Section 998 Cost-Shifting Applies to Pretrial Settlements After Rejected Offers—Default Rule Unless Parties Reallocate in Settlement

Introduction

In Madrigal v. Hyundai Motor America (Supreme Court of California, Mar. 20, 2025), the Court resolved a recurring but unsettled question under California’s offer-to-compromise statute, Code of Civil Procedure section 998: Does the statute’s postoffer cost-shifting apply when a plaintiff rejects a valid defense section 998 offer, but the case later settles before trial? The Court’s answer is yes. Section 998’s cost-shifting scheme is the default rule whenever its statutory predicates are met; it is not limited to cases resolved by trial or arbitration. Parties, however, remain free to agree to their own cost and fee allocation in their settlement agreement.

The case arose out of a consumer warranty dispute under the Song-Beverly Consumer Warranty Act. After Hyundai twice served section 998 offers that were not accepted, the parties reached an oral settlement on the first day set for trial and left cost and fee allocation to be decided by motion. The trial court refused to apply section 998 because there had been no trial and therefore, in its view, no “judgment.” The Court of Appeal reversed. In a unanimous opinion by Justice Corrigan, the Supreme Court affirmed, clarifying that “judgment” in section 998 includes a judgment entered pursuant to a settlement, and that cost-shifting applies unless the settlement itself reallocates costs and fees.

Summary of the Opinion

Section 998 modifies the prevailing party cost regime in section 1032 by imposing postoffer cost-shifting when the offeree fails to obtain a more favorable “judgment or award” than the rejected offer.
The statute’s operation is not confined to adjudicated outcomes. A settlement followed by entry of judgment—or a functionally equivalent disposition—can constitute a “judgment” for purposes of section 998(c)(1).
Section 998(a)’s directive that costs “shall be withheld or augmented” applies as a default absent a contrary settlement allocation. Parties may contract around cost-shifting by expressly allocating costs and fees in their settlement.
The trial court erred by holding section 998 inapplicable solely because the case settled before trial. The Court of Appeal correctly remanded for the trial court to determine offer validity, whether the settlement result was less favorable than the offer, and the resulting cost and fee consequences.

Case Background

Oscar and Audrey Madrigal purchased a Hyundai vehicle in 2011. After alleged warranty defects and unsuccessful repairs, they sued Hyundai under the Song-Beverly Act seeking repurchase or restitution (Civ. Code, § 1790 et seq.; see Civ. Code, § 1793.2, subd. (d)(2); § 1794, subd. (d)).

Hyundai served two defense section 998 offers:

First offer (about 2 months post-complaint): either restitution (purchase price plus expenses) or a fixed payment of $37,396.60; attorney fees of $5,000 or in an amount awarded by the court. Plaintiffs did not accept; the offer was deemed withdrawn (CCP § 998(b)(2)).
Second offer (6 months later): either restitution (purchase price plus expenses) or a fixed payment of $55,556.70; attorney fees of $5,000 or in an amount awarded by the court. Plaintiffs again did not accept; the offer was deemed withdrawn.

On the first day set for trial—approximately 18 months after the second offer expired—the court issued tentative rulings granting Hyundai’s evidentiary and damages motions in limine. The parties then placed an oral settlement on the record under Code of Civil Procedure section 664.6 for $39,000, with no vehicle surrender (the plaintiffs no longer owned the car), broad releases, plaintiffs’ right to move for costs and fees, and dismissal with prejudice after payment of the settlement and any costs awarded. The settlement did not mention section 998 or allocate costs/fees beyond allowing plaintiffs to move for them.

Plaintiffs moved for $207,438.75 in attorney fees (including a 0.5 multiplier) and $20,865.83 in other costs. Hyundai moved to strike or tax, arguing section 998 barred plaintiffs’ postoffer costs and fees and entitled Hyundai to its postoffer costs because plaintiffs settled for less than the $55,556.70 fixed offer. The trial court declined to apply section 998 on the ground there was no trial and thus no “judgment,” but it substantially reduced plaintiffs’ fee and cost claims on traditional reasonableness grounds. The Court of Appeal reversed and remanded to apply section 998. The Supreme Court affirmed the remand.

Analysis

Statutory Framework and the Court’s Legal Reasoning

General rule: Under section 1032, the “prevailing party” recovers costs as a matter of right, and section 1033.5 specifies allowable items, including attorney fees when authorized by statute (e.g., Song-Beverly’s fee provision at Civ. Code, § 1794, subd. (d)).
Section 998’s modification: Section 998(a) mandates that costs “shall be withheld or augmented as provided in this section.” If a plaintiff rejects a defense offer and “fails to obtain a more favorable judgment or award,” the plaintiff “shall not recover” postoffer costs and “shall pay” the defendant’s postoffer costs; expert witness fees may also shift (CCP § 998(c)(1)). Those costs are deducted from any damages awarded to plaintiff and can produce a net in the defendant’s favor (CCP § 998(e)).
Textual focus on “judgment”: Section 998(b)(1) itself contemplates that acceptance of an offer leads to “entry of judgment,” demonstrating that “judgment” includes one arising from a settlement rather than an adjudication. The Court applies the normal presumption of consistent usage within a statute: “judgment” bears the same meaning in section 998(c)(1).
Section 664.6 settlements: A settlement placed on the record under section 664.6 that contemplates entry of judgment is functionally equivalent to a judgment for cost and fee purposes. DeSaulles v. Community Hospital of Monterey Peninsula recognized that a compromise entailing payment and dismissal is the legal equivalent of a judgment in the plaintiff’s favor for enforcement and cost allocation.
No trial requirement in the statute: Nothing in section 998 limits the cost-shifting trigger to post-trial judgments; indeed, a plaintiff can “fail to obtain a more favorable judgment or award” by securing no award at all, including via voluntary dismissal (Mon Chong Loong Trading Corp. v. Superior Court).
Policy coherence: The Court’s construction furthers section 998’s “carrot and stick” design to promote early, reasonable settlements and penalize rejection of reasonable offers, independent of whether the case ultimately resolves by adjudication or settlement (Bank of San Pedro; Martinez v. Brownco Construction Co.; Scott Co. v. Blount, Inc.).
Freedom to contract around the default: Consistent with section 1032, subdivision (c), parties may stipulate to alternative procedures for awarding costs and fees in their settlement. Trial courts should inquire whether parties resolved cost allocation; if not, section 998’s default applies (DeSaulles).

Why the Trial Court’s Contrary View Failed

The trial court reasoned that, because there was no trial, there was no “judgment,” so section 998 did not apply. The Supreme Court rejected this reading for several reasons:

Textually, section 998 nowhere restricts “judgment” to adjudicated outcomes. Accepted offers expressly result in “judgment,” revealing that settlements can produce an applicable judgment.
Contextually, section 998(a)’s mandatory instruction to withhold or augment costs would be seriously undercut if the statute silently excluded the large proportion of cases that settle after litigation is underway. If the Legislature intended such a sweeping carveout, it would have said so expressly.
Practically and purposefully, limiting section 998 to cases tried to judgment would diminish incentives to make early, reasonable offers and would remove the statute’s discipline on offerees who reject such offers and continue litigating to a worse result.

Plaintiffs’ Arguments and the Court’s Responses

“Judgment or award” means adjudication only: The Court disagreed. Section 998(b)(1) itself recognizes entry of judgment upon acceptance of an offer—a non-adjudicatory path—so the term “judgment” cannot be confined to trial verdicts. The Court also noted that “failure” to obtain a more favorable judgment occurs whenever the offeree ends with an equal or worse result, including settlements and dismissals.
Section 998(e)’s reference to “damages awarded” implies adjudication: Not so. Parties frequently refer to settlement payments as damages, and the statute’s use of “any damages” encompasses zero damages and non-adjudicatory dispositions. The mechanism for deduction or netting can be applied in post-settlement cost judgments as needed.
Section 998(f)’s “compromise settlement” language shows a distinction: That language was added to clarify that issues resolved by section 998 are compromises, not litigated determinations, for collateral estoppel purposes; it does not restrict the statute’s cost-shifting reach.
Legislative history suggesting application “at trial”: Two later bill analyses used “at trial” as shorthand, but nothing in the statute’s text warrants narrowing section 998 this way. The Court found no persuasive legislative history to contradict the plain language.
Policy objections—penalizing settlement and reducing flexibility: Section 998 does not penalize parties because they settled; it penalizes rejecting a reasonable offer and then achieving an inferior resolution. The statute deliberately shifts risk to the rejecting offeree, encouraging careful evaluation of early offers. Parties retain flexibility by allocating costs in their settlement if they wish to avoid the default.
Contract merger doctrine: Inapplicable. Hyundai did not seek to enforce contract terms from either its offer or the settlement. It invoked statutory rights under section 998, which are independent of the settlement contract and unaffected by merger.
Reliance interests and “settled expectations”: Case law and practice already recognized section 998’s application in settled cases, and parties commonly address cost allocation in settlements. The Court’s decision clarifies rather than disrupts practice.

Precedents Cited and Their Influence

DeSaulles v. Community Hospital of Monterey Peninsula (2016) 62 Cal.4th 1140: Established that a settlement with payment and dismissal is the legal equivalent of a judgment for cost purposes and urged trial courts to inquire whether settlements allocate costs. This case undergirds the Court’s treatment of settlements as “judgments” for section 998 and emphasizes that parties can contract around default cost rules.
Scott Co. v. Blount, Inc. (1999) 20 Cal.4th 1103: Confirmed that section 998 modifies section 1032’s prevailing party regime and treats a losing defendant who made a better offer than the judgment as if it were the prevailing party for postoffer costs. This supports cost-shifting even absent an adjudicated plaintiff victory.
Martinez v. Brownco Construction Co. (2013) 56 Cal.4th 1014: Stressed section 998’s purpose to promote settlement and the incentive structure that rewards making reasonable offers. The Court relied on this policy backdrop to interpret section 998 broadly.
Bank of San Pedro v. Superior Court (1992) 3 Cal.4th 797: Described the “carrot and stick” nature of section 998 that penalizes rejecting reasonable offers. The Court invoked this framework in applying section 998 outside the trial context.
T. M. Cobb Co. v. Superior Court (1984) 36 Cal.3d 273: Allowed use of contract principles to interpret section 998 offers when consistent with the statute’s purposes and clarified that offers may be revoked before acceptance. The Supreme Court here declined to apply the merger doctrine to negate statutory cost rights.
Mon Chong Loong Trading Corp. v. Superior Court (2013) 218 Cal.App.4th 87: Recognized that dismissal can constitute a failure to obtain a more favorable judgment under section 998—proof that no trial is required to trigger cost consequences.
Winn v. Pioneer Medical Group, Inc. (2016) 63 Cal.4th 148; People v. Dillon (1983) 34 Cal.3d 441: Presumption of consistent usage of statutory terms; used here to give “judgment” the same meaning across section 998’s subdivisions.
Goodstein v. Bank of San Pedro (1994) 27 Cal.App.4th 899: Cited for the proposition that a settlement entailing payment and dismissal is the equivalent of a judgment between the parties.
California State Auto. Assn. Inter-Ins. Bureau v. Superior Court (1990) 50 Cal.3d 658: Explained the purpose of the predecessor statute’s “compromise settlement” language (now section 998(f)) as avoiding collateral estoppel from compromises.
Reck v. FCA US LLC (2021) 64 Cal.App.5th 682; McKenzie v. Ford Motor Co. (2015) 238 Cal.App.4th 695; Westamerica Bank v. MBG Industries, Inc. (2007) 158 Cal.App.4th 109: Decisions reflecting that section 998 can operate in settled cases, supporting the Court’s conclusion that the statute is not limited to adjudicated judgments.
Murillo v. Fleetwood Enterprises, Inc. (1998) 17 Cal.4th 985; Estate of Johnson (1926) 198 Cal. 469: Costs are creatures of statute—framing the analysis under section 1032 and section 998.
Great Western Bank v. Converse Consultants, Inc. (1997) 58 Cal.App.4th 609: Reinforces that, absent settlement allocation, courts determine and award costs under section 1032.
Sviridov v. City of San Diego (2017) 14 Cal.App.5th 514: Emphasizes that section 998 places the risk of changed circumstances on the rejecting offeree—relevant to plaintiffs’ flexibility argument.

Impact and Practical Consequences

The decision creates a clear default rule with broad implications across California civil litigation:

Applicability beyond trials: Section 998 cost-shifting applies when a case settles after a rejected or expired offer, not merely when it is tried to judgment or arbitrated to an award.
Settlement drafting: Parties should expressly address cost and fee allocation in their settlement agreements—especially if a section 998 offer was made. Silence will likely trigger section 998’s default regime.
Attorney fees as “costs”: Where attorney fees are statutorily authorized (e.g., Song-Beverly), they are “costs” under section 1033.5 and thus subject to section 998’s postoffer cutoff for the rejecting plaintiff. Plaintiffs may forfeit postoffer fees and may owe defendants’ postoffer costs if they do not obtain a more favorable result than the rejected offer.
Litigation strategy: Both sides have amplified incentives to make and seriously evaluate early, reasonable 998 offers. Defendants gain greater leverage to curb fees and costs spirals; plaintiffs must more carefully assess the risks of holding out for better terms.
Valuation disputes: Trial courts may need to compare offers and results that contain mixed monetary and nonmonetary terms (e.g., vehicle surrender, releases, fee provisions). The Supreme Court left the validity comparison to the trial court on remand—expect parties to brief “apples-to-apples” valuation issues.
Judicial economy: The decision encourages parties to settle earlier—or, at minimum, to settle with clear cost/fee clauses—reducing post-settlement motion practice.

Complex Concepts Simplified

Section 998 offer: A formal written offer to allow entry of judgment, served no fewer than 10 days before trial or arbitration. If not accepted within 30 days or before trial (whichever first), the offer is “deemed withdrawn” and cannot be used as evidence at trial. If the offeree then does worse than the offer, cost-shifting consequences attach.
“Fails to obtain a more favorable judgment or award”: If, after rejecting a 998 offer, the offeree ends up with an equal or less favorable outcome—including settlement, dismissal, or zero recovery—the statute deems the offeree to have “failed” for cost purposes.
“Judgment” in this context: Not limited to a trial verdict. It includes a judgment entered pursuant to a settlement or a functionally equivalent disposition (e.g., a section 664.6 settlement that contemplates entry of judgment or dismissal after performance).
Default vs. contractual allocation: Section 998 sets the default cost-shifting rules. But parties can contract around that default in their settlement by expressly allocating costs and fees, including agreeing that each side bears its own or that a party waives claims to fees.
Attorney fees as “costs”: Under section 1033.5(a)(10)(B), attorney fees authorized by statute qualify as costs. Thus, if section 998 applies, a plaintiff may be barred from recovering postoffer attorney fees even under fee-shifting statutes.
Section 664.6 settlement: A procedural device allowing a court to enter judgment pursuant to a settlement placed orally on the record or signed by the parties. It provides a streamlined enforcement mechanism and, here, facilitated treating the settlement as a judgment-equivalent.
Merger doctrine (contracts): The principle that a final written agreement supersedes prior negotiations. It does not defeat statutory cost-shifting rights under section 998 unless the settlement expressly addresses costs/fees.

Unresolved Questions for the Trial Court on Remand

The Supreme Court did not decide:

Offer validity: Whether Hyundai’s second 998 offer complied with all statutory requirements (clarity, unconditionality, acceptance mechanism, provision for entry of judgment, and treatment of fees and costs).
Comparative favorability: Whether the $39,000 settlement (with its specific nonmonetary terms and fee-motion provision) was less favorable than Hyundai’s $55,556.70 fixed offer or its alternative restitution formulation. This comparison may require valuation of nonmonetary terms, fee entitlements, and timing considerations.
Scope of cost-shifting: The precise computation of plaintiffs’ pre- and postoffer costs and fees, defendant’s recoverable postoffer costs, and any expert witness fee shifting at the court’s discretion.

Guidance for Practitioners

Always address costs and fees in settlements. If a section 998 offer was made and you want to avoid default cost-shifting, include an explicit allocation (e.g., each side bears its own costs and fees, or a lump-sum payment inclusive of all costs and fees, or a specified fee amount).
Value nonmonetary terms and fee structures when evaluating 998 offers. Offers that provide either a fixed sum or restitution, and that address fees by a court-awarded amount, can materially change the comparison calculus.
Track time and expenses pre- and postoffer. Because section 998 draws a temporal line at the offer date, you will need accurate segmentation of fees and costs.
Anticipate “netting” under section 998(e). If the defendant’s postoffer costs exceed the plaintiff’s damages or settlement value, the net may run to the defendant—with judgment entered accordingly absent a contrary settlement term.
Mind local practices for section 664.6. If a settlement contemplates fee motions or entry of judgment, memorialize that clearly; ambiguity can complicate the 998 analysis.

Conclusion

Madrigal v. Hyundai Motor America settles a significant question of California practice: Section 998’s cost-shifting regime applies by default even when a case settles after a plaintiff has rejected or allowed a defense 998 offer to lapse. The statute’s reference to “judgment” encompasses judgments entered pursuant to settlement, and its purpose—to induce reasonable settlement behavior—would be thwarted by limiting application to adjudicated outcomes. The decision harmonizes the text, structure, and policy of sections 998 and 1032 and reaffirms that parties retain the power to contract around the default by explicitly allocating costs and fees in their settlement.

Key takeaways:

Section 998 cost shifting is not confined to trials or arbitrations; it applies to settlements reached after rejection of a valid offer.
“Judgment” includes judgments entered pursuant to section 664.6 settlements and the legal equivalent of judgments achieved by compromise.
If the settlement is silent on costs and fees, section 998’s default regime controls; if parties want a different outcome, they must say so.
Attorney fees authorized by statute are “costs” for section 998 purposes; postoffer fees can be cut off and defense costs can shift.

By clarifying the statute’s reach and reaffirming parties’ freedom to allocate costs in settlement, Madrigal is poised to influence settlement negotiations across California civil cases—especially those involving fee-shifting statutes—encouraging earlier, more realistic evaluations of section 998 offers and reducing post-settlement litigation over costs and fees.