Appeal from an order of the United States District Court for the Southern District of New York (Robert L. Carter, Judge) awarding defendants $76,000 attorney's fees for the plaintiff's bad faith continuance of a meritless suit and use of dilatory tactics. Affirmed.
TIMBERS, NEWMAN, and PIERCE, Circuit Judges.
A prevailing defendant is entitled to an award of attorney's fees if a plaintiff brings or maintains an action without adequate factual basis and in bad faith. See Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 258-59, 44 L. Ed. 2d 141, 95 S. Ct. 1612 (1975). That rule must be applied with caution to make sure that plaintiffs are not deterred from suing to enforce their rights, especially when enforcement of those rights vindicates the Constitution or acts of Congress. At the same time, the rule must be applied in appropriate cases to spare members of the public from the expense of defending against baseless allegations. This appeal from an order of the District Court for the Southern District of New York (Robert L. Carter, Judge) awarding attorney's fees to defendants illustrates both our caution in administering the rule and our willingness to see it invoked when compelling circumstances warrant its use.In the unusual circumstances of this case, we affirm the District Court's order.
On March 25, 1977, the Boston law firm of Hale & Dorr filed a class action suit on behalf of Robert Nemeroff, a shareholder of Technicare Corporation, against Alan Abelson, a columnist for Barron's Business and Financial Weekly ["Barron's "]; Robert Bleiberg, Abelson's editor; Dow Jones & Company, Abelson's publisher; and several investor defendants who were acquaintances of Abelson's. According to the complaint, the investor defendants had advance information about columns that Abelson wrote between May 1976 and February 1977 predicting a decline in the fortunes of Technicare Corporation. The complaint alleged that, based on their knowledge of the forthcoming columns, the investor defendants took short positions in Technicare stock. Once the columns were published, the price of Technicare stock allegedly declined and the investor defendants allegedly made substantial profits by covering their short positions.*fn1 On January 6, 1978, plaintiff amended his complaint to reverse the direction of the alleged wrongdoing: he now claimed that the investors induced Abelson to write negative articles to enhance their short positions in Technicare.Eleven months after filing the original complaint, Nemeroff and his attorneys agreed to discontinue the action. On May 3, 1978, the District Court signed a stipulation dismissing the complaint with prejudice and reserving for the defendants the right to seek reimbursement for attorney's fees. On June 14, the defendants notified the District Court that they would seek attorney's fees.
In its first opinion in this case, the District Court examined whether the plaintiff and his attorneys from Hale & Dorr instituted the suit in good faith with an adequate factual basis. Nemeroff v. Abelson, 469 F. Supp. 630 (S.D.N.Y. 1979). After receiving documentary evidence, the Court concluded that at the time of filing, plaintiff and his attorneys lacked an adequate factual basis for suiing either the publishing or the investor defendants. However, the Court found that Nemeroff and his lawyers acted in bad faith only as to the publishing defendants and not as to the investor defendants. The District Court awarded the publishing defendants $50,000 of their claim for attorney's fees, which exceeded $100,000.
On appeal and cross-appeal, a panel of this Court disagreed with the District Court's conclusion that Nemeroff lacked an adequate factual basis for commencing the suit.Nemeroff v. Abelson, 620 F.2d 339 (2d Cir. 1980). We noted that Nemeroff and his attorneys had two bases for suing the defendants. The first basis, which we labeled the "nuts and bolts" of the conspiracy, comprised circumstantial evidence consistent with the allegations: during the period covered by the complaint, Abelson had published several columns critical of Technicare Corporation; at the same time, there was an unusually high volume of short positions in Technicare stock; toward the end of the period and following one of Abelson's critical columns, the price of Technicare stock began to decline; finally, there were rumors in the financial community that certain investors, including some of the investor defendants, had profited in the past from advance information about the contends of Abelson's column.
Plaintiff's second basis for the suit was a conversation between one of plaintiff's attorneys and a lawyer from the New York Stock Exchange (NYSE). Plaintiff's attorney understood from this conversation that the NYSE was investigating trading in Technicare stock and had found a correlation between the dates of some of Abelson's columns and the dates of certain short sales of Technicare stock. The District Court had discounted this report of a correlation as a basis for the suit because, before the suit was filed, the plaintiff's attorney had learned from another NYSE official that the Technicare specialist at the NYSE had satisfied himself that there had been no manipulation of the company's stock.
On the first appeal, we concluded that Nemeroff's attorney was justified in relying on his initial conversation with the NYSE attorney at least until July 19, 1977, when the NYSE released a report dispelling any suspicion of impropriety based on a supposed Technicare-Abelson "correlation." Having decided that Nemeroff and his attorney had an adequate factual basis for commencing their suit, we reversed the District Court's award of attorney's fees. However, we remanded the matter to the District Court to consider whether defendants might nevertheless be entitled to attorney's fees if the District Court found either that Nemeroff's attorneys conducted the litigation in an intentionally dilatory fashionor that "during the litigation and prior to dismissal, sufficient facts became available to [plaintiff] to demonstrate that a failure at that point to withdraw the action necessarily amounted to bad faith." 620 F.2d at 350-51.
On remand, the District Court received additional documentary evidence pertinent to the two alternative grounds for fee awards suggested by our previous opinion and again awarded attorney's fees, this time to all of the defendants who requested them. Nemeroff v. Abelson, 94 F.R.D. 136 (S.D.N.Y. 1982). The District Court first concluded that as of July 19, 1977, when the NYSE reported that it had found no evidence of a conspiratorial link between Abelson and the investor defendants, Nemeroff and his attorneys lacked an adequate factual basis for continuing the suit. The District Court then focused on the manner in which Nemeroff's attorneys conducted the litigation after July 19. Between July 1977 and the following May when the case was dismissed, Nemeroff's attorneys made only insignificant efforts to replace the "correlation" previously though to have been uncovered by the NYSE with new evidence linking Abelson's columns to the trading of the investor defendants. During this nine-month period, Nemeroff's attorneys concerned themselves primarily with a motion for class certification and with requests for additional discovery time. The District Court concluded that given the inadequate factual basis for the suit as of July 19, Nemeroff's attorneys had continued the litigation in bad faith by choosing to pursue peripheral, procedural issues after July 19 without making any perceptible effort to locate evidence that might support the complaint. The District Court also found plaintiff's conduct of the litigation to be intentionally dilatory.
The District Court concluded that the defendants were entitled to reasonable attorney's fees for work done after July 19, 1977, under either theory left open by our previous opinion. The District Court then awarded attorney's fees of $50,000 to the publishing defendants and a total of $26,000 to various investor ...