Domain Protc v. Sea Wasp

Case: 20-40411 Document: 00516166706 Page: 1 Date Filed: 01/13/2022
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
January 13, 2022
No. 20-40411 Lyle W. Cayce
Clerk
Domain Protection, L.L.C.,
Plaintiff—Appellant,
Gary N. Schepps,
Appellant,
versus
Sea Wasp, L.L.C.,
Defendant—Appellee,
consolidated with
_____________
20-40518
_____________
Domain Protection, L.L.C.,
Plaintiff—Appellee,
versus
Sea Wasp, L.L.C.,
Defendant—Appellant.
Case: 20-40411 Document: 00516166706 Page: 2 Date Filed: 01/13/2022
No. 20-40411
Appeal from the United States District Court
for the Eastern District of Texas
USDC No. 4:18-CV-792
Before Elrod, Southwick, and Costa, Circuit Judges.
Gregg Costa, Circuit Judge:
For physical addresses, location is paramount. As the quip goes, the
three most important things about real estate are location, location, location.
The same is true for internet addresses. The right domain name can
draw traffic to a site, making certain names extremely valuable. Consider
these astounding prices for some Fifth Avenues of e-commerce:
“business.com” sold for $345 million, “LasVegas.com” sold for $90 million,
and “carinsurance.com” went for almost $50 million.1 The potential value
of domain names has led to more than a decade of litigation over the
ownership of the ones at issue in this case.
This latest chapter in the dispute started well for the plaintiff. It
obtained some preliminary relief and then a summary judgment ruling that
the defendant had violated state and federal law. But it did not end well; a
jury awarded no damages. So the plaintiff appeals seeking some remedy
1
Business.com Sold to RH Donnelley; Beating DJ, NYT and News Corp; Price $345
Million, Forbes (July 26, 2007, 1:47 pm),
https://www.forbes.com/2007/07/26/businesscom-donneley-advertising-tech-
cx_pco_0726paidcontent.html?sh=2879669777f9; Michael Gargiulo, Exact Match
Domains: How to Price These High-Value Assets, Forbes (Aug. 7, 2018, 8:30 am),
https://www.forbes.com/sites/forbestechcouncil/2018/08/07/exact-match-domains-
how-to-price-these-high-value-assets/?sh=51f131027437; Michael Gargiulo, What Exactly
Is a Premium Domain Name, Forbes (July 6, 2021, 9:10 am),
https://www.forbes.com/sites/forbestechcouncil/2021/07/06/what-exactly-is-a-
premium-domain-name/?sh=5bf33d483050.
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while the defendant challenges the liability rulings. Given the mixed rulings,
it is no surprise that both sides also want attorney’s fees. To top things off,
the district court sanctioned the plaintiff’s lawyer for misconduct. We end
up affirming the judgment except for the sanctions. And with three appeals
arising from one lawsuit—one from the plaintiff, one from the defendant, one
from the sanctioned lawyer—this case allows us to clarify when arguments
should be made in responsive briefing and when they require a cross-appeal.
I.
When you type a domain name into your internet browser—say
ca5.uscourts.gov for the multitudes wanting to read this opinion—and press
enter, the computer brings you to the Fifth Circuit homepage. While this can
happen in a flash, a lot is going on behind the scenes.
Basically, it works like this: Registered domain names are listed in a
giant database, called a registry. In that registry, each domain name is
matched with a “nameserver.” When a computer user types a domain name
into a browser, the registry connects it to the nameserver for that domain
name. The nameserver then sends back to the computer the numerical
internet protocol (IP) address for the domain name. One IP address for the
Fifth Circuit website is 23.221.222.250. Using that address, the computer
connects directly with the desired website. Once that happens, the website
appears on the computer.
Nameservers play an important part in this case. For now, the
important thing to understand is that their function—translating a desired
domain name into the associated IP address—is a key link in the sequence
that connects users to websites. As a result, someone with access to a
nameserver can modify it to direct internet traffic (and therefore ad revenue)
to a different website than the one actually associated with the domain name.
As for the parties before us, defendant Sea Wasp is an accredited
registrar of internet domain names. A customer pays Sea Wasp to register
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available domain names. Plaintiff Domain Protection is one such customer;
it had tens of thousands of domain names registered through Sea Wasp.
A few months into the parties’ relationship, Sea Wasp learned there
was litigation over whether Domain Protection had a right to those domain
names. In fact, the domain names had been at the center of ownership
controversy for years before our parties entered the picture.
These earlier disputes help explain how we got to where we are today.
Back in 2009, litigation over these domain names began after a party breached
a contract. A court-approved settlement ultimately divided the domain
names between two entities. One of those entities was Quantec, LLC, owned
by Jeffrey Baron.
Baron’s ownership of the domain names was short-lived. After Baron
failed to pay his attorneys, a court ordered his assets—including the domain
names owned by Quantec—into receivership. Baron appealed. See
Netsphere, Inc. v. Baron, 703 F.3d 296 (5th Cir. 2012). While Baron’s appeal
was pending, appellant Gary Schepps—one of Baron’s lawyers who was not
getting paid—helped his law school friend Lisa Katz get a job at Quantec.
She too started to complain that she was not getting paid.
We reversed and remanded the receivership decision. Id. at 308–11.
Still, more obstacles stood between Baron and the domain names. After the
case was remanded, the district court ordered the receiver to return
Quantec’s assets—including the domain names—to Katz. She was to hold
the domain names as Quantec’s agent pending the resolution of various
disputes.
But that is not what happened. Instead, Schepps and Katz formed
Domain Protection as a “liquidation vehicle” to sell the domain names to pay
themselves the attorney’s fees and backpay they were owed. Katz was
installed as the manager of Domain Protection and Schepps acted as the
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lawyer. Katz soon assigned Quantec’s domain names to Domain Protection
with the intent to liquidate them.
After the assignment, Quantec and others sued Katz to recover the
domain names. In the wake of the lawsuit, a registrar named Fabulous (with
whom the domain names were registered at the time) “locked” the domain
names to prevent them from being sold or redirected to a different
nameserver.2 This lock remained in place for the next few years.
Enter at last Sea Wasp. In 2017, unaware of the ongoing ownership
dispute, Sea Wasp purchased Fabulous’ assets. At that time, the domain
names were still locked. But at some point in early 2018, Katz unlocked them
and changed the nameservers to redirect internet traffic (and ad revenue).
When Sea Wasp realized the nameservers had been changed, it restored the
original ones and relocked the domain names. The lock prevented Domain
Protection from transferring, selling, or modifying the domain names
pending the resolution of the ownership dispute.
In response, Domain Protection filed this lawsuit. It alleged that Sea
Wasp had violated Title II of the Electronic Communications Privacy Act,
also known as the Stored Communications Act, and the Texas Theft Liability
Act. It also brought common-law claims for conversion, civil conspiracy, and
tortious interference with contracts. Domain Protection sought preliminary
injunctive relief, recovery of its property (control over the domain names),
actual damages, and statutory damages.
The district court granted Domain Protection preliminary injunctive
relief requiring Sea Wasp to unlock the domain names. The district court
2
The Internet Corporation for Assigned Names and Numbers permits a registrar
to deny holders the ability to transfer domain names when there is a reasonable dispute
involving the identity of the holder. And a “lock” on a domain name refers to a system
setting that a registrar can use to prevent a holder from accessing and altering the
registration record for the domain name.
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eventually granted Domain Protection summary judgment on liability for all
its claims except tortious interference.
But at a trial on damages, a jury did not award Domain Protection
anything. After the trial loss, Domain Protection unsuccessfully sought
statutory damages under the Stored Communications Act.
The district court’s final judgment ordered that Domain Protection
take nothing and dismissed the case with prejudice. The court also refused
to award either side attorney’s fees. Earlier, however, the court had
sanctioned Schepps $7,110.50 for deceiving the court about his financial
interest in Domain Protection.
These rulings generated three appeals. Domain Protection seeks the
following relief: a return of property for its conversion claim and statutory
damages and attorney’s fees on its Stored Communications Act claim. In its
cross-appeal, Sea Wasp argues that Domain Protection lacked Article III
standing to bring this suit in the first place, that the court erred in ruling that
Sea Wasp violated federal and state law, and that it is entitled to attorney’s
fees for ultimately prevailing on the Texas Theft Liability Act claim. In
addition to the parties’ appeals, attorney Schepps challenges the sanctions.
II.
We start with Sea Wasp’s claim that the district court lacked
jurisdiction over this lawsuit.3 That is so, according to Sea Wasp, because
Domain Protection did not suffer an injury sufficient to give it Article III
standing to bring this suit. Lujan v. Defs. of Wildlife, 504 U.S. 555, 562 (1992).
3
Sea Wasp raises this jurisdictional challenge in its cross-appeal. But a “cross-
appeal . . . is not necessary to challenge the subject-matter jurisdiction of the district court,
under the well-established rule that both district court[s] and appellate courts are obliged
to raise such questions on their own initiatives.” 15A Charles Alan Wright &
Arthur R. Miller, Federal Practice and Procedure § 3904 (3d ed. 2021).
This argument thus should have been raised in the appellee’s brief. We discuss more below
about the limited role of cross-appeals.
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Its argument is essentially as follows: Because Katz did not have authority to
assign the domain names to Domain Protection, Domain Protection is not the
rightful holder of them and thus cannot claim it was injured by something
that happened to the domain names.
Sea Wasp’s argument does not go to Article III standing. By arguing
that the assignment between Katz and Domain Protection was invalid, Sea
Wasp is asserting that Domain Protection has no contractual right to the
domain names or to claims arising out of them. Whether a party has a
“contractual right to bring this suit” is not a question of Article III standing.
Maxim Crane Works, L.P. v. Zurich Am. Ins. Co., 11 F.4th 345, 350 (5th Cir.
2021) (per curiam); Cotton v. Certain Underwriters at Lloyd’s of London, 831
F.3d 592, 594 (5th Cir. 2016); see also SM Kids, LLC v. Google LLC, 963 F.3d
206, 211 (2d Cir. 2020); Novartis Seeds, Inc. v. Monsanto Co., 190 F.3d 868,
871 (8th Cir. 1999). “Contractual standing” is instead an issue of contract
interpretation that goes to the merits of a claim. Perry v. Thomas, 482 U.S.
483, 492 (1987); Maxim Crane, 11 F.4th at 350.
Looking beyond the contract context, a dispute about ownership of an
asset—a frequent source of litigation—does not deprive a federal court of
jurisdiction. See Webb v. City of Dallas, 314 F.3d 787, 791 (5th Cir. 2002)
(recognizing that it was sufficient for Article III standing that the plaintiffs
alleged they owned disputed land even if they “may ultimately fail to prove
ownership”).4 Imagine a diversity suit seeking to recover allegedly stolen
4
Sea Wasp incorrectly cites several cases from other circuits as having held that a
plaintiff must prevail in an ownership dispute to establish Article III standing. Two of the
cases did not involve an ownership dispute. See In re Bay Circle Props., 955 F.3d 874, 878
(11th Cir. 2020); Tal v. Hogan, 453 F.3d 1244, 1254 (10th Cir. 2006). The injury-in-fact
problem was that the plaintiffs admitted that someone else owned the property at issue.
Bay Circle, 955 F.3d at 878; Tal, 453 F.3d at 1254. If Domain Protection likewise asserted
no property interest in the domain names, that would be an Article III problem. The other
case properly treated a plaintiff’s failure to meet a statutory requirement of having a
“property interest in the regulated land” as a merits question subject to Rule 12(b)(6)
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jewelry. Not possessing the jewelry is the plaintiff’s Article III injury. The
defendant may defend the claim on the ground that the plaintiff never had a
right to the jewelry. But that argument goes to the merits question of who
owns the jewelry. See id.; see also Glen v. Am. Airlines, Inc., 7 F.4th 331 (5th
Cir. 2021) (explaining that challenge to plaintiff’s ownership of property he
sought to recover “goes to the merits of [his] claim, not his standing”). If
the law were otherwise, the entire lawsuit over the disputed jewelry would be
resolved as a question of jurisdiction.
Substitute domain names for jewelry and this case is no different. It is
enough for Article III’s injury-in-fact requirement that Domain Protection
contended when filing suit that it did not possess domain names it owned.
Deciding who actually owns those names is a merits question. As a result,
there is no jurisdictional problem with this lawsuit.
III.
Because there is federal jurisdiction over this lawsuit, we can consider
Domain Protection’s appeal. It raises three issues, each searching for some
relief after it established liability.
A.
Domain Protection first looks for relief on its conversion claim. The
jury awarded it zero damages for conversion, a finding that Domain
Protection does not appeal. But it argues it is entitled to return of the
converted property.
It is true that “[a] plaintiff who establishes conversion is entitled to
return of the property.” Winkle Chevy-Olds-Pontiac, Inc. v. Condon, 830
S.W.2d 740, 746 (Tex. App.—Corpus Christi 1992, writ dism’d). But there
must be property to return. Sea Wasp has already returned the relevant
dismissal rather than a jurisdictional issue. See Gerber v. Herskovitz, 14 F.4th 500, 510 (6th
Cir. 2021) (quoting 42 U.S.C. § 2000cc-5(5)).
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property—the domain names. After the preliminary injunction ordered it to
do so, Sea Wasp unlocked the registration records for the domain names,
thus returning them to Domain Protection. Domain Protection asserts that
there are other domain names that Sea Wasp failed to return but does not
provide any evidence to support that claim. Of the 31 domain names that
Domain Protection identifies as unreturned, 29 were lost because of Domain
Protection’s own conduct; it let their registrations expire. The remaining
two were returned. To the extent others might be challenging Domain
Protection’s ownership of certain domain names, that cannot be remedied in
a suit against Sea Wasp.
As Domain Protection did not identify any property Sea Wasp has not
returned, the district court did not err.
B.
Next, Domain Protection seeks a remedy on its successful Stored
Communications Act claim. It contends that even when a plaintiff cannot
prove actual damages, the statute awards at least $1,000 per violation. The
relevant language is that a “court may assess as damages . . . the sum of the
actual damages suffered by the plaintiff[,] but in no case shall a person
entitled to recover receive less than the sum of $1,000.” 18 U.S.C. § 2707(c).
Rather than reading the statute to automatically give a plaintiff $1,000 for
each violation, the district court viewed the $1,000 provision as a floor on
damages only once the plaintiff has proven some damages.
We agree that the $1,000 provision kicks in only if a plaintiff has
suffered actual damages. In addressing nearly identical language in the
Privacy Act, see 5 U.S.C. § 552a(g)(4)(A), the Supreme Court concluded that
“person entitled to recover” refers back to the party that suffers “actual
damages.” Doe v. Chao, 540 U.S. 614, 620 (2004). Two circuits have held
that this reasoning should apply to the same terms in the Stored
Communications Act. Vista Mktg., LLC v. Burkett, 812 F.3d 954, 964–75
(11th Cir. 2016); Van Alstyne v. Elec. Scriptorium, Ltd., 560 F.3d 199, 204–208
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(4th Cir. 2009). Last year, we said the same in an unpublished opinion. See
Hovanec v. Miller, 831 F. App’x 683, 685 (5th Cir. 2020). We endorse the
reasoning of those opinions and see no need to repeat it.
Because Domain Protection did not prove actual damages, it is not
entitled to statutory damages.
C.
The final place Domain Protection looks for a recovery is attorney’s
fees. It argues that the district court erred in holding that attorney’s fees are
discretionary under the Stored Communications Act. Once again, the words
of the statute do not help Domain Protection.
The law first provides that a “person aggrieved by any violation of [the
Act] . . . may, in a civil action, recover . . . such relief as may be appropriate.”
18 U.S.C. § 2707(a) (emphasis added). The following subsection then states
that “appropriate relief includes (1) such preliminary and other equitable or
declaratory relief as may be appropriate; (2) damages under subsection (c);
and (3) a reasonable attorney’s fee and other litigation costs reasonably
incurred.” Id. § 2707(b). The subsection on damages provides that “[i]n the
case of a successful action to enforce liability under this section, the court
may assess the costs of the action, together with reasonable attorney fees
determined by the court.” Id. § 2707(c) (emphasis added).
“May” is a word of discretion. Fogerty v. Fantasy, Inc., 510 U.S. 517,
533 (1994). Given the repeated use of “may” in the Stored Communications
Act’s relief provision, it seems straightforward that the Act allows but does
not require an award of fees to a successful party.
Domain Protection’s argument to the contrary does not overcome the
statutory grant of discretion. It tries to avoid the “may” in section 2707(a)
by arguing that it does not apply to the enumerated relief that follows in
section 2707(b). Viewed on its own, section 2707(b)(3) would say that
appropriate relief includes attorney’s fees, which Domain Protection
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contends would be a mandatory fee provision. But the best reading is that
the discretionary “may” in section 2707(a) is prefatory to the “attorney’s
fee” provision in section 2707(b)(3).
Domain Protection counters that connecting the two provisions would
result in a redundancy. The provision for injunctive relief in section
2707(b)(1) repeats the “as may be appropriate language” that appears in
section 2707(a). Yet some repetition is acceptable, especially when the
injunctive relief provision covers preliminary relief that would not depend on
proving a violation of the statute. Cuozzo Speed Techs., LLC v. Lee, 579 U.S.
261, 294 (2016) (Alito, J., concurring in part and dissenting in part)
(“Language is not superfluous when it removes any doubt about a point that
might otherwise be unclear.” (citation omitted)); see also Antonin
Scalia & Bryan A. Garner, Reading Law: The
Interpretation of Legal Texts 176–77 (2012) (“Sometimes
drafters do repeat themselves and do include words that add nothing of
substance, either out of a flawed sense of style or to engage in the ill-
conceived but lamentably common belt-and-suspenders approach.”). And
Domain Protection’s argument suffers from a much bigger problem under
the surplusage canon: Its reading of the statute would give no meaning to the
discretionary language appearing in both sections 2707(a) and (c). See
Microsoft Corp. v. i4i Ltd., 564 U.S. 91, 106 (2011) (“But the canon against
superfluity assists only where a competing interpretation gives effect to
‘every clause and word of a statute.’” (citations omitted)).
Attorney’s fees are thus discretionary when a plaintiff proves a
violation of the Stored Communications Act. See Vista Mktg., 812 F.3d at
977–79. The district court reasonably exercised that discretion in denying
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fees based on its finding that “Domain Protection has time and again litigated
in an unbecoming manner, distorted the record, and misstated the law.”5
***
Domain Protection’s attempt to recover damages or attorney’s fees in
this litigation comes up empty. We affirm the take-nothing judgment entered
against it.
IV.
Our affirming the judgment entered against Domain Protection
streamlines Sea Wasp’s cross-appeal.
A.
Most of Sea Wasp’s appeal challenges the district court’s summary
judgment rulings finding it liable under both federal and state law. Despite
those rulings, however, the court ultimately entered a judgment “that
Plaintiff takes nothing and that Plaintiff’s case against Defendant is
DISMISSED WITH PREJUDICE.” In other words, Sea Wasp won the war
even if it lost some battles along the way. Because the final judgment was a
full victory for Sea Wasp, it is not an aggrieved party entitled to bring a cross-
appeal. Cooper Indus., Ltd. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 876 F.3d
119, 126 (5th Cir. 2017).
This point bears further explanation because there is a recurring
misunderstanding about when filing a cross-appeal is appropriate as opposed
to asserting in the appellee’s brief alternative grounds supporting the
judgment. See Maxim Crane, 11 F.4th at 350–51 (holding that alternative
5
Domain Protection also argues that the district court violated due process by
denying the fee request without providing Domain Protection notice and an opportunity to
be heard. But there is no constitutionally protected property interest in discretionary
attorney’s fees, so there is no due process right. See Horton v. City of Smithville, 117 F.
App’x 345, 348 (5th Cir. 2004) (“We have recognized that discretionary statutes do not
give rise to constitutionally-protected property interests.”).
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ground for affirming should not have been raised via cross-appeal); Cooper
Indus., 876 F.3d at 126–27 (same). This is not just an academic point. Cross-
appeals are inefficient. They “complicate[] briefing schedules and the
number and length of the briefs in ways that may generate more confusion
than enlightenment.” Maxim Crane, 11 F.4th at 350 (quoting 15A Wright
& Miller, supra, § 3904). Cross-appeals should thus be confined to their
proper place.
Justice Brandeis explained that a cross-appeal is necessary when the
appellee wants to “attack the decree with a view either to enlarging his own
rights thereunder or of lessening the rights of his adversary.” United States
v. Am. Ry. Express Co., 265 U.S. 425, 435 (1924). The focus is on whether the
party is seeking a change in the decree, or what we today call the judgment.
That makes sense because we “review judgments, not opinions.” Cooper
Indus., 876 F.3d at 126. Thus a “cross-appeal is generally not proper to
challenge a subsidiary finding or conclusion when the ultimate judgment is
favorable to the party cross-appealing.”6 Id. (quoting Nat’l Union Fire Ins.
Co. of Pittsburgh v. W. Lake Acad., 548 F.3d 8, 23 (1st Cir. 2008)).
Consider a simple personal injury case in which the jury finds the
defendant was negligent but then awards no damages. The resulting take-
nothing judgment does not injure the defendant, so it could not file a cross-
appeal challenging the subsidiary finding of liability.
What the defendant in our hypothetical could do is defend the take-
nothing judgment on the alternative ground that it was not negligent. Maxim
Crane, 11 F.4th at 350; 15A Wright & Miller, supra, at 13
(“[A]rguments that support the judgment as entered can be made without a
cross-appeal.”). The place for such arguments that support a judgment is in
6
Sea Wasp could have appealed the preliminary injunction after it issued but did
not. See 28 U.S.C. § 1292(a)(1).
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the appellee’s brief. That is the where Sea Wasp should have put its
challenge to the district court’s liability rulings.
Even if we were inclined to look past the procedural misstep and treat
Sea Wasp’s cross-appeal on liability as an alternative ground for affirming its
win, there is no need to consider an alternative ground when we have
affirmed for the reasons the district court relied on. Because we have
affirmed the take-nothing judgment on the ground that Domain Protection is
not entitled to damages or fees, we do not consider the liability issues.
B.
A cross-appeal is necessary, however, for the other issue Sea Wasp
raises. Sea Wasp argues it is entitled to attorney’s fees for successfully
defending the Texas Theft Liability Act claim. Because the district court did
not award those fees, on this issue Sea Wasp is seeking something the
judgment did not include. Am. Ry. Express Co., 265 U.S. at 435.
The Texas theft statute provides that “[e]ach person who prevails in
a suit under this chapter shall be awarded court costs and reasonable and
necessary attorney’s fees.” Tex. Civ. Prac. & Rem. Code
§ 134.005(b). Unlike the Stored Communications Act fee provision we
addressed earlier, this one contains a “shall” making fees “mandatory”
when a party prevails. Merritt Hawkins & Assocs., L.L.C. v. Gresham, 861 F.3d
143, 155 (5th Cir. 2017). And a defendant generally prevails when it obtains
dismissal of a Texas Theft Liability Act claim. See id. at 156.
Sea Wasp thus contends it is entitled to fees because the judgment
dismissed the theft claim after the jury refused to award damages. The
district court thought otherwise, concluding that the preliminary injunction
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it entered against Sea Wasp meant this claim was a wash with neither party
prevailing.7
When both sides achieve some litigation victories on a claim, there
may not be a prevailing party. See, e.g., PlainsCapital Bank v. Jani, 2015 WL
7303934, at *3 (Tex. App.—Fort Worth Nov. 19, 2015, pet. denied) (neither
party prevailed); Mendleski v. Silvertooth, 798 S.W.2d 30, 32 (Tex. App.—
Corpus Christi 1990, no writ) (same); Schlobohm v. Pepperidge Farm, 806 F.2d
578, 584 (5th Cir. 1986) (same); Tunison v. Cont’l Airlines Corp., 162 F.3d
1187, 1191 (D.C. Cir. 1998) (same, citing cases); see also Travel Music of San
Antonio, Inc. v. Douglas, 2002 WL 1058527, at *3 (Tex. App.—San Antonio
May 29, 2002, pet. denied) (neither side prevailed under Texas Theft
Liability Act when plaintiff dismissed before trial). Finding no prevailing
party was sound here. Not only did Domain Protection obtain an early win
with the preliminary injunction, but by unlocking the domain names that
injunction may have contributed to Domain Protection’s later failure to
prove damages. It would be odd—and seemingly undermine the goal of
mitigating damages—if a plaintiff’s obtaining preliminary relief in a case later
means it has to pay defense fees if it no longer has damages to recover. The
district court thus was entitled to conclude that neither side prevailed.
The intermediate Texas case Sea Wasp relies on does not counsel
otherwise. See Glattly v. Air Starter Components, Inc., 332 S.W.3d 620, 640–
41 (Tex. App.—Houston [1st Dist.] 2010, pet. denied).8 Glattly does not
7
The district court also believed that Domain Protection’s ability to establish
standing precluded an award of fees to Sea Wasp under the Texas statute. As standing
(whether of the constitutional or statutory variety) is not a form of relief that Domain
Protection obtained, we disagree with that rationale for denying fees.
8
As an intermediate Texas decision, Glattly is persuasive authority to factor into
our Erie guess but not decisive. See Commissioner v. Bosch, 387 U.S. 456, 465 (1967)
(recognizing that decisions of lower state courts are not controlling “where the highest
court of the State has not spoken to the point”); West v. American Tel. & Tel. Co., 311 U.S.
223, 237 (1940) (“Where an intermediate appellate state court rests its considered
judgment upon the rule of law which it announces, that is a datum for ascertaining state law
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answer the fee question for a party in Sea Wasp’s situation and, if anything,
indicates that such a defendant is not entitled to fees. In Glattly, the plaintiff
was seeking fees on appeal after it had established liability on its theft claim
but obtained zero damages. That failure to obtain relief meant it was not
entitled to fees. Id. at 641. To show it had prevailed, the plaintiff also tried
to invoke the permanent injunction it obtained after trial preventing use of its
trade secrets, but the court found the argument forfeited and also mistaken
given “that the Texas Theft Liability Act does not authorize injunctive
relief.”9 Id. Thus, the direct lesson from Glattly is that Domain Protection—
as a plaintiff that won on liability and even obtained an injunction but lost on
damages—is not entitled to fees on its theft claim.
But Domain Protection is not seeking fees on this claim, Sea Wasp is.
The more notable feature of Glattly, then, is that the defendant that was
enjoined but ultimately defeated the damages claim—sound familiar?—was
which is not to be disregarded by a federal court unless it is convinced by other persuasive
data that the highest court of the state would decide otherwise.”). In any event, for the
reasons we explain, we conclude that it does not support Sea Wasp’s fee request and if
anything undermines it. See Temple v. McCall, 720 F.3d 301, 307 (5th Cir. 2013) (explaining
that when an intermediate state court decision is meaningfully distinguishable, “we are not
bound by its holding nor required to identify other persuasive data” to show the state high
court would not follow it).
9
Sea Wasp relies heavily on this language from Glattly, but for a number of reasons
it does not help its cause. First, Glattly involved a post-trial injunction whereas the district
court issued a preliminary injunction against Sea Wasp. That distinction already impacts
one thing we have noted—that the preliminary injunction may have undermined Domain
Protection’s request for damages at trial. Jurisprudentially, preliminary equitable relief is
on firmer footing as Texas has long recognized that “a district court has constitutional and
statutory authority to issue writs of injunction,” with only permanent injunctions facing a
number of additional requirements. Morgan v. Morgan, 657 S.W.2d 484, 494 (Tex. App.—
Houston [1st Dist.] 1983, writ dism’d) (citing Tex. Const. art. V, § 8, Tex. Rev.
Civ. Stat. Ann. art. 4642 (1940)). Second, as a factual matter it appears the Glattly
injunction did not rely on the theft statute as it was directed at trade secrets. Glattly, 332
S.W.3d at 630 (quoting “an injunction prohibiting Specialized, Glattly, and Molina from
using Air Starter’s trade secrets”). Finally, even if it was improper to preliminarily enjoin
Sea Wasp based on likely violations of the Texas Theft Liability Act, Sea Wasp did not
appeal that injunction, so it has to be accepted for purposes of the fee inquiry.
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not awarded fees and did not even ask for them. If anything from Glattly
informs our Erie guess, it is that the party most similarly situated to Sea Wasp
did not receive fees. At a more general level, Glattly supports the district
court’s middle ground—fees for neither side—as it is yet another case
showing there may be no prevailing party in a case with conflicting results.
We conclude that the Supreme Court of Texas would also take that
reasonable approach that courts have long recognized under other
“prevailing party” statutes. The Texas high court looks to federal law in
defining “prevailing party.” See Intercontinental Group Partnership v. KB
Home Lone Star, L.P., 295 S.W.3d 650, 653 (Tex. 2009) It is noteworthy,
then, that in our circuit a plaintiff like Sea Wasp that obtains a preliminary
injunction may be entitled to prevailing party status. See Dearmore v.
Garland, 519 F.3d 517 (5th Cir. 2008). The standard used by both Texas and
federal courts is whether the preliminary relief resulted in a “material change
in the legal relationship between the parties.” Id. at 524; see Buckhannon Bd.
& Care Home, Inc. v. W. Va. Dep’t of Health & Human Res., 532 U.S. 598, 603
(2001); see also Intercontinental Group, 295 S.W.3d at 654 (quoting “material
alteration of the legal relationship of the parties” standard). The injunction
here effectuated that change by requiring Sea Wasp to unlock the domain
names. As a result, both sides prevailed in some aspects of this suit and the
district court did not err in refusing to award fees.
V.
The third and final appeal challenges the sanctions imposed against
Schepps. Sea Wasp filed two motions for sanctions alleging various
misconduct on Schepps’s part. The court rejected most of the grounds but
found that “Schepps acted in bad faith in concealing his financial interest in
the case by filing documents with the Court which purposefully omitted his
interest.” In the court’s view, Schepps should have disclosed in the
Certificate of Interested Persons his and Katz’s role in creating Domain
Protection and that they stood to gain if the company prevailed. In addition
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to citing Federal Rule of Civil Procedure 7.1, which requires a corporate party
to file the certificate at the outset of each lawsuit, the court cited the Eastern
District of Texas’s local rule that “[a] lawyer owes candor, diligence, and
utmost respect to the judiciary.” See Fed. R. Civ. P. 7.1; E.D. Tex.
Local Rule AT-3. The court required Schepps to pay Sea Wasp the cost
of preparing its second sanctions motion, which is the one that cited
Schepps’s failure to identify his interest in Domain Protection.
Schepps challenges both the procedure and substance of the sanctions
ruling. We review the imposition of sanctions for abuse of discretion. United
States v. Brown, 72 F.3d 25, 28 (5th Cir.1995). The alleged misconduct is one
of nondisclosure. So there must have been some duty for Schepps to disclose
his connection to Domain Protection. See generally Chiarella v. United States,
445 U.S. 222, 228–29 (1980) (recognizing the common law rule that an
omission qualifies as fraud only when there is a duty to disclose).
The Rules of Civil Procedure do not require this disclosure. Rule 7.1
requires a corporate party to “identif[y] any parent corporation and any
publicly held corporation owning 10% or more of its stock.” Fed. R. Civ.
P. 7.1(a)(1). On its face, that does not cover Schepps’s creditor relationship
with Domain Protection. And we see no authority interpreting the rule to
require such a relationship. What is more, the corporate relationships that
must be disclosed under Rule 7.1 are those that might warrant a judge’s
disqualification based on a holding in such an entity. See id. committee note
on rules—2002 (explaining that the disclosure requirement “reflects the
‘financial interest’ standard” that governs disqualification under “Canon
3C(1)(c) of the Code of Conduct for United States Judges”). Of course, as
an attorney in the case, Schepps was already known to the court for recusal
purposes.
That leaves the general duty of candor that is part of the local rules
and a lawyer’s professional obligations. The duty of candor extends beyond
not making false statements. An omission may also violate the duty. For
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example, an attorney was sanctioned when he sought a continuance citing his
recent retention by the creditors’ committee without disclosing that he was
already familiar with the case because of work for a particular creditor. In re
Renco, Inc., 838 F.2d 212, 218 (7th Cir. 1988). That nondisclosure was
“highly relevant to the question of whether the bankruptcy judge should have
granted a continuance.” Id. A relevance requirement is consistent with the
general principle that nondisclosures are actionable only when the omitted
fact is material. See Bombardier Aerospace Corp. v. SPEP Aircraft Holdings,
LLC, 572 S.W.3d 213 (Tex. 2019).
Consequently, Schepps’s failure to disclose his relationship with
Domain Protection is sanctionable for violating the duty of candor only if that
relationship was relevant to some decision in this case. That relevance is not
apparent from the record. But recognizing the complexity of this case and
the district court’s much greater familiarity with it, we believe a remand is
appropriate for the court to identify when Schepps should have disclosed his
relationship with Domain Protection and why his failure to do so mattered.
Because that remand will allow the parties an opportunity to brief this
question, we need not decide Schepps’s procedural challenges to the
sanctions ruling that we are vacating.
***
The judgment is AFFIRMED except for the sanctions. We
VACATE the sanctions and REMAND for further proceedings.
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