Case Offers Some Clarity for Those Making, Receiving Section 998 Offers

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The California Code of Civil Procedure Section 998 has been around in one form or another since 1851. However, after more than 150 years, litigants still continue to search for the bounds of permissible joint offers and the effects of consecutive offers. Last month, the Court of Appeal passed upon these issues once again in Palmer v. Schindler, 2003 DJDAR 4619 (Cal. App. 2nd Dist. March 28, 2003).

Plaintiff Cindra Palmer suffered injuries when an elevator in which she was riding suddenly dropped several floors before stopping abruptly. It fell another three floors and stopped abruptly again while she was being rescued. She brought suit against the building owner, Equitable Real Estate and Investment Management Inc.; the building management company, Compass Management & Leasing, Inc.; and the elevator company, Schindler Elevator Corp.

During the litigation, Palmer served two offers to compromise pursuant to Section 998. The first was directed to defendant Schindler only and offered judgment in the amount of $1,999,999.99. The second offer was for judgment against all "defendants, jointly and severally" in the amount of $1,599,999.99. No defendant responded to either of these offers.

After trial, the jury awarded Palmer $5.75 million in economic and noneconomic damages. The Court of Appeal's opinion does not specify the amount of economic and noneconomic damages that comprise this award. According to counsel, the jury awarded $4.75 million in noneconomic damages and $1 million in economic damages.

After the verdict, Palmer claimed costs pursuant to Section 998 and prejudgment interest pursuant to Civil Code Section 3291 because the jury's award was higher than both statutory offers. The defendants moved to tax the Section 998 costs and opposed Palmer's motion for prejudgment interest. They argued that the second offer revoked the first and that the second offer was invalid because Palmer improperly directed it to all defendants "jointly and severally."

In the published portion of this decision, the court tersely stated that the second Section 998 offer was invalid because it did not specify which defendant was to pay what: "To be effective, an offer to multiple parties under section 998 must be explicitly apportioned among the parties to whom the offer is made so that each offeree may accept or reject the offer individually."

Without further discussion of this proposition, the court cited Taing v. Johnson Scaffolding Co., 9 Cal. App. 4th 579 (1992), and Santantonio v. Westinghouse Broadcasting Co., 25 Cal. Ap. 4th 102 (1994).

The Palmer court then held that because the second offer was directed to all three defendants "jointly and severally," it was ineffective to expose the defendants to an award of certain, statutory costs after trial. To reach this result, the court again cited Taing.

Taing involved an action by a construction worker arising from a fall from scaffolding. Meng Taing made a joint Section 998 offer to the scaffolding subcontractor, the general contractor and the owner of the property, which they did not accept.

Reversing an award of prejudgment interest and expert witness fees, the Taing court held that "if a plaintiff elects to submit a Section 998 offer in cases involving multiple defendants, the offer to any defendant against whom the plaintiff seeks to extract penalties for nonacceptance must be sufficiently specific to permit that individual defendant to determine the exact amount plaintiff is seeking from him or her."

Although Taing is properly cited for the Palmer holding, other language suggests (and other cases provide) an alternate approach to the interpretation of joint offers. The Taing court noted that "[t]he purpose of section 998 is to encourage the settlement of lawsuits before trial by penalizing a party who fails to accept a reasonable settlement offer from the other party."

Taing acknowledged cases holding that an offer made by several plaintiffs to a single defendant generally have been considered "too uncertain where it was impossible to tell whether any single plaintiff's recovery at trial exceeded the amount of the rejected offer." Citing Brown v. Nolan, 98 Cal.App.3d 445 (1979), the Taing court also noted that an offer jointly made by multiple defendants "may be sufficient to trigger section 998 penalties where the defendants are jointly and severally liable."

However, the court questioned whether such an offer would be valid in a post-Proposition 51 case where each defendant is only jointly liable for plaintiff's economic damages and severally liable for noneconomic damages in proportion to each defendant's percentage of fault. Indeed, the Taing court reasoned that such an offer is invalid.

Santantonio, the other case cited in Palmer, involved three defendants who jointly made a single offer to three "plaintiffs" and who offered to have judgment taken against "them." As the Sanantonio dissent explained, an offer that is conditioned upon acceptance by other recipients of the offer is invalid. However, the majority held that "since defendants expressly offered $100,000 to each plaintiff, the plaintiffs did not have to agree among themselves as to how the offer would be apportioned."

There was no apportionment of the "joint and several" offer made in Palmer, as there was in Sanantonio. The Palmer court, therefore, held the offer in that case to be an improper, conditional offer.

Although the court determined that Palmer's second statutory offer was invalid, the court, nevertheless, held that the second offer extinguished the first offer for purposes of Section 998. It adopted the bright line rule that "[a] later offer under Section 998 extinguishes any earlier offers, regardless of the validity of the offers."

Palmer, therefore, was unable to seek statutory Section 998 costs under the earlier valid offer. In adopting this rule, the court relied upon the reasoning of several cases to serve the "statutory purpose of encouraging settlement of lawsuits prior to trial."

In Wilson v. Wal-Mart Stores, Inc., 72 Cal. App. 4th 382 (1999), the plaintiff had made two statutory offers, neither of which was accepted by the defendant. Judgment was entered in favor of Robin Wilson for an amount greater than the first offer, but less than the second. Wilson then sought recovery of costs and prejudgment interest from the date of her first statutory offer. Wilson argued that the defendant's rejection of the first statutory offer was not "nullified" by the second offer

The Wilson court rejected the argument in favor of a bright line rule: "The legislative purpose of section 998 is generally better served by a bright line rule in which the parties know that any judgment will be measured against a single valid statutory offer—i.e., the statutory offer most recently rejected—regardless of offers made earlier in the litigation." The court reasoned that any other rule could, in some cases, allow the plaintiff to argue that it had obtained a more favorable judgment than any offer made at any time.

The Palmer plaintiff argued that Wilson should not control unless both offers are valid. This argument appears to be consistent with Wickware v. Tanner, 53 Cal. App. 4th 570 (1977). In Wickware, the court compared the plaintiff's judgment to an earlier statutory offer after a determination that a subsequent offer was invalid.

However, the Palmer court did not adopt the decision and reasoning of Wickware. Instead, the court applied general contract principles to the Section 998 offer, as the California Supreme Court directed courts to do in T.M. Cobb Co. Inc. v. Superior Court, 36 Cal.3d 273 (1984). There, the court stated that "section 998 involves the process of settlement and compromise and since this process is a contractual one, it is appropriate for contract law principles to govern the offer and acceptance process under section 998."

The Cobb court explained that this rule of construction does not apply to the extent that general contract principles conflict with the language or purpose of Section 998, citing Poster v. Southern California Rapid Transit District, 52 Cal.3d 266 (1990).

In applying this rule, the Palmer court refused to distinguish between a valid offer and a defective or invalid subsequent offer. The court stated: "We reject such a proposed rule because the validity of an offer will often be determined only in hindsight and would improperly place the consequences of an invalid, or arguably invalid, offer on the offeree, rather than on the offeror who caused the invalidity. Indeed, were we to adopt Palmer's analysis, a plaintiff could make multiple valid and invalid offers to single or multiple parties, then sit back and decide after the fact which offer is the most advantageous for purposes of enhanced costs and prejudgment interest."

The court, therefore, adopted the "bright line rule" that a later offer under Section 998 extinguishes any earlier offers, regardless of the validity of the offers.

These holdings provide greater clarity for those making and receiving statutory offers. Read together, these cases should further the statutory purposes of Section 998 by encouraging pretrial settlements and punishing those who unreasonably fail to settle.

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