Pursuant to Fed. R. Civ. P. 68, a party defending a claim may offer to allow judgment to be entered against it to the amount specified in the offer. This offer of judgment is open for ten days and if it is not accepted within the time limit it is deemed withdrawn. If the judgment finally obtained by the offeree is not more favorable than that made by the defending party in the offer of judgment, the offeree "must pay the costs incurred [by the defending party] after the making of the offer." Of course, "[t]he plain purpose of Rule 68 is to encourage settlement and avoid litigation." Marek v. Chesny, 473 U.S. 1, 5 (1985).
Costs Under Rule 68 - The Attorney Fee Question
The "costs" awardable to a defendant under Rule 68 are those costs that can be properly awarded "under the relevant substantive statute or other authority." Marek, 473 U.S. at 9. Importantly, the "costs" recoverable by the offeror typically do not include the attorney's fees expended in the post-offer defense of the case. Marek, 473 U.S. at 8. This rule has, however, been subjected to scrutiny in a number of cases in which the substantive statute defines "costs" to include attorney's fees.
Marek was a civil rights case brought pursuant to 42 U.S.C. § 1983 and 42 U.S.C. § 1988, and the only question presented to the Supreme Court was whether a plaintiff who had prevailed at trial - but recovered less than the offer of judgment previously made by the defendant - could recover attorney's fees incurred after service of the offer of judgment. The Supreme Court reasoned that the plaintiff could not. Thus, the Supreme Court held that a prevailing plaintiff subject to the cost-shifting provision of Rule 68 cannot recover its own post-offer attorneys' fees where the underlying statute defines those fees as an item of "costs."
Importantly, the Supreme Court did not "consider the question whether [a prevailing plaintiff who recovers less than the offer of judgment] must not only lose the post-offer attorneys' fees to which it would have been otherwise entitled, but must also pay the defendant's post-offer attorneys' fees." Id. Further, the Supreme Court did not consider the offer of judgment rule under any other statute.
The Circuit Courts Split
The Supreme Court's failure to answer the question of the rights of a defendant when an offer of judgment and a fee-shifting statute are both in play, has led to a split in the Circuit Courts over whether a defendant who makes an offer of judgment may recover its attorney's fees as an element of costs incurred after the making of the offer of judgment. In the context of copyright law, the Seventh Circuit has held that the offer of judgment does nothing to make fees payable to the defendant, while the Eleventh Circuit and a district court of the Fourth Circuit have reached the opposite conclusion.
In Harbor Motor Company v. Arnell Chevrolet, 265 F.3d 638 (7th Cir. 2001), the Seventh Circuit, examining the question in the context of the Copyright Act, concluded that service of an offer of judgment could not switch responsibility for defendant's attorney's fees to a prevailing plaintiff who has recovered something, but less than the offer of judgment. Harbor Motor Company, 265 F.3d at 646-47. In reaching its conclusion, the Seventh Circuit followed the First Circuit in Crossman v. Marcoccio, 806 F.2d 329 (1st Cir. 1986), reasoning that: (1) the Supreme Court in Marek stated that only "properly awardable" costs would be shifted; (2) that only a "prevailing party" may recover attorney's fees as costs under the language of the Copyright Act; and (3) a defendant who has had judgment entered against it under the Copyright Act (even if the amount of the judgment is less than the offer of judgment) is not a "prevailing party" and thus attorney's fees are not "properly awardable" to him. Harbor, 265 F.3d at 646-47. Indeed, Crossman holds that a prevailing plaintiff suing pursuant to a fee-shifting civil rights statute can never be required to pay attorney's fees regardless of Rule 68 and the Marek decision. Crossman, 806 F.2d at 334.
This position is premised upon the language of the Copyright Act which states: "the court in its discretion may allow the recovery of full costs by . . . any party . . . [and] the court may also award a reasonable attorneys' fee to the prevailing party as part of the costs." 17 U.S.C. § 505. Thus, the Seventh Circuit reasoned that a defendant who has been found liable for copyright infringement and who has been required to pay a judgment to the plaintiff is not a "prevailing party" properly entitled to attorney's fees - even if the offer of judgment shifts defendant's post-offer costs to the plaintiff. The Seventh Circuit's holding in Harbor has the benefit of insuring that only "prevailing parties" in the traditional sense are capable of recovering attorney's fees.
The Harbor decision, however, avoids the serious question as to how Rule 68 would be applied in a uniform manner across numerous federal statutes that include attorney's fees as costs, but, in some cases, only upon a showing of exceptional circumstances. See Crossman, 806 F.2d at 334. Moreover, the decision fails to explain why Marek, in holding that Rule 68 could curtail plaintiff's right to recover fees, found the plaintiff's "prevailing party" status irrelevant. That is, under Marek, a prevailing plaintiff is not entitled to the attorney's fees granted by the statute for the period subsequent to the offer of judgment. In light of this ruling, it is unclear, and the Seventh Circuit makes no attempt to clarify the issue, why Rule 68 alters the statutory language as to plaintiffs, but not as to defendants. Implicitly, then, Marek suggests that Rule 68 alters the statutory language requiring a defendant to "prevail" in order to recover attorney's fees.
The Eleventh Circuit has also addressed the issue of whether, in a copyright infringement case, a prevailing plaintiff who recovers less than the offer of judgment must pay the defendant's post-offer attorneys' fees. In Jordan v. Time, Inc., 111 F.3d 102 (11th Cir. 1997), an author brought a copyright infringement action against Time which reprinted his article without prior consent. Id. at 103-4. Time made two offers of judgment - one for $15,000 and another for $20,000. Id. at 104. Plaintiff rejected both offers and the jury returned a verdict awarding plaintiff $5,000. Id. at 104.
After trial, plaintiff argued that as the prevailing party, he was entitled to fees and costs pursuant to 17 U.S.C. §505 (1994). Id. Time contended that it was entitled to fees and costs pursuant to Rule 68. Id. The district court denied both motions. Id. On appeal, the Eleventh Circuit, referencing the Marek decision, held that Time was entitled to recover its attorneys' fees incurred after the tender of the offer of judgment under Rule 68 because the underlying statute defined costs to include attorneys' fees. Id. at 105. Notably, the court never considered the issue of whether defendant must be a prevailing party to recover fees.
In 2000, the Jordan decision was cited with approval in another copyright infringement action, Lucas v. Wild Dunes Real Estate, Inc., 197 F.R.D. 172 (D.S.C. 2000). Wild Dunes served an offer of judgment in the amount of $15,000 which was subsequently rejected by Lucas. At trial, the jury found for plaintiff and awarded him $4,120.40. Id. Defendant then moved for an award of costs under Rule 68. Id. The district court concluded that defendant need not be a prevailing party in order to be eligible for an award of attorneys' fees in a copyright action pursuant to Rule 68. Id. at 175. Instead, the district court, referencing the Marek decision, concluded that attorneys' fees are included in costs awarded under Rule 68 as long as the underlying statute defines costs to include attorneys' fees; thus, attorney's fees were properly awarded to the defendant. Id. at 176-77.
The benefit of the approach taken by the Eleventh Circuit and the District of South Carolina is that it eliminates the disparity between plaintiffs and defendants created by the Seventh Circuit's decision which does not appear to be justified by the holding or rationale of Marek. Further, the Jordan/Lucas approach encourages settlements by making plaintiffs look carefully at the actual value of their claims.
In the context of the Copyright Act, only two circuit courts have addressed the issue and have come to opposite conclusions, leaving the value of the offer of judgment rule to create substantial leverage for settlement uncertain throughout the remainder of the country.