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Litton Industries, Inc. v. IMO Industries

November 2, 2009

LITTON INDUSTRIES, INC. AND LITTON SYSTEMS, INC., PLAINTIFFS-RESPONDENTS AND CROSS-APPELLANTS,
v.
IMO INDUSTRIES, INC., VARO, INC., BAIRD CORPORATION AND OPTIC-ELECTRONIC INTERNATIONAL, INC., DEFENDANTS-APPELLANTS AND CROSS-RESPONDENTS.



On certification to the Superior Court, Appellate Division.

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

This appeal addresses the award and computation of attorneys' fees arising out of a breach of contract action. In May 1995, Litton Industries, Inc. and Litton Systems, Inc. (collectively, plaintiffs) agreed to purchase for $52 million certain assets of the optical systems business of IMO Industries, Inc., Varo, Inc., Baird Corporation, and Optic Electronic, Inc. (collectively, defendants). The Purchase and Sale Agreement (Agreement) provided for a transfer date of June 2, 1995. Defendants warranted that they did not reasonably anticipate that any of their government bids or contracts would result in loss and agreed not to submit any government bid or contract that they estimated in good faith would result in a loss during the period before the transfer date. Prior to the transfer date, defendants submitted a bid to the United States Army for the refurbishment and manufacture of certain military equipment, which was awarded to defendants but ultimately resulted in a huge financial loss for plaintiffs.

On May 8, 1997, plaintiffs filed a complaint against defendants alleging that they lost approximately $16 million in fulfilling the obligations under the Army Contract on which defendants improperly bid. Plaintiffs claimed a breach of Section 3.12(a) (iv) of the Agreement as well as fraud in relation to the alleged breach. Section 3.12(a) (iv) of the Agreement provides that none of the contracts or bids of the sellers is reasonably anticipated to result in a contract loss on completion or performance. According to plaintiffs, defendants breached that provision because they should have anticipated a loss on the Army bid. In 2003, plaintiffs amended their complaint to include a claim based on an alleged violation of Section 5.3(ii) of the Agreement, which prohibits defendants from making any government bid or contract that they estimated in good faith would result in a loss. Ultimately, the plaintiffs prevailed on the claim based on the breach of Section 5.3(ii); the jury rejected all other claims. The jury awarded plaintiffs $2.3 million in damages, which the parties agreed to reduce to $2.1 million to correct an error.

Defendants moved for judgment notwithstanding the verdict, and plaintiffs filed a motion to recover attorneys' fees and costs in the amount of $6,411,354. Section 11.1 of the Agreement provided that defendants agreed to indemnify and reimburse plaintiffs for "any and all Losses suffered or incurred by the Buying interest (whether suffered or incurred with respect to any Third-Party Claim or otherwise) and resulting from or arising out of." among other things, "Breach of Covenant of Agreement." The Agreement defined the term "losses" as "all demands, claims. actions or causes of action. losses, damages, costs, expenses, liabilities, judgments, awards. and amounts paid in settlement (including reasonable attorneys' fees and costs incident to any of the foregoing).."

The trial court denied defendants' motion for judgment notwithstanding the verdict and appointed a Special Master on the issue of attorneys' fees. Focusing on the fact that plaintiffs would have had to establish the same proofs to succeed on a claim under either Section 5.3 or Section 3.12, the Special Master found that the claims related to those contract provisions arose from a "common core of facts" and were so interrelated that the legal services on the Section 3.12 claim should be included in the lodestar amount for the Section 5.3 claim. The Special Master determined that the attorneys' fees and costs would be better adjusted through a proportionality analysis and that a reduction was necessary for the unsuccessful fraud claim. Because the fraud claim was one of plaintiffs' three basic claims, the Special Master found it would be fair and reasonable to reduce plaintiffs' request for attorneys' fees by one-third. The Special Master reduced plaintiffs' request for costs by a similar amount. After calculating the reduction, the Special Master recommended an award of $2,971,295 for attorneys' fees and $693,026.96 for costs.

On September 13, 2006, after reviewing the Special Master's report, the trial court awarded plaintiffs legal fees, costs, and prejudgment interest at a simple rate of interest from the date of the commencement of the litigation, totaling $8,886,407.03. In respect of the legal fees, the trial court agreed with the Special Master that the contractual claims under Section 3.12 and Section 5.3 constituted a "common core of facts," and that the legal work performed could not be separated. However, the trial court rejected the Special Master's conclusion that the fraud claim represented an equal one-third amount of legal work, expenses and costs and ordered a total fee offset for the fraud claim of $226,250. The court approved a lodestar of $4,287,472, and found that plaintiffs' costs of $1,039,540 were fully allocated to their successful claims, as were the experts' fees of $896,920 and the consultants' fees of $180,718. The trial court addressed proportionality relating to the modification of the lodestar fee in order to accommodate the level of success achieved in litigation, concluding that there was no justification to greatly modify plaintiffs' fee request. The court determined that a reduction of ten percent to the lodestar for an amount of $3,858,725 was both fair and reasonable. With the approved costs, expert fees and consultants' fees, the trial court awarded the plaintiffs a total of $5,975,903 in attorneys' fees and costs. The court also found an award of prejudgment interest appropriate and looked to the tort model as a guide to award plaintiffs simple interest commencing as of the filing date of the original complaint, setting prejudgment interest at $810,504.

The Appellate Division reversed in part and remanded for trial limited to plaintiffs' claim for administrative expenses and lost profits associated with their successful contract claim. In all other respects, the Appellate Division affirmed the judgment of the trial court but granted a stay of execution on that judgment. The panel concluded that, in light of the trial court's consideration of all the appropriate factors, there was no abuse of discretion in the amount of legal fees and costs awarded. In respect of plaintiffs' cross-appeal, the panel affirmed the trial court's award of pre-judgment interest at a simple interest rate and rejected plaintiffs' multiple allegations of trial error.

The Supreme Court granted certification.

HELD: The Purchase and Sale Agreement provided for attorneys' fees and costs and the amount of the fee award is governed by traditional principles applicable to attorneys' fee awards, within the context of the contract. The trial court did not abuse its discretion in the amount awarded for pre-judgment interest or commit error in the claimed trial deviations.

1. The trial court correctly concluded that the Agreement provided for attorneys' fees and costs in plaintiffs' successful breach of contract claim. The reviewing court will generally not disturb a trial court's award of counsel fees except in cases of clear abuse of discretion. The Court has applied the same test for reasonable attorneys' fees in contract cases that has been used in other attorneys' fee award cases in New Jersey. The threshold issue is whether the party seeking the fee prevailed in the litigation. Plaintiffs satisfied the test for the awarded fees - they prevailed on one of their breach of contract claims and the contract required defendants to indemnify plaintiffs for their losses in the event of the breach. (pp. 11-15)

2. To determine the fee award, the court must calculate the lodestar, which is the number of hours reasonably expended by the successful parties' counsel in the litigation multiplied by a reasonable hourly rate. The court must consider the degree of success in determining the reasonableness of the time expended and, when a party is successful on only some of its claims for relief, the trial court should reduce the lodestar to account for that limited success. Moreover, if the same evidence adduced to support a successful claim was also offered on an unsuccessful claim, the court should consider whether it is nevertheless reasonable to award legal fees for the time expended on the unsuccessful claim. Beyond the lodestar amount, in cases in which the fee requested far exceeds the damages recovered, the trial court should consider the damages sought and the damages actually recovered. In addition to that proportionality analysis, the court must evaluate the reasonableness of the total fee requested as compared to the amount of the jury award. There is no precise formula, the ultimate goal is to approve a reasonable attorneys' fee that is not excessive. (pp. 15-17)

3. The Court affirms the conclusion of both the Special Master and the trial court finding a common core of facts necessitating the production of essentially the same evidence in evaluating the time spent on the successful and unsuccessful contract claims. The trial court properly found that the attorneys' fees related to the unsuccessful fraud claim were identifiable and, therefore, deleted that from the award. It does not appear that the trial court considered the large difference between the attorneys' fee requested and the amount actually recovered. Although in a contract action enhancement is not a concern, the relationship between the fee requested and the damages recovered is a factor to be considered by the trial court because the notion of proportionality is integral to contract fee-shifting in order to meet the reasonable expectations of the parties. Here, the trial court should have separately considered whether to reduce even more the amount of the fee, which exceeded the amount of the recovery. On remand, in addition to plaintiffs' claim for administrative expenses and lost profits associated with their successful contract claim that must be retried, the trial court must consider the reasonableness of the attorneys' fee request in light of all the factors noted. Further, the trial court did not abuse its discretion in determining that the costs of $1,039,540 were reasonable and fully allocable to plaintiffs' successful jury award. Finally, the award of pre-judgment interest in a contract case is within the sound discretion of the trial court as is the rate at which that interest is calculated. Trial court's decision to choose the rate set by Rule 4:42-11a (11), without enhancement added by subsection (a) (iii), was not a manifest denial of justice. (pp. 17-21)

4. Plaintiffs challenged the trial court's response to the jury's questions concerning the limitations of federal antitrust law as it may have impacted the Agreement. The Appellate Division correctly found no merit to plaintiffs' challenge; the trial court fairly and adequately responded to the jury's questions. In addition, the Court finds no abuse of discretion in the trial court's limitations on plaintiffs' counsel's comments in summation regarding defendants' failure to call certain witnesses. (pp. 21-26)

Judgment of the Appellate Division is AFFIRMED in part and REVERSED in part. The matter is REMANDED to the trial court to consider the reasonableness of the attorneys' fee award, after the retrial of the issue remanded by the Appellate Division, in accordance with the principles pronounced herein.

JUSTICE RIVERA-SOTO, joined by JUSTICE HOENS, CONCURRING in part and in the result, is of the view that the majority's approach, which imports wholesale concepts developed in the tort or statutory fee-shifting context, is ill-suited in a contract setting. In that discrete context,, whether a counsel fee award is appropriate and, if so, in what amount, should be informed, but not rigidly governed, by the well-recognized methodology used in determining counsel fees awards -- a lodestar analysis -- followed by the application of traditional contract principles that eschew any enhancements and define the quantum of any recovery in terms of what is foreseeable.

CHIEF JUSTICE RABNER and JUSTICES LONG, LaVECCHIA, ALBIN, and WALLACE join in this opinion. Justice RIVERA-SOTO filed a separate opinion concurring in part and in the result, in which JUSTICE HOENS joins.

Per curiam.

Argued December 2, 2008

The principal issue in this appeal is the award and computation of attorneys' fees arising out of a breach of contract action. Plaintiffs sought $9 million in damages for the alleged breach of two provisions in the contract and for fraud. The jury found that defendants breached one provision of the contract, rejected plaintiffs' other claims, and awarded plaintiffs $2.3 million in damages. The trial court determined that the contract provided for attorneys' fees and costs and awarded plaintiffs $3,858,725 in attorneys' fees, $896,920 in experts' fees, $180,718 in consultants' fees, and $1,039,540 in costs, as well as prejudgment interest.

The Appellate Division essentially affirmed, but remanded on an issue not relevant to this appeal. We granted both defendants' petition for certification related to the attorneys' fees and costs, and plaintiffs' cross-petition related to the calculation of prejudgment interest and two asserted trial errors. We reverse in part and remand. We hold that the agreement provided for attorneys' fees and costs and that the amount of the fee award is governed by traditional principles applicable to attorneys' fee awards, within the context of the contract. We also hold that the trial court did not abuse its discretion in the amount awarded for prejudgment interest or commit error in the claimed trial deviations.

I.

The underlying litigation centered on a complex contract between plaintiffs Litton Industries, Inc. and Litton Systems, Inc. (collectively Litton or plaintiffs), and defendants IMO Industries, Inc., Varo, Inc., Baird Corporation, and Optic Electronic International, Inc. (collectively defendants). In May 1995, plaintiffs agreed to purchase certain assets of defendants' optical system business for $52 million. The Purchase and Sale Agreement (Agreement) provided for a transfer date of June 2, 1995. Defendants warranted that they did not reasonably anticipate that any of their government bids or contracts would result in a loss and agreed not to submit any government bid or contract that they estimated in good faith would result in a loss during the period before the transfer date.

Prior to the transfer date, defendants submitted a bid to the United States Army for the refurbishment and manufacture of certain military equipment. The transfer occurred in early June 1995, and shortly thereafter the Army awarded the military equipment contract to defendants. The Army contract ultimately resulted in a huge financial loss for plaintiffs.

On May 8, 1997, plaintiffs filed a complaint against defendants alleging that they lost approximately $16 million in fulfilling the obligations under the Army contract on which defendants improperly bid. Plaintiffs initially made two claims: breach of § 3.12(a)(iv) of the Agreement and a fraud claim based on the same alleged breach. Section 3.12(a)(iv) provided in part that [e]xcept as described on Schedule 3.12(a)(iv), none of the Government Contracts, Sales Contracts, Bids or Government Bids of the Sellers with respect to the Business is reasonably anticipated to result in a Contract Loss upon completion of performance . . . . [(emphasis added).]

Plaintiffs asserted that defendants breached that provision because they should have anticipated a loss on the bid submitted to the Army.

In June 2003, plaintiffs moved to amend their complaint to include an additional claim based on the alleged violation of § 5.3(ii) of the Agreement, which prohibited defendants from making any government bid or contract that they estimated in good faith would result in a loss. Section 5.3 of the Agreement provided in part that [e]xcept as otherwise may be required by Applicable Law, Antitrust Law, or Government Contract Law, the Sellers shall not, without the prior consent of Litton . . . make or enter into any Contract, Government Bid or Bid respecting . . . (ii) Contracts for which the total cost estimate at the time of execution thereof or at the time of the Government Bid or Bid, as the case may be, as estimated in good faith by the Sellers, would result in a net loss on the applicable Contract . . . .

At trial plaintiffs sought $9,022,042 for the claims based on the theories of fraud and breach of both § 3.12(a)(iv) and § 5.3(ii) of the Agreement. Ultimately, plaintiffs prevailed on the breach of contract claim premised on § 5.3(ii), but the jury rejected all other claims. The jury awarded plaintiffs $2.3 million in damages, which the parties agreed to reduce to $2.1 million to correct an error.

Defendants moved for judgment notwithstanding the verdict, and plaintiffs filed a motion to recover attorneys' fees and costs in the amount of $6,411,354. Section 11.1 of the Agreement provided that defendants agreed to indemnify and reimburse plaintiffs for any and all Losses suffered or incurred by the Buying interest (whether suffered or incurred with respect to any Third-Party Claim or otherwise) and resulting from or arising out of each of the following:

(b) Breach of Covenant of Agreement Any breach of non-fulfillment by [defendant] or any Seller of any of their covenants, agreements, or other obligations set forth in this Agreement . . . . "Losses" is defined in the Agreement as "all demands, claims . . . actions or causes of action . . . losses, damages, costs, expenses, liabilities, judgments, awards . . . and amounts paid in settlement (including reasonable attorneys' fees and costs incident to any of the foregoing) . . . ."

The trial court denied defendants' motion for judgment notwithstanding the verdict and appointed a Special Master*fn1 on the issue of attorneys' fees. Specifically, the trial court asked the Special Master to determine and recommend . . . a lodestar amount for the attorneys['] fees and costs reasonably incurred by Plaintiffs in the litigation of their claim under [s]section 5.3(ii) of the [Agreement], the claim on which the Plaintiffs prevailed at trial. The Court will conduct its proportionality analysis and determine the amount of any fee award, so the Special Master need only determine the lodestar amount for that claim.

The Special Master found that plaintiffs' claims under § 3.12 and § 5.3 arose from a "common core of facts" and that those claims were so interrelated that the legal services on the § 3.12 claim were to be included in the lodestar amount for the § 5.3 claim. The Special Master focused on the fact plaintiffs would have had to establish the same proofs to succeed on a claim under either § 3.12 or § 5.3. The Special Master determined that the attorneys' fees and costs would be better adjusted through a proportionality analysis than by parsing out each and every fee from the intermingled claims, and that a reduction was necessary for the failed fraud claim. Because the fraud claim was one of plaintiffs' three basic claims, the Special Master found it would be fair and reasonable to reduce plaintiffs' request for attorneys' fees by one-third. The Special Master also reduced plaintiffs' request for costs by a similar amount. After calculating the reduction, the Special Master recommended an award of $2,971,295 for attorneys' fees and $693,026.96 for costs.

The trial court received the Special Master's report and rendered a decision on September 13, 2006. The court denied defendants' motion for judgment notwithstanding the verdict, and awarded plaintiffs legal fees, costs, and prejudgment interest at a simple rate of interest from the date of commencement of the litigation. In addressing the legal fees, the trial court agreed with the Special Master that the contractual claims under § 3.12 and § 5.3 constituted a "common core of facts." The trial court explained that

[t]he claims themselves are inextricably intertwined . . . . The claims relate and overlap and it is impossible to envision a manner of separating the legal work and expenses associated with one claim from the other. It simply cannot be done. They indeed are based upon a common core. Accordingly, and without qualification, this court finds that the legal work, costs and expenses attributable to the two contractual claims may be attributed entirely to the § 5.3(ii) claim for purposes of determining the [lode]star.

However, the trial court rejected the Special Master's conclusion that the fraud claim represented an equal one-third amount of legal work, expenses and costs, as compared to the two contractual claims. The court found that the fraud claim could be easily separated and required markedly less work than the contractual claims. The court accepted the itemized reductions proposed by plaintiffs' counsel and ordered a total fee offset for the fraud claim of $226,250. The court approved a lodestar of $4,287,472, and concluded that plaintiffs' costs of $1,039,540 were fully allocated to their successful claim, as were the experts' fees of $896,920, and the consultants' fees of $180,718.

The trial court next discussed proportionality:

Generally, a proportionality analysis relates to a modification of a [lode]star fee, by virtue of fee-shifting statutes, in order to accommodate the level of success achieved in litigation. Here, the basis for the fee application is the [Agreement] and the [lode]star computation work was performed by a [S]pecial [M]aster as a result of rare agreement between the parties as embodied in the appointing order dated April 15, 2005 . . . .

[E]xpert and consultant fees have been determined. Costs in [the] amount of $1,039,540.00 have been found to be intrinsically reasonable and fully allocated to [plaintiffs'] successful jury award. Therefore, the proportionality adjustment pertains to the attorneys' fees alone.

In its proportionality analysis the court reasoned that

[a] critical consideration in the required analysis is the relationship of the success realized as compared to the amount of damages sought. A meaningful difference exists between the two in this case.

[Plaintiffs] asked for damages of more than $9 million and [were] rewarded with a verdict of $2.3 million. Even [plaintiffs'] expert on this issue obliquely expressed an understanding that a partial reduction of attorneys' fees would be forthcoming. This is an accurate forecast. The question, of course, is by what amount?

The answer is not the product of a mathematical computation resulting in a percentage based on a comparison of prospectively recoverable damages to damages recovered in fact. While this relationship unquestionably is important, an answer is dependent on a complex of other considerations, including those factors referenced in RPC 1.5.

The trial court noted that the litigation was extremely complex, required lengthy discovery and intense trial preparation, resulted in a long trial, and that "[c]ompetent counsel expended much energy and a great number of legal hours, reasonable legal hours, successfully pursing legal redress against [defendants] because there was no alternative." The court concluded that there was no justification to greatly modify plaintiffs' fee request and determined that a reduction of ten percent was both fair and reasonable. Consequently, the court deducted ten percent from the lodestar of $4,287,472 to arrive at an attorneys' fee award of $3,858,725. With the approved costs of $1,039,540, experts' fees of $896,920, and consultants' fees of $180,718, the trial court awarded plaintiffs a total of $5,975,903 in attorneys' fees and costs.

Further, the court found that this was an appropriate case for the award of prejudgment interest and looked to the tort model as a guide to award plaintiffs simple interest commencing as of the filing date of the original complaint.

In the amended judgment, the court entered judgment in favor of plaintiffs in the amount of $8,886,407.03, as follows:

a. $2,100,000.00 on the jury's verdict for compensatory damages;

b. Prejudgment interest awarded pursuant to R. 4:42-11(a)(ii), in the amount of $810,504.03 (calculated on the amount of the compensatory award of $2,100,000.00 from the date of the filing of the Complaint on May 8, 1997 through October 6, 2006); and

c. Attorneys' fees, expenses and costs of litigation awarded in the amount of $5,975,903.00.

Both sides appealed. In an unpublished opinion, the Appellate Division reversed in part, and remanded for trial limited to plaintiffs' claim for administrative expenses and lost profits associated with their successful contract claim. In all other respects, the Appellate Division affirmed the judgment of the trial court, and granted a stay of execution on the final amended judgment.

The panel found that the definition of "losses" in the Agreement clearly included attorneys' fees in connection with litigation, and that the trial court's "common core of facts" analysis was supported by the record. Further, the panel agreed with the trial court that the fraud claim was easily separated from the other claims, and that the legal time associated with that claim did not account for a large portion of the legal work. The panel approved the calculation of the lodestar and noted that the trial court "critically considered" the large difference between the amount of damages sought and the amount actually recovered. Although the panel stated that it might have arrived at a different result than the trial court, it concluded that in light of the trial court's consideration of all the appropriate factors, there was no abuse of discretion in the amount of legal fees and costs awarded.

In respect of plaintiffs' cross-appeal, the panel affirmed the trial court's award of prejudgment interest at a simple interest rate and rejected ...


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