In re Pennie & Edmonds Llp

• Decision Date: 14 March 2003
• Docket Number: No. 02-7177.,02-7177.
• Citation: 323 F.3d 86
• Parties: In re PENNIE & EDMONDS LLP, Appellant.
• Court: U.S. Court of Appeals — Second Circuit

323 F.3d 86

In re PENNIE & EDMONDS LLP, Appellant.

No. 02-7177.

United States Court of Appeals, Second Circuit.

Argued: September 11, 2002.

Decided: March 14, 2003.

Frank H. Wright, Frank H. Wright & Associates, New York, N.Y., for Appellant.

Before: NEWMAN and F.I. PARKER, Circuit Judges; and UNDERHILL,^* District Judge.

Judge UNDERHILL dissents with a separate opinion.

JOHN O. NEWMAN, Circuit Judge.

This appeal presents a narrow issue concerning the applicable mens rea standard when a trial judge, sua sponte, initiates a post-trial Rule 11 sanction proceeding because a lawyer permitted a client to submit a false affidavit at an earlier stage of the litigation. The specific issue is whether the lawyer's liability for the sanction requires a mental state of bad faith or only objective unreasonableness in circumstances where the lawyer has no opportunity to withdraw or correct the challenged submission. Pennie & Edmonds LLP ("P & E") appeals from the January 17, 2002, order of the District Court for the Southern District of New York (John S. Martin, District Judge) ruling that the law firm violated Rule 11(b)(3) of the Federal Rules of Civil Procedure. We conclude that where, as here, a sua sponte Rule 11 sanction denies a lawyer the opportunity to withdraw the challenged document pursuant to the "safe harbor" provision of Rule 11(c)(1)(A), the appropriate standard is subjective bad faith. In this case, the District Court accepted the firm's assertion that it acted in subjective good faith. We therefore vacate the sanction ruling.

Background

The sanction proceeding had its origin in trademark litigation concerning the marketing of pasta sauce. A detailed account of that litigation is set forth in Patsy's Brand, Inc. v. I.O.B. Realty, Inc., 317 F.3d 209 (2d Cir.2003). For purposes of this appeal, we recount only the following circumstances. One issue in the trademark litigation was the date when the Defendants had begun using allegedly infringing labels on their product. They initially contended that their labels were first used in 1993, before the Plaintiff started marketing its product. At an early stage of the litigation, before P & E had entered its appearance, the Defendants presented two documents in support of the 1993 usage: what purported to be an example of the allegedly infringing label and what purported to be an invoice from a printer showing that this label had been printed in 1993. The probative value of these documents was destroyed by evidence that a bar code on the label did not exist until at least 1998 and the area code for a phone number on the invoice did not exist until some time after 1993. The Defendants then disclaimed reliance on the fraudulent documents.

After the District Court granted the Plaintiff's motion for a preliminary injunction, P & E appeared for the Defendants. Two partners of the firm queried two of the Defendants concerning the previous submission of the fraudulent documents. One Defendant, Frank Brija, said that the submitted label was a 1999 label that he had inadvertently submitted and that a similar label had in fact been used in 1993. Brija also said that, after the fraudulent invoice had been submitted, he was told by the printer that the printer had been unable to locate any of the original invoices and had therefore, without the Defendants' knowledge, reconstructed an invoice to reflect the printer's recollection of the printing order. Brija showed the lawyers an affidavit, purportedly signed by the printer, which stated that the printer had reconstructed the invoice and did not recall telling Brija that the document sent to Brija for submission to the Court was not a copy of the original invoice.

Substantial doubts about these explanations later arose from at least two circumstances. The 1999 label, which Brija claimed was similar to the label used in 1993, bore a trademark registration symbol for a mark that was not registered until several years after 1993. In addition, when the P & E lawyers contacted a lawyer for the printer, they were told that the printer, if subpoenaed for a trial, would testify that he had not done any business with the Defendants in the relevant time period. The P & E lawyers questioned Brija, who insisted that his explanation for the submission of the fraudulent label and invoice was true.

Thereafter, the Plaintiff moved for summary judgment. Among the papers submitted by the Defendants in opposition was an affidavit of Brija's that became the basis for the Rule 11 sanction. Two paragraphs of that affidavit repeated Brija's explanation for the submission of the fraudulent documents: inadvertence as to the first "1993" label and the printer's undisclosed reconstruction of the invoice.

The District Court granted summary judgment for the Plaintiff. The Court's opinion reflected Judge Martin's view that Brija's explanation for the fraudulent documents was false. At the end of the opinion explaining that ruling, the Court sua sponte ordered P & E to show cause why the firm should not be sanctioned under Rule 11 for permitting Brija to submit a false affidavit. P & E's response detailed the steps taken to investigate Brija's explanations and reported Brija's repeated insistence that he was telling the truth.

In an opinion and order entered January 17, 2001, the District Court sanctioned P & E under Rule 11 for permitting Brija to file an affidavit containing statements that the law firm could not have objectively believed were true. Judge Martin accepted the firm's assertion that it had acted in subjective good faith. As a penalty, the firm was ordered to send copies of the Court's sanction opinion to every lawyer in the firm, with a memorandum stating that the firm adheres to the highest ethical standards and that, if such adherence causes the loss of a client, the lawyer will suffer no adverse consequence. The sanction order has been stayed pending this appeal.

Discussion

Rule 11 was amended in 1993 in two respects relevant to the pending appeal. First, the standard for imposing sanctions because of written factual contentions submitted to a district court was changed. Under the prior standard, a signature on a document certified that the contentions contained in it were "well grounded in fact." 2 Moore's Federal Practice § 11 App.02 [1] (3d ed.2001) (quoting Fed.R.Civ.P. 11 (1983)). Under the current standard, presenting a document to the court certifies "that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, ... (3) the allegations and other factual contentions have evidentiary support...." Fed. R.Civ.P. 11(b) (as amended 1993).

Second, a "safe harbor" provision was added, providing an opportunity to withdraw or correct a challenged submission. Where a sanction is initiated by a party's motion, this provision requires initial service of the motion but delays filing or presentation of the motion to the court for 21 days; filing of the motion is permitted 21 days after service only if the challenged submission is not "withdrawn or appropriately corrected." Id. 11(c)(1)(A). Although Rule 11 contains no explicit time limit for serving the motion, the "safe harbor" provision functions as a practical time limit, and motions have been disallowed as untimely when filed after a point in the litigation when the lawyer sought to be sanctioned lacked an opportunity to correct or withdraw the challenged submission. See Barber v. Miller, 146 F.3d 707, 710-11 (9th Cir.1998) (Rule 11 sanction disallowed where motion filed after complaint dismissed); Ridder v. City of Springfield, 109 F.3d 288, 295-97 (6th Cir. 1997) ("A party must now serve a Rule 11 motion on the allegedly offending party at least twenty-one days prior to conclusion of the case or judicial rejection of the offending contention"; Rule 11 sanction disallowed where motion filed after summary judgment motion granted); DeShiro v. Branch, 183 F.R.D. 281, 287-88 (M.D.Fla.1998) (same); Daliessio v. DePuy, Inc., 178 F.R.D. 451, 452 (E.D.Pa. 1998) (Rule 11 motion disallowed where motion not served on adverse party prior to entry of final judgment). The Advisory Committee on Civil Rules contemplated that Rule 11 motions would be deemed untimely if filed too late to permit correction or withdrawal,¹ and the Moore treatise endorses this approach.²

A sanction proceeding may also be initiated by a court on its own motion by issuance of a show cause order, see id. 11(c)(1)(B), but no "safe harbor" opportunity exists to withdraw or correct a submission challenged in a court-initiated proceeding, id.

In recommending the "safe harbor" provision, the rule-makers explicitly noted its unavailability for sanction proceedings initiated by a court and expressed their view that, as a result, court-initiated sanction proceedings would be used only in more egregious circumstances:

Since show cause orders will ordinarily be issued only in situations that are akin to a contempt of court, the rule does not provide a "safe harbor" to a litigant for withdrawing a claim, defense, etc., after a show cause order has been issued on the court's own initiative.

Fed.R.Civ.P. 11 advisory committee's note to 1993 Amendments. We have noted that the Advisory Committee's "akin to a contempt" standard is applicable to sanction proceedings initiated by a court, see Hadges v. Yonkers Racing Corp., 48 F.3d 1320, 1329 (2d Cir.1995), as have other circuits, see Hunter v. Earthgrains Co. Bakery, 281 F.3d 144, 151 (4th Cir.2002); Barber v. Miller, 146 F.3d 707, 711 (9th Cir.1998). Courts have taken the Advisory Committee's note to mean that sua sponte Rule 11 sanctions must be reviewed with "particular stringency." Hunter, 281 F.3d at 153; United National Insurance Co. v. R & D Latex Corp., 242 F.3d 1102, 1115 (9th Cir. 2001). However, we have not explicitly ruled on the applicable mens rea standard in such circumstances.

The mental state...