When defendants can win by losing a case

When a business is served with a lawsuit, the company and its legal counsel should undertake a prompt risk-management assessment of the potential exposure and estimated defense costs.
Litigation can prove to be expensive, even where the defendant’s defenses are strong, because a civil case may span several years before reaching a final judicial adjudication (including all appeals). In addition to legal counsel’s charges, the company may incur fees for expert witnesses, private investigators, stenographers and constables.
There will be “opportunity costs” to the company, given that employees will be diverted from their work responsibilities to attend depositions and compile information that must be produced to the other side (often including retrieval of electronically stored information). While the case awaits a trial, pre-judgment interest will accrue on the plaintiff’s claim, adding to the company’s potential exposure. Plus, in certain cases such as those brought under civil rights and consumer protection statutes, a plaintiff who prevails in court will have a right to petition for the recovery of reasonable attorney’s fees.
Unless there is a compelling principle requiring the company to defend a case to a final judicial determination, business managers will often seek counsel’s advice on the best means to achieve a practical resolution. Settlement discussions and mediation efforts are preferred methods to achieve closure, especially if the result includes a confidentiality clause regarding the amount paid to a plaintiff. When faced with obstacles hindering a privately negotiated settlement, there is an often underutilized strategic option under Rule 68 of the Federal Rules of Civil Procedure and both the R.I. Superior Court and District Court Rules of Civil Procedure – an offer to have a judgment entered in court against the defendant. When advised of this option by counsel, a defendant may ask – “why would we agree to lose a case?” To answer this question, it is necessary to review the process to make an offer of judgment and the effects of such an offer if accepted or rejected.
When conveying an offer of judgment, the defendant should consider carefully its amount and timing. The defendant must be ready to resolve the litigation in the stated amount, which should be based upon a realistic and balanced assessment of the potential exposure and total costs of defending the litigation. Also, the offer should state clearly that it is for an all-inclusive amount, covering all of the plaintiff’s damages claims as well as all interest, costs and attorney fees associated with such claims. General contract law principles apply to the interpretation of offers of judgment, and an effectively stated offer should leave no doubt that it is conveyed to resolve the plaintiff’s claims in their entirety.
Unlike a private settlement, an accepted offer of judgment does not result in the filing of a dismissal stipulation. Rather, the litigation ends with the court’s entry of a formal judgment for the plaintiff. The judgment will be a document available to the public in the court’s files, but it has no precedential value in other cases. If publicity ensues about the judgment, the best response is to state exactly why it was offered and accepted – to bring closure to the litigation.
There are potential adverse consequences to the plaintiff if it rejects the offer of judgment. If the plaintiff elects to take the case through a judicial determination by a judge or jury but recovers a judgment in a lesser amount, the plaintiff is precluded from recovering its own costs and must pay the costs incurred by the defendant after the offer of judgment was made. By way of a simple example, assume the plaintiff rejected an offer of judgment in the amount of $20,000 and recovered a $10,000 judgment at a trial two years later. Between the time of the offer of judgment and the plaintiff’s victory in court, the defendant incurred costs totaling $5,000. The plaintiff’s recovery would be reduced to $5,000 to reimburse defendant for its costs. Under this cost-shifting mechanism, the defendant does not recover its attorney’s fees from the plaintiff. Rather, the recoverable costs include fees incurred for court filings, subpoenas, deposition transcripts and trial exhibits. Still, such recoverable costs can be significant in complex or contentious cases. Of particular benefit to the defendant, a plaintiff may not be able to recover its attorney’s fees as a “prevailing party” under certain statutes if the amount awarded by the court was less than the rejected offer of judgment.
As the U.S. Supreme Court has stated, the offer of judgment process provides the defendant with leverage to make the plaintiff “think very hard about whether continued litigation is worthwhile.” An offer of judgment can prove to be an especially effective settlement tool in cases where there may be liability exposure, but the plaintiff’s damage demands seem excessive. The defendant is able to drive the timing and amount of settlement efforts.
An offer of judgment can invigorate otherwise stalled settlement efforts and result in a resolution that makes business sense to the defendant. •


Steven M. Richard is an attorney with Nixon Peabody LLP, in the firm’s commercial-litigation practice.

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