Cybersquatting California Tech Firm Faces Discovery Sanctions

A California software company must face sanctions for concealing evidence related to long-running claims it cybersquatted by purchasing various domains to divert traffic from its competitors, a state appeals court decided.

VeriPic Inc., which provides digital asset management software to law enforcement agencies, sued rival company Foray Technologies LLC in Santa Clara County in 2009. It sought damages of more than $225 million, alleging causes of action including libel, slander, false advertising, and unfair competition.

Foray allegedly disparaged VeriPic’s products, and falsely accused the company of registering the domain name “foray.ca” to deceptively direct traffic to VeriPic’s website.

But Foray filed a cross complaint, alleging cybersquatting, trademark infringement, and unfair business practices, based in part on VeriPic’s operation of the domain name.

During discovery, VeriPic Chief Executive Officer John Kwan said he purchased the domain name and others like it to poke fun at competitors, but that the domains didn’t direct users back to his company’s own website.

The companies were snarled in pretrial litigation over the next several years. In 2013, additional evidence provided by VeriPic’s internet service provider indicated the company had withheld email evidence of its intent to redirect the purchased domains back to its site, according to the appeals court. Evidence also showed its attempts to deactivate the incriminating domain names, according to the court.

Foray sought more than $4 million in monetary sanctions for misuse of discovery, contending it wouldn’t have incurred such high litigation costs if VeriPic had been truthful at the outset of litigation.

The trial court found VeriPic took steps to conceal and suppress evidence related both to its own claims and to those brought by Foray, but denied Foray’s request. It dismissed VeriPic’s claims, ordered it to pay $22,000 to the court as a monetary sanction for its fraud, and to disgorge $83,000 in attorneys’ fees and costs.

The California Court of Appeals, Sixth District, reversed the decision as to sanctions Wednesday, deciding Foray was entitled to the additional costs it incurred as a result of VeriPic’s misuse of the discovery process.

California law prevents discovery sanctions from being imposed as punishment, but no evidence suggested a monetary award in this case would constitute such punishment, Justice Allison M. Danner wrote for the court.

And while the consideration of punishment may impact the amount of sanctions the court should award, it doesn’t change Foray’s entitlement to it, Danner said. The case was remanded back to the trial for a determination of the amount of sanctions appropriate.

But the trial court correctly refused to impose sanctions against VeriPic’s former counsel, Grellas Shah LLP. Direct evidence supported the assertion that the firm didn’t advise VeriPic to engage in misuse of the discovery process, and no substantial evidence existed to the contrary, Danner said.

Presiding Justice Mary J. Greenwood and Justice Adrienne M. Grover joined the opinion.

Greenan, Peffer, Sallander & Lally LLP represents Foray. Mlnarik Law Group Inc. represents VeriPic.

The case is Kwan Software Eng’g Inc. v. Foray Techs. LLC, Cal. Ct. App., 6th Dist., No. H042715, 12/2/20.