Free Motion for Sanctions - District Court of Arizona - Arizona

1 Terry E. Fenzl (#002485) C. Mark Kittredge (#013907) 2 PERKINS COIE BROWN & BAIN P.A. 3 2901 North Central Avenue Post Office Box 400 4 Phoenix, Arizona 85001-0400 (602) 351-8000 5 [email protected] 6 [email protected] 7 Attorneys for Defendants 8 9 10 11 Richard G. Krauth, an individual, and R.M. 12 Wade & Co., an Oregon corporation, 13 14 15 16 Phelps Dodge Corporation, a New York corporation, et al., 17 Defendants. 18 19 20 21 22 Pursuant to Federal Rules of Civil Procedure 15 and 16, Defendants(Oral Argument Requested) vs. Plaintiffs, No. CV 04-0544 PHX PGR UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA

DEFENDANTS' MOTION FOR SANCTIONS AGAINST PLAINTIFFS FOR VIOLATING THE COURT'S AUGUST 16, 2004 ORDER AND FOR LEAVE TO AMEND THEIR ANSWER TO INCLUDE ADDITIONAL INEQUITABLE CONDUCT AND UNCLEAN HANDS DEFENSES

23 Counterclaimants request that the Court (a) preclude Plaintiffs from relying on the United 24 States Patent and Trademark Office's reexamination and expected re-allowance of the 25 patent claims at issue as a sanction for their violation of this Court's Order of August 16,

26 2004; and (b) permit Defendants to file a proposed amended Answer adding additional

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affirmative defenses of unclean hands and inequitable conduct. The proposed amended pleading is attached as Exhibit 1; a redline against the current pleading is attached as Exhibit 2. A proposed form of order will be provided to the Court pursuant to the Case Management/Electronic Case Filing rules. I. SUMMARY On August 16, 2004, this Court conducted a scheduling conference. At that time, Plaintiffs urged the Court to stay this case while Plaintiffs petitioned the Patent Office to "reexamine" the two patents involved in this litigation. The Court did stay the case, but ordered Plaintiffs to provide Defendants with copies of the petitions for reexamination of the `279 and `806 patents that Plaintiffs intended to file with the Patent Office. Because Patent Office reexaminations are ex parte proceedings, the Court's Order was intended to enable Defendants to review the petitions and determine whether to include any responsive arguments in those petitions. On August 25, 2004, Plaintiffs sent Defendants two documents that they represented to be "the two reexamination requests." Those petitions were short (nine pages each) and non-argumentative, so Defendants chose not to submit any counterarguments to those specific petitions. Shortly thereafter, Plaintiffs filed petitions with the Patent Office that were very different from the petitions they had sent to Defendants for review: Plaintiffs added twelve additional pages to each petition, presenting extensive argument that Defendants had not been allowed to preview. Plaintiffs violated their duty of candor to the Patent Office by misdescribing the prior art and failing to disclose known contrary evidence that was material to the reexamination. Even worse, newly discovered evidence (produced by Plaintiffs within the past couple weeks, and confirmed by Plaintiffs' counsel during his March 21 deposition) has just revealed that Plaintiffs intentionally violated the Court's Confidential information has been deleted and filed separately intended to Order: Plaintiffs first drafted the petition theyunder seal file with the Patent Office, then

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removed large sections of theinformation has beenitdeleted and filed Confidential draft before sending to Defendants, then they reinserted separately under seal those deleted sections and filed the originally-drafted document with the Patent Office. This motion seeks two kinds of relief: First, the Court should sanction Plaintiffs for their direct and knowing violation of its August 16, 2004 Order. In particular, under Rule 16(f) and its inherent authority, the Court can and should preclude Plaintiffs from relying on the reexamination in this case, and it should strike the corresponding allegations from Plaintiffs' amended Complaint. Second, the Court should permit Defendants to amend their Answer to include additional defenses based on Plaintiffs' misconduct--namely, allegations of inequitable conduct during the reexamination and unclean hands barring equitable relief. (Defendants are required to move for leave to amend under Rule 16(b) because on January 24, 2006, the Court retroactively imposed a January 23, 2006 deadline for amending the pleadings. Defendants have good cause to amend because they only recently learned of Plaintiffs' intentional misconduct and there will be no prejudice to Plaintiffs because the discovery cutoff and trial date are far away.) II. FACTUAL BACKGROUND A. The Court's August 16, 2004 Order Required Plaintiffs to Provide Defendants with Copies of Their Reexamination Requests So that Defendants Could Rebut Plaintiffs Arguments for Patentability.

On July 2, 2004, Defendants produced documents in this case pursuant to a discovery request seeking prior art that might invalidate the patents. Included in that production was a 1978 report written by William Rudy entitled "Heap Leaching at Cyprus Johnson" (the "Rudy Report").1 During July 2004, Plaintiffs informed

Defendants that they were planning to ask the Patent Office to reexamine their patents in light of prior art that Defendants had raised, presumably including the Rudy Report. Cyprus Johnson Camp Mine is a copper mine located 65 miles east of Tucson in Cochise County.
1

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Plaintiffs then asked this Court to stay the litigation pending that reexamination. [August 3, 2004 Joint Case Mgmt. Report at 3] Defendants opposed a stay. [Id. at 8] At a scheduling conference on August 16, 2004, Defendants expressed concerns regarding the ex parte nature of Patent Office reexamination proceedings. The Court granted the stay, but ordered Plaintiffs to provide Defendants with copies of the petitions within one week so that Defendants could review them and submit any responsive arguments that they wanted Plaintiffs to include in the reexamination petitions. The Court's minute order stated: "Plaintiff to provide defendant copy of reexamination petition within 1 week. Defendant argument for inclusion due 9/6/04." B. In Violation of the Court's Order, Plaintiffs Removed Arguments from the Reexamination Petitionsdeleted and filed separately under seal to Defendants. Confidential information has been Before Providing Them

requests." [Exhibit 3] The petitions were straightforward and nonargumentative, merely identifying the newly-discovered prior art without making arguments as to the validity of the patents over that art. Because Plaintiffs had made no arguments warranting a

On August 25, 2004, Plaintiffs faxed Defendants "a copy of the two reexamination

response, Defendants decided not to respond and advised Plaintiffs of that fact. On October 5, 2004, Plaintiffs filed their petitions for reexamination with the Patent Office. Those petitions, however, were substantially different from the documents provided to Defendants on August 25. [Compare Exhibit 3 (Requests sent to Defendants) with Exhibit 4 (Requests as filed with Patent Office)] As filed, the requests contained 12 pages of arguments that Defendants had not previously seen. Those arguments were misleading, in part because Plaintiffs omitted known contradictory information. A significant part of the reexamination petitions focused on the Rudy Report. The petitions did not, however, reveal that on September 30, 2003, George M. Potter testified in a deposition about his personal, eye-witness account of his visit to the Cypress Johnson mine, where he observed the system described in the Rudy Report. [See Ex. 1 ¶¶ 70-75]

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Potter's testimony was material to the patentability of the Patents and directly contradicted arguments and representations that Plaintiffs made to the Patent Office about the Rudy Report. [Id.] Had Plaintiffs revealed their arguments to Defendants ahead of time, as the Court had ordered, Defendants would have provided arguments and evidence contradicting the arguments presented by Plaintiffs. Once the petitions were submitted, however,

Defendants were precluded from further participation in the reexamination proceedings, including presenting contradictory arguments or evidence because of the ex parte nature of reexamination proceedings. 37 C.F.R. § 1.550(g). C. Plaintiffs Recently Produced Evidence Showing that They Intentionally Removed Arguments from the Incomplete Versions of the Petitions Confidential information has been They showed to Defendants.deleted and filed separately under seal

The litigation remained stayed for well over a year pending the reexamination. Late in 2005, the Patent Office issued a notice that it intended to allow the claims despite the prior art. The reexamination certification has not yet formally issued. Although the stay remained pending, on December 14, 2005, Plaintiffs requested and Defendants agreed to stipulate to the filing of an amended complaint reciting the allowance of the claims in the reexamination. In January of this year, in preparation for filing their answer to the amended complaint, Defendants reviewed Plaintiffs' requests for reexamination in the form actually filed with the Patent Office and considered raising the misrepresentations in Plaintiffs' arguments. Nevertheless, recognizing the high level of "intent to deceive" required to plead and prove inequitable conduct, and not wanting to impugn the integrity of opposing counsel without very strong evidence, Defendants did not include an inequitable conduct defense at that time. Defendants instead gave

Plaintiffs the benefit of the doubt, assuming that Plaintiffs had proceeded in good faith and had developed and drafted their arguments just before filing and after Defendants' review of the application.

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Not until March 13, 2006, did Defendants learn what really happened. At that Plaintiffs waived any attorney-client privilege and produced several

communications between Mr. Heuser and his clients, ostensibly to support Plaintiffs' position regarding the settlement agreement. One of the documents produced at that time revealed for the first time that Plaintiffs intentionally removed arguments from the petitions providedConfidential information has been deletedthosefiled to Defendants for review and then pasted and arguments back into separately under seal the petitions before filing them with the Patent Office. Specifically, on September 15, 2004, Peter Heuser, counsel for Plaintiffs, sent an e-mail message to his clients, Richard Krauth and Ed Newbegin, regarding Defendants' review of the reexamination requests. That e-mail, under the subject heading "Kittredge called" (referring to Defendants' counsel, C. Mark Kittredge), stated:

He [Kittredge] said they are not submitting arguments to the PTO. That is great with me. He said he may be getting back to us on our settlement proposal in the next couple of days (or maybe not). I said I would wait to file the reexam until next week. I am out of town for the interim. _____ Michelle Please reincorporate the arguments I deleted before sending it to Kittredge. That is what we will file upon my return. [Exhibit 5 emphasis added)]2 "Michelle" as his assistant (or "secretary") and confirmed that he drafted the petitions, During Heuser's recent deposition, he identified

then removed arguments from the draft sent to the Defendants, and then instructed his
2

Plaintiffs have designated the e-mail message [Exhibit 5] as "Confidential" the Protective Order of June 14,
Confidential information has been deleted and filed separately under seal

20 04. Defendants believe that designation is improper and will seek to alter the status of the email at a later time, but for the time being the "Confidential" designation forces Defendants to file Exhibit 5 under seal.

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assistant to reinsert those deleted arguments before filing the petitions with the Patent Confidential information has been deleted and filed separately under seal Office. [Ex. 6, Heuser Dep. 22:4-23:1, 25:22-26:5, Mar. 21, 2006] violation of the Court's August 16, 2004 Order and evidence of the improper intent necessary to plead and prove inequitable conduct. While Defendants had hoped to avoid making such accusations, Plaintiffs' shocking and prejudicial misbehavior cannot go without redress. III. ARGUMENT A. As a Sanction for Violating the Court's August 16, 2004 Order, Plaintiffs Should Be Barred from Relying on the Reexamination. Thus, Defendants now have direct evidence of Plaintiffs' counsel's intentional

The Court's August 16, 2004 Order specifically required "Plaintiff[s] to provide defendant copy of reexamination petition[s]." Plaintiffs intentionally violated and

subverted that Order. This Court never statedbeen deleted and filed Confidential information has or implied that Plaintiffs should provide separately requests, or only select portions of the reexamination under seal that Plaintiffs were permitted to remove arguments before providing the copies to Defendants. Indeed, the point of the Court's Order was to allow the examiner to consider Defendants' rebuttals to Plaintiffs' arguments, in order to ameliorate the one-sided nature of the ex parte reexamination process. Because the August 16, 2004 Order was a case management order pursuant to Rule 16, sanctions for violating it are appropriate under Rule 16(f). In addition, the Court has inherent power to punish violations of its orders. Fink v. Gomez, 239 F.3d 989, 991, 994 (9th Cir. 2001) (court has inherent authority to punish a party for violations of court orders and bad faith misrepresentations made in an attempt to "manipulate proceedings in one case in order to gain tactical advantage in another case.") As Rule 16(f) indicates, the sanctions available include those set forth in Rule 37(b)(2)(B)-(D). The

reexamination is now over, and this Court cannot directly interfere with the Patent Office

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proceedings. Nevertheless, the Court can preclude Plaintiffs from taking advantage of their misconduct in this litigation by barring them from introducing evidence of the reexamination and reallowance at trial. See Rule 37(b)(2)(B) (authorizing an "order refusing to allow the disobedient party to support or oppose designated claims or defenses, or prohibiting that party from introducing designated matters in evidence); see also 3 James Wm. Moore et al., MOORE'S FEDERAL PRACTICE §16.92[1] (appropriate sanctions for violating pretrial order include "prohibiting [the offending] party from

introducing designated matters into evidence").3 Similarly, Plaintiffs' reliance on the reexamination in their amended Complaint should be stricken. See Rule 37(b)(2)(C) (authorizing an "order striking out pleadings or parts thereof"). B. The Court Should Permit Defendants to Amend Their Answer to Add Additional Affirmative Defenses of Unclean Hands and Inequitable Conduct.

Rule 15(a) provides that a party may amend its pleadings by leave of Court and that "leave shall be freely given when justice so requires." The policy encouraging the amendment of pleadings is "to `be applied with extreme liberality.'" Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003). Based on this liberal policy, motions to amend are typically granted so long as the amendment (1) will not cause undue delay, (2) will not unduly prejudice the opposing party, (3) is not sought in bad faith, and (4) is not an exercise in futility. Id. at 1051-52 (identifying these four factors and citing Foman v. Davis, 371 U.S. 178, 182 (1962)). In this case, however, the Court has entered a scheduling order under Rule 16(b). Although the Court entered that order on January 24, 2006, it retroactively set a cutoff date for amending the pleadings of the previous day (January 23, 2006). Rule 16(b) Indeed, in appropriate cases, the court has broad authority to impose far more severe sanctions, including dismissal with prejudice. See Malone v. U.S. Postal Serv., 833 F.3d 128 (9th Cir. 1987).
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authorizes the Court to modify the scheduling order and permit amendments upon a showing of "good cause." The primary issue in determining "good cause" is the diligence of the party seeking the amendment and its reasons for not bringing a claim earlier. The presence or absence of prejudice to the opposing party and Court schedule may also be considered. See Johnson v. Mammoth Recreations, Inc. 975 F.2d 604, 608-09 (9th Cir. 1992). In this case, Defendants' motion satisfies the standards of both rules. Defendants did not unduly delay in seeking leave to amend, and Plaintiffs will suffer no undue prejudice. When Defendants filed their previous answer on January 17, 2006, they did not know that this Court was going to establish January 23, 2006 as the presumptive cutoff for amending pleadings. To the contrary, Defendants believed they would be entitled to take more discovery before any deadline to amend pleadings was imposed.4 Defendants recognized that courts dislike allegations of professional misconduct and did not want to inject such issues into the case without strong evidence of intentional misbehavior. Thus, even after reading Plaintiffs' misleading submission to the Patent Office, Defendants were prepared to give them the benefit of the doubt. Defendants have moved for leave to amend promptly after obtaining documents and deposition and filed leaving no doubt Confidential information has been deleted testimony separately under seal that the conduct was intentional. Permitting Defendants to amend their Answer will cause no delay or undue prejudice to Plaintiffs. The case was stayed until two months ago, and the parties are just now getting re-engaged in the litigation. Discovery in this matter is in its early stages and is not set to conclude until June 1, 2007--well over a year from now. Indeed, the only Indeed, Defendants' Answer to First Amended Complaint expressly noted that it "reserve[d] the right to amend and supplement its responses and affirmative defenses
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depositions that have been completed since the stay was lifted are those of counsel with respect to the settlement dispute. Trial is even further out. Defendants' amendments will not in any way alter the current schedule. IV. CONCLUSION For the foregoing reasons, Plaintiffs should be precluded from raising the reexamination process or its outcome as evidence of the validity of the patents-in-suit, and the corresponding portions of their amended Complaint should be stricken. Defendants should also be given leave to amend their Answer to include defenses of unclean hands and inequitable conduct during the reexamination. Dated: March 30, 2006. PERKINS COIE BROWN & BAIN P.A.

By s/ Terry E. Fenzl Terry E. Fenzl C. Mark Kittredge 2901 North Central Avenue Post Office Box 400 Phoenix, Arizona 85001-0400 Attorneys for Defendants and Counterclaim Plaintiffs

after further discovery." [Defendants' Answer to First Amended Complaint, p. 9, lines 20-21]

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CERTIFICATE OF SERVICE I hereby certify that on March 30, 2006, I electronically transmitted the attached documents to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: Daniel R. Malinski [email protected] BURCH & CRACCHIOLO, P.A. 702 East Osborn, Suite 200 Phoenix, Arizona 85014 Attorneys for Plaintiffs and Counterclaim Defendants Peter E. Heuser [email protected] Kolisch Hartwell, P.C. 200 Pacific Building 520 S.W. Yamhill Street Portland, Oregon 97204 Attorneys for Plaintiffs and Counterclaim Defendants I hereby certify that on March 30, 2006, I served the attached document by hand delivery to: The Honorable Paul G. Rosenblatt United States District Court Sandra Day O'Connor U.S. Courthouse, Suite 621 401 West Washington Street, SPC 56 Phoenix, AZ 85003-2156 s/ Janet Roe

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