Opinion ID: 783938
Heading Depth: 3
Heading Rank: 1

Heading: Factual contentions and denials

Text: 73 With regard to factual contentions, sanctions may not be imposed unless a particular allegation is utterly lacking in support. O'Brien v. Alexander, 101 F.3d 1479, 1489 (2d Cir.1996) (interpreting the 1993 amendment to Rule 11(b)). 74 The district court specifically identified eight factual contentions or denials that lacked evidentiary support or that were not warranted on the evidence. Here, we consider them in groups, because, in some instances, the isolation of fragmentary contentions creates the appearance of an unwarranted contention. Cf. Schlaifer Nance & Co., 194 F.3d at 337 (reviewing sanctions imposed under the court's inherent power and under 28 U.S.C. § 1927 and noting that the facts in their totality belie the conclusion that [plaintiff's] claim lacked a colorable basis). Although some of the identified factual contentions are more suspect than others, we hold that the district court abused its discretion in imposing sanctions based on these contentions because they are not utterly lacking in support. O'Brien, 101 F.3d at 1489. 75
76 The district court sanctioned Cello for its representation that it filed the arbitration proceedings because Storey engaged in a `new act of cybersquatting.' Storey, 182 F.Supp.2d at 366. Although, as discussed above, the legal contention in this statement has more validity than the district court recognized, the district court was understandably troubled by the factual contention in this statement. In a letter of April 13, 2001 submitted to the district court, counsel for Cello stated that the September 25 Letter was the basis for the arbitration, yet neither Cello's answer nor Cello's UDRP complaint mentions it. In its motion for summary judgment, Cello's counsel likewise contended that Cello commence[d] its arbitration predicated upon the September 25 Letter. 19 (Def.'s Mem. Supp. Summ. J. at 13) (emphasis added). These representations communicate more than the subjective reason for the commencement of the arbitration, as Cello now attempts to construe the statements on appeal; they incorrectly state that the September 25 Letter was a relevant fact in the UDRP Administrative Proceeding. 77 Although these statements are highly suspect, they cannot serve as the basis of the sanctions imposed by the district court: Rule 11 contains a notice requirement, and Cello did not receive proper notice of the impending sanctions with regard to these statements. The text of Rule 11 requires that a party's motion initiating the sanctions process shall describe the specific conduct alleged to violate subdivision (b). Fed.R.Civ.P. 11(c)(1)(A). Alluding to the due process rights of any person potentially subject to any kind of sanctions, this Circuit has explained that: 78 At a minimum, the notice requirement mandates that the subject of a [Rule 11] sanctions motion be informed of: ... [ inter alia ] the specific conduct or omission for which the sanctions are being considered so that the subject of the sanctions motion can prepare a defense. Indeed, only conduct explicitly referred to in the instrument providing notice is sanctionable. 79 Schlaifer Nance & Co., 194 F.3d at 334 (internal citation omitted). This notice requirement permits the subjects of sanctions motions to confront their accuser and rebut the charges leveled against them in a pointed fashion. Moreover, when Rule 11 sanctions are initiated by the motion of a party, it gives the subject the opportunity to withdraw the potentially offending statements before the sanctions motion is officially filed. See Fed.R.Civ.P. Rule 11(c)(1)(A) (providing a safe harbor by requiring the motion for sanctions to be served twenty-one days before it can be filed with the court). 80 Storey's Memorandum in Support of Plaintiff's Motion for Sanctions, the instrument providing notice here, references only a frivolous answer denying the material allegations of the complaint as the predicate for the imposition of sanctions under Rule 11. Storey's sanctions motion makes no direct reference to the September 25 Letter, and, as the district court itself noted, there is no mention of the September 25 Letter in Cello's answer. 20 See Storey, 182 F.Supp.2d at 359. Accordingly, we conclude that Cello did not receive the requisite notice that sanctions might be imposed because of its contention that the September 25 Letter was the factual predicate of the UDRP Administrative Proceeding.
81 The district court also sanctioned Cello for its representation in its motion for summary judgment that the First Action addressed only the prior use of cello.com; the district court stated that this representation was false because Cello sought prospective relief. Storey, 182 F.Supp.2d at 367. Again, however, because this contention was not made in the answer, Rule 11's notice requirements make it ineligible as a basis for sanctions. 82
83 The district court doubly sanctioned Cello for the following contention in its answer concerning the August 15, 2000 order dismissing the First Action: The Order entered by the Court is a matter of public record. The Order was entered pursuant to a settlement agreement, not as a determination on the merits and was without prejudice to the rights of the Defendants herein to assert ownership of the disputed domain name. Storey, 182 F.Supp.2d at 366-67. 84 First, the district court noted that Cello itself argued the opposite when, in its motion for summary judgment, it stated that the parties never agreed upon the terms of a settlement. Id. at 366. On the same page of the summary judgment motion, however, Cello qualified this statement with the following: The only agreement, therefore, was to dismiss the First Action which addressed only the prior use of the name. (Def. Mem. Supp. Summ. J. at 3). Furthermore, in the Virginia court proceedings, the parties concurred that at the end of the First Action they had reached an agreement that [the action] was not going to be pursued any further at that point. Although Cello had sufficient notice to be sanctioned for this statement, its contention that the First Action was dismissed pursuant to an agreement, as tenuous as it is, is not utterly lacking in support. O'Brien, 101 F.3d at 1489. 85 Second, the district court considered that the contention was factually false because the text of the August 15 order contains the words with prejudice and the answer states that the same order was without prejudice. Here, the district court confused a factual argument with a legal argument. Cello admitted the textual contents of the order as a matter of public record. As the discussion of the merits above demonstrates, Cello's argument that the judgment in the First Action was without prejudice to the rights of the Defendants herein to assert ownership of the disputed domain name is, in a limited fashion, legally accurate. Cello's statement is nothing more than a reformulation of the principle that res judicata does not apply to bar the entirety of the current action. Accordingly, this statement is not sanctionable. 86
87 The district court held that Cello's denial in its answer of Storey's assertion that Storey objected to the jurisdiction of the arbitral panel was unwarranted on the evidence because Storey's response to Cello's UDRP complaint raised the res judicata defense as its first argument. Storey, 182 F.Supp.2d at 366. Cello, however, was again making a legal argument, rather than a factual argument concerning the contents of Storey's response papers in the UDRP Administrative Proceeding. Cello was arguing, as it does on appeal in its waiver argument, that Storey's decision to submit papers to the UDRP panel must affect the Instant Action because Storey chose to participate in the proceedings rather than to contest the legal authority of the panel to render a decision. Furthermore, the next sentence in Cello's answer admits precisely the fact the district court believed that Cello was falsely denying: It is admitted that the [Storey] relied upon the August 15, 2000 Order as a part of his defense in the UDRP Administrative Proceeding.
88 The district court doubly sanctioned the following denial in Cello's answer: It is denied that the arbitral decision was erroneous. It is denied that an actual case or controversy regarding ownership of the domain name `cello.com' exists between the parties because the arbitral award is final and binding. The district court concluded that Cello's denial of an actual case or controversy was not warranted by the evidence because Cello itself brought the action in Virginia, indicating it believed that a dispute between the parties existed; the district court also found that Cello's contention that the arbitration award was final and binding was factually false. Storey, 182 F.Supp.2d at 366-67. 89 The sanctioned statement is actually a single, non-frivolous legal argument. The contention that there is no actual case or controversy between the parties does not necessarily imply that there is no dispute between two parties. Rather, the denial in Cello's answer that there was an actual case or controversy regarding the ownership of the domain name `cello.com' can be read as a short-hand notation for the argument that the district court lacked jurisdiction to review or supersede the UDRP panel's decision on the merits. We read Cello's characterization of the UDRP panel decision as final and binding as making the same legal point. 90
91 Finally, the district court sanctioned Cello for its assertion that Storey `voluntarily participated' in the arbitration proceedings to such an extent that he should be deemed to have waived his res judicata defense. Storey, 182 F.Supp.2d at 367. The district court does not identify the particular pleading or other paper from which it culled this assertion, but we find no mention of Storey's voluntary participation in the UDRP proceedings in Cello's answer. Accordingly, to the extent Cello made this representation, we hold that it had insufficient notice as to sanctions concerning this contention. Furthermore, to the extent that this statement is a factual assertion, Storey participated in the UDRP proceedings by submitting an answer, and no allegations of coercion have been made.