F.T.C. v. Kuykendall

• Decision Date: 28 September 2006
• Docket Number: No. 05-6138.,No. 05-6047.,05-6047.,05-6138.
• Citation: 466 F.3d 1149
• Parties: FEDERAL TRADE COMMISSION, Plaintiff-Appellee/Cross-Appellant, v. H.G. KUYKENDALL, Sr.; C.H. Kuykendall, Defendants-Appellants/Cross-Appellees, and H.G. Kuykendall, Jr.; Diversified Marketing Service Corporation; National Marketing Service Inc.; NPC Corporation of the Midwest Inc.; Magazine Club Billing Service, Inc., Defendants.
• Court: U.S. Court of Appeals — Tenth Circuit

466 F.3d 1149

FEDERAL TRADE COMMISSION, Plaintiff-Appellee/Cross-Appellant, v. H.G. KUYKENDALL, Sr.; C.H. Kuykendall, Defendants-Appellants/Cross-Appellees, and H.G. Kuykendall, Jr.; Diversified Marketing Service Corporation; National Marketing Service Inc.; NPC Corporation of the Midwest Inc.; Magazine Club Billing Service, Inc., Defendants.

No. 05-6047.

No. 05-6138.

United States Court of Appeals, Tenth Circuit.

September 28, 2006.

Andrew W. Lester, Lester, Loving & Davies, P.C., Edmond, OK (Gregory J. Kerwin, Gibson, Dunn & Crutcher LLP, Denver, CO, and Susan B. Loving, Lester, Loving & Davies, P.C., Edmond, OK, with him on the briefs), for Defendants-Appellants/Cross-Appellees.

Michele Arington, Attorney (William Blumenthal, General Counsel, John F. Daly, Deputy General Counsel, and Gary

L. Ivens, Of Counsel, with her on the briefs), Federal Trade Commission, Washington, DC, for Plaintiff-Appellee/Cross-Appellant.

Before TACHA, Chief Circuit Judge, EBEL, Circuit Judge, and CASSELL, District Judge.^†

TACHA, Chief Circuit Judge.

H.G. Kuykendall, Sr. and C.H. Kuykendall (together, the "Senior Kuykendalls") appeal the District Court's denial of attorney fees pursuant to the Equal Access to Justice Act ("EAJA"), 28 U.S.C. § 2412(b). The Federal Trade Commission ("FTC") cross-appeals the District Court's award of certain costs under 28 U.S.C. § 2412(a)(1). We take jurisdiction under 28 U.S.C. § 1291, AFFIRM the denial of attorney fees, and REVERSE the award of certain costs to the Senior Kuykendalls.

I. BACKGROUND

The factual background of this case has been exhaustively set out in our en banc opinion, F.T.C. v. Kuykendall, 371 F.3d 745 (10th Cir.2004) ("En banc Opinion"), and the vacated panel opinion, F.T.C. v. Kuykendall, 312 F.3d 1329 (10th Cir.2002) ("Panel Opinion"). We therefore only briefly summarize the procedural history. In 1996, the FTC brought an action against a number of affiliated telemarketing corporations as well as the Senior Kuykendalls and H.G. Kuykendall, Jr., both as individuals and as officers of the corporate defendants (collectively "the defendants"). The complaint alleged that the defendants engaged in deceptive and misleading business practices in violation of 15 U.S.C. § 45. The parties entered into a settlement agreement that was eventually incorporated into a "Stipulated Final Judgment and Order for Permanent Injunction" ("Permanent Injunction").

In 2002, the FTC filed a motion to show cause why the defendants should not be found in contempt of the Permanent Injunction and requested that the District Court award $51 million in contempt sanctions. All of the defendants moved to dismiss on due process grounds, and the Senior Kuykendalls separately filed a motion to dismiss claiming a lack of personal liability. The Senior Kuykendalls argued that they played no role in the management of the corporations during the period of the alleged contempt and therefore could not be held liable for violating the Permanent Injunction. After an evidentiary hearing, the District Court denied the Senior Kuykendalls' motion, ruled in the FTC's favor as to liability, and held each of the defendants jointly and severally liable for $39 million. En Banc Opinion, 371 F.3d at 750-51.

The defendants appealed the District Court's ruling on a variety of grounds including an individual appeal by the Senior Kuykendalls arguing that the District Court erred by denying their motion to be dismissed from the contempt proceedings. A panel of this court affirmed the District Court's findings that all of the defendants were liable, but remanded for further proceedings as to the amount of damages awarded. See Panel Opinion, 312 F.3d at 1342-43. This Court granted rehearing en banc, vacated the panel opinion, and reversed the District Court's judgment as to the Senior Kuykendalls' liability, but upheld the District Court's finding of liability as to H.G. Kuykendall, Jr. and one of the corporate defendants. See En Banc Opinion, 371 F.3d at 757-63.

Thereafter, the Senior Kuykendalls filed a motion for attorney fees and expenses, pursuant to 28 U.S.C. § 2412(b). They also sought taxation of approximately $168,000 in costs associated with the appeal, see 28 U.S.C. § 2412(a)(1), which included over $161,000 needed to secure a $5 million letter of credit that the District Court required in order to stay enforcement of the judgment during the course of the appeal. The District Court awarded the Senior Kuykendalls a total of $167,946.77, but denied their motion for attorney fees. The Senior Kuykendalls now appeal the District Court's denial of attorney fees, and the FTC cross-appeals the award of costs associated with the letter of credit.

II. DISCUSSION

A. The District Court Properly Denied the Motion for Attorney Fees

Under the "American Rule," the prevailing party in civil litigation may not collect attorney fees from the loser. United States v. McCall, 235 F.3d 1211, 1216 (10th Cir.2000). In certain rare circumstances, however, an exception to this rule is applied when a party opponent is found to have acted "in bad faith, vexatiously, wantonly, or for oppressive reasons." Id. (quotation omitted). This "bad faith exception" to the American Rule applies to the Government pursuant to 28 U.S.C. § 2412(b), which states that the United States is liable for attorney fees "to the same extent that any other party would be liable under the common law." 28 U.S.C. § 2412(b). In order to fall within the exceedingly narrow bad faith exception to the general rule, there must be clear evidence that the challenged claim "is entirely without color and has been asserted wantonly, for purposes of harassment or delay, or for other improper reasons." F.T.C. v. Freecom Commc'ns, Inc., 401 F.3d 1192, 1201 (10th Cir.2005). Because a fee award under § 2412(b) is punitive, it "requires more than a showing of a weak or legally inadequate case," and is only appropriate "in exceptional cases and for dominating reasons of justice." United States v. 2,116 Boxes of Boned Beef, 726 F.2d 1481, 1488 (10th Cir.1984).

Whether the bad faith exception applies turns on the party's subjective bad faith. Sterling Energy Ltd. v. Friendly Nat'l Bank, 744 F.2d 1433, 1435 (10th Cir. 1984). A district court's determination as to whether a party has acted in bad faith is a finding of fact that we review for clear error. Bergman v. United States, 844 F.2d 353, 357 (6th Cir.1988); Vibra-Tech Eng'rs, Inc. v. United States, 787 F.2d 1416, 1418 (10th Cir.1986); Int'l Union of Petroleum and Indus. Workers v. W. Indus. Maint., Inc., 707 F.2d 425, 428 (9th Cir.1983). Finally, we review a district court's denial of attorney fees for an abuse of discretion. 2,116 Boxes of Boned Beef, 726 F.2d at 1488.

The District Court did not make any findings as to the first prong of the bad faith test—whether the FTC's claim was colorable—because it concluded that the Senior Kuykendalls had failed to present any evidence that the FTC's claims were brought for an improper purpose. The Senior Kuykendalls' argument on appeal relies on statements made in our En Banc Opinion to support their claim of bad faith. Specifically, they highlight that this Court found that the FTC failed to introduce any evidence to support a finding that the Senior Kuykendalls could be held personally liable for the challenged conduct. See En Banc Opinion, 371 F.3d at 759-63.

Even if we were to accept the Senior Kuykendalls' contention that the claim against them was colorless, that fact alone would not support taxation of fees on the FTC.¹ The test for bad faith is conjunctive—it requires clear evidence of both a complete lack of color and an improper purpose on the part of the government. See Freecom, 401 F.3d at 1201. Our statements regarding the factual inadequacies in the FTC's case do not shed light on whether the FTC subjectively acted with an improper purpose. In fact, there is no evidence to suggest as much.

The Senior Kuykendalls argue, however, that the case against them was so deficient as to give rise to an inference that the claim was motivated by an improper purpose. See Sterling Energy, 744 F.2d at 1437 (stating that "a case can be so frivolous as to reflect impermissible conduct"). The District Court found that such a finding was not warranted in this case because there was a dearth of other evidence to suggest that the FTC brought the claims for any improper reason. Indeed, "bad faith requires more than a mere showing of a weak or legally inadequate case, and the exception is not invoked by findings of negligence, frivolity, or improvidence." F.D.I.C. v. Schuchmann, 319 F.3d 1247, 1252 (10th Cir.2003).

Finally, the Senior Kuykendalls point out that this Court, in questioning why the FTC waited approximately five years before filing the contempt action, suggested that the FTC's conduct "raises questions about its bona fides." En Banc Opinion, 371 F.3d at 755. As the District Court noted, however, this observation was made with regard to the timing of the FTC's actions against all the defendants (some of whom were properly held liable) and does not provide "clear evidence," see Freecom, 401 F.3d at 1201, that the action against the Senior Kuykendalls was motivated by an improper purpose. Accordingly, the District Court's factual determination that the FTC did not pursue its action against the Senior Kuykendalls in bad faith is not clearly erroneous. Clearly, then, the court did not abuse its discretion in denying the Senior Kuykendalls' recovery of attorney fees.

B. Sovereign Immunity Bars the Award of Costs not Enumerated in 28 U.S.C. § 1920

The Federal Rules of Appellate Procedure direct that costs be taxed against the party who loses on appeal. See Fed. R.App. P. 39(a). These costs may include "premiums paid for a supersedeas bond or other bond to preserve rights pending appeal." Fed. R.App. P. 39(e)(3). But "[c]osts for or against the United States, its agency, or officer...