Statutory Offers to Compromise in California

California, like Nevada, authorizes parties to a lawsuit to extend what are commonly referred to as “statutory offers to compromise” or “offers of judgment.”  Unlike Nevada, however, which has two separate enactments addressing such offers (N.R.C.P. 68 and N.R.S. 17.115), California has a single statute which governs this process, Code of Civil Procedure section 998.

Section 998, entitled “Withholding or augmenting costs following rejection or acceptance of offer to allow judgment”, is California’s all inclusive equivalent to Nevada’s N.R.C.P. 68 and N.R.S. 17.115.  Like its Nevada counterparts, the statute permits either party to extend an offer to allow judgment to be taken against it upon specified terms at any time up to, and including, ten days prior to trial, but California also specifically authorizes such an offer to be made upon the same time line in an arbitration proceeding, as well. Such an offer can be for a monetary amount, for property, or anything of value, including a dismissal of the action in exchange for a waiver of claims.

MINIMUM REQUIREMENTS

To be effective, an offer under section 998 (usually called “a 998”) the terms and conditions must be sufficiently certain to be capable of evaluation; that is, it must be specific enough that the recipient can meaningfully evaluate it, and make a reasoned decision whether to accept or reject it.  This also permits the Court to determine whether any recovery at trial is more favorable than the offer. (Chen v. Interinsurance Exch. of Auto. Club (2008) 164 CA4th 117, 121; Berg v. Darden (2004) 120 CA4th 721, 727)

A 998 cannot include terms relating to matters beyond those at issue in the pending lawsuit, because there is no way to determine whether a judgement is more favorable than those terms; thus an offer conditioned on a release of “all” claims is defective, if the offeree had at least one claim not part of the action in which the offer was extended (Chen, supra, at 121).

There is no requirement that in multiple party actions the offer must be extended to all parties, and where there are multiple claims, an offer need not include all claims.  (Arno v. Helinet Corp. (2005) 130 CA4th 1019, 1026)  However, an offer made by a defendant to multiple plaintiffs jointly is ineffective, unless the offer specifically indicates how it is to be allocated among them.  This results from the fact that without an allocation it is impossible to determine whether each plaintiff’s recovery was more favorable than the offer. One court has gone so far as to say ““(A)s a matter of law only an offer made to a single plaintiff, without need for allocation or acceptance by other plaintiffs, qualifies as a valid offer under section 998.” (Meissner v. Paulson (1989) 212 CA3d 785, 791.  Likewise, an offer to several plaintiffs that is conditioned on acceptance by all of them is invalid. (Hutchins v. Waters (1975) 51 CA3d 69, 73) For the same essential reasons, an offer made by several plaintiffs to a single defendant, without allocation, is likewise defective.  However, where several defendants are jointly and severally liable, and each is liable for the full amount of any judgment, they can make a joint offer to a plaintiff, as it is read as an offer by each of them.

MUST BE IN WRITING, AND MUST HAVE ACCEPTANCE PROVISION

While California’s Judicial Council has adopted an official form for an offer to compromise, the use of the form is not mandatory, but oral offers are not enforceable, thus, the offer must be in writing.  The offer must state all of the terms and conditions upon which the proposed judgment or arbitration award is to be entered, and must contain a provision that allows the offeree to accept the offer by signing a statement so stating.  The lack of such an acceptance provision renders the offer defective, and cannot trigger the cost shifting penalties otherwise inherent in a proper offer. Such an offer must be accepted either prior to trial, or thirty days after it is served, it is deemed withdrawn, and like Nevada, it cannot, once withdrawn, be given in evidence at trial.

INCENTIVES TO MAKING THE OFFER AND PENALTIES FOR REJECTION

 As in Nevada, the principal incentive to accept an offer to compromise is to avoid the “penalties” resulting from failure to accept if the case goes to trial. “That policy is plain. It is to encourage settlement by providing a strong financial disincentive to a party—whether it be a plaintiff or a defendant—who fails to achieve a better result than that party could have achieved by accepting his or her opponent’s settlement offer. (This is the stick. The carrot is that by awarding costs to the putative settler the statute provides a financial incentive to make reasonable settlement offers.)” [Bank of San Pedro v. Sup.Ct. (Goodstein) (1992) 3 C4th 797, 804, 12 CR2d 696, 700-701 (parentheses in original); Mesa Forest Products, Inc. v. St. Paul Mercury Ins. Co. (1999) 73 CA4th 324, 331, 86 CR2d 398, 401]    The “penalties” for failing to accept an offer of compromise can be substantial, thus a clear appreciation of the potential upside, and downside, of one’s case is critical to a determination whether to accept, or reject, the offer.

If a Plaintiff turns down such an offer, and fails to obtain a “more favorable” judgment at trial or in contractual arbitration proceedings, he faces both mandatory and discretionary penalties.  The mandatory penalty is that he cannot recover court costs incurred after the offer was made, although pre-offer costs are still recoverable (assuming he prevailed in the action), and must pay defendant’s post-offer court costs. The discretionary penalty is that the court may order him plaintiff to pay a reasonable sum to cover the defendant’s expert witness fees both for preparation and during trial or arbitration of the case.  This penalty applies no matter whose witness the expert is, meaning the defendant can recover the costs incurred in deposing the plaintiff’s own experts.

If a defendant rejects a plaintiff’s 998, and fails to obtain a better result at trial or arbitration, the Plaintiff is entitled to recover his statutory costs, and the court in its discretion may require the defendant to pay a reasonable sum for post-offer costs of expert witnesses reasonably necessary for the preparation for trial or arbitration of the case.  All costs incurred by the plaintiff, pre-offer and post-offer, are included in determining whether the judgment is more favorable than the pretrial offer. Courts have identified the policy behind this rule, stating that since the defendant is the one who forced the case to the trial, “(t)here is, then, no reason to limit the plaintiff to damages plus preoffer costs for purposes of determining whether the judgment exceeds the offer.” [Stallman v. Bell (1991) 235 CA3d 740, 748, 286 CR 755, 760]

Note also that, in the context of both plaintiff’s and defendant’s offers, while expert witness fees are described as being awarded subject to the discretion of the court, such discretion is almost universally exercised, and expert witness fees awarded.

RECOVERABLE COSTS MAY INCLUDE ATTORNEYS FEES TO BOTH OFFEROR AND OFFEREE

The “costs” subject to recovery under C.C.P. section 998 include those items routinely allowable as costs to the prevailing party as a matter of law. This includes attorney fees awarded to plaintiff by statute or contract. This means that if a defendant rejects a plaintiff’s offer and fails to obtain a better result at trial, the plaintiff is entitled to recover attorney fees where authorized by contract, statute or law. A noteworthy wrinkle here, however, is that this also means that in an action upon a contract, where a plaintiff prevails at trial but recovers less than defendant’s offer, both parties may recover costs including attorneys fees. The plaintiff is entitled to recover “costs” as the prevailing party under the traditional prevailing party rules, but because it did not recover more than the offer, it is limited to pre-offer costs. (CCP § 998(c)(1)). At the same time, the defendant is entitled under section 998 to post-offer costs, because its offer was greater than plaintiff’s judgment, it is treated as the prevailing party for purposes of post-offer costs. (CCP § 998(c)(1); also Scott Co. of Calif. v. Blount, Inc. (1999) 20 C4th 1103, 1110; SCI Calif. Funeral Services, Inc. v. Five Bridges Found. (2012) 203 CA4th 549, 576-578)

In actions upon a contract, even where the plaintiff was not the prevailing party under the code section authorizing the recovery of attorneys fees to the party prevailing upon the contract, if each side prevailed on some issues, he is still entitled “as a matter of right” to attorney fees incurred after the offer, because the defendant did not obtain a judgment more favorable than the offer.

PERSONAL INJURY ACTIONS

A unique component of California’s cost shifting statute applies in personal injury actions. A companion statute, Civil Code section 3291, expressly provides “If the plaintiff makes an offer pursuant to Section 998 of the Code of Civil Procedure which the defendant does not accept prior to trial or within 30 days, whichever occurs first, and the plaintiff obtains a more favorable judgment, the judgment shall bear interest at the legal rate of 10 percent per annum calculated from the date of the plaintiff’s first offer pursuant to Section 998 of the Code of Civil Procedure which is exceeded by the judgment, and interest shall accrue until the satisfaction of judgment.”  This is unique, because under normal circumstances, no prejudgment interest applies in personal injury cases.  The power of this statute is further enhanced by case law, which provides that, if the plaintiff makes several unsuccessful offers, and recovers more than any of them, prejudgment interest runs from the date of the first offer.

CONCLUSION

In California, a “998” is a potentially powerful tool for the resolution of any lawsuit. It can compel the recipient to a review and analysis of his case in the cold, hard, light of day.  It can have the same effect upon the offeror.  While most widely utilized in personal injury actions, the potential benefits of an ill-considered rejection of a well drafted offer make it a useful, if under-utilized, tool in business litigation of all types, especially in expert heavy cases such as accounting cases and trade secret actions.  The fact that it can also be used in contractual arbitration cases gives the statute even wider scope.  Given the benefits of “a 998” think about your own California cases, you might find a likely candidate in your own backyard.

 

Peter H. Cuttitta is an attorney practicing in California and Nevada, and is a principal in the Porter Simon law firm located Truckee, with offices in Reno and Tahoe City.  He practices primarily in the areas of personal injury, accidents, insurance defense and other litigation matters.  Peter may be reached at cuttitta@portersimon.com or www.portersimon.com.  

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The content contained and opinions expressed in this blog are solely those of the author. This blog contains content and opinions concerning the law generally, and is not intended to constitute legal advice or to create any attorney‑client relationship with the reader. The reader should consult with an attorney about any specific legal issues prior to embarking on any course of action or inaction involving legal matters.