Attorneys' Fleece

Some potential dangers of "loser-pays"

Mark S. Pulliam from the November 1995 issue

If a lawyer hired to handle a $50,000 damage claim won and then submitted a bill to his client for $1 million, the client would be entitled to rip up the bill and report the lawyer to disciplinary authorities. Everyone would agree that such an excessive fee is patently unreasonable, even uncon scionable. Unless, of course, the attorneys' fees are not being paid by the client, but are being awarded by the court against the losing party, pursuant to a fee-shifting statute. In that case, the lawyer might get not only the $1 million he asked for, but a bonus of $650,000 and an additional recovery of $200,000 in fees for time spent arguing over fees.

It happened. In a little-noted finale to the widely publicized sexual harassment case Weeks v. Baker & McKenzie, the trial court in San Francisco awarded Rena Weeks $1.8 million in attorneys' fees1.7 times the actual hours her lawyers spent on the case multiplied by a prevailing hourly rateeven though the jury awarded her only $50,000 in compensatory damages. (The $6.9 million punitive damages verdict, reduced by the judge to $3,725,000, is on appeal.) In sexual harassment cases, as with other types of employment discrimination suits, the prevailing party can recover reasonable attorneys' fees from the losing party.

When Congress and state legislatures began passing civil rights statutes in the 1960sprohib iting discrimination on the basis of race, sex, and other characteristicsthey typically included a provision allowing the court to award reasonable attorneys' fees to the prevailing party. Until re cently, many civil rights laws limited the amount of monetary damages recoverable. Therefore, in the past, the prospect of recovering attorneys' fees created an arguably needed incentive for litigants primarily interested in obtaining non-monetary relief, such as reinstatement to their jobs or declara tory or injunctive relief.

The number and scope of civil rights statutes have proliferated greatly since the 1960s, as have the types and amount of damages recoverable in such actions. Not surprisingly, the amount of civil rights litigation has greatly increased as well. You can now win attorneys' fees in many types of lawsuitsemployment discrimination, sexual harassment, police brutality, and many types of litiga tion alleging deprivation of constitutional rights.

Fee-shifting statutes generally draw no distinction between winning plaintiffs and winning defendants. But courts, as a matter of policy, have decided that prevailing plaintiffs are nearly always entitled to recover their attorneys' fees, while prevailing defendants cannot recover unless the law suits were frivolous, unreasonable, or groundless. Winning isn't enough.

In addition to specific fee-shifting statutes, sometimes attorneys' fees can be awarded to a prevailing party pursuant to a broader "private attorney general" statute when a lawsuit results in a significant benefit to the general public. In Weeks , the court invoked both types of statutes.

The court in Weeks asserted without discussion that "the amount of monetary damages recov ered does not fully reflect the value to society of the plaintiff's victory." (How a seven-figure award to a legal secretary who endured less than a month of abuse from an obnoxious boss creates value to society was never explained.) The judge would have awarded an even higher multiplier of the al ready disproportionate attorneys' fees but for the punitive damage windfall Weeks had previously received.

The trial court stated, "[Rena Weeks] had substantial difficulty in securing counsel to handle her case. She was turned down by seven attorneys before obtaining representation by [trial counsel]. Plaintiff's counsel took the case on a fully contingent basis, and expended well over $1 million dollars [sic] in time and expenses on a case in which, as plaintiff's counsel puts it, '[a]nticipated compensatory damages were not necessarily substantial, and the availability of punitive damages was purely speculative.'...Without enhancement of their normal, non-contingent hourly rate, attor neys would have insufficient incentive to take cases such as plaintiff's."

The trial judge also commented, with no apparent irony, that "[Rena Weeks'] prospects of recovering...anything close to $1 million were dim until the very end." There you have it. The litigation lottery our civil justice system has become generates higher stakes as courts award attor neys' fees far in excess of the damages recovered or the hours actually spent.

Absent a fee-shifting statute or a contractual provision, the general rule in the United States is that each party to a lawsuit bears its own attorneys' fees, win or lose. This is the so-called American rule. Because of the potential for unfairness and abuse inherent in allowing a litigant to impose tremendous, unrecoverable expenses on his opponent for tactical reasons (such as to extort an out-of -court settlement less than the anticipated cost of defense), proponents of civil justice reform often advocate a "loser-pays" approach to attorneys' fees, sometimes called the "English rule." (See "Civil Suits," June.)

The result of the Weeks case shows a possible weakness in such plans. While the amount of attorneys' fees awarded in the Weeks case is extraordinary, the principle is unfortunately quite rou tine. In cases now subject to fee-shifting statutes, courts regularly award litigants attorneys' fees well in excess of those contemplated by the contingent-fee arrangement with their lawyers, well in excess of their actual damages, and even well in excess of the fee that would have been appropriate based on the actual hours worked at a market rate. Such fees would never be charged or paid in a voluntary transaction between an attorney and client. But when courts award fees to prevailing parties, they are not trying to replicate the market; they are advancing their own vision of public policy.

Even though existing fee-shifting statutes allow recovery of only "reasonable" attorneys' fees, courts eschew any restriction based on the degree of success or even the amount of work expended. Courts in essence disregard the concept of reasonableness in awarding attorneys' fees. Believe it or not, in a legal system choked with a growing volume of lawsuits, courts are overtly and consciously encouraging litigation. The judiciary's prevailing attitude is that litigationa bane to most of soci etypromotes the public interest. Hence, litigation is rewarded, and the more speculative the case, the greater the reward.

For example, in a recent pregnancy discrimination lawsuit against a California employer too small to be covered by the California discrimination statute, the court nevertheless allowed the plaintiff to recover $20,226 in damages on the theory that pregnancy discrimination is already forbidden by the state constitution, which prohibits discrimination based on sex. Leave aside ques tions of whether pregnancy and sex are interchangeable terms, or why the legislature felt it necessary to enact a statute limited to large employers to create a remedy already universally available under the state constitution. Consider only that the trial court awarded the plaintiff another $30,000 in attorneys' fees to be paid by the hapless employer (in addition to the employer's own attorneys' fees).

On July 20, an appellate court upheld both the verdict and the fee award in Badih v. Myers, agreeing with the trial court that an individual suing a small employer to receive legal protection denied by the legislature confers a significant benefit on the general public. That the attorneys' fees exceeded the damages elicited nary a comment.

Not to be outdone, the New Jersey Supreme Court ruled on July 24 in Szczepanski v. Newcomb Medical Center, Inc. that contingent-fee lawyers in that state are entitled to an "enhancement" of up to double the actual hours spent on an employment discrimination case, to reflect the risk of nonpayment if the case were unsuccessful. (I thought that was the whole point of taking a case on a contingent fee basis.) The more marginal the case, the greater the risk and, hence, the greater the enhance ment. Thus, the lucky litigant who prevails on a frivolous case will be entitled to a greater "enhance ment" of attorneys' fees than a prevailing party with a strong case. The New Jersey case, which involved sexual harassment, resulted in a damage award of $115,000 after a month-long trial. The successful plaintiff's attorney claimed that his work on the case$135,360 at the prevailing hourly ratewas worth more than his client's damages. Does a legal system make sense in which the attorneys are supposed to get more than the "injured" party?

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