Bar News - August 17, 2016
Federal Rules of Civil Procedure: A Rule 68 Cautionary Tale
By: By Bryanna Kleber and David McGrath
Rule 68 of the Federal Rules of Civil Procedure is a seemingly simple cost-shifting rule that can be quite powerful if used correctly. Rule 68 creates what is called an “Offer of Judgment” that is meant to encourage speedy resolution of litigation. Most states have adopted some variation of Rule 68; New Hampshire is one of the few that has not.
In short, the rule allows the defendant to accept judgment against it in a specified amount. A defendant is always free to offer to resolve the case, but Rule 68 creates a powerful incentive for the plaintiff to accept the offered resolution. If the plaintiff rejects the Rule 68 offer, but wins a judgment at trial less favorable than the unaccepted offer, then the plaintiff must pay the defendant for certain costs the defendant incurred after the offer. In addition, the plaintiff is not allowed to recover its own post-offer costs, which are normally awarded to a prevailing party. Simple enough? Read on.
There are four ways a Rule 68 offer can play out.
1) Plaintiff accepts the offer: the litigation is over, and a clerk enters judgment against the defendant;
2) Plaintiff rejects the offer and loses at trial: the defendant is happy with the win, but is not entitled to recover any costs under Rule 68 (it might get some costs independent of Rule 68);
3) Plaintiff rejects the offer, wins at trial, and the judgment is higher than the offer: it is as if the offer was never made; and
4) Plaintiff rejects the offer, wins, but the judgment is lower than the offer: the plaintiff has to pay certain of the defendant’s costs accrued after the offer was made, and because the plaintiff won the case but lost the Rule 68 battle, the plaintiff is not entitled to its post-offer costs as a prevailing party.
Rule 68 can be tricky in practice. Depending on the desired outcome, a defendant must make the offer enticing enough to be accepted or low enough for a plaintiff to reject, yet high enough to exceed a potential judgment for the plaintiff. Only post-offer costs shift and, when comparing the Rule 68 offer and the judgment obtained, pre-offer costs incurred are added to the judgment amount. Therefore, an astute defendant will typically make a Rule 68 offer as early in a case as possible. Also, it is important to remember that when “costs” are defined in the underlying statute to include attorney fees and not just traditional costs, there is real danger for a prevailing plaintiff who obtains a judgment less favorable than the offer, because she will be precluded from recovering all of her post-offer costs, including her attorney fees. In these ways, lawyers for plaintiffs and defendants alike must be thoughtful and strategic when navigating Rule 68.
There is one very important potential trap for defendants that results in a defendant unwittingly paying the offer of judgment to an accepting plaintiff, plus pre-offer costs, which could include plaintiff’s attorney fees. This is exactly what happened in LaPierre v. City of Lawrence (1st Cir. Mass. 2016).
In LaPierre, the First Circuit taught an important cautionary lesson to defendants extending Rule 68 offers: Make sure your offer conveys exactly what you want your offer to include, because it is not modifiable or revocable during the 14-day consideration period.
Here, the defendant offered the plaintiff “judgment against the City of Lawrence and dismissal of all claims against any other Defendant in exchange for $300,000 payable over three (3) years.” The problem was that the defendant’s offer was silent as to whether “costs,” which the underlying statute in this case defined to include attorney fees, were included in the $300,000 offer. The next day, maybe seeing the snare around his feet, the defendant tried to withdraw the offer. However, revocation of an offer is not an option for Rule 68 offers, because the Court “must” enter judgment of an accepted offer. In scramble mode, two days after his unsuccessful attempt to rescind, defendant’s counsel sent an email to the plaintiff attempting to “clarify” the original offer.
The defendant “clarified” the initial offer by adding language that stated the $300,000 offer was inclusive of costs and fees, including attorney’s fees. Within the 14-day period, the plaintiff ignored the clarification and accepted the first offer, which was silent as to costs and fees, and noted she would move to recover costs and fees, in addition to the $300,000. The threshold question the First Circuit addressed was whether the plaintiff could accept the original offer, or whether that offer had been replaced by the amended offer.
The First Circuit reversed the District Court’s decision and held that the plaintiff’s acceptance of the first offer was valid. An offeror may clarify an offer only if the offer was incomplete or ambiguous. If the offer is neither incomplete, nor ambiguous, a plaintiff must be given the full 14 days to consider the offer, even if the defendant realizes he made a mistake. The court relied on actual language, and sentence construction, in Rule 68, and the Supreme Court’s holding that silent offers will always result in a court awarding an additional amount for the pre-offer costs incurred. So, the defendant was required to pay the $300,000 offer of judgment amount, in addition to the awarded pre-offer costs plaintiff incurred.
As set forth above, parties have much to think about when deciding whether to make a Rule 68 Offer of Judgment or whether to accept one. There are traps for the unwary, so don’t let the seeming simplicity of the rule cause you to overlook its dangers. For those on the defense side, learn from the LaPierre case and craft Rule 68 offers carefully, paying particular attention to whether your client intends for the offer to be inclusive of costs and fees.
Bryanna Kleber, a 2016 Sheehan Phinney summer associate, graduated from Middlebury College with honors and now attends Vermont Law School on full academic scholarship. David McGrath serves as president and managing director at Sheehan Phinney Bass + Green and is a certified mediator and maintains an active commercial litigation and employment practice. He is vice president of the NH Bar Association.