Positive Software Solutions, Inc. v. New Century Mortgage Corp.
(5th Cir. (Tx.) September 13, 2010)
In 2003, Positive Software Solutions, Inc. sued New Century Mortgage Corporation for allegedly infringing telemarketing software licensed to New Century. The case was ordered to arbitration. During arbitration, Ophelia Camina, a partner at Susman Godfrey LLP, advised New Century on various discovery matters. The arbitrator had a previous professional relationship with Camina, which caused the district court to vacate the arbitration award. The United States Court of Appeals for the Fifth Circuit reversed the vacatur and remanded.
After remand, New Century declared bankruptcy. During those proceedings, plaintiff settled its claims against New Century. Pursuant to the settlement, New Century waived and assigned to plaintiff its attorney-client and work-product rights. The district court granted plaintiff’s demand that Susman Godfrey LLP turn over its files for use by plaintiff in pursuing sanctions. In February 2009, the district court sanctioned Camina $10,000, representing a portion of plaintiff’s attorneys’ fees. Camina appealed.
The Fifth Circuit Court of Appeals reversed. The court noted that a district court has the inherent authority to impose sanctions in order to control the litigation before it. However, this authority is not unlimited. It may be exercised only if essential to preserve the authority of the court. A district court’s inherent power to impose sanctions does not extend to collateral proceedings that do not threaten the court’s own judicial authority or proceedings.
In this case, arbitration, as an alternative method of dispute resolution, is a collateral proceeding. The fact that the court ordered the parties to arbitrate does not change the collateral nature of arbitration. The court held that “[t]reating arbitration as if it were an appendage to adjudication is a mistake that would undermine the very purpose of arbitration – the provision of a relatively quick, efficient and informal means of private dispute settlement.” Because the district court imposed sanctions not on account of any direct violation of a court order, but only because it found that Camina had exhibited four particular instances of bad faith during arbitration, the sanction was beyond the reach of the district court’s inherent authority.
The sanction award was also contrary to the Federal Arbitration Act. Under the FAA, the district court has the authority to determine (1) whether arbitration should be compelled and (2) whether an arbitration award should be confirmed, vacated, or modified. Beyond these narrowly defined powers, the district court has no authority to interfere with an arbitration. A district court’s retention of jurisdiction over a case stayed pending arbitration does not create the inherent power to sanction arbitration conduct.
The court also held that the district court’s sanction order unduly threatened to inflate the judiciary’s role in arbitration. The FAA provides for minimal judicial involvement in resolving arbitrable disputes. By using its power to sanction, a district court could seize control over substantive aspects of arbitration and become a roving commission to supervise a private method of dispute resolution, encroaching on the authority reserved to the arbitrator. Such an expansion of a district court’s inherent authority would threaten the integrity of federal arbitration law by “filling a gap that does not exist” by allowing courts to delay the resolution of disputes through alternative means.
Accordingly, the court reversed the sanction award and remanded the case for further proceedings.
For a copy of the decision click here
Toni Frain and Jeffrey Kingsley
https://www.goldbergsegalla.com/attorneys/Frain.html
https://www.goldbergsegalla.com/attorneys/Kingsley.html
case provided courtesy of Lexis