Imagine you bring a personal injury claim seeking damages of $950,000. At the end of trial, the jury finds the defendant negligent and awards you $375,000. Although you prevailed at trial, the court orders you to pay a portion of the defendant’s litigation costs. Accordingly, you lose your entire award and are required to provide an additional payment of $18,000 to the defendant. If you are confused by this hypothetical situation, you are not alone. This seemingly backwards scenario is made possible by California Code of Civil Procedure section 998 (“section 998”),1See Cal. Civ. Proc. Code § 998(e) (West 2024). Under section 998, if a plaintiff rejects a defendant’s 998 offer and subsequently fails to obtain a more favorable judgment or award, costs from the time of the offer are to be deducted from plaintiff’s award. If the costs exceed damages awarded to the plaintiff, “the net amount shall be awarded to the defendant and judgment or award shall be entered accordingly.” Id. This hypothetical operates under two major assumptions. First, that the defendant, at some point, made a valid 998 offer to the plaintiff that was greater than $375,000, which the plaintiff subsequently rejected. And second, that the defendant’s recoverable costs pursuant to section 998(c)(1) were $393,000. a cost-shifting statute that has perplexed California litigators for decades.
When it comes to the determination of which party is responsible for paying legal fees in a litigation, there are two prominent models: the “English rule” and the “American rule.”2Albert Yoon & Tom Baker, Offer-of-Judgment Rules and Civil Litigation: An Empirical Study of Automobile Insurance Litigation in the East, 59 Vand. L. Rev. 155, 160–61 (2006). The majority of the Western world implements the English rule,3Christopher Hodges, Stefan Vogenauer & Magdalena Tulibacka, Costs and Funding of Civil Litigation: A Comparative Study 19 (Univ. of Oxford Legal Rsch. Paper Series, Working Paper No. 55, 2009). which embodies a loser-pays system in which litigation costs, including attorney’s fees, are shifted to the losing party.4Id. Conversely, in America, absent bad faith or a statutory or contractual provision to the contrary, the general rule is no fee-shifting.5Id. at 23. In other words, unless a lawsuit involves bad faith, a contractual dispute and the contract at issue contains a fee-shifting provision, or a statute that provides for recovery of costs, each party bears their own litigation costs, irrespective of the outcome.6Id.
Each model has its pros and cons. On the one hand, a loser-pays system—the English rule—discourages nuisance litigation and promotes settlement, but may subsequently reduce access to litigation,7Thomas D. Rowe, Jr., The Legal Theory of Attorney Fee Shifting: A Critical Overview, 1982 Duke L.J. 651, 653 (1982); Jaime Leigh Loos, The Effect of a Loser-Pays Rule on the Decisions of an American Litigant, 7 Major Themes Econs., 31, 43– 44 (2005). even for those with meritorious claims.8Yoon & Baker, supra note 2, at 161. Conversely, a system that does not generally allow for fee-shifting—the American rule—enables individuals to have their fair day in court, avoiding the English rule’s “potential chilling effect on meritorious litigation.”9Id. The American rule, however, may subsequently decrease the likelihood of settlement and open the door for increased nuisance litigation, which may overwhelm court systems.10John F. Vargo, The American Rule on Attorney Fee Allocation: The Injured Person’s Access to Justice, 42 Am. U. L. Rev. 1567, 1634–35 (1993).
Because the American rule may lack distinct incentives for parties to settle or to refrain from bringing frivolous claims that create a backlog in courts, the American justice system has devices to encourage parties to settle their claims and resolve disputes as quickly and efficiently as possible. One such device includes offer-of-judgment rules: a type of fee-shifting statute that provides an exception to the general rule against fee-shifting. Offer-of-judgment rules are offer-based fee-shifting rules that allocate costs according to pretrial settlement offers.11Kathryn E. Spier, Pretrial Bargaining and the Design of Fee-Shifting Rules, 25 RAND J. Econ. 197, 197 (1994). Thus, under an offer-of-judgment rule, if a litigant rejects a pretrial settlement offer and subsequently receives a less favorable judgement at trial, they must compensate the offeror for certain post-offer costs.
Section 998 is California’s offer-of-judgment rule. Section 998 is a cost-shifting statute designed to encourage settlement of litigation, without the need for a trial, by shifting certain costs to a party that rejected a 998 “offer to compromise” from their opponent and subsequently failed to obtain a better result at trial.12See Cal. Civ. Proc. Code § 998(c)(1), (d), (e) (West 2024). The California legislature and courts have made clear that the fundamental policy behind section 998 is to encourage the settlement of lawsuits prior to trial. However, statutory and case law analyses may indicate that 998’s policy also encompasses promoting settlement without unduly limiting access to courts.
The effectiveness of section 998 remains an ongoing debate among civil litigators. Application of section 998 is exceedingly difficult to understand and there is concern that it may not offer a high enough incentive to settle since the statute allows only a limited amount of recoverable costs. On the other hand, even if section 998 does not result in settlement as frequently as anticipated, it is a beneficial tool that provides a financial incentive for parties to settle that might not otherwise exist. As the debate over section 998’s efficacy continues, the California legislature and courts will likely be increasingly confronted with proposed amendments and judicial disputes over its applicability. Accordingly, in the future, these state actors may wish to consider how section 998 may be a powerful vehicle to relieve overburdened courts without overly deterring claimants from protecting their rights or interests.
This Note considers the extent to which section 998 can genuinely be considered a compromise between the English and American rules for fee-shifting, rather than just a tool to promote settlement. In particular, this Note asks whether section 998 seeks to promote settlement without unduly limiting access to courts, and if so, to what extent.. Although section 998 may be used in trial and arbitration,13See id. § 998(b). this Note focuses on section 998 in the context of litigation and trial. To help inform this Note’s discussion of the underlying policy tradeoffs behind different fee-shifting rules and the significance of promoting settlement prior to trial, Part I provides an overview of the mechanics, principal stages, and costs of civil litigation. Part II discusses section 998 relative to the competing models of the English rule and the American rule, including general policy tradeoffs and impact on litigation strategy. Part III provides an overview of the statutory framework of section 998 and its underlying policy considerations. Part IV examines section 998 legal developments and whether if, and to what extent, judicial determinations are not only promoting section 998’s purpose of encouraging settlements but also doing so without unduly limiting access to courts. A conclusion with final considerations follows.
