Fifth Circuit Rules Courts Lack Inherent Authority to Impose Sanctions for Arbitral Conduct

The Fifth Circuit has held that it lacks inherent authority to impose sanctions for conduct which occurred during arbitration.

In Positive Software Solutions, Inc. v. New Century Mortgage Corp., No. 09-10355, (5^th Cir., September 13, 2010), Positive Software Solutions sued New Century for allegedly infringing telemarketing software licensed to New Century. The case was subsequently ordered to arbitration under the terms of the parties’ contract. During arbitration, attorney Ophelia Camina advised New Century on various discovery matters despite that the arbitrator had a previous professional relationship with Camina. As a result of this relationship, the district court vacated the arbitration award. The Fifth Circuit reversed the vacatur and remanded the case.

After the case was remanded, New Century declared bankruptcy. Positive Software moved for sanctions against Camina under Federal Rule of Civil Procedure 37, 28 U.S.C. § 1927, and the court’s inherent authority. The district court sanctioned Camina a portion of Positive Software’s attorneys’ fees under its purported inherent authority. Camina then appealed the sanction.

The Circuit Court declared that a district court has a limited inherent authority to impose sanctions in order to control the litigation before it. A court’s inherent authority may be exercised only if doing so is essential to preserve the authority of the court. The court then stated that a district court’s inherent power to impose sanctions does not extend to collateral proceedings.

According to the court, arbitration itself is a collateral proceeding regardless of whether a court ordered the parties to arbitration. The court further stated, “Because Camina’s conduct was neither before the district court nor in direct defiance of its orders, the conduct is beyond the reach of the court’s inherent authority to sanction.”

The Circuit Court also held that the lower court’s sanction award violated the Federal Arbitration Act (FAA) because it went beyond a court’s narrowly defined authority under the act. Under the FAA, a court may only determine whether arbitration should be compelled and whether an arbitration award should be confirmed, vacated or modified. Because the FAA specifically provides for limited judicial involvement in an arbitral dispute, to enforce the lower court’s order would expand the judiciary’s role in the arbitration in direct conflict with the FAA.

The Fifth Circuit reversed the sanctions award and remanded the case.

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