Section 998: Defendant Properly Framed 998 Offer, With Result That $152,147.45 In Post-Offer Costs And Attorney’s Fees Affirmed On Appeal

Appellate Court Also Correctly Rejected Defense Request for $55,000 in Expert Witness Fees.

     For all of you who have ever had trouble figuring out how 998 offers work in a fee-shifting context, the next unpublished decision is a good primer on how these offers are applied in real time.

     In Linear Electric, Inc. v. Moorefield Construction, Inc., Case No. D053828 (4^th Dist., Div. 1 Mar. 11, 2010) (unpublished), defendant contractor served a pre-trial Code of Civil Procedure section 998 offer on plaintiff subcontractor for $150,033 inclusive of plaintiff’s reasonable fees and other court costs incurred through the date of the 998 offer. Following a 10-day bench trial, plaintiff recovered damages of $97,211, later supplemented by $51,389.25 in pre-offer reasonable fees and costs (out of a requested $68,000) as determined by the trial court subsequently. Adding the damages of $97,211 and $51,389.25 together, plaintiff came close, but only recovered $148,600.25—below defendant’s 998 offer of $150,033. Based on the fee-shifting feature of 998, the lower court awarded defendant certain post-offer fees and costs of $152,147.45, but denied a defense request for an additional award of about $55,000 in expert witness fees. (Notice that the two awards were just about a wash—attorney’s fees, yet again, became the equalizer.) Both sides appealed.

   

A WASH

     The appellate court first explained the “carrot and stick” nature of 998 offers. The “stick” is that, although a prevailing party in a civil lawsuit is ordinarily entitled to recover its costs, when a party prevailing at trial obtains a judgment less favorable than a pretrial settlement offer submitted by the other party, the prevailing party may not recover its own postoffer costs and, moreover, must pay its opponent’s postoffer costs, potentially including attorney’s fees and costs. (Scott v. Blout, Inc., 20 Cal.4^th 1103, 1116 (1999); Barella v. Exchange Bank, 84 Cal.App.4^th 793, 798 (2000).) The “carrot” is that by awarding costs to the putative settler, the statute provides a financial incentive to make reasonable settlement offers. (Bank of San Pedro v. Superior Court, 3 Cal.4^th 797, 804 (1992).)

     Plaintiff mainly argued that the lower court erred in not using its claimed fees rather than just reasonable fees in determining what pre-offer fees to include and, had it used the higher $68,000 in requested fees, plaintiff actually prevailed. Not so much, said the Court of Appeal in more eloquent reasoning. “We are convinced the interplay between section 998 and Civil Code section 1717 grants the court discretion to determine that the recoverable costs and attorney fees incurred before the settlement offer are limited to the reasonable attorney fees as set by the court.” (Slip Opn., p. 9.) The appellate panel also found a policy basis for its conclusion that reasonable fees should be the yardstick: “If an offeror may not calculate the amount of his or her section 998 offer based on estimation of a reasonable attorney fees component, but is instead left at the caprice of whether the opposing party has incurred excessive attorney fees as of the date of the offer, the offeror is threatened with the loss of section 998’s financial incentive even though meeting the statutory obligation of making an objectively reasonable settlement offer. We are convinced that policy considerations militate in favor of, rather than against, permitting a court to limit the attorney fees incurred prior to the section 998 offer to reasonable attorney fees.” (Slip Opn., p. 10.) [BLOG MUSING—This discussion of 998 raises two interesting discovery questions: Can a putative 998 offeror obtain discovery of pre-offer costs and fees of an offeree? Can a putative offeror also obtain financial discovery of the offeree’s net worth so as to make sure the offer is not token in nature? We have seen no cases on this, but arguments pro and con can certainly be made in this area.]

     That brought the appellate court to defendant’s appeal of the refusal to award it $55,000 in expert witness fees. Although ordinary costs must be awarded to the successful 998 offeror, section 998 does have a discretionary penalty provision applying to defendant’s reasonable expert witness costs “actually incurred and reasonably necessary in either, or both, the preparation of trial of the case by the defendant.” (Bodell Construction Co. v. Trustees of Cal. State University, 62 Cal.App.4^th 1508, 1519-1520 (1998).) Because the trial court could conclude that defendant’s offer was only a “sufficiently nominal offer,” it also had the discretion to determine (as it did) that an award of expert fees would be inappropriate. (See, e.g., Wear v. Calderon, 121 Cal.App.3d 818, 821 (1981).)

     End result was a wash, because the judgment was affirmed and each side ordered to bear their own costs on appeal.