A Potent Olive Branch: The Offer of Judgment Rule
December 29, 2008
New Jersey Law Journal
The tender of an Offer of Judgment is a powerful legal tactic that forces an adversary to either settle or undertake an increased risk by proceeding to trial. New Jersey's Offer of Judgment rule, Rule 4:58-1 to -5, allows any party to tender a formal settlement offer, with the result that if the offer is not accepted and the final judgment is significantly less favorable to the offeree, then the offeror is entitled to attorney's fees, costs, and expenses, and prejudgment interest incurred after nonacceptance. See generally Wiese v. Dedhia, 188 N.J. 587 (2006). These substantial penalties make the Offer of Judgment a powerful and effective tool for both plaintiffs and defendants. This article will briefly examine New Jersey's rule, along with the use of an offer as a settlement device and as a litigation tactic.
New Jersey's Offer of Judgment rule provides that, in nonmatrimonial actions, so long as monetary relief is the exclusive remedy sought, either party may make an offer to allow entry of judgment for or against that party for a proposed sum. If both injunctive relief and damages are sought, a valid offer can not be tendered unless the injunctive claim is dismissed. See generally Pressler, "Current N.J. Court Rules," comment 1 on R. 4:58-1 to 5 (2009). The offer must be made at least 20 days before trial, and the offeree has 90 days or until 10 days before trial to accept, whichever period lapses first.
In the event that the offer is not accepted, the value of the nonaccepted offer will be measured against the verdict or final judgment. See, e.g., Gonzalez v. Safe & Sound Sec. Corp., 185 N.J. 100 (2005) (explaining that the fee-shifting provisions are triggered by the verdict amount). If the offer was made by a claimant who subsequently obtains a judgment that, excluding prejudgment interest and counsel fees, is 120 percent or greater of the offer, then the defendant shall be subject to the penalties of the rule. For example, if a claimant tenders an Offer of Judgment proposing to accept a $100,000 judgment on his claims, the defendant would be subject to the rule if he does not accept and the claimant later obtains a judgment for $120,000 or more.
Similarly, a claimant shall be subject to the same penalties if he or she declines a defendant's offer and subsequently obtains a judgment that, excluding prejudgment interest and counsel fees, is 80 percent or less of the tendered offer. Thus, a party whose offer is not accepted and who obtains a favorable judgment beyond the 20 percent margin may move for an allowance of attorney's fees, costs, litigation expenses, and prejudgment interest incurred after nonacceptance. Allowable counsel fees include those incurred on appeal, Wiese, 188 N.J. at 593-94, or at additional proceedings following a mistrial, Negron v. Melchiorre, Inc., 389 N.J. Super. 70 (App. Div. 2006), certif. denied 190 N.J. 256 (2007).
One limitation which most defense practitioners fail to recognize is that a defendant is not entitled to any award under the rule if it wins the lawsuit outright. To reiterate, in order for a defendant to recover an allowance under the Offer of Judgment rule, the claimant must prevail and obtain a monetary judgment less than 80 percent of the offer; outright dismissal of the claim, a nocause verdict, or an award of nominal damages will not qualify. Effectively, the claimant must recover somewhere between 80 percent and 1 percent of the offer. While this has the potential to create a situation where the claimant is better off losing outright than securing a judgment in an amount that is less than an allowance under the rule, this inconsistency is understandable in light of the rule's purpose - to induce settlement. See Wiese, 188 N.J. at 593.
Encouraging settlement, and not fee-shifting, remains the primary goal of the Offer of Judgment rule. A formal offer can provide an effective method of reaching settlements with adversaries who are otherwise unreasonable or unrealistic. It may compel the offeree to reconsider their position and expectations, or open a dialogue for further negotiations or additional offers. See Palmer v. Kovacs, 385 N.J. Super. 419 (App. Div.), certif. denied 188 N.J. 356 (2006) (explaining that the tender of a second offer does not vitiate the fee-shifting consequences of the first).
However, while settlement remains the laudable goal of the rule, its employment of severe sanctions to intimidate parties towards that goal opens the door to the use of an offer as a potent legal maneuver. Indeed, New Jersey's rule imposes much harsher penalties than its Federal counterpart, Federal Rule of Civil Procedure 68, which, along with not allowing claimants to tender offers, generally does not allow for the recovery of attorney's fees. See Le v. Univ. of Pa., 321 F.3d 403 (3d Cir. 2003) (explaining that attorney's fees are only recoverable if they are defined as a "cost" which defendants may recover via the underlying substantive statute). The New Jersey Supreme Court has recognized that New Jersey's rule is intended to penalize a party who rejects what turns out to be a favorable settlement offer; it "serves the unique and particular purpose of imposing financial consequences on parties who unwisely reject an offer of settlement and insist on a trial" Weise, 188 N.J. at 593. Even Judge Pressler's comments note that the rule "does not explicitly require that the offer be made in good faith and for the purpose of effecting a settlement of the controversy." Pressler, supra, comment 5 on R. 4:58-1 to -5.
As such, practitioners should consider some strategic uses of the Offer of Judgment rule.
When a claimant is seeking recovery of a sum certain, he should generally consider tendering an Offer of Judgment for his expected recovery less the estimated cost of proceeding with the case. So long as the claimant's estimates are correct, the offer involves no sacrifice while subjecting the defendant to the potential for substantial repercussions should it not accept, including the claimant's costs and fees. For claimants, this is a small wager with the potential for a significant and immediate payout.
An Offer of Judgment is also an effective tactic for claimants faced with an opponent that is escalating attorney's fees or for defendants confronted with "nuisance" claims. Some defendants, under Federal Rule 68, have used the Offer of Judgment mechanism to moot their case by tendering an offer for the entire amount in controversy. See, e.g., McCauley v. Trans Union, L.L.C., 402 F.3d 340 (2d Cir. 2005) (explaining that despite the defendant's refusal to admit liability, the case would be moot upon the claimant's refusal to accept an Offer of Judgment for the entire amount in controversy). While the authors are unaware of any New Jersey case examining this issue, logically the same result should follow under the New Jersey rule.
Another potential use of the rule is to avoid paying prejudgment interest, such as when interest has been accruing for a significant time or when it is almost certain that a plaintiff will eventually prevail. Since the rule excludes prejudgment interest from the calculation of whether a judgment is "favorable," offers can be calculated based only on the value of the underlying claim. See generally Ford v. Garvin, 127 N.J. Super. 391 (App. Div.) ("The offer of judgment rules. . . give trial counsel ample opportunity to submit offers of judgment and avoid paying prejudgment interest, and in fact give them other monetary advantages."), certif. denied 65 N.J. 566 (1974). To illustrate: If a $125,000 offer is made to a claimant seeking $100,000 plus prejudgment interest already accrued at $40,000, he is practically forced to accept the $125,000 offer, since only the $100,000 base judgment will be compared against the defendant's $125,000 offer. Thus, by making an offer of judgment, the defendant can effectively cut off the claimant's right to prejudgment interest.
Another tactic is to use an Offer of Judgment to exploit the significantly greater access that defendants have to relevant evidence. Once a claimant has filed a complaint, there is nothing to prevent the defendant from internally investigating the allegations, assessing the strength of the claim, and tendering an offer prior to discovery or even to the filing of an answer. Indeed, since the sooner an offer is made, the sooner costs and fees become compensable, there is actually some incentive for a defendant to proceed in this manner. The end result is that the claimant is forced into the precarious position of attempting to assess the value of an offer against his or her claim with minimal information.
An Offer of Judgment therefore provides an opportunity for litigants on either side to force their adversaries towards settlement or to obtain a tactical advantage. It is a potent tactic which should have a place in every practitioner's playbook.
Ronald L. Israel is a member of the law firm of Wolff & Samson PC in West Orange, New Jersey. He can be reached at (973) 530-2045 or by email at firstname.lastname@example.org. Raymond A. Brandes, Esq. is an associate at the firm. He can be reached at (973) 530-2099 or by email at email@example.com.
Reprinted with permission from the DECEMBER 29, 2008. edition of the New Jersey Law Journal ©2008 ALM Properties,lnc. All rights reserved. Further duplication without permission is prohibited. For information. call 973.854.2923 or Elissa.Peterson@incisivemedia.com. ALM is now Incisive Media, www.incisivemedia.com.