IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF MISSOURI

WESTERN DIVISION
FEDERAL TRADE COMMISSION, )
Plaintiff,
V. Case No. 14-CV-0815-W-BCW
BF LABS INC., et al.,
Defendants.

DEFENDANTS BF LABS INC. SUGGESTIONS IN OPPOSITION
TO PLAINTIFF’S MOTION TO DISMISS COUNTERCLAIMS

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TABLE OF CONTENTS

TCP EE OOP IT EI gece ncaa ess eee ceed ates he Rect sees ects i
TABLE OF AUTHOR UIE sccggtcsvegesertaaccrescede terest aeloae nae ened cee li
Te ARC GRID sara steric satc cs Caceres cae dence she vase gn vic da epiee ah dana eamaaw never eadeniaas 1
T.. (LEGALS UAINDAR D isi pcstesusnsacspaxcaaeesequan consadsasucedacninaiacsasuastentepeety a aresancsauemaadentaaameanuseaas 2
1 aa) 2 0 hale Remeeeerene eee menterre mer n em renrinr et erree terete rere terrere weet meererr yy nner aeereren ert eer ery |
A. Congress Has Waived Sovereign Immunity To Claims For Fees and Expenses

ee eit ee Prone VW ep tose cg cee eetcne en tceenncee tone cvadiecnceenss envencenveeceianeteadeetee 4
1. Receivership Costs Are Awardable Under 28 U.S.C. § 2412(a)...... eee eeeeeeeeeee 4

2. Attorney Fees Related to Contesting Receivership Are Awardable Under 28
US. 8 OA12 ae ee eee ee ee ee 6
3. BF Labs is a Prevailing Party For EAJA Purposes.......... ee eeeeeeceeeeeeeneeesseeeseeneees a
B. BF Labs Has Stated a “Stigma-Plus” Claim Sufficiently to Avoid Dismissal.............. 9
C. BF Labs is Not Required to Pursue Administrative Remedies With the FTC............ 10

D. Inthe Alternative, This Court Should Transfer BF Labs’ Wrongful Injunction
Coutiterclaim.to the Court: of Pedéral Cais: sccsc2ccacceuroessssanczescevancataseuudensteneesieeaucnncs 11

1. BF Labs’ Wrongful Injunction Counterclaim Could Have Been Timely
Filed in the Court of Federal Claims at the Time the it was Filed... 12

2. Transferring BF Labs’ Wrongful Injunction Counterclaim is in the Interest
OT PSO a sede cedy ddaaia clea seonds cau ponadeautactesecwibedsaietadesancedudeaceelecsanienianiesbeecemucaaiodie 13

DV COIN GTS IN etic ceca ac tea be aecreb ce hc dd eeceia ead en ea anda nan benacuubeues aiedaalald eneuieacee’ 14

i
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TABLE OF AUTHORITIES

Page(s)

Cases
Advantage Media, L.L.C. v. City of Hopkins,

SUT B68 (OM 1 DOOBY sia ycscics seckacastadde ria enceracion desied va even ses caren pordancttacousnivaee bane ioaracaeaauiauss 8
Bell Atlantic Corp. v. Twombly,

DO SO areas ccole ceria nnendaeiancessotesacen enon eriiemnuio arent ances es 2
Bertuglia v. City of New York,

39. Supp.2d FOS SING Y O12 ) cncascsscuizapmsqesdiaremasncspanenanenstedasneuyeled Ueedoniassnsaaciuiedavesaueutiens 10
Blumenthal v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

BTU P20 OAD 2 ii VD) ecccecsticnaet ease uneeaeiocnaceaveeeseinebase eee ies eo eet 7,13
Bramlet v. Wilson,

OS Ee 7 COUN Ci 1D 7D 2525 ta sa ei5i 055 sa sen eieancedy cade saq ected anaeeaneainaauieaneaeans dere 3
Buckhannon Bd. and Care Home, Inc. v. W. Va. Dept. of Health and Human Resources,

BM I aaa ae head eoucccaceduscouiea ey envaesuGoneasuwsteans nice iteesssmsteatnte seaseaeeuisarvennesnet: 8
Cochrane v. Ia. Beef Processors, Inc.,

SE 2 th te, 7 bows seesiesttspaieintarsbin amscissadeag vbosise caw nied over aneiacaceaetaw tiasbueasduetaaiaetuded 11
Com’r, Immigration and Naturalization Serv. v. Jean,

ze 6 0 Es ee oa 2 32] 8 Vemma rte ee ee een PUES ee Pen ee Per ae 4
Commodity Futures Trading Com’n v. Frankwell Bullion Ltd.,

OD Fd 299 (OU Cie NOG) pcs seiahatces cote sieee tiie autre esees caret rndenas ba sccaunmapew stay dettalnunidatnasaacety 5
Coons v. Mineta,

ATO FS TOSG CSC DUD) 2c ds canntacerpartvctsuasteremnaavqaanceieaccreneaaienateaeaceemereeunnies 2
Dir. Of Office of Thrift Supervision v. Lopez,

ET Rs 19-15, Z | oscscsaiscsnatupinssaunncansecsmanigreienaniahavasainsiueeancnieasisemasaiepueniauunenaatis 5
Gurley v. Peake,

moa ait 6 Be Ue 2a ile (Re Gist e018) err emeeene een etn epee Em test oy Br eee eR Oate fr me nee a resney mene Ere Peter 8
Guzman v. Local 32B-32J Service Employees Intern. Union,

P2260 (2 Cit, TODS) saaccsias eaiacsccsoocgaasevssies cceeusataneauatencdancsrneeseueseetspeveaie saxanecegecesautuasanwen: 7
Hernandez v. State Bd. of Registration for Healing Arts,

OSG Wd Go4 (NIG. A, 199 7 ) ie sesscassectpnacdiandesounstnnsatceiysesaticeaicouanshearereaee aneweuoaes 4

ii
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Jones v. United States,

God FO GAO Ct 701 5 )) accsata spears eiesornereseauewieans easements anal ates acne 3
LaForgia v. Davis,

2004 - Wis 2884524 (3. ALY, DGG: 14. 2004) swcsassrvcusasnsetpuntesisvasssssndancuaniantierasvaaschidascunsadentens 10
Little Earth of the United Tribes, Inc. v. Dep’t of Housing and Urban Development,

OF 20) VANS STINE POG) 5s icrscareicssies yd tsa cata oaince sans bean eset enebeeas onan cee 5, 6
Lopez v. Heinauer,

BOL Ad DOF (Ot UA 2008) xajiccate rises didssicacdesarwsaatascecalesaean ein uaieadeevieatalenscadte oumeenasereotnaass 11,12
Lorillard Tobacco Co. v. Engida,

GT ek 209 0 ie Cit 207 ) oc a: scovacacsentact lcossearecstenennceen gaan iea asain ale teense 8
Maine Sch. Admin. Dist. No. 35 v. Mr. & Mrs. R.,

AG AS J Bo 0 os OT cae 602 enema ee emer PY re treet ec ener nr eee re ree eT ee 8
Marine Const. & Dredging, Inc. v. U.S. Army Corps of Engineers,

602) F260 83: (Om Cir. 1989) (unpuelished } saiscictiaesoiaccsea ana uae aes 12,13
Matrixx Initiatives, Inc. v. Siracusano,

MS TA MA ooo aaceeetucoise esti eecp aha ace actanesaa naira oie taco nonaotexeuice nels ee ee Z
McLarty v. United States,

Se aE i ID a, cass cnnceca etennees se seensacte esas entada tp ental basse eaioeextateeteonerenemncies 4
Miner v. Brackney,

PLO A DSA Ot C1, 18 5) osssaisenniacanevsvcusananencedtas vacate cienlusensatiorarysun ded turvteuasnsiunnntessdedseamen ss cessts 9
N. Cheyenne Tribe v. Jackson,

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Norco Constr., Inc. v. King Cnty.,

721 -P:20 31.1 CWash: 1986) (él DANG) iesccickcdiess.sataieidicecs baa satadenade bests davnanndae deus eegugeaehadecesensuaans 12
Parker v. Matthews,

AI Pipi, (OSS CP AIA WTO cccotisaccocciud ence teessaunsnnancotsins oecuuseeneetpeassetitngenteueseentaneevenecduats 9
Resolution Trust Corp. v. Eason,

Wo, WAG Sn ae 1 Nos as ceyertcosc unt an ccpscivaed vg ets vcast aw anctuvensSncedics nofoettasdartesmantaee sare arias: 4
Rogers Group, Inc. v. City of Fayetteville,

GSS FA O05 (Mine it, ZO): ach ators saeaceersluantceuo em neaeseauacyyenaaeeees aakeneedNuee sane earns 8,9
Sadallah v. City of Utica,

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Case 4:14-cv-00815-BCW Document 278 Filed 03/27/15 Page 4 of 21

Satz v. ITT Financial Corp.,

LS P20 FFB Ae 1) 255 crrara saisarsedonsacenavnigusndehesibnsoatedavesadtawesbrenniehetigseaas inet nicenees 3
Scheuer v. Rhodes,

BN Gy po 21 TA) ac esizicacansnarssuice'sgas annua teassiswaniunsea baci saeonssleqaoasssiauasnepunigeteusndatesnaenneete 3
Select Milk Producers, Inc. v. Johanns,

400 F360 939 (DiC. Cir, 2005) fsesevissiehsasvanddevivide nis ilansielaensedadd aed aan dante 8
Spinale v. U.S. Dept. of Agriculture,

G21 Fosupp.20 112 (SIN. Y 2009) oo ssscaicdsciecnncsaaleseccate taamesienjay sae varoidatapseoatessanecceaiuecdeuines 9,11
State of Kan. ex rel. Stephan v. Adams,

COS 20 267 CLO ICIi POR )\ wsascetass<tsneand soacnsvoaseunacatoedenstoneanadenssadsnastenaaninedassenGae sawenenes 12
Topchian v. JPMorgan Chase Bank, N.A.,

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Tower Village, Inc. v. Service Employees Intern. Union, AFL-CIO, CLC Local 2000,

277 Peep 2d. 133 4 BAL AIvG: 2008 )stacssccss eee eae 3
Travelers Mut. Cas. Co. of Des Moines v. Skeer,

24 FT Slipp. O05 (WD. MO. 1938 ) sn hatcansicoreentaneis hewn earn eadanoda anaes 6, 13
Tullock v. Mulvane,

VS B97 (LOD cts cccseresnacastesudtdieraanseasastenddatadsianinsekassuseunecaiostpessiionarasoniedaaseaenio incidences 12
U.S. Steel Corp. v. United Mine Workers of Am.,

BOF 20 E55 (OOK Me, VOT 2) icc dcircassiessanstau ance suai euestiadaiyddnuansasmeseapesadss tes taeniaesncaatemdusajesneeians t2
United States for Heydt v. Citizens State Bank,

668. F206 444. (Sth Cit 1982) cscs ssccspsngacsieccavie acide Antena oie aes aeiarnians 9
United States v. Guess,

No. 04CV2184, 2005 WL 1819382 (S.D. Cal. June 28, 2005) ..........ecccesscecssceessseeesseeeessees 5,6
Vankempen v. McDonnell Douglas Corp.,

O73 Boi IAG (ED, NIG, VODG ).ccsnacvdcipndencatdcessaunsnnancotsasentsuasendets caevibtagenteraesvectuntencinanenes 3
Statutes
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DONT S27 ICA) con saesisAeiote saihannses anna piecesiesiecinataesdiisuinmcatatton etude seteanieinsanbsnauiadaietonedsacnenatuootaias 10, 11
ZONA, © OSU ) ainsysspnosesstecaneaensneasgapiandetapenons aielermeanteseianmuatanenaaaioamentesiammaneactenaaiasenns 9
Other Authorities

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I. BACKGROUND

On September 15, 2014, the FTC filed its Complaint for Permanent Injunction and Other
Equitable Relief (the “Complaint’) in this Court, asserting claims against Defendants under 15
U.S.C. § 45(a). See Dkt. 2. On September 17, 2014, the FTC filed its Motion for Ex Parte
Emergency Temporary Restraining Order, With Asset Freeze, Appointment of Receiver, Limited
Expedited Discovery, and Order to Show Cause Why a Preliminary Injunction Should Not Issue
and related Suggestions in Support (the “TRO Motion”). Dkts. 7, 8. The FTC’s unnoticed TRO
Motion contained numerous misrepresentations and omissions of critical facts. See Dkt. 227, pp.
18-21. For example, the FTC construed a standard business accounting practice—moving
incoming revenue into savings accounts, rather than keeping it in a checking account—as
“misusing corporate funds.” Dkt. 8 at 43. The FTC likewise claimed that a TRO was necessary
“[t]o immediately halt Defendants’ illegal practices,” even though the FTC was aware that BF
Labs had already ceased accepting pre-orders and begun refunding dissatisfied customers. Dkt.
8 at 24; Dkt. 227 at 18-19.

On September 18, 2014, this Court entered a TRO without notice based on the FTC’s
misrepresentations. See Dkt. 9. Among other remedies, the Court appointed a temporary
receiver and ordered Defendants to show why a preliminary injunction should not issue. See id.
The next day, the FTC and the temporary receiver raided BF Labs’ facilities unannounced. They
halted BF Labs’ business operations and seized its assets, including products being prepared for
shipment. The FTC issued a press release disparaging BF Labs and its senior officers, using

99 66

terms like “bogus,” “scammers,” and “ill-gotten gains.” See Dkt. 227 Ex. A. Various national
news publications reported the FTC’s press release and echoed the release’s deliberately

inflammatory language. See id. Dkt. 227 at 22.

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During the temporary receivership, BF Labs was unable to maintain any regular business
operations. The temporary receiver engaged in extensive interviews with BF Labs’ officers and
staff. or the receivership’s first three weeks, no business activity occurred. Thereafter, the
receiver frustrated every attempt BF Labs made to ship its products to consumers.

On November 28 and 29, 2014, this Court held a hearing on the FTC’s request for
preliminary injunction. The Court heard evidence and accepted post-hearing briefing from the
parties. On December 12, 2014, the Court denied the FTC’s Motion for Preliminary Injunction,
finding that the FTC had not shown that it was likely to succeed on the merits. See Dkt. 201. On
December 15, 2014, the Court ordered the temporary receiver to submit procedures for winding
down the receivership. See Dkt. 208.

On January 6, 2015, BF Labs filed its Answer and Counterclaims, seeking to recover
damages, costs, and fees associated with opposing the TRO and subsequent receivership. Dkt.
227. On March 10, 2015, the FTC filed its Motion to Dismiss BF Labs’ Counterclaims. Dkts.
272-73. The FTC argues that BF Labs’ counterclaims are barred by sovereign immunity and that
BF Labs may not proceed until they exhaust administrative remedies. See generally Dkt. 272.

Il. LEGAL STANDARD

To survive a motion to dismiss under Rule 12(b)(6), a party “need only allege ‘enough
facts to state a claim to relief that is plausible on its face.’” Matrixx Initiatives, Inc. v.
Siracusano, 131 S.Ct. 1309, 1323 n.12 (2011) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S.
544, 570 (2007)). “When determining whether a claim is facially plausible, we ‘accept the
allegations contained in the complaint as true and draw all reasonable inferences in favor of the
nonmoving party.’” Id. (quoting Coons v. Mineta, 410 F.3d 1036, 1039 (8th Cir. 2005)). Claims

eee

should not be dismissed merely because a plaintiff's allegations do not support the legal theory

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he advances, for the court is under a duty to examine the complaint to determine if the
allegations provide for relief on any possible theory.’” Topchian v. JPMorgan Chase Bank,
N.A., 760 F.3d 843, 848-49 (8th Cir. 2014) (quoting Bramlet v. Wilson, 495 F.2d 714, 716 (8th
Cir. 1974)).

“The party seeking to invoke federal jurisdiction . . . carries the burden” to prove it.
Jones v. United States, 727 F.3d 844, 846 (8th Cir. 2013). But the “standards applied to a motion
to dismiss for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1)
are the same as those applied to a motion to dismiss for failure to state a claim under Rule
12(b)(6).”. Vankempen v. McDonnell Douglas Corp., 923 F.Supp. 146, 147 (E.D. Mo. 1996)
(citing Satz v. ITT Financial Corp., 619 F.2d 738, 7442 (8th Cir 1980)). Therefore, the “issue on
a motion to dismiss is not whether the plaintiff will ultimately prevail, but whether the plaintiff is
entitled to present evidence in support of his or her claim.” Tower Village, Inc. v. Service
Employees Intern. Union, AFL-CIO, CLC Local 2000, 277 F.Supp.2d 733, 735 (E.D. Mo. 2005)
(citing Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)).
I. ARGUMENT

Contrary to the FTC’s contention, this Court has jurisdiction to award BF Labs’ expenses
and fees resulting from the wrongful TRO this Court issued based on the FTC’s
misrepresentations. Two separate provisions of the Equal Access to Justice Act, 28 U.S.C. §
2412, permit this Court to enter an award to BF Labs in this case. But even if this Court
considers dismissing BF Labs’ counterclaim, and it should not, it should instead transfer the

claims or dismiss without prejudice and permit BF Labs to re-file in the Federal Court of Claims.

6)
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A. Congress Has Waived Sovereign Immunity To Claims For Fees and Expenses
Resulting From a Wrongful TRO.

28 U.S.C. § 2412, the Equal Access to Justice Act, “operates as a limited waiver of the
United States’ sovereign immunity by permitting courts to award reasonable [costs and fees] to
the prevailing party in any civil action brought by or against the federal government.”
Resolution Trust Corp. v. Eason, 17 F.3d 1126, 1134 (8th Cir. 1994).

The purpose of the EAJA . . . is to require agencies to carefully scrutinize
agency and court proceedings and to increase accountability of the
administrative agencies. The statutes were designed to encourage
relatively impecunious private parties to challenge abusive or
unreasonable government behavior by relieving such parties of the fear of
incurring large litigation expenses.
Hernandez v. State Bd. of Registration for Healing Arts, 936 S.W.2d 894, 901-02 (Mo. App.
1997). “They were enacted to eliminate for the average person the financial disincentive to
challenge unreasonable government actions.” Id. (citing Com’r, Immigration and Naturalization
Serv. v. Jean, 496 U.S. 154, 163 (1990)). Under the EAJA, the government is liable for an
opposing party’s expenses to the same extent as any other party under the common law.
McLarty v. United States, 6 F.3d 545, 549 (8th Cir. 1993).

In this case, 28 U.S.C. § 2412(a)(1) and (b) each permit this Court to award BF Labs
costs associated with the TRO and temporary receivership. Receivership costs are awardable
under 28 U.S.C. 2412(a) as among the costs enumerated in 28 U.S.C. § 1920, and BF Labs’ legal
fees and expenses are awardable under 28 U.S.C. § 2412(b). These provisions, which the FTC
overlooks, each waive sovereign immunity expressly.

1. Receivership Costs Are Awardable Under 28 U.S.C. § 2412(a).

28 U.S.C. § 2412(a)(1) permits a federal court to enter “a judgment for costs, as

enumerated in section 1920 of this title [to] the prevailing party in any civil action brought by or

against the United States or any agency” thereof. This includes costs to a party associated with a

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court-ordered receivership. See Commodity Futures Trading Com’n v. Frankwell Bullion Ltd.,
99 F.3d 299, 304-07 (9th Cir. 1996); Dir. Of Office of Thrift Supervision v. Lopez, 141 F.R.D.
165, 167 (S.D. Fla. 1992). See also United States v. Guess, No. 04CV2184, 2005 WL 1819382,
*7 (S.D. Cal. June 28, 2005). The Eighth Circuit, “although not explicitly discussing sovereign
immunity, [agrees] that a district court has discretion to award receivership costs against the
United States.” Id. (citing Little Earth of the United Tribes, Inc. v. Dep’t of Housing and Urban
Development, 807 F.2d 1433, 1442 (8th Cir. 1986)). In Little Earth, the Eighth Circuit held that,
“[a]fter submitting itself to the court’s equitable authority [by asking the district court to appoint
a receiver], HUD cannot successfully contend that the district court was powerless to direct the
terms of the receivership.” Little Earth, 807 F.2d at 1442.

Awarding receivership costs is appropriate in cases “where there can be no dispute that
the Receiver should not have been appointed.” Guess, 2005 WL 1819382 at *7. In Guess, the
Commodity Futures Trading Commission “filed an unnoticed ex parte application for a TRO and
the appointment of a temporary receiver.” Jd. at *1. The district court “entered the
government’s proposed TRO, without modification of its broad terms,” and appointed a
temporary receiver. Jd. at *2. “After a lengthy hearing, this Court dissolved the TRO, denied the
entry of any preliminary injunction, terminated the Temporary Receiver’s appointment, and
ordered the immediate return of all assets frozen or property seized pursuant to the TRO.” Jd.
The temporary receiver bore his own expenses during the receivership and applied to the court
for a reimbursement of costs. Jd. The court, relying on Frankwell Bullion, granted the
temporary receiver’s application, highlighting the fact that, although “[t]he government
represented that a receiver was needed because the defendants were allegedly dissipating

fraudulently obtained assets,” the “Court found that the government produced no evidence that

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any of the defendants are dissipating their assets or that any of the assets seized under the TRO
are traceable to criminal activity.” /d. (internal quotations omitted).

The same reasoning applies here. The FTC filed an unnoticed ex parte application for
TRO and specifically requested that the Court appoint a temporary receiver. Dkt. 8. The FTC’s
application misrepresented that BF Labs were dissipating corporate assets as part of “misusing
corporate funds.” Jd. at 43. Though this Court initially granted the FTC’s request, it later found
that the FTC could not show a likelihood of success on the merits and quashed the temporary
receivership. Dkts. 201, 208. Having availed itself of the district court’s equitable jurisdiction
by requesting the appointment of a temporary receiver, the FTC cannot now claim that the Court
is powerless to award costs against it. See Little Earth, 807 F.2d at 1442. This Court therefore
has jurisdiction to award BF Labs’ receivership costs under 28 U.S.C. § 2412(a).

2 Attorney Fees Related to Contesting Receivership Are Awardable Under
28 U.S.C. § 2412(b).

This Court may also award attorney fees and related costs against the government under
28 U.S.C. § 2412(b). That statute states, “[u]nless expressly prohibited by statute, a court may
award reasonable fees and expenses of attorneys, in addition to the costs which may be awarded
pursuant to subsection (a), to the prevailing party in any civil action brought by or against the
United States or any agency” thereof “to the same extent that any other party would be liable
under the common law or under the terms of any statute which specifically provides for such an
award.” This subsection waives sovereign immunity to claims for fees. Fed. R. Civ. P. 65
provides for the award of “the costs and damages sustained by any party found to have been
wrongfully enjoined or restrained.” Fed. R. Civ. P. 65(c). A party is wrongfully enjoined when
the party obtaining the injunction fails to inform the court of facts that would have prevented the

injunction’s issuance. See Travelers Mut. Cas. Co. of Des Moines v. Skeer, 24 F.Supp. 805, 805

6
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(W.D. Mo. 1938). See also Guzman v. Local 32B-32J Service Employees Intern. Union, 72 F.3d
260, 263 (2d Cir. 1995) (“a party has been wrongfully enjoined [if it has been] ordered to do
something it had a right to refrain from doing or to cease doing something it had a right to
continue doing”); Blumenthal v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 910 F.2d 1049,
1054 (2d Cir. 1990) (“A party has been ‘wrongfully enjoined’ ... if it is ultimately found that
the enjoined party had at all times the right to do the enjoined act”). A party may recover costs
of a wrongful injunction from the government because it can recover them from a private party.
See U.S.C. § 2412(b).

In this case, it is clear a private party would be liable to BF Labs under Rule 65(c). The
FTC misrepresented and omitted critical facts in its TRO application. It claimed to have
evidence of illegal activity requiring urgent action, despite the fact that the FTC knew that BF
Labs (1) had ceased to accept pre-orders for their products; (2) were under an obligation to
preserve documents and data due to a separate legal proceeding; and (3) were refunding
dissatisfied customers before the TRO application was filed. Dkt. 227 at 18-19. In addition, the
FTC failed to conduct a thorough (if any) investigation into the 307 consumer complaints the
FTC alleges it received about BF Labs. When the FTC procured an ex parte TRO against BF
Labs on this basis, BF Labs was forced to cease business activities that they had a right to
continue. See Guzman, 72 F.3d at 263. Because BF Labs could recover costs from a private
party for a wrongful injunction under Rule 65, they may also recover costs from the government.
28 U.S.C. § 2412(b).

3. BF Labs is a Prevailing Party For EAJA Purposes.

In general, a prevailing party is entitled to recover under a fee-shifting statute if it
“obtain[s] a judicially sanctioned material alteration of the legal relationship of the parties to the
lawsuit.” N. Cheyenne Tribe v. Jackson, 433 F.3d 1083, 1085 (8th Cir. 2006). See also

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Buckhannon Bd. and Care Home, Inc. v. W. Va. Dept. of Health and Human Resources, 532 U.S.
598, 604-605 (2001). The Eighth Circuit has “recognized that a preliminary injunction can in
some instances carry the judicial imprimatur required by Buckhannon to convey prevailing party
status.” Advantage Media, L.L.C. v. City of Hopkins, 511 F.3d 833, 837 (8th Cir. 2008). This
can occur when three “core principles” are met:

First, in order to be a prevailing party, a claimant must show that there has

been a court-ordered change in the legal relationship between the plaintiff

and the defendant.

Second, a prevailing party is a party in whose favor a judgment is
rendered, regardless of the amount of damages awarded.

Third, a claimant is not a prevailing party merely by virtue of having
acquired a judicial pronouncement unaccompanied by judicial relief.

Rogers Group, Inc. v. City of Fayetteville, 683 F.3d 903, 910 (8th Cir. 2012) (quoting Select Milk
Producers, Inc. v. Johanns, 400 F.3d 939, 946 (D.C. Cir. 2005)). Cf N. Cheyenne Tribe, 433
F.3d at 1086 (“a preliminary injunction granting temporary relief that merely maintains the status
quo does not confer prevailing party status”). These criteria may be met by a preliminary
injunction ruling. See id. (holding that preliminary injunctions are judgments for fee-shifting
purposes because they are appealable orders). See also Lorillard Tobacco Co. v. Engida, 611
F.3d 1209, 1216-17 (10th Cir. 2010) (recognizing that, although not applicable under the
circumstances of that case, a party who defeats a preliminary injunction request on the merits can
be a prevailing party for attorney fee purposes); Maine Sch. Admin. Dist. No. 35 v. Mr. & Mrs.
R., 321 F.3d 9, 17 (1st Cir. 2003) (same).

999

Fees recovery under the EAJA also “requires ‘some relief on the merits.’” Gurley v.
Peake, 528 F.3d 1322, 1326 (Fed. Cir. 2008) (citing Buckhannon, 532 U.S. at 603). But “[t]he

phrase ‘prevailing party’ should not be limited to a victory only after entry of a final judgment

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following a full trial on the merits.” United States for Heydt v. Citizens State Bank, 668 F.2d
444, 447 (8th Cir. 1982). A fee award may be “appropriate where the party has prevailed on an
interim order which was central to the case.” Id. (citing Parker v. Matthews, 411 F.Supp. 1059,
1064 (D.D.C. 1976)).

BF Labs in this case are a prevailing party for EAJA purposes because this Court denied
the FTC’s request for preliminary injunction and dissolved the TRO after the FTC was unable to
prove that it was likely to succeed on the merits of the case. Dkts. 201, 208. The dissolution of
the TRO materially altered the FTC’s relationship with BF Labs and represented a judgment in
BF Labs’ favor accompanied by judicial relief, namely that BF Labs could resume business
operations. See Rogers Group, 683 F.3d at 910 (holding that such parties are “prevailing parties”
for fee-shifting statutes purposes, even if they do not receive money damages). BF Labs is thus a
prevailing party under the EAJA, and their claim for recovery of fees and costs associated with
the temporary receivership in this case may proceed. See 28 U.S.C. §2412(a), (b).

B. BF Labs Has Stated a “‘Stigma-Plus” Claim Sufficiently to Avoid Dismissal.

The FTC argues that the Federal Tort Claims Act does not waive sovereign immunity for
claims founded on libel, slander, and misrepresentation. See 28 U.S.C. § 2680(h); Miner v.
Brackney, 710 F.2d 954, 956 (8th Cir. 1983). The “Stigma Plus” doctrine, however, “provides a
remedy for government defamation under federal constitutional law.” Sadallah v. City of Utica,
383 F.3d 34, 38 (2d Cir. 2004). Defamation plus requires a party to “plead (1) the utterance of a
statement sufficiently derogatory to injure his or her reputation, that is capable of being proved
false, and that he or she claims is false, and (2) a material state-imposed burden or state-imposed
alteration of the plaintiffs [sic] status or rights.” Spinale v. U.S. Dept. of Agriculture, 621

F.Supp.2d 112, 119 (S.D.N.Y. 2009). “[T]here must be a material, government-imposed burden

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in addition to and temporally proximate to, the stigmatizing statement.” Bertuglia v. City of New
York, 839 F.Supp.2d 703, 725 (S.D.N.Y. 2012). Charges of dishonesty, immorality, or illegality
establish stigmatization. Id. (citing LaForgia v. Davis, 2004 WL 2884524, *7 (S.D.N.Y. Dec.
14, 2004).

In this case, BF Labs’ second counterclaim meets the pleading requirements of the
Stigma-Plus doctrine. BF Labs has pled that the statements of the FTC in its press release,

99 oe

including using deliberately-inflammatory terms like “bogus,” “scammers,” and “ill-gotten
gains” injured BF Labs’ reputation, are false and resulted in a material state-imposed alteration
of BF Labs’ rights. See Dkt. 227 at 21-25, Ex. A. BF Labs has alleged that the FTC charged
falsely that BF Labs and its officers acted dishonestly and illegally. Accepting BF Labs’
allegations as true, as this Court must, they state a claim for relief under the Stigma-Plus
doctrine. This Court therefore should deny the FTC’s Motion to Dismiss BF Labs’ second
counterclaim.

C. BF Labs is Not Required to Pursue Administrative Remedies With the FTC.

The FTCA’s administrative-remedies requirement does “not apply to such claims as may
be asserted under the Federal Rules of Civil Procedure by third party complaint, cross-claim, or
counterclaim.” 28 U.S.C. § 2675(a). No decision of this Court or of the Eighth Circuit Court of
Appeals has limited this rule’s application to compulsory counterclaims only. To the extent that
the rule is so limited, the Eighth Circuit has adopted four tests to determine whether a
counterclaim is compulsory: whether (1) the issues of fact and law raised by the claim and
counterclaim are largely the same; (2) res judicata would bar a subsequent suit on defendant’s
claim absent the compulsory counterclaim rule; (3) substantially the same evidence would

support or refute plaintiff's claim and defendant’s counterclaim; and (4) any logical relation

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exists between the claim and counterclaim. Cochrane v. Ia. Beef Processors, Inc., 596 F.2d 254,
264 (8th Cir. 1979).

In this case, the FTC’s claims and BF Labs’ counterclaims raise the same issues and are
logically related. BF Labs’ wrongful injunction claim is grounded in the misrepresentations and
omissions the FTC made in its Complaint. See Dkt. 227 p.17-20, 25-26. BF Labs is entitled to
recovery because this Court determined that the FTC did not show a likelihood of success on the
claims in its complaint. See Dkt. 201, Dkt. 227. The FTC’s claims rest on its allegations that BF
Labs’ business practices violated the Federal Trade Commission Act. See Dkt. 2. BF Labs’
Stigma-Plus counterclaim for defamation requires BF Labs to prove that those allegations are
false. See Spinale, 621 F.Supp.2d at 119. This Court therefore must determine the legality of BF
Labs’ acts to resolve the FTC’s claims and BF Labs’ second counterclaim. BF Labs’
counterclaims are thus compulsory and within the exception to 28 U.S.C. § 2675(a)’s exhaustion
requirement.

D. In the Alternative, This Court Should Transfer BF Labs’ Wrongful
Injunction Counterclaim to the Court of Federal Claims.

If this Court determines that BF Labs’ counterclaims seek damages that do not fall under
the immunity waiver in Section 2412, which it should not, it should transfer the counterclaims
under 28 U.S.C. Section 1631 rather than grant the FTC’s Motion to Dismiss. When a court
finds that it lacks jurisdiction, “the court shall, if it is in the interest of justice, transfer such
action or appeal to any other such court in which the action or appeal could have been brought at
the time it was filed or noticed.” 28 U.S.C. § 1631. “The purpose of this transfer statute is to aid
parties who might be confused about which court has subject matter jurisdiction, and to preserve
their opportunity to presents the merits of the claim... .” Lopez v. Heinauer, 332 F.3d 507, 511

(8th Cir. 2003). “The transfer statute is mandatory, indicating that a court ‘shall, if it is in the

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interest of justice, transfer such action or appeal to any other such court in which the action or
appeal could have been brought at the time it was filed.” Jd. (citing 28 U.S.C. § 1631).

1. BF Labs’ Wrongful Injunction Counterclaim Could Have Been Timely
Filed in the Court of Federal Claims at the Time the it was Filed.

Under the Tucker Act, 28 U.S.C. § 1491, the U.S. Court of Federal Claims has
jurisdiction over cases involving “any express or implied contract with the United States, or for
liquidated or unliquidated damages in cases not sounding in tort.” BF Labs’ wrongful injunction
claim falls under this jurisdiction because “[a]lmost all states classify a wrongful injunction
action as an action in contract,” Marine Const. & Dredging, Inc. v. U.S. Army Corps of
Engineers, 892 F.2d 83, at *3 (9th Cir. 1989) (unpublished), meaning that “there is no liability in
tort for the damages,” U.S. Steel Corp. v. United Mine Workers of Am., 456 F.2d 483, 492 (3d
Cir. 1972). See also Tullock v. Mulvane, 184 U.S. 497, 516 (1902) (an injunction bond “‘is in the
nature of a contract” between the party seeking relief and the court). Though the FTC was not
required to post a bond in advance of the TRO, this implied contract still exists between the FTC,
the Court, and BF Labs. See Marine Const. & Dredging, 892 F.2d 83, at *3; Norco Constr., Inc.
v. King Cnty., 721 P.2d 511, 513-14 (Wash. 1986) (en banc). Failure to provide a bond does not
absolve a governmental entity from liability for a wrongful injunction. See State of Kan. ex rel.
Stephan v. Adams, 705 F.2d 1267, 1269 (10th Cir. 1983) (stating that where “the applicant
opposes a motion for posting of security on the basis of its financial responsibility and does not
seek to limit its liability, it may not avoid liability on the ground that a bond was not required.”
(internal quotation marks omitted)). BF Labs’ wrongful injunction claim is accordingly an
action on the FTC’s implied bond under Federal Rule of Civil Procedure 65(c).

BF Labs’ counterclaim for wrongful injunction could have been filed as a separate action

in the Court of Federal Claims. 28 U.S.C. § 1491 permits that court to hear all contract disputes

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involving the federal government, including disputes over implied contracts. An injunction is an
implied contract. See Marine Const. & Dredging, 892 F.2d at *3. Because there is no dispute
that BF Labs’ counterclaim would have been timely when it was filed, this Court may therefore
transfer it to the Court of Federal Claims. 28 U.S.C. § 1631.

2 Transferring BF Labs’ Wrongful Injunction Counterclaim is in the Interest
of Justice.

As described above, a party is wrongfully enjoined when the party seeking the injunction
fails to inform the court of facts that would have prevented the issuance of the injunction, or it is
ultimately found that the enjoined party had the right to perform the enjoined act. Travelers
Mut., 24 F.Supp. at 805; Blumenthal, 910 F.2d at 1054. In this case, the FTC made
misrepresentations and omissions in its Complaint and TRO application that led the Court to
enter the TRO. Later, with more fulsome disclosures, the Court refused to grant the FTC’s
request for a preliminary injunction. BF Labs asserts that this Court can properly exercise
jurisdiction over their Counterclaim because Sections 2412(a) and (b) waive the FTC’s sovereign
immunity. Given the language of these statutes and the other relevant legal authority, as
discussed above, this position is a reasonable one.

Further demonstrating BF Labs’ good faith is the lack of legal development in this area.
There are very few cases addressing a governmental agency’s liability for wrongful injunction.
Though BF Labs maintains that such liability exists, there is little guidance in the law on avenues
for asserting such liability. As a result, even assuming that this Court ultimately determines that
it lacks jurisdiction, BF Labs’ counterclaims were nevertheless filed in good faith given that it
was not clear at the time of filing that the Court lacked jurisdiction. Thus, should this Court
determine that BF Labs’ counterclaims do not fall under the purview of Section 2412’s immunity

waiver, it should still deny the FTC’s Motion.

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IV. CONCLUSION

BF Labs’ counterclaims seek recovery of costs and fees associated with the temporary
receivership this Court entered based on misrepresentations and omissions in the FTC’s
Complaint and ex parte TRO application. The EAJA waives sovereign immunity for such
awards. BF Labs also has pled sufficiently the elements of a Stigma-Plus defamation claim.
Both BF Labs’ counterclaims raise the same issues as the FTC’s claims and are logically related
to those claims. For that reason, no administrative exhaustion is necessary. This Court therefore
should deny the FTC’s Motion to Dismiss or transfer BF Labs’ counterclaims to the Court of

Federal Claims under 28 U.S.C. § 1631.

Respectfully submitted,

/s/ Michael S. Foster

James M. Humphrey MO # 50200
Michael S. Foster MO # 61205
Miriam E. Bailey MO # 60366
Polsinelli PC

900 W. 48th Place, Suite 900
Kansas City, Missouri 64112-1895
Telephone: (816) 753-1000
Facsimile: (816) 753-1536
jhumphrey @ polsinelli.com
mfoster @polsinelli.com

mbailey @ polsinelli.com

Braden M. Perry MO # 53865
Kennyhertz Perry, LLC

420 Nichols Road, Suite 207

Kansas City, MO 64112

Direct: 816-527-9445

Fax: 855-844-2914

braden @kennyhertzperry.com

Attorneys for Defendant BF Labs Inc., Sonny
Vleisides, and Darla Jo Drake

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CERTIFICATE OF SERVICE

The undersigned hereby certifies that on the 27th day of March 2015, a true and correct
copy of the foregoing was filed electronically with the United States District Court for the
Western District of Missouri using the CM/ECF system, which sent notification to all parties of
interest participating in the CM/ECF system.

/s/ Michael S. Foster
Attorney for Defendants BF Labs Inc., Sonny
Vleisides, and Darla Jo Drake

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