Locke Lord QuickStudy: Economic Loss Rule Precludes Negligence Claims in the Southern California Gas Leak Litigation

December 21, 2017

On December 15, 2017, a California appellate court held in Southern California Gas Co. v. Superior Court, No. B283606, 2017 WL 6398546 (Cal. Ct. App. Dec. 15, 2017), that Southern California Gas Company (“SoCalGas”) did not owe a duty to prevent economic losses to local businesses based on alleged negligent conduct related to the leak of natural gas from its Aliso Canyon Storage Facility. The ruling reinforces California’s “economic loss rule,” which bars plaintiffs from recovering pure economic losses under a negligence theory without personal injury, property damage or a special relationship. It should have a significant impact on the type of claims that could be asserted against the operators of oil and gas production, transportation and storage facilities.

In Southern California Gas Co., seven businesses filed a putative class action against SoCalGas, asserting negligence based claims on behalf of themselves and other businesses located within a five-mile radius of the Aliso Canyon gas leak. The business plaintiffs did not allege any property damage or personal injury. Instead, they alleged that the gas leak and subsequent relocation of residents of the surrounding area caused purely economic injuries to their businesses. Put differently, the business plaintiffs alleged that they suffered a decline in commercial activity because neighborhood residents temporarily relocated after the gas leak.

The trial court overruled SoCalGas’s demurrer, concluding that SoCalGas owed a duty of care to the businesses and that the economic loss rule did not apply to bar the negligence-based claims (SoCalGas did not challenge the business plaintiffs’ cause of action for alleged violations of California’s Unfair Competition Law). The trial court concluded in part: “The economic loss rule thus does not apply in a context like this one: a classic mass tort action where high transactions costs precluded transactions, where the risk of harm was foreseeable and was closely connected with [SoCalGas’s] conduct, where damages were not wholly speculative, and where the injury was not part of the plaintiff’s ordinary business risk.” Id. at *2.

In an opinion certified for publication, the California Court of Appeal disagreed with the trial court’s reasoning and held that the business plaintiffs’ negligence claims were not viable. Relying on the California Supreme Court’s prior holding in J’Aire Corp. v. Gregory, 24 Cal. 3d 799, 804 (1979), the Court of Appeal stated: “[A] third party’s purely economic loss arising from a transaction is a prerequisite for recovery in tort, absent injury to person or property.” Southern California Gas Co., 2017 WL 6398546 at *7. 

The court analyzed and distinguished several appellate opinions involving plaintiffs who successfully sought purely economic losses. The “common element” in those cases was the “physical destruction of the property which enabled [plaintiffs] to earn a livelihood.” Id. at *9; see also George A. Hormel & Co. v. Maez, 92 Cal. App. 3d 963, 966 (1979) (power surge burned out a motor for critical machinery in the plaintiff’s nearby facility); Adams v. S. Pac. Transportation Co., 50 Cal. App. 3d 37, 40 (1975) (physical destruction of plant at which plaintiffs worked), disapproved of by J’Aire Corp., 24 Cal. 3d 799; Union Oil Co. v. Oppen, 501 F.2d 558, 560 (9th Cir. 1974) (destruction of sea life, upon which the commercial fishermen depended for their livelihoods). That element was not present in the allegations against SoCalGas.

In addition, although the Court of Appeal reaffirmed that an exception to the economic loss rule may exist under the test set forth in Biakanja v. Irving, 49 Cal. 2d 647, 650 (1958), the court also recognized “that foreseeability alone may not be enough to permit recovery on a negligence theory if the imposition of liability would be ‘out of proportion to fault or [would] promote virtually unlimited responsibility for intangible injury.’” Southern California Gas Co., 2017 WL 6398546 at *9 (citing Bily v. Arthur Young & Co., 3 Cal. 4th 370, 398 (1992)).

Given the notoriety surrounding the Aliso Canyon gas leak and its wide ranging impact on the residents and businesses of the area, the Southern California Gas Co. decision is a strong endorsement of the economic loss rule in the context of mass tort litigation. Although the decision may not affect claims by residents who suffered actual personal injuries or property owners for physical damage to their property resulting from a leak at a gas storage facility, or, for that matter, a spill or other discharge of a pollutant from an oil and gas production, transportation or storage facility, the affirmation in Southern California Gas Co. of the bar on the recovery of solely economic damages should limit the scope of potential negligence claims by persons and businesses whose only injury resulting from a leak or spill was economic, such as lost revenues or a decrease in property value. 

The attorneys of Locke Lord’s Business Litigation & Dispute Resolution Practice Group are well positioned to answer any questions that you may have about the scope and impact of the Court of Appeal’s ruling as well as related issues.