Supreme Court Addresses Judges’ Inherent Sanction Authority in “Goodyear v. Haeger”

Featured Expert Column—Civil Justice/Class Actions

Cruz-Alvarez_FFrank Cruz-Alvarez, a Partner in the Miami, FL office of  Shook, Hardy & Bacon L.L.P., with Rachel A. Canfield, an Associate with the firm.

Most litigants are familiar with the federal sanction powers as promulgated under Federal Rules of Civil Procedure 11, 26, 30 and 37, as well as pursuant to 28 U.S.C. § 1927.  Each sanction power is codified in the applicable Rule or statute and limited in scope to a particular type of misconduct.1 However, a court’s inherent power to levy sanctions is arguably broader and more amorphous in nature than any of the other sanction powers.  As a result, many litigants are unclear about the full extent and application of a court’s inherent power to sanction.

On April 18 in Goodyear Tire & Rubber Co. v. Haeger, the United States Supreme Court provided more clarity on such limitations when it resolved a split of authority among federal appellate courts regarding the breadth of a federal court’s inherent authority to sanction a litigant for bad-faith misconduct.

The sanction controversy arose from a products-liability proceeding in which Plaintiffs Leroy, Donna, Barry, and Suzanne Haeger, sued Defendant Goodyear Tire & Rubber Company after their motorhome swerved off the road and flipped.  Plaintiffs alleged that the Goodyear G 159 tire was not designed to withstand the level of heat generated when used on a motorhome at highway speed levels.  Over the course of several years, Plaintiffs repeatedly requested that Goodyear provide them with internal test results for the G 159 tire.  Goodyear failed to fully and timely do so.  Eventually, the parties settled for an undisclosed amount on the eve of trial.

The Haegers later sought sanctions for discovery fraud upon learning that, in an unrelated lawsuit, Goodyear had disclosed a set of relevant test results which established that the G 159 tire got unusually hot at speeds of between 55 and 65 miles per hours.  Goodyear conceded that it had withheld this information.

The district court concluded that Goodyear engaged in a course of repeated and deliberate bad-faith behavior that extended over several years and frustrated resolution of the case on the merits.  Because the case had already settled and no statute or rule permitted the district court to impose sanctions, the district court exercised its inherent power to levy sanctions for all $2.7 million in fees against Goodyear.  In so doing, the district court recognized that fees must be causally connected to misconduct, but abandoned that standard, insisting that it could award all fees in this case because the misconduct occurred early on and rose to a “truly egregious level.”  The district court noted that full and timely disclosure would have affected the settlement, as well.  Remarkably, the district court also crafted a “contingent” award in the event of reversal, reducing the award to $2 million for fees incurred that were causally linked to the misconduct.

On appeal, a divided US Court of Appeals for the Ninth Circuit affirmed the full award under the premise that the district court’s inherent authority permitted an award of an amount it reasonably believed the Haegers incurred “during the time” Goodyear acted in bad faith.  The dissent disagreed, contending that the district court was limited to awarding fees “sustained as a result of Goodyear’s misconduct” and noting that full and timely disclosure would not necessarily have deprived Goodyear of colorable defenses (including, that the Haegers’ tire had endured more than 40,000 miles of wear and tear failed because it struck road debris), making it unclear whether disclosure would have affected settlement.  Goodyear petitioned the Supreme Court for certiorari review.

On certiorari review, the Supreme Court reversed the Ninth Circuit and remanded the case.  Interestingly, the Haegers and Goodyear agreed on the applicable legal precepts: federal courts possess certain inherent powers, including the ability to fashion appropriate sanctions for misconduct, yet there are limits on this authority.  Established jurisprudence informs courts and practitioners alike that fees imposed as a sanction are designed to compensate an aggrieved party, not to punish a litigant for misconduct, and a court can shift only those fees which were incurred because of the misconduct.  In exceptional cases, however, the appropriate test could produce an award for all of the aggrieved party’s fees.

Although the Supreme Court recognized that a full award may be appropriate in certain exceptional cases, it took issue with the test employed by the district court and embraced by the circuit court majority.  The Supreme Court emphasized that the need for a causal link between the misconduct and fees is not extinguished merely because the misconduct rose to a “truly egregious level,” as the district court had ruled.   Instead, a full award was appropriate in certain cases where it had been shown that the fees were incurred “solely” because of the misconduct or where the case would have settled at a specific time, but for the misconduct.  In other words, the complaining party may recover only the portion of fees that the party would not have paid, but for the misconduct.

Following this rationale, where the misconduct reaches to a level that all legal expenses were caused “solely” by the misconduct or every cost incurred is attributable only to the sanctioned behavior, the court may impose what appears to be a blanket award.  The Court gave several examples, including where a plaintiff initiates suit in complete bad faith, where a defendant’s entire course of conduct is unethical and part of a sordid scheme to defeat a valid claim, or where a party fails to disclose evidence fatal to its position, i.e., in exceptional cases where none of the fees would have been incurred but for the misconduct.  And this was no such case.

Notably, the Supreme Court agreed with Ninth Circuit Judge Watford’s dissent and distinguished this case from those cases where it was clear settlement would have occurred at a specific time because, here, colorable defenses would have remained, despite disclosure.  The Court also rejected the temporal notion that it was appropriate to affirm a grant of all fees incurred “during the time when [Goodyear was] acting in bad faith,” as the Ninth Circuit had held, explaining that the focus of the measure was on the resulting fees, not merely when the misconduct occurred.

The Court further scrutinized the district court’s “contingent” award, noting that even after conducting a causal analysis, the district court found that $700,000 of the incurred fees had nothing to do with Goodyear’s misconduct and the Haegers would have incurred those fees whether Goodyear had acted in bad faith or not.  The Court declined to determine whether the “contingent” award was appropriate without the benefit of knowing whether the district court has applied the appropriate “but for” test.  The Court also declined to address whether Goodyear waived argument on this point, since waiver had not been raised in the circuit court.

Accordingly, the Supreme Court concluded that because the district court failed to award an amount calculated under the correct legal standard, the case must be remanded for a determination of an award under the appropriate legal standard.

The full extent of this decision remains to be seen, yet it provides some clarity on the scope and limitations of a court’s inherent authority to impose fees by explaining the award must be causally linked to the misconduct and is subject to a “but for” test.

Footnotes

1. For example, each sanction power applies to a specific type of misconduct.  Rule 11 presents perhaps the most limited source for sanctions and the most frequently misapplied; it was designed as a deterrent for improper pleadings, motions, and other documents or other misrepresentations to the court and has a built-in safe harbor provision.  Many litigants, however, treat Rule 11 as a catch-all.  Rules 26(g), 30(d), and 37 govern discovery violations, but are also quite limited in their scope.  Rule 26(g) is limited to abuses which stem from initial and pretrial disclosures or formal written discovery.  On the other hand, Rules 30(d) and 37 specifically govern sanctions for discovery violations.  Rule 30(d) addresses sanctionable conduct during oral deposition, whereas Rule 37 permits sanctions for violations that occur during disclosure or for the failure to cooperate during discovery.  Finally, 28 U.S.C. § 1927 permits imposition of sanctions against a lawyer, but not a litigant, who engages in dilatory litigation tactics.

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