Pae Government Services, Inc. v. Mpri, Inc. ( 2007 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
PAE GOVERNMENT SERVICES, INC., a 
California corporation,
No. 06-56438
Plaintiff-Appellant,
v.  D.C. No.
CV-06-00964-RGK
MPRI, INC., a Delaware
OPINION
corporation,
Defendant-Appellee.

Appeal from the United States District Court
for the Central District of California
R. Gary Klausner, District Judge, Presiding
Argued and Submitted
October 15, 2007—Pasadena, California
Filed December 18, 2007
Before: Alex Kozinski, Chief Judge, A. Wallace Tashima
and M. Margaret McKeown, Circuit Judges.
Opinion by Chief Judge Kozinski
16483
PAE GOVERNMENT SERVICES v. MPRI, INC. 16485
COUNSEL
Richard E. Drooyan, Mark H. Epstein, Katherine K. Huang
and E. Dorsey Heine, Munger, Tolles & Olson LLP, Los
Angeles, California, for the plaintiff-appellant.
Kathleen M. Wood and Nicholas P. Connon, Connon Wood
Sheidemantle LLP, Los Angeles, California, for the
defendant-appellee.
OPINION
KOZINSKI, Chief Judge:
We consider whether a district court may strike allegations
from an amended complaint because they contradict an earlier
iteration of the same pleading.
Facts
PAE Government Services, Inc. and MPRI, Inc. sell ser-
vices to government agencies. The companies agreed to work
together to submit a bid for a government contract, and signed
a “Teaming Agreement” that divided duties between them.
16486 PAE GOVERNMENT SERVICES v. MPRI, INC.
MPRI submitted the bid as “prime contractor” and won.
MPRI thereafter refused to subcontract to PAE all the work
specified in the Teaming Agreement—or so PAE claimed in
its original complaint.
The district court dismissed that complaint because, in its
view, the Teaming Agreement is no more than an “agreement
to agree.” The agreement is governed by Virginia law, and the
district court held that Virginia won’t enforce agreements to
agree.1 PAE thereupon amended its complaint to allege that,
after MPRI won the government contract, it entered into a
second agreement with PAE. According to the amended com-
plaint, this second agreement was “confirmed” in “written
communications” and by the parties’ “course of conduct.”
The amended complaint also added a promissory estoppel
claim against MPRI.
The district court found PAE’s new allegations of a second
agreement with MPRI to be “sham pleadings that contradict
allegations made in the original Complaint.” In particular, the
allegation of a second agreement contradicted PAE’s original
claim that “[f]ollowing the award of the . . . [government con-
tract], MPRI failed and refused to enter into a subcontract
with PAE.” The district court therefore struck the new allega-
tions from PAE’s First Amended Complaint. After holding
that Virginia law also barred PAE’s promissory estoppel
claim, the district court dismissed the complaint.
PAE amended its complaint yet again, adding more detail
about its second agreement with MPRI. The district court
remained unmoved; it deemed the Second Amended Com-
plaint to be “merely a revision of the [First Amended Com-
plaint] which alleges more specific facts evidencing the
existence of a subsequent subcontract between the parties.”
1
PAE has not appealed that ruling, so we don’t consider the district
court’s interpretation of Virginia law or its application of that law to the
Teaming Agreement.
PAE GOVERNMENT SERVICES v. MPRI, INC. 16487
The district court struck the additional allegations and dis-
missed the complaint—this time, with prejudice.
Analysis
[1] 1. By striking the allegations in PAE’s amended com-
plaint as a “sham,” the district court effectively resolved those
allegations on the merits. In other words, it determined that
the allegations in the amended complaint were unfounded
because they contradicted (in the district court’s view) earlier
allegations PAE made in its original complaint. But the Fed-
eral Rules of Civil Procedure do not authorize a district court
to adjudicate claims on the merits at this early stage in the
proceedings; the court may only review claims for legal suffi-
ciency. See Fed. R. Civ. P. 12(b). Adjudication on the merits
must await summary judgment or trial. Rule 12(f) does autho-
rize the court to strike “any insufficient defense,” which this
is clearly not, and “any redundant, immaterial, impertinent, or
scandalous matter.” PAE’s allegations of a second agreement
are certainly not any of those things; they are normal contract
claims that would not be in the least bit objectionable, but for
the fact that they appeared, in the district court’s view, to con-
tradict allegations in an earlier version of the complaint.
[2] Which brings us to the meat of the coconut: Does the
fact that an amended complaint (or answer) contains an alle-
gation that is apparently contrary to an earlier iteration of the
same pleading render the later pleading a sham? The answer
is: not necessarily. To begin with, allegations in the two ver-
sions of the complaint might not conflict at all. Here, for
example, PAE explains that the allegations in the original
complaint referred to MPRI’s refusal to sign the specific sub-
contract contemplated in the Teaming Agreement; the
amended complaint, by contrast, referred to an entirely differ-
ent agreement reached over email. Only a careful comparison
of the two documents, rather than a glance at isolated provi-
sions, can determine whether PAE’s account is plausible. We
have not undertaken such a comparison, however, nor need
16488 PAE GOVERNMENT SERVICES v. MPRI, INC.
we do so to resolve this case. Even assuming that the two
pleadings were irreconcilably at odds with each other, this
would not, by itself, establish that the later pleading is a sham.
At the time a complaint is filed, the parties are often uncer-
tain about the facts and the law; and yet, prompt filing is
encouraged and often required by a statute of limitations,
laches, the need to preserve evidence and other such concerns.
In recognition of these uncertainties, we do not require com-
plaints to be verified, see Fed. R. Civ. P. 11(a), and we allow
pleadings in the alternative—even if the alternatives are mutu-
ally exclusive. As the litigation progresses, and each party
learns more about its case and that of its opponents, some
allegations fall by the wayside as legally or factually unsup-
ported. This rarely means that those allegations were brought
in bad faith or that the pleading that contained them was a
sham. Parties usually abandon claims because, over the pas-
sage of time and through diligent work, they have learned
more about the available evidence and viable legal theories,
and wish to shape their allegations to conform to these newly
discovered realities. We do not call this process sham plead-
ing; we call it litigation.2
[3] This does not mean, of course, that allegations in a
complaint can never be frivolous, or that a district court can
never determine that a complaint or answer was filed in bad
2
PAE’s earlier allegation may or may not have relevance to further pro-
ceedings in the case, including any under Rule 11. To the extent the super-
seded pleading is verified, it becomes something akin to a sworn
declaration, and the party that presented it may suffer a loss of credibility
before the trier of fact, which may be less inclined to believe a party that
has sworn to inconsistent material statements. Also, a party’s representa-
tions may judicially estop it from taking a contrary position in later pro-
ceedings. We mention this only as a theoretical possibility in the interest
of completeness, not because we believe it could apply here. Indeed, the
requirements for judicial estoppel are strict, see Fredenburg v. Contra
Costa County Dep’t of Health Servs., 172 F.3d 1176, 1180 (9th Cir. 1999),
and nothing we have seen in this record suggests those requirements are
met here.
PAE GOVERNMENT SERVICES v. MPRI, INC. 16489
faith. But the mechanism for doing so is in Rule 11, which
deals specifically with bad faith conduct. MPRI points to Rule
11 as a source of the district court’s authority for the order it
entered here. But Rule 11 can play no role in this case
because the district court did not invoke the rule’s procedural
safeguards, nor did it employ the rule’s substantive standard,
which would have required a finding that PAE or its counsel
acted in bad faith.3 The district court has no free-standing
authority to strike pleadings simply because it believes that a
party has taken inconsistent positions in the litigation. Rather,
the district court’s powers are generally limited to those pro-
vided by the Federal Rules of Civil Procedure. Though the
Federal Circuit reached a contrary conclusion in Bradley v.
Chiron Corp., 136 F.3d 1317, 1326 (Fed. Cir. 1998), no other
court of appeals has followed that decision, and we decline to
do so.4
3
A prior version of Rule 11 did authorize a district court to “strike
pleadings . . . as sham and false,” but this provision was eliminated in
1983. See Fed. R. Civ. P. 11 advisory committee’s note to 1983 amend-
ment; 5A Charles Alan Wright & Arthur R. Miller, Federal Practice and
Procedure § 1336.3 (3d ed. 2004). MPRI relies on one of our Rule 11 pre-
cedents, Ellingson v. Burlington Northern, Inc., 653 F.2d 1327 (9th Cir.
1981), but Ellingson is no longer good law after the amendment to Rule
11.
The Advisory Committee notes to Rule 11 suggest that the 1983 amend-
ment was designed to avoid precisely the type of error committed by the
district court here: “confus[ing] the issue of attorney honesty with the mer-
its of the action.” Though false factual assertions may be evidence of bad
faith, they are usually not; generally, they are the result of ignorance, mis-
understanding or undue optimism. If bad faith is found, in accordance with
the procedures outlined in Rule 11, the district court has wide latitude to
impose sanctions, including the striking of the offending pleading. See,
e.g., Morris v. Wachovia Sec., Inc., 448 F.3d 268, 284 (4th Cir. 2006). But
absent a finding of bad faith, factual allegations in the complaint (or
answer) must be tested through the normal mechanisms for adjudicating
the merits.
4
Ironically, Bradley purported to rely on two of our cases. One of them
is Ellingson; for reasons explained p.16489 n.3 supra, that case does not
survive the amendments to Rule 11. The other case Bradley relied on was
16490 PAE GOVERNMENT SERVICES v. MPRI, INC.
[4] The short of it is that there is nothing in the Federal
Rules of Civil Procedure to prevent a party from filing succes-
sive pleadings that make inconsistent or even contradictory
allegations. Unless there is a showing that the party acted in
bad faith—a showing that can only be made after the party is
given an opportunity to respond under the procedures of Rule
11—inconsistent allegations are simply not a basis for striking
the pleading. The district court’s order, which is based on the
contrary conclusion, must be reversed.
[5] 2. Because MPRI made its alleged promises in con-
nection with the Teaming Agreement, that agreement’s
choice-of-law clause governs PAE’s promissory estoppel
claim. See Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th
459, 470 (1992) (agreement’s choice-of-law clause applies to
“all causes of action arising from or related to that agree-
ment”); Olinick v. BMG Entm’t, 138 Cal. App. 4th 1286,
1300 (Ct. App. 2006) (choice-of-law clause applies to claims
that are “inextricably intertwined with the construction and
enforcement” of the contract). The Teaming Agreement
chooses Virginia law, which doesn’t recognize promissory
estoppel as a cause of action. W.J. Schafer Assocs., Inc. v.
Cordant, Inc., 254 Va. 514, 521 (1997). We see no reason not
to enforce the agreement’s choice of law: Virginia has a sub-
stantial relationship to MPRI (which has its principal place of
business there), and enforcing the clause won’t violate a fun-
damental policy of California. See Gamer v. duPont Glore
Forgan, Inc., 65 Cal. App. 3d 280, 287-88 (Ct. App. 1976)
(quoting Restatement (Second) Conflict of Laws § 187). The
district court properly dismissed PAE’s promissory estoppel
claim.
Reddy v. Litton Industries, Inc., 912 F.2d 291 (9th Cir. 1990), a case that
stands for the unremarkable proposition that, where a complaint cannot be
cured by amendment, the district court may deny leave to amend under
Rule 15. Id. at 296. We see no analogy between that situation and the one
presented here. See Foman v. Davis, 371 U.S. 178, 182 (1962) (“futility
of amendment” is reason to deny leave to amend).
PAE GOVERNMENT SERVICES v. MPRI, INC. 16491
* * *
Rule 12 provides no authority to dismiss “sham” pleadings.
If a party believes that its opponent pled in bad faith, it can
seek other means of redress, such as sanctions under Rule 11,
28 U.S.C. § 1927 or the court’s inherent authority. Chambers
v. NASCO, Inc., 501 U.S. 32, 45-46 (1991).
REVERSED in part, AFFIRMED in part and
REMANDED. No costs.