The stick and the carrot: Martinez and the “last offer rule”

To make another offer, or not to make another offer

2013 October

On June 6, 2013, the California Supreme Court decided Martinez v. Brownco (2013) 56 Cal.4th 1014. The question presented in that case was this:

When a plaintiff serves two unaccepted offers to compromise pursuant to [Code Civ. Proc.] section 998, and the defendant fails to obtain a judgment more favorable than either offer, does the plaintiff’s last offer extinguish the first offer for purposes of expert fee recovery under section 998?

(Id., 56 Cal.4th at p. 1018.)

The Court framed its answer to that question in these terms:

We conclude that where, as here, a plaintiff makes two successive statutory offers, and the defendant fails to obtain a judgment more favorable than either offer, allowing recovery of expert fees incurred from the date of the first offer is consistent with section 998’s language and best promotes the statutory purpose to encourage settlements.

(Id., at p. 1017.)

Presumably, the same applies if a defendant makes two successive statutory offers, and the plaintiff fails to obtain a judgment more favorable than either offer.

In legal shorthand, this was a test of what is known as the “last offer rule” as applied to section 998. And in further shorthand, the Supreme Court rejected the “last offer rule” as applied to Mrs. Martinez. The Court, however, did not drive a stake through the rule. While section 998 has been greatly improved by Martinez, litigants will still need to proceed cautiously when using the statutory procedure.

“The last offer rule”

This issue arose because the trial court applied the “last offer rule” when it taxed Mrs. Martinez’s cost bill, which sought to recover expert-witness costs from the date of her first offer, and instead limited her cost recovery to costs incurred from the date of her second (and last) offer. A quick summary of the facts will make this clearer.

Raymond Martinez was horribly injured when an electrical panel he was dismantling exploded. He filed a third-party lawsuit for his injuries against the demolition company, Brownco, which had allegedly contaminated the electrical panel, causing the explosion that injured Mr. Martinez. The lawsuit included a claim by his wife for loss of consortium. Each plaintiff, husband and wife, made two section 998 offers, one shortly after the case was filed ($250,000 for Mrs. Martinez) and a second, lesser demand two and a half years later, ten days before opening statements ($100,000 for Mrs. Martinez.) The case was tried before a jury, and judgment entered in favor of plaintiffs ($1,646,674 for Mr. Martinez and $250,000 for Mrs. Martinez). The judgment for Mr. Martinez exceeded his second section 998 offer but not the first (after offsets for contributory fault.) The judgment for Mrs. Martinez exceeded her second section 998 offer and equaled the first.  

The trial court ruled that Mrs. Martinez could only recover expert fees incurred from the date of the second offer. This was so even though the judgment awarded to Mrs. Martinez matched her first section 998 offer. In making its decision, the trial court applied a nearly unbroken line of cases beginning over 40 years ago with Distefano v. Hall (1968) 263 Cal.App.2d 380 and continuing more recently with One Star, Inc. v. Staar Surgical Company (2009) 179 Cal.App.4th 1082.

The facts of these cases differ from each other. And none involved the situation in Martinez: two proper, unaccepted and unrevoked statutory offers made by a plaintiff who won a judgment at trial that matched or exceeded both offers. Nonetheless, in each of the cited cases the courts either applied the last-offer rule to deny the recovery of certain augmented costs or cited the rule approvingly. Hence, before Martinez, if you made more than one statutory offer, the last offer extinguished all prior offers and section 998 cost recovery was available from the date of the last offer, and only the last offer, assuming the party making the offer received a more favorable result at trial.

This rule is certainly not commanded by the language of the statute. Nothing in section 998 dictates that a later offer is made at the offeror’s peril. And there is nothing particularly intuitive about the notion that by making multiple section 998 offers you are cutting off potential cost recovery, and in certain situations, arguably committing malpractice. Put yourself in Martinez’s counsel’s shoes: on the eve of trial the case does not look quite as strong as it did two and a half years ago; but there is a prior, unaccepted section 998 offer, and plaintiff has incurred six-figure expert-witness costs. If counsel makes another offer, plaintiff arguably loses any hope of recovering expert-witness and other costs incurred to date. If counsel does not make another offer and fails, at trial, to meet or beat that now dated offer, plaintiff loses any opportunity to recover the expert witness and other costs incurred during final trial preparation and trial. What would you do? Counsel chose to make a second offer fortified by his belief that “last offer rule” could not and definitely should not be as it appeared.

The courts following the last-offer rule draw upon principles of general contract law: subsequent offers extinguish earlier offers. The Supreme Court itself has approved the usefulness of looking to general contract principles as guidance when interpreting section 998, as long as such principles neither conflict with nor defeat the purpose of the statute. (T.M. Cobb Co v. Sup. Ct. (1984) 36 Cal.3d 273, 280.) And in Cobb, the Court expressly approved last-offer case Distefano for its use of the contract-law approach. So from Distefano’s early adaptation of contract law to section 998, the last-offer rule was born and subsequently thrived. Over the years it garnered substantial acceptance because it was a bright-line rule, easily applied and understood. The problem with the rule, as both the Court of Appeal and the Supreme Court recognized in Martinez, is that it can undermine the statutory purpose of section 998, which was enacted to encourage the settlement of lawsuits prior to trial. Section 998 is designed in classic carrot and stick fashion. A party making a section 998 offer that is not accepted can recover enhanced costs if the result at trial is more favorable to him than the offer. The statute encourages parties to extend the offers with the promise of possibly recovering those enhanced costs. The statute encourages parties to accept the offers with the threat of having to pay those costs. Since the enhanced costs can, depending on the circumstances, include prejudgment interest, attorneys’ fees, and expert fees, the carrot and stick can be quite persuasive.

The carrot and the stick

In Bank of San Pedro v. Sup. Ct. (Goodstein) (1992) 3 Cal.4th 797, 804, the California Supreme Court explained:

[T]he policy behind section 998 ... is plain. It is to encourage settlement by providing a strong financial disincentive to a party – whether it be plaintiff or a defendant – who fails to achieve a better result than that party could have achieved by accepting his or her opponent’s settlement offer.

(This is the stick. The carrot is that by awarding costs to the putative settler, the statute provides a financial incentive to make reasonable settlement offers.)

The last-offer rule undermines section 998’s purpose by imposing a cost upon making multiple offers, thereby deterring them, and making settlement less likely. At the risk of being overly simplistic: more is better than less. The more offers that are made, the more likely one will be accepted and the case settled. (See Cobb, 36 Cal.3d at 281 “The more offers that are made, the more likely the chance for settlement.” [italics added].) The statute’s purpose is not advanced by making the carrot a little less tasty and the stick less threatening. This could not be more plain than in cases where plaintiffs make successive declining demands or defendants make successive increasing offers. Those plaintiffs and defendants are reevaluating their cases and reducing their demands or increasing their offers in an effort to entice the other side to settle. Under the last-offer rule, however, when a plaintiff or defendant makes the second offer – even one moving towards the other party – the offeror is extinguishing his opportunity to recover enhanced costs incurred from the date of the first offer.

Martinez agreed:

The purpose would be more fully promoted if the statutory benefits and burdens were to operate whenever the judgment or award is not more favorable than any of the statutory offers made. Conversely, if the statutory benefits and burdens were to run only from the date of the last offer in circumstances such as these, plaintiffs may be deterred from making early offers or from later adjusting their demands.

(Id., 56 Cal.4th at p. 1025.)

The Court further noted that the rule it was adopting had the added benefit of promoting “the public policy of compensating injured parties. ... [T]he policy of compensating injured parties is best served by according parties flexibility to adjust their settlement demands in response to newly discovered evidence.” (Id., 56 Cal.4th at p. 1026.)

The Court’s decision allows Mrs. Martinez to recover expert-witness costs from the date of her first offer, subject to issues to be sorted out on remand. The last-offer rule, however, was not put out to pasture. “To reach this conclusion [in favor of Mrs. Martinez] we need not find the last offer rule or the first offer rule controlling in all circumstances. Indeed for present purposes we may assume the propriety of applying the last offer rule where, as in Distefano and Wilson, an offeree obtains a judgment or award less favorable than a first section 998 offer but more favorable than the later offer. The present circumstances, however, call for a different result.” (Ibid.)

Undermining section 998

The last-offer rule undermines section 998 in many circumstances; but the facts in Martinez did not require a broader ruling, so the Court declined to issue one. Indeed, the Court is signaling that it is unwilling to do so. In practical application, however, Martinez will help the vast majority of litigants, both plaintiff and defense. The situations carved out by the Court for Distefano and Wilson are factually unusual. In Distefano the defendant made a first statutory offer of $20,000 and a second offer of $10,000. Plaintiff obtained an award of $12,559.96. The defendant wanted plaintiffs to pay defense costs because the judgment did not exceed the first offer. The court, applying the last offer rule, rejected defendant’s position. In Wilson, plaintiff made a first statutory offer of $150,000 and a second offer of $249,000. The jury returned a verdict of $175,000 for the plaintiff. Plaintiff’s effort to recover expert-witness fees was rebuffed, even though the verdict exceeded the first offer.

It is not clear what logic is behind a plaintiff making a second higher section 998 demand (as in Wilson) or a defendant making a second lower section 998 offer (as in Distefano). After all if, after making an early statutory offer, counsel believes the case is becoming stronger for his client, then one is probably best advised to sit on the existing offer, if for no other reason than to save the cost of postage. Nonetheless, for whatever reasons, counsel sometimes do make those offers, as is evident by Distefano and Wilson.

The upshot of Martinez seemingly is that plaintiffs make increasing section 998 demands at their peril. Likewise, defendants make decreasing section 998 offers at their peril. By doing so, the offeror risks losing out on section 998 cost recovery if, as plaintiff, the judgment or award is greater than the first statutory demand but less than the second, and as defendant, if the judgment or award is less than the first statutory offer but greater than the second. Indeed, this aspect of section 998 (multiple offers), post-Martinez, possibly remains quite the malpractice trap for litigants who do not think through their statutory offers. 

But as long as you are making offers that are more enticing to the other side (plaintiff is decreasing his demands and defendant is increasing his offers) and the decision at trial is more favorable than or equals all of those offers, then you will be able to recover augmented costs from the date of your first offer. No longer will you be risking malpractice by making that second, more enticing offer. No longer will you or your clients need to grapple with whether you should make a second, more enticing offer and risk losing accrued costs.

While it is unclear whether you are limited to two offers, there is nothing in the underlying reasoning of Martinez that would limit a party to two offers. Undoubtedly, the next case will come up when three or more offers are made and the outcome at trial is more favorable than some combination of the multiple offers (including the last offer), but not all of the offers. For example, plaintiff’s counsel, believing his ship has come in, makes an early $1 million statutory offer, and then later makes two lesser statutory offers. At trial, the judgment for plaintiff exceeds the last two statutory offers but not the gold-plated $1 million offer. The logic of Martinez seems to allow for that plaintiff to recover augmented costs from the first statutory demand equaled or beaten at trial – i.e., from the date of the second of the three statutory demands. 

My head hurts, so for now some simple suggestions going forward. After Martinez, do not make multiple statutory offers that are sequentially less enticing to the other side. If you make a second offer, it should be better than the first offer. If your case is stronger and plaintiff wants to make a higher demand or defendant wants to offer less, you should do so without using the section 998 procedures. But for the rest of us, after Martinez, we can now make an early section 998 offer and another more enticing offer on the eve of trial without worrying about whether, by so doing, we are cutting off our cost recovery.