A Federal Court’s Award of Attorneys’ Fees As a Sanction for Bad-Faith Conduct Cannot be Punitive

June 07, 2017

Most practitioners are familiar with the federal sanction powers as codified in the Federal Rules of Civil Procedure (i.e., Rules 11, 26, 30 and 37). However, all federal courts also possess inherent sanction power that is conceivably broader than those articulated under the various Rules.  And, notwithstanding that this is an ESI blog, the Court’s inherent sanction powers are not limited to issues involving electronic discovery.

On April 18, 2017, the Supreme Court of the United States (“SCOTUS”) provided guidance on the breadth of a federal court’s inherent authority to sanction a litigant for bad faith misconduct. Specifically, SCOTUS held in Goodyear Tire & Rubber Co. v. Haeger (137 S. Ct. 1178 (Apr. 18, 2017)), that when a federal court exercises its inherent authority to sanction bad-faith conduct by ordering a litigant to pay the other side’s legal fees, the award cannot be punitive but rather, must be limited to the fees the innocent party incurred solely because of the misconduct.

Relevant Background

In 2003, Leroy, Donna, Barry, and Suzanne Haeger (“Haegers”) were injured when one of the tires on their motorhome failed while they were driving on the highway.  This failure caused the motorhome to overturn. The tire was manufactured by The Goodyear Tire & Rubber Company (“Goodyear”). In 2005, the Haegers sued Goodyear, alleging various actions sounding in product liability. Specifically, the Haegers 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. After a protracted discovery period replete with disputes, due in part to Goodyear’s slow response to repeated requests for internal tire testing on the G 159 model, the parties reached a settlement prior to trial.

Over a year later, the Haegers’ attorney learned of relevant information – not previously disclosed during discovery – that was damaging to Goodyear’s defense.  Specifically counsel learned 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 specific speeds.  The Haegers’ attorney filed with the District Court a motion seeking discovery sanctions arguing that Goodyear committed discovery fraud by knowingly concealing crucial testing information. Goodyear opposed the motion and argued that it never represented that it had provided to the Haegers all of the records reflecting testing conducted on the tire at issue.

The District Court granted the Haergers’ motion, finding that Goodyear’s conduct rose to an “egregious level.” However, because the case had settled, the District Court determined it was not able to impose sanctions, and so, opted, instead, to award the Haegers’ attorney’s fees. In so doing, the District Court recognized that fees must be causally connected to the misconduct, but abandoned that standard, and awarded instead all fees in the case (approximately $2.7million) because the misconduct occurred early on and rose to a “truly egregious level.” * Goodyear appealed arguing that the District Court could not impose such sanctions without the additional procedural protections required for the imposition of punitive sanctions.

On appeal, a divided U.S. Court of Appeals for the Ninth Circuit held that the District Court did not abuse its discretion and affirmed the award finding the District Court’s inherent sanction authority permitted the Court to aware the amount it reasonably deemed the innocent party suffered “during the time” Goodyear acted in bad faith.  Goodyear petitioned the Supreme Court for certiorari review.

The Supreme Court, relying entirely on established precedent, reversed the Ninth Circuit and remanded the case to the District Court. Specifically, SCOTUS found that any imposition of sanctions must be compensatory, and not punitive in nature. While the Court acknowledged Goodyear’s misconduct and the importance of a District Court’s discretion, SCOTUS upheld the established standard that the imposed sanction for bad-faith conduct must be limited to compensate for the misconduct with a documented causal standard, and nothing more. SCOTUS reasoned that a sanction is only compensatory if it is calibrated to the damages caused by the bad-faith acts on which it is based, and a causal link between the bad-acts and the legal fees paid by the bad actor is necessary.**  Because, here, the District Court went beyond established precedent, SCOTUS reversed and remanded to the District Court for review based on the but-for test.

*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.

**The Court also reviewed 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 were fees the Haegers would have incurred irrespective of whether Goodyear 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.