A New Twist In The Law Of Good Faith Settlements

   If you have a multi-defendant product liability or other high-stakes tort case in California and don't know about the concept of "good faith settlements," you need to.  And then you really need to know about this case, Long Beach Memorial Medical Center v. Superior Court (March 26, 2009) ___Cal.App.4th ___ (Second District, B210470).  The case shows a level of appellate scrutiny over defense tactics the likes of which I have never seen at either the trial or appellate level.

More after the jump.

    Some background:  Remember that in California, liability for non-economic damages (e.g., pain and suffering) is "several" (i.e., each defendant pays only for its share), while liability for economic damages is "joint and several" -- the plaintiff can recover all such damages from any defendant held liable, whether the defendant is 100% at fault or 1% or less at fault.

    Since 1978, California has recognized the right of jointly liable defendants to have a jury or judge apportion liability among them.  American Motorcycle Association v. Superior Court (1978) 20 Cal. 3d 578.  This means that even though jointly liable defendants in a tort case are each on the hook to the plaintiff for as much as 100% of the economic damages (until the plaintiff has been 100% compensated for that portion of the judgment), the defendant who is 2% liable but pays 100% of the judgment is entitled to recover the remaining 98% from the other liable defendants.

    Now, what about the defendant who settles the case before others take the case to verdict?  Since the mid-1980's, that problem has been addressed by California's good faith settlement statute, Code of Civil Procedure section 877.6.  Under the statute, a settling defendant get a hearing on the good faith of its settlement, and if the settlement is held to be in good faith, other defendants are barred from prosecuting an action against it for apportionment.  This means, to show an extreme example, that if Defendant A settles for $50,000 in economic damages, the court finds the settlement to be in good faith, the case goes to trial against Defendant B and the jury comes back with an economic damages verdict of $10 million and finds Defendant B 5% at fault, Defendant B is on the hook for $9,950,000 in economic damages and has no recourse against Defendant A.

    In 1995, the Cal Supremes listed the factors a trial court should consider in evaluating whether the settlement was "in good faith."  These are known as the "Tech-Bilt factors" for reasons that will become apparent when you see the citation at the end of the upcoming block quotes.  The factors include these: 

. . . a rough approximation of plaintiffs' total recovery and the settlor's proportionate liability, the amount paid in settlement, the allocation of settlement proceeds among plaintiffs, and a recognition that a settlor should pay less in settlement than he would if he were found liable after a trial. Other relevant considerations include the financial conditions and insurance policy limits of settling defendants, as well as the existence of collusion, fraud, or tortious conduct aimed to injure the interests of nonsettling defendants.

    Also: 

"[A] defendant's settlement figure must not be grossly disproportionate to what a reasonable person, at the time of the settlement, would estimate the settling defendant's liability to be." [Citation omitted.] The party asserting the lack of good faith, who has the burden of proof on that issue (§ 877.6, subd. (d)), should be permitted to demonstrate, if he can, that the settlement is so far "out of the ballpark" in relation to these factors as to be inconsistent with the equitable objectives of the statute.

Tech-Bilt, Inc. v. Woodward-Clyde & Associates (1985) 38 Cal.3d 488, 499.

    The courts also look at the financial condition and insurance policy limits of the settling defendants.  Mattco Forge, Inc. v. Arthur Young & Co. (1995) 38 Cal.App.4th 1337, 1349.   A small policy limits settlement from a company with no assets to respond in damages is, all things considered, more likely to be held to be in "good faith" than the same settlement from a company with lots of assets (if there are any more of those left).  And under Mattco Forge and other cases, the good faith determination is a matter left to the trial court's discretion.

    Now along comes Long Beach Memorial Medical Center.  This was an obstetrics malpractice case involving catastrophic neurological injuries to the newborn amid allegations that a hospital and nurse failed to timely notify the physician of infant distress and the physician failed to timely act on the information he had.  In significant part, the case was a big-time "he said, she said" battle, with the nurse insisting she both made two calls to the doctor and explained what the problem was, while the doctor denied the first call and contended that in the second call, the only information she provided was "reassuring."

    Plaintiffs calculated economic damages in excess of $10 million, so it is hardly surprising that (a) at least some defendants were very anxious to settle and (b) the settlement process wasn't easy.  After two mediations and a plaintiff demand with a very short deadline, the hospital and nurse's employer settled for a combined $7.75 million.  The next day, the physicians' group settled for $200,000.  Shortly thereafter, it moved for a good faith settlement in order to bar the hospital and nurse's employer from going after them for contribution.  The trial court weighed all the evidence put in front of it by everyone, and found the settlement to be in good faith.

    So far, this is pretty routine.  Except that on appeal, the court of appeal reversed, holding that the trial court had abused its discretion.  This is something that just doesn't happen in this context,  particularly with six figure settlements.   But here, the court of appeal went through every one of the Tech-Bilt factors, noted that the hospital and nurse's employer had the burden of proof, and held against the doctors on darned near all of them!

    The doctors used an expert's declaration to demonstrate they had no liability.  But this doctor hadn't been deposed at the time of the settlement, so he shouldn't have been considered because the evaluation must "be made on the basis of information available at the time of the settlement."  And even if the declaration were to be considered, "the payment of $200,000 in a settlement fora $10 million claim was wholly disproportionate.  Even a slight probability of liability on [the physicians' part] would warrant a contribution more significant than 2 percent."

    Also relevant, said the court, was the doctors' $2 million policy, "with the result that their settlement consitituted only 10 per cent of their available policy limits. . . The physicians' settlement is simply not defensible in view of their financial condition and policy limits." 

    The case goes on and on.  The record of negotiations shows bad faith.  They cut off substantial potential indemnity liability to the hospital and nurse's employer.  It appears that this was reason for the settlement:  "Hence, by the time the physicians' counsel contacted plaintiffs' attorney to make an offer in settlement, the physicians' liability exposure to the hospital for indemnity was far greater than their potential exposure to plaintiffs for negligence."  And finally, the settlement was collusive:  "Here, the conclusion is inescapable that the physicians' offer was tactical and did not reflect the cooperative decision-making among all interested parties that is one of the aims of settlements."

    Amazing.  I haven't taken a settlement position in my years as an attorney that wasn't "tactical."  And now we hear that after a trial court has reviewed all the evidence, a court of appeal can find a settlement to be in bad faith even where the evidence would support a defense verdict.  Why?  Because the settling attorneys got too good a deal, had too much insurance, and  made the mistake of acting "tactically."