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Opinion: Keep to the American Rule: No Attorney Fees as Actual Damages in Defamation Cases

February 26, 2019

A recent New Jersey Law Journal editorial, “Keep to the American Rule: No Attorney Fees as Actual Damages in Defamation Cases,” reports on the fee-shifting in defamation actions.  The editorial reads:

In an article which appeared in the Jan. 14, 2019, edition of this Law Journal, New Jersey attorney Andrew B. Bolson discussed the subject of damage awards in defamation actions.  It was pointed out that under New Jersey law, a jury can award either specific damages or general damages.  The former are intended to compensate the successful plaintiff for a specific pecuniary loss.  General damages, however, are those which are not susceptible to precise calculation.  Mr. Bolson points out that under the Supreme Court’s decision in Nuwave Investment Corp. v. Hyman Beck & Co., 221 N.J. 495, 499 (2015), “all compensatory damages, whether considered special or general, depend on showing of actual harm, demonstrated through competent evidence, and may not include a damage award presumed by the jury.”

It is also noted that where a plaintiff is unable to show actual damages, a jury does have the authority to award presumed damages (generally limited to $1.00) in order to offer some solace to the plaintiff whose reputation has been damaged.  Mr. Bolson says that New Jersey is in a minority of states that limit presumed damages to nominal damages.  He urges that, “To eliminate any confusion as to whether attorney fees can be awarded in defamation cases, the New Jersey legislature should pass legislation to definitively establish that attorney fees are compensable to successful plaintiffs as actual damages.”  Mr. Bolson contends that protecting one’s reputation should not be worth just a dollar.  He urges that successful plaintiffs should be able to receive legal fees and costs even where only nominal damages are awarded.

Although the internet has revolutionized publishing and made it far easier to broadcast malicious lies about anyone, the fact is that to adopt Mr. Bolson’s suggestion would be to drastically change our American system whereby, except for specified statutory or contractual exceptions, litigants bear their own legal costs.  Whether that established system is ever to be changed remains to be seen.  However, to provide in defamation actions that, even in the absence of actual harm, a prevailing plaintiff may receive attorney fees as “actual damages” would be to distort the meaning of such damages and, in effect, adopt the British system where the loser pays.  While we respect Mr. Bolson’s contention that one’s reputation should be compensable, irrespective of demonstrated harm, we are not yet prepared to endorse such change in our American system.

Article: Fresh Takes on Seeking Costs and Fees Under Rule 45

February 22, 2019

A recent Pepper Hamilton blog post article by Donna Fisher, Matthew Hamilton, and Sandra Hamilton, “Fresh Takes on Seeking Costs and Fees Under Rule 45,” reports on fee-shifting incurred in responding to a Federal Rules of Civil Procedure 45 subpoena.  This article was posted with permission.  The article reads:

Recent case law reveals that courts vary widely in their approaches to shifting the costs and fees incurred in responding to a Federal Rule of Civil Procedure 45 subpoena.  Some courts view shifting costs and fees as mandatory in situations where a nonparty is forced to bear “significant” costs.  Others may shift costs and fees only to the extent those costs are “unreasonable,” which is measured by (1) the nonparty’s size and economics, despite its lack of connection to the dispute, (2) defining “reasonable costs” so narrowly that the nonparty bears substantial costs or (3) eliminating attorneys’ fees from the cost-shifting calculation.  The relief a nonparty may be awarded may depend on factors that are not specifically identified in Rule 45 but that are nonetheless included in the court’s concept of fairness.  As the cases discussed below demonstrate, nonparties responding to Rule 45 discovery requests should consider the following best practices:

Know and understand the applicable jurisdiction’s rules pertaining to Rule 45’s protections. 

Be able to demonstrate that the non-party has attempted to respond to Rule 45 discovery in the most efficient manner available.

If possible, demonstrate that review for compliance with regulations or attorney-client privilege is consistent with any applicable protective order or local rule and, therefore, not just for the non-party’s benefit. 

In order to increase the likelihood of recovering costs of any motion practice, attempt to cooperate with the requesting party and demonstrate a willingness to resolve or mitigate the costs and the dispute.

The cases discussed below evaluate motions for costs and fees in two broad categories: (1) those incurred when litigating the scope of the subpoena itself and (2) those incurred in compliance.

Costs and Fees Incurred Litigating the Scope of the Subpoena Itself

The district court in In re Aggrenox Antitrust Litigation considered the motion of a nonparty, Gyma Laboratories of America, to recover $72,778.20 in costs and fees incurred in response to a Rule 45 subpoena from the direct purchaser plaintiffs.  Gyma objected to the requests as overbroad and asserted that production would be unduly burdensome.  At the hearing on cross-motions to compel and to shift costs and fees, the court expressed concern that Gyma had not made a record establishing the alleged difficulties in production, but directed that Gyma would be eligible for reimbursement of reasonable costs incurred.

In reviewing Gyma’s subsequent motion for costs and fees, the court reasoned that Rule 45 makes cost-shifting “mandatory in all instances in which a non-party incurs significant expense from compliance with a subpoena,” but that it did not require the requesting party to bear the entire cost of compliance.  Further, the court held that only “reasonable” costs are compensable under Rule 45 and that the moving party bears the burden of proof.  The court found that Gyma had not established that a reasonable client would use its “expensive” New York counsel to handle the subpoena, and further that costs and fees incurred prior to the date it provided an estimate of costs to the plaintiffs and the court were not fairly chargeable.

Moreover, the court found that many of the costs and fees were incurred in connection with Gyma’s efforts to resist compliance with the subpoena, which the court found was a unilateral “decision to litigate the subpoena zealously.”  Finding that Gyma was “notably intransigent and dilatory in its response,” and considering the admonition of the U.S. Court of Appeals for the Second Circuit, that courts should “not endorse scorched earth tactics” or “hardball litigation strategy,” the district court denied Gyma’s motion for fees in bringing the motion, and awarded only $20,000 in reasonable costs and fees for compliance with the subpoena.

The court in Valcor Engineering Corp. v. Parker Hannifin Corp. considered the motion of non-party MEDAL, to shift the entire cost of production pursuant to a subpoena, $476,000, to the requesting party.  The court found that the costs and fees were objectively unreasonable, and that much of the cost resulted from MEDAL’s tactical decision to aggressively challenge every aspect of the subpoena, which led to two separate motions to compel.  Moreover, the court found that MEDAL demonstrated little interest in minimizing expenses or preventing further motion practice.  For example, after the court granted the first motion to compel, MEDAL withheld nearly 90 percent of the documents identified by search terms as non-responsive, without providing any explanation.  The court also found that MEDAL’s aggressive tactics tended to demonstrate that it was not a truly disinterested non-party, and that it had been intimately involved in the acts giving rise to the litigation.  Finding that MEDAL’s motion came “close to wielding the shield of Rule 45 as a sword,” the court denied its motion for cost-shifting.

By contrast, the court in Linglong Americas Inc. v. Horizon Tire Inc. granted, in full, a similar request by non-party GCR Tire & Service for costs and fees associated with a Rule 45 subpoena served by Horizon.  GCR objected to the scope of the subpoena, and its counsel spent several months negotiating with Horizon’s counsel to narrow the request.  GCR moved to recover its costs and fees, and Horizon objected to allocation of fees incurred in narrowing the scope of the subpoena.  Reviewing Rule 45 case law, including Aggrenox, the court reasoned that it was required to protect the non-party from significant, reasonable expenses incurred in compliance.  The court found that narrowing the subpoena took several months of work by GCR’s attorneys and that the charges were reasonable, particularly since GCR had already paid them.  The court further found that expenses incurred in litigating the fee dispute were reasonable and incurred in compliance with the subpoena.  Accordingly, the court awarded the full $24,567 sought for responding to the subpoena and another $15,338 in fees for filing the fee dispute.

Costs and Fees Incurred in Collection, Processing and Review

In Sands Harbor Marina Corp. v. Wells Fargo Insurance Services of Oregon, the plaintiffs alleged that EVMC Real Estate Consultants, Inc. and others conspiring with EVMC fraudulently induced the plaintiffs to pay advance loan commitment fees when, in fact, no financing was available.  Wells Fargo, the employer of one of the defendants, served a subpoena on Dogali Law Group, a nonparty law firm that had represented EVMC in connection with the loan transactions at issue.  Dogali withheld multiple documents on the basis of attorney-client privilege.  Several years later, the court ruled that a defendant law firm could not withhold documents on the basis of attorney-client privilege because no surviving entity had standing to invoke the privilege on EVMC’s behalf.  Wells Fargo then renewed and expanded its earlier subpoena to Dogali, seeking the withheld documents.  When Dogali argued that an electronic production would be time-consuming, Wells Fargo proposed to use its own vendors to reduce time and costs.  After unsuccessful negotiations about the payment of costs and fees for the production, the court ordered production of the previously withheld privileged documents, as well as all documents responsive to the expanded subpoena.  Dogali later filed a motion for costs and fees in the amount of $39,709.

Weighing the mandate of Rule 45, the court held that Dogali was entitled to an award of fees.  While the court generally agreed that the legal services rates charged were reasonable, it found that the legal time spent responding to the second subpoena and renewed subpoena included time for tasks that were unreasonable, such as time spent researching whether Dogali had standing to assert the attorney-client privilege, reviewing the documents for privilege, creating privilege logs for documents reviewed previously, and researching privilege and waiver issues.  In addition, the court held that time spent communicating with former partners, preparing file memoranda, and conferring with Wells Fargo’s counsel about costs and production was not reasonable.

Finally, the court looked at the attorney time spent researching and preparing the motion for costs as well as the paralegal time spent reviewing documents for production.  The court denied Dogali’s request for the costs of drafting and reviewing the application as unnecessary and excessive.  As to time billed for the paralegal and cost of production, the court noted Wells Fargo’s offer to allow Dogali to utilize its vendor and determined that “rather than explore a more efficient and economical approach for the production, [Dogali] opted to have [its] paralegal print each email individually and convert it into a pdf…[Wells Fargo] should not be required to bear the cost of [Dogali’s] unilateral decision to utilize a more time-consuming approach.”  After carving out costs and fees determined to be unreasonable, the court awarded Dogali fees and costs in the amount of $10,537.33.

In Nitsch v. Dreamworks Animation SKG Inc., the court determined that attorneys’ fees and costs associated with protecting the confidentiality of affected non-parties were reasonable and therefore compensable.  Non-party Croner Company, a consulting company that conducted annual compensation benchmarking, moved for reimbursement of costs incurred in responding to the plaintiffs’ subpoena, which sought survey data that Croner obtained from companies in the animation and visual effects industry over several years.  Before Croner responded to the subpoena, its counsel conferred with plaintiffs’ counsel, advised that it would seek reimbursement of costs, and provided an initial estimate of those costs.

Because all surveys Croner conducted were subject to confidentiality provisions, Croner notified affected clients about the subpoena and devised a form of production to produce the information for the plaintiffs but preserve the anonymity of the survey participants.  The process was more time-consuming than expected, and Croner sought costs, including outside attorneys’ fees, in the amount of $67,787.55.  The plaintiffs objected on the basis that the request was unreasonable, arguing that Croner had produced only 16 documents and that the requested sum was grossly over-inflated and unreasonable.

Citing Rule 45(d)(2)(B)(ii)’s requirement that a court must protect a person who is neither a party nor a party’s officer from “significant expense resulting from compliance,” the court stated that the “shifting of significant expenses is mandatory, but the analysis is not mechanical; neither the Federal Rules nor the Ninth Circuit has defined ‘significant expenses.’”  The court then discussed whether costs tied to Croner’s confidentiality concerns were compensable, as “resulting from compliance” with a subpoena.

The court noted that reimbursable fees include those incurred in connection with legal hurdles or impediments to production, such as ensuring that production does not violate federal law or foreign legal impediments, but reimbursable fees do not include fees incurred for services for the non-party’s sole benefit and peace of mind.  The plaintiffs argued that Croner’s efforts to protect client confidentiality were purely business interests that inured solely to Croner’s benefit and that the protective order was sufficient to address Croner’s confidentiality issues.  The court disagreed, finding that the efforts to address confidentiality issues were reasonable and compensable.

Significantly, the court held that Croner’s efforts were consistent with the protective order entered into by the parties, stating that: Croner’s efforts to protect client confidentiality were not made to be obstreperous, but were the result of compliance with the subpoena.  Indeed, if any of the parties in this case were asked to produce a non-party’s confidential information, the stipulated protective order requires them to do what Croner did.

In Steward Health Care System LLC v. Blue Cross & Blue Shield of Rhode Island, however, the court reached the opposite conclusion when the non-party, Nemzoff & Company LLC, requested reimbursement for costs and fees associated with complying with a subpoena from Blue Cross, which included a review for relevancy and privilege.  Nemzoff initially refused to comply due to the costs involved, resulting in a court order compelling compliance and a warning that Nemzoff should minimize expense as it may bear the cost.  The court explained that only “reasonable expenses” incurred — and not all expenses — may be shifted.

The court held that attorneys’ fees have traditionally been awarded as sanctions in the most egregious circumstances or when the requested fees were for work that benefited only the requesting party.  Since it was not presented with any argument for sanctions, the court found that Nemzoff’s use of its own attorneys to review the documents for relevancy, confidentiality and privilege matters was only for Nemzoff’s benefit, and conferred an unwanted benefit upon Blue Cross.  Nemzoff’s attorneys were protecting its own interests.  As such, the court denied Nemzoff’s request.

While cost-shifting remains within the discretion of the court, courts have consistently been more likely to award costs and fees when a non-party has worked in good faith to narrow the scope of a subpoena and responded in an efficient fashion.  To the contrary, when a non-party attempts to obstruct the discovery process, courts have refused to shift costs and fees.  As demonstrated by the case law, the potential for cost-shifting must necessarily turn on the particular facts and circumstances of each case.

Donna Fisher is a member of the health sciences department at Pepper Hamilton LLP.  Matthew Hamilton is a member of the health sciences department at and partner at the firm.  Sandra Adams is a discovery attorney at the firm.  For a full list of end notes, visit https://www.pepperlaw.com/publications/fresh-takes-on-seeking-costs-and-fees-under-rule-45-2019-02-13/

Revisiting the American Rule: Fee-Shifting Strategies for NY Litigators

February 11, 2019

A recent the New York Law Journal article by Robert S. Friedman, “Revisiting the American Rule: Fee-Shifting Strategies for NY Litigators,” examines fee-shifting options in the context of the American Rule in which parties presumptively pay their own fees regardless of the outcome, including the offer of judgment rules under FRCP 68 and CPLR 3220.  This article was posted with permission.  The article reads:

What is the definition of “success” in a business litigation?  This is the first question a litigator should ask their client in the initial meeting.  In some cases, there are business goals that go beyond dollars and cents.  However, in most cases, businesses will define success by comparing the aggregate cost to either the total recovery (if a plaintiff) or the reasonable exposure (if a defendant).  The expense of modern day litigation mandates that a business litigator not only provide a forecast for various stages of a commercial case but also consider proactive strategies for managing expenses.  Many companies also seek modified fee arrangements including flat fees, capped fees and structures that provide an incentive for both success on the merits and in controlling expenses.  The growth of litigation funding has added more spice to the recipe.  In this environment, fee-shifting strategies take on added importance and should be considered early and often in appropriate cases.

This article examines fee-shifting options in the context of the American Rule in which parties presumptively pay their own fees regardless of the outcome, including the offer of judgment rules under FRCP 68 and CPLR 3220.  Many of these opportunities are misunderstood and underutilized.  In doing this analysis, it is helpful to begin with an overview of the historical background for fee-shifting in the United States.

Historical Background

The “American Rule” provides that each side in a litigation bears its own attorney fees in the absence of a statute or contractual prevailing party provision.  This is in contrast to the “English Rule” where the loser pays.  There is much commentary as to which system is better. See, e.g., Steven Baicker-McKee, The Award of E-Discovery Costs to the Prevailing Party: The Analog Solution in a Digital World, 63 Clev. St. L. Rev. at 420; Robert G. Bone, To Encourage Settlement: Rule 68, Offers of Judgment, and the History of the Federal Rules of Civil Procedure, 102 Nw. U. L. Rev. 1561, 1597-99 (2008).  Proponents of the American Rule claim that a loser-pays regime will disincentivize plaintiffs from bringing legitimate claims.  The counter is that the American Rule provides no push for parties to take a reasonable settlement position and serves to perpetuate frivolous litigation.

The American Rule has a long tradition in U.S. jurisprudence dating back to 1796. Arcambel v. Wiseman, 3 U.S. (3 Dall.) 306 (1796).  In the many years since, lawmakers and commercial actors have chipped away at the Rule.  Federal and state legislators have enacted statutes that provide for varying degrees of fee-shifting.  There are approximately 200 federal statutes and 2,000 state statutes that provide for some form of fee shifting.  Steven Baicker-McKee, The Award of E-Discovery Costs to the Prevailing Party: The Analog Solution in a Digital World, 63 Clev. St. L. Rev. at 419 & n.153-54.  In addition, at least nine states have offer of judgment rules that, contrary to FRCP 68, specifically allow for the recovery of attorney fees.  New Jersey is one of these states.  New York is not.

Strategic Options Under Federal and State Law

Federal Litigation: FRCP 68 provides that a defendant in a lawsuit may make an offer of judgement to the plaintiff; if the plaintiff accepts this offer, the court will automatically enter judgment against the defendant according to the offer’s terms.  However, if the plaintiff declines the offer, plaintiff is liable for costs that the defendant incurs during subsequent litigation if the plaintiff fails to obtain a judgment that is more favorable than the offer of judgement.  It is well-established that costs do not include attorney fees under Rule 68 and a party achieving a result below an offer of judgment under Rule 68 is therefore, not entitled to attorney fees.  See, e.g., Delta Air Lines v. August, 450 U.S. 346, 352 (1981).  The result is that Rule 68 is rarely used by civil defendants because attorney fees are usually the most significant expense and the upside of an offer of judgment is therefore limited.

There remain opportunities, however, to use Rule 68 strategically.  In Marek v. Chesney, 473 U.S. 1 (1985), the U.S. Supreme Court held that, while attorney fees are not recoverable as part of costs, where there is statutory fee-shifting, a Rule 68 offer of judgment can establish the baseline for a successful litigant otherwise entitled to legal fees.  Marek v. Chesney 473 U.S. 1, 11 (1985).  Thus, for example, a civil defendant can stop the clock on statutory attorney fees by making an offer of judgment early in a litigation.  With the proliferation of statutory attorney fee provisions, this can be a powerful tool for defendants’ counsel in cases where the attorney fee award is the prime driver of the litigation.  See also Stancyzk v. City of New York, 752 F.3d 273, 281 (2d Cir. 2014).

Moreover, the Second Circuit has held that where there is a contractual claim for attorney fees, and the plaintiff accepts an offer of judgment that provides for dismissal of all claims that could have been made arising out of the contract, any claim for attorney fees is dismissed as well, and the question of who is the prevailing party under the contractual fee shifting agreement becomes moot.  See Steiner v. Lewmar, 816 F.3d 26, 34 (2d Cir. 2016).

Another possible tool for litigants arises out of Local Civil Rule 54.2 of the Southern and Eastern Districts of New York, which provides that the court may by motion or on its own initiative require a party to file a bond covering costs or risk dismissal of the action.  Courts have held that costs in this context includes attorney fees authorized by statute or authorized by a contractual provision.  See Kensington Int’l v. Republic of Congo, 2005 U.S. Dist. LEXIS 4331 (S.D.N.Y. March 21, 2005) (Preska, J.) (citing cases).  One court has suggested that if the party moving to require a Local Civil Rule 54.2 bond from the other side likewise offers to post its own bond in an equal amount, both including attorney fees, and the other side rejects the proposal, then the attorney fees provision would not be enforceable against the moving party from that point on. See RBFC One v. Zeeks, 2005 U.S. Dist. LEXIS 19148, *8 (S.D.N.Y. Sept. 2, 2005).  Accordingly, a party may use Local Rule 54.2 to establish a baseline for success and attempt to push a recalcitrant or unreasonable adversary to put its money where its mouth is.

The New York State Analog. CPLR 3220 is the New York cousin of Rule 68.  The legislative history seems to indicate an intent to exclude attorney fees as recoverable under 3220.  In the initial draft of the CPLR during the overhaul from the Civil Practice Act in 1957, the provision for an offer to liquidate damages conditionally provided that “[i]f the damages awarded [claimant] do not exceed the sum offered, he shall pay the reasonable expenses incurred by his opponent in preparing for the trial of the question of damages, including reasonable attorney’s fees.  The expenses shall be determined by the court.” (emphasis added).  See Advisory Committee on Practice and Procedure of the Temporary Commission of the Courts, First Preliminary Report 109 (1957).  The fact that the express mention of the recovery of attorney fees was removed from the final language of the CPLR, not just with regard to the CPLR 3220, but also tenders and offers of compromise under CPLR 3219 and CPLR 3221, respectively, weighs against the argument that “expenses” under CPLR 3220 includes reasonable attorney fees.  See also Weinstein Korn and Miller, 7 New York Civil Practice: CPLR 3220.03 (2018).  In addition, New York courts are historically strong adherents to the American Rule. 214 Wall Street Associates v. Medical Arts-Huntington Realty, 99 A.D.3d 988 (2d Dep’t 2012) internal citations omitted.

On the other hand, there is case law supporting the inclusion of attorney fees under CPLR 3220.  In Abreu v. Barkin and Associates Realty, 115 A.D.3d 624 (1st Dep’t 2014), the First Department directed the trial court to hold a hearing on the amount of the defendant’s legal fees after a 3220 offer was made.  The Court stated that “Susan Barkin is entitled to a hearing on the amount of her individual fees, if any, under CPLR 3220.  Defendant made an offer to liquidate.  Plaintiff then withdrew her claims against Barkin in a stipulation on the record at trial.  Having failed to obtain a more favorable judgment than the offer, plaintiff became liable for costs and fees.”  The Second Department, however, has held the opposite. Saul v. Cahan, 153 A.D.3d 947, 953 (App. Div. 2017).  Accordingly, there remains an open question and apparent conflict between the First and Second Departments which may require clarification from the Court of Appeals.

Notwithstanding the above, litigators may be able to use CPLR 3220 when there is a contractual prevailing party provision.  In McMahan v. McMahan, 53 Misc. 3d 1030, 1036 (Sup. Ct., Westchester Co. 2016), the court held that the term “costs” in CPLR 3220 includes attorney fees that are properly recoverable in the action by agreement of the parties.  The court further held that when attorney fees are recoverable by agreement, and the offer of judgment is silent as to the treatment of attorney fees, the offer must be deemed to include attorney fees as an element of costs.  Id. at 1036.  The import of this decision in the ability of parties to create a baseline to determine the prevailing party remains to be seen.

Conclusion

The American Rule has an honored history in New York.  Still, there are opportunities for creative litigators facing unreasonable adversaries to implement strategies which put attorney fees in play.  These strategies can lead to faster, more efficient and just resolutions.

Robert S. Friedman is a partner at Sheppard, Mullin, Richter & Hampton and heads the New York litigation group.  Bradley Rank, the managing attorney of the New York office, and Aditya Mitra, a law clerk awaiting admission, contributed to the preparation of this article.  Reprinted with permission from the “February 8, 2019” edition of the “New York Law Journal”© 2019 ALM Media Properties, LLC.  All rights reserved.  Further duplication without permission is prohibited. ALMReprints.com877-257-3382 - reprints@alm.com.

Article: Defense Costs Coverage 101

January 16, 2019

A recent New York Law Journal article by Howard B. Epstein and Theodore A. Keyes, “Defense Costs Coverage 101,” reports on defense fees and costs in the insurance coverage practice area.  This article was posted with permission.  The article reads:

Upon receipt of a claim, the risk manager or in-house counsel should coordinate with the company’s insurance broker to make sure notice is submitted to the insurer.  However, even earlier, in anticipation of claims, counsel should review the terms of the relevant insurance policies and develop an understanding of the defense cost coverage provisions.

An insurance company’s obligation to pay defense costs incurred by its insured in response to a claim typically falls into one of two categories: (1) a duty to defend or (2) a duty to advance defense costs. The duty to defend is most often included in general liability (GL) policies while the duty to advance is more likely to be included in directors’ and officers’ liability (D&O) policies.  Policy forms can vary, however, and a GL or D&O policy may contain either type of defense obligation.  In addition, specialty insurance policies covering, for example, employment practices or pollution liability risks may contain either a duty to a defend or duty to advance clause.

Regardless of the type of insurance policy, an insurer may be willing to consider including either defense clause if requested by the broker or the insured.  While each of these clauses provides insurance for defense costs incurred by the insured, there are distinctions worth considering which may dictate which clause is preferable for a given insured.

Duty to Defend

While case law varies to some degree from state to state, the duty to defend is broader than the duty to advance under New York law and the law of the majority of other jurisdictions.  It is also well-settled that the duty to defend is broader than the insurer’s duty to indemnify for loss under a policy. The duty to defend is triggered “whenever the allegations in a complaint against the insured fall within the scope of risks undertaken by the insurer, regardless of how false or groundless those allegations may be.” Seaboard Surety Company v. Gillette Company, 64 N.Y.2d 304, 486 N.Y.S.2d 873 (1984).  Even where some asserted claims fall outside the scope of covered risks, as long as some of the claims are within the scope of coverage, the insurer will have a duty to defend.  Once triggered, the insurer is required to pay defense costs on behalf of the insured.

While the duty to defend is broader than the duty to advance, it also gives the insurer control over the defense of the claim.  Typically, where a policy contains a duty to defend, the insurer will have the right to appoint defense counsel.  Thus, with a duty to defend policy, the insured gets the benefit of broad defense coverage but gives up the right to choose defense counsel and, effectively, control of the defense.

An exception to this rule, in most jurisdictions including New York, is that where there is a conflict of interest between the insured and the insurer, the insured is entitled to select independent defense counsel.  Public Service Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 442 N.Y.S.2d 422 (1981).  In the case of such a conflict, the insurer is responsible to pay the reasonable defense fees of independent counsel.

Duty to Advance Defense Costs 

In contrast to the duty to defend, the duty to advance merely requires the insurer to reimburse the insured for costs incurred in defense of claims.  Moreover, while the duty to defend requires the insurer to pay defense costs on behalf of an insured whenever the claims alleged fall within the scope of the risk insured, the duty to advance only requires the insurer to advance defense costs for covered claims.

Policies that contain a duty to advance clause generally require the insurer to advance defense costs on an unspecified “timely basis” or within a specified period of time that can range from 30 to 120 days after submission of invoices.  Such policies also typically permit the insurer to allocate defense costs to covered and uncovered claims and thus, in some cases, provide a basis for the insurer to advance only a percentage of the defense costs.  In addition, a duty to advance is conditional—in the event that it is subsequently determined that there is no coverage for the claims, the insurer may have a right to seek recoupment of the defense costs from the insured.

On the other hand, in the context of a duty to advance, the insured is typically entitled to select its own defense counsel and has control of the defense as well as the responsibility to defend the claim.  In addition, a duty to advance will typically be triggered by a written demand seeking monetary relief whereas a duty to defend, in some policies, will only be triggered by an actual suit.

Key Considerations

Whether a duty to defend or duty to advance is a better fit for a particular insured may depend on several factors including the insured’s profile and the types of potential claims.  For example, a cost-conscious insured may prefer a duty to defend because defense costs will be paid directly by the insurer and because the insurer is more likely to pay 100 percent (or close to 100 percent) of the defense costs above the applicable deductible or retention.  In contrast, under a policy with a duty to advance, there is likely to be considerable lag time between the submission of legal invoices and payment by the insurer, and there is also a stronger possibility that the insurer will pay less than 100 percent of the invoices—either based on an allocation between covered and uncovered claims or persons or based on the insurer’s defense counsel guidelines.

Where choice of counsel is important to the insured, a duty to advance will likely be the preferred option.  Choice of counsel may be of primary importance to an insured if the insured has a relationship with counsel in whom they have developed confidence.  Similarly, if the claims at issue require a particular expertise or in-depth understanding of a specific industry, the insured may believe it is better positioned to select counsel than the insurer.  Likewise, where the claims asserted threaten the continued viability of the insured’s business, the insured will likely prefer to retain counsel with whom they have substantial experience or counsel with a reputation for expertise in the relevant area.

While a duty to advance clause typically grants the insured the right to select counsel, in some cases selection of counsel will be subject to insurer approval, such approval not to be unreasonably withheld.  In the case of either a duty to defend or advancement policy, it may also be possible to negotiate pre-approval of defense counsel.

Where control of the defense is the primary concern, a duty to advance policy will likely be a better fit for the insured.  Control may be the primary concern where the insured is involved in a regulated industry and where it may be the subject of investigations or claims by government agencies.  Similarly, where the insured operates in an industry in which litigation is relatively common or routine, the insured may prefer to have control over its defense.  Likewise, where a claim concerns private, confidential or even potentially embarrassing issues, the insured will likely prefer to have control of the defense.

Timely Notice and Tender

In any event, regardless of the type of defense obligation, the risk manager or in-house counsel should be sure to give timely notice of claim in order to avoid jeopardizing the right to coverage.  In addition, it is crucial to give notice as soon as possible because an insurer’s obligation to pay defense costs is not typically triggered until notice has been submitted.  So while a couple of weeks’ delay in providing notice may not jeopardize coverage, the defense costs incurred prior to the notice will not be recoverable from the insurer.  Further, to the extent that an opportunity for early settlement negotiations may arise, it will be necessary to coordinate those discussions with the insurer.  Consequently, notice should always be provided before any significant defense costs are incurred.

Howard B. Epstein is a partner at Schulte Roth & Zabel, and Theodore A. Keyes is special counsel at the firm.

Article: When Is a Prevailing Party Not a Prevailing Party for Purposes of Awarding Fees?

January 14, 2019

A recent Daily Business Review article by Richard Bec, “When Is a Prevailing Party Not a Prevailing Party for Purposes of Awarding Attorney Fees,” reports on prevailing party attorney fees.  This article was posted with permission.  The article reads:

The court just entered judgment in favor of your client after prevailing on its breach of contract action.  As you savor the victory, your lawyer brain begins outlining a motion for prevailing party attorney fees.  You notice, however, that the judge has reduced the damages award due to a “diminution of value” defense raised by defendant.  Following the reduction in the amount of damages, you question whether your client may still be the prevailing party for purposes of attorney fees under the subject agreement.

First thing first, look at the subject agreement.  If a clear reading of the attorney fees provision applies to the context and type of contract claim of your case, then you are off to a good start.  In Dear v. Q Club Hotel, Ltd. Liability Co., No. 15-CV-60474, 2017 U.S. Dist. LEXIS 181905 (S.D. Fla. Nov. 1, 2017) the Southern District refused to grant prevailing party attorney fees to a defendant that could not show how the subject attorney fees provision “clearly” and “unambiguously” authorized an award of attorney fees and costs for the type of contract claim at issue.

Your next question should be whether the only significant issue is, without a doubt, the one in which your client prevailed.  Does your case involve a clear-cut breach of contract by the defendant and nothing else, or was it more complicated?  The Eleventh Circuit Court of Appeals construes the term “prevailing party” to be the party that has prevailed on the “significant issues in the litigation.”

It is important to remember that it is not mandatory for courts to decide on a prevailing party.  The Florida Supreme Court has made clear that trial courts have the discretion to determine that there is no prevailing party and, thus, to decline to award attorney’s fees to either party, see Trytek v. Gale Industries, 3 So. 3d 1194, 1196 (Fla. 2009).  Rather, where one is determined to exist, “… the entitlement to attorneys’ fees is mandatory.”

Sometimes when parties win and lose on significant issues, the court will just pass on deciding who is the prevailing party.  That is what happened in Schoenlank v. Schoenlank, 128 So. 3d 118 (Fla. 3d DCA 2013).  There, neither party had completely prevailed on either major issue of the case.  The Third DCA stressed that an attorney fee award is not required whenever a contract provides for prevailing party fees and made clear that a trial court retains the discretion to deny fees to both parties when each has prevailed and lost on significant issues.

The same applies to federal courts applying Florida law. In R.S.B. Ventures v. Federal Deposit Insurance, 2014 U.S. Dist. LEXIS 188109, 2014 WL 11598000 (S.D. Fla. May 20, 2014), the federal court concluded that where one party had prevailed on some issues and another party had prevailed on another issue, neither party should be deemed the prevailing party for purposes of fees, and it declined to make an award to either party.

More recently, in Winn-Dixie Stores v. Big Lots Stores, 2016 U.S. Dist. LEXIS 65508, 2016 WL 2918152 (S.D. Fla. May 18, 2016) (Middlebrooks, D.J.), the court concluded that because neither party had recovered on a claim or counter-claim and because neither party had been without fault, neither was a prevailing party and neither was entitled to an award of fees.

Returning to our hypothetical at the top of this article, assuming your client’s win on the breach of contract claim is the only significant issue of the case, and your client has an applicable fee-shifting provision in the governing agreement, it is likely that your client is indeed the prevailing party.  However, a very limited result in comparison to the scope of the litigation as a whole may affect the amount of attorney fees your client may ultimately be able to recover from the court in a subsequent motion for fees see Rodriguez v. Super Shine & Detailing, No. 09-23051-CIV, 2012 U.S. Dist. LEXIS 80214, at *22 (S.D. Fla. June 11, 2012).  A setoff or reduction of damages is secondary to the significant issue of the case and generally will not affect your client’s status as the prevailing party for purposes of recovery of attorney fees.

Richard Bec is an attorney with the Miami intellectual property boutique law firm of Espinosa Martinez.  He focuses his practice on practice on intellectual property and commercial litigation, real estate law and bankruptcy matters.