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Upwards of 90% of all civil lawsuits settle before trial. Given the near inevitability of settlement before trial, posturing a case for settlement is a vital component of any litigation strategy and the California state legislature enacted Code of Civil Procedure Section 998 to assist civil litigants to this end.
Section 998’s power comes from the drastic cost-shifting it imposes when a party who rejects the offer fails to obtain a more favorable outcome at trial or arbitration. 998 settlement offers (often called statutory offers to compromise) operate differently depending on whether the plaintiff or the defendant make the offer. If the defendant makes a valid 998 offer that is rejected and the plaintiff fails to obtain a more favorable outcome at trial or arbitration, the plaintiff is not entitled to recover its post-offer costs and must pay the defendant’s post-offer costs, including expert witness fees. C.C.P. § 998(c)(1). Alternatively, if a defendant rejects a plaintiff’s 998 offer and the plaintiff obtains a more favorable result at trial or arbitration, the plaintiff is entitled to recover its post-offer expert witness fees. C.C.P. § 998(d). There is no need for the statute to shift the recovery of ordinary litigation costs to plaintiffs as plaintiffs already recover those costs as a prevailing party under C.C.P. section 1032.
To take advantage of the statute’s cost shifting benefits a valid 998 offer must meet certain statutory requirements. While there is no mandatory prescribed form for a 998 offer, the offer must be in writing and served at least 10 days before the trial date. C.C.P. § 998(b). The offer automatically expires 30 days after service or on the first day of trial, which ever comes first. C.C.P. § 998(b)(2). The offer also must be accepted in writing and must contain a provision that allows the party to indicate acceptance of the offer by signing a statement that the offer is accepted. C.C.P. § 998(b). The offer must also be made in terms capable of valuation, meaning the inclusion of non-monetary terms, such as a confidentiality provision, could result in the offer being invalidated. Barella v. Exch. Bank (2000) 84 Cal.App.4th 793.
Finally, the offer must be reasonable and made in good faith. By way of example, a 998 offer served by plaintiff at the same time as the initial summons and complaint could be deemed not to be made in good faith because it would not give the defendant adequate time to assess whether the offer was reasonable before the offer automatically expires in 30 days. Najera v. Huerta (2011) 191 Cal.App.4th 872, 878-79.
In addition to issues of technical compliance, to maximize effectiveness, careful consideration should be given to how the offer allocates costs, including where appropriate attorneys’ fees. By way of example, if attorneys’ fees are authorized by statute or contract and an offer is silent as to costs, a plaintiff could accept the offer and then move for attorneys’ fees as the prevailing party.
Section 998 has been regularly amended since it was first enacted in 1969, and with nearly a thousand opinions filed on 998 offers just over the past few years, the statute and the cases interpreting it require regular monitoring or risk losing its benefits. In an opinion published just last month in the case of Heimlich v. Shiraz, the court of appeal held that a party seeking to collect costs after obtaining a more favorable award than a rejected 998 offer must present its claim for costs to the arbitrator after the arbitrator makes an award, and that a party who waits to request its costs under section 998 until confirming an award with the trial court will be found to have waived any right to recovery of those costs for failure to have made a timely claim to the arbitrator.
Section 998’s cost-shifting mechanism dictates that a civil litigant carefully consider a valid 998 offer or face exposure to significant adverse financial consequences. A defendant’s good faith 998 offer can be particularly effective in getting settlement negotiations started early in cases where claims that provide for either contractual or statutory attorney’s fees may otherwise encourage opportunistic plaintiffs’ lawyers to stay away from the bargaining table while running up attorneys’ fees. Likewise, given the potential peril of not accepting a reasonable offer, 998 offers can often jump start settlement negotiations when trial is getting close.
In sum, settlement offers made pursuant to section 998 act as both a carrot and a stick to encourage parties to civil litigation to make and accept reasonable settlement offers and a savvy practitioner should consider and re-consider the benefits of making a 998 offer throughout the course of any civil lawsuit in California.