Pitfalls to Avoid When Making or Accepting Section 998 Settlement Offers

So you find yourself in the middle of what seems to be a never-ending lawsuit, wondering what might be the best way to extricate yourself, save some money, and even get the other party to pay some of your costs.  There are various ways any litigation might end:  with the judge ruling that the plaintiff has no claim (demurrer), with the judge ruling that the pleadings disclose that a party is entitled to judgment as a matter of law (judgment on the pleadings or summary judgment), with the parties settling, or with the parties going to trial and obtaining a verdict.  If the first options are not viable, and you are seeking to avoid a trial, you can encourage settlement—and possibly recover some costs—by making a “998 Offer” to the other party.

A 998 Offer is named after the California code section that defines it.  Code of Civil Procedure section 998 permits cost-shifting from one party to its opponent if (1) the party makes a 998 Settlement Offer, (2) the opponent rejects the offer or it expires, and (3) the opponent recovers less at trial than the 998 Settlement Offer made by the party.   Section 998 allows a losing party to recoup attorneys’ fees and costs incurred after the party made the 998 Offer, if the offer was adequate and complied with statutory requirements and case law.

Although this process seems to be a straightforward path to resolution of a dispute—and the possible recovery of at least some fees and costs—there are several legal pitfalls lurking for the unwary litigant who decides to make a 998 offer.  As a recent appellate court opinion pointed out, “As most experienced trial lawyers and judges appreciate, the terms of a settlement agreement can be the subject of much negotiation. And the terms can be problematical.”  Sanford v. Rasnick (2016) _ Cal.App.4th _, 2016 WL 2585250, at 9 (C.A. 1st, April 25, 2016.)   For example, last year an appellate court held invalid a section 998 offer that contained a waiver of all claims “known and unknown.”  McKenzie v. Ford Motor Company (2015) 238 Cal.App.4th 695, 706.   Requiring a waiver of claims that have not yet accrued will also invalidate a section 998 offer.   McKenzie.  Similarly, the courts will find invalid a section 998 offer that requires the recipient waive claims that are not the subject of the current lawsuit.  Valentino v. Ellion Sav-On Gas, Inc. (1988) 201 Cal.App.3d 692, 697–698.

In the Sanford case, the Court held that, because the terms of a 998 offer must be fully contained in the offer itself and the offer must be unconditional, requiring a separate settlement agreement makes the 998 offer invalid. The Rasnicks’ 998 Offer required Sanford to enter into a settlement agreement and general release, but the terms of the settlement agreement and general release were not contained in that 998 Offer. The 998 Offer was, therefore, invalid, and the Rasnicks were not entitled to recoup fees and costs that they otherwise would have been able to recoup had their 998 Offer not contained conditions.

Despite these rulings, 998 offers often start out by offering a sum of money, and go on to state that the offer is in exchange for execution of (1) a settlement agreement, and/or (2) a “section 1542 release of [known and unknown] claims.”  Therefore, in addition to deciding whether you want to accept or ignore any 998 Offer based on the sum of money offered, you will also want to determine whether it is valid and enforceable should your opponent prevail at trial.

Blog by: Kathryn Turner-Arsenault, San Diego, Associate