To settle or not to settle with a joint tortfeasor?

Typically, the goal of mediation in multi-party litigation is to resolve the entire case. In most instances, all parties participate in mediation and do so in pursuit of a global settlement. But not always. Sometimes it makes sense to consider a partial settlement. A particular defendant may have evaluated the case differently than others. One defendant might be differently situated. Or plaintiff's counsel might simply decide that settling with less than all defendants is a good tactical move. There are many reasons why a partial settlement can be desirable.

Before you pursue a partial settlement though, either on the defense or plaintiff's side, it is important to understand the implications. How will it affect the rest of the case? Will it provide your client the peace of mind he or she is seeking? What are the pros and cons?

This article provides a brief overview of several important considerations in evaluating the merits of a potential partial settlement.

The Impact of Partial Settlements on Non-Settling Defendants

One major consideration is how a partial settlement will impact the potential liability of a non-settling defendant. For example, will the proposed settlement reduce the non-settling party's liability and, if so, by how much? To evaluate this issue, you need to understand the "offset" rules.

Code of Civil Procedure Section 877(a) provides that a settlement with a joint tortfeasor "shall reduce the claims against the others in the amount stipulated by the release, the dismissal or the covenant, or in the amount of consideration paid for it, whichever is greater." This provision sounds pretty straightforward. But it's not. It turns out that while a credit or offset is often available when there has been a prior settlement among joint tortfeasors, the amount of that offset will largely be determined by how the jury eventually allocates damages between economic and noneconomic damages.

In Espinoza v. Machonga, 9 Cal. App. 4th 268 (1992), the court considered the interplay between Section 877 and Section 1431.2 (the statute that eliminated "joint and several liability" for noneconomic damages). After surveying the history and summarizing the language of the two statutes, the court concluded quite succinctly that the "portion of the settlement attributable to noneconomic damages is not subject to set off." The court's rationale was fairly clear. Since Section 1431.2 limits joint-tortfeasor liability for noneconomic damages to the percentage of fault attributable to that particular defendant, a settlement by one defendant cannot be said to include compensation with respect to noneconomic damages attributable to "others." Since each defendant is only responsible for his or her share of noneconomic damages, settlement money paid by one defendant for such damages is not compensation for the other defendant's share of those same damages. Each defendant bears full responsibility for his or her own share of noneconomic damages.

A non-settling defendant is only entitled to credit for the portion of the prior settlement attributed to economic damages. But how does one calculate that number? Espinoza answered that question, too. First, you need to identify the ratio of economic damages to the total damages awarded by the jury. Then, you multiply the settlement by that percentage. It's that simple! The resulting number is the amount of the settlement attributable to economic damages. Only that portion of the settlement will act as an offset against the non-settling defendant's liability. See id. at 277. If the jury returns a total verdict for $1 million and 40 percent is attributed to economic damages, to determine the offset you would multiple the partial settlement by 0.4. If the partial settlement was for $200,000, the portion of the settlement attributable to economic damages is $ 80,000. The non-settling defendant will only be entitled to an $80,000 off set, not the full $200,000.

Notice the implications. The smaller the economic damages awarded by the jury compared to noneconomic damages, the less the non-settling defendant can assert as an offset. The ratio becomes critical. Consider, for example, the severely injured plaintiff who sustains a relatively small amount of economic damages but has endured and will continue to endure massive pain and suffering. The noneconomic damages might outweigh the economic damages 10-1. If so, less than 10 percent of the prior settlement will be applied as an offset. Or what about the plaintiff who waives economic damages entirely (which actually happens fairly often including in certain wrongful death cases or pure emotional distress cases). In that instance, there will be no offset at all. The portion of economic damages is zero. On the other hand, if you have significant economic damages relative to noneconomic damages, the partial settlement may provide the non-settling defendant a significant offset.

There is at least one significant exception to the Espinoza rule -- in cases where fault is not allocated between joint tortfeasors (i.e., where 1431.2 does not apply). For example, in Miller v. Stouffer, 9 Cal. App. 4th 70 (1992), the court held that an employer cannot reduce its liability based on 1431.2 for injuries caused by an employee in the scope of employment. Because the employer's liability is not based on fault, it makes no sense to allocate fault between the employer and employee. The same rule applies in the context of the permissive user statute in vehicular negligence cases, which imposes liability on the owner of the accident-involved vehicle without regard to fault. See Vehicle Code Section 17150; Rashtian v. BRAC-BH, Inc., 9 Cal. App. 4th 1847 (1992).

Similarly, in the strict products liability context, courts have rejected attempts by entities in the chain of distribution to allocate fault between each other. The strict liability of a retailer, distributor or other "non-negligent" participant in the marketing chain is not based on fault, but on the social policy of placing the burden of loss on those who profit from marketing a "defective" product. Because liability is imputed rather based on tradition "fault," strict liability is not affected by Section 1431.2. See Bostick v. Flex Equipment Co., Inc., 147 Cal. App. 4th 80, 93-95 (2007); Wimberly v. Derby Cycle Corp., 56 Cal. App. 4th 618, 625-33 (1997). In those instances, the rationale of Espinoza does not apply. The non-settling defendant will likely be entitled to a full offset for prior settlements.

The Settling Defendant's Potential Exposure to Indemnity/Contribution Claims

While a settlement ends the case between the settling defendant and the plaintiff, it will not necessarily protect the settling party from claims by non-settling co-tortfeasors. Under principles of equity (equitable indemnity or comparative contribution), a joint tortfeasor can seek indemnity or contribution from another tortfeasor. See American Motorcycle Association v. Superior Court (Viking Motorcycle Club), 20 Cal. 3d 578 (1978). If an at-fault party is dismissed from the case or settles before the case is filed, and a joint tortfeasor ultimately pays a settlement or gets hit with a judgment, the latter can seek contribution or indemnity from the former. The settling party avoids liability to the plaintiff but remains exposed to an indemnity/contribution claim. This is where Section 877 kicks in again.

Under Section 877(b), a "good faith" settlement "shall discharge the [settling party] from all liability for any contribution to any other parties." A joint tortfeasor is barred from seeking contribution from a settling tortfeasor who settles in good faith. This provision has been construed to include equitable indemnity and contribution claims. Importantly, however, this rule does not bar claims based on express contractual indemnity. Willdan v. Sialic Contractors Corp., 224 Cal. App. 4th 1357 (2007). Thus, if your client owes contractual indemnity to a joint tortfeasor, settling with the plaintiff will not fully insulate your client from liability. Still, at a minimum, if you intend to enter a partial settlement, it should be contingent on a finding that the settlement was made in good faith under Section 877(b).

Trial Considerations

Perhaps most important among the many considerations is how a partial settlement will impact the trial dynamics. There are important ramifications when an at-fault defendant is dismissed from a case.

The dismissed party will not be sitting as a defendant at trial. This can create an awful perception. Jurors are known to speculate about why a responsible party is not involved at trial. For example, a juror might assume there was a settlement, which could (although improperly) impact the juror's evaluation of damages. Or a juror might believe the plaintiff sued the remaining defendant not because it is at fault, but because it has "deep pockets." At a minimum, settling with an at-fault defendant creates a big question for jurors that may never be answered to their satisfaction.

There are other intangible reasons not to enter a partial settlement before trial. As the plaintiff's counsel, you might prefer the settling party's attorney be involved in defending the case, perhaps, because you think he or she is not a very good trial lawyer. You may believe the potential settling defendant makes a horrible impression, increasing your chances in front of the jury. Or you may think there is an advantage to having a group of defendants and defense lawyers on the other side, creating a David vs. Goliath feel. I personally think that jurors are influenced when they see a lot of parties and lawyers in the courtroom. "There must be something big going on here!"

For defense counsel, you may believe that holding out jointly with other defendants will increase the pressure on the plaintiff to settle. Once you open the door to unilateral talks, you lose some of that leverage. You introduce the possibility that the plaintiff can "eat his cake and have it too" (i.e., recover a settlement and then swing for the fences against a non-settling defendant). On the other hand, if you refuse to consider a separate settlement, you may find that one or more of your co-tortfeasors settled without you. Then you are left "holding the bag." Also, in some instances, your client really is a fringe defendant. Refusing to broach a separate settlement might insure your client gets dragged along for a very expensive and stressful ride when it makes little sense.

For plaintiff's counsel, remember also that once you've let out an at-fault defendant, the remaining defendant often ramps up its finger pointing at the absent party. While co-defendants often "stick together" during pre-trial work up, once a defendant drops out, the cohesive defense evaporates. The non-settling defendant now turns his guns on its former ally. Why not? Any fault attributed to the settling party directly reduces the non-settling defendant's exposure for noneconomic damages. It doesn't matter that the settling party is no longer a defendant in the case. See Dafonte v. Up-Right, 2 Cal. 4th 593, 603 (1992). Only now, the settling defendant is not in the courtroom defending itself through counsel (or at least not with the same incentive to do so)!

Lastly, for plaintiffs, ultimately you may not have a real option of settling with just one defendant. You may be stuck. For example, your client may have responded to discovery asserting fault against the potential settling defendant. Your expert may have given testimony blaming that defendant. A smart defense lawyer representing a non-settling defendant will take advantage of this record. And jurors will be left wondering why you previously blamed a person or entity that is not at trial and to whom you longer assign fault.

Of course, there are ways to mitigate these problems. For example, you can settle the case before taking a firm position "on the record" about the settling defendant's fault. But a good defense lawyer will tease out your contentions regarding other defendants early in the case. You can ask the court to give CACI 5007, which instructs the jurors not to consider the fact that a party is no longer in the case. But this might only highlight the absence of the former defendant. You can also file a motion in limine to prevent the non-settling defendant from telling the jury that plaintiff sued another party, and also ask the court to remove any reference to the settling party from records accessible to jurors. But neither of those options are bullet proof. In my experience, through the deluge and fog of trial, jurors eventually figure it out.

As a litigator, there are times when reaching a partial settlement makes sense. But you have to carefully consider the implications. For the plaintiff's lawyer, consider the impact on your ability to recover against non-settling defendants, as well as appearances and dynamics at trial. For the defense lawyer, consider whether a partial settlement will fully insulate your client from liability, and whether there are reasons to "hold out" with other defendants. While it usually makes more sense to reach a global settlement, that is not always the case. Knowing the rules that apply in partial settlements, and the intangible considerations, will give you and your client the confidence to pursue alternative (if not ideal) paths to resolution in some cases.