In the City and County of San Francisco, any property built before June of 1979 is subject to the San Francisco Rent Ordinance. The ordinance was enacted to provide tenants significant rights relating to their use and ownership interest in their unit, while allowing for attorney fees for prevailing parties so as to encourage enforcement. Like many laws providing for attorney fees, landlord plaintiff attorneys here in San Francisco have built careers off of filing lawsuits for minimal damages while driving up their attorney fees so as to force settlement. In these cases where the facts are clear early on in litigation that the damages are minimal, counsel for the defendant landlord may find it prudent to offer an early §998 Offer for Settlement so as to cap the plaintiff’s attorney fees early on. The language used in the §998, as it relates to attorney fees, is critical in ensuring the §998 is effective in minimizing the force and effect of the fees as the litigation moves along.
Strategies Regarding “Inclusive” Versus “Reasonable Attorney Fees” in §998 Offers
California Civil Code §998 was enacted to encourage early settlement of lawsuits by penalizing parties who receive and reject reasonable settlement offers. Where a plaintiff receives a reasonable offer to settle, rejects that offer, and then fails to obtain a “more favorable” judgment, he or she is subject to the following mandatory and discretionary penalties:
The plaintiff cannot recover court costs which are incurred after the date the §998 was offered and must pay the defendant’s postoffer court costs. The defendant’s postoffer costs are subtracted from the plaintiff’s recovery. If those costs exceed the plaintiff’s recovery, the defendant is entitled to a judgment against the plaintiff. (Code Civ. Proc., § 998)
In addition to being required to pay the defendant’s costs, the court, in its discretion, may order the plaintiff to pay reasonable costs for the defendant’s expert witness fees, for those costs which are “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.” (Code Civ. Proc., § 998.)
The strategic key to §998 offers is the calculation of “costs” following a judgment. This is because for a court to determine which party received a “more favorable” judgment than a previously made offer or demand, the court will first add to the judgment certain costs. Where a judgment is being compared to an offer made by a defendant, the court will only consider those costs which were incurred by the plaintiff prior to the date the §998 offer was made.
Where available either by statute or contract, “costs” include reasonable attorney fees incurred by each party. (Code Civ. Proc., § 1032.) Thus, where a plaintiff’s judgment is being compared to a defendant’s §998 offer, the plaintiff’s preoffer attorney costs (and other reasonable costs incurred) are added to its final judgment and compared against the defendant’s §998 offer to determine whether it was “more favorable” than the settlement offer. Notably, just like other costs, where a plaintiff rejects a reasonable §998 offer and fails to achieve a “more favorable” judgment, the plaintiff’s judgment, plus preoffer costs, are offset by the defendant’s costs including attorney fees. (Scott Co. of California v. Blount, Inc. (1999) 20 Cal.4th 1103, 1112.)
In matters in which attorney fees are recoverable, a potentially decisive question a defendant must choose is whether or not to include the plaintiff’s attorney fees as part of its offer. If a defendant includes attorney fees as part of its offer, the defendant risks the possibility that the plaintiff will receive a judgment lower than the §998 amount, but beat the defendant’s §998 offer with attorney fees. The following is an illustrative example:
Early on in a civil lawsuit relating to a dispute over a contract which includes an attorney fees provision, the defendant offers the plaintiff $100,000 with “attorney fees included.” The plaintiff rejects the offer and continues to trial, ultimately receiving a judgment in the amount of $80,000. The plaintiff then argues, and is granted, $60,000 in costs, including attorney fees, $25,000 of which were incurred prior to the defendant’s §998 offer. Thus, because the total amount the plaintiff received, including the judgment and pre-offer costs and attorney fees, amounts to $105,000, the plaintiff has beaten the defendant’s §998 offer of $100,000. As a result, the plaintiff is entitled to the $80,000 judgment plus the entirety of the $60,000 of costs, totaling $140,000.
The benefit of this option is that if the plaintiff accepts the §998 offer, the plaintiff’s entire recovery is capped and the amount is known at the time of acceptance. The risk, as demonstrated, is that if the plaintiff rejects the offer and is rewarded a judgment, the plaintiff has an opportunity to artificially inflate its attorney fees to try and beat the §998 offer.
A second option for defendants wishing to cap a plaintiff’s attorney fees is to offer a §998 with “reasonable attorney fees.” The benefit of this option is that it precludes a plaintiff from beating a §998 solely with attorney fees, such in cases similar to the example above. The drawback of this option is that it risks the possibility that the plaintiff will accept the §998 offer for a nominal sum, but recover greater attorney fees than anticipated. The following two examples illustrate the risks and benefits.
During a lawsuit involving a cause of action for habitability, with the lease containing an attorney fees provision, the defendant determines that although its liability is almost certain, the plaintiff’s damages are minimal. The defendant offers the plaintiff $100,000 with “reasonable attorney fees.” The plaintiff then rejects that offer and heads to trial, ultimately receiving an $80,000 judgment. The plaintiff then argues, and receives costs of $60,000, including attorney fees, $25,000 of which are determined to have occurred prior to the defendant’s §998 offer. Because the plaintiff was awarded $100,000, with “reasonable attorney fees,” it failed to obtain a more favorable judgment than the defendant’s offer of $80,000 with “reasonable attorney fees.” As a result, the plaintiff cannot recover the $35,000 worth of costs and attorney fees which occurred after the §998 offer. In addition, the plaintiff’s $105,000 recovery (judgment plus preoffer costs) is diminished by the costs, including attorney fees, incurred by the defendant, which not only severely reduces the plaintiff’s recovery, but could result in the defendant receiving a judgment against the plaintiff for costs exceeding the plaintiff’s recovery.
As illustrated, by including “reasonable attorney fees” in its §998 offer, the defendant forced the plaintiff to beat its offer of $80,000 purely on the judgment, without regard for attorney fees.
The next brief example illustrates the drawback to defendants including “reasonable attorney fees” as part of its §998.
Early on during a lawsuit involving a local ordinance which awards attorney fees to the prevailing party, the defendant determines that while its liability is certain, the plaintiff’s damages are nominal at best. In order to avoid the risk of paying exorbitant attorney fees on a nominal judgment, the defendant offers the plaintiff $15,000 with “reasonable attorney fees.” The plaintiff accepts the §998 and during a prove-up hearing, is awarded $25,000 in attorney fees, far more than the defendant figured at the time of the offer.
In this illustration, had the defendant offered $25,000 with attorney fees “inclusive,” there was a strong chance the plaintiff would not only have accepted the §998, but that the defendant would have paid $15,000 less total, having known the exact amount it would pay if the §998 was accepted.
Presenting plaintiff with a §998 Offer can be a useful method in capping plaintiff’s attorney fees. However, an appropriate strategy should be used in creating a §998 Offer based on the calculation of plaintiff’s preoffer attorney costs in each individual case, or the defendant can face financial risks.