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Category: Fee Doctrine / Theory

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.

Judge Applies ‘Average Fee-Paying Client' Test to Fee Request

September 10, 2019

A recent Law 360 story by David Simpson, “Hagens Berman, Cohen Milstein Fee Bid Slammed By Judge,” reports that no client would stand for the “insufficient” way that Hagens Berman Sobol Shapiro LLP and Cohen Milstein Sellers & Toll PLLC explained their billing in a $10 million attorney fee bid that followed a deal in an electronics price-fixing proposed class action, a California federal judge said in a fiery order.

U.S. District Judge James Donato said that the firms’ billing charts provide only an attorney’s name and an associated billing amount, with no explanation of how the billed time was used to help the proposed class members, which bought allegedly price-fixed linear resistors directly from electronics companies like Panasonic Corp.  The charts did not provide the level of detail required, the judge said, but he gave the firms a chance to refile their bid by next month.

“This approach is plainly insufficient under well-established standards,” Judge Donato said.  “No paying client would ever stand for it, and it is a disservice to the class and the court.”  The judge made clear that he is willing to award the firms attorney fees to compensate them for the risks they took and the work they did to reach the combined $50.25 million proposed deals on behalf of direct purchasers over the past year.

“But here, plaintiffs’ counsel at Cohen Milstein and Hagens Berman are in effect asking that they be paid whatever they think is fair, no questions asked,” Judge Donato said.  “That will not do.  The court will not award millions of dollars based on counsel’s and the named plaintiff’s say-so, especially when that money will be taken directly out of the hands of class members.”

The judge also thrashed a proposed order submitted by the firms, calling its “self-congratulatory” language “unwarranted and unhelpful.”  The proposed order described the firms’ results as “exceptional” and lauded the reputations of the two firms, the judge noted.  “Statements like these are better suited for firm marketing materials than they are for orders proposed for the court’s issuance,” he said.

The firms had asked for more than $1.8 million in expenses and requested a $25,000 bonus for named plaintiff Schuten Electronics, according to the fee bid.  Judge Donato said that the request for the named plaintiff bonus was “equally bereft of support.”

The president of the company “simply ‘estimates’ the hours of work he did with no time records or periods of any sort and only the vaguest of descriptions of what his work was,” the judge said.  “The court also notes that the proposed award equates to an eye-watering hourly rate of $455 for Schuten, which vastly exceeds anything the court has ever been asked to consider for a named plaintiff.”

Article: Consider Attorney Fee Litigation When Drafting Business Contracts

September 2, 2019

A recent Daily Business Review article by Noah B. Tennyson, “Consider Potential Litigation Fees, Costs When Drafting Business Contracts,” reports on attorney fee dispute litigation in business contracts in Florida.  This article was posted with permission.  The article reads:

Before you sue someone, it may be prudent to consider potential litigation fees and costs.  This is because, unless your claim arises from a Florida statute or contract that entitles you to recoup attorney fees, each side will bear their own regardless of who prevails.  Thus, you may find that prevailing in court results in the type of victory lamented by Plutarch during the Pyrrhic war: “if we are victorious in one more battle with the Romans, we shall be utterly ruined.”

Ask yourself this question: If I wound up in a lawsuit, would I want there to be a basis for legal fees to be awarded to the prevailing party?  Of course, if you expect to prevail in future lawsuits, then the answer is easy.  But, few truly know what tomorrow brings and simply hoping that your side will prevail in future lawsuits is likely just wishful thinking.  So, to help mitigate the risk of an uncertain future, it may be helpful to consider various legal fee language to insert into some of your business’ most important documents—its contracts.

As a starting place, look at the agreements that you executed with your landlord, vendors, bank, and other parties in order to run your business.  What does the legal fee language say?  Does it provide that any party that prevails in any dispute arising from the contract can recoup its legal fees?  If not, to what extent did your counterpart create an attorney fees clause which favors its side?  Finally, which state laws are to be applied to the contract if there is a lawsuit?

You may have chafed at these terms but signed anyway, perhaps because you saw signing as but one more requirement to get your business up and running.  Whether you signed or not, in your future contract negotiations, consider using legal fee language which may favor your business as opposed to your counterpart’s.  Aside from your own scruples, the limit to how unfair you can be is the reasonable likelihood that a judge will enforce your contract as you intended.

To determine whether a judge will enforce your legal fee language, it can be helpful to look at what Florida courts have decided in the past.  For instance, let’s say your new business is a franchise.  As noted in prior Florida cases, Subway Restaurants (Subway) has written into in its contracts that its franchisee “agrees to pay the cost of collection and reasonable attorney fees on any part of its rental that may be collected by suit or by attorney, after the same is past due.”  In other words, Subway, and only Subway, can recoup its legal fees if they arise from the franchisee failing to pay rent.

This provision appears to be an illicit one-way fee clause which Florida courts have ruled permits either side to seek a fee award, so long as that side prevails in the lawsuit.  Thus, in a dispute between Subway and one of its franchisee Florida stores, the franchisee sought attorney fees from Subway after prevailing in its claim for wrongful eviction.  However, the Florida court ruled that the franchisee’s lawsuit never triggered an entitlement to attorney fees because the legal fee language limited awards to matters involving the collection of rental payments.  Put another way, even if this fee clause were a two-way street, the lanes would still be confined to matters involving the collection of the franchisee’s rent.  Therefore, the franchisee was not entitled to recoup its legal fees even though it won its case.

As seen above, a careful examination of contract language can uncover provisions that might go unnoticed by most, but are duly noted by those seasoned in business disputes.  As another example, contracts made in Florida can be written to have the laws of other states, such as New York or Virginia, be used to resolve disputes.  This might seem innocuous, but the impact can be severe because the treatment of one-way attorney fees clauses varies from state-to-state.

In one Florida case, stockbrokers put into their brokerage agreement that New York law would govern the agreement’s terms.  The agreement also stated that stock purchasers who signed it in order to purchase stock would reimburse the brokers for any debts owed, which included related attorney fees.

When a stock trading error cost a group of purchasers more than $70,000, the purchasers sued the brokers and won damages totaling $81,500.  Yet, the Florida court refused to award the purchasers their attorney fees even though the agreement’s legal fee clause applied to their lawsuit, and even though Florida law requires a two-way street for such fee clauses.

The Florida court’s reasoning was simple: New York law does not require that one-way fee clauses be made into two-way clauses.  Because New York—and not Florida—law applied, the Florida court had no authority to grant a fee award to the stock purchasers.

You should examine proposed contracts with care because established corporations have legal teams crafting contracts which benefit them.  Bear that in mind if you consider signing.  Conversely, when drafting your own contracts, heed your lawyer’s advice.  Otherwise, you, too, may fall victim to unintended consequences.

Noah B. Tennyson is an associate at Nason Yeager in Palm Beach Gardens.  His practice focuses on commercial and business litigation matters, including commercial foreclosures, business disputes, contract litigation, condominium and homeowners’ association issues, construction defect litigation and employment issues.