Sanctions have long been available under federal statute for “multiply[ing] the proceedings in any case unreasonably and vexatiously.”  Entitled “Counsel’s Liability for Excessive Costs,” 28 U.S.C. § 1927 is a short and seemingly straightforward provision that applies to “[a]ny attorney or other person admitted to conduct cases in any court of the United States…” and makes that person liable “to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.”  (The first version of the statute was enacted in 1813.)

Can law firms be held liable under the statute?  In Kaass Law v. Wells Fargo Bank, N.A., the Ninth Circuit Court of Appeals has recently said “No,” adding to an existing circuit split.  Of the six United States Courts of Appeals that have ruled on the issue, three now hold that law firms may not be sanctioned under § 1927, and three have said firms can be liable.

Reckless and knowing multiplication?

Acting on behalf of a plaintiff, Kaass Law sued a lender and nine other defendants.  The suit arose from certain information about the plaintiff that had allegedly been reported to credit agencies.  The district court granted defendants’ motion to dismiss, and the defendant lender moved for sanctions under § 1927, seeking more than $11,000 in attorney fees both against the plaintiff individually and against the law firm.

The district court declined to sanction the individual plaintiff, but ruled that the law firm was liable under § 1927 for “act[ing] in bad faith by knowingly raising frivolous arguments” against the lender.  Further, in attempting to file an amended complaint, the district court said, the firm ignored “glaring” legal errors that the defendants had pointed out, thereby “recklessly and knowingly multiplying the proceedings.”

In reversing, the Ninth Circuit relied on “the plain language of the statute” as well as the reasoning of rulings from the Sixth and Seventh Circuits.

No reason to consider a law firm a “person”

The Ninth Circuit said that if Congress had intended to allow § 1927 to reach law firm conduct, “it would have included an express authorization to do so in the statute.”  The court in Kaass Law agreed with the Seventh Circuit, which in 2005 had reasoned, in Claiborne v. Wisdom, that § 1927 was similar to Federal Civil Rule 11 before its amendment in 1993 — which the U.S. Supreme Court had held did not permit sanctions to be imposed on law firms.  When Rule 11 was amended to allow sanctions against “any attorney, law firm, or party” that violated the rule, no such change was made to § 1927.

Additionally, the Ninth Circuit agreed with the Sixth Circuit, which held in 2011 that even if a law firm can be “personified in a literary sense, … there is no reason to consider a law firm a ‘person’ under [§ 1927],” and therefore the statute “does not authorize the imposition of sanctions on law firms.”

Reasoning of other circuits not persuasive

The Third, Second and Eleventh Circuits have each upheld sanctions against law firms pursuant to § 1927, but the court in Kaass Law was not persuaded by the reasoning in those cases.  Particularly, the court said, the Third Circuit failed to address “the limiting statutory language” of § 1927; the Second Circuit based its holding “on the inherent powers of the district court, not on the express language of” § 1927; and the Eleventh Circuit “seemingly conflated the sanctioning powers in two different rules” in upholding sanctions against a law firm under § 1927 and Rule 11.

Will the split be resolved?

Although the issue was one of first impression in the Ninth Circuit, the debate in the federal circuit courts on the reach of § 1927 stretches back three decades.  It is possible that the now-deepened split will prompt Supreme Court review — eventually.  In the meantime, practitioners will have to deal with the divergent views of the different circuits.