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,

D.C. No.  CV-05-2670-JAT Plaintiffs-Appellees,

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
COUNSEL

David B. Goodwin, Covington & Burling LLP, San Francisco, California, for the appellants and cross-appellees.

GOLDBERG v. PACIFIC INDEMNITY 19439
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 Procedure 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’ insurance 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’

1This appeal was brought as a cross-appeal to plaintiffs’ appeal of various decisions by the district court. (No. 08-17316.) We affirm the district

court with regard to all issues raised in plaintiffs’ appeal in a memorandum disposition filed concurrently with this opinion. 

19440 GOLDBERG v. PACIFIC INDEMNITY
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 thirteenday 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 reasonable 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 judgment that is equal to or more favorable to the offeror than the

offer.2 Federal Rule 68, on the other hand, provides that an

2The 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 making of the offer. . . .” Ariz. R. Civ. P. 68(d) (2007). 

GOLDBERG v. PACIFIC INDEMNITY 19441
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 plaintiffs. 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.4See Delta Air Lines v.

August, 450 U.S. 346, 352 (1981).

[2] The question presented by this appeal is whether Arizona Rule 68 applies in a federal diversity action when judgment 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 “sufficiently broad to control the issue.” Walker v. Armco Steel

Corp., 446 U.S. 740, 749 (1980). If the federal rule is sufficiently 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.5Shady Grove Ortho3Federal 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). 

4A 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 MexicanAm. Educators v. California, 231 F.3d 572, 591-92 (9th Cir. 2000) (en

banc). Defendants did not request fees under Rule 54(d)(1). 

5Defendants do not argue that Federal Rule 68 transgresses the limits of

the Rules Enabling Act or the Constitution. 

19442 GOLDBERG v. PACIFIC INDEMNITY
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 interpreted 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 counterparts 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

GOLDBERG v. PACIFIC INDEMNITY 19443
Cir. 2000) (finding no direct conflict because “Rule 68 only

governs defendants’ costs, while plaintiff’s costs are the subject of the Colorado statute”); S.A. Healy Co., 60 F.3d at 310

(“There is no direct conflict between the Wisconsin rule concerning 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 recovery of costs, fees or sanctions that are not available under Federal 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 witness 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

6The 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 defendant/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 analysis. Id. at 702. 

19444 GOLDBERG v. PACIFIC INDEMNITY
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 coextensive with the asserted purposes of Arizona Rule 68 to indicate

that the federal rule occupies the Arizona rule’s field of operation.

[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

7This court’s opinion in MRO Commc’ns, Inc. v. Am. Telephone & Telegraph 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.

GOLDBERG v. PACIFIC INDEMNITY 19445
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 imposing 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 situations 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 plaintiff/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 federal rule covering the identical issue.” 60 F.3d at 311. 

19446 GOLDBERG v. PACIFIC INDEMNITY
to Federal Rule 68 in isolation. Although a prevailing defendant 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. Educators v. California, 231 F.3d 572, 591-92 (9th Cir. 2000) (en

banc). When Federal Rules 68 and 54(d)(1) are read in concert, 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 provides 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.

GOLDBERG v. PACIFIC INDEMNITY 19447