Source: http://www.thenalfa.org/blog/category/fee-doctrine-theory/
Timestamp: 2019-04-21 16:11:57+00:00

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A recent Law 360 story by Chris Villani, “Mass. Top Court Sets Standard for Atty Fees in Wage Suits,” reports that an employee suing an employer for unpaid wages can recover attorneys' fees when winning a "favorable settlement," even when a court does not sign off on the deal, according to a Massachusetts Supreme Judicial Court ruling with potentially wide-ranging implications. The appeals court affirmed a lower court ruling and sided with a pair of former employees of a Boston dry cleaner who claimed they were denied about $28,000 owed to them in wages and overtime and ultimately settled for more than 70 percent of that figure. The top court said the so-called catalyst test should apply when assessing whether to tack on attorneys' fees.
Under this standard, fee-shifting can occur if a lawsuit is a "necessary and important factor" in causing a defendant to fork over a "material portion" of relief requested by a plaintiff through a settlement agreement, even if there is no judicial involvement in the accord. The bar, which is lower than federal fee-shifting standard, is necessary to avoid needlessly long and costly litigation, the top court said.
"The catalyst test best promotes the purposes of fee-shifting statutes by encouraging attorneys to take cases under such statutes to correct unlawful conduct and rewarding them accordingly when they do so," Associate Justice Scott L. Kafker wrote in the unanimous opinion. "The catalyst test also promotes the prompt settlement of meritorious cases, avoiding the need for protracted litigation, superfluous process, or unnecessary court involvement solely to 'prevail' in a formalistic sense to ensure an award of attorney's fees and costs."
The dry cleaner, Sturgis Cleaners Inc., had sought to enforce the federal standard set in 2001 by the U.S. Supreme Court in Buckhannon Board and Care Home v. West Virginia Department of Health & Human Resources, which said a party is required to win an enforceable judgment or a consent decree before being eligible to be the "prevailing party" and having the chance to collect attorneys' fees. But the Massachusetts high court disagreed, seeing the catalyst test as a better method because it provides two crucial incentives related to all wage litigation: giving attorneys a reason to take cases where individual employees claim to have been denied wages, and adding, the opinion said, "a powerful disincentive for employers to withhold the wages in the first place." "If such settlements did not result in the obligation to pay attorney's fees, there would be a disincentive to bring such cases in the first place, thereby leaving other unlawful conduct unaddressed and uncorrected," Justice Kafker wrote.
The former employees, Belky Ferman and Veronica Guillen, filed suit in 2014. After two years of litigation, including the entry and lifting of a default judgment against the dry cleaner, the case settled through mediation for $20,500. The attorney fee issue was left to the court, and a Suffolk County Superior Court judge, applying the catalyst test, ruled in favor of the employees. "The catalyst test thus recognizes that successful litigation may be reflected in settlements as well as court rulings," Justice Kafker wrote, "as settlements are often 'the products of pressure exerted by [a] lawsuit.'"
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.
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.
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.
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.com – 877-257-3382 - reprints@alm.com.

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