Michele E. Shepherd and Larue Graves v. American Broadcasting Companies, Inc.

Citations: 62 F.3d 1469; 314 U.S. App. D.C. 137; 1995 WL 502232Docket: 94-7141, 94-7186

Court: Court of Appeals for the D.C. Circuit; October 6, 1995; Federal Appellate Court

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The case involves Michele E. Shepherd and LaRue Graves, who filed an employment discrimination lawsuit against American Broadcasting Companies, Inc. (ABC) and related parties in 1986, alleging race and gender discrimination, as well as retaliation for participation in minority employee activities. After the case was removed to federal court, ABC moved for summary judgment. On the hearing date in July 1989, Shepherd and Graves filed an emergency motion for sanctions, claiming ABC engaged in litigation misconduct, including altering a discovery document and harassing witnesses. The district court postponed the summary judgment hearing to investigate these allegations. Shepherd and Graves contended that ABC altered a memorandum from a 1985 meeting of minority employees, removing their names to mislead the court. A witness testified to recalling the inclusion of Shepherd's name in an earlier draft, although she could not confirm Graves' name. The appellate court reviewed the district court's inherent power to impose a default judgment for misconduct. It established that such a judgment requires clear and convincing evidence of abusive behavior and that lesser sanctions would be inadequate. Since the district court did not make these findings, the appellate court vacated the default judgment and remanded the case for further proceedings.

ABC denied any alteration of a memorandum, presenting evidence that Ms. Powell may have misremembered seeing Ms. Shepherd's name on other documents. Testimonies from Ms. Ornes, several recipients of the memorandum, and attorneys involved confirmed the authenticity of the version produced by ABC. Additionally, a second copy from ABC's Vice President for Human Resources, John Frisoli, did not include either Ms. Shepherd's or Mr. Graves' names, though it had handwritten notes from Frisoli. The district court, favoring the plaintiffs' witnesses and rejecting ABC's defenses, concluded that ABC or its attorneys fraudulently altered the memorandum and harassed witnesses. The court imposed a default judgment against all defendants, citing misconduct such as false answers to interrogatories and deceptive practices regarding witness roles. ABC's motion for reconsideration challenged these findings, but the district court maintained the preponderance of evidence standard, modifying some findings but reaffirming others, including the removal of Ms. Shepherd's name and ABC's failure to preserve the memorandum. Although the default judgment against individual defendants was vacated, the judgment against ABC and Capital Cities remained. Following further proceedings, the court awarded Ms. Shepherd $125,000 and Mr. Graves over $184,000 in damages, vacated the judgment against Capital Cities, and awarded over $518,000 in attorneys' fees to both plaintiffs.

ABC is appealing a default judgment, contending that Rule 37(b) is inapplicable, that inherent power sanctions necessitate clear and convincing evidence of misconduct, and that even under a preponderance standard, the evidence does not support the district court's findings of misconduct. ABC further asserts that the district court failed to conduct additional hearings to address disputed issues regarding damage calculations and attorney fees. 

The appeal examines Rule 37(b)(2), which allows courts to impose sanctions for noncompliance with discovery orders. The court notes that a production order is typically required to invoke Rule 37(b) sanctions, and there was no identified discovery order violated by ABC. Although some argue that sanctions can be applied for violations of oral or "constructive" orders, no such basis was established in this case, rendering Rule 37(b) ineffective for the sanctions applied.

The discussion then shifts to the court's inherent power to impose sanctions, including default judgments, especially when procedural rules are insufficient to maintain judicial integrity. This power has been recognized historically and encompasses a range of sanctions, such as fines and attorney fee awards. While the exercise of inherent power is reviewed for abuse of discretion, it requires careful restraint due to its significant impact. The appeal raises questions about the burden of proof for establishing underlying misconduct and the necessity for the district court to justify the appropriateness of the sanctions imposed.

Resolution of the issues involves balancing the judicial system's need to discourage and punish misconduct against the necessity for restraint in imposing inherent power sanctions. The inherent power aims to achieve orderly case dispositions, reflecting a preference for adjudications on the merits. Before addressing inherent power issues, two arguments are considered. First, plaintiffs assert that the district court found clear and convincing evidence of misconduct, citing the court's use of terms like "convincing clarity." However, these terms largely mirror the plaintiffs' proposed findings. Notably, the district court clarified that it applied a "preponderance of the evidence" standard, rejecting the clear and convincing standard. ABC contends that even under the preponderance standard, evidence is insufficient for the findings of misconduct; however, the court maintains that, under a "clearly erroneous" review standard, it could find sufficient evidence that ABC altered a memorandum related to the litigation. The critical question is whether the inherent power sanction of default for fraudulent or bad-faith misconduct requires proof by a preponderance of the evidence or by clear and convincing evidence. This is a novel issue in this circuit, highlighting the implications of selecting a standard of proof in litigation, where the preponderance standard is viewed as appropriate due to the relative risks of error.

A heightened standard of proof is warranted in cases involving litigation misconduct due to the fundamental importance of ensuring trials are based on merits. The potential harm of allowing a party guilty of misconduct to proceed is less significant than the risk of denying an innocent party their day in court. Several circuit courts have established that when a district court seeks to dismiss a case for fraud on the court, the evidence must meet a "clear and convincing" standard. For instance, the First Circuit in Aoude and the Eighth Circuit in Pfizer, Inc. v. International Rectifier Corp. both emphasized the need for clear, unequivocal, and convincing evidence to support findings of fraud. Moreover, dismissals for a party's or counsel's failure to comply with court procedures require a clear record of misconduct. The discussion highlights a judicial tradition of employing a heightened standard of proof to prevent wrongful impositions of sanctions, which are often punitive in nature. This principle is reflected in various cases concerning civil contempt and punitive damages, where courts have recognized the necessity of a rigorous evidentiary standard to protect against erroneous judgments.

Awards of attorneys' fees for bad faith conduct are viewed similarly to fines for civil contempt, serving both punitive and compensatory functions. Courts require clear and convincing evidence of misconduct before imposing such fees, as established in several case precedents. Sanctions like dismissal and default also aim to uphold judicial authority, necessitating the same clear and convincing standard of proof due to the serious nature of allegations involved, such as fraud or quasi-criminal behavior. The heightened proof requirement arises from the significant interests at stake, which extend beyond mere financial loss, thus reducing the risk of reputational harm to defendants. Proof of civil fraud typically demands clear and convincing evidence, as seen in various rulings. Additionally, for relief from judgments under Rule 60(b)(3) regarding fraud upon the court, clear and convincing evidence is also mandated. However, the district court distinguished this requirement from default judgments, suggesting a lower standard of preponderance of the evidence during proceedings. Yet, when a default judgment hinges on the occurrence of fraud, the implications are more severe, warranting the application of the clear and convincing standard even in this context.

Clear and convincing evidence of litigation misconduct is required for default judgments, ensuring district courts retain the authority to address and deter such misconduct. Instead of granting a default judgment, a court can determine that a party, such as ABC, was aware of specific relevant facts, like a witness's attendance at a meeting, based on evidence of misconduct like document alteration. This would involve imposing issue-related sanctions, which are remedial and can be applied based on a preponderance of the evidence, allowing courts to counteract abuses without needing a higher proof standard.

However, for more severe sanctions—like default judgments, dismissals, contempt orders, and attorney fee awards—courts must find clear and convincing evidence of misconduct. The district court failed to apply this standard, necessitating a remand for reconsideration. On remand, merely finding misconduct by clear and convincing evidence is insufficient for a default judgment; the court must also provide a detailed rationale for rejecting lesser sanctions, such as fines or adverse evidentiary rulings. This approach aligns with precedent emphasizing that drastic measures like dismissals should only follow unsuccessful attempts at lesser sanctions and must balance the need for judicial integrity with the preference for resolving cases on their merits.

A district court must consider less severe sanctions before dismissing an action under its inherent powers, as established by the Ninth Circuit in Halaco Eng'g Co. v. Costle. The court is required to provide a reasonable explanation for the rejection of alternative remedies, which has been supported by several circuit courts reviewing sanctions under various rules. While it is not mandatory for a court to impose a lesser sanction first, it must justify the imposition of default or dismissal without lesser alternatives, ensuring that sanctions correspond appropriately to the misconduct. This calibration must be evident in the record for appellate review. Courts typically resort to dismissal or default in cases of document destruction when the destroyed document is crucial to the case or when extensive destruction of evidence prevents effective sanctions. In this case, the alleged misconduct involved a single memorandum, which, even if altered, would not have directly supported claims of discrimination but merely limited a defense argument related to retaliation claims. Thus, the circumstances did not warrant the ultimate sanctions imposed.

The district court's decision to impose severe sanctions on the defendants for their misconduct is based on findings of document destruction, witness harassment, and the submission of false affidavits. The court deemed striking the defendants' answers and entering a default judgment appropriate, arguing that lesser sanctions would reward their misconduct. However, the appellate court finds the district court's rationale lacking, noting that it did not sufficiently explain why lesser sanctions would fail to deter or punish the defendants effectively. The appellate court distinguishes this case from Weisberg v. Webster, where severe sanctions were warranted due to a plaintiff's noncompliance that halted discovery, whereas the alleged misconduct here did not significantly delay the case. Additionally, the appellate court points out that the default judgment was imposed under the court's inherent powers, which require careful consideration, unlike sanctions under Federal Rule of Civil Procedure 37. The appellate court emphasizes the need for the district court to provide a reasoned explanation for rejecting lesser sanctions and to establish misconduct by clear and convincing evidence before sustaining the default judgment in favor of the plaintiffs. In Mr. Graves' case, the district court recognized that the evidence did not support that the Ornes memorandum referred to him.

The alleged alteration of a document is deemed too tangential to Mr. Graves' claims to warrant a default judgment in his favor. The court references the Synanon Church case to illustrate that a sanction of dismissal is justified only when the evidence significantly impacts the merits of the case. The court reverses the default judgment against Graves, noting that other findings of misconduct by ABC do not support such a severe penalty. Specifically, the district court found ABC failed to preserve copies of the Ornes memorandum, misled the court regarding Mr. Sam's role at an employee meeting, improperly verified interrogatory responses, and harassed a witness. However, the court indicates that the findings of misconduct are either inadequately supported by evidence or insufficient to justify sanctions. A sanction for failing to preserve evidence requires a conscious disregard of obligations, and while ABC was obligated to preserve relevant documents, the court found no evidence that additional copies of the Ornes memorandum existed when ABC recognized their relevance in early 1986. ABC's inability to locate the memorandum does not imply a breach of duty, as long as it conducted a diligent search and produced the best evidence available. Moreover, if additional non-identical copies were found, ABC was required to supplement its responses accordingly.

ABC's potential alteration of a memorandum raises concerns about the preservation of original copies, which could warrant sanctions if proven part of a cover-up. However, without clear evidence of alteration, the inability to locate exact copies after early 1986 does not justify sanctions. The district court imposed a default sanction based on findings that ABC attempted to mislead by denying it sent Robert Sam to spy on a minority employee meeting. Despite ABC's denial, it did not contest Ms. Ornes' awareness of Mr. Sam's attendance or her interest in a report from the meeting. The court faced a factual dispute over whether ABC directed Mr. Sam to attend. A finding against ABC would require evidence of bad faith, but the record lacks proof that ABC procured false testimony. Any misconduct regarding Mr. Sam's presence could only be attributed to Ms. Ornes or Mr. Sam's truthfulness.

Concerning interrogatory responses, the district court criticized ABC for improper verification, noting that Ms. Ornes could not confirm their accuracy during a sanctions hearing. However, there is no evidence of misconduct in how ABC verified its responses. Federal Rule of Civil Procedure 33 allows a corporate representative to verify answers based on available information. A representative must have a reasonable basis for asserting the accuracy of responses, but the lack of personal knowledge does not inherently constitute misconduct.

A corporate representative can use any internal process, including discussions with legal counsel, to verify the truthfulness of the corporation's responses to interrogatories. The inability of the representative to recall the verification process years later does not undermine the original answers. If a party wants to know who provided personal knowledge for each response, they can request that information through interrogatories. In this case, ABC stated that its responses were based on information gathered from relevant officials, including the individual defendants, and offered to identify sources if a reasonable need was demonstrated. The plaintiffs did not pursue further clarification after ABC's response.

Regarding interrogatory content, the only disputed answer was related to Ms. Ornes’ knowledge of Mr. Sam's attendance at a meeting; she claimed she was unaware, but the district court concluded she had directed him to attend. Thus, the court affirmed the accuracy of ABC’s response. ABC maintained that it had no obligation to amend its answers post-hearing, as Ms. Ornes' inconsistent testimony did not warrant sanctions against the corporation.

Additionally, the district court found that ABC's attorney, Steven Hut, harassed potential witness Kristina Celich after she had previously expressed a desire not to discuss the case. Although Ms. Celich felt uncomfortable during the encounter, Mr. Hut claimed his approach was standard practice, and he did not press further after she reiterated her unwillingness to engage. The court noted a factual dispute regarding Hut's statements to Ms. Celich, concluding only that his comments had disturbed her.

The district court sanctioned ABC based on Mr. Hut's conduct under Model Rule of Professional Conduct 4.4, which prohibits lawyers from actions aimed solely at embarrassing, delaying, or burdening others. The court's finding was influenced by Ms. Celich's perceptions of Mr. Hut's attempt to communicate with her. However, the interpretation of Rule 4.4 indicates that the assessment of unprofessional conduct should consider the attorney's intent, specifically whether there was a substantial purpose behind the contact. The district court acknowledged Mr. Hut had a legitimate reason for approaching Ms. Celich, as ABC needed information from her, and found that his actions did not rise to harassment warranting sanctions.

The court emphasized that sanctions against a party should only occur if the party is implicated in the attorney's misconduct. Consequently, the appellate court reversed several of the district court's findings, including that ABC failed to preserve documents and that it had misled the court regarding Mr. Sam's attendance. The appellate court also reversed the default judgments in favor of Mr. Graves and Ms. Shepherd, remanding the cases for further proceedings.

Upon remand, the district court may impose sanctions related to the issues identified, contingent upon a preponderance of evidence supporting claims of misconduct, such as altering documents. The appellate court underscored the need for a well-reasoned approach to any sanctions, ensuring that any severe measures like default judgments are justified by clear evidence that lesser sanctions would be insufficient. This ruling aims to uphold the integrity of the judicial process while preventing the misuse of inherent powers and promoting fair trials.