Contracts with “prevailing party” provisions offer the tantalizing, coveted prospect of the winner recovering attorneys’ fees from the loser in legal disputes over the contract’s enforcement.
Prevailing party fee-shifting provisions are an exception to the litigant-loathed “American rule,” under which the winner cannot recover attorneys’ fees from the loser unless explicitly authorized in an “unmistakably clear” contract, statute, or court rule.
A simple prevailing party provision goes something like: “If either party brings an action to enforce the terms of this agreement, the prevailing party shall be entitled to reimbursement of its reasonable attorneys’ fees, costs, and expenses in connection with such action.”
Prevailing party provisions can be simple to read, but difficult to apply, occasionally spawning a litigation within a litigation over whether one side or the other actually prevailed. A court’s task of determining whether one side or the other – or any side at all – is the prevailing party gets complicated when each side lobs a raft of claims and counterclaims against the other, and neither wins much of the relief it sought.
This problem arose in a recent decision concluding a proceeding to confirm an arbitration award in an astoundingly long-running legal dispute among three doctors in a medical practice called New York Urologic Institute (“NYUI”).
YC MD, P.C. v Shusterman (___ AD3d ___, 2024 NY Slip Op 03893 [2d Dept July 24, 2024]), is a warning to petitioners / plaintiffs to critically and objectively assess the strength of their claims before embarking upon a legal proceeding under a contract with a prevailing party provision. Unsuccessful prosecution of those claims can have dire consequences, the resulting fee award dwarfing any actual monetary award to either side.
The Short-Lived Business Relationship
In April 2008, Shusterman joined NYUI as an employee. Section 1.9 of his Associate Partner Practice Agreement (the “Agreement”), promised that NYUI “shall extend an offer” for Shusterman to “become a stockholder of NYUI” at the “earlier of” Shusterman treating five hundred patients per month or January 1, 2009.
Shusterman alleged he complied with Section 1.9, and either did become, or should have become, a shareholder, but NYUI breached the Agreement by not elevating him to shareholder status. Such elevation, he alleged, should have been easy: no written shareholder agreement existed between NYUI’s two other principals, the second of whom acquired his equity six years earlier with a modest, $65,000 buy-in.
NYUI, on other hand, alleged that it caught Shusterman slandering, competing against (or, “moonlighting”), and soliciting patients of NYUI in violation of a restrictive covenant in Section 5.2 of the Agreement. Shusterman countered that Section 1.2 of his Agreement explicitly permitted “moonlighting positions” as “Permitted Outside Activities.”
In June 2009, Shusterman spoke to NYUI about the fact that he desired, but did not receive, an offer of ownership under Section 1.9 of the Agreement. In response, NYUI terminated Shusterman’s employment for his alleged violation of Section 5.2.
A business relationship of just 14 months turned into 14 years(!!!) of litigation.
The Arbitration
In November 2010, under an arbitration provision in Section 6.6 of the Agreement, Shusterman filed an arbitration demand before the American Health Lawyers Association.
Each side asserted a barrage of claims and counterclaims. Shusterman sued for breach of Section 1.9 among roughly a dozen other claims seeking damages exceeding $7 million. NYUI counterclaimed for breach of Section 5.2, disgorgement of compensation under the faithless servant doctrine, and ten or so other counterclaims.
Six years later, the Preliminary Arbitration Ruling was a total loss for Shusterman on his claims, and an almost total loss for NYUI on its counterclaims, with just one minor, almost nominal, recovery by NYUI on one sliver of one counterclaim.
On Shusterman’s contract claim, the arbitrator concluded that Shusterman “correctly asserts” that NYUI’s refusal to make him an offer of stock ownership “was a breach of the Agreement.” But the arbitrator concluded that the terms of Section 1.9 violated the so-called “doctrine of definiteness,” about which we wrote previously, because “it is impossible to enforce this provision in that the essential terms for an offer of ownership were not defined.”
One wonders whether the arbitrator’s decision would be the same after LMEG Wireless, LLC v Farro (190 AD3d 716 [2d Dept 2021]), which we litigated then blogged about, announcing that “an agreement to accept a reasonable offer is not necessarily unenforceable,” and “a party may agree to be bound to a contract even where a material term is left open” so long as there is some “objective criteria,” including a business’s “financial records,” to “determine whether a given offer was ‘reasonable.’”
In Shusterman, the arbitrator might have supplied the missing price term simply by reference to the preceding equity owner’s buy-in price of $65,000, perhaps with some adjustment for the firm’s growth, if any, in the ensuing years.
In any event, the arbitrator concluded that Shusterman “should recover nothing in respect of his claims.”
On the counterclaims, the arbitrator concluded that NYUI was not entitled to recover on any of them because most of the alleged competition by Shusterman comprised “Permitted Outside Activities,” with one exception. The arbitrator found that Shusterman received $27,700 for providing medical services at a single location affiliated with NYUI, of which Shusterman admitted NYUI was entitled to receive 25% — just $6,925 — under the “Terms of Compensation” schedule to the Agreement.
Notwithstanding his breach, the arbitrator concluded that Shusterman should not forfeit his compensation as a “faithless servant,” another doctrine about which we recently blogged, the arbitrator ruling, “The fact that he didn’t pay over a small amount that he admitted was due to NYUI . . . doesn’t mean he was stealing.”
Finally, turning to the subject of this article, the arbitrator wrote:
Both parties seek attorneys’ fees. Since no relief has been ordered on [Shusterman’s] claims, and since [NYUI] prevailed on one of its claims, [NYUI] is the prevailing party. This means that the ‘arbitrator may award reasonable costs and attorneys’ fees to [NYUI].’
(citation omitted).
In the Final Award Ruling, the arbitrator exercised his discretion by awarding NYUI fees of $386,265 and costs of $47,915, for a final arbitration award, including damages, of $441,106.
The Petition to Confirm the Arbitration Award
In 2017, NYUI filed a Petition to confirm the arbitration, spawning more years of litigation, including a Decision and Order, an Order, and a final Decision and Order in which Shusterman unsuccessfully attacked the arbitrator’s fee award.
Kings County Supreme Court Justice Peter P. Sweeney concluded:
While [NYUI] was only awarded $6,925 in damages on its counterclaim, [NYUI] succeeded in defeating all of Shusterman’s claims, including his claim for damages in excess of $7 million based on his claim that he was entitled to an ownership interest in [NYUI] . . . . Under these circumstances, there is no basis to disturb the arbitrator’s finding that [NYUI] was the prevailing party.
In the final Judgment, NYUI received a total award, with prejudgment interest, of $648,245. Quite the recovery on an almost nominal award of damages.
The Appeal
Shusterman filed a Notice of Appeal, deposited into Court the full amount of the Judgment to stay enforcement, then took his sweet time prosecuting the appeal, which took an astounding five years (minus 11 days) from start to finish. You can read the appeal briefs, of which there were only two, here and here.
In the appellate decision, the Court ruled:
To be considered a ‘prevailing party,’ one must simply prevail on the central claims advanced, and receive substantial relief in consequence thereof. Such a determination requires an initial consideration of the true scope of the dispute litigated, followed by a comparison of what was achieved within that scope. Here, in light of [NYUI]’s success in defending against Shusterman’s claims for more than $7 million in damages and its success in prosecuting one of its counterclaims, Shusterman failed to establish his entitlement to vacatur of so much of the arbitration award as awarded [NYUI] attorneys’ fees and costs.
(citations and quotations omitted)
Thoughts on Shusterman
Arbitration awards are notoriously difficult to overturn.
In New York, a court may not vacate an arbitration award unless it “violates a strong public policy, is totally irrational, or clearly exceeds a specifically enumerated limitation on an arbitrator’s power” (Metro. Transp. Auth. v Westfield Fulton Ctr., LLC, 228 AD3d 435 [1st Dept 2024] [quotations omitted]). A tough standard for anyone hoping to overturn an arbitration decision.
But was there some room for a more forceful challenge? There is case law emanating from the same Court in which Shusterman lost his appeal holding that an outsized attorneys’ fee award may, in some circumstances, satisfy the “strong public policy” grounds to vacate an arbitration decision.
In Briscoe Protective, LLC v N. Fork Surgery Ctr., LLC (215 AD3d 956 [2d Dept 2023]), the Court vacated an arbitrator’s fee award on this very basis, ruling:
After awarding the petitioner damages in the principal sum of $22,614.89, . . . the arbitrator proceeded to award attorneys’ fees in the sum of $11,307, which is equal to 50% of the damages award . . . . [This] violates the strong public policy against excessive fees . . . where the amount becomes large enough to be out of all proportion to the value of the professional services rendered.
(quotations omitted).
Unfortunately, though Shusterman twice used the phrase “public policy” in his appellant’s brief, he cited no case law in support of this particular point. A missed opportunity perhaps.
On the other hand, as with almost any line of case law, there is competing case law holding the opposite, including one about which we wrote four months ago holding that “there is no per se rule against awarding fees in excess of damages recovered, and fees may be appropriate even where a party recovers only nominal damages” (Seibel v Ramsay, 225 AD3d 529 [1st Dept 2024]). In Seibel, the appeals court affirmed an award of “prevailing party” attorneys’ fees of $4 million based upon an actual damages award of $1.5 million.
What about the mutual legal losses each side endured? There is a line of case law holding, “Where the outcome of litigation is mixed and the relief awarded is not substantially favorable to either party, neither party can claim to be the prevailing party” (49 E. Owners Corp. v 825 Broadway Realty, LLC, 224 AD3d 493 [1st Dept 2024]).
Even though NYUI succeeded in defeating Shusterman’s direct claims, the outcome of Shusterman was at least arguably a “mixed” result because Shusterman defeated NYUI on all but one minor component of the counterclaims, and Shusterman received a written finding in his favor in the Preliminary Arbitration Ruling on his most important legal claim: that NYUI’s refusal to offer him equity “was a breach of the Agreement.”
One can’t help but think that if the attorneys’ fee decision in Shusterman emanated from a court, instead of an arbitration, the Appellate Division might have had a less deferential, more skeptical perception of whether NYUI was the “prevailing party.”