SellPoolSuppliesOnline.com LLC v. Ugly Pools Arizona Inc.

          ORDER

          BRIDGET S. BADE, UNITED STATES MAGISTRATE JUDGE

         Defendants, Ugly Pools Arizona, Inc., and Brian Morris (“Defendants”), have filed a motion for sanctions pursuant to 28 U.S.C. § 1927 and the Court's inherent authority. (Doc. 103.) The motion is fully briefed. (Docs. 105, 107.) As set forth below, the Court denies the motion.

         I. Background

         The facts of this case are explained in detail in this Court's orders on the motions for summary judgment (Docs. 64, 95, 96), and are not repeated here. However, the Court notes that this case involved Plaintiff's claims for (1) copyright infringement under the Copyright Act, 17 U.S.C. § 501(a) (Count One), (2) unfair competition under Arizona law (Count Two), and (3) violation of the Digital Millennium Copyright Act (“DMCA”), integrity of copyright management information under 17 U.S.C. § 1202 (Count Three). (Doc. 39.) Plaintiff described its business as licensing pre-made websites that it referred to as the Platform. (Doc. 78-1 at 1.) The Platform was described generally as computer programs, photographs, and writing. (Id. at ¶ 2.) Plaintiff's claims were based on its allegation that Defendants had reproduced the copyrighted elements of the Platform “verbatim.” (Doc. 39 at ¶ 38.) The parties filed several motions for summary judgment on Plaintiff's claims. (Docs. 43, 45, 78, 79, 86.) The Court granted summary judgment in favor of Defendants on Plaintiff's claims, entered judgment in Defendants' favor, and dismissed Plaintiff's cause of action. (Docs. 64, 95, 96, 97.) Defendants then filed a motion for attorney's fees and the pending motion for sanctions against Plaintiff. (Docs. 102, 103). The Court considered the motion for attorney's fees in a separate order. (Doc. 111.)

         II. Sanctions under § 1927

         Defendants' motion seeks sanctions against Plaintiff's attorney under 28 U.S.C. § 1927. (Doc. 103 at 3-10.) Section 1927 provides, in pertinent part, that “[a]ny attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.” 28 U.S.C. § 1927. To impose sanctions under § 1927, the court must find that the sanctioned party “knowingly or recklessly raise[d] a frivolous argument, or argue[d] a meritorious claim for the purpose of harassing an opponent.” In re Keegan Mgmt. Co., 78 F.3d 431, 436 (9th Cir. 1996).

         Additionally, sanctions under § 1927 may be used only to sanction the multiplication of proceedings, not the initiation of proceedings. Matter of Yagman, 796 F.2d 1165, 1187 (9th Cir. 1986). The section “applies only to unnecessary filings and tactics once a lawsuit has begun.” Keegan, 78 F.3d at 436 (internal quotations omitted). A “finding that the attorney recklessly or intentionally misled the court is sufficient to impose sanctions under § 1927, and a finding that the attorneys recklessly raised a frivolous argument which resulted in the multiplication of the proceedings is also sufficient to impose sanctions under § 1927.” In re Girardi, 611 F.3d 1027, 1061 (9th Cir. 2010) (citations omitted). “[W]ith § 1927 as with other sanctions provisions, [d]istrict courts enjoy much discretion in determining whether and how much sanctions are appropriate.” Haynes v. City & Cty. of San Francisco, 688 F.3d 984, 987 (9th Cir. 2012) (internal quotation marks and citation omitted).

         Defendants cite several instances of conduct by Plaintiff's counsel that they allege warrant sanctions under § 1927. (Doc. 103.) As set forth below, the Court finds that counsel's conduct, while inappropriate in some instances, did not “unreasonably and vexatiously” multiply the proceedings.

         A. Unreasonable Settlement Demands

         Defendants assert that Plaintiff, through counsel, made settlement demands that were unreasonable and necessitated several years of litigation.^[1] (Doc. 103 at 4-5.) Defendants argue that Plaintiff's settlement demands greatly exceeded their claimed damages.^[2] (Id. at 4.) Defendants argue that these settlement demands are evidence of counsel's bad faith and support the imposition of sanctions. As explained below, the Court rejects Defendants' argument.

         Defendants assert that the value of a license for Plaintiff's website was about $15, 000, and Defendants grossed about $3, 000 from the allegedly infringing website. (Id. at 5.) Defendants argue that Plaintiff's damages, including attorney's fees, totaled $32, 000 on January 18, 2016. (Id. at 4 (citing Doc. 46-7 at 2 (stating that Plaintiff's “damages to date” were “$32, 000 including the cost of the platform, lost revenue from monthly rental of the platform, and legal fees.”)).) However, Plaintiff initially demanded $90, 000 to settle this case, and later reduced that demand to $65, 000 for a May 10, 2016 settlement conference. (Doc. 103 at 4; Doc. 102, Ex. F at 6.)

         Defendants, however, misstate Plaintiff's calculation of the damages that it had incurred by the time of the May 10, 2016 settlement conference. Plaintiff asserted that it had suffered the following damages: lost licensing fees of $18, 000, monthly maintenance fees totaling $1, 199.88, and attorney's fees through April 30, 3016 totaling $31, 000. (Doc. 102, Ex. F at 4.) Therefore, at the time of the May 2016 settlement conference, Plaintiff asserted that it had suffered damages, including attorney's fees, totaling $50, 199.88. (See id.) Plaintiff also asserted that Defendants had offered $20, 000 to settle the case and did not increase their offer. (Id., Ex. F at 6.) Defendants' motion for sanctions and their reply in support of that motion do not address their offers to settle the case. However, Defendants' reply in support of their motion for attorney's fees states that they made a $20, 000 settlement offer. (Doc. 109 at 2.) Therefore, the Court concludes that Defendants offered $20, 000 to settle the case and did not increase that amount at any point during the litigation.

         Defendants assert that Plaintiff's rationale for its settlement demands, which they characterize as “far beyond” the amount of Plaintiff's damages, was that “Defendants would be liable for more than that amount in attorney's fees by the conclusion of the litigation.” (Doc. 103 at 4; Doc. 107 at 2 (stating that Plaintiff “insisted on being paid attorneys' fees Plaintiff had not yet incurred”); Doc. 107 at 3 (“a settlement demand based upon attorney's fees not yet incurred is plain extortion and unreasonable.”) (emphasis in original).) To support their argument for sanctions based on the allegedly unreasonable settlement demands, Defendants cite Calloway v. Marvel Entm't Group, 854 F.2d 1452, 1482 (2d Cir. 1988), rev'd in part on other grounds by Pavelic & LeFlore v. Marvel Entm't Group, 39 U.S. 120 (1989). In Calloway, the district court awarded sanctions under § 1927 because the plaintiff delayed in accepting a settlement offer that would have provided all the relief plaintiff could expect to recover from the defendant. Calloway, 854 F.2d at 1481. In that case, the plaintiff rejected the defendant's settlement offer without explanation and continued the litigation, eventually accepting the same offer several days after trial had commenced. Id. at 1482. On appeal, the Second Circuit did not consider the merits of the ruling on the motion for § 1927 sanctions. Id. Rather, the court reversed the award of sanctions because it concluded that the parties' stipulation of dismissal had settled all their disputes, including the motion for sanctions that had been filed before trial. Id.

         Defendants' reliance on Calloway is misplaced because the Second Circuit's decision did not consider the merits of the sanctions award under § 1927.^[3] Additionally, in contrast to the plaintiff in Calloway, Plaintiff did not reject an offer that would have provided all the relief it would have been entitled to recover from Defendants if it prevailed in the litigation. At the time of the parties' May 2016 settlement conference, Plaintiff claimed it had incurred approximately $51, 000 in damages, and Defendants offered $20, 000 to settle the case. (Doc. 102, Ex. F at 4, 6.) Therefore, Plaintiff's $65, 000 settlement demand may have exceeded its damages, but Defendants' $20, 000 settlement offers were not for the full amount of Plaintiff's claimed damages. Although the Court's analysis would differ if Defendants had offered the full amount of Plaintiff's claimed damages (excluding any ...