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Ninth Circuit defines the “costs” associated with offers of judgment or settlement

11/5/25

By: Nicholas S. Franos

In Alvarado v. Wal-Mart Associates, Inc., issued by the United States Court of Appeals for the Ninth Circuit on September 30, 2025, the court clarified the scope of awards under California Code of Civil Procedure Section 998. This decision, which mirrors Federal Rule of Civil Procedure 68 on Offers of Judgment, underscores the importance of precise drafting when making settlement offers.

What Happened in Alvarado

Claudia Alvarado brought individual, putative class and Private Attorneys General Act (PAGA) claims against Walmart for violations of California’s Labor Code. After her motion for class certification was denied, she settled her individual claims for $22,000 under Section 998 and dismissed her PAGA claims without prejudice.

The settlement agreement stated it was “in full and complete settlement of the claims asserted,” and allowed Alvarado’s counsel to seek “reasonable fees and costs actually incurred as of the date of the offer in pursuit of Plaintiff’s individual claims in this action and recoverable by law.” If the parties couldn’t agree on the amount, the court would decide.

The parties failed to agree, and the court awarded $312,429 in fees and costs.

On appeal, Walmart argued that the award violated the agreement because it included fees under Hensley v. Eckerhart, 461 U.S. 424 (1983).

The Ninth Circuit’s Ruling

Section 998 encourages pre-trial settlement by shifting litigation costs to a party that rejects a settlement offer but fails to achieve a better result at trial. Parties may expand or limit recoverable costs by express agreement. If silent, the prevailing party is entitled to costs and fees if authorized by statute or contract.

Here, the relevant statute is California’s Labor Code, which entitles successful employees to reasonable attorney fees. When success is partial, courts apply the Hensley test: fees may be apportioned unless unsuccessful claims are “so intertwined” with successful ones that separation is impractical.

The Ninth Circuit held that Alvarado could seek fees for her individual claims and, under Hensley, for class and PAGA claims to the extent they were intertwined. The court emphasized that the agreement permitted recovery of fees “recoverable by law,” which includes Hensley fees. Walmart’s argument that the agreement excluded such fees was rejected because it was not raised in the district court and contradicted the agreement’s plain language.

What This Means for Employers

Although grounded in California law, this decision has broader implications. Section 998 offers closely resemble Rule 68 offers under federal law, making this a cautionary tale for employer-defendants nationwide.

Key takeaways

• Offers of judgment are contracts. Their language governs what costs and fees are recoverable.

• Be explicit. If excluding Hensley-type fees is the goal, say so clearly.

• Consider the strategy. A higher offer that includes fees may be preferable to a lower one that leaves fee determination to the court.

• Draft carefully. Ambiguity can lead to costly surprises.

This case is a timely reminder that precision in settlement agreements can significantly impact litigation outcomes.

For more information, please contact Nicholas S. Franos at nicholas.franos@fmglaw.com or your local FMG attorney.

Information conveyed herein should not be construed as legal advice or represent any specific or binding policy or procedure of any organization. Information provided is for educational purposes only. These materials are written in a general format and not intended to be advice applicable to any specific circumstance. Legal opinions may vary when based on subtle factual distinctions. All rights reserved. No part of this presentation may be reproduced, published or posted without the written permission of Freeman Mathis & Gary, LLP.