Appeal from the United States District Court for the Middle District of Pennsylvania, D.C. Civil No. 86-0144.
Gibbons, Chief Judge, Weis and Greenberg Circuit Judges.
Counsel for plaintiffs appeal the imposition of sanctions under Federal Rule of Civil Procedure 11 for failure to reasonably investigate the facts and research the law before filing the complaint in this antitrust suit. We conclude that the record reveals adequate compliance with the pre-filing requirement of Rule 11, and we will therefore vacate the award of sanctions. Moreover, to eliminate piecemeal appeals we adopt a supervisory rule that counsel seeking Rule 11 sanctions must file their motions before entry of final judgment in the district court.
Plaintiffs own a local retail beer outlet. Defendants operate a distributorship licensed by the state as the exclusive wholesaler of beer manufactured by certain out-of-state breweries. Plaintiffs brought this antitrust action asserting three claims: a conspiracy to restrain trade in violation of section 1 of the Sherman Act; an attempt to monopolize interstate commerce in violation of section 2 of the Sherman Act; and price discrimination in violation of section 1 of the Robinson-Patman Act. In opposing the defendants' motion for summary judgment, plaintiffs pressed only their Sherman Act monopoly claim, voluntarily dismissing the other counts. The district court entered summary judgment against plaintiffs on this claim, and we affirmed on appeal. Mary Ann Pensiero, Inc. v. Lingle, 810 F.2d 1163 (3d Cir. 1987). Before we issued the mandate, defendants filed a motion under Rule 11. After the mandate issued, the district court assessed sanctions against the plaintiff law firm.
Plaintiffs opened their retail business -- Bargain Beer and Soda -- in Lewistown, Pennsylvania in November 1985. They intended to sell, in addition to other labels, Genesee and Anheuser-Busch products, the two most popular brands in the Lewistown area. Because of Pennsylvania's byzantine alcoholic beverage laws, plaintiffs were required to purchase these two brands from defendants Lingles, the area's exclusive wholesale distributor for the Anheuser-Busch and Genesee breweries. The Lingles, however, refused to deal with plaintiffs.
To assist them in resolving this stand-off plaintiffs consulted the law firm of Litman, Litman, Harris, Brown and Watzman. Attorney Thomas R. Betz of that firm met with Mr. and Mrs. Pensiero, the principals of the plaintiff corporation, in late 1985. Preliminarily, the Pensieros informed Mr. Betz that the Lingles disapproved of Bargain Beer's sales philosophy, which emphasized large volume and low prices. Plaintiffs recounted Mr. Lingle's refusal to sell Genesee and Anheuser-Busch products to the Pensieros, and repeated his threat to drive Bargain Beer out of business.
The Pensieros told Betz that they had contacted the two out-of-state breweries to enlist their assistance in directing defendants to sell to Bargain Beer. Neither manufacturer agreed to intervene. The Pensieros also advised that Lingle Distributing belonged to Pennsylvania Importing Malt Distributors Association, a trade organization which apparently supported the defendants' refusal to deal with Bargain Beer. In its newsletter, the Association allegedly commended the Pennsylvania Liquor Control Board for declining to penalize defendants for their conduct.
On the basis of this information, Betz stated in a November 12, 1985 letter to the Lingles that their conduct violated the federal antitrust laws and, if continued, suit would be filed. Copies of the letter were sent to the Genesee and Anheuser-Busch breweries, and to Stroh's Brewery, a third manufacturer represented by the Lingles.
The Lingles did not respond to Betz's letter. Instead, they filed suit in December 1985 in state court to enjoin the Pensieros' purchase of the disputed brands from any other wholesaler. A scheduled hearing was postponed; thereafter, Lingle's counsel relayed an offer to sell the disputed brands to the Pensieros. However, the quoted prices were not those offered to other similarly situated distributors, but were the higher retail prices. The Pensieros rejected this offer. No further action has been taken in the state court suit.
In December 1985 and January 1986, Betz conferred with both the Chief Counsel to the Pennsylvania Liquor Control Board and the Deputy Attorney General of the Antitrust Section of the Pennsylvania Attorney General's Office. The Chief Counsel concluded that the defendants' refusal to sell to Bargain Beer was a "citable offense" under the Pennsylvania Liquor Code, yet the Board elected not to take formal remedial action.*fn1 The Deputy Attorney General opined that the defendants' conduct gave rise to a valid antitrust claim, citing legal authority in support of this view.
According to his unchallenged affidavit, Betz conducted further review of the applicable facts and additional legal research. Deciding that a federal antitrust action was warranted, Betz filed the complaint in this case on January 30, 1986.
Defendants moved for summary judgment in April 1986. In their legal memorandum submitted the following month, defendants asserted that they "should be awarded the attorneys' fees and costs incurred in defending this suit." They also noted their intention, after deposing Mrs. Pensiero, to file a separate motion "pursuant to Rules 11 and 56(g), Fed.R.Civ.P., and 28 U.S.C. § 1927" for costs and fees.
Two weeks later, the district court granted the defendants' motion for summary judgment on the section 2 Sherman Act claim, observing that plaintiffs had abandoned their other claims. By Order dated January 22, 1987 this court affirmed the judgment.
After receipt of a copy of this court's affirmance Order, but before the mandate had issued, defendants filed a formal motion in the district court to obtain attorney's fees under Rule 11. The district court determined that it had jurisdiction over the post-judgment motion, rejecting the plaintiffs' contention that no case or controversy remained after this court issued its affirmance. Although concluding that Betz had not acted in bad faith in filing the complaint, the court nevertheless ruled he and his firm had not met the objective standard for reasonableness required by Rule 11. Mary Ann Pensiero, Inc. v. Lingle, 115 F.R.D. 233 (M.D. Pa. 1987).
In analyzing the section 1 Sherman Act claim -- which plaintiffs withdrew at the summary judgment stage -- the court decided that the facts were "insufficient to establish grounds for a conspiracy," and that the plaintiffs' allegations were conclusory. With respect to the Robinson-Patman price discrimination claim, also voluntarily dismissed, the court noted the absence of a purchase and sale element, which caselaw establishes is necessary to "state a valid claim under this section."
As to the section 2 Sherman Act claim, the court initially commented that plaintiffs had not presented "specific facts to buttress [their] contention that particular brands of beer could constitute a product market . . . Plaintiff[s] could have requested additional time for discovery but did not do so. . . . " The court rejected the plaintiffs' assertion that the section 2 claim was grounded in a good faith argument for the extension, modification, or reversal of existing law. On this point, the court faulted plaintiffs for not so characterizing the claim. The court commented that "the section 2 claim was presented in a cursory fashion and, under the circumstances of this case, sanctions are justified for its pursuit."
In a later memorandum after reconsideration, the court conceded that its holding on the relevant product market "may or may not have been correct." However, deeming the possibly erroneous ruling as harmless in light of the plaintiffs' failure to set forth facts relevant to that issue, the court reaffirmed the imposition of sanctions.
Finding that the plaintiffs' counsel had proceeded in good faith, the court concluded that a $5,000 sanction, rather than the larger sum requested by defendants, was appropriate.*fn2 Furthermore, because "plaintiff had no part in the decision to pursue this case, other than to abide by the advice of counsel," the court imposed sanctions on counsel only. Plaintiffs' counsel appeals, denying a Rule 11 violation, but conceding the district court's jurisdiction.