Lawyers Sanctioned for Ignoring Res Judicata

• Author: Rachel A. Harris
• Pages: 7-7

Published in Litigation News Volume 47, Number 2, Winter 2022. © 20 22 by the American Bar A ssociation. Repro duced with permissio n. All rights reser ved. This informati on or any portion the reof may not be copie d or disseminated in any

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federal court tossed an intel-

lectual property (IP) law-

suit brought by Stan Lee’s

daughter on res judicata

grounds even though she

was not a party to prior lawsuits. The

court further sanctioned her $1 million

for frivolous f‌ilings and ordered her

attorneys jointly and severally liable for

$250,000 of the sanction. The deci-

sion serves as a stark reminder that

zealous advocacy is not an impenetra-

ble shield against Rule 11 sanctions.

In 1998, Stan Lee assigned his IP

rights to Stan Lee Entertainment, Inc.,

predecessor to Stan Lee Media, Inc.

(SLMI). A few years later, Stan Lee

terminated the agreement based on

SLMI’s failure to perform its salary and

benef‌its obligations. He and others

then formed POW! Entertainment, Inc.

(POW), transferring all his IP rights

to POW. Over the next decade, the

1998 agreement between Stan Lee

and SLMI was the subject of several

lawsuits over the true owner of Stan

Lee’s IP rights. Various courts found

that the agreement was terminated,

that any claims were barred by the

statute of limitations, or that the

claims were precluded by res judicata.

Nevertheless, Stan Lee’s daughter, JC

Lee, f‌iled Lee v. POW! Entertainment,

Inc. in the U.S District Court for the

Central District of California to enforce

the agreement between her father

and SLMI.

The court dismissed JC’s lawsuit

on res judicata grounds, f‌inding the

claims in prior lawsuits and JC’s law-

suit arose out of the same “nucleus

of facts.” JC argued that her claims

focused on a severable assignment

clause while prior lawsuits focused

on an employment clause. The court

called this argument “false” and “a

direct misrepresentation,” noting two

other courts “squarely addressed” the

assignment clause.

JC also argued res judicata did not

apply because she was not a party

Lawyers Sanctioned for Ignoring

Res Judicata

to the prior lawsuits. While true, the

court found she had a “commonality

of interest” with SLMI to be “in priv-

ity.” On this point, JC faced a catch-22

by conceding she “joined forces” with

SLMI and seeking declaratory relief

of SLMI’s rights. The court noted, “JC

Lee must be in privity with SLMI to

seek the relief requested or she would

lack standing to seek a declaration of

SLMI’s rights.”

The court imposed Rule 11 sanc-

tions because JC and her attorneys

f‌iled a “frivolous” complaint without a

“reasonable and competent inquiry”

and with an “improper purpose.” The

court concluded that JC’s conduct

demonstrated an improper purpose

since certain allegations in the com-

plaint were “unnecessary” and poten-

tially included for sensationalism. As

to her lawyers, the court said meritless

cases f‌iled by experienced attorneys is

“a strong inference” of improper pur-

pose. JC’s attorneys each had over 25

years of experience and should have

known “that a case barred by res judi-

cata time and time again should not

be f‌iled.”

JC’s attorneys argued that zealous

lawyering led to the lawsuit: “Forceful

representation often requires that an

attorney attempt to read a case or an

agreement in an innovative though

sensible way.” The court disagreed,

f‌inding it “completely unreasonable

to f‌ile a suit premised on an issue

debated and analyzed in more than

f‌ive federal district courts over the last

decade.” The court ordered JC’s attor-

neys liable for $250,000 of the $1 mil-

lion sanction.

“Zealous advocacy does not per-

mit an attorney to bring a baseless

claim or lawsuit that is pursued for an

improper purpose,” explains Michael

D. Steger, New York, NY, cochair of the

ABA Litigation Section’s Intellectual

Property Litigation Committee.

“Zealous advocacy in and of itself

does not act as a shield to ward o

By Rachel A. Ha rris, Litigation N ews Contributing Editor

sanctions when the entire underlying

case is found to be frivolous,” he adds.

While most litigators know to avoid

pursuing cases between the same

parties over the same issues, “this

decision highlights the importance

of taking it a step further and really

evaluating the underlying interests of

parties to a potential case,” explains

Tiany A. Rowe, Washington, DC,

cochair of the Litigation Section’s

Professional Liability Litigation

Committee. “Even in dierent cases

where the parties are not identical, it

is important to step back and consider

how interests could be intertwined

and preemptively try to untangle the

web,” she elaborates.

“The purpose of Rule 11 sanctions

is not to compensate the moving

party but to deter future abuse by the

oending party,” Rowe continues. “For

a party with signif‌icant resources, the

sanctions amount has to be signif‌i-

cant to deter future conduct,” Steger

adds. POW presented undisputed

evidence of JC’s $50 to $70 million

inheritance, which the court consid-

ered in its calculations. “For someone

worth, say, $50 million, the level of f‌ine

or sanction that is going to actually

result in some kind of deterrence will

be dierent than someone worth, say,

$750,000,” Rowe concludes.

RESOURCES

Lee v. POW! Entm’t , Inc., 468 F. Supp. 3d

1220 (C.D. Cal. 2020).

Mich ael Stefanilo Jr., “Rul e 11 Sanctions

Are Not Fit for Ever y Occasion,” Pretrial

Prac. & Disc overy (Apr. 30, 2020).

Meli ssa L. Stuart, “A Young Lawyer ’s

Guide to Rule 11 S anctions,” Trial Prac .

(June 20, 2012).

Adam E . Lyons, “Procedural Di smissal

Leads to Subst antive Loss,” Litigation

News (Feb. 20, 2017).

Carey L. Menasco, “Party...Barred...

Claim,” Prof’l Liab. Litig. (Aug. 31, 2015) .

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