3443323233_0e0a3371c3_zLast week, a divided California Supreme Court handed down its decision in DeSaulles v. Community Hospital of the Monterey Peninsula, holding that as long as a settlement agreement involves a payment of money from defendants to plaintiff – no matter how small in relation to the plaintiff’s demand – the plaintiff is a “prevailing party” under Section 1032(a)(4) of the Code of Civil Procedure and entitled to an award of costs as a matter of law.

The Court emphasized that its conclusion was a default rule only, and the parties were free to provide in their settlement agreement for a different allocation of costs. But in the wake of DeSaulles, parties who neglect to make such an express allocation may be in for an unfortunate surprise – a cost bill, which in some kinds of litigation can be substantial.

Plaintiff in DeSaulles worked for defendant for a little over a year as a patient business services registrar. In 2007, the plaintiff filed suit, purporting to allege claims for (1) failure to accommodate her physical disability; (2) retaliation under FEHA; (3) breach of implicit conditions of employment contract; (4) breach of the covenant of good faith and fair dealing; (5) & (6) negligent and intentional infliction of emotional distress; and (7) wrongful termination. Following the defendant’s motions for summary judgment or adjudication and motion in limine, the trial court held that the plaintiff would be barred from offering any evidence on any claim other than the third and fourth causes of action. Subsequently, the parties placed a settlement on the record, pursuant to which the defendant paid the plaintiff $23,500 in connection with the third and fourth claims, and the remaining claims were dismissed with prejudice. The court subsequently entered a judgment providing that the “plaintiff recover nothing from defendant.” The judgment was affirmed on appeal.

Following remand, both parties filed cost bills, claiming to be the prevailing party (the parties’ settlement agreement said nothing about costs). The trial court granted the defendant’s request for costs and denied the plaintiff’s. The Court of Appeal reversed, holding that the plaintiff was the prevailing party as a matter of law, since the litigation had ended with a payment – albeit a small one – from defendant to plaintiff.

In an opinion by Justice Goodwin Liu, the Supreme Court affirmed the Court of Appeal. The majority began by assessing whether a defendant could be considered the prevailing party following a settlement due to Section 1032’s reference to a “prevailing party” including “a defendant in whose favor a dismissal is entered.” The majority held it could not. The rationale for allowing a defendant costs, according to the Court, is to compensate the defendant for preparing for a trial on unmeritious claims when the plaintiff dismisses on the courthouse steps. That rationale did not apply when the plaintiff receives a cash payment (even a nuisance one). In contrast, the Court concluded that a settling plaintiff was a “prevailing party” on the grounds that a settlement payment constituted a “net monetary recovery” under the statute. This was so, the Court held, in part in order to prevent defendants from avoiding a cost award by settling on the eve of trial.

The majority conceded that “defendants may settle cases with little merit in order to be spared the expense of trial. However, the rule is that a partial recovery, as long as it is a net monetary recovery, entitles a plaintiff to costs.” The Court not only encouraged parties to specifically make an express provision for costs, but noted that courts are free to exercise their discretion to adjust a cost award under Section 664.6 of the Code where “parties . . . overlook the issue of costs in their settlement agreements.” But of course, the corollary of the trial courts having such discretion is always the risk that the court will refuse to make such adjustments.

Justice Kruger dissented, joined by Justice Werdegar. The dissenters agreed that a settling plaintiff was a “prevailing party” under Section 1032, but concluded that settling defendants were too, given the statutory reference to a “defendant in whose favor a dismissal is entered.” Since both sides in a settlement couldn’t be entitled to an award of costs as of right, it necessarily followed that trial judges were free to allocate costs as they see fit when the parties failed to expressly allocate them in the settlement agreement.

Image courtesy of Flickr by Anthony Easton (no changes).