In American courts, the default is that you pay your own lawyer even if you win. Recovering attorney fees in US litigation is possible only when a specific exception applies: a fee-shifting clause in a contract, a statute that authorizes fee awards, a court sanction for bad-faith conduct, or a settlement fund created for a group. When one of those routes is available, judges usually calculate the amount using the lodestar method — reasonable hours multiplied by a reasonable rate — and trim from there.
The Default: The American Rule
Under what courts call the American Rule, each side in a US lawsuit bears its own attorney fees regardless of who wins. A plaintiff who obtains a $50,000 judgment but spent $60,000 on lawyers walks away with a net loss, and no automatic mechanism forces the losing defendant to cover those fees. The Supreme Court reinforced this principle in Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975), holding that only Congress — not courts — can create broad exceptions.
The rationale is access. If people with legitimate claims faced the risk of paying a corporation’s legal bills after losing, fewer would sue. The rule also discourages wealthier parties from weaponizing the threat of massive legal costs to force settlement of weak claims. Everything below is a carve-out from this default. When no contract clause, statute, or judicial finding of bad faith applies, each side pays its own way.
Fee-Shifting Clauses in Contracts
Parties can agree in advance to override the American Rule by writing a fee-shifting clause into their contract. These provisions appear routinely in commercial leases, loan agreements, and employment contracts. A typical clause says that if a dispute over the contract goes to court, the loser reimburses the winner’s attorney fees.
To trigger the clause, the party seeking reimbursement usually needs “prevailing party” status — a win on the central issues, not just a minor side argument. Courts read the actual contract language to determine what the parties intended, and judges will trim a fee request that looks inflated or includes work unrelated to the dispute.
One-Sided Clauses and State Reciprocity Statutes
A one-sided fee clause creates an obvious imbalance. A landlord might include language entitling itself to fees if it sues a tenant, while offering the tenant nothing in return. Roughly a dozen states have addressed this through reciprocity statutes that automatically convert one-sided clauses into mutual ones. Under these laws, whichever party wins can recover, even if the contract named only the other side. Some states apply reciprocity broadly across all contract types; others limit it to residential leases or consumer agreements. Before signing a contract with a fee-shifting provision, check whether your state has this kind of statute.
Statutes That Shift Fees
Congress has built fee-shifting into hundreds of federal statutes, typically in areas where private lawsuits serve a public enforcement function. If a civil rights violation affects one person, that person’s lawsuit also deters future violations against everyone. Without the prospect of recovering fees, many such cases would never be filed, because the individual damages are too small to justify the cost.
Civil Rights and Employment
The Civil Rights Attorney’s Fees Awards Act of 1976, codified at 42 U.S.C. § 1988, allows courts to award reasonable attorney fees to prevailing parties in cases involving racial discrimination, police misconduct under Section 1983, and violations of other core civil rights provisions.1Office of the Law Revision Counsel. 42 USC 1988 – Proceedings in Vindication of Civil Rights Similar provisions appear in the Fair Labor Standards Act, the Americans with Disabilities Act, and Title VII employment discrimination claims.
An important asymmetry applies. A prevailing plaintiff is entitled to fees as a matter of course in all but special circumstances. A prevailing defendant can recover fees only if the plaintiff’s case was frivolous, unreasonable, or groundless. The Supreme Court established this lopsided standard in Christiansburg Garment Co. v. EEOC, 434 U.S. 412 (1978).2Legal Information Institute. Christiansburg Garment Co. v. Equal Employment Opportunity Commission
Suing the Federal Government
The Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412, creates a pathway for individuals and small businesses to recover fees when they prevail against the federal government. Eligibility is capped: individuals must have a net worth below $2 million, and businesses must have fewer than 500 employees and a net worth under $7 million.3Office of the Law Revision Counsel. 28 USC 2412 – Costs and Fees
What Counts as “Prevailing”
Most fee-shifting statutes award fees only to the “prevailing party.” Sometimes a plaintiff sues, and the defendant changes its behavior before any ruling issues. Did the plaintiff prevail?
The Supreme Court said no. In Buckhannon Board & Care Home, Inc. v. West Virginia Department of Health and Human Resources, 532 U.S. 598 (2001), the Court rejected the “catalyst theory” and held that a plaintiff qualifies as a prevailing party only by obtaining an enforceable judgment on the merits or a court-ordered consent decree. A defendant’s voluntary change in conduct, even if clearly prompted by the lawsuit, does not count.4Legal Information Institute. Buckhannon Board and Care Home Inc. v. West Virginia Department of Health and Human Resources Many plaintiffs’ fee claims fall apart at this step: they get the result they wanted, but no court order to show for it.
Rule 68 Offers of Judgment
Federal Rule of Civil Procedure 68 gives defendants a tool that can shift costs against a plaintiff who turns down a reasonable settlement offer. A defendant may serve a formal offer of judgment at least 14 days before trial. If the plaintiff rejects it and then wins less at trial than the offer, the plaintiff must pay the costs the defendant incurred after the offer date.5Legal Information Institute. Rule 68 – Offer of Judgment
The expensive twist is that “costs” can include attorney fees when the underlying statute treats fees as costs. The Supreme Court confirmed this in Marek v. Chesny, 473 U.S. 1 (1985), a Section 1983 case. Because 42 U.S.C. § 1988 defines attorney fees as part of “costs,” the plaintiff who rejected the Rule 68 offer and won a smaller amount at trial lost the right to recover any post-offer attorney fees.6Justia Law. Marek v. Chesny, 473 US 1 (1985) In fee-shifting cases, a Rule 68 offer is genuinely dangerous to ignore.
Sanctions for Bad-Faith Litigation
Courts can order one side to pay the other’s attorney fees as a punishment for litigation misconduct, even when no contract or statute provides for fee-shifting.
Inherent Judicial Power
Federal courts have inherent authority to sanction parties who litigate in bad faith. The Supreme Court affirmed this in Chambers v. NASCO, Inc., 501 U.S. 32 (1991), holding that courts can shift fees as a sanction even when a statute or rule might also cover the conduct. The bar is high: the judge must find bad intent or an improper motive, not merely sloppy lawyering or a losing argument. When a party destroys evidence, files knowingly false claims, or commits fraud on the court, this authority lets judges make the other side whole.
Section 1927 and Rule 11
Under 28 U.S.C. § 1927, any attorney who unreasonably and vexatiously multiplies court proceedings can be personally ordered to pay the excess costs and attorney fees caused by that conduct.7Office of the Law Revision Counsel. 28 USC 1927 – Counsel’s Liability for Excessive Costs This targets lawyers, not clients, and it bites hardest when an attorney files pointless motion after pointless motion to drive up the opponent’s costs.
Federal Rule of Civil Procedure 11 takes a different angle. It requires attorneys to certify that every filing is grounded in fact, supported by existing law or a good-faith argument to change the law, and not filed for an improper purpose. An attorney who violates these requirements faces sanctions that can include the opposing party’s reasonable fees. Rule 11 includes a 21-day “safe harbor”: after being served with a sanctions motion, the offending party has three weeks to withdraw the problematic filing before the motion goes to the court.
Common Fund Cases
When a lawyer’s work creates a pool of money that benefits a group — most commonly in class action settlements — the common fund doctrine allows the attorney to be compensated from that pool. Without it, class members who did nothing would collect their share while the attorney absorbing years of contingent litigation gets nothing.
Courts typically calculate the fee as a percentage of the total fund rather than tracking hours. The exact percentage varies by case and circuit, but judges scrutinize the request against the actual benefit delivered to the class. Complexity, the risk the attorney assumed by taking the case on contingency, and the quality of the result all shape the final number.
How Courts Calculate the Fee: The Lodestar
Outside the common fund context, courts calculate fee awards using the lodestar method. The Supreme Court endorsed this approach in Hensley v. Eckerhart, 461 U.S. 424 (1983), calling it “the most useful starting point for determining the amount of a reasonable fee.”8Justia Law. Hensley v. Eckerhart, 461 US 424 (1983) The formula: reasonable hours spent on the case, times a reasonable hourly rate for the attorney’s market and experience level.
The formula is simple; the practice is not. Attorneys must submit detailed billing records, and judges comb through them to remove hours that were excessive, duplicative, or unrelated to the claims on which the plaintiff prevailed. If a plaintiff succeeded on some claims but not others, the court may reduce the award to reflect only the winning work.
Upward and Downward Adjustments
Once the base figure is set, judges can adjust it, but upward adjustments are rare. In Perdue v. Kenny A., 559 U.S. 542 (2010), the Supreme Court held that the lodestar carries a “strong presumption” of reasonableness and may be increased only in extraordinary circumstances where the calculated amount would not have been enough to attract competent counsel.9Justia Law. Perdue v. Kenny A., 559 US 542 (2010) The Court identified narrow grounds for enhancement: when the hourly rate formula doesn’t capture the attorney’s true market value, when the case required exceptional expense outlays over a protracted timeline, or when payment was delayed far beyond normal. Downward adjustments are more common. Courts regularly cut lodestar figures when the degree of success was limited relative to the scope of the litigation.
If You Represent Yourself
People who represent themselves in federal court generally cannot recover attorney fees under fee-shifting statutes, even if they win. The statutes authorize recovery of “attorney’s fees,” and a person who did not hire an attorney has none to recover. The Supreme Court extended this rule even to lawyers representing themselves in Kay v. Ehrler, 499 U.S. 432 (1991), holding that a pro se attorney may not collect fees under 42 U.S.C. § 1988.10Legal Information Institute. Kay v. Ehrler The Court reasoned that fee-shifting was designed to encourage plaintiffs to obtain counsel, and awarding fees to self-represented lawyers would undermine that purpose. The economic incentive built into these statutes works only when an attorney is actually retained.
Taxes on the Fee Portion of a Recovery
Winning a fee award or settlement creates a tax question that catches many litigants off guard. Under IRC Section 61, all income from any source is taxable unless a specific exclusion applies.11Internal Revenue Service. Tax Implications of Settlements and Judgments When a settlement check includes both damages and attorney fees, the IRS requires the payor to report the full amount — including the portion paid directly to the attorney — as income to the plaintiff. A plaintiff who settles for $500,000 and pays $200,000 to their lawyer may owe taxes on the full $500,000.
The Above-the-Line Deduction for Discrimination and Whistleblower Cases
Congress carved out a relief valve for certain case types. Under 26 U.S.C. § 62(a)(20), plaintiffs in employment discrimination, civil rights, and whistleblower cases can deduct their attorney fees and court costs “above the line,” reducing adjusted gross income rather than being buried in itemized deductions.12Office of the Law Revision Counsel. 26 USC 62 – Adjusted Gross Income Defined The statute defines “unlawful discrimination” broadly, covering claims under the Civil Rights Act, the Fair Labor Standards Act, the ADA, the Age Discrimination in Employment Act, and a catchall provision for any federal, state, or local law enforcing civil rights or regulating the employment relationship. The deduction is capped at the amount of income the plaintiff received from the case in the same tax year.
Contract Disputes, Business Torts, and Physical Injury Cases
For cases outside the employment and civil rights umbrella — contract disputes, business torts, defamation — there is no above-the-line deduction. Before 2018, these fees could be deducted as miscellaneous itemized deductions subject to a 2% floor. The Tax Cuts and Jobs Act suspended that category, and subsequent legislation made the elimination permanent. A plaintiff who wins a breach-of-contract case and pays substantial attorney fees has no federal deduction for those fees at all. The tax bill lands on the gross recovery.
One exception matters. Damages received for personal physical injuries or physical sickness are excluded from gross income entirely under IRC Section 104(a)(2), and this exclusion covers the attorney fee portion of the recovery as well.13Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness Emotional distress alone does not qualify unless the damages cover medical expenses attributable to that distress. The distinction between physical and non-physical claims can mean a six-figure difference in tax liability on otherwise identical settlement amounts.