Many parties use Code of Civil Procedure Section 998 offers to shift which party will be determined the prevailing party supposing the plaintiff wins less than was offered by the defendant in the § 998 offer. However, parties should carefully consider their options and § 998 offer strategies to attempt to produce a favorable outcome. As explained below, it may be wise to consider whether § 998 offers to be inclusive of attorneys’ fees given the calculation of “costs” following a judgment.
Why are 998 Offer Strategies Important?
Strategizing a good 998 offer is important because the terms of a 998 offer may determine who the court considers the “prevailing party.”
A Court Considering the Prevailing Party will Compare the Defendant’s 998 Offer with Plaintiff’s Judgment Plus Plaintiff’s Pre-Offer Costs
When a court determines which party received a “more favorable” judgment than a previously made offer, the court will first add certain costs to the judgment. When a judgment is being compared to an offer made by a defendant, the court will only consider those costs which were incurred by the plaintiff prior to the date the §998 offer was made.
“Costs”, if available by contract or statute, include reasonable attorney fees incurred by each party. (Code Civ. Proc. § 1032 (b)) The plaintiff’s pre-offer attorney costs (and other reasonable costs incurred) are added to its final judgment and compared against the defendant’s §998 offer to determine whether it was “more favorable” than the settlement offer. If a plaintiff rejects a reasonable §998 offer and fails to achieve a “more favorable” judgment, the plaintiff’s judgment, plus pre-offer costs, are offset by the defendant’s costs including attorney fees. (Code Civ. Proc. § 998 (c)(1))
Statutory Penalties Imposed by California Code of Civil Procedure § 998
Acceptance of a §998 offer is not mandatory – A party may decide to reject the offer if he or she believes a more favorable judgment can be won in court. However, if a party refuses a § 998 offer, proceeds with trial, and then fails to obtain a “more favorable” judgment, there are certain potential penalties that need to be carefully considered.
If Plaintiff Rejects a § 998 Offer:
If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment or award, certain penalties apply. For example, if a plaintiff rejects a § 998 offer that offers $10,000, but only wins $10,000 in court, the plaintiff will the following penalties apply:
Mandatory Penalties:
Plaintiff’s Loses Post-Offer Costs. The plaintiff will not be permitted to recover his or her post-offer costs. Post-offer costs are all court costs which are incurred after the date the § 998 was offered. (Code Civ. Proc. § 998 (c)(1))
Plaintiff Pays Defendant’s Post-Offer Costs. The plaintiff will be required to pay the defendant’s post-offer costs. (Code Civ. Proc. § 998(c)(1))
Defendant’s Post-Offer Costs Deducted from Plaintiff’s Award. Furthermore, the defendant’s post-offer costs are subtracted from the plaintiff’s recovery. If those costs exceed the plaintiff’s recovery, the defendant is entitled to a judgment against the plaintiff. (Code Civ. Proc. § 998(e))
Discretionary Penalties:
If Defendant Rejects a § 998 Offer:
Similarly, if a defendant fails to accept a 998 offer from a plaintiff and the plaintiff recovers an amount greater than the 998 offer at trial or arbitration the following penalty applies pursuant to Code of Civil Procedure § 998(d):
Discretionary Penalty:
The judge or arbitrator may order the defendant to pay the plaintiff’s reasonable expert costs.
This discretionary penalty is in addition to paying for a prevailing plaintiff’s entitled costs and, if a statute or contract providing for an attorney’s fees award is involved, its legal fees as well.
Should Attorneys’ Fees be Included in a § 998 Offer?
A § 998 Offer can be strategically used to cap a plaintiff’s attorneys’ fees. In matters in which attorney fees are recoverable, a defendant may choose whether to (1) have both parties bear their own costs and attorneys’ fees; (2) include the plaintiff’s costs and attorney fees as part of its offer; or (3) “plus costs and attorneys’ fees.” (See Judicial Council form (CIV-090) for options under paragraph 2, section a, subsections (1)- (5)).
§ 998 Offer “For $X Including Costs and Attorneys’ Fees”
When an offer includes costs and attorneys’ fees, it means that the amount offered is inclusive and will cap the attorneys’ fees to be included in the monetary amount offered. The benefit to including attorneys fees in an offer is that if a plaintiff accepts, the plaintiff’s entire recovery is capped and the amount shall be known at the time of acceptance. However, if the defendant includes the attorneys’ fees, the defendant risks the chance that the plaintiff will receive a judgment lower than the § 998 amount, but still exceed the defendant’s § 998 offer with the addition of attorney fees. If plaintiff rejects the offer and wins a judgment, there is a risk that the plaintiff may artificially inflate its attorneys’ fees to beat the 998 offer.
The following is provided as an example:
Scenario: The defendant offers the plaintiff $100,000 “including attorneys’ fees.” The plaintiff rejects the offer and continues to trial, receiving a judgment in the amount of $90,000. The plaintiff then argues for, and is granted, $40,000 in costs, including attorney fees. $15,000 worth of attorneys’ fees incurred prior to the defendant’s §998 offer.
Outcome: The total amount the plaintiff received (including the judgment and pre-offer costs and attorney fees) amounts to $105,000. Therefore, the plaintiff’s $105,000 judgment has beaten the defendant’s §998 offer of $100,000. Accordingly, the plaintiff is entitled to not only the $90,000 judgment but also the entirety of the $40,000 of costs. The plaintiff is then entitled to a total of $130,000.
§ 998 Offer “For $X Plus Costs and Attorneys’ Fees”
A second option for defendants wishing to cap a plaintiff’s attorney fees is to offer a §998 “plus attorney fees.” That means that if the plaintiff rejects the offer, it must win a monetary judgment that is greater than the § 998 offer, excluding the attorneys’ fees. The benefit of this option is that it prevents a plaintiff from exceeding a § 998 by adding on attorney fees, like in the example above. The negative of this option is that it risks the possibility that the plaintiff will accept the §998 offer for a nominal sum, but recover greater attorney fees than anticipated. The following example shows the benefits to a defendant who uses this method:
Scenario: The defendant offers the plaintiff $100,000 “plus attorney fees.” The plaintiff then rejects that offer and continues to trial, receiving a $90,000 judgment. The plaintiff then argues for, and is granted $40,000 in costs, including attorney fees. $15,000 of those attorneys’ fees incurred before the defendant’s §998 offer.
Outcome: Because the plaintiff was awarded $90,000, “plus attorney fees,” it failed to obtain a more favorable judgment than the defendant’s offer of $100,000 “plus attorney fees.”
Since the plaintiff failed to obtain a more favorable judgment, he or she is subject to statutory penalties:
California Code of Civil Procedure section 998 (c)(1) provides:
(c)(1) If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment or award, the plaintiff shall not recover his or her postoffer costs and shall pay the defendant’s costs from the time of the offer. In addition, in any action or proceeding other than an eminent domain action, the court or arbitrator, in its discretion, may require the plaintiff to pay a reasonable sum to cover postoffer costs of the services of expert witnesses, who are not regular employees of any party, actually incurred and reasonably necessary in either, or both, preparation for trial or arbitration, or during trial or arbitration, of the case by the defendant.
California Code of Civil Procedure section 998 (e) further provides:
(e) If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment or award, 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 judgment or award shall be entered accordingly.
Accordingly, the plaintiff cannot recover the $25,000 worth of post-offer costs and attorney fees. In addition, the plaintiff’s $105,000 recovery (judgment plus pre-offer costs) is reduced by the defendant’s costs and attorney fees. Plaintiff’s recovery is severely reduced, and if the defendant’s costs exceed the plaintiff’s recovery, the defendant could receive a judgment against the plaintiff for his or her costs!
By including “plus attorneys’ fees” rather than “including attorneys’ fees” in the § 998 offer, the defendant prevailed by forcing the plaintiff to beat its offer purely on the monetary judgment, without regard for attorneys’ fees.
How to Consider Attorney’s Fees in a 998 Offer
Parties considering using a § 998 must consider the consequences as well as the benefits. For a defendant, a good § 998 offer strategy would use the offer as a method in capping the plaintiff’s attorneys’ fees. However, failing to consider an appropriate § 998 offer strategy based on the calculation of pre-offer attorneys’ costs could unintentionally create costly liability, which may cost more than the § 998 offer itself.
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