Where appropriate, the use of this statutory mechanism can provide the strategic advantage of shifting the risks of litigation to the plaintiff.
Published on August 22, 2023
By Diane O’Neil, Director & Senior Counsel, Complex Claims
No one is unaffected by the alarming trend of nuclear verdicts and settlements. While the long-term societal and economic consequences of “bet the company” verdicts have yet to be fully felt or even appreciated, the resulting uncertainty and volatility have left corporate defendants and their insurers searching for new methods to combat plaintiffs’ tactics. One promising tool is the Offer of Judgment/Settlement, a statutory mechanism by which parties seek to shift liability for payment of litigation costs and/or attorneys’ fees.
What was labeled a nuclear verdict just a few years ago might be considered “not so bad” today. Outsized verdicts and settlements continue to shock. But the unfortunate reality is that high damage awards that exceed any rational basis are becoming the norm. And so insurers—acting in the interests of insureds, as well—should continue to explore methods that allow for some degree of certainty in, and control over, the outcomes of claims.
An opportunity to shift the risks of litigation
Prompt claims resolution remains one of the most impactful litigation techniques for the defense. But with the sustained and successful strategies of the plaintiffs’ bar, defendants and their insurers often hit a wall when they suggest early settlement. Enter the Offer of Judgment/Settlement (hereinafter “Offer”), which allows one party to a lawsuit to offer the other party a financial incentive to accept a pretrial settlement.
Where appropriate, a well-crafted and reasonable Offer can provide the strategic advantage of shifting the risks of litigation to the plaintiff. Though the mechanics and effects of Offers vary, the typical penalty for a rejected Offer is payment of costs, and sometimes attorneys’ fees.
“If a valid Offer is refused and the plaintiff does not obtain a judgment that is more favorable than the unaccepted Offer, the plaintiff must pay the costs incurred after the Offer was made.”
Fed. R. Civ. P. 68 allows an Offer of Judgment to be made only by a defendant. If a valid Offer is refused and the plaintiff does not obtain a judgment that is more favorable than the unaccepted Offer, the plaintiff must pay the costs incurred after the Offer was made. It is important to note that for cost shifting to apply under the federal rule, the plaintiff must prevail at trial. So, if the defendant secures a defense verdict, the mandatory cost-shifting in the Rule is eliminated. For the reasons stated above, over the years, there has been much debate over the efficacy of the federal rule.
Let’s take a look at the Offer of Judgment statutes in a few of the states that are leading the charge on nuclear verdicts.1 While some of these states allow either party to file an Offer, we will focus solely on the implications of non-acceptance when the defendant makes the Offer:
- California: If the judgment is not more favorable than the Offer, the plaintiff shall pay the defendant’s costs incurred, starting from the time of the Offer. If those costs exceed the damages awarded to the plaintiff, the net amount is awarded to the defendant. The California statute has an expanded definition of costs which includes expert witness fees.
- Florida: The offeror is entitled to reasonable costs and attorneys’ fees if the judgment is 25% less favorable than the Offer. Note, however, that if the Offer is not in good faith, the court may disallow costs and fees.
- Texas: If the judgment is significantly less favorable (as defined in mathematical percentages) than the Offer, the offeree must pay the litigation costs incurred after the Offer was rejected. Litigation costs include attorneys’ fees and some testifying expert witness fees.
- Georgia: If the defendant makes an Offer that is rejected, the defendant shall be entitled to recover reasonable attorneys’ fees and expenses incurred from the date of rejection through the entry of judgment, as long as the final judgment is one of no liability or the final judgment obtained by plaintiff is less than 75% of such Offer.
“Another possible advantage of Offers is their inherent transparency, something which is often lacking in less formal negotiations.”
The rejection of an Offer in the foregoing states has real ramifications. The well-planned use of Offers in jurisdictions like the above—in which the threat of a nuclear award looms large—should be considered by defendants as part of an overall resolution strategy.
The benefit of added transparency
Another possible advantage of Offers is their inherent transparency, something which is often lacking in less formal negotiations. During the last few years and continuing through today, when virtual mediations have become commonplace, plaintiffs attend the negotiations less frequently, and defendants are never really certain whether Offers are being communicated. When the Offer is written and filed with the court, it is far more likely that the plaintiff’s attorney will communicate it to their client.
The question of attorneys’ fees
Some argue that the benefits of Offers are marginal, at best, because the federal rule, and the civil procedure rules of many states, allow for the recovery of costs but not attorneys’ fees, thereby diluting the potential penalty to the rejecting plaintiff. Even in those instances, however, the prevailing party can recover attorneys’ fees if the claim is based on a federal or state statute that includes such fees in the definition of “costs,” making Offers far more potent and attractive.
“Offers of Judgment/Settlement are one of several tools in the defense’s belt that should be weighed relative to the circumstances of the case and the potential exposure.”
Moreover, some states—including Alaska, Florida, Connecticut, Georgia, Idaho, Massachusetts, New Jersey, Nevada, Oklahoma, Texas and North Carolina2 —do allow for the potential recovery of attorneys’ fees.
Weighing risks versus opportunities
Finally, a sometimes overlooked but extremely important feature of an Offer of Judgment is that, as the name suggests, the Offer becomes a judgment if accepted.3 Unlike a confidential settlement agreement, it is a public judgment, which could have consequences. It may be considered an admission of liability. The judgment potentially carries a public stigma and could result in reputational damage to the defendant. It may affect a defendant’s ability to do business. The publicity of the judgment could invite future claims. The judgment might also, in certain circumstances, be used in other litigation. The Offer may result in a waiver by the defendant of the right to appeal pre-judgment rulings. Thus, care must be taken to consider the practical implications of an Offer of Judgment, and to correctly craft the Offer to avoid, or at least minimize, potentially adverse consequences. The insured and its in-house and/or personal counsel should be consulted and involved in every aspect of the process.
As with all resolution options, there is no silver bullet or one-size-fits-all approach. While they’re a far cry from “making an offer they can’t refuse,” Offers of Judgment/Settlement are one of several tools in the defense’s belt that should be weighed relative to the circumstances of the case and the potential exposure. In the final analysis, the more a plaintiff has at stake, the more likely that plaintiff will be to think carefully about the consequences of rejecting an Offer, and the more incentivized to resolve the case. Creating risk for the plaintiffs, and increasing their motivation to settle, provides a good foundation for helping to avoid nuclear results.
1 According to the Sept. 2022 U.S. Chamber of Commerce Institute for Legal Reform study of 1,376 nuclear verdicts during the 10-year period from 2010-2019, California had 211 nuclear verdicts, with $9 billion awarded; Florida had 213 nuclear verdicts, with $35 billion awarded; Texas had 132 nuclear verdicts, with $7 billion awarded; and Georgia had 53 nuclear verdicts, with $3 billion awarded. Notably, the frequency and size of nuclear verdicts have risen further post-COVID-19.
2 Standards among states differ, and limits may apply. Always check your statutes and case law! Some states have an extensive body of appellate decisions interpreting the language of their statute and their rule of procedure.
3 This may not necessarily be the case where the jurisdiction allows for an Offer of Settlement, as opposed to an Offer of Judgment.