Client-Plaintiff in Legal Malpractice Action Entitled Only to Be Made Whole, Not to a Windfall
LACBA Update, December 2003

By Louisa Lau, member, LACBA Professional Responsibility & Ethics Committee. Lau practices civil litigation and is a senior staff counsel with State Compensation Insurance Fund. She is also a member of the California State Bar Committee on Professional Responsibility and Conduct. The opinions expressed are her own.

In a recent decision, Ferguson v. Lieff, Cabraser, Heimann & Bernstein, LLP (2003) 30 Cal.4th 1037, the California Supreme Court held that plaintiffs in legal malpractice action may not recover as compensatory damages the punitive damages they allegedly lost due to the negligence of their attorneys in the underlying litigation.

Plaintiffs in Ferguson are individuals who joined a class action against Unocal, allegedly emanating toxic chemicals from a leak at its refinery. Defendants class action attorneys engaged in a global settlement negotiation with Unocal. Settlement could not have been achieved without the agreement to dismiss with prejudice the punitive damages allegations of the non-opt-out punitive damages class. The court-appointed settlement master recommended that the court grant the class counsels' motion to dismiss the punitive class claim with prejudice. The court issued an order finding that the settlement "is fair, reasonable and made in good faith" under Code of Civil Procedure Sec. 877.6.

Appellants (eight of the class members) filed an objection claiming the settlement inadequate and unfair, and asked the court to allocate the $80 million settlement solely to the punitive damages claims. Appellants did not appeal the dismissal of the punitive damages claims, instead participated in the claims process, and received an award from the settlement money.

Appellants then sued the class attorneys for, among other claims, legal malpractice. The trial court sustained respondents' demurrer and motion for summary judgment after finding that claims were barred by the doctrine of collateral estoppel and no due process violation because appellants received adequate notice of proceedings.

The Court of Appeal affirmed, concluding that, as a matter of law, lost punitive damages are not recoverable as compensatory damages for legal malpractice. The court opined that an attorney's liability is for all damages directly and proximately caused by his negligence. Proximate cause involves two elements: One is cause in fact -- whether defendant's negligence was a cause in fact of plaintiff's damages, a factual question for the jury to resolve. The second element focuses on public policy consideration -- an additional limitation on liability.

The Supreme Court noted that it had previously refused to hold a negligent insurer liable for punitive damages assessed against its insured (PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal 4th 310, 313). It reiterated that punitive damages by definition are not intended to compensate the injured party but rather to punish the tortfeasor whose wrongful action was intentional or malicious, and to deter the tortfeasor and others from similar extreme conduct. Making a negligent attorney liable for lost punitive damages would not serve a societal interest since the attorney did not commit and had no control over the intentional misconduct justifying the punitive damages award. Imposing such liability on attorneys would therefore neither punish the culpable tortfeasor nor deter that tortfeasor and others from committing similar wrongful acts in the future.

Allowing recovery of lost punitive damages as compensatory damages in legal malpractice actions would also violate public policy because the amount of the award bears no relation to the gravity of the attorney's misconduct or the attorney's wealth. An award of lost punitive damages would frustrate the public policy to punish and deter a wrongdoing who was not ultimately and nominally responsible for the wrong.

The imposition of such damages in legal malpractice actions also violates the public policy against speculative damages. The court reasoned that an award of punitive damages constitutes a moral determination that is inherently subjective. Lost punitive damages are too speculative. Additionally, the standards of proving compensatory damages (Evidence Code Sec.115, by a preponderance of the evidence) and punitive damages (Civil Code Sec. 3294(a), by clear and convincing evidence that defendant has been guilty of oppression, fraud, or malice) are different. To recover lost punitive damages, a plaintiff must prove by a preponderance of the evidence that but for the attorney negligence the jury would have found clear and convincing evidence of oppression, fraud, or malice. This complex standard posts a pragmatic difficulty that provides additional support for barring recovery of lost punitive damages in a legal malpractice action.

In this case, allowing recovery of such damages would hinder the ability of trial courts to manage and resolve mass tort actions by discouraging the use of mandatory, non-opt-out classes. Furthermore, exposing attorneys to such liability would likely increase the cost of malpractice insurance. The resulting financial burden on attorneys would probably make it more difficult for consumers to obtain legal services or obtain recovery for legal malpractice. At a minimum, the specter of lost punitive damages would encourage the practice of "defensive law," further overburdening the system with additional expenditure of resources merely to build a record against a potential malpractice. The court found overwhelming public policy considerations militating against recovery of lost punitive damages.

However, three justices, concurring and dissenting, would leave for another date the determination whether this holding applies to cases outside the class action context when consideration different from those involved here may lead to a different conclusion.