Introduction to Federal Rule of Civil Procedure 68 “Offer of Judgment”

(Updated February 26, 2024)

Rule 68 of the Federal Rules of Civil Procedure is somewhat of a hybrid between a settlement and a decision on the merits. The Rule provides that if a timely pretrial offer of settlement (made no later than 14 days before trial) is made and accepted, a judgment is entered against the defendant according to the terms of the offer. If the offer is not accepted and the judgment finally obtained by the offeree is not more “favorable” than the offer, the offeree must pay the costs incurred after the making of the offer. The plain purpose of Rule 68 is to encourage settlement and avoid litigation. As noted by the United States Supreme Court in Marek v. Chesney, 473 U.S. 1 (1985), “[t]he rule prompts both parties to a suit to evaluate the risks and costs of litigation and to balance them against the likelihood of success upon trial on the merits.” In other words, if the defendant believes the plaintiff is over-optimistic about its prospective recovery, it may call the plaintiff’s bluff.  For refernce, the text of the rule is reproduced at the end of this post.  

The Supreme Court has interpreted Rule 68, and particularly use of the term “costs” therein as all costs properly awarded under the relevant substantive statute or other authority, which means all costs properly awardable in an action are to be considered within the scope of Rule 68 costs. 

Yet, the circuit courts are divided on the specific application of the cost-shifting provision of Rule 68, particularly in the context of substantive statutes that only award attorneys’ fees to a “prevailing party.”  The following discusses application of the rule to common intellectual property litigation cases, which all involve different substantive statutes or governing law – copyrights, patents, trademarks, and trade secrets.  

Copyright Cases and Rule 68

The Supreme Court has made clear that when Congress expressly includes attorneys’ fees as part of the costs recoverable under a statute, those fees are subject to the cost-shifting provision of Rule 68. But what happens when the underlying or substantive statute—like the Copyright Act—also includes “prevailing party” language? For example, in copyright infringement cases, 17 U.S.C. § 505 permits the court to award attorneys’ fees to the “prevailing party” as part of the “costs.” So what if the plaintiff technically “prevails” on its copyright claim by proving the defendant’s liability and obtains a judgment for $10,000, but that judgment is less than the defendant’s pretrial Rule 68 offer of $25,000? 

The various circuits seem to agree that a plaintiff in this situation could not recover its post-offer costs or fees, because it did not obtain a judgment more favorable than the Rule 68 offer—but what about the defendant? The circuit courts also appear to agree that a defendant may recover its post-offer costs under such circumstances, but what about its attorneys’ fees? Does Rule 68’s cost-shifting provision allow the defendant to recover its post-offer attorneys’ fees, as well as costs, for receiving a more favorable judgment than its offer, even though it technically is not the “prevailing party?” The answer to this question depends on where a case lies. 

As noted above, the circuit courts are split on the issue. The majority view—held by the Seventh, Ninth, and First Circuits—is that a defendant in this situation may recover his post-offer costs, but may not recover post-offer attorneys’ fees, as he is not the “prevailing party” under the Copyright Act. These circuits rely on the Supreme Court opinion in Marek, and in particular the Marek Court’s interpretation of the term “costs” to mean all costs properly awardable under the relevant substantive statute or other authority.” The reasoning behind this position is that costs are recoverable only if they are “properly awardable” under the relevant statute. And since costs are properly awardable only to the “prevailing party” under the Copyright Act, an accused infringer who receives anything less than a defense verdict is not entitled to fees under Rule 68.

The Eleventh Circuit disagrees. According to the Eleventh Circuit, the cost-shifting provision of Rule 68 is mandatory such that if the judgment obtained is less than the Rule 68 offer, the offeree must pay the costs incurred post-offer; the district court does not have the discretion to rule otherwise. Moreover, “costs” under Rule 68 includes attorneys’ fees when the underlying statute so prescribes. The reasoning in the Eleventh Circuit, then, is that because the Copyright Act has a provision for including attorneys’ fees with costs, and because Rule 68 is mandatory, if a plaintiff fails to obtain a judgment more favorable than the Rule 68 offer, the defendant must recover his post-offer attorneys’ fees regardless of whether he is—or is not—the prevailing party. 

In the Fifth Circuit, the answer remains undecided. The most recent Fifth Circuit opinion on this issue was handed down in 2020.  In Energy Intelligence Group, Inc. v. Kayne Anderson Capitol Advisors, LP, EIG brought claims against Kayne Anderson under the Copyright Act and DMCA. Prior to trial, Kayne Anderson made a Rule 68 offer of $5 Million, which EIG refused. EIG received a verdict in its favor at trial but was awarded less than Kayne Anderson’s $5 Million offer. The parties agreed that EIG could not recover its costs or attorneys’ fees incurred after receipt of the Rule 68 offer, but could not agree on whether Rule 68’s cost-shifting provision would allow Kayne Anderson to recover its own post-offer attorneys’ fees. 

In light of the Supreme Court’s opinion in Marek, the Fifth Circuit noted that Kayne Anderson’s ability to recover its own post-offer attorneys’ fees under Rule 68 depended upon whether such fees were “properly awardable” under the Copyright Act or DMCA. The Court also went on to note the split between the circuits as well as the limitations of the Marek opinion, which was specific to a prevailing plaintiff  and held that such a plaintiff “may be forced to bear [its] own post-offer attorneys’ fees” under Rule 68. But the Fifth Circuit stopped short of any determination of the overall fee-shifting issue, holding instead that its vacatur of the district court’s judgment rendered the issue moot. Based solely on its discussion in EIG, if forced to rule on this issue, it  appears the Fifth Circuit could align itself with the majority of other circuits and allow for the fee-shifting provision of Rule 68 to include attorneys’ fees paid to a defendant only in the event of a defense verdict.

The Second, Tenth, and Sixth Circuits also have not ruled directly on this issue, although various of their district court opinions appear to adopt the majority view.

Rule 68 Offers of Judgment in Patent & Trademark Cases

The underlying statutes for both patent and federal Lanham Act trademark infringement suits do not include attorneys’ fees as “costs.” Instead, attorneys’ fees are recoverable under 35 U.S.C. § 285 (patent) and 15 U.S.C. § 1117 (trademark) only by the prevailing party in “exceptional cases.” Because of these definitions of “costs,” it is unlikely to recover attorney’s fees by making a Rule 68 offer in patent or trademark cases.

Trade Secrets & Common Law Misappropriation Offers of Judgment

State law governs trade secret, non-Lanham Act trademark, and common law misappropriation claims. Therefore, any offer of judgment would fall under Rule 167 of the Texas Rules of Civil Procedure. Rule 167 is not frequently used because once invoked, the defendant may only recover costs if the judgment is less than 80% of the offer rejected by the plaintiff. On the other hand, if the plaintiff counters and the judgment is more than 120% of the plaintiff’s offer, the plaintiff must receive costs. Making matters worse, costs assessed against a plaintiff are a set-off to its recovery. This limit prevents plaintiffs from paying more than the judgment. Therefore, a plaintiff who recovers nothing will not pay costs. 

Final Thoughts on Rule 68 Offer of Judgment Strategy

The key takeaway is to carefully review the underlying statute to determine whether attorneys’ fees are ultimately recoverable. If not, a Rule 68 offer is likely not the best option for early resolution of a case.

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Text of Rule 68. Offer of Judgment

(a) Making an Offer; Judgment on an Accepted Offer. At least 14 days before the date set for trial, a party defending against a claim may serve on an opposing party an offer to allow judgment on specified terms, with the costs then accrued. If, within 14 days after being served, the opposing party serves written notice accepting the offer, either party may then file the offer and notice of acceptance, plus proof of service. The clerk must then enter judgment.

(b) Unaccepted Offer. An unaccepted offer is considered withdrawn, but it does not preclude a later offer. Evidence of an unaccepted offer is not admissible except in a proceeding to determine costs.

(c) Offer After Liability is Determined. When one party's liability to another has been determined but the extent of liability remains to be determined by further proceedings, the party held liable may make an offer of judgment. It must be served within a reasonable time—but at least 14 days—before the date set for a hearing to determine the extent of liability.

(d) Paying Costs After an Unaccepted Offer. If the judgment that the offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay the costs incurred after the offer was made.

If you have any questions, please contact Darin M. Klemchuk or Mandi Phillips.

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Klemchuk PLLC is a leading intellectual property law firm focusing on litigation, anti-counterfeiting, trademarks, patents, and business law. We help clients protect innovation and increase market share through investments in IP.

This article has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please consult your attorneys in connection with any fact-specific situation under federal law and the applicable state or local laws that may impose additional obligations on you and your company. © 2024 Klemchuk PLLC