Court Backs ‘Sliding-Scale’ Settlements if They’re Fair

The state Supreme Court ruled Thursday that defendants who join in so-called “sliding-scale” agreements to settle liability suits must still pay a reasonable amount for their share of fault.

The court rejected the contention that such arrangements--known also as “guaranteed verdict” agreements--must be invalidated as inherently unfair. But neither may a defendant use them to avoid paying a rightful portion of the damages, it said.

“What is required is simply that the settlement not be grossly disproportionate to the (settling defendant’s) fair share,” Justice Edward A. Panelli wrote in the majority opinion.

The 6-1 ruling came in a case, widely watched in the legal community, testing the permissible scope of sliding-scale agreements, which increasingly have been used to help settle civil cases with more than one defendant.

Generally under such arrangements, one defendant agrees with the plaintiff on an amount the plaintiff is to recover--for example, $1 million for injuries suffered in an accident.

In return for avoiding trial, the defendant agrees to make up the difference if the plaintiff eventually gets less than that from other defendants who did not settle. Thus if a jury awards $700,000, the settling defendant will pay the final $300,000.

Supporters of these agreements say they help give people filing suits more bargaining power and encourage settlements of big and complex cases before costly trials.

Critics have contended, however, that the agreements can invite collusion and open the way for defendants most at fault to evade their fair share of liability.

In its ruling Thursday, the court refused to condemn or condone all sliding-scale agreements, noting that they vary widely in their terms and scope. But the justices laid down a list of guidelines for lower courts to follow to make sure that such arrangements fairly apportion liability.

The court’s lone dissenter, Justice Stanley Mosk, agreed with the majority that the agreements are permissible. But he said that they should be rejected only when there was collusion against defendants who refused to settle.

In the case before the court, Phyllis Smith and her husband filed a personal injury suit in Los Angeles Superior Court arising from an automobile accident in West Covina in 1981.

According to the suit, a 1965 Mercury station wagon driven by Phyllis Smith was hit by a wheel that came loose from a 1979 Ford van driven by Ramsey Sneed. The windshield of the station wagon was shattered by the impact of the 55-pound wheel, and the woman was blinded in both eyes and lost her sense of smell.

The Smiths named as defendants Sneed, the other driver; Abbott Ford, the dealer that sold the van and customized it with “mag wheels” and oversized tires; Ford Motor Co., manufacturer of both vehicles, and Sears, Roebuck Co., which had serviced the van shortly before the accident.

Make Up Difference

In pretrial negotiations, Ford and Sears refused to settle. But the Smiths eventually reached a sliding-scale agreement with Abbott’s insurers guaranteeing them recovery of $3 million in exchange for dismissal of the case against Abbott. If the Smiths won less than that amount from Ford and Sears, Abbott would make up the difference; if the Smiths recovered $3 million or more, Abbott would pay nothing.

Ford and Sears opposed the arrangement, contending that it was not reached in “good faith” and should be rejected as unreasonable because Abbott could escape without paying anything to the Smiths. The trial judge agreed, finding that the arrangement was not a valid settlement but instead a “gambling transaction” by Abbott. However, a state Court of Appeal reinstated the agreement, finding it was valid.

Ford and Sears brought the case to the state Supreme Court, saying they faced the prospect of paying damages of up to $3 million or more, while Abbott, the defendant they considered most at fault, might not have to pay anything.

In their ruling, the justices rejected the contention by Ford and Sears that sliding-scale agreements should be barred altogether. But such arrangements should provide for “at least some rough measure of fair apportionment of loss between settling and non-settling defendants,” Panelli wrote.

Future Cases

In future cases, the court said, the plaintiff and the defendant should negotiate a minimum amount to be paid by the defendant; damages against the other defendants, in turn, would be reduced by that amount.

The court said that trial judges, in reviewing such agreements, could take into account whether defendants who did not settle had done so unreasonably.

The justices said that ordinarily, they would have sent the case back for further proceedings but that the dispute had since been fully settled by all parties and thus was moot. Attorneys in the case acknowledged that it had been settled but said that its terms could not be disclosed.

The court said it had gone ahead and decided the case because of the importance of the issue. Lawyers for Ford and Sears said they were not surprised that the court had refused to declare all sliding-scale agreements invalid, but they welcomed the court’s limitations on such arrangements.

Robert T. Hanger of Beverly Hills, who represented Sears, predicted that the court’s new guidelines “will probably discourage use of such agreements.”