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Using Cost-Shifting Rules and Statutes to Increase Recoveries in Arbitration

Jonathan Polland


  • Cost-shifting rules and statutes can improve arbitration results by allowing the offering party to recover attorney fees and costs.
  • Rules like Federal Rule of Civil Procedure 68 incentivize parties to make reasonable settlement offers by permitting the recovery of costs and attorney fees if offers made prior to trial are not accepted and certain conditions are met.
  • California, Arizona, Michigan, and possibly Nevada have cost-shifting rules that apply to arbitration. Other jurisdictions may also allow the use of such rules.
Using Cost-Shifting Rules and Statutes to Increase Recoveries in Arbitration
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The effective use of cost-shifting rules and statutes, which may also entitle an offering party to recover attorney fees in certain cases, can significantly improve the results achieved in arbitration.

To incentivize parties to make and accept reasonable settlement offers, statutes and procedural rules, such as Federal Rule of Civil Procedure 68, permit the recovery of costs and even attorney fees when offers of settlement made prior to trial are not accepted, and certain other conditions are satisfied. Only a defendant can make use of Rule 68 by offering to allow judgment on specified terms. Where that offer is not accepted within the specified time frame, and the judgment that the plaintiff obtains is less favorable than the unaccepted offer, the plaintiff generally must pay the defendant’s post-offer costs.

Over 40 states have adopted similar cost-shifting rules and statutes. In many states, plaintiffs as well as defendants can make offers of judgment or settlement in accordance with those provisions. Parties can recover their post-offer costs—and, in certain circumstances, post-offer attorney fees—if the result obtained by the offering party is more favorable than the terms of the unaccepted offer made to the offeree. A party making an unaccepted offer that obtains a better result at trial can also prevent the non-accepting party from recovering its post-offer costs.

Litigators regularly make effective use of these cost-shifting rules and statutes in actions tried in state and federal courts. In California, Arizona, Michigan, and possibly Nevada, similar rules apply in arbitration. This article discusses the effective use of cost-shifting provisions in those jurisdictions in which they apply to arbitration.

Jurisdictions in Which Cost-Shifting Statutes and Rules Apply to Arbitration

California. For over 20 years California’s cost-shifting statute, Code of Civil Procedure section 998, has expressly applied to arbitration. Section 998 can be used by either party to a dispute. Moreover, “costs” recoverable by a prevailing party in California include attorney fees if authorized by contract, law, or statute. Cal. Civ. Proc. Code § 1033.5(a)(10). Thus, if a claimant or respondent makes a section 998 offer in an arbitration, which includes either statutory claims that provide for an award of attorney fees to the prevailing party or claims on a contract that includes an attorney fees clause, then the offering party may be able to recover both post-offer costs and post-offer attorney fees if the award issued by the arbitrator is more favorable to the offering party than the unaccepted offer made pursuant to section 998.

The following example illustrates the significant impact that effective use of section 998 can have on the outcome of a California arbitration. The parties arbitrate a nonemployment dispute in which the contract or statute that is the subject of the arbitration provides that the prevailing party is entitled to attorney fees. The respondent makes a section 998 offer in the amount of $100,000, which is not accepted. After the respondent makes its section 998 offer, the respondent and claimant each incur $25,000 in costs and $200,000 in attorney fees. The claimant is awarded $50,000 by the arbitrator on its claims. Absent the section 998 offer, the claimant would be deemed the prevailing party and therefore entitled to recover its costs and attorney fees. However, because the respondent has obtained a better result than its unaccepted section 998 offer, the respondent is entitled to recover its post-offer costs instead of paying them. Because in California costs include attorney fees recoverable pursuant to contract or statute, the respondent’s post-offer attorney fees are treated as costs, and the respondent is entitled to recover its post-offer attorney fees as well.

In this example, the respondent will recover $25,000 in post-offer costs and $200,000 in post-offer attorney fees, rather than being obligated to pay the claimant those amounts. Thus, the effective use of section 998 results in a benefit to the respondent of $450,000 (that is, the ability to recover $225,000 in post-offer costs and fees, while avoiding the obligation to pay the claimant’s post-offer fees and costs in that same amount). However, in this example, the respondent may still be liable for the claimant’s pre-offer costs and attorney fees.

As discussed in  the conclusion of this article, different rules apply to claims brought under statutes governing certain employment and discrimination claims, such as the California Fair Employment and Housing Act, California Government Code sections 12900–12999, and section 998 cannot be used by a California employer defending against such claims to recover costs and fees.

Arizona. Arizona’s cost-shifting rule, Arizona Rule of Civil Procedure 68, expressly applies to cases in which arbitration is mandatory if the amount in dispute is below certain dollar thresholds. Either party may use Arizona Rule 68. Arizona Rule 68(g)(1) has a built-in sanction provision, presumably designed to encourage parties to accept reasonable settlement offers, which provides: “A party who rejects an offer, but does not obtain a more favorable judgment, must pay as a sanction twenty percent of the difference between the amount of the offer and the amount of the final judgment.”

Michigan. Unlike section 998 in California and Arizona Rule 68, Michigan Court Rule 2.405 does not make its cost-shifting provisions expressly applicable to arbitration. However, in Simcor Construction, Inc. v. Trupp, 322 Mich. App. 508 (2018), the Michigan Court of Appeals held that Michigan Rule 2.405 applied to an arbitration award that had been confirmed by a Michigan district court. Id. at 519. Thus, in Michigan, a party that obtains an award that is better than its unaccepted offer may be entitled to recover “actual costs,” which are “the costs and fees taxable in a civil action and a reasonable attorney fee, dating to the rejection of the prevailing party’s last offer or counteroffer, for services necessitated by the failure to stipulate to the entry of judgment.” See Michigan Rule 2.405(a)(6). Michigan Rule 2.405 also allows either a plaintiff/claimant or a defendant/respondent to invoke its cost-shifting provisions through offers of judgment.

Nevada. The Nevada cost-shifting rule, like the Michigan rule, does not make express reference to arbitration. In WPH Architecture, Inc. v. Vegas VP, LP, 360 P.3d 1145 (Nev. 2015), the Nevada Supreme Court addressed the issue of whether the Nevada cost-shifting rule applies to arbitrations. The court held that an arbitration panel did not manifestly disregard Nevada law by not awarding costs and attorney fees based on Nevada Rule of Civil Procedure 68 because such an award was discretionary in arbitration. The court left open the possibility that a future arbitration panel could award fees and costs based on Nevada’s cost-shifting rule. Id. at 1148. By agreement, some parties to Nevada arbitrations have expressly made Nevada Rule 68 applicable to arbitration proceedings.

Other Jurisdictions. Parties can attempt to make use of cost-shifting rules in jurisdictions in which those rules do not make express reference to arbitration (and instead refer to trials) or where courts have not yet addressed whether their jurisdiction’s cost-shifting rules apply to arbitration. Where courts have not yet addressed the issue in published decisions or in Nevada, where the application of Rule 68 to arbitration is uncertain, some parties have inserted clauses in their arbitration agreements stating that the cost-shifting rules in their jurisdiction shall apply for the purposes of determining the prevailing party. However, absent authority authorizing the use of cost-shifting provisions in the jurisdiction in which the arbitration is pending, a party risks ongoing disputes, and potential appeals, regarding whether and how these cost-shifting rules apply to arbitration.

Special Considerations for Use of Cost-Shifting Rules and Statutes in Arbitration

The cost-shifting rules and statutes in each of the jurisdictions discussed above have their own stringent requirements. These requirements apply whether the case is being arbitrated or litigated in court. There are also certain issues that arise only in the arbitration context, including whether requests for costs and fees incurred during the arbitration, and recoverable under cost-shifting statutes and rules, should be made to the arbitrator or to the court.

In California, requests for costs and fees incurred during the arbitration that are awardable by the arbitrator must be made to the arbitrator. Indeed, the failure to request that the arbitrator make an award of such costs and fees under section 998 will result in a waiver of the offering party’s right to obtain the cost-shifting benefits of this statute, and those costs and fees will not be available from the trial court confirming the award. Maaso v. Signer, 203 Cal. App. 4th 362, 377 (2012).

Parties making section 998 offers in arbitration may have legitimate concerns about sharing the existence and terms of such an offer with the arbitrator before the arbitrator makes a merits determination because of the potential impact of that information on the arbitrator’s deliberations. The California Supreme Court has observed that the policies behind section 998 would be undermined if parties were required to disclose the existence and terms of section 998 offers before the arbitrator has made a merits determination. See Heimlich v. Shivji, 7 Cal. 5th 350, 365 (2019).

The best strategy for avoiding waiver of fees and costs recoverable under section 998, while also avoiding premature disclosure before the arbitrator makes a merits determination, is to request that the arbitrator first issue an interim award making a merits determination and then a final award addressing attorney fees and costs. The parties can brief the attorney fees and costs issues after the issuance of the interim award but before the issuance of the final award. In the final briefing on costs and attorney fees, the offering party can disclose the terms of the unaccepted offer without concern that the disclosure will improperly influence the arbitrator’s merits determination. The briefs on attorney fees and costs can also address the impact of the unaccepted offer on the award of costs and fees under Section 998.

In many arbitrations, especially where substantial fees and costs have been incurred by the parties, this two-step process (an interim award followed by a final award) is used. For the reasons stated, this two-step process is especially appropriate where an unaccepted section 998 offer has been made.

Although California courts require that the arbitrator make an award of costs and potentially attorney fees under section 998, Arizona and Michigan do not seem to have this requirement. Arizona Rule 68 and Michigan Rule 2.405 seem to place the responsibility for determining whether and how those cost-shifting provisions apply with the trial courts. In Nevada, there is not enough published authority to make an informed judgment on the issue. However, to avoid the risk that a Nevada court might follow the California rule and find that costs and fees recoverable under Nevada Rule 68 are waived if not sought from the arbitrator, offering parties in Nevada arbitrations should consider requesting that an interim award first be issued on the merits, and then address the entitlement to costs and fees under Nevada Rule 68 with the arbitrator prior to issuance of the final award.

Final Thoughts

Each jurisdiction has different requirements that must be satisfied in order to invoke the benefits of cost-shifting rules and statutes, including such items as the language that must be used in the offer, the settlement terms that must be addressed, and how the offer must be transmitted. Thus, before making an offer of judgment, an advocate must carefully research the requirements in the applicable jurisdiction and fully comply with them.

Depending on the type of claim in the underlying arbitration, there may be limitations on the effect of cost-shifting rules and statutes. For example, in California, an employer’s rights to costs and attorney fees on claims brought under the California Fair Employment and Housing Act cannot be expanded by use of a section 998 offer, and California Government Code section 12965(c)(6) states that “notwithstanding Section 998 of the Code of Civil Procedure, 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.” See also Mangano v. Verity, Inc., 167 Cal. App. 4th 944, 951 (2008) (holding that section 998 does not apply to nonfrivolous California Fair Employment and Housing Act actions, and reversing trial court order awarding defendant costs and expert witness fees pursuant to section 998). Thus, advocates making use of cost-shifting provisions must also determine whether the provisions are potentially in conflict with other statutes that are the subject of the arbitration, especially in the context of employment and discrimination claims, and adjust offers (or expectations) to take those conflicting statutes into account.

For decades, advocates have made effective use of cost-shifting rules and statutes in state and federal courts. Given the significant amount in costs and fees that is potentially recoverable in arbitration proceedings, advocates should carefully consider whether cost-shifting rules and statutes can be used to increase their client’s recoveries in arbitration. Use of such rules and statutes in arbitration may also encourage settlement, which is the reason these rules and statutes were originally enacted.