No Recovery for Lost Profits in Massive LA Methane Leak

Crews work on a relief well at the Aliso Canyon facility above the Porter Ranch area of Los Angeles on Dec. 9, 2015. (Dean Musgrove/Los Angeles Daily News via AP, Pool, File)

(CN) – The largest gas leak in U.S. history occurred in a neighborhood north of Los Angeles in 2015, forcing a mass exodus of residents and affecting businesses who lost customers while Southern California Gas Company worked for months to cap the blowout. On Thursday, the California Supreme Court rejected a group of business owners’ efforts to recoup lost profits from the utility, finding “the ripple effects of industrial catastrophe on this scale in an interconnected economy defy judicial creation of more finely tuned rules.”

In October 2015, a massive methane leak occurred at Aliso Canyon natural gas storage facility. It took SoCalGas over 100 days to shut down the leak, caused by corroded pipes, which eventually spewed 100,000 tons of methane into the San Fernando Valley.

Initially, residents fled the Porter Ranch neighborhood and surrounding areas. But the evacuation zone expanded after a few weeks and what was once a five-mile radius bloomed into a much wider net after residents complained of headaches, nosebleeds and other respiratory problems.

Approximately 50,000 plaintiffs sued the utility company in Los Angeles Superior Court for personal and property damage as an oily mist coated nearby neighborhoods and forced people from their homes and schools.

But the Second Appellate District ruled in 2017 that seven businesses suing SoCalGas to recoup their lost profits could not go after SoCalGas for purely economic damages. The businesses include a realtor, camera shop, a daycare center and a gas station. 

But in a case that had the potential to upend tort law and the concept of duty of care, the California Supreme Court unanimously agreed with the reversal of the trial court’s denial of SoCalGas’ demurrer.

In a 32-page opinion, Justice Mariano-Florentino Cuéllar noted California law generally does not allow for recovery of purely economic losses in negligence cases – except when plaintiff and defendant have a “special relationship:” when the plaintiff is the intended beneficiary of a transaction but plaintiff was negligent in carrying out said transaction.

In this case, Cuéllar wrote, no special relationship exists between the business owners and SoCalGas. He noted precedent and decisions in numerous jurisdictions “cuts sharply against imposing a duty of care to avoid causing purely economic losses in negligence cases like this one: where purely economic losses flow not from a financial transaction meant to benefit the plaintiff (and which is later botched by the defendant), but instead from an industrial accident caused by the defendant (and which happens to occur near the plaintiff).”

Cuéllar also found trying to quantify profits lost from an industrial accident creates line-drawing problems for courts, since there are too many variables to consider to pin down recovery for purely economic loss suffered in the disaster.

“The ‘during the disaster’ option would require a way of determining precisely what the words ‘during’ and ‘disaster’ mean in a given case,” writes Cuéllar. “That will not always be easy.”

Cuéllar also pointed to problems drawing the line at evacuation, since some are mandatory and some aren’t, and some disasters don’t require evacuations at all, like oil spills at sea.

“Faced with all this potential for negative consequences and doctrinal confusion, ‘we would be acting rashly to adopt a rule treating’ evacuation zones as talismanic,” Cuéllar wrote.

“We see no workable way to limit geographically who may recover purely economic losses. Without one, the dangers of indeterminate liability, over-deterrence, and endless litigation are at their apex.”

The court agreed the economic loss was severe but suggested the Legislature should act to hold utilities liable for these types of disasters.

In a statement, SoCal Gas said it is “pleased with the Supreme Court’s decision today, which adheres to the long-settled precedents on the economic loss doctrine in California and upholds the appellate court’s previous ruling in favor of SoCalGas.”

The businesses’ attorney Leslie Brueckner with Public Justice said the opinion has gotten in the way of tort law and that the true deterrent would have been to hit SoCal Gas where it hurts: their bottom line.

“The court clearly indicates that the rule being advocated by SoCal Gas is harsh and unfair, but at the end of the day the court was worried about adopting a rule that could spread like wildfire. They were concerned this would open the flood gates on other environmental disasters and liability utility companies could face. They were not ready to take that step,” Brueckner said.

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