Introduction
An arbitration panel acting under a broad, unrestricted arbitration agreement can generally impose sanctions on a party. But if a federal district court compels arbitration, and retains jurisdiction, can it impose sanctions on counsel who allegedly misbehave during the arbitration proceedings? On September 13, 2010 the United States Court of Appeals for the Fifth Circuit held 3-0 that the answer is “no,” unless the conduct was in direct defiance or disobedience of the district court’s orders or otherwise threatened the district court’s own judicial authority or proceedings. See Positive Software Solutions Inc. v. New Century Mtg. Corp., No. 09-10355, slip op. (5th Cir. September 13, 2010).
Background
Positive Software Solutions arose out of arbitration between Positive Software Solutions, Inc. and New Century Mortgage Corp. A district court in Texas compelled arbitration and retained jurisdiction. Positive Software lost, and sought to vacate the award on evident partiality grounds, which were ultimately rejected by the Fifth Circuit en banc. See Positive Software Solutions Inc. v. New Century Mtg. Corp., 476 F.3d 278 (5th Cir. 2007) (en banc). After the Fifth Circuit remanded the award for confirmation, New Century declared bankruptcy, the parties settled, and the American Arbitration Association administratively closed the proceedings.
As part of the settlement, New Century waived the attorney-client privilege, and turned over to Positive Software its arbitration files, which Positive Software would use in support of a motion in the district court for sanctions against New Century’s arbitration counsel, Ophelia Camiña, a partner at Susman, Godfrey, LLP (“Susman Godfrey”); Susman Godfrey; and Barry Barnett (apparently another lawyer who represented New Century). On March 2008 Positive Software filed its motion for sanctions pursuant to Fed. R. Civ. P. 37, 28 U.S.C. § 1927, and the court’s inherent power.
In February 2009 the district court imposed pursuant to its inherent power $10,000 in sanctions against Camiña, which represented a portion of Positive Software’s attorney fees incurred during arbitration. The district court ruled that the sanctions were for conduct that “took place in connection with the arbitration, not in connection with discovery under the Court’s supervision.”
Camiña appealed, and the Fifth Circuit reversed.
The Fifth Circuit’s Decision
The Fifth Circuit held that “the district court lacked inherent authority to sanction Camiña for her conduct during the arbitration.” Slip op. at 8. The Court acknowledged that a district court has the inherent power to “control the litigation before it,” and to “sanction conduct in direct defiance” or “disobedience” of the district court or its orders. Slip op. at 3-4 (citations and quotations omitted).
But that “power. . . may be exercised only if essential to preserve the authority of the court.” Slip op. at 4 (citation and quotation omitted). And “[b]ecause Camiña’s conduct was neither before the district court nor in direct defiance of its orders, the conduct [was] beyond the reach of the court’s inherent power to sanction.” Slip op. at 5.
In FDIC v. Maxxam, Inc., 523 F.3d 566, 593 (5th Cir. 2008), the Fifth Circuit ruled “that the inherent power does not extend to collateral proceedings that do not threaten the court’s own judicial authority or proceedings.” Id. (quotation omitted). Positive Software attempted to distinguish Maxxam by arguing that the arbitration proceedings were not collateral, but an “annex” to the litigation.
The Court rejected this argument on the ground that arbitration is not an “annex” to litigation, but an alternative to it: “Treating arbitration as if it were an appendage to adjudication is a mistake that would undermine the very purpose of arbitration – the provision of a relatively quick, efficient and informal means of private dispute settlement.” Slip op. at 4-5 (citation and quotation omitted; emphasis in original). One of the purposes of arbitration, after all, is to avoid litigation.
Nobody contended that a court would have the power to impose sanctions in a private arbitration proceeding that the court had not compelled. And the Court rejected the notion that the rule is any different when a district court does compel arbitration.
The Court also found that the sanctions order was “in serious tension with the Federal Arbitration Act. . . .” Slip op. at 6. Noting that the Federal Arbitration Act gave the district court the power to compel arbitration, stay litigation, and confirm, vacate or modify an award, the court said these “narrowly defined procedural powers” represented the extent of a court’s power to “interfere with an arbitration proceeding.” Slip op. at 6. Because the parties apparently agreed that the arbitrator had the power to sanction Camiña – a dubious proposition since Camiña was not a party to the arbitration – “the FAA counsels against the district court’s assigning itself that task.” Slip op. at 6.
Finally, the Court ruled that “the sanctions order threatens unduly to inflate the judiciary’s role in arbitration.” Courts are supposed to have only limited, narrowly-defined and mostly procedural involvement with arbitration proceedings. Exercising its power to impose sanctions would enable “a court to seize control over substantive aspects of arbitration. . . . ,” and “in effect, become a roving commission to supervise a private method of dispute resolution and exert authority that is reserved, by statute, caselaw, and longstanding practice, to the arbitrator.” Slip op. at 7. That supervision cannot be squared with “the scope of inherent authority and with federal arbitration policy, which aims to prevent courts from delaying the resolution of disputes through alternative means.” Slip op. at 7.
Positive Software argued that the district court’s involvement was necessary here because Camiña’s alleged misconduct was not discovered until after the settlement and administrative closure of the arbitration, which meant there were allegedly no other means to redress Camiña’s alleged wrongdoing. But the Court said that the parties could have requested the American Arbitration Association to reopen the arbitration to allow Positive Software to make its sanctions claim, or requested the state bar to discipline Camiña.
In fact, Positive Software did file a grievance, which was rejected by the state bar for lack of just cause. But the Court nevertheless directed the Clerk to send a copy of its opinion to the Office of General Counsel of the State Bar of Texas, noting:
We do not condone Camiña’s complained of actions as they are alleged to have occurred. . . . We are mindful that the State Bar declined to act on this matter in response to Positive Software’s request, and we express no view on whether the State Bar should consider this matter further or, if it does, on what action it should take. We opine only that the federal courts are without power to issue sanctions under these particular facts.
Slip op. at 8, n.2. Perhaps the Court referred the opinion simply as part of its function of keeping the Texas State Bar informed of possible ethical violations committed by attorneys appearing before it, but unless the State Bar’s rejection of the grievance was, or appeared to be, based on the availability of court-imposed sanctions, one wonders why the Court took this action.
Discussion
The Fifth Circuit decided this case correctly based on the facts before it. One wrinkle practitioners should keep in mind is that the parties apparently agreed the arbitrators had the power to sanction Camiña in her personal capacity. Ordinarily, arbitrators do not have this authority — at least in the Second Circuit — because counsel are usually not parties to the arbitration agreement, and arbitrators can order relief only against parties. See Porzig v. Dresdner, Kleinwort, Benson, North Am. LLC, 497 F.3d 133, 140-41 (2007).
But even had the parties not agreed that the arbitrators had the authority to impose sanctions against counsel, the result would likely have been the same. The principal ground for the decision was that courts do not have inherent power to sanction conduct that takes place in private arbitration proceedings, unless it somehow constitutes direct defiance or disobedience of the court or its orders, or otherwise threatens the court’s authority or proceedings. Attorney misconduct in arbitration does not ordinarily meet that standard, and did not here.
Two additional points deserve a word. First, the Court did not rule that attorney misconduct before an arbitration panel can never be the subject of district-court-imposed sanctions. The Court noted that:
New Century affirmatively sought the entry of a protective order governing discovery both before the district court and in the arbitration proceedings; New Century also petitioned the court for sanctions against Positive Software on multiple occasions. Accordingly, had the alleged conduct arisen in connection with discovery before the district court or the protective order or preliminary injunction, it might have threatened the court’s own judicial authority or proceedings.”
Slip op. at 8 n.3. But the Court expressed “no ultimate view on this hypothetical, which [was] not before” it. Id.
Second, note how New Century, after declaring bankruptcy, was willing to turn over its arbitration files to its former adversary, including attorney-client privileged materials (a decision presumably made by the bankruptcy trustee). We lawyers must remember that the attorney-client privilege belongs to the client, and when a bankruptcy trustee is appointed, all bets are off. Be careful what you say, because you never know how a third party might interpret it. And consider the old adage that both inside and outside counsel should follow: think long and hard before you say or write anything you would be uncomfortable seeing on the front page of The New York Times.
Tags: 28 U.S.C. 1927, Attorney Fees, Attorney Misconduct, Attorney-Client Privilege, Bad Faith Exception to the American Rule, District Court's Inherent Power, Fed. R. Civ. P. 37, Federal Arbitration Act, Fifth Circuit, Grievance, Porzig v. Dresdner Kleinwort Benson North Am. LLC, Positive Software Solutions Inc. v. New Century Mtge Corp, Sanctions
