This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480A.08, subd. 3 (2012).

STATE OF MINNESOTA

IN COURT OF APPEALS

A13-2064

Guava LLC, et al., 

Appellants, 

Michael Dugas, 

Appellant,

vs. 

Spencer Merkel, 

Defendant, 

Qwest Communications Corporation, et al., 

Respondents, 

John Doe 173.23.48.174, et al., 

Respondents, 

John Doe 24.111.103.45, et al., 

Respondents, 

John Doe 173.19.225.244, et al., 

Respondents,

John Doe, et al.,

Respondents.

Filed August 4, 2014

Affirmed as modified

Toussaint, Judge*

Hennepin County District Court

File No. 27-CV-12-20976

 

* Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to 

Minn. Const. art. VI, § 10. 
2

Paul Robert Hansmeier, Class Justice PLLC, Minneapolis, Minnesota (for appellants

Alpha Law Firm LLC and Guava LLC)

Michall Dugas, Class Justice PLLC, Minneapolis, Minnesota (pro se)

David Earle Camarotto, Bassford Remele, P.A., Minneapolis, Minnesota (for respondents

Qwest Communications Corporation, et al.)

Mark Christopher Santi, Thompson Hall Santi Cerny & Dooley, Minneapolis, Minnesota 

(for respondents John Does 173.23.48.174, et al.)

Paul Allen Godfread, Godfread Law Firm, P.C., Minneapolis, Minnesota (for respondents

John Doe 24.111.103.45, et al.)

John Thomas Sullivan, Edward Peter Sheu, Best & Flanagan, LLP, Minneapolis, 

Minnesota (for respondents John Doe 173.19.225.244)

Phillip Gainsley, Phillip Gainsley Law Office, Minneapolis, Minnesota (for respondent 

John Doe, et al.)

Considered and decided by Schellhas, Presiding Judge; Halbrooks, Judge; and 

Toussaint, Judge. 

U N P U B L I S H E D O P I N I O N

TOUSSAINT, Judge

This appeal is taken from a district court order imposing attorney-fee sanctions 

against appellants for the bad-faith pursuit of litigation. Because the district court did not 

abuse its discretion, we affirm. 

FACTS

As the district court observed, “[t]his case has a relatively short but peculiar 

history. This Court was presented with virtually no factual evidence during the pendency 

of this ‘litigation.’” Much of the evidence that was presented to the district court related 
3

to decisions from courts in other jurisdictions finding misconduct, similar to that alleged 

here, by the same parties or by apparently related entities. It is clear from these decisions 

that appellants are believed to be engaged in a sophisticated scheme to improperly use the 

judicial process to obtain the identities of Internet subscribers from Internet service 

providers (ISPs), and to use that information to pursue settlements of alleged copyright 

and/or hacking claims with those Internet subscribers. See, e.g., AF Holdings, LLC v. 

Does 1-1058, __ F.3d __, 2014 WL 2178839, at *2 (D.C. Cir. May 27, 2014) (describing 

“modus operandi” of Prenda Law); Ingenuity 13 LLC v. John Doe, 2013 WL 1898633, at 

*2-3 (C.D. Calif. May 6, 2013) (setting forth findings on scheme by attorneys John 

Steele, Paul Hansmeier, Paul Duffy and Prenda Law).1 Like the district court, however, 

although we may take judicial notice of the decisions from other jurisdictions, Minn. R. 

Evid. 201(b), we base our decision on the record developed before the district court in 

these proceedings, viewed in the light most favorable to the district court’s findings. See 

Rasmussen v. Two Harbors Fish Co., 832 N.W.2d 790, 797 (Minn. 2013) (holding that 

appellate courts examine evidence in light most favorable to district court’s findings).

 

1

The types of claims asserted by appellants and their law firms have changed over time. 

Both AF Holdings and Ingenuity 13 involved copyright claims asserted directly against 

John Does, and attempts to use third-party subpoenas to discover the identities of the 

John Doe defendants. AF Holdings, 2014 WL 2178839, at *2 (describing suit against 

1,058 John Does); Ingenuity 13, 2013 WL 1898633, at *2-3 (describing multiple suits 

filed in federal district court). In this case, as is further described below, appellants 

initiated a computer-hacking claim against a single, passive defendant, and sought 

discovery of the identities of Internet subscribers alleged to have conspired with the 

defendant. What this case has in common with the previously asserted actions, again as 

we discuss further herein, are attempts to misuse subpoena power. 
4

The parties 

In the complaint that initiated this litigation, plaintiff-appellant Guava LLC is 

described as “a limited liability company that owns and operates protected computer 

systems . . . accessible throughout Minnesota.” It is unclear, however, whether Guava 

even exists. Despite repeated inquiries by the district court, the record includes no 

evidence regarding Guava’s incorporation, the identity of its principals, or the nature of 

its business operations. John Steele, one of several attorneys who appeared on behalf of 

Guava in the district court proceedings, stated during a hearing that Guava has “an office 

in Las Vegas. They’re also based out of I believe they’re in Nevis [in the Caribbean].” 

At another hearing, in response to questioning regarding Guava’s existence, appellant 

Michael K. Dugas conceded that he had provided no documentary or affidavit evidence 

of the company’s existence, asserting merely that “there’s several principals that I met 

from Guava LLC so I am, you know, very aware that they’re an actual company.” No 

corporate representative of Guava ever appeared before the district court. 

Appellant Alpha Law Firm LLC was a Minnesota limited liability company 

registered on January 22, 2010, by Paul Hansmeier, an attorney licensed to practice in 

Minnesota. Hansmeier filed a notice of dissolution for the firm on August 30, 2013. 

Appellant Dugas is also an attorney licensed to practice in Minnesota. 

Dugas, Hansmeier, Steele, Alpha, and Prenda Law Inc. represented Guava in 

proceedings before the district court. Although most of the pleadings included a 

signature block identifying Dugas and Alpha as counsel for Guava, Hansmeier filed a 

notice of appearance in the district court identifying himself as “of counsel” at Prenda 
5

Law and Steele, an Illinois attorney, sought pro hac vice admission in the district court. 

On appeal, Guava and Alpha are represented by Hansmeier and Class Justice PLLC, a 

limited liability company registered with the Minnesota Secretary of State by Hansmeier

on July 3, 2013. 

Spencer Merkel is a resident of Beaverton, Oregon and the defendant in the 

lawsuit initiated by Guava. Merkel was represented by Minnesota attorney Trina 

Morrison, who went to law school with Dugas. 

Respondents are ISPs and John Does, and their counsel, who objected to thirdparty subpoenas served by appellants in this action and who sought and obtained 

sanctions from the district court. 

Factual Background

In September 2012, Merkel received a letter from Prenda Law Inc., alleging that 

he had violated copyright laws by downloading an adult film from the Internet. The letter 

advised Merkel that the owner of the copyright, Hard Drives Productions, Inc., would 

bring suit against Merkel unless he paid $3,400 in settlement of the claims. Unable to 

pay, Merkel called the number provided in the letter, and spoke to someone who 

identified himself as “Michael” or “Mike,” who offered Merkel an alternative settlement 

arrangement. Under that arrangement, Merkel would agree to be sued, Prenda would ask 

for, and Merkel would provide, a copy of his bit-torrent log, and Prenda would dismiss 

the case against Merkel. In discussing the settlement, “Michael” stated that he did not 

know any attorneys in Oregon, but that he knew an attorney in Minnesota who would 

represent Merkel pro bono. Merkel thus agreed to be sued in Minnesota, and he retained 
6

Morrison based on information provided to him by “Michael” at Prenda Law. Merkel 

had never heard of Guava or Alpha before this suit was initiated, and he believed he 

would be sued by Hard Drives in Minnesota and that Prenda Law would be opposing 

counsel. 

Procedural History

Guava served the complaint in this action on Merkel on October 15, 2012, and 

filed it in Hennepin County District Court two days later. The complaint alleged two 

counts: the first for interception of electronic communications in violation of Minn. Stat. 

§ 626A.02 (2012) and the second for civil conspiracy to violate the same statute. The 

complaint contains little detail about the supposed violations, alleging generally that 

Merkel “used a username and password that did not belong to him to gain unauthorized 

access to [Guava’s] protected computer systems” and “intercepted electronic 

communications between [Guava] and its paying members,” and that Merkel “obtained 

the username and password . . . from a website that allows its members to trade stolen 

usernames and passwords amongst one another.” 

On October 25, 2012, one week after filing the complaint, Guava filed an 

“unopposed discovery motion for authorizing order,” seeking the district court’s approval 

of subpoenas directed to more than 300 ISPs, ostensibly to discover Merkel’s alleged coconspirators’ names, addresses, telephone numbers, e-mail addresses, and media access 

control addresses. The district court held a hearing on October 31, 2012; neither Merkel 

nor his counsel appeared. The district court denied the motion, concluding that Guava 
7

had “not demonstrated that the personally identifying information possessed by over 300 

Internet Service Providers . . . is relevant and material to this matter.” 

 On November 6, 2012, Guava filed an “emergency renewed unopposed 

discovery motion for authorizing order,” this time seeking approval for subpoenas 

directed to 17 ISPs. Guava asserted in its motion that “these specific ISPs 

unquestionably possess information connected to the issues in this litigation,” but 

provided no evidentiary support for that assertion. The district court held a hearing on 

November 7, 2012, and issued an order that day granting Guava’s motion, but allowing 

the targeted ISPs a period of 30 days to file motions to quash. A number of ISPs and 

individual Internet subscribers, referenced as John Does, moved to quash the subpoenas, 

and a hearing was scheduled for January 25, 2013. 

At the January 25 hearing, counsel for the ISPs and John Does asserted that the 

litigation was being pursued for the improper purpose of using third-party discovery to 

obtain names of Internet subscribers from whom settlements could be extorted. In 

support of this assertion, counsel submitted an affidavit from Merkel regarding his 

interactions with Prenda Law in the months leading up to the initiation of this suit. The 

district court also heard testimony from attorney Morrison that Merkel was referred to her 

by Dugas and Hansmeier; that she expected a suit from Hard Drives; and that “[t]here’s 

been some bait and switch you might call it in this case.” Counsel opposing the 

subpoenas further asserted that the improper purpose of the litigation was evidenced by 

Guava’s failure to seek any discovery from Merkel himself. Guava, through attorneys

Steele and Hansmeier, denied any connection between Hard Drives and this action, 
8

conceded that they had not yet sought any discovery from Merkel, and asserted that the 

third-party discovery was an important first step to their discovery efforts. 

Counsel for the ISPs and John Does also raised concerns about Guava’s failure to 

file a certificate of authority, a prerequisite for foreign entities doing business in 

Minnesota before bringing suit. See Minn. Stat. § 322B.694 (2012). Attorneys Steele

and Hansmeier conceded that no certificate had been filed, but asserted that the statute 

did not apply because Guava was not doing business in Minnesota. When pressed by the 

district court for a basis for Minnesota courts exercising jurisdiction, Steele asserted that, 

despite Guava’s and Merkel’s lack of connections to Minnesota, personal jurisdiction was 

proper because the parties consented to it. He also somewhat cryptically asserted that the 

case had a Minnesota connection because “the location and progress verifying activities 

were trying to show that much of the activity, of certain amounts of the activity, was 

occurring in Minnesota[,] so it’s the acts themselves that are occurring in Minnesota.” 

The district court was not persuaded by Steele and Hansmeier’s arguments, and at the end 

of the January 25 hearing the district court indicated that it would take the matter under 

advisement but was inclined to dismiss the entire action based on Guava’s failure to file a 

certificate of authority under Minn. Stat. § 322B.694. 

On March 1, 2013, before the district court issued a ruling on the motions to 

quash, Guava and Merkel filed a stipulation for dismissal with prejudice. The same day, 

counsel for one group of the John Does filed a motion and affidavit seeking to recover 

attorney fees and requesting that the district court issue an order to show cause why 

Guava and its counsel should not be required to pay the fees incurred by all of the ISPs 
9

and John Does in defending against the subpoenas. The district court ordered dismissal, 

and judgment was entered on March 5, 2013. 

On March 6, 2013, the district court issued an order to show cause (OSC), based 

on the John Does’ motion for fees, “and all the files, records, and proceedings herein, 

including the arguments, affidavit and testimony received at the January 25, 2013 hearing 

in this matter.” The OSC required that Guava, Dugas, and Alpha “PERSONALLY 

APPEAR AND SHOW CAUSE” at a hearing on April 23, 2013 “why the Court should 

not order [them] to pay the reasonable attorney fees and costs incurred by the non-parties 

to this action.” The OSC allowed the John Does to file fee petitions and appellants to file 

responses. On March 8, 2013, the district court issued an amended OSC that also 

allowed the ISPs to file fee petitions. The OSC was not addressed to Steele, Hansmeier, 

or Prenda Law. 

Attorney Dugas appeared at the April 23 hearing, without any corporate 

representative attending for Guava. Dugas stated: “My understanding[,] and I guess it 

was incorrect, is that as an agent as an attorney for [Guava] that I could represent them in 

this matter as certainly I’ve done throughout of the entirety of the case.” The district court 

pressed Dugas for a reason why no evidence had been presented regarding Guava’s 

structure or its business: 

[W]hy don’t I have anything from them? I mean why don’t I 

have any documents since you know that they’re alleging it’s 

fraudulent? If I agree that it’s fraudulent then I could, I 

would have a basis to Order you to pay attorney’s fees so 

because I’m saying it looks like you’re doing this fraud on the 

Court. So if you want to show me that you’re not doing a 

fraud on the Court, then why wouldn’t you say Your Honor, 
10

this is wholly unjust, how dare they say these things? Look 

here’s my affidavit from the President and CEO of Guava 

LLC. This is the nature of the business that we do. This is 

how we found out about what Mr. Merkel was doing. Why 

don’t I have anything like that? . . . . Why don’t I have an 

affidavit from someone from Guava LLC other than you? 

In responding to the district court’s concerns about fraud, Dugas asserted for the 

first time at the OSC hearing that the action was filed in Minnesota because it was 

convenient to Hansmeier and Dugas as counsel. Dugas also conceded that Guava still 

had not filed a certificate of authority pursuant to Minn. Stat. § 322B.94, but argued that 

Guava was not doing business in Minnesota and thus the statute did not apply. Dugas 

also conceded that no discovery had been sought from Merkel, but again asserted that the 

third-party discovery was of primary importance. Dugas also denied any connection 

between the communications that Merkel had with “Mike” or “Michael” at Prenda Law 

and this action, asserting, “I made no offer, I made no deal.” 

On August 7, 2013, the district court issued an order granting in part the 

nonparties’ motions for attorney fees and costs. The court ordered appellants Guava, 

Dugas, and Alpha jointly and severally liable to pay within 30 days a total of $63,367.52 

in attorney fees and costs to one attorney and four law firms representing the ISPs and 

John Does. The district court also enjoined appellants from filing “any future civil action 

against the John Does or the ISPs without first posting a bond with the Court in the 

amount of $10,000 or such other amount as the Court deems appropriate, and without 

first obtaining a certificate of authority from the Minnesota Secretary of State.” 
11

On August 30, 2013, the district court issued a memorandum in support of its 

order. In the memorandum, the district court recited the procedural and factual history of

the case, including the initial letter from Prenda Law to Merkel regarding alleged 

violations of Hard Drive’s copyrights and Merkel’s discussions with “Michael” at Prenda 

Law about the alternative settlement arrangement that required Merkel to consent to suit 

in Minnesota. The district court expressly rejected as not credible attorney Dugas’s 

assertions that those discussions did not take place and this action is unrelated to the Hard 

Drives demand letter: “This Court finds that Dugas lacks any credibility . . . based upon 

the actions he has taken in this matter. Therefore, any declaration and testimony offered 

is discredited with this Court.” 

The district court’s memorandum also reviewed the applicable law, including 

Minn. Stat. §§ 322B.94, which requires certificates of authority from foreign corporations 

doing business in Minnesota, 549.18, which requires foreign corporations to file a bond 

before initiating suit in Minnesota, and 549.211 (2012), which requires certification that 

litigation is not pursued for any improper purpose, as well as Minn. R. Civ. P. 45.03(a), 

which mandates that “[a] party or attorney responsible for the issuance and service of a 

subpoena shall take reasonable steps to avoid imposing undue burden or expense on a 

person subject to that subpoena.” The district court cited Minnesota caselaw addressing 

the inherent authority of the courts to issue sanctions, particularly Peterson v. 2004 Ford 

Crown Victoria, 792 N.W.2d 454, 462 (Minn. App. 2010).
12

The district court found that:

Plaintiff Guava LLC and its counsel Michael K. Dugas of 

Alpha Law Firm LLC acted in bad faith and without a basis 

in law and fact to initiate this action in Minnesota State 

District Court. This Court finds that an award of attorneys’ 

fees is an appropriate and just sanction pursuant to the 

Court’s inherent authority. 

In support of its bad-faith finding, the district court cited Guava’s initiation of this action 

in Minnesota without any apparent connection to this state, and the related failure to file a 

certificate of authority before filing suit. The district court reasoned that, if a certificate 

of authority was required, that “alone illustrates bad faith on the part of [Guava] because 

it commenced this action without the Certificate of Authority and when the matter was 

brought to [Guava’s] attention, nothing was done to obtain the Certificate of Authority.” 

The court further reasoned that, if a certificate was not required because Guava was not 

doing business in Minnesota, “jurisdiction of this Court is . . . undermined and the 

vexatious and oppressive nature of this action become clearer because any connection to 

the State of Minnesota between these two parties is eliminated.” The district court also 

based the finding of bad faith on the course of the litigation, including a “fishing 

expedition for IP addresses of the alleged conspirators without regard to their relation to 

Merkel.” The district court noted counsel’s concession that no discovery was sought 

from Merkel and reasoned, “If there was a true civil conspiracy at play in this action, the 

Court cannot imagine a scenario where discovery of what Merkel knew regarding his 

alleged co-conspirators would not be vital information.” The district court concluded: 

With no good faith pursuit against Merkel in this case, the 

Court is left only with [Guava’s] attempts to harass and 
13

burden Non-Parties through obtaining IP addresses to pursue 

possible settlement rather than proceed with potentially 

embarrassing litigation regarding downloading pornographic 

movies. Therefore, the Court is using its inherent authority to 

issue the sanctions . . . .

Appellants failed to pay the sanctions within 30 days of the August 7, 2013 order, 

and the district ordered the entry of judgments. This appeal was taken from the 

judgments entered against Alpha Law Firm, Guava, and Dugas on September 23, 2013. 

D E C I S I O N

The district courts have authority to impose sanctions as necessary to protect their 

“vital function—the disposition of individual cases to deliver remedies for wrongs and 

justice freely and without purchase; completely and without denial; promptly and without 

delay, conformable to the laws.” Patton v. Newmar Corp., 538 N.W.2d 116, 118 (Minn. 

1995) (quotation omitted). “This includes awarding attorney fees.” Peterson, 792 

N.W.2d at 462. But such awards are available only when a party acts in “bad faith, 

vexatiously, wantonly, or for oppressive reasons.” Chambers v. NASCO, Inc., 501 U.S. 

32, 45-46, 111 S. Ct. 2123, 2133 (1991) (quotation omitted); see also Roadway Express, 

Inc. v. Piper, 447 U.S. 752, 767, 100 S. Ct. 2455, 2465 (1979); Harlan v. Lewis, 982 F.2d 

1255, 1260 (8th Cir. 1993) (characterizing Chambers and Roadway as setting a bad faith 

standard for attorney-fees awards, although not for all exercises of inherent power); 

Patton, 538 N.W.2d at 119 (relying on federal caselaw addressing sanctions imposed 

under inherent authority).

“The task of determining what, if any, sanction is to be imposed is implicated by 

the broad authority provided the [district] court.” Patton, 538 N.W.2d at 118. 
14

Accordingly, we review the district court’s decision to impose sanctions under an abuseof-discretion standard. See Frazier v. Burlington N. Santa Fe Corp., 788 N.W.2d 770, 

782 (Minn. App. 2010) (applying abuse-of-discretion standard to attorney-fee sanctions

imposed under inherent authority), rev’d on other grounds, 811 N.W.2d 618 (Minn. 

2012). The burden is on appellant to show both error and prejudice resulting from the 

error. Midway Ctr. Assocs. v. Midway Ctr., Inc., 306 Minn. 352, 356, 237 N.W.2d 76, 78 

(1975). “Error cannot be presumed.” Noltimier v. Noltimier, 280 Minn. 28, 29, 157 

N.W.2d 530, 531 (1968). 

We have carefully reviewed the record, and we conclude that the district court did 

not abuse its discretion in imposing attorney-fee sanctions against appellants. The district 

court found that appellants initiated and pursued this litigation in bad faith, that the only 

purpose of the litigation was “to harass and burden Non-Parties through obtaining IP 

addresses to pursue possible settlement rather than proceed with potentially embarrassing 

litigation regarding downloading pornographic movies.” This is an improper use of the 

judicial system. See Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 352 n. 17, 98 

S. Ct. 2380, 2390 n.17 (1978) (upholding denial of discovery request when the purpose of 

the request was “to gather information for use in proceedings other than the pending 

suit”); see also AF Holdings, 2014 WL 2178839, at *6-7 (vacating order upholding 

subpoenas of ISPs because plaintiff had no good-faith basis for believing that all affected 

Internet subscribers could be joined as defendants and thus information about those 

subscribers “could not possibly be relevant to the subject matter involved in the action”)

(citing Fed. R. Civ. P. 26(b)(1)); Mick Haig Prods. E.K. v. Does 1-670, 687 F.3d 649, 
15

652 (5th Cir. 2012) (affirming sanctions award based on plaintiff’s attempt to use a 

“strategy of suing anonymous internet users for allegedly downloading pornography 

illegally, using the powers of the court to find their identity, then shaming or intimidating 

them into settling for thousands of dollars”); Raw Films, Ltd. v. Does 1-32, 2011 WL 

6182025 (E.D. Va. Oct. 5, 2011) (holding that using subpoena powers as “inexpensive 

means to gain the Doe defendants’ personal information and coerce payment from them,” 

with “no interest in actually litigating the cases,” indicates “improper purpose for suits”). 

Appellants articulate four arguments for reversing the sanctions award. We 

address, and reject, each in turn. 

1. Due Process 

Appellants first assert that the sanctions award must be reversed because the OSC 

proceedings violated their rights to procedural due process. We disagree. “The 

fundamental requirement of due process is the opportunity to be heard at a meaningful 

time and in a meaningful manner.” Mathews v. Eldridge, 424 U.S. 319, 333, 96 S. Ct. 

893, 902 (1976) (quotation omitted). Appellants claim violations of their due-process 

rights by virtue of (a) improper ex parte communications between respondents’ counsel 

and the district court; (b) insufficient notice of the conduct to be sanctioned; and 

(c) imposition of sanctions against Alpha when the OSC was directed only to Guava and 

Dugas. 

a. Ex Parte Contacts 

The Minnesota Code of Judicial Conduct generally prohibits ex parte 

communication, but permits, “when circumstances require it, ex parte communication for 
16

scheduling, administrative, or emergency purposes, which [do] not address substantive 

matters” if “the judge reasonably believes that no party will gain a procedural, 

substantive, or tactical advantage as a result of the ex parte communication” and “makes 

provision promptly to notify all other parties of the substance of the ex parte 

communication and allows an opportunity to respond.” Minn. Code Jud. Conduct Rule 

2.9 (2014). In support of their argument that the district court engaged in improper ex 

parte communications, appellants cite to time records reflecting (1) a paralegal visit to the 

courthouse to obtain the district court’s signature on the OSC and (2) an attorney’s 

telephone conversation with the district court’s clerk, requesting an amendment to the 

OSC. Although the better practice with respect to these requests may have been for

counsel to submit letters to the district court, copying all counsel, there is no indication of 

any improper ex parte communication in connection with the requests. Moreover, 

appellants identify no prejudice resulting from the communications. Appellants were 

given the opportunity to be heard on the OSC, both in writing and through oral argument, 

before the district court issued the order imposing sanctions. Accordingly, we reject 

appellants’ arguments for reversal based on alleged improper ex parte communications. 

See Koes v. Advanced Design, Inc., 636 N.W.2d 352, 363 (Minn. App. 2001) (rejecting 

argument for reversal based on ex parte communications because there was no evidence 

of any substantive communications and no evidence of prejudice resulting from ex parte 

communications), review denied (Minn. Feb. 19, 2002). 
17

b. Sufficiency of Notice 

“A party or attorney must have fair notice of both the possibility of a sanction and 

the reason for its proposed imposition.” Rumachik v. Rumachik, 494 N.W.2d 68, 71 

(Minn. App. 1992), review denied (Minn. Feb. 25, 1993). Appellants argue that the OSC 

failed to put them on notice of the conduct for which sanctions were sought. But the 

OSC incorporated one group of the John Does’ memorandum in support of its motion for 

attorney fees, which asserted that “Guava and its counsel filed this action for improper

purposes, namely, to uncover the names and addresses of non-parties . . . to extort money 

from those non-parties.” This is precisely the conduct for which the district court imposed 

sanctions. The OSC also referred to the January 25 hearing, at which many of bases for 

the bad-faith finding were raised. We conclude that, by the time of the OSC hearing, 

appellants were well aware of the district court’s concerns. Accordingly, we reject 

appellants’ arguments for reversal based on insufficient notice. 

c. Notice to Alpha

Appellants assert that the sanctions against Alpha must be reversed because Alpha

was not identified in the OSC. We disagree. The district court ordered “that you, 

Plaintiff Guava, LLC and its counsel of record Michael K. Dugas, Esq., Alpha Law Firm 

LLC, 900 IDS Center, 80 South 8th Street, Minneapolis, MN 55402 PERSONALLY 

APPEAR AND SHOW CAUSE. . . .” The language of the order might have been more 

clear had the court included the word “and” between Dugas and Alpha. Nevertheless, 

Alpha is identified in the OSC and was put on notice that sanctions could be awarded 

against it. Further, Alpha was notified through the multiple fee petitions filed by the ISPs 
18

and John Does, all of whom sought to recover fees from Guava and its counsel of record. 

As we note above, counsel of record included Dugas, Hansmeier, Steele, and Alpha. The 

district court denied requests for sanctions against Hansmeier, Steele and Prenda Law 

who were not identified in the OSC. It follows that the district court imposed sanctions 

against Alpha because it was identified in the OSC. Accordingly, we reject appellants’ 

arguments for reversal of the sanctions award against Alpha. 

2. Sufficiency of the Evidence 

Appellants next assert that the sanctions award must be reversed because there is 

insufficient evidence to support the district court’s finding of bad faith. Again, we 

disagree. “Findings of fact, whether based on oral or documentary evidence, shall not be 

set aside unless clearly erroneous, and due regard shall be given to the opportunity of the 

trial court to judge the credibility of the witnesses.” Minn. R. Civ. P. 52.01. A finding is 

“clearly erroneous” if the reviewing court is “left with the definite and firm conviction 

that a mistake has been made.” Rasmussen, 832 N.W.2d at 797 (quotation omitted). 

“And when determining whether a finding of fact is clearly erroneous, we view the 

evidence in the light most favorable to the verdict.” Id. In doing so here, we are mindful 

that “circumstantial evidence is entitled to as much weight as any other evidence.” 

Rogers v. Moore, 603 N.W.2d 650, 657 (Minn. 1999). 

After considering all of the circumstances, the district court found that appellants

had pursued this litigation in bad faith. Although the record in this case was not fully 

developed because appellants voluntarily dismissed the underlying action before it could 

be considered on the merits, it includes sufficient evidence to support the district court’s 
19

finding. The evidence includes Merkel’s affidavit testimony that he received a letter 

from Prenda Law threatening suit on behalf of its client, Hard Drives; he made 

arrangements with someone named “Michael” or “Mike” at Prenda Law for an alternative 

settlement arrangement, including his consent to be sued in Minnesota; Prenda Law 

referred him to pro bono counsel; Hard Drives would dismiss the suit after Merkel

provided his BitTorrent log; and he was surprised to be sued by Guava, rather than Hard 

Drives. The evidence also includes Morrison’s testimony that Merkel was referred to her 

by Hansmeier and Dugas; that she expected a lawsuit to be filed by Hard Drives, rather 

than Guava; and “[t]here’s been some bait and switch you might call it in this case.” And 

the evidence includes the facts that (a) despite repeated questioning by the district court 

regarding Guava’s corporate status, appellants failed to file a certificate of authority or 

provide any evidence regarding Guava’s incorporation, its officers, or its business 

operations, and (b) despite Merkel’s alleged involvement in a hacking conspiracy, 

appellants sought no discovery from Merkel during the pendency of the litigation. This 

evidence, taken together, amply supports the finding that appellants had no good-faith 

basis for this litigation. See, e.g., Westling v. Holm, 239 Minn. 191, 193, 58 N.W.2d 252, 

253 (1953) (explaining that circumstantial evidence must “furnish a reasonable basis for 

an inference” and that a finding based on circumstantial evidence “cannot be set aside 

merely because another inference might have been drawn from the same facts”). 

Appellants assert that the district court erred by relying on the communications 

between Merkel and Prenda Law relating to claims by Hard Drives, arguing that there is 

no evidence of a connection to this action. But the district court found a connection, and 
20

there is evidence in the record to support that finding. “Michael” at Prenda Law offered 

to refer Merkel to Minnesota attorney, Morrison. Morrison testified that she received the 

referral from Hansmeier and Dugas; Hansmeier filed a notice of appearance identifying 

himself as “of counsel” to Prenda Law, and Dugas submitted a declaration in this matter 

identifying himself as the only “‘Mike or Michael’” at either Alpha Law Firm LLC or 

Prenda Law, Inc.” Dugas denied representing Hard Drives or being involved in the 

settlement agreement between Merkel and Hard Drives. But the district court rejected 

this assertion as incredible, and we will not disturb that credibility determination. 

Appellants address and attempt to rationalize each of the additional circumstances 

relied upon by the district court. For instance, they assert that the certificate of authority 

required under Minn. Stat. § 322B.694 is not jurisdictional, but rather provides an 

affirmative defense, and that Guava was not required to file a certificate because it was 

not doing business in Minnesota. They further assert that the district court could exercise 

jurisdiction over a case involving only nonresident parties, and that they were not 

required to seek discovery from Merkel before third-party discovery. We need not 

address the merits of these legal assertions because they miss the point of the district 

court’s bad-faith analysis. The district court found, based on the totality of the 

circumstances—including Prenda Law’s communications with Merkel, Guava’s failure to 

seek any discovery from Merkel, and Guava’s failure to file a certificate of authority or 

otherwise substantiate its corporate existence—that appellants had no good-faith basis for 

bringing this action. And we have concluded that the finding is not clearly erroneous. 
21

Appellants further assert that the evidence cannot sustain a bad-faith finding 

because the district court stated, in its order conditionally allowing appellants to 

subpoena 17 ISPs, that Guava had demonstrated “that the personally identifying 

information possessed by the [ISPs] is relevant and material in this matter and there is 

good cause for the discovery of this information.” Appellants contend that the district 

court’s order “further strengthened Guava’s good faith belief in the propriety of its 

discovery.” Appellants essentially argue that, regardless of whether it was true, they 

(initially) succeeded in convincing the district court that they were acting in good faith, 

and they should be able to rely on the district court’s statements to prove their actual 

good faith. We reject this argument as circular and unpersuasive. The district court’s 

initial determination that Guava demonstrated that the information it sought was relevant 

and material did not preclude it from later—on being made more fully informed of the 

facts—finding that appellants were acting in bad faith. 

Finally, appellants assert that the sanctions against Dugas and Alpha must be 

reversed because the district court made no specific findings of bad faith by them. We 

disagree. The district court’s order details Dugas’s and Alpha’s involvement as counsel 

for Guava, and the district court specifically found that “Plaintiff Guava LLC and its 

counsel Michael K. Dugas of Alpha Law Firm acted in bad faith and without a basis in 

law or fact to initiate this action in Minnesota State District Court.” Moreover, because 

attorney Hansmeier, the sole manager of Alpha, participated in proceedings before the 

district court, the authority relied upon by appellants is inapposite. Cf. Browning 

Debenture Holders’ Comm. v. DASA Corp., 560 F.2d 1078, 1089 (2d Cir. 1977)
22

(reversing sanctions where sanctioned parties were not “personally . . . aware of or 

otherwise responsible for the procedural action instituted in bad faith”); Wolters Kluwer 

Fin. Servs., Inc. v. Scivantage, 564 F.3d 110, 114-15 (2d Cir. 2009) (reversing sanctions 

imposed against large law firm when there was no evidence that firm acted in bad faith). 

3. Amount of Sanctions

Appellants assert that the district court awarded excessive sanctions, challenging 

certain attorney-fee awards as unsupported and arguing that the district court erred by 

granting injunctive relief and by failing to consider Dugas’s ability to pay the sanctions. 

With one exception, we disagree. The district court did not abuse its discretion by 

allowing fees for respondents’ ex parte contacts with the district court (which we have 

determined were not improper), for time spent researching related matters, or for time 

reflected in an affidavit in a format other than that specified in Minn. R. Gen. Pract. 

119.02. See Mears Park Holding Corp. v. Morse/Diesel, Inc., 426 N.W.2d 214, 219-20 

(Minn. App. 1988) (“As long as the record reflects a reasonable correlation between the 

final amount of the sanctions imposed, the expenses incurred by the party defending the 

unfounded claims, and the basis of the court's imposition of sanctions, there will be no 

abuse of discretion by the trial court.”); Minn. R. Gen. Pract. 1.02 (providing district 

court with discretion to “modify the application of these rules in any case to prevent 

manifest injustice”). Nor was the district court required to limit the sanctions imposed 

against Dugas based on his alleged inability to pay. See Uselman v. Uselman, 464 

N.W.2d 130, 145 (Minn. 1990) (“If the court chooses to impose a monetary sanction, it 

might consider the attorney’s or party’s ability to pay.” (emphasis added)). Furthermore, 
23

given the egregiousness of the conduct found by the district court, and the breadth of the 

district court’s inherent authority, we observe no error in the district court’s requiring 

appellants to submit a $10,000 bond before filing any future litigation. We are unable to 

discern, however, a basis in the record for the district court’s requirement that Guava, 

Dugas, or Alpha file a certificate of authority under Minn. Stat. § 322B.94. The statutory 

requirement does not apply to Dugas or Alpha, neither of which is a foreign corporation, 

and, because there has been no factual determination that Guava does business in 

Minnesota, it is not clear whether the statute applies to it. See Minn. Stat. § 322B.91 

(2012) (requiring foreign limited liability company “transacting business in this state” to 

obtain certificate of authority). Accordingly, we will modify the district court’s 

injunctive relief to omit the requirement that a certificate of authority be filed before 

commencing suit.2

4. Authority for Post Dismissal Sanctions

Lastly, appellants assert that the district court was precluded from awarding 

sanctions after the action had been voluntarily dismissed, citing such a limitation in the 

district court’s authority under Minn. R. Civ. P. 11.03 and Minn. Stat. § 549.211 (2012). 

See, e.g., Gibson v. Coldwell Banker Burnet, 659 N.W.2d 782, 790 (Minn. App. 2003)

(explaining that, under Minn. R. Civ. P. 11.03 “motions for sanctions brought after the 

conclusion of the trial must be rejected precisely because the offending party is unable to 

withdraw the improper papers or otherwise rectify the situation”). But the district court’s 

 

2

This modification should not be construed to preclude a district court from determining 

on appropriate facts in a future suit that Guava is required to file a certificate of authority. 
24

inherent authority to impose sanctions is not so circumscribed. See, e.g., Brickwood 

Contractors, Inc. v. Datanet Eng'g, Inc., 369 F.3d 385, 389 n.2 (4th Cir. 2004) explaining 

that “failure to comply with the safe-harbor provisions would have no effect on the 

court’s authority to . . . impose sanctions within its inherent power”). 

Affirmed as modified.