In contrast to the “loser pays” principle in England and other countries, in the United States the American Rule posits that each party, successful or not, bears its own attorneys fees. That rule can be altered by contract, and professional contracts frequently provide that one of the contracting parties will undertake to indemnify or reimburse the other for any losses, including reasonable attorneys’ fees caused by a breach of the contract.

The New Jersey Supreme Court recently issued a decision to guide courts in determining the amount of attorneys’ fees that should be awarded pursuant to such a provision. In Litton Industries, Inc. v. IMO Industries, Inc., plaintiffs sued for fraud and breach of two provisions of an asset purchase agreement, claiming over $9 million in damages. At trial, the jury found defendants had breached only one provision, rejected plaintiffs’ other two claims, and awarded $2.3 million in damages. Following the trial, the court determined that the contract allowed for reimbursement of attorneys’ fees. Although plaintiffs had spent over $4.5 million litigating the case, the court recognized that plaintiffs had only succeeded on some of their claims and reduced the amount of recoverable fees to approximately $3.8 million. On appeal, the Appellate Division affirmed that decision.

On appeal to the Supreme Court, the court found that the contract provision allowing for the reimbursement of “losses” arising out of any breach supported the award of fees incurred in enforcing the agreement. “Losses” were explicitly defined to include “all demands, claims . . . assessments, losses, damages, costs . . . and amounts paid in settlement (including reasonable attorneys’ fees and costs incident to any of the foregoing)”. The court found that just because “reasonable attorneys’ fees” appeared in a parenthetical did not detract from the clear intent of the parties that fees would be recoverable as a “loss” to make the injured party whole in the event of a breach.

The court next addressed how the trial court had calculated the attorney’s fee. Because there was no express provision in the contract about how to calculate reasonable attorneys’ fees, the court approved the trial court’s use of the well-established “lodestar” computation, which is the number of hours reasonably expended by the successful party’s counsel multiplied by a reasonable hourly rate. The lodestar can be enhanced or reduced depending on the results achieved in the lawsuit. In Litton, it was properly reduced because the plaintiff had not succeeded on each claim for relief. If unsuccessful and successful claims arise from the same core facts so that the time expended on each cannot be segregated, however, a court may deem it reasonable to award fees for the time spent on the unsuccessful claim. The Supreme Court ruled that the trial court did not err in its determination of the lodestar amount, reducing the requested fee amount for the time attributed to litigating the unsuccessful fraud claim, but allowing the fees in connection with the unsuccessful contract claim because the two contract claims rested on essentially the same evidence.

The Supreme Court found, however, that the trial court’s analysis was incomplete. After determining the lodestar amount, discounted for the time readily attributable to an unsuccessful claim, the trial court was required to engage in a proportionality analysis - in other words to consider whether the fee amount should be further adjusted (upward or downward) to accommodate the level of success achieved in the litigation. A downward adjustment may be appropriate if a party fails to obtain the amount it originally sought, while a further reduction is justified if the fees sought are disproportionate to the jury award. The court held that the trial court was justified in making a downward adjustment to the lodestar amount because the actual damages recovered ($2.3 million) were substantially less than the damages originally sought ($9 million). But the trial court should have also considered whether to make a further reduction based on the amount of the requested attorneys’ fees ($3.8 million) and the damages actually recovered. The Supreme Court remanded the matter to the trial court to consider whether such an additional adjustment was necessary.

The Litton decision shows that, even in the face of contract “fee shifting” provisions, there is strong judicial resistance to completely overturning the American Rule. Litton also shows that courts will closely scrutinize fee requests in an effort to avoid awarding a windfall recovery to a plaintiff who has only partly prevailed in its lawsuit