One of the most common questions I get from my clients is whether they can recover their legal expenses for having to defend a meritless case. The short answer is that in most cases, no.
That may seem unfair, especially when the Plaintiff’s claims are weak. Plaintiffs may file lawsuits just to get a quick settlement, hoping the defendant would rather settle on the front end instead of incurring costly litigation expenses.
The rule that each party is responsible for its own legal costs is known as the “American rule.” Under the American rule, litigants are required to pay their own attorney’s fees regardless of who wins the case. In contrast, the English rule requires the losing party to pay the prevailing party’s legal fees.
In Tennessee, the American rule has been the standard since at least 1948 when the Tennessee Supreme Court ruled that there is no inherent right for the prevailing party to have its legal fees paid by the opposing side. The American Rule’s history traces even further back than that.
The reason for the American rule is that parties should not be discouraged from going to court by the threat of incurring not only their own legal fees, but also the other party’s fees if they lose the case.
However, the American rule is only a default, and there are numerous exceptions which allow the prevailing party to recover its legal costs. Just as Tennessee law is clear that there is no inherent right to recover legal fees, Tennessee law also allows the winning party to recover its legal fees from the losing party if that right is provided by contract, statute, or principles of equity.
For example, many of the litigation cases I handle involve claims for unfair or deceptive practices in business transactions under the Tennessee Consumer Protection Act (“TCPA”). The TCPA allows the prevailing plaintiff to recover its legal fees if the defendant engaged in prohibited acts listed in the TCPA. The right to recover legal fees is not one-sided, as the TCPA also allows the defendant to recover its legal fees if the plaintiff’s claim was frivolous, without legal or factual merit, or brought for the purpose of harassment.
Also, many of the contracts I deal with in the litigation context have fee-shifting provisions. For example, I recently had a settlement agreement which contained a provision allowing the prevailing party in an enforcement action to recover its legal fees. Other common examples include mortgage agreements which require the mortgagee to pay legal costs incurred in foreclosure proceedings. Credit card agreements also require the credit card holder to pay legal costs incurred in collection efforts. These contractual provisions, which shift the burden of legal fees to the losing party, are generally enforceable.
There are also some grounds for requiring a party or its attorney to pay legal fees for abusing the litigation process. For example, a court may sanction a party or its attorney with the other side’s fees for filing papers for improper purposes, such as harassment; for making unwarranted claims or defenses in pleadings; or for making factual allegations that have no evidentiary support. A court may also award legal fees against a party or its attorney for abusing the discovery process during litigation.
(In a recent case, however, the Tennessee Court of Appeals held that the general sessions court does not have the authority to impose attorney fees against a party as a sanction for bringing a frivolous action. In that case, the court held that unlike courts of record, the general sessions court lacked any statutory authority or inherent authority to award legal fees for improper behavior.)
Business litigants, whether plaintiff or defendant, should always be aware of the potential for getting tagged with the other side’s legal fees. Though Tennessee follows the American rule, which requires each side to bear their own litigation costs, there are numerous exceptions to that rule. These fee-shifting, prevailing party rules are found in numerous statutory and contractual provisions, and in most cases they are enforceable. Any litigation strategy should always consider the chance for increased exposure by fee-shifting provisions.