California Supreme Court Clarifies Cost Shifting Under Section 998

On March 20, 2025, the California Supreme Court unanimously held that a plaintiff who refuses a settlement offer under Code of Civil Procedure section 998 but later accepts a less favorable offer before trial will be liable for statutory cost-shifting pursuant to the statute.

For context, Code of Civil Procedure section 1032 entitles a prevailing party to recover certain litigation costs. Code of Civil Procedure section 998 modifies that rule by preventing a plaintiff who does not accept a valid statutory offer from recovery otherwise recoverable costs after the date the offer was issued. Instead, the defendant would be entitled to recovery of such post-offer costs.

The California Supreme Court held that by failing to accept the previous and more favorable statutory offer and then accepting a lessor settlement offer later in the case, this scenario met the definition under section 998 of “fails to obtain a more favorable judgment or award.” This triggers the cost-shifting under the code. In essence, the court ruled that section 998 applies to pretrial settlements in addition to verdicts obtained at trial.

Notably, the court observed in its ruling that preclusion of section 998 cost-shifting can and should be addressed in the settlement agreement. A simple term confirming that each side will pay their own respective costs and fees might be sufficient to foreclose such cost-shifting. Notwithstanding, this ruling may provide further incentive for parties to carefully consider early statutory offers to avoid a potential fight over section 998 cost recovery if and when a settlement is reached.