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Charging that two lawyers in a cybersquatting dispute misrepresented the law and the facts, U.S. District Judge Denny Chin of the Southern District of New York said that he will impose sanctions in the case. Chin criticized attorneys John P. Sheridan and Scott E. Mollen of Herrick, Feinstein in New York for claiming their client had every right to take a cybersquatter to arbitration after Judge Chin had dismissed their action with prejudice on the assumption the case had been settled. Chin said in Storey v. Cello Holdings, 01 Civ. 208, that he would sanction the attorneys for “multiple instances of misleading statements and omissions and the assertion of baseless arguments and defenses.” Mollen said Monday that absent a reconsideration by the judge, “we will have no choice but to appeal the decision.” “We have enormous respect for Judge Chin,” Mollen said. “However, we believe that his conclusions as to both the facts and the law are incorrect and are either unsupported or contradicted by the record.” The case first landed before Judge Chin in 1997, when Cello, a maker of audio and video entertainment systems, sued Lawrence Storey, claiming that Storey’s registration of “Cello.com” was diluting its trademark. The company alleged that Storey registered the domain name solely to “blackmail” someone into buying it. While cross-motions for summary judgment were pending before Chin in 1999, Congress passed the Anticybersquatting Consumer Protection Act. Chin denied the motions, but allowed Cello to amend its complaint to add a cause of action under the act. Just before trial in August 2000, attorneys with Hunton & Williams — then acting as Cello’s counsel — told the court that the case had been settled, and Judge Chin issued an order saying the case would be dismissed with prejudice within 30 days. But settlement talks were never completed, and according to Mollen, on Sept. 25, 2000, after the 30 days had expired, Storey’s attorney sent a letter to Cello stating that his ownership interest in the domain name was now for sale. Cello then filed an arbitration complaint contending Storey had obtained the name in bad faith. On the complaint form, the company claimed it had “voluntarily dismissed the case” in the Southern District in order to avail itself of dispute resolution by the arbitration panel. Storey, citing the dismissal with prejudice by Judge Chin, contested the panel’s jurisdiction, arguing that res judicata barred the action. As an alternative, he presented a defense before the arbitration tribunal. After the panel ruled for Cello and ordered Storey to surrender the domain name, Storey filed suit seeking a declaratory judgment before Chin. Cello then retained Herrick, Feinstein. NEW CYBERSQUATTING ACT Judge Chin found several problems with the firm’s answer to Storey’s complaint and ordered sanctions under Rule 11 of the Federal Rules of Civil Procedure. The judge described as “false” the attorneys’ claim that Storey had committed “a new act of cybersquatting” when he sent the Sept. 25 letter. He said the firm’s answer to Storey’s complaint first stated that the dismissal order was entered pursuant to a settlement agreement, but that the firm argued in its memorandum that “the parties never agreed upon the terms of a settlement.” Judge Chin also said the lawyers denied that Storey objected to the jurisdiction of the arbitration tribunal, and “alleged that the arbitration decision was ‘final and binding,’” when, in fact, judicial relief is available both before and after an arbitration proceeding is commenced. Moreover, the judge said Mollen and Sheridan claimed the first action in the Southern District “addressed only the prior use of the domain name.” “This assertion is false,” Judge Chin said. “Cello’s complaint in the first action also sought relief based on ongoing and future use of the domain name, and the complaint specifically sought an injunction ordering Storey to transfer … registration of the domain name to Cello.” The judge also faulted the attorneys for claiming that Storey voluntarily participated in the arbitration proceedings, thereby waiving any res judicata defense. While Storey argued the merits, “he only did so as an alternative to his res judicata defense,” and only repeated “the arguments and papers he had submitted in the first action,” Chin said. “Based on the record before me, I find that Cello acted to harass Storey and to cause both unnecessary delay and needless increase in the cost of litigation,” Chin said. “I find also that at a minimum, Cello’s counsel failed to make reasonable inquiry under the circumstances” on the law. Chin said, “I have no doubt that Cello, with substantially greater resources than Storey, sought to wear Storey down.” “Just as the first action was to be tried, Cello withdrew its claims, only to reassert them some two months later,” he said. “Then, despite warnings from this Court and the opportunity provided by the safe harbor provision of Rule 11 to re-evaluate its defense of this action, Cello chose not to withdraw its answer and persisted in pressing its meritless arguments and defenses, which were based largely on factual misrepresentations.” He said a “reasonably competent attorney would have known that the dismissal ‘with prejudice’ of the first action would have barred future claims based on the same causes of action,” and a “reasonably competent attorney” would not have asserted that the Sept. 25 letter constituted a new act of cybersquatting. PAY REASONABLE COSTS The judge then ordered that Cello and the attorneys pay the reasonable costs and attorney fees incurred by Storey in having to prosecute the action in the Southern District. In addition to disputing the judge’s rendition of the facts, Mollen said the decision is “inconsistent with decisions by several judges in this circuit that have held that a party cannot sit back, fail to move to stay arbitration, participate in arbitration on the merits and then attack the proceeding after an unfavorable decision has been rendered.” Mollen also said that both parties, and not just Cello, indicated to the judge that a settlement had been reached in the first action, and that Storey intentionally waited until the case was officially dismissed with prejudice to reassert his ownership in the domain name. Thomas Engel of Engel & McCarney in New York, who represented Storey along with partner James C. McCarney, said the firm’s fees and costs in the case amount to just under $60,000.

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