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CCP Section 998 Offer Strategy: When To Offer

Code of Civil Procedure section 998 states “any party may serve an offer in writing upon any other party to the action to allow judgment to be taken or an award to be entered in accordance with the terms and conditions stated at that time.” Such 998 Offers to Compromise serve as an effective settlement procedure as they potentially impose monetary penalties in the form of litigation costs on the offeree who allows the offer to lapse and fails to obtain a more favorable judgment or award at trial or arbitration. Notably, the offeror may recover its expert witness fees from the offeree who fails to obtain a more favorable judgement or award.
The policy behind Code of Civil Procedure section 998 penalties is to “encourage settlement by providing a strong financial disincentive to a party – whether it be a plaintiff or a defendant – who fails to achieve a better result than that party could have achieved by accepting his or her opponent’s settlement offer.” (Bank of San Pedro v. Superior Court (Goodstein) (1992) 3 Cal.4th 797, 804; Martinez v. Brownco Construction Company, Inc. (2013) 56 Cal.4th 1014, 1019; Mesa Forest Products, Inc. v. St. Paul Mercury Insurance Company (1999) 73 Cal.App.4th 324, 330.) “Section 998 should be interpreted so as to effectuate its purpose of encouraging the settlement of lawsuits before trial. (Citation omitted.) Section 998 achieves its aim by punishing a party who fails to accept a reasonable offer from the other party.” (Elrod v. Oregon Cummins Diesel, Inc. (1987) 195 Cal.App.3d 692, 698-699.)

A 998 Offer can be made any time up to 10 days before commencement of trial or arbitration. The cost penalties imposed by section 998 are calculated from the date of the offer. As such, it may be beneficial to serve a 998 Offer at an early stage of litigation. However, initial discovery should be performed prior to serving a 998 Offer as to allow the parties to perform a reasonably accurate evaluation of the plaintiff’s claims and the potential exposure.

Further, for a 998 Offer to be deemed valid, it must be made in good faith and with a reasonable expectation it will be accepted. (Santantonio v. Westinghouse Broadcasting Co., Inc. (1994) 25 Cal.App.4th 102, 116.) The Court of Appeal held the test for determining the reasonableness of a 998 Offer is as follows:

As a general rule, the reasonableness of a defendant’s offer is measured, first, 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. It goes without saying that a defendant is not expected to predict the exact amount of his exposure. If an experienced attorney or judge, standing in defendant’s shoes, would place the prediction within a range of reasonably possible results, the prediction is reasonable.
(Citation omitted.)

If the offer is found reasonable by the first test, it must then satisfy a second test: whether defendant’s information was known or reasonably should have been known to plaintiff
(Elrod v. Oregon Cummins Diesel, Inc., supra, 195 Cal.App.3d 692, 699, underlining added.) Whether a 998 Offer was “realistically reasonable” is tested by circumstances existing at the time the offer was made. (Fortman v. Hemco, Inc. (1989) 211 Cal.App.3d 241, 264.; Whatley-Miller v. Cooper (2013) 212 Cal.App.4th 1103, 1112.)
A party may challenge the validity of a 998 Offer by arguing there was no reasonable expectation it would be accepted because there was a lack of evidence with which to evaluate the offer at the time the offer was made. In this regard, it is beneficial for the defense to serve the 998 Offer at a stage of the litigation when a significant amount of discovery has been performed, but prior to commencement of costly expert discovery.

Takeaway

Although a 998 Offer can be served at the outset of the action up until 10 days of trial or arbitration, it is in the best interests of the defense to serve the offer when a significant amount of discovery has been performed and prior to commencement of expert discovery.

ABOUT THE AUTHOR: Morgan Van Buren is an associate attorney in Tyson & Mendes’ San Diego office. Mr. Van Buren specializes in general liability, personal injury, and insurance litigation. Contact Craig at 858.263.4107 or mvanburen@tysonmendes.com.