A Different Kind of Fee-Shifting Contract Clause

Contracts often include a fee-shifting provision based on who ultimately prevails in a lawsuit. The idea, of course, is both to deter marginal litigation and, in all circumstances, to provide the prevailing party with compensation for the substantial fees and expenses that often attend litigation.

While sensible in the abstract, these clauses often do not work as advertised, neither deterring litigation nor providing sufficient compensation. This article accordingly proposes a different kind of fee-shifting clause, one triggered not by who ultimately prevails in a lawsuit, but by who prevails on certain specified motions that commonly add unnecessary expense and delay to dispute resolution proceedings.

The Shortcomings of Standard Clauses

A market standard fee-shifting clause provides as follows:

In the event that any suit or action is instituted to enforce any provision in this agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses, including reasonable attorneys' fees, incurred in connection with such suit or action.

In concept, such a clause should cause a litigant with a marginal claim to refrain from bringing it. In practice, however, the risk of payment often proves too far in the future to affect the thinking of most litigants at the start of a case, especially when emotions can be running high. Then, of course, there is the related problem that the case, which seems marginal to a defendant, may not seem marginal to a plaintiff. Additionally, the fact that many disputes are resolved by settlement diminishes any perceived risk that fees of an adversary will ever actually have to be paid.

Such clauses, moreover, often fail to provide the promised compensation, even when disputes are resolved on the merits. That is because, at the end of the day, it often is not clear which party has “prevailed,” with one winning this claim and the other winning that claim. Compounding the problem of calling wins and losses is the fact that, in retrospect, aggregate fees over the course of a multi-year litigation often strike a court (and clients) as too high. After the apportionment of fees and the adjustments of rates and hours, the compensation awarded usually is far less than the fees and expenses actually incurred.

Litigation

Given these shortcomings, drafters may wish to consider a different type of fee-shifting clause: one that aims not to deter litigation in general, but instead to streamline litigation when it does occur. In particular, a major source of delay and expense in litigation, and frustration for parties, is routine motion practice focused not on the merits of a case, but on the litigation process itself. “Litigation about the litigation” commonly includes motions relating to: 1) Discovery (including motions to compel and protect); 2) Convenience of the forum; 3) Personal jurisdiction; 4) Subject matter jurisdiction; 5) Service of process; 6) Removal; 7) Attorney or party conduct in the course of the litigation (including sanctions); 8) Recusal; 9) Disqualification; 10) Joinder of parties; 11) Consolidation of proceedings; and 12) Compliance with confidentiality orders (together, “nonmerits-based motions”).

A fee-shifting clause triggered by who prevails on a nonmerits-based motion could have a dramatic impact on how litigation is fought and the expense associated with it. The risk of having to pay fees and costs in the course of a case for nonmerits-based motions should deter advocates from both engaging in dilatory conduct necessitating a motion (e.g., unreasonably withholding documents) and filing nonmerits-based motions more for strategic than substantive reasons ( e.g. , to obtain delay or “wear down” an opposing party). Further, limiting such fee-shifting to discreet motions (rather than an entire case) reduces the “sticker-shock” problem, and thereby increases the chances of full compensation for that which the parties have agreed merits an award of fees and expenses.

Drafting Suggestions

To give such a modified fee-shifting clause teeth, it is prudent to require fees to be paid to the prevailing party immediately after the court decides the nonmerits-based motion. This avoids the “too far off in the future” problem.

To address the issue of which party is actually the “prevailing party,” the clause should provide the court with agreed-upon guidelines ' e.g., the “prevailing party shall be the party deemed by the court to have prevailed on the majority of the claims or defenses raised in connection with a non-merits based motion;” or, if the goal is to deter most motion practice in its entirety, “the nonmoving party shall be deemed the prevailing party unless the moving party secures all of the relief requested.”

Such a fee-shifting clause might use a definition of “nonmerits-based motion” akin to the one in the text above, and state as follows:

In the event any party brings a nonmerits-based motion (as defined), the losing party shall pay the prevailing party's reasonable attorneys' fees and expenses associated with such motion within 10 days after adjudication of the motion and determination by the trial court of the prevailing party. The prevailing party shall be the party deemed by the court to have prevailed on the majority of the claims or defenses raised in connection with the nonmerits-based motion. If the losing party fails to pay the prevailing party's reasonable attorneys' fees and expenses in the time period set forth above, the prevailing party may apply for an order compelling such payment and shall be awarded all reasonable attorneys' fees and expenses incurred in connection with such application.

A fee-shifting clause tied to who prevails on nonmerits-based motions would avoid many of the problems that attend standard fee-shifting clauses, while both deterring some of the gamesmanship that can make litigation unduly expensive and putting the focus of litigation where it belongs: on the merits.

Eric Fishman is a partner at Pillsbury Winthrop Shaw Pittman.

Contracts often include a fee-shifting provision based on who ultimately prevails in a lawsuit. The idea, of course, is both to deter marginal litigation and, in all circumstances, to provide the prevailing party with compensation for the substantial fees and expenses that often attend litigation.

While sensible in the abstract, these clauses often do not work as advertised, neither deterring litigation nor providing sufficient compensation. This article accordingly proposes a different kind of fee-shifting clause, one triggered not by who ultimately prevails in a lawsuit, but by who prevails on certain specified motions that commonly add unnecessary expense and delay to dispute resolution proceedings.

The Shortcomings of Standard Clauses

A market standard fee-shifting clause provides as follows:

In the event that any suit or action is instituted to enforce any provision in this agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses, including reasonable attorneys' fees, incurred in connection with such suit or action.

In concept, such a clause should cause a litigant with a marginal claim to refrain from bringing it. In practice, however, the risk of payment often proves too far in the future to affect the thinking of most litigants at the start of a case, especially when emotions can be running high. Then, of course, there is the related problem that the case, which seems marginal to a defendant, may not seem marginal to a plaintiff. Additionally, the fact that many disputes are resolved by settlement diminishes any perceived risk that fees of an adversary will ever actually have to be paid.

Such clauses, moreover, often fail to provide the promised compensation, even when disputes are resolved on the merits. That is because, at the end of the day, it often is not clear which party has “prevailed,” with one winning this claim and the other winning that claim. Compounding the problem of calling wins and losses is the fact that, in retrospect, aggregate fees over the course of a multi-year litigation often strike a court (and clients) as too high. After the apportionment of fees and the adjustments of rates and hours, the compensation awarded usually is far less than the fees and expenses actually incurred.

Litigation

Given these shortcomings, drafters may wish to consider a different type of fee-shifting clause: one that aims not to deter litigation in general, but instead to streamline litigation when it does occur. In particular, a major source of delay and expense in litigation, and frustration for parties, is routine motion practice focused not on the merits of a case, but on the litigation process itself. “Litigation about the litigation” commonly includes motions relating to: 1) Discovery (including motions to compel and protect); 2) Convenience of the forum; 3) Personal jurisdiction; 4) Subject matter jurisdiction; 5) Service of process; 6) Removal; 7) Attorney or party conduct in the course of the litigation (including sanctions); 8) Recusal; 9) Disqualification; 10) Joinder of parties; 11) Consolidation of proceedings; and 12) Compliance with confidentiality orders (together, “nonmerits-based motions”).

A fee-shifting clause triggered by who prevails on a nonmerits-based motion could have a dramatic impact on how litigation is fought and the expense associated with it. The risk of having to pay fees and costs in the course of a case for nonmerits-based motions should deter advocates from both engaging in dilatory conduct necessitating a motion (e.g., unreasonably withholding documents) and filing nonmerits-based motions more for strategic than substantive reasons ( e.g. , to obtain delay or “wear down” an opposing party). Further, limiting such fee-shifting to discreet motions (rather than an entire case) reduces the “sticker-shock” problem, and thereby increases the chances of full compensation for that which the parties have agreed merits an award of fees and expenses.

Drafting Suggestions

To give such a modified fee-shifting clause teeth, it is prudent to require fees to be paid to the prevailing party immediately after the court decides the nonmerits-based motion. This avoids the “too far off in the future” problem.

To address the issue of which party is actually the “prevailing party,” the clause should provide the court with agreed-upon guidelines ' e.g., the “prevailing party shall be the party deemed by the court to have prevailed on the majority of the claims or defenses raised in connection with a non-merits based motion;” or, if the goal is to deter most motion practice in its entirety, “the nonmoving party shall be deemed the prevailing party unless the moving party secures all of the relief requested.”

Such a fee-shifting clause might use a definition of “nonmerits-based motion” akin to the one in the text above, and state as follows:

In the event any party brings a nonmerits-based motion (as defined), the losing party shall pay the prevailing party's reasonable attorneys' fees and expenses associated with such motion within 10 days after adjudication of the motion and determination by the trial court of the prevailing party. The prevailing party shall be the party deemed by the court to have prevailed on the majority of the claims or defenses raised in connection with the nonmerits-based motion. If the losing party fails to pay the prevailing party's reasonable attorneys' fees and expenses in the time period set forth above, the prevailing party may apply for an order compelling such payment and shall be awarded all reasonable attorneys' fees and expenses incurred in connection with such application.

A fee-shifting clause tied to who prevails on nonmerits-based motions would avoid many of the problems that attend standard fee-shifting clauses, while both deterring some of the gamesmanship that can make litigation unduly expensive and putting the focus of litigation where it belongs: on the merits.

Eric Fishman is a partner at Pillsbury Winthrop Shaw Pittman.