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XCO INTERNATIONAL INCORP. v. PACIFIC SCIENTIFIC CO.

April 25, 2003

XCO INTERNATIONAL INCORPORATED, PLAINTIFF,
v.
PACIFIC SCIENTIFIC COMPANY, DEFENDANT



The opinion of the court was delivered by: John W. Darrah, United States District Judge.

MEMORANDUM OPINION AND ORDER

Plaintiff, XCO International Inc. ("XCO"), filed suit against Defendant, Pacific Scientific Co. ("Pacific"), alleging breach of contract Pacific filed a counterclaim, alleging that XCO breached a licensing agreement between the parties. Judgment was entered in favor of Pacific on XCO's breach of contract claim and in favor of XCO on Pacific's counterclaim. Presently before the Court are: (1) XCO's Motion for Attorney's Fees and Costs Pursuant to Federal Rule of Civil Procedure 11; (2) XCO's Motion for Attorney's Fees and Costs Pursuant to 28 U.S.C. § 1927; (3) XCO's Motion for Attorney's Fees and Costs Pursuant to 35 U.S.C. § 285; (4) Pacific's Cross-Motion for Attorney's Fees Pursuant to Rule 11; (5) XCO's Motion for Costs; and (6) Pacific's Motion for Costs.

BACKGROUND

Certain United States Patents ("Patents") were owned by XCO. In February 1991, XCO entered into a Purchase Agreement with Pacific for the purchase of the Patents. At the same time, XCO entered into a License Agreement with Pacific, granting XCO an exclusive license to use and sell products under the Patents throughout the world.

Prior to August 2001, XCO brought a breach of contract suit against Pacific in the Circuit Court of Kane County, alleging that Pacific failed to pay maintenance fees required by the Purchase Agreement The action was removed from the Circuit Court of Kane County to this Court. Pacific filed its answer and a counterclaim against XCO, alleging that XCO breached the License Agreement by failing to pay royalties for sales of the product and by increasing prices for the product without justification, as required by the License Agreement.

XCO filed an Answer and Affirmative Defenses to the Counterclaim; wherein, XCO denied that the product was the same product that was the subject of the License Agreement XCO's affirmative defenses included laches, statute of limitations, payment accord and satisfaction, unclean hands, and waiver.

XCO filed Motions for Summary Judgment in its favor on its complaint and against Pacific on the Counterclaims. XCO's Motion for Summary Judgment on Pacific's breach of contract claim for failure to pay royalties for the time periods of 1991 to 1993 and 1998 to the present was based on the grounds that the royalties allegedly owed for 1991 to 1993 were barred by the applicable statute of limitations. The Court found that the claim for royalties sought for 1991 to 1993 were time barred.

As additional grounds, XCO contended that no royalties were owed for 1998 to the present and that XCO was allowed to raise the prices because XCO had only sold the new product to Pacific which was not the product covered by the License Agreement. On October 1, 2002, the Court granted XCO's Motion for Summary Judgment on the counterclaim against it for 1998 to the present, finding that the new product was not covered by the License Agreement.

On that same day, the Court denied XCO's Motion for Summary Judgment against Pacific on XCO's breach of contract claim. XCO filed a Motion for Reconsideration of this ruling which was denied on December 18, 2002. On January 8, 2003, XCO filed the three motions for sanctions. Subsequently, each party filed a motion for costs. On March 10, 2003, Pacific filed a cross-motion for sanctions.

ANALYSIS

1. XCO's Motion for Attorney's Fees and Costs Pursuant to Rule 11

Federal Rule of Civil Procedure Rule 11 states, in pertinent part:

(b) By presenting to the court . . . a pleading, written motion, or other paper, an attorney . . . is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, —
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law . . .
(3) 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;
(c) Sanctions. If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation.
Pursuant to Rule 11, the motion for sanctions must be (1) made separately from other motions and (2) it may not be presented to the court unless, within twenty-one days of service, the non-movant has not withdrawn or corrected the challenged behavior. Fed.R.Civ.P. 11(c)(1)(A); Divane v. Krull Electric Co., 200 F.3d 1020, 1025 (7th Cir. 1999) (Divane). It is an abuse of discretion to impose sanctions without adhering to the twenty-one day "safe harbor". However, Rule 11(c)(1)(A) does not specify a specified time period when a motion for sanctions must be filed. See Divane, 200 F.3d at 1025.

To measure the reasonableness of a party's inquiry into the factual bases of its claims, the court reviews several factors, including: whether the signer of the document has sufficient time for investigation; the extent to which the attorney had to rely on his client for the factual foundation underlying the pleading; the complexity of the facts and the ability to do a sufficient pre-billing investigation; and whether discovery would have been helpful to the development of the underlying facts. See Divane, 200 F.3d at 1028. However, a party is not required to revise pleadings to conform with newly discovered evidence that were not subject to sanctions when the papers were filed. See Pantry Queen Foods, Inc. v. Lifschultz Fast Freight, Inc., 809 F.2d 451, 454 (7th Cir. 1987). "The signer's conduct must be judged by inquiring what was reasonable to believe at the time the pleading or other paper was signed", and the attorney "need not advance a winning argument to avoid Rule 11 sanctions." LaSalle Nat. Bank of Chicago v. County of DuPage, 10 F.3d 1333, 1338 (7th Cir. 1993).

XCO asserts that Pacific violated Rule 11 by filing its counterclaims before reasonably investigating and examining whether the product at issue was covered by the License Agreement. XCO contends that Pacific should have interpreted the claims of the underlying patents and should have tested the product to determine if it fell within the claim limitations of the underlying patents and; therefore, was subject to the License Agreement. Moreover, Pacific persisted in its counterclaim against XCO despite learning through discovery and being informed by XCO that the new product it was selling was not the product covered by the License Agreement. XCO seeks $383,894.43 in attorney's fees and costs in defending the counterclaims.

Pacific contends that the Rule 11 motion should be denied because XCO did not comply with the twenty-one day safe harbor provision. In its response to the motion, Pacific states that it was served with the motion on January 8, 2003. Later, it states that it was not served prior to January 16, 2003. The conflicting statements are not clarified in the response nor are they supported by any affidavits or exhibits.

XCO states that Pacific was served with the motion on January 8, 2003; the motion was filed on January 29, 2003, and presented to the Court on February 4, 2003. Based on these facts, the motion was filed in accordance with the twenty-one day safe harbor provision.

Pacific next contends XCO's Rule 11 motion for sanctions was untimely because it was not filed as soon as possible. Instead, XCO waited until over 100 days after summary judgment was granted on October 1, 2002.

Motions for sanctions should be filed as soon as practicable after the discovery of a Rule 11 violation. See Divane, 200 F.3d at 1027; Kaplan v. Zenner, 956 F.2d 149, 151 (7th Cir. 1992). However, they can be filed after entry of judgment. Divane, 200 F.3d at 1027.

XCO responds that it was necessary to wait until summary judgment was entered because Pacific failed to produce relevant evidence in the course of discovery and that it was not until the resolution of the summary judgment proceedings that the lack of evidentiary support for Pacific's claims could be conclusively determined. However, this contention by XCO is flatly contradicted by XCO's assertion that Pacific proceeded on its counterclaim in bad faith. XCO claims that Pacific knew the product at issue was not covered by the counterclaim as early as April or May of 2002. In support of this argument, XCO identifies filings XCO made to the Court which informed Pacific of this fact as well as an expressed warning to Pacific that Pacific was violating Rule 11 by maintaining its counterclaim.

Obviously, XCO believed that Pacific's counterclaims were meritless at this time because both parties knew XCO had been selling a product that was not included in the License Agreement XCO clearly believed that Pacific was, therefore, in violation of Rule 11 in this regard as early as April/May 2002.

XCO attempts to justify the eight-month delay after it first believed that Pacific's claims were meritless and in violation of Rule 11. XCO first argues that equitable considerations of warning Pacific in April/May 2002 excuse XCO's delay. Second, XCO argues that its reliance on the ruling in Divane v. Krull Electric Co., 200 F.3d 1020 (7th Cir. 1999), i.e., that a motion for sanctions under Rule 11 could be filed after the entry of summary judgment, supports a finding that the present motion was timely. XCO's attempted justification is meritless. XCO's "warning" to Pacific clearly demonstrates that it believed that Pacific's claims were meritless and in violation of Rule 11 even before the close of discovery. Instead of timely acting on this knowledge, XCO continued with the litigation and filed motions for summary judgment and a motion for reconsideration.

Furthermore, XCO's reliance on the Divane court's holding, that a sanctions motion need not be filed prior to the entry of summary judgment, is contrary to Divane's explicit caution that `[r]easonableness is necessarily dictated by the specific facts and circumstances in a given case'. Divane, 200 F.3d at 1028. The prevailing party in Divane did file a motion for Rule 11 sanctions prior to trial when the evidence first suggested the claims were meritless. But the motion was refiled after trial because the trial court had dismissed the original motion as premature. Here, XCO did not move for sanctions until more than eight months after it believed Rule 11 sanctions were appropriate and only after extensive motion practice and the entry of final judgment. Based on these facts, XCO's Motion for Sanctions Pursuant to Federal Rule of Civil Procedure was not filed as soon as practicable after the discovery of a Rule 11 violation; and ...


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