When a contract awards attorneys’ fees to one party in a contract action, California Civil Code § 1717 intervenes by a) directing the attorney’s fees to the prevailing party, regardless of the party awarded fees in the contract, and b) requiring the court to fix the attorney’s fees as an element of the costs of suit. But does § 1717 supplant the right to a jury trial in situations where attorney’s fees are sought as damages, instead of as costs? As the California Court of Appeal recently held in Monster, LLC v. Superior Court of Los Angeles County: No.

Background

In 2012, Dr. Dre, Jimmy Iovine (collectively, the founders of “Beats”) and Monster, LLC terminated a licensing agreement that granted Monster the right to manufacture and sell “Beats by Dre” headphones. Noel Lee, Monster’s founder, subsequently sold back the interest in Beats he had obtained pursuant to the now terminated licensing agreement. The termination and unit repurchase agreements governing these transactions contained broad release and attorney’s fees provisions.

Shortly thereafter, Apple acquired Beats for over $3 billion and Monster later filed a tort action against Beats alleging Monster had been fraudulently divested of its interest in Beats. Beats asserted waiver as an affirmative defense, contending Monster’s claims were barred by the release provisions in the parties’ agreements. Beats also cross-complained that Monster’s “sham” claims breached those release provisions and that Beats was damaged by being forced to expend money, time and resources to defend the allegedly meritless claims.

Beats was granted summary judgment on Monster’s claims, and the court set a trial solely on Beats’ cross-complaint. Beats then claimed that the damages it was seeking — attorney’s fees and costs in defending against Monster’s claims — should be resolved through noticed motion to the court under § 1717. Monster, on the other hand, asserted that the right to a jury trial attaches when a party seeks attorney’s fees as damages. The trial court agreed with Beats. Monster petitioned for a writ of mandate.

Section 1717 Does Not Abrogate the Right to a Jury

The Court of Appeal granted Monster’s petition and reversed. In doing so, the Court recognized a split of authority among the Courts of Appeal as to whether § 1717 applies when a defendant successfully asserts a contract containing a fees provision as a defense – currently under review in the California Supreme Court. But here, Beats also asserted affirmative contract claims, and attorney’s fees as damages. In such a case, the Court of Appeal held that nothing in § 1717 revokes the right to a jury trial.

Beats did not dispute that a right to jury trial generally exists for breach of contract claims, or that the right extends to assessment of damages. It contended, however, that § 1717 effectively withdraws that right when damages sought for breach of contract consist of attorney’s fees. In that case, Beats contended, the statute takes precedence.

The Court disagreed. For the Court, it was paramount that Beats sought to recover attorney’s fees as damages and not simply as the prevailing party on the dismissed fraud claims leveled against the company. This made the issue “whether the trial court was authorized to act as the trier of fact in determining the amount of fees Beats was entitled to recover as damages.” It was not.

Citing the Supreme Court of California’s decision that a trial court lacks authority to set attorney’s fees until a contract claim has been fully resolved, the Court explained that only after the claim is resolved and the prevailing party files a motion is a court empowered to set attorney’s fees. The Court distinguished this from assessing attorney’s fees sought as damages, which are an “element that must be proved to prevail on the merits of a contract claim.” Therefore, Beats was putting the cart before the horse: trying to assess fees prior to the final resolution of the contract claim, of which the fees were an element.

The Court further observed that even if it accepted the premise of Beats’ position, the statute would be invalid to the extent of its conflict with the California constitution’s jury trial right as to questions of fact.

The Court concluded that Monster has a right to a jury trial to determine the attorney’s fees owed to Beats.

So while the jury is still out on whether § 1717 applies to the successful assertion of a contract with a fees provision as an affirmative defense to other claims, parties should consider whether they are interested in a jury trial before affirmatively claiming attorney’s fees as damages on a contract action as a defensive strategy.