In a March 10, 2016 decision titled DeSaulles v. Community Hospital of the Monterey Peninsula, 62 Cal. 4th 1140, 1144 (2016), the California Supreme Court held that where a settlement agreement is silent regarding litigation costs, a plaintiff who enters a stipulated judgment to be paid money in exchange for a dismissal obtains a “net monetary recovery,” which allows the Plaintiff to recover costs as the “prevailing party.”
Under California law, the party that prevails in a lawsuit is entitled to recovery of its costs. California Code of Civil Procedure §1032(a)(4) provides a variety of categories that define a prevailing party for purposes of recovering costs in litigation. Two of these categories are: 1) the party with a net monetary recovery, and 2) a defendant in whose favor a dismissal is entered. These two categories are in conflict when the parties enter into a settlement wherein the defendant pays the plaintiff in exchange for a dismissal. In DeSaulles, the California Supreme Court explicitly held that in such cases, the plaintiff obtains a “net monetary recovery,” and that a dismissal is not a dismissal [in the defendant’s favor] under the statute. As such, the plaintiff is the prevailing party and is entitled to costs. The Court, however, emphasized that the statute only provides a default rule and the parties are free to make their own arrangements regarding costs. As such, it is important for parties to specifically spell out in their settlement agreements which party, if any, is to recover its costs of suit. This is especially important in cases that settle close to trial wherein the costs may be substantial and may affect the amount of money the settling party is willing to pay.