Special Settlement Agreements

The traditional notion of a settlement is that the defendant pays the plaintiff some amount, and the matter is brought to an immediate and final close. This, however, is not always the case.

EXAMPLE: Billy, a roofer with 15 years of experience, loses his footing when the sole of his boot comes loose and falls off the roof while on a job. He sues the boot manufacturer, Treeland, Inc., claiming design and manufacturing defects causes the sole to come loose. Because the doctors say he will live in pain for the rest of his years and will never regain sufficient flexibility in his legs to permit his return to roofing, he seeks $10 million dollars in compensatory and punitive damages. Treeland is concerned that an adverse ruling against them would set a precedent which would expose them to tremendous liability. They therefore initiate negotiations with Billy’s lawyer. The parties, fairly quickly, come to an agreement whereby Billy will be paid $500,000 by Treeland upon execution of the settlement agreement and his doctors’ bills to date will be paid in full by Treeland. In addition, Treeland will pay Billy $100,000 each year for the next 20 years, and $50,000 per year after that for the rest of Billy’s life.

This is a common way in which settlements are structured, allowing the plaintiff significant compensation for damages without demanding an immediate, potentially crippling, payment from the defendant. Interestingly, an entire industry has sprung up around these settlements whereby people can sell their rights to future payments in exchange for a lump sum (these are the same “entrepreneurs” who offer identical arrangements for lottery winners who prefer a large payment today to a guaranteed payment for some period of years).

Another special type of settlement involves FRCP 68. These go by a number of names including “Rule 68 settlement” and “statutory offer settlement.” It is important to note that FRCP 68 applies only to civil cases in federal court. Of course, many states have their own rules of civil procedure, usually including something similar to FRCP 68.

FRCP 68 (“Offer of Judgment”) can be translated into English(!) and paraphrased as follows (note that the actual intricate mechanisms are not fully reflected here):

Any time, more than 10 days before a trial begins, a defendant may make a written settlement offer for the money or property or to the effect specified in the offer, with costs then accrued. The Plaintiff than has ten 10 days to accept in writing, after which either party files the offer and notice of acceptance with the court. If the plaintiff does not agree to the settlement offer, the defendant is not prevented from making a new offer. If the plaintiff does not agree to any settlement offer in this way, and later wins the case but receives something less favorable from the court than the defendant had offered in his settlement, the plaintiff must pay the costs incurred after the making of the offer.

Even this abridged and revised summary of FRCP 68 is not self-explanatory, and the oft-cited case of Marek v. Chesny, 473 U.S. 1 (1985), superseded by statute, is informative here, as is Basha v. Mitsubishi Motor Credit of Am., Inc., 336 F.3d 451 (5th Cir. 2003) when considering the finer questions of applying Rule 68.

EXAMPLE: Gabrielle sues Daniel for breach of contract, claiming that Daniel did not hold up his end of the bargain. She seeks $15,000 plus all costs and attorney’s fees. The case is so situated that it is appropriately brought in the closest District Court, meaning that Rule 68 applies. The case is set to go to trial on July 1. On June 16, Daniel offers to settle the suit and pay Gabrielle $10,000 by serving Gabrielle with a properly drafted written offer of settlement. By June 26, Daniel has not heard back from Gabrielle, which means she did not effectively accept within the 10-day period set forth in Rule 68. On July 1, the case goes to trial and judgment is speedily arrived at in Gabrielle’s favor. However, Gabrielle is awarded only $8,000. Because the judgment was less favorable than the $10,000 offer from Daniel, which Gabrielle rejected, she will be unable to recover for those costs and attorney’s fees which she incurred after June 16- the date the offer was made. She can still recoup costs incurred prior to that date.

At its heart, Rule 68 reflects a general policy which favors, and encourages, negotiated settlements. Whether it is in finding the requirements of the contract have been met, or in giving parties an incentive to accept favorable settlements rather than try to suck out every drop in a protracted court battle, the law looks kindly upon those who manage to see through their differences and agree to settle a case rather than see it to its bloody end.