Although I normally do not write about cases outside the disability insurance arena, I found this case particularly interesting on the subject of attorney fees under the Employee Retirement Income Security Act, as well as under a rarely used statute, 28 U.S.C. §1927.

The case involved a suit against a medical benefits plan for wrongful failure to pay for a liver transplant. After ordering payment for the treatment, the court took up both parties' motions for fees. The court rejected all of the defendants' requests for fees but granted fees to the plaintiff. Franklin v. H.O. Wolding Inc., 2004 U.S. Dist. LEXIS 26592 (S.D. Ind., Dec. 8).

First, the court discussed 28 U.S.C. §1927, which provides: ''Any attorney or other person admitted to conduct cases in any court of the United States or any territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses and attorney fees reasonably incurred because of such conduct.''

The court found sanctions were warranted because the defendant's actions were unreasonable and vexatious. The court found the basis of defendant's refusal to pay for the transplant unreasonable and considered defendant's tactic of trying to avoid plaintiff's fee request under ERISA by moving for sanctions to be vexatious.

''The four defense motions,'' the court noted, ''have also been vexatious, in the court's view. Defendants have been threatening sanctions from the time the suit was filed, though they folded quickly on the underlying question of coverage.

''Recognizing that plaintiff would have a solid (though debatable) claim for her own fees, defendants apparently decided that the best defense would be a good offense. A good offense, however, is not one based on such distortions of the supposedly offending statements to the court. 'If a lawyer pursues a path that a reasonably careful attorney would have known, after appropriate inquiry, to be unsound, the conduct is objectively unreasonable and vexatious.' In re TCI Ltd., 769 F.2d 441, 445 (7th Cir. 1985) (affirming fee award under section 1927); accord, Johnson v. C.I.R., 289 F.3d 452, 456 (7th Cir. 2002) ('Bad faith under section 1927 of the Judicial Code is not a subjective concept, as the words ''who so multiplies the proceedings in any case unreasonably and vexatiously'' might be thought to imply; ''reckless'' or ''extremely negligent'' conduct will satisfy it.'); IDS Life Insurance Co. v. Royal Alliance Associates Inc., 266 F.3d 645, 654 (7th Cir. 2001) (reversing denial of sanctions under section 1927: 'So clear is it that the defendants filed a frivolous suit in a New York court in order to complicate this already far too complicated and absurdly protracted litigation, to the cost of the plaintiffs, that the district judge committed an abuse of discretion in refusing to sanction the defendants' counsel under section 1927.').''

The court also applied the standard of Hooper v. Demco Inc., 37 F.3d 287 (7th Cir. 1994), to determine the propriety of fees under ERISA. In Hooper, as in Franklin, the issue was whether fees were properly payable where the defendant agreed after litigation was commenced to pay for the cancer treatment sought in the lawsuit.

The court explained the fee analysis:

''When a cause is settled or disposed of without full litigation on the merits (as in this case), this circuit applies a two-step analysis to determine if the party prevailed in the litigation. In In re Burlington Northern Inc., 832 F.2d 422, 425 (7th Cir. 1987), we ruled that a party must initially prove that the outcome of the plaintiff's lawsuit must be causally linked to the achievement of the relief obtained. The lawsuit is causally linked to the relief obtained if it played a 'provocative role in obtaining relief.' Nanetti v. University of Illinois, 867 F.2d 990, 993 (7th Cir. 1989) citing DeVito, 656 F.2d at 267.

''Therefore 'the lawsuit must [be] a ''catalyst'' or ''material factor'' in obtaining concessions from the opponent and a favorable outcome to the dispute.' Id. quoting Ekanem v. Health & Hospital Corp., 778 F.2d 1254, 1258 (7th Cir. 1985); Stewart v. Hannon, 675 F.2d 846, 851 (7th Cir. 1982).

''Under the second step of the Burlington analysis, however, the suit must have prompted the defendant (the settling party) to act or cease its behavior based on the strength of the case, not 'wholly gratuitously' in response to the plaintiff's claims. Id. We review the second step, whether the defendant acted wholly gratuitously under the abuse of discretion standard. Id.; Dixon v. Chicago, 948 F.2d 355, 358 (7th Cir. 1991). Thus, we must determine whether Demco settled this case with an eye toward its possible exposure if litigation progressed, or whether their motivation to settle was wholly gratuitous.''

In this case, the court found the litigation was the catalyst for the defendant's eventual agreement to pay for the liver transplant. Thus, the plaintiff was considered a prevailing party entitled to fees (even though the ERISA statute does not require prevailing party status for an award of fees). The court then applied the prevailing fee analysis approach in the 7th U.S. Circuit:

''The court first looks to five factors that the court should consider in connection with the fee question: (1) the degree of the losing party's culpability or bad faith; (2) the ability of the losing party to satisfy an award of fees; (3) whether an award of fees against the losing party would deter others from acting under similar circumstances; (4) whether the party requesting fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA; and (5) the relative merits of the parties' positions. Meredith [v. Navistar International Transportation Corp., 935 F.2d 124, 128 (7th Cir. 1991)].

''The second approach indicates that the district court should award fees to the prevailing party unless either (1) the losing party's position was substantially justified or (2) special circumstances make a fee award unjust. Id. In the end, we think these two formulations are simply alternative ways of making the same basic point: as we have put it before, 'the bottom-line question is Was the losing party's position substantially justified and taken in good faith, or was that party simply out to harass its opponent?' Id. We review the district court's decision to award fees for abuse of discretion. Bowerman v. Wal-Mart Stores Inc., 226 F.3d 574, 592 (7th Cir. 2000).'' See Central States, Southeast and Southwest Areas Pension Fund v. Hunt Truck Lines Inc., 272 F.3d 1000, 1004 (7th Cir. 2001).

Following either prong, the District Court found that the plaintiff was entitled to fees. The court concluded that the defendant failed to conduct an appropriate medical review of the necessity for a transplant and ruled that the defendant could not be allowed to justify its actions by having a qualified specialist review the claim for the first time after the dispute arose. Thus, the plaintiff met the prevailing standards.

The court added a sound policy reason why fees were appropriate:

''Further, a fee award in this case should be consistent with the purposes and policies of ERISA. When a family buys health insurance, whether through an employer or not, they seek the security of knowing that if they face catastrophic health care expenses, the insurer they have paid to assume the risk will step in and take responsibility for those costs. ERISA already removes the risk of punitive damages and consequential damages that might apply if the case were governed by state law. To provide full equitable relief, and to encourage insurers to fulfill their obligations rather than delay until a patient's health has deteriorated substantially, or worse, a fee award is needed to take a step toward making the insured patient financially as well off as she would have been if the insurer had acknowledged its contractual responsibility in the first place.''

Although the court awarded fees, the court declined to approve fees for work on the pre-suit appeal that was distinct from the litigation. However, the court did award fees for the time spent on the fee dispute. The amount of the fee request was modestly reduced because one of the attorneys combined all time spent in a particular month without specifying time for particular days or tasks.

This ruling is extremely instructive to litigants by explaining what litigation tactics constitute unreasonable and vexatious conduct, by noting the duties imposed on plans when they deny benefits, and by placing record-keeping responsibilities on the parties seeking fees. For anyone involved in ERISA litigation, this case should be kept closely at hand as a reference any time fee disputes arise.