Appeal from the United States District Court for the Eastern District of Kentucky at Lexington. No. 99-00061-Joseph M. Hood, District Judge.
The opinion of the court was delivered by: McKEAGUE, Circuit Judge.
RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206
Argued: November 19, 2009
Before: MERRITT, GIBBONS, and McKEAGUE, Circuit Judges.
In 2005, we affirmed a grant of partial summary judgment for Lexmark International ("Lexmark") in a suit brought by Lexmark's one-time partners, BDT Products and Buro-Datentechnik GMBH & Company KG (hereinafter collectively "BDT"), arising from the contention that Lexmark had misappropriated trade secrets in developing a printer tray that substantially resembled a tray developed by BDT.
Among the firms appearing for BDT were Higgs, Fletcher & Mack ("Higgs") and Meisenheimer Herron & Steele ("Meisenheimer"). Following our ruling, the district court granted Lexmark's motion for attorney fees and imposed sanctions to the extent of those fees (more than five million dollars) on BDT, Higgs, and Meisenheimer under Kentucky Revised Statute § 365.886,*fn1 28 U.S.C. § 1927, and its inherent powers. Meisenheimer now appeals the imposition of these sanctions, arguing that courts may not impose sanctions under § 1927 on law firms (as opposed to individual attorneys), and that, regardless, BDT's suit was not necessarily meritless and Lexmark has not demonstrated that Meisenheimer (as opposed to BDT or Higgs) acted in bad faith or with improper purpose.*fn2 We agree that courts may not impose sanctions on law firms under § 1927; the critical question, then, is whether the court abused its discretion in imposing sanctions under its inherent powers. We conclude that, as BDT's tray was commercialized and sold before BDT even transmitted some of its information to Lexmark, BDT and its attorneys pursued a suit based at its heart on misappropriation of "trade secrets" that were, in fact, not secret at all. In determining that Meisenheimer acted in bad faith or with improper purpose in pursuing this meritless lawsuit, however, the district court relied in part upon a misstatement of Sixth Circuit law and, without sufficient proof, ascribed the improper purpose sought by BDT and Higgs to Meisenheimer as well. Accordingly, we vacate the district court's order insofar as it imposes sanctions on Meisenheimer and remand to the district court for entry of an order denying Lexmark's motion for sanctions as to Meisenheimer and for any other necessary actions consistent with this opinion.
Beginning in 1990, Lexmark and BDT, which both develop paper handling technology for printers, worked together on various projects. As part of this relationship, between 1990 and 1996 the two companies entered into seven confidentiality agreements, including four "one-way agreements" ("Confidential Disclosure Agreements") under which only Lexmark was to disclose confidential information to BDT and three "two-way agreements" ("Confidential Exchange Agreements") under which Lexmark and BDT disclosed confidential information to each other. Each of these agreements expressly provided that Lexmark was free to use (and disclose through sales of its products) any information BDT disclosed to Lexmark.
Language of the Confidentiality Agreements
Each of the four one-way Confidential Disclosure Agreements, which were signed by BDT respectively in February of 1990, August of 1991, June of 1992, and March of 1995, included the following Paragraph 9:
In connection with this agreement, Lexmark does not wish to receive any information which may be considered confidential or proprietary by Contractor. Accordingly, except with respect to the rights of Contractor under valid patents and copyrights, no obligation of any kind is assumed by or is to be implied against Lexmark by virtue of Lexmark's discussions with Contractor or with respect to any information received (in whatever form) from Contractor and Lexmark will be free to reproduce, use and disclose such information to others without limitation. Moreover, discussions and/or correspondence, or other activities under this agreement shall not in any respect, impair the right of Lexmark to make, procure, or market products or services now or in the future which may be competitive with those offered by Contractor.
(Appellee App'x VI:1674, 1676-77, 1680, 1683.) The first of the two-way Confidential Exchange Agreements, which was signed by BDT in May of 1993, stated as part of Paragraph 4:
Except with respect to rights under valid patents, the receiving party shall be free to use any such Confidential Information provided by the disclosing party, any reports and written documentation prepared by the receiving party, and any ideas, concepts and/or techniques contained in any such Confidential Information for any purpose including the use of such Information in the development, manufacture, marketing and maintenance of its products and services, subject only to the obligation not to disclose, publish, or disseminate such Confidential Information during such foregoing specific period of confidentiality.
(Appellee App'x VI:1686.) Each of the other two Confidential Exchange Agreements, which were signed by BDT in March of 1995 and March of 1996 respectively, contained the same language in Paragraph 3:
Except with respect to rights under valid patents and copyrights, Recipient shall be free to use any such Confidential Information provided by Discloser subject only to the obligation not to disclose, publish or disseminate such Confidential Information during the foregoing specified period of confidentiality.
(Appellee App'x VI:1690.) Section 5(c) of the 1995 and 1996 Confidential Exchange Agreements (and Section 6(c) of the 1993 Confidential Exchange Agreement) stated that any obligations under the agreements to maintain confidentiality would not apply to information that was or that became publically available without breach. Similarly, Section 5(f) of the 1995 and 1996 Confidential Exchange Agreements (and Section 6(f) of the 1993 Confidential Exchange Agreement) provided an exemption from disclosure obligation for information that "is inherently disclosed in the use, lease, sale or other distribution of, or publicly available supporting documentation for, any present or future product or service by or for Recipient . . . ." (Appellee App'x VI:1691, 1687, 1695.)
Lexmark's Sale of Technology Resembling BDT's LF 2000 Printer Tray
In the confines of a closed and "confidential" prototype room at the 1993 Hannover Fair, an annual printer industry trade show in Germany, BDT demonstrated to Lexmark both a diverter (output device) and an advanced high-capacity input tray, known for the purposes of this suit as the LF 2000. Following the Fair, BDT (at Lexmark's request) provided prototypes of the LF 2000, information on the timing sequences and algorithms for the printer tray, and the costs of a license for the technology and of the product itself if manufactured by BDT. Between 1993 and 1995, Lexmark repeatedly asked for, and BDT repeatedly provided, advice and information on the workings of the LF 2000. Ultimately, however, Lexmark informed BDT that it was not interested in licensing the LF 2000.
During this period, BDT also entered into discussions with other clients, including Hewlett Packard Guadalajara ("Hewlett Packard") and Tektronix, regarding paper-tray technology. As part of those discussions, BDT executed one-way Confidential Disclosure Agreements with both clients, under which BDT promised to safeguard the confidential information of its clients, but its clients were not required to safeguard confidential information provided by BDT. Late in 1993, BDT began to develop what ultimately became the auxiliary tray for Hewlett Packard's "HP4v" printer, which Hewlett Packard released to the public in 1994. As the district court noted in granting Lexmark's motion for partial summary judgment, "The HP4v tray was the first commercial tray to embody every component of the BDT System that is at issue in this case." BDT Prods., Inc. v. Lexmark Int'l, Inc., 274 F. Supp. 2d 880, 884 (E.D. Ky. 2003).
Given Lexmark's decision not to license the LF 2000 technology, BDT representatives were taken aback at the end of 1996, when Lexmark demonstrated its new "Optra S" printer -- a printer that, to BDT's eyes, utilized that technology.
BDT's Preparation for Filing a Lawsuit
Having concluded that Lexmark had somehow acted inappropriately by developing the Optra S, BDT contacted its intellectual property attorney, Bernard L. Kleinke, who was then with the Higgs firm. BDT did not, however, immediately file suit, because it did not "know what [it] could file about." Instead, BDT asked Kleinke to research the issue and determine whether he thought that Lexmark "took [BDT's] look and feel" or "trade." At the end of 1997, Kleinke suggested to BDT that there might be a good case against Lexmark, but that BDT should wait before filing suit to see whether Lexmark would also release the diverter Lexmark had seen at the Hannover Fair, on which BDT had a patent. Lexmark never released the diverter, and early in 1998 Higgs agreed to take the LF 2000 suit on a contingency fee basis.
In explaining why BDT chose to file its lawsuit, Freidhelm Steinhilber, the head of the management board of Buro-Datentechnik GMBH & Company KG, stated that "the main reason was that we don't like if somebody takes information from us and uses it freely" and "to protect our IP, number one . . . ." (District Court Mem. & Order, June 27, 2008 (DCM) at 8.) Glenn Klein, the president of BDT Products, stated that "the biggest reason" was that "we had offered them for a license. We offered them a license three times, and three times they turned us down on the license." (DCM at 8-9.) "We wanted to get a license from those guys, yeah," Klein concluded. (DCM at 9.) BDT was also worried that BDT's existing customers would believe that the technology they had purchased from BDT actually belonged to another company.
In preparation for filing a suit, BDT provided Higgs with correspondence and communications between BDT and Lexmark from 1990-1997. From these materials, and from correspondence between Klein and Kleinke in 1997, Higgs created the "BDT v. Lexmark Chronology of Facts." As a result of a misstatement or falsehood in a December 1997 letter from Klein to Kleinke, the Chronology of Facts contained the claim -- which was, quite simply, false -- that ...