Optimal Markets, Inc. v. Salant

Filed 11/26/13
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SIXTH APPELLATE DISTRICT
OPTIMAL MARKETS, INC., H038571
(Santa Clara County
Plaintiff, Super. Ct. No. CV147711)
v.
DAVID SALANT et al.,
Defendants and Appellants,
CARL LIPPENBERGER et al.,
Objectors and Respondents.
This appeal arises from an order in which the trial court, after confirming an
arbitration award in favor of defendants, denied a separate motion brought by some of the
prevailing parties for an award of sanctions against plaintiff’s attorneys. The sanctions
motion was made pursuant to Code of Civil Procedure section 128.7 on the grounds that
the case was “pursued . . . for an improper purpose, and that the claims . . . were not
supported by law, nonfrivolous extensions of the law, or fact.”1 The trial court held that
sanctions under section 128.7 were precluded because plaintiff’s attorneys had been
substituted after the filing of the complaint in court and after the judicial action had been
stayed pending binding arbitration; therefore, plaintiff’s attorneys had not “present[ed] to
1
All further statutory references are to the Code of Civil Procedure unless
otherwise specified.
the court” (§ 128.7, subd. (b)) any pleadings or arguments, as is required by the
applicable statute. A similar motion for sanctions brought under Rule 11 of the Federal
Rules of Civil Procedure (28 U.S.C.; Rule 11)—the federal statute upon which section
128.7 is based—had previously been denied by the arbitrator for lack of jurisdiction.
On appeal, the parties who had moved for sanctions in the trial court assert that the
court erred in finding that section 128.7 did not authorize an award of sanctions. They
urge that plaintiff’s attorneys, in advancing frivolous claims in the binding arbitration on
behalf of their clients, advocated a meritless complaint before the court within the
meaning of the section 128.7, thereby warranting the imposition of sanctions under that
statute.
We conclude that the court did not err. Accordingly, we will affirm the order
denying the motion for sanctions.
PROCEDURAL BACKGROUND
On July 17, 2009, Optimal Markets, Inc. (Optimal)2 filed a complaint in the court
below against a number of parties (collectively, Defendants),3 namely, FTI Consulting,
Inc. (FTI); Auction Technologies, LLC (Auction, LLC); Auction Technologies, Inc.
(Auction, Inc.); Xonomic Inc.; David Salant (Salant); Harold Lea (Lea); and Paul
Milgrom (Milgrom).4 The next month, on August 25, 2009, the parties entered into a
written agreement to submit their dispute to binding arbitration pursuant to the JAMS
2
Appellants in their opening brief repeatedly referred to the plaintiff, Optimal
Markets, Inc., by the erroneous designation, “Respondent.” This error was corrected in
the reply brief. To avoid confusion, and because plaintiff was not the aggrieved party in
connection with the order that is the subject of this appeal, we will refer to it as
“Optimal.”
3
The various parties sued by Optimal were referred to as “respondents” in the
arbitration. For the sake of simplicity, we will refer to them herein as “Defendants.”
4
In December 2008, Optimal had filed a similar suit in federal court, which
Optimal later dismissed.
2
Comprehensive Arbitration Rules and Procedures. On September 10, 2009, the court
entered an order staying the action, pending the conclusion of arbitration proceedings.
Binding arbitration occurred over eight days between February 2010 and March
2010. The matters arbitrated consisted of Optimal’s seven causes of action alleged in the
complaint it had filed in superior court (misappropriation of trade secrets, common law
unfair competition, statutory unfair competition [Bus. & Prof. Code, § 17200], breach of
contract, breach of fiduciary duty, breach of covenant of good faith and fair dealing, and
declaratory relief);5 the counterclaims of Salant and Lea for tortious interference with
prospective economic advantage and tortious interference with contract (collectively, the
tortious interference counterclaims); and the counterclaims of all Defendants for
declaratory relief.6 The arbitrator in June 2010 issued an interim award in which he, inter
alia, denied each of Optimal’s claims. Later that month, Defendants filed a motion for
attorney fees and costs and a motion for sanctions. On July 15, 2010—the day its
opposition to the fee and sanctions motions was due—Optimal filed for bankruptcy
protection. The stay of further arbitration proceedings was vacated after the United
States Bankruptcy Court for the Northern District of California closed Optimal’s
bankruptcy case on September 20, 2010.
In a 46-page final arbitration award dated May 13, 2011,7 the arbitrator made final
his denial of each of Optimal’s claims; denied the tortious interference counterclaims of
Salant and Lea; granted Defendants’ counterclaim for declaratory relief; and granted
5
At the commencement of the arbitration, Optimal dismissed two other claims
(i.e., claims for tortious interference with contract and tortious interference with
prospective economic advantage).
6
The counterclaims had been alleged in the federal court action. (See fn. 4, ante.)
7
The arbitrator had issued a number of interim orders, including interim
arbitration awards, between the date the submission of evidence was completed and the
date of the final award.
3
Defendants’ requests for attorney fees and costs, awarding Defendants $2,563,487 in
attorney fees and $221,225 in costs and expenses to be paid by Optimal.8 The attorney
fees and costs were awarded by the arbitrator under two alternative theories: (1) they
were awardable under the California Uniform Trade Secrets Act, and specifically Civil
Code 3426.4, because Optimal’s trade secret “claims [not only were] frivolous when they
were brought, but were pursued in subjective bad faith for the improper motive of
harassing [Defendants] and frustrating the newly formed business relationship between
FTI and Milgrom/Salant/Lea”; and (2) they were awardable “as sanctions to punish
[Optimal’s] conduct as found [by the arbitrator],” under Rule 11.
Elsewhere in the final award, the arbitrator recited that in an earlier case
management order, he had denied “[Defendants’] motion for Rule 11 sanctions against
[Optimal’s attorneys,] Morrison & Foerster and Lippenberger and Berland.” The
arbitrator reasoned, in pertinent part, that “while Rule 11 allows the imposition of
sanctions against counsel, the parties’ Arbitration Agreement does not. The Arbitration
Agreement permits the Arbitrator to issue sanctions ‘against any party to the extent
permitted by Federal Rules of Civil Procedure.’ . . . [T]he most reasonable interpretation
of the term ‘party’ in the clause at issue is a party [in] the federal or state action.
Morrison & Foerster and Lippenberger and Berland are not and were not ever parties to
the federal or state actions, and thus are not included within the term ‘party’ as used in
the Arbitration Agreement.”
On January 26, 2012, some of the Defendants—namely, Salant, Milgrim, and
Auction LLC (hereafter, collectively, Moving Parties) filed a motion for sanctions
pursuant to section 128.7. The motion sought the imposition of sanctions against
Optimal’s counsel, Lippenberger, and the law firm of Lippenberger, Thompson, Welch,
8
Defendants sought an award from the arbitrator of $3,220,541 in attorney fees
and $390,916 in costs and expenses.
4
Soroko & Gilbert LLP. (Law Firm).9 Lippenberger and Law Firm, respondents in this
appeal (hereinafter, collectively, Attorneys), opposed the sanctions motion, arguing, inter
alia, that they had not been Optimal’s attorneys of record when the superior court action
was filed, and had only substituted as counsel in October 2009—after the action had been
stayed and four months before the arbitration hearing. Defendants also petitioned the
court to confirm the arbitration award;10 that motion was unopposed.
After a hearing on March 23, 2012, the court adopted its tentative ruling granting
the petition to confirm the arbitration award and denying the motion for sanctions. In
denying the sanctions motion, the court reasoned that Attorneys never signed, filed,
submitted or advocated a pleading to the court; they substituted as Optimal’s counsel
after the action had been stayed; and “[t]he instant opposition [to the sanctions
motion] . . . is the first time Lippenberger has appeared and presented any paper to the
Court. Notably, Lippenberger and Plaintiff are not even challenging the petition to
confirm the arbitration award.” The court thereafter entered formal orders denying the
sanctions motion and granting the petition confirming the arbitration award.
Moving Parties filed a timely appeal from the order denying the motion for
sanctions. An order denying a motion for sanctions sought under section 128.7 is, under
these circumstances, appealable. (§ 904.1, subd. (a)(2); Day v. Collingwood (2006) 144
Cal. App. 4th 1116, 1123.)
9
Law Firm is also referred to below and on appeal as “Thompson, Welch, Soroko
& Gilbert LLP.”
10
The petition to confirm the arbitration award is not part of the record on appeal,
but is referred to in the motion for sanctions and in the order confirming the arbitration
award and denying motion for sanctions.
5
DISCUSSION
I. Denial of the Sanctions Motion Was Proper
A. Sanctions Imposed Under Section 128.7
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.
(§ 128.7, subd. (a).)11 The signing of a filed pleading constitutes a certification by the
person signing it 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. (§ 128.7, subd. (b).)12 Based upon these requirements,
the court, after proper statutory notice, may impose sanctions upon the attorneys, law
11
“Every pleading, petition, written notice of motion, or other similar paper shall
be signed by at least one attorney of record in the attorney’s individual name, or, if the
party is not represented by an attorney, shall be signed by the party. Each paper shall
state the signer’s address and telephone number, if any. Except when otherwise provided
by law, pleadings need not be verified or accompanied by affidavit. An unsigned paper
shall be stricken unless omission of the signature is corrected promptly after being called
to the attention of the attorney or party.” (§ 128.7, subd. (a).)
12
“By presenting to the court, whether by signing, filing, submitting, or later
advocating, a pleading, petition, written notice of motion, or other similar paper, an
attorney or unrepresented party is certifying that to the best of the person’s knowledge,
information, and belief, formed after an inquiry reasonable under the circumstances, all
of the following conditions are met: [¶] (1) It is not being presented primarily for an
improper purpose, such as to harass or to cause unnecessary delay or needless increase in
the cost of litigation. [¶] (2) The claims, defenses, and other legal contentions therein are
warranted by existing law or by a nonfrivolous argument for the extension, modification,
or reversal of existing law or the establishment of new law. [¶] (3) The allegations and
other factual contentions have evidentiary support or, if specifically so identified, are
likely to have evidentiary support after a reasonable opportunity for further investigation
or discovery. [¶] (4) The denials of factual contentions are warranted on the evidence or,
if specifically so identified, are reasonably based on a lack of information or belief.”
(§ 128.7, subd. (b).)
6
firms, or parties who have improperly certified a pleading in violation of subdivision (b)
of section 128.7. (§ 128.7, subd. (c).)13
There is a “safe-harbor” provision of section 128.7 with which the moving party
must comply in bringing a sanctions motion.14 “The party seeking sanctions must follow
a two-step procedure. First, the party must serve a notice of motion for sanctions on the
offending party at least 30 days before filing the motion with the court, which specifically
describes the sanctionable conduct. ([(§ 128.7, subd. (c)(1).]) Service of the motion on
the offending party begins a 30-day safe harbor period during which the sanctions motion
may not be filed with the court. (Ibid.) If the pleading is withdrawn, the motion for
sanctions may not be filed with the court. [Citation.] If the pleading is not withdrawn,
the motion for sanctions may then be filed. [Citation.]” (Levy v. Blum (2001) 92
13
“If, after notice and a reasonable opportunity to respond, the court determines
that subdivision (b) has been violated, the court may, subject to the conditions stated
below, impose an appropriate sanction upon the attorneys, law firms, or parties that have
violated subdivision (b) or are responsible for the violation. In determining what
sanctions, if any, should be ordered, the court shall consider whether a party seeking
sanctions has exercised due diligence. [¶] (1) A motion for sanctions under this section
shall be made separately from other motions or requests and shall describe the specific
conduct alleged to violate subdivision (b). Notice of motion shall be served as provided
in Section 1010, but shall not be filed with or presented to the court unless, within 21
days after service of the motion, or any other period as the court may prescribe, the
challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or
appropriately corrected. If warranted, the court may award to the party prevailing on the
motion the reasonable expenses and attorney’s fees incurred in presenting or opposing the
motion. Absent exceptional circumstances, a law firm shall be held jointly responsible
for violations committed by its partners, associates, and employees. (2) On its own
motion, the court may enter an order describing the specific conduct that appears to
violate subdivision (b) and directing an attorney, law firm, or party to show cause why it
has not violated subdivision (b), unless, within 21 days of service of the order to show
cause, the challenged paper, claim, defense, contention, allegation, or denial is withdrawn
or appropriately corrected.” (§ 128.7, subd. (c).)
14
The court must follow a similar procedure if it, on its own motion, wishes to
impose sanctions for violating subdivision (b) of section 128.7. (See § 128.7, subd. (c).)
7
Cal. App. 4th 625, 637.) “The purpose of the 30-day safe harbor provision is to permit the
‘offending party to avoid sanctions by withdrawing the improper pleading during the safe
harbor period. [Citation.] This permits a party to withdraw a questionable pleading
without penalty, thus saving the court and the parties time and money litigating the
pleading as well as the sanctions request.’ [Citations.]” (Banks v. Hathaway, Perrett,
Webster, Powers & Christman (2002) 97 Cal. App. 4th 949, 953, quoting Malovec v.
Hamrell (1999) 70 Cal. App. 4th 434, 441.)
The primary purpose of the statute is deterrence of filing abuses, not to provide
compensation for those impacted by those abuses. “While section 128.7 does allow for
reimbursement of expenses, including attorney fees, its primary purpose is to deter filing
abuses, not to compensate those affected by them. It requires the court to limit sanctions
‘to what is sufficient to deter repetition of conduct or comparable conduct by others
similarly situated.’ (§ 128.7, subd. (d).)” (Musaelian v. Adams (2009) 45 Cal. 4th 512,
519; cf. Business Guides v. Chromatic Comm. Enterprises (1991) 498 U.S. 533, 553:
“The main objective of [Rule 11] is not to reward parties who are victimized by
litigation; it is to deter baseless filings and curb abuses.”)
Section 128.7 was modeled nearly verbatim from the federal statute, Rule 11.
(Board of Trustees v. Superior Court (2007) 149 Cal. App. 4th 1154, 1168; see also Hart
v. Avetoom (2002) 95 Cal. App. 4th 410, 413.) Therefore, California courts may consider
federal cases construing Rule 11 in interpreting the language of section 128.7. (Board of
Trustees, at p. 1169.)
A trial court is to apply an objective standard in making its inquiry concerning the
attorney’s or party’s allegedly sanctionable behavior in connection with a motion for
sanctions brought under section 128.7. (Bockrath v. Aldrich Chemical Co. (1999) 21
Cal. 4th 71, 82; see also Business Guides v. Chromatic Comm. Enterprises, supra, 498
U.S. 533, 558-559 [inquiry concerning proposed sanctions under Rule 11 is based upon
objective reasonableness of inquiry, not whether attorney’s or party’s action was
8
subjectively in bad faith].) Thus, for example, whether an action is frivolous under
section 128.7 is measured by an objective standard. (Burkle v. Burkle (2006) 144
Cal. App. 4th 387, 401.)
Ordinarily, a ruling on a motion for sanctions brought under section 128.7 is
reviewed under a deferential abuse-of-discretion standard. (Martorana v. Marlin &
Saltzman (2009) 175 Cal. App. 4th 685, 698; Guillemin v. Stein (2002) 104
Cal. App. 4th 156, 167; cf. Cooter & Gell v. Hartmarx Corp. (1990) 496 U.S. 384, 401-
405 (Cooter & Gell) [“an appellate court should apply an abuse-of-discretion standard in
reviewing all aspects of a district court’s Rule 11 determination”].)15 But where a
question of statutory construction is presented in the course of the review of a
discretionary decision, such issues are legal matters subject to de novo review. (Pineda
v. Williams-Sonoma Stores, Inc. (2011) 51 Cal. 4th 524, 529; see Connerly v. State
Personnel Bd. (2006) 37 Cal. 4th 1169, 1175 [although attorney fee orders under private
attorney general doctrine of § 1021.5 are generally reviewed for abuse of discretion, “ ‘de
novo review of such a trial court order is warranted where the determination of whether
the criteria for an award of attorney fees . . . have been satisfied amounts to statutory
construction and a question of law’ ”].) Thus, to the extent the trial court’s denial of the
motion for sanctions here involved an interpretation of the language of section 128.7, our
review is de novo.
B. Denial of Sanctions Was Not Error
Moving Parties argue that the court erred in denying their motion for sanctions
pursuant to section 128.7. They contend that although “the trial court confirmed the
15
Cooter & Gell, supra, 496 U.S. 384, was superseded in other respects by a 1993
amendment to Rule 11 of the Federal Rules of Civil Procedure; the amendment created
the safe harbor provision similar to the one found in section 128.7. (See Barnes v.
Department of Corrections (1999) 74 Cal. App. 4th 126, 137, fn. 6.)
9
arbitrator’s conclusion that . . . Attorneys advocated frivolous claims in arbitration, it
found their advocacy was not ‘before the court,’ within the meaning of Section 128.7.”
Moving Parties urge that the court’s basis for denying the sanctions motion was
erroneous, and “[Optimal] invoked the jurisdiction of the trial court when it filed this
action, and the court retained jurisdiction throughout the proceedings, including while the
case was in arbitration.”
There is no authority supporting the position that a superior court, after a matter
has been stayed and ordered to binding arbitration, may impose section 128.7 sanctions
for an attorney’s prosecution of a client’s meritless claim before the arbitrator. Moving
Parties acknowledge the absence of such authority. For several reasons, we conclude that
under the circumstances presented here, the court correctly held that it could not impose
sanctions against Attorneys under section 128.7.
First, by the plain language of the statute, sanctions were not appropriate.
Subdivision (c) of section 128.7 authorizes the court to impose sanctions—assuming
proper statutory notice has been given and the violation has not been cured during the
safe harbor period—when the attorney (or party) has violated subdivision (b) “[b]y
presenting to the court, whether by signing, filing, submitting, or later advocating, a
pleading” that contains, inter alia, claims not “warranted by existing law or by
nonfrivolous argument for the extension, modification, or reversal of existing law or the
establishment of new law,” or claims containing “allegations and other factual
contentions [without] evidentiary support.” (§ 128.7, subd. (b), italics added.) It is
undisputed that Attorneys did not file the complaint with the court that was ultimately the
subject of binding arbitration. They became Optimal’s counsel of record three months
after the complaint’s filing, and after the dispute had been ordered to binding arbitration
pursuant to the parties’ agreement. Attorneys thus did not “present[] to the court” the
objectionable pleading “by signing, filing, [or] submitting” it. (§ 128.7, subd. (b).)
Likewise, Attorneys did not “present[] to the court” the complaint by “later advocating”
10
it. (Ibid.) While Attorneys did advocate the complaint on behalf of Optimal in the
binding arbitration, we hold 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. (Ibid.)
Second, allowing the imposition of section 128.7 sanctions under the
circumstances presented here would be inconsistent with the limited power the court
retains when the judicial action is stayed and the case is referred to binding arbitration
pursuant to the parties’ agreement. In general, arbitration submissions are broadly
construed to empower the arbitrator to resolve all of the parties’ controversies. (Van
Tassel v. Superior Court (1974) 12 Cal. 3d 624, 627, overruled on other grounds in
Bouton v. USAA Casualty Ins. Co. (2008) 43 Cal. 4th 1190, 1193; see also Ericksen,
Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal. 3d 312,
323 [“doubts regarding the scope of arbitrable issues must be resolved in favor of
arbitration”].) “ ‘Under the rule of broad construction an arbitrator is authorized to
determine all questions which he [or she] needs to determine in order to resolve the
controversy submitted to him [or her], and the arbitrator himself [or herself] decides
which questions need to be determined.’ [Citations.]” (Van Tassel, at p. 627.) Thus, if a
lawsuit is stayed pending a decision through binding arbitration, “the action at law sits in
the twilight zone of abatement with the trial court retaining merely vestigial jurisdiction
over matters submitted to arbitration.” (Brock v. Kaiser Foundation Hospitals (1992) 10
Cal. App. 4th 1790, 1796 (Brock).)
This “vestigial jurisdiction” (Brock, supra, 10 Cal.App.4th at p. 1796) consists of
the court being empowered to “appoint arbitrators if the method selected by the parties
fails (§ 1281.6); grant a provisional remedy ‘but only upon the ground that the award to
which an applicant may be entitled may be rendered ineffectual without provisional
11
relief’ (§ 1281.8, subd. (b))[16]; and confirm, correct or vacate the arbitration award (§
1285). Absent an agreement to withdraw the controversy from arbitration, however, no
other judicial act is authorized. [Citation.] [¶] In the interim, the arbitrator takes over. It
is the job of the arbitrator, not the court, to resolve all questions needed to determine the
controversy. [Citations.] The arbitrator, and not the court, decides questions of
procedure and discovery. [Citations.] It is also up to the arbitrator, and not the court, to
grant relief for delay in bringing an arbitration to a resolution.” (Titan/Value Equities
Group, Inc. v. Superior Court (1994) 29 Cal. App. 4th 482, 487-488, fns. omitted
(Titan/Value Equities).) Appellate courts have therefore routinely rejected parties’ efforts
to have courts overstep their limited jurisdiction in cases that are stayed pending binding
contractual arbitration. (See, e.g., MKJA, Inc. v. 123 Fit Franchising, LLC (2011) 191
Cal. App. 4th 643, 661 [court cannot issue order lifting stay based upon party’s claim that
it cannot afford contractual arbitration]; Finley v. Saturn of Roseville (2004) 117
Cal. App. 4th 1253, 1259-1260 (Finley) [order compelling review of decision by second
arbitrator which was provided for in arbitration agreement was unauthorized]; Blake v.
Ecker (2001) 93 Cal. App. 4th 728, 737 [remedy for failure to timely prosecute arbitration
was in the arbitration proceeding, not through court order], disapproved on other grounds
in Le Francois v. Goel (2005) 35 Cal. 4th 1094, 1107, fn. 5; Titan/Value Equities, supra,
29 Cal. App. 4th 482 [order compelling arbitration to proceed under stated conditions
involving potential reinstatement to trial calendar was in excess of court’s jurisdiction].)
16
“A party to an arbitration agreement may file in the court in the county in which
an arbitration proceeding is pending, or if an arbitration proceeding has not commenced,
in any proper court, an application for a provisional remedy in connection with an
arbitrable controversy, but only upon the ground that the award to which the applicant
may be entitled may be rendered ineffectual without provisional relief.” (§ 1281.8, subd.
(b).) “Provisional remedy” is defined in section 1281.8, subdivision (a) as including
attachments, temporary protective orders, writs of possession, preliminary injunctions,
temporary restraining orders, and appointment of receivers.
12
In its order referring the case to arbitration, the court here indicated that “this
action and any and all proceedings or activity herein are hereby stayed pending
conclusion of the arbitration proceedings.” The order makes no reference to the court’s
continuing jurisdiction over the matter. Rather, the court broadly stayed all activity in the
judicial action. It was specifically contemplated in the order that once the arbitrator’s
award had issued, “[a]ny motions to confirm or vacate the arbitrator’s award will be filed
within the time set by applicable law.” Thus, there is no basis for claiming that the
court’s “vestigial jurisdiction” (Brock, supra, 10 Cal.App.4th at p. 1796) over the case
included entertaining a motion for sanctions, and there is no authority supporting the
contention that, once the arbitration award was rendered and subject to a motion to
confirm, consideration of such a sanctions motion under section 128.7 was included
within the powers of the court.
Moving Parties rely on Preston v. Kaiser Foundation Hospitals (1981) 126
Cal. App. 3d 402 (Preston). There, the plaintiffs brought a wrongful death action arising
out of medical malpractice. After the case was ordered to arbitration based upon a
written agreement to arbitrate and the arbitration foundered for a number of years, the
court granted the defendant’s motion to dismiss for lack of prosecution of the arbitration.
(Id. at pp. 405-406; see also id. at pp. 411-412 (dis. opn. of Compton, J.).) The plaintiffs
asserted, inter alia, that the trial court did not have jurisdiction to dismiss the arbitration
proceedings pursuant to former section 583, once it had ordered the case to arbitration.
(Preston, at p. 406.) The court rejected this argument, concluding that a trial court retains
jurisdiction to entertain a motion to dismiss a matter referred to arbitration when the
plaintiff fails to timely pursue the arbitration: “We read the provision of Code of Civil
Procedure sections 1281.4 and 1292.6 in combination as investing a court, which has
ordered a matter to be arbitrated, with the power on the one hand to entertain a petition by
the plaintiff for judicial assistance in moving the arbitration forward where the matter is
foundering for reasons beyond plaintiffs’ control, or on the other hand, to entertain a
13
motion by defendants to dismiss the arbitration where plaintiffs have failed to exercise
reasonable diligence in moving the dispute to a conclusion.” (Id. at p. 407.)
The holding in Preston, supra, 126 Cal. App. 3d 402, that the court retains
jurisdiction to dismiss a matter ordered to arbitration for lack of prosecution has been
disagreed with and not followed in several decisions. (See Finley, supra, 117
Cal.App.4th at pp. 1258-1259; Titan/Value Equities, supra, 29 Cal.App.4th at p. 488,
fn. 8; Brock, supra, 10 Cal.App.4th at p. 1804; Nanfito v. Superior Court (1991) 2
Cal. App. 4th 315, 319, fn. 3; Byerly v. Sale (1988) 204 Cal. App. 3d 1312, 1316, fn. 3.) In
any event, irrespective of the correctness of Preston’s holding on this issue, and for the
reasons stated in this opinion, we disagree with Moving Parties that Preston supports the
view that, in the circumstances presented here, the trial court had jurisdiction to impose
section 128.7 sanctions for conduct occurring while the matter was stayed and referred to
binding contractual arbitration. (Cf. Jackson v. Smedema Trucking, Inc.
(W.D.Wis. 2008) 536 F. Supp. 2d 1009 [rejecting argument that District Court had “roving
authority” to impose Rule 11 sanctions for conduct occurring before another tribunal
involving an administrative law judge].)17
Third, the fact that the decision concerning the imposition of sanctions is a
discretionary one (Martorana v. Marlin & Saltzman, supra, 175 Cal.App.4th at p. 698)
strongly militates against the superior court’s authority to impose section 128.7 sanctions
for conduct occurring before the arbitrator. “ ‘To exercise the power of judicial
17
This case does not involve judicial arbitration under section 1141.10 et seq. We
express no views on the applicability of section 128.7 in court proceedings that are
referred to judicial arbitration. (See Weil & Brown, Cal. Practice Guide: Civil Procedure
Before Trial (The Rutter Group 2013) ¶ 13:118.1, p. 13-46 [suggesting that, in
connection with judicial arbitration, sanctions under § 128.7 “may be available if a party
‘presents’ papers to the court (e.g., an opposition to arbitration) that are entirely without
legal or factual merit”].)
14
discretion all the material facts in evidence must be both known and considered, together
also with the legal principles essential to an informed, intelligent and just decision.’
[Citation.]” (In re Cortez (1971) 6 Cal. 3d 78, 85-86, fn. omitted; see also Oldham v.
California Capital Fund, Inc. (2003) 109 Cal. App. 4th 421, 430.)
In the context of awarding sanctions under Rule 11, the United States Supreme
Court has emphasized the importance of the trial court’s close familiarity with the case in
evaluating the potential sanctionee’s litigation activity. “[T]he Rule requires a [trial]
court to consider issues rooted in factual determinations. For example, to determine
whether an attorney’s prefiling inquiry was reasonable, a court must consider all the
circumstances of a case. . . . In considering whether a complaint was supported by fact
and law ‘to the best of the signer’s knowledge, information, and belief,’ a court must
make some assessment of the signer’s credibility. Issues involving credibility are
normally considered factual matters. [Citations.] The considerations involved in the Rule
11 context are similar to those involved in determining negligence, which is generally
reviewed deferentially. [Citations.] Familiar with the issues and litigants, the district
court is better situated than the court of appeals to marshal the pertinent facts and apply
the fact-dependent legal standard mandated by Rule 11.” (Cooter & Gell, supra, 496
U.S. at pp. 401-402; see also id. at p. 404 [“issues involved in determining whether an
attorney has violated Rule 11 likewise involve ‘fact-intensive, close calls’ ”]; Navarro-
Ayala v. Nunez (1st Cir. 1992) 968 F.2d 1421, 1425 [“the decision about whether a
litigant’s (or lawyer’s) actions merit the imposition of sanctions is heavily dependent
upon the district court’s firsthand knowledge of the case and its nuances”].)
Under the circumstances presented here, Moving Parties’ position would suggest
that the trial court may exercise its discretion in deciding whether to award section 128.7
sanctions when it has no direct knowledge of any of the issues relevant to such a motion,
such as the merits of the legal and factual positions asserted in the arbitration by the
proposed sanctionees. This approach is antithetical to the requirement that “ ‘all the
15
material facts in evidence must be both known and considered’ ” by the court in properly
exercising its discretion. (In re Cortez, supra, 6 Cal.3d at pp. 85-86.)
Based upon the foregoing considerations, we conclude that under the
circumstances presented here, the proposed imposition of sanctions against Attorneys by
the trial court under section 128.7 for alleged conduct occurring in the arbitration was
neither appropriate nor authorized by law. Accordingly, the court did not err in denying
Moving Parties’ motion for sanctions.
DISPOSITION
The order denying motion for sanctions under Code of Civil Procedure section
128.7 is affirmed.
Márquez, J.
WE CONCUR:
Elia, Acting P.J.
Bamattre-Manoukian, J.
16
Trial Court: Santa Clara County Superior Court
Superior Court No.: CV147711
Trial Judge: The Honorable
James P. Kleinberg
Attorneys for Defendants and Appellants MITCHELL + COMPANY
David Salant et al.:
Brian E. Mitchell
Attorneys for Objectors and Respondents Law Offices of Carl Lippenberger
Carl Lippenberger et al.:
Carl Lippenberger