Attorneys' fleece: some potential dangers of 'loser-pays.'

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 unconscionable. 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' fees--1.7 times the actual hours her lawyers spent on the case multiplied by a prevailing hourly rate--even 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 1960s--prohibiting discrimination on the basis of race, sex, and other characteristics--they typically included a provision allowing the court to award reasonable attorneys' fees to the prevailing party. Until recently, 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 declaratory 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 lawsuits--employment discrimination, sexual harassment, police brutality, and many types of litigation 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 lawsuits 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 recovered 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 already 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, attorneys 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 attorneys' 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 routine. 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 law-suits, courts are overtly and consciously encouraging litigation. The judiciary's prevailing attitude is that litigation--a bane to most of society--promotes 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 questions 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 enhancement. Thus, the lucky litigant who prevails on a frivolous case will be entitled to a greater "enhancement" 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 rate--was 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?

The attorney then requested twice that amount--$270,720--from the defendant to compensate for the attorney's risk of failure. The trial court quite sensibly rejected this claim on the ground that the contingent-fee agreement the attorney had with his client set the upper limit of a reasonable fee. A unanimous New Jersey Supreme Court disagreed. Neither the contingent-fee agreement nor the amount of damages awarded can limit the recovery of attorneys' fees. When courts determine reasonable attorneys' fees, the sky is the limit.

All economic activity responds to incentives, and litigation is no exception. Even without fee-shifting statutes, there are plenty of contingent-fee wildcatters willing to prospect for damages by filing speculative lawsuits. When courts confer on prevailing plaintiffs the additional windfall of exorbitant attorneys' fees, while at the same time denying fees to prevailing defendants unless the cases were utterly groundless, they are unabashedly encouraging unnecessary litigation by rewarding the filing of weak claims and encouraging the excessive litigation of all claims. "Enhancements" and "multipliers" explicitly incentivize lawsuits.

Webster's defines barratry as "the practice of exciting and encouraging or maintaining lawsuits or quarrels: the persistent incitement of litigation." The judiciary used to punish barratry. Now the courts are engaged in it. Is it any wonder we are drowning in a flood of lawsuits?

Bad experiences with existing fee-shifting statutes don't mean that loser-pays doesn't have merit. But those experiences teach two important lessons, both of which must be heeded for loser-pays to represent an improvement over the status quo. First, the standard for awarding fees must be applied evenhandedly, without (as now) preference for prevailing plaintiffs over prevailing defendants. The existing "American rule" is preferable to one-sided loser-pays.

Second, the existing approach for determining reasonable attorneys' fees must be abandoned. The attorneys' fees prevailing parties are allowed to recover must be strictly limited, and in the case of a prevailing plaintiff, recoverable fees should ordinarily be an amount significantly less than the damages recovered, with no enhancements or multipliers. Even in the rare case in which the legal interest being vindicated is more substantial than the amount of damages (for example, a title dispute), recoverable fees must bear a reasonable relationship to damages.

The standard should be guided by what fee would be reasonable in a transaction between an uncoerced buyer and seller of legal services. Allowing recovery of unlimited attorneys' fees (as courts now do) in a loser-pays scheme would be a license for excessive litigation and defeat the salutary purpose of the English rule.

Mark S. Pulliam, an attorney in private practice, serves on the board of San Diego County Citizens Against Lawsuit Abuse.