On April 5, 2023, the United States Court of Appeals for the Third Circuit affirmed a determination of the United States District Court for the District of Delaware that plaintiffs violated Rule 11 of the Federal Rules of Civil Procedure but vacated the portion of the lower court’s order that declined to impose sanctions. Scott v. Vantage Corp., —F.4th—, 2023 WL 2780350 (3d Cir. 2023). The Third Circuit held that, for a claim governed by the Private Securities Litigation Reform Act (“PSLRA”), some form of sanctions must be imposed for a Rule 11 violation.Under Rule 11(b), a filing must “not be[ ] presented for any improper purpose, such as to harass,” the claims must be “warranted by existing law or by a nonfrivolous argument for extending” or modifying existing law, “the factual contentions [must] have evidentiary support or … [be] likely [to] have evidentiary support after” discovery, and the parties and their attorneys must undertake an “inquiry reasonable under the circumstances” to verify compliance with Rule 11 prior to filing. Id. at *2. While Rule 11 states that a court “may impose an appropriate sanction,” the PSLRA imposes additional requirements for private actions under federal securities laws. Id. The PSL

[Thus, an evaluation of the plaintiff's] litigation motives -- whether it brought suit in good faith or to obtain nuisance value settlements . . . has no place in the Rule 11 analysis. On December 7, 2012, in Raylon, LLC v. Complus Data Innovations, Inc., the U.S. Court of Appeals for the Federal Circuit (Prost,* Moore, Reyna) affirmed-in-part, vacated-in-part and remanded the district court's summary judgment that Complus did not infringe U.S. Patent No. 6,655,589, which related to a hand-held identification investigating and ticket issuing system, and the denial of Complus' motion for Fed. R. Civ. P. 11 sanctions and attorney fees and costs under 35 U.S.C. § 285. The Federal Circuit stated: Rule 11 expressly requires that an attorney presenting a pleading, motion, or other paper before the court certify that he has performed "an inquiry reasonable under the circumstances" such that he can verify that (1) "it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation," (2) "the claims . . . are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law;" (3) "the factual contentions have evidentiary support or, . . . will likely have evidentiary support after a reasonable opportunity for further investigation or discovery."

Moeck v. Pleasant Valley School District, ___ F.3d ___ (3d Cir. 2016). Motions for sanctions under Federal Rule of Civil Procedure 11 are not favored because, as Judge Shwartz pointed out in her opinion in this case today, Rule 11 sanctions “are 1) in derogation of the general American policy of encouraging resort to the courts for peaceful resolution of disputes, 2) tend to spawn satellite litigation counter-productive to efficient disposition of cases, and 3) increase tensions among the litigating bar and between [the] bench and [the] bar.” In today’s case, defendants filed two Rule 11 motions based on alleged false statements in plaintiffs’ pleadings and in plaintiffs’ Rule 56.1 statement that was filed in response to defendants’ motion for summary judgment.

Therefore, the Motion for Sanctions was filed for an improper purpose. See Fed. R. Civ. P. 11(b)(1) (describing an “improper purpose” to include harassment).” The Court also observed that since Rule 11 provides for an award of attorney’s fees to the “prevailing party” the Court had discretion under Rule 11 to award attorney’s fees expended by the target of the motion to defend against the improper Rule 11 allegations: ““Rule 11 authorizes a court to sanction a party who submits a pleading for an improper purpose.”

The U.S. Court of Appeals for the Seventh Circuit inJorge Alcarez, et al. v. Akorn Inc., et al. mapped out one means by which a court may evaluate mootness fees paid to individual shareholders after the voluntary dismissal of an action challenging a public company merger. Specifically, the Seventh Circuit held that although a district court does not have the inherent power to review a mootness fee paid to an individual shareholder following the voluntary dismissal of a suit under Rule 41(a) of the Federal Rules of Civil Procedure, it nonetheless may review the fee following intervention in the case by an absent shareholder, a Rule 60(b) motion for relief from judgment and an evaluation of compliance by the plaintiff and his attorneys with Rule 11 of the Federal Rules of Civil Procedure. As the Seventh Circuit explained, should the district court find a violation of Rule 11, Rule 11(c) then gives the district court discretion to order appropriate sanctions in the event it determines that a shareholder initiated a merger challenge not for good reason but only to extract a payment from the company for the benefit of plaintiffs’ lawyers. Thus, while not directly articulating a standard of review for mootness fees paid to an individual shareholder, the Seventh Circuit indicated that Rule 11 provides the proper framework to evaluate the propriety of the underlying disclosure lawsuit. The ruling in this case could be persuasive to courts outside the Seventh Circuit, encourage objections to mootness fees and reduce the number of frivolous merger challenge cases filed.Background to Merger Challenge LitigationThe announcement of a public company merger is almost guaranteed to attract one or more challenges by shareholder class action plaintiffs who claim that the deal disclos

Generally, Rule 11 requires an attorney to make an objectively reasonable inquiry into the facts and law prior to filing and to refrain from pursuing an action that is not objectively reasonable based on the facts. Failure to meet these requirements can trigger sanctions against the offending parties and their attorneys. More particularly, Rule 11(b)(2), mandates that in any filing the attorney certifies that the attorney made a reasonable inquiry that the claims, defenses, and other legal contentions are warranted by existing law.Source Vagabond, 753 F.3d at 1292 (citing Fed. R. Civ. P. 11(b)(2)). In addition, Rule 11(b)(3) also requires attorneys to certify that they have made a reasonable inquiry into whether their factual contentions have evidentiary support.Id.

Federal Circuit Affirms Exceptional Case Finding and Rule 11 Sanctions Against a Patent-Holding Company and Its Counsel 09-1308 July 29, 2011 Decision Last Month at the Federal Circuit - August 2011Judges: Lourie (author), Mayer, O’Malley [Appealed from: W.D. Wash., Judge Martinez] In Eon-Net LP v. Flagstar Bancorp, No. 09-1308 (Fed. Cir. July 29, 2011), the Federal Circuit affirmed the district court’s exceptional case finding under 35 U.S.C. § 285 and its imposition of Fed. R. Civ. P. 11 sanctions against plaintiff Eon-Net LP (“Eon-Net”) and counsel for Eon-Net, Zimmerman & Levi, L.L.P., including its principal, Jean-Marc Zimmerman. Eon-Net asserted U.S. Patent Nos. 6,683,697 (“the ’697 patent”), 7,075,673 (“the ’673 patent”), and 7,184,162 (“the ’162 patent”) against Flagstar Bancorp (“Flagstar”).

District Court Did Not Abuse Its Discretion in Awarding Rule 11 Sanctions Against Patentee's Counsel 02-1502 November 24, 2003 Decision Last Month at the Federal Circuit - December 2003Judges: Michel (author), Rader, and Newman (dissenting)In Phonometrics, Inc. v. Economy Inns of America, No. 02-1502 (Fed. Cir. Nov. 21, 2003), the Federal Circuit affirmed a sanction under Fed. R. Civ. P. 11 against a patentee's counsel for continuing to pursue infringement claims after he should have known the claims were groundless. During the mid to late 1990s, Phonometrics, Inc. ("the patentee") sued numerous hotel companies, including Economy Inns of America (collectively "Defendants"), for infringement of U.S. Patent No. 3,769,463 ("the '463 patent").

And, if the sharp-tongued rhetoric of the Court wasn’t enough, sometimes it will award sanctions for good measure, on top of a scathing opinion.Under Fed. R. Civ. P. 11(c), the Court “may impose an appropriate sanction” for a violation under 11(b), which provides that in presenting any paper to the Court, the attorney certifies that it is not brought for an improper purpose and is not frivolous. Fed. R. App. P. 46(c) further allows a court of appeals to discipline an attorney for “conduct unbecoming a member of the bar or for failure to comply with any court rule.”

Isn’t it time for Rule 11? Federal Rule of Civil Procedure 11 provides, in pertinent part, that sanctions are available when: the claims ... are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law. Fed. R. Civ. P. 11(b)(2).