California No Longer Follows The Common Law “Release Rule”

Leung v. Verdugo Hills Hospital
(Cal. Sup. Ct.), filed August 23, 2012

KEY FACTS

Six days after his birth, Adrian Ming-Ho Leung suffered irreversible brain damage. Through his mother, he sued his pediatrician and the hospital in which he was born.

Before trial, Leung and the pediatrician agreed to a settlement of $1 million, the limit of the pediatrician’s malpractice insurance policy. The trial court denied the pediatrician’s motion for a determination that the settlement was made in “good faith.” It found the settlement to be “grossly disproportionate to the amount a reasonable person would estimate” the pediatrician’s share of liability would be.

At trial, a jury awarded plaintiff both economic and noneconomic damages. The jury found that the pediatrician was 55 percent at fault, the hospital 40 percent at fault, and Leung’s parents 5 percent at fault.

The hospital filed an appeal. One of its major contentions was that under the common law “release rule,” Leung’s settlement with the pediatrician also released it from liability for Leung’s economic damages. The Court of Appeal reluctantly agreed. It observed that although the California Supreme Court “has criticized the common law release rule,” it “has not abandoned it.” It therefore reversed the judgment.

HOLDING & REASONING

The California Supreme Court reversed the decision of the Court of Appeal and remanded for further consideration. It held that the “release rule” no longer applies in California. It also held that, subject to a set-off for the amount the pediatrician paid, the hospital was liable for all of Leung’s economic damages and that it had the right to seek contribution from the pediatrician for his share of the damages.

Under the traditional common law rule, a plaintiff’s settlement with, and release from liability of, one joint tortfeasor also releases from liability all other joint tortfeasors. The rationale for the rule was that there can be only be one compensation for a single injury and because each joint tortfeasor is liable for all of the damage, any joint tortfeasor’s payment of compensation in any amount satisfies the plaintiff’s entire claim.

The “release rule” can lead to harsh results because, for example, a plaintiff might have settled with one tortfeasor for a sum far less than the plaintiff’s damages because that is all the tortfeasor can afford to pay.

In an effort to avoid an unjust and inequitable result in such a situation, California courts hold that a plaintiff who settled with one of multiple tortfeasors could, by replacing the word “release” in the settlement agreement with the phrase “covenant not to sue,” and by stating that the agreement applied only to the parties to it, preserve the right to obtain additional compensation from the nonsettling joint tortfeasors.

In 1957, the California Legislature Code of Civil Procedure section 877 modified the common law “release rule” by providing that a “good faith” settlement and release of one joint tortfeasor, rather than completely releasing other joint tortfeasors, merely reduces, by the settlement amount, the damages that the plaintiff may recover from the nonsettling joint tortfeasors, and that such a good faith settlement and release discharges the settling tortfeasor from all liability to others. However, the statute governed only good faith settlements.

Section 877 did not apply to Leung’s lawsuit because the trial court determined that the pediatrician’s settlement was not in “good faith.”

Recognizing that settlements might occur even though they did not fully compensate an injured plaintiff, the fiction used by the courts to avoid the “release rule” and rejecting the hospital’s contention that in enacting section 877, the Legislature signaled an intent to preclude future judicial development of the law pertaining to settlements involving joint tortfeasors. The Court held that the “release rule” would no longer be followed in California.

The Court then turned to the question of the apportionment of liability among joint tortfeasors when one tortfeasor settles, but the settlement has been made in “good faith” under section 877. (When there is a finding of “good faith,” the settlement discharges the settling tortfeasor from liability for contribution.)

The Court noted that there were three possible ways of apportioning liability: (1) applying a set-off for the amount paid by the settling tortfeasor and allowing a contribution action; (2) applying a set-off for the amount paid by the settling tortfeasor and not allowing a contribution action; and (3) payment of just the tortfeasor’s proportionate share of the damage award.

The Court summarily rejected the option of a set-off without contribution as that was reserved for when there was a finding of “good faith.”

The Court then compared the remaining options and concluded that considerations of practical utility and fairness dictated that a set-off with contribution be used.

ANALYSIS

The release rule created a potential trap for settling plaintiffs, and any corresponding utility was not readily apparent to the Supreme Court. This decision certainly adds clarity to California law.