Opinion
Case No.: 18cv871-DMS(MSB)
02-12-2021
EVOLUSION CONCEPTS, INC., Plaintiff, v. CROSS ENGINEERING, LLC, et al., Defendants.
REPORT AND RECOMMENDATION FOR ORDER:
(1) GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR ENFORCEMENT OF SETTLEMENT AGREEMENT AND RELATED RELIEF
[ECF NO. 152]
AND
(2) GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION FOR ORDER ENFORCING SETTLEMENT AGREEMENT TERM TO DISMISS ACTION
[ECF NO. 153]
Before the Court are Plaintiff's Evolusion Concepts Inc.'s "Motion for Enforcement of Settlement Agreement and Related Relief" ("Motion for Enforcement") [ECF No. 152] and Defendants' Cross Engineering, LLC's and Wes Cross's "[Motion] for Order Enforcing Settlement Agreement Term to Dismiss Action" ("Motion to Dismiss Action") [ECF No. 153]. This Report and Recommendation is submitted to Chief United States District Judge Dana M. Sabraw pursuant to 28 U.S.C. § 636(b)(1) and Local Civil Rule 17.1 of the United States District Court for the Southern District of California. After reviewing the parties' pleadings, and for the reasons discussed below, the Court RECOMMENDS that the District Court: (1) GRANT IN PART and DENY IN PART Plaintiff's Motion for Enforcement [ECF No. 152] and (2) GRANT IN PART and DENY IN PART Defendants' Motion to Dismiss Action [ECF No. 153].
The Court notes that Defendants' notice of motion is titled "Notice of Motion of Cross Engineering, LLC, and Wes Cross for Order Enforcing Settlement Conference Provision to Dismiss Action." (ECF No. 153 at 1 (emphasis added).) Defendants' enclosed Memorandum of Points and Authorities, however, states that it is filed in support of a "Motion of Cross Engineering, LLC, and Wes Cross for Order Enforcing Settlement Agreement Term to Dismiss Action." (ECF No. 153-1 at 1 (emphasis added).) Both the Notice and the Memorandum of Points and Authorities ask the Court to enforce the provision of the parties' Settlement Agreement requiring Plaintiff to dismiss the action within five days of the signing of the Settlement Agreement. (See ECF No. 153 at 1; 153-1 at 4.) Accordingly, the Court construes Defendants' motion as a Motion for Order Enforcing Settlement Agreement Term to Dismiss Action.
I. RELEVANT FACTUAL AND PROCEDURAL BACKGROUND
On May 4, 2018, Plaintiff Evolusion Concepts, Inc. ("Evolusion") filed a Complaint against Defendant Cross Engineering, LLC ("Cross Engineering"). (ECF No. 1.) On December 17, 2018, Plaintiff filed a First Amended Complaint ("FAC"), the operative pleading in this case, against Defendants Cross Engineering and Wes Cross. (ECF No. 29.) Plaintiff's FAC alleged the following causes of action: (1) patent infringement; (2) declaratory judgment; (3) breach of contract; (4) trade libel; (5) intentional interference with prospective economic advantage; and (6) unfair competition. (Id. at 1, 8-17.) With respect to the patent infringement cause of action, Plaintiff alleged that it owns United States Patent Number 8,756,845 ("the '845 Patent") entitled "Method and Device for Converting Firearm with Detachable Magazine to a Firearm with Fixed Magazine." (Id. at 5.) Plaintiff further alleged that Defendants "infring[ed] the '845 patent by making, using, selling, offering for sale, and/or importing a number of magazine release products that are covered by one or more claims of the '845 patent[.]" (Id. at 6.) On December 20, 2018, Defendants filed an Answer to Plaintiff's FAC. (ECF No. 31.) Defendants denied infringement of the '845 Patent, and asserted, inter alia, that Claims 1, 8, and 15 of the '845 Patent were invalid under 35 §§ U.S.C. 102, 103, and 112(b). (Id. at 4-5, 7.)
On May 7, 2019, the District Court held a Claims Construction Hearing, and on May 21, 2019, issued an "Order Construing Claims." (See ECF Nos. 63, 65.) On May 29, 2019, Defendants filed a motion seeking clarification of the Claim Construction Order. (ECF No. 66.) On July 18, 2019, the District Court issued an "Order Granting Defendants' Motion for Clarification of Claim Construction Order." (ECF No. 86.)
On August 7, 2019, this Court held a Mandatory Settlement Conference, during which the case settled and the terms of the parties' settlement were placed on the record. (See ECF Nos. 96, 97, 100.) The basic terms of the settlement recited on the record included a payment of $68,500 within ninety days of the date of the Mandatory Settlement Conference, "payments of $3,805.56 [beginning on January 1st, 2020], made in 18 monthly payments thereafter [for] a total of $68,500," and "an ongoing royalty rate of 18.77 percent for every accused product sold by Cross Armory." (ECF No. 100 at 8.) The parties were to generate and execute a written agreement after the Mandatory Settlement Conference. (Id. at 6.)
On August 7, 2019, the parties signed a form entitled "Consent to Exercise of Settlement Jurisdiction by a United States Magistrate Judge and Order of Reference," which the District Judge signed on August 12, 2019. (ECF No. 99.) The document stated the following:
The parties, having settled the case, by signing below further voluntarily consent to the jurisdiction of United States Magistrate Judge Michael S. Berg to decide:
(1) all disputes regarding settlement terms arising during the documentation thereof not resolved by the parties themselves; and,(Id.) The document further provided that "Magistrate Judge Berg shall retain jurisdiction until August 7, 2020." (Id.)
(2) all disputes arising out of the terms of the settlement agreement once completed;
AND, that any decision by the Magistrate Judge regarding any such dispute(s), 1 or 2, above, shall be FINAL AND BINDING, WITH NO APPEAL.
In light of the settlement, the Court ordered the parties to file their Joint Motion to Dismiss the case no later than November 29, 2019. (ECF No. 97 at 2.) The parties required more time to finalize their written settlement agreement, mainly the definition of "Licensed Product," and the Court therefore continued the deadline to file the Joint Motion to Dismiss the case. (See ECF Nos. 112, 115).
The parties did not file the Joint Motion to Dismiss by the set deadline. (See Docket.) The Court subsequently held a Settlement Disposition Conference, and on January 17, 2020, issued an "Order Following Settlement Disposition Conference." (ECF Nos. 116, 117, 118.) The January 17, 2020 Order required Defendants, among other things, to make eighteen monthly payments beginning on January 24, 2020, in the amount of $3,805.56, and to pay "an ongoing monthly royalty for every accused product sold" in the amount of 18.77 percent, proceeding for the life of the '845 Patent, due within 15 days of the end of the respective preceding month. (ECF No. 118 at 1-2.) The Order further stated that "[t]he term 'kits' within the settlement agreement, includes the package that contains an identified licensed product plus any other product sold by Cross Engineering within that package that would infringe upon the '845 Patent. Said 'kits' will be royalty bearing." (Id. at 2.)
On January 26, 2020, Defendants filed a Motion for Reconsideration asking the Court to reconsider the January 17, 2020 Order. (ECF No. 119.) On May 7, 2020, the Court denied the Motion for Reconsideration and directed the parties to include in their written settlement agreement the following definition of "Licensed Product" proposed by Plaintiff:
Licensed Product. "Licensed Product" means the Safe Mag .308/AR10, Safe Mag-MIL-SPEC AR-15/M4 (including Special Red Edition), the Safe Mag 2-ALL AR-15/M4 magazine release product, and kits including such. Licensed Product further includes components from Cross Engineering or third parties that are part of or used in conjunction with a Licensed Product, and any product manufactured, sold, produced, or distributed, now or in the future, by Cross Engineering that would infringe the '845 Patent in the absence of this Agreement.(ECF No. 147 at 7.)
On May 29, 2020, Defendants filed a petition for writ of mandamus with the United States Court of Appeals for the Federal Circuit. (ECF No. 150.) They sought a writ of mandamus directing this Court to vacate its January 17, 2020 and May 7, 2020 orders, and require inclusion in the settlement agreement of a different definition of "Licensed Product" proposed by Defendants. (See ECF No. 151 at 1-2; see also Decl. of Stuart Clark, ECF No. 153-2 ("Clark Decl.") at 3 (explaining that in their petition for writ of mandamus, Defendants asked the court "to direct the Magistrate Judge to substitute a definition limited to paying royalties on accused Safe Mag products, and only on those accused Safe Mag products).) On July 17, 2020, the United States Court of Appeals for the Federal Circuit denied Defendants' petition for mandamus, reasoning, in relevant part, that "Cross has not shown a clear and indisputable right to its requested relief." In re Cross Eng'g, LLC, 820 F. App'x. 1021, 1023 (Fed. Cir. 2020).
The Court of Appeals for the Federal Circuit noted, in relevant part, that "Cross's position is that licensed products should be limited to the accused products, which it believes are the Safe Mag products only—not kits including those products." In re Cross Eng'g, LLC, 820 F. App'x. at 1023. With respect to "Cross['s] argu[ment] that the complaint defined the accused products as limited to the Safe Mag products[,]" the appellate court stated that "as Cross acknowledges, the complaint also references kits as part of Evolusion's infringement allegations." Id. at 1024. The appellate court further stated that "Evolusion included kits in the infringement contentions it served on Cross." Id. n.2. Additionally, the appellate court noted in the footnote the following:
To the extent that Cross contends that the definition of Licensed Product improperly covers non-infringing components, Evolusion has represented that "[i]t has always been Evolusion's position (and the function of Section 1.3 [of the settlement agreement] ) that . . . components sold separately from the kit are not royalty-bearing, unless they also infringe the '845 Patent. That is the structure of . . . the settlement agreement in this case."Id. n.1.
On July 20, 2020, the parties fully executed their written Settlement Agreement, which included the definition of "Licensed Product" quoted above. (ECF No. 152-2 at 2, 11; see also Clark Decl. at 3.) On August 17, 2020, Plaintiff filed a "Stipulation of Consent to Jurisdiction by a United States Magistrate Judge." (ECF No. 154.) In the notice, Plaintiff "stipulate[d] its continuing consent to jurisdiction by a United States Magistrate Judge until August 7, 2021, consistent with the terms of the parties' Consent to Jurisdiction by a United States Magistrate Judge (ECF No. 99) executed on August 7, 2019." (Id. at 2.)
On August 19, 2020, Defendants filed a "Notice of Non-Consent by Cross Engineering, LLC and Wes Cross to Jurisdiction by a United States Magistrate Judge." (ECF No. 155.) Defendants stated that they did not "consent to the extension of the jurisdiction of Hon. Michael S. Berg under the consent to jurisdiction dated August 7, 2020." (Id. at 1.) Further, Defendants "decline[d] to stipulate to Hon. Michael S. Berg having jurisdiction to adjudicate the motion of Evolusion Concepts, Inc. for Enforcement of Settlement Agreement and Related Relief[.]" (Id.) After considering the parties' notices [ECF Nos. 153, 154], the Court issued an order requiring further briefing "regarding this Court's jurisdiction or lack thereof to address the pending motions [ECF Nos. 152 & 153]." (ECF No. 158). The parties timely filed their respective briefs. (See ECF Nos. 162, 163, 164; see also ECF No. 161.) The case was subsequently reassigned to Chief United States District Judge Sabraw, in light of the "expiration of the parties' consent to Magistrate Judge Jurisdiction." (ECF No. 168.) Judge Sabraw referred Plaintiff's Motion for Enforcement [ECF No. 152] and Defendant's Motion to Dismiss Action [ECF No. 153] to this Court for a Report and Recommendation. (Id. at 1-2.)
The issues, arguments, and supporting documentation in the pending Motion for Enforcement [ECF No. 152] and Motion to Dismiss Action [ECF No. 153] overlap. The Court will therefore address both motions in this Report and Recommendation.
II. DEFENDANTS' MOTION FOR ORDER ENFORCING SETTLEMENT AGREEMENT TERM
TO DISMISS ACTION [ECF NO. 153]
A. Parties' Arguments
Defendants move for an order enforcing the provision of the parties' Settlement Agreement requiring Plaintiff to dismiss this action within five days of the signing of the Settlement Agreement. (ECF No. 153-1 at 4.) Defendants argue that "the condition precedent to paying all amounts due under the agreement at the time of signing was satisfied by the Cross Parties making that payment on July 24, 2020," but Plaintiff has refused to dismiss the action asserting that Defendants have not made all required royalty payments. (Id. at 14-16.) Defendants contend that the kits on which Plaintiff claims royalties are not royalty bearing because Defendants are not required to pay royalties on components of kits that would not infringe the '845 Patent. (Id. at 17.) Defendants assert that "although it was denied, the Cross parties' writ petition resulted in clarification that royalties are not payable on non-infringing products under the Court's definition." (Id. at 12-14.) Defendants assert that since Plaintiff refused to voluntarily dismiss the action, the Court should order an involuntary dismissal pursuant to Federal Rule of Civil Procedure 41(b), the Court's inherent power to order dismissal as a sanction, as well as the Court's power to enforce a settlement agreement. (Id. at 16-17.)
Plaintiff responds that Defendants have not satisfied the condition precedent to dismissal, pursuant to the dismissal provision of the parties' Settlement Agreement, because Defendants have not made any royalty payments for the sales of kits. (ECF No. 165 at 4-6, 8.) Plaintiff asserts that "Licensed Product" is clearly defined in Section 1.3 of the Settlement Agreement and includes Cross Engineering's "kits," and this Court found that "the entire kit, regardless of its name, is royalty bearing." (Id. at 5.) Plaintiff states that Defendants' payments for the sales of kits amount to $0.00, and Defendants justify this nonpayment by "inventing a new definition of 'kit'." (Id. at 6.) Plaintiff contends that Defendants are essentially rearguing the scope of "accused products" and the definition of "kits"—the exact issues that this Court and the Federal Circuit decided in Plaintiff's favor. (Id. at 5.) Plaintiff further maintains that Defendants' arguments about "noninfringing" or "incapable of infringing" components are irrelevant, because this case settled before a determination of infringement, and "[o]nly the scope of accused products and licensed products matters for purposes of determining Cross's compliance with the settlement." (Id. n.1.)
Defendants reply that they have "paid all royalties except on kits" because they have not sold any royalty bearing kits. (ECF No. 166 at 5; see also id. at 13.) Defendants assert that "the definition of 'Licensed Product' in the settlement agreement, and the related definition of 'kits' in the Magistrate Judge's order ECF No. 118, . . . determine the payment obligations of Cross Engineering." (Id. at 5.) Defendants contend that "the only royalty bearing kits are those sold in a 'package' that includes a Safe Mag and 'any other product sold by Cross Engineering within that package that would infringe upon the '845 Patent.'" (Id. at 8.) Defendants maintain that they are not required to pay royalties on unspecified kits that are not sold in a "package" with a Safe Mag and that would not infringe upon the '845 Patent. (Id. at 8-9; see also id. at 11.) Defendants argue that because they have paid "royalties on all other licensed products on which royalties are payable," they have satisfied the condition precedent to Plaintiff's dismissal of the action. (Id. at 5, 13.) Defendants assert that Plaintiff "should be ordered to [dismiss the action], failing which the Court should dismiss the action" with prejudice. (Id. at 5; see also id. at 13.) Defendants also seek the award of attorney's fees and costs pursuant to Section 14 of the Settlement Agreement in the amount of $7,644.26, as well as "further fees and costs associated with the Dismissal Motion." (Id. at 13.)
B. Legal Standard
Federal Rule of Civil Procedure 41(b) states the following: "Involuntary Dismissal; Effect. If the plaintiff fails to prosecute or to comply with these rules or a court order, a defendant may move to dismiss the action or any claim against it." Fed. R. Civ. P. 41(b). District courts have inherent power to impose sanctions for "conduct which abuses the judicial process." Chambers v. NASCO, Inc., 501 U.S. 32, 44-45 (1991). Dismissal sanction is available when "a party has engaged deliberately in deceptive practices that undermine the integrity of judicial proceedings" because "courts have inherent power to dismiss an action when a party has willfully deceived the court and engaged in conduct utterly inconsistent with the orderly administration of justice." Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006) (quoting Anheuser-Busch, Inc. v. Natural Beverage Distribs., 69 F.3d 337, 348 (9th Cir. 1995)). Dismissal sanction should be imposed only in extreme circumstances, "where the violation is 'due to willfulness, bad faith, or fault of the party.'" In re Exxon Valdez, 102 F.3d 429, 432 (9th Cir. 1996) (quotation omitted). In deciding whether to dismiss a case as a sanction, district courts must weigh the following factors: "(1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its dockets; (3) the risk of prejudice to the party seeking sanctions; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions." Leon, 464 F.3d at 958 (quoting Anheuser-Busch, 69 F.3d at 348).
A district court has the inherent power to enforce "a settlement agreement involving an action pending before it." In re City Equities Anaheim, Ltd., 22 F.3d 954, 957 (9th Cir. 1994); TNT Mktg., Inc. v. Agresti, 796 F.2d 276, 278 (9th Cir. 1986); Dacanay v. Mendoza, 573 F.2d 1075, 1078 (9th Cir. 1978). This inherent power applies to settlement agreements entered on the record but later reneged on by one party. See Henderson v. Yard House Glendale, LLC, 456 F. App'x 701, 702 (9th Cir. 2011) ("The district court did not abuse its discretion in enforcing the settlement agreement after [plaintiff] entered into it on the record in open court, but later refused to execute a formal agreement to dismiss the action[.]"). A district court may only enforce a settlement agreement if the following conditions are met: (1) the settlement agreement is complete, and (2) the settlement agreement is the result of the parties or their authorized representatives agreeing upon the terms of the settlement. Maynard v. City of San Jose, 37 F.3d 1396, 1401 (9th Cir. 1994); Callie v. Near, 829 F.2d 888, 890 (9th Cir. 1987); Dacanay, 573 F.2d at 1078. Generally, "[t]he construction and enforcement of settlement agreements are governed by principles of local law which apply to interpretation of contracts[.]" United Commercial Ins. Serv., Inc. v. Paymaster Corp., 962 F.2d 853, 856 (9th Cir. 1992) (quotation omitted).
C. Analysis
This action settled on August 7, 2019 at the court-conducted Mandatory Settlement Conference, during which the parties stated the terms of the settlement on the record. (See ECF Nos. 96, 97, 100.) The parties fully executed their written Settlement Agreement on July 20, 2020. (ECF No. 153-1 at 4.) Accordingly, the Settlement Agreement is a complete agreement, agreed to by all the parties in this case. Plaintiff, however, refused to dismiss the action asserting that Defendants have not satisfied condition precedent to dismissal set out in the dismissal clause of the parties' Settlement Agreement. (See ECF No. 165 at 5-6, 8.)
Defendants were the last party to sign the Settlement Agreement on July 20, 2020. (ECF No. 152-2 at 11.)
Section 4 of the parties' Settlement Agreement provides the following:
DISMISSAL OF DISTRICT COURT ACTION
No later than five (5) days after this Agreement has been signed by all Parties, and subject to Cross Engineering making payments under Section 5 that have become due by the time of signature, Evolusion shall dismiss the Action, with prejudice. The Cross Parties agree to do all things
that may be reasonably necessary to assist Evolusion to accomplish the dismissal of the Action under this paragraph.(ECF No. 152-2 at 3 (emphasis added).) Section 5 of the Settlement Agreement further provides:
SETTLEMENT AND ROYALTY PAYMENTS
5.1 Settlement Payment. Cross Engineering shall pay Evolusion one hundred and thirty-seven thousand dollars ($137,000.00), paid as follows:
(Id. at 3-4.) Finally, Section 5.2 of the Settlement Agreement provides, in relevant part:5.1.1 an Initial Settlement Payment of sixty-eight thousand, five hundred dollars ($68,500.00) paid to Evolusion within ninety (90) days of the Effective Date, i.e., on or before November 5, 2019; and
5.1.2 eighteen (18) Monthly Settlement Payments of three thousand, eight hundred, and five dollars and fifty-six cents ($3,805.56) paid to Evolusion beginning on January 1, 2020, each Monthly Settlement Payment due on or before the first business day of every month.
5.2 Royalty Payments on Future Sales. For every Licensed Product sold on or after July 1, 2019, Cross Engineering agrees to pay Evolusion a royalty of 18.77% of the sales price of each Licensed Product. For the avoidance of doubt and by way of example, if Cross Engineering sells a Licensed Product for $75.99, the royalty due to Evolusion for that Licensed Product would be $75.99 x 18.77% for an amount of $13.68. Evolusion must receive the royalty payment, along with the Payment Reporting Form (as set for in Section 13.2 and Exhibit A), within fifteen (15) days of the end of the respective preceding reporting period. For example, for all royalties incurred on Licensed Products sold during a reporting period ending on April 30, the respective monthly royalty payment and Royalty Report must be received by Evolusion no later than May 15.(Id. at 4 (emphasis added).) Accordingly, the dismissal provision of the parties' Settlement Agreement requires Cross Engineering to "mak[e] payments under Section 5 that have become due by the time of signature[,]" (July 20, 2020), and Section 5 sets forth Cross Engineering's obligation to pay "a royalty of 18.77% of the sales price of each Licensed Product" for "every Licensed Product sold on or after July 1, 2019." (Id. at 3-4.)
The parties do not dispute that Defendants' payment of all settlement and royalty amounts under Section 5 of the Settlement Agreement "that have become due by the time of signature" of the Agreement is a condition precedent to the dismissal of the action by Plaintiff. (See ECF Nos. 153, 165, 166; see also ECF No. 152-2 at 3.) The documents presented to the Court establish that as of the filing of the instant Motion to Dismiss Action [ECF No. 153], Defendants have made all payments due under the parties' Settlement Agreement, with the exception of royalties for the sales of kits. (See ECF No. 152-7, Declaration of Charles Blazer ("Blazer Decl.") at 3 (stating that "on July 24, 2020, Cross tendered a payment purportedly for the overdue amounts owed"; however, "all of Cross's royalty reporting forms included a line item for 'Kits that include a Safe Mag and another products that would infringe the '845 Patent,' showing zero (0) units sold, amounting to $0.00 in sales and $0.00 in royalty payments[,]" and "[n]one of Cross's royalty reporting forms reported any sales of licensed kits."); Clark Decl. at 3 (declaring that "Cross Engineering made all of the royalty and other payments—including accrued interest—to Evolusion on July 24, 2020, in the sum of $40,313.75."); ECF No. 157-1, Declaration of Savannah Cross ("Cross Decl.") at 2 (stating that as a Chief Executive Officer of Cross Engineering, she "prepared a reconciliation of all royalties owed by Cross Engineering under the settlement agreement[,]" which included "interest at 10% from the due date of each royalty and settlement payment[,]" and on July 24, 2020, wire transferred "$40,313.75, shown in the reconciliation to be owed by Cross Engineering" to Plaintiff's counsel's bank account.); see also ECF No. 114-1, Declaration of Stuart Clark (Clark Decl. I) at 1-2 (stating that Defendants paid the $68,500 initial settlement payment, as well as the accrued royalty payments).)
Plaintiff asserts that the condition precedent to dismissal of this action has not been satisfied because Defendants have not made any royalty payments for the sales of kits, while Defendants argue that they satisfied the condition precedent because they made no sales of royalty bearing kits. Accordingly, the Court needs to determine whether the condition precedent to dismissal has been satisfied; namely—whether Defendants have made all required royalty payments "that have become due by the time of signature" of the Settlement Agreement on July 20, 2020. (See ECF No. 152-2 at 3); see also Silicon Image, Inc. v. Genesis Microchip Inc., 395 F.3d 1358, 1363 (Fed. Cir. 2005) (holding that "the district court cannot enter a dismissal until [plaintiff] receives the payment required as a condition precedent to dismissal and so certifies to the court[,]" where "[defendant's] payment and [plaintiff's] stipulation to the court that it had received such payment [we]re conditions precedent to dismissal of the underlying infringement claims.").
Defendants contend that the kits on which Plaintiff claims royalties are not royalty bearing because Defendants are not required to pay royalties on components of kits that would not infringe the '845 Patent. (See ECF No. 153 at 5, 17.) Defendants' argument lacks merit. On August 7, 2019, Defendants agreed on the record to pay "an ongoing royalty rate of 18.77 percent for every accused product sold by Cross Armory[,]" (ECF No. 100 at 8 (emphasis added)), and on July 20, 2020, fully executed the written Settlement Agreement requiring Cross Engineering to pay "a royalty of 18.77% of the sales price of each Licensed Product" for every Licensed Product sold on or after July 1, 2019, (ECF No. 152-2 at 4 (emphasis added); see also id. at 11). The Settlement Agreement clearly defines "Licensed Product" in Section 1.3 as follows:
"Licensed Product" means the Safe Mag .308/AR10, Safe Mag-MIL-SPEC AR-15/M4 (including Special Red Edition), the Safe Mag 2-ALL AR-15/M4 magazine release product, and kits including such. Licensed Product further includes components from Cross Engineering or third parties that
are part of or used in conjunction with a Licensed Product, and any product manufactured, sold, produced, or distributed, now or in the future, by Cross Engineering that would infringe the '845 Patent in the absence of this Agreement.(Id. at 2 (emphasis added).) Accordingly, the parties' Settlement Agreement requires payment of royalties on kits, and states that the royalty bearing kits include "the Safe Mag .308/AR10, Safe Mag-MIL-SPEC AR-15/M4 (including Special Red Edition), the Safe Mag 2-ALL AR-15/M4 magazine release product." (Id.) Licensed Product also includes "any product manufactured, sold, produced, or distributed, now or in the future, by Cross Engineering that would infringe the '845 Patent in the absence of this Agreement." (Id.) This definition is consistent with the terms of the parties' settlement recited on the record, requiring "an ongoing royalty rate of 18.77 percent for every accused product sold by Cross Armory." (ECF No. 100 at 8.)
Contrary to Defendants' arguments, the Court's Order Following Settlement Disposition Conference [ECF No. 118] did not alter the definition of "Licensed Product" in Section 1.3 of the Settlement Agreement; it merely clarified that a licensed kit "includes the package" containing the Safe Mag products, and that any other package including a product sold by Defendants "that would infringe upon the '845 Patent" would also be a licensed royalty bearing kit. (Id. at 2.) Therefore, regardless of whether the kit includes a "Safe Mag" or a product identical to a Safe Mag that has a different name, "[s]aid 'kits' will be royalty bearing." (See id.) As correctly argued by Plaintiff, this definition is consistent with Section 1.3 of the Settlement Agreement and "makes sense in the context of Cross's efforts to escape paying royalties by renaming its products to 'bundles'." (See ECF No. 159 at 7.) The definition is also consistent with the Court's Order Denying Defendants' Motion for Reconsideration. (ECF No. 147 at 6 (stating that "the entire kit, regardless of its name, is royalty bearing.").)
The Order stated the following, in relevant part:
In support of their motion for reconsideration, Defendants cite paragraph three of the Court's January 17, 2020 Order, which states the following: "The term 'kits' within the settlement agreement, includes the package that contains an identified licensed product plus any other product sold by Cross Engineering within that package that would infringe upon the '845 Patent. Said 'kits' will be royalty bearing." (Mot. at 21 (citing ECF No. 118 at 2).) Defendants allege that this paragraph created "confusion" with respect to what language should be included in Section 1.3 of the parties' draft settlement agreement defining "Licensed Product." (See Mot.)(ECF No. 147 at 5-6 (emphasis added).)
Contrary to Defendants' contention, the above paragraph does not direct the parties to make changes to Section 1.3 of their settlement agreement; it merely clarifies that the entire kit, regardless of its name, is royalty bearing. After extensive questioning of the parties' counsel and having considered the parties' arguments during the January 7, 2020 hearing, the Court unequivocally stated that it adopted the definition of "Licensed Product" proposed by Plaintiff.
Defendants quote some of this Court's statements out of context and offer an overly restrictive definition of a royalty bearing kit. (See ECF Nos. 153, 166.) The Settlement Agreement, however, neither requires the royalty bearing kit to include both a Safe Mag and other product that would infringe the '845 Patent, nor limits the royalty base to only a single component inside the kit. (See ECF No. 152-2.) Defendants' misconstrued definition would essentially allow them to unilaterally decide whether the other product in the kit infringes. This would encourage further patent litigation in contradiction of the express purpose of the Settlement Agreement, which is "to avoid the expense and uncertainties of litigation" and settle the case. (See id. at 2 (containing the following language in the parties' Settlement Agreement: "recognizing and wishing to avoid the expense and uncertainties of litigation, the Parties have settled in principle the dispute between them which forms the basis of the Action, and placed the settlement terms on the record, and they now wish to memorialize in writing the complete terms of that settlement[.]").)
Plaintiff is correct that because the case settled, only the scope of accused and licensed products is at issue when determining Defendants' obligation to pay royalties under the terms of the parties' Settlement Agreement; there is no need to litigate the issue of infringement to determine whether the accused kits infringe, whether each individual component inside the accused kits infringe, or whether a group of non-infringing individual parts may give rise to an infringing combination. (See ECF No. 165 at 5 n.1; ECF No. 152-1 at 18-20); see also Silicon Image, Inc. v. Genesis Microchip, Inc., 271 F. Supp. 2d 840, 845, 879 (E.D. Va. 2003) (finding that royalties were due on all products at issue "without regard to whether those products infringe[d] any [of plaintiff's] patent claims . . . [because] only this interpretation will reasonably effectuate the [settlement agreement's] goal of settling, for all time, the patent infringement issues in the pending litigation"; rejecting defendant's argument that "the royalty base [was] limited to those [products] that actually infringe the patent claims described in the [settlement agreement's] license grants.").
Specifically, Plaintiff argues that
the only relevant question is what products were accused of infringement. That question is answered not by Cross's unilateral, conclusory opinion, but rather by looking to the Complaint and Infringement Contentions, which were both known when Cross agreed to settle. And as repeatedly observed by this Court and the Federal Circuit, the Complaint and Infringement Contentions identified Cross's California Compliance Kits as accused products. E.g., ECF No. 127-5 at 38 (January 7 Hearing Transcript) (the Court pointing out to Cross's counsel that paragraph 29 of the Complaint identifies Cross's "AR15 California compliance kit" as an infringing product), 39-40 (the Court pointing out to Cross's counsel that the Infringement Contentions identified Cross's California compliance kits as accused products); Exhibit B at 4-6 (Federal Circuit Order, citing the Complaint and Infringement Contentions); see ECF No. 29, ¶ 29 (operative Complaint); ECF No. 29-10 (Complaint Exhibit J, "Infringement of Claim 15 by CA Compliance Kit"); ECF No. 127-6 at 1-2 (Infringement Contentions).(ECF No. 152-1 at 20.)
Defendants have only reported sales of "'Kits that include a Safe Mag and another products that would infringe the '845 Patent,' showing zero (0) units sold, amounting to $0.00 in sales and $0.00 in royalty payments[,]" and "[n]one of Cross's royalty reporting forms reported any sales of licensed kits." (Blazer Decl. at 3; see also ECF No. 152-10.) By relying on overly restrictive interpretation of their royalty payment obligations with respect to the sales of kits, Defendants may have underreported and underpaid all royalties due under the Settlement Agreement. Accordingly, Defendants should be ordered to recalculate the accrued royalties for the sales of kits, as clarified in this Report and Recommendation.
If Defendants have not made all "payments under Section 5 [of the parties Settlement Agreement] that have become due" by the signing of the Settlement Agreement, Defendants have not satisfied condition precedent to dismissal of the action, and the Court cannot dismiss the action unless Defendants make the required payments. See Silicon Image, Inc., 395 F.3d at 1363 ("[T]he bargain embodied by the [parties' settlement agreement] made a dismissal with prejudice of [plaintiff's] patent infringement claims consideration for providing the agreed upon settlement amount and royalty payments"; reasoning that "[o]nce the district court determined that this was the bargain entered into by the parties, it was powerless to order a dismissal with prejudice of [plaintiff's] infringement claims until the parties complied with the terms of the agreement."). The Court should therefore require Defendants to tender payment of all accrued royalties for the sales of kits by a date to be set by the District Court.
Accordingly, to the extent Defendants seek an order dismissing this action with prejudice before they pay all accrued royalties for the sales of kits, as clarified in this Report and Recommendation, the Court RECOMMENDS DENYING the motion. To the extent Defendants seek an order directing Plaintiff to dismiss the action with prejudice after Defendants satisfy the condition precedent to dismissal of the action by making payments of all accrued royalties for the sales of kits, the Court RECOMMENDS GRANTING IN PART the motion. Specifically, the Court RECOMMENDS that the District Court set the deadline for the parties to file their Joint Motion to Dismiss the action within five days of Defendants' deadline to tender full payment of royalties for the sales of kits.
Turing to Defendants' request for $7,644.26 in attorney's fees and costs pursuant to Section 14 of the Settlement Agreement, as well as "further fees and costs associated with the Dismissal Motion," (ECF No. 153 at 13), Section 14 provides, in relevant part, that "[t]he prevailing party in any action or proceeding to enforce this Agreement shall be further entitled to recover all fees and costs associated with commencing the action or proceeding, including attorneys' fees and costs." (ECF No. 152-2 at 8.) For the reasons stated above, Defendants are not entitled to recover their attorney's fees and costs sought in their Motion to Dismiss Action.
D. Conclusion
The Court RECOMMENDS that the District Court issue an order (1) clarifying that the entirety of each of Defendants' kits, regardless of its name, is royalty bearing, and (2) directing Defendants to report and tender the payment of all accrued royalties for the sales of kits, as well as all accrued interest on those royalties, by a date to be set by the District Court. The Court further RECOMMENDS that the District Court set the deadline for the parties to file their Joint Motion to Dismiss the action within five days of Defendants' deadline to tender full payment of accrued royalties and interest for the sales of kits. The Court further RECOMMENDS GRANTING IN PART and DENYING IN PART Defendant's Motion to Dismiss Action [ECF No. 153], and DENYING Defendants' request for attorney's fees and costs. / / / / / / / / /
The Court's recommendation incorporates additional recommendations discussed below in the section addressing Plaintiff's Motion for Enforcement.
III. PLAINTIFF'S MOTION FOR ENFORCEMENT OF SETTLEMENT AGREEMENT AND
RELATED RELIEF [ECF NO. 152]
In its Motion for Enforcement, Plaintiff seeks the following:
1) a finding that Cross has breached the parties' settlement agreement;(ECF No. 152-1 at 30-31.)
2) an order directing Cross to tender immediate full payment and reporting of the overdue royalties for sales of kits pursuant to the parties' written settlement agreement and clarifying (for the fifth time) that the entire kit, regardless of its name, is royalty bearing;
3) a finding of contempt by Cross;
4) a finding that Cross and its counsel have acted in bad faith in the course of litigating and settling this case;
5) a finding that this case is exceptional under 35 U.S.C. § 285;
6) a finding that Evolusion is entitled to enhanced damages in the form of treble damages for the overdue unpaid royalties for sales of kits;
7) a finding that Evolusion is entitled to enhanced damages in the form of treble the amount wrongfully withheld by Cross before July 24, 2020;
8) a finding that Evolusion is entitled to interest on all ordered payments;
9) a finding that Evolusion is entitled to all of its attorneys' fees and costs in connection with the parties' settlement since August 7, 2019, pursuant to the attorneys' fees provision of the parties' written agreement and further pursuant to this Court's authority in law, in equity, and by express agreement of the parties;
10) entry of sanctions against Cross's counsel (Venture LLP and Stuart C. Clark);
11) a finding that Cross's counsel (Venture LLP and Stuart C. Clark) are jointly and severally liable with Cross Engineering, LLC and Wes Cross for the above-requested damages for contempt, including all of Evolusion's attorneys' fees and costs awarded; and
12) entry of injunction against Cross, enjoining Cross from making, using, or selling any of the licensed products under the '845 Patent and the parties' settlement agreement, including kits, until all ordered payments are made (including payment of attorneys' fees and costs) and further until an independent audit of Cross's sales can be completed, with Cross bearing the full cost of the audit. Only once Cross's reported sales and fully paid royalties have been verified by the auditor, Cross may move the Court to lift the injunction.
The Court initially notes that in support of its motion, Plaintiff argues that patent infringement is reserved for the federal courts and gives rise to pendent jurisdiction over related claims. (ECF No. 159 at 5-6.) Plaintiff contends that because the Complaint in this case includes a patent law cause of action, the Court has subject matter jurisdiction under 28 U.S.C. § 1338(a). (Id. at 5.) Plaintiff further asserts that once jurisdiction has been acquired through pleading a federal question, the Court may decide any issue necessary to the disposition of the case, notwithstanding that other non-federal questions of fact and law may be involved. (Id.) In their Opposition, Defendants maintain that this Court cannot adjudicate Plaintiff's unpleaded claim for breach of contract between nondiverse parties in the absence of a federal question. (ECF No. 157 at 14-16, 26, 29.)
As stated above, a district court has the inherent power to enforce "a settlement agreement involving an action pending before it." In re City Equities Anaheim, Ltd., 22 F.3d at 957 (emphasis added); TNT Mktg., Inc., 796 F.2d at 278; Dacanay, 573 F.2d at 1078. "The Court's jurisdiction to enforce settlement agreements between parties in pending cases is well-settled in this Circuit." Brooks v. Tarsadia Hotels, Case No.: 3:18-cv-02290-GPC-KSC, 2020 WL 5870203, at *4 (S.D. Cal. Oct. 2, 2020) (citing Doi v. Halekulani Corp., 276 F.3d 1131, 1136 (9th Cir. 2002); In re City Equities Anaheim, Ltd., 22 F.3d at 957; Wilcox v. Arpaio, 753 F.3d 872, 877 (9th Cir. 2014)). After a district court dismisses an action, however, "[e]nforcement of a settlement agreement . . . is more than just a continuation or renewal of the dismissed suit, and hence requires its own basis for jurisdiction." Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 378 (1994). A district court lacks jurisdiction to enforce a settlement agreement following dismissal unless the district judge either: (1) expressly in the dismissal order, retains jurisdiction over the settlement agreement; or (2) incorporates the terms of the settlement agreement in the dismissal order. Id. at 381-82. A breach of the settlement agreement would then be considered a violation of the order, and ancillary jurisdiction to enforce the agreement would exist. Id. at 381. Otherwise, the enforcement of the settlement agreement is a separate contract dispute requiring independent basis for jurisdiction. See id.
In this case, the action has not yet been dismissed and the case is still pending. Accordingly, the Court has jurisdiction to consider Plaintiff's motion. See In re City Equities Anaheim, Ltd., 22 F.3d at 957; TNT Mktg., Inc., 796 F.2d at 278; Dacanay, 573 F.2d at 1078.
A. Plaintiff's Request for a Finding that Defendants Breached the Parties' Settlement Agreement
Plaintiff moves the Court to find that Defendants breached the parties' Settlement Agreement. (ECF No. 152-1 at 30.) Defendants contend that Plaintiff has not established that they have breached the Settlement Agreement by not paying royalties on kits. (ECF No. 157 at 29; see also id. at 15-16; see also ECF Nos. 153, 166.)
In light of the Court's findings and recommendations with respect to Defendants' Motion to Dismiss Action, Plaintiff's request is premature. If, however, Defendants do not tender the payment of all accrued royalties for the sales of kits, as clarified in this Report and Recommendation, by a date to be set by the District Court (presuming the District Court adopts this Report and Recommendation), Plaintiff's request will become ripe. Accordingly, the Court RECOMMENDS DENYING Plaintiff's request as premature.
B. Plaintiff's Request for an Order Clarifying the Definition of Kit and Directing Defendants to Report and Pay Overdue Royalties for the Sales of Kits
Plaintiff asks the Court to issue an order directing Defendants to "tender immediate full payment and reporting of the overdue royalties for sales of kits pursuant to the parties' written settlement agreement" and clarifying that "the entire kit, regardless of its name, is royalty bearing." (ECF No. 152-1 at 30.) Defendants oppose the request. (See ECF No. 157; see also ECF Nos. 153, 166.)
The Court has discussed the issues implicated by this request in detail above when addressing Defendants' Motion to Dismiss Action. For the reasons stated above, the Court RECOMMENDS that the District Court issue an order clarifying that the entirety of each of Defendants' kits, regardless of its name, is royalty bearing, and requiring Defendants to tender the payment of all accrued royalties for the sales of kits by a date to be set by the District Court. The payments should be accompanied by the reporting documentation required under the terms of the parties' Settlement Agreement. The Court therefore RECOMMENDS GRANTING Plaintiff's request.
C. Plaintiff's Request for Finding of Contempt by Defendants
Plaintiff asserts that Defendants did not make any payments for the sales of kits, and refused to timely make many settlement and royalty payments, despite multiple court orders requiring such payments. (See ECF No. 152-1 at 21-22 (citing ECF No. 112; ECF No. 118 at 1-2; and ECF No. 148 at 8).) Plaintiff maintains that Defendants' "consistent course of violations and unjustified nonpayment paints a picture of bad faith frivolousness, obstinance, disrespect for the Court, and intent to delay." (ECF No. 152-1 at 22.)
An unreacted version of this order appears on the docket as ECF No. 147.
Defendants argue that they have not violated any court orders and made the required payments, and Plaintiff's request should therefore be denied. (See ECF No. 157 at 20-22.) Defendants assert that this Court issued two orders requiring Defendants to make payments: (1) the November 21, 2019 Order [ECF No. 112] and (2) January 17, 2020 Order [ECF No. 118]. (Id. at 10-11, 20-21.) Defendants contend that they complied with the November 21, 2019 Order, and once the January 17, 2020 Order became final, Defendants signed the Settlement Agreement and paid all amounts owed within four days of the signing of the Agreement. (Id. at 11.)
Civil contempt "is a sanction to enforce compliance with an order of the court to compensate for losses or damages sustained by reason of noncompliance." McComb v. Jacksonville Paper Co., 336 U.S. 187, 191 (1949). Civil contempt occurs when a party disobeys a "specific and definite court order" by failing to "take all reasonable steps within the party's power to comply." Reno Air Racing Ass'n v. McCord, 452 F.3d 1126, 1130 (9th Cir. 2006). Civil contempt is a "severe remedy"; therefore, courts should not resort to contempt when there is a "fair ground of doubt as to the wrongfulness of the defendant's conduct." Taggart v. Lorenzen, 139 S. Ct. 1795, 1801-02 (2019) (quotation omitted). A finding of contempt is not warranted where the alleged contemnor's actions were taken in good faith and on a reasonable interpretation of the court order. In re Dual-Deck Video Cassette Recorder Antitrust Litig., 10 F.3d 693, 695 (9th Cir. 1993). "'Substantial compliance' with a court order is a defense to an action for civil contempt." Id. The party alleging contempt is required to show that the opposing party violated the court order by clear and convincing evidence. Id.
The Court issued the following orders requiring Defendants to make payments to Plaintiff:
(1) November 21, 2019 Order required Defendants to tender the initial settlement payment of $68,500, and the royalties that had accrued, including royalties for the sales of kits, by December 2, 2019. (ECF No. 112 at 2.)
(2) January 17, 2020 Order required Defendants to make eighteen monthly payments beginning on January 24, 2020, in the amount of $3,805.56. (ECF No. 118 at 1.) The Order further required the payment of "an ongoing monthly royalty for every accused product sold" in the amount of 18.77 percent, proceeding for the life of the '845 Patent, due within 15 days of the end of the respective preceding month. (Id.) Defendants were ordered to pay the accrued royalty payments for the months of July-November 2019, for sales of the accused kits by January 24, 2020. (Id. at 2.)
(3) May 7, 2020 Order denied Defendants' Motion for Reconsideration of the Court's January 17, 2020 Order, and required Defendants to comply with the terms of the January 17, 2020 Order by May 29, 2020. (ECF No. 147 at 8.) Defendants were ordered to "pay all additional payments due under the terms of the parties' settlement that have accrued since the issuance of the January 17, 2020 Order by May 29, 2020." (Id.)
After paying the initial settlement amount of $68,500 and accrued royalties, with the exception of royalties for the sales of kits, (see Clark Decl. I at 1-2), Defendants moved for reconsideration of the Court's January 17, 2020 Order, and later challenged the Court's January 17, 2020 and May 7, 2020 Orders by filing a petition for writ of mandamus in the United States Court of Appeals for the Federal Circuit, (see ECF No. 150; see also ECF No. 151 at 1-2). On July 17, 2020, the Court of Appeals for the Federal Circuit denied Defendants' petition. See In re Cross Eng'g, LLC, 820 F. App'x. 1021. Several days later, on July 20, 2020, Defendants signed the parties' written Settlement Agreement, and on July 24, 2020, tendered the accrued payments, royalties, and interest, with the exception of royalties for the sales of kits. (ECF No. 152-2; see also Cross Decl.; Clark Decl.)
The Court carefully reviewed the parties' pleadings, as well as all attached declarations and exhibits. As discussed in detail above, the documents presented to the Court as of the filing of Plaintiff's Motion for Enforcement and Defendants' Motion to Dismiss Action, establish that Defendants have made all payments due under the parties' Settlement Agreement, with the exception of royalties for the sales of kits. (See Blazer Decl. at 3; Clark Decl. at 3; Clark Decl. I at 1-2; Cross Decl. at 2.) Defendants' nonpayment reportedly stemmed from their misinterpretation of the definition of a royalty bearing kit. (See Clark Decl.; Cross Decl.) Further, although some of the payments (not including royalties for the sales of kits) were late, Defendants paid interest on such amounts from the due date of each royalty and settlement payment, as required by the parties' Settlement Agreement. (See Cross Decl.)
Having reviewed the declarations filed by Defendants and their counsel in opposition to the instant motion, as well as the procedural history in this case, the Court does not find that the "severe remedy" of civil contempt is warranted under the circumstances. See Taggart, 139 S. Ct. 1795 at 1801-02 (providing that civil contempt is a "severe remedy" and courts should not resort to contempt when there is a "fair ground of doubt as to the wrongfulness of the defendant's conduct."). The Court therefore RECOMMENDS DENYING Plaintiff's request for finding of contempt.
D. Plaintiff's Request for Finding that Defendants and Defense Counsel Acted in Bad Faith , and Request to Impose Sanctions
Plaintiff asks the Court to find that Defendants and their counsel acted in bad faith in the course of litigating and settling this case. (ECF No. 152-1 at 30.) Plaintiff further seeks an "entry of sanctions against Cross's counsel (Venture LLP and Stuart C. Clark)," and "a finding that Cross's counsel (Venture LLP and Stuart C. Clark) are jointly and severally liable with Cross Engineering, LLC and Wes Cross for the above-requested damages for contempt, including all of Evolusion's attorneys' fees and costs awarded[.]" (Id. at 30-31.) Plaintiff seeks sanctions under Federal Rule of Civil Procedure 11, 28 U.S.C. § 1927, and the Court's inherent power. (See id. at 13.)
Defendants and their counsel deny that they acted in bad faith, and argue that Plaintiff's request for sanctions, damages, and other penalties lack merit. (ECF No. 157 at 20-24, 29.) Defendants assert that Plaintiff's claims for sanctions under 28 U.S.C. § 1927 and Rule 11 are unsupported and frivolous, Defendants have not violated any Court orders, and Rule 11 motion is procedurally improper. (Id. at 22-24.)
A district court may sanction parties or their counsel for improper conduct under Federal Rule of Civil Procedure 11, 28 U.S.C. § 1927, and the court's inherent power. Fink v. Gomez, 239 F.3d 989, 991 (9th Cir. 2001). Federal Rule of Civil Procedure 11(b)(1) provides the following:
By presenting to the court a pleading, written motion, or other paper—whether by signing, filing, submitting, or later advocating it—an attorney . . . certifies that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances . . . it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation[.]Id. "If, judged by an objective standard, a reasonable basis for the position exists in both law and fact at the time the position is adopted, then sanctions should not be imposed." Conn v. Borjorquez, 967 F.2d 1418, 1421 (9th Cir. 1992) (quotation omitted). Rule 11 "must be read in light of concerns that it will spawn satellite litigation and chill vigorous advocacy"; however, its main goal is to "deter baseless filings in district court." Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990). "Rule 11 is an extraordinary remedy, one to be exercised with extreme caution." Operating Eng'rs Pension Trust v. A-C Co., 859 F.2d 1336, 1345 (9th Cir. 1988).
28 U.S.C. § 1927 provides: "Any attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct." Id. A court may also impose sanctions pursuant to its inherent authority "if the court specifically finds bad faith or conduct tantamount to bad faith . . . . including recklessness when combined with an additional factor such as frivolousness, harassment, or an improper purpose." B.K.B. v. Maui Police Dep't, 276 F.3d 1091, 1108 (9th Cir. 2002); see also In re Keegan Mgmt. Co., Sec. Litig., 78 F.3d at 435 (sanctions under the court's inherent power are appropriate where the counsel's conduct constitutes or is tantamount to bad faith). "[A]n attorney's reckless misstatements of law and fact, when coupled with an improper purpose, . . . are sanctionable under a court's inherent power." B.K.B., 276 F.3d at 1108.
The Court is intimately familiar with the parties and counsel in this case in light of numerous in-person and telephonic hearings it conducted before and after the Mandatory Settlement Conference. (See Docket.) Having reviewed procedural history, the arguments advanced by Defendants, as well as the declarations filed by Defendants and their counsel, and for the reasons stated above, the Court does not find that Defendants and their counsel acted in bad faith.
The Court also does not find that Defendants' and their counsel's position and arguments in their filings were objectively unreasonable. Rule 11 "extraordinary remedy" is therefore not warranted. While defense counsel was perhaps overzealous in seeking multiple clarifications of the Court's past orders, the circumstances do not establish that counsel "unreasonably and vexatiously" multiplied the proceedings. The Court therefore finds no evidence of bad faith sufficient to warrant sanctions pursuant to the Court's inherent authority or under 28 U.S.C. § 1927.
Accordingly, the Court RECOMMENDS DENYING Plaintiff's request to find that Defendants and their counsel acted in bad faith in the course of litigating and settling this case. The Court further RECOMMENDS DENYING Plaintiff's request for sanctions against defense counsel, Venture LLP and Stuart C. Clark, and DENYING Plaintiff's request for "a finding that Cross's counsel (Venture LLP and Stuart C. Clark) are jointly and severally liable with Cross Engineering, LLC and Wes Cross for the above-requested damages for contempt, including all of Evolusion's attorneys' fees and costs awarded."
E. Plaintiff's Request to Find the Case Exceptional and Award Treble Damages
Plaintiff moves the Court to find that this case is exceptional under 35 U.S.C. § 285, and multiply damages pursuant to 35 U.S.C. § 284. (ECF No. 152-1 at 26-28, 30.) In support, Plaintiff asserts that this case is "exceptional" in light of Defendants' "late payment, continued nonpayment with respect to kits, violations of Court orders, mischaracterizations of law and fact, frivolous contumacy, and other misconduct[.]" (Id. at 26.) Plaintiff argues that "the wrongfully withheld settlement payments and royalties for November 2019 to June 2020, reported by Cross on July 24, 2020, should be trebled as damages under Section 284[,]" and "the remaining amount due as unpaid royalties for kits should likewise be trebled for Cross's continued defiance of this Court and of the Federal Circuit." (Id. at 28; see also id. at 26.) Plaintiff further maintains that the parties' Settlement Agreement expressly provides for attorney's fees, and the release of claims only pertains to claims in the Complaint. (ECF No. 159 at 10-11.) Plaintiff contends that it seeks to enforce the Settlement Agreement following a post-settlement breach by Defendants, and the allegations in the Complaint do not limit or preclude any recovery potentially available for Defendants' post-settlement misconduct not alleged in the Complaint. (Id.) Plaintiff emphasizes that it seeks damages under Section 284 in addition to damages for contempt, sanctions, and attorney's fees. (ECF No. 152-1 at 27.)
Defendants respond that Plaintiff's claim for fees based on an exceptional case finding under 35 U.S.C. § 285 was released under the parties' Settlement Agreement. (ECF No. 157 at 25.) They argue that under Section 12 of the Settlement Agreement, Plaintiff released "all claims . . . asserted against the Cross Parties in the Action by Evolusion[,]" and a claim under 35 U.S.C. § 285 was one of Plaintiff's asserted claims. (Id. (citing ECF No. 29).) Defendants also contend that even if the claim was not released, Plaintiff is not entitled to the relief it seeks because it did not prevail in this case; rather, Plaintiff settled on a compromise basis, with each party acknowledging that the settlement implied no admissions. (Id.) Defendants further assert that their conduct, as well as the conduct of their counsel, was not "exceptional," and ask the Court to deny Plaintiff's request. (Id.)
35 U.S.C. § 285 provides that "[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party." Id. "[A]n 'exceptional' case is simply one that stands out from others with respect to the substantive strength of a party's litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated." Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. 545, 554 (2014); Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 572 U.S. 559, 563 (2014) (same). District courts have discretion to determine whether a case is "exceptional," considering the totality of the circumstances, and may "consider a 'nonexclusive' list of 'factors,' including 'frivolousness, motivation, objective unreasonableness (both in factual and legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence.'" Id. at 554 n.6 (quoting Fogerty v. Fantasy, Inc., 510 U.S. 517, 534 n.19 (1994)); see also SunEarth, Inc. v. Sun Earth Solar Power Co., 839 F.3d 1179, 1181 (9th Cir. 2016) (same). A patent litigant must establish their entitlement to attorney's fees under Section 285 by a preponderance of the evidence. Octane Fitness, LLC, 572 U.S. at 557.
35 U.S.C. § 284 further provides, in relevant part, that "[w]hen the damages are not found by a jury" a court "may increase the damages up to three times the amount found or assessed." Id. "The subjective willfulness of a patent infringer, intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless." Halo Elecs., Inc. v. Pulse Elecs., Inc., 136 S. Ct. 1923, 1933 (2016). While "awards of enhanced damages are discretionary, . . . 'courts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount.'" Georgetown Rail Equip. Co. v. Holland L.P., 867 F.3d 1229, 1244 (Fed. Cir. 2017) (quoting Halo Elecs., Inc., 136 S. Ct. at 1932).
This case settled during a Mandatory Settlement Conference, and each party acknowledged in their executed written Settlement Agreement that the settlement implied no admissions. (See ECF No. 152-2 (containing Section 2 of the parties' Settlement Agreement, which provides that "it is understood and agreed that this is a compromise and release of disputed claims," and "nothing contained herein shall be construed as an admission by any Party of liability or responsibility of any kind, or a concession by any Party that assertions of any other Party with respect to any claims or defenses are valid.").) Further, despite the parties' settlement, the case has not yet been dismissed. Finally, as discussed above, the Court cannot find that Defendants acted in bad faith, or that the arguments they have been advancing were frivolous or objectively unreasonable. Based on the record before it, and considering the totality of the circumstances in this case, the Court concludes that Defendants' and their counsel's conduct was not "so 'exceptional' as to justify an award of fees." Octane Fitness, LLC, 572 U.S. at 555 (stating that a district court may award attorneys' fees when a "party's unreasonable conduct . . . is nonetheless so 'exceptional' as to justify an award of fees."); see also Highmark Inc., 572 U.S. at 564 ("'[A]s a matter of the sound administration of justice,' the district court 'is better positioned' to decide whether a case is exceptional, because it lives with the case over a prolonged period of time."). The Court therefore RECOMMENDS DENYING Plaintiff's requests to find the case exceptional and award treble damages.
Because the Court finds that Plaintiff's request lacks merit, it needs not address Defendants' argument that Plaintiff's claim for fees based on an exceptional case finding under 35 U.S.C. § 285 was released under the parties' Settlement Agreement. (See ECF No. 157 at 25).
F. Plaintiff's Request for Interest on All Ordered Payments
Plaintiff seeks a finding that it is entitled to receive interest on all ordered payments. (ECF No. 152-1 at 30.) Defendants oppose the request. (See ECF No. 157.)
The parties' Settlement Agreement contains a provision stating the following:
[I]f the records reveal an underpayment to Evolusion then Cross Engineering shall pay Evolusion the amount of underpayment due together with simple interest thereon at a rate ten percent (10%) per annum for the underpayment amount due from the time when the payment thereof should have been made pursuant hereto until the time of actual payment thereof on behalf of or by Cross Engineering.(ECF No. 152-2 at 7.) As discussed above, the Court recommends issuing an order directing Defendants to pay all accrued royalties for the sales of kits. Consistent with this recommendation, Defendants should pay interest on the accrued royalties for the sales of kits, pursuant to the terms of the parties' Settlement Agreement. Accordingly, the Court RECOMMENDS GRANTING Plaintiff's request. / / / / / /
G. Plaintiff's Request for Attorneys' Fees and Costs in Connection with the Parties' Settlement
Plaintiff seeks a finding that it is entitled to "all of its attorneys' fees and costs in connection with the parties' settlement since August 7, 2019, pursuant to the attorneys' fees provision of the parties' written agreement and further pursuant to this Court's authority in law, in equity, and by express agreement of the parties[.]" (ECF No. 152-2 at 30; see also id. at 25-26.) Plaintiff argues that the parties' Settlement Agreement provides for attorney's fees, the release of claims only pertains to claims in the Complaint, and Plaintiff seeks to enforce the Settlement Agreement following a post-settlement breach by Defendants. (Id. at 26; see also ECF No. 159 at 10-11.) Plaintiff further states that if the Court makes the above findings of Defendants' liability for attorneys' fees and costs, Plaintiff will provide a full accounting of the fees and costs incurred since August 7, 2019. (ECF No. 152-2 at 31.)
Defendants contend that attorney's fees under the Settlement Agreement are only recoverable following notices of default given under the Settlement Agreement. (ECF No. 157 at 26-28.) Defendants further assert that even if Plaintiff were to be found entitled to some award of fees, costs, or damages, Plaintiff's failure to submit evidentiary support for its claims requires them to be dismissed for failure of proof. (Id. at 27.)
Section 14 of the parties' Settlement Agreement provides the following in relevant part:
If the defaulting party fails to cure the breach within ten (10) days after . . . written notice, the Party not in default shall be entitled to commence such legal proceedings as may be appropriate to enforce this Agreement, and/or to seek any other appropriate remedy available in law, including specific performance, and/or to seek damages and/or injunctive relief. The prevailing party in any action or proceeding to enforce this Agreement shall be further entitled to recover all fees and costs associated with commencing the action or proceeding, including attorneys' fees and costs.(ECF No. 152-2 at 8.) As discussed above, the Court does not find that at this stage of the proceedings Defendants breached the parties' Settlement Agreement. Further, under the facts of this case, the Court does not find that the award of fees and costs is warranted "pursuant to this Court's authority in law [and] in equity." Accordingly, the Court RECOMMENDS DENYING Plaintiff's request.
Defendants also seek an award of their fees and costs associated with opposing Plaintiff's Motion for Enforcement under Section 14 of the Settlement Agreement, in the sum of $12,660, as well as "additional fees and costs as may be incurred." (ECF No. 157 at 27-29.) The Court does not find that the request is warranted under the circumstances and RECOMMENDS DENYING Defendant's request for attorney's fees and costs.
H. Plaintiff's Request for Permanent Injunction
Plaintiff moves the Court to
enjoin Cross from making, using, or selling any of the licensed products under the '845 Patent and the parties' settlement agreement, including kits, until all ordered payments are made (including payment of attorneys' fees and costs) . . . until an independent audit of Cross's sales can be completed, with Cross bearing the full cost of the audit.(ECF No. 152-1 at 31; see also id. at 28-31.) In its reply, Plaintiff clarifies that it seeks a permanent injunction barring Defendants from selling any of the licensed products, including kits, for the remaining term of the '845 Patent. (ECF No. 159 at 11.) Defendants argue that Plaintiff has not established that the circumstances in this case warrant the issuance of an injunction. (Id.)
35 U.S.C. § 283 authorizes courts to issue injunctions in patent cases. A plaintiff seeking a permanent injunction must demonstrate the following:
(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006). "The decision to grant or deny permanent injunctive relief is an act of equitable discretion by the district court, reviewable on appeal for abuse of discretion." Id.
1. Irreparable Injury
Plaintiff contends that Defendants, its direct competitors, have been selling kits licensed under the '845 Patent since August 7, 2019 without paying royalties, and "every sale of an accused Cross product harms Evolusion by way of lost profits." (ECF No. 152-1 at 28.) Although a competitor's underpayment of royalties constitutes an injury, Plaintiff does not explain why its alleged injury is irreparable. For example, Plaintiff does not explain why the payment of the accrued royalties for the sales of kits, as well as interest on those royalties, would not adequately compensate it for Defendants' alleged nonpayment of such royalties. Accordingly, the Court finds that Plaintiff has not established irreparable injury, and this factor therefore weighs against the issuance of a permanent injunction.
2. Adequacy of Legal Remedies
The second factor asks whether legal remedies are inadequate to compensate Plaintiff for its injuries. Plaintiff asserts that "[i]f defendants cannot be made to pay what they owe, then Evolusion's remedy at law has proven inadequate." (ECF No. 128-1 at 28; see also ECF No. 152-1 at 29 (citing ECF No. 128-1 at 28).) Defendants have paid all royalties with the exception of the royalties on the sales of kits, and Defendants' underpayment stemmed from a misconstrued definition of royalty bearing kits. There is no evidence before the Court indicating that Defendants are unable to pay the royalties at issue. Furthermore, the parties' fully executed Settlement Agreement gives Plaintiff audit rights to inspect Defendants' financial, manufacturing, and other reporting documents necessary to verify Defendants' reported sales. (See ECF No. 152-2 at 7-8.) The Settlement Agreement also provides Plaintiff with various remedies, including specific performance, damages, and injunctive relief, in case of breach by Defendants. (See id. at 8.) In the absence of any other explanation why legal remedies are inadequate to compensate for Plaintiff's injuries, the Court finds that this factor weighs against the issuance of a permanent injunction.
3. Balance of Hardships
The third factor requires the Court to balance the hardships between Plaintiff and Defendants. Plaintiff does not adequately explain what hardships it would suffer if an injunction does not issue; rather, it asserts that many alternative non-infringing methods exist for making a firearm compliant with California law, and Defendants could thus offer alternative methods of modifying a firearm to comply with California law without infringing Plaintiff's patent. (ECF No. 128-1 at 28; see also ECF No. 152-1 at 29 (citing ECF No. 128-1 at 28).) The Court is not persuaded that the use of the alternative methods of modifying a firearm will not impose some hardship on Defendants. Notably, Plaintiff carefully negotiated the terms of the Settlement Agreement with Defendants, which is now fully executed. (See ECF No. 152-2.) The Settlement Agreement requires Defendants' ongoing royalty payments and provides mechanisms for the resolutions of disputes with respect to such payments. (See id.) Accordingly, this factor weighs against the issuance of a permanent injunction.
4. Public Interest
The fourth factor requires Plaintiff to establish that the public interest would be served by a permanent injunction. "[T]he public interest nearly always weighs in favor of protecting property rights in the absence of countervailing factors, especially when the patentee practices his inventions." Apple v. Samsung, 809 F.3d 633, 645-46 (Fed. Cir. 2015). In this case, the public interest in protecting patent rights and discouraging future wrongdoing would be served by the issuance of a permanent injunction. This factor therefore weighs in favor of the issuance of permanent injunction.
After considering the equitable factors, the Court concludes that the majority of the factors weigh against imposing a permanent injunction. Accordingly, the Court RECOMMENDS DENYING Plaintiff's request for the issuance of a permanent injunction. See Am. Calcar, Inc. v. Am. Honda Motor Co., Inc., CASE NO. 06cv2433 DMS (CAB), 2008 WL 11337489, at *2 (S.D. Cal. Nov. 18, 2008) (denying plaintiff's motion for entry of permanent injunction in a patent case, where the public interest factor weighed in favor of the issuance of a permanent injunction, but the remaining factors weighed against such injunction).
Turning to Plaintiff's request to impose the entire cost of audit on Defendants, Section 13.3 of the parties' Settlement Agreement provides that "Evolusion shall bear the full cost of preparing the annual report, unless there is more than a five percent (5%) underreporting discrepancy found, in which case Cross Engineering shall bear the full cost in addition to paying the royalties due and interest as set out in Section 1.1, supra." (ECF No. 152-2 at 7.) At this point, Plaintiff's request is premature and speculative because there is no evidence before the Court showing that there is an underreporting discrepancy exceeding five percent. Even if such discrepancy exists, the parties carefully negotiated the above provision detailing their payment obligations in case of payment discrepancies. Because the parties' executed Settlement Agreement expressly describes their payment obligations for an audit, the Court RECOMMENDS DENYING Plaintiff's request to issue an order imposing the costs of the audit on Defendants.
I. Conclusion
For the reasons stated above the Court RECOMMENDS that the District Court GRANT IN PART and DENY IN PART Plaintiff's Motion for Enforcement [ECF No. 152]. The Court RECOMMENDS that the District Court GRANT Plaintiff's request for an order (1) clarifying that the entirety of each of Defendants' kits, regardless of its name, is royalty bearing, and (2) directing Defendants to report and tender the payment of all accrued royalties for the sales of kits, as well as all accrued interest on those royalties, by a date to be set by the District Court. The Court RECOMMENDS DENYING all of Plaintiff's remaining requests in the Motion for Enforcement [ECF No. 152]. The Court further RECOMMENDS DENYING Defendant's request for an award of fees and costs associated with opposing Plaintiff's Motion for Enforcement.
IV. CONCLUSION AND RECOMMENDATION
For the reasons discussed above, IT IS HEREBY RECOMMENDED that the District Court issue an order: (1) adopting this Report and Recommendation; (2) GRANTING IN PART and DENYING IN PART Plaintiff's Motion for Enforcement [ECF No. 152]; and (3) GRANTING IN PART and DENYING IN PART Defendants' Motion to Dismiss Action [ECF No. 153].
IT IS ORDERED that no later than February 22 , 2021 , any party to this action may file written objections with the Court and serve a copy on all parties. The document should be captioned "Objections to Report and Recommendation."
IT IS FURTHER ORDERED that any reply to the objections shall be filed with the Court and served on all parties no later than February 26 , 2021 . The parties are advised that failure to file objections within the specified time may waive the right to raise those objections on appeal of the Court's order. See Turner v. Duncan, 158 F.3d 449, 455 (9th Cir. 1998).
IT IS SO ORDERED. Dated: February 12, 2021
/s/_________
Honorable Michael S. Berg
United States Magistrate Judge