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Intelli-Check, Inc. v. TriCom Card Technologies

December 22, 2005


The opinion of the court was delivered by: E. Thomas Boyle United States Magistrate Judge


Before the Court is plaintiff Intelli-Check, Inc.'s ("Intelli-Check" or "plaintiff") motion for sanctions against the defendants.*fn1 The plaintiff requests an order which: (1) disqualifies defendants' litigation counsel from any further involvement with this case; and (2) compels defendants and their law firms, jointly and severally, to pay reasonable costs and attorneys' fees expended in connection with uncovering alleged misconduct which is the subject of this motion and in opposing defendants' motion to dismiss the Second Amended Complaint.*fn2 (Pl.'s Mem. of Law in Supp. of Pl. Intelli-Check, Inc.'s Mot. for Sanctions ("Pl.'s Mem."), at 1.)

The conduct of which plaintiff complains in the pending motion for sanctions has been previously considered by the Court. The complained of conduct was the subject of plaintiff's motion to compel production of documents, filed by plaintiff on December 6, 2004. By Memorandum Opinion and Order dated December 23, 2004, I granted Intelli-Check's motion for an order compelling the production of certain documents and rejecting defendant Tricom's assertion of attorney-client privilege over certain documents submitted to the Court for in camera review. Plaintiff did not file any motion for sanctions with that motion to compel.


A court deciding a motion for disqualification and monetary sanctions must give particular attention to the factual record. See MacDraw, Inc. v. CIT Group Equipment Financing, Inc., 73 F.3d 1253, 1262 (2d Cir. 1996) (finding that when imposing sanctions, a court "must do so with care, specificity, and attention to the sources of its power"); U.S. v. Standard Oil Co., 136 F. Supp. 345, 367 (S.D.N.Y. 1955) (stating that when deciding a motion for disqualification, "the conclusion in a particular case can be reached only after painstaking analysis of the facts and precise application of precedent"). Accordingly, the relevant history of this action is set below.

A. Overview

Defendants Mark Baughman ("Baughman") and Stephen Stone ("Stone") are the majority shareholders of corporate defendant TriCom Card Technologies ("TriCom"), a closely held corporation. Intelli-Check alleges that Stone and Baughman, through TriCom, intentionally infringed Intelli-Check's patents for electronic identification and age verification technology. The complaint and first amended complaint in this action named a single defendant-- the corporate defendant TriCom. Intelli-Check filed a second amended complaint on May 17, 2004, which includes claims of false advertising and which names Stone and Baughman as individual defendants under a corporate veil piercing theory. Plaintiff alleges in its second amended complaint that Baughman and Stone organized TriCom as a sham, judgment-proof corporation, maintained to shield Baughman and Stone from individual liability. Defendants Baughman, Stone, and TriCom are jointly represented by David Yohannan ("Yohannan") and Thomas Gilbertsen ("Gilbertsen") of the firm Collier Shannon Scott, PLLC.*fn3 A third attorney, James Coonan ("Coonan") of the Chicago law firm Masuda Funai, was-- and still may be-- counsel to the defendant TriCom, but does not appear as counsel in this action.

The most useful starting point for purposes of the motion is December 10, 2002. On December 10, 2002, a meeting occurred between Baughman, Stone, and Coonan. Coonan had served as counsel for TriCom when it was sued by the third founding shareholder, John Sherry, on allegations of minority shareholder oppression. Coonan testified at his deposition that, on his suggestion, the meeting constituted a meeting of TriCom's board of directors. (Coonan Deposition, dated November 19, 2004 ("Coonan Dep."), at 119.) The only other person present at the meeting was Corine Sanchez ("Sanchez"), a bookkeeper and erstwhile general helper from TriCom, who was employed as an independent contractor rather than an employee. (Id. at 122-23.) Coonan took handwritten notes at the meeting, and those notes are significant in the conduct that is the subject of plaintiff's motion.

Coonan testified that he took notes for himself during the meeting, but that the notes did not memorialize what was discussed at the meeting. (Id.) ("These are the notes that I recorded for myself at the meeting in which discussions were proceeding at a very rapid pace. They're not an attempt to memorialize the meeting. . . .") Despite Coonan's testimony, defendants' counsel represent that these handwritten notes constituted a draft of formal meeting minutes, which were later reduced to a typewritten version and presented as the final formal minutes of the meeting. (Defs.' Reply Brief on Motion to Dismiss, annexed to McGeary Cert. Vol. 2 at Exh. 8.) In defendants' motion to dismiss (which, as noted above, was terminated by Judge Irizarry on November 30, 2005), defendants rely on these minutes, as well as corporate actions which were purportedly discussed at the December 10, 2002 meeting, as evidence demonstrating that corporate formalities were adhered to and that TriCom observed corporate formalities. (Defs.' Mot. to Dismiss, Exh. B, Tab 1 and Tab 2.)

On January 30, 2003, Coonan sent an e-mail to Baughman, Stone and Sanchez, discussed further infra, which purports to attach typewritten "minutes" of the December meeting (quotes in original). On October 14, 2004, plaintiff filed a letter motion seeking the minutes attached to the e-mail. The defendants contended that the minutes were protected by privilege. On October 19, 2004, defendants submitted the following to the Court for in camera inspection: (1) the January 30, 2003 e-mail, (2) the typewritten draft minutes, (3) a May 11, 2004 letter from Coonan to Baughman and Stone, and (4) a privilege log. Significantly, the log listed the recipients of the January 30, 2003 e-mail as Baughman, Stone and Joji Kaegi, a partner at Coonan's firm. (TriCom Card Technologies Supplemental Privilege Log, annexed as Exh. 16 to Certification of Vincent E. McGeary ("McGeary Cert.").)

On December 23, 2004, I rejected the defendants' privilege claims on the ground that a subject matter waiver occurred based on representations made in defendants' then-pending motion to dismiss. (Memorandum Opinion and Order by the undersigned, dated December 23, 2004, at 5-6.) I held that the defendants placed the December 10, 2002 meeting in issue, and cannot hide behind the shield of the attorney-client privilege to mislead the plaintiff or the Court. (Id. at 5-6.) I further found that any privilege asserted over the January 10, 2003 e-mail was waived by virtue of Ms. Sanchez's receipt of the e-mail, as well as the subsequent voluntary production of the e-mail by TriCom's general counsel at Masuda Funai. (Id. at 6-7.) Accordingly, I directed the defendants to turn over unredacted copies of the documents. Thereafter, plaintiff received two versions of the January 30, 2003 e-mail: one copy produced by Coonan's law partner, Edward Underhill, at Coonan's deposition,*fn4 which indicates Baughman, Stone, and Corine Sanchez as recipients, and a second version produced by Yohannan, which differed in that it indicates Baughman and Stone as recipients and Joji Kaegi as a carbon copy recipient. It was upon receipt of these documents that plaintiff first learned that Corine Sanchez had also received the January 30, 2003 e-mail, thereby further destroying any claim of privilege that may have otherwise attached to the document. (Pl.'s Mem. at 16-17; see also Memorandum Opinion and Order by the undersigned, dated December 23, 2004, at 6 ( "The defendants' attempted explanation of the second version of the e-mail-- the one addressed to Ms. Corine Sanchez-- is inadequate and unconvincing and, thus, the defendants have failed to establish the element of confidentiality, which is requisite to assertion of the privilege.").) Significantly, Sanchez's name had not appeared on the privilege log previously submitted to the Court and to plaintiff. Moreover, Sanchez had not appeared as a recipient on the copy of the e-mail submitted to the Court for in camera inspection. (Pl.'s Mem. at 16-17.) Plaintiff suggests that Sanchez's name was deliberately removed from the privilege log and the e-mail submitted to the Court to enable the defendants to cling to the claim of privilege in order to avoid turning over the potentially damaging document. (Id. at 25.)

Defendants dispute the plaintiff's allegations, and argue that Yohannan first learned of the discrepancy between the versions of the January 30, 2003 e-mail produced to the plaintiff at the December 1, 2004 conference before the Court. (Defs.' Mem. at 12.) In response, plaintiff notes that Yohannan was copied on a November 17, 2004 letter from Edward Underhill of Masuda Funai to E. Evans Wohlforth at Gibbons, Del Deo that discusses the version of the January 30, 2003 e-mail which lists Sanchez as a recipient. (McGeary Cert., Exh. 25.) Yohannan claims that he did not have time to read this letter. Additionally, defendants now insist that there is only one version of the January 30, 2004 e-mail (the version that Coonan produced, indicating Sanchez received the e-mail), but offer little explanation for the discrepancy, other than the possibility that it arises from the fact that Yohannan and Coonan use different e-mail programs. (Defs.' Mem. at 12-13.)

B. The January 30, 2003 e-mail

The e-mail dated January 30, 2003, sent from Coonan to Baughman, Stone and Sanchez, with a "cc" to Joji Kaegi, discusses the December 10, 2002 meeting. The e-mail states:

I have attached "minutes" of our meeting in December. As you will see, this is essentially approving a plan of action and setting forth a formal rationale. Please let me know your comments, it is just my ideas on the matter and the facts may need some revision. Rather than explain the underlying reasons, lets just chat about it after you have reviewed it.

In the event that we need to give some legal notice to Sherry of the actions that we are taking (e.g. transferring the assets of TriCom to a new company in exchange for shares) and he gets his attorney fired up again, I am intending to send these minutes to show our justification. I have drafted documents to reduce the board of directors to two persons during 2002, which I will forward for signature with other documents at the appropriate time. (January 30, 2003 e-mail, annexed as Exh. 5 to McGeary Cert.)

Plaintiff argues that this e-mail makes clear that the minutes are false in recording a proceeding that never happened in the way described. (Pl.'s Mem. at 6.) Specifically, plaintiff states that the e-mail demonstrates (1) that Sherry had no notice of the meeting and that the draft of the "minutes" was to gain an advantage over Sherry; (2) that the corporate actions reducing the Board and eliminating Sherry had not been forwarded to Baughman and Stone as of January 30, 2003; and (3) Coonan did not want to set forth in writing the complete motives behind the purported minutes. (Id.) Plaintiff also states that during Coonan's deposition, Coonan admitted that the final, typewritten version of the "minutes" were not true minutes. (Coonan Dep., 103-104) ("Q: Do these minutes accurately reflect what happened at the meeting? A: No.".)

C. The May 11, 2004 Letter

Also of significance to the plaintiff's motion is a May 11, 2004 letter transmission from Coonan to Baughman and Stone.

According to Coonan, after January 30, 2003, no communication occurred between him and Baughman and Stone until April of 2004. Thereafter, Coonan transmitted via e-mail attachment a letter dated May 11, 2004, addressed to Baughman and Stone. (Letter dated May 11, 2004, annexed as Exh. 3 to McGeary Cert.) The timing of the letter coincides with both the filing of John Sherry's lawsuit against TriCom (Coonan's explanation for why he drafted the letter) (Coonan Dep. 183:5-13), and with plaintiff's revelation that the complaint would be amended to include Baughman and Stone as individual defendants (plaintiff's explanation for why Coonan drafted the letter). Although the letter is not addressed or carbon copied to Yohannan, plaintiff asserts that it is "an intuitively obvious fact" that Yohannan received an electronic copy of the letter at the time it was transmitted to Stone and Baughman, because other correspondence in the record from Coonan's firm is ...

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