Opinion
Case No. C-1-00-540
March 9, 2001
Memorandum and Order
The history of this matter is well-documented in the previous orders of this Court. Six motions are presently before the Court: Defendants' motion for a protective order and sanctions (Doc. 22); Plaintiff's motion for an order requiring Defendants to show cause why they should not be held in contempt for violation of the September 15, 2000 Preliminary Injunction (Doc. 114); plaintiff's motion for a second preliminary injunction (Doc. 116); Defendants' motion to clarify the September 15, 2000 Preliminary Injunction and/or to amend the Findings of Fact and Conclusions of taw issued simultaneously therewith (Doc. 76); Defendants' motion for a stay of discovery (Doc. 157); and Defendants' motion for sanctions (Doc. 158). The Court also considers the parties' responses to the Court's December 7, 2000 Memorandum and Order.
1. Defendants' Motion for Protective Order and Sanctions
On July 14, 2000, Plaintiff's counsel caused a subpoena to be issued to Pacific Bell Telephone Company for telephone records of both Defendants and of Chung-Ho Hong, an employee of Apollo Biomedicals Corporation. The subpoena called for the production of the requested documents on July 28, 2000. Plaintiff's counsel actually received the documents on August 2, 2000. plaintiff did not serve a copy of the subpoena upon counsel for Defendants as is required by Rule 45(b)(1) of the Federal Rules of Civil Procedure. Plaintiff's counsel represents that the failure was inadvertent, and Defendants offer no evidence to the contrary.
In any event, when Plaintiff's counsel learned of the failure on August 3, 2000, they offered to send copies of the phone records and of the subpoena immediately. Plaintiff's counsel placed those items in the mail on that date. Defendants' counsel responded by letter on August 4, 2000, and demanded that Plaintiff agree to make the telephone records subject to a protective order. Plaintiff's counsel responded on that same date and continued to attempt to resolve the parties' dispute concerning the use and dissemination of the documents for several days.
Counsel did not send the documents by facsimile because they were voluminous.
Defendants had not received the documents by mail as of August 7, 2000. Their counsel spoke by telephone to Plaintiff's counsel, who asked Defendants' counsel to discuss the dispute when they had received the documents. Instead, Defendants filed the instant motion for a protective order and sanctions (Doc. 22) on August 9.
The Court first notes that Defendants have never articulated a basis for their contention that the documents ought to be subject to a protective order. For that reason alone, their motion for a protective order (Doc. 22) is DENIED. The Court further notes that Plaintiff has offered to return the original telephone records and all copies to Defendants. The Court ORDERS Plaintiff to do so and concludes that Defendants' motion for a protective order is moot, inasmuch as Plaintiff can make no use of the documents after they have been returned to Defendants. The motion for a protective order (Doc. 22) is also DENIED on that basis.
Defendants move for sanctions for Plaintiff's failure to comply with the service requirement of Rule 45(b)(1). They request, specifically, reimbursement for their fees and costs incurred in bringing the instant motion and in other attempts to resolve the dispute and for an order requiring Plaintiff to take various actions with respect to future subpoenas. Defendants do not identify the authority upon which this Court would award such sanctions.
The Court notes that Rule 37 of the Federal Rules of Civil Procedure does not provide for an award of sanctions for a violation of Rule 45(b) (1). Rule 45 is silent with regard to the enforcement of that provision.
Defendants cite only Spencer v. Steinman, 179 F.R.D. 484, 489 (E.D. Pa. 1998), as authority for the proposition that the Court may award sanctions for a violation of Rule 45(b)(1). While the Spencer court did award sanctions, including monetary sanctions, for such a violation, it did not indicate upon what authority it made the award. Accordingly, Defendants have failed to identify any such authority.
In any event, the Court concludes that Defendants violated Southern District of Ohio Local Rule 37.1 by filing their motion before extrajudicial means for resolving their dispute over the telephone records had been exhausted. Defendants never spoke with Plaintiff's counsel after receiving the copies of the telephone records in the mail, even though plaintiff's counsel had plainly requested that discussions be continued after that time. Defendants cannot, therefore, argue that extrajudicial means were exhausted. Their motion (Doc. 22) was, therefore, filed prematurely and is hereby DENIED.
2. Plaintiff's Motion for an Order Requiring Defendants to Show Cause
The Court issued the Preliminary Injunction on September 15, 2000. On November 13, 2000, Plaintiff filed a motion in which it alleges that Defendants have violated several provisions of the Preliminary Injunction. Plaintiff seeks an order directing Defendants to show cause why they should not be held in contempt for those alleged violations.
Plaintiff's specific allegations involve Paragraphs IV, V, VI, and VII of the Preliminary Injunction. The Court has considered the arguments of the parties and the evidence they have submitted.
A civil contempt order "compel[s] obedience to a court order and compensate[s] for injuries caused by non-compliance." TWM Manufacturing Co. v. Dura Corp., 722 F.2d 1261 (6th Cir. 1983). In order to prove contempt, a party must show, by clear and convincing evidence, that the alleged contemnor violated a definite and specific order of the court requiring that party to perform or refrain from performing a particular act with knowledge of the court's order. See NLRB v. Cincinnati Bronze, Inc., 829 F.2d 585, 590-91 (6th Cir. 1987).
The test for a violation is whether the alleged contemnor took "all reasonable steps within [its] . . . power to comply with the Court's order." Peppers v. Barry, 873 F.2d 967, 969 (6th Cir. 1989). The applicable standard is objective rather than a subjective good faith standard. See Nettis Environment, Ltd. v. IWI, Inc., 46 F. Supp.2d 722, 726 (N.D. Ohio 1999) (citing Glover v. Johnson, 138 F.3d 229, 244 (6th Cir. 1998)). An award of fees and costs may be an appropriate sanction when civil contempt is proved. See McMahan Co. v. Po Folks, Inc., 206 F.3d 627, 634 (6th Cir. 2000); Redken Laboratories, Inc. v. Levin, 843 F.2d 226, 229-30 (6th Cir.), cert. denied, 488 U.S. 852 (1985).
Paragraph IV of the Preliminary Injunction provides that
Dr. Yi shall not for a period of two (2) years from the termination of his employment with Meridian own, manage, operate, join, control, or participate, either directly or indirectly, in the ownership. management, operation or control of, or provide funding to, be employed by, or consult with, or be connected in any manner with, any entity that markets or develops in the continental United States diagnostic clinical microbiotic tests or systems developed by Meridian as of the date of the termination of Dr. Yi's employment, including, without limitation, the H. pylori stool antigen products.
Plaintiff's contention that Defendant Yi is in contempt with respect to Paragraph IV of the Preliminary Injunction is based upon the erroneous premise that Defendant Yi's continued involvement in the ownership and management of Defendant Apollo is a per se violation of that paragraph. The Court did not order Defendant Yi to disassociate himself from Apollo. Rather, the Court's order in Paragraph IV of the Preliminary Injunction is generic as regards the entities from whom Defendant Yi must disassociate himself. Defendant Apollo is included only to the extent that it continues, after the date of the Preliminary Injunction, to "market or develop in the continental United States diagnostic clinical microbiotic tests or systems developed by Meridian as of the date of the termination of Dr. Yi's employment." The issue as regards Paragraph IV, therefore, is whether Defendant Apollo has done so.
Plaintiff did not present evidence at the hearing on its motion for an order to show cause or otherwise that tends to show that Defendant Apollo has continued to market or develop in the continental United Statee diagnostic clinical microbiotic tests or systems developed by Meridian as of the date of the termination of Dr. Yi's employment. Plaintiff introduced some evidence that tends to show that Apollo and/or Defendant Yi sold certain patent rights that may or may not have been related to such tests or systems. The sale of those rights is not a violation of "a definite and specific order of the court requiring [Apollo or Dr. Yi] to perform or refrain from performing a particular act," however. Cincinnati Bronze, 829 F.2d at 590-91. Accordingly, Plaintiff has not demonstrated, by clear and. convincing evidence that Defendant Yi has violated Paragraph IV of the Preliminary Injunction.
Plaintiff contends that Defendant Yi violated Paragraph V of the Preliminary Injunction, which provides, in pertinent part, as follows:
On or before September 29, 2000, Dr. Yi shall disclose to Meridian any and all inventions, discoveries, and improvements conceived or made by him, either alone or with others, during the period of his employment with Meridian relating to the business or activities of Meridian or within six (6) months after Dr. Yi's resignation from Meridian involving any rapid test for H. pylori stool antigen, any improvements to the H. pylori stool antigen test, or any other improvement, invention, or discovery.
The evidence introduced by Plaintiff in support of its motion for an order to show cause unequivocally demonstrates that Defendant Yi violated Paragraph V. He did not disclose the inventions, discoveries, and improvements encompassed within the Court's order. Rather, he suggested in writing that Plaintiff was aware of those inventions, discoveries, and improvements conceived or made by him during his employment by Meridian and that he had conceived or made no inventions, discoveries, or improvements within the six month period following the termination of that employment.
Defendant Yi did not seek leave of the Court to respond in a fashion that was clearly not in compliance with the Court's definite and specific order. See Cincinnati Bronze, 829 F.2d at 590-91. Plaintiff has, therefore, demonstrated by clear and convincing evidence that Defendant Yi violated Paragraph V of the Preliminary Injunction.
Plaintiff contends that Defendant Yi violated Paragraph VI of the Preliminary Injunction, which provides as follows:
Dr. Yi shall return to Meridian, on or before September 29, 2000, all documents, including, without limitation, drawings, manuals, letters, contracts, agreements, notes, notebooks, records, reports, memoranda, computer disks, formulae, and all other materials relating to research, experimentation, development, scientific theory, or business strategy at Meridian, including all copies thereof, which are in his possession, custody, or control. Dr. Yi shall use his best efforts to obtain the return of all such material in the possession, custody, or control of third parties and shall return those materials to Meridian when they are obtained. Dr. Yi shall notify Meridian and this Court, on or before October 2, 2000, of the efforts he has used to obtain the return of such materials and the results of those efforts.
Plaintiff alleges that Defendant Yi is in contempt with respect to various aspects of Paragraph VI.
Plaintiff contends that Defendant Yi has produced only one item from his own possession: a small notebook, which was produced well after the September 29, 2000, deadline set forth in the preliminary Injunction. Plaintiff argues that the notebook was in Defendant Yi's possession prior to September 29 and that his failure to return it to Plaintiff on or before that date is a violation of the Court's order that he return all materials in his possession on or before September 29.
Plaintiff also observes that several pages are missing from the notebook. It alleges that Defendant Yi's failure to return those pages constitutes a second violation of Paragraph VI.
Plaintiff further alleges that Defendant Yi has not used his best efforts to obtain materials in the possession of third parties. Plaintiff makes that allegation in the face of Defendant Yi's statement concerning his efforts to effectuate the return of such materials.
Finally, Plaintiff alleges that Defendant Yi has violated Paragraph VI by failing to return a host of materials that must be in his possession. Plaintiff argues that Defendant Yi's disavowal of knowledge of the whereabouts of other materials encompassed within the Court's order defies credibility.
The Court is persuaded, by clear and convincing evidence, that Defendant Yi violated Paragraph VI of the preliminary Injunction in one respect. Defendant Yi did not return the small notebook within the time allotted by the Court. Defendant Yi acknowledges that the notebook was in his possession as of September 29, 2000. Under the objective civil contempt standard, Defendant Yi violated a definite and clear order of the Court by failing to return it to Plaintiff.
The Court is not persuaded by any of Plaintiff's other allegations. Defendant Yi represents that the missing pages of the notebook are not in his possession. Plaintiff has not introduced evidence to the contrary.
Defendant Yi has explained his efforts to obtain materials from third parties. While his efforts have been fruitless, Plaintiff has not demonstrated, by clear and convincing evidence, that they were not in conformity with the Preliminary Injunction.
Finally, Plaintiff's allegation that other materials must exist does not satisfy the clear and convincing standard for a contempt finding. Absent evidence that specific materials are in Defendant Yi's possession and that he has failed to return them to Plaintiff, the Court is not persuaded of the existence of such materials. In sum, the Court finds that Defendant Yi committed one minor violation of Paragraph VI of the Preliminary Injunction.
Plaintiff contends that Defendants Yi and Apollo have violated Paragraph VIII of the Preliminary Injunction. That paragraph provides as follows:
Dr. Yi and Apollo and his or its agents, employees, officers, affiliates, or anyone acting by, through, or on behalf of Dr. Yi or Apollo, are required to withdraw or cause to be withdrawn any patent applications or price reimbursement applications, and to cease from engaging in any steps or activities in furtherance of patenting or making patent applications or price reimbursement applications, for the products described in paragraphs (I) and (II) above. . . . Dr. Yi and Apollo are required, on or before September 29, 2000, to notify all patent offices and government agencies to which they have submitted a patent application that this Court has ordered the withdrawal of all such patent applications. Dr. Yi and Apollo shall provide the Court and counsel for Meridian with copies of all such notifications on or before October 2, 2000.
Paragraphs I and II are as follows:
(I) Dr. Yi and Apollo are prohibited from possessing, disclosing, communicating, using, manufacturing, marketing, selling, distributing, researching, developing, testing, or working on an H. pylori stool antigen ETA test or rapid assay H. pylori stool antigen test, either directly or indirectly, and from assisting any third party in doing so.
(II) Dr. Yi and Apollo are prohibited from possessing, disclosing, communicating, using, manufacturing, marketing, selling, distributing, researching, developing. testing, or working on any other products that in any manner utilize or are derived from, in whole or in part, the experiments, processes, methodology, or information that Meridian used to develop, market, sell, or patent any diagnostic test in its infectious disease or parasitology product line as that line existed at the time of Dr. Yi's resignation from Meridian, either directly or indirectly, and from assisting any third party in doing so.
Plaintiff alleges that Defendants Yi and Apollo violated Paragraph VIII of the Preliminary Injunction by failing to withdraw a provisional patent application, filed on December 14, 1999, for a method for detecting H. pylori antigens in body fluids and tissues. See Plaintiff's Ex. 12 (January 26, 2001 hearing). That application included, in its specification, a method for detecting H. pylori antigens in stool specimens. See id., ¶ 1. On September 29, 2000, Defendants petitioned the United States Patent and Trademark Office for the expungement of the portion of the specification that related to H. pylori antigens in stool specimens. See id. Plaintiff contends that Defendants' failure to withdraw that application altogether is a violation of Paragraph VIII of the Preliminary Injunction.
Defendants admit that they did not withdraw the application in question. They tacitly admit that the application included products described in Paragraphs I and/or II of the Preliminary Injunction, and the Court finds that it did. They have, in essence, admitted that they have violated Paragraph VIII of the Preliminary Injunction.
Paragraph VIII did not authorize the expungement of portions of patent applications. Rather, it required the withdrawal of any patent that included products described in Paragraphs I and II. By failing to withdraw the provisional patent application in question, therefore, Defendants violated Paragraph VIII of the Preliminary Injunction. The Court finds, by clear and convincing evidence, that Defendants are in contempt of the definite and clear order included in Paragraph VIII.
Defendants argue that they would have lost the filing priority for those portions of the application that, arguably, were not encompassed in Paragraph VIII had they withdrawn the application altogether. They did not, however, seek leave to expunge, rather than withdraw, the application. Applying the requisite objective standard, the Court finds Defendants in contempt of Paragraph VIII of the Preliminary Injunction.
Plaintiff alleged violations of four paragraphs of the Preliminary Injunction. Roughly one-half of their allegations have been established by clear and convincing evidence. The Court concludes that an appropriate sanction for Defendants' contempt of this Court's order is an award of one-half of Plaintiff's fees and costs in bringing and arguing the motion for an order to show cause. Plaintiff's motion (Doc. 114) is hereby GRANTED. Plaintiff is ORDERED to submit, on or before March 30, 2001, to the Court and to counsel for Defendants, a statement of its fees and costs in bringing and arguing the motion, together with underlying documents. Defendants may file, on or before April 13, 2001, a memorandum in response to Plaintiff's submission in the event that they wish to challenge the amount of the fees and costs or any item comprising a portion of those fees and costs. Plaintiff may file a reply memorandum on or before April 24, 2001.
3. Plaintiff's Motion for a Second Preliminary Injunction
On November 15, 2000, Plaintiff moved for a temporary restraining order and preliminary injunction freezing assets of Defendants Apollo and Yi (See Doc. 116). After a telephone conference regarding Plaintiff's motion for a temporary restraining order, the Court denied that motion. The Court observed that Plaintiff had not identified a single liquid asset of Defendant Apollo and had identified only a First Union Securities account as an asset of Defendant Yi. The First Union account was then the subject of a separate motion for prejudgment attachment, which has since been granted. Subsequently, Plaintiff clarified that the First Union account is not a subject of its motion for preliminary injunction. Indeed, in the memoranda related to that motion and filed since the Court denied plaintiff's motion for a temporary restraining order, Plaintiff has focused its arguments exclusively upon the assets of Defendant Apollo.
Plaintiff asks the Court, pursuant to Rule 65(a) of the Federal Rules of Civil Procedure, to issue an order freezing the assets of Defendant Apollo on the ground that Defendants have engaged in fraudulent conduct with respect to the First Union brokerage account and are likely to conceal or dissipate other assets to the detriment of Plaintiff. See EBSCO Industries, Inc. v. Lilly, 840 F.2d 333 (6th Cir.), cert. denied, 488 U.S. 825 (1988); USACO Coal Co. v. Carbomin Energy, Inc., 689 F.2d 94 (6th Cir. 1982).
A motion for preliminary injunction invokes the district court's authority, at an early stage in the proceedings, to determine whether equitable relief is warranted pending resolution of the plaintiff's claims on their merits. See University of Texas v. Camenisch, 451 U.S. 390, 395 (1981); Corbin v. Texaco, Inc., 690 F.2d 104, 105 (6th Cir. 1982). The four factors to be balanced when determining whether a preliminary injunction may issue are
(1) the likelihood of the plaintiff's success on the merits;
(2) whether the injunction will save the plaintiff from irreparable injury;
(3) whether the injunction would harm others; and
(4) whether the public interest would be served by the injunction.See Forry v. Neundorfer, Inc., 837 F.2d 259, 262 (6th Cir. 1988);Frisch's Restaurant, Inc. v. Shoney's, Inc., 759 F.2d 1261, 1263 (6th Cir. 1985). These four factors are to be weighed in a balance; they do not constitute absolute prerequisites. See Keweenaw Bay Indian Community v. State, 11 F.3d 1341, 1348 (6th Cir. 1993); In re DeLorean Motor Co., 755 F.2d 1223, 1229 (6th Cir. 1985). In general, the degree of likelihood of success on the merits that must be shown is inversely proportional to the degree of irreparable injury the plaintiff will suffer absent an injunction. See Ohio ex rel. Celebrezze v. Nuclear Regulatory Commission, 812 F.2d 288, 290 (6th Cir. 1987).
In this instance, the Court is persuaded that the most relevant factors are the first, second, and third. Plaintiff may well establish that Defendants engaged in fraudulent conduct in transferring the assets that were held in the First Union brokerage account at the same time as this Court was considering plaintiff's motion for prejudgment attachment of those assets. The Court also observes that Defendants have been quite reluctant to identity assets and to disclose financial information. They have offered no explanation for the dissipation of some $360,000 in Apollo's accounts as of April 1, 2000 or approximately $1 million in investment monies that Defendant Yi has testified Apollo received. The Court is persuaded, for purposes of the present motion, that Plaintiff is likely to succeed on the merits of its claim that Defendant Apollo, by and through Defendant Yi, has concealed and dissipated assets for the purpose of keeping those assets out of Plaintiff's hands.
The Court is, however, not firmly convinced that Plaintiff will suffer irreparable injury should the Court deny the motion for an injunction freezing Apollo's assets. Plaintiff has failed to identify assets in Defendant Apollo's possession. As it has done in past attempts to prevent the spoliation of Defendants' assets, Plaintiff has identified assets that Defendant Apollo once possessed but has since transferred. Among those assets are cash, equipment, and patents. Plaintiff has not identified a single asset that is presently in Defendant Apollo's possession that would be the subject of an injunction freezing assets.
As Plaintiff observes, its failure to identify such assets is substantially caused by Defendants' evasion of attempts by plaintiff and the Court to obtain information concerning assets. As the Court documents in the next portion of this Memorandum and Order, Defendant has defied even direct orders from the Court regarding production of financial information. At the telephone conference prompted by Plaintiff's motion for a temporary restraining order, Defendants' counsel misrepresented the extent of Defendant Apollo's assets. By the time the misimpression created by counsel's representation was corrected, additional assets had been dissipated. In sum, the Court concludes that Plaintiff's failure to demonstrate the existence of assets of Apollo that may be concealed or dissipated is largely the result of Defendants' abuses of discovery and evasions of direct orders of the Court.
The Court notes that Defendant Yi represented at the January 26, 2001, hearing on Plaintiff's motion for an order to show cause that Defendant Apollo is, for all practical purposes, out of business. Defendant Yi testified, in effect, that Apollo had spent or transferred all of its assets and that he and the other principal in Apollo were looking for other employment. The Court concludes, on the basis of that evidence, that Defendant Apollo will not be substantially harmed in the event that the court issues an injunction freezing its assets.
Defendant Yi and his counsel have protested that Apollo will not be able to attract investment monies if the Court freezes its assets. They have also represented, however, that investors have already been sufficiently shaken by the issuance of this Court's September 15, 2000, Preliminary Injunction to stop the influx of capital. Accordingly, the issuance of the injunction Plaintiff currently requests will have little additional deleterious effect upon Defendant Apollo.
On balance, the factors outlined above favor the issuance of the requested preliminary injunction. As the Court has noted, Apollo may not possess assets now or during the future life of this litigation. To the extent that it does possess or come into the possession of assets, however, Plaintiff's motion for a preliminary injunction (Doc. 116) is hereby GRANTED. Defendant Apollo's assets are hereby FROZEN, and Defendants are ENJOINED from spending, transferring, concealing, dissipating, or otherwise disposing of any assets in the possession or ownership of Defendant Apollo. This Order includes assets that are presently in the possession or ownership of Defendant Apollo and assets that come into its possession or ownership in the future, pending further order of this Court. The Court hereby ORDERS Defendants to disclose, on or before March 30, 2001, all assets presently in the possession or ownership of defendant Apollo, including, but not limited to, securities, cash, and other property, and to provide documentation reflecting the approximate value and the whereabouts of those assets.
4. The Parties' Responses to the court's December 7, 2000 Memorandum and Order
On December 7, 2000, this Court issued a Memorandum and Order addressing Plaintiff's motion to compel (Doc. 42) and Plaintiff's motion for an order of attachment and to avoid fraudulent transfers. The second motion related to Defendant Yi's First Union Securities account, which the Court mentioned in the preceding portion of this Memorandum and Order.
The Court ordered Defendants to submit a document, signed by Defendant Yi and Defendants' counsel, in response to certain of Plaintiff's discovery requests. That document was to include the following:
(a) the Bates numbers of all documents produced that are responsive to any of the above-listed items, along with a recitation of the items to which the document is responsive;
(b) the Bates numbers of all documents withheld from Plaintiff under a claim of privilege or for any other reason, the nature of the document and the asserted privilege or other reason for withholding the document, and a recitation of the items to which the document is responsive;
(c) a statement that no further documents in the possession or control of Defendants are responsive to any of the above-listed items or to any other discovery request of Plaintiff.
The Court further ordered Defendants to produce to the Court and to counsel for Plaintiff any documents in their possession or control that were responsive to any of the above-listed items and were not previously produced. The Court also ordered Defendants to produce all checking and/or banking records and any other financial materials of either Defendant that relate in any way to the business of Defendant Apollo. The Court defined "financial materials" in the broadest possible sense to include any document, formal or informal, that relates in any sense to money, the exchange of money, stock, the exchange of stock, or indebtedness, or the exchange of indebtedness, either to Defendant Yi and/or Apollo or from Defendant Yi and/or Apollo. Finally, the Court ordered Defendants to produce all documents relating to the testing, research, development, or marketing of its stool collection device. The Court indicated that after Defendants had complied with the Order, the Court would resolve issues related to asserted privileges and any other outstanding issues and rule on Plaintiff's request for sanctions.
The Court has reviewed Defendants' actions in response to the December 7, 2000 Memorandum and Order. The Court finds that Defendants committed at least four separate violations of the Federal Rules concerning discovery and/or the Court's orders. First, the Court finds that Defendants failed to produce a privilege log, before being ordered to do so, in which they provided the Bates numbers of documents withheld in response to Plaintiff's various discovery requests and the general nature of the documents and the basis for the claim of privilege. Defendants were required to do so by Rule 26(b)(5) of the Federal Rules of Civil Procedure. Their failure constitutes a violation of Rule 37(a)(3) and subjects Defendants to sanctions in the form of Plaintiff's "reasonable expenses incurred" in making the motion to compel. Fed.R.Civ.P. 37(a) (4)(A).
In their response to the Court's December 7, 2000 Order, Defendants claimed privileges with respect to various classes of documents. The Court addressed one of those classes, billing records from Defendants' counsel, at the January 26, 2001 hearing on Plaintiff's motion for an order to show cause. There, the Court rejected Defendants' privilege claim and ordered that the billing records be produced. Defendants' failure to produce those records, with appropriate redactions, at an earlier time was in violation of Rule 37(a)(3) and subjects Defendants to sanctions in the form of Plaintiff's reasonable expenses in making the motion to compel. See Fed.R.Civ.P. 37(a)(4)(A).
Defendants also claim attorney-client privilege with respect to patent applications and documents related to patent applications. Materials relating to a patent application are confidential, and, therefore, enjoy a degree of protection against disclosure. See Fischer Imaging Corp. v. Lorad Corp., 148 F.R.D. 273, 274 (D. Colo. 1993). For example, 35 U.S.C. § 122 expressly provides that patent applications shall be kept confidential unless disclosure is authorized by the applicant. See id. This statutory prohibition is not, however, binding on the courts.See id. (citing Paper Converting Machine Co. v. Magna-Graphics Corp., 207 U.S.P.Q. 1136 (E.D. Wis. 1980); Ideal Toy Corp. v. Tyco Industries, Inc., 478 F. Supp. 1191, 1192 (D. Del. 1979)).
The courts apply a heightened relevancy standard to patent applications and materials related thereto. See id. A balancing test is employed in determining whether or not to permit discovery of a patent application, weighing the requesting party's interest in the materials against the objector's legitimate interest in secrecy. See Davco Manufacturing Corp. v. Peninsular Diesel, Inc., 128 F.R.D. 91, 93 (N.D. Ohio 1989). A demonstration of direct relevancy will tip the scale in favor of disclosure, See Paper Converting Machine Co., 207 U.S.P.Q. at 1136. On the other hand, a showing that the parties are competitors weighs against disclosure. See Wolowitz v. United States, 185 U.S.P.Q. 155 (Ct. Claims 1975); Struthers Scientific International Corp. v. General Foods Corp., 45 F.R.D. 375, 381 (S.D. Tex. 1968). If the plaintiff is able to obtain sufficient information regarding the application or the device or method described therein from other sources, discovery of the patent application and related materials is generally denied. See Ideal Toy Corp., 478 F. Supp. at 1193; Wolowitz, 185 U.S.P.Q. at 155. Disclosure of any significant part of a communication or application to third parties waives the privilege and requires to disclosure of the details underlying the data which was to be published. See Schenet v. Anderson, 678 F. Supp. 1280, 1281 (E.D. Mich. 1988) (citing In re Grand Jury Proceedings, 727 F.2d 1352, 1356 (4th Cir. 1984)).
Plaintiff and Defendant Apollo are competitors. The disclosure of Defendants' patent applications is, therefore, disfavored. Plaintiff has demonstrated that it is able to obtain sufficient information about products manufactured or developed by Defendants to present its case. Accordingly, while the information contained in Defendants' patent applications and materials related thereto is directly relevant to Plaintiff's claims in this action, the Court concludes that, on balance, the pertinent considerations weigh against requiring disclosure in general of the applications and related materials.
At the January 26, 2001, hearing on Plaintiff's motion for an order to show cause, Defendant Yi revealed that he and/or Defendant Apollo had sold at least one of the patent applications in question. The sale of an application results in the waiver of the claim of privilege with respect to that application and any related materials. Accordingly, to the extent that Defendants, or either of them, have sold or transferred a patent application, they are hereby ORDERED to produce an unredacted copy of the application and any other materials related to the application as to which they have asserted a privilege. Defendants MUST PRODUCE those documents on or before March 30, 2001.
The third violation by Defendants involved the redaction of information from financial materials produced in response to the Court's December 7, 2000 Memorandum and Order. The Court observes that Defendants redacted the dollar figure from copies of certain checks they produced. Defendants neither sought nor obtained leave to redact those dollar figures. The Court will not order Defendants to produce unredacted versions of the checks, inasmuch as the Court takes judicial notice that the dollar figures may be determined from the printed notation in the lower right corner of the checks. For example, with respect to check number 1211 on the Apollo Biomedicals Corporation account, the notation in the lower right corner of the check is 0000086300. The dollar figure is $863.00.
Defendants' act of redacting dollar figures without leave of Court to do so constitutes a violation of a direct order of the Court to produce financial materials. That violation subjects Defendants to sanctions in the form of Plaintiff's reasonable expenses incurred in making the motion to compel. See Fed.R.Civ.P. 37(a)(4)(A).
The fourth violation by defendants was their failure to produce, in response to the Court's December 7, 2000, Memorandum and Order, the documents underlying tax documents prepared by Defendant Apollo's tax accountant. Defendant Yi has represented that no underlying documents were provided to the accountant. That representation defied credibility. The accountant could not have prepared the tax documents without underlying data in written form. That data was responsive to the Court's December 7 Order and was not produced. Defendants MUST PRODUCE, on or before March 30, 2001, all written data provided to the tax accountant. Their failure to do so previously subjects them to sanctions in the form of Plaintiff's reasonable expenses incurred in making the motion to compel.
In its December 7, 2000, Memorandum and Order, the Court also ordered Plaintiff to file a memorandum regarding Defendants' arguments concerning the court's jurisdiction over Defendant Yi's First Union Securities account. The Court indicated that it considered Defendants' arguments, which were included in a memorandum regarding plaintiff's motion for prejudgment attachment of that account, filed after the Court ordered the attachment, as a motion for reconsideration.
Defendants have argued that, although First Union is a national concern with an office in Cincinnati, the situs of Defendant Yi's account is St. Louis, Missouri, and this Court may not properly exercise jurisdiction over the account. At the January 26, 2001, hearing on Plaintiff's motion for an order to show cause, evidence that a check on Defendant Yi's First Union account was issued from Wisconsin, rather than St. Louis, was introduced. That evidence confirms the Court's finding in issuing its order of attachment that the administration of Defendant Yi's funds was a pursuit of the national First Union entity. This Court properly exercises jurisdiction over the funds managed by that entity by virtue of its presence in this judicial district. The court was not without jurisdiction, therefore, to order the attachment of the funds in Defendant Yi's First Union account.
5. Defendants' Motion for Modification and Clarification of the September 15, 2000, Preliminary Injunction and to Amend the Court's Findings of Fact and Conclusions of Law
Defendants move the Court to reconsider various portions of its September 15, 2000, Preliminary Injunction and to amend its Findings of Fact and Conclusions of Law. See Doc. 76. The Court has reviewed the Preliminary Injunction carefully in light of the arguments of the parties. Defendants' motion (Doc. 76) is hereby GRANTED as follows:
(a) Finding of Fact No. 6 is amended to indicate that PUMC was moving forward with the approval process in China in the Spring of 2000;
(b) the words "joint venture" in Finding of Fact No. 34 are replaced with "joint enterprise" in order to clarify that the Court has not made a specific finding that Apollo and PUMC were involved in a joint venture in the strict legal sense.
In all other respects, the Preliminary Injunction, Findings of Fact, and Conclusions of Law are unchanged.
6. Defendants' Motion to Stay Discovery
Defendants have filed a motion to stay discovery pending resolution of their interlocutory appeal from this Court's September 15, 2000, Preliminary Injunction (Doc. 157). In the alternative, they ask the Court to impose a stay of discovery pending a ruling on their motion to dismiss portions of Plaintiff's second amended complaint.
Defendants' motion (Doc. 157) is hereby GRANTED as follows: discovery regarding claims first asserted in Plaintiff's second amended complaint is STAYED until such time as the Court issues a ruling upon Defendants' motion to dismiss portions of Plaintiff's second amended complaint. Defendants' request for a stay of discovery pending resolution of their interlocutory appeal is not supported, and is denied.
7. Defendants' Motion for Sanctions
Defendants move for sanctions for some 17 alleged violations by Plaintiff of this Court's August 24, 2000, oral ruling on Defendants' motion to compel. The Court has considered the arguments and submissions of the parties with regard to those allegations.
The Court finds that Plaintiff did not violate the Court's ruling with respect to twelve of the requests for production of documents and interrogatories cited by Defendants. Specifically, the Court finds no support for Defendants' contention that Plaintiff did not produce, in conformity with the Court's ruling, all documents in its possession, custody, or control that were responsive to Defendants' Requests for Production of Documents Numbers 1, 2, 3, 4, 9, 11, 15, 17, and 18.
As regards Request for Production of Documents Number 1, Defendants have not identified a basis for discrediting Plaintiff's assertion that it produced all responsive documents in its possession, custody, or control as of August 26, 2000, the date for compliance with the Court's ruling. The Court agrees with Defendants that underlying raw data from clinical tests would have been responsive had Plaintiff possessed it as of August 26. Plaintiff's failure to request it from third parties until January 2001 is not explained. That failure does not constitute a violation of the Court's August 24, 2000, ruling, however. Because Defendants' motion for sanctions is based upon alleged violations of that ruling only, the Court does not award sanctions to Defendants for Plaintiff's failure to produce raw data as of August 26, 2000. Plaintiff is ORDERED to produce the raw data, to the extent that it is in Plaintiff's possession, custody, or control, on or before March 30, 2001.
As regards Requests Numbers 2 and 18, Defendants have not identified a basis for discrediting Plaintiff's assertion that no responsive documents are or were in its possession, custody, or control. As regards Requests Numbers 3, 4, and 9, Defendants have not identified a basis for discrediting Plaintiff's assertion that it has produced all responsive documents in its possession, custody, or control. As regards Request Number 11, the Court agrees with Plaintiff's contention that the request may not fairly be read to include actual invoices. To the extent that the actual invoices, which Plaintiff did not produce, are the source of Defendants' allegation, it is not well-taken. As regards Request Number 15, the Court is persuaded that Plaintiff produced all of the responsive documents in its possession, custody, or control at the time of the Court's ruling and has fairly supplemented its responses since that time. As regards Request Number 17, Plaintiff was entitled to rely on Defendants' August 4, 2000, letter in which they indicated that Plaintiff was not required to produce the requested documents. Accordingly, Plaintiff's failure to produce those documents was not a violation of the Court's ruling.
The Court further finds that Defendants have not established a violation of the Court's ruling regarding Interrogatories Numbers 1, 3, and 8. The Court finds that Plaintiff answered the interrogatories to the best of its ability in conformity with the requirements of Rule 33 of the Federal Rules of civil Procedure. Plaintiff fairly relied upon Defendants' August 4, 2000, letter in which they clarified that the interrogatories sought alleged trade secrets and confidential information related to Plaintiff's H. pylori stool antigen test. To the extent that Defendants complain about Plaintiff's failure to identify trade secrets and confidential information related to its stool filtration device, the Court is persuaded that Defendants had excused Plaintiff from doing so.
The Court finds that Plaintiff violated the Court's August 24 oral ruling with respect to five requests for production of documents. As regards Request Number 8, Plaintiff concedes that it failed to produce a copy of its distributorship agreement with Beijing Strong and some documents that are privileged as attorney work-product. Plaintiff further concedes that it did not produce a privilege log with respect to the responsive documents as to which it asserts a privilege. Plaintiff's failure to produce the distributorship agreement constitutes a violation of Rule 37(a)(3) of the Federal Rules of Civil procedure. Its failure to produce a privilege log constitutes a violation of Rules 26(b)(5) and 37 (a)(3). Those violations subject Plaintiff to sanctions in the form of Defendants' "reasonable expenses incurred" in making the motion for sanctions. Fed.R.Civ.P. 37(a)(4)(A). Plaintiff is ORDERED to produce the privilege log and a copy of the distributorship agreement on or before March 30, 2001, to the extent it has not already done so.
As regards Request Number 14, Plaintiff concedes that it did not produce documents related to pricing of its stool antigen tests outside the United States, China, and Taiwan. Plaintiff asserts that Defendants' request for such documents was not reasonably calculated to lead to the discovery of admissible evidence. The Court is persuaded, however, that evidence of pricing in Europe and elsewhere may be relevant to Plaintiff's claim that Defendants' activities in China and Taiwan have caused or will cause Plaintiff to price its products less advantageously in China and Taiwan than it otherwise would have. Accordingly, the documents are discoverable. Plaintiff's failure to produce them constitutes a violation of Rule 37(a)(3) and subjects Plaintiff to sanctions in the form of Defendants' "reasonable expenses incurred" in making the motion for sanctions. Fed.R.Civ.P. 37(a)(4)(A). Plaintiff is ORDERED to produce the documents on or before March 30, 2001 to the extent that it has not already done so.
As regards Request Number 19, the Court is persuaded by virtue of plaintiff's use of some responsive documents at the hearing on Plaintiff's motion for a preliminary injunction that Plaintiff possessed some responsive documents as of August 26, 2000. Accordingly, Plaintiff violated the Court's August 24 ruling by failing to produce the responsive documents that were in its possession at that time. Plaintiff's violation of the Court's ruling subjects it to sanctions in the form of Defendants' reasonable expenses in making the motion for sanctions. See Fed.R.Civ.P. 37(a)(4)(A). Plaintiff is ORDERED to produce all responsive documents in its possession, custody, or control on or before March 30, 2001, to the extent that it has not done so already.
As regards Requests Numbers 20 and 21, Plaintiff argues that the responsive documents in its possession, custody, or control as of August 26, 2000, are privileged. Plaintiff does not represent that it produced a privilege log regarding those documents, however. Its failure to do so constitutes a violation of Rules 26(b)(5) and 37(a)(3). That violation subjects Plaintiff to sanctions in the form of Defendants' "reasonable expenses incurred" in making the motion for sanctions. Fed.R.Civ.P. 37(a)(4)(A). Plaintiff is ORDERED to produce the privilege log on or before March 30, 2001, to the extent it has not already done so.
In sum, the Court finds that Plaintiff violated the Court's August 26, 2000, ruling in five of the 17 instances cited by Defendants. Those instances constitute roughly thirty percent of the alleged violations. The court concludes that an appropriate sanction for Plaintiff's violations is an award of thirty percent of Defendants' expenses in bringing their motion for sanctions. Defendants' motion for sanctions (Doc. 158) is hereby GRANTED. Defendants are ORDERED to submit, on or before March 30, 2001, to the Court and to counsel for Plaintiff, a statement of their expenses in making the motion, together with underlying documents. Plaintiff may file, on or before April 13, 2001, a memorandum in response to Defendants' submission in the event that it wishes to challenge the amount of the expenses or any item comprising a portion of those expenses. Defendants may file a reply memorandum on or before April 24, 2001.
IT IS SO ORDERED.