California law states that the “prevailing party” in a lawsuit is entitled to recover its costs from the other party. The law defines the “prevailing party” as “the party with a net monetary recovery” and “a defendant in whose favor a dismissal is entered.” So what happens when a plaintiff sues a defendant but, before trial, the defendant pays a settlement to the plaintiff in exchange for the plaintiff agreeing to dismiss the lawsuit? Who is the prevailing party — is it the plaintiff (did the plaintiff receive a “net monetary recovery” by being paid a settlement) or the defendant (did the defendant get a dismissal entered in its favor)?
Plaintiffs and defendants frequently both claim to be the “prevailing party” in this very common scenario. In most cases, the written settlement agreement between the parties compromises and states specifically that no party is the prevailing party. But what happens when the parties’ settlement agreement is silent — will the law default to a finding that one or the other is the prevailing party?
On March 10, 2016, in DeSaulles v. Community Hospital of the Monterey Peninsula, the California Supreme Court answered this question.
In DeSaulles, the Court ruled that a dismissal pursuant to a monetary settlement is not a dismissal in the defendant’s “favor.” Thus, the defendant is not the prevailing party according to the Court. In contrast, a settlement payment of any amount to a plaintiff is a “net monetary recovery.” Thus, the settling plaintiff is legally considered the prevailing party under California law in the absence of any contrary agreement between the parties.
The bottom line: when settling active litigation cases, be sure your written settlement agreement addresses the prevailing party issue. If the settlement being paid is intended to be the one and only payment to the plaintiff, the defendant should be sure the agreement states that there is no prevailing party and that neither party shall be entitled to costs.
You can find Court’s opinion here.