Antitrust Law Daily Wrap Up, ADVERTISING—CalCtApp: $2.9 Million Attorney Fee Award Upheld in State Challenge to R.J. Reynolds Tobacco Advertising Campaign, (Apr 30, 2013)

By Tobias J. Gillett, J.D., LL.M.

A California Court of Appeal has upheld an award of over $2.9 million in attorney fees to the State of California in an action challenging R.J. Reynolds Tobacco Company’s use of certain images in an advertising campaign, allegedly in violation of a ban on using "cartoons" in tobacco advertising incorporated in a consent decree between Reynolds and most states (In re: Tobacco Cases I, April 26, 2013, McConnell, J.).

In November 1998, Reynolds entered into a master settlement agreement (MSA) with most states, which included prohibitions on the use of "cartoons" to advertise tobacco products, an agreement later incorporated in a consent decree. In 2006, Reynolds launched a "Farm Rocks" advertising campaign that included collages of fanciful objects, and placed advertisements adjacent to editorial content in Rolling Stone magazine that contained cartoons.

In December 2007, the State of California sued Reynolds to enforce the consent decree. Following Reynolds’ voluntary cessation of the Farm Rocks campaign, the court concluded that injunctive relief was unwarranted. The court found that "a relatively small portion" of the images in the Farm Rocks campaign violated the consent decree, rejected the state’s argument that Reynolds violated the consent decree by having its Rolling Stone advertisement adjacent to the editorial cartoons, and declined to assess sanctions against Reynolds.

The trial court’s decision was upheld on appeal, and a subsequent trial court proceeding awarded the state attorneys’ fees. The court of appeals reversed the order, finding that (1) California Civil Code Section 1717, which designated as the prevailing party the party "who recovered a greater relief in the action on the contract," applied and (2) attorneys’ fees should be based on the rates prevailing in the community for similar work. On remand, the trial court found the state was the prevailing party, awarding it $32,673.02 in litigation costs and $2,943,920.63 in attorneys’ fees based on San Francisco Bay Area market rates. Reynolds appealed.

Prevailing party determination. The court of appeals explained that Section 1717 gives courts "broad discretion" in determining the prevailing party and that a party could be a prevailing party if it "achieved its main litigation objective," even if it was "denied direct relief on a claim." Reynolds contended that the trial court abused its discretion in declaring the state to be the prevailing party, because it had denied injunctive relief and found that only "a relatively small portion" of Reynolds’ images violated the consent decree and because the state had failed to achieve success on the adjacency issue, which Reynolds described as the state’s "main litigation objective."

The appeals court rejected these arguments, concluding that the trial court had not abused its discretion. The state had devoted nine pages of its trial brief to the issue of Reynolds’ own images, but only three pages to the adjacency issue, and its opening statement spent somewhat more time on the issue of Reynolds’ own cartoons. Although the trial court judge made two "limited" statements indicating that the adjacency issue "was the central merits issue," those comments were not enough for the appeals court to "second guess" the judge’s determination that halting the advertising campaign was the state’s chief objective, and that the state had achieved that objective. Further, the state had succeeded in "push[ing] the envelope" on the MSA’s definition of "cartoons."

Moreover, the trial court’s denial of injunctive relief and sanctions did not alter the court’s decision. The trial court had denied injunctive relief because Reynolds had represented that it would permanently halt the advertising campaign, and had denied sanctions "in part, to essentially reward Reynolds for voluntarily ceasing its campaign." The court found "Reynolds’s attempt to now characterize its use of cartoons as trivial" to be "not well taken."

Amount of attorneys’ fees. The court also rejected Reynolds’ contention that the trial court abused its discretion in awarding the state attorneys’ fees based on market rates in the San Francisco Bay Area rather than on local San Diego market rates. The court explained that the market rate is generally "that prevailing in the community for similar work," but that a court can make an exception "when the prevailing party shows it was impracticable to use local counsel."

Here, the Attorney General had only two litigators from its Tobacco Section in its San Diego office, and those litigators "were the least experienced litigators in the section, and both were heavily committed to other cases." Instead, the state assigned two highly experienced litigators from its Oakland office. The state had submitted a declaration stating that it could not assign all MSA enforcement work to San Diego attorneys, and therefore it assigned work based on factors including the complexity of the case and the experience and work load of the attorneys.

The appeals court also dispensed with Reynolds’s argument that the state did not need experienced litigators on the case because the appeals court had previously concluded that the term "cartoon" is unambiguous, and therefore the state’s attorneys needed "no expertise about the MSA." Reynolds had contended that the rates should be no more than those paid to Reynolds’s local counsel.

The appeals court observed that Reynolds had also hired attorneys from the national law firms of Jones Day and Womble Carlyle Sandridge & Rice, LLP, and had "engaged in the type of litigation tactics pejoratively referred to as ‘scorched earth,’ presumably to cause delay and increase the [state’s] (and the trial court’s) financial burden." The state had to vigorously contest every step of the litigation, including "a variety of unmeritorious procedural roadblocks" and Reynolds’ arguments regarding the definition of "cartoon." Although the appeals court later found that definition to be "unambiguous," "hindsight [did] not affect the [state’s] need for experienced litigators." Moreover, Reynolds’s attorneys billed Reynolds substantially more in attorneys’ fees than the amount the state sought.

Finally, the appeals court rejected Reynolds’s contention that the trial court should have reduced the attorneys’ fees by a greater amount to reflect the state’s limited success. The state had voluntarily reduced its fees by 15 percent, noting that most time spent on the adjacency issue could not be separated from that spent on the rest of the case. The court noted that only a small amount of the state’s exhibits, stipulations of fact, and discovery requests were solely limited to the adjacency issue.

The court observed that, although the state had two theories on how Reynolds had violated the cartoon ban, its claim was solely contractual, and therefore "no apportionment of fees between contract and non-contract claims [was] at issue." Moreover, the claims were based on the same contract and contractual relationship, and to the extent apportionment was required the state had reduced its fees by 15 percent.

Furthermore, an award of attorneys’ fees was within the broad discretion of the trial court and should only be reversed if it "shocks the conscience and suggests that passion and prejudice influenced the determination," facts not evident here, in the court’s view. The appeals court concluded that it was "satisfied the awards of attorney fees and costs comport with the court’s broad discretion."

The case is Nos. D061077 and D061676.

Attorneys: Jeanne Finberg of the Office of the Attorney General for the People of California. Robert C. Wright (Wright & L'Estrange) for R.J. Reynolds Tobacco Co.

Companies: R.J. Reynolds Tobacco Company

Cases: Advertising ConsumerProtection CaliforniaNews