In California, the “prevailing party” in litigation is entitled to recover its costs as a matter of law under California Code of Civil Procedure (“CCC”) §1032. But under CCP §998, a party may make an “offer to compromise,” which can cut-off and even reverse the parties’ right to recover costs after the date of the offer.
How Section 998 Offers Work
Here’s how it works — Defendant serves a Section 998 offer to compromise on Plaintiff. Plaintiff rejects Defendant’s offer. After trial, the jury returns a verdict for Plaintiff but that verdict is less than the amount offered to the Plaintiff by the Defendant in its Section 998 offer.
Plaintiff is clearly the “prevailing party” here because the jury awarded money to the Plaintiff. So Plaintiff would ordinarily be entitled to recover her costs in the litigation under CCP 1032. But in this case Plaintiff rejected Defendant’s Section 998 offer which was better than the jury’s offer. Therefore, Plaintiff only gets her costs up to the date when Defendant made its Section 998 offer. And Defendant gets its costs from the date it made its Section 998 offer. In short, Section 998 has “shifted” costs normally awarded to Plaintiff (as the prevailing party) to the Defendant as a “penalty” for failing to accept Defendant’s offer.
The Policy Behind Section 998
The policy of Section 998 offers is to encourage settlement. This purpose is achieved by providing encouragement to both parties in the form of the cost-shifting “penalty.” As one Court put it, Section 998 operates as “a strong financial disincentive to a party…who fails to achieve a better result than that party could have achieved by accepting his or her opponent’s settlement offer.” Bank of America v. Superior Court, 3 Cal.4th 797, 804 (1993).
In most litigation, however, “costs” are not the largest expense. Those filing fees, jury fees, photocopying fees, expert witness fees, process service fees, and other expenses typically pale in comparison to other major expense of litigation: attorneys’ fees. So in cases that don’t involve an award of attorneys’ fees (either because there’s no contract at issue that awards them or because the plaintiff is not suing on a statute that allows them), Section 998 aren’t all that incentivizing.
Section 998 Offers in Attorneys’ Fees Cases
But, the Section 998 game gets a lot more interesting — and complicated — when attorneys’ fees are in play in the litigation. That’s because CCP §1033.5(10) awards attorneys’ fees as “costs” when they are authorized by “contract, statute, or law.” And when are they so authorized in California? In many employment cases because they involve statutes that specifically award attorneys’ fees. In these cases, therefore, Section 998 offers can be really powerful weapons in a litigator’s arsenal. They must be considered carefully or they can shift costs — which now include significant attorneys’ fees because of the nature of the claims in the case.
California’s Fair Employment and Housing Act (“FEHA”) prohibits discrimination, harassment, and retaliation in the workplace. It is also include a specific statutory section that awards attorneys’ fees to the prevailing party in a FEHA case. Cal. Gov’t Code §12965(b). The goal of awarding attorneys’ fees was to encourage lawyers to take these cases. The legislature clearly recognized that the inability to enforce a right made that worthless. So, FEHA built-in an attorneys’ fees award to give employees more ability to enforce their rights.
Section 998 Offers in FEHA Cases
Plaintiff’s in attorneys’ fees cases have always been wary of Section 998 offers from employers because, if a Plaintiff rejected the offer and did worse at trial, the Plaintiff could end up paying the employer’s legal bills. And that could potentially bankrupt the employee.
Well that risk no longer exists, at least not in FEHA cases that were “non-frivolous” when filed. In Huerta v. Kava Holdings, 29 Cal. App. 5th 74 (2018), the Court held that FEHA’s “prevailing party cost provisions are express exceptions to CCP §1032.” In other words, the employer in a FEHA case could never obtain an award of costs under CCP §1032 because the costs of provisions of FEHA apply instead. Thus, it follows that a court may not “augment” the employer’s award of costs (including attorneys’ fees) under Section 998 because that statute is tied directly to CCP §1032, which does not apply in FEHA cases. Finally, since FEHA limits an employer’s ability to recover attorneys’ fees to only those cases where the employer can prove that the employee’s case was “frivolous,” Section 998 can apply only when the employee’s case is “frivolous.”
Sounds convoluted, right? Here’s the take-away — Section 998 does not apply in non-frivolous FEHA actions and cannot be used to force an employee to pay the employer’s attorneys’ fees.
You can read the opinion in Huerta v. Kava Holdings here.