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Seventh Circuit hears arguments in Prenda attorneys' appeal over $261K sanction order; judge says Lightspeed record is "troublesome"

By Bethany Krajelis | Apr 7, 2014

The chief judge for the Seventh Circuit Court of Appeals today asked the lawyer representing the trio of Prenda Law-affiliated attorneys appealing a $261,025 sanction order a question courts across the nation have been trying to get answered to no avail.

The question was simple and so was Daniel Voelker’s answer, but time will only tell whether the latter will satisfy the Chicago-based panel that heard arguments in the southern Illinois case of Lightspeed Media Corp. v. Anthony Smith, et al.

Judge Diane Wood asked Voelker if he could describe, in 25 words or less, the relationship between his clients – attorneys Paul Duffy, Paul Hansmeier and John Steele – and the now-dissolved Prenda Law firm in Chicago, as well as the Alpha Law Firm in Minnesota.

“I can’t, your honor,” Voelker said. “I don’t know.”

Voelker, a Chicago attorney, went on to explain he wasn’t avoiding Wood’s question, but literally did not know how or if the attorneys and firms fit together.

“That’s shocking,” Judge Diane Sykes said, after taking her glasses off and shaking her head in what appeared to be disbelief.

Along with Wood and Sykes, Judge Michael Kanne served on the panel that collectively asked attorneys for both sides dozens of questions.

Duffy, a Chicago attorney, attended today's arguments. It did not appear that Hansmeier, a Minnesota attorney, or Steele, a former Chicago attorney who lives in Miami, were there.

Based on the record of the case that originated in the St. Clair County Circuit Court, Wood told Voelker it seems like there was “a lot of shell game activity" in the trio’s practice.

Duffy, Hansmeier and Steele have been accused by some judges and defense attorneys of being the key players behind a nationwide practice that allegedly involved creating sham corporations to bring computer hacking and copyright infringement suits in an attempt exploit the court’s subpoena power and extort settlements out of “John Doe” defendants.

In a November order in Lightspeed, since-retired U.S. District Judge G. Patrick Murphy of the Southern District of Illinois ordered the three attorneys to pay a total of $261,025 in fees to defendants Anthony Smith, AT&T and Comcast.

Murphy said Duffy, Hansmeier and Steele showed “a relentless willingness to lie to the Court” and pointed to the Star Trek-themed sanctions order of U.S. District Judge Otis Wright II in the California case of Ingenuity 13 v. John Doe, along with other judicial findings adverse to the trio.

Prenda attorneys' argument
On behalf of his clients, Voelker told the panel today that it was “unfair” of Murphy to rely on and take  judicial notice of what judges in other jurisdictions said to reach his conclusion.

Murphy's determination that the claims brought in Lightspeed were frivolous and baseless is “pure conjecture and speculative," Voelker said.

He said Murphy looked at judicial findings from California, Minnesota and Massachusetts that involve “different judges, plaintiffs and claims” than the case at issue.

Voelker further noted that Wright’s sanction order is currently before the Ninth Circuit Court of Appeals and that the ruling in the Minnesota case of AF Holdings LLC V. Roeum Hean was overturned late last month in favor of his clients.

Following today’s arguments, he told The Cook County Record that it is “unfortunate” the lower court relied on the decisions of other courts instead of the merits in this case. He said Wright’s order started a “snowball” effect.

During arguments, Sykes said Murphy cited other findings to show the trio’s conduct appeared to fit into a pattern and Wood told Voelker that judges, to a certain extent, can take judicial notice of other cases without being asked to.

“To some extent,” Voelker said, quickly adding that Murphy went behind that and “failed completely” to identify exactly what was frivolous or baseless about the claims.

Instead of providing facts to explain his finding, Voelker contends Murphy basically adopted what the California judge said in his order, including that three attorneys showed a “relentless willingness to lie” and had “shattered law practices.”

Wood again pointed back to the record, which she dubbed as “troublesome,” saying Murphy had reasons to be concerned the claims were pursued in bad faith in an attempt to get the Internet Service Providers (ISPs) to disclose personal information about Internet Protocol (IP) addresses Lightspeed accused of hacking into its computer system.

After Wood said ISPs “would go out of business if they” disclosed the personal information of their subscribers, Voelker told her that before the suit was amended, removed to federal court and voluntarily dismissed, the St. Clair County Circuit Court granted Lightspeed’s request to subpoena AT&T and Comcast for that information.

But, Wood countered, the Illinois Supreme Court overturned that ruling and ordered the circuit court to grant the ISPs motions to quash the subpoenas.

Seeking the reversal of the nearly quarter of a million in sanctions against his clients, Voelker also argued that Murphy failed to allocate responsibility between the three attorneys and rather, found them joint and severally liable.

Wood said Murphy took an “all for one, one for all” approach in his order and then went on to question how “these guys” all worked on various aspects of the case at one point or another, but then tried to say they didn’t when sanctions entered the picture.

In a brief to the Seventh Circuit, the three attorneys claimed they only took certain “discrete” actions in the case and pointed the finger at Belleville attorney Kevin Hoerner, who they said is the one who signed the amended complaint while serving as co-counsel.

Hoerner was not subjected to Murphy's sanction order.

No one denies Duffy, Hansmeier and Steele all filed appearances in the case, Voelker told the panel, before refocusing the discussion back on his main argument that the sanction order needs to be reversed because Murphy failed to identify what was frivolous about the claims.

Wood said Murphy specifically pointed to a November hearing in his order, which said “Hansmeier skirted the Court’s direct questions, Steele made feigned protestations, and both flat-out lied about their association with Prenda Law, Inc. in the face of documentary evidence on the record in this case, and their sworn declarations in other cases.”

“That’s all pretty serious conduct,” she said.

That, Voelker said, has “nothing to do” with whether the claims were frivolous.

Defense arguments
Bart Huffman, a Texas attorney representing AT&T, and Massachusetts attorney Daniel Booth, who represents Smith, split the defendants’ allotted argument time today. Each side had 15 minutes and Voelker was given time for a rebuttal.

Wood asked Huffman, who argued on behalf of both ISPs, why they “waited so long” to file their motion seeking attorney's fees. Smith filed his motion first and after Murphy approved it, the ISPs submitted their request.

He said the ISPs “didn’t have an appetite for it” after Lightspeed voluntarily dismissed the suit in March 2013, but decided to follow in Smith’s footsteps since the court issued a finding against the Prenda-affiliated attorneys.

Huffman also disputed Voelker’s statement dealing with the recently-overturned Minnesota ruling that ordered the attorneys to repay money received from defendants who settled and to pay attorney’s fees.

Huffman told the federal appeals panel the ruling in that case was vacated on the basis that it exceeded the authority of the magistrate judge who issued it since magistrate judges can’t impose sanctions. It was not overturned based on the merits of the case, he said.

In the second half of the defendants’ argument, Booth attempted to answer the question Wood posed and Voelker couldn't answer.

He said Brett Gibbs, who previously served as of counsel to the now-dissolved Chicago firms of Steele Hansmeier and Prenda Law, explained it "very clearly" in a deposition.

Gibbs, who was named in Wright’s sanction order, said Steele Hansmeier passed on its strategies to Prenda when it dissolved and that Duffy, Hansmeier and Steele all had roles in Prenda, Booth said.

Urging the panel to uphold the nearly quarter of a million dollars ins sanctions, Booth asserted the claims against his client were obviously. baseless because they sued “the wrong person.” He said his client’s ISP was Charter Communications.

Also during today’s arguments, Wood noted the Seventh Circuit earlier this month was asked to review Chief Judge David Herndon’s recent decision to hold Duffy, Hansmeier and Steele in contempt for failing to pay the $261,025 sanction by the deadline.

Herndon, who took over the case after Murphy retired, imposed an additional $26,000 sanction on the three attorneys and gave them until March 31 to pay both the original and remedial sanction, as well as interest.

The trio on March 31 asked him to stay his contempt order pending its appeal to the Seventh Circuit. Herndon granted the request, as well as the three attorneys’ draft supersedeas bond of $287,300. He gave them until April 9 to file the bond with the court.

The latest docket entry in the contempt order appeal notes that the appeal may be premature because Herndon has not yet ruled on Hansmeier’s motion seeking reconsideration of the ruling.

Court records show the Prenda-affiliated attorneys have until April 15 to file a memo on why their appeal shouldn’t be stayed pending the disposition of Hansmeier motion.

Judge finds Prenda attorneys in contempt for failing to pay $261K sanctions; adds on $26K and hints at possibility for more

Defendants urge Seventh Circuit to uphold $261K in sanctions against Prenda attorneys

Prenda attorneys file opening brief in the Seventh Circuit over $261K sanctions award, opposes contempt motion

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