“COST SHIFTING PROVISION OF SECTION 998 APPLIES TO PARTIES WHO REJECTED STATUTORY OFFER BUT SETTLED BEFORE TRIAL” 

As part of our holistic approach to representing businesses and insurers, MVPF provides analysis of important developments in California and law that potentially impact our clients’ interests. The California Supreme Court recently published a decision that significantly impacts the resolution of litigated civil cases. 

Elizabeth Sutlian‑Mardikian
Trial Attorney, MVPF Law

MADRIGAL V. HYUNDAI MOTOR CO. 

Plaintiffs Oscar and Audrey Madrigal purchased a vehicle from defendant Hyundai Motor America, which was defective. They filed a lemon law case under the Song-Beverly Act when Hyundai refused to buy the vehicle back. Less than two months after suit was filed, Hyundai made its first 998 offer of $37,396.60 and $5,000 for attorney’s fees or an amount determined by the court per motion. This offer lapsed. Six months later Hyundai made a second Code of Civil Procedure (“CCP”) §998 offer for $55,556.70 and $5,000 for attorney’s fees or an amount determined by the court per motion. This also lapsed. On the first day of trial, the parties settled for a total of $39,000 and attorney’s fees to be determined by motion. Plaintiffs moved to recover their costs as the prevailing party and their attorney’s fees pursuant to the Song-Beverly Act. Hyundai moved to strike their costs, arguing that plaintiffs could not recover any costs incurred after the date of the second CCP §998 offer because plaintiffs agreed to accept an amount less than the second CCP §998 offer. The trial court rejected Hyundai’s argument, holding that there was no trial and consequently no judgment or award was entered, thus CCP §998 does not apply. Hyundai subsequently appealed and the matter made its way up to the Supreme Court of California. 

BACKGROUND: CCP 998 

CCP Section 998 is a written offer of compromise made by one party to the litigation to the opposing party containing the terms and conditions under which the offering party is willing to settle. A CCP § 998 offer must be accepted in writing by the opposing party. Further, the offer must remain open until the commencement of trial, or within 30 days after service, whichever comes first. If a CCP § 998 is not accepted within the statutory period, it is deemed withdrawn. What makes a CCP § 998 different than a standard written settlement offer is the cost shifting provision designed to give the offer “teeth.” If a party turns down a CCP § 998 offer and fails to obtain a more favorable judgment at trial, there are statutory penalties that apply. Namely, the party cannot recover their court costs after the CCP § 998 was made and may have to pay the offering party’s expert witness fees incurred after the service of the offer. This is because the California Legislature intended Section 998 to encourage the settlement of litigation without trial by punishing a party who fails to accept a reasonable offer.  

KEY TAKEAWAYS 

• The Court’s holding in Madrigal is a victory for defendants as it creates enforceable consequences for plaintiffs who fail to accept reasonable settlement offers. 
• The potential liability for post-offer defense costs, including costly expert fees, will incentivize plaintiffs to settle earlier on in the litigation as opposed to dragging it out closer to trial in hopes of obtaining a better offer. 
• Defendants can expect plaintiffs to insist on language in the settlement release that requires each party to bear their own costs before they agree to a resolution. 
• However, as demonstrated above, prudent defendants should only agree to do so as a condition of accepting their CCP § 998 offers, with no guarantee of doing so if the offer lapses. 

ISSUE AND HOLDING 

The issue presented by Madrigal was a novel one: does CCP § 998’s cost-shifting provisions apply to a plaintiff who rejects a statutory offer but later agrees to a lower settlement before trial? The Supreme Court unanimously agreed it does. The Court held the default rule in this situation is to apply the cost shifting provisions whenever the statute’s terms are met; Nowhere does section 998 require that the case by resolved by trial before it comes into play, nor does it exclude from its reach cases resolved by a post-rejection, but pretrial settlement. The Court reasoned the basic premise of CCP §998 is that plaintiffs who reject reasonable settlement offers and then obtain less favorable results should be penalize for continuing the litigation. The Court further held there is little incentive to make one’s best offer early if there is no cost-shifting benefit unless a case goes to trial. 

The Court also recognized in the ebb and flow of litigation, incentives may change, but rejection of a CCP § 998 offer is a tactical choice, balancing known benefits against uncertain and potential unobtainable ones. However, the Court stated their interpretation in Madrigal is intended to clarify for litigants the risks and rewards they face in the hope that it incentivizes further settlement discussions in some circumstances, and discourage them in others. The Court also stated the holding does not foreclose parties from agreeing among themselves how to allocate costs.  

MVPF continually monitors legal developments in California and will provide updates on our news blog. 

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By | Elizabeth Sutlian-Mardikian | Trial Attorney

Elizabeth is an experienced defense attorney who has represented individuals and businesses and advised insurance carriers in multiple areas of civil litigation, including personal injury, products liability, premises liability, contract disputes, employment law, professional negligence, and insurance arbitration.