Second Circuit Reminds Courts That They Have Inherent Authority to Sanction Litigant for a Single Misrepresentation, Even If the Court Was Not Misled

In Int’l Techs. Mktg., Inc. v. Verint Sys., Ltd., No. 19-1031 (2d Cir. Mar. 16, 2021), the Second Circuit vacates and remands an order denying sanctions, reiterating that “a court need not wait until it is defrauded before it may impose monetary sanctions on a party who knowingly prosecutes a frivolous claim in bad faith.”

During a commercial dispute, the plaintiff ITM filed a complaint alleging breach of contract and quasi-contract claim. The district court dismissed the complaint, holding that the contract had as a matter of law expired. It gave the plaintiff leave to replead quantum meruit, but that any such “claim should be limited to costs ITM incurred after its contract with [defendant] Verint expired.”

Plaintiff filed a first amended complaint which continued to allege breach of contract. Defendant moved to dismiss and for sanctions “arguing that ITM’s renewal of its breach of contract claim was patently frivolous in light of the district court’s previous order dismissing that claim with prejudice.” ITM then filed a third complaint in which it “sought to recover $350,000 under a quantum meruit theory based on expenses it allegedly incurred on Verint’s behalf after February 21, 2007 – the exact amount it previously claimed to have spent on behalf of Verint both before and after the parties’ contract expired.”

“It did not take long,” the panel writes, “for holes to start appearing in ITM’s story.” Defendant deposed the plaintiff’s principal, named Schehtman, who “contradict[ed] many of the factual predicates upon which [ITM’s] quantum meruit claim [wa]s based.” It also turned out that many of ITM’s claimed expenses were unrelated to the venture set out in the parties’ contract. “Indeed, the record was so damning that ITM’s current counsel – its prior counsel having withdrawn only one week after Schehtman’s deposition – later informed the district court that ITM would be dropping its quantum meruit claim altogether.”

Defendant sought sanctions against ITM and Schehtman, among other things, “under the district court’s inherent power in light of ITM prosecuting a frivolous quantum meruit claim.” The district court denied the motion, holding that ITM’s “conduct did not impede the ability of the [c]ourt to adjudicate the issues presented in the case” and that ITM had committed only “a single misrepresentation,” which it deemed “insufficient” to demonstrate fraud on the court.

The Second Circuit vacates and remands. Under the court’s inherent power, “a court can control admission to its bar and discipline attorneys who appear before it; ‘vacate its own judgment upon proof that a fraud has been perpetrated upon’ it; ‘bar from the courtroom a criminal defendant who disrupts a trial[;]’ ‘dismiss an action on grounds of forum non conveniens[;]’ and sua sponte ‘dismiss a suit for failure to prosecute’” (quoting Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991)). “And, most relevant to the case before us, a court’s inherent power allows it to impose monetary sanctions against a litigant (or its counsel) for misconduct” (quoting id. at 45–46).

To impose sanctions for a “knowingly frivolous claim,” a court must find that it was (1) without a “colorable basis” and (2) “brought in bad faith, i.e., motivated by improper purposes such as harassment or delay.” The district court made these findings, but then erred by “graft[ing] additional requirements that, while perhaps relevant considerations, should not have been given dispositive effect.”

First, the district court believed that sanctions should not be awarded because ITM did not impede adjudication of the case. “Our precedent is clear, however, that a court should primarily focus on the intent of the potentially sanctionable conduct, not on its effect.”

Second, “the district court mistakenly reasoned that ITM’s misconduct was not sanctionable because ‘a single misrepresentation is insufficient’ to justify an award of sanctions under the court’s inherent power …. We disagree. A court need not wait until a party commits multiple misrepresentations before it may put a stop to the party’s chicanery.”

“So, by primarily considering the effect of the misrepresentation, rather than the motive behind it, and by focusing on the quantity of misrepresentations, rather than on their ‘quality,’ the district court committed legal error. Indeed, the district court appeared to assume that it could not sanction ITM unless ITM committed ‘fraud on the court’ …. While a finding that a litigant has successfully defrauded the court would no doubt be sufficient grounds for imposing monetary sanctions, it is not necessary.”