SECTION 998 OFFERS TO COMPROMISE:

THE PROCEDURAL MINEFIELD

by

Geoffrey L. Bryan

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 The offer is deemed withdrawn if not accepted before trial commences or within 30 days, whichever occurs first.

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, a number of cost-shifting mechanisms kick in. The prospect of such cost-shifting is designed 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 placed significant limitations on the plain language of the statute. Any lawyer who makes or receives a 998 offer must be aware of these limitations.

The Statutory Scheme

The basic mechanism of Section 998 is straightforward, varying 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. On the flip side, 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.

Section 998 in the Real World

The statute seems straightforward enough in the context of a simple case involving a single plaintiff, a single defendant, and money damages. But what about cases with multiple plaintiffs or multiple defendants, differing theories of liability and resulting exposure, rights of contribution or indemnity among co-defendants, and separate allocation of non-economic damage under Proposition 51? And what about 998 offers that, while technically in compliance with Section 998, do not seem to be realistic settlement offers? These are the issues that have occupied courts in applying Section 998, and they can form traps for the unwary in practice.

Here are some key points that apply to 998 offers:

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.

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. Careful reading of all relevant decisions is imperative in advising any client that receives, or wishes to make, a 998 offer in multiple party 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 requirements can create enormous headaches in multi-party cases.

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.

Conclusion

Where does this leave the practitioner in a modern, multi-party case? How likely is it that a 998 offer can be crafted that makes economic sense, on the one hand, and will survive judicial scrutiny, on the other?

Consider this example: a lawsuit is brought by two people who jointly buy a house and own it as tenants in common with undivided one-half interests. They sue the former owners (the sellers), an inspection company, and the real estate agents involved on the transaction, on the theory that the house contains material undisclosed defects that substantially diminish its value.

It would seem straightforward enough for a defendant to make a 998 offer to both plaintiffs, allocating one-half to each one. But must the offer, in order to be valid, permit one plaintiff to accept while the other proceeds to trial? The Hutchins case seems to require this, but it is a nonsensical requirement, given that the damage to the house is indivisible and it will cost the offering defendant just as much to litigate against one plaintiff as against two. In this case, an offer requiring acceptance by both plaintiffs makes the best sense (and indeed an offer permitting acceptance by only one plaintiff makes no sense), but it may not withstand post-trial challenge.

Unfortunately, therefore, in a number of contexts Section 998 may not prove effective to put settlement pressure on adverse parties, and an apparently valid 998 offer may prove inadequate to shift costs even where an apparently superior trial result has been reached. Offers to compromise under Section 998 nonetheless have an important role to play in today's litigation environment, and a thorough knowledge of the law in this area will best equip the litigator to obtain optimum benefit from the statute.

This article originally appeared in the ABTL Report published by the Association of Business Trial Lawyers in Los Angeles.




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Geoffrey L. Bryan
geoffbryan@earthlink.net
213-626-0100
Last updated June 6, 1998