Schedule A (SAD Scheme) Plaintiff Sanctioned for “Fraud on the Court”–Xped v. Respect the Look
This is one of the thousands of “Schedule A” cases, a phenomenon I’ve labeled the “SAD Scheme.” (Technically, the defendants in this case are enumerated on “Exhibit 1” instead of “Schedule A,” but same thing). The court describes the phenomenon:
This case is one of many in the Northern District of Illinois’s “cottage industry” of “Schedule A” cases. As of March 2022, over 1,900 such cases had been filed. These cases often proceed in rote fashion. Plaintiffs allege hundreds of defendants are infringing their trademarks and selling counterfeit goods. Fearing overseas defendants will abscond with ill-gotten gains if served with a lawsuit, plaintiffs seek an ex parte temporary restraining order (“TRO”) to freeze funds held by online merchants, then follow up with a request for a preliminary injunction. Few defendants appear in court, so plaintiffs move for default judgment and collect what funds they can.
For a fuller description of the litigation genre and its problems, see my paper.
[Note: one minor correction to the court’s description. The real action takes place at the TRO stage, not the preliminary injunction stage, where the account/fund freeze forces merchants to settle fast without appearing in court to contest the preliminary injunction.]
I’ve been shocked at how acquiescent judges have been towards SAD Scheme cases, especially in the Northern District of Illinois, where the judges see these cases frequently and surely have witnessed first-hand some litigation abuses. I don’t know if it’s because this plaintiff’s lawyer made more visible mistakes, or because the judge is relatively new to the N.D.Ill. bench and inherited this docket, but either way this judge recognizes and calls out the obviously sanctionable conduct that other judges might have overlooked.
What Went Wrong
This case involves Expeditee’s trademark, FLAGWIX, used to sell flags like the upper one in this screenshot. The defendant sold the flag below it. The court explains, “the two flags are not identical: the stripes run in different directions, the hands are slightly different, and other elements vary in size and position. More significantly, the Respect the Look flag does not bear the FLAGWIX mark.”
The judge concludes: “the Court finds that Expeditee, its former counsel, or both have engaged in serious misconduct in pursuing claims against Respect the Look…At key points in this litigation, Expeditee, Jones, or both have committed fraud on the court and acted in bad faith. Further, Jones violated Rule 11 by making false factual representations and frivolous legal arguments.” [note: Jones refers to Patrick M. Jones, now of AEGIS Law, the plaintiff’s lawyer at the relevant times who has since been replaced].
The judge recounts some errors in this case:
- The complaint lists the plaintiff as “Xped LLC,” but its actual name is “Expeditee LLC.”
- The complaint says the plaintiff is a Nevada LLC located in Chicago, but it’s actually a Delaware LLC located in Hanoi, Vietnam.
- The plaintiff represented that it needed an account freeze to keep defendants from expatriating cash out of the country, but Respect the Look is a US company based in Connecticut, so the risk of expatriation is low. (Jones disagreed but didn’t have evidence to support his disagreement).
- “Jones filed a certificate of service, declaring under penalty of perjury that he ’caused to be served true and accurate copies of’ the relevant documents ‘via email on the Defendants….’ But that was not true.” Jones asked PayPal to email the affected defendants and presumed that PayPal had done so, but it hadn’t.
- “When the Court asked how Expeditee could have a trademark infringement claim if Respect the Look removed the mark, Jones appeared to change his legal theory to a copyright claim.”
The Court Drops the Hammer
The court explains the limitations of Rule 11’s application to the SAD Scheme’s ex parte proceedings:
When Expeditee sought and obtained the TRO, Respect the Look was not a party and could not have been on notice of the litigation because the relevant filings were sealed. It would have been impossible for Respect the Look to give Expeditee “three weeks to decide whether to withdraw the supposedly offending pleading [and motion],” which is the purpose of Rule 11’s safe harbor. Withdrawing its false allegations and frivolous arguments after the fact would do nothing to punish Expeditee for its misconduct or remedy the harm it inflicted on Respect the Look. If Rule 11 permits Expeditee a consequence-free do-over, then the Rule is inadequate in these circumstances
These limitations clear the way for the court to grant sanctions using its inherent authority.
The court doesn’t sanction the incorrect plaintiff name in the caption, saying it “was merely clumsy lawyering, not bad faith to obstruct the judicial process.” The court similarly excuses the misreporting of the plaintiff’s state of incorporation, saying Jones replicated information from a trademark filing rather than doing his own independent investigation. (The court questions if there were improprieties with the trademark filing, though).
In contrast, the court sanctions the misrepresentation that the plaintiff had a principal place of business in Chicago. “It is wholly incredible that Jones could have believed in good faith that Expeditee’s principal place of business was in Chicago via the location of its U.S. agent, but still represent at the hearing that its home base was his law firm. Moreover, even if Jones somehow held this implausible belief, it would be based on a frivolous legal argument….a reasonably careful attorney in Jones’s position would have known that his client’s principal place of business had to be where its employees were located and could not have been at his own law firm’s office.”
The misrepresentation was material because it supported venue in Chicago. The “Court might have required Expeditee to put on evidence showing venue was proper before granting the TRO if Expeditee had told the truth.” (In practice, Northern District of Illinois judges routinely rubberstamp venue in SAD Scheme cases). The judge also says it may have questioned venue if it had realized that both the plaintiff and many of the defendants were located in Vietnam.
The judge also criticizes the assertion that Respect the Look would expatriate funds out of the US because “no reasonable pre-suit investigation could have led Jones to believe that Respect the Look was a foreign company.” To get around this, Jones argued that this was a Schedule A case with hundreds of defendants and it needed to move fast, so the diligence standard should be relaxed. The judge replies tartly: “This argument is a non-starter….These circumstances do not permit relaxing the standards for pre-suit investigation—if anything, they require the opposite. If a plaintiff seeks extraordinary relief with respect to many defendants, it should expect to put in a corresponding amount of effort.” (my emphasis).
The judge also criticizes Jones for claiming trademark infringement against Respect the Look. “Expeditee has never produced evidence that Respect the Look used the FLAGWIX mark or demonstrated any reasonable basis for believing it did, making any trademark infringement claim against Respect the Look frivolous. Jones cannot avoid sanctions through ignorance of this aspect of trademark law; lawyers must research the law before advancing a legal theory in court.” Jones claimed that Respect the Look’s flag cropped out the trademark from the plaintiff’s image, but the other differences between the images make that argument specious. Furthermore:
PMJ suggests that Respect the Look’s physical flags bear the mark, even if the pictures online do not. PMJ represents that it would have been cost prohibitive to purchase flags from each of the alleged infringers before filing suit and suggests that this cost-benefit analysis makes Jones’s pre-suit investigation reasonable. This is a non-sequitur. The fact that it might have been prohibitively expensive to obtain evidence by purchasing flags doesn’t get Expeditee any closer to having evidence that Respect the Look (or other Defendants who did not use the mark) infringed its trademark. A plaintiff bears the burden of clearly establishing that it is entitled to preliminary injunctive relief. A plaintiff in Expeditee’s position who wishes to obtain an extraordinary remedy does not have a license to fail to develop an evidentiary record or to pursue frivolous legal arguments. (emphasis added)
Finally, the judge criticizes Jones for representing that he served the defendants when he relied on PayPal to effectuate service to the defendants, which it didn’t do.
Being honest about how Jones had attempted to effectuate service might have given the Court pause about granting a preliminary injunction or extending the TRO, as there was a risk that some or all Defendants might not have received proper notice. By portraying service as having been properly effected, Jones increased the chances of receiving a preliminary injunction and decreased the chances of the Court dissolving the TRO. Because Jones’s filing the January 10 certificate of service was an intentional and material false representation or misleading omission, it was fraud on the Court…
Service is a critical moment in litigation. It marks the moment when defendants become obligated to defend their interests. If service is effectuated and defendants no-show, judges routinely hold that absence against the defendants. So if a plaintiff doesn’t tell the complete truth about service, it can improperly advance the case forward. As a practical matter, I doubt many defendants in SAD Scheme cases get proper service, yet judges routinely acquiesce to the plaintiffs’ representations about service. More rigorous judicial scrutiny of the service issue would materially reduce the SAD Scheme.
As you can see, this judge undercuts the prevailing belief among SAD Scheme plaintiffs that it’s OK that they’ll make a few errors of fact and law because they are dealing with a high volume. That’s not the way litigation rules work–the diligence standards apply equally with respect to every defendant and every fact claim. If they can’t do their homework properly, then the lawyers are disregarding their duties as officers of the court.
The court awards attorneys’ fees to Respect the Look:
If plaintiffs or their attorneys commit fraud on the Court or misrepresent the facts to obtain preliminary injunctive relief, it will be difficult to detect and sanction misconduct without the participation of attorneys on the other side. It is necessary to incentivize defendants to do what Respect the Look did here: hire a lawyer, defend its interests on an expedited basis, and bring deception to the Court’s attention. Awarding attorney’s fees provides this incentive because it makes fighting rather than giving up a more financially viable choice.
I agree. And yet…given these obvious concerns are present in every SAD Scheme case, I have been shocked at how rarely courts have awarded attorneys’ fees. I get so many emails from targeted defendants who simply cannot afford lawyers to defend their interests. More frequent fee-shifts to SAD Scheme defendants might motivate more defense lawyers to take the cases on spec.
As a sanction, the court also dismisses the claims against Respect the Look with prejudice. “if a party commits fraud on the court, particularly in an ex parte proceeding, it does not receive a second chance to bring viable claims.” This didn’t seem like much of a sanction because the plaintiff’s case seemed weak against Respect the Look.
The court could have punished the plaintiff and Jones even more. Some ideas that occurred to me: fines payable to the court for the extra work the plaintiff imposed on the judicial system, dismissals of other defendants who were equally affected by the plaintiff’s fraud, restitution to any defendants who were victims of the fraud but already resolved their cases, and forfeiting of the bond (if it’s still in place). Given the relatively limited nature of the sanctions (fee shift and dismissal only) compared to these alternatives, I feel like Expeditee and Jones got off easy.
Also, the court doesn’t mention referring Jones to the Illinois state bar. I think such referrals should be routine every time a court determines that a lawyer committed fraud on the court.
* * *
For taking a much-needed stand against the SAD Scheme, I’m awarding the Technology & Marketing Law Blog judge-of-the-day award to Judge Lindsay C. Jenkins, who was just appointed to the bench in February and is already distinguishing herself. I’m giving a bonus commendation to Brian Beck of Zuber Lawler LLP, who helped the judge see the problems with the SAD Scheme. That may not sound remarkable, but many talented SAD Scheme defense lawyers haven’t gotten the judicial relief he got.