Commercial Litigation and Arbitration

10b-5 Count Requires PSLRA Sanctions Inquiry Even If Plaintiff Prevails on Others — Failure to Satisfy Rule 9(b) Not Necessarily Sanctionable — Position Supported by Some Authority and Not Foreclosed in Circuit Is Not Frivolous

From Fishoff v. Coty Inc., 634 F.3d 647 (2d Cir. 2011):

Because Fishoff's initial complaint included a cause of action for violations of Section 10(b) of the Securities Exchange Act of 1934, pursuant to the terms of the Private Securities Litigation Reform Act ("PSLRA"), the district court was required at the close of litigation to enter findings on whether Fishoff's action violated Federal Rule of Civil Procedure 11. See 15 U.S.C. § 78u-4(c)(1) (providing that at the end of any private securities action, the district court must "include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b)"). The district court concluded that Fishoff [who prevailed on other counts] had not violated Rule 11..., and Coty appeals that finding.

*** The fact that a legal theory is a long-shot does not necessarily mean it is sanctionable. See Kropelnicki v. Siegel, 290 F.3d 118, 131 (2d Cir. 2002). The operative question is whether the argument is frivolous, i.e., the legal position has "no chance of success," and there is "no reasonable argument to extend, modify or reverse the law as it stands." Morley v. Ciba-Geigy Corp., 66 F.3d 21, 25 (2d Cir. 1995) (internal quotation marks omitted); see also ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 579 F.3d 143, 152 (2d Cir. 2009) ("The express congressional purpose of the PSLRA [sanctions] provision was to increase the frequency of Rule 11 sanctions in the securities context, and thus tilt the 'balance' toward greater deterrence of frivolous securities claims." (emphasis added)).

In this case, Fishoff argued before the district court, inter alia, that the options he was awarded were "securities" as that term is defined in the Securities Exchange Act of 1934. The district court concluded that Fishoff's "position was not without some support — albeit non-binding and unpersuasive." Fishoff v. Coty Inc., No. 09 Civ. 628, 2010 WL 305358, at *2 & n.18 (S.D.N.Y. Jan. 25, 2010) (noting that Fishoff cited a "host of cases" in support of his position). The district court further explained that, "while I found that Fishoff had failed to adequately plead scienter, this does not mean that Fishoff's claim had absolutely 'no chance' of success." Id. (footnotes omitted). We agree with the district court that Fishoff's arguments were non-frivolous; they were not foreclosed a priori by binding precedent even if they were unlikely to succeed, and Fishoff's position was not unsupported by case law even though the cases he cited were not binding on the court adjudicating his claims. We also agree with the district court that a party's failure to plead with the requisite particularity does not necessarily warrant sanctions. Accordingly, we conclude that the district court did not abuse its discretion in denying sanctions.

Share this article:


Recent Posts