Supreme Court Lets Stand Attorney Sanctions Without Bad Faith Finding, Deepening Circuit Split

The U.S. Supreme Court on April 27 declined to review a case concerning a federal court's power to impose monetary sanctions on legal counsel without a specific finding of "bad faith." The denial of certiorari in EscapeX IP, LLC v. Google LLC leaves in place a Federal Circuit decision that affirmed over $250,000 in attorneys' fees against a litigant, cementing a deep and unresolved disagreement among the nation's appellate courts on the standard for such penalties. The decision not to hear the case means that the legal threshold for sanctioning an attorney or their client for litigation misconduct will continue to vary significantly depending on the geographical jurisdiction of the federal court. At the heart of the EscapeX petition was the question of whether a court, using its "inherent authority" to manage proceedings, must find that a party acted in bad faith before imposing financial penalties, or if sanctions could be justified for less severe conduct, such as negligence. The case stems from a district court ruling that ordered EscapeX's counsel to pay more than $250,000 of Google's legal fees. The U.S. Court of Appeals for the Federal Circuit upheld the award, prompting the appeal to the Supreme Court. By letting that ruling stand, the Court passed on an opportunity to create a uniform national standard, leaving businesses and their lawyers to navigate a complex and contradictory legal map. This inconsistency is stark. According to legal briefs and scholarly articles, the federal circuits are deeply divided on this issue. The Second Circuit, which covers New York, Connecticut, and Vermont, requires an explicit finding that a party has acted "in bad faith, vexatiously, wantonly, or for oppressive reasons." This high standard is intended to protect litigants from being penalized for good-faith mistakes or zealous but permissible advocacy. In sharp contrast, other circuits have adopted a lower bar. The First and Eighth Circuits have held that a finding of bad faith is not a prerequisite for imposing sanctions under a court's inherent authority. The First Circuit has even permitted sanctions for conduct deemed "merely negligent or unintentional." This creates a situation where the same action by a company's legal team could be considered a sanctionable offense in one part of the country and acceptable conduct in another. The Supreme Court has previously touched on the boundaries of judicial sanctions. In its 2017 decision in Goodyear Tire & Rubber Co. v. Haeger, the Court addressed the amount of sanctions. In a unanimous opinion, the justices ruled that sanctions awarded under inherent authority must be compensatory, not punitive. This established a "but-for" causation requirement, meaning the financial penalty should be limited to the attorneys' fees the other party incurred specifically because of the misconduct. The Goodyear ruling reined in the potential size of sanctions but critically left open the question of what conduct is sufficient to trigger them—the very issue the EscapeX petition sought to clarify. For small and mid-sized businesses, the unresolved circuit split introduces a significant element of unpredictability and risk into federal litigation. The prospect of facing substantial financial penalties for an unintentional procedural error can have a chilling effect, potentially discouraging companies from defending their rights or pursuing valid claims. It also may embolden opponents to engage in what some practitioners call "litigation by sanction," a strategy of filing numerous procedural motions to provoke a misstep that can be leveraged for a sanctions award, thereby distracting from the actual merits of the case. This tactic can dramatically increase the cost and complexity of litigation, placing a heavier burden on companies with fewer resources. The Supreme Court's decision to sidestep this issue creates a minefield for businesses engaged in litigation. In our experience, legal disputes are already a major financial drain, and this ruling amplifies the risk. The lack of a uniform "bad faith" standard means that a simple procedural mistake in one jurisdiction could result in a six-figure penalty, while the same action in another might be overlooked. This is not just a legal problem; it's a critical business risk that demands proactive management. Companies must now factor this jurisdictional lottery into their litigation budgets and strategies. It underscores the necessity for exceptionally rigorous internal controls and documentation, not only to support the legal case but to defend against accusations of misconduct. This is a core component of effective financial risk management, ensuring that operational and legal processes are robust enough to withstand scrutiny. For guidance on structuring internal processes to mitigate these kinds of contingent liabilities, businesses can contact C&S Finance Group LLC at csfinancegroup.com. With the Supreme Court declining to establish a national standard, companies and their counsel must remain vigilant and adapt their strategies to the specific rules of the circuit where they are litigating. The stark disagreement among the appellate courts remains in place, and legal experts anticipate that similar petitions will continue to reach the high court until it eventually chooses to resolve the conflict and define the precise limits of a federal judge's power to sanction.