Co-authored by Lynn Kappelman and Michael Fleischer

This question – what constitutes an effective Rule 68 offer of judgment to block or exit litigation – is all important to employers in all types of class actions and collective actions.

The Fourth Circuit recently issued a decision clarifying the magic terms that need to be in a settlement offer in order for it to qualify as a Rule 68 offer of judgment. Rule 68 is an especially effective tool for employers because it can be used to cut off a plaintiff’s entitlement to attorneys’ fees and costs; typically, the result is to shift the litigation dynamics and gain settlement leverage. Pursuant to Rule 68, plaintiffs who reject a pre-trial offer of judgment and end up recovering less than the offer at trial must pay the defendant’s attorney’s fees and costs of litigation incurred after the rejection of the offer of judgment. 

In Simmons et al v. United Mortgage and Loan Investment, et al., No. 09-2047 (4th Cir. Jan. 24, 2011) [link to ruling], Plaintiffs, a group of nine Junior Asset Managers at United Mortgage, brought a collective action against United Mortgage, pursuant to 29 U.S.C. § 216(b), alleging that they had been misclassified as exempt employees and were entitled to overtime wages for all hours worked over forty per week. Defense counsel tried to eliminate the case through a series of settlement offers and motions based on the principles underlying Rule 68. On appeal, the Fourth Circuit considered whether the district court erred in holding that the contents of Defendant’s settlement letter to Plaintiffs dated May 16, 2008, and clarified in another letter thirteen days later, constituted a Rule 68 offer of judgment. The Fourth Circuit also considered whether the two settlement letters rendered Plaintiffs’ claims moot since they offered the named Plaintiffs full recovery and, as a result, there was no longer a live case or controversy. 

The Fourth Circuit found that neither Defendants’ May 16th letter nor their follow-up clarification letter constituted a Rule 68 offer of judgment. First, the Defendants’ letters provided for only a five day window to accept the Defendants’ offer, rather than the 14 day window as provided by Rule 68. Second, the Defendants’ offer did not make an unconditional offer of judgment on specified terms as required by Rule 68, and instead conditioned the offer upon the Plaintiffs’ submission of additional affidavits. Third, the Defendants’ offer stated that the Defendants would enter into a settlement agreement rather than an offer to have judgment entered against them.  Fourth, in contrast to the public nature of an unsealed judgment entered pursuant to Rule 68, the Defendants offer required the Plaintiffs to keep the fact of the settlement and the terms of settlement confidential.

The Fourth Circuit also considered whether Plaintiffs’ claims were still moot because “the doctrine of mootness is constitutional in nature, and therefore, not constrained by the formalities of Rule 68.” The Fourth Circuit concluded that Plaintiffs’ claims were not moot. Defendants’ offer for a settlement agreement failed to provide Plaintiffs “full relief in this case” because district courts do not have the same enforcement power with settlement agreements as they do with judgments. Further, the claims were not moot because Defendants failed to make an unconditional offer of judgment on specified terms and instead conditioned the offer upon Plaintiffs’ submission of affidavits. Finally, Defendants’ requirement of confidentially prevented Plaintiffs from obtaining an unsealed judgment in their favor. In sum, the Fourth Circuit concluded that Defendants’ flawed offer of judgment did not render Plaintiffs’ claims moot and it remanded the case back to the district court for reconsideration.

In those jurisdictions where federal courts allow Rule 68 offers of judgment to be used in class actions, they can be an effective strategy for driving a wedge between plaintiffs and their counsel because once they decline the Rule 68 offer, they risk incurring responsibility for both attorneys’ fees and costs if the ultimate trial verdict is less than the offer of judgment. The United Mortgage case makes clear, however, that in order to make an effective Rule 68 offer of judgment, there are certain magic terms which Defendants must include in the offer.