Ninth Circuit Upholds $5K Sanctions Award Against Attorney Based on Factual Misrepresentations in Trade Secrets Dispute

Earlier this week, the Ninth Circuit approved a district court order from the Northern District of California imposing $5,000 in sanctions against a plaintiff’s attorney for factual misrepresentations made in an underlying trade secret case lawsuit brought by a toy inventor.

According to the complaint, California toy designer Jason Heller wanted to get a price quote for a prototype of a robotic hamster toy he had designed.  He entered into NDAs with two Hong Kong toy companies and handed over information about his hamster toy idea.  Heller accepted the quote, and the companies built a prototype that Heller eventually pitched to Hasbro and Mattel.  At the 2009 Dallas Toy Fair, Heller saw some Zhu Zhu Pets toy hamsters that allegedly had the same features and accessories as the toy described in the materials he gave to the Hong Kong companies.  The alleged knock-off hamsters were being sold by defendant Cepia.  In 2011, Heller filed suit against Cepia, alleging that it developed a line of toys based on trade secrets he gave to the two Hong Kong companies.  On March 29, 2012, the court granted the parties’ stipulated request and dismissed the complaint against Cepia with prejudice.  After reviewing discovery in the case, Heller acknowledged in the stipulated request for dismissal that “he did not find any evidence that Cepia had any access to any of Mr. Heller’s hamster toy ideas or information” and therefore was “satisfied that Cepia independently developed its toy hamsters and toy hamster accessories marketed under the Zhu Zhu Pets brand and is therefore voluntarily dismissing his lawsuit against Cepia.”

The district court ordered Heller’s attorney Robert C. Matz of Markman & Matz LLP to pay $5,000 in sanctions because two allegations in the complaint were not “grounded in fact.”  In particular, the district court found that there was no factual support for the allegations that: (1) sign-in sheets “appeared to confirm” that Cepia had visited the premises of a co-defendant and (2) Heller had confronted some of the defendants, who then “refused” to provide information about their relationship with Cepia.

Matz appealed, arguing in his appellate brief that “in hindsight, that his wording could have been better,” but that he subjectively intended a letter he wrote to one of the manufacturers to constitute a method of “confront[ing]” them on the issue.

A three-judge panel at the Ninth Circuit sided with the lower court and affirmed its decision under Federal Rule of Civil Procedure 11, noting that even though the complaint wasn’t completely baseless, “the presence of some supported allegations in a pleading does not necessarily shield from sanctions an attorney who also includes unsupported allegations.”  Addressing the amount of its sanction, the court said that “[s]uch a sanction is hefty, especially given that the district court did not conclude that the complaint was baseless, but the amount is not so unreasonable that it constitutes an abuse of discretion.”