Amount of Attorneys’ Fees Awarded as Sanction Must be Causally Related to Misconduct

The United States Supreme Court recently analyzed a federal court’s “inherent authority to sanction bad-faith conduct by ordering a litigant to pay the other side’s legal fees,” holding that such an award was “limited to the fees the innocent party incurred solely because of the misconduct.”

In Goodyear Tire & Rubber Co. v. Haegger, No. 15-1406, 581 U.S. ____ (April 18, 2017), the Haeger family had sued Goodyear after a Goodyear tire allegedly failed and caused their motorhome to flip over. During the original suit, Goodyear was slow and unresponsive to many of the Haegers’ discovery requests, especially when the Haegers requested internal company tests for the tire at issue. The case eventually settled just before trial. Months later, the Haegers’ attorney noticed a news story indicating that, in a similar suit, Goodyear had disclosed “test results indicating that the tire got unusually hot at highway speeds.” Goodyear subsequently admitted to the attorney that it had withheld information in the Haeger suit.

Because the case had already settled, the district court was limited in its options when addressing Goodyear’s misconduct, and “[a]ll it could do for the Haegers was to order Goodyear to reimburse them for attorney’s fees and costs paid during the suit.” The district court determined that this award could be “comprehensive, covering both expenses that could be causally tied to Goodyear’s misconduct and those that could not.” The district court calculated all the Haegers’ litigation expenses after the very early moment when Goodyear first dishonestly responded to discovery and awarded the Haegers $2.7 million. When explaining its award, the district court stated that while the usual case requires the fees awarded to be causally related to the misconduct, the misconduct in this case “rose to a truly egregious level.” The district court found that the level of misconduct here meant that all attorneys’ fees could be awarded with no need to find a causal link between the fees and the sanctioned party’s conduct.

Realizing that a causal link might in fact be required, the district court also found that a contingent award of $2 million would be appropriate. This contingent amount took off the $700,000 that the Haegers “incurred in developing claims against other defendants and proving their own medical damages.”

Although divided, a Ninth Circuit panel affirmed the larger $2.7 million award. The majority here found that the district court properly awarded fees “during the time when Goodyear was acting in bad faith.” The United States Supreme Court, however, reversed this decision, holding that all fees awarded as sanctions must be causally linked to the misconduct and that a but-for test should be used in such a situation.

When a party has acted in bad faith, “one permissible sanction is an assessment of attorney’s fees.” (internal quotation omitted). When fees are imposed as a sanction, the sanction “must be compensatory rather than punitive in nature.” (internal citation omitted). “[T]he fee award may go no further than to redress the wronged party for losses sustained; it may not impose an additional amount as punishment for the sanctioned party’s misbehavior.” (internal citation and quotation omitted). This compensatory limitation means that “the court can shift only those attorney’s fees incurred because of the misconduct at issue.” To award fees, a court must “establish a causal link—between the litigant’s misbehavior and legal fees paid by the opposing party.” To identify a causal link, courts should use a but-for test: “The complaining party…may recover only the portion of his fees that he would not have paid but for the misconduct.” (internal citation and quotation omitted). In explaining how to use the but-for test, the Supreme Court explained:

The court’s fundamental job is to determine whether a given legal fee—say, for taking a deposition or drafting a motion—would or would not have been incurred in the absence of the sanctioned conduct. …The essential goal in shifting fees is to do rough justice, not to achieve auditing perfection. Accordingly, a district court may take into account its overall sense of a suit, and may use estimates in calculating and allocating an attorney’s time. …In exceptional cases, the but-for standard even permits a trial court to shift all of a party’s fees, from either the start or some midpoint of a suit, in one fell swoop.

Here, the Court noted that the parties agreed on the relevant law—their disagreement was over how the law affected this case. Goodyear argued that the fee award should be thrown out and re-litigated, as the lower courts did not rely on a causal link. The Haegers argued that the award should stand, asserting that “both courts below articulated and applied” the but-for standard, and alternatively that the Supreme Court could hold that the fee award passed the but-for test. The Court rejected both of the Haegers’ arguments.

First, the Court noted that neither lower court applied the required but-for causal standard to the fee award. The Court pointed out that the district court “specifically disclaimed the usual need to find a causal link between the misconduct and fees when the sanctioned party’s behavior was bad enough[.]” Further, by providing for an alternative award, the district court conceded that the $2.7 million award was not confined to causally related fees. The Ninth Circuit, likewise, failed to use the but-for standard, instead applying a “temporal limitation” when it held that “the trial court could grant all attorney’s fees incurred ‘during the time when Goodyear was acting in bad faith.’” The Supreme Court determined that neither lower court properly analyzed this case, holding that “[a] sanctioning court must determine which fees were incurred because of, and solely because of, the misconduct at issue (however serious, or concurrent with a lawyer’s work, it might have been).”

Next, the Court rejected the Haegers’ assertion that the Court could “fill in that gap” and deem the $2.7 million award causally related to the misconduct. The Haegers asserted that had the internal test been revealed, the case would have settled, avoiding all the legal expenses thereafter. The Court noted, though, that Goodyear still had other defenses and theories to argue, including its theory that a different tire with more wear and tear had failed and caused the accident. Accordingly, the Court found that the record did not allow it to hold that disclosure of the test results would have led to immediate settlement, and that the full award of $2.7 million was not supported as being causally related. Further, the Court found that the Haegers “cannot demonstrate that Goodyear’s non-disclosure so permeated the suit as to make that misconduct a but-for cause of every subsequent legal expense[.]…If nothing else, the District Court’s back-up fee award belies that theory[,]” as at least some expenses were related to the Haegers pursuing claims against other defendants and proving their own medical expenses.

Ultimately, the Court held that the $2.7 million award could not stand, as that amount of fees was not causally related to Goodyear’s dishonest discovery responses. The Haegers claimed that Goodyear had waived its ability to contest the $2 million contingent award, as “that sum reflected Goodyear’s own submission…that only about $700,000 of the fees sought would have been incurred ‘regardless of Goodyear’s behavior.’” Because the waiver argument had not yet been considered, the case was remanded for consideration of whether Goodyear had in fact waived its right to contest the $2 million award. If no waiver was found, the district court was instructed to “reassess fees in line with a but-for causation requirement.”

Should you be on either end of a federal case where attorneys’ fees are awarded as sanctions due to party misconduct, you should keep this case in mind. If you represent the party who committed the misconduct, you can use the but-for test to attempt to limit the award to as small an amount as possible. If you are receiving the award, though, make sure to present enough evidence that will support a finding that the fees you seek would not have been incurred but for the misconduct.

Finally, I wonder if the attorneys representing Goodyear were aware that the test results were being withheld and, if so, what if any disciplinary action was ordered against them.