Commercial Litigation and Arbitration

Sanctions — Inherent Power — Wrong Kind of Bad Faith

The American Rule holds that litigants pay their own attorneys' fees. The Supreme Court ruled in Chambers v. NASCO, Inc., 501 U.S. 32 (1991), that the federal courts possess the inherent power to impose sanctions, including an adversary's attorneys' fees, on a lawyer or litigant who has willfully abused the judicial process or conducted litigation in bad faith. But not all bad faith is sanctionable under the inherent power, as the plaintiffs learned in Centex Corp. v. United States, 486 F.3d 1369 (Fed. Cir. 2007). The plaintiffs had entered into contracts with the federal government in 1989 to acquire failing thrifts. The government agreed in return to provide the plaintiffs with specified financial benefits, including favorable tax treatment. Four years later, in 1993, Congress retroactively eliminated the tax benefits. The plaintiffs sued and won, as they should. They then moved the trial court for attorneys' fees on the theory that the government had acted in bad faith, necessitating this litigation. The Federal Circuit upheld the trial court’s refusal to consider pre-litigation conduct of the government (from 1989-93) because that was the basis of the substantive cause of action, and did not reflect abuse of the litigation process: ‛We agree with the trial court that authorizing a court to shift fees based solely on bad faith conduct that forms the basis for the substantive claim for relief would undermine the American Rule by penalizing a party who raises good faith defenses to claims of liability for bad faith conduct.“ The Centex Court cited decisions from eight other Circuits holding that ‛fee awards cannot be assessed based on claims of bad faith primary conduct,“ but noted that two D.C. Circuit cases could be read as coming to the opposite conclusion. The timing of the bad faith misconduct is critical.

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