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July 24, 2014

Homecare and its Attorneys Hammered with Rule 11 Sanctions for Pursuing Frivolous Trade Secrets Claim

A few tips worth considering:

1. Do not describe pre-filing investigation documents as "corporate espionage."

2. Do not send internal e-mails instructing employees to "rob whatever we can from any good product ideas they have."

3. Do not pursue a claim for misappropriation of trade secrets when the product of your "corporate espionage" concluded that you "have no intellectual property concerns."

These missteps and more led to a strongly-worded order from Judge Batten of the Northern District of Georgia imposing sanctions on Homecare CRM, LLC ("Homecare") and its attorneys for violation of Rule 11(b) of the Federal Rules of Civil Procedure.  The motion for sanctions was just one of many disputes in a hotly contested battle between Homecare and The Adams Group, Inc. of Middle Tennessee d/b/a PlayMaker ("PlayMaker"), two competitors in the business of developing customer-relationship management software for the home care and hospice industry.[1]  Each company has a core software product and an add-on product that allows more access to information and provides additional features.  Homecare's and PlayMaker's add-on products, "Harvest" and "TargetWatch," respectively, were the subject of the lawsuit that involved claims of trademark infringement, false advertisement, unfair competition, misappropriation of trade secrets, violation of Georgia's Uniform Deceptive Trade Practices Act and Tennessee's Consumer Protection Act, libel, slander, and tortious interference with business relations, among other things.  The trade secrets claim was the subject of the motion for sanctions.

In its original June 2012 complaint, Homecare alleged that PlayMaker "misappropriate[ed] significant portions of [Homecare's] proprietary software solutions, including the manner in which [Homecare's] software analyzes, compiles, presents and displays data on home health care referral sources, and using that information to design and develop competing software solutions."  After substantial discovery, PlayMaker filed a motion for sanctions asserting that Homecare and its attorneys violated Rule 11 because it knew or should have known that the factual allegations in support of the trade secrets claim were false, and that Homecare could not reasonably assert such a claim.  PlayMaker argued that Homecare nonetheless included the claim and throughout the litigation refused to dismiss the claim despite strong evidence of its lack of merit.  PlayMaker asked the Court to strike the misappropriation claim, to require Homecare to a monetary sanction to the Court, and to award PlayMaker its attorneys' fees and costs associated with the sanctions motion.

The Court started by noting that sanctions under Rule 11 is not something to be taken lightly or routinely granted.  The Court also remarked that while Rule 11(b) addresses the conduct of attorneys who sign a pleading, courts may nonetheless sanction a represented party for a Rule 11(b) violation, if the circumstances warrant.  The Eleventh Circuit employs a two-step inquiry when evaluating a Rule 11 motion, determining "(1) whether the party's claims are objectively frivolous; and (2) whether the person who signed the pleadings should have been aware that they were frivolous."[2]

As the Court put it, several "damning" pieces of evidence essentially sealed Homecare's fate with respect to this motion.  The most crucial among them was a matrix assembled by Homecare several months before it filed its complaint that compared the features of Homecare's Harvest product with the features of PlayMaker's TargetWatch product.  One version of the matrix uncovered during discovery included a paragraph entitled "Intellectual Property Concerns" which concluded that Homecare had "no intellectual property concerns" about TargetWatch.  Further, though Homecare insisted that PlayMaker had inappropriately accessed and misappropriated Harvest, the evidence overwhelmingly showed that it was Homecare who was clandestinely accessing TargetWatch for what it deemed "corporate espionage."  One particularly indicting internal Homecare email instructed an employee to "rob whatever we can from any good product ideas they [Playmaker] have so we can incorporate into our product ASAP."  Judge Batten said that this email made Homecare's contention that PlayMaker stole Homecare's trade secrets "farcical."

Homecare's pre-filing matrix also evidenced seven "key features" of the Harvest product that were missing in PlayMaker's TargetWatch product.  This evidence flew in the face of an allegation that PlayMaker copied or stole trade secrets from Homecare.  In addition, discovery did not support the contention that PlayMaker had access to or had in fact accessed the Harvest product.  The Court likewise rebuffed Homecare's argument that it needed an opportunity for "vigorous discovery" to support its claim, finding that (a) Homecare's belief at the time of filing was unreasonable regardless of discovery, and (b) the discovery uncovered to date contradicted Homecare's claims.

In the end, the Court found that striking the claim for misappropriation of trade secrets and ordering Homecare to reimburse PlayMaker for the fees and costs incurred in bringing the sanctions motion would be a sufficient deterrent to Homecare.  The Court then stayed the case pending mediation, which is scheduled for September 6, 2013 before Magistrate Judge E. Clayton Scofield, III.

Homecare CRM, LLC v. The Adam Group, Inc. of Middle Tennessee d/b/a PlayMaker CRM, No. 1:12-cv-1958-TCB, 2013 U.S. Dist. LEXIS 95277 (N.D. Ga. July 8, 2013).


[1] Expressing clear exasperation, the Court stated that the parties had filed a plethora of motions and engaged in numerous discovery disputes that required the Court's involvement and attention.

[2] Baker v. Alderman, 158 F.3d 516, 524 (11th Cir. 1998)

Copyright © 2014 Womble Carlyle Sandridge & Rice, PLLC. All Rights Reserved.

About the Author

Preston H Heard, Womble Carlyle Law Firm, Intellectual Property Attorney
Partner

Preston Heard is an experienced patent litigation attorney who represents clients in a variety of industries, including the mechanical, computer and chemical sectors, in patent-related disputes.

 A registered patent attorney, Preston has represented patent clients in U.S. District Court in numerous states, as well as before the U.S. International Trade Commission. He works with patent owners to devise overall strategies to protect and enforce patent rights and to assess potential patent-related claims. He also works with clients to develop effective defenses against patent...

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