USSC Outlines Inherent Authority Sanctions Test for Bad Faith Conduct

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Summary: The Haeger family sued Goodyear alleging the failure of a Goodyear tire caused the family’s motor home to leave the road and flip over. After the case was settled and dismissed, the Haegers’ lawyers learned that Goodyear had withheld testing data. The Haegers then sought attorney’s fees and costs as sanctions for the discovery fraud. The District Court awarded $2.7M after finding it had inherent authority to sanction the bad faith litigation conduct, that Goodyear’s conduct was truly egregious, but also made a contingent award of $2 million in case a causal link was required between the misconduct and the sanctions awarded. The Ninth Circuit affirmed the full $2.7 million award without addressing the contingent award. The United States Supreme Court reversed and remanded for the Ninth Circuit to determine whether the District Court applied a but-for causation test.

Goodyear Tire & Rubber Co. v. Haeger

The Haeger family sued Goodyear contending that the tire on its motor home would over heat at highway speeds. After several years of contentious discovery, a confidential settlement was entered on the eve of trial. After learning that Goodyear had disclosed certain test results in another lawsuit never disclosed in the Haeger case, Goodyear conceded withholding the information. Thereafter, the Haegers sought sanctions for discovery fraud. The District Court agreed there had been discovery fraud and made an award “in the exercise of its inherent power to sanction litigation misconduct.” The District Court found both Federal Rule of Civil Procedure 11 and 28 USC §1927 inapplicable. Goodyear did not contest the appropriateness of sanctions.

The District Court calculated the legal fees and costs awardable at $2.7 million, the amount incurred by the Haegers from the time (early in the litigation) “Goodyear made its first dishonest discovery response.” The District Court also found that in a usual case “sanctions under a [c]ourt’s inherent power must be limited to the amount [of legal fees] caused by the misconduct.” But in this case, the District Court found “the sanctionable conduct r[ose] to a truly egregious level.” For that reason, the District Court concluded “all of the attorneys’ fees incurred in the case [can] be awarded,” without any need to find a “causal link between [those expenses and] the sanctionable conduct.” However, in case the law required a “linkage between [Goodyear’s] misconduct and [the Haegers’] harm is required,”  the Court found the award would be limited to $2 million, a reduction based “on estimates Goodyear offered” as amounts incurred in “developing claims against other defendants and proving their own medical damages.”

A divided Ninth Circuit affirmed the award of the $2.7 million. The majority found that the District Court “did not abuse it discretion” when it awarded “the Haegers’ all their attorneys’ fees and costs” after Goodyear “began flouting [its] discovery obligations.” However, the dissenting judge found the law required “a causal link between Goodyear’s misconduct and the fees awarded.” The dissenting judge would have awarded fees only “sustained as a result of Goodyear’s misconduct.”

A unanimous United States Supreme Court noted that other circuits “have insisted on limiting sanctions like this one to fees or costs that are causally related to a litigant’s misconduct.” Earlier United States Supreme Court rulings distinguished between coercive sanctions, (designed to make a party comply with a court order), and civil procedure abuse sanctions (designed to reimburse a party for its legal fees and costs incurred as a result of the opponent’s bad faith conduct). Sanctions imposed to reimburse a party for abuse of civil procedures is one which is to redress the wrong rather than to punish the sanctioned party for its misbehavior. (Citing Mineworkers v. Bagwell, 512 U.S. 821, 826-830 (1994)). Before punitive sanctions may be imposed, “procedural guarantees applicable in criminal cases” must be in place. Because there were no criminal due process protections in place in this case, “pretty much by definition” the District Court was only allowed to shift “those attorneys’ fees incurred because of the misconduct at issue. Recognizing those standards, a sanction could be “compensatory only if it is ‘calibrate[d] to [the] damages caused by the bad faith acts on which it is based.” If an award goes beyond those fees incurred but-for the conduct, “then it crosses the boundary from compensation to punishment.” For that reason, a court exercising its inherent sanctioning authority within the rules of civil procedures must ensure that a causal link has been established “between the litigant’s misbehavior and legal fees paid by the opposing party.” Justice Kagan noted that Federal Rules 37 and 11 and 28 USC §1927 similarly require findings of “such a causal connection before shifting fees.” Justice Kagan stated that the goal under such fee shifting schemes is “to do rough justice, not to achieve auditing perfection.” A District Court finding all or a percentage of a particular category of expenses “where incurred solely because of a litigant’s bad faith conduct” satisfies the required but-for test. Justice Kagan suggested there are “exceptional cases” where the but-for standard “permits a trial court to shift all of a party’s fees, from either the start or some mid-point of a suit.”

Because Goodyear seemingly agreed that at least $2 million in legal fees and expenses had been incurred due to Goodyear’s bad faith conduct, the Haegers argued Goodyear had waived any opposition to the contingent $2 million award. However, the Ninth Circuit had not addressed that issue. On remand the Ninth Circuit was required to consider the waiver issue. If the Ninth Circuit found a waiver, that was “the end of the case. If not, the District Court must reassess fees in line with a but-for causation requirement.”

Insurers, claimants, and their attorneys need to be aware of the Haeger case, the possible imposition of sanctions under a court’s inherent authority, and the test announced for a federal court’s imposition of such sanctions. Quite often in bad faith litigation, one party argues the other engaged in discovery fraud or other bad faith litigation conduct by the way it is prosecuting or defending the case. Haeger provides important guidance for responding to such conduct, even after the case has been dismissed with prejudice.

By Anthony L. Martin

Martin, A

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