Commercial Litigation and Arbitration

Sanctions — Reversible Error Not to Consider Lawyer’s Ability to Pay under Rule 37 — Inherent Power vs. Rule-Based Power in Punishing Discovery Abuse

In reversing all but $121,000 of a $2.7 million sanctions award, the Court in Clearvalue, Inc. v. Pearl River Polymers, Inc., 560 F.3d 1291 (Fed. Cir. 2009) held the imposition of joint-and-several liability on counsel to the sanctioned plaintiffs was improper because his ability to pay the award was not considered:

[Need to Consider Ability to Pay in Fashioning Monetary Sanction under Rule 37]

As to the court's imposition of joint and several liability on Waggett for the $ 121,207.38 under Rule 37(c)(1)(A), we agree with Waggett that the court abused its discretion by failing to consider that Waggett does not have the ability to pay when fashioning the sanction against him. Thus, we reverse the imposition of liability as to him personally. We note that the Fifth Circuit "has consistently held that a district court, when considering the imposition of sanctions for discovery violations . . . should impose the least severe sanction that will accomplish the desired result." United States v. Garrett, 238 F.3d 293, 298 (5th Cir. 2000) (internal quotation marks omitted). Although Rule 37(b)(2)(C) specifically authorizes the court to order "the attorney advising [the] party" to pay "reasonable expenses, including attorney's fees," a number of circuits, including the Fifth, have concluded that monetary sanctions must be tailored to a party's ability to pay. See Thomas v. Capital Sec. Servs., Inc., 836 F.2d 866, 881 (5th Cir. 1988) (en banc) (noting, in the Rule 11 context, that the "resources of the party to be sanctioned" are "relevant" to the sanction imposed); see also Martin v. Automobili Exclusive, Inc., 307 F.3d 1332, 1337 (11th Cir. 2002) ("We conclude that, when exercising its discretion to sanction under its inherent power, a court must take into consideration the financial circumstances of the party being sanctioned."); Johnson v. A.W. Chesterton Co., 18 F.3d 1362, 1366 (7th Cir. 1994) ("One equitable consideration is the ability of the sanctioned attorney (or party) to pay an award of the other party's attorney's fees." (addressing Rule 11)); Oliveri v. Thompson, 803 F.2d 1265 (2d Cir. 1986) ("[G]iven the underlying purpose of sanctions — to punish deviations from proper standards of conduct with a view toward encouraging future compliance and deterring further violations — it lies well within the district court's discretion to temper the amount to be awarded . . . by a balancing consideration of his ability to pay."); cf. Arnold v. Burger King Corp., 719 F.2d 63, 68 (4th Cir. 1983) ("The policy of deterring frivolous suits is not served by forcing the misguided Title VII plaintiff into financial ruin simply because he prosecuted a groundless case."). Although these courts did not specifically address sanctions in the Rule 37 context, we find their guidance applicable here. In Waggett's case, even an award of $ 121,107.38 is four times his reported net income for the 2006 fiscal year. We conclude that the district court erred in failing to consider that Waggett lacked the ability to pay. Therefore, we find an abuse of discretion, and reverse the award of joint and several liability as against Waggett.

[Inherent Power Defers to Applicable Rules in Punishing Discovery Abuse]

Discovery violations are appropriately addressed through the application of Rule 37. As articulated in Chambers, "when there is bad-faith conduct in the course of litigation that could be adequately sanctioned under the Rules, the court ordinarily should rely on the Rules rather than the inherent power." 501 U.S. at 50. A district court should only use its inherent powers when "neither the statute nor the Rules are up to the task." Id. In this case, the court did not indicate it was sanctioning broad litigation conduct of the parties. Rather, it specified it was sanctioning a discovery violation, properly addressed under Rule 37. We thus hold that the district court abused its discretion by using its inherent powers to impose sanctions against Appellants. We therefore reverse this additional imposition of sanctions.

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