FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
MARK H. GOLDBERG, SHERRY R.
GOLDBERG, AND THE MH & SR
GOLDBERG FAMILY TRUST BY MARK
H. GOLDBERG AND SHERRY R. No. 09-16243
GOLDBERG, as Trustees,
Plaintiffs-Appellees,
D.C. No.
CV-05-2670-JAT
OPINION
v.
PACIFIC INDEMNITY COMPANY AND
FEDERAL INSURANCE COMPANY,
Defendants-Appellants.
Appeal from the United States District Court
for the District of Arizona
James A. Teilborg, District Judge, Presiding
Argued and Submitted
November 1, 2010—San Francisco, California
Filed December 6, 2010
Before: Arthur L. Alarcón and Pamela Ann Rymer,
Circuit Judges, and David G. Trager, District Judge*
Opinion by Judge Trager
*The Honorable David G. Trager, Senior United States District Judge
for the Eastern District of New York, sitting by designation.
19437
GOLDBERG v. PACIFIC INDEMNITY 19439
COUNSEL
David B. Goodwin, Covington & Burling LLP, San Fran-
cisco, California, for the appellants and cross-appellees.
19440 GOLDBERG v. PACIFIC INDEMNITY
Robert M. Traylor, Seltzer, Caplan, McMahon, Vitek, San
Diego, California, for the appellees and cross-appellants.
OPINION
TRAGER, District Judge:
Defendants Pacific Indemnity Co. and Federal Insurance
Co. (collectively “defendants”) appeal the district court’s
denial of their request for expert witness fees and double costs
pursuant to Arizona Rule of Civil Procedure 68 (“Arizona
Rule 68”). The district court found that Arizona Rule 68 did
not apply because it conflicts with Federal Rule of Civil Pro-
cedure 68 (“Federal Rule 68”), under which defendants are
not entitled to recover costs because judgment was entered in
their favor. This court has jurisdiction under 28 U.S.C.
§ 1291. For the following reasons, the district court’s decision
is affirmed.1
Facts and Procedural History
Defendants’ request for expert witness fees and double
costs arises out of a breach of contract and bad faith action
brought by plaintiffs Mark H. Goldberg, Sherry R. Goldberg
and the MH & SR Goldberg Family Trust (collectively
“plaintiffs”) against defendants for refusing to raze and
rebuild the Goldbergs’ home in response to plaintiffs’ insur-
ance claim that the house intermittently reeked of urine, and
that the smell could not be eliminated using traditional
remediation measures. Plaintiffs’ complaint alleges that their
raze and rebuild demand was required under the “all risk”
insurance policy that defendants issued for the Goldbergs’
1
This appeal was brought as a cross-appeal to plaintiffs’ appeal of vari-
ous decisions by the district court. (No. 08-17316.) We affirm the district
court with regard to all issues raised in plaintiffs’ appeal in a memoran-
dum disposition filed concurrently with this opinion.
GOLDBERG v. PACIFIC INDEMNITY 19441
house, and that defendants acted in bad faith by, inter alia,
failing to conduct an adequate investigation of plaintiffs’
claim.
On July 6, 2007, defendants made an offer of judgment
“pursuant to Rule 68 of the Federal Rules of Civil Procedure”
in the amount of $1.25 million. Plaintiffs did not respond to
defendants’ offer, causing the offer to lapse ten days later. On
February 20, 2008, the district court granted defendants’
motion for summary judgment on plaintiffs’ bad faith claim,
but denied their motion for summary judgment on plaintiffs’
breach of contract claim. Plaintiffs’ breach of contract claim
then proceeded to trial on August 27, 2008. After a thirteen-
day jury trial, the jury issued a verdict in favor of defendants.
On May 13, 2009, the district court awarded defendants
nearly $3 million in attorneys’ fees under Arizona law. The
district court, however, denied defendants’ request for reason-
able expert witness fees and double costs under Arizona Rule
of Civil Procedure 68, finding instead that Federal Rule 68
applied, and that defendants were not entitled to costs under
the federal rule.
Discussion
[1] Arizona Rule 68 provides that, if either party makes an
offer of judgment or offer of settlement that is declined by the
opposing party, the offeror is entitled to mandatory expert
witness fees and double costs if that party obtains a final judg-
ment that is equal to or more favorable to the offeror than the
offer.2 Federal Rule 68, on the other hand, provides that an
2
The version of Arizona Rule 68 in effect when defendants’ offer of
judgment was made stated: “If the judgment finally obtained is equal to,
or more favorable to the offeror than, the offer, the offeree must pay, as
a sanction, those reasonable expert witness fees and double the taxable
costs of the offeror, as defined in A.R.S. § 12-332, incurred after the mak-
ing of the offer. . . .” Ariz. R. Civ. P. 68(d) (2007).
19442 GOLDBERG v. PACIFIC INDEMNITY
offeror defendant is entitled to costs if the opposing party
obtains judgment that is less favorable than the offer.3 Unlike
the Arizona rule, the federal rule only applies to offers made
by defendants; it has no application to offers made by plain-
tiffs. Simon v. Intercontinental Transp. (ICT) B.V., 882 F.2d
1435, 1439 (9th Cir. 1989). In addition, Federal Rule 68 does
not allow a defendant to recover costs when judgment is
entered in the defendant’s favor.4 See Delta Air Lines v.
August, 450 U.S. 346, 352 (1981).
[2] The question presented by this appeal is whether Ari-
zona Rule 68 applies in a federal diversity action when judg-
ment is entered in favor of the defendant, making the
defendant unable to recover costs under Federal Rule 68. We
find that it does not.
[3] Under Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938),
federal courts are to apply state substantive law and federal
procedural law to diversity cases. When there is a conflict
between federal procedural rules and state substantive rules,
courts must first determine whether the federal rule is “suffi-
ciently broad to control the issue.” Walker v. Armco Steel
Corp., 446 U.S. 740, 749 (1980). If the federal rule is suffi-
ciently broad to create a direct conflict, then the federal rule
controls so long as it does not transgress the limits of the
Rules Enabling Act or the Constitution.5 Shady Grove Ortho-
3
Federal Rule 68 states: “If the judgment that the offeree finally obtains
is not more favorable than the unaccepted offer, the offeree must pay the
costs incurred after the offer was made.” Fed. R. Civ. P. 68(d).
4
A prevailing defendant may recover costs under Federal Rule of Civil
Procedure 54(d)(1), which states: “Unless a federal statute, these rules, or
a court order provides otherwise, costs — other than attorney’s fees —
should be allowed to the prevailing party.” This court has held that the rule
creates a presumption in favor of awarding fees, and that the district court
has limited discretion to deny fees under the rule. See Assoc. of Mexican-
Am. Educators v. California, 231 F.3d 572, 591-92 (9th Cir. 2000) (en
banc). Defendants did not request fees under Rule 54(d)(1).
5
Defendants do not argue that Federal Rule 68 transgresses the limits of
the Rules Enabling Act or the Constitution.
GOLDBERG v. PACIFIC INDEMNITY 19443
pedic Assoc. v. Allstate Ins. Co., 130 S. Ct. 1431, 1437
(2010); Hanna v. Plumer, 380 U.S. 460, 463-64 (1965). If
there is no direct conflict between the federal rule and the
state rule, courts must look to the policies underlying Erie,
namely its twin aims: “discouragement of forum-shopping
and avoidance of inequitable administration of the laws.”
Hanna, 380 U.S. at 468; see also Gasperini v. Center for
Humanities, Inc., 518 U.S. 415, 428 (1996); Metabolife Int’l
Inc. v. Wornick, 264 F.3d 832, 845 (9th Cir. 2001).
[4] In order to determine whether there is a direct conflict
between a federal and state rule, “[f]ederal courts have inter-
preted the Federal Rules . . . with sensitivity to important state
interests and regulatory policies.” Gasperini, 518 U.S. at 427
n.7 (citing Walker, 446 U.S. at 750-52 and S.A. Healy Co. v.
Milwaukee Metro. Sewerage Dist., 60 F.3d 305, 310-12 (7th
Cir. 1995)). But when “the purposes underlying the [Federal]
Rule are sufficiently coextensive with the asserted purposes of
the [state rule] to indicate that the [Federal] Rule occupies the
[state rule’s] field of operation,” then the two rules are in
direct conflict and the Federal Rule “preclude[s] [the state
rule’s] application in federal diversity actions.” Burlington N.
R.R. Co. v. Woods, 480 U.S. 1, 7 (1987).
With regard to Federal Rule 68, the question of whether
there is a direct conflict with its state law counterparts
depends, at least in part, on the scope of the relevant state rule
and the circumstances under which it would be applied in the
particular case. Federal courts have found that state counter-
parts to Federal Rule 68 apply in federal diversity actions
under some circumstances, but not others.
For instance, because Federal Rule 68 applies only to offers
of judgment by defendants, and not to offers of settlement by
plaintiffs, several circuits have found that state rules that
allow for some form of sanctions when a plaintiff’s offer of
settlement is rejected do not conflict with Federal Rule 68.
Garcia v. Wal-Mart Stores, Inc., 209 F.3d 1170, 1176 (10th
19444 GOLDBERG v. PACIFIC INDEMNITY
Cir. 2000) (finding no direct conflict because “Rule 68 only
governs defendants’ costs, while plaintiff’s costs are the sub-
ject of the Colorado statute”); S.A. Healy Co., 60 F.3d at 310
(“There is no direct conflict between the Wisconsin rule con-
cerning plaintiffs’ settlement demands and any rule of federal
procedure; . . . Rule 68 is limited to offers by defendants.”).
But when it is a defendant whose offer of judgment is
rejected, at least one circuit has held that state rules that allow
for some form of sanction do conflict with Federal Rule 68 in
cases where Rule 68 allows for recovery of costs — namely,
when a plaintiff obtains a judgment, but the judgment “is not
more favorable than the unaccepted offer.” Fed. R. Civ. P.
68(d). This is so even when the state rule provides for recov-
ery of costs, fees or sanctions that are not available under Fed-
eral Rule 68. Gil De Rebollo v. Miami Heat Assoc., 137 F.3d
56, 66 (1st Cir. 1998) (“[Puerto Rico] Rule 35.1 and [Federal]
Rule 68 both ostensibly apply to this case and would result in
a different award. The two rules are in ‘direct collision’
despite the fact that they are not ‘perfectly coextensive’
because Rule 68 is ‘sufficiently broad to cover the point in
dispute.’ ”); cf. Aceves v. Allstate Ins. Co., 68 F.3d 1160,
1167-68 (9th Cir. 1995) (holding that the federal expert wit-
ness compensation rules are in direct conflict with the state
rules, even when the state rules allow for a greater recovery).
However, none of the cases cited above directly address the
question presented by the instant appeal,6 and this court has
6
The only circuit that has addressed this particular situation is the First
Circuit, which held that Puerto Rico Rule of Civil Procedure 35.1 applies
in cases like the one at bar because the Puerto Rico rule, unlike Federal
Rule 68, “permits recovery of costs, fees and expenses by a defen-
dant/offeror when the plaintiff/offeree loses the suit in its entirety.”
Ganapolsky v. Keltron Corp., 823 F.2d 700, 701 (1st Cir. 1987). Because
we reach the opposite conclusion, we note that the First Circuit’s opinion
in Ganapolsky does not include any significant discussion of the Erie anal-
ysis. Id. at 702.
GOLDBERG v. PACIFIC INDEMNITY 19445
never directly addressed the issue.7 In this case, defendants’
offer of judgment was made pursuant to Federal Rule 68
(unlike a plaintiff’s offer of settlement, which would never be
made pursuant to Federal Rule 68), but defendants are unable
to recover costs under Federal Rule 68 because judgment was
entered in their favor — a situation for which the Federal
Rule does not allow recovery. Under these circumstances, the
purposes underlying Federal Rule 68 are sufficiently coexten-
sive with the asserted purposes of Arizona Rule 68 to indicate
that the federal rule occupies the Arizona rule’s field of opera-
tion.
[5] Both Federal Rule 68 and Arizona Rule 68 are meant
to encourage settlement of litigation. See Delta Air Lines v.
August, 450 U.S. 346, 352 (1981); Warner v. Sw. Desert
Images, LLC, 180 P.3d 986, 1002 (Ariz. App. 2008); Wersch
v. Radnor/Landgrant-a Phoenix Partnership, 961 P.2d 1047,
1050 (Ariz. App. 1997). In fact, Arizona courts have relied on
federal precedent concerning Federal Rule 68 in interpreting
their own Rule 68. See Wersch, 961 P.2d at 1050 (citing Delta
Air Lines, 450 U.S. at 352 & n.8). Furthermore, both rules
promote settlement, at least in part, by providing an incentive
for defendants to make offers of judgment. Because Federal
Rule 68 and Arizona Rule 68 have the same purpose, at least
when invoked by defendants, the federal rule occupies the
field of operation and they are therefore in direct conflict with
each other.
The fact that the scope of Federal Rule 68 differs somewhat
from that of Arizona Rule 68 does not make the conflict
7
This court’s opinion in MRO Commc’ns, Inc. v. Am. Telephone & Tele-
graph Co., 197 F.3d 1276 (9th Cir. 1999), is not on point because it deals
with attorneys’ fees, not costs. In that case, the district court awarded
attorneys’ fees under Federal Rule of Civil Procedure 54(d)(2), which
explicitly incorporates the substantive statutes under which attorneys’ fees
might be available, including state attorneys’ fees statutes. Id. at 1280. The
corresponding rule that deals with costs, Federal Rule 54(d)(1), does not
incorporate state statutes.
19446 GOLDBERG v. PACIFIC INDEMNITY
between the two rules any less significant. The Supreme
Court’s decision in Burlington Northern Railroad Co. v.
Woods, 480 U.S. 1 (1987), is instructive on this point. In that
case, the Supreme Court held that an Alabama statute impos-
ing a mandatory fixed penalty on appellants who obtain stays
on judgments pending unsuccessful appeals directly conflicts
with Federal Rule of Civil Procedure 38 (“Federal Rule 38”),
which affords a court of appeals plenary discretion to assess
“just damages” in order to penalize an appellant who takes a
frivolous appeal. Id. at 7. Although Federal Rule 38 only
applies to frivolous appeals, the Court concluded that the two
rules are in direct conflict for non-frivolous appeals as well,
even though the Alabama rule would mandate a 10% penalty
whereas the federal rule would not allow recovery. Id. at 7-8.
According to the Court, despite the differences in both the
scope and effect of the two rules, the rules “unmistakably
conflict[ ]” because “the purposes underlying the [rules] are
sufficiently coextensive” so as occupy the same “field of
operation.” Id. at 7 & n.5.
As in Burlington Northern, the federal and state rules at
issue in this case occupy the same “field of operation” in situ-
ations where a defendant makes an offer of judgment, even if
the rules differ somewhat in scope and effect. As such, the
two rules are in direct conflict under those circumstances,
regardless of whether a defendant is ultimately able to recover
costs under Federal Rule 68.8
The conflict between Federal Rule 68 and Arizona Rule 68
becomes even clearer when Arizona Rule 68 is compared to
the Federal Rules of Civil Procedure as a whole, as opposed
8
In S.A. Healy Co., the Seventh Circuit suggested as much in dicta. In
that case, the court held that Wisconsin’s statute allowing a plain-
tiff/offeror to recover double costs if its settlement demand is rejected
applied in a federal diversity action, but stated that “if the case involved
defendants’ offers of settlement . . . we would have a state rule and a fed-
eral rule covering the identical issue.” 60 F.3d at 311.
GOLDBERG v. PACIFIC INDEMNITY 19447
to Federal Rule 68 in isolation. Although a prevailing defen-
dant cannot recover costs under Federal Rule 68, it would be
unnecessary for such a defendant to seek costs under Rule 68
because a prevailing defendant is generally entitled to recover
costs under Federal Rule of Civil Procedure 54(d)(1). Rule
54(d)(1) creates a presumption in favor of awarding costs to
the prevailing party, and a district court has limited discretion
to deny fees under the rule. See Assoc. of Mexican-Am. Edu-
cators v. California, 231 F.3d 572, 591-92 (9th Cir. 2000) (en
banc). When Federal Rules 68 and 54(d)(1) are read in con-
cert, it becomes clear that their combined scope is nearly
identical to that of Arizona Rule 68 with regard to offers by
defendants. Although state and federal rules need not be
entirely co-extensive in scope to be in direct conflict with one
another, the fact that the state and federal schemes are nearly
identical in scope when applied to offers by defendants pro-
vides further support for the conclusion that Arizona Rule 68
is in direct conflict with Federal Rule 68 when invoked by
defendants.
Conclusion
[6] Because Arizona Rule of Civil Procedure 68 directly
conflicts with Federal Rule of Civil Procedure 68 when
applied to prevailing defendants/offerors, the district court’s
decision to deny defendants’ request for expert witness fees
and double costs under Arizona Rule of Civil Procedure 68 is
affirmed.
AFFIRMED.