A recent Legal Intelligencer story, “Littler Mendelson Hit with Fees By Federal Court in Case it Won,” reports that Littler Mendelson has been ordered to pay sanctions in a case that is won on a summary judgment in federal court in Philadelphia.
Last month, the law firm won an employment discrimination suit that had been filed against it client, Fox Chase Cancer Center, but the motions it filed seeking attorney fees and sanctions against the plaintiff were so lacking the U.S. District Judge Stewart Dalzell of the Eastern District of Pennsylvania held that the motions were intended only to harass and imposed sanctions under Section 1927, which holds counsel liable for causing excessive costs, on the firm.
Elaine Barley, who was represented by lawyers from Margolis Edelstein, had initially brought the suit alleging that Fox Chase had violated the American with Disabilities Act when it failed to accommodate her asthma condition. She also claimed discrimination. Barley lost on summary judgment because her claims were at odds with her position to the Social Security Administration from which she collects disability benefits.
On Sept. 22—19 days after Datzell issued his summary opinion—Littler Mendelson filed a motion to collect attorney fees and a motion for sanctions against Barley. It based its motion for nearly $126,000 in attorney fees on the argument that Barley’s suit was frivolous, but it missed the deadline for filing the motion by five days. The motion was so heavily redacted that it looked as if the firm was “guarding top-secret information involving national security,” Dalzell said. It offered to furnish the court with unredacted copies, but not the plaintiff. Dalzell said.
“These supposedly reasonable hours multiplied by Littler Mendelson’s putative reasonable rates, Fox Chase avers, total $125,907.05, which it describes without evident embarrassment as a “presumptively reasonable” amount ‘necessary’ to Fox Chase’s defense,” the judge said. He denied the motion for attorney fees after rejecting Fox Chase’s argument that the suit was frivolous, but went on to find the motion was so heavily redacted that it wouldn’t merit an award of attorney fees anyway.
“Although we conclude that Barley’s claims were not brought frivolously and therefore Fox Chase is not entitled to attorney fees, we also find Fox Chase’s redacted fee submission is insufficient to support any claim for attorney fees,” Dalzell said. “Contrary to Fox Chase’s assertion that it spent the ‘presumptively reasonable’ amount ‘necessary’ to prevail, other legal professionals might reasonably question a $125.907.05 expenditure in a discrimination case brought by a probationary clerical employee. Be that as it may, Fox Chase gave us no choice but to deny its motion for fees which it actually asks us and Ms. Barley to take on faith.”
On Oct. 15, Barley asked the judge to sanction Littler Mendelson under Section 1927 of the U.S. Code. “To impose sanctions under Section 1927, we must find that counsel has (1) multiplied ‘the proceeding’; (2) in an unreasonable and vexatious manner; (3) thereby increasing the cost of the ‘proceedings’; and (4) did so in bad faith or by intentional misconduct,” Dalzell explained. He held that Littler Mendelson’s two motions qualified for sanction under that section “without question.” He ordered the firm to pay Barley’s attorney fees for defending the two motions.
A recent New Jersey Law Journal editorial, “Fee-Shifting in Insurance Dispute Should Be Expanded,” discusses the history and the current state of affairs of attorney fee recovery in insurance coverage disputes in the state of New Jersey.
The current and long-standing attorney fee rule, known as the American Rule, is that prevailing litigants must pay their own attorney fees and are not entitled to charge their attorney fees to the adversary. That rule is followed in New Jersey upon the judicially expressed thought that “sound judicial administration will be best advanced if litigants bear their own counsel fees.”
As early as 1966, our Supreme Court in Gerhardt v. Continental Ins. Cos. noted that when our court rules were originally adopted, they embraced this view “except in those few situations specially designated” in the rules of the court. Since 1966 transfer of fees, as it is known, have mushroomed in many instances as the result of rules and statutes promulgated or enacted to satisfy particular considerations.
In 1971, the Supreme Court amended R.4:42-9(a)(6) to provide that no fee for services shall be allowed in the taxed cost or otherwise except: “in an action upon a liability or indemnity policy of insurance, in favor of a successful claimant.” The purpose of the amended rule was to prompt careful consideration by the insurer of its policy terms and, if warranted, to encourage it to provide defense and indemnification of the insured.
If, however, the insurer fails to agree to defend or indemnify its insured when obligated to do so, the insured may obtain fees from the insurer in prosecuting a successful policy action so that the insured is made whole with any financial loss occasioned by the insurer’s misinterpretation or misapplication of its own policy. Such a suit against the insurer for coverage is known as a third-party action, that is, on required because of claims by a third party for whom the defense or indemnification is the contractual obligation of the insurer.
Our cases have uniformly held that the court rule does not apply to a first-party action against the insurer that is a direct action in which the insured seeking to recover benefits or reimbursement for its own loss, successfully litigates that claim against the insurer. The only exception to the direct action bar attorney fees is when the insured is successful in enforcing an action for personal injury protection benefits to which the insured is entitled but the insurer has refused to pay.
The dichotomy of viewpoints on this fee issue, between successful first-party actions and successful third-party actions, has in the past been discussed at Judicial Conferences and the subject of a recommendation by the Supreme Court Civil Practice Committee to allow first-party attorney awards against the insurer. Nevertheless, except for the personal injury protection, the rule remains clear that attorney fees to be paid by the insurer may be awarded only in third-party actions where the insured establishes the right of defense or indemnification.
It has been stated many times that the rule authorizing attorney fee awards in defense and indemnification cases was “promulgated to discourage groundless disclaimers and to provide equitably to an insured the benefits of the insurance contract without the necessity of obtaining a judicial determination that the insured, in fact, is entitled to such protection.” We know that policies of insurance, although contracts whose enforcement is sought by a contract action, are treated in a more consumer-friendly judicial atmosphere than other contracts because of the inability of insureds to negotiate the terms of the policy and because of the important social context within which such contracts are written.
The arguments of fee awards in first-party actions has over the years been that the court wants to discourage groundless disclaimers, the third-party rationale should hold true for direct claims against the insurer. Then in neither instance will the insured be short-changed by payment of attorney fees necessitated by the insurer’s failure to reasonably carry out the terms of its policy.
This issue came to the forefront most recently during oral argument before the New Jersey Supreme Court on Sept. 9 in the cases Badiali v. New Jersey Manufacturers Insurance Group and Wadeer v. New Jersey Manufacturers Insurance Group, each involving issues arising under an uninsured motorist policy. Each case arose in a separate factual complex and presented different issues, but each was similar in the claims by insureds that their insurer has acted contract to the terms of its policies and its obligations under the law. If the Court were to rule in favor of the insureds, the question was whether and, if so, how insureds might be made whole for their attorney fees, which in the Badiali case far exceed the amount at issue for each party.
In the course of oral arguments, members of the Court questioned whether attorney fees should not be awarded a successful insured in a first-party suit in order to provide the same insurer encouragement as in third-party action and for the same reasons. One Justice, addressing the practical difficulty of obtaining counsel in legitimate cases of small value, indicated that “a real simple fix” would be to amend R.4:42-9(a)(6) to include first-party cases where there is no other incentive for the insurer to “raise its game” and settle promptly, fairly and reasonably, rather than to require litigation.
The combination of a fiduciary obligation of insurers to their insureds and the important social benefit of insurance coverage to our society, suggest to us that the Court would be, as it has been in the past, an instrument of social justice by, at the least in the context of insured and underinsured motorist claims, if it authorized payment of the insured’s attorney fees if the insured is the “successful claimant” in such a policy suit. Defending what constitutes “successful claimant” presents a difficult question, but one we believe the Court can answer to provide the necessary guidance for future application.
A recent article, “Tips to Ensure Recovery of Prevailing Party Legal Fees,” by Shepard Davidson of Burns & Levinson LLP in Boston, writes about the recent First Circuit opinion, Thompson v. Cloud.
While it may not be standard practice when drafting contracts to include a clause stating that “if litigation between the parties ensues the prevailing party will recover its legal fees,” such provisions do appear in a variety of contracts from time to time. A recent First Circuit opinion, Thompson v. Cloud, involves such a clause and also serves as a good reminder that it can be dangerous to take lightly even seemingly simple provisions in an agreement.
In Thompson, the contract at issue stated that all disputes:
[A]rising out of or relating to this Agreement … shall be submitted to mediation ... If a party does not agree first to go to mediation, then that party will be liable for the other party’s legal fees in any subsequent litigation regarding that same matter in which the party who refuses to go to mediation loses in that subsequent litigation.
Notwithstanding the foregoing language, the plaintiff filed suit without ever suggesting that the parties mediate the underlying dispute. In response, the defendants filed a counterclaim, asserting that the plaintiff breached his obligation to engage in pre-litigation mediation. Ultimately, the defendants prevailed in the litigation and sought an order that the plaintiff reimburse them for their legal fees. The District Court refused to award legal fees to the defendants, and the First Circuit agreed it would not be appropriate to engage in fee shifting in this case.
As an initial matter, the First Circuit noted that while the mediation provision at issue could have been drafted so as to equate the filing of a lawsuit with a refusal to mediate, it was not. Rather, the prevailing party clause in the agreement took “a different approach by imposing the penalty of paying attorney’s fees only when a party ‘does not agree first to go to mediation.” In light of this language, the Court reasoned that “the refusal to mediate [must] be clear before the heavy sanction of attorney’s fees can be imposed.”
The Court then discussed that the defendants did not request mediation when the dispute was raised prior to the commencement of litigation, nor did they move to compel mediation after the plaintiff filed suit. Rather, the defendants actively engaged in litigating the matter in the District Court. In light of all these circumstances, the First Circuit ultimately concluded, the plaintiff never clearly refused to mediate.
Accordingly, Thompson provides two relatively straightforward lessons for in-house counsel. First, when drafting a provision that calls for the prevailing party to recover its legal fees, a slight deviation in language and/or approach can have an enormous impact on its applicability, to be sure to say exactly what you mean. Second, if in-house counsel anticipates wanting to invoke a fee-shifting provision that does exist, be sure your client invokes all potential predicates to recovering legal fees. While “lying in wait” sometimes can be an appropriate and effective strategy, Thompson reminds us not to be so cleaver that we outsmart ourselves.
This article was reprinted with permission. Shepard Davidson is a Partner at Burns & Levinson LLP in Boston, and Co-Chair of the Firm’s Business Litigation Department. Mr. Davidson is also co-publisher of the blog The In-House Advisor.
A recent Legal Intelligencer story, “Third Circuit Wrestles with Attorney Fees under ERISA,” reports that after broaching the issue in an opinion issued last summer as not precedential, the U.S. Court of Appeals for the Third Circuit suggested during arguments Tuesday morning that it might soon answer definitively whether or not the catalyst theory for recovering attorney fees applies under ERISA. The catalyst theory allows plaintiffs to collect fees when the pressure of legal action causes a defendant to voluntarily change its conduct.
“I’m trying to sort out the law here … on the catalyst theory,” Judge Thomas L. Ambro told Mark Oberstaedt on Tuesday. Oberstaedt, of Archer & Greiner in Haddonfield, NJ argued on behalf of CareFirst, a member of the Blue Cross Blue Shield Association and a defendant in the case.
The case, Templin v. Independence Blue Cross, was initially filed as an Employee Retirement Income Security Act (ERISA) action in 2009 by people who have hemophilia seeking reimbursement for their medication. The insurance companies agreed to pay $2.2 million in claims, according to court papers. The plaintiffs then moved to collect the interest that had accrued on those claims, which settled in 2013. They are now seeking to recover attorney fees for that part of the litigation.
In 2010, the U.S. Supreme Court ruled in Hardt v. Reliance Standard Life Insurance that the ERISA statute gives district courts broad discretion to award attorney fees to plaintiffs. The high court ruled that the statute doesn’t limit attorney fee awards to only prevailing parties, but allows parties who show “some degree of success on the merits” to recover attorney fees.
U.S. District Judge Joel Slomsky of the Eastern District of Pennsylvania had rejected the plaintiffs’ bid to collect attorney fees in the hemophilia case because the interest they collected came from a settlement rather than a judgment and the amount of interest that they had won was small.
NALFA also reported on this issue in “Third Circuit OKs ERISA Attorney Fees Under Catalyst Theory”
A recent AM Law Litigation Daily story, “Cooley Wins Attorney Fees After NexTag Patent Trial Win,” reports that Cooley has won an award of attorney fees for client NexTag Inc. in a patent case brought by Lending Tree LLC. In an Oct. 9 ruling, U.S. District Judge Frank Whitney in Charlotte held that Lending Tree and its lawyers at Sheppard Mullin engaged in unreasonable tactics. The amount of the fee award, which will include work done by Cooley since Jan. 10 of this year, will be determined later.
Lending Tree, which runs an online service that matches borrowers and lenders, had sued NexTag for patent infringement in 2010. During a trial, which Lending Tree lost, evidence emerged that Lending Tree knew of NexTag’s allegedly infringing activity more than six years before suing.
Cooley had argued Lending Tree’s claims were barred by the equitable doctrine of laches, which prevents litigants from waiting too long to sue. The judge noted that some of this evidence came from data backup tapes that Lending Tree had initially refused to produce, even after a court order.
The judge cited other tactics by Lending Tree, including a failure to do a meaningful investigation before suing and a failure to review the company’s communications concerning NexTag. “This case is exceptional under a totality of the circumstances,” Whitney wrote.
NexTag didn’t get the full fee award it sought. The judge rejected it request for fees from the start of the case. Instead, he awarded fees as of Jan. 10, the date that he rejected Lending Tree’s motion for summary judgment. The judge declined to hold Sheppard Mullin jointly liable for fees as Cooley had asked, finding that the firm didn’t act in bad faith or intentionally abused the judicial process. Whitney did, however, previously order Sheppard Mullin to pay sanctions during discovery.
The judge ordered NexTag to submit an accounting of its attorney fees.
NALFA welcomes Nancy B. Rapoport as a qualified bankruptcy fee examiner. NALFA member Nancy Rapoport is a professor of law at UNLV Law School in Las Vegas.
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