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Dueling Sanction Motions Draw Denials: FS2 Capital Partners, LLC vs. Church
Posted on Categories Business & Employment, Court DecisionsTags , ,

By David C. Franceski, Jr.

Late but substantial compliance with court-ordered expedited discovery in a restrictive covenant action does not warrant F.R.C.P. 37 sanctions, and such action, brought after reasonable investigation and notice to defendant’s new employer, is neither so frivolous nor harassing as to warrant Rule 11 sanctions either.

FS2 Capital Partners, LLC vs. Church, No. 14-4933 (E.D. Pa., 1/16/15).

The Case

Plaintiff, a broker dealer operating in the independent broker channel and specializing in alternative investments for non-institutional investors through a creative structure known as a non-traded business development company (“BDC”), sued to enforce defendant’s ex-employee’s Confidentiality, IP Ownership and Non-Solicitation Agreement. Following defendant’s resignation from plaintiff, defendant had joined an alleged competitor with non-traded products in the independent channel as Regional Sales Director.

Dueling Motions

Faced with separate motions for sanctions – plaintiff’s under Rule 37 for defendant’s alleged failure to respond in a timely fashion to court-ordered expedited discovery, and defendant’s requesting Rule 11 sanctions for filing a frivolous and harassing action – the Court denies both. Before doing so, the Court first addresses whether it retains jurisdiction to decide the motions while the matter is on appeal from the trial court’s denial of defendant’s motion to compel arbitration, holding that it does, because the sanctions issues are collateral to the merits of the case.

The Rule 37 Motion

Addressing first plaintiff’s Rule 37 sanctions motion to designate the facts as established and plaintiff as prevailing party, the Court applies a six-part test and concludes that, absent real prejudice, bad faith or dilatoriness and given defendant’s subsequent compliance with the expedited discovery, neither sanctions nor contempt are warranted. This is especially so where the requested sanctions are tantamount to a default judgment for plaintiff.

The Rule 11 Motion

Moving on to defendant’s Rule 11 motion, the determinant factor is reasonableness, “a forgiving standard with sanctions being warranted only in ‘the exceptional circumstance where a claim or motion is patently unmeritorious or frivolous.’” Given plaintiff’s investigation and notice to defendant and his employer prior to filing suit, and the admission by press release that defendant had affiliated with an independent channel competitor in the non-traded product business, the Court concludes plaintiff’s breach of contract claim was filed with a reasonable belief and that it was well-grounded in fact.  Therefore Rule 11 sanctions are not warranted.

(D. Franceski: Given the Court’s acknowledgment that the requested Rule 37 sanctions were tantamount to an entry of a default judgment in plaintiff’s favor, one must wonder whether the answer to the jurisdictional question would have been the same if the Court were inclined to grant plaintiff’s motion.)

(SLC Ref. No. 2015-11-04)

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