On April 18, 2017, the United States Supreme Court decided Goodyear Tire & Rubber Co. v. Haeger, No. 15-1406, holding that when a federal court exercises its inherent authority to sanction bad-faith conduct by ordering a party to pay the other side’s legal fees, the award must be limited to the fees the innocent party incurred because of the misconduct.
The Haegers sued Goodyear, alleging that the failure of its tire caused their motorhome to swerve off the road and flip over. After several years of heated discovery, due in part to Goodyear’s slow response to repeated requests for internal tire testing, the parties settled. Several months later, the plaintiffs’ lawyer learned Goodyear had released test results in different litigation. Goodyear conceded withholding the information even though the plaintiffs had repeatedly requested it. Plaintiffs sought sanctions for discovery fraud, arguing that Goodyear’s discovery misconduct entitled them to attorneys’ fees and costs for the underlying litigation.
The District Court found that Goodyear had engaged in an extended course of misconduct. The court therefore exercised its inherent power to sanction bad-faith behavior and awarded the plaintiffs $2.7 million, which was the entire sum of legal fees spent in the underlying litigation from the moment that Goodyear made its first dishonest discovery response. The Court reasoned that although generally a court’s inherent sanctions must be limited to the amount of legal fees caused by the misconduct, where a party’s conduct was particularly egregious, a court could award all of the attorneys’ fee incurred in the case without any need to find a causal link between the behavior and the fees. The District Court contingently awarded $2 million, which removed fees incurred in developing claims against other defendants and proving their damages. The Ninth Circuit affirmed the full $2.7 million award because it was all of the fees incurred during the time Goodyear was acting in bad faith.
The Supreme Court reversed and remanded, holding that when a federal court exercises it inherent authority to sanction bad-faith conduct by ordering a litigant to pay the other side’s legal fees, the award must be limited to the fees the innocent party incurred solely because of the misconduct. The Court agreed that the federal courts possess inherent powers, including the inherent power to award attorneys’ fees against a bad-faith actor. However, the sanction must be compensatory, not punitive. The Court reasoned that a sanction is only compensatory if it is calibrated to the damages caused by the bad-faith acts on which it is based, and therefore there needs to be a causal link between the bad-acts and the legal fees paid by the bad actor. The Court held that a court may only award those fees that the innocent party would not have incurred in the absence of misconduct, but did recognize that in some exceptional cases, that standard allows a court to shift all of a party’s fees from either the start or some midpoint of a suit.
Justice Kagan delivered the opinion for a unanimous Court. Justice Gorsuch took no part in the consideration or decision of the case.