This week, the Los Angeles Court of Appeal decided an important case upholding the requirement that a plaintiff who wishes to challenge an assessment under Proposition 218 must exhaust administrative remedies before suit. In Hill RHF Housing Partners, L.P. v. City of Los Angeles, et al., the Court held that to challenge adoption or re-adoption of a business improvement district (BID) assessment, an assessed property owner must appear at the public hearing and articulate its legal theories. Simply voting “no” is not enough. This is useful and much-needed authority clarifying these procedural requirements, and will be often cited in future assessment and other cases challenging public revenues. [Disclosure: CH&W represented two BIDs in the case.]

The Property and Business Improvement District Law of 1994 (PBID Law), and Proposition 218, authorize cities and counties to establish business improvement districts to assess property  to fund special services for the benefit of assessed property owners, such as supplemental security, marketing, and beautification. Here, owners of residential rental property for low-income seniors sued to dissolve the Downtown Center Business Improvement District (DCBID), serving a 65-block area in Downtown Los Angeles, and the San Pedro Historic Waterfront Business Improvement District (SPBID).

The Los Angeles Superior Court ruled against the property owners on the merits, most fundamentally because Dahms v. Downtown Pomona Property & Business Improvement District “eviscerates” their legal position, in the words of trial judge, the Hon. Mitchell L. Beckloff. Dahms upheld a substantially similar BID in Pomona against a Proposition 218 challenge. The trial court found the DCBID and SPBID’s engineer’s reports and district management plans adequately distinguished special from general benefits flowing from their activities, evaluated the benefits conferred on parcels, and properly allocated the assessments in proportion to the special benefit each parcel received, and provided solid record support for these necessary findings under Proposition 218.

The Court of Appeal affirmed, but only for the plaintiffs’ failure to exhaust administrative remedies. The Court found while the property owners voted against renewal of the BIDS, they did not make a record of the reasons for their objection. Proposition 218 and its implementing statute require an assessing agency to mail notice to the record owner of every assessed parcel of the proposed assessment and the date, time, and location of a public hearing on the proposal. The notice must summarize the procedures for completion, return, and tabulation of ballots, and that a majority protest will defeat the assessment. At the hearing, the assessing agency must “consider all protests against the proposed assessment and tabulate the ballots.” Prop. 218’s implementing statute provides that “[a]t the public hearing, any person shall be permitted to present written or oral testimony.” The PBID Law has similar notice-and-hearing requirements for the formation and renewal of BIDs.

The Court of Appeal’s opinion recites general jurisdictional requirements for exhaustion of administrative remedies, and the need for agencies to be able to reach a reasoned and final conclusion on each and every issue within its jurisdiction before a plaintiff can sue. Citing a property tax case, the Court wrote: “As in Williams & Fickett, we conclude that the procedure outlined in the PBID Law ‘bespeaks a legislative determination that the [City] should, in the first instance, pass on’ the questions Hill, Olive, and Mesa present in their petitions, ‘or decide that it need not do so.’” Voting against the assessments without participating in the hearing and identifying one’s concerns was not sufficient to exhaust that process. The Court explains that allowing a simple “no” vote to constitute exhaustion would frustrate the purpose of the exhaustion rule to allow an agency to consider all concerns and to address them, perhaps avoiding litigation or, at least, making a complete record of both sides of a dispute to assist judicial review.

This case offers useful guidance. For those representing BIDs and assessing cities and counties in litigation, it’s a reminder to review the administrative record carefully to ensure there was adequate exhaustion of remedies. If not, you may be able to resolve your matter quickly and efficiently on a motion for judgment on the pleadings or even demurrer. And, of course, advise your agencies early and often of their procedural obligations under the PBID Law and Proposition 218 and its implementing statute for mailed notice and public hearings for proposed assessments.


The San Francisco Court of Appeal issued the third landmark local government finance decision in two days today in City and County of San Francisco v. All Persons Interested in the Matter of Proposition C. [A blog post on one appears here and we’ll have one up on the other shortly.] The case concludes that special taxes do not require two-thirds voter approval if proposed by initiative under any of Prop. 13, Prop. 218, or San Francisco’s charter. [Disclosure: CH&W represents the County of Alameda in a case challenging a special tax approved by less than two-thirds of its voters in March 2020.]

It follows on a 2017 decision of the California Supreme Court in California Cannabis Coalition v. City of Upland, regarding Prop. 218. That case concluded that a provision of that 1998 initiative amendment to California’s Constitution requiring local general taxes (those which can be used in the discretion of the legislative body) to appear on general election ballots when city council or board of supervisors seats are contested did not apply to initiative tax proposals because “local government” did not include the electorate exercising the initiative power.

Here’s my initial analysis of the decision.

Facts: San Francisco voters approved Measure C in 2018 to raise a business license tax to fund homeless services. It passed by 61% and SF filed a validation action to test whether it could be enforced despite the lack of two-thirds-voter approval. The California Business Properties Association, the Howard Jarvis Taxpayers Association, and the California Business Roundtable answered. The case was tried on cross motions for judgment on the pleadings and the trial court ruled for the City, citing Upland.

Claims: On appeal, the Business Associations argued that two-thirds was required by Prop. 13, Prop. 218, and the City Charter, which extends the initiative power to measures “within the powers conferred upon the Board of Supervisors to enact.”  The Court of Appeal disagreed.

Analysis:

First, the court concluded that Prop. 13 was ambiguous as to whether the two-thirds-voter approval requirement for special taxes under article XIII A, section 4 applies to the initiative power because no express reference to initiatives appears in section 4. That ambiguity allowed resort to extrinsic evidence of voters’ intent. The two-thirds voter approval requirement is in conflict with the initiative provisions of the Constitution, which require only simple majority voter approval of initiatives. Several doctrines favor construing Prop. 13 not to require two-thirds voter approval for initiative special taxes:

    • The rule against implied repeals (citing Kennedy Wholesale, Inc. v. State Bd. of Equalization, a Prop. 13 case underlying Upland)
    • The rule favoring broad construction of the initiative power
    • That the ballot materials gave no hint voters intended to restrict their initiative power
    • Procedural requirements for actions by legislative bodies are not extended to voters acting by initiative (citing Upland and Associated Home Builders etc., Inc. v. City of Livermore)
    • The Court of Appeal rejected as dictum language in Kennedy Wholesale stating that article XIII A, section 4’s text was strong evidence that “the voters knew how to impose a supermajority voting requirement upon themselves when that is what they wanted to do.”
    • The Court also cited the language from City and County of San Francisco v. Farrell narrowly construing the super-majority requirements of Prop. 13 because they are anti-majoritarian. This theory of the liberal Rose Bird court was not often cited in the years following her 1986 recall and the construction of a very conservative judiciary under 16 years of the Deukmejian and Wilson governorships. Modern California looks less and less like the red or purple state of that era and its courts, especially after the second eight years of Governor Jerry Brown, have changed, too.
    • Contemporaneous construction of Prop. 13 by the Legislature did not show intent to limit the initiative power nor did the absence of changes to the initiative provisions of the Elections Code.

Second, as to Prop. 218, the Court used these bases to conclude that its article XIII C, section 2(d) imposes the two-thirds requirement on legislative bodies, not voters:

    • The Business Associations conceded that Prop. 218 implements Prop. 13 and the two should be interpreted consistently
    • Upland’s conclusion that “local governments” as used in Prop. 218 means legislative bodies, not voters
    • Upland interpreted article XIII C, section 2(b) (regarding election timing) and it has parallel language to its section 2(d) (the two-thirds rule in issue here)
    • The rule favoring broad construction of the initiative power
    • Nothing supported the Business Associations’ effort to distinguish Upland by having “local government” exclude voters for purposes of election timing, but include them for purpose of vote thresholds
    • Nothing in Prop. 218’s ballot materials indicated an intent to limit the initiative power

Third, as to San Francisco’s charter, the Court applied the rule that procedural restrictions on legislation by legislators are not applied to the initiatives.

This is a very nice win for local government but, of course, it is not the end of the story. A trial court in Oakland reached the opposite conclusion and the appeal in that case (to Division One of the San Francisco Court of Appeal) is just now being briefed. That court could disagree. A Fresno court also ruled that the two-thirds rules applies to local government initiatives and that appeal is pending in the Court of Appeal in that city. That, too, is still in briefing. Moreover, a petition for review to the California Supreme Court is a near certainty in the San Francisco case and, given that this flurry of legal developments has its roots in the Supreme Court’s 2017 Upland decision, review is far more likely than in a typical appeal — though still a bit of a long shot, especially with Justice Chin’s vacancy on the horizon.

Still, the decision is big news for San Francisco and for local government. It got immediate press attention here and here. We’ll keep you posted as this story unfolds.

 

The San Francisco Court of Appeal upheld a victory for the Bay Area Toll Authority (the Metropolitan Transportation Commission “wearing another hat”) today in Howard Jarvis Taxpayers Association v. Bay Area Toll Authority (HJTA v. BATA). The case is a challenge to 2018’s Regional Measure 3, authorizing a $3 hike in tolls on Bay Area bridges (other than the Golden Gate) to fund 35 alternative transportation programs. The Howard Jarvis Taxpayers Association and individuals sued, arguing the toll increase was a special tax requiring two-thirds voter approval (it got 55% at the polls) or two-thirds legislative approval (it got two-thirds in the Senate, but not in the Assembly). The trial court had ruled for the government at an early stage (judgment on the pleadings, for the lawyers among us). This is an important development under Proposition 26, a 2010 initiative amendment to the California Constitution making most government revenues taxes requiring voter approval unless one of seven exceptions applies for local government fees. Only five exceptions apply to the State.

First, the Court of Appeal concluded this fee was imposed, not authorized, by the Legislature, so the State provisions of Proposition 26 apply. Proposition 26’s provisions for state taxes are largely parallel to those for local government, although the former require two-thirds approval of each house of the Legislature to adopt a tax, while the latter require majority approval of local voters to approve general taxes and two-thirds voter approval of local special taxes. The case helpfully clarifies the meanings of three terms used in Proposition 26:

  • “Enact” means to establish by legal and authoritative act (i.e., what a legislative body does);
  • “Impose” means to establish or apply by authority, also typically what a legislative body does; and,
  • “Adopt” means to accept formally and put into effect and could describe the role of the regional transportation agency in this case.

Second, the Court of Appeal found this was not a tax because it was a fee for the use of government property and those are not subject to any cost of service limit — they are one of the few revenue sources available to government that can provide discretionary revenue without voter approval.

For we appellate lawyers, there is a nice statement (in footnote 7) that the Court of Appeal can decide legal issues whether or not forfeited in the trial court and suggesting that one has to very clearly agree with a trial court ruling to forfeit the right to appeal it.

The Court of Appeal reasoned that the cost-of-service limits in the first three exceptions to Proposition 26 (for fees for benefits and privileges, services and products, and regulatory fees) do not apply to the fourth (for use of government property) and fifth (fines and penalties) for these reasons:

  • Different language is used in the first three than in the fourth and fifth.
  • It would be illogical to read the final provision of Proposition 26 regarding the burden of proof as changing the substantive standards of the measure because that would render much of the language of exceptions unnecessary, violating a rule by which courts construe statutes and initiatives.
  • Limiting fees to buy or lease state property and fines and penalties to the cost the State incurs would lead to absurd results — it may cost very little to sell an asset of great value and the goal of Proposition 26 was not to make State government sell assets for a song.
  • There is nothing by which to measure costs as to fees for use of property or as to fines. Governments set fees for property based on their rental values and set fines considering how large a fine is both fair and effective. Neither kind of fee is set only to recover particular costs.

Interestingly, the Court of Appeal devotes a lengthy footnote (number 18) to disagreeing with Zolly v. Oakland, a March 30th decision of another panel of the San Francisco Court of Appeal. Zolly overturned a win for Oakland on demurrer (another early disposition of a case) in a challenge to franchise fees its solid waste haulers pay the City but fund from fees imposed on customers. The HJTA v. BATA court held that Zolly erred to apply the cost-of-service standard to a fee for use of property. A petition for review in the California Supreme Court is pending in Zolly and the Supreme Court recently granted the plaintiffs’ lawyers an extension of time to file their answer to the petition. It is now due July 10, 2020. HJTA v. BATA’s disagreement with Zolly may make review more likely in Zolly, but Supreme Court review is unlikely nevertheless. A petition for review is likely in HJTA v. BATA, too. Review in Zolly must be granted or denied by August 7th unless the Supreme Court extends its time by 30 days, as it commonly does. A petition for review in HJTA v. BATA is due 40 days from today or by August 10th. So, we’ll know more about the status of these issues in a bit more than a month.

HJTA v. BATA is a very helpful win for the State and for local governments, nearly all of which charge for the use of their property. It also develops the law nicely for those of us who practice in this area. Things are still in motion, though, so stay tuned!

Cities around America are looking at yawning budget deficits due to the sudden economic slowdown arising from the COVID-19 pandemic. Today, Politico, a news source covering the federal government, has this piece suggesting many California cities are looking to tax cannabis commerce to close the gap.

The deadline to place measures on the November 3, 2020 ballot is August 7th, though elections officials will surely appreciate more notice. A useful model ordinance to tax cannabis activity, that reflects public health policy advice, is available here. [Disclosure: I prepared that ordinance on retainer to the Public Heath Institute.] The Public Health Institute also provides a model land use ordinance to regulate cannabis commerce, too. [Disclosure: I worked on that, too.]

The City of Grass Valley recently placed a tax on the ballot, using the Public Health Institute model. News coverage of that proposal is here. [Disclosure: CH&W serves as City Attorney of Grass Valley and wrote its ordinance.]

 

Last week, The Los Angeles City Council unanimously approved moving forward with study of a “vacancy tax” it might add to the November 2020 ballot. The Los Angeles vacancy tax would likely be modeled after Oakland’s Measure W — which voters approved in 2018 by a 70%–30% margin, meeting Proposition 218’s two-thirds threshold for special taxes — and would levy an annual tax of at least $5,000 per vacant residential unit or parcel.

A report supporting the Los Angeles vacancy tax estimates that Los Angeles has a housing vacancy rate of 6 to 7 percent, suggesting the city likely has between 85,000 and 100,000 vacant residential units. Los Angeles, like Oakland, would direct proceeds of the vacancy tax to fund services to address the homelessness crisis and other affordable housing needs.

The Los Angeles Times editorial board is unconvinced, characterizing the report the City Council relied upon as inadequate to identify the number of affected property owners and criticizing the exclusions the City Council has proposed. As cities struggle with housing demands and revenue shortfalls, those believed to have many vacant residential parcels and units might consider a vacancy tax as a tool to address both issues.

If you’ve tuned in to any local or national news this week, you know that police reform remains a hot topic. We remain committed to updating you on the latest case reports, court updates, and recent legislation. Check back soon, because this story keeps evolving!

We reported a few weeks ago that the U.S. Supreme Court was considering a number of cases for certiorari review involving qualified immunity. Despite recent tumult across the nation over police use of force policies, SCOTUS declined on Monday to reexamine the legal doctrine — at least for now. In an unsigned order, the Justices declined to hear any of nine petitions.

Four justices must vote to grant certiorari review. But only Justice Clarence Thomas dissented from denial of cert in these cases, writing the “qualified immunity doctrine appears to stray from the statutory text.” Thomas argued the judiciary’s present application of the qualified immunity doctrine “is no longer grounded in the common-law backdrop against which Congress enacted” the Civil Rights Act of 1871 Act, 42 U.S.C. § 1983, and that there is likely no basis for the objective inquiry into the existence of clearly established law forbidding the challenged conduct that our modern cases prescribe when qualified immunity is asserted as a defense to liability claims against public officers.

Despite SCOTUS’s silence, three lower federal courts revived police-excessive-force suits in the past few weeks. On June 9, the U.S. Court of Appeals for the Fourth Circuit decided Estate of Wayne A. Jones v. City of Martinsburg, et al., Case No. 18-2142, denying qualified immunity to West Virginia police officers involved in a 2013 shooting of a homeless black man walking in the street, instead of on a sidewalk as required by law. Five officers shot Jones 22 times after a confrontation in which he refused to drop a knife. The Court held the district court erred in granting the officers summary judgment on qualified immunity because “[i]n 2013, it was clearly established that law enforcement may not constitutionally use force against a secured, incapacitated person —let alone use deadly force against that person.” Jones had been “tased four times, hit in the brachial plexus (a nerve center in the neck), kicked, and placed in a choke hold.”

On June 10, the Ninth Circuit decided Jessie Lee Stoddard-Nunez v. City of Hayward, et al., Case No. 18-16403, holding a jury must decide whether a California police officer used excessive force in 2013 when he shot nine times at a passing vehicle, the driver of which he suspected of driving under the influence, killing a passenger. There too, the Court reversed summary judgment for the officer on qualified immunity, finding factual issues justifying trial abounded as to whether the vehicle swerved toward the officer or was driving away. The Court concluded: “Officers are not entitled to qualified immunity for shooting at an individual in a fleeing vehicle that does not pose a danger to them or to the public.”

And on June 8, the Fifth Circuit issued an opinion reviving a suit accusing two Rio Grande City, Texas police officers of excessive force when they tased a teen girl.

With SCOTUS deferring the issue at least for next term — and lower courts reaching conflicting rulings on the doctrine — it’s up to Congress to take on qualified immunity for alleged police misconduct. House Democrats introduced the Justice in Policing Act 2020 last week, while Senate Republicans led by South Carolina’s Tim Scott introduced the JUSTICE Act this week. While there are many differences between the bills, qualified immunity may well be the biggest sticking point. The Democratic bill would eliminate it; Republicans have said any proposed change to qualified immunity is a non-starter. The President’s Executive Order on police reform this week doesn’t even mention qualified immunity. If Congress does not address qualified immunity, we can expect this issue back on SCOTUS’s docket next year.

We will continue to keep you updated on developments in this area. Stay tuned!

The City Council in Fort Bragg, in Mendocino County, will soon consider whether to propose a November ballot measure to change its name. The city’s name honors Braxton Bragg, who became a Confederate Army general after lending his name to a military base that would become the City of Fort Bragg.

Bragg’s connection to California stems from his service during the Mexican-American War, where he served with future U.S. President Zachary Taylor. In honor of Bragg’s service, in 1857 his former commanding officer named a new military post in California after him, which would later become the City of Fort Bragg. By the Civil War, Bragg had betrayed the Union and served as a trusted military advisor to Confederate President Jefferson Davis and a general in the Confederate Army. Bragg is also the namesake of a ghost town in Texas and Fort Bragg, North Carolina, believed to be the largest military installation in the world, home to more than 50,000 active duty personnel.

Fort Bragg incorporated as a city in 1889, retaining the name of the military post. This is not the first time Fort Bragg has heard calls to change the city’s name; in 2015, state Senator Steven Glazer asked that Fort Bragg leaders consider a name change when he proposed SB539, which would have required renaming state or local property — but not cities — named after Confederate military leaders. Former Governor Jerry Brown vetoed SB539, preferring that local leaders make such changes.

General law cities may change their names under California law by an ordinance approved by four of five Council members. Several other California cities have changed their names, including Grover Beach, one of the “Five Cities” of San Luis Obispo County, which was known as Grover City until 1992, when its residents affirmed the name change by popular vote. Fort Bragg has not yet identified an alternative name to use if its voters consider and approve a change.

The “validation statutes,” Code of Civil Procedure sections 860 to 870.5, are a powerful tool public agencies (and the plaintiffs that sue them) might overlook when defending challenges to legislative acts. They provide a short statute of limitations — 60 days — and allow agencies to sue for a court ruling validating an action, to which any and all challengers must answer or be forever barred from challenging it. (Code Civ. Proc., § 870, subd. (a).) Challengers may also use the validation statutes to challenge legislative acts, but only if they meet the short statute of limitations and publish summons in a newspaper of record, among other procedural requirements. (Code Civ. Proc., § 863.)

The validation statutes apply only to public agency actions the Legislature has identified as requiring them. Even so, the Legislature has identified a wide range of actions subject to validation, including bonds and other contracts for debt (Gov. Code, § 53511), annexations (Gov. Code, § 56103), assessments under the Municipal Improvement Act of 1913 (Sts. & Hy. Code, § 10601), and formation of water reclamation districts (Wat. Code, § 50440). Chartered cities might also be empowered to require the use of the validation statutes (and their short statute of limitations) in challenges to certain actions, but there is no published authority to allow — or prohibit — this. (Reid v. City of San Diego (2018) 24 Cal.App.5th 343, 373–374.)

As the validation statutes bar later claims to “all matters therein adjudicated or which at that time could have been adjudicated” (Code Civ. Proc., § 870, subd. (a)), they also apply to bar challenges on theories usually governed by longer statutes of limitation. The Los Angeles Court of Appeal recently reaffirmed this principle in finding a conflict-of-interest challenge to a school district’s lease-leaseback agreement for a school construction project subject to validation because it challenged the validity of the underlying contract. (McGee v. Torrance Unified Sch. Dist. (May 29, 2020, B298122) __ Cal.App.5th __.) The plaintiff argued Code of Civil Procedure section 526a (the “taxpayer standing” or “taxpayer waste” statute) and Government Code section 1090 provided a separate basis for his suit outside the validation statutes, but the Court of Appeal disagreed. Because the plaintiff sought to invalidate the contracts, the Court concluded his claims were subject to the validation statutes’ procedural requirements and statute of limitations. As the school district had completed the challenged project while the plaintiff’s claims were pending, his claims were moot, too.

Thus, in any facial challenge to public agency actions — especially those involving long-term financial obligations and debt — the first question to answer is whether the challenge is subject to the validation statutes. If so, the next step is to determine whether the challenger met the short, 60-day statute to sue, no matter his theory for invalidating the action.

Today, the U.S. Supreme Court decided three cases brought by employees terminated for being gay or transgender. (Bostock v. Clayton County, Georgia.) These cases were brought as sex discrimination claims under Title VII of the Civil Rights Act of 1964. The Court held that: “An employer who fires an individual for being homosexual or transgender fires that person for traits or actions it would not have questioned in members of a different sex. Sex plays a necessary and undistinguishable role in the decision; exactly what Title VII forbids.” Thus, the Court outlawed employment discrimination based on sexual orientation and gender identity across the country.

Title VII of the Civil Rights Act of 1964 makes it:

Unlawful for an employer to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual… because of such individual’s race, color, religion, sex, or national origin.

In these cases, the employers did not dispute they fired the plaintiffs for being gay or transgender. Rather, they argued Title VII does not prevent discrimination based on sexual orientation or gender identity, i.e., that such discrimination is not “because of sex.”

Title VII had not previously been applied to sexual orientation or gender identity discrimination claims. In today’s 6-3 decision (with Chief Justice Roberts and Justice Gorsuch joining the four left-of-center justices), the Supreme Court held that firing or refusing to hire a gay, lesbian, bisexual, or transgender person is illegal sex discrimination:

An employer violates Title VII when it intentionally fires an individual based in part on sex … . If the employer intentionally relies in part on an individual employee’s sex when deciding to discharge the employee — put differently, if changing the employee’s sex would have yielded a different choice by the employer — a statutory violation has occurred. (Emphasis added.)

In the Court’s view, it is unimportant whether gender identity or sexual orientation fall within Title VII’s definition of “sex.” Rather, an employment decision made on the basis of gender expression or sexual orientation violates Title VII because that decision is necessarily grounded in an employee’s sex. The Supreme Court hypothesized two employees, identical in every way except sex. Per the Court: “If the employer fires the male employee for no reason other than the fact he is attracted to men, the employer discriminates against him for traits or actions it tolerates in his female colleague.”

Title VII and, therefore, Bostock v. Clayton County, is limited to workplace discrimination claims. Discrimination in places of public accommodation (i.e., most businesses) remains legal in dozens of states. Further, this Supreme Court decision does not change California law. The California Fair Employment and Housing Act is broader than Title VII, protecting gender identity, gender expression, and sexual orientation in housing and employment. Other civil rights laws address public accommodations and government conduct. The employers’ actions in the cases the U.S. Supreme Court decided today were plainly unlawful in California. Therefore, this case will not substantively affect what constitutes unlawful discrimination in California. Nonetheless, it clarifies discrimination claims brought under Title VII and will have wide ranging effects on employment law throughout much of the country. It may also ease passage of a federal statute to protect LGBTQ Americans from discrimination in public accommodations and by governments.

The Los Angeles Court of Appeal issued a recent ruling clarifying a long-established — but often contested — rule of tax litigation procedure: to have standing (the right to raise a claim in court) to challenge a government revenue measure, you must be among the people who are legally obliged to pay it, not merely someone who ends up bearing its cost. So, for example, sales taxes are legally incident on sellers — it is a tax on selling. But, in most cases, buyers end up paying, except when sellers offer to pick up the tax during a “sales tax holiday.” Only sellers can sue for a refund. The California Supreme Court recently reaffirmed that rule in a case involving drug stores’ erroneous application of sales tax to diabetic supplies.

California’s County jails contract with telephone carriers to provide telephone services used by inmates and their families. Inmates have no alternatives to that service because possession of a cellphone in jail is illegal. The telephone carriers pay concession fees to the Counties for the right to provide these services and, as a result, inmates and their families pay much more than the going rate for telephony. The Legislature has not forbidden this practice, but did require the proceeds of these contracts to fund services to inmates, like job training, civilian clothes and a bit of pocket money on release, etc.

A class of inmates and their family members sued a number of Counties, alleging the increased telephone charges violate Proposition 26, a 1996 initiative amendment to the California Constitution making all local government revenues taxes requiring voter approval with seven stated, and two implied, exceptions. The exception relevant here limits service fees to the cost of service. They also sued for civil rights violations, alleging the telephone services charges had a disparate impact on African Americans and Latinos, who are over-represented in jail populations. The cases were consolidated for trial in Los Angeles County and the trial court sustained the counties’ demurrer without leave to amend — ending the case at the outset concluding that, even if the inmates could prove the facts they alleged (they very likely could), the law would still require a victory for the Counties. Because the case involved coordination of a number of underlying suits, it is labeled without a “v.” — County Inmate Telephone Services Cases.

The Court of Appeal affirmed, concluding that inmates did not pay the challenged commissions, but merely bore their economic impact, and therefore did not have standing to sue:

First, plaintiffs say they “actually paid the illegal tax, not the providers,” so “the ‘general rule’ requires that plaintiffs have standing to obtain a refund.” Plaintiffs paid nothing to the counties, and they had no legal responsibility to pay anything to the counties. Simply asserting that they effectively or indirectly “paid the illegal tax” does not make it true. Plaintiffs may have paid exorbitant charges to the telephone provider, but they did not make any payment to the county and they had no legal obligation to do so. Plaintiffs ask us in effect to find that a customer, who pays higher prices because of a tax on a vendor who raises prices in order to recover the amount of the tax from the customer, has standing to seek a refund. No legal authority supports that position.

This is a very strong statement of the rule that one must bear the legal duty to pay a charge to have standing to challenge it. It will be useful to governments defending a wide range of revenue measures.

On the civil rights claims, the Court of Appeal concluded that the relevant comparison to determine unlawful discrimination was not between disproportionately African American and Latino inmates and the general population of California, but between those inmates and all inmates and, even as plaintiffs alleged the case, all inmates paid the same, exorbitant telephone charges.

The plaintiffs sought review in the California Supreme Court on June 8, 2020, retaining a high-profile appellate boutique to assist. Decision on that petition is due in 60 days, although the Supreme Court commonly extends it to 90.

The case is in contrast to recent decisions involving franchise fees passed through by investor-owned utilities to their customers to compensate local governments for use of rights of way (Jacks v. Santa Barbara) and such fees on solid waste haulers who pay franchise fees to local governments, too (Zolly v. City of Oakland). Plaintiff customers were permitted to challenge those fees. How do we reconcile the two outcomes? The Court of Appeal distinguished them in the County Inmate Telephone Services Cases by noting neither case considered standing — cases are not binding authority on issues their facts raise but which the court did not discuss. [Disclosure: CH&W represents Santa Barbara in Jacks, which is pending on remand in the Ventura Court of Appeal.]

Perhaps a more satisfying answer is this: in both Jacks and Zolly, the plaintiffs alleged a conspiracy between government  and the vendor to collect revenue from the vendor‘s customers. In County Inmate Telephone Services Cases, the jails procured telephone services competitively — at arm’s length — but required the commissions. Jacks makes clear that the standard for one who alleges a conspiracy between government and a franchisee or other fee-collector faces a very difficult test — the fees survive review if they were negotiated at arms-length between government and the vendor or if the fees are even roughly proportionate to the value of the rights government confers on the vendor for the fee (like use of government rights-of-way).

Jacks is final, but Zolly is also the subject of a petition for review filed June 8, 2020 and is on the same 60- to 90-day schedule as the County Inmate Telephone Services Cases. We should know by late summer if the cases will be reviewed. We’ll keep an eye on them for you!