First District Court of Appeal Invalidates C.C.P. ยง 998 Offer Conditioned on Execution of an Undisclosed Settlement Agreement

May 2016

On April 27th California's First District created a bright line rule prohibiting a party from conditioning acceptance of a Code of Civil Procedure 998 Offer on the execution of an undisclosed settlement agreement. The case, Sanford v. Rasnick (2016 DJDAR 3975) further limits a defendant's ability to make a 998 Offer that includes non-monetary terms and resolves claims outside the scope of a plaintiff's complaint.

In Sanford, the defendant driver struck the plaintiff's motorcycle causing injuries to the plaintiff. Plaintiff sued both the defendant driver and her father, the owner of the vehicle. Defendants served a C.C.P. 998 Offer for $130,000 which the plaintiff rejected. The matter went to trial and the jury returned a verdict less than $130,000. Defendants requested their costs, including their expert fees, under the cost-shifting mechanism of C.C.P. Section 998.

The defendants’ written 998 offer required the plaintiff to deliver an executed “written settlement agreement and general release.” The proposed settlement agreement was not attached to the offer and never disclosed to plaintiff's counsel. Plaintiff challenged the validity of the offer, arguing that without first seeing the executed settlement agreement, he could not adequately evaluate the offer. Defendants countered that case law allows a party to condition acceptance of its C.C.P. 998 Offer on the execution of a general release. The trial court agreed with Defendants and upheld the offer as valid.

The First Appellate District reversed finding that the defendants' conditioning the acceptance of their 998 Offer on the execution of a settlement agreement made the offer invalid. Addressing Defendants' argument from the trial court, the court noted that, while a party can condition the acceptance of a 998 Offer on the execution of a general release, a general release is not synonymous with a settlement agreement. The court pointed out that settlement agreements are subject to much negotiation and frequently contain terms that would, if included in the actual 998 Offer itself, invalidate the offer. Specifically the court noted that a condition which requires a plaintiff to release “all claims, known and unknown,” invalidates a 998 Offer.

The Sanford case leaves several questions unanswered. The first is whether a court would uphold a 998 Offer requiring the execution of a settlement agreement if the offering party attached the proposed settlement agreement to the 998 Offer. While attaching the settle agreement to the C.C.P. 998 Offer would permit the offeree to evaluate its terms in deciding whether to accept the offer, it is likely a trial court would still invalidate the offer if the settlement agreement contained any non-monetary terms (i.e. non-disparagement clauses, confidentiality clauses, non-compete clauses, denial of liability clauses) or waived claims outside the scope of the lawsuit. Courts have routinely found that the inclusion of such terms invalidate the Offer on the grounds that they make it impossible for the trial court to determine if a defendant is the prevailing party.

The second unanswered question is what is the dividing line between a general release, which a party may include as a condition in accepting a 998 Offer, and a settlement agreement, which Sanford now prohibits as a condition to a 998 Offer? Given the appellate courts' preference for creating bright line rules in interpreting 998 Offers, a general release would likely be limited to a release of all known claims at issue in the litigation. Thus, any 998 Offer requiring execution of a release that covers unknown claims or claims not part of the instant litigation would likely be invalidated.

The Sanford case reinforces the trade off a defendant must make for C.C.P. Section 998's cost-shifting benefit and its accompanying leverage in settlement negotiations. The practitioner should advise her client before making a 998 Offer that, if the Offer is accepted, the client might not be able to negotiate a separate settlement agreement that would include important non-monetary settlement terms and a release of all unknown claims or claims outside the scope of the lawsuit. Ultimately the client, with the practitioner's advice, will need to decide if making a C.C.P. Section 998 Offer is worth the uncertainty of resolving a case without such a written agreement.

When serving a C.C.P. 998 Offer, the practitioner should include a general release for the offeree to sign. This practice eliminates any argument that the 998 Offer is invalid on the basis the offeree could not fully evaluate Offer.

Nathaniel Lucey is an attorney in the San Jose office. He can be reached at 408.286.0880