Procter & Gamble Co, et al v. Amway Corporation, e

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________
m 00-20127
_______________
THE PROCTER & GAMBLE COMPANY;
THE PROCTER & GAMBLE DISTRIBUTING COMPANY,
Plaintiffs-Appellants-
Cross Appellees,
VERSUS
AMWAY CORPORATION, ET AL.,
Defendants,
THE AMWAY DISTRIBUTORS ASSOCIATION COUNCIL,
Defendant-Appellee-
Cross-Appellant,
JA-RI CORPORATION,
Defendant-Appellee,
AND
INTERNET SERVICES CORPORATION,
Movant-Appellee-
Cross-Appellant.

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_________________________
Appeals from the United States District Court
for the Southern District of Texas
_________________________
January 17, 2002
Before JOLLY, SMITH, and BENAVIDES,
Circuit Judges.
JERRY E. SMITH, Circuit Judge:
The Procter & Gamble Co. (“P&G”)
appeals the award of attorneys’ fees and costs
to Ja-Ri Corporation (“Ja-Ri”), the Amway
Distributors Association Council (“ADAC”),
and Internet Services Corporation (“Internet”)
under 28 U.S.C. § 1927 and 15 U.S.C.
§ 1117(a). Concluding that the district court
committed several errors, we vacate and
remand.
I.
P&G manufactures and distributes nu-
merous household products. Since the late
1970’s and early 1980’s, rumors of links to
Satanism have circulated throughout the
United States. A common version alleges that
P&G’s president admitted to worshiping Satan
on a television talk show and that a portion of
P&G’s profits goes to the church of Satan.
The rumor has circulated in the form of
voicemail messages and printed fliers.
P&G alleges that Amway and its
distributors started or spread the rumor in the
1980’s and began spreading it again in the
mid- 1990’s. Rather than suing Amway in the
1980’s, P&G worked with Amway’s corporate
headquarters to stop the rumor. In 1995,
however, the rumor resurfaced when Randy
Haugen, an Amway Distributor, forwarded it
to other Amway distributors via an internal tel-
ephone messaging system. Haugen served on
the ADAC and was a very successful Amway
distributor with a network of distributors
throughout Utah, Nevada, Texas, Mexico, and
Canada.
The rumor spread rapidly. Some
distributors printed fliers containing the rumor
and circulated them to consumers. P&G
offered evidence that the number of Satanism
rumors increased substantially in the states in
which the majority of Haugen’s distributors
live.
Within days of learning that the rumor was
false, Haugen sent out a short retraction on the
voice messaging system. Shortly thereafter, an
Amway representative contacted Haugen and
delivered a copy of a P&G “truth kit,” which
explains that the rumor is false. Using the kit,
Haugen sent out a second and more detailed
retraction, but the rumor continued to spread
for some time.
Amway’s distributors make money both
from selling Amway products to the general
public and from recruiting other distributors.
Newly recruited distributors become “down-
line” distributors who earn commissions for
the “upline” distributors who recruited them.
More senior and profitable distributors sell
their products predominately to downline dis-
tributors rather than to consumers. There is
high turnover among the more junior

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distributors. The most elite and profitable
distributors rely on the sale of motivational
tools rather than Amway products to earn
large profits.
P&G alleged that this structure constitutes
an illegal pyramid scheme and gave upline dis-
tributors a possible motive to repeat the rumor
to the downline distributors because it might
affect the ability to recruit distributors and sell
Amway products. The relationship of Amway
distribution network to Ja-Ri, ADAC, and In-
ternet remains a bit murky, but P&G unearthed
evidence that the four entities have close ties.
II.
In 1995, P&G filed a federal suit in Utah,
alleging that Haugen, Freedom Associates,
Inc., and Freedom Tools, Inc., circulated the
Satanism rumor; P&G later joined Amway,
Randy Walker, and Walker International Net-
work as defendants. In 1996, P&G filed a sec-
ond amended complaint alleging defamation,
common law unfair competition, violations of
the Utah Truth in Advertising Act, tortious in-
terference, negligent supervision, and
violations of the Lanham Act § 43(a), 15
U.S.C. § 1125(a), and vicarious liability. P&G
then filed a third amended complaint alleging
that Amway is an illegal pyramid and alleging
fraud and product disparagement; the district
court dismissed that complaint in 1997. Later
in 1997, P&G filed a fourth amended
complaint to assert fraud and disparagement
claims, which the Utah court denied as
untimely.1
On the day after the dismissal in Utah, P&G
sued Haugen, Amway, ADAC, Ja-Ri, Internet,
and other parties in Texas federal court,
alleging that the defendants had (1) spread the
Satanism rumor, (2) disparaged P&G’s Crest
toothpaste, and (3) harmed P&G’s sales by
luring people into Amway’s illegal pyramid
scheme as distributors. The complaint assert-
ed various causes of action, including common
law fraud, violations of the Lanham Act
§ 43(a), violations of the Racketeer Influenced
and Corrupt Organizations Act (“RICO”), 28
U.S.C. § 1962(c)-(d), and violations of the
Texas Business and Commerce Code § 16.29.
The Texas district court granted Amway’s
FED. R. CIV. P. 12(b)(6) motion dismissing the
RICO claim because P&G had not alleged re-
liance on Amway’s alleged predicate acts of
mail and wire fraud. The court held that P&G
lacked standing to bring its § 43(a) claim based
on Amway’s illegal pyramid scheme and that
the statute of limitations had expired for the
fraud claim. This dismissal eliminated Internet
as a party to the suit, because P&G had
asserted only the Lanham Act illegal pyramid
scheme against Internet.
The remaining claims and parties went to
trial. At the close of P&G’s case, Amway
moved for judgment as a matter of law
(“j.m.l.”). The court granted j.m.l. and
1 In September 1998, the Utah district court
granted defendants’ joint motion for summary
judgment and dismissed the § 43(a) claim, holding
that the misrepresentation did not relate to a
product within the meaning of the Lanham Act. In
(continued...)
1(...continued)
March 1999, the Utah court granted summary
judgment to the defendants on the defamation per
se, vicarious liability, and negligent supervision
claims, then entered a final judgment dismissing all
of P&G’s claims. The Tenth Circuit reversed,
P&G v. Haugen, 222 F.3d 1262 (10th Cir. 2000),
and remanded for further proceedings on the Lan-
ham Act disparagement and Utah state law
disparagement claims.

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dismissed the § 43(a) claim against Amway,
Walker, and Haugen based on the res judicata
effect of the Utah final judgment. The Texas
court dismissed the § 43(a) claim for
disparagement against the remaining
defendants because the First Amendment
requires, and the plaintiffs had failed to
present, evidence of “actual malice.” The
court also dismissed the Texas Business and
Commerce Code § 16.29 claim and all
remaining claims. P&G appealed the decision
on the merits.
The district court then issued three orders
imposing sanctions on P&G by shifting at-
torneys’ fees and costs. It granted sanctions to
Ja-Ri in the form of all attorneys’ fees expend-
ed after April 1999 (the “Ja-Ri sanctions or-
der”), citing § 1927 as its authority for shifting
fees. The court granted a fees motion in favor
of ADAC, citing its authority under § 1927
and 15 U.S.C. § 1117 (the “ADAC sanctions
order”). The court granted Internet’s motion
for all attorney’s fees under §§ 1117 and 1927
(the “Internet sanctions order”). P&G brought
the instant appeal to challenge the sanctions
orders.
In Procter & Gamble Co. v. Amway Corp.
(“P&G I”), 242 F.3d 539, cert. denied, 122 S.
Ct. 329 (2001), we affirmed the decision on
the merits in part, reversed in part, and
vacated. (1) We reversed the rule 12(b)(6)
dismissal of the RICO claims based on the
predicate acts of mail and wire fraud in
spreading the Satanism rumor. We affirmed
the dismissal of the RICO claims based on the
illegal pyramid scheme. Id. at 564-65. (2) We
affirmed the summary judgment dismissing the
Lanham Act illegal pyramid claims because
P&G lacked standing. Id. at 562-63. (3) We
reversed the j.m.l. that the Utah judgment has
res judicata effect, because the Tenth Circuit
had reversed and remanded on the Lanham
Act claim. We refused to give the Utah
court’s decision on vicarious liability
preclusive effect as to the Lanham Act claims.
Id. at 546. (4) We reversed the j.m.l. on the
Lanham Act disparagement claim, concluding
that the First Amendment does not require
proof of “actual malice.” Id. at 546-59. (5)
We reversed the dismissal of the product
disparagement claims under the Lanham Act
and Texas Business and Commerce Code §
16.29. Id. at 565-66. (6) We upheld the
dismissal of the common law fraud claims as
barred by the statute of limitations. Id. at 566-
67. (7) We upheld the dismissal of the alter
ego, single business enterprise, and vicarious
liability claims against Ja-Ri and ADAC.
The only claims currently before the district
court relate to spreading the Satanism and
Crest toothpaste rumors. The district court
still must decide whether Amway and its dis-
tributors fraudulently spread the Satanism ru-
mor and violated RICO, unlawfully disparaged
P&G products under the Lanham Act, or un-
lawfully disparaged P&G products under Tex-
as Business and Commerce Code § 16.29.
P&G has never identified evidence that Ja-Ri,
ADAC, or Internet spread the Satanism or
Crest toothpaste rumor. In P&G I, we
affirmed the decision that Ja-Ri and ADAC
could not face alter ego, single business
enterprise, or vicarious liability for the actions
of Amway or downline distributors. 242 F.3d
at 559-60. We may safely assume that none of
the claims currently pending before the district
court relates to Ja-Ri, ADAC, or Internet.
III.
P&G argues that the district court lacked
jurisdiction to enter sanctions, because P&G
already had appealed the final decision on the
merits. Perfecting an appeal deprives the dis-

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trict court of jurisdiction to hear matters
connected to the appeal. Offshore Logistics
Servs., Inc. v. Mut. Marine Office, Inc., 639
F.2d 1168, 1170 (5th Cir. Unit A Mar. 1981).
The district court, however, retains
jurisdiction to resolve motions for sanctions
and attorneys’ fees while a judgment on the
merits is pending on appeal.2 Such motions
are collateral to the merits, so the appeal does
not divest the district court of jurisdiction.3
P&G argues that by attaching the label
“Second Amended Final Judgment” to the
order resolving sanctions and attorneys’ fees,
the district court deprived itself of jurisdiction.
P&G does not cite any authority for the
proposition that the label alone should have
this effect.
The district court did not alter the terms of
its judgment on the merits and only repeated
its earlier conclusions. Even if the court
lacked jurisdiction to alter the judgment on the
merits, it retained jurisdiction to resolve
sanctions and fees issues; we decline to vacate
and remand to force the district court to add a
different label to the same order. That court
plainly had jurisdiction to enter its order.
IV.
According to § 1927, a district court may
shift reasonable fees to “any attorney” “who so
multiplies the proceedings in any case
unreasonably and vexatiously.”4 The court can
shift fees only to counsel, not to parties.5
2 Thomas v. Capital Sec. Serv., Inc., 812 F.2d
984, 987 (5th Cir. 1987) (“[E]ven though the judg-
ment on the merits has been properly appealed and
is pending in the courts of appeal, the district court
retains jurisdiction to entertain and resolve a mo-
tion requesting attorney’s fees or sanctions.”),
vacated in part, reinstated in part, and remanded
on other grounds, 836 F.2d 866 (5th Cir. 1988)
(en banc); CHARLES ALAN WRIGHT, ARTHUR R.
MILLER, & EDWARD H. COOPER, 15B FEDERAL
PRACTICE AND PROCEDURE § 3915.6, at 338
(West 2d ed. 1992) (“The rule that appeal can and
must be taken upon final disposition of all matters
other than attorney fees leaves the district court
free to continue proceedings on the fee request
pending appeal.”). Cf. Budinich v. Becton Dickin-
son & Co., 486 U.S. 196, 200-01 (1988)
(declaring fee award separable from decision on the
merits for purposes of FED. R. APP. P. 4’s time
limits for appeal); Buchanan v. Stanships, Inc.,
485 U.S. 265, 268 (1988) (holding that courts
should not treat a motion for costs as a motion to
alter or amend the judgment that tolls the time
limits for filing an appeal).
3 Thomas, 812 F.2d at 987. Cf. Taylor v. Ster-
rett, 640 F.2d 663, 668 (5th Cir. Unit A Mar.
1981) (explaining that interlocutory appeal does
not divest district court of jurisdiction over matters
not involved in the appeal, including attorneys’
fees).
4 Section 1927 provides:
Any attorney or other person admitted to
conduct cases in any court of the United
States or any Territory thereof who so mul-
tiplies the proceedings in any case
unreasonably and vexatiously may be
required by the court to satisfy personally
the excess costs, expenses, and attorneys’
fees reasonably incurred because of such
conduct.
28 U.S.C. § 1927.
5 E.g., Maguire Oil Co. v. City of Houston, 143
F.3d 205, 208 (5th Cir. 1998) (“Because the award
at issue in this case was imposed against the
CitySSand not any of the attorneys involvedSSit
plainly cannot be sustained under section 1927");
Matta v. May, 118 F.3d 410, 413-14 (5th Cir.
(continued...)

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The district court must find that the
sanctioned attorney multiplied the proceedings
both “unreasonably” and “vexatiously.” FDIC
v. Calhoun, 34 F.3d 1291, 1297 (5th Cir.
1994). This requires “evidence of bad faith,
improper motive, or reckless disregard of the
duty owed to the court.” Edwards v. Gen.
Motors Corp., 153 F.3d 242, 246 (5th Cir.
1992). Section 1927 only authorizes shifting
fees that are associated with “the persistent
prosecution of a meritless claim.” Browning v.
Kramer, 931 F.2d 340, 345 (5th Cir. 1991)
(citation omitted) (internal quotation omitted).
The courts often use repeated filings despite
warnings from the court, or other proof of ex-
cessive litigiousness, to support imposing
sanctions. Nat’l Ass’n of Gov’t Employees v.
Nat’l Fed’n of Fed. Employees, 844 F.2d 216,
224 (5th Cir. 1988). To prevent the courts
from dampening “the legitimate zeal of an at-
torney in representing her client,” Browning v.
Kramer, 931 F.2d 340, 344 (5th Cir. 1991),
we have interpreted § 1927 as penal and
construed it in favor of the sanctioned party,
FDIC v. Connor, 20 F.3d 1376, 1384 (5th Cir.
1994).
The district court must make detailed fac-
tual findings when imposing large sanctions in
a complex case with an extensive record.6 The
court must (1) identify sanctionable conduct
and distinguish it from the reasons for deciding
the case on the merits,7 (2) link the sanction-
able conduct to the size of the sanctions,8 and
(3) differentiate between sanctions awarded
under different statutes.9 Specific findings per-
mit effective appellate review of the validity
and amount of fees. Browning, 931 F.2d at
346.
To shift the entire cost of defense, the
claimant must prove, by clear and convincing
evidence, that every facet of the litigation was
5(...continued)
1997) (“Unlike Rule 11, § 1927 sanctions are, by
the section’s plain terms, imposed only on
offending attorneys; clients may not be ordered to
pay such awards.”); Traveler’s Ins. Co. v. St. Jude
Hosp., 38 F.3d 1414, 1416 (5th Cir. 1994) (same).
6 Topalian v. Ehrman, 3 F.3d 931, 936 & n.5
(5th Cir. 1993) (stating that large sanctions
imposed in a complex case must be accompanied
by detailed findings); Smith Int’l, Inc. v. Tex.
Commerce Bank, 844 F.2d 1193, 1197 (5th Cir.
(continued...)
6(...continued)
1988) (stating that larger sanctions require more
rigorous appellate review, requiring more detailed
factual and legal findings).
7 Topalian, 3 F.3d at 937 (stating that “the
court must announce the sanctionable conduct giv-
ing rise to its order”); Browning, 931 F.2d at 346
(“Section 1927 is aimed at specific conduct and
claims.”); Smith Int’l, 844 F.2d at 1198
(distinguishing between decision on the merits and
determination that legal claim was so frivolous as
to justify sanctions for multiplying proceedings).
8 Connor, 20 F.3d at 1385 (stating that district
court must link conduct to fees shifted); Topalian,
3 F.3d at 937 (“The district court must
demonstrate some connection between the amount
of monetary sanctions it imposes and the sanction-
able conduct by the violating party”); Browning,
931 F.2d at 346 (stating that findings must provide
attorney with opportunity to challenge amount of
fees shifted on appeal).
9 Topalian, 3 F.3d at 931 (stating that district
court has obligation to announce which legal rules
or statutes give rise to which sanctions); Browning,
931 F.2d at 346 (explaining that § 1927 grants
only limited authority to shift fees and requiring
district courts to specify the sources of their
authority for shifting fees).

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patently meritless, Nat’l Ass’n of Gov’t
Employees, 844 F.2d at 223, and counsel must
have lacked a reason to file the suit and must
wrongfully have persisted in its prosecution
through discovery, pre-trial motions, and trial,
Lewis v. Brown & Root, Inc., 711 F.2d 1287,
1292 (5th Cir. 1983), clarified on
reconsideration, 722 F.2d 209 (5th Cir. 1984).
We review an order awarding sanctions un-
der § 1927 only for abuse of discretion.
Mercury Air Group, Inc. v. Mansour, 237
F.3d 542, 549 (5th Cir. 2001). “A district
court abuses its discretion if it awards
sanctions based on an erroneous view of the
law or on a clearly erroneous assessment of
the evidence.” Walker v. City of Bogalusa,
168 F.3d 237, 240 (5th Cir. 1999).
V.
The Lanham Act provides that “[t]he court
in exceptional cases may award reasonable
attorney’s fees to the prevailing party.” 15
U.S.C. § 1117(a). The prevailing party must
demonstrate the exceptional nature of the case
by clear and convincing evidence. CJC
Holdings, Inc. v. Wright & Lato, Inc., 979
F.2d 60, 65 (5th Cir. 1992). This court rarely
has interpreted the requirements for a
prevailing defendant to recover fees under
section 1117(a), so we briefly review the
relevant legal principles, relying on decisions
from other jurisdictions.
Several courts have held that a party can
recover under § 1117(a) only for work
performed in connection with claims filed
under the Lanham Act.10 A court should
permit recovery for work on non-Lanham Act
claims only if “the Lanham Act and non-
Lanham Act claims are so intertwined that it is
impossible to differentiate between work done
on claims.” Gracie, 217 F.3d at 1069-70
(citations omitted). Limiting the scope of
§ 1117(a) comports with the background rule
in AmericaSSthe prevailing party usually can-
not recover fees absent statutory authority.
Alyeska Pipeline Serv. Co. v. Wilderness
Soc’y, 421 U.S. 240, 247 (1975).
Courts permit prevailing plaintiffs to
recover attorneys’ fees under § 1117(a) if the
defendant maliciously, fraudulently, deliberate-
ly, or wilfully infringes the plaintiff’s mark.
Tex. Pig Stands, Inc. v. Hard Rock Café Int’l,
Inc., 951 F.2d 684, 696-97 (5th Cir. 1992).
The prevailing plaintiff must show “a high de-
gree of culpability” by the defendant. Id. at
1305. We have used “bad faith” as a
shorthand for conducting this inquiry, Pebble
Beach Co. v. Tour 18 I Ltd., 155 F.3d 526,
556 (5th Cir. 1998), but we also have
instructed district courts to consider all the
facts and circumstances to determine whether
a case is exceptional, id. at 555.
We have not articulated a very precise stan-
dard for determining when to award a
prevailing defendant attorneys’ fees. In Fuji
Photo Film Co., Inc. v. Shinohara Shoji
10 This court has not addressed this issue. The
Sixth and Ninth Circuits, as well as a district court,
have so held, however. Gracie v. Gracie, 217 F.3d
(continued...)
10(...continued)
1060, 1069-70 (9th Cir. 2000) (remanding for dis-
trict court to apportion fees between Lanham Act
and non-Lanham Act claims); U.S. Structures, Inc.
v. J.P. Structures, Inc., 130 F.3d 1185, 1193 (6th
Cir. 1997) (opining that “under 15 U.S.C.
§ 117(a), attorneys’ fees are recoverable only for
work performed in connection with claims filed
under the Lanham Act”); Neva, Inc. v. Christian
Duplications Int’l, Inc., 743 F. Supp. 1533, 1543
(M.D. Fla. 1990) (same).

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Kabushiki Kaisha, 754 F.2d 591, 601-02 (5th
Cir. 1985), we affirmed the refusal to grant
fees based on a finding that the plaintiff had
brought the action in good faith, but we did
not address the role of the objective merits of
the plaintiff’s suit in determining the existence
of “exceptional” status.
On remand, the district court should
consider the objective merits of the suit when
determining whether P&G acted in good faith.
In the context of prevailing plaintiffs, we have
considered the existence or nonexistence of
reasonable legal defenses probative of good or
bad faith.11 The vast majority of circuits have
developed a separate test for prevailing
defendants under § 1117(a) and permit district
courts to consider directly the objective merits
of the suit.12 Fuji Photo precludes us from
doing so, but district courts nonetheless should
consider the merits and substance of the civil
action when examining the plaintiffs’ good or
bad faith. We review the award of attorneys’
fees under the Lanham Act for abuse of
discretion, and the court’s finding as to wheth-
er the case is exceptional for clear error. Sea-
trax, Inc. v. Sonbeck Int’l, Inc., 200 F.3d 358,
373 (5th Cir. 2000) (citation omitted).
11 Pebble Beach, 155 F.3d at 556 (describing
exceptional classification as inappropriate where a
party presents a reasonable defense in good faith);
CJC Holdings, 979 F.2d at 66 (“A district court
normally should not find a case exceptional where
the party presents what it in good faith believes to
be a legitimate defense.”); Martin’s Herend
Imports, Inc. v. Diamond & Gem Trading USA,
Co., 112 F.3d 1296, 1305 (5th Cir. 1997) (refusing
to infer that infringer had acted in bad faith where
outcome hinged on difficult legal questions about
gray market goods and parallel importers).
12 The Fourth, Seventh, Eighth, Ninth, Tenth,
and District of Columbia Circuits have refused to
endorse symmetrical tests for prevailing plaintiffs
and defendants; these courts permit district courts
to consider the objective merits of the underlying
suit as an independent factor. Ale House Mgmt.,
Inc. v. Raleigh Ale House, Inc., 205 F.3d 137, 144
(4th Cir. 2000) (describing an open-ended, mul-
tifactor test for determining when prevailing de-
fendants should recover fees); Door Sys. Inc. v.
Pro-Line Door Sys., Inc., 126 F.3d 1028, 1032
(continued...)
12(...continued)
(7th Cir. 1997) (Posner, J.) (“[A] suit can be op-
pressive because of lack of merit and cost of de-
fending even though the plaintiff honestly though
mistakenly believes that he has a good case and is
not trying merely to extract a settlement based on
the suit’s nuisance value”); Hartman v. Hallmark
Cards, Inc., 833 F.2d 117, 123 (8th Cir. 1987)
(reasoning that “the absence of bad faith is not
alone determinative of the Lanham Act fee issue”);
Boney, Inc. v. Boney Serv., Inc., 127 F.3d 821,
827 (9th Cir. 1997) (finding that exceptional cir-
cumstances other than bad faith can justify shifting
fees in favor of the prevailing defendant); Nat’l
Ass’n of Prof’l Baseball Leagues, Inc. v. Very
Minor Leagues, Inc., 223 F.3d 1143, 1147 (10th
Cir. 2000) (describing multifactor test that permits
district court to consider objective and subjective
reasonableness); Noxell Corp. v. Firehouse No. 1
Bar-B-Que Restaurant, 771 F.2d 521, 526 (D.C.
Cir. 1985) (“Something less than ‘bad faith,’ we
believe, suffices to mark a case as ‘exceptional.’”).
Only the Second Circuit has endorsed Fuji
Photo’s holding that to recover fees under
§ 1117(a), the defendant must prove the plaintiff
brought the action in bad faith. Conopco, Inc. v.
Campbell Soup Co., 95 F.3d 187, 194-95 (2d Cir.
1996) (affirming because defendant had failed to
show the action was brought in bad faith). Cf. Se-
curaComm Consulting, Inc. v. Securacom, Inc.,
224 F.3d 273, 280 & n.1 (3d Cir. 2000) (requiring
evidence of subjective bad faith for prevailing
plaintiff to recover fees for defendants’ actions in
bringing retaliatory suits in multiple fora).

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9
VI.
The sanctions orders in favor of Ja-Ri,
ADAC, and Internet share two common, fatal
flaws. First, the district court shifted fees and
costs under § 1927 to P&G rather than to its
counsel. Second, the court failed to specify
which statute authorized shifting which fees, to
separate the vexatious conduct or exceptional
features from its reasons for deciding the
claims on the merits, or identify the link be-
tween the objectionable conduct or
exceptional claims and the fee award’s size.
Standing alone, these errors justify vacating
and remanding. To provide guidance on
remand, however, we review the propriety of
the individual sanctions orders.
A.
The district court shifted fees from Ja-Ri to
P&G only under § 1927. The Ja-Ri sanctions
order explains that P&G “vexatiously” and
“unreasonably” multiplied the proceedings by
“filing groundless claims, pursuing those
claims through the discovery process, refusing
to dismiss the Defendant from the case, and in
the end, failing to offer any evidence during its
case-in-chief supporting its allegations.” Ja-Ri
requested only the fees it had expended
between the time it lost on the motion for
summary judgment and the entry of j.m.l. The
district court, however, shifted total fees and
costs of $63,421 in favor of Ja-Ri.
On summary judgment and at trial, P&G
presented evidence of the following links be-
tween Amway and Ja-Ri: (1) Amway’s owners
created Ja-Ri; (2) Amway and-Ja-Ri share the
same address and telephone number; (3) Am-
way and Ja-Ri both engage in the distribution
of Amway products; (4) Amway pays its em-
ployees to provide administrative, accounting,
and selling services for Ja-Ri; (5) Amway pays
Ja-Ri’s expenses; (6) Amway and not Ja-Ri
compensates Ja-Ri’s officers and directors;
(7) members of Amway’s founding families
own both Ja-Ri and Amway and serve as their
officers and directors; (8) Ja-Ri does not hold
formal officer or director meetings; and
(9) Amway delegated the express authority for
Ja-Ri to control downline distributors by en-
forcing Amway’s Rules of Conduct, taking
corrective acti ons, or terminating a
distributorship.
When Ja-Ri moved for summary judgment,
the court considered the above evidence
sufficient to create a fact question about
participation in an illegal pyramid scheme,
indirect liability for Amway’s actions when
spreading the rumor, and vicarious or
respondeat superior liability for the actions of
downline distributors. The court found that
the close links between Amway, Ja-Ri, and
downline distributors justified including Ja-Ri
as a party at trial. Despite these conclusions
at summary judgment, the Ja-Ri sanctions
order labeled the legal claims “groundless” and
declared that P&G should have dismissed Ja-
Ri.
The court committed three errors in the Ja-
Ri sanctions order. First, it assessed the sanc-
tions against the party. We must remand for
the court to determine whether P&G’s counsel
should bear these costs.13
13 We remand where a district court obviously
intended to levy sanctions for vexatiously and un-
reasonably multiplying the proceedings but
accidentally sanctioned a party instead of an
attorney. Meadowbriar Home for Children v.
Gunn, 81 F.3d 521, 534 (5th Cir. 1996). We have
reversed and rendered for levying sanctions on a
party under § 1927 only in three circumstances: (1)
(continued...)

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10
Second, the court failed to explain which
claims P&G pursued vexatiously and
unreasonably. Several of these claims had
potential merit. Ja-Ri does not contest its
status as an upline distributor for Amway.
Although we held in P&G I that P&G lacked
standing to bring the Lanham Act illegal
pyramid claim, we described the standing
question as a close legal issue. P&G I, 242
F.3d at 560-61, 562 (describing two questions
of first impression). P&G should not be
penalized for forcing Ja-Ri to incur defense
costs against a legal claim that rested on a
solid factual basis and a close legal question.
In P&G I, we refused to consider the alter
ego, single business enterprise, and vicarious
liability claims against Ja-Ri because P&G did
not present a coherent argument on appeal.
Id. at 559-60. We noted that the alter ego and
single business enterprise theories appeared
implausible; P&G never offered proof of an in-
equitable result that would justify piercing the
corporate veil or imposing alter ego or single
business enterprise liability. We did not, how-
ever, address the merits of the vicarious
liability question. At summary judgment, the
district court found that P&G created a fact
question about Ja-Ri’s vicarious liability for
the actions of downline distributors. If, as Ja-
Ri asserts on appeal, P&G failed to provide
any factual basis for the claims at trial, the
court should have explained that absence of
support in its sanctions order. The record of
the decisions on the merits cannot, standing
alone, support the sanctions award.
Finally, the court did not provide an
explanation for the amount of fees awarded.
Ja-Ri requested only fees from the denial of
the motion for summary judgment forward,
but the court should have provided an
explanation for assessing even these limited
fees. If P&G failed to provide any support for
its claims at summary judgment, the court
could have granted Ja-Ri’s motion for
summary judgment,14 but, instead, it refused
Ja-Ri’s motion for summary judgment and
eventually imposed sanctions on P&G for
failing to dismiss voluntarily the claims against
Ja-Ri.
The court does not explain this duty to dis-
miss or its application to the case before it.
Does a plaintiff who provides summary
judgment evidence of liability bear the burden
of dismissing a defendant if it cannot prove the
claims at trial? Or, does the plaintiff have a
right to present its weak evidence to a jury?
Why did the district court impose much larger
fees in favor of ADAC, using almost identical
language? The scant explanation raises many
questions and cannot justify imposing sanc-
13(...continued)
We will render if we perform a detailed analysis
under other doctrines that might permit sanctions
and conclude that the sanctions lack all merit. Ma-
guire Oil, 143 F.3d at 212; Matta, 118 F.3d at
413-14, 416. (2) We will render if the district
court has already had the opportunity to correct the
§ 1927 sanctions during a prior remand.
Browning, 931 F.3d at 344. (3) We will render if
the district court does not identify a source for its
authority to levy sanctions, we conclude that the
court could not have intended to award sanctions
under § 1927 because the court sanctioned a party,
and the other grounds for sanctions lack merit.
Traveler’s Ins., 38 F.3d at 1414, 1416; Brezeale v.
Smith, 857 F.2d 258, 259-61 (5th Cir. 1988).
None of these exceptions applies to this case.
14 Browning, 931 F.2d at 345 (“[O]ne might
well wonder how a case could be so frivolous as to
warrant sanctions if it has sufficient merit to go to
trial.”); Nat’l Ass’n of Gov. Employees, Inc., 844
F.2d at 223 (same).

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11
tions in such an unusual posture; on remand,
the court should reconsider its decision and
should provide a more complete explanation
for whatever decision it makes.15
B.
The ADAC sanctions order contains the
same language justifying sanctions under
§ 1927, without any further explanation. The
ADAC sanctions order, however, differs from
the Ja-Ri sanctions order in two important
ways. First, the court also identified § 1117(a)
as a vehicle for shifting fees and costs.
Second, the court shifted ADAC’s entire costs
for defending the litigation, from start to finish,
thus imposing $307,002.96 in sanctions.
P&G presented the following evidence to
link Amway and ADAC at summary judgment
and trial: (1) The founders and current owners
of Amway created the ADAC; (2) ADAC’s
membership consists solely of Amway
distributors; (3) Amway participates in the
selection of half the ADAC board members;
(4) the ADAC board meets three times a year
to consider ways to improve Amway
distributorships and makes recommendations
to Amway; (5) Amway officers unilaterally
approve the minutes of ADAC meetings;
(6) Amway officers routinely use ADAC let-
terhead to communicate with distributors;
(7) Amway’s documents and founders describe
the relationship as a partnership; (8) ADAC
establishes speaking guidelines and works in
cooperation with Amway to develop rules and
regulations; (9) ADAC’s board serves as a
tribunal for hearing grievances against
distributors and makes recommendations to
Amway. ADAC makes only recommendations
to Amway, however, and lacks authority to
discipline or sanction any distributor.
When ADAC moved for summary
judgment, the district court found that P&G
had created a fact issue as to whether ADAC
could face indirect liability under Texas’s
“alter ego” or “single business enterprise”
theory. The court considered the above
evidence sufficient to demonstrate a close link
between Amway and ADAC and to raise
factual issues about indirect liability. Despite
the court’s earlier conclusions at summary
judgment, the ADAC sanctions order reflects
a belief that P&G’s claims so lacked substance
that P&G should not have impleaded ADAC.
The court committed the same errors under
§ 1927 that we identified in discussing the Ja-
Ri sanctions award. First, the court i mper-
missibly used § 1927 to sanction a party. Sec-
ond, t he court did not identify which legal
claims lacked all merit or explain its reasons
for imposing sanctions independently from its
reasons for deciding the merits. Third, the
court failed to justify the amount of the
sanctions. It should have isolated specific
unnecessary and dilatory proceedings; it then
could have shifted the costs associated with
those proceedings.
Moreover, the district court does not even
begin to justify shifting all of ADAC’s defense
costs while shifting only a portion of Ja-Ri’s
defense costsSSa difference of over $200,000.
The close relationship between Amway and
ADAC appears to have justified impleading
ADAC, and the court did not explain at what
point the pursuit of this litigation became vex-
atious and unreasonable.
15 A remand is the correct remedy where the
district court has failed to offer an adequate
explanation. Connor, 20 F.3d at 1385 (vacating
and requesting explanation); Schwarz v. Follodor,
767 F.2d 125, 133 (5th Cir. 1985) (same).

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12
The court also failed to make findings suffi-
cient to justify sanctions under § 1117(a).
First, the court did not separate the fees shifted
under § 1927 from those shifted under
§ 1117(a). Second, the ADAC sanctions order
does not restrict the fees shifted to those in-
curred in defense of a Lanham Act claim, and
the court did not find that the Lanham Act and
non-Lanham Act claims were too intertwined
to disentangle. Third, the court provided only
a cursory explanation for the reasons it
believed that the case was “exceptional” or
that P&G acted in bad faith.
C.
The Internet sanctions order emphasizes
that the district court had only P&G’s Lanham
Act illegal pyramid claim before it at summary
judgment. The sanctions order then explains
that the court disposed of that claim at
summary judgment because P&G lacked
standing to bring the claim. The Internet sanc-
tions order concludes that “for all the above-
mentioned reasons,” P&G unreasonably and
vexatiously multiplied the proceedings and
acted in bad faith. The court shifted total
costs and fees of $128,176.53 based on these
findings.
P&G presented more tenuous evidence of
Amway’s connection with Internet: (1) Dexter
Yager’s three sons formed Internet and
purchased the assets of Freedom Distributing
Company, their father’s tool company; (2) In-
ternet provides business support materials to
Amway distributors; and (3) Internet’s success
depends on selling Amway motivational ma-
terials. Internet, however, is not a downline
distributor, and it has customers outside the
Amway distribution network.
Although P&G presented the weakest fac-
tual case against Internet at summary
judgment, the Internet sanctions order does
not sufficiently justify shifting fees. In addition
to repeating the mistakes made in the Ja-Ri
and ADAC orders, the court failed to find that
the case against Internet lacked factual support
but, instead, relied on a recitation of its
reasons for granting the motion for summary
judgmentSSP&G’s failure to satisfy the
prudential standing requirements of the Lanh-
am Act.
P&G’s belief that it might have standing
under the Lanham Act, however, could well be
considered reasonable for purposes of § 1927.
P&G certainly could have asserted the claim in
good faith as defined by Fuji Photo and
§ 1117(a). The question of standing under the
Lanham Act to sue for an illegal pyramid
scheme was difficult and novel. P&G I, 242
F.3d at 560-61, 562. A party that predicates
its legal claim on a controversial and unsettled
legal theory should not face sanctions under ei-
ther § 1927 or § 1117(a) when the court ul-
timately rejects the claim.16
The orders appealed from are VACATED
and REMANDED for further proceedings as
appropriate.
16 Calhoun, 34 F.3d at 1299-1300 (finding
party not subject to § 1927 sanctions where Su-
preme Court had decided issue adverse to party);
Hogue v. Royse City, Tex., 939 F.2d 1249, 1256
(5th Cir. 1991) (affirming finding that § 1927
sanctions were inappropriate where outcome de-
pended on difficult Erie question).

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