Antitrust Law Daily Wrap Up, ANTITRUST—SDNY: Sanctions Imposed for Baseless Antitrust, RICO Claims Against Attorneys Allegedly Involved in Sexual Harassment Extortion Scheme, (Feb 25, 2013)

By Tobias J. Gillett, J.D., LLM.

The failure of two attorneys to support their Sherman Act and Racketeer Influenced and Corrupt Organizations (RICO) Act claims against certain attorneys for their alleged participation in an extortion scheme warranted sanctions, the federal district court in New York has ruled (Watkins v. Smith, February 22, 2013, Cote, D.).

On June 13, 2012, Kevin Watkins filed a complaint in state court asserting a variety of claims against a range of defendants, including two groups of attorneys, one designated the Eisen Defendants and the other designated the Phillips Defendants. The defendants removed the case to federal court, and Watkins filed an amended complaint in response to the defendants’ motion to dismiss.

The complaints both alleged that the defendants worked together “to fabricate claims of sexual harassment against” Watkins, and that some of the defendants sent Watkins a letter offering to settle the claims. The amended complaint also asserted that the defendants had “engaged in a conspiracy to extort settlements out of victims like the plaintiff and to reduce competition in the plaintiff’s field of work for at least the last three years,” and had targeted fifty to one hundred small businesses each month. The amended complaint alleged that the defendants hired a woman to pose as a prospective client for Watkins, to trick him into making sexually explicit statements, and then to record those statements to extort a settlement out of him.

On July 9, 2012, the Eisen Defendants sent one of Watkins’ lawyers, Anil Taneja, a safe harbor letter requesting him to voluntarily withdraw his complaint, and on July 30, 2012, the Eisen Defendants filed a motion for sanctions pursuant to Federal Rule of Civil Procedure 11 directed to the original complaint. The court dismissed the motion, but without prejudice to bringing it again in connection with a motion to dismiss the amended complaint, and the Eisen Defendants renewed their motion on September 17, 2012. The Phillips Defendants also sent Taneja a fair harbor letter, on July 27, 2012, and on August 22, 2012 they filed their own motion for sanctions.

The court stayed the motions for sanctions until resolution of the defendants’ motions to dismiss the amended complaint. On November 19, 2012 the court dismissed the complaint, and in the present decision it took up the sanctions motions.

The court began its discussion of the sanctions motions by noting that “the challenged papers are judged by a standard of objective unreasonableness.” The court observed that “[t]he operative question is whether the argument is frivolous, i.e., the legal position has no chance of success, and there is no reasonable argument to extend, modify, or reverse the law as it stands.” An allegation must be “utterly lacking in support” for sanctions to be imposed.

Moreover, a party seeking sanctions must comply with Rule 11’s “safe harbor” provision, which requires that the motion for sanctions be served on the other party, and that the motion cannot be filed if the party withdraws the challenged material within twenty-one days of the service. Although sanctions cannot ordinarily be imposed for pleadings originally filed in state court, the amended complaint here had been filed in federal court. The court did not address whether sanctions could have been imposed for the original complaint.

Safe Harbor. The court concluded that both motions for sanctions complied with the safe harbor provision. Although the Phillips Defendants’ motion “addressed some deficiencies that are found in the original complaint and not in the amended complaint,” most deficiencies addressed appeared in both complaint. The Eisen Defendants’ motion also complied, even though it was filed on the twenty-first day after service, an hour and half prior to the deadline, because the court concluded the evidence showed the complaint would not have been withdrawn during that period.

Decision to Sue Certain Defendants. Although the defendants’ motions pointed to many possible reasons for sanctions, the court only addressed one, the defendants’ contention “that the plaintiff frivolously sued a number of defendants who had no connection to the underlying factual events that gave rise to the plaintiff’s suit.” The Phillips Defendants alleged they had no involvement in sending the letter to Watkins, while four of the Eisen Defendants claimed they were similarly uninvolved.

The court agreed that sanctions should be imposed for naming “defendants without any evidentiary support for the claims against them.” The opposition to the motions for sanctions did not explain why those defendants had been named, although it did refer to an e-mail exchange in which Taneja had contended that any attorney listed on the website of the Derek Smith Law Group was vicariously liable for the actions of the firm’s employees.

The court concluded that, to the extent the “reference to the e-mail exchange [was] an effort to rely on the doctrine of vicarious liability, the effort failed. The website did not list two of the named defendants, and the amended complaint only asserted claims on the basis of the defendants’ “direct participation” in the alleged conspiracy, not on the basis of vicarious liability.

Moreover, the plaintiff did not identify “any basis to plead that attorneys listed as ‘Of Counsel’ to the law firm were vicariously liable.” The court observed that attorneys designated “Of Counsel” are typically not considered partners. Although such attorneys could be held liable on a “partnership by estoppel” theory, the plaintiff did not identify “any statements or conduct of the defendants constituting representations of an existing partnership,” or of the plaintiff’s reliance on such representations.

The court observed that “the fact that a claim is properly asserted against one defendant does not mean that the same claim may properly be asserted against a different defendant,” particularly when that claim involved fraudulent conduct. A failure to specifically allege claims against each defendant undermined the purpose of the pleading requirements—giving fair notice of the claim and the grounds on which it rested. Since the plaintiff had not shown any support for his claims against those defendants, or that he could have discovered such evidence with reasonable investigation, the court held that the defendants were entitled to sanctions, although the court denied the motion for sanctions on all other grounds.

Persons to Be Sanctioned. The court concluded that both of the plaintiff’s counsel, Taneja and Andre Soleil, could be sanctioned for their conduct. Soleil had been the attorney of record since signing the amended complaint, and he had notice of the motions for sanctions, even though no evidence showed that he had been involved in the case since the filing of the amended complaint. Although Taneja did not sign the complaint, he had “sign[ed] and submitt[ed] memoranda of law and affirmations in opposition to the defendants’ motion to dismiss.” Therefore, the court imposed sanctions of all of the Phillips Defendants’ reasonable attorneys’ fees and expenses incurred in opposing the amended complaint, as well as half of the fees and costs incurred by the Eisen Defendants.

However, the court held that, although sanctions could be imposed under Second Circuit law on Watkins for making allegations unsupported by evidence, “the record offers little indications of Watkins’ participation in the decisions regarding which individuals and entities would be named as defendants.” Therefore, the court declined to impose sanctions on Watkins.

The case is No. 12 Civ. 4635 (DLC).

Attorneys: Anil Taneja for Kevin Watkins. Andre Ramon Soleil (Soleil & Co., P.C.) for Kevin Watkins. Adriane Simone Eisen (Arce Law Group) for Derek Smith. Bryan S. Arce (Akin & Smith, LLC) for Adriane Eisen. Jesse Curtis Rose (The White Rose Group, LLC) for William K. Phillips.

Companies: Derek T. Smith Law Group, P.C.; Arce Law Group, PC; Phillips & Phillips

Cases: Antitrust RICO NewYorkNews