Evidence of judicial action not required for recovery of attorney’s fees

A showing of “success on the merits” need not be connected to judicial action in order for a party in an ERISA action to recover attorney’s fees, according to the U.S. Court of Appeals in Philadelphia (CA-3). In remanding the case back to the district court, however, the Third Circuit declined to express an opinion as to whether or not attorney’s fees should ultimately be awarded.

Background

Two individuals and two pharmacies (the claimants) brought an ERISA denial of benefits action in district court in 2009 against various insurance companies, which had refused to honor claims for the payment of blood-clotting factor products. After being ordered by the court to review the claims for benefits, the insurance companies paid the claims in full, whereupon the complaint was dismissed.

Both the claimants and the insurance companies filed for attorney’s fees and costs, which the court denied. The appellate court affirmed the denial of fees and costs but remanded with regard to whether or not the claimants were entitled to interest payments (approximately $1.5 to $1.8 million) on the delayed payment of benefits. After much procedural wrangling, the insurance companies agreed to pay $68,000 interest and the case was dismissed.

However, the claimants then filed another motion, which the district court denied, for attorney’s fees and costs in the amount of just under $350,000 for work performed from November 1, 2010 until August 4, 2013. The court’s denial was based on its belief that the claimants had not achieved a degree of success on the merits, noting that the agreement to pay the initial $68,000 in interest was made outside the courtroom without a judgment from the court. The court also found the amount of interest the claimants ultimately received to be trivial compared with the millions originally sought.

The appellate court first explained that a decision regarding an award of attorney’s fees should involve two steps: a determination of whether the claimants were eligible for the award, and the application of a five-factor test. The court further explained that, because this was an ERISA matter, eligibility for an award of attorney’s fees and costs would depend upon whether the claimants had shown a degree of success on the merits, and not on whether or not they were the prevailing parties in the litigation.

Catalyst theory of recovery

The claimants pursued what the court terms a catalyst theory of recovery, arguing that they had achieved a level of success on the merits because, during the proceedings, the insurance companies voluntarily changed their position and agreed to pay interest. The district court had denied recovery when presented with this argument, because it believed that judicial action had to serve as the catalyst, as opposed to activities of litigation itself.

The appellate court stated that ERISA allows fees and costs to be awarded to either party, and added that the Supreme Court has held that one need not be a prevailing party to be eligible for an award of fees in an ERISA action (Hardt v. Reliance Standard Life Ins., 560 U.S. 242, at 254 (2010)). In fact, the appellate court found that the Hardt decision required only a showing of some degree of success on the merits to be eligible for a fee award. (Conversely, “trivial success” on the merits or a “purely procedural” victory, is insufficient.) The court concluded that the catalyst theory of recovery of attorney’s fees is available under ERISA.

The court then held it would not be necessary for the claimants to provide evidence that judicial activity caused the out-of-court settlement. It was only necessary to show that litigation activity pressured the insurance companies to settle, said the court.
Taking the above factors into account, the court held that the claimants were eligible for an award of fees and costs, especially since the insurance companies changed their position from refusing to pay any fees or costs, to paying $68,000 to the claimants, which was due, said the court, to the pressure of the lawsuit.

The matter was remanded back to the district court, with instructions to apply the five-factor test: (1) the offending parties’ culpability or bad faith; (2) the ability of the offending parties to satisfy an award of attorney’s fees; (3) the deterrent effect of an award of attorney’s fees; (4) the benefit conferred upon members of the plan as a whole; and (5) the relative merits of the parties’ positions.

Source: Templin v. Independence Blue Cross (CA-3).

Visit our News Library to read more news stories.