Courts and Legislature Have Worked to “Defang” the Effectiveness of Section 998 Offers
Courts and Legislature Have Worked to “Defang” the Effectiveness of Section 998 Offers

In the recent case of Huerta v. Kava Holdings, Inc., 2018 WL 5999639 (Cal. Ct. App. Nov. 14, 2018), the California Court of Appeal held that a prevailing employer that made a section 998 settlement offer to the plaintiff in an action brought under the Fair Employment and Housing Act (“FEHA”) was not entitled to costs and expert witness fees incurred after the plaintiff’s rejection of the offer.

Defendant Kava Holdings, Inc. terminated two restaurant servers, Plaintiff Felix Huerta and another employee, after they were involved in an altercation at work.  After he was terminated, Huerta for the first time, made allegations of race discrimination, harassment, and retaliation and brought a lawsuit alleging those as well as other theories of recovery.  Ultimately, the harassment, discrimination, and failure to prevent harassment/discrimination claims were tried by a jury.  Shortly before the trial commenced, the employer served Huerta with a section 998 settlement offer, which Huerta did not accept.  The jury returned a verdict in favor of the Kava Holdings.

As the prevailing party in a FEHA action, Kava Holdings sought costs, expert witness fees, and attorney’s fees pursuant to Government Code section 12965(b).  Additionally, Kava Holdings sought the same costs and fees pursuant to section 998.  The trial court ruled that Kava Holdings was precluded from recovering attorney’s fees, costs, and expert witness fees under section 12965(b) because the action was not frivolous.  The trial court did allow for the recovery of ordinary costs and expert witness fees pursuant to section 998 because Huerta had rejected a 998 settlement offer.  The Court of Appeal reversed with respect to the 998 portion of the decision and held that if the action was not frivolous, Kava Holdings could not recover costs and expert fees under section 998.

Court’s Reasoning
The Court of Appeal recognized a split among the appellate courts over whether costs and expert fees are recoverable by employers under section 998.  The courts in Seever v. Copley Press, Inc., 141 Cal. App. 4th 1550 (2006) and Holman v. Altana Pharma US, Inc., 186 Cal. App. 4th 262 (2010) both allowed employers to recover under section 998, while the court in Arave v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 18 Cal. App. 5th 1098 (2018) held that employers could recover their costs and expert fees after a section 998 offer was rejected only in frivolous cases.

The Huerta court held that the general policies behind section 998 must yield to the specific policies concerning costs and attorney and expert witness fee awards in non-frivolous FEHA actions.  The court adopted the reasoning in Arave that section 12965(b) is an express exception to California Code of Civil Procedure section 1032(b), which provides for prevailing parties to recover costs.  According to the court, section 998 operates only as an adjustment to cost awards under section 1032(b), so it follows that section 12965(b) overrides section 998(c).  If an employer may not obtain an award of costs under section 1032(b) because Plaintiff’s claims are non-frivolous, the trial court may not augment an award of costs by awarding expert witness fees under 998(c).

Legislature Resolves Conflict in Appellate Courts
In response to the #MeToo movement, the California legislature amended the FEHA.  Senate Bill 1300 amended a variety of discrimination and harassment provisions but specifically answered the question concerning the conflict between section 998 and section 12965(b).  Effective January 1, 2019, section 12965(b) has been amended to specifically state that “a prevailing defendant shall not be awarded fees and costs unless the court finds the action was frivolous, unreasonable, or groundless when brought, or the plaintiff continued to litigate after it clearly became so.”  This amended language appears to end the conflict in the appellate courts: starting in 2019 employers will not be able to recover their attorney’s fees, costs, and expert witness fees unless a discrimination/harassment claim is frivolous. 

The courts and the legislature have weakened the impact of a 998 offer in a FEHA lawsuit.  While an unaccepted 998 offer may still minimize a plaintiff’s attorney’s fees, the added hammer of potential liability for an employer’s costs and expert witness fees appears to have vanished except in the small percentage of cases that are held to be frivolous.  Thus, it will behoove employers to make 998 offers early in litigation before significant attorney’s fees and costs have been incurred.

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