Repudiation of California's Common Law Release Rule Creates Hospitable Environment For Plaintiff Settlements

On August 23, 2012, in Leung v. Verdugo Hills Hospital, Case No. S192768, the California Supreme Court repudiated the long-standing, but somewhat dormant, common law "release rule".

Previously, California had followed a rule which provides that a plaintiff's settlement with, and release from liability of, one joint tortfeasor also releases all other joint tortfeasors. The rule originated in England at a time when a plaintiff could sue in a single action only those tortfeasors who had acted in concert to produce the harm. The basis for the rule was that there could be only one compensation for a single injury and, because each joint tortfeasor is liable for all economic damages, any joint tortfeasor's payment in any amount satisfied the plaintiff's entire claim. (Leung v. Verdugo Hills Hospital, Case no. S192768; 5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts §70, pp. 142-143.)

The effect of the California Supreme Court's ruling is that when a plaintiff's settlement with a defendant is not made in good faith, the nonsettling defendants are still jointly and severally liable to plaintiff, and the settlement amount will simply be credited against the eventual damage award.

In Leung, the plaintiff child brought a negligence suit against his pediatrician and a hospital for causing his irreversible brain damage. Before trial, plaintiff settled with the pediatrician for his malpractice insurance policy limit of $1 million. As part of the settlement, the pediatrician agreed to participate as a defendant at trial, and plaintiff agreed to release him from all claims. The pediatrician petitioned the Court, pursuant to California Code of Civil Procedure §877, for a determination that the settlement met the statutory requirement of having been made in "good faith," thus seeking to limit his proportionate liability to the amount of the settlement. The trial court denied the motion and held that the settlement was "grossly disproportionate to the amount a reasonable person would estimate" as to the pediatrician's share of liability. Nevertheless, plaintiff and the pediatrician decided to proceed with the settlement.

At trial, the jury awarded economic damages (present value of $15,000,000) and non-economic damages ($250,000). It found the pediatrician 55 percent liable, the hospital 40 percent liable, and plaintiff's parents 5 percent liable. The judgment stated that the hospital was jointly and severally liable for 95 percent of all economic damages awarded to plaintiff (reducing the award to reflect the parents' 5% fault). The hospital appealed, claiming that under the common law release rule, plaintiff's settlement with and release of liability claims against the pediatrician also released the hospital from all liability for plaintiff's economic damages. The Court of Appeal reluctantly agreed, observing that while criticized by the Supreme Court, it had not abandoned the common law release rule.

Based on its analysis of the origin of the common law release rule, the "practical application" of California negligence law, and public policy concerns, the Supreme Court concluded that the rule would no longer be followed. The Court noted that the rationale for the rule assumes that the amount paid in settlement in return for the release from liability of one joint tortfeasor provides full compensation for plaintiff's injuries, and thus anything obtained beyond that would be an inappropriate double recovery. However, applying this rationale in Leung, the Court held this would lead to unfair results for plaintiffs. For example, plaintiff would receive $1 million from the pediatrician and nothing from the hospital, even though the jury apportioned 40 percent of fault to the hospital and calculated total economic damages at $15 million.

In addition, the Court adopted the "setoff-with-contribution" approach for deciding how to apportion liability in a negligence action where plaintiff's settlement with a joint tortfeasor was not in good faith.  The Court determined that the settlement money paid by the pediatrician should be credited against the damages assessed against the nonsettling hospital. The hospital, however, was entitled to seek contribution against the pediatrician for damages it paid beyond its share of liability, consistent with the principle of comparative fault. The net result is that a plaintiff would recover for all economic damages (less the amount attributable to his own negligence), with the settlement providing part of the recovery and the judgment against the nonsettling tortfeasors providing the rest.

The practical effect of the California Supreme Court's repudiation of the common law release rule is that it allows plaintiffs to maximize leverage against non-settling defendants even if they enter into a settlement with one party that is not deemed to be made in good faith. The Court has ultimately removed some of plaintiff's incentive to negotiate proper settlements with truly liable defendants, and is likely to result in efforts to buy off certain parties, and their attorneys, so plaintiffs can focus on deeper pockets, regardless of degree of fault. While the nonsettling defendants have a notional right to contribution from the "bad faith" settling party, any adjudication of this right could be years down the road after the nonsettlors spend substantial sums defending and trying the case, or paying larger settlements.