Let’s Make A Deal: The Art of Offers to Compromise

Litigation is a costly endeavor. Whether a case has merit or lacks it, getting to a resolution acceptable to both sides takes time and money – an investment by the parties, as well as by our overburdened civil justice system. While the goal is always to win your case on the best terms possible for your client, the reality is that the system requires, and often demands, compromise.

Why the CA CCP Section 998 Offer Exists:

The majority of cases settle before trial. The legal system is geared to encourage parties to settle in an attempt to aid an already overburdened court. A useful incentive to encourage settlement devised by the California legislature is the California Code of Civil Procedure section 998 Offer to Compromise (“998 Offer”). Because of the legal system’s affinity for early settlement, a 998 Offer may be made by any party at any time 10 days before trial or arbitration. Further, 998 Offers may be renewed and re-offered several times throughout the litigation.

The 998 Offer is a cost-shifting tool that places the non-settling party at risk of additional financial burdens if it fails to accept the offer, and then fails to secure a more favorable result than the offer at the conclusion of the trial. Should the offering party recover more, or be liable for less than the rejected or expired 998 Offer, the offering party may be entitled to recover certain costs, expert fees, and prejudgment interest incurred after the date of issuance of the offer. In some cases, attorney fees are also recoverable by the offering party.

The cost-based impact of rejecting a 998 Offer requires the recipient of the offer to pause and honestly evaluate their case. It also provides some motivation for the parties to have an open channel for serious negotiation and settlement before incurring significant litigation costs – especially before or during the often costly expert phase. Therefore, a party receiving a 998 Offer must soberly evaluate their case and the likelihood they will prevail at trial and obtain a more favorable outcome than the 998 Offer amount.

The Rules of 998 Offers:

• Defense Offers – if an offer made by a defendant is not accepted or expires without acceptance and plaintiff fails to obtain a more favorable judgment, the plaintiff

(a) is not entitled to recover court costs (despite being a “prevailing party”), and
(b) must pay the offering defendant’s costs incurred from the date the offer was made.

The Court also has discretion to award all of defendant’s costs incurred from the date of filing of the complaint, and to award a “reasonable sum” to cover the incurred expenses for expert witnesses used by the defendant in the defense work-up and trial of the case.

Moreover, if the costs awarded exceed plaintiff’s recovery, the court “shall” enter a judgment against the plaintiff in favor of the defendant for the difference.

• Plaintiff Offers – if an offer made by plaintiff is refused or expires without acceptance, and defendant fails to obtain a more favorable judgment, the court may award (in addition to the costs to which plaintiff will already be entitled to recover as the “prevailing party”) a “reasonable sum” to cover plaintiff’s incurred expenses for expert witnesses.

Moreover, California Civil Code section 3291 provides pre-judgment interest on plaintiff’s judgment at the legal rate of 10 percent, starting on the date of plaintiff’s first 998 Offer which is exceeded by the eventual trial judgment in plaintiff’s favor.

The key statutory details to consider when making or accepting a 998 Offer are the following:

A 998 Offer has a life of no more than 30 days. If left unaccepted, the offer expires/is deemed automatically withdrawn or rejected as to the party who fails to accept it, and the power of the 998 Offer comes into play. If the 998 Offer is made close to trial – between 10 days and 30 days before the trial – the commencement of the trial will terminate the time to accept the offer. An oral ruling in a summary judgment hearing resolving all the disputes will also terminate the time to accept a 998 Offer. See, Trujillo v. City of Los Angeles (2022) 84 Cal.App.5th 908. The Trujillo case stands for the proposition that parties must consider whether to accept a 998 Offer before any dispositive motions are heard.

However, to be enforceable after trial, a 998 Offer must be made in writing with “the terms and conditions of the judgment or award, and a provision that allows the accepting party to indicate acceptance of the offer by signing a statement that the offer is accepted.” California Code of Civil Procedure section 998 (b). The offer must also include a statement that the accepting party is dismissing the case with prejudice. Finally, the offer terms must be reasonable and made in good faith.

The California Sixth District Court of Appeal in Chen v. BMW of North America (2022) 303 Cal.Rptr.3d 703 reiterated that a 998 Offer must be specific and certain. However, not every technical detail needs to be specified in the offer. The terms must only be specific enough to allow the acceptor to determine what they stand to gain by accepting the offer instead of proceeding to trial. However – and importantly – when a 998 Offer is silent about the post-judgment recovery of cost items, those costs can be recovered by a motion. Therefore, it is imperative that post-judgment recovery of costs and expenses are covered in the terms of the 998 Offer.

There are two additional key points to keep in mind.

First, unlike a negotiated settlement, an accepted 998 Offer results in a formal judgment against the accepting party. This may or may not be a stumbling block to its use in your case, but must be discussed with all decision-makers before any formal acceptance is made. Judgments can lead to unintended accounting and/or other business consequences for the acceptor.

Second, when determining the merit of rejecting or accepting a 998 Offer, the timing of its issuance and amount must be kept in mind. The 998 Offer’s reasonableness is determined by the facts that were known or should have reasonably been known about the case at the time the offer is made. In other words, the 998 Offer must be for a settlement amount that accurately reflects the amount of damages a jury may award based to the facts known to the parties at the time the offer is made. To prevent gamesmanship, courts can charge parties with knowledge of facts when it determines those facts reasonably should have been known at the time the offer is made. This imputation of knowledge protects the offeror from the offeree burying its head in the sand and claiming it does not have sufficient information to assess the reasonableness of the offer. So, on the plaintiff side, a large 998 Offer issued shortly after the case has been filed can be rightfully challenged on good faith and reasonableness grounds; conversely, on the defense side, a small 998 Offer (or one made for a waiver of costs alone) made after grounds for potential liability have been fairly established may also lack good faith and reasonableness.

Caution When Using 998 Offers:

Although it is a useful tool to persuade a party to fairly evaluate their case a consider a pretrial settlement, the 998 Offer procedure has traps for the unwary.

• Covers Current Case ONLY – a 998 Offer cannot be used to release potential claims unrelated to the current litigation.

In Council for Education and Research on Toxics v. Starbucks Corp. (2022) 84 Cal.App.5th 879, the court invalidated defendant’s general release of “all claims known and unknown” under an alleged failure to warn statute (Proposition 65). The court explained that general release language is only valid if the unknown claims are underlying claims of the current litigation.

Therefore, in cases involving the potential death of the plaintiff prior to trial and expected follow-on wrongful death claim made by his or her heirs thereafter, a 998 Offer made in the pending personal injury action only covers that pending action; an offer accepted in the personal injury action to extinguish the case will not extinguish the future wrongful death action.

• Multi-party Litigation Considerations – “joint” 998 Offers are difficult to enforce.

A 998 Offer to multiple plaintiffs or defendants in an action must provide terms that can be accepted by each plaintiff or defendant, and allocate a settlement amount for each plaintiff or defendant. Failure to individually provide each plaintiff or defendant with a specific allocable settlement amount that provides for individual acceptance without the consent of the other parties affected can invalidate the 998 Offer, and an invalid 998 Offer provides no utility to the issuing party.

• Impact of Multiple 998 Offers – a withdrawn or revoked second 998 Offer will not extinguish the power of the first unaccepted/rejected 998 Offer.

As noted above, a party who has made a 998 Offer may change its mind and issue a second 998 Offer after the first, and the second offer will extinguish the power of the first – as long as the second offer goes into effect under the Section 998 rules described above. If the second 998 Offer is withdrawn or revoked by the offeror prior to its applicable time/case activity expiration, the first 998 Offer remains in full force and effect. In other words, a second 998 Offer does not supersede the first offer when it is issued, but rather when it expires and blossoms into its full force and effect.

The Bottom Line With 998 Offers:

When used with care, 998 Offers can be an effective tool in the litigator’s toolbox to increase the pressure on the other side to fairly evaluate the merits of their case or defenses, to open settlement negotiations by signaling the perceived strength or weaknesses of the case and give the parties a starting point for those negotiations, and to nudge a case away from trial and its costly expense by adding additional cost risk to the other side.

However, unless your case involves multiple experts and extensive deposition costs, the leverage provided by a 998 Offer may be minimal. In cases without such costs, the highest costs are attorney’s fees. Therefore, there is a reasonable argument that in most cases, offering to stipulate to the other side that the prevailing party will recover reasonable attorneys’ fees will probably create more leverage than making a 998 Offer. Even if the proposed attorneys’ fees stipulation is not accepted, the sides will get a better idea of what each other think of the merits of their case.

For more information or specific guidance, please contact Chuck Sheldon.

Hira Yoshihara-Saint contributed to this article.