June 03, 2014 Articles

Tips for Drafting, Accepting, Rejecting, or Simply Understanding a Rule 68 Offer

Many would argue that the rule has yet to live up to its promise of encouraging settlements.

By Merritt B. Quigley

Among the practitioners who are familiar with Federal Rule of Civil Procedure 68, many would argue that it has yet to live up to its promise of “encourag[ing] settlements and avoid[ing] protracted litigation.” Marek v. Chesny, 473 U.S. 1, 4 (1985); 12 Charles Alan Wright et al., Federal Practice and Procedure: Civil § 3001, at 66 (2d ed. 1997). Despite the intention for Rule 68 to serve as a court-sponsored settlement tool, it remains an often overlooked means of effecting early resolution of claims.

Rule 68 differs from typical settlement devices because a plaintiff’s rejection of a Rule 68 offer of judgment carries consequences. Specifically, if a plaintiff is awarded a less favorable outcome at trial than the amount of the rejected Rule 68 offer, he or he cannot recover otherwise awardable costs (and in some cases attorney fees) incurred after rejecting the offer. Moreover, the plaintiff must pay the defendant’s post-offer costs (and in some cases attorney fees). So defendants “use” the rule to encourage plaintiffs to accept reasonable settlement offers before costs and attorney fees escalate.

Or at least that is how Rule 68 should work in theory. In practice, the rule’s operation is much less obvious. When used, Rule 68 tends to create more uncertainty as a result of its ambiguity, which is why many defendants avoid it altogether. Similarly, plaintiffs are unable to make informed decisions about whether to accept or reject a Rule 68 offer because it is unclear how a court may interpret its terms and calculate costs.

This article focuses on tips for drafting and interpreting Rule 68 offers in order to avoid unintended consequences, while noting some of the inherent complexities of the rule. This article also discusses proposed amendments to Rule 68, which may actually encourage the use of the rule without resorting to unnecessary collateral litigation.

Federal Rule 68
The text of Rule 68 appears straightforward. In full, it states as follows:

Rule 68. Offer of Judgment

1. 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 the acceptance, plus proof of service. The clerk must then enter judgment.

2. 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.

3. 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 hearing to determine the extent of liability.

4. 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.

Despite the intentions of the drafters and the proclaimed purpose of the rule, the text itself is, at best, cursory in form, making Rule 68 “among the most enigmatic of the Federal Rules of Civil Procedure.” Crossman v. Marcoccio, 806 F.2d 329, 331 (1st Cir. 1986).

The Offer: Who Bears the Greatest Risk?
The offer is critically important because it “stands as the marker by which the plaintiff’s results are ultimately measured.” Nusom v. COMH Woodburn, Inc., 122 F.3d 830, 834 (9th Cir. 1997). In other words, the offer is the benchmark that a plaintiff must surpass at trial to avoid the shifting of costs under Rule 68. Because plaintiffs must respond with either acceptance or rejection of a Rule 68 offer of judgment, and because both responses have consequences, plaintiffs are necessarily at their peril whether they accept or reject, depending on how the court will construe the terms of the nonnegotiable Rule 68 offer. Any uncertainty about the court’s interpretation creates risk for a plaintiff.

Plaintiffs are not the only ones who have to think hard about a Rule 68 offer. As set out above, the text of Rule 68 affords “a party defending against a claim” no real guidance on how to apply the rule’s cost-shifting mechanism. Defendants are not eager to utilize the rule only to have a court misinterpret the terms of the offer, subjecting them to a worse fate than had they not used the rule in the first place. In fact, defendants should be mindful that the offer of judgment will be construed strictly against them. It is easy to see why the wording of the offer becomes all-important.

What Is Included in “Costs”? 
One of the core requirements of a Rule 68 offer is that it must include not only an offer of judgment on the claims raised by the plaintiff, but such an offer must also include “costs then accrued.” Costs recoverable under the rule are typically limited to taxable costs enumerated in 28 U.S.C. § 1920 unless the substantive laws on which plaintiff’s claims are based include attorney fees as part of the definition of costs.

By far the greatest confusion in drafting and interpreting Rule 68 offers relates to the question of the scope of particular offers. Does the amount of the offer include costs or attorney fees (when applicable)? Courts have reached considerably different results on the issue of whether acceptance of an offer of judgment that is silent as to costs and attorney fees entitles the plaintiff to recover additional costs and attorney fees on top of the amount of the offer. The stakes regarding interpretation are especially high in fee-shifting cases in which the statute underlying the plaintiff’s claim authorizes attorney fees to be awarded to the prevailing plaintiff as costs, such as copyright cases.

The U.S. Supreme Court thought it answered the questions surrounding the interpretation of the scope of Rule 68 offers in Marek v. Chesny:

If an offer recites that costs are included or specifies an amount for costs, and the plaintiff accepts the offer, the judgment will necessarily include costs; if the offer does not state that costs are included and an amount for costs is not specified, the court will be obligated by the terms of [Rule 68] to include in its judgment an additional amount which in its discretion it determines to be sufficient to cover the costs.

473 U.S. at 6.

Unfortunately, the question that arises is whether costs were in fact included within the terms of the offer based on the defendant’s choice of language regarding “costs.” Moreover, courts are not consistent in their interpretations, even following the Supreme Court’s decision in Marek.

Some courts have held that a Rule 68 offer that is silent as to costs is nevertheless inclusive of such costs. For example, an offer for $501 “to settle all pending claims” was inclusive of costs. Blumel v. Mylander, 165 F.R.D. 113, 115–16 (M.D. Fla. 1996). Similarly, another district court concluded that an offer that did not mention costs was “sufficiently clear” in including costs. McCain v. Detroit II Auto Fin. Ctr., Inc., 228 F. Supp. 2d 799, 801 (E.D. Mich. 2002), rev’d in part and aff’d in part, 378 F.3d 561 (6th Cir. 2004). But on appeal, the Sixth Circuit reversed the district court’s ruling on attorney fees, holding that the defendant’s silence on the subject of costs in its Rule 68 offer meant that costs were not included in the offer, citing Marek for the proposition that costs are not included in an offer unless the offer so states.

A practitioner seeking certainty about how a court will interpret a Rule 68 offer would gain little assurance from the existing body of case law. The raging inconsistency between cases casts legitimate doubt on how any given court would rule, especially one that has yet to address the issue. Obviously, a plaintiff cannot reasonably and fairly value a Rule 68 offer that does not mention costs—and make a decision to accept or reject it—without knowing if a court will read such an offer to include or exclude costs (and attorney fees, for that matter). Still, that is precisely what plaintiffs must do, given the fact that Rule 68 offers are “non-negotiable” yet consequential even if rejected. Likewise, a defendant will never use the rule to begin with if he or she cannot be certain that the court will interpret the scope of the offer as intended.
When considering drafting a Rule 68 offer of judgment, or when faced with accepting or rejecting an offer under the rule, do the necessary legal research. Has the court in which the case is pending previously considered the issue? Know and understand the cases applicable to the situation at hand (to the extent they exist) and use them as authority in making, accepting, or rejecting these kinds of offers. Otherwise, counsel may find himself or herself subjected to unwanted litigation, like many others, who thought they knew the terms and scope of their Rule 68 offer. For this reason alone, instead of “encouraging settlement and avoiding protected litigation,” when left open to courts’ interpretations, Rule 68 offers breed their own disputes.

“Trying” to Change Rule 68 
Federal Rule of Civil Procedure 68 was adopted in 1938. To date, no substantive modifications have been accepted and incorporated. As a result, the current rule has changed very little from the first version, and its essence is stunningly the same. This does not reflect a lack of trying to change, particularly with respect to the difficult and important subject of whether Rule 68 should be amended to clearly authorize an award of “attorneys’ fees” in addition to an award of “costs.” See Civil Rules Advisory Comm., Judicial Conference of the United States, Minutes: Nov. 17–18, 2008. And to clarify whether Rule 68 authorizes the shifting of the defendant’s attorney fees to a prevailing plaintiff who obtains a less favorable judgment. See Jordan v. Time, Inc., 111 F.3d 102 (11th Cir. 1997) (awarding defendant its attorney fees after plaintiff rejected the Rule 68 offer and where plaintiff prevailed but obtained a judgment less favorable than the offer). 
For the most part, the proposals for modification follow from the widespread belief that the rule is underutilized and ineffective as written and interpreted. Primarily, practitioners, including members of the Civil Rules Advisory Committee, recognize that the present incentives are inadequate to achieve the rule’s primary purpose—settlement. So what can be done about it?
The Eleventh Circuit (and the Fourth Circuit by way of an unpublished opinion) is on the right path in giving Rule 68 the teeth it needs to effectuate its intended purposes. Unfortunately, the conclusion drawn by the Eleventh Circuit (awarding a defendant its post-offer attorney fees when the judgment obtained is less favorable than the terms of the offer) is by far the minority. Most courts are hung up on the fact that statutes permitting the recovery of attorney fees as part of costs are limited to the “prevailing party.” A defendant who “prevails” under Rule 68 will never be a “prevailing party” in the traditional sense. See, e.g.Harbor Motor Co. v. Arnell Chevrolet-Geo, Inc., 265 F.3d 638, 645–47 (7th Cir. 2001). In fact, by its terms, Rule 68 does not apply unless the plaintiff prevails—“obtains a judgment” against the defendant. Most courts reason that attorney fees cannot be properly awarded unless the terms of the underlying statute are met, i.e., the party “prevailed.” 

The majority of courts’ interpretation that a defendant/offeror cannot recover attorney fees where the underlying statute includes fees as part of costs provides for an internally inconsistent definition of “costs” as used in Rule 68. A plaintiff cannot recover “costs” (including plaintiff’s attorney fees) post-offer, yet a defendant can only recover “costs” (the traditional taxable costs, excluding defendant’s attorney fees) incurred post-offer. This interpretation is not only inconsistent, but it also makes absolutely no sense and defeats the purpose of Rule 68.

The rule’s operation must become comprehensible, and attorney fees need to be awardable to a defendant/offeror when they are defined as awardable costs in the underlying statute. Otherwise, Rule 68 will not have the force it was originally intended to possess: to truly promote settlement for the purposes of clearing the dockets and discouraging frivolous litigation. Without the possibility of an award of attorney fees, Rule 68 will likely remain fairly dormant, as it has to date. After all, without the award of fees, in most cases there is no true disincentive for a plaintiff to refuse a generous offer of judgment. Taxable costs just don’t cut it.

Needless to say, there is a lot of work to be done to create an effective and fair federal settlement-promotion rule. It is beyond debate that Rule 68 should be improved—it is just a matter of how and when. It seems most logical for the Supreme Court to assume the responsibility for that improvement, given the inconsistency in the lower courts’ decisions following Marek. Until then, we will watch with interest. And if daring enough, using what we know about Rule 68, if and when the opportunity arises to draft, accept, or reject an offer of judgment, we will do so with at least some amount of confidence.

Keywords: litigation, business torts, Federal Rule of Civil Procedure 68, offer of judgment, settlement, cost-shifting

Merritt B. Quigley – June 3, 2014