Sooner or later, a defense attorney will find himself or herself defending an employment lawsuit involving a clear statutory violation or a very bad fact pattern that almost surely will result in a jury verdict in favor of the plaintiff-employee. In these situations, the obvious strategy is to resolve the lawsuit through a settlement. This is because the value of the claim and the defendant-employer’s corresponding exposure continue to increase throughout the course of litigation in the form of back pay accrual and both parties’ attorneys’ fees, since the vast majority of federal and state employment laws contain an attorney fee-shifting provision requiring the defendant to pay a successful plaintiff’s attorneys’ fees (in addition, of course, to the defendant-employer’s contractual obligation to pay its own attorneys’ fees). And although a prevailing plaintiff is entitled to his/her costs and attorneys’ fees under these statutes, a successful defendant is entitled only to its costs (e.g., filing fees, court reporter fees, etc.) and not an award of attorneys’ fees.

These one-sided fee-shifting provisions dramatically alter the settlement posture of employment cases. Unlike litigation in other contexts in which the litigation process reduces the value of the plaintiff’s claim through the accrual of attorneys’ fees that cannot be recouped even if the plaintiff prevails, a plaintiff in an employment case has every incentive to litigate a strong claim through trial because the plaintiff has a statutory entitlement to an award of reasonable attorneys’ fees if a plaintiff’s verdict is obtained.

The following hypothetical illustrates a plaintiff’s statutory disincentive to settle a case and the defendant’s resulting dilemma: An employer terminates an employee for violating its drug testing policy but commits a clear violation of the applicable state drug testing statute in the process. The employee is unemployed for six months before securing comparable employment with another employer. The drug testing statute permits a back pay award and requires the defendant to pay a prevailing plaintiff’s reasonable attorneys’ fees. The plaintiff files suit under the drug testing statute seeking $25,000 in back pay and attorneys’ fees. The defendant, realizing its position is indefensible, immediately offers to settle the case for $27,000 – i.e., the full six months of back pay ($25,000), plus the full $2,000 in attorneys’ fees accrued by the plaintiff through the filing of the complaint. The plaintiff’s attorney, who is not particularly busy and knows he can easily win the case, rejects the settlement offer and demands the $25,000 in back pay plus the $100,000 in attorneys’ fees that he estimates would be incurred through trial. The defendant considers this $125,000 settlement demand extortion, but realizes that litigating the case through trial would result not only in an award of $125,00 to the plaintiff, but also an outlay of another $100,000 in attorneys’ fees to its own attorneys to litigate a case that the defendant knows it almost certainly will lose. Should the defendant cut its losses and pay the plaintiff’s attorney’s unreasonable demand to settle the case? No, the defendant should make a Fed. R. Civ. P. 68 (“Rule 68”) offer of judgment for the amount it offered to settle the case. As explained below, Rule 68 offers of judgment require the plaintiff to accept reasonable offers to resolve litigation or risk not recovering their attorneys’ fees even if they prevail at trial.

Rule 68 Offers of Judgment

A Rule 68 offer of judgment is a written offer by the offeror (typically the defendant) to allow judgment to be entered against it and in favor of the offeree (typically the plaintiff) for the amount specified in the offer. The offeree has 10 days to accept the offer by filing it with the court, at which time the court would enter judgment in favor of the offeree for the amount specified in the offer. However, if the offer is rejected, and “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.” Fed. R. Civ. P. 68(d).

The U.S. Supreme Court has held that, because Rule 68 does not define the term “costs,” the rule “incorporates the definition of costs that otherwise applies to the case.” Marek v. Chesny, 473 U.S. 1, 9 n.2 (1985). Thus, whether attorneys’ fees are included as costs for purposes of Rule 68’s penalty provision is dependent upon the language of the statute under which the plaintiff is proceeding in the case. The courts have routinely held that the term “costs” in Title VII of the Civil Rights Act of 1964, as amended, encompasses attorneys’ fees. See Wilson v. Nomura Securities Int’l, Inc., 361 F.3d 86, 89 (2nd Cir. 2004) (finding that Title VII expressly includes attorney’s fees in its definition of costs); Tai Van Le v. Univ. of Penn., 321 F.3d 403, 409 (3rd Cir. 2003) (same); Baum v. Rockland, No. 03 Civ. 5987, 2005 WL 8751, *6 (S.D.N.Y. 2005) (same). Consequently, the courts have held in cases brought under Title VII and other statues that define “costs” to include attorneys’ fees that a plaintiff who rejects an offer of judgment, prevails at trial, but fails to recover more than the amount previously rejected, cannot recover any attorneys’ fees or costs that the plaintiff incurred following the plaintiff’s rejection of the offer of judgment.

However, the courts have ruled that the term “costs” in the Age Discrimination in Employment Act, the Fair Labor Standards Act, and Americans with Disabilities Act, does not encompass attorneys’ fees, and thus, the rejection of an offer of judgment in cases brought under these statutes would have no impact on the prevailing plaintiff’s attorneys’ fee award. See Webb v. James, 147 F.3d 617 (7th Cir. 1998) (finding that Rule 68 did not defeat eligibility for fees because the ADA does not define costs to include attorney’s fees); Baum, 2005 WL 5987, *6 (same); Dalal v. Alliant Techsys., Inc., 182 F.3d 757, 760-61 (10th Cir. 1999) (ruling that Rule 68 does not bar an award of attorneys’ fees to the plaintiff, even though the amount he was awarded by the jury on his ADEA claim was less than the offer of judgment he rejected); Utility Automation 2000, Inc. v. Choctawhatchee Elec. Cooperative, Inc., 298 F.3d 1238, 1242 (2002) (noting that the FLSA does not define costs to include attorneys’ fees); Haworth v. Nevada, 56 F.3d 1048, 1051 (9th Cir. 1995) (holding that, because the FLSA defines attorneys’ fees separately from costs, attorneys’ fees in an FLSA action are not automatically shifted by Rule 68, and Rule 68 does not bar an award of attorneys’ fees to a plaintiff); Fegley v. Higgins, 19 F.3d 1126, 1135 (6th Cir. 1994) (same). Thus, an employer should research the definition of “costs” under the applicable statute before making an offer of judgment.