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Lightspeed Media Corp. v. Smith

United States Court of Appeals, Seventh Circuit

July 19, 2016

Lightspeed Media Corporation, Plaintiff,
v.
Anthony Smith, et al., Defendants-Appellees, Appeals of John Steele and Paul Hansmeier, Appellants.

          Argued February 18, 2016

         Appeals from the United States District Court for the Southern District of Illinois. No. 3:12-cv-889-DRH-SCW - David R. Herndon, Judge.

          Before Wood, Chief Judge, and Kanne and Sykes, Circuit Judges.

          Wood, Chief Judge.

         When last we considered John Steele and Paul Hansmeier's challenges to contempt sanctions imposed on them, we gave them some friendly advice: stop digging. See Lightspeed Media Corp. v. Smith, 761 F.3d 699 (7th Cir. 2014) (Lightspeed I). Apparently they did not realize that we meant what we said. Hoping to avoid paying additional sanctions, they dissembled to the district court and engaged in discovery shenanigans. Anthony Smith, a defendant in the underlying litigation, found out what was going on and moved for yet more contempt and discovery sanctions against Steele, Hansmeier, and Paul Duffy. (We occasionally refer to them collectively as the Attorneys.) Although the district court initially denied his request, it granted Smith the requested sanctions on a motion for reconsideration. Duffy is now deceased and so beyond our jurisdiction. Hansmeier and Steele have appealed, arguing that the district court erred in (1) revisiting its initial ruling on Smith's motion; (2) finding the Attorneys in contempt; and (3) sanctioning the attorneys for discovery misconduct. With regard to Steele, we affirm the district court's discovery sanction and vacate its contempt sanction. We dismiss Hansmeier's appeal.

         I

         For present purposes, only a précis of this case's origin is necessary. (A detailed account may be found in Lightspeed I.) Hansmeier, Steele, and Duffy were the members of a shifting and overlapping set of law firms and business entities that a district court dubbed a "porno-trolling collective." Ingenuity 13 LLC v. John Doe, No. 2:12-CV-8333-ODW (JCx), 2013 WL 1898633, at *1 (C.D. Cal. May 6, 2013). On behalf of Lightspeed Media, a company that operates websites purveying online pornography, the Attorneys sued a John Doe defendant in Illinois state court under the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, and state law. Lightspeed I, 761 F.3d at 702. They then served ex parte subpoenas on several Internet service providers (ISPs), demanding that the ISPs hand over the personally identifiable information of more than 6, 600 "coconspirators" who, Lightspeed alleged, had violated the Act. This suit was only one among many similar actions that the Attorneys filed in courts around the United States. They evidently hoped to extract quick settlements from individual users whose personal information was revealed; few defendants, they believed, would be willing to litigate their pornography consumption in open court.

         But they overlooked a key vulnerability in their strategy: the need for information held by ISPs. It turned out that the ISPs were not willing to cooperate; to the contrary, in our case, the ISPs filed motions to quash the subpoenas and sought a protective order. The Illinois courts refused to compel compliance, after which the ISPs removed the case to the U.S. District Court for the Southern District of Illinois. Id. at 702–03.

         At that point, things started to unravel for our heroes. A court in the Central District of California imposed sanctions on them in a similar case. Id. at 703. Perhaps seeing the handwriting on the wall, the Attorneys began voluntarily dismissing cases across the country, including this one. Id. Shortly after the district court granted Lightspeed's motion for voluntary dismissal, Smith filed a motion for attorney's fees under 28 U.S.C. § 1927 and Federal Rule of Civil Procedure 54(d)(2). Id. at 703–04. On November 23, 2013, the district court found that the Lightspeed lawsuit was frivolous, baseless, and "smacked of bullying pretense, " and imposed sanctions of $261, 025.11, jointly and severally, against Hansmeier, Steele, and Duffy.

         These are the third and fourth appeals arising out of that order. After the three failed to pay their sanctions, defendants Comcast, AT&T, and Smith moved for contempt. The Attorneys repeatedly asserted that they had no money or assets with which to satisfy the sanctions order. The district court scheduled a show-cause hearing for February 13, 2014.

         Doubting the Attorneys' claims of insolvency, Smith issued third-party subpoenas to 12 of the Attorneys' financial institutions on January 16, 2014. He also served each of the three with interrogatories and requests for production. Denying receipt, they did not comply. On January 30, each attorney moved to quash Smith's subpoenas to his financial institutions. That same day, Steele faxed a copy of the motion to quash to JPMorgan, but without revealing in what court it had been filed or whether it had been granted. When JPMorgan requested a court-stamped copy, Steele did not reply.

         At the hearing on February 13, 2014, the Attorneys insisted that they could not pay the sanctions. The district court ordered them to produce financial statements prepared by certified public accountants; they did so, submitting the statements in camera. On February 19, the district court denied Steele's January 30 motion to quash Smith's subpoenas. On March 3, JPMorgan again requested a court-stamped copy of the motion to quash. Duffy sent it, but failed to disclose that the motion had been denied.

         On March 20, 2014, Smith filed a renewed motion for contempt based on the Attorneys' financial statements, their representations to the court, and discovery interference with regard to JPMorgan. The district court held all three attorneys in contempt on March 24, 2014, and ordered them to pay the defendants $26, 102.58, an amount equal to ten percent of the original sanctions award. That day, Smith issued eight new third-party subpoenas to the Attorneys' financial institutions.

         On April 4, 2014, the district court stayed the contempt order pending the Attorneys' appeal. On April 11, Steele told Smith's counsel that he had informed the subpoenaed third parties that "the action ha[d] been stayed and the subpoenas must be withdrawn." This was untrue: the stay order did not apply to the subpoenas. That fact, however, did not stop Steele on April 16 from faxing a copy of the stay order to Sabadell United Bank and stating that the matter was stayed. Two days later, Smith moved for sanctions against Duffy and Steele for obstructing discovery.

         On April 21, 2014, Hansmeier moved to quash Smith's March 24 subpoenas. The Attorneys' third-party financial institutions continued to withhold production. On July 31, 2014, we decided Lightspeed I, upholding the ...


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