Under the “offer of judgment” mechanism detailed in Federal Rule of Civil Procedure 68 (Rule 68), a defendant makes a settlement offer to resolve the case. If accepted, the offer is filed at the courthouse and the case ends. However, if the receiving party rejects the offer, prevails at trial, and recovers an amount that is less than the offer, the rejecting party must pay the offeror’s costs incurred after the offer was made. Further, when the statute under which the plaintiff has sued defines “costs” to include “attorney’s fees,” a plaintiff who rejects a Rule 68 offer of judgment and then achieves a less favorable judgment at trial cannot recover attorney’s fees under the statute.
The Rule 68 Process
Defendants can use a Rule 68 offer of judgment to attempt to settle a case by leveraging cost pressure against plaintiffs. Such offers are “actively supported by courts” because the ”very purpose of Rule 68 is to encourage termination of litigation.” Latshaw v. Trainer Wortham & Co., 452 F.3d 1097, 1103 (9th Cir. 2006).
Rule 68 provides that the defendant may serve on plaintiff an offer of judgment at any point up to fourteen days before trial. In the offer, the defendant must state that it will allow a judgment to be taken against it for a specific sum of money or on other specific terms, along with costs then accrued.
The plaintiff has 14 days to accept the offer after it is served.
If the plaintiff accepts the offer, he must file the offer along with a notice of acceptance with the court. The clerk must then enter the agreed-upon judgment. If the plaintiff does not accept the offer within the requisite time, it is deemed withdrawn. However, if the plaintiff does not obtain at trial a “more favorable” judgment than the offer, the plaintiff is penalized by having to pay the costs the defendant incurs after the offer is made. Fed. R. Civ. P. 68; Marek v. Chesny, 473 U.S. 1, 5 (1985).
The term “costs” as used in Rule 68(d) includes “all costs properly awardable in an action.” Marek, 473 U.S. 1, 9 (1985). This generally includes those costs enumerated in 28 U.S.C. § 1920 including:
Expert witness fees are not recoverable as “court costs” unless specifically authorized by statute. Arlington Central School Dist. Bd. of Ed. v. Murphy, 548 U.S. 291, 302 (2006); see, e.g., 42 U.S.C. §§ 1988(c), 2000e-5(k) (expert fees awardable in civil rights action).
Cost-Shifting
When applicable, “Rule 68 shifts both the plaintiff’s and the defendant’s post-offer costs to the plaintiff.” Knight v. Snap-On Tools Corp., 3 F.3d 1398, 1405 (10th Cir. 1993) (emphasis in original).
The intent of this cost-shifting penalty is to encourage settlement. Marek, 473 U.S. at 5 (“plain purpose of Rule 68 is to encourage settlement and avoid litigation”); Pouillon v. Little, 326 F.3d 713, 718 (6th Cir. 2003) (Rule 68 “encourages early settlements by increasing the risks to claimants of continuing to litigate once the defending party has made a settlement offer”).
Costs Recoverable Under 28 U.S.C. § 1920 May Include Attorney’s Fees
A number of federal statutes provide for an award of attorney’s fees to the prevailing party. See, e.g., Marek, 473 U.S. at 44 (Brennan, J., dissent ing) (listing numerous federal statutes providing for an award of fees).
Under Rule 68, attorney’s fees awardable by statute or contract to a prevailing party are not Rule 68 “costs” unless the statute or contract at issue defines such fees as “costs.” Marek, 473 U.S. at 9; King v. Rivas, 555 F.3d 14, 20 (1st Cir. 2009); Wilson v. Nomura Securities Intern., Inc., 361 F.3d 86, 89 (2d Cir. 2004).
Rule 68 – Attorney’s Fees and the Plaintiff
If attorney’s fees are not defined as costs under the applicable statute or contract, Rule 68(d) has no impact on plaintiff’s right to seek recovery for such fees whether pre- or post-offer. See, e.g., Gurule v. Land Guardian, Incorporated, 912 F.3d 252, 260 (5th Cir. 2018) (but court may consider rejected offer in assessing reasonableness of fee award); McKelvey v. Secretary of U.S. Army, 768 F.3d 491, 498 (6th Cir. 2014); Haworth v. State of Nevada, 56 F.3d 1048, 1051 (9th Cir. 1995).
If, however, such fees are defined as costs, an effective Rule 68 offer cuts off plaintiff’s right to post-offer (but not pre-offer) fees. See, e.g, Marek, 473 U.S. at 9 (“[s]ince Congress expressly included attorney’s fees as ‘costs’ available to a plaintiff in a § 1983 suit, such fees are subject to the cost-shifting provision of Rule 68”); Gurule, 912 F.3d at 260; Champion Produce, Inc. v. Ruby Robinson Co., Inc., 342 F.3d 1016, 1028 (9th Cir. 2003) (state statute defining attorney’s fees as costs).
Rule 68 – Attorney’s Fees and the Defendant
In most instances, courts have refused to award post-offer attorney’s fees as costs to the defendant even when Rule 68(d) applies. In reaching this conclusion, these courts rely on the holding in Marek that attorney’s fees are recoverable by the offeree as costs under Rule 68 only if they are “properly awardable” under the relevant substantive statute. Marek, 473 U.S. 1, 9 (1985).
These courts generally hold that if the underlying statute or contract allows an award of fees to the prevailing party, and because a defendant entitled to costs under Rule 68 is, by definition, not a prevailing party such fees are not “properly awardable” to the defendant. See, e.g., Hescott v. City of Saginaw, 757 F.3d 518, 528 (6th Cir. 2014) (losing civil rights defendant cannot recover post-Rule 68 attorney’s fees under § 1988 because it was not prevailing party in action); Harbor Motor Co., Inc. v. Arnell Chevrolet–Geo, Inc., 265 F.3d 638, 647 (7th Cir. 2001) (“any defendant who is entitled to invoke Rule 68 is by definition not a prevailing party”); Champion Produce, 342 F.3d at 1030 (“Rule 68 ‘costs’ do not include a non-prevailing defendant’s post-offer attorneys’ fees when the underlying statute awards attorneys’ fees to a prevailing party”).
The Eleventh Circuit, standing alone, however, has held that a Rule 68 award of costs includes attorney’s fees under the Copyright Act which allows an award of such fees to the prevailing party. There are a number of cases that have held otherwise. Compare Jordan v. Time, Inc., 111 F.3d 102, 105 (11th Cir.1997) (post-offer fees awarded defendant), with UMG Recordings, Inc. v. Shelter Capital Partners LLC, 718 F.3d 1006, 1034 n.25 (9th Cir. 2013) (fees not allowed), and Harbor Motor Company, 265 F.3d at 647 (same).
FLSA Cases
In many cases filed under the Fair Labor Standards Act (FLSA), in which former employees seek to recover alleged unpaid overtime or minimum wages, each individual plaintiff’s unpaid wage damages may be small. However, as the case goes on, the plaintiff’s attorney’s fees can mount quickly and can become a significant part of any judgment, as the FLSA includes a fee-shifting provision that allows a prevailing plaintiff to recover their fees from the defendant employer. A recent decision from the Fifth Circuit Court of Appeals, however, confirmed – for the first time in that Circuit – that an offer of judgment can be used to significantly reduce the attorneys’ fees a prevailing plaintiff can recover.
It can reduce Plaintiff’s attorney’s fees
In a decision that may increase the benefit to defendants of making an offer of judgment in cases involving claims under the Fair Labor Standards Act (FLSA), the Fifth Circuit recently held in Gurule, that a rejected offer of judgment can be used to significantly reduce the attorney’s fees a prevailing plaintiff can recover in such cases. In so holding, the Fifth Circuit joined several other Circuits in finding that a rejected offer of judgment that is greater than the amount the plaintiff recovers at trial is an important factor in determining the degree of success achieved by a prevailing plaintiff. Thus, while the rejection of a more favorable offer of judgment does not preclude the recovery of attorney’s fees by a prevailing FLSA plaintiff, it can nevertheless substantially reduce the amount of attorney’s fees a court will award as reasonable.
In Gurule, the plaintiff sued to recover alleged unpaid minimum wages. Approximately a year and a half before trial, the defendant made the plaintiff a Rule 68 offer of judgment for approximately $3,000, which she rejected. Following trial, the plaintiff obtained an award of just over $1,000 in compensatory damages. The trial court reduced the amount of attorney’s fees it awarded the plaintiff under the FLSA by 60 percent based on several factors, including the fact that the plaintiff had rejected a more favorable Rule 68 offer of judgment.
The Fifth Circuit affirmed the 60 percent reduction in attorney’s fees, noting that although Rule 68 did not preclude an attorney’s fee award after the rejection of a more favorable offer of judgment, such rejection should nonetheless be considered in determining the amount of attorney’s fees that is reasonable to award. In so finding, the Fifth Circuit noted that the “most critical factor” in assessing the amount of attorney’s fees that is reasonable in a particular case is the prevailing party’s “degree of success.” The Fifth Circuit then instructed that “[i]n measuring that success, a court should ask whether the party would have been more successful had his attorney accepted a Rule 68 offer instead of pressing on to trial.”
Avoid the Need for Court Approval of an FLSA Settlement
Where parties settled a case brought under Fair Labor Standards Act (FLSA) pursuant to offer of judgment provided by an employer, entry of judgment was allowed without further court inquiry because FLSA was not exempt from right of voluntary dismissal under Fed. R. Civ. P. 41(a). Picerni v. Bilingual Seit & Preschool, Inc., 925 F. Supp. 2d 368, (E.D.N.Y. 2013).
Prevent or Stop Forward Progress
A cable-service installer’s acceptance of offer of judgment in his putative collective action against cable companies and subcontractors (arising from alleged failure to be properly compensated for overtime), precluded his right to direct disclosure of names and addresses of all putative class members — because upon entry of consent judgment, installer no longer had continuing personal stake in litigation. Valdez v. Cox Communs. Las Vegas, Inc., 557 Fed. Appx. 655 (9th Cir. 2014).
Force Potential Class Representative to Consider Settlement
In the Weiss decision (Weiss v. Regal Collections, 385 F.3d 337 (3d Cir. 2004)) — where the plaintiff filed premature motion for class certification — the Third Circuit specifically found that appropriate course — in the event the defendant makes a Rule 68 offer to his individual claim — has the effect of mooting possible class relief asserted in the complaint and would relate the certification motion back to the filing of the class complaint, provided that the plaintiff had not unduly delayed in filing such a motion. Smith v. Interline Brands, 87 F. Supp. 3d 701 (D.N.J. 2014).
