FM Industries, Inc. v. Citicorp Credit Services, Inc.

In the

United States Court of Appeals
For the Seventh Circuit

Nos. 08-3154, 08-3781, 09-1382, 09-1406 & 09-1637

FM INDUSTRIES, INC.,
Plaintiff-Appellant,
v.

C ITICORP C REDIT S ERVICES, INC., et al.,

Defendants-Appellees.
Additional appeals of:

W AYNE D. R HINE
W ILLIAM T. M C G RATH

Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 07 C 1794—Suzanne B. Conlon, Judge.

A RGUED N OVEMBER 3, 2009—D ECIDED JULY 22, 2010

Before E ASTERBROOK, Chief Judge, and W OOD and
T INDER, Circuit Judges.
E ASTERBROOK, Chief Judge. FM Industries sued Citicorp
Credit Services for copyright infringement. The copy-
righted work is computer software—“The Ultimate
2 Nos. 08-3154, 08-3781, 09-1382, 09-1406 & 09-1637

Collection and Network Software” or TUCANS—designed
to help lawyers to collect debts and lenders to monitor
how its lawyers are doing. The suit also named the
Law Offices of Ross Gelfand, LLC, contending that it
continued using the software after Citicorp dropped its
license and told outside lawyers to stop using TUCANS.
(There were still more defendants, whose dismissal, see
2007 U.S. Dist. L EXIS 90129 (N.D. Ill. Dec. 5, 2007), is no
longer contested.) The “copying” in question is the
transfer of software from a computer’s hard disk to its
random access memory, without the permission of the
copyright proprietor. Citicorp licensed the TUCANS
program, but FM Industries contends that Citicorp did not
pay the agreed price and induced its outside debt-collec-
tion lawyers to go on using the program (thus making
extra copies in computers’ memory) after the license
expired.
The district court dismissed FM Industries’ request for
damages because it failed to register the copyright until
2007. “Statutory damages” are available only for infringe-
ment after registration, and then only if the registration
occurred within three months of the work’s publication
(2004 for this version of TUCANS). 17 U.S.C. §412; see also
Reed Elsevier, Inc. v. Muchnick, 130 S. Ct. 1237 (2010). FM
Industries never tried to show actual damages. See 2008
U.S. Dist. L EXIS 3575 (N.D. Ill. Jan. 14, 2008). That left
questions about prospective relief. Defendants contended
that Michael Friedman (FM Industries’ president and
principal shareholder) owns the copyright as the recipient
of assets from FM. Ware Industries, Inc., when it dissolved
in 2004. This would imply that the suit must be dis-
Nos. 08-3154, 08-3781, 09-1382, 09-1406 & 09-1637 3

missed under Fed. R. Civ. P. 17(a), because not filed in the
name of the real party in interest. Defendants also main-
tained that no infringement was ongoing or in prospect.
The district judge concluded that material disputes pre-
vented summary judgment on those questions and set
the case for trial. 2008 U.S. Dist. L EXIS 20670 (N.D. Ill.
Mar. 17, 2008).
Ownership matters not only under Rule 17 but also
because it affects who is entitled to damages. Friedman
had filed for bankruptcy and wanted to keep any copy-
right recovery away from his creditors, prominent
among which was Citicorp. FM Industries never did
produce a contemporaneous document showing a transfer
of ownership to itself, and the district judge was under-
standably suspicious of an affidavit that Friedman exe-
cuted while this suit, and his bankruptcy, were under
way. See 2008 U.S. Dist. L EXIS 84270 (N.D. Ill. Oct. 21, 2008).
Trial never occurred. Local rules require the parties to
cooperate to produce a pretrial order. Northern District
of Illinois Local Rule 16.1 Appendix (“Standing Order
Establishing Pretrial Procedure”) Instruction 6. The plain-
tiff’s lawyer is supposed to produce a draft, which serves
as the basis of discussion and modification. Wayne D.
Rhine, the principal counsel for FM Industries, did not
complete this task on time. When he finally produced a
draft, it was egregiously non-compliant. (The problem
here, and in much else that went wrong with the case, is
that Rhine allowed Friedman, a non-lawyer, to draft
many of the papers that were filed over Rhine’s name.
Rhine insists that he did not simply rent out his law license
4 Nos. 08-3154, 08-3781, 09-1382, 09-1406 & 09-1637

but instead reviewed and edited the documents before
filing them. We accept that representation, but it also
means that Rhine, who resumed legal practice in 2006
after 24 years as a judge of the Circuit Court of Cook
County, Illinois, bears the responsibility for amateurish
and absurd filings.)
Defendants’ lawyers noted the problems, which Rhine
promised to fix. But by the date set for the parties to
present the joint pretrial order to the court, Rhine had not
provided a revision incorporating defendants’ contribu-
tions. Instead he presented a new draft based on the
original deficient one and omitting the defendants’ correc-
tions and proposals, despite Rhine’s promise to include
them. The district judge reminded Rhine of the need to
do his duties and warned him that failure would lead
to dismissal for want of prosecution. Defense counsel
drafted a pretrial order and asked Rhine to suggest modi-
fications. Instead Rhine again tendered a woefully defec-
tive product that reflected the work of Friedman rather
than anyone who knew what he was doing. Defendants
protested; Rhine promised to do better. But at the next
status conference in the district court there was no
pretrial order to consider. The judge gave up and on
May 6, 2008, dismissed the remaining claims for want of
prosecution.
Next Rhine filed a motion asking the judge to reconsider
and reinstate the claims originally set for trial. While
the parties debated the propriety of relieving FM Industries
of the adverse decision, defendants continued to request
that Rhine prepare a draft pretrial order. By July 23, 2008,
Nos. 08-3154, 08-3781, 09-1382, 09-1406 & 09-1637 5

when the judge denied the motion to reinstate the dis-
missed claims, Rhine still had not submitted a draft in
anything remotely like the form required and had not
begun the process of consultation needed to get from
the plaintiff’s initial draft to the final joint pretrial order.
Rhine’s failure to act even with the benefit of this addi-
tional time was the district judge’s main reason for
denying the motion.
Dismayed by what had happened, the district court
then ordered FM Industries to pay defendants’ legal fees
under 17 U.S.C. §505. See Fogerty v. Fantasy, Inc., 510 U.S.
517 (1994); Riviera Distributors, Inc. v. Jones, 517 F.3d 926
(7th Cir. 2008). The judge also concluded that Rhine
had vexatiously multiplied the proceedings and is liable
for attorneys’ fees under 28 U.S.C. §1927. The judge made
a further award under §1927 against William T. McGrath,
a copyright specialist who Rhine had engaged to assist
him. McGrath had signed only five of FM Industries’
plentiful filings, but the judge deemed him fully responsi-
ble—perhaps more so than Rhine, a newcomer to copy-
right litigation. FM Industries was ordered to pay ap-
proximately $750,000 in attorneys’ fees under §505. The
tab for the two lawyers was smaller, because the district
judge deemed only a subset of the filings sanctionable
under §1927. They were held jointly and severally re-
sponsible for $35,000. See 2009 U.S. Dist. L EXIS 9263 (N.D.
Ill. Feb. 4, 2009) (consolidated opinion covering most
awards of attorneys’ fees). A separate order directed
Rhine to pay an additional $2,694.60.
FM Industries no longer contests the district judge’s
conclusion that it is not entitled to damages. But it says
6 Nos. 08-3154, 08-3781, 09-1382, 09-1406 & 09-1637

that the judge should have granted partial summary
judgment in its favor on the question whether it owns
and is entitled to enforce the copyright. That subject is
no longer relevant, however, nor does it matter whether
the judge should have given FM Industries more
time for discovery. Even if the evidence establishes that
Friedman transferred the copyright to FM Industries,
triable questions remained about whether any defendant
was infringing the copyright. So the judge could not
have entered summary judgment in FM Industries’ favor.
And the reason this case did not get to trial is that Rhine
bollixed the job of preparing the pretrial order. All
other subjects fall out of the picture.
Now represented by different counsel, FM Industries
says that pretrial orders aren’t all that important and
that errors in their preparation shouldn’t lead to dis-
missal. But Fed. R. Civ. P. 16(f)(1)(B) says that, when a
party is unprepared to participate in the pretrial confer-
ence, a judge may use any of the sanctions mentioned
in Fed. R. Civ. P. 37(b)(2)(A)(ii)–(vii). Subsection (v) in
this list authorizes “dismissing the action or proceeding
in whole or in part”. That’s what the judge did. (Contrast
Smith v. Chicago School Reform Board of Trustees, 165 F.3d
1142 (7th Cir. 1999), which reversed a judge for using
the sanction specified in Rule 37(b)(2)(A)(i), which is
omitted from the authorization in Rule 16(f)(1)(B).)
It is not as if the judge acted precipitately. Rhine’s
failures were of both commission (bizarre drafts) and
omission (producing nothing when a new draft was
required, and not using defendants’ drafts as the basis
Nos. 08-3154, 08-3781, 09-1382, 09-1406 & 09-1637 7

for his own proposals). The judge warned Rhine that
failure to produce an appropriate draft and cooperate
in negotiation would lead to dismissal. The warning
did not work. And the real end did not come until, 11
weeks after the dismissal for want of prosecution, Rhine
still had not produced a plausible draft pretrial order.
A district judge need not wait forever. Eventually a plain-
tiff’s failure to cooperate in the prosecution of its own
suit leads to dismissal. The sanction must be proportional
to the delict, see Ball v. Chicago, 2 F.3d 752 (7th Cir. 1993),
but the problem with the pretrial order was just the
straw that broke the camel’s back. There were many
more deficiencies, which surely influenced the dismissal
order as well as the substantial awards of attorneys’ fees.
Long before dismissing this suit for want of prosecu-
tion, the district judge had concluded that FM Industries
and its lawyers were playing games, engaged in extor-
tion, or both. They demanded statutory damages of
$15 billion, although 17 U.S.C. §504(c)(2) provides that,
even for willful infringement, the award cannot exceed
$150,000. The theory seems to have been that this limit
applies per copy made, and that as computers are very
good at copying data, and may move software instruc-
tions around in random access memory, every computer
using the TUCANS software made multiple copies daily.
This is the same flavor of argument that a former judge
in the District of Columbia made in support of his
demand for $65 million from a laundry that supposedly
lost one pair of pants. That claim failed, see Pearson v.
Chung, 961 A.2d 1067 (D.C. App. 2008), and was widely
lampooned. See also Pearson v. District of Columbia, 644
8 Nos. 08-3154, 08-3781, 09-1382, 09-1406 & 09-1637

F. Supp. 2d 23 (D. D.C. 2009), affirmed, 2010 U.S. App.
L EXIS 11055 (D.C. Cir. May 27, 2010). The defendants
pointed out that the statutory limit under §504(c) is per
copyright (“any one work” is the statutory language)
rather than per copy, as well as the fact that the delayed
registration made statutory damages unavailable. Rhine
and his client were undeterred and filed a blizzard of
paper, to which defendants had to respond.
That’s not all—and not even the worst of it. Although
Rhine never produced a plausible draft of a pretrial order,
and exceeded many other time limits in the litigation,
when defendants missed one discovery deadline, and by a
single day, FM Industries moved for sanctions. It wanted
cash compensation for the injury caused by this delay.
How much? It demanded $815 million! The defendants
and the district judge were not amused, but defendants
had to devote substantial time (and thus expense) to
responding, because if the judge were prepared to award
even a tiny fraction of the request the outlay would
be considerable.
FM Industries served extensive discovery demands on
several law firms that are not parties to the suit but work
as outside counsel for Citicorp in collecting debts. Rhine
did not pay any attention to Fed. R. Civ. P. 45, which
tells litigants how to obtain information from nonparties.
Nor did Rhine notice that the right venue for nonparty
discovery is a court with personal jurisdiction over each
entity. A federal district court’s subpoena power in
most civil litigation runs only within its district (or 100
miles from its courthouse, if that is farther). See Rule
Nos. 08-3154, 08-3781, 09-1382, 09-1406 & 09-1637 9

45(b)(2)(B). After serving blunderbuss demands without
regard to the rules, forcing the recipients to incur legal
expenses to learn what obligations they had (none, as
it turns out), FM Industries simply walked away when
informed that all of the demands that it had served were
ineffectual. It did not follow up with proper subpoenas.
This was extortionate discovery, the kind a litigant
undertakes when it hopes to be paid to go away and
spare opponents the expense of vindicating their rights.
FM Industries’ attempt to force Charles Prince, then the
chairman of Citigroup’s board of directors, and Sanford
Weill, his predecessor, to submit to depositions, even
though they had nothing to do with Citicorp’s use of
TUCANS, is further evidence that FM Industries and
its lawyers were engaged in an abuse of legal process.
There is more, but extending this recitation would not
serve much purpose.
As for attorneys’ fees: None of the appellants ques-
tions the reasonableness of the amounts. They contend
only that the district judge should not have awarded any
fees at all. Yet a defendant that prevails in copyright
litigation is presumptively entitled to fees under §505.
See Mostly Memories, Inc. v. For Your Ease Only, Inc., 526
F.3d 1093, 1099 (7th Cir. 2008). Damages and equitable
relief encourage copyright proprietors to enforce their
rights, whether or not they get attorneys’ fees too. A
defendant who prevails in copyright litigation vindicates
the public’s interest in the use of intellectual property, but
without an award of fees the prevailing defendant has
only losses to show for the litigation. Defendants in
10 Nos. 08-3154, 08-3781, 09-1382, 09-1406 & 09-1637

this suit incurred substantial expense to beat back a series
of preposterous claims ($15 billion in statutory damages
indeed!) and are entitled to be made whole. Not that
FM Industries is apt to pay, but defendants are entitled
to what they can collect from any unencumbered
assets they can find. (Defendants stand in line behind
FM Industries’ secured creditors.) See 656 F. Supp. 2d
795 (N.D. Ill. 2009) (discussing some of the problems
one defendant has encountered trying to collect).
Rhine contends that he did not “multiply” the pro-
ceedings, and therefore should not have been sanctioned
under §1927, but the district court’s award is sound. See
In re TCI Ltd., 769 F.2d 441 (7th Cir. 1985). This litigation
was marked by excessive and unnecessary filings that
richly deserve the label vexatious. Rhine’s objections are
quibbles. He contends, for example, that he did not de-
mand $15 billion in damages—a stupendous figure that
led defendants to generate far more paper, and endure
higher legal bills, than any plausible claim would have
warranted. No, Rhine insists, all he did was demand that
defendants and the court use a formula that worked out
to $15 billion. The fact that the phrase “$15 billion” does
not appear in a complaint is irrelevant. A complaint
that demands $150,000 (the statutory cap) times 100,000
(the complaint’s estimate of the number of times com-
puters copied the software into random access memory)
is demanding $15 billion. Even lawyers can multiply
two numbers. And the fact that this sum is, in the words
of Rhine’s appellate brief—he is representing himself
and testing the adage that a lawyer who does this has
a fool for a client—“one prayer for relief, out of many, and
Nos. 08-3154, 08-3781, 09-1382, 09-1406 & 09-1637 11

based on certain possible scenarios” does not help. One
other prayer “out of many” was for statutory damages of
$7.2 million ($150,000 times 48, the number of outside
law firms that used the software), which is no more
tenable than $15 billion. Another demand was for $235
million in actual damages, which plaintiff never at-
tempted to prove and now has abandoned. No more
need be said about the award against Rhine.
McGrath, by contrast, did not sign the complaint,
demand $815 million as a discovery sanction, insist that
Sanford Weill appear for a deposition, foul up the
process of preparing a pretrial order, or take any of the
other steps that led to the sanction against Rhine. True,
he filed an appearance for FM Industries and signed
five papers, but the district court did not find that any
of those five vexatiously multiplied the proceedings.
Indeed, neither the magistrate judge (who recommended
sanctions) nor the district judge identified a single thing
that McGrath did wrong. He seems to have been sanc-
tioned for making the mistake of agreeing to help a
careless lawyer (Rhine) who put his name to frivolous
and malicious documents drafted by a self-interested
layman (Friedman), and then not reviewing all of the
documents that Friedman prepared for Rhine’s signature.
But of course McGrath was not engaged as a second-tier
reviewer of Friedman’s scribbling; he was engaged to
help Rhine get his bearings in copyright law. That McGrath
failed at this task does not make him responsible for
documents that bear Rhine’s name but not his own.
Liability under §1927 is direct, not vicarious. See
Claiborne v. Wisdom, 414 F.3d 715, 722–24 (7th Cir. 2005)
12 Nos. 08-3154, 08-3781, 09-1382, 09-1406 & 09-1637

(liability is restricted to the misbehaving lawyer and may
not be transferred to his partners or law firm). At oral
argument defendants contended that McGrath could be
held liable because he did not prevent Rhine from filing
unreasonable and vexatious documents. Well, McGrath
was not hired to do that, and no lawyer undertakes such
a role for free. Section 1927 does not require every
lawyer who files an appearance to review and vet every
paper filed by every other lawyer. Neither the text of
§1927, nor any decision of which we are aware, imposes
on any lawyer a duty to supervise or correct another
lawyer’s work. Nor did the district court give this as a
reason for the award against McGrath. We appreciate
that the judge was disgusted by the behavior of FM
Industries and its counsel, but personal responsibility
remains essential to an award of sanctions under §1927.
The decision awarding sanctions against McGrath is
reversed. All of the district court’s other decisions are
affirmed.

7-22-10