Opinion
E040219
5-14-2007
CUMBRE, INC. et al., Plaintiffs and Appellants, v. STATE COMPENSATION INSURANCE FUND, Defendant and Respondent.
Nossaman, Guthner, Knox & Elliott, James C. Powers, Charles M. Calderon and Melissa A. Poole for Plaintiffs and Appellants. Sheppard, Mullin Richter & Hampton, Andre J. Cronthall, Whitney Jones Roy; Charles Savage, Jody Debernardi and Lori Oesterreich for Defendant and Respondent.
NOT TO BE PUBLISHED
1. Introduction
Plaintiffs Cumbre, Inc. and its wholly owned subsidiary, Coachella Valley Insurance Service, Inc., (collectively "Cumbre") were preferred brokers for defendant State Compensation Insurance Fund ("State Fund"). In 2003, State Fund unilaterally terminated its preferred broker agreements with certain brokers, including Cumbre, who had a loss ratio above 80 percent for the years 1999, 2000, and 2001. Cumbre sued State Fund for various causes of action, including a breach of contract, a violation of the Unfair Competition Law ("UCL") (Bus. & Prof. Code, § 17200 et seq.), and a violation of the common law doctrine of fair procedure. In 2004, State Fund offered to reinstate the brokers on condition that the brokers were not engaged in litigation with State Fund. Cumbre declined the offer and amended its complaint by adding a claim under section 1983 of title 42 of the United States Code ("section 1983") for encumbering its access to the courts. In response to the parties pretrial motions, the trial court largely ruled in State Funds favor, sustaining its successive demurrers and granting its motion for summary judgment.
This appeal primarily addresses the question of whether the common law doctrine of fair procedure applied to State Funds decision to terminate Cumbres broker agreement. Cumbre claims that the doctrine applies because State Funds decision involved an important public interest and adversely affected Cumbres substantial economic interests. Cumbre raises a number of arguments, including that State Funds reliance on Insurance Code section 769 provided no defense to its fair procedure claim. Cumbre also challenges the trial courts decisions sustaining State Funds demurrers on its breach of contract and section 1983 causes of action and granting State Funds motion for summary judgment on its cause of action under the UCL.
We conclude that the common law doctrine of fair procedure may preclude State Fund from unilaterally terminating its broker agreements without affording basic procedural rights where such termination affected the brokers substantial economic interests. There remains, however, triable issues of material fact as to whether the rule applied under the circumstances in this case and, if so, whether State Fund failed to provide fair procedure in deciding to terminate the agreement and in considering Cumbres appeal from that decision. For this reason and for the reasons discussed below, we reverse the trial courts judgment in part and affirm in part.
2. Factual and Procedural History
State Fund is a public enterprise fund and a state agency under the Department of Industrial Relations. (Ins. Code, § 11773; Lab. Code, § 56.) State Fund provides employers with workers compensation insurance and operates as a self-supporting business. (Ins. Code, § 11775.) State Fund insures over 50 percent of the states employers. State Fund operates by issuing policies to employers both directly and through authorized brokers. State Fund enters into one-year broker agreements with its authorized brokers. State Fund currently has contracts with 4,000 brokers.
Cumbre is an insurance broker, specializing in workers compensation insurance. In 1995, Cumbre became an authorized broker for State Fund. In 1999, Cumbre also qualified to participate in State Funds preferred broker program, which entitled brokers, who had a large volume of business, to additional commissions over and above the standard commissions. In addition to their "Broker Agreement," Cumbre and State Fund executed a one-year "Preferred Broker Agreement." For the year 2003, as in the previous years, Cumbre and State Funds business relationship was defined by the standard broker agreement and the preferred broker agreement.
Because State Fund was created, in part, to ensure that all employers had access to workers compensation insurance, State Fund provided insurance to employers who otherwise may not have been able to obtain policies from private insurers. In recent years, many private insurers, either voluntarily or because of insolvency, have left the market, resulting in an increase in business for State Fund. This also has resulted in a decline in State Funds "premium to surplus ratio." In order to maintain or improve its financial strength, State Fund implemented a new program to terminate its relationships with brokers who had an average combined loss ratio in excess of 80 percent during the years 1999, 2000, and 2001.
The 2003 broker agreement provides that the agreement can be terminated "[b]y either party after not less than sixty (60) days prior written notice to the other, such termination to be effective as of the date designated in the notice." The agreement does not require cause for termination.
On April 2, 2003, State Fund sent Cumbre a letter stating its new program and informing Cumbre that, according to State Funds records, Cumbre had a three-year combined average loss ratio in excess of 80 percent. The termination was effective August 1, 2003. The letter also informed Cumbre that it had the option to appeal the termination in writing. Cumbre submitted a written appeal, which was evaluated by State Fund and rejected.
After the termination, Cumbre was not permitted to place new business with State Fund. Cumbre, however, was allowed to maintain its existing policies. In the year before the termination, Cumbres policies produced over $16,500,000 in premiums, resulting in over $1,425,000 in commissions. After the termination, Cumbre continued to receive commissions on the existing policies, estimated at about $580,000.
Cumbre filed its original complaint on July 2, 2003. Cumbres complaint included causes of action for breach of contract, negligence, breach of the implied duty of good faith and fair dealing, unfair business practices under the UCL, and declaratory relief.
In 2004, State Fund offered to reinstate all of the terminated brokers. The letter offering reinstatement provided the following condition: "Brokerages engaged in litigation with State Fund which arises in whole or part out of State Funds termination of any brokers or State Funds broker rehabilitation program are not eligible for reinstatement."
Unwilling to relinquish its claim for damages incurred during its termination, Cumbre proceeded with the lawsuit. After the court sustained the demurrer with leave to amend on the first four of its complaints, Cumbre, with new counsel, filed its fourth amended complaint. In its fourth amended complaint, Cumbre for the first time alleged a violation of its rights under the common law doctrine of fair procedure. Cumbre also alleged causes of action for breach of contract, interference with prospective economic advantage, unfair business practices, and a violation of section 1983 based on the infringement of Cumbres constitutional rights. State Fund demurred and the trial court sustained the demurrer only as to Cumbres breach of contract and section 1983 claims.
In its fifth amended complaint, which was filed on April 29, 2005, Cumbre omitted the breach of contract claim and amended its claim under section 1983. State Fund demurred, arguing only that Cumbre failed to allege facts sufficient to support its fifth cause of action. The trial court sustained the demurrer without leave to amend. Thereafter Cumbre unsuccessfully petitioned this court for writ of mandate. (Cumbre, Inc. v. State Compensation Insurance Fund (E038876, petn. for writ of mandate denied Oct. 6, 2005).)
Cumbre filed a motion for summary adjudication to resolve the issues related to its claim under the common law doctrine of fair procedure. State Fund also filed a motion for summary judgment or summary adjudication. The trial court heard both motions on December 1, 2005, and later issued its statement of decision denying Cumbres motion and granting State Funds motion.
The trial court entered judgment for State Fund.
3. Cause of Action for Fair Procedure
The main issue in this case is whether the doctrine of fair procedure applied to State Funds decision to terminate Cumbres preferred broker agreement. We, therefore, begin our discussion by reviewing the trial courts rulings on the parties motions for summary judgment or summary adjudication, which involved this issue.
A. Standard of Review
A trial court may grant a motion for summary judgment when the moving party has shown that there is no triable issue of fact and that the moving party is entitled to judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c); Kahn v. East Side Union High School Dist. (2003) 31 Cal.4th 990, 1002-1003.) Similarly, a court may grant a motion for summary adjudication if it completely disposes of a cause of action, affirmative defense, claim for damages, or an issue of duty. (Code Civ. Proc., § 437c, subd. (f)(1); Marie Y. v. General Star Indem. Co. (2003) 110 Cal.App.4th 928, 949.) In both cases, a reviewing court evaluates the record and ruling de novo and applies the same standard used by the trial court — i.e., we consider all the uncontradicted evidence and the undisputed inferences reasonably drawn from that evidence and we determine whether the moving party was entitled to judgment as a matter of law. (See Kahn v. East Side Union High School Dist., supra, at pp. 1002-1003.)
In regards to the trial courts rulings, Cumbre preliminarily argues that the court failed to consider State Funds motion for summary judgment and summary adjudication separately from Cumbres motion for summary adjudication. Specifically, Cumbre argues that the trial court erroneously considered evidence presented in support of its motion for summary adjudication when it ruled on State Funds motion for summary judgment. According to Cumbre, the court should have relied solely on the evidence cited in the separate statements submitted with State Funds motion for summary judgment.
In making this argument, Cumbre relies on the "Golden Rule." While the "Golden Rule" is that the separate statement must set forth all the facts necessary for the summary judgment (see United Community Church v. Garcin (1991) 231 Cal.App.3d 327, 335), courts have viewed this rule as permissive and not mandatory (see, e.g., San Diego Watercrafts, Inc. v. Wells Fargo Bank (2002) 102 Cal.App.4th 308, 315-316; accord, Zimmerman, Rosenfeld, Gersh & Leeds LLP v. Larson (2005) 131 Cal.App.4th 1466, 1478; Fenn v. Sherriff (2003) 109 Cal.App.4th 1466, 1480-1481). Code of Civil Procedure section 437c affords trial courts discretion in evaluating motions that are not accompanied by adequate statements of undisputed facts. (Code Civ. Proc., § 437c, subd. (b); Zimmerman, Rosenfeld, Gersh & Leeds LLP v. Larson, supra, at p. 1478.) Therefore, rather than a mechanical application of the "Golden Rule," the use of evidence not referenced in the moving partys separate statement should be left to the trial courts sound discretion. (San Diego Watercrafts, Inc. v. Wells Fargo Bank, supra, at p. 315.)
In this case, because both State Fund and Cumbre filed motions for summary judgment or summary adjudication involving many of the same issues, it was not an abuse of discretion to consider evidence presented by both parties to resolve the issues. In reviewing the trial courts decision de novo, we likewise have the same discretion to consider the evidence together, rather than the evidence presented with each motion separately, to determine whether either or any party was entitled to judgment as a matter of law. (See Fenn v. Sherriff, supra, 109 Cal.App.4th at p. 1481.)
B. Common Law Doctrine of Fair Procedure
The common law doctrine of fair procedure is similar to the constitutional doctrine of due process. While due process applies only to government actions (see Santa Monica Beach, Ltd. v. Superior Court (1999) 19 Cal.4th 952, 978), fair procedure also applies to the decisions of private organizations (see Potvin v. Metropolitan Life Ins. Co. (2000) 22 Cal.4th 1060, 1066).
Based on one description of the rule, "[t]he common law right to fair procedure protects an individual from arbitrary exclusion or expulsion from membership in a `private entity affecting the public interest where the exclusion or expulsion has substantial adverse economic ramifications. [Citation.] `The purpose of the common law right to fair procedure is to protect, in certain situations, against arbitrary decisions by private organizations. [Citation.] When the right to fair procedure is found to apply, `the decisionmaking "must be both substantively rational and procedurally fair." [Citation.]" (Kim v. Southern Sierra Council Boy Scouts of America (2004) 117 Cal.App.4th 743, 746-747, citing Potvin v. Metropolitan Life Ins. Co., supra, at pp. 1070-1072, 1066, respectively.)
Procedural fairness usually requires certain components, including notice, an impartial decision maker, and a meaningful opportunity to respond or to be heard. (See Youngblood v. Wilcox (1989) 207 Cal.App.3d 1368, 1373-1374; Curran v. Mount Diablo Council of the Boy Scouts (1983) 147 Cal.App.3d 712, 720; Hackethal v. California Medical Assn. (1982) 138 Cal.App.3d 435, 442.) However, "[f]air procedure does not compel proceedings with the formalities of a court trial. The minimum requirements are described in varying ways and may depend upon the action contemplated by the organization and the effect of that action on the individual." (Hackethal v. California Medical Assn., supra, at p. 442.)
Courts have applied the common law right to fair procedure in a few different contexts. The large majority of fair procedure cases have involved medical and dental professionals and the decisions made by private hospitals, medical groups, health insurance companies, and professional associations. Courts have imposed certain procedural requirements in making the following decisions: rejecting a physicians application for employment (Ascherman v. Saint Francis Memorial Hosp. (1975) 45 Cal.App.3d 507, 514); dismissing a physician from a residency program (Ezekial v. Winkley (1977) 20 Cal.3d 267, 275); denying, suspending, or revoking a physicians staff privileges (see, e.g., Miller v. Eisenhower Medical Center (1980) 27 Cal.3d 614, 626; Rosenblit v. Superior Court (1991) 231 Cal.App.3d 1434, 1445; Huang v. Board of Directors (1990) 220 Cal.App.3d 1286, 1295; Applebaum v. Board of Directors (1980) 104 Cal.App.3d 648, 660); reviewing a physicians grievances (Payne v. Anaheim Memorial Medical Center, Inc. (2005) 130 Cal.App.4th 729, 737-744); removing a physician from an insurance companys preferred provider list (Potvin v. Metropolitan Life Ins. Co., supra, 22 Cal.4th at pp. 1070-1072); reducing the fees paid to a dentist by an insurance company (Delta Dental Plan v. Banasky (1994) 27 Cal.App.4th 1598, 1605-1606); and excluding or censuring an orthodontist from a professional association (see, e.g., Pinsker v. Pacific Coast Society of Orthodontists (1974) 12 Cal.3d 541 (Pinsker II); Pinsker v. Pacific Coast Soc. of Orthodontists (1969) 1 Cal.3d 160; Salkin v. California Dental Assn. (1986) 176 Cal.App.3d 1118, 1125; Hackethal v. California Medical Assn., supra, 138 Cal.App.3d at pp. 441-442).
The doctrine of fair procedure also has been applied in the context of other private professional organizations. Courts originally appealed to a basic concept of fairness in an effort to protect individuals from arbitrary exclusion from unions and other professional associations. (See Otto v. Tailors P. & B. Union (1888) 75 Cal. 308; Von Arx v. San Francisco G. Verein (1896) 113 Cal. 377.) Since then, courts have developed a common law doctrine of fair procedure and have held that the right to fair procedure requires certain procedural protections in making decisions affecting a persons union membership. (See, e.g., Cason v. Glass Bottle Blowers Assn. (1951) 37 Cal.2d 134, 143-144; James v. Marinship Corp. (1944) 25 Cal.2d 721, 731, 740; Ellis v. American Federation of Labor (1941) 48 Cal.App.2d 440, 443-444.) One court explained the reason for imposing such procedural requirements: "Where a union has, as in this case, attained a monopoly of the supply of labor by means of closed shop agreements and other forms of collective labor action, such a union occupies a quasi public position similar to that of a public service business and it has certain corresponding obligations. It may no longer claim the same freedom from legal restraint enjoyed by golf clubs or fraternal associations. Its asserted right to choose its own members does not merely relate to social relations; it affects the fundamental right to work for a living." (James v. Marinship Corp., supra, at p. 731; see also Ezekial v. Winkley, supra, 20 Cal.3d at p. 271.)
Despite language in some decisions, courts also have extended the doctrine of fair procedure to cases involving membership in private organizations that do not have any direct effect on ones ability to earn a living or pursue a particular profession. The doctrine of fair procedure has been applied to golf clubs, fraternal societies, and other mutual benefit associations. These cases sometimes involve other fundamental rights. (See, e.g., Warfield v. Peninsula Golf & Country Club (1989) 214 Cal.App.3d 646, 658 [denial of golf club membership to a divorced woman]; Curran v. Mount Diablo Council of the Boy Scouts, supra, 147 Cal.App.3d 712 [expulsion from the Boy Scouts because of homosexuality].) Some of these cases, however, simply recognize that even private organizations cannot make decisions affecting a persons membership arbitrarily or against its own bylaws and regulations. (See Von Arx v. San Francisco G. Verein, supra, 113 Cal. at pp. 379-380 [mutual aid society]; Taboada v. Sociedad Espanola etc. (1923) 191 Cal. 187, 191 [fraternal society]; Supreme Lodge, etc. v. L.A. Lodge No. 386 (1917) 177 Cal. 132, 136 [same]; Youngblood v. Wilcox, supra, 207 Cal.App.3d at p. 1374 [country club membership].) "The underlying theme of these decisions, variously stated, is that membership in an association, with its associated privileges, once attained, is a valuable interest which cannot be arbitrarily withdrawn. Thus, they comport with the broader principle that one on whom an important benefit or privilege has already been conferred may enjoy legal protections not available to an initial applicant for the same benefit. [Citation.]" (Ezekial v. Winkley, supra, 20 Cal.3d at p. 273.)
Although the right to fair procedure is a common law doctrine, the Legislature has recognized the need for procedural protections and, accordingly, has codified the right to fair procedure in certain contexts, including physician peer review (Bus. & Prof. Code, § 809 et seq.) and membership in unincorporated associations (Corp. Code, § 18320). While the common law still applies, courts also may rely on the uniform procedures provided in these statutes. (See Kaiser Foundation Hospitals v. Sacramento County Superior Court (2005) 128 Cal.App.4th 85, 100, fn. 13, 102.)
From the above cases, it appears that the courts have applied the right to fair procedure to private entities involved in medical and dental care, unions and other professional organizations, and mutual benefit societies. When the courts have confronted the question of whether the doctrine of fair procedure applies in a new context, they have not always been consistent. While some courts have been reluctant to extend the doctrine of fair procedure (see King v. Meese (1987) 43 Cal.3d 1217, 1231, fn. 15; King v. Regents of University of California (1982) 138 Cal.App.3d 812, 817), other courts have applied the common law doctrine rather liberally (see Warfield v. Peninsula Golf & Country Club, supra, 214 Cal.App.3d at p. 658).
In King v. Regents of University of California, the Third District held that a teacher was not entitled to a hearing before being removed from a tenure track position because the university did not exert sufficient control over his right to pursue his profession. (King v. Regents of University of California, supra, 138 Cal.App.3d at p. 817.) In other words, not achieving tenure at a university did not have the same consequences as losing staff privileges at a hospital. The Third District also noted that, before achieving tenure, the teacher had not been deprived of an important benefit or privilege that already had been conferred upon him. (Ibid.) Therefore, unlike members of mutual benefit societies, the teacher was not losing something that he already had. The Third District, therefore, refused to extend the common law right of fair procedure to a universitys decision to deny tenure. (Ibid.)
By contrast, in Warfield v. Peninsula Golf & Country Club, supra, 214 Cal.App.3d 646, the club terminated a womans membership after her divorce based on the clubs bylaws, which required that regular memberships be issued to men only. The woman sued and raised a number of claims, including one under the common law doctrine of fair procedure. She argued that her membership was important to her work as a real estate agent because of the contacts she had made through use of the club facilities. The club argued that the right to fair procedure applies only where the organization holds monopoly power over a particular trade or profession. The club argued that the plaintiff failed to show that the termination of membership adversely affected her right to pursue her profession as a real estate agent.
The First District rejected the clubs attempt to limit application of the common law right of fair procedure only to unions and professional organizations. The court specifically stated: "Although most of the recent decisions concerning the right to fair procedure have arisen in the context of trade union or professional membership claims, the Supreme Courts language has been much broader in scope: `However, the application of the common law rule does not depend on the existence of "monopoly" power. [Citations.] The judicial inquiry, rather, has consistently been focused on the practical power of the entity in question to affect substantially an important economic interest. Plaintiff has alleged such power in the matter before us. [Citation.]" (Warfield v. Peninsula Golf & Country Club, supra, 214 Cal.App.3d at pp. 658-659, fn. omitted.) The court recognized that, because the golf club membership was awarded to her as a community property interest, the plaintiff could establish that she had a valuable property interest in her golf club membership. (Id. at p. 659.)
After surveying the fair procedure cases, it is apparent that the law is not entirely clear and the application of the law has not always been consistent. We can, however, discern two common elements. As in the majority of the cases described above, the person seeking fair procedure must show both (1) that the private entity functions as a quasi-public agency, performs a public purpose, or otherwise significantly affects the public interest, and (2) a violation of a fundamental right or an infringement upon a substantial economic interest.
As noted by Cumbre, a few of the cases do not include a discussion of the public interest requirement. (See Oskooi v. Fountain Valley Regional Hospital (1996) 42 Cal.App.4th 233, 245-250 (conc. opn. of Sills, J.) [observing a trend toward reliance on only the element of substantial economic interest].) However, even the cases that do not identify a "public interest" involve matters that affect the public in a significant way. The California Supreme Court reaffirmed the public interest requirement in Potvin v. Metropolitan Life Ins. Co.: "The private organizations in our Marinship-Pinsker-Ezekial cases (respectively, a labor union; local, regional, and national associations of orthodontists; and a hospital offering a surgical residency program) all shared an attribute of significance in our determination that they were subject to the common law right to fair procedure. Each one was a private entity affecting the public interest. As has been recognized: `[C]ertain institutions and enterprises are viewed by the courts as quasi-public in nature: The important products or services which these enterprises provide, their express or implied representations to the public concerning their products or services, their superior bargaining power, legislative recognition of their public aspect, or a combination of these factors, lead courts to impose on these enterprises obligations to the public and the individuals with whom they deal, reflecting the role which they have assumed, apart from and in some cases despite the existence of a contract. [Citation.]" (Potvin v. Metropolitan Life Ins. Co., supra, 22 Cal.4th at p. 1070.)
Moreover, the public interest requirement is necessary to safeguard against unwarranted government intrusion into purely private affairs. While many decisions of private entities may affect individual rights, not all decisions should be subject to judicially-imposed procedural requirements. Only those affecting the public interest warrant the imposition of procedures that may not otherwise be afforded under any existing laws or agreements that govern the parties relationship. If the case does not involve a matter of great public importance, there is no legitimate basis for burdening the judiciary and interfering with the autonomy of private corporations and associations. (See California Dental Assn. v. American Dental Assn. (1979) 23 Cal.3d 346, 353-354.)
As to the second criteria, the person demanding fair procedure must show that the private entitys decision adversely affects a fundamental right. Often the liberty interest involved is the ability to earn a living. The California Supreme Court has held that, "the right to practice a lawful trade or profession is sufficiently `fundamental to require substantial protection against arbitrary administrative interference, either by government [citations] or by a private entity [citation]." (Ezekial v. Winkley, supra, 20 Cal.3d at p. 272; see also Tiholiz v. Northridge Hospital Foundation (1984) 151 Cal.App.3d 1197, 1202.)
The common law doctrine of fair procedure protects not only ones right to earn a living, but also ones right to practice fully ones profession. (Pinsker II, supra, 12 Cal.3d at p. 554.) In Delta Dental Plan v. Banasky, supra, 27 Cal.App.4th 1598, two dentists signed contracts with Delta Dental to be members of its panel of participating dentists. When Delta Dental discovered that the two dentists were associated with SmileCare Dental Group, Delta Dental decided to reduce their fees to that of SmileCare. After unsuccessfully appealing the decision to the membership action committee, the dentists demanded arbitration. When Delta Dental refused, the dentists filed a complaint for declaratory and injunctive relief. The trial court denied relief on the ground that the dentists had agreed to be bound by the committees decision.
In determining whether Delta Dental was entitled to judicial review, Division Three of the Second District relied on the common law right to fair procedure. The court explained, "[f]air procedure comes into play where private organizations are `"tinged with public stature or purpose" or attain a `"quasi-public significance," as contrasted with purely private associations which have no larger `"purpose or stature than pleasant, friendly and congenial social relationships." [Citation.] [Citation.] Further, the right to fair procedure with respect to membership actions is not limited to matters of exclusion or expulsion. [Citations.]" (Delta Dental Plan v. Banasky, supra, 27 Cal.App.4th at p. 1607, citing Salkin v. California Dental Assn., supra, 176 Cal.App.3d at p. 1125 [involving censure, not termination].) Delta Dentals decision did not prevent the dentists from pursuing a particular profession, but involved only the amount of the dentists usual and customary fees. The court nevertheless held that the right to fair procedure applied to the determination of the dentists fees. (Delta Dental Plan v. Banasky, supra, at p. 1608.) Therefore, the case was not about whether the dentists could continue to practice their profession, but whether they would receive adequate payment for their services.
While the cases often involve the right to earn a living, the fundamental right need not be tied to ones profession. Rather, the person demanding fair procedures must establish some substantial liberty or property interest. For example, even if the case involves a quasi-public entity or a matter of great public interest, the courts will not intervene and impose additional procedural requirements where the individual cannot demonstrate an infringement upon a fundamental right or substantial economic interest. (See, e.g., Kim v. Southern Sierra Council Boy Scouts of America, supra, 117 Cal.App.4th at p. 747 [refusal to promote to the rank of Eagle Scout does not affect a substantial economic interest].) Without a showing of both elements, private entities should be entitled to govern themselves without judicial interference.
We turn now to the question of whether the threshold elements were present in this case.
C. Public Interest
As stated earlier in this opinion, the public interest element is essential to a claim of fair procedure because it guards against unwarranted government intrusion into purely private affairs. The public interest element is concerned with whether the private entity performs a function that affects the public interest. In this case, however, before making this determination, we must address the more basic question of whether the common law doctrine of fair procedure has any application where the defendant is not a private entity, but a public agency functioning as a private insurer. During oral argument, State Fund contended that the common law doctrine did not apply because State Fund is not a private entity that performs a function that affects the public interest. After having requested supplemental briefing on this issue and reviewed the parties arguments, we conclude that, although State Fund is an agency of the state, this status does not preclude it from being treated as a private entity subject to the common law doctrine of fair procedure. Furthermore, because State Fund has been entrusted with an important public function, the public interest element is amply supported by the facts in this case.
State Fund is appropriately described as a quasi-public agency. (Tilbury Constructors, Inc. v. State Compensation Ins. Fund (2006) 137 Cal.App.4th 466, 478, fn. 2.) State Fund was created by the Workmens Compensation Insurance and Safety Act of 1913. Its organization and power are designated by statute. (Ins. Code, § 11770.) It is an agency under the Department of Insurance and its board members are appointed by the governor. (Tilbury, supra, at p. 478, fn. 2.)
Although State Fund is an agency of the state, it also functions as a private insurance carrier. (Gilmore v. State Comp. Ins. Fund (1937) 23 Cal.App.2d 325, 329; Notrica v. State Comp. Ins. Fund (1999) 70 Cal.App.4th 911, 918-919.) As one court noted, "[T]he Legislature has established the [State] Fund as a proprietary enterprise." (Maxon Industries, Inc. v. State Compensation Ins. Fund (1993) 16 Cal.App.4th 1387, 1394, citing Courtesy Ambulance Service v. Superior Court (1992) 8 Cal.App.4th 1504, 1511-1512.) State Fund was created to operate as a self-supporting entity authorized to conduct business like any other insurance company. (Ins. Code, § 11775; Notrica, supra, at p. 918.) State Fund was entrusted with the responsibility of providing workers compensation insurance to employers in order to secure sufficient compensation for injured employees and their dependents. (Gilmore, supra, at pp. 328-329.)
Because it operates as a proprietary enterprise, State Fund is liable in tort and contract as any other private insurer. Insurance Code section 11783, subdivision (a), provides that the State Fund may "[s]ue and be sued in all actions arising out of any act or omission in connection with its business of affairs." Courts have held that State Fund could be liable under contract theories, tort theories, and other common law theories, including the implied duty of good faith and fair dealing. (MacGregor Yacht Corp. v. State Comp. Ins. Fund (1998) 63 Cal.App.4th 448, 453, 456-459; Tricor California, Inc. v. State Compensation Ins. Fund (1994) 30 Cal.App.4th 230, 242.) Courts also have held that State Fund could be liable for punitive damages. (See, e.g., Courtesy Ambulance Service v. Superior Court, supra, 8 Cal.App.4th 1504.) Courts uniformly have rejected State Funds attempt to avoid liability or assert immunities as a state agency. (See, e.g., Courtesy Ambulance Service, supra, at p. 1514; accord Maxon Industries, Inc. v. State Compensation Ins. Fund, supra, 16 Cal.App.4th at pp. 1391-1394.)
While State Fund is statutory defined as an agency of the state, it is to be treated no differently than a private insurer. Under Insurance Code section 11873, the general rule is that, aside from a few exceptions, State Fund is not subject to the Government Code provisions applicable to other state agencies, unless specifically provided. There are no other such specific provisions. (Notrica v. State Comp. Ins. Fund, supra, 70 Cal.App.4th at p. 941; Courtesy Ambulance Service v. Superior Court, supra, 8 Cal.App.4th at p. 1514.) "It is apparent that the Fund sought to cast itself as a private enterprise rather than a public entity when it sponsored the 1979 legislation. It should be treated that way, receiving both the benefits and the disadvantages of that status." (Maxon Industries, Inc. v. State Compensation Ins. Fund, supra, 16 Cal.App.4th at p. 1392; see also Courtesy Ambulance Service, supra, at p. 1517.)
As with other private insurers, State Fund already is subject to government regulation in almost every aspect of its business. (20th Century Ins. Co. v. Superior Court (2001) 90 Cal.App.4th 1247, 1265, fn. 19.) "The business of insurance is `"clothed with a public interest," and therefore subject "to be controlled by the public for the common good." [Citation.] Especially in California, the insurance industry `is a highly regulated industry. [Citation.] [¶] The field of insurance so greatly affects the public interest that the industry is viewed as a `quasi-public business, in which the special relationship between the insurers and insureds requires special considerations." (Id. at p. 1265 [fns. omitted].)
But, unlike other private insurers, State Fund has over 50 percent of the market share. Most California employers obtain their workers compensation insurance through State Fund. Ordinarily, the public interest element is satisfied "when the organization involved is one affected with a public interest, such as a private hospital." (Applebaum v. Board of Directors, supra, 104 Cal.App.3d at p. 657.) We conclude that State Fund qualifies as a "private entity" affected with a public interest.
As noted by the parties, the California Supreme Courts analysis of the public interest requirement in Potvin v. Metropolitan Life Ins. Co., supra, 22 Cal.4th 1060 (hereafter Potvin) suggests that Cumbre also must show that State Funds relationship with its brokers also affected the public interest. In Potvin, Metropolitan Life Insurance Company removed the plaintiff, a physician, from its preferred provider lists without an explanation or a hearing. The court held that, under the common law doctrine of fair procedure, the physicians removal from the insurance companys preferred provider list "must be `both substantively rational and procedurally fair. [Citation.]" (Potvin, supra, 22 Cal.4th at p. 1072.)
In arriving at this conclusion, the court in Potvin explained that the relationship between the insurers and their preferred provider physicians had a significant effect on the public interest. The court laid out two specific effects: "One practical effect of the health care revolution, which has made quality care more widely available and affordable through health maintenance organizations and other managed care entities, is that patients are less free to choose their own doctors for they must obtain medical services from providers approved by their health plan. The Managed Health Care Improvement Task Force stressed in its 1997 report to the California Legislature that the provision of health care `has a special moral status and therefore a particular public interest. [Citation.] But an even greater public interest is at stake when those medical services are provided through the unique tripartite relationship among an insurance company, its insureds, and the physicians who participate in the preferred provider network. As the New Hampshire Supreme Court noted recently in Harper v. Healthsource New Hampshire (1996) 140 N.H. 770 [674 A.2d 962, 966], the removal of a physician from a preferred provider list `affects more than just [the doctors] own interest, adding that `[t]he public has a substantial interest in the relationship between health maintenance organizations and their preferred provider physicians." (Potvin, supra, 22 Cal.4th at p. 1070.)
The court in Potvin discussed both the general nature of health care as being entrusted with a public interest and the specific concerns involved in the relationships among the insured, insurer, and physicians, particularly, the concern as to the insureds ability to choose his physician. (Potvin, supra, 22 Cal.4th at p. 1070.) The New Hampshire case cited by the court addresses the additional concern of the cost of healthcare. (Harper v. Healthsource New Hampshire, supra, 674 A.2d at p. 966.) Although it is sufficient to show that the private entity is affected with a public interest, as in the cases prior to Potvin, these other concerns provide additional justification for government involvement. In each case, the court must evaluate the relevant facts to determine whether the private business is so affected with a public interest that the government may intervene and demand fair procedure when there is infringement upon a substantial interest. The facts will vary from case to case.
In this case, State Funds quasi-public nature, dominant market share, and important public function justify the application of the requirements of fair procedure. In dispensing its public duty to be competitive and self-supporting, State Fund decided to maintain a network of brokers and preferred brokers. Even if some of these relationships did not prove to be economically advantageous, State Fund initially made use of them to fulfill its statutory mandate and, presumably, to expand its reach beyond its own capacity. While the concerns over an individuals choice of doctor and the rising costs of healthcare, obviously, are not involved in this case, we are nonetheless dealing with business relationships that affect the public interest.
D. Substantial Economic Interest
The second threshold requirement to establish that State Fund owed Cumbre a duty under the common law doctrine of fair procedure is that the private entitys decision infringed upon a fundamental right or substantial economic interest. Although we cannot say as a matter of law that Cumbre had a substantial economic interest in its preferred brokerage agreement with State Fund, we reject State Funds argument that Cumbre was incapable of making such a showing.
In its motion for summary judgment or summary adjudication, State Fund argued that the doctrine of fair procedure applies primarily in cases involving an individuals right to practice his or her profession. State Fund contends that only individuals and not corporations like Cumbre are capable of claiming a fundamental right sufficient to trigger the requirements of fair procedure.
While the fair procedure cases usually involve an individual asserting his or her right to certain procedural protections, State Fund provides no adequate basis for distinguishing between individuals and corporate entities. Although Cumbre represents two brokerage firms, it also represents the interests of the brokers employed by those firms. A brokerage firm is a collective singularity, i.e., a single entity representing multiple individuals.
Moreover, in the analogous context of due process, courts have long recognized that private corporations are "persons" for purposes of the Fourteenth Amendment. (Gamet v. Blanchard (2001) 91 Cal.App.4th 1276, 1285, citing Pembina Consol. Silver Mining & Milling Co. v. Pennsylvania (1888) 125 U.S. 181, 188-189; see also Genesis Environmental Services v. San Joaquin Valley Unified Air Pollution Control Dist. (2003) 113 Cal.App.4th 597, 605, fn. 9.) Government interference with the interests of a corporation, therefore, can constitute a violation of due process. (See, e.g., Golden Day Schools, Inc. v. State Dept. of Education (2000) 83 Cal.App.4th 695, 707-709 (Golden Day); Stacy & Witbeck, Inc. v. City and County of San Francisco (1995) 36 Cal.App.4th 1074, 1087, fn. 6; see also Marvin Lieblein, Inc. v. Shewry (2006) 137 Cal.App.4th 700, 720.)
Corporations often are included in the definition of "persons" under various state statutes. (See, e.g., Lab. Code, § 18; Corp. Code, § 18; Evid. Code, § 175.)
Also in the context of due process, one court, in rejecting a claim similar to the one offered by State Fund, explained: "The definition of liberty under the Fifth or Fourteenth Amendments has never been stated with exactness. Nevertheless, it is clear that the concept encompasses more than mere freedom from bodily restraint, and includes `the right of the individual to contract, to engage in any of the common occupations of life, to acquire useful knowledge, to marry, establish a home and bring up children, to worship God according to the dictates of his own conscience, and generally to enjoy those privileges long recognized at common law as essential to the orderly pursuit of happiness by free men. [Citation.] Admittedly, a corporation may not be bodily seized. Nor may it marry or bring up children. But a corporation may contract and may engage in the common occupations of life, and should be afforded no lesser protection under the Constitution than an individual to engage in such pursuits." (Old Dominion Dairy v. Secretary of Defense (D.C. Cir. 1980) 631 F.2d 953, 962, emphasis added.)
If sufficient to invoke constitutional protection, a corporations liberty interest also may be protected under the common law doctrine of fair procedure. The constitutional and common law principles differ as to their origin, but not as to the scope of their protection of individual rights. (Anton v. San Antonio Community Hosp. (1977) 19 Cal.3d 802, 829.)
In Golden Day, the State Department of Education debarred Golden Day Schools, a child care contractor, which precluded it from applying for further three-year contracts. When Golden Day Schools appealed the debarment, the agency provided a hearing but not before an impartial decision maker. Before addressing Golden Day Schoolss specific complaints concerning the procedural defects with the hearing afforded by the agency, the court determined the nature of the private interest at stake. Because of the stigma associated with debarment, which usually is based on the contractors wrongful conduct, the court found that government debarment implicates a liberty interest. (Golden Day, supra, 83 Cal.App.4th at pp. 705-706.)
A corporation may assert a fundamental right sufficient to trigger the requirements of fair procedure. As in Golden Day, courts have recognized that corporations may have a cognizable liberty interest in their participation in certain government programs. (See, e.g., Golden Day, supra, 83 Cal.App.4th at pp. 707-709 [child care provider]; Marvin Lieblein, Inc. v. Shewry, supra, 137 Cal.App.4th at p. 720 [Medi-Cal provider].) Although this case does not involve a debarment for wrongful conduct, the point is that a corporate entity may assert a liberty interest.
Furthermore, to show an infringement upon a liberty interest, the person claiming a right to fair procedure need not establish a complete termination. The duty to comply with the common law right to fair procedure arises where the private entity possesses sufficient power such that its decision or action significantly impairs the practice of ones profession or affects a substantial economic interest. (Potvin, supra, 22 Cal.4th at p. 1071.) The private entitys decision may affect the persons substantial economic interest without completely severing the business relationship. As stated above, courts have imposed the duty of complying with the requirements of fair procedure where the private entitys decision prevented a person from practicing his profession fully or earning his full salary. (See Delta Dental Plan v. Banasky, supra, 27 Cal.App.4th at p. 1607; Applebaum v. Board of Directors, supra, 104 Cal.App.3d at p. 658.)
In a case where a hospital only limited, rather than suspended, a physicians staff privileges, the court explained: "The hospitals action did not completely eliminate plaintiffs staff privileges or remove him from staff membership. There is no indication in the record that his use of hospital facilities other than those in the obstetrical department was affected by the investigation and adjudication. Since plaintiff testified that about 40 percent of his income was derived from his obstetrical practice, his interest in obstetrical privileges was substantial and we do not find that a partial exclusion of this magnitude merits any less procedural protection than revocation of full staff membership . . . ." (Applebaum v. Board of Directors, supra, 104 Cal.App.3d at p. 658.)
In this case, although Cumbre was able to continue brokering insurance policies, it lost its preferred status with State Fund. In his declaration, Michael Holzman, Cumbres Chief Operating Officer, explained that workers compensation insurance accounted for over 60 percent of Cumbres total revenue. After State Fund terminated the preferred broker agreement, Cumbre was not permitted to place new lines of insurance with State Fund. According to Holzman, in 2003, Cumbres policies produced over $16,500,000 in premiums, resulting in over $1,425,000 in commissions. After the termination, in 2005, Cumbres commissions for the existing policies resulted in an estimated $580,000 in commissions. Certain policies were affected particularly by the change in status. Because State Fund was the only workers compensation insurance carrier for construction, trucking, and farming employers, Cumbre observed a 50 percent reduction in commissions on policies issued to these types of businesses. This evidence supports Cumbres claim that, although it was able to continue providing insurance brokerage services, State Funds decision had a substantial effect on Cumbres economic interests.
In challenging this factual claim, State Fund cited a part of Holzmans deposition describing the effect of the termination of preferred broker status on Cumbres revenues. While Holzmans testimony may be read consistently with his statements in his declaration, there is some indication that Cumbres decline in revenues was a result of a business trend, not some external decision by State Fund, and that the trend was not as drastic as indicated by the numbers cited above.
Because there remains a disputed issue of material fact as to whether State Funds decision to terminate Cumbres preferred broker status had a significant effect on Cumbres substantial economic interest, we conclude that the trial court erred in granting State Funds motion for summary judgment.
E. Violation of Fair Procedure
Once a plaintiff establishes the threshold elements, he may present his case that the defendants decision violated his right to fair procedure. But the question of whether a violation occurred in this case also cannot be determined as a matter of law.
The common law doctrine of fair procedure has both a substantive and procedural component. First, the decision must be substantively rational. (Potvin, supra, 22 Cal.4th at p. 1072, citing Pinsker II, supra, 12 Cal.3d at p. 550.) While, as here, the business relationship may be governed by a contract that provides for termination at will and without cause, the contractual provision remains subject to the common law requirement of fair procedure. (See Potvin, supra, at p. 1073.) A decision violates this requirement when it is arbitrary, capricious, discriminatory, or in some other way irrational. (See Gill v. Mercy Hospital (1988) 199 Cal.App.3d 889, 897; James v. Marinship Corp., supra, 25 Cal.2d at pp. 736-737.) Second, the decision must be procedurally fair. (Potvin, supra, at p. 1072, citing Pinsker II, supra, at p. 550.) At minimum, procedural fairness requires notice and an opportunity to be heard. (Payne v. Anaheim Memorial Medical Center, Inc., supra, 130 Cal.App.4th at p. 741.)
Cumbre argues that State Funds decision violated its right to fair procedure as a matter of law. Cumbre specifically contends that State Funds termination program was substantively irrational because it would not have produced its desired effect of reducing its liabilities or losses. As the insurer of last resort, State Fund was obligated to insure high-risk employers. State Funds decision did not involve the cancellation of any existing policies with high-risk employers. Although the program might have eliminated the broker fees for future high-risk policies, Cumbre notes that the preferred broker agreements already permitted State Fund to modify commissions according to adverse risk characteristics. The termination program, Cumbre argues, was not necessary to accomplish the goal of reducing losses.
Cumbre also argues that State Funds use of retroactive criteria was inherently unfair. Borrowing from the principle against the retroactive application of new laws, Cumbre contends that State Funds use of retroactive criteria as the basis for its decision to terminate certain preferred brokers was unfair. By "retroactive criteria," Cumbre apparently means the use of past factors (i.e., loss ratios for the years 1999, 2000, and 2001) to make the current decision to terminate its preferred broker agreements without prior notice (e.g., warning before 1999 that the loss ratio from that year will be considered in making the termination decision). Cumbre argues that, without prior notice, a brokerage firm could do nothing to improve its loss ratio and prevent the termination. Cumbre thus argues that State Funds use of retroactive criteria violated its right to fair procedure.
On the other hand, State Fund argues that the undisputed facts establish that its decision and procedures were fair. State Fund notes that its decision was based on Cumbres unprofitability. State Fund also notes that it provided 120 days notice and an internal appeals process. Although Cumbre was allowed to appeal only in writing and the panel deciding Cumbres appeal consisted of State Fund employees, State Fund maintains that not all disputes require a full-blown hearing before an independent decision maker. After receiving Cumbres written appeal, State Fund employees evaluated the complaints and responded to them in writing, explaining its reasons for affirming its original decision.
Cumbre challenges the fairness of State Funds internal appeals process. Cumbre argues that it should have been afforded a hearing and an opportunity to confront and cross-examine its accusers and examine and refute the evidence. Cumbre also argues that, although State Fund developed criteria to evaluate the appeals, it refused to disclose the criteria to the brokers, which would have assisted them in preparing for their appeals. Cumbre notes that, during his deposition, Ingo Coolins, a State Fund supervisor, testified that, even if Cumbres overall loss ratio was below 80 percent, it still would have been terminated based on its loss ratios in specific areas.
In evaluating these claims, we note that the doctrine of fair procedure protects against arbitrary decisions and unfair procedures. It is not designed to impose impractical and unworkable standards on private entities. The California Supreme Court observed: "[T]his court should not attempt to fix a rigid procedure that must invariably be observed. Instead, the associations themselves should retain the initial and primary responsibility for devising a method which provides an applicant adequate notice of the `charges against him and a reasonable opportunity to respond. In drafting such procedure, and determining, for example, whether an applicant is to be given an opportunity to respond in writing or by personal appearance, the organization should consider the nature of the tendered issue and should fashion its procedure to insure a fair opportunity for an applicant to present his position. Although the association retains discretion in formalizing such procedures, the courts remain available to afford relief in the event of the abuse of such discretion." (Pinsker II, supra, 12 Cal.3d at pp. 555-556, fn. omitted.)
In regards to State Funds initial act of implementing its termination program, the court must defer to State Funds expertise and discretion. Under the broker agreement, either party was able to terminate the agreement with 60 days written notice prior to termination. The agreement does not require any specific cause for termination. Where the decision is not arbitrary, discriminatory, or otherwise irrational, the court cannot intervene and rewrite the agreement to include provisions that were not bargained for by the parties.
In support of its motion for summary judgment, State Fund submitted a copy of Renee Korens declaration. Renee Koren was State Funds Vice President. Koren explained that State Fund provided insurance to employers who were unable to obtain insurance from other private insurers. Also, as other private insurers withdrew from the market or became insolvent, employers, including high-risk employers, sought insurance with State Fund. Koren asserted that the increase affected State Funds premium to surplus ratio. To address this issue, the California Department of Insurance and State Fund decided to implement a termination program to sever ties with brokers who brought unprofitable business to State Fund. Koren noted that State Fund typically lost money on accounts where the policyholder had a loss ratio above 80 percent. Koren also noted that, in addition to losing money, State Fund often paid commissions to the broker who placed the line of insurance with State Fund. Although insuring high-risk employers may be unavoidable, State Fund instituted the termination policy to stop paying additional commissions on unprofitable accounts. Koren also explained that State Fund did not implement its termination program arbitrarily, but applied its criteria uniformly and treated all brokers considered for termination in the same manner. These facts, if true, should be more than sufficient to satisfy the requirement of being substantively rational. The doctrine of fair procedure does not require perfect decisions, but only ones that are not arbitrary.
Furthermore, there is nothing inherently unfair about the application of "retroactive criteria." Cumbre has failed to provide any relevant authority to restrict State Fund from considering retroactive criteria or historical facts in making its business decisions. Cumbres reliance on the principles involved in the retroactive application of rules is unavailing. The retroactive application of rules is not inherently unfair, but is unfair because it violates the parties vested rights or settled expectations based on existing law or the parties agreement. (See Savnik v. Hall (1999) 74 Cal.App.4th 733, 739; In re Marriage of Lachenmyer (1985) 174 Cal.App.3d 558, 561.) As stated above, the agreement between the parties in this case did not require any specific cause for termination. Where the contract does not provide otherwise, it would be unreasonable to impose upon State Fund the requirement that it must consider only prospective facts in making its decisions. Although State Funds criteria of considering loss ratios for the years 1999, 2000, and 2001, made it impossible for Cumbre to take preventive measures to avoid termination, a corporations decision to terminate a business relationship because the relationship has proved unprofitable in the past is neither irrational nor inherently unfair where the agreement between the parties does not demand otherwise.
Unlike State Funds initial decision to implement its termination program, which was quasi-legislative in nature, its subsequent decision to deny Cumbres appeal was quasi-judicial in nature. Although these terms apply to administrative decisions, they also are useful here. While quasi-legislative decisions involve the adoption of rules of general application, quasi-judicial or quasi-adjudicative decisions involve the application of certain rules to the particular facts of an individual case. (Nasha L.L.C. v. City of Los Angeles (2004) 125 Cal.App.4th 470, 482.) With a quasi-adjudicative decision, fair procedure requires certain basic procedural rights, including the right to notice, a reasonable opportunity to respond, and an impartial decision maker. Depending on the circumstances, the opportunity to respond need not always involve an in-person hearing. Likewise, the requirement of an impartial decision maker does not mean necessarily that the corporation must secure the services of an independent decision maker. It is neither fair nor necessary to impose upon private entities all the formalities of a full-blown judicial proceeding or even an administrative proceeding. The doctrine of fair procedure, instead, imposes only certain minimum requirements: "Adequate notice of charges and a reasonable opportunity to respond are basic to both due process and fair procedure. [Citation.] The individual has a right to a tribunal which meets the prevailing standards of impartiality. Biased decisionmakers are impermissible and the probability of unfairness is to be avoided. [Citation.]" (Hackethal v. California Medical Assn., supra, 138 Cal.App.3d at p. 442.)
Factual questions remain as to whether State Funds appeals process in this case comported with these minimum requirements. Although State Fund claims that it applied its criteria uniformly, Cumbre contends that State Fund relied on other undisclosed criteria in making its decision. It is unclear whether State Funds failure to inform Cumbre of these additional criteria deprived it of having a reasonable opportunity to respond to the termination and present a defense. It is also unclear whether State Fund correctly reviewed its decision based on its original loss ratio criteria or whether it applied a more stringent standard in upholding its decision to terminate Cumbres preferred broker status. Cumbre presented evidence indicating that State Fund would have terminated Cumbre for other reasons even if its overall loss ratio did not exceed 80 percent. State Fund, however, also presented evidence that Cumbres loss ratio exceeded 80 percent and the other reasons for its decision likewise concerned Cumbres unprofitability. Because there remained disputed issues of material fact, neither party was entitled to judgment as a matter of law.
F. Insurance Code section 769
All statutory references in this section will be to the Insurance Code unless otherwise stated.
State Fund also argues that section 769, which allows for the termination of a broker agreement with 120 days notice, precluded the application of the common law doctrine of fair procedure. State Fund asserts that it not only complied with the requirements of section 769, but also provided additional procedures above and beyond the statutory requirements, including an appeal and an offer of reinstatement.
State Fund argues that, "where a code addresses a subject, the code controls, not general principles of common law." State Fund relies on authority that establishes that the common law governs when the code is silent (Victory Oil Co. v. Hancock Oil Co. (1954) 125 Cal.App.2d 222, 229) or, when the code has modified the common law, the common law no longer applies (Monterey Club v. Superior Court (1941) 48 Cal.App.2d 131, 145).
These cases, however, do not address whether the common law can require other procedures in addition to what the code explicitly provides. On this question, the courts have held that the common law may supply additional rules that are not inconsistent with the code. (See, e.g., Donovan v. RRL Corp. (2001) 26 Cal.4th 261, 286; Peart v. Ferro (2004) 119 Cal.App.4th 60, 78-79; In re Sloans Estate (1935) 7 Cal.App.2d 319, 329.) Moreover, "`it will not be presumed that the common law was repealed by a statutory or a constitutional provision unless the language naturally and necessarily leads to that conclusion. [Citation.]" (In re Sloans Estate, supra, at p. 329; see also Theodor v. Superior Court (1972) 8 Cal.3d 77, 92.)
Contrary to State Funds interpretation, the statute does not affirmatively authorize the termination of brokerage contracts. It also does not provide a "safe harbor" against the application of other laws. It only sets forth certain requirements for termination. The main part of the statute provides: "After a written agency or written brokerage contract, where the broker-agent represents the insurer, has been in effect for at least one year, it shall not be terminated or amended by an insurer, except by mutual agreement, unless 120 days advance written notice has been given by the insurer to the broker-agent." (§ 769, subd. (a).)
Based on this and other language, the statute contains only a mandatory rule requiring 120 days written notice prior to termination and other supplemental rules dealing with policies that cannot be placed with another insurer. (See Vikco Ins. Services, Inc. v. Ohio Indem. Co. (1999) 70 Cal.App.4th 55, 62.) State Fund argues that section 769 entirely supersedes any additional requirements that may apply under the common law doctrine of fair procedure. The statute, however, does not provide broad immunity from liability for all wrongs caused by the termination so long as the insurer gives 120 days notice.
Furthermore, as noted by Cumbre, the statute applies only to written brokerage contracts that have been in effect for at least one year. (§ 769, subd. (a).) State Funds broker and preferred broker agreements are one-year contracts. The parties executed new contracts on an annual basis. Although State Fund maintains an ongoing business relationship with its brokers, even sometimes in the absence of a duly executed contract for a particular year, the relationship is not subject to section 769. Section 769 explicitly applies to brokerage contracts that have been in effect for over a year. Because State Funds broker agreements do not fall under this description, State Funds rights and obligations, technically, are not governed by its provisions.
The fact that State Fund voluntarily complied with the requirements of section 769 by giving 120 days notice and paying commissions on existing policies does not establish conclusively that its conduct was reasonable or fair for all other purposes. As stated, compliance with section 769 does not immunize State Fund from claims of violations of other applicable rules — whether derived from statute or common law.
4. Cause of Action Under the UCL
Cumbre argues that it was entitled to summary adjudication on its fourth cause of action, in which it alleged that State Fund violated its duty of fair procedure by failing to comply with the UCL. Cumbres claim under the UCL is an alternative theory for recovery based on the same underlying facts.
The UCL was enacted "to protect both consumers and competitors by promoting fair competition in commercial markets for goods and services. [Citation.]" (Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 949.) Unfair competition is defined as any act or practice that is unlawful, unfair, or fraudulent. (Bus. & Prof. Code, § 17200.)
Cumbre contends that State Funds conduct was both unlawful and unfair under the UCL. As noted by Cumbre, any law or regulation, including a rule established by common law, can serve as the predicate for "unlawful" conduct under the UCL. (Paulus v. Bob Lynch Ford, Inc. (2006) 139 Cal.App.4th 659, 681.) To the extent that this cause of action turns on the preliminary determination of whether State Fund was unlawful (i.e., violated its duty to comply with the common law doctrine of fair procedure), there remained issues of material fact, as discussed above, and neither party was entitled to judgment as a matter of law.
A business practice is "unfair" under the UCL when it offends established public policy, constitutes an immoral or unethical business practice, or causes substantial injury to consumers. (Smith v. State Farm Mutual Automobile Ins. Co. (2001) 93 Cal.App.4th 700, 718.) "One test for determining an `unfair practice is that the gravity of the harm to the victim outweighs the utility of the defendants conduct." (People ex rel. Renne v. Servantes (2001) 86 Cal.App.4th 1081, 1095.)
As noted by Cumbre, its claim that State Funds conduct constituted an unfair business practice under the UCL was an alternative basis for relief, independent of its common law claim. While the same facts and similar considerations apply (i.e., the economic impact on Cumbre and the purpose and effect of State Funds termination program), the UCL involves a separate balancing test. Also, unlike with the fair procedure claim, which evaluates State Funds decision to determine whether it was arbitrary, the unfair business practice claim also evaluates State Funds decision for utility or effectiveness in accomplishing its intended purpose.
As noted by Cumbre, while the scope of conduct that may violate the UCL is broad, the remedies afforded under the statute are limited. Because an action under the UCL is equitable in nature, the remedies primarily are limited to injunctive relief and restitution. (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1144.)
Neither party presented conclusive evidence or argument to warrant summary adjudication on this cause of action. State Fund simply contends that the common law doctrine of fair procedure does not apply and, therefore, cannot provide the basis for a claim under the UCL. State Fund also contends that its compliance with section 769 provided a safe harbor against any claim under the UCL. Based on our discussion above, both of these arguments lack merit.
Cumbre contends that its evidence showed that it suffered sufficient economic harm and State Funds program was ineffective in accomplishing its purpose of minimizing losses. These matters, however, were disputed and the evidence was inconclusive at this stage. Because there remained disputed issues of material fact as to whether State Funds conduct constituted an unfair or unlawful business practice under the UCL, neither party was entitled to judgment as a matter of law. The trial court erred in granting State Funds motion for summary judgment or adjudication on Cumbres fourth cause of action.
5. Cause of Action Under Section 1983
Cumbre argues that the trial court erred in sustaining State Funds demurrer on its cause of action under section 1983.
Before dispensing with the other causes of action by summary judgment, the trial court sustained State Funds demurrer on Cumbres fifth cause of action under section 1983 on the ground that Cumbre failed to allege facts sufficient to state a cause of action. Because a demurrer tests the legal sufficiency of a complaint, we will review the complaint de novo to determine whether it states a viable cause of action. (See Mosley v. San Bernardino City Unified School Dist. (2005) 134 Cal.App.4th 1260, 1263.)
To state a cause of action under section 1983, the plaintiff must show, first, that the conduct complained of was committed by a person acting under color of state law and, second, that the conduct deprived the person of rights or privileges under the Constitution or law of the United States. (Irwin v. City of Hemet (1994) 22 Cal.App.4th 507, 516, citing Parratt v. Taylor (1981) 451 U.S. 527, 535.) Although State Funds unique status as a state agency functioning as a private insurer arguably may preclude it from qualifying as a person acting under color of state law, State Fund did not raise an issue as to this element.
The demurrer concerned only the second element. State Fund contended that Cumbre failed to identify a fundamental right protected under federal law. Relying on Retail, Wholesale and Department Store U. v. N.L.R.B. (D.C. Cir. 1972) 466 F.2d 380 (Retail Union), Cumbre claimed that State Fund, as a governmental agency, violated the rule against depriving a person of a benefit or advantage on the basis of retroactive criteria. Cumbre also claimed that State Fund violated its First Amendment right by impeding its access to the courts.
A. Retroactive Criteria
Cumbre appears to claim that, even if State Funds application of retroactive criteria does not violate a fundamental right under the federal Constitution and laws, it violated the rule established in the Retail Union case. The Retain Union case involved the retroactive effect of rules applied in an administrative proceeding. As mentioned earlier in this opinion, Cumbre fails to provide adequate authority to support its effort to extend the rules prohibiting the retroactive application of statutory laws and administrative rules to an insurers decision to terminate brokerage contracts based on the brokers past performance.
The general rule against the retroactive application of a statute or administrative rule is well established. "The general rule, both in California and in the United States, is that absent some clear indication to the contrary, any change in the law is presumed to have prospective application only. `The principle that statutes operate only prospectively, while judicial decisions operate retrospectively, is familiar to every law student. [Citations.] This Court has often pointed out: "[T]he first rule of construction is that legislation must be considered as addressed to the future, not to the past. . . . The rule has been expressed in varying degrees of strength but always of one import, that a retrospective operation will not be given to a statute which interferes with antecedent rights . . . unless such be `the unequivocal and inflexible import of the terms, and the manifest intention of the legislature." [Citations.] [Citations.]" (Rosasco v. Commission on Judicial Performance (2000) 82 Cal.App.4th 315, 320, citing United States v. Security Industrial Bank (1982) 459 U.S. 70, 79, and Evangelatos v. Superior Court (1988) 44 Cal.3d 1188, 1207.) The presumption against retroactivity also applies to administrative rules and regulations. (See Bowen v. Georgetown University Hosp. (1988) 488 U.S. 204, 208; Union of American Physicians & Dentists v. Kizer (1990) 223 Cal.App.3d 490, 504-505.)
In determining whether a statute or administrative rule applies retroactively, the courts evaluate the rule on a case-by-case basis in light of a few relevant considerations. For example, in an immigration case, the United States Supreme Court explained: "A statute has retroactive effect when it `"takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already past . . . ." [Citations.] As we have repeatedly counseled, the judgment whether a particular statute acts retroactively `should be informed and guided by "familiar considerations of fair notice, reasonable reliance, and settled expectations." [Citations.]" (I.N.S. v. St. Cyr (2001) 533 U.S. 289, 321.)
Unlike with statutory laws and administrative rules, there is no presumption against retroactivity in the context of judicial or quasi-judicial decisions. (See Claxton v. Waters (2004) 34 Cal.4th 367, 378.) Generally, in each case, some balancing test is used to determine whether retroactive application of the rule is appropriate. (See, e.g., id. at pp. 378-379; People v. Carrera (1989) 49 Cal.3d 291, 328.) As to the question of the retroactive effect of new rules applied in a quasi-judicial administrative proceeding, the court in Retail Union set forth a five-part balancing test, which apparently is the prevailing approach in the federal courts. (Retail Union, supra, 466 F.2d at p. 390; but see Microcomputer Technology Institute v. Riley (5th Cir. 1998) 139 F.3d 1044, 1050 .)
Cumbre suggests that we apply the Retail Union approach here. Cumbre, however, fails to appreciate where Retail Union fits into the overall scheme of decisional law addressing the question of retroactivity. Cumbre also fails to appreciate the need to preserve the distinction between public and private action. While a private corporation may be forced to comply with a certain rule (e.g., the common law doctrine of fair procedure) to advance a significant public interest, this does not alter the essential nature of the parties or subject matter involved. Although, as stated earlier, State Funds termination of Cumbres preferred broker status involved both "quasi-legislative" and "quasi-judicial" components, State Fund was not acting as a legislative, judicial, or administrative body. Instead, State Fund was acting as a private insurer. (See Notrica v. State Compensation Ins. Fund, supra, 70 Cal.App.4th at p. 941; P.W. Stephens, Inc. v. State Compensation Ins. Fund (1994) 21 Cal.App.4th 1833, 1836.) Also, the subject matter involved was the termination of a brokerage contract. Cumbre has not provided any authority for applying the rules governing the retroactive effect of legislative, judicial, and administrative decisions to the criteria that a private insurer uses in terminating a brokerage contract. Unless otherwise provided by law or by agreement, there is no bar against private entities terminating business relationships based on past performance.
B. Access to the Courts
Cumbre also claims that State Funds conduct constituted an infringement upon its constitutional right to access to the courts. Cumbres claim is based on State Funds offer of reinstatement which included the following condition: "Brokerages engaged in litigation with State Fund which arises in whole or in part out of State Funds termination of any brokers or State Funds broker rehabilitation program are not eligible for reinstatement." Cumbre argues that, because State Fund conditioned reinstatement on forfeiting its rights to recover damages through litigation, State Fund impermissibly infringed upon its constitutional right to petition the government for redress of grievances.
State Fund responds that a government entity can condition a benefit, here, the reinstatement of the broker agreement, on the dismissal of a lawsuit. To suggest otherwise, State Fund contends, is to prevent government entities from ever settling lawsuits.
Cumbre disagrees with State Funds description of the condition as a settlement offer. The condition appears in a letter sent to approximately 140 brokers, who were given the same option, regardless of whether they were involved in a lawsuit with State Fund. The condition did not arise out of any settlement negotiations. Cumbre argues that the allegations in its fifth amendment were sufficient to state a claim under section 1983.
Although we reject State Funds attempt to describe the condition as a settlement offer, we cannot conclude that Cumbre has pled a sufficient denial-of-access claim. It is well established that the right of access to the courts is protected under the First Amendment right to petition the government for redress of grievances. (McDonald v. Smith (1985) 472 U.S. 479, 482-484.) Generally, denial-of-access claims fall under one of two categories, namely, the denial of some relief in the past (i.e., a backward-looking claim) and the frustration of a present remedy (i.e., a forward-looking claim). (See Christopher v. Harbury (2002) 536 U.S. 403, 413-414.) Each category involves a different objective. The object of the first category of claims is to obtain the relief that was denied and the object of the second category of claims is to remove any obstacles and place the plaintiff in a position to pursue a separate claim for relief. (Ibid.) In both cases, the ultimate justification is "to provide some effective vindication for a separate and distinct right to seek judicial relief for some wrong." (Id. at pp. 414-415.)
State Fund relies on Jersey v. John Muir Medical Center (2002) 97 Cal.App.4th 814, which held that an employer could condition continued employment on the employees dismissal of his lawsuit. Jersey, however, is distinguishable because the case involved a lawsuit brought by the employee against a patient, not the employer. Such an agreement "would not exempt the hospital from the consequences of its own misconduct, . . ." (Id. at p. 828; see also Civ. Code, § 1668; Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 100.) In this case, State Funds conditional reinstatement offer asked Cumbre to relinquish its right to bring a lawsuit against it for its own alleged misconduct, not the misconduct of a third party.
Cumbres denial-of-access claim did not fall under either category. Cumbres claim was not a forward-looking claim because it neither asserted the denial of a present remedy nor sought the removal of any obstacles in the way of its lawsuit. In fact, nothing barred Cumbre from seeking an adequate remedy in the present action.
Also, because of the availability of the present action, Cumbre cannot maintain that it was denied some past relief. When the access claim looks backward, "the complaint must identify a remedy that may be awarded as recompense but not otherwise available in some suit that may yet be brought. There is, after all, no point in spending time and money to establish the facts constituting denial of access when a plaintiff would end up just as well off after litigating a simpler case without the denial-of-access element." (Christopher v. Harbury, supra, 536 U.S. at p. 415.) In this case, while the conditional reinstatement offer may have burdened Cumbres right of access to the courts, it did not prevent Cumbre from filing the present action. Moreover, the relief sought in the denial-of-access claim was essentially the same as the relief sought in its other claims. For instance, in both its fair procedure claim and denial-of-access claim, Cumbre sought compensation for commissions that it would have earned had State Fund not terminated its status as a preferred broker. The availability of an adequate remedy in the present lawsuit rendered the denial-of-access cause of action unnecessary.
We conclude that Cumbre cannot establish that State Funds conditional reinstatement offer resulted in a deprivation of a constitutional right.
6. Cause of Action for Breach of Contract
Cumbre argues that the trial court also erred in sustaining State Funds demurrer on the cause of action for breach of contract in its fourth amended complaint. Cumbre specifically contends that, "if [it] pleaded facts sufficient to give rise to a duty of fair procedure, as the trial court found, then the termination without cause provision was superseded by the duty of fair procedure as held in Potvin." State Fund rejects this argument and maintains that Cumbre failed to state a sufficient claim for breach of contract.
As stated, we review de novo the trial courts determination as to the legal sufficiency of the complaint. (Tilbury Constructors, Inc. v. State Compensation Ins. Fund, supra, 137 Cal.App.4th at p. 472.)
In Potvin, a physician alleged three causes of action in order to challenge an insurance companys decision to terminate his preferred provider status: a violation of statute, a violation of fair procedure, and a breach of contract. The trial court granted the insurance companys motion for summary judgment on all three causes of action. On the breach of contract claim, the trial court concluded that the insurance company validly had exercised its right to terminate the agreement without cause and with 30 days written notice. Both the Court of Appeal and the California Supreme Court left undisturbed the trial courts ruling on the breach of contract claim. (Potvin, supra, 22 Cal.4th at p. 1065.)
Although the California Supreme Court held that the termination violated the physicians common law right to fair procedure, that holding had no effect on the physicians breach of contract claim. In this case, Cumbre suggests that we modify the broker agreement to include a duty to comply with the requirements of fair procedure so that State Funds breach of that duty would constitute not only a violation of the common law doctrine, but also a breach of contract. As argued by State Fund, the California Supreme Courts holding in Potvin does not authorize such modification.
In Potvin, in addressing the insurance companys argument that the physician waived its right to fair procedure by agreeing to the "without cause" provision of the proffered provider agreement, the California Supreme Court held only that the "without cause" provision in the agreement was unenforceable to the extent it was inconsistent with the physicians common law right to fair procedure. (Potvin, supra, 22 Cal.4th at p. 1073.) In arriving at its decision, the court considered a New Hampshire case involving similar facts where the physician claimed that the "without cause" provision was void against public policy. (Ibid., citing Harper v. Healthsource New Hampshire, supra, 674 A.2d at pp. 964-966 (hereafter Harper).) In Harper, the New Hampshire Supreme Court held that the provision was unenforceable if it violated the implied duty of good faith and fair dealing or was otherwise contrary to public policy. (Harper, supra, at p. 966.)
While both California and New Hampshire cases authorize a remedy to challenge such decisions, they do not allow the plaintiff to assert a breach of contract claim without a violation of any provision of the contract itself. In Harper, the court explained, "A terminated physician is entitled to review of the termination decision under this standard, whether the termination was for cause, or without cause. This rule does not eliminate a health maintenance organizations contractual right to terminate its relationship with a physician without cause. [Citation.] If a physicians relationship, however, is terminated without cause and the physician believes that the decision to terminate was, in truth, made in bad faith or based upon some factor that would render the decision contrary to public policy, then the physician is entitled to review of the decision.
[¶] Harper is entitled to proceed upon the merits of his claim that Healthsources decision to terminate its relationship with him was made in bad faith or violated public policy." (Harper, supra, 674 A.2d at p. 966, emphasis added.) The appropriate claim is under one of these alternative theories, not as a cause of action for a breach of contract.
In this case, although the common law right of fair procedure may apply, and, therefore, to some limited extent impose greater rights and obligations upon the parties than originally anticipated, the right to fair procedure does not transform the contractual relationship from one terminable without cause to one that can be terminated only on reasonable grounds. This is beyond what fair procedure requires. The right to fair procedure requires that decisions be "both substantively rational and procedurally fair." (Pinsker II, supra, 12 Cal.3d at p. 550.) Cumbre appears to equate "substantively rational" with "sufficient cause for termination." The term "substantively rational," however, means that the decision itself (i.e., the substance) must not be irrational. It provides a low threshold to guard against arbitrary or discriminatory decisions. The term in no way imposes some additional unbargained-for obligation that the decision must be based on sufficient justification or made with cause.
Because State Fund complied with the terms of the broker agreement, there was no breach of contract. The trial court, therefore, properly granted State Funds demurrer without leave to amend this cause of action.
7. Disposition
We reverse the trial courts decision granting State Funds motion for summary judgment or summary adjudication as to Cumbres causes of action under the doctrine of fair procedure and under the UCL. We affirm the trial courts judgment in all other respects. Cumbre shall recover its costs on appeal.
We concur:
McKinster, J.
Richli, J.