California utilities face increasing and potentially crippling litigation exposure from wildfires. This exposure has caused utilities like Pacific Gas and Electric Company (PG&E) to suffer lost market capitalization and lower credit ratings. But on July 2, 2018, the firm obtained a notable appellate victory for PG&E in the California Court of Appeal for the Third District, which held that PG&E could not be held liable for punitive damages for the 2015 Butte Fire in Calaveras and Amador Counties. The decision eliminated a potential multi-billion-dollar threat against the company, and its stock price rose on the news.
PG&E runs an extensive, state-of-the-industry vegetation management program, spending $190 million a year to inspect, trim and remove dangerous trees along its 135,000 miles of powerlines. Its contracts with the tree companies that carry out that work require the contractors to comply with detailed government and industry arboricultural and fire prevention standards in training and supervising their employees.
Despite these efforts, the 2015 Butte wildfire in Calaveras and Amador Counties started when a gray pine tree came into contact with one of PG&E’s powerlines. Over 2000 plaintiffs sued PG&E, seeking over $1 billion in compensatory damages. The plaintiffs also sought potentially even greater amounts of punitive damages, asserting that PG&E was aware of the risk of wildfires but had failed to undertake adequate mitigation efforts.
PG&E argued that, in light of its risk management efforts, it could not be liable for punitive damages under California law, which requires clear and convincing evidence of “despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights and safety of others.” The trial court rejected most of plaintiffs’ arguments, but allowed the punitive damages claims to proceed on the unprecedented theory that “conscious disregard” could be shown by improper reliance on independent contractors to honor their contractual commitments.
The firm then filed a petition for a writ of mandate to the Court of Appeal. Such petitions seek extraordinary relief and are rarely granted. But the Court of Appeal granted the petition and issued a unanimous, published decision reversing the trial court and directing entry of judgment that PG&E could not be held liable for punitive damages.
The Court held that PG&E could not possibly be found to have consciously disregarded the risk of tree-related wildfires in light of its extensive vegetation management efforts. In so doing, the Court expressly rejected the plaintiffs’ argument that an unsuccessful risk management policy necessarily shows conscious disregard warranting punitive damages. The court sharply contrasted PG&E’s efforts with other cases where corporate defendants had deliberately disregarded known risks like that of rollovers in certain makes of cars.
In addition to saving PG&E from the threat of billions of dollars in additional damages, this decision makes significant new California law. It will protect all companies that institute risk management programs from the threat of punitive damages should those programs fall short, which will encourage companies to initiate and continue such salutary programs in the future.