by Dennis Law

If one supposes that in today’s world almost all civil controversies will involve mediation, and that a Code of Civil Procedure Section 998 (“998”) offer may be at least considered in most civil controversies, then one would naturally expect that mediations and 998 offers will most likely cross paths in some fashion or another during the course of a typical lawsuit.[1]  But how, if at all, do mediations and 998 offers relate to one another?

Mediations and 998 offers share the common goal of promoting settlements, but the similarity pretty much ends there.

Although the word “offer” is used in connection with 998, it is not the kind of settlement offer that can or will lead to settlement negotiation.  Rather, 998 offers promote settlements by giving the offeror an advantage at trial should the offeree fail to beat the offer.  In effect, Section 998 rewards one party for making an offer and punishes the other party for failing to accept the offer.  As a result, 998 offers are often considered more as a trial strategy than a settlement tool, largely because 998 offers do not encourage a negotiation process that is conducive to problem solving.

Mediations, on the other hand, are heavily focused on the settlement process.  The process encourages the parties to discuss and consider a wide range of settlement arrangements.   The negotiation process is highly refined.  It involves a neutral mediator who guides the parties in their search of common ground. But mediations provide no penalty for unreasonable settlement positions.  A party can reject an abundantly reasonable settlement offer at a mediation and then lose at trial without any penalty.  Correspondingly, a party who makes a generous offer at mediation will not be rewarded for doing so should he or she succeed at trial.  Failed mediations play no role at trial.

In spite of these differences, mediations and 998 offers are both valuable tools that should be considered in developing case strategy.  Sometimes it is best to make a 998 offer prior to the mediation; allowing sufficient time, i.e., thirty days, for the offeree to accept the offer or have it deemed rejected.  In the right case, this can enhance the offeror’s potential recovery at trial and hence enhance his or her position at mediation.  In other cases, it is best to hold off on making a 998 offer until after mediation.  Doing so avoids the potential problem of the 998 offer being inconsistent with the position taken in the mediation, and it allows the offeror to take into account the settlement positions articulated by the parties at the mediation when formulating the 998 offer.  In other words, a pre-mediation 998 offer allows the offeror to take advantage of 998 offer penalties when negotiating at mediation.  A post-mediation 998 offer maximizes the negotiation process at mediation. And a post-mediation 998 offer is used primarily as a trial strategy.  Of course, in some cases there is no substantial benefit for either party to make a 998 offer.  In those cases, settlement strategy will be focused strictly on mediation.

There is one other scenario to mention and that is making a pre-mediation 998 offer less than thirty days before the mediation so the offeree can accept it during or after the mediation. Such a strategy would rarely be justified because the 998 penalties would not have matured and the open offer would impede the negotiation process.

There are three forms of penalties/benefits that 998 offers can potentially provide.  First is the recovery of court costs by a defendant who suffers a partial loss.  These offers are typically made by defendants, and they are especially useful in cases where attorneys’ fees are included in recoverable costs.  Second is a plaintiff’s ability to recover pre-judgment interest under Code of Civil Procedure Section 3291 in a personal injury case.  Plaintiffs will consider such an offer where there is the potential for a large award and a lengthy delay in getting to trial.  Third is the potential recovery of expert witness fees by a plaintiff and defendant; this can be a compelling factor when expert witness fees are expected to be very high.

998 penalties usually accrue from the date of the offer.  This factor motivates parties to make 998 offers early.  However, as mentioned above, in order to trigger 998 penalties/benefits, the offeror has to beat the 998 offer at trial.  Determining the amount of the 998 offer is an educated guess. It is especially difficult when the case is still being developed.

It is evident that 998 offers require close examination because the development of such offers involves difficult and complex issues, but there are some rules of thumb to be followed.

One, in cases where there is the potential for a significant 998 penalty/benefit, the offeror should make the offer early in the case, prior to mediation, so long as sufficient information is available to develop an educated guess as to the amount of the offer.  Two, if it is not feasible to make an early offer, or if the penalty/benefit is not substantial, then wait to make the 998 offer until after the mediation.  On balance, it is better to make a pre-mediation 998 offer versus a post-mediation 998 offer, so long as doing so does not unreasonably interfere with the negotiating position that the offeror wants to adopt at the mediation.  Following is an example:

Assume that a plaintiff has a $500,000 breach of contract claim that will allow him or her to recover attorneys’ fees if he or she is the prevailing party.  The plaintiff will be the prevailing party even if he or she obtains a small recovery such as $5,000.  Such an award would essentially be a victory to the defendant, but the cost and attorney fee award could be very substantial, say $100,000.  Had the defendant made an early 998 offer of $10,000, the plaintiff would no longer be treated as the prevailing party because the plaintiff would have failed to beat the 998 offer.  The plaintiff will only be allowed to recover his or her fees and costs incurred before the 998 offer, and the defendant will be allowed to recover his or her fees and costs incurred after the 998 offer.  Assuming the defendant’s fees and costs are also $100,000, then the defendant will end up recovering fees and costs from the plaintiff even though the plaintiff technically won. See, for example, Biren v. Equality Emergency Medical Group (2002) 102 CA4th 125, 140. This really changes the outcome of the trial, but you can see how it would also change the parties’ position at mediation.  Had the 998 offer been made prior to the mediation, then the defendant can point out that the plaintiff will have to beat the $10,000 offer at trial in order to recover his or her fees and costs.  The plaintiff will have been more at a disadvantage.  Had the defendant not made such an offer prior to the mediation, he or she would have had to convince the plaintiff that he or she had a chance of complete victory in order to avoid liability for the plaintiff’s fees.

The issues in considering a 998 offer as part of a mediation strategy are wide ranging, complex and nuanced.  So much so that litigants can be overwhelmed, leading to paralysis.  But the wiser course of action is to take on the challenge.  Begin your analysis early in the case and revisit it appropriately as the case develops.  Above all else, litigants should not simply avoid these issues, because doing so leaves them vulnerable and unprepared.

[1]   California Code of Civil Procedure Section 998 provides for certain offers to compromise and the consequences to a litigant who fails to accept such an offer.  Generally, a party who fails to accept a valid 998 offer is required to pay additional amounts (such as interest, costs and fees) if he or she fails to do better than the offer at the time of trial.  These offers are generally referred to as “998 Offers”.