Sanctions. A tax preparation business franchisee and her two counsel were ordered to pay a franchisor sanctions of $40,000 for filing a frivolous court action against the franchisor, a federal district court in Greenbelt, Maryland, has ruled.

All of the claims in the court action had been earlier resolved by arbitration, and were subject to the res judicata effect of the prior arbitration, according to the court. Apparently seeking to avoid the res judicata effects of the arbitration proceeding, the franchisee took the step of adding her wholly-owned LLC, as a plaintiff to the court action, alleging that it was a third-party beneficiary of the contract between the parties, and that it had not been a party to the arbitration. However, in attempting to avoid that bar, the franchisee signed an affidavit contradicting her sworn arbitration positions, the court determined.

The franchisor asked for sanctions in the amount of $91,281, representing the attorney fees and costs it incurred to defend the frivolous action. Counsel for the franchisor accumulated $85,064 in attorney fees and $6,216 in costs, spending approximately 175 hours on the case. This included work by two partners, whose billable rates were $590 and $580 per hour, as well as an associate with a billable rate of $520 per hour, and a law clerk billing $310 per hour. Although those rates were on the high side, they were not out of range from the hourly rates charged by other large law firms, the court commented. Further, the hours spent on the case were reasonable, particularly in light of the time required to attempt to persuade the franchisee and her counsel to dismiss the suit.

As to the severity of the Rule 11 violation, it should have been abundantly clear, even to an inexperienced attorney, that all the claims raised in the suit were barred by the res judicata effect of the prior arbitration. The franchisee participated in the violation by submitting an affidavit in direct contradiction of her positions taken in the arbitration. However, a sanction in excess of $90,000 was far more than needed to deter such conduct. Thus, a total of $40,000 as a sanction was awarded, enough to make an emphatic point to the franchisee and her attorneys, all of whose conduct was indefensible, in the court's view.

Instant Tax Service 10060 v. TCA Financial, DC Md., ¶14,206.