Seventh Circuit: Dismissal with prejudice makes defendant “prevailing party” and eligible for feesFebruary 21, 2008

In a decision yesterday, the Seventh Circuit clarified what is required for a party to be considered a "prevailing party" in a copyright case, and therefore be eligible for an award of attorneys' fees under § 505. In this case, the plaintiff asked for a voluntary dismissal without prejudice under Rule 41(a)(2), as the case had been pending for over a year. The district court dismissed the case with prejudice, but held that the dismissal did not make the defendant a prevailing party, and therefore declined to award fees under § 505.

The Seventh Circuit reversed, holding that because the dismissal with prejudice was a favorable judgment that materially altered the legal relationship of the parties. As a result, the district court should have considered whether fees were appropriate. The court took the next step also, and found that an award of fees was appropriate in this case, given the facts and the relationship between the parties, and remanded with instructions to award appropriate fees for both the original case and the appeal.

The plaintiffs, Riviera, and defendants, Midwest Electronic Specialties, in this case both write and distribute computer software, specifically computer games. The plaintiffs sued the defendants for copyright infringement. However, after the suit had been pending for more than a year, the plaintiffs sought a voluntary dismissal without prejudice under Rule 41(a)(2), as it had been unable to muster evidence to prove its claim but hoped to acquire better evidence in the future. The district court instead dismissed the case with prejudice. The defendants then moved for attorney fees under § 505, asserting that the dismissal with prejudice made them "prevailing parties" entitled to fees under the statute. The district court declined to award fees because the court "did not in any way pass on the merits of the litigation," and there was "no evidence of lack of merit" to the plaintiff's claims, and as a result the court held the defendants were not entitled to "prevailing party" status under § 505. The defendants appealed.

The Seventh Circuit reversed. The court noted that to be considered a "prevailing party," all that matters is whether there was a "material alteration of the legal relationship of the parties." Here, because of the dismissal with prejudice prevents the plaintiffs from refiling its claims, there was such an alteration, and therefore the defendants were entitled to prevailing party status under § 505.

The court didn't stop there, however. Instead of remanding to the district court to determine in the first instance whether an award of fees was warranted under the Supreme Court's standard in Fogerty v. Fantasy, Inc., the Seventh Circuit looked at the relevant facts itself to determine whether an award of fees was appropriate. Here, the parties had previously entered into an agreement that provided, in relevant part:

In the event that either party hereto believes that its rights as to the Riviera [intellectual property] Rights or Enhancements have been violated by [Midwest], then such source code and programs shall be provided to a mutually agreeable, independent software expert who shall inspect and review such applicable source code and programs and determine such questions. The parties agree to be bound by the findings of the independent software expert.

Here, the plaintiffs filed suit without ever following this provision of their earlier agreement. As a result, the court stated that the plaintiffs "forced [the defendants] to bear the very expenses that the parties had agreed to avoid. The party responsible for creating excessive legal costs must bear them itself in the end." Accordingly, the court instructed the district court on remand to award fees to the defendants, including fees associated with the appeal.

To read the full decision in Riviera Distribs., Inc. v. Jones, click here.