Discovery sanctions are a fact of life in the courts and becoming more so in high stakes litigation. They can arise from judgment calls that are proved wrong by a court ruling, as in the case of HM Electronics, Inc. v. R.F. Technologies, Inc., 2016 WL 1267385 (S.D. Cal. March 15, 2016). There, the question arose regarding whether parties could compromise sanctions awarded by a magistrate judge in their settlement agreement in advance of the District Court decision to affirm that award.

Defendants (the client and its attorney) objected to the sanction award on the grounds that the parties’ settlement of their dispute, including the sanctions award, mooted the court’s jurisdiction to entertain the motion. The District Court agreed and vacated the sanctions award as moot. How did this happen?

The defendants were sanctioned for discovery misconduct under Rule 37 (for violation of prior discovery orders of the court) and under Rule26(g)(3) (raised by the court for improper certifications of discovery responses). This misconduct caused the plaintiff to incur great expense, and an award of compensatory sanctions was made to compensate plaintiff for the fees and costs involved in collecting discovery from defendants.

Two days before the hearing on discovery misconduct, the parties settled and dismissed the case, notifying the magistrate judge to vacate the motions that were scheduled to be heard. The hearing went forward partly because the magistrate judge held that the settlement could not affect the court’s right to pursue sanctions for the Rule 26 violations, which outlived the settlement. The court proceeded with the scheduled hearing, which resulted in a finding that the violations justified a compensatory sanctions award.

Defendants filed an objection with the District Court judge on several grounds, including those that the settlement agreement mooted the issue of sanctions. The District Court ruled that, as an Article III court with limited authority to hear only actual cases or controversies, mootness was a threshold jurisdictional objection that could be raised at any time, which the court had an independent obligation to address. The District Court held that settlement removed the court’s jurisdiction to rule and therefore the mootness objection was dispositive.

Parties to litigation may bargain away sanctions which are designed to compensate the parties themselves. Generally, compensatory sanctions are paid to the complaining party and are designed to compensate that party for losses sustained as a result of the contemnor’s misconduct; punitive sanctions, on the other hand, are made payable to the court and are aimed to vindicate the authority of the court by punishing the offending party.

The magistrate judge’s order labeled the award as compensatory sanctions based upon the damages sustained by the plaintiff resulting from defendants’ discovery violations and which the parties settled away. But how could that settlement affect the court’s inherent power to sanction for violations of its rules? The answer is that because the court characterized the sanctions as compensatory, the court was satisfied that the offending party was properly sanctioned without the court separately enforcing its inherent right to sanction. Moreover, the settlement agreement specifically included “ any and all costs and fees,” which the District Court found also meant those costs and fees associated with an award of compensatory sanctions. This conclusion was bolstered by comments made at the hearing by plaintiff’s counsel.

Mootness barred the court from taking any further action, and even if it awarded sanctions, the parties had already bargained them away and dismissed the action. Thus, such an award would not be collectible. The court simply saw no possibility for an appropriate remedy after dismissal as the parties had already adjusted their dispute and addressed it in their settlement; there was no longer a “live” issue for the court to rule upon. In the end, it was the type of sanctions that controlled, not the court’s inherent power to sanction. Nothing in the Federal Rules required the court to act when a party had bargained away its right to sanctions and any additional award by the court was outweighed by the strong public policy favoring settlement of litigation.

The lesson of this case is that the sanctioned party with a strong incentive to settle to avoid sanctions should include wording in a settlement agreement to avoid sanctions. It is also important to guide any potential sanctions award toward a finding that it is compensatory and therefore adequately address the wrong committed in discovery.