Monday, March 18, 2013

Split Noted: Can A Defendant Obtain Fees Based On A Rejected Rule 68 Offer of Judgment?

Per UMG Recordings, Inc v. Shelter Capital Partners LLC (9th Cir. Mar. 14, 2013)

I have always been surprised how few defendants use Rule 68.  To facilitate settlement, that rule
authorizes defendants to make an "offer of judgment" before trial.  Such offer must specify terms (money, injunction, apology, etc.) to be entered as a formal court judgment if accepted.

The rule itself encourages defendants to make such offers because they come at no cost (other than the offered/confessed judgment) to defendants.  To encourage Plaintiffs to accept such offers, or at least consider them, the rule provides that, "[i]f the judgment that the [plaintiff] finally obtains is not more favorable than the unaccepted offer, the [plaintiff] must pay the costs incurred after the offer was made."  Fed. R. Civ. P. 68(d).

In Marek v. Chesney, 473 U.S. 1, 9 (1985), the Supreme Court held that "costs" for purposes of Rule 68 included "all costs properly awardable under the relevant substantive statute or other authority. . . .
Thus, . . . where the underlying statute defines 'costs' to include attorney's fees, we are satisfied such fees are to be included as costs for purposes of Rule 68."

Given this authority, it would seem clear that where a plaintiff (1) brings a federal suit under a fee shifting statute that defines costs to include fees, (2) rejects an offer of judgment, and (3) ultimately receives a judgment less favorable than the offer, the defendant would be entitled to costs, including its post-offer fees.

But that is not the position of the majority of courts, as this CA9 opinion notes.  (p. 58 n.25.)  Indeed, it appears that only the CA11 adheres to this view, while the CAs DC, 1, 4, 5, 7, 8, and 9 all disagree.

I agree with the CA11.  The majority misreads Marek's use of "properly awardable."  For example, many majority-school opinions find fees not "properly awardable" because the underlying statute authorizes  fees only to the "prevailing party", and defendants did not prevail.

This mistakes the baseline for determining who "prevailed."  The proper yardstick is not the status quo ante litem, but rather the status quo post confessionem (my translation of offer).  For example, before litigation, the damages baseline for prevailing is $0.  But after an offer, the damages baseline for prevailing becomes the amount of the offer.  Thus, if a plaintiff achieves more than an offer, it has still prevailed.  But, if a plaintiff rejects an offer and ultimately receives less, the defendant has prevailed.

The structure of the rules mandates utilizing the status quo post confessionem yardstick.  For example, Rule 54(d) presumes that costs--other than fees--will be awarded to the prevailing party.  But nobody, not even the CA9 here, disputes that Rule 68 mandates that post-offer, non-fee costs be awarded to the offeror.  Thus, Rule 68(d) in essence renders the offeror the prevailing party for purposes of non-fee costs.

No majority-school opinion offers any convincing reason why Rule 68(d) should alter the meaning of "prevailing party" for non-fee costs under Rule 54(d), or at least suspend operation of Rule 54(d)'s "prevailing party" provision for non-fee costs, but not do the same for "prevailing party" statutes where fees are defined as an element of costs.  (One could try to tease out a theory based on the Rules Enabling Act, but Marek rejected such a theory, which was espoused in Justice Brennan's dissent.)

Moreover, as a policy matter, the majority-school creates a one-way ratchet that is inconsistent with the objectives of Rule 68.  The fee shifting statute at issue here allows both prevailing defendants and plaintiffs to recover their fees equally.  (Thus distinguishing the Supreme Court's gloss on the civil-rights attorneys' fees.)  Thus, there is no policy reason to be more protective of plaintiffs in this situation.  Yet, the CA9 permits plaintiffs to avoid paying defendants' attorneys fees even if they recover less than an offer, but still recover their own attorneys' fees if they recover more.  This undermines the incentives to settle, contrary to the express purpose of Rule 68.

This is an issue ripe for review, or at least rulemaking.  Given the Court's concern about floods of litigation, one would think that a stronger interpretation of Rule 68--i.e., the CA11--should win out.

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