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On April 11, 2023, California’s Third District Court of Appeal issued its decision in Madrigal v. Hyundai Motor America (Cal. Ct. App., April 11, 2022, No. C090463) 2023 WL 2883009, which reversed a judgment from the lower court and held that Code of Civil Procedure section 998(c)(1)’s cost-shifting penalty provisions may apply when an offer to compromise is rejected and the case ends in settlement.

Background

Plaintiffs Oscar and Audrey Madrigal (Plaintiffs) sued Defendant Hyundai Motor America (Hyundai) under the Song-Beverly Act alleging breaches of express and implied warranties arising out of Plaintiffs’ purchase of an allegedly defective 2012 Hyundai Elantra for which Plaintiffs paid $24,172.73. Early in the case, Hyundai made two offers to compromise pursuant to Code of Civil Procedure section 998. The first offer was for $37,396.60, which included the total amount Plaintiffs paid for the vehicle, actual and consequential damages. Plaintiffs allowed this offer to expire without accepting it. Hyundai’s second offer was for $55,556.70, which again included the total amount Plaintiffs paid for the vehicle, actual and consequential damages. Plaintiffs also allowed this offer to expire without accepting.

On the day of trial, after a jury was sworn and Hyundai’s motions in limine to exclude certain issues were granted, Plaintiffs agreed to settle with Hyundai on the following terms: (1) Hyundai would pay Plaintiffs $39,000; (2) there would be no surrender of the vehicle as Plaintiffs no longer owned it; (3) Plaintiffs would release Hyundai and the selling dealership of any claims related to the sale of the vehicle; (4) the settlement would be subject to Section 664.6; and (5) Plaintiffs could seek fees by motion to be filed within six months of the date of settlement. No mention was made during the settlement of the effect, if any, of Hyundai’s 998 offers on the recovery of costs or fees, nor was there any discussion of what defenses Hyundai could raise in response to any motion for costs and attorneys’ fees.

Plaintiffs filed their motion for costs and attorneys’ fees as prevailing parties and requested $207,438.75 in fees and $20,865.83 in costs and expenses, totaling $228,304.58. In response, Hyundai filed a motion to strike or, in the alternative, tax Plaintiffs’ costs and expenses, contending that Plaintiffs’ ultimate settlement was $16,556.70 less than Hyundai’s second 998 offer and Plaintiffs failed to obtain a more favorable judgment than the second offer. Accordingly, Hyundai asked the trial court to strike $20,242.88 of Plaintiffs’ costs and expenses, leaving only $622.95 recoverable.

The trial court held that the cost shifting measures of Section 998(c)(1) did not apply to the case because the parties settled the matter prior to trial, and as there was no trial, no judgment or award was rendered. Hyundai appealed.

Court of Appeal’s Opinion

California’s Third District Court of Appeal reversed the trial court’s ruling and held, in this case, that Section 998(c)(1) applied based on the terms of the stipulated settlement between the parties because the stipulation for settlement under Section 664.6, “calling for dismissal of the entire action with prejudice constituted a ‘judgment’ within the meaning” of Section 998(c)(1). The appellate court reasoned that Section 998(c)(1) is silent on the timing or form of a “favorable judgment” and whether a “favorable judgment” must occur after trial, summary judgment, settlement, or otherwise. In analyzing the section, the court considered subdivision (b) of Section 998 and the legislative intent that judgments include dismissals with prejudice following a settlement, which constitute a final judgment on the merits. The court further reasoned that Section 998 does not require that the offering defendant achieve any specific result. The statute is only triggered, “[i]f…plaintiff fails to obtain a more favorable judgment or award…” (CCP §998(c)(1)).

Relying on the terms of the parties’ settlement agreement to conclude that the case resulted in a judgment within the meaning of Section 998, the court determined that the parties’ inclusion of Section 664.6 in the settlement agreement indicated an intention that the settlement be a final, formal judgment, or its equivalent. The Court of Appeal also examined the attorneys’ fees provision of the Song-Beverly Act, under which Plaintiffs sought attorneys’ fees, which provides for recovery of fees by a prevailing vehicle purchaser as part of a judgment. The court noted that the Song-Beverly Act’s definition of judgment mirrored that of Section 998.

In considering the policy behind Section 998’s cost-shifting penalty provisions, the appellate court recognized that the statute’s purpose of conserving judicial resources and encouraging early settlements with strong financial disincentives would be substantially undercut by reading the phrase “at trial” into Section 998(c)(1). As the entire purpose of the section to encourage early settlements, application of Section 998 only to judgments rendered after trial, would incentivize an offeree to pursue needless litigation up to the eve of trial before accepting an offer.

After its analysis of Section 998, the court held that a plaintiff need only factor any operative Section 998 offer into a comprehensive settlement, and either negotiate a fixed amount of costs or attorneys’ fees, or bargain for a waiver of any rights under Section 998 from the defendant.

In this case, Plaintiffs took neither precaution. They instead agreed to litigate the issue of costs and attorneys’ fees without restricting the defenses that Hyundai could raise in response to their motion. Plaintiffs rejected reasonable offers to compromise early in the case, creating a known risk that they might have to forfeit costs and attorney fees from the date of the operative Section 998 offer if they failed to obtain a more favorable judgment later. When they ultimately agreed on the brink of trial to accept a monetary settlement that was less than Hyundai’s second Section 998 offer, and further agreed to dismiss their complaint with prejudice, they failed to obtain a more favorable judgment within the meaning of Section 998(c)(1).

Dissent’s Opinion

The dissent advanced its opinion that Section 998(c)(1) should only apply to cases actually litigated and concluded that the cost-shifting provision does not apply to settlement agreements which do not result in a winner or a loser. The dissent concluded that Section 998 applies only when a plaintiff’s unilateral action, rather than a compromise between opposing parties, results in a judgment less favorable than a previously rejected 998 offer.

The dissent urged that the application of Section 998(c)(1) to settlement agreements would cause uncertainty, complicate the settlement process and may substantially increase litigation following settlement.

Conclusion

It appears that the appellate court was most persuaded by the terms of the parties’ oral settlement agreement and the inclusion of Section 664.6, signaling the intent that the matter result in a judgment within the meaning of Section 998(c)(1). The parties’ inclusion of the right to recover of attorneys’ fees pursuant to the Beverly-Song Act seemed to be a pivotal element upon which the conclusion was reached.

As the ruling in this case appears to imply, settling parties should thoroughly consider all forms of discussions along with the terms contained within their agreements, and include language that demonstrates that a settlement acts as a final judgment of the matter. It will be interesting to see whether courts will entertain fee requests pursuant to Section 998 cost shifting where the matters do not involve the Beverly-Song Act or other specific fee statutes or references to Section 664.6.

This ruling makes it imperative that settling parties carefully consider the potential for post settlement fees and costs, any intention that the settlement be a final judgment and specifically address these in the release to avoid unintended consequences of prior litigation tactics like Section 998 offers to compromise. It will be interesting to see whether courts will entertain fee requests pursuant to Section 998 cost shifting where the matters do not involve the Beverly-Song Act or other specific fee statutes or references to Section 664.6.

For more information or specific guidance, please contact Helen Luetto.