6th Circuit/ Sanctions vs. law firms over meritless suits

The 6th Circuit Court of Appeals has ruled that, under federal law, courts may not impose sanctions on law firms -- as opposed to individual lawyers -- for knowingly pursuing meritless lawsuits. (See Law.com article )

The Court recounted, "In 2005, we affirmed a grant of partial summary judgment for Lexmark International ("Lexmark") in a suit brought by Lexmarks one-time partners, BDT Products and Buro-Datentechnik GMBH & Company KG (hereinafter collectively "BDT"), arising from the contention that Lexmark had misappropriated trade secrets in developing a printer tray that substantially resembled a tray developed by BDT. Following our ruling, the district court granted Lexmark's motion for attorney fees and imposed sanctions to the extent of those fees (more than five million dollars) on BDT, Higgs, and Meisenheimer under Kentucky Revised Statute § 365.886, 28 U.S.C. § 1927, and its inherent powers." Meisenheimer in this case appealed the imposition of those sanctions, arguing that courts may not impose sanctions under § 1927 on law firms (as opposed to individual attorneys), and that, regardless, BDT’s suit was not necessarily meritless and Lexmark has not demonstrated that Meisenheimer (as opposed to BDT or Higgs) acted in bad faith or with improper purpose."

In its reasoning last Wednesday, the Court first addressed the statutory provisions, saying, "Whether this language prohibits the sanctioning of law firms is an issue of law that the court reviews de novo. Claiborne v. Wisdom, 414 F.3d 715,722 (7th Cir. 2005). While we have never directly ruled on this question, after the district court issued its order requiring Meisenheimer to pay sanctions in this case, a Sixth Circuit panel stated in dicta that '§ 1927 does not authorize the imposition of sanctions on a represented party, nor does it authorize the imposition of sanctions on a law firm." Rentz v. Dynasty Apparel Indus., Inc., 556 F.3d 389, 396 n.6 (6th Cir. 2009)(imposing sanctions against attorneys in their individual capacities solely under Fed. R.Civ. P. 11 rather than under § 1927) (citing Claiborne, 414 F.3d at 722-24)… The Rentz court, while offering no analysis itself, cited to Claiborne, 414 F.3d 715, in which the Seventh Circuit collected cases and issued a well-reasoned explanation of why, under § 1927, judges may not appropriately sanction law firms."

"As this case demonstrates," the Court said with respect to the second portions, "there is some confusion regarding what behavior constitutes improper purpose, bad faith or conduct tantamount to bad faith. In particular, it is not entirely clear from our case law whether the simple fact that a party pursued a clearly frivolous and meritless lawsuit constitutes conduct that is 'tantamount to bad faith' sufficient for the imposition of sanctions…"

"For a court to impose sanctions under its inherent powers, it is not necessary that the court find that an action was meritless as of filing, or even shortly thereafter. It can become apparent part-way through a suit that an action that initially appeared to have merit is in fact meritless; parties and attorneys have a responsibility to halt litigation whenever they realize that they are pursuing a meritless suit. As in this case, moreover, a party or firm might enter an action long after the filing of the initial complaint, but may still be sanctionable under a court’s inherent powers if it acts in bad faith. The ‘something more’ that a court must find to meet the third prong of the Big Yank test may similarly occur at any stage of the proceedings. A court imposing sanctions under its inherent powers may consider the nature and timing of the actions that led to a finding of bad faith in determining whether to impose sanctions on conduct from that point forward, or instead to infer that the party’s bad faith extended back in time, perhaps even prior to the filing of the action."

"The Big Yank requirement (Big Yank Corp. v. Liberty Mut. Fire Ins. Co., 125 F.3d 308, 313 (6th Cir. 1997) that a court find that a party have an improper purpose in filing a suit resembles the Supreme Court’s general requirement that a court find bad faith or conduct tantamount to bad faith. Put another way, satisfying the overarching bad faith requirement mandated by the Supreme Court before imposition of sanctions under a court's inherent powers often automatically satisfies the improper purpose prong of the Big Yank test. See First Bank of Marietta v. Hartford Underwriters Ins. Co., 307 F.3d 501 at 519 n.15 ("This Court has likewise used 'improper purpose' and 'bad faith' interchangeably.")"