On March 20, 2017, in Purchasing Power, LLC v. Bluestem Brands, Inc., the US Court of Appeals for the Eleventh Circuit reversed the district court's imposition of sanctions under its inherent authority on the plaintiff's lawyers. The Eleventh Circuit concluded that the district court abused its discretion, applied the wrong standard in imposing sanctions under its inherent authority, and ignored or misunderstood critical evidence ( (11h Cir. Mar. 20, 2017)).

The underlying case presented complex jurisdictional issues, which neither the parties nor their counsel succeeded in sorting out until several years into the litigation. The plaintiff, Purchasing Power LLC, represented by law firm Burr & Forman (B&F), sued Bluestem Brands Inc. in Georgia state court in December 2011. Bluestem, a citizen of Minnesota and Delaware, sought to remove the case to federal court based on diversity jurisdiction, so its counsel contacted B&F to determine the plaintiff's citizenship.

As an LLC, Purchasing Power's citizenship was that of each of its members. Purchasing Power had one member, Purchasing Power Holdings LLC (PPH), whose membership in turn consisted of individual residents of Georgia plus three additional LLCs. One of these additional LLCs was called Falcon Investment Advisors LLC (Falcon LLC).

In response to Bluestem's queries about citizenship, B&F reached out to company leadership and was assured by Purchasing Power's CEO and president that none of the additional LLC members were from Minnesota or Delaware. Bluestem's counsel attached this statement to its removal petition as the only evidence that complete diversity existed between the parties and on January 25, 2012, the case was removed.

Several months later, Bluestem served discovery requests on Purchasing Power, which included requests for information on the residency and citizenship of all the various LLC members. B&F objected to the requests and no additional steps were taken to verify subject matter jurisdiction. In 2014, the district court granted summary judgment in favor of Bluestem. Purchasing Power appealed, which ultimately led to the realization (over two years after removal) that a separate corporation, Falcon Inc., partially owned Falcon LLC. Falcon Inc. was incorporated in Delaware, which destroyed diversity jurisdiction.

The district court then sanctioned B&F under its inherent power for misrepresenting to the court and to Bluestem that diversity of citizenship existed. The court ordered B&F to pay Bluestem $582,385 in fees and costs. B&F appealed the sanctions order.

Finding that the district court abused its discretion, the Eleventh Circuit reversed the sanctions against B&F. The district court held that recklessness alone could meet the standard for a court's inherent power sanctions. However, the Eleventh Circuit rejected this argument and concluded that the standard is a subjective one satisfied only if an attorney's conduct is so egregious that it could have only been committed in bad faith. In this case, there was no evidence that B&F or any party acted with bad intentions.

The Eleventh Circuit also clarified that the purpose of the inherent power to sanction is to strengthen judicial authority and punish disobedience, and that it should not be a remedy for protracted litigation. The Eleventh Circuit also found that the district court failed to consider other relevant evidence in its inquiry, including:

The Eleventh Circuit also noted that courts must be vigilant in forcing parties to meet the unfortunate demands of diversity jurisdiction in the 21st century.