Settling some settlement issues with offers to compromise

Abraham Lincoln advised attorneys: "Discourage litigation. Persuade your neighbors to compromise whenever you can." Over a century later, Federal Rule of Civil Procedure 68 and California Code Civil Procedure Section 998 were enacted to encourage parties to make and accept offers of compromise. These statutes provide that if a party who prevails at trial obtains a judgment less favorable than a pre-trial offer, the prevailing party may not recover costs it incurred after the offer was made and must pay its opponent's post-offer costs. Half a century later, the courts are still determining the reach and nuances of these statutes. This year, two appellate courts -- one federal, one state -- published decisions in favor of parties who made offers of compromise. Abe would be proud.

In Miller v. City of Portland, 868 F.3d 846 (Aug. 22, 2017), the 9th U.S. Circuit Court of Appeals held that under the terms of a settlement offer, the plaintiff was entitled to attorney fees even if the judgment was de minimus. Roberta Miller had brought a 42 U.S.C. Section 1983 action against the city of Portland and three of its police officers, asserting the officers' excessive force had caused her to be injured while seven months pregnant and her fetus to be aborted. The city made an offer of judgment under FRCP 68 for $1,000 plus reasonable attorney fees to be determined by the district court. Miller accepted the city's offer. However, the district court denied her subsequent motion for $16,900 in fees. It ruled that Miller was not entitled to fees under 42 U.S.C. Section 1988, which allows fee awards under certain circumstances for Section 1983 actions, because the $1,000 award was de minimus relative to the amount at stake.

The Court of Appeals reversed. It noted that once accepted, an offer of judgment becomes a settlement agreement and the usual rules of contract construction apply. It determined the district court erred in applying Section 1988 principles rather than contract construction principles when deciding the fee motion. The Court of Appeals recognized that the settlement offer provided for Miller's reasonable attorney fees without referencing Section 1988 or otherwise reserving the question of whether Miller was entitled to a fee award. The court concluded that under general contract principles, Miller was entitled to rely on the plain language of the offer she accepted; that language provided for her reasonable attorney fees.

In a case involving CCP Section 998, California's counterpart to FRCP 68, the California Court of Appeal reversed the superior court's denial of costs for a successful arbitration. In Heimlich v. Shivji, 12 Cal. App. 5th 152 (2017), arbitration resulted in no recovery by either party. Six days after the arbitrator rendered the decision, the defendant requested an award of costs because the recovery was less favorable than the defendant's earlier Section 998 offer. The arbitrator stated he no longer had jurisdiction over the matter; the superior court agreed, ruling that the 998 claim was untimely.

The Court of Appeal recognized that Section 998(b) prohibits the disclosure of a rejected offer of compromise during arbitration. Accordingly, parties should not be required to violate this subsection in order to request an award of costs. Instead, the court held, the request should be deferred until after the arbitration award is made. Then the arbitrator could re-characterize the existing award as interim, interlocutory or partial and resolve the Section 998 request by a subsequent award. The appellate court directed the arbitration award to be partially vacated to allow a determination of the section 998 request.

Although the compromise offers in these two cases were considered valid, this is not always so. Compromise offers must be made with care. The party extending the offer bears the burden to demonstrate its validity. Two cases from 2016 demonstrate that unclear or overly broad settlement offers will be deemed void. In Sanford v. Rasnick, 246 Cal. App. 4th 1121 (2016), the Court of Appeal ruled that the plaintiff who rejected a pre-trial offer that included a request for a "settlement agreement" was not liable for costs under Section 998 because the request made the offer unclear. In Ignacio v. Caracciolo, 2 Cal. App. 5th 8 (2016), the release submitted as part of the settlement offer sought to release the defendant from claims outside the scope of the lawsuit. The appellate court deemed this overly broad and, therefore, found the Section 998 settlement offer invalid.

Over 400 years ago, the poet George Herbert said "A lean compromise is better than a fat lawsuit." Offers of compromise can be powerful tools for litigators. But in order to enjoy their advantages -- mainly, timely settlements and reduced litigation expenses -- they must be employed wisely and carefully.