Sanctions Never Seem to Stick, the Sequel

Optimal Markets v. Salant, No. H038571 (D6 Nov. 26, 2013)

The Sixth District holds that Code of Civil Procedure § 128.7 does not authorize sanctions against an attorney who substituted into a case and frivolously prosecuted it after it was sent to arbitration.

Plaintiff Optimal Markets sued defendants for, among other things, misappropriation of trade secrets. Shortly after the complaint was filed, the parties agreed to arbitrate the case and the superior court action was stayed. New counsel then substituted in for Optimal Markets. Defendants prevailed in the arbitration and the arbitrator found that Optimal Markets’ claims were frivolous when initially brought and pursued in bad faith and with improper motive.

The arbitrator awarded sanctions by ordering Optimal Markets to pay defendants’ attorneys’ fees and costs. It justified the award under Civil Code § 3426.4—the California Uniform Trade Secrets Act’s provision permitting such an award to a prevailing defendant when a plaintiff brings bad faith claims—as well as under Federal Rule of Civil Procedure 11, which had been incorporated into the parties’ arbitration agreement. But the arbitrator declined to enter any sanction against Optimal Markets’ attorneys because the CUTSA does not authorize attorney sanctions and the attorneys were not signatories to the arbitration agreement that incorporated Rule 11.

Soon thereafter, Optimal Markets went bankrupt, rendering the fee award against it uncollectable. Defendants moved the trial court to confirm the arbitration award. They also asked the court to levy sanctions against Optimal Markets’ attorneys under Code of Civil Procedure § 128.7. The court confirmed the award but declined to enter the sanctions, and defendants appealed.

Starting with the text of the statute, the court of appeal noted that § 128.7 was conditioned upon a lawyer’s having signed a pleading, thus certifying that the assertions in it had a reasonable factual and legal basis and that it was not being filed for an improper purpose. Here, the attorneys who were the subject of the sanctions motion subbed in after the original complaint was filed and did not appear in the superior court case at any time until until their opposition to the sanctions motion. They thus had never signed any pleading or other paper that would trigger the application of § 128.7.

The court further rejected the proposition that it could award § 128.7 sanctions based on the attorneys’ having prosecuted the arbitration, during which they did sign various papers, giving three reasons for its holding. First, the language of § 128.7(c)—which authorizes sanctions based on “presenting [signed pleadings] to the court”—did not encompass papers presented to an arbitrator. Second, sanctioning attorneys for conduct that occurred during an arbitration would exceed the court’s tightly cabined “vestigial jurisdiction” to interfere with arbitration proceedings once an arbitration has commenced. Finally, the court noted that the standard for awarding sanctions under § 128.7 is highly deferential to the discretion of the trial court. It is thus inherently reliant on the trial court’s understanding of the factual context of the conduct at issue. A trial court has no such knowledge of proceedings before an arbitrator, so awarding sanctions based on attorney conduct in such proceedings would be antithetical to the requirement that all the material facts in evidence must be both known and considered by the court in properly exercising its discretion. Because sanctions under § 128.7 were neither appropriate nor authorized by law, defendants’ motion was properly denied.

Affirmed.