Fee Dispute Hotline
(312) 907-7275

Assisting with High-Stakes Attorney Fee Disputes

The NALFA

News Blog

Category: Fee Shifting

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

February 11, 2019

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

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

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

Historical Background

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

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

Strategic Options Under Federal and State Law

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

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

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

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

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

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

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

Conclusion

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

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

NJ Court Calls Fee Request ‘Inexplicable’ in Employment Case

January 24, 2019

A recent New Jersey Law Journal story by David Gialanella, “Court Affirms $57K Fee Award Following ‘Inexplicable’ $360K Request,” reports that an award of $57,000 in legal fees, in an employment case where the plaintiff recovered about $8,000 at trial and her lawyers sought some $360,000 in fees, was affirmed by a New Jersey appeals court.  “It is inexplicable to us how the amounts requested were accumulated given the factual circumstances behind the claim,” the Appellate Division said in Lema v. BTS Holdings, a per curiam decision issued Jan. 18.

The case was lodged by plaintiff Melissa Lema, who had worked as an overnight dispatcher for defendant BTS Holdings, a livery car service.  According to the decision, Lema claimed that one of the drivers, an independent contractor, treated her inappropriately—via social media photos and messages, and by touching her shoulder and whispering in her ear—and that she reported the issue to a supervisor.  Lema was fired in late September 2014, after about three months on the job, and claimed in her suit that she was told that her services weren’t needed anymore and that she was terminated because she watched pornography while on the job.

Within days of her firing, she filed an action alleging retaliatory discharge.  The suit also named BTS Holdings’ owner, Craig Lax, seeking punitive damages based on Lema’s claim that it was Lax who made the decision to fire her.  Lax contended that he was unaware of the situation.  Lema was represented by McOmber & McOmber in Red Bank.

The judge below was identified in electronic court records as Essex County Superior Court Judge Francine Schott, who oversaw a four-day trial in the case.  The jury awarded $5,000 on Lema’s retaliation claim and $2,983 for lost wages, according to the decision.  Schott dismissed the claim against Lax, finding that a lone alleged statement from Lema’s supervisor that Lax was behind the firing was not enough to keep him in the case.

Based on the Law Against Discrimination’s fee-shifting provision, the McOmber firm sought $360,588 in fees and $82,83 in costs.  Schott deemed the request excessive in what she called a “relatively straightforward” case, reduced the lodestar from $240,392 to $135,843, and also discounted some of the costs.  She also included a downward adjustment of 60 percent, though she did add a 5 percent contingency enhancement.  In all, the firm was awarded $57,054 in fees and $5,367 in costs.

On appeal, the McOmber firm contended that the fees sought were reasonable, and that Schott unfairly reduced the award.  Appellate Division Judges Carmen Alvarez, William Nugent and Susan Reisner affirmed.  “We see no reason why there should have been so many attorneys present in the courtroom during the course of trial,” the court said in the unpublished decision.  “That seems to be entirely unnecessary duplication of effort in a fairly straightforward case.”  “Lema’s counsel called two witnesses,” the panel said.  “Defendants had offered Lema substantially more than she recovered by way of settlement.  The court took this appropriate consideration into account in making the allowance.”

Also at issue on appeal: The McOmber firm twice moved for Schott to recuse herself based on what they claimed were bias and disparaging comments toward the plaintiff, the first of those motions coming after a pretrial settlement conference.  But Schott denied the motions. The appeals court did acknowledge an “arguably less than ideal” demeanor to counsel on both sides, but it affirmed the denials, saying that Schott “exhaustively explained her off-the-record comments, made in the hopes of reaching a settlement, as triggered by the weaknesses in Lema’s case, and she also indicated to defense counsel the weaknesses in their case.”

The court also affirmed Schott’s dismissal of the punitive damages claim against Lax.  The panel said Lema failed to establish, under the standard set out in the state Supreme Court’s 1995 opinion in Rendine v. Pantzer, “actual participation in, or willful indifference to,” the conduct at issue, or proof that the conduct was “especially egregious.”

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

January 14, 2019

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

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

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

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

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

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

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

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

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

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

UBS Balks at $3.2M in Attorney Fees in Whistleblower Action

December 12, 2018

A recent Law 360 story by John Petrick, “UBS Balks at Whistleblower Case’s $3.2M in Attys’ Fees,” reports that UBS Securities asked a New York federal judge to reject a “jaw-dropping” and “excessive” $3.2 million in attorneys' fees requested by a former analyst who won a $1 million verdict in his whistleblower trial under representation by Herbst Law PLLC and Broach & Stulberg LLP.  Attorneys for the bank argue that while the Sarbanes-Oxley Act allows for a winning party to recoup “reasonable” fees, this request is overstuffed with billable hours spent on claims that were lost at former analyst Trevor Murray's trial, duplication of work and extra time needed to make up for the attorneys’ own mistakes.

“The court should significantly reduce the amount of fees and costs that Murray’s counsel requests in order to prevent Murray’s counsel from reaping a windfall from their own limited success and inefficient, excessive work,” attorneys for UBS said in the motion.  Murray won only a “fraction” of what he sought at trial and his attorneys went after unreachable claims that a reasonable attorney would never have pursued, which prolonged the case needlessly, UBS attorneys said in the motion.

Murray won a nearly seven-year fight with the bank after he alleged he was fired in 2012 for complaining his superiors were pressuring him to falsely report better market conditions to boost UBS’ revenue numbers and impress investors.  The former analyst filed the lawsuit in February 2014, claiming UBS pressured him to skew his research to support the bank’s commercial mortgage-backed securities trading and loan origination activities, and to report better conditions in the market because that line of securities was a significant revenue source.

Murray allegedly told the bank’s head CMBS trader he was concerned certain CMBS bonds were overvalued, according to the suit.  But Murray was told not to publish anything negative about the bonds because they had been purchased by the UBS trading desk, he claimed.  He was fired shortly thereafter, just a month after receiving what he said was an excellent performance review.  UBS argued Murray was laid off as part of a mass downsizing sparked by the global financial downturn in 2011.

A jury in Manhattan awarded Murray nearly $1 million following a three-week trial, deciding he was fired for refusing to skew his research to impress investors, according to filings in the case.  The jury disagreed, however, on how long Murray would have remained at the firm, and awarded him much less than the amount of damages he was seeking.

Petitions filed last month asked for $638,950 to cover Herbst's attorneys’ fees and another $1,160.55 plus interest in costs, and $2.6 million to cover Broach & Stulberg's work in the case.  While Broach & Stulberg started out as lone counsel during several rounds of pretrial motions, Herbst “parachuted” into the case just a month before trial, applying to become lead counsel because it said it had more trial experience, according to the motion.

UBS attorneys maintained in their opposition motion that though a judge said Herbst could only assist in the case and not take over as lead counsel, for all intents and purposes, Herbst performed as if its attorneys were in fact lead counsel for the remainder of the case.

Herbst told Law360 his billable hours were reasonable and that he expects the court to think so, too.  "All of our firm’s time was spent on the Sarbanes-Oxley claim on which Mr. Murray prevailed and obtained what the jury decided was the full measure of his economic loss, special damages and compensatory damages," he said.  "Accordingly, based on UBS’s opposition, which does not attack our hourly rates and only presents picayune opposition to the hours we expended, our firm should hopefully receive a full lodestar recovery."

The case is Trevor Murray v. UBS Securities LLC et al, case number 1:14-cv-00927, in the U.S. District Court for the Southern District of New York.

Eleventh Circuit Reverses Entitlement to Fees in Miami Construction Dispute

November 29, 2018

A recent Daily Business Review story by Katheryn Tucker, “11th Circuit Reverses Fee Award in Miami Construction Dispute,” reports that, in a ruling that the winning lawyer said saved the construction industry from being “turned on its head,” the U.S. Court of Appeals for the Eleventh Circuit has reversed an award of $155,000 in legal fees in a dispute over the superstructure at Miami’s $1 billion Brickell CityCentre.  Senior Circuit Judge Frank Hull wrote the decision joined by Judges Robin Rosenbaum and Julie Carnes.  The panel reversed a ruling from U.S. District Judge Marcia Cooke of the Southern District of Florida granting $154,536 in attorney fees to International Fidelity Insurance Co. and Allegheny Casualty Co. — referred to jointly by the court as Fidelity.

On the winning side is Americaribe-Moriarty Joint Venture, a general contractor on the massive mixed-use development.  The dispute arose when the contractor replaced a subcontractor, Certified Pool Mechanics, called “CPM” in the opinion.  The contractor contended the sub failed to perform and then sought relief under a Fidelity performance bond.  Fidelity sought a declaratory judgment that Americaribe was not entitled to assert a claim against the performance bond and won at the district court level. The Eleventh Circuit upheld that ruling.

But then Fidelity asked for the fee award, which the district judge granted.  “In the first appeal, we affirmed the district court’s grant of summary judgment to Fidelity, holding Fidelity had no liability under its performance bond,” Hull wrote.  “Subsequently, the district court awarded attorney’s fees to Fidelity against Americaribe.”

On a second appeal, Americaribe argued Fidelity wasn’t entitled to recover fees  because the performance bond and the subcontract didn’t provide for it, and the panel agreed.  Richard Chaves of Ciklin Lubitz in West Palm Beach represented the Americaribe-Moriarty Joint Venture, or AMJV.  “The unchecked effect of the district court’s decision would impact not just our client (AMJV) but contractors and subcontractors across the state of Florida,” Chaves said in an email.

“Contractors and subcontractors routinely enter into bonded contracts which contain prevailing party attorneys’ fee provisions and/or separate indemnity provisions, and have asserted (and likely will assert in the future) claims against performance bonds which are typically challenged by the issuing surety,” he said.  “Fidelity’s position that — despite not having performed their surety obligations under their performance bond — they were entitled to prevailing party attorneys’ fees from AMJV under the indemnity provision of the underlying subcontract (to which Fidelity was not a party) is contrary to Florida’s public policy and, if made into legal precedent, would have turned the construction industry on its head.”

Chaves also suggested Hull’s decision may have helped avoid trouble beyond disputes over performance bonds.  “Contracts are governed by common law,” Chaves said. “An errant decision can create havoc in existing commercial relationships and create uncertainty in future ones.”

The case is Fidelity v. Americaribe-Moriarty JV, No. 17-10814.

Law 360 Covers NALFA CLE Program

October 25, 2018

A recent Law 360 story by Bonnie Eslinger, “Excessive Attys’ Fee Bids Can Backfire, Judges Say,” reported on a NALFA CLE program hosted today, “View From the Bench: Awarding Attorney Fees in...

Read Full Post