Los Angeles Lawyer
The Magazine of the Los Angeles County Bar Association

MCLE Article:  Bad Compromises

Although Section 998 is designed to encourage settlements, certain court decisions have actually served to discourage them

By Judith Ilene Bloom

Judith Ilene Bloom is a member of Clark & Trevithick in Los Angeles, where she specializes in commercial and bankruptcy litigation. She represented National Bank of California in Premium Commercial Services Corporation v. National Bank of California but was not involved with drafting, reviewing, or signing the Section 998 offer in that case.

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Cases settle in a variety of ways. Some cases settle after a few telephone calls between opposing counsel. Others need a settlement officer to pound the table and drag a settlement out of the parties. It is not uncommon for cases to settle when a courtroom suddenly becomes available for trial. And in some cases, parties rely on the carrot or the stick (or both) contained in Code of Civil Procedure Section 998 to develop a settlement.

Under Section 998, a party can offer to have judgment entered under specific terms and conditions. If the adverse party accepts, then the case is settled, and judgment is entered with no requirement for court approval. If the adverse party does not accept, goes to trial, and is victorious but wins less than the proposed settlement, the party is not awarded postoffer costs even though the party is the prevailing party--and the party making the offer may recover postoffer costs. The benefits and drawbacks of the Section 998 process are seemingly straightforward, but the risks for both parties are more dangerous than they may appear at first glance. Indeed, Section 998 is not just a way to settle a case. It is a trap for the merely careful.1

Section 998 contains gaps and ambiguities. Courts have exercised considerable discretion regarding some aspects of Section 998 and in doing so have rewritten the statute. They also have declined to act in other areas implicated by the statute. The effect of the judicial interpretations is to discourage settlements, even though Section 998 is designed to encourage them.

The conventional wisdom is that either party has a motive to make a Section 998 offer or demand because of the possibility of shifting postoffer costs. That seems a weak reason in most cases, however, because recoverable costs usually are not economically significant. Unless there are numerous postoffer depositions or extensive use of high-tech computer presentations at trial, it is difficult to incur a big bill for costs. A plaintiff whose offer is rejected and who does better at trial may also, in the court's discretion, recover expert witness fees, which are ordinarily not a recoverable cost.2 But since expert witness fees are not automatically awarded, it is hard to rely on the possibility of recovering those fees when analyzing whether or not to make or accept a settlement offer.

Of course, a settlement by definition leads to savings because it renders unnecessary the expenditure of considerable costs, including attorney's fees. However, this savings is included in the calculation of a reasonable settlement offer and is not unique to the use of a Section 998 procedure. Although Section 998 does not offer a big tasty carrot or a big sharp stick, most attorneys ascribe an unwarranted importance to making or receiving a Section 998 offer, even though the often insignificant benefits of a Section 998 offer can be outweighed by its serious risks.

Unlike most other pleadings or discovery, for example, there is little opportunity to correct an error in a Section 998 offer or acceptance. Code of Civil Procedure Section 473 can be used to ameliorate the devastating effect of a default judgment, and provisions exist to correct erroneous discovery responses,3 but there is no established way to correct an error in a Section 998 offer or acceptance. An offer that is made too early or that is too low may, even if it is an accurate forecast of the result at trial, not give the party making the offer the benefits of Section 998. It may even cause the parties to incur additional costs to litigate the underlying good faith of the offer.

Clearly, numerous opportunities abound for parties using Section 998 to err and lose money. Moreover, courts have increased the risks of making Section 998 offers.

The offering party must calculate an offer that will create an incentive to settle. For a defendant, the offer must be high enough to include all the elements of a plaintiff's expected recovery so that the cost-shifting mechanism will actually work.4 This means that, unlike calculating a settlement offer for a settlement conference or mediation, the calculation must include estimated preoffer costs (including attorney's fees if applicable) and interest.

Section 998 does not refer to its procedures as an offer of settlement but instead as an "offer...to allow judgment to be taken...." The statute does not recognize that a Section 998 settlement is unlike any other settlement, which is a product of compromise and good faith bargaining. A settlement pursuant to Section 998 is instead an offer (if made by the defendant) to be the losing party.5 Thus the courts are not encouraged to use their discretion to enforce the actual bargain the parties intended but may have misstated.

The most dangerous risk to a defendant who wants to settle using Section 998 is failing to prepare an offer that addresses liability for additional costs. Defendants who use the standard form and offer to allow judgment to be entered for a stated sum accept that they are the losing party and liable not only for costs but also for attorney's fees if the complaint is based on a statute or contract with an attorney's fees clause.6 A defendant trying to settle a case arising from a contract with an attorney's fees clause must make sure the offered sum includes all damages, claims, costs, expenses, fees, and interest. Further, the offer should state that "each party shall bear its own costs and attorney fees and expenses," or it should specifically limit attorney's fees or costs.7

Limited Relief for Mistakes

The risk that a defendant offering to settle will find itself liable for the amount of the offer plus costs and attorney's fees is by now so well documented that no one can be ignorant of it. Rappenecker v. Sea-Land Services Inc.8 established the liability of a settling defendant for court costs when the terms of the Section 998 offer were silent as to those costs. Lanyi v. Goldblum9 alerted defendants offering to settle for a stated sum that they will be liable for costs and attorney's fees as well. Ever since Lanyi, which was decided 18 years ago, courts have held, more often than not, that trial courts lacked authority even to consider a motion for relief under Code of Civil Procedure Section 473 from a poorly drafted Section 998 offer that contained inadvertent flaws. Pazderka v. Caballeros Dimas Alang, Inc.10 held that a motion for reconsideration11 as well as a motion for relief12 are beyond the trial court's discretion. The plainly stated rationale of the court was the protection of 998-type settlements13 and the avoidance of "spawn[ing] separate, time-consuming litigation."14

Similarly, in Premium Commercial Services Corporation v. National Bank of California,15 an appellate court reversed the trial court's granting of relief when the Section 998 offer inadvertently omitted the "each party to bear its own costs and attorney fees" limitation customarily used by defense counsel. This was not deemed the type of mistake for which Section 473 provides relief from a Section 998 offer.16

The California Supreme Court, however, has acknowledged that a motion for relief under Section 473 is appropriate when the error in a Section 998 offer or acceptance is a clerical one--the type of error for which Section 473 does provide a remedy. In Zamora v. Clayborn Contracting Group, Inc.,17 the plaintiff sent a Section 998 offer dictated by counsel and then mistyped by an assistant to provide for a judgment "taken against himself and for defendant Clayborn" rather than for a judgment in the plaintiff's favor. (Counsel in Premium had not reviewed the erroneous written offer before serving it and did not realize the error until after the defendant had filed its notice of acceptance.) Plaintiff Zamora then moved to set aside the judgment. The court first dispelled the theory that a 998-based judgment is never reviewable under Section 473, citing Palace Hardware Company v. Smith18 and other cases.19 The court then proceeded to determine if the trial court had properly exercised its discretion by granting relief under Section 473. The standard was whether "'a reasonably prudent person under the same or similar circumstances' might have made the same error.'"20 The typographical error, substituting "against" for "in favor of," was the kind of error anyone could make, the court reasoned, which was distinguishable from the errors in Pazderka and Premium. The supreme court, however, carefully avoided stating that Pazderka or Premium had been properly decided.21 Further, the court emphasized that the policy favoring settlements is not impaired by a rule that a settlement on terms not authorized by the parties is not a settlement that public policy requires to be enforced.22

Of course, these cases do not completely answer the question of how to resolve errors in a Section 998 offer or acceptance. An error that easily meets anyone's definition of a typo can probably be relieved under Section 473. This might include mistakenly adding a digit to the actual amount to be paid in settlement of a case--for example, changing $67,150 to an unintended $671,150. What if the address of the recipient of the offer or the acceptance is mistyped, and thus the offer or acceptance is not timely received? What if the offer or acceptance is miscalendared or misfiled? What if a word is left out of an offer so that it reads "$300,000 against defendant and attorney fees and costs," with the word "no" inadvertently omitted before the words "attorney fees and costs"? What if the entire phrase "no attorney fees and costs" is omitted? What is the distinction between a clerical typo and an attorney's failure to review documents before they are served? The Zamora court hinted at this issue but did not resolve it, and the similar circumstances of Premium and Zamora led to dramatically different results.

The effect of ordinary contract law also is still unclear. The cases dutifully recite the principle that the rules of contract interpretation apply to a Section 998 offer.23 However, there is no opportunity for the court to use such rules.24 The rules of contract interpretation will be applied only if they "neither conflict with the statute nor defeat its purpose."25 In Zamora, the court gave a clear signal that evidence regarding the intent of the parties, as known to each other, remains relevant. The court described the evidence that showed that Clayborn knew the Section 998 offer was a mistake but tried to take unfair advantage of it.26 Thus there was sufficient evidence of mistake.27

Even with the consolation provided by this opinion, there remains a risk that the error at issue will turn out to be the type of error for which Section 473 relief is unavailable. That will only be determined after a timely motion is made and decided. In determining how it will rule on a motion for Section 473 relief, a court necessarily will have to consider the subjective intent of the parties--including, perhaps, their subjective analysis of the settlement value of the case--and other inadmissible settlement communications.28

Since there is no reason to be confident that Section 473 will be available to grant relief for ministerial errors, the best course is to take every possible precaution to prevent them. Counsel should read a Section 998 offer or acceptance before it is served, and then read it again. Next, counsel should have someone else in the office read it--and then have another someone else read it! Finally, a defendant should try to frame a Section 998 settlement offer as an offer to accept a dismissal.29 This prevents the imposition of costs and attorney's fees since the plaintiff will not be the prevailing party.30

The Good Faith Requirement

Before awarding discretionary costs31 to a party entitled to request them under Section 998, the court has authority to determine whether or not a Section 998 offer was made in good faith, although that language appears nowhere in the statute. This is an area in which the courts have rewritten the statute in a way that can only discourage settlements, especially early settlements.32

The good faith requirement was first discussed in 1980 in Pineda v. Los Angeles Turf Club, Inc.,33 in which the family of a jockey killed in a race sued the race track and the manufacturer of the helmet he wore. A month before trial the manufacturer offered to settle for $2,500 pursuant to Section 998. The offer was rejected, and at trial judgment was entered in favor of the manufacturer. The victorious defendant filed a motion for expert witness fees, but the motion was denied. On appeal the court held that the trial court "had ample reason" to conclude that the offer was not reasonable, because the defendant "had no expectation that its offer would be accepted."34 Based on that ground and nothing else, the appellate court reasoned "that the sole purpose of the offer was to make Defendant eligible for the recovery of large expert witness fees at no real risk."35 The court declined to find that the offer was not in good faith but did conclude it was not "realistic" and affirmed the denial of expert witness fees.36 The court did not explain its basis for determining that an offer must meet a test of good faith or "realism" or that the party offering to settle had to take a demonstrable risk by doing so.

The following year, however, in Wear v. Calderon,37 the court of appeal formally and specifically imposed a good faith requirement for Section 998 offers--a requirement that the legislature had not included in the statute. In Wear, which arose from a car accident, one defendant offered to settle for $1 pursuant to Section 998, but the plaintiff rejected the offer. The plaintiff recovered from the other defendants but was awarded nothing against the defendant who had made the Section 998 offer. The defendant sought and received an award of her expert witness fees, and the appellate court reversed the award. The court stated:

[A] good faith requirement must be read into section 998. In other words, the pretrial offer of settlement required under section 998 must be realistically reasonable under the circumstances of the particular case. Normally, therefore, a token or nominal offer will not satisfy this good faith requirement, particularly where, as here, there is no cross-complaint.38

After making its pronouncement, the court substituted its judgment for the trial court's and concluded that there was no good faith accompanying the settlement offer. The language and holding in Wear are what later cases have cited and recited to discuss the good faith requirement.39 Post-Wear appellate courts, however, have not shown as much willingness to interfere with a good faith determination by a lower court.

In Culbertson v. R. D. Werner Co., Inc.,40 the court made obeisance to Wear and Pineda but explained why a plaintiff who rejected a low settlement offer and lost at trial should not be able to complain about paying costs, including expert witness fees:

Reduced to its simplest terms, the essence of plaintiff's argument is that the filing of a complaint for damages, no matter how unmeritorious the claim might be, imposes upon a defendant, no matter how meritorious its defense may be, an obligation to reward the plaintiff by making an offer of settlement which would liquidate any outstanding liens, pay plaintiff's attorney's fees and costs and yield some significant sum to the plaintiff, or lose the benefits of section 998. That, of course, is diametrically opposed to the clear language and intent of section 998. Such a strained interpretation of the statute and the cases would result in an increase of spurious lawsuits and a reduction in the number of settlements.41

How true. The only effect of this grafted good faith element is to burden the trial court with a challenge to an award of expert witness fees (and attorney's fees for cases filed in Riverside County) or interest in a personal injury case, when the whole objective of the Section 998 procedure is to settle cases and avoid litigation.

The court explained that, for defendants faced with what they perceive to be a meritless action, making a low offer is consistent with the goals of Section 998. When the offer is rejected, hiring experts to help with the defense of the case also is consistent with the statute.42

In Elrod v. Oregon Cummins Diesel, Inc.,43 a case brought by the driver of a logging truck who became a paraplegic after an accident, the court disallowed requested expert witness fees for one defendant. This defendant had made an offer of $15,001 before the other two defendants settled. The two defendants paid $500,000 that would be offset from any jury verdict against the remaining defendant. Workers' compensation awards were also to be deducted from any verdict. The damages awarded were less than the $500,000 offset, and the plaintiff was awarded nothing against the defendant who had offered $15,001 to settle. The court established a two-part test to determine the good faith of a Section 998 offer. First, the reasonableness of the offer "is 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, discounted by an appropriate factor for receipt of money by plaintiff before trial, all premised upon information that was known or reasonably should have been known to the defendant."44 The court noted that the test does not require an accurate prediction; instead, the prediction of an experienced attorney or judge will be sufficient evidence to determine reasonableness.45

Once the offer is deemed to be reasonable under the first part of the test, then the second part of the test is implicated. This part questions whether the information the defendant had was known, or reasonably should have been known, by the plaintiff. The answer shows whether the offeree had the information necessary to gauge the reasonableness of the offer.46

This two-part test suggests that a defendant intending to make an early or low offer should include with the offer a written explanation of the basis for the offer. This may require the defendant to disclose explosive evidence not yet known to the plaintiff.47 Of course, if this evidence is disclosed but the plaintiff does not appreciate its impact, the objective standard enunciated in Elrod has still been met. In Colbaugh v. Hartline,48 the series of demand letters written by the successful defendant were admitted to show that the plaintiff knew why the defendant believed there was no liability, and thus the plaintiff should not have been surprised by the nonsuit. The trial court however, failed to follow the two-part test and did not decide to award attorney's fees under Code of Civil Procedure Section 1021.1.49 The case was remanded for the trial court to exercise its discretion--presumably to award the attorney's fees--under the two-part test.

In Nelson v. Anderson,50 a principal of a corporation formed to market products through an infomercial sued the other principal and the attorneys for the enterprise. The law firm made a Section 998 offer of $5,000, with each party to bear its own costs and attorney's fees. The plaintiff rejected the offer and, at trial, the law firm was awarded a nonsuit. The trial court taxed all costs claimed by the law firm, reasoning that the offer was a "token" and thus not reasonable or propounded in good faith. This case applied the good faith test not just to expert witness fees or attorney's fees--with both available only in the court's discretion--but to all costs as well. Without explaining how or under what theory the court had discretion to refuse to award the postoffer costs specified in Section 998, the court simply applied the two-part test of Elrod. The court found that the law firm had met the first part of the test because $5,000 was within the range of expected recovery due to defects in the pleading, but the court also found that there was no evidence regarding the second part of the test, and thus the law firm had failed to meet its burden.

Incorrect Analysis

The reason this good faith analysis is a mistake is that it forces the court to examine the subjective motives, knowledge, and intent of parties who make or reject settlement offers. Courts ordinarily eschew such examinations, for good reason. In examining the good faith or realism of a low and unsuccessful settlement offer, the court permits the parties to introduce statements made by settlement judges,51 notwithstanding the lack of competence of the judges to so testify.52 Apparently it is now permissible to introduce these otherwise inadmissible statements through the hearsay declarations of counsel. Of course, in settlement conferences, judges often give their opinions to one side or the other and out of the hearing of the adverse party. Permitting reference to seemingly inadmissible statements is a bad idea. The statements by a settlement officer may be an exaggeration designed to encourage a settlement and not the actual analysis of the value of the case.

The assumption that an early53 or low offer is unrealistic or unfair and that the adverse party should not be obligated to consider it and provide a thoughtful response makes no sense. A defendant who believes that the case against it is without merit, behaves in a manner consistent with that belief, and makes an immediate low offer to the plaintiff should, if proven right at the end of trial, be accorded the same benefits as if the offer had been made at a later point in the process. The purpose of the statute is to encourage settlements, not just to encourage predictable settlements.

A party who receives an early and low offer should not be excused from giving it every consideration.54 A law designed to encourage settlements should recognize this and not give parties a loophole through which to reject an early or low offer. No public policy is served by forcing the court to inquire into the reasons for the offer or the rejection.

The legislature states that it wants to encourage settlements, and the courts proclaim the same goal. Section 998 should be interpreted and applied to promote settlements and not, by increasing risks and costs, to discourage them. To accomplish this, the legislature should:

1) Disapprove Pazderka and Premium.

2) Eliminate the good faith requirement.

3) Endorse Zamora and ease access to Section 473 motions for relief for clerical or ministerial errors in offers or acceptances.

Until the legislature takes these actions, attorneys making or responding to Section 998 offers should remember that even clerical errors may not be relieved by a timely motion and that a low-ball offer may be construed as a bad faith effort rather than a true attempt to settle the case. Section 998 remains a trap that belies its purpose.

Endnotes:

1 This article is not a blueprint of all the requirements for a §998 offer. For a thorough discussion of how to make a successful offer or demand, see Frank E. Marchetti & Eric A. Schneider, Making Effective Use of Section 998 Offers to Compromise, Los Angeles Lawyer, Oct. 2002, at 22.
2 Code Civ. Proc. §998(c)(1). See Code Civ. Proc. §1033.5(b)(1) (barring recovery of expert witness fees in other circumstances).
3 See, e.g., Code Civ. Proc. §§2031(m)(amending interrogatory answers), 2033(m) (amending answers to requests for admissions).
4 See text, infra. The party formulating an offer should try to anticipate what will be added to a basic recovery in order to determine what will truly induce a party to settle.
5 This is not unlike the provisions of Code of Civil Procedure §1025 permitting a defendant to deposit with the court the amount claimed by the plaintiff in order to avoid liability for costs. Taking this step is an admission of liability.
6 Lanyi v. Goldblum, 177 Cal. App. 3d 256 (1979).
7 See Elite Show Servs., Inc. v. Staffpro, Inc., 119 Cal. App. 4th 263 (2004).
8 Rappenecker v. Sea-Land Servs. Inc., 93 Cal. App. 3d 256 (1979).
9 Lanyi, 177 Cal. App. 3d 181. In this case, the litigation arose from a written agreement for the purchase of real property, and the agreement contained a broad attorney's fees clause. The court distinguished a §998 judgment from a dismissal-and attorney's fees are not available in the event of a dismissal. See International Indus., Inc. v. Olen, 21 Cal. 3d 218 (1978).
10 Pazderka v. Caballeros Dimas Alang, Inc., 62 Cal. App. 4th 658 (1998).
11 Code Civ. Proc. §1008.
12 Code Civ. Proc. §437.
13 Pazderka, 62 Cal. App. 4th at 672.
14 Id.
15 Premium Commercial Servs. Corp. v. National Bank of Cal., 72 Cal. App. 4th 1493 (1999).
16 Id. at 1496. The defendant who made the settlement offer later lost the jury verdict but won its motion for judgment notwithstanding the verdict and its motion for a new trial.
17 Zamora v. Clayborn Contracting Group, Inc., 28 Cal. 4th 249 (2002).
18 Palace Hardware Co. v. Smith, 134 Cal. 381 (1901).
19 See, e.g., Basinger v. Rogers & Wells, 220 Cal. App. 3d 16 (1990).
20 Zamora, 28 Cal. 4th at 258 (quoting Bettencourt v. Los Rios Community Coll. Dist., 42 Cal. 3d 270, 276 (1986) (italics added by Zamora court)).
21 Id. at 260 n.5.
22 Id. at 260.
23 Roden v. Bergen Brunswig Corp., 107 Cal. App. 4th 620, 624 (2003); Lanyi v. Goldblum, 177 Cal. App. 3d 181, 184 (1986).
24 Pazderka v. Caballeros Dimas Alang, Inc., 62 Cal. App. 4th 658, 667 (1998).
25 T. M. Cobb Co. v. Superior Court, 36 Cal. 3d 273, 280 (1984), quoted in Pazderka, 62 Cal. App. 4th at 671.
26 This evidence showed that 1) Zamora's complaint sought damages of over $140,000, 2) Zamora never offered to settle for less than $150,000, and the §998 offer was for almost the same amount, and 3) Clayborn knew Zamora was facing financial pressure.
27 Zamora, 28 Cal. 4th at 260.
28 Evid. Code §1152.
29 Goodstein v. Bank of San Pedro, 27 Cal. App. 4th 899, 908 (1994).
30 Civ. Code §1717(b)(2). See Santisas v. Goodin, 17 Cal. 4th 599 (1998) (no attorney's fees awarded upon dismissal); Jue v. Palton, 35 Cal. App. 4th 456 (1995) (same).
31 These costs include expert witness fees under Code of Civil Procedure §998(c)(1) and (d), interest awarded under Civil Code §3291, and costs ordinarily in the court's discretion, pursuant to Code of Civil Procedure §1033.5(a)(11), (c)(4). While §1033.5(c)(2) and (3) gives the court discretion regarding the amount of certain costs and their reasonable necessity, these elements appear to have nothing to do with the good faith requirement of the settlement offer-and the discretion provided at (c)(2) and (3) should not give the unsuccessful party that rejected a settlement another argument about the allocation of costs awarded under §1033.5(a).
32 When the legislature reenacted §998, courts presumed that it adopted and accepted the good faith requirement imposed by the court of appeal in Wear v. Calderon, 121 Cal. App. 3d 818 (1981). Elrod v. Oregon Cummins Diesel, Inc., 195 Cal. App. 3d 692, 696 (1987).
33 Pineda v. Los Angeles Turf Club, Inc., 112 Cal. App. 3d 53 (1980).
34 Id. at 63.
35 Id.
36 It does not appear from the language of the appellate court opinion that the trial court believed that the sole reason for the manufacturer's offer was to shift expert witness fees. Only the appellate court reached that conclusion regarding the offer.
37 Wear v. Calderon, 121 Cal. App. 3d 818 (1981).
38 Id. at 821.
39 Jones v. Dumrichob, 63 Cal. App. 4th 1258, 1262 (1998); Culbertson v. R.D. Werner Co., Inc., 190 Cal. App. 3d 704, 708-10 (1987).
40 Culbertson, 190 Cal. App. 3d 704.
41 Id. at 709-10.
42 Id. at 710-11. See Jones, 63 Cal. App. 4th 1258 (citing Wear and Pineda but distinguishing them to find that an offer by defendant to waive costs was made in good faith and had economic value).
43 Elrod v. Oregon Cummins Diesel, Inc., 195 Cal. App. 3d 692 (1987).
44 Id. at 699 (footnote omitted) (emphasis in original).
45 Id. (citing Abbott Ford, Inc. v. Superior Court, 43 Cal. 3d 858, 874 (1987)).
46 Id. at 699.
47 Id. at 699-700.
48 Colbaugh v. Hartline, 29 Cal. App. 4th 1516 (1994).
49 The attorney's fees provision was previously available in San Bernardino County as well as in Riverside County.
50 Nelson v. Anderson, 72 Cal. App. 4th 111 (1999).
51 Goodstein v. Bank of San Pedro, 27 Cal. App. 4th 899, 908 (1994) (statements of settlement judge introduced by declarations of counsel).
52 Evid. Code §703.5.
53 This is a tactic used by those filing frivolous lawsuits under Bus. & Prof. Code §17200.
54 See Bus. & Prof. Code §6103.5 (permitting discovery of counsel's transmittal of a written settlement offer to his or her client).