Raymond Martinez, et al. v. Brownco Construction Company, Inc.
California Supreme Court (June 10, 2013)
California’s statutory settlement procedure (Code of Civil Procedure §998) permits a party to make a written offer to compromise and, if that offer is not accepted and the opposing party fails to recover a judgment more favorable than the offer, then the offering party may recover otherwise unrecoverable expert witness fees. For defendants who make such offers that are not accepted, expert witness fees are recoverable regardless of when the fees were incurred. For plaintiffs making such offers, expert witness fees are recoverable only if incurred after the making of the offer. The statute is silent as to the effect of a party’s multiple offers. This case determines, in the case of multiple offers by a plaintiff, that expert witness fee recovery is measured from the date of the first of such offers because that result is consistent with §998’s language and best promotes the statutory purpose to encourage settlements.
In this case, plaintiffs Raymond Martinez and his wife, Gloria Martinez, sued defendant Brownco Construction Company, Inc. (“Brownco”) for damages arising out of an electrical explosion that severely injured Mr. Martinez. Prior to trial, plaintiffs each served on Brownco two settlement offers pursuant to §998. Brownco neither accepted nor rejected these offers within the statutory 30-day period and, therefore, pursuant to the statute the offer was “deemed withdrawn”. Just before trial, Mr. Martinez and Mrs. Martinez served reduced compromise offers on Brownco. As before, Brownco took no action.
At trial, Mr. Martinez and Mrs. Martinez obtained Judgments which were each in excess of both prior §998 offer. Plaintiffs filed a memorandum of costs seeking a total of $561,257.14 in itemized costs. Brownco moved for an order disallowing Mrs. Martinez’s recovery of $188,536.86 in expert fees incurred after her first settlement offer but before her second offer. The trial court sided with Brownco and entered an order disallowing the disputed expert fees. Relying on Wilson v. Wal-Mart Stores, Inc. (1999) 72 Cal.App.4th 382 (“Wilson”), the trial court stated: “The most recently rejected offer is the only pertinent offer. All prior offers are extinguished by the subsequent offer.”
The Court of Appeal reversed the trial court, reasoning that allowance of expert fees incurred from the date of the first rejected offer is consistent with §998’s language and purpose, and that contract principles do not compel otherwise.
The Supreme Court began its analysis with a consideration of the policy behind §998. It determined that the policy behind §998 is to encourage the settlement of lawsuits prior to trial. To effectuate this policy, §998 provides “a strong financial disincentive to a party, whether it be a plaintiff or a defendant, who fails to achieve a better result than that party could have achieved by accepting his or her opponent’s settlement offer. At the same time, the potential for statutory recovery of expert witness fees and other costs provides parties a financial incentive to make reasonable settlement offers. §998 aims to avoid the time delays and economic waste associated with trials and to reduce the number of meritless lawsuits. Nothing in the wording of §998 prevents a plaintiff from making more than one compromise offer, but the statute makes no mention as to the effect of a later offer on an earlier offer.
When the language of §998 does not provide a definitive answer for a particular application of its terms, courts may consult and apply general contract law principles. Because the process of settlement and compromise is a contractual one, such principles may, in appropriate circumstances, govern the offer and acceptance process under §998. A general contract law principle may be found controlling if the policy of encouraging settlements is best promoted thereby. For example, under general contract law, an offer may be revoked any time before acceptance. In the case of T.M. Cobb Co. v. Superior Court (1984) 36 Cal.3d 273 (“T.M. Cobb”), the Court invoked that basic principle in concluding that a §998 offer is revocable prior to its acceptance or statutory expiration. The Court there explained that a party is more likely to make a statutory offer to compromise in the first instance if it knows the offer may be withdrawn and revised should circumstances change or new evidence be developed. Because “more offers will be made if revocation is permitted,” and because “[t]he more offers that are made, the more likely the chance for settlement,” the Court there concluded that applying the basic principle of revocability better serves the policy of encouraging settlements than a rule of irrevocability.
However, a contract law principle will not be found to govern if its application would conflict with §998 or defeat its purpose. For instance, under general contract law, a counteroffer that deviates from the terms of an offer ordinarily operates as a rejection of the offer so as to terminate the offer immediately. In finding this principle inapplicable in the §998 context, the Court in Poster v. Southern Cal. Rapid Transit Dist. (1990) 52 Cal.3d 266 (“Poster”) observed that negotiations involving the making of counteroffers are a normal and routine occurrence during the statutory 30-day period and “ought not to affect the right of the offeree to ultimately accept the statutory offer in a timely fashion.” Because the general counteroffer rule would tend to stifle negotiations and discourage settlement, Poster concluded that, even after extending a counteroffer, an offeree may accept a statutory offer any time before its revocation or expiration.
Another relevant consideration is whether applying §998 in a particular manner serves the public policy of compensating the injured party. Courts look favorably upon applications that provide flexibility when parties discover new evidence bearing on the plaintiff’s injuries or the defendant’s culpability. For example, the revocability of §998 offers allows the offeror to either propose a new offer in light of the newly discovered evidence or proceed to trial and present all the evidence in an attempt to be compensated fairly by the trier of fact’s decision.
Further, a court should assess whether the particular application injects uncertainty into the §998 process. If a proposed rule would encourage gamesmanship or spawn disputes over the operation of §998, rejection of the rule is appropriate. In Poster, for example, the Court emphasized the difficulty of discerning between a mere inquiry as to the possibility of different terms (which would leave an offeree free to accept an outstanding §998 offer) and a true counteroffer (which would operate as a rejection of the statutory offer and prevent its later acceptance). To promote clarity over the status of a §998 offer, Poster concluded the general counteroffer rule is inapplicable in the §998 context. In other instances, courts have adopted bright line rules in order to avoid confusion. The Court cited as examples: Perez v. Torres (2012) 206 Cal.App.4th 418, 425-426 [confusion regarding cost determinations avoided by bright line rule invalidating any §998 offer when it omits a statutorily required provision]; One Star, Inc. v. STAAR Surgical Co. (2009) 179 Cal.App.4th 1082, 1094-1095 [legislative purpose better served and gamesmanship avoided by bright line rule that if party withdraws second §998 offer prior to its statutory expiration, then withdrawing party’s right to cost shifting is determined by previously rejected statutory offer]; Engle v. Copenbarger & Copenbarger, LLP (2007) 157 Cal.App.4th 165, 169 [adhering to bright line rule that a §998 offer excludes attorney fees only if it says so expressly. The Court noted that the parties in the case before it focused primarily on two Court of Appeal decisions that addressed the effect of a second statutory offer on a first statutory offer: Distefano v. Hall (1968) 263 Cal.App.2d 380 (“Distefano”) and Wilson v. Wal-Mart Stores, Inc. (1999) 72 Cal.App.4th 382. Distefano involved two defense offers to compromise under former § 997, the predecessor to §998. There, the defendants first made a $20,000 statutory offer, which was not accepted. At trial, the plaintiff obtained an award of $28,500, which was reversed on appeal. The defendants thereafter made a $10,000 statutory offer, which also was not accepted. The plaintiff obtained an award of $12,559.96 at the retrial and was allowed costs. On appeal, the defendants challenged the cost award and further contended the plaintiff should pay their costs because he refused to accept their first offer of $20,000, which was more favorable to the plaintiff than the result at the retrial. The Distefano court affirmed, emphasizing the contractual nature of the statutory settlement and compromise process and the general contract rule that “any new offer communicated prior to a valid acceptance of a previous offer, extinguishes and replaces the prior one.” Discerning a legislative intent to give “full effect to the parties’ reappraisals of the merits” of their cases, Distefano concluded that parties should be encouraged to make and consider multiple settlement offers and that the policy in favor of settlements would be promoted by a rule that a later statutory offer extinguishes a previous statutory offer for purposes of cost shifting. Thus, because the plaintiff ultimately obtained a verdict more favorable than the defendants’ last offer, he was not required to pay the defendants’ costs. The T.M. Cobb case, above, did not address the effect of multiple offers under §998. Significantly, however, the decision approved of Distefano’s reasoning that, because §998 involves the contractual process of settlement and compromise, general contract law principles may properly govern the statutory offer and acceptance process so long as they “neither conflict with the statute nor defeat its purpose.”
In Wilson, a plaintiff made two §998 offers to compromise. The first offer was for $150,000, and the second was for $249,000. The defendant failed to respond to either offer, and each was statutorily deemed withdrawn. The jury awarded a verdict of $175,000 in the plaintiff’s favor. The trial court granted the defendant’s motion to tax the expert witness fees upon finding the plaintiff’s last offer of $249,000 “ ‘superseded and extinguished’ ” her first offer of $150,000. The Wilson court affirmed. After noting §998’s silence on whether a subsequent statutory offer extinguishes a prior one, Wilson relied on T.M. Cobb and Distefano to conclude the plaintiff’s second offer extinguished her first offer. Specifically, Wilson agreed with Distefano that, in fairness, parties must be allowed to “review their respective positions” as more information is discovered and to “consider how the law applies before they are asked to make a decision that, if made incorrectly, could add significantly to their costs of trial. Although Wilson acknowledged that “settlements achieved earlier rather than later are beneficial to the parties and thus to be encouraged” (Ibid.), it expressed concern that, if a subsequent offer did not extinguish a previous one, then “[a] plaintiff might be encouraged to maintain a higher settlement demand on the eve of trial and refuse to settle a case that should otherwise be settled if the plaintiff finds comfort in the knowledge that, even if the plaintiff receives an award less than his or her last demand, the plaintiff might still enjoy the cost reimbursement benefits of §998 so long as the award exceeded a lower demand made by the plaintiff sometime during the course of the litigation.” Thus, under the so-called “last offer rule” applied in Wilson and Distefano, when a party makes successive unrevoked and unaccepted §998 offers, the last such offer is the only operative offer with respect to the statutory benefits and burdens.
The Court noted that the Legislature did not respond to the Distefano decision in 1971 when it repealed former § 997 and reenacted its contents in §998. Nor did the Legislature act to otherwise repudiate the last offer rule in several subsequent amendments of the statute. None of the Legislature’s activity regarding §998 has ever addressed successive offers, or any of the case law relating to this particular topic. And the Court found it significant that the Legislature has never acted to cabin its holdings in Poster and T.M. Cobb that a basic contract law principle may not be applied if it would defeat or conflict with §998’s policy of encouraging settlement. In light of the foregoing, the Court was not persuaded that the doctrine of “legislative acquiescence” mandated judicial application of the “last offer rule” in all multiple offer situations.
The Court observed that although the language of the statute does not definitively answer the question before it, its terms are not contravened by allowing Mrs. Martinez to recover expert fees incurred after her August 2007 settlement offer in addition to those incurred after her February 2010 offer. Moreover, allowing such recovery would further the goals of §998. As explained, the Legislature sought to encourage settlement by affording the benefit of enhanced costs to parties who make reasonable settlement offers and imposing the burden of those costs on offerees who fail to obtain a result better than they could have achieved by accepting such offers. This purpose would be more fully promoted if the statutory benefits and burdens were to operate whenever the judgment or award is not more favorable than any of the statutory offers made. Conversely, if the statutory benefits and burdens were to run only from the date of the last offer in circumstances such as these, plaintiffs may be deterred from making early offers or from later adjusting their demands. This would inhibit settlement opportunities and be at direct odds with the Court’s prior recognition that “[t]he more offers that are made, the more likely the chance for settlement.”
The Court next considered the effect of applying general principles of contract law. Brownco claimed that the statutory policy of encouraging settlements would be advanced by application of the basic contract principle that a new offer communicated prior to a valid acceptance of a previous offer extinguishes and replaces the previous one. Brownco argued the Court should follow Distefano and Wilson and apply the last offer rule. The Court of Appeal had declined to apply the last offer rule because it found the underlying contract principle inapt. In its view, a first offer that lapses due to non-acceptance within the 30-day statutory period has no enduring contractual effect and thus cannot be extinguished by a later offer. In such circumstances, the court reasoned, a party becomes statutorily entitled to recover expert fees when the offeree fails to obtain a more favorable judgment, and nothing in contract law requires divestment of this statutory benefit simply because the party makes the later offer. In effect, the court applied a “first offer rule,” in which favorability of the judgment and recoverability of costs would be measured against the earliest reasonable offer regardless of later offers, with the trial court retaining discretion when awarding costs to address any gamesmanship concerns or any mischief or confusion arising from later offers.
The Supreme Court disagreed with the contract reasoning of the Court of Appeal and concluded that Mrs. Martinez is not precluded from recovering the expert witness costs she incurred between the dates of her first and second settlement offers. To reach this conclusion, the Court stated that it need not find “the last offer rule” or “the first offer rule” controlling in all circumstances. Indeed, for purposes of the case then before it, the Court assumed the propriety of applying the last offer rule where, as in Distefano and Wilson, an offeree obtains a judgment or award less favorable than a first §998 offer but more favorable than the later offer. The Court found that the case before it called for a different result.
In the case before it, plaintiff made two statutory offers, and defendant failed to obtain a judgment more favorable than either. In cases such as that, the Court found that §998’s policy of encouraging settlements is better served by not applying the general contract principle that a subsequent offer entirely extinguishes a prior offer. Not only do the chances of settlement increase with multiple offers, but to be consistent with §998’s financial incentives and disincentives, parties should not be penalized for making more than one reasonable settlement offer. Nor should parties be rewarded for rejecting multiple offers where each proves more favorable than the result obtained at trial. Accordingly, the Court held that where a plaintiff serves two unaccepted and unrevoked statutory offers, and the defendant fails to obtain a judgment more favorable than either offer, the trial court retains discretion to order payment of expert witness costs incurred from the date of the first offer.
In addition to encouraging the making of more settlement offers, the Court found that this conclusion promotes the public policy of compensating injured parties. That policy is best served by according parties flexibility to adjust their settlement demands in response to newly discovered evidence. This can be accomplished by allowing a plaintiff who made an early settlement offer to “either propose a new offer in light of the newly discovered evidence or proceed to trial and present all the evidence in an attempt to be compensated fairly by the trier of fact’s decision”, without having to forfeit the statutory benefits flowing from the early offer.
At the same time, holding a defendant responsible for expert witness costs in situations such as this will not confuse the §998 process or give rise to disputes over the status of a statutory offer. To the contrary, such holding is easily applied and is consistent with the terms of the statute in permitting augmentation of costs whenever “an offer made by a plaintiff is not accepted and the defendant fails to obtain a more favorable judgment or award. Predictability of the process will not be upset by inapplicability of the last offer rule in cases where each statutory offer proves either equal or more favorable to the offeree than the judgment or award at trial.
Finally, the Court noted that §998 expressly states an award of expert witness fees is discretionary. Accordingly, if a later offer results in mischief or confusion, or any gamesmanship appears, the court may address such concerns when considering what post-offer expert fees to award. In this regard, the Court noted that §998 allows a court, in its discretion, to award a defendant expert fees incurred both before and after a defense settlement offer where the plaintiff fails to obtain a more favorable judgment or award. The Court expressed its confidence that, as in those situations, the discretion conferred upon trial courts suffices as a meaningful check against mischief and gamesmanship.
While §998 appears simple and straightforward on its face, as this case demonstrates, not all issues of its interpretation are resolved by reference to the words of the statute. For that reason, when making, accepting or rejecting §998 offers, care must be given to avoid unintended consequences. The Court has now clarified that defendants who reject an early settlement offer will not benefit from that rejection in a situation where plaintiff makes multiple offers and achieves a better result than all of them.
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