Gemshares LLC v. Lipton et al

Filing 336

MEMORANDUM OPINION AND ORDER signed by the Honorable Matthew F. Kennelly on 1/2/2020: For the reasons stated in the accompanying Memorandum Opinion and Order, plaintiff's motion for leave to file under seal 309 is granted; plaintiff's mo tion for relief under Federal Rule of Civil Procedure 64 306 is denied without prejudice; and plaintiff's motion for enforcement of fee-shifting provision and obligation to assign creations 297 is granted in part and denied in part as stated in this order. By no later than 1/6/2020, plaintiff is to take appropriate steps to dismiss its remaining claims as it has represented and is to make a filing that includes appropriate language for entry of judgment against Lipton and for the allowed modification to the injunction order. (mk)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

GEMSHARES LLC,
Plaintiff,
vs.
ARTHUR JOSEPH LIPTON and
SECURED WORLDWIDE, LLC.,
Defendants.

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Case No. 17 C 6221

MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
The Court found in favor of plaintiff GemShares LLC as to liability on its claim for
breach of contract against defendant Arthur Lipton. The claim involved GemShares'
operating agreement, which barred its investors, including Lipton, from competing with
the company. Lipton later formed Secured Worldwide LLC (SWW), which applied for a
patent on a product that arguably was based on GemShares' intellectual property.
In a separate federal lawsuit involving SWW and another one of its investors,
Cormac Kinney, a court concluded that Lipton had fraudulently represented that SWW
had permission to use GemShares' intellectual property. In the present case, the Court
concluded that under the doctrine of issue preclusion, the findings in the SWW-Kinney
lawsuit precluded Lipton and SWW from disputing the allegation that Lipton had
breached the non-compete agreement. GemShares LLC v. Lipton, No. 17 C 6221,
2019 WL 330470, at *5 (N.D. Ill. Jan. 25, 2019).
In a later ruling, the Court ruled that this entitled GemShares to summary

judgment on its breach of contract claim against Lipton. GemShares LLC v. Lipton, No.
17 C 6221, 2019 WL 587392, at *2 (N.D. Ill. Feb. 13, 2019). The Court thereafter
denied Lipton's motion for reconsideration. Order of Mar. 18, 2019 (dkt. no. 206). More
recently, the Court issued a permanent injunction barring Lipton and SWW from
violating the non-compete agreement and also ordered the assignment to GemShares
of Lipton's interest in a particular SWW patent application. GemShares LLC v. Lipton,
No. 17 C 6221, 2019 WL 3287838, at *4-6 (N.D. Ill. July 2, 2019). In that ruling, the
Court left open the question of GemShares' entitlement to attorney's fees under a feeshifting provision in the operating agreement, because GemShares had asserted other
claims that had not yet been adjudicated.
GemShares has now filed a motion seeking attorney's fees under the operating
agreement and 35 U.S.C. § 285 as well as a further injunction directing the assignment
to GemShares of any rights that GemShares may retain in the SWW patent application
and any other intellectual property within the scope of the non-compete agreement.
GemShares represents that once the Court enters a fee award and injunctive relief, it
will dismiss its remaining claims, thus concluding the litigation before this Court except
for efforts at collection. Pl.'s Mem. in Support of Pl.'s Mot. for Enforcement of Fee
Shifting Provision (hereafter Pl.'s Opening Mem.). at 1.
GemShares has separately moved under Federal Rule of Civil Procedure 64 for
an order permitting it to take collection-related discovery and freeze Lipton's assets in
anticipation of a judgment.
The Court addresses both motions in this decision.

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Discussion
1.

Attorney's fees and expenses
GemShares' fee request under the operating agreement is directed at Lipton, the

other contracting party. 1 Its fee request under section 285 is directed at SWW. See
Pl.'s Reply Mem. (dkt. no. 323) at 8. GemShares asks to recover fees of $1,471,703.65
and expenses of $59,638.46, for a total of $1,531,342.11. In support, it has provided
the invoices it received from its attorneys and a summary that breaks down the
requested fees by task.
The Court begins with the request for fees against SWW under 35 U.S.C. § 285.
Section 285 does not automatically award fees to the prevailing party (or to a prevailing
patent holder) in a suit under the patent laws. Rather, the statute permits a court to
award reasonable attorney's fees to the prevailing party only "in exceptional cases." An
exception case is "one that stands out from others with respect to the substantive
strength of a party’s litigating position (considering both the governing law and the facts
of the case) or the unreasonable manner in which the case was litigated." Octane
Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. 545, 554 (2014). "[T]here is no
precise rule or formula for making these determinations"; a court considers the totality of
the circumstances. Id.
GemShares, however, makes no attempt to show in its motion how its case
against SWW meets the statutory requirement of an "exceptional case." It does not
address the point at all. Perhaps there is a viable argument in favor of GemShares'

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GemShares does not suggest, and certainly does not support any contention, that the
operating agreement entitles it to recover fees against SWW.
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implicit contention that the case is exceptional, but making that argument was
GemShares' job, not the Court's job. GemShares has forfeited its request for fees
under section 285 by failing to address the point.
By contrast, there is no question that GemShares is entitled to attorney's fees
against Lipton in some amount under the GemShares operating agreement's feeshifting provision. Section 14.04 of the operating agreement states as follows:
14.04 Prevailing Party's Attorneys' Fees and Costs. Except as
may be otherwise expressly provided herein and then only in such limited
instances and circumstances as is so otherwise provided, any party who
or which shall substantially prevail in any litigation brought to enforce any
of the obligations of this agreement or otherwise brought in connection
with any dispute regarding this agreement shall be entitled to the payment
of reasonable attorneys' fees, court costs, and related legal expenses
upon written demand served upon the non-prevailing party or parties.
Such non-prevailing parties shall be jointly and severally liable for the
payment of reasonable attorneys' fees, court costs, and related legal
expenses as aforesaid.
Operating Agr. (dkt. no. 84-2) § 14.04.
GemShares has substantially prevailed against Lipton in this litigation. It
obtained summary judgment against him on its claim for breach of the operating
agreement and has already obtained significant relief, specifically an assignment of
Lipton's interest in SWW's patent application. Lipton's response to GemShares' motion
for fees largely consists of an attempt to relitigate the merits of the claim for breach of
the non-compete agreement, as well as other claims not at issue on the motion for fees.
These arguments are misplaced in the present context. The Court considered any
arguments appropriately made by Lipton when it ruled on the question of issue
preclusion, granted summary judgment in favor of GemShares on its claim for breach of
the non-compete agreement, and denied Lipton's motion for reconsideration.

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The real question is whether GemShares' fee request is "reasonable" within the
meaning of section 14.04 of the operating agreement. At first blush, there is a good
deal to suggest that the answer is no. The case appears to have been significantly
overstaffed. Time was charged by twelve attorneys at Gibbons P.C., eight of them
partners ("directors," as Gibbons calls them), as well as six billing non-attorneys at the
firm; seven attorneys from "local counsel" Levin Ginsburg, four of whom are partners;
and a partner at Vedder Price—in other words, twenty attorneys. And the time charged
for certain tasks appears to be seriously out of whack. For example, nearly $71,000
was charged for the brief in opposition to defendants' motion to dismiss and the brief in
opposition to defendants' motion for reconsideration of the ruling on the motion to
dismiss. Assuming an average rate of $500 per hour, that's 140 hours, which in the
Court's view is way more than was reasonably warranted on two briefs that only
involved a subset of the claims SWW asserted. Similarly, nearly $181,000 was charged
for preparing for, taking, and defending eight depositions, which means about $22,000
per deposition (44 hours if one assumes an average rate of $500), which again seems
to be well beyond the high end of the reasonableness scale. In addition, a total of
nearly $70,000 (140 hours at an assumed rate of $500 per hour) dealing with motions
by four law firms to withdraw from representing defendants, which seems outlandishly
high even though these were reasonably significant steps in the litigation.
But judicial review of "reasonable attorney's fees" required under a contractual
indemnity arrangement like the one at issue here is not the same as review of a fee
petition under a fee-shifting statute. See Medcom Holding Co. v. Baxter Travenol Labs.,
Inc., 200 F.3d 518, 521 (7th Cir. 1999). Specifically, "[u]nder the contract the initial

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question is whether the outlay [of fees] is one 'resulting from' [defendant's]
misrepresentation or breach of the agreement. If the answer is yes, then the next issue
is whether the attorneys' fees were reasonable," in other words, "were they fees that
commercial parties would have incurred and paid knowing that they had to cover the
outlay themselves." Id. And on the latter point, "[i]nstead of doing a detailed, hour-byhour review after the fashion of a fee-shifting statute . . ., the district court should
[should undertake] an overview of [plaintiff's] aggregate costs to ensure that they were
reasonable in relation to the stakes of the case and [defendant's] litigation strategy . . . ."
Id.
Judging from the invoices (in particular the documentation showing receipts and
current amounts due), however, the requested fees and expenses all got paid. This
"strongly implies that they meet market standards. The fees in dispute here are not piein-the-sky numbers that one litigant seeks to collect from a stranger but would never
dream of paying itself. These are bills that [plaintiff] actually paid in the ordinary course
of its business." Id. at 520. Given that highly significant circumstance—GemShares, a
sophisticated commercial party, actually incurred and paid the fees in question even
though it knew it might be stuck with the bill and unable to shift it—the Court concludes
that the overall fee-and-expense request meets the operating agreement's
reasonableness standard.
Lipton makes no significant argument that the requested fees do not meet the
contractual standard. He makes five points. The second, that the case is not over and
thus total fees cannot be determined, lacks merit. The question under the contract is
whether GemShares substantially prevailed, and it has. Perhaps GemShares could

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have waited until later to petition for fees, but by seeking a fee award earlier it
disadvantages only itself, because it is effectively foregoing fees that might be awarded
for work performed later. Lipton's third point is that he has not been able to present
evidence that would show GemShares' claims lack merit and that it has perpetrated a
fraud on the court. But Lipton had a fair opportunity to oppose GemShares' request for
summary judgment, so the contention that he has been prevented from defending
himself lacks merit. Lipton's fourth point also lacks merit; he says that if the case
progresses he may prevail on some issues. But as the Court understands GemShares'
representations, it will drop the rest of its claims once the Court rules on its current
requests for relief. At that point the case will be over.
Lipton's other two points are at least colorable. He argues that any fees and
expenses relating to claims that GemShares is dropping—mainly the patent
infringement claim, one supposes—should be eliminated, because it did not prevail on
those claims. And Lipton also argues that requests for fees for litigation other than the
present lawsuit should be deducted.
The Court begins with the latter point (Lipton's objection 1). GemShares is
asking to recover a little under $43,000 for fees associated with the GemShares v.
Lipton case that was filed in federal court in New York in 2017, and a little under
$166,000 for fees associated with SWW's bankruptcy. The fees related to SWW's
bankruptcy are not recoverable under the operating agreement's fee-shifting provision.
SWW was not a party to the contract, so it is not clear, at least not on the surface, how
fees incurred in SWW's bankruptcy (largely, the Court assumes in an effort to get the
automatic stay lifted so that GemShares could proceed against SWW) constitute fees

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incurred in, as required, "litigation brought to enforce any of the obligations of [the
operating] agreement or otherwise brought in connection with any dispute regarding this
agreement." And GemShares has not addressed this question on its merits, either in its
opening memorandum or even in its reply after Lipton made the argument. The Court
concludes that GemShares has forfeited the point. The same is true of the fees
incurred in the New York GemShares v. Lipton lawsuit. GemShares makes no effort to
explain how these fees are recoverable and thus has forfeited the point. The Court
reduces the fee request by $208,733.05 ($42,908.50 + $165,824.55) on account of
these objections.
See Pl.'s Ex. E (dkt. no. 297-2).
Lipton's other remaining point (objection 5) concerns claims on which
GemShares has not prevailed. As indicated, one assumes that this is directed at the
patent infringement claim, which GemShares has represented to the Court it will drop.
But this claim at least constitutes "litigation . . . otherwise brought in connection with any
dispute regarding [the operating] agreement," even if it arguably might not entail
"litigation brought to enforce . . . the obligations of [the] agreement." Specifically, the
patent infringement claim involves the very product whose development by Lipton in
connection with SWW constitutes the claimed breach of the non-compete agreement.
Thus the patent infringement claim was brought "in connection with" the litigation over
Lipton's claimed breach of the operating agreement. For this reason, the Court
overrules Lipton's contention that fees related to the patent infringement claim should be
deducted.
For these reasons, the Court awards GemShares a total of $1,322,609.06

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against Lipton in attorney's fees and costs but overrules GemShares' request for a fee
award against SWW.
2.

Assignment of "creations"
One aspect of GemShares' request for further injunctive relief is simple. It seeks

a further order with respect to SWW. The Court has already entered a judgment
against SWW (also known as American Diamond Mint, LLC) "assigning any rights [and]
interests in U.S. Patent Application No. 14/619,333, including any interests assigned or
owed to Secured Worldwide, LLC by its employees, officers, members, contractors, or
agents, including Jay Plourde, to plaintiff Gemshares LLC." Am. Judg. (dkt. no. 335).
At the request of the bankruptcy judge in the SWW case, GemShares now asks for an
order stating that "to the extent SWW retains any rights and interests in" the patent
application, those are assigned and transferred to GemShares. The Court believes it
already did that, but because there is apparently some doubt, this request is granted.
GemShares' other request is trickier: it seeks an order assigning to it "any other
of SWW's Creations (as defined by the Operating Agreement)" and enjoining the
defendants "from using or disclosing in any way any such Creations." Pl.'s Opening
Mem. at 18-19. The operating agreement defines "Creations" as follows:
"Creations" means any invention, discovery, idea, concept, original work
of authorship, design, process, development, improvement, or trade
secret, including all Confidential Information and all Proprietary
Information, as defined herein, whether or not patentable or registrable
under patent, copyright or similar laws, which the Interest Holder may
solely or jointly conceive or develop, or acquire free of restrictions, or
reduce to practice during the period of active involvement, as defined
below, (i) relating to "Gemstone Financial Products," as referenced in
Section 3.01 hereof, or relating to any present or reasonably
anticipated business and purpose of the Company, as set forth and
defined in Section 3.01 (a) and (b) hereof, or (ii) created or otherwise
developed at any time using equipment, supplies, facilities, information or
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proprietary rights, inventions or other property of the Company, including,
but not limited to, any or all of the Confidential Information, Proprietary
Information, Gemstone Financial Products, and the Patent Interest of the
Company.
Operating Agr. § 3.04(a)(1). The terms "Confidential Information" and "Proprietary
Information," used in the definition of "Creations," are defined as follows:
"Confidential Information" and "Proprietary Information" means information
(including information created by each Interest Holder) which is not
generally known about the Company and, including without limitation,
information about any and all other products, projects, developmental or
experimental work, computer programs, data bases, knowhow, processes,
formulas, customers, suppliers, business plans, marketing plans and
strategies, finances, or personnel, and information of the Company or
obtained from third parties under confidentiality agreements and,
including, without limiting the generality of the foregoing confidential and
proprietary information or matters within the scope of and as defined
under: the provisions and protective covenants of Article 12, Confidential
Information, hereof; Creations, as defined in Section 3.04(a)(1) hereof;
and Gemstone Financial Products, as defined in Section 3.01(a) hereof.
Confidential Information shall not include (i) information in the public
domain or (ii) information made available to each Interest Holder or the
Company from other sources which are not subject to an obligation of
confidentiality.
Id. § 3.04(a)(2).
This covers a wide range of territory. The Court quite seriously doubts that an
injunction that—as GemShares asks—quotes these provisions and directs the
assignment to GemShares of anything covered by them would meet the particularity
requirements for an injunction. Under the Federal Rules of Civil Procedure, an
injunction must "state its terms specifically; and . . . describe in reasonable detail—and
not by referring to the complaint or other document—the act or acts restrained or
required." Fed. R. Civ. P. 65(d)(1)(B)-(C). Under this rule, an injunction must "contain
enough content to permit effective enforcement," Auto Driveaway Franchise Sys., LLC
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v. Auto Driveaway Richmond, LLC, 928 F.3d 670, 677 (7th Cir. 2019), and this one
wouldn't under the circumstances, given the combination of its generality and breadth.
Presumably GemShares knows, or should know given its conduct of extensive
discovery (for which its attorneys have billed nearly $350,000), what exactly SWW and
Lipton have that should be conveyed pursuant to the operating agreement's terms. But
GemShares has not described this at all in its briefing. The Court concludes that
GemShares has failed to support a request for an injunction beyond what the Court has
already ordered (as supplemented in this decision) and therefore overrules the request.
3.

Asset freeze and collection-related discovery
GemShares expresses concern—citing allegations or findings of earlier asset

transfers—that Lipton will dispose of or transfer assets to avoid collection of a judgment,
and it asks the Court to freeze his assets. But a district court has "no authority to issue
a preliminary injunction preventing [a party] from disposing of [its] assets pending
adjudication of [the opposing party's] claim for money damages." Grupo Mexicano de
Desarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 333 (1999). The Court
overrules GemShares' request while noting that, as of the last court date in late
November 2019, Lipton was the debtor in a pending federal bankruptcy case. Thus if
he transfers assets without obtaining the bankruptcy court's approval, he faces criminal
penalties under 18 U.S.C. § 152, in addition to whatever civil proceedings might arise
from the transfer or disposition of assets in anticipation of a judgment.
The Court also notes that because GemShares has represented that it will
dismiss its remaining claims against Lipton upon disposition of the present motions, it
will at that point be able to obtain a final judgment against Lipton. This, in turn, will

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permit GemShares to serve appropriate process on Lipton and others who might hold
assets on his behalf to discover potentially leviable assets. Assuming GemShares
follows state-law procedure in aid of collection and execution, see Fed. R. Civ. P. 69(a),
Illinois procedure permits service of citations to discover assets upon a judgment debtor
and others who may be holding assets in which the judgment debtor has an interest,
see 735 ILCS 5/2-1402(a), and service of a citation operates as an injunction barring
transfer of assets of the judgment debtor or in which he has an interest pending
conclusion of the citation proceedings, see id. 2-1402(f)(1). In short, if GemShares acts
promptly in getting to the Court the necessary language for a judgment, disposing of its
remaining claims, and serving appropriate post-judgment process, it will effectively have
its asset freeze in relatively short order.
Finally, GemShares seeks leave to serve asset-discovery-related document
requests and interrogatories upon Lipton. The Court denies this request, without
prejudice to GemShares obtaining discovery in aid of the judgment, following
appropriate procedures, once a judgment is entered.
Conclusion
For the reasons stated above, plaintiff's motion for leave to file under seal [309] is
granted; plaintiff's motion for relief under Federal Rule of Civil Procedure 64 [306] is
denied without prejudice; and plaintiff's motion for enforcement of fee-shifting provision
and obligation to assign creations [297] is granted in part and denied in part as stated in
this order. By no later than 1/6/2020, plaintiff is to take appropriate steps to dismiss its
remaining claims as it has represented and is to make a filing that includes appropriate
language for entry of judgment against Lipton and for the allowed modification to the

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injunction order.
Date: January 2, 2020
________________________________
MATTHEW F. KENNELLY
United States District Judge

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