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Applicable Standards

In evaluating whether to impose sanctions, Judge Cott identified four sources of authority under which sanctions could potentially be imposed: (1) Rule 16(f) of the Federal Rules of Civil Procedure (Rule 16(f)), (2) the court’s “inherent powers,” (3) 28 U.S.C. §1927, and (4) N.Y. Rule of Professional Conduct 4.1 (Rule 4.1). Judge Cott addressed the standards for imposing sanctions under each authority.

With respect to Rule 16(f), Judge Cott observed that a court may impose sanctions “‘if a party or its attorney … does not participate in good faith … in a pretrial conference,’ including a settlement conference.” 2019 WL 1034116, at *5 (quoting Fed. R. Civ. P. 16(f)(1)(B) (alterations in original)). Judge Cott noted, however, that “in the context of a court-ordered settlement conference, courts have interpreted good faith narrowly to require compliance with orders to attend a settlement conference, provide pre-settlement memoranda, and in some cases, produce organizational representatives with sufficient settlement authority.” Id. (citations omitted; alterations in original).

Judge Cott next confirmed that a court can impose sanctions pursuant to its “inherent powers” for misconduct during a settlement conference or discovery, but he noted that “this power should be exercised with restraint and only upon the finding of bad faith,” which “requires clear evidence that the challenged conduct was … taken for improper purposes.” Id. at *6 (citations omitted). Judge Cott then observed that “a court also has the inherent power to sanction a party for perpetrating a fraud on the court,” and he identified five factors that a court should consider in determining whether to impose such a sanction: “(1) whether the misconduct was the product of intentional bad faith; (2) whether and to what extent the misconduct prejudiced the other party; (3) whether there is a pattern of misbehavior … ; (4) whether and when the misconduct was corrected; and (5) whether further misconduct is likely to continue in the future.” Id. (citations omitted). Judge Cott cautioned, however, that a court should only impose sanctions pursuant to its inherent authority if “it finds, by clear and convincing evidence, that a party or attorney knowingly made … a materially false or misleading representation … as part of a deliberate and unconscionable scheme to interfere with the Court’s ability to adjudicate the case fairly.” Id. (citation and alterations omitted).

Turning to §1927, Judge Cott noted that “the standard for sanctions pursuant to this statute is identical to the standard under the court’s inherent power,” with “the only meaningful difference … being that … sanctions under §1927 are made only against attorneys or other persons authorized to practice before the court while sanctions made under the court’s inherent power may be made against an attorney, a party, or both.” Id. (citations omitted). Finally, Judge Cott observed that a court may impose sanctions under Rule 4.1 if “a lawyer … knowingly makes a false statement of fact or law in a negotiation.” Id. at *11.

Judge Cott ultimately decided to “analyze defendant’s sanctions motion under the court’s inherent powers, as doing so would best enable him to efficiently and comprehensively assess both the conduct of plaintiff and his counsel during both the settlement conference and the course of discovery.” Id. at *7.

Judge Declined to Impose Sanctions

Although Judge Cott stated that he was “troubled by the allegations surrounding plaintiff’s counsel’s purported misuse of the Warner Bros. License … at the settlement conference,” he declined to impose sanctions for the alleged settlement conference-related misconduct for three reasons. Id. First, the settlement conference was off-the-record, and therefore plaintiff’s counsel’s alleged misrepresentations were not memorialized or recorded, leaving Judge Cott with an insufficient basis to confirm that the alleged misrepresentations had, in fact, been made. Id. Second, no settlement was reached based on plaintiff’s counsel’s purported misrepresentations, and “defendant therefore did not suffer any prejudice in this respect.” Id. at *8. Third, even if plaintiff’s counsel had, in fact, stated during the settlement conference that the License was not part of the settlement of the Warner Bros. case, defendant did not disprove that statement “with evidence that existed at the time the alleged statement was made,” and it is at least possible that the alleged statement was accurate at the time it was made since the settlement “with Warner Bros. was not executed until four days after the settlement conference.” Id.

Judge Cott also declined to impose sanctions for the alleged discovery and deposition misconduct. Judge Cott reasoned that, even if plaintiff’s counsel’s production of the License as a stand-alone document on Dec. 7, 2017 constituted bad faith, it did not amount to sanctionable conduct because any misrepresentation was corrected eight days later (when the full settlement agreement from the Warner Bros. case was produced) and “defendant did not suffer any significant prejudice.” Id. at *10. Similarly, Judge Cott stated that, even if plaintiff had perjured himself during his deposition, sanctions would not be warranted because, among other things, there was no evidence of “a pattern of misbehavior” and any misrepresentation “was corrected four days later, and defendant acknowledged that it suffered relatively little prejudice.” Id. (citations omitted).

Judge Cott characterized his decision not to impose sanctions as “a close call,” and “strongly cautioned plaintiff’s counsel to be mindful of overplaying his hand (or worse) during settlement negotiations.” Id. at *12. “If a license had been obtained as part of the Warner Bros. settlement,” Judge Cott added, “then plaintiff’s counsel should have been transparent in that regard and not tried, as leverage, to pawn the license off as something other than a settlement.” Id.

Puffery vs. Actionable Misrepresentations

As Judge Cott observed, lawyers routinely engage in “posturing and puffery … during settlement negotiations.” Id. at *1. There is a line, however, between “posturing or puffery” and actionable misrepresentations, and that line is crossed when a lawyer knowingly misrepresents a fact that is material to the resolution of the case. See Ausherman v. Bank of Am., 212 F. Supp. 2d 435, 443-52 (D. Md. 2002) (referring attorney to disciplinary committee for knowingly making material misrepresentation during settlement negotiations). In the context of settlement negotiations, “a fact is material … if it reasonably may be viewed as important to a fair understanding of what is being given up and, in return, gained by the settlement.” Id. at 449. Both “federal and state courts have been ready to discipline or hold liable attorneys who make knowing, material misrepresentations to third persons during settlement negotiations.” Id. at 446-48 (citing cases); see Slotkin v. Citizens Cas. Co. of N.Y., 614 F.2d 301, 307-08, 314 (attorney appropriately held liable in fraud for misrepresenting the existence and extent of his client’s insurance coverage during settlement negotiations); see generally Barry R. Temkin, Misrepresentation by Omission in Settlement Negotiations: Should there Be a Silent Safe Harbor?, 18 Geo. J. Legal Ethics 179, 192-201 (2004) (citing cases where attorneys have been disciplined or held liable for material misrepresentations in settlement discussions).

Conclusion

Lawyers should beware that making material misrepresentations during settlement conferences may result in sanctions.

Edward M. Spiro and Christopher B. Harwoodare principals of Morvillo Abramowitz Grand Iason & Anello P.C. Mr. Spiro is the co-author of “Civil Practice in the Southern District of New York,” 2d Ed. (Thomson Reuters 2018), and Mr. Harwood is the former Co-Chief of the Civil Frauds Unit at the U.S. Attorney’s Office for the Southern District of New York.