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Accounting for Attorneys' Fees: Why the 'American rule' requires that each side in a case almost always pays its own

Written by: Scott H. Harris

Published in NH Business Review (9/30/16)

“Jack, as my lawyer, you’re telling me that we’ve spent three years and a million and a half in fees and costs, prevailed at trial and on appeal, and the other side has to pay $20,000 in ‘costs,’ but has no responsibility to pay my attorneys’ fees? We won and we have to eat the attorneys’ fees? Don’t get me wrong you’ve done a magnificent job, but really?” 

Not an unreasonable position for a client to take, right? Having prevailed in protracted litigation, the winner often feels like the outcome was clear from the start. Of course, if victory was always assured, then the substantial sums spent on attorneys’ fees must have been for naught. Shouldn’t the party who necessitated that expenditure be made to pay the cost? 

Putting aside that hindsight can sometimes produce an inaccurate assessment of the facts, the “American rule” on the award of attorneys’ fees is that each side pays their own. There are few exceptions.

Although in the common parlance “attorneys’ fees” are a “cost” of litigation, they are not what is considered a recoverable “cost.” Recoverable costs consist of items like filing fees, stenographer charges (at around $800 per deposition, not an insubstantial expense), expenditures to compel witnesses to attend trial and expert witness fees. 

The philosophy behind the American rule is that parties should be encouraged to settle their disputes in court. The right of citizens to access the courts with their disputes is one of the principles upon which our democracy is founded. Were litigants worried about having to pay both their and their opponent’s attorneys’ fees, they might be discouraged from fully prosecuting or defending their claims and defenses.

Claims by injured parties would be especially compromised, as many such individuals are already financially compromised by their injuries. While some might argue that discouraging litigation by whatever means is a good thing, we as a country subscribe to the belief that the resolution of disputes on their merits in a public forum is the better approach. 

There are exceptions to the American rule. One is when the parties have entered into a contract or other written agreement (like a condominium association agreement) that specifies that the prevailing party in any litigation is entitled to recover their attorneys’ fees. With such an agreement, the courts will likely require the loser to pay the prevailing party’s attorneys’ fees. This exception is one to have in mind when negotiating or otherwise binding oneself to an agreement.

A second frequent exception occurs when a statute provides for a litigant to recover their attorneys’ fees and costs as part of their remedy. This is often the case in employment discrimination, civil rights and some whistleblower cases in which the applicable statute is designed to make the harmed party whole and to otherwise encourage such individuals to prosecute their claims. Consumer protection, unfair business practices, and many intellectual property statutes also often specify that injured parties, should they prevail, are entitled to recover their attorneys’ fees should they prevail. Where attorneys’ fees are awarded pursuant to a statute the ability to receive such an award is often unilateral, meaning that it is the putatively injured party who can seek an award of fees and costs if they prevail, not whichever party prevails. 

Another exception to the rule comes in those cases in which one or the other party has been forced to defend or prosecute a known right. In other words, when it can be proven that no reasonable plaintiff or defendant would, respectively, bring or defend the case, then the prevailing party can recover costs. Although many litigants believe their adversary’s claims to be without merit, there are very few cases that actually fit into this category. 

In analyzing the merits of filing a lawsuit, the prudent party assumes that in the absence of one of the above exceptions the attorneys’ fees they incur are a sunk cost that will not be recovered. In that event, any recovery must compensate for that cost if the lawsuit is to be worthwhile as a financial matter.  

Scott Harris, a director in the Litigation Department of McLane Middleton, be reached at 603-628-1459 or [email protected].

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