Bradley & Gmelich LLP Letters

Defendants Be Warned – Make Sure Litigation Costs are Included in the Settlement Agreement

Maureen DeSaulles v. Community Hospital Of the Monterey Peninsula (March 10, 2016) Supreme Court of California 62 Cal.4th 1140

The recent California Supreme Court decision of DeSaulles v. Community Hospital shows that defendants who settle should be diligent in their preparation of settlement agreements and make sure to include costs in the settlement.  Generally, in a settlement, parties agree to place a clause in a settlement agreement establishing that settling parties agree to bear their own attorneys fees and costs.

Here’s the Risk: where a settlement agreement is silent regarding litigation costs, a plaintiff can obtain mandatory costs as the prevailing party because the settlement proceeds constitute the required “net monetary recovery.”  Although we often don’t consider either party to a settlement “a prevailing party,” the fact that plaintiff is obtaining a “net monetary recovery” places plaintiff in the position as the prevailing party.

In DeSaulles, plaintiff filed an employment based lawsuit against her employer for wrongful termination and retaliation against her exercising her rights under California’s Fair Employment and Housing Act (as well as various other causes of action).  Ultimately, the Court precluded plaintiff from introducing evidence regarding any cause of action other than breach of contract and breach of the implied covenant of good faith and fair dealing.  Shortly before trial, the parties reached a settlement for $23,5000.00 (as to those two causes of action) and defendant was to prepare a judgment for the remaining claims and the parties would not file any cost motions until the completion of the appeal.  The appeal was eventually denied (with regard to the preclusion of evidence regarding the other causes of action).  The trial Court then granted the Hospital $12,731.92 in costs as the prevailing party.  However, the Court of Appeal reversed this finding.

When plaintiff dismissed her action in exchange for the defendant’s payment of a monetary settlement, she became the prevailing party for purposes of an award of costs under Code of Civil Procedure § 1032, because she was “the party with a net monetary recovery.”  The Court held that when a “defendant pays money to a plaintiff in order to settle a case, the plaintiff obtains a “net monetary recovery” and a dismissal pursuant to such a settlement is not a dismissal in “the [defendant’s favor].”

With this decision, the new default rule is that if a defendant settles a case paying plaintiff and in return gets a dismissal of the pending complaint, the plaintiff is then entitled to costs if the settlement agreement is silent.  The Court held that a plaintiff that enters into a stipulated judgment to be paid money in exchange for a dismissal has obtained a “net monetary recovery,” whether or not the judgment mentions the settlement.  Where the settlement agreement is silent as to the recovery of costs, the plaintiff is entitled to recover costs as a matter of right.

As is typically the case, the parties can contract around this issue (bearing their own costs).  Going forward, defense counsel would be wise to make sure to draft Settlement Agreements carefully so as to avoid such pitfalls.

Lesson:  Your settlement agreements should include a sentence that “each party to this agreement will bear their own costs and attorney’s fees.”  If not, you may be responsible for the other side’s cost bill.