Sixth Circuit Affirms Fee Award to Employer in Non-Compete Case Without Prevailing on Final Judgment

Yesterday, the Sixth Circuit Court of Appeals affirmed an award of $72, 183 in attorney’s fees to an employer which successfully obtained a preliminary injunction against former employees who had begun working for a competitor in violation of their non-competition agreements.  Kelly Services, Inc. v. De Steno, No. 18-1118 (6^th Cir. 1-10-19).   The Court rejected the employees' arguments that they should not be liable for the fees without a judgment on whether their agreements were enforceable and without a jury trial on the amount of fees.   Their agreements awarded the employer fees incurred in enforcing the agreement and did NOT require the employer to actually prevail before obtaining a fee award.    In other words, the employer was entitled to attorney’s fees regardless of whether the non-compete clauses were actually enforceable and regardless of whether it ultimately prevailed on the merits.  The Court affirmed, but noted that the reasonableness of the fees might depend on the reasonableness of the enforcement efforts.  In any event, it would be “highly impractical” to ask a jury to rule on attorney’s fees earned in a pending action, so a jury trial was not required under the Seventh Amendment.

According to the Court’s opinion, the defendant employees each signed a non-competition agreement which precluded them from working for a competitor for one year after leaving employment with the plaintiff employer. Their contracts also contained a provision which provided in relevant part that:

I further agree to pay any and all legal fees, including without limitation, all attorneys’ fees, court costs, and any other related fees and/or costs incurred by the Company in enforcing this Agreement.

When the employer learned that they were working for a competitor in violation of their non-competition agreements, it filed suit for breach of contract and breach of the duty of loyalty and sought damages, including attorney’s fees.  A preliminary injunction hearing was held and the employees preliminarily enjoined from working for competitor in violation of their non-compete agreements.   The Court did not lift the preliminary injunction until approximately four months after the one-year period in the non-compete had passed.  The parties subsequently both moved for summary judgment.  The employees argued, among other things, that the non-compete agreements were not enforceable and they were entitled to a jury trial under the Seventh Amendment to determine their financial liability for, and the reasonability of, the attorney’s fees.  The employer argued that it had already obtained all of the relief that it sought (i.e., to keep the employees from working for the first year after their employment for a competitor)  and were, thus, automatically entitled to an award of attorneys’ fees for obtaining enforcement of the agreement.  Indeed, the employer asserted that the contracts did not require the employer to prevail on the merits in order to be entitled to attorneys’ fees when seeking to enforce the agreement.  The trial court ruled in favor of the employer and rejected the request for a jury trial on the amount of fees.

The contracts by their terms do not require a final determination of liability in favor of [the employer] as a condition for the award of fees.  Unlike numerous similar agreements, these contracts do not employ the words “prevailing party,” nor by their literal language do they require a final determination of liability.  In fact, as the district court correctly noted, defendants argued below that these provisions were not prevailing party provisions.  . . .

In reasoning that a final determination of contract breach was not required, the district court may have stated too freely that the contract required former employees to pay attorneys’ fees “if [the employer] merely sought to enforce the contracts.”  De Steno, 2017 WL 4786105, at *2.  One can imagine cases where efforts to “seek enforcement” could for instance be unreasonable, made with little or no basis, or made for purposes of oppression or harassment, or could be simply unsuccessful.  A court might read the words “reasonable . . . fees . . . involved in enforcing” and “fees . . . incurred . . . in enforcing this Agreement” not to extend to such situations.  We do not address the possibility of such a limited interpretation, however, because the record is clear that none of these situations is present in this case.  The district court entered a preliminary injunction that resulted in substantial relief, based on a determination that [the employer] had shown a strong likelihood of success on the merits.  Indeed, defendants withdrew their appeal from the grant of that relief. . . .

The Court rejected the Seventh Amendment argument on the grounds that calculating attorney’s fees for the pending case is an equitable power better left to a judge, as previously explained by the Second Circuit:

Accordingly, although plaintiff had the right to a jury decision on whether defendants should recover attorneys’ fees, plaintiff did not have the right to a jury decision on a reasonable amount of attorneys’ fees. Unlike the client in Simler v. Conner, [372 U.S. 221 (1963),] no party here claimed that the contract directed the amount of attorneys’ fees to be awarded by specifying a percentage of an ascertainable sum. Therefore, the district court, in its equitable role, should have determined a reasonable fee.

The Court found it would be “highly impractical” to require a jury to determine a reasonable amount of attorney’s fees.  The trial would become a trial about the cost of the trial itself.  It would also be impractical to require a jury to “look behind the curtain” and determine the proper cost of pretrial motions, etc. before the trial was even complete.  Therfore, it distinguished prior cases where juries ruled on the amount of attorneys’ fees to be awarded concerning disputes which had already been concluded (as in indemnification cases).  In this case, the Court also found that summary judgment was properly granted to the employer on the liability question, so it did not need to be submitted to a jury.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit: Denial of LTD Benefits, Attorneys Fees and Remand

This morning, the Sixth Circuit Court of Appeals affirmed a trial court decision that the denial of LTD and 401(k) benefits were arbitrary and capricious and that the plaintiff was entitled to attorney fees as a prevailing party under ERISA. However, the remedy for the denial of benefits was not the award of benefits, but rather, remand to the plan administrator to re-evaluate its prior invalid decision. Burge v. Republic Engineered Products, Inc., No. 10-3124 (6th Cir. 8/3/11). The plaintiff injured her wrist in a fall, subsequently became depressed and left work in mid-January 2006. A variety of physicians and psychiatrists issued conflicting decisions about the existence, extent, and scope of her medical and emotional condition. There was some evidence of malingering and exaggeration of symptoms. The employer terminated receipt of LTD on the grounds that there was no evidence of “total disability.” Her position was then eliminated in August 2006. Problem was, the employer’s LTD plan did not require evidence of total disability and there was no discussion in the decision about the plaintiff’s ability to perform any work. Accordingly, the trial court concluded on appeal that even though the plan vested discretion in the plan administrator, the decision had been arbitrary and capricious for relying on requirements that were not contained in the LTD plan, by not following a methodical appeal process, by reverting between the LTD and STD plans, by refusing to consider all evidence of her wrist condition and by considering only her medical status without also considering her ability to perform any gainful employment. The court also awarded attorney fees to the plaintiff as a prevailing party. On appeal, the Sixth Circuit affirmed the trial court on the merits and award of attorney fees, but found that the proper remedy for the benefit claims was to remand to the employer to make a proper decision.

“Generally, when a plan administrator chooses to rely upon the medical opinion of one doctor over that of another in determining whether a claimant is entitled to ERISA benefits, the plan administrator’s decision cannot be said to have been arbitrary and capricious because it would be possible to offer a reasoned explanation, based upon the evidence, for the plan administrator’s decision.” The employer was not required to consider evidence of vocational experts and the plaintiff’s receipt of SSA benefits was only one factor to be considered.

Nonetheless, the employer made an arbitrary decision when it failed to follow a methodical appeal process:

Specifically, Republic (1) failed to follow a stated, methodical appeal process and inconsistently applied and reverted between the STD and LTD Plans; (2) applied a standard of “total disability” that did not appear in the Plan; and (3) failed to consider evidence of Burge’s actual wrist condition. . . . [The employer] never “reasoned from [the plaintiff’s] condition to her ability to perform her occupation. There is no statement or discussion of [plaintiff’s] occupational duties or her ability, or inability, to perform them.”

In Elliot, we held that “medical data, without reasoning, cannot produce a logical judgment about a claimant’s work ability.” Id. at 618. There, as here, we noted that the plan administrator’s two denial letters contained “mere recitation[s] of medical terminology employed by various physicians in their diagnoses of [the claimant’s] condition, without any reasoning as to why those diagnoses would permit her to function in the workplace. A court’s decision that merely said ‘affirmed’ or reversed’ could not be considered ‘reasoned.’ Similarly, [the plan administrator] cannot be said to have given a reasoned denial of the [claimant’s] claim . . . .” Id. at 619. Even assuming that the appropriate definition of disability is that used in the STD Plan, which requires the claimant to be unable to engage in her regular occupation, rather than the LTD Plan, which is broader, none of [the employer's] benefits denial letters analyzed whether [the employee] would be able to perform her regular occupation in light of the restrictions imposed on her by the physicians who examined or treated her and in view of her complaints that [the employer] did not accommodate these restrictions.

A trial court is empowered to either award benefits or to remand to the plan administrator to make a proper determination following a flawed decisionmaking process. In light of the question in this case about the plaintiff’s malingering and exaggeration of symptoms, the Sixth Circuit found remand to be a more appropriate remedy than simply awarding the plaintiff LTD benefits.

Even though the plaintiff ultimately may not be entitled to LTD benefits, she would still be entitled to attorney fees as a prevailing party under ERISA. The trial court was not arbitrary in awarding her fees after ruling on the merits of her claim in that the employer’s underlying decision was flawed.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Supreme Court: Even Partially Prevailing Parties Can Win Attorneys Fees in ERISA Litigation

On Monday, an almost unanimous United States Supreme Court held that certain parties can be awarded attorney fees from the opposing party even if they are not "prevailing parties" in the litigation. Hardt v. Reliance Standard Life Ins. Co., No. No.09-448 (5/14/10). In that case, the plaintiff sued the defendant insurance company when it denied her LTD benefits for carpal tunnel syndrome. The trial court found that she had presented compelling evidence that she was totally disabled and that the defendant had acted on incomplete medical evidence. Instead of granting her summary judgment, however, the trial court remanded the case to the insurance company to reconsider its prior decision within 30 days. Not surprisingly under the circumstances, the defendant reversed its decision and awarded the plaintiff benefits. The trial court then awarded her attorney fees under ERISA §1131(g)(1). The Fourth Circuit Court of Appeals reversed on the grounds that the plaintiff had never obtained an enforceable court judgment and, thus, was not a "prevailing party." With Justice Thomas writing the majority opinion, the Supreme Court reversed on the grounds that the specific statutory provision permits the trial court discretion to award attorney fees to either party, not merely prevailing parties. Justice Stevens concurred separately.

The insurance company initial denied the LTD claim based on its evaluation of the results of her functional capacity evaluation (showing she was capable of some sedentary work). After she appealed, it reversed itself and found she was totally disabled from her current occupation (clerical) and could have benefits for 24 months. In the meantime, the plaintiff was diagnosed with "small-fiber neuropathy, a condition that increased her pain and decreased her physical capabilities over the ensuing months." She applied for and received social security benefits on the grounds that she was completely disabled from working. The insurance company notified her that her LTD benefits were about to run out and demanded repayment for about $14K because of her receipt of SSA benefits. She appealed and provided updated medical information. The insurance company again asked for a capacity evaluation, but did not ask the evaluator to consider her neuropathy problems. The evaluators requested two evaluations and complained that the plaintiff was refusing to try out of fear of pain. The defendant then hired a physician and vocational counselor to resolve her appeal, but the physician concluded that she might improve after reviewing only some of her medical records and the counselor opined that there were 8 jobs she was capable of performing based on her 2003 medical condition (before the neuropathy was diagnosed). Thus, the insurance company terminated her benefits in 2006.

After exhausting her administrative remedies, the plaintiff filed suit in federal court. The court denied cross-motions for summary judgment. However, the court found compelling evidence that the plaintiff was completely disabled and the defendant had failed to properly review her medical records. Thus, it remanded the case for 30 days to the insurance company to reconsider its prior decision. After the insurance company reversed itself again, the plaintiff requested to be awarded attorney fees.

ERISA's section 1132(g)(1) provides: "In any action under this subchapter (other than an action described in paragraph (2)[i.e, recovering delinquent contributions on behalf of a multi-employer plan]) by a participant, beneficiary, or fiduciary, the court in its discretion may allow a reasonable attorney's fee and costs of action to either party." Based on the plain text of the statute, the Supreme Court found that it was erroneous to limit the recovery fees to a prevailing party and, instead, held that it is within the trial court's discretion to award fees "as long as the fee claimant has achieved 'some degree of success on the merits.'" Unlike §1132(g)(2) which limits fees to a party who obtains a judgment for the plan, there is no mention of "prevailing party" in that section of the statute.

To guide courts faced with this decision in the future, the court then analyzed when it would be appropriate to award attorney fees under §1132(g)(1). The basic principle of the "American Rule" is that each party pays their own attorney unless provided otherwise by statute or contract. Statutory standards vary widely from prevailing party, to substantially successful litigant, to when appropriate to the court's discretion. The Court found the most analogous situation to involve a similar statute under the Clean Air Act which permits an award of fees "when appropriate." Even in that situation, the Court found that Congress did not intend to completely abandon the American Rule and would still require some success by the party to obtain its aims in the litigation before it would be awarded fees. Thus, fees are available to partially prevailing parties who achieved some success.

A claimant does not satisfy that requirement by achieving "trivial success on the merits" or a "purely procedural victor[y]," but does satisfy it if the court can fairly call the outcome of the litigation some success on the merits without conducting a "lengthy inquir[y] into the question whether a particular party's success was 'substantial' or occurred on a 'central issue.'"

In this case, the plaintiff convinced the court that the defendant insurance company had failed to comply with ERISA in reviewing her request for benefits. Summary judgment in her favor was only denied in order to give the insurance company another chance to evaluate her application – something it had already done several times before she initiate the litigation. Only because of the trial court's instruction did the insurance company reverse itself. Thus, the plaintiff achieved victory even without a court order.

These facts establish that [the plaintiff] has achieved far more than "trivial success on the merits" or a "purely procedural victory." Accordingly, she has achieved "some success on the merits," and the District Court properly exercised its discretion to award [the plaintiff] attorney's fees in this case.

No further remand was deemed necessary.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.