This morning the Supreme Court of the United States issued an important ruling that will affect employers’ ability to defend against a variety of lawsuits brought as class actions, including employment discrimination, Equal Pay Act, Worker Adjustment & Retraining Notification Act, and Fair Credit Reporting Act cases.  In a 6-3 decision in Campbell-Ewald Co. v. Gomez, No. 14-857 (U.S. Jan. 20, 2016), which our readers can review here, the Supreme Court ruled that when a party defending against a claim in a federal lawsuit makes an offer to a named plaintiff under Rule 68 to pay money to completely cover the alleged damages he is seeking and his accumulated costs to that point, and the plaintiff does not accept it, the lawsuit nonetheless may proceed. As explained below, this decision is a game-changer because it denies defendants the opportunity to use Rule 68 to moot the claims of named plaintiffs, and therefore end the class action, by removing the basis for subject-matter jurisdiction under the “cases and controversies” clause of Article III of the U.S. Constitution.

What Is Federal Rule of Civil Procedure 68?

Rule 68 is a relatively obscure provision. Known as the “offer of judgment” rule, it shifts costs to a plaintiff who rejects an offer which is more favorable than the ultimate judgment. Sub-section (a) of Rule 68 states that at least 14 days before a trial date, “a party defending against a claim may serve on an opposing party an offer to allow judgment on specified terms, with the costs then accrued.  If, within 14 days after being served, the opposing party serves written notice accepting the offer, either party may then file the offer and notice of acceptance, plus proof of service.  The clerk must then enter judgment.”  That portion of Rule 68 is straightforward, and operates as a form of settlement to spare the courts of the obligation to carry through with the trial.

Defendants’ increasing use of Rule 68 offers in employment-related class actions arose from the language of sub-section (d), which states:  “If the judgment that the offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay the costs incurred after the offer was made.”  This provision serves to put pressure on the plaintiff to weigh the risks of proceeding to trial, given that he or she will be ultimately liable to pay the offeror the costs it incurred after the date the offer of judgment was rejected. Thus, the purpose of Rule 68 is plainly to encourage settlement and avoid unnecessary trials.  It essentially permits a defendant to make a settlement offer that raises the stakes for the plaintiff who continues to litigate.  It accomplishes this goal by providing that if the plaintiff does not accept the offer within 14 days and the ultimate judgment obtained by the plaintiff is not greater than the offer, the plaintiff must pay the statutory costs incurred by the defendant after the date the offer is made.  Simply put, Rule 68 shifts to the plaintiff the cost of litigating a lawsuit that the defendant should not have been forced to defend.

The Supreme Court recently interpreted Rule 68 in a 2013 case involving a collective action (a case entitled Genesis HealthCare Corp. v. Symczk, 133 S. Ct. 1523 (2013) – the procedures that require individuals to opt-in to obtain relief in a lawsuit brought by a representative plaintiff, such as under the Equal Pay Act.  But due to a concession made by the plaintiff in that case, the Supreme Court did not reach the key question it decided today in Campbell-Ewald.  As Justice Ginsburg, who wrote the majority opinion today put it, “Is an unaccepted offer to satisfy the named plaintiff’s individual claim sufficient to render a case moot when the complaint seeks relief on behalf of the plaintiff and a class of persons similarly situated?”  Campbell-Ewald, slip op. at 1.

What Did The Supreme Court Rule Today About Unaccepted Offers Of Judgment?

Today, Justices Ginsburg, Kagan, Sotomayor, Kennedy, and Breyer, with Justice Thomas concurring, denied defendants the option of arguing that because the named plaintiff did not accept a full settlement offer under Rule 68 before filing the motion for class certification, he or she does not have a sufficient interest in the controversy to create jurisdiction under Article III of the U.S. Constitution, and both the individual and class claims must be dismissed for lack of subject-matter jurisdiction.  The U.S. Courts of Appeal for the Third, Fourth, and Sixth Circuits had previously ruled that an unaccepted offer under Rule 68 can moot a named plaintiff’s claim in this way, while the First, Second Fifth, Seventh, and Eleventh Circuits had held it could not.  The Supreme Court entered the fray to resolve this split amongst the circuits.  Id. at 5-6.

Under Article III, only “cases” or “controversies” can create federal court jurisdiction, and if the named plaintiff no longer has a personal stake in the outcome of the lawsuit – as opposed to an interest in simply the class action aspects of it – the case must be dismissed as moot.  This was the Supreme Court’s holding in 2013 when it last interpreted Rule 68 in the context of representative lawsuits.  Id. at 6.  In Genesis HealthCare Corp. v. Symczyk, the plaintiff had conceded that the unaccepted offer of judgment made by the defendant in that case served to moot her individual claim, and the Supreme Court considered only whether the lawsuit was justiciable based solely on her interest in pursuing collective action allegations against the defendant.  The answer in that case was “no,” but Justice Kagan in dissent argued that the Supreme Court should have reached the issue that plaintiff conceded – and should have ruled that an unaccepted offer does not moot the plaintiff’s individual claim in the first place.  Campbell-Ewald, slip op. at 7-8.

The Supreme Court now has adopted Justice Kagan’s view in that dissent, and reached the issue explicitly, because Mr. Gomez did not make the same concession Ms. Symczyk made – namely, that his failure to respond to Campbell-Ewald’s offer made his individual claim moot.  Gomez had alleged that Campbell-Ewald, a marketing communications company hired by the U.S. Navy to assist in recruiting volunteers, had violated the Telephone Consumer Protection Act (“TCPA”) by retaining a subcontractor who sent text messages to his telephone encouraging him to serve in the Navy, messages he did not consent to receive.  Id. at 1-3.  He filed a class action lawsuit under the TCPA seeking to represent a nationwide class and obtain treble statutory damages plus costs and attorneys’ fees. Id. at 3.  Before his motion for class certification was due, Campbell-Ewald proposed to settle his individual claim by paying him the amount of money he could receive in statutory damages under the TCPA, plus costs, by serving on him a Rule 68 offer of judgment.  Id. at 3-4.  The 14-day time period for Gomez to respond elapsed, and Campbell-Ewald then moved to dismiss the case under Rule12(b)(1) for lack of subject-matter jurisdiction, arguing his claim had become moot because the offer provided him with complete relief, and therefore the class claims were moot as well.  Id. at 4.

Both the District Court and the U.S. Court of Appeals for the Ninth Circuit denied the motion to dismiss (but made differing rulings regarding the doctrine of “derivative sovereign immunity” that are not relevant here). Today’s majority at the Supreme Court affirmed the Ninth Circuit, and held that “Gomez’s complaint was not effaced by Campbell’s unaccepted offer to satisfy his individual claim.”  Id. at 8.  The Supreme Court did so by applying “basic principles of contract law” that an offer made but not accepted has no force, and is “only a proposal, binding neither Campbell nor Gomez.” Id. at 8-9.  It also noted that by not responding to the offer, Gomez was left “emptyhanded,” so his individual claim was not made moot by the unaccepted offer, so that claim “retains its vitality during the time involved in determining whether the case could proceed on behalf of a class.”  Id. at 11.

The dissenting Justices argued that this case presents a classic case of mootness because Campbell-Ewald offered to give Gomez the maximum amount that he could recover, “but it turns out he wants more.  He wants a federal court to say he is right.  The problem for Gomez is that the federal courts exist to resolve real disputes, not to rule on a plaintiff’s entitlement to relief already there for the taking.”  Id. slip op. at 1 (dissenting opinion, Roberts, J.). Because the plaintiff filed suit “seeking redress for an alleged injury, and the defendant agrees to fully redress that injury, there is no longer a case or controversy for purposes of Article III.”  Id. at 4 (emphasis in original).  Essentially, according to the dissenters, once an offer to completely redress the plaintiff’s injury has been made, there is no need for a court to redress that injury, and the adversity necessary to confer subject matter jurisdiction no longer exists.  Id. at 4.

What Should Employers Do Now, If They Wish To Use Rule 68 To Try And End Class Actions?

Although employers and other defendants facing class action lawsuit lost an important strategy today in the Supreme Court, due to the expense of defending against class certification motions, they still may use Rule 68 to attempt to create settlement leverage, and may even be able to re-invent the Rule 68 procedure to try to moot plaintiff’s claims.  Importantly, the majority limited the holding to situations where there is merely an “offer” to settle the claims.  They expressly reserved and did not decide the question of whether the outcome would be different if a defendant invokes Rule 68 and “deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.”   Id. at 11.  Further, the majority did not eviscerate the requirement of Rule 68(d), which shifts costs of an unaccepted offer of judgment to the plaintiff going forward.  The majority noted that the “built-in sanction” for a plaintiff who rejects an offer remains: “the offeree must pay the costs incurred after the offer was made.”  Id. at 9.

So in the end, it is likely that parties defending against claims will continue to use Rule 68, and will do so in these two specific ways that ironically were explicitly suggested by Justice Ginsburg’s majority opinion.  And one prediction we will make here is that, as a result, it is likely that litigation over Rule 68 will turn on disputes over whether creating an “account payable” to a plaintiff satisfies the Rule’s requirement that an “offer” be made to the plaintiff.