Did You Know: About the American Rule on Attorneys Fees?

The American Rule requires each party to a lawsuit to pay its own attorney fees unless they are allowed to recover attorney's fees by contract, by statute or one of the exceptions discussed below. This article reviews the history of the American Rule and explains a party may recover attorney's fees. (For a more complete discussion, historically minded readers may wish to read the learned discussion in the attached opinion in the 2006 Massachusetts Federal Court case, EIU Group v. Citibank of Delaware.).

England (and other countries) has passed laws awarding attorneys fees to the “winners” of civil lawsuits. There were two reasons for these statutes. These “fee-shifting” statutes discourage suits that have little chance of success or are worth less than the costs of resolving the issue privately. The older English statutes also set a schedule of fees that could be charged to clients and assessed in Courts. In the seventeenth century, some American colonies adopted the English Rule, passing laws that set legal fees and awarded these fees to the “winners” of civil lawsuits. The U.S. Congress passed similar laws, which lapsed or were revoked by the early 1800s.

Nevertheless, many colonial Courts established a common law practice of requiring each side to pay its own attorney fees. (In the absence of a statute or regulation, Courts must establish their own rules. These rules are referred to as the common law.) In Arcambel v Wiseman (1796), the U.S. Supreme Court held: "[t]he general practice in the United States is in opposition [to awarding attorney's fees to the “winning” party]; and even if that practice were not strictly correct in principle, it is entitled to the respect of the Court, till it is changed, or modified, by statute." Eighty years later, the US Supreme Court noted that legal remedies were more accessible because each side bears its own fees. That is, an average citizen could afford his or her day in Court. The Court also noted that a trial to determine a reasonable fee might be more burdensome than the original trial.

Both Wisconsin and Federal common law recognize exceptions to the American Rule. There are over 150 Federal laws and over 50 Wisconsin laws allowing a successful plaintiff to recover attorney's fees. Consumer protection laws and law encouraging private prosecution of crimes against the government often allow the plaintiff to collect attorney's fees. Courts will also allow contracting parties to enter into almost any agreement to share risk.

The second most common exception is contract clauses awarding attorney's fees to the winning party. Sometimes these clauses allow creditors to collect attorney's fees required to collect receivables. Sometimes theses clauses are designed to discourage litigation unless the plaintiff believes he or she has a high probability of success. Often each party wins some claims and loses others. Courts sometimes adjust contract based fee awards to reflect relative success.

Courts in Wisconsin may also award attorney's fees where the wrongful acts of the defendant have involved the plaintiff in litigation with others. For example a principle may become liable for acts of his or her agent. If a real estate agent makes a false statement about the condition of a home, the buyer may sue both the agent and the seller. The seller would be entitled to recover both his damages and his attorney's fees.

Wisconsin Courts may also award attorney's fees for an insurance company's bad faith denial of coverage or benefits. A contract of insurance promises to defend an insured and pay damages up to the policy limits. Bad faith occurs when the insurance company denies coverage or payment without just cause. If an insurance company fails to defend its insured, the insured can recover his or her cost to sue the insurance company for payment or defend against a suit brought by a third party. Likewise, if an insurer fails to pay the full amount of covered damages within policy limits, an insured can recover attorney's fees required to obtain payment. In either case, attorney's fees are paid as damages in the same way that medical expenses are paid as damages for a personal injury.

Federal Courts may award attorney's fees where plaintiffs have established rights as beneficiaries of a common fund, such as a pension fund. When this happens, the attorneys fees are paid by the fund. This means all of the beneficiaries share the costs of the judgment obtained by the plaintiffs.

The American Rule is an important protection for individuals sued in civil court. Sometimes Judges overreach their authority in an effort to make one party whole. Recently the Court of Appeals reversed the Trial Court's award of attorney's fees in two cases. In one case a Circuit Court Judge awarded a municipality attorney's fees as contractual damages. The Appeals Court reversed the award. The contract did not provide for attorney's fees, therefore the American Rule required each side to pay its own attorneys. In a second case, a Circuit Court Judge awarded attorney's fees as punitive damages for trespass. The Appeals Court reversed this award because the American Rule does not allow attorney's fees to be awarded as punitive damages.

The Final Words

Litigation is risky. The American Rule holds it is unfair to penalize a party for merely bringing or defending a lawsuit. The American Rule encourages access to the Courts by reducing the cost of losing a case. The same incentive makes it more “affordable” for a business to take actions that may result in litigation. The American Rule reduces the cost of trial by eliminating the burden of determining what is a reasonable fee in every suit. The exceptions to American Rule raise the stakes whenever they apply. Exceptions encourage certain kinds of litigation by increasing the rewards for success. Hopefully individuals and businesses exercise greater caution when they face the additional penalty of paying the plaintiff's attorney's fees.