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Third Circuit Finds Rejected Settlement Offers a Factor in Fee Awards

By Effie Silva, Litigation News Associate Editor – September 17, 2009

In a case of first impression, Lohman v. Duryea Borough [PDF], the Third Circuit Court of Appeals has held that rejected informal settlement offers may be used as an indicator of success in deciding attorney fees.

After winning a jury trial, the successful plaintiff’s attorneys requested $112,883.73 in fees. The jury had awarded the plaintiff only $12,205.00 in lost wages and nominal damages.

Prior to the verdict, but after trial had commenced, the defendant employer had made three settlement offers, including one for $75,000.00. Each offer was rejected by the employee.

The court considered the $75,000 settlement offer as a “measure of success” and calculated the attorney fee award in conjunction with the damages.

Lohman appealed, arguing that Federal Rule of Evidence 408 does not allow the court to consider settlement negotiations in determining the attorney fees claim. The Third Circuit disagreed, and affirmed the district court’s award of $30,000 in fees. It held that FRE 408 only precludes consideration of those negotiations in determining the liability of a claim but does not bar a court from considering settlement negotiations when determining what would be a reasonable fee award.

“The court essentially seems to have created a defacto offer of judgment rule without any procedural protections or process,” observes Lori A. Sochin, Miami, FL, cochair of the ABA Section of Litigation Alternative Dispute Resolution Committee.

“A party should know what they are stepping into before entering into informal settlement negotiations, so that it is not surprised when such discussions become relevant later on when trying to justify their fees award,” Sochin says.

The Third Circuit opinion used the same theory that underlies the offer of judgment rule. “In essence, because the prevailing party unnecessarily prolonged the litigation by rejecting the settlement offer that was better than the result they obtained at trial, the court can reduce the prevailing party’s fee award,” Sochin notes.

“When confronted with this defacto offer of judgment argument, the court distinguished [Lohman] by stating it was not shifting fees from one party to another party, but rather it was using the evidentiary support as a basis to cut down the fees; frankly, that the other party has to pay,” she says.

“I think this rule will certainly caution parties to think twice about offers and worrying about what may happen down the road,” opines Charles M. Denton, Grand Rapids, MI, cochair of the Section’s Alternative Dispute Resolution Committee.

“Most claimant’s mind-set is that settlement negotiations are privileged, but if this is not always the case, there would be a chilling effect,” he says.

“Rule 408 states that such evidence is not admissible in trial when it is offered to prove liability or the validity of the claim at issue,” agrees Denton. “But if it doesn’t exclude evidence of such negotiations when purportedly offered for other reasons,” such as in Lohman, “there could be abuses and settlements could be discouraged,” he opines.

The Third Circuit noted in Lohman that judges are free to reject settlement negotiation evidence as not bearing on success when, for instance, negotiations occur at an early stage before discovery or are otherwise not a fair measure of what a party is truly seeking in damages. Nonetheless, the court’s message rings with caution: even if a party prevails at trial, the prevailing party attorney’s fees award could be reduced, based upon its rejection of prior settlement offers.

Keywords: Attorney fees, settlement, Third Circuit


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