How to Recover Attorneys' Fees When You've Been Falsely Sued
There are few experiences as frustrating as being sued for malpractice—especially when the claims are obviously baseless. And when it comes to recovering legal fees for a wrongful suit, the cards would seem to be stacked against the design professional. But there is hope. The process of hiring an attorney, even to defend against the most groundless of claims, is expensive.
There are few experiences as frustrating as being sued for malpractice—especially when the claims are obviously baseless. And when it comes to recovering legal fees for a wrongful suit, the cards would seem to be stacked against the design professional. But there is hope.
The process of hiring an attorney, even to defend against the most groundless of claims, is expensive. Moreover, suits without merit convert litigation into a kind of extortion that compels insurance companies to settle most claims. And this litigation can generate enough attorneys' fees to eat up most or all of the deductible on the insurance policy.
Unfortunately, the U.S. litigation process is permanently slanted against the design professional. Of course, it wouldn't be so bad if engineering designers were permitted to recover from the claimant the amount spent on attorneys' fees defending against what, in the end, turn out to be baseless claims.
In Great Britain, it is a basic tenet of litigation that the prevailing party may recover its attorneys' fees from the losing party. Unfortunately, this rule is not followed in the U.S. Under what is known as the "American Rule," each party generally bears its own attorneys' fees. The rationale advanced for the American Rule by the U.S. Supreme Court is that "one should not be penalized for merely defending or prosecuting a lawsuit, and the poor might be unjustly discouraged from instituting actions to vindicate their rights if the penalty for losing included the fees of their opponents' counsel." [ F.D. Rich Company v. Industrial Lumber Company, 417 US 116 (1974)]
Exceptions to the rule
There are, however, three exceptions to the American Rule:
Where a statute provides for recovery of attorneys' fees.
Where a contract provides for recovery of attorneys' fees.
Where a party has acted in bad faith, such as by knowingly making a claim that is legally baseless or frivolous.
Unfortunately, there is no statute directed specifically at design professionals that enables the recovery of attorneys' fees spent defending against baseless claims. (28 USC
However, when a claim is so groundless that it's obvious the allegations are being made in bad faith, the courts seem to be increasingly willing to reimburse design professionals for the attorneys' fees that they have paid defending such "nuisance suits." Sometimes, the claimant is ordered to pay the design professional's attorneys' fees. But this is not always the case, and in fact, in other cases, courts have required the claimant's lawyer to pay the defendant.
There are cases where the federal courts have made claimants and/or their lawyers personally liable for the design professional's attorneys' fees, when the claimant prosecutes a clearly baseless claim. Moreover, many states have enacted laws with the same intent.
Where to begin
As a starting point, if a lawsuit is filed in federal court, Rule 11 of the Federal Rules of Civil Procedure requires that all pleadings—a legal term for submissions to the court—be signed by the party or its attorney. By signing the pleading, a certification is made to the court that to the best of his or her knowledge, information and belief, the claim was "formed after reasonable inquiry" and is "well-grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or cause unnecessary delay or needless increase in the cost of litigation." Many states have substantially similar rules. [See, for example, Wis. Stats
In Harrold v. Joffrion [73 FRD 267 (WD La), affd without opinion 545 F2d 167 (CA5, 1976)], the court assessed costs—but not attorneys' fees—against the plaintiff's lawyer for prosecuting a medical malpractice case that the attorney knew or reasonably should have known to be groundless. The statute on which the court relied was later amended to permit a litigant to recover attorneys' fees as well as costs from any attorney who unreasonably and vexatiously brings false claims or otherwise multiplies the costs of litigation (28 USC
Similarly, a court also has the power to order the losing party itself to pay the prevailing party's attorneys' fees when the losing party has brought a groundless claim in bad faith. The power to issue such orders may be derived from the inherent power of the courts [ Hall v. Cole, 412 US 1, 5 (1973)], or it may result from a state statute that explicitly authorizes the courts to award attorneys' fees to punish allegations made in bad faith. (See, e.g., Illinois Supreme Court Rule 137, supra, which provides that the court may order an offending party, his attorney or both to pay the other party's reasonable attorneys' fees if a pleading is frivolous or interposed for an improper purpose.)
For example, in Wang v. Gordon , the plaintiff had filed two groundless claims against the defendant under federal securities laws [No. 82-C-1521 (ND Ill Nov. 24, 1982), affd on appeal No. 82-3072 (CA7, August 22, 2983)]. The defendant's attorney wrote to the claimant explaining why the claims were groundless, but the claimant nonetheless persisted.
When the court ultimately dismissed the lawsuit, it held that the suit was an attempt "to manufacture federal claims against these defendants where plaintiff knew or should have known that none existed." Thus, the court ordered the plaintiff to pay the costs and attorneys' fees that the defendant had incurred in responding to the claims. The Seventh Circuit affirmed the order, noting that a court has the inherent power to award attorneys' fees to the successful party when the opponent "has acted in bad faith, vexatiously, wantonly or for oppressive reasons" in prosecuting the claims.
In fact, the courts have demonstrated a willingness to award even massive amounts for attorneys' fees to parties who are forced into court because of a false claim made in bad faith. For example, in an Illinois case, the trial judge awarded over $1.8 million in attorneys' fees and expenses to the defendant after finding that the essence of the claimant's complaint was untrue and allegedly in bad faith. [ Dayan v. McDonald's Corp., 70 Ch 2258 (Memorandum and Order dated March 1, 1983)] Rulings like this put some teeth into existing laws regarding bad faith claims and may galvanize other judges into making similar awards of fees.
Those making claims against design professionals have become more creative in their approach. But in their zeal, they may be exposing themselves to potential liability for a design professional's attorneys' fees. For example, some claimants have attempted to bring actions against those involved in the construction process under state consumer fraud laws. [See, e.g., Parkman & Weston Assoc., Ltd., v. Ebenezer African Methodist Episcopal Church, 2003 WL 22287358 (N.D.Ill, Sept. 30, 2003) The court held that an action could be maintained against a design professional under the Illinois Consumer Fraud Act.]
Typically, these actions require a lesser quantum of proof than a standard fraud action. A state consumer fraud act may be attractive to claimants, because it often provides for the recovery of multiplied damages. But potential for increased recovery or windfall may also include a corresponding risk; some of these consumer fraud actions provide that the losing party must pay the prevailing party's attorneys' fees (see, e.g. 815 ILCS 505/1 et seq).
Although some courts are willing to award attorneys' fees for bad faith pleadings, in real practice these are rarely awarded. Even though many claims may strike the design professional as groundless, whether the claim is in bad faith is a far more difficult standard to establish. It is within the relative safety of making a potentially groundless yet "good faith" claim that claimants have long plagued design professionals and their insurance carriers. To avoid this risk, design professionals would be well advised to include a clause in their standard form of agreement that provides for the recovery of attorneys' fees in the event a claim is unsuccessfully brought. The best of these clauses will be unilateral, meaning that the ability to recover attorneys' fees only runs to the design professional. However, a bilateral, prevailing party clause may be sufficient to prevent a claimant from pursuing a baseless claim.
The policy of American courts not to assess attorneys' fees against the losing party in order not to discourage potential claimants has long worked as a virtual extortion upon design professionals and their professional liability carriers. Now, however, the courts are beginning to redress that balance, at least in part, so that parties cannot bring bad faith claims with impunity and so that design professionals may recover their attorneys' fees spent defending against these bad faith claims.
NSPE Files An Amicus Curiae Brief
The National Society of Professional Engineers, along with the Structural Engineers Association of California, has filed a "friend of the court" brief in response to a recent lower court decision that could have far-reaching legal consequences for professional engineers.
According to the December 2003 issue of NSPE's Engineering Times, the case is being heard in the Court of Appeal of the State of California. If the lower court's decision stands, it could impose upon the design professional liability for the economic damages of contractors.
McCarthy v. Teng Li involves a construction project begun in 1995 to add two levels to a parking structure at John Wayne Airport in Orange County, Calif. The county hired an integrated-services firm to design and engineer the project, who, in turn, subcontracted Teng Li & Associates to act as its structural engineer. The written agreement between Teng Li and the other firm specified that Teng Li would provide only structural consultation and design specifications.
Eventually, the county hired McCarthy Building Companies Inc., to undertake the project according to the plans. But McCarthy began to fall behind schedule, claiming the specifications were "unattainable" or "defective." Eventually, project completion was delayed by seven months.
As a result, the county withheld $3.7 million in damages from McCarthy. Consequently, the contractor filed suit against the county, integrated-services firm and Teng Li. A decision in Orange County Superior Court awarded McCarthy more than $3.5 million in damages.
Teng Li appealed the judgement. McCarthy then filed a cross-appeal, asserting that the trial court's judgement should have included approximately $2.26 million in additional damages. Both appeals are currently pending, and the NSPE amicus curiae brief was filed on behalf of Teng Li.
The NSPE brief argues that "under economic loss doctrine, there is no liability when a project error causes only economic losses and neither personal injury to the plaintiff nor physical damage to the plaintiff's property," reports Engineering Times. It states that damages should be limited to direct damages and not speculative damages.
The NSPE brief also points out that design professionals are not traditionally held responsible when there is no privity of contract and no "special relationship" with the plaintiff. According to the brief, both of these conditions are absent in this case.
The reasoning in this brief is that saddling the design professional with after-the-fact liabilities would seriously impair the provision of full professional services to the client. The amicus curiae advised the court that design professionals should not have any obligation to the client for claims of purely economic injury.
For more information on the brief, visit the web at