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Category: Fee Shifting

Bankruptcy Court Denies Fee Enhancement Under Common Fund Doctrine

January 17, 2020

A recent Legal Intelligencer article by Rudolph J. DiMassa, Jr. and Geoffrey A. Heaton, “Bankruptcy Court Denies Motion for Fee Enhancement Under ‘Common Fund Doctrine’,” reports on a bankruptcy court that recently denied creditors’ counsel’s motion for a fee enhancement under the common fund doctrine.  This article was posted with permission.  The article reads:

In a bankruptcy case filed 91 years ago (and reopened 85 years later), the U.S. Bankruptcy Court for the Western District of Virginia recently denied creditors’ counsel’s motion for a fee enhancement under the “common fund doctrine,” finding it could not award the requested fees absent statutory authority.  In particular, the court determined it would be an abuse of its equitable powers to award fees beyond the scope of applicable bankruptcy law in In re Yellow Poplar Lumber, Case No. 605 B.R. 416 (Bankr. W.D. Va. 2019).

Background

In July 1928, White Oak Lumber Co. filed an involuntary Chapter 7 petition in the U.S. District Court for the Western District of South Carolina, seeking to have Yellow Poplar Lumber Co., Inc. “adjudged a bankrupt” under the Bankruptcy Act of 1898.  n 1931, the district court adjudged Yellow Poplar as bankrupt and closed the case.

In 2013, the case was reopened in connection with a dispute over ownership rights in certain gas estates on parcels of land in Virginia, and it ultimately found its way to the U.S. Bankruptcy Court for the Western District of Virginia.  The dispute resulted in a settlement whereby Yellow Poplar’s bankruptcy estate stood to receive approximately $2 million in gas royalties.  The Chapter 7 trustee appointed in the reopened case, with the assistance of a genealogist, identified several of the original creditors’ existing heirs or successors-in-interest.  The bankruptcy court, in turn, directed the trustee to file a brief addressing the appropriate interest rate on the anticipated distribution to creditors, and invited any other party-in-interest to do the same.  While the trustee contended that the interest rate should be 2.4%, counsel for the heirs of two creditors advocated a 7% rate, which reflected the legal rate in effect in South Carolina when Yellow Poplar’s bankruptcy case was filed.  The court ultimately ordered the application of a rate of 3.6%.

Creditors’ counsel, however, successfully appealed the court’s ruling, which resulted in general unsecured creditors receiving 7% interest on their distributions, and increasing the asset pool to be distributed to general unsecured creditors by approximately $740,000.  Notably, the efforts of creditors’ counsel did not increase the amount of funds in the bankruptcy estate, but rather increased just the proportion of estate funds going to the class of general unsecured creditors, effectively diverting funds from one class of constituents to another.  Creditors’ counsel then filed a motion with the bankruptcy court seeking a fee enhancement of $164,164.90 under the “common fund doctrine.”  The trustee opposed the motion, arguing, among other things, that the common fund doctrine does not apply in bankruptcy cases.

Common Fund Doctrine

The common fund doctrine is an exception to the American Rule, i.e., the general rule prevailing in the United States that each litigant is responsible to pay its own attorney fees.  The doctrine generally applies where a litigant, acting to recover on its own claim, recovers property from which others may satisfy their claims as well, entitling the litigant to payment of attorney fees and costs from the “common fund” used for payment of all claims.

Based upon principles of equity, the common fund doctrine recognizes that one who benefits from a lawsuit without contributing to its cost is unjustly enriched at the expense of the successful litigant who bore the costs.  In addition to payment of a litigant’s attorney fees and costs, the doctrine also allows the litigant’s attorney to collect an extra award of fees from the common fund, even if the attorney is merely performing services for his client per the terms of his engagement.

Court Analysis

The court determined that the operative question was not whether the common fund doctrine applies, but rather whether the court had authority to grant the requested fee enhancement from estate assets.  To that end, the court considered precedent under both the Bankruptcy Act of 1898 and the Bankruptcy Code currently in effect: although the Bankruptcy Act governed Yellow Poplar’s case, the court considered cases applying the Bankruptcy Code for additional guidance.

Quoting at length from In re Fesco Plastics, 996 F.2d 152 (7th Cir. 1993), a case filed under the Bankruptcy Code that denied a fee request under the common fund doctrine, the court highlighted the central problem with counsel’s requested fee enhancement: a bankruptcy court cannot award attorney fees without statutory authority, such as that found in Bankruptcy Code Sections 327-330, 1103 and 503(b)(4).  The court concluded that an award of fees outside the context of applicable statutory provisions is beyond a bankruptcy court’s mandate.  In the words of the Fesco Plastics court, “a bankruptcy court is simply not authorized to do whatever is necessary to reach an equitable result; it may only do whatever is necessary to enforce the Code.”

The court noted that prevailing case authority decided under the Bankruptcy Act was in accord with Fesco Plastics.  In particular, the court highlighted Cox v. Elliott (In re Calhoun Beach Club Holding), 122 F.2d 851 (8th Cir. 1941), which rejected the argument that a bankruptcy court “has inherent equitable power” to authorize payment of a creditor’s attorney fees from estate assets.  As the U.S. Court of Appeals for the Eighth Circuit explained in Cox, the Bankruptcy Act “carefully regulates the compensation and expenses that may be allowed in bankruptcy,” and contains an implied exclusion of other fee allowances not expressly set out in the Bankruptcy Act.

After considering Fesco Plastics, Cox and several other cases under both the Bankruptcy Act and the Bankruptcy Code, the court concluded it could not “abuse the equitable power Congress bestowed upon it to award fees for services outside the scope of applicable bankruptcy law.”  The bankruptcy court noted that, even were it to conclude that it had the authority to award fees under the common fund doctrine, counsel might nonetheless remain ineligible for the additional fees: as noted above, counsel’s efforts did not increase funds flowing into the bankruptcy estate, but rather reallocated estate funds among classes of creditors.

Although acknowledging that the common fund doctrine might apply in exceptional circumstances, the court confirmed that a fee award or enhancement would still have to be made pursuant to statutory authority, such as section 64(b)(3) of the Bankruptcy Act, allowing a “reasonable attorney fee” to petitioning creditors in an involuntary case, or section 64(b)(2), allowing for payment of “reasonable expenses” of creditors who recover property transferred by a bankrupt.

Here, however, no provision of the Bankruptcy Act or the Bankruptcy Code existed to authorize “fees for creditor’s attorneys whose actions incidentally benefited some creditors, to the detriment of others, while pursuing their clients’ best interests.”  The court noted, moreover, that counsel had not identified any provision of the Bankruptcy Act or the Bankruptcy Code that authorized the fee award, and the authorities it did cite were either distinguishable, were not on point, or supported the court’s analysis.  Accordingly, the court denied counsel’s motion for a fee enhancement.

Conclusion

Viewed through the equities of the case, it is arguably unfair that all members of the general unsecured creditor class benefited without having to contribute to the legal fees and expenses incurred by just a few creditors in the class.  Indeed, the court confessed that it was “not unsympathetic” to counsel’s fee request.  Nevertheless, Yellow Poplar provides valuable guidance to creditors seeking payment of attorney fees from estate funds: asserting equitable theories such as the “common fund doctrine” may engender judicial sympathy, but they are no substitute for statutory authority.  Consequently, creditors’ counsel seeking any fee enhancement should make their request pursuant to a Bankruptcy Code section that explicitly authorizes such an enhancement.

Rudolph J. Di Massa, Jr. is a partner at Duane Morris in Philadelphia.  Geoffrey A. Heaton, is a special counsel at Duane Morris in San Francisco.

Federal Circuit: Attorneys Lack Standing to Recover Attorney Fees for Veteran

January 13, 2020

A recent Law 360 story by Kevin Penton, “Fed Circ. Won’t Let Attys Get Fees From Feds on Vet’s Behalf, reports that attorneys lack standing under federal law to sue the federal government on their own to recover fees for work they performed on behalf of a veteran, the Federal Circuit held in a precedential opinion.  The appellate panel rejected arguments by attorneys Meghan Gentile and Harold H. Hoffman III of the nonprofit Veterans Legal Advocacy Group that they could collect over $4,000 in fees after their former client, Matthew Shealey, prevailed in his case, even though he had fired them and had opposed their attempt to collect the money.

The Federal Circuit noted that in a 2010 case known as Astrue v. Ratliff, the U.S. Supreme Court held that under the Equal Access to Justice Act, the “prevailing party” is the actual party in a case, not the individual’s attorneys.  “The fact that the statute awards to the prevailing party fees in which [its] attorney may have a beneficial interest or a contractual right does not establish that the statute ‘awards’ the fees directly to the attorney,” the Federal Circuit said, quoting the Supreme Court.

The Federal Circuit also rejected an alternative argument by Gentile and Hoffman that they had a right to the money under the fee agreement that they had inked with Shealey, as “the fee agreement on its face does not purport to assign Mr. Shealey’s [Equal Access to Justice Act] claim to intervenors, and the intervenors expressly disclaimed such a theory at oral argument.”  The appellate panel also rejected the argument that the attorneys had so-called third party standing to sue for fees on their former client’s behalf, as Shealey revoked his authorization for them to apply for the fees and costs, according to the opinion.

“The interests of a client such as Mr. Shealey — including the ability to resolve their fee claim by settlement with the government and the ability to decline pursuing an [Equal Access to Justice Act] claim at all — would be impaired if their attorneys were afforded standing to file a claim on their behalf when that authority has been revoked,” the Federal Circuit wrote.

FTC Ordered to Pay Attorney Fees and Costs Under EAJA

December 27, 2019

A recent NLJ story by Mike Scarcella, “FTC Ordered to Pay $843K in Legal Fees, Costs After Losing Privacy Case,” reports that the Federal Trade Commission must pay more than $843,000 in attorney fees and costs to the law firms that represented a now-defunct medical diagnostic testing company that had long argued the agency was misguided in an enforcement action alleging inadequate data-privacy protections.

Atlanta-based LabMD, which has claimed the FTC’s enforcement action put it out of business, was represented by such firms as Ropes & Gray, Dinsmore & Shohl, and Wilson Elser Moskowitz Edelman & Dicker.  A team from Ropes & Gray served pro bono as lead counsel for LabMD in the U.S. Court of Appeals for the Eleventh Circuit, which last year ruled against the FTC.

The appeals court this week upheld a special master’s report that said the law firms were entitled to fees and costs for their successful advocacy on behalf of LabMD.  The report said the FTC’s litigation position was not “substantially justified,” a threshold test for disputes involving whether a federal agency is on the hook for legal fees.  Ropes & Gray was awarded nearly $300,000 in fees.  Dinsmore was granted about $346,000, and Wilson Elser was awarded $83,200.

LabMD’s lawyers sought to recoup attorney fees under the Equal Access to Justice Act, which can provide some relief to parties who prevail against federal agencies.  FTC lawyers had urged the federal appeals panel to reject any legal-fee award at all.  “LabMD is not entitled to recover any of its fees or costs because the commission’s position at every stage—when it opened the investigation, prosecuted an enforcement complaint, and defended its cease-and-desist order on appeal—had ‘a reasonable basis in both law and fact’ and therefore was ‘substantially justified,’” FTC attorney Theodore Metzler said in a court filing last month.

The special master, Walter Johnson, a U.S. magistrate judge in Rome, Georgia, concluded the FTC was not “substantially justified” in its investigation and prosecution of LabMD.  Johnson, like others before him, examined the FTC’s relationship with, and reliance on, a company that allegedly tried to get LabMD to buy its data-protection services after informing the company of an alleged information-security breach.  “Tragically, as this case was proceeding through the enforcement action stage, LabMD was forced to cease operations,” Johnson wrote in his report.

LabMD’s fee petition in the Eleventh Circuit revealed various rates for leading Ropes & Gray partners and associates as of October 2018.  The firm said it would reinvest any awarded compensation into further pro bono work.  Douglas Meal, the primary lawyer for LabMD in the Eleventh Circuit and formerly co-leader of the firm’s privacy and cybersecurity practice, reported an hourly rate of $1,500.  Appellate partner Douglas Hallward-Driemeier was charging $1,200, and then-partner Michelle Visser was billing at $1,060 hourly.  The firm’s fee application presented both current hourly rates and discounted figures that were used as the basis for the petition.

SCOTUS Strikes Down USPTO Attorney Fee Rule

December 16, 2019

A recent Law 360 story by Bill Donahue, “Supreme Court Strikes Down USPTO Atty Fee Rule,” reports that the U.S. Supreme Court struck down an unusual U.S. Patent and Trademark Office policy that saw the agency automatically demand repayment of its legal bills, ruling that it ran afoul of the centuries-old rule that U.S. litigants must usually pay their own lawyers.  Ruling unanimously in favor of a drugmaker called NantKwest Inc., the justices rejected the agency's recent reinterpretation of a decades-old provision in the federal Patent Act that says companies must pay "all expenses" incurred by USPTO in certain types of appeals — regardless of who wins the case.

Affirming a lower court's ruling last year, the high court said that term should not be read to cover the salaries paid to USPTO attorneys who worked on a particular case.  Writing for the court, Justice Sonia Sotomayor said that the agency's approach would violate the so-called American Rule, a doctrine that says litigants must pay for their own attorneys unless Congress expressly says otherwise.

"The [American Rule] presumption against fee shifting not only applies, but is particularly important because [the Patent Act] permits an unsuccessful government agency to recover its expenses from a prevailing party," Justice Sotomayor wrote.  "Reading [the statute] to award attorney's fees in that circumstance would be a radical departure from longstanding fee-shifting principles adhered to in a wide range of contexts."  The ruling had stakes for trademark lawyers, too.  The Lanham Act contains an identical provision and the USPTO has also asked for such attorney fees in trademark cases.

First rolled out in 2013, USPTO's policy was rooted in a novel interpretation of decades-old statutory language.  When the USPTO refuses to grant a patent, the Patent Act allows the applicant to file a streamlined appeal on the existing record directly to the Federal Circuit, or it can file a "de novo" appeal in a district court — a more robust process that allows the applicant to enter new evidence into the record.

The law says that applicants who choose the de novo route must pay "all expenses" of the proceeding, regardless of who wins the appeal.  The provision makes no mention of winning or losing; the applicant pays no matter what.  For decades, the USPTO had only interpreted "expenses" to mean relatively small things, like travel expenses, expert fees and copying.  But that changed in 2013, when the agency started arguing that the expenses provision also covers attorney fees, which are typically far larger.

In the years since, courts have split over the policy.  While the Fourth Circuit ruled that the policy was a fair rereading of the statute, the Federal Circuit ruled that it violated the American Rule.  On appeal to the high court, USPTO had argued that the American Rule didn't apply at all to the unusual Patent Act provision in question.  The rule only covers awards of fees to prevailing parties, the agency argued, and the “expenses” provision applies regardless of who wins a case.

The high court flatly rejected that argument.  “That view is incorrect.  This Court has never suggested that any statute is exempt from the presumption against fee shifting,” Justice Sotomayor wrote.  “Nor has it limited its American Rule inquiries to prevailing-party statutes.  Indeed, the Court has developed a line of precedents addressing statutory deviations from the American Rule that do not limit attorney’s fees awards to the prevailing party.”

Analyzing the provision under the American Rule — which requires clear authorization from Congress — the high court said Patent Act was not explicit enough to cover attorney fees.  "The reference to 'expenses' in [the Patent Act] does not invoke attorney's fees with the kind of clarity we have required to deviate from the American Rule," Justice Sotomayor wrote.  "Simply put, in common statutory usage, the term 'expenses' alone has never been considered to authorize an award of attorney's fees with sufficient clarity to overcome the American Rule presumption," the justice wrote.

Attorney Fee Award Analysis in Section 285

December 10, 2019

A recent Mintz law firm blog post by Andrew H. DeVoogd and Kara E. Grogan of Mintz Levin PC, “Counterproductive and Cost-Increasing Litigation Tactics are Objectively Unreasonable in Section 285 Attorney Fee Award Analysis,” reports on attorney fee awards under Section 285.  This story was posted with permission.  The post reads:

Nearly six years ago, the Supreme Court in Octane Fitness v. ICON Health & Fitness promulgated a “totality of the circumstances test” for awarding reasonable attorney fees to the prevailing party in exceptional cases under 35 U.S.C. §285.  As lower courts have applied this standard, it has become clear that the motivation and conduct of the losing party is a focal point of the exceptionality analysis.  However, two recent decisions emphasize that bad faith arguments and litigation tactics—by both parties and in all stages of litigation—are critical to the exceptionality analysis in Section 285 attorney fee awards. 

By way of background, Section 285 permits courts, in exceptional cases, to award reasonable attorney fees to the prevailing party.  Using the totality of the circumstances test, courts consider factors such as frivolousness, motivation, objective unreasonableness (both in the factual and legal components of the case).  However, exceptional cases are rare—reserved for circumstances where a party’s unreasonable conduct—while not necessarily independently sanctionable—is nonetheless so “exceptional” as to justify an award of fees. 

First, the Western District of Louisiana in Total Rebuild Inc. v. PHC Fluid Power, LLC, concluded that although the plaintiff’s patent was found unenforceable due to inequitable conduct, the case was not exceptional, due to the defendant’s “counter-productive and cost-increasing litigation tactics.”  The defendant’s unscrupulous actions included: (1) not informing the court in its opening brief that the plaintiff proposed a “walkaway” settlement offer; (2) evidence suggesting that the defendant’s motive was to deny the “walkaway” settlement, seek judgment against the plaintiff, and file a motion for sanctions to hit the plaintiff—a competitor—with a large judgment; and (3) not engaging in any meaningful settlement discussions.  This amounted to “objective unreasonableness.”  Due these bad faith litigation tactics, the court refused to allow the defendant to “benefit from fueling an environment that increased the cost to litigate this case.”  

Second, a magistrate judge in the Southern District of New York in EMED Technologies v. Repro-Med Systems, recommended finding the case exceptional and granting nearly $1 million in attorney fees due to the plaintiff’s bad faith shortly after granting a summary judgment of noninfringement.  Surprisingly, the magistrate judge based its attorney fee analysis in large part on the plaintiff’s claim construction position.  According to the magistrate, based on Federal Circuit precedent and the patent’s prosecution history, it was bad faith to initiate the litigation despite knowing the “conventional” construction of the claim term “consisting of” as used in the claim.  And, although the court ruled in plaintiff’s favor on other claim terms, “EMED’s success in that regard does not render any less unreasonable its objectively baseless construction and application of the closed mechanical fastener element.”  The court also cited additional examples of the plaintiff’s bad faith, including: (1) filing the action in the incorrect venue; (2) filing a motion for preliminary injunction; and (3) pressing on with the litigation “even after claim construction and the Court’s ruling against it.”  Although the district court judge has yet to affirm this report and recommendation, the magistrate’s opinion is instructive.

Taken together, these cases illustrate that practitioners should be mindful of reasonableness and decorum.  Courts are unlikely to find a case exceptional and award attorney fees if the prevailing party refuses reasonable requests for extensions of time or calls opposing counsel inappropriate names, as in Total Rebuild.  Along those same lines, practitioners should also avoid counterproductive and cost-increasing litigation tactics.  Tactics such as filing useless motions, taking objectively unreasonable positions, refusing to engage in meaningful settlement discussions, and excessive billing are all not only unprofessional (and potentially unethical), but may be used as fodder by an adversary to support an exceptional case fee award.  It is important to also remember that the entire record is scrutinized in a Section 285 analysis.  Baseless or unsupportable motions or positions, even at the start of a case, may come back to bite you and your client.

Andrew H. DeVoogd is a Member at the Boston office of Mintz Levin. Drew is an experienced intellectual property litigator and trial attorney whose work encompasses a broad range of technologies.  He regularly represents clients in high stakes patent disputes, including at the International Trade Commission, involving some of the world's largest technology companies. Kara E. Grogan is an Associate at the Boston office of Mintz Levin.  Kara focuses her practice on Section 337 cases in the International Trade Commission and district court patent litigation.  She has experience in, for example, motion practice, written discovery, and drafting license agreements.