$1 Million Cost Denial Reversed on Appeal for Failure to Exercise Discretion

A recent case shows how recovery of costs can involve large dollar amounts – over $1.5 million – and the application of subtle legal principles and appellate procedure.

In City of Los Angeles v. Pricewaterhousecoopers, LLP (D2d5 Jul. 8, 2021) no. B305583 (nonpub. opn.), a contractor agreed to modernize the billing system for the water and power department. The contractor allegedly bungled the job (the new system failed to reliably produce accurate bills), and over four years of litigation ensued.

For reasons not discussed in the opinion, the city dismissed its claims with prejudice. The contractor then sought $379,000 in deposition costs, $67,000 in travel costs, and nearly $1.1 million for electronic discovery costs. (A dismissal with prejudice usually suggests a settlement was reached. A $1.5 million costs claim tends to suggests otherwise.)

The trial court struck the travel costs and about half the deposition costs, finding it was not reasonable for a multi-national firm with a large Los Angeles presence to fly in out-of-town attorneys for depositions and hearings.

But the city took a different route in opposing the electronic discovery costs. Instead of asking the trial court to reduce those costs in its discretion ($1.1 million leave a lot of room for discretion), the city argued the court lacked discretion to grant any portion of those costs. Electronic discovery costs are not mentioned one way or the other in Code of Civil Procedure section 1033.5, so ordinarily that means it is left to the sound discretion of the court. But the city argued that a 1995 case had disallowed such costs, and that that case had not been overruled. Thus, the city argued, the trial court was bound to deny all those costs as beyond its discretion.

The court agreed. The contractor appealed.

A Voluntary Dismissal Is Not an Appealable Order, but a Costs Order May Be Appealable as a Judgment:

In the Court of Appeal, the city tried out another technical argument. Costs awards typically are appealable as an order after a judgment. (Code Civ. Proc., § 904.1(a)(2).) But there was no appealable judgment here. There was just a voluntary dismissal. (See here for more on the appealability of voluntary dismissals. I have seen courts play fast and loose with these rules if they are minded to dismiss an appeal. So your mileage may vary.)

The court here agreed the voluntary dismissal – even with prejudice – was not an appealable order. (Mesa Shopping Center-East, LLC v. O Hill (2014) 232 Cal.App.4th 890, 897.) But: “ ‘A judgment is the final determination of the rights of the parties in an action or proceeding.’ (Code Civ. Proc., § 577.) ‘[I]t is the substance and effect of an adjudication that is determinative, not the form of the decree. [Citation.] As a general test, an order constitutes the final determination of a case “where no issue is left for future consideration except the fact of compliance or noncompliance with the terms of the first decree.’ ” (Otay River Constructors v. San Diego Expressway (2008) 158 Cal.App.4th 796, 801.)”

Here, the court concluded the order taxing costs was a final determination in itself and not interlocutory. (See Mesa, supra, 232 Cal.App.4th at p. 898.)

And even if the cost order isn't directly appealable under section 904.1(a)(1), it is appealable as a collateral order. (Krikorian Premiere Theatres, LLC v. Westminster Central, LLC (2011) 193 Cal.App.4th 1075, 1083 [order taxing costs on appeal is independent of any determination of the merits, effectively final and immediately enforceable as to the ancillary issue of costs on appeal, and could otherwise escape review entirely].)

And even if the cost order isn't appealable as a direct appeal or a collateral appeal, the court is going to exercise its discretion to review it as a petition for a writ of mandate. (Mesa, supra, 232 Cal.App.4th at p. 899; Mon Chong Loong, supra, 218 Cal.App.4th at p. 92.)

Failure to Exercise Discretion Is an Abuse of Discretion:

The Court of Appeal agreed with the contractor that the trial court misapprehended the scope of its authority. The city-respondent had urged an incorrect proposition of law when it argued the trial court lacked discretion to award any electronic discovery costs. When it agreed with the respondent's incorrect legal contention, the trial court failed to exercise its discretion to determine the reasonableness of the cost request. As a result, that factual determination was never performed. So back down the case goes.

The Court of Appeal starts from the premise that the trial court does properly understand its discretion. “Normally, we must presume the trial court was aware of and understood the scope of its authority and discretion under the applicable law." (Barriga v. 99 Cents Only Stores (2020) 51 Cal.App.5th 299, 333–334 (Barriga).)

But if the record shows the trial court misunderstood its authority, the error is per se reversible. Here is the authority to clip-and-save:

“If the record demonstrates the trial court was unaware of its discretion or that it misunderstood the scope of its discretion under the applicable law, the presumption has been rebutted, and the order must be reversed. ... Alternatively stated, if a trial court's decision is influenced by an erroneous understanding of applicable law or reflects an unawareness of the full scope of its discretion, it cannot be said the court has properly exercised its discretion under the law. [Citations.] Therefore, a discretionary order based on the application of improper criteria or incorrect legal assumptions is not an exercise of informed discretion and is subject to reversal even though there may be substantial evidence to support that order." (Barriga, supra, 51 Cal.App.5th at p. 334.)

Here, the trial court's statements on the record were ambiguous whether it misunderstood the scope of its authority, or whether it was exercising discretion. There were statements suggesting either. And the ultimate ruling was a bit of word salad: "the court is going to exercise the discretion and high costs associated with electronic discovery in this case [sic]. And the court will grant the motion to strike costs related to electronic discovery.”

What convinced the Court of Appeal the trial court had not exercised its discretion? "Although it is a close question in this case, given the City's primary argument that the costs associated with electronic discovery are never recoverable under Science Applications and the lack of clarity in the transcript of the hearing, we cannot presume the trial court understood the extent of its discretion to award costs related to electronic discovery."

Reversed and remanded.

Takeaway: If you manage to persuade the trial court of your legal proposition, why not ask the trial court to exercise its discretion in your favor as well, just to be safe? Had the trial court also based its ruling on its discretion, the outcome likely would have been much different.

Tim Kowal helps trial attorneys and clients win their cases and avoid error on appeal. He co-hosts the Cal. Appellate Law Podcast at www.CALPodcast.com, and publishes a newsletter of appellate tips for trial attorneys at www.tvalaw.com/articles. His appellate practice covers all of California's appellate districts and throughout the Ninth Circuit, with appellate attorneys in offices in Orange County and Monterey County. Contact Tim at tkowal@tvalaw.com or (714) 641-1232.

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