Methode Electronics v. Adam Technologies In ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-3252
METHODE ELECTRONICS, INCORPORATED,
Plaintiff-Appellant,
v.
ADAM TECHNOLOGIES, INCORPORATED
and VINCENT DEVITO,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 03 C 2971—John F. Grady, Judge.
____________
ARGUED APRIL 8, 2004—DECIDED JUNE 14, 2004
____________
Before KANNE, EVANS, and WILLIAMS, Circuit Judges.
EVANS, Circuit Judge. The parties before us, who are
in the electronic connector business, have been involved in a
number of disputes in Delaware state courts and one in the
United States District Court for the District of New Jersey.
The latter resulted in a settlement and an exclusive
licensing agreement. When Methode Electronics, Incorpo-
rated sought a finding that the licensing agreement was
breached, it chose not to return to court in New Jersey, but
rather it came to the Northern District of Illinois seeking a
2 No. 03-3252
temporary restraining order. In its verified complaint,
signed by attorney Terrence P. Canade and verified by
James F. McQuillen, executive vice-president of Methode,
Methode alleged that venue was proper in the Northern
District of Illinois. In the eyes of the district judge, the
Honorable John F. Grady, that turned out not to be true.
Sanctions were imposed against both attorney Canade and
Methode. Methode appeals, contending that the sanctions
were improperly imposed.1
As to the underlying lawsuit, it is enough to say that from
1987 to 1993 Methode owned all the stock of Adam Technol-
ogies, Inc. (Adam Tech), a New Jersey corporation with its
principal place of business in New Jersey. Under the
settlement in the federal district court in New Jersey,
Methode was to sell to Vincent DeVito all of its shares in
Adam Tech as well as the Adam Tech trade name and
trademarks and a large amount of inventory. Under a sep-
arate license agreement, Methode obtained an exclusive
right to market the remaining Adam Tech products it had
on hand; in addition, Adam Tech and DeVito would do
nothing to interfere with Methode’s exclusive license. The
claim in the present lawsuit is that less than a day after the
licensing agreement was signed, Adam Tech and DeVito
began to undermine Methode’s rights by issuing a press
release to Methode’s customers which announced that
“Adam Tech will be accepting orders and opportunities for
more than 5,000,000 connectors stocked at its Union, NJ
facility.” It was in response to this press release that
Methode filed the present case. However, as Adam Tech and
DeVito point out, the settlement agreement also expressly
provided that “nothing shall prevent Mr. DeVito or his
designee, during the period of the License Agreement, from
selling inventory that Methode delivers pursuant to this
Settlement Agreement.”
1
Attorney Canade has not appealed from the sanction order.
No. 03-3252 3
The allegation in the verified complaint which gives rise
to the order for sanctions is found in paragraph 19, which
states:
Adam Tech and/or Mr. DeVito issued the Press Release
to Methode distributors and customers throughout
North America, including distributors and customers in
this District.
The verified complaint was filed on May 2, 2003, and 3 days
later, on the 5th, Harold Hoffman, the attorney for Adam
Tech and DeVito, sent Canade a letter pursuant to Rule 11
advising him that Illinois was not an appropriate forum for
the action and that Adam Tech’s conduct as alleged in the
complaint was permissible under the settlement agreement.
Hoffman stated that if Methode proceeded with this case in
Illinois, he would seek sanctions under Rule 11 of the
Federal Rules of Civil Procedure. Despite the letter,
McQuillen advised Canade to proceed with Methode’s
motion for a temporary restraining order. Canade filed the
motion and set it for hearing on May 7. Adam Tech and
DeVito challenged the allegation that venue was proper in
the Northern District of Illinois and disclosed the portion of
the settlement agreement that authorized DeVito to sell
inventory delivered by Methode during the exclusivity
period of the license agreement.
Discussing the latter fact during the hearing, Judge
Grady said that Methode had omitted “relevant information
that the court should have been given.” The judge was,
however, more interested in, and annoyed by, the venue
allegations. He was concerned with the venue allegations
because “if [the court] lacked venue, [it] would in no event
grant a temporary restraining order. It would instead . . .
grant defendants’ request that the case be transferred to
the District of New Jersey, where venue was clearly proper
and where the court was already familiar with the parties
and the background of their disputes.”
4 No. 03-3252
On behalf of Adam Tech and DeVito, attorney Hoffman
orally moved for sanctions, requesting that they be awarded
costs incurred as a result of being improperly haled into
court in Illinois. A briefing schedule was set on the motion.
The next day, the judge entered an order stating that he
would delay transferring the case to New Jersey until he
had ruled on the motion for sanctions. He then issued a rule
“to show cause why [Canade and Methode] should not be
held to have violated Rule 11(b)(3) in regard to paragraph
19” of the complaint. A briefing schedule was set on the
rule. On May 9, Methode filed a notice of voluntary dis-
missal of the case without prejudice pursuant to Fed. R.
Civ. P. 41(a).
The rule to show cause remained pending. Discovery
confirmed that the venue allegation lacked an evidentiary
basis. The press release was not sent directly to entities
in the Northern District of Illinois. It only reached Illinois
indirectly. Two of Methode’s customers, each of which
maintain branches in the Northern District, received copies
of the press release outside of Illinois, and they were the
ones who forwarded copies to those branch offices in
Illinois. After considerable examination of the issue, the
judge issued an order saying that the venue allegation not
only lacked evidentiary support but was intentionally false
and that Methode’s conduct in advancing it was “intention-
ally deceptive.” He found that neither Adam Tech nor
DeVito sent the press release into the district. The order
further stated that “this was not a question of mere negli-
gence,” but rather an effort to deceive the court. Pursuant
to Rule 11(c)(2), the judge imposed sanctions against
Methode: a fine of $10,000 payable to the court and half the
defendants’ attorney fees and expenses, which would be
determined later. The same sanction was assessed against
attorney Canade. The attorney fees were later stipulated to
be $45,000.
No. 03-3252 5
In its appeal, Methode contends that Judge Grady erred
in awarding attorney fees, costs, and a fine as a sanction
because Adam Tech and DeVito did not comply with Rule
11’s safe-harbor provisions. Methode also contends that it
was error to award sanctions because there is no evidence
in the record to support the holding.
We review the grant of sanctions with deference because
of the familiarity of the trial court with the relevant pro-
ceedings. The imposition of sanctions, under either Rule 11
or the court’s inherent power, is reviewed for an abuse of
discretion. Jimenez v. Madison Area Tech. Coll., 321 F.3d
652 (7th Cir. 2003).
We reject the claim that there was no evidence in the
record to support the holding that Paragraph 19 was false.
The record is clear that almost as the verified complaint
was being filed, McQuillen told Canade that he did not
know whether the press release had been sent to Illinois.
Less than 90 minutes before the complaint was filed,
Canade sent an e-mail to McQuillen, attaching a draft of
the complaint and requesting that McQuillen provide anec-
dotes to support the allegations in paragraph 19. No anec-
dotes were provided, supporting an inference that none
were available. At his deposition, McQuillen testified that
when he signed the verified complaint he did not know
whether anyone in the Northern District of Illinois had
been sent a copy of the press release:
Q. Now, sir, on May 2nd before you signed the Verified
Complaint at around 3:00 p.m., or somewhere
between 3:00 and 4:00 p.m., did you know if the
press release had been sent to branch offices in
Illinois?
A. No.
Methode’s other claim is that the district court did not
have authority to award attorney fees and expenses on a
rule to show cause under Rule 11. Related is the claim that
Adam Tech and DeVito did not file a motion as Rule 11
6 No. 03-3252
requires, nor did they comply with Rule 11(c)(1)(A)—that is,
provide a 21-day “safe harbor.” Methode is partly right.
Rule 11 requires that a motion “shall be made separately
from other motions or requests and shall describe the spe-
cific conduct alleged to violate” the rule. The motion must
be served on the opposing party but “shall not be filed with
or presented to the court unless within 21 days after service
of the motion (or such other period as the court may
prescribe), the challenged paper, claim, defense, contention,
allegation, or denial is not withdrawn or appropriately
corrected.” Alternatively, the court may, on its own initia-
tive, “enter an order describing the specific conduct” that
appears to violate the rule and “directing an attorney, law
firm, or party to show cause” why it has not violated the
rule.
It can be argued that Adam Tech and DeVito did not file
a separate motion, although their attorney moved for
sanctions at the close of the hearing on the request for a
temporary restraining order. Methode emphasizes that, in
any case, Adam Tech and DeVito did not comply with the
safe-harbor provisions of Rule 11. Therefore, the argument
goes, the only basis for the award of sanctions is a rule to
show cause on the court’s own initiative. Methode points
out that the problem with the order is that Rule 11 does not
authorize the award of attorney fees when the court is
acting on its own motion. The rule provides that the sanc-
tion may consist of
directives of a nonmonetary nature, an order to pay a
penalty into court, or, if imposed on motion and war-
ranted for effective deterrence, an order directing pay-
ment to the movant of some or all of the reasonable
attorneys’ fees and other expenses incurred as a direct
result of the violation.
We agree with Methode that, if the sanction is imposed on
the court’s own motion, attorney fees cannot be awarded.
No. 03-3252 7
We have previously ruled that Rule 11(c)(2) “allows the
imposition of attorneys’ fees against a party only if the
sanctions were initiated by motion” and that it would be an
abuse of discretion for a judge to impose sanctions sua
sponte, pursuant to Rule 11(c)(1)(B). Divane v. Krull Elec.
Co., 200 F.3d 1020, 1030 (7th Cir. 1999).
But the record in this case is open to interpretation. We
could conclude that Adam Tech and DeVito were in sub-
stantial compliance with Rule 11; or we could find that it
was impossible for them to comply with Rule 11; or we
could determine that Methode waived its right to a 21-day
safe harbor.
For example, it is relatively clear that Adam Tech and
DeVito did what they could to comply with Rule 11. They
sent a “heads-up” letter to Methode. This is exactly what
the commentary to the rule suggests a party should do: “In
most cases, however, counsel should be expected to give in-
formal notice to the other party, whether in person or by a
telephone call or letter, of a potential violation before
proceeding to prepare and serve a Rule 11 motion.” When
Methode proceeded with the hearing, it, in effect, rejected
the warning. And at that point, Adam Tech and DeVito had
no opportunity to file their motion and were prevented by
the speed of events from granting a 21-day period to
withdraw the allegation. They argue, with some basis, that
what Methode did when it proceeded with the hearing was
to waive the right to the 21-day period.
Then, when the judge chose to proceed on a rule to show
cause, the case proceeded on that basis. Under Rule 11
there is no problem with proceeding on the judge’s own
initiative by a rule to show cause. As we said, the problem
is that, under the rule, if he proceeds without a motion from
the parties, a judge is without authority to award attorney
fees. Even though there may be a basis in this case for
finding substantial compliance with the rule, or that
8 No. 03-3252
Methode waived its rights to the 21-day safe-harbor pro-
vision, we will not decide those issues. Rather, we are con-
vinced that this was a proper case for the exercise of the
court’s inherent power to control the proceedings before it.
And, of course, we can affirm “a grant of sanctions on any
basis supported by the record and the law.” Divane, 200
F.3d at 1026.
Rule 11 has not robbed the district courts of their in-
herent power to impose sanctions for abuse of the judicial
system. In Chambers v. NASCO, Inc., 501 U.S. 32, 49
(1991), the Court was quite clear that “the inherent power
of a court can be invoked even if procedural rules exist
which sanction the same conduct.” The Court stated that
there was “no basis for holding that the sanctioning scheme
of the statute and the rules displaces the inherent power to
impose sanction for . . . bad-faith conduct . . . .” At 46. Even
before Chambers we recognized the inherent power of the
district courts. See G. Heileman Brewing Co. v. Joseph Oat
Corp., 871 F.2d 648 (7th Cir. 1989) (en banc). We have,
however, continued to make clear that there is a “need to be
cautious when resorting to inherent powers to justify an
action, particularly when the matter is governed by other
procedural rules . . . .” Kovilic Constr. Co. v. Missbrenner,
106 F.3d 768, 772-73 (7th Cir. 1997).
The case before us today illustrates the wisdom of re-
taining the inherent power of the courts. As in many cases
involving a request for preliminary relief, blind adherence
to the procedures in Rule 11 is not possible. Events often
move too fast to allow strict compliance with the rule. To
repeat, Adam Tech and DeVito had sent a letter warning of
their intention to move for sanctions if the case remained in
Illinois. Methode decided to proceed with its motion for a
temporary restraining order by scheduling a hearing 2 days
after the letter was sent. The case was filed and voluntarily
dismissed, all within 7 days. Short as it was, that time
period was long enough for Adam Tech and DeVito to have
No. 03-3252 9
to appear at a hearing in Illinois, thus incurring the
attorney fees and costs at issue here. The judge certainly
acted wisely in trying to sort out what was going on.
In order to sanction a party under its inherent power, a
court must provide notice of its intention to impose sanc-
tions and give the party an opportunity to respond. Sanc-
tions can then be imposed if the court finds that the party
“acted in bad faith, vexatiously, wantonly, or for oppressive
reasons . . . .” Chambers, 501 U.S. at 33. Judge Grady pro-
vided notice and gave Methode an opportunity to respond.
He also carefully considered the conduct, examining affi-
davits, briefs, and McQuillen’s deposition testimony. He
then found that when McQuillen signed the complaint, he
did not know whether any copies of the press release had
been sent into the Northern District. He found not only that
Methode’s venue allegations were false, but that Methode’s
conduct in advancing them was intentionally deceptive.
He recognized that Methode had filed a verified complaint
with the explicit allegation that venue was proper in Illinois
because a less definite allegation (acknowledging that while
it did not have evidentiary support for an allegation that
venue was proper in Illinois but that it hoped to develop
evidence regarding venue during discovery) would have
meant that the temporary restraining order would not have
been issued. He said, “[T]his was not a question of mere
negligence. It was an effort to deceive the court as to the
existence of venue, so that Methode could litigate the case
in a forum that was convenient to it, however inconvenient
to defendants, and possibly even obtain preliminary
injunctive relief.” Judge Grady acted well within his
authority in ordering a sanction of attorney fees and costs,
as well as the fine payable to the court. The order imposing
sanctions is AFFIRMED.
10 No. 03-3252
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—6-14-04