In this fascinating opinion issued yesterday, the Oregon Court of Appeals ruled in favor of the Oregon Attorney General in his effort to collect the state’s share of a $350 million punitive damages verdict in a case where the state was not a party litigant.

In the underlying case, German truck manufacturer Man AG brought a lawsuit in Oregon state court against Freightliner, now known as Daimler Trucks North America. Man won an $850 million jury verdict, including $500 million in compensatory damages and $350 million in punitive damages. Under Oregon law, the state becomes a creditor on any punitive verdict when entered, and is entitled to 60 percent of any punitive award.

Before the state could collect its cut, while Freighliner’s posttrial motion challenging the punitive award was pending, the parties settled and Man agreed to drop the punitive damages portion of the verdict. Without ruling on the posttrial motion, the trial court vacated the original judgment on the jury verdict and entered a new judgment dismissing the case pursuant to the settlement.

The state appealed from the judgment of dismissal, arguing that the parties could not bargain away the state’s 60 percent share of the award. The Court of Appeals, on its own motion, asked the parties to brief the question of the state’s standing to pursue this appeal. After briefing and argument, the court concluded that the state has standing to proceed on the merits of the appeal.

It will be interesting to see how this plays out. If the state wins the right to prevent a plaintiff from agreeing to dismissal of an action after verdict, the ability of parties to enter post-verdict settlement agreements will be greatly inhibited. But if the state loses, the split-recovery statute may be effectively nullified because many parties will realize that they both come out ahead if they jettison the state’s statutory share of the judgment to arrive at a settlement figure that is lower than the defendant would have to pay under the judgment, but perhaps higher than the plaintiff would receive if the judgment were affirmed.

This is the sort of issue that may arise in California if the Legislature revives our punitive damages sharing statute. In 2004 our Legislature passed a bill entitling the state to 75 percent of any punitive damages award, but the law had a built-in sunset provision of only two years. Because the law applied only to complaints that were filed and litigated to conclusion (including appeals) within a narrow two-year window, it expired without impacting a single case. In August 2006 the Legislature attempted to extend the effective date of the bill, by passing the bill in a late-night session without any hearings or debate. Governor Schwarzenegger vetoed the bill, inviting the sponsor to resubmit the bill in the next legislative session for proper hearings and debate. Nothing has happened since.