SDNY Awards Rule 11 Sanctions for Complaint over Speculative Allegations

In (RC) 2 Pharma Connect, LLC v. Mission Pharmacal Co., 1:21-cv-11096 (S.D.N.Y. Sep. 14, 2022), the district court imposed Rule 11 sanctions against plaintiff for filing pleadings based on speculative allegations of breaches of contract.

Plaintiff (RC) 2, a pharmaceutical broker, entered into an NDA and Proposal Agreement with defendant Mission, a pharmaceutical company, to provide certain testing needed for FDA approval of a new topical medication. The relationship soured after Mission declined to grant (RC) 2 an exclusive license to use certain technology that Mission had developed in connection with the project. (RC) 2 inferred from this refusal that Mission intended to misappropriate (RC) 2’s confidential information for projects with third parties. After Mission failed to provide assurances of performance by a deadline (RC) 2 unilaterally imposed, (RC) 2 came to suspect that Mission did not intend to complete its work for (RC) 2 at all. (RC) 2 sued, alleging breach and anticipatory breach of both the NDA and the Proposal Agreement.

After receiving the complaint, Mission’s counsel contacted (RC) 2’s counsel and provided assurances that Mission was doing the work and was willing to complete it. Id. at *4-*5. (RC) 2 responded by filing an amended complaint repackaging substantially the same allegations and seeking a TRO. Mission’s counsel again contacted counsel for (RC) 2 and offered to provide additional assurances about Mission’s work, but (RC) 2 refused to withdraw its application for a TRO until after Mission had filed its opposition with the court.

Mission subsequently moved to dismiss and for sanctions under Federal Rule of Civil Procedure 11, 28 U.S.C. § 1927, and the court’s inherent authority. Id. 7. The court granted the motion to dismiss and granted sanctions under Rule 11. Under Rule 11, a lawyer’s filing of a pleading constitutes a representation that the pleading has been filed for a proper purpose, that its factual allegations are or will be supported by evidence, and that its legal arguments are supported by the law or a non-frivolous argument for a change in the law. Id. at *8-*9.

Finding Mission’s request for Rule 11 sanctions to be “well-founded,” the court held that none of the conduct alleged in the amended complaint supported the claim that Mission had breached its obligations or that it had clearly and unequivocally indicated its intentions to breach those obligations. (RC) 2’s claim for breach of the NDA was “rank speculation” based on Mission’s refusal to grant the exclusive license. Id. at 9. Mission was not obligated to provide that license, and it had any number of rational business reasons for its refusal. Id. The claim for breach of the Proposal Agreement was similarly baseless. Mission’s failure to assure its performance pursuant to a deadline arbitrarily imposed by (RC) 2 did not satisfy (RC) 2’s obligation, as plaintiff, to present evidence or a reasonable basis to believe that Mission would not perform. Id. at *10-*13. Further, by the time (RC) 2 filed its Amended Complaint, it knew that Mission was in fact performing its obligations. Id. at *11-*12.

Explaining the basis for its sanctions award under Rule 11, the Court succinctly described what a court’s role is and is not:

Courts exist to resolve disputes; they are not intended to serve as vehicles for a party, who has been told that its counterparty is satisfying its contractual obligations and who has no reason to believe otherwise, to ask for further assurance that its rights will be respected.

Id. at *13.

The court declined, however, to award sanctions under 28 U.S.C. § 1927 or the court’s inherent power. Section 1927 authorizes sanctions against counsel whose conduct is (1) entirely without basis and (2) done in bad faith. Id. at *14. The court’s inherent sanctions power must be “exercised with restraint and discretion” and requires “a particularized showing of bad faith.” Id. at *15. While (RC) 2’s counsel failed to fully investigate the facts and filed pleadings unsupported by evidence, those failures did not establish that the amended complaint had been filed in bad faith or for an improper purpose. Id. at *15.

(RC) 2 Pharma Connect illustrates the breadth and flexibility of the federal courts’ sanctions authority to address parties and counsel who fall short of their obligations.

If you have questions about breach of contract claims or court sanctions, please contact Michael Rakower or Travis Mock.

(RC) 2 Pharma Connect (Opinion)

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