Application Of Toxic Tort Economics To Construction Litigation
March 15, 1995
Work on both residential and commercial construction projects invariably
entails the need for water; plumbing; copper tubing; flux; mastics; joints;
wallboard; roofing; sheetrock; taping compounds; insulation; heating;
ventilation; and air conditioning; powerlines; and so forth. Parties involved in
such projects must be aware of the composition of various construction
materials, their possible interactions with other compounds and solvents, as
well as with what is under the ground on which the project is being built. This
is because there exists a serious risk of complex and protracted litigation
having significant economic consequences of even peripheral players. Use of
creative strategies and foresight, however, can successfully minimize potential
economic harm.
The potential for mass litigation present in virtually all construction
projects is precisely why builders, contractors, and suppliers must be concerned
about the environmental implications of their work.
In 1990 and 1991, in Contra Costa County (a
suburban county across the bay from San Francisco), five residential
subdivisions were built in a semi-rural area nestled in the hills. The residents
of hundreds of these new homes were unable to use their tap water for drinking,
cooking, or bathing, however, because it contained excessive amounts of copper
that could cause flu-like symptoms. As a result of these excessive copper
levels, the water was bright blue. Three years and a host of related lawsuits
later, a debate still rages over the source of the copper that caused the
"blue water".
When the problem first came to light in 1990, a special investigative
committee-comprised of representatives of developers, the East Bay Municipal
Utility District (water district), the Contra Costa County Department of Health,
and their consultants – was formed to address the problems of displaced
residents and to identify both the cause or causes of the problem and a cure for
the tainted water. The committee’s efforts were unsuccessful, however, and a
myriad of lawsuits followed. The homeowners sued the water district and the
developers, who, in turn, filed cross-complaints against the general
contractors, subcontractors, manufacturers, distributors, and suppliers of all
types of plumbing fixtures. They also sued the realtors who sold the property
and the lenders that financed the purchases of individual homes.
In order to determine the cause of the blue water, the developers built model
homes where, using the water and pipe samples, they could experiment with the
possible remedies (e.g., flushing the home plumbing systems with a citric acid
solutions). After the developers’ efforts proved fruitless, the water district
increased the level of chlorine in its water treatment protocol. While it was
widely accepted that (a) the water’s bluish coloration was the result of
excessive levels of copper in the water, and (b) the copper was somehow leaching
out of the water pipes, it was not apparent why this was so and whether the
affected piping was why this blue water phenomenon was unique to these
subdivisions in Contra Costa County and not experienced elsewhere in the country
where the same types and brands of copper tubing, flux, and other plumbing
materials were used.
A special master of discovery issues was appointed by the Contra Costa County
Superior Court to administer this large complex litigation. The special master
severed the construction defect claims- raised by a number of the
homeowners-from the blue water claims. Initially, the cases were consolidation
under one caption. However, as homeowners in different subdivisions filed new
cases, the loosely managed consolidation unraveled.
Faced with the above situation, a questions arises as to what a counsel
should do to protect his or her client’s interests. The answer to this
question depends on whom counsel represents. Strategies and tactics useful in
managing toxic case problems can also be applied in construction litigation.
Thus, counsel representing one of the target defendants will want to work toward
extricating his or her client as early as possible from the litigation –
thereby avoiding heavy transactional costs (for example, in the blue water
cases, the volume of daily mail which had to be reviewed was so great the a case
clerk was needed to file and organize it). If extracation is not possible,
counsel should form a enact specific case management orders, with the proviso
that failure to comply with such orders will result in dismissal of the case.
The case management order must be fashioned such that it requires the plaintiff
to establish a casual nexus linking a defendant’s product with causing
plaintiff’s specific injury or damage. Courts, in such large cases, prefer to
group the defendants for each case management. The groupings in this case
naturally fell into categories of manufacturers, distributors, suppliers,
applicators, lenders, realtors, etc.
Initial cases review and analysis must focus on analyzing who brought in the
client into the litigation and why. In the blue water case, the interesting fact
was that one party, a supplier, was not sued by the plaintiffs, but instead
initially was sued by the plumbers and other suppliers on indemnity
cross-complaints. At the outset, the supplier made informal requests of these
codefendants for discovery, followed closely by requests for voluntary
dismissal. Unfortunately, since transactional costs for the cross-complainants
were already so substantial at the point the cross-complaints were served, the
goal of serving more defendants was to share the expense and burden of bringing
in more cross-defendants-i.e., the manufacturers. Like a chain letter, the idea
was to sue right up the chain and pass it on.
Because it appeared that there would by no productive purpose in simply
participating in the typical reactive process of sending out cross-complaints
against the manufacturers and others (a tack that would surely have promoted
reciprocal cross-complaints against the distributor) thereby leading to more
cross-complaints from which to get dismissed, a different strategy was devised.
The fundamental meaning of a cross-complaint is the supplier would only be
potentially liable to the cross-complainants to the extent that those
cross-complainants ever became obligated to compensate the plaintiffs because of
the supplier’s conduct. It was, therefore, to the supplier’s advantage to be
named in as few cross-complaints as possible (hence no knee jerk
cross-complaints were filed by the distributor) and to work, after product and
site specific informal discovery, toward setting directly with plaintiffs. It
soon became evident that the cross-complainants who brought the supplier in were
unwilling to dismiss the supplier because those cross-complainants did not know
the cause of the blue water and, therefore, could not assess the relative
liabilities for the homeowner’s damages. Moreover, the more defendants
present, the more entities there were to contribute toward settlement. Likewise
the manufacturers, who were brought into the lawsuits by another supplier, did
not accept any tender of defense because they also "did not know the cause
of the blue water". The refrain "you can’t get out because we don’t
know the cause of the blue water" became a familiar one – and the costs
continued to mount. Therefore, extricating a small player with little or no
liability from this spider’s web before being strangled to death in
transactional costs became paramount.
Instead of simply taking "no" for an answer and participating in
protracted and costly litigation, the decision was made, after discussions with
the supplier, to negotiate a settlement directly with the plaintiffs in the one
of 14 lawsuits where informal discovery could place the supplier at the site.
Plaintiffs’ counsel enthusiastically embraced this idea, even granting the
supplier a "discount" for being the first litigant to settle.
Significantly, settlement dollars were only paid to plaintiffs who lived in a
development where the evidence indicated plumbing materials furnished by the
supplier were installed. The plaintiffs’ attorney called a "town
meeting" where the proposed settlement and soliciting writing consent to
the agreement. All those homeowners responded by accepting the settlement, and
the supplier was dismissed from the case. Then came the "battle" –
i.e., litigation of the good faith of the settlement. Why would this be a
battle? Because one party was getting out of the lawsuit thereby leaving a
smaller pool of contributors to the settlement pot for all 14 cases.
At first, the Contra Costa County Superior Court granted the motion for an
order determining the good faith of the settlement and dismissing all
cross-complaints. Despite adequate notice, however, not all parties appeared at
this hearing. When word of the court’s ruling circulated, one of the dismissed
parties moved for reconsideration. With more objecting parties in attendance,
the court subsequently granted the motion of reconsideration and reversed
its prior ruling, holding that because the cause of the blue water was
"unknown", the motion for good faith settlement was premature. After
discussions with the client, the decision was made to writ the ruling. Within a
few months, the California Court of Appeal upheld the client’s position by
issuing a writ of mandamus directing the trial court to reconsider its change of
position. Thereafter, the trial court found the settlement to be in good faith
and dismissed the cross-complaints against the supplier.
It must be remembered, however, that this finding applied to one case only;
13 others were still pending, and additional defendants continued to be added on
reflexive cross-complaints. For such suits, the "worse case scenario"
is a discovery order stating that "a cross-complaint filed against one
defendant is deemed against all defendants". Counsel must be aware of this
situation and obtain a case management order fashioned such that someone cannot
bring a new party into the lawsuit who has not previously been served with
process.
While the appellate proceeding was still pending, counsel telephoned the
numerous cross-complainants who had subsequently sued the client on indemnity
cross-complaints in other consolidated blue water cases and requested voluntary
dismissals. These calls were followed up by detailed letters factually
discussing the lack of evidence placing the client’s products at the sites.
Because the client supplied more than one product line, informal discovery
needed to be completed to eliminate all lines being present at the subject
sites. After those parties were made aware of the successful result of the writ
petition, all voluntarily executed dismissals in the 13 remaining cases.
Consequently, the supplier was not required to pay any settlement monies other
than those paid, $50 per house, in the first case.
The analytical approach used to reach this successful result – the
transactional costs paid and settlement monies paid were the lowest of any
defendant in all 14 lawsuits – was to focus at the onset upon the factual
basis for the client’s involvement in the litigation and its potential
liability. Thereafter, meetings were held with the client to discuss strategy,
tactics, and prospective transactional costs (meanwhile the defense was tendered
to the manufacturers). The decision was made to avoid the reflexive litigation
response to cross-complain against "old" and new parties and instead
to settle directly with plaintiffs, moving for determination of good faith
settlement, and securing the dismissal of all cross-actions thereafter in all
other lawsuits.
None of these solutions are uniquely brilliant. The difficulty lies in
crafting a separate plan and successfully implementing it amidst the tidal wave
of mass litigation. Like a fish swimming upstream, counsel has to reanalyze his
or her position at each step, be it at a discovery meeting or a court hearing,
to see if the position taken by the "mass" of litigants – plaintiffs
and defendants – is in line with the goal of counsel’s client.
- Peripheral Party Perspective.
If a party wants to stay on the
periphery of a case and get out quickly, its counsel must keep that goal in
mind and be willing to take some calculated risks. The irony of being counsel
for a peripheral player is that, while maintaining a low profile to keep costs
down, counsel wants to be creative and aggressive in his or her efforts to get
the client out of the case. For example, to minimize the cross-complaints
against the client, do not begin by filing cross-complaints against
anyone. If, as in the blue water cases, a special master is appointed or the
judge raises the issue, sua sponte, actively discourage him or her from
entering an order that a cross-complaint for indemnity against one is deemed
to be a cross-complaint against all. Moreover, consider requesting a case
management order which focuses on causation issues. To explain, in the blue
water cases, counsel was aggressive in filing a motion to adopt a case
management order – a toxic tort strategy applied to construction litigation.
The proposed case management order, if adopted, would have brought with it the
probable dismissal of numerous peripheral defendants. Thus, merely moving for
the case management order assisted counsel in persuading certain
cross-complainants to voluntarily dismiss the client prior to the hearing on
the motion.
At the same time, counsel must perform an internal factual investigation to
determine where the client’s products were used an in what amounts. In this
way, it will be possible to put a dollar value on any potential settlement. The
factual investigation will also enable counsel to assess the client’s role in
the case and, correspondingly, the settlement options available.
Next, while conducting the investigation, counsel should avoid becoming
involved in any administrative role that may make it more difficult to extricate
the client from the case. For example, courts often appoint lead counsel and
steering committees. Counsel should avoid assuming these roles. Along those
lines, in order to limit costs and the client’s exposure, attend only
mandatory appearances and defer retaining and designating any expert witnesses.
If ordered to name experts by a specific date, counsel should attempt to share
experts with other defendants similarly situated. Identify and attend only
critical depositions and propound discovery requests only if informal attempts
to obtain evidence against the client prove unsuccessful.
It is too easy to become overly conservative and to fall into the trap of
propounding boilerplate discovery, attending every depositions, retaining and
designating experts, etc. Instead, before taking any of those steps, ask
"Do I really need to this; what is the worst that will happen if I do not
do this, and is that really so bad?" Call the client to discuss creative
approaches to the litigation, explaining the risks and the benefits of a
suggested strategy. On securing the "green light", counsel should stay
on the chosen path and not allow more traditional methods of litigation to steer
him or her off course. In the end, counsel will have saved the client a lot of
money in settlement dollars and transactional costs and both counsel and client
will feel enriched because of counsel’s creative strategizing.
In a complex case where the distributor client is a very small player, it is
a risk worth taking to go to trial without having retained any experts. Instead,
make the cross-complainant seeking indemnity prove its causation case against
the client. This is usually an uphill battle because the jury will know that the
client did not make or install any product which could have caused the injury.
The jurors will be concentrating on the primary target defendants that the
plaintiff has chosen to sue and will be much less concerned with peripheral
defendants brought in on cross-complaints.
- Blue Water Meets Toxic Torts.
As discussed, supra, a middleman
supplier in a mass litigation context has the option of settling directly with
the plaintiffs to avoid the high transactional costs of lengthy, complex
litigation. This same type of approach which was used in the foregoing
"blue water" case paradigm has recently been used in the breast
implant litigation. Although in that litigation the distributor was sued
directly by the plaintiffs, nevertheless the defendant, like the construction
client, was simply a middleman distributor. In the breast implant litigation,
the distributor purchased a silicone gel product from Dow Corning and could
have brought a cross-complaint for indemnification against that manufacturer.
Instead, the distributor first approached Dow Corning to discuss settlement,
but its overtures were rejected. Rather than accepting defeat, the distributor
then initiated settlement discussions directly with the plaintiffs’
attorneys. Because of the national scope of the litigation, the decision to
settle early, rather than engage in prolonged and costly litigation, no doubt
staved off the bankruptcy that could have resulted had the distributor’s
counsel followed the more traditional litigation route. The imaginative
solution, creating a fund to compensate past and future breast implant claims,
was attractive to plaintiffs who would have fared poorly had distributor filed
for bankruptcy and who were thereby assigned the settling distributor’s
rights to pursue indemnification from Dow Corning.
Not long ago, a similar approach was also used by a manufacturer of asbestos
insulation in settling a number of asbestos-related personal injury and wrongful
death claims. Plaintiffs and this manufacturer aligned themselves against the
deep-pocket insurance carriers by the manufacturer assigning to plaintiffs
"a piece of the action" against the carriers in its insurance coverage
litigation. In exchange for plaintiffs’ dismissals of their claims against the
manufacturer, the plaintiffs received settlement payments comprised partly of
cash and partly of "paper IOU’s-bucks" which were assignments of the
right to recover specified sums of money should the manufacturer prevail in the
insurance coverage litigation. Ultimately, the carriers found it more cost
effective to negotiate a settlement of the coverage issues than to continue to
litigate.
It is essential to the peripheral player strategy that counsel always be
mindful of where the client fits into the big picture of the case and should not
hesitate to be creative and to carve out a niche for the client. As a general
rule, plaintiffs’ attorneys will not settle with a party for a low price early
in the litigation, unless the attorney is convinced that the settling defendant
or cross-defendant is a peripheral player or that there is a subset of big
players to whom plaintiff can look for major settlement monies. Timing of
settlement as well as strategy are important. However, whether the case is a
toxic tort case or construction defect case, it is creative thinking up front
tied to long-term goals that can result in efficient and successful outcomes for
the clients.