The Bespoke Clause: Tailoring Federal Rule 68 to Arbitration for a Better Fit
By Abigail Pessen
Reprinted with permission from: New York Dispute Resolution Lawyer, Fall 2013, Vol. 6, No. 2, published by the New York State Bar Association, One Elk Street, Albany, NY 12207.
One of arbitration’s great benefits is the opportunity it offers parties to design a process custom-tailored to their needs. Regrettably, this opportunity is often overlooked, and a “one size fits all” arbitration clause adopted instead, frequently borrowing the Federal Rules of Civil Procedure en masse. Although such wholesale adoption of the Federal Rules is anathema to the arbit ration community, Federal Rule 68 might be a useful stand-alone import, and indeed would have far more oomph in arbitration than it does in federal court litigation.1
This article accordingly describes the Rule’s features and suggests ways in which it might be altered and incorporated into arbitration clauses.
Rule 68 is the only federal rule to explicitly encourage settlement.2 It provides, in substance, that if a defendant makes an offer of judgment which the plaintiff rejects, and the plaintiff later recovers a judgment less favorable than the rejected offer, then the plaintiff must pay the costs incurred after the offer was made. In theory, this consequence encourages plaintiffs to evaluate their cases accurately and to consider settlement offers seriously. However, because costs—statutorily defined—are so minimal in federal litigation,3 the leverage created by the Rule is as a practical matter negligible and it is rarely invoked.4
In contrast, arbitration “costs” are far more substantial, encompassing the administering entity’s filing fees and the arbitrator(s)’ compensation, which may in large cases easily climb into six figures. Thus, even if Rule 68 were incorporated into an arbitration clause “as is,” its settlement-incentivizing effect in arbitration could be robust. And, if the Rule were tweaked — as arbitration parties are free to do —(i) to make it symmetrical, (ii) to have it triggered by written settlement offers (rather than “offers of judgment”), and/or (iii) to expand the defi nition of potentially shifted “costs” to include attorneys’ fees, or e-discovery costs—then parties would be motivated to consider settlement offers in arbitration very seriously indeed.
Only defendants are permitted to make offers of judgment under the current version of Federal Rule 68. In contrast, twenty-three states (but not New York) have adopted some variation of a two-way rule.5
No articulated rationale for the one-way regime is found in the sparse legislative history of the Rule. However, unless attorneys’ fees are included in recoverable costs, or some multiplier of costs is included, altering the Rule to make it available to claimants in arbitration would not confer any additional benefit on them, because the costs awarded under a Rule 68 scenario would be no more than the costs typically already recoverable by prevailing parties. (In contrast, respondents would likely benefi t from Rule 68 since without it, their costs typically would not be recoverable if a claimant recovers an award of any amount after hearing.)
Allowing Written Settlement Offers to Trigger the Rule
Rule 68 applies only when a defendant offers in writing to have a “judgment” entered against it on specified terms; a simple settlement offer does not suffi ce. To encourage use of the Rule in arbitration, parties may choose to have it triggered by written settlement offers rather than offers of judgment, particularly since parties in arbitration often prize confidentiality and might well prefer that no judgment be entered. (Indeed, because there is no pending litigation, it is questionable whether a judgment could even be entered as contemplated by the Rule, without a consent award, thus adding another layer of expense.) On the other hand, the spectre of invoking the Rule following any settlement discussion might have the perverse effect of discouraging settlement discussions at all, especially at early stages in the arbitration.
Including Attorneys’ Fees in the “Costs” Shifted Under the Rule
Modifying Rule 68 to include as part of recoverable costs the attorneys’ fees incurred by the offeror following the offer’s rejection would significantly raise the stakes involved in weighing such an offer, and thus would encourage early settlement of cases, in turn enhancing the efficiency of arbitration. Such a change would also presumably deter claimants from pursuing marginal claims beyond the point where the costs of arbitration outstrip any potential recovery, and—if the Rule were made symmetrical—deter respondents from using superior resources to “wear out” claimants.
To prevent potential injustice resulting from fee-shifting under the Rule, arbitration parties could agree that (i) fee-shifting be inapplicable unless the award at the hearing is a certain percentage below the rejected offer; and/or (ii) arbitrators be given considerable discretion to modify or deny fee-shifting based on the facts and circumstances of a given case.
By way of example, Alaska’s counterpart to Federal Rule 68, Alaska R. Civ. P. 68, contains these two elements, providing:
California’s counterpart to Federal Rule 68, Cal. Civ. Proc. Code § 1021, also requires trial judges to consider the following multiple factors in deciding whether to award attorneys’ fees to the offeror following a judgment at trial less favorable than the rejected offer:
In this regard, the existence of a statutory fee-shifting mechanism applicable to the underlying claim (i.e., civil rights or employment discrimination) might be a factor militating against awarding the respondent some or all of the fees it would otherwise be entitled to. Conversely, if claimants become entitled to make offers of judgment in Title VII cases, to make the rule truly symmetrical they would have to receive a “premium” on their recovery of attorneys’ fees if they obtained an award in excess of a rejected Rule 68 offer.
In considering whether to include attorneys’ fee-shifting in an adaptation of Rule 68, arbitration parties should be mindful of many commentators’ serious concerns that such a rule change will put undue pressure on claimants in particular to accept low offers of judgment, rather than risk being saddled with the respondent’s attorneys’ fees if the arbitrator awards less than anticipated; accordingly, a party’s right to a hearing will, as a practical matter, be restricted. The rule change would modify the “American rule”—long established in our jurisprudence—which leaves each party responsible for its own attorneys’ fees, win or lose, unless a contract or relevant statute provides otherwise; however, the American rule would remain unchanged unless Rule 68 were triggered. Moreover, giving arbitrators discretion to modify the Rule will create a new layer of post-hearing briefing and expense as parties attempt to in?uence the exercise of that discretion.
Including E-Discovery Cost-Shifting Under Rule 68
Finally, arbitration parties may wish to consider including e-discovery costs in the costs to be shifted under the version of Federal Rule 68 they agree to import. Some courts have permitted parties entitled to “copying costs” under Rule 68 to recover e-discovery costs. While the cost of “copying” electronic documents (in contrast to searching for or reviewing them) is minimal, some courts have been interpreting electronic “copying costs” expansively.6 However, the first appellate court to address the issue recently rejected this approach.7
The potential benefit of including e-discovery costs as part of the costs shifted under Rule 68 is that it would increase the incentives to accept a Rule 68 offer, and encourage litigants to seek only necessary discovery. On the other hand, such a change could have the opposite effect of encouraging unnecessary e-discovery in the hope of convincing an adversary to accept a Rule 68 offer, and also might increase “satellite arbitration” to determine the reasonableness of various e-discovery costs sought by the Rule 68 offeror. Additionally, although not relevant to arbitration parties’ choices, including e-discovery costs would contravene the intent of Rule 68’s drafters, who could not have envisioned/intended that the “copying” costs to be imported from Section 1920 would encompass the enormous costs of contemporary e-discovery.
Federal Rule 68 imposes cost-shifting consequences on parties who “guess wrong” in rejecting settlement offers in federal litigations; including it “as is” in arbitration clauses would surely give pause to parties considering settlement offers. Moreover, in contrast to the cumbersome process required to amend any of the Federal Rules of Civil Procedure, arbitration’s ?exibility allows parties to tailor Rule 68 to their particular specifications with a few clicks of a mouse, thereby making the consequences of rejecting settlement offers even more substantial, as well as reciprocal. Whatever the decision, the pros and cons of including such a provision in an arbitration clause merits thoughtful consideration by counsel.
Abigail Pessen is a mediator and arbitrator in New York City. She can be reached at: Abigail@pessenadr. com.