Section 998: The high-stakes settlement strategy you need to know

California Code of Civil Procedure Section 998 is a settlement tool parties use to shift costs upon the resolution of a case. If a party rejects a Section 998 offer and then fails to obtain a more favorable judgment, they could be held responsible for the offering party's post-offer costs and fees. While Section 998 has served as an influential tool for pre-trial settlements for years, it also has proven enigmatic in practice. This article addresses the most common questions that arise when extending or responding to a Section 998 offer.

1. What costs are recoverable under Section 998?

Costs available under Section 998 are consistent with CCP sections 1032 and 1033.5. Those costs include filing fees and jury fees, as well as a myriad of other court costs. Engle v. Copenbarger & Copenbarger, 157 Cal. App. 4th 165, 168 (2007).

If a Section 998 offer made by a party is rejected and the other party fails to obtain a more favorable judgment or award, the offering party can recover the aforementioned costs incurred from the time of the offer. Cal. Civ. Proc. Code § 998. The court or arbitrator also has discretion to permit the offering party's recovery for post-offer expert witness costs. Id.

2. Can costs be recovered if the case ends in a settlement rather than a judgment?

As of the writing of this article, this issue remains "unsettled." In Madrigal v. Hyundai Motor Am., 90 Cal. App. 5th 385, 390 (2023) (Madrigal), review granted Aug. 30, 2023, S280598, the parties settled on the eve of trial for an amount lower than the defendant's Section 998 offer. The trial court determined that Section 998's cost-shifting provisions do not govern because the lawsuit did not end in a judgment, and it awarded the plaintiff significant attorneys' fees and costs. Id. at 399. In a split decision, the Third District Court of Appeal reversed, holding that Section 998 's cost-shifting provisions indeed apply because the payment of money in exchange for dismissal with prejudice of the complaint effects a "judgment" within the meaning of Section 998. Id. at 401. In a sharply-worded dissent, Justice Ronald Robie disagreed and proposed that Section 998's cost-shifting provisions apply only when a plaintiff "through unilateral action" obtains a less favorable judgment than a previously rejected Section 998 offer. Id. at 410.

The majority holding in Madrigal has faced significant scrutiny over the last two years, but it is not without support. In Ayers v. FCA US, LLC, 99 Cal. App. 5th 1280, 1298 (2024) (Ayers), review granted May 15, 2024, S284486, the Second District Court of Appeal cited Madrigal favorably and likewise held that Section 998 applies even where the litigation is terminated by settlement. 

The California Supreme Court granted review in both Madrigal and Ayers. The Court recently conducted oral argument in Madrigral on January 8, 2025, and a decision is forthcoming. Look for clarity on this subject in the coming weeks or months.

3. Must the 998 offer include an acceptance provision?

A Section 998 offer must include a written provision that allows the accepting party to indicate acceptance of the offer. This acceptance is done through signature of the statement indicating that the offer has been accepted. See Cal. Civ. Proc. Code § 998.

4. What happens if the offer makes no reference to costs and attorneys' fees?

If an offer is silent as to costs and fees, the party accepting a Section 998 offer may separately seek costs and attorneys' fees. Martinez v. L.A. Cnty. Metro. Transp. Auth., 195 Cal. App. 4th 1014, 1021 (2011). To avoid this result, the Section 998 offer would need to expressly include fees and costs in the offer.

If an offer specifically excludes costs but remains silent on attorneys' fees, then the bright-line rule is that both costs and attorney's fees will be excluded. Id. at 1021.

5. Can a party add conditions when accepting a 998 offer?

A conditional acceptance does not create a binding settlement enforceable under section 998. Siri v. Sutter Home Winery, Inc., 82 Cal. App. 5th 685, 693 (2022). To form a binding settlement, an offeree's acceptance of a Section 998 offer must be "absolute and unqualified." Id. at 691 (quoting Bias v. Wright, 103 Cal. App. 4th 811, 820 (2002)). Accordingly, a conditional acceptance is treated as a counteroffer. Id. However, a Section 998 offer is not revoked by a subsequent counteroffer. Id. The original offer may still be accepted during the statutory period until expressly withdrawn by the offeror. Poster v S. Cal. Rapid Transit Dist., 52 Cal. 3d 266, 270 (1990).

6. If there are multiple plaintiffs, must the defendant make a separate offer to each plaintiff to invoke Section 998?

Only an offer made to a single plaintiff, without need for allocation or acceptance by other plaintiffs, will qualify as a valid offer under 998. As a result, if an offer is proffered collectively to multiple parties such that one party could not accept unless the other party also accepted, the offer is invalid. Meissner v. Paulson, 212 Cal. App. 3d 785, 790 (1989).

7. How many CCP 998 offers can a party make?

A party may make more than one settlement offer. In Martinez v. Brownco Constr. Co., 56 Cal. 4th 1014 (2013), the Court considered whether applying section 998 in a particular manner (i.e., allowing for only one offer per party) serves the public policy of compensating the injured party. Id. at 1020. The Court concluded that public policy favors the opportunity to make multiple 998 offers leading up to trial. As discovery progresses and more evidence is accumulated, allowing an offeror to propose a new offer in light of newly discovered evidence in lieu of proceeding to trial supports public policy. Id.

8. If multiple 998 offers are extended, which one will the Court use?

Courts have followed two different rules depending on the facts of the case. In one instance, a court held that the first offer was extinguished by a latter offer. The first offer had been extended before the first trial, but, when the case was reversed on appeal, a second offer was extended before the second trial. Under such facts, courts follow general contract law principles, which do not conflict with section 998 or defeat its purpose. Distefano v. Hall, 263 Cal. App. 2d 380, 385 (1968) (Distefano); T.M. Cobb Co. v. Superior Court, 36 Cal. 3d 273, 280 (1984).

However, another court rejected the general contract law "last offer rule" when the first offer was made early in the case and the second offer occurred shortly before trial. The California Supreme Court found that applying the Distefano rules would frustrate the purpose of Section 998, and therefore allowed the plaintiff to recover costs incurred after the time of the first offer. Martinez, 56 Cal. 4th at 1025.

9. Can a 998 offer be withdrawn?

A section 998 offer may be revoked any time before acceptance or the expiration of the statutorily designated period. Poster v. S. Cal. Rapid Transit Dist., 52 Cal. 3d 266, 271 (1990). Revocation reflects a general principle of contract law and neither conflicts with Section 998 nor defeat its purpose. Id.

10. What happens when a trial is unexpectedly delayed?

Parties may request extensions to the response deadlines of Section 998 offers. Licudine v. Cedars-Sinai Med. Ctr., 30 Cal. App. 5th 918, 920 (2019). Additionally, a party may make more than one 998 offer. Martinez, 56 Cal. 4th at 1017. Therefore, if a trial is delayed, a party may request an extension to the response deadline or serve a new 998 offer. Otherwise, if a 998 offer is not accepted, it will lapse either in 30 days from when it was made or prior to the start of trial or arbitration, whichever comes first. See Cal. Civ. Proc. Code § 998.

11. What factors are at play in the Court's assessment of whether the 998 offer was reasonable?

The reasonableness of a Section 998 offer is left to the sound discretion of the trial court. Elrod v. Or. Cummins Diesel, Inc., 195 Cal. App. 3d 692, 700 (1987) (citing Tech-Bilt, Inc. v. Woodward-Clyde Assocs., 38 Cal. 3d 488, 502 (1985)). Whether a Section 998 offer was reasonable is determined by looking at the circumstances when the offer was made. Id. The reasonableness of an offer depends upon the information used to evaluate it, and thus "the reasonableness of an offer may lie in the eye of its beholder." Id. at 699.

As a general rule, the reasonableness of a defendant's offer is first measured by determining whether the offer represents a reasonable prediction of the amount of money, if any, defendant would have to pay plaintiff following a trial. Id. This amount is premised upon information that was known or reasonably should have been known to the defendant. Id. "If an experienced attorney or judge, standing in defendant's shoes, would place the prediction within a range of reasonably possible results, the prediction is reasonable." Id. (citing Abbott Ford, Inc. v. Superior Court, 43 Cal. 3d 858, 874 (1987)).

The next test is whether the defendant's information was known or reasonably should have been known to plaintiff. The court utilizes this second test because the 998 mechanism works only where the offeree has reason to know the offer is a reasonable one. Id.

In addition to reasonableness, a 998 offer must be in good faith. Generally, there are three factors in determining good faith: (1) how far into the litigation the 998 offer was made, (2) the information available to the offeree prior to the offer's expiration, and (3) whether the offeree let the offeror know it lacked sufficient information to evaluate the offer and how the offeror responded. Licudine v. Cedars-Sinai Med. Ctr., 30 Cal. App. 5th 918, 921 (2019).

12. Can Section 998 costs be recovered in an employment dispute where the California Labor Code often prevents an employer from recovering costs?

The shifting of costs under section 998 is only applicable in the absence of a specific Labor Code provision governing the awards of costs. Chavez v. Cal. Collision, LLC, 107 Cal. App. 5th 298, 309 (2024). If claims were made under Labor Code sections that provide a statutory framework for the shifting of costs, then the Labor Code framework is used for the evaluation of cost-shifting for the entirety of the case. Id. For example, the one-way cost shifting provisions of Labor Code sections 1194 and 218.5 will override the more general cost shifting provisions of Section 998. Id.

13. Are 998 offers made in an arbitration proceeding enforceable?

Section 998 offers may be made in disputes that are to be resolved in arbitration. See Cal. Civ. Proc. Code § 998. The Legislature amended Section 998 in 1977 to make sure the same 998 incentive available in court was available in arbitrations, as well. Heimlich v. Shivji, 7 Cal. 5th 350, 356 (2019). Parties must seek their Section 998 fees and costs from the arbitrator, not from the court. Maaso v. Signer, 203 Cal. App. 4th 362, 379 (2012). Evidence of a 998 offer may be presented before or after an arbitrator's final award on the merits. Heimlich, 7 Cal. 5th at 361.

14. Can a Section 998 offer be served with the complaint or with the response?

A Section 998 offer can be served at any time up to ten days before trial. However, if the 998 offer is extended too early in the case, the court may find that it does not meet the good faith requirement. Licudine v. Cedars-Sinai Med. Ctr., 30 Cal. App. 5th 918, 927 (2019). While there is no minimum period that must elapse following commencement of a suit, a litigant receiving a 998 offer at the time that a lawsuit is filed, or soon thereafter, is less likely to have sufficient information upon which to evaluate that offer. Barba v. Perez, 166 Cal. App. 4th 444, 452 (2008).

15. Can simultaneous offers be included within one 998 offer?

A section 998 offer is not sufficiently certain if it consists of two offers made at the same time to the same party, leaving it up to the offeree to decide which offer to accept. Gorobets v. Jaguar Land Rover N. Am., LLC, 105 Cal. App. 5th 913, 920 (2024). Section 998 offers are valid if they are reasonably certain in two ways. First, if they are certain enough in their terms and conditions so that the offeree can evaluate the worth of the offer at the time it was made. Second, the terms and conditions must be certain enough for the trial court to determine whether the judgment is more favorable than the offer at the time the case is resolved. Simultaneous offers are not effective because they do not satisfy the requirement of sufficient certainty such that the trial court could determine whether the judgment is more favorable than the offer. Id. at 932.

16. Can non-monetary terms be included in a 998 offer?

Non-monetary terms do not necessarily invalidate a Section 998 offer. However, non-monetary terms complicate the court's ability to determine if the judgment exceeded the value of the offer. Therefore, parties should be wary when including non-monetary terms and ensure that the value of each non-monetary term is not speculative. Khosravan v. Chevron Corp., 66 Cal. App. 5th 288, 297 (2021). The terms and conditions of the offer must be sufficiently certain and capable of valuation to allow the court to determine whether the ultimate judgment is more favorable than the offer. Menges v. Dep't of Transp., 59 Cal. App. 5th 13, 26 (2020).

17. Can a Section 998 offer contain a confidentiality clause?

Confidentiality clauses, like other non-monetary terms, are incapable of valuation and will render a Section 998 offer invalid. Barella v. Exch. Bank, 84 Cal. App. 4th 793, 802 (2000). Non-monetary language can render the Section 998 offer too difficult to fairly determine whether the damage award is more favorable or less favorable than the 998 offer. Id. at 801. The value to a particular plaintiff of public vindication, or the negative value of confidentiality, is so highly subjective and elusive that no court can determine its monetary worth. Id. at 802.

18. Can a 998 offer include general release language?

General release language contained within a section 998 offer makes it too difficult to evaluate the monetary terms to decide whether the damage award did or did not exceed the amount offered in the settlement of the instant case. Valentino v. Elliott Sav-On Gas, 201 Cal. App. 3d 692, 698 (1988). Section 998 does not describe an offer in monetary terms, but rather includes the offer's terms and conditions. Therefore, the offer must be evaluated in light of all of its terms and conditions, whether they are monetary or nonmonetary. Evaluating the nonmonetary terms and conditions of an offer, such as general release language, makes it impractical, if not impossible, for a court to fairly evaluate the offer. Id. at 699.

19. Can a Section 998 offer include an indemnity clause?

While an indemnity clause is not, by itself, an invalidating term, parties must be cautious. Khosravan v. Chevron Corp., 65 Cal. App. 5th 288, 296 (2021). The Khosravan court held that an indemnity provision within a Section 998 offer could be too difficult to value, especially when it involves the release of parties and claims not involved in the litigation. If the indemnity clause requires the evaluation of possible future claims and their contingencies, the court would likely find that the offer is invalid.

20. If a plaintiff rejects a defendant's Section 998 offer and later dismisses the defendant, could the plaintiff still be liable for costs incurred after the 998 offer?

Courts have deemed a plaintiff liable for costs incurred by a defendant after an unaccepted Section 998 offer even where the plaintiff voluntarily dismissed the case. Mon Chong Loong Trading Corp. v. Superior Court, 218 Cal. App. 4th 87, 94 (2013). In Mon Chong Loong Trading Corp., the court found that a voluntary dismissal constituted the conclusion of the action, and therefore triggered the court's discretion as to the assessment of fees and costs under Section 998.