Ferguson v. Lieff, Cabraser, Heimann & Bernstein, LLP

KENNARD, J., Concurring and Dissenting.

I agree with the majority that these two plaintiffs in a legal malpractice action may not recover as compensatory damages the punitive damages they allegedly lost when, as part of a settlement in the underlying class action, the attorneys for the class stipulated to a dismissal of the punitive damages sought by the class. But, unlike the majority, I would leave for another day the determination whether today’s holding applies to cases outside the class action context, when considerations different from those involved here may lead to a different conclusion.

I.

Plaintiffs are two of over 12,000 individuals who, after exposure to a toxic chemical emanating from a leak at a refinery, joined a class action against the refinery’s owner. Plaintiffs were among eight objectors to the $80 million settlement, which included a stipulation for dismissal of the punitive damage claims. The trial court approved the settlement, finding that “the public’s interest in punishing . . . and deterring” the defendant had been achieved, and that the settlement was made in good faith (Code Civ. Proc., § 877.6).

Under the terms of the settlement, plaintiffs were free to seek a jury trial on their compensatory damage claims, but they did not do so. After receiving their arbitration awards, plaintiffs collaterally attacked the settlement through this malpractice action against class counsel, asking for punitive *1054 damages lost to them, when as part of the settlement, counsel stipulated to a dismissal of the punitive damage claims of the non-opt-out class.

I agree with the majority that this case presents important issues of public policy. In my view, however, the crucial policy issues spring from both the nature and resolution of the underlying class action lawsuit. This court long ago acknowledged that public policy encourages the use of class actions. (Richmond v. Dart Industries, Inc. (1981) 29 Cal.3d 462, 473 [ 174 Cal.Rptr. 515 , 629 P.2d 23 ].) Public policy favoring settlement is especially weighty for class actions. (Franklin v. Kaypro Corp. (9th Cir. 1989) 884 F.2d 1222, 1229 ; Cotton v. Hinton (5th Cir. 1977) 559 F.2d 1326 , 1331.) Settlement of class actions is encouraged precisely because they “consume substantial judicial resources and present unusually large risks for the litigants.” (In re General Motors Corp. Pick-Up Truck Fuel Tank Products Liability Litigation (3d Cir. 1995) 55 F.3d 768, 805 .)

If we permitted all dissident members of a class to pursue a malpractice action against class counsel for punitive damages relinquished by settlement, attorneys would have little incentive to bring class actions and even less incentive to settle them. Counsel acting pro bono would be especially unlikely to undertake class representation. (See Thomas v. Albright (D.D.C. 1999) 77 F.Supp.2d 114, 123 [“In a world fraught with numerous injustices that can only be vindicated through the vehicle of a class action, attorneys should not be dissuaded from bringing meritorious actions by the threat of a state court malpractice law suit.”].) And, as this case illustrates, permitting such a collateral attack undermines the very authority of the judiciary. Here, two of 12,000 class members sought to recoup from class counsel potential punitive damages based on a claim that had been bargained away in exchange for a global settlement of $80 million, even though the trial court expressly found the settlement to have been made in good faith and to have vindicated the public interest in “punishing, . . . and deterring” the defendant’s conduct. (Adams v. Murakami (1991) 54 Cal.3d 105, 110 [ 284 Cal.Rptr. 318 , 813 P.2d 1348 ].)

To permit plaintiffs to now collaterally attack what they perceive to be an insufficiently lucrative settlement in the underlying class action violates an overriding public policy favoring settlement of class actions. On this point, I agree with the majority. Unlike the majority, however, I would stress the narrowness of the holding, leaving for another day whether the same considerations would apply outside the class action context. I outline my concerns below.

*1055 II.

The vast majority of legal malpractice claims do not arise from class actions or from class action settlements, as in this case. Probably the most frequent type of attorney malpractice occurs when counsel fails to timely file a complaint or preserve a claim, leaving the client with no recourse except a malpractice action against counsel. The measure of damages for legal malpractice is the value of the claim lost (Smith v. Lewis (1975) 13 Cal.3d 349, 361 [ 118 Cal.Rptr. 621 , 530 P.2d 589 , 78 A.L.R.3d 231 ]) or all detriment proximately caused by the malpractice (Civ. Code, § 3333). But often an injured client suffers only a small economic loss or incurs substantial noneconomic harm not easily valued in dollars and cents. When the client’s injury is caused by especially egregious conduct, the value of the client’s claim may lie almost entirely in a large punitive damage recovery. (See BMW of North America, Inc. v. Gore (1996) 517 U.S. 559, 582 [ 116 S.Ct. 1589, 1602 , 134 L.Ed.2d 809 ] [in such cases low compensatory damages will support higher ratio of punitive damages].) By denying recovery for lost punitive damages in every legal malpractice action, instead of limiting today’s holding to the confines of a class action settlement, the majority effectively denies such injured clients anything but a nominal recovery of compensatory damages, insulating the attorneys while failing to fully compensate the clients for the loss caused by the malpractice.

The majority condemns a claim of lost punitive damages as too speculative. Yet, whether a jury trying the underlying claim would have awarded punitive damages, and how much it would have awarded but for the claim’s forfeiture, are no more speculative than whether the client would have prevailed had the claim gone to trial and how much in compensatory damages the jury would have awarded. Lost punitive damages, like any other item of compensatory damage in a malpractice action, must be proven to a degree of reasonable certainty. (Clemente v. State of California (1985) 40 Cal.3d 202, 219 [ 219 Cal.Rptr. 445 , 707 P.2d 818 ].)

In a malpractice action, punitive damages lost because of attorney error are not true punitive damages but are merely a measure of some of the injury resulting from the attorney’s malpractice. Thus, lost punitive damages are a form of compensatory damages. In tort law, a goal of awarding compensatory damages is to deter harmful conduct by making the wrongdoer compensate the person harmed. (1 Dobbs, The Law of Torts (2001) § 10, p. 17.) As Justice Puglia explained in Merenda v. Superior Court (1992) 3 Cal.App.4th 1 [ 4 Cal.Rptr.2d 87 ], a legal malpractice plaintiff “should be entitled to *1056 recover ... as compensatory damages the amount of punitive damages [the plaintiff] proves she would have obtained ... in the underlying action. This amount is a portion of the difference between the amount of the actual recovery . . . and the amount which would have been recovered but for” the attorney’s negligence. (Id. at p. 12.)

When the majority here suggests that an award of lost punitive damages inappropriately punishes a merely negligent attorney, it conflates lost punitive damages as one measure of compensatory damage with punitive damages assessed against a particularly culpable party. (Maj. opn., ante, at p. 1047.) If the attorney has not performed competently, the attorney is liable for the client’s injury, including punitive damages lost to the client because of the attorney’s deficient performance. Only if an attorney commits malpractice and does so oppressively, fraudulently, or maliciously is the attorney liable for punitive damages. Conceivably, an attorney could be liable for both types of damages, but analytically only the latter would be punitive damages.

Not only are lost punitive damages subject to proof at trial of the malpractice claim, but the amount of an award for lost punitive damages is ultimately constrained by due process. As the United States Supreme Court held recently, “few awards [of punitive damages] exceeding a single-digit ratio between punitive and compensatory damages . . . will satisfy due process.” (State Farm Mutual Automobile Ins. Co. v. Campbell (2003) 538 U.S. 408 , _ [ 123 S.Ct. 1513, 1524 , 155 L.Ed.2d 585 ].) The high court went on to note that “[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages can reach the outermost limit of the due process guarantee.” (Ibid.)

The majority here observes that permitting recovery of lost punitive damages in legal malpractice actions may “exact a significant social cost” by driving insurers offering professional liability coverage out of the California market. (Maj. opn., ante, at p. 1050.) That is an issue to be addressed to the Legislature, not to this court. Moreover, the majority’s observation assumes that until now, both in this state and in the majority of other jurisdictions that have addressed the question, legal malpractice actions have not permitted recovery of lost punitive damages as an item of compensatory damage. Not so. So far, only one state excludes recovery of lost punitive damages. Thus, the general rule is this: “Attorneys can be liable for exemplary or punitive damages lost or imposed because of their negligence.” (3 Mallen & Smith, Legal Malpractice (5th ed. 2000) Damages, § 20.7, p. 136, fn. omitted.) The *1057 majority does not explain why a malpractice insurance crisis will result from leaving in place a rule that has prevailed until now in many jurisdictions, including California.

In sum, I am not persuaded that the public policy rationales the majority advances support the broad rule it announces.

III.

Finally, I reject the majority’s suggestion that its decision follows from this court’s decision in PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310 [ 84 Cal.Rptr.2d 455 , 975 P.2d 652 ] (PPG). In PPG, a driver who was seriously injured because of a defectively installed windshield received an award of compensatory and punitive damages against the window installer. In a later suit by the installer against its insurer, we declined to permit the installer to shift to the insurer its liability for the punitive damage award. The installer had intentionally used a faster and cheaper way to install replacement windshields instead of the method recommended by the truck’s manufacturer, but continued to charge an amount based on the recommended method. (Id. at p. 314.) We explained that public policy would not permit the installer to shift to its insurer liability for its own intentional wrongdoing merely because the insurer had negligently failed to settle the case before trial. {Id. at p. 317.) The installer, we said, should not be able to obtain indemnification from the installer’s insurer for its own wrongdoing. We concluded that allowing the installer to shift its duty to pay punitive damages would not serve the public purpose of punishing and deterring the installer’s egregious misconduct. Of the two culpable parties, the insurer, although liable for failing to settle, was not “the party actually responsible for the wrong” inflicted upon the truck driver. {Ibid.) PPG held that as between two potentially blameworthy parties, sound policy reasons prohibited allowing the blameworthy installer, whose conduct brought about the punitive damage award, from shifting responsibility for punitive damages to its insurer, whose fault lay in failing to settle the case before a punitive damage verdict was returned. {Id. at p. 319.)

In a client’s action against an attorney for lost punitive damages, unlike the situation in PPG, only one of the parties—the attorney—is blameworthy. The client is a victim twice over—a victim first of the third party’s intentional tort and second of the attorney’s malpractice. Such an action, unlike the lawsuit in PPG, does not involve a more culpable party’s attempt to shift to a less culpable party a liability resulting from its own intentional *1058 wrongdoing; instead, it involves a nonculpable party’s attempt to obtain full compensation from a culpable party for the complete financial loss caused by the culpable party’s negligence. No public policy forbids such compensation.

For the reasons given above, I join in affirming the judgment of the Court of Appeal, but I do not join in either the majority’s reasoning or the broad application of the rule it announces.

Werdegar, J., and Moreno, J., concurred.