Attorney's Fees and Interest
The American Rule
In contrast to English jurisprudence, the “American Rule” provides that generally, each party in a lawsuit is responsible for his or her own attorney's fees. However, “fee-shifting” may be permitted when there is a contractual or statutory exception. Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975). ERISA provides such a statutory exception, allowing parties to petition the court for an award of attorney's fees.
Under 29 U.S.C. § 1132(g), an award of attorney's fees is discretionary with the district court. However, while many courts award attorney's fees to a successful ERISA plaintiff, they usually do not do so to a successful defendant, in accordance with the 5-Factors test. McElwaine v. US West, Inc., 176 F.3d 1167, 1172 (9th Cir. 1999) (ERISA should be liberally construed to further the statute's remedial purpose); Perryman v. Provident Life & Accident Ins. Co., 690 F. Supp. 2d 917, 955-956 (D. Ariz. 2010) (spelling out the 5-factors test.).
The Five Factors Test
In awarding attorney's fees, courts, including the Ninth Circuit, apply the 5-factors test. The “five factors” are: (1) the degree of the opposing party's culpability or bad faith; (2) the opposing party's ability to satisfy an award of attorneys' fees; (3) the deterrent effect of an award on other persons under similar circumstances; (4) whether the party requesting fees sought to confer a common benefit on all participants and beneficiaries of an ERISA plan or resolve significant legal questions regarding ERISA; and (5) the relative merits of the parties' positions. Hummel v. SE Rykoff & Co., 634 F.2d 446, 453 (9th Cir. 1980).
Not all five factors need necessarily be present for the court to award attorney's fees. Curry v. Contract Fabricators, Inc. Profit Sharing Plan, 891 F.2d 842, 849 (11th Cir. 1990) (“these five factors are the ‘nuclei of concerns' … which should guide but not control the district court's decision.”), and courts are divided as to whether a court should consider some or all of the 5-factors.
A fee award may also include pre- and post-judgment interest under 28 U.S.C. § 1961. Blankenship v. Liberty Life Assurance Co. of Boston, 486 F.3d 620, 628 (9th Cir. 2007).
However, a party need not necessarily be a “prevailing party” in order to be entitled to a fee award, if that party achieves “some degree of success on the merits.”
Some Degree of Success on the Merits
While there is a strong judicial preference that “a request for attorneys' fees should not result in a second major litigation,” Hensley v. Eckerhart, 461 U.S. 424, 439 (1983), courts have allowed an award of attorney's fees even when there is no “prevailing party,” and litigation is still on-going.
In Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242 (2010), the United States Supreme Court held a district court may award attorney's fees “to either party” under §1132(g)(1), as long as the fee-claimant achieved “some degree of success on the merits.” While Hardt was not a “prevailing party” because she had not obtained an “enforceable judgment on the merits,” she nonetheless achieved “some degree of success on the merits” when the district court remanded her claim back to Reliance.
However, under Hardt, in order to qualify for a fee award, the “success on the merits” must be more than a “trivial success” or a “purely procedural victory.”
Attorney's Fee Awards Apply for Work Done “Before the Court”
Attorneys' fees are available for work before the district court and during appellate litigation. Secretary of Dep't of Labor v. King,775 F.2d 666, 670 (6th Cir.1985). The general rule in ERISA cases is that a plaintiff must exhaust her administrative remedies before filing a case in court. Therefore, any legal work performed while exhausting administrative remedies prior to the filing of a lawsuit usually will not qualify for a fee award. Peterson v. Continental Cas. Co., 282 F.3d 112, 121, (2nd Cir. 2002).
When a district court remands a claim back to the administrator, that decision is not a final, appealable, order. Bowers v. Sheet Metal Workers' Nat'l Pension Fund, 365 F.3d 535, 537 (6th Cir. 2004). The court retains jurisdiction, and any attorney time spent on remand may be eligible for an award of attorney's fees because it is considered “court time.”
Time devoted to the prosecution of the attorney fee motion itself is appropriately included in the resulting award of fees. Mogck v. UNUM Life Ins. Co. of America, 289 F.Supp.2d 1181, 1194 (S.D.Cal. 2003).
Presumption of Entitlement to a Fee Award
In the Ninth Circuit, there is a presumption that the plaintiff, as a prevailing party, is entitled to attorney's fees, “unless special circumstances would render such an award unjust.” McElwaine v. U.S. West Inc., 176 F.3d 1167, 1172 (9th Cir. 1999). Furthermore, in the Ninth Circuit, a court is admonished to “keep at the forefront ERISA's remedial purposes that [ERISA's provisions] ‘should be liberally construed in favor of protecting participants in employee benefit plans.' ” (citing Smith v. CMTA-IAM Pension Trust, 746 F.2d 587, 589 (9th Cir. 1983)).
Fee Awards in Favor of Successful Defendants and Against Losing Plaintiffs
Fee awards in favor of successful defendants and against losing plaintiffs are generally disfavored, absent a strong showing of bad faith on the part of a plaintiff. Toussaint v. JJ Weiser, Inc., 648 F.3d 108, 111 (2d Cir., 2011). By applying the five factors test, fee awards against losing plaintiffs would run counter to requiring a “favorable slant toward ERISA plaintiffs … necessary to prevent the chilling of suits brought in good faith.” Id.
For example, if the losing plaintiff engaged in non-meritorious litigation simply to harass the defendant, a fee award to the defendant could be justified. Meredith v. Navistar, 935 F.2d 124, 128 (7th Cir. 1991).
In Hoover v. Armco, Inc., 915 F.2d 355 (8th Cir. 1990), the appeals court held that a district court may award attorney's fees to a prevailing defendant under the bad faith exception to the American Rule, when it finds ‘the losing party has ‘acted in bad faith, vexatiously, wantonly, or for oppressive reasons.' ” [citing] Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 258-59.
Appealing a Fee Award
A party may appeal a district court's fee determination under an abuse of discretion standard. Tiemeyer v. Community Mut. Ins. Co., 8 F.3d 1094, 1101-02 (6th Cir.1993). “[A]n abuse of discretion exists only when the court has the definite and firm conviction that the district court made a clear error of judgment in its conclusion upon weighing relevant factors.” Foltice v. Guardsman Prods., Inc., 98 F.3d 933, 939 (6th Cir. 1996).
While the district court has discretion over fee awards, its discretion is not unlimited. Hensley v. Eckerhart, 461 U.S. 424, 437 (1983). The district court is required to provide an explanation of its reasons for the fee award and that it has considered the relationship between the amount of the fee awarded and the results obtained. Jordan v. Multnomah County, 815 F.2d 1258, 1263-1264 (9th Cir 1987).
Calculating the Fee Award
“Once it is determined that the plaintiff is entitled to attorneys' fees, it is incumbent upon the district court to ‘utilize the lodestar method to determine the amount to be awarded.'” Lain v. UNUM Life Ins. Co. of America, 279 F.3d 337, 348 (5th Cir. 2002). The calculation of the lodestar figure “requires the district court to assess the ‘reasonable number of hours expended on the litigation and the reasonable hourly rates for the participating attorneys, and then multiply the two figures together to arrive at the “lodestar.” ' Id. at 348.
In order to calculate the “lodestar” figure, the court should consider twelve factors. Johnson v. Georgia Highway Exp., Inc., 488 F.2d 714 (5th Cir. 1974). To wit:
(1) the time and labor required; (2) the novelty and difficulty of the questions; (3) the skill requisite to perform the legal service properly; (4) the preclusion of employment by the attorney due to acceptance of the case; (5) the customary fee; (6) whether the fee is fixed or contingent; (7) time limitations imposed by the client or the circumstances; (8) the amount involved and the results obtained; (9) the experience, reputation, and ability of the attorneys; (10) the “undesirability” of the case; (11) the nature and length of the professional relationship with the client; and (12) awards in similar cases. Id, at 717-719. [See also: American Bar Association Code of Professional Responsibility, Disciplinary Rule 2-106.]
Rebutting the Fee Award
“Once a fee applicant has provided support for his requested rate, the burden falls on the [opposing party] to go forward with evidence that the rate is erroneous. And when the [opposing party] attempts to rebut the case for a requested rate, it must do so by equally specific countervailing evidence.” National Ass'n of Concerned Veterans v. Secretary of Defense, 675 F.2d 1319, 1326 (D.C. Cir. 1982).
A party seeking to oppose a fee award must produce evidence challenging the accuracy and reasonableness of the hours charged, including declarations of other counsel. Gates v. Deukmejian, 987 F.2d 1392, 1397-1398 (9th Cir. 1992); Envtl. Protection Info. Ctr. v. Pacific Lumber, Co., 229 F.Supp.2d 993, 1005 (N.D.Cal. 2002).
When to File a Fee Petition
If the court does not grant attorney's fees in its judgment, it is prudent to file a fee petition no later than 14 days after judgment, in accordance with Fed. R. Civ. P. 54. Failure to comply with the 14-day requirement may constitute a waiver. Allen v. Murph, 194 F.3d 722, 723-24 (6th Cir.1999). However, it is important to check the local rules because Rule 54 paragraph (d)(2)(D) allows the district court to set its own time limits for deciding fee issues.
Attorney's fees are often awarded to successful ERISA plaintiffs, but usually not to successful defendants, absent a showing of bad faith on the part of the plaintiff. Attorney's fees may be awarded even while litigation is on-going and there is no “prevailing party,” if plaintiff can show “some degree of success on the merits,” such as a remand back to the insurer for failure to provide a full and fair administrative review of plaintiff's claim.
Pre-Judgment and Post-Judgment Interest
You have just won a hard-fought money judgment against an ERISA disability insurer. The next question is whether you are entitled to an award of interest on the judgment and, if so, what is the rate of interest that applies?
Pre-judgment and Post judgment Interest Are Different
“Interest” has been defined as “compensation allowed by law ... for use or forbearance of money, or as damages for its detention ...” Brown v. Hiatts, 82 U.S. 177, 185 (1872).
“If justice were immediate, there would never be an award of prejudgment interest.” Michael S. Knoll, A Primer on Prejudgment Interest, 75 Tex. L. Rev., 293, 294 (1996). However, justice is seldom “immediate,” and prejudgment interest is awarded to make plaintiffs whole for the loss they suffer when denied the use of money to which they were legally entitled, and to avoid unjust enrichment on the part of defendants who have improperly withheld that money. Dishman v. Unum Life Ins. Co. of Am., 269 F.3d 974 (9th Cir. 2001).
Courts have discretion to award pre-judgment interest in ERISA cases. Shaw v. International Ass'n of Machinists & Aerospace Workers Pension Plan, 750 F.2d 1458, 1456 (9th Cir. 1985).
In a long-term disability (LTD) case, pre-judgment interest is typically awarded from the time a disabled claimant becomes eligible to receive benefits, or, from the date benefits were improperly terminated, up to the date judgment is entered. When an insurer improperly delays or denies payment of benefits, this may be tantamount to a “coerced loan” from plaintiff to insurer for which plaintiff deserves compensation in the form of pre- and post-judgment interest.
Courts have discretion to award pre-judgment interest and to set the rate of interest. Accordingly, courts have imposed varying interest rates from historically low rates (e.g., 0.3% U.S. Treasury Rate) to higher rates (e.g., California's Insurance Code rate of 10%), or they have awarded interest at the Federal Prime Rate as a balanced measure of the time-value of money improperly withheld. Oster v. Standard Ins. Co., 768 F. Sup. 2d 1026, 1039-1040 (N.D. Calif. 2011); Blankenship v. Liberty Life Assurance Co. of Boston, 486 F.3d 620, 628 (9th Cir. 2007).
The Federal Prime Rate is the rate that banks charge their most credit-worthy customers. It is the market rate for banking and is the basis for commercial and personal loans, small business loans, and mortgages. Arguably, it is a reasonable approximation of the market rate of borrowing. Hizer v. Gen. Motors Corp., 888 F. Supp. 1453, 1464 (S.D. Indiana (7th Cir. 1995). See also: In re Oil Spill by the Amoco Cardiz Off the Coast of France on March 16, 1978, 954 F.2d 1279 (7th Cir. 1992).
Post-judgment interest is awarded from the entry of judgment to when that judgment is paid by the insurer to the prevailing plaintiff. In contrast to pre-judgment interest, the rate of post-judgment interest is governed by 28 U.S.C. 1961, which sets the rate at the 1-year “constant maturity Treasury” (CMT).
Because CMT rates can be as low as 0.1%, when a court awards post-judgment interest at a statutorily rate that fails to reflect market rates of borrowing, there is a legitimate question as to whether it fully compensates a plaintiff or whether it results in unjust enrichment to the insurer. In the context of pre-judgment interest, “overpayment” may be considered “punitive” to the insurer, while “underpayment” is inadequate compensation to the plaintiff. From a public policy standpoint, this should apply with equal force to post-judgment interest rates.
The three stated purposes of post-judgment interest are to (1) fully compensate the plaintiff, (2) avoid frivolous appeals, and (3) incentivize prompt payment of the judgment without having to resort to judicial enforcement.
As a matter of public policy, it is questionable if a statutorily imposed rate of interest at the CMT rate could accomplish those purposes. Moreover, plaintiff is not an institution or a corporation that issues bonds or other debt securities, and an insurer cannot borrow at rates as low as the federal government.
It is important to keep in mind that Section 1961 applies only to post-judgment interest and not to pre-judgment interest. The court has discretion in awarding pre-judgment interest, which is reviewed for “abuse of discretion”, and need not be restricted by Section 1961.
Pre-judgment Interest is Compensation and Not a Penalty
Insurers may argue that there is no evidence that defendants acted in bad faith, and that pre-judgment interest should not be used as a “penalty.” However, that argument misses the mark because a prevailing plaintiff is entitled to an award of pre-judgment interest even if the insurer did not act in “bad faith.” An award of pre-judgment interest is not to “penalize” an insurer for bad behavior, but to compensate plaintiff for an insurer's improper detention or delay in payments due under the Policy.
Federal Question versus Diversity Action
In a diversity action, federal courts follow federal procedure, but they apply state law in awarding pre- and post-judgment interest. Shook & Fletcher Insultation Co. v. Central Rigging and Contracting Corp., 684 F.2d 1383, 1388 (4th Cir. 1982). In some cases, this may result in an award of interest at considerably higher interest rates.
Courts usually award interest based on the time- value of money when long-term disability insurers wrongly deny or detain payment of benefits. Pre-judgment interest is entirely discretionary with the court. Post-judgment interest is governed by statute (28 U.S.C. 1961).