3-1-2-9 APPALACHIAN INSURANCE CO. ET AL., PLAINTIFFS AND APPELLANTS, V. MCDONNELL DOUGLAS CORPORATION ET AL., DEFENDANTS AND APPELLANTS (Super.Ct.No. 481712)

Facts

In order for a telecommunications satellite to function effectively, it must be placed into a "geosynchronous orbit." A geosynchronous orbit is an orbit in which a satellite remains stationary vis-a-vis a particular location on the earth. This orbit is approximately 22,000 miles above the equator.

Prior to 1981, NASA launched commercial satellites by NASA's "Delta" rocket, a three-stage, expendable launch vehicle which could lift a satellite into a geosynchronous orbit. Each Delta carried only one satellite. In the 1970s, NASA decided to phase out expendable rockets and to launch all satellites from the Space Shuttle. The Space Shuttle could carry up to four satellites at a time but was not designed to reach the geosynchronous orbit. Instead, the Space Shuttle orbited at an altitude of 150-160 nautical miles (a "parking orbit"). To launch satellites from the Space Shuttle's parking orbit into higher orbits, each satellite needed its own upper stage rocket.

In 1976, McDonnell Douglas proposed to develop such an upper stage rocket for satellites, at its own expense, if NASA agreed not to fund development of a competing system. NASA agreed but did not obligate itself to purchase any hardware from McDonald Douglas nor promise not to purchase similar hardware or services from other companies. NASA also retained the right to set a ceiling on the price McDonnell Douglas could charge for the upper stage rocket and related launch services.

McDonald Douglas's upper stage rocket, a power assist module (PAM), had two key components: (1) airborne support equipment, consisting principally of a spin table, cradle, sun shield and related control electronics and hardware designed to hold the satellite in the Space Shuttle's cargo bay from liftoff to the parking orbit; and (2) a Star 48 motor manufactured by Morton Thiokol which is attached to a satellite prior to liftoff. The nozzle or exit cone of the Star 48 motor was manufactured by Hitco under a subcontract with Morton Thiokol.

Western Union initially contacted both NASA and Arianespace, a French based company of the European Space Agency to launch its Westar VI satellite. The Ariane rocket was an expendable launch vehicle capable of placing a satellite into a geosynchronous orbit without the use of a PAM.² In 1981, Western Union entered a contract with Arianespace for a December 1983 launch on their Ariane rocket. Subsequently Western Union relinquished its launch reservation with NASA.

Later in 1982, Arianespace had a failure (its second in six launches). It rescheduled Western Union's launch date which caused Western Union to reconsider its decision to launch via Arianespace. At this point, Western Union felt more confidence in the Space Shuttle than Ariane, believing the Space Shuttle was better priced³ and more reliable. By April 1983, Western Union had decided to use the Space Shuttle "because of economic reasons, and the advantages of the new program and the new vehicle [i.e., the Space Shuttle]."

In December 1982, Western Union began negotiations with McDonnell Douglas for a PAM for its Westar VI satellite. Western Union had previously purchased PAMs from McDonnell Douglas for its Westar IV and Westar V satellites which were launched in 1982. In March 1983, Western Union signed a contract with McDonnell Douglas. The execution of the contract was conditioned on later incorporating an inter-party waiver clause NASA would require of Western Union in a Launch Services Agreement. As part of the contract between Western Union and McDonnell Douglas, McDonnell Douglas disclaimed any warranties and Western Union agreed to hold McDonald Douglas harmless for any loss or damage and to obtain insurance to cover any potential loss.

In January 1984, after having terminated its agreement with Arianespace, Western Union signed a Launch Services Agreement with NASA for a launch on the Space Shuttle. Western Union drafted an inter-party waiver of liability for the McDonnell Douglas contract to comply with a condition in the NASA Launch Services Agreement and submitted the draft to McDonnell Douglas for its approval. McDonnell Douglas approved the draft and the waiver was incorporated, by amendment, into the parties' agreement as article 14.

On February 3, 1984, the Space Shuttle Challenger lifted off carrying Westar VI. About eight hours after liftoff, Westar VI was deployed from the Space Shuttle's cargo bay. The upper stage rocket, scheduled to burn for 85 seconds to boost Westar VI into an orbit which would intersect with the geosynchronous orbit, failed when the Star 48 motor's exit cone, or nozzle, disintegrated about four seconds after ignition. Thereafter, the motor nozzle assembly was expelled and the motor extinguished itself. The short burn of the upper stage rocket caused Westar VI to go into a low elliptical orbit around the earth with a maximum altitude of only 655 nautical miles. In this orbit, Westar VI was useless for telecommunication purposes.

Western Union made a claim against its insurance companies for a total loss of the satellite. The insurers paid Western Union about $105,000,000 million on the claim.

About three weeks after the Space Shuttle mission, Hughes Aircraft Corporation (which had manufactured Westar VI) briefed NASA about the possibility of retrieving the satellite. On September 7, 1984, an agreement was reached by Hughes and the majority insurers of Westar VI to retrieve the satellite. In November 1984, Westar VI was retrieved from its improper orbit and brought to Hughes Aircraft Company.

On January 17, 1986, Appalachian filed suit in the Orange County Superior Court against McDonald Douglas, Morton Thiokol and Hitco, alleging causes of action for negligence and strict liability. On February 14, McDonnell Douglas filed for a petition to remove the case to federal court. Thereafter, on February 18, Appalachian voluntarily dismissed the federal court action and filed a new complaint, containing minor modifications, in the Orange County Superior Court. In federal court, McDonnell Douglas filed a motion to strike or vacate Appalachian's dismissal. The federal court denied the motion, noting that removal had been improper.