Legal View: When a settlement isn't settled

 Patricia Stone, The Daily Record Newswire

When a settlement is reached between the parties, there often remains much in the way of details to iron out.

The language of the release is usually the primary bone of contention between the two [or more] sides, but other issues can be raised, as well. Namely, parties often have attempted to claim “prevailing party” status, thus entitling them to costs, after a settlement is reached.

Rule 54 of the Federal Rules of Civil Procedure allows a court to award costs — other than attorneys’ fees — to the “prevailing party” in an action. Whether a settling party is entitled to costs hinges almost entirely on the definition of “prevailing party.”

The logic behind making a claim that a settling plaintiff is “prevailing party” is obvious: a settlement usually indicates that some amount of compensation has been paid by the defendant, thus confirming the validity or the lawsuit’s claims. Of course, we all know that cases also settle for nuisance value, rather than expending significant resources on what is otherwise a frivolous claim.

The issue of what constitutes a “prevailing party” has been discussed previously by the U.S. Supreme Court in Buckhannon Bd. & Care Home Inc. v. W. Virginia Dep’t of Health & Human Res., 532 U.S. 598 (2001). In Buckhannon, the high court held that attorneys’ fees under Rule 54 were appropriate in two situations: (1) when there was a judgment on the merits and (2) when there was a “settlement agreement enforced through a consent decree” i.e. when there “is a court-ordered ‘change in the legal relationship between the plaintiff and the defendant.’” Buckhannon, 532 U.S. 598 (quoting Texas State Teachers Assn. v. Garland Independent School Dist., 489 U.S. 782, 792 (1989)).

The plain language of Rule 54 defines judgment as: “a decree and any order from which an appeal lies.” However, other courts have provided further clarification of the meaning of “a judgment on the merits.” “A party prevails for purposes of Rule 54(d) when a final judgment awards it substantial relief.” Smart v. Local 702 Int’l Bhd. of Elec. Workers, 573 F.3d 523, 525 (7th Cir. 2009); see also d’Hedonwille v. Pioneer Hotel Co., 522 F.2d 886 (9th Cir. 1977).

The latter component of the Buckhannon definition typically is the portion that plaintiffs use to support a contention that they are entitled to costs even when a voluntary settlement was entered into by the parties. Specifically, courts have, at times, provided general support to the contention that prevailing party costs are awarded even when a settlement is entered. See e.g. Dillard v. City of Foley, 995 F.Supp. 1358 (D.C. Ala. 1998).

The court in Buckhannon, however, specifically stated that “[p]rivate settlements do not [typically] entail the judicial approval and oversight involved in consent decrees” 532 U.S. 598, n7. As such, only in the rare cases where a settlement also requires judicial approval have plaintiffs succeeded in claiming prevailing party status.

Ultimately, the case law in federal courts is relatively clear that private, voluntary settlements do not confer prevailing party status so as to allow the recovery of costs.

Such case law, however, is not exhaustive and a judge could be persuaded to award costs to a party where the court finds there to be a court-ordered change in the legal relationship of the parties. The definition of such “change” is absent in the case law. As such, future case law will undoubtedly make this issue clearer for parties and courts alike.

In the meantime, however, it would be wise for parties to agree at the time of settlement, in writing, that each party is to bear their own costs. Otherwise, a settled matter may not be settled, after all.