Chambers v. NASCO, Inc. – Oral Argument – February 27, 1991

Media for Chambers v. NASCO, Inc.

Audio Transcription for Opinion Announcement – June 06, 1991 in Chambers v. NASCO, Inc.

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William H. Rehnquist:

We’ll hear argument next in No. 90-256, G. Russell Chambers v. NASCO.

Mr. Barham, you may proceed whenever you’re ready.

Mack E. Barham:

Mr. Chief Justice, and may it please the Court:

This, or the issues for this Court arise out of a suit for a specific performance for breach of a contract in a Federal court in Louisiana.

A Louisiana resident owned a television station in Lake Charleston, Louisiana, and it was a contract to purchase on that station.

There was a nonresident purchaser, and that nonresident purchaser filed suit in Federal court under the diversity jurisdiction to enforce, by specific performance, the contract.

The Louisiana Civil Code provides for the concepts of breach of contract, and also for the remedies for breach of contract, including specific performance or damages, or specific performance and damages, or specific performance with delay damages.

The damages in Louisiana are economic damages.

We do not have punitive damages, and the only damages allowed are for economic loss.

They… Louisiana prohibits attorneys’ fees unless they are specially provided for either in the legislation or in the contract, and neither were provided here.

And Louisiana does not have any acceptance of the bad faith exception to the–

Sandra Day O’Connor:

Well, Mr. Barham, does Louisiana recognize any inherent right of a trial court judge to impose sanctions on parties for conduct of litigation?

Mack E. Barham:

–The only ones, Your Honor, are the ones that are in the higher tiers, like contempt, those kind of inherent powers which have, as, you know, generally across the country they have been put into legislative form.

But it’s that high tier of inherent power that is recognized, and that only.

Not the necessary… useful, in the sense of useful.

Only those necessary for the court to carry out its functions.

Anthony M. Kennedy:

So, so if an attorney knowingly introduced perjured testimony or falsified documents in a Louisiana State court, the Louisiana State court could impose monetary sanctions?

Mack E. Barham:

The Louisiana State court could, under its, the fact that all lawyers are in an integrated bar and therefore the court rules the lawyers, they could take care of the lawyers under that power that’s given to them as a court.

They could take care of them under a criminal charge referral.

They could take care of them under contempt or a fine.

They do not have a fee shifting.

Anthony M. Kennedy:

Well, but they could impose monetary sanctions, I take it, measured by the amount of the attorneys’ fees incurred by the injured party, under your–

Mack E. Barham:

We have no cases–

Anthony M. Kennedy:

–under your first inherent power explanation?

Mack E. Barham:

–Under the, under the contempt… I don’t believe, I don’t believe Louisiana has that power.

I question even whether the fine for contempt could carry with it, even under Federal law, I would have to say I question even whether it could carry attorneys’ fees that were attendant upon the fine in Federal law.

But we do not recognize the bad faith exception for shifting attorneys’ fees, and we do–

Sandra Day O’Connor:

Well, this case, of course, was tried in Federal court.

Mack E. Barham:

–Yes.

Under diversity, not under a Federal question.

Sandra Day O’Connor:

Right.

And you take the position that the Federal court has no inherent powers to control what goes on in the litigation in its court?

Mack E. Barham:

No.

I say that it has inherent powers, and those have been defined in Alyeska.

Justice White discussed the inherent power in question about a pot to be divided–

Sandra Day O’Connor:

Well, haven’t we said in Alyeska and Roadway effectively that a Federal court has inherent power to impose monetary sanctions for bad faith litigation in its court?

Mack E. Barham:

–But you have also said very clearly in Alyeska that not for that… not in diversity.

That’s the footnote–

Sandra Day O’Connor:

You mean footnote, the footnote, the famous footnote?

Mack E. Barham:

–Yes.

Sandra Day O’Connor:

Well, aren’t you reading something into that footnote that might not be there?

Mack E. Barham:

Well, I read it as in an ordinary diversity case where the State law does not run counter to a valid Federal statute or rule of court, a State denying the right to attorneys’ fees, which reflects a substantial policy of the State, should be followed.

Sandra Day O’Connor:

Well, why doesn’t that just mean in an ordinary fee shifting situation where you have to determine whether a cause of action carries with it fee shifting in attorneys’ fees, and the State doesn’t allow it, we’re not going to impose it in Federal court sitting in diversity.

What does that footnote have to do with any inherent power situation of the Federal court to control bad practices going on in its courtroom?

I don’t see that that footnote has anything to do with that.

Mack E. Barham:

Well, may it please Your Honor, it is a footnote to an exception to the general American rule against fee shifting, which is the bad faith exception, which means bad faith, vexatious conduct, during litigation.

So if it’s attached to that footnote, I would assume Justice White, speaking for the Court, intended that that would be a meaning carried down into that footnote, which is very clear and plain and goes on to say the same would clearly hold for a judicially created rule, which is the inherent power.

Thurgood Marshall:

Mr. Barham, in a diversity case suppose a lawyer was in obvious contempt of the court.

Would the court be denied the right to punish him because it was a diversity case?

Mack E. Barham:

No.

There are so many ways to punish him.

You now have, I believe there are 12 sanctions in the rules.

There is 28, for the lawyer there is 28 1927.

Thurgood Marshall:

But isn’t it true that once the lawyer is in the Federal court, his conduct is controlled by Federal and not State?

Is that right or wrong?

Mack E. Barham:

The conduct–

Thurgood Marshall:

His conduct–

Mack E. Barham:

–Yes.

Thurgood Marshall:

–in the presence of the Federal court.

Mack E. Barham:

I would have to agree, it is.

Mack E. Barham:

It is.

Thurgood Marshall:

Thank you.

Mack E. Barham:

In this case the… we went through the merit trial.

There was a judgment for specific performance.

The Fifth Circuit set this for argument, and in the midst of arguments set the… placed the lawyers at ease and immediately imposed sanctions for a frivolous appeal.

In the whole process of the merit trial there was one sanction imposed, and that was a contempt sanction for violation of an order of court imposed on the client.

That was an area part of the proceeding, it went 2 years and nothing else happened.

The Fifth Circuit said that they would hold double cost and attorneys’ fees as sanctions for the frivolous appeal, and it remanded to the district court saying would you look for casting costs or attorneys’ fees under Rule 11, on the client and attorneys are under 28 U.S.C. 1927 for the attorneys.

And when it went back to the district court… before we got to that there was a motion to indicate some of the extent of damages in this case which are not really permitted except for economic, there was a motion for assistance before we got to the… to this motion.

And the district court in that motion for assistance ordered $2 million worth of assets, equipment that had been added to the television station since the list was made up for what would be transferred, to also be transferred for the same consideration.

Then NASCO, the respondent, urged the court to reject Rule 11 and reject 28 1927, and to go to the inherent power.

And that court said we find and agree with the parties to this sanctioning proceeding… that’s NASCO… that Federal Rule of Civil Procedure 11 does not furnish a basis for the consideration of the sanctionable acts alleged by NASCO.

We find that Federal Rule of Civil Procedure 11 for the levying of sanctions at this time, at the time of the appellate court’s decree on August 6th, 1986, and at the time of the acts themselves were committed, to be insufficient for our purposes here.

So what happened is you have them rejecting any conduct that could be sanctioned under 11, and none was sanctioned under 11 during the proceedings, and none was sanctioned under 1927 during the proceedings.

It was only after the court of appeal jogged the mind of the district court judge that you may impose sanctions that it came into being.

And almost 2 years later, that’s after the appeal, those sanctions were imposed.

And what happened is one lawyer was disbarred for 3 years, one lawyer was suspended for 5 years, one for 6 months, and they are not before this Court.

And then $1 million of attorneys’ fees, more or less, were imposed on the client, given to the movant.

Byron R. White:

Suppose that, suppose, Mr. Barham, that there was a Federal statute which said that in diversity cases the Federal court has inherent power to impose… to shift attorneys’ fees as a sanction for bad faith conduct during trial.

Would that statute be invalid?

Mack E. Barham:

That’s what you were kind of considering yesterday, and we got copies of this opinion.

When you’re looking under the rules of the Enabling Act, you know, that’s, to me, different–

Byron R. White:

Well, it’s an Erie case, diversity–

Mack E. Barham:

–It’s an Erie case whether it’s under the rule or whether it’s under a statute or what.

Byron R. White:

–[inaudible] it’s a diversity case, I’d say–

Mack E. Barham:

Yes, sir.

Byron R. White:

–It’s a diversity case.

And I suppose whatever answer you give to that question, I suppose you would give the same question if there was a rule of court?

Mack E. Barham:

Yes, sir.

First you’d have to examine is the rule within the Enabling Act, or is the rule constitutional.

Mack E. Barham:

That’s the only thing.

Byron R. White:

Well, of course, the famous footnote in Alyeska said that where a State law that does not run counter to a valid Federal statute, then all this follows.

But I suppose if there was a statute like that, your… what you’re urging would be counter to a Federal statute, and then the question would be whether it was valid.

Mack E. Barham:

I think that’s what you would have to, to look to, and I don’t believe you would hold that valid.

My understanding of this Court’s approach to the rules–

Byron R. White:

Well, you would, you would if you thought it was just a procedural housekeeping matter.

Mack E. Barham:

–Well, procedural housekeeping is hardly what you said is applicable to fee shifting when that’s State policy.

That is State policy, that we don’t believe that people should pay other people’s attorneys’ fees.

We believe that’s a cost of doing business, and we don’t agree that other persons ought to be made to pay attorneys’ fees.

It makes coming to court less desirable.

It has a chilling effect.

William H. Rehnquist:

What, Mr. Barham, if the court had simply held your client in contempt and fined him this amount of money, and said I’m going to fine you an amount equivalent to the attorneys’ fees?

Mack E. Barham:

If you pay that into the court, I only can question the amount.

William H. Rehnquist:

But what is–

Mack E. Barham:

I can’t question your power.

William H. Rehnquist:

–And what… even if… what if it were done as a form of civil contempt, where you would presumably pay the money to the other side?

Mack E. Barham:

If it’s under contempt, I don’t know that what… I’m not sure that I could agree that I would, I would not have to argue against that.

The fee shifting is what bothers me, because there is such a very strong policy consideration, not only in Louisiana but in most States against fee distribution by a court.

It is determined by either the legislation or the parties themselves if there is going to be fee shifting.

William H. Rehnquist:

This isn’t fee shifting, as I understand what the Fifth Circuit did here, or the district court, simply because you have lost a case, in the English tradition of fee shifting.

This is fee shifting, if that’s what you call it, because of very bad behavior during the course of litigation.

Don’t you see some difference?

Mack E. Barham:

Well, it’s also outcome involved because only the loser is going to get this fee shift.

Only the loser.

William H. Rehnquist:

Yes, but the great majority of losers won’t get it, only losers who behave the way your client did.

Mack E. Barham:

Well, but it does run counter to that outcome look under Erie.

Antonin Scalia:

Why, why is it that only the loser will ever get it?

Don’t you think that a winner, in the course of winning could have–

Mack E. Barham:

I don’t believe you can shift–

Antonin Scalia:

–could have been so… could have had such outrageous conduct that the court can… which causes additional expenses to the other side, even though he wins, and the court can say, you know, in the course of getting there you violated the rules?

Mack E. Barham:

–That is not the concept of the equity power, the equity inherent power for shifting fees.

The concept is that you make whole the party who is the victor, so the loser always pays, the victor pockets.

Antonin Scalia:

But as the Chief Justice suggested, maybe we’re not talking about that power.

Maybe we’re talking about some different power, which is the power of the court to protect itself from being imposed on by the parties, to protect its processes.

Mack E. Barham:

If you don’t use one of the rule powers, which are so numerous now and cover every piece of conduct… in fact despite the statement by the court, if you read what he enumerates is the conduct, it could have been sanctioned at the time under Rule 11, but–

Antonin Scalia:

What if Rule 11 only applies to signed pleadings?

Rule 11 applies to signed pleadings.

Mack E. Barham:

–Well, almost… litigation begins, proceeds, the discovery, everything is… was signed pleadings in this case as in every other case.

Thurgood Marshall:

Your only complaint is that it was shifting of a fee.

If it had just been a charge of that amount of money you wouldn’t be complaining.

Mack E. Barham:

I would be complaining, but if you did it under your–

Thurgood Marshall:

But I mean, what’s the magic of shifting fees?

There’s no magic to that.

You’re being punished for doing wrong.

Mack E. Barham:

–There is a general American rule which says it is wrong to shift fees.

Thurgood Marshall:

Well, if you give the same amount of money, and says in the order this is not a shifting of fee, would you have a complaint?

Mack E. Barham:

If… if it’s going to be contempt–

Thurgood Marshall:

If the fee is $15,000, and the court says for the harm that you have done by your misconduct you must pay $15,000, but this is not a shift in the fees, would you be complaining?

Mack E. Barham:

–Is it going to be paid to the court?

Thurgood Marshall:

Sir?

Mack E. Barham:

Is it going to be paid to the court?

Thurgood Marshall:

Yes.

Mack E. Barham:

Then I have… I cannot complain.

Thurgood Marshall:

Then you wouldn’t be complaining?

Mack E. Barham:

I’d complain about the amount.

Thurgood Marshall:

Well then you would just complain.

[Laughter]

But you concede that substantially all of the conduct here could be sanctionable under Rule 11?

Mack E. Barham:

This court could have sanctioned, if it thought it necessary, any time.

This court never lost control of this case.

Mack E. Barham:

This court had full control throughout the proceedings, and it carried it through to the very end without any difficulty whatsoever.

It was only when the court of appeal imposed the frivolous–

Anthony M. Kennedy:

Well, set that aside.

Mack E. Barham:

–All right.

Hugo L. Black:

The district court had a very extensive opinion detailing the misconduct by the attorney concurred in, if not directed, by the client.

And I thought you agreed that substantially all of that conduct, if it did in fact occur, was sanctionable under Rule 11?

Mack E. Barham:

I have to… I have to take back… if I said that, I have to take it back to this extent.

Much of the conduct was pretrial, prepetition conduct as is discussed by the court, then–

Anthony M. Kennedy:

Well, it began–

Mack E. Barham:

–there is some litigation–

Anthony M. Kennedy:

–it was the Friday, Saturday, Sunday conduct that led up to a pleading–

Mack E. Barham:

–Yes, sir.

Anthony M. Kennedy:

–that was filed in the following week.

Mack E. Barham:

Then litigation conduct, yes.

Anthony M. Kennedy:

And I think you were correct to say that this is within the ambit of Rule 11.

Mack E. Barham:

Yes.

Anthony M. Kennedy:

Well, then why can’t we just affirm, based on the fact that it… the judge could have made these findings under Rule 11?

Mack E. Barham:

I have trouble with a district court rejecting your Federal rule and reaching for inherent powers because the Rule 11 says–

Anthony M. Kennedy:

Well, we’ll say he’s right in finding that there was wrongful conduct, he just found the wrong rule.

Rule 11 would have served just fine, and so we affirm, or at least remand it and tell him to impose a sanction under Rule 11 if he chooses.

Mack E. Barham:

–Well, in your dissent yesterday you had trouble with even the discrete pact shifting of attorneys’ fees, and this is–

Anthony M. Kennedy:

But you don’t need to have that trouble because the majority opinion ruled to the contrary.

[Laughter]

Mack E. Barham:

–But this was not a discrete act.

This was a massive imposition of an amount of money, not accountable act by act by act by act.

I don’t know what I got wrong.

There was no deterrence, there was no flag waving anytime during this, like your rules are, to say don’t do this and if you do I will punish because you didn’t see the flag.

What we have is punishment for punishment’s sake.

We have a vindication, if you will, or… it is totally without regard to the deterrence upon future litigants or attorneys, or even upon–

Sandra Day O’Connor:

I thought… I thought in this record it disclosed that the district court gave notice at several times during the proceedings that sanctions were being contemplated if certain behavior continued.

Mack E. Barham:

–Well now, Mr…. when there was a publication of some article in regard to sanctions he called it to the attention of counsel, is my understanding.

When a Mr. McCabe from Massachusetts came in and was not associated with counsel before he got into the courtroom, he was somewhat lectured and then told that his conduct would have to be up to par, but he had not even been there before.

I’m trying to think of another instance… that’s all I can think of, other than the one instance of the contempt for violation of an order.

And what is so befuddling to me is that the conduct of the trial did not disturb the judge until it was over.

It went to its conclusion fairly well, and he never had need for this.

When he ordered something, it happened.

When they were at the FCC and he told them to not be at the FCC, they removed themselves.

Order is all that he needed.

It always seemed to me that the least that you have to do to control a court is the most effective control, and the more quickly you control the court and that you keep it in order, the better order you have.

There is no order in court when you only tell them after court is through, you did wrong.

It is the manner in which you conduct the court during the trial, during the argument, during the hearing, which is conducive to the good conduct and accord.

And that’s why the rules generally say it must be timely, and you say it has to be the discrete, or that act–

William H. Rehnquist:

Don’t at least some of our cases dealing with contempt committed in the presence of the court during a trial say that it’s better for the court to perhaps wait until the trial is over rather than just do it instantaneously, kind of perhaps in the heat of passion?

Mack E. Barham:

–I believe what it… what do though is we say I hold you in contempt, but you wait to impose that contempt, put penalty, fine, or other.

But I think you give notice.

William H. Rehnquist:

You say defer the penalty?

Mack E. Barham:

Yes, sir.

It’s the penalty.

It’s not that… I want you to know you passed the red flag in my court, you’re in contempt.

But you don’t necessarily have to impose the penalty then.

That would be… it’s time consuming.

It’s much like this breeding of a lot of different litigation when you go into this inherent power and you have no restrictions on it.

I say, one, that in a diversity case you can’t have it.

I say, two, you can’t have this kind, you wouldn’t permit this kind of sanction… not a sanction, you wouldn’t permit this kind of fee shifting.

There is no rule to permit it.

The rule is against this fee shifting.

The general American rule says you don’t shift fees, and yesterday you, both the majority and the minority, discussed very much the interference with the… the whole procedure and all the things that happen from it.

Your dealing with Alyeska, if it please Your Honor, was that we don’t have to apply Alyeska, look to it here, because that was under the Court’s inherent power, not the rule’s Enabling Act.

And then you found three reasons that it did not constitute a kind of fee shift at issue in Alyeska, and one, it was not tied to the outcome of that litigation, and two, it did not shift the entire cost to get litigation, only for the discrete event.

And then finally, it wasn’t necessarily a fee shifting statute.

Mack E. Barham:

It wasn’t, because it had no… movant had no entitlement to fees or other sanction, explained in Cooter v. Gell in citing that.

Then, what I understand, Justice Kennedy, is that any mechanism for redistributing cost, even the inherent sanctioning authority of the Federal court has the potential to affect decisions concerning whether and where to file suit.

If we get to there, we can’t get past Erie.

You cannot use the inherent power in an Erie case.

You can’t use it in a rules of decision case.

Whether you can do it under the Enabling Act, I have my problems, but I don’t have to address that because we have no rules here.

You have a judge-made law, and that law comes peculiarly from almost nowhere, out of the Atkinson case which did deal and own up and finally is inherent power.

But I do not say there is not inherent power, and this Court doesn’t need inherent power.

It does not need this, nor can a Federal court sitting in Louisiana, Texas, or wherever, if they don’t have fee awarding, a Federal court can’t make a decision like this, which is outcome dictating, a million dollars’ worth of sanction, when a court across the street, sitting as a State court could not do the same.

And if that won’t take in forum shopping, if that won’t be an inequitable practice–

Thurgood Marshall:

Is there any case you can give us which says, quote,

“Rule 11 does not apply in diversity cases. “

end quote?

Mack E. Barham:

–Rule 11 does–

Thurgood Marshall:

Apply… does not–

Mack E. Barham:

–Does apply.

Thurgood Marshall:

–Do you have any case that says Rule 11 does not apply to diversity cases?

Mack E. Barham:

No, Sir.

And in fact–

Thurgood Marshall:

So you want some new law?

Mack E. Barham:

–No, sir.

Rule 11, as I understand it, does apply in diversity because it, it fits the category of everything I’m saying.

It’s not this kind of inherent power.

It is not a fee shifting.

It is taking care of… it’s sanctions.

It’s deterrence.

This was not deterrence.

This was not sanctions.

This was punitive, retributive.

I suggest there’s a difference.

Mack E. Barham:

Rule 11, I believe, applies in diversity cases, as it has been enunciated by this Court.

I don’t think you’ll have a problem applying it, as you enunciated it yesterday.

Mr…. Justice Kennedy, you went on to say that it’s not the business of this Court to proscribe rules redistributing litigation costs in a manner that discourages good faith attempts to vindicate rights granted by substantive law.

And the allocation of costs accruing from litigation is a matter for the legislature, not the courts.

Our potential incursion into matters reserved to the States also counsel–

William H. Rehnquist:

Now, that point of view didn’t carry the day yesterday.

Mack E. Barham:

–Well, he didn’t.

He didn’t, but he is quoting a fear that I think every member of the Court, including the majority, did have a feel for.

I don’t believe the majority was disregarding a thought, does this have any incursion on the States, and as an enunciated rule, I don’t have a problem with Rule 11 being applied in the diversity case.

Thank you.

William H. Rehnquist:

You would like to reserve the remainder of your time, Mr. Barham?

Mack E. Barham:

Yes.

William H. Rehnquist:

Very well.

Mr. Klein.

Joel I. Klein:

Mr. Chief Justice, and may it please the Court:

The question in this case is whether petitioner was improperly sanctioned for his bad faith litigation conduct.

We submit that he wasn’t, based on the following analysis.

First, the authority to impose attorneys’ fees for abusing the court’s processes is clearly on of the several inherent sanctioning powers that Federal courts possess, in this Court’s words, for the specific purpose of managing their affairs so as to achieve the orderly and expeditious disposition of cases.

Second, that kind of sanctioning power, by definition, protects core judicial process concerns, and therefore applies in diversity cases just as it applies in all other cases.

And third, the district court didn’t abuse its discretion in this case in setting the amount of petitioner’s sanction to reflect the full cost of respondent’s attorneys’ fees.

That determination properly rested on the factual finding that petitioner’s entire litigation effort was designed to obstruct, impede, and indeed prevent judicial resolution of respondent’s claim in the belief that through fraud, delay, harassment, and increasing legal fees, respondent would abandon its claim.

Anthony M. Kennedy:

At some point during your argument, Mr. Klein, perhaps we could discuss or you could tell me why the district court couldn’t have done all of this, or substantially all of it, under Rule 11.

I am very troubled by that.

It seems to me that Rule 11 classically covers this conduct.

Joel I. Klein:

Well, Your Honor, I think there are two points that I’d like to say.

First of all, I would agree with the point you made before, that is if this conduct was all sanctionable under Rule 11 and the district court simply invoked the wrong rule, then I think the case ought to be affirmed on that basis.

I will suggest to you why I think the court thought that he could not, and that is I think there has been some dispute among the circuits about just how far Rule 11 applies in terms of signings and parties, also in terms of, for example, in this case there was a fabrication of a fraud, as you pointed out ahead of… in the other argument, there is a fabrication of a fraud designed to mislead and abuse the court.

Now, in that situation a lot of events occurred that were in some respects reflective of a pleading, but not necessarily.

And so I think the court was simply being cautious, given the fact that the circuits have had a more limited view of Rule 11, and I would suggest the majority did suggest yesterday that Rule 11 had a kind of discrete power analysis rather than a generic.

William H. Rehnquist:

Rule 11 certainly is basically limited to filed papers, isn’t it?

Joel I. Klein:

That is my understanding of it, and I think the behavior here went far beyond filed papers.

William H. Rehnquist:

So if, if the court below had been limited to Rule 11 it could not have imposed the extensive… the extent of sanctions that it did?

Joel I. Klein:

I think that is correct.

I think that is… it applies to particular filings, and I think there would be limits on what the court could have awarded here.

However, I don’t want to be in a position of suggesting that something close to this award isn’t sustainable on Rule 11.

I think the court was right in putting it on the power that he did have, and I think… and I think that you’re right, Mr. Chief Justice, in pointing out that I think this Court and certainly the circuit courts have taken a more limited view of what Rule 11 is addressed to.

After all, it’s only one of several sanctions in the course of the entire rules directed at a particular phase in the proceedings.

Antonin Scalia:

Mr. Klein, there’s another problem besides the fact that Rule 11 only applies to particular filed papers.

There is also the problem that, as I read Rule 11, there has to be some assessment of how much harm the particular filing caused to the other side, and the award here was all the attorneys’ fees, wasn’t it?

Joel I. Klein:

Yes, it was.

Antonin Scalia:

Did the court seek to calculate what incremental additional attorneys’ fees were caused by–

Joel I. Klein:

I believe he did.

And that’s what I think the essential finding is, Justice Scalia, that is I think this determination rests on the finding that the whole effort, that what the petitioner set out to do is to say, look, when we go to court we are going to tie this process in knots.

We are going to use every abusive power.

By the time they sort this out there is going to be $1 million worth of fees.

And many years later, this guy will cave.

I think the district court found that, the court of appeals affirmed it, and I think that it should be–

Antonin Scalia:

–Well, they might have had that in mind, but that’s quite different from saying that this amount of damage was caused by these particular abuses.

They might have wanted, you know, had willfully in mind to run up attorneys’ fees through abuses and through nonabuses.

But what Rule 11 says is that it can, an order to pay the other party the amount of the reasonable expenses incurred because of the filing, not all attorneys’ fees.

Joel I. Klein:

–Well, that’s what I was suggesting, I thought, before.

That is, I think the consequences of what Rule 11 would allow you to recover are more limited.

Antonin Scalia:

Why don’t we… why shouldn’t we take Rule 11 as being a limitation upon the way the more general discretion of the court to impose costs.

You acknowledge the court, or you assert that the court has an inherent power.

If it does, why shouldn’t we think that that inherent power has been limited by Rule 11–

Joel I. Klein:

Well, I think–

Antonin Scalia:

–so that you can’t shift fees, but you can only require the other side to pay the amount of the fees that are attributable to the misconduct?

Joel I. Klein:

–I want to say two points, Justice Scalia, because I may have confused at first.

I think this award is based on the amount of fees attributable to the misconduct.

I think that’s what the district court found and clearly was affirmed by the court of appeals.

Joel I. Klein:

The whole–

Antonin Scalia:

The misconduct before the court?

Joel I. Klein:

–The misconduct before the court, the contempt of courts that were held.

In other words, it was misconduct in the FCC, but that was in contempt, in violation of the court’s order.

Everybody recognized that.

It wasn’t that those were extraneous proceedings.

There was a TRO that was outstanding when he violated it, there was a preliminary injunction that was outstanding.

Every bit of this behavior was not for the purpose that courts are open for, and that is to resolve legal disputes.

Every bit of it was to frustrate and thwart the court’s effort at doing that.

He litigated for 3 years over a series of counterclaims and affirmative defenses.

On the eve of trial, voluntarily, after this whole process, he stipulates that the contract was valid, that he had no defense to the contract, and that we had not violated the contract.

That, I think, is the essential finding, and I think that’s the basis that this Court should affirm on.

Now, I think the second issue, to the extent… let me say, I don’t want to be in this box.

If Rule 11 is coextensive with this inherent power, based on that fact finding, then I think I am perfectly happy to have the Court rest the judgment on Rule 11.

I would also say the inherent power, if it awarded, Justice Scalia, for legitimate fees, that is it didn’t… it used, so to speak, a sledge hammer, when a more careful approach would be necessary, I don’t think that would be a prudent and might indeed be an abuse of discretion of the inherent power.

So I don’t want to get into the box of trying to argue which particular sanction, because I think–

William H. Rehnquist:

Well, Mr. Klein, I think perhaps you ought to, because I think Justice Scalia’s question to you was why doesn’t Rule 11 limit inherent power.

My question to you is take a look at Section 1920… 1927.

In June of 1980 this Court decided in Roadway that 1927 did not extend to the imposition of attorneys’ fees.

In September of 1980 Congress comes along and says… and amends 1927, and says yes, it does.

Now, was that just brutum fulmen on the part of Congress?

I mean, could Congress… could the Court have done whatever it wanted under inherent powers anyway?

I think inherent powers may disappear as Congress steps in, or as the rules committee–

Joel I. Klein:

–Let me answer it this way.

First of all, there were two aspects to Roadway, Mr. Chief Justice.

The initial aspect was the inherent sanctioning power against parties.

That was what the Court built upon to extend to attorneys.

Now, that… then, subsequent to that, this Court, Congress, as you point out, amended 1927 to cover parties.

And I would say, quite frankly, that 1927, as I read it, is coextensive with the Roadway power that was applied to attorneys.

However, this other power in Roadway, which I think traces back much earlier, for example to Chief Justice Taft’s opinion in Toledo Scale, that power Congress has never touched.

Joel I. Klein:

It has not amended, it has not changed.

Second, the Court is also clear in Link v. Wabash, Justice Harlan’s opinion, he says when Congress or the rulemakers want to limit or eliminate an inherent power, one that this Court has recognized, it has to speak with unmistakable clarity.

Now, Congress, certainly in passing 1927, never suggested, never suggested that it was attempting to divest the Federal courts of their ability to sanction parties; 1927 is purely attorneys.

And second of all, the rulemakers, when they amended Rule 11 in 1983, flat out said they were, quote, “building on and expanding” the… inherent power recognized in Roadway.

So it seems to me–

William H. Rehnquist:

–If the power was already there, why did the rulemakers fuss with it at all?

Joel I. Klein:

–They made it… they imposed a higher standard.

What the rulemakers did in 1983, Mr. Chief Justice, is that they said under the inherent power you need to have a showing of bad faith, subjective bad faith.

We are now imposing a higher standard on counsel, and as the Court has found, on parties to require more of an objective.

That was what the rule did.

William H. Rehnquist:

So the inherent power only went to one state of mind.

To get to another state of mind you had to have legislation?

Joel I. Klein:

Precisely.

William H. Rehnquist:

That’s a strange definition of inherent power.

Joel I. Klein:

Well, the inherent power, I think, was a more limited one.

It was for, frankly, I think, the concerns that were articulated in the opinion yesterday.

That is, that the inherent power was saying if you act in bad faith, you intentionally misuse the processes of this court.

The court needs that power to defend itself, to protect its integrity and to protect its processes.

That is the scope of it.

That was what was applied here.

Now, I think that’s unequivocal in Roadway.

I mean, I think what Roadway says, and it seems to me this is the key to the holding, that there are inherent powers governed not by rule or statute, but by the control necessarily, necessarily vested in courts to manage their affairs.

And it seems to me if that’s the power we’re talking about, then it must be clear… it must be clear it applies in diversity cases just as it does in all other Federal cases.

For example, the conduct that was condemned in Roadway itself, those abuses, is it conceivable that the Court would have said that they were not sanctionable in a case that was based on 1332 rather than 1331?

That’s not at all possible.

And let me suggest when we’re dealing with, as I think Justice Marshall pointed out before, we’re dealing with the court running its business.

That is such a core concern that it seems to me, even if a State thinks that a different set of powers is appropriate in its court, that you don’t need this power.

If the Federal courts have made that determination, the State has no legitimate interest, cognizable under Erie or any other doctrine, that would divest the Federal courts of that power, just as it has no interest that would allow them to take away the full measure of contempt power, even if they insisted different contempt proceedings were held in their courts, or the power recognized in Link v. Wabash to dismiss a case sui sponte, even if they had a different view in their courts.

Now, I think to some degree, I just want to point out a couple of other quick points here, but I think petitioner is confusing a variety of different powers, and I will be the first to concede that Federal courts have lots of powers that are not clearly defined either by statute or by the Constitution, for example, the power to invoke an injunction or deny an injunction in an equitable case.

And I admit, each of those powers presents its own individual Erie question.

Joel I. Klein:

But I would suggest that while some of those powers raise complex Erie questions, a power that this Court has found as a fundamental sanctioning power to control the processes presents a very simple Erie question.

And as I think Justice O’Connor has amply pointed out, I don’t think anything in Alyeska was intended to detract from that point whatsoever.

Petitioner’s reliance on Alyeska, it seems to me, confuses two very different bases of authority for directing a party to pay fees.

One is to impose sanctions on an abusive… litigant.

That’s the power at issue in this case.

Now there is another power, and that is a power to shift fees to a prevailing party, having nothing to do with whether that party abused the process or not.

And that power has substantitive impact in the following ways.

It either is designed to bring, encourage bringing certain title litigation, or frankly, it may be designed to discourage certain kind of conduct.

That kind of power, we acknowledge, is probably substantitive under Erie, and that’s the kind of power, by citing the Sioux City case in this footnote, that the Court had in mind in Alyeska.

Alyeska itself had nothing to do with judicial sanctioning powers.

Alyeska was concerned, pure and simple, with basic prevailing party situations.

Finally, if I can just take a moment–

Antonin Scalia:

Mr. Klein, before you get to that, because it relates to the point you have been talking about, as I read the district court opinion which calculated the amount of this award, much of that was not only not based upon how much specific harm had been caused, but it was not even entirely based upon conduct before the court.

As I read the district court opinion, part of… part of what they say, it’s page 51 of the appendix, Chambers and Gray… Chambers, knowing that NASCO had a good and valid contract, hired Gray to find a defense and arbitrarily refused to perform.

In other words, I think that there, some of these sanctions are indeed the substantive-type sanctions you are talking about–

Joel I. Klein:

–With respect–

Antonin Scalia:

–at the district court level, anyway.

Joel I. Klein:

–With respect, Your Honor, I’ll disagree with that, and if I might explain.

That is to say, it is… the fact that Gray was hired by Chambers didn’t lead to the imposition of any fees in and of itself by, to our client.

What the court has sanctioned this person for is saying look, you came into my court, the first thing you did was you tried to defraud me by suggesting you had made a bona fide sale, and therefore preventing specific performance.

That didn’t happen.

That was a fraud.

You misled me and you misled the public.

You registered certain recordation papers that claim to be a cash sale.

Now, everything that happened, Justice Scalia, grew out of that process, and the court’s… except for one exception which I’ll come to… and the court’s basically saying in that situation look, we understand what went on here.

You never showed up to resolve a legal claim.

It didn’t happen.

You showed up to tie this process in knots.

I’m not going to tolerate it.

The one exception that I think is for out-of-court conduct has to do with the violations of the orders.

Joel I. Klein:

That is to say, in its expanded power, if he goes to the FCC and seeks to change the status quo, that is a standard contempt remedy, and the court clearly could have done it on that basis.

Anthony M. Kennedy:

Were 100 percent of the fees awarded as sanctions?

Joel I. Klein:

100 percent of the fees were awarded as sanctions, yes, Your Honor.

Anthony M. Kennedy:

And was… is there a finding, either implicit or explicit, that Chambers, the client, directed 100 percent of that conduct?

Joel I. Klein:

I think that the finding was that Chambers… explicit finding that Chambers was the engineer, that is, he was the strategist and the lawyer was the tactician.

And that is to say there may be individual motions that were filed, defenses that were raised, that were designed by the lawyers, but what the district court found was that was part of Chambers’ overall plan to misuse this litigation to delay, harass, and impose fees on our client.

And I think that’s what the court of appeals affirmed.

Antonin Scalia:

Mr. Klein, I’m not sure the district court’s statement at least bears the reading you’re giving it.

I mean, the district court says that the full amount of $996,000–

–Where are you reading from?

It’s from A-52, Mr. Chief Justice.

It says that the full amount is $996,000.

This sum is exclusive, and does not include fees and expenses awarded by the court in the contempt proceedings.

Okay.

It does include, however, $53,000 in attorneys’ fees and expenses paid by NASCO for services rendered in connection with the sanctions portion of this suit.

This latter portion of the fees and expenses, the district court says, like the balance of such fees and expenses included in the sanctions… like the balance… would not have been incurred by NASCO if Chambers had not defaulted and forced NASCO to bring this suit.

Joel I. Klein:

Well, Your Honor–

Antonin Scalia:

Now, what he’s saying, it seems to me, is that Chambers is a bad actor.

He knew he didn’t have a leg to stand on in the contract and he forced the thing to go to litigation.

That’s… that’s not the contempt type of a sanction that–

Joel I. Klein:

–I don’t think that’s right.

I would refer the Court further.

I want to comment to that specific language, but I would refer the Court, on page A-51 he says the sanctions assigned and established in this–

William H. Rehnquist:

–Whereabouts on A-51?

Joel I. Klein:

–A-51 at the bottom of the first incompleted paragraph.

The sanctions assigned and established in this paragraph… these are the sanctions against Chambers… apply only to sanctionable acts which occurred in connection with proceedings in the trial court.

Court of appeals affirmed, on page A-79, it says,

“Finally Chambers contends the amount of the sanction was an abuse of discretion. “

“We disagree. “

“NASCO’s expenses throughout this litigation were without exception the product of Chambers’ bad faith tactics. “

Joel I. Klein:

“The award reflects the amount of these expenses. “

And I would suggest to you, Justice Scalia, he could have sat back and made us sue him, but once he showed up in court, if he has no defenses he can’t defraud the court and he can’t play games and he can’t manufacture defenses.

That, I think, is the difference.

Antonin Scalia:

But you have to pay the lawyer at least 50 bucks for showing up to move for summary judgment.

I mean, you’ve got to subtract something.

You’re clearly penalizing him for forcing a lawsuit to be filed.

He’s entitled to force a lawsuit to be filed.

He only has to be an honest man once he gets before the court, as far as sanctions are concerned.

Joel I. Klein:

I agree with that, and if the argument is it’s an abuse of discretion not to deduct the cost of the complaint, I really don’t think that, under these circumstances, given the pervasiveness and given the sanctioning power… it is, after all, a deterrent remedy, not a–

Antonin Scalia:

But the omission of that, you know, it suggests that the court wasn’t, didn’t have its eye on the ball.

It isn’t just the $50 I’m worried about.

It casts the whole sum into, into doubt.

Joel I. Klein:

–But I’d like to discuss that with you, because I think that is wrong, and I think the record couldn’t be clearer about it.

And the reason I think that’s wrong is he starts out… let’s look at what he… what took these proceedings so long.

He starts out by a clear fraud, intentionally designed to abuse and mislead the court.

That’s indisputable.

All right, that… now, then we have 2 years of discovery on affirmative defenses, okay, as well as on, on counterclaims that he filed, which are really just completely manufactured.

They’re frivolous.

Then we have endless motions for stays.

Then we have a recusal, we finally get a trial date, he files a recusal motion before the district court mandamuses him in the court of appeals.

Now I suggest to the Court, what went on that was the business of the litigation in this 2 year process?

The whole time he is doing depositions, he takes depositions of people in Boston about whether we could finance the deal or not.

The whole time he is pursuing his counterclaims, the whole time that he is pursuing his affirmative defenses, fees are running up.

The night before trial, literally, he says oh, all of that I stipulate away.

What’s left?

What’s his whole defense?

It’s his fraudulent defense, which the Fifth Circuit found was so offensive that they affirmed from the bench, sanctioned him, and described his conduct as manipulative.

That was the only issue when all this was sorted out, and none of the other issues, none of the other issues he even thought were meritorious enough to proceed to trial.

So I suggest to the Court that everything he did, and I think that finding is absolutely safe on this record, everything he did was an abuse of the process.

I think his strategy was clear, and it almost succeeded.

Joel I. Klein:

He said if he can tie these guys up in knots… these are not people with a lot of means, if I can tie them up in knots, they’ll cave, they’ll give in.

And I think that’s intolerable, and I thought the Court was exactly right in sanctioning it.

And I would urge this Court to affirm it.

Anthony M. Kennedy:

Is the rule you propose that if a fraud is designed for specific judicial proceedings, that that is within the inherent power of the court to sanction?

Joel I. Klein:

Absolutely.

That is what’s called by this Court in Universal Oil, perpetration… a perpetration of a fraud on the court, and that is what this was.

Yes, Your Honor.

Sandra Day O’Connor:

Mr. Klein, if a court’s inherent power is limited by the necessity to protect itself, and if a court has available to it sanctions under Rule 11 that cover at least a portion of this conduct, why should we not require the court to at least determine what of this conduct is covered by Rule 11?

Joel I. Klein:

Well, I guess I think that the answer in part to that, Justice–

Sandra Day O’Connor:

Because I’m not sure… only then do we know whether it’s necessary to resort to inherent power, isn’t that right?

Joel I. Klein:

–Well, it seems to me… it seems to me that there are two parts to that.

That is if Rule 11, as I said, is coextensive with this power, then it’s not necessary.

If it’s not, then I suggest it is, because there are abuses that will go unredressed.

I don’t think it can be an either/or.

Sandra Day O’Connor:

Well, we don’t know.

Apparently the district court did not take up the Fifth Circuit on its suggestion that it sort out what could be sanctioned under Rule 11.

Joel I. Klein:

Well, that’s correct… and the Fifth Circuit–

Sandra Day O’Connor:

It didn’t do that.

So we don’t know, really.

Joel I. Klein:

–But, I guess what I… I realize that.

Sandra Day O’Connor:

And I didn’t understand your answer to be very clear in telling us whether every single dollar imposed here could have been imposed under a Rule 11 sanction.

Joel I. Klein:

The reason my answer is less than clear about that, Your Honor, frankly, is because this Court hasn’t ruled on those kinds of issues and the circuits are split.

That’s the reason why my answer is somewhat unclear.

But I would suggest to the Court, and perhaps I haven’t put this properly, but I would suggest to the Court that it seems to me Rule 11 was designed for a more narrow purpose, relating primarily to pleadings, and that it was, as the Court said yesterday, concerned with discrete events.

There are, after all, sanctions under Rule 56–

Sandra Day O’Connor:

Well, so your best reading of Rule 11 is to the effect that it did not cover all the conduct here?

Joel I. Klein:

–That is my best reading of it at this point.

Byron R. White:

Well, that wasn’t the rationale of the court of appeals, was it?

Joel I. Klein:

It was not the rationale of the court of appeals.

Byron R. White:

Are you defending the rationale of the court of appeals?

Joel I. Klein:

I am defending fully the rationale of the–

Byron R. White:

Well, they said that Rule 11 just doesn’t replace the inherent power to any extent.

Joel I. Klein:

–That is their view.

I happen to agree with their view.

Byron R. White:

Well–

Joel I. Klein:

But if… what I’m saying, Justice White, is–

Byron R. White:

–Well, could I ask you, do you think that presented here is the question of the relationship between Rule 11 and inherent power?

Joel I. Klein:

–I don’t believe that’s a fairly presented question.

The question here is whether he had the power, the inherent power.

I think the answer on Roadway is yes, and if he exercised that properly–

Byron R. White:

You don’t think the questions presented here really succeed on the question of whether Rule 11 or the statute limits inherent power?

Joel I. Klein:

–The question is very broadly presented.

I wouldn’t say the Court was barred from reaching the question, based on the question that is presented, but I think it’s clear Rule 11 doesn’t.

And the reason I think it’s clear is because the rule itself expressly states it’s expanding and building upon, and no way contracting.

And it seems to me at worst the two powers are coextensive.

And if they are, the district court and the court of appeals acted entirely properly in placing it on the inherent power rather than Rule 11.

If the two powers are not coextensive, then it seems to me that the inherent power, being broader, is necessary in the sense that this Court found it necessary in Roadway.

Thank you, Mr. Chief Justice.

William H. Rehnquist:

Thank you, Mr. Klein.

Mr. Barham, do you have rebuttal?

You have 2 minutes remaining.

Mack E. Barham:

Quickly.

In regard to the rules, not only Rule 11, 11, 16(f), 26(g), 30(g)(1) and (2), 37(a), 37(b), 37(b)(1) and (2), 37(c), on and on are rules that govern conduct.

And in this case the rules were, by the Fifth Circuit, said not to have anything to do with inherent power.

You don’t have to use the rules.

Sit back.

They don’t have to mitigate.

Let them sit back and let them amass attorneys’ fees and waste the court’s time, then hit him.

Hit him with inherent power.

And that’s just not the way the game should be played in this Court, not the way the rules envision it, not the way this Court envisions it.

Mack E. Barham:

Moreover, there is not one fact in the entire record that Chambers designed a fraud upon the court.

It’s a conclusion that he participated in everything and in the design, but the only fact is his statement that I didn’t want to sell.

I thought it was in the best interest of the public and me not to go through with it.

I was willing to pay damages.

I asked lawyers, can I pay damages and not sell.

The lawyers said yes, and they devised the plan, and I questioned the plan.

I thought it might be a legal trick, but they persuaded me.

And must have persuaded him pretty good because he kept running his business at the tune of an extra $2 million investment over the time of the litigation.

The other thing is they wait 3 years to even bring their motion for sanctions after the court of appeals said do it.

William H. Rehnquist:

Thank you, Mr. Barham.

Your time has expired.

The case is submitted.

The honorable court is now adjourned until Monday next at ten o’clock.