Safe-harbor rule requires strict compliance

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A postjudgment sanction for filing a frivolous lawsuit is not allowed under the new version of Rule 802.05, because the 21-day safe harbor provision must be satisfied, the Wisconsin Court of Appeals held on Nov. 29.

Ten Mile Investments, LLC sued Cynthia Siciliano seeking specific performance for her refusal to close on a real estate transaction. Siciliano counterclaimed, also seeking specific performance.

Siciliano prevailed on the merits and moved for sanctions under the statute, for filing a frivolous claim. Jackson County Circuit Court Judge John A. Damon found the suit frivolous and awarded a sanction of more than $17,000.

Both parties appealed, and the court of appeals reversed, in a decision by Judge Paul B. Higginbotham.

The court first held that the new rule applies to the case, even though the lawsuit was filed before it became effective.

Under the safe-harbor provision of the new rule, a party seeking sanctions must first serve the motion on the opposing party, who then has 21 days to withdraw or appropriate correct the claimed violation. The party seeking sanctions cannot move the court for them until that time period has expired.

In Trinity Petroleum, Inc. v. Scott Oil Co., 2007 WI 88, 735 N.W.2d 1, the Supreme Court held that retroactivity of the statute must be decided on a case-by-case basis, and may not be retroactive if such an application would impose an unreasonable burden on the party seeking sanctions.

In both Trinity Petroleum and the case at bar, the suit was filed before ht rule became effective. However, in Trinity Petroleum, the circuit court decided the case only five days after the effective date.

In contrast, 11 weeks passed between the effective date and the trial date in Sic-iliano’s case. Finding that she had ample opportunity to comply with the new rule’s procedural requirements, the court concluded that retroactive application of the rule would not impose an unreasonable burden on her.

The court then held that a postjudgment motion for sanctions cannot comply with the safe-harbor provision.

When Trinity Petroleum was before the court of appeals, the court held that post- judgment motions for sanctions must be denied. Trinity Petroleum, Inc. v. Scott Oil Co., 2006 WI App 219, 296 Wis.2d 666, 724 N.W.2d 259.

However, when the Supreme Court heard the case and reversed, it did not express any opinion on whether a postjudgment sanction motion complies with the safe-harbor provision; thus, the court of appeals concluded its holding on that issue — that a postjudment motion does not — retains its precedential authority.

The court then rejected Sicilian’s argument that she substantially complied with the substance of the safe-harbor provision by putting Ten Mile on notice that she considered its position to be frivolous.

Citing its holding in Trinity Petroleum, the court found that the rule cannot be satisfied by substantial compliance.

Accordingly the court reversed the award of sanctions.

Case Analysis:

The decision resolves what was an unsettled issue in Wisconsin — whether post judgment sanctions for violating Rule 802.05 are allowed under the safe-harbor provisions of the rule.

In two unpublished decisions, the court of appeals has given conflicting answers. In Davis v. Roehl, 298 Wis.2d, 726 N.W.2d 357 (Table), 2006 WL 3299991 (unpublished)(Wis.App. Nov. 15, 2006), the court held they were not.

However, in In re Guardianship of Eleanor S., 739 N.W.2d 490, fn. 1 (Table), 2997 WL 2363002 (unpublished)(Wis. App., Aug. 21, 2007), the court suggested otherwise: “The safe-harbor provisions in the amended sec. 802.05 are not at issue in this matter as James S. received numerous warnings that his conduct was sanctionable throughout the course of the proceedings.”

It is also noteworthy that, although Rule 802.05 was based on Rule 11 of the Federal Rules of Civil Procedure, the court’s decision may conflict with how the Seventh Circuit has interpreted that rule with respect to the issue of substantial compliance.

In Methode Electronics, Inc., v. Adam Technologies, Inc., 371 F.3d 923 (7th Cir. 2004), the court upheld an award of sanctions, despite the fact that the defendant did not technically comply with the safe-harbor provision.

In Methode Electronics, the court recognized several reasons for imposing sanctions: substantial compliance with Rule 11; impossibility of complying with the Rule; and waiver of the right to adherence to the 21-day safe harbor. Id., at 927.

The defendant in Methode Electronics sent the plaintiff what the court called a “heads-up” letter, stating that venue was improper, three days after the complaint was filed. Two days later, a hearing was held that the plaintiff scheduled, and venue was held improper by the district court. The defendants then orally moved for sanctions, which the court awarded,

and which the Seventh Circuit affirmed. Id., at 924-925.

Methode Electronics is obviously distinguishable from the case at bar — the whole case lasted less than 21 days, while, in the case at bar, the defendant could have complied with the safe-harbor provision.

Nevertheless, the Methode Electronics case is an example of a case in which the court’s apparent hard-and-fast rule — post judgment motions for sanctions must be denied — should not apply.

The Seventh Circuit wrote, “As in many cases involving a request for preliminary relief, blind adherence to the procedures in Rule 11 is not possible. Events often move too fast to allow strict compliance with the rule.” Id., at 927.

As noted, the Seventh Circuit found three separate reasons to award sanctions despite noncompliance: the defendant alerted the plaintiff that venue was improper; the plaintiff scheduled a hearing that made compliance chronologically impossible; and the plaintiff intentionally deceived the court. Id., at 928.

In future cases, however, even when all three factors are not present, but only one factor, a case could be made that strict compliance with the rule can be excused, rather than blindly adhering to the procedures in the Rule.

In fact, the court of appeals in the case at bar suggests such relief may be possible in a footnote. The court declined to address the issue because it was not adequately briefed, but it noted that the Rule permits a court to impose sanctions on its own initiative, without complying with the safe-harbor provision. The Seventh Circuit opinion in Methode Electronics provides a good example of when a court would be within its authority in doing so.