May 24, 2007

Savvy businesspeople are no strangers to the concept of risk assessment. More often than not, that process is a collaborative exercise involving a coordinated effort on the part of key stakeholders or members of the management team. Companies employ predictive matrices and informed assumptions with one goal in mind: to minimize known risks and maximize positive opportunities. This month, we examine the Rule 68 offer of judgment, an underutilized strategic tool that is available to businesses as a means of managing litigation risk.

An Opportunity for the Defendant to Take the Offense

Rule 68 of the Federal Rules of Civil Procedure is a potentially powerful tool for a corporate defendant in a suit that is filed in federal court. Currently, there is no equivalent rule in Illinois, which is one of only five state jurisdictions that do not have an offer of judgment rule.

Although the analysis that goes into the crafting of a successful offer of judgment is often subtle and complicated, the mechanics of the rule itself are relatively straightforward. The process starts with a written offer in which the defendant proposes a voluntary judgment in a specified amount. If the plaintiff declines to accept the offer within 10 days and subsequently obtains a judgment in a lesser amount, the plaintiff is barred from recovering its own costs and must pay all costs incurred by the defendant after the date of the original offer of judgment. Additionally, in those instances where the plaintiff might otherwise be entitled to claim attorney's fees as the "prevailing party," the offer of judgment will arm the defendant with a strong argument against any shifting of fees.

Despite the obvious advantages, some defendants are reluctant to pursue the potential benefits associated with a carefully calculated offer of judgment. Why? If accepted, it will result in a judgment in favor of the plaintiff. Like any other judgment, it will then be a matter of public record and could cast the defendant in an negative light in the marketplace. On the other hand, if negative publicity or public perception are not significant concerns, an offer of judgment provides the defendant an opportunity to challenge the plaintiff early in the development of a case, which could shake the plaintiff's confidence in the viability or value of the claim.

Collaboration Between Counsel and Client Is Key

Even though the basic concept of an offer of judgment is fairly simple, there are many nuances that must be taken into account before determining whether this tactic is appropriate, and if so, what the terms of an offer should be. From the lawyer's perspective, there are concerns involving collateral estoppel, as well as how to appropriately value a plaintiff's request for injunctive or other non-monetary relief. One of several important issues from the client's perspective is whether the defendant can include a disclaimer of liability with the offer of judgment without compromising the offer's effectiveness. These and many other considerations require a thorough analysis by an attorney who is well versed in the subtleties of Rule 68.

Footnote from the Editor: Possible Illinois State Court Rule

The Chicago Bar Association's Commercial Litigation Committee recently created a special subcommittee—comprised of sitting judges and prominent legal practitioners—to draft an offer of judgment rule for the Illinois state court. As of the writing of this article, that proposed rule awaits approval by the CBA Board of Managers, as a preliminary step to consideration by the Illinois Supreme Court Rules Committee. Updates regarding the status of the draft rule will be provided in future issues of the Litigation & Counseling Alert.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.