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Ninth Circuit:
$12 Million Sanction Against Partly Prevailing Party Stands
In Protracted Matter in Which Antitrust Judgment Was Set Aside After Discovery of Plaintiff’s Tax Evasion, Opinion Says There Was No Abuse in Ordering That Perpetrator Pay Despite Success on Remaining Claim
By a MetNews Staff Writer
A trial judge did not abuse his discretion in granting a $12 million fee award against a plaintiff in protracted litigation during which a $44 million antitrust judgment in the party’s favor was set aside after the other side discovered that the company had engaged in tax evasion, inflating profits and undermining the damages calculations, the Ninth U.S. Circuit Court of Appeals held Friday.
In a memorandum decision, signed by Circuit Judges Kim McLane Wardlaw, Johnnie B. Rawlinson, and Senior District Court Judge Jed S. Rakoff of the Southern District of New York, sitting by designation, the court declared that the judge did not abuse his inherent authority to impose a $1.5 million sanction or in denying a motion to vacate a prior $10.5 million fee award to the defendant despite the plaintiff’s ultimate success on a remaining cause of action.
The question arose in a dispute between tobacco companies. The plaintiff, Trendsettah USA Inc., had contracted with defendant Swisher International Group Inc. to manufacture cigarillos, or thin cigars, for it to sell.
According to Trendsettah, the defendant—which sells similar products under its own name—limited the number of cigarillos it supplied to the plaintiff, reducing the profitability of the venture. Trendsettah filed a complaint against Swisher in 2014, asserting breach of contract causes of action as well as an antitrust claim under the Sherman Act.
A jury awarded the plaintiff $14,815,494 on the antitrust claim and $9,062,679 for breach of contract. Then-District Court Judge James V. Selna of the Central District of California (now on senior status) ordered a trebling of the antitrust damages and, upon stipulation between the parties, reduced the contract award to zero.
Judgment was entered in favor of the plaintiff for more than $44 million.
Tax Evasion Scheme
Swisher alleged that it later learned, after the plaintiff’s Chief Executive Officer Akrum Alrahib was indicted, that Trendsettah was only able to make a profit on the cigarillos by virtue of engaging in a fraudulent scheme to avoid excise taxes. In September 2020, Selna granted the defendant’s motion for relief from judgment under Federal Rule of Civil Procedure 60, finding that the scheme amounted to fraud on the court under subdivision (d) and newly discovered evidence of fraud as contemplated by subsection (b). Trendsettah immediately appealed.
On Dec. 20, 2020, Selna granted Swisher’s request for attorney fees as the prevailing party, awarding the defendant $10.5 million.
Nearly two years later, the Ninth Circuit held that Selna abused his discretion in finding that the plaintiff had committed fraud on the court under Rule 60(d) but not as to the determination that the information qualified as newly discovered evidence of fraud.
The court ordered that the jury’s verdict on the breach of contract cause of action be reinstated and affirmed the relief from judgment as to the antitrust claim. The opinion does not address the fee award.
On remand, judgment of $9,062,679 was entered in the plaintiff’s favor. In the order, Selna wrote:
“Defendant is awarded sanctions in the amount of $1,555,250.73, which reflects the Court’s $3,943,316.68 sanctions award minus the $2,388,065.95 to which the sanctions award overlapped with the Court’s prior award of attorney’s fees and disbursements.
“There is an existing judgment entered on September 28, 2020…under which Plaintiffs were found liable to Defendant for $10,462,480.60 in prevailing party attorney’s fees and disbursements, plus post-judgment interest.”
After calculating interest, he added:
“Plaintiffs are awarded $10,237,493 in prevailing party attorney’s fees….
“Offsetting the $23,368,671.35 Defendant owes to Plaintiffs by the $12,055,031.32 Plaintiffs owe to Defendant results in the net amount of $11,313,640.03 owed by Defendant to Plaintiffs as of February 27, 2024.”
Ninth Circuit’s View
The Ninth Circuit panel affirmed the entire $12 million award as an allowable sanction, saying: “[W]e conclude that the district court properly exercised its inherent authority to reach a holistic and equitable resolution of this protracted dispute.”
Wardlaw, Rawlinson, and Rackoff said:
“On remand, the district court exercised its inherent authority to impose sanctions, and denied Trendsettah’s motion under Rule 60(b)(5) to vacate a prior attorneys’ fee award in favor of Swisher. Although we reinstated the breach-of-contract verdict, the rule that when a ‘fee award is based on the merits judgment, reversal of the merits removes the underpinnings of the fee award’ does not address the different situation of attorneys’ fees as a post-appeal sanction.”
They continued:
“While Trendsettah’s fraudulent conduct was not imputed to its counsel, our prior decision concluded that Trendsettah is responsible for Alrahib’s fraud in litigating this case….As a result, the district court possessed ‘inherent authority’ to impose attorneys’ fees ‘as a sanction for [Trendsettah’s] bad-faith litigation conduct.’…Notably, the district court reduced the fee award by $2,388,065.98 to account for any overlap between the prior fee award and the sanctions,…and did not abuse its discretion in imposing sanctions based on the equities of the case.”
Addressing the defendant’s assertion that Selna erred in declining to issue a larger award representing all fees and costs incurred in defending the action, the judges wrote:
“The district court determined that Trendsettah’s ‘fraud infected [its] damages, but not necessarily [Swisher’s] liability.’ Even if our mandate did not bar the district court from awarding Swisher’s full fees and costs, the district court did not err in distinguishing between Swisher’s breach-of-contract liability based on the jury’s verdict and Trendsettah’s theory of damage.”
The case is Trendsettah USA Inc. v. Swisher International Group Inc., 23-4257.
Swisher was represented by Theodore J. Boutrous Jr. of the Los Angeles office of Gibson, Dunn, & Crutcher LLP. Mark Poe of the San Francisco-based Gaw Poe LLP acted for Trendsettah.
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