After twenty years of dormancy, California courts recently regained the authority to impose sanctions against parties for bad faith tactics and frivolous litigation. Unfortunately, the good news for California business owners may be short-lived.
Operating a business in California today presents many challenges. From an abundance of strict regulations to laws that were drafted with the express intent to favor employees, it comes as no surprise to many business owners that a special report issued by Forbes several years ago gave California an “F” for small business friendliness, leaving the state in a tie for last place.
From our perspective as a full-service business law firm, one of the most prominent issues facing our clients is the prevalence of litigation, particularly the frivolous variety. Although legal disputes are often seen as an inevitable cost of doing business, California business owners can find that these costs are higher for them than they are for most of their counterparts across the nation. There are many reasons for this.
Especially problematic are several statutes that provide for mandatory, unilateral attorney fees awards to employee plaintiffs who receive even the most nominal recovery, but do not protect employer defendants against frivolous suits, thereby effectively encouraging baseless lawsuits.
Furthermore, with the massive, unprecedented cuts in California’s court funding since 2008, which have led to the closure of 52 courthouses and the reduction of services throughout the state, defending against litigation can prove to be an exceptionally lengthy and expensive process. Even the simplest of cases can take years before they are resolved, and parties often have to wait many months just to have motions heard.
Given the expense of litigation, the possibility of being held liable for an attorney fees award that might far exceed any reasonably conceivable damages, and the duration of the litigation process—and the corresponding toll it takes on a company’s resources—defendants frequently feel compelled to settle even the most frivolous of actions. Knowing this, the less scrupulous among plaintiffs’ attorneys have been known to engage in bad faith actions and tactics to increase the cost of litigation and pressure defendants into settlement.
Unfortunately, in 1995 California courts lost one of their best tools to thwart such behavior—the ability to impose sanctions against a party or the party’s attorney. However, on January 1, 2015, after twenty years of dormancy, the California State Legislature resurrected the courts’ statutory authority to impose sanctions for “bad-faith actions or tactics that are frivolous or solely intended to cause unnecessary delay.” Cal. Code Civ. Proc. § 128.5(a).
The provision allows a court to order a party, the party’s attorney, or both, to pay reasonable expenses, including attorney fees, incurred by another party as a result of bad faith or frivolous “actions or tactics,” including but not limited to “making or opposing motions or the filing and service of a complaint, cross-complaint, answer or other responsive pleading.” Cal. Code Civ. Proc. § 128.5(b)(1).
Certainly the reinstitution of a broad sanctioning power alone will not bring an end to all frivolous litigation or to improper tactics that may occur in connection therewith. However, this statute does provide aggrieved parties with an avenue for confronting the most egregious and meritless conduct so that they are not forced to defend against such conduct without recourse. Furthermore, those who pursue frivolous litigation and engage in bad faith tactics again face potential liability for the unnecessary expenses they cause.
But there is a catch. When the Legislature reinstated the broader sanctioning power, it did so only temporarily: the statute includes a three-year sunset provision meaning that, unless the Legislature takes action to renew the law, it will expire on January 1, 2018, before it even has the chance to fully achieve its intended purpose. In fact, even though the statute’s life is nearing an end, it still is not commonly employed because the statute created many new questions for both practitioners and courts deal with. As is common with such changes in the law, it often takes several years before the changes are widely understood and any uncertainty surrounding their application is eliminated. Indeed, it took nearly a year-and-a-half for the courts to determine what prerequisite actions were required before a motion under the statute could even be brought.
In the end, this statute is a promising development for California business owners, who have been desperately awaiting some form of deterrent against the rising tide of frivolous lawsuits and bad faith litigation tactics. Hopefully, the Legislature will act to renew the law so that it can continue to develop into a shield against such tactics and reduce at least one cost of doing business in the state.