Hudson v. Moore Business Forms, Inc., 85-2176

• Decision Date: 13 January 1988
• Docket Number: No. 85-2176,85-2176
• Citation: 836 F.2d 1156
• Parties: 48 Fair Empl.Prac.Cas. 898, 2 Indiv.Empl.Rts.Cas. 1049 Ida HUDSON, Plaintiff/Appellee, v. MOORE BUSINESS FORMS, INC., a corp., Joe McArthure, et al., Defendants, and Law Firm of Littler, Mendelson, Fastiff & Tichy, a Professional Corp., and the individual attorneys and members of that firm, Wesley J. Fastiff, Maureen E. McClain & Henry D. Lederman, attorneys, Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1156

836 F.2d 1156

48 Fair Empl.Prac.Cas. 898,

2 Indiv.Empl.Rts.Cas. 1049

Ida HUDSON, Plaintiff/Appellee, v. MOORE BUSINESS FORMS, INC., a corp., Joe McArthure, et al., Defendants and Law Firm of Littler, Mendelson, Fastiff & Tichy, a Professional Corp., and the individual attorneys and members of that firm, Wesley J. Fastiff, Maureen E. McClain & Henry D. Lederman, attorneys, Appellants.

No. 85-2176.

United States Court of Appeals Ninth Circuit.

Argued and Submitted June 8, 1987.

Decided Sept. 2, 1987.

As Amended on Denial of Rehearing and

Rehearing En Banc Jan. 13, 1988.

Gary P. Scholick and Peter R. Boutin, San Francisco, Cal., for appellants.

J. Kenneth Donnelly and Marilyn Mac Rae, Oakland, Cal., for plaintiff/appellee.

Appeal from the United States District Court for the Northern District of California.

Before CHAMBERS, TANG and NELSON, Circuit Judges.

NELSON, Circuit Judge:

Ida Hudson filed suit against her former employer, Moore Business Forms, Inc. ("Moore"), alleging wrongful discharge and sex discrimination. Moore retained the law firm of Littler, Mendelson, Fastiff & Tichy ("Littler") to represent it. Littler filed an answer and a counterclaim that alleged tortious conduct by Hudson in connection with her discharge, and requested $200,000 in compensatory damages, $4 million in punitive damages, costs, and attorneys' fees. The district court dismissed the counterclaim, conducted a hearing to determine if Rule 11 sanctions were appropriate, and imposed sanctions of $14,692.50 against Littler, equal to the amount Hudson spent to defend against the counterclaim and the subsequent motion for sanctions. Littler appeals the sanctions ruling. We note jurisdiction under 28 U.S.C. Sec. 1291 (1982).

We believe that the district court erred in concluding that certain of Littler's claims were wholly frivolous. However, because we find that the request for $4.2 million in damages against Hudson in Moore's counterclaim had no plausible factual or legal basis and was made for the improper purpose of harassing Hudson, we affirm in part, vacate the sanction award, and remand to the district court to reconsider the appropriate amount of the award in light of our holding.

FACTUAL AND PROCEDURAL BACKGROUND

The facts of the lawsuit underlying the sanction award against Littler are set out in detail in the district court's published The key facts are as follows. Moore hired Hudson in 1968 as a collection correspondence clerk. Id. at 470. After a number of years of competent service, she eventually became the credit manager of the Credit Department, in the Western Area Administrative Department, in 1978. Id. In 1980, Moore announced a major reorganization that necessitated the transfer of most of the personnel in Hudson's department to a facility in Denton, Texas. Id. The facts are in dispute as to whether Hudson was qualified for a transfer or was offered the opportunity to do so. Id. at 473. It is undisputed, however, that Hudson remained with Moore until 1982 when her department closed and she was terminated. Id. at 470. She received $10,932.06 in special incentive-to-stay and severance payments. ¹

                memorandum decision and order.    Hudson v. Moore Business Forms, Inc., 609 F.Supp. 467 (N.D.Cal.1985).  The conclusions regarding the sanction hearing are separately recorded in a published supplemental opinion.    Id. at 481-85
                

Following her termination, Hudson filed suit against Moore alleging various federal and pendent state law claims, including breach of her employment contract and breach of the implied covenant of good faith and fair dealing. Id. at 469-70. Hudson's principal allegations were that she was paid less than male employees performing substantially similar work, and that Moore deliberately prevented her from continuing to work at the company by refusing to offer her the opportunity to transfer to the Texas offices. Id. at 470.

Moore, who hired Littler to represent the company, removed the action to federal court and filed an answer and a counterclaim. Id. Moore denied that Hudson received unequal pay for comparable duties of male employees and alleged that it offered Hudson the opportunity to transfer to Texas. In its counterclaim, which prompted the Rule 11 sanction at issue in this appeal, Moore contended that Hudson breached the implied covenant of good faith and fair dealing, a duty of loyalty, and various sections of the California Labor Code, by deliberately refusing offers to transfer to Texas in order to initiate actions for wage discrimination and wrongful termination against Moore. Id. In addition, Moore requested " 'costs of suit, attorneys' fees and interest' " as well as $200,000 in compensatory damages and $4 million in punitive damages. Id. at 484.

Moore filed a motion for partial summary judgment on Hudson's complaint and Hudson filed a motion for summary judgment on Moore's counterclaim. Id. at 470. Moore's motion was granted in part and denied in part. ² Id. Because the district court found that the critical facts of the lawsuit were in dispute, it concluded that summary judgment on Moore's counterclaim would be inappropriate. Id. at 477-78. It proceeded instead to treat Hudson's motion for summary judgment as a motion to dismiss, and dismissed Moore's counterclaim as wholly frivolous and brought for the improper purpose of intimidating Hudson. Id. at 480. On its own motion, the court then ordered Moore and Littler to show cause why Rule 11 sanctions should not be imposed. Id.

After the parties had filed memoranda and following oral argument, the court found that Moore's counterclaim "was brought without the support of any reasonable factual or legal basis and that the defendants' motive for bringing the counterclaim was to harass the plaintiff into dropping her suit and to deter others from bringing suit." Id. at 484. The court awarded sanctions of $14,692.50 under Fed.R.Civ.P. 11, jointly and severally against Littler and the three attorneys who signed the counterclaim. Id. at 484-85. Littler filed a timely appeal.

ISSUES

1) Whether the defendants' counterclaim against Hudson for (a) breach of the covenant

of good faith and fair dealing; (b) breach of the duty of loyalty; (c) violations of various California labor statutes; and (d) $200,000 in compensatory damages, $4 million in punitive damages, plus costs and attorney's fees, constituted a sanctionable violation of Fed.R.Civ.P. 11. 2) Whether the district court abused its discretion in imposing $14,692.50 in sanctions against Littler and the individual attorneys who signed the counterclaim.

STANDARD OF REVIEW

The review of Rule 11 ³ sanctions may require three separate inquiries. Zaldivar v. City of Los Angeles, 780 F.2d 823, 828 (9th Cir.1986). First, whether specific conduct violated Rule 11 is a legal issue reviewable de novo. Golden Eagle Distrib. Corp. v. Burroughs Corp., 801 F.2d 1531, 1538 (9th Cir.1986). Second, any disputed factual determinations are reviewed under a clearly erroneous standard. Id. Third, the appropriateness of the sanction imposed is reviewed for abuse of discretion. Id.

In addition, in 1983, the amendments to Rule 11 rejected the requirement of establishing the subjective bad faith of a signing attorney prior to imposing sanctions. Zuniga v. United Can Co., 812 F.2d 443, 452 (9th Cir.1987). The new standard for appraising the actions of a signing attorney is one of objective reasonableness under the circumstances. Greenberg v. Sala, 822 F.2d 882, 885 (9th Cir.1987); Zaldivar, 780 F.2d at 829.

DISCUSSION

I. General Principles for Reviewing Rule 11 Sanctions

Pursuant to the 1983 amendments to Rule 11, an attorney who signs a "pleading, motion, or other paper," Fed.R.Civ.P. 11, in federal court warrants that it is "well-grounded in fact, that it is warranted by existing law or a good faith argument for an extension, modification or reversal of existing law, and that it is not filed for an improper purpose." See Golden Eagle, 801 F.2d at 1536. The two problems that Rule 11 addresses, therefore, are "frivolous filings" and the use of judicial procedures as a tool for "harassment." Zaldivar, 780 F.2d at 830. Sanctions are mandatory if the court concludes that Rule 11 has been violated. Fed.R.Civ.P. 11; Huettig & Schromm, Inc. v. Landscape Contractors Council, 790 F.2d 1421, 1426 (9th Cir.1986).

An objective standard of reasonableness is applied to determinations of frivolousness as well as improper purpose. Zaldivar, 780 F.2d at 830-31. The key question in assessing frivolousness is whether a complaint states an arguable claim--not whether the pleader is correct in his perception of the law. Id. at 830, 832. Therefore, courts "do not examine the complaint in the same manner as a court considering a Rule 12(b)(6) motion," because ultimate failure on the merits is irrelevant. Id. at 832. In addition, because of the objective standard applicable to Rule 11 analyses, a complaint that is found to be well-grounded in fact and law cannot be sanctioned as harassing, regardless of the attorney's subjective intent. Id.; see also Golden Eagle, 801 F.2d at 1538.

An award of Rule 11 sanctions raises two competing concerns: the desire to avoid abusive use of the judicial process Finally, although this court reviews de novo whether particular conduct is sanctionable, it is necessarily handicapped in its review because it is more distant from the parties and events than the district court. Specifically in this case, Judge Patel refers to previous sanctions against Littler and personal warnings to counsel Lederman that undoubtedly colored her appraisal of the propriety of Littler's conduct in this action. Hudson, 609 F.Supp. at 484-85 (also noting that Littler's reference to a case that supported a contrary argument to its claim was "perhaps the greatest degree of candor defendants have displayed in these proceedings;" also noting that "the court should not be forced to expend time and money...