Does Your 998 Offer to Compromise Include Attorneys’ Fees and Costs?

In California, the “prevailing party” in litigation is generally entitled to recover its costs as a matter of law. See Cal. Code Civ. Proc. § 1032. But under California Code of Civil Procedure section 998, a party may make a so-called “offer to compromise,” which can reverse the parties’ entitlement to costs after the date of the offer, depending on the outcome of the litigation. Cal. Code Civ. Proc. § 998. The potential payoff of a 998 offer to compromise is explained in section 998(c)(1):

If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment or award, the plaintiff shall not recover his or her postoffer costs and shall pay the defendant’s costs from the time of the offer.

Cal. Code Civ. Proc. § 998(c)(1) (emphasis added).

The Basic Requirements for a Valid 998 Offer

Pursuant to section 998(b), a 998 offer must satisfy three principal conditions: (1) it must be contained in a writing; (2) it must state the terms and conditions of the proposed judgment or award; and (3) it must contain a provision allowing the offeree to accept the offer by signing a statement to that effect. Cal. Code Civ. Proc. § 998(b).

Beyond these requirements, a 998 offer must also be certain and capable of valuation to trigger potential section 998 penalties. See Chen v. Interinsurance Exchange of Auto. Club (2008) 164 Cal.App.4th 117, 120, 122 (holding 998 offer was too uncertain because it required release of all claims, which would have purportedly included separate insurance claim for flooding incident that was not part of the litigation). In other words, a main limitation on a 998 offer is that it may not be conditioned on matters that cannot be valued in monetary terms. See Barella v. Exchange Bank (2000) 84 Cal.App.4th 793, 800 (holding 998 offer conditioned on acceptance of confidentiality provision in settlement was too indefinite to incur section 998’s cost-shifting penalties because “the value to a particular plaintiff of public vindication (or, conversely, the negative value of confidentiality) is so highly subjective and elusive that no court can determine its monetary worth”).

Nevertheless, a 998 offer that includes an offer to pay “reasonable attorneys’ fees and costs” is, as a general proposition, not too uncertain to be enforced, because applicable statutes and court rules (i.e., California Code of Civil Procedure section 1033.5(c) and California Rule of Court 3.1702) set forth the procedure for determining the amount awardable. Elite Show Services, Inc. v. Staffpro, Inc. (2004) 119 Cal.App.4th 263, 269 (holding 998 offer that included “reasonable attorneys’ fees and taxable costs” without specifying a dollar amount was not too uncertain and noting that many contracts contain a provision authorizing the prevailing party in litigation arising out of the contract to recover reasonable attorneys’ fees, and these provisions are enforced); Seever v. Copley Press, Inc. (2006) 141 Cal.App.4th 1550, 1560–61 (offer to pay “statutory costs including attorney’s fees, incurred to the date of this offer in the amount determined by the Court, according to proof,” was enforceable upon acceptance).

But What if Your 998 Offer is Silent as to Costs and Attorneys’ Fees?

Similarly, a 998 offer that is silent as to costs generally does not preclude a plaintiff’s right to recover costs on entry of judgment, including attorneys’ fees where allowed by contract, statute, or other law. Rappenecker v. Sea-Land Service, Inc. (1979) 93 Cal.App.3d 256, 263 (“Defendant cites us to no authority which states that in the absence of specific language contained in the contract which provides for costs in the event of suit, the prevailing party cannot recover costs. . . . Plaintiffs are not precluded from recovering their costs because a compromise settlement is construed as a contract.”); Calvo Fisher & Jacob LLP v. Lujan (2015) 234 Cal.App.4th 608, 629 (“[W]hen a section 998 offer is silent as to costs and fees, contractual or statutory attorney fees are recoverable in addition to the amount of the accepted offer.”); Engle v. Copenbarger and Copenbarger (2007) 157 Cal.App.4th 165, 168 (“Where a section 998 offer is silent on costs and fees, the prevailing party is entitled to costs and, if authorized by statute or contract, fees.”) (citation omitted); Cal. Code Civ. Proc. § 1033.5(a)(10) (attorneys’ fees allowed as an item of costs under section 1032 when authorized by contract, statute, or law).

For example, in Engle, the plaintiff sued defendants for eight causes of action related to alleged sexual harassment. Engle, 157 Cal.App.4th at 167. Defendants made a 998 offer of $35,000, stating, in part, that judgment be taken against them “in exchange for a release and discharge of any and all claims, of whatever nature (substantive and procedural) which the plaintiff may have against the defendants.” Id. Plaintiff accepted the 998 offer, and when one of the defendants delivered the settlement check, he attempted to get plaintiff to sign a general release that would have encompassed all of the relief sought in plaintiff’s complaint, including her request for attorneys’ fees. Id. at 167–68. After plaintiff refused to sign the release, defendants attempted to block entry of judgment but failed when the trial judge ruled defendants were not entitled to the release, and entered judgment on the terms of the offer. Id. at 168. Plaintiff moved for her attorneys’ fees and costs as the prevailing party (seeking attorneys’ fees as an item of costs) and the trial judge denied the motion because he found the statement in the 998 offer regarding released claims broad enough to include any claim for fees and because he found it impossible to say from the language of the offer whether plaintiff had prevailed on any of her discrimination claims. Id. On appeal, the court reversed, holding plaintiff was entitled to fees because they were not expressly excluded in the offer to compromise. Id.; see also id. at 169 (“This case falls squarely within the rule that a party who secures a recovery by accepting a section 998 offer is entitled to costs and fees unless they are excluded by the offer.”).

The court explained the rationale of its holding as follows:

The rule is that a section 998 offer to compromise excludes fees only if it says so expressly. It is a bright-line rule: The only question is does the offer address fees or not? We are unaware of any case that suggest a broadly-worded release clause in a section 998 offer can serve to waive a prevailing party’s fee claim, and none are cited by [defendants]. If [defendants] meant the offer to include [plaintiff’s] attorney fees, it was a simple enough matter to spell out that condition. Certainly it was simple enough that the firm had figured it out by the next day, when it tendered a release that included fees.

Id.

Finally, Engle’s bright-line rule has been expanded such that where a 998 offer provides that each party will bear its own costs, the word “costs” refers to all costs described in California Code of Civil Procedure section 1033.5, including attorneys’ fees. Martinez v. Los Angeles County Metropolitan Transp. Authority (2011) 195 Cal.App.4th 1038, 1040 (holding that 998 offer providing that the parties were to bear their own costs included attorneys’ fees within the purview of “costs:” “[u]nless the offer expressly states otherwise, an offer of a monetary compromise under section 998 that excludes ‘costs’ also excludes attorney fees”); see also id. at 1041 (“A party who accepts a monetary offer of compromise under section 998 is the ‘prevailing party’ for purposes of a cost award under section 1032.”).

Conclusion and Takeaway

Parties considering making a 998 offer should carefully consider whether to include attorneys’ fees and costs as an item included within the offer. Failing to consider whether to include attorneys’ fees and costs within a 998 offer could unintentionally create unexpected liability—in some cases even greater than the amount of the 998 offer itself.