California law states that the “prevailing party” in a lawsuit is entitled to recover its costs from the other party.  California Code of Civil Procedure §1032(a)(4) provides a variety of classifications which define the prevailing party for purposes of recovering costs in litigation. The most prevalent of these classifications are (1) the party with a net monetary recovery, and (2) a defendant in whose favor a dismissal is entered. However, what occurs when the defendant pays a settlement to the plaintiff in exchange for the plaintiff agreeing to dismiss the lawsuit prior to trial…who is the “prevailing party?”  Some might say it is plaintiff for obtaining a monetary recovery for settlement of the action; others may approximate the defendant is the victor as it did obtain a dismissal of the suit.  In the end, who gets to then call themselves the “prevailing party” under these quite common terms of case settlement?

Ordinarily, a written settlement agreement between parties will and should provide language which states in specificity that no party to the underlying settlement agreement is to be deemed the “prevailing party.” This language is crucial for final determination of collection of litigation costs following a settlement. However, when this magic phrase or language is forgotten, in the settlement agreement, who, under California law is the “prevailing party?”

On March 10, 2016, The DeSaulles v. Community Hospital of the Monterey Peninsula (2016), 62 Cal. 4th 1140 the California Supreme Court addressed this question. In DeSaulles, the Court ruled a 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), and thus defendant should not be considered the prevailing party for purposes of recovery of litigation costs.

Further, this Court went on to hold 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), this is applicable whether or not the judgment mentions the settlement. The DeSaulles case plainly establishes an underlying rule which becomes applicable when the parties have not previously resolved the collection of litigation costs in their settlement agreement and/or have not agreed to other measures for awarding costs within the release or agreement.

The lesson to learn: Although we are often motivated and eager to settle and resolve an active file or litigation; be sure to take a second and even third glace at your settlement agreement to assure the language in some shape or form properly and clearly addresses the “prevailing party” issue. If you forget it you could have an unexpected and unwanted cost bill coming your way.

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