FILED
United States Court of Appeals
Tenth Circuit
February 24, 2011
PUBLISH
Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
SCOTTSDALE INSURANCE
COMPANY,
Respondent - Appellee,
v. No. 09-5150
MICHAEL S. TOLLIVER and
SANDRA L. TOLLIVER,
Petitioners - Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OKLAHOMA
(D.C. No. 4:04-CV-00227-CVE-FHM)
Brian E. Dittrich, Dittrich Law Firm, Tulsa, OK, for Petitioners-Appellants.
James E. Weger (C. Michael Copeland, Tadd J. P. Bogan, Adam J. Strange, with him on
the briefs), Jones, Gotcher & Bogan, Tulsa, OK, for Respondent-Appellee.
Before KELLY and GORSUCH, Circuit Judges, and MELGREN, District Judge.*
MELGREN, District Judge
*
The Honorable Eric F. Melgren, United States District Court for the District of
Kansas, sitting by designation.
In this diversity case, Defendants Sandra and Michael Tolliver appeal from the
district court’s order granting Plaintiff Scottsdale Insurance Company’s Motion for
Attorneys’ Fees. The Tollivers contend that because the Oklahoma statute allowing such
fees, Okla. Stat. tit. 12, § 1101.1, is procedural and because that statute is in conflict with
the procedure of Rule 68 of the Federal Rules of Civil Procedure, the attorneys’ fees
awarded by the district court violated the principles of Erie R. Co. v. Tompkins, 304 U.S.
64 (1938). Scottsdale denies any collision between the Oklahoma statute and Rule 68,
and argues that because § 1101.1(B)(3) of the Oklahoma statute is substantive, the district
court properly awarded attorneys’ fees under state law. Exercising jurisdiction under 28
U.S.C. § 1291, we AFFIRM, but for reasons other than those relied upon by the district
court.
I.
The Tollivers purchased a dwelling insurance policy from Scottsdale Insurance
Company to insure a residential property they owned in Tulsa, Oklahoma. After the
house was destroyed by fire, the Tollivers submitted a claim to Scottsdale pursuant to that
policy. In the process of investigating the claim, Scottsdale discovered that the Tollivers
had failed to disclose on their application for insurance their complete loss history, which
included two total-loss fire claims within the prior three years. Based on this omission,
Scottsdale filed a declaratory judgment action seeking to avoid payment of the Tollivers’
claim and rescission of the policy due to misrepresentation.
The Tollivers asserted counterclaims against Scottsdale for bad faith and breach of
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contract. Scottsdale moved for summary judgment on all of the Tollivers’ counterclaims
and prevailed only with respect to the bad faith claim. Thereafter, Scottsdale made an
offer of judgment to the Tollivers pursuant to both Rule 68 and § 1101.1 regarding the
Tollivers’ counterclaims.1 In this offer, Scottsdale agreed to have judgment taken against
it in the amount of $25,000, inclusive of costs and attorneys’ fees. The Tollivers rejected
Scottsdale’s offer of judgment.
The action proceeded to trial where the jury returned a verdict in favor of
Scottsdale. After trial, the Tollivers appealed. We affirmed the district court’s grant of
summary judgment on the Tollivers’ bad faith claim, but reversed and remanded based on
the district court's erroneous instruction on the burden on proof with respect to the
element of intent to deceive under Okla. Stat. tit. 36, § 3609, a statute concerning
representations made in applications for insurance coverage. See Scottsdale Ins. Co. v.
Tolliver, 261 Fed. Appx. 153, 162 (10th Cir. 2008). After remand, a second trial returned
1
Rule 68 permits a party defending against a claim to serve upon the plaintiff an
offer of judgment. If the plaintiff fails to accept that offer and receives judgment less
favorable than the offer, the defendant is entitled to costs incurred after the offer was
made. Fed. R. Civ. P. 68(a), (d). Section 1101.1 allows a defendant, in certain actions, to
make a similar offer of judgment, but where a plaintiff receives judgment less favorable
than the offer, the defendant is entitled to recover reasonable attorneys’ fees in addition to
costs incurred after the offer was made. Okla. Stat. tit. 12, § 1101.1(B). While the federal
courts have held Rule 68 inapplicable where a defendant receives a judgment in its favor,
see Delta Air Lines, Inc. v. August, 450 U.S. 346. 352 (1981); Fry v. Bd. of Cnty.
Comm’rs of Baca, 7 F.3d 936, 943-44 (10th Cir. 1993), the Oklahoma courts have
interpreted § 1101.1 so as to apply whether the plaintiff or defendant receives judgment in
its favor. See S.R. v. Stockdale, 216 P.3d 305, 308 (Okla. Civ. App. 2009); CFS v. J.P.
Morgan, 152 P.3d 897, 901 (Okla. Civ. App. 2007); Commercial Fin. Servs., Inc. v. J.P.
Morgan Sec., Inc., 152 P.3d 897, 901 (Okla. Civ. App. 2006).
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a verdict in Scottsdale’s favor, and the Tollivers again appealed the jury’s verdict. We
affirmed. Scottsdale Ins. Co. v. Tolliver, 343 Fed. Appx. 347 (2009).
After we affirmed the jury’s verdict from the second trial, Scottsdale moved the
district court for attorneys’ fees pursuant to § 1101.1. While the Tollivers opposed
Scottsdale’s right to attorneys’ fees, the parties stipulated that the proper amount of
attorneys’ fees, should the district court determine that Scottsdale was entitled to recover,
was $140,000. The district court referred Scottsdale’s motion to a magistrate judge for a
report and recommendation, who recommended that Scottsdale be awarded attorneys’
fees pursuant to § 1101.1. The Tollivers objected to the magistrate judge’s report and
recommendation. The district court reviewed the matter de novo, accepted the magistrate
judge’s report, and granted Scottsdale’s attorneys’ fee request.
II.
“We review a district court’s decision on whether to award attorney fees for abuse
of discretion, but we review de novo the district court’s application of the legal principles
underlying that decision.” Pound v. Airosol Co., Inc., 498 F.3d 1100-01 (10th Cir. 2007).
The Tollivers challenge the district court’s award of attorneys’ fees by first arguing
that the procedural requirements for both Rule 68 and the Oklahoma statute, which
Scottsdale contends provides the basis for the award, are in direct conflict, and as a result,
the Oklahoma statute is inapplicable in federal court pursuant to the Erie doctrine,
precluding Scottsdale’s claim for attorneys’ fees. The Tollivers argue that § 1101.1
requires that an offer of judgment be filed with the court regardless of whether it is
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accepted, while Rule 68 provides the opposite by prohibiting the filing of an unaccepted
offer. Applying Erie and its progeny, the district court determined that because Rule 68
and § 1101.1 collided with respect to the procedural mechanism for making an offer of
judgment, a federal court must apply the procedure of Rule 68. The district court further
stated that because Scottsdale clearly intended to make its offer of judgment under both
Rule 68 and § 1101.1, and because Scottsdale followed the correct procedure for making
an offer of judgment in federal court under Rule 68, its offer did not become invalid due
to its failure to follow § 1101.1's requirement that the offer be filed with the court.2
We have held that the “first analytical step” in an Erie case “is to determine
whether [a state] statute collides with any federal procedural rule.” Trierweiler v.
Croxton & Trench Holding Corp., 90 F.3d 1523, 1539 (10th Cir. 1996) (quoting Hanna v.
Plumer, 380 U.S. 460, 470 (1965)). In other words, we must determine “ ‘whether, when
fairly construed, the scope of [the Federal Rule] is “sufficiently broad” to cause a “direct
collision” with the state law or, implicitly, to “control the issue” before the court.’ ” Id. at
1539-40 (quoting Burlington N. RR. Co. v. Woods, 480 U.S. 1, 4-5 (1987) (quoting
Walker v. Armco Steel Corp., 446 U.S. 740, 749-50 (1980))) (alteration in original). In
such a case, there “leav[es] no room for the operation of [the state] law,” and we must
apply the Federal Rule unless the Rule violates the Rules Enabling Act or is
unconstitutional. Id.; see Walker v. Armco Steel Corp., 445 U.S. 740, 749-50 (1980);
2
The district court further stated that had Scottsdale filed its offer of judgment, it
would have violated strong federal policy against filing unaccepted offers of judgment,
and the district court would have struck the filing. Aplt. App. 35-36.
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Hanna, 380 U.S. at 471. Put another way, a “clear case” under Erie occurs when:
[T]he state rule is in actual conflict with one of the Federal Rules of Civil
Procedure, so that enforcing the state rule would knock out the federal rule.
If the federal rule is within the scope of the Rules Enabling Act, 28 U.S.C. §
2071(a), under which the Federal Rules were promulgated, then it is valid
(barring some constitutional objection . . .) and the Supremacy Clause
requires that the state rules give way. S.A. Healy Co. v. Milwaukee Metro.
Sewerage Dist., 60 F.3d 305, 310 (7th Cir. 1995).
There already exists broad guidelines concerning the meaning of the term
“conflict.” On one end of the spectrum, the Supreme Court has explained that a “direct
collision . . . is not meant to mandate that federal law and state law be perfectly
coextensive and equally applicable to the issue at hand.” Stewart Org., Inc. v. Ricoh
Corp., 487 U.S. 22, 26 n.4 (1988). On the other end of the spectrum, we have held that if
the state and federal rules have only “superficial similarity,” there is no direct collision if
each rule “ ‘can exist side by side, . . . each controlling its own intended sphere of
coverage without conflict.’ ” Trierweiler, 90 F.3d at 1540 (quoting Walker, 446 U.S. at
752).
“Only when there is a conflict between state and federal substantive law are the
concerns of Erie[] at issue.” Chambers v. NASCO, Inc., 501 U.S. 32, 52, (1991). Since
this case is grounded on diversity jurisdiction, we are obligated by the Erie doctrine to
apply the substantive law of the forum state, in this case Oklahoma, but we apply federal
procedural law. Erie, 304 U.S. at 78; see also Gasperini v. Ctr. for Humanities, Inc., 518
U.S. 415, 427 (1996); Fincher ex rel. Fincher v. Prudential Prop. & Cas. Ins. Co., 374
Fed. Appx. 833, 838 (10th Cir. 2010) (citing Blank v. Alexander, 152 F.3d 1224, 1228,
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1230 (10th Cir. 1998)). This policy serves to satisfy the twin aims of the rule in Erie,
which is to discourage forum shopping and avoid the inequitable administration of the
laws. Hannah, 380 U.S. at 468 (citing Erie, 304 U.S. at 74-75). We therefore must
determine to what extent, if any, § 1101.1 and Rule 68 collides.
The district court concluded that Okla. Stat. tit. 12, § 1101.1(B)(1)3 and Rule
68(a)4 are in direct conflict with respect to the manner in which a party is required to
3
Okla. Stat. tit. 12, § 1101.1(B)(1) provides:
After a civil action is brought for the recovery of money or property in an
action . . . , any defendant may file with the court, at any time more than ten
(10) days prior to trial, an offer of judgment for a sum certain to any
plaintiff with respect to the action or any claim or claims asserted in the
action. An offer of judgment shall be deemed to include any costs and
attorney fees otherwise recoverable unless it expressly provides otherwise.
If an offer of judgment is filed, the plaintiff or plaintiffs to whom the offer
of judgment is made shall, within ten (10) days, file:
a. a written acceptance or rejection of the offer, or
b. a counteroffer of judgment, as described in paragraph 2 of this
subsection.
If a plaintiff fails to file a timely response, the offer of judgment shall be
deemed rejected. The fact an offer of judgment is made but not accepted or
is deemed rejected does not preclude subsequent timely offers of judgment.
4
Rule 68(a) of the Federal Rules of Civil Procedure provides:
At least 14 days before the date set for trial, a party defending against a
claim may serve on an opposing party an offer to allow judgment on
specified terms, with the costs then accrued. If, within 14 days after being
served, the opposing party serves written notice accepting the offer, either
party may then file the offer and notice of acceptance, plus proof of service.
The clerk must then enter judgment.
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make an offer of judgment.5 As a result, the district court held that the federal rule
applies when making an offer of judgment in federal court. Because § 1101.1 requires
that a party initially file the offer of judgment with the court, and because Rule 68
precludes a defendant from filing an offer of judgment with the court at the time the offer
is made, a party is unable to satisfy the procedural requirement of the state statute without
violating Rule 68's filing restriction in federal court. Accordingly, we agree with the
district court that, with respect to the filing requirements of § 1101.1(B)(1) and Rule
68(a), the state procedure is in direct collision with the federal procedure, and thus, the
federal rule must prevail. See Walker, 446 U.S. at 750 n.9.
As the basis for its attorneys’ fee claim, Scottsdale relies on Okla. Stat. tit. 12, §
1101.1(B)(3).6 Section 1101.1(B)(3) entitles a defendant to the recovery of costs and its
reasonable attorneys’ fees after an offer of judgment when the judgment awarded is less
than the amount of the offer. Rule 68 operates in a similar fashion, but only permits the
recovery of reasonable costs incurred after the offer. Fed. R. Civ. P. 68(d). Rule 68 does
5
Neither party disputes that § 1101.1(B)(1) is procedural, as the provision clearly
regulates the “manner and means” by which the litigants rights are enforced. See Shady
Grove Orthopedic Assocs. v. Allstate Ins. Co., --- U.S. ---- , 130 S. Ct. 1431, 1442 (2010).
6
Okla. Stat. tit. 12, § 1101.1(B)(3) provides:
If no offer of judgment or counteroffer of judgment is accepted and the
judgment awarded the plaintiff is less than one or more offers of judgment,
the defendant shall be entitled to reasonable litigation costs and reasonable
attorney fees incurred by the defendant with respect to the action or the
claim or claims included in the offer of judgment from and after the date of
the first offer of judgment which is greater than the judgment until the date
of the judgment. Such costs and fees may be offset from the judgment
entered against the offering defendant.
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not provide for the recovery of attorneys’ fees, nor does it allow for the recovery of costs
where the defendant receives judgment in its favor.7 Despite these differences, we
conclude that § 1101.1(B)(3) and Rule 68 do not collide, and each “can exist side by side
. . . controlling [their] own sphere of coverage without conflict.” See Trierweiler, 90 F.3d
at 1540 (citing Walker, 446 U.S. at 741). Section 1101.1(B)(3) does nothing to impede
the operation of Rule 68 where judgment is in favor of a plaintiff. Instead, the statute
provides a party with the additional advantage of recovering attorneys’ fees. Where
judgment is in the defendant’s favor, Rule 68 simply becomes inapplicable. As a result,
no federal rule exists for which § 1101.1(B)(3) may collide, leaving § 1101.1(B)(3) to
operate on its own.
In awarding Scottsdale its reasonable attorneys’ fees, the district court concluded
that § 1101.1(B)(3) was substantive as opposed to procedural law, and as a result, applied
the statute to Scottsdale’s claim. The Tollivers, however, argue that because Oklahoma’s
Title 12 as a whole is procedural, § 1101.1(B)(3) is procedural, and accordingly, the
statute is precluded by Erie and has no application in federal court. We find this
argument unpersuasive, as this Court has already found that Title 12 of the Oklahoma
7
Generally, “the costs which are subject to the cost-shifting provisions of Rule 68
are those enumerated in 28 U.S.C. § 1920, unless the substantive law applicable to the
particular cause of action expands the general § 1920 definition.” Knight v. Snap-On
Tools Corp., 3 F.3d 1398, 1404-05 (10th Cir. 1993) (quoting Parkes v. Hall, 906 F.2d
658, 660 (11th Cir.1990)); see also Marek v. Chesny, 473 U.S. 1, 9 (1985) (where the
underlying substantive law defines costs to include attorneys’ fees, such fees are included
as costs under Rule 68). Costs enumerated in 28 U.S.C. § 1920 include those items
typically included in a bill of costs but do not include attorneys' fees.
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Statutes includes certain substantive provisions. See Boyd Rosene & Assoc., Inc. v. Kan.
Mun. Gas Agency, 174 F.3d 1115, 1119 n.4 (10th Cir. 1999) (involving a different
provision in Title 12 which also awards attorneys’ fees). However, because our prior
holdings have not addressed § 1101.1(B)(3) specifically, we must determine whether §
1101.1(B)(3) itself is procedural or whether the statute creates a substantive right to fees,
as Scottsdale suggests. If the statute is procedural, federal law applies, but if it is
substantive, then the court must follow the law of the forum state. See Erie, 304 U.S. at
78.
We have previously held that “[i]n diversity cases, attorney fees are a substantive
matter controlled by state law.” Mooring Capital Fund, LLC v. Knight, 2010 WL
2881529, at *10 (10th Cir. July 22, 2010) (citing Combs v. Shelter Mut. Ins. Co., 551 F.3d
991, 1001 (10th Cir. 2008)); see also Jones v. Denver Post Corp., 203 F.3d 748, 757
(10th Cir. 2000). Although our previous holdings did not involve Rule 68 offers of
judgment, those holdings comport with the Supreme Court’s determination that statutory
provisions permitting an award of attorneys’ fees are substantive where the statute
permits the prevailing party in certain classes of litigation to recover attorneys’ fees. See
Chambers v.NASCO, Inc., 501 U.S. 32, 52-53 (1991); Alyeska Pipeline Serv. Co. v.
Wilderness Soc’y, 421 U.S. 240, 260 n.31 (1975); Hanna, 380 U.S. at 469. Substantive
fees are those which are “tied to the outcome of the litigation,” whereas procedural fees
are generally based on a litigant’s “bad faith conduct in litigation.” See Chambers, 501
U.S. at 52-53; see also Shady Grove Orthopedic Assocs. v. Allstate Ins. Co., --- U.S. ----,
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130 S. Ct. 1431, 1442 (2010) (citing Sibbach v. Wilson & Co., 312 U.S. 1, 14 (1941))
(procedural rules regulate “the judicial process for enforcing rights and duties recognized
by substantive law and for justly administering remedy and redress for disregard or
infraction of them”); Monganroth & Monganroth v. DeLorean, 213 F.3d 1301, 1317
(10th Cir. 2000); Camacho v. Tex. Workforce Comm’n, 445 F.3d 407, 412-13 (5th Cir.
2006) (attorneys’ fees statute at issue was procedural where the award was not tied to the
outcome of the litigation). The distinction revolves around whether “[f]ee shifting . . . is .
. . a matter of substantive remedy, [or] of vindicating [federal] judicial authority.”
Chambers, 501 U.S. at 55. In other words, “[i]f it governs only “the manner and means”
by which the litigants’ rights are “enforced,” [the rule is procedural].” Shady Grove, 130
S. Ct. at 1442 (citing Miss. Publ’g Corp. v. Murphree, 326 U.S. 438, 445 (1946)).
However, “if it alters “the rules of decision by which [the] court will adjudicate [those]
rights,” it is substantive. Id.
With the foregoing in mind, we turn to the Oklahoma statute. Whether a
defendant8 is entitled to attorneys’ fees under § 1101.1(B)(3) depends on both the
plaintiff’s decision to either accept or reject the offer of judgment, and the ultimate
judgment of the case. The statute prompts a plaintiff to evaluate the risks and the costs of
litigation, and to balance those risks against the likelihood of success on the merits when
determining whether or not to settle a case. See Boston Ave. Mgmt., Inc. v. Associated
8
Although Scottsdale was the plaintiff in this litigation, it was the defendant for the
counterclaim with respect to which it made the offer of judgment. Therefore, for
purposes of this matter, Scottsdale is the defendant.
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Res., Inc., 152 P.3d 880, 885-86 (Okla. 2007). A plaintiff that fails to properly evaluate
the merits of their case in deciding whether to accept or reject an offer of judgment faces
the penalty of paying the defendant’s attorneys’ fees. The entitlement to award of fees
after this decision depends on the judgment amount the plaintiff ultimately receives. As a
result, the distinction between the plaintiff’s “litigation conduct” and the “outcome of the
litigation” is inconclusive in this case.
The twin aims of Erie cause us to decide whether failing to apply § 1101.1(B)(3)
would lead to either forum shopping or horizontal inequity. See Hanna, 380 U.S. at 468.
Section 1101.1(B)(3) provides a defendant with a powerful shield to protect it against
frivolous litigation by causing a plaintiff to seriously consider the merits of a claim after
receiving a reasonable offer of judgment. In the event that a plaintiff insists on pursuing a
claim to trial after receiving an offer of judgment, he becomes at risk of paying the
defendant’s attorneys’ fees. Because there is no federal rule providing a defendant with
this same protection, we must conclude that not applying this statute would lead to forum
shopping – a plaintiff will choose federal over state court to avoid providing a defendant
with this option. If § 1101.1(B)(3) were to apply in state but not federal court, a state
court defendant would have an advantage that is unavailable to a defendant with an
identical claim in federal court under diversity jurisdiction. This result makes §
1101.1(B)(3) substantive. As a result, we apply Oklahoma substantive law, specifically §
1101.1(B)(3), to the matter before us. See Erie, 304 U.S. at 78. To do otherwise would
undoubtedly result in an “inequitable administration of the laws” and be contrary to the
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twin aims of Erie. See Chambers, 501 U.S. at 52 (citing Hanna, 380 U.S. at 468).
In applying the federal rule, the district court correctly recognized that Rule 68
applies only with respect to cost shifting and did not provide Scottsdale with a right to
attorneys’ fees. Nevertheless, relying on the reasoning of MRO Commc’ns Inc. v. AT & T
Corp., 197 F.3d 1276 (9th Cir. 1999), the district court split the Rule, applying the filing
provision of Rule 68 while following the substantive provisions of § 1101.1(B)(3).9
While we find this improper, we conclude that it was not improper for Scottsdale to
follow Rule 68's procedure at the time it made its offer of judgment. At that time, it was
reasonable for Scottsdale to serve its offer pursuant to Rule 68 because the outcome of the
trial was yet unknown, and Rule 68 was the only federal rule relating to offers of
judgment regarding costs. Scottsdale’s offer of judgment not only included its attorneys’
fees, but also included its costs, thereby implicating Rule 68 at the time it made the offer.
It was therefore conceivable that at that time, the Tollivers might prevail on their claims
yet receive a judgment less favorable than Scottsdale’s offer. In that event, Rule 68
would have been applicable with respect to a claim for costs by Scottsdale. Thus,
9
MRO concerned an offer of judgment made under Rule 68 that did not refer to
attorneys’ fees. See MRO, 197 F.3d at 1279. The defendant prevailed and filed a motion
for attorneys’ fees pursuant to Rule 54(d)(2), which the district court granted. Id. at 1280.
The Ninth Circuit held Rule 68 inapplicable because the defendant, and not the plaintiff,
was the prevailing party. Although the Ninth Circuit stated that Rule 68 provides the
procedure for making offers of judgment in federal court, it recognized that the federal
rules require an independent source of authority for awarding attorneys’ fees, which in
MRO, was Nevada substantive law. Id. at 1279, 1281. The court went on to analyze the
defendant’s post-judgment attorneys’ fees motion pursuant to Rule 54(d)(2), a Rule not at
issue in this appeal.
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Scottsdale properly relied on Rule 68 at the time it served its offer of judgment on the
Tollivers.
While it was not improper for Scottsdale to rely on Rule 68 at the time it made its
offer of judgment, it could no longer rely on the Rule after receiving judgment in its favor
because Rule 68 only applies to offers made by the party defending against a claim and
only to judgments obtained by the plaintiff. Delta Air Lines, Inc. v. August, 450 U.S. 346,
352 (1981); Fry v. Bd. of County Comm’rs of Baca, 7 F.3d 936, 943 (10th Cir. 1993).
Here, the Tollivers failed to received a judgment in their favor; rather, it was Scottsdale
that prevailed in defending against the Tollivers’ claims. Accordingly, Rule 68 is not
only inapplicable to Scottsdale’s claim for fees, but it also provides no grounds for an
award of costs. Section 1101.1(B)(3), therefore, is the applicable substantive law
entitling Scottsdale to its reasonable attorneys’ fees.
III.
In conclusion, because of the result of the trial, Rule 68 of the Federal Rules of
Civil Procedure is inapplicable to Scottsdale’s claim for attorneys’ fees based on its offer
of judgment. Oklahoma substantive law, specifically Okla. Stat. tit. 12, § 1101.1(B)(3),
governs Scottsdale’s claim. For the reasons discussed in this opinion, we AFFIRM the
district court, but for reasons different than those upon which the district court relied.
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