FRAPs do not allow a district court to alter allocation of costs

Last week the U.S. Supreme Court unanimously held that Federal Rule of Appellate Procedure 39 "does not permit a district court to alter a court of appeals' allocation of the costs listed in subdivision (e) of that Rule." City of San Antonio, Texas v. Hotels.com, L. P., 2021 DJDAR 5110 (Mat 27, 2021).

The ruling effectively, though not expressly, disapproved of numerous lower court precedents cited in the petition for certiorari, including the 9th U.S. Circuit Court of Appeals' opinion in Johnson v. Pac. Lighting Land Co. (9th Cir. 1980) (acknowledging district court discretion under Rule 39(e) and reviewing for abuse of discretion).

Most of the cost items listed in subdivision (e) are relatively minor (i.e., preparation and transmission of the record, the reporter's transcript, and the filing fee fo r filing the notice of appeal). However, one enumerated item of costs (supersedeas bonds) can be thousands or even millions of dollars.

For instance, in Hotels.com a number of popular online travel companies who were hit with a $55 million dollar class action verdict claimed to have incurred approximately $2.3 million in premiums to obtain supersedeas bonds to stay enforcement of the judgment during the pendency of the appeal.

The underlying trial concerned whether or not the internet travel companies had collected the proper amount of local hotel occupancy taxes. The local government plaintiffs claimed the tax should have been based upon the retail price internet customers paid the companies, not the wholesale price the companies actually paid the hotels. The federal Fifth Circuit Court of Appeals reversed and rendered judgment for the companies.

Under Rule 39, the winner may generally claim costs. For example, under subdivision (a)(3) "if a judgment is reversed, costs are taxed against the appellee." Procedurally, under subdivision (d)(1), the general rule is that "[a] party who wants costs taxed must -- within 14 days after entry of judgement -- file with the circuit clerk and serve an itemized and verified bill of costs." (Emphasis added.)

However, under subdivision (e), the four aforementioned enumerated costs such as supersedeas bond premiums "are taxable in the district court for the benefit of the party entitled to costs under this rule." (Emphasis added.) The Supreme Court pointed out that the delegation "makes good sense" because all such costs are "incurred in the district court" and therefore the "nature of these costs makes it fitting for them to be taxed in the district court.")

The local governments argued "that the appellate court may say 'who can receive costs (party A, party B, or neither)' but lacks 'authority to divide up costs.'" But the Supreme Court ultimately accepted the travel companies' argument that "the appellate court has the discretion to divide up the costs as it deems appropriate and that a district court cannot alter that allocation."

The Supreme Court's mode of analysis (penned by Justice Samuel Alito) was decidedly "textualist."

First, the court pointed out that subdivision (a) of Rule 39 establishes five "default rules" that "tracks the 'venerable presumption that prevailing parties are entitled to costs'" unless "the court orders otherwise." "The text of subdivision (a) cuts decisively" in favor of the interpretation that a district court cannot alter the appellate court allocation because "[t]hat provision states that the court of appeals need not follow the default rules ... but can 'orde[r] otherwise.'" (Emphasis added.)

The parties agreed "that this reference to 'the court' means the court of appeals, not the district court." Moreover, "In the Rules of Appellate Procedure, which 'govern procedure in the United States courts of appeals,' references to a 'court' are naturally read to refer to a court of appeals unless the text or context clearly indicates otherwise."

Second, subdivision (e) "refers to 'the party entitled to costs under this rule'" and therefore that party "has a right to obtain them and not merely to seek them -- when a proper application is made in the district court." Moreover, practically speaking, the court of appeals' determination that a party is 'entitled' to costs would mean little if ... the district court could take a second look at the equities."

The Supreme Court rejected the textualist argument that "the word 'taxable' can be used to describe something that may, but need not necessarily, be taxed."

"The use of that term does suggest that the costs in question are not automatically or necessarily when the case returns to the district court, but that may mean no more than that the party seeking those costs will not get them unless it submits a bill of costs with the verification specified by statute and complies with any

other procedural requirements that the local rules of the court in question impose."

Moreover, the 1998 amendment that changed the language of the rule from "shall be taxed in the district court" to "are taxable in the district court" was "intended to be stylistic only."

Finally, the Supreme Court also rejected "a variety of practical arguments why district courts should have the discretion to alter the allocation of appellate costs."

As to the argument that its interpretation would cause confusion if district courts exercised discretion as to most trial court costs, but not costs related to an appeal, the Supreme Court observed that its interpretation "quite sensibly gives federal courts at every lever primary discretion over costs relating to their own proceedings."

As to the argument that review of costs enumerated in subdivision (e) turn upon factual and equitable issues more suitable for the trial court to review the Supreme Court characterized such concerns as "overblown" because most of said costs "are readily estimable, rarely disputed, and frankly not large enough to engender contentious litigation in the majority of cases." And although supersedeas bond premiums may be substantial in some cases, experience has shown their cost is not often disputed because, as a practical matter, the amount of such bonds are "often . . . negotiated by the parties." Moreover, the circuits are quite capable of delegating the exceptional case to the district courts.

As to concerns about how to oppose the cost of supersedeas bonds, the Supreme Court pointed out such bonds are subject to the trial court's initial discretion under Rule 62, and are otherwise subject to judicial review in the appellate courts by way of "a simple motion 'for an order'" under rule 27, raising the issue during merits briefing under rule 28, filing objections to a bill of costs under Rule 39(d)(2), and petitions for rehearing under Rule 40.

In conclusion, the Supreme Court rejected the notion that district courts may "exercise a free-ranging form of equitable discretion that would directly conflict with the equitable discretion of the Court of Appeals." 