Since the advent of modern class action litigation in the 1960s, companies have struggled to stem the tide of these time-consuming and expensive lawsuits. Consider the following strategy. After learning that a plaintiff has filed a putative class action against it, the company offers to fully and completely compensate the named plaintiff for its injuries, while simultaneously denying liability. The offer, made pursuant to Rule 68 of the Federal Rules of Civil Procedure, provides the company with two ways to quickly terminate the case. First, if the plaintiff accepts the Rule 68 offer, the case is settled and the plaintiff is barred from bringing the class action. Second, even if the plaintiff rejects the Rule 68 offer, the company may seek to dismiss the case, arguing that the plaintiff’s claim is moot because the defendant offered to fully compensate the plaintiff for its injuries. Recently, the Supreme Court limited the effectiveness of this strategy. In Campbell-Ewald Co. v. Gomez, No. 14-857 (Jan. 20, 2016), the Court held that an unaccepted Rule 68 offer is a “legal nullity,” and that such an offer does not render a plaintiff’s claim moot. Companies still may make these offers, but they will only terminate the would-be class action if the plaintiff accepts the offer.
In Campbell-Ewald, a contractor for the U.S. Navy, Campbell-Ewald Co. (“Campbell”), devised a recruiting and marketing scheme for the Navy, whereby Campbell would send text messages to young adult males, encouraging them to consider a career in the Navy. The Telephone Consumer Protection Act (“TCPA”) prohibits companies from using an “automatic telephone dialing system” to send unsolicited texts to a cell phone. 47 U.S.C. § 227(b)(1)(A)(iii). As a result, Campbell restricted its marketing scheme to individuals who had specifically consented to receiving texts from the Navy. Nonetheless, Jose Gomez (“Gomez”) filed a putative class action against Campbell under the TCPA, alleging that Campbell sent him unsolicited text messages using an automatic dialing system in violation of the Act.
While the action was pending, Campbell offered to settle Gomez’s claim pursuant to Rule 68. In its offer, Campbell agreed to: (1) compensate Gomez for his legal costs, (2) pay Gomez the maximum penalty allowable under the TCPA for each message Gomez received, and (3) refrain from sending text messages in violation of the TCPA. Gomez rejected the offer, and Campbell subsequently moved to dismiss the case, arguing that no Article III “case or controversy” remained because its settlement offer “mooted Gomez’s individual claim by providing him with complete relief.”
In a 6-3 decision penned by Justice Ginsburg, the Supreme Court held that an unaccepted settlement offer made pursuant to Rule 68 does not render a plaintiff’s claim moot. The Court adopted Justice Kagan’s rationale from her dissent in a 2013 Supreme Court case, Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523 (2013). In Genesis Healthcare, Kagan reasoned as follows.
An unaccepted settlement offer – like any unaccepted contract offer – is a legal nullity, with no operative effect. As every first-year law student learns, the recipient’s rejection of an offer “leaves the matter as if no offer had ever been made.” Nothing in Rule 68 alters that basic principle.
Consistent with Kagan’s rationale, the Court explained that, because Gomez rejected Campbell’s settlement offer, the offer had no legal effect on the viability of Gomez’s complaint.
Three justices dissented from the Court’s decision, penning two separate dissents. The first, by Chief Justice Roberts, was joined by Justices Scalia and Alito. Roberts disagreed with the majority and would have held that Campbell’s settlement offer extinguished the Article III “case or controversy” between Campbell and Gomez. He added that “federal courts exist to resolve real disputes, not to rule on a plaintiff’s entitlement to relief already there for the taking.” Justice Alito also wrote separately to emphasize that, under the majority’s holding, “a defendant who actually pays complete relief – either directly to the plaintiff or to a trusted intermediary – [can still] seek dismissal on mootness grounds.”
Takeaways for Companies
Campbell-Ewald dealt a blow to companies facing class action litigation because they now have a less potent tool in their toolbox. Although decided in the context of the TCPA, the decision has far-reaching consequences as Rule 68 offers frequently were used by companies facing law suits based on consumer statutes lacking statutory damages caps and law suits brought under the Fair Labor Standards Act.
Companies facing these types of claims should take note that the Court left the door open for mooting a claim based on a company’s payment of complete relief (as opposed to merely offering to make such a payment). The majority highlighted the distinction between an offer and payment, but expressly declined to decide whether the result would be different. Roberts and Alito each seized on this distinction in their dissents. Roberts suggested that a defendant could deposit a certified check with the trial court for the full amount due, and that such an act may present a means to moot a claim—even against a plaintiff who “won’t take ‘yes’ for an answer.” Alito’s dissent also may be read as an invitation for a company to challenge how far the Court is willing to go when deciding if there is an Article III “case or controversy” by actually paying the relief requested. Given the steep costs of class action litigation and the relatively low cost of settling individual claims, it may not be long before a defendant takes Justice Alito up on his invitation. Such a challenge would help to flesh out the logistics of making such a payment—e.g., to whom must the payment be made and is it necessary for a company seeking to moot a claim to obtain a judgment from the Court in the plaintiff’s favor in the amount of the payment before the payment is made?
Companies also should keep in mind that Rule 68 offers provide another advantage, which the Court did not disturb. When a company makes a Rule 68 offer and the judgment that the plaintiff obtains is not more favorable than the rejected offer, then the plaintiff must pay the company’s costs incurred after the offer was made. The risk of this cost-shifting may provide considerable leverage in settlement discussions.