On November 19, 2013, the US Court of Appeals for the Second Circuit found in Cabala v. Crowley that an informal settlement offer for the maximum statutory damages and attorney's fees in exchange for a dismissal of claims did not constitute an offer of judgment under FRCP 68 (No. 12-3757-cv, (2d Cir. Nov. 19, 2013)).

The underlying dispute involved alleged violations of the Fair Debt Collection Practices Act (FDCPA). Shortly after the action was commenced, the defendant offered to settle the case for the maximum statutory damages available (in this case, $1,000) and the plaintiff's costs and attorney's fees (to be determined by the court). Notably, the settlement proposal specifically sought to avoid entry of judgment. The plaintiff refused the offer and the parties engaged in a protracted dispute over the nature and form of the settlement.

Ultimately, the parties stipulated to entry of judgment. In addition to recovering $1,000 in statutory damages, the plaintiff was awarded more than $32,000 in attorney's fees and costs by the district court. Most of the $32,000 related to work done by plaintiff's counsel after the defendant's initial settlement offer.

The defendant objected to the fee award as excessive, claiming the initial settlement offer was essentially an offer of judgment under Rule 68 of the FRCP. FRCP 68(d) provides that a plaintiff who rejects an offer of judgment, but does not ultimately receive greater relief, cannot recover its costs accruing after the date of the rejection (in certain cases "costs" also includes attorney's fees). Here, the plaintiff settled for $1,000 in statutory damages, the same amount initially offered by the defendant.

The Second Circuit upheld the district court's $32,000 fee award, concluding that the informal settlement offer was not covered by FRCP 68 because the defendant "consistently declined a resolution that included a judgment."

This case is an important reminder of the risk of not stipulating to entry of judgment when making a settlement offer. Although there may be tactical reasons for settling without formal entry of judgment, counsel must weigh these advantages against the possibility of paying the adversary's attorney's fees if an informal settlement offer is rejected.