Opinion ID: 1989751
Heading Depth: 1
Heading Rank: 3

Heading: Attorney's Fees as an Element of Punitive Damages

Text: Any consideration of a common-law standard for awarding attorney's fees must begin with the prevailing rule in this country. Known as the American Rule, it prohibits the prevailing party in a lawsuit from recovering his attorney's fees as an element of damages. Alyeska, 421 U.S. at 247, 95 S.Ct. at 1616, 44 L.Ed.2d at 147; Empire, 269 Md. at 285, 305 A.2d at 148. A brief history of the American Rule reveals that it evolved from the English Rule, which originated some time before the reign of Edward I. At that time, a successful plaintiff could obtain the costs of litigation as an element of damages. See C. McCormick, Handbook on the Law of Damages 234, 235 (1935), relying on 2 F. Pollock & F. Maitland, The History of English Law 597 (2d ed. 1911). Beginning with the reign of Henry VIII, this benefit was also extended to successful defendants. McCormick at 235. Consequently, the English Rule  which allows the successful party in a lawsuit to recover from the losing party the costs of litigation, including attorney's fees  became firmly established in the English common-law courts. Id. The rule continues in England today. [4] Alyeska, 421 U.S. at 245, 95 S.Ct. at 1616, 44 L.Ed.2d at 147-48 (1975); Goodhart, Costs, 38 Yale L.J. 849, 849 (1929). The English Rule was popular in America before the Revolution. McCormick at 235. Originally, the pre-colonial statutes which fixed the scale of recoverable court costs satisfied a substantial portion of the attorney's fees incurred by a successful litigant. Id.; Restatement (Second) of Torts § 914, comment a at 492 (1979). This was so even though local statutes rigidly limited the amount recoverable as attorney's fees. [5] McCormick at 235. Of course, nowhere in this country have statutorily-fixed attorney's fees been revised to keep pace with the fall in the value of money. Id. at 236. Such legislative reluctance to keep pace suggests that the principle of full compensation for litigation expenses never firmly took hold in this country. Id. at 235-36. This may best be explained by a historic distrust of lawyers prevalent throughout the colonial era, and a then growing preference of the organized bar for fee schedules set by a free market and not hostile legislatures. Leubsdorf, Toward a History of the American Rule on Attorney Fee Recovery, 47 Law & Contemp. Probs. 9, 11, 19 (1984). Nevertheless, there are exceptions to the American Rule. For example, in Maryland, attorney's fees may be awarded when (1) parties to a contract have an agreement to that effect, Empire, 269 Md. at 286, 305 A.2d at 148, citing Webster v. People's Loan, Savings & Deposit Bank, 160 Md. 57, 152 A. 815 (1931); (2) there is a statute which allows the imposition of such fees, Freedman v. Seidler, 233 Md. 39, 47, 194 A.2d 778, 783 (1963); or (3) the wrongful conduct of a defendant forces a plaintiff into litigation with a third party, McGaw v. Acker, Merrall & C. Co., 111 Md. 153, 160, 73 A. 731, 734 (1909). See also, Empire, 269 Md. at 286, 305 A.2d at 148; Fowler v. Benton, 245 Md. 540, 550, 226 A.2d 556, 563 (1967). Counsel fees may also be awarded when a plaintiff is forced to defend against a malicious prosecution. Tully v. Dasher, 250 Md. 424, 442, 244 A.2d 207, 217 (1968). Movement away from a strict application of the American Rule began in this country as early as the 19th century, when legislatures launched attacks against it. Leubsdorf at 25. Three federal statutes, the voting rights legislation of 1870, the Interstate Commerce Act of 1887, and the Sherman Act of 1890, allowed successful plaintiffs to recover their legal expenses in addition to liquidated damages, ordinary damages, or a treble damage award. Id., citing Act of May 31, 1870, 16 Stat. 140, §§ 2, 3, repealed by Act of February 8, 1894, 28 Stat. 36; Act of February 4, 1887, 24 Stat. 379, § 8; Sherman Antitrust Act § 7, 26 Stat. 210 (1890). In Maryland, various statutes permit recovery of attorney's fees. Attorney-fee recovery provisions are contained in either the penalty or liability sections of most of these statutes. [6] One statute authorizes attorney's fees in conjunction with a treble damage award. Maryland Code (1974, 1988 Repl.Vol.), Real Property Article, § 8-203 (attorney's fees awarded along with treble damages). It is reasonable, therefore, to conclude that in this state, an award of attorney's fees serves, in general, as a legislative tool for punishing wrongful conduct. A punishment rationale is also found in the federal courts. There, the courts may award counsel fees to a successful party when his opponent has acted `in bad faith, vexatiously, wantonly, or for oppressive reasons.' Hall v. Cole, 412 U.S. 1, 6, 93 S.Ct. 1943, 1946, 36 L.Ed.2d 702, 707 (1973). The same rule exists in Maryland, where the courts may impose costs and reasonable attorney's fees on either party when a proceeding is brought in bad faith or without substantial justification. Maryland Rule 1-341. In this class of cases, the underlying rationale of `fee shifting' is, of course, punitive, and the essential element in triggering the award of fees is therefore the existence of `bad faith' on the part of the unsuccessful litigant. Id.; see also Yamaner v. Orkin, 313 Md. 508, 509, 545 A.2d 1345, 1345 (1988) (in which Judge Rodowsky, speaking for the Court, characterizes the rule as a sanction). It is this punishment rationale that forms a solid basis for allowing the jury to consider attorney's fees when they are asked to calculate an award of punitive damages. For, like statutorily-imposed attorney fee awards, one of the main goals of punitive damages in Maryland is to punish wrongful conduct. Wedeman v. City Chevrolet Co., 278 Md. 524, 531, 366 A.2d 7, 12 (1976) (action for fraud seeking punitive damages); Embrey v. Holly, 293 Md. 128, 142, 442 A.2d 966, 973 (1982) (punitive damages sought in defamation action). This rationale is consistent with the dictum in Empire. In Empire, an action in fraud in which attorney's fees were sought as an element of incidental damages, we held: The general rule is that, other than the usual and ordinary court costs, the expenses of litigation  including legal fees incurred by the successful party  are not recoverable in an action for damages. Id. at 285, 305 A.2d at 148. See Freedman, 233 Md. at 47, 194 A.2d at 783 (1963); Harry's Thrifty Tavern, Inc. v. Pitarra, 224 Md. 56, 63, 166 A.2d 908, 912 (1961); McGaw, 111 Md. at 160, 73 A. at 734. While we emphasized the American Rule in Empire, we also remarked in dictum that had the case fallen within the framework of punitive damages, the allowance of legal fees would have been vastly different. Empire, 269 Md. at 288, 305 A.2d at 150. Because equitable relief was sought in Empire, and because a court of equity may not award punitive damages, Prucha v. Weiss, 233 Md. 479, 483-84, 197 A.2d 253, 255 cert. denied, 377 U.S. 992, 84 S.Ct. 1916, 12 L.Ed.2d 1045 (1964), we declined to describe exactly what that difference might be. We now take the opportunity to do so. The American Rule reflects a widespread rejection of both general indemnity for litigants and a make-whole rationale as a basis for awarding attorney's fees as an element of compensatory damages. Rowe, The Legal Theory of Attorney Fee Shifting: A Critical Overview, 1982 Duke L.J. 651, 660 (1982). Nevertheless, this leaves open the possibility of grounding some fee shifting on a rationale of punishment for conduct worse than negligence, breach of contract without bad faith, or other bases for compensatory damages. The best example of fee shifting on such a basis is that in many states legal fees constitute a proper element of punitive damages. Id. The highest courts of seventeen states have considered whether to permit a jury calculating an award of punitive damages to take into account the amount of reasonable attorney's fees incurred in the pending litigation. Nine states regularly allow jury consideration of attorney's fees on the issue of punitive damages. [7] Two states require evidence sufficient to sustain an award of punitive damages as a threshold condition: once met, attorney's fees may be awarded as an additional compensatory or special damage item. [8] Six states deny jury consideration of reasonable attorney's fees on the issue of punitive damages, [9] although one of these states denies recovery of punitive damages altogether. Thus, the majority of states to consider the issue, permit the jury to take into account the amount of reasonable attorney's fees incurred in the pending litigation when calculating a punitive damage award. This is borne out by the Restatement which, while stating the general rule that, damages in a tort action do not ordinarily include compensation for attorney fees or other expenses of litigation, recognizes the exception that: [I]n awarding punitive damages when they are otherwise allowable, the trier of fact may consider the actual or probable expense incurred by the plaintiff in bringing the action. Restatement (Second) of Torts, § 914 and comment a at 492-93 (1979). A minority of courts [10] decline to allow jury consideration of reasonable attorney's fees on the issue of punitive damages reasoning (1) that such fees are compensatory in nature and therefore not a proper consideration in measuring a punitive damage award; and (2) that the jury ought to have unfettered discretion in deciding the amount of punitive damages. See e.g., International Electronics Co. v. N.S.T. Metal Prod. Co., 370 Pa. 213, 88 A.2d 40, 46 (1952). It is true that an award of attorney's fees reimburses a plaintiff for his out-of-pocket legal expenses. When viewed solely in this light such fees may seem to be wholly compensatory in function. Yet, when viewed in the context of the long-standing prohibition against awarding attorney's fees, and the fact that when they are awarded, they most often serve as a statutorily-imposed punitive measure, the need to include them in compensatory damages diminishes. Under this view, attorney's fees would seem to be an appropriate consideration in measuring an award of punitive damages. The other point advanced by the minority states, which supports the traditional view that the amount of attorney's fees rests solely within the discretion of the jury, has been the subject of substantial attack. Restatement (Second) Torts, § 908, comment f at 464 (1979). Indeed, a look at the various states reveals that Connecticut, Georgia, and Michigan, [11] limit punitive damages by treating them as a form of compensation fixed in proportion to the level of aggravation sustained in an injury; five states [12] either totally or partially prohibit punitive damages. See 1 J. Ghiardi & J. Kircher, Punitive Damages L. & Prac. §§ 4.02-.12 (Callaghan 1985, 1989 Cum.Supp.). In still other states, the appellate courts exert control over the discretion of the trier of fact, reviewing the amount of a jury's punitive award. See e.g., Jones v. Fisher, 42 Wis.2d 209, 166 N.W.2d 175, 181 (1969). In Browning-Ferris Industries of Vermont, Inc., v. Kelco Disposal, Inc., 492 U.S. ___, 109 S.Ct. 2909, 106 L.Ed.2d 219 (1989), the United States Supreme Court held that the Excessive Fines Clause of the Eighth Amendment does not apply to punitive damage awards in cases between private parties. Justice Brennan, in a concurring opinion, offered cogent lament over the vague punitive damage instructions currently given to juries faced with the responsibility of calculating the amount of a punitive award. He stated that: Without statutory (or at least common-law) standards for the determination of how large an award of punitive damages is appropriate in a given case, juries are left largely to themselves in making this important, and potentially devastating, decision. Indeed, the jury [in Browning-Ferris ] was sent to the jury room with nothing more than the following terse instruction: `In determining the amount of punitive damages, you may take account of the character of the defendants, their financial standing, and the nature of their acts.' [Cit. Omitted.] Guidance like this is scarcely better than no guidance at all. Browning-Ferris at ___, 109 S.Ct. at 2923, 106 L.Ed.2d at 242. Like the jury in Browning-Ferris, juries in Maryland are left largely to themselves in assessing the amount of a punitive damage award, considering predominantly subjective elements such as the character of the defendant, his wealth, and the severity of harm to the plaintiff. D.C. Transit System v. Brooks, 264 Md. 578, 589, 287 A.2d 251, 256-57 (1972), citing Meibus v. Dodge, 38 Wis. 300 (1875). The majority in Browning-Ferris left the responsibility of developing further guidelines to the states when it held that the propriety of an award of punitive damages for the conduct in question, and the factors the jury may consider in determining their amount, are questions of state law. Browning-Ferris at ___, 109 S.Ct. at 2922, 106 L.Ed.2d at 240. We think the majority states [13] offer an additional guideline by allowing a jury  faced with determining the appropriate amount of a punitive damage award  to consider the amount of reasonable attorney's fees incurred in the pending litigation. Those states guide the jury by giving them the aid of one fairly definite factor which they may take into account in fixing the amount of punitive damages. McCormick at 297. The Kansas Supreme Court has reached the same conclusion, reasoning that: While [punitive damages] imply punishment, and their assessment is largely a matter of discretion with the jury, yet a court is not bound to turn the matter over to them arbitrarily, and without any suggestions as to matters which they ought to consider in their assessment of such damages. It may and, indeed, ought to call their attention to any matters which will tend to prevent any mere arbitrary and thoughtless award, and to make the assessment fair and reasonable, considering all of the circumstances of the case.... [A]nd [attorney's fees] as influencing the amount of smart-money, are eminently proper. [Emphasis added.] Brewer v. Home-Stake Production Co., 200 Kan. 96, 434 P.2d 828, 831, 30 A.L.R.3d 1435, 1440 (1967), quoting Titus v. Corkins, 21 Kan. 722 (1879). Connecticut seems to extend this reasoning even further. McCormick at 297. There, all punitive damage recovery is limited to an amount which will serve to compensate the plaintiff to the extent of his expenses of litigation less taxable costs. Triangle Sheet Metal Works, Inc. v. Silver, 154 Conn. 116, 222 A.2d 220, 225 (1966). Thus, while the jury is allowed to consider reasonable attorney's fees on the issue of punitive damages, attorney's fees also constitute the limit to which an award of punitive damages may be had. Markey v. Santangelo, 195 Conn. 76, 485 A.2d 1305, 1308 (1985); McCormick at 297 (stating that, [m]uch may be said for the practical common sense of this restriction, but, so far as discovered, Connecticut stands alone in this view). We prefer the reasoning of the Kansas court. When a jury determines that punitive damages are appropriate and has considered reasonable attorney's fees, two seemingly disparate goals are satisfied. First, because the jury will be offered objective guidance in calculating the amount of its punitive award, punitive damages will be more accurately measured and the potential for abuse decreased. Brewer [434 P.2d] at 831, 30 A.L.R.3d at 1440; McCormick at 297. Second, the plaintiff can be made truly whole in precisely those kinds of cases in which the defendant's wrongful conduct is found to be at its most flagrant, for only in such cases are punitive damages warranted. Rowe, The Legal Theory of Attorney Fee Shifting: A Critical Overview, 1982 Duke L.J. 651, 660 (1982). Therefore, to aid the jury in calculating an amount of punitive damages that will deter a party from future wrongful conduct, evidence of reasonable attorney's fees may be considered by the jury whenever punitive damages are appropriate. Because Pastor Buchenroth retracted his allegations and apologized to many of the principals, including Ms. Smith, the jury could easily have found that the subsequent reiteration of his allegations to the Ruperts was made with knowing falsity or reckless disregard for the truth. The jury had sufficient evidence, if believed, to award punitive damages. As a result, evidence of the amount of Ms. Smith's attorney's fees was admissible. JUDGMENT OF THE COURT OF SPECIAL APPEALS REVERSED. THE CASE IS REMANDED TO THAT COURT WITH DIRECTIONS TO AFFIRM THE JUDGMENT OF THE CIRCUIT COURT FOR MONTGOMERY COUNTY. COSTS IN THIS COURT AND IN THE COURT OF SPECIAL APPEALS TO BE PAID BY ST. LUKE'S CHURCH. RODOWSKY, J., dissents in opinion in which MURPHY, C.J., and McAULIFFE, J., concur. RODOWSKY, Judge, dissenting. I respectfully dissent because I believe the Court's holding is unsound, both practically and philosophically. As a practical matter this new rule of punitive damages will not control, but will enlarge, punitive damage verdicts. Philosophically the Court's new rule, but for the label attributed to the additional recovery, does not involve punitive damages at all. Rather, it is a judicially adopted rule of fee shifting, contrary to this Court's historic position of viewing fee shifting as the exercise of legislative or rulemaking power.