With the recent economic downturn, everyone is looking for bargains.  Accordingly, attorney’s fees and expert costs have become a progressively more important factor in valuation of disputes and litigation goals.  Thus, California Code of Civil Procedure ("CCP") Section 998 has become an increasingly useful tool in the litigation arsenal by shifting litigation costs.  Section 998 is designed to encourage settlement by penalizing any party who rejects the offer and then fails to achieve a better result at trial.  The 998 offer can be a valuable tool, if you read the fine print. 

Act Now: CCP Section 998

Under CCP Section 998, any party may serve an offer to compromise in writing to any other party in the action to allow a judgment to be taken or an award to be entered against it.  Section 998 can be used in most types of litigation including in arbitration.  If the offer is accepted, that offer is filed with the court and judgment entered accordingly.  If the offer is not accepted within 30 days or upon commencement of trial, the offer expires.  If the offer is not accepted and the rejecting party does not obtain a better trial result than the offer, a number of cost-shifting mechanisms take effect.  

Priced as Marked: Offers to Plaintiffs

If a plaintiff is presented with a favorable 998 offer, that party has many factors to consider before accepting or rejecting it.  Under Section 998, if the plaintiff receives a trial result that is less favorable than the 998 offer, the court may choose to punish the plaintiff by denying its statutory court costs and forcing it to pay some of the defendant’s costs incurred after the date of the offer.  Section 998 also gives the court authority to award defendant its fees from the onset of the action and all or a portion of the defendant’s expert witness fees.  Of course, whether the court chooses to invoke this authority depends greatly on the specific judge and individual circumstances of the action. 

A defense verdict is not necessary for a defendant to recover costs under Section 998.  Rather, if a plaintiff obtains a judgment or award that is merely less favorable than a defendant’s previous 998 offer, the plaintiff cannot recover the typical costs as the prevailing party and instead must pay certain costs incurred by the defendant from the date of the 998 offer.  In this situation, the court has discretion to award all of defendant's costs from the date of filing of the complaint, and to award a "reasonable sum" for expert witness costs incurred in preparation for trial.  Under Section 998, if the costs awarded by the court actually exceed plaintiff's recovery, the court will enter a judgment against plaintiff in favor of the defendant for the difference.  Thus, a plaintiff confronted with a 998 offer from a defendant must carefully weigh the risks as much is at stake.

While Supplies Last: Offers to Defendants

Alternatively, similar risks exist for the defendant.  If a defendant rejects a plaintiff’s 998 offer and fails to obtain a more favorable judgment, the court may award plaintiff a reasonable sum to compensate for expert witness costs in addition to the typically recoverable costs as the prevailing party.  In a personal injury action, the plaintiff may also recover interest on the judgment at the legal rate of 10 percent from the date of plaintiff's first 998 offer which exceeds the final judgment.

Terms and Conditions May Apply: Use of 998 Offers

Parties may make as many Section 998 offers as they want during the course of a case.  The timing of a 998 offer can have particular strategic importance.  For example, a plaintiff may opt to serve a Section 998 offer during the initial stages of the litigation to start the clock on the potentially recoverable costs and fees.  However, if the offer is made too early, before both parties know the merits of the claims and potential damages, the offer may be deemed too premature and unreasonable under the circumstances. 

The 998 offer must be made in good faith and be reasonable under the circumstances of the particular case.  Therefore, a token or nominal offer will not typically satisfy this good faith requirement.  However, as a case gets closer to trial and additional information is discovered which impacts valuation, parties may opt to send a second 998 offer for a different amount. 

No Refunds, No Exchanges: Responding to Section 998 Offers

Determining the appropriate response to a 998 offer requires extensive evaluation of the pros and cons given the specific facts of the case.  Section 998 states that an offer must be accepted within 30 days or before trial/arbitration begins, which ever occurs first.  If offeree provides no response and merely lets the offer lapse, it ultimately has the same effect as a rejection.  However, if a party explicitly rejects an offer, it inhibits the ability to settle during the remainder of the 30 day time period.  Rejection of a Section 998 offer must be unambiguous; merely objecting to an offer does not constitute a rejection and thus leaves the offer open until the 30 day window lapses. 

If the offer is accepted, it is filed with the court and judgment entered against the accepting party. Acceptance of an offer under Section 998 does not include any potential future actions by the plaintiff or his/her heirs or for a different injury.  The judgment then becomes res judicata (the law of the case) for any future claims the party may have based on the same set of facts.  For example, in a personal injury case, acceptance of a plaintiff’s Section 998 offer would not include any potential future wrongful death action that could eventually be filed by the plaintiff's heirs.  Accordingly, in a future wrongful death action the liability issues would be deemed res judicata and the only issue would be damages.  Contrast this with an informal resolution outside of Section 998 where parties can negotiate a full release of all claims in exchange for a settlement amount.  Such a term, if included in a Section 998 offer, may make the offer unenforceable.  If the offeree believes the offer is low enough to warrant the risk of a future action against, then that party may wish to take the chance and accept the offer.  Instead, the offeree could consider a counter offer to settle the case.  Unlike in common law contract principles, a counteroffer does not constitute a rejection of the original Section 998 offer.  However, conditional acceptance of a Section 998 offer, with terms or conditions that are materially different from the original offer, is deemed to be a counteroffer that eliminates the ability to accept the original offer. 

Defendants often wish to take advantage of the 998 statutory offer to compromise with the caveat that plaintiffs agree to a release of all claims; however, California courts have rejected this concept.  The courts have held that relinquishment of outside claims cannot be required.  In part, the basis for this decision was that the court could not realistically measure the value of the offer.  To trigger the cost shifting component of Section 998, the court must be able to value the 998 offer to compare the offer to the ultimate verdict.  Thus, for example, structured settlements often do not trigger the Section 998 cost shifting mechanism without the benefit of expert testimony as to the true value of the offer. 

Price Check: Calculating the Costs

To determine whether to accept a Section 998 offer or whether the ultimate judgment will be more favorable, parties must evaluate the recoverable costs.  When the court compares the final judgment to the Section 998 offer, the court must add to the judgment certain costs incurred by the plaintiff.  If the offer was made by a defendant, the court will add only those costs that the plaintiff incurred before receiving the defendants 998 offer.  If the court is comparing the judgment to an offer made by a plaintiff, the plaintiff’s pre-offer and post offer costs will be added to the judgment before the comparison is made.  Therefore, defendants sometimes opt to make a Section 998 offer early in the case before the plaintiff incurs significant recoverable costs. 

Depending on the case at hand, it may be appropriate to consider the plaintiff’s attorneys fees incurred at the time of the offer.  In a matter where attorney’s fees are recoverable either by statute or by contract, the recoverable attorneys fees are added to the judgment before the total is compared to the Section 998 offer to determine which was more favorable. 

Another factor to consider may be the prejudgment interest.  In personal injury tort cases where the plaintiff obtains an ultimate judgment that is more favorable than the Section 998 offer rejected by the defendant, the plaintiff can recover prejudgment interest at a rate of 10 percent from the date that the plaintiff served the Section 998 offer. 

Cash Only:  Non-Monetary Terms

The law does not explicitly prohibit nonmonetary terms in Section 998 offers.  This includes such items as injunctive terms, conditions for acceptance of monetary terms such as a release of all claims, confidentiality clauses and even structured settlements.  However, there is a risk that the court will not be able value the nonmonetary term and could thus deem the entire 998 offer invalid.  For example, courts have held that a Section 998 offer for a waiver of all claims including those beyond the pending litigation is impossible to value for purposes of cost shifting.  On the other hand, courts have enforced Section 998 offers that call for the plaintiff to dismiss the case with prejudice and provide defendant with a general release of all claims relating to the pending litigation (rather than accepting the 998 in the form of a judgment against the defendant).  In another example, courts have found that a 998 offer which includes a confidentiality condition is unenforceable.  Thus, great caution should be used when deciding whether to include nonmonetary terms in a Section 998 offer. 

Another factor to consider is the impact of nonmonetary terms on the value of the monetary component of the offer.  When the court decides whether the ultimate judgment or the Section 998 offer was more favorable, the court must establish the value of the nonmonetary submission and determine whether it weakens or augments the monetary portion of the offer. 

No Group Discounts: Multiple Parties

Section 998 can be quite complex in cases with more than two parties.  Typically, a separate Section 998 offer should be made to each party.  However, offers need not be sent to all adverse parties.  Offers involving multiple adverse parties can be at risk of being challenged unless (a) they provide individual allocations of the proposed judgment amount to each party, and (b) they allow each individual party to accept without consent of the other parties.

Section 998 offers must be unconditional and thus one party’s acceptance cannot be conditioned upon acceptance by all parties.  This can be both problematic and beneficial for defendants who have been sued by multiple plaintiffs in one case.  If one plaintiff accepts the 998 offer and another rejects the offer, the defendant is required to honor the settlement with the first plaintiff while continuing to litigate with the second plaintiff.  On the other hand, if a defendant serves Section 998 offers to two plaintiffs who both reject the offers and the jury returns a verdict in favor of one plaintiff but not the other, the defendant could recover the Section 998 costs and fees with respect to one of the plaintiffs and could be deemed the "prevailing party" with respect to at least one plaintiff despite the fact that the defendant was not the overall victor in the case.

In some instances, the court has held that joint offers by defendants without internal allocations are deemed enforceable where the court believed the claim was joint and indivisible.  On the flip side, it has been held that a 998 offer made by multiple plaintiffs with severable causes of action must include an allocation among themselves in order to be valid.  Again, the court must be able to determine the value of the offer in order to ascertain whether each plaintiff obtained a judgment that was more or less favorable than the offer and hence trigger the award the expert witness fees and prejudgment interest to plaintiffs under Section 998.  Interestingly, the court has held that when one person is suing in multiple different legal capacities, for purposes of Section 998 there is only one plaintiff and thus only one offer must be made.  For example, if a plaintiff is suing on behalf of himself and the estate of a decedent, that plaintiff is still one person under the law despite the multiple legal capacities. 

Not Sold Separately: Impact of Proposition 51

The influence of Proposition 51 on Section 998 offers has not yet fully been explored by the California courts.  Under Proposition 51, defendants are only liable for the amount of non-economic damages allocated as a percentage of fault.  Thus, Section 998 joint settlement offers made to defendants must typically distribute the offered amount amongst the defendants for plaintiff to recover their costs if they receive a judgment against one defendant that is more favorable than the joint offer to multiple defendants.  This is in stark contrast to joint and several liability, which is the case for economic damages in California.  In such a case, the plaintiff’s section 998 offer does not need to specifically assign the settlement value among the various defendants because each defendant is fully liable for the entire judgment. 

All Sales Final: Conclusion

California Code of Civil Procedure Section 998 offers can be used as both a shield and a sword to recover costs and to encourage settlement where desired.  Although everyone likes a good bargain, the decision to make, accept or reject a Section 998 offer should be made with a full understanding of the merits of the case, the impact of the law and the potential risks.  Caveat Emptor! 

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