On March 21, 2025, the California Supreme Court issued a significant decision in Madrigal v. Hyundai Motor America, holding that a plaintiff who rejects or allows a Code of Civil Procedure Section 998 offer to lapse may still face cost-shifting consequences—even if the case settles before trial. This ruling resolves long-standing uncertainty about whether Section 998 penalties apply only when a case proceeds to judgment after trial, and it marks a reaffirmation of the statute’s purpose to promote early settlement.
Section 998 allows a party to make a formal settlement offer that, if not accepted, can shift litigation costs. Specifically, if the offeree does not obtain a result more favorable than the offer, they may be barred from recovering post-offer costs and could be required to pay the offeror’s post-offer costs. In Madrigal, plaintiffs rejected two separate 998 offers from Hyundai—one of which offered over $55,000 plus attorney fees—and ultimately settled for $39,000 on the day of trial. The trial court initially awarded plaintiffs over $17,000 in costs, reasoning that Section 998 did not apply since the case settled before trial. However, the Court of Appeal reversed, and the Supreme Court affirmed, holding that the statute’s cost-shifting provisions are triggered by settlement just as they are by trial, so long as the settlement is less favorable than the offer.
The Supreme Court explained that a pretrial settlement involving payment by the defendant and dismissal of the action is legally equivalent to a judgment for purposes of Section 998. The Court emphasized that limiting cost-shifting to cases resolved at trial would undermine the purpose of the statute, which is to encourage reasonable settlement offers and discourage unnecessary litigation. As the Court put it: “Rewarding the making of reasonable offers…is enhanced by an understanding that section 998 applies even to cases that settle before trial but after rejection of an offer.” This interpretation increases the incentive for litigants to make their best offers early in the case, knowing they could still benefit from cost-shifting protections if the case settles later.
The key takeaway from Madrigal is that Section 998’s cost-shifting power does not depend on a case going to trial. Parties should carefully evaluate the potential value of their case and consider making timely, strategic 998 offers to maximize their leverage. Importantly, parties should also be explicit in their settlement agreements about how costs will be handled, to avoid post-settlement disputes. The decision signals to both plaintiffs and defendants that the risks of rejecting a reasonable settlement offer are real, regardless of whether a case ends in trial or a negotiated resolution.
If you need more information on 998 offers or settlement agreements, please contact us at info@mnklawyers.com.
This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create a client-lawyer relationship between MNK Law and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material.
