Business Law Journal

For context, California Code of Civil Procedure Section 998 allows a party in a lawsuit to make a formal settlement offer (aka a “998 offer”) that can have significant cost-shifting consequences if such offer is not accepted.  In order to constitute a 998 offer, at least ten days before the commencement of trial or arbitration, the offering party must serve a written statement of the offer, which contains the terms and conditions of said offer, along with a provision that allows the recipient to indicate acceptance of the offer by signing a statement that the offer is accepted.  In order to accept the offer, the recipient must do so in writing and the recipient’s counsel, to the extent it has one, must sign the written acceptance.  If the recipient does not have counsel, then the recipient must sign the written acceptance.  If the recipient does not accept the offer prior to trial or within 30 days after service of the offer, whichever occurs first, then the offer shall be deemed withdrawn.  Moreover, and most importantly, if the offer is deemed withdrawn and the recipient fails to obtain a judgment or award that is more favorable than the offer, then the recipient (i) will not recover its postoffer costs and (ii) will pay the offeror’s postoffer costs.[1] 

In Madrigal, plaintiffs purchased a car from defendant Hyundai Motor America for $24,172.73.  Plaintiffs alleged that the car did not operate as warranted and repeated attempts to repair the car were unsuccessful.  Plaintiffs requested that defendant purchase the car back, but defendant refused.  Plaintiffs then sued defendant for violations of the Song-Beverly Consumer Warranty Act.  Less than two months after plaintiffs filed their complaint, defendant made its first 998 offer, which was deemed withdrawn.  Six months later, defendant made a second 998 offer, which consisted of a fixed amount of $55,556.70 and attorney fees of $5,000.00 or an amount to be awarded by the court.  The second 998 offer was also deemed withdrawn. 

Eighteen months after the second offer was deemed withdrawn and on the first day set for trial, the parties reached a settlement, the terms of which included defendant paying plaintiffs $39,000.00 and plaintiffs dismissing their complaint with prejudice after said payment along with any costs awarded by the court.  Plaintiffs subsequently moved to recover their costs as the prevailing party, which defendant moved to strike on the grounds that plaintiffs could not recover any costs incurred after the second 998 offer because plaintiffs settled for less than said offer.  The trial court rejected defendant’s argument and awarded plaintiffs $17,681.05 in costs based on its reasoning that the parties settled the case before trial and given that there was no trial, no judgment or award was rendered that would allow the cost shifting in Section 998 to come into play.  The Court of Appeal, however, reversed and remanded the trial court’s decision while concluding that the cost shifting in Section 998 applied to the question of recoverable costs.

The Supreme Court agreed that the trial court’s reasoning was incorrect for several reasons.  The Supreme Court first stated that the plain language of Section 998 does not require that the case be resolved by trial because the statute only references a judgment rather than specifying a judgment after trial or by other means.  The Supreme Court further explained that in a prior case it had held that a settlement agreement that includes payment by defendant and dismissal of the action by plaintiff is the legal equivalent of a judgment.  See, e.g., Reck v. FCA US LLC (2021) 64 Cal.App.5th 682, 693.

The Supreme Court also stated that construing Section 998 to allow for cost shifting when a case settles after a 998 offer is deemed withdrawn would enhance the statute’s policy objectives of encouraging pretrial settlement and explained that:

“Rewarding the making of reasonable offers, by imposing liability for postoffer costs on a rejecting offeree, is enhanced by an understanding that section 998 applies even to cases that settle before trial but after rejection of an offer. Offerors will be encouraged to make reasonable offers earlier; the better the offer, the more likely it is to be more favorable than the eventual result. There is little incentive to make one’s best offer early if there is no cost-shifting benefit unless a case goes to trial.”

The Supreme Court lastly made clear that parties are still well within their rights to come to an agreement regarding how costs should be allocated, whether it be a part of the settlement agreement or otherwise.

The key takeaway here is that parties should seriously consider making a reasonable 998 offer early on in the litigation process as doing so will potentially protect them from having to pay their opposition’s postoffer costs while also allowing them to obtain their own postoffer costs from the opposition, so long as they settle the case for less than the 998 offer or obtain a more favorable result at trial than the 998 offer.  Accordingly, at the outset of the case as well as throughout the litigation process, parties should evaluate (i) how much they believe the dispute is actually worth and (ii) how much they are willing to resolve the dispute for, and then make a reasonable 998 offer if it makes sense strategically and aligns with their objectives.

AALRR has a team of attorneys well-versed in resolving disputes as efficiently as possible.   If you need any assistance with resolving a dispute or have additional questions regarding 998 offers, please contact the authors or your usual counsel at AALRR.

[1] Such costs may include expert witnesses’ reasonable fees post-offer, subject to the court’s discretion.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.

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