Warning: Some Cost Shifting May Occur
California Lawyer

Warning: Some Cost Shifting May Occur

by Gerald G. Knapton

September 2012

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California has a strong public policy designed to foster the settlement of lawsuits. Indeed, that is why the Legislature has declared that evidence of an offer to compromise is inadmissible to prove liability (Cal. Evid. Code § 1152) and that all statements made during mediation are confidential (Cal. Evid. Code § 1119).

But nowhere is this policy favoring settlement more clear than in section 998 of the Code of Civil Procedure. That section applies when a party's written offer "to allow judgment to be taken or an award to be entered" is not accepted. It provides, in essence, that if the other side does not secure a more favorable judgment, the refusing party not only loses the right to recover litigation costs but also becomes liable for all costs the offerer subsequently incurs. (Cal. Code Civ. Proc. § 998(c)(1) and (d).) As the appellate courts have recognized, the "very essence" of section 998 is its encouragement of settlement. (One Star, Inc. v. Staar Surgical Co., 179 Cal. App. 4th 1082, 1089 (2009); Scott Co. of Calif. v. Blount, Inc., 20 Cal. 4th 1103, 1114 (1999).)

Especially in personal injury cases, where interest normally is not awarded, this section can be a potent weapon because the first 998 offer also triggers the recovery of prejudgment interest at 10 percent per year - and the interest accrues until the judgment is satisfied. (See Cal. Civil Code § 3291.)

Knowing the mechanics of section 998 is imperative for every civil litigator in California. Over the years the statute has been amended several times, which has implications for the present application of many older court opinions. Counsel are well advised to stay current with the continually evolving text of this important law.

Making the Offer
Statutory prerequisites are few. A written offer, served on a party at least ten days before trial or arbitration, is required. The offer must contain all pertinent terms and conditions, as well as a provision allowing the other side to indicate acceptance in writing. (§ 998(b).)

Many opinions on 998 offers have been published in the past few years, and some of them are surprising. For example, it has long been the rule that one party can shift expert witness fees to the other side, but who knew the courts would also allow recovery of fees paid to the opponent's expert at deposition? Yet this was the holding in Chaaban v. Wet Seal, Inc. (203 Cal. App. 4th 49, 55 (2012)).

Good Faith and Reasonable Offers
The statute does not expressly contain a "good faith" requirement. Nevertheless, it is settled law that only a good faith offer qualifies for the benefits of section 998. Courts have ruled that the statute mandates good faith in that the offer must carry with it some reasonable prospect of acceptance, and the other side must have reason to know the offer is reasonable. (Elrod v. Oregon Cummins Diesel, Inc., 195 Cal. App. 3d 692, 698-699 (1987).) A party having no expectation that his or her offer will be accepted will not be allowed to benefit from a no-risk offer made for the sole purpose of later recovering large expert witness fees. (Jones v. Dumrichob, 63 Cal. App. 4th 1258, 1262-3 (1998).) In a case that stemmed from a high-speed accident involving a motorcycle and a van, counsel for the plaintiff, an injured motorcyclist, served a $50,000 offer to compromise along with the complaint. (Najera v. Huerta, 191 Cal. App. 4th 872, 878 (2011).) Plaintiff's counsel then refused to extend the 30-day deadline for responsive pleading, which was (and is) a common courtesy among litigators. After a verdict for the plaintiff in the amount of $728,704, plaintiffs counsel sought to recover all of his expert costs plus prejudgment interest, based on the 998 offer that was not accepted by the defense.

The defense moved to tax the expert costs and the prejudgment interest, arguing that the plaintiff's section 998 offer was not made in good faith because it was served with the summons and complaint and expired before the defendant had adequate time to conduct a reasonable investigation and discover facts necessary to properly evaluate the offer. The court of appeal commented that "[a]n important factor in deciding whether a section 998 offer is unreasonable or in bad faith is whether the offeree was given a fair opportunity to intelligently evaluate the offer." The court noted that in this case, there was no such opportunity; in the court's eye, plaintiffs counsel was trying to "game the system" by not extending the deadline or providing requested information that was needed to fairly evaluate the offer.

Contrast that situation with Adams v. Ford Motor Company (199 Cal. App. 4th 1475 (2011)), where the defendant made an offer of $2,500 on the courthouse steps just before trial in a mesothelioma death case. At first blush, a defense offer of $2,500 with a waiver of costs made only a few days before trial might not seem realistic or reasonable. But in the Adams case, causation was still largely in dispute at that stage, and this uncertainty - which shifted $185,742 in costs - was enough to make the offer reasonable.

It should be noted that under an amendment of section 998(d), if a plaintiff's offer is rejected and the plaintiff does better at trial, only the post-offer costs for experts can be recovered. However, the rules are more permissive for defendants: Under 998(c)(1), a defendant might recover both pre-offer and post-offer costs for experts, as was allowed in Adams.

Watch Your Language
Since a 2006 amendment, section 998(b) has contained a requirement that the settlement offer contain a provision that lets the accepting party indicate acceptance by signing a written statement to that effect. This requirement is crucial, for an offer that does not contain the appropriate language is invalid and will not trigger cost-shifting. (Puerta v. Torres, 195 Cal. App. 4th 1267, 1269 (2011).)

Litigators should use care when making or responding to an offer that contains the words "each side to bear their own costs" yet makes no mention of attorneys fees. A 998 offer that excludes costs also excludes attorneys fees, even though it does not use those words, according to one appellate court. (Martinez v. Los Angeles County Metropolitan Transportation Authority, 195 Cal. App. 4th 1038, 1041 (2011).) This is because of the rapport between various "cost" statutes, including Code of Civil Procedure sections 998, 1032, and 1033.5.

On the other hand, if a 998 offer is silent about fees and costs, then a party that prevails under the ensuing judgement may be entitled to recover both costs and contractual or statutory attorneys fees. (Engle v. Copenbarger & Copenbarger, LLP, 157 Cal. App. 4th 165, 169 (2007).)

Revocation and Multiple Offers
A 998 offer is like any other contractual promise. After all, it's merely an offer, and it can be revoked at any time before the other side accepts it. And a second offer made while the first offer is still pending will supersede the prior proposal. (Palmer v. Schindler Elevator Corp., 108 Cal. App. 4th 14 (2003).)

It is also well settled that an offeree can haggle away while an offer is pending and then still accept the original offer before it expires. (Guzman v. Visalia Community Bank, 71 Cal. App. 4th 1370, 1377 (1999).)

If there are multiple offers and all expire, does the earliest offer vest any rights or have any significance?

Perhaps. It all depends on timing. Keep in mind that a 998 offer that lapses or expires is simply an offer that was not accepted within the statutory 30-day time frame; it is the equivalent of a rejected offer. When viewed in this light, an expired 998 offer remains on the books, and if the other side does not secure a more favorable result at trial, cost shifting may be permitted.

This is exactly what happened in a case where the plaintiff made two 998 offers to settle. (Martinez v. Brownco Construction Co., Inc., 203 Cal. App. 4th 507 (2012).) The first was for $250,000, served in August 2007. The second offer, for $100,000, was served about six months later. Both offers expired without acceptance, and the jury later awarded the plaintiff $250,000. But it was an expensive case to try; the plaintiff racked up $188,537 in expert fees for services provided between the two offers alone. Could the plaintiff collect those fees from the defendant under section 998? The trial court said no, but the court of appeal had a different view altogether.

Applying general principles of contract law, the appellate court observed that any new offer communicated prior to acceptance of the first offer would extinguish and replace the earlier offer. In this case, however, the interval between the two offers made the difference: The first offer had lapsed and was not superseded by the second offer; they were simply two independent 998 offers that the other side did not accept. As such, the lapsed first offer did indeed vest rights under 998. "The sole significance of the first offer," said the court, "was that pursuant to section 998 it entitled [the plaintiff] to cost shifting if [the defendant] failed to obtain a more favorable judgment. This conditional entitlement vested when [the defendant] allowed [the] first offer to lapse." Nothing in contract law, the justices observed, divests the plaintiff of that entitlement "simply because she later made another offer." (Martinez, 203 Cal. App. 4th at 522.)

Multiparty Cases
If there are several parties to the litigation, an offer to compromise must be sufficiently specific to permit an objective analysis of who has prevailed. If the defendants are alleged to be joint tortfeasors, then a single offer by both of the defendants may be acceptable. (Brown v. Nolan, 98 Cal. App. 3d 445 (1979).) The same is true if the sides are not true joint tortfeasors but are nevertheless unified in their interests. (Winston Square Homeowners Ass'n v. Centex West, Inc., 213 Cal. App. 3d 282, 294 (1989).) However, a lump sum offer by the plaintiff to multiple defendants who have proportional liability for damages is not enforceable under section 998. (Taing v. Johnson Scaffolding Co., 9 Cal. App. 4th 579, 584 (1992).)

A 998 offer that overreaches may be invalid. In one instance, two plaintiffs separately sued one defendant for damages arising out of a municipal bus accident. The defendant made a single 998 offer to both plaintiffs for an aggregate sum. The offer expressly provided that neither plaintiff could accept unless the other also accepted. The court held that the offer was an invalid "conditional settlement offer." The opinion explains that it is in the public interest that each party be given the right to accept and consummate an offer made to him or her. (Hutchins v. Waters, 51 Cal. App. 3d 69, 73 (1975).)

In addition, when the plaintiffs are married to each other, a single offer by the defense may not qualify under section 998. The key issue is whether the couple has a single "indivisible" injury. In a case that involved a husband-and-wife claim against a third party over damage to a community asset, the court held that it was a unified claim and a joint offer was valid. (Vick v. DaCorsi, 110 Cal. App. 4th 206 (2003); and Farag v. ArfvinMeritor, Inc., 205 Cal. App. 4th 372 (2012).) But when the case involves particular injury to each spouse, separate offers must be made. (Weinberg v. Safeco Ins. Co. of America, 114 Cal. App. 4th 1075 (2004).)

Arbitration and Other Cases
Section 998 now applies to cases that are arbitrated as well as to trials. Judges and arbitrators have the same powers under this statute. (Maaso v. Signer, 203 Cal. App. 4th 362, 379 (2012).)

But not every case will qualify for section 998 cost-shifting benefits. A classic example is a family law dispute. Given the broad discretion that family law statutes vest in the trial court to consider the conduct or misconduct of a party or counsel in awarding attorneys fees and costs, appellate tribunals have held that "the Legislature could not have meant to limit this discretion" by having the provisions of section 998 apply. (In Re Marriage of Green, 213 Cal. App. 3d 14, 24 (1989).)

In less expansive statutory schemes such as the state's consumer warranty law, commonly known as the Song-Beverly Act, the usual section 998 rules will hold. Because the cost-shifting provisions of the Song-Beverly Act (Cal. Civ. Code §§ 1790-1795.8) do not expressly disable a prevailing defendant from recovering section 998 costs and fees in general, or expert witness fees in particular, a trial court can exercise its discretion to award expert witness fees. (Murillo v. Fleetwood Enterprises, Inc., 17 Cal. 4th 985, 1000 (1998).)

Proper Proof
It's important when submitting a section 998 offer to present admissible evidence to prove up the offer and the existence of the costs claimed under it. In a recent case, the court of appeal noted that a party "failed to support her memorandum of costs with a written offer to compromise. Accordingly, the award of expert witness fees must be reversed." (Behr v. Redmond, 193 Cal. App. 4th 517, 538 (2011).) Also, a party should not serve a 998 offer on an insurance carrier alone, because a demand served only on a (nonparty) insurer is not a valid 998 offer. (Arno v. Helinet Corp., 130 Cal. App. 4th 1019, 1025 (2005).)

Attorneys Fees
In most cases section 998 focuses on cost-shifting that is related to charges for witnesses, but in some circumstances the statute allows for the recovery of legal fees - particularly if a contract closely related to the dispute has a provision that authorizes such a recovery. When there is an attorneys fees clause, those fees become recoverable costs by virtue of section 1033.5 of the Code of Civil Procedure, and that, in turn, triggers cost shifting of the fees under section 998. (Scott Co. v. Blount, Inc., 20 Cal. 4th 1103, 1113 (1999).)

Offers under section 998 demand a good deal of thought. Requesting costs and fees at the conclusion of a case is often a move made against a defeated opponent, who will likely exploit any procedural irregularity in an effort to win the final skirmish.

Gerald G. Knapton is a partner at Ropers Majeski Kohn & Bentley in Los Angeles.

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