Procter & Gamble Co v. Amway Corporation, e

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT
_______________

m 00-20127
_______________

THE PROCTER & GAMBLE COMPANY;
THE PROCTER & GAMBLE DISTRIBUTING COMPANY,

Plaintiffs-Appellants-
Cross Appellees,

VERSUS

AMWAY CORPORATION, ET AL.,

Defendants,

THE AMWAY DISTRIBUTORS ASSOCIATION COUNCIL,

Defendant-Appellee-
Cross-Appellant,

JA-RI CORPORATION,

Defendant-Appellee,

AND

INTERNET SERVICES CORPORATION,

Movant-Appellee-
Cross-Appellant.
 _________________________

Appeals from the United States District Court
for the Southern District of Texas
_________________________

January 17, 2002

Before JOLLY, SMITH, and BENAVIDES, to other Amway distributors via an internal tel-
Circuit Judges. ephone messaging system. Haugen served on
the ADAC and was a very successful Amway
JERRY E. SMITH, Circuit Judge: distributor with a network of distributors
throughout Utah, Nevada, Texas, Mexico, and
The Procter & Gamble Co. (“P&G”) Canada.
appeals the award of attorneys’ fees and costs
to Ja-Ri Corporation (“Ja-Ri”), the Amway The rumor spread rapidly. Some
Distributors Association Council (“ADAC”), distributors printed fliers containing the rumor
and Internet Services Corporation (“Internet”) and circulated them to consumers. P&G
under 28 U.S.C. § 1927 and 15 U.S.C. offered evidence that the number of Satanism
§ 1117(a). Concluding that the district court rumors increased substantially in the states in
committed several errors, we vacate and which the majority of Haugen’s distributors
remand. live.

I. Within days of learning that the rumor was
P&G manufactures and distributes nu- false, Haugen sent out a short retraction on the
merous household products. Since the late voice messaging system. Shortly thereafter, an
1970’s and early 1980’s, rumors of links to Amway representative contacted Haugen and
Satanism have circulated throughout the delivered a copy of a P&G “truth kit,” which
United States. A common version alleges that explains that the rumor is false. Using the kit,
P&G’s president admitted to worshiping Satan Haugen sent out a second and more detailed
on a television talk show and that a portion of retraction, but the rumor continued to spread
P&G’s profits goes to the church of Satan. for some time.
The rumor has circulated in the form of
voicemail messages and printed fliers. Amway’s distributors make money both
from selling Amway products to the general
P&G alleges that Amway and its public and from recruiting other distributors.
distributors started or spread the rumor in the Newly recruited distributors become “down-
1980’s and began spreading it again in the line” distributors who earn commissions for
mid- 1990’s. Rather than suing Amway in the the “upline” distributors who recruited them.
1980’s, P&G worked with Amway’s corporate More senior and profitable distributors sell
headquarters to stop the rumor. In 1995, their products predominately to downline dis-
however, the rumor resurfaced when Randy tributors rather than to consumers. There is
Haugen, an Amway Distributor, forwarded it high turnover among the more junior

2
distributors. The most elite and profitable On the day after the dismissal in Utah, P&G
distributors rely on the sale of motivational sued Haugen, Amway, ADAC, Ja-Ri, Internet,
tools rather than Amway products to earn and other parties in Texas federal court,
large profits. alleging that the defendants had (1) spread the
Satanism rumor, (2) disparaged P&G’s Crest
P&G alleged that this structure constitutes toothpaste, and (3) harmed P&G’s sales by
an illegal pyramid scheme and gave upline dis- luring people into Amway’s illegal pyramid
tributors a possible motive to repeat the rumor scheme as distributors. The complaint assert-
to the downline distributors because it might ed various causes of action, including common
affect the ability to recruit distributors and sell law fraud, violations of the Lanham Act
Amway products. The relationship of Amway § 43(a), violations of the Racketeer Influenced
distribution network to Ja-Ri, ADAC, and In- and Corrupt Organizations Act (“RICO”), 28
ternet remains a bit murky, but P&G unearthed U.S.C. § 1962(c)-(d), and violations of the
evidence that the four entities have close ties. Texas Business and Commerce Code § 16.29.

II. The Texas district court granted Amway’s
In 1995, P&G filed a federal suit in Utah, FED. R. CIV. P. 12(b)(6) motion dismissing the
alleging that Haugen, Freedom Associates, RICO claim because P&G had not alleged re-
Inc., and Freedom Tools, Inc., circulated the liance on Amway’s alleged predicate acts of
Satanism rumor; P&G later joined Amway, mail and wire fraud. The court held that P&G
Randy Walker, and Walker International Net- lacked standing to bring its § 43(a) claim based
work as defendants. In 1996, P&G filed a sec- on Amway’s illegal pyramid scheme and that
ond amended complaint alleging defamation, the statute of limitations had expired for the
common law unfair competition, violations of fraud claim. This dismissal eliminated Internet
the Utah Truth in Advertising Act, tortious in- as a party to the suit, because P&G had
terference, negligent supervision, and asserted only the Lanham Act illegal pyramid
violations of the Lanham Act § 43(a), 15 scheme against Internet.
U.S.C. § 1125(a), and vicarious liability. P&G
then filed a third amended complaint alleging The remaining claims and parties went to
that Amway is an illegal pyramid and alleging trial. At the close of P&G’s case, Amway
fraud and product disparagement; the district moved for judgment as a matter of law
court dismissed that complaint in 1997. Later (“j.m.l.”). The court granted j.m.l. and
in 1997, P&G filed a fourth amended
complaint to assert fraud and disparagement
claims, which the Utah court denied as 1
untimely.1 (...continued)
March 1999, the Utah court granted summary
judgment to the defendants on the defamation per
se, vicarious liability, and negligent supervision
1
In September 1998, the Utah district court claims, then entered a final judgment dismissing all
granted defendants’ joint motion for summary of P&G’s claims. The Tenth Circuit reversed,
judgment and dismissed the § 43(a) claim, holding P&G v. Haugen, 222 F.3d 1262 (10th Cir. 2000),
that the misrepresentation did not relate to a and remanded for further proceedings on the Lan-
product within the meaning of the Lanham Act. In ham Act disparagement and Utah state law
(continued...) disparagement claims.

3
dismissed the § 43(a) claim against Amway, had reversed and remanded on the Lanham
Walker, and Haugen based on the res judicata Act claim. We refused to give the Utah
effect of the Utah final judgment. The Texas court’s decision on vicarious liability
court dismissed the § 43(a) claim for preclusive effect as to the Lanham Act claims.
disparagement against the remaining Id. at 546. (4) We reversed the j.m.l. on the
defendants because the First Amendment Lanham Act disparagement claim, concluding
requires, and the plaintiffs had failed to that the First Amendment does not require
present, evidence of “actual malice.” The proof of “actual malice.” Id. at 546-59. (5)
court also dismissed the Texas Business and We reversed the dismissal of the product
Commerce Code § 16.29 claim and all disparagement claims under the Lanham Act
remaining claims. P&G appealed the decision and Texas Business and Commerce Code §
on the merits. 16.29. Id. at 565-66. (6) We upheld the
dismissal of the common law fraud claims as
The district court then issued three orders barred by the statute of limitations. Id. at 566-
imposing sanctions on P&G by shifting at- 67. (7) We upheld the dismissal of the alter
torneys’ fees and costs. It granted sanctions to ego, single business enterprise, and vicarious
Ja-Ri in the form of all attorneys’ fees expend- liability claims against Ja-Ri and ADAC.
ed after April 1999 (the “Ja-Ri sanctions or-
der”), citing § 1927 as its authority for shifting The only claims currently before the district
fees. The court granted a fees motion in favor court relate to spreading the Satanism and
of ADAC, citing its authority under § 1927 Crest toothpaste rumors. The district court
and 15 U.S.C. § 1117 (the “ADAC sanctions still must decide whether Amway and its dis-
order”). The court granted Internet’s motion tributors fraudulently spread the Satanism ru-
for all attorney’s fees under §§ 1117 and 1927 mor and violated RICO, unlawfully disparaged
(the “Internet sanctions order”). P&G brought P&G products under the Lanham Act, or un-
the instant appeal to challenge the sanctions lawfully disparaged P&G products under Tex-
orders. as Business and Commerce Code § 16.29.
P&G has never identified evidence that Ja-Ri,
In Procter & Gamble Co. v. Amway Corp. ADAC, or Internet spread the Satanism or
(“P&G I”), 242 F.3d 539, cert. denied, 122 S. Crest toothpaste rumor. In P&G I, we
Ct. 329 (2001), we affirmed the decision on affirmed the decision that Ja-Ri and ADAC
the merits in part, reversed in part, and could not face alter ego, single business
vacated. (1) We reversed the rule 12(b)(6) enterprise, or vicarious liability for the actions
dismissal of the RICO claims based on the of Amway or downline distributors. 242 F.3d
predicate acts of mail and wire fraud in at 559-60. We may safely assume that none of
spreading the Satanism rumor. We affirmed the claims currently pending before the district
the dismissal of the RICO claims based on the court relates to Ja-Ri, ADAC, or Internet.
illegal pyramid scheme. Id. at 564-65. (2) We
affirmed the summary judgment dismissing the III.
Lanham Act illegal pyramid claims because P&G argues that the district court lacked
P&G lacked standing. Id. at 562-63. (3) We jurisdiction to enter sanctions, because P&G
reversed the j.m.l. that the Utah judgment has already had appealed the final decision on the
res judicata effect, because the Tenth Circuit merits. Perfecting an appeal deprives the dis-

4
trict court of jurisdiction to hear matters order resolving sanctions and attorneys’ fees,
connected to the appeal. Offshore Logistics the district court deprived itself of jurisdiction.
Servs., Inc. v. Mut. Marine Office, Inc., 639 P&G does not cite any authority for the
F.2d 1168, 1170 (5th Cir. Unit A Mar. 1981). proposition that the label alone should have
this effect.
The district court, however, retains
jurisdiction to resolve motions for sanctions The district court did not alter the terms of
and attorneys’ fees while a judgment on the its judgment on the merits and only repeated
merits is pending on appeal.2 Such motions its earlier conclusions. Even if the court
are collateral to the merits, so the appeal does lacked jurisdiction to alter the judgment on the
not divest the district court of jurisdiction.3 merits, it retained jurisdiction to resolve
P&G argues that by attaching the label sanctions and fees issues; we decline to vacate
“Second Amended Final Judgment” to the and remand to force the district court to add a
different label to the same order. That court
plainly had jurisdiction to enter its order.
2
Thomas v. Capital Sec. Serv., Inc., 812 F.2d
984, 987 (5th Cir. 1987) (“[E]ven though the judg- IV.
ment on the merits has been properly appealed and According to § 1927, a district court may
is pending in the courts of appeal, the district court shift reasonable fees to “any attorney” “who so
retains jurisdiction to entertain and resolve a mo- multiplies the proceedings in any case
tion requesting attorney’s fees or sanctions.”), unreasonably and vexatiously.”4 The court can
vacated in part, reinstated in part, and remanded shift fees only to counsel, not to parties.5
on other grounds, 836 F.2d 866 (5th Cir. 1988)
(en banc); CHARLES ALAN WRIGHT, ARTHUR R.
MILLER, & EDWARD H. COOPER, 15B FEDERAL
4
PRACTICE AND PROCEDURE § 3915.6, at 338 Section 1927 provides:
(West 2d ed. 1992) (“The rule that appeal can and
must be taken upon final disposition of all matters Any attorney or other person admitted to
other than attorney fees leaves the district court conduct cases in any court of the United
free to continue proceedings on the fee request States or any Territory thereof who so mul-
pending appeal.”). Cf. Budinich v. Becton Dickin- tiplies the proceedings in any case
son & Co., 486 U.S. 196, 200-01 (1988) unreasonably and vexatiously may be
(declaring fee award separable from decision on the required by the court to satisfy personally
merits for purposes of FED. R. APP. P. 4’s time the excess costs, expenses, and attorneys’
limits for appeal); Buchanan v. Stanships, Inc., fees reasonably incurred because of such
485 U.S. 265, 268 (1988) (holding that courts conduct.
should not treat a motion for costs as a motion to
alter or amend the judgment that tolls the time 28 U.S.C. § 1927.
limits for filing an appeal).
5
E.g., Maguire Oil Co. v. City of Houston, 143
3
Thomas, 812 F.2d at 987. Cf. Taylor v. Ster- F.3d 205, 208 (5th Cir. 1998) (“Because the award
rett, 640 F.2d 663, 668 (5th Cir. Unit A Mar. at issue in this case was imposed against the
1981) (explaining that interlocutory appeal does CitySSand not any of the attorneys involvedSSit
not divest district court of jurisdiction over matters plainly cannot be sustained under section 1927");
not involved in the appeal, including attorneys’ Matta v. May, 118 F.3d 410, 413-14 (5th Cir.
fees). (continued...)

5
 The district court must find that the court must (1) identify sanctionable conduct
sanctioned attorney multiplied the proceedings and distinguish it from the reasons for deciding
both “unreasonably” and “vexatiously.” FDIC the case on the merits,7 (2) link the sanction-
v. Calhoun, 34 F.3d 1291, 1297 (5th Cir. able conduct to the size of the sanctions,8 and
1994). This requires “evidence of bad faith, (3) differentiate between sanctions awarded
improper motive, or reckless disregard of the under different statutes.9 Specific findings per-
duty owed to the court.” Edwards v. Gen. mit effective appellate review of the validity
Motors Corp., 153 F.3d 242, 246 (5th Cir. and amount of fees. Browning, 931 F.2d at
1992). Section 1927 only authorizes shifting 346.
fees that are associated with “the persistent
prosecution of a meritless claim.” Browning v. To shift the entire cost of defense, the
Kramer, 931 F.2d 340, 345 (5th Cir. 1991) claimant must prove, by clear and convincing
(citation omitted) (internal quotation omitted). evidence, that every facet of the litigation was
The courts often use repeated filings despite
warnings from the court, or other proof of ex-
cessive litigiousness, to support imposing 6
(...continued)
sanctions. Nat’l Ass’n of Gov’t Employees v. 1988) (stating that larger sanctions require more
Nat’l Fed’n of Fed. Employees, 844 F.2d 216, rigorous appellate review, requiring more detailed
224 (5th Cir. 1988). To prevent the courts factual and legal findings).
from dampening “the legitimate zeal of an at-
7
torney in representing her client,” Browning v. Topalian, 3 F.3d at 937 (stating that “the
Kramer, 931 F.2d 340, 344 (5th Cir. 1991), court must announce the sanctionable conduct giv-
we have interpreted § 1927 as penal and ing rise to its order”); Browning, 931 F.2d at 346
construed it in favor of the sanctioned party, (“Section 1927 is aimed at specific conduct and
claims.”); Smith Int’l, 844 F.2d at 1198
FDIC v. Connor, 20 F.3d 1376, 1384 (5th Cir.
(distinguishing between decision on the merits and
1994).
determination that legal claim was so frivolous as
to justify sanctions for multiplying proceedings).
The district court must make detailed fac-
tual findings when imposing large sanctions in 8
Connor, 20 F.3d at 1385 (stating that district
a complex case with an extensive record.6 The court must link conduct to fees shifted); Topalian,
3 F.3d at 937 (“The district court must
demonstrate some connection between the amount
5
(...continued) of monetary sanctions it imposes and the sanction-
1997) (“Unlike Rule 11, § 1927 sanctions are, by able conduct by the violating party”); Browning,
the section’s plain terms, imposed only on 931 F.2d at 346 (stating that findings must provide
offending attorneys; clients may not be ordered to attorney with opportunity to challenge amount of
pay such awards.”); Traveler’s Ins. Co. v. St. Jude fees shifted on appeal).
Hosp., 38 F.3d 1414, 1416 (5th Cir. 1994) (same).
9
Topalian, 3 F.3d at 931 (stating that district
6
Topalian v. Ehrman, 3 F.3d 931, 936 & n.5 court has obligation to announce which legal rules
(5th Cir. 1993) (stating that large sanctions or statutes give rise to which sanctions); Browning,
imposed in a complex case must be accompanied 931 F.2d at 346 (explaining that § 1927 grants
by detailed findings); Smith Int’l, Inc. v. Tex. only limited authority to shift fees and requiring
Commerce Bank, 844 F.2d 1193, 1197 (5th Cir. district courts to specify the sources of their
(continued...) authority for shifting fees).

6
patently meritless, Nat’l Ass’n of Gov’t permit recovery for work on non-Lanham Act
Employees, 844 F.2d at 223, and counsel must claims only if “the Lanham Act and non-
have lacked a reason to file the suit and must Lanham Act claims are so intertwined that it is
wrongfully have persisted in its prosecution impossible to differentiate between work done
through discovery, pre-trial motions, and trial, on claims.” Gracie, 217 F.3d at 1069-70
Lewis v. Brown & Root, Inc., 711 F.2d 1287, (citations omitted). Limiting the scope of
1292 (5th Cir. 1983), clarified on § 1117(a) comports with the background rule
reconsideration, 722 F.2d 209 (5th Cir. 1984). in AmericaSSthe prevailing party usually can-
not recover fees absent statutory authority.
We review an order awarding sanctions un- Alyeska Pipeline Serv. Co. v. Wilderness
der § 1927 only for abuse of discretion. Soc’y, 421 U.S. 240, 247 (1975).
Mercury Air Group, Inc. v. Mansour, 237
F.3d 542, 549 (5th Cir. 2001). “A district Courts permit prevailing plaintiffs to
court abuses its discretion if it awards recover attorneys’ fees under § 1117(a) if the
sanctions based on an erroneous view of the defendant maliciously, fraudulently, deliberate-
law or on a clearly erroneous assessment of ly, or wilfully infringes the plaintiff’s mark.
the evidence.” Walker v. City of Bogalusa, Tex. Pig Stands, Inc. v. Hard Rock Café Int’l,
168 F.3d 237, 240 (5th Cir. 1999). Inc., 951 F.2d 684, 696-97 (5th Cir. 1992).
The prevailing plaintiff must show “a high de-
V. gree of culpability” by the defendant. Id. at
The Lanham Act provides that “[t]he court 1305. We have used “bad faith” as a
in exceptional cases may award reasonable shorthand for conducting this inquiry, Pebble
attorney’s fees to the prevailing party.” 15 Beach Co. v. Tour 18 I Ltd., 155 F.3d 526,
U.S.C. § 1117(a). The prevailing party must 556 (5th Cir. 1998), but we also have
demonstrate the exceptional nature of the case instructed district courts to consider all the
by clear and convincing evidence. CJC facts and circumstances to determine whether
Holdings, Inc. v. Wright & Lato, Inc., 979 a case is exceptional, id. at 555.
F.2d 60, 65 (5th Cir. 1992). This court rarely
has interpreted the requirements for a We have not articulated a very precise stan-
prevailing defendant to recover fees under dard for determining when to award a
section 1117(a), so we briefly review the prevailing defendant attorneys’ fees. In Fuji
relevant legal principles, relying on decisions Photo Film Co., Inc. v. Shinohara Shoji
from other jurisdictions.
10
Several courts have held that a party can (...continued)
1060, 1069-70 (9th Cir. 2000) (remanding for dis-
recover under § 1117(a) only for work
trict court to apportion fees between Lanham Act
performed in connection with claims filed
and non-Lanham Act claims); U.S. Structures, Inc.
under the Lanham Act.10 A court should v. J.P. Structures, Inc., 130 F.3d 1185, 1193 (6th
Cir. 1997) (opining that “under 15 U.S.C.
§ 117(a), attorneys’ fees are recoverable only for
10
This court has not addressed this issue. The work performed in connection with claims filed
Sixth and Ninth Circuits, as well as a district court, under the Lanham Act”); Neva, Inc. v. Christian
have so held, however. Gracie v. Gracie, 217 F.3d Duplications Int’l, Inc., 743 F. Supp. 1533, 1543
(continued...) (M.D. Fla. 1990) (same).

7
Kabushiki Kaisha, 754 F.2d 591, 601-02 (5th doing so, but district courts nonetheless should
Cir. 1985), we affirmed the refusal to grant consider the merits and substance of the civil
fees based on a finding that the plaintiff had action when examining the plaintiffs’ good or
brought the action in good faith, but we did bad faith. We review the award of attorneys’
not address the role of the objective merits of fees under the Lanham Act for abuse of
the plaintiff’s suit in determining the existence discretion, and the court’s finding as to wheth-
of “exceptional” status. er the case is exceptional for clear error. Sea-
trax, Inc. v. Sonbeck Int’l, Inc., 200 F.3d 358,
On remand, the district court should 373 (5th Cir. 2000) (citation omitted).
consider the objective merits of the suit when
determining whether P&G acted in good faith.
In the context of prevailing plaintiffs, we have 12
(...continued)
considered the existence or nonexistence of (7th Cir. 1997) (Posner, J.) (“[A] suit can be op-
reasonable legal defenses probative of good or pressive because of lack of merit and cost of de-
bad faith.11 The vast majority of circuits have fending even though the plaintiff honestly though
developed a separate test for prevailing mistakenly believes that he has a good case and is
defendants under § 1117(a) and permit district not trying merely to extract a settlement based on
courts to consider directly the objective merits the suit’s nuisance value”); Hartman v. Hallmark
of the suit.12 Fuji Photo precludes us from Cards, Inc., 833 F.2d 117, 123 (8th Cir. 1987)
(reasoning that “the absence of bad faith is not
alone determinative of the Lanham Act fee issue”);
11 Boney, Inc. v. Boney Serv., Inc., 127 F.3d 821,
Pebble Beach, 155 F.3d at 556 (describing
exceptional classification as inappropriate where a 827 (9th Cir. 1997) (finding that exceptional cir-
party presents a reasonable defense in good faith); cumstances other than bad faith can justify shifting
CJC Holdings, 979 F.2d at 66 (“A district court fees in favor of the prevailing defendant); Nat’l
normally should not find a case exceptional where Ass’n of Prof’l Baseball Leagues, Inc. v. Very
the party presents what it in good faith believes to Minor Leagues, Inc., 223 F.3d 1143, 1147 (10th
be a legitimate defense.”); Martin’s Herend Cir. 2000) (describing multifactor test that permits
Imports, Inc. v. Diamond & Gem Trading USA, district court to consider objective and subjective
Co., 112 F.3d 1296, 1305 (5th Cir. 1997) (refusing reasonableness); Noxell Corp. v. Firehouse No. 1
to infer that infringer had acted in bad faith where Bar-B-Que Restaurant, 771 F.2d 521, 526 (D.C.
outcome hinged on difficult legal questions about Cir. 1985) (“Something less than ‘bad faith,’ we
gray market goods and parallel importers). believe, suffices to mark a case as ‘exceptional.’”).

12
The Fourth, Seventh, Eighth, Ninth, Tenth, Only the Second Circuit has endorsed Fuji
and District of Columbia Circuits have refused to Photo’s holding that to recover fees under
endorse symmetrical tests for prevailing plaintiffs § 1117(a), the defendant must prove the plaintiff
and defendants; these courts permit district courts brought the action in bad faith. Conopco, Inc. v.
to consider the objective merits of the underlying Campbell Soup Co., 95 F.3d 187, 194-95 (2d Cir.
suit as an independent factor. Ale House Mgmt., 1996) (affirming because defendant had failed to
Inc. v. Raleigh Ale House, Inc., 205 F.3d 137, 144 show the action was brought in bad faith). Cf. Se-
(4th Cir. 2000) (describing an open-ended, mul- curaComm Consulting, Inc. v. Securacom, Inc.,
tifactor test for determining when prevailing de- 224 F.3d 273, 280 & n.1 (3d Cir. 2000) (requiring
fendants should recover fees); Door Sys. Inc. v. evidence of subjective bad faith for prevailing
Pro-Line Door Sys., Inc., 126 F.3d 1028, 1032 plaintiff to recover fees for defendants’ actions in
(continued...) bringing retaliatory suits in multiple fora).

8
 Ja-Ri’s expenses; (6) Amway and not Ja-Ri
VI. compensates Ja-Ri’s officers and directors;
The sanctions orders in favor of Ja-Ri, (7) members of Amway’s founding families
ADAC, and Internet share two common, fatal own both Ja-Ri and Amway and serve as their
flaws. First, the district court shifted fees and officers and directors; (8) Ja-Ri does not hold
costs under § 1927 to P&G rather than to its formal officer or director meetings; and
counsel. Second, the court failed to specify (9) Amway delegated the express authority for
which statute authorized shifting which fees, to Ja-Ri to control downline distributors by en-
separate the vexatious conduct or exceptional forcing Amway’s Rules of Conduct, taking
features from its reasons for deciding the corrective acti ons, or terminating a
claims on the merits, or identify the link be- distributorship.
tween the objectionable conduct or
exceptional claims and the fee award’s size. When Ja-Ri moved for summary judgment,
Standing alone, these errors justify vacating the court considered the above evidence
and remanding. To provide guidance on sufficient to create a fact question about
remand, however, we review the propriety of participation in an illegal pyramid scheme,
the individual sanctions orders. indirect liability for Amway’s actions when
spreading the rumor, and vicarious or
A. respondeat superior liability for the actions of
The district court shifted fees from Ja-Ri to downline distributors. The court found that
P&G only under § 1927. The Ja-Ri sanctions the close links between Amway, Ja-Ri, and
order explains that P&G “vexatiously” and downline distributors justified including Ja-Ri
“unreasonably” multiplied the proceedings by as a party at trial. Despite these conclusions
“filing groundless claims, pursuing those at summary judgment, the Ja-Ri sanctions
claims through the discovery process, refusing order labeled the legal claims “groundless” and
to dismiss the Defendant from the case, and in declared that P&G should have dismissed Ja-
the end, failing to offer any evidence during its Ri.
case-in-chief supporting its allegations.” Ja-Ri
requested only the fees it had expended The court committed three errors in the Ja-
between the time it lost on the motion for Ri sanctions order. First, it assessed the sanc-
summary judgment and the entry of j.m.l. The tions against the party. We must remand for
district court, however, shifted total fees and the court to determine whether P&G’s counsel
costs of $63,421 in favor of Ja-Ri. should bear these costs.13

On summary judgment and at trial, P&G
presented evidence of the following links be- 13
We remand where a district court obviously
tween Amway and Ja-Ri: (1) Amway’s owners
intended to levy sanctions for vexatiously and un-
created Ja-Ri; (2) Amway and-Ja-Ri share the reasonably multiplying the proceedings but
same address and telephone number; (3) Am- accidentally sanctioned a party instead of an
way and Ja-Ri both engage in the distribution attorney. Meadowbriar Home for Children v.
of Amway products; (4) Amway pays its em- Gunn, 81 F.3d 521, 534 (5th Cir. 1996). We have
ployees to provide administrative, accounting, reversed and rendered for levying sanctions on a
and selling services for Ja-Ri; (5) Amway pays party under § 1927 only in three circumstances: (1)
(continued...)

9
 Second, the court failed to explain which liability question. At summary judgment, the
claims P&G pursued vexatiously and district court found that P&G created a fact
unreasonably. Several of these claims had question about Ja-Ri’s vicarious liability for
potential merit. Ja-Ri does not contest its the actions of downline distributors. If, as Ja-
status as an upline distributor for Amway. Ri asserts on appeal, P&G failed to provide
Although we held in P&G I that P&G lacked any factual basis for the claims at trial, the
standing to bring the Lanham Act illegal court should have explained that absence of
pyramid claim, we described the standing support in its sanctions order. The record of
question as a close legal issue. P&G I, 242 the decisions on the merits cannot, standing
F.3d at 560-61, 562 (describing two questions alone, support the sanctions award.
of first impression). P&G should not be
penalized for forcing Ja-Ri to incur defense Finally, the court did not provide an
costs against a legal claim that rested on a explanation for the amount of fees awarded.
solid factual basis and a close legal question. Ja-Ri requested only fees from the denial of
the motion for summary judgment forward,
In P&G I, we refused to consider the alter but the court should have provided an
ego, single business enterprise, and vicarious explanation for assessing even these limited
liability claims against Ja-Ri because P&G did fees. If P&G failed to provide any support for
not present a coherent argument on appeal. its claims at summary judgment, the court
Id. at 559-60. We noted that the alter ego and could have granted Ja-Ri’s motion for
single business enterprise theories appeared summary judgment,14 but, instead, it refused
implausible; P&G never offered proof of an in- Ja-Ri’s motion for summary judgment and
equitable result that would justify piercing the eventually imposed sanctions on P&G for
corporate veil or imposing alter ego or single failing to dismiss voluntarily the claims against
business enterprise liability. We did not, how- Ja-Ri.
ever, address the merits of the vicarious
The court does not explain this duty to dis-
miss or its application to the case before it.
13
(...continued) Does a plaintiff who provides summary
We will render if we perform a detailed analysis judgment evidence of liability bear the burden
under other doctrines that might permit sanctions of dismissing a defendant if it cannot prove the
and conclude that the sanctions lack all merit. Ma- claims at trial? Or, does the plaintiff have a
guire Oil, 143 F.3d at 212; Matta, 118 F.3d at right to present its weak evidence to a jury?
413-14, 416. (2) We will render if the district Why did the district court impose much larger
court has already had the opportunity to correct the fees in favor of ADAC, using almost identical
§ 1927 sanctions during a prior remand. language? The scant explanation raises many
Browning, 931 F.3d at 344. (3) We will render if
questions and cannot justify imposing sanc-
the district court does not identify a source for its
authority to levy sanctions, we conclude that the
court could not have intended to award sanctions
14
under § 1927 because the court sanctioned a party, Browning, 931 F.2d at 345 (“[O]ne might
and the other grounds for sanctions lack merit. well wonder how a case could be so frivolous as to
Traveler’s Ins., 38 F.3d at 1414, 1416; Brezeale v. warrant sanctions if it has sufficient merit to go to
Smith, 857 F.2d 258, 259-61 (5th Cir. 1988). trial.”); Nat’l Ass’n of Gov. Employees, Inc., 844
None of these exceptions applies to this case. F.2d at 223 (same).

10
tions in such an unusual posture; on remand, distributors and makes recommendations to
the court should reconsider its decision and Amway. ADAC makes only recommendations
should provide a more complete explanation to Amway, however, and lacks authority to
for whatever decision it makes.15 discipline or sanction any distributor.

B. When ADAC moved for summary
The ADAC sanctions order contains the judgment, the district court found that P&G
same language justifying sanctions under had created a fact issue as to whether ADAC
§ 1927, without any further explanation. The could face indirect liability under Texas’s
ADAC sanctions order, however, differs from “alter ego” or “single business enterprise”
the Ja-Ri sanctions order in two important theory. The court considered the above
ways. First, the court also identified § 1117(a) evidence sufficient to demonstrate a close link
as a vehicle for shifting fees and costs. between Amway and ADAC and to raise
Second, the court shifted ADAC’s entire costs factual issues about indirect liability. Despite
for defending the litigation, from start to finish, the court’s earlier conclusions at summary
thus imposing $307,002.96 in sanctions. judgment, the ADAC sanctions order reflects
a belief that P&G’s claims so lacked substance
P&G presented the following evidence to that P&G should not have impleaded ADAC.
link Amway and ADAC at summary judgment
and trial: (1) The founders and current owners The court committed the same errors under
of Amway created the ADAC; (2) ADAC’s § 1927 that we identified in discussing the Ja-
membership consists solely of Amway Ri sanctions award. First, the court i mper-
distributors; (3) Amway participates in the missibly used § 1927 to sanction a party. Sec-
selection of half the ADAC board members; ond, t he court did not identify which legal
(4) the ADAC board meets three times a year claims lacked all merit or explain its reasons
to consider ways to improve Amway for imposing sanctions independently from its
distributorships and makes recommendations reasons for deciding the merits. Third, the
to Amway; (5) Amway officers unilaterally court failed to justify the amount of the
approve the minutes of ADAC meetings; sanctions. It should have isolated specific
(6) Amway officers routinely use ADAC let- unnecessary and dilatory proceedings; it then
terhead to communicate with distributors; could have shifted the costs associated with
(7) Amway’s documents and founders describe those proceedings.
the relationship as a partnership; (8) ADAC
establishes speaking guidelines and works in Moreover, the district court does not even
cooperation with Amway to develop rules and begin to justify shifting all of ADAC’s defense
regulations; (9) ADAC’s board serves as a costs while shifting only a portion of Ja-Ri’s
tribunal for hearing grievances against defense costsSSa difference of over $200,000.
The close relationship between Amway and
ADAC appears to have justified impleading
15
A remand is the correct remedy where the ADAC, and the court did not explain at what
district court has failed to offer an adequate point the pursuit of this litigation became vex-
explanation. Connor, 20 F.3d at 1385 (vacating atious and unreasonable.
and requesting explanation); Schwarz v. Follodor,
767 F.2d 125, 133 (5th Cir. 1985) (same).

11
 The court also failed to make findings suffi- judgment, the Internet sanctions order does
cient to justify sanctions under § 1117(a). not sufficiently justify shifting fees. In addition
First, the court did not separate the fees shifted to repeating the mistakes made in the Ja-Ri
under § 1927 from those shifted under and ADAC orders, the court failed to find that
§ 1117(a). Second, the ADAC sanctions order the case against Internet lacked factual support
does not restrict the fees shifted to those in- but, instead, relied on a recitation of its
curred in defense of a Lanham Act claim, and reasons for granting the motion for summary
the court did not find that the Lanham Act and judgmentSSP&G’s failure to satisfy the
non-Lanham Act claims were too intertwined prudential standing requirements of the Lanh-
to disentangle. Third, the court provided only am Act.
a cursory explanation for the reasons it
believed that the case was “exceptional” or P&G’s belief that it might have standing
that P&G acted in bad faith. under the Lanham Act, however, could well be
considered reasonable for purposes of § 1927.
C. P&G certainly could have asserted the claim in
The Internet sanctions order emphasizes good faith as defined by Fuji Photo and
that the district court had only P&G’s Lanham § 1117(a). The question of standing under the
Act illegal pyramid claim before it at summary Lanham Act to sue for an illegal pyramid
judgment. The sanctions order then explains scheme was difficult and novel. P&G I, 242
that the court disposed of that claim at F.3d at 560-61, 562. A party that predicates
summary judgment because P&G lacked its legal claim on a controversial and unsettled
standing to bring the claim. The Internet sanc- legal theory should not face sanctions under ei-
tions order concludes that “for all the above- ther § 1927 or § 1117(a) when the court ul-
mentioned reasons,” P&G unreasonably and timately rejects the claim.16
vexatiously multiplied the proceedings and The orders appealed from are VACATED
acted in bad faith. The court shifted total and REMANDED for further proceedings as
costs and fees of $128,176.53 based on these appropriate.
findings.

P&G presented more tenuous evidence of
Amway’s connection with Internet: (1) Dexter
Yager’s three sons formed Internet and
purchased the assets of Freedom Distributing
Company, their father’s tool company; (2) In-
ternet provides business support materials to
Amway distributors; and (3) Internet’s success
depends on selling Amway motivational ma-
terials. Internet, however, is not a downline 16
Calhoun, 34 F.3d at 1299-1300 (finding
distributor, and it has customers outside the party not subject to § 1927 sanctions where Su-
Amway distribution network. preme Court had decided issue adverse to party);
Hogue v. Royse City, Tex., 939 F.2d 1249, 1256
Although P&G presented the weakest fac- (5th Cir. 1991) (affirming finding that § 1927
tual case against Internet at summary sanctions were inappropriate where outcome de-
pended on difficult Erie question).

12