Does A Second Section 998 Offer Extinguish The First? / March 17, 2012
by Jeff Huron

The answer is both “yes” and “no,” because the California Courts of Appeal are split on the issue.

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, written setltement offer and then fails to obtain a better result at trial.

Section 998 is silent as to the effect of multiple offers. The Second and Third Districts of the Courts of Appeal have decided the issue differently.

In Wilson v. Wal-Mart Stores, Inc. (1999) 72 Cal.App.4th 382, the Third District Court of Appeal applied contract principles to conclude that a new offer made prior to acceptance of a previous offer extinguished and replaced the prior one. The court reasoned that a different rule would enable litigants to make offers that could discourage settlement. Thus, it was better to apply the bright line rule making the most recent 998 offer 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 continuing effect. In other words, a later 998 offer cannot extinguish an earlier offer that has already lapsed. The Martinez court recognized that denying litigants the benefits of earlier offers would actually discourage settlement. And it noted that any concerns  regarding gamesmanship could be controlled through the court's discretion to determine whether a 998 offer has been made in good faith and could therefoe 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.