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United States District Court, E.D. Missouri, Eastern Division

May 29, 2019

ERIC SCHMITT, [1] Defendant.



         This matter is before the Court on Defendant Missouri Attorney General Eric Schmitt's “Motion for Criminal Contempt and Civil Sanctions Against, LLC” (hereinafter, “motion for sanctions”) [ECF No. 73]. Defendant seeks sanctions against Plaintiff, LLC (“Backpage”) and its former counsel, Davis Wright Tremaine LLP (“DWT”). Defendant also asks (in his reply brief) for permission to engage in discovery related to DWT. [ECF No. 96 at 20-22]. For the reasons that follow, the Court denies Defendant's motion for sanctions and Defendant's request for discovery.

         I. Factual and Procedural Background

         In May 2017, Defendant issued civil investigative demands (“CIDs”) to Backpage, Backpage's CEO Carl Ferrer, and two other corporate officers for the purpose of investigating possible violations of the Missouri Merchandising Practices Act (“MMPA”), Mo. Rev. Stat. §§ 407.010, et seq. [ECF No. 1] The objective of the CIDs was to investigate whether Backpage used “deception, fraud, false promise, misrepresentation, unfair practice, or the concealment, suppression, or omission of material fact in connection with the sale or advertisement” of “commercial sexual conduct, other sexually oriented services, massage services, dating services and other merchandise.” [ECF No. 21-2 at 1]

         In June 2017, Defendant filed in the Circuit Court of St. Charles County a “Petition for Order to Enforce” the CID against Backpage. [ECF No. 21-5] During the first two weeks of the next month, Backpage filed in this Court a “complaint for injunctive and declaratory relief, ” asking the Court to “enjoin and declare unlawful” Defendant's efforts to investigate and prosecute it under the MMPA. [ECF No. 1] In the complaint, Backpage argued that Section 230 of the Communications Decency Act (“CDA”), 47 U.S.C. § 230, barred state law claims against internet websites and publishers arising from content created by a third party. [Id.] Backpage also claimed that Defendant's investigation and the CID violated: the rights of Backpage and its users under the First and Fourteenth Amendments; Backpage's rights under the Fourth, Fifth, and Fourteenth Amendments; and the MMPA. [Id.]

         Approximately two weeks later, on July 27, 2017, Backpage filed a motion for preliminary injunction based on its purported immunity under the CDA and its constitutional rights under the First, Fourth, and Fifth Amendments. [ECF No. 11] In support, Backpage presented declarations, including one from Backpage General Counsel Elizabeth McDougall, stating under penalty of perjury that Backpage had no role in creating or editing advertisements and took active measures to prevent any illicit activity on its website. [ECF No. 13]

         On August 1, 2017, Defendant moved to dismiss Backpage's complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) [ECF No. 21], and filed within two weeks his opposition to Backpage's motion for preliminary injunction [ECF No. 26]. In the motion to dismiss, Defendant argued, among other things, that the Court should abstain and dismiss the case pursuant to Younger v. Harris, 401 U.S. 37 (1971). Backpage filed its brief in opposition to Defendant's motion to dismiss by the end of August [ECF No. 34], and its reply in support of its motion for preliminary injunction on September 7, 2017 [ECF No. 39]. Defendant filed a reply supporting his motion to dismiss on September 13, 2017 [ECF No. 42]. At the end of September 2017, the Court heard oral argument on Defendant's motion to dismiss and held a Rule 16 conference with counsel for the parties. [See ECF Nos. 24, 31, and 46]

         Approximately one month later, on October 30, 2017, Backpage filed a second motion for preliminary injunction challenging newly enacted MMPA regulations [ECF No. 48] and a motion for leave to file a first amended complaint addressing the “validity and enforcement of the new regulations” [ECF No. 51 at 1]. Defendant filed his opposition to those two motions on November 27, 2017 [ECF Nos. 56 and 58].

         On November 28, 2017, this Court abstained on Younger grounds, granting Defendant's motion to dismiss on the basis of Younger, and denied as moot Backpage's first and second motions for preliminary injunction, as well as Backpage's motion to file a first amended complaint. [ECF No. 59] On December 27, 2017, Backpage filed its notice of appeal of this Court's dismissal of the complaint to the Eighth Circuit.[2] [ECF No. 60]

         In early April 2018, Ferrer signed on behalf of Backpage a plea agreement in the United States District Court for the District of Arizona (“federal plea agreement”) and a plea agreement on behalf of Backpage in a Texas state court. [ECF Nos. 73-1, 73-2; 87-1, 87-2] In the Texas state court case, Backpage pleaded guilty to “trafficking of persons” and “engaging in organized criminal activity.” [ECF No. 73-2] Backpage pleaded guilty to the Class C felony of “money laundering conspiracy” under the federal plea agreement.

         The federal plea agreement states the parties intend that Backpage “will cease to exist or operate” upon entry of the guilty plea; and that Backpage “agrees to pay full restitution” of no more than $500 million “to all victims directly or proximately harmed” by Backpage's conduct. [ECF No. 73-1 at 2-4] The federal court also entered, upon agreement of the parties, an order forfeiting Backpage's assets. [ECF No. 73-2] Backpage's counsel in this lawsuit did not represent Backpage in either the Texas state court criminal case or the Arizona federal court criminal case that resulted in Backpage's guilty pleas and the forfeiture of its assets.[3] [ECF No. 90 at 8 n.8]

         In May 2018, Backpage's counsel in this lawsuit, DWT and local counsel, Thompson Coburn LLP (“Thompson Coburn”), moved to withdraw from this case “based on professional considerations, and because of recent events and communications from Carl Ferrer….” [ECF No. 68]. This Court granted DWT and Thompson Coburn leave to withdraw as Backpage's counsel in the instant case. [ECF No. 69] The Eighth Circuit also granted Backpage's counsel leave to withdraw from the appellate proceeding, and dismissed Backpage's appeal for failure to prosecute. [ECF Nos. 70, 73-4]

         Less than a week after dismissal of Backpage's appeal, Defendant filed his motion for sanctions asking this Court to order: (1) Backpage to show cause “why it should not be held in criminal contempt” and (2) Backpage and its counsel, DWT, [4] to show cause why the Court should not impose civil sanctions against them. [ECF No. 73 at 24]. For civil sanctions, Defendants asks the Court to require Backpage and DWT to pay Defendant's fees and costs, as well as compensation to the Court “for its expenses.” [ECF No. 73 at 24-25]. For criminal contempt sanctions, Defendant asks the Court to require Backpage to pay unspecified amounts as a fine and as “a fee into a restitution fund to be set up” for Backpage's Missouri victims.[5] [ECF No. 73 at 13 and 24; ECF No. 96 at 7 n.2] According to Defendant, sanctions “are warranted, ” under either the Court's inherent power with respect to Backpage and DWT or under 28 U.S.C. § 1927 with respect to DWT only, “because the . . . criminal plea agreements entered by Backpage [through] its CEO reveal that this lawsuit against [Backpage] was based on false statements and was calculated to mislead this Court and impede a lawful investigation.” [Id. at 1]

         If the Court declines to issue sanctions pursuant to its inherent power or 28 U.S.C. § 1927, Defendant argues in the alternative that the Court “should grant leave to expedite a motion for Rule 11 sanctions.” [Id. at 23] Specifically, Defendant asks the Court either to “decrease the safe-harbor period [in Rule 11(c)(2)] from 21 days to zero days, and . . . deem this motion [for sanctions] to be a timely motion for sanctions under Rule 11” or to “consider Rule 11 sanctions sua sponte without any delay” under Rule 11(c)(3). [Id. at 23-24]

         Backpage opposes Defendant's motion for sanctions on the grounds that “the relief requested…would conflict with Backpage's cooperation requirements with federal authorities who have shut down, LLC and seized and forfeited its assets.” [ECF No. 87 at 1] Additionally, Backpage asserts that, by requesting “criminal sanctions in the form of a victim's restitution fund, ” Defendant essentially seeks “a judgment on the merits of a case that has not been filed, where no discovery has been conducted, where no evidence has been heard, and without any due process….” [Id. at 2 (emphasis in original)] Backpage further argues that “criminal sanctions [are] inappropriate because Defendant has not shown that a lesser sanction of civil sanctions would not be equally effective as criminal sanctions.” [Id. at 3]

         DWT filed a memorandum in opposition to Defendant's motion for sanctions as a non-party respondent.[6] [ECF No. 90] DWT asserts that it did not act in bad faith or “vexatiously and unreasonably” because Backpage's complaint and motions for preliminary injunction were well-grounded in established First Amendment and statutory law. [Id.] DWT further contends that neither “Mr. Ferrer's post h[o]c criminal plea deals” on behalf of Backpage nor the “red flags” identified by Defendant establish DWT's “knowledge that [Backpage officials'] . . . sworn statements [made prior to and during the pendency of this lawsuit] were all false.” [Id. at 13] Finally, DWT argues that Rule 11's twenty-one-day “safe harbor provision is mandatory” and “any Rule 11 motion would be untimely because the case is over.” [Id. at 23]

         II. Legal Standard

         A federal court has discretion to impose sanctions pursuant to its inherent authority, 28 U.S.C. § 1927, or Rule 11. Duranseau v. Portfolio Recovery Assocs., LLC, 644 Fed.Appx. 702, 706 (8th Cir. 2016) (unpublished). However, “[t]he imposition of sanctions is a serious matter and should be approached with circumspection.” O'Connell v. Champion Int'l Corp., 812 F.2d 393, 395 (8th Cir. 1987).

         III. Discussion

         Defendant asks the Court to sanction DWT pursuant to the Court's inherent authority and 28 U.S.C. § 1927. Defendant also argues that the Court should exercise its inherent power to sanction and hold Backpage in criminal contempt “because Backpage repeatedly lied to this Court.” [ECF No. 73 at 12] Defendant contends, in the alternative, that the Court “should grant leave to expedite a motion for Rule 11 sanctions” against both Backpage and DWT. [Id. at 23] Backpage and DWT counter that the imposition of sanctions on either Backpage or its counsel is improper and unwarranted.

         A. Sanctions against DWT

         Defendant moves the Court to sanction DWT pursuant to the Court's inherent authority and 28 U.S.C. § 1927 because DWT “falsely asserted on behalf of Backpage that Backpage was not directly involved in any human trafficking conduct and that it engaged only in lawful activity.” [ECF No. 73 at 17] DWT counters that sanctions are not appropriate because DWT “had colorable factual and legal arguments to support the claims” that Defendant's investigation violated the CDA and First Amendment. [ECF No. 90 at 14]

         A federal court has the inherent power “to supervise and ‘discipline attorneys who appear before it' and discretion ‘to fashion an appropriate sanction for conduct which abuses the judicial process,' including assessing attorney fees….” Vallejo v. Amgen, Inc., 903 F.3d 733, 749 (8th Cir. 2018) (quoting Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991)). The assessment of an adversary's attorney's fees as a sanction under a court's inherent power requires that the court find the sanctioned person demonstrated bad faith. Willhite v. Collins, 459 F.3d 866, 870 (8th Cir. 2006) (affirming the district court's sua sponte imposition of sanctions against an attorney while remanding for further consideration of the sanctions imposed) (citing Roadway Express, Inc. v. Piper, 447 U.S. 752, 766-67 (1980)). Therefore, “a finding of ‘bad faith' is specifically required in order to assess attorneys' fees pursuant to the court's inherent authority” to impose sanctions. Ideal Instruments, Inc. v. Rivard Instruments, Inc., 243 F.R.D. 322, 335 (N.D. Iowa 2007) (citing Chambers, 501 U.S. at 45-46).

         Additionally, Section 1927 provides that, upon concluding an attorney “so multiplie[d] the proceedings in any case unreasonably and vexatiously[, a court may] require[ the attorney] to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.” 28 U.S.C. § 1927. Sanctions under Section 1927 are appropriate when an attorney's conduct, “viewed objectively, manifests either intentional or reckless disregard of the attorney's duties to the court.” Wagner v. Gallup, Inc., 788 F.3d 877, 891 (8th Cir. 2015) (internal quotation marks omitted) (quoting Clark v. UPS, Inc., 460 F.3d 1004, 1011 (8th Cir. 2006). “Because section 1927 is penal in nature, it should be strictly construed so that it does not ‘dampen the legitimate zeal of an attorney in representing his client.'” Lee v. L.B. Sales, Inc., 177 F.3d 714, 718 (8th Cir. 1999) (quoting Travelers Ins. Co. v. St. Jude Hosp. of Kenner, La., Inc., 38 F.3d 1414, 1416 (5th Cir. 1994)).

         In his motion, Defendant argues that DWT knew or should have known when it filed the complaint, motions for preliminary injunction, and appeal that Backpage was engaging in conduct not protected by the CDA and United States Constitution. [ECF No. 73 at 17] Defendant maintains that DWT knew or should have known that Backpage was involved in human trafficking because there were “numerous red flags that would have cautioned any reasonable attorney to engage in a thorough investigation before filing its vexatious lawsuit.” [Id.] Examples of these “red flags, ” Defendant asserts, include: Ferrer's arrest on sex trafficking charges in October 2016; Ferrer's indictment two months later for misrepresenting Backpage to credit card companies; a report by a U.S. Senate permanent subcommittee released in January 2017 detailing Backpage's human trafficking activity; and documents published by the Washington Post, which revealed that Backpage edited and/or created ads for illegal services. [Id. at 17-20]

         Although DWT may have known about ongoing investigations into Backpage's activities, that does not establish that DWT knew in 2017 that Backpage's officers were lying about the company's involvement in financial crimes and sex trafficking. See, LLC v. Dart, No. 1:15-CV-6340, slip op. at 7 (N.D. Ill. Mar. 25, 2018) (denying motion to sanction DWT because there was no evidence that DWT “made or facilitated a specific representation of fact that was known to be untrue when it was made”). The “red flag” materials are not analogous to Backpage's or its officers' guilty pleas, i.e., sworn statements by Backpage officers, sufficient to raise questions about the veracity of previous representations regarding Backpage's activities. Defendant has not identified sworn statements of Backpage's officers or similar credible evidentiary material that DWT had access to in 2017 that necessarily alerted DWT that its presentation of Backpage's position(s) in the materials and arguments submitted in this case were inaccurate or without merit. As the Court in Dart found, Defendant “has not come up with the smoking gun showing that DWT knew, or was deliberately avoiding, the truth about Backpage's practices” at the time DWT represented Backpage before this Court. Id.

         Due to the absence of evidentiary material constituting a “smoking gun” regarding the truthfulness of Backpage's officers' declarations available in 2017, there is no basis for imposing sanctions on DWT under this Court's inherent power based on Defendant's argument that DWT failed to delve further into information provided by Backpage. Defendant's suggestion that a “reasonable inquiry” would have uncovered Backpage's deception is unavailing. [ECF No. 73 at 17] In his motion, Defendant argues DWT may not avoid the Court's imposition of sanctions under the Court's inherent power through any failure of DWT to “conduct a reasonable inquiry of the factual and legal basis for a claim before filing” the lawsuit. [ECF No. 73 at 17]. In support, Defendant cites Coonts v. Potts, 316 F.3d 745, 753 (8th Cir. 2003), a decision addressing sanctions under Rule 11 only. In his reply, Defendant acknowledges the “reasonable inquiry” language is from Rule 11, and argues an attorney's failure to conduct a “reasonable inquiry” supports the imposition of sanctions under a court's inherent power, citing circuit and district court cases outside the ...

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