California Bar Journal
OFFICIAL PUBLICATION OF THE STATE BAR OF CALIFORNIA — OCTOBER 2000
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Supreme Court
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which is up from his single dissent last term. All of the other justices had significantly more dissents: Justice Stanley Mosk dissented in about 17 percent of the cases, Justice Joyce Kennard in 14 percent of the cases, Justice Kathryn Werdegar in nine percent of the cases, Justice Janice Brown in eight percent of the cases, Justice Marvin  Baxter in six percent of the cases, and Justice Ming Chin in five percent of the cases.

The statistics indicate that the most significant correlations in voting patterns are between Justices Mosk, Kennard and Werdegar, on the one hand, and Justices Baxter, Brown and Chin, on the other hand. In close cases, the Chief is still the most important swing vote, confirming his central role on the court.

Now to the highlights from a few of the term’s more interesting cases:

Dispersion of powers

The most important protection against governmental abuse is the dispersion of powers between different branches of government (i.e., separation of powers), between different levels of government (i.e., federalism and the division of powers between state and local governments), and between government and the people (i.e., bills of rights and, in many states, the powers of the initiative and referendum). Several decisions by the court this term raise questions about whether too much power has been ceded by the court to the legislative branch of government.

The first case is Senate of the State of California v. Bill Jones (1999) 21 Cal.4th 1142, where the court held that Proposition 24, the “Let the Voters Decide Act of 2000,” violated the single-subject rule. Proposition 24 contained four substantive provisions: Section 3 reduced legislative compensation and made further increases subject to voter approval. Section 4 reduced travel and living expenses for legislators and provided that further increases were subject to voter approval. Section 5 provided that legislators would forfeit some of their salary and reimbursement for travel and living expenses if the legislature failed to pass the budget bill by the constitutional deadline and that forfeited payments could be paid to legislators retroactively only if approved by the voters. Finally, Section 6 transferred control over reapportionment from the legislature to the Supreme Court, limited the factors to be used in reapportionment to essentially objective criteria, and subjected the Supreme Court’s plan to voter approval.

An original proceeding in the Supreme Court of California was filed on Oct. 28, 1999, seeking an order to keep Proposition 24 from appearing on the March 7, 2000, election ballot. Acting with unusual speed, the court issued an order to show cause on Nov. 10, 1999, established an expedited briefing schedule, and rendered its decision only one month later on Dec. 13, 1999.

Chief Justice George wrote the court’s opinion for a 5-2 majority, with a dissent filed by Justice Kennard in which Justice Brown concurred. The Chief’s opinion sets forth the traditional standard for assessing single-subject challenges, that is, whether all of the parts of an initiative are “reasonably germane” to each other and to the general purpose or object of the initiative. In the court’s view, “when viewed from a realistic and commonsense perspective, the provisions of Proposition 24 appear to embrace at least two distinct subjects — state officers’ compensation and reapportionment.” Id., 21 Cal.4th at 1161.

The court correctly rejected the argument advanced by proponents of Proposition 24 that the common theme linking the proposition’s provisions was the requirement of voter approval. As the court noted, the topic of “voter approval” is too broad to serve as a constitutionally acceptable unifying subject for purposes of the single-subject rule since too many entirely unconnected provisions could be swept under such a broad topic.

The proponents also argued that all of the provisions dealt with the problem of “legislative self-interest.” The court rejected this overarching topic on the somewhat weaker ground that there is no legislative self-interest problem under current law in how legislative salaries are set since those salaries are set by the California Citizens Compensation Commission, the members of which are appointed by the governor and may not be current or former legislators.

J. Clark KelsoThe weakest part of the opinion rejected the contention that Proposition 24’s provisions could be tied together under the theme of “incumbency reform.” The problem for the court here was that it had previously used “incumbency reform” in Legislature v. Eu (1991) 54 Cal.3d 492, to approve the term limits initiative which, among other things, reduced legislative pensions, thereby making an extended career in public office less available and less attractive to incumbent legislators. In rejecting incumbency reform as a basis for supporting Proposition 24, the court explained that Proposition 24 “simply combine[s] a measure that would transfer the reapportionment authority from the legislature to this court with unrelated provisions that would make various changes pertaining to the compensation of legislators and other state officers.” State Senate, 21 Cal.4th at 1167. This reasoning is not particularly convincing. Under Legislature v. Eu, Proposition 24’s reductions in legislative salaries would seem to be related to incumbency reform, perhaps even more related than the pension reform provision in the term limits initiative upheld in Eu. And, Proposition 24’s transfer of reapportionment from the legislature to the Supreme Court, particularly when combined with a modification of the standards for reapportionment, must be seen as a form of incumbency reform, since it is common knowledge that incumbency protection is one of the primary goals of reapportionment from a legislative perspective.

There is no question but that State Senate represents a huge victory for the legislature vis-a-vis the initiative process and the voters. Questions have been raised by some whether the decision had more to do with the politics of a court that had become too dependent upon the legislature for full budgets than it did with a proper interpretation of the single- subject rule. We won’t know the answer to those questions until we see how the court deals with other single-subject challenges and whether it ultimately appears that the court’s decision in State Senate is an aberrational gift to the legislature or is a principled application of single-subject precedents.

The next important case dealing with separation of powers issues is Obrien v. Jones (2000) 23 Cal.4th 40, where the court upheld the constitutionality of a statute that took away from the Supreme Court the power to appoint all of the members of the State Bar Court in favor of an appointment system in which, of the five judges of State Bar Court hearing department, only two judges were appointed by the court, one was appointed by the governor, one by the Senate committee on rules, and one by the Speaker of the Assembly. It would seem at first blush that a power as central to the judiciary’s core as the appointment of subordinate officers to the State Bar Court would be exclusively held by the judicial branch and that the legislature’s attempt to arrogate to itself that appointment power would violate the separation of powers.

In a close 4-3 decision, however, the court held that in the unique context of the State Bar disciplinary system — that is, a context in which the court has historically permitted some legislative involvement — separation of powers was not violated so long as the court retained its ultimate power over the structure and operations of the State Bar Court. The majority reasoned that it retained sufficient control over appointments because (1) the non-judicial appointing authorities were statutorily required to make appointments in light of the same set of statutory factors as had previously existed when all appointments were made by the court, and (2) the court would continue to require that all appointees be screened, evaluated and approved as meeting those statutory factors by an Applicant Evaluation and Nomination Committee, the members of which are appointed by the court. The opinion also noted that the court still appoints all members of the State Bar Court review department, suggesting that any problems with the hearing department could essentially be cured by the review department.

Two dissents were filed, one authored by Justice Kennard and joined by Justice Werdegar, and the second authored by Justice Brown. The dissenting judges believed that vesting the appointment authority for three of five members of the State Bar Court hearing department in the governor, Senate rules committee, and Speaker violated separation of powers.

It is somewhat ironic that the majority took the position that this new appointment process was constitutional in large part because the court purported to retain for itself the power to review and approve the non-judicial appointments, a review and approval process that itself seems to complicate even further the interconnections between the court, the governor and the legislature.   For example, one can reasonably wonder how the governor, Senate rules committee, and Speaker would react to having one of their nominees rejected by the Applicant Nomination and Evaluation Committee or rejected by the court itself. And one can reasonably wonder whether the Applicant Nomination and Evaluation Committee and the court will have the self-discipline to reject unqualified nominees when a rejection might be followed by retaliation by the appointing authority. Even more serious, even if an appointee is qualified, won’t the appointee feel beholden to the appointing authority? At a minimum, won’t there be an appearance of being beholden to the appointing authority?

These decisions, and a few others which I don’t have space to write about, raise concerns about whether the court is being sufficiently attentive to the concentration of powers in the legislative branch of government. The court protected the legislature from an incumbency reform initiative and permitted the legislature to become more involved in the operation of the State Bar’s disciplinary system.  No wonder the court is so popular with legislators.

Business cases

One of the burning issues under California’s Unfair Competition Law (“UCL”) has been whether 17203 of the Business and Professions Code authorized the remedy of disgorgement of the defendant’s profits into a fluid recovery fund. The court held this year that it does not authorize that remedy.

A little background will set the stage. In addition to injunctive relief, 17203 authorizes restitution, which can involve an order requiring the defendant to disgorge unjust profits received as a result of an unfair practice. The UCL also permits “representative” actions in which a private person as the plaintiff seeks relief on behalf of persons other than or in addition to the plaintiff. Bus. & Prof. Code 17204. For several years now, plaintiffs have been trying to combine the representative action provision with disgorgement to create the equivalent of a fluid recovery fund remedy without satisfying the requirements of a class action. Two court of appeal decisions had previously approved fluid recoveries in UCL actions that had not been certified as class actions. People v. Powers (1992) 2 Cal.App.4th 330; People ex rel. Smith v. Parkmerced Co. (1988) 198 Cal.App.3d 683.

In Kraus v. Trinity Management Services, Inc. (2000) 23 Cal.4th 116, the court rejected the fluid recovery fund as a remedial device in a representative action under the UCL absent certification of a class. A few individual plaintiffs filed suit on their own behalf and on behalf of present and former tenants of the defendants. Among other things, the defendants required tenants to pay unlawful nonrefundable security deposits in the amount of $100 at the time of signing the lease. The trial court entered an order requiring defendants to disgorge all of those deposits received within the four-year statute of limitations period, which equaled $447,000. This amount was to be placed in a fluid recovery fund. Pursuant to the court’s order, the defendants were supposed to use “due diligence” for 90 days to find all present and former tenants who had paid the unlawful deposits and to pay each person found $100. The residual funds were to be organized and administered as a trust fund for the purpose of providing financial assistance for the advancement of legal rights and interests of residential tenants in the City and County of San Francisco.

The court reversed this remedial order by a vote of 6-1 with an opinion by Justice Baxter for the court and a dissenting opinion by Justice Werdegar. Critical to the court’s decision was the distinction between disgorgement and restitution in the context of an action under the UCL.   Restitution, which 17203 clearly authorizes, involves restoring to a particular victim unjust profits taken by the defendant from the victim. Disgorgement, by contrast, involves taking all unjust profits away from a defendant resulting from an unfair practice without regard to whether there is a particular victim to whom the unjust profits should be paid. If the disgorged profits can be paid to victims by way of restitution, so much the better, but any disgorged profits that cannot be paid to particular victims may be put to other uses as part of a fluid recovery fund (which is an application of the cy pres doctrine to class actions).

The majority explained that when the legislature added restitution to the list of UCL remedies in the 1970s, there was no authority for a fluid recovery and that the legislature is therefore unlikely to have intended fluid recoveries under the UCL. The court’s conclusion was fortified when the legislature subsequently endorsed fluid recoveries in class actions by virtue of the 1993 enactment of what is now C.C.P. 384, and did not add any language to extend that type of remedy to a representative action under the UCL.

Rejecting the fluid recovery fund remedy under the UCL will make it more difficult for plaintiffs to use the UCL as an alternative to a class action. However, all is not lost for plaintiffs who desire to use the UCL to provide restitution to injured consumers who are not parties to the action. The court in Kraus clearly approves using a representative action under the UCL to provide restitution to non-plaintiff consumers who were injured by an unfair practice. Justice Baxter explained that “the trial court should order defendants to identify, locate, and repay to each former tenant charged [unlawful fees] the full amount of funds improperly acquired from that tenant, retaining the power to supervise defendants’ efforts to ensure that all reasonable means are used to comply with the court’s directives.” Id., 23 Cal.4th at 138. Whether this remedy will be sufficient to attract private attorneys general to bring representative actions under the UCL remains to be seen. For the time being, however, the decision in Kraus is a significant victory for business defendants under the UCL.

Business won another big victory in Asmus v. Pacific Bell (2000) 23 Cal.4th 1, a case involving the validity of an employer’s unilateral termination of an employment policy that had previously been unilaterally adopted by the employer. In 1986, Pacific Bell adopted a “Management Employment Security Policy” which provided that Pacific Bell would “offer all management employees who continue to meet our changing business expectations employment security through reassignment to and retraining for other management positions, even if their present jobs are eliminated. This policy will be maintained so long as there is no change that will materially affect Pacific Bell’s business plan achievement.” Although there was no change materially affecting Pacific Bell’s business plan achievement, Pacific Bell unilaterally discontinued the policy in 1992, precipitating a lawsuit.

The majority held that Pacific Bell could unilaterally terminate the policy simply by giving reasonable notice to its employees. In support of this result, the majority held, somewhat unconvincingly, that the final clause, which promised to maintain the policy so long as there was no material change affecting Pacific Bell’s business plan, was so indeterminate as to convert the clause into a promise of indefinite duration. Because it was a unilateral promise of indefinite duration, it could be terminated on reasonable notice.

Chief Justice George authored a strong dissent which was joined by Justices Mosk and Kennard. Among other things, the Chief argued that the majority’s holding is contrary to general principles of contract law regarding modification of contracts which ordinarily require additional consideration and mutual assent to the modification (especially where the modification amounts to one party simply agreeing to forego an existing contract right). The Chief properly warns that the majority’s holding will “undermine the efficacy of implied-in-fact employment agreements” since “employer promises expressly set forth in employment manuals and handbooks, or in policy memoranda, would not be enduring promises but rather hollow gestures that could be repudiated by an employer once they were viewed as no longer necessary or in the interest of the employer.” Id., 23Cal.4th at 38-39 (George, C.J., dissenting).

In addition to its obvious significance to employment contracts, Asmus may create ripples throughout the law of contracts if its principles are applied to other consumer contracts. Will a bank, credit card company, online service, or HMO have similar power unilaterally to terminate unilaterally promised benefits? The court will clearly have to face this issue in the near future, and its resolution is far from clear in light of the close division on the court in Asmus. In the meantime, casebook authors are busy adding Asmus to their yearly supplements.

J. Clark Kelso is a professor of law and director of the Institute for Legislative Practice, McGeorge School of Law. He most recently served as acting insurance commissioner of California.