For small firms, sanctions pack big punch

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Even a threat can raise risk of litigation

It’s a truism of criminal defense work: Remember, your client goes to jail, not you.

It’s a tongue-in-cheek reminder that your zeal to represent your client should never bleed over into misconduct. In civil litigation, it should be much the same thing. You represent your client as zealously as possible within the bounds of the law and court rules, and if you (and your client) lose, that should be that.

The increasing use of attorney sanctions, however, changes the dynamic of litigation. Recently, the story of an attorney twice sanctioned for repeatedly bringing frivolous claims in foreclosure actions has sparked discussion of the use of sanctions, as this (apparently) small-firm lawyer was slapped first with $50,000 in sanctions from the District Court and then with a sanction to pay the mortgage company’s attorney’s fees. The increased use of sanctions in courts has the potential to dramatically affect the way small-firm and solo attorneys look at the risk of litigation.

A little history. From the adoption the federal rules in 1938 until 1983, there were only three reported cases of sanctions being imposed. In 1983 the federal rules were amended to toughen sanctions, and 3,000 were reported in the next eight years. In 1993 Rule 11 was amended again, allowing (instead of requiring) courts to impose sanctions, and in 2011 the Lawsuit Abuse Reduction Act was introduced (though not passed) in Congress to reinstate the requirement of sanctions against attorneys who engage in “frivolous” practice.

The result of this movement is that courts, under ever-increasing caseloads, are more willing to sanction attorneys who waste their time with frivolous actions and motions. The problem, of course, is the line between “incorrect” and “frivolous” is blurry at best.

Although the Comment to Rule 11 specifies that monetary sanctions should be awarded taking into account the “financial resources of the responsible person,” it cannot be disputed that such sanctions will fall harder on solos than on large or mid-size firms. An award, such as the award imposed against the foreclosure defense attorney to pay the attorney’s fees of the opposing party, is one that is made without regard to the “financial resources of the responsible person,” and naturally would have a greater impact on a small firm than a large one. Without commenting on the merits of the sanction — the court in each case laid out the reasons for the award — this cannot help but cause a chilling effect on small-firm attorneys bringing or defending “close” cases.

The award of sanctions could affect solos, especially young solos, for another reason. Let’s face it: Young solos are more likely to screw up. It’s hoped that anyone who decides to hang a shingle has mentors or peers available to talk through issues, but it’s far from a certainty. The established mentor and supervisory relationships inherent to larger firms are by definition unavailable to solos, and along with that comes mistakes. As hard as we try, every attorney will make mistakes, and without an established mentor or supervisor reviewing our work, the chance that the mistake is caught and fixed is diminished.

Of course, the argument is that sanctions are not intended to punish mistakes or punish an attorney out of business but merely to slap an attorney acting in bad faith with the minimum deterrence necessary to prevent a recurrence of the bad acts. Well and good, but that’s only half the point.

The real problem is that the combination of these two factors leaves solos increasingly vulnerable not only to sanctions but to a more insidious tactic: the threat of sanctions. Let’s imagine a bright-faced solo practitioner, sitting in the office one day when he brings in the mail and received that heart-stopping Safe Harbor letter from the large firm he is litigating against. “Your claim is improper under Smith v. Jones. Drop your claim immediately or we will move for sanctions.” His palms start to sweat. He is aware of Smith v. Jones but thinks his claim is distinguishable. Will a court agree? And if not, will the court decide that his argument is “frivolous” and award a sanction against him? Or is the risk to him personally enough to make him drop the case?

One commenter noted that “in the real world of litigation, Rule 11 really is largely a form of escalation, a cutthroat tactic in the struggle over the merits.” The deterrent force of the threat can be used disproportionately against small firms, who are disproportionately vulnerable to its effects. A threat of sanctions against a larger firm is part of the cost of doing business. A threat against a smaller firm reads more like a ransom note. “Do this or you might be out of business.” On a whim, I called my malpractice carrier. Debbie at Minnesota Lawyers Mutual was very helpful but was sure that their firm did not offer “sanction insurance,” nor was she aware of any other company that did. If you are sanctioned, it is out of your pocket.

Every 1L in their Civil Procedure class learns the difference between the American and British rules for attorney fees: the pay-your-own-way versus loser-pays approach. And every Civ Pro professor says much the same thing. The American system was designed to protect meritorious cases from the threat of “loser pays.”  In other words, it was designed to allow clients to bring cases free from the threat that if they lose, they will be saddled with costs they cannot afford.

The increase of sanctions, perversely, transfers that threat from the client to the attorney, who is forced to factor in the threat that the attorney, not the client, might bear the costs of actions the court finds “frivolous.” It’s one step closer to the British rule and yet one more factor for solos to consider when taking a case.