Watch Out for Litigation Costs
Some attorneys (and their clients) do not consider litigation costs when performing their cost/benefit analysis. I’m not talking about the attorney fees. All parties are likely painfully aware of the attorney fees. I’m referring to the costs — deposition fees, filing fees, expert fees, etc. From my experience, if opposing counsel considers the costs at all, it is only from the perspective of what they will need to spend to prosecute the action. But the prevailing party in litigation is entitled to recover their costs. As our recent case illustrates, how much the opposition is going to spend must be considered.
Here are the facts.
Our client (we’ll call them Acme) is a small business, that has customers all over the world. Acme hired someone to work overseas, but fired him after a few months based on poor work performance. The employee was very well paid for his time, and Acme even allowed him to vacation in Greece for a couple of weeks on the company dime after the termination, just to show there were no bad feelings.
But the employee did not go quietly into the night. He found a sleazebag attorney who was willing to file an action containing ridiculous claims, ranging from Labor Code violations to false imprisonment.
The attorney’s background was in personal injury, and I think he thought that by making the claims so outrageous, Acme would enter into a quick settlement to make the action go away. Instead, Acme became driven to defeat the action to leave no doubt that the claims were all false.
Quick sidebar: Contrary to what many believe, this is the more typical reaction. A common refrain from callers is that “if we just file an action, they will quickly settle to avoid the publicity.” Often, if I dare ask for details about how we would prove the claims, the caller becomes frustrated. “Didn’t you hear me? This will never go to trial. We just need to file the action.” But once the action is filed, that is the publicity. If the company then quickly settles, even if the parties agree to keep the terms private, the assumption will be that there had to be some truth to the allegations. And perhaps worse, the company would gain the reputation as an easy mark. But hoping to settle based on the threat of litigation is no panacea either. Attorney Michael Avenatti thought Nike would pay $25 million “to avoid the publicity” of certain facts becoming public. Nike decided the best defense was a good offense, and told the authorities about the shakedown attempt. Avenatti was given 2.5 years in prison to ponder his failed litigation strategy.
As ridiculous as the claims were, Acme had to take them seriously because the lawsuit sought millions in damages. And since the employee had worked in various countries, that meant traveling to those countries and spending significant sums to take the depositions of witnesses.
Victory.
In the end, the claims were all disposed of with a motion for summary judgment. As the prevailing party, Acme was then entitled to recover its litigation costs.
Let’s talk about costs.
Costs are subject to California Code of Civil Procedure section 1033.5. That statute lists in very specific detail which costs can, and cannot, be recovered.
Relevant to this case, one recoverable cost is “travel expenses to attend depositions.” And then there is my favorite allowable cost, section (c) (4), which provides: “Items not mentioned in this section and items assessed upon application may be allowed or denied in the court’s discretion.” In other words, the court can award any cost it deems to be reasonable and necessary for the litigation.
Travel expenses to attend depositions are specifically recoverable, but what does that include? Airfare seems obvious, as does any transfers. But what about a hotel? One can’t fly to Romania, take a deposition, and return the same day, so a hotel stay is necessary for the deposition. But what level of hotel? Are the client and I permitted to stay in the sort of hotel we would normally stay in when traveling, or must we stay in the equivalent of a Motel 6 in order to keep down the costs for the opposing party?
And what do we do about food? A judge could reason that we’d need to eat whether or not we were in Romania, so that should not be put on the opposing party. But the cost of eating at a restaurant will be much higher than eating at home. We are only there because Plaintiff filed this frivolous action, so why should we bear that cost?
As you can see, there are many decisions for the court to make, and no way to know what the judge will conclude.
My cost strategy.
I have seen attorneys who follow the strategy of throwing every conceivable cost against the wall to see what will stick. They fly first class, stay at high end hotels, and even include the drinks they had with dinner on the cost application. But I think that destroys their credibility, and causes the judge to question other items.
I also question the ethics of such a practice. The client will ultimately be responsible for all the costs incurred. A first class ticket from Los Angeles to Bucharest is around $8,000. If the judge disallows that cost, then it comes out of the client’s pocket. I do everything I can do to keep down the costs for the client, and would not roll the dice like that. Of course, if the fee agreement provides that the attorney always flies first class, then that is a different matter. The client agreed to the expense in advance.
I am reasonable when incurring the costs, and equally so when submitting them. I make sure to set forth the expenses I am not seeking, so the judge knows I am already making cuts.
In this case, the bulk of the expenses had been incurred before I was retained. Thankfully, prior counsel and the client had followed a philosophy similar to mine, and had not gone first class on everything. I submitted the cost memorandum, and the judge awarded the full amount — over $150,000 in costs.
Costs may be unavoidable.
Hence, the point of this article. Personal injury attorneys typically go for quantity, and will not turn away even an obviously weak case. To them, it’s a numbers game. They assume that most cases will settle. Even the sort of ridiculous claim that was filed against my client will often settle for “costs of defense,” meaning that the defendant will settle for what it would cost to defend the action, and thereby avoid any potential liability.
To an attorney with this mindset, there is no downside to filing an action. He knows he would never prevail at trial, and has no intention of every going to trial. If it becomes clear that the defendant won’t settle, the attorney will kick the client to the curb before trial. That was no doubt the intention with the case against our client, but we foiled that plan by filing a motion for summary judgment.
A prevailing party is always entitled to recover certain, specified costs from the opposition. But they must be the prevailing party, and that is not always as clear as it might seem. Case law used to hold that to be the prevailing party, one must prevail on the merits. If a motion for summary judgment is brought, and the plaintiff responds by dismissing the action, does that make the defendant the prevailing party? Some courts said no, because that is not a decision on the merits. But case law has evolved on the point, and now it is held that if the plaintiff dismisses the complaint in the face of a pending motion for summary judgment, it will be assumed he did so because the motion had merit, making the defendant the prevailing party, even though the motion was never heard.
Once we filed the motion for summary judgment, the plaintiff was locked in. He did his best to oppose, but based on the strength of the deposition testimony, the motion was granted.
Opposing counsel no doubt hoped for a quick settlement, even though his case was too weak to even withstand a motion for summary judgment. Did it not occur to him, when Acme’s counsel was incurring significant expenses, that those expenses could someday fall to his client?
His client is now liable for over $150,000 in costs; an amount that is life-altering to most.
Take 998 offers seriously.
On the topic of costs, a discussion of Section 998 is in order. California long ago created a way to punish a party who does not settle a case when they should have. Section 998 of the Code of Civil Procedure provides that, not less than 10 days before commencement of trial, any party to an action “may serve an offer in writing upon any other party to the action to allow judgment to be taken in accordance with the terms and conditions stated at that time.” The offer is deemed withdrawn if not accepted before trial commences or within 30 days, whichever occurs first. This is referred to as a “998 offer.”
If a party makes a 998 offer, which is rejected by the opposition, and the rejecting party does not do better at trial than what was offered, they are punished for wasting everyone’s time by having to pay additional costs. The big one is expert witness fees. Experts are very expensive, and some matters require multiple experts.
Historically, 998 offers were fertile ground for gamesmanship. Indeed, it could be malpractice not to make a 998 offer, for a chance at triggering the cost shifting. If a plaintiff was seeking millions in damages, but there was some chance for a defense verdict, a defendant would make a 998 offer of $1. If the defendant prevailed, then the failure to take the $1 would trigger the cost shifting.
Case law eventually held that the offer had to be reasonable under the circumstances of the case, in order to trigger the cost shifting. Now, if the defendant thinks they will prevail, but still wants to trigger the cost shifting, they strive to make an offer just high enough to be arguably reasonable, but hopefully low enough that the plaintiff won’t accept.
But gamesmanship or not, when the 998 offer comes in, it must be taken seriously.
I was recently asked to consult on a case that was being appealed. The plaintiff had brought an action, seeking millions in damages. Given the nature of the action, it was very expert witness intensive, and the defense left no possible stone unturned, retaining some eight expert witnesses. During the litigation, the defense had made a 998 offer. The number was relatively large, but small in comparison to the damages that were being sought. Plaintiff and his counsel rejected it out of hand, concluding that plaintiff would certainly do better than the offer, and even if not, the court would conclude that the offer was not reasonable.
Plaintiff and his counsel were wrong on both counts. Judgment was entered in favor of defendant, and the court found the 998 offer was reasonable. The plaintiff’s error was to consider the offer only from his point of view. From that perspective, it was a lowball offer, but the defendant thought it had a good chance of prevailing, which turned out to be the case. From defendant’s perspective, the money offered was more than reasonable.
As a result, the court awarded defendant all the expert witness fees, which exceeded $300,000.
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