Opinion ID: 783938
Heading Depth: 3
Heading Rank: 2

Heading: Legal claims and defenses

Text: 92 Merely incorrect legal statements are not sanctionable under Rule 11(b)(2). Rather sanctionable legal contentions must not be warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law. Fed.R.Civ.P. 11(b)(2). 93 The district court identified four arguments made by Cello that it believed had no reasonable basis in existing law or fact. Storey, 182 F.Supp.2d at 367-69. It concluded that these assertions could not represent nonfrivolous arguments for the establishment of new law because the legal principles at issue are well settled and the facts simply do not support Cello's legal contentions. Id. at 367. We hold that the district court abused its discretion in labeling Cello's arguments unwarranted. Although all of Cello's arguments may not ultimately have prevailed, none are patently contrary to existing law, especially as it existed at the time the papers were signed, see MacDraw, Inc. v. CIT Group Equip. Fin., Inc., 73 F.3d 1253, 1260 (2d Cir.1996) (examining the reasonableness of a statement under Rule 11 at the time that it was submitted), nor are they so lacking in merit as to amount to a frivolous argument for the extension of existing law. 94
95 As mentioned above, 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. Notwithstanding that this argument was not in Cello's answer, and that Cello therefore did not receive proper notice concerning potential sanctions based on this argument, this argument is closely related to other arguments that have been actively litigated in the federal courts over the last two years. Cello argued that because the UDRP proceedings were akin to traditional arbitration proceedings, Storey's decision to file a response in the proceeding, rather than immediately challenge the authority of the arbitration panel, affected Storey's right to argue his case in the federal courts. Cf. Halley Optical Corp., 752 F.Supp. at 639 (Under 9 U.S.C. § 4, the proper procedure for a party to challenge whether it is subject to an arbitration agreement is to move the district court for a stay of arbitration.) (citations omitted). Since Cello filed its answer, a district court issued an opinion addressing at length whether the Federal Arbitration Act (FAA) restrictions on judicial review of arbitration awards were applicable to UDRP Paragraph 4 proceedings, see Parisi, 139 F.Supp.2d at 749-53, and the Third Circuit reversed a district court which had held that the FAA did apply to judicial review of UDRP proceedings, see Dluhos, 321 F.3d at 369-73. Although we concluded above that Cello's arguments do not comport with the UDRP's textual provision for an independent resolution of the dispute, the legal principles structuring review of a UDRP panel decision, and their relationship to the law of binding arbitration, were sufficiently unsettled at the time that Cello filed its answer so as to render the district court's decision to sanction the argument an abuse of discretion. This conclusion is further supported by district court's misunderstanding of the relationship between a UDRP proceeding and a registrant's cause of action under § 1114(2)(D)(v) insofar as it held that res judicata barred Cello from submitting its complaint to a UDRP panel. 96
97 The district court sanctioned Cello for arguing in its answer that the UDRP panel decision was final and binding. The same argument just discussed applies here: Cello was arguing that some principles of arbitration law applied to the court's review of a UDRP decision, and such arguments were, especially at the time the answer was filed, not unwarranted given the infancy of the UDRP system and the lack of clear, binding precedent on the issue. 98
99 The district court sanctioned Cello because it believed that there was no good faith basis for the answer's assertion of an affirmative defense based on laches and contractual limitations of actions. See Storey, 182 F.Supp.2d at 367-68. As discussed above, the sparsity of cases interpreting the UDRP at the time Cello filed its answer makes it difficult to label the simple reservation of an affirmative defense as frivolous. 100 Additionally, the district court may have misunderstood the complexity of Cello's argument. The district court characterizes Cello's laches argument as unreasonable because documentation from NSI clearly shows that the UDRP Paragraph 4(k) deadline was January 11, 2001, and Storey filed the Instant Action before the deadline on January 10, 2001. Cello's argument, however, was not just that Storey failed to file in time but that Storey failed to do so in a proper forum. The argument that failing to comply with the UDRP Paragraph 4(k) process affected Storey's rights in the Instant Action is weak but it is not objectively unreasonable, again, especially given the lack of judicial interpretation of the UDRP.
101 The district court sanctioned Cello for asserting lack of personal jurisdiction and improper venue as defenses. Because these arguments were not properly raised on appeal, we did not reach them in our review of Cello's jurisdictional objections, but we believe that they are not frivolous. The district court premised its belief that no reasonable basis existed for these defenses on Cello's contacts with New York as a plaintiff in the First Action and on the facts underlying the first action. See Storey, 182 F.Supp.2d at 368. Whether a litigant's involvement as a plaintiff in a prior action, or the facts introduced in a prior action, can serve as the basis of personal jurisdiction over that litigant when he is a defendant in a subsequent action, in which the plaintiff's case relies on the res judicata effect of the prior action, is a novel issue. We need not resolve it at this time, however, because it is enough for our purposes here to say that the argument is at least non-frivolous.