Arcsona Inc. v. Appirio Inc.

Background

Arcsona filed a state-court action asserting one promissory-fraud claim against Appirio Inc. and Daniel Lascell. The defendants removed the case to federal court. The court denied Arcsona’s request to send the case back to state court and dismissed the original complaint with permission to amend. Arcsona then filed a first amended complaint, which the defendants also moved to dismiss. The court granted those dismissal motions on January 12, 2022.

Before the amended-complaint dismissal, Lascell served and filed a motion seeking sanctions under Rule 11 of the Federal Rules of Civil Procedure against Arcsona and its counsel, Michael Kelly. Rule 11 requires an attorney who files a pleading or motion to make a reasonable inquiry and certify, among other things, that the filing is not for an improper purpose and that its legal claims are supported by existing law or a nonfrivolous argument for changing the law.

Arguments and analysis

Lascell argued that Arcsona’s promissory-fraud claim was frivolous because it arose from an arm’s-length contract between sophisticated parties and was barred by the economic-loss rule. He also argued that Arcsona’s litigation was intended to harass him and was pursued for an improper purpose.

The court rejected the request for sanctions. Although the court had concluded that Arcsona failed to state a promissory-fraud claim, it found that the claim was not objectively baseless. Arcsona and Kelly relied primarily on Locke v. Warner Bros. to argue that the contract created a duty that Lascell had violated. The court said that argument was unsuccessful but not objectively baseless in light of that decision.

The court also said that the economic-loss rule did not make the claim objectively baseless. It noted that judges in the district had questioned whether the rule applies to service contracts and that the California Supreme Court had apparently not expressly resolved that issue. The court did not decide that economic-loss issue in ruling on the dismissal motion.

As to improper purpose, the court found that Arcsona’s filings—including its complaint, request to remand, request for permission to seek reconsideration, amended complaint, and opposition papers—did not show the kind of delaying tactics or harassment that could support sanctions. The court characterized the filings as vigorous advocacy that did not unnecessarily delay the case or needlessly increase litigation costs. Lascell’s additional argument that the filings lacked evidentiary support was raised for the first time in his reply brief, so the court treated that argument as waived.

Disposition

The court denied Daniel Lascell’s motion for Rule 11 sanctions against Arcsona and Michael Kelly. The order did not impose sanctions.