In Re Pennie & Edmonds LLP

323 F.3d 86, 66 U.S.P.Q. 2d (BNA) 1101, 55 Fed. R. Serv. 3d 205, 2003 U.S. App. LEXIS 4529, 2003 WL 1191197

• Court: Court of Appeals for the Second Circuit
• Decided: March 14, 2003
• Docket: 02-7177
• Status: Published

Opinions

Judge UNDERHILL dissents with a separate opinion.

JON 0. NEWMAN, Circuit Judge.

This appeal presents a narrow issue concerning the applicable mens rea standard when a trial judge, sua sponte, initiates a post-trial Rule 11 sanction proceeding because a lawyer permitted a client to submit a false affidavit at an earlier stage of the litigation. The specific issue is whether the lawyer’s liability for the sanction requires a mental state of bad faith or only objective unreasonableness in circumstances where the lawyer has no opportunity to withdraw or correct the challenged submission. Pennie & Edmonds LLP (“P & E”) appeals from the January 17, 2002, order of the District Court for the Southern District of New York (John S. Martin, District Judge) ruling that the law firm violated Rule 11(b)(3) of the Federal Rules of Civil Procedure. We conclude that where, as here, a sua sponte Rule 11 sanction denies a lawyer the opportunity to withdraw the challenged document pursuant to the “safe harbor” provision of Rule 11(c)(1)(A), the appropriate standard is subjective bad faith. In this case, the District Court accepted the firm’s assertion that it acted in subjective good faith. We therefore vacate the sanction ruling.

Background

The sanction proceeding had its origin in trademark litigation concerning the marketing of pasta sauce. A detailed account of that litigation is set forth in Patsy’s Brand, Inc. v. I.O.B. Realty, Inc., 317 F.3d 209 (2d Cir.2003). For purposes of this appeal, we recount only the following circumstances. One issue in the trademark litigation was the date when the Defendants had begun using allegedly infringing labels on their product. They initially contended that their labels were first used in 1993, before the Plaintiff started marketing its product. At an early stage of the litigation, before P & E had entered its appearance, the Defendants presented two documents in support of the 1993 usage: what purported to be an example of the allegedly infringing label and what purported to be an invoice from a printer showing that this label had been printed in 1993. The probative value of these documents was destroyed by evidence that a bar code on the label did not exist until at least 1998 and the area code for a phone number on the invoice did not exist until some time after 1993. The Defendants then disclaimed reliance on the fraudulent documents.

After the District Court granted the Plaintiffs motion for a preliminary injunction, P & E appeared for the Defendants. Two partners of the firm queried two of the Defendants concerning the previous submission of the fraudulent documents. One Defendant, Frank Brija, said that the submitted label was a 1999 label that he had inadvertently submitted and that a similar label had in fact been used in 1993. Brija also said that, after the fraudulent invoice had been submitted, he was told by the printer that the printer had been unable to locate any of the original invoices and had therefore, without the Defendants’ knowledge, reconstructed an invoice to reflect the printer’s recollection of the printing order. Brija showed the lawyers an affidavit, purportedly signed by the printer, which stated that the printer had reconstructed the invoice and did not recall telling Brija that the document sent to Brija for submission to the Court was not a copy of the original invoice.

Substantial doubts about these explanations later arose from at least two circumstances. The 1999 label, which Brija claimed was similar to the label used in 1993, bore a trademark registration symbol for a mark that was not registered until several years after 1993. In addition, when the P & E lawyers contacted a lawyer for the printer, they were told that the printer, if subpoenaed for a trial, would testify that he had not done any business with the Defendants in the relevant time period. The P & E lawyers questioned Brija, who insisted that his explanation for the submission of the fraudulent label and invoice was true.

Thereafter, the Plaintiff moved for summary judgment. Among the papers submitted by the Defendants in opposition was an affidavit of Brija’s that became the basis for the Rule 11 sanction. Two paragraphs of that affidavit repeated Brija’s explanation for the submission of the fraudulent documents: inadvertence as to the first “1993” label and the printer’s undisclosed reconstruction of the invoice.

The District Court granted summary judgment for the Plaintiff. The Court’s opinion reflected Judge Martin’s view that Brija’s explanation for the fraudulent documents was false. At the end of the opinion explaining that ruling, the Court sua sponte ordered P & E to show cause why the firm should not be sanctioned under Rule 11 for permitting Brija to submit a false affidavit. P & E’s response detailed the steps taken to investigate Brija’s explanations and reported Brija’s repeated insistence that he was telling the truth.

In an opinion and order entered January 17, 2001, the District Court sanctioned P & E under Rule 11 for permitting Brija to file an affidavit containing statements that the law firm could not have objectively believed were true. Judge Martin accepted the firm’s assertion that it had acted in subjective good faith. As a penalty, the firm was ordered to send copies of the Court’s sanction opinion to every lawyer in the firm, with a memorandum stating that the firm adheres to the highest ethical standards and that, if such adherence causes the loss of a client, the lawyer will suffer no adverse consequence. The sanction order has been stayed pending this appeal.

Discussion

Rule 11 was amended in 1993 in two respects relevant to the pending appeal. First, the standard for imposing sanctions because of written factual contentions submitted to a district court was changed. Under the prior standard, a signature on a document certified that the contentions contained in it were “well grounded in fact.” 2 Moore’s Federal Practice § 11 App.02 [1] (3d ed.2001) (quoting Fed.R.Civ.P. 11 (1983)). Under the current standard, presenting a document to the court certifies “that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, ... (3) the allegations and other factual contentions have evidentiary support .... ” Fed. R.Civ.P. 11(b) (as amended 1993).

Second, a “safe harbor” provision was added, providing an opportunity to withdraw or correct a challenged submission. Where a sanction is initiated by a party’s motion, this provision requires initial service of the motion but delays filing or presentation of the motion to the court for 21 days; filing of the motion is permitted 21 days after service only if the challenged submission is not “withdrawn or appropriately corrected.” Id. 11(c)(1)(A). Although Rule 11 contains no explicit time limit for serving the motion, the “safe harbor” provision functions as a practical time limit, and motions have been disallowed as untimely when filed after a point in the litigation when the lawyer sought to be sanctioned lacked an opportunity to correct or withdraw the challenged submission. See Barber v. Miller, 146 F.3d 707, 710-11 (9th Cir.1998) (Rule 11 sanction disallowed where motion filed after complaint dismissed); Ridder v. City of Springfield, 109 F.3d 288, 295-97 (6th Cir.1997) (“A party must now serve a Rule 11 motion on the allegedly offending party at least twenty-one days prior to conclusion of the case or judicial rejection of the offending contention”; Rule 11 sanction disallowed where motion filed after summary judgment motion granted); DeShiro v. Branch, 183 F.R.D. 281, 287-88 (M.D.Fla.1998) (same); Daliessio v. DePuy, Inc., 178 F.R.D. 451, 452 (E.D.Pa.1998) (Rule 11 motion disallowed where motion not served on adverse party prior to entry of final judgment). The Advisory Committee on Civil Rules contemplated that Rule 11 motions would be deemed untimely if filed too late to permit correction or withdrawal,¹ and the Moore treatise endorses this approach.²

A sanction proceeding may also be initiated by a court on its own motion by issuance of a show cause order, see id. 11(c)(1)(B), but no “safe harbor” opportunity exists to withdraw or correct a submission challenged in a court-initiated proceeding, id.

In recommending the “safe harbor” provision, the rule-makers explicitly noted its unavailability for sanction proceedings initiated by a court and expressed their view that, as a result, court-initiated sanction proceedings would be used only in more egregious circumstances:

Since show cause orders will ordinarily be issued only in situations that are akin to a contempt of court, the rule does not provide a “safe harbor” to a litigant for withdrawing a claim, defense, etc., after a show cause order has been issued on the court’s own initiative.

Fed.R.Civ.P. 11 advisory committee’s note to 1993 Amendments. We have noted that the Advisory Committee’s “akin to a contempt” standard is applicable to sanction proceedings initiated by a court, see Hadges v. Yonkers Racing Corp., 48 F.3d 1320, 1329 (2d Cir.1995), as have other circuits, see Hunter v. Earthgrains Co. Bakery, 281 F.3d 144, 151 (4th Cir.2002); Barber v. Miller, 146 F.3d 707, 711 (9th Cir.1998). Courts have taken the Advisory Committee’s note to mean that sua sponte Rule 11 sanctions must be reviewed with “particular stringency.” Hunter, 281 F.3d at 153; United National Insurance Co. v. R & D Latex Corp., 242 F.3d 1102, 1115 (9th Cir.2001). However, we have not explicitly ruled on the applicable mens rea standard in such circumstances.

The mental state applicable to liability for Rule 11 sanctions initiated by motion is objective unreasonableness, i.e., liability may be imposed if the lawyer’s claim to have evidentiary support is not objectively reasonable. See Ted Lapidus, S.A. v. Vann, 112 F.3d 91, 96 (2d Cir.1997). That standard is appropriate in circumstances where the lawyer whose submission is challenged by motion has the opportunity, afforded by the “safe harbor” provision, to correct or withdraw the challenged submission. P & E contends that, because the “safe harbor” protection does not exist when a lawyer’s submission is challenged in a show cause proceeding initiated by a trial judge, the more rigorous standard of bad faith should apply. That position draws support from the Advisory Committee’s expectation that court-initiated sanction proceedings will ordinarily be used only in situations that are “akin to a contempt of court.”

We have previously held that when courts are acting either pursuant to their inherent powers or their statutory power to impose contempt sanctions upon attorneys while those attorneys are engaged in matters intended to further the interests of their clients, a finding of bad faith on the part of the attorney is essential to a finding of contempt.³ See, e.g., Schlaifer Nance & Co., Inc. v. Estate of Andy Warhol, 194 F.3d 323, 338 (2d Cir.1999) (sanctions imposed pursuant to court’s inherent powers doctrine as well as 28 U.S.C. § 1927 require highly specific finding of bad faith) (citing Milltex Indus. Corp. v. Jacquard Lace Co., 55 F.3d 34, 38 (2d Cir.1995)); Sakon v. Andreo, 119 F.3d 109, 114 (2d Cir.1997) (same) (citations omitted). These cases provide strong support for the proposition that, when applying sanctions under Rule 11 for conduct that is “akin to a contempt of court,” a bad faith standard should apply.

Any regime of sanctions for a lawyer’s role in the course of representing a client inevitably has implications for the functioning of the adversary process. If the sanction regime is too severe, lawyers will sometimes be deterred from making legitimate submissions on behalf of clients out of apprehension that their conduct will erroneously be deemed improper. On the other hand, if the sanction regime is too lenient, lawyers will sometimes be emboldened to make improper submissions on behalf of clients, confident that their misconduct will either be undetected or dealt with too leniently to matter. The 1993 amendments to Rule 11 strike a sensible balance between these extremes by making a lawyer sanctionable for an objectively unreasonable submission and at the same time affording the lawyer a “safe harbor” opportunity to reconsider and withdraw a submission challenged by an adversary.

However, when a lawyer’s submission, unchallenged by an adversary, is subject to sanction by a court, the absence of a “safe harbor” opportunity to reconsider risks shifting the balance to the detriment of the adversary process. The risk is that lawyers will sometimes withhold submissions that they honestly believe have plausible evidentiary support for fear that a trial judge, perhaps at the conclusion of a contentious trial, will erroneously consider their claimed belief to be objectively unreasonable. This risk is appropriately minimized, as the Advisory Committee contemplated, by applying a “bad faith” standard to submissions sanctioned without a “safe harbor” opportunity to reconsider. A vigorous adversary process is better served by avoiding the inhibiting effect of an “objectively unreasonable” standard applied to unchallenged submissions, and letting questionable evidence be tested with cross-examination and opposing evidence than by encouraging lawyers to withhold such evidence. It is better to apply a heightened mens rea standard to unchallenged submissions and take the slight risk with respect to such submissions that, on occasion, a jury will give unwarranted weight to a few submissions that a judge would consider objectively unreasonable than to withhold from the jury many submissions that are objectively reasonable but that cautious lawyers dare not present.

It is arguable, as P & E contends, that a “bad faith” standard should apply to all court-initiated Rule 11 sanctions because no “safe harbor” protection is available and because the Advisory Committee contemplated such sanctions for conduct akin to contempt. However, we need not make so broad a ruling in the pending case. Not only was the sanction against P & E initiated by the District Court, it was initiated long after P & E had an opportunity to correct or withdraw the challenged submission. At least in such circumstances, a “bad faith” standard, applicable for contempt proceedings, is especially appropriate and is what the rule-makers contemplated.⁴ We need not decide the standard for a sanction proceeding initiated earlier in the litigation at a time when the challenged submission could be corrected or withdrawn as part of the lawyer’s response to the show cause order, even though the Rule does not explicitly guarantee a “safe harbor” protection in such circumstances.⁵

Judge Martin gave several reasons for applying an “objective unreasonableness” standard, rather than a “bad faith” standard, to a court-initiated Rule 11 sanction. First, he properly considered the issue open in this Circuit, noting that the reference in Hodges to the Advisory Committee’s note was not a holding. Next, he emphasized the Committee’s use of the word “ordinarily” in its identification of contempt-like circumstances as those that warrant court-initiated sanctions. Third, he cited language in Wilder v. GL Bus Lines, 258 F.3d 126 (2d Cir.2001), stating that Rule 11 sanctions are appropriate “where the attorney has negligently or recklessly failed to perform his responsibilities as an officer of the court.” Id. at 128, Finally, he reasoned that “[s]inee the Court as an institution has a far greater interest in weeding out abuses than does any individual litigant, there is no reason not to apply the well-established ‘objective reasonableness’ standard to Rule 11 proceedings initiated by the Court.” Patsy’s Brand, Inc. v. I.O.B. Realty, Inc., 2002 WL 59434, at *6 (S.D.N.Y. Jan.16, 2002). We are not persuaded.

We do not regard the Advisory Committee’s use of “ordinarily” as indicating that the Committee had some particular category of cases in mind where court-initiated Rule 11 sanctions could be imposed in the absence of conduct “akin to contempt.” The word “ordinarily” is frequently used (some might say “ordinarily used”) simply to reflect a natural reluctance of rule-makers to say “always,” in candid recognition of their inability to anticipate every imaginable set of circumstances that might one day arise. Cf. United States v. Turkish, 623 F.2d 769, 777 (2d Cir.1980) (“[T]here is a natural judicial reluctance to say ‘never.’”).

The language Judge Martin quoted from Wilder must not be separated from the context supplied by the citation that follows it, United States v. Seltzer, 227 F.3d 36, 40-42 (2d Cir.2000). Seltzer involved a sanction, pursuant to a court’s inherent authority, imposed because of a lawyer’s tardy return to a court session. Noting that the conduct at issue was not undertaken “as part of [the lawyer’s] role in representing her client,” id. at 41, but involved “a lawyer’s negligent or reckless failure to perform his or her responsibility as an officer of the court,” id., we ruled that in such circumstances a sanction may be justified “absent a finding of bad faith,” id. Wilder used the “negligently or recklessly” standard in referring to a lawyer’s non-representational conduct, in contrast to the heightened standard applicable where “the lawyer has acted in bad faith in the actions that led to the lawsuit or in the conduct of the litigation.” Wilder, 258 F.3d at 130. Wilder, which concerned whether a lawyer is liable for costs imposed under Rule 54, is not authority for dispensing with a “bad faith” standard where a Rule 11 sanction is imposed without the availability of the “safe harbor” protection.

As for Judge Martin’s appropriate concern for a court’s responsibility to “weed out abuses,” we believe, for reasons already explained, that his application of an “objectively unreasonable” standard, in the absence of either an explicit “safe harbor” protection or an equivalent opportunity where a court initiates a Rule 11 proceeding at an early stage of litigation, risks more damage to the robust functioning of the adversary process than the benefit it would achieve. We do not doubt that his standard would deter some submissions deserving condemnation. We are concerned that its deterrent effect would broadly reach some submissions that should merit a fact-finder’s consideration and assessment.

Because Judge Martin accepted P & E’s representation that its lawyers acted with subjective good faith, the Rule 11 sanction must be vacated. In view of our disagreement with Judge Martin as to the mens rea element, we need not consider P & E’s further contention that the District Court erred in framing the issue to be whether the lawyers’ belief to be tested was their belief that Brija’s statements were true, rather than their belief that their submissions had evidentiary support.

Conclusion

The order imposing a Rule 11 sanction is vacated. No costs.

1 . Ordinarily the motion should be served promptly after the inappropriate paper is filed, and, if delayed too long, may be viewed as untimely.... Given the "safe harbor” provisions ... a party cannot delay serving its Rule 11 motion until conclusion of the case (or judicial rejection of the offending contention).

Fed.R.Civ.P. 11 advisory committee's note to 1993 Amendments.

2 . The 21-day, safe-harbor service requirement controls not only the earliest date on which a motion may be filed ..., it also indirectly controls the last date on which a Rule 11 sanctions motion may be filed. At the very least, a party must serve its Rule 11 motion before the court has ruled on the pleading, and thus before the conclusion of the case. Otherwise, the purpose of the "safe harbor" provision would be nullified. This has been interpreted to mean that Rule 11 motions must be served at least a full 21 days before the court concludes the case or resolves the offending contention ....

2 Moore’s Federal Practice § 11.22[1](c) (3d ed.2001) (footnotes omitted).

3 . In some cases, we applied a lesser standard of wilfulness or purposefulness, but such cases were decided under specific rules or scenarios not applicable to the circumstances of this case. See, e.g., City of New York v. Local 28, Sheet Metal Workers’ Int’l Assn., 170 F.3d 279, 282-83 (2d Cir.1999) (court may find party in contempt upon "clear and convincing” showing that party violated a “clear and unambiguous” order of the court; wilful noncompliance is not required) (citations omitted).

4 . Our dissenting colleague accords less significance to the Advisory Committee’s note than we do. We have taken seriously the Committee's expectation that show cause orders will be issued in circumstances where the challenged conduct is "akin to contempt,” which, as we have noted, requires bad faith. Nor do we think the Committee was using the contempt analogy merely to be predictive. By declining to make the "safe harbor” provision applicable to court-initiated show cause orders, the Committee was signaling that the unavailability of an opportunity to withdraw or correct makes the sanction appropriate for conduct "akin to contempt,” conduct that traditionally requires a heightened mens rea standard. We believe we implement the Committee’s expectation by applying a contempt-like mens rea standard to court-initiated show cause orders issued where there is no opportunity to withdraw or correct.

In reaching our conclusion, we have not, as Judge Underhill apprehends, applied our own notions of public policy. Rather, we have discussed the policy implications of our ruling and the adverse implications of a contrary ruling only to indicate the soundness of the Advisory Committee’s expectation that show cause orders issued without an opportunity to withdraw or correct a challenged submission will be used in circumstances akin to contempt.

Finally, we cannot leave unanswered the dissent’s observation that our conclusion must be flawed because no court interpreting the 1993 version of Rule 11 has applied the bad faith standard to the circumstances where we rule it to be applicable. What the dissent fails to mention is that no court has considered the argument presented on this appeal: that the bad faith standard applies to a court-initiated show cause order issued where an opportunity for withdrawal or correction is unavailable. Although Hunter involved a show cause order issued in the absence of an opportunity to correct or withdraw the challenged document, the Fourth Circuit's ruling was that the sanction should be vacated. Hunter, 281 F.3d at 158.

5 . We note that the Advisory Committee considered and rejected a proposal to provide "safe harbor” protection for court-initiated sanctions:

Several groups have suggested that the safe harbor provisions, which under the published draft apply only to motions filed by other litigants, should apply also to show cause orders issued at the court’s own initiative. The Advisory Committee continues to believe that court-initiated show cause orders — which typically relate to matters that are akin to contempt of court — are properly treated somewhat differently from party-initiated motions.

Letter from Hon. Sam C. Pointer, Chairman, Advisory Committee on Civil Rules, to Hon. Robert E. Keeton, Chairman, Standing Committee on Rules of Practice and Procedure (May 1, 1992), reprinted in 146 F.R.D. 519, 525 (1993).