A law firm brought suit against a client to recover unpaid legal fees and costs. The client eventually served the law firm with an offer to compromise pursuant to California Code of Civil Procedure § 998. The Client offered a waiver of its recovery of costs in exchange for the law firm’s dismissal of all claims against the client. Law Firm didn’t accept the offer, but more than a year later it dismissed its complaint against Client without prejudice. Because Law Firm didn’t accept the § 998 offer, Client obtained an award of expert witness fees pursuant to § 998(c).
In California, the “prevailing party” in litigation is usually allowed to recover its costs pursuant to § 1032; however, under California Code of Civil Procedure § 998, a party can make an offer to compromise. This will reverse the parties’ entitlement to costs after the date of the offer, depending on the outcome of the litigation.
Client moved for an award of $21,000 in expert witness fees pursuant to § 998. Law Firm opposed the motion, arguing Client had made a “token” § 998 offer with no reasonable prospect of acceptance. The trial court granted Client‘s motion for expert fees.
Law Firm contended that the trial court erred in finding that Client‘s § 998 offer was enforceable. However, the Court of Appeals disagreed. Acting Presiding Judge Louis Mauro wrote in his opinion for the panel that the version of § 998(c)(1) in effect during the relevant time period provided:
If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment or award, the plaintiff . . . shall pay the defendant’s costs from the time of the offer. In addition, in any action or proceeding other than an eminent domain action, the court…, in its discretion, may require the plaintiff to pay a reasonable sum to cover costs of the services of expert witnesses, who are not regular employees of any party, actually incurred and reasonably necessary in either, or both, preparation for trial or arbitration, or during trial or arbitration, of the case by the defendant.
The judge quoted an earlier case that held that “[t]he policy behind section 998 is ‘to encourage the settlement of lawsuits prior to trial.’” To activate the cost-shifting provision of § 998, Judge Mauro explained that a settlement offer must be made in good faith, i.e., it must be “realistically reasonable under the circumstances of the case, and there must have been a reasonable prospect of acceptance.”
Judge Mauro explained that a party who refuses a reasonable settlement offer and subsequently fails to obtain a more favorable award may have to pay the offeror’s reasonable costs. A plaintiff who voluntarily dismisses a complaint fails to obtain a more favorable judgment or award within the meaning of § 998(c)(1), thereby triggering consideration of a defense cost award under that statute. In this case, the judge explained that the Law Firm bore the burden of establishing in the trial court that Client‘s § 998 offer was unreasonable or that it wasn’t made in good faith. And likewise, on appeal, Law Firm bore the burden of establishing that the trial court abused its discretion in finding that Client‘s offer was reasonable and made in good faith.
The reasonableness of a § 998 settlement offer is evaluated in light of the information available to the parties at the time the offer was made, Judge Mauro opined. In the case of a defense § 998 offer, the fact that the offer was modest in comparison to the amount of damages the plaintiff sought doesn’t preclude a finding of reasonableness. That’s because the amount of claimed damages isn’t the only factor to consider in determining reasonableness. The offer must also be evaluated in light of the plaintiff’s likelihood to prevail.
Here, as the trial court found, Client “went to great lengths” to inform Law Firm that its claim for unpaid attorney’s fees was barred by a conflict of interest. “An attorney may be required to forfeit fees where he or she represented clients with actual or potential conflicts of interest and failed to obtain the clients’ informed written consent,” Judge Mauro said.
Further, counsel for Client told Law Firm that Client never authorized Law Firm to provide it with legal services and never received a statement of what was owed.
In opposition to Client‘s motion for expert fees, an attorney of Law Firm averred he didn’t believe Client had a viable affirmative defense based on actual conflict of interest. But Law Firm failed to present any evidence to contradict the facts alleged in Client‘s supplemental interrogatory responses. Nothing in the record showed that Client waived any actual or potential conflicts of interest in Law Firm‘s representation; in fact, the trial court denied Law Firm‘s summary adjudication motion because Law Firm didn’t present evidence of such a waiver by Client. The judge there also found there was no evidence that Law Firm sent Client any statement for legal services or costs.
Judge Mauro held that Client “resolutely” notified Law Firm of defenses which, if successful, could bar its causes of action. A trial court doesn’t abuse its discretion in finding a defense offer to compromise reasonable where the defendant maintained it had a complete defense to the plaintiff’s claims, and there was a reasonable possibility that liability didn’t exist. Although counsel for Law Firm averred that the decision to voluntarily dismiss the complaint against Client was based on economic considerations and not the merits, the trial court wasn’t required to accept that representation.
Quoting precedent, the judge wrote:
When a defendant perceives himself to be fault free and has concluded that he has a very significant likelihood of prevailing at trial, it is consistent with the legislative purpose of section 998 for the defendant to make a modest settlement offer. If the offer is refused, it is also consistent with the legislative intent for the defendant to engage the services of experts to assist him in establishing that he is not liable to the plaintiff. It is also consistent with the legislative purpose under such circumstances to require the plaintiff to reimburse the defendant for the costs thus incurred.
Additionally, Client offered to waive its costs. Given Client‘s affirmative defenses and discovery responses, it should have been no surprise that Client would retain experts on the issue of ethical and professional standards for attorneys. The trial court awarded Client $21,377.08 in expert fees. As such, Judge Mauro declined to characterize Client‘s proposal as a “token” offer under the circumstances.
Law Firm argued that Client‘s offer wasn’t reasonable because at the time of the offer, the trial court had overruled Client‘s demurrer to Law Firm‘s second amended complaint, granted Law Firm‘s special motion to strike Client‘s cross-complaint, and awarded Law Firm over $12,000 in fees and costs. However, the Court found that those orders didn’t decide whether Law Firm‘s claims were barred by a conflict of interest.
The trial court recognized that whether a § 998 offer was made in good faith requires an examination of the circumstances of the particular case and the information available to the parties at the time the offer was served. Judge Mauro found no error in the trial court’s statement of the applicable analytical framework.
The order awarding expert fees was affirmed. Client was awarded its costs on appeal.