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Attorneys’ fees reduced by half where post-trial settlement much lower than prior rejected offer

By Lorene D. Park, J.D.

In reducing the attorneys’ fee lodestar by half, a trial court did not err in considering the fact that an army veteran rejected a pre-trial offer to settle his Rehab Act claims for $300,000, and then agreed to a much lower post-trial settlement with a $60,000 payout. Affirming the fee award, a Sixth Circuit panel explained that accepting the lower offer was one measure of success (or lack thereof), that Rule 68 did not conflict with the fee-shifting statute at issue, and that the reduction was reasonable (McKelvey v Secretary of United States Army, September 18, 2014, Sutton, J).

The Army veteran lost his right hand and sustained other injuries when a roadside bomb exploded. Two years later, he moved back to Michigan and took a civilian position with the Army as an operations specialist. At his new job, he received only menial assignments. He was also constantly taunted about his war-related injuries by coworkers. He eventually reached a breaking point and resigned in 2007. He subsequently sued the Army under the Rehab Act.

Pre-trial settlement offer. Attempting to settle the claim, the army offered to reinstate him in a new position that was equivalent to his old job, then offered $300,000 to boot. The parties negotiated but did not settle. The employee’s hostile work environment and constructive discharge claims went to the jury, which found in his favor and awarded nearly $4.4 million in front pay. The district court vacated the award, however, and the Sixth Circuit affirmed in part, precluding front pay and holding that reinstatement was the proper remedy under the Rehab Act.

Attorneys’ fees. One year after remand, the parties settled on terms that included reinstatement and a $60,000 payment to the employee. The district court award attorneys’ fees to the employee as the prevailing party, calculating a lodestar of $244,000 but cutting the award in half because the employee incurred most of his fees after he rejected the more favorable pre-trial settlement offer of unconditional reinstatement and $300,000. The employee appealed a second time.

As an initial matter, the Sixth Circuit rejected the employee’s argument that the district court abused its discretion by reducing the award based on the lack of success on some of his claims. That mischaracterized the court’s analysis, which disavowed a reduction based on the percentage of unsuccessful claims.

Effect of rejected offer. Also rejected was the employee’s claim that the court erred by reducing the lodestar based on his rejection of the $300,000 settlement offer. Such a rejection was well within the “broad constellation of factors a trial court may consider” in determining the amount of fees to award, if any. Degree of success was a critical factor in determining a reasonable fee and, to the appeals court, “[f]ew, if any, reasonable litigants would call a monetary judgment that comes in well under the money offered to settle the case a success.” Also, refusing a reasonable offer of settlement promotes few public interests when a plaintiff ultimately receives a less favorable recovery after trial. Nonetheless, hindsight has a way of making things look clearer, the appeals court noted, and just because a plaintiff ends up with less than originally offered does not mean fees should be reduced. “The critical point is that this potential measure of lack of success is one factor among many that a district court may consider” in exercising its discretion.

Effect of Rule 68. The employee also argued that Rule 68’s detailed provisions for shifting costs and fees after a rejected settlement offer preclude courts from considering such offers in applying fee-shifting statutes. Not so, said the Sixth Circuit. First, there is no conflict between Rule 68 and the fee-shifting statute here. “Rule 68 requires fee reductions in some settings after a formal offer of judgment; the fee statute permits fee reductions for all manner of reasons, including if a prevailing party could have won more had he settled the case. The one is automatic; the other turns on discretion.” Nor did the district court apply the fee reduction in a way that made Rule 68 superfluous. Rule 68 would have required the court to impose a three-quarters reduction (the total amount of fees incurred after the pre-trial offer was rejected) but the court imposed a 50-percent reduction. It thus did not sidestep the rule’s formalities and impose the same deduction on the basis of the statute.

Second, the language of Rule 68 does not purport to occupy the field of cost and fee reductions, explained the appeals court, and the norm is that matters left unaddressed are “presumably left subject to” another law. Rule 68 says nothing about whether spurned settlement offers, combined with other factors, warrant fee reduction. “When the conditions of Rule 68 have been satisfied, the Rule controls. Otherwise, the normal rules for awarding fees apply, including the discretionary authority of the district court to award fees and to consider a wide range of factors in doing so,” wrote the court. It further noted that the language of Rule 68 provides other indications that it does not remove spurned settlement offers from the conversation about attorneys’ fees when a defendant does not invoke the Rule, including the fact that Rule 68 applies to offers of judgment, not settlement offers.

Fifty-percent reduction was reasonable. The appeals court also found that the 50-percent reduction in the lodestar was well within the range of reason, especially considering the prior cash settlement offer was five times what the employee ultimately received in back pay, and that three-quarters of his attorneys’ fees accrued after he rejected that offer. For these reasons, the fee award was affirmed.