Update: On November 12, 2020, the Court dismissed this case because the parties reached a settlement.

Read the analysis of the argument here.

On August 18, 2020, the Supreme Court of Ohio will hear oral argument in Rayco Manufacturing, Inc. v. Murphy, Rogers, Sloss, & Gambel, a Professional Law Corporation, et al., 2019-1498. At issue in this case is whether attorney fees incurred from a motion to enforce a settlement agreement are recoverable as compensatory damages. Justice Stewart has recused herself from this case, and Judge John W. Wise from the Fifth District Court of Appeals will sit for her.  

Case Background

On October 21, 2013, Rayco Manufacturing filed a legal malpractice suit against its former attorneys Murphy, Rogers, Sloss, & Gambel (“Murphy”) of Louisiana, Murphy’s local counsel, the Cleveland firm of Cavitch, Familio and Durkin “(Cavitch”) (collectively, “The Law Firms”) and a number of individually named lawyers, who had represented Rayco in a prior lawsuit. 

 After participating in mediations, Rayco’s attorney sent a letter stating Rayco’s willingness to settle the malpractice claim for $3,050,000, which Rayco had repeatedly insisted throughout the mediations was the amount necessary to settle the case. The Law Firms’ lawyers accepted this settlement demand and subsequently sent a draft settlement agreement to Rayco for review and execution. After several back and forth communications about the agreement, including an agreement to cancel a scheduled pretrial conference about the case, Rayco refused to sign the draft settlement agreement.

On June 16, 2017, the Law Firms moved to enforce the alleged settlement agreement. Further, the Law Firms requested an award of attorney fees, alleging that Rayco’s failure to sign the alleged settlement agreement constituted frivolous, bad faith conduct that justified the recovery of attorney fees. Rayco argued that the agreement could not be enforced because the parties had never reached a settlement.

Cuyahoga County Court of Common Pleas Judge John P. O’Donnell held an evidentiary hearing before an advisory jury which was asked to determine whether the parties had entered into a contract to settle the lawsuit. The advisory jury found that the parties had entered into a settlement agreement. Based on the evidence presented and the jury verdict, Judge O’Donnell found that there was an enforceable settlement agreement; however, Judge O’Donnell declined to award to award the Law Firms any attorney fees.

Rayco appealed the trial court’s decision enforcing the alleged settlement agreement. The Law Firms cross-appealed the trial court’s decision denying the award of attorney fees.

The Appeal

Because of a conflict among panel decisions on this issue, the Eighth District heard this case en banc. In a 7-5 decision, written by Judge Eileen A. Gallagher, and joined by Judges Mary Eileen Kilbane, Mary J. Boyle, Frank D. Celebrezze, Jr., Raymond C. Headen, Larry A. Jones, Sr., and Kathleen Ann Keough, the Eighth District affirmed the trial court’s decision to enforce the settlement agreement between Rayco and the Law Firms but reversed the trial court’s denial of attorney fees to the Law Firms. In so holding, the majority found that attorney fees can be awarded as compensatory damages to a prevailing party on a motion to enforce a settlement agreement when the attorney fees are incurred as a direct result of a breach of the settlement agreement. The Eighth District remanded the case to determine the amount of reasonable attorney fees that the Law Firms had incurred to enforce the settlement agreement.

The Eighth District noted that compensatory damages are awarded to fully compensate a party for a loss caused by the other party. When parties agree to settle a case, the end of litigation is an essential part of the consideration that is exchanged as part of the agreement. By breaching a settlement agreement, the breaching party deprives the other party of the essential benefit of its bargain. Therefore, the Eighth District held that the nonbreaching party should recover reasonable attorney fees as compensatory damages, not “costs of litigation.” Because attorney fees are recoverable as compensatory damages, the American Rule did not preclude recovery in this case, even though none of the exceptions to the American Rule applied. The majority also noted that it does not matter if the nonbreaching party sought enforcement of the settlement agreement in a separate action or by filing a motion.

Judge Michelle J. Sheehan wrote the dissenting opinion, joined by Judges Patricia Ann Blackmon, Eileen T. Gallagher, Sean C. Gallagher, and Anita Laster Mays. The dissent viewed the majority’s finding as deviating from the American Rule, noting that this “fourth exception” recognized by the majority had been carved out by lower courts, without any guidance from the Supreme Court of Ohio or the legislature. Because no exception to the American Rule applied in this case, and because simply calling attorney fees compensatory damages does not change their nature as fees, the dissent would deny any award of attorney fees to the Law Firms.

Rayco appealed the majority’s finding that the Law Firms could recover attorney fees for enforcing the agreement.

Votes to Accept the Case

Yes: Chief Justice O’Connor and Justices Kennedy, French, Fischer, and DeWine*

No: Justice Donnelly

*Justice DeWine would accept the appeal on proposition of law Nos. I through III only.

Justice Stewart is not participating in this case.

Rayco’s Proposition of Law Accepted for Review No. 1

The American Rule requires that each party pay its own attorney fees unless the parties agreed otherwise by contract, a statute provides for fee shifting, or a party acted in bad faith.

Rayco’s Proposition of Law Accepted for Review No. 2

Compensatory damages for breach of contract do not include attorney fees.

Rayco’s Proposition of Law Accepted for Review No. 3

Attorney fees incurred to prosecute a motion to enforce a settlement agreement constitute litigation expenses rather than damages.

Rayco’s Proposition of Law Accepted for Review No. 4

Where a party seeks attorney fees as a form of compensatory damages, such damages must be determined by the fact finder based upon the evidence presented at trial.

Key Statutes and Precedent

Spercel v. Sterling Industries, Inc., 31 Ohio St.2d 36 (1972) (“The law favors the resolution of controversies and uncertainties through compromise and settlement rather than through litigation. The resolution of controversies by means of compromise and settlement results in a saving of time of the parties, the lawyers, and the courts, and it is thus advantageous to judicial administration, and, in turn, to government as a whole.”)

Alyeska Pipeline Serv. Co. v. Wilderness Soc., 42 U.S. 240 (1975) (in holding that the prevailing party could not recover attorney fees, the Court declined to create a far-reaching exception to the American Rule without legislative input.) 

Kovach v. Lazzano, 11th Dist. Geauga No. 1082 (Aug. 5, 1983) (“Compensatory damages in Ohio have been traditionally defined as the measure of actual loss suffered by the aggrieved party. [T]he object of compensatory damages is to make the damaged party whole for the wrong done to him. General compensatory damages are those which result from the wrongful act and which are traceable to and the necessary result of the act.”)

S & D Mechanical Contrs., Inc. v. Enting Water Conditioning Sys., Inc., 71 Ohio App.3d 228 (2d Dist. 1991) (holding that a plaintiff may recover attorney fees expended in an action brought by a third party as compensatory damages where the defendant’s breach of contract caused the plaintiff to engage in the litigation with the third party.)

*Mayfran Internatl v. May Conveyor, Inc., 8th Dist. Cuyahoga No. 62913 (July 15, 1993) (holding that a prevailing party on a motion to enforce a settlement agreement was not entitled to recover the attorney fees it incurred to enforce the agreement as compensatory damages because there had been no finding that the other party had acted in bad faith.)

Johnson v. Weiss Furs, 8th Dist. Cuyahoga No. 76680 (Feb. 24, 2000) (“[T]he purpose of monetary compensatory damages is to put the injured party in the position that he or she would have been in, had the wrong complained of not occurred.”)

*R.C.H. Co. v. Classic Car Auto Body & Frame, Inc., 2004-Ohio-6852 (8th Dist.) (holding that no attorney fees may be awarded absent a contractual or statutory basis for an award of attorney fees, or a finding of bad faith by the non-prevailing party.)

Tejada-Hercules v. State Automobile Insurance Co., 2008-Ohio-5066 (10th Dist.) (permitting parties to recover attorney fees incurred to enforce a settlement agreement as compensatory damages “encourages parties to comply with the terms of their settlement agreements, lest they put themselves at risk of paying the nonbreaching parties’ attorney fees” incurred from enforcing the settlement agreement.)

Wilborn v. Bank One Corp., 2009-Ohio-306 (The “American Rule” provides that a prevailing party in a civil action usually cannot recover its attorney fees as “costs of litigation” unless a statute provides for attorney fees, the losing party acts in bad faith, or an enforceable contract “specifically provides for the losing party to pay the prevailing party’s attorney fees.”)

Berry v. Lupica, 2011-Ohio-5381 (8th Dist.) (holding that, notwithstanding the American Rule, a party is entitled to recover its attorney fees as compensatory damages when the fees are incurred as a direct result of the breach of a settlement agreement.)

Brown v. Spitzer Chevrolet Co., 2012-Ohio-5623 (5th Dist) (“[A]ttorney fees are allowed as compensatory damages when the fees are incurred as a direct result of the breach of a settlement agreement.”)

Rohrer Corp. v. Dane Elec. Corp. USA, 482 F. App’x 113 (6th Cir. 2012) (“Ohio law allows a court to award attorney’s fees as compensatory damages when a party’s breach of a settlement agreement makes litigation necessary, even where none of the exceptions to the American Rule have been shown.”)

Wilson v. Prime Source Healthcare of Ohio, N.D. Ohio No.1:16-CV-1298 (Mar. 2, 2018) (“Attorney’s fees as compensatory damages are available whether a party files a separate breach of contract suit or a motion to enforce settlement before the original trial court.”)

Phoenix Lighting Group, L.L.C. v. Genlyte Thomas Group, L.L.C., 2020-Ohio-1056 (reaffirming that Ohio courts generally follow the “American Rule.”)

*To the extent that these cases are inconsistent with the Eighth District’s en banc opinion in this case, these cases are overruled.

Rayco’s Argument

When determining whether to award attorney fees to a prevailing party, Ohio courts rely on the “American Rule.” Under the American Rule, each litigant must pay its own attorney’s fees, unless a statute provides for fee shifting, the parties agreed otherwise by contract, or a party acted in bad faith. Because none of the exceptions to the American Rule apply in this case, the Law Firms are not entitled to recover attorney fees.

A court must cautiously exercise the bad-faith exception to the American Rule. Namely, a court may award attorney fees only after finding that bad faith conduct occurred. This finding of bad faith is distinct from a finding of a “bad-faith breach” of a contract. Rather, to fall under the bad-faith exception to the American Rule, a party must improperly behave during the judicial proceedings. Neither exercising one’s legal rights nor holding disparate legal views constitutes bad faith under the exception. Because Rayco has engaged in no improper conduct during the judicial proceedings, this Court may not invoke the bad-faith exception to award attorney fees to the Law Firms. Additionally, there is no applicable statute in this case that provides for fee shifting. Lastly, the parties indisputably did not contract for some fee shifting arrangement. Therefore, under the American Rule, the Law Firms are responsible for their own attorney fees.

In this case, the attorney fees should be characterized as litigation costs, not “compensatory damages.” Some lower courts have allowed attorney fees to be characterized as compensatory damages, but only if there was a finding of bad faith. Additionally, attorney fees may be labeled as damages when fees are awarded as punitive damages in tort cases. Neither of these scenarios are applicable here. Rayco did not act in bad faith, and this case is a contract dispute, where punitive damages are unavailable.

Some prior case law has held that Ohio courts may award attorney fees as compensatory damages when a party’s breach of a settlement agreement makes litigation necessary, even where none of the exceptions to the American Rule apply. However, this Court should reject this line of cases because both this Court and the U. S. Supreme Court have held that attorney fees must be characterized as litigation costs, not damages. Calling attorney fees anything other than litigation costs is simply a rhetorical trick. Indeed, if making a party whole means awarding damages such that the aggrieved party is in the same position that it would have been without the breach, then the American Rule is dead, and all statutory or contractual provisions that provide for fee shifting are superfluous. By awarding attorney fees to the Law Firms, this Court would essentially impose a fee-shifting provision into all settlement agreements as a matter of public policy. This would result in essentially telling litigants that they should automatically agree if the other side contends a settlement was reached, because disputing that an agreement was reached will result in an award of fees against the disputing party.  

Even if the Court holds that Rayco’s conduct constitutes the bad faith exception to the American Rule, the Law Firms should still not recover attorney fees because the Law Firms filed a motion, not a distinct claim or counterclaim. A motion is an improper vehicle for seeking an award of compensatory damages for claims not raised in the pleadings. To recover attorney fees, the Law Firms should have filed a distinct new claim or counterclaim for breach of the settlement agreement, rather than merely a motion in an existing lawsuit.

If this Court decides to characterize the attorney fees as “compensatory damages,” then the usual rules for proving and determining attorney fees should apply. First, when a party invokes its right to a jury trial, the jury must determine compensatory damages. Accordingly, Rayco has a right to have the jury determine the amount of compensatory damages. Second, the party seeking compensatory damages must present evidence of such damages at trial in order to preserve any alleged error by the trial court in failing to award such damages. The Law Firms did not present any evidence of the compensatory damages at trial. In fact, the Law Firms first articulated, by inappropriate motion, the argument that it should receive compensatory damages nine days after the jury trial ended. Accordingly, the window of opportunity for proving such damages has closed, and the Law Firms are not entitled to recover attorney fees.

The Law Firms’ Argument

Generally, the American Rule does not allow the recovery of attorney fees without statutory authorization, bad faith, or an agreement by the parties to shift fees. However, Ohio courts have held that, when a party breaches a settlement agreement, thereby forcing the nonbreaching party to continue litigation, the nonbreaching party may recover its attorney fees incurred from enforcing the settlement agreement. These attorney fees may be awarded as compensatory damages incurred as a direct result of the other party’s breach. Here, a settlement agreement existed between the Law Firms and Rayco. The Law Firms are entitled to attorney fees because the fees were incurred as a direct result of Rayco’s breach of the settlement agreement.

A distinction exists between cases where attorney fees are sought as incidental “costs of litigation” and cases where attorney fees are sought as compensatory damages directly flowing from a breach of contract. When parties to a lawsuit contract to settle, the benefit of that contract is the end of litigation and attorney fees. If the contract is breached, the nonbreaching party has lost the benefit of its bargain because it is forced to continue litigation. Accordingly, the fees that the nonbreaching party must incur to end the litigation constitute damages directly flowing from the breach—not incidental costs or expenses from litigation.

Contract damages are awarded to compensate the nonbreaching party for the losses suffered due to the breach and to provide that party with the benefit of its bargain. By awarding attorney fees as compensatory damages, courts can restore the nonbreaching party to the position it would have been absent the breach.

When Rayco breached the settlement agreement, the Law Firms lost an essential benefit of their bargain—namely, to end the expenses of further litigation. Therefore, attorney fees—in the form of compensatory damages—are appropriate to restore the Law Firms to the position they would have been in absent the breach. 

Rayco concedes that the American Rule does not apply when parties contractually agree to shift fees. Here, such a contractual agreement would be redundant. By expressly contracting to settle litigation to avoid legal fees, the parties already substantively agreed to shift the risk of incurring legal fees to the breaching party. A core purpose of a settlement agreement is to avoid additional attorney fees.

Rayco’s argument that a motion is an improper vehicle for seeking compensatory damages is waived because it was not raised to either the trial court or to the appellate court below. Even if this argument were not waived, the Law Firms still properly requested attorney fees through their motion. Ohio courts have held that a settlement agreement may be enforced by filing a motion to enforce a settlement agreement, as long as the trial court has not entered final judgment. Here, the litigation was still pending when the Law Firms filed their motion. Therefore, the Law Firms properly sought attorney fees by filing a motion.

The Law Firms neither presented evidence on the amount of attorney fees nor considered whether such fees should be considered by a jury because the trial court denied their request for attorney fees. The advisory jury in this case considered only whether there was a settlement agreement. Once this case is remanded, the trial court will determine, for the first time, whether a jury trial on damages should occur.

The Law Firms’ Response to Proposition of Law No. 1

While the general American Rule does not permit a prevailing party to recover its attorney fees as part of the costs of litigation in the absence of statutory authorization, bad faith, or an agreement by the parties to shift fees, where a party to a settlement agreement to end litigation breaches the agreement and forces the nonbreaching party to continue to litigate, the nonbreaching party may recover its attorney fees incurred to enforce the settlement, not as the incidental costs of the action, but as compensatory damages incurred as a direct result of the other party’s breach.

The Law Firms’  Response to Proposition of Law No. 2

Compensatory damages for breach of contract include attorney fees where an essential benefit bargained for is an end to the expense associated with further litigation.

The Law Firms’ Response to Proposition of Law No. 3

Attorney fees incurred to prosecute a motion to enforce a settlement may be recovered as compensatory damages.

The Law Firms’ Response to Proposition of Law No. 4

Where a trial court errs in finding that a party is not entitled to compensatory or expectancy damages as a matter of law, and therefore does not hold a trial or evidentiary hearing to determine the amount of those damages, the proper procedure is remand for such a determination on the merits.

Student Contributor: Maria Ruwe