Business Court rejects sanctions over defendant's $1 Rule 68 offer |

Michael Dayton, Editor//July 30, 2007//

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Offering a measly buck may not do much to encourage a settlement, but there is nothing sanctionable about that defense tactic, a Business Court judge has ruled.
At issue in Burgess v. Am. Express Co. (North Carolina Lawyers Weekly No. 07-15-0870, 12 pages) is civil procedure Rule 68, which allows a defendant to make a formal settlement offer before trial.
A plaintiff who rejects the Rule 68 offer — then winds up with a final judgment for less than that amount — may be required to pay any costs that the defendant incurs after the offer date.
While Rule 68 is intended to promote settlements, it’s sometimes used as a tool, with defendants making a lowball offer to set the rule’s cost-shifting provisions in motion.
That was apparently the case in Burgess.
“In making that $1 offer of judgment, our goal was ultimately to receive a defense verdict,” said Charlotte attorney John E. Spainhour, who represented the defendant. “And the offer was specifically made to trigger the teeth in the Rule 68 offer of judgment.”
The pro se plaintiff, who sued multiple defendants over “pop-up” ads on his computer, cried foul. He said the offer had been made in bad faith and moved for Rule 11 sanctions.
Judge Albert Diaz acknowledged the settlement proposal did little to advance the objectives of Rule 68.
“[I]t is difficult to see how a $1 offer of judgment tendered at the very inception of the litigation promotes the rule’s purpose, given that it has ‘little if any chance of seriously opening negotiations or of settling a case,'” Diaz wrote.
Even so, the plaintiff’s request for sanctions was meritless, the court said in a first-impression ruling.
“[T]hat an offer of judgment may not be bona fide — in the sense that it does not promote the purpose of Rule 68 — does not mean that the offeror should be subject to Rule 11 sanctions,” Judge Diaz wrote. “After all, [the defendant’s] offer of judgment does satisfy the literal requirement of Rule 68(a), even if the amount offered is only $1.”
In an ironic twist, the plaintiff was himself penalized for requesting sanctions over the lawsuit’s transfer to Business Court.
Spainhour said the ruling affirms his defense strategy.
“A Rule 68 offer of judgment is specifically authorized, regardless if it’s only for $1,” Spainhour told Lawyers Weekly. “To my knowledge, no North Carolina court has held that any particular number in a settlement offer or offer of judgment is in bad faith.”
Rocky Mount defense attorney Nick Ellis agreed.
“There’s no requirement at all that what you offer has to reflect anything,” he told Lawyers Weekly. “You can make any offer you want. It doesn’t have to be made in good faith or reflect your evaluation of the case. If you want to make an offer of a certain amount to the plaintiff, then you do it.”
Ellis said it’s not uncommon to see nominal Rule 68 offers.
“But it doesn’t accomplish much if you’re pretty certain of a defense victory,” he said. “You have the ability to recover costs where the jury says the defendant is not negligent, just like you do when you get a final judgment that is higher than the offer of judgment. So making an offer of $1 doesn’t really do anything.”

Background

Burgess arose last February when Charles Burgess sued 20 defendants, including American Express. He alleged several companies had placed illegal software on his computer, allowing unwanted and damaging “pop-up” ads.
Shortly after the suit was filed, American Express asked that the action be designated a mandatory complex business case pursuant to G.S. Sect. 7A-45. That statute allows parties to steer specific actions, including those involving Internet advertising and electronic commerce, to the state’s Business Court.
American Express also filed an offer of judgment pursuant to Rule 68(a). The offer amount: $1 for “all damages, attorneys’ fees taxable as costs, and the remaining costs accrued at the time the offer is filed.”
The state Supreme Court approved the Sect. 7A-45 designation, and the case was assigned to Judge Diaz on March 26.
Burgess formally opposed the move to Business Court that same day and filed for Rule 11 sanctions. He said American Express had filed its offer of judgment and notice of designation “frivolously and in bad faith,” according to Diaz’s order.
In a filing marked by what the court termed “hyperbole,” Burgess alleged:

“AMEX and its counsel filed the $1 offer of judgment ‘solely for purposes of extorting the plaintiff into a ridiculous settlement.'”

“[T]he motivation behind the removal to Business Court is to get the case in a court in Charlotte where counsel for [AMEX] resides and thereby prejudice the plaintiff, who will then have to travel to a location outside his home.”

“[C]ounsel for [AMEX] is trying to extort a settlement from the plaintiff in a perverted effort to impress his wealthy client and fatten his own pocket by using devious and illegal means.”
American Express requested that Burgess withdraw his Rule 11 motions. When he refused, Spainhour filed a competing Rule 11 motion.

Ruling

The court rejected Burgess’ request for sanctions over the $1 offer.
“Rule 68 makes no attempt to define the contours of a valid offer of judgment, other than to say that it must be for money, property, or in the case of injunctive or other relief, ‘to the effect specified in [the] offer,'” Judge Diaz wrote.
The token settlement amount appeared to be a tactical maneuver designed to trigger the cost-shifting provisions of Rule 68 in the event of a defense verdict, Judge Diaz said.
But was the defendant’s tactic subject to sanctions?
“I conclude that it is not,” Judge Diaz said.
There is no North Carolina case law on what constitutes a proper offer of judgment, but courts in other jurisdictions have found Rule 68 has an implicit “good faith” requirement. Only bona fide offers of judgment are effective, those courts have held.

In the 2004 opinion of Warr v. Williamson, 195 S.W.3d 903, the Arkansas Supreme Court ruled a $1 offer had not been made in good faith. “It is difficult to imagine any circumstances under which an offer of one dollar would compel a plaintiff to seriously consider settling a case,” the Warr court said.

A 2003 unpublished Michigan opinion, Century 21 Today, Inc. v. Tarrant, affirmed a trial judge who declined to award costs under Rule 68 where a $1 offer was made. The judge found the offer was “de minimus and made with the intent to tack attorney fees to the costs in the event of success and not with the intent to actually settle,” according to the Tarrant ruling.
Neither of those cases addressed sanctions, and Judge Diaz declined to impose them.
“What is clear is that the law in North Carolina regarding Rule 68 offers of judgment is far from settled,” Diaz said. “As a result, I ‘cannot say that [AMEX’s offer of judgment] was made for an improper purpose or that a reasonable inquiry into the issue of what offer is required to trigger an award of costs under Rule 68 at the time the offer was made would have shown that it was implausible.'”

Other sanctions rulings

Judge Diaz found “absolutely no merit” in Burgess’ request for sanctions based on the case’s transfer to Business Court.
Business Court Judge Ben Tennille overruled Burgess’ objection in April, finding the Internet advertising issues fell squarely within his court’s reach.
Ruling on the sanctions motions by American Express, Judge Diaz said he would not penalize Burgess for challenging the offer of judgment.
“[B]ecause I do not believe that a $1 offer of judgment promotes the purpose of Rule 68, I do not fault Burgess for seeking sanctions on that basis,” he said.
But Judge Diaz said sanctions were appropriate on the removal issue.
“In his motion, Burgess argues that AMEX’s ‘motivation behind the removal to Business Court is to get the case in a court in Charlotte where counsel for American Express resides and thereby prejudice the plaintiff who will then have to travel to a location outside his home.’
“[H]ad Burgess made any reasonable inquiry into the matter before filing his motion, he would have discovered that the court’s policy is to hear all pretrial and trial proceedings in a mandatory complex business case in the county where the case originates unless the parties agree otherwise,” Judge Diaz said.
The purpose behind that portion of Burgess’ Rule 11 filing “was to harass AMEX, unnecessarily delay these proceedings, and needlessly increase the cost of litigation,” Judge Diaz found.
He directed American Express to file an affidavit of its reasonable fees and expenses “incurred in responding to that part of Burgess’s motion related to the notice of designation.”
— Questions or comments may be directed to [email protected].