Summary. What makes a settlement hold, and what makes an offer of judgment worth making.

The document written when everyone wants to stop

The overwhelming majority of civil cases end by agreement. The agreement is typically drafted after the hard negotiating is over, by lawyers whose clients have decided to stop paying them, under time pressure created by an imminent deadline.

That is why settlement agreements fail in a small number of predictable ways: the release does not cover what someone thought it covered; a necessary party did not sign; the court has no power to enforce it; or a confidentiality term was breached by someone who never knew it existed.

Each is preventable in a paragraph.

The release

The operative provision, and the one that determines what has actually been resolved.

Scope — what claims. The choice is between a general release covering all claims of any kind, known or unknown, arising from the beginning of time to the effective date, and a specific release limited to claims arising from defined conduct or a defined transaction.

Parties routinely misunderstand which they have agreed to. A defendant paying to resolve a contract dispute usually wants a general release; a plaintiff with other potential claims against the same defendant usually does not.

Unknown claims. A general release ordinarily covers known claims. Whether it covers unknown claims depends on the language and on state law. Several states require an express waiver of statutory protections for unknown claims, and the waiver language must be conspicuous. A release intended to be comprehensive should say so explicitly:

"This release extends to all claims, whether known or unknown, suspected or unsuspected, that Releasor has or may have against Releasees, and Releasor expressly waives any statute, rule, or common law principle that would limit a release to claims known at the time of execution, including [the applicable state provision]."

Time. Through what date? A release "as of the Effective Date" does not cover conduct occurring afterward, which matters where the relationship continues.

Claims that cannot be released. Several categories persist regardless of language: claims for future conduct; certain statutory rights; the right to file a charge with an administrative agency, though monetary recovery may be waived; workers' compensation claims in many states; and claims that arise from the settlement agreement itself.

The scope trap: a release covering "all claims arising from the Agreement" does not cover a tort claim arising from the same relationship. If comprehensive resolution is intended, the release must say "arising from or relating to the Agreement, the relationship of the parties, or any conduct occurring before the Effective Date."

Who must sign

The most common structural failure, and it is entirely avoidable.

On the releasing side: every person or entity that holds a claim. Where the plaintiff is an entity, confirm the signatory's authority. Where claims may belong to affiliates, subsidiaries, or successors, they must be bound. Where a claim was assigned, the assignee holds it.

On the released side: every person or entity to be protected. A release of "Defendant Corporation" does not release its officers, employees, parent, subsidiaries, insurers, or successors unless it says so. The standard formulation:

"Releasees means [Defendant] and each of its past, present, and future parents, subsidiaries, affiliates, predecessors, successors, assigns, officers, directors, employees, agents, attorneys, insurers, and representatives, in each case in their capacities as such."

Third parties who may hold interests:

  • Lienholders. Medical providers, health plans, and government payors may have statutory or contractual liens on a recovery. A settlement that ignores them exposes the paying party.
  • Insurers with subrogation rights.
  • Counsel with charging liens on the recovery.
  • Secured creditors where the settlement transfers assets.
  • Government payors whose reimbursement rights survive private agreement.

Confirm capacity and authority. A minor's settlement generally requires court approval and often a structured arrangement. An entity's signatory needs authority. A settlement by a party in bankruptcy requires bankruptcy court approval.

The enforcement problem

The trap the Supreme Court identified, and the one practitioners most often walk into.

Kokkonen v. Guardian Life Insurance Co. of America, 511 U.S. 375 (1994) held that a federal court does not retain jurisdiction to enforce a settlement agreement merely because it dismissed the case pursuant to that agreement. Justice Scalia wrote for a unanimous Court:

"Enforcement of the settlement agreement . . . is more than just a continuation or renewal of the dismissed suit, and hence requires its own basis for jurisdiction."

The consequence: a party seeking to enforce a settlement in a dismissed federal case must establish an independent basis for federal jurisdiction — diversity, typically — or sue in state court for breach of contract.

The solutions, in order of reliability:

One: an express retention of jurisdiction in the dismissal order. The Court in Kokkonen said so directly: the situation would be different if the dismissal order had "either a separate provision (such as a provision 'retaining jurisdiction' over the settlement agreement) or [incorporated] the terms of the settlement agreement in the order." The court must agree, and many will on request.

"The Court retains jurisdiction to enforce the terms of the parties' Settlement Agreement dated [date], the terms of which are incorporated herein by reference."

Two: incorporation of the settlement terms into the dismissal order. Effective, but it makes the terms part of a public order.

Three: a consent judgment rather than a dismissal. The strongest, enforceable by contempt, and appropriate where compliance over time matters.

Four: conditional dismissal. The court dismisses subject to reinstatement within a defined period if the settlement is not consummated — the "sixty-day order" many districts use.

Five: nothing, and accept a state court breach action. Adequate for a settlement fully performed at signing.

The practical rule: if any obligation extends past the dismissal — installment payments, ongoing conduct restrictions, cooperation — obtain retained jurisdiction. If everything is performed simultaneously, it matters less.

Rule 68 offers of judgment

Federal Rule of Civil Procedure 68 is the most misunderstood provision in the settlement toolkit.

The mechanic. More than fourteen days before trial, a defending party may serve an offer to allow judgment on specified terms. The offeree has fourteen days to accept. If accepted, the clerk enters judgment.

The consequence of rejection: if the offeree rejects and the judgment finally obtained is not more favorable than the offer, the offeree "must pay the costs incurred after the offer was made."

Four features that determine whether Rule 68 is worth using:

One: it applies only to a defending party. A plaintiff cannot make a Rule 68 offer.

Two: it operates only where the plaintiff wins less than the offer. If the defendant wins outright, Rule 68 does not apply at all — the plaintiff simply pays ordinary costs as the losing party. This surprises defendants regularly.

Three: "costs" usually means very little. Ordinary taxable costs — filing fees, transcript costs, copying — are modest, typically a few thousand dollars. Shifting them is not a meaningful deterrent.

Four: unless the underlying statute defines attorney fees as costs. This is what makes Rule 68 powerful in the cases where it works.

Marek v. Chesny, 473 U.S. 1 (1985) held that where the substantive statute defines attorney fees as part of "costs," those fees are included in Rule 68's cost-shifting. Chief Justice Burger wrote:

"[A]bsent congressional expressions to the contrary, where the underlying statute defines 'costs' to include attorney's fees, we are satisfied such fees are to be included as costs for purposes of Rule 68."

The practical consequence is that in fee-shifting statutory cases, a rejected Rule 68 offer can cut off a prevailing plaintiff's post-offer fees — which frequently exceed the damages by a wide margin. In such a case a well-calibrated offer is one of the most effective settlement tools available.

Drafting requirements:

  • Be specific about what is included. An offer silent on costs and fees is construed against the offeror, and the offeree may obtain them in addition.
  • Address fees expressly: whether the offer is inclusive of fees and costs, or in addition to them.
  • Cover all claims, or specify which.
  • Watch the arithmetic. Whether the judgment is "more favorable" compares the offer to the judgment plus pre-offer costs and fees in most formulations.
  • Fourteen days to accept, and the offer cannot be revoked during that period.
  • Serve, do not file. An unaccepted offer is generally inadmissible except in a proceeding to determine costs.

And note: Campbell-Ewald Co. v. Gomez, 577 U.S. 153 (2016) held that an unaccepted offer of judgment does not moot a plaintiff's claim. The strategy of picking off a named plaintiff with a full-value offer does not work.

Attorney fees in settlement

Fees are frequently the largest contested number, and several doctrines shape how they are handled.

The prevailing party question. Buckhannon Board and Care Home, Inc. v. West Virginia Department of Health and Human Resources, 532 U.S. 598 (2001) rejected the "catalyst theory," holding that a plaintiff whose lawsuit caused a defendant to change its conduct voluntarily is not a prevailing party entitled to fees. Prevailing party status requires a judicially sanctioned change in the legal relationship — a judgment, or a consent decree.

The practical consequences:

  • A defendant who capitulates without a judgment or consent decree avoids fee liability under most fee-shifting statutes.
  • A plaintiff who wants fees must obtain something the court sanctions.
  • A private settlement agreement dismissed without a consent decree generally does not confer prevailing party status, which is why plaintiffs in fee-shifting cases press for consent decrees and defendants resist them.

Settling fees together with the merits. Evans v. Jeff D., 475 U.S. 717 (1986) held that a defendant may condition settlement on a waiver of statutory attorney fees, and that a court may approve such a settlement. The Court acknowledged the ethical tension — counsel must advise on an offer that benefits the client and eliminates counsel's fee — but declined to prohibit the practice.

The practical result: fee waivers as a condition of settlement are permissible and common, and the conflict they create is managed through disclosure and the client's informed decision rather than through prohibition.

Structuring options:

  • Inclusive settlement. A single number covering damages, costs, and fees, with allocation left to the plaintiff's side. Simplest, and it eliminates a second negotiation.
  • Separate fee negotiation. Merits resolved first, fees negotiated after. Cleaner ethically, and it avoids the argument that counsel traded client recovery for fees.
  • Fees to be determined by the court. Used where the parties cannot agree; it preserves the dispute.
  • Fee waiver. Permissible under Evans, and a real point of leverage for defendants in fee-shifting cases.

Confidentiality and non-disparagement

The terms that generate the most post-settlement disputes, and the ones most often drafted carelessly.

Confidentiality of what? The amount? The existence of the settlement? The underlying facts? Each is a different commitment, and a clause saying "the parties will keep this confidential" resolves none of them.

Who is bound? A party cannot bind employees, family members, or counsel unless the agreement says so and the individuals know. A confidentiality provision that binds "the parties" and is breached by a spouse or a former employee is unenforceable against them and awkward for everyone.

Necessary carve-outs, without which the clause is unenforceable or traps the parties:

  • Disclosure required by law, subpoena, or court order — with a notice obligation where permitted
  • Disclosure to accountants, auditors, tax authorities, and financial advisors
  • Disclosure to insurers and lenders
  • Disclosure to the extent necessary to enforce the agreement
  • Communications with government agencies, including regulators and whistleblower channels. A provision that appears to restrict such communications may be unenforceable and, in the securities context, may itself violate rules protecting whistleblowers.
  • Information already public through no breach

Remedies. A confidentiality clause without a remedy is aspirational. Options: liquidated damages, which must be a reasonable estimate rather than a penalty; injunctive relief with a stipulation that breach constitutes irreparable harm; and repayment of some portion of the settlement, which courts scrutinize.

Non-disparagement raises the same drafting problems plus one more: it restrains speech, and courts construe such clauses narrowly. Address: what statements are covered; whether truthful statements are covered; whether internal statements count; the carve-out for testimony and government communications; and whether it is mutual. A one-way non-disparagement clause in an employment settlement is common and frequently unenforceable in part.

No-rehire and non-cooperation clauses deserve separate attention. No-rehire provisions are restricted in several jurisdictions. Clauses purporting to prevent a party from assisting others' claims raise serious problems and, in some contexts, may be unlawful.

Class and representative settlements

Settlements requiring court approval operate under a different framework.

Federal Rule of Civil Procedure 23(e) requires court approval of any settlement of a certified class or a class proposed to be certified, following notice and a hearing, and a finding that the settlement is fair, reasonable, and adequate. The 2018 amendments enumerated the factors: adequacy of representation; arm's-length negotiation; adequacy of relief considering costs, risks, delay, the distribution method, attorney fee terms, and any side agreements; and equitable treatment of class members relative to each other.

Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997) and Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999) established that certification requirements must be satisfied even for settlement-only classes, with the specific concerns of adequacy and conflicts among class members receiving heightened attention.

Recurring problems in class settlements:

  • Intra-class conflicts between present and future claimants, or among claimants with different injuries
  • Claims-made structures where low claiming rates leave most of the fund unclaimed
  • Cy pres distributions of unclaimed funds, which draw scrutiny
  • Clear-sailing agreements on fees and reverter provisions returning unclaimed money, both of which are red flags
  • Side agreements that must be disclosed under Rule 23(e)(3)
  • Objectors, including professional objectors, and the 2018 amendment requiring court approval of any payment to withdraw an objection

Other approval contexts: minors' settlements; settlements by parties in bankruptcy; shareholder derivative settlements; consent decrees involving public entities; and Fair Labor Standards Act settlements in most circuits.

A worked settlement

Wrenfield Logistics sues Corbeau Freight Systems for breach of a transportation services agreement and for misappropriating a routing algorithm. Corbeau counterclaims for unpaid invoices. Eighteen months in, after an adverse ruling on Corbeau's summary judgment motion narrows Wrenfield's claims, the parties mediate and reach a deal.

The economic terms take four hours. The documentation takes three weeks, and the three weeks are where the value is.

What the term sheet said

Corbeau pays $4.2 million: $2.0 million within 30 days, $1.1 million on the first anniversary, $1.1 million on the second. Mutual releases. Confidentiality. Dismissal with prejudice.

Six lines. Every problem below is latent in them.

The release: whose claims, and against whom

Wrenfield's counsel, Idris Fontaine-Achebe, asks the questions the term sheet does not answer.

Whose claims are released? Wrenfield has two subsidiaries that used Corbeau's services under the same agreement. If they are not parties to the release, they can sue tomorrow. They are added as releasing parties, and their signatures obtained.

Against whom? Corbeau is one entity in a group. Its parent guaranteed performance under the services agreement; two affiliates performed some of the work. Corbeau wants the release to cover all of them. Idris agrees, and prices it — a release covering the parent's guarantee is worth something, and he says so in the negotiation.

Known and unknown? Corbeau wants a general release of unknown claims. Wrenfield's business team is uneasy, because an audit of Corbeau's billing is underway and nobody knows what it will find. Resolution: general release with a carve-out for claims arising from the billing audit, which is defined by reference to the specific invoices under review, with a ninety-day deadline for Wrenfield to assert any such claim.

Through what date? The relationship continues; Corbeau will keep hauling freight. The release runs to the Effective Date only, and the agreement says so twice.

The trade secret problem

Wrenfield's algorithm claim was the emotional center of the case, and the settlement resolves it with money. Idris asks a question nobody had raised: does Corbeau still have the algorithm?

It does — in files produced in discovery, in an expert's analysis, and possibly in a former Wrenfield employee's memory.

Added to the agreement: certification of destruction or return of all copies within thirty days, covering Corbeau, its counsel, and its experts; a covenant not to use or disclose; and a provision that the confidentiality obligations of the protective order survive independently. Without these, Wrenfield would have sold a trade secret rather than settled a claim.

The enforcement problem

The term sheet says "dismissal with prejudice." Corbeau owes $2.2 million over two years.

Under Kokkonen v. Guardian Life Insurance Co. of America, 511 U.S. 375 (1994), a dismissal does not give the court power to enforce the agreement. If Corbeau misses the second-anniversary payment, Wrenfield's remedy is a new breach of contract action — in state court, from the beginning, three years after the fact.

Two changes:

  1. The dismissal order provides: "The Court retains jurisdiction to enforce the terms of the parties' Settlement Agreement dated [date], the terms of which are incorporated by reference."
  2. The agreement includes a confession of judgment provision: on a payment default not cured within fifteen days, Wrenfield may submit a stipulated judgment for the unpaid balance plus interest and fees.

Corbeau resists the second. Idris explains that it costs Corbeau nothing if it pays, which is what Corbeau says it will do. Corbeau agrees.

Confidentiality, carefully

The term sheet says "confidentiality."

What is confidential? The amount and the terms — not the existence of the settlement, because both companies have contracts with customers requiring disclosure of material litigation outcomes, and a clause they must immediately breach is worse than none.

Who is bound? The parties and their counsel. Employees are addressed by an obligation on each party to instruct personnel with knowledge; individual employees are not made parties.

Carve-outs: compelled disclosure with notice where permitted; auditors, accountants, and tax authorities; insurers and lenders; enforcement of the agreement; communications with government agencies, which are expressly preserved; and information otherwise public.

Remedy: liquidated damages of $150,000 per breach, which the parties recite is a reasonable estimate given the difficulty of proving harm, plus injunctive relief.

The taxes and the liens

Allocation. The $4.2 million is allocated: $3.5 million to the contract claim, $700,000 to the trade secret claim. The allocation matters for tax treatment and for Corbeau's insurance recovery, and it is negotiated rather than left blank.

Reporting. The agreement specifies the tax forms each party will issue and the taxpayer identification numbers required.

Liens. Wrenfield's litigation funder holds a security interest in the proceeds. It is identified, and its payoff is provided for in the payment mechanics, with a release of its interest as a condition of the first payment.

What the three weeks bought

  • Two subsidiaries bound, which prevented a second lawsuit
  • A carve-out for an audit that later produced a $340,000 claim Wrenfield was able to assert
  • A trade secret returned rather than sold
  • Enforceable payment obligations, which mattered when Corbeau paid the second installment eleven days late
  • A confidentiality clause both parties could actually comply with
  • An allocation that saved Corbeau a substantial insurance argument

Idris's note to the client: "The number was decided in an afternoon. Everything that determines whether we actually get it was decided in the drafting."

Getting to the agreement

The negotiation has its own structure, and the sequence affects the result.

Settle the economics first, then paper it. Attempting to negotiate release scope while the number is open produces trades between things that are not comparable.

But identify the structural issues early. Whether a fee waiver is required, whether a consent decree is acceptable, whether payments are deferred, and whether ongoing obligations exist are terms that affect the number and should be on the table during the economic negotiation rather than after it.

Use a term sheet, and make it specific enough. Six lines is too few. A term sheet should cover: the amount and timing; who releases whom; scope, including known and unknown claims; whether fees are included; the dismissal mechanism and retained jurisdiction; confidentiality in outline; and any ongoing obligations. Whether it is binding should be stated expressly.

Mediator's proposals. Where the parties are close, a mediator's proposal — a single number each side accepts or rejects confidentially — resolves the last gap without either side bidding against itself. It works best when both sides have authority in the room.

Authority. Confirm it. A settlement reached by counsel without client authority is a recurring and expensive problem, and the law on apparent authority varies.

Mediation privilege and Federal Rule of Evidence 408. Communications during compromise negotiations are inadmissible to prove the validity or amount of a disputed claim, with exceptions. Several states add a broader mediation privilege by statute. Do not assume the protection is absolute, and do not say things in mediation that would be damaging if repeated.

Timing pressure. Settlements concentrate around events: after a dispositive ruling, after a certification decision, before an expensive expert phase, and on the eve of trial. Each moment has a different bargaining dynamic, and a party that understands which one it is in negotiates better.

Frequently asked questions

Who pays the mediator? Usually split equally, though it is negotiable and is sometimes allocated as part of the settlement. Address it in the mediation agreement rather than after the session.

Is an oral settlement enforceable? Sometimes, and it is a recurring source of disputes. Many jurisdictions enforce settlements placed on the record in open court or memorialized in a signed writing, and are less receptive to purely oral agreements — particularly where a statute of frauds applies or where material terms remain open. The safe practice is to put the essential terms on the record or in a signed term sheet before anyone leaves the room.

Should the settlement agreement be filed with the court? Generally not, if confidentiality matters. A filed agreement becomes a judicial record subject to the public right of access, and courts frequently deny sealing. The alternative — dismissal by stipulation with the agreement held by counsel — preserves confidentiality but forfeits easy enforcement, which is why retained jurisdiction over an agreement referenced but not filed is the usual compromise.

What is a Mary Carter or high-low agreement? Arrangements among fewer than all parties that alter the incentives of a settling defendant who remains in the case — for example, an agreement capping a defendant's exposure while giving it a financial interest in the plaintiff's recovery against others. Most jurisdictions require disclosure to the court and the other parties, and several prohibit particular forms outright. Do not enter one without checking the local rule.

Can we settle with one defendant and continue against others? Yes, and it is common. Address: the effect on the remaining defendants' contribution or indemnity claims; whether the settlement amount reduces the remaining exposure pro tanto or by proportionate share, which varies by jurisdiction; whether the settling defendant will cooperate; and disclosure obligations to the court and the other parties.

Does dismissing the case give the court power to enforce the settlement? No. Kokkonen holds otherwise. Obtain retained jurisdiction in the dismissal order, incorporate the terms, or use a consent judgment.

Is a Rule 68 offer worth making? It depends entirely on whether the underlying statute defines attorney fees as costs. Where it does, per Marek, a well-calibrated offer can cut off post-offer fees. Where it does not, the shift is limited to modest taxable costs.

Can a defendant use Rule 68 to moot a claim? No. Campbell-Ewald holds that an unaccepted offer does not moot a claim.

Can a plaintiff make a Rule 68 offer? No. The rule applies only to a party defending against a claim.

Can a defendant require a fee waiver? Yes. Evans v. Jeff D. permits conditioning settlement on waiver of statutory fees.

Does a settlement make a plaintiff a prevailing party? Generally not without a judgment or consent decree. Buckhannon rejected the catalyst theory.

Are settlement negotiations admissible? Federal Rule of Evidence 408 makes compromise offers and negotiations inadmissible to prove or disprove the validity or amount of a disputed claim, with exceptions including proof of bias, negating a contention of undue delay, and obstruction of a criminal investigation.

Can we keep the settlement confidential? Between the parties, usually. Where the agreement is filed with the court or submitted for approval, the public right of access frequently defeats confidentiality — which is why parties who need it structure so the agreement is not filed.

Enforcing a settlement that has been breached

Settlements break. Payments are missed, obligations are ignored, and confidentiality is violated. What can be done depends almost entirely on decisions made at the dismissal.

If the court retained jurisdiction: file a motion to enforce in the original action. Fast, familiar to the judge, and the remedy can include entry of judgment for amounts owed.

If the settlement was incorporated into a consent judgment: enforce by contempt, which is faster and more powerful than a breach action, and which can compel performance rather than merely awarding damages.

If neither: Kokkonen v. Guardian Life Insurance Co. of America, 511 U.S. 375 (1994) requires an independent jurisdictional basis. The options are a new federal action if diversity exists, or a state court breach of contract action. Both start from the beginning.

If a confession of judgment provision exists: submit the stipulated judgment per its terms. This is why the provision is worth negotiating even when the paying party objects.

Common enforcement disputes and how to prevent them:

Dispute Prevention
"That claim was not released" Define the released claims precisely; state whether unknown claims are covered
"We never agreed to that" Integration clause; term sheet stating whether it is binding
"That entity did not sign" Identify every releasing and released party by name
"The payment was late but we cured" Define default, cure period, and consequence
"We did not breach confidentiality — our employee did" Bind the parties and impose an obligation to instruct personnel
"The liquidated damages are a penalty" Recite the difficulty of proving harm and the reasonableness of the estimate
"There is no jurisdiction here" Retained jurisdiction in the dismissal order

Relief from a settlement. A party seeking to undo a settlement faces Federal Rule of Civil Procedure 60(b) if a judgment was entered, or ordinary contract defenses — fraud, mutual mistake, duress, lack of capacity, lack of authority — if it was not. Courts are reluctant. A settlement is a contract, and buyer's remorse is not a ground.

Practical advice on the first missed payment: send a cure notice in the form the agreement requires, on the day the payment was due. Parties that let two payments slip before acting weaken every subsequent position, and courts asked to enforce ask why the movant waited.

Tax and accounting consequences

The allocation in a settlement agreement determines tax treatment for both sides, and it is frequently left blank by people who do not realize it matters.

For the payer. Amounts paid to settle ordinary business disputes are generally deductible as business expenses. Amounts characterized as fines or penalties payable to a government are generally not, and the characterization in the agreement matters to that analysis. Punitive damages are deductible for the payer in most business contexts, though the recipient's treatment differs.

For the recipient. The general rule is that all income is taxable unless excluded. The principal exclusion is for damages received on account of personal physical injuries or physical sickness, which is narrower than plaintiffs expect — emotional distress alone does not qualify unless it originates in physical injury. Amounts for lost wages are ordinary income and generally subject to employment tax withholding. Amounts for property damage may be a return of basis rather than income.

Attorney fees. A recipient may be taxed on the gross recovery including the portion paid to counsel, with the deduction limited or unavailable depending on the claim type. Statutory fee-shifting cases have specific treatment for certain claims. This can produce the striking result of a plaintiff owing tax on money that went to their lawyer, and it should be raised before the settlement is structured rather than after.

Allocation. The agreement's allocation among claim types is generally respected if it is reasonable and reflects the economic substance of the dispute. An allocation that is plainly tax-motivated and unsupported by the pleadings invites challenge.

Reporting. Specify who issues what form, to whom, and when. Payments to a claimant, to counsel, and to a claimant jointly with counsel are reported differently, and getting it wrong produces correspondence with tax authorities for years.

Structured settlements. Periodic payments funded by an annuity can preserve exclusions and manage the recipient's tax position, and are common in personal injury matters. They require planning before signing.

Practical rule: where the amounts are meaningful, involve a tax adviser before the agreement is signed. Litigation counsel who allocate a settlement without tax input are making a decision with consequences they have not analyzed, and the allocation cannot be revised afterward.

Using Rule 68 well

For the small number of cases where it works, an offer of judgment is one of the most effective tools available. Using it well requires calibration.

Confirm the statute defines fees as costs. This is the threshold question, and it decides whether Rule 68 does anything. Under Marek v. Chesny, 473 U.S. 1 (1985), fees shift only where the substantive statute includes them within "costs." Where it does not, a rejected offer shifts a few thousand dollars in taxable costs and is not worth the strategic disclosure.

Calibrate the number. The offer must exceed the likely judgment, not the plaintiff's demand. An offer set too low is rejected and the cost-shifting never triggers; one set too high is accepted and overpays. The analysis requires a genuine damages assessment, which is why offers made early — before the damages picture is clear — are frequently miscalibrated.

Time it. The offer must be served more than fourteen days before trial, and the cost-shifting reaches only post-offer costs. An offer made early captures more of the plaintiff's fees, but is made with less information. The usual compromise is to make one after the principal damages discovery and before expert reports, which are expensive.

Consider serial offers. Nothing prevents making a second, higher offer later. Each resets the post-offer period for costs incurred after it. A defendant that offers $250,000 in month six and $400,000 in month fourteen has two opportunities for the shift to bite.

Draft it precisely.

  • State whether it is inclusive of or in addition to costs and fees accrued to date. Ambiguity is construed against the offeror, and the offeree may take the offer plus fees.
  • Specify which claims and which parties it covers.
  • State that judgment will be entered, and on what terms.
  • Include any non-monetary terms — but note that Rule 68 judgments are public, which limits confidentiality.

Understand what the plaintiff faces. A plaintiff whose counsel is working on a fee-shifting basis, holding a rejected offer, is exposed to losing all post-offer fees if the verdict comes in lower. That is a genuine and uncomfortable pressure, and it is exactly what the rule is designed to create.

And understand the limits. A Rule 68 judgment is a judgment against the defendant — public, on the docket, and admitting liability in substance if not in form. Some defendants will not accept that at any price, which is a legitimate business decision that should be made deliberately rather than discovered mid-strategy.

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