Key Decisions

December 2013 – Section 128.7 Did Not Authorize Sanctions Against An Arbitration Party’s Attorneys

(filed under: Key Decisions Archive | December 19, 2013)

Section 128.7 Did Not Authorize Sanctions Against An Arbitration Party’s Attorneys

Optimal Markets, Inc. v. Salant
(Cal. Ct. of App., 6th Dist.), filed November 26, 2013, published November 26, 2013

Optimal Markets, Inc. filed a complaint against multiple defendants, alleging causes of action for misappropriation of trade secrets, common law unfair competition, statutory unfair competition, breach of contract, breach of fiduciary duty, breach of the covenant of good faith and fair dealing, and declaratory relief.

The following month, the parties entered into a written agreement to submit their dispute to binding arbitration pursuant to the JAMS Comprehensive Arbitration Rules and Procedures. As a result of this agreement, the trial court entered an order staying the action, pending the conclusion of arbitration proceedings.

After the trial court entered its stay order, Optimal changed its counsel.

A binding arbitration took place over an eight day period. The matters arbitrated consisted of Optimal’s seven causes of action as alleged in the complaint it had filed along with the defendants’ counterclaims. The arbitrator denied each of Optimal’s claims. It then awarded the defendants $2,563,487 in attorney’s fees and $221,225 in costs and expenses to be paid by Optimal. The arbitrator denied the defendants’ request for sanctions against Optimal’s attorneys. That request was based on the assertion that Optimal’s attorneys pursued a frivolous action. The arbitrator denied the request because the arbitration agreement authorized sanctions against a party, but did not authorize them against a party’s counsel.

Some of the defendants then filed a motion in the trial court for sanctions against Optimal’s attorneys pursuant to Code of Civil Procedure section 128.7. Optimal’s attorneys opposed the motion, arguing that they had not been Optimal’s attorneys of record when the superior court action was filed. Furthermore, Optimal’s attorneys had only substituted as counsel after the action had been stayed, which was four months before the arbitration hearing. The trial court denied the motion.

The Court of Appeal affirmed.

Section 128.7 requires that all pleadings filed with the court be signed by an attorney of a represented party, or, if the party is not represented by counsel, by the party. The person signing a filed pleading certifies that after a reasonable inquiry, the pleading: (1) is not being presented for an improper purpose; (2) contains positions that are not frivolous; (3) alleges factual matter having evidentiary support; and (4) contains denials of factual allegations, which denials have evidentiary support. Based on these requirements, the court, after proper statutory notice, may impose sanctions upon the attorneys, law firms, or parties who have improperly certified a pleading.

However, according to the court: “The primary purpose of the statute is deterrence of filing abuses, not to provide compensation for those impacted by those abuses.” Thus, the question is not whether a party was impacted by an improperly filed complaint, but rather whether the attorneys against whom the sanctions are sought engaged in filing abuses.

Since Optimal’s attorneys filed nothing with the court, they had not engaged in any filing abuses and were not subject to sanctions.

While Optimal’s attorneys did advocate the complaint on behalf of Optimal in the binding arbitration, the court held that such advocacy to an arbitrator does not constitute a presentation of the party’s claim “to the court” as required under the language of section 128.7.