Settling out a party may not solve your choice-of-law problem

Devising a settlement strategy in multiparty litigation can be especially challenging given the multiple interests, resources and theories of liability that may be involved. But when parties come from multiple jurisdictions, choice-of-law issues can add an extra complexity to the settlement calculus.

In a recent case of first impression, the California Supreme Court considered whether settling with a party in a multiparty tort case should alter a prior choice-of-law ruling in that case. At first glance, the result may appear surprising, for the court upheld application of the law of another state even after the sole defendant from that state settled out before trial. But there was a method to what some might call madness in the court's decision.

Facts

Chen v. Los Angeles Truck Centers, LLC, 444 P.3d. 727 (July 22, 2019), involved a tour bus accident in which 10 Chinese nationals were killed or severely injured. The survivors and surviving relatives sued the California tour company and its driver, the Indiana bus manufacturer and the California bus dealership. The accident took place in Arizona.

Plaintiffs first settled with the California tour company and driver, leaving only the bus manufacturer and its dealer to defend against product liability claims. Roughly one year later, the two remaining defendants filed a joint motion to determine choice of law, asking the court to apply Indiana product liability law in the case.

The Trial Court

As a general rule, a California court will apply California substantive law unless a party timely invokes the law of a foreign state. The moving party must demonstrate that the foreign state has an interest in seeing its own law applied to the particular circumstances in the case. The court then must engage in a three-step analysis, known as the "government interest test," to determine which state's substantive law should apply. This involves determining whether the laws of the two (or more) states differ, and if so, whether the interests underlying each state's law are the same or in conflict. If the interests conflict, then the court must determine which state's interests will be more impaired if the other state's law is applied.

After extensive briefing by both sides, the trial judge concluded that Indiana product liability law, which was much more favorable to the defendants than California law, should govern the case.

Several months later, and shortly before trial, plaintiffs settled with the Indiana bus manufacturer, leaving only the California dealer in the case. After the court ruled the settlement to be in good faith, plaintiffs asked the court to reconsider its decision to apply Indiana law.

A new trial judge denied plaintiffs' request on procedural grounds, but also addressed the substantive issues raised by the parties. Agreeing with the first judge's analysis of the different states' interests, he found that dismissal of the Indiana defendant was not a "new fact or circumstance" requiring reconsideration of the initial ruling. Also noting that the settlement occurred just shortly before the trial date, and because the parties had prepared assuming Indiana law would apply, he concluded it would be unfair to change the applicable law so late in the day.

The defendant subsequently prevailed at trial.

The Appeal

The Court of Appeal relied on both procedural and substantive law to reverse and remand. The trial court had treated the plaintiffs' motions as motions for reconsideration. The appellate court disagreed, characterizing the requests as motions in limine, "subject to reconsideration when the facts were fully developed at trial." As to the substantive merits, the appellate court decided once the Indiana party disappeared from the case, Indiana no longer had an interest and California law should apply.

The California Supreme Court

The California Supreme Court disagreed. The appellate court had framed the question before it as "Should Indiana or California law [now] apply?" and focused less on the timing of plaintiffs' motions and more on the government interests at stake. In contrast, the Supreme Court framed the question more narrowly: Should the trial court "have reconsidered its initial ruling after a defendant settled out of the case?" And in answering this question, the court emphasized procedural over substantive concerns.

Noting the benefits of early choice-of-law rulings in a case, the Supreme Court reasoned that parties needed to be able to rely on those rulings in order to best manage, prepare and, ultimately, resolve the case. The court also agreed with the trial court that plaintiffs' requests should be treated as motions for reconsideration, and that requiring a court to revisit its choice-of-law ruling should be "the exception and not the rule." The court concluded that the settlement with the only Indiana party was not sufficiently exceptional in this case.

Almost as an aside, the Court expressed little concern about the substantive fairness of applying the law of a state no longer involved in the case. It "simply observe[d]" that because the plaintiffs chose to settle as they did, they were "hard-pressed to argue any unfairness due to any consequence arising from the settlement." In other words, they assumed the risk that Indiana law would still apply.

The court did take care to articulate the limits of its decision. It expressly did not decide whether a court could revisit a prior choice of law ruling under these particular circumstances. And it did not decide whether a court ever could be required to revisit its choice-of-law ruling under different circumstances.

The Takeaway

Despite the limited scope of the decision in Chen, it now is riskier to delay settlement with parties from a jurisdiction whose law you wish to avoid. Once a court rules that the law of an adverse jurisdiction applies, settling afterwards with parties from that jurisdiction may not solve your choice-of-law problem. Given the rationale outlined in Chen, even if a court is inclined on the merits to revisit its ruling, it may be less inclined if asked to do so too close to trial. 