Statutory Reimbursement Exceptions

April 13, 2006

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Generally, the U.S. courts lack a loser pays system, which is a serious risk factor inherent in litigation. One way to control these risk factors is to find exceptions that make the loser pay in a lawsuit.

A party may bring a court action based on a "common law" right to sue or a right to sue authorized by statute. The courts originally developed common law causes of action, which include almost all tort (i.e., personal injury) actions, as well as breach of contract cases. The general rule that governs a common law cause of action is that, absent a contract clause to the contrary, the winner of the action will not be reimbursed by the loser for attorney's fees and related costs.

However, a second exception exists when a cause of action is based on a statute that specifically authorizes reimbursement. Note that not every statute that authorizes a private cause of action also authorizes reimbursement. Moreover, the statutes that do authorize reimbursement typically work in a very narrow way, sanctioning reimbursement only to the plaintiff when he prevails in the action.

State Versions of the FTC Act. The small business owner who is a plaintiff will be at a distinct advantage if he can base his claim on a statute that authorizes reimbursement of attorney's fees and related costs. Perhaps the most common statute used for this purpose will be the state's version of the Federal Trade Commission (FTC) Act.

The FTC Act itself does not authorize private causes of actions. However, every state has a version of the FTC Act that does authorize the filing of private actions. While consumers who believe they have been the victims of "unfair and deceptive" business practices typically use the statutes, the statutes are not limited to protecting consumers. Small business owners can file actions against other commercial parties under these statutes. The term "unfair and deceptive" business practices is interpreted very broadly by the courts. Thus, it usually is not too difficult to fit most claims under these statutes.

State Franchise Acts. The FTC also extensively regulates franchise agreements (see below). A violation of the FTC's franchise rules automatically is deemed to be an unfair and deceptive business practice, and thus a violation of the FTC Act. However, because the FTC Act does not authorize private actions, this relationship also means that a franchisee cannot sue under the federal statute for a violation of the FTC's franchise regulations.

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Fifteen states have franchise laws based on the FTC's franchise regulations. These states include:

States with Franchise Laws Based on FTC Franchising Act
California	Michigan	Rhode Island
Hawaii	Minnesota	South Dakota
Illinois	New York	Virginia
Indiana	North Dakota	Washington
Maryland	Oregon	Wisconsin

Each of these state statutes authorizes a private cause of action and reimbursement to the plaintiff for attorney's fees and related costs, if the plaintiff prevails in the action. The acts also authorize awards of punitive damages. Because of the extensive disclosures required by these statutes, it often is not difficult to find a violation by a franchisor. Because many small business owners will operate franchises, and disputes frequently occur between franchisors and franchisees, these state statutes can offer small business owners a distinct advantage in litigating the dispute.

RICO. The Racketeering Influenced and Corrupt Organizations (RICO) Act is the federal statute originally enacted to combat organized crime. It is perhaps best known for its criminal provisions.

However, RICO also authorizes the filing of private civil causes of actions by parties who suffer losses due to "racketeering." The statute also authorizes reimbursement of attorney's fees and related costs to a plaintiff who prevails in the action.

Ordinarily, small business owners would not have reason to sue an organized crime syndicate. Thus, it may initially seem that RICO would be of little use to small business owners. However, as is true with many other areas in the law (e.g., the definition of unfair and deceptive trade practices), the term "racketeering" has been very broadly construed by the courts, so as to extend well beyond organized crime syndicates.

Specifically, RICO is violated if an organization carries on a pattern of illegal activities. A business entity can meet the legal definition of an organization, which usually is defined simply as a group comprised of two or more individuals. A pattern of illegal activities exists if a party repeats the illegal activity as little as two different times. Further, the illegal activities do not have to be criminal in nature, but instead can be in the nature of unfair or fraudulent business practices that may or may not result in a monetary loss to another party.

An action may be based on RICO in many situations that arise in ordinary business relationships. For example, a franchise relationship could form the basis for a RICO cause of action by the franchisee against the franchisor, if the franchisor had committed a series of fraudulent or deceptive acts.

In fact, successful civil actions under RICO have been brought against banks, insurance companies, brokerage houses and even protestors. In general, if the small business owner is the victim of any type of fraudulent scheme carried out by another party, a RICO action may be available.

Statutes Providing Reimbursement to Either Party. Finally, certain statutes apply a broader rule, authorizing reimbursement to either party who prevails in the action. For example, a federal statute that outlaws copyright infringement also authorizes a private cause of action. This statute allows the court to order reimbursement of attorney's fees and related costs to either party, including the defendant, when that party prevails in the action.

These types of statutes are relatively unusual, as most statutes merely authorize reimbursement to plaintiffs who prevail in the action.