U.S. Supreme Court Speaks on Discovery Sanctions

The discovery phase, which lasted several years, was contentious and required the district judge to referee some of the acrimonious disputes. The plaintiffs repeatedly asked Goodyear to turn over the internal test results for the G159 tires, but responses were “both slow in coming and unrevealing in content.” The case settled for an undisclosed sum on the eve of trial.

Months later, the Haegers' lawyer learned from a newspaper article that, in another lawsuit involving the G159, Goodyear had disclosed a set of test results that he had never seen. That data indicated that the G159 got unusually hot at speeds of between 55 and 65 miles per hour. In ensuing correspondence, Goodyear conceded withholding the information. The plaintiffs then sought sanctions for discovery fraud, claiming that defendant “knowingly concealed crucial 'internal heat test' records related to the [G159's] defective design.” Plaintiffs argued they were entitled to attorney fees and costs expended in the litigation.

The district court agreed to make such an award in the exercise of its “inherent power” to sanction litigation misconduct, which the court found to be a “years-long course of bad-faith behavior.” By withholding the tests, said the judge, the company and its lawyers had made “repeated and deliberate attempts to frustrate the resolution of this case on the merits.” Since the case had settled, however, entering a default judgment was not feasible. So it ordered Goodyear to reimburse the Haegers for their attorney fees, and costs paid during the suit. That amounted to $2.7 million from the time the defendant made its first dishonest discovery response.

Because the misconduct rose to a “truly egregious level,” the court concluded that all of the fees and costs could be awarded without any need to find a causal link between the sanctionable conduct and those expenses. Further, the district court reasoned that full and timely disclosure of the test results likely would have made the case settle much earlier. Nevertheless, “perhaps sensing thin ice,” as Justice Kagan put it, the trial judge also made a “contingent award” in the event the U.S. Court of Appeals for the Ninth Circuit rejected the preferred award. The contingent award of $2 million deducted $700,000, which was based on estimates Goodyear offered as representing fees the plaintiffs incurred in developing claims against the other defendants and proving their own medical damages. The Ninth Circuit, with one judge dissenting, affirmed the full $2.7 million award.

Practical Consequences

The Supreme Court rejected the “all fees and expenses” approach. 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 is limited to the fees the innocent party incurred solely because of the misconduct. Or, put another way, the award is limited to the fees that the innocent party would not have incurred but for the bad faith. Sanctions based on the court's inherent power to curb abuses of the judicial process must be compensatory rather than punitive. The sanction is compensatory only if it is “calibrate[d] to [the] damages caused by” the bad faith acts on which it is based. The court must establish a causal link between the litigant's misbehavior and legal fees paid by the opposing party.

Such a standard generally demands that the district court assess and allocate specific litigation expenses — yet still allows it to exercise discretion and judgment. There may, however, be “exceptional cases” where shifting all the fees could allow the court to avoid segregating individual expense items as, for example, where the entire course of conduct throughout is part of a sordid scheme to defeat a valid claim. Or, the same would be true if a plaintiff initiates a case in complete bad faith so that every cost of defense is attributable only to sanctioned behavior.

In the Goodyear case, however, the blanket award was not justified. It was unclear that Goodyear would have settled had the test results been produced. Indeed, Goodyear had gone to trial in such a case elsewhere despite disclosure of the test records. Plus, it had a colorable defense that a tire used over 40,000 miles had struck road debris, causing the failure. Thus, the $2.7 million award was rejected and the matter remanded for a causation analysis.

Before litigants and their lawyers break out the champagne to celebrate the Supreme Court's standard of more limited discovery sanctions, consider some practical consequences of the Goodyear decision. First, the nation's highest court has famously put on the map the notion that discovery sanctions in the form of awards of attorney fees and costs is not only permissible, it has salutary objectives, to curb abuses of the judicial process. Thus, although courts should not be excessive with use of blanket awards, it's okay to order the other side's attorney fees to be paid. Trial courts surely knew before Goodyear that they had inherent authority to do that. Now, however, they have a seal of approval from on high. Don't you think that a percentage of lawyers will be encouraged to play aggressive discovery “gotcha” games, especially in electronic discovery where delays and disclosure complexities abound?

Second, Goodyear seems to confirm that discovery-fraud or bad-faith misconduct claims can be pursued after a settlement. The concept of a settlement is for the litigants to buy their peace, to close the unpleasant chapter and go forward. But Goodyear perhaps suggests that the end of a case may not really be the end. Weeks, months, maybe years later, a news article or another litigation may suggest that there had been some form of misconduct in the settled case. There may now be powerful incentives to go back to the litigation well for more. If revival of litigation that ended by settlement is feasible, don't think it is only deep-pocket defendants that could be targets. Plaintiffs can be vulnerable as well, perhaps more so, since defendant companies have ready access to investigators and lawyers who can run down post-hoc rumors that a plaintiff's bad-faith misconduct led to increased attorney fees and litigation expense. Is this a powder keg of rump litigation awaiting the proverbial fuse to be lit?

Third, we already have indications that in this era of e-discovery, courts are getting restive about disclosure misconduct and, increasingly, are willing to award sanctions. Thus, in his fine New York Law Journal “Outside Counsel” column, “Federal Discovery Sanctions Are Real and Prevalent” (NYLJ, March 28, 2017), commercial litigator James G. Ryan observes that, within the last two years, approximately 130 Rule 37 motions for sanctions have been granted in the U.S. Court of Appeals for the Second Circuit. This number, he says, “vividly illustrates that the potential for a sanctions order in a New York federal court is very real.” Out of the 130 sanctions orders imposed, nearly 60 resulted in an order of dismissal. Ryan goes on to illustrate by discussing several cases in which most of the sanctions were levied upon plaintiffs. While Ryan writes about Rule 37 sanctions, it is a short hop, skip and a jump to get to a court's “inherent power” sanctions.

In their recent New York Law Journal article, “Courts Warn of Sanctions for Future FRCP 34 Violations” (NYLJ, April 3, 2017), litigation specialists H. Christopher Boehning and Daniel J. Toal advise that courts are getting fed up with boilerplate responses and objections to e-discovery demands, despite Federal Rules amendments intended to curb such practices. They illustrate the point with discussion of two “fiery decisions” promising sanctions for any future discovery response that fails to comply with the amended rules.

Thus, Magistrate Judge Andrew Peck of the Southern District of New York issued a “discovery wake-up call” to litigators in Fischer v. Forrest, 2017 WL 773694 (S.D.N.Y. Feb. 28, 2017), criticizing boilerplate “general objections” incorporated by reference into all responses. Judge Peck admonished: “From now on in cases before this Court, any discovery response that does not comply … will be deemed a waiver of all objections (except as to privilege).”

The authors also discuss the decision by Iowa District Judge Mark Bennett in Liguria Foods v. Griffith Labs, 2017 WL 976626 (N.D. Iowa March 13, 2017), urging his judicial colleagues to start issuing increasingly harsh sanctions to combat the “boilerplate culture.” While declining to impose sanctions in the case, Judge Bennett closed by stating in all capital letters: “No more warnings. In the future, using 'boilerplate' objections to discovery in any case before me places counsel and their clients at risk for substantial sanctions.”

Conclusion

Although the Supreme Court's decision in Goodyear mandates that a court's award of monetary discovery sanctions must be causally proportional to the misbehavior, it also may stimulate a rush by some litigators to assert so-called “discovery tort” claims, even after settlements are believed to have ended the litigation. Further, some practitioners may be encouraged to play “gotcha” during e-discovery hoping to catch the opposing litigant committing some discovery error. Recent judicial developments suggest that some courts are indeed more disposed to order sanctions.

*****
Michael Hoenig is a member of Herzfeld & Rubin. This article also appeared in the New York Law Journal, an ALM silbing publication of this newsletter.

It is rare for a discovery sanction case to reach the nation's highest court. But on April 18, the U.S. Supreme Court issued its decision in Goodyear Tire & Rubber Co. v. Haeger, 2017 U.S. LEXIS 2613 (April 18, 2017), reversing a $2.7 million sanctions award that had been rendered by an Arizona district court and affirmed by a divided Ninth Circuit panel. The Supreme Court opinion by Justice Elena Kagan was joined by all the Justices (except for Justice Neil Gorsuch, who took no part in the decision).

Background

The case started out as a product liability case filed by the Haegers against Goodyear and two other defendants after their motorhome swerved off the road and flipped over. One other defendant settled and one was dismissed, leaving Goodyear the sole defendant. The plaintiffs claimed that a G159 tire on the vehicle failed, causing the mishap. They theorized that the tire was not designed to withstand the level of heat it generated on a motorhome driven at highway speeds. Goodyear, on the other hand, posited that the tire had endured more than 40,000 miles of wear and tear and failed because it struck road debris.

The discovery phase, which lasted several years, was contentious and required the district judge to referee some of the acrimonious disputes. The plaintiffs repeatedly asked Goodyear to turn over the internal test results for the G159 tires, but responses were “both slow in coming and unrevealing in content.” The case settled for an undisclosed sum on the eve of trial.

Months later, the Haegers' lawyer learned from a newspaper article that, in another lawsuit involving the G159, Goodyear had disclosed a set of test results that he had never seen. That data indicated that the G159 got unusually hot at speeds of between 55 and 65 miles per hour. In ensuing correspondence, Goodyear conceded withholding the information. The plaintiffs then sought sanctions for discovery fraud, claiming that defendant “knowingly concealed crucial 'internal heat test' records related to the [G159's] defective design.” Plaintiffs argued they were entitled to attorney fees and costs expended in the litigation.

The district court agreed to make such an award in the exercise of its “inherent power” to sanction litigation misconduct, which the court found to be a “years-long course of bad-faith behavior.” By withholding the tests, said the judge, the company and its lawyers had made “repeated and deliberate attempts to frustrate the resolution of this case on the merits.” Since the case had settled, however, entering a default judgment was not feasible. So it ordered Goodyear to reimburse the Haegers for their attorney fees, and costs paid during the suit. That amounted to $2.7 million from the time the defendant made its first dishonest discovery response.

Because the misconduct rose to a “truly egregious level,” the court concluded that all of the fees and costs could be awarded without any need to find a causal link between the sanctionable conduct and those expenses. Further, the district court reasoned that full and timely disclosure of the test results likely would have made the case settle much earlier. Nevertheless, “perhaps sensing thin ice,” as Justice Kagan put it, the trial judge also made a “contingent award” in the event the U.S. Court of Appeals for the Ninth Circuit rejected the preferred award. The contingent award of $2 million deducted $700,000, which was based on estimates Goodyear offered as representing fees the plaintiffs incurred in developing claims against the other defendants and proving their own medical damages. The Ninth Circuit, with one judge dissenting, affirmed the full $2.7 million award.

Practical Consequences

The Supreme Court rejected the “all fees and expenses” approach. 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 is limited to the fees the innocent party incurred solely because of the misconduct. Or, put another way, the award is limited to the fees that the innocent party would not have incurred but for the bad faith. Sanctions based on the court's inherent power to curb abuses of the judicial process must be compensatory rather than punitive. The sanction is compensatory only if it is “calibrate[d] to [the] damages caused by” the bad faith acts on which it is based. The court must establish a causal link between the litigant's misbehavior and legal fees paid by the opposing party.

Such a standard generally demands that the district court assess and allocate specific litigation expenses — yet still allows it to exercise discretion and judgment. There may, however, be “exceptional cases” where shifting all the fees could allow the court to avoid segregating individual expense items as, for example, where the entire course of conduct throughout is part of a sordid scheme to defeat a valid claim. Or, the same would be true if a plaintiff initiates a case in complete bad faith so that every cost of defense is attributable only to sanctioned behavior.

In the Goodyear case, however, the blanket award was not justified. It was unclear that Goodyear would have settled had the test results been produced. Indeed, Goodyear had gone to trial in such a case elsewhere despite disclosure of the test records. Plus, it had a colorable defense that a tire used over 40,000 miles had struck road debris, causing the failure. Thus, the $2.7 million award was rejected and the matter remanded for a causation analysis.

Before litigants and their lawyers break out the champagne to celebrate the Supreme Court's standard of more limited discovery sanctions, consider some practical consequences of the Goodyear decision. First, the nation's highest court has famously put on the map the notion that discovery sanctions in the form of awards of attorney fees and costs is not only permissible, it has salutary objectives, to curb abuses of the judicial process. Thus, although courts should not be excessive with use of blanket awards, it's okay to order the other side's attorney fees to be paid. Trial courts surely knew before Goodyear that they had inherent authority to do that. Now, however, they have a seal of approval from on high. Don't you think that a percentage of lawyers will be encouraged to play aggressive discovery “gotcha” games, especially in electronic discovery where delays and disclosure complexities abound?

Second, Goodyear seems to confirm that discovery-fraud or bad-faith misconduct claims can be pursued after a settlement. The concept of a settlement is for the litigants to buy their peace, to close the unpleasant chapter and go forward. But Goodyear perhaps suggests that the end of a case may not really be the end. Weeks, months, maybe years later, a news article or another litigation may suggest that there had been some form of misconduct in the settled case. There may now be powerful incentives to go back to the litigation well for more. If revival of litigation that ended by settlement is feasible, don't think it is only deep-pocket defendants that could be targets. Plaintiffs can be vulnerable as well, perhaps more so, since defendant companies have ready access to investigators and lawyers who can run down post-hoc rumors that a plaintiff's bad-faith misconduct led to increased attorney fees and litigation expense. Is this a powder keg of rump litigation awaiting the proverbial fuse to be lit?

Third, we already have indications that in this era of e-discovery, courts are getting restive about disclosure misconduct and, increasingly, are willing to award sanctions. Thus, in his fine New York Law Journal “Outside Counsel” column, “Federal Discovery Sanctions Are Real and Prevalent” (NYLJ, March 28, 2017), commercial litigator James G. Ryan observes that, within the last two years, approximately 130 Rule 37 motions for sanctions have been granted in the U.S. Court of Appeals for the Second Circuit. This number, he says, “vividly illustrates that the potential for a sanctions order in a New York federal court is very real.” Out of the 130 sanctions orders imposed, nearly 60 resulted in an order of dismissal. Ryan goes on to illustrate by discussing several cases in which most of the sanctions were levied upon plaintiffs. While Ryan writes about Rule 37 sanctions, it is a short hop, skip and a jump to get to a court's “inherent power” sanctions.

In their recent New York Law Journal article, “Courts Warn of Sanctions for Future FRCP 34 Violations” (NYLJ, April 3, 2017), litigation specialists H. Christopher Boehning and Daniel J. Toal advise that courts are getting fed up with boilerplate responses and objections to e-discovery demands, despite Federal Rules amendments intended to curb such practices. They illustrate the point with discussion of two “fiery decisions” promising sanctions for any future discovery response that fails to comply with the amended rules.

Thus, Magistrate Judge Andrew Peck of the Southern District of New York issued a “discovery wake-up call” to litigators in Fischer v. Forrest, 2017 WL 773694 (S.D.N.Y. Feb. 28, 2017), criticizing boilerplate “general objections” incorporated by reference into all responses. Judge Peck admonished: “From now on in cases before this Court, any discovery response that does not comply … will be deemed a waiver of all objections (except as to privilege).”

The authors also discuss the decision by Iowa District Judge Mark Bennett in Liguria Foods v. Griffith Labs, 2017 WL 976626 (N.D. Iowa March 13, 2017), urging his judicial colleagues to start issuing increasingly harsh sanctions to combat the “boilerplate culture.” While declining to impose sanctions in the case, Judge Bennett closed by stating in all capital letters: “No more warnings. In the future, using 'boilerplate' objections to discovery in any case before me places counsel and their clients at risk for substantial sanctions.”

Conclusion

Although the Supreme Court's decision in Goodyear mandates that a court's award of monetary discovery sanctions must be causally proportional to the misbehavior, it also may stimulate a rush by some litigators to assert so-called “discovery tort” claims, even after settlements are believed to have ended the litigation. Further, some practitioners may be encouraged to play “gotcha” during e-discovery hoping to catch the opposing litigant committing some discovery error. Recent judicial developments suggest that some courts are indeed more disposed to order sanctions.

*****
Michael Hoenig is a member of Herzfeld & Rubin. This article also appeared in the New York Law Journal, an ALM silbing publication of this newsletter.