April 30, 2012

KEEPING CURRENT: When Judges Attack: A Cautionary Tale of Lawyer Error in Two Cases

Arthur F. Fergenson

Two recent Seventh Circuit decisions, both written by its chief judge, illustrate how courts react to lawyer error. The usual course, followed in one case, is to forgive and forget. But a court is less likely to be in a forgiving mood, as demonstrated in the other case, when (1) as a result of attorney error, the court itself may never have had the power to hear the case, (2) the court had to do the work to extricate itself and the parties from the problem, and (3) the attorneys for the prevailing party disregarded the local and federal rules when seeking sanctions because the lawsuit was meritless. Err once and all is well. Rely on the court to find and fix the problem of its own jurisdiction, and you are less likely to get a pass. But compound those errors with a further error when asking the court to exercise its discretion in your client's favor, and you invite judicial ire. By putting the two cases together, litigators can gain a deeper appreciation of what courts care about when deciding how to treat lawyer error.

Courts follow an unwritten rule of lenity when dealing with attorney error. But there are limits, as successful defendant's counsel discovered on February 7, 2012, when Chief Judge Easterbrook of the United States Court of Appeals for the Seventh Circuit wrote a unanimous opinion excoriating by name a law firm and connecting the court's refusal to grant sanctions with serious errors of practice committed by the firm. Heinen v. Northrop Grumman Corp. (February 7, 2012, No. 10-3408). Why this court acted with such ferocity should act as a cautionary tale for practitioners, especially in light of Judge Easterbrook's more forgiving treatment of successful defense counsel in Dixon v. ATI Ladish LLC (January 26, 2012, No. 11-1976). Heinen filed in Illinois state court alleging a breach of employment contract with the defendant company, for which Heinen worked for about six months in 2006. The defendant removed the case to the United States District Court for the Northern District of Illinois. The removal notice, and the jurisdictional allegation in the brief before the Seventh Circuit, stated that Heinen was a "resident of Massachusetts" and therefore a "citizen" of Massachusetts, allowing the federal courts to exercise power to decide the controversy pursuant to the constitutional, under Article III, and congressional, under 28 U.S.C. ยง 1332, grant of diversity jurisdiction. Yet, diversity jurisdiction depends on the domicile of the parties, not residence. That Heinen was a resident of Massachusetts may have been evidence of citizenship, but it was not the same, especially because Heinen agreed to take a job with the defendant in Illinois while he was living in California, and defendant is a Delaware corporation with its principal place of business in California. Not only did the plaintiff live in California when he agreed to take the Illinois job, but his family remained in California and a lender foreclosed on his California house in 2008.

Judge Easterbrook stated that "both sides were surprised" to learn that the law required domicile, not residence, when the issue was presented at oral argument. The panel directed an amended notice of removal. The removal notice was re-drafted to state that plaintiff and his family had a home in Massachusetts, he was registered to vote there, and he had a Massachusetts driver's license. That was enough for citizenship, and subject matter jurisdiction was established.

But the damage was done to the judicial process, and the court made plain the costs: the court's time was wasted, as well as the client's money, "by postponing essential inquiries until after the case reached the court of appeals." More was to come, including the implicit charge that the lawyers failed in their "professional obligation to analyze subject-matter jurisdiction before judges need to question the allegations."

That was bad enough, but the punishment to be meted out to the lawyers was compounded by the court's further determinations. The court held that on the merits it was proper for the trial court to dismiss the claim because it was subject to an arbitration clause. The merits were so obviously in favor of the defendant company that the circuit court held that the appeal was frivolous. The court then went out of its way to blame defendant's lawyers for the refusal of the court to grant sanctions. The lawyers put a request for sanctions in its appellate brief, instead of following Fed. R. App. P. 38 and filing a motion. The lawyers filed a motion two weeks after oral argument. The circuit court stated bluntly that it "is not inclined to award sanctions in favor of a party that cannot be bothered to follow the rules itself," citing to both Rule 38, and "be[ing] able to tell the difference between residence and
domicile. . . ."

The consequences of the lawyers' failure, as identified in the opinion, will cost the law firm in the fees that it spent preparing and filing the notice of removal, and, most likely, in all the fees that could have been recovered by the motion for sanctions, and in intangible costs, in terms of its relationship with its client and the law firm's reputation. It is hard to argue with the court's own logic: but for the multiple errors by defendant's counsel, sanctions would have been awarded.

The Heinen case was argued on January 12 and decided February 7. Six weeks before, on December 1, 2011, the Dixon case was argued, and it was decided on January 26, while the Heinen appeal was pending. Judge Easterbrook also wrote the opinion in Dixon, and cited to two merits arguments that defense counsel could have made but did not. One was pre-emption under the Securities Litigation Uniform Standards Act of 1998 (SLUSA). In what turned out to be a preview of a distinction that turned out to be crucial in Heinen, Judge Easterbrook wrote that "[p]reemption under SLUSA is a defense rather than a limit on subject-matter jurisdiction." While stating that the failure to raise the defense forfeits any use of the statute, the court stated that a carve out "appears to preserve" plaintiff's claim. The court thus observed the general practice of educating counsel rather than excoriating them. At issue on the merits of the appeal was the applicability of the business judgment rule in defending against plaintiff's claims. The applicable state statute was not cited by defendants until their appellate brief, but the issue had been raised generally below. The court ruled that "a litigant does not forfeit a position just by neglecting to cite its best authority; it suffices to make the substantive argument." Nowhere in the opinion did the court identify the lawyers who failed to identify the critically-important statute before the trial court.

Why the difference in the way Judge Easterbrook treated successful defending counsel? Two reasons immediately suggest themselves. First, in Heinen the issue at stake was subject-matter jurisdiction. Without subject-matter jurisdiction, which cannot be waived, the federal court is bereft of power to adjudicate the controversy. For federal courts that take jurisdiction seriously, and Judge Easterbrook does, this is a sin of a high order. The courts may be, in Professor Bickel's adoption of Alexander Hamilton's term, the "least dangerous branch," but the ability to exercise those powers it legitimately possesses must be preserved by refusing to act beyond the constitutional limits of its authority. Lawfulness for courts starts at home, as the Supreme Court held in the landmark assertion of authority through negative action in Marbury v. Madison, 5 U.S. (1 Cranch) 137 (1803). Second, the Heinen court was certainly influenced by the utter basics of the legal proposition that the lawyers failed to understand. Contrast that with the failure in Dixon to allege SLUSA, a far more esoteric area of the law. A close reading of Heinen suggests a further reason for the court's ire. In Heinen, the court was compelled to do all the work, a task that it was compelled to undertake because subject-matter jurisdiction is a baseline inquiry that courts must make whenever it is spotted, even by the courts. The panel received no help from anyone. In Dixon, at least on appeal the statutory argument was fully briefed by defendants; the court did not have to do the work of the lawyers. In Heinen the defendants also requested sanctions, and then failed to follow the rules in seeking sanctions. Unfortunately, mistakes happen. In litigation, mistakes happen all the time. One of the author's mentors, a seasoned federal narcotics prosecutor and then criminal defense attorney, was fond of quoting Bobby Knight's observation that college basketball was a game of mistakes; so, too, is litigation. But there are limits, and those limits were transgressed in Heinen, in ways that implicated the federal courts in a possible constitutional violation of judicial power. It was, ultimately, too much for Judge Easterbrook. He and his fellow panel members had had enough, and silence and forgiveness were not enough. Let us all stand warned and remain wary.

Arthur F. Fergenson

Arthur F. Fergenson is of counsel at the Ellicot City, Maryland, office of Ansa Assuncao LLP.