Ann Maher May 7, 2013, 10:34am

A federal judge in California has sanctioned lawyers in a copyright infringement case, ordering their referral to the criminal investigation unit of the Internal Revenue Service, the U. S. Attorney in Central California and their respective state and federal bars where they are admitted to practice.

U.S. District Judge Otis D. Wright, II of the Central District of California also indicated he would notify all judges before whom the attorneys have pending cases of his order.

One of the attorneys, Paul Duffy of Prenda Law in Chicago, is the lead plaintiff attorney in similar litigation unfolding in St. Clair County Circuit Court. That case, LW Systems v. Christopher Hubbard, is presided over by Circuit Judge Andrew Gleeson.

In an order published Monday, Wright unleashed his wrath using themes from Star Trek.

“[T]hough Plaintiffs boldly probe the outskirts of law, the only enterprise they resemble is RICO,” Wright wrote. “The federal agency eleven decks up is familiar with their prime directive and will gladly refit them for their next voyage.”

Wright concluded that the lawyers, including John Steele and Paul Hansmeier of Steele Hansmeier in Chicago and Brett Gibbs of San Francisco, “suffer from a form of moral turpitude unbecoming an officer of the court.”

In the case before Wright (Ingenuity 13 LLC v. John Doe), the judge wrote that attorneys Duffy, Steele and Hansmeier created entities such as Ingenuity 13 and AF Holdings for the sole purpose of litigating copyright infringement cases.

He wrote that the lawyers created the entities to shield the principals from potential liability and to give “an appearance of legitimacy.”

“AF Holdings and Ingenuity 13 have no assets other than several copyrights to pornographic movies. There are no official owners or officers for these two offshore entities, but the Principals are the de facto owners and officers.”

The principals’ litigation strategy, according to Wright, starts by monitoring the downloading activity of copyrighted pornographic movies. From there, Internet Protocol (IP) addresses are recorded, lawsuits are filed and subpoenas are issued to Internet Service Providers (ISPs) for the identities of subscribers to these IP addresses. The lawyers then send cease and desist letters to subscribers offering to settle cases for about $4,000.

“Plaintiffs have outmaneuvered the legal system,” Wright wrote.

“They’ve discovered the nexus of antiquated copyright laws, paralyzing social stigma, and unaffordable defense costs. And they exploit this anomaly by accusing individuals of illegally downloading a single pornographic video. Then they offer to settle—for a sum calculated to be just below the cost of a bare-bones defense. For these individuals, resistance is futile; most reluctantly pay rather than have their names associated with illegally downloading porn. So now, copyright laws originally designed to compensate starving artists allow starving attorneys in this electronic-media era to plunder the citizenry.”

Wright wrote that settlements have resulted in millions of dollars due to the vast number of defendants. Those settlement funds, he wrote, resided in the principals’ accounts and not in accounts belonging to AF Holdings or Ingenuity.

“No taxes have been paid on this income,” Wright wrote.

He also wrote that their “enterprise” relies on deception.

“Part of that ploy requires cooperation from the courts, which could only be achieved through deception,” he wrote.

“In other words, if the Principals assigned the copyright to themselves, brought suit in their own names, and disclosed that they had the sole financial interest in the suit, a court would scrutinize their conduct from the outset. But by being less than forthcoming, they defrauded the Court. They anticipated that the Court would blindly approve their early-discovery requests, thereby opening the door to more settlement proceeds.

“The Principals also obfuscate other facts, especially those concerning their operations, relationships, and financial interests.”

As a punitive measure, Wright doubled an award of attorney’s fees and costs for defense lawyers to $81,319.72. The sanctioned attorneys are ordered to pay the fees within 14 days of the court’s order.

Wright prefaced his order with a famous quote from Spock in Star Trek II: The Wrath of Khan:

“The needs of the many outweigh the needs of the few.”

LW Systems v. Hubbard

In the St. Clair County case, LW Systems sued Hubbard in January.

Less than two weeks after the case was filed, Chief Judge John Baricevic signed an agreed discovery order that allowed LW Systems to subpoena the names, addresses, phone numbers, email addresses and Media Access Control addresses associated with particular IP’s from 325 ISPs.

The agreed discovery order was reached between Duffy and Hubbard’s attorney, Adam Urbanczyk, also of Chicago.

As a result, hundreds of ISPs have been subpoenaed seeking the identities of John Does whom LW Systems has recognized through their IP addresses.

The suit accuses Hubbard and his alleged co-conspirators of hacking into LW Systems’ computer system that supplies content for adult Web site operators.

Hundreds of John Does have responded to the suit, seeking to quash subpoenas of their identities. Several attorneys representing John Does, some whom have called the litigation a “shakedown,” are challenging the plaintiff’s standing to bring suit in Illinois, as the company is not registered to do business in the state.

Judge Gleeson is scheduled to hear arguments in June.

Duffy declined to comment on the St. Clair County case when contacted earlier.

Urbanczyk has not returned a phone call.

Belleville attorney Kevin Hoerner serves as local counsel for Duffy. He was contacted for comment last month, but did not return a phone call.

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