Chapter 11 Shifting Risk with Offers

• Library: From the Trenches III: Pretrial Strategies for Success (ABA) (2018 Ed.)

Chapter 11 Shifting Risk with Offers Alexandra W. Wahl¹

There is more than one way to balance the litigation playing field. Thorough preparations, effective advocacy, favorable venue selection and carefully crafted voir dire are all critical ingredients for success. But exploiting procedures for allocating risks of cost and expense can also provide leverage to force an opposing party to stop, pause, and consider the benefits of settlement. These cost-shifting mechanisms expose one of the parties, frequently a plaintiff, to unexpected risks. Most notably, the looming potential for an award of significant costs and, possibly, attorney's fees—which could outweigh a "winning" judgment—can cause even a gambler to get more realistic.

This chapter analyzes various procedural rules available to shift the risks of litigation costs and, therefore, change the risk-benefit calculus for the opposing party. These rules encourage settlement, with the effect of punishing an offeree who fails to accept a reasonable offer. Because state court jurisdictions lack uniformity in how they approach this issue, and some differ significantly from federal practice, lawyers should consult the procedural rules in their relevant jurisdictions in appropriate cases. These shifting devices are useful in particular cases where an opposing side greatly overestimates its chances of success.

Federal Rules of Civil Procedure Rule 68

Federal Rules of Civil Procedure Rule 68 "Offer of Judgment" states in full:

(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 An unaccepted offer is considered withdrawn, but it does not preclude a later offer.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.²

This rule is "one of the most powerful pieces of leverage" for a defendant in federal court, but is largely underutilized.³ It is a "hybrid between a settlement and a decision on the merits."⁴ Under Rule 68, at any time after the lawsuit is filed, but at least 14 days before trial, a defendant may make an offer including a "judgment on specified terms, with the costs then accrued."⁵ After service, the plaintiff has 14 days to serve a written acceptance.⁶ The offer remains irrevocable during this 14-day period. Thereafter, an unaccepted offer is deemed withdrawn.⁷ Still, this does not preclude a defendant from submitting subsequent proposals. If accepted, either side may file the offer, the notice of acceptance, and proof of service, prompting the clerk to automatically enter a public judgment against the defendant in accordance with the terms of the offer, without a trial.⁸

The purpose of Rule 68 is to encourage settlement and avoid litigation and the associated costs by prompting "both parties to a suit to evaluate the risks and costs of litigation, and to balance them against the likelihood of success upon trial on the merits."⁹ In furtherance of this purpose, the offer of judgment must specify a definite sum or other relief for the judgment to be entered and must be unconditional.¹⁰ This allows the plaintiff to have clarity concerning what is being offered.¹¹

As encouragement, the rule effectively provides a penalty if the offeree fails to obtain a judgment "more favorable" than the extended offer. If the plaintiff prevails at trial, but receives a judgment less favorable than the rejected offer, the plaintiff "must pay the costs incurred [by the defendant] after the offer was made."¹² Moreover, because the plaintiff won the case but lost the Rule 68 battle, the plaintiff will be deprived of its post-offer costs as a prevailing party. As a result, a plaintiff who refuses a reasonable Rule 68 offer can experience a dual penalty.¹³ By this framework, defendants are "motivated to make well-grounded offers of judgment, and plaintiffs are incentivized to carefully consider such offers."¹⁴ Since the "offer of judgment shifts liability for costs to the plaintiff as of the date on which it is extended, it is advantageous to the offeror to extend the offer as early in litigation as possible."¹⁵

Requisites and Sufficiency of the Offer

An effective Rule 68 offer does not require a specific refence to "costs." However, a failure to do so creates peril for the defendant (offeror). Defendants must draft "clear and unambiguous offers of judgment"—meaning, effective drafting may determine whether an offer is enforceable.¹⁶ Since the terms of the offer are strictly construed, poor drafting may lead to unintended consequences.

In Marek v. Chesny, the Supreme Court held the Rule 68 offer need not recite that costs are included, specify the amount defendant is allowing for costs, or refer to costs at all. The Supreme Court reasoned,

if the offer does not state that costs are included and an amount for costs is not specified, the court will be obliged by the terms of the Rule to include in its judgment an additional amount which in its discretion . . . it determines to be sufficient to cover the costs.¹⁷

Although the offer is technically still valid, the defendant may risk an additional award against it for the additional costs.

Citing Marek, when defendants offered a judgment of $30,000 "as full and complete satisfaction," the Fourth Circuit effectively determined that the offer was silent as to "costs."¹⁸ Even though defendants argued their offer included costs, the District Court awarded the plaintiff $66,463.80 in costs in addition to the $30,000 judgment. In its reasoning, the Fourth Circuit noted the offer places the plaintiff at a difficult choice: either accept on defendant's terms or proceed to trial, running the risk of attaining a judgment less than the offer and paying defendant's post-offer costs.¹⁹ Because a Rule 68 offer may have consequences for a plaintiff either way, the court "construe[d] the offer's terms strictly, and ambiguities in the offer are to be resolved against the offeror."²⁰

Because a Rule 68 offer cannot be modified or revoked during the 14-day consideration period, a defendant must be careful to precisely convey its intended terms. In a First Circuit case, LaPierre v. City of Lawrence, a defendant submitted an offer of judgment for $300,000, which was otherwise silent as to costs. Realizing this mistake, the defendant immediately attempted to revoke the offer and, the next day, attempted to send clarification that the offer was inclusive of all costs. Notwithstanding this attempt, the court held the plaintiff could accept the original offer.²¹ The court noted the original offer was "unambiguously exclusive of both costs and, as a subset of costs, attorneys' fees."²² Relying on Marek, the court awarded plaintiff (appellant) an additional amount for the pre-offer costs incurred, as well as costs on appeal.

In contrast, in Radecki v. Amoco Oil Co., a defendant offered judgment for $525,000 "including costs now accrued."²³ The Eighth Circuit held the original offer "subsum[ed] within the amount offered any liability for 'costs.'"²⁴ Because the underlying statute did not define "attorney's fees" as part of "costs," the court found the original offer was not clear as to whether it was intended to include attorney's fees.²⁵ For that reason, the Eighth Circuit concluded a pre-acceptance clarification was valid and operative, and the court would consider extrinsic evidence to determine whether the defendant intended the offer to be inclusive of attorney's fees.²⁶

The Rule 68 offer also may not impose any additional obligations on the plaintiff which could not otherwise be obtained from a judgment in a trial on the mer-its.²⁷ For example, the Fourth Circuit found a defendant's offer was not a valid "Rule 68 offer" where the written offer provided only five days for acceptance (instead of the mandatory 14 days), required the plaintiff to produce affidavits, required a settlement agreement instead of a judgment, and required plaintiff to keep the settlement and the terms of the settlement confidential.²⁸ The lessons here are clear. As a defendant, make sure to get your offer right the first time, or, as a plaintiff, be able to spot an invalid offer or any omissions to your advantage!

Are Attorney's Fees Included in "Costs"?

The Marek court also opined that "costs" under Rule 68 do not include attorney's fees unless the underlying statute for the plaintiff's cause of action includes attorney's fees within the definition for recoverable "costs."²⁹ For example, federal courts have held that statutory "costs" encompass attorney's fees in Title VII cases,³⁰ but do not under the Age Discrimination in Employment Act, the Fair Labor Standards Act (FLSA), and the Americans with Disabilities Act, where attorney's fees are defined or referenced separately.³¹ Of course, where attorney's fees are within the definition of recoverable "costs," this can exponentially increase the stakes for a plaintiff by potentially extinguishing the plaintiff's right to recover fees following a rejected offer.

Be careful. If the underlying statute allows...