Beverly Hills Teddy Bear Company v. Best Brands Consumer Products, Inc.

Background

Beverly Hills Teddy Bear Company brought a copyright-infringement claim concerning its Squeezamals products. The remaining claim arose under the Copyright Act. The defendants had raised issues including standing, copyright ownership, and copyright validity.

After fact discovery closed, GennComm informed the defendants that it had a non-exclusive license agreement with Beverly Hills dating from June 16, 2017, and that the agreement covered the products involved in this case. Beverly Hills and GennComm were also litigating two related cases in California. The agreement addressed ownership of intellectual-property rights, including copyrights, trademarks, and patents. The court later joined GennComm as a necessary party, and Beverly Hills amended its complaint to add GennComm as a defendant.

The defendants moved for sanctions under Federal Rules of Civil Procedure 26(g) and 37(c), and under the court’s inherent power. They alleged that Beverly Hills had failed to identify relevant people and documents, withheld responsive documents, gave incomplete or false interrogatory answers, and that Beverly Hills’s CEO, David Socha, had given perjured deposition testimony. They requested dismissal, attorney’s fees, and costs. Beverly Hills argued that the agreement concerned patent rights, not the copyrights at issue, and did not cover the Squeezamals products. It maintained that its discovery responses were accurate and made in good faith.

Rule 26(a) disclosures

The court denied in part the defendants’ request for sanctions under Rule 37(c) based on Beverly Hills’s initial disclosures. Rule 26(a) requires a party to identify information and documents it may use to support its claims or defenses. Beverly Hills represented that it did not intend to use the GennComm-related people or documents to support its case. Because the rule did not require disclosure of information Beverly Hills did not intend to use in support of its claims or defenses, the court found that sanctions were not warranted for the initial disclosures.

Failure to supplement discovery

The court granted in part the defendants’ request for sanctions under Rule 37(c) based on Beverly Hills’s failure to supplement its discovery responses. Rule 26(e) requires a party to correct or supplement a discovery response when it learns that the response is materially incomplete or incorrect and the information has not otherwise been made known during discovery.

The court found that Beverly Hills failed to provide relevant and responsive information in its answers to interrogatories and its document production. For example, an interrogatory requested all agreements relating to the Squeezamals products and Beverly Hills’s claimed rights, but Beverly Hills identified transfer agreements with Benson Tijo while omitting the GennComm agreement. Other answers identified only two people most closely involved with the products, omitted information about GennComm’s claimed role in their design, and failed to identify prior-art information that Beverly Hills had cited in related litigation.

The court also found that Beverly Hills failed to produce documents responsive to requests concerning agreements, licenses, intellectual-property rights, prior litigation, third-party claims, and disputes involving the products. Beverly Hills did not disclose that it was withholding responsive materials based on objections, as required by the discovery rules. The court found that Beverly Hills had an obligation to produce the information, had at least acted with gross negligence, and withheld evidence relevant to standing, ownership of a valid copyright, and other claims and defenses.

Sanctions against counsel under Rule 26(g)

The court denied without prejudice the defendants’ request for sanctions against Beverly Hills’s attorneys under Rule 26(g). That rule requires attorneys to make a reasonable inquiry before signing discovery responses and to supervise the search for and production of relevant information. The court expressed concern that Beverly Hills’s counsel did not know about the GennComm relationship and questioned whether counsel had adequately supervised discovery. But the record did not contain enough information about counsel’s inquiry and management of discovery to justify sanctions at that time.

Sanctions under the court’s inherent power

The court also denied without prejudice the defendants’ request for sanctions under its inherent power. Sanctions for fraud on the court require clear and convincing evidence of bad faith and an intentional scheme to interfere with the court’s ability to decide the case fairly. The court found that the evidence raised suspicions about Beverly Hills’s conduct but did not meet that demanding standard. It stated that the incomplete deposition answers could have resulted from faulty memory or confusion and that the record did not clearly establish perjury or an effort to defraud the court.

Sanctions imposed

Judge Woods concluded that dismissal was not appropriate because the circumstances were not extreme and the defendants had not yet sought supplemental responses or additional depositions. As a sanction for Beverly Hills’s discovery failures, the court ordered that fact discovery be reopened at Beverly Hills’s expense.

The court also ruled that the defendants were entitled to reasonable attorney’s fees and costs attributable to the additional work caused by the discovery failures. This included work on the sanctions motion, work on the standing and joinder issues, and follow-up discovery needed to obtain complete and accurate responses.

Disposition

The defendants’ motion for sanctions was granted in part. The court ordered Beverly Hills to pay for supplemental discovery and the defendants’ reasonable fees and costs resulting from the discovery failures. The defendants could renew their requests for sanctions under Rule 26(g) and the court’s inherent power after further discovery or after an evidentiary hearing. The clerk was directed to terminate the pending motion.