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March 2017

Gordon & Rees Obtains Important Arizona Supreme Court Opinion Regarding Attorneys’ Fee Awards in Contract Actions

On March 23, 2017, the Arizona Supreme Court issued its second Opinion in American Power Products v. CSK Auto, Inc., vacating a portion of the Court of Appeals’ memorandum decision and reversing the trial court’s determination of prevailing party for purposes of an award of attorneys’ fees. Once again the result is very favorable for Gordon & Rees’ client, CSK Auto, Inc. (now O’Reilly Auto Parts). (Read the opinion here). Phoenix attorneys, Leon Silver and Andrew Jacob, handled the appeals of the matter.

In 2005, American Power Products, a gas and electric powered scooter, generator, and light vendor, sued CSK for claims arising from the purchase of its products for resale in CSK’s Checker, Schuck’s and Kragen retail stores under a Master Vendor Agreement (MVA). American claimed that CSK wrongfully took a variety of discounts and wrongfully returned product in violation of the terms of the manufacturer warranty, which American claimed governed the account.  

Several months prior to trial, CSK served American with a $1,000,001 offer of judgment under Rule 68 Arizona Rules of Civil Procedure.  Having rejected the offer, American asked the jury for $10.8 million in damages. Silver, who represented CSK from the very beginning of the dispute, argued that the appropriate award, and balance on the open account was $10,733. After two hours of deliberations, the jurors returned a 6-2 verdict awarding American $10,733. Both parties sought awards of attorneys’ fees and costs, each asserting it was the prevailing party under the MVA. The superior court found that American was the prevailing party and award it $775,000 in attorneys’ fees, plus costs, for a total judgment of $858,403.29.

On appeal, CSK argued that its settlement offer under Rule 68 triggered the second sentence of Arizona’s contractual attorneys’ fee statute (if judgment obtained is equal to or more favorable to the offerer than a written settlement offer, the offeror is deemed to be the successful party from the date of the offer forward) making it the prevailing party entitled to attorneys’ fees. The Court of Appeals disagreed, reasoning that when attorneys’ fees are based on a contract provision, the contract controls to the exclusion of the statute. 

CSK petitioned for review, arguing that since (1) the contract stated that the parties rights and remedies were to be governed and interpreted under Arizona law, (2) the contract did not contain a definition of prevailing party, (3) the Arizona attorneys’ fee statute applies by its terms to “all contested actions arising out of contract” and (4) the statute provides a mandatory definition of prevailing party in the circumstances of this case, the Court had to find that CSK was the prevailing party for purposes of an award of attorneys’ fees from the date of the offer forward.

After hearing argument on the case, the Arizona Supreme Court agreed: “Thus, rather than being completely supplanted by an attorney fee provision in the parties’ contract, the statute – consistent with its plain language – applies to ‘any contested action arising out of contract’ to the extent it does conflict with the contract.” The Court remanded the case to the trial court for a re-allocation of attorneys’ fees for each side, pre- and post-offer of judgment.

The opinion should have a significant effect on contract litigation in Arizona. A party that rejects a meaningful settlement offer runs the risk of paying both its attorneys and the other side’s attorneys’ fees from the date of the offer, even if it ultimately recovers a judgment. This in turn, should encourage far more early settlements.