from Viridian are reflective of its desire to gain a leg up in
its competitive posture vis-a-via Viridian by obtaining the
latter's confidential business information, rather than those
demands having any bona fide connection to this action as a
legitimate lawsuit.

It is against that framework that Viridian's motion for an
award of attorneys' fees and expenses must be viewed. To begin
with, Zila's dismissal of its Lanham Act claim with prejudice
clearly makes Viridian the “prevailing party” for purposes of
considering such an award. Although the parties have called upon
other authorities in advancing their conflicting arguments on
that score, this Court has found most compelling our own Court of
Appeals' exposition of that subject in the course of contrasting
such a with-prejudice dismissal with a voluntary without-
prejudice dismissal under Fed.R.Civ.P. (“Rule”) 41(a) (1) (i) --

here is the relevant excerpt from Szabo Food Serv., Inc. v.

Canteen Corp., 823 F.2d 1073, 1076-77 (7% Cir. 1987) (citations
omitted):

A dismissal without prejudice under Rule 41(a) (1) (i)
does not decide the case on the merits. The plaintiff
may refile the complaint (or, as Szabo-Digby did here,
file a redacted complaint in a different court). The
defendant remains at risk. A dismissal under Rule
4i(a) is unlike a dismissal with prejudice under Rule
41(b), which enables the defendant to say that he has
“prevailed”. A cave-in by the defendants may support
an award of fees to the plaintiff without a judicial
declaration of entitlement to relief. Capitulation or
settlement is the practical equivalent of success.
Surrender by the plaintiff should be treated similarly.



No labeling, has previously been affixed to any of Viridian’s prototypes or product
samples. Nor has any packaging been designed or distributed for Viridian’s products that could
have included the marks “GMP” or “INNOVATIVE”, or the name “Innovative Swab
Technologies”. Viridian has never advertised its single-use self-contained unit dose swab
applicator or its break-tip tube products in the mass media,

Plaintiff markets and distributes a single-use swab applicator product undpr the name
“Pro-Swab”. It does not use the marks “GMP” or “INNOVATIVE” on the labeling or the
packaging of its single-use swab applicators, In its advertising, Plaintiff identifies the
manufacturer of its single-use swab applicator product as being “Zila” and “Zila
Pharmaceuticals, Inc.”

One of Plaintiffs customers, Beutlich Pharmaceuticals, L.P., previously sought to
purchase from Viridian a bulk quantity of its single-use self-contained unit dese swab applicator
product. No transaction has yet occurred. Beutlich Pharmaceuticals, L.P. was not in the course
of attempting to purchase product from Viridian confused about the distinction between
Plaintiff's products and Viridian’s products. All of the products Zila Swab Technologies, Inc.
has offered to sell to Beutlich Pharmaceuticals, L.P, have been identified with the name “Zila”,
Plaintiff’s single-use swab applicator product marketed under the name “Pro-Swab” competes in
the professional marketplace with a product marketed by Beutlich Pharmaceuticals, L.P.

ROUEN
BROCHEENT,

VATIVE” IN

VIRID- S NOT USED THE MARKS “GMP” OR_*

COMMERCE.

Zila’s First Amended Complaint alle;

Wative” and combinations thereof, which is likely to cause confusio

2¢-to-the-affilietion, connection: .

igtol toch
a mistalice,_or-to~decery

3



But it is also true that it should quickly have become
apparent to Zila, certainly not later than the time when it and
its counsel learned that no sales of competing merchandise had
been made (or even offered) by Viridian under any false indicia
of origin, that the lawsuit no longer had any legitimate purpose.
By that point Zila's real goal was plainly to obtain a
competitive advantage over Viridian by getting confidential
business information and by using the lawsuit as a pressure
tactic. This action had then become an “exceptional case” within
the meaning of Section 35 (see, e.g., S Indus., Inc. v. Centra

2000, Inc., 249 F,3d 625, 627-28 (7 Cir. 2001) and Door Sys.

Inc. v. Pro-Line Door Sys., Inc,, 126 F.3d 1028, 1031-32 (7% Cir,

1997)), and the proceedings were then being multiplied
unreasonably and vexatiously so as to trigger the liability of
Zila's counsel under 28 U.S.C. §1927 (see e.g., Gregory Joseph,
Sanctions: The Federal Law of Litigation Abuse §23(A) (3), at 391
(3d ed. 2000) and cases cited there) .°

This Court therefore grants Viridian's motion in principal
part, although not entirely. For purposes of quantifying the
award of fees and expenses, the litigants' attention is called to
the provisions of this District Court's LR 54.3(d). Although LR

54.3(a) states that the rule “does not apply to motions for

8 Indeed, many aspects of the manner in which Zila and
its counsel dealt with their discovery obligations -- one of the
major contributors to the prolonged nature of the litigation --
are comparable to what justified the sanctions award in S$ Indus.

6



Accord, 10 Moore's Federal Practice §54.171[3] [c] [iv], at 54-280
to 54-281 (3d ed. 2002) (footnotes and case citations omitted):

As such, a dismissal without prejudice does not render

the defendant a prevailing party for purposes of the

fee-shifting statutes. Conversely, a dismissal with

prejudice is an adjudication on the merits that changes

the legal relationship between the plaintiff and the

defendant, extinguishing whatever claim the plaintiff

might have had against the defendant. Accordingly, a

dismissal with prejudice makes the defendant a

prevailing party.’

With Viridian's potential entitlement to a fee award as the
“prevailing party” thus having been established, the question
becomes whether that potential has become converted into
actuality, either as to Zila under the auspices of Section 35 or
as to its counsel under 28 U.S.C. §1927, or as to both. Again
the answer is “yes” -- this time as to both of those questions --
but not as to the entirety of the services rendered by Viridian's
counsel. As stated earlier, based on what has been represented
to this Court as to what Zila knew about Viridian's use of the

challenged marks at the outset, the lawsuit could initially have

been brought in objective good faith,

’ Zila has cited a few cases that contain some language
that suggests otherwise. But those opinions, which disclaim the
availability of fee awards to a defendant after a with-prejudice
dismissal, do so on the premise that the legal services will not
have to be repeated in future litigation. Thus the cases have no
relevance to the question whether the cost of defense counsel's
past services to their clients are recoverable as sanctions under
Rule 11 or 28 U.S.C. §1927 or the Lanham Act. Instead they deal
with situations wholly distinguishable from the one before this
Court, and they carry no persuasiveness.

5



Plaintiff in Count 2 of its Firs

Amended Conypfaint attempts to state a claim under the

Illinois Trade Secrets Act, and has alleged ental jurisdiction exists for that claim

First Amended Complaint 4.14. Supplemental jurisdiction over

under 28 U.S.C. § 13672

the Plaintiff's

Plaintiff s Slaw claim is based upon this Court’s original jurisdiction o

1

Yahi, A
S@nhanrstet

STATEMENT OF FACTS

The Defendant limited liability company was organized under the name of GMP
Products, LLC on April 2, 2001. Thereafter, it had imprinted on its stationery the name “GMP
Products, LLC” and the phrase “Innovative Packaging Solutions.” No later than April 17, 2002,
the Defendant limited liability company lawfully changed its name from GMP Products, LLC to
Viridian Packaging Solutions, LLC, and removed the name “GMP Products, LLC” and the
phrase “Innovative Packaging Solutions” from its stationery. Viridian did not thereafter send to
prospective customers any material using the name “GMP Products, LLC”, the phrase
“Tnnovative Packaging Solutions”, or the marks “GMP” or “INNOVATIVE”.

Viridian has not to-date manufactured any product in bulk or filled any order for any
customer. Nor has it sold any products or received any revenues. Viridian has only
manufactured limited quantities of product prototypes and samples of a single-use unit dose

swab applicator and a break-tip tube.

’ Plaintiff is incapable of alternatively establishing the existence of diversity jurisdiction
under 28 U.S.C..§ 1332(a) because it is a citizen of the State of Illinois within the meaning of 28
U.S.C, § 1332(c)(1). Defendants are also citizens of the State of Illinois.

2

APPENNIX 1



Minute Order Ferm (06/97)

United States District Court, Northern District of Illinois

Name of Assigned Judge i Sitting Judge if Other
or Magistrate Judge Milton I. Shadur than Assigned Judge
CASE NUMBER 01 C 8729 DATE 4. 3/31/2003
CASE Zila Swab Technologies vs. Darrcll W. Van Dyke, et al.
TITLE
[In the following box (a) indicate the party filing the motion, c.g., plaintitf, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented. ]

DOCKET ENTRY:

qd) oO Filed motion of [ use listing in “Motion” box above.]
(2) Oo Brief in support of motion due
(3) im) Answer brief to motion due. . Reply to answer briefdue_
(4) Oo Ruling/Hearing on set for at
(5) o Status hearing[held/continued to] [set for/re-sct for] on __ set for at
(6) oO Pretrial conference[held/continued to] [sct for/re-sct for) on set for at.
(7) oO Trial[sct for/re-set for] on at
(8) Oo [Bench/Jury trial] [Hearing] held/continued tot
(9) Oo This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OFRCP4(m) O Local Rule 41.1 OFRCP41(ay1) OO FRCP41(a)(2).
(io) ff [Other docket entry) ENTER MEMORANDUM OPINION AND ORDER.
(ll) 8 [For further detail see order attached to the original minute order.)
No notices required, advised in open court 5 Document

No notices required.

YIN
Notified counsel by telephone.

» Number:

“A

number of notives

ices maited by judge's staff. APR OS a993
4

date docketed

Docketing to mail notices.

Mail AO 450 form, Inff deputy initials

Copy w judge/magistrate judge.

31/2003

date mailed notice
courtroom

deputy’s
initials

ra

BINA GU

Datejtime received.in,
cert Che stOrtiog | 4

JID wD

mailing deputy initials



sanctions under Fed.R.Civ.P. 11 or other sanctions
the procedure that is called for there (though not
the same timetable) has always proved constructive

(if not in eliminating entirely) parties' disputes

provisions,”
necessarily on
in narrowing

in generating

the final numbers for fee awards in sanctions situations as well.

This Court will await appropriate further submissions by the

parties as soon as may prove feasible.

Ch Mae Kccotcr

Milton I. Shadur

Senior United States District Judge

Date: March 31, 2003



legitimacy had a limited life, for it soon became obvious that
Zila could never demonstrate an actual violation of its trademark
rights by Viridian's placement of the protected marks (or
confusingly similar marks) on any goods at all, let alone by
Viridian's sale of any goods so marked in commerce. Instead
Viridian promptly abandoned any use of “GMP” or “Innovative
Packaging Solutions” (1) by changing the limited liability

company's name and by removing the name and phrase from its

stationery -- something that it did within a few months after
this action was brought -- and (2) by never using either of the

claimed marks in connection with any goods or packaging. And at
that point Zila, having sustained no damage of any sort before
that abandonment, no longer had any good faith basis for pursuing
the litigation.

This is made even more plain when Zila's other conduct in
connection with this litigation is examined. Its claim that it
had suffered an infringement of some trade secrets (Van Dyke had
been its President before he left to engage in his own proposed
start-up business) was never validated even in terms of its own
beliefs, let alone by its identifying any such trade secrets
despite having been given numerous opportunities to do so. And

the unjustified breadth of Zila's efforts to obtain discovery

appropriately raise a trademark infringement claim to begin with,
Viridian's counsel has never posed an objection in those terms,
so this opinion merely mentions the matter in passing.

3



marks lawyers' submissions. Just one example on each side will
be cited, though these are by no means exhaustive. On the one
hand, Viridian seeks to taint Zila's conduct as having been
improper from the very outset, relying for that purpose on the
false premise that as a matter of law no Section 43(a) claim can
arise unless an assertedly infringing trademark is placed on
goods in commerce. On the other hand, Zila incorrectly asserts
that it remained entitled to proceed with its Section 43 (a)
action until Viridian had removed, from the very small sign that
identified the two companies that were located in the small
industrial building where Viridian is housed, the words “GMP
Products, LLC” (that was the name under which Viridian was
originally organized, and that name constitutes one of the
asserted infringements charged by Zila).

When the underbrush of those and other non-outcome-
determinative matters is cleared away, however, the issues become
more clear. This Court finds that Zila did have a legitimate
concern and predicate for bringing this action in the first
instance, because it had a reasonable good faith belief that
Viridian was then infringing its “GMP” and “Innovative” marks by

soliciting business under those names.? But that level of

3 This is said despite the fact that Zila itself
apparently did not use either of those marks on its_own goods
(see App. 1, which this Court has previously attached as an
appendix to its November 12, 2002 memorandum order} . Although
that certainly appear to raise a question whether Zila could

2



aw
IN THE UNITED STATES DISTRICT COURR ee a
FOR THE NORTHERN DISTRICT OF ILLINOIS i .
EASTERN DIVISION 5
nv
ae
ZILA SWAB TECHNOLOGIES, INC.,
etc.,

)
)
)
Plaintiff, )

) a

Vv. ) No. 01 C 8729

)

DARRELL W. VAN DYKE, et al., )
)
Defendants. )

MEMORANDUM OPINION AND ORDER

After Zila Swab Technologies, Inc. (“Zila”) had effectively
said “we surrender” in its action against Darrell Van Dyke (“Van
Dyke”) and GMP Products, LLC (now Viridian Packaging Solutions,
LLC)* by dismissing (1) its Lanham Act claim? with prejudice and
(2) its supplemental-jurisdiction state law claims without
prejudice, Viridian moved for an award of attorneys' fees and
expenses under Section 35 (15 U.S.C. §1117) and 28 U.S.C. §1927.
Successive and extensive briefing by the parties has made that
motion ripe for decision.

It should be said at the outset that each side has engaged

in some aspects of the impermissible hyperbole that too often

2 For convenience both defendants will collectively be

referred to in this opinion as “Viridian,” treated as a singular
noun,

2 Zila's federal-question claim wag advanced under Lanham

Act §43(a), 15 U.S.C. §1125(a). Further citations to the Lanham
Act will simply take the form “Section --,” referring to the
numbering within the Lanham Act and not to the Title 15
numbering.

A\