Substantial Compliance with Federal Rule 11(c)(2): Are Letters Enough?

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by: Colin E. Flora

     Today we return to a topic that we’ve addressed only sparsely: sanctions under Rule 11 of the Federal Rules of Civil Procedure. The impetus for our discussion is an interesting decision from the Seventh Circuit last month. The case, Northern Illinois Telecom, Inc. v. PNC Bank, N.A., examined the technical aspect of Rule 11(c)(2), which, as the court majority explained, “requires a party seeking Rule 11 sanctions first to serve a proposed motion on the opposing party and to give that party at least 21 days to withdraw or correct the offending matter. Only after that time has passed may the motion be filed with the court.”

     As our astute readers will have noted, I wrote, “court majority.” It was a case with a brief, but strong, dissent by Judge Richard A. Posner. Frequent readers of the Hoosier Litigation Blog may be quick to recognize that I often sing the praises of Judge Posner. In this instances, however, I find myself in agreement with the majority opinion, authored by Judge David F. Hamilton and joined by Chief Judge Diane P. Wood.

     Most lawyers are familiar with the general dictates of Rule 11: “require[ing] attorneys to sign all pleadings and treat[ing] the signature as a certificate that the lawyer had read the pleading and that, to the best of the lawyer’s knowledge, information, and belief, there was good ground to support it and it was not interposed for delay.” As explained in detail in the opinion, the additional facet of Rule 11–permitting sanctions for violations–has undergone a great deal of modification in the last eighty years. Presently, subdivision (c)(2) requires a party to, as Judge Hamilton characterized it, “first fire a warning shot that gives the opponent time to find a safe harbor” before filing a motion for Rule 11 sanctions. The question, then, is what form must that warning shot take: can it be a letter or is “a letter [ ]not a substitute for a motion[?]”

     The case began as a breach of contract case that was decided in favor of the defendant, PNC Bank, because there was no contractual relationship between the plaintiff, NITEL, and PNC Bank. The problem with the claim was that PNC Bank was not the party with whom NITEL had a contract. I trust that even non-lawyers reading this post can recognize that a breach of contract case requires the parties to have a contract.

     “Before discovery began and again before PNC Bank moved for summary judgment, PNC Bank’s lawyer sent letters to[NITEL’s lawyer] asserting that [the] breach of contract claim was frivolous. Both letters proposed to settle the case by having NITEL dismiss its suit and pay PNC Bank its attorney fees. Both letters concluded by threatening to seek Rule 11 sanctions if NITEL did not agree to the demands within a few days.” Neither letter received a response.

     The district judge concluded that the breach of contract claim was frivolous and that Rule 11 sanctions were warranted. The court ordered that both NITEL and its lawyer be held jointly and severally liable for $84,325. The lawyer appealed, arguing that PNC Bank’s letters did not comply with the requirements of Rule 11(c)(2). On appeal, the majority of the panel agreed.

     Judge Hamilton’s decision traced Rule 11 to its original form in 1938 and followed it through its various modifications to its present form. He noted that the original 1938 version “authorized sanctions, [bu]t did so in only this vague language: ‘For a wilful violation of this rule an attorney may be subjected to appropriate disciplinary action.’” The original focus was on the subjective mindset of the lawyer, which made awarding sanctions extremely difficult and rare. In 1983, the standard was made objective, but resulted in “an over-correction,” leading a commentator to note in “1988 that Rule 11 had become ‘the cottage industry of the litigation bar.’”

     In 1993, the “warning shot” was added. Judge Hamilton looked to the Advisory Committee comments to understand the 1993 amendment:

The rule provides that requests for sanctions must be made as a separate motion, i.e., not simply included as an additional prayer for relief contained in another motion. The motion for sanctions is not, however, to be filed until at least 21 days (or such other period as the court may set) after being served. If, during this period, the alleged violation is corrected, as by withdrawing (whether formally or informally) some allegation or contention, the motion should not be filed with the court. These provisions are intended to provide a type of “safe harbor” against motions under Rule 11 in that a party will not be subject to sanctions on the basis of another party’s motion unless, after receiving the motion, it refuses to withdraw that position or to acknowledge candidly that it does not currently have evidence to support a specified allegation. Under the former rule, parties were sometimes reluctant to abandon a questionable contention lest that be viewed as evidence of a violation of Rule 11; under the revision, the timely withdrawal of a contention will protect a party against a motion for sanctions.

To stress the seriousness of a motion for sanctions and to define precisely the conduct claimed to violate the rule, the revision provides that the “safe harbor” period begins to run only upon service of the motion. In most cases, however, counsel should be expected to give informal notice to the other party, whether in person or by a telephone call or letter, of a potential violation before proceeding to prepare and serve a Rule 11 motion.

Based upon those comments, Judge Hamilton concluded that “[a] letter may thus warn about impending service of the motion, but a letter is not a substitute for a motion.”

     Were Judge Hamilton deciding this matter upon tabula rasa, that would likely have been the end of the analysis. But, beholden to horizontal stare decisis, the analysis needed to continue into the doctrine of substantial compliance, which has been applied in prior Seventh Circuit decisions. Judge Hamilton explained:

Our line of cases on “substantial compliance” with the warning-shot requirement began with Nisenbaum v. Milwaukee County, where we concluded that where the failure to satisfy the warning-shot requirement was only “technical,” the moving party’s substantial compliance with the warning-shot requirement entitled it “to a decision on the merits.” In Nisenbaum, we held that there was substantial compliance with Rule 11 because the defendants sent a letter—rather than a motion—that explained the grounds for sanctions and provided more than 21 days to remedy the problem. Insisting on a formal motion seemed unduly formalistic.

In Matrix IV[, Inc. v. American National Bank & Trust Co. of Chicago], the moving party similarly sent a letter that explained the grounds for the sanctions and informed the opposing party it would seek Rule 11 sanctions if the claim were not dismissed voluntarily. The letter explicitly asserted that it served “as notice” of the party’s intention to seek sanctions at the close of the case. We found that this warning also amounted to substantial compliance with the warning-shot requirement, though we ultimately decided the case on other grounds, finding that the sanctions were unwarranted on the merits.

There are both legal and factual problems with this theory of “substantial compliance” to save the sanctions order in this case. The legal problem is that the substantial compliance theory we adopted in Nisenbaum stands alone and is difficult to reconcile with the explicit requirements of the Rule and the clear explanation from the Advisory Committee. No other circuit has adopted this approach. See Penn, LLC v. Prosper Business Dev. Corp., 773 F.3d 764, 767–68 (6th Cir. 2014) (reviewing circuit split: Second, Third, Fourth, Fifth, Sixth, Eighth, Ninth, and Tenth Circuits have rejected “substantial compliance,” and only Seventh Circuit has adopted it). Our colleagues in other circuits have been highly critical of the terse treatment of the issue in Nisenbaum. As the Ninth Circuit explained in Barber v. Miller, “warnings were not motions” and “the Rule requires service of a motion.” The 1993 amendment “deliberately imposed” the requirement of service. It would therefore wrench both the language and purpose of the amendment to the Rule to permit an informal warning to substitute for service of a motion.”

The Advisory Committee notes warn against treating anything less than formal service of a motion as sufficient to comply with the warning-shot/safe-harbor requirement: “To stress the seriousness of a motion for sanctions and to define precisely the conduct claimed to violate the rule, the revision provides that the ‘safe harbor’ period begins to run only upon service of the motion. In most cases, however, counsel should be expected to give informal notice to the other party, whether in person or by a telephone call or letter, of a potential violation before proceeding to prepare and serve a Rule 11 motion.” By treating a mere warning letter as sufficient, a standard of substantial compliance leaves the recipient unclear as to both whether the opposing party is serious and when the 21-day safe-harbor clock starts to run.

Despite the criticism, though, Nisenbaum remains controlling circuit law on this point. We need not revisit here whether substantial compliance can ever satisfy the warning-shot requirement of Rule 11(c)(2). PNC Bank’s warning-shot letters fell far short of even the generous target of substantial compliance.

     After further noting that the letters were actually settlement offers, the majority opinion concluded that they fell short of the “the 21-day safe harbor that was offered in Nisenbaum or Matrix IV.” Thus, the court concluded that there was no substantial compliance here. It is also pretty clear that Judge Hamilton is certainly in favor of the Seventh Circuit overturning the substantial compliance caselaw and joining its sister circuits in the process. If there were somehow doubt left after our discussion above, footnote 5 of the opinion ends it: “It should not be difficult for a party who is serious about seeking Rule 11 sanctions to comply with Rule 11(c)(2). Parties and district courts that rely on a theory of substantial compliance should understand that, at least in the present landscape, they are inviting possible en banc and/or Supreme Court review of the question.”

     Judge Posner, on the other hand, dissented. Notably, although not the author, Judge Posner was a signatory to the majority decision in Nisenbaum. Instead of finding PNC Bank’s letters to have fallen short of Nisenbaum and Matrix IV, Judge Posner stated, “a good example of substantial compliance, as the district judge found and my colleagues on this panel, enamored as they appear to be of legal technicalities, or reluctant to punish misbehaving lawyers, miss.”

     The focus of Judge Posner’s terse dissent was the text of the rule itself and the fact that, in his esteem, the facts fit neatly within the circuit precedent. Although not specifically discussed, I think there is a third factor that drove the dissent. Judge Posner is a prolific author, but few, if any, of his books have obtained greater notoriety than his numerous editions of his book Economic Analysis of Law. Here, Judge Posner found, “Th[e letters] placed [the lawyer] on notice that if his suit against PNC was indeed frivolous, as it was, he’d better withdraw it or face Rule 11 sanctions.” In an economic view, the purpose of the warning shot seems to be satisfied at that moment.

     My problem, however, with the substantial-compliance instead of strict-adherence approach to Rule 11(c)(2) is that it ignores the gray areas. Mind you, Judge Posner’s dissent does mention that the first letter “explain[ed] in detail the legal and factual problems with [the] lawsuit[.] But what if it had not gone into “detail,” whatever “detail” really means? My point being that, in practice, letters very rarely go into the same depth and call upon the same degree of legal support and analysis as a motion to a court. Where is the dividing line between a sufficiently detailed letter that would serve the same function as a copy of the motion and a letter that merely says, “Dismiss your case now, for it is frivolous and warrants Rule 11 sanctions”?

     Nisenbaum merely states that “defendants alerted Nisenbaum to the problem[.]” Matrix IV says, “Moreover, we have held that a letter informing the opposing party of the intent to seek sanctions and the basis for the imposition of sanctions—like the one Gateway sent in this case—is sufficient for Rule 11 purposes.” Fabriko Acquisition Corp. v. Prokos, cited in Matrix IV with a parenthetical stating, “finding a letter informing offending party of sanctions to be adequate[,]” does not even make clear if a letter alone was adequate. Instead, the Fabriko panel wrote, “Although Sorenson informed Fabriko of the causation problem in a letter and subsequently in a formal motion for sanctions . . . .” A look at the district court opinion, reveals defense “counsel served a formal Rule 11 motion for sanctions on plaintiff’s counsel, accompanied by requests for discovery and a letter explaining that plaintiff’s counsel had a twenty-one day safe harbor period to take remedial action.” Lastly, Methode Electronics, Inc. v. Adam Technologies, Inc., on which both Judge Posner and the district judge relied, the court stated, “the attorney . . . sent [ ]a letter pursuant to Rule 11 advising [ ] that Illinois was not an appropriate forum for the action and that [the] conduct as alleged in the complaint was permissible under the settlement agreement.” Notably, Methode does not actually hold that a letter is sufficient, it held that a party that engages in a Rule 11 hearing conducted within twenty-one days of receiving anything regarding sanctions, has waived compliance with the safe-harbor. Thus, the critique by the majority of Methode as merely dicta is accurate.

     My point is that under the four cases that I’ve found in the Seventh Circuit, three of which were cited by Judge Posner and a fourth found cited by one of those cases, none explain how descriptive the letter must be of the legal failings. The motion, by its very nature must be sufficiently explanatory as to inform the court of why the relief sought–Rule 11 sanctions–is warranted.

     Northern Illinois Telecom might be merely a step in defining the line of what content the letter must contain. Based upon the purpose of the rule and the comments from the Advisory Committee, I think the simple answer is that Nisenbaum, Fabriko, Matrix IV, and whatever guidance is found in Methode are wrong. Their terse analysis has fallen well below the counter point made by Judge Hamilton and agreed with by Chief Judge Wood.

     Returning to the question that started this post–what form must that warning shot take: can it be a letter or is “a letter [ ]not a substitute for a motion”–the answer, at least in the Seventh Circuit, is cloudier than ever.

     Join us again next time for further discussion of developments in the law.



*Disclaimer: The author is licensed to practice in the state of Indiana. The information contained above is provided for informational purposes only and should not be construed as legal advice on any subject matter. Laws vary by state and region. Furthermore, the law is constantly changing. Thus, the information above may no longer be accurate at this time. No reader of this content, clients or otherwise, should act or refrain from acting on the basis of any content included herein without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue.

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