In recent years, discussions regarding the contours of a federal court’s inherent authority to sanction litigants for bad-faith behavior have been heating up faster than a defective tire at highway speeds. In the 2015 amendments to the Federal Rules of Civil Procedure, the Civil Rules Advisory Committee considered the impact of inherent authority on the patchwork of spoliation cases decided in the last decade, and decided to displace it wherever the new rule 37(e) applied.
The US Supreme Court’s decision on Tuesday in Goodyear Tire & Rubber Co. v. Haeger regarding a court’s inherent authority to sanction has reheated these discussions. In Goodyear, the Court reaffirmed the requisite “but-for” causal link between the sanctionable conduct and the attorney’s fees incurred by the innocent party, reining in those courts that sought to impose punitive sanctions through exercise of their inherent authority. The Court’s opinion—in a case that had been settled but was reopened when proof of pre-settlement discovery misconduct came to light—is a rare and useful treatment of the ill-defined power.
Goodyear Tire & Rubber Co. v. Haeger
After the Haeger family’s motorhome swerved off the road and flipped over, the family sued the Goodyear Tire & Rubber Company1 alleging that the failure of the Goodyear G159 tire on the vehicle caused the accident. Goodyear Tire & Rubber Co. v. Haeger, 581 U.S. ___ (2017) (slip op., at 1–2). The Haegers theorized that the tire was not designed to withstand the heat it generated when used on a motorhome at highway speeds. Id. at 2. During discovery, the Haegers repeatedly requested that Goodyear turn over internal tests regarding the G159, but the company’s responses were delayed and unrevealing. Id. at 2. The district court had to referee a number of contentious disputes between the parties during discovery, which lasted several years. Id. Nonetheless, on the eve of trial, the parties settled the case. Id.
Several months after settlement, the Haegers discovered that, in another lawsuit, Goodyear had disclosed test results for the G159 that indicated it became unusually hot at certain speeds. Id. Goodyear subsequently conceded in correspondence that it had withheld requested information from the Haegers during discovery. Id. The Haegers then sought sanctions for discovery fraud alleging that Goodyear knowingly concealed crucial test records related to the alleged defective design. Id.
The district court agreed with the Haegers and ordered Goodyear to pay $2.7 million in an exercise of its inherent power to sanction litigation misconduct. Id. The district court lambasted Goodyear’s “years-long course” of bad-faith behavior and the company’s “repeated and deliberate attempts to frustrate the resolution of this case on the merits.” 906 F. Supp. 2d 938, 971–72 (D. Ariz. 2012). The district court wanted to enter a default judgment against Goodyear but was unable to do so because the case had already settled. Id. at 972. Limited in its options, the district court imposed a $2.7 million sanction by calculating those fees the Haegers had spent since the moment Goodyear made its first dishonest discovery response. Id. at 974–75.
Recognizing such sanctions are usually limited to the amount of fees caused by the misconduct, the district court reasoned that where the conduct rose “to a truly egregious level,” all of the attorneys’ fees incurred in the case may be awarded without any need to find a causal link. Id. at 975. Nonetheless, the district court seemed to suggest a causal link was present by speculating that it was more likely than not that the case would have settled earlier had Goodyear not engaged in discovery misconduct. Id. at 972. The district court also provided a contingent award of $2 million in the event the US Court of Appeals reversed its preferred award, based upon Goodyear’s estimate that $700,000 of those fees were incurred developing claims against other defendants. Haeger, 581 U.S. ___ (slip op., at 4).
On appeal, a divided Ninth Circuit panel affirmed the $2.7 million award finding that the district court acted properly in awarding the amount it reasonably believed the Haegers expended during the time when Goodyear acted in bad-faith. 813 F.3d 1233, 1250 (2016). In other words, the Ninth Circuit found that the award was not an abuse of discretion because it was temporally limited only to the time during which Goodyear displayed bad-faith. Id. Recognizing a split of authority regarding the limits of sanctions available to a court under its inherent authority, the Supreme Court granted certiorari. Haeger, 581 U.S. ___ (slip op., at 5).
The Supreme Court unanimously held that a federal court’s inherent authority to sanction a litigant for bad-faith conduct by ordering it to pay the other side’s legal fees is limited to the award of fees the innocent party would not have incurred but-for the misconduct. Haeger, 581 U.S. ___ (slip op., at 1). The Supreme Court noted that courts generally have inherent authority that includes “the ability to fashion an appropriate sanction for conduct which abuses the judicial process.” Id. at 5 (citing Chambers v. NASCO, Inc., 501 U.S. 23, 44–45 (1991)). But, the Court explained that it “has made clear that such a sanction, when imposed pursuant to civil procedures, must be compensatory rather than punitive in nature.” Id. Thus, in fashioning such a sanction, a federal court must calibrate the award to the damages caused by the acts on which it is based. Id. And “if an award extends further than that—to fees that would have been incurred without the misconduct—it crosses the boundary from compensation to punishment.” Id. The Court explained that the need for a court to identify a causal link is not only limited to its inherent sanctioning authority, but also extends to rule-based and statutory sanction regimes that similarly require courts to find such a causal connection before shifting fees. Haeger, 581 U.S. ___ (slip op., at 6, n.5).
The Court reiterated that the requisite causal connection is “appropriately framed as a but-for test: The complaining party  may recover ‘only the portion of his fees that he would not have paid but for’ the misconduct.” Id. at 7 (quoting Fox v. Vice, 563 U.S. 826, 836 (2011)). But, district courts still have discretion and judgment in assessing and allocating specific litigation expenses and do not have to achieve “auditing perfection.” Fox, 563 U.S. at 837–38. And in light of the trial court’s superior understanding of the litigation, such determinations are entitled to substantial deference on appeal, so long as they are grounded in a causal link between the misconduct and the harm. Haeger, 581 U.S. ___ (slip op., at 8).
While the parties did not quibble with each other regarding the state of the law, they sharply disagreed over what the law meant for the viability of the district court’s sanction award. Id. at 9. The Haegers maintained that the award could stand, arguing first that both the district court and the Ninth Circuit articulated and applied the but-for causation standard, and alternatively that the award should be upheld because it objectively passed the but-for test. Id. at 9–10. Goodyear asserted that the entire award should be thrown out because the proper legal standard was not applied. Id. at 9.
The Supreme Court agreed with Goodyear, reversing the entire award because it did not arise from application of the but-for test and remanding the matter to the district court. Id. at 10. The Court explained that both the district court’s egregiousness standard and the Ninth Circuit’s temporal limitation missed the mark. Id. at 11. “A sanctioning court must determine which fees were incurred because of, and solely because of, the misconduct at issue (however serious, or concurrent with a lawyer’s work, it might have been).” Id. The Court refused to uphold the $2.7 million award or the contingent $2 million award because it was uncertain if either objectively satisfied the but-for test. Id. at 12.
Discussions regarding the contours of a court’s inherent authority to sanction will likely continue. But, in the wake of Haeger, the Supreme Court has made clear that a federal court’s inherent authority to sanction a party in a civil case for bad-faith behavior consists only of the power to compensate for the harm the misconduct has caused, and does not include the power to impose punitive sanctions that lack the requisite but-for causal link between conduct and harm. Id. at 7.
In the e-discovery context, the extent of a district court’s power to punish discovery lapses was fiercely debated during consideration of amended Rule 37(e). The Haeger decision is consistent with the Rules Committee’s ultimate decision in 2015 to give parties making preservation decisions in good faith some breathing room by reducing the in terrorem impact of drastic and disproportionate spoliation sanctions. Likewise, Haeger will restrain lower courts from using their inherent authority to award punitive, as opposed to compensatory, sanctions against preserving parties who have lost data that should have been preserved.