The California Code of Civil Procedure § 998 is a powerful tool for settlement purposes.  (For the full text of the statute, click here.)  If a plaintiff makes a § 998 offer and the defendant rejects the offer or allows it to expire, and the defendant does not achieve a better result at trial, then the plaintiff may be entitled to expanded costs—such as its expert witness fees—incurred after the offer was made.  The same applies in reverse: if a defendant makes a § 998 offer which is not accepted, and the plaintiff does not achieve a better result at trial, then the defendant may be entitled to expanded costs.  (Note that in both cases, the rejecting party must obtain a better result than the offer to avoid the cost-shifting effect.  A tie goes to the offeror.)

When there are multiple § 998 offers, things get a bit more confusing.  In Distefano v. Hall, 263 Cal. App. 2d 380 (1968) (link here), the Court of Appeal applied basic contract law principles to reach its determination that a subsequent § 998 offer extinguishes an earlier offer.

In DiStefano, the defendants made an offer for $20,000, and the plaintiff obtained an award of $28,500, which was reversed on appeal.  The defendants then made a 10,000 offer, and on retrial, the plaintiff recovered $12,559.96.  Defendants attempted to recover their post-offer costs dating back to the first $20,000 offer.  The court held that the latter offer extinguished the first one, and awarded the defendants none of their costs.

In T.M. Cobb Co. v. Superior Court, 36 Cal. 3d 273 (1984) (link here), the California Supreme Court approved of the DiStefano court’s reasoning, and said that general contract law principles may properly govern the statutory offer and acceptance process so long as they “neither conflict with the statute nor defeat its purpose.”  Id. at 280.

In Martinez v. Brownco Construction Co., Inc. (link here), the state Supreme Court was confronted with a slightly different situation, and rejected the “last offer” rule in that instance.  In Martinez, the plaintiff Mrs. Martinez made two settlement offers, one for $250,000 early in the case, and another for $100,000 shortly before trial.  At trial, she obtained a $250,000 award.  The issue is whether she could recover her costs from the date of the first offer, or only from the date of the second offer.

The Court reasoned that applying the DiStefano rule to these facts would actually frustrate the intent behind § 998.  The policy behind § 998 is to encourage the parties to settle, and applying the rule in this case limiting Mrs. Martinez to the costs incurred after only the second offer would discourage her (and others) from making more reasonable settlement offers as trial approached.

Instead, the Court held that allowing Mrs. Martinez to recover costs from the date of the first offer better fulfilled the purposes of § 998, stating “[w]here, as here, a plaintiff serves two statutory offers to compromise, and the defendant fails to obtain a judgment more favorable than either offer, recoverability of expert fees incurred from the date of the first offer is consistent with section 998’s language and best promotes the statutory purpose to encourage the settlement of lawsuits before trial.

Author: Amy Howse