By John W. Scanlan, J.D.
A federal court using its inherent authority to sanction a party for bad faith conduct by ordering it to pay the other side’s legal fees may award only the fees the innocent party incurred solely as a result of the misconduct, the U.S. Supreme Court unanimously held. The decision reversed and remanded a Ninth Circuit decision upholding a district court’s award of $2.7 million against Goodyear for the entire amount a family suing the company had spent in attorney fees and costs since the company’s misconduct began during discovery (Goodyear Tire & Rubber Co. v. Haeger, April 18, 2017, Kagan, E.).
A motorhome equipped with Goodyear G159 tires swerved off the road and flipped over. The family owning the motorhome brought suit against Goodyear, along with the manufacturers of the motorhome and its chassis (the family settled with the motorhome manufacturer and the district court granted summary judgment to the chassis maker). The owners alleged the tire failed as a result of a defect because it was not designed to handle the heat generated while used on a motorhome operated at highway speeds. During the discovery process, which lasted several years, the owners repeatedly asked Goodyear to turn over internal test results for the G159 tire, but Goodyear’s responses were slow and "unrevealing." The parties eventually settled for an undisclosed sum. Later, the owners’ attorney learned from a newspaper article that in a similar case, Goodyear had disclosed the test results, which indicated that the tire got "unusually hot" between 55 and 65 miles per hour. Goodyear conceded that it had withheld this information despite the owners’ frequent requests during discovery for "all testing data" regarding the G159 tire.
The owners then sought sanctions against Goodyear for discovery fraud, and the district court found that Goodyear had engaged in a "years-long" course of bad behavior. It awarded the owners $2.7 million, which represented the total sum of the owners’ legal fees and costs incurred since Goodyear made its first dishonest response in discovery. Because it found the company’s conduct was egregious, the court stated that it was unnecessary to find a causal link between the expenses and the sanctionable conduct, observing that if Goodyear had turned over the test results at that time, the case would more likely than not have been settled much earlier. As a backup, it also made a contingent award of $2 million, based on Goodyear’s estimates that $700,000 of the fees and costs would have been incurred regardless of Goodyear’s behavior because it involved proving their medical damages or their claims against other defendants. The Ninth Circuit affirmed the $2.7 million award on appeal, and Goodyear appealed.
The U.S. Supreme Court granted certiorari because the Ninth Circuit’s decision created a split among the circuits, with other circuits limiting such awards to fees and costs causally related to a litigant’s misconduct.
Compensation for misconduct. The High Court observed that it has previously stated that penalties imposed pursuant to civil procedures must be compensatory rather than punitive in nature; therefore, they may go no further than necessary to compensate a wronged party for the losses it sustained as a result of the other party’s misconduct and may not impose an additional penalty as punishment for wrongdoing. As a result, a federal court using its inherent sanctioning authority must establish a causal link between a litigant’s misconduct and another party’s legal fees, and the innocent party may recover only the fees it would not have paid "but for" the misconduct.
The owners argued that the lower courts had applied the "but-for" test and that the awards could be upheld based on this standard because (1) the case would have been settled as soon as Goodyear had disclosed the test results or (2) Goodyear’s withholding of this data so infected the lawsuit as to be responsible for every subsequent expense they had incurred in litigating it. However, the Supreme Court found that neither the district court nor the Ninth Circuit had applied the correct standard. The district court expressly stated that it was unnecessary to find a causal link due to the egregiousness of Goodyear’s conduct; its second, contingent award, which was intended to go into effect if the Ninth Circuit insisted on a causal link, made it clear that the initial $2.7 million award had been made without a finding of a causal link. The Ninth Circuit’s determination that the district court could award all attorney fees incurred "during the time" Goodyear was acting in bad faith applied a temporal requirement rather than a causal one.
Furthermore, the owners had not shown that the litigation would have been settled as soon as Goodyear disclosed the test results. The district court had said only that it probably would have been settled earlier, and a dissent issued with the Ninth Circuit’s opinion properly pointed out that the test results did not deprive Goodyear of colorable defenses because the company could still argue that the tire, which had more than 40,000 miles on it, had failed due to striking road debris. The owners also could not show that Goodyear’s non-disclosure so permeated the entire lawsuit as to make it a "but-for" cause for every subsequent expense because at least $700,000 of the $2.7 million award was spent litigating against other defendants or establishing the owners’ medical expenses.
Remand. On remand, the district court must first consider the owners’ argument that Goodyear had waived its right to challenge the $2 million contingent award through its submission that $700,000 represented fees that would have been incurred regardless of its behavior. If not, the district court must reassess the award under the "but-for" standard because the Supreme Court could not determine from the district court’s discussion of the contingent award whether it had properly applied this standard.
The case is No. 15–1406.
Attorneys: Pierre H. Bergeron (Squire Patton Boggs) for The Goodyear Tire & Rubber Co. John J. Egbert (Jennings, Strouss & Salmon, PLC) for Leroy Haeger.
Companies: The Goodyear Tire & Rubber Co.
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