The California Supreme Court cited the Restatement of the Law Third, Torts: Liability for Economic Harm in its recent decision involving the issue of whether a gas company had a tort duty to guard against purely economic losses.

The case, Southern California Gas Company v. Superior Court of Los Angeles County, concerns a massive, four-month-long leak from a natural gas storage facility located outside Los Angeles in which the court held that the defendant, Southern California Gas Company (SoCalGas) did not have a tort duty to guard against “purely economic losses” for the plaintiffs, local area businesses, none of which alleged they suffered personal injury or property damage.

The plaintiffs alleged the leak, which displaced thousands of residents and severely harmed the local economy, resulted in substantial economic losses for which they deserve compensation. The plaintiffs did not allege personal injury or property damage and acknowledged they were suing solely for the income lost during the course of the leak.

SoCalGas argued that the business’s negligence claims should fail because they were seeking to recover for purely economic losses. The trial court overruled the defendant’s demurrer, holding that companies “must face the full cost of accidents” they create, or else “they will underinvest in precautions.” The trial court further held that “the general prohibition against liability for pure economic loss does not apply in a mass tort action.”

SoCalGas petitioned for a writ of mandate and the Court of Appeal issued a new order sustaining the demurrer without leave to amend, holding that California law did not permit recovery for purely economic losses unaccompanied by injury to person or property.

The California Supreme Court affirmed this decision citing code, California case law, and several secondary sources, including the Restatement Third of Torts: Liability for Economic Harm. In its finding that plaintiffs’ claim does not fall within any exception to the state’s rule against tort recovery for pure economic loss, the court noted that the Restatement Third of Torts takes the dominant view on the issue. Below is an excerpt of this analysis:

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 Economic Harm (Tent. Draft. No.1, Apr. 4, 2012) § 1 (Restatement T.D. 1).)

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. (RestatementT.D. 2); Civ. Code, § 3493 [originally enacted in 1872].)

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.”

Read the full opinion here.

Lauren Klosinski

ALI Staff

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