The California Supreme Court recently held that a plaintiff who obtains a monetary settlement and dismisses the action is the prevailing party entitled to statutory costs under Code of Civil Procedure section 1032. DeSaulles v. Community Hospital of the Monterey Peninsula 2016 Cal LEXIS 1281. Most often, parties reaching settlement will dispose of any costs issues as part of the settlement agreement. Therefore, DeSaulles should only come into play when for whatever reason, costs are not resolved in the settlement and entitlement to costs is then litigated.

In DeSaulles, after being stripped of other causes of action by prior motions, the plaintiff settled her remaining causes of action for the sum of $23,500 in return for dismissal with prejudice of those claims. The settlement reserved plaintiff’s right to appeal the previously dismissed causes of action, and expressly reserved resolution of costs until completion of that appeal. After plaintiff lost the appeal, plaintiff and defendant each moved for statutory costs. Plaintiff claimed to be the statutory “party with a net monetary recovery” as set forth in section 1032(a)(4). Defendant claimed entitlement to costs under that same provision as “a defendant in whose favor a dismissal is entered.”

As the Supreme Court put it, the “question in this case is whether a plaintiff who voluntarily dismisses an action after entering into a monetary settlement is a prevailing party under section 1032 … .” Despite the question presented, Justice Goodwin H. Liu, writing for the majority, began the analysis by answering a different question, “first address[ing] whether a dismissal obtained in exchange for a monetary settlement may be considered a dismissal in a defendant’s favor” under section 1032. To answer that question, the majority looked not so much to the language of the statute, but to the legislative history. Based on the purpose of the statute—imposing costs on the losing party—and the codification of prior case law, the Court concluded that “a defendant is not a prevailing party as a matter of right” when the plaintiff’s dismissal is obtained by way of a settlement payment.

The Court then turned to the question at hand, whether a plaintiff who obtains a monetary settlement—no matter the amount or the circumstances—is a statutory prevailing party under section 1032. Looking to the statute, the Court noted that it provides trial court discretion in only two situations: “[w]hen any party recovers other than monetary relief;” and “in situations other than as specified.” Having found “no reason why a monetary settlement cannot fit within the statutory definition of a ‘net monetary recovery,’” the Court concluded that settlement payments are among the “monetary relief” that precludes trial court discretion under the “other than monetary relief” prong. And having found that settlement payments qualify as a statutory net monetary recovery and that dismissals in conjunction with settlement are not “in a defendant’s favor,” the Court impliedly rejected the dissent’s premise that operation of the discretionary clause for “situations other than as specified” should control.

Justice Leondra R. Kruger, joined by Justice Kathryn M. Werdegar, dissented. To the dissent, the same assumptions and logic that led the majority to conclude that settlement payments are a net monetary recovery should have led it to conclude that a dismissal pursuant to settlement is still a dismissal for prevailing party purposes. The dissent contended that because the settlement-driven dismissal is still a dismissal in a defendant’s “favor,” these situations create two potential prevailing parties (the plaintiff with the net monetary recovery and the defendant with the dismissal), bringing into play the discretionary “situations other than as specified” clause. According to the dissent, in such situations, the trial court can evaluate all the circumstances and award costs as is just.

The majority made the bright line rule, but did the dissent have the better interpretation? Under the dissent’s analysis, a trial court could decide that a plaintiff obtaining only a nominal settlement despite numerous causes of action, large demands and lengthy litigation, is not entitled to costs. And just because a plaintiff is not entitled to costs does not mean that costs will automatically go to defendants. Under the discretionary provision, a trial court “may allow costs or not.” The dissent, however, failed to come to terms with the incongruity noted by the majority that under the dissent’s construction of the statute, a plaintiff who obtains a settlement that includes entry of judgment is a prevailing party entitled to costs as a matter of right, whereas a plaintiff who obtains the exact same settlement in return for a dismissal, is not.

This is one of those decisions that while creating a bright line rule, may have little application in the future. But in the event that costs are not being resolved under the terms of a settlement, DeSaulles makes it clear that no matter how nominal the settlement and despite the dismissal, the plaintiff will be entitled to costs.