In Roberts v. Packard, Packard & Johnson, the California Court of Appeal for the Second Appellate District made an important clarification in the law and held that under Civil Code section 1717, attorney fees can only be awarded to the party that prevails in the “action” and not to the party that prevails in a petition to compel arbitration.

Plaintiffs, on behalf of the United States, retained Packard, Packard & Johnson (PPJ) as counsel in a series of cases against several technology companies under False Claims Act (FCA). In its fee agreement, PPJ placed an arbitration clause that related to disputes to enforce or interpret the provisions of the contract.

Several defendants settled their FCA claims. Afterwards, the plaintiffs negotiated with the United States to determine their statutory share and recovery of attorney fees. The statutory fees, costs and expenses amounted to approximately $2.6 million. However, PPJ allocated over 95% of the $2.6 million to its attorney fees, leaving less than 5% to costs and expenses.

After making those allocations, PPJ asked the plaintiffs to reimburse an additional $1.338 million for unpaid and uncovered costs. When the plaintiffs refused to comply with the demand, PPJ withheld $1.338 million from the settlement. The plaintiffs eventually filed suit against PPJ, alleging breach of fiduciary duty and other causes of action. PPJ moved to compel arbitration pursuant to the arbitration clause in the agreement. The trial court granted the motion and ruled that PPJ was entitled to attorney fees under the contingency fee agreement because it had prevailed on the petition to compel arbitration.

The second appellate district reversed, relying, in part, on Civil Code section 1717. The statute provides that in contract litigation involving a prevailing party fee clause, the party who is determined to be the prevailing party shall be entitled to reasonable attorney fees.

The Appellate Court determined that a petition to compel arbitration is not an “action,” and attorney fees can only be awarded to the prevailing party when all the causes of actions are finally resolved.

Here, the ultimate outcome of the case cannot be determined until the arbitration has been completed. Hence, the Appellate Court reversed the award of attorney fees.