By Emily Green, Daily Journal Staff Writer
June 11, 2013

The state Supreme Court on Monday endorsed the expansive application of a unique settlement offer that raises the stakes for civil defendants who go to trial, with the stated purpose of encouraging cases to resolve early.

Plaintiffs’ attorneys cheered the decision, which they said would encourage their use of so-called Section 998 offers. Such tenders differ from regular settlement offers in that they operate as a carrot and stick tool.

If a plaintiff makes a 998 offer which the defendant rejects, and then wins more money at trial than the offer amount, the defendant is on the hook for 10 percent annual interest on the judgment extending back to the date of the offer, as well as the plaintiffs expert fees.

Defendants also use 998 offers, but they tend to do so less frequently because the payoff is smaller. If they come out ahead on a 998 offer rejected by the plaintiff, they can have the cost of their expert fees covered.

The question before the state Supreme Court concerned an issue that had split the state courts of appeal: What happens when litigants make more than one settlement offer? Which one should apply – all of then, or just the last offer?

The answer: It depends.

Justice Marvin R. Baxter wrote the opinion for the unanimous court. Martinez v. Brownco Construction Co. Inc., 2013 DJDAR 7341

He said that if the party that makes more than one Section 998 offer wins a judgment less favorable than the first offer, but more favorable that the later offer, the controlling offer is the last one. That is to say, if a plaintiff makes an offer for $100,000, and then a second offer for $50,000 – both of which the defendant rejects – and then the plaintiff wins $75,000 at trial, the plaintiff can win 10 percent interest on the judgment extending back to the date of the second offer.

That calculation changes, however, if the plaintiff makes two offers and then beats both offers at trial. Then, the court said, the plaintiff is eligible to receive interest and the cost of expert fees extending to the date of the first offer.

“Not only do the chances of settlement increase with multiple offers, but to be consistent with section 998’s financial inventive and disincentives, parties should not be penalized for making more than one reasonable settlement offer, “ Baxter wrote. “Nor should parties be rewarded for rejecting multiple offers where each proves more favorable than the result obtained at trial.”

Baxter also wrote that if there are allegations of gamesmanship, the trial court has discretion to make that determination and deny interest on the judgment or expert fees.

The case stems from two settlement offers Gloria Martinez made to Brownco Construction Co. Inc. after her husband was severely injured on the job.

Three months after the accident, in 2007, she made a 998 offer for $250,000. Two and a half years later on the eve of trial, she made a second 998 offer for $100,000.

The company rejected the offer, and Martinez won $250,000 at trial. Subsequently, she sought to recover interest on the case and cost of expert fees. The trial court held that Martinez couldn’t recover expert fees incurred between the two offers because the second offer extinguished the first one. The appellate court reversed and said the last offer is not necessarily the operative offer for purposes of cost shifting.

Sacramento plaintiffs’ lawyer Roger Dreyer, who was not involved in the case, described the state Supreme Court’s decision as “hugely important” for trial lawyers. He said he was often reluctant to make second 998 offers for fear that it would eviscerate the first one – and the potential to win interest extending back to the first offer.

“This may be the most important statute in the civil code as it affects trials,” Dreyer said. “It’s a strategic tool. It’s also a tool that forces the defense to evaluate their options.”

Albro Lundy III, who represented Martinez, said the court’s decision puts pressure on the litigants to settle.

“It increases the risk of going forward to trial and it lowers the risk of making a subsequent offer, and therefore increases the possibility of settling.”

Brownco Construction’s attorney, George M. Lindahl, called the decision “well reasoned.”

“I was hoping they would go the other way on it. But the law was in need of clarification.”

Lindahl cautioned that the decision could leave trial courts burdened with resolving complaints of gamesmanship in 998 offers – an argument he said he would now make in this case.