Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_11-cv-02996/USCOURTS-casd-3_11-cv-02996-6/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:0078m(a) Securities Exchange Act

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

SETH WALLACK and SAN DIEGO

VETERINARY IMAGING, INC.,

Plaintiffs,

CASE NO. 11cv2996-GPC(KSC)

ORDER DENYING DEFENDANTS

WRIGHT AND WALTERS’

MOTION FOR ATTORNEYS’

FEES

[Dkt. No. 149.]

vs.

IDEXX LABORATORIES, INC.;

IDEXX REFERENCE

LABORATORIES, INC.; MATTHEW

WRIGHT; an individual; and

STEPHEN WALTERS, an individual

Defendants.

Before the Court is Defendants Matthew Wright and Stephen Walters’

(“Defendants”) motion for attorneys’ fees assanctions pursuant to the Court’s inherent

authority and pursuant to 28 U.S.C. § 1927. (Dkt. No. 149.) Plaintiffs filed an

opposition and Defendants replied. (Dkt. Nos. 154, 157.) After a review of the briefs,

supporting documentation and the applicable law, the Court DENIES Defendants’

motion for attorneys’ fees. 

Procedural Background

On December 22, 2011, Plaintiff Seth Wallack (“Wallack”) and San Diego

Veterinary Imaging, Inc. (“SDVI”) (collectively “Plaintiffs”) filed a complaint against

Defendants Idexx Laboratories, Inc., Idexx Reference Laboratories, Inc. (collectively

“Idexx Defendants”), Matthew Wright (“Wright”) and Stephen Walters (“Walters”)

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alleging numerous causes of action for federal and state securities fraud, fraud related

causes of action, and trademark infringement. (Dkt. No. 1.) On February 24, 2012,

Defendants Walters and Wright, and Idexx Defendants filed separate motions to

dismiss. (Dkt. Nos. 9, 15.) On April 11, 2013, the Court granted in part and denied in

part all Defendants’ motions to dismiss with leave to amend. (Dkt. No. 33.) A first

amended complaint was filed on May 2, 2013. (Dkt. No. 34.) On May 16, 2013,

Defendants Walters and Wright filed a motion to dismiss and on May 30, 2013, Idexx

Defendants filed a motion to dismiss. (Dkt. Nos. 37, 39.) On September 12, 2013, the

Court granted in part and denied in part Defendants’ motions to dismiss with leave to

amend. (Dkt. No. 49.) The operative second amended complaint was filed on

September 26, 2013 and asserted four causes of action: (1) trademark infringement by

Plaintiff SDVI against Idexx Defendants; (2) breach of fiduciary duty by Plaintiff

Wallack against Wright and Walters; (3) civil conspiracy by Plaintiffs against all

Defendants; and (4) request for declaratory relief by Plaintiffs against Idexx

Defendants. (Dkt. No. 50.) Defendants Wright and Walters moved to dismiss the

second cause of action for breach of fiduciary duty, and third cause of action for civil

conspiracy on October 7, 2013. (Dkt. No. 52.) On April 14, 2014, the Court denied

Defendants’ motion to dismiss the breach of fiduciary duty claim, and granted their

motion to dismiss the civil conspiracy claim with prejudice. (Dkt. No. 68.) Idexx

Defendants filed a counterclaim against Plaintiffs on May 12, 2014. (Dkt. No. 73.) On

February 12, 2015, Defendants filed a motion for summary judgment on the remaining

causes of action for breach of fiduciary duty. (Dkt. No. 87.) On April 15, 2015, the

Court granted Defendants Wright and Walters’ motion for summary judgment for

breach of fiduciary duty. (Dkt. No. 99.) The Court concluded that the general release

contained in the Stock Repurchase Agreement barred the claim. (Id.) On July 15,

2015, Idexx Defendants filed a motion for summary judgment on the trademark

infringement claim and declaratory relief related to the trademark which the Court

denied on October 13, 2015. (Dkt. Nos. 103, 136.) In March 2016, Plaintiff and Idexx

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Defendants filed a joint motion to dismiss the complaint and counterclaims with

prejudice which the Court granted. (Dkt. Nos. 143, 146.) 

Factual Background1

Plaintiff is a licensed veterinary radiologist and established San Diego

Veterinary Imaging, Inc. (“SDVI”), in 2002, to conduct his veterinary radiology

practice. (Dkt. No. 93-5, Wallack Decl. ¶¶ 2, 8.) In the early 2000s, Plaintiff

recognized the need and benefit of digital imagery to view x-rays over the internet

instead of “making the rounds” and visiting veterinary offices, clinics and hospitals to

conduct his practice. (Id. ¶¶ 2, 3, 4.) In early 2004, Plaintiff contemplated and began

work to develop a software program to serve as a “platform” for veterinary radiologists

where they could keep, organize, retrieve and use all of their imagery. (Id. ¶ 7.) 

At that time,Plaintiff hiredDefendant Stephen Walters, a computer programmer,

to assist in the programming and coding of the computer platform/website. (Id. ¶ 9.) 

They worked together for months to develop the program and they agreed that Walters

would eventually become a 20% ownership in any future company. (Id.) Walters also

retained ownership of the portions of the source code/programmed information he

developed related to the platform/website. (Id.) 

In early 2004, Plaintiff named the software “DVMInsight” and decided to

conduct his tele-radiology practice under the name “DVMInsight.” (Id. ¶ 10.) In 2005,

SDVI established, through GoDaddy.com a domain name and website called

“DVMInsight.com” and SDVI registered the trademark “DVMInsight”. (Id.)

In July 2005, Plaintiff created and incorporated a new business called Veterinary

Imaging Center of San Diego, Inc. (“VICSD”). (Id. ¶ 13.) VICSD replaced SDVI for

some but not all of his work. (Id.) After VICSD opened, Plaintiff performed

conventional veterinary radiology and tele-radiology under its auspices. (Id.)

At the end of November 2005, Defendant Wright, a veterinary radiologist, 

The facts are taken verbatimfromthe Court’s order granting Defendants Wright 1

and Walter’s motion for summary judgment. (Dkt. No. 99 at 2-7.) 

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joined Plaintiff to work at VICSD to work on the DVMInsight platform and set up a

new corporation called DVMInsight. Inc. (Id. ¶ 14.) In 2005/2006, Wright became the

manager and resident radiologist at VICSD so Plaintiff could generate funds by

“making the rounds” to veterinary hospitals. (Id.) 

Wright, through his company AnimalInsides, Inc., provided online commentary

on veterinary radiology and on the increasing importance of digital imaging in

veterinary radiology. (Id. ¶ 15.) Plaintiff appreciated Wright’s talent for writing and

Wright expressed his appreciation for Plaintiff’s talent for undertaking and organizing

the DVMInsight/VICSD initiatives. (Id.) All three worked to complete the

development of the software program. (Id.) 

In September 2006, Plaintiff,Wright and Waltersincorporated DVMInsight, Inc.

(“DVMI”). (Dkt. No. 95-2, Ds’ Concordance of Separate Statement of Undisputed

Material Facts (“CSSUF”) No. 1.) At the time of incorporation, the purpose of

DVMInsight wasthreefold: 1) development of a software platform (“DVM platform”)

that could be used by veterinarians for teleradiology purposes; 2) operation of a

website where clients and providers could use the software; and 3) the generation of

teleradiology work for Plaintiff and Wright. (Id.) At the time of incorporation,

Plaintiff and Wright each owned 40% of DVMI’s outstanding stock, and Walters

owned the remaining 20%. (Id., CSSUF No. 2.) Plaintiff, Wright and Walters were

named officers and directors of DVMI. (Id.) Plaintiff was the President, Director and

Shareholder. (Id., CSSUF No. 4.) Plaintiff was never an employee of DVMI but he

occasionally read cases for DVMI. (Id.) 

Plaintiff’s role was to grow VICSD while Wright’s role was to grow DVMI. 

(Dkt. No. 87-16, Ds’ NOL, Ex. I, Wallack Depo. at 88:6-11; 90:19-91:5.) Over time,

Plaintiff stepped away from being administratively involved at DVMI and allowed

Wright to take over and grow the business. (Dkt. No. 87-16, Ds’ NOL, Ex. I, Wallack

Depo. at 71:5-16; 73:18-74:8.) Eventually, he was no longer involved in the day to day

operations of DVMI as he had a lot of other things going on. (Id.) There was a clear

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separation of responsibilities. (Dkt. No. 87-16, Ds’ NOL, Ex. I, Wallack Depo. at

90:19-91:5.) Hisrole was to grow the VICSD business and he left Wright and Walters

in charge of the DVMI business. (Id.) 

From the beginning of DVMI, Walters was employed and responsible for

information technology for the DVMI. (Dkt. No. 95-2, CSSUF No. 8.) In particular,

Walters was responsible for programming, keeping the servers up and running, and

providing high level technical support. (Id.) Wright also became an employee of

DVMI after he left employment at VICSD in June/July 2009. (Id., CSSUF No. 6.) 

DVMI grew steadily. (Id., CSSUF No. 9.) 

Around the spring 2009, Defendant Idexx Laboratories, Inc. (“Idexx”) was

searching for partners for its teleradiology/storage needs and issued a Request for

Proposal (“RFP”) to companies, including DVMI, to fulfill that need. (Id., CSSUF No.

10.) Wright made Plaintiff aware of the RFP and Defendants worked to prepare a

response on behalf of DVMI to offer its ImageBank services. (Id.) Because Plaintiff

devoted his full attention to VICSD, he did not have time to review the RFP or to

contribute, in a substantial way, to the RFP response. (Id.) 

Wright nonetheless provided Plaintiff with the RFP response, kept him apprised

of the status of the response, and informed Plaintiff that in the late spring of 2009, he

would be traveling to Maine, where Idexx was headquartered, to present the response

and to explore any interest that Idexx had in purchasing DVMI. (Id., CSSUF No. 11.) 

While Plaintiff now professes to have had a desire to attend the Idexx meeting, he

acknowledges that Wright did not stop him from accompanying Wright to the meeting

in Maine and that Plaintiff simply had other commitments outside of DVMI that

prevented him from attending. (Id.)

Wright testified that he and Farber discussed an offer where Idexx would pay a

multiple of 1.1-1.2 of DVMI’s gross revenues to purchase DVMI’s assets. (Dkt. No.

87-15, Ds’ NOL, Ex. H, Wright Depo. at 134:22-135:6.) Wright calculated the amount

based on DVMI’s $900,000 gross revenues for 2008/09 and came up with a purchase

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price of $1 million. (Id.) When Wright returned, he informed Walters and Plaintiff

about the offer of $1 million and they collectively agreed it was not acceptable. (Id.

at 145:22-146:4; Dkt. No. 93-5, Wallack Decl. ¶ 22.) 

While it is disputed as to who initially raised the idea of DVMI buying out

Plaintiff’s shares, in August 2009, the parties exchanged emails about the possibility

of buying Plaintiff out. (Dkt. No. 87-18, Ds’ NOL, Ex. I at 16-18 .) Plaintiff

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acknowledged that since Wright and Walters grew the company, they should reap the

rewards. (Id. at 16.) Plaintiff raised concern about distribution at the time for

shareholder distributions since he was not involved in DVMI. (Id.) DVMI’s attorney,

Michael Christian (“Christian”), responded that Plaintiff should hold onto his 40%

ownership and go along for the ride. (Id. at 17.) However, Plaintiff responded that he

did not agree because he did not think it would be fair and could result in a “train

wreck when it is time for shareholder distributions.” (Id.) Plaintiff was open to a

buyout. (Id.) Later, in another email, Plaintiff wrote that he did not need to get out and

was fine “staying in for the ride.” (Id. at 18.) At that time, discussions regarding a

buyout ended. As a result, Wright proposed a shareholder meeting to discuss the issue

of shareholder distribution. (Dkt. No. 93-3, P’s NOL, Ex. S at 274; 277-78.) A

shareholder meeting was held in August 2009. (Dkt. No. 87-17, Ds’ NOL, Ex. I,

Wallack Depo. at 146:2-3.) 

On December 7, 2009, Plaintiff emailed Christian, DVMI’s attorney, about

having DVMI repurchase his shares and asked for advice. (Dkt. No. 87-20, Ds’ NOL,

Ex. J, Christian Depo. at 51:1-9; Dkt. No. 87-20, Ds’ NOL at 18.) Plaintiff wrote, 

I am forwarding an email I received today from Matt. It is good to see

the company is doing well however, the context of the message

concerns me with respect to fiduciary responsibilities and bonuses

intended to drive the year end profits to a level that would require

retention of earnings. I don’t want to get into a legal battle so rather

than call for an accounting evaluation I think it is better if the other

shareholders buy me out. I am steadfast on this decision and believe

that a complete company valuation is required to determine a fair

market value.

The page numbers are based on the CM/ECF pagination. 

2

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(Dkt. No. 87-20, Ds’ NOL at 18.) Christian informed Plaintiffthatsince he represented

DVMI, he could not represent Plaintiff, a shareholder, against the interests of the

company. (Dkt. No. 87-20, Ds’ NOL, Ex. J, Christian Depo. at 63:3-8; Dkt. No. 87-20,

Ds’ NOL at 18.) 

Plaintiff subsequently retained counsel, William Markham (“Markham”), to

assist him in selling his shares to DVMI. (Dkt. No. 95-2, CSSUF No. 20.) In order to

determine the value of DVMI, Plaintiff reached out to Farber at Idexx in December

2009 to confirm the information that Wright had relayed in April 2009 that an offer of

a potential purchase price was made in the $1 to $1.1 million range. (Dkt. No. 95-2,

CSSUF No. 21.) 

In mid-December 2009, Plaintiff believed he had three options for effectuating

the repurchase of his DVMI shares: 1) negotiations between the parties; 2)submission

to binding arbitration and selection of a business valuation specialist/accountant whose

valuation would be binding on the parties; or 3) litigation among the parties. (Dkt. No.

95-2, CSSUF No. 22.) 

On December 18, 2009, Wallack, through his attorney, threatened to initiate a

lawsuit against Defendants. (Dkt. No. 95-2, CSSUF No. 23; Dkt. No. 87-23, Ds’ NOL,

Ex. L at 24-25.) In an effort to resolve differences among the parties without litigation,

Markham and Christian began working together in mid-December 2009 to negotiate

a stock repurchase agreement. (Dkt. No. 95-2, CSSUF No. 36.) Negotiations

continued through the latter part of December 2009 with the parties having vastly

different views about the value of DVMI and the provisions to be included in any

agreement. (Dkt. No. 95-2, CSSUF No. 37.) After negotiations with counsel and with

the assistance of a third party, David Zanders, the parties reached an agreement. (Dkt.

No. 95-2, CSSUF No. 37.) The parties executed a Stock Repurchase Agreement on

December 31, 2009. (Dkt. No. 93-3, P’s NOL, Ex. M.) Plaintiff agreed to sell his

DVMI shares for $274,500 and received a payment of $30,000 in exchange for the

settlement and mutual release. (Dkt. No. 95-2, CSSUF No. 37; Dkt. No. 93-3, P’s

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NOL, Ex. M.) 

On September 9, 2011, DVMI and Idexx entered into an Asset Purchase

Agreement where Idexx purchased the assets of DVMI and Animal Insides, Inc. for

around $3,200,000. (Dkt. No. 93-3, P’s NOL, Ex. N; Dkt. No. 95-2, CSSUF No. 42.) 

On December 22, 2011, Plaintiff and SDVI filed the instant action. (Dkt. No. 1.) 

Discussion

Defendants seek sanctions in the form of attorneys’ fees against Plaintiffs under

the Court’s inherent powers, or alternatively, under 28 U.S.C. § 1927. Plaintiffs

oppose. 

A. Court’s Inherent Powers

Defendants argue that Plaintiffs with the assistance of their counsel filed a

frivolous lawsuit whose purpose was to extort from Wright and Walters a portion of

the proceeds that they enjoyed when Idexx purchased the assets of DVMI in September

2011 even though Plaintiffs signed a general release barring these claims. They further

argue that Wallack wrongfully used the judicial process to assuage his own seller’s

remorse and engaged in bad faith conduct. Defendants seek attorneys’ fee incurred in

this case which amount to $92,530.00 plus the fees incurred with bringing the instant

motion.

Plaintiffs oppose arguing that they and their counsel did not act in bad faith in

prosecuting this case. They violated no court orders, did nothing vexatious, and

prosecuted their claims reasonably and expeditiously. According to Plaintiffs, they

prevailed on the trademark infringement against Idexx and that cause of action was

primarily caused by Defendants lying to Idexx that Wright wasthe person who created

the trademark, that the trademark transferred to DVMI as part of the Stock Repurchase

Agreement and then sold to Idexx. Since Wright and Waters were the root causes of

the lawsuit, Wallack was forced to file the complaint to protect his trademark rights,

and the other causes of action were necessarily included in the complaint. 

A court has the inherent power to assess attorneys’ feesfor “willful disobedience

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of a court order . . . or when the losing part has acted in bad faith, vexatiously,

wantonly, or for oppressive reasons . . . .” Roadway Express, Inc. v. Piper, 447 U.S.

752, 766 (1980) (citations omitted). Bad faith applies not only to actions that led to

filing the complaint but also to conduct during the litigation. Id. The court may assess

attorneys’ fees against the responsible party when the court finds “that fraud has been

practiced upon it, or that the very temple of justice has been defiled.” Chambers v.

Nasco, 501 U.S. 32, 46 (1991). Due to its potency “inherent powers must be exercised

with restraint and discretion.” Id. at 44. 

A specific finding of bad faith or conduct tantamount to bad faith is required for

inherent power sanctions. Fink v. Gomez, 239 F.3d 989, 993, 994 (9th Cir. 2001); see

also Yagman v. Republic Ins., 987 F.2d 622, 628 (9thCir. 1993) (quoting United States

v. Stoneberger, 805 F.2d 1391, 1393 (9th Cir.1986)); accord Zambrano v. City of

Tustin, 885 F.2d 1473, 1478 (9th Cir. 1989) (“To insure that restraint is properly

exercised, we have routinely insisted upon a finding of bad faith before sanctions may

be imposed under the court’s inherent power.”) Bad faith conduct includes willful

actions such as “recklessness combined with an additional factor, such as

frivolousness, harassment, or an improper purpose.” Fink, 239 F.3d at 994. 

“[S]anctions should be reserved for the ‘rare and exceptional case where the action is

clearly frivolous, legally unreasonable or without legal foundation, or brought for an

improper purpose.’” Primus Auto. Fin. Servs, Inc. v. Batarse, 115 F.3d 644, 649 (9th

Cir. 1997) (citation omitted). A finding of bad faith “does not require that the legal and

factual basis for the action prove totally frivolous; where a litigant is substantially

motivated by vindictiveness, obduracy, or mala fides, the assertion of a colorable claim

will not bar the assessment of attorney’s fees.” In re Itel Sec. Litig., 791 F.2d 672, 675

(9th Cir. 1986) (quoting Lipsig v. Nat’l Student Mktg. Corp., 663 F.2d 178, 182 (D.C.

Cir. 1980)). 

In Barber v. Miller, the Ninth Circuit affirmed the district court’s denial of

sanctions under 28 U.S.C. § 1927 and the court’s inherent authority where the district

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court found that the record demonstrated ignorance or negligence on the part of the

plaintiff’s counsel but not a finding of bad faith or recklessness. Barber v. Miller, 146

F.3d 707, 711 (9th Cir. 1998). In Barber, the plaintiff filed a complaint alleging patent

infringement and numerous state law causes of action. Id. at 709. Plaintiff’s counsel

conceded the plaintiff did not own the patent in question but she had transferred it to

another. Id. The defendant sent the plaintiff’s counsel a letter warning that there was

no federal jurisdiction due to lack of standing and the claims were barred by a mutual

general release and if the complaint was not dismissed, it would seek sanctions under

Federal Rule of Civil Procedure 11(c). Id. Eventually, the district court dismissed the

complaint for lack of standing, the same issue previously raised by the defendant. Id. 

At a hearing, the district court commented on plaintiff’s counsel’s “tactical bad faith”

and suggested that his lawsuit was a nuisance suit to extract a settlement and granted

defendant’s motion to dismiss with prejudice. Id. The defendant subsequently filed

a motion for sanctions. Id. The district court imposed sanctions under Rule 11 but

denied sanctions under the court’s inherent authority and under 28 U.S.C. § 1927. Id. 

The Ninth Circuit reversed the Rule 11 sanctions due to the defendant’s failure to

follow the procedures and affirmed the district court’s denial of sanctions under its

inherent authority and 28 U.S.C. § 1927 because there was no finding that counsel was

reckless or acted in bad faith; instead the evidence demonstrated ignorance or

negligence. Id. at 711.

Here, the Court granted Wright and Walters’ motion for summary judgment on

the breach of fiduciary duty claim because the general release contained in the Stock

Repurchase Agreement barred that claim. (Dkt. No. 99.) The Court concluded that

Wallack was aware of all the facts surrounding the breach of fiduciary claim prior to

signing the Stock Repurchase Agreement. (Id. at 22.)

Defendants argue that the Court, while it did not make a finding of bad faith,

concluded that the undisputed evidence, which were known to Wallack before the case

was filed, that he released the Defendants in 2009 from the claims he raised in this

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case. Based on this, Defendants contend that there is a logical inference that the action

was so completely without merit from its inception that it was pursued with an

improper purpose. Plaintiffs contend that because Wright and Walters were the

underlying cause, by trying to sell the trademark to Idexx, of the trademark

infringement, Wallack was forced to file the complaint. 

While a general release can be complete bar to known and unknown claims at

the time of the release, a release can be voided if (1) there was fraud in the inception -

misrepresenting the nature or contents of the document being executed; (2) a release

obtained by a fiduciary without full disclosure of the relevant facts; or (3) fraud as a

ground for not applying a release to an unknown claim because the fraud prevented the

releasor from knowing about the claim. San Diego Hospice v. Cnty. of San Diego, 31

Cal. App. 4th 1048, 1053, 1054 n.2 (1995). In determining the enforceability of a

release, courts consider (1) whether the parties are represented by counsel; (2) whether

the releasor was aware of any potential claims, and (3) whether the releasor with this

awareness of the second factor, and advice of counsel, the releasor agreed to release

unknown claims explicitly waiving the protection of California Civil Code section

1542. Id. at 1054 (citing Winet v. Price, 4 Cal. App. 4th 1173, 1168 (1992)). 

Based on this legal standard, Plaintiffs had a plausible argument for voiding the

general release based on fraud and/or breach of fiduciary duty. In the spring of 2009,

Wright flew to Maine and met with an Idexx representative concerning Idexx’ interest

in purchasing DVMI where Idexx indicated it would pay about $1 million for DVMI. 

As the year progressed, the relationship between Wallack, and Wright and Walters

became strained which led to discussions about buying Wallack out starting in August

2009. As the relationship deteriorated, the parties executed a Stock Repurchase

Agreement on December 31, 2009 where Wright and Walters bought out Wallack’s

share in DVMI. The Stock Repurchase Agreement contained a mutual general release.

Under the Agreement, Wallack received $274,500 for selling his shares in DVMI and

$30,000 for the settlement and mutual release. Almost two years later, in September

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2011, Idexx purchased DVMI and Animal Insides, Inc. for around $3.2 million, which

was 4.3 times higher than the valuation that the parties used to buy out Wallack. In that

same month, Wallack was approached by an executive at Idexx at a convention they

were attending and offered Wallack $5,000 for SDVI to transfer the trademark to

Idexx. It was at that time that Wallack learned about the sale of DVMI to Idexx. Then 

in November 2011, Idexx attempted to have the trademark registered in its name which

was rejected by the U.S. Patent and Trademark Office. 

While certain facts supporting breach of fiduciary duty were known to Plaintiffs

at the time of the Stock Repurchase Agreement, it was not until after the Stock

Repurchase Agreement that Wallack was approached by an Idexx representative who

sought to purchase the trademark and Wallack learned of the $3.2 million sale of

DVMI to Idexx in 2011. According to Plaintiffs, SDVI wasthe owner of the trademark

as it was not part of the Stock Repurchase Agreement, and Idexx’ attempt to buy or

register the trademark meant that Wright and Walters must have attempted to sell the

trademark to Idexx in September 2011. According to Plaintiffs, the sales price of $3.2

million for SDVI most likely included ownership of the trademark. Therefore, these

facts support an allegation of fraud and/or breach of fiduciary duty, concerning the

alleged sale or transfer of the trademark to Idexx, that could void the release. 

However, through discovery, the additional facts did not support a claim for

breach of fiduciary duty, and summary judgment was granted in favor of Defendants. 

Plaintiffs provide the declarations of Wallack, their counsel, and former counsel

concerning their due diligence by carefully reviewing the record and conducting legal

analysis before filing the complaint in this case. (Dkt. Nos. 154-1, 154-2, 154-3.) 

Former counsel stated that he spent 73.3 hours prior to filing the complaint to review

the facts and applicable law, including significant research on whether the causes of

actions were viable in light of the general release. (Dkt. No. 154-2, Markham Decl. ¶

5.) Current counsel states he spent 40-50 hours reviewing the record, the pleadings,

motions and talking with Wallack to determine whether the general release could be

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voided. (Dkt. No. 154-3, Millar Decl. ¶ 5.) On the other hand, Defendants present no

facts, besides an inference that is not supported, that Plaintiffs and their counsel acted

in bad faith or that the lawsuit was brought for an improper purpose. 

Defendants also argue that “had all the pertinent facts been pleaded at the

inception of this lawsuit, the case would have been dismissed at the pleading stage

because ultimately the Summary Judgment Order was issued because of the Release

Argument.” (Dkt. No. 149-1 at 11-12.) However, Rule 8 only requires “a short and

plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ.

P. 8(a). Defendants do not provide any legal support for their argument that more is

required. Plaintiffs sufficiently alleged causes of action for breach of fiduciary duty

and trademark infringement in their second amended complaint. 

Accordingly, the Court concludes that Plaintiffs and their counsel did not bring

the instant case or pursue the litigation in bad faith and the causes of action brought

were not wholly frivolous and not brought for an improper purpose. Accordingly, the

Court DENIES Defendants’ motion for sanctions under the Court’s inherent powers. 

B. 28 U.S.C. § 1927

Alternatively, in the event the Court denies Wright and Walter’s motion for

attorneys’ fee based on the court’s inherent power, it should award attorneys’ fees

under 28 U.S.C. § 1927 because Plaintiffs’ attorney should have known better than to

continue pursuing claims by filing a complaint and engaging in conduct that multiplied

the proceedings. 

28 U.S.C. § 1927 provides:

Any attorney or other person admitted to conduct cases in any court of

the United States or any Territory thereof who so multiplies the

proceedingsin any case unreasonably and vexatiouslymay be required

by the court to satisfy personally the excess costs, expenses, and

attorneys’ fees reasonably incurred because of such conduct. 

28 U.S.C. § 1927. District courts have discretionary authority “to hold attorneys

personally liable for excessive costs for unreasonably multiplying proceedings.” 

Gadda v. Ashcroft, 377 F.3d 934, 943 n. 4 (9th Cir. 2004). An attorney who

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“multiplies the proceedings” may be required to pay the excess fees and costs caused

by such conduct. Braunstein v. Arizona Dep’t of Transp., 683 F.3d 1177, 1189 (9th

Cir. 2012). There must be a showing of the attorney’s recklessness or bad faith. Estate

of Blas ex rel. Chargualaf v. Winkler, 792 F.2d 858, 860 (9th Cir. 1986). “Bad faith

is present when an attorney knowingly or recklessly raises a frivolous argument or

argues a meritorious claim for the purpose of harassing an opponent.” Id. “Bad faith

may be inferred from a totally baseless course of conduct.” Id. Ignorance or

negligence or incompetence does not support a finding of recklessness or bad faith. 

Banas v. Volcano Corp., 47 F. Supp. 3d 941 (N.D. Cal. 2014) (citing Park B. Smith,

Inc. v. CHF Indus. Inc., 811 F. Supp. 2d 766, 775 (S.D.N.Y. 2011)). 

Sanctions under § 1927 are warranted when attorneys file repetitive motions or

generate an extraordinary volume of paperwork in the case. Braunstein, 683 F.3d at

1189. Sanctions do not apply to the filing of a complaint because § 1927 applies to

unnecessarily multiplying the proceedings after a complaint is filed. In re Keegan

Mgmt. Co., Securities Litigation, 78 F.3d 431, 435 (9thCir. 1996). A “frivolous” filing

is one “that is both baseless and made without a reasonable and competent inquiry.” 

Holgate v. Baldwin, 425 F.3d 671, 677 (9th Cir. 2005).

Defendants argue that Plaintiffs’ counsel acted in bad faith as he knew orshould

have known that the legal and factual contentions, that he himself repeatedly included

in pleadings and oppositions were not only weak, they were wholly lacking in merit as

the Court ultimately ruled. They contend that if Plaintiffs’ counsel had fulfilled his

obligations to conduct research when he substituted in as counsel, he would have

known that the bases of any alleged claims had been validly released with the Stock

Purchase Agreement in 2009; therefore, he acted in bad faith. By filing the first

amended complaint, the second amended complaint, the opposition to the MSJ, and

pursuing discovery, he multiplied the proceedings that he knew would not alter the

outcome. Defendants also allege that Plaintiffs’ counsel purposely presented

allegations to this Court that he knew to be false and/or he did not plead facts, that, if

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they had presented with the initial pleading, would have foreclosed years of needless

litigation. Plaintiffs disagree arguing that there were no unnecessary delays or

extensions of time. Counsel for Plaintiffs states that he did not commit bad faith and

he prosecuted the case in good faith despite the MSJ outcome and in light of the overall

outcome of the case. 

Similarly, based on reasoning above, counsel for Plaintiffs did not purposely

prolong the proceedings by filing amended complaints, and oppositions, and seeking

discovery in the case. He was advocating and vigorously representing his client. 

Moreover, as the Court concluded above, Plaintiffs’ counsel had a reasonable basis to

file a complaint in this case. 

Thus, the Court concludes that Defendants did not multiply the proceedings

unreasonably or vexatiously. The Court DENIES Defendants’ motion for attorneys’

fees pursuant to 28 U.S.C. § 1927. 

Conclusion

Based on the above, the Court DENIES Defendants Wright and Walters’ motion

for attorneys’ fees. The hearing set for June 3, 2016 shall be vacated. 

IT IS SO ORDERED. 

DATED: June 1, 2016

HON. GONZALO P. CURIEL

United States District Judge

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