Very few cases in civil litigation actually go to trial. See here (discussing declining number of federal court civil trials). Rather, most cases are resolved either by dispositive motion (i.e., a motion to dismiss or a motion for summary judgment) or by settlement. Indeed, cases that cannot be “thrown out” on motion usually are settled (albeit sometimes on the eve of trial).
Ordinarily, settlements are confidential agreements between the parties whereby the plaintiff agrees to dismiss his/her claims against the defendant in exchange for a monetary payment; the defendant, in agreeing to make such payment, does not admit liability. Settlements can be win-win situations that resolve disputes efficiently, provide the parties with finality, and guarantee that the plaintiff receives at least some compensation for his/her injuries.
The legal system tends to encourage settlements. Judges often urge, and sometimes even browbeat, the parties to reach a settlement. The uncertainty of jury verdicts provides an incentive for the parties to settle. The rules of evidence (e.g., Federal Rule of Evidence 408 and similar state rules) encourage settlement negotiations by excluding what is said during such negotiations from trial.
Another device intended to encourage the settlement of litigation is the “offer of judgment” pursuant to Federal Rule of Civil Procedure 68. (Many states have a similar procedural rule.) Rule 68 (amended in 2009) provides as follows:
(a) Making an Offer; Judgment on an Accepted Offer.
At least 14 days before the date set for trial, a party defending against a claim may serve on an opposing party an offer to allow judgment on specified terms, with the costs then accrued. If, within 14 days after being served, the opposing party serves written notice accepting the offer, either party may then file the offer and notice of acceptance, plus proof of service. The clerk must then enter judgment.
(b) Unaccepted Offer.
An unaccepted offer is considered withdrawn, but it does not preclude a later offer. Evidence of an unaccepted offer is not admissible except in a proceeding to determine costs.
(c) Offer After Liability Is Determined.
When one party's liability to another has been determined but the extent of liability remains to be determined by further proceedings, the party held liable may make an offer of judgment. It must be served within a reasonable time – but at least 14 days – before the date set for a hearing to determine the extent of liability.
(d) Paying Costs After an Unaccepted Offer.
If the judgment that the offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay the costs incurred after the offer was made.
What distinguishes a Rule 68 offer of judgment from an ordinary settlement offer?
First, a Rule 68 offer of judgment is not confidential. It is filed with the court and becomes part of the public record about a lawsuit.
Second, it operates legally as a finding of liability. This is what “judgment” means. It means that the defendant is being held liable to the plaintiff. Of course, the rule provides that the party making an offer of judgment may do so “on specified terms.” Consequently, most defendants state that their offer of judgment is “not to be construed as an admission of liability,” just like they do in an ordinary settlement agreement. Such a disclaimer, however, is meaningless legally (perhaps it has public relations value). The very nature of the offer of judgment is that it “allow[s] judgment” to be entered against the defendant in the case.
Why would a defendant do this?
This brings us to the third main difference between a Rule 68 offer of judgment and an ordinary settlement offer.
With an ordinary settlement offer, there are no legal consequences to the plaintiff for rejecting such an offer. With an offer of judgment, however, there can be significant legal consequences to the plaintiff for rejecting such an offer.
Specifically, if the plaintiff rejects an offer of judgment (say, for $25,000) and the judgment he/she finally obtains is less favorable than the offer (say, the jury awards only $10,000), then the plaintiff must pay all of the costs incurred after the offer was made. This means that the plaintiff not only has to pay his/her own post-offer costs, but also must pay the defendant’s post-offer costs (e.g., for court filings, depositions, trial exhibits, etc.). Depending on the case, these costs may be substantial. The offer of judgment, therefore, can serve as a powerful incentive to “settle” claims, and must be considered very carefully by the plaintiff.
Unfortunately, the wording of Rule 68 is vague, incomplete, and difficult to understand. The two main questions about Rule 68 are (1) Does it apply when the plaintiff loses the case? and (2) Does it require the plaintiff to pay the defendant’s attorney’s fees in addition to costs?
The answer to the first question clearly is no. This was the issue decided by the U.S. Supreme Court in Delta Air Lines, Inc. v. August, 450 U.S. 346 (1981). In that case, the plaintiff sued Delta Air Lines for race discrimination in violation of Title VII of the Civil Rights Act of 1964. A few months after the complaint was filed, the defendant made an offer of judgment in the amount of $450. The plaintiff rejected the offer. Subsequently, the plaintiff lost at trial. The defendant then moved for an order requiring the plaintiff to pay the costs incurred by the defendant after the offer was made. The district court denied the motion, and the court of appeals affirmed. The Supreme Court affirmed, but on different grounds.
Whereas the lower courts had held that the company’s $450 offer had not been made in a good faith attempt to settle the case, the Supreme Court held that Rule 68 does not apply where judgment is entered against the plaintiff (offeree) and in favor of the defendant (offeror). As the Court explained, “the plain language of Rule 68 confines its effect to . . . [cases] in which the plaintiff has obtained a judgment for an amount less favorable than the defendant’s settlement offer”; therefore, “it is clear that [Rule 68] applies only to offers made by the defendant and only to judgments obtained by the plaintiff.” (Note: Losing plaintiffs, and losing defendants, can be held liable for costs under Federal Rule of Civil Procedure 54 and similar state rules.)
Turning to the second question, regarding attorney's fees, the answer also is no.
This question has not been addressed by the Supreme Court. In Marek v. Chesny, 473 U.S. 1 (1985), the Court answered a different but related question: “whether attorney’s fees incurred by the plaintiff subsequent to an offer of settlement under Federal Rule of Civil Procedure 68 must be paid by the defendant under 42 U.S.C. § 1988, when the plaintiff recovers a judgment less than the offer.” The Court said no. In that situation, Rule 68 acts to cut off the defendant’s liability for attorney’s fees to the plaintiff because Section 1988 defines attorney’s fees “as part of the costs” of litigation. This means that a prevailing plaintiff will not be able to receive an award of attorney’s fees under a statute like Section 1988 if he/she does not obtain a judgment more favorable than the defendant’s offer of judgment.
But does this mean, on the other hand, that the plaintiff will have to pay the defendant’s attorney’s fees? This question was addressed by Judge Leonard Wexler of the U.S. District Court for the Eastern District of New York in Boisson v. Banian Ltd., 221 F.R.D. 378 (E.D.N.Y. 2004) (link not available). The key portion of Judge Wexler’s decision reads:
Although Marek precludes a plaintiff from recovering attorneys' fees incurred after the making of the Rule 68 offer, it does not discuss whether the offering defendant is entitled to recover attorneys' fees incurred after the making of the offer. Most courts considering this issue in the context of civil rights actions, have held that there is no such right to recovery. See, e.g., Le v. University of Pennsylvania, 321 F.3d 403 410–11(3d Cir.2003) (denying defendant Rule 68 attorneys' fees in Title VII action); Payne v. Milwaukee County, 288 F.3d 1021, 1027 (7th Cir.2002) (denying defendant Rule 68 attorneys' fees in case brought pursuant to 42 U.S.C. § 1983) E.E.O.C. v. Bailey Ford, Inc., 26 F.3d 570 (5th Cir.1994) (same); O'Brien v. City of Greers Ferry, 873 F.2d 1115 (8th Cir.1989) (same); Crossman v. Marcoccio, 806 F.2d 329 (1st Cir.1986) (same); Jolly v. Coughlin, 1999 WL 20895 *12 (S.D.N.Y.1999) (same).
Courts denying defendants the right to recover post-offer attorneys' fees note that while Marek states, simply, that “costs” include attorneys' fees where authorized by statute, Marek also holds that such costs are recoverable only if they are “properly awardable” under the relevant statute. Marek, 473 U.S. at 9, 105 S.Ct. 3012; see, e.g., Crossman, 806 F.2d at 333–34. Where, as in civil rights cases, costs and fees are properly awardable only to the prevailing party, a defendant who has not prevailed is not entitled to attorneys' fees when seeking to collect costs pursuant to Rule 68. Id.
Cases involving other fee shifting statutes have similarly held that attorneys' fees may be recovered pursuant to Rule 68 only if such fees are “properly awardable” under the relevant statute. If prevailing party status is a prerequisite to such an award, a defendant who has not “prevailed” within the meaning of the statute, may not recover attorneys' fees as part of a Rule 68 award. See, e.g., Champion, 342 F.3d at 1030–31(denying defendant attorneys' fees in case arising under state law defining costs to include fees to a prevailing party); Poteete v. Capital Engineering, Inc., 185 F.3d 804, 807–08 (7th Cir.1999) (denying defendant attorneys' fees in case arising under ERISA statute entitling fees only to prevailing party); cf. United States v. Trident Seafoods Corp., 92 F.3d 855, 860 (9th Cir.1996) (denying defendant attorneys' fees in case brought pursuant to Clean Air Act which awards fees only if the action commenced against the defendant was “unreasonable”).
Thus, as Judge Wexler explained, the key is whether the attorney’s fee statute at issue allows a non-prevailing party to recover attorney’s fees. Because such statutes, like Section 1988, only award fees to prevailing parties (I am not aware of any exceptions), a defendant that loses the case will not be entitled to attorney’s fees under Rule 68, even if Rule 68 otherwise applies with respect to costs.
For useful commentary on Rule 68, see here and here.