Commercial Litigation and Arbitration

Sanctions 2006

Gregory P. Joseph*

It is difficult to deny taking a certain pleasure in witnessing a federal agency hammered with a $72 million sanction for a decade-long campaign of litigation abuse, as occurred in FDIC v. Hurwitz, 384 F. Supp. 2d 1039 (S.D. Tex. 2005), even though we as taxpayers will end up footing the bill if the sanction is sustained on appeal. Hurwitz is the largest reported monetary sanction entered in the federal courts in the past year, but there were several other notable decisions in the field. This column summarizes recent developments.

Supreme Court on Removal Sanctions. Improper removal of a case from state to federal court is subject to sanction under 28 U.S.C. § 1447(c), which authorizes an award of attorney’s fees and costs in the order remanding the case to state court. None of the procedural limitations placed on the award of Fed. R. Civ. P. 11 sanctions apply under § 1447(c). There is no separate-motion requirement, no 21-day safe harbor, and no limitation on the power of the court to award compensatory sanctions sua sponte under § 1447(c)(1).

Until December 7, 2005, there was a split in the circuits as to whether § 1447(c) sanctions were awardable more or less automatically if the case was remanded, or whether sanctions were to be imposed only if the defendant lacked objectively reasonable grounds for removing the case. The Supreme Court adopted the latter view in Martin v. Franklin Capital Corp., 126 S. Ct. 704, 708 (2005), holding that, "absent unusual circumstances, attorney's fees should not be awarded when the removing party has an objectively reasonable basis for removal."

What, then, are "unusual circumstances" that may warrant the imposition of § 1447(c) sanctions, even though the defendant had an objectively reasonable basis for removal? This is not addressed. The Martin Court remarked that "a plaintiff's delay in seeking remand or failure to disclose facts necessary to determine jurisdiction may affect the decision to award attorney's fees." Id. at 711. That illustration, however, suggests only that it could be appropriate to deny a plaintiff’s motion for fees if the defendant lacked objectively reasonable basis for removal. Martin does not indicate when objectively-reasonable removal papers might appropriately be sanctioned.

Perhaps there is a parallel in Rule 11(b)(1), which authorizes sanctions if papers are filed "for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation." Rule 11(b)(1) appears to authorize the imposition of sanctions for ill-motivated but objectively reasonable papers — otherwise, it would largely be surplusage because objectively unreasonable papers are separately subject to sanction under Rule 11(b)(2) (although there is some difference in the presumptively applicable sanction). Yet courts are, as they should be, properly circumspect about imposing improper-purpose sanctions for the presentation of meritorious papers. See generally Joseph, Sanctions: The Federal Law of Litigation Abuse § 13(C) (Supp. 2006). Just as Martin effectively incorporated Rule 11(b)(2)’s standard of objective reasonableness into § 1447(c) jurisprudence, perhaps it has incorporated Rule 11(b)(1)’s improper purpose standard and jurisprudence as well.

Innocent Misstatement. Under Rule 11(b), statements in court papers are certified as true "to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances." This "is not a strict liability provision," as the First Circuit ruled in Young v. City of Providence, 404 F.3d 33, 39 (1st Cir. 2005). Rather, a "lawyer who makes an inaccurate factual representation must, at the very least, be culpably careless to commit a violation [of Rule 11(b)(2)-(4)].... [T]he wheels of justice would grind to a halt if lawyers everywhere were sanctioned every time they made unfounded objections, weak arguments, and dubious factual claims" Id. Not exactly heartening words for the quality of day-to-day lawyering. This reflects dispensation from sanctions because the court is grading on a curve.

Misstatement vs. Overstatement. The trial judge in Obert v. Republic Western Ins. Co., 398 F.3d 138 (1st Cir. 2005), modified at 2005 U.S. App. LEXIS 4793 (1st Cir. Mar. 24, 2005), sanctioned a lawyer for filing an untruthful affidavit. Reversing, the appellate court found one of the challenged statements to be "more fairly described as an unsound piece of lawyer advocacy rather than a lie about a fact"— "simply tendentious characterization." Id. at 144. With respect to the affidavit’s statement that the district judge had said "would" rather than "could" at an unrecorded conference, the appeals court held that the affiant could not "be found to be lying when, supported by two witnesses...." Id. Echoing the judicial administration theme of Young, the Obert Court concluded that: "Counsel every day file motions that are hopeless, just as they make hopeless objections in trials and hopeless arguments to the judge. Perhaps a court could sanction counsel under Rule 11 for many such hopeless motions, but doing so routinely would tie courts and counsel in knots." Id. at 146.

Although the Obert Court found that the affidavit contained no falsehoods, it held that the accompanying motion was "objectively hopeless." Nonetheless, the First Circuit reversed the sanctions award because "it is unrealistic in the extreme to treat the present sanctions order, in relation to its Rule 11 findings, as if it concerned only a time-wasting motion, filed in good faith but objectively hopeless…. Because there were no proven lies, we think that the Rule 11 findings cannot stand even through we agree that the motion was objectively hopeless." Id. at 146–147. Counsel should take little comfort from this opinion. Another appellate court or panel might easily have concluded that the hopelessness of the motion constituted a viable alternate ground to sustain the sanction.

Expert Document Retention Policy vs. Rule 26. The discoverability of expert notes and drafts — and the sanctions awardable for their destruction — has been the subject of prior articles (e.g., Joseph, Expert Spoliation, Nat’l L. J., Feb. 3, 2003, at B7). The fact that the destruction may have been effected pursuant to the expert’s document retention policy is not necessarily a defense to sanctions. Fidelity Nat’l Title Ins. Co. v. Intercounty Nat’l Title Ins. Co., 412 F.3d 745, 750–751 (7th Cir. 2005) ("There is no legal duty to be a pack rat. But a firm’s document-retention policy cannot trump Rule 26(a)(2)(B)"). As previously observed, this is a problem that can be avoided by a well-written expert retention agreement (Joseph, Engaging Experts, Nat’l L. J., April 18, 2005 at 12).

Safe Harbor Waiver. The Third Circuit ruled in DiPaolo v. Moran, 407 F.3d 140, 145 (3d Cir. 2005) that a sanctioned party waived, by failing to raise below, the defense that the movant failed to comply with the 21-day safe harbor of Rule 11(c)(1)(A). Effectively, the Third Circuit joined the Fourth, which concluded that the 21-day safe harbor provision of Rule 11 is not jurisdictional and may be waived, in Rector v. Approved Fed. Sav. Bank, 265 F.3d 248 (4th Cir. 2001).

But this waiver doctrine should not be applied reflexively. It is generally in the best interests of the courts for the 21-day rule to be strictly applied. The 21-day safe harbor serves the sensible goal of requiring litigants to attempt to rid cases of infirm claims, defenses and positions without involvement of the court. If the safe harbor is ignored, it may still suit the institutional interests of the appellate courts to vacate the Rule 11 sanction, even if the target of the award missed the issue (by definition, the target of the award has likely missed other issues). To do otherwise would countenance, and perhaps encourage, disregard of the safe harbor —e.g., by litigants who can no longer satisfy the 21-day requirement because the motion is already decided or the case is already concluded. Thus in Brickwood Contractors v. Datanet Eng’g, 369 F.3d 385, 397–399 (4th Cir. 2004) (en banc), the Fourth Circuit applied a plain-error analysis to reach and correct the safe harbor violation.

Vicarious Liability. Rule 11(c)(1)(A) expressly contemplates vicarious liability of a law firm for the infractions of its lawyers and employees. Vicarious liability does not exist under all sanctions powers. The Seventh Circuit ruled in Claiborne v. Wisdom, 414 F.3d 715 (7th Cir. 2005) that a law firm is not vicariously liable under 28 U.S.C. § 1927 for a violation committed by one of its attorneys. This is the general rule because the statute (which authorizes the imposition of monetary sanctions on any lawyer who wrongfully proliferates litigation) is penal in nature and is to be strictly construed. However, § 1927 does presumptively apply to all attorneys who are representing a party in a case, subject to their proving their non-involvement. Malhiot v. So. Cal. Retail Clerks Union, 735 F.2d 1133, 1138 (9th Cir. 1984) (Boochever, J., concurring and dissenting).

Abusive Extrajudicial Fact-Gathering. In Greviskes v. Universities Research Ass’n, 417 F.3d 752, 759 (7th Cir. 2005), the action was dismissed to sanction the plaintiff for case-related but extrajudicial misconduct — such as sending fraudulent faxes and forgeries to the corporate defendant to obtain the personnel file of a witness — and for lying about this misconduct to the court. "[Plaintiff’s] fraudulent conduct in the course of discovery and attempts to hide such behavior behind a cloak of further fraud and deceit is an affront to the legal process. No court should be asked to tolerate such behavior in any circumstance." Id.

While there are limits to the reach of the inherent power of the court — that is, limits on the extent to which the court can reach beyond conduct occurring in the litigation — the power authorizes the courts to punish misconduct that directly relates to a litigation and frustrates the court’s ability to discharge its function. See, e.g., Stevenson v. Union Pac. RR, 354 F.3d 739, 747-48 (8th Cir. 2004) (pre-litigation destruction of evidence).

Absence of Written Order. In Schmude v. Sheahan, 420 F.3d 645 (7th Cir. 2005), the Seventh Circuit reversed inherent power sanctions imposed for failure to heed a judicial directive that was not embodied in a written order. The Schmude Court held that a court’s "oral directive" barring counsel from seeking appointment in a state court that would entitle them to fees for defending the federal action "without more, is not binding on counsel. To be enforceable, a command must be in the form of ‘a separate document, with a self-contained statement of what the court directs to be done.’"

To the extent that this might be read as countenancing disregard of oral court orders—e.g., those issued during a trial or hearing—there is little doubt that the Schmude Court intended no such thing. The decision is probably best read as reflecting the appellate court’s view that the district court should not have issued the directive or order at all, rather than as a vibrant precedent representing the proposition that litigants and counsel have carte blanche to ignore oral court orders.


* Mr. Joseph, of Gregory P. Joseph Law Offices LLC in New York, is a fellow of the American College of Trial Lawyers and former Chair of the Litigation Section of the American Bar Association. He may be reached at © 2006 Gregory P. Joseph

Share this article:


Recent Articles