Commercial Litigation and Arbitration

District Court Lacks Inherent Power to Sanction Counsel for Conduct During Arbitration Even If Court Ordered the Parties to Arbitration (Note: Not Court-Annexed Arbitration)

The Court ordered the parties to arbitration pursuant to contract, on defendant’s motion, in Positive Software Solutions, Inc. v. New Century Mortgage Corp., 2010 U.S. App. LEXIS 19072 (5th Cir. Sept. 13, 2010):

During arbitration, [Attorney] Camina advised [Defendant] New Century on various discovery matters. In September 2004, the district court vacated the award because the arbitrator had failed to disclose his previous professional relationship with Camina. This court reversed the vacatur and remanded. ***

After remand, New Century declared bankruptcy. In the course of the bankruptcy proceedings, [Plaintiff] Positive Software settled its claims against New Century, and the case was administratively closed. Under the settlement, New Century waived and assigned to Positive Software its attorney-client and work-product rights. The district court granted Positive Software's demand that Susman Godfrey LLP turn over its files for use by Positive Software in pursuing sanctions.

In March 2008, Positive Software moved for sanctions against Camina, Barry Barnett, and Susman Godfrey LLP under Federal Rule of Civil Procedure 37, 28 U.S.C. § 1927, and the court's inherent authority. In February 2009, using its purported inherent authority, the court sanctioned Camina $ 10,000, representing a portion of Positive Software's attorneys' fees. Camina appeals the sanction. ***

In [FDIC v. Maxxam, Inc., 523 F.3d 566 (5th Cir. 2008)], we confirmed the limited reach of the court's inherent authority. There the FDIC sued Charles Hurwitz, alleging that he was responsible for the failure of a savings and loan association. The FDIC also encouraged the Office of Thrift Supervision ("OTS") to pursue similar claims in an administrative proceeding. The FDIC moved that the district court stay its case pending completion of the OTS proceeding. When the district court denied that motion, the FDIC continued to support the administrative action. Invoking its inherent powers, the court sanctioned the FDIC for Hurwitz's expenses in defending the OTS action. We reversed part of those sanctions on the ground that the inherent power does not extend to collateral proceedings that "do not threaten the court's own judicial authority or proceedings." Maxxam, 523 F.3d at 593. Inherent authority "is not a broad reservoir of power, ready at an imperial hand, but a limited source; an implied power squeezed from the need to make the court function." Id. at 591 (citation omitted).

Here the district court distinguished Maxxam, positing that arbitration is not a collateral proceeding but instead an "annex" to litigation. It reasoned that because the court ordered the parties to arbitrate, it retained the authority to impose sanctions for conduct committed in arbitration. That approach is puzzling. To begin with, arbitration is not an annex to litigation, but an alternative method for dispute resolution. [Footnote 1. This opinion deals only with traditional arbitration, which is contractual in nature, and not with so-called "judicial" or "court-annexed" arbitration or mediation, which is often compulsory.] Treating arbitration as if it were an appendage to adjudication is a mistake that would undermine the very purpose of arbitration — "the provision of a relatively quick, efficient and informal means of private dispute settlement . . . ." *** Parties agree to arbitration to avoid litigation; they voluntarily surrender judicial remedies in favor of an extrajudicial process.

Furthermore, the notion that the court's inherent authority turns on whether the arbitration was "court-ordered" is untenable. Positive Software claims that the district court retained significant supervisory authority by virtue of ordering the parties to arbitrate. When asked, in oral argument, whether the court would have had inherent authority to sanction Camina if the parties had chosen to enter arbitration at the outset, Positive Software's counsel candidly stated, "of course not—that's Maxxam." Positive Software's distinction, then, would allow trial courts to oversee arbitrations in which one party had to be compelled to arbitrate but not those in which both parties complied with their arbitration agreement. Such a significant and perverse asymmetry cannot be justified, and Positive Software's efforts to distinguish this case from Maxxam are unavailing.

In an attempt to rescue the sanctions order, Positive Software additionally claims that the sanctions are based on Camina's direct defiance of the preliminary injunction and protective order. That assertion, however, is belied by the court's own explicit explanation that the sanctioned conduct "took place in connection with the arbitration, not in connection with discovery under the Court's supervision." In other words, the court imposed sanctions not on account of any direct violation of a court order, but only because it found that Camina had exhibited four particular instances of bad faith during arbitration. ***

Not only are the sanctions at odds with our caselaw on inherent authority, but they also are in serious tension with the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq. Under the FAA, the district court has the authority to determine (1) whether arbitration should be compelled, see §§ 2-4, and (2) whether an arbitration award should be confirmed, vacated, or modified, see §§ 9-11. Beyond those narrowly defined procedural powers, the court has no authority to interfere with an arbitration proceeding. *** Because both parties agree that their contract gave the arbitrator authority to sanction Camina for bad-faith conduct, the FAA counsels against the district court's assigning itself that task.

Positive Software cites LaPrade v. Kidder Peabody & Co., 146 F.3d 899, 330 U.S. App. D.C. 386 (D.C. Cir. 1998), to resolve the apparent tension between the sanction order and the FAA. In LaPrade, the district court stayed an action brought by Linda La-Prade against her former employer because the dispute was covered by a valid arbitration agreement. While the arbitration was pending, LaPrade's attorney went into state court and obtained an ex parte order staying the arbitration without informing that court of the district court's previous order. On the employer's motion, the district court lifted the state court's stay and imposed sanctions against LaPrade's attorneys under 28 U.S.C. § 1927 for their "vexatious and dilatory tactics." LaPrade, 146 F.3d at 900. On appeal, the District of Columbia Circuit upheld the sanctions, concluding that the FAA did not divest the district court of jurisdiction to enter the sanctions order. Id. at 903.

LaPrade, however, does not support the district court's exercise of inherent power against Camina. First, LaPrade held only that the FAA does not affect the district court's jurisdiction over a case stayed pending arbitration. *** But jurisdiction alone does not create the inherent power to sanction arbitration conduct. That power must be grounded in some threat to the court's authority or its ability to function and must not be contrary to statute. Unlike the court in LaPrade, which involved sanctions under a specific statutory provision, the district court here relied only on its inherent authority, which, as noted, was not up to the task.

Furthermore, it is misleading to suggest that LaPrade's attorneys were sanctioned for conduct in arbitration. Instead, the court imposed sanctions for the direct violation of its order. *** In staying the federal suit, the court mandated that LaPrade seek redress of her employment-related grievances only through arbitration. By obtaining a stay of arbitration in state court, her attorneys disregarded that order, thereby posing a threat to the federal district court's authority. That conduct might have been analogous to what happened here if Camina's sanctions had rested on her violation of the preliminary injunction or the protective order. But as already discussed, the district court found no such violation.

Finally, and perhaps most importantly, the sanctions order threatens unduly to inflate the judiciary's role in arbitration. The FAA provides for minimal judicial involvement in resolving an arbitrable dispute; the court is limited to only a few narrowly defined, largely procedural tasks. But by using its power to sanction, a court could seize control over substantive aspects of arbitration. The court would, in effect, become a roving commission to supervise a private method of dispute resolution and exert authority that is reserved, by statute, caselaw, and longstanding practice, to the arbitrator. That supervision is inconsistent with the scope of inherent authority and with federal arbitration policy, which aims to prevent courts from delaying the resolution of disputes through alternative means. ***

First, it [Plaintiff Positive Software] could have asked the American Arbitration Association to re-open the proceedings so it could request sanctions from the arbitrator. See American Arbitration Association, Commercial Arbitration Rule 36, 38 (2009). Second, it could have relied on the grievance process. In fact, it did: Its counsel filed a grievance against Camina, which was dismissed as lacking just cause. Contrary to Positive Software's contentions, then, there was no particular need for the district court to expand its inherent authority to prevent misdeeds from falling through the cracks.

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