United States: Attorneys Fees Revisited: Rule 68 and Section 505

By David Goldberg and Robert J. Bernstein

In a copyright action, where the defendant is unlikely to prevail on the merits, a cost-effective strategy may be found in the offer of judgment provision of the Federal Rules and the costs and attorneys' fees section of the Copyright Act. Before even answering or moving to dismiss, making an offer of judgment under Fed. R. Civ. Pro. Rule 68 can dramatically alter the outcome of a copyright litigation in defendant's favor. If the offer is accepted, the case is over quickly, for an amount of money the defendant deems tolerable.¹ The more interesting result, however, occurs when the offer is rejected (as it is quite likely to be). Under the Rule, if a defendant offers to have judgment entered against it in a specified amount, and the plaintiff's eventual judgment after trial is less than that amount, the plaintiff is liable for all "costs incurred" by the defendant after the making of the offer.²

In most federal actions, such taxable "costs" are relatively minimal (transcripts, witness fees, etc.), so rejecting a Rule 68 offer is seldom a real threat to plaintiff's pocketbook. This is probably the reason why Rule 68 seems to have been used sparingly for much of its existence. Copyright cases, however, are different, because in a copyright case, the term costs under §505 can include attorneys' fees. In 1985, the United States Supreme Court held that "the term costs in Rule 68 was intended to refer to all costs properly awardable under the relevant substantive statute or other authority."³

It may appear, therefore, that in a copyright case, a losing defendant could thus recover fees under the Rule, even though it is not the "prevailing party" as required by §505. Moreover, Rule 68 is mandatory ("if the judgment ... is not more favorable than the offer, the offeree must pay the costs incurred after the making of the offer"), while §505 is discretionary, often requiring a showing of "objective unreasonableness" on the part of the non-prevailing party. A defendant who immediately offers to settle the case for an appropriate amount can hardly be deemed objectively unreasonable. The plaintiff receiving a reasonable Rule 68 offer thus faces a real prospect of having its recovery reduced by the amount of defendant's attorneys' fees, as well as having to pay its own fees. A rational plaintiff might easily decide to settle under those circumstances, which is exactly the result Rule 68 was created to encourage.

The Rule seems simple enough on its face, but the two federal circuits that have struggled with the issue have reached contrary results.

Circuit Court Precedent

In 1997, the Eleventh Circuit decided Jordan v. Time, Inc.⁴ Pat Jordan, a professional writer, sued Time, Inc. for reprinting without permission an article he wrote for Sports Illustrated about Bo Belinsky, a former baseball pitcher. Pursuant to Rule 68, Time made an offer of judgment for $15,000, plus attorneys' fees and costs, if any, and subsequently increased the offer to $20,000. Jordan rejected both offers. After Time admitted liability, the jury returned a verdict awarding Jordan $5,000 in actual damages. Jordan then elected to recover statutory damages pursuant to §504(c)(1) of the Copyright Act, and the district court awarded Jordan $5,500 in damages. The district court denied both parties' motion for attorneys' fees and costs.

On appeal, Time argued that Rule 68 mandated an award of costs including attorneys' fees, because Jordan recovered less than the offer of judgment. The Eleventh Circuit agreed, holding that "the mandatory language of the Rule leaves no room for district court discretion." Since both the jury's award and the statutory damage award were less favorable than the offer of judgment, the Court of Appeals reversed the denial of costs and fees to Time and remanded for a determination of Time's costs, including attorneys' fees.

Where the Eleventh Circuit gave effect to Rule 68, the Seventh Circuit, in a case decided this past September, did not. In Harbor Motor v. Arnell Chevrolet⁵, Harbor and Arnell were competing auto dealerships in northwest Indiana. In conjunction with a tent sale, Harbor designed and ran an advertisement in the local newspaper, the Post Tribune. Harbor had conducted its tent sales in the same location over a three-year period. Four weeks after a Harbor sale in June 1997, Arnell also ran a tent sale in the same location. Arnell procured the newspaper to create an ad for its sale which was a virtual copy of the Harbor ads. Harbor sued both Arnell and the newspaper for infringement.

During pre-trial proceedings, Arnell and the newspaper tendered a joint offer of judgement to Harbor for $20,100, which it rejected. At the close of Harbor's case, the court ruled the infringement was not willful and also dismissed the newspaper on First Amendment grounds. The jury then returned a verdict against Arnell for statutory damages of $12,500. The district court awarded the newspaper attorneys' fees as a prevailing party under §505 of the Copyright Act. It also awarded Arnell attorneys' fees under Rule 68 because the $12,500 judgemnt was less than the $20,100 offer.

On appeal, the Seventh Circuit reversed the district court's dismissal of the case against the newspaper and accordingly, reversed the award of attorneys' fees. Now we come to the more difficult and interesting question, the interplay between Rule 68 and §505 of the Copyright Act. Rule 68 deals with costs. And the Supreme Court in Marek said costs can include attorneys' fees when the underlying statute includes them as part of costs. Section 505 of the Copyright Act also includes attorneys' fees as costs, but only to the prevailing party. So the issue, as posed by the Seventh Circuit, is whether Arnell must be a prevailing party under the Copyright Act to recover attorneys' fees under Rule 68.

The Court of Appeals recognized the paucity of precedent on the issue. The Eleventh Circuit, in Jordan v. Time, Inc., read Rule 68 in a straightforward way to require attorneys' fees as part of costs when the judgment is less than the recovery. The Seventh Circuit criticized Jordan, however, contending that the court in Jordan did not confront squarely the requirement in §505 of the Copyright Act that a party seeking attorneys' fees must be a prevailing party. The Seventh Circuit looked instead to a 1986 decision of the First Circuit in Crossman v. Marcoccio.⁶ That case involved a civil rights action pursuant to 42 U.S.C. §1983 against five Providence, Rhode Island police officers. Plaintiffs rejected an offer of judgment and ultimately recovered less than the offer. The district court had awarded defendants post offer costs and post offer attorneys' fees.

The First Circuit reversed on the issue of attorneys' fees, holding that a losing defendant in a civil rights case could not recover post offer attorneys' fees because it was not the "prevailing party" under 42 U.S.C. §1988. The court went back to the Supreme Court's language in Marek which stated that "the term 'costs' in Rule 68 was intended to refer to all costs properly awardable under the relevant substantive statute or other authority."

Since the Civil Rights statute and the Copyright Act contained the same language, the Seventh Circuit sided with the First to hold that only prevailing parties can recover attorneys' fees under Rule 68 in a copyright case. The award is tied to costs properly awardable, and addresses the Copyright Act's mandate that only the prevailing party is permitted to recover its attorneys fees.

The underlying purpose of Rule 68 is not in dispute. It is to encourage settlements and avoid protracted litigation. Whether the result reached by the Seventh Circuit in Harbor Motor v. Arnell Chevrolet does so is questionable. A plaintiff who recovers less than the offer still pays "costs," but defendant's attorneys' fees cannot be included because the defendant did not prevail. If the defendant prevails, he cannot avail himself of the mandatory provisions of Rule 68 because they have been held to apply only where the plaintiff obtains a judgment less favorable than the offer. Where plaintiff fails to obtain a judgment, a prevailing defendant is left to recover attorneys' fees at the court's discretion under §505 of the Copyright Act.

If the Seventh and First Circuits are followed, Rule 68 has no significant application in copyright cases. In order for the discrepancy to be resolved, other circuits, and eventually the Supreme Court, will have to consider this issue.