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Category: Fee Doctrine / Theory

In California, Attorney Fees May Be Awarded in ‘Reverse-CPRA’

November 18, 2019

A recent Metropolitan News story, “Attorney Fees May Be Awarded in ‘Reverse-CPRA’ Case,” reports that a newspaper that intervened in an action brought by a department of the City of Los Angeles seeking a declaration that certain of its records are non-disclosable, and succeeded in effecting the release of those records, is entitled to its attorney fees under the private attorney general doctrine, the Court of Appeal for this district has held.

Justice Maria Stratton of Div. Eight wrote the opinion.  It affirms a $136,645.82 award of attorney fees under the private attorney general statute, Code of Civil Procedure §1021.5, to the San Diego Union and tacks on $12,350.33, bringing the total to $148,996.15.

The records relate to pay-outs by the Department of Water & Power (DWP) to customers in the 2014-2015 fiscal year—rebates totaling nearly $18 million—for tearing up their lawns and replacing them with fake grass.

The San Diego Union on May 19, 2015, made a request under the California Public Records Act (CPRA) for records relating to the rebates.  That request was directed to the Metropolitan Water District (MWD), a cooperative water wholesaler with 26 utilities, including DWP, as its members.

MWD failed to adhere to the statutory time limits for responding, but on June 29, 2015, did release information to the Union—but with the names and addresses of DWP customers redacted.  The newspaper pressed for particularized information.  DWP on July 31, 2015, brought an action in mandate to block MWD from releasing records pertaining to rebates to approximately 7,800 of its customers. Three other water districts intervened, seeking non-disclosure.

The Union, too, intervened, urging denial of the DWP’s petition. It also filed a cross petition under the CPRA.  Meanwhile, the significance of release of the records intensified.  The Office of City Controller on Nov. 20, 2015 released an audit showing that the program cost more and was less effective than cheaper measures to deal with the drought.

City Controller Ron Galperin, in a letter on that date to the mayor, city attorney, members of the City Council, and “All Angelenos,” reported on an “Audit of DWP Customer-Based Water Conservation Programs,” saying:  “Auditors found that DWP does not adequately prioritize water conservation projects based on which are the most cost effective.  The key component of DWP’s conservation program last year-turf replacement-targeted outdoor water use, which constitutes about half of residential water use.  But evidence suggests that the turf replacement program, called ‘Cash in Your Lawn,’ was largely a gimmick—a device intended to attract attention and publicity.

“It in some ways worked as intended.  By paying more to provide customers an initial opportunity to get involved in water conservation-in hopes that participation and behavior might continue—it had value as an advertising campaign that helped stimulate major public interest in the drought.  But this came at a rather high cost and, arguably at the cost of some fairness.  Aid was distributed Citywide but was most concentrated in the western San Fernando Valley.  As well as ordinary ratepayers, beneficiaries included some affluent households and some private golf courses. One particular contractor benefited handsomely.”

Los Angeles Superior Court Judge James C. Chalfant on Jan. 15, 2016, denied the DWP’s petition and granted that of the Union. Those decisions were not appealed.  The DWP and the three water districts did appeal the attorney fee award against them.  Chalfant’s award of $25,319 against the MWD in connection with the cross-petition, pursuant to a provision in the CPRA, was not in issue in the appeal.

Stratton said that DWP’s action to block release by MWD of records “is not specifically authorized by CPRA, but this District Court of Appeal has permitted non-statutory actions to prevent disclosure of records requested under CPRA, that is reverse-CPRA actions.”

She cited Div. Seven’s 2012 decision in Marken v. Santa Monica-Malibu Unified School District, and explained:  “Such reverse actions have been viewed as necessary to protect the privacy rights of individuals whose personal information may be contained in government records, because CPRA provides no mechanism for notifying such individuals of the requested disclosure and does not specifically authorize actions to prevent disclosure.”

The jurist observed:  “This case highlights many of the issues that have emerged from permitting reverse-CPRA actions, like DWP’s, to prevent disclosure of public records.  The issue most directly implicated in this case, and the only issue we consider on appeal, is the availability of attorney fees in reverse-CPRA actions.”

She declared: “We conclude Union was eligible for attorney fees under CPRA for work on the CPRA cross-petition and for attorney fees under Code of Civil Procedure section 1021.5 for its work opposing the petition for writ of mandate….The trial court did not abuse its discretion in finding Union met the requirements of Code of Civil Procedure section 1021.5 for attorney fees.  Union was the prevailing party and its action resulted in the enforcement of an important right affecting the public interest, conferring a significant benefit on the general public.”

Stratton elaborated: “DWP’s action, if successful, would have established or expanded the ability of utilities to withhold information from the public and curtailed the public’s ability to obtain information on how the DWP, and potentially all public utilities, spends public funds. The expenditure of public funds is a matter of clear public interest….If, as DWP argued, its customers’ privacy rights outweighed the public’s clear and well-established interest in monitoring the expenditure of public funds, it is difficult to imagine when disclosure of customer information could ever be warranted.”

She went on to say: “DWP sought to block the public’s access to records necessary to monitor and assess the use and alleged misuse of public funds, and potentially to shield its customer information from disclosure in all circumstances.  That is sufficient for purposes of Code of Civil Procedure section 1021.5.”

DWP relied on the decision in Marken, which established the recognition of reverse-CPRA actions.  That case, it contended, supports its position that attorney fees may never be awarded in such cases.  There, Presiding Justice Dennis Perluss said that “a requesting party who participates in a reverse-CPRA lawsuit would not be entitled to the recovery of attorney fees, as would be the case if the party had successfully litigated his or her right to access to documents against a public agency.”

Stratton pointed to factual differences between that case and the one at hand, adding: “Further, Marken’s statement about attorney fees was part of the court’s general discussion of the viability of reverse-CPRA actions and so was dicta; no attorney fees were sought in that appeal.”

She did ascribe significance to an April 12, 2018 opinion by this district’s Div. One in Pasadena Police Officers Assn. v. City of Pasadena.  The underlying facts were that a police union sought an order in the trial court barring the public release of a report relating to a police shooting; the Los Angeles Times intervened, seeking the release of the entire report; the Los Angeles Superior Court found the report partially disclosable; the union sought a writ in the Court of Appeal; Div.  One on Sept. 10, 2015, denied the petition and directed that, on remand, disclosure of additional portions be considered; the trial court ordered further disclosures.

The Times then sought $350,422 in attorney fees under the CPRA and the private attorney general statute. It received an award of $45,472, only under the CPRA.  In the 2018 opinion, Div. One, in an opinion by Justice Jeffrey Johnson, reversed the denial of fees under §1021.5, and remanded the case.

DWP maintained that the Pasadena Police Officers Assn. case (“PPOA”) is distinguishable. Stratton responded: “We disagree.  PPOA is quite similar factually to this case. Both PPOA and this appeal involve records related to a matter of public interest; the PPOA reverse-CPRA action was brought by a union representing the interests of its large number of members, and this reverse-CPRA action to prevent disclosure was brought by a public agency, DWP, representing a large number of its customers.”

An Exception to the American Rule: Attorney Fees Under ERISA §502(G)(1)

November 7, 2019

A recent New York Law Journal article by Michael C. Rakower and Melissa Yang of Rakower PLLC in New York, “Attorney Fees Under ERISA §502(G)(1): An Exception to the American Rule,” report on ERISA §502(g)(1).  This federal statute vests courts with discretion to award attorney fees and costs in an action brought by a plan participant, beneficiary or fiduciary.  This article examines the standards courts apply when assessing motions for these discretionary awards.  This article was posted with permission.  The article reads:

The Employee Retirement Income Security Act (ERISA) marks one of those rare instances where Congress chose to depart from the American Rule to grant litigants an opportunity to seek attorney fees. ERISA §502(g)(1) vests courts with discretion to award attorney fees and costs in an action brought by a plan participant, beneficiary or fiduciary.  This article examines the standards courts apply when assessing motions for these discretionary awards.

‘Some Degree of Success on the Merits’

In 2010, the U.S. Supreme Court issued an opinion in Hardt v. Reliance Standard Life Ins. Co., clarifying the standard under ERISA §502(g)(1). 560 U.S. 242 (2010).  A litigant need not be a “prevailing party” to be eligible for a fee award; rather, the litigant must establish “some degree of success on the merits.” Id. at 254-55.  According to the Second Circuit, this is “the sole factor that a court must consider in exercising its discretion.” Donachie v. Liberty Life Assurance Co. of Boston, 745 F.3d 41, 46 (2d Cir. 2014) (emphasis in original).

The “some degree of success on the merits” standard is met when a claimant obtains a “favorable judicial action on the merits.” Scarangella v. Grp. Health, 731 F.3d 146, 152 (2d Cir. 2013).  A summary judgment or trial verdict can, of course, meet this standard, see, e.g., Buckley v. Slocum Dickson Med. Grp., PLLC, 585 Fed. App’x 789, 794 (2d Cir. 2014) (stating employee entitled to seek attorney fees under ERISA §502(g)(1) after prevailing on summary judgment); Toussaint v. JJ Weiser, 648 F.3d 108, 110 (2d Cir. 2011) (acknowledging some degree of success requirement was met when summary judgment was affirmed in favor of the directors of ERISA plan sponsor), as can a favorable out-of-court settlement if it is triggered by court action, see, e.g., Scarangella, 731 F.3d at 154 (citing to Perez v. Westchester Cnty. Dep’t of Corr., 587 F.3d 143, 150-51 (2d Cir. 2009)).  Even a remand to the plan administrator can qualify where it is premised upon a determination that the administrator’s prior assessment of a claim was deficient or rendered in an arbitrary or capricious manner.  See, e.g., Gross v. Sun Life Assurance Co. of Canada, 763 F.3d 73, 79 (1st Cir. 2014); McKay v. Reliance Standard Life Ins. Co., 428 F. App’x 537, 546-47 (6th Cir. 2011); Valentine v. Aetna Life Ins. Co., 2016 WL 4544036, at *4 (E.D.N.Y. Aug. 31, 2016); Delprado v. Sedgwick Claims Mgmt. Servs., No. 1:12-CV-00673 BKS, 2015 WL 1780883, at *41 (N.D.N.Y. April 20, 2015) (concluding plaintiff obtained “some degree of success on the merits” when plaintiff’s claim was remanded back to plan administrator because prior denial of disability benefits was arbitrary and capricious).

In contrast, “trivial success on the merits” or a “purely procedural victory” is insufficient to merit an award of attorney fees. Hardt, 560 U.S. at 255.  Accordingly, obtaining “relief due to the voluntary conduct of another party after minimal litigation” will not warrant a discretionary award. Scarangella, 731 F.3d at 155.

Favorable Slant Toward Plaintiffs

Case law shows that a court’s discretion is guided by Congress’ intent to encourage participants and beneficiaries to enforce their statutory rights under ERISA. Salovaara v. Eckert, 222 F.3d 19, 28 (2d Cir. 2000).  As a result, even though ERISA §502(g)(1) contemplates that an award may be imposed against “either party,” courts have construed attorney fee motions with a “favorable slant towards ERISA plaintiffs … to prevent the chilling of suits brought in good faith … .” Id. (internal citation omitted); see, e.g., Critelli v. Fidelity Nat’l Title Ins. Co. of New York, 554 F. Supp. 2d. 360 (E.D.N.Y. 2008) (declining to award attorney fees to employer because plaintiff did not act in bad faith and a fee award to employer could act as a disincentive to potentially meritorious ERISA actions).  Rarely does a court award attorney fees against a participant or beneficiary; such instances tend to arise when a court not only rules against the claimant, but also deems the action to be frivolous.  See, e.g., Garlock v. Nelson, No. 96-CV-1096(FJS), 1998 WL 315089, at *1 (N.D.N.Y. June 9, 1998) (considering defendant’s application for fees after concluding defendant is entitled to a fee award because participant’s claims under ERISA are frivolous).

(Discretionary) ‘Chambless’ Factors

Upon a finding of “some degree of success on the merits,” a court in New York may (but is not required to) consider five additional factors to determine whether to grant a fee award.  Hardt, 560 U.S. at 255 n.8 (“[A] court may consider the five factors adopted by the Court of Appeals … in deciding whether to award attorney fees.”); Donachie, 745 F.3d at 46 (“Although a court may, without further inquiry, award attorney fees to a plaintiff who has had ‘some degree of success on the merits,’ Hardt also made clear that courts retain discretion to ‘consider [] five [additional] factors … in deciding whether to award attorney’s [sic] fees.”).  These factors, known as the “Chambless Factors,” are set forth in Chambless v. Masters, Mates & Pilots Pension Plan, 815 F.2d 869, 871 (2d Cir. 1987) as follows:

(1) the degree of the offending party’s culpability or bad faith, (2) the ability of the offending party to satisfy an award of attorney’s fees, (3) whether an award of fees would deter other persons from acting similarly under like circumstances, (4) the relative merits of the parties’ positions, and (5) whether the action conferred a common benefit on a group of pension plan participants.

If the court looks to the Chambless Factors, then it must consider all of the factors; it cannot selectively weigh certain factors and disregard others. Donachie, 745 F.3d at 47.  However, a court may grant a fee award after considering all of the Chambless Factors even if all factors do not weigh in favor of the award. Locher v. Unum Life Ins. Co. of Am., 389 F.3d 288, 299 (2d Cir. 2004) (concluding that failure to satisfy fifth Chambless factor does not preclude an award of fees).

Interim Awards

While the majority of litigants seek attorney fees and costs at the conclusion of a litigation, parties who face financial adversity during the course of the litigation may seek an interim award so long as they can satisfy the “some success on the merits” standard.  See, e.g., Pagovich v. Moskowitz, 865 F. Supp. 130, 139 (S.D.N.Y. 1994) (granting interim attorney fees to plaintiff after defendant admitted to liability for some benefits owed to plaintiff under the plan); Aronoff v. Serv. Employees Local 32-BJ AFL-CIO, No. 02-CIV-5386, 2003 WL 1900832, at *2 (S.D.N.Y. April 16, 2003) (acknowledging court’s authority under ERISA to award interim attorney fees but declining to do so under the facts of the case).  However, practically speaking, any litigant contemplating a motion for interim relief should recognize that establishing sufficient success to warrant discretionary relief will likely be more difficult in the middle of the case than at the end.

Recoverable Costs

Under ERISA §502(g)(1), litigants can recover attorney fees and other reasonable out-of-pocket expenses incurred by their attorneys, such as filing fees, service of process fees, courier charges and printing costs.  Algie v. RCA Glob. Commc’ns, 891 F. Supp. 875, 898 n.13 (S.D.N.Y. 1994) (“Section 502(g)(1) of ERISA refers to an award of ‘costs’, but that term apparently covers not only taxable costs under 28 U.S.C. §1920, but also other disbursements that are customarily charged to the client.”); Severstal Wheeling v. WPN, No. 10CIV954LTSGWG, 2016 WL 1611501, at *4 (S.D.N.Y. April 21, 2016); Cohen v. Metro. Life Ins. Co., No. 00 CIV 6112 LTS FM, 2007 WL 4208979, at *2 (S.D.N.Y. Nov. 21, 2007), aff’d in part, 334 F. App’x 375 (2d Cir. 2009); Taaffe v. Life Ins. Co. of N. Am., 769 F. Supp. 2d 530, 544-45 (S.D.N.Y. 2011).  These costs must have been incurred in connection with the prosecution or defense of a lawsuit in court.  Peterson v. Cont’l Cas. Co., 282 F.3d 112, 119 (2d Cir. 2002).  Thus, pre-litigation costs incurred by litigants to exhaust their administrative remedies or to attempt a negotiated settlement are not recoverable.  See Aminoff v. Ally & Gargano, No. 95 CIV. 10535 (MGC), 1996 WL 675789, at *4 (S.D.N.Y. Nov. 21, 1996) (disallowing fee award to plaintiffs who expended resources to settle retirement plan dispute because no litigation was commenced).  However, “fees incurred during an administrative remand ordered by the district court and over which the court retains jurisdiction are authorized by the statute.” Id. at 122.  (“The fact that a court orders additional fact finding or proceedings to occur at the administrative level does not alter the fact that those proceedings are part of the ‘action’ as defined by ERISA.”)

Factors Affecting the Size of the Award

Any fee award under ERISA §502(g)(1) must be reasonable.  In New York, courts generally apply the lodestar method, which multiplies the number of hours reasonably expended in the action by attorneys and paralegals against a reasonable hourly rate for each such timekeeper.  Conners v. Connecticut General Life Ins. Co., No. 98-CV-8522(JSM), 2003 WL 1888726, at *1 (S.D.N.Y. April 15, 2003).  After determining the lodestar, the court may in its discretion deduct from that amount the cost of legal services rendered in connection with unsuccessful aspects of the case. Id. at *2.  In this way, hours expended on failed claims wholly unrelated to the successful ones may be excluded from the fee award. Grant v. Martinez, 973 F.2d 96, (2d Cir. 1992). See also Conners, 2003 WL 1888726, at *2 (defining claims as unrelated if they are based on “‘different claims for relief that are based on different facts and legal theories’”) (quoting Hensley v. Eckerhart, 461 U.S. 424, 434 (1983)).  But if all of the claims are interrelated (i.e., the claims involve a “common core of facts” or are “based on related legal theories”), then the court should “focus on the significance of the overall relief obtained” to determine whether any reduction to the lodestar is warranted.  Conners, 2003 WL 1888726, at *2 (internal quotation marks and citation omitted).  Of course, courts are always free to adjust a lodestar award by comparing it to the size of the plaintiff’s recovery, even if no reduction for unsuccessful claims is warranted.  In doing so, courts discharge their obligation to consider whether “[t]he amount of fees awarded [are] reasonable in relation to the results obtained.” Id.

Aside from the lodestar, courts may use their discretion to award an appropriate sum to further the goals of ERISA.  This seems most apt in the case of fee award to a defendant who successfully defends against a frivolous action. Weighing the deterrent value of a fee award against a plaintiff for filing frivolous claims with the chilling effect that award would have on potential plaintiffs, courts have discretion to grant a defendant an award lower than the lodestar would support.  See, e.g., Christian v. Honeywell Retirement Ben. Plan, No. 13-CV-4144, 2014 WL 1652222, *8 (E.D. Penn. April 24, 2014) (concluding that an award of $10,000 to defendant serves the purpose of protecting pension benefits and deterring conduct at odds with ERISA’s purpose even though defendant incurred approximately $76,779.18 in succeeding on its motion to dismiss).  Courts are also free to adjust the lodestar upward if, for example, a party’s counsel exhibits superior work product and exceeds the expectation of the party and normal levels of competence.  Feinstein v. Saint Luke’s Hosp., No. 10-CV-4050, 2012 WL 4364641, at *6 (E.D. Penn. Sept. 25, 2012) (citing Rode v. Dellarciprete, 892 F.2d 1177, 1184 (3d Cir. 1990).)

Conclusion

ERISA §502(g)(1) offers an exception to the American Rule to encourage participants, beneficiaries and fiduciaries of ERISA-governed plans to vindicate their rights in court.  A court’s discretionary right to grant a fee award under this provision arises when a party achieves “some degree of success on the merits.”  Courts apply a plaintiff-friendly slant to motions for attorney fees in recognition of ERISA’s fundamental purpose, which is to protect employees’ rights.  This approach generally insulates plaintiffs unsuccessful in litigation from the pain of an adverse fee award, but offers a valuable incentive to a party who may have been wrongly denied an applicable benefit.

Reprinted with permission from the October 10, 2019 edition of the New York Law Journal © 2019 ALM Media Properties, LLC. All rights reserved.  Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

Michael C. Rakower and Melissa Yang are partners at Rakower Law PLLC, a boutique commercial litigation firm located in New York City.  www.rakowerlaw.com.  

Can Insured Recover Attorney Fees From Public-Private Insurers?

October 10, 2019

A recent Law 360 article by Alexander Cogbill, “Can Insureds Recover Atty Fees From Public-Private Insurers?,” reports on the recent case law on attorney fee entitlement and recovery in insurance coverage litigation.  This article was posted with permission.  The article reads:

In 2009, the U.S. Court of Appeals for the Fifth Circuit definitively foreclosed awards of attorney fees in coverage litigation against insurance companies arising out of flood claims under policies written under the National Flood Insurance Program (NFIP) with its decision in Dwyer v. Fidelity National Property & Casualty Insurance Co.

This appeared to be the final word on the subject until 2019, when, in a series of three opinions, the United States District Court for the Middle District of Florida held otherwise.  These recent decisions have revived a decade-old argument about whether public-private partnerships — in this case, the NFIP — trigger a distinct federal civil rights statute: the Equal Access to Justice Act.

The National Flood Insurance Program: On the Radar

The NFIP was signed into law in 1968 as a response to endemic underinsurance which had been laid bare by a series of disastrous river floods and hurricanes in prior years.  The NFIP has enabled more than 5,000,000 homeowners and small businesses within 18,000 communities to purchase insurance for flooding annually at discounted premiums.

Although the federal government subsidizes all of the policies underwritten within this program, the Federal Emergency Management Agency, which runs the program, does not administer most NFIP policies.  Instead, FEMA engages the expertise and resources of private insurance companies as “fiscal agent[s]."  By this arrangement, the federal government accepts the insureds’ risk but delegates underwriting and claim administration.

Although the program has been a success in terms of enrolling policy holders, resultant expenses and risk accepted by the NFIP has grown unwieldy.  Presently, the program owes more than $25 billion dollars and continues to underwrite trillions of dollars of additional risk.  Accordingly, the future of the program is uncertain.

For purposes of the following discussion, understanding several key features of NFIP policies is useful.  First, FEMA receives most of the premiums (after a fee from the participating insurers) and pays the costs of claims, investigation and litigation, albeit indirectly.  Second, because NFIP policies are governed by federal common law, suits regarding these policies are properly asserted in federal court, without consequential damages.

Equal Access to Justice Act: All Hands on Deck

The American Rule dictates that litigants pay their own attorney fees unless fee-shifting is prescribed by contract or statute.  The EAJA is a substantial statutory exception to this default rule. Under the EAJA, a party that prevails in litigation against “the United States or any agency or official of the United States” may recover attorney fees except when a court finds that the position of the United States was “substantially justified or [] special circumstances make an award unjust."  Notably, there is no fee-shifting provision when a plaintiff is unsuccessful.

The EAJA was enacted in 1980 to assist litigants, particularly civil rights litigants, in accessing the court systems so that they would be on equal footing with the government and would be able to pursue their rights without being deterred by the cost of legal representation.  The legislative history specifically states that the EAJA is not to burden private parties with attorney fees, but is silent about the application to the NFIP.

FEMA is an agency of the United States, and suits against them allow for attorney fees unless defenses are “substantially justified."  However, whether a private insurer is an agent of the United States for the purpose of this section is more nuanced.  Hurricane Katrina litigation in the Eastern District of Louisiana highlighted this confusion, with decisions repeatedly flip-flopping on the issue over three years.

Dwyer v. Fidelity: The Eye of the Storm

The Katrina decision on this topic to filter to a higher court was Dwyer v. Fidelity National Property and Casualty Insurance Co.  At the trial court level, the Federal District Court for the Eastern District of Louisiana held that insurers participating in the NFIP were acting as “an instrumentality of the United States” and, as such, qualified for the EAJA fee shifting.  In its opinion, the Dwyer trial court observed that the organizing statute of the NFIP utilizes the term “agent” to describe participating insurers qualifying them as “agencies” as contemplated by the EAJA for the purposes of fee shifting.

On appeal, the Fifth Circuit Court of Appeals reversed.  The Dwyer appellate court began its discussion by observing that Title 28 defines “agency” for the purpose of the EAJA as “any department, independent establishment, commission, administration, authority, board or bureau of the United States or any corporation in which the United States has a proprietary interest…”  The court further noted that none of these categories describe a private insurer subsidized by FEMA.

The court next looked to the NFIP regulations which describe the role of a private insurer as a "fiscal agent" rather than an "agent" for the purposes of the EAJA.  The court found support for this conclusion in Supreme Court of the United States precedent which similarly cautions that mere contractual relationships do not transform all federal contractors into governmental “agen[cies].”  Summarizing their opinion, the court stated, “[t]he District Court might be correct in concluding that allowing suit against private insurers is a mere formality imposed by regulation, but regardless, the EAJA must be applied according to its terms.”

Since Dwyer, no appellate court has revisited this issue, and when trial courts — with the notable exception of the Middle District of Florida — have confronted the issue with NFIP participating insurers, they have adopted Dwyer’s reasoning.

Middle District of Florida’s Storm Surge

Initially, the Middle District of Florida capitulated to Dwyer.  In 2017, citing Dwyer, the court decided Chatman v. Wright National Flood Insurance Co. in favor of the private NFIP-insurer dismissing claims for attorney fees.

However, this year, courts in this one federal district have latched onto a novel argument and are going against the current.  In these cases, the courts determined that although the insurer was not an agency of the United States, the payment made under a FEMA policy is functionally remitted by the United States government.  Under this reasoning, this connection with U.S. Department of the Treasury funds is sufficient to survive an initial motion to dismiss.

These decisions rely on the U.S. Court of Appeals for the Eleventh Circuit opinion Newton v. Capital Assurance Co., which assessed whether prejudgment interest is appropriate under the NFIP.  In reaching its decision, the Newton court reasoned that the United States retained a financial stake in litigation against NFIP insurers.  Therefore, its sovereign protection from prejudgment interest extends to suits against its insurer partners as any interest charges are, in reality, “direct charges against FEMA.”  Newton holds “the line between a [NFIP insurer] and FEMA is too thin to matter for the purposes of federal immunities such as the no-interest rule.”  As is evident, Newton’s reasoning diverges from Dwyer’s even if they address slightly different issues.

In January of 2019, the Middle District of Florida first began its swim against the current by declining to dismiss attorney fees entirely and only eliminating state claims of attorney fees in Lovers Lane LLC v. Wright National Flood Insurance Co.  This decision cited but did not explicitly rely upon Newton in permitting a claim for attorney fees under the EAJA to survive an initial pre-answer motion.  In fact, the Lovers Lane court failed to discuss its reasoning except to acknowledge pre-Dwyer decisions ruling in favor of insurers on the same issue.

In April, the court issued a second decision departing from Dwyer.  In Collier v. Wright National Flood Insurance Co. the court again declined to dismiss a claim of attorney fees, citing Lovers Lane LLC without further discussion.  On June 13, the court committed to this interpretation in Arevalo v. American Bankers Insurance Co. of Florida. The court held:

Based on the principles and regulations discussed by the Eleventh Circuit in Newton, the determining factor is not so much whether [the insurer] is an “agency” of the United States under the Act.  Rather, it seems to matter more whether the government is the source of the funds or who would pay an award of attorney’s fees.  Here, payment of attorney’s fees may be a direct charge on federal funds if FEMA approves [the insurer’s] request for reimbursement of the attorney’s fees incurred defending this NFIP litigation.

This is of course assuming that [the insurer] seeks reimbursement for its defense costs from FEMA and otherwise has an arrangement with FEMA whereby it is entitled to reimbursement.  Either way, it is at least plausible at this point in the litigation that attorney’s fees may be paid from federal funds by FEMA.

Notably, however, the Middle District’s reasoning has already been rejected by the Southern District of Florida in its Aug. 12 decision in Hampson v. Wright National Flood Insurance CoHampson dismissed Arevalo in a footnote, holding without further discussion, “this Court disagrees [with Arevalo’s conclusion that the source of the funds plausibly relates to fee shifting] and declines to depart from case law in this circuit and other courts finding that a WYO carrier is not an agency of the United States as required by the EAJA.”

Next Steps: Batten Down the Hatches

At this point, it is unclear whether other districts will join the Middle District of Florida in applying Newton to the EAJA. Even if the trend were isolated to this single court — which is by no means guaranteed — it represents a district split on this critical issue.  Moreover, this conflict may portend a circuit split between the U.S. Court of Appeals for the Fifth Circuit (Dwyer) and the Eleventh Circuit (Newton).

The consequences of this nascent split are not purely academic.  One-way fee shifting agreements — where only the defendant is potentially liable for their adversary’s attorney fees — such as the EAJA, are understood to raise settlement values in favor of defendants (and their attorneys) and increase the likelihood of settlements on otherwise questionable claims.  Accordingly, the practical effect of this line of cases in the Middle District of Florida may be increased payments to NFIP insureds throughout the United States.  For all the legitimate policy calculations undergirding the EAJA, this effect on the financially strapped NFIP was not clearly intended.

Given the existing financial vulnerabilities of the NFIP, the sheer number of policy holders (greater than 5,000,000), and the predictions of increasing intensity of hurricanes and flooding because of climate change, this trend merits close monitoring.  NFIP insurers and United States taxpayers alike have a vested interest in its outcome.  These cases from the Middle District of Florida may be a drop in the ocean or could foreshadow a change in the weather.

Alexander Cogbill is an associate at Zelle LLP in New York.

SCOTUS Questions Seem to Doubt USPTO’s Attorney Fee Claim

October 9, 2019

A recent Law 360 story by Jimmy Hoover and Bill Donahue, “Justices Question USPTO’s Bold Pursuit of Atty Fees,” reports that the U.S. Supreme Court appeared skeptical of the U.S. Patent and Trademark Office’s recent practice of seeking attorney fees from parties that take the agency to court, given that the USPTO paid for its own lawyers for more than a century.  At oral arguments in the case Peter v. NantKwest, the justices, minus an ailing Justice Clarence Thomas, peppered an attorney from the U.S. Solicitor General’s Office with questions about the USPTO’s new and aggressive pursuit of attorney fees, which extends even to cases that the agency loses.

The Federal Circuit ruled last year that the policy violates the so-called American Rule, a deep-rooted doctrine that litigants must pay their own attorneys unless Congress expressly says otherwise.  Several members of the Supreme Court seemed sympathetic to that view.  “What sense does it make to think that Congress wanted the winning party to turn around and pay the government's legal fees, given how unusual that is?” Justice Brett Kavanaugh asked. “Why would Congress have thought to do it that way?”

The case revolves around de novo appeals, which allow dissatisfied patent or trademark applicants to effectively relitigate their application in district court rather than merely appeal to the Federal Circuit.  Both the Patent Act and the Lanham Act say that for applicants who choose the de novo route, “[a]ll the expenses of the proceedings shall be paid by the applicant.”

USPTO long interpreted that to cover things like travel expenses and copying, but started arguing in 2013 that the “expenses” provision covers attorney fees too.  In the case at hand from NantKwest Inc., that included over $78,000 for the cost of the agency attorneys who defended the company’s lawsuit over a rejected cancer treatment patent.

At arguments, Justices Neil Gorsuch and Stephen Breyer homed in on the fact that the USPTO had long declined to pursue attorney fees from applicants under the current statute or its predecessors.  “How did the government just figure this out?” Justice Gorsuch asked.  While Deputy Solicitor General Malcolm Stewart admitted — to laughter in the courtroom — that the abrupt change was “an atmospherically unhelpful point for us,” he denied that this historical record doomed his case.  “For that 170-year period we were foregoing a source of income that we were entitled to get,” he said.

Defending the policy, Stewart said that collecting attorney fees is “consistent with the overall statutory scheme” whereby the USPTO is supposed to cover aggregate costs, including personnel costs.  He also pointed out that NantKwest’s lawsuit “caused us to incur 30 times the expenses that would ordinarily be the fees for the patent application and examination.”

“It seems fair and appropriate to make the applicant pay,” he said.  Morgan Chu of Irell & Manella LLP, representing the company, disagreed.  “The government is arguing for a radical departure from the American Rule,” Chu said.  “It is arguing that when a private party sues the government for its improper action, then that private party must pay for the government's attorneys, even if the government and its attorneys are flatly wrong.”

3 Things to Watch with USPTO Fee Rule Before SCOTUS

October 4, 2019

A recent Law 360 article by Bill Donahue, “3 Things to Watch as USPTO’s Fee Rules Hits the High Court, reports on the USPTO attorney fee rule that's before the U.S. Supreme Court.  The article reads:

With the U.S. Supreme Court set to hear arguments over the U.S. Patent and Trademark Office's controversial policy on attorney fees, Law360 asked legal experts what they’re expecting to hear from the justices.  The case, Peter v. NantKwest, will determine the legality of an unusual USPTO policy that demands reimbursement of the agency’s attorney fees in certain types of appellate proceedings — regardless of whether or not it wins the case.

The USPTO has argued that the tactic, first rolled out in 2013, is necessary to pay for a more expensive appellate option, but critics say it will harm small businesses and individual inventors who can’t afford to automatically pay the agency’s legal bills.  Lower appeals courts have split on whether the policy violates the so-called American Rule — a deep-rooted doctrine that says litigants must pay their own expenses unless Congress expressly says otherwise.

After the Federal Circuit struck down the policy last year in a case filed by the drugmaker NantKwest, the USPTO appealed to the high court, which agreed to hear the case in March.  With oral arguments set for Monday morning, here are three big issues that experts who have been tracking the case say they’ll be watching.

American Rule

One major factor to watch is the extent to which the justices focus on big questions about the American Rule and public policy or on narrow questions about exact statutory language.  The USPTO's fee policy is rooted in a novel interpretation of so-called de novo appeals — a longer and more fact-intensive route that allows a dissatisfied patent or trademark applicant to appeal to a district court rather than simply asking the Federal Circuit to review a refusal on the existing record.

At issue at the high court?  Language included in both the Patent Act and the Lanham Act that says applicants who choose the de novo route must reimburse "all expenses of the proceeding."  Crucially, that requirement applies regardless of whether an applicant wins or loses its appeal.

For decades, the USPTO interpreted that language to mean relatively minor expenses, like travel costs and expert fees.  But that changed in 2013, when the USPTO started demanding that applicants reimburse the substantially larger cost of the salaries paid to agency attorneys.  Whether that reinterpretation is legal has split the circuits courts.

In the current case against NantKwest, the Federal Circuit ruled that the policy violates the American Rule, saying that Congress did give the agency clear authority to win such fees.  But in a separate trademark case, the Fourth Circuit refused to apply the American Rule, and instead simply held that the definition of “all expenses” could reasonably include salaries paid to agency lawyers.

Experts will be watching whether the justices seem to be focusing, like the Federal Circuit did, on the bigger question of the American Rule or whether they merely want to analyze what “all expenses” means.  “If questions from the bench refer to the American Rule, it may mean the court views the government’s case skeptically,” said Theodore H. Davis, an attorney Kilpatrick Townsend & Stockton LLP who penned an amicus brief against the USPTO for the American Bar Association.  “But if the court zeros in on the definition of the word ‘expenses,’ that may suggest it’s leaning toward a reversal or a vacatur,” Davis said.

Across the Aisle

The challenge to the USPTO’s fee policy presents arguments that experts say could resonate on with both ideological wings of the high court.  Much of the criticism of the agency’s policy has been centered on the idea that it would limit access to justice for applicants with fewer resources.  The ABA said the rule means that applicants' “wealth would determine their access to the pathway to justice provided by Congress.”  The International Trademark Association warned that it would make de novo appeal unavailable “for all but the wealthiest applicants.”

Those policy arguments could strike a chord with the court’s liberal members, experts say.  “The more liberal justices may focus on the fact that fee-shifting creates an access to justice problem,” said Dyan Finguerra-DuCharme, an attorney at Pryor Cashman LLP.  “Those with less money will hesitate to pursue legitimate claims by civil action.”

For the conservatives, an abrupt about-face by a federal administrative agency that results in foisting large legal bills onto private companies might not sit well.  “I am particularly looking forward to the questions that Justices Neil Gorsuch and Brett Kavanaugh present to the parties,” said William Atkins, an attorney at Pillsbury Winthrop Shaw Pittman LLP who wrote an amicus brief against the USPTO for the Federal Circuit Bar Association.  “The views of administrative law may be on full display.”

Dissenting Voice

Ahead of arguments, the amicus briefs filed in the case have largely been one-sided, with almost all of them asking the court to strike down USPTO’s policy.  But one outside group, a conservative think tank called the R Street Institute, is pressing the court to uphold the agency’s interpretation.  According to R Street, administrative procedures at the USPTO for rejected patent applications largely replicate the advantages of a de novo appeal for a fraction of the cost, eliminating much of the “access to justice” policy arguments against the fee rule.

The real advantage of de novo appeals, according to R Street, is that they can be exploited to give “well-financed applicants” in the pharmaceutical industry extra time on the back end of a patent term.  Under separate provisions of the Patent Act, time spent litigating a de novo case is tacked onto the term.  For Charles Duan, the attorney at R Street who penned the group’s brief, the extent to which that argument gains traction with the justices will be another element to watch.