Safety Equipment Corpooration, et al. v. Plains All American Pipeline, et al.
Case No: 17CV02224
Hearing Date: Mon Apr 09, 2018 9:30

Nature of Proceedings: Demurrer

CASE:

Safety Equipment Corporation, et al. v. Plains All American Pipeline, et al., Case No. 17CV02224 (Judge Sterne)

HEARING DATE: April 9, 2018

MATTER: Demurrer to First Amended Complaint

ATTORNEYS:

Gretchen M. Nelson for Plaintiffs Safety Equipment Corporation dba Secorp Industries, Inc., Secorp Operations Company, Secorp Industries Partnership, and W&C, Inc.

Brad D. Brian for Defendants Plains All American Pipeline, L.P., and Plains Pipeline, L.P.

TENTATIVE RULING: Defendants’ demurrer to plaintiffs’ first and second causes of action for strict liability for ultrahazardous activity and negligence is sustained with leave to amend. Defendants’ demurrer to plaintiffs’ third cause of action for negligent interference with prospective economic advantage is overruled. Plaintiffs shall have to and including April 23, 2018 to file an amended pleading.

BACKGROUND:

Plaintiffs Safety Equipment Corporation dba Secorp Industries, Inc., Secorp Operations Company, Secorp Industries Partnership, and W&C, Inc. provide products and services to oil companies doing business in Santa Barbara County and elsewhere. Defendants Plains All American Pipeline, L.P., and Plains Pipeline, L.P., own and operate a crude oil pipeline used to transport oil produced at three offshore platforms that are owned and operated by Exxon/Mobil. The pipeline carries crude oil from the offshore platforms inland, across Refugio State Beach, and to the Gaviota Pumping Station. On May 19, 2015, the pipeline ruptured near Refugio State Beach, spilling approximately 140,000 gallons of oil onto the beach and into the ocean. On May 21, 2015, the federal Pipeline and Hazardous Materials Safety Administration (“PHMSA”) issued an order, shutting down the pipeline. As a result of the spill and shutdown order, the offshore platforms and processing facilities that utilize the pipeline were forced to shut down as well, laying off dozens of oil and gas workers. This has resulted in economic losses to businesses that support the local oil industry.

For decades, plaintiffs have sold products and services, including Hydrogen Sulfide safety equipment, rescue equipment, and rental equipment, to oil companies and drilling platform operators in and around Santa Barbara County and off the coast. Due to the oil spill and non-operation of the pipeline, some of plaintiffs’ largest customers in Santa Barbara County have had to cease or reduce operations. As a result, plaintiffs have lost substantial revenue and have had to lay off numerous employees. Plaintiffs contend that their losses are a direct result of defendants’ conduct.

On May 19, 2017, plaintiffs filed their original complaint in this action against defendants, asserting causes of action for (1) strict liability for ultrahazardous activity, (2) negligence, and (3) negligent interference with prospective economic advantage. On August 16, 2017, plaintiffs filed a first amended complaint (“FAC”), alleging the same three causes of action against defendants. Defendants now demur to the FAC on the ground that the FAC fails to state facts sufficient to constitute a cause of action. Plaintiffs oppose the demurrer.

ANALYSIS:

Request for Judicial Notice

Defendants request that the court take judicial notice of the May 21, 2015 shutdown order issued by the U.S. Department of Transportation, Pipeline and Hazardous Materials Safety Administration (“PHMSA”). Judicial notice may be taken of the “[o]fficial acts of the legislative, executive, and judicial departments of the United States and of any state of the United States.” Evid. Code §452, subd. (c). However, while courts may take judicial notice of official acts and public records, including the date the document was filed and the document’s legally operative language, judicial notice may not be taken of any hearsay or disputed facts in the document. Mangini v. R.J. Reynolds Company (1994) 7 Cal.4th 1057, 1063; Poseidon Development, Inc. v. Woodland Lane Estates, LLC (2007) 152 Cal.App.4th 1106, 1117. With this understanding, the court will take judicial notice of the PHMSA order.

In their reply, defendants ask the court to take judicial notice of (1) F.E.R.C. (Federal Energy Regulatory Commission) Local Tariff No. 114.2, (2) F.E.R.C. Local Tariff No. 114.3, and (3) F.E.R.C. Local Tariff No. 114.4, all of which pertain to Plains Pipeline, L.P. The court declines to take judicial notice of these documents because they were not included in defendants’ original demurrer. It is a general rule of motion practice that new evidence (including matters subject to judicial notice) is not permitted with reply papers because the party opposing the motion has no opportunity to respond. Jay v. Mahaffey (2013) 218 Cal.App.4th 1522, 1538.

Demurrer to FAC

The grounds for objecting to a complaint by demurrer are set forth in Code of Civil Procedure Section 430.10, which provides, in relevant part:

“The party against whom a complaint or cross-complaint has been filed may object, by demurrer or answer as provided in Section 430.30, to the pleading on any one or more of the following grounds:

* * *

“(e) The pleading does not state facts sufficient to constitute a cause of action.”

California law requires a complaint in a civil action to contain a statement of the facts constituting the cause of action in ordinary and concise language and a demand for relief to which the plaintiff claims to be entitled. Code Civ. Proc. §425.10, subd. (a). “What is necessary to state a cause of action are the facts warranting legal relief . . . .” Alfaro v. Community Housing Improvement System & Planning Association, Inc. (2009) 171 Cal.App.4th 1356, 1371. If the complaint does not state facts sufficient to constitute a cause of action, a general demurrer to the complaint will be sustained. Code Civ. Proc. §430.10, subd. (e).

Defendants challenge plaintiffs’ first cause of action for strict liability based upon ultrahazardous activity. To establish such a claim, the plaintiff must allege (1) that the defendant was engaged in an ultrahazardous activity, (2) that the plaintiff was harmed, (3) that the plaintiff’s harm was the kind of harm that would be anticipated as a result of the risk created by the ultrahazardous activity, and (4) that defendant’s ultrahazardous activity was a substantial factor in causing the plaintiff’s harm. Luthringer v. Moore (1948) 31 Cal.2d 489, 495; CACI 460 (2018). “An activity is ultrahazardous if it (a) necessarily involves a risk of serious harm to the person, land or chattels of others which cannot be eliminated by the exercise of the utmost care and (b) is not a matter of common usage.” Luthringer, at 498. Whether an activity is ultrahazardous is a question of law to be determined by the court. Id., at 496.

Defendants argue that plaintiffs cannot satisfy the third element of the cause of action because the economic damages sought by plaintiffs are not recoverable under a strict liability claim. The court agrees. The rule of strict liability for ultrahazardous activity applies only to harm that is within the scope of the abnormal risk that makes the activity abnormally dangerous. It does not apply to every possible harm that may result from engaging in the abnormally dangerous activity. Goodwin v. Reilley (1985) 176 Cal.App.3d 86, 91. Quoting Section 519, Restatement Second of Torts, the Goodwin court stated:

“One who carries on an abnormally dangerous activity is subject to liability for harm to the person, land or chattels of another resulting from the activity, although he has exercised the utmost care to prevent the harm. . . . This strict liability is limited to the kind of harm, the possibility of which makes the activity abnormally dangerous.”

Here, plaintiffs seek to recover purely economic losses allegedly stemming from the shutdown of the pipeline. However, if transporting oil is ultrahazardous, it is because of the risk of physical injury to persons or property from an oil spill, not because the non-operation of a pipeline may cause economic damages to businesses located in the same geographic area. An activity is ultrahazardous if it “necessarily involves a risk of serious harm to the person, land or chattels of others which cannot be eliminated by the exercise of the utmost care.” Luthringer, at 498. Thus, in Green v. General Petroleum Company (1928) 205 Cal.328, 334, an oil company was held strictly liable to owners of residential property damaged by rocks and debris falling from a blow-out of the defendant’s well. Likewise, in Smith v. Lockheed Propulsion Company (1967) 247 Cal.App.2d 774, 785, the court held that test firing a rocket is an ultrahazardous activity and because the seismic vibrations from the rocket caused damage to an adjacent property owner’s well, the property owner could state a cause of action for strict liability in tort. Clearly, the economic damages alleged in the FAC are not the kind of damages that would make transporting oil an ultrahazardous activity and defendants’ demurrer to plaintiffs’ first cause of action will be sustained.

Plaintiffs’ second cause of action is for negligence. A negligence action requires a showing (1) that the defendant owed the plaintiff a legal duty of care, (2) that the defendant breached the duty, and (3) that the breach was the proximate cause of the injuries or damages suffered by the plaintiff. Ann M. v. Pacific Plaza Shopping Center (1993) 6 Cal.4th 666, 673. Thus, the existence of a duty to use due care is “[t]he threshold element of a cause of action for negligence.” Bily v. Arthur Young & Company (1992) 3 Cal.4th 370, 371; see also, Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc. (2016) 1 Cal.5th 994, 1012 (“The threshold element of a cause of action for negligence is the existence of a duty to use due care toward an interest of another that enjoys legal protection against unintentional invasion.”). Whether a duty of care is owed by the defendant in a particular case is a question of law for the court to resolve. Bily, supra, at 397.

Defendants initially demur to plaintiffs’ negligence cause of action on the ground that they are a public entity and, under established California case law, public entities owe no duty to prevent harm related to an interruption of services. “In the absence of a contract between the utility and the consumer expressly providing for the furnishing of a service for a specific purpose, a public utility owes no duty to a person injured as a result of an interruption of service or a failure to provide service.” White v. Southern California Edison Company (1994) 25 Cal.App.4th 442, 448 (public utility owes no duty to the motoring public for inoperable streetlights); Niehaus Brothers Company v. Contra Costa Company (1911) 159 Cal. 305, 312-316 (water utility owes no duty to furnish water to extinguish a fire). The court, however, declines to consider whether defendants are a public entity and whether they are immune from liability for claims predicated on the interruption of service. Plaintiffs do not plead that defendants are a public entity and, while defendants ask the court to take judicial notice that they transport oil pursuant to F.E.R.C. tariffs, which allegedly demonstrates that they are a regulated public utility, defendants did not seek judicial notice of the tariffs as part of their original demurrer, but as part of their reply, and the request was denied.

Defendants next argue that plaintiffs’ negligence claim is barred by the economic loss rule. The economic loss rule holds that recovery for purely economic losses resulting from a negligence cause of action is not permitted, absent injury to person or property, unless there exists a “special relationship” between the parties. “[E]conomic loss alone, without physical injury, does not amount to the type of damage that will cause a negligence . . . cause of action to accrue.” County of Santa Clara v. Atlantic Richfield Company (2006) 137 Cal.App.4th 292, 318; Zamora v. Shell Oil Company (1997) 55 Cal.App.4th 204, 210 (“In a . . . negligence case, compensable injury must be physical harm to persons or property, not mere economic loss.”). The rationale for the economic loss rule is to prevent unlimited liability, otherwise damage awards in negligence cases would “threaten[] to impose liability out of proportion to fault [and thereby] promote virtually unlimited responsibility for intangible injury.” Bily, supra, at 398. The tentative draft of the Restatement (Third) of Torts explains the rule as follows:

“[E]conomic losses can proliferate long after the physical forces at work in an accident have spent themselves. A collision that sinks a ship will cause a well-defined loss to the ship’s owner; but it also may foreseeably cause economic losses to wholesalers who had expected to buy the ship’s cargo, then to retailers who had expected to buy from the wholesalers, and then to suppliers, employees, and customers of the retailers, and so on. Recognizing claims for those sorts of losses would greatly increase the number, complexity, and expense of potential lawsuits arising from many accidents. In some cases, recognition of such claims would also result in liabilities that are indeterminate and out of proportion to the culpability of the defendant. These costs do not seem likely to be justified by comparable benefits. Courts doubt that threats of open-ended liability would usefully improve the incentives of parties to take precautions against accidents or would make a material contribution to the cause of fairness.”

(Restatement (Third) of Torts: Liab. for Econ. Harm § 7 TD No 2 (2014).)

California recognizes an exception to the economic loss rule where a “special relationship” exists between the parties. J’Aire Corporation v. Gregory (1979) 24 Cal.3d 799, 804. The test for determining the existence of a “special relationship” is a matter of public policy and involves the balancing of various factors, including “(1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and the injury suffered, (5) the moral blame attached to the defendant’s conduct, and (6) the policy of preventing future harm.” Ibid; see also, Centinela, supra, at 1013-1014. The existence of such a relationship is a question of law for the court. Greystone Homes, Inc. v. Midtec, Inc. (2008) 168 Cal.App.4th 1194, 1228.

Defendants contend that the economic loss rule applies in this case because plaintiffs allege no physical injury to persons or property and seek only economic damages for business losses suffered following the oil spill. (FAC, ¶¶ 69-73.) Additionally, plaintiffs do not allege facts establishing a “special relationship” between the parties that would give rise to a duty of care on the part of defendants because they do not allege facts establishing or satisfying the first factor in J’Aire – that defendants’ maintenance of the pipeline was “intended to affect” plaintiffs. Without such a specific intent, there can be no special relationship, regardless of whether plaintiffs indirectly benefited from the pipeline. “The absence of this foundation [the “intended to affect” factor] precludes a finding of ‘special relationship’ as required by J’Aire.” Ott v. Alfa-Laval Agri, Inc. (1995) 31 Cal.App.4th 1439, 1455-1456; see also, Zamora v. Shell Oil Company, supra, 55 Cal.App.4th 204, 212 (holding that the “special relationship” exception did not apply because the record did not support a finding that the defendant’s actions “were intended to affect” the fourteen homeowner plaintiffs).

The specific intent requirement for a “special relationship” is analogous to that of a third party beneficiary contract. In Adelman v. Associated International Insurance Company (2001) 90 Cal.App.4th 352, 363, the court stated:

“[W]here the ‘end and aim’ of the contractual transaction between a defendant and the contracting party is the achievement or delivery of a benefit to a known third party or the protection of that party’s interests, then liability will be imposed on the defendant for his or her negligent failure to carry out the obligations undertaken in the contract even though the third party is not a party thereto.”

Here, plaintiffs do not allege that defendants’ transportation of oil through their pipeline was specifically intended to affect plaintiffs. The allegations are much more general. Plaintiffs allege that “[t]he spill caused an immediate impact on the livelihood of local workers and businesses” and that “businesses that support the oil industry, like Secorp, saw their revenues plummet.” (FAC, ¶37.) Plaintiffs further allege that “[f]or decades Secorp has sold its products and services to oil companies and drilling platforms who operate in and around Santa Barbara County and off the coast of Santa Barbara,” that “[a]s a direct result of the spill, Secorp’s customers have had to cease operations and have reduced and/or cancelled their contracts with Secorp,” and that “[b]ecause of the loss of that business . . . Secorp has lost substantial revenue and has been forced to lay off numerous employees.” (FAC, ¶¶ 71, 72, 73.) Plaintiffs further allege that defendants, in the exercise of reasonable care, “should have known that the Pipeline could rupture or otherwise fail, and spill significant amounts of oil, and cause local oil and gas operations to shut down.” (FAC, ¶87.) However, the mere fact that plaintiffs do business with offshore oil platforms that transport oil through defendants’ pipeline does not establish that the pipeline was intended for their benefit or to affect them or any other entity that has done or will do business with the platform operators.

Plaintiffs also fail to allege sufficient facts to establish most of the other J’Aire factors. First, while it is certainly “foreseeable” that companies doing business with the oil industry will suffer economic injury if there is an oil spill and shutdown, “[f]oreseeability of financial injury to third persons alone is not a basis for imposition of liability for negligent conduct.” Quelimane Company v. Stewart Title Guaranty Company (1998) 19 Cal.4th 26, 58. Foreseeability is “but one factor to be considered in the imposition of negligence liability.” Bily, supra, at 398; see also, Nally v. Grace Community Church (1988) 47 Cal.3d 278, 297 (“Mere foreseeability of the harm or knowledge of the danger is insufficient to create a legally cognizable special relationship giving rise to a legal duty to prevent harm.”). The reason foreseeability alone does not justify finding a special relationship is that it would provide virtually unlimited liability for nonphysical harm. Thing v. LaChusa (1989) 48 Cal.3d 644, 663.

The third J’Aire factor is “the degree of certainty that the plaintiff suffered injury.” Here, plaintiffs have alleged that their oil industry customers have been unable to operate due to the oil spill and the pipeline closure and, as a result, they have “lost substantial revenue.” (FAC, ¶73.) However, nothing more specific is alleged in the negligence cause of action concerning the nature of plaintiffs’ business relationship with the platform operators and whether defendants knew (not just “should have known”) that plaintiffs were engaged in business activities that would likely be harmed as the result of a negligent discharge of oil and a shutdown of the pipeline.

The fourth J’Aire factor, “the closeness of the connection between the defendant’s conduct and the injury suffered,” also weighs against finding a special relationship as the connection between defendants’ conduct and plaintiffs’ injuries is attenuated. While plaintiffs allege that the pipeline failure was due to defendants’ long history of not properly maintaining the system, as well as their failure to install an automatic shut-off valve, which allegedly would have ensured an immediate shutdown of the pipeline without waiting for human action (FAC, ¶¶ 38, 39), plaintiffs acknowledge that PHMSA issued the shutdown order that remains in effect today (FAC, ¶¶ 53, 61, 73). Thus, the shutdown order, not just the pipeline failure, has caused the oil platforms to remain non-operational. Where an independent act separates a defendant’s negligence from the plaintiff’s injury, the connection between the defendant’s conduct and the plaintiff’s harm may be too tenuous to permit recovery as the defendant’s conduct must be a “substantial factor” in causing injury to the plaintiff. State Department of State Hospitals v. Superior Court (2015) 61 Cal.4th 339, 352.

In contrast to the first four J’Aire factors, the remaining factors (“the moral blame attached to the defendant’s conduct” and “the policy of preventing future harm”) both suggest the existence of a special relationship. Defendants’ alleged lack of diligence in maintaining the pipeline, their decision not to install an automatic shut-off valve system, and their failure to respond to the spill in a timely manner are certainly blameworthy. (FAC, ¶¶ 33, 38, 39.) Defendants argue that a finding of moral blame is no different than a finding of negligence, but the court disagrees, though moral blame may attach to certain forms of negligence. Defendants also argue that the policy of preventing future harm does not justify finding a special relationship because oil pipelines are already heavily regulated, including by PHMSA. However, the allegations in the FAC suggest that additional safety incentives are needed.

On balance, consideration of all six J’Aire factors militates against finding a special relationship, notwithstanding how close some of the factors may be, as the case law clearly holds that the first factor (“the extent to which the transaction was intended to affect the plaintiff”) is the most important factor. Here, it is not alleged that the transportation of oil through defendants’ pipeline was specifically intended to affect plaintiffs and their business operations. On the contrary, the allegations show that the effect of the shutdown on plaintiffs’ business, like many other businesses whose operations are in the same geographic area, was merely incidental.

The recent decision of the Second Appellate District, Division Five, in Southern California Gas Leak Cases (2017) 18 Cal.App.5th 581, review granted Feb. 28, 2018, S246669, is directly on point. In Southern California Gas, a natural gas leak in a pipeline owned by defendant utility company resulted in the temporary relocation of approximately 15,000 area residents. Seven businesses within a five mile radius of the leak filed suit against the utility company for strict liability for ultrahazardous activity, negligence, and negligent interference with prospective economic advantage, alleging economic losses resulting from the relocation of the area residents. The businesses did not claim an injury to person or property. The utility company filed a demurrer to the negligence claims, which was overruled. The utility company then filed a petition for a writ of mandate. The court of appeal granted the petition and directed the trial court to vacate its order overruling the demurrer and issue a new order sustaining the demurrer without leave to amend. Id., at 595.

The issue in Southern California Gas, as in this case, was whether the economic loss rule barred the businesses’ claims. The court concluded that the claims were barred. “Where the alleged negligence has caused economic loss, but no personal injury or property damage, duty is not presumed. Rather, courts examine the [J’Aire] factors to determine whether to impose on the defendant ‘an exceptional duty to third parties.’” Id., at 588. After reviewing the J’Aire factors and relevant case law, the court noted that “[n]o appellate authority addressing negligent liability for purely economic loss to third parties has found the existence of a duty of care in the absence of the first [J’Aire] factor.” Id., at 590. The court concluded that “[t]he failure to establish this foundation precludes a finding of the ‘special relationship’ required by J’Aire.” Id., at 591. As the court explained:

“Although our Supreme Court long ago recognized plaintiffs may sue in negligence for economic loss alone such recovery has been limited to situations where a transaction between the defendant and another was intended to directly affect the plaintiff (a third party), whose economic loss was a foreseeable consequence of the defendant’s negligence.”

Id., at 583 (citation omitted).

Because the plaintiffs in Southern California Gas sought damages for purely economic losses resulting from the natural gas leak and did not claim any injury to person or property, the court concluded, as a matter of law, that the utility company did not owe a duty to prevent the plaintiffs’ losses resulting from negligent conduct. “Without personal injury, property damage or a special relationship, the general rule that precludes business plaintiffs from recovering for pure economic losses under a negligence theory remains viable.” Id., at 595.

Like the Southern California Gas plaintiffs, the plaintiffs in this case allege no personal injury or property damage, but instead allege that the release of oil from defendants’ pipeline resulted in their losing revenue. Plaintiffs also do not allege the existence of any transaction that was intended to affect them. Defendants’ demurrer to plaintiffs’ negligence cause of action will therefore be sustained.

Plaintiffs’ third cause of action is for negligent interference with prospective economic advantage. To state a claim for negligent interference with prospective economic advantage, the plaintiff must allege (1) an economic relationship existed between the plaintiff and a third party that contained a reasonably probable future economic benefit to the plaintiff, (2) the defendant knew of the existence of the relationship and was aware or should have been aware that if it did not act with due care its actions would interfere with this relationship and cause the plaintiff to lose in whole or in part the probable future economic benefit of the relationship, (3) the defendant was negligent, and (4) such negligence caused damage to the plaintiff in that the relationship was actually interfered with or disrupted and the plaintiff lost in whole or in part the economic benefit reasonably expected from the relationship. North American Chemical Company v. Superior Court (1997) 59 Cal.App.4th 764, 786.

Defendants argue that plaintiffs have not sufficiently alleged an economic relationship between plaintiffs and a third party, nor have they alleged that defendants knew about any such relationship. The court disagrees. Plaintiffs allege:

● Plaintiffs have existing or prospective economic relationships with individuals and organizations doing business in Santa Barbara County.

● These relationships have a reasonably probable likelihood of resulting in future economic benefit to plaintiffs.

● Defendants knew or in the exercise of reasonable care should have known of these existing and prospective economic relationships. Specifically, defendants knew that plaintiffs had contracts with Exxon/Mobil to provide services to the oil platforms located off the Santa Barbara coast and in the area affected by the oil spill.

● Defendants knew or should have known that if they failed to act with reasonable care, plaintiffs’ existing and prospective economic relationships would be interfered with and disrupted.

● Defendants were negligent and failed to act with reasonable care in maintaining their pipeline so as to prevent an oil spill.

● As a direct and proximate result of defendants’ negligence, plaintiffs’ existing and prospective economic relationships were interfered with and disrupted, causing plaintiffs to suffer economic harm.

(FAC, ¶¶ 92-101.)

Defendants contend that these allegations are insufficient because plaintiffs do not allege any facts to indicate how defendants knew of plaintiffs’ contracts with Exxon/Mobil. They also do not allege the nature of the contracts. Such specificity, however, is not required at the pleading stage. “[T]he complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.” C.A. v. William S. Hart Union High School District (2012) 53 Cal.4th 861, 872. Plaintiffs have pleaded ultimate facts. Defendants’ demurrer to the third cause of action will therefore be overruled.

If a demurrer is sustained, leave to amend is ordinarily granted unless it appears from the complaint and applicable law that there is no reasonable possibility that an amendment could cure the defect. Heckendorn v. City of San Marino (1986) 42 Cal.3d 481, 486. In their opposition, plaintiffs have requested leave to amend. While the court questions whether plaintiffs can allege any facts that would cure the deficiencies of their first and second causes of action for strict liability for ultrahazardous activity and negligence, leave to amend will be granted. Any amended pleading shall be filed on or before April 23, 2018.