Court Reform Right Under Our Nose

Monday, December 1, 2008 - 00:00

The consistent calls for litigation reform are likely to intensify in volume and tone as those affected by the current business conditions increasingly turn to the courts. One possible means to quick and effective reform in business cases is right at our fingertips - in fact, it is already law. By expanding Federal Rule of Civil Procedure 68 to include attorney fees, Congress would make a quantum leap in promoting early resolution of commercial disputes. Together with a simple mechanism to ensure good faith, legitimate offers, both plaintiffs and defendants will benefit.

Rule 68

Each side bears its own litigation costs under the "American Rule." This contrasts with the "English Rule," which generally provides that the loser pays, as a deterrent to frivolous litigation. Rule 68 allows a defendant to recover costs of litigation if it prevails in a case after making an offer of judgment. It has been on the books for decades and yet is one of the least utilized and unknown provisions of the federal rules. The reason? Rule 68 has no teeth; the cost-shifting mechanism does not generally include attorney fees, rendering the practical utility of the statute little more than window dressing.

Subjecting attorney fees to Rule 68 is by no means a novel idea. Formal amendments to include attorney fees were considered by the Advisory Committee on Civil Rules in 1983 and 1984. The committees shot down the amendment each time, citing concerns about the potential for a chilling effect on contingency fee litigation. There were also legitimate concerns expressed about the effect on litigation with statutory fee-shifting mechanisms, such as civil rights cases. In 1996, the American Bar Association proposed an amendment to include attorney fees and to allow both sides to make an offer of judgment. This proposal likewise went nowhere.

Throughout the years, fee-shifting has been the subject of commentators and critics alike. In 1992, Judge William Schwarzer of the Northern District of California offered a well reasoned revision to Rule 68 which included legal fees as costs, in addition to the following features: Both sides allowed to make offers; a simple methodology for capping costs and determining the proper amount of costs; and exclusion of class action and derivative cases.

It is also instructive to look at certain state statutes which have implemented offer of judgment regimes that include the shifting of attorney fees. These states include Alaska, Florida, New Jersey, Nevada and Oklahoma. According to a 2006 study of the New Jersey fee shifting statute focusing on automobile cases, the length to resolution of lawsuits was reduced by seven percent and attorney fees decreased by approximately twenty percent. Albert Yoon and Tom Baker, Offer of Judgment Rules and Civil Litigation: An Empirical Study of Automobile Insurance Litigation in the East, 59 Vand. L. Rev. 155 (2006). It seems that the efficiencies can be even greater in commercial cases.

A Proposal

Borrowing substantially from the various ideas, proposals and state statutes mentioned above, Rule 68 should be amended as follows:

• Costs include attorney fees.

• Both sides can make an offer of judgment.

• Costs are shifted only if more than 125% is recovered or less than 75%.

• Non-monetary relief can be part of the offer.

• A party can make unlimited offers as the case progresses; the amount of costs gets determined from the date of the offer.

• An offeree can challenge the good faith basis of the offer after which the offeror must present the rationale supported by evidence. There would be potential sanctions for a bad faith or unsupported offer.

•The focus is on commercial cases: class actions, derivative suits, personal injury and civil rights cases are excluded.

The above proposal would result in tremendous efficiencies leading to early resolution of commercial disputes and significant savings to business clients. The mechanics obviously need to be fine-tuned but the proposal is designed to meet many of the objections to past initiatives.

An additional, admittedly more radical revision to Rule 68 would make offers of judgment mandatory in every commercial case. In most commercial lawsuits, the lawyers have a good sense of the value of the case after documents are exchanged and reviewed. By making offers of judgment mandatory after the document discovery phase, with the requirement that each side be prepared to justify their proposal with evidentiary support, and coupled with the other revisions above, many more cases will be evaluated more realistically and much earlier. The mandatory offer of judgment would not preclude other offers consistent with the outline above. Again, this is not my idea - I draw inspiration from the federal judge before whom I recently tried a case. He showed us his "card trick" - each lawyer writes the maximum (defendant) or minimum (plaintiff) they would advise their client to accept. The cards are then submitted to the Court. In my case, the court did this two separate times, managing to bridge a nine-figure gap to forge the settlement of a complex case after a week of trial.

Conclusion

Every litigator's briefcase has tales of cases that went through depositions, expert discovery, dispositive motions and trial, only to settle at an amount that made sense when documents were exchanged sometimes years earlier. The purpose in amending Rule 68 is not to increase the number of settlements - most cases settle anyway. It is not to increase or reduce the monetary amount of settlements - the hope and expectation is that it would do neither. Rather, the primary goal is to settle cases earlier, allowing clients to save legal fees and personnel resources that are better used to invest in their business while freeing judges and lawyers to focus on cases that need to be tried. I am under no illusion that these revisions will go over well with many constituencies. There has been and will continue to be resistance to changing a culture and a comfortable way of doing things. However, true court reform needs to incentivize early and meaningful resolution of cases and I believe there is a necessity for this type of action.

Robert S. Friedman is a litigation partner at Kelley Drye & Warren LLP in New York City. Marie E. Choi, a litigation associate at the firm, assisted with research in the preparation of this article.