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June 2019: Appellate Victory in the California Supreme Court

June 2019

Quinn Emanuel won a significant appellate victory for its client Southern California Gas Co. (“SoCalGas”) in the California Supreme Court. The unanimous, published opinion by Justice Cuéllar reinforces and clarifies the scope of California’s economic loss rule, which is a tort doctrine that limits recovery in negligence to those who have suffered physical harm to person or property. This was one of the most-watched business cases in the California Supreme Court this term, and the decision was a resounding victory for the client.

For decades, defendant SoCalGas has stored natural gas in a facility outside of Los Angeles. In October 2015, the facility sprang a leak that took four months to fix. Following the leak, SoCalGas faced a series of lawsuits from area residents and homeowners who claimed property damage and physical injury. This case did not involve those plaintiffs. Instead, plaintiffs here were businesses located in a nearby suburb called Porter Ranch who claimed that, because some residents chose to temporarily relocate during the leak, downtown foot traffic declined, and their businesses did not make as much money as they had hoped. They initiated a class action against SoCalGas seeking lost profits, despite the fact that they did not suffer any direct, physical harm or property damage. SoCalGas’ potential exposure was enormous.

After the trial court overruled SoCalGas’ demurrer, ruling that pure economic losses like these are recoverable in negligence, the court of appeal reversed and held that the complaint should be dismissed. But the California Supreme Court granted a petition for review, over SoCalGas’s opposition.

SoCalGas then retained Quinn Emanuel to work with trial counsel on the merits phase of the case, and we convinced the California Supreme Court to affirm the court of appeal’s decision and deny recovery to all the businesses in Porter Ranch that claimed to suffer financial harm due to the gas leak allegedly caused by SoCalGas’ negligence. Our arguments relied on the newly adopted Restatement (3rd) of Torts on Economic Injury, California precedent and policy to explain why allowing recovery for this kind of purely financial loss would open the floodgates for all kinds of new claims and create limitless, rippling liability for those accused of even a single negligent act.

On the plaintiffs’ view, as the California Supreme Court explained, a defendant might be liable if a negligent accident blocked a bridge or tunnel and caused economic losses to all those who could not reach business destinations on the other side. The California Supreme Court agreed with SoCalGas’ arguments that any such result would be untenable, and reaffirmed that a tort plaintiff cannot sue in negligence for purely economic losses caused by harm to a third party. The Court’s decision will have a profound impact not just on SoCalGas but on California businesses as a whole, given it eliminates the threat of potentially billions of dollars of negligence liability in mass disaster cases from indirect and purely economic harm.