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Article: February 2018: Product Liability Litigation Update

Business Litigation Reports

Municipal Cost Recovery Rule May Be Potent Defense in New Wave of Tort Cases Brought by States, Cities, and Counties. In the wake of the Class Action Fairness Act of 2005 and the resulting federal court scrutiny of class action claims, attorneys seeking to aggregate claims have explored a number of options. One such option that has become increasingly common is for plaintiffs’ attorneys to partner with state attorney generals, cities, and other municipal subdivisions to bring lawsuits against companies for public harms allegedly incurred by these governmental entities. These suits have been filed in a variety of circumstances, including claims based on price fixing, tying arrangements, and deceptive marketing of everything from prescription medicines, credit cards, and televisions to vacation rentals. See, e.g., Hood ex rel. Mississippi v. JP Morgan Chase & Co., 737 F.3d 78, 82 (5th Cir. 2013) (alleging credit card companies mislead state residents); Louisiana v. Pfizer, Inc., 2014 WL 3541057, at *2 (M.D. La. July 17, 2014) (alleging drug manufacturer sold ineffective prescription medicine to state residents); Mississippi ex rel. Hood v. AU Optronics Corp., 134 S. Ct. 736, 740 (2014) (alleging price fixing by manufacturers of LCD panels); West Virginia ex rel. McGraw v. Comcast Corp., 705 F. Supp. 2d 441, 444 (E.D. Pa. 2010) (alleging unlawful tying by cable company).

The trend is exemplified most dramatically by a recent wave of claims against pharmaceutical companies that manufacture opioid medications, which now include suits brought by more than 400 cities and counties across the U.S., and which seek to recover the cost of providing medical, police, and other municipal services in response to drug abuse in those communities.

Defendants facing these types of suits have a number of defenses available to them, including standing, federal preemption, remoteness, and proximate cause. Additionally, these claims may, in many states, be barred by a common law doctrine known as the municipal cost recovery rule, which holds that municipal costs incurred in the rendering of public services are not a cognizable form of tort injury. As claims by municipalities become more prevalent, the municipal cost recovery rule could become an increasingly important and effective defense.

The Municipal Cost Recovery Rule Prevents Municipalities from Recovering the Costs of Providing Public Services. The municipal cost recovery rule prevents municipalities from recovering the costs of providing public services, such as fire department, police, and medical services. The rule is founded on public policy considerations, including the expectation of citizens that the costs of municipal services will be spread among the taxpayers. It is often traced to the Ninth Circuit’s decision, authored by now Supreme Court Justice Anthony Kennedy, in City of Flagstaff v. Atchison, Topeka & Santa Fe Ry. Co., 719 F.2d 322, 323 (9th Cir. 1983) (Arizona law), though similar principles had been applied in other states prior to that decision.

In City of Flagstaff, the city brought suit against a railroad company after railroad cars carrying gasoline derailed near the city limits, causing a fire. The city sought to recover the cost of responding to the accident, including the cost of overtime for fire department and emergency medical personnel. In affirming dismissal, the Ninth Circuit held that “the cost of public services for protection from fire or safety hazards is to be borne by the public as a whole, not assessed against the tortfeasor whose negligence creates the need for the service.” Id. at 323. The court emphasized that cities and states were free to abrogate the rule by statute. But to allow cities to recover municipal costs in tort in the absence of a statute would upend “the expectations of businesses and individuals, as well as their insurers.” Id. at 323-24. The court also made clear that historically recognized causes of action, such as claims seeking to recover the cost of abating a public nuisance, would not be barred by the rule. Id. at 324.

Similarly in State v. Black Hills Power, Inc., after a downed power line caused a massive forest fire, the State brought negligence claims in Wyoming federal district court against the power company that owned the power line, alleging damages in the form of fire suppression and emergency services. 354 P.3d 83, 85 (Wyo. 2015). Recognizing that the municipal cost recovery rule would generally bar those types of damages, but that no Wyoming court had yet addressed the rule, the district court held that the issue of whether the rule applied in Wyoming should be determined by the Wyoming Supreme Court. Id. at 84. On certification, the Wyoming Supreme Court adopted the rule based on the same public policy considerations articulated in City of Flagstaff. Noting that, “[w]here emergency services are provided by the government and the costs are spread by taxes, the tortfeasor does not anticipate a demand for reimbursement,” the court concluded that reallocating the risk of municipal costs to tortfeasors was not in the public interest, in light of the government’s power “to protect itself from extraordinary emergency expenses by passing statutes or regulations that permit recovery from negligent parties.” Id.

Most states that have considered similar attempts by cities and counties to recover the costs of providing fire, police, and other services have likewise concluded that such claims should not be allowed as a matter of public policy, including California, Delaware, the District of Columbia, Florida, Georgia, Illinois, Louisiana, Massachusetts, New York, New Jersey, Ohio, Pennsylvania, Virginia, and Wisconsin. See County of San Luis Obispo v. Abalone Alliance, 178 Cal. App. 3d 848 (Cal. App. 1986); Canyon County v. Syngenta Seeds, Inc., 519 F.3d 969 (9th Cir. 2008) (applying California law); Baker v. Smith & Wesson Corp., 2002 WL 31741522 (Del. Super. Nov. 27, 2002); District of Columbia v. Air Florida, Inc., 750 F.2d 1077 (D.C. Cir. 1984) (applying District of Columbia law); Penelas v. Arms Technology, Inc., 1999 WL 1204353 (Fla. Cir. Ct. Dec. 13, 1999); Walker County v. Tri-State Crematory, 643 S.E.2d 324 (Ga. App. 2007); City of Chicago v. Beretta U.S.A. Corp., 821 N.E.2d 1099 (Ill. 2004); Mayor & Council of City of Morgan City v. Jesse J. Fontenot, Inc., 460 So. 2d 685 (La. Ct. App. 1984); Town of Freetown v. New Bedford Wholesale Tire, Inc., 384 Mass. 60 (1981); Koch v. Consol. Edison Co. of New York, 468 N.E. 2d 1 (N.Y. 1984); County of Erie v. Colgan Air, Inc., 711 F.3d 147 (2d Cir. 2013) (applying New York Law); City of Bridgeton v. B. P. Oil, Inc., 369 A.2d 49 (N.J. Sup Ct. 1976); In re Lead Paint Litig., 924 A.2d 484, 502 (N.J. 2007); Board of Commissioners v. Nuclear Assurance Corp., 588 F. Supp. 856 (N.D. Ohio 1984) (applying Ohio law); City of Pittsburgh v. Equitable Gas Co., 512 A.2d 83 (Penn. 1986); City of Philadelphia v. Beretta U.S.A., Corp., 126 F. Supp. 2d 882 (E.D. Pa. 2000) (applying Pennsylvania law); Bd. of Sup’rs v. U.S. Home Corp., 18 Va. Cir. 181 (Va. Cir. Ct. 1989); Town of Howard v. Soo Line RR Co., 217 N.W.2d 329 (Wisc. 1974); State v. Black Hills Power, Inc., 354 P.3d 83 (Wyo. 2015).

The Municipal Cost Recovery Rule May Apply to the Categories of Damages Sought in Many Governmental Actions. Many of the current governmental actions seek the types of damages that may be barred by the municipal cost recovery rule. For instance, in many of the opioid cases, states, cities, and counties are seeking to hold pharmaceutical manufacturers and distributors responsible for the effects of opioid addiction, and claim injury in the form of expenses incurred in providing public services in response to drug abuse, including law enforcement, emergency medical services, prisons, and addiction treatment. Such municipal expenditures on public services are the type of damages that have been generally barred by the municipal cost recovery rule in the past. Thus, as these cases proceed, the municipal cost recovery rule is likely to play an important role in determining what damages are, and are not, compensable.

Conclusion. Under the municipal cost recovery rule, municipalities cannot recover the cost of providing public services from tortfeasors in the absence of specific statutory authorization. The rule may be an effective defense in the recent wave of claims filed by cities, states and counties against product manufacturers seeking to recover the costs of providing medical, police, and other municipal services to residents affected by the defendants’ products.