Multi-factor test flawed

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Attorneys in federal court looking to overturn multi-part tests got some support in an Oct. 5 Seventh Circuit decision, iterating previous cases opining that such tests tend to be “redundant, incomplete, and unclear.”

In the case, the trustees of a multiemployer pension plan brought suit in federal court against an employer under ERISA seeking contributions to the plan.

The district court found that the suit was not substantially justified, and awarded the defendant employer roughly $56,000 in attorney fees.

The trustees appealed, but the Seventh Circuit affirmed in a decision by Judge Richard A. Posner.

Attorneys Fees

After finding that the district court properly awarded summary judgment to the employer, the court turned to the award of attorney fees, authorized in ERISA cases pursuant to 29 U.S.C. 1132(g)(2).

The court noted that, in ERISA cases, any prevailing party can recover such an award, unless the loser’s position had substantial justification. Bittner v. Sadoff & Rudoy Industries, 28 F.2d 820 (7th Cir. 1984).

However, another case sets forth a five-factor test for determining the award of fees. Janowski v. International Brotherhood of Teamsters, 673 F.2d 931, 940 (7th Cir. 1982), vacated on other grounds: “(1) the degree of the offending parties’ culpability or bad faith; (2) the degree of the ability of the offending parties to satisfy personally an award of attorneys’ fees; (3) whether or not an award of attorneys’ fees against the offending parties would deter other persons acting under similar circumstances; (4) the amount of benefit conferred on members of the pension plan as a whole; and (5) the relative merits of the parties’ positions.”

The court proceeded to criticize use of the five-factor test both as “one too many,” and as substantively flawed.

Test Flaws

The court noted that the first factor, bad faith, is irrelevant, because courts have inherent authority to award attorney fees as a sanction for bad faith anyway.

The second factor, ability to pay, the court also found an irrelevant factor, because a pension plan will rarely be unable to afford an award of attorney fees.

The court found the third factor, deterrence, to be “empty,” because it cannot be determined, in any particular case, whether the award of fees will have a deterrent effect; instead, only a systematic practice of awarding fees could be a deterrent.

Finally, the court found the fourth and fifth factors to be subsumed in the substantial justification test used in Bittner.

Accordingly, the court concluded that the five-factor test is, at most, “a checklist of factors for the district judge to consider to make sure he hasn’t overlooked anything that might be relevant to the appropriateness or size of the award.”

Finding that the five-factor test adds little to Bittner’s test, and “perhaps has outlived its usefulness,” the court wrote, “American law is needlessly complex, and occasions for simplification should be embraced.”

Applying Bittner to the suit filed by the plan, the court concluded it was not substantially justified, and the district court was thus correct to award attorney fees.

Accordingly, the court affirmed, and remanded for an award of attorney fees in defending the appeal as well.

Analysis

The opinion is not relevant just to awards of attorney fees in ERISA cases, but to any case in which existing precedent employs a multi-factor test to decide any issue.

Of course, it is not enough just to invoke the court’s language that such tests are “redundant, incomplete, and unclear.” An attorney seeking to avoid application of such a test must be prepared to, as did the court in the case at bar, systematically show why the individual factors are not helpful to deciding the particular issue

In this case, the court found three of the five factors to be irrelevant to the underlying question. Most interesting of the three discussions is the court’s discussion of deterrence.

The court wrote, “Factor 3 (deterrence) is empty because while a PRACTICE of awarding fees to a winning party will tend to deter the filing of groundless suits and the interposing of groundless defenses to meritorious suits, whether the award of fees in a particular case will have a deterrent effect cannot be determined (emphasis in original).”

Deterrence, however, is a key objective in many areas of the law, most prominent, in criminal law. If imposing a sanction of attorney fees in any given civil case has no deterrent effect (or none that can be determined), then it logically follows that imposing a lengthy prison sentence in any given criminal case also lacks similar effect.

The same logic would apply to awarding punitive damage awards in civil cases.

However, the court’s criticism of deterrence as a factor seems to ignore that deterrence is a two-headed creature: a stiff sanction may deter the party sanctioned from repeating the conduct, or it may deter others from the same conduct.

As Justice Bablitch wrote in Jacque v. Steenberg Homes, Inc., 209 Wis.2d 605, 563 N.W.2d 154, 165 (1997), in upholding a $100,000 punitive damage award, despite only $1 in nominal damages, “the $100,000 punitive damages award does not excessively punish Steenberg Homes for its egregious conduct, to deter it from trespassing again, and to deter others who might be similarly tempted.”

The Seventh Circuit’s discussion of deterrence speaks only to the second objective, while ignoring the first. The decision of a district court in Chicago to impose attorney fees against a little-known construction association likely has little to no deterrent effect on others, but it may have a strong deterrent effect on that particular association.
Nevertheless, using deterrence as one factor in a multi-factor test is still always subject to criticism, because it will always favor imposition of a sanction, regardless of the individual facts

In any case, it can always be said that imposing a sanction will deter the non-prevailing party from repeating whatever conduct is at issue.

Thus, using deterrence as a factor in any test effectively says that a given sanction is appropriate to impose against the non-prevailing party, simply because it is the non-prevailing party.