Lawyers for Employers ®
Washington Supreme Court Refuses to
Award Federal Income Tax Offsets for
Noneconomic Damages and Gives Guidance
on Attorneys’ Fees Awards Under the
Washington Law Against Discrimination
Breaking Developments In Labor and Employment Law
02/07/07
In Pham v. City of Seattle, two employees sued the City of Seattle for employment
discrimination on the basis of race and national origin under the Washington Law Against
Discrimination ("WLAD"), Chapter 49.60 RCW. The jury awarded the plaintiffs front pay, back
pay and noneconomic damages. Following the jury verdict, the trial court awarded the plaintiffs
additional money to offset the adverse federal income tax consequences they would suffer from
receiving a "lump sum" front and back pay award, but declined to award an offset for the tax
consequences attributable to their noneconomic (emotional distress) damages award. The trial
court also reduced the plaintiffs' requested attorneys’ fees by $50,000 and declined to enhance
the reduced fees by a "multiplier" to compensate plaintiffs' attorneys for the risks they took,
given the contingent nature of success.
In responding to the plaintiffs' appeal, on February 1, 2007, the Washington Supreme Court
addressed the extent to which plaintiffs are allowed by the WLAD to shift their federal income
tax burdens to their employers. In addition, the Court provided guidance with regard to
attorneys’ fees requests by successful plaintiffs in discrimination cases.
Plaintiffs May Not Receive an Offset for Federal Income Taxes Attributable to
Noneconomic Damages Under the WLAD
By way of background, in 2004, the Washington Supreme Court, in Blaney v. International
Association of Machinists & Aerospace Workers, Dist. No. 160, 151 Wn.2d 203, held that
successful plaintiffs in discrimination cases can obtain additional money from their employers to
offset the adverse federal income tax consequences resulting from their receipt of large "lump
sum" damages awards. In Pham, the Supreme Court refused to extend its Blaney holding beyond
wage recovery awards, explaining that offsets are available under the WLAD only to the extent
that they are available under federal Title VII law (i.e., to ease the federal income tax burden
arising from large “lump sum” front and back pay awards). The Court noted that a 2004
amendment to federal income tax law, which allows successful claimants to deduct attorney fee
and cost recoveries from their gross income, had mooted Blaney's applicability to awards for
attorneys’ fees.
The Court recognized that, although the Blaney decision did not explicitly distinguish between
economic and noneconomic damages, noneconomic damages for emotional distress (which are
not intended to replace a tangible economic loss) are inherently different from front and back
pay (which are intended to "replace compensation that the employee would have earned in due
course absent the discrimination"). Accordingly, the offset to plaintiffs for the federal income tax
consequences of receiving an award of back pay and front pay is intended to relieve plaintiffs the
added tax burden of receiving that recovery in one “lump sum,” and to place plaintiffs in the
same economic position they would have enjoyed but for the discrimination. The Pham decision
pointed out that, because federal law provides that "lump sum" noneconomic damage awards
remain taxable to a successful plaintiff (unless attributable to physical injury), shifting the tax
burden on those awards to defendants would go beyond the WLAD's remedial goals.
Trial Court May Reduce Attorneys’ Fees for Hours Spent on Unsuccessful Claims,
Duplicated or Wasted Efforts, or Otherwise Unproductive Time
The Pham opinion also addressed issues related to the proper calculation of attorneys’ fees
awarded to a successful plaintiff in WLAD cases. In Pham, the Supreme Court confirmed that
the appropriate method for calculating an award of reasonable attorneys’ fees under the WLAD
is, first, to calculate a "lodestar" amount. The "lodestar" is measured by the number of hours
reasonably expended by the attorneys multiplied by a reasonable hourly rate. Second, the trial
court must consider whether to apply a "multiplier" to its initial lodestar calculation, which could
be based on a number of factors, including the contingent nature of success faced by a plaintiff
and his or her attorneys.
Under longstanding Washington law, courts may reduce the lodestar calculation for hours spent
on unsuccessful claims, duplicated or wasted efforts, or otherwise unproductive time. The
Supreme Court in Pham found that the trial court did not abuse its discretion in calculating the
lodestar for the plaintiffs' attorneys when it reduced the number of hours for which the attorneys
sought compensation. In particular, the Court affirmed the trial court's reduction of the requested
lodestar for hours that the trial court found unnecessarily expended or not reasonably related to
the plaintiffs' favorable resolution, including: (1) an unsuccessful claim for injunctive relief, the
propriety of which was in doubt after Initiative 200 (I-200) became law; (2) an unsuccessful
cross-motion for summary judgment; (3) an unsuccessful motion on the merits at the Court of
Appeals; (4) their second amended complaint, which was never filed; (5) the development of
media contacts; (6) plaintiffs' appeals; (7) plaintiffs' unsuccessful request for a multiplier; (8)
income tax offset issues; (9) settlement discussions; and (10) determination of the impact of a
plaintiff's death on the judgment. Finding that the trial judge "took care to enter 35 findings of
fact justifying his reasonable fee calculation," the Supreme Court declined to overturn the trial
court's findings on appeal.
Trial Court May Consider Awarding a Contingency Multiplier, but May Not Consider the
Weakness of the Plaintiff's Claims and Supporting Evidence in Denying a Contingency
Multiplier
The Pham decision also reaffirmed longstanding Washington law that allows a trial court to
adjust the lodestar award upward to reflect additional factors, including the contingent nature of
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success. In addressing the trial court's decision not to apply the multiplier requested by the
plaintiffs' attorneys, our Supreme Court first noted that it was declining to follow the reasoning
of the United States Supreme Court in Burlington v. Dague, 509 U.S. 557 (1992), where the
court held that under federal fee-shifting provisions similar to those in the WLAD, the lodestar
calculation is presumptively reasonable and a contingency multiplier would "likely duplicate in
substantial part factors already subsumed in the lodestar." Dague, 509 U.S. at 562. Instead, the
Pham decision stated that the WLAD "places a premium on encouraging private enforcement
and . . . the possibility of a multiplier works to encourage civil rights attorneys to accept difficult
cases." Accordingly, the Washington Supreme Court held that, "While we presume that the
lodestar represents a reasonable fee, occasionally a risk multiplier will be warranted because the
lodestar figure does not adequately account for the high risk nature of a case. Therefore, we
decline to disapprove of contingency multipliers altogether."
With regard to the trial court's decision in this case not to grant the plaintiffs' attorneys a
contingency multiplier, the Court concluded that the trial court abused its discretion in using the
plaintiffs' "inability to articulate their claims and lack of known evidence" (i.e., the weakness of
the plaintiffs' claims and supporting evidence) as justification for denying a contingency
multiplier. In remanding for reconsideration without the "improper factor," the Court noted that
it was possible that the trial court might have reached the same result even if it had not
improperly considered the reason for the risk of loss as its basis for not awarding a multiplier.
What This Means for Employers: The Pham decision provides three important messages for
employers. First, it clarifies the limits of Blaney's holding and forecloses any argument by
employees that they are entitled to an offset for the federal income tax consequences of any
award of noneconomic damages under the WLAD. Second, it reiterates that hours spent on
unsuccessful or unproductive tasks may be excluded from attorneys’ fees awards and states
clearly that the lodestar calculation is "presumed" to represent reasonable attorneys’ fees in most
cases. Third, however, Pham also forecloses any argument by employers that the trial court can
never consider a contingency multiplier in WLAD cases or that weak cases that ultimately
succeed will not ever warrant a risk-based multiplier. In any given case, of course, employers
may still argue that a contingency multiplier is not warranted because either: (1) the particular
case was not a "high risk" case; or (2) the lodestar fee calculation has already adequately
accounted for the "high risk" nature of the case.
For more information, please contact the Labor and Employment Law Practice Group at Lane
Powell:
206.223.7000 Seattle
503.778.2100 Portland
employlaw@lanepowell.com
www.lanepowell.com
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