A recent NLJ article, “An Oft-Overlooked Path to Recovering Costs, Fees,” by Sam Casey and Aaron Furniss of Sutherland Asbill & Brennan in Atlanta, reports that often overlooked in federal practice, state “offer of settlement” statutes potentially present both plaintiffs and defendants with an opportunity to recover costs and attorney fees.  Under certain circumstances, Rule 68 of the Federal Rules of Civil Procedure allows defendants in federal court to recover costs, although generally not attorney fees, incurred after they make an offer of judgment to plaintiffs.

Several states have offer-of-settlement statutes that contain broader provisions than Rule 68—that, for example, allow plaintiffs to make offers of settlement or specifically provide for an award of attorney fees to either party.  Practitioners often overlook the opportunity to use these statutes to recover costs and attorney fees in federal diversity actions.  Plaintiffs and defendants alike potentially leave significant settlement leverage and recoverable fees on the table when they fail to take advantage of these statutes.

Concerns about the applicability of these statutes in federal diversity actions, however, have been addressed by several recent federal appellate decisions clarifying that they are available.  These decisions reject arguments that Rule 68 pre-empts its state law counterparts or that offer-of-settlement statutes are not sufficiently “substantive law” to be applied in federal courts.

Both the U.S. Court of Appeals for the Eleventh Circuit and the Tenth Circuit have held the use of state offer-of-settlement statutes in federal diversity cases.  In Menchise v. Akerman Senterfitt, the Eleventh Circuit held that the Florida statute applies in federal bankruptcy proceedings in that state, “cannot be interpreted to discriminate against a federal forum, and is not pre-empted by Rule 68.”

In Gowen Oil Co. Inc. v. Abraham, the Eleventh Circuit upheld a decision by the District Court in the Southern District of Georgia that awarded attorney fees and expenses under Georgia law.  The court specifically reserved deciding whether the Georgia offer-of-settlement statute was procedural because the plaintiff did not raise this argument on appeal.  Based on the Eleventh Circuit’s reasoning in Menchise, however, it appears that Georgia’s statute would not be considered substantive.

The Tenth Circuit in Scottsdale Insurance Co. v. Tolliver, upheld the use of Oklahoma’s offer of settlement statute in federal diversity cases, concluding that the statute was not pre-empted by Rule 68 and was substantive.  The Scottsdale court grappled with whether the fee-shifting provisions of the Oklahoma statute were procedural or substantive, ultimately concluding that they were substantive because the possibility of attorneys’ fees under Oklahoma law could lead to forum shopping.

Practitioners should also be aware that many states, either through case law or explicitly by statute require that an offer be made “in good faith” before costs and fees can be awarded.  The good-faith requirement need not prevent defendants from making nominal offers, however, because even these can withstand the good-faith test.

For example, in State Farm Mutual Automobile Insurance Co. v. Marko, a Florida Court of Appeals held that an offer of $1 satisfied the good-faith requirement of Florida’s offer-of-judgment statute.  Thus, when a defendant believes that it will win the case either on a dispositive motion or after a trial, there is little reason not to make a token statutory offer of settlement to ensure the possibility of obtaining costs and fees.

While the law regarding the applicability of state “offer of settlement” statutes in federal diversity actions is far from settled, the Eleventh Circuit laid the framework for a successful argument that these statutes are substantive state law and not pre-empted by Rule 68’s cost recovery mechanism.  When state law allows either party to make such offers, the threat to the losing party of costs and attorney fees may provide the additional leverage needed to settle a case.