On February 27, 2024, the California Second District Court of Appeal issued an opinion in Jacob Ayers v. FCA US, LLC (B315884), in which it reversed the Los Angeles County Superior Court’s cost judgment following the settlement of a “lemon law” action brought pursuant to the Song-Beverly Consumer Warranty Act (Song-Beverly), Civil Code section 1790 et seq., in which the trial court ordered the defendant to pay the plaintiff’s attorney fees incurred after the plaintiff had rejected the defendant’s valid and good faith offer to compromise pursuant to Code of Civil Procedure section 998.
The plaintiff Jacob Ayers (“Plaintiff”) purchased a new Jeep Grand Cherokee manufactured and sold by the defendant, FCA US, LLC (“FCA”) for a total sale price of $57,300. Within the first three years of ownership, Plaintiff experienced numerous problems with the vehicle. He requested that FCA repurchase it, but FCA refused to do so. Plaintiff then filed a Complaint against FCA in which he asserted causes of action for violations of Song-Beverly and fraudulent inducement. The remedies sought by Plaintiff under Song-Beverly included restitution of the amount paid for the vehicle, a discretionary civil penalty up to double the actual damages (which could potentially result in a total damages award of up to three times the purchase price), plus reasonable costs and attorney fees pursuant to Song-Beverly’s fee-shifting provision.
Throughout the litigation, FCA served Plaintiff with three separate offers to compromise pursuant to Code of Civil Procedure section 998 in which FCA offered to buy back the vehicle plus pay Plaintiff’s reasonable fees and costs. FCA’s first offer was for $61,000 plus costs. The second offer was for $122,000 plus costs. The third offer was for $143,498 plus costs. Plaintiff did not accept any of these offers and continued to litigate.
In January 2020, Plaintiff traded the Jeep in for a new vehicle and received a credit of $13,000. Then later that year, in October 2020, there was a change in the law when the Court of Appeal held that amounts Plaintiffs had already received from trading in a vehicle were excluded from the damages calculation in Song-Beverly. (Niedermeier v. FCA US LLC (2020) 56 Cal.App.5th 1052, 1061, review granted Feb. 10, 2021, S266034.) This decision effectively reduced Plaintiff’s maximum potential recovery by $39,000 (i.e., three times the amount of the trade-in.)
Plaintiff then served FCA with a section 998 offer in the amount of $125,000 plus costs, expenses, and attorney fees. FCA accepted this offer. Plaintiff then filed a Motion for Fees and Costs because the parties could not come to an agreement on them. FCA opposed Plaintiff’s motion on the grounds that by settling for $125,000, he failed to obtain an outcome more favorable than FCA’s third section 998 offer for $143,498, and therefore Plaintiff should not be entitled to recover any fees or costs incurred after that offer was made.
The trial court rejected FCA’s arguments on two independent grounds. First, it held that section 998’s limitations on expense and cost recovery do not apply when the case is resolved by a pretrial settlement. Second, it held that Plaintiff should be exempted him from the usual consequences of section 998 under the circumstances of the case in which an intervening change in law reduced the maximum amount plaintiff could recover at trial after Plaintiff had already declined to accept the offer. The trial court did not cite to any authority for these holdings. FCA filed a timely appeal.
The Court of Appeal reversed the trial court’s decision, finding that section 998 does indeed apply to Song-Beverly cases that are resolved by a pretrial settlement. Relying on the rationale set forth in Madrigal v. Hyundai Motor America (2023) 90 Cal.App.5th 385, 399, the court found that a plain reading of section 998 compels the conclusion that it applies to any litigation that terminates with the plaintiff getting less than he would have if he had accepted the defendant’s earlier section 998 offer. The Court of Appeal further held that there is no exception under section 998 for intervening changes in the law, and therefore this does not exempt the plaintiff from the consequences of section 998. The court’s decision was based on the rationale that a party that fails to accept an earlier, more favorable settlement assumes the risk that an adverse change in the law will reduce their ultimate recovery.
As such, the court concluded that FCA’s third settlement offer was valid and that it cut off the Plaintiff’s right to attorney fees and costs incurred after the offer was made. The Court of Appeal remanded the case back to the trial court with instructions to enter a new judgment excluding any fees and costs incurred by the Plaintiff after the date of FCA’s earlier offer.
This opinion provides guidance on the additional risks that litigants should consider when deciding whether to accept or reject an offer to compromise pursuant to Code of Civil Procedure section 998. First, by rejecting an offer, the litigant is taking on the risk that the case ends in an outcome less favorable than the offer, regardless of whether the case ends via settlement or judgment at trial. Second, the litigant rejecting the offer is taking on the risk of an adverse change in the law will reduce their ultimate recovery and thereby prevent the litigant from obtaining the more favorable outcome. Under either of these circumstances, the litigant rejecting the offer will not be entitled to recover fees and costs incurred after the date the offer was made.
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