Maybe, but not necessarily, entitled to fees

APPELLATE ZEALOTS

It's funny when names are prophetic like in the recent California Supreme Court case of DisputeSuite, LLC v. Scoreinc.com, 2 Cal. 5th 968 (2017). DisputeSuite sued over a business squabble. Then after its case was dismissed on a procedural ground, DisputeSuite debated whether it owed the defendant attorney fees. Scoreinc.com was the defendant that achieved the dismissal. But its victory may have been Pyrrhic because the trial court denied its attorney fee request and DisputeSuite, true to its name, refiled the same row in another state. Their case raised an important question: If a breach of contract case is dismissed on a procedural ground, is the defendant entitled to attorney fees under the contract? Maybe -- but not necessarily -- answered the California Supreme Court.

DisputeSuite owns software used by companies that help people repair a bad credit rating, and Scoreinc.com services that software. DipsuteSuite contracted with Soreinc.com to refer companies to Scoreinc.com for software servicing. In exchange, Scoreinc.com agreed to pay DisputeSuite a commission and to market DisputeSuite software exclusively.

When Scoreinc.com allegedly breached the agreement and DisputeSuite filed suit in Los Angeles, the superior court dismissed the case because the contracts contain a clause giving Florida courts exclusive jurisdiction over disputes. The dismissal however was temporarily stayed so DisputeSuite could refile its case in Florida. After the dismissal, when Scoreinc.com moved for attorney fees under one of the contracts and California Civil Code Section 1717, the Los Angeles court denied the motion because the merits of the contract dispute were still under litigation.

The 2nd District Court of Appeal affirmed, finding Scoreinc.com was not entitled to fees, despite winning the dismissal, because "there had been no final resolution of the contract claims."

The California Supreme Court affirmed the Court of Appeal's judgment, upheld the denial of attorney fees, and disapproved of prior case law to the contrary.

Not Necessarily Entitled to Fees

In a case of first impression, the California Supreme Court held when a breach of contract case is dismissed on a procedural ground but refiled, a trial court acts within its discretion when it finds the defendant is not a prevailing party and denies the defendant immediate contractual attorney fees. Justice Kathryn Werdegar, writing for a unanimous court, explained, "[t]he trial court ruling on a motion for fees under section 1717 is vested with discretion in determining which party has prevailed on the contract, or that no party has." Section 1717 allows enforcement of a fee shifting clause when one party prevails against another on their contract. "[A] party who obtains an unqualified victory on a contract dispute, including a defendant who defeats recovery by the plaintiff on the plaintiff's entire contract claim, is entitled as a matter of law to be considered the prevailing party for purposes of section 1717. But 'when the results of the [contract] litigation are mixed,' the trial court has discretion under the statute to determine that no party has prevailed." (Citation omitted; bracket in original.)

The court further held when a breach of contract case is dismissed on a procedural ground but refiled, the defendant is not the prevailing party entitled to attorney fees under the contract "as a matter of law." Justice Werdegar explained "fees under section 1717 are awarded to the party who prevailed on the contract overall, not to a party who prevailed only at an interim procedural step." Of course, a defendant does not have to win on the merits to prevail overall. "A procedural victory that finally disposes of the parties' contractual dispute, such as an involuntary dismissal with prejudice and without any likelihood of refiling the same litigation in another forum, may merit a prevailing party award of fees under section 1717." But a court's discretion to determine if a defendant has prevailed for purposes of Section 1717 by obtaining a dismissal in favor of another forum is not unlimited. "[S]uch an order should be supported by a record showing that the contract claims have been finally resolved." A dismissal which merely moves the litigation to another forum does not make a defendant "the prevailing party as a matter of law under section 1717."

Takeaways

Under DisputeSuite, if a breach of contract case is dismissed on a procedural ground, the defendant may be (but is not necessarily) entitled to attorney fees under the contract. And there are several ways the defendant may go about seeking fees for the dismissed case:

• The defendant may argue for immediate contractual fees if the dismissal ended all litigation, future litigation is unlikely, or plaintiff's other case is substantively and procedurally independent.

• The defendant may argue for contractual fees later at the end of all litigation if the defendant is the prevailing party overall.

• The defendant may sue the plaintiff for contractual fees as damages if the dismissal was based on plaintiff's breach of a contract provision, like a forum selection clause. If the defendant prevails overall in its breach of contract case, then the defendant is not only entitled to an award of fees for plaintiff's dismissed case but for defendant's new case as well.

• Irrespective of contractual fees, the defendant may argue for immediate fees as a sanction under California Code of Civil Procedure Section 128.7 if the plaintiff filed the dismissed case for an improper reason, such as to harass the defendant or cause needless litigation costs.

Naturally, the plaintiff should take the opposite position to avoid paying fees to the defendant for the dismissed case.

Whether its name is truly prophetic and Scoreinc.com will win big by prevailing overall on all litigation and by recovering all its attorney fees, or whether Scoreinc.com's victory in dismissing the original case was Pyrrhic, remains to be seen. Although the California Supreme Court upheld the denial of immediate contractual fees, Scoreinc.com may still secure fees in the future.