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Ninth Circuit:
Settlement Is Enforceable Despite Some Unresolved Details
Sanction Based on Filing Late Counterclaim Without Permission Upheld Over Dissent; Appeal Stems From Action Accusing Law Firm of Nationwide Scheme to Extort Settlements by Businesses Through Meritless Suits
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals held yesterday that a judge properly ruled that a confidential agreement settling an action against a law firm based on an alleged nationwide fraudulent scheme was enforceable although some of the terms remained to be worked out, and affirmed, over a dissent, an order to the defendants’ law firm to pay $157,690.88 in attorney fees as sanctions for filing counterclaims without leave of the court.
Ninth Circuit Judges Patrick J. Bumatay and Kim Wardlaw, joined by District Court Judge Matthew F. Kennelly of the Northern District of Illinois, who was sitting by designation, were in agreement that an enforceable accord was reached, while Bumatay took issue with affirmance of the sanction.
The action was brought by Natural Immunogenics Corp. (“NIC”) against Newport Trial Group (“NTG”) and NTG’s lead attorney, Scott Jason Ferrell. In an action under the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”) and other provisions, NIC alleged that the firm engineered a bogus action against it to exact a settlement.
It alleged that NIC paid a man $900 to act as class representative in a meritless action contending that the plaintiff’s homeopathic remedies are worthless.
Allegations of Complaint
The First Amended complaint alleges:
“For at least the past five years, the Defendants have acted in concert and conspired to file state and federal lawsuits against corporations across the country on false pretenses, seeking to extort large payouts in the form of legal fees, damage awards, legal costs, and/or settlements from those entities.”
It added:
“NTG and its agents consistently and repeatedly paid individuals to sign false affidavits, pleadings, and legal filings in support of those actions and/or promised payment in exchange for falsified and fabricated allegations. NTG and its attorneys suborned perjury and obstructed justice. NTG and its attorneys relied on their employees or agents to recruit putative plaintiffs for hire, most often young individuals or recent college graduates in need of money and willing to participate in NTG’s fraudulent scheme. At least three such individuals have disclosed that they were paid (or were promised payment) in exchange for falsified and fabricated legal allegations. NTG and its attorneys filed demonstrably false statements in support of those fabricated cases, and collectively obtained tens of millions of dollars in settlement payments from those threatened with suits and from defendants.”
Accusation Against Lawyers
NTG was represented by attorneys David J. Darnell and James M. Sabovich of the Newport Beach firm of Callahan & Blaine, APLC. During the course of acrimonious litigation, NIC accused the lawyers of witness tampering and perjury.
A settlement was reach through mediation before retired District Court Judge Andrew Guildford, who served in the Central District of California. Terms were set out in what is referred to as a “Term Sheet.”
But some terms—in particular, the breadth of the confidentiality provision—were to be arrived at later.
NIC moved for an order to enforce the agreement, while NTG insisted the parties had merely agreed to reach an agreement but that a contract had not been formed. Then-Judge (now Senior Judge) James V. Selna of the Central District of California ruled:
“The Term Sheet is a complete agreement that binds both parties.”
Ninth Circuit Opinion
The Ninth Circuit affirmed, saying:
“Reading the contract to form a substantive agreement as to confidentiality does not render negotiations about the ‘precise scope’ surplusage. Rather, this reading is consistent with California courts’ recognition that parties may bind themselves to agreements while leaving minor matters to further discussion.”
It added:
“The Term Sheet contains no conditional language to suggest that the existence of an agreement would depend upon the parties’ ability to execute a long-form agreement. Moreover, a contract can remain enforceable if non-essential terms are left for future agreement.”
The judges quoted, with approval, this observation by Selna:
“If either party were to bring an action for breach of the Term Sheet, a court would be able to order specific performance or award damages in the absence of an agreed upon liquidated damages provision.”
Motion for Sanctions
NIC sought sanctions against NTG’s counsel based on bringing counterclaims past the time specified in the court’s scheduling order. Appealing from Selna’s order granting the motion, Darnell, Sabovich and NTG argued:
“The District Court erred in finding that leave was required to file the Counterclaim, rendering it ‘time-barred under the Court’s scheduling order,’ which it listed as an express basis for Rule 11 sanctions….The law on this area is admittedly unsettled without controlling authority, Appellants’ position was based on a reasonable and good faith analysis of the case law addressing: (1) when leave is required to file a counterclaim in response to complaint amendment and (2) when a counterclaims is compulsory.”
NIC responded:
“Here’s the nub: These Appellants and their clients chose to file their Counterclaim just six months before the scheduled trial on NIC’s RICO claims. That carried the unmistakable odor of a calculated effort to deny justice by delaying it. Judge Selna rightly sniffed it out.”
The Ninth Circuit held:
“The district court did not abuse its discretion by sanctioning NTG and its attorneys for filing a counterclaim in violation of the court’s scheduling order. The district court’s scheduling order set a deadline to file ‘all motions to join other parties or to amend the pleadings.’”
It added:
“NTG filed its counterclaim, which added several new parties, well after the scheduling order’s deadline, without making any effort to seek a modification of that order. Litigation of the counterclaim would necessarily have required modification of the schedule the district court had set. In light of NTG’s failure to seek leave and the significant disruption that litigation of the counterclaim would have caused…, the district court was well within its discretion to issue sanctions based upon the scheduling order violation.”
Bumatay’s Partial Dissent
Bumatay argued that although “the filing of the counterclaim may have been aggressive and potentially disruptive,” vigorous advocacy should not be chilled.
He said “it took considerable analysis” on Selna’s part to show that the counterclaim was barred, remarking:
“So it’s hard to say that asserting the counterclaim was baseless.”
The judge added:
“Darnell and Sabovich contend that they did not need to seek leave to file their counterclaim because it was a compulsory counterclaim. Although unwise not to seek permission first, it is at least colorable that they thought that Rule 13(a) required the filing notwithstanding the scheduling order. We have never addressed this question. And it has been raised before….Nor did the district court find this argument was made in bad faith. Given all this. I would reverse the sanctions against Darnell and Sabovich.”
The case is Natural Immunogenics Corp. v. Newport Trial Group, 22-55990.
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