New clause: Attorneys’ fee awarded against you if you fail to do better than a settlement offer

I’ve posted a first pass at a new section of contract clauses to give the parties an incentive to make early, reasonable settlement offers in contract disputes: If one party rejects a settlement offer, but then fails to get a ‘more favorable’ result in court, then the rejecting party must pay the offering party’s attorney’s fees, expenses, and court costs incurred after making the offer.

The problem with Federal Rule 68

The clause is modeled roughly on the offer-of-judgment provisions in Rule 68 of the Federal Rules of Civil Procedure. I’ve long been a fan of the underlying concept of Rule 68: If you fail to accept a settlement offer but then fail to do better than that at trial, then the expense of the trial should be on you.

The problem with Federal Rule 68, though, is that it’s toothless: it only shifts subsequently-incurred court costs, which usually don’t amount to a lot of money in the scheme of things, and doesn’t shift the burden of attorneys’ fees, which can be huge. As a result, most litigators don’t regard Rule 68 as providing much of an incentive to settle.

A somewhat better model: New Jersey Court Rule 4:58

A somewhat-better approach is New Jersey Court Rule 4:58, which shifts not just court costs but also attorneys’ fees.  The New Jersey rule, however, applies only when exclusively-monetary relief is sought. (The new clause doesn’t contain such a restriction.)

In the new clause, I’ve adapted a feature of the the New Jersey rule that gives the parties an incentive not to be insufficiently generous, or too demanding, in their settlement postures:

• If a defendant offers (say) $100 to settle a claim, but the claimant turns it down, then the claimant has to win at least $120 * for the judgment to be ‘more favorable’ to the claimant than the offer was.  If the win falls short of that amount, then the claimant has to pay the defendant’s attorneys’ fees and expenses and court costs.
• Conversely, if the claimant offers to settle for $100, but the defendant turns it down, then the monetary award has to be less than $80 * for the judgment to be more favorable to the defendant than the offer was; if not, then the defendant pays the claimant’s attorneys’ fees, etc.

(* In each case, the amount in question is exclusive of prejudgment interest and attorneys’ fees.)

FOOTNOTE: The New Jersey Supreme Court has ruled that “a defendant [employer] cannot be awarded fees [under Rule 4:58] in a [prevailing wage act] case for a plaintiff’s refusal to accept a settlement offer, [but] plaintiff’s application must be scrutinized, as are all statutory fee claims, against a reasonableness standard, including an assessment of plaintiff’s rejection of a reasonable offer of judgment in favor of the continuation of litigation.” Best v. C&M Door Controls, Inc., No. A-57-08 (N.J. Oct. 14, 2009) (in effect affirming district court’s refusal to award post-settlement offer fees to former employer).

Some empirical research by two law professors, of Northwestern University and (now) the University of Pennsylvania respectively, has shown that the New Jersey rule seems to encourage early settlement and to reduce attorneys’ fee expenses, without affecting the size of the damage award for cases that do go to trial. See Albert Yoon and Tom Baker, Offer-of-Judgment Rules and Civil Litigation: An Empirical Study of Automobile Insurance Litigation in the East (Nov. 2008).  I’m indebted to Professors Yoon and Baker for the pointer to the New Jersey rule.

The Georgia, Florida, and Texas fee-shifting statutes

ADDED 2010-04-15: Georgia and Florida have fee-shifting statutes similar to New Jersey’s — see Ga. Code Ann. § 9-11-68 and Fla. Stat. § 768.79, summarized in Lewis E. Hassett, “Pretty Soon You’re Talking Real Money” — Federal Court Shifts Cost of E-Discovery [link].

Texas likewise has a similar expense-shifting statute; see Tex. Civ. Prac. & Rem. Code ch. 42. In 2011, the Texas Legislature tightened the limits on the amount of fees and expenses that could be recovered to the amount of the jury verdict, as explained in this article (scroll down to “Attorneys’ fees after offer of settlement”).

Arizona’s fee-shifting statute after compulsory arbitration

ADDED 2009-07-18: A related concept is implemented in Arizona Rev. Stat. 12-133: In any civil case where the amount in controversy is less than $65,000, the court is normally required to send the case to arbitration. The party that ‘loses’ the arbitration can still demand a trial de novo in court. If the result of the trial de novo, however, is not at least 23% better than the arbitration award, the party demanding the trial must pay • the arbitrators’ fee, and • the other side’s costs and attorneys’ fees and expenses for the trial de novo. See also Final Report of the Committee on Compulsory Arbitration in the Superior Court in Arizona (June 2006).