The California Supreme Court recently addressed whether a party that voluntarily dismisses an action, in exchange for a settlement payment, is entitled to recovery of costs as “the prevailing party.” In deSaulles v Community Hospital of the Monterey Peninsula 2016 DJDAR 2364, the Supreme Court resoundingly answered that question in the affirmative.

The deSaulles case arose in the context of an employment lawsuit, ostensibly for failure to accommodate plaintiff’s physical disability/medical condition. The defense successfully moved for summary adjudication on several causes of action and prevailed on numerous motions in limine, effectively gutting the plaintiff’s case. Prior to empaneling a jury, plaintiff’s remaining claims were dismissed with prejudice in exchange for defendant’s payment within 10 days of $23,500. The settlement expressly reserved plaintiff’s right to appeal the court’s prior adverse rulings and the parties agreed to reserve the right to file any motions or memoranda for costs or attorney’s fees pending conclusion of the appeal.

The Court of Appeal affirmed the lower court’s judgment and the parties returned to the trial court, each claiming to be the prevailing party entitled to costs under Code of Civil Procedure section 1032. The lower court found the hospital to be the prevailing party and awarded defendant costs totaling $12,731.92. That ruling was reversed by the Court of Appeal, which held that plaintiff had obtained a net monetary recovery and was the prevailing party.

The California Supreme Court affirmed the Court of Appeal, holding that a dismissal pursuant to a monetary settlement is not a dismissal in defendant’s “favor” as that term is used in Code of Civil Procedure section 1032(a) (4). The Court further held that a plaintiff that enters into a stipulated judgment to be paid money in exchange for a dismissal had obtained a “net monetary recovery” within the meaning of that statute whether or not the judgment mentions the settlement. The Court effectively established a default rule that applies only when the parties have not resolved the cost issue in their settlement agreement.

The moral of this story is clear-unless the settlement agreement clearly waives costs and attorney’s fees, the parties risk a judicial adjudication that one of them is the prevailing party entitled to recover such costs and/or attorney’s fees.