The California Supreme Court has clarified how the cost-shifting provisions of California Code of Civil Procedure Section 998 (“Section 998”) may apply when a case settles before trial. In a recent decision, Madrigal v. Hyundai Motor America, the Court held that a plaintiff who rejects a valid Section 998 offer and later settles for less than the offer amount may still face the statute’s cost-shifting consequences—even without a trial verdict. This decision strengthens Section 998 as a strategic tool for employers looking to limit exposure to attorneys’ fees and costs.
Section 998 Explained
California Code of Civil Procedure Section 998 (“Section 998”) provides a powerful mechanism to encourage early resolution of cases by providing for cost-shifting provisions. By way of illustration and in the employment context, if a defendant employer makes a statutory Section 998 offer to compromise, the plaintiff employee rejects it and later obtains a less favorable result at trial, the Section 998 offer can operate to cut off plaintiff’s attorneys fees and costs incurred after the offer is made.
The Supreme Court’s Ruling
In Madrigal v. Hyundai Motor America, plaintiff car buyers sued defendant car manufacturer for alleged breaches of express and implied warranties under the Song-Beverly Consumer Warranty Act. After defendant made two Section 998 offers to plaintiffs over an eight-month period after the complaint was filed – both of which were rejected – the parties ultimately reached a stipulated settlement after a jury was sworn in on the first day of trial. The parties’ settlement left the issues of costs and attorney fees to be resolved by the Court, based on plaintiffs’ assertion of fee recovery under the Act as a prevailing party. The settlement that was ultimately reached was less favorable than the second Section 998 offer made by the defendant earlier in the case. Defendant opposed the plaintiffs’ motion for attorneys’ fees as unreasonable and argued that plaintiffs were not entitled to recover costs incurred after the date of the second Section 998 offer, as they had failed to obtain a more favorable judgment by ultimately settling for less than what had previously been offered.
The California Supreme Court found that Section 998 cost-shifting creates no requirement in the statute that the case be resolved by trial. In order to penalize a nonaccepting offeree for continuing the case after a Section 998 offer was properly made, the Court places the burden of obtaining “a more favorable judgment or award” on the party who did not accept the offer. In other words, a party who rejects a valid Section 998 offer and later settles for less remains subject to the statute’s consequences – even in the absence of a trial. The Supreme Court’s reasoning was based on the fact that a party who rejects a reasonable Section 998 offer should be penalized for continuing the litigation, and by giving effect to Section 998’s purpose of encouraging both the making and acceptance of reasonable settlement offers. That said, Section 998 does not preclude parties from independently agreeing on the allocation of costs in a settlement agreement.
Key Takeaways
The California Supreme Court’s decision in Madrigal reinforces the serious consequences of rejecting a valid and reasonable Section 998 offer. For employers, Madrigal strengthens Section 998 as an effective tool to use when employees overvalue their cases or when plaintiff’s counsel reject offers in an attempt to “bill up” cases to further drive up the cost of settlement. Moving forward, employers in litigation should discuss with their attorneys how a Section 998 offer may be used to resolve their case and limit their exposure to fees and costs.
*Special thanks to law clerk Victor Weber for the research and preparation of this article.
