Oz Spirits, LLC v. Swell Liquor, LLC

IN THE COURT OF APPEALS OF IOWA

No. 19-0513
Filed June 17, 2020

OZ SPIRITS, LLC,
Plaintiff-Appellee,

vs.

SWELL LIQUOR, LLC,
Defendant-Appellant,

and

DUNKEL CORPORATION d/b/a IOWA DISTILLING COMPANY, GLOBAL
UNDERDOG ENTERPRISES, LLC, and WILL RICHARDSON,
Defendants.
________________________________________________________________

Appeal from the Iowa District Court for Warren County, Paul R. Huscher,

Judge.

Swell Liquor, LLC appeals the denial of its motion for sanctions and attorney

fees. AFFIRMED.

Joshua J. Conley and Timothy J. Zarley of Zarley Law Firm, P.L.C., Des

Moines, for appellant.

Billy J. Mallory of Brick Gentry, P.C., West Des Moines, for appellee.

Considered by Vaitheswaran, P.J., and Doyle and May, JJ.
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VAITHESWARAN, Presiding Judge.

Oz Spirits, LLC (Oz) sued several defendants, including Swell Liquor, LLC

(Swell). Oz alleged Swell made vodka “using [Oz]’s proprietary alcohol purification

process.” Oz raised claims of trade secret misappropriation under the Defend

Trade Secrets Act and the Iowa Uniform Trade Secrets Act, as well as unfair

competition, conversion, and concert of action claims, and a request for permanent

injunctive relief. Swell moved for partial summary judgment. Swell included a

request for “an award for attorney fees as provided by statute and the imposition

of sanctions against Plaintiff and Plaintiff’s counsel for this frivolous action.” Oz

voluntarily dismissed Swell from the action without prejudice.

Following the dismissal, Swell filed a motion for sanctions and attorney fees.

Swell asserted Oz “began and maintained this action . . . without any factual basis.”

The district court determined Oz’s voluntary dismissal rendered Swell the

prevailing party1 but that fact alone did not entitle Swell to fees. Instead, the court

stated, “It is the conduct, or more accurately, the misconduct of [Oz] that could

permit the award of attorney fees to [Swell].” The court concluded:

The court has considered the pleadings filed by [Oz], and pursuant
to [Iowa Rule of Civil Procedure] 1.413, does not find that they were
filed without reasonable inquiry or interposed for an improper
purpose. Nor can this court conclude that the filing of the action
claiming misappropriation was done in bad faith. The filing of the
claim against [Swell] was not frivolous, unduly prolonged, or
harassing in nature.

1 The court expressed some equivocation on this point, but a recent opinion
supports the court’s conclusion. See Merrill v. Valley View Swine, LLC, 941
N.W.2d 10, 16 (Iowa 2020) (“Iowa precedents allow a party to be recognized as a
prevailing party even when the case is resolved through a voluntary dismissal.”).
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Swell moved to reconsider, enlarge, or amend the ruling. The district court

ruled:

The court considered the matters alleged in the Defendant’s Motion
for Sanctions and Attorney Fees, as well as the Reply to Plaintiff’s
Resistance in determining that imposition of sanctions and the award
of attorney fees in this case was neither necessary nor appropriate.
The Defendant has rearranged the sentences and realleged the
same matters in this Motion for Reconsideration. The Motion is
DENIED.

On appeal, Swell contends (1) “the district court abused its discretion by

denying [its] motion . . . under [rule] 1.413 and Iowa Code [section] 619.19” (2017)

and “under [rule] 1.503(6).” See Mathias v. Glandon, 448 N.W.2d 443, 445–46

(Iowa 1989) (setting forth standard of review).

Iowa Code section 619.19(2) states a signature on a court paper is a

certificate that:

a. The person has read the motion, pleading, or other paper.
b. To the best of the person’s knowledge, information, and
belief, formed after reasonable inquiry, it is grounded in fact and is
warranted by existing law or a good faith argument for the extension,
modification, or reversal of existing law.
c. It is not interposed for any improper purpose, such as to
harass or cause an unnecessary delay or needless increase in the
cost of litigation.

The statute authorizes sanctions for a violation:

If a motion, pleading, or other paper is signed in violation of this
section, the court, upon motion or upon its own initiative, shall impose
upon the person who signed it, a represented party, or both, an
appropriate sanction, which may include an order to pay the other
party or parties the amount of the reasonable expenses incurred
because of the filing of the motion, pleading, or other paper, including
a reasonable attorney fee.

Iowa Code § 619.19(4). Similarly, rule 1.413(1) describes the effect of an

attorney’s signature on court papers as follows:
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Counsel’s signature to every motion, pleading, or other paper shall
be deemed a certificate that: counsel has read the motion, pleading,
or other paper; that to the best of counsel’s knowledge, information,
and belief, formed after reasonable inquiry, it is well grounded in fact
and is warranted by existing law or a good faith argument for the
extension, modification, or reversal of existing law; and that it is not
interposed for any improper purpose, such as to harass or cause an
unnecessary delay or needless increase in the cost of litigation.

Iowa R. Civ. P. 1.413(1). The rule contains the same sanction language as the

statute.

Rule 1.503(6), which applies to discovery, tracks the language of rule 1.413,

stating:

By signing, an attorney or party certifies that to the best of the
person’s knowledge, information, and belief formed after a
reasonable inquiry:
(1) The disclosure is complete and correct as of the time it is made.
(2) The discovery request, response, or objection is:
1. Consistent with these rules and warranted by existing law
or by a nonfrivolous argument for extending, modifying, or reversing
existing law, or for establishing new law.
2. Not interposed for any improper purpose, such as to
harass, cause unnecessary delay, or needlessly increase the cost of
litigation.
3. Neither unreasonable or unduly burdensome or expensive,
considering the needs of the case, prior discovery in the case, the
amount in controversy, and the importance of the issues at stake in
the action.

Iowa R. Civ. P. 1.503(6)(a). The rule authorizes a sanction for improper

certification, as follows:

If a certification violates this rule without substantial justification, the
court, on motion or on its own, shall impose an appropriate sanction
on the signer, the party on whose behalf the signer was acting, or
both. The sanction may include an order to pay the reasonable
expenses, including attorney fees, caused by the violation.

Iowa R. Civ. P. 1.503(6)(c). Under section 619.19 and rule 1.413,

The reasonableness of the signer’s inquiry into the facts and law
depends on a number of factors, including, but not limited to: (a) the
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amount of time available to the signer to investigate the facts and
research and analyze the relevant legal issues; (b) the complexity of
the factual and legal issues in question; (c) the extent to which pre-
signing investigation was feasible; (d) the extent to which pertinent
facts were in the possession of the opponent or third parties or
otherwise not readily available to the signer; (e) the clarity or
ambiguity of existing law; (f) the plausibility of the legal positions
asserted; (g) the knowledge of the signer; (h) whether the signer is
an attorney or pro se litigant; (i) the extent to which counsel relied
upon his or her client for the facts underlying the pleading, motion, or
other paper; (j) the extent to which counsel had to rely upon his or
her client for facts underlying the pleading, motion, or other paper;
and (k) the resources available to devote to the inquiries.

Barnhill v. Iowa Dist. Ct., 765 N.W.2d 267, 273 (Iowa 2009); accord Homeland

Energy Sols., LLC v. Retterath, 938 N.W.2d 664, 709–10 (Iowa 2020). We have

no precedent applying these factors to rule 1.503(6), but we presume the same

analysis would apply.

Although the court’s rulings were summary, the documents and arguments

offered by Oz in resistance to the motion amply supported the denial of the motion

under the cited statute and rules and supported the district court’s conclusion that

the misappropriation claim was not filed in bad faith. We discern no abuse of

discretion in the court’s refusal to find a violation of the pertinent statutes or rules

and its refusal to impose sanctions or award attorney fees.

AFFIRMED.