Why it matters

An award to a prevailing party for fees and costs after the losing party rejected a Section 998 pretrial settlement offer does not apply to nonfrivolous cases filed under the Fair Employment and Housing Act (FEHA), a California appellate panel has ruled. A pair of restaurant servers were terminated by the Hotel Bel-Air after being involved in an altercation at work. One of the workers, Felix Huerta, then sued his former employer under a variety of legal theories. Most of his claims were dismissed prior to trial, and a jury returned a verdict in favor of the defendant on Huerta’s FEHA causes of action for a hostile work environment, discrimination, and failure to prevent harassment or discrimination. The trial court found the action was not frivolous and denied the employer’s request for attorney’s fees and costs under FEHA. However, the court did award the defendant $50,000 based on Huerta’s rejection of the defendant’s Section 998 pretrial settlement offer. On appeal, the panel affirmed the judgment and noted that effective January 1, Section 998 will have no application to costs and attorney and expert witness fees in a FEHA action unless the lawsuit is found to be “frivolous, unreasonable or groundless when brought, or the plaintiff continued to litigate after it clearly became so.” For litigation that predates the application of this amendment, the court held that Section 998 does not apply to nonfrivolous FEHA actions and reversed the order awarding the employer $50,000.

Detailed discussion

On the evening of December 21, 2013, the restaurant staff at one of the Hotel Bel-Air’s restaurants was preparing for the next shift after the guests had departed. One of the waiters, Atanas Kolev, became angry with another waiter, Felix Huerta, believing that Huerta was shirking his duties. The two men exchanged words, with Kolev putting his hands on Huerta.

The parties disagreed about the words exchanged and their mutual history. Huerta claimed that the altercation was only the most recent example of Kolev’s racial harassment, although when he reported the incident he did not mention that Kolev used racial epithets or had used them in the past. Both men were terminated for violating the employer’s code of conduct.

Huerta then filed suit, essentially alleging racial discrimination and harassment. Several claims were dismissed prior to trial. Shortly before the trial began, the defendant served Huerta with a Code of Civil Procedure Section 998 settlement offer in the amount of $375,000, with the litigants to bear their own attorney fees, costs and litigation expenses. The plaintiff did not accept the offer and countered with his own Section 998 demand of $1.55 million.

Trial began on Huerta’s claims under the Fair Employment and Housing Act (FEHA) for retaliation, harassment, discrimination, and failure to prevent harassment or discrimination. The trial court granted a motion for nonsuit on the retaliation claim, and the jury returned a verdict in the defendant’s favor on the remaining causes of action.

As the prevailing party in a FEHA case, the defendant requested costs, expert witness fees and attorneys’ fees pursuant to Section 12965(b). The defendant sought the same costs and fees pursuant to Section 998.

Determining that the plaintiff’s action was not frivolous, the trial court denied the motion with respect to Section 12965(b). As for Section 998, the court said the defendant was not entitled to postoffer attorney fees because the action was not frivolous, but did award the defendant postoffer ordinary costs and expert witness fees. Based on the plaintiff’s economic circumstances, the court reduced the award to $50,000.

Huerta appealed. The California appellate panel first affirmed the jury’s verdict and that nonsuit was properly granted on the plaintiff’s retaliation cause of action, before considering whether the Section 998 award was proper.

Since the trial court granted the award, the legal landscape has expanded to include Arave v. Merrill Lynch, Pierce, Fenner & Smith, Inc., where a fellow appellate panel held that Section 998 does not apply in nonfrivolous actions, the court noted.

Prior to Arave, it was unsettled whether Section 998 applied in nonfrivolous FEHA actions when a plaintiff refused a defendant’s reasonable statutory settlement offer but failed to achieve a better result.

“In 2018, however, our colleagues in Division Two of the Fourth Appellate District analyzed [prior cases], surveyed the development of the law, and concluded there is no statutory authority to award section 998 postoffer fees and costs in a nonfrivolous FEHA action,” the panel wrote.

“Arave reasoned as follows: Section 12965(b) is an express exception to section 1032, subdivision (b). Section 998 ‘operates only as an adjustment to cost awards under Section 1032(b), [so] it follows that Section 12965(b) overrides Section 998(c) … [I]f a defendant may not obtain an award of costs under Section 1032(b) [because] plaintiff’s claims are nonfrivolous, the trial court may not augment an award of costs by awarding expert witness fees under Section 998(c),’” the court said.

“We find Arave’s logic unassailable,” the panel added. “We hold that the general policies behind section 998 must yield to the specific policies concerning costs and attorney and expert witness fee awards in nonfrivolous FEHA actions.”

In addition, the state legislature amended Section 12965(b) (effective January 1, 2019) to read: “In civil actions brought under this section, the court, in its discretion, may award to the prevailing party, including the department, reasonable attorney’s fees and costs, including expert witness fees, except that, notwithstanding Section 998 of the Code of Civil Procedure, a prevailing defendant shall not be awarded fees and costs unless the court finds the action was frivolous, unreasonable, or groundless when brought, or the plaintiff continued to litigate after it clearly became so.”

The legislature expressly pegged Section 998 to Section 1032, the panel wrote. “In non-FEHA actions, a ‘defendant is entitled under section 998 to those costs incurred after the settlement offer to which a prevailing party would be entitled under section 1032.’ In non-FEHA actions, where the special prevailing party cost statute is not an express exception to section 1032, a defendant is also entitled under section 998 to its postoffer costs. But in nonfrivolous FEHA cases, the prevailing party cost provisions are express exceptions to section 1032. It follows, then, that section 998 does not apply in nonfrivolous FEHA actions.”

Therefore, “for cases that predate the amendment to section 12965(b), we see no reason to differentiate between the treatment of ordinary costs, attorney fees and expert witness fees in nonfrivolous FEHA actions,” the court concluded. “The language in section 12965(b) indicates all three categories are subject to the same rules.”

The panel reversed the trial court order awarding the defendant costs and expert witness fees pursuant to section 998. The court also emphasized that “nothing in our opinion is intended to apply to FEHA actions deemed ‘frivolous, unreasonable, or groundless when brought, or the plaintiff continued to litigate after it clearly became so.’ In those cases, the trial court retains discretion to award fees and costs pursuant to section 12965(b).”

To read the opinion in Huerta v. Kava Holdings, Inc., click here.