The “American rule” notwithstanding, fee shifting is a strategy that can be used to reduce costs and maximize recoveries in many circumstances and it isn’t restricted to traditional outside counsel.
In these challenging economic times, lawyers and their clients are looking for ways to reduce costs and maximize recoveries. One way to accomplish these objectives in the litigation context is through shifting legal fees and expenses to an adverse party. The familiar “American Rule” followed in Minnesota and many other jurisdictions holds that each side bears its own attorney fees and costs.1 There are, however, certain recognized exceptions where fee shifting is permitted by statute,2 case law3 or the terms of a contract.4
Awards of attorney fees are typically determined by the “lodestar” method, i.e., the number of hours reasonably expended multiplied by the reasonable hourly rate.5 These are familiar concepts frequently utilized in awarding fees to outside counsel representing a prevailing party. There is no reason that fee shifting is necessarily limited to traditional outside counsel. It may also be appropriate for the recovery of “inhouse” legal fees, such as costs of corporate counsel or government lawyers’ services, representation of nonprofit organizations, and even representation of clients in pro bono matters. Careful evaluation of whether such fees are recoverable can not only potentially boost the ultimate recovery, but significantly change the litigation and settlement dynamics, as well.
Inhouse Counsel Fees
Because inhouse lawyers are salaried and typically do not bill their clients for their services, the initial issue is whether the costs associated with those services are recoverable from an adverse party. A number of state and federal courts have permitted the recovery of inhouse attorney fees.6 As the California Supreme Court noted:
We discern no basis for discriminating between counsel working for a corporation in-house and private counsel engaged with respect to a specific matter or on retainer. Both are bound by the same fiduciary and ethical duties to their clients. … Both are qualified to provide and do provide, equivalent legal services. And both incur attorney fees and costs within the meaning of Civil Code section 1717 in enforcing the contract on behalf of their client.7
Apart from the traditional inhouse corporate context, a number of courts have awarded legal fees to lawyers representing government agencies,8 nonprofit organizations,9 and even pro bono matters.10
Some courts, however, have found that inhouse counsel fees are not recoverable. One rationale for this position is that inhouse attorney fees are included within overhead.11 Another rationale for this position is that the attorney was acting in a “liaison” capacity between the lawyers working on the matter and the client.12 Thus, the more counsel acts in the role of the client or in relaying client views and instructions, the more likely such activities will be viewed as “liaison” activities.13
Where, however, inhouse counsel is experienced as to the matters at issue and actively participates in the litigation, such fees have been found to be reasonable and recoverable.14 The rationale is that if inhouse “attorneys had refrained from activity, the workload and consequently the fee application of [outside counsel] would have been increased.”15 Moreover, such fees are recoverable on the grounds that for every hour that inhouse counsel spent on the matter, the client lost an hour of legal services that could have been spent on other matters.16
There are a variety of ways for inhouse counsel to establish active participation in the representation of the client. For example, it is possible for inhouse counsel to be listed as “of counsel” on the pleadings or to be admitted pro hac vice for the matter. Keep in mind, however, that a formal appearance in the proceeding subjects the attorney to all of the duties and responsibilities of trial counsel. In addition, inhouse counsel can actively participate in depositions and other discovery activities.
Computing Inhouse Fees
Most courts award attorney fees to inhouse counsel by computing the value of their services in the same manner as fees are computed for outside counsel, referred to as the market value or market rate approach.17 This is basically the familiar “lodestar” method, i.e., the number of hours reasonably expended multiplied by the reasonable hourly rate.18 Other courts award fees using a “cost-plus” method.19 Regardless which method is ultimately used, the burden is on the party seeking the award to meet all of the applicable elements. It is therefore important to be familiar with the rules and applicable factors for recovering inhouse counsel fees, as well as developing a game plan for meeting those factors throughout the course of the litigation.
Lodestar or Market Rate Method. Courts favoring the market-value approach view it as being more predictable for the parties and easy to administer, while the cost-plus approach is viewed as cumbersome, intrusive and costly, distorting the incentives for settlement and rewarding inefficiency.20 In order to establish the hours reasonably expended, inhouse counsel should maintain contemporaneous time records in sufficient detail to demonstrate what services were provided. This is basically no different than what outside counsel do. Courts are used to seeing fairly detailed submissions that accompany fee applications and may reduce or outright deny a claim for inhouse counsel fees where time records are incomplete or created after the fact.21 The submissions should include the identity of the attorney who rendered the services, a description of the services provided, and the amount of time devoted to the matter.22 Keep in mind that the attorney’s time records may be have to be produced in discovery as part of the fee award application process.23 Therefore, to the extent possible, the time records should describe what was done but not reveal the substance of attorney-client communications or attorney work product. It may be possible to redact sensitive entries prior to producing them or submitting them to the court, but there is a risk that the redactions will be successfully challenged, thereby potentially exposing privileged communications or work product. To the extent that one or more of the underlying claims may be subject to recovery of attorney fees and others are not, the attorney’s time entries should clearly segregate time between legal work related to the recoverable claim(s) and nonrecoverable claim(s). The time entries should also delineate and exclude what arguably might be characterized as “liaison” activities.24 The failure to properly segregate may be fatal to the claim.
Establishing a reasonable hourly rate for inhouse legal services is necessary as part of the fee application.25 In-house counsel should be prepared to provide the court their relevant experience and expertise in the matter at issue. This is typically done through an affidavit or declaration describing the attorney’s professional background, practical experience, and role in the case.26 The reasonable hourly rate is the prevailing rate in the community for similar work. For outside counsel, this is usually accomplished through the use of comparable billing rate surveys. These are usually specific to a geographical area and are typically broken down by size of firm, type of activity (e.g., business law, corporate law, litigation, real estate, real estate planning), and year admitted to practice. These billing rate surveys are not available to inhouse counsel. Comparable billing rates may, however, be established indirectly through these types of billing rate surveys or anecdotally.27 For example, many companies routinely retain outside law firms on various types of matters and in different areas of the country. The billing rates for these firms can be used as a surrogate to establish comparable billing rates for inhouse legal services.
Cost-Plus Approach. A number of courts have utilized the cost-plus approach for awards of inhouse attorney fees.28 The rationale for this approach is that the market-rate approach would award the salaried attorney’s employer with a windfall profit.29 Under the cost-plus approach, fees for inhouse counsel are limited to consideration actually paid or for which the party is obligated, calculated using a cost-plus rate. This methodology takes into account: (1) the proportionate share of the party’s attorney salaries, including benefits, which are allocable to the case based on the time expended, plus (2) allocated shares of the overhead expenses, which may include the costs of office space, support staff, office equipment and supplies, law library and continuing legal education, and similar expenses. Under the cost-plus method, it will still be necessary for the attorney to keep timely and accurate time records. Moreover, it may be necessary to reveal attorney salaries and benefits within the company or organization, which may be a sensitive issue. In some instances, legal departments track their costs and charge them back to their clients. This provides a ready basis for developing cost-plus information. If not, the financial or accounting department likely will need to be involved to develop the necessary data for presentation to the court.
Some strategies for assessing (and maximizing) the potential for recovery of inhouse legal fees are as follows.
- First, as a preliminary matter, identify the nature of the claims at issue. If the claim rests on a contract, check to see if there is a fee-shifting provision in the contract and, if so, whether it expressly includes inhouse legal fees or is broad enough to include such fees. If there is a statutory claim, check to see if the claim permits attorney fees and under what conditions.
- Second, assess which methodology is likely to be used in computing the inhouse counsel award (lodestar or cost-plus). If lodestar is the likely method, begin to assemble comparable rate data. If cost-plus is the likely method, begin to develop an early strategy for assembling the necessary corporate financial data.
- Third, take an active role in the case, thereby demonstrating the provision of substantive legal services. Consider being identified on the pleadings as “of counsel” or being admitted pro hac vice for the case, but be mindful that either may subject the attorney to all of the duties and responsibilities as an attorney of record.
- Fourth, keep contemporaneous time records. More detailed time entries may be required under the lodestar approach, but contemporaneous and accurate time records are essential to a successful award, regardless of the method used to compute the award. The daily log or timesheet should identify the attorney involved in rendering the services and record time devoted to the matter along with a brief description of the services. The time entries should demonstrate substantive legal work devoted to the matter so as to avoid an argument that counsel was merely acting in a “liaison” capacity. Where part of a claim may be subject to fee shifting, but not another part, time entries should clearly segregate between the matters.
- Finally, make a good faith and conservative effort to exclude from any application or petition fees that might be considered excessive, redundant, or otherwise unnecessary.30
1 See Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975); Ly v. Nystrom, 615 N.W.2d 302, 314 (Minn. 2000).
2 See 3 M. Derfner & A. Wolf, Court Awarded Attorney Fees (2008), chapters 29–48; Alan Hirsch & Diane Sheeheh, Awarding Attorneys’ Fees and Managing Fee Litigation, Second Edition, 1 n. 3 (Federal Judicial Center 2005).
3 See Robert L. Rossi, Attorney’s Fees (3rd Ed. 2002 and Cum. Supp. 2007), chapters 7 & 8; 1 M. Derfner & A. Wolf, Court Awarded Attorney Fees (2008), chapters 2-4.
4 Rossi, supra n. 3, chapter 9.
5 See e.g., 3 Derfner & Wolf, supra n. 2, §16.01.
6 See e.g., Smith v. Blue Cross & Blue Shield of Wisconsin, 959 F.2d 655, 660-61 (7th Cir. 1992); Textor v. Board of Regents of Northern Illinois University, 711 F.2d 1387, 1396 (7th Cir. 1983); Pittsburgh Plate Glass Co. v. Fidelity & Casualty Co. of New York, 281 F.2d 538, 542 (3rd Cir. 1960); Scott Paper Co. v. Moore Business Forms, Inc., 404 F.Supp. 835, 837 (D.Del. 1984); In re Trust Known as Great N. Iron Ore Properties, 311 N.W.2d 488, 493 (Minn. 1981)
7 PLCM Group, Inc. v. Drexler, 997 P.2d 511, 516-17 (2000) (citation and footnote omitted).
8 See e.g., Textor v. Board of Regents, supra n. 6 at 1396; United States v. Meyers, 363 F.2d 615, 621 (5th Cir. 1966); In re Outdoor Sports Headquarters, Inc., 161 B.R. 414, 427 (Bankr.S.D.Ohio 1993).
9 Blum v. Stenson, 465 U.S. 886, 892-96, 104 S.Ct. 1541, 1545-47 (1984); Environmental Defense Fund, Inc. v. Environmental Protection Agency, 672 F.2d 42 (D.C. Cir. 1982); Consumer Union of United States, Inc. v. Board of Governors of Fed. Reserve Sys., 410 F.Supp. 63, 65 (D.D.C. 1975).
10 See Brown v. Comm’n for Lawyer Discipline, 980 S.W.2d 675, 683-84 (Tex. App. 1998).
11 See Burger King Corp. v. Mason, 710 F.2d 1480, 1499 (11th Cir. 1983), cert. denied, 465 U.S. 1102, (1984); see also In re Cummins Utility, L.P., 279 B.R. 195, 207 (Bankr.N.D. Tex. 2002).
12 See also Federal Deposit Ins. Corp. v. Bender, 182 F.3d 1, 6 (D.C. Cir. 1999); Milgard Tempering, Inc. v Sealas Corp. of America, 761 F.2d 553, 558 (9th Cir. 1985).
13 See El Dorado Irrigation Dist. v. Trayler Bros., Inc., Civ. S-03-949 LKK/GG, 2007 WL 512428, at *5 (E.D. Cal. 02/12/07).
14 See n. 6, supra.
15 Scott Paper Co. v. Moore Business Forms, Inc., 604 F.Supp. 835, 837 (D.Del. 1984).
16 See Softsolutions, Inc. v. Brigham Young University, 1 P.3d 1095, 1106 (2000).
17 PLCM Group, Inc., supra n. 7 at 517, 519; Balkind v. Telluride Mountain Title Co., 8 P.3d 581, 588 (Colo.App. 2000); .AMX Enterprises, L.L.P. v. Master Realty Corp., 283 S.W.3d 506, 519 (Tex. App. 2009); Cent. States, SE & SW Areas Pension Fund v. Cent. Cartage Co., 76 F.3d 114, 115-16 (7th Cir. 1996); Milgard Tempering, Inc. v. Selas Corp. of Am., 761 F.2d 553, 558 (9th Cir. 1985); Milgard Tempering, Inc. v. Selas Corp. of Am., 761 F.2d 553, (9th Cir. 1985).
18 See 3 Derfner & Wolf, supra n. 5.
19 Softsolutions, Inc. v. Brigham Young University, 1 P.3d 1095, 1107 (2000); see also PPG Indus., Inc. v. Celanese Polymer Specialties Co., 840 F.2d 1565, 1579 (Fed.Cir. 1988); Goodrich v. Department of Navy, 733 F.2d 1578, 1579 (Fed.Cir. 1984); Nat. Treasury Emp. U. v. United States Dep’t of Treasury, 656 F.2d 848, 853 (D.C. Cir. 1981).
20 See Balkind v. Telluride Mountain Title Co., 8 P.3d 581, 588 (Colo. App. 2000).
21 See e.g., In re Donovan, 278 U.S.App.D.C. 194, 877 F.2d 982, 994 (D.C. Cir. 1989); Broadcast Music Inc. v. R Bar of Manhattan, Inc., 919 F.Supp. 656, 661 (S.D.N.Y. 1996); Ward v. Brown, 899 F.Supp. 123, 128 (W.D.N.Y. 1995); Federal Deposit Ins. Corp. v. Bender, 182 F.3d 1, 6 (D.C. Cir. 1999).
22 See e.g., AMX Enterprises, L.L.P. v. Master Realty Corp., 283 S.W.2d 506, (Tex. App. 2009); see also Rossi, supra n. 3, App. A (Form 32).
23 See Edna Selan Epstein, The Attorney-Client Privilege and the Work Product Doctrine (4th Ed.) at 72-75; 2 M. Derfner & A. Wolf, Court Awarded Attorney Fees (2008), chapter 25.
24 See e.g., Transclean Corp. v. Bridgewood Services, Inc. 134 F.Supp. 2d 1049, 1052 (D. Minn. 2001), aff’d, 290 F.3d 1364 (Fed. Cir. 05/21/02); AMX Enterprises, L.L.P. v. Master Realty Corp., 283 S.W.2d 506, 523 (Tex. App. 2009); Travelers Indemnity Co. of Ill. v. Millar Refrigerated Services, No. 8:00CV91, 2002 WL 2005717, at *2 (D. Neb. 09/03/02); see also 1 Derfner & Wolf, supra n. 3, chapter 12.
25 See Zacharias v. Shell Oil Co., 627 F.Supp. 31, 35 (E.D.N.Y. 1984).
26 See AMX Enterprises, L.L.P., supra n. 22 at 520; see also 2 Derfner & Wolf, supra n. 3 chapter 24.
27 See Broadcast Music Inc., supra n. 21, at 661.
28 Softsolutions, Inc., supra n. 19 at 1107; PPG Indus., Inc., supra n. 19 at 1570.
29 Softsolutions, supra n. 19 at 1107; see also Devine v. National Treasury Employees Union, 805 F.2d 384 (Fed.Cir. 1986), cert. denied, 484 U.S. 815.
30 See e.g., Transclean Corp., supra n. 24.