Recently, the U.S. Supreme Court clarified in Goodyear Tire & Rubber Co. v. Haeger that even a district court’s exercise of broad discretion to impose a civil sanction for a litigant’s bad faith conduct has to be limited by a causal link.

The parties in Goodyear had reached a settlement of the underlying product liability case after several years of contentious discovery. After the settlement, however, plaintiffs, the Haegers, learned (and Goodyear, the defendant, conceded) that Goodyear had withheld certain information that the Haegers had requested early and often during the discovery stage. Accordingly, the Haegers asked the District Court to impose sanctions on Goodyear for discovery fraud. Because the parties had already settled, the only sanction available was to award the Haegers attorney’s fees and costs expended in the litigation.

The District Court noted that Goodyear’s conduct rose to a “truly egregious level” and ordered Goodyear to reimburse the Haegers $2.7 million in legal fees and costs incurred since Goodyear’s first dishonest discovery response. In doing so, the District Court noted that there was not a causal link between the amount of fees and costs awarded as a sanction and the misconduct, but held that in truly egregious cases no causal link was required for a compensatory sanction.

Recognizing that, on appeal, the Ninth Circuit might require a causal link, the District Court made a “contingent” award of $2 million in case the appellate court required a link between the misconduct and the amount of the sanction. The $0.7 million deduction was based on Goodyear’s estimate of the fees the Haegers incurred in developing claims against other defendants and proving their own medical damages. A divided Ninth Circuit affirmed the full $2.7 million award, but a unanimous Supreme Court reversed and remanded the case for the District Court to reassess the amount of the sanction.

Analysis by Supreme Court

The Supreme Court first recognized federal courts’ inherent powers to “fashion an appropriate sanction for conduct which abuses the judicial process,” including the assessment of attorney’s fees.

Second, the Court differentiated between sanctions imposed pursuant to civil procedures or criminal procedures. A civil sanction is compensatory rather than punitive and can only redress the wronged party for losses sustained. A punitive sanction requires a court to provide the party against whom sanctions are sought criminal-type protections and procedural guarantees.

Third, the Court held that a compensatory sanction must be “calibrated to the damages caused by” the bad faith acts. The award cannot include fees that would have been incurred without the misconduct. Therefore, the Court held, a but-for test must be met to impose a compensatory sanction, even one awarded based on egregious misconduct.

Fourth, the Court held that a district court should assess and allocate specific litigation expenses in order to meet the but-for causation standard. Here, the Supreme Court recognized that the District Court’s judgments in the allocation are entitled substantial deference given the trial court’s superior understanding of the litigation. The Supreme Court also noted that there may be truly exceptional cases where all of a party’s fees from a specific point in time may be awarded under the but-for standard. Id. For example, if a litigant legally required to disclose evidence fatal to its position fails to do so, the court may grant all fees incurred from that point on. Even a broader, blanket award of all legal expenses is possible if the court finds that the entire course of conduct of a litigant throughout the litigation was “part of a sordid scheme” to defeat a valid claim. (in fact, such ruling was held in Chambers v. Nasco, Inc.). Likewise, if a plaintiff initiates a case in complete bad faith, the court may award every cost of defense.

Finding that neither the District Court nor the Ninth Circuit applied the correct legal standard to assess the compensatory sanction, the Supreme Court reversed. The Supreme Court pointed to the “contingent” award by the District Court as evidence that the primary $2.7 million award was not appropriately confined to the causal link.

In the end, the Supreme Court noted its role as a court of review and remanded the case to the District Court so that the trial judge can decide whether Goodyear waived any ability to challenge the contingent award, and if not waived, reassess the compensatory sanction by applying the appropriate causal limitation.

Key Takeaways

This case sends a simple but important message to litigants seeking or facing a sanction. Even when a district court exercises its inherent power to impose a sanction, the amount awarded will need to be justified by a causal link. In case where a compensatory sanction is sought, litigants will need to advocate for the existence or absence of a causal link in arguing about what the appropriate amount of a sanction should be.