Month: October 2011

Seventh Circuit Awards Sanctions For Frivolous and Vexatious Conduct

In the 2010 Seventh Circuit case Carr v. Tillery, 591 F.3d 909 (7th Cir. 2010) defendant attorneys filed a motion for sanctions against the plaintiff alleging the plaintiff was harassing them with repetitive litigation and borderline frivolous suits. The Seventh Circuit reversed the District Court’s dismissal of the motion and awarded the defendants sanctions.

Carr arose from various disputes between former law partners over the division of legal fees from cases their law firm handled before it disbanded. The plaintiff filed eight other suits in state courts against the defendants and at least four liens regarding cases handled by the firm before disbanding. The disputes were supposedly resolved and dismissed by a “Memorandum of Understanding” between the plaintiff and the defendants. However, in 2004, before the suits were dismissed pursuant to the Memorandum, the plaintiff amended a previous counterclaim alleging he had been fraudulently induced to sign the Memorandum. In 2006, the Illinois Circuit Court court rejected the amended counterclaim and dismissed all the pending suits with prejudice. The Illinois Appellate Court affirmed the Circuit Court’s decision.

The complaint before the federal court in the present case repeated the charges in the 2004 counterclaim. As a result, the Seventh Circuit affirmed the District Court’s dismissal of the current charges based on Illinois’s “one refilling” rule and the theory of “claim splitting.” Furthermore, although the current complaint characterized the alleged wrongful acts under the RICO Act, the Seventh Circuit affirmed the dismissal deciding the complaint was barred by res judicata and did not actually arise under the RICO Act because it was a basic breach of contract claim.

Section 1927 of the Judicial Code authorizes the court to grant “excess costs, expenses, and attorney’s fees” resulting from unreasonable and vexatious litigation.

However, this section has been held to be inapplicable to “misconduct that occurs before the case appears on the federal docket.” Nonetheless, the court noted that it “has inherent power, which is to say common law power, to punish by an award of reasonable attorney’s fees or other monetary sanction, or to prevent for the future by an injunction, misconduct by lawyers appearing before it.” Therefore, although much of the alleged misconduct occurred before the suit reached the federal court’s docket, the court decided the defendants would not be left remediless.

The court reasoned that, although the suit could not necessarily be characterized as utterly frivolous, the plaintiff’s actions indicate he had a motive to harass. It pointed out that the plaintiff had a “vitriolic tone” in his complaint, failed discuss important cases in the course of litigation, made a false statement in his opening brief, improperly raised new issues in his reply brief, and failed to even attempt to rebut the defendant’s motion for sanctions. Furthermore, the court reasoned that the plaintiff’s attempt to re-characterize a simple breach of contract claim as a claim under the RICO Act “was an abuse of the patience of the courts.”

The court concluded that “the plaintiff [was] out of control and his lawyers [were] neglecting their duties as officers of the state and federal courts by failing to rein him in,” and directed the lower court to assess a proper monetary sanction. The court also noted that the lower court should consider enjoining the plaintiff from filing any more claims against the defendants outside of potential future claims related to the money he is entitled to under the Memorandum.

Edward X. Clinton, Jr.

The Supreme Court Orders Lower Courts To Apportion Fee Claims Between Frivolous and Non-Frivolous Claims

The U.S. Supreme Court’s recent decision in Fox v. Vice established the method of determining the amount of attorney’s fees a defendant is entitled to under 42 U.S.C. § 1988 when a mix of frivolous and non-frivolous claims are filed against him or her under 42 U.S.C. § 1983.

In Fox, the plaintiff brought suit against the defendant based on the defendant’s attempt to sabotage the plaintiff’s campaign for chief of police. The plaintiff asserted state law claims for defamation, and federal civil rights claims under Section 1983 alleging the defendant interfered with his right to seek public office. The defendant removed the case to federal court only to have the plaintiff concede that the federal civil rights claims were invalid.

The defendant asked the federal court for attorney’s fees arguing he expended a significant amount of time and money defending against the plaintiff’s charges. However, the billing records the defendant submitted did not differentiate between the time spent on the frivolous federal claims and the non-frivolous state law claims.

The District Court granted the defendant attorney’s fees for all of the work done by his attorneys on the ground that the plaintiff’s federal claims were frivolous. The Fifth Circuit affirmed the District Court’s decision “deepening a Circuit Split” about how to determine which attorney’s fees a defendant is entitled to in situations such as this. The U.S. Supreme Court put the question to rest deciding that Section 1988 permits the defendant to receive only the fees he or she would not have paid but for the frivolous claims. As a result, the Court vacated the Circuit Court’s judgment and remanded the case for judgment consistent with its decision.
The Court based its decision on Congress’s intent to remove the burden associated with defending against frivolous claims when it enacted Section 1988. The Court reasoned that a standard allowing more expansive fee-shifting would result in some defendants being better off because they were subject to frivolous claims. A defendant may receive attorney’s fees for work done on the non-frivolous claims simply because that work was also useful in defending against the frivolous claims.
The court also pointed out that there are situations where its but-for test may result in a defendant receiving attorney’s fees for work useful in both the frivolous and non-frivolous claims. For example, where the defendant’s attorney did work that was useful in defending against both charges solely to insulate the defendant from exposure to damages resulting from the frivolous charge, the court may shift fees.

Also, as in Fox, when a frivolous federal claim results in additional expenses incurred due to removal to federal court, the court may shift fees even if that work pertained to both the frivolous and non-frivolous claims.

Finally, the Court emphasized that the courts should not become “green-eyeshade accountants” in determining the extent of attorney’s fees in these situations. “The essential goal in shifting fees (to either party) is to do rough justice, not to achieve auditing perfection.”

Comment: this case is significant as it is likely to be followed in other fee-shifting cases. If you wish to recover attorney fees, you would need to prepare detailed time records showing what time was spent defending the frivolous claims and what time was spent defending non-frivolous claims. The problem is that few attorneys prepare time records that are that detailed. Also, the court may not agree that a particular claim is frivolous. Thus, the lawyers will be required to do some green eyeshade work in preparing fee petitions.

Edward X. Clinton, Jr.

Thanks to our law clerk Pat Bushell for help on this blog entry.

Sanctions Imposed On United States For Failure To Admit A Fact

A district judge in the District of Alaska has imposed Rule 37(c)(2) sanctions on the United States for failing to admit the standard of care in a tort case.

Afcan submitted a request to admit a standard of care.  The Government responded: “This is an expert question and no answer is required until expert reports are due.”

At trial, Afcan hired an expert witness to prove the standard of care and prevailed at trial.  The Court explained Rule 37(c)(2) as follows: “Federal Rule 37(c)(2) provides that “[i]f a party fails to admit what is requested under Rule 36 and if the requesting party later proves . . . the matter true, the requesting party may move that the party who failed to admit pay the reasonable expenses, including attorney’s fees, incurred in making that proof.”[4] The Rule instructs that “[t]he court must so order unless: (A) the request was held objectionable under Rule 36(a); (B) the admission sought was of no substantial importance; (C) the party failing to admit had a reasonable ground to believe that it might prevail on the matter; or (D) there was other good reason for the failure to admit.”

The district court criticized the United States for failing to admit the issue before trial and found that no exception applied and ordered sanctions.  The United States was required to pay legal fees and some of the plaintiff’s expert costs.  In sum, the district court believed that the plaintiff asked the United States to admit the correct standard of care and that the United States failed to do so – and had no good reason for this failure.

Edward X. Clinton, Jr.

District Court Declines To Award Sanctions For Lost Evidence Where Both Parties Had Opportunity To Test The Evidence

CEDAR PETROCHEMICALS, INC., Plaintiff, v. DONGBU HANNONG CHEMICAL CO., LTD., 769 F.Supp. 2d 269 (2011)

In this case Cedar Petrochemicals sued Dongbu Hannong for breach of a contract for a quantity of phenol.  The Defendant moved for Rule 37 discovery sanctions on the ground that certain samples of the phenol had been lost (it claimed) by the defendant.  Defendant also sought to exclude Plaintiff’s experts under FRE 702.

Plaintiff entered into a contract for the delivery of 2000 metric tons of phenol from South Korea.  The phenol was tested at several times including when it arrived in the Netherlands.  The independent tests founds that the phenol had gone “substantially color.”

The Defendant argued that the plaintiff failed to preserve the samples of the phenol and that the case should be dismissed as a result.  The court writes: “Dongbu argues that Cedar’s failure to ensure the preservation of the physical samples of the phenol at issue in this case “requires the imposition of the sanction of dismissal.”

The samples were in the custody of a third party – a testing company.

The court reviewed the standard for Rule 37 sanctions for the spoliation of evidence:  ”

Where a party seeks sanctions based on the spoliation of evidence, it must establish:

(1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed “with a culpable state of mind”; and (3) that the destroyed evidence was “relevant” to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.

Residential Funding, 306 F.3d at 107accord Acorn (New York Association of Community Organizations for Reform Now) v. County of Nassau, No. 05 CV 2301, 2009 WL 605859, at *2 (E.D.N.Y. March 9, 2009); Richard Green (Fine Paintings), 262 F.R.D. at 289Treppel v. Biovail Corp., 249 F.R.D. 111, 120 (S.D.N.Y.2008)Zubulake V, 229 F.R.D. at 430.”

The court concluded that Plaintiff had a duty to preserve the samples.  However, it found that there was no culpable state of mind because either party could have preserved the samples by writing to the testing company. It wrote: ”

Accordingly, Cedar acknowledges that it had effective control of the Ulsan Samples, but argues that Dongbu had control to an equal extent. (Sanctions Opp. Memo. at 13). Cedar contends that written instruction from either party would have sufficed to save the Ulsan Samples from destruction by SGS Korea irrespective of the fact that Cedar had actually appointed and paid SGS Korea to conduct sampling in this matter. (Sanctions Opp. Memo. at 13). Likewise, Cedar asserts that both Cedar and Dongbu had equal control over the Rotterdam Samples because SGS Netherlands, which was retained by the end buyer of the phenol, would have acted—and indeed did act—on instruction by any of the parties to this transaction. (Sanctions Opp. Memo. at 17-18).

To be sure, equal negligence by both parties to a litigation in allowing the destruction of evidence renders sanctions unwarranted. See In re WRT Energy Securities Litigation, 246 F.R.D. 185, 196 (S.D.N.Y.2007). But because, as I will discuss below, the factors just discussed indicate that Dongbu was not prejudiced by the spoliation of these samples, and thus that sanctions are inappropriate in this case, I need not decide whether the parties were equally culpable in failing to preserve the samples.”

The court noted that the Defendant had opportunities to inspect the samples, but chose not to.  “Here, the combination of the opportunities Dongbu had to inspect the samples and its failure to demonstrate the relevance of the samples to its defense according to the spoliation standard indicate that it was not prejudiced by the spoliation of the samples sufficient to justify the drastic sanctions it has requested”  Again, the Court writes: “Although the post-litigation window of opportunity was relatively brief, Dongbu had a year overall to undertake to inspect the samples. Under the circumstances of this case, this opportunity was adequate to render drastic sanctions inappropriate. Further, that Dongbu did not take advantage of the opportunity casts doubt on the relevance of further testing to its case.”

Comment: this is a carefully written and thoughtful decision that concludes that there should not be discovery sanctions where the complaining party had an opportunity to examine the evidence.

Edward X. Clinton, Jr.

10th Circuit Affirms Dismissal of Lawsuit As Discovery Sanction

In a new case, the Eleventh Circuit has affirmed the dismissal of a lawsuit as a sanction against a litigant who did not comply with discovery orders.

The case, Lee v. Max Internatinal, LLC, 638 F3d 1318 (10th Cir. 2011), was a routine breach of contract case filed by Mr. Lee and his wholly owned company against the Defendant.

Plaintiff filed the case in February 2009.  The Defendant obtained a court order requiring the Plaintiff to produce responsive documents in October 2009.  Plaintiff, however, did not comply with the order. Shortly thereafter, Defendant moved, pursuant to Rule 37 of the Federal Rules of Civil Procedure, for discovery sanctions, specifically dismissal of the complaint.  In January 2010, the magistrate found that the Plaintiff had flouted the court’s order and granted the plaintiff one more chance to produce the documents but warned that, if plaintiff did not comply, plaintiff could expect the “harshest of sanctions.”  On January 25, 2010, the plaintiff certified that it had produced the requested documents.  Defendant disagreed and renewed its motion for sanctions.  The magistrate recommended that the complaint be dismissed and the district court agreed.

The Tenth Circuit affirmed the order of dismissal. The Court explained its ruling as follows:  “We hold that the district court’s considerable discretion in this arena easily 1321*1321 embraces the right to dismiss or enter default judgment in a case under Rule 37(b) when a litigant has disobeyed two orders compelling production of the same discovery materials in its possession, custody, or control. Plaintiffs in this case were given no fewer than three chances to make good their discovery obligation: first in response to Max’s document requests, then in response to the October 2009 order, and finally in response to the January 2010 order. Plaintiffs failed at all three turns. And three strikes are more than enough to allow the district court to call a litigant out. Of course, our legal system strongly prefers to decide cases on their merits. Because of this, we have held that a dismissal or default sanctions order should be predicated on “`willfulness, bad faith, or [some] fault'” rather than just a simple “inability to comply.” Archibeque v. Atchison, Topeka & Santa Fe Ry., 70 F.3d 1172, 1174 (10th Cir.1995)(quoting Nat’l Hockey League, 427 U.S. at 640, 96 S.Ct. 2778). Likewise, the Federal Rules protect from sanctions those who lack control over the requested materials or who have discarded them as a result of good faith business procedures. See, e.g., Fed. R.Civ.P. 37(e) (providing a safe harbor for those who “fail[ ] to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system”). But a party’s thrice repeated failure to produce materials that have always been and remain within its control is strong evidence of willfulness and bad faith, and in any event is easily fault enough, we hold, to warrant dismissal or default judgment.”

Edward X. Clinton, Jr.

Copyright 2011