March 01, 2014

Strategic Use of Rule 68 Offers of Judgment in Copyright Litigation

©2014. Published in Landslide, Vol. 6, No. 4, March/April 2014, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

Section 505 of the Copyright Act provides a trial court discretion to award costs, including “a reasonable attorney’s fee,” to the prevailing party in infringement actions. This fee-shifting provision applies regardless of whether the prevailing party is the plaintiff (so long as the work at issue was timely registered) or the defendant.1 Unlike the fee-shifting provisions of the Lanham Act and the Patent Act, no “exceptional” showing is required to recover fees in a copyright case.2

This relatively broad availability of attorneys’ fees, combined with the substantial discretion courts retain with respect to fee awards, introduces a great deal of uncertainty into many copyright cases. Particularly in matters involving a limited number of works, it is not uncommon for fee awards to exceed the amount of damages.

One way a copyright defendant can reduce its potential fee exposure is by making an offer of judgment under Federal Rule of Civil Procedure 68. If the offer is accepted, the litigation ends. If the plaintiff rejects the offer and prevails, but in a manner less favorable than the offer, then the plaintiff cannot recover its own subsequently incurred costs—including, in a copyright action, its attorneys’ fees. In some jurisdictions, the plaintiff also may be liable under Rule 68 for the defendants’ post-offer attorneys’ fees. Whereas awards of fees and costs under the Copyright Act are always discretionary, awards under Rule 68 are mandatory so long as the rule’s requirements are satisfied.

This article discusses offers of judgment in the context of copyright infringement actions. We address the application of Rule 68 under various scenarios and focus on two recent appellate decisions—UMG Recordings, Inc. v. Shelter Capital Partners LLC and Spooner v. EEN, Inc.—that illustrate the limits of Rule 68.3

Application of Rule 68 to Copyright Fee Awards

Rule 68 makes no reference to attorneys’ fees. On its face, it provides a mechanism for shifting only “costs.” In most cases, the items taxable as costs—court and witness fees, copying expenses, and the like—are minimal compared with the amount of attorneys’ fees.4 In Marek v. Chesny, however, the Supreme Court held that Rule 68 applies to all “properly awardable costs,” including attorneys’ fees if the underlying substantive statute defines fees as awardable “costs.”5 The Copyright Act is such a statute: it permits recovery of attorneys’ fees “as part of the costs” recoverable by the prevailing party.6 (In contrast, offers of judgment do not apply to attorneys’ fees in cases arising under the Patent Act or the Lanham Act, because neither statute’s fee-shifting provision refers to fees as “costs.”7)

Making an Offer of Judgment

The requirements for proposing an offer of judgment are straightforward. A defendant may serve the offer in writing any time up to 14 days before trial.8 The offer must be for an unconditional sum, and must “allow judgment on specified terms, with the costs then accrued.”9 The defendant should specify whether the offer includes pre-offer costs (which, in copyright cases, include attorneys’ fees), or whether the offer is for damages only and that costs and fees will be awarded later by the court. If the offer does not so specify, then 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.”10

If the plaintiff accepts the offer within 14 days, it is filed with the court and judgment must be entered pursuant to its terms. If the offer is not accepted it is deemed withdrawn, and it is not admissible “except in a proceeding to determine costs.” Subsequent offers are permissible, however.11

The potential for cost-shifting arises when the plaintiff rejects the offer and subsequently fails to win a better outcome. Under Rule 68(d), “[i]f 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.”

This provision applies only to offers that are formally served under Rule 68. As the First Circuit recently noted in Spooner, “[a] garden-variety settlement offer made without resort to Rule 68 affords the offeror no similar protection.”12 In Spooner, the alleged infringer made a Rule 68 offer for $10,000 (which the plaintiff rejected) and a subsequent informal settlement offer of $20,000. At trial, the plaintiff was awarded $10,000 against the infringer, an amount insufficient to trigger Rule 68(d). The First Circuit recognized that “[i]t is only a Rule 68 offer of judgment, more generous than the judgment ultimately secured, that operates to cut off a plaintiff’s entitlement to fees.”13

One unsettled question is how to determine whether a copyright judgment that includes an injunction against further infringement is “more favorable” than a prior offer of judgment containing no injunctive relief. In UMG, the Ninth Circuit held that before awarding a defendant costs under Rule 68, the district court must quantify the value of the injunction obtained in a judgment when evaluating whether it is more favorable to a previously rejected offer.14 But neither UMG nor the handful of other copyright cases addressing the issue offer substantive guidance on how to assess the value of nonmonetary relief for purposes of Rule 68.15

Nevertheless, defendants should consider including in any offer of judgment a stipulation to the injunctive relief sought by the plaintiff (particularly if the allegedly infringing conduct has already ceased or is of little value to the defendant). Conversely, plaintiffs arguing that an unaccepted offer of judgment was less favorable than the relief they ultimately obtained should emphasize the value of any injunctive or other nonmonetary remedy they received.

Effect of Rejected Offers of Judgment under Various Scenarios

A plaintiff that rejects a Rule 68 offer of judgment and then prevails at trial, but with a result less favorable than the rejected offer, may not recover its own post-offer fees. This principle, derived from Marek, applies in copyright cases: a prevailing copyright plaintiff in these circumstances is not entitled to recover any post-offer fees or costs, but may still be eligible for a discretionary award of pre-offer fees and costs under 17 U.S.C. § 505.16

The more difficult question—not addressed by Marek17—is whether Rule 68 also requires a prevailing plaintiff in these circumstances to pay the defendant’s post-offer fees and costs. Courts considering the issue in the copyright context are split.

In Jordan v. Time, Inc.,18 the Eleventh Circuit ordered a plaintiff to pay the defendant’s post-offer fees and costs after he won a money judgment at trial that was less than two earlier offers of judgment. Citing the “mandatory” language of Rule 68 and concluding that under Marek recoverable “costs” in copyright actions include attorneys’ fees, Jordan held that the nonprevailing defendant was entitled to its post-offer fees and costs. Jordan has been followed in copyright cases in the Southern District of New York and at least one other district court.19

The majority of copyright cases addressing the issue, however, hold that a nonprevailing defendant may not recover attorneys’ fees as “costs” under Rule 68 because the Copyright Act awards attorneys’ fees solely to a prevailing party. The Ninth Circuit expressly rejected Jordan in its recent UMG decision, as had the Seventh Circuit and several district courts. The rationale for these cases is that under Marek, “costs” under Rule 68 include attorneys’ fees only if they are “properly awardable” under the substantive statute at issue; and fees are “properly awardable” under 17 U.S.C. § 505 only to a “prevailing party.”20

But the outcome may be different for costs other than attorneys’ fees, according to the Ninth Circuit in UMG. In that case, the plaintiff rejected a Rule 68 offer for $100,000. The district court subsequently ruled that the defendant had a complete defense to infringement, and the parties stipulated to a judgment that included an agreed-upon injunction but no monetary relief. The district court found that the defendant was the prevailing party for purposes of 17 U.S.C. § 505, but declined to exercise its discretion to award the defendant fees under that provision. On appeal, the Ninth Circuit held that the defendant may still be entitled to costs (excluding fees) under Rule 68, but only if the district court determined on remand that: (1) the stipulated judgment was less favorable to the plaintiff than the rejected offer of judgment, and (2) the defendant was not the prevailing party “for Rule 68 purposes.”21

What does it mean for a party to prevail “for Rule 68 purposes”? As the Ninth Circuit explained in UMG, a defendant is eligible for costs under Rule 68 only when the judgment is “obtained by the plaintiff,” and not when judgment is entered in the defendant’s favor.22 In UMG, the fact that the judgment was entered by stipulation, and included an injunction against the defendant, left it unclear which party had “prevailed” for purposes of Rule 68—and put the defendant in the odd position of arguing, on remand, that it was entitled to a mandatory cost award because it had not prevailed.

In most cases, however, it is not so difficult to determine whether judgment has been entered in the defendant’s favor. When the defendant obtains the judgment, Rule 68 does not apply, and the fact that a plaintiff had previously rejected a more favorable offer will not mandate an award of fees and costs.23

Instead, a prevailing defendant’s entitlement to fees and costs is governed solely by 17 U.S.C. § 505. But a rejected Rule 68 offer is admissible evidence in a fee petition, and a court may find it relevant to the discretionary fee determination.24 

Practice Tips

  • The offer of judgment should be for a sum certain; must be properly served; and must clearly state its terms. Ambiguities are likely to be construed against the defendant. In cases involving multiple defendants, the offer should allocate the judgment against each defendant (or separate offers should be made by each defendant). The offer should state whether fees and costs are included or are to be determined separately by the court.
  • An offer of judgment, if accepted, is publicly filed. Unlike most settlement agreements, the terms of a matter resolved under Rule 68 generally will not be confidential.
  • If the plaintiff has claims for injunctive or other nonmonetary relief, the defendant should consider including such relief in the offer of judgment. Litigants should address the value of any injunction when arguing whether the judgment ultimately obtained by a plaintiff was “more favorable” for Rule 68 purposes than a rejected offer of judgment.
  • Even when Rule 68’s cost-shifting provisions are not triggered, a rejected offer of judgment may be relevant to the court’s discretionary award of fees under 17 U.S.C. § 505.

Endnotes

1. Fogerty v. Fantasy, Inc., 510 U.S. 517 (1994). A prevailing copyright plaintiff is eligible for fees only if the work at issue was registered within the period set out in 17 U.S.C. § 412, but a prevailing defendant may recover fees under § 505 regardless of whether, or when, the work was registered. E.g., Latin Am. Music Co. v. ASCAP, 642 F.3d 87, 90 (1st Cir. 2011).

2. 15 U.S.C. § 1117(a) (Lanham Act); 35 U.S.C. § 285 (Patent Act).

3. UMG Recordings, Inc. v. Shelter Capital Partners LLC, 718 F.3d 1006 (9th Cir. 2013), superseding 667 F.3d 1022 (9th Cir. 2011); Spooner v. EEN, Inc., 644 F.3d 62 (1st Cir. 2011).

4. See 28 U.S.C. § 1920.

5. Marek v. Chesny, 473 U.S. 1, 9 (1985).

6. 17 U.S.C. § 505.

7. Marek, 473 U.S. at 46–50 (Brennan, J., dissenting) (citing and classifying statutes).

8. Service must be pursuant to Fed. R. Civ. P. 5. See Magnuson v. Video Yesteryear, 85 F.3d 1424, 1429 (9th Cir. 1996) (offer of judgment served by fax and overnight delivery invalid).

9. Fed. R. Civ. P. 68(a).

10. Marek, 473 U.S. at 6 (citation omitted).

11. Fed. R. Civ. P. 68(a), (b).

12. Spooner, 644 F.3d at 70–71.

13. Id. at 71.

14. UMG, 718 F.3d at 1035.

15. See RCA/Ariola Int’l, Inc. v. Thomas & Grayston, 845 F.2d 773, 781 (8th Cir. 1988) (Rule 68 offer “inapplicable” because injunction obtained in final judgment was more restrictive, and thus more favorable to plaintiff, than injunction provided in rejected offer of judgment); Lish v. Harper’s Magazine Found., 148 F.R.D. 516, 520 (S.D.N.Y. 1993) (“vindication of [plaintiff’s] authorial right to control the first publication of his Letter is a more ‘favorable’ outcome than the payment” contained in offer of judgment); Domanski v. Funtime, Inc., 149 F.R.D. 556, 558 (N.D. Ohio 1993) (judgment containing permanent injunction against infringement more favorable to plaintiff than Rule 68 offer that contained more money but no injunction).

16. See, e.g., Boisson v. Banian Ltd., 221 F.R.D. 378, 382 (E.D.N.Y. May 18, 2004).

17. See Marek, 473 U.S. at 4, n.1.

18. 111 F.3d 102, 105 (11th Cir. 1997).

19. Baker v. Urban Outfitters, Inc., 431 F. Supp. 2d 351, 361–62 (S.D.N.Y. 2006); Lucas v. Wild Dunes Real Estate, Inc., 197 F.R.D. 172, 175–77 (D.S.C. 2000).

20. UMG, 718 F.3d at 1034 n.25; Harbor Motor Co. v. Arnell Chevrolet, 265 F.3d 638, 646–47 (7th Cir. 2001); Boisson, 221 F.R.D. at 382; Bruce v. Weekly World News, Inc., 203 F.R.D. 51 (D. Mass. 2001).

21. UMG, 718 F.3d at 1035.

22. Id., citing Delta Air Lines, Inc. v. August, 450 U.S. 346, 352 (1981). The standard differs from that used to determine “prevailing party” status under 17 U.S.C. § 505, which turns on whether a litigant obtained “a material alteration of the legal relationship of the parties.” See, e.g., Hyperquest, Inc. v. N’Site Solutions, Inc., 632 F.3d 377, 387 (7th Cir. 2011).

23. UMG, 718 F.3d at 1035; Overseas Direct Import Co., Ltd. v. Family Dollar Stores Inc., 2013 WL 5988937, at *1 (S.D.N.Y. Nov. 12, 2013).

24. Fed. R. Civ. P. 68(b). E.g., Bryant v. Media Right Prods., Inc., 603 F.3d 135, 144 (2d Cir. 2010) (citing rejected offer of judgment as support for denial of fees to prevailing copyright plaintiff); Compaq Comp. Corp. v. Ergonome Inc., 196 F. Supp. 2d 471, 474 (S.D. Tex. 2002) (same).