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998 OFFERS IN
CALIFORNIA LITIGATION: THE BASICS
Introduction:
The overwhelming
majority of cases settle before trial and the entire court system is
geared to facilitate settlement since the cost of a trial to the State
is significant. Mandatory settlement conferences, persuasion by judges,
and encouragement of mediation and arbitration are some of the tools
utilized to attempt to achieve a settlement.
Of course the most
powerful tool to promote settlement is to utilize the German system in
which the prevailing party receives reasonable attorneys fees incurred
in bringing the action. Few parties would risk having to pay the fees of
both sides unless they were truly confident in their case and Germany
has much less wasteful litigation than the United States.
But the United
States seldom allows such methods as to attorneys fees and minus
agreement of the parties, in most instances each party must pay its own
attorneys fees.
California does have
a variation of the attempt to encourage settlement by having a
prevailing party receive costs from the losing party. “Costs” are
carefully defined, as described below, and include such items as filing
costs, experts costs, etc. They do not include attorneys fees.
Such offers are
known as “998 Offers” after the section of the California Code of Civil
Procedure that describes the process. This article shall give the basics
of the mechanics of “998 Offers.” The reader should first review our
article on
American Litigation.
The Law:
1.
Section 998 of the Code of Civil Procedure provides that, not less than
10 days before commencement of trial, any party to an action "may serve
an offer in writing upon any other party to the action to allow judgment
to be taken in accordance with the terms and conditions stated at that
time." The offer is deemed withdrawn if not accepted before trial
commences or within 30 days, whichever occurs first.
2.
If the
offer is accepted, the accepted offer is filed with the court and
judgment entered accordingly. If the offer is not accepted, and
the person rejecting the offer does not obtain a trial result better
than the offer, certain cost-shifting mechanisms kick in. The prospect
of such cost-shifting is hoped to encourage settlement of lawsuits
before trial. T.M. Cobb Co. v. Superior Court (1984) 36 Cal. 3d
273, 280.
This deceptively
simple statute has existed in some form in California since 1851 and,
although modified over the years, remains essentially unchanged in
substance. Taing v. Johnson Scaffolding Co. (1992) 9 Cal. App.
4th 579, 585. However, the legal environment in which it operates has
changed substantially in 125 years, and numerous court decisions have
inserted crucial limitations on the statute
a.
The
Statutory Scheme
Section 998 is
straightforward, but varies according to whether the offer comes from a
defendant or a plaintiff.
Defense Offers.
Under Section 998(c), if an offer made by a defendant is not accepted
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 from the time of the offer.
In addition, the
court has discretion to award all of defendant's costs 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
preparation and trial of the action.
Under Section
998(e), if these awarded costs actually exceed plaintiff's recovery, the
court is directed to enter a judgment against plaintiff in favor
of the defendant for the difference. Thus, the stakes for a plaintiff
can be quite substantial when faced with a defense 998 offer.
Plaintiff Offers. Section 998(d) provides that if plaintiff's
998 offer is refused and defendant fails to obtain a more favorable
judgment, then the court may award (in addition to the costs that
plaintiff will already be eligible to recover as "prevailing party") a
"reasonable sum" to cover plaintiff's incurred expenses for expert
witnesses. In addition, Civil Code Section 3291 provides pre-judgment
interest on plaintiff's judgment at the legal rate of 10 percent
commencing on the date of plaintiff's first 998 offer which is exceeded
by the trial judgment.
b.
Mechanics:
The Offer Must
Specifically Refer to Section 998.
A letter merely stating, "This letter is intended as an invitation to
your clients to settle their disputes with my clients," while making no
reference to Section 998, was rejected as insufficient to trigger the
statutory cost-shifting in Stell v. Jay Hales Development Co.
(1992) 11 Cal. App. 4th 1214, 1231-32.
Only Reasonable
Offers Are Eligible.
The decisions in Pineda v. Los Angeles Turf Club, Inc. (1980) 112
Cal. App. 3d 53, 63, and Wear v. Calderon (1981) 121 Cal. App. 3d
818, 820-21, have recognized a threshold requirement of "realism" or
"good faith" for 998 offers. Pineda affirmed rejection of a
$2,500 defense offer in a $10 million wrongful death case, and Wear
reversed a Section 998 cost-shifting award following a defendant's offer
of $1 in a personal injury case. "[T]he pretrial offer of settlement
required under section 998 must be realistically reasonable under the
circumstances of the particular case. Normally, therefore, a token or
nominal offer will not satisfy this good faith requirement . . . ."
Wear, 121 Cal. App. 3d at 821.
The decision in
Elrod v. Oregon Cummins Diesel, Inc. (1987) 195 Cal. App. 3d 692,
698-70, takes this principle farther, and states that whether a 998
offer is reasonable also depends on whether the adverse party knows, or
reasonably should know, the information that makes it reasonable. Thus,
according to the Elrod court, even "dynamite" information
contained in defense files that should lead to a defense verdict will
not support a low-ball 998 offer unless the plaintiff knows about or has
the opportunity to discover this information (whether or not the
opportunity is actually used). In the same year, Culbertson v.
R.D.Werner Co. (1987) 90 Cal. App. 3d 704, 708-11, upheld the
validity of a $5,000 defense 998 offer against a $1.5 million demand in
a personal injury case, even though workers compensation liens against
plaintiff's recovery would have left the plaintiff with nothing if the
offer was accepted. The court pointed to a number of factors that would
lead to a reasonable expectation of a defense verdict. Id. at
707.
Only Unqualified
Acceptance Will Count.
Conditional acceptance of a Section 998 offer, containing terms or
conditions materially different from the original offer, is viewed as a
counteroffer that terminates the ability to accept the original offer.
Glende Motor Co. v. Superior Court (1984) 159 Cal. App. 3d 389,
398.
Relinquishment of
Outside Claims Cannot Be Required.
A defense 998 offer that provided not only an end to the pending
litigation but a release of all other potential claims against the
defendant, its attorneys, and its insurers, was rejected by the court in
Valentino v. Elliott Sav-On Gas, Inc. (1988) 201 Cal. App. 3d
692, 701. Although the court was troubled by the release on policy
grounds, it also found that the value of the other released claims was
sufficiently imponderable that the court could not realistically measure
the value of the offer compared to the trial result.
The 998 Offer Must
Be Capable of Valuation by the Court.
A plaintiff's 998 offer of a structured settlement (lump sum together
with annuity for the life of the plaintiff) was held inadequate to
trigger Section 998 cost-shifting because there was no evidence of the
present value of the annuity and therefore no means to compare the 998
offer to the trial result. Hurlbut v. Sonora Community Hospital
(1989) 207 Cal. App. 3d 388, 408-09. The court suggested that expert
testimony to establish present value might have solved the problem.
Id. at 409.
c.
Special Rules for Multiple Parties
The cases applying
Section 998 in multi-plaintiff or multi-defendant settings are confusing
and inconsistent, and substantially limit the effectiveness of the
statute in such cases.
In General, Separate
Offers Must Be Made to Multiple Parties.
Case law makes 998 offers from or to multiple adverse parties vulnerable
to challenge unless
(a) they set out
individual allocations of the proposed judgment to each party, and
(b) they provide for
individual acceptance without consent of the other parties affected.
These doctrines find
their origin in two early cases. Randles v. Lowry (1970) 4 Cal.
App. 3d 68, 74, set the stage in its holding that a defense offer under
Section 997 (the predecessor to Section 998) to three plaintiffs, with
no designation of how the proceeds should be divided among them, was a
"nullity" because of the failure to make such allocation. Accord,
Meissner v. Paulson (1989) 212 Cal. App. 3d 785, 790-91. A few
years later, Hutchins v. Waters (1975) 51 Cal. App. 3d 69,
invalidated a 998 offer by a defendant to two plaintiffs in which a
precise allocation was given, but neither could accept the offer unless
the other also accepted, holding that a valid offer could not require
the consent of all parties before any could accept. Accord,
Santantonio v. Westinghouse Broadcasting Co. (1994) 25 Cal. App. 4th
102, 112-114.
Subsequent decisions
have addressed a variety of variations on this theme. Thus, for example,
it has been held that a 998 offer made by multiple plaintiffs with
severable causes of action must include an allocation among themselves
in order to be valid. Gilman v. Beverly California Corp. (1991)
231 Cal. App. 3d 121, 126; Hurlbut v. Sonora Community Hospital,
supra, 207 Cal. App. 3d at 410.
Joint offers by
defendants without internal allocations of liability have been allowed
to stand where the court believed the claim was joint and indivisible.
Stallman v. Bell (1991) 235 Cal. App. 3d 740, 745-77; Brown v.
Nolan (1979) 98 Cal. App. 3d 445, 451; cf. Winston Square
Homeowner's Assoc. v. Centex West, Inc. (1989) 213 Cal. App. 3d 282,
294 (defendant found not liable on non-joint claim was entitled to rely
on joint 998 offer by defendants even though not broken down). This is
obviously an area of some danger, however, and defendants contemplating
a joint offer should thoroughly review the relevant case law.
It Is Not Necessary
to Make Offers to All Adverse Parties.
A defense offer to only one plaintiff was upheld in Stiles v. Estate
of Ryan (1985) 173 Cal. App. 3d 1057, 1064.
Realties of the 998:
Except in those
cases in which experts or deposition costs are truly high, the amount
that can be “won” in a 998 offer is usually not enough to spark
settlement. The highest cost in most cases is the attorneys fees and
many feel that a better approach to spark settlement is to offer to the
other side to stipulate that the prevailing party will receive
reasonable attorneys fees. Even if not accepted, their reaction will do
much to tell you whether they are confident in their case.
A 998 can also
commence the settlement discussions since opposing counsel will have to
present it to their clients and discuss the pluses and minuses. If there
is any desire to settle the matter reasonably, the 998 can at least
cause the issue to be placed on the table.
But the economics do
not make it the critical factor in the overwhelming majority of cases.
Typically, for every hundred thousand dollars in fees, one may have
fifteen thousand dollars in costs. By the time the 998 is received, many
parties are already so committed to the expense of the litigation that
the chance of having to pay a few tens of thousands more will not compel
them to rethink their position. |
