Refac International, Ltd., Plaintiff-appellant, v. Hitachi, Ltd.; Adry-mart, Inc. D/b/a Adray's; Albertson's,inc.; Astro; B.e. American Enterprises, Inc. A/k/a Baldwindiscount Store; Ballanda Corporation; Best Semiconductor,inc.; Boston Store; Brighter Sales International, Inc.;carter Hawley Hale Stores, Inc.; Cbm America Corporationd/b/a Cimatron Company and Q & Q Watches; Circuit Citystores, Inc. D/b/a Circuit City; Clarion Shoji Co., Ltd.(u.s.a.); Cmi Corporation; Consolidated Marketinginternational, Corp.; Fedco; the Federated Group, Inc.;feldmar Watch; Fortel Corporation; Frank Traders, Ltd.a/k/a Frank International, Ltd.; Lucky Stores, Inc. D/b/agemco; Chol No Lim D/b/a Hollytron; Kenny Kawah Ng D/b/ainvasion Time Company A/k/a Invasion Time Corp.; Kracoenterprises, Inc.; Larry Harmon Pictures Corp.; Leuk Fuchan D/b/a Lesa Watch Co.; Leo's Stereo, Inc. D/b/a Leo'sstereo; Los Angeles Dodgers, Inc.; Mattel, Inc.; 1554corp D/b/a the Mellinger Co.; Norman Maurer Productions,inc.; Osaka International Corp.; the Pep Boys Manny Mo &jack Cal D/b/a Pep Boys; Premium Crafters, Ltd.;robinson's; Sav-on-drugs, Inc.; Scisys Computer, Inc.;harold G. Spahn; Thrifty Corporation D/b/a Bif Fivesporting Goods and Thrifty Drug & Discount Stores; Tomixwatch & Trading Co., Inc.; Totenia Watch, Inc.; Twentiethcentury Fox Corporation; Unocal Corporation; Videoconcepts; International Electronics Prods., Inc. D/b/avideo Ten; Video Warehouse; Ata & James, Inc. D/b/avillage Video & Audio; Rudolf Wind D/b/a Virginiajewelry-watch Repair; Walconic Enterprise Usa, Inc.;wallace Berrie Licensing; the Walt Disney Company; R & Mparnassi, Inc. D/b/a World of Video & Audio; Lo Nan Fud/b/a a & a Electronics Co.; Soon Do Kim D/b/a Alvaradodiscount; Century 21 Electronics; Christian Brothers,inc.; Enterprex International Corp.; Ferrari Impex, Inc.;marketing West, Inc.; Network Time, Inc.; Specialtymerchandise Corporation; K Mart Corp. D/b/a K Mart Discountstores; Master Telecom, Inc.; Rees Electronics; Sharperimage Corporation D/b/a the Sharper Image; and Tele-comproducts, Inc., Defendants-appellees,brico International Corporation; Golden Pacificelectronics, Inc.; Hansen Sales Corp. D/b/a Travel-techinternational; Kin Son Electronics (usa), Inc.; Kawasakimotors Corporation D/b/a Kawasaki Motorcycles, U.s.a. Anddak Industries, Inc., Defendants/cross-appellants, 921 F.2d 1247 (Fed. Cir. 1990)

Refac International, Ltd. (Refac) appeals from an order of the United States District Court for the Central District of California, No. CV 87-6191 TJH (Bx) (May 15, 1989), entering judgment of noninfringement in favor of Hitachi, Ltd. et al. (appellees) and dismissing the action, pursuant to Rule 37(b) (2), Fed. R. Civ. P. Brico International Corporation et al. (cross-appellants) appeal from that part of the order denying sanctions for alleged violation of Rule 11, Fed. R. Civ. P. We affirm the order of dismissal, award attorney fees and double costs to appellees pursuant to Rule 38, Fed. R. App. P., and remand for consideration of cross-appellants' request for an appropriate Rule 11 sanction.

BACKGROUND

As stated in its 1987 Annual Report, Refac's primary business is licensing and technology transfer, with a staff of patent law experts "prepared to litigate without financial risk to its clients."¹  According to Refac's then president, Phillip Sperber, "It only makes sense to use the cost of litigation as a bargaining leverage to force a settlement on terms favorable to the party that can litigate the matter to death without worrying about the cash flow." Sperber, Overlooked Negotiating Tools, Les Nouvelles, June 1985, at 81 (cited in Refac Int'l, Inc. v. IBM, et al., 710 F. Supp. 569, 571, 11 USPQ2d 1476, 1478 (D.N.J. 1989)).

On September 17, 1987, Refac, alleged owner of United States Patent Nos. 3,744,049 ('049), 3,855,783 ('783),²  3,955,355 ('355) relating to liquid crystal display (LCD) technology, filed suit charging infringement of those patents by one hundred and eighteen original defendants (some have since entered settlements with Refac; some were Refac's own licensees when it sued them). Refac contended that the sale of any LCD device infringed its patents. See, e.g., Transcript of July 12, 1988 Hearing on Motion to Compel Discovery at 4; Supplemental Answer to Interrogatories Pursuant to Order of Court dated July 12, 1988 at 2.

Defendants attempted through interrogatories and requests for document production to discover the bases for Refac's allegations of infringement. Defendants found it necessary to move to compel discovery, pursuant to Rule 37, Fed. R. Civ. P., ³  and moved for sanctions pursuant to local rules. After a July 12, 1988 hearing on the motions, the magistrate⁴  that day ordered the following:

Not later than October 28, 1988, plaintiff shall respond to pending discovery specifically stating (1) which products are infringing o [f] each defendant; (2) which elements of each claim are present in the accused devices and (3) which elements of each claim are present in each accused device under the doctrine of equivalents. Plaintiff's counsel is warned that he shall henceforth meet discovery deadlines, or else before they expire obtain an extension of time from this court. Further delinquencies shall be punished, but any discovery otherwise due before July 26, 1988, shall be timely if made by that time.

The magistrate sanctioned Refac's attorney in the amount of $250 for refusal to cooperate in discovery, a direct violation of Local Rule 7.15.4, Central District of California Local Rules.⁵ 

On October 28, 1988, Refac filed its "Supplemental Answer to Interrogatories Pursuant to Order of Court dated July 12, 1988" (the October 28 response). Refac claimed that '049 claims 1-9 were infringed by any LCD: "It is plaintiff's position that all LCD's have the elements defined by, and included in, said Claims 1 to 9." Refac stated that its attached "Element by Element Analysis of Why Patent No. 3,744,049 Is Infringed By Each Product Listed In The Case" identified which elements of the claims were present in each of what it called the accused devices. Refac did not identify the elements of any specific product corresponding with the patent claim elements, made no reference to literal infringement or infringement by equivalents, and provided no analysis whatever respecting the '355 or '783 patents.⁶ 

On February 7, 1989, defendants DAK Industries and Kawasaki Motors Corp. filed a motion for dismissal and award of attorney fees, pursuant to Rules 11⁷  and 37, Fed. R. Civ. P., and 28 U.S.C. § 1927,⁸  on the grounds: (1) Refac violated the February 12, 1988 order commanding response to interrogatories seeking infringement contentions; (2) Refac admitted that its complaint was not based on comparison of any accused products to the asserted patent claims; (3) Refac filed its complaint in bad faith for harassment.

On February 12, 1989, cross-appellants filed an additional motion for sanctions, requesting discovery compulsion, evidence exclusion, taking particular matters as established, judgment of invalidity, judgment of noninfringement, and/or dismissal, pursuant to Rules 11, 26,⁹  37, Fed. R. Civ. P., Local Rules 6,¹⁰  7.15.2,¹¹  and 27, and 28 U.S.C. § 1927. Other defendants joined the motions.

After a hearing on the motions, the magistrate found that Refac: inadequately responded to discovery requests respecting the three issues set forth in the July 12, 1988 Order; failed to establish sufficient excuse for its delinquency; deliberately and knowingly violated the order; failed to tender specific discovery requested by movants; and prejudiced defendants by the delay. Respecting discovery generally, the magistrate found that Refac had steadfastly, consistently, and deliberately denied the defendants the discovery they diligently pursued, stating:

[D]efendants have labored under the cloud of the suit which plaintiff has prevented them from effectively defending, causing them loss of business and business opportunities and considerable legal expenses. It is not the duty of defendants, as plaintiff suggests ... "to make their own technical analysis of infringement in order to intelligently decide whether to fight or settle."

Refac Int'l, Ltd. v. Hitachi, Ltd. et al., No. CV 87-6191 TJH (Bx), Order at 8 (C.D. Cal. Feb. 22, 1989). The magistrate said Refac's inability to respond fully to discovery requests raised at least the suspicion that the action was originally filed in violation of Rule 11. However, the magistrate denied without prejudice the Rule 11 motions, suggesting they be renewed before the district court.

Accordingly, in a February 22, 1989 order, the magistrate stayed the action, recommending that the district court: (1) direct entry of a judgment of noninfringement as to each defendant; (2) direct entry of a judgment dismissing Refac's complaint with prejudice; and (3) consider initiating a Rule 11 inquiry. The magistrate ordered Refac to pay defendants' reasonable attorney fees and costs for the motions pursuant to Rule 37(a) (4), Fed. R. Civ. P.

Cross-appellants thereafter filed in the district court a motion for sanctions, pursuant to Rules 11 and 26(g), Fed. R. Civ. P., Local Rule 27, Central District of California Local Rules,¹²  28 U.S.C. § 1927, and 35 U.S.C. § 285.¹³  Cross-appellants sought a judgment of invalidity, attorney fees, and other monetary sanctions. Refac filed a motion for reconsideration of the magistrate's February 22, 1989 order. The district court consolidated the motions and heard oral argument on April 3, 1989.

At the hearing, Judge Hatter stated his intent to deny the motion for Rule 11 sanctions, on the basis that "I don't believe it is necessary at this time." The court further stated its intent to dismiss pursuant to Rule 37(b) (2) (C) without prejudice to refiling on other products. The court indicated that if Refac refiled, the court would appoint an expert to investigate the basis of the suit.

On May 15, 1990, the district court ordered, pursuant to Rule 37(b) (2), Fed. R. Civ. P., that: (1) a judgment of noninfringement be entered respecting each of defendants' products having an LCD made, used, imported, sold or offered for sale before May 15, 1990; and (2) the action be dismissed with leave to amend the complaint to assert infringement against other products. The district court further ordered, without giving reasons, that the motion for Rule 11 sanctions be denied, awarded defendants their fees in opposing Refac's motion for reconsideration, and did not rule on any of the other asserted bases for sanctions.

ISSUES

1. Did the district court abuse its discretion in applying Rule 37 sanctions?

2. Did the district court abuse its discretion in declining to apply Rule 11 sanctions?

DISCUSSION

Rule 37 Sanctions

This case presents a procedural question not unique to patent law; thus, the law of the Ninth Circuit applies. See Badalamenti v. Dunham's, Inc., 896 F.2d 1359, 1362, 13 USPQ2d 1967, 1970 (Fed. Cir. 1990); Panduit Corp. v. All States Plastic Mfg. Co., 744 F.2d 1564, 1574-75, 223 USPQ 465, 471 (Fed. Cir. 1984).

In reviewing Rule 37 sanctions, the question is whether the district court abused its discretion. Halaco Eng'g Co. v. Costle, 843 F.2d 376, 379 (9th Cir. 1988). Severe sanctions such as taking allegations as established and awarding judgment on that basis, dismissal and default judgment are authorized only in extreme circumstances. United States for the Use and Benefit of Wiltec Guam, Inc. v. Kahaluu Constr. Co., Inc., 857 F.2d 600, 603 (9th Cir. 1988). To warrant imposition of these severe sanctions, the violations must be due to willfulness, bad faith or fault. Id. The district court must take into account: (1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its docket; (3) the risk of prejudice to the defendants; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions. Id.; Malone v. United States Postal Serv., 833 F.2d 128, 130 (9th Cir. 1987), cert. denied, 488 U.S. 819, 109 S. Ct. 59, 102 L. Ed. 2d 37 (1988).

A. Refac's Noncompliance with the Discovery Order

Refac argues that the district court abused its discretion when it acted on a clearly erroneous finding of noncompliance with the magistrate's July 12, 1988 order. Further, Refac contends that no facts support the court's implicit bad faith finding. In its brief, Refac refers us, irrelevantly, to a response it filed in a different district court action.¹⁴ 

The finding of noncompliance with the July 12, 1988 order is not clearly erroneous. On the contrary, noncompliance is clear from the very face of the October 28 response because that response: (1) was not directed to any specific defendant or any specific accused products; (2) failed to identify the elements of specific products corresponding with patent claim elements; (3) failed to include any analysis of the '355¹⁵  or '783¹⁶  patents in suit; and (4) was based on the admittedly erroneous assertion that any LCD infringed the '049 patent.¹⁷ 

The magistrate's purpose in issuing its order was to require Refac to establish with particularity as to each defendant and each product the basis for its infringement allegations:

At least one of the defendants reads my order to require you to produce what is called an infringement analysis. Certainly it was the intent of the order, and I think it may be fairly read to require that you tell each of the defendants what of their products and what portions of their products infringe what portions of your patents.

Transcript of February 22, 1989 Hearing at 9. Refac's generalized response violated both the letter and the spirit of the order. The district court correctly determined that Refac failed to comply with the July 12, 1988 order.

Though the district court did not enter a written finding on the matter, it affirmed the magistrate's order in which willfulness was explicitly found. The parties have assumed that the district court found Refac's conduct willful. And rightly so. The extent of Refac's noncompliance in itself supports the willfulness finding. Its inability to spell out a proper basis for charging infringement more than a year after bringing suit highlights its willfulness. Further, the magistrate's clearly correct findings that Refac steadfastly, consistently and deliberately denied discovery to which defendants were entitled, that Refac's counsel was grossly delinquent in keeping promises to opposing counsel, in honoring their other duties imposed by the Federal Rules of Civil Procedure, and in according opposing counsel rudimentary professional courtesy also support the willfulness finding.

Refac contends that its compliance with numerous other discovery requests and interrogatories indicates its good faith. The argument is as specious as that of X, on trial for murdering Y, that he did not murder Z. It could persuade no one that any error occurred in the determination that Refac willfully failed to comply with the magistrate's July 12, 1988 order.

Refac argues that the district court abused its discretion in applying a sanction of dismissal in light of its good faith, compliance with other discovery requests, the availability of less drastic sanctions, and the absence of explicit warning.

Refac's bad faith and noncompliance with the magistrate's order are addressed above. Respecting less drastic sanctions, the magistrate recommended disposing of the action because "it would be unjust to permit this action to continue" in light of Refac's refusal to cooperate in the face of the magistrate's previous warnings and sanctions. February 22, 1989 order at 9. The district court took into consideration the five Malone factors, including availability of lesser sanctions, indicating that it could have dismissed with prejudice rather than providing Refac the opportunity to amend alleging infringement of products other than those disposed of in its order. The sanctions applied were carefully crafted to end Refac's discovery abuses, and any lesser sanction would have been insufficient in light of Refac's conduct. Refac falls far short of showing abuse of discretion in the selection of an appropriate sanction.

In arguing for the need of warning, Refac cites United States v. National Medical Enters., Inc., 792 F.2d 906, 910 (9th Cir. 1986) and Kahaluu Constr., 857 F.2d at 604-05. National Medical is distinguishable because the Ninth Circuit considered the dismissal an exercise of the court's inherent powers rather than a Rule 37(b) dismissal. In Kahaluu, the court stated that a warning is not always required to dismiss with prejudice, particularly where, as here, there are egregious circumstances. Kahaluu Constr., 857 F.2d at 600. We view the harm to the present defendants in being rendered unable to prepare their defense as the type of egregious circumstances referred to in Kahaluu.

Finally, Refac wastes the time and resources of the court in asserting an absence of warning. First, Rule 37 itself provides for dismissal and default judgment for failure to obey a discovery order. Presumably counsel was aware of the order and could hardly have been surprised. Indeed, the magistrate gave more than adequate warning in his July 12, 1988 hearing, in plenty of time for Refac to rectify its conduct when he stated his intent to punish further delinquencies. The magistrate stated in his order:

Plaintiff's counsel is warned that he shall henceforth meet discovery deadlines, or else before they expire obtain an extension of time in this court. Further delinquencies shall be punished ...

Refac Int'l, Ltd. v. Hitachi, Ltd. et al., No. CV 87-6191 TJH (Bx), Order at 2 (C.D. Cal. July 12, 1988). The dismissal comported with Ninth Circuit law.

Refac argues, disingenuously, that the district court "rubber stamped" the magistrate's findings, accepting them without considering Refac's objections and denying de novo review. The argument is belied by the record of the April 3, 1989 hearing, during which the district court demonstrated its intimate knowledge and treatment of the facts, the magistrate's findings, and Refac's objections.

Refac also contends that the award to defendants of attorney fees incurred in opposing its motion for reconsideration was an abuse of discretion. Refac's position on that motion, however, was so clearly unjustified that it would have been unfair and unjust to require defendants to pay for contesting it. The attorney fees award was proper.

"If a court of appeals shall determine that an appeal is frivolous, it may award just damages and single or double costs to the appellee." Rule 38, Fed. R. App. P. Refac's two main arguments (that it did comply with the order and that the court abused its discretion in choosing too harsh a sanction) are purely conclusory and clearly contrary to the record, as revealed by the above discussion.

Refac professes compliance with the magistrate's order, but the very face of its October 28 response belies that assertion. Refac professes good faith, but its conduct throughout this action belies good faith. Refac contends that the dismissal was contrary to Ninth Circuit law, but the cases it cites do not support its argument. Refac's attack is primarily on fact findings or discretionary matters, all of which are amply supported by the record, a record Refac simply ignores. Nowhere does Refac show any finding to have been clearly erroneous. Nowhere does Refac show any basis for finding an abuse of discretion. Refac nowhere shows any error of law and nowhere argues for any change in the law. Refac's appeal is frivolous; accordingly, we sanction Refac and require it to pay to defendants the sum of their attorney fees and double their costs on this appeal.¹⁸ 

Rule 11 Sanctions

The Supreme Court recently enunciated the standard for review of Rule 11 sanctions: all aspects of Rule 11 determinations are reviewed under an abuse of discretion standard. Cooter & Gell v. Hartmarx Corp., --- U.S. ----, ----, 110 S. Ct. 2447, 2461, 110 L. Ed. 2d 359 (1990).

Cross-appellants argue that Refac's complaint and its October 23 response were signed by its counsel without conducting a reasonable inquiry into whether the papers were well-grounded in fact or warranted by law. Cross-appellants contend that " [a] district court has no discretion to refuse to declare a Rule 11 violation where the uncontroverted facts disclose a failure to make 'reasonable inquiry.' "

The magistrate stated that he was "expressly going to duck the Rule 11 question", Transcript of February 22, 1989 Hearing at 39, recommending in its order issued the same day that the motions be renewed before the district court because Refac's inability to respond fully to discovery requests and Refac's counsel's responses at the July 12, 1988 hearing raised at least the suspicion that the complaint was signed in violation of Rule 11.

At the April 3, 1989 hearing, the district judge said he intended to deny the motion for Rule 11 sanctions because "I don't believe it is necessary at this time" and that he would consider the motion for Rule 11 sanctions if the complaint was amended. Transcript of April 3, 1989 Hearing at 14. We cannot know from the district court's naked statement in its order, "Defendants' motion for Rule 11 Sanctions be, and hereby is, denied", whether it determined that Refac's counsel did or did not violate Rule 11 by signing the complaint without reasonable inquiry respecting infringement by each of 118 defendants, including its own licensees. The Supreme Court stated in Cooter & Gell, "In considering whether a complaint was supported by fact and law 'to the best of the signer's knowledge, information, and belief,' a court must make some assessment of the signer's credibility," 110 S. Ct. at 2459, and "a district court's ruling that a litigant's position is factually well grounded and legally tenable for Rule 11 purposes is similarly fact-specific." 110 S. Ct. at 2460. We may speculate that the court denied the motions for Rule 11 sanctions in light of the Rule 37 sanction imposed, but speculation is an inappropriate basis for review of that denial and filing an unfounded complaint would be of at least equal and normally greater impact than the discovery abuse sanctioned here. Cooter & Gell, --- U.S. at ----, 110 S. Ct. at 2457 (Rule 11 is aimed at curbing baseless filings which put the machinery of justice in motion, burdening courts and individuals alike with needless expense and delay).

Rule 11, Fed. R. Civ. P., provides in pertinent part:

If a pleading, motion, or other paper is signed in violation of this rule, the court, upon motion or upon its own initiative shall impose upon the person who signed it, a represented party, or both, an appropriate sanction....

(Emphasis added). While the choice of "appropriate sanction" is discretionary, the imposition of sanctions once a violation has been found is mandatory.¹⁹  5 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure, at 223 (and cases cited therein) (Supp.1989). Rule 11 was amended in 1983 to include the "shall impose" mandatory language. The advisory committee notes to Rule 11 regarding the 1983 amendment indicate that the purpose of adding the mandatory language was to reduce the reluctance of courts to impose sanctions. See also Zaldivar v. City of Los Angeles, 780 F.2d 823, 829 (9th Cir. 1986) (Rule 11 is intended to be vigorously applied to curb widely acknowledged abuse). The advisory committee notes further recognize both the mandatory and discretionary aspects:

And the words "shall impose" in the last sentence focus the court's attention on the need to impose sanctions for pleading and motion abuses. The court however, retains the necessary flexibility to deal appropriately with violations of the rule. It has discretion to tailor sanctions to the particular facts of the case, with which it should be well acquainted.

We heed the words of the Court in Cooter & Gell, --- U.S. at ----, 110 S. Ct. at 2459: "Familiar with the issues and litigants, the district court is better situated than the court of appeals to marshall the pertinent facts and apply the fact-dependent legal standard mandated by Rule 11." Accordingly, we remand to the district court for it to determine whether Rule 11 was violated when the complaint was signed and, if it so finds, to impose an appropriate sanction upon the person who signed it or upon Refac or upon both.

COSTS AND SANCTIONS

Refac's sanction for bringing a frivolous appeal is payment to defendants of the sum of their attorney fees and double their costs in responding to the appeal. Each party is to bear its own costs respecting the cross-appeal.

AFFIRMED-IN-PART AND REMANDED.

ORDER

Upon consideratin of applications for attorney fees and costs, and Refac International, Ltd.'s (Refac's) responses thereto, it is OFDERED:

 That Refac shall pay to the following parties the amounts indicated: Kawasaki Motors Corp., U.S.A...................... $ 70,343.12 Brico International Corporation, Golden Pacific Electronics, Inc., Hansen Sales Corp., dba Travel Tech International, Kinson Electronics (USA, Inc.) .... $124,110.12 Tele Com Products Corp............................ $ 6,063.62 Leo's Stero, Inc.................................. $ 5,927.41 The May Department Stores Company ................ $ 2,880.27 Circuit City Stores, Inc.......................... $ 2,799.25