California Supreme Court: Plaintiffs Who Settle for Money are "Prevailing Parties" for Costs Purposes

Here's a quick post, mostly for litigators in employment law cases.  But clients should make sure that settlement agreements are drafted correctly when they review them.

The California Supreme Court once again interpreted California's costs statute, Civil Procedure Code section 1032.  The case happens to be an employment law lawsuit, but the facts do not really matter.

Section 1032 awards "costs" of suit, such as deposition transcripts, subpoena fees, filing fees, and the like to the "prevailing party" in litigation.

The "prevailing party" can mean "the party with a net monetary recovery, a defendant in whose favor a dismissal is entered, a defendant where neither plaintiff nor defendant obtains any relief, and a defendant as against those plaintiffs who do not recover any relief against that defendant."

Well, if the case settles before trial and the defendant pays the plaintiff money, does that mean that the plaintiff is prevailing party because the plaintiff is "the party with a net monetary recovery?"  Could be!  

But wait. Isn't defendant also the prevailing party because there's a "dismissal" in favor of defendant?  Probably so!  Can there be two prevailing parties then?   Who gets the costs?  Whatever will happen to us now?  

That's why there's a Supreme Court and here's what the Court said:

When a defendant pays money to a plaintiff in order to settle a case, the plaintiff obtains a net monetary recovery, and a dismissal pursuant to such a settlement is not a dismissal in [the defendant‘s] favor. (§ 1032(a)(4).) As emphasized below, this holding sets forth a default rule; settling parties are free to make their own arrangements regarding costs.

So, that means that when there's a settlement, it's very important for the parties to expressly include in the settlement agreement and/or the request for dismissal "each side will bear his/her/its/their own costs."  Unless the parties address the issue, the "default rule" will apply. The plaintiff can go into court and file for costs, which can mean more money on top of the settlement that the defendant paid

Sometimes legal mumbo-jumbo in settlement agreements matters and this is one of those times.

This case is  DeSaulles v. Community Hospital of the Monterey Peninsula and the opinion is here. 

U.S. Supreme Court: Rejected Settlement Offer Cannot "Moot" Plaintiff's Class Action Claim

Back in 2013, a 5-4 U.S. Supreme Court "assumed" in Genesis Healthcare v. Symczyk that an unaccepted "offer of judgment" could moot a plaintiff's class action, if the offer would have provided the plaintiff complete relief on her individual claim. We posted about that here.

The Court chose not to address the issue directly because of the way the case had been litigated.  As a result of the assumption, though, the court held that the plaintiff's decision to ignore the settlement offer took her out of the case, leaving the case without a proper named plaintiff.  Because the Court "assumed without deciding" the issue, it had no binding effect on lower courts.

Fast-forward to now, and the Court directly addressed the "assumed" issue above, and came out the other way.  This time, in Campbell-Ewald Company v. Gomez, the Court adopted the Genesis Healthcare dissent's position:  the unaccepted offer of compromise does not affect the plaintiff's right to continue litigation on behalf of the class. Let me explain.

Gomez was a recipient of a "spam" text message, for which he claimed he had not opted in. Campbell-Ewald Company, via a sub-contractor, sent the text message on behalf of the Navy. The Navy had hired Campbell to help with a recruiting campaign.

Gomez sued on behalf of a class of other recipients under a federal law not related to employment law. During the litigation, Campbell made an "offer of judgment" under Federal Rule of  Civil Procedure 68, under which Gomez would receive full payment for the text messages he received, including "treble damages." The offer included a proposed injunction, but no attorney's fees, and no relief for the other potential class members. (The statute does not provide for attorney's fees. The court had not yet granted class certification.)

Gomez let the offer lapse, resulting in a rejection. Campbell then asked the district court to dismiss the case. Campbell argued that its expired offer rendered Gomez's claim "moot" because he could not hope to recover more than Campbell had offered.  Campbell also argued that, as a federal contractor, it was immune from suit.  I'm focusing on the mootness argument here. The district court and 9th circuit rejected both arguments.

So, the Supreme Court had to decide if the unaccepted offer resulted in the case being "moot." Mootness is a doctrine that federal courts use to ensure that they are deciding "live" controversies, required by the Constitution.   A case may be moot if the plaintiff no longer has any personal stake in the litigation.

The 5-4 majority, led by Justice Ginsburg, decided that Campbell's offer did not mean Gomez had no personal stake in the litigation:

Having rejected Campbell’s settlement bid, and given Campbell’s continuing denial of liability, Gomez gained no entitlement to the relief Campbell previously offered. See Eli- ason v. Henshaw, 4 Wheat. 225, 228 (1819) (“It is an undeniable principle of the law of contracts, that an offer of a bargain by one person to another, imposes no obligation upon the former, until it is accepted by the latter . . . .”). In short, with no settlement offer still operative, the par- ties remained adverse; both retained the same stake in the litigation they had at the outset.

 * * *

Because Gomez’s individual claim was not made moot by the expired settlement offer, that claim would retain vitality during the time involved in determining whether the case could proceed on behalf of a class. While a class lacks independent status until certified, see Sosna v. Iowa, 419 U. S. 393, 399 (1975), a would-be class representative with a live claim of her own must be accorded a fair opportunity to show that certification is warranted.

The majority of course is correct that once expired, the offer could not be accepted. But the majority's decision weakened the point of Rule 68.  Rule 68 is supposed to end litigation early, and penalize parties who continue with litigation when they are offered a viable settlement.  

Justice Thomas concurred in the judgment, adding a sixth vote in favor of Gomez.  Justice Thomas, however, did not agree with the majority opinion. Rather, he focused on the fact that Campbell did not actually "tender" the settlement funds, and denied liability.  Historically, Justice Thomas noted, Campbell's actions were not enough to end the case. Therefore, there was no basis to hold the case was moot.

Chief Justice Roberts, writing for himself, and Justices Scalia and Alito dissented. They opined that Campbell offered Gomez what he wanted the district court to award him under federal law:

When a plaintiff files suit seeking redress for an alleged injury, and the defendant agrees to fully redress that injury, there is no longer a case or controversy for purposes of Article III. After all, if the defendant is willing to remedy the plaintiff’s injury without forcing him to litigate, the plaintiff cannot demonstrate an injury in need of redress by the court, and the defendant’s interests are not adverse to the plaintiff.

Seizing on language in the majority opinion, the Chief Justice suggested that there is a way for defendants to moot future plaintiffs claims by actually paying the offered sums:

The good news is that this case is limited to its facts. The majority holds that an offer of complete relief is insufficient to moot a case. The majority does not say that payment of complete relief leads to the same result. For aught that appears, the majority’s analysis may have come out differently if Campbell had deposited the offered funds with the District Court. See ante, at 11–12. This Court leaves that question for another day—assuming there are other plaintiffs out there who, like Gomez, won’t take “yes” for an answer.

 The majority did not actually decide this question. Therefore, it remains to be seen whether five justices will hold that paying an offer into Court will moot a plaintiff's case in a class action.  Stay tuned. 

This case is Campbell-Ewald Company v. Gomez and the opinion is here. 

California Court of Appeal SLAPPs Claim for Breach of Settlement Agreement

Perhaps you have read about the EEOC's recent lawsuits attacking severance agreements as allegedly containing illegal provisions, because they impede the EEOC's work. The EEOC is challenging everything from "cooperation clauses," to general releases that broadly preclude the releasing employee from bringing future claims.  You know, in exchange for money.   Here's an example of what the EEOC is doing.  If the EEOC wins,  and they don't win all of these efforts to radically change the law via agency internal policy and litigation rather than legislation (Hi, credit check lawsuits), many standard releases will have to be modified.

Yes, the above discussion is related to why I asked you here today.  Somewhat. The California Court of Appeal just found that an employer's lawsuit against a union for breach of settlement agreement should be stricken because the lawsuit was a Strategic Lawsuit Against Public Participation.   The court's ruling in part is based on a conclusion that the parties' non-cooperation agreement was not enforceable.

The United Farmworkers Union settled one of two pending unfair labor practice charges with a company called D'Arrigo Bros. of California.

On February 18, 2011, UFW's attorney sent D'Arrigo's counsel a letter purporting to "memorialize the UFW's agreement." In the letter UFW acknowledged that it had obtained dismissal of the second ULP, and it promised not to refile this charge "and/or the substantive allegations at a later date." . . . UFW therefore agrees that said Objection Five will in fact be dismissed in its entirety or that, in the event the Executive Secretary for any reason declines to dismiss all or any of it prior to a hearing, UFW will timely act to withdraw its declarations and argument regarding Objection Five and will not present any evidence thereon in the objection process; and will continue to advise (in writing, on the record) the Executive Secretary, General Counsel, and/or assigned administrative law judge that UFW wants Objection Five entirely dismissed; and that UFW will not pursue, nor assist [in] pursuing, Objection Five in any fashion whatsoever."

Then, during proceedings on the remaining unfair labor practice charge, D'Arrigo believed the UFW breached the above agreement and cooperated with the Agrigultural Labor Relations Board's general counsel.

D'Arrigo sued the UFW for breaching the settlement agreement.  The UFW filed a motion to strike the D'Arrigo lawsuit under California's anti-SLAPP law.  The UFW's basis for the motion was that D'Arrigo's claim was really a lawsuit designed to retaliate against UFW for cooperating with the ALRB's proceedings in the matter that was not settled.

The Court of Appeal held that UFW should win the anti-SLAPP motion, resulting in dismissal of D'Arrigo's lawsuit.    Of note, the Court held that D'Arrigo's basis for asserting breach of contract - that the UFW violated an agreement not to cooperate with the ALRB - was unenforceable:

we agree with UFW—and with the General Counsel as amicus curiae-- that any interpretation of the stipulated language to prohibit UFW from cooperating with [the general counsel] in his investigation and prosecution of the first ULP charge must be rejected as contrary to the public policy inherent in the ALRA.

*  *  * 

Moreover, the [employer's] ability to guarantee the silence of witnesses by means of a legally enforceable private agreement does not comport with either the spirit or the stated purpose of the ALRA." 

That purpose is clearly stated in Labor Code section 1140.2: "[T]o encourage and protect the right of agricultural employees to full freedom of association, self-organization, and designation of representatives of their own choosing, to negotiate the terms and conditions of their employment, and to be free from the interference, restraint, or coercion of employers . . . ." This public interest is not advanced if private agreements between employer and employee are allowed to obstruct the General Counsel's prosecution of complaints. (Cf. E.E.O.C. v. Astra U.S.A., Inc. (1st Cir. 1996) 94 F.3d 738, 744-745 [settlement provision prohibiting employee from assisting EEOC in its investigation of sexual harassment charges against employer is void as against public policy].)

So, another trend in employment law appears to be increased scrutiny of releases.  Employers should ensure they know what they are bargaining for when they settle claims.  Absolute confidentiality is not realistic. Neither is a promise never to participate or cooperate in a future proceeding.  Employers should not pay settlements or separation pay expecting to fully achieve these goals.   That said, there are ways to draft agreements to comply with the limitations.   At least there used to be. We'll have to see what happens in the EEOC's litigation.

This case is D'Arrigo Bros. of California v. United Farmworkers of Am.  and the opinion is here.

U.S. Supreme Court Holds Settlement Offer Thwarted FLSA Collective Action

Laura Symczyk, a nurse, challenged her employer's policy of "auto-deducting" a half hour for meal breaks, claiming that she and others "similarly situated" worked "off the clock."  She brought a "collective action" under the federal Fair Labor Standards Act, which is essentially an "opt-in" class action. That is, the other employees are given a chance to "opt in" to the action. In a class action, once certified, the unnamed class members are given a chance to "opt out" or they are bound by the judgment or settlement.

The courts never reached the auto-deduct issue.  The employer answered the complaint and simultaneously made an "offer of judgment" under Federal Rule of Civil Procedure 68. The offer was for $7500 plus attorneys fees and costs as determined by the court.  (Because it was the very beginning of the case, the employer must have figured the attorney's fees would be low).

The plaintiff ignored the Rule 68 offer.  The employer then brought a motion to dismiss the case, arguing that the Rule 68 offer completely compensated the plaintiff for her claims, and rendered it "moot" because she no longer had a stake in the case.  Therefore, she had no basis for leading the collective action against the employer.

The lower courts agreed that the settlement offer would have given the plaintiff complete relief. The district court dismissed the claim, but the Third Circuit Court of Appeals held the class action could proceed because the employer was trying to "pick off" the name plaintiff.

The Supreme Court assumed without deciding that an unaccepted Rule 68 offer would "moot" a claim if it offered complete relief. The Court did so because the plaintiff conceded that point in the courts below.

Based on that assumption and the plaintiff's concession, the Court decided that the claim could not proceed:  Justice Thomas, writing for 5 justices, wrote:

In the absence of any claimant’s opting in, respondent’s suit became moot when her individual claim became moot, because she lacked any personal interest in representing others in this action. While the FLSA authorizes an aggrieved employee to bring an action on behalf ofhimself and “other employees similarly situated,” 29 U. S. C. §216(b), the mere presence of collective-action allegations in the complaint cannot save the suit frommootness once the individual claim is satisfied
***
[W]e conclude that respondent has no personal interest inrepresenting putative, unnamed claimants, nor any other continuing interest that would preserve her suit from mootness. Respondent’s suit was, therefore, appropriatelydismissed for lack of subject-matter jurisdiction.

Justice Kagan wrote for 4 dissenters.  She in essence argues that an unaccepted offer does not moot the case, which the majority did not decide because the plaintiff conceded the point and the lower courts so held.  Justice Kagan in essence "yelled" at the lower courts that this approach was "wrong, wrong, and wrong again."  (We'll see if those who criticize Justice Scalia when he gets sassy objects to her rather caustic opinion, which I enjoyed reading a lot by the way).

To me, the plaintiff should be able to reject an offer and continue litigating, hoping to do better than the offer of judgment.  The issue here is that the plaintiff agreed she could not have obtained a more favorable result on her individual claim.  Plaintiffs in future cases may not make that concession which, as Justice Kagan predicts, will render this case inapplicable to most future claims.

Anyway, it remains to be seen how this case will affect future FLSA collective actions.  California law regarding offers to compromise is governed by Code of Civil Procedure Section 998, so state-law cases are not directly affected.  But we will have to stay tuned to see whether California courts follow the federal approach.

The opinion is Genesis Healthcare Corp. v. Symczyk and you can read it (and the dissent) here.

Court of Appeal: Employee Repudiated Settlement Agreement

So, Thomas Ferguson was a bad policeman, having been picked up in a sting, for soliciting a prostitute.  Facing discharge, he made a deal with his employer, Cathedral City, and settled for a suspension. But part of the settlement depended on the resolution of criminal charges pending, i.e., if he was found guilty, he would resign.  Ferguson's lawyer wrote the city, complaining they were trying to influence the DA in Ferguson's criminal case. He went too far, though, and said the settlement agreement was void.  No settlement agreement, no suspension.  The city fired Ferguson, even though his NEW lawyer tried to take back the repudiation of the settlement.

No dice. Upholding the discharge, the Court of Appeal addressed repudiation of a contract and a settlement agreement in particular:

once Ferguson committed his anticipatory breach on June 23, 2007, the City could then elect its remedies, which in this instance meant the reinstatement of Ferguson‟s discharge. The City was no longer bound by the separation agreement and was excused from further performance: “The real operation of a declaration of intention not to be bound appears to give the promisee the right . . . to act upon the declaration and treat it as a final assertion by the promisor that he is no longer bound by the contract, and as a wrongful renunciation of the contractual relation into which he has entered. If [the promisee] elects to pursue the latter course, it becomes a breach of contract, excusing performanceon his part and giving him an immediate right to recover upon it as such. Upon such election the rights of the parties are to be regarded as then culminating, and the contractual relation ceases to exist, . . . [Emphasis added.]”

In English, the employer has two options: treat the agreement as canceled, relieving the employer of obligations under the settlement agreement (such as a neutral reference, COBRA, unpaid settlement sums), or sue for breach of the agreement to recover the settlement proceeds and any damages occasioned by the breach.

Of note, the court held also that Ferguson's attorney had the power to repudiate Ferguson's agreement.

Although a public sector case, the discussion re breach of settlement agreements is generally applicable.

The case is Ferguson v. City of Cathedral City and the opinion is here.

Court of Appeal: Breach of Contract Against Employer for Breach of Settlement Confidentiality

Sanchez was a county labor relations manager for San Bernadino County. She became romantically involved with a union official, Erwin. Their respective employers negotiated labor relations memoranda of understanding. At some point, their relationship became known and unacceptable to the county's brass. The County thought a romance between labor negotiators on opposite sides of the table might constitute a conflict of interest. So sensitive! For her part, Sanchez denied the conflict of interest, but admitted the appearance of impropriety. So, the county gave Sanchez the chance to resign with a separation agreement.

The separation agreement contained a strict confidentiality requirement. But immediately after Sanchez resigned, the newspapers picked up on the story and quoted county officials. She sued the county and individual defendants for a variety of claims, including breach of contract. The county successfully "SLAPPED" most of the causes of action. The trial court eventually granted summary judgment on the rest of them. The court dismissed the breach of contract claim because the confidentiality agreement was contrary to the county's legal duty to disclose such facts to the public.

On appeal, the court of appeal reinstated the contract claim. The county's primary argument was that it was bound to disclose Sanchez's affair. After analyzing the various legal theories (including the Public Records Act and the First Amendment), the court said there was a triable issue of fact on the contract claim because the county did not have to disclose the affair to the papers. Had the settlement agreement been disclosed under the Public Records Act, the court might have come down the other way.

The court rejected the county's argument that Sanchez waived the confidentiality agreement by speaking with her parents and showing the agreement to Erwin. The court found it significant that Sanchez did so only after learning of the county's breach.

Regarding the issue of damages, she presented significant evidence it was harder to find a job after the disclosure of the affair to the newspapers. Therefore, the court rejected the county's contention that there were no damages available for the breach of confidentiality.

Typically, employers do not advertise their settlements with employees. So, this case may be an anomaly, particularly in the private sector. But to the extent employers needed motivation to maintain confidentiality, the prospect of a breach of contract claim should provide it. Employers should ensure they honor confidentiality provisions in separation agreements.

The case is Sanchez v. County of San Bernardino and the opinion is here.

Court of Appeal Upholds Release of Overtime Claims

Labor Code section 206.5 invalidates releases of wage claims. But when there is a bona fide dispute over whether wages are due, releases are valid. That's what the court of appeal held in Chindarah v. Pick Up Stix.

This was an overtime class action that went to mediation but did not settle. The employer did an "end run" and settled out about 200 employees with individual releases. Employees challenged the validity of the releases under Labor Code section 206.5. But the court of appeal, agreeing with the trial court, held:

The releases here settled a dispute over whether Stix had violated wage and hour laws in the past; they did not purport to exonerate it from future violations. Neither did the releases condition the payment of wages concededly due on their executions. The trial court correctly found the releases barred the Chindarah plaintiffs from proceeding with the lawsuit against Stix.

If this case is not taken up by the Supreme Court for review, it will clarify a longstanding unresolved issue in California law regarding when settlements of wage claims will be enforced.
Employers will be able to settle claims involving uncertain liability, such as for certain meal period claims, or misclassification issues when the factual issues are in dispute.

Read the opinion here.

Offers of Compromise

An offer of compromise under section 998 of the Code of Civil Procedure is a powerful tool to end litigation. If the other side does not accept the offer, it may result in financial penalties unless the other side's recovery is more than the section 998 offer. So, if you offer $10,000 under section 998 to settle a case, for example, the plaintiff has to do better than $10,000 at trial or the post-offer costs must be paid to the defendant.
But section 998 offers are tricky. The Court of Appeal recently held that a section 998 offer may not condition settlement on a "general release" of "all claims" (claims over and above what is included in the lawsuit that is the subject of the section 998 offer). The case is Chen v. Interinsurance Exchange and the opinion is here.

DGV