A Costly Omission: When a Settlement Agreement is Silent Regarding the Allocation of Litigation Costs

The California Supreme Court recently held that where settling parties fail to resolve the allocation of costs in their settlement agreement, the plaintiff is the “prevailing party” and is entitled to recover litigation costs. Although DeSaulles v. Community Hospital of Monterey Peninsula (2016) 62 Cal. 4th 1140 involved an action for alleged disability discrimination and related claims, the Court’s ruling is paramount to addressing omissions of the allocation of court costs across all legal areas, including but not limited to construction defect claims.

Under California law, the party that prevails in a lawsuit is entitled to recovery of its costs. California Code of Civil Procedure §1032(a)(4) provides a variety of categories that define a prevailing party for purposes of recovering costs in litigation. Two of these categories are: 1) the party with a net monetary recovery, and 2) a defendant in whose favor a dismissal is entered. These two categories are in conflict when the parties enter into a settlement wherein the defendant pays the plaintiff in exchange for a dismissal.

In DeSaulles v. Community Hospital of Monterey Peninsula (2016) 62 Cal. 4th 1140, Plaintiff Maureen DeSaulles (“Plaintiff”) sued her employer, Community Hospital of Monterey Peninsula (“the Hospital”), alleging a cause of action for failure to accommodate her disability or medical conditions under the California Fair Employment and Housing Act. In February 2005, Plaintiff worked for the Hospital as a part-time patient business service registrar. Plaintiff began to complain about her work shift assignments to the emergency room. The Hospital placed Plaintiff on leave of absence in January 2006 and terminated her employment in July 2006.

In July 2007, Plaintiff filed a complaint alleging the Hospital had (1) failed to accommodate her physical disability or medical condition (susceptibility to infection as a result of cancer); (2) retaliated against her for exercising her rights under the California Fair Employment and Housing Act (Gov. Code, § 12900, et seq.); (3) breached implicit conditions of an employment contract; (4) breached an implied covenant of good faith and fair dealing; (5) negligently and (6) intentionally inflicted emotional distress; and (7) wrongfully terminated her in violation of public policy.

After the Hospital’s motion for summary adjudication and subsequent motions in limine, the Court ruled that Plaintiff would be precluded from introducing evidence and argument regarding any cause of action except the third and fourth causes of action.

After the trial court’s ruling and before a jury was empaneled, the parties settled plaintiff’s claims for $23,500. The parties placed the following settlement on record to permit the Court to retain jurisdiction under California Code of Civil Procedure section 664.6: “[I]n consideration for dismissal with prejudice of the two claims of breach of contract and breach of covenant, Defendant will pay Plaintiff within 10 days $23,500.” Defense counsel “will prepare a judgment on the remaining claims which references the dismissal with prejudice and which preserves the right of appeal of the rulings of this court on the remaining causes of action … .” “[T]he parties will not file any motions or memoranda for costs or attorney fees[,] holding off until the completion of the appeal … .” The settlement agreement was silent regarding the payment of litigation costs for both Plaintiff and the Hospital.

Plaintiff filed a request for dismissal with prejudice as to the two remaining causes of action. The trial court awarded the Hospital its costs and denied Plaintiff’s request for costs. Plaintiff appealed.

The Court of Appeal reversed the trial court’s holding, concluding that Plaintiff had obtained a net monetary recovery, and therefore was the prevailing party for purposes of California Code of Civil Procedure section 1032, subdiv. (a)(4).

The Supreme Court affirmed the Court of Appeal’s judgment. The Court held that dismissal pursuant to a monetary settlement is not a dismissal in the defendant’s “favor” as the term is used in California Code of Civil Procedure section 1032, subdiv. (a)(4). The Court determined that a defendant that entered into a monetary settlement with a plaintiff in exchange for a dismissal is not deemed the “prevailing party” for recovery of litigation costs purposes.

The Court further held that a plaintiff who enters into a stipulated judgment to be paid money in exchange for a dismissal has obtained a “net monetary recovery” within the meaning of § 1032, subd. (a)(4), whether or not the judgment mentions the settlement. These holdings establish a default rule that applies only when the parties have not resolved the matter of costs in their settlement agreement or have not stipulated to alternate procedures for awarding costs.

The moral of the story is to always address the allocation of litigation costs between settling parties in the settlement agreement or else, by default, the court will deem the plaintiff the “prevailing party” for purposes of litigation costs recovery.

Blog by: Nicole Allen, Associate, San Diego