Picture yourself in the following situation. You are the defendant in a civil suit that is rapidly approaching trial. Your discovery is done and, though you hate to admit it, the plaintiff has uncovered some facts that suggest you just might be liable. Confident he will be able to retire off the judgment he'll have against you, the plaintiff no longer entertains your settlement offers. Worse yet, trying the case will require expending more money on attorneys, experts and costs. So even if you win and recover your costs, you are still facing attorney and expert fees of more than $100,000. No matter what the judge or jury decides, it appears you will be the loser.
Situations like this prompted the California Legislature to pass Code of Civil Procedure Section 998. The Section uses the potentially overwhelming cost of litigating a case through trial as both a carrot and a stick to get stubborn parties to settle. A party that brings a reasonable offer to the table only to have it rejected can be rewarded with its costs incurred after making the offer and all of its experts' fees. A party that balks at a reasonable offer to compromise faces the possibility of paying those same costs and fees to the opposing party.
Unfortunately, there are both legal and non-legal obstacles that can foil a defendant's ability to recover costs after making a successful 998 offer.
As written, Section 998 allows defendants to make low offers early in the litigation. By making a 998 offer early on, the defendant will be able to recover a greater amount of costs if the plaintiff does not beat the offer at trial. However, courts see this practice as a strategy of intimidation that undermines Section 998's goal of encouraging fair settlement of cases shortly before trial. In response, courts now require that a 998 offer must be made in "good faith" in order to be valid. The test to determine whether an offer is made in good faith is comprised of two questions. The first is whether the amount of money offered is a reasonable prediction of what the defendant would have to pay after trial. The second is whether the plaintiff had sufficient information to evaluate the reasonableness of the offer at the time it was made. If either question is answered in the negative, the offer is invalid.
The consequence of this analysis is that a plaintiff will usually be able to invalidate early, low 998 offers on the grounds he or she did not have enough information to determine whether the offer was an accurate prediction of what would be received from the defendant at the end of a trial.
If a defendant knows the plaintiff's case is frivolous and wants to make a low 998 offer, his safest strategy to assure the offer will be held valid is to wait until discovery is well underway or over. By then, the plaintiff should have enough facts to question the merit of his case and be able to assess whether the offer is a reasonable prediction of what a jury would award. Unfortunately, the defendant would have already amassed a substantial legal bill, none of which would be collectable. Thus, by adding a good faith requirement, the courts have eroded a defendant's ability to use a 998 offer to settle such litigation early on before costs begin to accumulate.
Moreover, the reasonableness of a Section 998 offer may be challenged by the plaintiff, forcing the defendant to fight expensive post-trial motions. Thus the cost of enforcing a 998 offer can frequently exceed the costs a defendant can recover from a plaintiff.
Adding to the uncertainty is the trial court's ability under Section 998 to limit or deny a defendant's recovery of expert fees. Once a trial court decides a defendant's 998 offer is valid and enforceable, it has little discretion in awarding costs to the defendant. It can, however, limit or deny recovery of expert fees. Thus a defendant must not only litigate the reasonableness of the offer but the reasonableness of the fees it seeks to recover.
Finally, deciding whether to make or enforce a 998 Offer also requires a close look as the financial condition of the other party. By trial, one should have some knowledge of the plaintiff's financial situation and whether he or she can pay a judgment. If the defendant would be one more creditor in a long line, seeking a judgment for costs against the plaintiff would be counter-productive. As an alternative, the right to collect costs can be used to negotiate a waiver of the plaintiff's appeal or post-trial motions.
Realistically, 998 offers are effective and practical in higher-cost litigation between parties with assets susceptible to a judgment. When the carrot and the stick are big enough, the parties will start seriously considering 998 Offers to Compromise.