Prenda Law sued thousands of people over allegations of illegally distributing adult movies before its business was brought to a crashing halt by a series of judicial sanctions. The lawyers behind Prenda—Paul Duffy, John Steele, and Paul Hansmeier—steadfastly maintained that those sanctions were unwarranted, and they appealed.

On Thursday, the US Court of Appeals for the Seventh Circuit became the first appeals court to weigh in on their arguments. It didn't think much of them. The first sentence of the 24-page opinion suggested where things were going to go. "The first rule of holes, according to an old saying, is to stop digging," wrote Chief Judge Diane Wood on behalf of the three-judge panel.

Duffy, Steele, and Hansmeier chose to appeal a lower court order that they should pay attorneys' fees to Anthony Smith, one of their erstwhile defendants in a porn-downloading lawsuit, as well as SBC Internet and Comcast, two giant Internet providers they unwisely prodded with a lawsuit. "They did not, however, file a motion either to clarify the nature of the sanctions or to stay the order," noted Wood. "Instead, they simply did not pay."

The district court found that "there was no excuse for their behavior," however. It held them in civil contempt and added 10 percent to the fee award. At that point, Prenda had paid for a bond of $287,000, which covered their sanction and interest through April. That payment allowed them to proceed with this appeal, which has now failed.

It's the first big loss for Prenda at an appeals court. With nowhere else to turn, it will be Prenda's costliest setback yet.

Subpoenaed and sued

This appeal relates to one of Prenda's oddly constructed "anti-hacking" lawsuits, the purpose of which appeared to be to get discovery through state (rather than federal) court. Working on behalf of a porn studio called Lightspeed Media, Prenda lawyers filed a suit against a single John Doe defendant, claiming he had used a "widely shared 'hacked' password." Lightspeed then identified 6,600 other "co-conspirators," although the only alleged act in this conspiracy was apparently using the same password.

When they served subpoenas on ISPs demanding personal information for the 6,600 users, the ISPs didn't provide them. Instead, they filed a motion to quash the subpoenas. Prenda, apparently feeling at the top of its game, actually sued the ISPs as co-conspirators, accusing them of everything from negligence to deceptive practices and violating the Computer Fraud and Abuse Act.

The appeals opinion recounts how, after the disastrous hearing in Los Angeles, Duffy, Steele, and Hansmeier began dismissing cases filed around the country. When they dismissed their case against the John Doe defendant now named as Anthony Smith, he responded with a motion for attorney's fees. The judge granted it in October, finding that the lawsuit against Smith "smacked of bullying pretense." Later, he granted fees to the ISPs as well.

The appeals judges recounted, and swatted down, each of the various excuses the Prenda lawyers brought up as to why the six-figure contempt order should be overruled. The lawyers argued that they weren't served properly and didn't have a proper chance to be heard in court. They argued that the fee motions weren't timely and that they weren't itemized correctly. Finally, they argued that they simply could not pay.

The trio of lawyers also "throw a variety of arguments regarding the substantive ruling against the wall, with the hope that one might stick," wrote Wood. "None does."

Noticed and heard

The opinion begins by dismantling the shell game of law firms and companies set up by Team Prenda. Duffy, Steele, and Hansmeier shifted their story about who they were working for, but it all used the same set of names and addresses. To take just one instance, the judges saw that the Steele Hansmeier firm was listed at the same Chicago address that Prenda used in its 2011 application to do business in Florida.

At one point, Steele and Hansmeier complained that Hansmeier was showing up representing "Alpha Law Firm, not Prenda Law," but the appeals judges wrote that "the district court had ample reason to find the Prenda/Alpha distinction illusory at best, fraudulent at worst."

Steele and Hansmeier's own lawyer couldn't explain the difference between Prenda and Alpha Law, a fact that Judge Diane Sykes called "shocking" during the hearing. The opinion states:

Little more need be said. We are disappointed that the appellants' own attorney, Daniel J. Voelker, was either unable or unwilling to tell us at oral argument about the precise relationship between Prenda and Alpha Law, despite its relevance for the issues on appeal. No matter: we have enough to conclude with confidence that notice to Duffy was reasonably calculated to apprise Steele and Hansmeier of the pendency of the motion. For the icing on the cake, we add that the district court also found that Steele received actual notice via email.

When their claims that they didn't get proper notice of sanctions hearings became irrelevant, their argument "shifted to one focusing on the adequacy of their opportunity to respond," wrote Wood. "It is too late to change theories, however, and the district court correctly ruled that whatever procedural flaw there may have been was fully corrected by affording a new opportunity for a hearing."

The Prenda-linked lawyers had a multitude of chances to tell their story, going right back to their April 2013 appearance in US District Judge Otis Wright's courtroom, where they chose to plead their right to not self-incriminate under the Fifth Amendment rather than explain their operations. In the present case, "Hansmeier explained in detail why he thought that sanctions should not be imposed against him," and Steele spoke as well. "This more than sufficed as an opportunity to be heard."

Outrageous and abusive

The original allegation was that when Comcast and SBC Internet wouldn't give Team Prenda the names and addresses it wanted, the ISPs became part of a 6,600 user "conspiracy" to steal pornography. "If there was any conceivable merit in that theory, then perhaps fees would have been inappropriate," wrote Wood. "But there was not."

The opinion recites one wild Prenda claim after another. Prenda claimed that ISPs violated the Computer Fraud and Abuse Act. “The only alleged assistance to the hackers, however, was the challenge to the subpoena," the opinion notes. The ISPs were “unjustly enriched” by getting subscriber fees from the "conspirators," a theory they "have provided no support for."

Prenda's arguments are so outlandish that they haven't aged well. The idea that challenging the subpoenas caused the ISPs to be part of a civil conspiracy is a suggestion that is "utterly without merit" and "lacks even the most rudimentary allegation... that would satisfy federal pleading standards," wrote Wood. The charge is frivolous, and the theory "is all the more outrageous given the fact that the Illinois Supreme Court quashed a functionally identical abusive subpoena."

The lower court judge had stated that Prenda lawyers were engaged in "abusive litigation... simply filing a lawsuit to do discovery to find out if you can sue somebody. That's just utter nonsense." On appeal, the panel found that to be just right, including the quote in their opinion. "We see no need to belabor the point," wrote Wood. "The record amply supports the district court's conclusions."

Finally, the judges addressed Hansmeier and Steele's arguments that they were simply out of money. "Inability to pay is indeed a valid defense in contempt proceedings," acknowledged Wood. But the sanctioned lawyers didn't even make an effort to pay, and they come far from meeting their burden to show "clearly, plainly, and unmistakably that compliance is impossible."

Before the district court judge had found them in contempt, he had asked Hansmeier and Steele to provide proof that they were unable to pay. He required them to submit financial statements verified by public accountants showing their "asserted lack of resources." The opinion describes what happened next:

Although the financial statements were submitted, they opened Pandora's Box. Attached to each financial statement was a bombshell letter from appellants' certified public accountant stating that appellants had "elected to omit substantially all of the disclosures required by generally accepted accounting principles." Not surprisingly, the district court found the statements insufficient to establish an inability to pay. It also took notice that these same attorneys had posted large bonds in other cases.

The order concludes by affirming the contempt holding and the sanctions against Duffy, Steele, and Hansmeier. The lawyers have paid several other fee awards, but this will be the largest yet by far. They continue to appeal the original sanction against them in the Ninth Circuit.