Saetes v. expHand, Inc.

Background

Peter Saetes and other expHand shareholders sued expHand and thirteen people allegedly involved in running the company. The plaintiffs claimed that expHand knowingly made false statements to solicit investments. The defendants served a proposed motion for sanctions under Federal Rule of Civil Procedure 11. The plaintiffs voluntarily dismissed the case during Rule 11’s safe-harbor period.

The defendants later sought sanctions under three authorities: the Private Securities Litigation Reform Act (PSLRA) and Rule 11; the court’s inherent authority; and 28 U.S.C. § 1927. The defendants also moved to strike an amended notice of voluntary dismissal that the plaintiffs filed after learning that sanctions were being sought. The amended notice purported to state that each side would bear its own costs and fees.

Sanctions under the PSLRA and Rule 11

The court denied sanctions under the PSLRA and Rule 11. The PSLRA requires a district court to determine whether a party violated Rule 11(b) upon a final adjudication of the action. The court held that a voluntary dismissal is not a final adjudication. It also held that, without the PSLRA’s mandatory inquiry, there was no independent basis for Rule 11 sanctions because the plaintiffs dismissed the case within Rule 11’s safe-harbor period.

Sanctions under the court’s inherent authority

The court denied sanctions under its inherent authority because the evidence did not sufficiently show bad faith or conduct equivalent to bad faith. The court stated that naming defendants who, as later shown, were not with the company when the alleged fraud began was more suggestive of negligence than bad faith.

Sanctions under 28 U.S.C. § 1927

The court denied sanctions under § 1927. That statute applies when an attorney unreasonably and vexatiously multiplies court proceedings. The court explained that Ninth Circuit precedent limits the statute to filings and tactics after a lawsuit begins, not an initial pleading. The decision to name defendants who were not affiliated with expHand until years after the plaintiffs purchased their shares therefore was not covered by § 1927. The court also found no later conduct in the record that warranted sanctions under that statute.

Motion to strike and disposition

The court granted the defendants’ motion to strike the amended notice of voluntary dismissal. The order denied the motions for sanctions and granted the motion to strike.