Understanding a Statutory Offer to Compromise Under CCP Section 998

By Aline Miranda on May 8, 2013

California courts follow the rule known as “loser pays,” which means that the “prevailing party” in a lawsuit is awarded certain costs of litigation (not including attorney’s fees). The “prevailing party” is the party who obtains a monetary award from the jury.

However, even if you prevail, the litigation costs awarded to you as the “prevailing party” may be reduced, and you may be ordered to pay the litigation costs of the losing party, if you reject the other party’s statutory settlement offer and you fail to obtain a more favorable judgement at trial. This means not only that you may not be awarded your litigation costs but also that you may be forced to pay the losing party’s litigation costs, even if you prevail in your lawsuit.

Subdivision (b) of Section 998 of the California Code of Civil Procedure provides, in part, as follows:

“Not less than 10 days prior to commencement of trial…, any party may serve an offer in writing upon any other party to the action to allow judgment to be taken or an award to be entered in accordance with the terms and conditions stated at that time…(2) If the offer is not accepted prior to trial or arbitration, within 30 days after it is made, whichever occurs first, it shall be deemed withdrawn, and cannot be given in evidence upon the trial or arbitration.”

Furthermore, subdivision (e) of Section 998 provides, in part, as follows:

“If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgement or awarded, the costs under this section, from the time of the offer, shall be deducted from any damages awarded in favor of the plaintiff. If the costs awarded under this section exceed the amount of the damages awarded to the plaintiff the net amount shall be awarded to the defendant and judgement or award shall be entered accordingly.”

The purpose of 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 opponent’s settlement offer. (This 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.)’” Scott Co. v. Blount, Inc. (1999) 20 Cal.4th 1103, 1116; Pilimai v. Farmers Ins. Exchange Co. (2006) 39 Cal.4th 133, 139.

It is universally recognized by California courts that the purpose of settlement offers made pursuant to Section 998 is to encourage the settlement of lawsuits prior to trial. T. M. Cobb Co. v. Superior Court (1984) 36 Cal.3d 273, 280.) That purpose is achieved by punishing a party who fails to accept a reasonable settlement offer from the other party. Taing v. Johnson Scaffolding Co. (1992) 9 Cal.App.4th 579, 583; Elrod v. Oregon Cummins Diesel, Inc. (1987) 195 Cal.App.3d 692, 699. Therefore, while the purpose of Section 998 is to encourage the settlement of litigation without trial, its effect is to punish the plaintiff who fails to accept a reasonable settlement offer from a defendant.

A Section 998 settlement offer shifts the burden to the plaintiff to recover more than the amount of the settlement offer at trial or face a court order to pay the defendant’s litigation costs. Litigation costs for even a small and uncomplicated case can reach $10,000.00 or more, including court fees, jury fees, deposition costs, court reporter fees, witness fees, subpoena costs, and the cost of trial exhibits and courtroom models. Therefore, it is critical that plaintiffs understand the effect of a Section 998 settlement offer made prior to trial.

I tell all of my clients that the decision to take their case to trial is theirs to make and I will stand by them in that decision. However, it is my job to ensure that my clients make informed decisions.