Tuesday, February 12, 2013

Discovery violations may lead to default false advertising judgment

Aviva Sports, Inc. v. Fingerhut Direct Marketing, Inc., 2013 WL 449775 (D. Minn.) (magistrate judge)

This “garden variety false advertising and patent infringement case” is of interest because of Aviva’s nearly 4-year battle to secure defendant Manley’s compliance with American rules.  Manley’s misconduct was so severe that the magistrate judge recommended entry of default judgment on liability and damages on Aviva’s false advertising claims.

As the magistrate judge began, “[w]hat has transpired should serve as a cautionary tale regarding the difficulties American lawyers may face when working with clients who do not operate within a system of jurisprudence that approximates the American system and who apparently have no fear about disregarding court orders.”  Manley ignored several court orders, and its “many American lawyers,” some of whom Manley was also apparently failing to pay, had little or no control or influence over their client.

The judge quoted the WSJ:

[C]hinese companies are especially prone to making big mistakes that spring from their failure to learn even basic principles about an American system that is very different from what they have at home. ... In China, litigants are not required to show their cards to each other. When an American lawyer talks about providing the opposing party with documents that might hurt the Chinese client's case, the Chinese company tends to view the lawyer as na├»ve. If, as too often occurs, the Chinese company second-guesses its American lawyer and fails to comply fully with the discovery process, it loses important credibility with the court…. Then, there are the complications when a Chinese litigant loses. The American system offers far more options for forcing a defendant to pay. Companies in China are notorious for shutting down their operations one day and then starting them a few days later under a new name to avoid paying a judgment.

Dan Harris, Chinese Companies Court Disaster, August 18, 2010.  The judge emphasized that compliance problems aren’t limited to Chinese companies, but “the difficulties Aviva and Manley's counsel were experiencing arose from Manley's profound lack of understanding of its responsibilities as a defendant in a U.S. lawsuit.”

Manley’s misconduct, at times facilitated by its American lawyers, included defiance of its basic discovery obligations: Manley refused to produce relevant documents, quite possibly moved documents from California to China to make discovery more difficult, produced huge numbers of untranslated Chinese documents, 90% of which turned out to be irrelevant (the production was over 500,000 pages), etc.  Manley’s counsel “rationalized this disaster” by stating that a “box” means something different, and bigger, in China than in the US. 

The judge noted that the lawyers “should have known that they needed to be more directly involved with their client's production. The ‘disconnect’ was obviously between Manley and its counsel.”  No American attorney for Manley ever went to China to oversee the production, violating FRCP 26(g), which imposes an affirmative duty on lawyers “to engage in discovery in a responsible manner that is consistent with the spirit and purpose of Rules 26 through 37... [and] obliges each attorney to stop and think about the legitimacy of a discovery ... response.”  Manley argued that it fulfilled its discovery obligations because it produced documents as they were kept in the normal course of business, including paper that had been used on one side and “recycled” by using the blank side for something else.  However, no one from Manley’s firm or counsel in China oversaw the document production for responsiveness.

The judge was also critical of Manley’s attorneys for acting as “passive conduits of Manley's indefensible positions and statements,” and occasionally compounding Manley’s intransigience with their own.  Practice note: attorneys should not “grant [themselves] a three-week extension of time” to comply with an order, fail to read an order, or the like.  (If Manley doesn’t pay up, query whether counsel can be made to pay at least some of the costs from the discovery dispute, which are on top of the liability for false advertising.)

Entry of default judgment is an extreme sanction, but justified given Manley’s defiance of explicit and detailed judicial instructions, including orders to pay costs.  “Manley has intentionally disobeyed every Order, has never offered any viable excuse for its willful conduct, and Aviva has been irreparably prejudiced in its ability to prepare for trial by the drain on its resources. Manley very clearly believes that compliance with the Orders of this Court is optional and that the Court is powerless to compel it to comply.”  A high standard for entry of default judgment is not insurmountable, and Manley managed to surmount it. 

The court concluded that lesser sanctions wouldn’t work; previous measures to secure Manley’s compliance, including monetary sanctions, had proved ineffective.  The only issue was the scope of the default judgment.  The discovery order and fee award that triggered this judgment addressed information related to damages, but that wasn’t the limit of Manley’s misconduct.  Default judgment was warranted for the totality of Manley’s misbehavior, including failure to provide discovery regarding how the products were advertised, whether returns were related to consumer deception, and how accurate the advertising was—issues that went to liability as well as damages.

Manley was willing to stipulate to damages in lieu of a liability finding, but Manley obstructed Aviva’s discovery into Manley’s costs and profits, severely limiting Aviva's ability to calculate damages.  The judge strongly suspected that Manley believed that Aviva’s damages calculations were too low.  (Manley submitted an answer to an interrogatory that purported to show that Manley wasn’t making any profit, but this was “absurd and completely unsupported,” and the court concluded that it was “created out of whole cloth.”)  “Limiting sanctions to a stipulation on damages, but forcing Aviva to prove liability, would reward Manley for its conduct.”  Since none of the orders Manley defied related to the patent infringement claims, it was appropriate to recommend default judgment only on the false advertising claims.

For damages, Aviva would be allowed to submit proof of its damages, and Manley wouldn’t be permitted to oppose its submission.  Aviva could also seek reasonable fees and costs under both state and federal false advertising laws.  The Minnesota DTPA allows a fee award for the prevailing party when a cause of action benefits the public, while the Lanham Act allows awards in “exceptional cases.”  Manley was also ordered to pay its existing obligations for the violations of earlier orders, presently over $360,000.

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