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Attorneys

Attorney’s Fees as Damages for Breach of Contract? A Jury Must Decide

August 9 2017

By Lukas Clary

Often times, contracts contain attorney’s fee provisions.  These terms allow the prevailing party in any action to enforce the contract to recover its attorney’s fees.  Under California Code of Civil Procedure section 1717, the prevailing party on these contract actions can simply file a motion and have the court award the fees as costs of suit.  But what happens when a party sues for breach of the contract and the only element of damages the party claims are the attorney’s fees it incurred as a result of the defendant’s breach?  Can that party still file a motion under section 1717 to have the Court award its fees?  Not according to a recent California appellate court opinion.  In Monster, LLC v. Superior Court of Los Angeles County, the court held that a jury must decide a claim for breach of contract alleging attorney’s fees as damages.  Confusing?  Let me explain.

The Case                                                 

Back in 2008, Monster, LLC (“Monster”) and its founder Noel Lee entered into a licensing agreement with music producer Jimmy Iovine and rapper Dr. Dre to manufacture and sell the duo’s “Beats By Dre”-branded headphones.  Dre and Iovine subsequently founded Beats Electronics (“Beats”), which entered into a new agreement with Monster superseding the 2008 agreement.  The new agreement gave Beats the right to terminate its licensing agreement with Monster should a third party acquire more than 50% of Beats.  As part of this subsequent agreement, Lee was given 5% equity in Beats.

In 2011, a third party, HTC, purchased 51% of Beats.  As a result, Beats exercised its termination rights on the licensing agreement with Monster.  Beats and Monster then entered into a termination agreement allowing the latter continued manufacturing rights through 2012 and royalty rights through 2013.  That termination agreement contained (1) a general waiver and release of all claims relating to the prior licensing agreements, expressly including fraud claims, and (2) a provision allowing the prevailing party to recover its attorney’s fees incurred in any action to enforce the contract.  Shortly thereafter, Lee entered into two agreements selling his 5% equity back to Beats.  Both of those agreements contained the same waiver/release and attorney’s fees provisions as set forth in the termination agreement between Monster and Beats.

Seven months after the parties executed the last of the above agreements, Apple acquired Beats for $3 billion.  Yes, billion.  Monster and Lee wanted a slice of that pie, so they sued Beats, alleging that Beats had engaged in fraudulent scheme to divest them of their business interests in the Beats by Dre line.  In defense, Beats argued that all of Monster’s and Lee’s claims were barred by the releases contained in the prior agreements.  Beats also filed a cross-complaint, alleging that Monster and Lee had breached those same agreements by even filing the lawsuit in the first place.  As damages on the cross-complaint, Beats cited only its attorney’s fees and costs incurred in defending Monster’s complaint.

The trial court entered summary judgment in favor of Beats on Monster’s complaint, agreeing that the fraud claims were released through the various agreements the parties had executed.  Beats then argued that the attorney’s fees it sought as damages on the cross-complaint should be awarded by motion under Code of Civil Procedure section 1717.  In contrast, Monster argued that, because Beats was pursuing a cross-complaint for breach of a contract, a jury must decide whether Beats was entitled to attorney’s fees as damages for the breach.  The trial court agreed with Beats and directed it to file a motion for fees under section 1717.  Before Beats could do so, Monster filed a writ of mandate asking the Court of Appeal to overturn the trial court’s ruling.

The Court of Appeal sided with Monster, directing the trial court to vacate its order and send Beats’ cross-complaint to a jury.  In doing so, the appellate court noted that “Beats did not seek to recover its attorney’s fees as the prevailing party on Monster’s fraud claims.  Instead, Beats sought to recover those fees as damages on its cross-claims for breach of contract.”  The court then recognized a long line of cases holding that, where attorney’s fees are sought as damages, the claim for attorney’s fees is part of the damage sought in the principal action.  Such claims, according to the court, are subject to California’s constitutional requirement that litigants be afforded the right to a jury on breach of contract actions.  The Court noted that Beats could have elected to wait until it was the prevailing party to pursue its attorney’s fees by way of a noticed motion.  Instead, Beats chose to seek those fees as damages by way of a cross-complaint.  Once it elected to do so, the fees became “part of the relief sought [and] must be pleaded and proved at trial … as any other item of damages.”

Takeaway

The Monster holding, while applicable in limited circumstances, is important.  Litigants should think carefully about how to recover attorney’s fees pursuant to contract.  Where the fees are sought by a prevailing party as an incident to the lawsuit, they will be recoverable via a post-judgment motion to the Court.  Where, however, the fees are sought as damages for breach of the contract, those damages will become part of the contract claim.  In the latter circumstance, a jury, rather than the court, will have to decide whether to award them.