E-Smart Technologies, Inc. et al v. Drizin et al
Filing
381
ORDER re CONTEMPT AND SANCTIONS: IT IS HEREBY ORDERED that this action is DISMISSED with prejudice;IT IS FURTHER ORDERED that Taylor&Co. may file within ten (10) days of the filing of this order a declaration certifying to the attorneys fees and costs incurred in prosecuting the OSC along with supporting documentation; Plaintiff shall file within twenty (20) days of such filing its objection, if any; Signed by Judge Marilyn Hall Patel on 5/24/2011. (awb, COURT STAFF) (Filed on 5/24/2011)
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UNITED STATES DISTRICT COURT
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NORTHERN DISTRICT OF CALIFORNIA
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United States District Court
For the Northern District of California
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No. C-06-05528 MHP
E-SMART TECHNOLOGIES, INC., a Nevada
Corporation, and IVI SMART TECHNOLOGIES, INC.,
a Delaware Corporation,
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ORDER RE
CONTEMPT AND
SANCTIONS
Plaintiff(s),
vs.
WAYNE DRIZIN, MICHAEL GARDINER,
ELECTRONIC PLASTICS CORPORATION, and
A CARD COMPANY,
Defendant(s).
/
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This action was referred to the Honorable William B. Shubb, a District Court Judge of the
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Eastern District of California for adjudication of an Order to Show Cause re Criminal or Civil
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contempt (“OSC”) issued by this court with respect to the disappearance of a biometric smart card
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manufactured by Fidelica (“Fidelica card”) during a settlement conference with Magistrate Judge
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Bernard Zimmerman of this court.1 The United State Attorney having declined prosecution, the
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court appointed the law firm of Taylor & Co., attorneys Stephen E. Taylor and Jonathan Alan
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Patchen, to serve pro bono and prosecute the matter. This court ultimately determined that the OSC
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should proceed as a civil contempt.
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Judge Shubb conducted a hearing and rendered his decision in a Memorandum and Order
re:Civil Contempt filed on May 18, 2011. He returned the matter to this court for “all further
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proceedings, including determination of the appropriate remedy to enforce this Order”. Dkt.No. 380
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at 20.
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Some history of this action is necessary to understand the background of this case. This
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action was filed on September 11, 2006. A number of claims are alleged, but the principle gravamen
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of the complaint is that defendants, former employees of plaintiff e-Smart Technologies, Inc. (“e-
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Smart”) and associates of plaintiff’s Chief Executive Officer, Mary Grace, stole trade secrets from
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the plaintiffs. Nearly five years and fifty-two pages of docket entries later, little has been
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accomplished other than bickering and sniping. Plaintiffs are on their fourth set of attorneys;
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defendants, who were previously represented, claim they cannot afford counsel and are representing
United States District Court
For the Northern District of California
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themselves.
It took over a year and finally the appointment of a Special Master to obtain any clear
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definition of the trade secrets at issue. Plaintiffs were unable to articulate a clear enumeration and
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description of the trade secrets and included many items that were purported trade secrets, but, in
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fact, were not. The Special Master worked mightily to extract from the myriad of ones presented to
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him by plaintiff what could reasonably be described as actual trade secrets.
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The litigation was stymied with each side substituting new counsel on more than one
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occasion. Motions, not in furtherance of the litigation but exacerbating the dispute, and abortive
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efforts at settlement consumed much of the time. Case management conferences often were
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conducted by phone since one defendant fequently was out of the country, although he did make
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himself available by phone. However, getting the attention of the necessary principals of plaintiff
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for settlement or productive litigation efforts consumed more time. Finally, at yet one more attempt
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at settlement, Judge Zimmerman convened the parties for a settlement conference on August 13,
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2010, four years after the filing of this action. It is that settlement conference that gave rise to the
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conduct at issue in the OSC and has been adjudicated by Judge Shubb.
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After a four-day hearing Judge Shubb found e-Smart in civil contempt. Id. at 4:26. He also
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found Mary Grace in contempt of court for failure to comply with Judge Zimmerman’s order dated
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August 13, 2010. In the course of the hearing Judge Shubb took testimony from Judge Zimmerman
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the defendants, Wayne Drizin and Michael Gardiner, the CEO of plaintiff, Mary Grace, and other of
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its officers and employees, as well as other witnesses proffered by each of the parties. The findings
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made by Judge Shubb are very instructive in suggesting the appropriate remedies this court should
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impose. The Judge noted that “credibility was a central issue at the hearing”. Id. at 6, n.3. He
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proceeded to determine the facts related to the settlement conference and those that related to the
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response to the August 23, 2010 order. The court will not repeat those here, for the Memorandum
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and Order speaks for itself. The conclusions reached and assessment of the testimony and conduct
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are what inform this court’s decision with respect to the appropriate remedies.
Judge Shubb stated that he “did not find Drizin to be a credible witness and finds him, like
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United States District Court
For the Northern District of California
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Grace, to display the typical characteristics of a con-artist.” Id. at 8:4-6. Ultimately he concluded,
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however, that neither Drizin nor Gardiner, whose credibility he also evaluated, were responsible for
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the lost evidence. He was not so impressed with the credibility of Mary Grace, whose testimony he
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found “amorphous and appeared to develop as she testified”. Id. at 9:7-8. The Judge’s
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Memorandum and Order is replete with references to her “non-responsive” testimony, “ever-
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changing story”, her demeanor on the stand and her motive for stealing the card (“Grace felt justified
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in simply taking back what she asserted belonged to her company”, namely the Fidelica card). Id. at
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9-11. Judge Shubb gave this assessment of her character and credibility, “Grace’s testimony and
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demeanor also persuade the court that she has skated through her various ventures as a flim-flam
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artist who fabricates information in an attempt to extort a profit.” Id. at 11:9-12:2.
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Judge Shubb concluded that the Special Prosecutor had established by clear and convincing
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evidence that Mary Grace had stolen the card and that she and e-Smart, therefore, were in contempt
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of court. Id. at 5-6, 19:2-5.
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There also are other holdings and observations of the Judge that inform this court’s decision
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with respect to the appropriate remedies. These are poignantly pointed out on pages twelve and
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thirteen of the Judge’s Memorandum and Order. “The court was unpersuaded, however, that e-
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Smart is anything more than a sham company or that Grace’s concern for its shareholders extends
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beyond the financial gain they bring her.” Id. at 12:15-17. Quoting “Grace’s comment about her
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strategy [the Judge observed] also reflects her use of litigation as an improper business tool: ‘I
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believe if we can put the pressure of a second law suit on both Gardiner and Drizin, that we can
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resolve both suits exponentially [sic]’.” Id. at 12:26-13-2. This, along with her demeanor and other
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testimony, convinced the Judge that “Grace views the judicial process as a mere tool to conduct
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business rather than an avenue to resolve disputes.” Id. at 12:19-20. Indeed, Judge Zimmerman
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“testified that he was under the impression that Grace was not negotiating in good faith during the
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settlement process.” Id. at 12:21-25.
There are essentially two types of sanctions that may be imposed upon a finding of civil
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contempt: coercive sanctions to compel obedience to a court order or compensatory sanctions to
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United States District Court
For the Northern District of California
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redress losses sustained by the adversary. United States v. United Mine Workers of America, 330
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U.S. 258, 303-04 (1947). Sanctions in a civil contempt are intended to be remedial. In determining
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the appropriate sanction here, the court considers this Circuit’s civil contempt cases and sanctions
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cases under both the court’s inherent power and Rule 37 of the Federal Rules of Civil Procedure.
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See,e.g., Lasar v. Ford Motor Co., 399 F,2d 1101, 1109-11 (9th Cir. 2005); Falstaff Brewing Corp.
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v. Miller Brewing Co., 702 F.2d 770, 73-84 (9th Cir. 1983). As with sanctions under the court’s
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inherent powers or Rule 37, contempt sanctions must comport with due process standards. Lasar,
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399 F.3d 1110, n.5; Falstaff Brewing, 702 F.2d at 783-84 nn.8 & 9. The sanctions should also be
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proportionate to the conduct addressed and tailored to necessarily redress that conduct.
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Plaintiff, in this case, has been afforded its due process rights, having been given notice of
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the contumacious conduct and the fact that it faced sanctions of dismissal of the action, and given a
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full opportunity to be heard as described in the Memorandum and Order.
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A thorough reading of Judge Shubb’s Memorandum and Order, particularly considering the
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salient portions quoted or referenced above, persuades the court that dismissal of this action is the
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appropriate remedy. It is obvious that coercive measures are not available here because from the
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Memorandum and Order it appears that compliance with the order in issue cannot be achieved. The
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Fidelica card was found to have been taken by plaintiff; it was not returned as required by the order;
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it is still missing and is not likely to be returned. The other sanction that may be imposed is
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compensatory. In this case dismissing the action with prejudice is compensatory in nature, for the
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defendants are relieved of the expense and burden of further litigation. It is also the penalty
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contemplated by the OSC and of which plaintiff was given notice by that Order. While dismissal
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may be considered harsh, it takes into consideration the magnitude of the offensive conduct, CEO
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Grace’s lack of credibility on the stand, and the attitude of the plaintiff and its CEO toward this
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litigation, the parties and the court, including the Magistrate Judge who states that he spent more
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hours attempting to settle this case than on any other case he has had. Dkt. No.380 at 12.
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In dismissing an action or in ordering default as a sanction or penalty, the court should
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determine (1) the existence of extraordinary circumstances; (2) the presence of wilfulness, bad faith,
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For the Northern District of California
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or fault by the offending party; (3) the efficacy of lesser sanctions; and (4) the relationship of the
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misconduct and the matters in controversy; (5) prejudice to the party-victim of the misconduct; and
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(6) the government interests at stake.. See Estrada v. Speno & Cohen, 244 F.3d 1050 (9th Cir. 2001);
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see also Halco Engineering Co. v. Costle, 843 F.2d 376 (9th Cir. 1988).
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In sanctions cases whether under the court’s inherent power or pursuant to Rule 11 or Rule
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37 of the Federal Rules of Civil Procedure, dismissal is considered a drastic sanction. Nevertheless,
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it is justified where there is willfulness, fault or bad faith on the part of the sanctioned party. See,
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e.g., Valley Engineers Inc., v. Electric Engineering Co., 158 F.3d 1051, 1056 (9th Cir. 1998)(“facts
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of the case show dishonesty, not just recalcitrance and delay”); Fjelstad v. American Honda Motor
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Co., Inc., 762 F.2d 1334, 1337 (9th Cir. 1985).
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This case demonstrates an extreme set of extraordinary circumstances and bad faith. It
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appears from the CEO’s testimony that the case was brought more as a punishment against
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defendants, or in the words of its CEO as a “business tool”. This is an abuse of the judicial process
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and essentially amounts to an unfair business practice. This is borne out by the manner in which this
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case was litigated, for example, being unresponsive to discovery and asserting theft of trade secrets
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but failing to clarify exactly what they were. In fact, the court was required to appoint a Special
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Master who, although knowledgeable about the technology, struggled to get answers from the
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plaintiff and concluded that many of the answers did not consist of real trade secrets. This is not to
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say that defendants are not without fault in this case. Nonetheless, their transgressions do not
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compare with those of the plaintiff in their approach to the litigation of this case. Judge Shubb’s
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Memorandum and Order is replete with evidence of bad faith, willfulness and fault, so much so that
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plaintiff and its CEO have been found in contempt of court.
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Any lesser standard than dismissal of this action would result in continuing this litigation,
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litigation which smacks of bad faith and has been conducted by plaintiff in that fashion. Monetary
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sanctions or exclusion of evidence will only multiply this litigation.
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The nexus between the sanction of dismissal and the offending conduct in this case is
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apparent. The contumacious conduct of plaintiff to date suggests that there is little merit to this case.
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For the Northern District of California
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This is not a situation where there are discovery failures or abuses that may go to only a part of the
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case and that can be cured by more tailored remedies. The misconduct in this action goes to the
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heart of the case.
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As a result of this misconduct, defendants have incurred unnecessary expenditures and time.
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They no longer have counsel because they assert they are no longer able to afford counsel, litigation
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expenses having mounted. Defendant Gardiner has made a number of trips from the Middle East
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to participate in these proceedings.
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Finally, the attitude to these proceedings by the plaintiff’s CEO, as discussed above and at
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greater length in Judge Shubb’s decision, strikes at the heart of the legitimate interests of the judicial
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branch of our government. That attitude has infected the length and tenor of these proceedings. The
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CEO’s glib attendance to the truth and the use of the courts for her ends are directly at odds with the
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purpose of achieving a just resolution fairly, efficiently, speedily and inexpensively as mandated by
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the very first Rule of the Federal Rules of Civil Procedure. Fed.R.Civ.P. Rule 1.
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Therefore, for the foregoing reasons,
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IT IS HEREBY ORDERED that this action is DISMISSED with prejudice.
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IT IS FURTHER ORDERED that Taylor&Co. may file within ten (10) days of the filing of
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this order a declaration certifying to the attorneys’ fees and costs incurred in prosecuting the OSC
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along with supporting documentation. Plaintiff shall file within twenty (20) days of such filing its
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objection, if any.
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Date: May 24, 2011
MARILYN HALL PATEL
United States District Court Judge
Northern District of California
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ENDNOTES
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1. Since it was necessary for Judge Zimmerman to testify at the hearing, being the primary witness for
the prosecution of the OSC, an out-of-district judge was assigned by the Chief Judge of this Circuit to
conduct the hearing.
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