[co-author: Kina Wong, Summer Associate]

A divided court in Madrigal v. Hyundai Motor America (2023) 90 Cal.App.5th 385, as modified on denial of reh’g (May 9, 2023), review filed (June 20, 2023) recently held that the cost-shifting penalty provisions of California Code of Civil Procedure section 998 apply when a case settles for less than the amount of the offer to compromise, and where the settlement agreement either does not identify the plaintiff as the prevailing party or provides that each party is responsible for its own attorney’s fees and costs.

In Madrigal, the plaintiffs sued the defendant manufacturer under the Song-Beverly Consumer Warranty Act (the “Act”) alleging breach of express and implied warranties arising out of their purchase of an allegedly defective vehicle. Id. at 390. Early in the case, the defendant manufacturer made two offers to compromise under section 998, but the plaintiffs allowed both offers to expire. Id. at 390–91. Litigation continued, and after a jury was sworn in, the parties settled for an amount that was less than the amount offered in the defendant manufacturer’s second 998 offer in exchange for the plaintiffs dismissing their complaint with prejudice. Id. at 390–92. The stipulation for settlement included a provision that attorney’s fees and costs would be decided by way of motion and the settlement would be subject to section 664.6. Id. at 391–92; see also Code Civ. Proc. § 664.6 (“If parties to pending litigation stipulate, in a writing signed by the parties . . . or orally before the court, for settlement of the case . . . the court . . . may enter judgment pursuant to the terms of the settlement.”). The plaintiffs then filed a motion for attorney’s fees and costs. Madrigal,90 Cal.App.5th at 392. In response, the defendant manufacturer moved to strike or tax recovery of any costs and expenses incurred after the second 998 offer on the basis that the plaintiffs failed to obtain a judgment that was more favorable than the defendant manufacturer’s second 998 offer. Id. The defendant manufacturer also filed an opposition to plaintiffs’ motion for attorney’s fees on that same basis and argued that plaintiffs were precluded from recovering costs or attorney’s fees incurred after the second 998 offer. Id. The trial court held for the plaintiffs, reasoning that section 998’s cost-shifting provisions do not apply to cases that end in settlement, and that because there was no trial, there was no judgment. Id. The defendant manufacturer appealed, arguing that (1) the stipulation to settlement “calling for dismissal of the entire action with prejudice constituted a ‘judgment’ within the meaning of section 998” or alternatively that (2) the “voluntary dismissal of the entire action with prejudice constitutes a failure by [plaintiffs] to obtain a judgment or award of any kind, triggering the cost-shifting provisions of section 998.” Id. at 396.

In a 2-1 opinion, the appellate court held that the terms of the settlement constituted a “judgment” within the meaning of section 998 subdivision (c), and that the trial court erred by not analyzing the parties’ entitlement to costs and attorney’s fees through the lens of that statute. Id. at 397. The court held that [s]ection 998 “is triggered ‘[i]f . . . plaintiff fails to obtain a more favorable judgment or award. . . .’” Id. at 398, quoting Code Civ. Proc. § 998 (c)(1) (emphasis in original). The court reasoned that by its plain language, section 998 requires that the plaintiff who refused the reasonable settlement offer obtain a more favorable “judgment” to avoid application of section 998. Id. The court further stated that courts have interpreted the term “judgment” under section 998 broadly “to encourage parties to make and accept reasonable offers to compromise.” Id. at 399–400.This includes, as the courts have repeatedly explained, construing the term “judgment” to include a dismissal with prejudice, like the one agreed to by the parties in this case. Id. at 401. Additionally, the court found that the structure and terms of the settlement in this case supported the finding that the case ended with a judgment within the meaning of section 998. Id. at 402. Indeed, there was no question that the stipulated settlement resulted in final determination of the parties’ rights within the meaning of section 577. Id. Specifically, the settlement resolved all claims and defenses that were pled with a payment by the defendant manufacturer in exchange for a release of the company and the selling dealership for “any claims that arise out of or [relate] to the facts and circumstances described in the complaint or relating to the sale of the vehicle or relating to the service and repair history of the subject vehicle.” Id. at 402. Moreover, “the parties relied on section 664.6 to craft a settlement effecting a final, formal judgment or its functional equivalent.” Id. at 403; see also Code Civ. Proc. § 664.6. Further, the stipulated settlement indisputably permitted plaintiffs to recover some amount of costs and attorney’s fees under Civil Code section 1794 subdivision (d) “as part of the judgment,” which further evinces the parties’ intent that the settlement functions as, or would likely lead to, a judgment. Madrigal, 90 Cal.App.5th at 403.

The policy considerations underlying section 998’s cost-shifting penalty provisions also supported the court’s conclusion that the statute was designed “to encourage the acceptance of offers to compromise within the parameters of the statute by using the stick of post-offer costs and fees against reluctant offerees.” Id. at 404 (emphasis in original). Here, the plaintiffs rejected reasonable offers to compromise early in the case, creating a known risk that they might have to forfeit costs and attorney’s fees from the date of the operative offer to compromise if they failed to obtain a more favorable judgment later. Id. at 406. While the plaintiffs ultimately settled for less than the defendant manufacturer’s second 998 offer, and agreed to dismiss their complaint with prejudice, they “fail[ed] to obtain a more favorable judgment” within the meaning of section 998. Id. Madrigal shows that the purpose behind section 998 is to encourage the acceptance of offers to compromise, even if that means, in certain instances, shifting post-offer costs and expert fees to the plaintiff.

*Kina Wong is a 2023 summer associate in Snell & Wilmer’s Orange County office and is not admitted to practice law. She is anticipated to graduate from University of San Diego School of Law in May 2024.