Spooner v. EEN, Inc., No. 10-2393 (1st Cir. July 5, 2011) [link]
On Tuesday the First Circuit Court of Appeals issued a useful reminder to those negotiating settlements of lawsuits in federal court. If a plaintiff rejects an offer of judgment pursuant to Rule 68 of the Rules of Civil Procedure, and does not achieve a better result at trial, the plaintiff cannot expect to recover any attorneys' fees incurred after the rejection. However, if the plaintiff rejects "a garden-variety settlement offer," the plaintiff's entitlement to fees is not cut off.
In his complaint, Mr. Spooner alleged that the defendants infringed his copyright in a musical composition by using the music without authorization in television and Internet advertisements. Apparently, the litigation was hotly contested ("What followed was the litigation equivalent of hand-to-hand combat."). The defendants made a Rule 68 offer of judgment of $10,000, which was rejected. The defendants later made a $20,000 settlement offer, but not under Rule 68, which was also rejected. After trial, Mr. Spooner prevailed. The court awarded him injunctive relief, $40,000 in statutory damages, and $98,745.80 in attorneys fees as the "prevailing party" pursuant to Section 505 of the Copyright Act. (which authorizes a district court "in its discretion" to "award a reasonable attorney's fee to the prevailing party" in a copyright action.).
On appeal, the defendants argued that the fee award was so excessive that the district court should not have awarded any fees at all, and that, even if an award was warranted, the court should have limited it to work performed prior to the date that the second settlement offer was rejected.
The First Circuit rejected both arguments. With respect to the attorneys fees incurred after the rejection of the settlement offer, the First Circuit explained that there is a significant difference between the conseqences of rejecting a Rule 68 offer of judgment and the consequences of rejecting a 'garden variety" settlement offer. Rule 68 provides a framework that allows a defendant to make a firm, non-negotiable offer of judgment, which the plaintiff can reject or accept. If the plaintiff rejects a Rule 68 offer, and and does not improve upon the offer at trial, then the plaintiff is obligated to pay the defense costs and attorneys' fees incurred after the rejection. But, the Court pointed out, a settlement offer made without resort to Rule 68 does not accrue the same benefits, and the rejection of a settlement offer does not work to cut off the plaintiff's entitlement of fees.
The First Circuit also found the award of attorneys fees was not excessive.
As a result, defendants proposing settlement offers in copyright cases must be careful to consider Rule 68 and to determine whether or not to make the offer of judgment pursuant to Rule 68. If the settlement offer is made without the protection of Rule 68, then the offer does not act to cut off the plaintiff's right to request attorney's fees incurred after the rejection under the Copyright Act, even if the plaintiff does not improve his position at trial.