Most practitioners understand the game theory aspect of Section 998 offers. But the rules have changed slightly. In March, the California Supreme Court held that if a plaintiff rejects a 998 settlement offer, they can then be liable for costs and fees if they later settle before trial. Importantly, this decision clarifies that Section 998 applies not just to trial outcomes but also to pre-trial settlements.
The ruling underscores that while parties can negotiate their own cost allocations in settlement agreements, Section 998’s default rules apply if such terms are not specified. This decision reinforces the statute’s purpose of encouraging reasonable pre-trial settlements by shifting costs to parties who reject favorable offers and later secure less favorable outcomes. In other words, if a plaintiff rejects a 998 offer and then “fails to obtain a more favorable judgment or award,” Section 998 overrides the usual rule that a prevailing plaintiff can recover costs. The case highlights the strategic importance of Section 998 offers in California litigation, serving as a powerful tool to leverage settlements and manage costs.