A federal appellate court has determined that a lower court “abused its discretion” in assessing a $1.5 million sanction against the Schlichter Bogard law firm.
The Suit
The suit—which was dismissed in August 2020—was actually two suits, brought by participants (Obeslo, Hall and Gorrell-Deyerle) in plans that had chosen Empower as recordkeeper, and investment options from Great-West and other fund complexes from which participants could choose. Plaintiffs claimed that the fees charged by Defendants Great-West Capital Management, LLC (GWCM) and Great-West Life & Annuity Insurance Co. (GWL&A) violate § 36(b) of the Investment Company Act of 1940 (ICA), which prohibits fees that are “so disproportionately large that [they] bear[] no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.”
In the September 2020 sanction order, U.S. District Judge Christine M. Arguello (who was also the judge in the litigation) writes that, “in spite of the red flags that Defendants and the Court raised with respect to Mr. Meyer’s opinions, Plaintiffs proceeded to trial, relying on Mr. Meyer as the sole means of calculating the amount of damages they allegedly suffered.” That said, she went on to note that “when he testified, Mr. Meyer was thoroughly discredited. For instance, he went as far as admitting that some of his opinions were implausible and ‘probably shouldn’t have [been] included’ in his report. His complete lack of credibility as to the element of damages dealt a fatal blow to Plaintiffs’ case.”
Judge Arguello concludes that, “In summary, Plaintiffs’ attorneys were undeterred by the signs that their case was fatally flawed; they recklessly proceeded to trial in violation of their duty to objectively analyze their case.”
The Appellate Review
That said, and by a 2-1 vote (the opinion written by Circuit Judge McHugh), the appellate court leaned heavily on comments made about the expert testimony of J. Chris Meyer on behalf of the plaintiffs. Despite the comments noted above in the sanction order, the appellate court noted that “in evaluating the parties’ evidence, the court repeatedly cited statements from Mr. Meyer pertaining to the Gartenberg factors,” while also noting Empower’s critiques of those opinions. The appellate court also noted that “the district court declined to rule on the issue of damages, despite Empower having moved for summary judgment on the independent, alternative basis that Plaintiffs could not prove actual damages.” The appellate court also found comments from the district court where it “reiterated that it found Mr. Meyer was qualified, his credibility was a proper issue for cross examination, and at the Daubert stage a court’s focus is on ‘an expert’s methodology rather than the conclusions it generated.’”
The appellate court also commented that the district court had “noted that many of Empower’s arguments relating to Mr. Meyer’s conclusions were based on non-binding authority. While acknowledging such caselaw “may suggest that Mr. Meyer’s conclusion is inaccurate” and “may ultimately prove to be persuasive,” the court was unconvinced that it established Mr. Meyer’s methods and opinions were inherently unreliable and inadmissible.” And ultimately, the appellate court found that “considering Mr. Meyer’s educational background and experience, the court concluded his methods were ‘sufficiently reliable for him to offer his opinions at trial’ and his ‘opinions [were] not ‘so fundamentally unsupported that they can offer no assistance to the trier of fact.’” Id. (quoting First Union Nat’l Bank v. Benham).
The appellate court also noted that “at the conclusion of trial, the district court thanked both parties’ counsel for ‘the time and effort [they] put into preparing for . . . trial’ as well as ‘the professionalism and the respectfulness that [counsel] showed to one another.’”
In essence, the appellate court seems to have thought that the district court was just fine with the plausibility of the case presented—including overcoming a motion for summary judgement—deciding only after the trial itself that there were no merits in the case presented by plaintiffs. “Upholding the sanctions in this matter would chill legitimate, zealous advocacy in an area where plaintiffs already face a high barrier to success on the private right of action provided by Congress,” cautioned the appellate court. The appellate court went on to note that such action would be unprecedented here.
“The pretrial record in this matter gave Plaintiffs’ counsel no reason to anticipate their claims were so meritless as to risk sanctions by proceeding to trial. That lack of precedent (“where no plaintiff has succeeded in the fifty years since the creation of a private right of action”) raised concerns that “the specter of such unforeseeable sanctions would deter prospective litigants and their counsel from pursuing enforcement of shareholders’ rights under § 36(b).” The appellate court also characterized the law under which sanctions would be authorize as “an extreme standard” for imposing sanctions, and we have cautioned that “fees should be awarded only in instances evidencing a serious and standard disregard for the orderly process of justice.”
The Dissent
Diverging from the majority, Circuit Judge Tymkovich wrote that the sanctions here were “wholly justified” based on what he described as “counsels’ abusive conduct in unreasonably prolonging baseless litigation.” He went on to note that the district court had dealt with “a seven-year odyssey involving complex but ultimately groundless multi-million dollar claims against Empower and correctly concluded sanctions were justified. I see no abuse of discretion.”
Judge Tymkovich explained that Section 1927 “prohibits attorneys from unreasonably and vexatiously multiplying the proceedings in any case,” and that not only do attorneys have an ongoing and independent duty to objectively reevaluate their claims from beginning to end, but that “a district court may impose sanctions when an attorney intentionally or recklessly disregards that duty.”
He viewed the lower court’s decisions to allow plaintiffs’ case to proceed as being one dictated by legal limitations in the standard of review. He specifically noted the standard incessantly recited in such reviews—that the court is required to view the facts and draw reasonable inferences in the light most favorable to plaintiffs—and saw the district court as allowing the action to proceed “because of what Mr. Meyer would eventually substantiate at trial.”
But in fact, Judge Tymkovich said that “Mr. Meyer’s conclusions on actual damages—an essential element of plaintiffs’ claim—were not brought to light until trial.”
And while the majority decision claimed there was an abuse of discretion by the district court “because no Tenth Circuit or Supreme Court precedent has established a calculation for damages”—that Meyer’s “theories were not just meritless, they were flawed.” Judge Tymkovich explained that “the district court also noted that plaintiffs’ counsel purposefully manufactured this case, solicited clients, and were highly motivated to litigate because of how much they stood to earn—even when it became clear the best course would have been to dismiss their case.”
He concluded that “attorneys have an independent duty to continually reevaluate their claims to avoid prolonging a meritless case. The failure to do so is sanctionable. Here, plaintiffs’ counsel failed to avoid prolonging a meritless case. For these reasons, I conclude that the district court did not abuse its discretion in awarding sanctions against plaintiffs’ counsel.”
What This Means
Considering some of the seemingly spurious claims made over the years in this type of litigation, there was some measure of fiduciary relief to be found in a judicial sanction for what the judge deemed a reckless pursuit of a claim. Even more so perhaps in the acknowledgement by the appellate court here that such a finding could have a “chilling effect” on this type of litigation. That said, and as the appellate court noted, such actions are, if allowed, without precedent here—and pursuit of legitimate claims might suffer as well.
The dissent gives voice to the legal structures in place to preserve the right to those claims, of course. And those seem to have been sufficient here to sustain claims that the district court judge later found not only to be without merit (“fatally flawed”), but to be so much so that she deemed pursuit of the suit to be “reckless,” however professional/polite she may have been at the conclusion to the parties involved.
One might well think that the judge who not only oversaw interactions during a seven-year “odyssey” but an 11-day trial (and goodness only knows how many other cases) would have a sense of norms upon which to base her assessment—and that an appellate court might be inclined to defer to that perspective, however unprecedented.
Or not.
