|Featured Article |
|The Costly Client|
By Vincent H. Herron and Vered Yakovee
Vincent H. Herron is an associate with Latham & Watkins.
Case law provides guidance on how lawyers can avoid the Trope rule against awarding attorney's fees.
Vered Yakovee is a third-year law student at the University of Southern California.
By reading this article and answering the accompanying test questions, you can earn one credit. To apply for credit, please follow the instructions on the test.
Attorneys should be aware that when they represent themselves in litigation, and they win, they may not be entitled to recover attorney's fees—even when a contractual provision explicitly provides attorney's fees to the prevailing party. This rule emerged in 1995 when the California Supreme Court, in Trope v. Katz,1 disallowed attorney's fees for a prevailing law firm that represented itself in a contract action. While Trope remains good law today, recent case law indicates that the rule will be narrowly applied. Indeed, a trend by courts to move away from the holding is apparent, and case law is providing guidance on how to avoid the effects of the rule.
In Trope, a law firm representing itself sued a former client for unpaid fees. The suit alleged that the client breached the retainer agreement, which contained a standard attorney's fees provision: "In the event it becomes necessary to file an action to recover the fees and costs set forth in this agreement, the Court may award reasonable attorney's fees for the recovery of said fees and costs." In response to the firm's suit, the former client filed a cross-complaint alleging malpractice. The trial resulted in a net verdict for the law firm, and the trial court awarded attorney's fees to the law firm pursuant to the attorney's fees provision in the retainer agreement.
In reversing the award of fees, the supreme court acknowledged that the law firm would have been entitled to attorney's fees had it retained an attorney. Nevertheless, it held that the firm was barred from recovering attorney's fees because it had represented itself. Key to the court's ruling was its interpretation of Civil Code Section 1717:
|In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded to either one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs.|
The court determined that an attorney litigating in propria persona does not "incur" attorney's fees as required by Section 1717. According to the court, "attorney's fees… [are] the consideration that a litigant actually pays or becomes liable to pay in exchange for legal representation."2 Moreover, the court stated, "To incur a fee, of course, is to 'become liable' for it."3 From this premise, the court reasoned that since an attorney litigating in propria persona does not become obligated to pay any money for legal representation, he or she cannot be said to have incurred any attorney's fees. Accordingly, the attorney is not entitled to recover them even if he or she is the prevailing party.
The court rejected the law firm's argument that its time should not be rendered less valuable simply because it represented itself rather than another party. Also, the court did not accept the law firm's contention that it incurred attorney's fees in an amount equal to the time and opportunities that the firm lost in order to litigate the case in propria persona.
Although Trope is purportedly based on Civil Code Section 1717, the opinion clearly was driven by concerns about public policy and public perception. The court observed that Section 1717 addresses mutuality, and its purpose is to ensure the evenhanded enforcement of attorney's fees provisions. The court also noted that a contrary holding would provide recompense for attorneys litigating pro se but would not do the same for nonattorney pro se litigants. This result, according to the court, would make the time of an attorney litigating pro se more valuable than that of, for example, a doctor litigating pro se. The Trope ruling seeks to avoid a one-sided system that discriminates between attorney litigants and nonattorney litigants because such a system "would be viewed by the public as unfair.…"4 In the court's view, "'the public perception of fairness in the legal system is of greater moment than a lawyer litigant's claim to an attorney fee award if he elects to represent himself.'"5
As further evidence that public policy played a major role in the Trope decision, the court stated its clear intent "to discourage attorneys from electing to appear in propria persona because such self-representation may often conflict with the general public and legislative policy favoring the effective and successful prosecution of meritorious claims."6 Further, "[e]ven a skilled lawyer who represents himself is at a disadvantage" due to ethical considerations, impaired judgment, and perhaps the lack of an attorney-client relationship.7
The Trope court expressly declined to address the issue of whether Civil Code Section 1717 barred a prevailing party from recovering attorney's fees for its own in-house counsel. Three years later, however, in PLCM Group, Inc. v. Drexler,8 the court indicated that it did not.
Underlying Drexler was a malpractice lawsuit against an attorney, Drexler, who tendered the suit to PLCM, his professional malpractice insurer. PLCM accepted the tender and hired Drexler's preferred defense counsel but expected Drexler to pay for the defense in the amount of the deductible. When Drexler failed to pay his defense counsel, PLCM paid the balance and, through its in-house counsel, sued Drexler for breach of the insurance contract. The insurance contract between PLCM and Drexler provided attorney's fees and costs to the prevailing party. Drexler countersued for breach of contract and bad faith. The trial court found for PLCM on the contract action and awarded PLCM $61,500 in attorney's fees based on a lodestar approach that multiplied the number of hours its in-house counsel worked on the matter by a prevailing market rate of $185 per hour. With this approach, PLCM recovered fees based on the fair market value of its in-house counsel's time, not the amount that PLCM paid the in-house counsel in salary.9
The California Supreme Court upheld the award of attorney's fees to PLCM, holding that a corporation incurs attorney's fees for purposes of Civil Code Section 1717 when it pays the salary of an in-house counsel because in-house counsel is akin to private counsel engaged on retainer. The court stated, "Both are bound by the same fiduciary and ethical duties to their clients.…And both incur attorney fees and costs within the meaning of Civil Code section 1717 in enforcing the contract on behalf of their clients."10
Although the Drexler court based its holding on legal grounds, the court noted that the public policy concerns in Trope did not exist in Drexler because the relationship of a corporation and its in-house counsel is an agency relationship, and ethical or emotional issues would not impede the effective prosecution of claims. Indeed, in an effort to avoid the Trope holding, the Drexler court sought to limit Trope to the facts of the case and characterized Trope as "expressly involving the 'narrow issue' whether pro se litigant attorneys could recover fees."11
One year later, in Gilbert v. Master Washer and Stamping Company, Inc.,12 the Second District Court of Appeal further distinguished the Trope holding. In Gilbert, the law firm of Gernsbacher & McGarrigle represented a tenant in a suit against his landlord. In response, the landlord countersued the tenant and also named attorney David Gernsbacher individually as a defendant. Attorneys from Gernsbacher & McGarrigle (other than Gernsbacher himself) represented both the tenant and Gernsbacher in the litigation. Gernsbacher was dismissed from the case at the demurrer stage, and the tenant ultimately prevailed in the litigation that followed. Nonetheless, the trial court denied Gernsbacher's motion to fix his attorney's fees as costs. The trial court reasoned that because Gernsbacher was represented by his own law firm, the holding of Trope prevented him from recovering attorney's fees.
In reversing the trial court's ruling on attorney's fees, the court of appeal held that a member of a law firm who is represented by other attorneys in the firm incurs fees within the meaning of Civil Code Section 1717: "Either the represented attorney will experience a reduced draw from the partnership (or a reduced salary from the professional corporation) to account for the amount of time his or her partners or colleagues have specifically devoted to his or her representation, or absorb a share of the reduction in other income the firm experiences because of the time spent on the case."13 The Gilbert court also concluded that the policy concerns expressed in the Trope decision do not exist when an attorney is represented by another attorney—even if both attorneys are from the same firm.
The reasoning in Gilbert is difficult to square with the holding in Trope. Under Trope, sole practitioners representing themselves or their firms in litigation do not incur fees, despite the fact that sole practitioners are losing the opportunity cost of 100 percent of their time and potentially losing their entire draw. Conversely, pursuant to Gilbert, a partner in a two-attorney firm who is represented by his or her partner in litigation incurs fees because the lost opportunity cost of his or her partner results in a lower draw.
The most recent case to sidestep Trope is Farmers Insurance Exchange v. Sayas,14 a May 2001 opinion from the Ninth Circuit. In that case, two law firms represented an insured in an action against Farmers Insurance Exchange. The retainer agreement between the insured and the law firms provided that "[i]n any dispute between Lawyers and Client, the prevailing party will be entitled to reasonable attorney's fees." The client settled the underlying lawsuit and fired the two law firms. The law firms were both forced to sue the client for breach of contract to collect unpaid fees. Presumably to avoid the Trope bar to fee recovery, the law firms chose to represent each other in the litigation against the client. The law firms prevailed in the litigation, and the district court awarded the law firms the attorney's fees that were incurred in prosecuting the fee dispute on each other's behalf.
In affirming the district court, the Ninth Circuit looked at the broad interpretation of the term "incur" applied in Drexler and Gilbert and the narrow application of Trope since its issuance in 1995. The court reasoned that since the parties in Drexler and Gilbert had incurred fees when they became liable to other parties for fees as a result of litigation, so too had the law firms in Farmers incurred fees. Thus, according to the court, "[u]nder California law, recovery is permissible provided that fees were incurred, which is evidenced by an obligation by the client to pay attorney's fees, the existence of an attorney-client relationship, and distinct interests between the attorney and the client."15 The Ninth Circuit also noted that the law firms' agreement to represent each other satisfied policy concerns because attorney-client relationships and fiduciary duties had been created, and the attorneys' interests were potentially separate from the clients' interests.
In contrast to courts seeking to limit the impact of Trope, the Second District Court of Appeal in 1999 expanded the Trope ruling in Argaman v. Ratan.16 In Argaman, the appellate court held that attorneys litigating pro se could not recover sanctions for their adversary's discovery abuses because the Code of Civil Procedure sets the measure of sanctions as attorney's fees, and the pro se attorney had not incurred any such fees.17 This year, the Second Appellate District, in Kravitz v. Superior Court, recognized that Argaman's expansive holding gave "litigants opposing pro se parties a license to abuse the discovery process."18 As a practical matter, the Kravitz holding better serves the litigation process than the Argaman holding because Kravitz acknowledges that sanctions are intended to punish a mischievous party as well as to compensate the aggrieved victim.19 Still, the Kravitz court followed Argaman but narrowly applied it only to fees, holding that discovery sanctions in the amount of itemized expenses (such as filing fees, photocopying costs, transportation costs to and from court, computerized research costs, or "any other identifiable item") are properly recoverable even by a litigant acting in propria persona. According to the Kravitz court, "there is no reason those expenses cannot be recovered as discovery sanctions."20
Guidance for Attorneys
Despite Argaman, courts have been trying to restrict Trope's reach. At the same time, the post-Trope cases are providing a road map for attorneys who want to preserve their options for recovering fees in litigation in which the attorneys are parties. For example, if a corporate or finance attorney is sued for professional malpractice, Gilbert indicates that the attorney can recover fees if the attorney is represented by litigators from the attorney's own firm. The same result would occur if one litigator at a firm was sued and subsequently represented by another litigator at the same firm. But Gilbert leaves open the question of recovery when the corporate lawyer and the firm are both named defendants and both defendants are represented by other attorneys at the firm. Also unresolved is whether a law firm, following Drexler, could ensure recovery of fees by designating one particular attorney as the firm's in-house counsel to handle all suits involving the firm.
In Farmers, the court awarded one firm $45,652.80 and the other $16,990.80 for their representation of each other in the litigation against the former client. The disparity in the awards suggests that the firms labored at different oars in the litigation. The Farmers court did not address whether it would have found that both firms had incurred fees if the two firms had agreed to provide each other with services of identical value so that neither firm paid the other anything at the end of the litigation. Indeed, what if the two firms represented each other on a pro bono basis or agreed to waive fees? These issues have not been addressed in the context of Civil Code Section 1717; however, recent cases involving anti-SLAPP suits—with some courts analyzing the Trope decision and its progeny—suggest that fees might be recoverable.21
Although the cases provide some guidance for attorneys and law firms on the issue of attorney's fees in litigation in which they are parties, attorneys and firms should also seek to avoid this issue altogether by addressing Trope and Civil Code Section 1717 proactively in retainer agreements, vendor contracts, and leases. Attorneys should seek to avoid the implications of Trope by carefully drafting attorney's fees provisions that allow costs to the prevailing party even if the prevailing party is an attorney representing himself or herself or a firm representing itself. To do this would involve a waiver of Trope. Indeed, much like settlement agreements requiring parties to waive the protections of Civil Code Section 1542,22 an attorney's fees clause might state that the parties are aware of the Trope holding and that it is the intent of the parties to avoid its effects. Whether such a waiver provision would be enforceable would depend on how a court balanced the intent of the contracting parties against the public policy dictates enunciated in Trope. On this front, Casey v. Proctor23 suggests that such a provision is indeed enforceable.
Casey addresses the application of Civil Code Section 1542 to a general release. In Casey, a personal injury plaintiff signed a general release expressly discharging liability for known and unknown injuries. Later, after discovering previously unknown injuries, the plaintiff cited Section 1542 to avoid application of the release. The Casey court ultimately held that the releasee failed to prove that the releasor intended to void the effects of Section 1542 by his general release of unknown claims, but the court squarely noted that "Section 1542 [did] not prevent all settlements for unknown claims." Indeed, the court acknowledged that a party may say, "'I may have serious injuries I know nothing about. As to them I will take my chances.' This, one may do."24 According to the court, if the evidence had shown an intent by the releasor to waive his rights under Section 1542, such a waiver would have been valid.
Civil Code Section 1717 imposes a legislative interpretation on contract terms (attorney's fees provisions) for public policy purposes. Civil Code Section 1542 imposes a legislative interpretation on contract terms (general releases) for public policy purposes. This similarity in the two sections suggests that the treatment of attorney's fees provisions and general releases should be the same. If the Casey holding on general releases is extrapolated to attorney's fees provisions, contracting parties should be able to waive their rights under Section 1717 and Trope and to agree to reimburse the prevailing party for attorney's fees, even when the prevailing party is an attorney or law firm litigating in propria persona.