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S.C. Says CCP §998 Cost-Shifting Rule Applies If Plaintiff Accepts Later, Less Favorable Offer
Opinion Says There Is No Requirement That Case to Go to Trial; Party Who Accepts Lower Terms After Rejecting Better Bid Is Precluded From Recovering Fees for Time Between Two Proposals
By a MetNews Staff Writer
The California Supreme Court held yesterday that a plaintiff who has rejected a statutory offer to compromise, or allowed it to expire, but later agrees to resolve the case before trial may be subject to the cost-shifting provisions of Code of Civil Procedure §998(c) if the later bid is lower than the first.
At issue is an exception to the general rule, set forth in Code of Civil Procedure §1032, that a prevailing party is entitled to recover litigation costs. Sec. 998(c)(1) provides:
“If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment or award, the plaintiff shall not recover his or her postoffer costs and shall pay the defendant’s costs from the time of the offer.”
In a unanimous opinion, written by Justice Carol Corrigan, the court said:
“The specific question here is a narrow one. Does a plaintiff who has rejected a 998 offer or allowed it to be deemed withdrawn for want of timely acceptance, but later agrees to settle before trial, necessarily avoid the postoffer cost-shifting effects of section 998? We hold that a plaintiff does not necessarily avoid section 998’s reach in this scenario. Rather, section 998 sets out the default rule, imposing cost shifting whenever its terms are met. However, the parties remain free to agree to their own allocation of costs and fees as part of the settlement agreement.”
Lemon Law Action
The question arose after plaintiffs Oscar and Audrey Madrigal filed a complaint against Hyundai Motor America, asserting claims under California’s Song-Beverly Consumer Warranty Act, known as the “lemon law,” based on allegations that a car they purchased for $24,172.73 did not operate as warranted.
Shortly after the complaint was filed, the automaker made its first offer under §998, saying it would pay either the total amount the Madrigals had paid into the car or $37,396.60, plus $5,000, or an amount to be determined by the trial court, in attorney fees. The plaintiffs did not accept within the 30-day statutory acceptance window.
Six months later, Hyundai made a second offer, this time proposing to pay either the purchase price plus expenses or a fixed amount of $55,556.70. The bid contained the same attorney fee provision and the Madrigals again allowed the proposal to expire.
About a year and a half later, Placer Superior Court Judge Michael W. Jones tentatively ruled in favor of the defendant on two pretrial motions. Following the rulings, the Madrigals accepted an offer to settle the matter for $39,000, with both sides agreeing that the court would resolve the matter of attorney fees.
Litigation Costs Requested
The plaintiffs moved to recover litigation costs as the prevailing party under §1032, seeking $207,438.75 in fees and $20,865.83 in other expenses. Hyundai objected, arguing that the Madrigals were precluded by §998(c) from recovering any costs they incurred after the second offer.
Jones rejected the defendant’s position, saying:
“[T]he parties settled the case prior to trial, and as there was no trial, no judgment or award was rendered. Accordingly, Code of Civil Procedure section 998 does not apply.”
He awarded the Madrigals $84,742.50 in fees, finding “numerous instances of duplicative billing” and other issues with the plaintiffs’ initial request, and $17,681.05 in other costs.
A divided Third District Court of Appeal reversed. In an opinion authored by Justice Peter A. Krause, the majority concluded that §998 applied and remanded for the court to determine “whether the offer was more favorable than the judgment obtained by plaintiff[s].”
No Trial Requirement
Corrigan wrote:
“Under the trial court’s analysis, cost shifting is only required if a plaintiff rejects a 998 offer and then takes the case to trial and obtains a less favorable judgment. In other words, cases that settle before trial, but after a section 998 offer is rejected or deemed withdrawn, would not fall within the cost-shifting scheme. The Court of Appeal majority was correct to reject this construction.”
Saying “[n]owhere does section 998(a) require that the case be resolved by trial before it comes into play,” she turned to the statutory text.
She noted that Jones relied on language in the section mandating cost shifting if “the plaintiff fails to obtain a more favorable judgment or award” and opined that if there was no trial, there was no such “judgment or award.” Finding “several flaws” with this reading, she pointed out that the section “speaks only of a ‘judgment,’ not a judgment obtained in any particular manner.”
Turning to the statute as a whole, she explained that subdivision (b) contemplates the entry of judgment after the acceptance of an offer and remarked:
“There is no reason to think the term ‘judgment’ carries a different meaning in section 998(c)(1).”
The jurist added:
“If the Legislature intended to limit cost shifting in that way, it could certainly have done so in a more obvious manner given the large percentage of cases resolved by settlement. It seems unlikely such a significant exception would be tucked into the conditions that trigger mandatory cost shifting.”
Clear Policy
Corrigan pointed out that “[t]he clear policy behind section 998 is to encourage the settlement of lawsuits before trial” and said that the statute accomplishes this goal by use of a “carrot”—making possible the awarding of costs to a party making a reasonable settlement offer—and a “stick”—by providing a strong financial disincentive to reject sensible proposals.
Reasoning that “[t]he trial court’s construction of section 998 would undermine the statute’s policy objectives,” she commented:
“A party that does not accept a section 998 offer, and then settles for less later, is not being punished for settling. It is being punished for not accepting a reasonable settlement offer and then obtaining a less favorable result. This is precisely what the statute is designed to do.”
Acknowledging that parties’ motivations may change “in the ebb and flow of litigation,” she said that “[t]he rule we articulate here may operate to incentivize further settlement negotiations in some circumstances and to discourage them in others.” However, she declared:
“[Our] interpretation clarifies for the parties the risks and rewards that they face. Moreover, it does not foreclose them from agreeing among themselves how to allocate costs.”
Rejecting the plaintiffs’ assertion that the court’s construction will “embroil trial courts in hearings” over which settlement offer is more favorable to the plaintiff, she said:
“The more likely result is that parties, knowing that section 998 cost shifting can apply absent a different and agreed-upon allocation, will deal with the issue of costs in their settlement agreements rather than leaving it to a court to decide by way of a section 1032 motion.”
The case is Madrigal v. Hyundai Motor America, 2025 S.O.S. 729.
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