Typically, each party to a lawsuit pays their own legal fees and costs, unless otherwise provided for my contract or statute. However, in California, this burden can be shifted from one party to the other through the tactical use of a California Code of Civil Procedure Section 998 offer (commonly referred to by lawyers as a "998 offer" or just a "998.")
The practical intended result of a 998 offer is shifting the burden of paying a party's costs, but it is mainly used as a form of leverage in pre-trial settlement negotiations. Note that the CCP 998 offer to compromise cannot be used in pre-litigation settlement negotiations, but only in negotiations taking place after litigation has commenced.
When 998 offers are considered, the matter of who pays for what costs can be a bit difficult to understand because one of three things could happen:
A statutory offer to compromise, codified as the California Code of Civil Procedure (CCP) Section 998 allows for either party involved in a lawsuit (the plaintiff or the defendant) to offer the other party financial incentive to cut the legal process short and accept a pretrial settlement. The §998 offer is effectively a cost-shifting statute that places a greater financial burden on the party that does not accept a "reasonable" pre-trial settlement 998 offer that's made in "good faith." In short, CCP §998 provides a party with the ability to make a settlement offer with strings attached—by providing financial disincentives to the offeree if the case proceeds to arbitration or trial.
Further, during the litigation process, courts encourage parties to negotiate a pre-trial settlement whenever possible. A 998 offer can push parties to take those pre-trial settlement negotiations even more seriously. Because a 998 offer can shift one party’s costs to the other party, it encourages all parties involved in the lawsuit to think more critically about the value of their case before marching blindly towards trial.
A strategic tool used to force the settlement of a case
The purpose behind a statutory offer to compromise - laid out in California Code of Civil Procedure (CCP) §998 - (or "998" as it's call by practicing lawyers), is to encourage the settlement of disputes prior to trial or arbitration. CCP §998 accomplishes this purpose by providing financial benefits to the party making the offer (“offeror”) while incentivizing the other party (“offeree”) to accept the offer in order to avoid sanctions.
When one party submits a 998 offer, which includes a specific dollar amount, they are betting that the other party won’t be able to obtain “a more favorable judgement” at trial. And the loser of this scenario may be held to pay the “prevailing party” (the winner) for items such as: their legal costs for the trial process, expert witness fees and interest accrued on the judgement. Confused yet? Let’s move through it step by step below.
The amount and types of expenses that can be shifted to either party during a lawsuit are specifically outlined by California law. In addition, the "costs” which can be estimated in a §998 are limited. They may include such expenses as document filing fees and expenses incurred by consulting with expert witnesses (such as medical specialists), jury fees, and, to some extent, the costs associated with investigations. However, it's important to note that these applicable expenses DO NOT INCLUDE attorneys' fees.
The process of making a § 998 offer is specifically laid out in the California Code of Civil Procedure.
The 998 Offer must be reasonable based on the information known by the party to whom the offer is made at the time the offer is made. Thus there are two components that are used when determining if a specific § 998 offer meets the "reasonable" requirement:
When evaluating “reasonableness” the court will look to whether both parties had enough facts and information about the merits of the claims in the lawsuit, including issues like liability and damages sought by the plaintiff. The offer must be realistic based on the facts of the case and accurately estimate the damages a jury would award the plaintiff in a trial. And, the party evaluating (and receiving) the 998 Offer must have the necessary information to intelligently evaluate whether they should accept this offer or take their chances at trial.
For example, a 998 offer served by the defendant with its answer to the lawsuit before a plaintiff has had the time to conduct discovery to evaluate the merits of their claim for liability, would not be considered a “reasonable” offer made in “good faith.” Najera v. Hurta (2011) 191 Cal.App.4th 872. Such a premature offer to compromise cannot be seen as reasonable, as there simply was not enough time (or litigation) for the receiving party to intelligently evaluate the 998 offer. That means it's absolutely imperative that if an attorney makes a §998 early on in the legal process, they maintain an open channel of communication with the other side throughout the process. They must accurately convey material and information about the case to provide them with everything they need to either accept or reject the offer. Failure to do so could result in the §998 offer being negated and could result in a significant financial impact for the attorney's client.
Further, a nominal or token offer, such as $2,500 in a $10 million wrongful death case would be considered unreasonable, and not in good faith. See, e.g. Pineda v. Los Angeles Turf Club, Inc. (1980) 112 Cal. App. 3d 53, 63. In this particular case, the court found that the sole purpose of the offer was to make defendant eligible for recovery of large expert witness fees at no real risk. The “reasonableness requirement” exists so that this sort of gamesmanship is not be permitted when using 998 Offers.
Either party, plaintiff, defendant, or both, can use a 998 Offer but the way the costs are shifted will depend on who made the offer.
(1) Accept the offer, sign the offer, and settle the case, or
(2) Reject the offer and go to trial.
In this scenario, the plaintiff could obtain a $95,000 judgement (decent, but less than the 998 offer made previously by the defendant) in their favor, and still end up owing the defendant a lot of money.
(1) Accept the offer, sign the offer, and settle the case, or
(2) Reject the offer and go to trial.
Unlike the strict requirements for plaintiffs, CCP §998 does not explicitly provide mandatory penalties for defendants, only discretionary penalties. Defendant may, however, still be required to pay plaintiff’s pre-offer and post-offer costs, including attorney’s fees, if provided for by statute or contract. Thus, in analyzing whether to make/accept an offer, personal injury attorneys should closely consider all applicable contractual provisions and statutes that may afford plaintiff recovery of costs or attorney’s fees.
Although CCP Section 998 does not provide for mandatory sanctions for defendants who fail to succeed after rejecting a plaintiff’s 998 Offer, there is an even more serious penalty that personal injury defendants face. California Code of Civil Procedure §3291 provides mandatory penalties for such defendants in personal injury cases. Under CCP §3291, if a personal injury defendant rejects a plaintiff’s 998 Offer and the personal injury plaintiff obtains a more favorable judgement than their 998 Offer at trial, that personal injury plaintiff is entitled to collect prejudgment interest, at a rate of 10%, from the date the plaintiff served the 998 Offer, to the date of the judgement.
Depending on the size of the judgement and how long before trial the CCP 998 offer was made, this interest can be pretty significant and should be considered a powerful weapon for personal injury attorneys in pre-trial negotiations of high-value cases. For example, if the 998 offer made by plaintiff was for $99,000 and was made 3 months before trial, and plaintiff obtained a judgement of $100,000 at trial, interest would be around $2,500. Or, more significantly, if the 998 offer made by plaintiff was for $950,000 3 months before trial, and plaintiff obtained a judgment of $1,000,000 at trial, you would be looking at $25,000 in interest. This is a significant penalty (potentially much more than a plaintiff’s post-offer costs) and therefore any CCP 998 Offer made by a plaintiff's personal injury lawyer in a high-stakes personal injury case should be taken very seriously by defense attorneys.
§998 Offers can be used in cases involving multiple parties, but there are special rules to follow in such circumstances. As a general rule, separate §998 Offers must be made to each party involved in a lawsuit. To be safe, the 998 Offer should set out individual allocations of the proposed judgement to each party, meaning the 998 Offer must state exactly how much of the offer is allocated to each individual party. Accord, Meissner v. Paulson (1989) 212 Cal. App. 3d 785, 790-91. The matter isn't as cut-and-dry as that. Indeed, joint offers by defendants without specific allocations to each party involved have been accepted by the court when proof that the "claim" cannot be divided between individual parties.
However, it’s not necessary to make 998 Offers to all parties involved in a case. A 998 Offer can be made to single parties and not others. Lastly, the 998 Offer also must allow each individual party to accept the offer without the consent of all other parties. (Joint offers by defendants without specific allocations to each party involved have been accepted by the court when there was proof the claim could not be divided between individual parties. Stallman v. Bell (1991) 235 Cal. App. 3d 740, 745-77; Brown v. Nolan (1979) 98 Cal. App. 3d 445, 451.)
In order for a party to “prevail” and reap the benefits of their CCP §998 offer, a court or arbitrator must determine that their 998 offer was “more favorable” to them than the judgment. In making this determination, a court will add certain costs to the judgment, which depends on which party made the §998 offer.
If the defendant made the offer, the judge will add only the costs that the plaintiff incurred before receiving the defendant’s §998 offer. If the plaintiff made the offer, the plaintiff’s pre-offer and post-offer costs will be added to the judgment before it is compared to the §998 offer.
If a party is likely to recover their attorney’s fees and costs (check CCP §1033.5 for an exhaustive list of items that will be considered “allowable costs” for the purposes of enforcing 998 Offers) they should include this amount in their §998 offer.
This is based on the notion that when attorney’s fees are recoverable (which they are not in your average personal injury case), they are often the most costly component of the prevailing party’s judgment or award. As such, a §998 offer that fails to provide for recoverable fees incurred up to the date of the offer will likely be disregarded.
Lastly, liens are not considered when determining whether the judgment is more favorable than the offer to compromise.
CCP §998 offers can be effective tools because they clearly outline the financial risk that the offeree could be facing if they fail to accept the offer and proceed in taking a case to arbitration or trial. Depending on the size of the case and the financial risks each party is willing to take, that financial incentive may be enough for the party to accept the §998 offer and essentially cut the legal process short.
This could benefit the offeror in two ways: (1) The offeror receives the compensation they are seeking sooner (rather than waiting to get to and go through the trial process; and (2) They receive a guaranteed amount (it is not left to chance by a judge or jury at trial).
On the flip side, the offeror must make the effort to create the offer with careful consideration of their potential to prevail at trial and the amount of financial compensation they could win (or lose) if the case goes to trial. An unrealistic offer that will likely be beaten at trial or arbitration will not only make the offeror lose but will prevent them from recovering any of the penalties to which they would have been entitled had the offer been met the reasonability qualifications outlined above.
In short, a more conservative, realistic offer could actually be more profitable for the offeror in the end. Also, accepting a reasonable offer sooner could be financially beneficial for the offeree as well. Regardless of which side you are on, you want to carefully consider how a 998 offer to compromise could help your client resolve the case quickly and with less costs than if they proceeded to trial.
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