In a 2-1 decision, a panel of the Court of Appeals for the Federal Circuit ruled it lacked jurisdiction to hear an appeal of an order imposing terminating sanctions in a patent case based upon trial counsels’ conduct in misleading the court about evidence of an on-sale bar. The Federal Circuit ruled that because the parties in the underlying action settled, no case or controversy existed. Although the sanctioned attorneys argued that they suffered reputational injury based on the district court’s order, the majority ruled that any claims they may have had were rendered moot when the parties settled the litigation. Tesco Corp. v. National Oilwell Varco, L.P., No. 15-1041 (Fed. Cir. Oct. 30, 2015). The court, therefore, dismissed the appeal, which the sanctioned attorneys had attempted to continue, based upon lack of jurisdiction. We previously wrote about the district court’s sanctions order in our posts here and here.
The underlying case stems from appellant Tesco’s lawsuit against National Oilwell Varco, L.P. (NOV) alleging patent infringement of its well-drilling technology. The U.S. District Court for the Southern District of Texas dismissed Tesco’s suit as a sanction for litigation misconduct, pursuant to the court’s inherent authority.
During trial a dispute arose over plaintiff’s alleged failure to produce a Tesco brochure depicting the claimed invention, which may have proven an on-sale bar. At trial, plaintiff’s counsel, attorneys Glenn Ballard and John Luman, represented to the district court that the alleged “on sale” bar evidence (the brochure) “unequivocally” did not portray the invention. The district court later concluded that counsels’ representation was false, based on “post-trial discovery contrary to the representations Tesco made to the Court during trial.” Because the brochure dispute could have resolved the case, the district court issued terminating sanctions and dismissed the lawsuit with prejudice.
Tesco appealed. During the pendency of the appeal, the parties settled. As part of the settlement agreement, the parties and attorneys signed mutual releases, including a release for NOV’s request for attorney’s fees. Despite the settlement, the Tesco attorneys whose conduct led to the terminating sanctions maintained the appeal on the basis “there remains an Article III case or controversy because the statements made in the district court’s opinion constitute a sanction against the attorneys, and the subsequent reputational harm to the Attorneys is a sufficient injury-in-fact to justify our jurisdiction.”
The attorneys argued proffered evidence rejected by the district court would clear their names in the brochure dispute. Accordingly, the attorneys requested the Federal Circuit: (1) vacate the underlying order; (2) remove the district court’s finding of bad faith; or (3) remand the case for a full hearing on litigation misconduct.
The panel majority declined to address whether the sanctions order was a formal reprimand sufficient to confer standing, and instead limited its inquiry to the redressability issue in light of the settlement agreement. Specifically, the court ruled that “[s]anctions designed to compensate a party for the harm it incurred because of the misconduct of its adversary or its counsel—such as the burden shifting sanction and dismissal order at issue here—[were] mooted by any subsequent settlement.” Accordingly, the majority concluded dismissal was warranted for absence of a justiciable controversy.Although the court declined to classify whether this sanction constituted an otherwise appealable “formal judicial action,” the court provided a lengthy discussion on the distinction between “mere” judicial criticisms and formal reprimands. The court stated attorneys should tolerate a certain degree of judicial criticism, rather than opening “the floodgates” to all similarly situated nonparties.
In her dissent, Circuit Judge Pauline Newman noted the conflict attorneys might face when carrying out one’s persistent duty to act in a client’s best interest. Specifically, “by settling a case in the client’s interest [an attorney] may have to forfeit a personal right to appeal the sanctions levied against him.” (quoting Perkins v. General Motors Corp., 965 F.2d 597, 600 (8th Cir. 1992)). Judge Newman also raised a notable point—although the Court of Appeals dismissed the case for lack of jurisdiction, the majority nonetheless provided a detailed (and arguably one-sided) factual background and made adverse findings regarding the attorneys’ alleged misconduct, further exacerbating the very harm Tesco’s attorneys sought to remedy on appeal and highlighting the unfairness of the outcome.
Judge Newman emphasized the importance of reputation in the legal industry—quite arguably the most valuable asset for any attorney. Here, the Sanctions Order issued by the district court emphasized the various faults of counsel, stating the attorneys made inconsistent representations to the court and that such representation amounted to bad faith.
The majority’s focus on whether the district court’s order was a “reprimand” puts form over substance especially where, as here, the district court imposed terminating sanctions based upon what it found to be egregious attorney misconduct. Moreover, as Judge Newman opined, the district court classified the attorneys’ conduct as “troubling” and “out of character,” inevitably harming the attorneys’ reputation for years to come. Moving forward, attorneys must strike a careful balance between protecting against reputational harm and acting in a client’s best interest.
Judge Newman’s dissenting opinion hits the nail on the head. For one, appellate courts always have the power to hear collateral issues even after an action is settled. As the dissent explained: “The appealability of a severe sanction, such as dismissal with prejudice, is recognized in all of the circuits. Appealability is not defeated by an intervening settlement. The courts have reasoned that settlement soes not “moot” an attorney sanction, for the reputational damage is perpetual.”
Furthermore, attorneys who are sanctioned by a district court often face more than just reputational harm. They also may face professional discipline predicated on the presumed correctness of the findings of fact and conclusions of law forming the basis of a court’s order imposing sanctions. The U.S. PTO’s Office of Enrollment and Discipline, for example, has not hesitated to charge patent practitioners for violating the USPTO’s ethics rules based on litigation sanctions. See In re Janka, Proceeding No. D2011-57 (USPTO Dir. Nov. 21, 2011) (imposing professional discipline upon counsel who produced document in violation of court order); In re Bollman, Proceeding No. D2010-40 (USPTO Dir. Oct. 19, 2011) (same).
The affect of the Federal Circuit’s ruling is that sanctioned counsel may have no opportunity to seek judicial recourse to challenge whether the district court abused its discretion or made erroneous factual findings or legal conclusions. It is unclear as of the date of this publication whether the sanctioned attorneys will seek rehearing in the Federal Circuit or file a petition for writ of certiorari.