Making and responding to CCP 998 offers in employment matters

Dealing with multiple parties, and determining whether the judgment at trial was more favorable than the 998 offer

2015 June

Referred to as “statutory offers to compromise” or “998 offers,” offers made pursuant to Code of Civil Procedure section 998 may serve as powerful tools that can materially affect the ultimate outcome of a case. A 998 offer is a settlement offer allowing for cost shifting when the verdict or award is more or less favorable than the offer.

The policy underlying section 998 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 opponents’ settlement offer. (That 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. Superior Court (1992) 3 Cal.4th 797, 804.)

If a plaintiff rejects a defendant’s 998 offer and then fails to get a more favorable result, the plaintiff will be denied his or her post-offer costs and has to pay the defendant’s post-offer costs. (Code Civ. Proc., § 998, subd. (c)(1).) The plaintiff may also be ordered to pay the defendant’s expert-witness fees. (Ibid.) This may result in a plaintiff who prevails at trial owing the defendant money after the defendant’s post-offer costs and expert-witness fees are awarded. A frightening example for plaintiffs is found in Scott Co. of Calif. v. Blount, Inc. (1999) 20 Cal.4th 1103, where a prevailing plaintiff who was awarded a judgment in excess of $442,000 ended up owing the defendant more than $400,000 at the conclusion of the case because of cost shifting.

Conversely, where defendants reject a 998 offer and then the plaintiff achieves a more favorable result at trial, the plaintiff’s recovery stands to be enhanced dramatically by obtaining prejudgment interest at the rate of 10 percent per annum from the date of the offer in actions brought to recover damages for personal injury. (Civ. Code, § 3291.) This includes actions for violation of California’s Fair Employment and Housing Act (FEHA) and actions for defamation. (See, e.g., Bihun v. AT&T Information Systems, Inc. (1993) 13 Cal.App.4th 976, 1004, disapproved on other grounds in Lakin v. Watkins Associated Industries (1993) 6 Cal.4th 644, 664.) Moreover, the court has discretion to award post offer-expert witness fees to a plaintiff whose 998 offer was rejected and who achieves a more favorable result at trial. (Code Civ. Proc., § 998, subd. (d).) While not as important in cases brought under the FEHA, where a court already has discretion to award expert-witness costs to a prevailing plaintiff under Government Code section 12965, subdivision (b), this can be a significant benefit in other types of employment claims.

998 offers seem to be becoming more prevalent in employment cases. Plaintiffs’ counsel must be prepared to fully evaluate the risks of rejecting reasonable 998 offers and should also consider using their own 998 offers in appropriate cases to maximize potential recovery.

There are many intricacies involved in evaluating whether and how to make and respond to 998 offers. This article examines some of those intricacies.

Making a 998 offer

Section 998, subdivision (b), of the California Code of Civil Procedure sets forth the basic terms of a 998 offer and how it is to be presented. The offer must be made in writing, and must be accepted in writing and signed by counsel for the party accepting the offer or by the accepting party if not represented by counsel. (Code Civ. Proc., § 998, subd. (b).) If the offer is accepted, it is filed with the court, and judgment is entered. If the case is in arbitration, the offer and proof of acceptance are filed with the arbitrator, who then renders an award in accordance with its terms. The offer must state that it is to be accepted in writing, or provide a method for providing written acceptance. Otherwise, it will be held invalid. (Puerta v. Torres (2011) 195 Cal.App.4th 1267, 1273.) The best practice is to include a signature line for acceptance directly in the offer. (See, e.g., Judicial Council form section 998 offer (CIV-090).)

The timing of a 998 offer must also be proper in order for it to be valid. The offer must be made not less than 10 days before commencement of the trial or arbitration. (Code Civ. Proc., § 998, subd. (b).) Commencement of trial or arbitration is defined as the beginning of the plaintiff or plaintiff’s counsel’s opening statement or, if there is no opening statement, at the time the first witness is sworn in. (Code Civ. Proc., § 998, subd. (b)(3).) There is no minimum time period after the lawsuit has been filed that must elapse before a valid 998 offer may be served. (Barba v. Perez (2008) 166 Cal.App.4th 444, 452.)

Beware making too early an offer

While it is to the plaintiff’s advantage to serve the 998 offer as early as possible to start the clock running on prejudgment interest and for post-offer expert witness fees, the offer must be reasonable and made in good faith in order for the cost shifting benefits of section 998 to apply. (Elrod v. Oregon Cummins Diesel, Inc. (1987) 195 Cal.App.3d 692, 698-699; Nelson v. Anderson (1999) 72 Cal.App.4th 111, 134.) Where a plaintiff serves a 998 offer too early to give the defendant an opportunity to intelligently evaluate the offer, it may be deemed unreasonable or in bad faith. (Najera v. Huerta (2011) 191 Cal.App.4th 872, 878-879.)

In Najera, a plaintiff in a personal-injury action served a 998 offer for $50,000 at the same time it served the defendant with the summons and complaint. The defendant did not accept the offer, instead sending a letter to the plaintiff’s counsel objecting that the offer was premature and not made in good faith because the defendant had not been given sufficient time to conduct basic discovery and review the plaintiff’s medical records. At trial, the plaintiff recovered more than $728,000 and sought significant pre-judgment interest and expert-witness fees based on the defendant’s failure to accept the $50,000 offer

The defendant moved to tax these costs, claiming that the 998 offer was invalid because not made in good faith. The trial court agreed and the Court of Appeal affirmed. The court held that the trial court had not abused its discretion in determining that the 998 offer was unreasonable or not in good faith because it was served too early to allow the defendant a fair opportunity to intelligently evaluate the offer.

Service of the 998 offer concurrently with the summons and complaint does not, however, automatically render it invalid. Such a 998 offer was found to be reasonable in a case in which the parties had a close, semi-familial relationship, and information had been provided to the defendant in connection with the 998 offer. (Barba v. Perez, supra, 166 Cal.App.4th at pp. 450-451.)

Inclusion of other, non-monetary terms will invalidate the 998 offer, because it is not possible to value those provisions. (See, e.g., Barella v. Exchange Bank (2000) 84 Cal.App.4th 793, 795 (confidentiality provision contained in 998 offer rendered the offer invalid); Valentino v. Elliot Sav-On Gas, Inc. (1988) 201 Cal.App.3d 692, 694 (requirement that plaintiff release causes of action not contained in her complaint rendered 998 offer invalid).

It is the party serving the 998 offer that bears the burden of demonstrating that the offer is a valid one under section 998. (Taing v. Johnson Scaffolding Co. (1992) 9 Cal.App.4th 579, 585.)

Accepting or rejecting a 998 offer

The party to whom the 998 offer was made must accept the offer in writing within 30 days after it is made, or before the trial or arbitration, whichever is earlier. If the 998 settlement offer is served by mail, the provisions of Code of Civil Procedure section 1013 apply to extend by 5 days the 30-day period within which to accept. (Poster v. Southern Cal. Rapid Transit Dist. (1990) 52 Cal.3d 266, 275.)

If the party receiving the offer fails to accept it, in writing, within 30 days or prior to trial or arbitration, it is deemed withdrawn. The 998 offer remains open for 30 days, although it may be revoked at any time before acceptance. (T.M. Cobb Co., Inc. v. Superior Court (1984) 36 Cal.3d 273, 283-284) Even if the party receiving the offer makes a counteroffer during the 30-day period, the counteroffer does not serve as a rejection of the offer, contrary to general contract law governing non-statutory offers. (Poster v. Southern Cal. Rapid Transit Dist., supra, 52 Cal.3d at pp. 270-272.)

Determining whether the 998 offer includes fees and costs

One issue that arises in connection with 998 offers is whether the offer includes fees and costs. A party who obtains a recovery by accepting a 998 offer is entitled to costs and attorney’s fees, unless costs and fees are specifically excluded by the offer. (Engle v. Copenbarger & Copenbarger, LLP (2007) 157 Cal.App.4th 165, 169.) Unless the offer expressly states otherwise, “an offer of a monetary compromise under section 998 that excludes ‘costs’ also excludes attorney fees.” (Martinez v. Los Angeles County Metropolitan Transportation Authority (2011) 195 Cal.App.4th 1038, 1041.) The rationale behind this rule is that a party who obtains a monetary recovery as a result of acceptance of a 998 offer is deemed a prevailing party entitled to costs. (Ibid.; see also Code Civ. Proc., § 1032.) Allowable costs to a prevailing party include attorney’s fees when authorized by contract, statute or law. (Martinez v. Los Angeles County Metropolitan Transportation Authority, supra, at p. 1041; see also Code Civ. Proc., § 1033.5.)

Thus, in evaluating a defendant’s 998 offer, the plaintiff should determine whether the offer expressly excludes costs. If it does not, the plaintiff will be entitled to an award of costs which, in cases such as those brought under the FEHA, will include attorney’s fees. (Gov. Code, § 12965, subd. (b).) The anticipated amount of a cost and fee award should be factored into the decision whether to accept the 998 offer.

Moreover, a provision in a 998 offer that offers to include “reasonable attorney’s fees” as part of any recovery is not too uncertain to render the 998 offer invalid. (Elite Show Services, Inc. v. Staffpro, Inc. (2004) 119 Cal.App.4th 263, 268-269.)

Dealing with multiple parties

Where there are multiple plaintiffs, “only an offer 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 Cal.App.3d 785, 791.) Thus, if a defendant makes one lump sum offer to more than one plaintiff, and all plaintiffs must either accept or reject it, the 998 offer is invalid. (Ibid.; see also Hutchins v. Waters (1975) 51 Cal.App.3d 69, 74.)

Similarly, if multiple plaintiffs want to make settlement demands under section 998, the demands should be allocated per plaintiff. (Hurlbut v. Sonora Community Hospital (1989) 207 Cal.App.3d 388, 410.) Hurlbut involved a medical-malpractice lawsuit by three plaintiffs against a hospital. The three plaintiffs jointly served a 998 offer which demanded a lump-sum payment plus monthly payments to one of the plaintiffs for the term of her life or, in the alternative, for a larger cash payment. The offer was not accepted by the defendants. The Court of Appeal found the 998 offer to be invalid for two reasons. One was the inclusion of a structured settlement offer. (Id. at pp. 408-409.) The second was the joint nature of the offer by the three plaintiffs. (Id. at pp. 409-410.) Because the plaintiffs’ interests were not identical, and because section 998 speaks in the singular − “any party may serve an offer” − the Court of Appeal held the 998 offer to be invalid. (Id. at p. 410.)

A different result was reached in Fortman v. Hemco, Inc. (1989) 211 Cal.App.3d 241, in which two plaintiffs made a joint 998 offer to a defendant in a products-liability case. In Fortman, the two plaintiffs − a child seriously injured by a defective design of a car door and her mother − jointly made a 998 offer to settle the case for $1 million. Subsequently, the child’s mother dismissed her action and only the child’s claim proceeded to trial. The child received a verdict of more than $23 million. The Court of Appeal found the 998 offer to be valid, notwithstanding that it had been made jointly by two plaintiffs, because it was completely clear that the plaintiff’s recovery far exceeded the statutory offer. (Id. at p. 263; see also Stallman v. Bell (1991) 235 Cal.App.3d 740, 747 (998 offer made to two plaintiffs jointly held valid where the plaintiffs received a joint damages award from the jury, resulting in a single verdict to be compared to a single offer).) Nevertheless, the safer practice is for each plaintiff to individually serve a 998 offer to ensure its validity.

The rule is different for 998 offers by a plaintiff to multiple defendants who are sued under a theory of joint and several liability. Where an employer is jointly liable with its employees on a theory of respondent superior or vicarious liability, a joint 998 offer made to the employees and the employer should be valid. (Bihun v. AT&T Information Systems, Inc., supra, 13 Cal.App.4th at pp. 1000-1001.) The Bihun Court’s conclusion that a joint 998 offer to multiple defendants sued under a theory of joint and several liability is valid has been upheld in other decisions. (See, e.g., Steinfeld v. Foote-Goldman Proctologic Medical Group (1996) 50 Cal.App.4th 1542, 1550.)

The same rule regarding multiple defendants seems to apply in reverse. Where multiple defendants are sued under the theory that they are jointly and severally liable for the plaintiff’s damages, the defendants may jointly submit a 998 offer and it should not be found invalid based on its joint nature. (Santantonio v. Westinghouse Broadcasting Co., Inc. (1994) 25 Cal.App.4th 102, 114; Brown v. Nolan (1979) 98 Cal.App.3d 445, 452.) Nevertheless, the best practice may still be to serve a separate 998 offer to each defendant.

Is the award more favorable than the 998 offer?

Where a plaintiff rejects a defendant’s 998 offer, the plaintiff’s judgment or award is compared against the offer to determine if the plaintiff beat the 998 offer. The costs incurred by the plaintiff post-offer are excluded from the calculation of whether the judgment is more favorable than the offer. (Code Civ. Proc., § 998, subd. (c)(2)(A).) However the plaintiff’s pre-offer costs – those incurred before the offer was made – are to be factored into the determination of whether the plaintiff beat the 998 offer. (Heritage Engineering Construction, Inc. v. City of Industry (1998) 65 Cal.App.4th 1435, 1441.) Furthermore, in cases where attorney’s fees are authorized, such as employment lawsuits brought under the FEHA, the plaintiff’s pre-offer attorney’s fees are also considered part of the judgment for determining whether the judgment is more favorable than the statutory offer. (Wilson v. Safeway Stores, Inc. (1997) 52 Cal.App.4th 267, 269.) Where a defendant rejects a plaintiff’s 998 offer, the plaintiff’s pre-offer costs and post-offer costs, including attorney’s fees where authorized, such as in cases brought under the FEHA, are included in calculating whether the judgment exceeds the 998 offer. (Stallman v. Bell, supra, 235 Cal.App.3d at p. 748.) This is regardless of whether the 998 offer itself provides that each side will bear its own costs. (Id. at p. 749.)

Multiple 998 offers

There may be situations in which a party makes multiple 998 offers during the course of litigation. Nothing prevents a party from         doing so, as its evaluation of the case may change over time. The issue becomes which offer is used for purposes of determining the date to use for cost shifting purposes. The California Supreme Court recently addressed this issue, finding that where “a plaintiff makes two successive statutory offers, and the defendant fails to obtain a judgment more favorable than either offer, allowing recovery of expert witness fees incurred from the date of the first offer is consistent with section 998’s language and best promotes the statutory purpose to encourage settlements.” (Martinez v. Brownco Construction Co. (2013) 56 Cal.4th 1014, 1017.) But the Court did not address what happens if the party making the 998 offer obtains a judgment more favorable than the first one, but not more favorable than the second one, leaving intact appellate case law holding that in such an instance, the second 998 offer is deemed to revoke the first 998 offer. (Id. at p. 1026; Wilson v. Wal-Mart Stores, Inc. (1999) 72 Cal.App.4th 382, 389-390.)

If a party withdraws a second 998 offer before its statutory expiration, the withdrawing party’s right to cost shifting is determined by the last rejected statutory offer. (One Star, Inc. v. STAAR Surgical Co. (2009) 179 Cal.App.4th 1082, 1094-1095.)

The court has discretion to refuse to award costs to a party who beat a 998 offer

Courts construing section 998 have read a good faith and reasonableness requirement into the statute. (Elrod v. Oregon Cummins Diesel, Inc., supra, 195 Cal.App.3d at p. 698; Wear v. Calderon (1981) 121 Cal.App.3d 818, 821.) If the 998 offer was not reasonable, the court may exercise its discretion to refuse to award costs to an offering party who received a judgment or award more favorable than the rejected 998 offer. (Nelson v. Anderson (1999) 72 Cal.App.4th 111, 134.) The burden is on the party who rejected the offer to establish that the costs should be disallowed. (Santantonio v. Westinghouse Broadcasting Co., supra, 25 Cal.App.4th at pp. 116-117.)

Reasonableness of a defendant’s 998 offer is evaluated using a two-part test. The first part looks at “whether the offer represents a reasonable prediction of the amount of money, if any, defendant would have to pay plaintiff following a trial, discounted by an appropriate factor for receipt of money by plaintiff before trial,” based on information known or reasonably known to the defendant. (Nelson v. Anderson, supra, 72 Cal.App.4th at p. 135; Elrod v. Oregon Cummins Diesel, Inc., supra, 195 Cal.App.3d at p. 699.) The second part is “whether defendant’s information was known or reasonably should have been known to plaintiff.” (Ibid.)

In Elrod, the defendant Cummins’ 998 offer to resolve the plaintiff’s claim for $15,001 was found unreasonable given the jury’s finding that the plaintiff’s damages as to all defendants exceeded $1 million. Even though the plaintiff’s net judgment against Cummins was zero after a credit against the verdict for a settlement by other defendants and a deduction for workers’ compensation benefits, the court exercised its discretion to deny Cummins its post offer costs and expert witness fees based on its determination that Cummins’ token 998 offer had not been reasonable. (Elrod v. Oregon Cummins Diesel, Inc., supra, 195 Cal.App.3d at p. 697.)

Thus, if faced with the prospect of being required to pay costs as a result of rejecting a 998 offer, the plaintiff should demonstrate to the court that the 998 offer was not reasonable when made, and ask the court to exercise its discretion not to shift post-offer costs and expert witness fees to the plaintiff.

Conclusion

The effective use of 998 offers, both as the offering party and the offeree, requires a realistic evaluation of succeeding on liability and the likely amount of recoverable damages. Once this evaluation has been made, counsel should carefully analyze with their client the potential financial benefits of serving a 998 offer and the potential downsides of rejecting a reasonable 998 offer made by the defendant.