Summary
denying defendant's motion for Rule 11 sanctions without prejudice and allowing defendant to renew the motion at the close of discovery
Summary of this case from Int'l Techs. Mktg., Inc. v. Verint Sys., Ltd.Opinion
No. 04 Civ. 1691 (KMW) (DF).
November 4, 2004
MEMORANDUM AND ORDER
In this patent infringement case, referred to me by the Honorable Kimba M. Wood for general pretrial supervision, defendant Investment Technology Group, Inc. ("Defendant" or "ITG") has moved under Federal Rule of Civil Procedure 11 for monetary sanctions against plaintiffs John K. Wald and Pendelton Trading Systems Inc. (collectively "Plaintiffs") and their counsel, for purportedly asserting a baseless claim, without sufficient pre-litigation investigation of the merits of that claim. Plaintiffs, in turn, have requested their fees and costs for having to defend what they characterize as a baseless sanctions motion. For the following reasons, the parties' requests for sanctions are denied without prejudice.
BACKGROUND
In their Complaint, Plaintiffs allege that various of Defendant's products, including a product known as ITG ACE™ ("Agency Cost Estimator"), infringe United States Patent No. 6,493,682 (the "'682 Patent"). ( See Complaint, dated Mar. 1, 2004 ("Compl."), ¶ 28.) According to Plaintiffs' Complaint, the '682 Patent claims, inter alia, "a method permitting an investor to maximize portfolio gains by determining the optimal execution price at which the limit order (or similar order) should be placed." ( Id. ¶ 9.) ITG asserts, in its sanctions motion, that the claims of the '682 Patent are, on their face and based on Plaintiffs' own statements in the Complaint, restricted to methods involving "limit orders." (ITG's Memorandum of Law In Support of Its Motion for Sanctions, dated Apr. 15, 2004, at 2.) Further, ITG contends that, prior to commencing this action, Plaintiffs knew (or should have known, from reasonable investigation, including a review of ITG's marketing material) that ITG ACE does not apply to "limit orders," but rather only to "market orders," and that the patent in suit therefore cannot cover this particular product. ( Id. at 4-8.)
Prior to moving for Rule 11 sanctions, ITG, in compliance with the Rule's requirements, requested that Plaintiffs withdraw their infringement claim as to ITG ACE. Plaintiffs declined to withdraw the claim, taking the position that Defendant has engaged in an overly narrow reading of the patent. ( See Plaintiff's Memorandum in Opposition to Defendant's Motion for Sanctions, dated June 4, 2004 ("Pl. Mem."), at 6-7.) According to Plaintiffs, the '682 Patent is not restricted in the manner ITG describes, but rather is broad enough to cover a product that, like ITG ACE, allegedly assists a trader in choosing whether to make a "limit" or a "market" order. ( Id. at 7.)
See Motion for Sanctions Pursuant to Federal Rule of Civil Procedure 11, dated Apr. 15, 2004 (Dkt. 8), at 1.
Although ITG is seeking only monetary sanctions and not dismissal of the claim directed to ITG ACE, it is apparently ITG's hope that an early sanctions ruling by the Court will force Plaintiffs to withdraw the claim. ( See id. at 4.) On this point, Plaintiffs ask the Court to take note of the fact that, despite ITG's contention that Plaintiffs' claim is flawed on its face, ITG never moved to dismiss the claim, but rather answered the Complaint. ( Id. at 1.) Nor did ITG move for summary judgment on this claim, and indeed, discovery in the action is at an early stage.
DISCUSSION
Under Rule 11, when an attorney files a complaint, he or she is representing to the Court that, "to the best of [his or her] knowledge, information, and belief, formed after an inquiry reasonable under the circumstances," . . . the claims therein "are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law." Fed.R.Civ.P. 11(b)(2). Further, in filing the complaint, the attorney is representing that, after reasonable inquiry, he or she believes that "the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery." Fed.R.Civ.P. 11(b)(3). It appears that ITG is arguing that Plaintiffs and/or their counsel violated both of these provisions, although, as Plaintiffs point out ( see Pl. Mem. at 3), only counsel (not the represented party itself) may be sanctioned for a violation of Rule 11(b)(2). See Fed.R.Civ.P. 11(c)(2)(A).
ITG contends that, in the context of a patent infringement suit, Rule 11's requirement of pre-suit, reasonable inquiry should be considered a "gateway," so that, if a plaintiff cannot demonstrate at the outset that it made such an inquiry, the defendant should not be required to defend against the claim in any way. In support of this position, ITG relies on Federal Circuit authority, most specifically View Eng'g, Inc. v. Robotic Vision Sys., Inc. v. Morrison Law Firm, 208 F.3d 981, 986 (Fed. Cir. 2000) (cited in Reply Memorandum of ITG In Support of Motion for Sanctions, dated June 18, 2004, at 3-5), in which the court noted:
A patent suit can be an expensive proposition. Defending against baseless claims of infringement subjects the alleged infringer to undue costs — precisely the scenario Rule 11 contemplates. Performing a pre-filing assessment of the basis of each infringement claim is, therefore, extremely important. In bringing a claim of infringement, the patent holder, if challenged, must be prepared to demonstrate to both the court and the alleged infringer exactly why it believed before filing the claim that it had a reasonable chance of proving infringement. Failure to do so should ordinarily result in the district court expressing its broad discretion in favor of Rule 11 sanctions, at least in the absence of a sound excuse or considerable mitigating circumstances.Id.
Plaintiffs, however, argue that ITG's early Rule 11 motion is a ploy to obtain a favorable ruling on an issue of patent claim construction — without discovery and in advance of a Markman hearing — and to secure the de facto dismissal of a claim without having to make either a motion to dismiss or for summary judgment. ( See Pl. Mem. at 1-2.) In support of this argument, Plaintiff cites the decision of this Court in Safe-Strap Co. v. Koala Corp., 270 F. Supp. 2d 407 (S.D.N.Y. 2003), in which the Court opted to defer ruling on a similarly early Rule 11 motion until the end of the litigation. In that case, the Court reasoned that the defendant's motion was improperly serving as a surrogate for a summary judgment motion. See id. at 412, 414 ("Koala's Rule 11 motion is, inter alia, a transparent effort to procure a favorable Markman claim construction determination and to thereby influence the resolution of this action.").
Upon consideration of both parties' arguments, the Court acknowledges the tension between, on the one hand, a sanctions rule that is intended to prevent frivolous litigation, and, on the other hand, the discovery and summary judgment rules that enable the Court to determine claims on their merits with the benefit of a full record. Taking both sides' arguments into account, the Court concludes that the better course is not to entertain ITG's sanctions motion at this time.
The Rule 11 cases cited by ITG involved sanctions motions brought upon much more fully developed records than the record that currently exists in this case. For example, in View Eng'g, the Rule 11 motion was made in conjunction with a summary judgment motion, and was granted only after the party asserting the challenged claims had admitted that it had no factual basis for its claims and had voluntarily withdrawn most of them. See View Eng'g, 208 F.3d at 982, 984. In contrast, the early-stage posture of this case is much more akin to the posture of the case in Safe-Strap, and, in the circumstances presented, the Court finds the logic of that well-reasoned opinion to be compelling. Here, as in that case, it appears that the parties dispute whether the particular infringement claim at issue has merit. In all likelihood, the merits of the claim will only be resolved following a claim construction hearing. At this point, it would be putting the cart before the horse for the Court to construe the language of the patent claims, just so as to determine the merits of the sanctions motion.
Moreover, the Court notes that deciding the Rule 11 motion in ITG's favor at this juncture would not substantially reduce either the breadth or cost of discovery in this action. Nor would it shield from discovery any potentially sensitive, commercial information regarding the operation of the ITG ACE product. Even if Plaintiffs were to withdraw their infringement claim directed to ITG ACE, the infringement claims as to ITG's other products would remain, including claims that are directed to at least one more comprehensive product (called "QuantEX"), into which it appears that the ITG ACE product is integrated. ( See Pl. Mem. at 9.) Thus, it appears that ITG will incur essentially the same costs to defend this case — and will likely need to disclose the same information about ITG ACE — regardless of the outcome of the motion.
CONCLUSION
As both the parties and the Court would benefit from the development of the record before having to address matters of patent claim construction, and as Defendant would not suffer undue prejudice from having to engage in discovery with respect to the ITG ACE product, Defendant's motion for Rule 11 sanctions is denied, without prejudice to renew the motion at the close of discovery. Plaintiffs' counter-request for sanctions is likewise denied without prejudice.
SO ORDERED.