Asia Economic Institute et al v. Xcentric Ventures LLC et al

Filing 135

NOTICE OF MOTION AND MOTION for Sanctions Fed.R.Civ.P. 11 filed by Defendants Edward Magedson, Xcentric Ventures LLC. Motion set for hearing on 10/4/2010 at 01:30 PM before Judge Stephen V. Wilson. (Speth, Maria)

Asia Economic Institute et al v. Xcentric Ventures LLC et al

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JABURG & WILK, P.C. ATTORNEYS AT LAW 3200 NORTH CENTRAL AVENUE SUITE 2000 PHOENIX, ARIZONA 85012

Maria Crimi Speth, (Admitted Pro Hac Vice) [e-mail] JABURG & WILK, P.C. 3200 North Central Avenue, Suite 2000 Phoenix, Arizona 85012 [phone] David S. Gingras, CSB #218793 [e-mail] Gingras Law Office, PLLC 4072 E Mountain Vista Dr. Phoenix, AZ 85048 Tel.: [phone] Fax: [phone] [e-mail] Attorneys for Defendants Xcentric Ventures, LLC and Edward Magedson

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA ASIA ECONOMIC INSTITUTE, LLC, et al., Plaintiffs, v. XCENTRIC VENTURES, LLC, et al., Defendants. Case No: 2:10-cv-01360-SVW-PJW MOTION FOR SANCTIONS PURSUANT TO FED.R.CIV.P. 11 Hearing Date: October 4, 2010 Time: 1:30 p.m. Courtroom: 6

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Pursuant to Rule 11(c), Fed.R.Civ.P., Defendants XCENTRIC VENTURES, LLC and EDWARD MAGEDSON (collectively, "Defendants") respectfully request that the Court enter an Order sanctioning Plaintiffs Asia Economic Institute, LLC, Raymond Mobrez, and Iliana Llaneras for their violations of Rule 11(b), Fed.R.Civ.P. Plaintiffs filed with the Court a First Amended Complaint which (1) has been presented for an improper purpose; (2) contains claims and legal contentions that are not warranted by MOTION FOR SANCTIONS
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existing law; and (3) contains factual allegations which have no evidentiary support, each of which is a direct violation of Rule 11(b). Defendants have presented this Motion to Plaintiffs and requested that they withdraw the First Amended Complaint entirely or correct each of the deficiencies identified within this Motion. In response, Plaintiffs have moved to file a Second Amended Complaint, which does not include RICO claims, but has once again asserted the vast majority of the allegations identified in this Rule 11 Motion as baseless. Twenty-one days have passed and Plaintiffs have elected to correct some but not all of these problems. As a result, sanctions are warranted pursuant to Rule 11(c)(2).1 This motion is made following a 21-day period after service on Plaintiffs, which Defendants believes also complies with L.R. 7-3. DATED this 3rd day of September, 2010. JABURG & WILK, P.C.

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This Rule 11 Motion and the Rule 11 Motion served on Plaintiffs 21 days ago are not identical because Plaintiffs have removed some claims and allegations. In order to comply with the 21-day hold, Defendants have added no content to this motion except a reference to the removed allegations. Defendants have, however, deleted some of the arguments and updated the fact chart (below) to reflect the removed allegations and the new paragraphs.
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/s/Maria Crimi Speth Maria Crimi Speth Attorneys for Defendants

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JABURG & WILK, P.C. ATTORNEYS AT LAW 3200 NORTH CENTRAL AVENUE SUITE 2000 PHOENIX, ARIZONA 85012

MEMORANDUM OF POINTS AND AUTHORITIES

TABLE OF CONTENTS I. THEORY UNDERLYING RULE 11........................................................................... 1

II. PROCEDURAL HISTORY OF THIS LITIGATION.................................................. 2 III. IV. V. VI. VII. PLAINTIFFS HAVE VIOLATED RULE 11(B)(3)................................................. 4 PLAINTIFFS HAVE VIOLATED RULE 11(B)(2)................................................. 5 PLAINTIFFS HAVE VIOLATED RULE 11(B)(1)............................................... 10 SANCTIONS ARE WARRANTED....................................................................... 12 CONCLUSION ....................................................................................................... 13

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TABLE OF AUTHORITES
Cases

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AMF Inc. v. Sleekcraft Boats, 599 F.2d 341 (9th Cir.1979 .............................................................................................. 6 Brookfield Commons. v. W. Coast Entm't Corp., 174 F.3d 1036 (9th Cir. 1999)...................................................................................... 5, 6 Burnette v. Godshall, N.D.Cal.1993, 828 F.Supp. 1439, affirmed 72 F.3d 766 ................................................. 5 Christian v. Mattel, Inc., 286 F.3d 1118 (9th Cir.2002)........................................................................................... 1 Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 110 S. Ct. 2447, 110 L. Ed. 2d 359 (1990) ............................................... 1 Effects Associates, Inc. v. Cohen, 908 F.2d 555 (9th Cir. 1990)............................................................................................ 7 G.C. & K.B. Investments, Inc. v. Wilson, 326 F.3d 1096 (9th Cir. 2003)........................................................................................ 12 Gardner v. Nike, Inc., 279 F.3d 774 (9th Cir. 2002)............................................................................................ 7 Golden Eagle Distrib. Corp. v. Burroughs Corp., 801 F.2d 1531 (9th Cir.1986)......................................................................................... 11 GoTo.Com, Inc. v. Walt Disney Co., 202 F.3d 1199 (9th Cir.2000)........................................................................................... 6 Hartmax, 496 U.S. at 393 ............................................................................................................... 12 Holmes v. Securities Investor Protection Corporation, 503 U.S. 258, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992) .................................................. 9 Hudson v. Moore Business Forms, Inc., 836 F.2d 1156 (9th Cir.1987)..................................................................................... 1, 10 In re Curl, 803 F.2d 1004 (9th Cir.1986),.......................................................................................... 4 In re Girardi, --- F.3d ----, 2010 WL 2735731 (9th Cir. 2010) ............................................................. 5 In re Yagman, 796 F.2d 1165, amended, 803 F.2d 1085 (9th Cir.1986), .............................................. 11 Interstellar Starship Services, Ltd. v. Epix, Inc., 304 F.3d 936 (9th Cir. 2002)............................................................................................ 6 Mezzetti v. State Farm Mut. Auto. Ins. Co., 346 F.Supp.2d 1058, 1067 (N.D.Cal.2004)...................................................................... 5 Partington v. Gedan, 923 F.2d 686 (9th Cir.1991)............................................................................................. 4 Pavelic & LeFlore v. Marvel Entm't Group, 493 U.S. 120, 126, 110 S.Ct. 456, 107 L.Ed.2d 438 (1989) ............................................ 1 Rachel v. Banana Republic, Inc., 831 F.2d 1503 (9th Cir.1987)........................................................................................... 1 Rhinehart v. Stauffer, 638 F.2d 1169 (9th Cir. 1979).......................................................................................... 9 Silvers v. Sony Pictures Entm't, Inc., 402 F.3d 881 (9th Cir. 2005)............................................................................................ 7 Stewart v. Am. Int'l Oil & Gas Co., 845 F.2d 196 (9th Cir. 1988).......................................................................................... 12 Townsend v. Holman Consulting Corp., 929 F.2d 1358 (9th Cir.1990)................................................................................... 10, 12 MOTION FOR SANCTIONS
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Universal City Studios v. Corley, 273 F.3d 429, 448 (2d. Cir. 2001) .................................................................................... 6 Zaldivar v. City of Los Angeles, 780 F.2d 823 (9th Cir.1986)........................................................................................... 10
Statutes

§ 1964(c)............................................................................................................................... 9 § 201(d)(1)............................................................................................................................ 7 15 U.S.C. § 45 ...................................................................................................................... 8 17 U.S.C. § 101 .................................................................................................................... 7 17 U.S.C. § 201(d)(2) ........................................................................................................... 7 47 U.S.C. § 230 .................................................................................................................. 10
Other Authorities

Advisory Committee Note on Rule 11, 28 U.S.C.App., p. 576 ...................................................................... ii, 1, 3, 4, 5, 9, 11, 12 Notes of Advisory Committee, 28 U.S.C.A. Rules of Civil Procedure (Supp.1988); ......... 1
Rules

Local.Rules. 7-3.................................................................................................................... ii Rule 11(b)(1) ...................................................................................................................... 10 Rule 11(b)(2) ........................................................................................................................ 5 Rule 11(b)(3) .................................................................................................................... 4, 5 Rule 11(c), Fed.R.Civ.P .................................................................................................... i, ii
Regulations

16 C.F.R. § 255.0(a) ............................................................................................................. 8

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I.

THEORY UNDERLYING RULE 11 "Filing a complaint in federal court is no trifling undertaking. An attorney's

signature on a complaint is tantamount to a warranty that the complaint is well grounded in fact ...." Christian v. Mattel, Inc., 286 F.3d 1118, 1127 (9th Cir.2002). "[T]he central purpose of Rule 11 is to deter baseless filings in district court and thus, consistent with the Rules Enabling Act's grant of authority, streamline the administration and procedure of the federal courts." Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393, 110 S. Ct.

2447, 2454, 110 L. Ed. 2d 359 (1990) (citing Advisory Committee Note on Rule 11, 28 U.S.C.App., p. 576). "Rule 11 imposes a duty on attorneys to certify that they have conducted a reasonable inquiry and have determined that any papers filed with the court are well grounded in fact, legally tenable, and `not interposed for any improper purpose.'" Id. As the Notes of the Advisory Committee on Rules point out, the language of Rule 11 "stresses the need for some prefiling inquiry into both the facts and the law to satisfy the affirmative duty imposed by the rule. The standard is one of reasonableness under the circumstances.... This standard is more stringent than the original good-faith formula and thus it is expected that a greater range of circumstances will trigger its violation." Fed.R.Civ.P. 11, Notes of Advisory Committee, 28 U.S.C.A. Rules of Civil Procedure (Supp.1988); see Rachel v. Banana Republic, Inc., 831 F.2d 1503, 1508 (9th Cir.1987) (counsel has affirmative duty of investigation into law and fact before filing). Under Rule 11(b), an attorney has a "nondelegable responsibility" to "personally ... validate the truth and legal reasonableness of the papers filed," Pavelic & LeFlore v. Marvel Entm't Group, 493 U.S. 120, 126, 110 S.Ct. 456, 107 L.Ed.2d 438 (1989), and "to conduct a reasonable factual investigation," Christian, 286 F.3d at 1127. To determine whether the inquiry actually conducted was adequate, the court applies a standard of "objective reasonableness under the circumstances." Hudson v. Moore Business Forms, Inc., 836 F.2d 1156, 1159 (9th Cir.1987). MOTION FOR SANCTIONS
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II.

PROCEDURAL HISTORY OF THIS LITIGATION Plaintiffs and their counsel have had plenty of opportunities to adequately

investigate their claims against Defendants, yet, as is made clear by the recent filing of the First Amended Complaint, have either chosen not to do so, or otherwise ignored the facts which they have been provided. This lawsuit was first initiated on or around January 27, 2010. Defendants

immediately filed a Special Motion to Strike the Complaint under the anti-SLAPP statute, explaining that each of the defamation-related causes of action failed as a matter of law. On April 20, 2010, the Court denied Defendants' request, finding that the statements posted on the Rip-Off Report website do not implicate matters of public interest. See Doc. No. 23 at p. 19. As the case progressed forward, it was proven that the individual Plaintiffs (Mr. Mobrez and Ms. Llaneras) committed perjury in this case by manufacturing and presenting sworn false testimony accusing Mr. Magedson of demanding $5,000 in order to make negative information disappear from the Rip-Off Report website. It was further apparent that Plaintiffs could not establish the necessary predicate acts to prove their RICO claims. Counsel for Defendants consistently communicated with counsel for

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Plaintiffs, explaining that there was no good faith basis upon which they could base their RICO or extortion claims. Counsel for Defendants also consistently requested that

Plaintiffs withdraw their claims, since there was no evidence or legal theory which could support them; however, counsel for Plaintiffs refused to withdraw the Complaint against Defendants. At an initial case status conference, the Court bifurcated the trial in this case, and allowed Plaintiffs to only litigate the issue of liability on their RICO claims as the first matter to proceed to trial. Plaintiffs then filed a motion before Magistrate Judge Walsh to bifurcate discovery so as to limit discovery prior to the trial to the RICO and extortion claims only. This motion was granted. See Doc No. 82. Under these guidelines,

Defendants took the deposition of Plaintiff Mobrez, while Plaintiffs ­ twice ­ took the MOTION FOR SANCTIONS 2:10-cv-01360-RSWL-PJW 2
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deposition of Defendant Ed Magedson, once in his individual capacity, and once on behalf of Defendant Xcentric. The parties also engaged in written discovery. On or around May 24, 2010, Defendants filed a Motion for Partial Summary Judgment, asserting that no material facts were in dispute and that Plaintiffs were unable to prevail on their claims for RICO and extortion as a matter of law. See Doc. No. 40. This Motion was supported by six declarations, as well as numerous other exhibits. Id. On July 12, 2010, the Court granted Defendants' Motion, finding that no unlawful threats were made by Defendants to Plaintiffs, and therefore no predicate acts had occurred which would give rise to Plaintiffs' causes of action for RICO with extortion as the predicate act. See Doc. No. 94. At that same hearing, the Court raised the issue of whether the Plaintiffs' Complaint was sufficient to state a plausible claim for RICO violations based on the alleged predicate acts of wire fraud. Defendants argued that the Complaint was not sufficient, and made an oral motion to dismiss those claims for failure to plead the alleged acts of wire fraud with particularity. See Doc No. 94. Plaintiffs requested leave of the Court, based on "newly discovered evidence," to file an amended complaint to allow them to assert essentially the same causes of action which had just been dismissed. The Court gave Plaintiffs the opportunity to file an amended complaint; however, in doing so, it reminded Plaintiffs of their obligations under Rule 11 and suggested that appropriate investigations be undertaking before any filings were made. Id. Disturbingly, on July 27, 2010, Plaintiffs filed their eighty-four page First Amended Complaint ("FAC"), alleging a variety of causes of action including, claims for RICO violations. See Doc. No. 96. In filing this FAC, Plaintiffs violated a number of provisions of Rule 11, since the FAC (1) has been presented for an improper purpose; (2) contains claims and legal contentions that are not warranted by existing law; and (3) contains factual allegations which have no evidentiary support.

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On August 17, 2010, Plaintiffs sought leave to file their Second Amended Complaint. III. PLAINTIFFS HAVE VIOLATED RULE 11(B)(3) Rule 11(b)(3) explains that by filing a pleading with the Court, the attorney certifies that: to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances...the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery. Fed.R.Civ.P. Rule 11(b)(3). The FAC is rife with factual contentions that are wholly lacking in any evidentiary support. Moreover, as to most of these false allegations, Plaintiffs and their counsel had actual knowledge that the allegations which they are presenting are false. Even if Plaintiffs only "chose to state as a fact what was at the best a guess and a hope, [they] engaged in misrepresentation." In re Curl, 803 F.2d 1004, 1006 (9th Cir.1986), overruled on other grounds, Partington v. Gedan, 923 F.2d 686 (9th Cir.1991) (en banc). Due to the size of the FAC (84 pages and 371 paragraphs) and the quantity of factual contentions made by Plaintiffs that are devoid of evidentiary support, for the ease of the Court, Defendants have created a chart (Exhibit "A") pointing out each allegation made by Plaintiffs which is in violation of Rule 11(b)(3).2 After serving this Rule 11

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Motion, Defendants have updated this chart to reflect the paragraph in the proposed Second Amended Complaint and to remove from the chart allegations that Plaintiffs did not include in the proposed Second Amended Complaint. The statements in the FAC are presented as facts; yet these statements are either knowingly false or unsupported by any evidence, either existing or having potential to exist. The Ninth Circuit has explained why misrepresentation by attorneys to a court cannot be taken lightly:
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This chart does not include all allegations within the FAC which Defendants deny. It only contains those allegations which violate Rule 11.

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The vice of misrepresentation is not that it is likely to succeed but that it imposes an extra burden on the court. The burden of ascertaining the true state of the record would be intolerable if misrepresentation was common. The court relies on the lawyers before it to state clearly, candidly, and accurately the record as it in fact exists. In re Girardi, --- F.3d ----, 2010 WL 2735731 (9th Cir. 2010) (internal quotation omitted). The complete absence of evidence to support the allegations identified above suggests that Plaintiffs, at best, failed to conduct a reasonable inquiry, and, at worst, made deliberate misrepresentations to this Court. See Mezzetti v. State Farm Mut. Auto. Ins. Co., 346 F.Supp.2d 1058, 1067 (N.D.Cal.2004) (noting that "[g]obbledygook can be no less obfuscatory than an outright lie"). Each of Plaintiffs' statements identified in the chart above demonstrates that the factual contentions they have made lack evidentiary support or even the potential to discover such evidentiary support, in violation of Rule 11(b)(3). IV. PLAINTIFFS HAVE VIOLATED RULE 11(B)(2) Rule 11(b)(2) explains that by filing a pleading with the Court, the attorney certifies that: to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances... the claims, defenses, and other legal contentions are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law. Fed.R.Civ.P. Rule 11(b)(2). An attorney's responsibility under Rule 11 to conduct reasonable prefiling investigation is particularly important where, as here, claims have been made under Racketeer Influenced and Corrupt Organizations Act (RICO). Burnette v. Godshall, N.D.Cal.1993, 828 F.Supp. 1439, affirmed 72 F.3d 766 Plaintiffs have made frivolous legal arguments regarding the use of trademarks in HTML code, as well as the use of computer code itself, for the purpose of finding liability against a website. In Paragraphs 80 and 81 of the FAC, Plaintiffs reference two cases, citing them for propositions which neither can be read to support. Citing Brookfield Commons. v. W. Coast Entm't Corp., 174 F.3d 1036, 1065 (9th Cir. 1999), Paragraph 80 argues that courts "regularly enjoin" the use of infringing trademarks through their MOTION FOR SANCTIONS
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inclusion in the "description and keyword metatags of HTML." In Brookfield, the court found that use of a confusingly similar mark in a web site's metatags is actionable under Lanham Act. Id. However, this holding was limited to the context of initial interest confusion when the defendant uses the plaintiff's trademark "in a manner calculated `to capture initial consumer attention.'" Interstellar Starship Services, Ltd. v. Epix, Inc., 304 F.3d 936, 941 (9th Cir. 2002) (quoting Brookfield, 174 F.3d at 1062). When determining whether trademark infringement has occurred on a website, the Ninth Circuit has explained that a court must evaluate "(1) the similarity of the marks, (2) the relatedness of the goods or services, and (3) the parties' simultaneous use of the Web as a marketing channel," coupled with the other four Sleekcraft factors. Id. (quoting GoTo.Com, Inc. v. Walt Disney Co., 202 F.3d 1199, 1204 (9th Cir.2000)); see also AMF Inc. v. Sleekcraft Boats, 599 F.2d 341, 346 (9th Cir.1979). Plaintiffs neglected to provide the Court with a complete, accurate recitation of current case law regarding initial interest confusion for metatags. Similarly, citing Universal City Studios v. Corley, 273 F.3d 429, 448 (2d. Cir. 2001), Plaintiffs assert that courts consider computer code to be "speech," thereby recognizing the "power and impression" of search results on the internet, and holding parties accountable for what the HTML code contains. See FAC at ¶¶ 81-82. Again, Plaintiffs neglect to explain the context and limitations of the holding in Corley in an effort to mislead the Court. As the Corley court explained, "The functionality of

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computer code [ ] affects the scope of its First Amendment protection." Corley, 273 F.3d at 452. Importantly, the computer code the Corley court was referring to was decryption software, which possessed a "skeleton key" or a "combination that can open a locked door." Id. at 453. Notably, even though this decision has been present in the Second Circuit for nine years, it has not yet been adopted by any court in the Ninth Circuit, including this one, for the purpose advocated by Plaintiffs.

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Plaintiffs have also misinterpreted copyright law, and, in particular, 17 U.S.C. § 101. Plaintiffs are asking the Court to find that the transfer of an exclusive license in a copyright protected work is the same thing as the transfer of ownership in that work. This is not an accurate reflection of the law, and there is no statute or case law which interprets the license granted to Xcentric in this manner. The Court Effects Associates, Inc. v. Cohen, 908 F.2d 555 (9th Cir. 1990) explained that "Copyright ownership is comprised of a bundle of rights" and the granting of a license is giving up "only one stick from that bundle." Id. at 559. The plain language of 17 U.S.C. § 201(d)(2) limits the rights of an exclusive licensee to those "protections and remedies" afforded in the 1976 Act, thereby identifying the distinction between an exclusive license and copyright ownership. See Gardner v. Nike, Inc., 279 F.3d 774, 780 (9th Cir. 2002). The Ninth Circuit in Gardner analyzed ­ and rejected ­ the very argument advocated by Plaintiffs in trying to blur the line between an exclusive licensee and a copyright owner. That court explained: Appellants contend that, if a licensee of exclusive rights under the copyright is characterized by the 1976 Act as an "owner" of those rights under § 201(d)(2), then it must follow that such "ownership" carries with it an unrestricted right to freely transfer the license. However, Appellants' argument ignores the plain language of § 201(d)(2), which states that the owner of such exclusive rights is entitled only to "the protection and remedies" accorded the copyright owner under the 1976 Act. This explicit language limits the rights afforded to an owner of exclusive rights. Based on basic principles of statutory construction, the specific language of § 201(d)(2) is given precedence over the more general language of § 101 and § 201(d)(1). Id. Instead of the granting of an exclusive right being the equivalent to blanket copyright ownership, as Plaintiffs have advocated, the Ninth Circuit has explained that the exclusive licensee becomes the owner of the particular right in the copyright which was transferred to them. See Silvers v. Sony Pictures Entm't, Inc., 402 F.3d 881, 886 (9th Cir. 2005). There is no basis to argue as Plaintiffs have that this exclusive license is a transfer of the entirety of the copyright ownership. Id. Plaintiffs again have made legal contentions that are not justified under the law as it currently stands, nor is there any reason to believe that

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a court will change their standing interpretation of the language of the 1976 Copyright Act. Plaintiffs have also made legal conclusions in Paragraphs 183-184 which are unsupportable as a matter of law regarding Xcentric being in violation of Section 5 of the FTC Act, 15 U.S.C. § 45, and the Codes of Federal Regulations, 16 C.F.R. Part 255.0 et seq. Plaintiffs argue that Xcentric is obligated to "disclose that it is paid money to make these testimonials and endorsements." Plaintiffs are asking that the Court impose a much broader regulation on Defendants than the FTC does. Moreover, what Plaintiffs have pointed to are FTC's Endorsement Guides. These are not new legal principles; they simply provide new examples to show how these standards apply in social media. In full, those FTC endorsement guidelines can be found at

http://ftc.gov/os/2009/10/091005revisedendorsementguides.pdf. However, the FTC has recognized that since these guidelines were published in October, 2009, a general state of confusion has occurred regarding what, if anything, website owners need to do. To address the confusion, the FTC created a fact sheet on the Revised Endorsement Guides. See http://ftc.gov/bcp/edu/pubs/business/adv/bus71.shtm. Interestingly enough, these

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Guides are simply intended to "provide the basis for voluntary compliance." See 16 C.F.R. § 255.0(a) (emphasis added). The Guides were issued under the authority of 15 U.S.C. § 45, which outlaws "unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce," and authorizes the FTC to enforce this prohibition by the adoption of rules and by issuing orders to cease and desist against violators. It does not, notably, contemplate using these guides as the basis for a private right of action, nor is there any basis to believe such an extension is warranted, given that the FTC itself as exclaimed it will not likely be policing websites for violations of these Guides. See http://ftc.gov/bcp/edu/pubs/business/adv/bus71.shtm. Before filing a civil action, an attorney has a duty to make an investigation to ascertain that it has at least some merit, and further to ascertain that the damages sought appear to MOTION FOR SANCTIONS
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bear a reasonable relation to injuries actually sustained. Rhinehart v. Stauffer, 638 F.2d 1169 (9th Cir. 1979). Plaintiffs have identified certain damages, which they claim are recoverable. However, certain items identified are not recoverable damages as a matter of law, including (1) Plaintiffs' rent for their office space for the entire time Plaintiffs have been in business; (2) Plaintiffs' phone and internet connections for the entire time Plaintiffs have been in business; (3) Plaintiffs' move-in costs for starting up their business; (4) Plaintiffs' start-up costs for their business; (5) Plaintiffs' lobbying costs; (6) amounts spent on SEO consultants and services; (7) cost of registering and maintaining domain names; and (8) lost profits from commercial transactions Plaintiffs allegedly would have entered into. None of these "damages" are actually recoverable as a matter of law. In Holmes v. Securities Investor Protection Corporation, 503 U.S. 258, 268, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992), the Supreme Court held that a plaintiff may sue under § 1964(c) only if the alleged RICO violation was the proximate cause of the plaintiff's injury. Plaintiffs knew or should have known that they needed a causal connection between their alleged damages and the predicate acts. This Court warned Plainitiffs'

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counsel at the oral argument on the motion for summary judgment that it is a Rule 11 violation to plead a wire fraud claim without knowing what the damages are and how those damages are related to the predicate acts. Instead of heeding this Court's warning, Plaintiffs pled that virtually every expense that Plaintiffs incurred in the conduct of AEI's business is a damage causally related to the predicate acts. Plaintiffs go so far as to include their rent in the damages even though they know they can not allege with a straight face that the rent was incurred as a result of the predicate acts. In Paragraphs 309-355, Plaintiffs attempt to allege a cause of action against Xcentric for "common law defamation," "defamation per se," "false light," "intentional interference with prospective economic relations," "negligent interference with prospective economic relations," "negligent interference with economic relations," and MOTION FOR SANCTIONS
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JABURG & WILK, P.C. ATTORNEYS AT LAW 3200 NORTH CENTRAL AVENUE SUITE 2000 PHOENIX, ARIZONA 85012

"injunction."

Plaintiffs are aware that every court of law which has addressed this

question, including the current Court before which this case is pending, has held that Xcentric is immune from liability for defamation for statements authored by third parties pursuant to the Communications Decency Act, 47 U.S.C. § 230. Thus, Plaintiffs have asked this Court to find these causes of action exist when no existing case law would allow them to do so, and where no reasonable extension of case law or creation of new law would allow them to do so. V. PLAINTIFFS HAVE VIOLATED RULE 11(B)(1) Rule 11(b)(1) explains that by filing a pleading with the Court, the attorney certifies that: to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances... it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation. Fed.R.Civ.P. Rule 11(b)(1). The Court in Townsend noted that sanctions must be imposed if either (a) the paper is filed for an improper purpose or (b) the paper is frivolous. See, e.g., Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1362 (9th Cir.1990). The word "frivolous" is shorthand used to denote a filing that is both (i) baseless and (ii) made without a reasonable and competent inquiry. Id. Although the "improper purpose" and "frivolousness" inquiries are separate and distinct, they will often overlap since evidence bearing on frivolousness or non-frivolousness will often be highly probative of purpose. Id. The standard governing both inquiries is objective. Id. (citing Zaldivar v. City of Los Angeles, 780 F.2d 823, 829 (9th Cir.1986)). Plaintiffs here have filed their FAC both for an improper purpose, as well as it being a frivolous pleading. "The key question in assessing frivolousness is whether a complaint states an arguable claim-not whether the pleader is correct in his perception of the law." Hudson v. Moore Bus. Forms, Inc., 836 F.2d 1156, 1159 (9th Cir. 1987). Evidence of the

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frivolousness of Plaintiffs' filing is abundant, and can be easily understood if the Court is to look at the big picture of the FAC. Although Plaintiffs throw a number of baseless and MOTION FOR SANCTIONS
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unsubstantiated claims out for review, these are, at least facially, potentially salacious enough to give the Court pause. Yet the analysis is not whether Plaintiffs individual "fact" allegations are interesting, but whether Plaintiffs have stated an arguable claim. Unquestionably, they have not. The Court recognized the serious problems with Plaintiffs' original complaint at the July 12, 2010 hearing. Plaintiffs had in their possession each piece of evidence and information utilized in crafting the FAC. Generally speaking, the arguments identified by Plaintiffs as to why they could pursue their claims are directly in line with the arguments which they actually advocate in the FAC. Yet the Court specifically addressed these arguments, and explained to Plaintiffs that, absent something more, they still would be unable to state a cognizable claim for wire fraud. In fact, the Court explained to Plaintiffs not only the deficiencies in their pleading, and specifically, in their allegations concerning the predicate act of wire fraud, but the Court also cautioned Plaintiffs about its concerns regarding the reasonable investigation necessary before a pleading is filed : See, that's the problem, ma'am. This is, in my view, pretty ­ I'm looking for a word that is not pejorative that still makes the point -- pretty unacceptable lawyering because under Rule 11 you've now admitted to a Rule 11 violation. You filed a wire fraud allegation as a predicate act for your RICO. As you stand at the lectern, you can't even, in a best-world sense, articulate a wire fraud. You now say you have to speak to your client. The rules clearly say that you have to have a good-faith basis for alleging something in a complaint, and how could you have had a good-faith basis without speaking to your client and now being totally unable to articulate a basis? See Transcript for July 12, 2010 hearing at p. 7. Unfortunately, it appears that Plaintiffs failed to heed the Court's warning. A major purpose of the 1983 amendments to Rule 11 was to enable district courts to deter dilatory or abusive pretrial tactics and to streamline litigation. See Golden Eagle Distrib. Corp. v. Burroughs Corp., 801 F.2d 1531, 1536 (9th Cir.1986) (discussing views of advisory committee members). Recognizing that that sanctions should not be used to "chill an attorney's enthusiasm or creativity in pursuing factual or legal theories," In re Yagman, 796 F.2d 1165, 1182, amended, 803 F.2d 1085 (9th Cir.1986), the Ninth Circuit MOTION FOR SANCTIONS
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has also explained that it must "draw the line between creative lawyering and abuse of the judicial process." Stewart v. Am. Int'l Oil & Gas Co., 845 F.2d 196, 201 (9th Cir. 1988). Here, the process was abused. While "[a] district court confronted with solid evidence of a pleading's frivolousness may in circumstances that warrant it infer that it was filed for an improper purpose," the Court does not need to make such an inference, since Plaintiffs have also filed the FAC for an improper purpose. Townsend, 929 F.2d at 1365. An example of the improper purpose of Plaintiffs' filing is the fact that Plaintiffs failed to heed the Court's advice about the necessary elements of wire fraud, namely, the causation elements. The Ninth Circuit has held that that "[w]ithout question, successive complaints based upon propositions of law previously rejected may constitute harassment under Rule 11." G.C. & K.B. Investments, Inc. v. Wilson, 326 F.3d 1096, 1110 (9th Cir. 2003) (internal citations omitted). This is now Plaintiffs' second bite at the apple, and they are no closer to pleading any legally cognizable claim than they were when the Court dismissed the original Complaint. Plaintiffs' improper purpose appears to be to cost Xcentric so much money in the litigation that it will give in and remove or edit the posting about Plaintiff regardless of the merits of the claim. Without a doubt, the filing of the FAC was done for the purpose of harassing Defendants and costing them money, which is an improper purpose under Rule 11. VI. SANCTIONS ARE WARRANTED "An attorney who signs the paper without such a substantiated belief `shall' be penalized by `an appropriate sanction.'" Hartmax, 496 U.S. at 393 (emphasis added). The Court in Hartmax succinctly explained why Plaintiffs and their counsel must be sanctioned: "Baseless filing puts the machinery of justice in motion, burdening courts and individuals alike with needless expense and delay." Id. at 398. As established herein, Plaintiffs are in violation of three separate sections of Rule 11. Because each violation subjects Plaintiffs ­ and their counsel ­ to sanctions, Defendants request that the Court MOTION FOR SANCTIONS
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JABURG & WILK, P.C. ATTORNEYS AT LAW 3200 NORTH CENTRAL AVENUE SUITE 2000 PHOENIX, ARIZONA 85012

order Plaintiffs to pay all of Defendants' attorney fees incurred in defending this frivolous lawsuit and such other relief as the Court deems appropriate. VII. CONCLUSION For all of the foregoing reasons, Defendants request that the Court order Plaintiffs and their counsel to pay all of Defendants' attorney fees incurred in defending this frivolous lawsuit and such other relief as the Court deems appropriate. DATED this 3rd day of September, 2010. JABURG & WILK, P.C.

/s/Maria Crimi Speth Maria Crimi Speth Attorneys for Defendants

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JABURG & WILK, P.C. ATTORNEYS AT LAW 3200 NORTH CENTRAL AVENUE SUITE 2000 PHOENIX, ARIZONA 85012

CERTIFICATE OF SERVICE I hereby certify that on the 3rd day of September, 2010, I electronically transmitted the attached document to the Clerk's Office using the CM/ECF System for filing, and for transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: Ms. Lisa Borodkin, Esq. Mr. Daniel F. Blackert, Esq. Asia Economic Institute 11766 Wilshire Blvd., Suite 260 Los Angeles, CA 90025 Attorneys for Plaintiffs [e-mail] [e-mail] And a courtesy copy of the foregoing delivered to: Honorable Stephen V. Wilson U.S. District Court Judge /s/Debra Gower

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