Michael Daugherty v. Joel Adams ( 2022 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 20-1446
_____________
LABMD INC.,
Appellants
v.
ROBERT J. BOBACK; ERIC D. KLINE; TIVERSA
HOLDING CORP.;
_______________
On Appeal from the United States District Court
For the Western District of Pennsylvania
(D.C. No. 2-17-cv-0368)
District Judges: Honorable Marilyn J. Horan and Maureen P.
Kelly
_______________
Nos. 20-1731, 20-1732, 20-3191, 20-3316, and 21-1429
_______________
LABMD, INC.,
v.
TIVERSA HOLDING CORP., FKA Tiversa Inc.; ROBERT
J. BOBACK; M. ERIC JOHNSON; DOES 1-10
LABMD INC., Appellant in 20-1731,
20-3191 and 21-1429
*JAMES W. HAWKINS, Appellant in
20-1732
*Pursuant to Fed. R. App. P. Rule 12(a)
MARC E. DAVIES, Appellant in
20-3316
_______________
On Appeal from the United States District Court
For the Western District of Pennsylvania
(D.C. No. 2-15-cv-0092)
District Judges: Honorable Mark R. Hornak and Maureen P.
Kelly
_______________
Nos. 20-1446, 20-1731, and 21-1429
Argued November 16, 2021
Nos. 20-1732, 20-3191, and 20-3316
Submitted under Third Circuit L.A.R. 34.1(a)
November 15, 2021
Before: AMBRO, JORDAN, and RENDELL, Circuit
Judges
(Filed August 30, 2022)
_______________
2
Ronald D. Coleman
Christie C. Comerford [ARGUED]
Lawrence G. McMichael
Dilworth Paxson
1500 Market Street – Ste. 3500E
Philadelphia, PA 19102
Richard B. Robins
Michael A. Saffer
Mandelbaum Salsburg
3 Becker Farm Road – Ste. 105
Roseland, NJ 07068
Counsel for Appellant, LabMD, Inc.
Cary Ichter
Ichter Davis
3340 Peachtree Road, N.E. – Ste. 1530
Atlanta, GA 30326
Counsel for Appellant, James W. Hawkins
Marc E. Davies
1315 Walnut Street – Suite 320
Philadelphia, PA 19107
Appellant Pro Se
Brandon J. Verdream
Clark Hill
301 Grant Street
One Oxford Centre – 14th Fl.
Pittsburgh, PA 15219
Counsel for Robert J. Boback
3
Eric N. Anderson
John L. Wainright [ARGUED]
Meyer Darragh Buckler Bebenek & Eck
600 Grant Street – Ste. 4850
Pittsburgh, PA 15219
Counsel for M. Eric Johnson
John C. Toro
King & Spalding
1180 Peachtree Street, NE – Ste. 1600
Atlanta, GA 30309
Counsel for Eric D. Kline
Jamie S. George [ARGUED]
Michael P. Kenny
Alston & Bird
1201 West Peachtree Street – Ste. 4900
Atlanta, GA 30309
Counsel for Pepper Hamilton
Jarrod S. Mendel
McGuire Woods
1230 Peachtree Street, NE
Suite 2100, Promenade II
Atlanta, GA 30309
Jarrod D. Shaw [ARGUED]
Natalie L. Zagari
McGuire Woods
260 Forbes Avenue – Ste. 1800
Pittsburgh, PA 15222
Counsel for Tiversa Holding Corp.
and Robert J. Boback
4
_______________
OPINION OF THE COURT
_______________
JORDAN, Circuit Judge.
In 2008, Tiversa Holding Corp., a cybersecurity
company, informed LabMD, Inc., a medical testing business,
that it had found some of LabMD’s confidential patient
information circulating in cyberspace and that it could provide
services to help LabMD respond to the data leak. LabMD’s
own investigation revealed no such leak, and it accused Tiversa
of illegally accessing the patient information. Tiversa
submitted a tip to the Federal Trade Commission (“FTC”),
prompting an investigation into LabMD’s cybersecurity
practices, and the regulatory pressure resulting from that and a
subsequent FTC enforcement action, along with the
reputational damage associated with public disclosure of the
supposed leak, ultimately ran LabMD into the ground. Later,
in 2014, a former Tiversa employee confirmed LabMD’s
suspicions about Tiversa when he claimed that the patient
information in question did not spread from a leak but that
Tiversa itself had accessed LabMD’s computer files and then
fabricated evidence of a leak.
Following that accusation, LabMD initiated numerous
lawsuits against Tiversa and its affiliates. Two of those suits
form the basis of this appeal. The complaint in the first
asserted, among other things, claims for defamation and fraud.
The District Court dismissed all of those claims, except for one
defamation claim that was subsequently defeated on summary
judgment. The Court limited the scope of discovery on that
5
defamation claim, including a prohibition on the discovery or
use of expert testimony. It then imposed severe sanctions
when, in its view, LabMD and its counsel breached those
limits. In addition to awarding fees and costs to the defendants,
the Court struck almost all of LabMD’s testimonial evidence
and revoked its counsel’s pro hac vice admission. When
LabMD’s replacement counsel later tried to withdraw, the
Court denied that request, and when LabMD failed to pay the
monetary sanctions, the Court held it in contempt. The second
lawsuit proceeded in somewhat the same timeframe as the first
and asserted similar claims for fraud. The District Court
dismissed that case in its entirety, for a variety of procedural
and substantive reasons.
LabMD now appeals the dispositive rulings in both
cases, along with the rulings on sanctions, contempt, and the
motion to withdraw. We agree with LabMD that, in the first
case, the District Court erred in granting summary judgment,
primarily because the Court’s prohibition on expert testimony
was unwarranted. We also hold that the Court abused its
discretion in imposing sanctions and that it erred in denying the
motion to withdraw. But we agree with the District Court in
general that LabMD’s other claims in that case were properly
dismissed. Thus, we will affirm in part and vacate in part the
judgment of the District Court in that matter. In the second
case, because LabMD does not challenge independently
sufficient grounds for the District Court’s decision, we will
affirm in full.
6
I. BACKGROUND1
LabMD is a privately owned Georgia corporation based
in Atlanta, Georgia. It had been a cancer-testing enterprise
and, at its peak, employed approximately forty medical
professionals. Before ceasing its ordinary business operations,
it had served many thousands of patients. Its CEO is Michael
J. Daugherty, a citizen of Georgia.
Tiversa is a Delaware corporation based in Pittsburgh,
Pennsylvania. It is a self-proclaimed world leader in peer-to-
peer (“P2P”) network cybersecurity.2 Tiversa has provided to
the FTC information about data breaches on P2P networks, and
representatives from Tiversa have testified before Congress
about cybersecurity. Tiversa’s CEO is Robert J. Boback, a
citizen of Pennsylvania. During times relevant to this
1
Unless otherwise noted, the narrative in this section is
based on undisputed facts or the evidence produced in
discovery (for LabMD’s defamation claim on the motion for
summary judgment) and the allegations of LabMD’s
complaints (for all the other claims on the motions to dismiss),
all viewed in the light most favorable to LabMD. Tundo v.
Cnty. of Passaic, 923 F.3d 283, 287 (3d Cir. 2019); Matrix
Distribs., Inc. v. Nat’l Ass’n of Bds. of Pharmacy, 34 F.4th 190,
195 (3d Cir. 2022). Citations to the appendices from Case Nos.
20-1446, 20-1731, and 21-1429 are designated by reference to
the last four digits of the respective case number.
2
P2P networks are networks in which internet-
connected computers share resources. They allow users to
download a computer file directly from other network
participants who already possess that file.
7
litigation, Tiversa had an agreement with Professor M. Eric
Johnson, a former director of the Center for Digital Strategies
at Dartmouth College, pursuant to which the professor worked
with Tiversa on cybersecurity research. Johnson is a citizen of
Tennessee.
A. The Alleged Data Leak and FTC Actions
In mid-2008, Tiversa informed LabMD that it had
obtained a 1,718-page computer file containing the
confidential data of more than 9,000 LabMD patients (the
“1718 File”). Tiversa represented that it had found the 1718
File on a P2P network and that it “continued to see individuals
… downloading copies of the [1718 File].” (1731 App. at 223.)
Tiversa tried to use that purported breach to persuade LabMD
to purchase its incident response services. LabMD rejected the
offer but still “spent thousands of dollars, and devoted
hundreds of man hours,” seeking to detect and remedy the
supposed data leak. (1731 App. at 223.)
In what LabMD alleges to be retaliation for its refusal
to purchase Tiversa’s services, Tiversa took two actions. First,
it gave the 1718 File to Johnson for use in an upcoming
research paper. That paper, published in April 2009 under the
title “Data Hemorrhages in the Health-Care Sector,”
prominently featured a redacted version of the 1718 File,
although it did not name LabMD as the company whose data
had been leaked. (1731 App. at 226-28.) Second, Tiversa
provided the 1718 File to the FTC. It told the FTC that it had
found the 1718 File on a P2P network and that third parties
were also downloading the file from that network.
8
Relying on Tiversa’s tip, the FTC commenced an
investigation in 2010 into the suspected failure of LabMD to
protect its customers’ personal information. That investigation
eventually resulted in an FTC enforcement action against
LabMD in August 2013. According to LabMD, the
repercussions of the investigation and enforcement action were
devasting to its business:
As a direct consequence of the FTC’s
proceedings, including the attendant adverse
publicity and the administrative burdens that
were imposed on LabMD to comply with the
FTC’s demands for access to current and former
employees and the production of thousands of
documents, LabMD’s insurers cancelled all of
the insurance coverage for LabMD and its
directors and officers, and LabMD lost virtually
all of its patients, referral sources, and
workforce, which had included around 40 full-
time employees. Consequently, LabMD was
effectively forced out of business by January
2014, and it now operates as an insolvent entity
that simply provides records to former patients.
(1731 App. at 229.)
LabMD, for its part, believes that its data was secure,
despite some indications to the contrary. (See 1731 App. at 53
(Daugherty noting in his book, The Devil Inside the Beltway,
that a particular P2P file-sharing program “was an unruly beast
that could cause [LabMD] to expose . . . workstation files
9
without . . . ever knowing”).)3 It did, however, “suspect[] from
as early as May 2008 that [Tiversa was] lying about the source
of the 1718 File.” (1731 App. at 909.)
B. The Georgia Action
In October 2011, during the early days of that FTC
investigation, LabMD filed a lawsuit against Tiversa in
Georgia (the “Georgia Action”).4 The suit included claims for
violations of the federal Computer Fraud and Abuse Act
(“CFAA”) and Georgia’s computer crimes statute, along with
conversion and trespass claims, all of which were based on
allegations that Tiversa had unlawfully obtained the 1718 File.
Tiversa was represented in the Georgia Action by the law firm
of Pepper Hamilton LLP – now constituted as Troutman
3
In reviewing the FTC’s enforcement action, the
Eleventh Circuit accepted as supported by substantial evidence
that, “contrary to LabMD policy, a peer-to-peer file-sharing
application called LimeWire was installed on a computer used
by LabMD’s billing manager[,]” and that the contents of a “My
Documents” folder on that computer could have exposed the
1718 File. LabMD, Inc. v. FTC, 894 F.3d 1221, 1224, 1227,
1233 n.35 (11th Cir. 2018). It also noted, however, that the
ALJ who presided over the enforcement action determined that
“Tiversa’s representations in its communications with LabMD
that the 1718 File was being searched for on peer-to-peer
networks, and that the 1718 File had spread across peer-to-peer
networks, were not true.” Id. at 1224 n.6.
4
The case was filed in state court and subsequently
removed to federal court.
10
Pepper Hamilton Sanders LLP (“Troutman Pepper”) – and, in
particular, by a partner named Eric D. Kline.
Tiversa moved to dismiss the Georgia Action for lack
of personal jurisdiction. In support of its motion, it submitted
a declaration from its CEO, Boback, asserting that it did not
regularly solicit business in Georgia, and it argued that its only
solicitation of business in Georgia was its contact with LabMD
in 2008 regarding the 1718 File. The U.S. District Court for
the Northern District of Georgia accepted those representations
and dismissed the claims against Tiversa for lack of personal
jurisdiction. The Eleventh Circuit affirmed. LabMD now
alleges, however, that Tiversa and its lawyers knowingly
omitted from Tiversa’s briefs and from Boback’s declaration
the fact that Tiversa had also “solicited business from at least
five other companies” in Georgia. (1446 App. at 214-15.)
Nevertheless, at the time, LabMD did not refute the factual
assertions about Tiversa’s lack of Georgia contacts, nor did it
refile its claims in another jurisdiction or otherwise pursue
further action against Tiversa.
C. The Whistleblower and the Government’s
Investigation of Tiversa
LabMD was moved to action again in April 2014, when
a former Tiversa employee, Richard Wallace, called to share
his account of how Tiversa actually obtained the 1718 File.
According to Wallace, Tiversa had located the file on one of
LabMD’s own computers on a P2P network, downloaded it,
and then fabricated the file’s metadata in forensic reports to
make it appear as if the 1718 File had leaked and spread across
the network. Wallace later told LabMD that Tiversa was able
to search for and access the 1718 File only because it had used
11
secret, government-owned software called “enhanced P2P.”
According to Wallace, and contrary to Tiversa’s earlier
representations, the 1718 File had never leaked; Tiversa stole
it from LabMD’s own computer.
Wallace blew the whistle on Tiversa to the FTC as well,
telling them that Tiversa had essentially made an extortionate
business model out of accessing a company’s files, fabricating
evidence of the files spreading across a network, using the false
impression of a leak to sell data security remediation services
to the company, and reporting the company to the FTC if it
refused to purchase Tiversa’s services. In response, the U.S.
House of Representatives Oversight and Government Reform
Committee commissioned an investigation into Tiversa’s
business practices and its relationship with the FTC. It found
that Tiversa “often acted unethically and sometimes unlawfully
in its use of documents unintentionally exposed on peer-to-
peer networks” and that the information it provided to the FTC
“was only nominally verified but was nonetheless relied on by
the FTC for enforcement actions.” (1446 App. at 297.) Armed
with Wallace’s testimony and the findings of the congressional
investigation, LabMD fought the FTC enforcement action and
eventually prevailed. Although it was awarded attorneys’ fees
from the government in the amount of almost $850,000, that
was too little too late. LabMD’s business was destroyed.
Through all those dramatic events, Boback vigorously
defended Tiversa, proclaiming that the company had done
nothing wrong. In February 2015, he published an online post
on the Pathology Blawg in which he called LabMD’s
accusations baseless and reiterated Tiversa’s assertion that
LabMD’s lax security had allowed the 1718 File to be leaked
onto the internet. Boback later wrote a letter to the editor of
12
The Wall Street Journal, published in December 2015, in
which he similarly defended Tiversa and said that LabMD had
publicly exposed the 1718 File.
D. The First Pennsylvania Action
At the beginning of 2015, LabMD filed a new lawsuit
against Tiversa, Boback, and Johnson in the U.S. District Court
for the Western District of Pennsylvania (the “First
Pennsylvania Action”). It asserted Pennsylvania state-law
claims for conversion, defamation, tortious interference with
business relations, fraud, negligent misrepresentation, and civil
conspiracy, as well as federal RICO claims. Upon the
defendants’ motion, the District Court dismissed some of the
claims with prejudice, including the RICO claims, but it
dismissed the rest without prejudice and gave LabMD an
opportunity to amend those claims. LabMD filed an amended
complaint in February 2016, in which it asserted, among other
things, a claim for defamation based on statements Tiversa and
Boback made variously to the FTC, in a press release, on the
Pathology Blawg, and in The Wall Street Journal.
The defendants again moved to dismiss the complaint.
This time, the District Court dismissed all of the claims with
prejudice, except for the defamation claim, which survived
dismissal only as to two allegedly defamatory statements. The
first statement, labeled “Statement 13” in the complaint, was
one that Boback made for Tiversa on the Pathology Blog:
LabMD lawsuit – The claims are baseless and
completely unsubstantiated … even in the
complaint itself. This appears to be another
attempt by Daugherty to distract people from the
13
INDISPUTABLE FACT that LabMD and
Michael Daugherty leaked customer information
on nearly 10,000 patients.
(1731 App. at 4897.) The second statement to survive
dismissal, listed as “Statement 16,” was one that Boback, again
speaking for Tiversa, made in The Wall Street Journal:
LabMD’s CEO Michael Daugherty admits that a
LabMD employee improperly installed … file-
sharing software on a company computer. Doing
so made confidential patient information
publicly available.
(1731 App. at 4898.)
The First Pennsylvania Action proceeded to discovery
on the defamation claim. LabMD’s counsel, James Hawkins,
first deposed Joel Adams, a former Tiversa employee. Tiversa
believed that Hawkins’s questioning was entirely unrelated to
the defamation claim, and it moved for a protective order,
which the District Court granted. The Court highlighted
examples of irrelevant questions Hawkins had asked, including
“if there was something secretive about [Adams’s] children,
strengths and weaknesses of a certain employee, the workplace
culture at Tiversa, leadership styles, guns in the workplace, an
AIDS clinic in Chicago, Edward Snowden, an Iranian IP
address[,] and whether the witness had ‘ever met [the judge
presiding over the case].’” (1731 App. at 1709, 1775.) It then
ordered that “[t]he scope of the depositions in this action must
be limited to the remaining portion of the defamation per se
claim, specifically Statements #13 and #16, LabMD’s alleged
damages and defenses thereto.” (1731 App. at 1713.) The
14
protective order did not otherwise specify what categories of
questioning were off limits.
Over the next two weeks, Hawkins deposed six more
current and former Tiversa employees, including Boback and
Wallace. After completion of the depositions, Tiversa moved
for sanctions against LabMD and Hawkins. It argued that
Hawkins had continued to ask irrelevant questions at those
depositions, in violation of the protective order. The District
Court agreed, finding that Hawkins had asked “no questions”
or “very minimal questions” related to Statements 13 and 16
and had instead “used the depositions to obtain discovery for
other cases” and to conduct “fishing expeditions[.]” (1731
App. at 1798-800.) As examples of such off-limits conduct,
the District Court quoted numerous questions from each of the
depositions. Those questions fell under the following general
topics: the alleged false spread of the 1718 File, including the
fabrication and alteration of metadata on the 1718 File; the
technology that Tiversa used to search for and access
documents on P2P networks; the legality of Tiversa’s products
and services; Tiversa’s prior representations to the FTC and
Congress; Boback’s alleged attempts to intimidate Wallace
into not testifying against Tiversa; and the culture at Tiversa’s
workplace, including whether there was a “gun culture.”
Having concluded that Hawkins’s questioning violated
the protective order, the Court decided the violations warranted
severe sanctions. Although it declined to dismiss the case, the
Court ordered the following sanctions (the “First Sanctions
Order”): LabMD was to pay Tiversa’s and Boback’s attorneys’
fees and costs related to the filing of the motion for sanctions
($12,056); Hawkins personally was to pay Tiversa’s court
reporter fees and transcript costs for the six depositions
15
($4,737.75); and LabMD was barred from using any testimony
elicited in those six depositions for any purpose in this case or
any other case in any other forum. The Court also put Hawkins
on “final notice” that “further litigation misconduct or
disregard of orders” would result in the termination of his pro
hac vice admission. (1731 App. at 1804.) LabMD moved for
reconsideration of the First Sanctions Order, which the District
Court denied.
At a status conference ahead of Tiversa’s anticipated
motion for summary judgment, LabMD indicated that it might
have to use an expert witness to respond to issues raised on
summary judgment as to its defamation claim. In response, the
District Court stated that it was “[not] going to need expert
reports for the motion for summary judgment[,]” and that it
would set a schedule for expert discovery only if the claim
survived summary judgment. (1731 App. at 1766-67.) Tiversa
and Boback then moved for summary judgment on the
defamation claim. LabMD, in its brief opposing summary
judgment, did not cite to any of the depositions outlawed by
the First Sanctions Order. It did, however, simultaneously file
an “offer of proof” in which it submitted transcripts of all six
depositions and explained how it would use the depositions to
rebut Tiversa’s factual claims if it were permitted to do so.
(1731 App. at 4264-71.) LabMD also submitted a declaration
from Daniel Regard, a specialist in computer forensics (the
“Regard Declaration”). Regard opined that the 1718 File was
never “publicly available” on any P2P network and was only
accessible using secret, government-owned software.
Tiversa moved to strike the offer of proof and the
Regard Declaration, and the District Court granted that motion.
It determined that the submission of the deposition transcripts
16
violated the First Sanctions Order and that the submission of
the Regard Declaration violated its directive prohibiting
experts. It thus imposed additional sanctions (the “Second
Sanctions Order”): Hawkins’s pro hac vice admission was
revoked, and LabMD was to pay Tiversa’s and Boback’s
attorneys’ fees and costs related to the filing of the motion to
strike. That same day, the Court also granted summary
judgment for the defendants on the defamation claim, holding
that there was not sufficient evidence to establish actual or
presumed damages.
Because Hawkins had lost his pro hac vice admission,
LabMD retained attorney Marc Davies to appeal the two
Sanctions Orders and the summary judgment order. Hawkins,
in his individual capacity, separately appealed the Sanctions
Orders. In the meantime, LabMD did not pay the monetary
sanctions the District Court had ordered. Instead, it asked the
Court to vacate, or at least stay, the monetary sanctions,
asserting that it lacked the financial ability to pay. After a
quick briefing schedule, which required Davies to file a
supplemental brief and a reply brief for LabMD, the District
Court denied LabMD’s motion and set a deadline for payment.
When LabMD missed that deadline, the Court ordered it to
show cause for its nonpayment. Davies, on behalf of LabMD,
filed a response to that order.
The next day, Davies moved to withdraw as counsel.
He explained that he had originally been engaged only for
appellate matters, that the motions practice before the District
Court was outside the scope of his engagement, and that
LabMD had terminated him as its counsel. He said that
LabMD was “currently seeking pro bono counsel” to resolve
the sanctions issues. (1429 App. at 683.) The District Court
17
denied his motion. It held that, because a corporation must be
represented by a lawyer, Davies could not withdraw without
first naming his successor counsel. LabMD and Davies each
appealed the denial of the motion to withdraw.
The District Court then held a hearing on the order to
show cause. At the hearing, Davies read an email from
LabMD’s CEO, Daugherty, in which Daugherty explained that
he was skipping the hearing because he “did not anticipate [it]
going forward” and had scheduled other matters at the same
time. (1429 App. at 699.) Daugherty’s email also reiterated
that “LabMD discharged [Davies] as its attorney long ago” and
that Davies had “no authority from LabMD to speak or act on
its behalf.” (1429 App. at 699.) The District Court found
LabMD in civil contempt for failing to comply with the
Sanctions Orders. LabMD then appealed the contempt ruling.
In summary, LabMD has appealed the District Court’s
rulings on dismissal, summary judgment, sanctions, contempt,
and the withdrawal of counsel. Additionally, Hawkins has
appealed the sanctions orders, and Davies has appealed the
order denying his withdrawal.
E. The Second Pennsylvania Action
On July 8, 2016, while the First Pennsylvania Action
was ongoing, LabMD and Daugherty filed a complaint against
Tiversa, Boback, Troutman Pepper, and Kline, among others,
in Georgia federal court, and the case was subsequently
transferred to the Western District of Pennsylvania (the
“Second Pennsylvania Action”). The complaint asserted
Georgia state RICO claims against all the defendants. It also
brought claims against Troutman Pepper and Kline for
18
violations of the federal RICO statute, along with state-law
claims of fraud, negligence, fraudulent misrepresentation,
negligent misrepresentation, and common-law conspiracy.
The defendants filed a motion to dismiss, which the District
Court granted in full. LabMD and Daugherty timely appealed,5
and we combined for argument the appeals from the two
Pennsylvania Actions.
II. DISCUSSION6
We begin with the issues on appeal from the First
Pennsylvania Action and then turn to the issues in the Second
Pennsylvania Action.
5
The District Court dismissed the complaint as to all
defendants, but LabMD appealed the decision only with
respect to defendants Tiversa, Boback, Kline, and Troutman
Pepper.
6
The District Court had jurisdiction in both cases under
28 U.S.C. §§ 1331, 1332, and 1367. We have appellate
jurisdiction under 28 U.S.C. § 1291 over all the appeals,
including those from the orders on sanctions, contempt, and the
motion to withdraw. In re Westinghouse Sec. Litig., 90 F.3d
696, 706 (3d Cir. 1996) (“Under the ‘merger rule,’ prior
interlocutory orders merge with the final judgment in a
case[.]”); Ohntrup v. Firearms Ctr., Inc., 802 F.2d 676, 678
(3d Cir. 1986) (per curiam) (“[M]ost post judgment orders are
final decisions within the ambit of 28 U.S.C. § 1291 as long as
the district court has completely disposed of the matter.”).
19
A. The Issues in the First Pennsylvania Action
The District Court’s dismissal of the federal RICO
claims and the claims for tortious interference with business
relations, fraud, and negligent misrepresentation against
Tiversa, Boback, and Johnson will be affirmed, but we will
vacate in large part the District Court’s decisions on the
defamation claim – both the dismissal with respect to certain
allegedly defamatory statements and the grant of summary
judgment with respect to the two statements that had originally
survived dismissal. We will also vacate the imposition of
sanctions, the finding of contempt, and the denial of Davies’s
motion to withdraw.
1. Dismissal7
i. Federal RICO Claims
LabMD alleges that Tiversa, Boback, and Johnson
violated the federal RICO statute, 18 U.S.C. § 1962(c),8 in
three ways: first, by lying about how and where Tiversa found
the 1718 File, so as to induce LabMD to purchase Tiversa’s
“We review a District Court’s dismissal of a complaint
7
under Federal Rule of Civil Procedure 12(b)(6) de novo.”
Schmidt v. Skolas, 770 F.3d 241, 248 (3d Cir. 2014).
8
That statute makes it “unlawful for any person
employed by or associated with any enterprise engaged in, or
the activities of which affect, interstate or foreign commerce,
to conduct or participate, directly or indirectly, in the conduct
of such enterprise’s affairs through a pattern of racketeering
activity[.]” 18 U.S.C. § 1962(c).
20
incident response services; second, by using the 1718 File in
Johnson’s research paper on data leaks in the medical field; and
third, by turning over the 1718 File to the FTC after LabMD
refused to hire Tiversa. The District Court dismissed the RICO
claims as being time-barred, and we agree with that conclusion.
“Establishing liability under … the RICO statute
requires (1) conduct (2) of an enterprise (3) through a pattern
(4) of racketeering activity, plus [(5)] an injury to business or
property,” and (6) the racketeering activity must have been
“the ‘but for’ cause as well as the proximate cause of the
injury.” Reyes v. Netdeposit, LLC, 802 F.3d 469, 483 (3d Cir.
2015). The limitations period for a federal RICO claim is four
years. Agency Holding Corp. v. Malley-Duff & Assocs., Inc.,
483 U.S. 143, 156 (1987). LabMD filed its complaint on
January 21, 2015. Thus, absent any tolling of the statute of
limitations, LabMD’s federal RICO claims were time-barred if
they accrued before January 21, 2011.9
The statute of limitations begins to run when the
plaintiff knows or should know of both its injury and the source
of its injury. Prudential Ins. Co. of Am. v. U.S. Gypsum Co.,
9
“[T]he law of this Circuit … permits a limitations
defense to be raised by a motion under Rule 12(b)(6), but only
if the time alleged in the statement of a claim shows that the
cause of action has not been brought within the statute of
limitations. If the bar is not apparent on the face of the
complaint, then it may not afford the basis for a dismissal of
the complaint under Rule 12(b)(6).” Robinson v. Johnson, 313
F.3d 128, 135 (3d Cir. 2002) (internal quotation marks and
citations omitted).
21
359 F.3d 226, 233 (3d Cir. 2004);10 Forbes v. Eagleson, 228
F.3d 471, 483 (3d Cir. 2000). Thus, we start by identifying
LabMD’s injury and the injury’s source. As for its injury,
LabMD says that, due to the FTC’s investigation and
enforcement action, it suffered a “reduction in value of its
business, lost revenue, and expenses associated with
insolvency,” as well as costs associated with “attempting to
resolve the purported security breach and to comply with the
investigations and [their] demands,” and finally “the
substantial and irreparable loss of goodwill and business
opportunities[.]” (1731 App. at 904.)11 As for the source of
10
There may be some tension between the accrual rule
we laid out in Prudential – that a federal RICO claim accrues
only after a plaintiff knows of both the injury and the source of
the injury, 359 F.3d at 233 – and the Supreme Court’s
instruction that a federal RICO claim accrues upon “discovery
of the injury, not discovery of the other elements of a claim,”
Rotella v. Wood, 528 U.S. 549, 555 (2000); see also Robert L.
Kroenlein Tr. ex rel. Alden v. Kirchhefer, 764 F.3d 1268, 1278
(10th Cir. 2014) (rejecting the “injury plus source discovery”
rule). Nevertheless, because we would conclude that LabMD’s
RICO claims accrued before 2011 under either the injury-
discovery-rule or the injury-plus-source-discovery-rule, we
need not address any such tension now.
11
Those injuries were alleged in LabMD’s RICO case
statement, a document required by local rules to be filed as a
supplement to a RICO complaint. See W.D. Pa. Civ. R. 7.1(B).
It may be considered as part of the pleadings on a motion to
dismiss. E.g., Lorenz v. CSX Corp., 1 F.3d 1406, 1413 (3d Cir.
22
the injury, LabMD alleges that Tiversa used fraudulent
representations to “proximately cause[] the FTC to investigate
and bring an enforcement action against LabMD.” (1731 App.
at 905.)
Determining when LabMD knew of its alleged injuries
is complicated because the extent of the injuries grew over
time. For example, when the FTC launched its investigation in
2010, LabMD faced “administrative burdens … to comply
with the FTC’s demand for access to current and former
employees and the production of thousands of documents[.]”
(1731 App. at 229.) But once the FTC filed the enforcement
action in 2013, LabMD suffered more severely from “adverse
publicity” resulting in the loss of “all of [its] insurance
coverage” and “virtually all of its patients, referral sources, and
workforce.” (1731 App. at 229.)
Certainly, LabMD may not have expected that the
FTC’s initial involvement in 2010 would result in the demise
of its business. But “[a] cause of action accrues even though
the full extent of the injury is not then known or
predictable. Were it otherwise, the statute would begin to run
only after a plaintiff became satisfied that [it] had been harmed
enough, placing the supposed statute of [limitations] in the sole
hands of the party seeking relief.” Kach v. Hose, 589 F.3d 626,
634-35 (3d Cir. 2009) (quoting Wallace v. Kato, 549 U.S. 384,
391 (2007)). For purposes of assessing the accrual of its
1993) (affirming dismissal of RICO claims “[a]fter reviewing
the amended complaints and RICO case statement”).
23
claims, then, we conclude that LabMD knew of its injuries in
2010, at the latest.12
LabMD also knew or should have known by 2010 that
Tiversa was the source of the injuries flowing from the FTC’s
investigation and subsequent enforcement action. Right from
the beginning of the “leak” ordeal, LabMD was suspicious of
Tiversa. It alleges that it “suspected from as early as May 2008
that Defendants were lying about the source of the 1718 File.”
(1731 App. at 909.) Even if LabMD did not have actual
knowledge that the FTC had gotten its information about the
1718 File from Tiversa, there were enough “storm warnings”
that it should have known that Tiversa was the source. Cf.
Cetel v. Kirwan Fin. Grp., Inc., 460 F.3d 494, 507 (3d Cir.
2006) (“[W]hen plaintiffs should have known of the basis of
their claims depends on whether and when they had sufficient
information of possible wrongdoing to place them on ‘inquiry
notice’ or to excite ‘storm warnings’ of culpable activity.”
(internal quotation marks and alterations omitted)). Tiversa
had demonstrated a willingness to disclose the 1718 File to
others, such as when it collaborated with Johnson on a research
paper that included a redacted version of the 1718 File. That
paper, published in April 2009, begins by noting that Johnson’s
12
LabMD’s allegations of injury also arguably
encompass the “thousands of dollars” and “hundreds of man
hours” that LabMD spent trying to remedy a purported data
breach after Tiversa – in 2008 – fed it misleading information
about the purported leaked. (1731 App. at 223.) To the extent
that LabMD’s theory of liability focuses on Tiversa misleading
the FTC into investigating LabMD, the injurious effects of that
conduct first arose by 2010.
24
research was “conducted in collaboration with Tiversa[.]”
(1731 App. at 310.) Tiversa had also demonstrated a close
relationship with government investigators. In 2007, Boback
testified alongside FTC representatives before the Senate
Oversight and Government Reform Committee about the
dangers of P2P networks. Two years later, he testified before
the House Subcommittee on Commerce, Trade and Consumer
Protection about P2P network data leaks, and produced the
1718 File as an example. LabMD’s complaint also highlights
two news articles from Computerworld in February 2010, in
which Boback and Johnson were both interviewed about the
FTC opening investigations into almost 100 companies
regarding data leaks on P2P networks. Based on all those
circumstances, LabMD knew or should have known by 2010
that Tiversa was very likely the source behind the FTC’s
investigation and eventual enforcement action.13
Because LabMD knew or should have known by 2010
about its injuries and their source, its federal RICO claims
accrued more than four years before it filed its complaint in
January 2015. Thus, unless the limitations period was tolled,
the RICO claims are time-barred.
13
It is further telling that, in a September 2010 letter to
Tiversa and in evident anticipation of government action,
LabMD accusingly asked Tiversa to describe its relationship
with the FTC and to disclose any communications with the
FTC about the 1718 File. Nevertheless, because that letter was
not mentioned in the complaint nor attached thereto, we do not
rely on it in reaching our conclusion here. Schmidt, 770 F.3d
at 249.
25
The limitations period for a RICO claim may be
equitably tolled “where a pattern remains obscure in the face
of a plaintiff’s diligence in seeking to identify it[.]” Rotella v.
Wood, 528 U.S. 549, 561 (2000). Equitable tolling is “the
exception, not the rule.” Id. It requires active misleading by
the defendant. Mathews v. Kidder, Peabody & Co., 260 F.3d
239, 256 (3d Cir. 2001). Active misleading involves “tak[ing]
steps beyond the challenged conduct itself to conceal that
conduct from the plaintiff.” Gabelli v. S.E.C., 568 U.S. 442,
447 n.2 (2013). Here, the only purported acts of active
misleading that LabMD cites are Tiversa’s assertions that
LabMD had a data leak and that the 1718 File was spreading
across cyberspace. But those misrepresentations, if they are
that, are not acts of concealment “beyond the challenged
conduct itself.” Id. Rather, they are at the very heart of
LabMD’s claims. When LabMD was asked to identify the
predicate acts for its RICO claim, it listed a half-dozen acts of
alleged “wire fraud” involving Tiversa and Boback “making
misrepresentations about the 1718 File” in telephone calls and
emails to LabMD. (1731 App. at 889.) LabMD has not
pointed to any other independent instances of active
misleading that would entitle it to equitable tolling of its RICO
claims. As a result, those claims are time-barred, and we will
affirm the District Court’s dismissal of them.
ii. Tortious Interference with
Business Relationships
Next, LabMD claims that Boback’s statements in 2015
on the Pathology Blawg and in The Wall Street Journal
tortiously interfered with LabMD’s prospective business
26
relationships.14 To plead a claim under Pennsylvania law for
tortious inference with a prospective business relationship,
LabMD must allege facts showing, among other things, “the
existence of a … prospective contractual relationship between
[LabMD] and a third party,” and “a reasonable likelihood that
the relationship would have occurred but for the interference
of [Boback].” Brokerage Concepts, Inc. v. U.S. Healthcare,
Inc., 140 F.3d 494, 530 (3d Cir. 1998). A prospective
contractual relationship is “something less than a contractual
right, something more than a mere hope.” Thompson Coal Co.
v. Pike Coal Co., 412 A.2d 466, 471 (Pa. 1979).
LabMD has not adequately alleged that Boback’s
statements caused any prospective contractual relationships to
suffer. The timing of events matters here. The amended
complaint identifies numerous third-party payors and a handful
of insurance carriers that previously did business with LabMD,
but it does not allege that any of those parties would have been
likely to do future business with LabMD. As the District Court
observed, LabMD was effectively shut down by January 2014,
over a year before Boback made the statements at issue. And
the amended complaint acknowledges that it was the FTC’s
actions, not Boback’s later allegedly defamatory remarks, that
drove away business: “OneBeacon, for example, refused to
provide LabMD with [insurance] coverage … because of the
FTC investigation and Enforcement Action, which were
14
LabMD also claimed tortious interference based on
Tiversa’s false statements to it in 2008 regarding the source
and spread of the 1718 File. The District Court dismissed that
portion of the claim as barred by the applicable two-year statute
of limitations, and LabMD does not challenge that decision.
27
predicated on Tiversa and Boback’s False Statement [from
2008].” (1731 App. at 4905.) There is not an objectively
reasonable probability that Boback’s 2015 statements did any
additional damage to LabMD’s prospective contractual
relationships. The District Court’s dismissal of the tortious
interference claim was thus proper.
iii. Fraud and Negligent
Misrepresentation
LabMD claims that Tiversa and Boback are liable for
fraud and negligent misrepresentation based on their telling
LabMD “that Tiversa had obtained the 1718 File from a [P2P]
network and that Tiversa continued to see individuals
downloading copies of the 1718 File.” (1731 App. at 4909
(internal quotation and alteration marks omitted).) Under
Pennsylvania law, plaintiffs must bring fraud claims “within
two years of when they learned or should have learned, through
the exercise of due diligence, that they have a cause of action.”
Beauty Time, Inc. v. VU Skin Sys., Inc., 118 F.3d 140, 148 (3d
Cir. 1997). For that limitations period to begin running, “a
claimant need only be put on inquiry notice by ‘storm
warnings’ of possible fraud.” Id. The statute of limitations for
negligent misrepresentation is also two years. 42 Pa. Cons.
Stat. § 5524(7).
We agree with the District Court that LabMD knew or
should have known of its fraud and negligent
misrepresentation claims by 2011, when it filed its complaint
in the Georgia Action. There, LabMD alleged that “Tiversa
intentionally accesse[d] LabMD’s computers and networks
and downloaded the [1718 File] without authorization” and
that “Tiversa accessed LabMD’s computers and networks with
28
the intent to extort money from LabMD[.]” (1731 App. at
1549-50.) Those older allegations demonstrate that LabMD
had already concluded that Tiversa lied about obtaining the
1718 File from a P2P network. That knowledge should have
also put LabMD on inquiry notice in 2011 as to whether
Tiversa allegedly lied about others obtaining the 1718 File
from a P2P network. Because LabMD learned or should have
learned of the claimed falsehoods more than two years before
filing its original 2015 complaint in the First Pennsylvania
Action, its fraud and negligent misrepresentation claims are
barred by the applicable statutes of limitations. See Toy v.
Metro. Life Ins. Co., 863 A.2d 1, 9 (Pa. Super. Ct. 2004)
(applying the same statute-of-limitations analysis to uphold
dismissal of claims for fraud and negligent misrepresentation),
aff’d, 928 A.2d 186 (Pa. 2007). We will therefore affirm the
District Court’s dismissal of those claims.
iv. Defamation
“Defamation … is the tort of detracting from a person’s
reputation, or injuring a person’s character, fame, or
reputation, by false and malicious statements.” Joseph v.
Scranton Times L.P., 959 A.2d 322, 334 (Pa. Super. Ct. 2008).
Under Pennsylvania law, the plaintiff bears the burden of
proving, inter alia, the defamatory character of a statement and
harm resulting from its publication. 42 Pa. Cons. Stat. Ann.
§ 8343(a)(6). The plaintiff does not have to affirmatively
prove that the statement was false; rather, a defendant who
disputes falsity has to prove the truth of the defamatory
communication. Id. § 8343(b)(1).
In its amended complaint, LabMD identified twenty
allegedly defamatory statements made by Boback, for Tiversa,
29
accusing LabMD of having poor data security practices and
exposing the 1718 File to the public. Statements 1 through 4
were made to the FTC in 2009. Statements 5 through 9 were
made in a Tiversa press release in May 2009. Statements 10
through 14 were published on the Pathology Blawg in February
2015. And Statements 15 through 20 were made in a letter to
the editor of The Wall Street Journal that was published in
December 2015. The District Court dismissed LabMD’s
defamation claim as to Statements 1-9, and LabMD does not
challenge that aspect of the Court’s decision.
Concerning the statements on the Pathology Blawg
(Statements 10 through 14), the District Court denied the
motion to dismiss only as to Statement 13, which, as noted
earlier, reads as follows:
LabMD lawsuit – The claims are baseless and
completely unsubstantiated … even in the
complaint itself. This appears to be another
attempt by Daugherty to distract people from the
INDISPUTABLE FACT that LabMD and
Michael Daugherty leaked customer information
on nearly 10,000 patients.
(1731 App. at 4897.) The Court held that Statement 13 was
“defamatory on its face,” and it rejected Tiversa’s argument
that the statement was a non-actionable opinion. (1731 App.
at 1542.) But the Court granted Tiversa’s motion to dismiss as
to the other statements made on the Pathology Blawg because
it thought LabMD had not addressed those individual
statements in its opposition to Tiversa’s motion to dismiss and
thus had “conceded that [they] were not defamatory.” (1731
App. at 1542.)
30
The District Court erred in that. As to Statements 10
and 14, LabMD did not make such a concession. Those two
statements read, respectively:
After all, we found this file in a public file
sharing network that was accessible by millions
of people from around the world.
…
To my understanding from the deposition
transcripts, LabMD had a policy against
installing file sharing software. An employee at
LabMD violated that policy, which resulted in
the exposure of nearly 10,000 patients[’] private
information. This clearly demonstrates that
LabMD DID NOT adequately protect their
[patients’ private information], which is [all] that
the FTC needs to demonstrate. Case closed. The
rest of this is just a desperate attempt to distract
everyone from that INDISPUTABLE FACT.
(1731 App. at 4896-97.)
In its brief in opposition to Tiversa’s motion to dismiss,
LabMD included a subsection titled “Defamatory Statements
Nos. 10 – 14,” in which it wrote: “Although the entire
statement [on the Pathology Blawg] provides the context of
this ongoing dispute, it is absolutely clear that Defendants
made a false and defamatory statement about LabMD by
asserting as ‘indisputable fact’ that LabMD ‘leaked’ customer
information on nearly 10,000 patients. Defendants cannot
dismiss this statement on the basis that it is an opinion.” (1731
31
App. at 1946-47.) At no point did LabMD single out Statement
13 as the only part of its defamation claim that it was
defending.
Instead, the District Court appears to have reached its
conclusion by observing that Statement 13 was the only one
that specifically included the exact terms “indisputable fact”
and “leaked[,]” which were the terms LabMD quoted in its
brief. But it appears that LabMD quoted those specific terms
merely to exemplify how Tiversa’s statements on the
Pathology Blawg contained assertions of fact, not opinions.
Other statements on the Pathology Blawg included analogous
phrases. Statement 10 said that the 1718 File was “found … in
a public file sharing network that was accessible by millions of
people from around the world” – which is consistent with
LabMD’s use of the term “leaked” in its brief. (1731 App. at
4896.) Statement 14 similarly said that “[a]n employee at
LabMD … expos[ed] … nearly 10,000 patients[’] private
information” – again, an assertion effectively synonymous
with “leaked” – and it even used the exact phrase “indisputable
fact” that LabMD quoted in its brief. (1731 App. at 4897.) Yet
the District Court took a constricted view of LabMD’s
opposition and gave too little weight to the substance of its
argument. LabMD was not required to repeat each of the
defamatory statements verbatim in order to preserve its claim.
Cf. Nelson v. Adams USA, Inc., 529 U.S. 460, 469 (2000)
(“[Preservation] does not demand the incantation of particular
words; rather, it requires that the lower court be fairly put on
notice as to the substance of the issue.”).15
15
We agree with the District Court, however, that
LabMD did not adequately defend the motion to dismiss as to
32
Statements 11 and 12. Those two statements read,
respectively:
The FTC then filed a Civil Investigative Demand
(CID) that forced Tiversa to comply. In
compliance with the CID, Tiversa provided
information on 84 companies that were
breaching information and that matched the
criteria of the CID. LabMD was one of those
listed.
Tiversa has not had a single criminal allegation
alleged against us by any individual or
organization in our entire 11 year history … not
even Daugherty or LabMD, despite the
defamatory and baseless allegations of extortion,
theft and fraud. One would think that if
Daugherty truly believed he was the victim of an
actual extortion plot, as he has suggested, he
would have called the police or FBI. To my
knowledge, he has not. It is my belief that he
knows that if he files a false police statement, he
could be prosecuted, which may be the likely
reason why he has decided not to do so.
(App. at 4896-97 (alteration in original).) Unlike the other
statements on the Pathology Blawg, Statements 11 and 12 do
not contain accusations of LabMD “leaking” patient
information, declarations of “undisputable facts,” or anything
else that LabMD alluded to in its brief.
33
The District Court applied a similarly erroneous
analysis to Statements 15 through 20, found in a letter to The
Wall Street Journal. The Court sustained the defamation claim
as to Statement 16, which said:
LabMD’s CEO Michael Daugherty admits that a
LabMD employee improperly installed … file-
sharing software on a company computer. Doing
so made confidential patient information
publicly available over the Internet.
(1731 App. at 4898.) The Court rejected Tiversa’s argument
that the statement was true, reasoning that the meaning of
“publicly available” was subject to interpretation. But it then
granted the motion to dismiss as to the other statements made
in The Wall Street Journal, because it again thought LabMD
had conceded that those statements were not defamatory by not
adequately opposing Tiversa’s motion to dismiss. Again,
however, LabMD did no such thing, at least as to Statements
15, 17, and 18. Those statements read, respectively:
LabMD, a Georgia-based cancer screening
company, admits its own employee mistakenly
exposed the confidential medical records of
nearly 10,000 individuals on the Internet.
…
Using this information, LabMD discovered that
it had peer-to-peer sharing software on a
company computer. Without Tiversa’s free
information, LabMD would have never known it
was continuing to publicly expose patient
information.
34
The suggestion that Tiversa provided
information on exposed files to the Federal Trade
Commission as a means of retribution because
LabMD didn’t hire Tiversa is 100% false.
(1731 App. at 4898.)
In its opposition to the motion to dismiss, LabMD
argued that Statements 15 through 20 were defamatory because
its files “were and are never ‘publicly available’ on [P2P]
networks, as a matter of fact and as a matter of law.” (App. at
1948-49 (footnote omitted).) The District Court focused on the
words “publicly available,” concluding that LabMD had
conceded its defamation claim as to all those statements except
for Statement 16, the only statement with the exact phrase
“publicly available.” Once more, the District Court’s narrow
approach led it to erroneously dismiss the other statements as
being concededly non-defamatory. Yet other statements
likewise contain accusations of the 1718 File being made
publicly available. Statement 15 said that “LabMD … admits
its own employee mistakenly exposed the confidential medical
records of nearly 10,000 individuals on the Internet.” (App. at
4898 (emphases added).) Statement 17 said that “LabMD
would have never known it was continuing to publicly expose
patient information.” (App. at 4898 (emphasis added).) And
Statement 18 similarly addressed LabMD’s “exposed files.”
(App. at 4898 (emphasis added).) Thus, LabMD’s briefing
35
adequately preserved its argument with respect to Statements
15, 17, and 18, and not just Statement 16.16
We will therefore direct the reinstatement of LabMD’s
defamation claim pertaining to Statements 10, 14, 15, 17, and
18. On remand, the District Court may consider any other
arguments Tiversa has made in favor of dismissing the claim
as to those statements.
16
We agree with the District Court that LabMD did not
sufficiently preserve its opposition to the motion to dismiss as
to Statements 19 and 20, which respectively read:
In the Fall of 2009 – well over a year later – as
part of its investigation into cyber leaks, the FTC
issued the equivalent of a subpoena to Tiversa,
which legally required us to provide information
on all the breaches we found from many
companies. There was absolutely no “deal”
entered into between the FTC and Tiversa. It is
no different than the subpoena the FTC issued on
LabMD. LabMD was legally required to
respond, as was Tiversa.
As a result of this dispute, LabMD’s CEO has
defamed my company and made statements that
are 100% wrong.
(App. at 4898-99.) Neither statement relates to LabMD
making the 1718 File publicly available, which was the topic
of the statements that LabMD argued in its briefing were
defamatory.
36
2. Summary Judgment17
After the District Court held that LabMD had
adequately stated a defamation claim as to Statements 13 and
16, Tiversa and Boback moved for summary judgment. The
District Court’s decision at summary judgment turned on
whether LabMD could establish that it was harmed by
Boback’s statements. The District Court held that the record
did not support a finding of actual damages, since LabMD had
already gone out of business over a year before Boback made
those statements. It further held that the record did not support
an alternative finding of presumed damages. Although
LabMD concedes the lack of actual damages, it contests the
District Court’s decision that there was no evidence to support
presumed damages – and, specifically, the Court’s refusal to
consider the evidence it offered on that issue.
A plaintiff who establishes presumed damages can
prevail on a claim for defamation even without proof of actual
damages. See Dun & Bradstreet, Inc. v. Greenmoss Builders,
Inc., 472 U.S. 749, 760-61 (1985) (discussing the common-law
rule that allows juries to presume that damage occurred from
defamatory statements, even when “proof of actual damage [is]
impossible”). To establish presumed damages in
Pennsylvania, the plaintiff must prove that the defendant made
the defamatory statements with actual malice. Joseph v.
Scranton Times L.P., 129 A.3d 404, 432 (Pa. 2015). Actual
malice is “knowledge of falsity or reckless disregard for the
“We review orders granting summary judgment de
17
novo.” Daubert v. NRA Grp., LLC, 861 F.3d 382, 388 (3d Cir.
2017).
37
truth.” Id. at 426 (quoting Gertz v. Robert Welch, Inc. 418 U.S.
323, 349 (1974)). Whether there has been actual malice is
judged by a subjective standard. Lewis v. Phila. Newspapers,
Inc., 833 A.2d 185, 192 (Pa. Super. Ct. 2003). The question is
whether there is “evidence that the defendant in fact
entertained serious doubts as to the truth of his publication.”
Id. (emphasis and internal quotation marks omitted).
In support of their motion for summary judgment,
Tiversa and Boback submitted an affidavit from Boback in
which he declared that files in a folder on a P2P network are
“publicly available” and that a person who places the
documents on the network has “leaked” the documents. He
declared that he has always believed that to be true and that he
“relied upon [his] knowledge as it existed … when [he] made
Statements 13 and 16.” (1731 App. at 1810.)
LabMD sought to rebut Boback by using expert
evidence to demonstrate that the 1718 File was not publicly
available. The District Court, however, refused to consider any
expert declaration, expert report, or other expert discovery on
the motion for summary judgment. At an earlier scheduling
conference, the District Court had stated that “it appears to the
Court that it’s in the interests of efficiency that, before we get
into experts we see if the claim survives [the motion for
summary judgment].” (App. at 1766.) LabMD’s counsel then
observed that “[i]t may be that issues are raised on summary
judgment that need to be addressed by an expert[.]” (1731
App. at 1766.) But the District Court reiterated that it would
not hear expert testimony:
And let me be clear. Given the issues of what’s
left in this case, the two remaining issues are not
38
an issue where we’re going to need expert reports
for the motion for summary judgment. … So if
the remaining portion of [the defamation claim]
survives the motion for summary judgment, then
at that point we’ll set a schedule for each side’s
expert reports and expert depositions. [I]f the
case happens to be dismissed, then the parties
will have spent considerable time and money,
and I am respectful of that. And in light of the
posture of this case and the issues at hand, we
will deal with summary judgment first, and then,
if the claim survives as to one or both statements
at issue, then we’ll set the expert schedule.
(1731 App. at 1767.)
Nevertheless, in LabMD’s opposition to the motion for
summary judgment, it submitted the Regard Declaration.
Regard, a specialist in computer forensics, asserted that the
1718 File was never publicly available; that Tiversa had used
secret, government-owned software to access the 1718 File;
and that the metadata supported Wallace’s story that he was
directed by Boback to generate the appearance of a prior leak.
But the District Court, at Tiversa’s request, struck the Regard
Declaration and refused to consider it when ruling on the
motion for summary judgment. The Court found that LabMD
“plainly violate[d] the Court’s clear directive” and
“conduct[ed] litigation by surprise.” (1731 App. at 1878-79.)
LabMD challenges that refusal to consider the Regard
Declaration.
Parties are permitted to submit declarations to support
or defend against a motion for summary judgment. Fed. R.
39
Civ. P. 56(c)(1)(A). That includes expert declarations. E.g.,
1836 Callowhill St. v. Johnson Controls, Inc., 819 F. Supp.
460, 462 (E.D. Pa. 1993) (“An expert’s affidavit … is eligible
for summary judgment consideration if the affiant would be
qualified to give the expert opinion at trial.”). As with other
rules for obtaining and presenting evidence, the timing and
availability of expert discovery is subject to the court’s
discretion. See Lloyd v. HOVENSA, LLC., 369 F.3d 263, 274-
75 (3d Cir. 2004) (“It is well established that the scope and
conduct of discovery are within the sound discretion of the
trial court and that after final judgment of the district court …
our review is confined to determining if that discretion has
been abused.” (quoting Marroquin-Manriquez v. I.N.S., 699
F.2d 129, 134 (3d Cir. 1983)). But, of course, a district court’s
discretion is not unbounded. It abuses that discretion if it
“interfere[s] with a substantial right[.]” Pub. Loan Co. v.
FDIC, 803 F.2d 82, 86 (3d Cir. 1986) (quoting Marroquin-
Manriquez, 699 F.2d at 134) (internal quotation marks
omitted).
Here, the District Court abused its discretion when it
prohibited LabMD from submitting an expert declaration
during the summary-judgment phase of this case. By refusing
to allow expert support for the defamation claim until after
summary judgment – and then entering summary judgment
against LabMD – the Court denied LabMD any opportunity to
present expert testimony, despite the technical subject matter
at issue. Discerning the falsity of the allegedly defamatory
statements about LabMD “leak[ing]” the 1718 File or making
it “publicly available” was predictably going to involve
determining whether the participants on a computer network
were able to search for and access the 1718 File using publicly
available programs. Expert insight into the technical workings
40
of P2P networks and available search software clearly would
have aided that determination and should have been allowed.
It also may have aided the actual malice inquiry, as it could
have shed light on whether reckless disregard of the truth could
be inferred from the allegedly false statements of the CEO of a
P2P-network cybersecurity company about how his company
retrieved documents from a P2P network. Reckless disregard
can be proven by circumstantial evidence, Joseph, 129 A.3d at
437, and LabMD was not obligated to stand mute in the face of
Boback’s self-serving testimony that his statements were true
and he always thought so. See Schiavone Constr. Co. v. Time,
Inc., 847 F.2d 1069, 1090 (3d Cir. 1988) (“[O]bjective
circumstantial evidence can suffice to demonstrate actual
malice. Such circumstantial evidence can override defendants’
protestations of good faith and honest belief that the report was
true.” (footnote omitted)). Yet the District Court’s “no
experts” insistence put LabMD in exactly that position,
depriving it of the substantial right to prove its case.
We do not minimize the District Court’s legitimate
concern that expert discovery can become disproportionately
burdensome and costly. There are, however, other ways to
control costs besides a blanket prohibition on expert evidence.
Limits on the type and amount of such evidence and associated
discovery may be appropriate. See Fed. R. Civ. P. 26(b)(2).
But, again, the nature of the accusations here, involving
computer software functions, strongly indicated that resort to
expert testimony was to be anticipated and should have been
allowed.
The District Court’s exclusion of expert evidence on
LabMD’s defamation claim resulted in fundamental unfairness
in the resolution of the case, and its exclusion order was thus
41
an abuse of discretion. We will therefore vacate the District
Court’s order granting summary judgment. On remand, the
District Court should set a schedule that will permit LabMD to
present its expert evidence to oppose the motion for summary
judgment and also give Tiversa and Boback an opportunity to
respond to LabMD’s proposed expert declaration.
Furthermore, for the reasons already discussed, the District
Court should include Statements 10, 14, 15, 17, and 18 as
additional grounds for LabMD’s defamation claim.
3. Sanctions and Contempt18
Hawkins and LabMD engaged in aggressive discovery
tactics that frustrated Tiversa and unnecessarily burdened the
District Court, as is apparent from discovery disputes that we
need not describe in detail here. Suffice it to say, we do not
doubt that some of those tactics, including some of the
questioning at depositions, warranted sanctions. For example,
after the District Court issued a protective order because
Hawkins was asking deposition questions about guns in the
workplace, and he then pursued further questioning on that
subject in later depositions, there was a blatant disregard for
18
We review for abuse of discretion a district court’s
decision to impose sanctions under Rule 37 of the Federal
Rules of Civil Procedure. Naviant Mktg. Sols., Inc. v. Larry
Tucker, Inc., 339 F.3d 180, 185 (3d Cir. 2003). “While this
standard of review is deferential, a district court abuses its
discretion in imposing sanctions when it bases its ruling on an
erroneous view of the law or on a clearly erroneous assessment
of the evidence.” Grider v. Keystone Health Plan Cent., Inc.,
580 F.3d 119, 134 (3d Cir. 2009) (cleaned up).
42
the District Court’s order, and it was not an abuse of discretion
to impose some sanction as a consequence.
Yet that First Sanctions Order did not stop at penalizing
Hawkins and LabMD solely for asking questions on obviously
extraneous topics that the District Court had warned against in
the protective order. Instead, the language of the First
Sanctions Order and the breadth of the sanctions imposed
suggest that the Court was treating a much wider range of
questions as off limits. It erred in that regard.
The protective order said that “[t]he scope of the
depositions in this action must be limited to the remaining
portion of the defamation per se claim, specifically Statements
#13 and #16, LabMD’s alleged damages and defenses thereto.”
(1731 App. at 1777.) And large portions of Hawkins’s
questioning did fall within that narrowed scope of LabMD’s
defamation claim. For example, questions about what
technologies Tiversa used to access documents on P2P
networks – which might have included proprietary or
government-owned technologies – are relevant to whether it
was true, as Boback stated, that Tiversa’s ability to download
the 1718 File from LabMD’s computer in fact made the 1718
File “publicly available.” Furthermore questions about
whether Tiversa took steps to create a false appearance of the
1718 File spreading across the P2P network are plainly
relevant to whether Boback had “knowledge of falsity or
reckless disregard for” the true nature of the 1718 File’s
availability, which could support a finding of presumed
damages. Joseph, 129 A.3d at 426 (quoting Gertz, 418 U.S. at
349); see also id. at 437 (observing that actual malice may be
proven through circumstantial evidence). Despite that, the
District Court repeatedly expressed its concern that most of the
43
questions, especially those about false spread, were trying to
uncover information that would be used in other cases. But
evidence of Tiversa creating a false “leaks” narrative could be
relevant to claims in other cases and, at the same time, be
relevant to the defamation claim here. The District Court erred
in holding that the scope of its protective order, as objectively
understood from the language of the order, prohibited inquiry
into such topics.
Even if the Court had intended to prohibit questioning
on those topics,19 the protective order was not specific enough
to delineate the exact topics that were off limits during
depositions. The order appeared to broadly permit questions
within the scope of the defamation claim as to Statements 13
and 16, including whether the 1718 File was publicly available
and, if it was not, whether Boback knew that. Those were the
rules in effect when Hawkins conducted the remaining
depositions. When the District Court penalized Hawkins for
asking questions that did not actually violate the announced
rules as reasonably understood, it abused its discretion. See
Clientron Corp. v. Devon IT, Inc., 894 F.3d 568, 580-81 (3d
Cir. 2018) (explaining that a sanction must be “just,” which
“represents the general due process restrictions on the court’s
discretion”).
Furthermore, with respect to the portion of the First
Sanctions Order that prohibited LabMD from using the six
depositions for any purpose in any case, it also abused its
19
We need not decide here whether a protective order
precluding such relevant questioning would have itself been an
abuse of discretion.
44
discretion under the test announced in Meyers v. Pennypack
Woods Home Ownership Ass’n, 559 F.2d 894, 905 (3d Cir.
1977), overruled on other grounds as recognized by Goodman
v. Lukens Steel Co., 777 F.2d 113 (3d Cir. 1985). In
Pennypack, we identified five factors to consider when
determining whether a district court abuses its discretion in
precluding evidence as a discovery sanction: (1) the prejudice
or surprise in fact of the party against whom the evidence
would have been presented, (2) the ability of that party to cure
the prejudice, (3) the extent to which the presentation of the
evidence would disrupt the orderly and efficient trial of the
case or other cases in the court, (4) bad faith or willfulness in
failing to comply with the court’s order, and (5) the importance
of the excluded evidence. Konstantopoulos v. Westvaco Corp.,
112 F.3d 710, 719 (3d Cir. 1997). “The importance of the
evidence is often the most significant factor.” ZF Meritor, LLC
v. Eaton Corp., 696 F.3d 254, 298 (3d Cir. 2012).
The District Court did not expressly consider the
Pennypack factors. Its primary reasons for excluding the
evidence seem to be what it perceived as an unwarranted
expansion of issues and LabMD’s willful violation of the
protective order, which might correspond to the third and
fourth Pennypack factors. For the reasons discussed above,
however, those factors do not weigh as heavily against LabMD
when we consider the full scope of the defamation claim and
what the protective order objectively prohibited. Furthermore,
the importance of the evidence undoubtedly disfavored
exclusion; the District Court excluded testimonial evidence
from six out of seven witnesses, including the deposition
testimony from Boback, the alleged defamer himself. Thus,
the Pennypack analysis also indicates that, in the First
Sanctions Order, the District Court abused its discretion by
45
excluding critical evidence. We will therefore vacate the First
Sanctions Order.
As a consequence, we will also vacate the Second
Sanctions Order, the revocation of Hawkins’s pro hac vice
admission, and the contempt order. They were all based on the
District Court’s finding that LabMD and Hawkins had violated
the First Sanctions Order, and that conclusion no longer stands
on an entirely sound footing.
Nothing we say here, however, should be understood as
license for any counsel to disregard the warnings and orders
given by district courts. That we believe the District Court in
this case overstepped its bounds with its sanctions orders in no
way condones the hyper-aggressive behavior that burned
through the patience of a thoughtful judge and got Hawkins
and LabMD into trouble. The Court is free to keep them on an
appropriately designed and well-explained short leash, as the
case continues.
4. Attorney Withdrawal20
When Davies, the attorney that LabMD hired as
Hawkins’s replacement to appeal its case, moved to withdraw,
the District Court denied his motion for the sole reason that his
withdrawal would leave LabMD unrepresented by counsel. In
support of that decision, it cited Simbraw, Inc. v. United States,
367 F.2d 373, 373-74 (3d Cir. 1966) (per curiam), where we
20
We review for abuse of discretion the District Court’s
denial of a request by counsel to withdraw from
representation. Ohntrup, 802 F.2d at 679.
46
held that a corporation must be represented in court by an
attorney. The District Court acknowledged that Tiversa had
made two other arguments for why Davies’s motion should be
denied – namely, that LabMD still had the means to pay Davies
and that the motion to withdraw was simply a litigation tactic
intended to avoid paying the sanctions – but the Court
determined that it “[did] not need to resolve the merits of these
two arguments, in light of the clear application of [Simbraw]
to the instant Motion.” (1429 App. at 689.)
That reasoning too was in error. Although Simbraw
requires a corporation to be represented by counsel, it does not
absolutely prohibit a corporation’s counsel from withdrawing
before new counsel is retained. We have previously rejected
that interpretation of the rule. In Ohntrup v. Firearms Center,
Inc., 802 F.2d 676 (3d Cir. 1986) (per curiam), the district court
had held that a corporation’s attorney who sought to withdraw
“would be required to continue to represent [the corporation]
until such time as [the corporation] arranged for representation
by other counsel.” Id. at 679. We disagreed and reasoned that
such a rigid prohibition on an attorney’s ability to withdraw
was “neither mandated nor required for the effective
administration of the judicial system.” Id. at 679-80. Thus, in
certain circumstances, counsel for a corporation should be
permitted to withdraw even before the corporation finds a
suitable substitute.
That is not to say that Davies necessarily should have
been permitted to withdraw. A lawyer is entitled to withdraw
“once [he] demonstrates to the satisfaction of the district court
that [his] appearance serves no meaningful purpose[.]” Id. at
680; Fid. Nat’l Title Ins. Co. of N.Y. v. Intercounty Nat’l Title
Ins. Co., 310 F.3d 537, 541 (7th Cir. 2002) (holding that
47
counsel should have been permitted to withdraw, leaving a
corporate client unrepresented, after considering the burden
imposed on the potentially withdrawing counsel if the status
quo is maintained, the stage of the proceedings, and the
prejudice to other parties). But the District Court expressly did
not decide whether there were other reasons to deny Davies’s
motion to withdraw. Its decision was based solely on an
erroneous conclusion of law, so we will vacate and remand for
further consideration.21
B. Appeal in the Second Pennsylvania Action
In the Second Pennsylvania Action, LabMD brought
claims primarily against Tiversa’s lawyers, Kline and
Troutman Pepper, for their alleged participation in Tiversa’s
extortionate scheme. After conducting a thorough analysis, the
District Court dismissed those claims with prejudice. LabMD
contests various aspects of the District Court’s analysis, and,
as a fallback, argues that its claims should have been dismissed
without prejudice. None of its arguments is persuasive.
1. RICO Claims and Fraud Claims
According to LabMD, the District Court erred in
dismissing the federal RICO and Georgia RICO claims
21
The alternative arguments proposed by Tiversa are
grounded on the sanctions orders and finding of contempt. As
those grounds have been vacated, the alternative arguments
fail. There may, however, be other reasons that the District
Court believes should be taken into consideration in deciding
the resurrected motion to withdraw, and we do not prejudge
those.
48
because they were barred by the statutes of limitations.
LabMD also argues that the Court erred in dismissing its
federal and state RICO, fraud, fraudulent misrepresentation,
and negligent misrepresentation claims for failure to allege any
injury. We need not address the merits of either of those
arguments, however, because there is a threshold defect in
LabMD’s appeal. LabMD does not challenge the District
Court’s separate, independent reasons for dismissing each of
those claims, so we are compelled to affirm. The failure to
challenge an independent basis for a district court’s decision is
fatal to an appeal. See Nagle v. Alspach, 8 F.3d 141, 143 (3d
Cir. 1993) (“Because the plaintiffs have not contested two of
the four independent grounds upon which the district court
based its grant of summary judgment, each of which is
individually sufficient to support that judgment, we must
affirm.”); accord, e.g., Sapuppo v. Allstate Floridian Ins. Co.,
739 F.3d 678, 683 (11th Cir. 2014).
The District Court dismissed the federal RICO claims
against Kline and Troutman Pepper for multiple reasons: the
claims were time-barred and equitable tolling did not apply;
LabMD did not suffer an injury from the Georgia Action being
dismissed without prejudice; the allegedly fraudulent acts by
Kline and Troutman Pepper did not cause the Georgia Action
to be dismissed; LabMD did not adequately plead that
Troutman Pepper was involved in a RICO enterprise or acted
to further the common purpose of any such enterprise; and
LabMD did not adequately plead that Kline engaged in a
pattern of racketeering activity or acted to further the common
purpose of a RICO enterprise. Yet LabMD contests on appeal
only the reasoning related to the first two holdings, the time-
bar and the lack of injury. Because LabMD gives us no reason
to disturb the other substantive holdings, each of which
49
provides an independently sufficient ground for dismissing the
federal RICO claims, we must and will affirm the dismissal of
those claims.
The District Court’s dismissal of the Georgia RICO
claims against all defendants also rested on multiple
independent bases. The Court held that those claims were
barred by the statute of limitations. But it then addressed the
substantive merits of the Georgia RICO claims and concluded
that they were also substantively deficient as to each defendant.
As to Tiversa and Boback, the Court held that LabMD waived
its argument on the Georgia RICO claims by not opposing
Tiversa’s and Boback’s challenges to the merits of the claims.
As to Kline and Troutman Pepper, the Court held that the
Georgia RICO claims failed for the same reasons as the federal
RICO claims, including that Troutman Pepper was not a part
of the alleged enterprise, Kline did not engage in a pattern of
racketeering activity, and their conduct did not cause LabMD’s
alleged injuries. As LabMD contests only the statute-of-
limitations determination but not those other reasons, we must
and will affirm the dismissal of the Georgia RICO claims.
Finally, the District Court dismissed LabMD’s fraud,
fraudulent misrepresentation, and negligent misrepresentation
claims against Troutman Pepper and Kline for two reasons:
because the dismissal of the Georgia Action was without
prejudice and thus did not result in injury, and because
Troutman Pepper’s and Kline’s allegedly fraudulent acts did
not cause the Georgia Action to be dismissed. In its appeal,
LabMD does not address the District Court’s causation
determination, which stands as an independent basis for
dismissing those claims. The dismissal of the fraud, fraudulent
50
misrepresentation, and negligent misrepresentation claims
must therefore also be affirmed.
2. Dismissal Without Leave to Amend22
Lastly, LabMD challenges the District Court’s
dismissal of its complaint pursuant to Rule 12(b)(6) without
giving it an opportunity to amend. “[I] n civil rights cases[,]
district courts must offer amendment – irrespective of whether
it is requested – when dismissing a case for failure to state a
claim[.]” Fletcher-Harlee Corp. v. Pote Concrete
Contractors, Inc., 482 F.3d 247, 251 (3d Cir. 2007). In other
types of cases, however, a plaintiff must properly request leave
to amend a complaint in order for the district court to consider
whether to permit amendment. Id. at 252 (“[A] district court
need not worry about amendment when the plaintiff does not
properly request it.”). A plaintiff properly requests amendment
by asking the district court for leave to amend and submitting
a draft of the amended complaint, so that the court can judge
whether amendment would be futile. Id. The court may deny
leave to amend if the plaintiff does not provide a draft amended
complaint. E.g., Fletcher-Harlee, 482 F.3d at 252-53;
Ramsgate Ct. Townhome Ass’n v. West Chester Borough, 313
F.3d 157, 161 (3d Cir. 2002); Lake v. Arnold, 232 F.3d 360,
374 (3d Cir. 2000).
22
We review for abuse of discretion the decision to
dismiss without granting leave to amend. United States ex rel.
Wilkins v. United Health Grp., Inc., 659 F.3d 295, 302 (3d Cir.
2011), overruled on other grounds as recognized by United
States ex rel. Freedom Unlimited, Inc. v. City of Pittsburgh,
728 F. App’x 101 (3d Cir. 2018).
51
This is not a civil rights case, so the District Court was
not obligated to grant leave to amend of its own accord.
LabMD never filed a motion to amend, and it never submitted
a draft amended complaint. Thus, the District Court did not
have any reason to believe that amendment would cure the
identified defects, and it “had nothing upon which to exercise
its discretion.” Ramsgate, 313 F.3d at 161. It therefore did not
abuse that discretion in dismissing the complaint in the Second
Pennsylvania Action with prejudice and without leave to
amend.
III. CONCLUSION
For the foregoing reasons, we will affirm in part the
District Court’s dismissal of the complaint in the First
Pennsylvania Action, but will vacate specific rulings regarding
the defamation claim and remand, as described above. We will
also vacate the District Court’s orders on sanctions and
contempt, and the order denying Davies’s motion to withdraw.
In the Second Pennsylvania Action, we will affirm the District
Court’s dismissal of the complaint.
52