Opinion analysis

Unanimous court rejects district court discretion to reduce appellate cost awards

Thursday’s decision in City of San Antonio v. Hotels.com crisply resolved what would seem to be a basic procedural question: how courts should decide the “costs” that the prevailing party on appeal can recover from the losing party. Justice Samuel Alito’s opinion for a unanimous court tells us the answer: the court that resolved the appeal decides, not the district court.

The case involves the costs of appellate litigation. Under the “American Rule,” the prevailing party in litigation in the United States ordinarily must pay its own attorney’s fees, absent some statute that calls for a different outcome. Conversely, the prevailing party typically is reimbursed for many of the other costs of litigation. Rule 39 of the Federal Rules of Appellate Procedure governs the process of awarding those costs for appellate litigation in the federal courts. First, Rule 39(a) list four different default rules for how to identify the prevailing party, which is entitled to recover those costs “unless … the [appellate] court orders otherwise.” Second, Rule 39(e) lists four categories of costs that “are taxable in the district court for the benefit of the party entitled to costs under this rule.” Of relevance here is the third item, “premiums paid for a bond or other security to preserve rights pending appeal.” That covers the cost of a “supersedeas” bond: If an appealing party wants to prevent a judgment from going into effect while it challenges the judgment on appeal, it obtains a supersedeas bond, which stays the judgment until the end of the appeal.

The particular case before the justices involved a dispute between the city of San Antonio and a variety of online travel companies (including respondent Hotels.com). San Antonio persuaded the trial court that the companies had been underpaying hotel occupancy taxes. The companies appealed, posting a supersedeas bond so they would not have to pay the taxes immediately. Eventually, the companies prevailed on appeal and so were entitled to costs under Rule 39. The specific dispute involves the cost of that bond, more than $2 million. San Antonio asked the district court to reduce the amount it would have to pay, and the district court refused to do so, relying on a decision of the U.S. Court of Appeals for the 5th Circuit that said district courts have no discretion to reduce or eliminate any of the costs listed in Rule 39(e).

Alito’s brisk opinion firmly agrees with the 5th Circuit’s approach, rejecting the contrary approaches of most of the other lower courts. Alito perceives “a cohesive scheme for taxing appellate costs” in Rule 39. That scheme’s “default rules” flow from the “venerable presumption that prevailing parties are entitled to costs,” subject to the authority of the appellate court to order otherwise.

Alito rejects San Antonio’s argument that the appellate court can decide “who can receive costs” but lacks “authority to divide up costs.” For Alito, it “cuts decisively” against San Antonio that the rule directly “states that the court of appeals need not follow the default rules.” That is most apparent from the default rule for a judgment that is affirmed in part and reversed in part, which provides that “costs are taxed only as the court [of appeals] orders.” He offers an example: If “the appellant wins what is essentially a 75% victory, the appellant can be awarded 75% of its costs.” So, for the other subdivisions (complete victory for one party or the other), “where the default rules allocate 100% of the costs to the winning party, it is natural to understand the court of appeals’ authority to ‘order otherwise’ to include the authority to make a different allocation.”

For Alito, Rule 39(e) “points in the same direction.” By referring to “the party entitled to costs under this rule,” he writes, the rule refers to the party identified by the court of appeals under Rule 39(a). That party thus “has a right to obtain them and not merely seek them — when a proper application is made in the district court.” To summarize, Alito tells us that “Rule 39 gives discretion over the allocation of appellate costs to the courts of appeals,” which leaves no room in the district courts for “a second layer of discretion.” He offers another example, in which the court of appeals “awards the prevailing appellee 70% of its costs.” For Alito, a district court decision to “reduce those costs by half,” meaning that “the appellee would receive only 35% of its costs,” would be a “direct violation of the court of appeals’ directions.”

San Antonio’s principal textual argument is that the reference to the costs in Rule 39(e) as “taxable” in the district court means that they are “something that may, but need not necessarily be, taxed.” Alito explains that this means only that the prevailing party will not get the costs unless it provides the necessary “verification” of the amount of the costs to which it is entitled. Moreover, he explains, the “real work” of the provision is to specify that the district court is the place where those costs are actually “taxed.” And that “makes good sense” because it means that costs incurred in the court of appeals (printing appellate briefs and the like) are taxed in the court of appeals, whereas the specific categories of costs incurred in the district court (preparation of the record, fees for filing an appeal, and the like) are taxed in the district court. The most important of that latter category often is the cost of a bond, which is appropriately taxed in the district court because the district court previously will have approved the bond under Federal Rule of Civil Procedure 62.

Alito’s opinion closes by rejecting various practical arguments that San Antonio interposes. For example, San Antonio argues that appellate courts are not well placed to make cost allocations that might depend on factual disputes; Alito regards that concern as “overblown,” because appellate costs are so “readily estimable, rarely disputed, and frankly not large enough to engender contentious litigation in the great majority of cases.” The big exception, he acknowledges, is the cost of supersedeas bonds, but those will have been “negotiated by the parties, as happened here.” And though the bond costs seem large in hindsight, Alito points out that “San Antonio admits that it was largely aware of the costs of the bonds in this case when they were approved.”

The most troubling problem San Antonio raises is the possibility that “parties will be unable to obtain review of their objections to Rule 39(e) costs if the district court cannot provide relief after the matter returns to that court.” Alito acknowledges that “the current Rules and the relevant statutes could specify more clearly the procedure that such a party should follow to bring their arguments to the court of appeals, but this does not lead to the conclusion that a district court can reallocate those costs.” Rather, he points to a variety of rules that might apply and suggests that courts of appeals might adopt local rules if the problem persists.

For me, this case pretty clearly falls in the category of issues for which the clarity of the answer is far more important than what the answer is. And on that point, Alito’s decisive interpretation of Rule 39 seems to provide the guidance lower courts should want.