Reasonable Attorney Fee Awards
The “American Rule” with regard to attorney fee awards requires litigants to pay their own attorney fees. (See C.C.P. §1021.) However, if allowed by statute, contract, or other agreement, the trial court may award the prevailing party attorney fees. Other exceptions also exist such as the private attorney general, substantial benefit and common fund exceptions.

However, where such fees are recoverable, the golden rule of attorney fee awards is that the trial court has tremendous discretion in awarding reasonable attorney’s fees. When the case is finished, and the costs are at issue, it all boils down to the trial judge’s discretion.

The standard of review is “abuse of discretion,” since the trial judge is presumably in the best position to determine the value of the services rendered by counsel. The law is clear that the appellate court may not disturb the trial judge’s decision unless it is convinced it was clearly wrong.

Authority for Attorney Fee Awards
Most attorney fee awards are the result of a disputed contract with an attorney fee clause awarding the prevailing party attorney fees. California Code of Civil Procedure §1032 entitles the prevailing party to litigation costs as a matter of right. Attorney’s fees are an element of costs and are awardable if authorized by 1) statute or 2) contract. (C.C.P. §1033.5.)

If the contract litigated awards the prevailing party attorney fees, the fees are awardable as a contractual, post-trial, remedy. Two statutes allow the court to award attorney fees to successful litigants as an element of costs. California Civil Procedure §1021 allows attorney fee awards to litigants when agreed upon. Civil Code §1717 also awards the winning litigant attorney’s fees based upon a contract with an attorney fee clause. Various other statutes award attorney’s fees, such as Labor Code §98.2 which awards attorney’s fees to unsuccessful appellants of Labor Commissioner awards in labor disputes and C.C.P. §1021.5 for private attorney general litigants.

California Civil Code §1717
Some confusion surrounds the purpose of Civil Code §1717. Some early decisions misinterpreted the California Legislature’s intent in enacting Civil Code §1717 to solely allow reciprocity between contractual litigants with respect to attorney’s fees. Therefore, they ruled C.C. §1717 only applied to contracts where attorney’s fees are awardable to only one party and not the other.

The boilerplate language of contracts increasingly included an attorney fee clause that stated, in effect, “in the event the contract is litigated and I win, I am entitled to recoup my attorney’s fees from you.” The “other” party is deemed to have waived any attorney fee award.

These early decisions adhered to the literal and very narrow interpretation that Civil Code §1717 merely made the one-sidedness of such attorney fee clauses reciprocal. This meant any litigant to such a one-sided contract could recover attorney’s fees as the prevailing party regardless of whom the parties agreed would be entitled to attorney’s fees. The nature of these early decisions meant that Civil Code §1717 only applied to non-reciprocal attorney fee clauses, thereby making them reciprocal.

There is no doubt that the California Legislature enacted Civil Code §1717 to remedy the one-sidedness of attorney fee awards by making all attorney fee clauses reciprocal. The California Supreme Court stated that the legislative purpose was “to establish uniform treatment of fee recoveries in actions or contracts containing attorney fee provisions.” (Santias v. Goodin, (1998) 17 Cal.4th 599, 616 71 Cal.Rptr.2d 830,951 P.2d 399.)

Two schools of thought existed at the time. Numerous lower court decisions already adhered to the broader interpretation that C.C. §1717 was a statutory basis for awarding attorney’s fees. These decisions more accurately clarified the Legislature’s intent and declared Civil Code §1717 not only made contractual attorney fee provisions reciprocal, but it applies to all contracts with an attorney fee provision and constituted a statutory authority to award attorney fees as an element of costs.

In 1998, the California Supreme Court reaffirmed the majority understanding of C.C. §1717 in Santias v. Goodin, by ruling “…Civil Code §1717 applies equally to reciprocal attorney fee provisions.” The California Supreme Court further confirmed the majority understanding of C.C. §1717 by ruling it constitutes a statutory authority for the courts to grant attorney’s fees to victorious litigants.

This means that C.C. §1717 is a proper statutory authority for a party to rely on for a court to award attorney’s fees rather than merely a statute providing reciprocity toward attorney fee awards. The California Supreme Court ruled that courts have “the authority under Civil Code section 1717 to award attorney fees…” (PLCM Group v. Drexler (2000) 22 Cal.4th 1084, 997 P.2d 511, 95 Cal.Rptr.2d 198; see C.C.P. §1033.5.)

“Lodestar Method”
In California, the calculation to determine a “reasonable fee” begins with the “Lodestar method”: the number of hours reasonably expended multiplied by the reasonable hourly rate. The reasonable hourly rate is that prevailing in the community for similar work. (Margolin v. Regional Planning Com. (1982) 134 Cal.App.3d 999, 185Cal.Rptr. 145.)

The lodestar figure may then be adjusted based on factors specific to the case in order to fix the fee at the fair market value for the legal services provided. (Serrano v. Priest (1977) 20 Cal.3d 25, 141 Cal.Rptr. 315, 569 P.2d 1303.)

“Cost Plus” Method
The “Cost Plus” method for calculating attorney’s fees uses a more literal interpretation of “attorney’s fees: the consideration that a litigant actually pays or becomes liable to pay for legal representation,” (Trope v. Katz (1995) 11 Cal.4th 274, 280.)

The “Cost Plus” method of calculating attorney’s fees begins by using the actual attorney’s fees incurred and then adjusting the figure based on the specific factors of the case ensuring the reasonableness of the fee.

Attorney Fee Awards for in Propria Persona Litigants
Litigants operating in propria persona are not allowed attorney’s fees. (See Williams v. San Francisco Bd. Of Permit Appeals (1999) 88 Cal.Rptr.2d 565.)

The California Supreme Court ruled that even attorneys litigating in propria persona are not allowed attorney’s fees in Trope v. Katz (1995) 11 Cal.4th 274[45Cal.Rptr.2d 241, 902 P.2d 259]. The rational is that the term “attorney’s fees” implies the existence of an attorney-client relationship, i.e., a party receiving professional services from a lawyer. One noticeable exception exists. An attorney representing himself or herself may be awarded attorney’s fees when the opposing party files a pleading for an improper purpose, to harass, cause unnecessary delay or needless increase cost of litigation. (Laborde v. Aronson (2001) 92 Cal.App.4th 459, 465-69.)

The Supreme Court reasoned an attorney acting in propria persona should not receive compensation from his opponent simply because the time he devotes to litigating a matter on his own behalf has value when non-attorney pre se litigants cannot do so regardless of the personal and economic value of their time. Such an award would constitute disparate treatment, inimical to a statute designed to estqablish mutuality of remedy. The phrase “attorney’s fees” is the consideration that a litigant actually pays or becomes liable to pay for legal representation. Attorneys litigating in propria persona pay no such compensation.

Further, the courts discourage even skilled lawyers from representing themselves because it deprives the litigant of judgment of an independent third party in framing the theory of the case, evaluating alternative methods of presenting the evidence, cross-examining hostile witnesses, formulating legal arguments, and in making sure that reason, rather than emotion, dictates the proper tactical response.

In-House Counsel Attorney Fee Awards
Although attorneys acting in pro per cannot obtain attorney’s fees, in-house counsel may. The Supreme Court cited the fact that there is no disparate treatment because in-house attorneys do not represent their own personal interests, they are not seeking remuneration simply for lost opportunity and there is no ethical conflict with emotional investment. Further, an agency relationship exists between the attorney and the corporation. The denial of such awards to in-house counsel would violate the principal of reciprocity and reasonable attorney fee awards by discriminating unfairly between in-house and private counsel performing the same services.

In-house counsel’s attorney’s fees are the number of hours counsel spent on the action, multiplied by the reasonable in-house attorney rate prevailing in the community. This figure is then adjusted pursuant to any important factors of the case. This is how the California Supreme Court ruled how to calculate the fee even if the attorney’s salary that the corporation paid is significantly less.

The Supreme Court specifically rejected the “cost plus” approach which awards the attorney’s salary plus reasonable overhead which more closely reflects the attorney fees incurred. The court discouraged other courts from doing so by stating other methods for calculating a reasonable fee may be used only under “exceptional circumstances.” (See PLCM Group v. Drexler (2000) 22 Cal.4th 1084, 997 P.2d 511, 95 Cal.Rptr.2d 198.)

Market Rate
Most attorneys set goals to recover 100% of the attorney fees their clients incurred. However, in California, for in-house counsel, the reasonable attorney fee calculation is inherently in excess of the actual fee incurred.

In determining how to calculate attorney fee awards, the Supreme Court applied the Lodestar method to the in-house attorney fee awards. It disregarded the actual attorney’s fees incurred and inserted the community’s “reasonable rate” and the Lodestar calculation.

The “market rate” calculation for in-house attorney fees permits awards in excess of the fee actually incurred because, by definition, a market rate includes a profit component on top of costs. (See In re Cassell (W.D. Va. 1990) 119 B.R. 89,92.) The “market rate” includes a profit component because no attorney would otherwise do the work. Thus, a market rate approach will often penalize the losing party and reward the corporation by awarding a fee that exceeds the fee incurred. The byproduct is a windfall or profit to corporations. Furthermore it rewards and incentivises litigious corporations.

Corporations may also have less incentive to ensure that their in-house attorneys work efficiently and keep hours down if they may potentially recover fees for those hours based on a market rate that exceeds the in-house rate. In-house costs will often be lower than market costs because in-house counsel have the rare advantage of operating with a full-time focus on and a deep understanding of their client’s business and legal needs. Thus, a potential recovery of a market-rate fee that exceeds actual in-house costs may make corporations less willing to settle.

The definition for “attorney’s fees” as being “incurred” or a “liability” is only relevant after the Lodestar figure is resolved. The court may subsequently compare the Lodestar figure with the actual fee incurred, if known, and make any adjustments based on individual factors of the case.

A “cost-plus” approach, by awarding the victorious corporation the amount to which it is entitled, but no more, would punish neither the corporation for using in-house counsel nor the losing party.

Fee Splitting
There is a split of authority on the issue that market rate fee awards implicate proscriptions against fee splitting and the unauthorized practice of law to the extent it enables a corporation to profit from its legal department. To avoid this problem. Courts required either use of a cost-plus approach or a showing that all of the fee award will be put back into the legal operations, rather than general corporate coffers. (See Curran v. Department of Treasury (9th Cir. 1986) 805 F.2d 1406, 1408-10.) see also Central States v. Central Cartage Co. (7th Cir 1996) 76 F.3d 114, 115-117 [finding no ethical issues with market rate award because litigant, not counsel, owns the award]. (See also Cal. Compendium on Prof. Responsibility, pt. IIA, State Bar Formal Opn. No. 1987-91, p.273.)

Closing Thoughts
An important aspect of attorney fee awards relates to settlement attempts and C.C.P. §998 offers to compromise. Although negotiations are generally inadmissible evidence under Evidence Code §1152, it is admissible for purposes of attorney fee awards. If the opposing party rejects an offer, but still prevails at trial and does not fare as well as the rejected offer, your client should not be responsible for any attorney fees after the offer was rejected. Equity and fairness dictate that a party should not be responsible for the opposing party’s attorney’s fees after they rejected a settlement offer they could not bear at trial. (C.C.P. §998) Such fees were unnecessarily incurred.

There are several ways to determine what the reasonable attorney fee is. Such motions are often bitterly and intensively contested. However, remember the Golden Rule: it all boils down to what the judge feels is fair and equitable, as dictated by the equitable principals of California Civil Code §1717.