Himark Biogas, Inc. v. Western Plains Energy LLC

Filing 61

MEMORANDUM AND ORDER ENTERED: that as the just, reasonable, proportional and related sanction imposed as a result of the prior orders 55 and 56 , the declaration of Himark's CEO 39 and all references to and evidence of the patent assignme nt dated in August of 2012 are stricken from the record or disregarded as inadmissible evidence, and the allegations in Himark's complaint that it is the owner of the patents in question are not contradicted by any evidence of record. Signed by District Judge Sam A. Crow on 7/21/17. Mailed to pro se party Himark Biogas, Inc. by regular mail (daw)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
HIMARK BIOGAS, INC.,
Plaintiff
vs.

Case No. 14-1070-SAC

WESTERN PLAINS ENERGY LLC,
Defendant.
MEMORANDUM AND ORDER
On March 16, 2017, the court denied the plaintiff Himark Biogas,
Inc.’s (“Himark’s”) motion to dismiss (ECF# 39) all claims, both its own and
the counterclaims of the defendant Western Plains Energy LLC (“WPE”),
remaining in this case. ECF #56. With that motion, Himark submitted its
CEO’s declaration which stated that, “Himark transferred its ownership
interest of the U.S. Patent Nos. . . . to BABI” and that, “[p]ursuant to the
Assignment, effective August 21, 2012, Himark did not retain any rights to
license the patents in the United States.” ECF# 39-1. Because there were no
exhibits supporting this declaration, because this declaration contradicted
the express allegations of Himark’s own complaint in this case, and because
WPE questioned this latest representation and sought discovery on it, the
district court allowed limited discovery on the issues raised in Himark’s
motion and the CEO’s declaration. ECF# 45.

A month later, on October 21, 2016, counsel for Himark moved
to withdraw at the client’s direction. ECF# 46. Counsel attached an email
from Himark’s CEO which read, “I am hereby directing you to immediately
withdraw from representing HiMark. We have decided to wrap up the
business of HiMark and want to limit all further out-of-pocket costs. We
understand that this will likely result in a judgment against the company, but
as the company has virtually no assets, we are indifferent to that
conclusion.” ECF# 46-1. Before filing this motion, Himark’s counsel indicated
in the email to WPE that he would be withdrawing, because his clients
intended to let Himark “disappear,” to allow the charter lapse, and to cease
Himark’s legal existence. ECF# 49-4, p. 2. The magistrate judge granted
counsel’s motion to withdraw. He also advised Himark of its need to have
legal representation and warned that failure to have legal representation
could result in dismissal. ECF# 48.
WPE’s discovery requests concerning patent ownership had
yielded only two documents--an assignment of the patents from Himark to
BABI and an accounting firm’s presentation prior to the assignment. ECF##
49-4, 49-5, and 49-6. Because Himark had failed to answer all of the
discovery requests, WPE filed a motion to compel. ECF# 49. The magistrate
judge granted this motion (ECF# 52), and then subsequently granted WPE’s
motion for sanctions (ECF# 55). In that last order, the magistrate judge
granted WPE’s request “to submit proposed facts consistent with its position
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that BABI is the alter ego of Himark and/or Himark’s alleged transfer of its
intellectual property to BABI was a ‘sham’ transaction which this court may
disregard.” ECF #55. Based on these rulings, the district court entered an
order on March 16, 2017, holding:
The district court accepted the magistrate judge’s uncontested findings
that Himark had failed to cooperate with the discovery requests
directed at its pending motion to dismiss. In doing so, Himark has lost
its legal position for seeking such relief at this time. Having frustrated
discovery on the matters in dispute, Himark cannot carry its legal and
factual burden for obtaining dismissal. Moreover, Himark’s legal
representatives have stated to counsel and the court that Himark
intends to abandon this litigation and is indifferent to the judgment
likely to be granted against it. Therefore, the court will deny Himark’s
pending motion to dismiss and awaits WPE’s submission of proposed
findings.
ECF# 56, p. 5. After this order, several months passed without either party
acting in this case, so the magistrate judge issued on June 1, 2017, an order
to show cause why claims should not be dismissed for lack of prosecution
was filed. ECF# 59. The deadline of June 30, 2017, passed with only WPE
filing a response. ECF# 60.
WPE indicates the parties’ remaining disputes are unresolved,
and to cure its prosecution of its counterclaims, it submits proposed findings
of fact. Id. at p. 1. These proposed findings, however, were not attached to
WPE’s response, but they were emailed to chambers. Thus, there has been
no effort to serve Himark with these proposed findings.
In the magistrate judge’s order on discovery sanctions, the
following was discussed:
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WPE notes that the question of ownership of the intellectual property
and patents which have been incorporated into WPE’s biogas plant
remains unresolved. Thus, WPE argues that after over two years of
litigation and arbitration and incurring hundreds of thousands of
dollars of attorney and expert fees, it still has no certainty as to
whether it might be subject to future litigation over this intellectual
property. WPE further suggests that this uncertainty has also hindered
WPE’s ability to bring in third-parties to assist WPE in attempting to
rehabilitate the biogas plant.
WPE seeks to continue this litigation for two reasons: (1) to
obtain a ruling from court premised on the findings of the Arbitration
Award, that WPE is in compliance with the terms of the License
Agreement and holds a valid license to use Himark’s intellectual
property in WPE’s biogas plant; and (2) to commence collection efforts
on the monetary portion of the confirmed Arbitration Award.
....
WPE requests that the court enter sanctions against Himark
pursuant to Fed. R. Civ. P. 37(b)(2)(A)(i). Thus, WPE seeks an order of
the court directing that the matters embraced in the order or other
designated facts be taken as established for purposes of this action.
Specifically, WPE asks the court to allow it to submit findings of fact
consistent with its position, i.e., that BABI is the alter ego of Himark
and/or Himark’s alleged transfer of its intellectual property to BABI
was a sham. As noted previously, Himark has failed to timely respond
to WPE’s motion.
Rule 37(b) governs sanctions for failure to comply with an order
of the court. . . . The court has broad discretion to impose any
sanction or combination of sanctions it deems appropriate, including
deeming as established the facts that the moving party was seeking to
establish. Any sanction under Rule 37 must be just. The court should
be guided by the concept of proportionality between offense and
sanction.
The court finds that the requested sanction is appropriate under
the circumstances here. . . . Thus, the court grants WPE’s motion and
permits WPE to submit proposed facts consistent with its position that
BABI is the alter ego of Himark and/or Himark’s alleged transfer of its
intellectual property to BABI was a “sham” transaction which this court
may disregard.
ECF# 55, pp. 3-5 (footnotes omitted). The court’s dispositive authority to
handle these proposed findings comes from the magistrate judge’s sanctions

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ruling. The court, however, recognizes that the content and scope of those
proposed findings remain a matter committed to its sound discretion.
“Sanctions must be ‘just’ and related to the claim ‘at issue in the
order to provide discovery.’” Klein-Becker USA, LLC v. Englert, 711 F.3d
1153, 1159 (10th Cir. 2013). The discovery that was frustrated here is
related to the questions of who owned the patents and who is the real party
in issue. These questions are basic both to Himark’s patent infringement
claims and to WPE’s counterclaims for declaratory judgment of noninfringement and invalidity of the patents. In its motion to dismiss filed in
July of 2016, Himark first raised the questions of patent ownership and real
party in interest relief and relied exclusively on the unsupported declaration
of its CEO. Himark produced during discovery a copy of the assignment
which is dated August 21, 2012. Eighteen months after this apparent
assignment, Himark filed the complaint starting this action and alleged there
that it owned the patents. ECF# 1, ¶ 33.
Prior to July of 2016 and Himark’s motion to dismiss, there was
no disputed issue over the ownership of the patents. As it had alleged,
Himark owned the patents, and this was one of the facts on which the
parties had arbitrated the case but also had agreed to reserve the patent
claim for subsequent adjudication in federal court. Ownership became an
issue when late in the case Himark submitted its CEO’s declaration in an
effort to end this patent litigation and to cast doubt over the entire case.
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WPE offers its proposed findings without linking them to specific
discovery requests to which Himark failed to respond or to specific facts
asserted in a motion to which Himark failed to respond. Thus, WPE does not
show its proposed findings to be based on defaulted responses to discovery
or to a motion. Instead, WPE is asking this court to make findings as to the
genuineness of a legal document, the assignment, based on no more than
unsupported allegations and to couch that finding as based on the
“overwhelming weight of the evidence.” This court is not in the practice of
doing that. The court, however, finds that a just, proportional, and related
sanction would be to strike and/or disregard as inadmissible the declaration
of Himark’s CEO (ECF# 39-1) and to strike and/or disregard as inadmissible
all references to and evidence of the assignment from the record. Such a
sanction is directly related to Himark’s last-ditch effort to create an issue to
undermine this litigation and is justified by Himark’s bad faith refusal to
cooperate in discovery on this ownership issue. The effect of this sanction is
that there is no evidence of record contradicting Himark’s complaint that it is
the owner of the patents. The court expects WPE will act promptly in filing
the appropriate motion to address the remaining patent claims and
counterclaims.
IT IS THEREFORE ORDERED that as the just, reasonable,
proportional and related sanction imposed as a result of the prior orders
(ECF## 55 and 56), the declaration of Himark’s CEO (ECF# 39-1) and all
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references to and evidence of the patent assignment dated in August of
2012 are stricken from the record or disregarded as inadmissible evidence,
and the allegations in Himark’s complaint that it is the owner of the patents
in question are not contradicted by any evidence of record.
Dated this 21st day of July, 2017, Topeka, Kansas.

___/s Sam A. Crow_________________________
Sam A. Crow, U.S. District Senior Judge

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