Lead Creation Inc. v. The Partnerships and Unincorporated Associations…

Background

Lead Creation Inc. alleged that five defendants infringed U.S. Patent No. 7530706, which covers a particular flashlight design. The court first granted a temporary restraining order after giving the defendants an opportunity to appear, and later granted a preliminary injunction when the defendants had not appeared. Two defendants—Shenzhen Sen Zhi Run Dian Zi Shang Wu Co. Ltd. and Haikoushi Lvxuan Trading Co., Ltd.—then appeared and moved to vacate both orders.

Those defendants argued that the patent was invalid and that Lead Creation had violated its duty of candor and good faith in dealing with the United States Patent and Trademark Office. The court vacated the temporary restraining order and preliminary injunction on those grounds, among others. Lead Creation then voluntarily dismissed the case. The court determined that the dismissal was effective without further court action and later allowed Lead Creation’s counsel, Michael Hurckes, to withdraw.

The defendants obtained post-dismissal discovery orders requiring Lead Creation and its corporate officer, Xiaodong Fan, also known as Justin Lewis, to produce documents and appear for remote depositions. The opinion states that neither Fan nor anyone purporting to represent Lead Creation complied with those orders. The defendants then filed three motions: one to recover on the temporary restraining order bond, one seeking attorneys’ fees from Lead Creation and Hurckes, and one seeking sanctions against Lead Creation and Fan.

Sanctions Motion

The court applied Federal Rule of Civil Procedure 37, which generally requires a party that violates a discovery order to pay reasonable expenses caused by the violation unless the failure was substantially justified or an award would be unfair. The court found that the required discovery order existed, that it was served, and that Lead Creation and Fan did not comply. It therefore granted the defendants’ request for reasonable attorneys’ fees and costs caused by the discovery violations. The defendants sought $3,837.50, but the court reserved judgment on the amount because they had not submitted contemporaneous billing records or invoices.

The court also granted the request to treat certain matters as established for purposes of the action. Specifically, it deemed established that Lead Creation had no flashlight sales or manufacturing before or after the temporary restraining order and that the patent’s patentees and assignors intentionally failed to make a required patent-maintenance payment to the United States Patent and Trademark Office. The court found this sanction appropriate even though the case had been dismissed because the discovery had been sought partly to support the bond motion.

The court denied the request for a filing injunction barring Lead Creation and its successors or assigns from bringing claims based on the patent. Although the court noted another similar lawsuit and criticized aspects of Lead Creation’s conduct, it concluded that the two cases did not establish a sufficient pattern of harassing or vexatious litigation. It also found that the sanctions already granted might adequately protect the courts and other parties.

Temporary Restraining Order Bond

Federal Rule of Civil Procedure 65(c) permits recovery from posted security when a party was wrongfully restrained. The court explained that voluntary dismissal or dissolution of an injunction does not automatically establish entitlement to the bond. Instead, the defendants had to show that they were wrongfully restrained—that is, that they had the right to do what the injunction prevented them from doing.

The court granted the motion. In a patent case, a party seeking a preliminary injunction must show a likelihood of success regarding the patent’s validity. The court had already found that the defendants raised substantial questions about the patent’s validity, based partly on foreign decisions invalidating materially identical patents and partly on evidence concerning Lead Creation’s dealings with the United States Patent and Trademark Office. Lead Creation had not shown that the invalidity defense lacked substantial merit. The court therefore concluded that the defendants were wrongfully enjoined.

That conclusion created a presumption that the defendants could recover provable damages from the bond. The defendants submitted a declaration and sales records showing that their lost profits during the period covered by the temporary restraining order and preliminary injunction—January 26, 2023, through March 8, 2023—likely exceeded the $15,000 bond by a considerable margin. The court granted recovery of the bond in its entirety.

Separate Attorneys’ Fees Motion

The defendants also sought attorneys’ fees under Section 285 of the Patent Act from Lead Creation and Hurckes. The court denied that motion. It explained that a party must be a “prevailing party” to receive fees under that provision, meaning that the party must obtain a court-sanctioned material change in the parties’ legal relationship.

Lead Creation’s voluntary dismissal did not satisfy that requirement because it was without prejudice, did not require judicial action, and left Lead Creation free to refile. The court also stated that its determination that the defendants had been wrongfully enjoined was not a decision on the patent’s merits and therefore did not change the parties’ legal relationship for prevailing-party purposes.

Disposition

The court granted the sanctions motion in part and denied it in part: it granted attorneys’ fees and the request to establish specified matters, while denying the filing-injunction request. It granted the motion to recover the temporary restraining order bond and denied the separate motion for attorneys’ fees under Section 285. The defendants were directed to submit a proposed order releasing the bond and documentation supporting their discovery-related fees and costs.