Enforcing proposals for settlement and offers of judgment in federal court: mission impossible?

• Author: Sneed, Julie Simone
• Position: Business Law

Proposals for settlement and offers of judgment can shift liability for the cost of litigation. Depending on the difference between the amount of the proposal and the amount of the judgment, a party who rejected the proposal for settlement may be liable for court costs and reasonable attorneys' fees incurred by the opposing party. What is the effect of a proposal for settlement or offer of judgment served in an action pending in federal court based on diversity jurisdiction? What is the effect when the offer or proposal is served in an action pending in federal court based on a federal question? This article will explore the enforceability of an offer of judgment or proposal for settlement filed in federal court in Florida. The article also provides helpful practice pointers for making and enforcing offers and proposals.

Enforcing Offer in Federal Court

Here is a case hypothetical that illustrates the problems that could arise when trying to enforce a proposal for settlement or offer of judgment in federal court. Bob Smith serves as chair of a technology company, Software Developments, Inc. He resides in Arkansas. Software Developments, Inc., maintains its principal place of business in Arkansas and is incorporated in Delaware. Richard Pearl, a software developer, sued Software and Smith in the U. S. District Court for the Middle District of Florida. (1) He sued Software for royalty payments in excess of $75,000 he alleges it owes him, and he sued Smith for fraud. Pearl resides in Florida.

Plaintiff asserted both federal and Florida state claims in the complaint. Among other claims, Pearl sued Software for breach of contract and violation of the federal Copyright Act, 17 U.S.C. [section] 501. Both diversity and federal question jurisdiction exists. (2) For the purposes of this article, we presume that personal jurisdiction over defendants exists.

After some negotiations, Software and Smith jointly served Pearl with a proposal for settlement under I.S. [section] 768.79 (2009), and Fla. R. Civ. P. 1.442. Defendants offered to settle the parties' dispute for $2.5 million. Software and Smith apportioned the $2.5 million, offering $2 million from Software and $500,000 from Smith. Pearl did not accept the offer within 30 days and instead opted to pursue his case. After a protracted trial, the jury ruled in Pearl's favor. The jury awarded Pearl $100,000--less than 25 percent of the amounts offered by either Software or Smith. The court entered a judgment in the amount of the verdict. Software and Smith sought to enforce their proposal for settlement in federal court.

The Offer of Judgment Statute and Proposal for Settlement Rule

Under Florida law, a valid proposal for settlement must comply with the requirements of both I.S. [section] 768.79 (2009) and Fla. R. Civ. P. 1.442. (3) Essentially, the statute provides that the defendant may obtain an award of costs and attorneys' fees if the plaintiff does not timely accept the defendant's offer to settle the case and the defendant receives a judgment of no liability or the plaintiff receives a judgment that is 25 percent less than the defendant's offer. Conversely, if a plaintiff offers to settle a case under the statute, and the defendant fails to timely accept the offer, the plaintiff is entitled to recover attorneys' fees and costs if the plaintiff recovers a judgment in an amount at least 25 percent greater than the offer.

The offer must be made in good faith. It is the offeree's burden to prove that the offeror did not make the proposal in good faith. (4) "For an offer or proposal of settlement to be made in good faith the offeror must have had a reasonable foundation for making the offer and an intent to settle the case." (5)

Fla. R. Civ. P. 1.442 sets forth the procedural requirements provided in I.S. [section] 768.79. (6) As a rule of procedure, Rule 1.442 does not independently apply to determinations concerning attorneys' fees in matters pending in federal court. (7) However, parties must still comply with both the applicable rule and statute to ensure enforcement because the requirements of Rule 1.442 embody the procedural requirements of [section] 768.79. (8)

Proposals for Settlement/Offers of Judgment in Federal Court When Diversity Jurisdiction Exists

* The Erie Doctrine's Application--Federal courts look to state law when exercising diversity jurisdiction. The Supreme Court ruled in Erie R. Co. v. Tompkins, 304 U.S. 64 (1938), "federal courts sitting in diversity apply state substantive law and federal procedural law." (9) In Erie, the Supreme Court issued its landmark holding:

Except in matters governed by the Federal Constitution or by acts of Congress, the law to be applied in any case is the law of the state. And whether the law of the state shall be declared by its legislature in a statute or by its highest court in a decision is not a matter of federal concern. There is no federal general common law. Congress has no power to declare substantive rules of common law applicable in a state whether they be local in their nature or "general," be they commercial law or a part of the law of torts. And no clause in the Constitution purports to confer such a power upon the federal courts. (10)

"Classification of a law as 'substantive' or 'procedural' for Erie purposes is sometimes a challenging endeavor." (11) "Substantive in this context means that the state law applicable to the issue or issues of the suit would significantly affect the outcome of the suit. If so, the federal court must apply the applicable state law on these issues and will follow its own rules of procedure." (12)

* Section 768.79 is Substantive Law--Section 768.79 is substantive for Erie purposes. (13) In McMahan v. Toto, 256 F.3d 1120 (11th Cir. 2001) (McMahan I), the 11th Circuit considered whether [section] 768.79 applied to a case pending in federal court based on diversity jurisdiction where Virginia substantive law governed the underlying claim. (14) In the absence of state decisional law on the issue, the 11th Circuit concluded that [section] 768.79 would not apply because Virginia law applied to the substantive issues of the case. (15)

On the same day the 11th Circuit denied a rehearing of McMahan I, the...