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Frivolous, Unreasonable or Groundless: New Changes to Employer Statutory Offers to Compromise

Attorney: Mary Watson Fisher | Published 5.13.19

In late 2018, Governor Jerry Brown signed Senate Bill 1300 which included an amendment to the Fair Employment and Housing Act (“FEHA”). This amendment limited the use of Code of Civil Procedure Section 998 offers to compromise (“998 offer(s)”) by employer defendants in discrimination, harassment and retaliation cases. Does this amendment signal the end of employer’s use of statutory offers to comprise in California? The short answer is no; a 998 offer may still be a useful tool to employers, albeit a more limited one than in the past.

Code of Civil Procedure Section 998 was enacted to encourage the parties to a lawsuit to settle early, thus avoiding the expense of protracted litigation. Under section 998, if a plaintiff rejects a settlement offer made by a defendant, and the plaintiff fails to obtain a more favorable judgment or award, the plaintiff shall not recover his post-offer costs and shall pay the defendant’s costs from the time of the offer. (The statute includes a similar provision addressing a defendant’s rejection of a plaintiff’s 998 offer.) Recoverable costs include filing fees, deposition fees, service of process fees, jury fees, bond premiums, witness fees, court transcripts, etc. In addition, the court has discretion to require the plaintiff to pay the defendant’s expert witness fees.

Effective January 1, 2019, an employer who succeeds in defeating a claim for discrimination, harassment or retaliation under FEHA may not recover its costs or expert fees even if the employer made, and the plaintiff rejected, a 998 offer unless the court finds the plaintiff’s lawsuit was “frivolous, unreasonable or groundless when brought or the plaintiff continued to litigate after it clearly became so.” Prior to enactment of this change, a pair of California appellate court cases in 2018 required a court to find the plaintiff’s lawsuit to be “frivolous” in order for section 998 to apply. The amendment to FEHA applies only to prevailing defendants seeking recovery of fees and costs. Plaintiffs may recover costs, attorneys’ fees and expert witness fees as a prevailing party to a FEHA claim.

While the FEHA amendment places serious limitations on employer 998 offers, such offers may, nevertheless, continue to be useful in defending employment cases. Currently, the limitations on the use of 998 offers apply only to claims brought under FEHA. As such, a defendant may seek costs and expert fees when a plaintiff rejects a reasonable 998 offer to settle non-FEHA claims such as wrongful termination in violation of public policy, breach of contract, tort claims including intentional infliction of emotional distress and defamation, and wage and hour claims.

Further, a court may have the discretion to limit or decline to award attorneys’ fees and costs to a prevailing plaintiff in a FEHA case when the amount sought is disproportionate to a nominal damages award. Generally, a prevailing party may recover its costs of suit. In addition, the prevailing party may recover his attorneys’ fees if the law under which he sues provides for such an award. FEHA allows the court, in its discretion, to award a prevailing plaintiff her attorneys’ fees. However, in 2015, the California Supreme Court held that a plaintiff who recovered a FEHA award of just $11,500 was not entitled to more than $870,000 in attorneys’ fees. The Supreme Court reasoned that the plaintiff should have brought his claim as a “limited civil case,” a procedure that provides cost and time-saving advantages to lower stakes litigation. While the court noted that it must consider the policies and objectives of FEHA’s attorneys’ fees provision, including avoiding the chilling effect on plaintiffs with limited economic means to bring meritorious discrimination and harassment claims, in this case, plaintiff’s “minimal success and grossly inflated attorney fee requested” justified denying recovery of his attorneys’ fees.

Moreover, even if a FEHA case is properly brought as an “unlimited civil case,” a reasonable 998 offer by the defense could limit the amount of attorneys’ fees and costs awarded to a prevailing plaintiff if the plaintiff obtains an award that is equal to or less than the 998 offer. A court could find that the plaintiff’s failure to accept the 998 offer was unreasonable and limit the recovery of attorneys’ fees and costs to those incurred by the plaintiff before the defendant made the offer and deny the plaintiff’s post-offer fees and costs. With that said, courts may, in the future, find that the 2019 FEHA amendment precludes such a ruling. To be sure, this will continue to be a hotly contested issue, and we expect the law in this area to further evolve in the months and years to come.