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MICROSOFT CORP. v. UNITED COMPUTER RESOURCES OF NJ

August 15, 2002

MICROSOFT CORPORATION, PLAINTIFF,
V.
UNITED COMPUTER RESOURCES OF NEW JERSEY, INC., AND SOPHIA KEH AND ALFONSO KEH, AS HUSBAND AND WIFE AND INDIVIDUALLY, DEFENDANTS



The opinion of the court was delivered by: Orlofsky, District Judge.

  OPINION

In this Application, Plaintiff, Microsoft Corporation ("Microsoft"), seeks attorneys' fees in the amount of $252,476.25 and $63,064.34 in costs, for prevailing in a contempt action which resulted in an Order directing Defendants to pay $158,750.00 in sanctions to Microsoft for their contumacious conduct. Thus, Microsoft seeks to recover almost twice in fees and costs what it recovered against Defendants for violating an Order of this Court. Because I find that much of Microsoft's fee application is the result of duplication of effort, and the overstaffing of its "legal team," I shall reduce the amount of legal fees requested by Microsoft, and order Defendants to pay Microsoft $141,745.68 in legal fees and $63,064.34 in costs, or a total of $204,810.02. This amount more appropriately relates to the relief obtained by Microsoft, and should serve as a reminder to counsel that having a wealthy client does not justify a legal feeding frenzy resulting in the escalation of attorneys' fees and costs. Excessive legal fees, if not checked by the exercise of billing judgment or, in this case, this Court's inherent powers, will be borne unjustly by someone, be that a losing adversary, a client, or a client's unsuspecting customers or shareholders. The duty imposed by the Rules of Professional Conduct to represent a client zealously does not create a license to write a blank check for excessive legal fees.

I. BACKGROUND

On December 11, 2001, Microsoft filed an Application for an Order to Show Cause with this Court against Defendants, Alfonso Keh, Sophia Keh, United Computer Resources, Inc., and Kehtron Computer, Inc., (collectively, "Defendants"). Defendants were ordered to appear and show cause why they should not be held in civil contempt for continuing to distribute counterfeit Microsoft software in violation of two permanent injunctions entered against them by this Court. On April 8, 2002, I conducted a one day bench trial to consider the issues raised by Microsoft's Application to hold Defendants in contempt. In an unpublished Opinion and Order, dated May 23, 2002, I found that Microsoft had sustained its burden of proving, by clear and convincing evidence, that Defendants sold two units of counterfeit software and possessed an additional 42 units of counterfeit Microsoft software in violation of this Court's Orders. Microsoft Corp. v. United Computer Res., Inc., Civ. A. No. 96-4860 (D.N.J. May 23, 2002).

I found Microsoft's request for $1,750,000 in sanctions against Defendants to be excessive in light of Defendants' limited infringement. By Order dated May 23, 2002, I directed Defendants to pay $8,750.00 in sanctions for their contumacious behavior. I also found that Defendants' violations triggered a Stipulated Judgment which had been entered into by the parties as part of their previous settlement. Accordingly, in my Order of May 23, 2002, I also directed that the Stipulated Judgment for $150,000.00 be entered against Defendants. Finally, I determined that Microsoft was entitled to recoup its reasonable attorneys' fees and costs for enforcing the Orders of this Court. Pursuant to my May 23, 2002 Order, Microsoft has now submitted, in accordance with Local Civil Rule 54.2, an affidavit requesting reimbursement in the total amount of $315,540.59, which consists of attorneys' fees of $252,476.25, and costs of $63,064.34. For the reasons set forth below, I find the amount of legal fees sought by Microsoft to be excessive and unreasonable in several respects, and shall reduce the attorneys' fees which Microsoft is entitled to recover from Defendants to $141,745.68. I shall also award Microsoft costs in the amount of $63,064.34.*fn1

II. DISCUSSION

The traditional "American rule" disfavors an award of attorneys' fees and costs to the prevailing party in a litigation, absent statutory or contractual authority. Polonski v. Trump Taj Mahal Assoc., 137 F.3d 139, 145 (3d Cir. 1998)(citing Summit Valley Indus., Inc. v. Local 112, United Bhd. of Carpenters and Joiners, 456 U.S. 717, 721, 102 S.Ct. 2112, 72 L.Ed.2d 511 (1982)). In addition to statutory or contractual authority, a court may also award attorneys' fees and costs pursuant to its "inherent power to reimburse a party for outlays incurred in securing an adjudication of contempt." Halderman v. Pennhurst State Sch. & Hosp., 49 F.3d 939, 941 (3d Cir. 1995)(citing Robin Woods Inc. v. Woods, 28 F.3d 396, 400-01 (3d Cir. 1994)); see also Thompson v. Johnson, 410 F. Supp. 633, 643 (E.D.Pa. 1976)(acknowledging an exception to the "American rule" where the party seeking fees has been compelled to institute litigation from his adversary's misconduct). The fees and costs that may be awarded are limited to those incurred in prosecuting the petition for contempt. Lichtenstein v. Lichtenstein, 425 F.2d 1111, 1113-14 (3d Cir. 1970); Apple Corps Ltd., MPL v. Int'l Collectors Soc'y. 25 F. Supp.2d 480, 484 (D.N.J. 1998).

An award of attorneys' fees and costs to the prevailing party in a civil contempt action is determined according to the "lodestar method." Apple Corps., 25 F. Supp.2d at 484-85. The lodestar calculation involves determining the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate, Hensley c. Eckerhart, 461 U.S. 424, 433, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983), and is presumed to yield a "reasonable fee." Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 478 U.S. 546, 565, 106 S.Ct. 3088, 92 L.Ed.2d 439 (1986). A District Court may adjust the lodestar amount downward if the amount is not reasonable in light of the results obtained, Rode v. Dellarciprete, 892 F.2d 1177, 1183 (3d Cir. 1990)(citing Hensley, 461 U.S. at 434-37, 103 S.Ct. 1933), but is limited in its discretion to make upward adjustments, because factors such as the novelty and complexity of the issues, the special skill and experience of counsel, the quality of representation, and the results obtained, are reflected in the lodestar calculation and thus may not be used as independent bases for increasing a fee award upward. Delaware Valley, 478 U.S. at 565, 106 S.Ct. 3088; Blum v. Stenson, 465 U.S. 886, 898-900, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984).

The party seeking attorneys' fees has the burden of establishing the reasonableness of the fees sought and submitting evidence to support the rates and hours claimed. Hensley, 461 U.S. at 433, 103 S.Ct. 1933. In the District of New Jersey, Local Civil Rule 54.2 requires attorneys requesting compensation for services rendered and reimbursement of expenses to file an affidavit with the Court which sets out: (1) the nature of the services rendered, the results obtained, any particular novelty or difficulty involved in the matter; (2) the dates of services; (3) a breakdown of the services rendered, the identity of the person providing the services, the professional experience of that person; (4) the time spent rendering the services; and (5) the normal billing rate for each person providing services. Local Civ. R. 54.2(a).

Once the party seeking fees provides such evidence, the burden shifts to its adversary to contest, with sufficient specificity, the reasonableness of the hourly rate or the reasonableness of the hours expended. Apple Corps., 25 F. Supp.2d at 485 (citing Rode, 892 F.2d at 1183). If the party opposing the fee application meets its burden, the Court has wide discretion to adjust the attorneys' fee for inadequate documentation, duplication of effort, unreasonableness of hours expended, or lack of relation to the results obtained. Id. (citing Ursic v. Bethlehem Mines, 719 F.2d 670, 677 (3d Cir. 1983) and Rode, 892 F.2d at 1183). The Court may not, however, adjust the fee for reasons not raised by the objecting party.

Microsoft seeks $236,433.75 in legal fees for work performed by its local counsel, Montgomery, McCracken, Walker & Rhoads, LLP ("Montgomery McCracken"), and $16,042.50 in legal fees*fn2 performed by its national counsel, Preston Gates & Ellis, LLP ("Preston Gates").*fn3 Microsoft also seeks $38,551.28 in costs incurred by Montgomery McCracken, $106.95 in costs*fn4 incurred by Preston Gates; $3,442.10 in costs incurred by Pinkerton Consulting and Investigations, Inc. ("Pinkerton"), the firm which investigated Defendants' contumacious behavior; $18,325.61 in costs incurred by Intellectual Property Services, Inc., the firm which reviewed and analyzed the infringing software found at Defendants' stores; and $2,638.40 in costs for the travel expenses which Microsoft employee, Kristi Lamb Bankhead, incurred in connection with her deposition and hearing appearances. Thus, Microsoft seeks to recover attorneys' fees in the amount of $252,476.25 and costs of $63,064.34, or a total of $315,540.59.

Defendants*fn5 argue that the amount requested by Microsoft is excessive: (1) because the requested fees include work performed on a complaint in a related action;*fn6 (2) because Montgomery McCracken and Preston Gates performed duplicative work;*fn7 (3) because the legal fees incurred by Preston Gates for supervising Pinkerton's investigation were unnecessary; (4) because the hours billed on this case were unreasonable given: (a) the simplicity of the issues involved; and, (b) the fact that it was Microsoft's own aggressive litigation strategy that increased its litigation costs; and, (5) in light of the relative financial strength of the parties. In addition, Sophia Keh argues that her relative degree of fault as a passive participant in the underlying infringement should be considered in assessing an award of fees and costs. Finally, Defendants argue that the $150,000.00 Stipulated Judgment which was entered in conformity with the 1997 Injunction, see Opinion and Order, Microsoft Corp. v. United Computer Res., Inc., Civ. A. No. 96-4860 (D.N.J. May 23, 2002), should be subtracted from whatever fee award is granted.

Before embarking on an analysis of each of the Defendants' arguments, I note that they have not contested the reasonableness of the attorneys' hourly rates, nor any of Microsoft's costs. Accordingly, I will not address either of these components of Microsoft's application.*fn8

A. Duplicative Work

A reduction for duplication of effort "`is warranted only if the attorneys are unreasonably doing the same work.'" Rode, 892 F.2d at 1187 (quoting Jean c. Nelson, 863 F.2d 759, 773 (11th Cir. 1988)).

Preston Gates' affidavit summarizes that firm's involvement in this matter as follows:

Preston Gates' services related to the organization of the evidence obtained from the Pinkerton Investigator (Ms. Dang) and the Microsoft Software Identification Specialist (Ms. Bankhead).
Preston Gates prepared draft motion papers relating to Defendants' contumacious conduct and turned them over to Microsoft's New Jersey counsel, Montgomery, McCracken, Walker & Rhoads, LLP.
As Microsoft's national counsel, Preston Gates consulted with Montgomery, McCracken, Walker & Rhoads, LLP throughout the litigation. However, Microsoft is only seeking reimbursement for Preston Gates' fees incurred before Montgomery, McCracken was engaged and for work involved in planning for the contempt hearing initially scheduled for January 2, 2002.

Barrett Decl. at ¶¶ 23-25.

The Third Circuit has held that a prevailing party in a contempt proceeding may be reimbursed for reasonable attorneys' fees and costs incurred in demonstrating a contemnor's violations. Robin Woods, 28 F.3d at 400-01. Thus, Preston Gates may be reimbursed for fees and expenses related to organizing evidence pertaining to the Defendants' contumacious conduct. It appears from the billing records submitted by Preston Gates and Montgomery McCracken that this work was undertaken before Montgomery McCracken was brought into the case. Accordingly, none of this work was duplicative.

Both firms, however, seek reimbursement for fees incurred for the preparation and drafting of the Order to Show Cause which was filed in this Court, and for preparing for the hearing on the Order to Show Cause. Preston Gates, for example, has numerous entries relating to the drafting and revision of the memorandum of law and declarations filed in support of the application for an Order to Show Cause regarding civil contempt. See e.g., Barrett Decl. Ex. A, at Entry for: 12/4/01 (KM)(3.2 hrs); 12/5/01 (CCH)(5.9 hrs); 12/7/01 (CCH)(1.9 hrs); 12/9/01 (CCH)(4.4 hrs); 12/8/01 (KM)(3.2 hrs); 12/9/01 (CCH)(1.5 hrs); 12/10/01 (CCH)(4.2 hrs); 12/11/01 (JHB)(1.8 hrs); 12/11/01 (JHB)(1.3 hrs). Montgomery McCracken's bills contain entries for "reviewing and revising contempt brief and related papers" for the same time period. See e.g., Hyland Aff. Ex. A, at Entry for: 12/10/01 (SAF)(4.3 hrs); 12/11/01 (JDC)(4.5 hrs); 12/11/01 (SAF) (9.5 hrs).

Although a certain amount of communication between national and local counsel is essential to bring local counsel "up to speed" before taking over the management of a case, the number of hours expended here by senior partners, Jane H. Barret (JHB), Katherine Marelich (KM), and associates, James D. Cashel (JDC), and Stacy A. Fols (SAF) in the drafting, revising, and reviewing of the same Order to Show Cause and in preparation for the same hearing on that Order to Show Cause is duplicative. Accordingly, each firm's billings for the period ending December 31, 2001 shall be reduced by half. Cf. Garden State Auto Park Pontiac GMC Truck, Inc. v. Electronic Data Sys. Corp., 31 F. Supp.2d 378, 387 (D.N.J. 1998)(reduction of fees claimed by half where there was duplication of effort by lead and local counsel). Preston Gates's fees shall be reduced to $7,223.50. Montgomery McCracken's fees through December 31, 2001 shall be reduced to $9,715.88.*fn9

B. Preston Gates's Supervision of Pinkerton

Defendants argue that it was unnecessary for Preston Gates to supervise the investigation into Defendants' contumacious behavior conducted by Pinkerton, because "Pinkertons [sic] knew what to look for, as did Microsoft's in-house legal unit, and did not need Preston, Gates to direct the investigation." Defs.' Br. at 4.

It is well-settled in the Third Circuit that a prevailing party in a civil contempt matter is entitled to recover costs for investigating, preparing and conducting the contempt proceeding. Robin Woods, 28 F.3d at 400. Defendants do not appear to contest this legal principle, but instead, insist that the supervisory and organizational work performed by Preston Gates was duplicative and unnecessary. Such an argument, although creative, is without merit.

Investigation is distinct from the task of organizing the fruits of the investigation for use in a civil contempt proceeding. While it is true that Pinkerton is well-versed in counterfeit software investigations and that Microsoft's in-house paralegal, Kristi Lamb Bankhead, is skilled at determining whether software obtained by Pinkerton is indeed counterfeit software, neither Pinkerton nor Bankhead would be qualified to identify what evidence would be required to sustain a civil contempt action, to target the investigation to obtain such evidence, or to transform the raw data obtained from these investigative pursuits into successful legal argument. These tasks could only have been performed by attorneys. Thus, Preston ...


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