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Rule 68 of the Federal Rules of Civil Procedure is usually thought of as one of the swords in the defense lawyer’s arsenal, but a few recent court decisions are sharpening the other side so that the rule now cuts both ways and can sometimes pack a hidden weapon for the plaintiff. The decision last week by U.S. District Judge Ronald L. Buckwalter of the Eastern District of Pennsylvania in Minnick v. Dollar Financial Group Inc. is a perfect example of how a defendant’s attempt to settle a case quickly and cheaply with a Rule 68 offer can backfire and result in a quadrupling of the settlement costs. Stacey Minnick filed suit in March accusing Dollar Financial Group Inc. and National Money Mart Inc. of making illegal threats in a debt collection letter. Her lawyer, David A. Searles of Philadelphia’s Donovan Searles, included claims under the federal Fair Debt Collection Practices Act, the Pennsylvania Unfair Trade Practices and Consumer Protection Law and the Pennsylvania Fair Credit Extension Uniformity Act. Less than a month later, defense attorney Stephen G. Harvey of Philadelphia-based Pepper Hamilton threw down the gauntlet with a Rule 68 settlement offer of $2,000. For plaintiffs, a Rule 68 offer is truly both a promise and a threat. As a formal, court-filed offer of settlement, the promise of quick payment is very real. But the plaintiff who turns down such an offer does so at her peril because, if she presses on with the case and wins less than the settlement offer from a jury, she will be forced to foot the bill for all of the defendant’s post-offer litigation costs. Searles quickly notified Harvey that the $2,000 offer of judgment was accepted. But soon after, Searles asked Judge Buckwalter to award more than $6,700 in attorney fees and $436 in costs in addition to the $2,000 specified in the offer. Harvey cried foul, saying the Rule 68 offer was designed to settle the entire case. Now Buckwalter has sided with Searles, saying case law from the 3rd U.S. Circuit Court of Appeals makes clear that if the issue of attorney fees is not explicitly mentioned in a settlement, the fee issue is not settled. Buckwalter found that the leading case on the scope of Rule 68 is the U.S. Supreme Court’s 1985 decision in Marek v. Chesny in which the justices considered the question of whether “costs” included attorney fees under Rule 68. The Marek Court arrived at two significant holdings. First, the Court held that under Rule 68, a valid offer of judgment always includes costs (whether or not it so specifies) because Rule 68 authorizes such an offer only with costs then accrued. Second, the Court held that “costs” includes attorney fees only if fees are defined as costs under the relevant substantive statute or authority upon which the suit is premised. Buckwalter found that Minnick’s case presented a new question: “whether, and if so under what circumstances, attorney’s fees are separately recoverable pursuant to an accepted Rule 68 offer of judgment when (1) the statute or authority upon which the lawsuit is brought does not include attorney’s fees as costs (although it does authorize recovery of such fees), and (2) the offer of judgment does not specifically either include or exclude attorney’s fees.” Searles argued that the offer was “ambiguous on its face” as to whether it included or excluded attorney fees. Such an ambiguity, he said, should always be construed against the drafter of the offer. And under the 3rd Circuit’s 1984 decision in El Club Del Barrio Inc. v. United Community Corps., Searles said, a defendant seeking to extinguish the right to a separate award of attorney fees bears the burden of clearly stipulating such in a settlement agreement. In El Club Del Barrio, Searles argued that the 3rd Circuit established a bright-line rule that if the “losing party wishes to foreclose a suit under section 1988 for attorney’s fees, it must insist on a stipulation to that effect be placed in the settlement agreement.” In doing so, Searles said, the appellate court specifically rejected a “silence equals waiver” rule. But Harvey argued that the word “judgment” in Rule 68 unambiguously operates to preclude a separate award of attorney fees to Minnick in addition to $2,000 plus “costs” that she was promised. Harvey cited the 11th Circuit’s 1997 decision in Arencibia v. Miami Shoes Inc. in which the court refused to allow a plaintiff to seek a separate award of attorney fees after accepting a Rule 68 offer even though the offer of judgment did not mention attorney fees and the statute upon which the suit was premised did not define attorney fees as costs. Searles countered by arguing that Harvey was effectively asking Buckwalter to adopt the “silence equals waiver” rule that the 3rd Circuit has explicitly rejected. Buckwalter agreed, saying “ El Club Del Barrio sets a high bar for defendants seeking to extinguish a plaintiff’s statutory right to attorney’s fees in the 3rd Circuit. That bar is clearly not met here, as attorney’s fees are not mentioned at all in the offer.” More recently, Buckwalter said, the 3rd Circuit underscored just how high the El Club Del Barrio bar is. In Torres v. Metropolitan Life Insurance Co., Buckwalter noted that the 3rd Circuit considered settlement language “much more expansive than the offer in this case,” and declined to construe the settlement as waiving plaintiff’s right to attorney fees without an express stipulation on that point. Buckwalter rejected Harvey’s argument that the word “judgment” in the offer unambiguously operated to preclude a separate award for attorney’s fees. “In some cases, an award of attorney’s fees may be an appealable order separate from an order granting substantive relief. … Therefore, ‘judgment,’ standing alone can mean either the substantive relief ordered (whether legal or equitable), or that plus attorneys’ fees,” Buckwalter wrote. And the defendant’s hopes and beliefs are irrelevant, Buckwalter found. “It is quite reasonable that in the context of a Rule 68 offer of judgment, defendants may have used the term intending to settle all liability against them, including attorney’s fees. However, on its face, the term ‘judgment’ is also capable of being reasonably understood in another way, such as to permit a separate recovery for attorney’s fees,” Buckwalter wrote. Buckwalter said he recognized that El Club Del Barrio and Torres both involved plaintiffs who were asserting the right to attorney fees in negotiated settlements of civil rights suits, while Minnick’s case involved the right to fees pursuant to a Rule 68 offer of judgment accepted in a consumer protection action. Those distinctions, he said, made no difference. “Rule 68 offers of judgment that are accepted have a practical effect similar to settlements, Buckwalter wrote. Although the 3rd Circuit has not yet addressed the question, Buckwalter found that the 9th Circuit also requires that waivers of attorney fees in civil rights settlements be clear and unambiguous “and that court has chosen to apply that logic to Rule 68 offers as well.” Harvey urged Buckwalter to look beyond the text of the offer and consider evidence of the parties’ intent as to its meaning. In an affidavit, Harvey insisted that the history of the negotiations shows that both sides intended that acceptance of the offer would preclude a separate award of attorney fees. If necessary, Harvey said, Buckwalter should hold an evidentiary hearing to ferret out the truth. But Buckwalter said courts in the 3rd Circuit are barred from considering such evidence. “Under El Club Del Barrio, the 3rd Circuit laid down another bright line rule which binds this Court: extrinsic evidence of negotiations may not be considered to construe settlement agreements that are ambiguous or silent on the question of attorney’s fees,” Buckwalter wrote. That rule was reaffirmed in Torres, he noted, where the appellate court allowed an award of attorney fees even in light of clear evidence that one of the plaintiff’s attorneys believed the settlement agreement precluded their recovery. The Torres court explicitly warned defense lawyers to watch their language, saying: “It does not matter whether the parties discussed the issue of attorney’s fees or believed the settlement agreement waived such a claim. All that matters is whether the agreement expressly stipulates that the prevailing party’s claim for fees is waived. If it does not, then the claim survives.” In the final pages of his decision, Buckwalter concluded that Searles was entitled to the full amount requested, resulting in a combined award of more than $7,200 in fees and costs.

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