MEMORANDUM OF LAW IN OPPOSITION OF DEFENDANT …nylawyer.nylj.com/adgifs/decisions15/102815nxivmsanctionsopp.pdf · united states district court northern district of new york _____

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK ___________________________________ NXIVM Corporation, Plaintiff, -vs- TONI FOLEY, JOSEPH O’HARA, JOHN TIGHE, SUZANNA ANDREWS, JAMES ODATO, and JOHN DOES 1-59, Defendants. ___________________________________

MEMORANDUM OF LAW IN OPPOSITION OF DEFENDANT SUZANNA ANDREWS’ MOTION FOR LEAVE TO FILE RULE 11

MOTION FOR SANCTIONS

THE WOLFORD LAW FIRM LLP Michael R. Wolford, Esq.

Laura A. Myers, Esq. Attorneys for Plaintiff NXIVM Corporation

600 Reynolds Arcade Building 16 East Main Street

Rochester, New York 14614 Telephone: (585) 325-8000

O’CONNELL & ARONOWITZ, P.C.

Pamela A. Nichols, Esq. 54 State Street, 9th Floor Albany, New York 12207

Telephone: (518) 462-5601

Civil Action No.: 14-CV-01375

Case 1:14-cv-01375-LEK-RFT Document 91 Filed 10/20/15 Page 1 of 33

TABLE OF CONTENTS

Page TABLE OF AUTHORITIES ............................................................................................. iii PRELIMINARY STATEMENT ......................................................................................... 1 PROCEDURAL HISTORY ............................................................................................... 2 STATEMENT OF FACTS ................................................................................................ 6

A. NXIVM’s Concerns over Disclosure of its Proprietary and Confidential Information. ......................................................................... 7

ARGUMENT .................................................................................................................... 8

POINT I ANDREWS’ REQUEST FOR LEAVE TO FILE A RULE 11 MOTION FOLLOWING DISMISSAL OF THE ACTION SHOULD BE DENIED. ............................................... 9

A. Andrews Did Not Satisfy Rule 11

Procedures Prior to Dismissal. .......................................... 9 B. NXIVM Did Not Waive the Safe Harbor

Period. ................................................................................ 13 POINT II EVEN IF THIS MOTION WERE PROPER, IT MUST

BE DENIED BECAUSE NXIVM’S CONDUCT WAS OBJECTIVELY REASONABLE. .................................................... 14 A. NXIVM’s Factual Contentions and Legal

Arguments Were Objectively Reasonable. ...................... 14 B. The Court Dismissed the Complaint Based

on Newly Decided Second Circuit Case Law Interpreting the Statute of Limitations for the SCA and CFAA Claims. ..................................................... 16

C. Sanctions Are Warranted Only in

Extraordinary Circumstances Not Present Here. ................................................................................... 19


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POINT III SANCTIONS ARE NOT WARRANTED PURSUANT TO 28 U.S.C. §1927 OR THE COURT’S INHERENT POWER. .......................................................................................... 20

POINT IV ANDREWS COMES TO THE COURT WITH

UNCLEAN HANDS. ........................................................................ 23 CONCLUSION ............................................................................................................... 25


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TABLE OF AUTHORITIES

CASES: Page Aris–Isotoner Gloves, Inc. v. Berkshire Fashions, Inc., 792 F. Supp. 969

(S.D.N.Y.), aff’d 983 F.2d 1048 (2d Cir. 1992)......................................................... 24 Assoc. Indem. v. Fairchild Indus., 961 F.2d 32 (2d Cir. 1992) ........................... 19, 20, 21 Brickwood Contractors, Inc. v. Datanet Eng'g, Inc., 369 F3d 385 (4th Cir. 2004).......................................................................................................... 10 Brown v. Kay, 11 CIV. 7304 PAE, 2012 WL 573198 (S.D.N.Y. Feb. 21, 2012) ......................................................................................... 10 Browning Deb. Holders' Comm. v. DASA Corp., 560 F2d 1078 (2d Cir. 1977).......................................................................................................... 21 Castro v. Mitchell, 727 F. Supp.2d 302 (S.D.N.Y. 2010) ............................................... 10 Chambers v. NASCO, Inc., 501 U.S. 32 (1991) ............................................................ 11 Clark Street Wine & Spirits v. Emporos Sys. Corp., 754 F. Supp.2d 474 (E.D.N.Y. 2010) ..................................................................................................18, 22 Cooter & Gell v. Hartmarx Corp., 496 U.S. 384 (1990) ................................................. 11 Corroon v. Reeve, 258 F.3d 86 (2d Cir. 2001) .............................................................. 18 Devils Films, Inc. v. Nectar Video, No. 98 CIV 8016 JSM, 2000 WL 1201383 (S.D.N.Y. Aug. 23, 2000) ........................................................... 24 DeVoll v. Burdick Painting, Inc., 35 F.3d 408 (9th Cir. 1994) ........................................ 21 Deweese v. Reinhard, 165 U.S. 386 (1897) ................................................................. 25 E. Gluck Corp. v. Rothenhaus, 252 F.R.D. 175 (S.D.N.Y. 2008) .................................. 21 Eastway Const. Corp. v. City of New York, 762 F.2d 243 (2d Cir. 1985) ...................... 17 Gal v. Viacom Int'l, Inc., 403 F.Supp.2d 294 (S.D.N.Y. 2005) ....................................... 12 Giganti v. Gen-X Strategies, Inc., 222 F.R.D. 299 (E.D. Va. 2004) ............................... 13


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CASES: Page Goldstein v. Delgratia Mining Corp., 176 F.R.D. 454 (S.D.N.Y. 1997) .......................... 24 Hadden v. Letzgus, No. 96-2250, 1997 WL 434413 (6th Cir. Jul. 31, 1997) ............................................................................................. 14 In re HBA E., Inc., 101 B.R. 411 (Bankr. E.D.N.Y. 1989) .............................................. 17 In re Pennie & Edmonds LLP, 323 F.3d 86 (2d Cir. 2003) ............................................ 10 J.W. Sandri, Inc. v. Randy Howe’s Sunoco, Inc., No. 11-CV-23, 2012 WL 601908 (D. Vt. Feb. 22, 2012) .................................................................. 24 Jennings v City of N.Y., 90 CIV. 6049 (JSM), 1991 WL 207620 (S.D.N.Y. Oct. 1, 1991) ............................................................................................ 20 Johnson v. Univ. of Rochester Med. Ctr., 642 F.3d 121 (2d Cir. 2011) ......................... 12 Johnson v. University of Rochester Medical Center, 715 F. Supp. 2d 427

(W.D.N.Y. 2010) ...................................................................................................... 12 Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240 (1933) ................................ 24 Kropelnicki v. Siegel, 290 F.3d 118 (2d Cir. 2002) ........................................................ 17 L.B. Foster Co. v. Am. Piles, Inc., 138 F.3d 81 (2d Cir. 1998) ...................................... 12 Lafountain v Teamsters, Chauffers & Helpers Local 648, 91-CV-301, 1993 WL 339086 (N.D.N.Y. Sept. 2, 1993).............................................................. 19 Langdon v. Cnty. of Columbia, 321 F Supp. 2d 481 (N.D.N.Y. 2004) ......................10, 11 Lopez v. Pena, No. 2-12-cv-165, 2013 WL 819373 (N.D. Tex. March 5, 2013) ....................................................................................... 18 Mallack v. Local 805, International Brotherhood of Teamsters, 690 F. Supp. 276 (S.D.N.Y. 1988) ........................................................................... 19 Matrix IV, Inc. v. American National Bank & Trust Co., 649 F.3d 539 (7th Cir. 2011).......................................................................................................... 12 Motown Prods., Inc. v. Cacomm, 849 F.2d 781 (2d Cir.1988) ...................................... 17 O’Brien v. Alexander, 101 F.3d 1479 (2d Cir. 1996) ..................................................... 14


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CASES: Page Oliveri v. Thompson, 803 F.2d 1265 (2d Cir. 1986) .................................................19, 21 Pannonia Farms, Inc. v. USA Cable, 426 F.3d 650 (2d Cir. 2005)........................................................................................................... 12 Pannonia Farms, Inc. v. USA Cable, No. 03-civ-7841, 2004 WL 1276842 (S.D.N.Y. Jun. 8, 2004) ............................................................. 12 Penn, LLC v. Prosper Bus. Dev. Corp., 773 F.3d 764 (6th Cir. 2014) ........................... 14 Polar Int’l Brokerage Corp. v. Reeve, 196 F.R.D. 13 (S.D.N.Y. 2000) aff’d in part, dismissed in part sub nom. ........................................ 18 Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co.,

324 U.S. 806 (1945) ................................................................................................ 25 Ridder v. City of Springfield, 109 F.3d 288 (6th Cir. 1997) .......................................10, 14 Riis v. Mfg. Hanover Trust Co., 632 F. Supp. 1098 (S.D.N.Y. 1986) ....................................................................................................... 20 Safe-Strap Co., Inc. v Koala Corp., 270 F. Supp.2d 407 (S.D.N.Y. 2003) ....................................................................................................... 11 Salovaara v. Eckert, 222 F3d 19 (2d Cir. 2000) ................................................. 16, 21, 22 Schlaifer Nance & Co. v. Estate of Warhol, 194 F.3d 323 (2d Cir. 1999)................................................................................11, 21 Schlaifer Nance & Co., Inc. v. Warhol, 7 F. Supp. 2d 364 (S.D.N.Y. 1998) ....................................................................................................... 11 Sewell v. Bernardin, 795 F.3d 337 (2d Cir. 2015) ............................................................. Shafii v. British Airways, PLC, 83 F.3d 566 (2d Cir.1996) ............................................. 21 Stalley ex rel. U.S. v. Mountain States Health Alliance, 644 F.3d 349 (6th Cir. 2011).................................................................................... 14 Stalley v. Mtn. States Health Alliance, 2:06-CV-217, 2010 WL 446929 (E.D. Tenn. Feb. 2, 2010) aff’d sub nom. .................................... 14 Star Mark Mgt., Inc. v. Koon Chun Hing Kee Soy & Sauce Factory, Ltd., 682 F.3d 170 (2d Cir. 2012)..................................................................................... 12


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CASES: Page Storey v. Cello Holdings, L.L.C., 347 F.3d 370 (2d Cir. 2003) ..................... 14, 16, 22, 23 Weeks Stevedoring Co. v. Raymond Int’l Builders, Inc., 174 F.R.D. 301 (S.D.N.Y. 1997) .............................................................................. 12 Zaratzian v. Abadir, No. 10 CV 9049, 2014 WL 4467919 (S.D.N.Y. Sept. 2, 2014) .....................................................................................18, 22 STATUTES: 18 U.S.C. § 1030 ............................................................................................................ 9 18 U.S.C. § 2707 ............................................................................................................ 9 28 U.S.C. § 1927 .......................................................................................................... 21 Fed. R. Civ. P. 11.......................................................................................................9, 14


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PRELIMINARY STATEMENT

NXIVM Corporation (“NXIVM” or “Plaintiff”) submits this Memorandum of Law in

opposition to defendant Suzanna Andrews’ request for leave to file a motion pursuant to

Rule 11(c)(2) of the Federal Rules of Civil Procedure (“Fed. R. Civ. P.”), and for

sanctions pursuant to 28 U.S.C. §1927.1 The events leading to NXIVM filing its

Complaint against defendant Andrews’ were defendant Andrews’ repeated unlawful

access to NXIVM’s password protected website to obtain information and materials for

use in an article critical of NXIVM that she was writing for Vanity Fair magazine.

Defendant Andrews has never denied that she engaged in this unlawful conduct.

Andrews’ motion to dismiss was successful in light of a new decision handed down by

the Second Circuit Court of Appeals in August 2015. Pursuant to the new authority, the

Court determined NXVIM filed its lawsuit too late. Although NXIVM has a good faith

basis for asserting claims against Andrews and the other defendants, the Court

dismissed the case on statute of limitations grounds. Notwithstanding her unlawful

conduct and the fact that she avoided liability based on a recent Second Circuit case,

following dismissal, Andrews sought to impose unidentified sanctions against NXIVM

and the undersigned counsel for pursuing its claims against her in the first place. To the

extent any party is entitled to sanctions, it should be NXIVM given that it has been

forced to incur significant legal fees and costs in responding to this untimely and

baseless motion.

1 While Pro se defendant Joseph O’Hara has purported to join Andrews’ motion through a letter request, he never served a Rule 11 sanctions motion on Plaintiff, and therefore has completely disregarded the twenty-one day safe harbor period required by Rule 11. Dkt. No. 89. Plaintiff therefore, requests that the Court deny defendant O’Hara’s request in its entirety for failure to comply with the Rule 11 notice requirement. Should the Court choose to consider defendant O’Hara’s letter request as a motion on its merits, Plaintiff notes the arguments asserted herein apply equally to O’Hara, as he and Andrews stand in a similar position.


2

Defendant Andrews’ proposed Rule 11 sanctions motion is procedurally improper

and lacks merit. First, NXIVM was not provided the mandatory twenty-one day safe

harbor period prior to the Court dismissing Plaintiff’s Complaint. Second, there is no

pleading currently before the Court that can serve as a basis for sanctions given that the

Court has already dismissed the Complaint. Third, NXIVM and its counsel at all times

acted in good faith in filing NXIVM’s Complaint with the Court on October 22, 2013

(hereinafter “Complaint”), which contained claims under the Stored Communications Act

(“SCA”) and Computer Fraud and Abuse Act (“CFAA”). The ultimate decision reached

by this Court on September 17, 2015, dismissing these claims, was based heavily on a

new Second Circuit decision that was decided on August 4, 2015, almost two years

after the Complaint was filed and over six months after the briefing on defendant

Andrews’ motion to dismiss was completed. Finally, Andrews comes to this Court with

unclean hands, and, as a result, is not entitled to the requested relief. For the reasons

set forth below, the Court should not even permit Andrews to file her proposed motion

given the procedural irregularities. In the event the Court allows Andrews to proceed

with the motion, it should deny this motion on the merits.

PROCEDURAL HISTORY

On October 22, 2013, NXIVM filed suit against five named defendants, including

defendant Andrews and fifty-nine “John Doe” defendants for unlawfully accessing

NXIVM’s password protected website. Dkt. No. 1. At that time, NXIVM also filed a

motion with the Court requesting that its Complaint be filed under seal. Dkt. No. 2. The

basis for the sealing motion was an ongoing criminal investigation being conducted by

the New York State Police (hereinafter “State Police”) into defendants’ criminal trespass


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of NXIVM’s computer server. See Affidavit of Special District Attorney, Bruce Lennard,

Esq. (hereinafter “Lennard Aff.”) at ¶1-3, Dkt No. 2, Ex A. NXIVM filed its civil Complaint

at this time, under seal to avoid compromising the ongoing criminal investigation of the

same defendants. Id. at ¶4-8; Declaration of Michael R. Wolford, Esq., dated October

20, 2015, and submitted herewith (hereinafter “Wolford Decl.”) at ¶6. The Court granted

that motion, and filed NXIVM’s Complaint under seal. Dkt. No. 4.

On January 31, 2014, NXIVM moved to extend its time to serve the defendants

citing the ongoing criminal investigation and warrants that had been executed on the

residences of three of the defendants in this case on October 23, 2013. Dkt. No. 5. On

February 12, 2014, the Court granted the motion and NXIVM’s Complaint was served

on defendant Andrews on July 31, 2014. Dkt. No. 6. In response, and after receiving a

time extension to answer, defendant Andrews filed her Motion to Dismiss on September

30, 2014 (hereinafter “Motion to Dismiss”), which NXIVM opposed on December 8,

2014. See Dkt. Nos. 27, 53. The motion to dismiss was fully briefed as of January 12,

2015. Dkt. No. 62.

On August 14, 2015, defendant Andrews sent a letter to NXIVM in which she

asserted that NXIVM’s claims were time-barred under the SCA and CFAA. See Grygiel

Letter dated August 14, 2015, attached to defendant’s Notice of Motion for Leave to File

Rule 11 Motion (hereinafter “Rule 11 Notice”) as Ex. 1 (Dkt. No. 86-2). Defendant

Andrews further asserted that she would seek sanctions if the claims against her were

not withdrawn. NXIVM requested time to investigate Andrews’ assertions prior to

responding. On August 25, 2015, NXIVM requested additional time to respond.

Defendant Andrews’ counsel denied NXIVM’s request. In light of the serious allegations


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leveled against NXIVM and its counsel, Andrews should have provided a brief additional

extension of time. Nevertheless, NXIVM responded with a letter to defendant objecting

to the refusal to grant additional time and to the assertion that NXIVM had violated Rule

11. See Wolford Decl. ¶25.

On August 25, 2015, defendant Andrews filed a letter with the Court detailing her

argument that NXIVM’s claims were time-barred. In her letter to the Court, Andrews

relied on Sewell v. Bernardin, 795 F.3d 337 (2d Cir. 2015), which was decided on

August 4, 2015—nearly two years after NXIVM initiated this action—and interpreted that

decision to mean that the statutes of limitation under the SCA and CFAA began to run

when NXIVM initially began any investigation into potentially unlawful conduct.

Defendant Andrews subsequently served a motion for sanctions on NXIVM on August

31, 2015. NXIVM responded to Andrews’ August 25, 2015 letter on September 15,

2015 in a letter to the Court. In the September letter, NXIVM examined and

distinguished the Sewell decision. NXIVM highlighted the portion of the opinion holding

that mere suspicion of unlawful conduct without more, is not enough to start the clock

for statute of limitations purposes. See Wolford Letter dated September 15, 2015 at Dkt.

No. 82.

On September 17, 2015, prior to the expiration of the twenty-one day safe harbor

period required by Rule 11, the Court dismissed the claims against defendant Andrews.

In the memorandum decision the Court dedicated two pages to discussing the holding

in Sewell and more than six pages to discussing the timeliness of NXIVM’s claims

against defendant Andrews. See Dkt. 83, at 11-20. Without waiving the attorney-client

privilege or revealing any attorney work product, at the time the Court dismissed


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NXIVM’s complaint, NXIVM and its counsel were still deciding whether to amend the

Complaint, or take other action, in response to Andrews’ motion. See Wolford Decl. at

¶30.

Following the dismissal, NXIVM contacted defendant Andrews’ counsel on

September 18, 2015 to confirm that Andrews would not pursue her sanctions motion.

To NXIVM’s surprise, defendant Andrews indicated she would continue to pursue Rule

11 sanctions. NXIVM responded via letter on September 21, 2015 warning Andrews

that post-judgment Rule 11 sanctions were precluded by controlling case law in the

Second Circuit and the filing of such a motion could subject Andrews herself to

sanctions. See Myers Letter, dated September 21, 2015, attached to Rule 11 Notice as

Ex. 5 (Dkt. No. 86-10). Defendant Andrews responded on September 23, 2015, stating

that her Rule 11 motion for sanctions was not time-barred and reasserting her intention

to file the motion because NXIVM did not represent it would not appeal its claims. See

Grygiel Letter dated September 23, 2015, attached to Rule 11 Notice as Ex. 6 (Dkt. No.

86-11). Despite there being no pending document before the Court for NXIVM to

withdraw even if withdrawal were warranted, on September 25, 2015, defendant

Andrews filed a motion for sanctions under Rule 11 and 28 U.S.C. §1927.

As explained below, Andrews’ filing of this motion is procedurally improper

because she did not first comply with the safe harbor provision. The motion also is

without merit because NXIVM did not file the Complaint in bad faith. But for the recently

decided Sewell opinion, Andrews and her co-defendants would likely have been held to

answer to the well-founded and supported allegations in the Complaint. It is Andrews

and O’Hara who come to the Court with unclean hands.


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STATEMENT OF FACTS

NXIVM filed its Complaint on October 22, 2013, after discovering the defendants

had unlawfully accessed its proprietary server and password protected website. NXIVM

reached this conclusion only after performing an internal investigation, hiring a private

investigator to further pursue that investigation, and hiring computer experts to identify

the defendants who improperly accessed NXIVM’s website. See Declaration of Clare

Bronfman, dated October 20, 2015, (hereinafter “Bronfman Decl.”) at ¶¶23, 35, 39, 40.

The results of NXIVM’s extensive investigation revealed that the five named defendants,

including Suzanna Andrews, along with fifty-nine other unidentified individuals

repeatedly and unlawfully accessed NXIVM’s password protected website. See

Complaint at ¶69; Bronfman Decl. at ¶12. Specifically, NXIVM learned that defendant

Andrews accessed NXIVM’s Password Protected Website using Client P’s username

and password on July 9, 2010, July 10, 2010, twice on August 9, 2010, and once on

September 10, 2010. Complaint at ¶69. NXIVM’s IT personnel determined that

defendant Andrews accessed a number of confidential and proprietary pages on

NXIVM’s website, including its Magnificence Reports, coach list and corporate retreat

information. Id. at ¶70. While defendant Andrews moved to dismiss this lawsuit,

alleging that NXIVM’s claims against her were time-barred, she has never denied her

unlawful access to NXVIM’s website. Instead, defendant Andrews’ referred to her

unlawful access to NXIVM’s computer as a “technical statutory claim.” See Dkt. No. 27-

1 at 2.


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A. NXIVM’s Concerns over Disclosure of its Proprietary and Confidential Information.

Defendant Andrews has mischaracterized many of the events leading up to

NXIVM’s determination that its password protected website had been unlawfully

accessed. As described in the accompanying declarations of Clare Bronfman and

Benjamin Myers, while NXIVM may have been suspicious that information and materials

were being taken from its password protected website, NXIVM reasonably believed that

the information had been obtained from a current NXIVM client with access to NXIVM’s

website who was a “mole” for John Tighe and possibly others. Bronfman Decl. at ¶¶16,

18-20, 22, 23, 25; Declaration of Benjamin Myers dated October 20, 2015 (hereinafter

“Myers Decl.”) at ¶7. This belief was based in large part on John Tighe’s blog, wherein

he repeatedly referenced receiving information from a “mole” at NXIVM. Bronfman

Decl. at ¶16, Ex. A.

Based upon this suspicion, NXIVM performed an internal investigation of the

clients who had regularly been signing into NXIVM’s password protected website. In

September 2011, NXIVM’s IT department discovered that Mary Jane Pino, a member

who was currently in good standing with NXIVM, had been regularly logging into

NXIVM’s password protected website. Bronfman Decl. at ¶28. NXIVM’s officers were

concerned that Ms. Pino might have been the “mole” providing information to John

Tighe and possibly others. Id. at ¶29. Based, in part, on that concern, NXIVM

suspended Ms. Pino’s access to NXIVM’s website on September 27, 2011. Myers Decl.

at ¶11.

To confirm its suspicions, NXIVM hired a private investigator to locate and

question Ms. Pino about accessing NXIVM’s website. Bronfman Decl. at ¶34-35. On


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October 25, 2011, NXIVM’s investigator spoke to Ms. Pino by telephone, and, at that

time, she informed the investigator that she had not accessed NXIVM’s website since

2003 and had not provided her username and password to any unauthorized third

parties. Id. at ¶35. NXIVM’s investigator followed up with Ms. Pino to obtain a signed

statement. Id. at ¶36. Ms. Pino was initially hesitant, but on February 2, 2012, through

an attorney retained by her, Mary Jane Pino finally provided an Affidavit dated January

30, 2012. Id. at ¶36, Ex. C.

After confirming that Ms. Pino was not the mole in January 2012, but still

suspicious of her login history, NXVIM continued its investigation. Specifically, in May

2012, NXIVM’s IT department assembled all of the dates, locations, and IP addresses

for Ms. Pino’s logins, and it was at this time NXIVM first confirmed that multiple

individuals had been logging into NXIVM’s website using Ms. Pino’s user information at

the same time. Myers Decl. at ¶14, 15. Further, after May 2012, NXIVM’s IT personnel

performed a further investigation of the owners of the IP addresses that had been used

to access NXIVM’s website. Id. at ¶¶17-19. It was not until April, 2013 that NXIVM’s

outside expert was able to confirm the IP address of defendant Andrews, as the

individual who had illegally accessed NXIVM’s website using Mary Jane Pino’s

credentials. Id. at ¶20.

ARGUMENT

Defendant Andrews has incorrectly asserted that sanctions are warranted under

Rule 11(c)(2), 28 U.S.C. §1927, and the inherent power of the Court. The basis for her

assertions is that NXIVM knowingly filed the October 22, 2013 Complaint after the

statute of limitations had run under the CFAA and SCA. This is simply untrue.


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A claim brought under the CFAA must be brought “within 2 years of the date of

the act complained of or the date of the discovery of the damage.” 18 U.S.C. §1030(g).

Similarly, a claim brought under the SCA “may not be commenced later than two years

after the date upon which the claimant first discovered or had a reasonable opportunity

to discover the violation.” 18 U.S.C. §2707(f). At the time NXIVM filed the Complaint

against Andrews and her co-defendants in October 2013, the case law in the Second

Circuit interpreting the running of the statutes of limitation under the SCA and CFAA

was not well settled. As such, NXIVM’s arguments made in support of its interpretation

of the applicable statutes of limitation were not objectively unreasonable or made in bad

faith. As such, sanctions under Rule 11 or 28 U.S.C. §1927 are unwarranted.

POINT I

ANDREWS' REQUEST FOR LEAVE TO FILE A RULE 11 MOTION FOLLOWING DISMISSAL OF THE ACTION SHOULD BE DENIED

A. Andrews Did Not Satisfy Rule 11 Procedures Prior to Dismissal.

Andrews’ request for sanctions under Rule 11 should be denied on procedural

grounds. NXIVM’s complaint was dismissed prior to the expiration of the twenty-one

day safe harbor period, and prior to defendant Andrews filing of her motion for

sanctions.

In 1993, Rule 11 was amended to require that any motions for sanctions be

served twenty-one days prior to filing it with the trial court, and must not be filed where

the party amends or withdraws the challenged pleading during that time period. Fed. R.

Civ. P. 11. The Second Circuit has acknowledged that the “safe harbor” provision under

Rule 11 now functions as a practical time limit, and therefore motions filed at a point in

the litigation when there is no opportunity to correct or withdraw the challenged


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submission, should be rejected as untimely. See In re Pennie & Edmonds LLP, 323

F.3d 86, 89 (2d Cir. 2003) (citing Ridder v. City of Springfield, 109 F.3d 288, 295 (6th

Cir. 1997) (holding that “[a] party must now serve a Rule 11 motion on the allegedly

offending party at least twenty-one days prior to conclusion of the case or judicial

rejection of the offending contention. If the court disposes of the offending contention

before the twenty-one day ‘safe harbor’ period expires, a motion for sanctions cannot be

filed with or presented to the court. Any other interpretation would defeat the rule’s

explicit requirements.”)).

Second Circuit case law is very clear that there must be strict compliance with

the procedural requirements of Rule 11, and courts have repeatedly held that following

the dismissal of an action by the court, no motion for sanctions can be filed. See

Langdon v. Cnty. of Columbia, 321 F Supp. 2d 481, 485 (N.D.N.Y. 2004) (“Rule 11 does

not permit the court to entertain motions for sanctions filed after the conclusion of the

case or judicial rejection of the offending contention.”) (citing Brickwood Contractors,

Inc. v. Datanet Eng'g, Inc., 369 F3d 385, 389 (4th Cir. 2004) (holding that because the

rule requires the party submitting the challenged pleading be given an opportunity to

withdraw the pleading, sanctions cannot be sought after summary judgment has been

granted)); see also Brown v. Kay, 11 CIV. 7304 PAE, 2012 WL 573198, at *2 (S.D.N.Y.

Feb. 21, 2012); Castro v. Mitchell, 727 F. Supp.2d 302, 308 (S.D.N.Y. 2010).

As described above, the case law in the Second Circuit clearly demonstrates that

post-judgment sanctions, particularly those that do not comply with the safe harbor

provision, are not permissible under Rule 11. While defendant Andrews’ has tried to

argue otherwise, several of the cases cited in her memorandum of law were decided


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prior to the 1993 amendment to Rule 11 that established the twenty-one day safe

harbor period. See Dkt. No. 86-12 at 18 (citing Chambers v. NASCO, Inc., 501 U.S. 32,

56 (1991); Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 395-96 (1990)). While a

Rule 11 motion could be made after final judgment prior to the 1993 amendment, case

law decided since the amendment was enacted reflects that the purpose of the safe

harbor period is to provide the party to be sanctioned with an opportunity to cure any

defect in the pleading. Therefore, where such opportunity is not provided; sanctions are

not permitted under Rule 11. See Langdon, 321 F. Supp. 2d at 485 (Rule 11 sanctions

not permissible after conclusion of the case or judicial rejection of the offending

contention).

The case law cited by defendant Andrews does not support her claims that

sanctions are warranted in the present case. For example, Andrews has cited Schlaifer

Nance & Co. v. Estate of Warhol, 194 F.3d 323, 333 (2d Cir. 1999) in support of her

claim for post-judgment Rule 11 sanctions. However, the District Court in Schlaifer

specifically held that Rule 11 sanctions were not permissible at that stage of the

litigation. Id. at 331 (2d Cir. 1999) (citing Schlaifer Nance & Co., Inc. v. Warhol, 7 F.

Supp. 2d 364, 374 (S.D.N.Y. 1998)).2

Defendant Andrews also relies on several cases in support of her argument that

the Court can impose sanctions under Rule 11 where the procedural requirements have

2 While NXIVM has not elected to pursue a cross-motion for sanctions under Rule 11, defendant Andrews’ post-judgment pursuit of Rule 11 sanctions could in and of itself be grounds for sanctions. See Safe-Strap Co., Inc. v Koala Corp., 270 F. Supp.2d 407, 421 (S.D.N.Y. 2003) (holding that Rule 11 sanctions not well grounded in fact or law may themselves be sanctionable.) Case law in the Second Circuit is well settled on the issue of post-judgment sanctions. Further, defendant Andrews has cited no controlling case law in support of her position that Rule 11 sanctions are permissible after dismissal of a claim, and has distorted the facts and holdings of many of the cases she has cited in support of her argument, including several cases that are out-of-Circuit. For this reason, NXIVM respectfully requests that the Court consider awarding it reasonable attorneys’ fees and costs in connection with having to oppose this untimely and meritless motion.


12

not been strictly followed. However, these cases either do not stand for the proposition

she asserts and/or are easily distinguishable from this case. See Weeks Stevedoring

Co. v. Raymond Int’l Builders, Inc., 174 F.R.D. 301, 305 (S.D.N.Y. 1997) (denying Rule

11 sanctions and holding “Rule 11 clearly states that a sanctions motion must be served

at least twenty-one days before its filing in order to give the opposing party time to

withdraw the disputed pleading.”)3

Additionally, defendant Andrews has cited case law from outside the Circuit,

which clearly contradicts clear Second Circuit precedent. In Matrix IV, Inc. v. American

National Bank & Trust Co., 649 F.3d 539, 553 (7th Cir. 2011) the Court held an informal

letter to a party to be sanctioned satisfies the notice requirement of Rule 11. Id. at 552-

553. However, this decision is directly contradicted by Second Circuit case law. See

Star Mark Mgt., Inc. v. Koon Chun Hing Kee Soy & Sauce Factory, Ltd., 682 F.3d 170,

175 (2d Cir. 2012) (“[a]n informal warning in the form of a letter without service of a

separate Rule 11 motion is not sufficient to trigger the 21–day safe harbor period”)

(citing L.B. Foster Co. v. Am. Piles, Inc., 138 F.3d 81, 89–90 (2d Cir. 1998)); Gal v.

Viacom Int'l, Inc., 403 F.Supp.2d 294, 309 (S.D.N.Y. 2005) (holding that “the plain

language of the rule states explicitly that service of the motion itself is required to begin

the safe harbor clock—the rule says nothing about the use of letters.”).

3 In addition, both Johnson v. University of Rochester Medical Center, 715 F. Supp. 2d 427 (W.D.N.Y. 2010) and Pannonia Farms, Inc. v. USA Cable, No. 03-civ-7841, 2004 WL 1276842, at *10-11 (S.D.N.Y. Jun. 8, 2004), are distinguishable on their facts. In both cases, the party to be sanctioned was provided ample opportunity in excess of the required twenty-one days prior to filing of the notice and dismissal of the case to withdraw or amend the challenged pleading. It is also notable that on appeal, the Second Circuit did not reach a decision on the imposition of Rule 11 sanctions in either case. Johnson v. Univ. of Rochester Med. Ctr., 642 F.3d 121, 125 (2d Cir. 2011) (upholding sanctions under §1927); Pannonia Farms, Inc. v. USA Cable, 426 F.3d 650, 652 (2d Cir. 2005) (the court did not reach the Rule 11 issue due to jurisdictional deficiencies but did question whether the record clearly established whether the procedural protections of Rule 11 were in fact satisfied).


13

Here, the safe harbor clock did not begin to run until opposing counsel served the

August 31, 2015 motion for sanctions. As the case was dismissed on September 17,

2015, NXIVM was not provided with the full twenty-one day safe harbor period as

required by Rule 11, and defendants’ motion should be denied.

B. NXIVM Did Not Waive the Safe Harbor Period.

Defendant Andrews has asserted that the September 15, 2015 letter submitted

by NXIVM, in which NXIVM argues that Sewell is distinguishable from this case,

somehow waived NXIVM’s right to the twenty-one day safe harbor period. This

argument is without merit and is based only on case law decided outside of the Second

Circuit.

Defendant Andrews relies heavily on an eleven year old decision from the

Eastern District of Virginia, Giganti v. Gen-X Strategies, Inc., 222 F.R.D. 299, 305-06

(E.D. Va. 2004). In that case, a Rule 11 motion was served twenty-one days before the

case was dismissed. On the twenty-first day, the party to be sanctioned appeared by

counsel and argued vigorously against the motion to dismiss the claim. At no point

during the argument did they acknowledge the Rule 11 sanctions motion, or indicate

that they would consider using the final five hours or so of their safe harbor period to

amend their complaint or otherwise cure the alleged defect. Id. at 307. The facts in

Giganti are clearly distinguished from the present case in which NXIVM merely asserted

a legal argument in an effort to distinguish a new case that Andrews brought to the

Court’s attention. NXIVM was well within its rights to do so, and its counsel has an

obligation to zealously represent its client in that manner.


14

Defendant Andrews also cites to Hadden v. Letzgus, No. 96-2250, 1997 WL

434413, at *1 (6th Cir. Jul. 31, 1997), wherein the plaintiffs vigorously defended their

position even after the motion for sanctions was filed and a magistrate judge determined

that the complaint should be dismissed. This case is factually distinguishable because

NXIVM was considering whether to amend the Complaint or otherwise address the

motion when the Court dismissed the case. See Wolford Decl. at ¶30. Since the

dismissal, NXIVM has not advanced these arguments.4

POINT II

EVEN IF THIS MOTION WERE PROPER, IT MUST BE DENIED BECAUSE NXIVM'S CONDUCT WAS OBJECTIVELY REASONABLE

A. NXIVM’s Factual Contentions and Legal Arguments Were Objectively

Reasonable. Following the 1993 amendment, the courts have utilized an “objective

unreasonableness” standard when imposing sanctions initiated by motion under Rule

11. With regard to factual contentions, Rule 11 requires that for pleadings submitted to

the court the attorney must certify that “the allegations and other factual contentions

have evidentiary support . . .” Fed. R. Civ. P. 11(b)(3). The Second Circuit has

interpreted this provision to mean that “sanctions may not be imposed unless a

particular allegation is utterly lacking in support.” Storey v. Cello Holdings, L.L.C., 347

F.3d 370, 391 (2d Cir. 2003) (quoting O’Brien v. Alexander, 101 F.3d 1479, 1489 (2d

Cir. 1996)). 4 Moreover, it is unclear if Hadden is even considered good law within the Sixth Circuit. See Penn, LLC v. Prosper Bus. Dev. Corp., 773 F.3d 764, 768 (6th Cir. 2014) (“these [Hadden] unpublished decisions neither bind us nor persuade us to forsake the benefit to bench and bar afforded by requiring strict compliance with Rule 11’s clear text.”); see also Stalley v. Mtn. States Health Alliance, 2:06-CV-217, 2010 WL 446929, at *8 (E.D. Tenn. Feb. 2, 2010) aff’d sub nom. Stalley ex rel. U.S. v. Mountain States Health Alliance, 644 F.3d 349 (6th Cir. 2011) (holding that as Hadden is not reported, it could be argued with some persuasiveness that it is not the law at all, and that Ridder, supra should control where any conflict arises with respect to application of Rule 11 sanctions.).


15

In the present case, defendant Andrews’ has alleged that NXIVM made a number

of factual misstatements in its Complaint, based upon its counsel’s independent review

and interpretation of documents used in the criminal investigation of the defendants.

However, many of the statements identified by defendant Andrews’ were, in fact, taken

out of context and misinterpreted by defendant Andrews. For example, defendant

Andrews has repeatedly stated that NXIVM’s use of the phrase “late 2011” to describe

the time period when NXIVM first began to suspect that its password protected website

was being unlawfully accessed, is somehow sanctionable. Specifically, Andrews

argued that because NXIVM’s client list was published by John Tighe on his blog in

August 2011, and NXIVM blocked website access to one of its members, Mary Jane

Pino on September 27, 2011, that NXIVM definitively had suspicions that its website

was being unlawfully accessed in August or September 2011. Further, she alleges that

the characterization of that time period as “late 2011” should subject NXIVM to Rule 11

sanctions. Andrews’ argument in this respect fails on both the facts and the law.

As set forth in the Bronfman Declaration, while NXIVM may have had suspicions

as early as September 2011, that third parties had unlawfully accessed NXIVM’s

password protected website, it did not know that the NXIVM server had been unlawfully

accessed. Bronfman Decl. at ¶34. In fact, it was not until NXIVM’s investigator spoke

with Ms. Pino on October 22, 2011, and obtained an affidavit from her in January 2012,

that NXIVM had a “reasonable belief” that NXIVM’s website had been unlawfully

accessed. See Bronfman Decl. at ¶35. See Sewell, 795 F.3d at 342 (holding that the

district court’s conclusion was based on the erroneous assumption that “a plaintiff is on


16

notice of the possibility” of a security breach when she discovers any suspicious activity

affecting her Internet accounts).

B. The Court Dismissed the Complaint Based on Newly Decided Second Circuit Case Law Interpreting the Statute of Limitations for the SCA and CFAA Claims.

In its Memorandum-Decision and Order of September 17, 2015, this Court

dedicated two pages to a discussion of Sewell v. Bernardin, 795 F.3d 337 (2d Cir.

2015), which came out in August 2015, nearly two years after the Complaint was filed

and over six months after the parties’ briefing on defendant Andrews’ motion to dismiss

had been completed. Specifically, in reaching its decision to dismiss NXIVM’s

Complaint, this Court noted that “[t]he Second Circuit recently clarified how the statutes

of limitation operate under the civil enforcement provisions of both the CFAA and SCA.”

Dkt. No. 83, p. 11. In so doing, this Court implicitly acknowledged that the applicable

statute of limitations was not settled at the time NXIVM filed its complaint. This Court

also dedicated six pages to discussing the timeliness of NXIVM’s claims against

Andrews. See Salovaara v. Eckert, 222 F3d 19, 29 (2d Cir. 2000) (reversing sanctions

order where signing party’s interpretation of case law was ultimately unpersuasive but

required clarification by the trial court and thus was not frivolous or made in bad faith).

The Court’s ultimate determination that NXIVM had a reasonable opportunity to

discover Andrews’ hacking prior to October 2011, does not make NXIVM’s conduct in

filing this lawsuit against Andrews for engaging in unlawful conduct, frivolous. Storey v.

Cello Holdings, L.L.C., 347 F.3d 370, 391 (2d Cir. 2003) (declining to impose sanctions

where plaintiff’s arguments may not ultimately have prevailed, but were not patently

contrary to existing law, especially as it existed at the time the papers were signed); see


17

also Motown Prods., Inc. v. Cacomm, 849 F.2d 781, 785 (2d Cir.1988) (not all

unsuccessful legal arguments are frivolous or warrant sanctions). If the Court were to

accept Andrews’ argument, it would mean that anytime a case is dismissed on statute

of limitations grounds, the prevailing defendant would be entitled to seek sanctions

against the plaintiff because the plaintiff presumably had a reasonable opportunity to

discover the date the cause of action accrued. This cannot be and is not the law of the

Circuit.

Second Circuit case law has established that a claim is objectively unreasonable,

“where it is patently clear that a claim has absolutely no chance of success under the

existing precedents, and where no reasonable argument can be advanced to extend,

modify or reverse the law as it stands.” Eastway Const. Corp. v. City of New York, 762

F.2d 243, 254 (2d Cir. 1985). Under this standard, when there is even modest difficulty

in resolving the merits of the challenged legal position, then the Rule 11 certification has

been satisfied, and sanctions are inappropriate. In re HBA E., Inc., 101 B.R. 411, 415

(Bankr. E.D.N.Y. 1989). Therefore, even where a party asserts a theory that is unlikely

to be successful, sanctions are not necessarily warranted. See Kropelnicki v. Siegel,

290 F.3d 118, 131 (2d Cir. 2002) (upholding denial of sanctions where it was not

completely inconceivable that a novel legal theory could have been developed).

In the present case, NXIVM conducted a reasonable inquiry into the existing

case law governing the statute of limitation provisions of the CFAA and SCA at the time

the Complaint was filed in October 2013. NXIVM learned that the law was not well

settled, and many of the non-binding decisions that dealt with interpreting the statute of

limitation provisions were very fact specific. NXIVM did, however, find a number of


18

persuasive cases that it later cited in support of its opposition to defendant Andrews’

motion to dismiss supporting its position that its claims against defendant Andrews were

not time-barred. See e.g., Clark Street Wine & Spirits v. Emporos Sys. Corp., 754 F.

Supp.2d 474 (E.D.N.Y. 2010) (denying dismissal where plaintiff was notified that

sensitive data had been used fraudulently because that does not necessarily trigger the

running of the statute of limitations); Lopez v. Pena, No. 2-12-cv-165, 2013 WL 819373,

at *1 (N.D. Tex. March 5, 2013) (denying dismissal based on a finding that even though

airport security had obtained a check from plaintiff’s bank statements, plaintiff did not

have a “reasonable opportunity” to discover all of his accounts had been unlawfully

accessed). See also Zaratzian v. Abadir, No. 10 CV 9049, 2014 WL 4467919, at *4

(S.D.N.Y. Sept. 2, 2014) (denying dismissal and finding that the defendant bears the

burden of establishing that “no reasonable jury could [find that the plaintiff] did not have

a reasonable opportunity to discover [the violation] more than two years before the start

of the lawsuit.”). Further, defendant Andrews’ motion to dismiss did not cite to

controlling case law for its statute of limitations argument, because none existed in the

Second Circuit. Therefore, “[a]bsent clear precedent, it would be inappropriate to

conclude that plaintiffs' position presented ‘no chance of success and no reasonable

argument to extend, modify or reverse the law as it stands.’” Polar Int’l Brokerage Corp.

v. Reeve, 196 F.R.D. 13, 16 (S.D.N.Y. 2000) aff’d in part, dismissed in part sub nom.

Corroon v. Reeve, 258 F.3d 86 (2d Cir. 2001).

C. Sanctions Are Warranted Only in Extraordinary Circumstances Not Present Here.

Courts are reluctant to impose Rule 11 sanctions in an action that was dismissed

as time-barred where the applicable statute of limitations was not clearly defined. For


19

example, the defendants in Mallack v. Local 805, International Brotherhood of

Teamsters, 690 F. Supp. 276 (S.D.N.Y. 1988), moved for dismissal based on statute of

limitations grounds as well as for sanctions pursuant to Rule 11. While the court agreed

that the action should be dismissed, it declined to impose sanctions. Id. at 280-81. The

court reasoned that the “standard for the imposition of sanctions is a very stringent one,

and the Second Circuit has cautioned district courts to ‘resolve all doubts in favor of the

signer.’” Id. at 281 (quoting Oliveri v. Thompson, 803 F.2d 1265 (2d Cir. 1986)).

Ultimately, given that the applicable statute of limitations was not entirely settled, the

court found that the plaintiffs’ argument “was not patently meritless.” Id. Notably, in

declining to impose sanctions, the court further considered that the plaintiffs’ underlying

claims were not meritless. Id. See Point II.A.

Similarly, courts have declined to impose Rule 11 sanctions where the plaintiff’s

statute of limitation’s argument, while unsuccessful, was not meritless. The court in

Lafountain v Teamsters, Chauffers & Helpers Local 648, 91-CV-301, 1993 WL 339086,

at *6 (N.D.N.Y. Sept. 2, 1993), for example, declined to impose sanctions despite

dismissing the case as time-barred. In so doing, the Court considered the Second

Circuit’s ruling that “Rule 11 ‘is targeted at situations’ ‘where it is patently clear that a

claim has absolutely no chance of success under the existing precedents, and where no

reasonable argument can be advanced to extend, modify or reverse the law as it

stands.’” Id. at *22 (quoting Assoc. Indem. v. Fairchild Indus., 961 F.2d 32, 34 (2d Cir.

1992)). Ultimately, the Northern District Court found that “plaintiff’s argument . . . as to

the statute of limitations was merely a losing one, but certainly not losing and

sanctionable.” Id.; see also Riis v. Mfg. Hanover Trust Co., 632 F. Supp. 1098, 1106


20

(S.D.N.Y. 1986) (denying defendant’s motion for Rule 11 sections despite dismissing

the action on statute of limitations grounds where “there [wa]s no basis to conclude that

[plaintiff’s] pleadings were undertaken in bad faith, that her attorneys failed to make a

reasonable inquiry into the underlying elements of this factually complex action, or that

the pleadings were drafted in a manner so irresponsible as to rebut the presumption of

validity to which counsel's pleadings are entitled”); Jennings v City of N.Y., 90 CIV. 6049

(JSM), 1991 WL 207620, at *8 (S.D.N.Y. Oct. 1, 1991) (declining to impose Rule 11

sanctions where the action was time-barred because, although plaintiff’s arguments

were not successful, they “were not so untenable as a matter of law as to necessitate

sanction . . . [and] did [not] constitute the type of abuse of the adversary system that

Rule 11 was designed to guard against”). Because NXIVM’s arguments were based on

valid case law and all pleadings were submitted in good faith, Andrews’ motion should

be denied.

POINT III

SANCTIONS ARE NOT WARRANTED PURSUANT TO 28 U.S.C. §1927 OR THE COURT’S INHERENT POWER.

Sanctions against NXIVM are also unwarranted under §1927 or the Court’s

inherent power. Pursuant to §1927, “any attorney or other person admitted to conduct

cases in any court of the United States or any Territory thereof who so multiplies the

proceedings in any case unreasonably and vexatiously may be required by the court to

satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred

because of such conduct.” 28 USCA §1927. Sanctions under §1927 are only imposed

against attorneys who participate in the sanctionable conduct, while a court may also

impose sanctions against a client under its inherent power for “bad faith” conduct.


21

Oliveri v. Thompson, 803 F2d at 1272 (“Awards under the inherent power exception to

the American Rule may be made against the losing party or against the attorney for the

losing party.”)

Sanctions pursuant to §1927 are only warranted where “there is a clear showing

of bad faith on the part of an attorney.” Schlaifer Nance & Co., Inc. v. Estate of Warhol,

194 F3d at 336. (citing Shafii v. British Airways, PLC, 83 F.3d 566, 571 (2d Cir.1996)).

Further, the Second Circuit has determined that a showing of bad faith requires clear

evidence that the claims brought were entirely without color and made for reasons of

harassment or delay or for other improper purposes. Browning Deb. Holders' Comm. v.

DASA Corp., 560 F2d 1078, 1088 (2d Cir. 1977). Additionally, the Second Circuit has

held that reliance on a misinterpretation of case law is not necessarily grounds for a

finding of bad faith. Salovaara v. Eckert, 222 F3d 19, 29 (2d Cir. 2000); see also DeVoll

v. Burdick Painting, Inc., 35 F.3d 408, 414 (9th Cir. 1994) (“[a]ppellants’ claims were

neither frivolous nor made in bad faith, and were supported by existing out-of-circuit law

or good faith arguments to extend, modify, or reverse the law of this Circuit.”) Lastly,

when considering sanctions, the Second Circuit has held that all doubt should be

resolved in favor of the signing party. See Associated Indem. Corp. v. Fairchild Indus.,

Inc., 961 F2d 32, 34-35 (2d Cir. 1992). Although power to impose sanctions is within

the province of the district court, “any such decision [should be] made with restraint and

discretion.” E. Gluck Corp. v. Rothenhaus, 252 F.R.D. 175, 179 (S.D.N.Y. 2008).

Contrary to defendant Andrews’ assertions, NXIVM’s Complaint against Andrews

was made in good faith.5 First, case law interpreting the SCA and CFAA is complex at

5 In her motion for leave to file sanctions, Andrews has asserted that NXIVM filed its Complaint against her in bad faith and with full knowledge that the statutes of limitation had run under both the SCA and


22

best and at times has reached contradicting determinations regarding the factors that

should be reviewed in reaching a conclusion under each of the standards. Further,

there is no question that case law within the Second Circuit supported NXIVM’s

interpretation of the statutes of limitation for the SCA and CFAA. See e.g., Clark Street

Wine & Spirits v. Emporos Sys. Corp., 754 F. Supp.2d 474 (E.D.N.Y. 2010) (denying

dismissal and discovering that sensitive data had been used fraudulently does not

necessarily trigger the running of the statute of limitations); Zaratzian v. Abadir, No. 10

CV 9049, 2014 WL 4467919, at *4 (S.D.N.Y. Sept. 2, 2014) (denying dismissal and

finding that the defendant bears the burden of establishing that “no reasonable jury

could [find that the plaintiff] did not have a reasonable opportunity to discover [the

violation] more than two years before the start of the lawsuit.”). Further, as previously

discussed and similar to Salovaara v. Eckert, the Court dedicated a significant portion of

its memorandum decision to clarifying Sewell and discussing the timeliness of NXIVM’s

claims. Salovaara v. Eckert, 222 F.3d at 29. Had there been no colorable argument to

be made, a simple sentence dismissing the claims as baseless would have sufficed.

Moreover, the fact that the Court was not persuaded by NXIVM’s argument that their

claims were not time-barred under the SCA and CFAA is a far stretch from finding the

claims were frivolous or made in bad faith. Storey v. Cello Holdings, L.L.C., 347 F.3d at

391 (sanctions not warranted where party’s arguments were not patently contrary to

existing law, especially as it existed at the time the papers were signed).

CFAA. In support of her assertions, she has mischaracterized a number of statements made by Benjamin Myers in his May 2012 and September 2012 deposition testimony, as well as the previous testimony of Clare Bronfman. In an effort to correct these mischaracterizations, NXIVM has filed several declarations herewith, including that of Clare Bronfman, Benjamin Myers and Michael R. Wolford, Esq.


23

POINT IV

ANDREWS COMES TO THE COURT WITH UNCLEAN HANDS

Assuming, arguendo, that Andrews could demonstrate that the Court has

jurisdiction to entertain her motion (it does not) and that NXIVM’s conduct warrants the

imposition of sanctions (it does not), she is precluded from seeking sanctions because

she comes to the Court with unclean hands. As described above and alleged in the

Complaint, Andrews hacked into NXIVM’s proprietary website and unlawfully

downloaded materials from the site. On at least five documented occasions, Andrews

accessed NXIVM’s password protected website using a third party’s username and

password without authorization. Compl. at ¶69. Andrews accessed the site with the

express intent of reviewing and downloading NXIVM’s proprietary coach list,

Magnificence Reports, and Vanguard Week information page in connection with her so-

called “research” for a negative article about NXIVM she was preparing for publication

on October 13, 2010 in Vanity Fair magazine. Complaint at ¶70.

The evidence demonstrates that Andrews unlawfully accessed the NXIVM server

and obtained the information she wanted for her article. Her conduct amounts to

criminal activity under the CFAA and SCA, and was the subject of an ongoing

investigation by law enforcement authorities. While the Court has determined that its

claims against Andrews were time-barred and dismissed the action based on the

opinion in Sewell v. Bernardin, 795 F.3d 337 (2d Cir. 2015), that decision was only

issued on August 4, 2015—nearly two years after NXIVM commenced this action.

Even if Andrews were correct and NXIVM knew the action was time-barred when

it filed the Complaint, Andrews would not be entitled to sanctions because her own


24

criminal conduct in unlawfully accessing NXIVM’s computer system precludes her from

seeking equitable relief from the Court. The doctrine of unclean hands allows a court to

deny relief in an action in which a party has been guilty of unconscionable conduct in

relation to the matter that she seeks. Goldstein v. Delgratia Mining Corp., 176 F.R.D.

454, 458 (S.D.N.Y. 1997); Aris–Isotoner Gloves, Inc. v. Berkshire Fashions, Inc., 792 F.

Supp. 969, 971 (S.D.N.Y.), aff’d 983 F.2d 1048 (2d Cir. 1992). In applying the doctrine

of unclean hands, this Court is “not bound by formula or restrained by any limitation that

tends to trammel the free and just exercise of discretion.” Goldstein, 176 F.R.D. at 458

(quoting Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240, 245–46 (1933)).

When deciding whether to exercise their discretion to award sanctions, courts

may consider the conduct of the moving party—in this case Andrews. Andrews’ hands

are sullied with her unlawful conduct and the Court should not entertain her motion for

sanctions. See 5A Charles Alan Wright et al., Federal Practice and Procedure §1336.1

(3d ed. 2004) (“If that party is also at fault, a court may determine that no Rule 11

violation has occurred . . . .”); see also J.W. Sandri, Inc. v. Randy Howe’s Sunoco, Inc.,

No. 11-CV-23, 2012 WL 601908, at *4 (D. Vt. Feb. 22, 2012) (noting that in light of the

unclean hands doctrine a “district court has the widest possible latitude” to determine

whether sanctions are warranted under Rule 11); see also Devils Films, Inc. v. Nectar

Video, No. 98 CIV 8016 JSM, 2000 WL 1201383, at *1 (S.D.N.Y. Aug. 23, 2000)

(holding “[t]he ‘unclean hands’ doctrine ‘closes the door of a court of equity to one

tainted with inequitableness or bad faith relative to the matter in which he seeks relief,

however improper may have been the behavior of the defendant.’”) (quoting Precision

Instrument Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 814 (1945)); see also


25

Deweese v. Reinhard, 165 U.S. 386, 390 (1897) (“A court of equity acts only when and

as conscience commands, and if the conduct of the plaintiff be offensive to the dictates

of natural justice, then, whatever may be the rights he possesses and whatever use he

may make of them in a court of law, he will be held remediless in a court of equity.”).

In the present case, defendant Andrews’ criminal conduct must offend the

sensibilities of the Court and prevent her from seeking to recover sanctions from the

victim of her unlawful scheme. Further, as stated previously, defendant’s conduct in

filing this motion, when the challenged Complaint was no longer before the Court,

serves as further evidence of unclean hands based on clear Second Circuit precedent

entitling NXIVM to a twenty-one day safe harbor period which NXIVM never received

prior to dismissal. See Fn. 2. For this reason, this Court should deny Andrews’ claim

for sanctions under Rule 11, 28 U.S.C. §1927, or its inherent power.

CONCLUSION

Based upon the foregoing, NXIVM submits that defendant Andrews’ arguments

are without merit, and that defendant Andrews’ request for leave to file motion pursuant

to rule 11(c)(2), and for sanctions pursuant to 28 U.S.C. §1927 or the inherent power of

the court should be denied in its entirety. To the extent the Court awards sanctions to

any party, it should impose sanctions against Andrews and O’Hara for filing and

pursuing this untimely and baseless motion in utter disregard of Second Circuit

authority.


26

DATED: October 20, 2015

s/ Michael R. Wolford Michael R. Wolford, Esq. Bar Number: 502001 Laura A. Myers, Esq. Bar Number: 517195 THE WOLFORD LAW FIRM LLP 600 Reynolds Arcade Building 16 East Main Street Rochester, New York 14614 Telephone: (585) 325-8000 email: [email protected] email: [email protected]

Pamela A. Nichols, Esq. Bar Number: 103448 O’CONNELL & ARONOWITZ, P.C. 54 State Street, 9th Floor Albany, New York 12207 Telephone: (518) 462-5601 email: [email protected]

Attorneys for Plaintiff NXIVM Corporation


Documents

MEMORANDUM OF LAW IN OPPOSITION OF DEFENDANT …nylawyer.nylj.com/adgifs/decisions15/102815nxivmsanctionsopp.pdf · united states district court northern district of new york _____