Ashland Chemical Inc. v. Barco Inc.

• Citation: 123 F.3d 261
• Decision Date: 15 September 1997
• Docket Number: No. 96-40431,96-40431
• Parties: ASHLAND CHEMICAL INC., Plaintiff-Appellant, v. BARCO INC., et al., Defendants, Mesh Plastics Ltd., Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 261

123 F.3d 261

ASHLAND CHEMICAL INC., Plaintiff-Appellant, v. BARCO INC., et al., Defendants Mesh Plastics Ltd., Defendant-Appellee.

No. 96-40431.

United States Court of Appeals Fifth Circuit.

Sept. 15, 1997.

Debora M. Alsup, Thompson & Knight, Austin, TX, James Martin Underwood, Dallas, TX, for Plaintiff-Appellant.

Charles T. Frazier, Jr., Gregory Joseph Lensing, Cowles & Thompson, Dallas, TX, for Defendant-Appellee.

Appeal from the United States District Court for the Eastern District of Texas.

Before REAVLEY, KING and BARKSDALE, Circuit Judges.

KING, Circuit Judge:

Plaintiff-appellant Ashland Chemical, Inc. appeals the district court's order granting defendant-appellee Mesh Plastics, Ltd. an award of legal fees under Article 6, Section 9 of the Eastern District of Texas's Civil Justice Expense and Delay Reduction Plan. Because we find that Article 6, Section 9 of that Plan is a fee-shifting provision that was not authorized by Congress, we reverse the district court's award of legal fees to Mesh.

I. FACTUAL AND PROCEDURAL BACKGROUND

Ashland Chemical, Inc. (Ashland) sued Mesh Plastics, Ltd. (Mesh), Barco, Inc., and Lakiva Corp. in September of 1992, claiming that it suffered over $200,000 in damages as a result of defects in chemical holding tanks that it purchased from defendants. Mesh's primary defense was that its agent was unauthorized to bind it to the sales agreement upon which Ashland relied. Following the entry of default judgments against the other two defendants, Mesh presented Ashland with a written offer of judgment in the amount of $1000 pursuant to Article 6, Section 9 (the Local Rule) of the Civil Justice Expense and Delay Reduction Plan (CJEDR Plan) of the Eastern District of Texas. The Local Rule provides as follows:

(9) Offer of Judgment. At the Management Conference or any time thereafter, a party may make a written offer of judgment. If the offer of judgment is not accepted and the final judgment in the case is of more benefit to the party who made the offer by 10%, then the party who rejected the offer must pay the litigation costs incurred after the offer was rejected. In personal injury and civil rights cases involving contingent attorneys' fees, the award of litigation costs shall not exceed the amount of the final judgment. The Court may, in its discretion, reduce the award of litigation costs in order to prevent undue hardship to a party.

"Litigation costs" means those costs which are directly related to preparing the case for trial and actual trial expenses, including but not limited to reasonable attorneys' fees, deposition costs and fees for expert witnesses.

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS, CIVIL JUSTICE EXPENSE AND DELAY REDUCTION PLAN, art. 6, § 9 (1997). In accordance with the requirements of the Local Rule, Mesh set a deadline of May 1, 1993 for acceptance or rejection of the offer. In addition, Mesh's counsel stated in his letter: "If for some reason you believe that the time allowed is unreasonable, please contact me and perhaps we can make other arrangements." Ashland replied that it was unable to evaluate the offer because it was still awaiting a response to an outstanding discovery request. On May 1, 1993, the offer expired.

On March 28 and 29, 1994, the case was tried before a jury. The jury returned a verdict in favor of Mesh, and the court entered a take-nothing judgment and dismissed the case on the merits. Thereafter, Mesh filed a Motion for Assessment of Litigation Costs seeking $53,465.60 in attorneys' fees and expenses pursuant to the Local Rule. The district court granted Mesh's motion and ordered Ashland to pay the requested amount. Ashland then filed a Motion for Reconsideration, arguing on various theories that the Local Rule was invalid. The district court denied the motion in a Memorandum Opinion and Order, and Ashland now appeals that decision.

II. STANDARD OF REVIEW

We review de novo the conclusions of law made by a district court. Prudhomme v. Tenneco Oil Co., 955 F.2d 390, 392 (5th Cir.), cert. denied, 506 U.S. 826, 113 S.Ct. 84, 121 L.Ed.2d 48 (1992). We accept a district court's factual findings unless they are clearly erroneous. Id. In this case, the issues raised on appeal are questions of law.

III. DISCUSSION

Ashland argues that the Local Rule is a substantive fee-shifting provision that was not authorized by Congress. Mesh, however, insists that the Civil Justice Reform Act of 1990 (CJRA), 28 U.S.C. §§ 471-482, implicitly authorizes the Local Rule. Ashland disagrees, contending that if Congress had intended to authorize such action, it would have included explicit language to that effect in the statute. Ashland further argues that because the Local Rule is substantive in nature, under the Supreme Court's decision in Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975), it must be specifically authorized by Congress in order to be valid. Mesh counters that Alyeska does not control the outcome of this case, and argues instead that the Court's more recent decision in Chambers v. NASCO, Inc., 501 U.S. 32, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991), is the most relevant precedent. ¹

A. Fee-Shifting Rules Generally

This court has held that, "in an ordinary diversity case, state rather than federal law governs the issue of the awarding of attorney's fees." Shelak v. White Motor Co., 636 F.2d 1069, 1072 (5th Cir. Unit A Feb.1981). It is undisputed that under Texas law Mesh would not be entitled to attorneys' fees because Texas follows the " 'American Rule' which imposes the burden of attorney's fees upon the individual litigants." Crenshaw v. General Dynamics Corp., 940 F.2d 125, 129 (5th Cir.1991).

In addition, in Alyeska, the Supreme Court addressed the issue of fee shifting:

"[I]n an ordinary diversity case where the state law does not run counter to a valid federal statute or rule of court, and usually it will not, state law denying the right to attorney's fees or giving a right thereto, which reflects a substantial policy of the state, should be followed."

421 U.S. at 259 n. 31, 95 S.Ct. at 1623 n. 13 (quoting 6 J. MOORE, FEDERAL PRACTICE § 54.77(2), at 1712-13 (2d ed.1974)). Alyeska involved a suit brought by environmental groups that were attempting to bar the construction of an oil pipeline. Id. at 241-43, 95 S.Ct. at 1613-14. The sole issue before the Supreme Court was the lower court's decision to award attorneys' fees to the environmental groups where no applicable statute provided for such an award. Id. at 245, 95 S.Ct. at 1615. Relying on the "American rule"--"the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys' fee from the loser"--the Court held that "it would be inappropriate for the Judiciary, without legislative guidance, to reallocate the burdens of litigation in the manner and to the extent urged by respondents and approved by the Court of Appeals." Id. at 247, 95 S.Ct. at 1615. Although the Court took care to note that courts possess "inherent power ... to allow attorneys' fees in particular situations, unless forbidden by Congress," it declined to expand the scope of those situations. Id. at 259, 95 S.Ct. at 1622.

More recently, however, the Supreme Court has defined and limited the scope of Alyeska's determination that fee shifting is substantive in nature and must be congressionally authorized. In Chambers, the district court, relying on its inherent power to sanction bad-faith conduct, ordered defendant Chambers and his attorney to pay almost one million dollars in attorneys' fees and expenses. 501 U.S. at 40, 111 S.Ct. at 2130. The Supreme Court upheld the award, holding that when sanctions under applicable rules and statutes are inadequate, a court may call upon its inherent powers to "assess attorney's fees when a party has ' "acted in bad faith, vexatiously, wantonly, or for oppressive reasons." ' " Id. at 45-46, 111 S.Ct. at 2133-34 (quoting Alyeska, 421 U.S. at 258-59, 95 S.Ct. at 1622-23 (quoting F.D. Rich Co. v. United States ex rel. Industrial Lumber Co., 417 U.S. 116, 129, 94 S.Ct. 2157, 2164, 40 L.Ed.2d 703 (1974))). Further, the Court noted that when a federal court sits in a diversity case, its inherent power to use fee shifting as a sanction for bad-faith conduct is not limited by the forum state's law regarding sanctions. Id. at 52-53, 111 S.Ct. at 2136-37. The Court distinguished Alyeska, stating that "[t]he limitation on a court's inherent power described [in footnote 31 of Alyeska] applies only to fee-shifting rules that embody a substantive policy, such as a statute which permits a prevailing party in certain classes of litigation to recover fees." Id. at 52, 111 S.Ct. at 2137.

Taken together, these cases stand for the proposition that substantive departures from the American rule and its traditional exceptions must be authorized by Congress. See id. at 47, 111 S.Ct. at 2134. Indeed, as the Court explained in Chambers:

[T]he narrow exceptions to the American Rule effectively limit a court's inherent power to impose attorney's fees as a sanction to cases in which a litigant has engaged in bad-faith conduct or willful disobedience of a court's orders....

... Nevertheless, "we do not lightly assume that Congress has intended to depart from established principles" such as the scope of a court's inherent power.

Id. (quoting Weinberger v. Romero-Barcelo, 456 U.S. 305, 313, 102 S.Ct. 1798, 1803, 72 L.Ed.2d 91 (1982)). Thus, Chambers did not eviscerate the core holding of Alyeska that congressional authorization is necessary for novel departures from the American rule; rather it merely served to clarify that, despite Alyeska, courts retained their traditional, inherent power to sanction bad-faith conduct through the assessment of costs and attorneys' fees.

We therefore must determine whether the Local Rule is procedural, like sanctions for bad-faith conduct, or substantive....