In a precedent-setting decision by California’s Third District Court of Appeal, the court clarified the reach of Code of Civil Procedure (“CCP”) section 998, California’s cost-shifting statute. (Madrigal v. Hyundai Motor America (2023) 90 Cal.App.5th 385, as modified on denial of reh’g (May 9, 2023), review granted (Aug. 30, 2023) 1.) The case is noteworthy because it clarifies that a plaintiff who does not accept a section 998 offer, and later obtains a less favorable result through a stipulated settlement, rather than through a formal “judgment,” may still invoke the cost-shifting provisions of section 998. The court reasoned that a contrary interpretation would undermine the purpose of CCP section 998, as it would improperly benefit a party who did not accept a section 998 offer that proved to be reasonable based on the amount that party ultimately accepted through a stipulated settlement.

Factual Background of the Case

The plaintiffs brought a claim against Hyundai pursuant to the Song-Beverly Consumer Warranty Act, California’s “lemon law.” The claims stemmed from the plaintiffs’ purchase of a used Hyundai Elantra for $24,172. Hyundai issued two section 998 offers. The first was issued about five weeks into the case, and offered the amount of the purchase price plus incidental and actual damages, or a fixed amount of $37,396 plus attorney’s fees in the amount of $5,000 or as established by the court. About six months later, Hyundai issued a second section 998 offer, again offering the purchase price plus incidental and actual damages, but this time the alternate fixed-cost offer was for $55,556.70, along with attorney’s fees in the amount of $5,000 or as ordered by the court. The plaintiffs let both offers expire, and the case proceeded to trial.

On the first day of trial, the court asked the parties to revisit settlement. The court indicated that certain of Hyundai’s motions in limine would likely be granted, and then took a recess. After the recess, the parties advised the court they reached a resolution that they wanted to reduce to a “stipulated settlement” pursuant to CCP section 664.6. This statute provides that a settlement to which the parties stipulate in open court (or through a mutually signed writing that complies with various statutory requirements) is judicially enforceable in the same action, and may be reduced to a judgment. Among other things, this prevents the need for a separate breach of contract lawsuit if one party does not comply with the settlement.

As relevant here, the stipulated settlement required Hyundai to pay the plaintiffs $39,000, and did not provide that both parties would bear their own fees and costs. Instead, it provided that the plaintiffs could seek by motion any fees to which they claimed they were entitled under the Song-Beverly Consumer Warranty Act. There was no mention of the prior section 998 offers, particularly, the second one, which offered an amount appreciably more than that contemplated in the stipulated settlement. The settlement noted there would be no dismissal, and therefore no final judgment, until after the issues regarding fees and costs were resolved.

The plaintiffs proceeded to file their motion for fees, requesting over $207,000, and also a request for costs in the amount of $20,865.83. Hyundai moved to strike or tax all but $622.95 in costs, and also opposed the motion for fees. As relevant here, both filings noted that the plaintiffs’ ultimate recovery was less than the second section 998 offer, and therefore the plaintiffs could not recover fees/costs incurred after that offer.

The trial court disagreed with Hyundai, ruling that section 998 could not be invoked, since applying it to a settlement was in the court’s view inconsistent with the purpose of the statute. The court did reduce the claimed fees/costs significantly, finding the full amounts sought were unreasonably high. As issues concerning fees and costs remained unresolved, the plaintiffs did not dismiss the case, and Hyundai proceeded to file a notice of appeal as to the trial court’s orders.

Issues on Appeal

The court of appeal first determined that it had appellate jurisdiction over the interlocutory orders at issue under the rarely-invoked “final collateral order” doctrine. Although the orders clearly were not “final judgments,” and were not otherwise appealable under any statutory authority, the rulings were appealable under the elements that typically apply to the common law final collateral order doctrine: the rulings were final as to issues collateral to the merits of the case, and called for the payment of money.

The court of appeal noted that the case presented an issue of first impression, namely, whether CCP section 998 can apply when a case ends in settlement. More specifically, given the facts of this case, the court held that CCP section 998 can be invoked in the context of a “stipulated settlement under section 664.6.” Thus, the holding of the case is arguably limited to stipulated settlements under section 664.6, and the court was clear that it was applying the statute in this context and rejecting “a blanket rule that section 998 does not apply in cases that end with a settlement.”

Still, the broad language of the decision provides support for applying CCP section 998 to other situations where a case ends in a settlement and there is no agreement that each side will bear its own fees and costs. Indeed, the potential for the decision to be interpreted this broadly is perhaps why the Supreme Court granted review, as the question on which it permitted briefing and argument pertained to the broader issue of whether section 998 can apply “if the parties ultimately negotiate a pre-trial settlement.” The Supreme Court may be contemplating a decision in which it affirms the outcome of the Court of Appeal’s decision here, based on the fact a section 664.6 settlement is at issue, while narrowing the precedential effect of this outcome.

The Plain Language of CCP Section 998 Indicates It Applies to Stipulated Settlements under CCP Section 664.6

CCP section 998 allows for changes to how costs, including attorney’s fees that are otherwise permitted, should be allocated at the end of a case. Specifically, if a party makes an offer under the statute that is sufficiently clear and otherwise complies with the statute, as well as a judicially-crafted “good faith” requirement, and the other party fails to obtain a more favorable “judgment or award,” that party is subject to certain cost-shifting penalties. As relevant here, a plaintiff who fails to obtain a more favorable result cannot seek post-offer costs or fees.

Past cases interpreted the statute’s terms to provide that a voluntary dismissal indicates a plaintiff failed to obtain a more favorable judgment or award, thus triggering CCP section 998. Such case law stressed that the defendant does not have to “achieve any specific result.” Instead, whether the statute is triggered turns on what the plaintiff failed to achieve, namely, a more favorable judgment or award. In other words, the court of appeal noted how “a burden of sorts” is placed on a plaintiff who does not accept a section 998 offer – “the obligation to obtain a judgment [or award] more favorable than the unaccepted offer.”

Further, the court noted how, in the context of section 998, the term “judgment” has been used broadly, and is “equivalent to any final resolution of the action.” (Emphasis in original.) Likewise, the statute in fact uses the terms “judgment or award,” and, contrary to the dissent’s contention, several cases have interpreted “award” to mean more than just an arbitration award, as the term indicates a section 998 offer can properly call for resolution by dismissal, rather than by judgment. The majority noted how the Legislature has continued to amend section 998 following these judicial decisions, but has declined to overrule them, signaling support for these interpretations.

The court proceeded to note how “[t]he stipulated settlement here has several other indicia of a final judgment under section 998.” First, it unquestionably called for the final determination of the parties rights pursuant to CCP section 577. Second, that the parties invoked CCP section 664.6 “supports the proposition that the settlement was intended to effect a final judgment,” since the entire purpose of section 664.6 is to permit the enforceability of settlements as judgments. Third, and most specific to this case, is the fact the parties invoked the fee provisions of the Song-Beverly Consumer Warranty Act, which explicitly permits fees “as part of the judgment,” further evidencing the parties’ intent that the settlement contemplated a judgment (or its equivalent).

The Policy Underlying Section 998 Further Supported the Court’s Holding

The trial court ruled that section 998’s policy was not satisfied by the stipulated settlement in this case, but the court of appeal disagreed. It noted how the statute’s purpose is not necessarily to encourage just any type of settlement, but rather to specifically encourage settlement under the statute, since the same provides a “carrot and stick” mechanism. In other words, the trial court (as well as the dissent) erred in noting how this case seems to discourage the settlement the plaintiffs reached at the outset of trial. To the contrary, the majority’s decision furthers the purpose of CCP section 998 by ensuring that the “stick” provided by the statute was properly applied after the plaintiffs failed to accept the “carrot” offered earlier in the case by Hyundai.

Emphasizing this point, the court stressed how Hyundai’s second section 998 offer was for approximately $56,000, more than twice the value of the car at issue, plus attorney’s fees. The plaintiffs’ refusal to accept resulted in 18 more months of litigation, and the incursion of significant (and, ultimately, unnecessary) fees and costs. The court reasoned as follows: to “allow offerees to avoid section 998’s penalties by rejecting a reasonable offer to compromise, forcing the opposing party to continue defending against needless, aggressive litigation, and settling on the eve of trial” would contravene the purpose of the statute.

The Court Rejected the Plaintiffs’ Remaining Arguments, and Deferred Other Determinations for the Trial Court to Address Following Remand

The court concluded that CCP section 998 applied to the stipulated settlement, meaning the trial court erred when it rejected Hyundai’s arguments based on that threshold issue. Since the trial court did not have occasion to reach the plaintiffs’ other arguments that the fee-shifting provisions of CCP section 998 should not apply (e.g., based on uncertainty), the court of appeal ruled that the trial court should address those contentions upon remand.

The court also rejected alternative arguments advanced by the plaintiffs. First, the court disagreed with the plaintiffs’ invocation of the merger rule, which provides that a written contract supersedes prior negotiations or stipulations concerning the same subject matter. (Civ. Code, § 1625.) The court noted that the stipulated settlement here was oral, meaning Civil Code section 1625 did not apply. In so doing, the decision leaves open the possibility that other types of written settlements might not trigger CCP section 998, though the majority did not rule that the merger rule would apply in such circumstances.

The court then rejected the plaintiffs’ arguments under the so-called “last offer rule,” which provides that a subsequent settlement offer replaces a prior one. The court noted how it was unclear who made the offer that resulted in the stipulated settlement. It should also be noted that the last offer rule typically applies when the prior offer still has not been accepted, and, in the context of CCP section 998 offers, applies to successive statutory offers. Neither applies here with respect to the stipulated settlement, which was not the product of a statutory offer, and was not reached while any prior offer (whether statutory or not) was pending.

The majority likewise rejected arguments advanced by the dissenting opinion, as discussed further below. It proceeded to reverse the trial court’s ruling that CCP section 998 did not apply, and remanded for further proceedings as noted above.

The Dissenting Opinion Did Not Present Any Views Deemed Compelling by the Majority

Justice Ronald B. Robie filed a lengthy concurring and dissenting opinion. He agreed that the trial court’s order was appealable, and that the merger doctrine and last offer rule did not apply. He dissented, however, to the conclusion that CCP section 998 can apply “when the parties enter into a settlement agreement.” Justice Robie acknowledged that this was no ordinary settlement agreement, but rather a stipulated settlement under CCP section 664.6, which, as the majority noted, presupposes “that the settlement was intended to effect a final judgment.”

Nevertheless, Justice Robie’s view was that, even if the stipulated settlement sufficiently contemplated a judgment, CCP section 998 still could not be invoked, because it requires that the plaintiff “fails to obtain a judgment more favorable than a previously” unaccepted section 998 offer. He viewed this as requiring “unilateral action” by the plaintiff that results in the less favorable judgment (emphasis in original), and concluded that negotiated settlements do not fit within this meaning of the statute. He noted that a settlement simply “does not result in a winner or a loser.”

However, the statute does not refer to “unilateral” action, and also refers to a judgment “or award,” and there could be no dispute that Madrigal did fail to obtain a more favorable “award.” Justice Robie’s position that the term “award” in the statute refers only to “arbitration awards” conflicts with prior judicial decisions that interpret that term more broadly. (E.g., American Airlines, Inc. v. Sheppard, Mullin, Richter & Hampton (2002) 96 Cal.App.4th 1017, 1056 [use of the term “award” means that a “judgment in court is not strictly required”].) Moreover, as the majority noted, the term “fails” is used to indicate what the plaintiff must do to avoid section 998, but does not mean the inverse, i.e., there is no requirement that a defendant not fail to obtain a “judgment” as good or better than its section 998 offer. As the majority noted, the statute puts the burden squarely on the party who rejected a section 998 offer to affirmatively do better, and the plaintiffs in this case clearly failed to do so.

Justice Robie added that, even if the term “fails” was ambiguous, the legislative history underlying section 998 further supported his interpretation. He noted that the goal of the statute is to save party and judicial resources by penalizing a party who fails to “prove” more favorable damages than the amount included in a section 998 offer. He noted that “[a] settlement does not prove anything.” (Emphasis in original.) In Justice Robie’s view, a plaintiff “fails” to “prove” a more favorable award by either abandoning/dismissing the case, or obtaining a judgment that is not greater in amount than what was included in the section 998 offer. Justice Robie added that section 998 was amended in 1997 to apply to arbitration proceedings. In the process, Justice Robbie noted how the legislature seemed to recognize that, at the time, the statute applied only when a plaintiff “fails to do better at trial.” He viewed this as acknowledgement that, as concerns judicial proceedings, the statute applies only “when a plaintiff obtains a litigated result less favorable than a previously rejected section 998 offer.” (Emphasis added.) Again, however, this interpretation overlooks the broad interpretation of the term “award” in the statute, that the term “judgment” means also the equivalent of a judgment in this context, and that the term “fails” is used to show what a plaintiff must not do, not what the defendant must do.

Justice Robie further opined that Hyundai’s decision to enter into the settlement agreement was “inconsistent with an intent to keep the rejected section 998 offer operative.” He noted that a section 998 offer makes any earlier section 998 offer inoperative, and viewed the situation here as analogous. While this rule might have a more palatable application to privately negotiated contractual settlement agreements, the parties here employed CCP section 664.6 to create a judicially-enforceable settlement. The distinction is key, as this means there was a judicially-approved “award” on the record, and since it was not as favorable as the most recent section 998 offer, section 998 was properly implicated. Further, as the majority noted, Hyundai clearly did not intend to override its second section 998 offer given it agreed to keep issues of fees and costs reserved for later determination. Likewise, the majority noted how Justice Robie’s view here, if accepted, would defeat the purpose of section 998, as it would permit plaintiffs to avoid the statute’s cost-shifting penalties even if they failed to obtain a more favorable result.

In addition, Justice Robie invoked the rule that section 998 offers must be in “good faith,” that is, be issued with a reasonable prospect of acceptance, and that such a determination is made based on the facts known to the offeree at the time of the offer. But the judicially-created “good faith” rule simply provides a defense to enforcement of a section 998 offer, and does not go to the issue of whether the statute is implicated in the first place. Further, this portion of the dissent seems to overlook that plaintiffs must have a good faith basis for filing suit against a defendant, and even if they honestly believed they had a stronger claim, they must still bear the risk of failing to meet their burden of proof.

Lastly, Justice Robie’s concerns regarding the resulting uncertainty (particularly as to complex section 998 offers) and an adverse impact on settlement efforts seem misplaced. First, as to uncertainty, CCP section 998 already provides protection, as uncertain offers are not enforceable; indeed, the majority remanded the case with instructions to address this issue. Second, the concern of an adverse impact on settlement efforts due to the risk of cost exposure following settlements is an easily allayed concern, as parties can condition settlements on resolution of cost issues. The parties in this case simply chose not to do so. As Justice Robie, himself, acknowledged, section 998 implicates basic contractual rules, and these include the rights of parties to contract as they see fit. (See also Goodstein v. Bank of San Pedro (1994) 27 Cal.App.4th 899, 908 [“Nothing… prohibits parties from stipulating to alternative procedures for awarding costs in the litigation.”].)


The Madrigal opinion provides clarity in the law of CCP section 998 by (1) reiterating that the cost-shifting provisions of the statute apply after an offeree fails to obtain a more favorable result, not just a more favorable judgment; (2) holding that the statute, therefore, is clearly implicated after a stipulated settlement under CCP section 664.6 that is for an amount less than a prior section 998 offer; and (3) explaining how the language, history, and precedent pertaining to the statute indicate that it may likewise apply in other settlement-related contexts. The decision broadens the already useful tool provided by section 998, and furthers the goal of encouraging settlement pursuant to the terms of the statute.


1 Per the Supreme Court’s order granting review, the Court of Appeal’s decision in Madrigal remains a citable opinion.

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