The Often Misunderstood Texas Offer of Settlement Rule
For almost 20 years Texas has had a fee shifting "offer of settlement" rule. However, because the legislature made the process cumbersome it is still rarely used and often misunderstood. The rule applies to almost all cases in which monetary damages are sought; except certain limited types of cases such as class actions and suits brought under the Family Code.
Under Texas Rule of Civil Procedure 167, if an offer of settlement is made in accordance with the rule, then certain litigation costs can be awarded against a party who wrongfully rejects the offer. Initially, only a defendant or party against whom a claim for damages is made – which also includes cross-defendants, counterclaim defendants, and third-party defendants – can make a declaration invoking Rule 167. However, once a defendant files its declaration, a plaintiff may then make an offer of settlement to that defendant.
Rejection of a "reasonable" settlement offer will result in the rejecting party paying its opponent's litigation costs. Rule 167 defines “litigation costs” as court costs, deposition costs, fees for two expert witnesses, and attorney’s fees. The clock for calculation of litigation costs starts when the settlement offer is rejected and stops when the final judgment is signed. Under Rule 167, a "reasonable" settlement offer is one not "significantly less favorable" to the offeree than the actual judgment at trial. This means that for offers made by a defendant to a plaintiff -- a settlement offer is reasonable if the judgment is less than 80% of the offer amount. For offers made by a plaintiff to a defendant -- a settlement offer is reasonable if the final judgment is more than 120% of the offer amount. Litigation costs are awarded to a defendant only as a setoff of the plaintiff’s recovery. This limitation prevents a plaintiff from ever paying more than the awarded judgment. Therefore, if the plaintiff recovers nothing, then the defendant receives nothing. On the other hand, the plaintiff's litigation costs subject a defendant to additional monies over and above the judgment. Given that expert and attorney’s fees are generally not recoverable in tort cases, the offensive use of Rule 167 has the potential to significantly shift risks between the parties if a reasonable offer is wrongfully rejected.
Rule 167 is cumbersome as written. It is easiest to understand the application of the offer of settlement procedure by use of examples. Two common fact patterns are discussed below:
- Plaintiff sues Defendant and alleges damages of $500,000. Defendant offers to settle Plaintiff’s claim for $400,000. Plaintiff rejects the offer. At trial Plaintiff obtains a judgment of $300,000. Defendant’s settlement offer would be deemed reasonable since $300,000 is 75% (i.e. less than 80%) of Defendant’s offer of $400,000. The Defendant would be permitted to offset the amount of litigation costs against the Plaintiff’s $300,000 judgement.
- Plaintiff sues Defendant and alleges damages of $500,000. Defendant offers to settle Plaintiff’s claim for $200,000. Plaintiff rejects the offer. At trial there is a complete defense verdict and a take-nothing judgment is entered. Although Defendant’s settlement offer was reasonable, there is no cost shifting available to Defendant since the litigation costs are only set-off against Plaintiff’s recovery; which is zero.
HOW TO INVOKE RULE 167
To invoke Rule 167, a defendant must file a declaration with the court at least 45 days before trial. In addition, the offer must: 1) be in writing; 2) state that it is made under Rule 167; 3) state the terms by which all monetary claims — including any attorney’s fees, interest, and costs may be settled; 4) state the deadline — no sooner than 14 days after the offer is served — by which the offer must be accepted; and, 5) be served on all parties to whom the offer is made. Rule 167 identifies what conditions can be made in the offer. An offer may be subject to reasonable conditions, including the execution of appropriate releases, indemnities, and satisfaction of liens. If an offer is accepted, either the offeror or offeree may file the offer and move the court to enforce the settlement.
The litigation attorneys at Mayer LLP have significant experience assisting clients navigate the complexities of Rule 167. When used appropriately, it can be an effective tool in attempting to resolve difficult cases. Please let us know if we can be of assistance to you by answering your litigation related questions.