In light of recent California cases interpreting statutory offers to compromise, care must be taken in making, accepting or rejecting such proposals.
April 14, 2000
© Copyright 2000 Daily Journal Corp. Reprinted with Permission
As the complexity of proof has grown, so has the cost of litigating matters through trial. As is often the case, thfe potential recovery in, or cost of defending, a lawsuit does not warrant its continued litigation. Add to these complexities the American Rule regarding the recovery of attorney fees, codified at Code of Civil Procedure Section 1021, and the prospect of continued litigation grows bleaker. Enter California's strong public policy favoring settlement of lawsuits.
By enacting Section 998 of the Code of Civil Procedure, the Legislature has provided litigants a unique opportunity to lessen the economic burden on a party that unreasonably refuses to settle a lawsuit. Section 998 provides a party with the opportunity to shift responsibility for costs and attorney fees (where available), by making a reasonable settlement offer early in the case. The purpose of Section 998 is to encourage both the making and the acceptance of reasonable settlement offers.
If the plaintiff receiving the offer fails to obtain a more favorable award at trial, the defendant is treated as a prevailing party from the time of the offer and will be entitled to its post-offer costs and, in appropriate cases, attorney fees. If a defendant fails to obtain a determination more favorable than a plaintiff's offer, then the plaintiff will be entitled to its post-offer costs.
In both situations, the post-offer costs may include the reasonable sums paid to the party's expert witnesses actually incurred and reasonably necessary in the preparation for trial and at trial. Generally, this item of costs is otherwise not recoverable. Code of Civil Procedure Section 1033.5. Recent amendments to Section 998 have clarified that the recoverable expert fees are those that are "actually incurred and reasonably necessary in either, or both, preparation for trial or arbitration, or during trial or arbitration, of the case." See also Government Code Section 68092.5 (regarding the reasonableness of hourly fees charged).
In what has seemingly become an annual tradition since the enactment of Section 998, the appellate court has refined when and what costs may be recovered following a Section 998 offer to compromise. The cases fall into groups:
The extent of recovery permitted. In Scott Co. of California v. Blount Inc., 20 Cal. 4th 1103 (1999), the defendant made a statutory offer in the amount of $900,000. The plaintiff rejected the offer and made a counterdemand of $1.5 million. Following trial, the plaintiff received an award of damages in the amount of $442.054, substantially less than the defendant's offer. While the plaintiff sought costs and attorney fees pursuant to an attorney-fee provision in the subcontract, the defendant sought recovery of its costs and attorney fees incurred from the time of the settlement offer.
In 20 Cal. 4th 1103 (1999), the defendant made a statutory offer in the amount of $900,000. The plaintiff rejected the offer and made a counterdemand of $1.5 million. Following trial, the plaintiff received an award of damages in the amount of $442.054, substantially less than the defendant's offer. While the plaintiff sought costs and attorney fees pursuant to an attorney-fee provision in the subcontract, the defendant sought recovery of its costs and attorney fees incurred from the time of the settlement offer.
The California Supreme Court affirmed the trial court's determination that under Section 998, the plaintiff was only entitled to its costs and fees incurred prior to the defendant's offer, and the defendant was entitled to recover its post-offer costs and fees. After the awards were offset, the plaintiff was ultimately liable to the defendant for approximately $250,000.
The Scott ruling was acknowledged, but not followed, in Heppler v. J.M. Peters Company Inc., 73 Cal. App. 4th 1265 (1999); the appellate court determined the holding to be inapplicable because the sum of the verdict plus contractual attorney fees exceeded the defendants' statutory offer.
This holding should be relied upon with caution, however. In a situation where attorney fees are available as contract damages, the courts should be unwilling to consider post-offer attorney fees in determining who is the prevailing party. See Bennett v. Brown, 212 Cal.App.2d 909 (1963) and Harvard Investment Co. v. Gap Stores Inc., 156 Cal.App.3d 704 (1984). The appellate court in Harvard held that where the judgment ultimately obtained contains an award of attorney fees, the court must exclude the portion of the fees for services rendered after the time of the offer. The court thus implied that the trial judge must include the fees for services rendered before the offer. The Harvard court based its holding on the policy of discouraging litigation aimed solely at insuring an award greater than the statutory offer.
The importance of the Scott decision is underscored by the appellate court's decision in Premium Commercial Services Corp. v. National Bank of California, 72 Cal. App. 4th 1493 (1999).
In Premium Commercial, the defendant made a statutory offer that inadvertently failed to include the bank's customary offer term holding that each party must bear its own fees and costs. The plaintiff accepted the offer. Upon negotiating the terms of payment, the bank realized its mistake, and moved to set aside the settlement before judgment was entered. The court granted the motion.
The appellate court reversed, relying on Pazderka v. Caballeros Dimas Alang Inc., 62 Cal. App. 4th 658 (1998). The court reiterated that relief is proper only if "a reasonably prudent person under the same or similar circumstances might have made the error." Pazderka. Pazdekra, and now Premium Commercial, have both found that the failure to provide for attorney fees in the offer to compromise was not such a mistake.
Both courts similarly held that evidence of mistake or lack of intent should not provide grounds for unraveling settlements. Allowing an otherwise accepted settlement to be withdrawn would "contravene the policy objectives of Section 998." Premium Commercial. Therefore, the court reconfirmed the conclusion that absent a showing of undue influence or fraud, a valid compromise agreement "is decisive of the rights of the parties thereto and operates as a bar to the reopening of the original controversy."
In Mesa Forest Products Inc. v. St. Paul Mercury Insurance Company, 73 Cal. App. 4th 324 (1999), the defendants made a statutory offer approximately two months before trial. The offer apparently represented an amount equal to the sum of several undisputed, outstanding invoices alleged in the plaintiff's complaint. Although the offer was rejected, the defendants made what they termed a "voluntary" and "unilateral" payment in the amount of the offer.
The matter proceeded to trial and the plaintiff prevailed. The plaintiff then sought costs and attorney fees as permitted by contract. The defendants contended that even if prejudgment costs were included as part of the plaintiff's judgment, the plaintiff's award did not exceed the statutory offer, and the plaintiff would not be entitled to post-offer costs. However, the plaintiff argued that the payment made by the defendants should be included in calculating the amount of the plaintiff's "judgment."
As the court did not find anything within the provisions of Section 998 defining the term "more favorable judgment," the court looked to the statutory purpose. In this regard, the court noted that to effectuate the purpose of the statute, a Section 998 offer must be made in good faith. Good faith requires that the offer of settlement be reasonable under the circumstances. The offer must carry with it some reasonable prospect of acceptance. A party having no expectation that the offer will be accepted will not be allowed to benefit from a no-risk offer made for the sole purpose of later recovering costs.
In reviewing the facts of the particular case, the court found that the defendants had failed to act reasonably not only in making the offer, but throughout the action. Although the amount owed on outstanding invoices was ascertainable, the defendants refused to make payment until the action was filed, and only after 1½ years of litigation. The jury also offset the amount of the defendants' payment in its award. Therefore, the court included the prejudgment payment as part of the plaintiff's recovery, and found that the plaintiff did in fact receive an award greater than the defendants' offer.
A post-offer payment of an item of damages included within a statutory offer should therefore be included in the calculation of the plaintiff's "judgment" for the purpose of determining who is the prevailing party under Section 998. Alternatively, where an amount is not in dispute, that amount should be paid or expressly excluded from a statutory offer.
The burden of reasonableness. In Nelson v. Anderson, 72 Cal. App. 4th 111 (1999), the appellate court considered the trial court's refusal to award costs claimed under Section 998. The action alleged legal malpractice by a law firm relating to a corporation's unsuccessful marketing of skin care products, mostly through infomercials. Initially, the court noted that because the defendant prevailed in the action, its Section 998 offer was presumed reasonable.
In , 72 Cal. App. 4th 111 (1999), the appellate court considered the trial court's refusal to award costs claimed under Section 998. The action alleged legal malpractice by a law firm relating to a corporation's unsuccessful marketing of skin care products, mostly through infomercials. Initially, the court noted that because the defendant prevailed in the action, its Section 998 offer was presumed reasonable.
In its analysis, the court first noted that "[e]ven a modest or 'token' offer may be reasonable if an action is completely lacking in merit." The court next reasoned that the action had no merit, and disagreed with the trial court's assessment "that liability was a close issue," stating that this "does not necessarily mean, however, that the 998 offer was reasonable."
The court articulated a two-pronged analysis which must be conducted to determine the reasonableness of an offer.
First, as a general rule, reasonableness is measured by determining whether the offer represents a reasonable prediction of the amount of money, if any, that the defendant would have to pay the plaintiff following a trial, discounted by an appropriate factor for receipt of money by the plaintiff before trial, all premised upon information that was known or reasonably should have been known to the defendant.
A defendant is not expected to predict the exact amount of his exposure, however. If an experienced attorney or judge, standing in the defendant's shoes, would place the prediction within a range of reasonably possible results, the prediction is reasonable.
Second, if the offer is found reasonable, the question is whether the defendant's information was known or reasonably should have been known to the plaintiff. If the offeree has no reason to know that the offer is reasonable, then the offeree cannot be expected to accept the offer.
Unfortunately, in this case, the appellant failed to show what the plaintiff "knew or should have known regarding her likelihood of recovering damages," because the appellant failed to create a sufficient record in the joint appendices submitted to the court. Accordingly, the court had no basis upon which to hold that the trial court abused its discretion.
Taking a Section 998 offer off the table. The appellate court has recently addressed two important, related issues: when a Section 998 offer may be accepted, and which of successive offers is operative for purposes of awarding costs.
Guzman v. Visalia Community Bank, 71 Cal. App. 4th 1370 (1999) presents an interesting factual and legal wrinkle in Section 998 law. On May 2, 1996, the defendant filed a motion for summary judgment. On May 21, prior to the hearing of the summary judgment motion, the defendant served a Section 998 offer to compromise for $60,000. Over the few days after service of the offer, counsel for the parties conferred about several topics, including the offer. Plaintiff's counsel termed the offer "insulting and demeaning," but a final decision on the offer was not discussed.
On June 11, at 4:30 p.m., counsel learned of the tentative ruling in favor of the defendant on the motion for summary judgment. Shortly thereafter, as required by local rules, plaintiff's counsel faxed defense counsel a letter stating that she would oppose the motion at oral argument. That same evening, at 11:15 p.m., plaintiff's counsel faxed another letter to defense counsel accepting the Section 998 offer. The next day, at the hearing on the motion for summary judgment, the court took testimony concerning the disparagement of the offer, and refused to enforce the settlement agreement. The court then granted summary judgment.
After noting that Section 998 reflects the state's policy of encouraging settlements, and that the settlement process created by Section 998 is essentially contractual, the court reiterated that contractual principles will not control where they conflict with the purposes of Section 998.
For example, the court cited Poster v. Southern Cal. Rapid Transit Dist., 52 Cal.3d 266 (1990), where the court declined to adopt the common-law contract principle that a counteroffer operates as a rejection of the offer, because such a rule would discourage settlements.
After discussing the contract principles applicable to what will constitute an acceptance or rejection of a 998 offer, the court rejected these principles in favor of a "bright line rule." The court held, "in the absence of an unequivocal rejection of a Section 998 offer, the offer may be accepted by the offeree during the statutory period unless the offer has been revoked by the offeror." As the time to accept the defendant's offer had not yet expired, the plaintiff's acceptance was timely, and the court held that the settlement should have been accepted.
In Wilson v. Wal-Mart Stores, Inc., 72 Cal. App. 4th 382 (1999), the appellate court decided which of the plaintiff's two Section 998 offers to compromise was the operative one for purposes of awarding costs. In her personal injury action, the plaintiff first served a Section 998 offer for $150,000, each side to bear its own costs and fees. Wal-Mart did not respond to the offer in the time provided, and it expired. A year and three months later, she served a second offer for $249,000, each side to bear its own costs and fees.
The jury awarded $175,000. The court granted defendant's motion to tax the expert-fees claimed by the plaintiff as costs under Section 998. The appellate court found that Section 998 is silent as to "the effect of a subsequent statutory offer on a prior statutory offer." The court recognized that "there is an evolutionary aspect to lawsuits and the law [that], in fairness, must allow the parties the opportunity to review their respective positions as the lawsuit matures. The litigants should be given a chance to learn the facts that underlie the dispute and consider how the law applies before they are asked to make a decision that, if made incorrectly, could add significantly to their costs of trial."
Adopting a "bright-line" rule in the absence of any statutory prescription, and so as not to reward a plaintiff who maintains a higher settlement demand on the eve of trial, the court held that any subsequent statutory offer extinguishes prior offers for the purposes of awarding costs under Section 998.
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