The “American Rule” with regard to attorney fee awards
requires litigants to pay their own attorney fees. (See
C.C.P. §1021.) However, if allowed by statute, contract,
or other agreement, the trial court may award the prevailing
party attorney fees. Other exceptions also exist such as
the private attorney general, substantial benefit and common
fund exceptions.
However, where
such fees are recoverable, the golden rule of attorney
fee awards is that the trial court has
tremendous discretion in awarding reasonable attorney’s
fees. When the case is finished, and the costs are at issue,
it all boils down to the trial judge’s discretion.
The standard of
review is “abuse of discretion,” since
the trial judge is presumably in the best position to determine
the value of the services rendered by counsel. The law
is clear that the appellate court may not disturb the trial judge’s decision unless it is convinced it was clearly
wrong.
Authority for Attorney Fee Awards
Most
attorney fee awards are the result of a disputed contract
with an attorney fee clause
awarding the prevailing
party attorney fees. California Code of Civil Procedure §1032
entitles the prevailing party to litigation costs as a
matter of right. Attorney’s fees are an element of costs
and are awardable if authorized by 1) statute or 2) contract.
(C.C.P. §1033.5.)
If the contract litigated awards the prevailing party
attorney fees, the fees are awardable as a contractual,
post-trial, remedy. Two statutes allow the court
to award attorney fees to successful litigants as an element
of costs.
California Civil Procedure §1021 allows attorney fee awards to litigants when
agreed upon. Civil Code §1717 also awards the winning litigant attorney’s fees
based upon a contract with an attorney fee clause. Various other statutes award
attorney’s fees, such as Labor Code §98.2 which awards attorney’s fees to unsuccessful
appellants of Labor Commissioner awards in labor disputes and C.C.P. §1021.5
for private attorney general litigants.
California Civil Code §1717
Some
confusion surrounds the purpose of Civil Code §1717. Some early decisions misinterpreted the California
Legislature’s intent in enacting Civil Code §1717 to solely
allow reciprocity between contractual litigants with respect
to attorney’s fees. Therefore, they ruled C.C. §1717 only
applied to contracts where attorney’s fees are awardable
to only one party and not the other.
The boilerplate language of contracts
increasingly included an attorney fee clause that stated,
in effect, “in the
event the contract is litigated and I win, I am entitled
to recoup my attorney’s fees from you.” The “other” party
is deemed to have waived any attorney fee award.
These early decisions adhered to
the literal and very narrow interpretation that Civil
Code §1717 merely made
the one-sidedness of such attorney fee clauses reciprocal.
This meant any litigant to such a one-sided contract could
recover attorney’s fees as the prevailing party regardless
of whom the parties agreed would be entitled to attorney’s
fees. The nature of these early decisions meant that Civil
Code §1717 only applied to non-reciprocal attorney fee
clauses, thereby making them reciprocal.
There is no doubt that the California
Legislature enacted Civil Code §1717 to remedy the
one-sidedness of attorney fee awards by making all attorney
fee clauses reciprocal. The California Supreme Court
stated that the legislative purpose was “to establish
uniform treatment of fee recoveries in actions or contracts
containing attorney fee provisions.” (Santias
v. Goodin, (1998) 17 Cal.4th 599, 616 71
Cal.Rptr.2d 830,951 P.2d 399.)
Two schools of thought existed
at the time. Numerous lower court decisions already adhered
to the broader interpretation
that C.C. §1717 was a statutory basis for awarding attorney’s
fees. These decisions more accurately clarified the Legislature’s
intent and declared Civil Code §1717 not only made contractual
attorney fee provisions reciprocal, but it applies to all
contracts with an attorney fee provision and constituted
a statutory authority to award attorney fees as an element
of costs.
In 1998, the California Supreme
Court reaffirmed the majority understanding of C.C. §1717
in Santias v.
Goodin, by ruling “…Civil Code §1717 applies equally
to reciprocal attorney fee provisions.” The California
Supreme Court further confirmed the majority understanding
of C.C. §1717 by ruling it constitutes a statutory authority
for the courts to grant attorney’s fees to victorious litigants.
This means that C.C. §1717 is a
proper statutory authority for a party to rely on for a
court to award attorney’s
fees rather than merely a statute providing reciprocity
toward attorney fee awards. The California Supreme Court
ruled that courts have “the authority under Civil
Code section 1717 to award attorney fees…” (PLCM
Group v. Drexler (2000) 22 Cal.4th 1084,
997 P.2d 511, 95 Cal.Rptr.2d 198; see C.C.P. §1033.5.)
“Lodestar Method”
In California,
the calculation to determine a “reasonable
fee” begins with the “Lodestar method”:
the number of hours reasonably expended multiplied by the
reasonable hourly rate. The reasonable hourly rate is that
prevailing in the community for similar work. (Margolin
v. Regional Planning Com. (1982) 134 Cal.App.3d 999,
185Cal.Rptr. 145.)
The lodestar figure may then be adjusted
based on factors specific to the case in order to fix the
fee at the fair market value for the legal services provided.
(Serrano
v. Priest (1977) 20 Cal.3d 25, 141 Cal.Rptr. 315,
569 P.2d 1303.)
“Cost Plus” Method
The “Cost Plus” method for calculating attorney’s
fees uses a more literal interpretation of “attorney’s
fees: the consideration that a litigant actually pays or
becomes liable to pay for legal representation,” (Trope
v. Katz (1995) 11 Cal.4th 274, 280.)
The “Cost Plus” method of calculating attorney’s fees
begins by using the actual attorney’s fees incurred and
then adjusting the figure based on the specific factors
of the case ensuring the reasonableness of the fee.
Attorney Fee Awards for in Propria
Persona Litigants
Litigants operating in propria
persona are not allowed attorney’s fees. (See Williams v. San Francisco Bd.
Of Permit Appeals (1999) 88 Cal.Rptr.2d 565.)
The California Supreme Court ruled
that even attorneys litigating in propria persona are
not allowed attorney’s
fees in Trope v. Katz (1995) 11 Cal.4th 274[45Cal.Rptr.2d
241, 902 P.2d 259]. The rational is that the term “attorney’s
fees” implies the existence of an attorney-client relationship,
i.e., a party receiving professional services from a lawyer.
One noticeable exception exists. An attorney representing
himself or herself may be awarded attorney’s fees when
the opposing party files a pleading for an improper purpose,
to harass, cause unnecessary delay or needless increase
cost of litigation. (Laborde v. Aronson (2001) 92
Cal.App.4th 459, 465-69.)
The Supreme Court reasoned an attorney
acting in propria persona should not receive compensation
from his opponent
simply because the time he devotes to litigating a matter
on his own behalf has value when non-attorney pre se litigants
cannot do so regardless of the personal and economic value
of their time. Such an award would constitute disparate
treatment, inimical to a statute designed to estqablish
mutuality of remedy. The phrase “attorney’s fees” is the
consideration that a litigant actually pays or becomes
liable to pay for legal representation. Attorneys litigating
in propria persona pay no such compensation.
Further, the courts discourage even skilled lawyers from
representing themselves because it deprives the litigant
of judgment of an independent third party in framing the
theory of the case, evaluating alternative methods of presenting
the evidence, cross-examining hostile witnesses, formulating
legal arguments, and in making sure that reason, rather
than emotion, dictates the proper tactical response.
In-House Counsel Attorney Fee Awards
Although
attorneys acting in pro per cannot obtain attorney’s fees,
in-house counsel may. The Supreme Court cited the fact
that there is no disparate
treatment because
in-house attorneys do not represent their own personal
interests, they are not seeking remuneration simply for
lost opportunity and there is no ethical conflict with
emotional investment. Further, an agency relationship exists
between the attorney and the corporation. The denial of
such awards to in-house counsel would violate the principal
of reciprocity and reasonable attorney fee awards by discriminating
unfairly between in-house and private counsel performing
the same services.
In-house counsel’s attorney’s fees are the number of
hours counsel spent on the action, multiplied by the reasonable
in-house attorney rate prevailing in the community. This
figure is then adjusted pursuant to any important factors
of the case. This is how the California Supreme Court ruled
how to calculate the fee even if the attorney’s salary
that the corporation paid is significantly less.
The Supreme Court specifically
rejected the “cost plus” approach
which awards the attorney’s salary plus reasonable
overhead which more closely reflects the attorney fees
incurred. The court discouraged other courts from doing
so by stating other methods for calculating a reasonable
fee may be used only under “exceptional circumstances.” (See PLCM
Group v. Drexler (2000) 22 Cal.4th 1084,
997 P.2d 511, 95 Cal.Rptr.2d 198.)
Market Rate
Most attorneys set goals to recover 100% of the attorney
fees their clients incurred. However, in California, for
in-house counsel, the reasonable attorney fee calculation
is inherently in excess of the actual fee incurred.
In determining how to calculate
attorney fee awards, the Supreme Court applied the Lodestar
method to the in-house
attorney fee awards. It disregarded the actual attorney’s
fees incurred and inserted the community’s “reasonable
rate” and the Lodestar calculation.
The “market rate” calculation
for in-house attorney fees permits awards in excess of
the fee actually incurred because,
by definition, a market rate includes a profit component
on top of costs. (See In re Cassell (W.D. Va. 1990)
119 B.R. 89,92.) The “market rate” includes
a profit component because no attorney would otherwise
do the work. Thus, a market rate approach will often penalize
the losing party and reward the corporation by awarding
a fee that exceeds the fee incurred. The byproduct is a
windfall or profit to
corporations. Furthermore
it rewards and incentivises litigious
corporations.
Corporations may also have less
incentive to ensure that their in-house attorneys work
efficiently and keep hours
down if they may potentially recover fees for those hours
based on a market rate that exceeds the in-house rate.
In-house costs will often be lower than market costs because
in-house counsel have the rare advantage of operating with
a full-time focus on and a deep understanding of their
client’s business and legal needs. Thus, a potential recovery
of a market-rate fee that exceeds actual in-house costs
may make corporations less willing to settle.
The definition for “attorney’s fees” as being “incurred” or
a “liability” is only relevant after the Lodestar figure
is resolved. The court may subsequently compare the Lodestar
figure with the actual fee incurred, if known, and make
any adjustments based on individual factors of the case.
A “cost-plus” approach, by awarding
the victorious corporation the amount to which it is
entitled, but no more, would
punish neither the corporation for using in-house counsel
nor the losing party.
Fee Splitting
There is a split of authority on
the issue that market rate fee awards implicate proscriptions
against
fee splitting and the unauthorized practice of law to the
extent it enables a corporation to profit from its legal
department. To avoid this problem. Courts required either
use of a cost-plus approach or a showing that all of the
fee award will be put back into the legal operations, rather
than general corporate coffers. (See Curran v. Department
of Treasury (9th Cir. 1986) 805 F.2d 1406,
1408-10.) see also Central States v. Central Cartage
Co. (7th Cir 1996) 76 F.3d 114, 115-117
[finding no ethical issues with market rate award because
litigant, not counsel, owns the award]. (See also Cal.
Compendium on Prof. Responsibility, pt. IIA, State Bar
Formal Opn. No. 1987-91, p.273.)
Closing Thoughts
An important aspect
of attorney fee awards relates to settlement attempts and
C.C.P. §998 offers to compromise.
Although negotiations are generally inadmissible evidence
under Evidence Code §1152, it is admissible for purposes
of attorney fee awards. If the opposing party rejects an
offer, but still prevails at trial and does not fare as
well as the rejected offer, your client should not be responsible
for any attorney fees after the offer was rejected. Equity
and fairness dictate that a party should not be responsible
for the opposing party’s attorney’s fees after they
rejected a settlement offer they could not bear at trial.
(C.C.P. §998)
Such fees were unnecessarily incurred.
There are several ways to determine
what the reasonable attorney fee is. Such motions are
often bitterly and intensively
contested. However, remember the Golden Rule: it all boils
down to what the judge feels is fair and equitable, as
dictated by the equitable principals of California Civil
Code §1717.
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