Summary
holding contract term "costs" co-extensive with its meaning under Rule 54
Summary of this case from Dewey Beach Lions Club v. LongacreOpinion
C.A. No. 19254.
Submitted: January 22, 2004.
Decided: April 27, 2004.
Vernon R. Proctor, Esquire, Patricia Enerio, Esquire, THE BAYARD FIRM, Wilmington, Delaware, Attorneys for the Plaintiffs.
William M. Lafferty, Esquire, Patricia Uhlenbrock, Esquire, Andrew H. Lippstone, Esquire, MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware; Douglas H. Meal, Esquire, Emily C. Shanahan, Esquire, ROPES GRAY, Boston, Massachusetts, Attorneys for the Defendants.
MEMORANDUM OPINION
On January 22, 2004, the court held a hearing on the plaintiffs' application for an award of attorneys' fees and costs. For the reasons discussed below, the plaintiffs' request is granted in part and denied in part.
I.
The crux of the dispute in the underlying proceeding was the interpretation of a provision of a stock purchase agreement (the "Agreement") executed in connection with a sale of the plaintiffs' business for a combination of cash and stock options. That provision provides, in relevant part, that if a defined "Trigger Event" occurred (here, the decision not to proceed with an initial public offering without which the options provided as consideration are worthless) the buying company must either
(i) provide equivalent substitute or replacement awards on the same terms and conditions to the former employees of [the selling company]; or (ii) pay $4,620,000 in the aggregate for all Options then held by the Partners and former employees of [the selling company].
DX-29 Ex. 7.11.
After a Trigger Event occurred, the defendants, invoking clause (i) of that provision, proceeded to provide the plaintiffs with replacement options having the same value as the original options at the date of replacement of the options. The court found that the provision, although ambiguous, required the defendants to provide the plaintiffs with replacement options having the same value as the original options at the date of issuance of the original options. The court found damages in the amount of $2,190,620. Because the plaintiffs held only 58.8% of the options, the court awarded the plaintiffs $1,309,991.
The court's decision is reported at Comrie v. Enterasys Networks, Inc., 837 A.2d 1 (Del.Ch. 2003).
Certain employees of the selling company who were not plaintiffs in the underlying proceeding held the remainder of the options. The court, in a subsequent opinion, see Comrie v. Enterasys Networks, Inc., 2004 WL 293337 (Del.Ch. Feb. 17, 2004), held that such employees were third-party beneficiaries of the Agreement.
The plaintiffs now seek costs and attorneys' fees in connection with the underlying proceedings based on section 10.6 of the Agreement ("Section 10.6"). Section 10.6 provides, "[i]n any action or suit to enforce any right or remedy under this Agreement or to interpret any provision of this Agreement, the prevailing party shall be entitled to recover its costs, including reasonable attorneys' fees." Specifically, the plaintiffs seek (1) attorneys' fees, disbursements, and other costs in the amount of $373,260.74; (2) court costs totaling $4,983; (3) expert witness fees totaling $68,272.70; and (4) taxable fees and expenses of $56,540.59 in connection with services rendered by a litigation support firm that provided economic analysis and assistance to the plaintiffs' expert witness. The total amount of costs and fees sought is $503,057.03.
DX-29 § 10.6 (emphasis added).
The plaintiffs initially sought $4,591 in court costs, but increased that amount after receiving an additional invoice from the Register in Chancery for ordinary court costs. See Supplemental Aff. of Vernon R. Proctor at ¶ 2 ex. A.
The defendants respond to the plaintiffs' bill of costs with four arguments. First, they argue that Section 10.6 requires a claim-by-claim, rather than all-or-nothing approach in determining the prevailing party. Second, the defendants argue that, even assuming the all-or-nothing approach is correct, the plaintiffs were not the prevailing party in the underlying litigation. Third, the defendants contend that regardless of which approach is used, the plaintiffs' request for attorneys' fees is unreasonable in light of the fact that the plaintiffs were only awarded $1,309,991 of the $4,620,000 originally sought. Finally, the defendants argue that, apart from attorneys' fees, the term "costs" in Section 10.6 is not broad enough to include either certain of the ordinary disbursements made by the plaintiffs' attorneys, or that portion of the plaintiffs' expert witness and litigation support fees and expenses beyond those permitted by 10 Del. C. § 8906.
The defendants do not dispute that the underlying proceeding was an action to enforce a right or remedy under the Agreement.
Each of the defendants' arguments is addressed in turn.
II.
A. Section 10.6 Calls For An All-Or-Nothing Approach To Determining A Prevailing Party
The plaintiffs' amended verified complaint contains four counts: (1) specific performance of the Agreement; (2) injunction against a threatened breach of contract; (3) breach of contract; and (4) breach of the covenant of good faith and fair dealing. Because the court's decision rested solely on a breach of contract theory, the choice of approach is important to the determination of fees.
Am. Verified Compl. for Specific Performance and for Ancillary Injunctive Relief (Feb. 20, 2002).
The Agreement governs an award of costs, and the court looks solely to that document in determining which approach to utilize. In Brandin v. Gottlieb, a contractual agreement provided "[t]he party prevailing in any action, suit or proceeding shall be entitled to receive from the losing party prompt reimbursement of all reasonable legal fees and disbursements incurred by the prevailing party in connection with such action, suit or proceeding." Noting "a court of equity's natural tendency to avoid stark rulings," the Brandin court nevertheless held that such tendency "must give way to the court's duty to give effect to the most reasonable reading of" an agreement.
See Brandin v. Gottlieb, 2000 WL 1005954, at *28 (Del. Ch. July 13, 2000) (basing a determination of fees on contractual provisions).
Id. at *26 (internal quotations omitted).
Id at *27-*28; see also Citadel Holding Corp. v. Roven, 603 A.2d 818, 824 (Del. 1992) ("When construing a contract, and unless a contrary intent appears, we will give words their ordinary meaning."), cited in Brandin, 2000 WL 1005954, at *28 n. 75.
The same principle guides the court in this case. Section 10.6 provides that "[i]n any action or suit to enforce any right or remedy under this Agreement . . ., the prevailing party shall be entitled to recover its costs, including reasonable attorneys' fees." The language of the Agreement, itself the product of long negotiation by sophisticated parties and attorneys, clearly provides for an all-or-nothing approach in identifying the "prevailing party." As the court stated in Brandin, "[h]aving chosen the common term `prevailing party,' the parties can be presumed to have intended that the term would be applied by the court as it has traditionally done so." That traditional application is an all-or-nothing approach involving an inquiry into which party predominated in the litigation.
Brandin, 2000 WL 1005954, at *28.
The same is true here. Section 10.6, by its unambiguous terms, contemplates an all-or-nothing approach to determining the prevailing party.
The defendants' attempts to differentiate Section 10.6 from the provision in Brandin are unavailing. The language of Section 10.6 is clear and unambiguous. Nothing in Brandin undermines that conclusion or suggests that only the specific words used in the contractual provision at issue in that case will be effective to implement an all-or-nothing approach.
B. The Plaintiffs Are The Prevailing Party
In determining status as the prevailing party, Brandin suggests the standard is "predominance in the litigation." Using this standard, it is clear the plaintiffs here are the prevailing party.
Brandin, 2000 WL 1005954, at *28.
The defendants argue that the main issue in this case is the remedy. The plaintiffs initially sought $4,620,000 in damages. The court found damages amounting to $2,190,620, but only awarded the plaintiffs $1,309,991. That is, based on the $4,620,000 figure, the damages found are only 47%, and the damages awarded to the plaintiffs are only 28%, of the damages the plaintiffs initially sought.
In fashioning a remedy, the court began its assessment by accepting the analysis of the plaintiffs' expert and rejecting that of the defendants' expert. See Comrie, 837 A.2d at 19 n. 91. The court then adjusted the plaintiffs' expert's analysis, taking into account the vesting schedule of the options and the fact that termination of employment led to all unvested options being extinguished. Id. Thus, even if the remedy is the proper measure upon which to determine prevailing party status, the plaintiffs would be the prevailing party because notwithstanding the court's discount, it was the plaintiffs' and not the defendants' experts' testimony that the court accepted in fashioning the ultimate remedy.
The main issue in this case — and the issue upon which it can be determined the plaintiffs predominated in litigation — is the interpretation of the Agreement, specifically Exhibit 7.11 of the Agreement. First, were the main issue not interpretation, but award of a remedy, why would the defendants file two separate motions to dismiss and a motion for summary judgment based on the substantive question of how to properly interpret the Agreement? Second, the text of the court's opinion makes clear that the primary issue was interpretation, not remedy:
The court held a two-day trial and, following post-trial briefing and argument, now concludes that the defendants breached their performance obligation under this true alternative contract by failing to make an equivalent replacement award. This conclusion is based on a reading of the contract to require that a replacement award be structured to recreate the potential "in the money" value of the initial options at the time they were issued . . . rather than the "in the money" value of those options at the time the determination was made to abandon the IPO. Damages will be awarded based on this conclusion and certain secondary assumptions further discussed in this opinion.
Id. at 3, 4 (emphasis added).
This wording makes clear that the plaintiffs were predominate in the main issue in the case — the interpretation of the Agreement. The remedy, a determination of damages, was based on this interpretation.
Finally, accepting the defendants' assertion would lead to perverse results. Notwithstanding the fact that the plaintiffs prevailed on all pretrial motions and the substantive issue at trial, if the defendants' argument is accepted, they are the prevailing parties because the plaintiffs only received 28% of the remedy initially sought. Thus, the defendants would be the ones filing a fee application. Indeed, the defendants suggest this is a proper result. This is simply contrary to the reality of the litigation as well as the dictates of common sense.
See Answering Br. of Defs. Enterasys Networks, Inc. and Global Network Technology Services, Inc. to Pls.' Application for an Award of Att'ys Fees and Costs at 11 n. 2 ("Although Defendants opted not to file an application for attorneys' fees at this juncture, Defendants reserve their right to assert at some later time their status as the prevailing parties in this action and their attendant right to recover, pursuant to Section 10.6, some or all of their costs, including reasonable attorneys' fees, from Plaintiffs.").
C. The Plaintiffs' Request For Fees Is Reasonable
Section 10.6 allows for reasonable attorneys' fees. The defendants argue that "the critical factor in determining reasonableness is the limited level of success that Plaintiffs obtained in this action." The court does not agree.
Id. at 11.
The defendants base their argument on this court's ruling in Fasciana v. Electronic Data Systems Corp. The facts in Fasciana are inapposite to the facts here. First, Fasciana is a part of section 145 jurisprudence, which takes into account important concerns dealing with the relationship between fiduciaries and a company not found in this case which is a run-of-the-mill contract dispute that does not involve fiduciary relations. Second, the plaintiff in Fasciana achieved only "very limited success" in prosecuting his advancement claim. Indeed, the court stated, "[p]ut simply, Fasciana did not obtain the type of `excellent result' that would render him a prevailing party and therefore entitle him to a `fully compensatory fee.'" Here, by contrast, the court has already determined that the plaintiffs are the prevailing parties. Finally, Fasciana, while determining to what extent section 145 allows for fees, recognized that parties may modify statutory default rules by contract. This is exactly what occurred in the present case.
829 A.2d 178 (Del.Ch. 2003).
8 Del. C. § 145 provides for the indemnification and/or advancement of expenses incurred by certain corporate affiliates in certain settings, most notably litigation.
Fasciana, 829 A.2d at 186 (emphasis added).
See id. n. 20. Although these cases were cited for the proposition one could contract out of "fee-on-fee" awards in the advancement context, the principle that one can provide for contractual- as opposed to statutory-based fees is applicable here.
In this case, two sophisticated parties negotiated the terms of the Agreement, including a provision for an all-or-nothing approach when awarding fees. Although that provision only allows reasonable attorneys' fees, it does not explicitly tie reasonableness to success in the underlying litigation; for this court to do so would be to frustrate the language requiring an all-or-nothing approach. Rather, Section 10.6 requires a general review of fees to determine if they are reasonable. That is, reasonableness should be assessed by reference to legal services purchased by those fees, not by reference to the degree of success achieved in the litigation.
The defendants have proffered no explanation (other than their failed argument) for why the plaintiffs' attorneys' fees are unreasonable. This is not a contingent fees case; the plaintiffs were billed on an hourly-rate basis. The plaintiffs received a 10% "courtesy discount" on those hourly rates across the board on their monthly statements of July 2002, December 2002, and April 2003 through the present. The lead partner on the plaintiffs' case kept his hourly rate constant following inception of representation, notwithstanding two subsequent increases in his hourly rate for new matters. Finally, given that the plaintiffs amended their complaint in response to the defendants' first motion to dismiss, successfully argued against the defendants' second motion to dismiss and motion for summary judgment, completed extensive discovery, and proceeded through trial, the number of hours submitted is entirely reasonable.
Affidavit of Vernon R. Proctor ¶ 6.
Id. ¶ 7.
D. The Term "Costs" In Section 10.6 Does Not Extend To The Plaintiffs' Attorneys' Disbursements Or To The Plaintiffs' Expert Witness And Litigation Support Fees And Expenses Beyond Those Permitted By 10 Del. C. § 8906
1. Attorney Disbursements
The plaintiffs ask the court to broadly construe the word "costs" in Section 10.6 to include all expenditures made by them in pursuing the litigation. The defendants argue the term "costs" in the Agreement should be construed in light of the more limited definition of "costs" that has developed in case law interpreting Court of Chancery Rule 54(d).
Court of Chancery Rule 54 provides that "costs shall be allowed as of course to the prevailing party unless the Court otherwise directs." Also, 10 Del. C. § 5106 provides that "[t]he Court of Chancery shall make such order concerning costs in every case as is agreeable to equity."
This court has noted, "[w]hile `costs' and `expenses' may seem to be synonymous in everyday usage, they are not identical for purposes of Rule 54(d)." As has long been recognized by our courts, "[a]t the common law costs were unknown. The right to recover them depends on statutory authority, express or implied." Court of Chancery Rule 54 provides that "costs shall be allowed as of course to the prevailing party unless the Court otherwise directs." "Costs" under this Rule have been defined as "allowances in the nature of incidental damages awarded by law to reimburse the prevailing party for expenses necessarily incurred in the assertion of his rights in court." In applications for costs brought pursuant to Rule 54, our courts have disallowed recovery for certain items, such as photocopying, transcripts, travel expense, and computer research.
Gaffin v. Teledyne, Inc., 1993 WL 271443, at *1 (Del. Ch. July 13, 1993).
Peyton v. William C. Peyton Corp., 8 A.2d 89, 91 (Del. 1939).
Ct. Ch. Rule 54(d).
Peyton, 8 A.2d at 91 (emphasis added), quoted in Donovan v. Del. Water Air Res. Comm'n, 358 A.2d 717, 723 (Del. 1976).
See, e.g., Gaffin, 1993 WL 271443 at *2 (disallowing charges for transcripts, photocopying, travel, express mail, and computer research); Barnett v. Braxton, 2003 WL 21976411, at *2 (Del.Super. Aug. 15, 2003) (disallowing request to recover fees charged by process servers and couriers).
Delaware courts have, however, recognized that the scope of "costs" to be allowed may be expanded by agreement of the parties. Thus, the question is whether the language of Section 10.6 is broad enough to include elements of litigation expenses beyond those allowed by rule.
See, e.g., J.J. White, Inc. v. Metro. Merch. Mart, 107 A.2d 892, 894 (Del.Super. 1954) ("It is also generally held that in actions for . . . breach of a contract, in the absence of fraud, willful negligence or malice, the costs allowed should not exceed the expenses of litigation; and should not include [a]ttorneys' fees and expenses incurred by the plaintiff in the prosecution of his claim, unless there is contractual or statutory provision therefor.") (emphasis added).
Because the Agreement is a heavily negotiated contract between sophisticated persons who were represented by counsel, it is reasonable to assume that the parties and/or their attorneys were aware of the detailed and longestablished usage of the word "costs." The language of Section 10.6 can be seen to validate this assumption. By adding the statement "including reasonable attorneys' fees," the parties indicated their knowledge that the ordinary legal usage of the term "costs" is limited and would not include attorneys' fees. Moreover, Section 10.6 does not contain a broad term such as "all" (as in "all costs") or the legally recognized broader term "expenses." Those terms are present in cases relied upon by the plaintiffs. Not only does this differentiate those cases from the present case, it indicates a general awareness among the parties and their attorneys that the definition of "costs" is, through well-developed jurisprudence, a limited one.
See, e.g., Salaman v. Nat'l Media Corp, 1994 WL 465535, at *2 (Del.Super. July 22, 1994) (provision contained term "all costs and expenses (including attorneys' fees and disbursements)"); Phi Kappa Tau Hous. Corp. v. Wengert, 86 S.W.3d 856, 859 (Ark. 2002) (provision containing term "all costs incurred in connection with . . .").
For these reasons, the court construes the term "costs" in Section 10.6 consistently with the jurisprudence under Rule 54(d). The court recognizes the contrary argument that the parties' agreement to expand the definition of "costs" to include attorneys' fees evinces an intention to shift all of the costs of litigation to the losing party. Nevertheless, the court concludes that the better reading of the contract, and one that is more consistent with the precedent of this State, is to interpret the usage of the term "costs" in a manner consistent with established precedent under Rule 54(d). Parties intending to broaden that meaning by contract can easily do so.
2. The Plaintiffs' Expert Witness And Litigation Support Fees And Expenses Beyond Those Permitted By 10 Del. C. § 8906
The same logic applies in determining the plaintiffs' entitlement to expert witness and litigation support fees and expenses beyond those permitted by the court interpretation of 10 Del. C. § 8906. The statute provides:
[T]he fees for witnesses testifying as experts . . . in the . . . Court of Chancery, within this State, shall be fixed by the court in its discretion, and such fees so fixed shall be taxed as part of the costs in each case and shall be collected and paid as other witness fees are now collected and paid.
Courts construing this statute have held that it allows prevailing parties compensation for a trial expert's actual testimonial time, waiting time, and certain travel time as "`time necessarily spent in attendance upon the court.'" Travel time, however, is not compensated at the same rate as in-court time. Further, expressly excluded from the scope of recoverable expert witness fees are fees incurred in connection with the experts' time spent (1) consulting with or advising a party's attorney; (2) preparing for testimony in court; and (3) preparing for and providing deposition testimony.
Stevenson v. Henning, 268 A.2d 872, 874-75 (Del. 1970) (quoting State ex rel. Price v. 0.0673 Acres of Land, 224 A.2d 598, 602 (Del. 1966)).
Vaughan v. Creekside Homes, Inc., 1994 WL 586833, at *4 (Del.Ch. Oct. 7, 1994).
Miles, Inc. v. Cookson Am., Inc. 1995 WL 214397, at *1 (Del. Mar. 24, 1995).
Sliwinski v. Duncan, 1992 WL 21132, at *4 (Del. Jan. 15, 1992).
Little v. Morgan, 1991 WL 53456, at *1 (Del.Super. Apr. 10, 1991).
For the same reasons discussed above, Section 10.6 cannot be read to encompass an expanded definition of compensable witness fees. As such, the plaintiffs cannot recover for fees paid to their expert witness or the litigation support firm utilized by him that fall outside the scope of the statute.
III.
The plaintiffs seem to have arrived at the $373,260.74 figure for attorneys' fees, disbursements and other costs by adding bills for fees ($361,221) and disbursements ($37,006.94), and then subtracting from that sum a courtesy discount ($24,967.20). It is unclear how the courtesy discount is split between fees and disbursements. The plaintiffs are to calculate a sum equal to billed fees ($361,221) minus any applicable courtesy discount and an award will be made in that amount.
The plaintiffs are also awarded the full amount of court costs ($4,983.00).
See Answering Br. of Defs. Enterasys Networks, Inc. and Global Network Technology Services, Inc. to Pls.' Application for an Award of Att'ys Fees and Costs at 15 n. 4 ("Assuming the Plaintiffs are found to be the `prevailing parties' within the meaning of Section 10.6, the Defendants do not dispute that the term `costs' includes the Plaintiffs' court costs.").
The more difficult issue is the fees associated with the testimony of the plaintiffs' expert, Dr. Jarrell. In accordance with this letter opinion, Section 10.6 clearly does not cover the fees and expenses incurred in connection with services rendered by Dr. Jarrell's litigation support firm. The documents submitted to the court, however, are insufficient to provide a determination on which of Dr. Jarrell's fees fall within the scope of the statute. The plaintiffs are to provide further detail as to the nature of Dr. Jarrell's fees (specifically, further detailing how Dr. Jarrell's hours were spent). The plaintiffs will be awarded an amount equal to $450 (Dr. Jarrell's hourly rate) multiplied by the number of hours Dr. Jarrell spent in actual testimonial time and waiting time. In addition, the plaintiffs will be awarded an amount equal to $225 (or half Dr. Jarrell's hourly rate) multiplied by the time spent by Dr. Jarrell traveling to his testimony location. The plaintiffs are awarded fees for Dr. Jarrell's travel expenses.
This percentage is determined by the court within the discretion granted it.
See Dunning v. Barnes, 2002 WL 31814525, at *4 (Del.Super. Nov. 4, 2004) ("In addition, an expert's reasonable and ordinary traveling expenses may be reimbursed.").
The plaintiffs are directed to provide such information within 10 days. The parties shall submit a conforming order 10 days after the plaintiffs provide such information.