Receiving a judgment in your favor at trial does not automatically make you the prevailing party for the purpose of recovering your attorneys’ fees under the recently decided Arizona Supreme Court case of American Power Products, Inc., v. CSK Auto, Inc. On March 23, 2017, the Arizona Supreme Court issued an opinion which many claim turns the definition of prevailing party on its head.
In 2003, American Power Products (“American”) and CSK Auto (“CSK”) entered into a Master Vendor Agreement (“Agreement”) under which American agreed to sell electric scooters and other items to CSK on an open account. In 2005, American sued CSK for breach of that Agreement, seeking five million dollars in damages. In 2011, before the case went to trial, CSK served a written settlement offer in the amount of $1,000,001 on American pursuant to Rule 68 of the Arizona Rules of Civil Procedure. American did not accept the offer but proceeded to trial where it was awarded $10,733. The Court then awarded American an additional $775,000 in attorneys’ fees under Arizona’s attorneys’ fees statute, A.R.S. 12-341.01. After adding costs, interest, and attorneys’ fees, the total award for American was $861,000. CSK argued it was the prevailing party under Rule 68 (Arizona’s offer of judgment rule). The trial court ruled in favor of American reasoning that under the “totality of the litigation test” American was the prevailing party because it had received a judgment in its favor. The Court of Appeals upheld the trial court’s decision.
The issue addressed by our Supreme Court was whether the attorneys’ fees provision of the parties’ Agreement was to be interpreted to the exclusion of the Arizona attorneys’ fees statute or whether the statute and the contractual provisions must be harmonized.
Reversing both lower courts, our Supreme Court held that if the Agreement contained its own definition of “prevailing party” or if the Agreement conflicted with the statutory provisions, the Agreement would be interpreted to the exclusion of the statute, but because the Agreement did not contain a definition of “prevailing party” and was not in conflict with Arizona’s attorney’s fees statute, the Agreement and the statute must be harmonized.
Applying Arizona’s attorneys’ fees statute, the Supreme Court held that CSK was the prevailing party and entitled to recover its attorneys’ fees because its offer was greater than the amount American was awarded at trial, including attorneys’ fees, costs, and interest. Thus CSK was the prevailing party from the date of its offer and entitled to recover its attorneys’ fees from the date of the offer until the conclusion of the case. The Court further held that the Agreement’s mandatory attorneys’ fees language superseded the Arizona attorneys’ fees statute’s discretionary language and thus the trial court did not have the ability to deny CSK its attorneys’ fees.
The Court reversed trial court’s award of attorney fees to American and its ruling that American was the prevailing party. The Court held CSK was the prevailing party and entitled to recover the fees it incurred defending the action after the date the offer was made. However, the Court clarified that American was the prevailing party prior to the date CSK’s offer was made and it was entitled to recover its attorneys’ fees incurred prior to that date.
The description of this case is merely a summary and many facts critical to the interpretation of the contract were omitted in the interest of brevity but the importance of this case cannot be understated. This decision poses new challenges to both drafters of contracts and those interpreting the language of a contract after a dispute arises. If you want to discuss how this case may affect your contracts or any litigation you are presently involved in, please contact us.