Third Circuit decision on Rule 68 “offers of judgment” may add a page to the defense bar’s environmental citizen suit playbook

Last week, the U.S. Court of Appeals for the Third Circuit issued an opinion that may encourage defendants in environmental citizen suits to make greater use of the “offer of judgment” tool fashioned by Rule 68 of the Federal Rules of Civil Procedure, which historically has been somewhat underutilized in this context.  Rule 68 allows a party defending against a claim to serve a settlement offer on an opposing party 14 days before trial (or 14 days before a hearing to determine the extent of liability).  If the opposing party rejects the offer and obtains a judgment that is not more favorable than the unaccepted offer, the opposing party “must pay the costs incurred after the offer was made.”  As the U.S. Supreme Court noted in Marek v. Chesney, 473 U.S. 1 (1985), “[t]he plain purpose of Rule 68 is to encourage settlement and avoid litigation . . . . The 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.”

Interfaith Cmty. Org., et al. v. Honeywell Int’l, Inc, et al., Nos. 11-3813 and 11-3814 (3d Cir., opinion filed June 4, 2013), involved a pair of lawsuits brought pursuant to the citizen suit provision of the Resource Conservation and Recovery Act (RCRA), 42 U.S.C. §§ 6901-6992k.  In each lawsuit, organizations and/or residents of a neighboring community sought cleanup of areas of a property in Jersey City, New Jersey, that had been contaminated by a chrome manufacturing plant.  A company operating the plant from 1895 to 1954 had deposited roughly 1.5 million tons of industrial waste residue containing hexavalent chromium into wetlands along the Hackensack River.  Although one suit resulted in a judgment for the plaintiffs and the other resulted in a settlement, both the district court award in the one suit and the consent decrees in the other required the defendant, among other things, to pay the future fees and costs incurred by the plaintiffs in connection with monitoring defendant’s cleanup of the site.

After the parties failed to reach agreement with respect to plaintiffs’ fees sought for monitoring defendant’s remediation efforts, the defendant served offers of judgment pursuant to Rule 68 to try to resolve the dispute.  In response, plaintiffs asked the district court to issue a declaratory judgment that the Rule 68 offers were “null and void” in the context of RCRA citizen suits.  The district court, in an opinion substantially upholding plaintiffs’ fee requests, held that Rule 68 offers of judgment cannot be made in citizen suits filed under RCRA.  The district court concluded that “application of Rule 68 to RCRA citizen suits would violate the Rules Enabling Act, 28 U.S.C. § 2072, by discouraging the very citizen suits that Congress intended to promote.”  The Rules Enabling Act gives the Supreme Court the power to establish rules of practice and procedure and rules of evidence for cases in federal district courts and courts of appeals provided that “such rights [do] not abridge, enlarge or modify any substantive right.”  The defendant appealed the district court decision, challenging, among other things, the declaration that offers of judgment may not be made in the context of attorneys fees disputes under the fee shifting provisions of RCRA.  Last week, the Third Circuit reversed the district court’s declaration.

The Third Circuit began its Rule 68 analysis by acknowledging the Supreme Court’s instruction that “[w]e give the Federal Rules of Civil Procedure their plain meaning, and generally with them as with a statute, [w]hen we find the terms unambiguous, judicial inquiry is complete.”  Noting that Rule 68 does not exempt from its purview any type of civil action, the court found that the rule “by its plain terms” is applicable to RCRA citizen suits.  The court then turned to the district court’s conclusion that the application of Rule 68 to RCRA citizen suits would violate the Rules Enabling Act.  Based on Supreme Court precedent, the court found that “a rule of procedure impermissibly ‘abridge[s], enlarge[s], or modif[ies] [a] substantive right’ . . . only if it alters the rules for adjudicating a litigant’s rights.”  Because the court determined that “[t]he amount of the fee to be awarded remains governed by the same rules of decision regardless of the interposition of an offer of judgment,” it concluded that application of Rule 68 to RCRA’s fee-shifting provision did not violate the Rules Enabling Act.  The court rejected that consideration of the potential chilling effect of allowing Rule 68 offers of judgment in citizen suits under RCRA was in any way relevant to the pertinent inquiry (i.e., whether Rule 68 changes the rule for adjudicating the parties’ substantive rights).

Ultimately, the court found that there is “nothing incompatible” about the policy underlying the fee shifting provision of RCRA (encouraging plaintiffs to bring meritorious suits to enforce environmental laws) and the policy underlying Rule 68 (encouraging settlement of civil suits). Because the Third Circuit cited with approval cases in which courts have applied Rule 68 to suits seeking equitable relief and not just to “cases seeking damages or other relief amenable to simple comparisons,” the opinion may encourage defendants in environmental citizen suits to extend offers of judgment not only in the context of attorneys fees disputes, but also in connection with other remedies traditionally sought in these lawsuits, such as civil penalties and injunctive relief.  Citizen suit plaintiffs, many of whom rely on the recovery of attorneys fees and costs to help finance their operations, will have to carefully evaluate all offers of judgment that they receive going forward or risk forfeiting a potentially considerable portion of these fees and costs.  (Why “fees,” when Rule 68 only refers to “costs”?  Because the Supreme Court in Marek held that where a statute includes attorneys fees within the term “costs,” “a defendant is not liable for the post-offer attorney fees of a rejecting offeree who obtains a judgment not more favorable than the offer.”)

Interestingly, the Third Circuit in dicta appeared to reject the possibility that defendants in RCRA fee-shifting cases could ever recover their own costs and/or attorneys fees from plaintiffs under Rule 68 if plaintiffs’ ultimate recovery was less than an offer of judgment.  I am not certain why.  Citing Marek, the court stated that “the only impact that Rule 68 has on the ultimate outcome of the attorney’s fee dispute is to require [plaintiffs] to bear their post-offer costs, including counsel fees, if the fee award is less favorable than the offer of judgment.”  This statement implies that plaintiffs cannot be required to bear defendants’ post-offer costs and fees when defendants’ offers of judgment exceed plaintiffs’ ultimate recovery.  That particular issue, however, was not presented in Marek, where the defendant was not seeking to recover its post-offer costs or attorneys fees from the plaintiff.

In a footnote criticizing Pub. Interest Research Group of New Jersey v. Struthers-Dunn, Inc., No. 87-1773 (D.N.J. Aug. 16, 1988), on which the district court had relied to void the offers of judgment, the Third Circuit dismissed any concerns that plaintiffs “faced the specter of having to pay their own fees as well as defense costs, that could include defense counsel fees.”  The court reasoned that “a defendant in a fee-shifting case cannot recover attorney’s fees under Rule 68 because [where a plaintiff has prevailed on its underlying claim], it cannot be said that the plaintiff’s action was ‘frivolous, unreasonable or without foundation,’ the general standard for awarding fees as part of ‘costs’ to a prevailing defendant.”  But the court did not really explain why it would be appropriate to look beyond the “plain meaning” of Rule 68 to some other “general standard” in determining whether defendants can recover their costs and/or attorneys fees from plaintiffs when defendants’ offers of judgment exceed plaintiffs’ ultimate recovery, and such an approach would appear to run counter to the very approach that the court had just taken in determining whether Rule 68 was applicable to RCRA citizen suits.  Perhaps if the defendant’s offers of judgment end up exceeding the attorneys fees and costs that the district court ultimately awards the plaintiffs on remand, and if the defendant in turn seeks to recover its post-offer fees and costs from the plaintiffs, the Third Circuit will have an opportunity to elaborate.