UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
December 6, 2011
IN RE: METHYL TERTIARY BUTYL ETHER ("MTBE") PRODUCTS LIABILITY LITIGATION
THIS DOCUMENT RELATES TO:
YOSEMITE SPRINGS PARK UTILITY COMPANY V. CHEVRON, U.S.A. INC., ET AL., CASE NO. 09-CV-1419
The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.
OPINION AND ORDER
MDL 1358 (SAS)
In this consolidated multi-district litigationn ("MDL"), plaintiffs seek relief from contamination, or threatened contamination, of groundwater from various defendants' use of the gasoline additive methyl tertiary butyl ether ("MTBE") and/or tertiary butyl alcohol, a product formed by the natural degradation of MTBE in water. In this case, Yosemite Springs Park Utility Company ("YSPUC") alleges that Chevron U.S.A., Inc. ("Chevron") promoted and sold gasoline containing MTBE although it knew - or should have known - that MTBE would eventually pollute groundwater.
Currently before the Court is a motion in limine filed by YSPUC, seeking an order directing that Chevron "shall not make any reference to, offer any evidence, or make any argument suggesting that Chevron's liability should be reduced because Plaintiff has received compensation in the form of funding or financial support for a water treatment plant from any collateral source."*fn1 For the reasons explained below, the motion is granted in part and denied in part.
The Underground Storage Tank Cleanup Fund ("USTCF") is a California program that "amounts to a government-run insurance pool [that] reimburses owners of underground storage tanks ("UST") who clean up leaks."*fn2
Similar to an insurance premium, UST owners pay a certain amount into the USTCF on a regular basis; similar to a deductible, UST owners are also required to bear a certain level of financial responsibility "for taking corrective action and compensating third parties for bodily injury and property damage" on their own.*fn3
Once the cost associated with taking corrective action and compensating third parties exceeds the level of financial responsibility that the UST owner must bear, the owner may file a claim with the USTCF for reimbursement.*fn4 Consistent with normal insurance plans, reimbursement is made on a "per occurrence" basis.*fn5 Unlike a typical insurance plan, however, the USTCF does not disburse funds directly to affected third parties or represent UST owners in court. Instead, UST owners cover the costs on their own and seek reimbursement from the USTCF. As an owner of USTs in California, Chevron has made the required payments into the USTCF.*fn6
From June 1999 to December 2009, the USTCF was required by law to transfer five million dollars per year to the Drinking Water Treatment and Research Fund ("DWTRF").*fn7 Unlike the USTCF, which was essentially a government-created insurance pool financed by and run for the benefit of UST owners, the DWTRF -- which was administered by the California Department of Health Services ("CDHS")*fn8 -- paid public water systems directly to investigate and remedy oxygenate contamination.*fn9 Public water systems that receive more than one million dollars from the DWTRF are obliged to "aggressively pursue cost recovery from responsible persons."*fn10 YSPUC has received almost three million dollars in DWTRF funds from the CDHS to clean up the MTBE contamination of its wells.*fn11
III. LEGAL STANDARDS
A. The Collateral Source Rule
The collateral source rule is a substantive rule of law that states that a tortfeasor's liability is not reduced even though the tort victim has received benefits for the same injury from collateral or independent sources. California law, which governs here,*fn12 recognizes the collateral source rule, both as a substantive rule of law and as an evidentiary principle barring the introduction of evidence of payments from independent or collateral sources unless there is a "persuasive showing that the evidence sought to be introduced is of substantial probative value."*fn13 The primary rationale for the collateral source rule is a concern that juries will be unfairly influenced in their determination of a defendant's liability if they hear evidence that the plaintiff received payments for the same injury from another source,*fn14 such as the plaintiff's personal insurance,*fn15 or a gratuitous service rendered by an unrelated third party.*fn16
Federal courts disagree about the evidentiary impact of the collateral
source rule. The First Circuit has held that even though the
substantive portion of the collateral source rule is governed by state law, the admissibility
of collateral source evidence is governed by Federal Rule of Evidence
403.*fn17 Similar to California, however, the Fourth
and Fifth Circuits hold that the substantive prong of the collateral
source rule "carries with it an evidentiary rule requiring the
exclusion of evidence of any collateral benefits."*fn18
The Tenth Circuit holds that "substantive" rules of evidence,
such as the collateral source rule, are governed by state law under
Erie.*fn19 The Ninth Circuit, where this case will be
tried, has not issued a definitive decision on this issue.*fn20
Even if the evidentiary prong of the collateral source rule is not a substantive rule of law under Erie, there is no dispute that Federal Rule of Evidence 402 requires that any proffered evidence must be relevant. Accordingly, where the substantive prong of the collateral source rule applies, the fact that the plaintiff has received collateral source benefits will typically be irrelevant to the substantive issue of damages. Therefore, while evidence of collateral source benefits may be relevant to issues beyond damages, a court must take great care when admitting such evidence for limited purposes, as it is by nature prejudicial and likely to be misunderstood or misused by a jury.
Where the defendant itself has provided an independent benefit to the
plaintiff, the rationale for the collateral source rule fades, and the
concern about a double recovery becomes more concrete.*fn21
Accordingly, the court must scrutinize the defendant's intent
in providing such benefits. If the defendant provided the benefit with
the intent of offsetting tort liability, the collateral source rule
does not apply, either as a substantive rule or as a rule of
evidence.*fn22 By contrast, if the defendant provided
the benefit without the intent to offset tort liability, the
collateral source rule does apply, and the defendant will get no
offset credit.*fn23 In
sum, where the defendant is the source of an independent benefit, the
collateral source rule applies unless that benefit was provided by the
defendant as a tortfeasor.*fn24
B. Motions in Limine
The purpose of a motion in limine is to allow a court to rule on the
admissibility of potential evidence in advance of trial.*fn25
A court will exclude evidence on a motion in limine only if
the evidence is "clearly inadmissible on all potential
grounds."*fn26 However, a court "considering a motion
in limine may reserve judgment until trial, so that the motion is
placed in the appropriate factual context."*fn27
Additionally, the transferee court in an MDL should decide common
issues expeditiously, but may leave case-specific matters to the trial
court upon remand.*fn28
Under Federal Rule of Evidence 403, relevant evidence is admissible at trial as long as its probative value is not "substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence." However, under Federal Rule of Civil Procedure 26(b)(1), a party is entitled to discovery of relevant material that would be inadmissible at trial "if the discovery appears reasonably calculated to lead to the discovery of admissible evidence."*fn29
The parties agree that the USTCF contributed substantial amounts of money to the DWTRF,*fn30 and that the CDHS paid YSPUC with DWTRF funds ("DWTRF Payments"). The primary question presented by this motion is whether the substantive portion of the collateral source rule applies to DWTRF Payments by dint of Chevron's contributions to the USTCF. The subsidiary questions presented by this motion are whether the collateral source rule requires excluding evidence of such payments, and whether it should prevent discovery related to such payments.
A. The Collateral Source Rule Applies to the DWTRF Payments
YSPUC was legally entitled to the DWTRF Payments even though it never contributed to the DWTRF. Accordingly, the DWTRF payments would appear at first glance to be gratuitous third party payments squarely within the ambit of the collateral source rule. As noted above, however, the DWTRF was funded in part by an annual five million dollar transfer from the USTCF, to which Chevron contributed. The question, then, is whether the otherwise-collateral DWTRF Payments become non-collateral in light of Chevron's contribution to the USTCF.
Payments from the defendant or the defendant's insurance directly to
the plaintiff are often found to be non-collateral; accordingly,
courts typically allow defendants to offset their liability to account
for such payments, and to introduce related evidence.*fn31
As noted above, the USTCF is a quasi-insurance fund created
by the State of California to help the owners and operators of USTs
pay for cleanup -- including reimbursements to affected third parties
-- due to a perceived difficulty that some owners and operators had in obtaining private
insurance. Accordingly, the collateral source rule would not prevent
Chevron from introducing evidence that either it or the USTCF made
direct payments to YSPUC.
Chevron, however, does not argue that it or the USTCF made any direct payment to YSPUC for MTBE remediation, or for any other purpose. Chevron only argues that the DWTRF Payments are not subject to the collateral source rule because the DWTRF was not wholly independent from Chevron by dint of Chevron's contributions to the USTCF. The differences between the USTCF and the DWTRF, however, are too broad to make this leap. The purpose of the USTCF was to protect smaller owners and operators of USTs who could not afford to self-insure or buy insurance privately. On the other hand, the purpose of the DWTRF was to provide public water providers with a ready source of funds to study and implement the best methods of remediating oxygenate contamination -- effectively granting such providers insurance against oxygenate contamination at no cost to themselves. Simply put, Chevron's intent in contributing to the USTCF was to comply with the law and to insure itself against UST cleanup costs. Chevron's intent was not to contribute to the DWTRF -- and thereby to separate insurance for YSPUC -- or to make a down payment on any future liability to YSPUC. Instead, the DWTRF Payments are more akin to "fringe benefits," which, although funded by the tortfeasor, are routinely held to be subject to the collateral source rule.*fn32
Accordingly, I find that the collateral source rule applies to the DWTRF Payments, which therefore do not reduce Chevron's liability to YSPUC. Furthermore, Chevron may not introduce evidence of those payments for purposes of reducing its liability because they are not relevant to the issue of whether Chevron has any liability to YSPUC.
B. DWTRF Payments Are Not Admissible for Other Purposes
Chevron asserts that even if the collateral source rule applies to the DWTRF Payments, evidence of those payments may still be admissible for other purposes. Specifically, Chevron argues that such evidence is admissible to show the following: (1) YSPUC's damages, (2) the reasonableness of YSPUC's damages, (3) that YSPUC failed to mitigate damages, (4) to rebut YSPUC's claim for punitive damages, and (5) to impeach YSPUC's witnesses.*fn33
1. DWTRF Payments Are Not Admissible to Show YSPUC's Damages
Chevron asserts that YSPUC and its contractor, H2O.R2, agreed that YSPUC would not be liable for any costs that CDHS did not approve. Accordingly, Chevron argues that the only damages that YSPUC incurred were limited to the amount of the DWTRF Payments.*fn34 YSPUC disagrees with Chevron's characterization of its contract with H2O.R2, and argues that the final version of the contract requires it to pay H2O.R2 either out of the DWTRF Payments or "any funding received from the responsible parties"; YSPUC also states that it agreed to "diligently pursue the responsible party" for costs not covered by the DWTRF Payments.*fn35 Chevron argues in turn that YSPUC's characterization of its contract with H2O.R2 is belied by the testimony of Ken Harrington, a member of YSPUC's board of directors, who stated that H2O.R2 had in fact waived costs that were not covered by the DWTRF Payments.*fn36
For purposes of this motion, it is sufficient to note that CDHS made the DWTRF Payments directly to YSPUC; only after receiving the payments did YSPUC pay H2O.R2.*fn37 Therefore, even if I were to accept Chevron's description of the contract, YSPUC's costs can be proven by its direct payments to H2O.R2, without any mention of the DWTRF as the source of those funds. Accordingly, because the risk of undue prejudice that evidence of the DWTRF Payments would entail substantially outweighs its minimal probative value, Chevron may not use such evidence to prove YSPUC's costs or damages.
2. DWTRF Payments Are Not Admissible to Show That YSPUC's Costs May Have Been Unreasonable
Chevron notes that CDHS declined to make DWTRF Payments for some of the costs YSPUC claimed in connection with the design and construction of its MTBE treatment facility.*fn38 Chevron argues that such denials constitute "clearly relevant evidence as to whether YSPUC's claims here are reasonable" because section 3359 of the California Civil Code requires that damages be reasonable in every case.*fn39
Chevron's argument improperly shifts the focus of the admissibility test for collateral source evidence under Rule 403. The concern is not whether CDHS's denial of DWTRF Payments is relevant to the reasonableness of YSPUC's costs. Instead, the concern is whether the potential prejudice arising from that evidence -- that the jury may reduce an award to YSPUC because some of its costs were reimbursed by a third party -- substantially outweighs its probative value.
Chevron argues that Quintero v. United States stands for the proposition that a Rule 403 analysis permits the admission of collateral source payments for the purpose of ascertaining the reasonableness of damages.*fn40 But that case is inapposite for two reasons. First, it involved a bench trial, which eliminated the danger of undue prejudice,*fn41 whereas this case will be tried to a jury. Second, the court noted that if it had been a jury trial, it is unlikely that it would have admitted the collateral source evidence if other evidence existed to establish damages.*fn42 Here, YSPUC intends to offer expert testimony on the issue of whether its damages were reasonable.*fn43 As such, Quintero does not support Chevron's argument.*fn44 Accordingly, because there will likely be other evidence going to the reasonableness of YSPUC's costs, I find that the potential for undue prejudice outweighs any probative value of the CDHS decision to refuse certain DWTRF Payments. Chevron may not introduce such evidence in order to argue that YSPUC's costs were unreasonable.
Nonetheless, not all of what Chevron characterizes as "DWTRF Evidence" is inadmissible on the issue of reasonableness. YSPUC notes that some of the "DWTRF Evidence" is nothing more than CDHS's opinions of YSPUC's MTBE treatment plans,*fn45 and that CDHS would have had to review those plans even if the DWTRF did not exist.*fn46 Accordingly, testimony from CDHS employees charged with determining the reasonableness of YSPUC's plans is admissible to the extent that it does not implicate the disbursement or rejection of DWTRF Payments.
3. DWTRF Payments Are Not Admissible to Argue that YSPUC Failed to Mitigate Its Damages
Chevron asserts that precluding evidence of the DWTRF Payments would allow YSPUC to "present a complete fiction to the jury, implying that it was spending its own money. . . ."*fn47 The implications of this argument run directly contrary to the purposes of the collateral source rule. A hypothetical helps to indicate why this is so. If, for example, an accident victim had personal medical insurance, the defendant would not be allowed to show that said insurance paid some of his medical bills in order to show that the victim failed to mitigate his medical costs. Such a maneuver would render the collateral source rule illusory.
Chevron also argues that "[w]hat YSPUC told the DWTRF about the alleged contamination to secure and maintain . . . funding is relevant to its claims against Chevron" generally and specifically to "Chevron's defense that YSPUC did not mitigate its damages."*fn48 Chevron fails to note, however, that YSPUC interacted with the CDHS, and that the DWTRF was merely a legislatively-created fund administered by the CDHS. Chevron may use any relevant evidence it gleans from the interactions between the CDHS and YSPUC, with the caveat that it must refrain from mentioning the DWTRF Payments, for the reasons stated above.
4. Chevron's Contributions to the USTCF Are Admissible on the Issue of Punitive Damages
As part of its claim for punitive damages, YSPUC alleges that Chevron "knew or should have known that substantial quantities of MTBE-gasoline would be released and that Chevron had a reckless disregard for the consequences of the known leakage of gasoline containing MTBE from gasoline delivery systems," including USTs.*fn49 Accordingly, Chevron argues that it is "entitled to prove that it contributed to programs in place . . . to minimize any harm caused" by the release of MTBE.*fn50 YSPUC argues that this is "precisely the kind of argument the collateral source rule precludes . . . ."*fn51
It is true that if YSPUC ultimately obtains a punitive damages award, Chevron would not be allowed to use the DWTRF Payments to reduce that liability. Chevron's argument is not to the contrary. Instead, Chevron argues that the contributions it made to the USTCF indicate that it did not act with reckless disregard for the potential for MTBE pollution, precisely because USTCF funds can be used to clean up MTBE pollution.*fn52 Because such a mental state is an important element of punitive damages, Chevron argues that evidence of its contributions to the USTCF are highly relevant to the issue of whether punitive damages should be available at all.
Chevron's contributions to the USTCF are relevant to the issue of whether it acted with reckless disregard for the potential of MTBE pollution, and therefore admissible on the issue of the availability of punitive damages. However, given the connection between the USTCF and the DWTRF, there is a potential for unfair prejudice if the use of this evidence is not strictly limited to the issue of Chevron's intent. The wording of a limiting instruction is reserved for the trial court.
5. Whether Chevron May Use Collateral Source Evidence for Impeachment Is an Issue for the Trial Court
Even if it is not allowed to use evidence of DWTRF Payments for the
substantive reasons noted above, Chevron argues that it should still
be allowed to use such evidence in order to impeach YSPUC
witnesses.*fn53 While an impeachment exception to the
collateral source rule is recognized by federal courts*fn54
and by California courts,*fn55 its application still requires
the court to balance the risk of prejudice against the probative value
of the impeachment. Accordingly, even if collateral source evidence is
relevant to impeach, it may be excluded if the risk of prejudice is
too high.*fn56 In any event, Federal Rule of Evidence
105 requires that evidence admitted for a limited purpose be
accompanied by an appropriate limiting instruction to the jury if a
party so requests.
Given that YSPUC strenuously objects to the use of evidence of DWTRF Payments for substantive purposes, it is highly likely that YSPUC would request a limiting instruction should I allow Chevron to use such evidence for impeachment purposes. However, limiting instructions are highly-case specific and should not ordinarily be handled by the transferee court in an MDL case. Accordingly, I defer the question of whether evidence of DWTRF Payments should be admissible for purposes of impeachment to the trial court.
C. Chevron Should Not Be Precluded from Discovery of Evidence Related to DWTRF Payments
Expert discovery in this case is scheduled to conclude on January 31, 2012.*fn57 Even though evidence of DWTRF Payments is not admissible for the substantive purposes that Chevron proposes, it may reasonably lead to admissible evidence on other points, such as the interaction between CDHS and YSPUC. Furthermore, the trial judge may decide to admit evidence of DWTRF Payments for purposes of impeachment. Accordingly, although the collateral source rule applies to DWTRF Payments, Chevron is entitled to discovery thereof.
The collateral source rule applies to the DWTRF Payments. Accordingly, Chevron may not refer to or offer evidence of such payments in support of any argument that Chevron's liability to YSPUC should be reduced by the same amount. For the reasons stated above, Chevron also may not refer to or offer such evidence in support of any argument that YSPUC's damages were unreasonable, or that YSPUC failed to mitigate damages. Any decision of whether evidence of the DWTRF Payments should be admitted for impeachment purposes, as well as the formulation of any appropriate limiting instruction, is reserved for the trial court.
Chevron's contributions to the USTCF are admissible as evidence of Chevron's intent as they relate to the availability of punitive damages. Accordingly, Chevron may introduce evidence of those contributions, with the caveat that it may not refer to the connection between the USTCF and the DWTRF. Furthermore, the collateral source rule does not apply to the interactions between CDHS and YSPUC. Insofar as Chevron does not mention the DWTRF Payments, Chevron may use relevant evidence of such interactions for any purpose not inconsistent with this Opinion. Finally, Chevron is entitled to full discovery with regards to these payments.