Case: 09-10355 Document: 00511232038 Page: 1 Date Filed: 09/13/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
September 13, 2010
No. 09-10355
Lyle W. Cayce
Clerk
POSITIVE SOFTWARE SOLUTIONS, INC.,
Plaintiff-Appellee
Cross-Appellant,
versus
NEW CENTURY MORTGAGE CORPORATION; ET AL.,
Defendants,
versus
OPHELIA F. CAMIÑA,
Respondent-Appellant
Cross-Appellee.
Appeal from the United States District Court
for the Northern District of Texas
Case: 09-10355 Document: 00511232038 Page: 2 Date Filed: 09/13/2010
No. 09-10355
Before SMITH, WIENER, and ELROD, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Ophelia Camiña appeals the district court’s imposition of sanctions for her
conduct during arbitration. Because that court lacked inherent authority to im-
pose those sanctions, we reverse and remand.
I.
In 2003, Positive Software Solutions, Inc. (“Positive Software”), sued New
Century Mortgage Corporation (“New Century”) for allegedly infringing telemar-
keting software licensed to New Century. Ophelia Camiña, a partner at Susman
Godfrey LLP, appeared as attorney for New Century. Over Positive Software’s
objection, the district court ordered the case to arbitration in accordance with the
parties’ contract.
During arbitration, Camiña advised New Century on various discovery
matters. In September 2004, the district court vacated the award because the
arbitrator had failed to disclose his previous professional relationship with Ca-
miña. This court reversed the vacatur and remanded. Positive Software Solu-
tions, Inc. v. New Century Mortg. Corp., 476 F.3d 278 (5th Cir. 2007) (en banc).
After remand, New Century declared bankruptcy. In the course of the
bankruptcy proceedings, Positive Software settled its claims against New Cen-
tury, and the case was administratively closed. Under the settlement, New Cen-
tury waived and assigned to Positive Software its attorney-client and work-prod-
uct rights. The district court granted Positive Software’s demand that Susman
Godfrey LLP turn over its files for use by Positive Software in pursuing sanc-
tions.
In March 2008, Positive Software moved for sanctions against Camiña,
Barry Barnett, and Susman Godfrey LLP under Federal Rule of Civil Procedure
2
Case: 09-10355 Document: 00511232038 Page: 3 Date Filed: 09/13/2010
No. 09-10355
37, 28 U.S.C. § 1927, and the court’s inherent authority. In February 2009, us-
ing its purported inherent authority, the court sanctioned Camiña $10,000, rep-
resenting a portion of Positive Software’s attorneys’ fees. Camiña appeals the
sanction.
II.
“We review de novo a district court’s invocation of its inherent power and
the sanctions granted under its inherent power for an abuse of discretion . . . .”
FDIC v. Maxxam, Inc., 523 F.3d 566, 590 (5th Cir. 2008) (citation omitted). We
review the factual findings underlying those sanctions, however, only for clear
error. See Crowe v. Smith, 151 F.3d 217, 239 (5th Cir. 1998).
III.
Camiña claims that the district court lacked inherent authority to impose
sanctions for her conduct during arbitration. In the alternative, she argues that
the court employed the wrong standard of proof in finding that she acted in bad
faith, and that the sanctions were not supported by the evidence. Because the
court lacked inherent authority to sanction Camiña for her actions during arbi-
tration, we need not address her alternative claims.
A.
A district court has the inherent authority to impose sanctions “in order
to control the litigation before it.” NASCO, Inc. v. Calcasieu Television & Radio,
Inc., 894 F.2d 696, 703 (5th Cir. 1990), aff’d sub nom. Chambers v. NASCO, Inc.,
501 U.S. 32 (1991). The court may also use that power to sanction conduct, see
Chambers, 501 U.S. at 44, if it is “in direct defiance of the sanctioning court,”
CJC Holdings, Inc. v. Wright & Lato, Inc., 989 F.2d 791, 794 (5th Cir. 1993), or
constitutes “disobedience to the orders of the Judiciary,” Chambers, 501 U.S. 32,
3
Case: 09-10355 Document: 00511232038 Page: 4 Date Filed: 09/13/2010
No. 09-10355
44 (1991). Inherent power, however, “may be exercised only if essential to pre-
serve the authority of the court . . . .” Natural Gas Pipeline Co. of Am. v. Energy
Gathering, Inc., 86 F.3d 464, 467 (5th Cir. 1996).
In Maxxam, we confirmed the limited reach of the court’s inherent authori-
ty. There the FDIC sued Charles Hurwitz, alleging that he was responsible for
the failure of a savings and loan association. The FDIC also encouraged the Of-
fice of Thrift Supervision (“OTS”) to pursue similar claims in an administrative
proceeding. The FDIC moved that the district court stay its case pending com-
pletion of the OTS proceeding. When the district court denied that motion, the
FDIC continued to support the administrative action. Invoking its inherent pow-
ers, the court sanctioned the FDIC for Hurwitz’s expenses in defending the OTS
action. We reversed part of those sanctions on the ground that the inherent
power does not extend to collateral proceedings that “do not threaten the court’s
own judicial authority or proceedings.” Maxxam, 523 F.3d at 593. Inherent au-
thority “is not a broad reservoir of power, ready at an imperial hand, but a limit-
ed source; an implied power squeezed from the need to make the court function.”
Id. at 591 (citation omitted).
Here the district court distinguished Maxxam, positing that arbitration is
not a collateral proceeding but instead an “annex” to litigation. It reasoned that
because the court ordered the parties to arbitrate, it retained the authority to
impose sanctions for conduct committed in arbitration. That approach is puzz-
ling. To begin with, arbitration is not an annex to litigation, but an alternative
method for dispute resolution.1 Treating arbitration as if it were an appendage
to adjudication is a mistake that would undermine the very purpose of arbitra-
tionSS“the provision of a relatively quick, efficient and informal means of private
1
This opinion deals only with traditional arbitration, which is contractual in nature,
and not with so-called “judicial” or “court-annexed” arbitration or mediation, which is often
compulsory.
4
Case: 09-10355 Document: 00511232038 Page: 5 Date Filed: 09/13/2010
No. 09-10355
dispute settlement . . . .” Antwine v. Prudential Bache Sec., Inc., 899 F.2d 410,
412 (5th Cir. 1990) (emphasis added). Parties agree to arbitration to avoid liti-
gation; they voluntarily surrender judicial remedies in favor of an extrajudicial
process.
Furthermore, the notion that the court’s inherent authority turns on
whether the arbitration was “court-ordered” is untenable. Positive Software
claims that the district court retained significant supervisory authority by virtue
of ordering the parties to arbitrate. When asked, in oral argument, whether the
court would have had inherent authority to sanction Camiña if the parties had
chosen to enter arbitration at the outset, Positive Software’s counsel candidly
stated, “of course notSSthat’s Maxxam.” Positive Software’s distinction, then,
would allow trial courts to oversee arbitrations in which one party had to be com-
pelled to arbitrate but not those in which both parties complied with their arbi-
tration agreement. Such a significant and perverse asymmetry cannot be jus-
tified, and Positive Software’s efforts to distinguish this case from Maxxam are
unavailing.
In an attempt to rescue the sanctions order, Positive Software additionally
claims that the sanctions are based on Camiña’s direct defiance of the prelim-
inary injunction and protective order. That assertion, however, is belied by the
court’s own explicit explanation that the sanctioned conduct “took place in con-
nection with the arbitration, not in connection with discovery under the Court’s
supervision.” In other words, the court imposed sanctions not on account of any
direct violation of a court order, but only because it found that Camiña had ex-
hibited four particular instances of bad faith during arbitration.
Positive Software’s argument, therefore, fails according to the court’s own
findings. Because Camiña’s conduct was neither before the district court nor in
direct defiance of its orders, the conduct is beyond the reach of the court’s inher-
ent authority to sanction.
5
Case: 09-10355 Document: 00511232038 Page: 6 Date Filed: 09/13/2010
No. 09-10355
B.
Not only are the sanctions at odds with our caselaw on inherent authority,
but they also are in serious tension with the Federal Arbitration Act (“FAA”),
9 U.S.C. § 1 et seq. Under the FAA, the district court has the authority to deter-
mine (1) whether arbitration should be compelled, see §§ 2-4, and (2) whether an
arbitration award should be confirmed, vacated, or modified, see §§ 9-11. Beyond
those narrowly defined procedural powers, the court has no authority to interfere
with an arbitration proceeding. See Smith, Barney, Harris Upham & Co. v. Rob-
inson, 12 F.3d 515, 520-21 (5th Cir. 1994) (per curiam). Because both parties
agree that their contract gave the arbitrator authority to sanction Camiña for
bad-faith conduct, the FAA counsels against the district court’s assigning itself
that task.
Positive Software cites LaPrade v. Kidder Peabody & Co., 146 F.3d 899
(D.C. Cir. 1998), to resolve the apparent tension between the sanction order and
the FAA. In LaPrade, the district court stayed an action brought by Linda La-
Prade against her former employer because the dispute was covered by a valid
arbitration agreement. While the arbitration was pending, LaPrade’s attorney
went into state court and obtained an ex parte order staying the arbitration with-
out informing that court of the district court’s previous order. On the employer’s
motion, the district court lifted the state court’s stay and imposed sanctions
against LaPrade’s attorneys under 28 U.S.C. § 1927 for their “vexatious and dila-
tory tactics.” LaPrade, 146 F.3d at 900. On appeal, the District of Columbia Cir-
cuit upheld the sanctions, concluding that the FAA did not divest the district
court of jurisdiction to enter the sanctions order. Id. at 903.
LaPrade, however, does not support the district court’s exercise of inherent
power against Camiña. First, LaPrade held only that the FAA does not affect
the district court’s jurisdiction over a case stayed pending arbitration. Id. But
jurisdiction alone does not create the inherent power to sanction arbitration con-
6
Case: 09-10355 Document: 00511232038 Page: 7 Date Filed: 09/13/2010
No. 09-10355
duct. That power must be grounded in some threat to the court’s authority or
its ability to function and must not be contrary to statute. Unlike the court in
LaPrade, which involved sanctions under a specific statutory provision, the dis-
trict court here relied only on its inherent authority, which, as noted, was not up
to the task.
Furthermore, it is misleading to suggest that LaPrade’s attorneys were
sanctioned for conduct in arbitration. Instead, the court imposed sanctions for
the direct violation of its order. Id. In staying the federal suit, the court man-
dated that LaPrade seek redress of her employment-related grievances only
through arbitration. By obtaining a stay of arbitration in state court, her attor-
neys disregarded that order, thereby posing a threat to the federal district
court’s authority. That conduct might have been analogous to what happened
here if Camiña’s sanctions had rested on her violation of the preliminary injunc-
tion or the protective order. But as already discussed, the district court found
no such violation.
C.
Finally, and perhaps most importantly, the sanctions order threatens un-
duly to inflate the judiciary’s role in arbitration. The FAA provides for minimal
judicial involvement in resolving an arbitrable dispute; the court is limited to on-
ly a few narrowly defined, largely procedural tasks. But by using its power to
sanction, a court could seize control over substantive aspects of arbitration. The
court would, in effect, become a roving commission to supervise a private method
of dispute resolution and exert authority that is reserved, by statute, caselaw,
and longstanding practice, to the arbitrator. That supervision is inconsistent
with the scope of inherent authority and with federal arbitration policy, which
aims to prevent courts from delaying the resolution of disputes through alter-
native means.
7
Case: 09-10355 Document: 00511232038 Page: 8 Date Filed: 09/13/2010
No. 09-10355
In response, Positive Software claims that expansion of district court au-
thority is necessary here, because Positive Software did not discover some of Ca-
miña’s alleged misdeeds until after the case had been settled and administra-
tively closed. Positive Software argues that without the district court’s assertion
of inherent authority, there would have been no means to redress Camiña’s sup-
posed wrongdoing. That argument, however, ignores at least two other proce-
dures that were available to Positive Software.
First, it could have asked the American Arbitration Association to re-open
the proceedings so it could request sanctions from the arbitrator. See American
Arbitration Association, Commercial Arbitration Rule 36, 38 (2009). Second, it
could have relied on the grievance process. In fact, it did: Its counsel filed a
grievance against Camiña, which was dismissed as lacking just cause. Contrary
to Positive Software’s contentions, then, there was no particular need for the dis-
trict court to expand its inherent authority to prevent misdeeds from falling
through the cracks.
IV.
In sum, the district court lacked inherent authority to sanction Camiña for
her conduct during arbitration. That conduct was neither before the district
court nor in direct defiance of its orders. If inherent authority were expanded
to cover Camiña’s conduct, there would be nothing to prevent courts from insert-
ing themselves into the thicket of arbitrable issuesSSprecisely where they do not
belong. Such an expansion would also threaten the integrity of federal arbitra-
tion law in the name of filling a gap that does not exist. We therefore REVERSE
the sanctions2 and REMAND for any further proceedings that may be needed.3
2
We do not condone Camiña’s complained-of actions as they are alleged to have oc-
curred. The clerk is directed to send a copy of this opinion to the Office of the General Counsel
(continued...)
8
Case: 09-10355 Document: 00511232038 Page: 9 Date Filed: 09/13/2010
No. 09-10355
2
(...continued)
of the State Bar of Texas. We are mindful that the State Bar declined to act on this matter
in response to Positive Software’s request, and we express no view on whether the State Bar
should consider this matter further or, if it does, on what action it should take. We opine only
that the federal courts are without power to issue sanctions under these particular facts.
3
We apply the correct law to the facts at hand and do not speculate on whether a dis-
trict court might ever have the power to sanction for conduct in arbitration. We might have
reached a different result but for the district court’s specific factual finding that the discovery
issues “took place in connection with the arbitration, not in connection with discovery under
the Court’s supervision pursuant to the Federal Rules of Civil Procedure.” Here, New Century
affirmatively sought the entry of a protective order governing discovery both before the district
court and in the arbitration proceedings; New Century also petitioned the court for sanctions
against Positive Software on multiple occasions. Accordingly, had the alleged conduct arisen
in connection with discovery before the district court or the protective order or preliminary in-
junction, it might have “threaten[ed] the court’s own judicial authority or proceedings.” Max-
xam, 523 F.3d at 593, so the court might have been within its inherent authority to sanction
Camiña, see NASCO, 894 F.2d at 703. We express no ultimate view on this hypothetical,
which is not before us.
9