One March 20, 2025, the California Supreme Court ruled in Madrigal v. Hyundai Motor America that California Code of Civil Procedure Section 998 can bar plaintiffs from recovering litigation costs if they enter a pre-trial settlement that is less favorable than a prior defense offer. 

The general rule in California is that a “prevailing party” may recover all litigation costs as a matter of right. CCP Section 998 modifies this general rule in cases where the defense makes a qualifying settlement offer. Under Section 998, if a plaintiff rejects or fails to timely accept a qualifying settlement offer and then “fails to obtain a more favorable judgment or award,” the plaintiff may no longer recover post-offer litigation costs. This rule is designed to encourage reasonable pre-trial settlements. Parties often contract around this rule by providing for the allocation of costs and fees in settlement agreements.

In Madrigal v. Hyundai Motor America, car purchasers who sued Hyundai under a consumer warranty statute rejected two settlement offers before later settling for a lower dollar amount on the first day of trial. When plaintiffs attempted to recover litigation costs, Hyundai argued that recovery was precluded by Section 998 because plaintiffs had rejected their prior offers and “fail[ed] to obtain a more favorable . . . award” by accepting a lesser settlement. Plaintiffs argued that Section 998 did not apply because there was no “judgment or award” by a court.

The California Supreme Court held that Section 998 does not require resolution through trial or arbitration and therefore may apply if plaintiffs accept a pre-trial settlement that is less favorable than a prior defense offer. In the Court’s view, plaintiffs read the statute too narrowly: Section 998 does not require a “judgment or award” by trial, only that a plaintiff fail to obtain a more favorable resolution after rejecting a prior settlement offer. To prove its point, the Court emphasized that the statute would apply even where a plaintiff failed to obtain any award at all, such as through voluntary dismissal.

The Madrigal decision clarifies that Section 998’s cost-shifting rule may apply to cases resolved through settlement. Importantly, however, the Court noted that parties “remain free to agree to their own allocation of costs and fees as part of the settlement agreement.” The rule recognized in Madrigal will apply only when a settlement agreement that follows an earlier rejection of a more favorable settlement offer does not specify that costs are included.