The Church of the Eagle and the Condor and its members, who use ayahuasca containing a Schedule I controlled substance in religious ceremonies, sued the Attorney General and other officials. They claimed violations of the Religious Freedom Restoration Act, the First Amendment, and other statutes following the seizure of their religious supplies by Customs and Border Protection. After negotiations, the parties entered a written settlement agreement that included a provision for the plaintiffs to receive attorney's fees. The district court entered an order acknowledging the settlement and retaining jurisdiction to resolve fee disputes, but later denied the plaintiffs' motion for fees, concluding they were not prevailing parties because the settlement lacked formal judicial sanction. The court then dismissed the case with prejudice sua sponte.
The Ninth Circuit reviewed the denial of attorney's fees for abuse of discretion and questions of law de novo. The court applied the standard that a plaintiff prevails when they enter a legally enforceable settlement agreement that materially alters the relationship between the parties. The court found that the settlement agreement here met this standard because it required the government to pay fees it otherwise would not have been required to pay. The district court argued that the agreement lacked judicial sanction, but the Ninth Circuit clarified that retention of jurisdiction to resolve fee disputes provides sufficient judicial oversight. The court noted that the district court had not only retained jurisdiction but had exercised it by ordering the parties to comply with the settlement terms. The opinion distinguished the Supreme Court's recent decision in Lackey v. Stinnie, noting that unlike the preliminary injunction in that case, the settlement agreement here provided enduring relief. The court also addressed the sua sponte dismissal, finding that the district court cited no procedural mechanism under the Federal Rules of Civil Procedure to justify dismissing the case with prejudice.
The case is remanded to the district court to award attorney's fees and costs to the plaintiffs as prevailing parties. The decision clarifies that a settlement agreement coupled with the district court's retention of jurisdiction to resolve fee disputes is sufficient to establish prevailing party status, even if the settlement terms are not formally incorporated into a final judgment order. It also reinforces that federal courts cannot dismiss cases with prejudice sua sponte without a clear procedural basis under the Federal Rules of Civil Procedure.