Cost can be a deterrent when parties are considering whether to mediate a complex business dispute. Mediation is an excellent opportunity to settle a case in advance of costly trial preparation, but mediation requires parties to pay for both a mediator and their attorneys' time to prepare for and attend the mediation. Are those costs recoverable if mediation is unsuccessful and findings at trial require the losing party to pay the winning party's attorneys' fees and costs? According to recent federal case law in the District of Massachusetts, the answer to that question depends on the basis of the fee-shifting award.
The "American Rule" -- i.e., the rule requiring litigants to pay their own attorneys' fees and costs -- is the default rule in American litigation, but it can be displaced by statute. For instance, Mass. Gen. Laws Chapter 93A includes fee-shifting provisions, as does 42 U.S.C. § 1983. Parties can also alter the American Rule by contractual agreement.
Massachusetts law establishes the "lodestar" method for cases in which the prevailing party's fees are shifted to the non-prevailing party. See Berman v. Linnane, 434 Mass. 301, 303 (2001). The lodestar approach directs courts, when calculating an award of fees, to examine "the nature of the case and the issues presented, the time and labor required, the amount of damages involved, the results obtained, the experience reputation and ability of the attorney, the usual price charged for similar services by other attorneys in the same area, and the amount of awards in similar cases." Hatted v. Wal-Mart Stores, Inc. (No. 2), 455 Mass. 1024, 1025 (2010) (quotation omitted).
In the 2010 case of Janney Montgomery Scott LLC v. Tobin, 692 F. Supp. 2d 192, 198 (D. Mass. 2010) (hereinafter, "Tobin"), a party who had won at arbitration was seeking an award of fees and costs related to defending against the losing party's petition to vacate the arbitral award. In considering whether to include approximately 20 hours of settlement-related attorney time in his fee award, the U.S. District Court judge held:
Settlement negotiations are not normally considered in the lodestar calculation. To rule otherwise in a fee shifting regime would discourage parties from engaging in such negotiations because the losing party would have to pay for the prevailing party's fees. Such an effect would run counter to the institutional policy favoring settlement. Moreover, here the settlement negotiations failed and, by definition, no party prevailed in order to gain entitlement to fees.
In the Tobin case, the basis of the fee-shifting award was the arbitration panel's decision that Janney Montgomery Scott LLC had violated Massachusetts' consumer protection statute, M.G.L. c. 93A, §§ 2, 9 ("If the court finds in any action commenced hereunder that there has been a violation of section two, the petitioner shall, in addition to other relief provided for by this section and irrespective of the amount in controversy, be awarded reasonable attorney's fees and costs incurred in connection with said action . . . .") Although it did not deal directly with mediation costs, Tobin can be interpreted to mean that mediation costs -- insofar as they relate exclusively to the parties' efforts to settle the case -- are not recoverable in the Chapter 93A fee-shifting context.
By contrast, in NPS LLC v. Ambac Assurance Corp., 190 F. Supp. 3d 212 (2016) (hereinafter, "Ambac"), a U.S. District Court judge included mediation costs in a fee award made pursuant to a contractual fee-shifting clause. The parties' contract in Ambac required NPS LLC ("NPS") to "pay all costs and expenses incurred by Ambac in connection with the enforcement of [the] Agreement (including, without limitation, all reasonable fees and disbursements of Ambac's counsel)." Id. at § II. The dispute was governed by New York law, which dictated that an award of attorneys' fees pursuant to a contractual provision "may only be enforced to the extent that the amount is reasonable and warranted for the services actually rendered." Id. (citing M. Sobol, Inc. v. Wykagyl Pharmacy, Inc., 282 A.D.2d 438 (2001) ).
NPS argued, largely on the basis of the holding in Tobin, that "fees for mediation . . . are not recoverable as a matter of policy." Id. at § II(C). The District Court judge disagreed, stating:
Tobin is inapposite because it addresses attorneys' fees due under Chapter 93A and Massachusetts law in the context of a fee-shifting regime inapplicable here. The provision for costs and attorneys' fees in this case states that NPS "will pay all costs and expenses incurred by Ambac in connection with the enforcement of this Agreement . . . ." This is not a case involving a statutory fee-shifting provision entitling the prevailing party to attorneys' fees . . . .[D]enying attorneys' fees incurred in the reasonable pursuit of mediation or settlement in contract disputes would provide a significant disincentive for such alternative dispute resolutions. The policy implications relevant to the agreement suggest that mediation or settlement costs -- regardless of success -- should be included in an award of reasonable attorneys' fees and costs.
Id. Based on this reasoning, the District Court found that NPS was required to pay the majority of Ambac's attorneys' fees and costs related to the parties' one-day, unsuccessful mediation.
According to the case law cited above, policy considerations require different outcomes in cases where fee-shifting occurs pursuant to statute, on the one hand, versus cases in which the court shifts fees based on a contractual provision, on the other hand. These cases demonstrate that the courts are willing to use their broad discretion in fee-shifting cases to encourage parties to engage in pretrial settlement negotiations, including mediation.