House Bill 4: New Rules - Settlement Offers and Award of Litigation Costs
By Jennifer Knauth, Scott, Douglass & McConnico, LLP, Austin, Texas*
Article 2 of House Bill 4, the 2003 Texas "tort reform" bill, creates a new settlement offer framework in most types of civil cases involving claims by either party for monetary relief. This new settlement offer scheme will be codified as new Chapter 42 of the Texas Civil Practice & Remedies Code. Under the new law, if either party rejects a Chapter 42 settlement offer, the rejecting party may have to pay a defined portion of the offering party’s litigation fees and costs. This article outlines the new scheme and attempts to illustrate how it may apply in practice.
How Chapter 42 applies and the incentives it creates in a given case will have to be evaluated carefully by practitioners in each lawsuit where its provisions are invoked. When no other law provides for recovery of litigation costs, under Chapter 42 the offering party may recover litigation costs and fees incurred after the settlement offer was rejected. When a party is entitled to recovery of litigation costs under another law (such as the DTPA or Texas Civil Practice & Remedies Code Chapter 38), Chapter 42 does not authorize recovery of additional litigation costs for that party. The opposing party may still be able to recover a portion of its litigation costs under Chapter 42.
Effective Date of Chapter 42 and New Texas Rule of Civil Procedure 167
The new law is effective September 1, 2003, but new Chapter 42 applies only to actions filed on or after January 1, 2004. By that time, the Texas Supreme Court is required to have rules in place to implement the new scheme. These rules are to address the deadline for invoking Chapter 42; the time period for making settlement offers under Chapter 42; and procedures for countering, withdrawing, accepting, and rejecting settlement offers; and for modifying the applicable deadlines. In addition, the Supreme Court rules must address multi-party cases. In those cases, Section 42.005(c) requires the rules to provide as follows:
if the offering party joins another party or designates a responsible third party7 after making the settlement offer, the party to whom the settlement offer was made may declare the offer void.
The Supreme Court Advisory Committee already has produced draft Rule 167, entitled "Offer of Settlement; Award of Litigation Costs," to implement new Chapter 42. The Advisory Committee is holding public meetings monthly at the Texas Law Center in Austin to review and discuss this rule and other proposed rules and changes mandated by H.B. 4. The Texas Supreme Court began review of the proposed rules in late August. Draft Rule 167 in its present form contains many substantive provisions that supplement those of new Chapter 42. Those provisions of the proposed rule have not been incorporated in this article.
Purpose of Chapter 42: To Encourage Settlement Through Fee Shifting
The comments to proposed Rule 167 use the term "fee shifting" to describe the effect of Chapter 42. In general terms, the purpose and intent of Chapter 42 is to create an incentive for cases to settle earlier rather than later. The idea is that if a party rejects a reasonable offer (as compared to the award at trial) and therefore causes the offering party to incur additional litigation costs and fees, those additional (post-rejection) fees and costs can be "shifted" to the rejecting party under Chapter 42 and new Rule 167.
Chapter 42 is invoked when a defendant files a declaration that the settlement procedures allowed under Chapter 42 are available in the action. Once invoked, the Chapter 42 settlement procedures apply only to those defendants who file a declaration and those who respond, and only affects claims for monetary relief. "Defendant" is defined to include any party from whom a claimant seeks recovery and includes a counterdefendant / plaintiff, cross-defendant or third-party defendant.
Once Chapter 42 is invoked, any party (claimant or defendant) can make a settlement offer under the new scheme in relation to the defendant who invoked Chapter 42. In a multi-defendant case, Chapter 42 procedures do not apply to those defendants who do not file a declaration invoking Chapter 42. Rule 167 may eliminate joint or group offers and address how Chapter 42 offers are to be made directly to one or more of multiple plaintiffs.
The principal benefit to making an offer under Chapter 42 is the potential for "fee shifting." If the offer is rejected and the amount awarded in the judgment is "significantly less favorable" (by more than 20 % of the rejected offer) to the rejecting party, then the offering party is entitled to shift a portion of its litigation costs to the rejecting party. The offering party’s recoverable litigation costs are limited to those incurred after the settlement offer is rejected. In addition, the recoverable litigation costs are capped by a formula tied to the amount of damages awarded to the claimant (who can be either the offering or rejecting party). Thus, attorneys will need to implement procedures for documenting their post-rejection costs and fees, whether hourly or contingent.
Application of Chapter 42 if No Other Law Provides for Recovery of Litigation Costs and Fees
Some simple examples may help illustrate how Chapter 42 appears to work in cases where no other law provides for recovery of litigation costs:
Example A: A Settlement Offer by Defendant that Plaintiff Rejects in a Tort Case
Plaintiff sues Defendant in a tort case for $100,000. There is no right to recover litigation costs under another law (such as the DTPA). Defendant files a declaration invoking Chapter 42 (in compliance with Rule 167 as finally adopted). Defendant makes a pre-trial settlement offer of $20,000, which Plaintiff rejects. At trial, the jury awards actual economic damages of $10,000 and actual noneconomic damages of $5,000. Thus, the total award under the judgment to be rendered is $15,000, which is "less than 80%" of the rejected settlement offer. After the settlement offer was rejected, Defendant incurred $25,000 in litigation costs through trial. Under Chapter 42, the outcome is outside the 20% margin of error (being "significantly less favorable"); the Defendant may thus recover $10,000 of the $25,000 litigation costs from Plaintiff (50% of the $10,000 economic damages + 100% of the $5,000 noneconomic damages),8 as an offset against the Plaintiff’s recovery from Defendant. Therefore, the judgment against Defendant is reduced to $5,000.
Example B: Plaintiff Makes Settlement Offer in a Tort Case that Defendant Rejects
1. Plaintiff sues Defendant in a tort case for $100,000. There is no right to recover litigation costs under another law (such as the DTPA). Defendant files a declaration invoking Chapter 42. Plaintiff makes a settlement offer of $60,000, which the Defendant rejects. At trial, the jury awards economic damages of $55,000 and noneconomic damages of $10,000. After the settlement offer was rejected, Plaintiff incurred $25,000 in litigation costs through trial. The total award under the judgment to Plaintiff is $65,000, which although more than the amount rejected, is less than 120% of the rejected offer. Plaintiff is entitled to no recovery of litigation costs under Chapter 42.
2. Under the same scenario, if Plaintiff makes a pre-trial Chapter 42 settlement offer of $50,000 that Defendant rejects, the $65,000 trial award to Plaintiff is > 120% of the rejected offer ($65,000 > 120% of $50,000 = $60,000). Plaintiff can recover its $25,000 in post-rejection litigation costs under Chapter 42. According to the formula, Plaintiff begins with an entitlement to recover post-litigation costs under Chapter 42, capped at 50% of the economic damages ($27,500) plus 100% of the noneconomic damages ($10,000) = $37,500. Under § 42.004(c), however, Plaintiff is limited to the $25,000 litigation costs incurred after the settlement offer was rejected. Thus, the total judgment for Plaintiff is $90,000, not $102,500.
What Happens Under Chapter 42 if Litigation Costs are Recoverable Under Other Law?
If any party is entitled to recover litigation costs under another law, Chapter 42 does not increase that party’s recovery of litigation costs. Section 42.004(e) provides:
If a claimant or defendant is entitled to recover fees and costs under another law, that claimant or defendant may not recover litigation costs in addition to the fees and costs recoverable under the other law.9
If the offering party is not entitled to recovery of attorney’s fees under the other law, the offering party may still qualify for fee shifting under Chapter 42. In the event the rejecting party is entitled to fee shifting under another law, the rejecting party’s post-rejection fees and expenses are not to be included in the judgment under Section 42.004(a) even if they meet the Chapter 42 formula, for purposes of comparison to the amount of the rejected offer under Section 42.004(b). Section 42.004(f) so provides:
If a claimant or defendant is entitled to recover fees and costs under another law, the court must not include fees and costs incurred by that claimant or defendant after the date of rejection of the settlement offer when calculating the amount of the judgment to be rendered under Subsection (a).
Some examples may help illustrate how Sections 42.004(e) and (f) will operate in practice.
Example C: A Settlement Offer by Plaintiff in a Contract Case that Defendant Rejects
Plaintiff sues Defendant for breach of contract and makes a claim for attorney’s fees under Chapter 38 of the Texas Civil Practice & Remedies Code. Defendant files a declaration invoking Chapter 42. Plaintiff makes a settlement offer of $50,000 that is rejected by Defendant. After the date the Defendant rejected the settlement offer, Plaintiff incurs $15,000 in attorney’s fees through trial. At trial, the jury finds that Defendant breached the contract and awards Plaintiff economic damages of $50,000 and attorney’s fees of $35,000 (including the $15,000). Under Section 42.004(e), Chapter 42 does not apply to increase Plaintiff’s recovery of litigation costs which fall instead under Chapter 38. Plaintiff would be entitled to a judgment of $85,000.
Example D: Settlement Offer by Defendant in a Contract Case that Plaintiff Rejects
Plaintiff sues Defendant for breach of contract and makes a claim for attorney’s fees under Chapter 38 of the Texas Civil Practice & Remedies Code. Defendant files a declaration invoking Chapter 42. Defendant makes a settlement offer of $70,000 that Plaintiff rejects; after that date, Plaintiff and Defendant each incurred $15,000 in attorney’s fees through trial. At trial, the jury finds that Defendant breached the contract and awards Plaintiff economic damages of $30,000 and Chapter 38 attorney’s fees of $35,000 (including the $15,000 post-rejection amount). Under Section 42.004(f), the judgment amount to be compared to the rejected settlement offer is $50,000, not $65,000. As $50,000 < 80% of the rejected settlement offer, the judgment amount is "significantly less favorable" to Plaintiff under Section 42.004(b)(1). Defendant is therefore entitled to shift to Plaintiff the amount of litigation costs Defendant incurred post-rejection as an offset on the judgment, capped at 50% of Plaintiff’s economic damages. The $65,000 judgment which Plaintiff would have had under TCPRC Chapter 38 is therefore reduced under Chapter 42 to $50,000.
The implementation of Chapter 42 and the attendant procedural rules is intended to promote earlier investigation and discovery of cases on both sides of the docket. The application of Chapter 42 will be more complex in multiparty and multi-claim cases. Some of these issues will be addressed by new Rule 167; to follow its development, please consult the Texas Supreme Court’s website.10
*TLIE greatly appreciates the contribution of this timely article by Ms. Knauth, who is a partner of Scott, Douglass & McConnico, L.L.P. Ms. Knauth practices in the area of civil trial law, emphasizing legal malpractice litigation.
1 H.B. 4, art.2, § 42.002(a). Excepted are class actions, shareholder's derivative actions, actions by /against a governmental unit, actions under the Family Code, actions to collect workers' compensation benefits; and actions filed in Justice of the Peace Court. Id., § 42.002(b).
2 Id., art. 2 § 2.01. Hereinafter, cites to Section 2.01 of H.B. 4 will refer to the provisions of new Chapter 42 of the Texas Civil Practice & Remedies Code, adopted in that section of the bill.
3 § 42.004.
4 H.B. 4, § 23.02(a).
5 Id., § 2.02.
6 § 42.005.
7 Note that a 'responsible third party' need not be joined in the action to apply § 33.003(a)(4) comparative responsibility.
8 Under § 42.004(d)(1)(C), the amount of post-litigation costs recovered cannot exceed 100 percent of the exemplary or additional damages to be awarded to the claimant, in a case involving such claims.
9 The footnote to proposed Rule 167.11(e), which restates § 42.004(e) verbatim, states: "…if attorney's fees are recoverable under 'another law,' Rule 167 fee shifting is not available." The Advisory Committee does not address the effect of § 42.004(f), replicated verbatim in proposed Rule 167.11(f).
10 As of press time, the full committee reports were available by selecting publications / HB4 / Rule 167 at www.jw.com/scac.