The city of Los Angeles will need to pay accounting giant PricewaterhouseCoopers $2.5 million in sanctions after the California Supreme Court said a lower court judge had the authority to order the payment to punish the city for alleged obfuscation to conceal a scandal in which lawyers for the city schemed with plaintiffs' lawyers in class actions against the city over utility billing practices to allow plaintiffs' lawyers to reap big attorney fees and force PWC to foot the bill.
The decision comes as, perhaps, an epilogue to a story of scandal that erupted nine years ago surrounding the litigation that followed a botched rollout of new utility billing systems at the Los Angeles Department of Water and Power.
In 2010, the city contracted with PWC to modernize the LDWP's billing system. However, in 2013 when the city began using the new system, it resulted in a rash of incorrect or delayed bills.
Two years later, the city filed suit against PWC in Los Angeles County Superior Court, claiming the firm had defrauded the city by allegedly misrepresenting its abilities to develop and implement the new billing system. The city hired attorneys Paul Paradis, Gina Tufaro and Paul Kiesel to represent it in that action.
Shortly after, another lawyer, Jack Landskroner, filed a class action lawsuit against the city, demanding payment on behalf of named plaintiff Antwon Jones and other allegedly overbilled LADWP customers.
However, the city never contested Landskroner's suit, instead quickly settling under a deal to refund overpayments to 1.6 million LADWP customers, among other damages. Under the deal, Landskroner received $10.3 million in attorney fees.
The city at the time indicated it intended to recover the costs of the settlement from PWC.
In the city's action against PWC, the accounting firm learned Paradis and Landskroner had coordinated their litigation strategy, intentionally to create a situation in which PWC would ultimately pay the tab that included millions in attorney fees.
That discovery revealed Paradis had drafted a lawsuit complaint against PWC in which Jones was listed as the lead plaintiff.
The draft complaint listed the city's special counsel - Paradis, Tufaro and Kiesel - as Jones' attorneys, as well.
Paradis and the city claimed the draft complaint was created as part of a "thought experiment" concerning "different legal strategies" the city might pursue.
A later deposition of Jones reportedly revealed that Jones believed he was being represented by both Paradis and Landskroner, and that Paradis never told Jones he was also representing the city.
Later testimony by others further revealed the L.A. City Attorney's office had been aware of Paradis' involvement with Jones and Landskroner, showing "Paradis had recruited Landskroner to sue the city on Jones's behalf because he would settle the case on terms more favorable to the City..."
Following those revelations, the city continued to resist PWC's efforts to discover the full scope of the city's involvement in the scheme.
In later rulings, Los Angeles Superior Court Judge Elihu Berle found "PWC had established a prima facie case of fraud in which the City was complicit."
While the city appealed, they ultimately withdrew their action against PWC before an appeals court could rule.
Federal prosecutors later secured guilty pleas from Paradis and three city officials to criminal charges stemming from the scandal.
As part of their pleas, Paradis and the city officials "admitted that the City had pursued a collusive litigation strategy wherein Paradis and Kiesel would represent both Jones and the City in parallel lawsuits against PwC. The City later abandoned the parallel litigation strategy and sought outside counsel (ultimately, Landskroner) that would 'represent' Jones against the City while remainingamenable to the City’s litigation goals."
Paradis also admitted to accepting a kickback of nearly $2.2 million from Landskroner, to be paid from Landskroner's attorney fees.
After the city dismissed its case against PWC, the accounting firm asked the court to punish the city through sanctions. PWC had requested nearly $10 million, saying the city had engaged in an "egregious pattern" of abuse of the discovery process in attempting to hide the truth concerning the collusive litigation scheme.
The judge agreed with PWC's characterization of the city's conduct. But the judge cut the sanction to $2.5 million.
The city then appealed, winning a reprieve at the California Fifth District Appellate Court. There, a divided three-justice panel determined Judge Berle lacked the authority to issue such broad sanctions. Instead, they said the code of civil procedure, which governs how courts operate, limits judges to issuing sanctions for specific "individually redressable " acts, not overall courses of conduct or a pattern of abuse.
A unanimous California Supreme Court, however, sided with PWC, finding Judge Berle was in the right.
The high court noted certain provisions in California's code of civil procedure do limit judges to "method specific" sanctions.
But the Supreme Court said Judge Berle was correct to rely on so-called "general sanctions language" in the code's section 2023.030, which states: "The court may impose a monetary sanction ordering that one engaging in the misuse of the discovery process..."
While that language cannot override the other "method specific" limitations on sanctions found elsewhere in the code, the Supreme Court justices agreed with PWC that section 2023.030 gives court inherent authority to impose sanctions more generally.
"... It is one thing to read the '[t]o the extent authorized' language to mean that the authority recognized in section 2023.030 cannot extend farther than the authority conferred by other applicable sanctions provisions, assuming other sanctions provisions are applicable," Justice Kruger wrote in the opinion. "It is something else to say that section 2023.030 confers no sanctions authority at all — even for those relatively uncommon instances that may involve patterns of systemic abuse that transcend any individual instance of misuse, or in situations where the conduct undoubtedly meets section 2023.010’s definition of discovery misuse even though there are no other applicable sanctions provisions."
And they said they doubted the city's assertions that state lawmakers in enacting section 2023.010 did not intend to give judges such broad authority to impose monetary sanctions for such patterns of abuse, either.
"It seems ... unlikely that a Legislature concerned with stemming the tide of discovery abuse would have consigned courts confronting patterns of egregious abuse to the choice the City’s position would offer them: either attempt to fit the component parts of the pattern into individual method-specific sanctions rulings, or else rely purely on their inherent authority to control the litigation, with no statutory guidelines relevant to that exercise," Kruger wrote.
The high court further rejected the city's attempt to argue that the ruling would essentially swing wide the gate for parties to demand and receive sanctions on a generalized basis by merely alleging a pattern of misconduct by the opposing party, upsetting the state's "carefully calibrated scheme of escalating sanctions."
But the justices said they believed the safeguards within the code would continue to limit such unusual sanctions awards to highly unusual and extreme cases, such as the pattern of obfuscation alleged by PWC against the city and its lawyers.
"It is already well-established that a court may not rely on section 2023.030 to override the limitations prescribed by any other applicable sanctions provision in the Act," Kruger wrote.
"A court may invoke its independent authority to impose sanctions ... only when confronted with an unusual form of discovery abuse, or a pattern of abuse, not already addressed by a relevant sanctions provision. And where it invokes that authority, it is constrained by the long-settled rules generally governing the imposition of discovery sanctions under the Act."
The city of Los Angeles was represented in arguments before the state Supreme Court by attorney Kathryn L. McCann, of the firm of Annaguey McCann, of Los Angeles.
PWC was represented before the court by attorney Julian W. Poon, of Gibson Dunn & Crutcher, of Los Angeles.