Second Circuit Refuses To Vacate Attorney Sanctions

In a decision that underscores the risks of conditional settlement agreements, the U.S. Court of Appeals for the Second Circuit recently rejected a joint request to vacate a sanctions award of over $64,000 against three lawyers. ATSI Communications v. The Shaar Fund, Ltd.

ATSI filed a securities-fraud action in the U.S. District Court for the Southern District of New York. In its first, second, and third amended complaints, ATSI named Knight Capital Markets, LLC, as a defendant. The district court ultimately granted Knight’s motion to dismiss the third amended complaint with prejudice. Knight then moved for sanctions against ATSI and its counsel under the Private Securities Litigation Reform Act of 1995.

The district court granted the motion against ATSI’s counsel, finding that counsel “lacked any reasonably factual basis for asserting that Knight had violated the federal securities laws.” The court imposed $64,656.69 in sanctions.

ATSI’s counsel appealed to the Second Circuit, but before the parties submitted briefs on the appeal, ATSI’s counsel and Knight reached a settlement, provided that the Second Circuit vacate the sanctions judgment. Under their agreement, ATSI’s counsel and Knight jointly moved for vacatur of the district court’s judgment.

ATSI’s counsel also sought a court order directing legal publishers West Publishing Co., Westlaw, the Bureau of National Affairs, and LexisNexis to “depublish” court documents and other printed reports of the case.

The Second Circuit refused. Citing the U.S. Supreme Court’s decision in U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, the court held that a “[s]ettlement [a]greement which [is] contingent on the vacatur of [a prior] district court judgment” is “held to be invalid in nearly all circumstances.”

With respect to the request that the sanctions orders be “depublished,” the court noted that such an order would raise “serious constitutional questions.” Ultimately, the court declined to decide the issue because it denied the motion to vacate.

“I think the case informs us that taking certain positions in litigation can have unintended consequences,” says Ed Mullins, Miami, FL, cochair of the Section’s Alternative Dispute Resolution Committee.

“Moving for sanctions may be appropriate in a particular case, but once that missile has launched, it is not coming back, and when it hits, there are devastating ramifications. Does it, in fact, make the case ‘unsettleable’?” Mullins questions.

“This is a key reason to consider alternative dispute resolution procedures, such as arbitration in the right case, where there is not the competing interest of providing precedent that will prevent the parties from obtaining the amicable resolution they desire,” Mullins suggests.

“Under the law, the decision in ATSI is the correct result,” says Michele D. Hangley, Philadelphia, cochair of the Section of Litigation’s Ethics and Professionalism Committee, and a legal malpractice attorney. The case is distinct because the parties sought vacatur from the Second Circuit.

Hangley notes, however, that agreements such as this are not uncommon at the district court level. In crafting such an agreement, “a lawyer has to be very careful that his own interests are not taking precedent over the client’s,” she advises.

“Obviously the client has to come first in any negotiations. In a lot of cases, the client would be well-advised to get separate counsel; and the lawyer might even want to insist on that.”

Hangley notes that there may have been too much at risk in asking the Second Circuit to vacate the order. “If the lawyers can persuade the trial court to vacate, I think that’s the best bet.” Once the case winds up on appeal, “this isn’t the most efficient outcome that you could have,” she says. “A lot of the time that’s why parties enter into these kinds of agreements. They want to wrap up every part of the case.”

Hangley cautions, however, that “the client shouldn’t be giving up anything in the settlement to help the lawyer out.”

Keywords: Second Circuit, attorney sanctions, ATSI Communications v. The Shaar Fund, Ltd. securities, settlement agreement.

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