Discovery Sanctions Imposed in Securities Fraud Class Action After Parties Entered into Class Action Settlement and Informed District Court that Sanctions should not be Imposed must be Vacated because Parties may “Bargain Away the Right to Receive Compensatory Sanctions” Fifth Circuit Holds
Various individual and class action lawsuits alleging were filed against former outside directors of Enron following its collapse; some of those individual and class actions, alleging securities fraud violations, were consolidated in the Southern District of Texas. Fleming & Associates v. Newby & Tittle., 529 F.3d 631, 635 (5th Cir. 2008). The coordinated, consolidated class action plaintiffs were represented by Fleming & Associates L.L.P. Id. During the course of the litigation, a discovery battle emerged concerning one of plaintiffs’ expert witnesses, Curtis Verschoor, who had prepared a 165-page report that plaintiffs filed timely pursuant to the court’s discovery order; the report, however, was amended the day before the expert’s deposition raising objections both as to its timeliness and plaintiffs’ failure to post notice of the new report. Id., Verschoor’s deposition testimony concerning the report, whether it had been amended, who made the amendments and the nature of the amendments proved to be inconsistent with the document itself. Id., at 635-36. Ultimately, the court sanctioned plaintiffs’ counsel but denied a defense request to exclude the expert’s testimony because it concluded that the changes to the report were not material, id., at 636. Plaintiffs’ counsel sought reconsideration of the order and opposed defendants’ fee request, but the parties settled the litigation before the sanctions issue had been resolved. Id. Defendants notified the court that they were no longer entitled to sanctions against plaintiffs’ counsel because of the class action settlement reached by the parties, id., at 636 n.1. Nonetheless, the court considered the application and awarded defendants $15,000 in attorney fees and costs, id. On appeal, the Fifth Circuit affirmed the initial order awarding sanctions, but vacated the order requiring plaintiffs’ counsel to pay $15,000 on the ground that the class action settlement rendered the application moot.
While plaintiffs raised two arguments on appeal, the Fifth Circuit considered only the claim that sanctions were moot because the class action settlement “stripped the district court of jurisdiction to impose compensatory sanctions, requiring mandatory vacatur.” Fleming, at 637. Plaintiffs argued that the sanctions order was not final and appealable because the magistrate had not yet determined the amount of sanctions, id. The Fifth Circuit recognized that, under its opinion in Williams v. Ezell, 531 F.2d 1261 (5th Cir.1976), a court order granting a party attorney fees is not a final order if the court defers the question of the amount of the fees. Id. As the Circuit Court explained at page 637, “ If the instant case was moot before the district court’s final judgment on the sanctions order, that final order is subject to mandatory vacatur.” (Citation omitted.) On the other hand, the Fifth Circuit recognized that a district court has the power to imposed sanctions “designed to enforce its own rules, even after that court no longer has jurisdiction over the substance of a case,” because the purpose of such an award is not to reimburse a party for its fees or costs but, rather, “‘to punish a party who has already violated the court’s rules.’” Id., at 637-38 (citation omitted).
The Circuit Court explained that there were two aspects of the district court’s order that were subject to review: (1) whether plaintiffs’ lawyer engaged in sanctionable conduct, and (2) if so, whether plaintiffs’ lawyer should be compelled to pay defendants. Fleming, at 639. With respect to the latter issue, the Court found a fundamental difference between sanctions payable to the court, and sanctions intended to reimburse a party for its attorney fees, because “[the] parties should be able to bargain away the right to receive compensatory sanctions.” Id. (citation omitted). Because the sanctions awarded by the magistrate judge were payable to defendants to reimburse attorney fees, the Fifth Circuit held that they were subject to mandatory vacatur. Id., at 640. It refused, however, to set aside the court’s order in its entirety because it agreed that the conduct of plaintiffs’ lawyer was sanctionable, see id., at 641-42, and this finding pre-dated the settlement of the class action, id., at 640. The Fifth Circuit held, “It is clear that the sanctions issue could not have become moot before the settlement. Therefore the district court had jurisdiction on September 14 to issue the sanctions order, and mandatory vacatur does not apply.” Id. The Circuit Court explained at page 641, “Our holding preserves the right of parties to bargain away sanctions designed to compensate the parties themselves, such as the attorneys’ fee award in this case. On the other hand, we recognize that district courts retain the ability to police their own rules through various punitive sanctions mechanisms, including issuing written opinions that describe attorney misconduct. Such admonitions play an important role in discouraging bad behavior by litigators, and where a district court has reviewed a case of misconduct and issued a well reasoned sanctions order, we should not allow a subsequent settlement to erase that language.” Accordingly, it affirmed the order finding the conduct to be sanctionable, but vacated the order imposing sanctions. Id., at 642.