Everything You Ever Wanted to Know About Choice of Law Issues
By Mark B. Wilson, P.C.
Because traveling has become relatively inexpensive and interstate commerce is commonplace, attorneys are often faced with facts that suggest the law of another forum might apply. And sometimes, the law of another state is better than California law. The purpose of this article is to provide attorneys with a road map of how to address choice of law issues. Below is a fact pattern of a case I recently handled and the procedure I followed to get the Texas law to apply.
Defendant, a California corporation, manufactures electrical switches. Plaintiff, a Texas corporation, purchased one of Defendant's switches and resold it to a Texas company, which installed the switch into a mechanical system located in Texas (the "Texas System"). Plaintiff is a classic middleman who does nothing more than resell products manufactured by others. The Texas System exploded and caused serious property damage. The injured party filed a lawsuit in Texas against Plaintiff for products liability contending the switch caused the accident. Plaintiff sought indemnity from Defendant in the Texas case, but the Texas court refused to exercise jurisdiction over Defendant, who resided in California. After paying money to settle the Texas case, Plaintiff filed an action against Defendant in California for indemnity.
Summary of Choice of Law Issues
For reasons set forth below, Plaintiff wanted the California court to apply Texas indemnity law to this case and Defendant wanted California indemnity law. The first step in evaluating a choice law of question is to examine the laws of the states at issue to see if and how they are different. Reich v. Purcell (1967) 67 Cal.2d 551, 553: Offshore Rental Co. v. Continental Oil Co. (1978) 22 Cal.3d 157, 161.
Texas has an indemnification statute that provides a manufacturer is presumed liable in an indemnity case like this. The only way for a manufacturer to avoid liability is to prove the seller was comparatively at fault for the accident. The seller does not have to prove the product is defective or that the product in any way contributed to the accident. The seller only has to prove: (1) it was sued, (2) it gave the manufacturer notice of the action; and (3) the seller incurred costs or fees defending itself. If the seller prevails, it is entitled to all court costs, expert fees, attorneys' fees, and any other reasonable fee incurred in pursuing the indemnity action.
California law is not so generous. It requires a party, like Plaintiff, to prove all the elements of a product liability claim. Plaintiff has the burden of proof, and Plaintiff would not be entitled to recover attorneys' fees. Clearly there is a conflict between California and Texas law.
How To Get Foreign Law Applied In California
California courts will only apply a foreign state's law if a party files a choice of law motion and persuades the court the law of a foreign state should apply. Hurtado v. Superior Court (1974) 11 Cal.3d 574, 581. Accordingly, it is critical that attorneys identify choice of law issues and file a choice of law motion early in the case. "Each choice of law issue requires a separate consideration." Beach Aircraft Corp. v. Superior Court (1976) 61 Cal.App3d 501, 518. Therefore, if there are several laws at issue which conflict, address each of them in the choice of law motion. Otherwise, California law should apply. In the fact pattern above, Defendant contended before trial that since the California court was applying Texas indemnity law, the court should also apply the Texas law of comparative fault (which is very unfavorable to plaintiffs). Since Defendant failed to file a choice of law motion, the court should reject this request.
Choice of Law Test
Although the cases put different labels on the tests they apply in choice of law issues, there are essentially three steps in the analysis:
- The party who wants to apply foreign law must identify the foreign law and show that it is materially different from California law. If the laws are not different, the court should apply California law.
- The court determines what interest each state has in having its own law applied to the case. In arguing states' interests, parties often cite stated interests in case law, statutes, legislative comments and legislative history. If these sources do not reveal the state's interests, parties routinely argue "perceived" interests of a state's law. See discussion of Hurtado below.
- If the trial court determines the laws are different and that each state has a legitimate interest in having its law applied, the court chooses the state whose interests would be more impaired if not applied. See discussion in Washington Mutual Bank, FA v. Superior Court (2001) 24 Cal. 4th 906.
In evaluating states' interests in having their law applied, California courts focus on whom the two laws at issue were designed to protect. If only one party is in the protected class, the case presents a "false conflict," and the court applies the state law designed to protect that party. Hurtado v. Superior Court, supra, 11 Cal. 3d at p. 580; Reich v. Purcell, supra, 67 Cal.2d at p. 553; and Wong v. Tenneco, Inc. (1985) 39 Cal.3d 126, 144.
A False Conflict?
In Hurtado v. Superior Court, supra, plaintiffs filed an action for wrongful death arising out of an auto accident, which occurred in California. Plaintiffs' decedents were residents of Mexico. Defendants wanted Mexico law to apply because it limited plaintiffs' damages to about $2,000. Plaintiffs wanted California law to apply since damages were unlimited.
Recognizing the conflict, the Hurtado court identified the class of people for whom the Mexican law was designed to protect to see if it had any applicability in the case. The court found Mexico's law limiting wrongful death damages was designed to protect Mexican defendants from excessive financial burdens. Since it was the plaintiffs, and not the defendants, who were Mexican residents, the court found Mexico had no interest in applying its limitation of damages law. Accordingly, the court ruled there was a "false" conflict and applied California law.
In Pacific Diamond Company, Inc. v. Superior Court (1978) 85 Cal.App.3d 871. plaintiff filed an action to recover $150,000 for diamonds stolen from defendant's hotel in Colorado. Defendant wanted California law to apply because it limited plaintiff's damages to $250.00. Plaintiff wanted Colorado law to apply because its law was more generous on recovery of damages. The court identified the class of people for whom the California law was designed to protect to see if it had any applicability in the case. The court found that California's governmental interest was to protect California innkeepers within its territorial jurisdiction from unlimited liability. Since defendant's hotel was in Colorado, California had no interest in limiting the defendant's liability. Accordingly, the court applied Colorado's law, because Colorado had a valid governmental interest in seeing that its innkeeper statutes were applied to hotels inside its borders.
In my case, I argued there was a false conflict because Plaintiff was within the class of people the Texas law was designed to protect, and no parties were in the class the California law was designed to protect. In fact, the Senate Bill Analysis explained how the statue was designed to expand indemnity rights of sellers. Moreover, the Texas law was designed to regulate conduct in Texas' borders.
In contrast, California's indemnity law was designed to: (1) reimburse California residents who pay the debt of another and (2) regulate conduct in California. Since Plaintiff was not a California resident, and the accident occurred in Texas, California had no interest in having its indemnity law applied in this case.
Comparative Impairment Approach
Defendant argued California was designed to protect manufacturers from excessive liability exposure. California accomplished this goal by forcing injured Plaintiff to prove the product was defective and proximately caused the accident. As stated, where both states have an interest in having their laws apply, the court applies a "comparative impairment approach." Bernhard v. Harrah's Club (1976) 16 Cal.3d 313, 320.
Our significant consideration for the court to consider is the location of the accident. Offshore Rental Co. v. Continental Oil Co., supra, 22 Cal.3d 157, 168. "Indeed, with respect to regulating or affecting conduct within its border, the place of the wrong has the predominant interest." Hernandez v. Burger (1980) 102 Cal. App.3d 795, 802. (Emphasis added.).
It was undisputed the accident occurred in Texas. Texas has a strong interest in regulating conduct within its borders and ensuring its distributors are protected. California arguably has no competing interest. See Denham v. Farmers Insurance (1989) 213 Cal.App.3d 1061 [Nevada law applied to third party bad faith insurance case against Nevada insurer.
Mark B. Wilson is a business, real estate, and insurance trial lawyer in Newport Beach. He is also an OCTLA Board Member.