When Rule 68 offers go wrong

I would say the most confusing rule in the Federal Rules of Civil Procedure is Rule 68. What makes the confusion even worse is that misunderstanding the rule can have huge financial consequences. Rule 68 says the defendant can serve an Offer of Judgment on the plaintiff for a sum of money that the plaintiff has 14 days to accept or reject. If the plaintiff rejects the offer and then goes to trial but recovers less money than the defendant had offered under Rule 68, then the plaintiff suffers a penalty. The rule does not make this clear, but the Supreme Court 25 years ago interpreted Rule 68 to mean the punishment requires the plaintiff to cover the defendant's costs, but not attorneys' fees, and that if the case involves fee shifting (such as an in a civil rights case), the plaintiff cannot recover any fees that accrued after the Rule 68 offer was served. It's all very complicated, and lawyers have to ensure that the Rule 68 offer is clear and unambiguous for these penalties to kick in. The offer in this case was not clear.

The case is Electra v. 59 Murray Enterprises, issued on February 9. Plaintiffs are eleven professional models and actresses whose images were used to promote what we call "Gentlemen's Clubs" in New York City. They brought eight causes of action. Plaintiffs says they did not consent to have their photos used for this purpose. As the case proceeded, the defendants served a Rule 68 offer on the plaintiffs. The offer read, that Defendants were offering "Plaintiffs collectively to take a judgment against Defendants in the amount of $82,500.00 . . . on each of the Causes of Action contained in the Complaint," inclusive of interest, attorneys fees, etc. Plaintiffs accepted the offer, claiming in their response that they were expecting $660,000.000 in the settlement checks.

You can imagine the confusion and rage among defendants' attorneys when they learned that plaintiffs had accepted the Rule 68 offer but were now demanding more than $600,000.00.  Its moments like that that cause lawyers to drink. "Where the hell do they get off demanding $660,000!" Or something like that. Plaintiffs said they $82,500 referred to each of the eight claims asserted in the lawsuit. Defendants probably responded that they never interpreted the offer to be interpreted that way. So the courts had to deal with this problem. The trial court rejected the plaintiffs' interpretation and said the were not entitled to the $660,000. The Court of Appeals (Pooler, Kearse and Calabresi) agrees and finds against the plaintiffs. 

The problem with the Rule 68 offer is that it was ambiguous. The Rule 68 process requires that the parties have a meeting of the minds, as the offer is would create a contract between the parties. Here is the ambiguity: while the Rule 68 offer said the plaintiffs "collectively" would take judgment in the amount of $82,500.00 . . . on each of the Causes of Action," the offer was unclear as to the amount of the settlement. The offer was "reasonably susceptible to more than one interpretation because the word 'collectively' contradicts the use of the word 'each.'" The Court concludes, "An offer that states a dollar amount to be specified in the judgment but does so using language that would permit the defendant to argue later that the offer was for a different amount has no Rule 68 validity."

The Court then adds another gloss to this case: that even if a Rule 68 contract had somehow been formed calling for a judgment in the amount of $660,000, the Court would find that defendants would have been able to avoid the contract on the basis that the offer had a unilateral mistake. Under settled contract law principles, "where a mistake of one part at the time of a contact was made as to a basic assumption on which he made the contract has a material effect  . . . that is adverse to him, and the other party had reason to know of the mistake, the contract is . . . voidable by him." That principle works to defendants' advantage because, during settlement negotiations that predated the Rule 68 offer, it was clear the parties were not going to settlement in the high six-figures, and defendants then told plaintiffs they were going to serve a Rule 68 offer in the amount they had previously offered in settlement negotiations, which was $82,500. So plaintiffs knew the Rule 68 offer couldn't have been for $660,000.