Legal Updates

Settlement Offers And Attorneys' Fee Awards

A plaintiff’s “success” at trial is a yardstick that courts use to determine the reasonableness of a fee petition in a fee-shifting case. Courts consider many factors in this regard such as trial time consumed on unsuccessful claims. Attorneys’ fees are generally not compensable for time spent pursuing unsuccessful legal theories.

Another factor courts consider is whether the prevailing party rejected a pre-trial settlement offer that exceeded the ultimate damages award at trial. While courts are hesitant to apply formulaic fee reductions based upon a disparity between potential settlement and actual trial damages, fee reductions under such circumstances are common, and it may befit parties defending fee-shifting cases to put forth an aggressive pre-trial settlement proposal.

Introduction

To promote open and honest communications in resolving disputes, Massachusetts has adopted G.L. c. 233, 23C, which prohibits the disclosure of settlement communications made in the context of mediation. Indeed, parties to a mediation often expressly agree in writing that all settlement communications are confidential.

Notably, G.L. c. 233, 23C does not apply to settlement communications made outside the presence of a mediator. Prudent counsel often affix labels to settlement communications – “confidential” or “inadmissible” – to prevent their use in ongoing litigation.

Settlement negotiations, however, are not immune from disclosure. Federal and state law allow for disclosure of settlement discussions for purposes other than to prove or disprove the validity or amount of a disputed claim. One such area where disclosure may arise is in the context of crafting a fee award to a prevailing litigant in a fee-shifting case.

Settlement Negotiations And Fee Petitions

The United States Supreme Court has held that “where the plaintiff only achieved limited success, the district court should award only that amount of fees that is reasonable in relation to the results obtained.” Hensley v. Eckerhart, 461 U.S. 424, 436 (1983). “Considering a rejected settlement offer is one way of measuring the degree of success.” Hines v. City of Columbus, 676 Fed. Appx. 546, 556 (6th Cir. 2017). “Few, if any, reasonable litigants would call a monetary judgment that comes in well under the money offered to settle the case a success.” McKelvey v. Secretary of Army, 768 F.3d 491, 495 (6th Cir. 2014).

Six circuit courts that have considered the issue have found that evidence of a rejected settlement offer is an appropriate factor in addressing the reasonableness of a plaintiff’s fee petition. For example, in Lohman v. Duryea Borough, 574 F.3d 163 (3d Cir. 2009), in a matter of first impression, the court considered settlement negotiations in awarding attorneys’ fees to a prevailing plaintiff in an employment case. Prior to trial, the defendant offered the plaintiff $75,000.00 to resolve the case. The jury subsequently awarded the plaintiff $12,205.00 in lost wages and nominal damages. The plaintiff’s counsel sought attorneys’ fees and costs of $112,883.73.

The court awarded the plaintiff’s counsel $34,251.77 in costs and fees. The court reasoned that evidence of settlement negotiations is an indicator of the plaintiff’s measure of success, and observed that the plaintiff had rejected an offer more than six times the amount he obtained a trial. Accordingly, the court found that a reduction in the fee award was appropriate.

The Lohman decision is no outlier. “[W]e see no reason why a rejected settlement offer, and its relationship to the final result obtained, should not be a permissible consideration for the district court to take into account.” Walker v. Iron Sushi LLC, 752 Fed. Appx. 910, 915 (11th Cir. 2018); see also Haworth v. State of Nevada, 56 F.3d 1048, 1052 (9th Cir. 1995) (district court must consider rejected Rule 68 offer in determining whether requested fee is reasonable); Moriarty v. Svec, 233 F.3d 955, 967 (7th Cir. 2000) (where the prevailing party achieved only a limited success, the district court may reduce the lodestar amount); Dalal v. Alliant Techsystems, Inc., 182 F.3d 757, 761–62 (10th Cir. 1999) (request for attorneys’ fees reduced where plaintiff rejected a significant settlement offer); Sheppard v. Riverview Nursing Ctr., Inc., 88 F.3d 1332, 1337 (4th Cir. 1996) (court may consider plaintiff’s rejection of a settlement offer as one of the factors in crafting a fee award).

Second Circuit

The Second Circuit sees things differently. In Ortiz v. Regan, 980 F.2d 138 (2d Cir. 1992), the court declined to reduce an application for attorneys’ fees on the basis that a settlement proposal had been rejected. The court held that a “district court should not rely on informal negotiations and hindsight to determine whether further litigation was warranted and, accordingly, whether attorney’s fees should be awarded. Otherwise, plaintiffs with meritorious claims may be improperly dissuaded from pressing forward with their litigation.”

First Circuit

The First Circuit has not yet ruled on this issue. In Coutin v. Young & Rubicam Puerto Rico, Inc., 124 F.3d 331 (1st Cir. 1997), the court held that “it is a mistake of law to reduce an award of attorneys’ fees in a civil rights case in response to plaintiff’s rejection of a defendant’s settlement offer when the subsequent judgment exceeds that offer.” With regard to reducing a fee award in light of a judgment that falls short of a prior settlement offer, the court specifically noted that it would “leave that question for another day.”

Conclusion

Whether a court would consider a rejected settlement offer as a factor in determining an attorneys’ fees award is an open issue in Massachusetts. In litigating a fee-shifting case in Massachusetts state or federal court, it may very well make sense to tender a settlement offer outside the presence of a mediator. This could be accomplished on its own or in conjunction with a Rule 68 offer of judgment. Having rejected a generous settlement offer, a prevailing plaintiff achieving a nominal victory at trial in a fee-shifting case could be hard-pressed to recover 100% of its fees and costs.

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An earlier version of this article was published in Massachusetts Lawyers Weekly (“MLW”). We are grateful to MLW for its support.