The U.S. Court of Appeals for the Seventh Circuit confirmed a district court decision, holding that the plaintiff had failed to comply with local rules and pretrial orders by not filing the appropriate pretrial order and therefore dismissed the case and awarded sanctions against plaintiff to pay the defendant’s legal fees and attorneys’ fees. However, the court reversed the imposition of sanctions against counsel, holding that liability is direct, not vicarious. FM Industries, Inc. v. Citicorp Credit Services, Inc., Case No. 08-3154 (7th Cir., July 23, 2010) (Easterbrook, J.).

FM Industries sued Citicorp Credit Services for copyright infringement. FM Industries claimed that Citicorp had infringed its computer software by continuing to use its license by transferring the software from a computer’s hard disk to its random access memory after FM Industries had dropped it.

Local rules required the parties to cooperate to produce a pretrial order. The principal counsel for FM Industries, Rhines, did not complete this task on time. When he finally did, the documents were non-compliant because he allowed the president and principal shareholder of FM Industries, Michael Friedman, to draft many of the documents. After dismissing the claims, the district court ordered FM Industries to pay Citicorp’s legal fees. The district court also concluded that Rhine had vexatiously multiplied the proceedings and was thus liable for attorneys’ fees. Finally, the district court further held that McGrath, a copyright specialist engaged by Rhine to assist him, was also liable for payment of attorneys’ fees. FM Industries appealed.

On appeal, the Seventh Circuit affirmed the dismissal and the award of sanctions against FM Industries and Rhine, but reversed the impositions against McGrath. The Court noted that “FM Industries and its lawyers were playing games, engaged in extortion, or both.” They demanded statutory damages of $15 billion, even though the statute provides that the award cannot exceed $150,000. When Citigroup missed one deadline by one day, FM Industries sought $815 million in sanctions, even though FM Industries had missed many deadlines. Moreover, FM Industries served numerous demands without regard to the rules, which forced the recipients to incur legal expenses to learn what obligations they had. When FM Industries was informed that the demands it had served were ineffectual, they did not follow up with proper subpoenas, but walked away.

The court further noted that even though McGrath filed an appearance in the case and signed five documents, none of those five documents was found vexatious. The court stated that “McGrath was not engaged as a second-tier reviewer of Friedman’s scribbling; he was engaged to help Rhine get his bearings in copyright law. That McGrath failed at this task does not make him responsible for documents that bear Rhine’s name but not his own. Liability under §1927 is direct, not vicarious.”