A recent Law 360 article by Hugh Marbury and Molly Shaffer, “A Defense Strategy For Addressing Copyright Fee-Shifting”, reports on case strategy in copyright fee-shifting litigation.  This article was posted with permission.  The article reads:

Unlike in Europe, litigants in the U.S. are generally responsible for paying their own attorney fees. Limited exceptions to the American rule exist.  For example, subject to the court's discretion, prevailing parties in Section 1983 patent and copyright litigation are eligible to recover attorney fees.

Although permissive fee-shifting is not isolated to copyright matters, copyright defendants face unique challenges because of the outsized impact Section 505 of the Copyright Act has on the economic incentive structure in all copyright litigation.  Federal Rules of Civil Procedure, Rule 68 could neutralize the omnipresent threat of Section 505 and serve as a mechanism for copyright defendants to recover post-offer attorney fees incurred.

In 2014, the American Law Institute launched a project for developing the first Restatement of the Law, Copyright.  More than 175 elected American Law Institute members — consisting of judges, law professors and experienced copyright practitioners — have spent several years drafting the restatement.  The restatement surveys copyright law as it is applied today, including the conflicting case law regarding fee-shifting and Rule 68.  In addition to the impending restatement, the U.S. Supreme Court has demonstrated some interest in copyright issues.

In Warner Chappell Music Inc. v. Sherman Nealy, the U.S. Supreme Court heard oral argument Feb. 21 to determine the relationship between the discovery accrual rule and the statute of limitations provision contained in Title 17 of the U.S. Code, Section 507(b).  The intersection between Rule 68 and Section 505 is another unclear area of copyright law where copyright lawyers could benefit from the Supreme Court's guidance.

The Intersection Between Rule 68 and Section 505

The U.S. Congress and courts have struggled with economic drivers in copyright cases, the subject matter of which can range anywhere from a single infringing photograph to massive copyright disputes regarding new and emerging software algorithms.  In December 2020, Congress addressed one end of the economic spectrum in the copyright ecosystem by establishing the Copyright Claims Board.

The CCB is a three-member tribunal, which serves as an alternative forum for smaller copyright disputes up to $30,000.  The CCB, while still in its infancy, does nothing to address the pressures associated with fee-shifting in all federal copyright cases, however.  Section 505 permits the "prevailing party" to recover its reasonable attorney fees as part of costs incurred. Unlike in patent cases, where fee-shifting is limited to exceptional cases, there is no such statutory limitation in Section 505.

Without any guidance as to when attorney fees may be awarded under Section 505, copyright plaintiffs threaten attorney fees early and often in settlement negotiations.  The threat of fee-shifting significantly affects the alleged infringer's bargaining power and resolve in defending the case.  Regardless of whether Congress intended Section 505 to provide significant leverage to plaintiffs and shift the focus from the merits of the litigation to the costs associated therewith, the reality is that Section 505 heavily affects settlement negotiations.

Rule 68 was designed to encourage settlement.  Enacted in 1946, Rule 68 permits a defendant to serve an offer of judgment on an opposing party at any point until 14 days before the trial date.  The offeree then has 14 days to accept the offer. If the offeree does not accept the offer within 14 days, the offer is considered withdrawn.  If the final judgment is not more favorable than the unaccepted offer, the offeree must pay the defendant's costs incurred after the offer was made.

Rule 68 is overlooked and underutilized because costs are often insubstantial in most litigation. However, where costs may be inclusive of attorney fees — in Section 505 — Rule 68 is a powerful tool that could minimize the threat of Section 505 in settlement negotiations by weakening the copyright holder's claim to its fees and allow defendants to collect attorney fees incurred after the offer.

In Marek v. Chesny in 1985, the Supreme Court interpreted Rule 68 in connection with a Section 1983 fee-shifting claim.  In Marek, the Supreme Court confirmed that all costs "properly awardable under the relevant substantive statute" fall within the scope of Rule 68.  Where the underlying statute includes attorney fees in its definition of costs, attorney fees are properly awardable under Rule 68.  Section 505 expressly provides that "the court may also award a reasonable attorney's fee to the prevailing party as part of the costs."

The forthcoming restatement of the law copyright has addressed this topic.  Although not yet published, the American Law Institute has approved various chapters of the restatement, including the chapter discussing remedies. Comment (h) to the restatement's chapter on remedies acknowledges that Rule 68 affects Section 505.  The restatement discusses the Supreme Court's decision in Marek and presents the competing case law regarding when a copyright defendant is eligible to collect its post-offer attorney fees under Rule 68.

Defensive Strategy: Reining in Overly Aggressive Copyright Plaintiffs

Rule 68 can prevent plaintiffs from recovering attorney fees under Section 505.  Neutralizing the threat of Section 505 shifts the economic structure of the litigation and refocuses the parties' attention on the merits of the action.

Courts are granted broad discretion to award attorney fees under Section 505 and should engage in a "particularized, case-by-case assessment."  Nonexclusive factors for consideration include frivolousness, motivation, objective unreasonableness, and the need in particular circumstances to advance considerations of compensation and deterrence.  Courts should give substantial weight to the objective reasonableness of the losing party's position, while still giving "due consideration to all other circumstances relevant to granting fees."

Unfortunately, the Supreme Court recently rejected the opportunity to clarify further the appropriate standard for awarding attorney fees under Section 505 in Hasbro Inc., et al. v. Markham Concepts Inc.  A reasonable but unaccepted Rule 68 offer does not operate a wholesale bar to a plaintiff's recovery of fees, but defendants should urge courts to consider an offer of judgment as a "circumstance relevant to granting fees."

An unaccepted offer of judgment may trigger several of the nonexclusive factors.  For example, failing to accept a reasonable Rule 68 offer could indicate that a plaintiff's motivation in the litigation is to obtain a windfall.

Relatedly, a plaintiff's failure to come down to a realistic settlement figure could show that the plaintiff presented an unreasonable litigation position.  Moreover, prolonged litigation — a result of an unaccepted Rule 68 offer — could reflect a plaintiff's intent to rack up attorney fees for both parties.  Each of these arguments could serve as a basis for the court to reject a plaintiff's Section 505 request.

Although the exact impact of Rule 68 is unclear in the copyright fee-shifting context, defendants could benefit from making creative arguments grounded in Rule 68 principles in attempt to equalize the bargaining power in copyright infringement negotiations.

Offensive Strategy: Maximize Recovery Opportunity

Circuits are split on the more difficult questions regarding when a defendant may recover attorney fees after an unaccepted offer of judgment.

The U.S. Court of Appeals for the Eleventh Circuit held in Jordan v. Time Inc. in 1997 that the copyright defendant was entitled to costs, including attorney fees, following an unaccepted offer of judgment that was more favorable than the damages awarded.  The court relied upon the mandatory language in Rule 68 and determined that the mandatory costs included attorney fees incurred after the Rule 68 offer.

Other circuits, however, have rejected Jordan, and require that the defendant also be the prevailing party to earn attorney fees incurred after the Rule 68 offer.  Applying Marek, those circuits have generally concluded that attorney fees must be properly awardable under the substantive statute to fall within Rule 68.

Under Section 505, attorney fees are only available to the prevailing party, and therefore, some courts have held that the defendant must be the prevailing party to recover post-offer attorney fees.  What exactly a prevailing party is remains elusive.  Because of the interplay between Rule 68 and Section 505, it seems possible that a defendant could recover post-offer attorney fees.  The Eleventh Circuit considered this argument in February in Affordable Aerial Photography Inc. v. Trends Realty USA Corp.

In that case, the defendant served an offer of judgment, which was not accepted, and the plaintiff later voluntarily dismissed the case without prejudice pursuant to Federal Rule of Civil Procedure 41(a)(2).  Although the court held that Rule 68 was inapplicable, it is conceivable that a copyright defendant could recover post-offer attorney fees under different facts.

What's Next?

Rule 68 and Section 505 certainly overlap, but exactly how they interact is less than clear.

Copyright practitioners would benefit from the Supreme Court's guidance on if and how Rule 68 affects permissive fee-shifting.  The Supreme Court has shown renewed interest in copyright cases generally, having reviewed fair use in Andy Warhol Foundation for the Visual Arts v. Goldsmith last May and the timing of damages in Warner Chappell Music Inc. v. Sherman Nealy in February.

Given the Supreme Court's recent interest in copyright issues and the many billions of dollars potentially at stake in attorney fees — particularly in the massive artificial intelligence copyright cases being filed in all circuits — the Supreme Court should give guidance on the relationship between Rule 68 and Section 505.  But all copyright defendants should seriously consider the role of Rule 68 in their litigation strategy.

Hugh Marbury is a partner and co-chair of the copyright practice at Cozen O'Connor.  Molly Shaffer is an associate at the firm.

A recent Law.com article by Adam J. Levitt, “Arguing Class Actions: Why the Catalyst Theory Matters”, examines the catalyst theory in class action litigation.  This article was posted with permission.  The article reads:

The story presents a conundrum.  Plaintiffs file a class action, which the defendant initially resists.  Plaintiffs counsel spends hundreds of thousands of dollars (or more) in lodestar and costs prosecuting the case, but after potentially years of hotly contested litigation, the defendant issues a recall or announces a refund program that fixes the problem and then argues that the case is moot.  The question: Should those who filed this case, and consequently induced (or “catalyzed”) the defendant to fix the problem, be paid?

The right answer is obvious.  Of course the plaintiffs lawyers should be paid.  Without plaintiffs counsel’s actions and active litigation threat, the defendant would have never changed its behavior, ultimately for consumers’ benefit.  The law routinely rewards those who confer benefits on others, even in the absence of, say, a contractual guarantee (as with the doctrine of quantum meruit).  In short, nobody works for free.  Nobody, as some would have it, except plaintiffs lawyers.

The Rise and Fall of the Catalyst Theory

Rewarding lawyers for catalyzing a change used to be noncontroversial. See, e.g., Marbley v. Bane, 57 F.3d 224 (2d Cir. 1995) (“a plaintiff whose lawsuit has been the catalyst in bringing about a goal sought in litigation, by threat of victory … has prevailed for purposes of an attorney’s fee claim…”); Pembroke v. Wood Cnty., Texas, 981 F.2d 225, 231 (5th Cir. 1993) (recognizing viability of catalyst theory); Wheeler v. Towanda Area Sch. Dist., 950 F.2d 128, 132 (3d Cir. 1991) (same).

But the law became murkier in May 2001, with the U.S. Supreme Court’s decision in Buckhannon Bd. & Care Home v. W. Virginia Dep’t of Health & Hum. Res., 532 U.S. 598 (2001).  There, an assisted living facility sued West Virginia, arguing that a regulation violated the Fair Housing Amendments Act.  After the suit was filed, the Legislature removed the regulation, mooting the case.

In a 5-4 decision, the Supreme Court ruled that the plaintiff was not a “prevailing party” for purposes of the applicable fee-shifting statute.  Discarding the “catalyst theory,” it ruled that: “A defendant’s voluntary change in conduct, although perhaps accomplishing what the plaintiff sought to achieve by the lawsuit, lacks the necessary judicial imprimatur on the change” sufficient to make the plaintiff a “prevailing party.” Id. at 605.  As Justice Ruth Bader Ginsburg explained in her dissent, the Buckhannon decision frustrates the goals of the catalyst theory because it “allows a defendant to escape a statutory obligation to pay a plaintiff’s counsel fees, even though the suit’s merit led the defendant to abandon the fray, to switch rather than fight on, to accord plaintiff sooner rather than later the principal redress sought in the complaint.” Id. at 622 (Ginsburg, J., dissenting).

The Catalyst Theory Today

Notwithstanding the Buckhannon decision, the catalyst theory remains a powerful tool outside of Buckhannon’s specific context.

First, Buckhannon has no bearing on state causes of action.  In California, Cal. Code Civ. Proc. §1021.5 allows a court to award fees to a “successful” party.  The California Supreme Court has explained it takes a “broad, pragmatic view of what constitutes a ‘successful party,’” Graham v. DaimlerChrysler, 34 Cal. 4th 553, 565 (2004), and explicitly endorsed the “catalyst theory [as] an application of the … principle that courts look to the practical impact of the public interest litigation in order to determine whether the party was successful.” Id. at 566.  In short, it disagreed with the U.S. Supreme Court regarding what it means to “prevail” or “succeed” in a litigation.

The catalyst theory has also largely survived in the context of favorable settlements.  For example, in Mady v. DaimlerChrysler, 59 So.3d 1129 (Fla. 2011), the Supreme Court of Florida considered an award of attorney fees to a consumer who accepted defendant’s offer of judgment, an offer that neither conceded liability nor plaintiff’s entitlement to fees, in a case filed under the Magnuson Moss Warranty Act (MMWA), which guarantees fees to a “prevailing party.” Id. at 1131.  Explicitly considering and distinguishing Buckhannon, the court found that a party may “prevail” with a settlement.  In doing so, it rearticulated the logic underpinning the catalyst theory:

[The plaintiff] achieved the same result with a monetary settlement only after being forced to bear all of the costs and expenses associated with litigation and facing the statutory penalty if the offer of judgment had not been accepted. DaimlerChrysler could have resolved this dispute during the “informal dispute settlement” phase, but instead waited until after [plaintiff] was forced to commence this action and incur the expenses of this litigation. Id. at 1133.

Further, even in federal court, attorney fees may be awarded under statutes other than those limiting such awards to “prevailing” parties.  For example, in Templin v. Indep. Blue Cross, 785 F.3d 861 (3d Cir. 2015), the Third Circuit explained that a fee may be awarded for an Employee Retirement Income Security Act claim under the catalyst theory, because ERISA does not limit fee awards to the “prevailing party.” 785 F.3d at 865.  Including the Third Circuit, at least five circuits have endorsed the catalyst theory under such statutes: Scarangella v. Group Health, 731 F.3d 146, 154–55 (2d Cir. 2013); Ohio River Valley Env’l Coalition v. Green Valley Coal, 511 F.3d 407, 414 (4th Cir. 2007); Sierra Club v. Env’l Protection Agency, 322 F.3d 718, 726 (D.C. Cir. 2003); Loggerhead Turtle v. Cty. Council, 307 F.3d 1318, 1325 (11th Cir. 2002).

Despite the ongoing recognition of the catalyst theory in many contexts, there remains the risk that courts may apply the catalyst theory narrowly, or that defendants may find a way around it. Consider Gordon v. Tootsie Roll Indus., 810 F. App’x 495, 496 (9th Cir. 2020), a “slack-fill” case in which the plaintiff alleged that the defendant’s boxes of Junior Mints were mostly air.  After the plaintiff moved for class certification, the defendant changed the box’s label.  The plaintiffs dismissed and moved for fees.

The fee application was denied because “Gordon’s theory of the case was that the size of the box was itself misleading, and that Tootsie Roll should either fill the Products’ box with more candy to account for the size of the box … or shrink the box to accurately represent the amount of the candy product therein[, and] Tootsie Roll did not make either of these changes.” Id. at 497 (internal quotation omitted).  Considering the disincentives (or, conversely, the moral hazards) that arise from this type of narrow application of the catalyst theory, courts should take a decidedly more equitable view when adjudicating this important issue.

A Way Forward

For practitioners, a few lessons come out of this case law and history.  First, in writing their complaint, attorneys must think through the various paths that a company might take to remedy the purported harm.  Recall that in Gordon, the plaintiff focused entirely on the misleading box, but not on the misleading labeling. Second, favorable settlements and offers of judgment remain viable tools, and may support a catalyst theory attorney-fee payment even if the defendant resists paying fees in the settlement itself.  Finally, despite Buckhannon, the catalyst theory remains readily available under a host of statutes (state and federal).  In relying on citing those statutes, plaintiffs should not shy away from the catalyst theory’s compelling logic.  Courts understand that basic fairness requires that attorneys be paid if their lawsuit ultimately confers a significant benefit.  Nobody should work for free.  Not even plaintiffs lawyers.

Adam J. Levitt is a founding partner of DiCello Levitt, where he heads the firm’s class action and public client practice groups.  DiCello Levitt senior counsel Daniel Schwartz also contributed to this article.

A recent Law 360 story by Carolina Bolado, “11^th Circ. Says Broker Can’t Collect Fees in Copyright Case”, reports that the Eleventh Circuit has ruled that a Florida real estate broker cannot collect attorney fees incurred for defending himself from a copyright infringement suit by an aerial photography company because the broker was not a prevailing party once the photography company voluntarily dismissed the case.

In an opinion issued Feb. 28, the appeals court affirmed a district court decision denying a request by real estate broker John Abdelsayed and his company Trends Realty USA Corp. for an award of their attorney fees and costs from Affordable Aerial Photography Inc.  That company had sued over the use of a copyrighted photograph on Trends Realty's website.

Abdelsayed and Trends Realty argued that they are entitled to fees under Federal Rule of Civil Procedure 68, which mandates a fee award if an offer to settle is not accepted and ends up being more favorable than the judgment obtained, and under the Copyright Act's cost-shifting provision.

But the Eleventh Circuit said they are not entitled to fees under Rule 68 because it only applies when a plaintiff has obtained a judgment for an amount less favorable than the defendant's settlement offer.  It does not apply in cases where the defendant wins a judgment, the appeals court said.  And because Abdelsayed and Trends Realty did not obtain a judgment, they are not prevailing parties in the suit and are therefore not eligible for a fee award under the Copyright Act, according to the Eleventh Circuit.

"The order of dismissal does not prevent AAP from refiling its claims," the appeals court said.  "And even assuming future action by AAP may be unlikely or now barred by the statute of limitations, those facts are irrelevant because the court did not rebuff or reject AAP's claims on any grounds."

Abdelsayed, who operates in the Palm Beach County market, was sued in August 2021 in the Southern District of Florida by Affordable Aerial Photography for using a copyrighted photograph on Trends Realty's site.  AAP moved to voluntarily dismiss the suit without prejudice a year later.

After briefing and a hearing, the district court granted the motion and dismissed the case without prejudice. The court ruled that if AAP were to refile its case, it would have to pay the defendants' reasonable attorney fees incurred in defending this case.  Two months later, Abdelsayed and Trends Realty asked the court to reconsider that order, claiming they were entitled to immediate recovery of their fees under Rule 68 and the Copyright Act. But the court denied the request.

On appeal, the defendants argued to the Eleventh Circuit that allowing this would create an incentive for a plaintiff to drop a case just before an expected adverse ruling, but the appeals court pointed out that the plaintiff can't do this unilaterally and that a dismissal must be approved by the court.  In this case, the district court held a hearing and found that the defendants would not suffer legal prejudice because their counsel was pro bono or on a contingency agreement, according to the appeals court.

A recent Law 360 story by David Minsky, “Judge Rejects $5.2.M Atty Fee Bid In Poultry Farm Loan Suit”, reports that a New York federal judge rebuffed attorneys' attempt to collect a nearly $5.2 million fee for representing an affiliate of two billionaire brothers that accused an investment adviser of fraudulently inducing the affiliate to provide a loan for a Russian poultry operation, saying the adviser wasn't improperly defending himself.

In the order, U.S. District Judge Victor Marrero denied an attorney fee motion by Reed Smith LLP lawyers representing Bloomfield Investment Resources Corp., which accused adviser Elliot Daniloff of needlessly stretching out the firm's lawsuit against him over the course of several years before he was ultimately ordered to pay millions in compensatory and punitive damages.

Bloomfield — a British Virgin Islands company and affiliate of billionaire brothers David and Simon Reuben — sued Daniloff in 2017 and a judgment of more than $34 million was entered against him in 2023, a year after a bench trial was held, court records show.

"To prevail on a motion to shift fees, the moving party must provide 'clear evidence' that the losing party's claims were (1) 'entirely without color,' and (2) 'were made in bad faith,'" Judge Marrero said in his order.  "The court finds that Bloomfield has not established that Daniloff engaged in the sort of dilatory and vexatious litigation tactics that satisfy the standard for the 'bad faith' exception in this circuit."

In the 2017 case, the plaintiff accused Daniloff of misdirecting $25 million intended as a loan into a bank account opened for the Russian poultry farm and failing to return the money.

Following the judgment, in June 2023, Reed Smith attorney Steve Cooper filed a motion seeking attorney fees from Daniloff.  In the accompanying memo, Cooper said Daniloff failed to show credible evidence of his theory, which is that "Bloomfield made an investment in the Synergy Hybrid Fund as an investor and that the $25 million did not represent a loan."

"Daniloff's actions led to prolonged and expensive litigation," Cooper stated in his motion.  "He caused the collection, review and/or production of almost 150,000 pages of documents, and the taking or defending of 13 depositions.  He made numerous frivolous motions and appealed the dismissals of his first action to the Second Circuit twice."

Opposing the attorney fee motion, Daniloff said that the plaintiff couldn't show that his defense wasn't "colorable" and used for an "improper purpose."

"Efforts to delay proceedings are not sufficient to establish that the litigant is acting with an 'improper purpose' as required for the 'bad faith' exception," Daniloff said in his July opposition filing.  "Moreover, any assertion that Mr. Daniloff was defending against Bloomfield's claims to give himself leverage in resolving the dispute would be insufficient to establish that Mr. Daniloff litigated this dispute with an improper purpose."

The court found Daniloff's arguments "legally and factually baseless," according to Judge Marrero, who also noted that the "court found that Daniloff persisted in making baseless arguments without support and in conflict with the clear evidence showing that he (and Bloomfield) always understood the $25 million would be a loan and not an equity investment."

While Judge Marrero acknowledged Bloomfield's arguments that Daniloff convinced the parties to engage in lengthy negotiations that delayed the case and ultimately failed, he added the court wasn't persuaded that these tactics amounted to bad faith dealings.

Judge Marrero cited the "American rule" in which parties pay their own attorney fees, "absent statutory authority or by contract," but recognized that these costs can be shifted in limited circumstances.  One deviation from the rule is the "bad faith exception," the judge said, in which the non-prevailing party's actions are conducted "vexatiously, wantonly or for oppressive reasons."

The judge, however, found that Bloomfield hadn't established the required "high degree of specificity" in showing Daniloff litigated with the intent to harass or delay, saying that it has never been held in his circuit that a "frivolous position may be equated with an improper purpose."

"Without such evidence, the court cannot conclude that Daniloff's actions were taken with an improper motive," Judge Marrero said.  "Courts in this circuit have consistently declined to award attorneys' fees simply on the basis that the defendant improperly delayed the proceedings, even when the delay was accompanied (or even caused) by meritless legal positions."

A recent Law 360 story by Rose Krebs, “Del. Justices Clarify Fee-Shifting in Public Interest Cases”, reports that, in a decision offering guidance on attorney fee-shifting in public interest cases, Delaware's Supreme Court reversed a decision that awarded fees to nonprofit organizations that successfully challenged the use of outdated tax assessments in determining funding for the state's public schools.

In a 49-page ruling, the state's high court undid a Chancery Court order from last year that awarded roughly $1.5 million in fees to Delawareans for Educational Opportunity and the NAACP Delaware State Conference of Branches.  Left in place was the award of roughly $73,000 in legal expenses to the two groups, which hadn't been contested by the litigation parties.  "The parties in this appeal raise important questions regarding fee-shifting in the public interest litigation context," Justice Karen L. Valihura wrote for the court.

At issue were legal fees awarded after the two nonprofit organizations brought several lawsuits "that sought increased funding for Delaware's public schools," the Supreme Court said.  "The suits were brought against multiple Delaware public officials in their official capacities, some of whom were responsible for tax collection in Delaware's three counties," Justice Valihura wrote.

In a May 2020 opinion, Vice Chancellor J. Travis Laster ruled in favor of the two organizations, agreeing that the counties' tax assessment methods, which had relied on values from as far back as 46 years ago, treated owners of similar properties unequally.  "Appellees filed suit against the defendants because they believed that Delaware public schools were not providing an adequate education to disadvantaged students," the Supreme Court ruling said. "Appellees pointed to a broken system for funding public schools as one of the reasons why Delaware's public schools have fallen short."  The Supreme Court decision explained that in the state, "approximately one-third of funding for public schools is derived from local taxes levied by individual school districts."

"When school districts in Delaware levy local taxes, they use the county assessment rolls prepared by New Castle County, Kent County, and Sussex County," the ruling said.  "If there are deficiencies or problems with the counties' tax assessment rolls, those deficiencies or problems will affect the school districts' ability to levy taxes."  In his ruling, Vice Chancellor Laster said that "owners whose properties have appreciated more pay a lower effective rate than owners whose properties have appreciated less."

"The counties' outdated assessments conceal a reality of non-uniformity beneath a cloak of uniformity," the vice chancellor said.  His ruling came after the Chancery Court had bifurcated the litigation into a "County Track" to handle claims against county defendants, and a "State Track" to adjudicate claims against state officials, according to the Supreme Court opinion.

The "County Track" litigation was further divided, the Supreme Court said, including a "merits" phase that went to trial in 2019, leading to the vice chancellor's post-trial decision.  As proceedings continued following Vice Chancellor's Laster's ruling, an agreement was reached by the parties "pursuant to which each county agreed to conduct a general tax reassessment," according to the Supreme Court's decision.  The two nonprofit organizations sought an award of attorney fees and expenses in May 2021, and in two separate decisions, the Chancery Court first determined that the groups were entitled to the costs and then subsequently awarded the amounts to be paid by the defendants, the Supreme Court said.

In its ruling, the Supreme Court relied on two of its prior decisions, in Dover Historical Society v. Dover Planning Commission, in 2006, and Korn v. New Castle County, in 2007. In the Dover decision, the Supreme Court "rejected fee-shifting in a non-taxpayer, public interest suit that ultimately caused a government entity to 'perform properly,'" the opinion said.  "In Korn, fees were awarded under the 'common benefit exception' to the American Rule because the plaintiffs created for all taxpayers a tangible benefit that was both 'substantial' and 'quantifiable,'" the Supreme Court said.

The American Rule, which originated in the U.S. Supreme Court's 1796 decision in Arcambel v. Wiseman, provides that "litigants are generally responsible for paying their own legal fees absent certain limited exceptions," the Supreme Court said.  Exceptions for which fees can be shifted include cases in which a litigation party has acted in bad faith or the litigation "creates a common benefit," the high court's opinion said.

The two nonprofit organizations had argued in a filing that the Chancery Court had correctly determined they were entitled to fees and expenses for obtaining benefits "beyond the social good of making the government comply with the law."  Among those benefits were increasing annual tax benefits for school districts due to the agreement to perform updated tax reassessments, as well as "fixing deficiencies in the state equalization funding system," the groups asserted.

In an opening brief, the public officials argued that the Chancery Court had "ignored" Dover and incorrectly applied Korn, and that the court had ordered "defendants to pay fees for benefitting parties with whom those defendants have no identity of interest, which is both unprecedented and unwarranted."  The Chancery Court's "expansion of fee-shifting in public interest litigation should be curtailed," they argued.

In an amicus brief, the Delaware League of Local Governments urged the Supreme Court to reverse the Chancery Court's decision, arguing that it "improperly created a newfound common law exception to the American Rule by allowing fee-shifting ... for 'public benefit' litigation," the Supreme Court said.  On its website, the league describes itself as "a non-partisan, non-profit organization comprised of local government leaders."

The league had argued that a "mere social benefit does not justify an exception to the American Rule and it is up to the legislature, not the courts, to determine whether fee-shifting is appropriate in public interest litigation," the Supreme Court's decision said.  In its ruling, the justices agreed with the public officials and the league, saying the Chancery Court's decision exceeded "the bounds of Dover."  The Chancery Court's decision "omits any discussion of the guidance we offered in Dover as to the narrow parameters of the exception in the public interest context," the court ruled.

"Viewing this litigation through the prism of Dover's guidance, we conclude that the benefits achieved fall within Dover's 'perform properly' bounds," the Supreme Court said.  "Accordingly, we hold that the trial court erred in determining that the common benefit doctrine applied."  The high court said it was "not persuaded that the other benefits identified" warranted an award of fees and called some of the purported benefits "speculative."

The Chancery Court also erred by determining that the Korn decision "was not limited to taxpayer suits, but rather, it applied more broadly to public interest suits," the Supreme Court's ruling said.  "We decline to extend Korn beyond taxpayer suits that confer a quantifiable, non-speculative benefit to all taxpayers," the justices said.

New Castle County Executive Matt Meyer said in a statement: "We are proud that we just saved taxpayers $1.48 million, a substantial portion of which would have been paid to out of state New York lawyers.  This decision, from Delaware's highest court, means countless public funds will be at considerably less risk in future lawsuits against towns, cities, counties and local governments across Delaware."

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