Guava LLC v. Merkel

• Decision Date: 04 August 2014
• Docket Number: A13-2064
• Court: Minnesota Court of Appeals
• Parties: Guava LLC, et al., Appellants, Michael Dugas, Appellant, v. Spencer Merkel, Defendant, Qwest Communications Corporation, et al., Respondents, John Doe 173.23.48.174, et al., Respondents, John Doe 24.111.103.45, et al., Respondents, John Doe 173.19.225.244, et al., Respondents, John Doe, et al., Respondents.

Guava LLC, et al., Appellants,Michael Dugas, Appellant, v. Spencer Merkel, Defendant,Qwest Communications Corporation, et al., Respondents,John Doe 173.23.48.174, et al., Respondents,John Doe 24.111.103.45, et al., Respondents,

John Doe 173.19.225.244, et al., Respondents,

John Doe, et al., Respondents.

A13-2064

STATE OF MINNESOTA IN COURT OF APPEALS

August 4, 2014

This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2012).

Affirmed as modified

Toussaint, Judge^*

Hennepin County District Court

File No. 27-CV-12-20976Paul Robert Hansmeier, Class Justice PLLC, Minneapolis, Minnesota (for appellants Alpha Law Firm LLC and Guava LLC)

Michall Dugas, Class Justice PLLC, Minneapolis, Minnesota (pro se)

David Earle Camarotto, Bassford Remele, P.A., Minneapolis, Minnesota (for respondents Qwest Communications Corporation, et al.)

Mark Christopher Santi, Thompson Hall Santi Cerny & Dooley, Minneapolis, Minnesota (for respondents John Does 173.23.48.174, et al.)

Paul Allen Godfread, Godfread Law Firm, P.C., Minneapolis, Minnesota (for respondents John Doe 24.111.103.45, et al.)

John Thomas Sullivan, Edward Peter Sheu, Best & Flanagan, LLP, Minneapolis, Minnesota (for respondents John Doe 173.19.225.244)

Phillip Gainsley, Phillip Gainsley Law Office, Minneapolis, Minnesota (for respondent John Doe, et al.)

Considered and decided by Schellhas, Presiding Judge; Halbrooks, Judge; and Toussaint, Judge.

UNPUBLISHED OPINION

TOUSSAINT, Judge

This appeal is taken from a district court order imposing attorney-fee sanctions against appellants for the bad-faith pursuit of litigation. Because the district court did not abuse its discretion, we affirm.

FACTS

As the district court observed, "[t]his case has a relatively short but peculiar history. This Court was presented with virtually no factual evidence during the pendency of this 'litigation.'" Much of the evidence that was presented to the district court relatedto decisions from courts in other jurisdictions finding misconduct, similar to that alleged here, by the same parties or by apparently related entities. It is clear from these decisions that appellants are believed to be engaged in a sophisticated scheme to improperly use the judicial process to obtain the identities of Internet subscribers from Internet service providers (ISPs), and to use that information to pursue settlements of alleged copyright and/or hacking claims with those Internet subscribers. See, e.g., AF Holdings, LLC v. Does 1-1058, __ F.3d __, 2014 WL 2178839, at *2 (D.C. Cir. May 27, 2014) (describing "modus operandi" of Prenda Law); Ingenuity 13 LLC v. John Doe, 2013 WL 1898633, at *2-3 (C.D. Calif. May 6, 2013) (setting forth findings on scheme by attorneys John Steele, Paul Hansmeier, Paul Duffy and Prenda Law).¹ Like the district court, however, although we may take judicial notice of the decisions from other jurisdictions, Minn. R. Evid. 201(b), we base our decision on the record developed before the district court in these proceedings, viewed in the light most favorable to the district court's findings. See Rasmussen v. Two Harbors Fish Co., 832 N.W.2d 790, 797 (Minn. 2013) (holding that appellate courts examine evidence in light most favorable to district court's findings).

The parties

In the complaint that initiated this litigation, plaintiff-appellant Guava LLC is described as "a limited liability company that owns and operates protected computer systems . . . accessible throughout Minnesota." It is unclear, however, whether Guava even exists. Despite repeated inquiries by the district court, the record includes no evidence regarding Guava's incorporation, the identity of its principals, or the nature of its business operations. John Steele, one of several attorneys who appeared on behalf of Guava in the district court proceedings, stated during a hearing that Guava has "an office in Las Vegas. They're also based out of I believe they're in Nevis [in the Caribbean]." At another hearing, in response to questioning regarding Guava's existence, appellant Michael K. Dugas conceded that he had provided no documentary or affidavit evidence of the company's existence, asserting merely that "there's several principals that I met from Guava LLC so I am, you know, very aware that they're an actual company." No corporate representative of Guava ever appeared before the district court.

Appellant Alpha Law Firm LLC was a Minnesota limited liability company registered on January 22, 2010, by Paul Hansmeier, an attorney licensed to practice in Minnesota. Hansmeier filed a notice of dissolution for the firm on August 30, 2013. Appellant Dugas is also an attorney licensed to practice in Minnesota.

Dugas, Hansmeier, Steele, Alpha, and Prenda Law Inc. represented Guava in proceedings before the district court. Although most of the pleadings included a signature block identifying Dugas and Alpha as counsel for Guava, Hansmeier filed a notice of appearance in the district court identifying himself as "of counsel" at PrendaLaw and Steele, an Illinois attorney, sought pro hac vice admission in the district court. On appeal, Guava and Alpha are represented by Hansmeier and Class Justice PLLC, a limited liability company registered with the Minnesota Secretary of State by Hansmeier on July 3, 2013.

Spencer Merkel is a resident of Beaverton, Oregon and the defendant in the lawsuit initiated by Guava. Merkel was represented by Minnesota attorney Trina Morrison, who went to law school with Dugas.

Respondents are ISPs and John Does, and their counsel, who objected to third-party subpoenas served by appellants in this action and who sought and obtained sanctions from the district court.

Factual Background

In September 2012, Merkel received a letter from Prenda Law Inc., alleging that he had violated copyright laws by downloading an adult film from the Internet. The letter advised Merkel that the owner of the copyright, Hard Drives Productions, Inc., would bring suit against Merkel unless he paid $3,400 in settlement of the claims. Unable to pay, Merkel called the number provided in the letter, and spoke to someone who identified himself as "Michael" or "Mike," who offered Merkel an alternative settlement arrangement. Under that arrangement, Merkel would agree to be sued, Prenda would ask for, and Merkel would provide, a copy of his bit-torrent log, and Prenda would dismiss the case against Merkel. In discussing the settlement, "Michael" stated that he did not know any attorneys in Oregon, but that he knew an attorney in Minnesota who would represent Merkel pro bono. Merkel thus agreed to be sued in Minnesota, and he retainedMorrison based on information provided to him by "Michael" at Prenda Law. Merkel had never heard of Guava or Alpha before this suit was initiated, and he believed he would be sued by Hard Drives in Minnesota and that Prenda Law would be opposing counsel.

Procedural History

Guava served the complaint in this action on Merkel on October 15, 2012, and filed it in Hennepin County District Court two days later. The complaint alleged two counts: the first for interception of electronic communications in violation of Minn. Stat. § 626A.02 (2012) and the second for civil conspiracy to violate the same statute. The complaint contains little detail about the supposed violations, alleging generally that Merkel "used a username and password that did not belong to him to gain unauthorized access to [Guava's] protected computer systems" and "intercepted electronic communications between [Guava] and its paying members," and that Merkel "obtained the username and password . . . from a website that allows its members to trade stolen usernames and passwords amongst one another."

On October 25, 2012, one week after filing the complaint, Guava filed an "unopposed discovery motion for authorizing order," seeking the district court's approval of subpoenas directed to more than 300 ISPs, ostensibly to discover Merkel's alleged co-conspirators' names, addresses, telephone numbers, e-mail addresses, and media access control addresses. The district court held a hearing on October 31, 2012; neither Merkel nor his counsel appeared. The district court denied the motion, concluding that Guavahad "not demonstrated that the personally identifying information possessed by over 300 Internet Service Providers . . . is relevant and material to this matter."

On November 6, 2012, Guava filed an "emergency renewed unopposed discovery motion for authorizing order," this time seeking approval for subpoenas directed to 17 ISPs. Guava asserted in its motion that "these specific ISPs unquestionably possess information connected to the issues in this litigation," but provided no evidentiary support for that assertion. The district court held a hearing on November 7, 2012, and issued an order that day granting Guava's motion, but allowing the targeted ISPs a period of 30 days to file motions to quash. A number of ISPs and individual Internet subscribers, referenced as John Does, moved to quash the subpoenas, and a hearing was scheduled for January 25, 2013.

At the January 25 hearing, counsel for the ISPs and John Does asserted that the litigation was being pursued for the improper purpose of using third-party discovery to obtain names of Internet subscribers from whom settlements could be extorted. In support of this assertion, counsel submitted an affidavit from Merkel regarding his interactions with Prenda Law in the months leading up to the initiation of this suit. The district court also heard testimony from attorney Morrison that Merkel was referred to her by Dugas and Hansmeier; that she expected a suit from Hard Drives; and that "[t]here's been some bait and switch you might call it in this case." Counsel opposing the subpoenas further asserted that the improper purpose of the litigation was evidenced by Guava's failure to seek any discovery from Merkel himself. Guava, through attorneys Steele and...