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.