California Supreme Court Invalidates the Last Vestiges of the Common Law Release Rule – Plaintiffs May Recover the Unsatisfied Portion of All Awarded Damages from Nonsettling Joint Tortfeasors, Even in the Absence of a Good Faith Settlement

Until the California Supreme Court’s recent ruling in Leung v. Verdugo Hills Hospital, S192768, the common law release rule was technically still good law in California. Yet, the rule has long lain dormant due to jurisprudence and legislation that significantly narrowed its scope of applicability. Nevertheless, the particular set of facts that arose in Leung triggered the application of the common law release rule and, in turn, prompted the California Supreme Court to authoritatively end this rule’s application.

In short, the common law release rule provides that a plaintiff’s settlement with one joint tortfeasor automatically releases all other joint tortfeasors from liability as well. The rule arose out of the traditional common law rationale that there can only be one compensation for a single injury and that, in the instance of joint wrongdoers, each wrongdoer is responsible for the entire damage. As a result, compensation of plaintiff by any one of several jointly responsible tortfeasors in return for a release satisfies plaintiff’s entire claim, thereby releasing the other joint tortfeasors as well.

California courts first narrowed the scope of the common law release rule by holding that using the terminology “covenant not to sue,” rather than “release,” in a settlement with one of several joint tortfeasors would preserve the plaintiff’s right to recover additional compensation from the remaining nonsettling joint tortfeasors. The California Legislature further narrowed the scope of the rule’s application by enacting section 877 of the Code of Civil Procedure, providing that where a court determines that a settlement has been entered into in “good faith,” the settlement does not automatically discharge other joint tortfeasors from liability, but merely reduces the claims against the remaining joint tortfeasors by the settlement amount. Thus, compliance with section 877 protects a plaintiff’s interest in recovering the full amount of damages by making the common law release rule inapplicable and preventing the release of nonsettling joint tortfeasors. Compliance with section 877 also protects the settling tortfeasor from all liability for contribution to the non-settling tortfeasors for payment of the remaining damages awarded at trial.

Despite these constraints on the application of the common law release rule, until Leung, the rule still applied in the narrow circumstance where a settlement was not determined to be in good faith under section 877. This is the circumstance under which Leung made its way to the California Supreme Court. In Leung, the plaintiff, a newborn baby boy, suffered irreversible brain damage six days after his birth, and the plaintiff, through his guardian ad litem, sued both the pediatrician and the hospital for negligence. The plaintiff settled with the pediatrician prior to trial for $1 million, but the trial court denied the pediatrician’s application for a determination of a good faith settlement under section 877, stating that the settlement was grossly disproportionate to the pediatrician’s expected share of liability under a reasonable person standard. However, the plaintiff and the pediatrician proceeded with the settlement anyway. At trial, the jury found the pediatrician 55% at fault, the hospital 40% at fault, and the plaintiff’s parents 5% at fault and awarded the plaintiff approximately $15 million in damages. The trial court found the hospital jointly and severally liable for 95% of the damages, minus the $1 million already paid to the plaintiff in settlement. The hospital appealed, claiming that since the settlement had not been found to be in good faith under section 877, the settlement released it from liability as well under the common law release rule. The Court of Appeals reluctantly agreed with the hospital, on the basis that the California Supreme Court had never affirmatively abandoned the common law release rule in full.

The California Supreme Court granted the plaintiff’s petition for review and held, in this landmark decision, that the common law release rule is no longer to be followed in California. The Court’s decision focused on the harsh results that application of the rule can cause. For instance, in the case at hand, application of the rule meant the plaintiff would recover only 1/15th of his total awarded damages. The Court found the abolition of the rule to be in keeping with the legislative intent behind section 877’s enactment, which was to ameliorate the harshness and inequity of the common law release rule.

Abandoning the rule necessitated that the Court decide how to apportion liability among joint tortfeasors when the apportionment standard under Code of Civil Procedure section 877 does not apply because a trial court has determined that a tortfeasor’s settlement has not been made in good faith. The Court adopted the “setoff-with contribution” approach for this apportionment scenario. Under the “setoff-with contribution” approach, the money paid to the plaintiff in settlement is credited against the damages assessed against the nonsettling tortfeasors, the nonsettling tortfeasors pay that remaining amount to the plaintiff, and the nonsettling tortfeasors are then entitled to seek contribution from the settling tortfeasor for any damages in excess of their equitable share. The Court found this approach to be appropriate because it does not change the respective positions of the parties and is fully consistent with the concepts of comparative fault and joint and several liability.

The California Supreme Court’s abandonment of the common law release rule and adoption of the “setoff-with-contribution” approach makes conditioning the effectiveness of any proposed pre-trial settlement on the obtaining of a good faith determination from the presiding court of critical importance for settling defendants. Where a proposed settlement is not determined to have been made in good faith by the trial court, but the settling defendant nonetheless proceeds with its settlement, that defendant bears the risk of a contribution action brought by joint tortfeasors who are assessed excess damages at trial. The abandonment of the common law release rule perhaps does the least for nonsettling joint tortfeasors, who have no control over another defendant’s settlement. If a defendant and plaintiff decide to settle without the court’s good faith determination, the nonsettling tortfeasor is not released from liability, but must instead pay upfront all awarded damages that were not covered by the settlement and only then may file a contribution action against the settling defendant for its remaining share, exposed to the risk that the settling defendant may lack the financial ability to reimburse the nonsettling tortfeasor in this later contribution action. On the other hand, plaintiffs fare well in the abandonment of the rule. Regardless of whether a settlement is in good faith or not, plaintiffs are able to recover the full amount of awarded damages, minus what they have already received in settlement, from nonsettling joint tortfeasors.