Chambers v. Nasco Inc./Dissent Kennedy

Justice KENNEDY, with whom THE CHIEF JUSTICE and Justice SOUTER join, dissenting.

Today's decision effects a vast expansion of the power of federal courts, unauthorized by rule or statute. I have no doubt petitioner engaged in sanctionable conduct that warrants severe corrective measures. But our outrage at his conduct should not obscure the boundaries of settled legal categories.

With all respect, I submit the Court commits two fundamental errors. First, it permits the exercise of inherent sanctioning powers without prior recourse to controlling rules and statutes, thereby abrogating to federal courts Congress' power to regulate fees and costs. Second, the Court upholds the wholesale shift of respondent's attorney's fees to petitioner, even though the District Court opinion reveals that petitioner was sanctioned at least in part for his so-called bad faith breach of contract. The extension of inherent authority to sanction a party's prelitigation conduct subverts the American Rule and turns the Erie doctrine upside down by punishing petitioner's primary conduct contrary to Louisiana law. Because I believe the proper exercise of inherent powers requires exhaustion of express sanctioning provisions and much greater caution in their application to redress prelitigation conduct, I dissent.

* The Court's first error lies in its failure to require reliance, when possible, on the panoply of express sanctioning provisions provided by Congress.

The American Rule prohibits federal courts from awarding attorney's fees in the absence of a statute or contract providing for a fee award. Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 258-259, 95 S.Ct. 1612, 1622-1623, 44 L.Ed.2d 141 (1975). The Rule recognizes that Congress defines the procedural and remedial powers of federal courts, Sibbach v. Wilson & Co., 312 U.S. 1, 9-10, 61 S.Ct. 422, 424-425, 85 L.Ed. 479 (1941); McIntire v. Wood, 7 Cranch 504, 505-506, 3 L.Ed. 420 (1813), and controls the costs, sanctions, and fines available there, Kaiser Aluminum & Chemical Corp. v. Bonjorno, 494 U.S., , 110 S.Ct. 1570, 1576, 108 L.Ed.2d 842 (1990) ("[T]he allocation of the costs accruing from litigation is a matter for the legislature, not the courts"); Alyeska Pipeline Co., supra, 421 U.S., at 262, 95 S.Ct., at 1624 ("[T]he circumstances under which attorney's fees are to be awarded and the range of discretion of the courts in making those awards are matters for Congress to determine").

By direct action and delegation, Congress has exercised this constitutional prerogative to provide district courts with a comprehensive arsenal of Federal Rules and statutes to protect themselves from abuse. A district court can punish contempt of its authority, including disobedience of its process, by fine or imprisonment, 18 U.S.C. § 401; award costs, expenses, and attorney's fees against attorneys who multiply proceedings vexatiously, 28 U.S.C. § 1927;  sanction a party and/or the party's attorney for filing groundless pleadings, motions, or other papers, Fed.Rule Civ.Proc. 11; sanction a party and/or his attorney for failure to abide by a pretrial order, Fed.Rule Civ.Proc. 16(f); sanction a party and/or his attorney for baseless discovery requests or objections,  Fed.Rule Civ.Proc. 26(g); award expenses caused by a failure to attend a deposition or to serve a subpoena on a party to be deposed, Fed.Rule Civ.Proc. 30(g); award expenses when a party fails to respond to discovery requests or fails to participate in the framing of a discovery plan, Fed.Rule Civ.Proc. 37(d) and (g); dismiss an action or claim of a party that fails to prosecute, to comply with the Federal Rules, or to obey an order of the court, Fed.Rule Civ.Proc. 41(b); punish any person who fails to obey a subpoena, Fed.Rule Civ.Proc. 45(f); award expenses and/or contempt damages when a party presents an affidavit in a summary judgment motion in bad faith or for the purpose of delay, Fed.Rule Civ.Proc. 56(g); and make rules governing local practice that are not inconsistent with the Federal Rules, Fed.Rule Civ.Proc. 81. See also 28 U.S.C. § 1912 (power to award just damages and costs on affirmance); Fed.Rule App.Proc. 38 (power to award damages and costs for frivolous appeal).

The Court holds nonetheless that a federal court may ignore these provisions and exercise inherent power to sanction bad faith misconduct "even if procedural rules exist which sanction the same conduct." Ante, at 49. The Court describes the relation between express sanctioning provisions and inherent power to shift fees as a sanction for bad faith conduct in a number of ways. At one point it states that where "neither the statute nor the rules are up to the task [i.e., cover all the sanctionable conduct], the court may safely rely on its inherent power." Ante, at 50. At another it says that courts may place exclusive reliance on inherent authority whenever "conduct sanctionable under the rules was intertwined within conduct that only the inherent power could address." Ante, at 51. While the details of the Court's rule remain obscure, its general approach is clear: When express rules and statutes provided by Congress do not reach the entirety of a litigant's bad faith conduct, including conduct occurring before litigation commenced, a district court may disregard the requirements of otherwise applicable rules and statutes and instead exercise inherent power to impose sanctions. The only limitation on this sanctioning authority appears to be a finding at some point of "bad faith," a standard the Court fails to define.

This explanation of the permitted sphere of inherent powers to shift fees as a sanction for bad faith litigation conduct is as illegitimate as it is unprecedented. The American Rule recognizes that the legislature, not the judiciary, possesses constitutional responsibility for defining sanctions and fees; the bad faith exception to the Rule allows courts to assess fees not provided for by Congress "in narrowly defined circumstances." Roadway Express, Inc. v. Piper, 447 U.S. 752, 765, 100 S.Ct. 2455, 2463, 65 L.Ed.2d 488 (1980). By allowing courts to ignore express Rules and statutes on point, however, the Court treats inherent powers as the norm and textual bases of authority as the exception. And although the Court recognizes that Congress in theory may channel inherent powers through passage of sanctioning rules, it relies on Weinberger v. Romero-Barcelo, 456 U.S. 305, 102 S.Ct. 1798, 72 L.Ed.2d 91 (1982), a decision that has nothing to do with inherent authority, to create a powerful presumption against congressional control of judicial sanctions. Ante, at 47.

The Court has the presumption backwards. Inherent powers are the exception, not the rule, and their assertion requires special justification in each case. Like all applications of inherent power, the authority to sanction bad faith litigation practices can be exercised only when necessary to preserve the authority of the court. See Roadway Express, Inc. v. Piper, supra, 447 U.S., at 764, 100 S.Ct., at 2463 (inherent powers " 'are those which are necessary to the exercise of all others' "); ''Young v. United States ex rel. Vuitton et Fils,'' 481 U.S. 787, 819-820, 107 S.Ct. 2124, 2144, 95 L.Ed.2d 740 (1987) (SCALIA, J., concurring in judgment) (inherent powers only those "necessary to permit the courts to function").

The necessity limitation, which the Court brushes aside almost without mention, ante, at 43, prescribes the rule for the correct application of inherent powers. Although this case does not require articulation of a comprehensive definition of the term "necessary," at the very least a court need not exercise inherent power if Congress has provided a mechanism to achieve the same end. Consistent with our unaltered admonition that inherent powers must be exercised "with great caution," Ex parte Burr, 9 Wheat. 529, 531, 6 L.Ed. 152 (1824), the necessity predicate limits the exercise of inherent powers to those exceptional instances in which congressionally authorized powers fail to protect the processes of the Court. Inherent powers can be exercised only when necessary, and there is no necessity if a rule or statute provides a basis for sanctions. It follows that a district court should rely on text-based authority derived from Congress rather than inherent power in every case where the text-based authority applies.

Despite the Court's suggestion to the contrary, ante, at 48-49, our cases recognize that rules and statutes limit the exercise of inherent authority. In Societe Internationale Pour Participations Industrielles et Commerciales, S.A. v. Rog- ers, 357 U.S. 197, 78 S.Ct. 1087, 2 L.Ed.2d 1255 (1958), we rejected the Court of Appeals' reliance on inherent powers to uphold a dismissal of a complaint for failure to comply with a production order. Noting that "[r]eliance upon . . . 'inherent power' can only obscure analysis of the problem," we held that "whether a court has power to dismiss a complaint because of noncompliance with a production order depends exclusively upon Rule 37." Id., at 207, 78 S.Ct., at 1093. Similarly, in Bank of Nova Scotia v. United States, 487 U.S. 250, 254, 108 S.Ct. 2369, 2373, 101 L.Ed.2d 228 (1988), we held that a federal court could not invoke its inherent supervisory power to circumvent the harmless error inquiry prescribed by Fed.Rule Crim.Proc. 52(a). And Ex parte Robinson, 19 Wall. 505, 22 L.Ed. 205 (1874), the very case the Court cites for the proposition that " '[t]he power to punish for contempt is inherent in all courts,' " ante, at 44, held that Congress had defined and limited this inherent power through enactment of the contempt statute. "The enactment is a limitation upon the manner in which the [contempt] power shall be exercised." 19 Wall., at 512.

The Court ignores these rulings and relies instead on two decisions which "indicat[e] that the inherent power of a court can be invoked even if procedural rules exist which sanction the same conduct." Ante, at 49. The "indications" the Court discerns in these decisions do not withstand scrutiny. In Roadway Express, Inc. v. Piper, supra, we held that the costs recoverable under a prior version of 28 U.S.C. § 1927 for discovery abuse did not include attorney's fees. In the remand instruction, the Court mentioned that the District Court might consider awarding attorney's fees under either Fed.Rule Civ.Proc. 37 or its inherent authority to sanction bad-faith litigation practices. 447 U.S., at 767-768, 100 S.Ct., at 2464-2465. The decision did not discuss the relation between Rule 37 and the inherent power of federal courts, and certainly did not suggest that federal courts could rely on inherent powers to the exclusion of a federal rule on point.

The Court also misreads Link v. Wabash R. Co., 370 U.S. 626, 82 S.Ct. 1386, 8 L.Ed.2d 734 (1962). Link held that a Federal District Court possessed inherent power to dismiss a case sua sponte for failure to prosecute. The majority suggests that this holding contravened a prior version of Fed.Rule Civ.Proc. 41(b), which the Court today states "appeared to require a motion from a party," ante, at 630 (emphasis added). Contrary to the Court's characterization, the holding in Link turned on a determination that Rule 41(b) contained "permissive language . . . which merely authorizes a motion by the defendant," 370 U.S., at 630, 82 S.Ct., at 1388 (emphasis added). Link reasoned that "[n]either the permissive language of the Rule . . . nor its policy" meant that the rule "abrogate[d]" the inherent power of federal courts to dismiss sua sponte. The permissive language at issue in Link distinguishes it from the present context, because some sanctioning provisions, such as Rule 11 and Rule 26(g), are cast in mandatory terms.

In addition to dismissing some of our precedents and misreading others, the Court ignores the commands of the Federal Rules of Civil Procedure, which support the conclusion that a court should rely on rules, and not inherent powers, whenever possible. Like the Federal Rules of Criminal Procedure, the Federal Rules of Civil Procedure are "as binding as any statute duly enacted by Congress, and federal courts have no more discretion to disregard the Rule[s'] mandate than they do to disregard constitutional or statutory provisions." Bank of Nova Scotia v. United States, supra, 487 U.S., at 255, 108 S.Ct., at 2374. See also Fed.Rule Civ.Proc. 1 (Federal Rules "govern the procedure in the United States district courts in all suits of a civil nature") (emphasis added). Two of the most prominent sanctioning provisions, Rules 11 and 26(g), mandate the imposition of sanctions when litigants violate the Rules' certification standards. See Fed.Rule Civ.Proc. 11 (court "shall impose . . . an appropriate sanction" for violation of certification standard); Fed.Rule Civ.Proc. 26(g) (same); see also Business Guides, Inc. v. Chromatic Communications Enter- prises, Inc., 498 U.S., , 111 S.Ct. 922, 929 (Rule 11 "requires that sanctions be imposed where a signature is present but fails to satisfy the certification standard").

The Rules themselves thus reject the contention that they may be discarded in a court's discretion. Disregard of applicable rules also circumvents the rulemaking procedures in 28 U.S.C. § 2071 et seq., which Congress designed to assure that procedural innovations like those announced today "shall be introduced only after mature consideration of informed opinion from all relevant quarters, with all the opportunities for comprehensive and integrated treatment which such consideration affords." Miner v. Atlass, 363 U.S. 641, 650, 80 S.Ct. 1300, 1306, 4 L.Ed.2d 1462 (1960).

Upon a finding of bad faith, courts may now ignore any and all textual limitations on sanctioning power. By inviting district courts to rely on inherent authority as a substitute for attention to the careful distinctions contained in the rules and statutes, today's decision will render these sources of authority superfluous in many instances. A number of pernicious practical effects will follow.

The Federal Rules establish explicit standards for, and explicit checks against, the exercise of judicial authority. Rule 11 provides a useful illustration. It requires a district court to impose reasonable sanctions, including attorneys fees, when a party or attorney violates the certification standards that attach to the signing of certain legal papers. A district court must (rather than may) issue sanctions under Rule 11 when particular individuals (signers) file certain types (groundless, unwarranted, vexatious) of documents (pleadings, motions and papers). Rule 11's certification requirements apply to all signers of documents, including represented parties, see Business Guides, Inc. v. Chromatic Communications Enterprises, Inc., supra, but law firms are not responsible for the signatures of their attorneys, see Pavelic & LeFlore v. Marvel Entertainment Group, 493 U.S. 120,, 110 S.Ct. 456,, 107 L.Ed.2d 438 (1989), and the Rule does not apply to papers filed in fora other than district courts, see Cooter & Gell v. Hartmarx Corp., 496 U.S. , , 110 S.Ct. 2447,, 110 L.Ed.2d 359 (1990). These definite standards give litigants notice of proscribed conduct and make possible meaningful review for misuse of discretion-review which focuses on the misapplication of legal standards. See id., at, 110 S.Ct., at 2459 (misuse of discretion standard does "not preclude the appellate court's correction of a district court's legal errors").

By contrast, courts apply inherent powers without specific definitional or procedural limits. True, if a district court wishes to shift attorney's fees as a sanction, it must make a finding of bad faith to circumvent the American Rule. But today's decision demonstrates how little guidance or limitation the undefined bad faith predicate provides. The Court states without elaboration that courts must "comply with the mandates of due process . . . in determining that the requisite bad faith exists," ante, at 50, but the Court's bad-faith standard, at least without adequate definition, thwarts the first requirement of due process, namely, that "[a]ll are entitled to be informed as to what the State commands or forbids." Lanzetta v. New Jersey, 306 U.S. 451, 453, 59 S.Ct. 618, 619, 83 L.Ed. 888 (1939). This standardless exercise of judicial power may appear innocuous in this litigation between commercial actors. But the same unchecked power also can be applied to chill the advocacy of litigants attempting to vindicate all other important federal rights.

In addition, the scope of sanctionable conduct under the bad-faith rule appears unlimited. As the Court boasts, "whereas each of the other mechanisms [in Rules and statutes] reaches only certain individuals or conduct, the inherent power extends to a full range of litigation abuses." Ante, at 46. By allowing exclusive resort to inherent authority whenever "conduct sanctionable under the rules was intertwined within conduct that only the inherent power could address," ante, at 51, the Court encourages all courts in the federal system to find bad faith misconduct in order to eliminate the need to rely on specific textual provisions. This will ensure the uncertain development of the meaning and scope of these express sanctioning provisions by encouraging their disuse, and will defeat, at least in the area of sanctions, Congress' central goal in enacting the Federal Rules-" 'uniformity in the federal courts.' " Hanna v. Plumer, 380 U.S. 460, 472, 85 S.Ct. 1136, 1145, 14 L.Ed.2d 8 (1965). Finally, as Part IV of the Court's opinion demonstrates, the lack of any legal requirement other than the talismanic recitation of the phrase "bad faith" will foreclose meaningful review of sanctions based on inherent authority. See Cooter & Gell v. Hartmarx Corp., supra, 496 U.S., at, 110 S.Ct., at 2459.

Despite these deficiencies, the Court insists that concern about collateral litigation requires courts to place exclusive reliance on inherent authority in cases, like this one, which involve conduct sanctionable under both express provisions and inherent authority:

"In circumstances such as these in which all of a litigant's     conduct is deemed santionable, requiring a court first to      apply rules and statutes containing sanctioning provisions to      discrete occurrences before invoking inherent power to      address remaining instances of sanctionable conduct would      serve only to foster extensive and needless satellite      litigation, which is contrary to the aim of the rules      themselves." Ante, at 51.

We are bound, however, by the Rules themselves, not their "aim," and the Rules require that they be applied, in accordance with their terms, to much of the conduct in this case. We should not let policy concerns about the litigation effects of following the Rules distort their clear commands.

Nothing in the foregoing discussion suggests that the fee-shifting and sanctioning provisions in the Federal Rules and Title 28 eliminate the inherent power to impose sanctions for certain conduct. Limitations on a power do not constitute its abrogation. Cases can arise in which a federal court must act to preserve its authority in a manner not provided for by the Federal Rules or Title 28. But as the number and scope of rules and statutes governing litigation misconduct increase, the necessity to resort to inherent authority-a predicate to its proper application-lessens. Indeed, it is difficult to imagine a case in which a court can, as the District Court did here, rely on inherent authority as the exclusive basis for sanctions.

The District Court's own findings concerning abuse of its processes demonstrate that the sanctionable conduct in this case implicated a number of rules and statutes upon which it should have relied. Rule 11 is the principle provision on point. The District Court found that petitioner and his counsel filed a number of "frivolous pleadings" (including "baseless, affirmative defenses and counterclaims") that contained "deliberate untruths and fabrications." NASCO, Inc. v. Calcasieu Television & Radio, Inc., 124 F.R.D. 120, 127-128, 135 (WD La.1989). Rule 11 sanctions extend to "the person who signed [a paper], a represented party, or both." The Court thus had a nondefeasible duty to impose sanctions under Rule 11.

The Court concedes that Rule 11 applied to some of the conduct in this case, ante, at 50, and even hints that the Rule might have sufficed as a basis for all of the sanctions imposed, ante, at 42 n. 8. It fails to explain, however, why the District Court had the discretion to ignore Rule 11's mandatory language and not impose sanctions under the Rule against Chambers. Nor does the Court inform us why Chambers' attorneys were not sanctioned under Rule 11. Although the District Court referred to Chambers as the "strategist" for the abusive conduct, it made plain that petitioner's attorneys as well as petitioner were responsible for the tactics. For example, the District Court stated:

"[Petitioner's] attorneys, without any investigation     whatsoever, filed [the baseless charges and counterclaims].  We find . . . that these attorneys knew, at the      time that they were filed, that they were false." 124     F.R.D., at 128.

The Court further stressed that "Chambers, through his attorneys, filed answers and counterclaims . . . which both Chambers and his attorneys knew were false at the time they were filed." Id., at 143. In light of Rule 11's mandatory language, the District Court had a duty to impose at least some sanctions under Rule 11 against Chambers' attorneys.

The District Court should have relied as well upon other sources of authority to impose sanctions. The Court found that Chambers and his attorneys requested "[a]bsolutely needless depositions" as well as "continuances of trial dates, extensions of deadlines and deferments of scheduled discovery" that "were simply part of the sordid scheme of deliberate misuse of the judicial process to defeat NASCO's claim by harassment, repeated and endless delay, mountainous expense and waste of financial resources." Id., at 128. The intentional pretrial delays could have been sanctioned under Fed.Rule Civ.Proc. 16(f), which enables courts to impose sanctions, including attorney's fees, when a party or attorney "fails to participate in good faith" in certain pretrial proceedings; the multiple discovery abuses should have been redressed by "an appropriate sanction, . . . including a reasonable attorney's fee," under Fed.Rule Civ.Proc. 26(g). The District Court also could have sanctioned Chambers and his attorneys for the various bad-faith affidavits they presented in their summary judgment motions, see 124 F.R.D., at 128, 135, under Fed.R.Civ.P. 56(g), a Rule that permits the award of expenses and attorney's fees and the additional sanction of contempt. In addition, the District Court could have relied to a much greater extent on 18 U.S.C. § 401 to punish the "contempt of its authority" and "[d]isobedience . . . to its . . . process" that petitioner and his counsel displayed throughout the proceedings.

Finally, the District Court was too quick to dismiss reliance on 28 U.S.C. § 1927, which allows it to award costs and attorney's fees against an "attorney . . . who . . . multiplies the proceedings in any case unreasonably and vexatiously." The District Court refused to apply the provision because it did not reach petitioner's conduct as a nonattorney. 124 F.R.D., at 138-139. While the District Court has discretion not to apply § 1927, it cannot disregard the statute in the face of attorney misconduct covered by that provision to rely instead on inherent powers which by definition can be invoked only when necessary.

When a District Court imposes sanctions so immense as here under a power so amorphous as inherent authority, it must ensure that its order is confined to conduct under its own authority and jurisdiction to regulate. The District Court failed to discharge this obligation, for it allowed sanctions to be awarded for petitioner's prelitigation breach of contract. The majority, perhaps wary of the District Court's authority to extend its inherent power to sanction prelitigation conduct, insists that "the District Court did not attempt to sanction petitioner for breach of contract, but rather imposed sanctions for the fraud he perpetrated on the court and the bad faith he displayed toward both his adversary and the Court throughout the course of the litigation." Ante, at 54 (footnote omitted). Based on this premise, the Court appears to disclaim that its holding reaches prelitigation conduct. Ante, at 54, and nn. 16-17. This does not make the opinion on this point correct, of course, for the District Court's opinion, in my view, sanctioned petitioner's prelitigation conduct in express terms. Because I disagree with the Court's characterization of the District Court opinion, and because I believe the Court's casual analysis of inherent authority portends a dangerous extension of that authority to prelitigation conduct, I explain why inherent authority should not be so extended and why the District Court's order should be reversed.

The District Court's own candid and extensive opinion reveals that the bad faith for which petitioner was sanctioned extended beyond the litigation tactics and comprised as well what the District Court considered to be bad faith in refusing to perform the underlying contract three weeks before the lawsuit began. The Court made explicit reference, for instance, to "this massive and absolutely unnecessary lawsuit forced on NASCO by Chambers' arbitrary and arrogant refusal to honor and perform this perfectly legal and enforceable contract." 124 F.R.D., at 136. See also id., at 143 ("Chambers arbitrarily and without legal cause refused to perform, forcing NASCO to bring its suit for specific performance"); ibid.  ("Chambers, knowing that NASCO had a good and valid contract, hired Gray to find a defense and arbitrarily refused to perform, thereby forcing NASCO to bring its suit for specific performance and injunctive relief");  id., at 125 (petitioner's "unjustified and arbitrary refusal to file" the FCC application "was in absolute bad faith"). The District Court makes the open and express concession that it is sanctioning petitioner for his breach of contract:

"[T]he balance of . . . fees and expenses included in the     sanctions, would not have been incurred by NASCO if Chambers      had not defaulted and forced NASCO to bring this suit.  There      is absolutely no reason why Chambers should not reimburse in      full all attorney's fees and expenses that NASCO, by      Chambers' action, was forced to pay." Id., at 143.

The trial court also explained that "[t]he attorney's fees and expenses charged to NASCO by its attorneys . . . flowed from and were a direct result of this suit. We shall include them in the attorney's fees sanctions." Id., at 142 (emphasis added).

Despite the Court's equivocation on the subject, ante, at 54, n. 16, it is impermissible to allow a District Court acting pursuant to its inherent authority to sanction such prelitigation primary conduct. A Court's inherent authority extends only to remedy abuses of the judicial process. By contrast, awarding damages for a violation of a legal norm, here the binding obligation of a legal contract, is a matter of substantive law, see Marek v. Chesny, 473 U.S. 1, 35, 105 S.Ct. 3012, 3030, 87 L.Ed.2d 1 (1985) ("right to attorney's fees is 'substantive' under any reasonable definition of that term"); see also Alyeska, 421 U.S., at 260-261, and n. 33, 95 S.Ct., at 1623-1624, and n. 33, which must be defined either by Congress (in cases involving federal law), or by the States (in diversity cases).

The American Rule recognizes these principles. It bars a federal court from shifting fees as a matter of substantive policy, but its bad faith exception permits fee shifting as a sanction to the extent necessary to protect the judicial process. The Rule protects each person's right to go to federal court to define and to vindicate substantive rights. "[S]ince litigation is at best uncertain one should not be penalized for merely defending or prosecuting a lawsuit." Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 718, 87 S.Ct. 1404, 1407, 18 L.Ed.2d 475 (1967). When a federal court, through invocation of its inherent powers, sanctions a party for bad-faith prelitigation conduct, it goes well beyond the exception to the American Rule and violates the Rule's careful balance between open access to the federal court system and penalties for the willful abuse of it.

By exercising inherent power to sanction prelitigation conduct, the District Court exercised authority where Congress gave it none. The circumstance that this exercise of power occurred in a diversity case compounds the error. When a federal court sits in diversity jurisdiction, it lacks constitutional authority to fashion rules of decision governing primary contractual relations. See Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938); Hanna v. Plumer, 380 U.S., at 471-472, 85 S.Ct., at 1143-1145. See generally Ely, The Irrepressible Myth of Erie, 87 Harv.L.Rev. 693, 702-706 (1974). The Erie principle recognizes that "[e]xcept in matters governed by the Federal Constitution or by Acts of Congress, the law to be applied in any [diversity] case is the law of the State." 304 U.S., at 78, 58 S.Ct., at 822. The inherent power exercised here violates the fundamental tenet of federalism announced in Erie by regulating primary behavior that the Constitution leaves to the exclusive province of States.

The full effect of the District Court's encroachment on State prerogatives can be appreciated by recalling that the rationale for the bad faith exception is punishment. Hall v. Cole, 412 U.S. 1, 5, 93 S.Ct. 1943, 1946, 36 L.Ed.2d 702 (1973). To the extent that the District Court imposed sanctions by reason of the so-called bad-faith breach of contract, its decree is an award of punitive damages for the breach. Louisiana prohibits punitive damages "unless expressly authorized by statute," International Harvester Credit Corp. v. Seale, 518 So.2d 1039, 1041 (La.1988); and no Louisiana statute authorizes attorney's fees for breach of contract as a part of damages in an ordinary case. Ogea v. Loffland Brothers Co., 622 F.2d 186, 190 (CA5 1980); Rutherford v. Impson, 366 So.2d 944, 947 (La.App.1978). One rationale for Louisiana's policy is its determination that "an award of compensatory damages will serve the same deterrent purpose as an award of punitive damages." Ricard v. State, 390 So.2d 882, 886 (La.1980). If respondent had brought this suit in state court he would not have recovered extra damages for breach of contract by reason of the so-called willful character of the breach. Respondent's decision to bring this suit in federal rather than state court resulted in a significant expansion of the substantive scope of his remedy. This is the result prohibited by Erie and the principles that flow from it.

As the Court notes, ante, at 55, n. 17, there are some passages in the District Court opinion suggesting its sanctions were confined to litigation conduct. See ante, at 55, n. 17. ("[T]he sanctions imposed 'appl[ied] only to sanctionable acts which occurred in connection with the proceedings in the trial Court' "). But these passages in no way contradict the other statements by the trial court which make express reference to prelitigation conduct. At most, these passages render the court's order ambiguous, for the District Court appears to have adopted an expansive definition of "acts which occurred in connection with" the litigation. There is no question but that some sanctionable acts did occur in court. The problem is that the District Court opinion avoids any clear delineation of the acts being sanctioned and the power invoked to do so. This confusion in the premises of the District Court's order highlights the mischief caused by reliance on undefined inherent powers rather than on Rules and statutes that proscribe particular behavior. The ambiguity of the scope of the sanctionable conduct cannot be resolved against petitioner alone, who, despite the conceded bad-faith conduct of his attorneys, has been slapped with all of respondent's not inconsiderable attorney's fees. At the very least, adherence to the rule of law requires the case to be remanded to the District Court for clarification on the scope of the sanctioned conduct.

My discussion should not be construed as approval of the behavior of petitioner and his attorneys in this case. Quite the opposite. Our Rules permit sanctions because much of the conduct of the sort encountered here degrades the profession and disserves justice. District courts must not permit this abuse and must not hesitate to give redress through the Rules and statutes prescribed. It may be that the District Court could have imposed the full million dollar sanction against petitioner through reliance on federal Rules and statutes, as well as on a proper exercise of its inherent authority. But we should remand here because a federal court must decide cases based on legitimate sources of power. I would reverse the Court of Appeals with instructions to remand to the District Court for a reassessment of sanctions consistent with the principles here set forth. For these reasons, I dissent.