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Finding that a district court judge abused his discretion, the 2nd U.S. Circuit Court of Appeals vacated a decision to impose $18,000 in sanctions against two New York lawyers in a cybersquatting dispute. The 2nd Circuit ruled Thursday that lawyers Scott E. Mollen and John P. Sheridan of Herrick Feinstein had acted in good faith in pursuing a cybersquatter in arbitration after Southern District Judge Denny Chin had dismissed their client’s earlier court action with prejudice with the understanding the dispute had been settled. Judge Sonya Sotomayor held in Storey v. Cello Holdings, 02-7281, that the district court “abused its discretion in labeling Cello’s arguments unwarranted.” “Although all of Cello’s arguments may not ultimately have prevailed, none are patently contrary to existing law, especially as it existed at the time the papers were signed,” the court wrote. Mollen said he was “extremely grateful” for the 2nd Circuit’s ruling. “We believed we had a professional obligation to zealously advance our client’s non-frivolous claims and a right to present arguments in an area of the law that was in its infancy,” he said. Cello, a seller of high-end audio equipment, first sued Lawrence Storey in Manhattan federal court in 1997, contending that Storey’s Internet registration of “cello.com” was diluting its trademark “Cello.” Two years later, while the case was still pending before Chin, the federal Anticybersquatting Consumer Protection Act was passed, and Cello amended its complaint to add a cybersquatting claim. Shortly before trial in August 2000, Cello’s lawyers at the time, Hunton & Williams, told the court the matter had settled, and Chin issued an ordered dismissing the case with prejudice unless the parties applied to restore the action to the calendar within 30 days. But the settlement never took place, and on Sept. 25, 2000, after the 30-day window had expired, Storey’s counsel sent a letter to Cello stating that Storey was now offering the domain name for sale. Cello then brought a complaint in arbitration under the Uniform Domain Name Dispute Resolution Policy [UDRP] seeking transfer of “cello.com,” stating that it had voluntarily dismissed the Southern District complaint so as to avail itself of UDRP, “which was not available at the time of the [earlier] filing.” Storey disputed the arbitrators’ authority to hear the case, arguing that res judicata barred the action since it had been dismissed by Chin, and alternatively, that the claim lacked merit. The UDRP panel sided with Cello and ordered Storey to transfer the domain name. Storey then brought a declaratory judgment action before Chin. In its answer and in a letter to the court, Cello’s new lawyers, Herrick Feinstein, defended its actions, arguing that Storey’s Sept. 25 letter offering to sell the domain name was the basis for the arbitration, since it post-dated the first action by Cello. Chin disagreed, finding that the attorneys’ claim of Storey’s new act of cybersquatting was “false,” since the letter was “simply a reassertion by Storey of his rights to the domain name.” The judge also said that Cello was barred from reasserting its claims in arbitration, since the relief it sought there “was precisely the relief Cello had sought” in the earlier action. Chin also found that Cello filed its answer and defenses with the improper purpose of harassing Storey, causing unnecessary delay, and needlessly increasing litigation costs. The judge then ordered Cello and its lawyers to pay Storey his attorney fees as Rule 11 sanctions, and transfer the cello.com name back to Storey. INTERPRETING NEW LAW In a 41-page decision, the 2nd Circuit reversed the lower court, finding Chin had erred in interpreting the federal anticybersquatting law. A registrant’s right to a domain name under the law was not, as Chin had ruled, “a permanent determination that once made, cannot be disturbed,” but rather “contingent on ongoing conduct.” Thus, the panel held, Storey’s Sept. 25 letter presented a question whether he had an illegal “bad faith” intent to profit from Cello’s mark and was properly the basis for a new cause of action by Cello. The 2nd Circuit then vacated the Rule 11 sanctions, holding that the factual and legal arguments made by Cello and its lawyers were neither unwarranted or unreasonable. It found Chin had mischaracterized several of Cello’s legal arguments as factual arguments, and that Cello’s legal contentions were not frivolous given the evolving nature of the case law under the new statute. It remanded the case on the merits to the lower court. Mollen, a columnist for the Law Journal, said the 2nd Circuit’s decision was important to practitioners operating in an untested area of the law. “Attorneys should not have to decline to protect their clients’ interest for fear of being sanctioned,” he said. Thomas E. Engel of Engel & McCarney, who represented Storey with partner James C. McCarney, defended the motion for sanctions. “There are certain times when a lawyer is obliged to do things willy nilly, and although we had no skin in the game, we thought that we had a responsibility to the courts and the justice system in proceeding as we did,” he said. Engel said the firm’s fees and costs came to around $60,000, not including the cost of defending the lower court’s decision before the 2nd Circuit. “We’re pleased to be back in front of Judge Chin on the merits and we think we are likely to prevail,” he said.

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