California law has a strong preference for lawsuit settlements, for public policy reasons (such as judicial efficiency). As such, the state legislature has declared that evidence of an offer to settle is inadmissible to prove liability (Evid. Code § 1152), and that all statements made during mediation are confidential (Evid. Code §1119).
Another important (and far more complex) provision is section 998 of the Code of Civil Procedure, which provides that if a settlement offer is rejected, and the eventual judgment is not more favorable to the rejecting party than the settlement offer was, this party not only loses the right to recover litigation costs, but also becomes liable for all costs that the offering party subsequently incurs (after the settlement offer is made).
Naturally, creative attorneys try to game this system. The only requirements to section 998 are that a written offer is served at least 10 days before trial or arbitration, and that the offer is made in “good faith,” meaning that there is at least a reasonable prospect of acceptance (this includes allowing the other party ample time to consider the offer).
Section 998 is generally used to increase or mitigate judgment amounts. For example, if a defendant makes a 998 settlement offer, which the plaintiff does not accept, and the eventual judgment is not more favorable to this plaintiff than the 998 offer was, the defendant can (in some cases) actually be awarded money, if the plaintiff’s recovery amount is less than the defendant’s legal costs. Conversely, if a plaintiff makes a 998 offer, which the defendant does not accept, and this defendant does not secure a more favorable judgment than contained in the 998 offer, the plaintiff can be awarded all court costs, in addition to the judgment itself.
There are other issues, which are far too complex to discuss here (998 offer revocations, offers to multiple parties, etc.). If you find yourself party to a lawsuit in which a monetary judgment is sought, be sure to discuss section 998 with your attorney, or you may find a nasty surprise at the end.