19-1031(L) Int’l Techs. Mktg., Inc. v. Verint Sys., Ltd.
United States Court of Appeals For the Second Circuit
August Term 2019
Argued: April 23, 2020 Decided: March 16, 2021
Nos. 19-1031(L), 19-1297(xap)
INTERNATIONAL TECHNOLOGIES MARKETING, INC.,
Plaintiff-Appellant-Cross-Appellee,
v.
VERINT SYSTEMS, LTD.,
Defendant-Appellee-Cross-Appellant,
VERINT SYSTEMS INC.,
Defendant. *
Appeal from the United States District Court for the Southern District of New York No. 15-cv-2457, Gregory H. Woods, Judge.
Before: CALABRESI, WESLEY, and SULLIVAN, Circuit Judges.
* The Clerk of Court is respectfully directed to amend the caption as set forth above. The plaintiff appeals an order of the district court (Woods, J.) dismissing its breach of contract claim and denying its request for leave to file a fourth amended complaint; the defendant cross-appeals the district court’s denial of its motion for sanctions related to the plaintiff’s misrepresentations to the court during the litigation. Because the district court misconstrued our precedent regarding the court’s inherent power to impose sanctions – which makes clear that even a single bad-faith filing may warrant monetary sanctions, regardless of whether that conduct actually misled the court – we vacate the district court’s order denying sanctions and remand for proceedings consistent with this opinion. In all other respects, we affirm the district court’s judgment in a separately filed summary order.
VACATED IN PART AND REMANDED.
JAMES J. MAHON, Becker & Poliakoff, LLP, New York, NY, for Plaintiff-Appellant-Cross- Appellee. HOWARD I. ELMAN (Benjamin S. Litman, Yosef Rothstein, on the brief), Elman Freiberg PLLC, New York, NY, for Defendant- Appellee-Cross-Appellant.
RICHARD J. SULLIVAN, Circuit Judge:
This case began as a simple contract dispute between Verint Systems, Ltd.
(“Verint”), an Israeli software company that develops telecommunications
monitoring systems, and International Technologies Marketing, Inc. (“ITM”), a
small consulting and business development firm based in Florida. Unfortunately,
ITM’s antics throughout the course of the litigation have raised a host of other
2 questions, not the least of which is how much misconduct a court must permit
before enough is enough.
While we cannot provide an answer to that question for every possible
scenario that might arise, we can say, definitively, that a court need not wait until
it is defrauded before it may impose monetary sanctions on a party who
knowingly prosecutes a frivolous claim in bad faith. That remains true even if the
misbehaving litigant made only a single misrepresentation to the court. Because
it appears that the district court overlooked our past precedent when it declined
to impose sanctions against ITM under its inherent power, we vacate the district
court’s March 15, 2019 order in part and remand for further proceedings consistent
with this opinion. In all other respects, we affirm the district court’s judgment and
orders in a separately filed summary order.
I. Background
A. Facts
The parties’ representatives first met in the fall of 2005, when ITM pitched
itself to Verint as a capable partner that could help Verint expand its footprint in
the Brazilian market. Intrigued by the proposition, Verint agreed to let ITM begin
searching for Brazilian telecommunications firms interested in purchasing Verint’s
products. ITM quickly identified a promising candidate in early 2006. At that
3 point, ITM and Verint memorialized their partnership in a written agreement,
under which ITM would receive a commission based on the amount of revenue it
helped Verint earn. The companies appeared to anticipate a short-lived
relationship; by its terms, the agreement was to automatically expire in one year,
on February 21, 2007.
A few months after it was officially retained, ITM identified another
potential business partner for Verint: Suntech. In fact, Suntech presented such a
compelling fit that Verint was not content to merely partner with Suntech; Verint
wanted to acquire it outright. So, over the next few months, ITM switched gears
and facilitated negotiations between the two companies in the hope of bringing
the acquisition to fruition.
Initially, the talks progressed smoothly. Verint even provided Suntech with
a letter of intent and a term sheet in December 2006, outlining the framework of a
proposed acquisition. Around the same time, Verint and ITM amended their
existing agreement to formalize ITM’s new role as Verint’s acquisition advisor.
But ITM’s hopes of a major payday – a percentage of the deal’s purchase
price – soon took a blow. After several rounds of negotiations, Verint’s enthusiasm
for the transaction began to fizzle as a new acquisition target, Witness Systems,
4 caught its eye. And in February 2007, after agreeing to purchase Witness Systems,
Verint informed ITM that the Suntech acquisition was “off.” J. App’x at 147.
Not long thereafter, however, Verint and Suntech began to rekindle their
negotiations. Although its agreement with Verint had by then expired, ITM
eventually resumed its role as facilitator between the transactional counterparties.
But while the renewed discussions progressed through September 2007, Verint
again got cold feet and the transaction faltered.
That is, until August 2011, when Verint finally acquired Suntech (this time,
without ITM’s help). Upon discovering that the long-anticipated deal had been
struck, ITM approached Verint seeking to recover its contractual success fee.
Verint refused.
B. Procedural History In March 2015, ITM sued Verint, asserting various contractual and quasi-
contractual claims. Of particular relevance, ITM sought to recover more than
$350,000 in expenses under a theory of unjust enrichment (which it later restyled
as a claim for quantum meruit). 1 On January 27, 2016, the district court dismissed
1Under New York law, unjust enrichment and quantum meruit claims are analyzed together as a single quasi-contract claim. See Mid-Hudson Catskill Rural Migrant Ministry, Inc. v. Fine Host Corp., 418 F.3d 168, 175 (2d Cir. 2005).
5 ITM’s amended complaint in its entirety, reasoning that the parties’ contractual
relationship had expired on February 21, 2007, taking with it ITM’s right to
demand a contractual fee. See Int’l Techs. Mktg., Inc. v. Verint Sys., Ltd. (“ITM I”),
157 F. Supp. 3d 352, 365 (S.D.N.Y. 2016). But while the court dismissed several of
ITM’s claims with prejudice, including ITM’s breach of contract claim, it permitted
ITM to take another shot at amending its complaint, including its quantum meruit
claim. Id. at 365–71. The district court cautioned, however, that any quantum
meruit claim should be limited to costs ITM incurred after its contract with Verint
expired. See id. at 370–71 (explaining that a party “may not recover under a quasi-
contractual theory when the parties had a valid contract governing their
relationship”).
One month later, ITM filed a second amended complaint, asserting claims
for quantum meruit, breach of an implied-in-fact contract, and breach of contract.
Verint responded by filing motions to dismiss and for sanctions, arguing that
ITM’s renewal of its breach of contract claim was patently frivolous in light of the
district court’s previous order dismissing that claim with prejudice.
Perhaps realizing its error, ITM quickly filed yet another amended
complaint, this time without the breach of contract claim. But this third amended
6 complaint was not without its own problems. ITM sought to recover $350,000
under a quantum meruit theory based on expenses it allegedly incurred on Verint’s
behalf after February 21, 2007 – the exact amount it previously claimed to have
spent on behalf of Verint both before and after the parties’ contract expired.
In April 2016, Verint again moved to dismiss and again requested sanctions
under Rule 11, this time arguing that it was inconceivable that ITM’s expenditures
after the contract’s expiration could be identical to its expenditures over a longer
period. In a pre-motion conference, the district court asked ITM’s then-counsel
point-blank whether there was evidentiary support for his client’s claimed costs;
ITM’s lawyer indicated that there was. So, because federal pleading standards
presume the truth of all facts alleged in a complaint, the district court allowed ITM
to move forward with its quantum meruit claim and denied Verint’s Rule 11
motion. 2
It did not take long for holes to start appearing in ITM’s story. During
discovery, Verint deposed Anthony Schehtman, ITM’s principal. As the district
court tells it, “[t]o say that Mr. Schehtman’s deposition testimony contradict[ed]
many of the factual predicates upon which [ITM’s] quantum meruit claim [wa]s
2At the same time, however, the district court dismissed ITM’s only other claim, one for breach of an implied-in-fact contract.
7 based would be an understatement.” Int’l Techs. Mktg., Inc. v. Verint Sys., Ltd.
(“ITM II”), No. 15-cv-2457 (GHW), 2019 WL 1244493, at *3 (S.D.N.Y. Mar. 18, 2019).
For instance, Schehtman testified that, far from continuing to assist Verint’s
pursuit of Suntech during the post-contractual period, ITM began helping Verint’s
rivals and working to tarnish Verint’s reputation with potential business partners.
See, e.g., J. App’x at 961–62 (testifying that ITM was “helping Verint’s competitor
give Verint a bloody nose”). Schehtman even admitted that ITM’s goal was to
cause Verint to “los[e] out [on] business opportunities to competitors” because he
believed that such “short-term damage” would “be a catalyst for Verint to want to
acquire Suntech.” Id. at 958.
In addition, many of the expenses that ITM sought to recover bore no
plausible relation to Verint or its pursuit of Suntech. For example, ITM produced
expense statements for “U-haul rentals, Sirius Radio [fees], LinkedIn
[memberships], duty free charges at Heathrow Airport, and a trip to California.”
ITM II, 2019 WL 1244493, at *5. And when asked about such expenses, Schehtman
was often either unable to explain what they were, admitted that ITM had not
actually incurred them, or indicated that ITM had incurred them while working
against Verint’s interests. Id. at *4–5. Indeed, the record was so damning that
8 ITM’s current counsel – its prior counsel having withdrawn only one week after
Schehtman’s deposition – later informed the district court that ITM would be
dropping its quantum meruit claim altogether.
Nevertheless, in April 2018, ITM sought leave to file a fourth amended
complaint to assert brand new claims for breach of the implied covenant of good
faith and fair dealing and for anticipatory repudiation based on Verint’s purchase
of Witness Systems. ITM’s primary contention was that the Witness Systems
acquisition made it all but impossible for Verint to acquire Suntech in 2007 because
of certain covenants in the Verint-Witness Systems merger agreement. Verint
opposed ITM’s motion and sought sanctions against ITM and its current counsel
under Rule 11, asserting that these new claims were plainly time-barred, and that
ITM’s claim concerning the implied covenant of good faith and fair dealing had
previously been dismissed with prejudice. Verint filed a separate motion for
sanctions against ITM and Schehtman under the district court’s inherent power in
light of ITM prosecuting a frivolous quantum meruit claim, and also requested to
renew its Rule 11 motion from April 2016, which sought sanctions for the same
conduct against ITM and its former counsel.
9 On March 15, 2019, the district court issued two orders, which granted in
part and denied in part Verint’s motions. 3 In its first order, the district court
declined to impose sanctions against ITM and Schehtman under its inherent
power. Id. at *12. It did so not because ITM had brought its quantum meruit claim
in good faith. Rather, the court pointed to two facts that it determined made
sanctions improper. First, the district court noted that ITM’s “conduct did not
impede the ability of the [c]ourt to adjudicate the issues presented in the case.” Id.
at *8. Second, it reasoned that ITM had committed only “a single
misrepresentation,” which it deemed “insufficient” to demonstrate fraud on the
court. 4 Id. (internal quotation marks and citation omitted).
In the second order, the district court denied ITM’s motion for leave to file
an amended complaint. Int’l Techs. Mktg., Inc. v. Verint Sys., Ltd. (“ITM III”),
No. 15-cv-2457 (GHW), 2019 WL 1245013, at *9 (S.D.N.Y. Mar. 18, 2019).
Nevertheless, the court refused to impose sanctions against ITM and its current
counsel for seeking such leave. See id.
3 Although dated March 15, 2019, the orders were not filed on the docket until March 18, 2019. 4Separately, the district court granted Verint’s request to renew its motion for sanctions against ITM and its prior counsel under Rule 11 for filing the quantum meruit claim. But rather than grant Verint’s motion outright, the court permitted the parties to submit additional briefing on the matter. ITM II, 2019 WL 124493, at *12. This issue is still pending before the district court.
10 At that point, with no pending claims before it, the district court directed
the clerk of court to enter judgment in favor of Verint. Id. ITM timely appealed.
On appeal, ITM challenges the district court’s (i) January 27, 2016 order
dismissing its breach of contract claim, and (ii) March 15, 2019 order denying it
leave to file the proposed fourth amended complaint. Verint has cross-appealed,
challenging the district court’s March 15, 2019 orders, which denied Verint’s
motions for sanctions (i) against ITM and Schehtman under the court’s inherent
power for prosecuting the quantum meruit claim in bad faith, and (ii) against ITM
and its current counsel under Rule 11 for seeking leave to file the proposed fourth
amended complaint.
In this opinion, we address only the district court’s decision not to award
sanctions against ITM and Schehtman under its inherent power. We resolve all
other issues in a contemporaneously issued summary order.
II. Standard of Review
We review a district court’s denial of sanctions for abuse of discretion. See
Enmon v. Prospect Capital Corp., 675 F.3d 138, 143 (2d Cir. 2012); K.M.B. Warehouse
Distribs. v. Walker Mfg. Co., 61 F.3d 123, 131 (2d Cir. 1995). We will find such an
abuse where the court’s decision was the product of “an erroneous view of the law
11 or . . . a clearly erroneous assessment of the evidence.” Enmon, 675 F.3d at 143
(internal quotation marks and citations omitted).
III. Discussion
“[C]ourts are ‘vested, by their very creation, with power to impose silence,
respect, and decorum[] in their presence, and submission to their lawful
mandates.’” Schlaifer Nance & Co. v. Est. of Warhol, 194 F.3d 323, 336 (2d Cir. 1999)
(quoting Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991)). To perhaps state the
obvious, this power is “not conferred by rule or statute.” Goodyear Tire & Rubber
Co. v. Haeger, 137 S. Ct. 1178, 1186 (2017). Rather, it springs from “the nature of
[the judicial] institution,” Chambers, 501 U.S. at 43 (internal quotation marks and
citation omitted), and enables courts “to manage their own affairs so as to achieve
the orderly and expeditious disposition of cases,” Goodyear Tire & Rubber, 137 S.
Ct. at 1186 (quoting Link v. Wabash R.R. Co., 370 U.S. 626, 630–31 (1962)).
As part of this inherent power, a court can control admission to its bar and
discipline attorneys who appear before it; “vacate its own judgment upon proof
that a fraud has been perpetrated upon” it; “bar from the courtroom a criminal
defendant who disrupts a trial[;]” “dismiss an action on grounds of forum non
conveniens[;]” and sua sponte “dismiss a suit for failure to prosecute.” Chambers,
12 501 U.S. at 44. And, most relevant to the case before us, a court’s inherent power
allows it to impose monetary sanctions against a litigant (or its counsel) for
misconduct. Id. at 45–46. Such an award serves two ends: it “vindicat[es] judicial
authority,” and it makes the wronged party “whole for expenses caused by his
opponent’s obstinacy.” Id. at 46 (quoting Hutto v. Finney, 437 U.S. 678, 689 n.14
(1978)).
Because of its potency, however, a court’s inherent power “must be
exercised with restraint and discretion.” Id. at 44. When it comes to monetary
sanctions, that means a court should sanction only “bad faith, vexatious[], [or]
wanton[]” acts or actions otherwise undertaken for “oppressive reasons.” 5 Id.
at 45–46 (internal quotation marks and citation omitted).
One type of bad faith conduct that is often deserving of sanction is a party’s
decision to prosecute a knowingly frivolous claim. But as separating frivolous
claims from mere zealous advocacy can be difficult, we require courts to make two
findings before imposing such sanctions: first, that “the challenged claim was
without a colorable basis” and, second, that “the claim was brought in bad faith,
5 That said, a court need not make a finding of bad faith before sanctioning an attorney for “negligently or recklessly fail[ing] to perform his responsibilities as an officer of the court.” Wilder v. GL Bus Lines, 258 F.3d 126, 130 (2d Cir. 2001); see also United States v. Seltzer, 227 F.3d 36, 42 (2d Cir. 2000).
13 i.e., motivated by improper purposes such as harassment or delay.” Enmon, 675
F.3d at 143 (quoting Schlaifer Nance, 194 F.3d at 336). The former is satisfied where
the claim “lacks any legal or factual basis.” Wolters Kluwer Fin. Servs., Inc. v.
Scivantage, 564 F.3d 110, 114 (2d Cir. 2009). And the latter may be inferred when
an action is “so completely without merit as to require the conclusion that [it] must
have been undertaken for some improper purpose.” Enmon, 675 F.3d at 143
(internal quotation marks and citation omitted).
Here, the district court cited this two-pronged standard, but grafted onto it
additional requirements that, while perhaps relevant considerations, should not
have been given dispositive effect.
To start, the district court concluded that sanctions were not appropriate
“because [ITM’s] conduct did not impede the ability of the [c]ourt to adjudicate
the issues presented in the case.” ITM II, 2019 WL 1244493, at *8. Our precedent
is clear, however, that a court should primarily focus on the intent of the
potentially sanctionable conduct, not on its effect:
We read Chambers to mean that sanctions may be warranted even where bad-faith conduct does not disrupt the litigation before the sanctioning court. This accords with our sanctions jurisprudence, which counsels district courts to focus on the purpose rather than the effect of the sanctioned attorney’s activities. . . .
14 That [the sanctioned law firm’s] attempt to derail the [d]istrict [c]ourt proceeding was quickly thwarted by vigilant opposing counsel does not make [the firm’s] purpose any less improper.
Enmon, 675 F.3d at 145 (citation omitted).
And even if we were to agree that some disruption must occur before
sanctions are warranted – and, to be clear, we do not – that requirement would be
satisfied here. ITM’s prosecution of a knowingly frivolous claim not only
multiplied the proceedings, but it caused the district court “to expend considerable
time and effort that could have been devoted elsewhere.” ITM II, 2019 WL
1244493, at *9. Both consequences are plainly serious enough to support a
discretionary award of sanctions. See Enmon, 675 F.3d at 145.
Second, the district court mistakenly reasoned that ITM’s misconduct was
not sanctionable because “a single misrepresentation is insufficient” to justify an
award of sanctions under the court’s inherent power. ITM II, 2019 WL 1244493,
at *8 (internal quotation marks and citation omitted). We disagree. A court need
not wait until a party commits multiple misrepresentations before it may put a
stop to the party’s chicanery. 6
6 Nor do we agree that ITM committed only a single misrepresentation here. Not only did ITM file a fraudulent claim, but its former counsel confirmed that the claim had evidentiary support when directly pressed on the matter during a pre-motion conference. ITM II, 2019 WL 1244493,
15 For decades, we have consistently made clear that the only prerequisites to
a district court imposing monetary sanctions under its inherent power is that a
party advanced a colorless claim and did so for improper reasons. See, e.g., Enmon,
675 F.3d at 143; Wolters Kluwer, 564 F.3d at 114; Revson v. Cinque & Cinque, P.C., 221
F.3d 71, 78–79 (2d Cir. 2000); Eisemann v. Greene, 204 F.3d 393, 395–96 (2d Cir. 2000);
Schlaifer Nance, 194 F.3d at 336; United States v. Int’l Bhd. of Teamsters, 948 F.2d 1338,
1345 (2d Cir. 1991); Oliveri v. Thompson, 803 F.2d 1265, 1272 (2d Cir. 1986). Those
elements can be satisfied by even a single bad-faith filing. See, e.g., Huebner v.
Midland Credit Mgmt., Inc., 897 F.3d 42, 57 (2d Cir. 2018) (upholding sanctions
against a party merely for “initat[ing] th[e] lawsuit” in bad faith); Smith v.
Westchester Cty. Dep’t of Corr., 577 F. App’x 17, 18–19 (2d Cir. 2014) (affirming
sanctions against a party for filing a single motion for reconsideration because that
motion had no chance of success and “was made in bad faith”).
So, by primarily considering the effect of the misrepresentation, rather than
the motive behind it, and by focusing on the quantity of misrepresentations, rather
than on their “quality,” the district court committed legal error. Indeed, the
district court appeared to assume that it could not sanction ITM unless ITM
at *2. So, at the very least, ITM caused two misrepresentations to be made to the district court, albeit on the same topic.
16 committed “fraud on the court.” See ITM II, 2019 WL 1244493, at *8–9. While a
finding that a litigant has successfully defrauded the court would no doubt be
sufficient grounds for imposing monetary sanctions, it is not necessary. Compare
Gleason v. Jandrucko, 860 F.2d 556, 560 (2d Cir. 1988) (concluding that conduct must
actually “interfere[] with the judicial machinery” to constitute “fraud on the
court”), with Enmon, 675 F.3d at 145 (holding that “sanctions may be warranted
even where bad-faith conduct does not disrupt the litigation before the sanctioning
court”), and Va. Props., LLC v. T-Mobile Ne. LLC, 865 F.3d 110, 114, 123 (2d Cir. 2017)
(concluding that while the plaintiff did not “commit[] a fraud on the court,”
sanctions in “the amount of costs and attorney’s fees” could nevertheless still be
awarded on remand “to compensate appellees for the failure of [the plaintiff] or
its attorneys to make timely disclosures”). 7
To be clear, the effect of and number of misrepresentations that a party
makes are perfectly acceptable data points for a court to consider in determining
whether – and, perhaps more importantly, what – sanctions are warranted. See
7It bears noting that the fraud on the court doctrine is primarily reserved for cases where a litigant is asking the court to “vacate [a] judgment[] induced by fraud.” See Leber-Krebs, Inc. v. Capitol Recs., 779 F.2d 895, 900 (2d Cir. 1985). But the doctrine can be applied in other contexts as “the rule [is] characterized by flexibility and an ability to meet new situations demanding equitable intervention.” Id.
17 Chambers, 501 U.S. at 44–45 (recognizing that the severity of the sanction must
match the seriousness of the misconduct). But neither fact should be given
dispositive weight. To hold otherwise would not only upset decades of precedent,
but would also sap courts of the ability to effectively control their dockets when
parties attempt to assert knowingly frivolous claims.
In stating all this, we are simply clarifying what the law is. We are not, of
course, prejudging whether sanctions should be imposed in this case. That
remains within the careful discretion of the district court.
IV. Conclusion
For the reasons set forth above, we VACATE IN PART the district court’s
March 15, 2019 order denying monetary sanctions under its inherent power, and
REMAND the case to the district court to reconsider Verint’s request for sanctions
in light of this opinion.