The California Supreme Court recently ruled that in cases where the trial judge has not certified that a settlement was reached in good faith, the non-settling defendants may later sue the settling defendant if the jury apportions additional fault to the settling defendant. The case of Leung v. Verdugo Hills Hospital, No. S192768 (Cal. Aug. 23, 2012) concerned the unfortunate case of an infant who suffered irreversible brain damage due to alleged medical negligence. The infant’s pediatrician had settled with the infant’s mother for $1 million (the limits of his insurance coverage) but the jury awarded over $15 million to the infant for future expenses and only $250,000 for non-economic damages (e.g. pain and suffering). The jury also found that the settling pediatrician was 55% at fault for the infant’s injuries. The Leung court held that after paying the verdict, the hospital can still recover the pediatrician’s share of damages from the pediatrician, in spite of the pediatrician’s prior settlement with the infant’s family.

California’s Prop 51 makes defendants jointly and severally liable for economic damages in tort cases, but only severally liable for non-economic damages. This means that in a negligence case, if several defendants are responsible for damages, the “deep pocket” defendant may be forced to pay all of the economic damages, but can only be forced to pay its share of the non-economic damages. Typically, economic damages include expenses incurred or expenses that are likely to occur in the future such as medical bills, and actual out-of-pocket losses, including lost wages. Non-economic damages include amounts for pain and suffering. Often, personal injury cases involve small economic damages awards coupled with very large non-economic damages awards. The Leung case was a tragic example of the reverse, which allowed California’s high court to address apportionment of economic damages between defendants.

California’s Code of Civil Procedure allows parties to a pretrial settlement to obtain court approval of the settlement. Once the Court approves of the “good faith” settlement, the settling defendant cannot be sued by any of the other defendants for contributions toward the plaintiff’s damages. In Leung, the trial judge refused to approve the pediatrician’s settlement with the infant’s family, since the judge believed the settlement amount to be too low compared to the amount of damages involved. Prior to the Leung ruling, the old common law rule held that no claim could be made against a settling defendant. The Leung court rejected the “release rule,” and held that where the trial court has not determined that a settlement has been in “good faith,” the amount of the settlement will be subtracted from the ultimate judgment in the case, but the settling defendant can still be sued later by his or her co-defendants for outstanding amounts corresponding to the settling defendant’s fault (as apportioned at trial).

Commercial litigation usually only involves “economic damages” of the sort referred to in Prop 51 and the Leung decision. As such, where there are multiple defendants facing any non-contract claims in a commercial dispute in California, a defendant agreeing to a settlement with the plaintiff must obtain a good faith ruling from the trial judge in order to avoid future lawsuits by co-defendants or further exposure resulting from the trial involving the non-settling defendants.