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Category: Fee Shifting

Attorney Fees Under CA Trade Secrets Act Belong to Attorney, Not Client

September 16, 2020

A recent Metropolitan News-Enterprise story, “Attorney Fees Under Trade Secrets Act Belong to Attorney, Not Client—C.A.,” reports that attorney fees awarded to a “prevailing party” under the California Uniform Trade Secrets Act belong to the attorney and not the attorney’s client absent an enforceable agreement providing otherwise, the Third District Court of Appeal held.  The opinion by Acting Presiding Justice Coleman Blease affirms a judgment by Sacramento Superior Court Judge Alan G. Perkins who determined that the law firm of Porter Scott, P.C. was entitled to the attorney fees paid by the opposing party in litigation in which the firm successfully represented defendant Johnson Group Staffing Company.

The amount that was awarded initially, pursuant to Civil Code §3426.4, was $735,781.27; appeals ensued and, when paid, the fees had expanded to $917,811.48; after Perkins deducted sums which the Johnson Group had paid to Porter Scott, the remainder was $827,938.17, to which the judge added 90 percent of the interest that accrued while the money was in a blocked account.  Blease pointed to the California Supreme Court’s 2001 decision in Flannery v. Prentice.  The issue was whether the client or her former lawyers and their firms had entitlement to attorney fees that were awarded under Government Code §12900, a portion of the California Fair Employment and Housing Act.

Then-Justice Kathryn Werdegar (now retired) wrote, over the lone dissent by then-Justice Joyce Kennard (also retired): “[W]e conclude that attorney fees awarded pursuant to section 12965 (exceeding fees already paid) belong, absent an enforceable agreement to the contrary, to the attorneys who labored to earn them.”

Blease declared in yesterday’s opinion: “We thus conclude that attorney fees awarded under section 3426.4 (exceeding fees the client already paid) belong to the attorneys who labored to earn them, absent an enforceable agreement to the contrary.”

He went on to say: “Reading section 3426.4 to vest awarded ‘attorney’s fees’ in counsel would be consistent with the ordinary view that attorney fees compensate attorneys, not litigants… Reading the statute to vest fee awards in litigants, on the other hand, would at times stray from that ordinary understanding of attorney fees.”

The Johnson Group argued that Porter Scott had agreed to forego an award by consenting, in writing, to forfeit its entitlement to the past-due amount of $92,845.86, except for $25,000 of that amount, and to provide pro bono representation.  Blease noted that a footnote in the agreement provides: “Should the Johnson Group or Chris Johnson be awarded fees in the future based on Porter Scott’s underlying representation, all fees shall be reimburseable [sic] at that point and this waiver shall not apply.”

Blease added: “[A]s the Flannery court recognized, even attorneys who perform services pro bono may obtain ‘reasonable’ attorney fees under a fee-shifting statute.”

Five policies discussed by the Flannery court in support of such fees belonging to attorneys and not litigants were: 1) to encourage representation of legitimate FEHA claims and discourage frivolous suits; 2) to avoid unjust enrichment where an attorney had not been paid for services rendered; 3) to ensure fairness that the losing party pays only fees incurred and not a punitive penalty; 4) to avoid attorney fee-splitting; and 5) to avoid wrongly punishing attorneys who fail to secure written fee agreements.

Article: The Attorney Fee Key to Unlocking Additional Insured Coverage

August 24, 2020

A recent New York Law Journal article by Julian D. Ehrlich, “The Attorney Fee Key to Unlocking Additional Insured Coverage” reports on a new decision awarding attorney fees in a declaratory judgment to the party successful in obtaining additional insured coverage which if followed, could change existing risk transfer preferences.  This article was posted with permission.  The article reads:

The two well-worn paths to risk transfer in tort cases are contractual indemnity and additional insured coverage.  Typically, contractual indemnity obligations run to owners and general contractors, often referred to as upstream parties, from tenants or lower tier contractors, the downstream parties.  In contrast, additional insured (AI) status can provide coverage to upstream parties to downstream parties’ insurers.

While the paths are not mutually exclusive, many upstream insurers are reluctant to start declaratory judgment (DJ) coverage actions to enforce AI rights because of concerns that their attorney fees will not be recoverable.  These insurers prefer instead to rely exclusively on contractual indemnity claims where recovery of attorney fees is thought to be easier.  However, there are distinct advantages of AI over contractual indemnity to upstream parties and emerging case law suggests that DJ attorney fees can be recoverable.

Attorney Fees Rules

The American rule is that, win or lose, each side in litigation pays its own attorney fees absent a right in statute or contract.  Thus, in U.S. tort litigation, claimants typically pay their own attorney fees.  However, recovery of attorney fees between defendants is common.  This is because contractual indemnity provisions usually require the downstream party to both defend and indemnify the upstream party.  Similarly, additional insured (AI) status on a downstream party’s policy status includes coverage for the upstream parties’ defense.  However, the rules for recovering defense costs are convoluted. See, Julian D. Ehrlich, “Recovering Attorneys’ Fees in Construction Site Cases,” NYLJ, (May 25, 2007).

For example, the indemnitee generally is not entitled to reimbursement of its fees for enforcing its contractual indemnity rights, i.e. “no fees for fees.” Hooper Assoc. v. AGC Computers, 74 N.Y.2d 487 (1989). However, there is an exception for costs incurred in “defensive” third party and cross claims against the indemnitor. Springstead v. Ciba-Geigy Corp., 27 A.D.2d 720 (2d Dept. 2006).

Similarly, the general rule is that attorney fees for pursuing AI coverage in a DJ action are not recoverable even if the DJ is ultimately successful, Mighty Midgets Inc. v. Centennial Ins. Co. 47 N.Y.2d 12, 21 (1979).  However, an insured is entitled to recover fees if it wins a DJ brought by an insurer seeking to avoid coverage, U.S. Underwriters Insurance Co. v. City Club Hotel LLC, 3 N.Y.2d 592 (2004).  However, there is noteworthy reasoning in a new decision awarding attorney fees in a DJ to the party successful in obtaining AI coverage which if followed, could change existing risk transfer preferences.

A New Approach

In Houston Cas. Co. v. Prosight Specialty Ins. Co., 2020 U.S. Dist. LEXIS 927 28 (S.D.N.Y. May 27, 2020), an injured E.J. Electric employee brought a Labor Law claim against the owner, construction manager Turner and Nouveau Elevator Industries alleging a fall due to a misleveled elevator.  E.J.’s insurer, Houston Casualty Co. (HCC) accepted AI coverage for the owner and Turner.  However, Prosight, the insurer for the elevator contractor, refused to provide AI coverage to those parties.  Accordingly, HCC brought a DJ action seeking a declaration that Prosight owed primary non-contributory AI coverage to the owner and Turner.  The court in Houston held that Prosight owed primary non-contributory AI coverage and awarded HCC’s attorney fees notwithstanding the American rule and existing caselaw.

The Reasoning

Houston relies on a “thoughtful and persuasive” 2019 Report and Recommendation by U.S. Magistrate Judge Paul Davidson which has now been cited in several reported decisions.  The report finds that an insureds’ right to D.J. attorney fees can be found in the policy’s coverage grant because an insurer’s duty to defend extends to any action arising out of the occurrence including a defense against the insurer’s coverage suit.

The report notes longstanding case law which permits a prevailing insured to recover attorney fees from an insurer when the latter starts a DJ seeking to free itself of its duty to defend under the policy.  The report then suggests that the fortuity of who starts the DJ should not matter for fee recovery if the litigated issue is the insurer’s duty defend an insured in an underlying tort case.

The court in Houston extends this reasoning to award one insurer fees from another insurer which “persistently, reflexively and sequentially” wrongfully denied tenders for AI coverage.  If the reasoning in Houston is followed by other courts, risk transfer may be clearer, and settlements facilitated in the future.

Impact

Although Houston is a trial level decision and an appeal was filed June 24, 2020, there is now authority in a reported federal case holding that the losing defendant must pay attorney fees to the winning plaintiff insurer in the AI DJ context.

Accordingly, Houston may help ease upstream insurers’ hesitancy to bring DJ’s for AI coverage. Moreover, if downstream insurers realize they may face more severe consequences for unreasonably resisting AI, they may accept more tenders leading to an overall net decrease in coverage litigation.

In addition, AI can have advantages over contractual indemnity to upstream parties.  For example, in states like New York upstream parties may insure away via AI coverage active negligence which may not be contracted away due to anti-indemnity statues, see e.g. General Obligations Law § 322.1.

Accordingly, a strategy of foregoing AI coverage can result in an upstream party losing out on rights which contractual indemnity alone cannot provide.  Moreover, questions regarding whether the upstream was actively negligent can delay risk transfer and settlements.

Tenders for AI coverage often go answered by downstream insurers and until now have not always been aggressively pursued by upstream insurers.  However, arguably, when it is clearer that risk transfer will result in the downstream party being legally and financial responsible in a case, it may also be easier to settle multi-defendant litigation with claimants.

Finally, attorney fees may be substantial and are often the last obstacle to resolve before a settlement can be reached.  To the extent Houston streamlines a path to resolutions, it is most welcomed.

VW Calls Opt-Out Class Counsel’s Fee Request ‘Excessive’

August 20, 2020

A recent Law 360 story by Linda Chiem, “VW Slams Opt-Out Drivers’ ‘Excessive’ Atty Fee Bid,” reports that Volkswagen asked a California federal judge to reject an "excessive" request for more than $1.5 million in fees by lawyers for 52 drivers who opted out of the automaker's earlier settlements in multidistrict litigation over its emissions-cheating scandal in the hopes of taking Volkswagen to trial, but never did.

Volkswagen AG and Volkswagen Group of America Inc. fired back at the request for $1.5 million request in attorney fees and and nearly $200,000 in expenses from Knight Law Group LLP and its co-counsel with respect to 52 opt-out plaintiffs, whose cases were paused ahead of a bellwether trial for the first batch of opt-out plaintiffs that took place earlier this year.

"Knight Law seeks an unwarranted windfall," Volkswagen said in an opposition brief.  "Here, Knight Law seeks to be paid more than $1.725 million for representing 52 plaintiffs whose cases not only never went to trial, but were also stayed from their inception. ... In short, very little happened in plaintiffs' cases, because the court authorized very limited work on these stayed cases."  Knight Law can't try to pass off work it did to prepare for the bellwether trial as work for the 52 opt-out plaintiffs, whose cases didn't even get that far, Volkswagen said.

It accused Knight Law of "mismanagement, overstaffing, mis-staffing and overbilling of plaintiffs' stayed cases" by including nearly 3,000 time entries, submitted by 47 lawyers and one paralegal from seven different law firms, according to the brief. Essentially, Knight Law is seeking to turn its fees request "into an opt-out lawyers' bonanza" that should be flatly rejected, Volkswagen says.

Volkswagen also argued that the inflated hourly rates for the 47 lawyers — ranging from $200 to $1,150 — should be substantially reduced, and that the staggering $193,236 in costs and undefined expenses must be slashed as well.  The automaker also took issue with Knight Law's request to be reimbursed for $8,079 for a private jet to fly two attorneys from Los Angeles to San Francisco, and some $33,713 in travel, lodging and dining expenses in connection with a mediation session that was not attended by any of the 52 opt-out plaintiffs, according to the brief.

"No aspect of counsel's boondoggle even borders on the realm of reasonableness," Volkswagen said. "Because plaintiffs have not met their burden of showing that these charges were 'reasonably necessary' and 'reasonable in amount' they should be disallowed in full."

The 52 drivers are among more than 350 individuals who had opted out of Volkswagen's previous consumer settlements related to the "clean diesel" emissions cheating scandal and their individual actions are lumped into the sprawling MDL overseen by U.S. District Judge Charles Breyer in the Northern District of California.  The court oversaw a bellwether trial in late February and early March — which was split into two phases: one for compensatory, or economic, damages and one for punitive damages — covering the claims of 10 opt-out consumers.

A jury awarded damages to only five of them, awarding compensatory damages ranging from about $582 to more than $3,000 and punitive damages totaling $100,000. But Judge Breyer in April slashed their total punitive damages to $23,000, saying the earlier amount crossed "the line of constitutional impropriety."

And because the judge dismissed the bellwether plaintiffs' claims under California's Song-Beverly Act and Consumer Legal Remedies Act, saying the dismissal applies to all remaining opt-out plaintiffs, there is no viable fee-shifting claim for these 52 individuals who never went to trial.  So they cannot recover any fees from Volkswagen, the company said.  The 52 opt-out plaintiffs subsequently accepted offers from Volkswagen in June — ranging from $17,500 to $85,000 apiece, depending on the year, make and model of their Volkswagen vehicle — to avoid trial, according to court documents.

Article: New Case Law on Awarding Attorney Fees in Patent Litigation

July 18, 2020

A recent Law 360 article by Lionel Lavenue, Amanda Stephenson, R. Benjamin Cassady. and Brooke Wilner of Finnegan LLP, “Evolving Case Law Elucidates Atty Fees For Patent Litigants” reports on recent case law development in awarding attorney fees in patent litigation.  This article was posted with permission.  The article reads:

Title 35 of the U.S. Code, Section 285, in its entirety, states that "[t]he court in exceptional [patent] cases may award reasonable attorney fees to the prevailing party."  This means that if a party prevails in an "exceptional" case, the court may award it upwards of millions of dollars in attorney fees.  Unsurprisingly, the high value of these fees in often complex and high-stakes patent litigation has encouraged much debate over who can recover, and how they can recover, fees under the deceptively brief Section 285.

Though some decisions from the U.S. Court of Appeals for the Federal Circuit have clarified some answers to those questions, refining the definition of a "prevailing party" and explaining some circumstances when a court has jurisdiction to award attorney fees under Section 285, ambiguity remains.  For instance, uncertainties remain over what is required for a party to be deemed prevailing and when courts have jurisdiction to award fees.  Special circumstances, such as when an intervenor, or other entity whose involvement was limited and tangential to the main action, seeks attorney fees, further cloud the issues.  Is such an entity a prevailing party in a patent case under Section 285, such that the court has authority to award attorney fees?

Recent decisions in the Federal Circuit and other courts have provided some guidance for these questions.  For example, in My Health Inc. v. ALR Technologies Inc., the U.S. District Court for the Eastern District of Texas recently found, agreeing with a long line of cases, that a nonparty can be held liable for exceptional fees under Section 285.  And for its part, the Federal Circuit clarified this year, in Mossberg & Sons Inc. v. Timney Triggers LLC, what makes a defendant a prevailing party.  These recent decisions, when combined with the growing body of law on Section 285, give crucial and valuable insight to parties seeking attorney fees under Section 285 and defending against such requests.

When does a court have jurisdiction to award attorney fees under Section 285?

Determining whether and when a court has jurisdiction to award fees under Section 285 depends on what, exactly, the nature of an award under Section 285 is — a claim, cause of action, a sanction, a defense or something else.  Courts have made clear that it is not a standalone cause of action; i.e., not a claim or controversy.  In other words, a request for an award of attorney fees under Section 285 cannot be pled independently and cannot support jurisdiction on its own.  It must be collateral to an independent controversy over which the court has (or had) subject matter jurisdiction.

But this creates a curious procedural posture, as fees under Section 285 cannot be awarded until there is a prevailing party, i.e., when no controversy remains and jurisdiction for the original proceeding has terminated.  However, the U.S. Supreme Court, in Cooter & Gell v. Hartmarx Corp., confirmed that "district courts may award costs after an action is dismissed for want of jurisdiction" and that motions for attorney fees are "independent proceedings supplemental to the original proceeding and not a request for a modification of the original decree."

Thus, Cooter clarified that the imposition of attorney fees is not a judgment on the merits, but rather a determination of a collateral issue.  And, consistently with Cooter, the Federal Circuit has held that a court retains jurisdiction to decide requests for attorney fees under Section 285 after the court otherwise loses subject matter jurisdiction.  Thus, Section 285 is an ancillary issue over which a court will retain jurisdiction so long as it had jurisdiction over the underlying controversy and can properly be thought of as a sanction or remedy.  Indeed, in some cases, the Federal Circuit has described the grant of attorney fees under Section 285 as a sanction.

At its core, though, Section 285 provides one of several remedies available to prevailing parties in patent cases.[10] Indeed, "[t]he purpose of Section 285 is to reimburse a party injured when forced to undergo an 'exceptional' case."  Consistently with this purpose, courts have found that a litigant cannot avoid a prevailing party determination, and thus exposure to an attorney fee award, simply by dismissing their claims when it becomes clear that they have lost.

Indeed, such "mid-case mootness" does not necessarily remove a court's jurisdiction to determine which party is prevailing under Section 285, because "[w]here [parties] unilaterally dismiss cases after adverse findings, or move to dismiss them after granting a covenant not to sue, the [other party] is the prevailing party."  In patent cases, the issue of the nature of the dismissal itself may be considered a live controversy conferring jurisdiction, even where a judgment has cancelled all relevant patent claims.

What is required for a party to be deemed prevailing?

Whether jurisdiction to award fees exists is not the only issue — courts may only grant attorney fees under Section 285 to prevailing parties.  Of course, a party winning on every theory it proposed would certainly be a prevailing party.  But other victories may nonetheless allow a party to be characterized as prevailing under Section 285.  The Supreme Court has held that the touchstone of the prevailing party inquiry is "the material alteration of the legal relationship of the parties."  Thus, a favorable judgment on the merits is not explicitly required.  Instead, courts consider whether the court's decision, action or order — a "judicially sanctioned change in the legal relationship of the parties" — either "effects or rebuffs a plaintiff's attempt to effect" the alteration in the parties' relationship.

Accordingly, a dismissal with prejudice is enough to confer "prevailing" status.  In Raniere v. Microsoft Corp., for example, the Federal Circuit found that the court's dismissal with prejudice of plaintiff's claims was enough to make the defendant a prevailing party.  In fact, the Raniere court did not even adjudicate any patent claim—the plaintiff's claims were dismissed for lack of standing.  Dismissals with prejudice, even if they do not resolve patent claims, may thus be sufficient to confer "prevailing" status.

Not all dismissals will do, however.  Recently, in O.F. Mossberg & Sons Inc. v. Timney Triggers LLC, the Federal Circuit found that a voluntary dismissal without prejudice following successful post-grant proceedings was not sufficient to make the defendant a prevailing party.  Although the defendant had prevailed in trial proceedings at the Patent Trial and Appeal Board, a voluntary dismissal takes effect immediately upon giving notice, and thus the court's order to dismiss did not have the necessary judicial force — i.e., there was no judicially sanctioned change to the parties' legal relationship.

These cases highlight that winning on the merits may not always equate to prevailing under Section 285.  Timney Triggers won its case, after all, achieving a dismissal without prejudice after successful post-grant proceedings.  And Microsoft achieved a victory on constitutional grounds, not on the merits of its patent defense.

Thus, prevailing on the merits is not required; prevailing in the correct way is.  A party seeking to be deemed prevailing must prove (1) that the court decision which it believes makes it prevailing is indeed a final court decision with the necessary judicial imprimatur; and (2) that the relationship between it and the opposing party was materially altered in its favor.

When is a party, such as an intervenor or other entity whose involvement was limited and tangential to the case, entitled to attorney fees?

Where the Section 285 inquiry gets particularly thorny is where a party other than plaintiff or defendant seeks a remedy of attorney fees under Section 285.  After all, Section 285 allows that remedy for any prevailing party — it does not distinguish between plaintiffs, defendants and third parties.[19]

Third parties have many times been made to pay attorney fees under Section 285.  Even if a party was not an original party to the suit, but rather joined in its sole capacity as a third party defendant, for example, the case law is unanimous: Courts have the authority to award fees against a nonparty.

One special class of third parties stands out in the limited case law on this issue — shareholders.  Recently, in My Health v. ALR Technologies, the court clarified the state of the law on this issue, finding that corporations' shareholders can be held liable for deceptive conduct that leads to an exceptional case finding and the award of Section 285 attorney fees.

Just as third parties may be ordered to pay fees under Section 285, so too are they likely able to seek them.  Although there have been relatively few cases where such parties have sought attorney fees under Section 285, there is no case indicating that such parties may not do so.

In Sony Electronics, Inc. v. Soundview Technologies, for example, a third-party defendant sought Section 285 attorney fees as part of its prayer for relief related to an inequitable conduct issue.  The court found that the third-party defendant's actions in seeking Section 285 attorney fees as a remedy was "wholly appropriate" but denied the request because the inequitable conduct issue was moot.  Other courts have assumed that third parties or nonparties can recover fees under Section 285 but then found that those cases were not exceptional.  These cases were predominantly decided before the formation of the Federal Circuit.

The enticing remedy of attorney fees under Section 285 has provided incentive for parties to litigate over the brief statute's meaning for decades.  Recent decisions have clarified when a court has jurisdiction to grant attorney fees, when a party is prevailing, such that it could receive fees under Section 285, and how the section applies to third parties.  But with so much money potentially on the line, parties can expect more litigation in the years to come.

Ninth Circuit Urged to Uphold $7M Fee Award in ConAgra Case

July 15, 2020

A recent Law 360 story by Kevin Penton, “9th Circ. Urged to OK $7M Atty Fees in ConAgra Label Fight” reports that the Ninth Circuit should affirm a California federal court's blessing of a settlement in which attorneys received nearly seven times what class members obtained in a dispute over ConAgra Foods Inc.'s labeling on oil products, as the deal conforms with legal precedent, the class has argued.  The deal, in which the class received $993,919 while its attorneys received $6.85 million, was fair and reasonable, as the case involved more than eight years of litigation, ConAgra agreed to pay up more than $68 million depending on the participation of class members, and the lawyers received compensation for only a portion of the work they put in, according to the brief by the class.

Objector M. Todd Henderson fails to recognize that the U.S. Supreme Court determined in a 1986 case known as City of Riverside v. Rivera that attorney fees may not only be based on a percentage of what their clients receive, but also based on statutory fees, according to the brief.  The class notes that Henderson's counsel at the Hamilton Lincoln Law Institute Center for Class Action Fairness repeatedly challenge class action settlements, alluding that lawyers and defendants collude to strike deals in which attorneys get paid and companies get to walk away.

"Appellant is eager to continue a crusade that finds plaintiffs' lawyer misconduct anywhere that plaintiffs prevail," the reads.  "No doubt there will be other windmills to tilt at, but this appeal concerns fees governed by specific state laws with statutory fee-shifting provisions, not appellant's 'high-level concerns.'"  In the suit, the buyers alleged that ConAgra mislabeled its Wesson oil products as "100% natural" even though they contain genetically modified ingredients. U.S. District Judge Margaret M. Morrow certified 11 classes in the case in 2015, and the settlement was given final approval in December, according to court records.

In the settlement, class members were eligible to receive 15 cents for up to 30 units of Wesson essential oils product they purchased without having to submit a proof of purchase, according to the brief.  Class members who sought reimbursement for more than 30 units would need to submit a proof of purchase.  Henderson told the Ninth Circuit in April that the Central District of California did not consider the deal's true value to the class when it granted the attorney fees — giving value to an injunction in the deal that is, in reality, worthless.