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44 55 66 77 United States District Court 88 Central District of California 99 1100 1111 PILOT INC., a California corporation, Case No. 2:20-cv-02978-ODW (RAOx)

1122 Plaintiff, ORDER DENYING DEFENDANTS’

MOTION FOR SANCTIONS [47]

1133 v.

1144 TYC BROTHER INDUSTRIAL CO., LTD. a Chinese corporation, et. al, 1155 Defendants. 1166

1177 1188 I. INTRODUCTION 1199 Defendants Genera Corporation, T.Y.C. Brother Industrial Co., Ltd., David 2200 Tang, Nguyett Nguyen, Andrea Lira, and Beatriz Atkinson (“Defendants”), move for 2211 sanctions against Plaintiff Pilot, Inc. (“Pilot”) and its counsel, Lewis Brisbois 2222 Bisgaard & Smith LLP. (Mot. for Sanctions (“Motion” or “Mot.”), ECF No. 47.) For 2233 the reasons discussed below, the Court DENIES Defendants’ Motion. 1 2244 II. BACKGROUND 2255 Pilot is a distributor and supplier of aftermarket automotive replacement parts 2266 and accessories in the United States. (Compl. ¶ 19, ECF No. 1.) TYC is a Chinese 2277

2288 1 Having carefully considered the papers filed in connection with the Motion, the Court deemed the matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15. 1 conglomerate that manufactures, among other things, automotive replacement and 2 aftermarket parts and accessories. (Id. ¶¶ 6, 20.) Genera is a wholly-owned 3 subsidiary of TYC and is TYC’s general agent in the United States. (Id. ¶ 20.) 4 Genera/TYC are considered the same party for purposes of this litigation. (Id.) 5 Pilot has been a distributor for Genera/TYC in the United States for certain 6 national retail customers since 2004. (Id. ¶ 21.) In 2017, Pilot and Genera/TYC 7 entered into a written distribution agreement (the “2017 Distribution Agreement”) 8 providing that Pilot would be Genera/TYC’s exclusive distributor to six specific 9 retailers for three years. (Id. ¶ 26, Ex. C (“2017 Distribution Agreement”) § 1, ECF 10 No. 1-3.) The 2017 Distribution Agreement includes an arbitration clause which 11 states that “[a]ny dispute arising out of or in connection with” the 2017 Distribution 12 Agreement shall be resolved in arbitration. (2017 Distribution Agreement § 10.) 13 On July 19, 2019, Pilot and Genera/TYC executed a second agreement, to 14 appoint Pilot as Genera/TYC’s exclusive distributor for an additional three-year term 15 (the “2020 Agreement”). (Compl. ¶ 26, Ex. D (“2020 Agreement) §§ 1–2, ECF 16 No. 1-4.) The 2020 Agreement states that it “constitutes the entire agreement among 17 the parties, and supersedes all other agreements whether written and/or oral.” (2020 18 Agreement § 8.) The 2020 Agreement does not include an arbitration clause. 19 On January 10, 2020, Genera/TYC terminated Pilot as its exclusive distributor. 20 (Compl. ¶¶ 33–34.) Pilot contends that Genera/TYC poached Pilot’s former 21 employees, Defendants David Tang, Nguyett Nguyen, Andrea Lira, and Beatriz 22 Atkinson (“Individual Defendants”). (Id. ¶ 38.) Pilot claims that Genera/TYC also 23 solicited the Individual Defendants to steal Pilot’s trade secrets and confidential 24 information in an effort to take over Pilot’s exclusive business in the United States. 25 (Id. ¶ 37.) 26 Accordingly, on March 30, 2020, Pilot filed a Complaint against Defendants 27 asserting eleven causes of action. (Id. ¶¶ 42–125.) Pilot moved for a mandatory 28 preliminary injunction and Defendants moved to compel arbitration. (Mot. Prelim. 1 Inj., ECF No. 26; Mot. Compel Arbitration, ECF No. 36.) The Court heard oral 2 argument on both motions on June 22, 2020. On July 8, 2020, the Court granted 3 Defendants’ Motion to Compel Arbitration, denied Pilot’s Motion for Preliminary 4 Injunction, and dismissed the action without prejudice. (See Order Granting Mot. to 5 Compel, ECF No. 46.) 6 On July 13, 2020, Defendants moved for sanctions against Pilot and its counsel, 7 alleging that (1) Pilot’s Complaint was frivolous, (2) Pilot advocated positions that 8 lacked evidentiary support, and (3) Pilot’s counsel improperly contacted a Genera 9 officer and Individual Defendant Nguyett Nguyen (“Nguyen”). (See generally Mot.) 10 Defendants request that the Court order Pilot and its counsel to pay $222,824 in 11 attorneys’ fees and costs as a sanction, pursuant to 28 U.S.C. § 1927, Federal Rule of 12 Civil Procedure (“Rule”) 11, and the Court’s inherent authority. (Mot. 1, 8–10.) The 13 Motion is fully briefed. (See Opp’n, ECF No. 48; Reply, ECF No. 49.) For the 14 following reasons, Defendants’ Motion is DENIED. 15 III. LEGAL STANDARDS 16 A. 28 U.S.C. § 1927 17 “Any attorney . . . who so multiplies the proceedings in any case unreasonably 18 and vexatiously may be required by the court to satisfy personally the excess costs, 19 expenses, and attorneys’ fees reasonably incurred because of such conduct.” 20 28 U.S.C § 1927. “Because the section authorizes sanctions only for the 21 ‘multipli[cation of] proceedings,’ it applies only to unnecessary filings and tactics 22 once a lawsuit has begun.” In re Keegan Mgmt. Co., Sec. Litig., 78 F.3d 431, 435 23 (9th Cir. 1996). Moreover, “[a]n award of sanctions under 28 U.S.C. 24 § 1927 . . . requires a finding of recklessness or bad faith.” Barber v. Miller, 146 F.3d 25 707, 711 (9th Cir. 1998). 26 B. Rule 11 27 “[T]he central purpose of Rule 11 is to deter baseless filings in district court 28 and . . . streamline the administration and procedure of the federal courts.” Cooter & 1 Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990). The court may sanction an 2 attorney under Rule 11 for filing a pleading or other paper that is “frivolous, legally 3 unreasonable, or without factual foundation, or is brought for an improper purpose.” 4 Estate of Blue v. Cnty. of Los Angeles, 120 F.3d 982, 985 (9th Cir. 1997); Fed. R. Civ. 5 P. 11(b). Nonetheless, “[i]f, judged by an objective standard, a reasonable basis for 6 the position exists in both law and in fact at the time that the position is adopted, then 7 sanctions should not be imposed.” Golden Eagle Distrib. Corp. v. Burroughs Corp., 8 801 F.2d 1531, 1538 (9th Cir. 1986). 9 Imposing sanctions under Rule 11 “is an extraordinary remedy, one to be 10 exercised with extreme caution.” Operating Eng’rs Pension Tr. v. A-C Co., 859 F.2d 11 1336, 1345 (9th Cir. 1988). As such, courts have “significant discretion” when 12 determining whether to award sanctions. See Fed. R. Civ. P. 11(b), Advisory 13 Committee Notes (1993 Amendment). 14 C. The Court’s Inherent Authority 15 District courts have the “inherent authority to impose sanctions for bad faith, 16 which includes a broad range of willful improper conduct.” Fink v. Gomez, 239 F.3d 17 989, 992 (9th Cir. 2001). Sanctions pursuant to the Court’s inherent authority “are 18 available for a variety of types of willful actions, including recklessness when 19 combined with an additional factor such as frivolousness, harassment, or an improper 20 purpose.” Id. at 994. However, these sanctions are only available “if the court 21 specifically finds bad faith or conduct tantamount to bad faith.” Id. “Because of their 22 very potency, inherent powers must be exercised with restraint and discretion.” 23 Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991). 24 IV. DISCUSSION 25 Defendants contend that the Court should sanction Pilot pursuant to 28 U.S.C. 26 § 1927, Rule 11, and the Court’s inherent authority because: (1) Pilot initiated this 27 lawsuit instead of agreeing to arbitrate its claims, ignoring controlling Ninth Circuit 28 precedent; (2) Pilot advanced legal positions that lacked any evidentiary support; and 1 (3) Pilot’s counsel improperly contacted a Genera officer without the consent of 2 Genera’s counsel, and requested the opportunity to discuss settlement with Individual 3 Defendant Nguyen outside the presence of her counsel. (See generally Mot.) 4 Defendants’ arguments are meritless. The Court addresses each in turn. 5 A. Pilot Did Not Ignore Ninth Circuit Precedent 6 Defendants assert that Pilot “deliberately ignored controlling precedent” by 7 initiating this case instead of agreeing to arbitrate the dispute pursuant to the 8 arbitration clause in the 2017 Distribution Agreement. (Mot. 10–12.) Defendants 9 insist that Pilot should be sanctioned under Rule 11 for “pretending that potentially 10 dispositive authority” did not exist. (Mot. 10–12.) Specifically, Defendants contend 11 that Pilot “refused to recognize” Simula, Inc. v. Autoliv, Inc., 175 F.3d 716 (9th Cir. 12 1999) (“Simula”). (Id. at 11.) Pilot argues that it did not ignore Simula. (Opp’n 9.) 13 In fact, Pilot points to its Opposition to Defendants’ Motion to Compel Arbitration, 14 where Pilot directly quotes Simula, and distinguishes that case from the issues 15 presented in their lawsuit. (Id. at 9–10.) 16 Defendants’ argument is meritless. A cursory review of Pilot’s Opposition to 17 Defendants’ Motion to Compel Arbitration clearly demonstrates that Pilot addressed 18 Simula, and did not, as Defendants claim, “ignore[] controlling precedent.” (Mot. 10; 19 see Opp’n 9; see also Pilot’s Opp’n to Defs.’ Mot. to Compel Arbitration (“Opp’n 20 Mot. Compel”) 5, ECF No. 38 (arguing the facts in this case are distinguishable from 21 those in Simula).) 22 The Court finds that Pilot did not ignore controlling Ninth Circuit precedent. 23 Assuming without finding that Simula is controlling precedent, Pilot addressed 24 Simula, attempted to distinguish this case from the holdings there, and thus, in its 25 view, had a reasonable basis in fact and law to file its Complaint and oppose 26 Defendants’ Motion to Compel Arbitration. Pilot’s refusal to view Simula from the 27 same perspective as Defendants does not mean that Pilot “ignored” or “refused to 28 recognize” controlling precedent, as Defendants claim. (See Mot. 10–11 (emphasis 1 added).) Pilot simply does not agree with Defendants’ position. A mere disagreement 2 regarding the law and its applicability to this case does warrant sanctions. See e.g., 3 Golden Eagle, 801 F.2d at 1538 (“[i]f, judged by an objective standard, a reasonable 4 basis for the position exists in both law and in fact at the time that the position is 5 adopted, then sanctions should not be imposed.”). 6 B. Pilot Did Not Advocate Positions That Lacked Evidentiary Support 7 Defendants claim that the Court should sanction Pilot for “plead[ing] and 8 advocat[ing] bad-faith positions lacking evidentiary support.” (Mot. 13.) 9 First, Defendants contend that Pilot “ha[s] argued that because the [2020 10 Agreement] included an integration clause, the arbitration agreement in the 2017 11 Distribution Agreement was of no further effect.” (Mot. 13.) Defendants’ contention 12 is baseless. Pilot asserts that “it made no such argument” and highlights Defendants 13 fail to cite to anything in the record that demonstrates Pilot advocated that position. 14 (Opp’n 10.) Pilot actually agreed that the arbitration provision of the 2017 15 Distribution Agreement continued to apply to claims arising out of that agreement. 16 (Id.) Pilot explains that it “asserted that the ‘2017 arbitration provision does not 17 encompass the dispute at issue’ because ‘none of Pilot’s 11 causes of action arise out 18 of or in connection with the 2017 Distribution Agreement.” (Id. (brackets omitted) 19 (quoting Opp’n Mot. Compel 4).) The Court agrees with Pilot, Defendants fail to cite 20 to anything that demonstrates Pilot advocated the position that the arbitration 21 agreement was of no effect. (See generally Mot.) And Defendants completely fail to 22 address this omission in their Reply; thus, the Court interprets Defendants’ failure to 23 identify where or when Pilot made this “bad-faith” position as Defendants abandoning 24 this frivolous argument. 25 Second, Defendants contend that Pilot, in bad faith, advanced the argument that 26 its claims were not subject to arbitration because the 2020 Agreement, which did not 27 contain an arbitration clause, superseded the 2017 Distribution Agreement; and Pilot’s 28 claims arose out of the 2020 Agreement. (Mot. 13.) Defendants’ position, however, 1 strains credulity. Defendants’ own counsel stated, prior to Pilot filing this lawsuit, 2 that “[t]he [2020 Agreement] . . . constitutes the entire agreement among [sic] the 3 parties, and supersedes all other agreements whether written or oral. . . . [The 2017 4 Distribution Agreement] was expressly superseded by a later-executed written 5 contract.” (Opp’n 11 (emphasis added) (internal quotation marks omitted) (quoting 6 Decl. of Anthony Capobianco (“Capobianco Decl.”), Ex. A, ECF No. 47-4).) 7 It is apparent that Defendants have since changed their position regarding which 8 agreement governs Pilot’s claims. However, Defendants cannot, in good faith, assert 9 that Pilot’s argument that the arbitration agreement did not extend to the 10 2020 Agreement was frivolous, when Defendants’ own counsel appeared to have 11 agreed with Pilot before this litigation. (See id.) 12 Pressing on, Defendants argue Pilot’s former CEO, Scott Webb (“Webb”), 13 acknowledged the 2020 Agreement was an “extension” (therefore not a superseding 14 agreement), meaning the arbitration clause extended to the 2020 Agreement. 15 (Mot. 13.) Defendants contend that, by acknowledging the 2020 Agreement was an 16 extension, Pilot must have known its claims had no merit and asserted them in bad 17 faith. The one-sentence email from Webb states: “I’m traveling but will be back in 18 the office Thursday—I look forward to executing the extension then.” (Mot. 13 19 (quoting Decl. of Jackson Kwok ¶ 6, Ex. A, ECF No. 47-2).) The email is not 20 indicative of much, if anything, and it is definitely not sufficient to demonstrate Pilot 21 acted in bad faith by asserting the 2020 Agreement superseded the 2017 Distribution 22 Agreement. In addition to Defendants’ counsel’s email, the plain language of the 23 2020 Agreement states that it “supersed[es]” the 2017 Distribution Agreement. Thus, 24 Pilot’s argument that its claims were not subject to arbitration because the 2020 25 Agreement superseded the 2017 Distribution Agreement was reasonably based on the 26 language of the agreement, and is not, as Defendants allege, frivolous. See, e.g., 27 Woodrum v. Woodward Cnty, Okl., 886 F.2d 1121, 1127 (9th Cir. 1989) (“The key 28 question in assessing frivolousness is whether a [pleading] states an arguable claim— 1 not whether the pleader is correct in his perception of the law.”); see also Frivolous, 2 Black’s Law Dictionary (11th ed. 2019) (“Lacking a legal basis or legal merit . . . .”). 3 Third and finally, Defendants contend Pilot’s argument that the arbitration 4 clause did not apply to its claims was frivolous because Pilot ignored “well settled 5 jurisprudence” that an arbitration agreement survives even where the prior agreement 6 is rescinded by a later agreement. (Mot. 13–14 (emphasis omitted) (quoting Teledyne, 7 Inc. v. Kone Corp., 892 F.2d 1404, 1410 (9th Cir. 1989)).) Pilot asserts that it “[did] 8 not dispute that the arbitration agreement survives, [or] that it continues to govern 9 disputes that arise out of or relate to the 2017 Agreement, even after the 10 termination/expiration of the 2017 Agreement.” (Opp’n 11.) Pilot emphasizes that its 11 position is, and has always been, that “none of its currently-asserted claims arise out 12 of or relate to the 2017 Agreement.” (Id.) 13 As Pilot correctly notes, “[a]n arbitration clause does not govern a dispute based 14 on a subsequent agreement or contract that has no connection to the prior agreement 15 requiring arbitration.” (Opp’n 10 (quoting Homestake Lead Co. v. Doe Run Res. 16 Corp., 282 F. Supp. 2d 1131, 1142 (N.D. Cal. 2003).) Here, Pilot explains that, in its 17 view, the causes of action it asserts in the Complaint are not connected to the 2017 18 Distribution Agreement, and thus, that agreement’s arbitration clause does not apply 19 to this case. (Id. at 10–11.) Pilot’s position, then, is not frivolous. Pilot simply 20 disagrees with Defendants’ contention that the claims in this case arise out of or relate 21 to the 2017 Distribution Agreement. As previously noted, a mere disagreement 22 regarding the law and its applicability to this case does warrant sanctions. See e.g., 23 Golden Eagle, 801 F.2d at 1538. Accordingly, Defendants’ arguments fail. 24 C. Pilot Did Not Violate the Rules of Professional Conduct 25 Defendants contend that the Court should sanction Pilot for (1) communicating 26 directly or indirectly with a person represented by counsel, and (2) witness tampering, 27 in violation of California Rule of Professional Conduct 4.2 (“Rule 4.2”). (See 28 Mot. 14–15.) Rule 4.2 provides “a lawyer shall not communicate directly or indirectly 1 about the subject of the representation with a person the lawyer knows to be 2 represented by another lawyer in the matter, unless the lawyer has the consent of the 3 other lawyer.” Cal. R. Prof’l Conduct 4.2 (emphasis added). 4 First, Defendants claim that, on March 27, 2020, Pilot’s attorney, Ryan 5 Alexander (“Alexander”), directly contacted a Genera officer, David Tang (“Tang”), 6 without the consent of Genera’s counsel. (Mot. 14–15.) Pilot counters, arguing that 7 prior to filing this lawsuit, Alexander called Genera’s main telephone number and 8 asked to speak with Tang, solely to determine if he worked for the company. 9 (Opp’n 13–14 (citing Decl. of Ryan Alexander (“Alexander Decl.”) ¶ 1, ECF No. 10 48-1.) Pilot stresses that “Alexander never communicated with Mr. Tang.” (Id. at 13 11 (citing Alexander Decl. ¶ 1).) 12 The only evidence that Defendants put forth to support their claim that 13 Alexander violated Rule 4.2 by improperly communicating with Tang is an email 14 from Tang’s colleague, Nelson Sheih. (See Mot. 14 (citing Decl. of David Tang 15 (“Tang Decl.”) ¶ 3, Ex. A, ECF No. 47-3).) The email is addressed to Tang and 16 states: “Got a call from Ryan Alexander looking for you. Please call him . . . .” (Tang 17 Decl. ¶ 3, Ex. A.) This email is not evidence that Alexander communicated directly 18 with Tang about the subject of the representation, see Rule 4.2, as Defendants claim, 19 (see Mot. 14. (insisting “Alexander . . . directly contacted David Tang”)). And the 20 email certainly does not demonstrate Alexander engaged in any indirect 21 communication with Tang about the subject of the representation. Defendants’ 22 position strains reality and is way off-base. Defendants are manipulating the facts and 23 stretching the evidence, claiming Alexander violated Rule 4.2 by calling Genera’s 24 main telephone number; however, the evidence before the Court clearly demonstrates 25 that Alexander did not communicate with Tang in violation of Rule 4.2. 26 Second, Defendants claim that Alexander also violated Rule 4.2 by requesting 27 to speak directly with Individual Defendant Nguyen “to discuss terms of settlement” 28 outside the presence of her counsel. (Mot. 15.) Defendants point to a May 22, 2020 1 email from Alexander to Defendants’ counsel, Anthony Capobianco (“Capobianco”) 2 in which Alexander states: “My client has received a notice that [Nguyen] may no 3 longer be employed by the company. If this be the case, we would like to sit down 4 with [Nguyen] individually to discuss terms of settlement.” (Capobianco Decl., 5 Ex. C, ECF No. 47-4).) Capobianco, interpreting Alexander’s request as a violation of 6 Rule 4.2, replied: “You may not contact our client directly and speak to her outside 7 our presence, if that is what you are suggesting . . . .” (Id.) Four minutes later, 8 Alexander responded to Capobianco to dispel any confusion caused by his initial 9 email and stated: “To clarify, we (my client and me) would like to sit down with 10 [Nguyen] individually (without participation of the other defendants). Please convey 11 this offer to her in the interest of discussing a settlement with the participation of the 12 counsel of her choice.” (Id. (emphases added).) 13 Based on a plain reading of that chain of communication, Defendants’ claim 14 that Alexander attempted to speak with Nguyen outside the presence of her counsel is 15 ridiculous. However, Defendants insist that “Alexander . . . attempt[ed] to 16 communicate directly with [Nguyen]” in violation of Rule 4.2. (Mot. 15.) Defendants 17 are clearly wrong, and their persistence in pressing this non-issue is troubling. The 18 Court finds that nothing in the record suggests that Alexander attempted to 19 communicate with Nguyen or speak with Nguyen outside the presence of her counsel. 20 In sum, the Court finds nothing to suggest that Pilot engaged in any conduct 21 worthy of sanctions. In fact, most of Defendants’ arguments are frivolous and clear 22 misrepresentations of the facts. In light of the many unsupported and obviously false 23 assertions in the Motion, Defendants’ Motion appears to have been filed in bad faith. 24 See C.Q. v. River Springs Charter Schs., No. CV 18-01017 SJO (SHKx), 2019 WL 25 6331402, at *13 (C.D. Cal. Oct. 21, 2019) (“Bad faith is present when an attorney 26 knowingly or recklessly raises a frivolous argument . . . .” (quoting Estate of Blas 27 Through Chargualaf v. Winkler, 792 F.2d 858, 860 (9th Cir. 1986)). Here, 28 1 Defendants’ embellished claims that Pilot’s counsel engaged in improper conduct 2 were easily debunked by reviewing the record before the Court. 3 Based on the foregoing, the Court finds that Pilot did not violate Rule 11 or 4 Rule 4.2. Defendants’ Motion is DENIED. 5 D. Defendants’ Motion Is Frivolous 6 Somewhat ironically, after reviewing the papers Defendants filed in connection 7 with this Motion to sanction Pilot, the Court finds it necessary to remind Defendants’ 8 counsel of their ethical obligations—which require counsel to avoid filing motions 9 that are frivolous, or are brought only to harass the opposing side. See Rule 11 (“By 10 presenting to the court a . . . written motion . . . an attorney . . . certifies that to the best 11 of the person’s knowledge, information, and belief, . . . it is not being presented for 12 any improper purpose, such as to harass.”); Estate of Blue, 120 F.3d at 985 13 (explaining that the Court may sanction an attorney under Rule 11 for filing a pleading 14 or other paper that is “frivolous, legally unreasonable, or without factual foundation, 15 or is brought for an improper purpose.”); see also Cal. Rule of Prof’l Conduct 3.3 (“A 16 lawyer shall not . . . knowingly make a false statement of fact or law to a tribunal.”). 17 Several arguments that Defendants’ counsel put forth in this Motion are utter 18 nonsense. Defendants’ counsel make blatantly false statements and flagrantly 19 misrepresent the facts. (See, e.g., Mot. 15 (insisting that Alexander attempted to 20 communicate directly with Nguyen in violation of Rule 4.2, when the evidence clearly 21 demonstrates he did not).) Because several of Defendants’ arguments lack any 22 support, or are easily debunked, the Court can only infer that this Motion was filed in 23 bad faith and with the intent to harass Pilot and its counsel. It is evident that there is 24 animosity between Defendants and Pilot. Nevertheless, Defendants may not drag the 25 Court into its foolish and spiteful antics by filing a frivolous motion for sanctions, 26 thereby wasting valuable judicial resources. 27 /// 28 /// 1 V. CONCLUSION 2 For the reasons discussed above, the Court DENIES Defendants’ Motion for 3 | Sanctions. (ECF No. 47.) 4 IT IS SO ORDERED. 5 6 January 14, 2021 a . 7 SWF. □□ g 9 OTIS D. WRIGHT, II 0 UNITED STATES, DISTRICT JUDGE

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