NLFC, Inc. v. Devcom Mid-America, Inc.

Decision Date11 January 1996
Docket NumberNo. 93 C 609.,93 C 609.
PartiesNLFC, INC., Plaintiff, v. DEVCOM MID-AMERICA, INC., Defendant.
CourtU.S. District Court — Northern District of Illinois

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George W. Hamman, Hamman & Benn, Chicago, IL, for Plaintiff.

Bruce P. Golden, Bruce P. Golden & Associates, Chicago, IL, Jody B. Rosenbaum, Chicago, IL, for Defendant.

LINDBERG, District Judge.

Defendant's motion to strike {212-1} or disregard {212-2} plaintiff's objection to the magistrate judge's report and recommendation is denied. Defendant's motion for legal fees {153-1} and costs {153-2} is granted. The court finds that defendant is entitled to attorney's fees in the amount of $165,562.50 and costs in the amount of $3,784.45, for a total amount of $169,346.95.

REPORT AND RECOMMENDATION

ASHMAN, United States Magistrate Judge.

This case is presently before the Court on Defendant's, Devcom Mid-America, Inc. ("Devcom"), motion for legal fees and costs. Plaintiff, NLFC, Inc. ("NFLC"), is a corporation which designs computer software and licenses its use. On January 29, 1993, NFLC filed its original Complaint alleging "on information and belief" that Devcom infringed on NFLC's copyright by obtaining copies of NLFC's software from certain licensees, modifying and enhancing the software and marketing the modified and enhanced software. On February 23, 1993, Judge George W. Lindberg ("Judge Lindberg") dismissed the original Complaint pursuant to FED. R.CIV.P. 11. NLFC filed a First Amended Complaint on March 3, 1993, with the same allegations but omitting all references to "information and belief." On January 4, 1994, Judge Lindberg adopted Magistrate Judge Ronald Guzman's Report and Recommendation granting Devcom summary judgment as to Count I and dismissing Counts II through IV for lack of diversity jurisdiction; thus disposing of the entire Complaint. This order was affirmed by the Seventh Circuit Court of Appeals on January 19, 1995, and on May 30, 1995, the U.S. Supreme Court denied NLFC's petition for writ of certiorari.

Devcom brings the instant motion as prevailing party under 17 U.S.C. § 505, FED. R.CIV.P. 54 and 28 U.S.C. § 1920. Extensive briefing by both parties preceded a full evidentiary hearing and oral argument conducted on June 20 and 29, 1995, after which the parties had additional time to file proposed findings of fact and conclusions of law. After a review of the record, this Court recommends that Devcom's motion for legal fees and costs be granted and that Devcom be awarded $165,562.50 in attorney fees and $3,784.45 in costs.

Relevant Factual Background

The following undisputed facts are condensed from Judge Guzman's Report and Recommendation:

NLFC is a Delaware corporation with principal place of business in Dallas, Texas. NLFC is successor in interest of a Texas corporation known as Lab Force, Inc. ("Lab Force"). Robert Lewis has been president and a director of NLFC since June of 1990. Devcom is an Illinois corporation with principal place of business in Oak Brook, Illinois. Ronald G. Diener is president of Devcom.

In December 1987 and November 1989, respectively, NLFC entered into nonexclusive licensing agreements with two medical facilities, Cabrini Medical Center ("Cabrini") and Franciscan Shared Laboratory ("FSL"), for use of NLFC Software. The Cabrini Licensing Agreement permitted Cabrini to copy, modify, maintain, integrate and enhance the NLFC Software. (Cabrini Agreement, Sections 6.2.2, 6.2.4 and 6.2.7). The FSL Licensing Agreement specifically permitted FSL to use the services of a third party to maintain and support the NLFC Software. (FSL Agreement, Section 6).

Devcom was approached by FSL and then Cabrini to remove bugs and enhance their NLFC Software. Devcom used dedicated telephone lines, dumb terminals, and on-site efforts to debug and modify NLFC Software to allow it to run on Cabrini and FSL computers. In doing so, Devcom never received a copy of NLFC Software from either Cabrini or FSL; however, it did make a viewable printout of the software for the purpose of modifying the program for Cabrini and FSL as permitted under their respective Licensing Agreements.

On January 12, 1993, NLFC applied for a copyright with the U.S. Copyright Office to obtain copyright registration of its software entitled, "NLFC HYBRID Lab Information System Computer Program."

Standard of Law

Devcom seeks fees and costs expended in defense of NLFC's infringement suit pursuant to three statutory provisions: Section 505 of the Copyright Act, FED.R.CIV.P. 54 and Section 1920 of the Judiciary Code.

The parties agree that the instant dispute revolves around Section 505 of the Copyright Act ("§ 505") which directs:

In any civil action under this title, the court in its discretion may allow the recovery of full costs by or against any party other than the United States or an officer thereof. Except as otherwise provided by this title, the court may also award a reasonable attorney's fee to the prevailing party as part of the costs.

17 U.S.C. § 505. Two critical terms measure the scope and effect of this provision: `prevailing party' and `discretion.'

First, one seeking fees and costs under § 505 must be a `prevailing party.' A `prevailing party' is considered one who succeeds on a significant issue in the litigation after an adjudication on the merits. See Milwaukee Concrete Studios v. Fjeld Mfg. Co., 782 F.Supp. 1314, 1318 (E.D.Wis.1991) (award of costs and fees under § 505 held inappropriate where alleged infringer prevailed only on a showing that plaintiff's proposed venue was improper). Significantly, § 505 makes no distinction between prevailing plaintiffs or defendants; instead allowing recovery "by or against any party."

Second, § 505 expressly provides that "the court in its discretion may allow the recovery." Recently, the U.S. Supreme Court addressed and resolved a conflict among the circuit courts regarding the proper approach to § 505 matters. Fogerty v. Fantasy, Inc., ___ U.S. ___, 114 S.Ct. 1023, 127 L.Ed.2d 455 (1994). In Fogerty, plaintiff copyright holder brought an infringement suit against defendant musician regarding a song composed by defendant but sold to plaintiff's predecessor in interest. The jury returned a verdict for defendant who then moved under § 505 for attorney's fees. The District Court denied that motion and the Ninth Circuit affirmed the denial applying the so-called "dual standard" approach in determining motions for fees and costs.1 The Supreme Court, expressly rejecting the Ninth Circuit's "dual standard" approach favored by the Second, Seventh and D.C. Circuits, adopted the "evenhanded" approach favored by the Third, Fourth and Eleventh Circuits. As the name suggests, under the "evenhanded" approach, prevailing plaintiffs and prevailing defendants must be treated alike under § 505, and costs and fees are awarded only in the court's discretion. Fogerty, ___ U.S. at ___, 114 S.Ct. at 1027.

The Fogerty court noted that the critical difference between § 505 and the "British Rule," under which the prevailing party always recovers costs and fees, is the discretion of the court provided in § 505. The discretionary nature of this statute necessarily prevents creation of a precise rule or formula for determining when attorney's fees should be awarded under § 505. Fogerty, ___ U.S. at ___, 114 S.Ct. at 1033. Instead, Fogerty directs lower courts to exercise `equitable discretion' in light of several nonexclusive factors including "frivolousness, motivation, objective unreasonableness (both in the factual and in the legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence." Fogerty, ___ U.S. at ___ n. 19, 114 S.Ct. at 1033 n. 19, quoting Lieb v. Topstone Industries, Inc., 788 F.2d 151, 156 (3d Cir.1986).2 Post-Fogerty caselaw has taken into consideration other relevant factors such as the prevailing party's degree of success. See Diamond Star Bldg. Corp. v. Sussex Co. Builders, Inc., 21 F.3d 59 (4th Cir.1994).

Once liability is established, the prevailing party must prove that the costs and fees requested are reasonable. Caselaw interpreting FED.R.CIV.P. 54 and § 1920 provides guidance on what types of expenses are recoverable.3 While the Supreme Court has held that § 1920 "defines the term `costs' as it appears in Rule 54(d)" (Crawford Fitting Co. v. J.T. Gibbons, Inc., 482 U.S. 437, 441, 107 S.Ct. 2494, 2497, 96 L.Ed.2d 385 (1987)), the Seventh Circuit has found this does not forestall judicial interpretation of the meaning of phrases used in § 1920. Northbrook Excess and Surplus Ins. Co. v. Procter & Gamble Co., 924 F.2d 633, 643 (7th Cir.1991). Caselaw also provides guidance as to the reasonableness of the amount. Several factors may be considered at this stage: relative complexity of the litigation, relative financial strength of the parties and bad faith. See Lieb, 788 F.2d at 156. At base, the sum recoverable may not exceed that charged the client but the award does not have to equal that amount. Lieb, 788 F.2d at 156.

Therefore, under § 505 a prevailing party has a twofold burden of proof: First, it must establish that the circumstances entitles it to such costs and fees, and second, it must prove the reasonableness of those costs and fees in terms of necessity and amount.

Discussion
A. The Circumstances Warrant the Imposition Costs and Legal Fees Under § 505.

The relevant factors presented for this Court's consideration are frivolousness, factual and legal unreasonableness, motivation, compensation and deterrence, and other factors such as degree of success. This Court finds that the circumstances of this suit show that Devcom is entitled to costs and fees associated with its defense.

1. Frivolousness

The facts of this case reveal that NLFC's copyright infringement suit has been marked by frivolousness since its inception. First, NLFC's...

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