Attorney's Fees in California Demand Letters: How to Build Fee Recovery Into Your Pre-Litigation Strategy

Most business owners think about demand letters as a way to recover the money they’re owed or force performance of a contract obligation. What they don’t realize is that a properly structured demand letter in California can do something equally valuable: set up recovery of tens of thousands of dollars in attorney’s fees and costs that will accumulate if the dispute proceeds to litigation.

After more than a decade of handling contract disputes, payment processor freezes, construction defects, and business breakups across California, I’ve learned that the difference between a client who recovers their principal and a client who recovers their principal plus all their legal expenses often comes down to how the demand letter was structured months before any lawsuit was filed. The demand letter isn’t just about requesting payment—it’s about creating a record of reasonableness, identifying fee-shifting mechanisms, and establishing the foundation for cost recovery that can multiply your effective recovery by two or three times.

California’s fee and cost rules are complex and counterintuitive. The state follows the “American rule” that each side pays its own attorney’s fees, but that rule has so many exceptions that it’s almost meaningless in commercial litigation. Between contractual fee clauses, statutory fee-shifting provisions, and procedural cost rules, there are multiple pathways to shift fees and costs to the other side. But most of these pathways require advance planning, and that planning needs to start with the demand letter.

This article explains how California’s fee and cost rules work, how to identify which fee-shifting mechanisms apply to your dispute, and most importantly, how to structure your demand letter to maximize your fee recovery leverage while avoiding traps that could flip fee exposure back onto you.

The California Fee and Cost Landscape: Three Pathways to Recovery

Before you can effectively use a demand letter to set up fee recovery, you need to understand the three main ways that attorney’s fees and costs shift in California civil litigation. Each pathway has different triggering requirements, different limitations, and different strategic implications for demand letter drafting.

The American Rule and Its Exceptions

California follows the American rule, codified in Civil Code Section 1021, which provides that each party to litigation ordinarily pays its own attorney’s fees except where fees are authorized by statute or agreement. This default rule means that even if you win your case and recover every dollar you claimed, you’re still out of pocket for your legal expenses unless you can fit into one of the exceptions.

The exceptions fall into three categories: contractual fee provisions, statutory fee-shifting provisions, and procedural cost rules. Understanding which exceptions apply to your case is essential before you draft a demand letter, because the mechanisms you can invoke in the demand letter depend on which pathways to fee recovery exist in your specific dispute.

Contractual Fee Clauses: Civil Code Section 1717 and Reciprocity

The most common fee-shifting mechanism in business disputes is a contractual attorney’s fees provision. Most commercial contracts, service agreements, and even many consumer contracts include language like “the prevailing party in any action arising out of this Agreement shall be entitled to recover reasonable attorney’s fees and costs.”

These provisions are governed by Civil Code Section 1717, which does something that surprises most business owners: it makes every unilateral fee clause reciprocal. Even if your contract says only one party can recover fees, Section 1717 converts that into a two-way street. Both parties can recover fees if they prevail on the contract claims.

Section 1717 defines the prevailing party as the party who recovered a greater relief in the action on the contract. There can only be one prevailing party per contract suit, or the court can find there’s no prevailing party if the results are mixed or if the action is voluntarily dismissed or dismissed pursuant to settlement.

This reciprocity principle has enormous implications for demand letter strategy. When you’re writing a demand letter based on a contract with a fee clause, you’re not just threatening to recover your claimed damages—you’re threatening to recover all your attorney’s fees and costs on top of that. But you also need to remember that if you file suit and don’t prevail, the other side can recover their fees from you.

Statutory Fee-Shifting: Consumer Protection, Public Interest, and Employment Laws

California has dozens of statutes that provide for fee-shifting in specific types of cases. The most important for the types of disputes I typically handle are the Consumer Legal Remedies Act, Civil Code Section 1021.5 (the private attorney general statute), and various employment and wage laws.

The Consumer Legal Remedies Act, Civil Code Section 1780(e), provides that the court shall award costs and attorney’s fees to a prevailing plaintiff in a CLRA action. A prevailing defendant can only recover fees if the court finds the plaintiff’s action was not brought in good faith. This is a one-way fee-shifting statute that strongly favors consumers.

Section 1021.5, the private attorney general statute, authorizes fee awards where a successful party has enforced an important right affecting the public interest and the necessity and financial burden of private enforcement make the award appropriate. This statute includes the “catalyst” theory, which allows fee recovery even without a final judgment if the lawsuit was a substantial factor in causing the defendant to change its conduct, provided the plaintiff made reasonable efforts to settle before filing.

These statutory fee-shifting provisions are relevant to demand letters in two ways. First, they give you additional leverage beyond just contractual fee clauses. Second, some of them have pre-suit notice requirements that make the demand letter a mandatory statutory step, not just a strategic choice.

Procedural Cost Rules: Code of Civil Procedure Sections 1032, 1033.5, and 998

California’s procedural rules provide a third pathway to cost recovery through Code of Civil Procedure Sections 1032 and 1033.5, and most importantly, through Section 998 offers to compromise.

Section 1032 provides that a prevailing party is entitled as a matter of right to recover costs in any action or proceeding. Section 1033.5 lists the specific items that count as recoverable costs, which includes attorney’s fees when authorized by contract, statute, or law.

The interaction between these sections means that contractual and statutory fee provisions don’t stand alone—they’re implemented through the cost recovery mechanism. When you recover fees under a contract clause or statute, those fees are technically recovered as an item of costs under Section 1033.5.

Section 998 is California’s offer to compromise statute, and it’s one of the most powerful cost-shifting tools available. After a lawsuit is filed, any party can serve a written offer to compromise. If the offer is rejected and the rejecting party fails to obtain a more favorable judgment, that party must pay the offeror’s post-offer costs, which in some cases can include expert witness fees and attorney’s fees.

Section 998 doesn’t create an independent right to fees, but it enhances whatever fee recovery mechanisms already exist. If you have a contractual fee clause or statutory fee entitlement, a properly calibrated Section 998 offer can dramatically increase your fee recovery by making the other side pay not just your total fees, but your post-offer fees even if you don’t fully prevail on the merits.

Civil Code Section 1717: The Contract Fee Provision Workhorse

For most business disputes—payment processor holds, contractor disputes, software development failures, marketing agency breaches—the primary fee-shifting mechanism is a contractual attorney’s fees provision interpreted under Civil Code Section 1717. Understanding how Section 1717 actually works is essential to using it effectively in demand letters.

Reciprocity and the Prevailing Party Determination

Section 1717(a) provides that in any action on a contract where the contract specifically provides that attorney’s fees and costs incurred to enforce that contract shall be awarded to one of the parties, the prevailing party shall be entitled to reasonable attorney’s fees in addition to other costs. The statute explicitly makes such provisions reciprocal, meaning both parties have the same right to fees regardless of how the contract is worded.

The prevailing party determination is critical and often counterintuitive. Section 1717(b)(1) gives the court discretion to determine which party prevailed on the contract or was entitled to greater relief. The court looks at the practical results of the litigation—who got more of what they sought—not at whether plaintiff or defendant won on technical grounds.

Courts can find no prevailing party when the litigation results in a standoff where neither side achieved substantial success. Importantly, Section 1717(b)(2) provides that if an action is voluntarily dismissed or dismissed pursuant to settlement, there shall be no prevailing party for purposes of Section 1717.

This voluntary dismissal rule has huge implications for settlement strategy and demand letter drafting. If you’re the plaintiff and you send a demand letter threatening to recover fees under Section 1717, but then you settle before trial and dismiss the case as part of the settlement, you likely won’t be able to recover your attorney’s fees under Section 1717 because the dismissal means there’s no prevailing party. Your fee recovery will need to come from the settlement itself, not from a statutory or contractual entitlement.

The Santisas Problem: Voluntary Dismissal and Fee Recovery

The California Supreme Court addressed this issue in Santisas v. Goodin, holding that defendants could not recover Section 1717 fees on contract claims after the plaintiff voluntarily dismissed those claims. The court emphasized that Section 1717’s reciprocity principle shouldn’t create fee recovery where none would exist if the clause favored the party now seeking fees.

The practical effect: if you’re drafting a demand letter as plaintiff’s counsel and you think the case might settle with a dismissal, you can’t count on recovering fees under Section 1717 post-settlement. You need to build fee recovery into the settlement amount itself. The demand letter should reference the fee clause and Section 1717 to create settlement pressure, but you shouldn’t promise your client that they’ll definitely recover fees as a separate item if the case settles.

For defendants responding to demand letters, this creates an opportunity. If the plaintiff seems likely to settle and dismiss rather than push through to judgment, you can use the Santisas principle to resist paying their fees as part of settlement. The settlement payment might need to be higher to compensate for their legal expenses, but they can’t claim a separate entitlement to fees under Section 1717 if they’re voluntarily dismissing.

Section 1717.5: Book Account Fee Caps for Small Claims

Civil Code Section 1717.5 provides for attorney’s fees in actions on book accounts and consumer credit transactions, but caps the fees at either a percentage of the obligation (typically 25%) or a fixed dollar amount ($960 for amounts up to $500, $1,200 for amounts up to $1,000, and so on).

This statute is relevant when you’re dealing with small-dollar contract disputes—an unpaid invoice of a few thousand dollars, a credit card debt, a small business-to-business purchase on account. If the underlying obligation is small, Section 1717.5 might cap the attorney’s fees you can recover even if Section 1717 would otherwise allow full fee recovery.

In demand letters for small-dollar disputes, you can reference Section 1717.5 to provide realistic fee exposure figures. If you’re owed $5,000 and you’ve already incurred $8,000 in fees, the other side needs to understand that while Section 1717 makes fees recoverable, Section 1717.5 might cap the actual recovery. This transparency can facilitate settlement by making the numbers more realistic for both sides.

Demand Letter Strategy for Contract Fee Clauses

When drafting a demand letter for a dispute covered by a contractual fee clause, you should identify and quote the specific contract provision, reference Civil Code Section 1717’s reciprocity principle, provide a realistic estimate of current fees and projected fees if litigation proceeds, and explain that fees are recoverable as costs under Code of Civil Procedure Sections 1032 and 1033.5.

The tone should be informational rather than threatening. You’re not trying to extort settlement by threatening crippling legal fees—you’re explaining the economic reality that litigation will be expensive for both sides, but particularly expensive for the losing side because they’ll pay both their own fees and yours.

Example language for a demand letter: “The Services Agreement dated April 15, 2024, contains an attorney’s fees provision in Section 12.3, which provides that ‘the prevailing party in any action arising out of this Agreement shall recover its reasonable attorney’s fees and costs.’ Under California Civil Code Section 1717, this provision is reciprocal, meaning both parties have equal rights to fee recovery. As of this date, our client has incurred approximately $12,000 in attorney’s fees investigating and pursuing this claim. If litigation becomes necessary, we anticipate total fees through trial could exceed $75,000. Under Sections 1032 and 1033.5 of the Code of Civil Procedure, these fees would be recoverable as costs by the prevailing party.”

This paragraph accomplishes several goals: it identifies the specific fee provision with precision, it explains the reciprocity principle so the other side understands their own exposure, it provides current fee figures to establish that significant expense has already been incurred, and it projects future fees to demonstrate the stakes of litigation without making an explicit threat.

Statutory Fee-Shifting Mechanisms in Common Dispute Types

While contractual fee clauses are the most common fee-shifting mechanism, certain types of disputes are governed by statutes that provide for fee recovery independent of any contract. These statutory fee provisions often have their own requirements and limitations that affect how you structure demand letters.

Consumer Legal Remedies Act: One-Way Fees and Mandatory Pre-Suit Notice

The Consumer Legal Remedies Act, Civil Code Sections 1750 through 1785, prohibits various unfair and deceptive practices in consumer transactions. Section 1780(e) provides that the court shall award costs and attorney’s fees to a prevailing plaintiff in a CLRA action. The statute creates asymmetrical fee-shifting: prevailing plaintiffs recover fees automatically, while prevailing defendants can only recover fees if the court finds the action was not brought in good faith.

This one-way fee provision is enormously valuable for consumer plaintiffs and creates substantial settlement pressure on businesses. If you’re sending a demand letter on behalf of a consumer against a business for deceptive practices, false advertising, breach of warranty, or other conduct covered by the CLRA, you can invoke Section 1780(e) to demonstrate that the business faces not just the principal claim but also your client’s full legal fees if they lose.

The CLRA also has a mandatory pre-suit notice requirement. Section 1782 requires that before filing an action for damages under the CLRA, you must give the defendant 30 days’ written notice of the specific violations and the relief sought. This means your demand letter isn’t just strategy—it’s a statutory prerequisite. The defendant has 30 days to respond with an appropriate correction, repair, replacement, or refund. If they do so, the consumer cannot proceed with a damages action, though injunctive relief remains available.

This creates a interesting dynamic for demand letter drafting in CLRA cases. Your letter must comply with Section 1782’s requirements: it must enumerate the specific CLRA violations from the list of 33 prohibited practices in Section 1770, it must specify the actual damages suffered with reasonable particularity, and it must clearly state the correction or remedy sought.

The letter should also reference Section 1780(e) to establish fee exposure: “This letter constitutes the required 30-day pre-suit notice under California Civil Code Section 1782. The CLRA provides at Section 1780(e) that a prevailing plaintiff shall recover reasonable attorney’s fees and costs. A prevailing defendant may recover fees only if the court finds the action was not brought in good faith. If we cannot resolve this matter through your appropriate correction within 30 days, our client will file suit seeking both damages and injunctive relief, along with recovery of all attorney’s fees and costs incurred.”

This language satisfies the statutory notice requirement while making clear that fee recovery is a statutory entitlement, not a discretionary award or an optional term of settlement.

Private Attorney General Statute and the Catalyst Theory

Civil Code Section 1021.5, often called the private attorney general statute, authorizes attorney’s fees where a successful party has enforced an important right affecting the public interest, the necessity and financial burden of private enforcement make an award appropriate, and the action has resulted in enforcement of an important right affecting the public interest.

This statute is less commonly relevant to pure commercial disputes but can apply to cases involving consumer protection, environmental compliance, accessibility, or other matters with public interest dimensions. The statute is notable for incorporating the catalyst theory of fee recovery.

Under the catalyst theory, developed in cases like Graham v. DaimlerChrysler Corp., a plaintiff can recover fees under Section 1021.5 even without obtaining a final judgment if the lawsuit was a substantial factor in causing the defendant to change its conduct. The plaintiff must show the suit had merit, it was a substantial causal factor in the defendant’s change of conduct, and the plaintiff made reasonable efforts to settle before filing.

The demand letter is critical for establishing the “reasonable efforts to settle” requirement. If you’re bringing a case that might qualify under Section 1021.5—perhaps a consumer protection action with broader implications, or a case involving practices that affect many people beyond just your client—your demand letter should create a clear record of attempting pre-litigation resolution.

Document your settlement efforts clearly: describe the problem and its broader implications, propose specific relief that would address the public interest concerns, give a reasonable deadline for response, and preserve the correspondence to later demonstrate that you attempted settlement before filing.

If the defendant ignores your demand and you file suit, but then they change their conduct in response to the litigation, you can potentially recover fees under Section 1021.5 even if you dismiss the case because they’ve corrected the problem. The demand letter serves as evidence that the problem was clear, you gave them an opportunity to fix it voluntarily, and they only addressed it after you filed suit, making the litigation the catalyst for change.

Employment and Wage Law One-Way Fee Provisions

California has numerous employment-related statutes with one-way fee provisions favoring employees. The Labor Code provides for fee recovery in wage and hour cases. The Fair Employment and Housing Act provides for fees in discrimination, harassment, and retaliation cases. PAGA (Private Attorneys General Act) actions have their own fee provisions.

These statutes generally allow prevailing employees to recover fees while not allowing prevailing employers to do so, or allowing employer fee recovery only in very limited circumstances like frivolous claims. If you’re representing an employee in a wage claim, discrimination case, or PAGA action, these one-way fee provisions create substantial leverage.

In demand letters for employment cases, you can reference the applicable fee statute to demonstrate that the employer’s exposure isn’t just back wages or damages but also the full cost of litigation. For a wage claim involving a few thousand dollars in unpaid overtime, the employer might face $50,000 or more in attorney’s fees if they litigate and lose. That disproportion between the principal claim and the fee exposure often drives settlement.

However, explicitly threatening massive fee exposure in employment demand letters can be counterproductive. Some employers react defensively to what they perceive as extortionate threats, and some defense lawyers advise their clients that aggressive fee threats suggest the plaintiff’s lawyer is more interested in fees than in resolving the client’s problem. In employment demand letters, I typically mention the statutory fee entitlement factually without dwelling on specific dollar amounts: “Labor Code Section 1194 provides that an employee prevailing in an action to recover unpaid wages shall recover reasonable attorney’s fees. We believe the facts clearly establish liability, and we encourage resolution without the expense of litigation for both parties.”

Code of Civil Procedure Section 998: The Settlement Offer Force Multiplier

While Section 998 offers to compromise can only be served after a lawsuit is filed, understanding how Section 998 works is essential to demand letter strategy because your pre-litigation demand letter should be calibrated to set up an effective Section 998 offer later if the case proceeds to litigation.

How Section 998 Works and Why It Matters

Section 998 allows any party to serve a written offer to compromise the case at any time before trial or within a specified time before arbitration. The offer must include specific terms and must allow at least a reasonable time for acceptance. If the offer is rejected and the offeree fails to obtain a judgment more favorable than the offer, the offeree must pay the offeror’s post-offer costs.

The cost-shifting under Section 998 depends on who made the offer. If the defendant makes an offer that the plaintiff beats at trial, nothing special happens—the plaintiff recovers costs as usual. But if the defendant makes an offer that the plaintiff doesn’t beat, the defendant can recover its post-offer costs, and the plaintiff cannot recover its post-offer costs even though the plaintiff technically won. This can flip cost exposure even where the plaintiff nominally prevails.

If the plaintiff makes an offer that the defendant fails to beat, the plaintiff can recover not just standard costs but also expert witness fees (which are not normally recoverable as costs in California) and, if fees are otherwise recoverable under contract or statute, enhanced fee recovery.

The strategic power of Section 998 is that it enhances whatever fee and cost recovery mechanisms already exist. If you have a contract with a fee clause, and you make a Section 998 offer for $50,000, and the defendant rejects it and you recover $75,000 at trial, you recover your full attorney’s fees under the contract plus your expert witness costs under Section 998. If you only recover $50,000 or less at trial, you still recover your fees under the contract, but not the enhanced expert costs.

But if the defendant makes a Section 998 offer and you don’t beat it, you’re in serious trouble. Even if you win at trial, the defendant recovers its post-offer costs from you, and you don’t recover your post-offer costs. If the case has a fee clause, the defendant might also recover its post-offer fees as costs.

Setting Up Section 998 Leverage in Your Demand Letter

The demand letter is your opportunity to establish a settlement number that you can later mirror or approximate in a Section 998 offer. The goal is to create consistency between your pre-litigation position and your post-litigation settlement position so that you can credibly argue the defendant was unreasonable to reject both.

If you demand $100,000 in your pre-litigation letter, file suit, immediately serve a Section 998 offer for $50,000, and recover $60,000 at trial, the defendant will argue that your demand was inflated and your Section 998 offer was tactical rather than a genuine settlement attempt. Courts have discretion in awarding costs and fees, and they’re less generous when they think a party has been unreasonable in their positions.

Better strategy: make your demand letter settlement proposal realistic based on your analysis of the case. Build in a litigation premium—the amount should be higher than what you’d accept in a 998 offer because settling now saves the defendant legal fees and avoids litigation risk. But the amount shouldn’t be wildly inconsistent with what you later offer in a 998.

For example, if your analysis suggests the case is worth $60,000 to $80,000, your demand letter might seek $90,000 to settle immediately. This gives the defendant a discount versus potential trial exposure plus their own legal fees, but it’s still within a reasonable range. If they reject that and you file suit, you might serve a 998 offer for $70,000—lower than your original demand because there’s no longer a premium for avoiding litigation (you’re already in litigation), but still within the range of likely outcomes.

When drafting the demand letter, you can signal this structure: “We believe this matter will likely result in a judgment in the range of $65,000 to $85,000 based on established damages and precedent in similar cases. We’re offering to resolve the matter now for $90,000, which represents a favorable discount when you consider that proceeding with litigation will require you to incur substantial attorney’s fees and costs in addition to any judgment. If litigation becomes necessary, we will evaluate making a formal offer to compromise under Code of Civil Procedure Section 998 early in the case. Section 998 provides cost-shifting benefits to whichever party’s offer is more reasonable as measured by the ultimate result. We believe a court will find our valuation and settlement position reasonable, which will support cost and fee recovery in addition to the principal judgment.”

This language accomplishes several things: it provides a rational basis for your settlement demand tied to likely trial outcomes, it explains the litigation premium for settling now rather than later, it puts the defendant on notice that you’ll use Section 998 strategically if they force litigation, and it creates a record showing your settlement position is based on realistic case evaluation rather than posturing.

Calibrating 998 Risk on Both Sides

One critical point that many business owners miss: Section 998 cuts both ways. If you’re the plaintiff with a strong fee clause, you have Section 998 leverage. But the defendant can serve their own Section 998 offer, and if you don’t beat it at trial, you could end up paying their costs and potentially their fees even though you won.

In demand letters, this creates a delicate balance. You want to invoke Section 998 as leverage, but you don’t want to paint yourself into a corner with an unrealistic demand that invites an aggressive defense 998 offer designed to flip cost exposure onto your client.

If the defendant’s lawyer is sophisticated, they’ll respond to an inflated demand by preparing to serve a low-ball Section 998 offer immediately after you file suit. If your client recovers anything less than that low-ball offer, your client pays the defendant’s post-offer costs and possibly fees. This can turn a nominal win into an economic loss.

The demand letter should reflect realistic case valuation that you can defend later. If there’s any substantial risk that your client might not prevail or might recover less than you’re demanding, tone down the demand to avoid inviting a defense 998 strategy that could backfire on you.

Practical Demand Letter Structure to Maximize Fee and Cost Leverage

Understanding the legal framework is necessary but not sufficient. You need to translate that understanding into concrete demand letter language that creates maximum settlement pressure without overplaying your hand or creating traps for your client.

Identify and Quote All Fee Mechanisms

The first step in any demand letter where fee recovery is possible is identifying every potential fee-shifting mechanism that applies. Read the contract carefully for fee provisions. Check whether any statutes applicable to your claims provide for fee-shifting. Determine whether the case might qualify for private attorney general fees under Section 1021.5.

Once you’ve identified the mechanisms, quote them specifically in the demand letter. For contractual provisions, include the section number and the exact language. For statutes, cite the specific code section.

Example: “This dispute arises under the Master Services Agreement dated June 1, 2024. Section 15.7 of that Agreement provides: ‘In the event of any dispute arising out of or relating to this Agreement, the prevailing party shall be entitled to recover its reasonable attorney’s fees and costs incurred in connection with the dispute, including but not limited to fees and costs incurred in arbitration or litigation.’ Under California Civil Code Section 1717, this fee provision is reciprocal, meaning both parties have equal rights to fee recovery. Additionally, your marketing practices that form the basis for this claim may constitute violations of the Consumer Legal Remedies Act, which provides at Section 1780(e) that a prevailing plaintiff shall recover costs and attorney’s fees.”

This paragraph identifies two independent fee-shifting mechanisms—the contract clause and the CLRA—and cites the specific provisions. It explains that both are in play and both support fee recovery. This is more powerful than a vague statement that “we’ll seek attorney’s fees if we sue” because it demonstrates that you’ve done the legal research and you know exactly what bases for fee recovery exist.

Make the Fee Meter Explicit But Professional

The next step is quantifying the fee exposure in a way that creates settlement pressure without appearing to threaten or extort. You want to make clear that significant fees have already been incurred and that litigation will multiply those fees dramatically, but you want to do so in an informational tone rather than a threatening one.

I typically include a paragraph that addresses current fees and projected fees: “As of the date of this letter, our client has incurred approximately $15,000 in attorney’s fees investigating the facts, reviewing the contracts and correspondence, analyzing the applicable law, and preparing this demand. If litigation becomes necessary, we anticipate fees through the discovery phase could exceed $50,000, and fees through trial could exceed $100,000. These figures do not include expert witness costs, which we anticipate would be substantial given the technical nature of the platform issues involved. Under the fee provisions cited above, these fees and costs would be recoverable by the prevailing party.”

This is informational, not threatening. You’re not saying “we’re going to make you pay our fees to punish you.” You’re saying “litigation is expensive, here’s what we expect it to cost, and the legal framework provides that the losing party pays.” The defendant can evaluate whether the economic risk of that fee exposure makes settlement at your demanded amount more attractive than rolling the dice in litigation.

For consumer cases under the CLRA or similar statutes, I phrase it slightly differently because the one-way fee provisions mean the defendant’s exposure is asymmetric: “Under Civil Code Section 1780(e), a prevailing plaintiff in a CLRA action is entitled to recover reasonable attorney’s fees. A prevailing defendant may recover fees only if the court finds the action was not brought in good faith. We have thoroughly investigated the facts and law, and we’re confident this claim is meritorious and has been brought in good faith. Should litigation become necessary, the one-way fee provision means you face exposure for our attorney’s fees in addition to damages, while our client does not face reciprocal fee exposure.”

This explains the asymmetry clearly and makes the point that the defendant’s decision to litigate carries greater financial risk than the plaintiff’s decision.

Link Fee Exposure to Settlement Reasonableness

One of the most effective techniques in demand letters is explicitly connecting fee exposure to the reasonableness of settlement. You’re not just threatening fees—you’re explaining that your settlement demand is reasonable precisely because it allows the defendant to avoid the fee exposure that would come with litigation.

Example language: “We’re proposing settlement at $75,000, which represents our client’s principal damages and a portion of its costs to date. This figure is substantially less than what our client would likely recover at trial once interest, costs, expert fees, and attorney’s fees are added to the principal damages. By settling now, you avoid the accumulation of additional attorney’s fees on both sides, you avoid the risk that a court will award our client’s full fee bill as part of the judgment, and you avoid the enhanced cost-shifting provisions of Code of Civil Procedure Section 998 if we make a formal settlement offer after filing suit that you fail to beat at trial.”

This framing positions your settlement demand as the economically rational choice even if the defendant thinks they might prevail on some issues. The point isn’t that they’ll definitely lose—the point is that the fee and cost rules make litigation economically unattractive even if they have some chance of success.

Create a Record of Settlement Reasonableness for Later Fee Arguments

One often-overlooked function of demand letters is creating a record that you attempted reasonable settlement before filing suit. This record serves multiple purposes. For catalyst theory cases under Section 1021.5, it establishes that you made reasonable efforts to settle before filing. For contract cases where fee recovery depends on being the prevailing party, it establishes that you were the reasonable party throughout the dispute, which courts sometimes consider when exercising discretion over fee awards.

The record-creation function means you should approach demand letters with some formality. Send them via methods that create proof of delivery—email with read receipts, certified mail, or both. Include specific deadlines for response. If the other side responds, engage substantively rather than dismissing their points out of hand. If they make a counter-offer, respond with a counter-counter-offer or a clear explanation of why their offer is insufficient.

All of this creates a record that will be valuable later if you need to argue that you were reasonable in your settlement efforts while the other side was not. Courts awarding fees have discretion, and they’re more generous to parties they perceive as having acted reasonably throughout the dispute.

Address Defense Fee Exposure Without Overplaying Your Hand

If you’re representing a defendant responding to a demand letter, the fee analysis flips. You need to explain to the plaintiff why their fee threats don’t create as much leverage as they think, while also making clear that you have your own fee recovery pathways if they file suit and lose.

A defense response might include: “You cite the fee provision in Section 12.3 of the Agreement and reference Civil Code Section 1717. You’re correct that Section 1717 makes fee clauses reciprocal. What your letter doesn’t address is that this cuts both ways. If your client files suit and fails to prevail on the contract claims—which we believe is the likely outcome given the deficiencies in your position outlined below—your client will be responsible for our attorney’s fees in addition to its own. Similarly, if your client makes unrealistic settlement demands or pursues litigation rather than reasonable resolution, Code of Civil Procedure Section 998 allows us to shift post-offer costs to your client even if your client obtains a nominal recovery. We encourage you to evaluate the strength of your client’s position carefully in light of the reciprocal fee exposure you face.”

This response acknowledges the fee clause but reframes it as a mutual deterrent rather than one-sided leverage. It also signals that you’ll use Section 998 strategically if they file suit, which creates some counterbalancing pressure.

Common Fee Recovery Mistakes in Demand Letters

Over the years, I’ve seen recurring mistakes in how lawyers and business owners handle fee issues in demand letters. These mistakes range from failing to identify fee recovery mechanisms to overplaying weak hands to creating records that undermine later fee arguments.

Failing to Check the Contract for Fee Provisions

The most basic mistake is not reading the contract carefully before drafting the demand letter. Many contracts have attorney’s fees provisions buried in the boilerplate. If you send a demand letter without identifying and citing those provisions, you’ve missed an opportunity to create settlement leverage.

Worse, if the contract has a fee provision and you file suit without citing it in your demand letter, the defendant might later argue that you weren’t serious about pursuing the claim (because you didn’t even identify an obvious basis for fee recovery) or that your litigation is more aggressive than your pre-litigation position justified.

Before drafting any demand letter based on a contract, read the entire contract, find any fee provisions, note the section numbers, and incorporate that information into the demand letter.

Threatening Fees You Can’t Actually Recover

Some lawyers threaten fee recovery without having a legal basis for it. They assume that because they’re in the right, they’ll somehow recover fees, or they assume that aggressive fee threats will create settlement pressure even if the threats aren’t legally supportable.

This is a mistake for multiple reasons. First, it undermines your credibility. If the other side’s lawyer recognizes that you don’t actually have a basis for fee recovery, they’ll conclude that your entire demand is overblown. Second, it can subject you to sanctions or fee-shifting in the other direction if the court finds you made unsupportable fee claims. Third, it creates a record that can be used against you if fee issues are litigated.

Only threaten fee recovery where you have a clear legal basis—a contract provision, a statute, or a procedural rule like Section 998. If you don’t have a basis for fee recovery, don’t pretend you do.

Inconsistent Settlement Positions That Undermine Later 998 Offers

A common mistake is making an inflated demand in the pre-litigation letter and then drastically reducing that demand in a Section 998 offer after filing suit. If you demand $200,000 pre-suit and then offer to settle for $75,000 in a 998, the defendant will argue that your original demand was unrealistic, your 998 offer is a tactical litigation tool rather than a genuine settlement attempt, and any fee or cost award should be reduced or denied because you weren’t reasonable in your positions.

Your demand letter settlement figure should be calibrated to be consistent with what you’d offer in a 998 later. The demand can be somewhat higher to account for the litigation premium (settling now avoids costs for both sides), but it shouldn’t be so high that it’s inconsistent with your later position.

Failing to Document Settlement Efforts for Catalyst Theory

If you’re bringing a case that might qualify for fees under the private attorney general statute’s catalyst theory, you need to create a clear record of settlement efforts before filing. A perfunctory demand letter that doesn’t seriously engage with settlement won’t satisfy the “reasonable efforts to settle” requirement.

For catalyst theory cases, your demand letter should propose specific relief that would address the public interest concerns, provide a meaningful opportunity for response and discussion, engage substantively with any counter-proposals or explanations the defendant offers, and document the entire process carefully.

If you send a take-it-or-leave-it demand with a 48-hour deadline and then file suit when they don’t immediately capitulate, you haven’t made reasonable settlement efforts. Courts applying the catalyst theory want to see genuine pre-litigation attempts at resolution, not pro forma demands designed to check a box.

Making Fee Threats That Sound Like Extortion

There’s a fine line between explaining fee exposure and making threats that sound extortionate or violate ethical rules. You cannot threaten criminal prosecution or administrative action as leverage for settlement of a civil dispute. You cannot threaten to report someone to licensing boards or regulatory agencies unless they settle.

Some lawyers blur this line by implying that accepting the settlement demand will prevent not just civil litigation but also regulatory complaints or other consequences. This can subject you to disciplinary action and can make any settlement you obtain voidable.

Keep fee discussions focused on the civil litigation context: “If litigation becomes necessary, the fee provisions described above mean that the losing party will bear substantial fee exposure in addition to any damages judgment.” This is appropriate. “If you don’t settle, we’ll not only sue you but also report you to every regulatory agency we can think of, and you’ll face professional discipline, license suspension, and destruction of your reputation in addition to paying our fees” is not appropriate.

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FAQ

Our contract has a fee clause that says the prevailing party recovers fees, but we’re thinking about settling and dismissing the case. Will we still be able to recover our attorney’s fees?

No, probably not. Under Civil Code Section 1717(b)(2), if an action is voluntarily dismissed or dismissed pursuant to settlement, there is no prevailing party for purposes of Section 1717 fee recovery. The California Supreme Court’s decision in Santisas v. Goodin confirmed this principle. If you settle and dismiss your case as part of the settlement, you generally cannot separately recover your attorney’s fees under the contract’s fee clause because the dismissal means no one prevailed. Your attorney’s fees would need to be included in the settlement payment itself rather than recovered as a separate cost item. This is why it’s important during settlement negotiations to factor your fees into the settlement amount rather than assuming you’ll recover them separately. The only exception would be if the settlement agreement itself includes a provision for fee payment as part of the settlement terms, which effectively means you’re negotiating your fees into the settlement rather than recovering them as a prevailing party under Section 1717.

The other side’s demand letter threatens attorney’s fees but the contract doesn’t have a fee clause. Can they actually recover fees if they sue?

It depends on whether there’s a statute that provides for fee-shifting in your type of case. Without either a contractual fee provision or a statute authorizing fees, the American rule applies and each side pays its own fees. However, there are numerous California statutes that provide for fee-shifting in specific contexts. Consumer protection statutes like the CLRA provide for one-way fee recovery favoring consumers. Employment statutes often favor employees. Some business statutes provide for reciprocal fee-shifting. Before concluding that they can’t recover fees, you should have your lawyer research whether any statute applicable to their claims provides for fees. If there’s no contract provision and no applicable statute, their fee threats are empty. However, you should still be aware that even without fee recovery, litigation will be expensive for you because you’ll have to pay your own attorney’s fees to defend, and if you lose on the merits, you’ll pay damages plus their costs under Code of Civil Procedure Section 1032 (which are different from attorney’s fees and include filing fees, deposition costs, jury fees, and other litigation expenses, though not usually attorney’s fees unless authorized separately).

We sent a demand letter proposing settlement for $50,000. Now we’ve filed suit and want to serve a Section 998 offer. Should we offer the same $50,000 or a different amount?

There’s no single right answer, but you should generally make your 998 offer in the same ballpark as your demand letter proposal, with adjustments based on how the case has developed since you sent the demand. If your demand letter proposed $50,000 and nothing has changed, you might offer $50,000 in your 998, or perhaps slightly less (say $45,000) because the litigation premium for avoiding a lawsuit no longer applies—you’re already in litigation. If your demand was $50,000 and since then you’ve conducted discovery that strengthened your case, you might increase the 998 offer to $60,000 or $65,000. The key is maintaining consistency in your valuation. If you demanded $50,000 pre-suit and then offer $25,000 in a 998, the defendant will argue that your original demand was inflated and your positions have been unreasonable, which could affect cost-shifting under Section 998 and fee awards under your contract or statute. Courts have discretion in awarding fees and costs, and they’re less generous to parties whose positions have been inconsistent or unreasonable. If you need to significantly change your settlement position, be prepared to explain what changed—new facts from discovery, changed circumstances, refined legal analysis—rather than appearing to have simply made up numbers in your demand letter.

Can I include a provision in my settlement agreement that says the other party has to pay my attorney’s fees even though we’re settling and there won’t be a prevailing party under Section 1717?

Yes, absolutely. The limitation on fee recovery under Section 1717 when a case is dismissed pursuant to settlement only means you can’t separately recover fees as a prevailing party under that statute. But the settlement agreement itself is a contract, and you can negotiate any terms you want in that contract, including payment of attorney’s fees as part of the settlement consideration. In fact, this is very common. A settlement agreement might say: “Defendant will pay Plaintiff $75,000 in full settlement of all claims, which amount includes compensation for Plaintiff’s principal damages and reimbursement of attorney’s fees and costs incurred through the date of this agreement.” Or the fees might be broken out separately: “Defendant will pay (a) $50,000 in settlement of Plaintiff’s damages claims, and (b) $25,000 in reimbursement of Plaintiff’s attorney’s fees incurred through the date of this agreement.” Either structure works. The point is that fee payment is a negotiated term of the settlement contract, not a statutory entitlement under Section 1717. This is why your demand letter should reference the fee clause and Section 1717 to create settlement pressure, but your settlement negotiation should treat fee recovery as a component of the total settlement amount rather than as a separate entitlement. The other side knows that if the case proceeds to judgment, they might have to pay your fees under Section 1717, so they have an incentive to include fee reimbursement in the settlement to avoid that larger risk.

We’re defending a consumer CLRA claim. The plaintiff’s demand letter says we’ll have to pay their attorney’s fees if they sue and win. Is that actually true or are they bluffing?

That’s true. The Consumer Legal Remedies Act, Civil Code Section 1780(e), provides that the court shall award costs and reasonable attorney’s fees to a prevailing plaintiff. This is mandatory, not discretionary—if the plaintiff prevails, the court must award fees. Importantly, the fee provision is one-way: a prevailing defendant can only recover fees if the court finds that the plaintiff’s action was not brought in good faith, which is a high bar. This means the plaintiff has substantial fee leverage in CLRA cases. Even if the damages at stake are modest—say $5,000 in consumer damages—the plaintiff’s attorney’s fees could be $30,000 or $50,000 or more if the case proceeds through trial. This fee exposure is one reason businesses often settle CLRA claims even when they believe they have good defenses. The economics of litigation with one-way fee-shifting strongly favor settlement from the defendant’s perspective. However, you should also know that the plaintiff must comply with the CLRA’s pre-suit notice requirement under Section 1782—they must give you 30 days’ written notice with specific information about the violations and the relief sought, and if you make an appropriate correction, repair, replacement, or refund within that 30 days, they cannot pursue damages (though they can still seek injunctive relief). So if their demand letter constitutes a Section 1782 notice, you have 30 days to consider making an appropriate remedy that could cut off their damages claim and thus substantially reduce your exposure.

Our contract has a fee clause, but we’re the ones who breached and they’re demanding payment. If they sue and win, do we really have to pay their attorney’s fees on top of the damages?

Yes, that’s exactly how contractual fee clauses work under Civil Code Section 1717. If your contract says the prevailing party in any action arising from the contract can recover attorney’s fees, and they sue you for breach of contract and prevail, they’re entitled to recover their reasonable attorney’s fees as part of the judgment. This can significantly multiply your exposure. For example, if they’re claiming $40,000 in damages from your breach, and they have to spend $30,000 in attorney’s fees to pursue the claim through trial, and they win, you’ll owe not just the $40,000 in damages but also the $30,000 in fees (plus interest, plus costs). This is exactly why their demand letter referenced the fee clause—they’re not just bluffing, they’re explaining the economic reality of litigation. However, you should also understand that Section 1717 makes fee clauses reciprocal. Even though you breached the contract, if you were to prevail on their lawsuit (perhaps because they can’t prove damages, or because you have a defense they didn’t anticipate), you could recover your attorney’s fees from them under the same provision. This reciprocity principle is why fee clauses create risk for both sides and why they often encourage settlement—neither party wants to risk having to pay both sides’ legal fees if they lose. The smart move when you receive a demand letter citing a contractual fee clause is to take it seriously, evaluate the strength of their position realistically, and consider whether settlement at or near their demand is more economically rational than risking a judgment that includes both damages and fees.

The demand letter threatens to make a Section 998 offer if we don’t settle, and says we’ll have to pay enhanced costs if we don’t beat their offer. How does that actually work?

Code of Civil Procedure Section 998 allows any party to make a written settlement offer after a lawsuit is filed. If you reject the offer and then fail to obtain a more favorable result at trial or arbitration, you face cost consequences. The specific consequences depend on who made the offer. If they make a plaintiff’s 998 offer and you don’t beat it (meaning they recover more at trial than they offered to settle for), they can recover expert witness fees as costs, which normally aren’t recoverable in California. If attorney’s fees are otherwise recoverable under a contract clause or statute, those fees may also be enhanced post-998. Additionally, you lose the ability to recover your own post-offer costs even if you would otherwise be entitled to costs. If you make a defense 998 offer that they reject, and they then fail to recover more than your offer, you can recover your post-offer costs including expert fees, and they cannot recover their post-offer costs. The strategic implication is that Section 998 creates a powerful cost-shifting mechanism that enhances whatever fee and cost recovery rights already exist. In their demand letter, they’re warning you that if you force them to file suit, they’ll make a 998 offer that’s probably at or below their current demand, and if you don’t beat it at trial, you’ll pay not just the judgment and their fees under the contract or statute, but also enhanced costs including their expert fees. This stacking effect can make the total exposure much larger than just the principal damages. The threat isn’t empty—Section 998 is a real procedural tool and it’s commonly used in California commercial litigation specifically for this cost-shifting purpose.

We want to include language in our contracts that says if there’s a dispute, the losing party pays attorney’s fees. Is this enforceable in California and will it actually help us if we have to sue someone?

Yes, contractual attorney’s fees provisions are enforceable in California and can be very valuable if you end up in litigation. However, you need to understand how Civil Code Section 1717 works. Section 1717 makes any unilateral fee clause reciprocal, meaning both parties can recover fees if they prevail regardless of how you word the clause. So even if you draft a provision that says only you can recover fees, Section 1717 converts it into a two-way provision where the prevailing party—whether that’s you or the other party—can recover fees. The benefit of including a fee clause is that it creates a strong settlement incentive because both parties know that the losing party will have to pay both sides’ legal fees. This makes settlement more attractive than litigation for both sides. The fee clause also gives you cost recovery that you wouldn’t have under the American rule, where each side normally pays its own fees. If you sue someone for breach and recover $50,000, without a fee clause you’re still out of pocket for your $30,000 in legal fees even though you won. With a fee clause, you can recover those fees as part of the judgment. The key is making sure the clause is clearly drafted. Use language like: “In any action or proceeding to enforce or interpret this Agreement, the prevailing party shall be entitled to recover its reasonable attorney’s fees and costs.” This makes clear that fees are recoverable in litigation related to the contract. Avoid vague language that could be interpreted narrowly. And remember that Section 1717 only applies to “actions on a contract,” so if the dispute includes tort claims or other non-contract claims, the fee clause might not cover those unless it’s drafted broadly enough to encompass all disputes related to the contract.