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 naïve. 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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