If I win, will they pay my attorney’s fees?
This question is one of the recurring themes in litigation. Indeed, one of the first questions that arise when you are being sued – or contemplating suing someone – is who will be paying the legal fees. And if you have to pay them, the next question is whether there is a chance of reimbursement down the road – because, without such reimbursement, winning a lawsuit may turn out to be a pyrrhic victory.
It would be wrong to assume that the party that loses the dispute on the merits is necessarily required to pay the winner’s attorney’s fees. While that classic common law principle, known as the English Rule, still applies in some countries, it does not normally apply in the United States. Instead, under the American Rule, each party normally pays its own attorney’s fees, regardless of how the substantive dispute is resolved. The American Rule has two important exceptions, however: a different fee regime may be imposed by contract or by statute.
Many commercial contracts include some variety of a standard fee-shifting provision, stating in essence that, if the contract generates a legal dispute, the losing party will pay the winning party’s costs, including reasonable attorney’s fees. Such clauses are normally enforceable, and their existence may affect the parties’ litigation strategies. In some contexts (for instance, employment and consumer contracts, and landlord-tenant agreements), the purported fee-shifting may be unilateral, i.e. making only one party potentially liable to the other for attorney’s fees, but not the other way around. Such provisions are sometimes not enforced as written—some jurisdictions refuse to enforce contract provisions requiring a consumer or an employee to pay the manufacturer’s or employer’s attorney’s fees, and other jurisdictions expand unilateral clauses to cover both sides, i.e. if the contract says a losing employee has to pay the employer’s attorney’s fees, then a losing employer will have to pay the employee’s attorney’s fees too. Caution should be exercised with regard to such one-sided clauses, even if their enforceable effect is in doubt. On the other hand, a lot of contracts do not have any fee-shifting provisions – which means that the default American Rule will govern, and each of the parties will likely pay its own legal fees in a related dispute.
Many statutes provide for some form of fee-shifting in litigation generated by that statute. One illustrative example is the federal civil rights statutes which provide that the prevailing party in certain kinds of lawsuits is entitled to have its costs, including reasonable attorney’s fees, paid by the losing party. The policy behind these statutory provisions is to encourage meritorious civil rights claims, including by plaintiffs who otherwise could not afford them. Interestingly, determining who is the “prevailing party” turns out to be not as simple as it sounds, and has itself given rise to a lot of judicial interpretation. Lawsuits often involve numerous claims and counterclaims; some may succeed while others fail; and it is not always easy to determine the overall winner. Notably, however, the amount of damages does not usually affect the winner’s status as the “prevailing party.” It is not uncommon in civil rights lawsuits for the amount of legal fees the successful plaintiff recovers to exceed the award of actual damages.
Indemnification for Plaintiff in a Derivative Suit
In the business context, one of the most common examples of statutory fee-shifting arises in the context of derivative actions – lawsuits brought by a shareholder (or a group of shareholders) on behalf of a corporation or another business entity. The governing statutes usually provide that, if the derivative suit proves to be successful – in other words, once it becomes clear that it was genuinely brought for the benefit of the corporation and actually does benefit the corporation – the plaintiff’s costs, including legal fees, are reimbursed by the company.
Indemnification for Corporate Officers and Directors
Another common examples of fee-shifting in the corporate context is indemnification by a company of its officers and directors’ legal expenses incurred by reason of their present or former positions in the company. The New York Business Corporations Law (BCL) contemplates such indemnification for officers and directors who acted in good faith for the benefit of a corporation. Such officers or directors may be entitled to indemnification of their defense costs, including attorney’s fees, in any litigation related to their job, regardless of whether claims against them have been asserted by third parties or by the company itself. If the individual officer or director successfully defends the lawsuit, the BCL makes such indemnification mandatory. In addition, a company’s by-laws or operating agreements often contain provisions concerning potential indemnification of costs for directors, officers and employees. Sometimes such contractual provisions simply reiterate the protections set forth in the BCL, but often the contractual protections are broader than those provided by statute.
Indemnification v. Advances
Importantly, the potential right to indemnification does not by itself mean that the company will be covering the legal costs on an ongoing basis. To demonstrate entitlement to indemnification, the director, officer or employee usually needs to prove that he or she had acted in good faith or otherwise meets the statutory or contractual criteria for indemnification. That normally happens only at the end of the case – and litigation may take years. In order to facilitate an individual’s defense during the case, the relevant statutes and by-laws often contain separate provisions for advancement of legal fees. For instance, under the BCL, a director or officer is normally entitled to advances to cover the ongoing legal costs (including attorney’s fees) in a proceeding incurred by reason of his or her current or former position. On the other hand, if at the end of the day the officer or director loses his case, the company may be entitled to reimbursement of its advances.
Procedural Fee-Shifting Devices
In addition to the substantive statutes with fee-shifting provisions, there are some additional tools contemplated by the applicable procedural rules potentially enabling a party to shift the litigation costs to the other side, or at least limit its own exposure to paying the other side’s fees. For instance, both the Federal Rules of Civil Procedure and the New York Civil Practice Law and Rules contain provisions allowing a party to make an offer of judgment to the other side during the litigation. If such an offer is rejected, and the rejecting side fails to ultimately obtain a more favorable judgment, it may be liable for the offering party’s costs from the time of the offer. Of course, the specific terms of such provisions are different under the federal and state rules, and their interpretation contains many nuances, including the meaning of “costs” (which may or may not include attorney’s fees).
Who pays the legal fees, and who is potentially liable for their reimbursement, is one of the critical points to consider in litigation strategy. Schlam Stone attorneys have significant experience in litigating issues of indemnification, advances, and other fee-shifting devices, and will be happy to advise you.