Prevailing Party Clauses – Draft With Care

Drafting a ‘prevailing party’ clause requires more care than one might assume. This point is highlighted by the recent 8th Circuit opinion in DocMagic, Inc. v. The Mortgage Partnership of America, L.L.C., 729 F.3d 808, 2013 U.S. App. LEXIS 18329 (8th Cir., Sept. 4, 2013). DocMagic entered into an agreement with Lenders One, whereby Lenders One would supply DocMagic with a list of its members so that DocMagic could solicit new clients for its mortgage loan preparation software. Id. at *2. The agreement contained a choice of law provision, which selected Missouri law. Missouri law [1] The agreement also contained a ‘prevailing party’ clause, which merely stated that “the prevailing party shall be entitled to reasonable legal fees and other costs and expenses incurred in resolving such dispute….” Id. *3.

DocMagic filed a seven-count complaint alleging various causes of action from breach of contract to fraud in the inducement. Lenders One filed a counterclaim for breach of contract. After a jury trial, DocMagic “prevailed” on two counts, tortious interference and fraud in the inducement. However, the jury awarded no damages on the tortious interference count and only $243,000 of the $4,000,000 that Doc Magic requested on the fraud count. Lender One “prevailed” on its counterclaims for breach of contract and was awarded $52,500. Both parties moved for attorneys’ fees, expenses and costs. The District Court awarded Lender One over $450,000 in attorneys’ fees, expenses and costs.

The Eighth Circuit upheld the District Court’s ruling. The Eighth Circuit first held that, under Missouri law, when a contract contains a prevailing party clause, the court must award attorneys’ fees to the prevailing party. Id. at *11.

Next, The Eighth Circuit held that under either the “main issue” approach and the “net-prevailing-party’ approach Lender One was the prevailing party because it successfully defended five of the seven causes of action and prevailed on both of its counterclaims, despite suffering a net judgment of almost $200,000 against it, and DocMagic was awarded only $243,000 on alleged damages of $4,000,000, whereas Lender One was awarded $52,500 on a demand of $90,515. A strong dissent points out that the award of attorneys’ fees is not intended to reward the winner, “but to compensate the wronged party for having to resort to litigation to enforce its contractual rights.” Id. at *18-19.

One important point to take from this opinion is to be aware how the selected jurisdiction will apply the prevailing party clause before agreeing to it, e.g. whether an award of attorneys fee will be mandatory or discretionary and which approach the court will use to determine the prevailing party. A second point is that attorneys should draft prevailing party clauses that actually define the term “prevailing party.” For example, if the agreement in DocMagic defined ‘prevailing party’ as one who receives a net judgment of at least 75% of its alleged damages, neither DocMagic nor Lender One would have been awarded attorneys’ fees. That definition may have also fostered a more realistic demand that could have been settled without a trial.
Jeffrey Hamera co-authored this entry.

[1] DocMagic was a California corporation and Lenders One was a Missouri limited liability company.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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