Offers of Settlement Can Be Unsettling

WDC Journal Edition: Fall 2003
By: Vicki Arrowood

In Pachowitz v. LeDoux , the court of appeals for the first time addressed the application of §807.01, Wisconsin’s offer of judgment and settlement statute, in a case involving a plaintiff who was entitled to an award of attorney fees. Because both the plaintiff and the defendant in Pachowitz filed offers of settlement/judgment prior to trial, the case is instructive to any party involved in litigation in which a prevailing plaintiff is entitled to an award of attorney fees. Unfortunately, the decision as it now stands makes it almost impossible for a defendant to beat an offer of judgment filed in such cases.

Factual background

The Pachowitz case involved a claim for invasion of privacy under §895.50, Stats. The plaintiff, Julie Pachowitz filed suit against Katherina R. LeDoux, the EMT that Pachowitz alleged invaded her privacy, Tess Corners Volunteer Fire Department, and Tess Corners’ insurer, Continental Western Insurance Company. In her lawsuit, Pachowitz alleged that following an emergency call to her house, LeDoux made public her medical records, conditions, and private life, by making statements to third persons regarding why she required medical attention. Because an issue existed as to whether LeDoux was acting within the scope of her employment as an EMT at the time that she allegedly “made public” Pachowitz’ medical condition, separate attorneys were retained to file answers on behalf of LeDoux, and Tess Corners and Continental Western.

Prior to trial, Pachowitz filed an offer of settlement pursuant to §§807.01(3) and (4), directed to both LeDoux and Tess Corners. Pachowitz offered “to settle this matter with the Defendants, Katherina LeDoux, Tess Corners Volunteer Fire Department, and Continental Wester[n] for the sum of Twenty-Five Thousand Dollars ($25,000), which includes statutory attorneys’ fees as allowed by Wis. Stats., §895.50 together with taxable costs.” In addition, LeDoux filed an offer of judgment pursuant to §807.01(1), “to settle all of the plaintiff’s claims with regard to the above matter for a total of Five Thousand Dollars ($5,000) together with statutory taxable costs and disbursements.” Neither the offer of settlement nor the offer of judgment was accepted prior to trial.

The case proceeded to trial, and the jury concluded that LeDoux had violated Pachowitz’ right of privacy by publicizing a matter concerning her private life. The jury awarded Pachowitz $3,000 in compensatory damages.

The defendants filed motions after verdict requesting that the trial court find that the jury verdict was less favorable than the offer of judgment that was filed, and therefore, the defendants, and not the plaintiff, should be entitled to tax costs. The plaintiff also filed motions seeking judgment on the verdict, interest and double the amount of taxable costs pursuant to §807.01, and attorney fees pursuant to §895.50(1)(c), which allows for the recovery of “[a] reasonable amount for attorney fees.”

The trial court held that the defendant’s offer of judgment was ambiguous and unenforceable because it did not address the issue of attorney fees under §895.50. The trial court also ruled that the plaintiff’s offer of settlement was valid, and awarded Pachowitz double taxable costs and interest on the jury award. Finally, the trial court awarded the plaintiff more than $30,000 in attorney fees.


The Court of Appeals Decision

In its decision, the court of appeals set forth a three-step methodology to be used when determining if an offering party is entitled to the remedies of §807.01. First, the court must determine if the offer was sufficient under the standards set out in the case law. According to the court of appeals, this requires an assessment of whether the offer allowed the other party to fully and fairly evaluate the offer from his or her own independent perspective.

Second, the court must measure the offer against the judgment to determine if the offering party qualifies for the statutory remedies. In the case of an offer of judgment by a defendant, the court must determine if the plaintiff has failed to recover a more favorable judgment. In the case of an offer of settlement by the plaintiff, the court must determine if the plaintiff has recovered a more favorable judgment, entitling the plaintiff to double costs under §807.01(3), Stats., and whether the plaintiff has recovered a judgment which is equal to or greater than the offer of settlement, entitling the plaintiff to 12% interest on the amount recovered pursuant to §807.01(4).

Third, if the offer survives when measured against the judgment, the court must then determine the appropriate remedies allowed by §807.01.
With respect to Pachowitz’ offer of settlement, the court of appeals noted that the trial court had rejected LeDoux’ argument that the offer was invalid because it was made to multiple defendants. The trial court had concluded that because Continental was “going to pay the bill,” the fact that the offer was made to multiple defendants did not preclude the defendants from being able to evaluate the offer. The court of appeals disagreed, stating that the trial court’s ruling overlooked the fact that at the time that Pachowitz filed her offer of settlement, an insurance coverage dispute existed between Continental and LeDoux.

According to the court of appeals, the fact that Continental abandoned its claim that LeDoux was not acting within the scope of her employment at the close of evidence was not relevant for the purpose of determining the validity of the offer at the time it was made. Because a coverage dispute existed at the time that Pachowitz filed her offer of settlement, it would have been impossible for Continental or LeDoux to evaluate the offer from an independent perspective and to intelligently assess each party’s degree of exposure, as required by Wilbur v. Fuchs. Therefore, Pachowitz’ offer failed to survive the first step of the methodology, and the court of appeals reversed that portion of the judgment awarding Pachowitz double costs and 12% interest pursuant to §807.01(3) and (4).

With respect to the offer of judgment that LeDoux filed, the court of appeals held that the trial court correctly determined that LeDoux was not entitled to costs under §807.01(1) because the final judgment of $37,909, which included an award of attorney fees, far exceeded LeDoux’ $5,000 offer of judgment. The court of appeals concluded that when a defendant is sued under a fee shifting statute, “that party is put on notice that the plaintiff is seeking not only damages but also reasonable attorney fees.” Therefore, the court stated that when making an offer of judgment, “the defendant is properly held to include such fees and to so inform the plaintiff.” The court went on to state that “it logically follows that the trial court should also include attorney fees in the judgment when it measures the offer against the judgment.”

In analyzing LeDoux’ offer of judgment, the court noted that the offer “said nothing of attorney fees. Instead, it was limited to compensatory damages, costs and disbursements.” According to the court, LeDoux’ offer did not allow the plaintiff to fully and fairly evaluate the offer from his or her own perspective. The court of appeals described LeDoux’ offer as, “at best,” a partial settlement offer relating only to compensatory damages, costs and disbursements. However, the court stated that §807.01 does not envision partial settlements; it envisions complete settlements.

Therefore, the court concluded that LeDoux’ offer was invalid because it failed to include an allowance for Pachowitz’ reasonable attorney fees. Because the trial court properly included such fees in the judgment when measuring the offer against the judgment, LeDoux’ was not entitled to costs under §807.01(1). Id., at 52.

At both the trial court and the appellate levels, LeDoux relied on Northridge Co. v. W.R. Grace & Co., and Prosser v. Leuck, to support her argument that she was entitled to costs under §807.01. In both Northridge and Prosser, the courts held that the offer must be compared exclusive of any costs. Thus, in both Northridge and Prosser, the courts compared the amount of the jury verdict to the offer when evaluating an offer of settlement under §807.01.

The court of appeals in Pachowitz found the Northridge case to be distinguishable because the plaintiff did not sue under a statute which provided for both compensatory damages and “a reasonable amount for attorney fees.” What the court of appeals has now done is create two different standards when evaluating offers of settlement or judgment under §807.01. In cases in which attorney fees are not involved, the court compares the amount of the jury verdict to the offer. In cases in which attorney fees are involved, the courts compare the amount of the final judgment (which includes the amount of the jury verdict, the award of attorney fees, and costs) to the offer.

The Pachowitz decision now makes it very difficult for a defendant to ever beat an offer of judgment in those cases in which the plaintiff is entitled to an award of attorney fees. For example, assume that in a case such as Pachowitz, a defendant decides early on that the case is one that should be settled and wants to file an offer of judgment shortly after suit is filed and before a lot of fees and costs are incurred. The defendant reviews the case and determines that it has a value of $5,000. An offer of judgment is filed for this amount. The plaintiff refuses to accept the offer of judgment, and the case proceeds through discovery and ultimately goes to trial. The jury awards the plaintiff $3,000 in compensatory damages. However, the plaintiff has incurred $30,000 in attorney fees. Under Pachowitz, the amount of the judgment is in excess of the offer of judgment, and the defendant is not permitted to recover his costs.

This same result will occur regardless of when the defendant files an offer of judgment. Under §807.01, the last chance that a defendant has to file an offer of judgment is 20 days prior to trial. Even if a defendant files a last minute offer of judgment that includes attorney fees incurred, the defendant has little chance of prevailing because attorney fees are calculated through trial and up to the date that a judgment is entered. Assuming that the defendant has correctly assessed the compensatory damage portion of the case, the only way that the defendant can prevail is to include in the offer of judgment a sum of money to cover attorney fees incurred through trial and any post-verdict motions. However, such a result is unreasonable and absurd because it forces the defendant to engage in speculation and offer a sum of money to cover attorney fees that have yet to be incurred. In addition, the Pachowitz ruling penalizes a defendant who correctly evaluates a case at the time the offer is filed, but cannot benefit by filing an offer of judgment because the award of attorney fees through trial inflates the amount of the final judgment to more than the defendant’s offer.

The court’s decision in Pachowitz also puts defense counsel in the difficult position of having to guess what constitutes a reasonable amount of attorney fees. Defense attorneys are asked to determine whether a reasonable fee is one based on an hourly fee agreement or a contingency fee, what a reasonable hourly rate is, and what constitutes a reasonable amount of time spent working on the case. In Pachowitz, both the trial court and the court of appeals approved a fee bill which included 50 hours of trial preparation for a case in which the witness testimony was concluded in one day.

The basic purpose behind §807.01 is to encourage the settlement of cases prior to trial. The rule applied in both Northridge and Prosser is to compare the offer to the verdict amount exclusive of any costs when evaluating an offer under §807.01. To interpret the statute in any other manner converts the purpose behind the statute from encouraging to discouraging settlements. The quest for attorney fees becomes the driving force behind the litigation, and the defendant is precluded from attempting to reduce the amount of damages by filing an offer of judgment to cut off the plaintiff’s right to tax costs, and instead permit the defendant to tax costs. Cases should not be driven by attorney fees, which is precisely the result that will occur in any case in which a defendant is sued under a fee shifting statute, such §895.50, Wisconsin’s invasion of privacy statute.

BIOGRAPHY
Vicki L. Arrowood is an attorney at Emile Banks & Associates, LLC, where she represents insurance companies on defense matters, with an emphasis on coverage issues and appellate practice. She is a 1986 graduate of Marquette University Law School.

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2003 WI App 120, ___ Wis.2d ___, ___ N.W.2d ___,
Id., at 43.
Id.
Id.
Id., at 55.
158 Wis. 2d 158, 160, 461 N.W.2d 803 (Ct. App. 1990).
Pachowitz, 2003 WI App at 56-7.
Id., at 51.
Id.
205 Wis. 2d 267, 556 N.W.2d 345 (Ct. App. 1996).
225 Wis. 2d 126, 592 N.W.2d 178 (1999),
Pachowitz, 2003 WI App at 50-1.