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Category: Fees as Sanctions / Bad Faith

Ninth Circuit Upholds Fees for Fees Under Statute

April 24, 2017

A recent Metropolitan News story by Kenneth Ofgang, “Panel Upholds Award of ‘Fees-on-Fees’ Under Statute” reports that a statute that permits federal judges to sanction attorneys for vexatious litigation permits an award of fees to opposing counsel for litigating the right to fees, the Ninth U.S. Circuit Court of Appeals ruled.

In a published order, the panel—Judges Alex Kozinski, Richard A. Paez, and Marsha S. Berzon—denied reconsideration of the appellate commissioner’s ruling calculating sanctions against Boston attorney Michael J. Flynn and his client, Timothy Blixseth.  The two were ordered to pay nearly $192,000 in fees and costs incurred by several creditors of Blixseth, a co-founder of the bankrupt Yellowstone Mountain Club.  Blixseth was found jointly liable for all but around $34,000 of the award, for which Flynn was found separately liable by statute.

Blixseth and one of his ex-wives developed the Yellow Mountain Club as an exclusive resort for “ultra-wealthy” golfers and skiers.  He has blamed the 2008 mortgage crisis for the collapse of his finances.  His wealth was estimated by Forbes magazine at $1.3 billion when it named him one of the 400 wealthiest Americans in 2006.  Creditors have claimed Blixseth has hidden assets.

Blixseth, represented by Flynn, appealed the denial of a motion to recuse the District of Montana bankruptcy judge assigned to his case.  The Ninth Circuit affirmed, agreeing with the district judge that Blixseth’s accusations were “a transparent attempt to wriggle out of an unfavorable decision by smearing the reputation of the judge who made it.”

In August 2015, the Ninth Circuit panel said Blixseth and Flynn were subject to attorney fees incurred by creditors on that appeal, citing Rule 38 of the Federal Rules of Appellate Procedure and 28 U.S.C. §1927.  “If a court of appeals determines that an appeal is frivolous, it may, after a separately filed motion or notice from the court and reasonable opportunity to respond, award just damages and single or double costs to the appellee.”

Section 1927 provides: “Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.”

In the order, the panel agreed with the appellate commissioner that fees incurred in litigating the right to fees, or “fees on fees,” cannot be awarded under Rule 38, but may be awarded under §1927.  The panel also denied, without comment, Flynn’s motion that the judges recuse themselves.

Because Rule 38 refers to “damages,” the judges said, it is not a fee-shifting statute, and the only attorney fees that may be awarded under the rule are those “incurred in defending against the frivolous issues or frivolous portions of an appeal.”

Section 1927, by contrast, “may be characterized as a fee-shifting provision, despite its sanctions trigger,” the panel said.  The legislation’s purpose, the judges said, it to shift the burden of the vexatious litigation onto the vexatious lawyer, noting that fee-shifting statutes generally are interpreted as permitting the award of “fees on fees.”

The case is Blixseth v. Yellowstone Mountain Club, LLC, 12-35986.

SCOTUS Rules Fee Awards from Bad Faith Must Be Compensatory, Not Punitive

April 18, 2017

A recent The Recorder by Ross Todd, “At Odds With 9th Circuit, SCOTUS Nixes $2.7M in Discovery Sanctions,” reports that the U.S. Supreme Court held on Tuesday that attorney fee awards resulting from acts of bad faith in litigation must be causally linked to the underlying misconduct.

In a unanimous 13-page opinion (pdf), Justice Elena Kagan reversed a $2.7 million fee award against the Goodyear Tire & Rubber Co. finding that sanctions in civil cases “must be compensatory rather than punitive in nature.”  The upper end of fee award sanctions, Kagan wrote, should be “limited to the fees the innocent party incurred solely because of the misconduct—or put another way, to the fees that party would not have incurred but for the bad faith.”

Goodyear’s case drew amicus support from the American Bar Association and the National Association of Manufacturers.  Both warned that failure to require a direct causal link between penalties and a litigant’s discovery abuses could lead to outsized and abusive sanctions awards.

Tuesday’s decision reverses a 2015 ruling from the U.S. Court of Appeals for the Ninth Circuit that put Goodyear on the hook for all $2.7 million in legal fees incurred by Leroy, Donna, Barry, and Suzanne Haeger after an alleged discovery violation in their personal injury case.  The Haegers claimed that faulty Goodyear tires caused a 2003 accident involving their motor home in which they all suffered serious injuries.

For years with the case pending at the trial court, the Haegers’ lawyer had asked the company to hand over all test results for the tire model in question.  But only after the case settled pretrial in 2010 for an undisclosed sum did the Haegers’ lawyer learn from a newspaper article that Goodyear had disclosed test results in separate litigation that he’d never seen.

In response to a motion for sanctions U.S. District Judge Roslyn Silver in Phoenix issued an order in 2012 forcing Goodyear to pay its opponents legal fees and costs from the moment when she found Goodyear made its first dishonest discovery response.  Although the judge acknowledged that sanctions are limited to fees caused by the misconduct in the “usual” case, she wrote that Goodyear’s sanctionable conduct rose “to a truly egregious level.”

A divided Ninth Circuit panel affirmed Silver’s finding that she could grant attorney’s fees incurred “during the time when” Goodyear was acting in bad faith.  But in dissent, Circuit Judge Paul Watford wrote that his colleagues had mistakenly pointed to “a temporal limitation, not a causal one” to justify the sanction.  “A sanctioning court must determine which fees were incurred because of, and solely because of, the misconduct at issue (however serious, or concurrent with a lawyer’s work, it might have been),” wrote Watford, in a section quoted by Kagan.

Justice Neil Gorsuch did not take part in Tuesday’s decision.

Attorney Fees Against Lloyd’s Underwriters Affirmed

March 31, 2017

A recent Business Insurance story by Judy Greenwald, “Bad Faith, Attorneys Fee Awards Against Lloyd’s Underwriters Affirmed,” reports that a California appeals court has upheld a $50,000 punitive damages award plus more than $1 million in attorneys fees (known as Brandt fees in California) against Lloyd’s of London underwriters in connection with its denial of coverage under a fire insurance policy because of a mistake in listing the insured.

In January 2011, the Saddleback property suffered a fire resulting in a $2,150,000 million loss, and Saddleback submitted a claim to Lloyd’s, which hired an attorney to investigate the loss.  In May 2011, the attorney sent a letter to Saddleback on behalf of Lloyd’s denying coverage “because Saddleback owned the property and J.K. Properties did not have an insurable interest in the damaged property,” according to the ruling.

J.K. Property and Saddleback filed suit against defendants including Lloyd’s in January 2012, charging breach of contract, professional negligence and bad faith.  An amended complaint added a reformation cause of action to add Saddleback as an additional insured on the policy at issue.  A reformation is a remedy available when an otherwise valid insurance policy does not reflect the parties’ true intentions.

At a bifurcated hearing in July 2014 in Santa Ana, the court determined Saddleback and Lloyd’s had intended Saddleback be named as the insured under the policy, and the court reformed the contract to list the named insured as “Saddleback Inn, LLC and JK Properties, Inc., dba Saddleback Inn.” Lloyd’s paid Saddleback $2,884,583, reflecting the $2,150,00 for the fire damage and $734,583 in interest.

During the second phase of the trial, a jury determined Lloyd’s had unreasonably denied payments and awarded Saddleback $50,000 in punitive damages, plus $1,062,117 in attorneys fees and expenses.  Lloyd’s appealed the punitive damages and attorneys fees awards, which a three-judge California Court of Appeals panel unanimously affirmed. 

“Underwriters argue there is no bad faith liability as matter of law when an insurer properly denied coverage under a policy as issued, even if a court later reforms the policy to provide coverage,” said the ruling.  However, said the court, “Ultimately, a claim for bad faith liability hinges on whether the insurer’s refusal to pay policy benefits was reasonable at the time.”

Attorney Fee Awards in the Lanham Act

January 19, 2017

A recent law firm blog post, “Attorney Fees Awards in Lanham Act,” by James Bikoff and Holly James of Smith Gambrell & Russell LLP in Washington, DC report on attorney on attorney fee awards under the Lanham Act.  This was posted with permission.  The article reads:

On October 24, 2016 the Ninth Circuit joined the Third, Fourth, Fifth and Sixth Circuits in applying the fee-shifting ruling of Octane Fitness LLC v ICON Health & Fitness Inc, 134 S Ct 1749 (2014), to a Lanham Act case – SunEarth Inc v Sun Earth Solar Power Co, DC 4:11-cv-04991-CW (9th Cir 2016).

The 2014 Supreme Court decision in Octane Fitness overturned the Federal Circuit’s standard for determining when a case is “exceptional” under 35 USC §285, adopting a flexible “totality of the circumstances” analysis and lowering the standard of proof to establish entitlement of fees from “clear and convincing evidence” to a “preponderance of the evidence”.  While Octane Fitness was a patent law decision, the Lanham Act and Patent Act both limit the award of attorney fees to “exceptional” cases.  The SunEarth decision brings the total to five circuits that have held that the Octane Fitness standard should apply for determining an “exceptional” case brought pursuant to the Lanham Act.

Previously, attorney fees were awarded only where there was “malicious, fraudulent, deliberate or willful” infringement.  Now district courts in the Third, Fourth, Fifth, Sixth and Ninth Circuits can exercise their discretion in awarding attorney fees based on a flexible “totality of the circumstances” analysis.  In determining whether an award of attorney fees is warranted, the court may consider a number of factors including frivolousness, motivation, objective unreasonableness and the need to advance considerations of compensation and deterrence.

In addition, in SunEarth the court held that attorney fees awards granted pursuant to the Lanham Act should be reviewed for abuse of discretion, overruling precedent that mandated de novo review.  This decision aligns with another patent law decision by the Supreme Court – Highmark Inc v Allcare Health Mgmt Sys Inc, 134 S Ct 1744 (2014), in which the court held that attorney fees awards under the Patent Act should be reviewed under the deferential “abuse of discretion” standard.

This recent decision by the Ninth Circuit is in line with the trend of the circuit courts to apply interpretations of the Patent Act to counterpart provisions in the Lanham Act.  As the Supreme Court has taken a more flexible, deferential approach to the award of attorney fees under the Patent Act, trademark litigants will also be able to benefit from the less burdensome requirements for obtaining and maintaining an award of attorney fees in Lanham Act cases.

While district courts within the Eighth, Tenth and Eleventh Circuits have applied the Octane Fitness decision to Lanham Act cases, the Second and Seventh Circuits continue to use a traditional analysis – see Point 4 Data Corp v Tri-State Surgical Supply & Equip, Case 11-CV-726 (EDNY September 10 2015) and Burford v Accounting Practice Sales Inc, 786 F.3d 582 (7th Cir 2015).  Notably, there may soon be a shift in the Second Circuit as Tri-State has appealed the district court’s decision denying attorney fees and is urging the Court of Appeals for the Second Circuit to apply Octane Fitness, see Point 4 Data Corp v Tri-State Surgical Supply & Equip, Case 15-3212 (2nd Cir).

Florida Supreme Court: Insurer Required to Pay Legal Fees

November 14, 2016

A recent Daily Business Review story, “Florida Supreme Court Says Insurer Required to Foot Legal Fees,” reports that the Florida Supreme Court said a property insurer must pay the attorney fees of a homeowner who successfully challenged the company's contention that her home was not damaged by a sinkhole.

The court, in a 6-1 ruling in a Marion County case, sided with homeowner Kathy Johnson, who filed a claim in 2010 with Omega Insurance Co. because of extensive damage that included cracks in walls and separations between walls and ceilings.  The justices pointed to a need for policyholders to be able to recoup legal fees if they successfully fight insurance companies over claims.

"The need for fee and cost reimbursement in the realm of insurance litigation is deeply rooted in public policy.  Namely, the Legislature recognized that it was essential to 'level the playing field' between the economically advantaged and sophisticated insurance companies and the individual citizen," said the majority opinion, written by Justice R. Fred Lewis and joined fully by Chief Justice Jorge Labarga and Justices Barbara Pariente, Peggy Quince and James E.C. Perry.

"Most assuredly, the average policyholder has neither the finances nor the expertise to single-handedly take on an insurance carrier," Lewis said.  "Without the funds necessary to compete with an insurance carrier, often a concerned policyholder's only means to take protective action is to hire that expertise in the form of legal counsel.  Counsel then have the ability and knowledge to hire an independent engineer or other expert to prepare a report that either confirms or denies the policyholder's view of the cause of damages.  For this reason, the Legislature recognized that an insured is not made whole when an insurer simply grants the previously denied benefits without fees."

The legal dispute began after Omega Insurance hired a consulting firm that said the damage to Johnson's home was not caused by a sinkhole.  Johnson retained a law firm, which in turn hired a consultant who concluded a sinkhole was responsible.

Johnson filed a breach-of-contract lawsuit against Omega.  After another consulting firm said the damage was caused by a sinkhole, Omega agreed to pay for repairs, which totaled $213,465, according to the Supreme Court ruling.  Johnson then sought to require the insurer to pay her attorney fees.

A circuit judge ruled that the insurer should pay the legal fees, but the Fifth District Court of Appeal disagreed.  It said the insurer could only be forced to pay the fees if it initially denied the claim in "bad faith."

The Supreme Court's 27-page majority opinion overturned that ruling.  "We cannot, as the [appeals] court below held and Omega requests here, discourage insureds from seeking to correct the incorrect denials of valid claims and allow insurers to deny benefits to which insureds are entitled without ramifications," the opinion said.  "Johnson proceeded with the only action that a non-expert claimant in conflict with a major insurance company could take: She retained counsel and thus obtained access to an independent expert."