ESOP Group Urges 9th Cir. Redo on Labor Department Lawyer Fees

A recent Ninth Circuit opinion allowing the Labor Department to avoid paying attorneys’ fees overlooks serious, longstanding problems with how the government uses litigation to police employee stock ownership plans, an association promoting these plans said in a new brief.

The ESOP Association on Monday urged the US Court of Appeals for the Ninth Circuit to rehear its October decision declining to award attorneys’ fees to a Hawaii architectural firm that defeated a Labor Department challenge to its stock plan. The firm, Bowers & Kubota Consulting Inc., asked that the case be reheard because it misapplied the standard for awarding fees under a federal law aimed at curbing abusive lawsuits involving the government.

According to the firm, the court incorrectly swapped the standard used by the Equal Access to Justice Act—which denies attorneys’ fees when the government’s litigation position was “substantially justified"—for a more forgiving standard that asks whether the government “reasonably believed” its position was justified.

The ESOP Association took the argument a step further. The lawsuit against Bowers & Kubota was an attempt to hold the firm liable for failing to comply with the department’s “idiosyncratic interpretation” of a particular provision of the Employee Retirement Income Security Act that Congress intended to be fleshed out through a formal regulation, the association said.

But for “nearly 50 years, the DOL has failed to promulgate such a regulation, and instead has sued ESOP stakeholders for failing to comply with the DOL’s subjective opinion on what that provision should require (but does not),” the association said.

The underlying lawsuit says Brian Bowers and Dexter Kubota sold all their stock in Bowers & Kubota to the company’s ESOP for significantly more than the shares were worth.

A federal judge ruled against the department after a one-week trial, saying it failed to show that the $40 million paid by the ESOP in 2012 was an unfair price for the company’s stock. The judge awarded the defendants about $40,000 in costs but denied their request for attorneys’ fees.

The defendants appealed, saying they should have been awarded fees because the department’s litigation position was unjustified.

The Ninth Circuit disagreed, saying in a 2-1 opinion that while department presented “shoddy” case, it “arguably had a reasonable basis—at least at the time of trial—in questioning whether the company’s profits could surge by millions of dollars in just months.” Judge Kenneth Kiyul Lee wrote the majority opinion, and Judge Daniel P. Collins dissented in part.

Faegre Drinker Biddle & Reath LLP represents the association. The defendants are represented by Hawkins Parnell & Young LLP. The Labor Department represents itself.

The case is Su v. Bowers, 9th Cir., No. 22-15378, amicus brief 12/18/23.