Community Hospital of the Monterey Peninsula hired Maureen deSaulles in February 2005 as a part-time patient business services registrar.  deSaulles began complaining about her work shift assignments to the emergency room.  The Hospital placed deSaulles on a leave of absence the following January and terminated her employment in July 2006. 

deSaulles filed a complaint alleging (1) failure to accommodate her physical disability or medical condition; (2) retaliation in violation of the Fair Employment and Housing Act (FEHA); (3) breach of implicit conditions of an employment contract; (4) breach of an implied covenant of good faith and fair dealing; (5) negligent infliction of emotional distress; (6) intentional infliction of emotional distress; and (7) wrongful termination in violation of public policy. 

The trial court denied the Hospital's motion for summary judgment, but granted its motion for summary adjudication as to the claim of failure to accommodate.  The parties later placed their settlement agreement on the record, pursuant to which deSaulles would agree to dismiss her claims of breach of contract and breach of covenant in exchange for $23,500.  The court also granted some of the Hospital's pre-trial motions, thus precluding deSaulles from offering evidence at trial of the Hospital's failure to accommodate her disability or to engage in the interactive process, or that deSaulles was harassed, discriminated, or retaliated against. The trial court then entered judgment, stating that, in light of its rulings on the pre-trial motions, deSaulles would be unable to introduce any evidence that would establish her claims of retaliation, negligent or intentional infliction of emotional distress, or wrongful termination.  The court had already adjudicated deSaulles' failure to accommodate claim in favor of the Hospital, and the parties had already settled the remaining claims.  Thus, the court concluded that deSaulles would recover nothing from the Hospital, and ordered that the parties defer seeking recovery of costs and fees until after the time for all appeals.  deSaulles appealed, but the Court of Appeal affirmed the judgment in an unpublished opinion. 

Both parties filed memoranda seeking costs, and deSaulles filed a motion to strike the Hospital's memorandum on the basis that the Hospital was not the prevailing party.  The trial court ruled that the Hospital was the prevailing party, and awarded costs of approximately $12,700.  deSaulles appealed, and the Court of Appeal reversed.

Unless otherwise provided by statute, the prevailing party is entitled to recover costs as a matter of right.  "Prevailing party" is defined as including: (1) the party with the net monetary recovery; (2) a defendant in whose favor a dismissal is entered; (3) a defendant where neither plaintiff nor defendant obtains any relief; (4) a defendant as against those plaintiffs who do not recover any relief against that defendant.  If none of the situations listed above occur, the trial court determines the prevailing party and uses its discretion to determine the amount and allocation of costs. 

The Court of Appeal here addressed the novel question of whether "net monetary recovery" includes amounts received through settlement.  It relied on a previous case to determine that "net monetary recovery" is broad enough to include an amount of money obtained either by a favorable judgment or otherwise by the legal process.  In this case, the parties agreed on the day of trial to settle two causes of action, and they stipulated to the settlement orally before the court.  Thus, this settlement was accomplished through the legal process.  deSaulles ultimately received $23,500.  The Court held that this settlement fell within the definition of "net monetary recovery," and therefore the trial court should have found that deSaulles was the prevailing party. 

The Hospital argued that it was the prevailing party because it was a "defendant in whose favor a dismissal is entered."  However, the Court's review of the record disclosed that the trial court never entered a judgment expressly dismissing the action. The trial court summarily adjudicated deSaulles' retaliation claim, but never purported to dismiss it.  The trial court's order granting the Hospital's pre-trial motions also did not purport to dismiss the remaining claims.  A ruling should not be regarded as a dismissal unless it reflects an explicit or implicit intent to dismiss an action or claim.  While the court issued an order stating that deSaulles was to "recover nothing" from the Hospital, this order appeared to facilitate appellate review of the earlier rulings and did not reflect an intent to dismiss the action.   

Further, while deSaulles dismissed two causes of action in exchange for her settlement payment, the Court held that it only makes sense to mandate costs for a dismissal when the dismissal ends the action against a defendant and not when a voluntary dismissal leaves the plaintiff with pending claims against that defendant.  At most, the Hospital obtained a partial voluntary dismissal.

Thus, the Court of Appeal held that the Hospital was not a prevailing party.  If it were a prevailing party and the trial court was therefore faced with a situation in which there were two prevailing parties, it could have exercised its discretion and determined which party prevailed based on the merits of the case.  However, only one party fit the definition of prevailing party, and thus the statute operated mechanically to mandate costs and did not afford the trial court any discretion.   

Thus, the Court of Appeal reversed the trial court's order awarding costs to the Hospital.       

Note: 

The Court of Appeal noted that "parties can avoid this mechanical approach by taking care to provide for costs in their settlement."  In other words, the parties can negotiate and include as a term of the settlement whether the parties will cover their own costs, or whether one party will ultimately be responsible.

deSaulles v. Community Hospital of the Monterey Peninsula (2014) 225 Cal.App.4th 1427.