SOUTHERN CALIFORNIA GAS LEAK CASES.
S246669
IN THE SUPREME COURT OF CALIFORNIA
May 30, 2019
Second Appellate District, Division Five, B283606; Los Angeles County Superior Court, JCCP No. 4861
S246669
Opinion of the Court by Cuéllar, J.
This case concerns a massive, months-long leak from a natural gas storage facility located just outside Los Angeles. According to the allegations before us, the accident severely harmed the economy of a nearby suburb. We must decide if local businesses — none of which allege they suffered personal injury or property damage — may recover in negligence for income lost because of the leak. Our decision turns on whether the entity that allegedly caused the leak had a tort duty to guard against what we and other courts have termed “purely economic losses.”
The businesses argue that they deserve compensation for such losses, that the entity responsible must bear the full costs of its alleged negligence so tort law can play its essential role of forcing people and organizations to take sufficient account of the risks they generate, and that courts can sensibly apportion liability under these circumstances within meaningful limits. Tort law indeed lies in the heartland of our common law system. It serves society’s interest in allocating risks and costs to those who can better prevent them, and it provides aggrieved parties with just compensation. But a proper assessment of competing considerations in light of our precedent suggests, and the extent of consensus across other jurisdictions confirms, that claims for purely economic losses suffered from mere proximity to an industrial accident create intractable line-drawing problems for courts. So the claims before us are best not treated as compensable in negligence.
I.
Because this case comes to us at the demurrer stage, we take as true all properly pleaded material facts — but not conclusions of fact or law. (Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc. (2016) 1 Cal.5th 994, 1010 (Centinela).)
A.
Near the northwestern corner of Los Angeles lies Porter Ranch, a residential neighborhood home to some 30,000 people. Southern California Gas Company (SoCalGas) stores vast amounts of natural gas in an underground facility in the hills surrounding the community. Known today as the “Aliso Facility,” that subterranean storage site was once an oil reservoir. It was repurposed about 40 years ago for its present use. SoCalGas supplies over 21 million people with natural gas from its four storage facilities, but the Aliso Facility is the company’s largest. It holds up to 80 billion cubic feet of natural gas, which SoCalGas pumps underground at high pressure into more than 100 “injection wells.” Because natural gas is odorless, SoCalGas adds a nausea-causing chemical to the gas so that people notice when a leak happens.
In October 2015, a leak happened — and people noticed. An uncontrolled flow of natural gas from the Aliso Facility coated nearby neighborhoods in an oily mist. At its peak, the leak released some 55 tons of natural gas every hour. Porter Ranch residents reported unpleasant odors, headaches, dizziness, and respiratory problems. In addition to those symptoms, students at local schools complained of nosebleeds and vomiting.
SoCalGas finally got the leak under control in February 2016 — four months after detecting it. All told, about 100,000 tons of natural gas escaped the Aliso Facility, releasing enough greenhouse gases into the atmosphere to erase several years’ worth of efforts to combat climate change in California.
B.
Plaintiffs are Porter Ranch area businesses seeking to represent a class of “[a]ll persons and entities conducting business within five miles of the [Aliso] Facility from October 23, 2015 to [the] present.”1 They allege that SoCalGas’s negligence caused the leak. The resulting relocation of many Porter Ranch residents devastated the local economy: by
That harm, Plaintiffs maintain, is ongoing. Sales at businesses of all stripes declined sharply, and in many cases, stayed down. Enrollment at a local martial arts center, Plaintiff King Taekwondo, nosedived during the leak and has not recovered. The same was true of a neighborhood day care, Plaintiff Polonsky Family Day Care. Restaurants, gas stations, and pharmacies were affected, too. So were beauty salons, doctor’s offices, party suppliers, and a photography store.
With the en masse relocation of Porter Ranch residents and the diminution in property values caused by the leak, home mortgage lenders and home improvement businesses suffered economically as well. Plaintiff First American Realty saw clients get cold feet, loans fall out of escrow, and sales tumble. A local contractor’s business dropped by 25 percent, as customers moved away or decided against home improvements for the time being. “Since the onset of the gas leak,” in other words, business operations throughout Porter Ranch “have either halted or slowed substantially” — and Plaintiffs “have not yet recovered from the blow to their bottom lines.”
Yet no named plaintiff in this action alleges personal injury or property damage. Accordingly, Plaintiffs acknowledge they are suing SoCalGas to recover solely for the income they lost because of the leak.
C.
SoCalGas demurred, arguing that Plaintiffs’ negligence claims failed as a matter of law because Plaintiffs were seeking to recover for purely economic losses. Overruling the demurrer, the trial court explained that companies “must face the full cost
After SoCalGas petitioned for a writ of mandate, the Court of Appeal granted the petition and reversed the trial court. (Southern California Gas Leak Cases (2017) 18 Cal.App.5th 581, 583-584.) The Court of Appeal explained that, under California law, it is “not presumed” that a defendant owes a duty of care to guard against economic losses unaccompanied by injury to person or property. (Id. at p. 591.) And without a “special relationship” between the plaintiff and the defendant stemming in this context from a “transaction,” the Court of Appeal reasoned, California law did not permit recovery for the purely economic losses sought by Plaintiffs in this case. (Id. at p. 591.) The Court of Appeal also took the view that our decision in J’Aire had not rejected Adams in its entirety but instead disapproved Adams only “insofar as [it] held a plaintiff can never recover purely economic losses based on a defendant’s negligent conduct.” (Id. at p. 592, italics added.) Because Plaintiffs
II.
Recovery in a negligence action depends as a threshold matter on whether the defendant had “ ‘a duty to use due care toward an interest of [the plaintiff’s] that enjoys legal protection against unintentional invasion.’ ” (Centinela, supra, 1 Cal.5th at p. 1012, quoting Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 397 (Bily).) We review de novo whether this “ ‘essential prerequisite’ ” to recovery is satisfied.3 (Centinela, at pp. 1010, 1012.)
The issue here is whether SoCalGas — separate from other legal and practical reasons it had to prevent injury of any kind to the public — had a tort duty to guard against negligently causing what we and others have called “purely economic loss[es].” (Centinela, supra, 1 Cal.5th at p. 1013; see also 532 Madison Avenue Gourmet Foods, Inc. v. Finlandia Center, Inc. (N.Y. 2001) 750 N.E.2d 1097, 1102 (532 Madison).) We use that term as a shorthand for “pecuniary or commercial loss that does not arise from actionable physical, emotional or reputational injury to persons or physical injury to property.” (Dobbs, An Introduction to Non-Statutory Economic Loss Claims (2006) 48 Ariz. L.Rev. 713 (Dobbs).) And although SoCalGas of course had a tort duty to guard against the latter kinds of injury,
A.
In California, the “general rule” is that people owe a duty of care to avoid causing harm to others and that they are thus usually liable for injuries their negligence inflicts. (Cabral v. Ralphs Grocery Co. (2011) 51 Cal.4th 764, 771 (Cabral).) Under
In Rowland v. Christian (1968) 69 Cal.2d 108 (Rowland), we identified several factors that, among others, may bear on that question: (1) “the foreseeability of harm to the plaintiff,” (2) “the degree of certainty that the plaintiff suffered injury,” (3) “the closeness of the connection between the defendant‘s conduct and the injury suffered,” (4) “the moral blame attached to the defendant’s conduct,” (5) “the policy of preventing future harm,” (6) “the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach,” and (7) “the availability, cost, and prevalence of insurance for the risk involved.” (Id. at p. 113.) At core, though, the inquiry hinges not on mere rote application of these separate so-called Rowland factors, but instead on a comprehensive look at the “ ‘the sum total’ ” of the policy
What
A case in point is liability in negligence for purely economic losses, which is “the exception, not the rule” under our precedents. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 58 (Quelimane).) And that holds true even though
The primary exception to the general rule of no-recovery for negligently inflicted purely economic losses is where the plaintiff and the defendant have a “special relationship.” (J’Aire, supra, 24 Cal.3d at p. 804.) What we mean by special relationship is that the plaintiff was an intended beneficiary of a particular transaction but was harmed by the defendant’s negligence in carrying it out. Take, for example, Biakanja v. Irving (1958) 49 Cal.2d 647 (Biakanja). There, we held that the intended beneficiary of a will could recover for assets she would have received if the notary had not been negligent in preparing the document. (Id. at pp. 650-651.) A special relationship existed between the intended beneficiary and the notary in Biakanja, we emphasized, because “the ‘end and aim’ of the transaction” between the nonparty decedent and the notary was to ensure that the decedent’s estate passed to the intended beneficiary. (Id. at p. 650.)
For similar reasons, in J’Aire we held that a special relationship existed between a restaurant operator and a contractor hired by a third-party property owner to renovate the space rented by the restaurant operator. (J’Aire, supra, 24 Cal.3d at pp. 804-805.) So when the contractor negligently failed to complete the construction work on time, the restaurant operator could recover purely economic losses it suffered as a result.4 (J’Aire, at pp. 804-805.)
Our subsequent decision in Bily, however, underscored for negligence cases involving purely economic losses what is true of all negligence cases. Deciding whether to impose a duty of care turns on a careful consideration of the “ ‘the sum total’ ” of the policy considerations at play, not a mere tallying of some finite, one-size-fits-all set of factors. (Bily, supra, 3 Cal.4th at p. 397, quoting Dillon v. Legg (1968) 68 Cal.2d 728, 734 (Dillon).) In Bily, investors in a failed company sued the company’s auditor for financial losses they allegedly suffered due to the auditor’s negligent preparation of a public report on the
Appeal’s decision in Adams “[t]o the extent that [it] h[eld] that there can be no recovery for negligent interference with prospective economic advantage.” (J’Aire, supra, 24 Cal.3d at pp. 806-807 & fn. 3.) So as the Court of Appeal recognized, J’Aire disapproved Adams only to the extent it purported to impose an absolute rule that a plaintiff can never recover for negligently inflicted purely economic losses.
In requiring more than mere foreseeability for imposing a duty of care in Bily, we appreciated the need to safeguard the efficacy of tort law by setting meaningful limits on liability. (Bily, supra, 3 Cal.4th at pp. 398-399.) Citing decisions from our court limiting recovery for emotional harms based on similar concerns, we explained that although foreseeability “ ‘may set tolerable limits for most types of physical harm, it provides virtually no limit on liability for nonphysical harm.’ ” (Id. at p. 398, quoting Thing, supra, 48 Cal.3d at p. 663.) After all, on “ ‘clear judicial days’ ” courts “ ‘can foresee forever.’ ” (Bily, at p. 399, quoting Thing, at p. 668.) So although exposure to liability often provides an important incentive for parties to internalize the social costs of their actions, we were concerned that allowing the countless people who rely on public audit reports to recover “pure economic loss suffered” due to a shoddy audit would “raise[] the spectre of vast numbers of suits and limitless financial exposure.” (Bily, at p. 400.) The resulting universe of potential claims would not only raise difficult line-drawing questions for courts, it might deter socially beneficial behavior. (Id. at pp. 400, 404.) That result was
To be sure, several additional considerations cut further in favor of strictly circumscribing recovery in Bily. In the audit context, “[t]he client typically prepares [the] financial statements” on which the auditor relies in preparing a report — and that report “is not a simple statement of verifiable fact” but instead “a professional opinion based on numerous and complex factors.” (Bily, supra, 3 Cal.4th at pp. 399-400.) The plaintiffs in Bily were also particularly “sophisticated” and had “efficient means of self-protection,” such as diversifying their investment portfolios or conducting their own due diligence. (Id. at p. 406.) More fundamentally, purely economic losses flowing from a financial transaction gone awry — which were at issue in Biakanja, J’Aire, Bily, and our other negligence cases to date about purely economic losses6 — “are primarily the domain of contract and warranty law or the law of fraud, rather than of negligence.” (Aas v. Superior Court (2000) 24 Cal.4th 627, 636 (Aas), superseded by statute on other grounds as stated in Rosen v. State Farm General Ins. Co. (2003) 30 Cal.4th 1070, 1079-1080 (Rosen).)
B.
What we recognized in Bily fits with numerous decisions from other jurisdictions — as well as the Restatement of Torts. That consensus cuts sharply against imposing a duty of care to avoid causing purely economic losses in negligence cases like this one: where purely economic losses flow not from a financial transaction meant to benefit the plaintiff (and which is later botched by the defendant), but instead from an industrial
1.
Concerned about line-drawing problems and potentially overwhelming liability, courts across the country have rejected recovery for purely economic losses stemming from man-made calamity. Take the New York Court of Appeals’ decision in 532 Madison. There, part of a 39-story office tower collapsed, shutting down more than a dozen bustling blocks of midtown Manhattan for several weeks. (See 532 Madison, supra, 750 N.E.2d at p. 1099.) Among the plaintiffs in 532 Madison were local businesses who alleged that would-be customers “were unable to gain access to their stores” due to the disaster, forcing the plaintiffs to shut down for an extended period of time. (Id. at pp. 1099-1100.) They sued on behalf of themselves and “all other business entities” operating within the affected city blocks. (Ibid.)
The plaintiffs in 532 Madison sought compensation for the income they lost from the tower collapse. The New York Court of Appeals responded by declining to hold “that a landowner owes a duty to protect an entire urban neighborhood against purely economic losses.” (532 Madison, supra, 750 N.E.2d. at pp. 1102.) It instead “limit[ed] the scope of defendants’ duty to those who ha[d], as a result of th[e] [collapse], suffered personal injury or property damage.” (Id. at p. 1103.) The court explained that this limitation provided “a principled basis for reasonably apportioning liability” that was necessary to prevent potentially crushing liability to “an indeterminate group in the affected areas” who could prove “financial losses directly traceable to the” collapse. (Ibid.) Adopting that rule, the court
Indeed: the Illinois Supreme Court, for example, reached the same result for similar reasons in litigation flowing from a flood caused by human error that inundated downtown Chicago in 1992. (See In re Chicago Flood Litigation (Ill. 1997) 680 N.E.2d 265, 268, 276.) Consider also the West Virginia Supreme Court of Appeals’ decision in Aikens v. Debow (W.Va. 2000) 541 S.E.2d 576, the Iowa Supreme Court’s decision in Nebraska Innkeepers, Inc. v. Pittsburgh-Des Moines Corp. (Iowa 1984) 345 N.W.2d 124, the Massachusetts Supreme Judicial Court’s decision in Stop & Shop Companies, Inc. v. Fisher (Mass. 1983) 444 N.E.2d 368, and the Seventh Circuit’s decision applying Wisconsin law in Leadfree Enterprises, Inc. v. U.S. Steel Corp. (7th Cir. 1983) 711 F.2d 805. Those cases all concerned bridge accidents similar to the hypothetical we discussed in Bily — and those cases all rejected attempts by affected businesses to recover in negligence for purely economic losses resulting from those accidents. (See Aikens, at pp. 579, 589; Nebraska Innkeepers, at pp. 125, 128; Stop & Shop, at pp. 371-373; Leadfree Enterprises, at pp. 806, 809; see also American Petroleum and Transport, Inc. v. City of New York (2d Cir. 2013) 737 F.3d 185, 187, 196-197 [rejecting under federal maritime law recovery for purely economic losses stemming from a drawbridge malfunction].) Among their concerns were the endless “ripple effects of a negligence claim based upon pure economic loss.” (Aikens, at p. 591; see also Dundee Cement Co. v. Chemical Laboratories, Inc. (7th Cir. 1983) 712 F.2d 1166, 1172 [opining that allowing recovery in negligence for purely economic losses may unleash “multiversant possibilities” for litigation that “are staggering to the imagination”].)
Federal courts sitting in admiralty have dealt with industrial accidents perhaps most like the one before us: maritime spills of oil and other pollutants. Leaving aside one narrow exception not applicable here, they too have refused to impose a duty of care to guard against purely economic losses. To wit: in State of Louisiana ex rel. Guste v. M/V Testbank (5th Cir. 1985) 752 F.2d 1019 (Testbank), two ships collided in the Mississippi River Gulf. (Id. at p. 1020.) Some 12 tons of a toxic chemical called pentachlorophenol rushed into the water and caused the suspension of fishing, shrimping, and other maritime activities across four hundred square miles of marsh and waterways. (Ibid.) Among the plaintiffs were businesses like boat rental operators, seafood restaurants, and tackle and bait shops. (Id. at pp. 1020-1021.) They sued to recover “for
The Fifth Circuit rejected those claims. (See Testbank, supra, 752 F.2d at pp. 1028-1029.) The court echoed concerns about “wave upon wave of successive economic consequences” and stressed that “[t]hose who would delete the requirement of physical damage have no rule or principle to substitute,” save perhaps letting the trier of fact determine case-by-case, whim-by-whim which claims for purely economic losses warrant recovery. (Id. at p. 1028.) The Fifth Circuit further explained that “to the extent that economic analysis” mattered, it favored rejecting recovery for purely economic losses. (Id. at p. 1029.) That was because defendants in industrial accident cases — despite their frequently deep pockets — will have more difficulty obtaining third-party insurance coverage against purely economic losses than will individual plaintiffs seeking comparable first-party insurance. (See ibid.) Defendants’ potential liability for purely economic losses in such cases is massive and indeterminate. (Ibid.) So insurance companies cannot feasibly offer them comprehensive coverage — or even fix a sensible premium based on actuarial measurement. (Ibid.) Plaintiffs’ “own potential losses,” by contrast, “are finite and readily discernible.” (Ibid.) They can therefore obtain insurance to cover them — perhaps relatively cheaply. (Ibid.; see also Posner, Common-Law Economic Torts: An Economic and Legal Analysis (2006) 48 Ariz. L.Rev. 735, 737-738.)
Faced with an oil spill diverting a container ship at substantial cost, the First Circuit in Barber Lines A/S v. M/V Donau Maru (1st Cir. 1985) 764 F.2d 50 denied recovery in negligence for those purely economic losses. The First Circuit’s analysis in many ways mirrored the Fifth Circuit’s reasoning in
The narrow exception mentioned earlier, to which we now turn, does not help Plaintiffs. Applying maritime law and California law alike in Union Oil Co. v. Oppen (9th Cir. 1974) 501 F.2d 558, the Ninth Circuit held that commercial fishermen could recover in negligence for the “diminution of aquatic life” caused by an oil spill. (Id. at pp. 563, 570.) But that was because theirs was “a pecuniary loss of a particular and special nature” grounded in the time-worn principle that “seamen are the favorites of admiralty.” (Id. at pp. 567, 570; see also Curd v. Mosaic Fertilizer, LLC (Fla. 2010) 39 So.3d 1216, 1228.) Recovery in Union Oil was therefore tightly circumscribed: it
Against all these decisions, only the New Jersey Supreme Court’s opinion in People Express Airlines, Inc. v. Consolidated Rail Corp. (N.J. 1985) 495 A.2d 107 (People Express) cuts definitively the other way. In People Express, a railroad fire forced a nearby terminal at Newark International Airport to shut down for twelve hours — a terminal housing the plaintiff’s business. (See id. at p. 108.) The plaintiff brought a negligence claim for income lost as a result –– a claim the New Jersey Supreme Court permitted to proceed. (Id. at pp. 108, 116.) The court imposed a tort duty to guard against purely economic losses where there is “an identifiable class with respect to whom [the] defendant knows or has reason to know are likely to suffer such damages from its conduct.” (Id. at p. 116.) The court stressed “that an identifiable class of plaintiffs is not simply a foreseeable class of plaintiffs” — such as happenstance
Yet decades after the demise of the airline that gave the case its name, People Express remains “a lonely outpost.” (Rabin, Respecting Boundaries and the Economic Loss Rule in Tort (2006) 48 Ariz. L.Rev. 857, 858.) Its relatively ad hoc standard, embodied in a fact-intensive “ ‘particular foreseeability’ ” test, has been avoided by other courts with — as one scholar put it — “a striking degree of unanimity.” (Ibid.; see also 532 Madison, supra, 750 N.E.2d at p. 1103 [declining to follow People Express]; Aguilar, supra, 98 A.3d at p. 984 [same]).7
2.
Little wonder the Restatement of Torts takes the dominant view. Although acknowledging that “[d]uties to avoid the unintentional infliction of economic loss” exist in certain recognized circumstances, the latest Restatement provides that there is “no general duty to avoid the unintentional infliction of economic loss on another.” (Rest.3d, Torts, Liability for
In justifying that position, the Restatement echoes
widespread judicial concern that purely economic losses
“proliferate more easily than losses of other kinds” and “are not
self-limiting” in the same way. (Restatement T.D. 1, § 1, com. c.)
Those characteristics, the Restatement explains, threaten
“liabilities that are indeterminate and out of proportion
to [a defendant’s] culpability,” and with them “exaggerated
pressure to avoid an activity altogether.” (Restatement T.D. 1,
§ 1, com. c.) For centuries, in fact, similar concerns have
justified strict limits on private recovery for a public nuisance.
(See 4 Blackstone, Commentaries 167 [noting that a public
nuisance is usually not privately actionable because “it would be
unreasonable to multiply suits by giving every man a separate
right of action”]; accord Rest.3d Torts, Liability for Economic
Harm (Tent. Draft. No. 2, Apr. 7, 2014) § 8, com. c. (Restatement
T.D. 2);
Only when the foregoing considerations are “weak or absent” — such as in Biakanja and J’Aire, but not in Bily — does a duty to guard against purely economic losses exist under the Restatement approach to negligence claims. (See Restatement T.D. 1, supra, § 1, com. d; see also Restatement T.D. 2, supra, § 7, com. a [using 532 Madison’s facts and the court’s holding as an illustration of the Restatement view].) But in this case, as in the mine run of man-made disaster cases, those rationales apply with full force.
C.
The allegations before us underscore the ineluctable difficulty associated with imposing a duty to guard against
1.
We lack clear spatial bounds within which to cabin claims like those asserted here.
This case does not involve a so-called special relationship under our precedents. Plaintiffs concede — as they must — that their only relevant ties to SoCalGas are having the misfortune of operating near the Aliso Facility. Accordingly, they propose to limit the class they seek to represent based on geographic proximity alone. Putative class members here are businesses operating “in the area within five miles” of the leak, a space which Plaintiffs characterize as “the precise area from which residents were evacuated.”
What is far from clear is why the five-mile line means anything. Others beyond that boundary were also affected. We discern no compelling basis for us to let a business operating
Most of the foregoing difficulties emerge even when an evacuation zone is set in stone. But here the lines drawn were traced in sand. Plaintiffs’ own complaint acknowledges that, a few weeks after the leak was detected, the evacuation zone was extended beyond the initial five-mile mark. Why businesses operating outside the original boundary but inside the new one should not get to recover their equally real and foreseeable financial losses we do not know.
Using the boundary of an evacuation zone as a liability line might not just lack predictability. In certain circumstances, it could also inject a dangerous incentive into disaster response efforts. Consider how a company taking after Justice Oliver Wendell Holmes’s infamous “bad man” — that is, a company that “cares nothing for an ethical rule” and thus cares “only for
Such steps might include, most obviously, overt pressure on public officials to roll back or eliminate a proposed evacuation. But that’s not the only possibility. Public officials must often rely on company information to know what scale of risk the community faces. Case in point: during the very disaster at issue here, authorities allegedly demanded from SoCalGas real-time data about the leak — and a timeline for
Nor is it always simple to decide what counts as an evacuation, or to resolve claims for purely economic losses where the disaster in question never triggered an evacuation. Some evacuations are mandatory, others are voluntary. And sometimes public officials issue public safety warnings without telling people to leave the area. An evacuation zone rule would require a coherent way to decide which sorts of government action count and which ones don’t. We do not see one. What is more, the utility of an evacuation zone rule depends on there being at least some sort of evacuation. So adopting an evacuation zone rule would be of no help in cases where nothing remotely approaching an evacuation happens, but the economic effects are nevertheless severe. (Consider, for instance, an oil spill at sea that leaves dry land mostly untouched.) Faced with all this potential for negative consequences and doctrinal confusion, “we would be acting rashly to adopt a rule treating” evacuation zones as talismanic. (Intel Corp. v. Hamidi (2003) 30 Cal.4th 1342, 1363 [declining to extend trespass liability into cyberspace based on similar doctrinal and practical concerns].)
Without adopting a (not so) bright-line evacuation zone rule, the alternative is applying a fact-intensive, case-by-case standard à la People Express. But we have already experimented with an analogous approach regarding recovery for negligent infliction of emotional distress. It did not go well. In Thing, we lamented the “arbitrary results” and the “inconsistent and often conflicting” body of law that approach produced. (Thing, supra, 48 Cal.3d at p. 662.) Which is why we
We have not forgotten that experience. Today, we are confronted with hundreds of claims brought by hundreds of businesses stemming from one industrial accident — and that’s just the artificially limited class Plaintiffs seek to represent, not the full universe of potential claimants whose pocketbooks were adversely (and foreseeably) affected by the leak. We see no workable way to limit geographically who may recover purely economic losses. Without one, the dangers of indeterminate liability, over-deterrence, and endless litigation are at their apex.
2.
Nor do we see a viable way to limit temporally what purely economic losses could be recovered here.
Plaintiffs allege that they “have been and continue to be heavily impacted by the gas leak.” (Italics added.) That is possible because Plaintiffs complain not of being forced to shut down during the disaster — no named plaintiff squarely alleges that — but of losing customers due to the exodus of neighborhood residents. And even though the leak is over, they allege that, for as long as the Aliso Facility remains in use, “business will never return to Porter Ranch as usual.” (Italics added.) So Plaintiffs are, in effect, seeking pro rata recovery for the past, present, and future economic toll the leak allegedly had, has, and will have on Porter Ranch. These are claims without end.
True: we could conceivably cabin recovery for purely economic losses to those suffered during the disaster alone. Or we could allow recovery only for such losses suffered during a
The “during the disaster” option would require a way of determining precisely what the words “during” and “disaster” mean in a given case. That will not always be easy. Even assuming the beginning and end of most disasters can be easily fixed by the closing of a wayward valve or its equivalent, distinctions between one disaster (say, a leak of flammable fluid) and another (a fire) can be unstable. Moreover, disasters like the gas leak at issue here happen over an extended period of time, but other industrial accidents (like tower collapses or railroad explosions) happen in an instant. So for the latter sort of disaster, we might have to use the duration of any subsequent evacuation (if there is one) to time-bound the ensuing claims for purely economic losses. But doing that would inject into disaster response efforts the very same dangerous incentives and other problems discussed above.
The “business closure” option, for its part, would likely prove self-defeating. Requiring affected businesses to close as a prerequisite for recovery in negligence would lock them into a dilemma: shut down and lose any income you might have earned — or stay open and lose any tort claim you might have brought. Difficult though the choice could be for some, many businesses might rationally decide they are better off shutting down. Plaintiff Mediterranean Bistro, for example, would presumably be reluctant to keep its 80-seat restaurant open to serve a handful of customers if doing so meant forfeiting a potentially valuable tort claim. Encouraging businesses to close could thus catalyze the very economic stagnation we want to
D.
None of this is to say that denying recovery for those who did not suffer injury to person or property is a perfect solution in negligence cases like this one. Far from it. It is only the least-worst rule out there.
Like other courts, we acknowledge that denying recovery for purely economic losses under circumstances like these has “the vice of creating results in cases at its edge that are . . . ‘unjust’ or ‘unfair’ ” — or even “seemingly perverse.” (Testbank, supra, 752 F.2d at p. 1029; see also 532 Madison, supra, 750 N.E.2d at p. 1103 [acknowledging that this rule is “to an extent arbitrary because . . . invariably it cuts off liability to persons who foreseeably might be plaintiffs”].) The courthouse doors are open for people who experience slight physical injury — yet closed to others who suffer devastating purely economic losses. That line may appear arbitrary in some sense. Yet so are the alternatives we have considered and rejected — and those alternatives, as we’ve explained, have further flaws of their own.
At any rate, “drawing arbitrary lines is unavoidable if we are to limit liability and establish meaningful rules for application by litigants and lower courts.” (Thing, supra, 48 Cal.3d at p. 666.) And as we have explained, the ripple effects of industrial catastrophe on this scale in an interconnected economy defy judicial creation of more finely tuned rules. Hence the admittedly imperfect legal regime that governs in most jurisdictions — and that we now confirm governs in ours.
The Legislature, however, may be able to improve that regime in ways that would be exceptionally difficult, if not
With the economic consequences in this case allegedly so
severe, and the number of people affected allegedly so large, the
Legislature could be spurred yet again to act. To be sure, purely
economic losses caused by a natural gas leak may present their
own set of challenges. But so too, we can only presume, of those
caused by an oil spill. And in that context the Legislature has
already interceded. It enacted legislation permitting those “who
derive[] at least 25 percent” of their income from activities that
utilize “natural resources” to recover — without regard to
fault — for “[l]oss of profits or impairment of earning capacity
due to the injury, destruction, or loss of . . . natural resources”
from a spill.9 (
A partial solution leveraging the insurance market may also prove feasible, at least for some businesses. Although many business interruption insurance policies presently available might not cover the purely economic losses alleged here (see Buxbaum v. Aetna Life & Casualty Co. (2002) 103 Cal.App.4th 434, 448-449), private insurance companies could conceivably see a profit-making opportunity in today’s decision. Now certain that a lawsuit seeking purely economic losses of this sort will not succeed, businesses operating near a natural gas storage facility — or a dam, shipping lane, oil well, and so forth — may be more inclined to buy insurance covering profits they stand to lose if disaster strikes. (See, e.g., Testbank, supra, 752 F.2d at p. 1029 [observing that a local business’s “own potential losses” in the event of an industrial accident “are finite and readily discernible,” which may enable them to obtain insurance “at a relatively low cost”].) If so, private insurance companies might expand their policy offerings accordingly.
Finally, we recognize Plaintiffs’ concern that SoCalGas’s alleged negligent behavior will go insufficiently deterred if we deny recovery here. But SoCalGas is not getting off scot-free. At oral argument, the company represented that some 50,000 claimants have alleged in other litigation that they suffered property damage caused by the leak — several hundred of whom are local businesses. It further informed us, and we have no reason to doubt, that the company has spent some $450 million on remedial measures and agreed to pay another $120 million as part of a settlement with local authorities. SoCalGas, operating in a heavily regulated domain, also remains under
III.
Risks from industrial accidents raise grave concerns for society, and we have no doubt the accident precipitating this case caused significant hardships. To compensate those harmed and to deter those who do the harming, our society assigns tort law a pivotal role. But that does not mean society’s interests are best served by extending its scope indefinitely. Meaningful limits on tort liability, along with the incentives they set, are crucial to the functioning of our economy and of our courts. Where such limits leave gaps in our social fabric, tort does not stand alone: insurance also compensates, regulation also deters. And where gaps persist, the Legislature can act.
The better part of a century has passed since then-Judge Cardozo warned that permitting recovery in negligence for purely economic losses can threaten indeterminacy-cubed: “liability in an indeterminate amount for an indeterminate time to an indeterminate class.” (Ultramares Corp. v. Touche (N.Y. 1931) 174 N.E. 441, 444.) Courts across the country have since heeded that warning, by and large denying recovery in negligence cases like this one even though purely economic losses inflict real pain. That prevailing rule of no recovery is, like society itself, imperfect. Yet nearly everyone follows a rule that few (if any) entirely like. California does, too. So we affirm the Court of Appeal’s judgment.
CUÉLLAR, J.
We Concur: CANTIL-SAKAUYE, C. J. CHIN, J. CORRIGAN, J. LIU, J. KRUGER, J. GROBAN, J.