EarthCam, Inc. v. OxBlue Corporation et al
Filing
290
OPINION AND ORDER that Defendant Richard Hermann's Motion for Sanctions 193 is DENIED. Signed by Judge William S. Duffey, Jr on 2/26/2014. (anc)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
EARTHCAM, INC.,
Plaintiff,
v.
1:11-cv-2278-WSD
OXBLUE CORPORATION et al.,
Defendants.
OPINION AND ORDER
This matter is before the Court on Defendant Richard Hermann’s Motion for
Sanctions [193].
I.
BACKGROUND
Defendant Richard Hermann (“Hermann”) argues he is entitled to Rule 11
sanctions against Plaintiff EarthCam, Inc. (“Plaintiff” or “EarthCam”) because
Plaintiff’s claims against Hermann are frivolous, have been asserted for an
improper purpose, and are not warranted under existing law. Specifically,
Hermann alleges that Plaintiff executed a general mutual release and covenant not
to sue Hermann (“the Release”), but that, despite the Release, Plaintiff filed its
Second Amended Complaint adding Hermann to this action.
Hermann states that on August 13, 2008, EarthCam signed the Release,
which provides: “This letter will also serve as a mutual release for all claims,
liabilities, liens, demands and causes of action known or unknown, fixed or
contingent, which either you, Richard Hermann, or EarthCam may have or claim to
have against each other and both parties hereby agree not to file a lawsuit to assert
such claims.”
Hermann states he personally provided EarthCam with a copy of the Release
and another copy by letter dated March 27, 2013. Hermann further states that on
April 2, 2013, Hermann’s counsel notified Plaintiff of its intent to seek Rule 11
sanctions if Plaintiff failed to dismiss its claims against Hermann within 21 days.
Plaintiff refused to dismiss Hermann from this action, and Hermann now seeks
sanctions against EarthCam.
II.
DISCUSSION
A.
Legal Standard
Rule 11 provides that, by submitting a pleading to the court, an attorney
certifies that to the best of his knowledge, information, and belief “formed after an
inquiry reasonable under the circumstances” the claims in the pleading are not
submitted to harass the opposing party, are warranted by existing law, and “have
evidentiary support or . . . are likely to have evidentiary support after a reasonable
opportunity for further investigation or discovery.” Fed. R. Civ. P. 11(b)(1),
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(b)(2), (b)(3). Rule 11 further requires a litigant to abandon claims if, after a
reasonable opportunity for further investigation or discovery, the claims are no
longer tenable. Fed. R. Civ. P. 11, Advisory Committee Notes to 1993
Amendments; Turner v. Sunguard Bus. Sys., Inc., 91 F.3d 1418, 1422 (11th Cir.
1996) (that complaint contentions were not frivolous at time complaint was filed
does not prevent trial court from imposing Rule 11 sanctions for party’s continuous
advocacy of untenable claims).
If a pleading is submitted in violation of Rule 11 or a party prosecutes
untenable claims, a court has the right to impose appropriate sanctions against the
attorneys, law firms, parties or anyone else who violated the rule. Fed. R. Civ. P.
11(c); Battles v. City of Ft. Myers, 127 F.3d 1298, 1300 (11th Cir. 1997) (Rule 11
permits sanctions where an attorney insists upon a position after it is no longer
tenable).
Rule 11 Sanctions are intended to “reduce frivolous claims, defenses, or
motions, and to deter costly meritless maneuvers.” Massengale v. Ray, 267 F.3d
1298, 1302 (11th Cir.2001) (quoting Donaldson v. Clark, 819 F.2d 1551, 1557
(11th Cir. 1987) (en banc)). Accordingly, sanctions are only warranted where a
pleading: (1) has no reasonable factual basis; (2) is based on a legal theory that has
no reasonable chance of success and that cannot be advanced as a reasonable
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argument to change existing law; [or] (3) is filed in bad faith for an improper
purpose. Kaplan v. DaimlerChrysler, A.G., 331 F.3d 1251, 1255 (11th Cir. 2003).
The imposition of sanctions is properly reserved only for those claims that
demonstrate “deliberate indifference to obvious facts,” rather than those where “the
claimant’s evidence is merely weak” or where the claimant makes a “novel legal
argument.” Id. (quoting Davis v. Carl, 906 F.2d 533, 537-538 (11th Cir. 1990)
(noting that sanctions are inappropriate where claim is product of “poor judgment”
and are not intended to chill an attorney’s enthusiasm in pursuing factual or legal
theories).
The evaluation of whether sanctions are warranted is governed by an
objective standard: “whether the motion, pleading or other paper reflected what
could reasonably have been believed by the signer at the time of the signing.”
Didie v. Howes, 988 F.2d 1097, 1104 (11th Cir. 1993) (quoting Aetna Ins. Co. v.
Meeker, 953 F.2d 1328, 1331 (11th Cir. 1992)).
B.
Analysis
EarthCam argues it has a good-faith basis for believing that the Release was
obtained through fraud and that, accordingly, it is void. EarthCam thus argues it
was within its rights to assert claims against Hermann despite the existence of the
Release and Hermann’s multiple threats to file a motion seeking the imposition of
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sanctions. The Court has not yet ruled on the merits of this issue, but considers
only whether EarthCam has a reasonable belief that its claims against Hermann are
viable, despite the existence of the Release. EarthCam argues that the basis for the
viability of its complaint, and that the Release does not bar the claims, is that the
Release is void because it was obtained fraudulently. The Court thus considers
whether EarthCam has a colorable argument that the Release is void or voidable.
The parties agree that the Release is a contract governed by New Jersey law.
See Kobatake v. E.I. DuPont De Nemours & Co., 162 F.3d 619, 624 (11th Cir.
1998) (citing Darby v. Mathis, 212 Ga. App. 444, 441 S.E.2d 905, 906 (1994)) (“A
release or settlement agreement is a contract subject to construction by the court.”);
Domanske v. Rapid-American Corp., 749 A.2d 399, 402 (N.J. Super. Ct. App. Div.
2000) (“[A] release is merely a form of contract and the general rules that apply to
contract interpretation apply to releases.”). If a party to a release makes material
misrepresentations to induce the other party into signing the release, the release
becomes voidable upon the innocent party’s discovery of the fraud. See
Evangelista v. Pub. Serv. Coordinated Transp., 72 A.2d 534, 536 (N.J. Super. Ct.
App. Div. 1950); W. & A.R. Co. v. Atkins, 82 S.E. 139, 140 (1914).
To void a contract based upon fraud in the inducement, the party seeking
relief must prove five elements: (1) a false representation or concealment of a
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material fact; (2) that the defendant knew the representations or concealment were
false; (3) an intent to induce the allegedly defrauded party to act or refrain from
acting; (4) justifiable reliance by the plaintiff; and (5) damages as a result of the
false representations or concealment. Pacheco v. Charles Crews Custom Homes,
289 Ga. App. 773, 658 S.E.2d 396, 398 (2008); see also Ga. Code Ann. § 13-5-5;
Jewish Ctr. of Sussex County v. Whale, 432 A.2d 521, 524 (N.J. 1981) (“A
misrepresentation amounting to actual legal fraud consists of a material
representation of a presently existing or past fact, made with knowledge of its
falsity and with the intention that the other party rely thereon, resulting in reliance
by that party to his detriment.”).
EarthCam argues that Hermann fraudulently induced EarthCam to release
Hermann from any and all claims, known and unknown, that EarthCam might,
someday in the future, elect to assert against Hermann. Hermann naturally
disputes these charges of fraud. But what matters here is not whether the fraud
actually occurred, but whether EarthCam has a colorable argument that the fraud
might have occurred. If that is the case, then EarthCam does not violate Rule 11
by asserting that the Release is void, allowing it to assert claims against Hermann.
The Court thus turns its attention to the allegations of fraud-in-the-inducement that
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EarthCam levels at Hermann with respect to the circumstances that culminated in
the execution of the Release by EarthCam and Hermann.
EarthCam claims the following:
After Hermann terminated his employment with EarthCam on June
20, 2008, Herman sought payment of $1,038.00 in unpaid expenses
from EarthCam.
During post-termination discussions with Hermann in an email dated
July 7, 2008, Nizza, an EarthCam employee, advised Hermann that he
had to return all of EarthCam’s tools and materials, reminded
Hermann that he was bound to the terms and conditions of the noncompete agreement (the “Agreement”)1 he executed as a condition of
his employment, and confirmed that Hermann was acting in
compliance with the terms and conditions set forth in the non-compete
agreement.
In response to Nizza’s email, Hermann represented that “I do not have
EarthCam tools.” (Nizza Dec II. ¶ 7, Ex. C). As to the reminder that
1
Hermann executed the Agreement when he was employed by EarthCam.
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he comply with the terms and conditions of the Agreement, Hermann
represented as follows: “I respect the non-compete agreement.”
Hermann’s representation that he did not have EarthCam’s tools and
materials, and that he respected and was acting in compliance with the
terms and conditions of the Agreement, were false, and known to be
false by Hermann on that date.
Hermann, aware that he had wrongfully taken EarthCam’s Esprit
camera and was using EarthCam’s confidential and trade secret
information in an effort to obtain employment with EarthCam’s direct
competitor in violation of the terms and conditions of the Agreement,
rejected the initial form of EarthCam’s release, and insisted on a new
version.
Based upon Hermann’s misrepresentations that he did not have any of
EarthCam’s tools or equipment and that Hermann respected his
obligations not to use EarthCam’s confidential and trade secret
information or consult with EarthCam’s competitors, Nizza drafted
and executed the Release which Hermann seeks to enforce against
EarthCam.
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Had Nizza known or reasonably believed that Hermann had
misappropriated EarthCam’s trade secrets and transferred them to
OxBlue2 and had wrongfully taken EarthCam’s Esprit camera and
installed it at Hermann’s “friend’s” facility while he was
communicating with OxBlue to secure employment, Nizza would not
have executed the Release.
The Court finds that these allegations are sufficient, albeit barely, to form a
basis for the conclusion that some fraudulent inducement occurred. EarthCam’s
assertion that the Release is voidable is thus at least arguably creditable, and there
is an insufficient basis for imposing Rule 11 sanctions.
III.
CONCLUSION
Accordingly, for the foregoing reasons,
IT IS HEREBY ORDERED that Defendant Richard Hermann’s Motion
for Sanctions [193] is DENIED.
SO ORDERED this 26th day of February, 2014.
2
These are some of the claims EarthCam asserts against Hermann in this case.
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