Sometimes a former employee brings a lawsuit in which the potential recovery by the employee is low, but the employee's attorneys' fee recovery is high. Under federal and state anti-discrimination laws, attorneys' fees are routinely awarded to the winning employee's attorney. The purpose is laudable — to enable employees of limited means to pursue meritorious claims and provide fair compensation to the attorneys involved in the litigation at hand and encourage litigation of good-faith claims in order to protect public interests.

Through the years, courts in California have held that attorneys' fees awards do not have to bear a percentage relationship to the ultimate recovery in a civil rights case. In one such case, the court largely affirmed an attorneys' fee award of more than $1.1 million even though the damages award was only about $30,000. Even the U.S. Supreme Court has held that civil rights fees need to be proportional to the amount of the award.

Recently the California Supreme Court somewhat reversed streams. In Chavez v. City of Los Angeles (January 2010), the employee recovered only $11,500. The employee's attorney then sought $871,000 in attorneys' fees. The trial court denied any fee award, but the appeals court reversed. The California Supreme Court then held that the trial court correctly found that the employee could have brought a “limited civil case” under the California Code — a case with a claim not in excess of $25,000 — when attorneys' fees may be denied. The court identified two key factors regarding whether attorneys' fees may be denied in such situations: (1) whether the plaintiff's attorney had no reasonable basis to anticipate a damages award exceeding the $25,000 maximum; and (2) whether the lawsuit could have been litigated as a limited civil court case.

Chavez gives hope that fee awards to an employee in California will be moderated — which will very likely affect settlement negotiations. At least in California, the employer's attorney may now legitimately warn an employee's attorney that even assuming liability, there may be either no or only a moderate fee award. Even so, the Chavez decision leaves unclear whether a $25,001 award ($1 above the limited civil court maximum) can still justify an $871,000 attorneys' fees award. This is an area of developing law that is important to continue to monitor.