Fees as Damages

Fees as Damages

Rule 54(d)(2)(A) makes the motion the default way to claim attorney’s fees, but it exempts any claim where “the substantive law requires those fees to be proved at trial as an element of damages.”¹ An element of damages is a component of the loss that the plaintiff must prove to the fact-finder in order to recover, in the way a plaintiff proves lost profits or the cost of repair. The exemption therefore sorts fee claims into two groups. In the first, the fees are the injury the suit seeks to redress, and the claimant pleads and proves them at trial like any other item of loss. In the second, the fees are a consequence of winning, and the claimant seeks them by post-judgment motion on the track described in the preceding section.

The sorting looks to the role the fees play in the cause of action, and it ignores the source of the right. A statute and a contract can each create a right to fees, and for each the question is the same: do the fees measure the very harm being compensated, or do they reward the party that prevails? The answer fixes the procedure, the deadline, and the evidence the claimant needs. A claimant who guesses wrong can lose the fees altogether, as the last subsection shows. The first subsection takes up the damages group, because the rule’s exemption names it and it is the narrower of the two.

Fees That Are Damages

A contract in which one party promises to reimburse the other for the legal fees its own breach causes is the clearest case of fees as damages. The fees are then an item of loss that the breach produced, like a repair bill or a lost sale, and the plaintiff proves them as it proves every other component of the loss.² Because the fees belong to the merits of the claim, the ordinary post-judgment procedure does not fit them.

Trial is the right place for such fees because of what they are inside the lawsuit. A defendant sued for breach may contest whether each part of the claimed loss exists and how large it is, through pleadings, discovery, cross-examination, and a jury where one is available. A judge who resolved fees of this kind on a motion after judgment would pull a piece of the merits recovery out of that process. The Advisory Committee’s 1993 Note to Rule 54(d)(2) draws the same line, and the Supreme Court quoted it in Ray Haluch Gravel Co. v. Central Pension Fund: the motion procedure “does not . . . apply to fees recoverable as an element of damages, as when sought under the terms of a contract; such damages typically are to be claimed in a pleading and may involve issues to be resolved by a jury.”³ A fee claim that exists only because a party won has none of these features, and the motion procedure was built for that kind of claim.

Ray Haluch shows that the classification question arises in real litigation. The Funds sought fees under ERISA and under a collective bargaining agreement provision, and the district judge, before deciding the merits, observed that a fee motion could typically follow a judgment for the plaintiffs but that “attorney’s fees is part of the damages potentially here.” The judge let the Funds choose between submitting fee proof with their proposed findings of fact and conclusions of law and waiting to see whether the court found for them before petitioning.⁴ The Supreme Court did not decide how those fee claims should have been litigated. It reasoned that, however they should have been litigated, the Rules remove any concern about piecemeal appeals in the vast range of cases where fees are claimed by motion, including some in which a contract authorizes the fees.⁵ The judge’s hesitation still shows that classification is a live question whenever a contract is the basis for fees.

Kraft Foods North America, Inc. v. Banner Engineering Corp. walks through the classification step by step. Kraft sued Banner for breach of an express warranty, and the contract’s indemnification clause was broad. Applying Virginia’s plain-meaning rule to that language, the court held that Kraft could recover fees under the clause because they arose from Banner’s breach.⁶ The court then asked what the clause did. It did not award fees to a prevailing party; it provided for them as an element of damages. The fee question was therefore not collateral to the merits, and Kraft had to prove its fees at trial.⁷ Kraft offered no evidence of a contingency fee arrangement or of reasonable fees, and the court awarded none.⁸ The consequences of that omission are the subject of the last subsection.

A contractual fee clause does not by itself place fees on the damages side. Kraft acknowledged that fees will not always be an element of damages where a contract provides for them, and it named a clause that awards fees to the prevailing party as the primary exception.⁹ Ray Haluch points the same way. It noted that the motion route reaches some cases in which a contract authorizes the fees, and that fee-shifting provisions differ in whether they treat the fees as part of the merits.¹⁰

What sorts the two groups is what the clause pays for. A clause that reimburses a loss caused by the other side’s breach makes the fees the loss itself. A clause that hands fees to whichever side wins pays for victory, and those fees have no existence as a claim until the merits are decided. Because the rule asks what “the substantive law” requires, the court construes the clause under the law that governs the contract, as Kraft did when it applied Virginia’s plain-meaning rule to the indemnity language.¹¹

When a fact pattern quotes a fee clause, ask first what the clause pays for. Two shortcuts fail: treating every contractual fee clause as damages, and treating every fee clause as a matter for post-judgment motion. Each skips the question of what the clause compensates. A claimant who sees that the fees are damages must also see the consequence for pleading and proof: the fees belong in the complaint and in the trial evidence, because a later motion will not ordinarily supply them.

Prevailing-Party Fee Provisions

A fee provision that rewards the prevailing party stays on the motion track, because it falls outside the rule’s description of fees proved “as an element of damages.”¹³ Whether the provision appears in a statute or a contract, it gives fees to the side that wins, so entitlement depends on a result that does not exist until the merits are decided. A plaintiff cannot sensibly plead a loss that arises only if the plaintiff prevails, and a jury cannot value that loss before the verdict that creates it. The fees are therefore collateral to the merits, and a motion after judgment is the procedure suited to a claim that matures only when judgment is entered.

Contract clauses might seem to belong on the other side of the line, since a contract is the usual example of fees as damages. Ray Haluch shows why that assumption fails. The Court found unpersuasive the premise that contractual fee provisions are always a measure of damages, because such provisions often award fees to prevailing defendants.¹⁴ A winning defendant’s fees are not loss from any wrong the plaintiff was found to have done; they exist only because the defendant won. A clause that pays the winner, whichever side that turns out to be, rewards victory, and Rule 54(d)(2) governs it. The Court spoke in a dispute about finality and appeals and did not decide how the Funds’ own fee claims should have been litigated, but it recognized that the motion route reaches some cases in which a contract authorizes the fees.¹⁵

The rule’s reach is broad. A treatise the Court cited remarks that Rule 54(d)(2) applies “regardless of the statutory, contractual, or equitable basis of the request for fees,” with a single exception for fees that are an element of damages under the substantive law governing the action.¹⁶ The variety of fee provisions explains why the source of the right cannot do the sorting. Some provisions treat fees as part of the merits and some do not, some run to both sides and some to one, and some depend on prevailing-party status while others do not. The Court listed those variations in explaining why finality should turn on the character of the issue left open after the merits ruling, and not on distinctions among provisions.¹⁷ The Funds’ own papers show how hard the source can be to read: their notice of motion cited only ERISA, and the contractual basis surfaced only in an oblique reference in an accompanying affidavit.¹⁸

A shortcut that sorts by source, sending statutes to motion and contracts to trial, fails on the contract side. The indemnification clause in Kraft covered fees arising from a breach of express warranty and provided for them as an element of damages, so the fees were not collateral to the merits and had to be proved at trial.¹⁹ The same opinion acknowledged that fees will not always be damages where a contract provides for them, and it named a clause awarding fees to the prevailing party as the primary exception.²⁰ Within contracts alone, then, one clause sends fees to trial and another sends them to motion, so the source cannot be what sorts them. One variable does: whether the provision compensates a loss that a wrong caused or rewards the winner.

An essay built on this distinction will describe a contract, quote a clause, name a winner, and ask whether the fees were properly claimed after judgment.

The cost of guessing wrong about the category comes next.

Losing Fees by Silence

Rule 54(d)(2)(A) exempts a fee claim from the motion track when the substantive law requires the fees to be proved at trial as an element of damages, and the exemption has a price.²² Fees that belong to the merits must be proved with the merits, in the same trial and by the same kind of evidence as any other component of loss. A claimant who rests without offering that evidence has left an element out of the case, which is a different failing from choosing the wrong procedure. The consequence follows the ordinary logic of damages: where fees are an element of damages, the court should deny them if the claimant fails to carry its burden of proof at trial.²³

The door closes because of what a trial is for. A plaintiff who proves a breach but offers nothing on lost profits cannot return after the verdict and prove lost profits, and fees that form part of the damages get the same treatment. Were the rule otherwise, a claimant could wait to learn whether the court found liability and offer fee evidence only on winning, taking a free look at the result before committing to the proof. The defendant, who had prepared to contest the amount and reasonableness of fees on the trial record, would face a second round of proof on an issue it had reason to think closed. Opponent and court may treat the tried issues as finished, and the bar on late fee proof is the price of classifying fees as merits evidence.

Kraft shows the consequence. The court held that Kraft could recover fees under the broad indemnification clause because they arose from Banner’s breach of an express warranty, yet it denied them because Kraft failed to prove a contingency fee arrangement or otherwise present evidence of fees at trial.²⁴ Kraft then asked for permission to prove its fees if the court should find it entitled to them. The court refused: Kraft had its opportunity under Rule 54 to prove its fees at trial and chose not to, so it lost the opportunity and none were awarded.²⁵ The request was the free look at the result described above, since Kraft wanted to commit to fee proof only if the court first found the fees recoverable. Entitlement to fees under the clause carried no entitlement to a later chance to prove them.

The way around the bar is narrow, and Kraft marks the path. The court observed that the parties could have agreed to litigate the matter of fees after the trial on the breach of warranty claim, but did not.²⁶ The postponement must therefore be arranged before the merits are decided. In Ray Haluch the district judge, before ruling on the merits, noted that fees were potentially part of the damages and offered the Funds a choice: submit fee proof with their proposed findings, or wait to see whether the court found in their favor and file a fee petition later.²⁷ The Funds first chose to submit fees with their findings, then changed course and asked for more time to file their fee request.²⁸ The Supreme Court did not decide how those fee claims should have been litigated, so the episode shows what an advance arrangement looks like and does not show that every such arrangement is proper.²⁹ What separates it from Kraft is timing and notice. The later fee submission was set up before anyone knew the merits result, and both sides knew the fee evidence would arrive separately.

An essay stem on this point quotes an indemnity clause, reports that the plaintiff won at trial, and then has the plaintiff ask for fees afterward. Two questions resolve it. First, does the clause make the fees the loss being compensated or a reward for winning? That answer sorts the claim as damages or as a motion claim under the earlier subsections. Second, once the fees are damages, did the parties or the court arrange before the merits decision to try them later? If the first answer says damages and the second says no, the claim is gone, and a post-judgment request does not revive it.