There are people out there who believe the rules are stacked in favor of employees when it comes to employment lawsuits here in the Generally Sunny State. Why? Look no further than the rules on the recovery of attorney’s fees.

Despite a very neutral sounding statute that allows for “the prevailing party” in FEHA cases to recover his, her, or its attorney’s fees from the non-prevailing party, the reality is (as interpreted by our Courts of Infinite Wisdom) that prevailing employees “ordinarily” recover their fees, whereas prevailing employers are only entitled to their fees if they can show the plaintiff’s case was frivolous or brought in bad faith.

In other words, prevailing employees get damages and their attorney’s fees; prevailing employers get ... nothing.

This has had quite an impact on how employment cases, especially small ones, are filed and litigated in the state. The value of a $10,000 case becomes $10,000 plus attorney’s fees. How much in attorney’s fees? Well, that depends, does it not, on how much work the employee’s attorney puts into the case? Do you see the incentives here? If the attorney works the case up more and more and more, then the employee can recover more and more and more...even if the actual damages to the employee are pretty small.

Could you turn an $11,500 employee verdict into an attorney’s fee application for $870,000?

The employee in Chavez v. City of Los Angeles thought so. In fact, so did the appellate court, which ordered the trial court to grant the plaintiff’s fee application, thereby obligating the employer to pay over $1 million (if you count its own attorney’s fees) to cover an $11,500 verdict for the employee.

In its infinite wisdom, the Supremes reversed. (Here is the Supreme Court's decision.) And in the process, the Court may have swung the Giant Employment Law Pendulum (the GELP for short) just a wee bit back in the employer’s direction.

Here’s what happened:

THE CHAVEZ CASE

Police officer Robert Chavez had some issues with his employer. We won’t go into all of the details here, but they involved false allegations of payroll check theft, claims of helicopter surveillance of the officer’s home, psychiatric care, complaints by crime victims, stress leaves, a rescinded transfer to another division, and a whole bunch of lawsuits, removals, dismissals, and refilings. (If you want the nitty gritty details, check out the opinion.)

Ultimately, after a five day jury trial, the trial judge threw out some claims on nonsuit, and the jury found for the defendants on nearly all the rest. However, the jury returned a verdict for the officer on one FEHA claim, finding (a) that the officer had in fact been denied a transfer to another division; (b) that this denial had been in retaliation for the officer’s engaging in protected activity; and (c) that the officer had suffered economic damages. How much were the damages? $1,500! Add in the $10,000 general damages for the officer’s emotional distress and you have a total verdict of $11,500.

The plaintiff’s attorney followed up the verdict with a motion for recovery of his attorney’s fees in the amount of approximately $436,000, which he then doubled under a “lodestar” calculation (it wasn’t easy getting that $11,500) for a total fee application of over $870,000!

The defense, naturally enough, opposed the application. While probably wishing they could say what they really felt, the defense politely argued that the plaintiff had “overreached and outrageously inflated his fee request,” and asked that fees be denied altogether.

The trial court rejected the plaintiff’s fee request.

The appellate court rejected the trial court’s rejection of the fee request. It ruled that the trial court had to award the $870,000 in attorney’s fees to the prevailing plaintiff.

The Supreme Court rejected the appellate court’s rejection of the trial court’s rejection of the fee request (my head hurts). It held the trial court was within its discretion in denying the fee award.

THE LEGAL PRINCIPLES AT WORK

To understand just how far (or not far) the Supreme Court’s opinion moves that GELP, it is important to look at the statutes that are guiding the courts’ decisions.

1) FAIR EMPLOYMENT AND HOUSING ACT (FEHA)

A) FEHA’s Neutral Statute…

Let’s look first at the rules governing the award of attorney’s fees in FEHA cases.

Under Government Code section 12965(b), in actions brought under California’s Fair Employment and Housing Act (FEHA):

“the court, in its discretion, may award to the prevailing party reasonable attorney’s fees and costs . . . .”

True, this isn’t the “American Rule” we learned about in law school where everyone pays their own way, but it has that ring of fairness: The “prevailing party,” regardless of who it is, employee or employer, plaintiff or defendant, may be awarded his/her/its attorney’s fees. Great for the gamblers; a winner takes all formula.

Or is it?

B) …Interpreted To Benefit Employees…

Sure the statute says the court may award “the prevailing party reasonable attorney’s fees and costs,” but the courts, ITIW, have determined that the Legislature didn’t really mean what it said. Indeed, the courts (and this started with the U.S. Supreme Court interpreting Title VII) have determined that this statute really says:

“the court, in its discretion, should ordinarily award a prevailing plaintiff employee his or her attorney's fees unless special circumstances would render such an award unjust.”

(Paraphrasing Christiansburg Garment Co. v. EEOC (1978) 434 U.S. 412 [98 S.Ct. 694, 54 L.Ed.2d 648] and adopted in California in Cummings v. Benco Building Services (1992) 11 Cal.App.4th 1383.)

So the prevailing employee “ordinarily” gets his or her attorney's fees paid for by the losing employer.

And the prevailing employer? (Do you even need to ask?)

The courts, again ITIW, have determined that the trial court:

“may award attorney’s fees to a prevailing employer only when the plaintiff’s action was frivolous, unreasonable, without foundation, or brought in bad faith.” (Thanks once again to the Christiansburg Garment and Cummings courts.)

So to summarize the bidding: Prevailing employees “ordinarily” recover their attorney's fees; prevailing employers only recover fees if the action was frivolous or in bad faith. Or stated in the way most employers understand it: employees always get fees; employers never do.

C) …Creating Bizarre Incentives?

Without going into the whole law school debate over whether courts should or should not engage in policy-making by the way they construe statutes, California courts (and the U.S Supreme Court, for that matter) did have a reason for pushing that GELP towards the interests of plaintiff employees.

Employees of limited means – those at the lowest end of the pay and power structure in today’s economy – are likely to be subject to civil rights abuses (sexual harassment, racial discrimination, retaliation, etc.). They are also the least likely to be able to enforce those rights – they can’t afford attorneys on an hourly basis; and because their damages are more likely to be relatively low (since they were not making much to begin with), they could have trouble attracting the interest of attorneys willing to handle their cases on a contingency basis.

So, how do you incentivize attorneys to take on the cases of those most vulnerable? Why, you allow them to recover their attorney’s fees if they win…nearly guaranteed.

But will employees want to enforce their rights if there is a chance, if they lose, that they will have to pay the employer’s fees? Requiring employees to pay for the prevailing employer’s attorney’s fees in the ordinary course would certainly make an employee think twice before filing to enforce his or her rights. It may indeed have a chilling effect on the enforcement of basic civil rights. At leas so thought the Courts ITIW.

As a result of these policy preferences, the neutral-sounding FEHA fee-shifting statute has been intentionally interpreted to alter the economic playing field in a way that encourages employees of limited means to bring claims against their employers.

By all appearances, the encouragement has worked.

But as with any medicinal, there do appear to be some unintended side effects.

There are some who say this rule encourages plaintiff’s employment attorneys to excessively work up their cases – to generate unnecessary attorney’s fees – solely to increase the settlement value of the case and increase any attorney’s fee recovery after trial. True? Should we take a vote of California employers and their counsel to find out?

But we digress. What about the other statutory scheme at play here in the Chavez decision?

2) LIMITED AND UNLIMITED CIVIL CASES

There is another statutory scheme that overlays the FEHA statutes. And it is this other scheme that the Chavez courts analyzed in determining just how much discretion trial courts have in their attorney’s fee awards under FEHA.

Code of Civil Procedure Section 1033(a) deals with the situation where a plaintiff brings an action as an unlimited civil case (i.e., damages in excess of $25,000), but recovers an amount that could have been recovered in a limited civil case (i.e., less than $25,000). When a plaintiff brings an unlimited civil case but fails to recover at least $25,000, the trial court has discretion under 1033(a) to deny the plaintiff recovery of his or her costs of suit. The idea is to encourage small cases to be brought in a limited civil case (the old Municipal Court) where the procedures are streamlined and less expensive.

Attorney’s fees are considered costs of suit. So under 1033(a), a trial court in an unlimited civil action has the discretion to deny an attorney’s fee application where the plaintiff recovered damages less than $25,000.

But under FEHA, as we have seen, a prevailing employee is “ordinarily” entitled to his or her fees unless special circumstances would render such an award unjust.”

3) WHO WINS?

So who wins when a FEHA plaintiff in an unlimited civil action obtains a verdict in her favor (thereby “ordinarily” entitling her to a recovery of attorney’s fees), but the verdict is less than $25,000? Does the trial court have discretion under 1033(a) to deny the fee application? Or must the trial court award the fees under FEHA?

In other words, which prevails, the Government Code or the Code of Civil Procedure?

The Supreme Court, IIIW, found they both prevail. Using simple enough logic, the Court held that under FEHA, the prevailing employee “ordinarily” should be awarded his or her fees, “unless special circumstances would render such an award unjust.”

What kind of “special circumstances?” How about if an employee filed an unlimited civil action, but only recovered a small amount? This, according to the Supreme Court, may in fact “be considered a special circumstance that would render a fee award unjust.”

Since just about every employment case is brought as an unlimited civil suit, the Supreme Court is saying that it is perfectly within a trial court’s discretion to deny a prevailing employee’s fee award when he or she recovers less than $25,000. In the Court’s words:

“But if, to the contrary, the trial court is firmly persuaded that the plaintiff’s attorney had no reasonable basis to anticipate a FEHA damages award in excess of the amount recoverable in a limited civil case, and also that the action could have been fairly and effectively litigated as a limited civil case, the trial court may deny, in whole or in part, the plaintiff’s claim for attorney fees and other litigation costs.”

WHAT’S THE IMPACT OF THIS CASE?

Here’s the $870,000 question: Will Chavez have any impact on either (a) the filing of unmeritorious or marginal employment lawsuits; or (b) the overlawyering of simple employment lawsuits?

One could say that the California Supreme Court is sending a message to the bench and bar that the GELP has swung far enough in favor of the employees, and it is now time to bring it back, if but a little. Look at the Roby decision’s reining in of punitive damage awards (blog here). Hernandez’ decision to allow limited workplace surveillance (blog here). The decision to allow the appellate court’s Chau (Starbuck’s tip) decision to stand (blog here and here). And now Chavez – it’s ok not to award attorney’s fees to successful employee plaintiffs.

But will anyone listen? Now that the Court That Must Be Obeyed has expressly blessed the trial court’s discretion to deny attorney’s fee awards to employee plaintiffs who recover less than $25,000 in unlimited civil actions, will the trial courts now start exercising that discretion?

Now that employees who obtain only relatively small recoveries can be denied their attorney’s fees, will plaintiff’s attorneys be more selective in the cases they take? Will they litigate the smaller cases more in line with their actual value? Will they be sufficiently discouraged to overlitigate the small ones such that the settlement value of the small cases are actually in line with the claimed injury suffered by the employee?

Will there be more balance between the interests of employers and employees in California courts? Is that Pendulum swinging back?

The jury is out…