Ambiguity in settlement agreements can sabotage finality and certainty as a recent California decision shows. Where a settlement agreement is silent regarding litigation costs, an employee may obtain mandatory costs as the prevailing party under state law as the settlement proceeds constituted the required “net monetary recovery,” the California Court of Appeal has ruled. DeSaulles v. Community Hosp. of the Monterey Peninsula, No. H038184 (Cal. Ct. App. May 2, 2014). 

In an action for alleged disability discrimination and related claims, the Court found the employee’s settlement proceeds were a net monetary recovery triggering her entitlement to costs as a prevailing party, despite the fact that seven of the employee’s nine claims were resolved by summary adjudication and evidentiary rulings favorable to the employer. Consequently, the Court reversed the trial court’s order awarding discretionary costs to the employer and denying costs to the employee.

Background

Maureen deSaulles worked for the Community Hospital of the Monterey Peninsula as a part-time patient business services registrar. During her employment, deSaulles complained about her assignments to the emergency room. Thereafter, the Hospital placed deSaulles on a leave of absence and eventually terminated her employment. 

DeSaulles sued the Hospital, alleging it had failed to accommodate her disability and retaliated against her for exercising her rights under the California Fair Employment and Housing Act. She also asserted claims for breach of an implied contract and breach of the implied covenant of good faith and fair dealing, among other claims.

The Hospital filed a motion for summary adjudication and several evidentiary motions, which resolved all but two of deSaulles’s claims. The Hospital settled the remaining claims with prejudice for a settlement payment of $23,500. The trial court entered a judgment stating that deSaulles recovered “nothing from” the Hospital and that the parties would defer “seeking any recovery of costs and fees on this Judgment coming final after the time for all appeals.” The parties’ settlement agreement was silent regarding the payment of litigation costs.

The trial court subsequently determined the Hospital was the prevailing party and awarded the Hospital approximately $13,500 in discretionary costs and declined to award costs to deSaulles. DeSaulles appealed.

Applicable Law

Under California law, a prevailing party is entitled to recover litigation costs in any action or proceeding as a matter of right. Cal. Code Civ. Proc. § 1032(b). 

• A “prevailing party” is defined as including: 

• the party with a net monetary recovery; 

• a defendant in whose favor a dismissal is entered; 

• a defendant where neither plaintiff nor defendant obtains any relief; and 

• a defendant as against those plaintiffs who do not recover any relief against that defendant. 

Cal. Code Civ. Proc. § 1032(a)(4). 

If a party recovers anything other than monetary relief and in situations not specified, a trial court would determine the prevailing party and use its discretion to determine the amount and allocation of costs. However, a trial court has no discretion to deny costs completely when an award is mandatory, though it may exercise discretion over the amount awarded. Accordingly, when ruling on a request for costs, a trial court must determine whether an award is mandatory based on one (and only one) party “prevailing” according to a statutory definition. 

Mandatory Costs to Employee

DeSaulles argued she was entitled to mandatory costs because the settlement proceeds constituted a “net monetary recovery.” The Hospital argued it was due mandatory costs for obtaining a partial dismissal in its favor in exchange for its payment and later a judgment denying deSaulles any other relief. 

The appellate court agreed with deSaulles. After extensively reviewing case law regarding settlements and mandatory costs, the Court ruled the settlement payment constituted a “net monetary recovery.” Therefore, deSaulles was the prevailing party entitled to mandatory costs.

The Court further found the Legislature could not have intended the statute to allow two prevailing parties. It explained that, although the Hospital obtained favorable rulings on its motion for summary adjudication and its evidentiary motions, the trial court never entered an actual dismissal in favor of the Hospital on these claims. In these circumstances, the Court determined the Hospital was not a “defendant in whose favor a dismissal was entered.” Thus, the Hospital was not the prevailing party. Because deSaulles was a prevailing party, the trial court lacked the discretion to enter costs in favor of the Hospital, and the Court reversed the award of costs in favor of the Hospital. It observed the parties could have “avoid[ed] this mechanical approach by taking care to provide for costs in their settlements.”

Employers should ensure that actual case dismissals are entered whenever they obtain favorable adjudications of employees’ claims, whether by summary adjudication or evidentiary rulings. More important, employers should address mandatory costs expressly in their settlement agreements and dismissals. Settlement agreements should define the prevailing party and address the parties’ entitlement to costs, if any, to avoid subsequent litigation over the issue.