Does A Second Section 998 Settlement Offer Extinguish The First?

The answer is both “yes” and “no,” because there is a clear split of authority between the California Court of Appeals.

Code of Civil Procedure section 998 permits a party to make a written settlement offer with the potential to shift costs and fees to another party if that party does not accept a good faith 998 offer and then fails to obtain a better result.

In Wilson v. Wal-Mart Stores, Inc. (1999) 72 Cal.App.4th 382, the Third District Court of Appeal first noted that section 998 is silent as to the effect of multiple offers. The court then applied contract principles to conclude that a new offer made prior to acceptance of a previous offer extinguished and replaced the prior one. Additionally, the court reasoned that a different rule would enable litigants to make offers that could discourage settlement and thus it was better to have a bright line rule that the most recent 998 offer would control regardless of earlier offers.

Recently, the Second District Court of Appeal reached the opposite conclusion in Martinez v. Brownco Construction Company, Inc. (2012) 203 Cal.App.4th 507. Also, applying contract principles, the Martinez court concluded that a 998 offer that is not accepted lapses and thus has no more effect. In other words, a later 998 offer cannot extinguish an earlier lapsed offer. Furthermore, the Martinez court recognized that denying litigants the benefits of earlier offers would actually discourage settlement. And it noted that courts could control any gamesmanship because they have discretion to determine whether a 998 offer was made in good faith; and only good faith offers trigger section 998’s cost shifting mechanism.

The Martinez decision is better reasoned and certainly does a better job promoting settlement during times when courts are underfunded and overburdened. However, until the California Supreme Court resolves this issue, attorneys should keep in mind that a second 998 offer does not necessarily extinguish any prior offers, and that their clients may be on the hook for costs and fees dating back to the earliest 998 offer if they fail to obtain a better result.

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