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United States District Court, S.D. New York

April 20, 2004.

DARRYL L. DAGEN, Plaintiff; -against- CFC GROUP HOLDINGS LTD., ET AL., Defendants

The opinion of the court was delivered by: CONSTANCE MOTLEY, Senior District Judge


Following a jury verdict in favor of plaintiff on defendants' counterclaims and in favor of defendants on plaintiff's claims, defendants move the court to award them taxable costs, including attorney's fees. For the reasons stated below, the motion is GRANTED IN PART and DENIED IN PART.


  The factual and procedural background of this case has been laid out in full in previous opinions and orders, familiarity with which is assumed. The court therefore recounts only the facts that bear upon the court's disposition of the issue presented.

  In relevant part, this case arises out of plaintiff Darryl Dagen's employment with defendants CFC companies. Dagen charged defendants with constructive discharge, three violations for breach of contract (one of which was withdrawn prior to trial), failure to pay wages pursuant to New York Labor Law, intentional interference with contractual relations, and unjust enrichment. Plaintiff's sought relief in the amount of no less than $1,053,301.00 in compensatory damages and no less than $10,000,000 in punitive damages, as well as costs, attorneys' fees, and statutory damages.

  Defendants counterclaimed for breach of contract, fraudulent inducement of contract, conversion, fraud, negligent misrepresentation, unjust enrichment, and breach of fiduciary duties. They requested damages, together with costs, reasonable attorneys' fees, interest, all sums wrongfully obtained by Dagen, punitive damages, out — of — pocket losses and expenses.

  The court held a jury trial in this case from November 7, 2003 through November 19, 2003. At the close of plaintiff's case, the defense rested. The jury returned a verdict in favor of defendants on plaintiff's claims and in favor of plaintiff on defendants' counterclaims. Accordingly, on November 28, 2003, the court entered a judgment dismissing plaintiff's complaint and defendant's counterclaims.

  On January 5, 2004, defendants moved the court to award them taxable costs, including attorneys' fees. They argue that because plaintiff refused defendants' Offer of Judgment on September 25, 2003 for $50,000 and thereafter recovered a judgment of a lesser amount, they are entitled to all litigation — related costs incurred after that date under Fed.R.Civ.P. 68. Alternatively, they claim that as the prevailing party, the court should award them costs under Fed.R.Civ.P. 54(d). Plaintiff opposes defendants' motion, arguing that Rule 68 does not apply because plaintiff did not prevail and Rule 54(d) does not entitle defendants to costs because defendants did not prevail on their counterclaims. Further, plaintiff argues that even if the court were to award defendants costs under one or both of the Rules, neither statute entitles defendants to attorneys' fees.


 I. Are Defendants Entitled To Costs?

  A. Rule 54(d)(1)

  Fed.R.Civ.P. 54(d)(1) states in relevant part: "Except when express provision therefor is made either in a statute of the United States or in these rules, costs other than attorneys' fees shall be allowed as of course to the prevailing party unless the court otherwise directs." The decision whether or not to award costs rests with the sound discretion of the trial court, Cosgrove v. Sears, Roebuck & Co., 191 F.3d 98, 101-02 (2d Cir. 1999), but as the language of the Rule indicates, prevailing parties are presumptively entitled to costs. See Delta Air Lines. Inc. v. August, 450 U.S. 346, 352, 101 S.Ct. 1146 (1981).

  The question, then, is who is a "prevailing party?" The Rule provides no guidance as to the definition of the term. Generally, "the litigant in whose favor judgment is rendered is the prevailing party for purposes of Rule 54(d)." Wright, Miller & Kane, Federal Practice and Procedure: Civil 2d § 2667, at 178. The Supreme Court has stated that "[r]espect for ordinary language requires that a plaintiff receive at least some relief on the merits of his claim before he can be said to prevail." Buckhannon Bd. and Care Home, Inc. v. West Virginia Dept. of Health and Human Resources, 532 U.S. 598, 604, 121 S.Ct. 1835 (2001) citing Hewitt v. Helms, 482 U.S. 755, 760, 107 S.Ct. 2672 (1987). The inquiry focuses on the "material alteration of the legal relationship of the parties." Farrar v. Hobby, 506 U.S. 103, 111, 113 S.Ct. 566 (1992). According to the Second Circuit, a plaintiff prevails whenever he or she succeeds on "any significant issue" in the litigation which achieves some of the benefit the party sought in bringing suit. Bridges v. Eastman Kodak. 102 F.3d 56, 58 (2d Cir. 1996). The success must be more than "technical" or "de minimis." Lyte v. Sara Lee Corp., 950 F.2d 101, 103 (2d Cir. 1991). Here, although Dagen successfully warded off defendants' counterclaims, he did not receive relief on the merits or any of the benefits he sought in bringing suit, nor did his suit materially alter the parties' legal relationship. As such, Dagen is not the prevailing party in this case.

  At the same time, the court entered judgment for plaintiff on defendants' counterclaims. Plaintiff therefore argues that for the purposes of Rule 54(d), neither Dagen nor defendants can be considered the "prevailing party" entitled to costs. To substantiate this claim, plaintiff cites Srybnik v. Epstein, 230 F.2d 683 (2d Cir. 1956), holding that "where the defendant counterclaims for affirmative relief and neither party prevails on its claim, it is quite appropriate to deny costs to both parties." Id. at 686.

  Following Scientific Holding Co., Ltd, v. Plessey. Inc., 510 F.2d 15 (2d Cir. 1974), the court rejects plaintiff's argument as "too wooden a view." Id. at 28. In Scientific, the Second Circuit upheld the award of costs to a defendant pursuant to Rule 54(d) despite the fact that defendant did not prevail on its counterclaims. The Second Circuit noted that the defendant's counterclaim was limited to two issues, and "[l]ittle trial time was spent on the counterclaim, whereas consideration of plaintiffs claim for $1, 260,000 compensatory damages plus punitive damages required three weeks of trial, 16 witnesses, over 1,800 pages of testimony and more than 100 exhibits." Id. at 28. See also Ann Howard Designs, L.P. v. Southern Frills, Inc., 7 F. Supp.2d 388, 389-90 (2d Cir. 1998) (denying defendant costs under Rule 54(d) not because defendant lost its counterclaims, but because defendant "went beyond defensive counterclaims, asserting every minutely colorable counterclaim conceivable as found in any body of law it could locate," many of which "bordered on frivolous."); City of Rome, Italy v. Glanton, 184 F.R.D. 547, 550 (E.D. Pa., 1999) (in deciding whether an unsuccessful defendant counterclaimant is entitled to costs where the plaintiff is also unsuccessful on the merits, "[t]he court should look to whether the defendants have advanced counterclaims that are not related in some way to the main complaint or that require "proof outside the scope of plaintiff's claim . . . as well as the relative `size' of the counterclaim in comparison to the counts in the complaint."); Lacovara v. Merrill Lynch. Pierce, Fenner & Smith, 102 F.R.D. 959, 961 (E.D. Pa. 1984) (awarding defendant costs even though it lost its counterclaim because it sought only $4,494 as relief while the complaint sought over $80,000 for plaintiff's claim).

  Defendants' counterclaims for breach of contract, negligent representation, fraud, conversion, and breach of fiduciary duties were directly related to plaintiff Dagen's claims for breach of contract, unjust enrichment, intentional interference with contractual relations, and failure to pay wages. The proof required to defend against plaintiff's claims was substantially the same as the proof required to support defendants' counterclaims. For example, defendants' ability to show that plaintiff stole a company check and then walked off the job prior to the expiration of the contract's term was directly related to both defending against plaintiff's breach of contract claim and establishing defendants' claim for conversion, unjust enrichment, and breach of fiduciary duties. Similarly, defendants' ability to show that the owner of all CFC companies, defendant Boris Merkenich, explicitly encouraged plaintiff to improve his performance immediately before plaintiff claims to have been "constructively discharged" directly related to defending against Dagen's breach of contract and constructive termination claims and defendants' counterclaim for breach of contract and fiduciary duties. Moreover, with the obvious exceptions for opening and closing arguments, the entire trial was dedicated to plaintiff's case. For nearly four solid days, the jury was focused on items such as Merkenich's supposed scheme to force plaintiff out of work by refusing to allow plaintiff to secure his residential lease in the company name, the tapes he made of conversations with Merkenich by secreting a recorder in his clothing, Dagen's claimed inability to work due to CFC's cancellation of his cell phone even though he was contractually entitled to a cell phone, questionable expenses he submitted to defendants, explanations as to why he never closed any sales, and so forth. At the close of plaintiff's case, the defense rested. The fact that the defense rested at the close of plaintiff's case shows that the focus of litigation was on plaintiff's allegations as opposed to defendants', and, equally as important, that defendants' refutation of plaintiff's claims was sufficient to simultaneously establish their right to relief on their counterclaims. Finally, plaintiff demanded millions of dollars in relief. The size of his claim relative to defendants' counterclaims justifies, in part, the court's conclusion that defendants' failure to prevail on its counterclaims does not dispose of its rights under Rule 54(d)(1).

  Defendants' counterclaims were defensive in nature and not sufficiently weighty, complex, or time — consuming to warrant denying their Rule 54(d)(1) applications for costs. This result is not so extraordinary given that judgment was entered in favor of defendants on all of plaintiff's claims and the litigation was centrally focused on plaintiff's allegations, not defendants'. Thus, for the purposes of Rule 54(d)(1), defendants are the "prevailing party" and they are therefore entitled to costs allowable under the Rule.

  B. Rule 68

  On September 25, 2003, defendants offered Dagen to take judgment against them for $50,000 in settlement of all claims in this litigation. Dagen refused the offer.

  Rule 68 provides that if a timely pretrial offer of settlement is not accepted and "the judgment finally obtained by the offeree is not more favorable than the offer, the offeree must pay the costs incurred after the making of the offer." Fed.R.Civ.P. 68. As a means of encouraging settlement and avoiding litigation, "[t]he Rule prompts both parties to a suit to evaluate the risks and costs of litigation, and to balance them against the likelihood of success upon trial on the merits." Marek v. Chesny, 473 U.S. 1, 5, 105 S.Ct 3012 (1985). The Rule requires plaintiff to "think very hard" about whether continued litigation is worthwhile, id. at 111, especially in those cases where "there is a strong probability that the plaintiff will obtain a judgment but the amount of recovery is uncertain," Delta Air Lines, 450 U.S. at 352.

  A court is precluded from applying the Rule in situations where the defendant, rather than the plaintiff, obtains a judgment dismissing the complaint. Delta Air Lines. 450 U.S. at 352. In other words, if the plaintiff does not recover judgment, Rule 68 does not apply. But what Delta Air Lines does not address, however, are situations such as the one presented here, where the plaintiff does not obtain a judgment on any of the claims set forth in its complaint, but obtains a judgment dismissing a defendant's counterclaims. In that sense, Dagen was at least partially successful.

  Given the court's conclusion that defendants were the prevailing party under Rule 54(d)(1), it would be especially anomalous to conclude that Dagen was the prevailing party under Rule 68 because he successfully warded off defendants' counterclaims. Again, under any definition of a "prevailing party," Dagen is a far cry from having prevailed in this lawsuit. Courts facing similar situations have likewise concluded that a plaintiff whose only success consists of a judgment dismissing a defendant's counterclaim are shielded from application of Rule 68. See e.g., U.S. v. Safeco. Ins. Co. of America. 116 F.3d 487 (9th Cir. 1997) (finding Rule 68 inapplicable where plaintiff obtained a judgment dismissing defendant's counterclaims and defendant obtained a judgment dismissing plaintiff's complaint). Applying the Rule in this context is also illogical judged against its purpose. This was not a case in which defendants' liability was clear and the only uncertainty was the amount of Dagen's damages. As the verdict itself illustrates, it was far from clear that defendants breached the contract by constructively discharging Dagen and, had defendants been liable, Dagen would have been entitled to at least the wages he would have earned through the contractual term. Further, application of the Rule in situations such as the one before the court would encourage defendants to interpose relatively frivolous counterclaims so that they can then claim that plaintiff "prevailed" under Rule 68 for having obtained a judgment dismissing the frivolous counterclaims. Congress could not have intended such a result.

  Because plaintiff did not obtain a judgment on the claims set forth in his complaint, defendants are not entitled to costs under Rule 68.

 II. Allowable Costs Under Rule 54(d)

  The "costs" allowed under Rule 54(d)(1) include only the specific items enumerated in 28 U.S.C. § 1920. Crawford Fitting Co. v. J.T. Gibbons, Inc., 482 U.S. 437, 107 S.Ct. 2494 (1987); accord United States ex rel. Evergreen Pipeline Constr. Co. v. Merritt Meridian Constr. Corp., 95 F.3d 153, 171 (2d Cir. 1996). Local Civil Rule 54.1(c) further delineates the categories of expenses a prevailing party may recover, narrowing the scope of taxable items. See V — Formation, Inc. v. Benetton Group, 2003 WL 21403326 (S.D.N.Y. 2003).

  Defendants' bill of costs claims $68.40 for transcripts necessarily obtained for use in the case and $2,911.50 for deposition transcripts used at trial, totaling $2,979.90. Both costs are allowable under Federal Rule 54(d)(1). See 28 U.S.C. § 1920 (2); Local Civil Rule 54.1(c)(1)(2). Defendant also moves the court for $799.64 in costs incurred in creating oversized blow — ups of exhibits and charts admitted into evidence. Local Civil Rule 54.1(6) provides that the costs of enlargements greater than 8" by 10" and charts are not taxable except by order of the court. Because the enlarged exhibits were introduced into trial in a manner that was "incidental and necessary" to the representation of defendants, Amato v. City of Saratoga Springs, 991 F. Supp. 62, 68 (N.D.N.Y. 1998), and the cost of the items in question does not seem unreasonable, the court awards defendants $799.64 relating to the creation of these items.

  Finally, defendants seek attorneys' fees. Rule 54.1(7) does not contemplate the imposition of attorneys' fees and other related expenses except by order of the court. Under the American Rule, absent statutory authorization or an established contrary exception, each party bears its own attorneys' fees. Colombrito v. Kelly, 764 F.2d 122, 133 (2d Cir. 1985). However, a court may exercise its inherent power to award attorneys' fees where a party acts in bad faith by wantonly asserting a colorless claim for the purposes of harassment or delay or for other improper purposes. Id. at 133. See also Sierra Club v. U.S. Army Corps of Engineers, 776 F.2d 383, 390 (2d Cir. 1985), cert denied, 475 U.S. 1464 (1986) (the parties pay their own costs of litigation unless a party acted in bad faith, vexatiously, wantonly, or for oppressive reasons). "Neither meritlessness alone, nor improper motives alone, will suffice." Colombrito. 764 F.2d at 133. Although plaintiff's claims were dubious at best, especially given the evidence brought forth at trial regarding his own instances of misconduct, the court is not prepared to impose the extraordinary award of attorneys fees in this case absent further statutory authorization to do so or evidence of bad faith on the part of the plaintiff.


  Defendants' motion for taxable costs, including attorneys' fees under Federal Rules 54(d)(1) and 68 is GRANTED IN PART and DENIED IN PART. Given that defendants' counterclaims were defensive in nature, did not go beyond the scope of plaintiff's allegations, and consumed little to no time during the trial, the fact that judgment was entered against defendants on their counterclaims does not negate defendants' status as the "prevailing party" in this case. Accordingly, defendants are entitled to costs under Rule 54(d)(1) in the amount of $3779.54, but they are not entitled to costs under Rule 68.

  The Cleric of the Court is hereby directed to enter judgment in favor of the defendants for taxable costs totaling $3,779.54.



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