United States: California Supreme Court Endorses "Catalyst" Theory for Awarding Attorneys´ Fees to Plaintiffs in Unsuccessful Public Interest Litigation

State's High Court Refuses to Follow United States Supreme Court's Rejection of "Catalyst" Theory

On December 2, 2004, the California Supreme Court issued two important opinions that may greatly increase the exposure of defendants to attorneys’ fee awards in cases involving the "public interest." Defendants may now face substantial attorneys’ fee awards, even where no court has ruled in their opponents’ favor, and even where the underlying case has been dismissed prior to any final judicial ruling.

In Graham v. DaimlerChrysler Corporation and Tipton-Whittingham v. City of Los Angeles a sharply divided California Supreme Court endorsed the so-called "catalyst" theory, under which plaintiffs may receive attorneys’ fees if they can establish that their lawsuit motivated defendants to provide voluntarily the relief the lawsuit sought.

In Graham, more than three quarters of a million dollars in attorneys’ fees were awarded to the plaintiffs, even though the trial court dismissed their complaint as moot at the pleading stage. While the California Supreme Court imposed some additional requirements a plaintiff must satisfy before such an award is proper, the Court upheld the general principle under which the award was made. In the companion case, the California Supreme Court reiterated its support for a modified catalyst theory.

These rulings put California out of step with the federal courts. Indeed, the United States Supreme Court has expressly rejected the catalyst theory for cases litigated under various federal statutes.

The ultimate effect of these decisions remains to be seen, particularly because they invest the lower courts with significant discretion to grant or deny fee awards. But the comments of dissenting Justice Chin in the Graham case sound an ominous note for defendants:

DaimlerChrysler mistakenly advertised that certain of its 1998 and 1999 model pick up trucks had a towing capacity of 6,400 pounds. In fact, without modification, the trucks could only safely tow 2,000 pounds. Before any litigation was filed, DaimlerChrysler set up a "response team" that advised buyers of the error, told them not to attempt to tow more than 2,000 pounds and provided modified marketing information, manuals and brochures. DaimlerChrysler also offered refunds to buyers who paid for modifications that increased the trucks’ towing capacity. On a case-by-case basis, it also offered to replace or repurchase trucks from buyers who demanded that remedy.

The Santa Cruz District Attorney threatened legal action, but requested DaimlerChrysler’s input before acting. Shortly thereafter, the California Attorney General notified DaimlerChrysler that it was joining the Santa Cruz District Attorney. Before DaimlerChrysler could respond, plaintiff Graham filed a complaint seeking damages for breach of express warranty. Graham sought class action status for his claim, but no class was ever certified.

Ultimately, DaimlerChrysler offered to purchase or replace the trucks of all buyers. The trial court dismissed Graham’s complaint, finding that it was moot since DaimlerChrysler gave the truck buyers the relief Graham sought.

But the case did not end there. Graham’s attorneys sought a fee award, claiming, in essence, that their actions had been the "catalyst" that led DaimlerChrysler to offer to replace or repurchase the trucks. After lengthy (and apparently contentious) hearings, the trial court awarded Graham’s lawyers a total of $762,830 in fees.

Tipton-Whittington was a federal court race/sex discrimination case filed against the LAPD. While the suit was pending, the LAPD voluntarily instituted changes directed against discrimination. The federal court awarded plaintiffs in excess of $1.7 million in fees under the catalyst theory. After the U.S. Supreme Court rejected the catalyst theory for litigation under federal statutes, the City of Los Angeles sought reconsideration of the fee award. The federal district court then held that the award was proper as a matter of California state law. Answering questions posed to it by the Ninth Circuit Court of Appeals, the California Supreme Court agreed.

The California Supreme Court’s rulings grow out of section 1021.5 of the Code of Civil Procedure. That statute provides certain exceptions to the "American rule," under which parties to a lawsuit typically pay their own attorneys’ fees. One exception to that general rule recognized by the statute is for "private attorney general" actions. In certain circumstances, litigants may receive attorneys’ fee awards where their private litigation results in enforcement of an important right affecting the public interest.

Under the catalyst theory, plaintiffs may be awarded attorneys’ fees when the defendant takes voluntary corrective action, without any order or judgment having been entered in favor of the plaintiff. Plaintiffs must show that their lawsuit was the motivating factor compelling the defendant to take voluntary action. The majority in Graham rested its endorsement of the catalyst theory on its belief that the "private attorney general" doctrine embodied in section 1021.5 is designed to encourage suits enforcing important public policies by providing "substantial attorney fees to successful litigants in such cases."

The Court in Graham imposed additional burdens on plaintiffs seeking fee awards under the catalyst theory:

First, before awarding fees, the trial court must determine that the lawsuit was not "frivolous, unreasonable or groundless." In other words, the plaintiff must show the result was achieved "by threat of victory, not by dint of nuisance and threat of expense." The Court did not provide specific guidelines for making this determination, except to say that it was "not unlike" the determination a trial court makes in issuing a preliminary injunction.

Second, the plaintiff seeking attorneys’ fees under a catalyst theory must first reasonably attempt to settle the matter short of litigation. How much effort toward settlement the plaintiff must make remains unclear. The Supreme Court did state, however, that "a plaintiff must at least notify the defendant of its grievances and proposed remedies and give the defendant the opportunity to meet its demands within a reasonable time." The Court added that what constitutes a reasonable time "will depend on the context."

As noted above, the impact of Graham and Tipton-Whittingham remains to be seen. While the slim Supreme Court majority characterized the holdings as endorsing rules long ago recognized in California, the three dissenting Justices strongly disagreed. To the dissenting Justices, these cases represent a dramatic—and unwarranted—expansion of defendants’ potential liability for their opponents’ attorneys’ fees.

The practical application of these decisions also seems fraught with difficulty. How exactly does a defendant show that its decision to take voluntary corrective actions was motivated by something other than the plaintiffs’ lawsuit? Will California courts follow case law decided in the federal courts before the U.S. Supreme Court repudiated the catalyst theory? In Graham, for example, the Court noted that DaimlerChrysler’s response to the erroneous information regarding its trucks towing capacity began before Graham’s lawsuit was filed. Moreover, the first entities to raise this issue with DaimlerChrysler were government agencies, not the private plaintiff.

Ultimately, these decisions may greatly enhance plaintiffs’ leverage in settlement negotiations. As Justice Chin and the dissenting Justices observed:

For Further Information

If you wish either to obtain a more detailed explanation of these opinions, please contact the Pillsbury Winthrop attorney with whom you work. Questions regarding this alert may be directed to Robert C. Phelps in San Francisco or George S. Howard in San Diego.

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