Opinion
January 1, 1999
MORE PROPOSALS TO AMEND RULE 68: TIME TO SINK THE SHIP ONCE AND FOR ALL Bruce P. Merenstein INTRODUCTION
The author is currently a law clerk for Chief Judge Edward R. Becker of the United States Court of Appeals for the Third Circuit. This article was originally written for a seminar at the University of Pennsylvania Law School taught by Professor Stephen Burbank and Judge Anthony J. Scirica. Obviously, the views expressed herein (as well as any lingering errors) are those of the author and not of the aforementioned individuals. The title for this article is borrowed from an earlier article on this subject by Professor Burbank, Proposals to Amend Rule 68 — Time to Abandon Ship, 19 U. MICH. J.L. REF. 425 (1986).
Consider three hypothetical cases being litigated in the same federal district court. In all three cases, the plaintiff has been mildly injured (let us say she broke a toe) by a negligently placed can of corn in a supermarket in Philadelphia. Each plaintiff is a resident of New Jersey; each defendant is incorporated only in Delaware and has a principal place of business in New York, where it is headquartered. Each plaintiff alleges damages, including medical costs, loss of wages, and emotional suffering (each was subjected to an embarrassing puff piece on the local news), in excess of $75,000.
In the interest of minimizing litigation costs, the three (separate) super-markets make offers to the plaintiffs shortly after the filing of suit and after enough initial investigation to confirm that the accident actually occurred. Each plaintiff is offered $100,000 as compensation for all damages. Each plaintiff rejects the offer of settlement and insists on going to trial. At trial, plaintiff A breaks down under cross examination and admits that her five-year old son rammed a shopping cart into a shelf at the supermarket, causing the can of corn to plummet and land on her toe. The jury still finds for plaintiff, but returns a verdict of only $33,000 (finding that her damages were $60,000, but that she was 45% responsible under state comparative negligence law). Plaintiffs B and C, both of whom proved at trial that the respective supermarkets had negligently arranged the cans of corn and had repeatedly been made aware of the danger of their display, won their cases. Plaintiff B received a verdict of $99,000; plaintiff C, for virtually identical injuries, was awarded $150,000.
Under present Federal Rule of Civil Procedure 68, both plaintiffs A and B would be responsible for paying their opponent's costs from the time of offer until entry of judgment. Plaintiff C would not. This article will argue that, among other things, this result is illogical: To the extent that any cost-shifting (or other "sanction") should be imposed in this case, it is difficult to perceive why plaintiffs A and B should be treated the same, while plaintiffs B and C are treated differently. Current Rule 68 embodies neither the American nor the English Rule of litigation expense; rather, it reflects something very different: what might be called the Vegas Rule. Plaintiffs are forced to gamble that they will receive after trial a better judgment than they are offered before trial. In some cases, the outcome of this gamble should be obvious (e.g., case A above). To the extent procedural rules should impose sanctions for the rejection of reasonable settlement offers, case A should be a prime candidate for such sanctioning. On the other hand, to the extent that litigants should be permitted to pursue good faith claims (both as to liability and as to the specific judgment amount), cases B and C would not appear good candidates for such sanctioning.
Costs under Rule 68 include those costs for which a losing party would otherwise be responsible in most cases. See FED. R. CIV. P. 54(d)(1) ("[C]osts other than attorneys' fees shall be allowed as of course to the prevailing party unless the court otherwise directs. . . ."); 28 U.S.C. § 1920 (1994) (listing costs). In addition, under the Supreme Court's decision in Marek v. Chesny, a prevailing plaintiff who would otherwise be entitled to attorneys' fees pursuant to a fee-shifting statute will lose this entitlement if she does not receive a judgment that exceeds a Rule 68 offer and if the fee-shifting statute provides for attorneys' fees as a part of costs (as opposed to in addition to costs). See 473 U.S. 1, 9, 105 S.Ct. 3012, 87 L.Ed.2d 1 (1985).
Were the above hypotheticals actual cases, we might surmise that plaintiffs B and C were reasonable to reject an offer of $100,000, given that they might have received a judgment after trial of as much as $150,000. Under current Rule 68, however, plaintiff B is penalized for an inaccurate (though apparently reasonable) prediction. In other words, she gambled and lost. Plaintiff C gambled and won. The Vegas Rule treats these similar plaintiffs differently, based solely on the inevitable variance in jury verdicts. Moreover, if these claims had been civil rights claims (or certain other claims), Rule 68, along with the Supreme Court's decision in Marek v. Chesny, would deny to the prevailing plaintiffs in cases A and B their right to post-offer attorneys' fees from the losing party. Finally, recent proposals from both the Advisory Committee on Civil Rules and Congress would expand Rule 68 significantly, making the gamble even more risky. Not only would attorneys' fees become a part of the Rule 68 picture in all cases, but a prevailing party who lost a Rule 68 gamble would be required to pay the losing party's post-offer attorneys' fees, rather than simply lose her right to recover her own fees in a limited number of cases.
Although, as discussed below, some of the more recent proposals would cap a prevailing (but Rule 68-losing) party's liability for the other party's attorneys' fees at the amount of judgment received, this still can be a significant result: Parties who have a valid claim, on which they prevail at trial, can have their judgment reduced to nothing because they did not believe that a pre-trial offer of settlement was sufficient to compensate their injury.
This article briefly outlines some of these proposals to alter Rule 68. It also contends that Rule 68, in its present and proposed amended form, is a misguided rule for at least three reasons. First, the Rule affects substantive rights in a manner inappropriate for a rule of civil procedure. Second, it uses a stick to coerce plaintiffs to settle, even when they have met the substantive legal and jurisdictional requirements for access to federal court. Finally, it shifts costs (and, in some cases, denies attorneys' fees to prevailing parties) on the basis of a losing gamble, rather than on the basis of a plaintiff's insistence on litigating a nonmeritorious claim.
This criticism of Rule 68 has been dealt with extensively elsewhere and I will not address it at length here. For a short discussion, see infra Part III.A.1; see also sources cited infra note 45.
I argue, based on these criticisms, that a modified abrogation of Rule 68 is the best course. The Rule itself should be abolished. Prevailing parties should not be punished for losing a gamble or insisting on litigating a nonfrivolous claim. Legitimate concerns that parties sometimes reject offers of settlement that equal or exceed any possible judgment (based on the facts that should be known to the party at the time of the offer) can be addressed through a minor revision of Rule 11. If both offers of settlement and rejections of such offers were subject to Rule 11's requirement that claims (which here would include claims of entitlement to judgment of a certain value or of maximum liability of a certain value) be "warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law" and that "the allegations and other factual contentions [supporting the claim] have evidentiary support," a court could entertain motions for sanctions, including, in appropriate situations, attorneys' fees, for unreasonable rejections of offers, as well as for unreasonable (i.e., bad faith) offers themselves from both plaintiffs and defendants.
While it is possible to criticize the sanction regime of Rule 11 for, among other things, being difficult to enforce and lacking clear standards, this article takes Rule 11 as a given; the premise of the article is that Rule 11 is an accepted method for imposing sanctions on parties and attorneys for improper "claims" (in the broadest sense of that term) and, therefore, parties who frustrate settlements through improper claims should be subject to the sanction regime that is already in place.
In addition to the suggested modification of Rule 11, less egregious rejections of offers, which are followed by a lesser recovery at trial, can be dealt with through the district court's already-existing discretion, under Rule 54(d), to deny costs to the prevailing party. No justification exists for an automatic, mandatory shifting of costs, on the basis of nothing more than a losing gamble — no justification, that is, other than an unwarranted hostility to litigation that, even if valid, should be dealt with directly through Congress's modification of the substantive laws or the jurisdictional statutes, not through procedural rules that punish reasonable non-settling parties.
I. RULE 68: THE VEGAS RULE
Current Rule 68, which has existed virtually unchanged since the creation of the Federal Rules, provides that a defendant may make an offer of judgment up to ten days before trial begins. If the plaintiff does not accept the offer and prevails at trial — but for an amount that does not exceed the pre-trial offer — the plaintiff " must pay the costs incurred after the making of the offer." If the defendant prevails at trial, Rule 68 does not require the plaintiff to pay costs incurred after the offer. However, under Rule 54(d), a prevailing party is entitled to costs "unless the court otherwise directs." Therefore, a prevailing defendant usually will be awarded costs even without having made a pre-trial offer. The "costs" covered by Rule 68 are those usually recoverable by a prevailing party under Rule 54(d) and typically include such costs as court fees and statutory witness fees. In addition, in many cases in which a prevailing plaintiff would otherwise be entitled to attorneys' fees, Rule 68 will operate to deny such a plaintiff her post-offer fees when the judgment she obtains is not more favorable than the offer. The effect of Rule 68, therefore, is to make a losing defendant the prevailing party when he "wins" a Rule 68 gamble — and to override the district court's discretion under Rule 54(d) to determine the allocation of costs.
FED. R. CIV P. 68 (emphasis added).
See Delta Air Lines, Inc. v. August, 450 U.S. 346, 352, 101 S.Ct. 1146, 67 L.Ed.2d 287 (1981) ("[I]t is clear that [Rule 68] applies only to offers made by the defendant and only to judgments obtained by the plaintiff.").
See id.; see also 28 U.S.C. § 1920 (1994).
See Marek v. Chesny, 473 U.S. 1, 9, 105 S.Ct. 3012, 87 L.Ed.2d 1 (1985) ("[W]here the underlying statute defines `costs' to include attorney's fees, we are satisfied such fees are to be included as costs for purposes of Rule 68."). Because "costs" other than attorneys' fees are typically small (compared to attorneys' fees and other expenses), Rule 68 is seldom used in cases in which attorneys' fees are not available to a prevailing plaintiff. See FED. R. CIV. P. 68 comm. note (Preliminary Draft Proposal 1983), 98 F.R.D. 337, 363 (1983) ("The rule . . . has rarely been invoked and has been considered largely ineffective as a means of achieving its goals.").
While certain federal procedural rules reward parties for prevailing on their claims or defenses and others sanction parties for making frivolous claims or defenses, Rule 68 is unique in penalizing a party for an inaccurate guess. Particularly given the difficulty of predicting jury verdicts in many cases, it seems illogical and incongruous to have a rule of civil procedure that punishes plaintiffs who reasonably gamble that they will receive at trial more than they are offered before trial. As Judge William Schwarzer has noted in explaining a key difference between the American and English legal systems:
A case that might to some appear frivolous or marginal upon filing in an American court may still lead to a plaintiff's verdict; similarly, an apparently weak defense may prevail before a jury. As long as civil cases are tried before juries, fee shifting must be approached with caution, lest it result in imposition of possibly devastating penalties against actions or defenses that could have been winners.
Moreover, a lack of predictability in American law is not limited to juries. . . . Law in America is more volatile and less precedent-bound than in England.
William W Schwarzer, Fee-Shifting Offers of Judgment — An Approach to Reducing the Cost of Litigation, JUDICATURE, Oct.-Nov. 1992, at 147, 148-49.
While the hypothetical cases that opened this article might seem unlikely to occur in the real world, variations in jury verdicts are often much greater than those suggested here. In short, the present Rule 68 embodies neither the American Rule (each party bears his own expenses, including attorneys' fees) nor the English Rule (the losing party pays the winner's expenses). Rather, it is a Vegas Rule: Plaintiffs faced with a Rule 68 offer of judgment may accept the offer, even if they reasonably believe that they are entitled to a larger judgment and even if they reasonably believe that they are entitled to adjudicate their legal claim in a federal court — or they may gamble that they will receive more at trial than the offer, thereby risking their status as prevailing party for purposes of costs and, in some cases, attorneys' fees.
In an asbestos case, the Third Circuit noted that two cases were litigated in state court in Philadelphia with plaintiffs presenting similar illnesses and symptoms: One plaintiff was awarded $1.2 million by a jury, while the one most observers believed to be more ill received only $15,000. See In re School Asbestos Litig., 789 F.2d 996, 1001 n. 3 (3d Cir. 1986). Had the $1.2 million verdict been announced first, and the defendant in the other case offered the second plaintiff $50,000 to settle, it certainly would have been reasonable for her to refuse this offer. Yet, if the offer were made pursuant to Rule 68, she would be responsible for post-offer costs and, under many proposed amendments to Rule 68, the other party's post-offer attorneys' fees.
Except in those cases in which plaintiffs risk losing their entitlement to attorneys' fees, the effect of current Rule 68 is minimal, because, as noted, it is seldom used and covers only a small portion of litigation expenses. However, a number of proposals have been made — by scholars, by the Advisory Committee on Civil Rules, and, most recently, by Congress — to put more bite into Rule 68 by including attorneys' fees in the "costs" that are shifted in the event a party loses the Rule 68 gamble. Adoption of these proposals would extend the illogic of Rule 68 and would increase the punishment on parties, particularly plaintiffs, who refuse to accept a settlement offer that they reasonably believe is insufficient to satisfy their legal claim. The next Part of this article will briefly discuss some of these proposals.
II. PROPOSALS (AND MORE PROPOSALS) TO AMEND RULE 68 A. The 1983 and 1984 Proposals
For almost fifty years, Rule 68 went through only minor adjustments and remained largely forgotten. In 1983 and 1984, however, the Advisory Committee on Civil Rules proposed amendments to Rule 68 that would have substantially expanded its scope and almost certainly its use. The first proposal would have allowed both plaintiffs and defendants to make Rule 68 offers and would have provided for a Rule 68 shifting of costs whenever the judgment was not more favorable than the offer, even if the offeror prevailed at trial, effectively overruling the decision in Delta Air Lines, Inc. v. August. More fundamentally, the proposal would have changed "costs" to "costs and expenses, including reasonable attorneys' fees" incurred after the offer. Such expenses could be reduced if they were found to be "excessive or unjustified under all of the circumstances," but otherwise, a losing Rule 68 gamble would subject the offeree to the English Rule for all post-offer costs, expenses, and attorneys' fees. The Committee Note to the proposed amendment made clear the goal of the amendment:
See FED. R. CIV. P. 68 (Preliminary Draft Proposal 1983), 98 F.R.D. at 362. The 1983 proposal, as well as most of the other proposals discussed in this article, included a number of lesser changes, such as changing the period before trial during which a party could make a Rule 68 offer. This article will focus on the more substantial changes, particularly proposals to increase the penalty for losing a Rule 68 gamble, and will not discuss the minor changes in many of the proposals.
Id.
Id.
The purpose of Rule 68 as adopted in 1938 was to encourage settlements and avoid protracted litigation. . . .
. . . .
[T]he increased risk faced by an offeree is expected to encourage more serious evaluation of a proposed settlement at an earlier stage than otherwise might occur, which should lead to more dispositions of cases before the heaviest expenses have been incurred.
Id. comm. note, 98 F.R.D. at 365 (emphasis added).
The proposed amendment met with more than a little opposition. "In the face of this onslaught of criticism, the Advisory Committee withdrew the 1983 proposal to amend rule 68 and went back to the drawing board."
See Roy D. Simon, Jr., The Riddle of Rule 68, 54 GEO. WASH. L. REV. 1, 12-16 (1986); see also Stephen B. Burbank, Proposals to Amend Rule 68 — Time to Abandon Ship, 19 U. MICH. J.L. REF. 425, 428 n. 18 (1986); Julie M. Cheslik, Note, The Proposed Amendments to Federal Rule of Civil Procedure 68: Toughening the Sanctions, 70 IOWA L. REV. 237, 250 n. 128 (1984).
Simon, supra note 16, at 16.
The next year, the Advisory Committee suggested entirely different amendments to Rule 68. Yet, the goal of the amendments remained unchanged: "The proposal is designed to encourage early settlements, avoid protracted litigation, and thus reduce the current enormous delay and expense that marks dispute resolution in most federal courts." The 1984 proposal relabeled the Rule, "Offer of Settlement; Sanctions." The proposed Rule would no longer provide for an automatic shifting of costs when an offeree lost a Rule 68 gamble; rather, in line with the new title, any party who had offered a Rule 68 settlement could, within 10 days after the entry of judgment, move for sanctions against the party who had rejected the pre-trial offer. The court would have the discretion to impose sanctions if it "determines that an offer was rejected unreasonably, resulting in unnecessary delay and needless increase in the cost of the litigation." The determination would be based on "all of the relevant circumstances at the time of the rejection," with six specific factors listed. The sanction imposed would also be at the court's discretion, with four additional factors listed for determining the appropriate sanction. The Committee Note compared the revised Rule 68 to other rules that provide a district court with discretion to "facilitat[e] the efficient operation of the litigative process," including Rule 37 (disclosure refusals), Rules 11 and 26 (frivolous pleadings and motions), Rule 56 (bad faith summary judgment affidavits), and Rule 30 (failures to attend noticed depositions).
Letter from Hon. Walter R. Mansfield, Chairman, Advisory Committee on Federal Rules of Civil Procedure, to the Committee on Rules of Practice and Procedure of the Judicial Conference of the United States, Submitting Proposals for Amendment of the Federal Rules of Civil Procedure (Aug. 1984), reprinted in 102 F.R.D. 423, 423-24 (1984).
FED. R. CIV. P. 68 (Preliminary Draft Proposal 1984), 102 F.R.D. 407, 433 (1984).
Id. The factors included such things as the "apparent merit" of the claim at the time of the offer, the closeness of the legal and factual issues in the case, and the "relief that might reasonably have been expected if the claimant should prevail." Id.
Id. comm. note, 102 F.R.D. at 436.
The Committee Note retained the language regarding the purpose of original Rule 68 ("to encourage settlements and avoid protracted litigation") and of the proposed new Rule ("to encourage more serious evaluation of a proposed settlement at an earlier stage than otherwise might occur, which should lead to more dispositions of cases before the heaviest expenses have been incurred"). In other words, the emphasis remained on reducing costs by settling cases rather than trying them. The touchstone of the new Rule was to be "unreasonable" rejections of settlement offers, rather than failures to obtain judgments more favorable than rejected offers. While the 1984 proposal eliminated the most illogical aspect of Rule 68 (the "gamble"), it still received a great deal of criticism, some of it new and some of it old, and the proposal was never adopted.
Id. comm. note, 102 F.R.D. at 433, 435.
See, e.g., Simon, supra note 16, at 17-19 (noting opposition due to "the potential for shifting fees," as well as arguments about "an intolerable amount of collateral litigation" and threats to the attorney-client privilege and the attorney work-product doctrine).
B. The Schwarzer Proposal
Almost a decade passed before the Advisory Committee again seriously considered major amendments to Rule 68. In late 1992, a draft proposal was formulated; it was sent to interested parties for comments in early 1993 and was discussed at Advisory Committee meetings in 1993 and 1994. Unlike the 1984 proposal, the new proposal maintained the "gambling" aspect of Rule 68, providing for cost shifting when a party refused a Rule 68 settlement offer and failed to obtain a better judgment at trial. The proposal, like the 1983 proposed amendment, shifted not only costs, but expenses, including attorneys' fees. However, in striving for "a middle ground," the latest proposal limited the fee award to the amount of the judgment. Therefore, a plaintiff turning down a $50,000 settlement offer and receiving only $40,000 at trial, would be responsible for all post-offer costs and for post-offer attorneys' fees up to $40,000. In addition to the judgment cap, fees would be reduced by the difference between the offer and the judgment. In the above example, post-offer fees would be reduced by $10,000.
See Letter from Edward H. Cooper, Reporter, Advisory Committee on Federal Rules of Civil Procedure, to "Civil Procedure Buffs" (Jan. 21, 1993), at 1 [hereinafter Cooper Letter] ("No attempt to revise Rule 68 has been made since the controversial proposals published for comment in 1983 and 1984.").
See Minutes of the Advisory Committee on Federal Rules of Civil Procedure (May 1993), at 13 [hereinafter May 1993 Minutes].
See id.
The draft proposal was based on a plan outlined by Judge William Schwarzer in a 1992 Judicature article. Judge Schwarzer wrote that "revision of Rule 68 to encourage early settlement without inflicting draconian penalties or generating windfalls deserves renewed and serious consideration." He argued against adoption of the full English Rule, noting that "[i]t does not seem wise to try to cure problems inherent in our legal system by exposing parties who use it to severe and uncontrollable hazards." Therefore, he concluded, an incentive to settle that did not put a litigant at undue risk of "draconian penalties" made the most sense. Despite this "middle ground" approach, there were still "substantial objections" to the 1992 proposal. By the October 1994 meeting of the Advisory Committee, suggestions to abrogate the Rule altogether were being considered.
See Schwarzer, supra note 10.
Id. at 147.
Id. at 149.
Id. at 147.
See Reporter's Note, Advisory Committee on Federal Rules of Civil Procedure (Oct. 1994), at 1.
See id. ("If Rule 68 is to be pursued, there is at least one easily drafted and rather easily defended approach. Rule 68 could be abrogated. There is a strong argument that it has become perverse."); Minutes of the Advisory Committee on Federal Rules of Civil Procedure (Oct. 1994), available in 1994 WL 880348, at *18 ("A motion to abrogate Rule 68 was made and seconded twice. Brief discussion suggested that there was support for this view. . . .").
C. Other Proposals 1. Congressional Proposals
In addition to the Advisory Committee proposals from the 1980s and 1990s, proposals to amend Rule 68 have come from other quarters. Recently, Congress has considered a number of offer-of-judgment statutes with fee-shifting components. The Attorney Accountability Act of 1995 passed the House of Representatives on March 6, 1995, but never passed the Senate. It would have provided, in diversity cases only, for an offer-of-settlement rule under which post-offer "costs and expenses, including attorneys' fees," would be shifted when a judgment "is not more favorable to the offeree" than the rejected settlement offer. In 1997, Senator Hatch introduced, as part of the Civil Justice Fairness Act, a similar proposal that would have covered all cases in federal court. Earlier, a proposal drawn from Judge Schwarzer's plan was introduced as part of the Civil Justice Reform Act of 1993. Neither of these latter two proposals passed either house of Congress.2. Non-Congressional Proposals
In the sixteen years since the 1983 Advisory Committee proposal to amend Rule 68, there have been countless alternative proposals to amend the Rule in order to "encourage settlements." In 1983, Washington attorney Jay Varon proposed amending Rule 68 in a manner very similar to the Advisory Committee proposal. However, under Varon's proposal, only "reasonable litigation expenses ( other than attorney's fees)" incurred after the Rule 68 offer would be shifted when the party rejecting the offer failed to secure a judgment more favorable than the offer.In response to criticism of the 1983 and 1984 Advisory Committee proposals, Judge Schwarzer advanced an earlier suggestion, different from his more recent proposal discussed above. Under this earlier proposal, rejection of a settlement offer followed by failure to secure a more favorable judgment at trial would shift post-offer expenses, including attorneys' fees, only if, at the time of the Rule 68 offer, "a judicial officer other than the judge to whom the case is assigned" had made "a tentative determination that the offer [was] reasonable."
See Letter from Hon. William W Schwarzer, United States District Judge, to Editor, Legal Times (Aug. 22, 1984), at 2-3, included in Advisory Committee on Federal Rules of Civil Procedure, Comments Received on the 1984 Proposal to Amend Rule 68 (1985).
While the 1984 Advisory Committee proposal was being debated, Professor Roy Simon circulated a detailed proposal for amending Rule 68, later outlined in a George Washington Law Review article. His proposal would have provided for shifting of attorneys' fees only when settlement offers were rejected "frivolously, in bad faith, or for an improper purpose." However, the "costs" that would be shifted in most Rule 68 cases (that is, most cases in which "the judgment finally entered is not more favorable to the offeree than the rejected offer") would be " ten times the costs taxable under 28 U.S.C. § 1920 (excluding attorneys' fees)." District courts would have discretion to reduce the ten-times sanction, as well as discretion, under another provision of Simon's proposal, to order the parties to enter into an alternative dispute resolution procedure, even without their consent.
See Simon, supra note 16.
Id. at 47.
Id. at 83 (emphasis added).
See id. at 87.
Not to be outdone, economics professors have waded into the Rule 68 debate, offering amendments that allegedly will induce serious settlement negotiations, while "assur[ing] that offers will approximate the expected jury award." Finally, sections of the American Bar Association have promulgated suggested amendments that attempt to mitigate some of the harshness of the strict Rule 68 "gamble," providing for fee shifting when a judgment is not better than 75 percent of a rejected offer.
David A. Anderson, Improving Settlement Devices: Rule 68 and Beyond, 23 J. LEGAL STUD. 225, 240 (1994). Professor Anderson offers two proposals, labeled the "Sincerity Rule" and the "Final Offer Auction," the efficacy of which are beyond the ability of this author to discern. See id. at 240-42.
See American Bar Ass'n, Section of Tort Ins. Practice and Section of Litig., Recommended Resolution on Offer of Judgment Legislation (Aug. 1995).
III. PROBLEMS WITH THE PROPOSALS TO AMEND RULE 68 A. Judicial vs. Congressional Authority 1. The Rules Enabling Act
As noted above, lengthy arguments have been made elsewhere that any fee-shifting rule of procedure would violate the Rules Enabling Act. I will only summarize the key points of these arguments here, as well as highlight the underlying problems in enacting a fee-shifting provision through judicial — rather than legislative — action.Professor Paul Carrington has noted that Rule 68, even in its unamended form,
was not in any useful sense a rule of "pleading and practice" as the 1934 [Rules Enabling] Act authorized the Court to make. The rule had little to do with what happens in court or between judges and lawyers or their clients; it did nothing to increase the likelihood that a court's judgment would be the product of a correct application of law to accurately determined facts. . . . The pursuit of social peace is assuredly a proper object of ordinary Article I legislation, at least with respect to matters that are within federal cognizance, but it is not a proper object of legislative enactments by politically independent, invulnerable Article III courts.
Carrington, supra note 45, at 989 (footnote omitted).
If further evidence of the inappropriateness of judicial rulemaking in this area were needed, "[t]he imbroglio in which the Committee involved itself [in 1983 and 1984] ought to be taken as instruction that the issues raised by offer-of-settlement rules have too much political content to be wisely managed by rule of court."
Id. at 991; cf. Edward H. Cooper, Rule 68, Fee Shifting, and the Rulemaking Process, in REFORMING THE CIVIL JUSTICE SYSTEM 108, 116 (Larry Kramer ed., 1996) ("[T]he rulemaking process is not an appropriate means of adopting a general fee-shifting system. Whether fee shifting is regarded as `procedural' or `substantive' for purposes of the Rules Enabling Act, the topic is far too sensitive and bound up with political concerns to be addressed in this process." (footnote omitted)); id. at 123-24 (reiterating this point).
Professor Stephen Burbank has argued, in response to the earlier Advisory Committee proposals, that judicial rulemaking must both protect existing "`substantive legal and remedial rights,'" and avoid making "a choice between policies that relate to the process of litigation and policies that are extrinsic thereto." In fashioning numerous exceptions to the American Rule, Congress clearly has made policy choices regarding the encouragement of certain types of litigation and the vindication of certain legal rights. Congress also makes choices about the necessary hurdles for access to federal courts through such mechanisms as amount-in-controversy requirements, rules for removal of actions to federal court, and the enactment of a supplemental jurisdiction statute. All of the proposed amendments to Rule 68 would alter these policy choices to varying degrees. Parties who meet the requirements established by Congress (amount-in-controversy, subject matter, substantive law, etc.) could be coerced by a judicially-created rule into exiting a federal court to which Congress has granted them access.
Burbank, supra note 16, at 433-34 (quoting S. REP. NO. 1174, 69th Cong. 9 (1926)).
See, e.g., 42 U.S.C.A. § 1988(b) (1994 Supp. 1997) (providing for award of attorneys' fees to prevailing parties in certain civil rights cases).
See 28 U.S.C.A. § 1332(a) (1993 Supp. 1997) (requiring that "the matter in controversy exceed[] the sum or value of $75,000," in order for the federal district courts to have original jurisdiction in diversity cases); 28 U.S.C. § 1441 (1994) (removal statute); id. § 1367 (supplemental jurisdiction statute).
As a practical matter, there can be little doubt that a Rule 68 that included even partial fee shifting would deter some litigants from bringing suit and would encourage others to accept settlements below the amount to which they reasonably (and perhaps correctly) believed they were entitled. As Professor George Priest first demonstrated more than fifteen years ago, "the offer that the defendant submits under an offer-of-judgment . . . rule will be lower than the offer he submits under an American rule given similar conditions." Professor Priest concluded that "the Rule's principal effect . . . is distributive: plaintiffs become worse off. Indeed, Rule 68 is most likely to encourage settlement by those plaintiffs least able to with-stand the adverse effect of paying the defendant's litigation expenses." Professor Geoffrey Miller also noted that the assumption that Rule 68 will increase the rate of settlements "is based on an obvious fallacy," as it "focuses only on plaintiff's incentives while ignoring the likely effect of the rule on the behavior of defendants." In short, a defendant willing to offer a particular amount to settle without a cost- (or fee-) shifting rule will offer something less under Rule 68. Therefore, the Rule's "primary effect is not to encourage settlement but to benefit defendants and harm plaintiffs by shifting downward the relevant settlement range." The effects noted by Professors Priest and Miller would only be exacerbated by a fee-shifting Rule 68. Even with the proposals to make an amended Rule 68 bilateral, the detrimental effects on plaintiffs would remain in the many cases in which the plaintiff is more risk-averse than the defendant or when a prevailing plaintiff would already be entitled to costs (or fees) in the absence of a Rule 68 shift.
See Anderson, supra note 43, at 239 (concluding that a bilateral, fee-shifting version of Rule 68 would "find[] its strength in exploiting the vulnerability of the risk averse"); Cheslik, supra note 16, at 256 ("Poor and middle class litigants may be deterred from pursuing legitimate claims. The added stake of potential liability for the adverse party's attorney's fees introduces an element of gamesmanship and risktaking that litigants of modest means cannot bear." (footnote omitted)).
George L. Priest, Regulating the Content and Volume of Litigation: An Economic Analysis, 1 SUP. CT. ECON. REV. 163, 170-71 (1982). Professor Priest also demonstrated that, contrary to received wisdom, "relative to the American rule, the offer-of-judgment rule will increase the rate of litigation." Id. at 169 (emphasis added).
Id. at 179.
Geoffrey P. Miller, An Economic Analysis of Rule 68, 15 J. LEGAL STUD. 93, 94 (1986); see also Anderson, supra note 43, at 229 ("Rule 68 and its conventional variants may moderate the settlement amounts in cases that would settle without the Rule, but they do not encourage settlement for risk-neutral litigants when it would not otherwise occur.").
Miller. supra note 54, at 94; see also id. at 105-06, 111-12. An empirical study by Professors Thomas Rowe and Neil Vidmar found a related effect: With a bilateral offer-of-settlement rule that provided for fee shifting, plaintiffs were found to make lower counteroffers (at a statistically significant level) than they otherwise would without an offer-of-settlement rule. See Thomas D. Rowe, Jr. Neil Vidmar, Empirical Research on Offers of Settlement: A Preliminary Report, LAW CONTEMP. PROBS., Autumn 1988, at 13, 27.
See Miller, supra note 54, at 121 ("Rule 68's redistributive effect is thus greatly enhanced when fees are included in costs."); Rowe Vidmar, supra note 55, at 28 (finding that "the threat of an adverse fee shift . . . increase[s] the acceptance rate" of defendants' offers in civil rights case simulations and "that severe offer rules may enhance the acceptability of `low-ball' offers to risk-averse plaintiffs").
See supra notes 51, 56; see also Rowe Vidmar, supra note 55, at 29 ("Offer rules may thus moderate plaintiffs' counter-demands whether the rules are available to both sides or to defendants only.").
2. The Absence of Statutory Authority
Over the past two decades, the Supreme Court has frequently held that Congress, and not the courts, must determine the proper allocation of litigation expenses. The leading case in this area, of course, is Alyeska Pipeline Service Co. v. The Wilderness Society, in which the Court held that, whatever the policy arguments may be for fee shifting, "it is not for [the Court] to invade the legislature's province by redistributing litigation costs" in a manner not provided for by statute. The Court noted that, almost two centuries earlier, it had "ruled that the Judiciary itself would not create a general rule, independent of any statute, allowing awards of attorneys' fees in federal courts" and it had "consistently adhered to that early holding." While narrow exceptions exist in cases of willful disobedience of a court order or when a party "acted in bad faith, vexatiously, wantonly, or for oppressive reasons," the general rule in federal court is that, "absent statute or enforceable contract, litigants pay their own attorneys' fees." The Court could not have been more clear: "Under this scheme of things, it is apparent that the circumstances under which attorneys' fees are to be awarded and the range of discretion of the courts in making those awards are matters for Congress to determine."
421 U.S. 240, 270-71, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975).
Id. at 249-50.
Id. at 258-59 (internal quotations omitted). It is clear that both the 1983 and the 1984 proposals would have permitted fee shifting for conduct that did not rise to the level of "bad faith" — despite the contrary arguments of some proponents of the amended Rule. See, e.g., John E. Sprizzo, Unjustifiable Refusals to Settle and Rule 68, 62 ST. JOHN'S L. REV. 443, 451 (1988) ("Since the American rule does not and has never protected a litigant or his attorney from being made to pay an opponent's attorneys' fees as a sanction for misconduct, the proposed revision of rule 68 does not effect any substantive change in the American rule.").
Alyeska Pipeline, 421 U.S. at 257, 95 S.Ct. 1612.
Id. at 262, 95 S.Ct. 1612. The Court also noted that in diversity cases, "`state law denying the right to attorney's fees or giving a right thereto, which reflects a substantial policy of the state, should be followed.'" Id. at 259 n. 31, 95 S.Ct. 1612 (quoting 6 JAMES MOORE. FEDERAL PRACTICE ¶ 54.77[2], at 1712-13 (2d ed. 1974)). The Court found that pre- Erie cases holding that state fee-shifting laws should be applied in diversity cases were not affected by Erie, implying that fee-shifting laws are substantive and not procedural in nature.
In cases following Alyeska, the Court reiterated that federal courts could only tax attorneys' fees against a party when authorized by statute or when punishing bad faith litigation tactics. Surveying this line of cases, the Sixth Circuit noted:
See, e.g., Roadway Express, Inc. v. Piper, 447 U.S. 752, 761, 100 S.Ct. 2455, 65 L.Ed.2d 488 (1980); cf. West Va. Univ. Hosps., Inc. v. Casey, 499 U.S. 83, 102, 111 S.Ct. 1138, 113 L.Ed.2d 68 (1991) (refusing to permit shifting of expert witness fees absent explicit statutory authority); Crawford Fitting Co. v. J.T. Gibbons, Inc., 482 U.S. 437, 444-45, 107 S.Ct. 2494, 96 L.Ed.2d 385 (1987) (refusing to permit payment of expert witness fees in excess of amounts provided for in statute).
The taxation of actual attorneys' fees as costs in federal courts is an extraordinary remedy, allowed normally only where Congress has expressly created an exception to the "American rule" and authorized them in the substantive statutory right at issue in the litigation. . . . If a general rule may be read in Alyeska Pipe Line and its progeny, it is that the Supreme Court will not allow itself or other federal courts to vary the uniform scheme of costs and fees as set forth in the 1853 Fee Act, other than those narrowly defined circumstances of cases involving bad faith or abusive litigation, disobedience of court orders or the common fund doctrine.
Tiedel v. Northwestern Mich. College, 865 F.2d 88, 93-94 (6th Cir. 1988).
B. The Settlement Obsession
Even without the proposed amendments to Rule 68, the present Rule evinces a clear policy choice in favor of settlement of disputes in federal court rather than the trying of such cases: "The plain purpose of Rule 68 is to encourage settlement and avoid litigation." This is a policy choice that is not only appropriately made through the legislative (and not the rulemaking) process, but one which is not without controversy or opposition.1. A Dissenting Voice (or Two)
Professor Owen Fiss articulated perhaps the most well-known critique of the settlement obsession, in his 1984 article, Against Settlement. Professor Fiss argued that "settlement is a capitulation to the conditions of mass society and should be neither encouraged nor praised." In most cases, "settlement is . . . a function of the resources available to each party to finance the litigation, and those resources are frequently distributed unequally." A poorer party may have less information with which to evaluate proposed settlements, a particularly great concern when the failure to accurately predict the relationship between a settlement offer and a final judgment may lead to cost or fee shifting.
Owen M. Fiss, Against Settlement, 93 YALE L.J. 1073 (1984). For a recent discussion of some of the problems with settlement in general and judicial encouragement of settlement in particular, see Cooper, supra note 47, at 113-15.
Fiss supra note 66, at 1075.
Id. at 1076.
Cf. Marek, 473 U.S. at 31, 105 S.Ct. 3012 (Brennan, J., dissenting) (noting that defendants could make an early, "low-ball" offer shortly after suit is filed, resulting in "severe pressure on plaintiffs to settle on the basis of inadequate information in order to avoid the risk of bearing all of their fees even if reasonable discovery might reveal that the defendants were subject to far greater liability").
On a more fundamental level, the worshiping of settlement ignores the "broader" purpose of litigation and the important role of the public officials who oversee the litigation process, which is "to explicate and give force to the values embodied in authoritative texts such as the Constitution and statutes." Professor Fiss concluded that his disagreement with settlement proponents "stems from our [different] understanding of the purpose of the civil law suit and its place in society." To settlement advocates, "[t]he purpose of lawsuits and the civil courts is to resolve disputes, and the amount of litigation we encounter is evidence of the needlessly combative and quarrelsome character of Americans." But Professor Fiss "see[s] adjudication in more public terms: Civil litigation is an institutional arrangement for using state power to bring a recalcitrant reality closer to our chosen ideals."
Fiss, supra note 66, at 1085; see also Marc Galanter Mia Cahill, "Most Cases Settle": Judicial Promotion and Regulation of Settlements, 46 STAN. L. REV. 1339, 1384 (1994) ("Compared to adjudication, the level of information in settlements is low, and ambiguity is high."). As Galanter Cahill note, settlements "have neither the visibility nor the authority of decided cases, and messages about them are even more susceptible to bias, miscalculation, and distortion." Id. at 1385. As to the last (distortion), see In re American Continental Corp./Lincoln Sav. Loan Sec. Litig., 102 F.3d 1524, 1529-30 n. 2 (9th Cir. 1996) (describing a dispute among plaintiffs, defendants, and a district judge over the proper characterization of a prior settlement), rev'd on other grounds sub nom. Lexecon Inc. v. Milberg Weiss Bershad Hynes Lerach, 523 U.S. 26, 118 S.Ct. 956, 140 L.Ed.2d 62 (1998).
Fiss, supra note 66, at 1089.
Id.; see also Galanter Cahill, supra note 70, at 1380 ("Some of the general effects produced by adjudication are public goods: prevention of hazard-causing behavior by remote actors or communication of a sense of entitlement to previously ignorant rights bearers."); Minutes of the Advisory Committee on Federal Rules of Civil Procedure (Oct. 1993), available in 1993 WL 761148, at *16-*17 [hereinafter Oct. 1993 Minutes] ("The intrinsic value of settlement also can be questioned. . . . [I]t is a mistake to view trial as a pathological event, resulting from settlement miscalculations by the parties. The system is designed to provide trials.").
The movement to expand Rule 68 often proceeds without any discussion of this fundamental difference in perspective. It would seem obvious that before embarking on an unqualified drive to promote settlements through a coercive procedural device, a policy choice should be made as to what the purpose of the federal courts should be: simply to resolve disputes — or to interpret, develop, and enforce the law. Leaving aside the response that such a policy choice is for Congress to make, it is not clear that the proponents of a stronger Rule 68 have adequately debated (and won) this issue.
See supra Part III.A.
Although the apparent satisfaction of litigants with settlements might be raised as a justification for their further promotion, recent studies have called this assumption into question. For one thing, "significant numbers of those who settle are not very happy with the outcome." Further, even if litigants generally prefer settlement, this "does not mean that the pursuit of settlement in any particular instance is an informed and uncoerced expression of such a preference." One reason for this is that the savings from settlement (essentially the reduced transaction costs of resolving a dispute) are not evenly distributed between the parties. More powerful parties, even without the aid of a coercive fee-shifting sanction in Rule 68, can better appropriate the surplus gained from pre-trial settlement. Therefore, "[t]o produce settlements of high quality is not simply a matter of embracing whatever seems to produce more settlements."
Galanter Cahill, supra note 70, at 1353; see also id. at 1355 (citing a 1989 RAND study that found that settlement is "received less enthusiastically by disputants" than by members of the legal community).
Id. at 1352.
See id. at 1364.
See supra text accompanying notes 68-69.
Galanter Cahill, supra note 70, at 1388.
2. The Coercive Effect of Rule 68
Even assuming settlement is preferable to litigation, Rule 68, both as it exists now and certainly under the proposed amendments, does more than promote or encourage settlements; it coerces settlement. The tributes accorded settlement in connection with discussion of Rule 68 often ignore the fact that the Rule, particularly under the proposed amendments, penalizes parties who choose to litigate their valid claims rather than settle them for less than they believe they are worth. No other federal rule of civil procedure punishes litigants for nonfrivolous, nonvexatious, good faith pursuit of claims or defenses. Although courts (including the Supreme Court) occasionally speak as if Rule 68 only reaches the same bad faith or vexatious conduct covered by Rule 11 or the attorney-sanctions statute ( 28 U.S.C. § 1927), it obviously applies in many other situations.In fact, as soon as a defendant makes a Rule 68 offer, the train has left the station and no good faith or reasonable action by the plaintiff can stop it — except her acceptance of the settlement offer. The plaintiff essentially has two choices: (1) accept the settlement, even if it is less (possibly much less) than the amount to which she reasonably believes she is entitled, or (2) risk payment of the defendant's post-offer costs (or attorneys' fees, under the proposed amendments) if the plaintiff wins at trial, but fails to beat the settlement offer. This is clearly coercion, created and supported by a federal rule of civil procedure. Given that "[t]here is no preexisting procedural duty to settle," it is difficult to see the basis for a rule of procedure that coerces parties, particularly risk-averse parties, to settle when they justifiably would not otherwise settle. As one opponent of the 1984 Advisory Committee proposal noted, the proposed rule "does not help the judiciary decide cases; its goal is to compel litigants to decide cases outside of court." Given that the likely effect of Rule 68 is "to coerce low value settlements from parties who have limited resources for litigation and who are risk-averse, early settlement may be more bad than good," Again, even assuming settlement is an unmitigated good, coercive punitive measures to "encourage" settlement should only be used after it has been shown that less punitive and more tailored measures are inadequate.
Minutes of the Advisory Committee on Federal Rules of Civil Procedure (Apr. 1994), available in 1994 WL 809916, at *19.
Alliance for Justice, supra note 45, at 58-59.
Cooper Letter, supra note 24, at 1; see also Cooper, supra note 47, at 113 (noting that cases with small stakes and parties of modest means "raise the question whether even a limited fee-shifting incentive involves encouragement or coercion"); May 1993 Minutes, supra note 25 at 14 ("Fear of losing any recovery because of a fee award [under the 1992 proposal] might force some plaintiffs to accept Rule 68 offers that fall below the reasonably expected judgment. . . . [T]he effect on settlement may be seen as undesirable coercion rather than desirable encouragement.").
Cf. Cooper, supra note 47, at 109 ("The case for amending Rule 68 rests on the belief that traditional unregulated settlement processes are not as effective as should be.").
C. Gambling in the Federal Courts
Ultimately, both current Rule 68 and the proposed amendments to the Rule seem most problematic because of their underlying illogical nature: rather than arranging legal rights and entitlements (to costs, attorneys' fees, etc.) on the basis of objective analysis of claims or even on the basis of the validity of claims as established at trial, the current Rule and its variants determine such entitlements through the results of a gamble. Under the Rule, a litigant with a nonmeritorious, but nonfrivolous, claim suffers no consequence for pursuing her claim until she loses at trial; a litigant with a valid claim, perhaps one worth a substantial sum of money, is nonetheless punished for incorrectly gambling that a jury will believe that her claim is worth more than a defendant has offered in a pre-trial Rule 68 offer. Under the proposed amendments to Rule 68, this illogical result is exacerbated by the modification of the American Rule whenever a party loses a Rule 68 gamble. It is difficult to see why a full fee-shifting English Rule could not be adopted through the civil rulemaking process if, under the 1992 proposal, a winning litigant's judgment can be reduced to nothing through a Rule 68 fee shift. Certainly, if attorneys' fees can be awarded against a victorious, good faith litigant, they can be awarded against a losing litigant.Were Rule 68 amended, attorneys' fees could be shifted in three situations in federal courts: when Congress has made a policy judgment that prevailing parties should be awarded such fees to effectuate certain substantive policies; when a party acts vexatiously or in bad faith; and when a party loses a gamble regarding a settlement offer. As to the first situation, the Supreme Court has noted that not only do fee statutes reflect a considered congressional judgment regarding the allocation of litigation costs in certain substantive areas of the law, but most fee statutes award attorneys' fees only to prevailing plaintiffs, thereby "awarding [fees] against a violator of federal law." Similarly, in the second situation, a party or attorney is sanctioned for violating rules of conduct in the federal courts. By contrast, fees under an amended Rule 68 often would be awarded not against a violator of federal law, but against a prevailing party (that is, a litigant with a legitimate injury and a valid claim) who simply lost a Rule 68 gamble. The Court has expressed reluctance to interpret fee-shifting statutes as providing for awards against losing plaintiffs, because "seldom can a prospective plaintiff be sure of ultimate success" and "no matter how meritorious one's claim may appear at the outset, the course of litigation is rarely predictable." Given this reluctance in the case of statutory authority for fee shifting, it seems incongruous for the judiciary to propose a rule that would ignore the unpredictable nature of litigation and penalize prevailing plaintiffs for inaccurately predicting the specific dollar value of their "ultimate success." As Justice Brennan noted in his dissent in Marek v. Chesny, Rule 68 substitutes a bright-line rule for the usual reasonableness analysis, shifting costs and denying a prevailing civil rights plaintiff an award of attorneys' fees "simply because he guessed wrong, or because he did not have all information reasonably necessary to evaluate the offer, or because of unforseen changes in the law or evidence after the offer."
Christianburg Garment Co. v. EEOC, 434 U.S. 412, 418, 98 S.Ct. 694, 54 L.Ed.2d 648 (1978).
Id. at 422, 98 S.Ct. 694.
See Oct. 1993 Minutes, supra note 72, at *17 ("It is not fair to attach consequences to failure to guess right in response to a Rule 68 offer when there is no sound basis for predicting probable judgments."). A recent Federal Judicial Center study on Rule 68 found that almost 90 percent of counsel in tried cases in the study believed that either liability or damages (or both) were uncertain in their case, indicating that in many cases it is unreasonable to expect parties to predict the outcome of a case at the time of a Rule 68 offer. See FEDERAL JUDICIAL CENTER. LIKELY CONSEQUENCES OF AMENDMENTS TO RULE 68, at 60 tbl. 16 (1995). While about 27 percent of the counsel surveyed believed that a bilateral, fee-shifting Rule 68 would have made settlement more likely in their particular case included in the study, almost as many believed that the Rule would lead to less fair outcomes. See id. at 20. Not surprisingly, almost twice as many plaintiffs' counsel (25 percent) supported abolishing the rule as did defendants' counsel (13 percent). See id.
Marek v. Chesny, 473 U.S. 1, 37, 105 S.Ct. 3012, 87 L.Ed.2d 1 (1985) (Brennan, J., dissenting).
The argument for Rule 68 — and particularly for the proposed amendments that would add fee shifting to the Rule — is simply this: "A party who has offered a settlement that accurately forecasts the result of trial should not have to bear the expense of proving the accuracy of the forecast." But this argument is directly contrary to the American Rule. A defendant who makes no settlement offer (because he believes that he is not at fault) and prevails at trial has done the same thing as the Rule 68 victor: he has "accurately forecast[ed] the result of trial." Why then, given the logic of Rule 68, should he "have to bear the expense of proving the accuracy of the forecast"? As Professor Cooper has put it:
Cooper, supra note 47, at 110.
No theory has yet been advanced to clearly justify the proposition that although attorney fees should not be shifted merely because a party has brought an action and lost, or has defended an action and lost, shifting is proper because a party has made a wrong prediction in response to a formal offer of judgment.
Id. at 134.
Unlike the English Rule, the American Rule accepts that plaintiffs with valid claims may have to expend large sums to have their legal rights vindicated — and that defendants with valid defenses may similarly have to go to great expense to prevail against a nonfrivolous, but losing, claim. It is difficult to see the logic of carving out a single exception for those cases in which the plaintiff has a valid claim of uncertain value and the defendant is willing to make a largely risk-free guess as to how much the claim is worth.
See id. at 117 ("Adhering to the American Rule when a plaintiff has lost utterly or has been vindicated completely stands in stark contrast to a rule that shifts attorney fees if plaintiff or defendant guesses wrong by rejecting an offer that — in the extreme example — happens to match the judgment perfectly."). As Professor Cooper points out, the argument for expanding Rule 68 rests on the assumption "that the duty to accept the [Rule 68] offer imposes greater obligations, in relation to the general rule against fee shifting, than the decision to file suit." Id. Again, it is difficult to see why this is so.
IV. SINKING THE RULE 68 SHIP
The one alleged goal of Rule 68 that almost certainly enjoys universal support is the discouragement of frivolous litigation. When a party has a claim that by any objective analysis cannot exceed $50,000, and the defendant offers $50,000 to settle the claim, rejection of such an offer is clearly vexatious or in bad faith. Any offer-of-settlement rule must address such cases. After this, however, the consensus breaks down. Do the federal courts have a duty to encourage (even coerce) settlements? Do litigants, particularly plaintiffs who file a case in federal court, have a duty to settle? Do they have an obligation to bring suit only when they can accurately predict the outcome of their case? Even assuming all of the above obligations exist, can they be enforced through rules of civil procedure? Or must they be addressed through legislation?Given the serious concerns regarding the appropriateness of instituting fee shifting through rules of civil procedure, the illogical nature of the current (and proposed amended) Rule 68, and the questionable value of settlement in at least some cases, a strong argument exists for abolishing Rule 68. Were the Rule eliminated, the valid concerns regarding bad faith or vexatious settlement behavior can be addressed through three mechanisms: Rule 11, Rule 54, and the standard reasonableness analysis used to determine the appropriate award of attorneys' fees under fee-shifting statutes.
A. Adding Settlement to Rule 11
Federal Rule of Civil Procedure 11 currently provides that an attorney who presents any "pleading, written motion, or other paper" to a court
is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, [the pleading, written motion, or other paper] is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation [and that] the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law [and] the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery. . . .
FED. R. CIV. P. 11(b) (paragraphing omitted) (emphases added).
The Rule also provides for sanctions against "attorneys, law firms, or parties that have violated [the above requirements] or are responsible for the violation." With certain limitations, the sanction may be a monetary or nonmonetary penalty or, when "warranted for effective deterrence," an award of an opposing party's "reasonable attorneys' fees and other expenses incurred as a direct result of the violation."
Id. 11(c).
Id. 11(c)(2).
To the extent that one motivation for the move to expand Rule 68 is a concern with bad faith, frivolous, or vexatious refusals to settle, a minor amendment to Rule 11 would be warranted and potentially effective. Similar proposals have been suggested in the past by opponents of Rule 68 expansion, and at least one state already has a system approximating this proposal. In fact, both current Rule 68 and its proposed amendments have often been characterized as doing nothing more than what such an amendment to Rule 11 would do: imposing sanctions for bad faith refusals to settle. Rule 11 could be amended to provide that all offers of settlement and refusals of such offers must not be presented for any improper purpose, as well as be "warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law" and be supported by evidence obtained after a reasonable preoffer (or pre-refusal) inquiry.
See, e.g., Advisory Committee on Federal Rules of Civil Procedure, Summary of Comments Received on the 1984 Proposal to Amend Rule 68, at 6 (1985) (testimony of James Wagstaffe, Federal Courts Comm., California State Bar Ass'n); id. at 9 (testimony of attorney Patrick J. Moran); Simon, supra note 16, at 44-47 (proposing that an amended Rule 68 provide for fee shifting only "for rejections that are made frivolously, in bad faith, or for an improper purpose"); id. at 67-71 ("As they have done with improper tactics in pleadings, motions, and discovery, federal courts should impose financial penalties on refusals to settle that are wholly divorced from the merits of the litigation.").
See Beattie v. Thomas, 99 Nev. 579, 668 P.2d 268, 274 (1983) (interpreting Nevada Rule of Civil Procedure 68, which tracks Federal Rule 68 but provides for attorneys' fee shifting, as requiring an evaluation of "whether the plaintiff's decision to reject the offer and proceed to trial was grossly unreasonable or in bad faith").
See supra note 81 and accompanying text.
While judicial oversight of the settlement component of an amended Rule 11 would not be without problems, neither would it be impossible. First, such an amendment, like current Rule 11 itself, would be applied primarily in those unusual situations in which a party believed that it was worth litigating what it believed to be its opponent's bad faith conduct. Second, while the evaluation of facts (and the law) at the time of a prior settlement offer might be difficult, federal courts are already adept at evaluating potential settlements in cases in which much factual information in the case has not been formally developed or revealed. Third, bringing settlements under Rule 11 would be, to some degree, simply an acknowledgment of the power that federal courts already enjoy to impose sanctions for bad faith litigation conduct: "The bad-faith exception for the award of attorney's fees is not restricted to cases where the action is filed in bad faith. Bad faith may be found, not only in the actions that led to the lawsuit, but also in the conduct of the litigation." Finally, "[d]iscretion is desirable in fee shifting schemes when the purpose of the fee shifting is punitive as it is in [proposed] rule 68." The Vegas Rule of current Rule 68 and most of the proposed amendments to the Rule provide minimal, if any, discretion.
As noted supra note 4, I do not take up in this article the problems with current Rule 11, leaving it to others to debate the appropriateness, and difficulties of implementation, of sanctions (including fee shifting) for bad faith litigation conduct.
See, e.g., Cotton v. Hinton, 559 F.2d 1326, 1330 (5th Cir. 1977) (outlining the standard for a district court to evaluate a proposed class action settlement, including comparing the settlement terms "with the likely rewards the class would have received following a successful trial of the case"). When a case is actually tried, it is in some ways easier and in others more difficult for the district court to evaluate a pre-trial settlement offer. Some recent scholarly work has focused on how courts might better analyze the frivolousness of claims and defenses, and such work might be applied to assist courts in analyzing the frivolousness of settlement offers and rejections of such offers. See, e.g., Robert G. Bone, Modeling Frivolous Suits, 145 U. PA. L. REV. 520, 525 (1997) (proposing "a way to determine whether suits are frivolous based on a failure to investigate").
Roadway Express, Inc. v. Piper, 447 U.S. 752, 766, 100 S.Ct. 2455, 65 L.Ed.2d 488 (1980) (internal quotations and brackets omitted); see also GREGORY P. JOSEPH. SANCTIONS § 23(B)(3)(b), at 405 (2d ed. 1994) (noting that, in rare cases, 28 U.S.C. § 1927 can be used to sanction attorneys who vexatiously multiply proceedings by rejecting a settlement offer in bad faith). But cf. id. § 26(F), at 56 (Supp. 1998) ("Sanctions may not be imposed upon a party for declining to settle a case.").
Cheslik, supra note 16, at 263 n. 234.
While abolishing Rule 68 and adding settlement activity to the list of sanctionable conduct in Rule 11 will not solve all of the perceived problems of litigation abuse or excessive litigiousness, this step could go a long way toward penalizing the truly egregious refusals to settle that sometimes occur. At the same time, it would not punish those litigants with valid claims and a good faith belief that their opponent has not offered a sufficient amount to settle that claim.
It should be noted that not even full attorneys' fee shifting will necessarily solve many of the problems alleged to motivate such proposals. One study of Alaska's fee-shifting rule concluded that "[p]articular caution is urged towards those who support fee shifting because of anticipated effects such as decreased claims, faster dispositions, and more settlements. In Alaska's experience, the rule's effects in these areas have been subtle and often contradictory." Susanne Di Pietro, The English Rule at Work in Alaska, JUDICATURE, Sept.-Oct. 1996, at 88, 92.
B. Costs and Fee-Shifting Statutes
In addition to adding settlements to Rule 11, the legitimate goals of Rule 68 could still be accomplished while abolishing the Rule. Under current Federal Rule of Civil Procedure 54(d), a prevailing party is entitled to costs "unless the court otherwise directs." This discretion in awarding costs already allows a district court to consider an unreasonable rejection of a settlement offer when determining whether to award costs to a prevailing party, to deny such costs, or even to award them to a losing party who made a good faith settlement offer that was unreasonably rejected.
See Delta Air Lines, Inc. v. August, 450 U.S. 346, 356 n. 16, 101 S.Ct. 1146, 67 L.Ed.2d 287 (1981) ("[A] defendant could use a reasonable settlement offer as a means of influencing the judge's discretion to award costs under Rule 54(d)."); cf. Simon, supra note 16, at 71-72 ("Courts have broad discretion under rule 54(d) to consider all relevant circumstances when approving or modifying a bill of costs taxed by the clerk."). In addition, abrogation of Rule 68 could be accompanied by an Advisory Committee Note to Rule 54 that outlined factors to consider such as those from the 1984 proposal to amend Rule 68. See supra note 20 and accompanying text.
Finally, even without the Supreme Court's decision in Marek (which would effectively be overruled with the elimination of Rule 68), district courts can consider a settlement offer (and the reasonableness of its rejection) when determining the amount of "reasonable" attorneys' fees to award under current fee-shifting statutes. Courts, commentators, and the Advisory Committee have all noted as much.
Before Marek was decided, the Advisory Committee noted that Rule 68 neither prevented a prevailing party from being awarded fees under fee-shifting statutes nor prevented the court "from taking into consideration the prevailing party's refusal to accept a reasonable offer" in determining reasonable attorneys' fees. See FED. R. CIV. P. 68 comm. note (Preliminary Draft Proposal 1983), 98 F.R.D. 337, 366 (1983); see also Varon, supra note 37, at 824. Justice Brennan also made this point in his dissent in Marek, see Marek v. Chesny, 473 U.S. 1, 29, 105 S.Ct. 3012, 87 L.Ed.2d 1 (1985) (Brennan, J., dissenting), and other courts have made it since then, see Haworth v. Nevada, 56 F.3d 1048, 1052 (9th Cir. 1995).