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Sanctions against a New York law firm for allowing a client to submit a false affidavit in a trademark dispute have been vacated by the 2nd U.S. Circuit Court of Appeals. The 2nd Circuit found that a district judge’s belief that intellectual property firm Pennie & Edmonds acted with subjective good faith meant that the firm should not have been sanctioned. The court’s ruling in In re Pennie & Edmonds, 02-7177, concerned the decision of Southern District of New York Judge John S. Martin to order mild sanctions for the firm’s representation of a restaurant in litigation over a trademark for pasta sauce. Martin acted sua sponte, or without prompting from parties, in ordering sanctions. Long before the firm came into the case, Patsy’s Restaurant on 56th Street was embroiled in a dispute over the “Patsy’s” trademark with Patsy’s Pizzeria at First Avenue and 118th Street, which was owned by Frank Brija of I.O.B. Realty. Patsy’s Restaurant claimed it had been making Patsy’s brand pasta sauce since 1994 and that Brija was infringing on its trademark. Brija submitted an invoice from a New Jersey label maker for pasta sauce labels he claimed were produced in 1993 and 1994. A lawyer for Patsy’s Restaurant noticed something was amiss because the invoice contained a 973 area code, which did not go into effect in New Jersey until several years later. A false affidavit submitted by Brija explaining this discrepancy led Judge Martin to order I.O.B. to pay $250,351 in attorney fees and costs to Patsy’s Restaurant. Martin, in a sanctions ruling last year, faulted Pennie & Edmonds for allowing Brija to submit the false affidavit and essentially accepting his assertion that he “simply made a mistake” on dates the labels were produced and the invoice was printed. Martin found that the firm’s conduct was not “objectively reasonable” under the standards for Rule 11 sanctions. But the judge also praised the firm’s “candor” in disclosing damaging information about the printer of the labels, and he accepted the firm’s representation that it had acted in good faith. He said that a “little sanction beyond the publication of this opinion is required to prevent repetition of similar conduct.” The firm was ordered to send copies of the court’s sanction opinion to every lawyer in the firm, with a memorandum stating that the firm adheres to the highest ethical standards, and that if such adherence causes the loss of a client, the lawyer will suffer no adverse consequence. Deciding the firm’s appeal, 2nd Circuit Judge Jon O. Newman said that where a sua sponte sanction “denies the lawyer the opportunity to withdraw the challenged document pursuant to the ‘safe harbor’ provision of Rule 11(c)(1)(A), the appropriate standard is subjective bad faith.” He said that because Judge Martin accepted the firm’s assertion of good faith, the sanction was vacated. Under the safe harbor provision, an attorney challenging an opponent’s submission must make initial service of a motion for sanctions, but must delay filing or presentation of the motion for 21 days to give the opponent a chance to withdraw the offending submission. Judge Newman said that the problem in this case, where the judge ordered sanctions on his own initiative, is that the offending party had no opportunity to invoke the safe harbor provision. “Not only was the sanction against P & E initiated by the District Court, it was initiated long after P & E had an opportunity to correct or withdraw the challenged submission,” Newman said. “At least in such circumstances, a ‘bad faith’ standard, applicable for contempt proceedings, is especially appropriate and is what the rule-makers contemplated.” In dissent, Judge Stefan R. Underhill of the U.S. District Court for the District of Connecticut, who was sitting on the 2nd Circuit bench by designation, said: “With today’s decision, the Second Circuit becomes the first and only court to hold that the 1993 amendments to Rule 11 reverted to the pre-1983 subjective bad faith standard for even a subset of Rule 11 sanctions.” Judge Fred I. Parker joined in the majority opinion. Frank H. Wright represented Pennie & Edmonds.

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