Plan Recovers (Reduced) Legal Fees After Participant Argues Invalid Legal Position
Coordination of Benefits Employee Benefits Series THOMPSON July 2011 | VOL. 19, No.3
We’ve seen many cases where a self-funded ERISA health plan successfully recovers the benefits it paid from tort settlement proceeds, but we haven’t seen many cases where the plan also recovers its own attorney’s fees. American courts generally follow the practice that each party to a lawsuit bears the costs it incurs, whether it wins or loses the case. However, it’s not impossible for a successful litigant to recover its own legal fees from its unsuccessful opponent.A recent case illustrates how a court goes about determining whether the successful party is entitled to recover legal costs it incurred, and if so, how much of the fees it incurred are recoverable. The case is Electric Energy, Inc. v. Lambert, 2011 WL 1883986 (W.D. Tenn., May 17, 2011).
The Facts
Jack Lambert was injured in a motor vehicle accident, and his self-funded ERISA health plan paid almost $124,200 for his medical expenses. For $650,000, Lambert settled his claim against the other driver, whose liability insurer negotiated the settlement and paid that amount. Lambert’s health plan incurred attorney’s fees in the amount of slightly more than $44,700 in its effort to successfully recover the $124,200 it paid for Lambert’s medical care. It sought to recover those fees from the tort settlement proceeds.
The Decision
The 6th U.S. Circuit Court of Appeals had adopted a five-factor test to assess whether a district court can properly exercise its discretion in awarding fees to the prevailing party to a lawsuit. Those 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 attorney’s fees;
3) the deterrent effect of an award on others 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.
The court went on to note that:
No single factor is determinative, and thus, the district court must consider each factor before exercising its discretion. Likewise, because they are not statutory and “typically not dispositive,” the factors are “considerations representing a flexible approach.” There is no presumption that attorney’s fees will be awarded to the prevailing party.
Applying these five factors to the case before it, the court held that the balance of factors favored an award of attorney’s fees in this case. It explained how each of those factors applied to reach that result, as follows:
1) Lambert argued that the Illinois common-fund rule applied in this case, while it was well established that the common-fund rule conflicts with the plan language and cannot apply because of ERISA preemption. Previous cases in the 6th Circuit held that “pursuing arguments even after their rejection by the court” indicates bad faith. The court held that Lambert was “somewhat culpable based on his continued assertion of untenable legal arguments.”
2) Lambert had the ability to satisfy the award of attorney’s fees to the plan since he recovered $650,000. As a result, he had enough of his net recovery after allowing for his own attorney’s fees and reimbursement of about $124,200 to the plan to easily pay the plan’s attorneys.
3) An award in this case would deter other persons in similar circumstances from litigating the same issues in the future.
4) The plan fiduciary had the duty to seek, and successfully did seek, to confer a common benefit on all plan participants and beneficiaries.
5) Lambert’s legal positions had less relative merit than the plan had. The court found Lambert’s reliance on “inapposite case law” to be without merit since he failed to address any of the contrary legal authority on which the plan relied.
Having determined that the plan was entitled to reimbursement for its legal fees, the court then turned to determine whether the amount of the fee was reasonable, and the court reduced the recoverable legal fees to about $35,800. The court then went on to rule that it did not agree that counsel for Lambert behaved so unreasonably or badly that he should have to contribute to the award of attorney’s fees to the plan.
Implications
The lesson of this case is that the attorney for the plan participant should not argue for a legal position before a trial court that the appellate court has already determined to be invalid. That seems to be the main reason the court awarded the plan its attorney’s fees.
One might conclude that the court should have required Lambert’s attorney pay some or all the plan’s legal fees, since it was his futile arguments that apparently caused the plan’s attorney to devote more time to the case. After all, Lambert was not an attorney, and so he could not have persuaded his attorney to make those arguments or even know enough to try to talk him out of arguing improper points.
On one hand, Lambert’s attorney did get a very favorable result for his client. On the other hand, he probably should have known that his argument was contrary to the trend of court decisions in several jurisdictions. He would have saved his client almost $36,000 by not making that argument. As we have seen in the cases discussed in this Newsletter, an attorney’s legal strategy can fail (or backfire), and when it does, the client is the one who suffers a loss. Only in movies and novels do attorneys win all their cases and never make mistakes of judgment.
When all is said and done, Lambert ended up with a very good result. He pocketed something in the neighborhood of $284,000 for his pain and suffering and other out-of-pocket expenses. That’s about what he would have received after paying his attorney’s fee (assuming it was the usual one-third of the $650,000 settlement), reimbursing the plan for the $124,200 or so that it paid for his medical expenses, and the $36,000 or so that went toward the plan’s attorney’s fees. That’s not too bad compared to the results in the other cases discussed in this Newsletter.
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