Ingenuity13 LLC v. John Doe

Filing 130

ORDER ISSUING SANCTIONS by Judge Otis D. Wright, II: The Court awards attorneys fees and costs in the sum of $40,659.86 to Doe: $36,150.00 for Pietzs attorneys fees; $1,950.00 for Ranallos attorneys fees; $2,226.26 for Pietzs cost s; and $333.60 for Ranallos costs. As a punitive measure, the Court doubles this award, yielding $81,319.72.5 This punitive multiplier is justified by Plaintiffs brazen misconduct and relentless fraud. The Principals, AF Holdings, Ingenuity 13, Prenda Law, and Gibbs are liable for this sum jointly and severally, and shall pay this sum within 14 days of this order. The Court enters additional nonmonetary sanctions as discussed. (lc). Modified on 5/6/2013 .(lc).

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O 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 INGENUITY 13 LLC, 12 v. 13 14 Case No. 2:12-cv-8333-ODW(JCx) Plaintiff, ORDER ISSUING SANCTIONS JOHN DOE, Defendant. 15 “The needs of the many outweigh the needs of the few.” —Spock, Star Trek II: The Wrath of Khan (1982). 16 17 I. 18 INTRODUCTION Plaintiffs1 have outmaneuvered the legal system.2 19 They’ve discovered the 20 nexus of antiquated copyright laws, paralyzing social stigma, and unaffordable 21 defense costs. And they exploit this anomaly by accusing individuals of illegally 22 downloading a single pornographic video. Then they offer to settle—for a sum 23 1 24 25 26 27 28 The term “Plaintiffs” used in this order refers to AF Holdings LLC, Ingenuity 13 LLC, as well as related entities, individuals, and attorneys that collaborated in the underlying scheme fronted by AF Holdings and Ingenuity 13. 2 This order concerns conduct committed in the following related cases: AF Holdings LLC v. Doe, No. 2:12-cv-6636-ODW(JCx) (C.D. Cal. filed Aug. 1, 2012); AF Holdings LLC v. Doe, No. 2:12-cv6669-ODW(JCx) (C.D. Cal. filed Aug. 2, 2012); Ingenuity 13 LLC v. Doe, No. 2:12-cv-6662ODW(JCx) (C.D. Cal. filed Aug. 2, 2012); Ingenuity 13 LLC v. Doe, No. 2:12-cv-6668-ODW(JCx) (C.D. Cal. filed Aug. 2, 2012); Ingenuity 13 LLC v. Doe, No. 2:12-cv-8333-ODW(JCx) (C.D. Cal. filed Sept. 27, 2012). 1 calculated to be just below the cost of a bare-bones defense. For these individuals, 2 resistance is futile; most reluctantly pay rather than have their names associated with 3 illegally downloading porn. 4 compensate starving artists allow, starving attorneys in this electronic-media era to 5 plunder the citizenry. So now, copyright laws originally designed to 6 Plaintiffs do have a right to assert their intellectual-property rights, so long as 7 they do it right. But Plaintiffs’ filing of cases using the same boilerplate complaint 8 against dozens of defendants raised the Court’s alert. It was when the Court realized 9 Plaintiffs engaged their cloak of shell companies and fraud that the Court went to 10 11 battlestations. II. PROCEDURAL HISTORY 12 The Court issued its February 7, 2013 Order to Show Cause re Sanctions to 13 allow counsel, Brett Gibbs, to explain why he ignored the Court’s discovery-stay 14 Order, filed complaints without reasonable investigation, and defrauded the Court by 15 asserting a copyright assignment secured with a stolen identity. (ECF No. 48.) As 16 evidence materialized, it turned out that Gibbs was just a redshirt. 17 Gibbs’s behavior in the porno-trolling collective was controlled by several 18 attorneys, under whom other individuals also took their orders. Because it was 19 conceivable that these attorneys (and others) were culpable for Gibbs’s conduct, the 20 Court ordered these parties to appear. 21 The following additional parties were ordered to appear: (a) John Steele, of 22 Steele Hansmeier PLLC, Prenda Law, Inc., and/or Livewire Holdings LLC; (b) Paul 23 Hansmeier, of Steele Hansmeier PLLC and/or Livewire Holdings LLC; (c) Paul 24 Duffy, of Prenda Law, Inc.; (d) Angela Van Den Hemel, of Prenda Law, Inc.; 25 (e) Mark Lutz, of Prenda Law, Inc., AF Holdings LLC, and/or Ingenuity 13 LLC; 26 (f) Alan Cooper, of AF Holdings LLC; (g) Peter Hansemeier, of 6881 Forensics, LLC; 27 (h) Prenda Law, Inc.; (i) Livewire Holdings LLC; (j) Steele Hansmeier PLLC; (k) AF 28 Holdings LLC; (l) Ingenuity 13 LLC; (m) 6881 Forensics, LLC; and (n) Alan Cooper, 2 1 of 2170 Highway 47 North, Isle, MN 56342. (ECF Nos. 66, 86.) These parties were 2 ordered to show cause why they should not be sanctioned for their behind-the-scenes 3 role in the conduct facially perpetrated by Gibbs. These parties were also ordered to 4 explain the nature of their operations, relationships, and financial interests. III. 5 LEGAL STANDARD 6 The Court has a duty to supervise the conduct of attorneys appearing before it. 7 Erickson v. Newmar Corp., 87 F.3d 298, 301 (9th Cir. 1996). The power to punish 8 contempt and to coerce compliance with issued orders is based on statutes and the 9 Court’s inherent authority. Int’l Union, United Mine Workers of Am. v. Bagwell, 512 10 U.S. 821, 831 (1994). Though this power must be exercised with restraint, the Court 11 has wide latitude in fashioning appropriate sanctions to fit the conduct. See Roadway 12 Express, Inc. v. Piper, 447 U.S. 752, 764–65 (1980). 13 Under the Court’s inherent authority, parties and their lawyers may be 14 sanctioned for improper conduct. Fink v. Gomez, 239 F.3d 989, 991 (9th Cir. 2001). 15 This inherent power extends to a full range of litigation abuses, the litigant must have 16 engaged in bad faith or willful disobedience of a court’s order. Id. at 992. Sanctions 17 under the Court’s inherent authority are particularly appropriate for fraud perpetrated 18 on the court. See Chambers v. NASCO, Inc., 501 U.S. 32, 54 (1991). IV. 19 20 A. DISCUSSION Findings of fact 21 Based on the evidence presented on the papers and through sworn testimony, 22 the Court finds the following facts, including those based on adverse inferences drawn 23 from Steele, Hansmeier, Duffy, and Van Den Hemel’s blanket refusal to testify.3 1. 24 25 Steele, Hansmeier, and Duffy (“Principals”) are attorneys with shattered law practices. Seeking easy money, they conspired to operate this enterprise and 26 27 28 3 Even if their refusal was based on the Fifth Amendment privilege against self-incrimination, the Court still may draw adverse inferences against them in this civil proceeding. Baxter v. Palmigiano, 425 U.S. 308, 318 (1976). 3 1 formed the AF Holdings and Ingenuity 13 entities (among other fungible entities) for 2 the sole purpose of litigating copyright-infringement lawsuits. They created these 3 entities to shield the Principals from potential liability and to give an appearance of 4 legitimacy. 5 2. AF Holdings and Ingenuity 13 have no assets other than several 6 copyrights to pornographic movies. There are no official owners or officers for these 7 two offshore entities, but the Principals are the de facto owners and officers. 8 3. The Principals started their copyright-enforcement crusade in about 2010, 9 through Prenda Law, which was also owned and controlled by the Principals. Their 10 litigation strategy consisted of monitoring BitTorrent download activity of their 11 copyrighted pornographic movies, recording IP addresses of the computers 12 downloading the movies, filing suit in federal court to subpoena Internet Service 13 Providers (“ISPs”) for the identity of the subscribers to these IP addresses, and 14 sending cease-and-desist letters to the subscribers, offering to settle each copyright- 15 infringement claim for about $4,000. 16 4. This nationwide strategy was highly successful because of statutory- 17 copyright damages, the pornographic subject matter, and the high cost of litigation. 18 Most defendants settled with the Principals, resulting in proceeds of millions of 19 dollars due to the numerosity of defendants. These settlement funds resided in the 20 Principals’ accounts and not in accounts belonging to AF Holdings or Ingenuity 13. 21 No taxes have been paid on this income. 22 5. For defendants that refused to settle, the Principals engaged in vexatious 23 litigation designed to coerce settlement. These lawsuits were filed using boilerplate 24 complaints based on a modicum of evidence, calculated to maximize settlement 25 profits by minimizing costs and effort. 26 6. The Principals have shown little desire to proceed in these lawsuits when 27 faced with a determined defendant. Instead of litigating, they dismiss the case. When 28 pressed for discovery, the Principals offer only disinformation—even to the Court. 4 1 7. The Principals have hired willing attorneys, like Gibbs, to prosecute these 2 cases. Though Gibbs is culpable for his own conduct before the Court, the Principals 3 directed his actions. In some instances, Gibbs operated within narrow parameters 4 given to him by the Principals, whom he called “senior attorneys.” 5 8. The Principals maintained full control over the entire copyright-litigation 6 operation. The Principals dictated the strategy to employ in each case, ordered their 7 hired lawyers and witnesses to provide disinformation about the cases and the nature 8 of their operation, and possessed all financial interests in the outcome of each case. 9 9. The Principals stole the identity of Alan Cooper (of 2170 Highway 47 10 North, Isle, MN 56342). The Principals fraudulently signed the copyright assignment 11 for “Popular Demand” using Alan Cooper’s signature without his authorization, 12 holding him out to be an officer of AF Holdings. Alan Cooper is not an officer of AF 13 Holdings and has no affiliation with Plaintiffs other than his employment as a 14 groundskeeper for Steele. There is no other person named Alan Cooper related to AF 15 Holdings or Ingenuity 13. 16 10. The Principals ordered Gibbs to commit the following acts before this 17 Court: file copyright-infringement complaints based on a single snapshot of Internet 18 activity; name individuals as defendants based on a statistical guess; and assert a 19 copyright assignment with a fraudulent signature. 20 Gibbs to prosecute these lawsuits only if they remained profitable; and to dismiss 21 them otherwise. 22 11. The Principals also instructed Plaintiffs have demonstrated their willingness to deceive not just this 23 Court, but other courts where they have appeared. Plaintiffs’ representations about 24 their operations, relationships, and financial interests have varied from feigned 25 ignorance to misstatements to outright lies. But this deception was calculated so that 26 the Court would grant Plaintiffs’ early-discovery requests, thereby allowing Plaintiffs 27 to identify defendants and exact settlement proceeds from them. With these granted 28 requests, Plaintiffs borrow the authority of the Court to pressure settlement. 5 1 B. Sanctions 2 Although the Court originally notified the parties that sanctions would be 3 imposed under Federal Rule of Civil Procedure 11(b)(3) and Local Rule 83-3, the 4 Court finds it more appropriate to sanction the parties under its inherent authority. See 5 In re DeVille, 361 F.3d 539, 550 (9th Cir. 2004) (“[T]he bankruptcy court’s failure to 6 specify, in advance of the disciplinary proceedings, that its inherent power was a basis 7 for those proceedings, did not serve to undercut its sanctioning authority.”). The 8 sanctions for Plaintiffs’ misconduct are as follows. 9 1. Rule 11 sanctions 10 The Court maintains that its prior analysis of Plaintiffs’ Rule 11 violations is 11 accurate. (ECF No. 48.) Plaintiffs can only show that someone, using an IP address 12 belonging to the subscriber, was seen online in a torrent swarm. But Plaintiffs did not 13 conduct a sufficient investigation to determine whether that person actually 14 downloaded enough data (or even anything at all) to produce a viewable video. 15 Further, Plaintiffs cannot conclude whether that person spoofed the IP address, is the 16 subscriber of that IP address, or is someone else using that subscriber’s Internet 17 access. Without better technology, prosecuting illegal BitTorrent activity requires 18 substantial effort in order to make a case. It is simply not economically viable to 19 properly prosecute the illegal download of a single copyrighted video. 20 Enter Plaintiffs and their cottage-industry lawsuits. Even so, the Court is not as 21 troubled by their lack of reasonable investigation as by their cover-up. Gibbs argued 22 that a deep inquiry was performed prior to filing. Yet these arguments are not 23 credible and do not support Gibbs’s conclusions. Instead, Gibbs’s arguments suggest 24 a hasty after-the-fact investigation, and a shoddy one at that. 25 For instance, Gibbs characterized Marvin Denton’s property as “a very large 26 estate consisting of a gate for entry and multiple separate houses/structures on the 27 property.” (ECF No. 49, at 19.) He stated this to demonstrate the improbability that 28 Denton’s Wi-Fi signal could be received by someone outside the residence. But 6 1 Denton’s property is not a large estate; it is a small house in a closely packed 2 residential neighborhood. There are also no gates visible. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Gibbs’s statement is a blatant lie. His statement resembles other statements 21 given by Plaintiffs in this and their other cases: statements that sound reasonable but 22 lack truth. Thus, the Court concludes that Gibbs, even in the face of sanctions, 23 continued to make factual misrepresentions to the Court. 24 Nevertheless, Rule 11 sanctions are inappropriate here because it is the wrong 25 sanctions vehicle at this stage of litigation. The cases have already been dismissed 26 and monetary sanctions are not available. Fed. R. Civ. P 11(c)(5)(B) (a court cannot 27 impose a monetary sanction on its own unless it issued the show-cause order before 28 voluntary dismissal). The more appropriate sanction for these Rule 11 violations is 7 1 what the Court had already imposed: denial of requests for early discovery. (ECF 2 No. 28.) 3 2. 4 In addition to Gibbs’s misrepresentations, there is the matter of the ignored 5 Court Order vacating early discovery. (ECF No. 28.) The evidence does not show 6 that the Order was ignored because of miscommunication among Plaintiffs. The 7 Order was purposely ignored—hoping that the ISPs were unaware of the vacatur and 8 would turn over the requested subscriber information. Sanctions under the Court’s inherent authority 9 Then there is the Alan Cooper forgery. Although a recipient of a copyright 10 assignment need not sign the document, a forgery is still a forgery. And trying to pass 11 that forged document by the Court smacks of fraud. Unfortunately, other than these 12 specific instances of fraud, the Court cannot make more detailed findings of fraud. 13 Nevertheless, it is clear that the Principals’ enterprise relies on deception. Part 14 of that ploy requires cooperation from the courts, which could only be achieved 15 through deception. 16 themselves, brought suit in their own names, and disclosed that they had the sole 17 financial interest in the suit, a court would scrutinize their conduct from the outset. 18 But by being less than forthcoming, they defrauded the Court. They anticipated that 19 the Court would blindly approve their early-discovery requests, thereby opening the 20 door to more settlement proceeds. 21 In other words, if the Principals assigned the copyright to The Principals also obfuscate other facts, especially those concerning their 22 operations, relationships, and financial interests. The Principals’ web of 23 disinformation is so vast that the Principals cannot keep track—their explanations of 24 their operations, relationships, and financial interests constantly vary. This makes it 25 difficult for the Court to make a concrete determination. 26 Still, the Court adopts as its finding the following chart detailing Plaintiffs’ 27 relationships. Though incomplete, this chart is about as accurate as possible given 28 Plaintiffs’ obfuscation. 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 As for Van Den Hemel, Lutz, and Hansemeier, they are not without fault even 18 19 though they acted under orders from the Principals. They were not merely 20 assimilated; they knowingly participated in this scheme, reaping the benefits when the 21 going was good. Even so, their status as non-attorneys and non-parties severely limits 22 the sanctions that could be levied against them. 23 Despite these findings, the Court deems these findings insufficient to support a 24 large monetary sanction—a seven-digit sanction adequate to deter Plaintiffs from 25 continuing their profitable enterprise. Even if the Court enters such a sanction, it is 26 certain that Plaintiffs will transfer out their settlement proceeds and plead paucity. 27 Yet Plaintiffs’ bad-faith conduct supports other more fitting sanctions. 28 /// 9 1 First, an award of attorney’s fees to Defendants is appropriate. This award 2 compensates them for expenses incurred in this vexatious lawsuit, especially for their 3 efforts in countering and revealing the fraud perpetrated by Plaintiffs. 4 So far, only Morgan Pietz and Nicholas Ranallo have appeared.4 Upon review, 5 the Court finds Pietz’s expenditure of 120.5 hours at an hourly rate of $300 reasonable 6 based on his experience, work quality, and quantity of necessary papers filed with the 7 Court. (ECF No. 102.) Although many of these hours were spent after the case was 8 dismissed, these hours were spent in connection with the sanction hearings—time well 9 spent. 10 Similarly, the attorney’s fees and costs incurred by Ranallo also appear reasonable. 11 Therefore, the Court awards attorney’s fees and costs in the sum of $40,659.86 12 to Doe: $36,150.00 for Pietz’s attorney’s fees; $1,950.00 for Ranallo’s attorney’s fees; 13 $2,226.26 for Pietz’s costs; and $333.60 for Ranallo’s costs. As a punitive measure, 14 the Court doubles this award, yielding $81,319.72.5 15 justified by Plaintiffs’ brazen misconduct and relentless fraud. The Principals, AF 16 Holdings, Ingenuity 13, Prenda Law, and Gibbs are liable for this sum jointly and 17 severally, and shall pay this sum within 14 days of this order. This punitive multiplier is 18 Second, there is little doubt that that Steele, Hansmeier, Duffy, Gibbs suffer 19 from a form of moral turpitude unbecoming of an officer of the court. To this end, the 20 Court will refer them to their respective state and federal bars. 21 Third, though Plaintiffs boldly probe the outskirts of law, the only enterprise 22 they resemble is RICO. The federal agency eleven decks up is familiar with their 23 prime directive and will gladly refit them for their next voyage. The Court will refer 24 this matter to the United States Attorney for the Central District of California. The 25 will also refer this matter to the Criminal Investigation Division of the Internal 26 27 28 4 They appeared on behalf of the Doe Defendant in the case Ingenuity 13 LLC v. Doe, No. 2:12-cv8333-ODW(JCx) (C.D. Cal. filed Sept. 27, 2012). 5 This punitive portion is calculated to be just below the cost of an effective appeal. 10 1 Revenue Service and will notify all judges before whom these attorneys have pending 2 cases. For the sake of completeness, the Court requests Pietz to assist by filing a 3 report, within 14 days, containing contact information for: (1) every bar (state and 4 federal) where these attorneys are admitted to practice; and (2) every judge before 5 whom these attorneys have pending cases. 6 4. 7 For the same reasons stated above, the Court will refer Duffy and Gibbs to the 8 Local Rule 83-3 sanctions Standing Committee on Discipline (for this District) under Local Rule 83-3. V. 9 CONCLUSION 10 Steele, Hansmeier, Duffy, Gibbs, Prenda Law, AF Holdings, and Ingenuity 13 11 shall pay, within 14 days of this order, attorney’s fees and costs totaling $81,319.72 to 12 Doe. The Court enters additional nonmonetary sanctions in accordance with the 13 discussion above. 14 IT IS SO ORDERED. 15 May 6, 2013 16 17 18 ____________________________________ OTIS D. WRIGHT, II UNITED STATES DISTRICT JUDGE 19 20 21 22 23 24 25 26 27 28 11

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