The Common Fund Doctrine

The common fund and substantial benefit doctrines are judicially developed equitable exceptions to the "American rule" (Code Civ. Proc., 1021), which, as a general proposition, requires each party to a litigation to pay his or her own attorney fees. (Cziraki v. Thunder Cats, Inc. (2003) 111 Cal.App.4th 552, 557.) "'If the litigation has succeeded in creating or preserving a common fund for the benefit of a number of persons, the plaintiff may be awarded attorney fees out of that fund. Likewise, if a judgment confers a substantial benefit on a defendant, such as in a corporate derivative action, the defendant may be required to pay the attorney fees incurred by the plaintiff." (Id. at pp. 557-558.) The common fund doctrine was explained by the court in Consumer Cause, Inc. v. Mrs. Gooch's Natural Food Markets, Inc. (2005) 127 Cal.App.4th 387 as "based on the commonsense notion that the 'one who expends attorneys' fees in winning a suit which creates a fund from which others derive benefits may require those passive beneficiaries to bear a fair share of the litigation costs.' " (Id. at p. 397.) The court analogized an award of fees under this doctrine to an action in quantum meruit in that the individual seeking compensation has benefited another and seeks payment for the value of the services performed. (Ibid.) "An essential prerequisite to the application of the equitable common fund principle is the existence of a 'fund' from which attorney fees may be paid. " (Ibid.) The court in Mrs. Gooch's also addressed the related substantial benefit doctrine, an extension of the common fund doctrine. "It applies where no common fund has been created, but a concrete and significant benefit, although nonmonetary in nature, has nonetheless been conferred on an ascertainable class. " (Mrs. Gooch's, supra, 127 Cal.App.4th at p. 397.) In Cziraki v. Thunder Cats, Inc. (2003) 111 Cal.App.4th 552, the court concluded that the corporate derivative action had created both a common fund (a monetary judgment against the majority of shareholders) and a substantial benefit (preservation of a patent assignment, the main corporate asset). (Cziraki, supra, 111 Cal.App.4th at p. 558.) It explained that these doctrines are generally applied "to cases involving a distinct class of beneficiaries among whom the costs of litigation can be fairly spread to prevent the unjust enrichment of class members at the expense of the successful litigant." (Ibid., fns. omitted.) The Cziraki court applied these doctrines in the context of a minority shareholder's derivative action based on the failure of defendant shareholders to assign patent rights to the corporation as promised. The trial court found the defendant shareholders had breached their fiduciary duties by failing to assign the patent rights. It ordered them to do so and to pay a total of $258,000 in economic damages resulting from failure to assign the patents. No damages were awarded Cziraki on his individual claims. (Cziraki, supra, 111 Cal.App.4th at p. 556.) The court explained: "In a derivative action, the corporation represents the class of beneficiary shareholders. When the corporation pays attorney fees to the successful plaintiff, all shareholders indirectly share the cost of the beneficial litigation with the shareholder who brought the action." (Id. at p. 558.)