California Appellate Court End-Runs Moradi-Shalal

The California Court of Appeal has issued an opinion, which, if allowed to stand, will eat away at the once-settled body of law that prohibits third-party claimants who were injured by an insured from suing the insured’s insurance company for unfair claims settlement practices under California Insurance Code § 790.03. Over 20 years ago, the State Supreme Court held that only the State’s Insurance Commissioner may pursue insurers for improper settlement practices under that statute; § 790.03 does not grant either insureds or third-party claimants the right to sue insurers for violating the statute’s prohibitions. (Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d. 287.)

But the new opinion – from the intermediate appellate court - would create a loophole that could accommodate a whole fleet of trucks. (Zhang v. Superior Court (2009) 178 Cal.App.4th 1081.) LINK According to Zhang, if plaintiff’s allegations are not limited to unfair claims handling, but also include "specific" allegations that the insurer "made fraudulent misrepresentations and promulgated misleading advertising"- i.e., it never intended to pay covered claims - the complaint will survive the insurer’s demurrer challenge. However, to prevail, plaintiff would be required to prove the insurer made false representations to the public and that the insurer had a policy that was inconsistent with these representations.

Zhang candidly acknowledged it disagreed with a prior opinion which held squarely to the contrary. (Textron Financial Corp. v. National Union Fire Ins. Co. (2004) 118 Cal.App.4th 1061.) The conflict in the published opinions of the intermediate appellate courts makes Zhang a prime candidate for review by the State Supreme Court. Indeed, the high court extended its time to rule on the insurer’s Petition for Review, until March 9. (Ptn. for Review filed 12/09/09, No. S18542.)

Zhang is a troubling opinion, and Appellatestrategist urges interested parties to support the insurer’s petition. It is easy enough to allege a policy or practice. Under this decision, that alone is sufficient to defeat the insurer’s demurrer against what should have been a stillborn claim. The value of Moradi-Shalal is that it deals an immediate, fatal blow, saving defendants the time and expense of discovery and trial on allegations a plaintiff cannot possibly prove. If Zhang survives, the insurer cannot defeat the suit short of a motion for summary judgment, and perhaps not even then.

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Tort Reform Legislation Struck Down in Illinois

In 2005, the Illinois legislature enacted into law a wave of tort reform bills designed to respond to what it labeled a “health-care crisis” in the state. These reforms included changes to the Illinois Insurance Code, the Medical Practice Act and the Good Samaritan Act, among others. The centerpiece of the package was 735 I.L.C.S. 5/2-1706.5, which limited awards of noneconomic damages in any action based on alleged medical malpractice to $500,000 against a health care professional, and $1,000,000 against a hospital. On February 4, 2010, a divided Illinois Supreme Court held that Section 2-1706.5 violated the Separation of Powers Clause of the Illinois Constitution. (LeBron v. Gottlieb Memorial Hospital, Nos. 105741, 105745.)

LeBron was a malpractice case arising out of complications in a Caesarean section delivery. Among other things, the plaintiffs sought a declaratory judgment that Section 2-1706.5 was unconstitutional, either on its face or as applied, relying upon the Supreme Court’s decision in Best v. Taylor Machine Works, 179 Ill.2d 367 (1997), which had invalidated an earlier tort reform effort, the Tort Reform Act of 1995, on the grounds that it undercut the power and obligation of the judiciary to reduce excessive verdicts, thus functioning as a “legislative remittitur.”

The defendants in LeBron argued that the separation of powers analysis in Best did not govern on the grounds that it was dictum, not necessary to the decision. The majority responded, in so many words, that there is dictum, and then there is dictum: the court called its earlier analysis “judicial dictum,” which must be followed unless found to be erroneous. The court concluded that Section 2-1706.5 was invalid for the same reason cited thirteen years earlier in Best: it required courts to override the jury’s deliberative process and reduce any noneconomic damages in excess of the cap, irrespective of the facts and circumstances, and without the plaintiff’s consent. Thus, the statute was a “legislative remittitur” and unconstitutional on its face. Defending the statute, the Illinois Attorney General pointed out that the 2005 statute was similar to damages caps adopted in a large number of other states, but the majority had a succinct response: “That ‘everybody is doing it’ is hardly a litmus test for the constitutionality of the statute.”

Justice Karmeier, joined by Justice Garman, filed a spirited dissent. According to the dissenters, because the case was still at the pleading stage and the defendants had not been found liable for anything, the plaintiffs lacked standing to mount a facial challenge to the statute. The dissenters argued that the separation of powers analysis in Best was dictum, and erroneous dictum at that, rejected by many state and federal courts in the years since. The dissent concluded by pointing out that the majority’s decision might leave the Legislature with no alternative but to consider drastic measures, such as eliminating all noneconomic damages in medical malpractice cases, or abolishing the cause of action completely and replacing it with a claims system similar to workers compensation.

Appellate Trap for the Unwary: What Happens When You Do Not Get a Final Ruling

Here is an object lesson in appellate practice from a California court, but it could have come from anywhere. The plaintiff, believing that the trial judge had committed so many errors she couldn’t get a fair trial, stipulated to a judgment against herself, and appealed from that judgment. That’s appealable, at least according to this court. That's not the issue.

She still lost on appeal. The problem? Many of the trial court’s rulings against her at the motion in limine stage were only tentative. The court expressly said its rulings would be subject to reconsideration when the evidence came in. Trial judges often do that, because it can be hard sometimes to see the relevance (or not) of evidence early in the motions stage. In essence, a trial court that has only issued “tentative” rulings has not really finally “ruled” at all for purposes of challenging that "ruling" on appeal. So held California’s Fourth District, division Two, citing a case for that proposition handled by yours truly Appellate Strategist (Tudor Ranches, Inc. v. State Comp. Ins. Fund (1998) 65 Cal.App.4th 1422.)

Click here for a link to the opinion in Villano v. Waterman Convalescent Hospital, Inc.

Illinois Supreme Court Strikes Down State's Limit on Medical Malpractice Damages

In a widely anticipated decision, a fractured Illinois Supreme Court this morning struck down the state statute capping awards of noneconomic damages in medical malpractice cases. (LeBron v. Gottlieb Memorial Hospital, Nos. 105741 and 105745.) By a 4-2 vote, the Court held that the statute violated the Separation of Powers clause of the Illinois constitution. We will post an analysis of the opinions in this important case soon.

California Supreme Court Approves “Suggestive Palma” Notices, Heralding A New Age Of More Formal Oppositions To Writ Petitions

No, a “suggestive Palma notice” is not the title of a racy novel. “Palma notice” is the procedure by which California appellate courts give notice to the opposing party before granting a peremptory writ of mandate. The notice process had come under scrutiny of late, because some courts’ wording of the notice suggested the Court of Appeal had already made up its mind, thereby discouraging or preempting the filing of an opposition. Today, the California Supreme Court approved the “suggestive Palma notice” procedure, by a vote of 4-3. (Brown, Winfield & Canzoneri, Inc. v. Superior Court, S156598 (Slip Op.) (Click here for link to slip opinion.) But the majority added something new: if the trial court is inclined to change the order being challenged on the writ petition as a result of the notice, the trial court must first give notice and an opportunity to be heard to the party adversely affected.

The Problem: When one party challenges a trial court’s order in the appellate court by a writ petition, California long has long held that the Court of Appeal, before granting a peremptory writ, must first give the opponent notice it may do so. This is a matter of due process. A “peremptory” writ is just that: it short-circuits the usual appellate process - the “alternative writ” - whereby the court orders briefing and oral argument before deciding the merits. If the Court of Appeal is contemplating issuance of a peremptory writ because of urgency, it must first tell the opposing party so, and provide the opportunity to file a formal opposition. (Palma v. U.S. Industrial Fasteners, Inc. (1984) 36 Cal.3d 171.)

The “Suggestive” Palma Notice: Over the years, the Palma notice became a convention of California writ practice. As originally conceived, the notice simply requested an opposition to the petition, signaling the appellate court’s general interest. That has changed somewhat of late. Brown, Winfield is a case in point. The Court of Appeal issued a “suggestive” or “coercive” Palma notice, discussing the merits of the petition, before stating the petitioner’s entitlement to relief was “so obvious that no purpose could reasonably be served by plenary consideration of the issue.” (Slip Op. at 4, emphasis added.) A scant 19 hours later, the trial court, reading the handwriting on the wall, reversed the order that was being challenged via the writ petition without any prior notice to the litigants. The Court of Appeal then dismissed the writ petition as moot. (Slip Op. at 4, and Werdegar, J., concurring and dissenting opinion, at 3, n.3.)

The Brown Winfield Opinion: The State Supreme Court majority held a Palma notice is not a directive that obligates the trial court to bend its knee to the will of the reviewing court. (Slip Op. at 12.) Rather, a “suggestive” Palma notice “is more analogous to a tentative ruling,” which “indicates the way the judge is prepared to decide the matter based on the information before him or her when the ruling was prepared.” (Ibid.) A tentative ruling is not the final order, and does not bind the judge issuing it. (Ibid.)

The majority made it clear, however, that this new type of Palma notice is a recommendation only, and the notice may not “direct the trial court to change its order, or purport to grant the trial court authority to change its order without first affording the parties notice and an opportunity to be heard in the trial court.” (Slip Op. at 15 and 17.) The majority recognized that this may mean more formal oppositions to writ petitions will be filed, with the attendant expense to the client. It “strongly encourage[d]” “appellate courts to inform the parties—and invite preliminary opposition—in the event the appellate court anticipates taking any action other than summarily denying the writ petition.” (Slip Op. at 16-17.)

Ramifications: Before Brown Winfield, the party who obtained the order in the trial court could wait before filing an opposition to the writ petition to see if the Court of Appeal was interested in the writ. The vast majority of California writ petitions are summarily denied, even before an opposition can be filed. Now, however, appellate lawyers should counsel their clients and trial counsel: always file an opposition, and make it a formal opposition. That is the only way to ensure the appellate court has your side of the story before it is authorized to act, in peremptory fashion, on the opponent’s writ. It is no longer safe, in the interests of keeping costs down, to use a “wait and see” approach. As the dissent warned: since lawyers will wish to “insulate themselves from client criticism,” the “Court of Appeal can expect to see a rise in the number of full-blown preliminary opposition briefs addressing the merits of a writ petition.” (Dissent at 8.)

From our perspective as appellate strategists, the majority’s tacit endorsement of the “suggestive” Palma notice procedure may underestimate the impact of such a notice on a trial court. Most California practitioners and judges know that granting a writ petition is a relatively rare event. When a Court of Appeal expresses an opinion on the merits of a pending petition, that will be perceived as the handwriting on the wall, whether rightly or wrongly. Brown Winfield thus heralds a new day in appellate practice.

First Congressional Hearing on Citizens United Scheduled

Congressional activity in response to the Supreme Court's decision in Citizen United continues. The Constitution, Civil Rights and Civil Liberties Subcommitee of the House Judiciary Committee has scheduled a hearing for February 3 called "First Amendment and Campaign Finance Reform After Citizens United."

Meanwhile, Massachusetts Democrat Michael Capuano has proposed HR 4537, which would extend the current ban on campaign contributions or electioneering communications by foreign nationals to cover domestic corporations which are subsidiaries of foreign-owned corporations. HR 4550, sponsored by Massachusetts Democrat Niki Tsongas, would prohibit corporations or labor organizations from using federal funds contribute to political campaigns or finance lobbying activities. HR 4527, sponsored by Ohio Democrat Steve Driehaus, would require that any electioneering communication sponsored by a corporation or labor organization pursuant to Citizens United include a statement identifying the CEO of the corporation or the president of the labor organization. Finally, Minnesota Democrat Al Franken's S2959 would also amend the Federal Election Campaign Act of 1971 to protect federal, state and local elections from the influence of foreign nationals.

Quick Congressional Response to Citizens United

Congressional response to the Supreme Court's landmark campaign finance decision in Citizens United v. Federal Election Commission has been rapid. In the past twenty-four hours, five bills aimed at partially overturning the decision have been introduced in the House:

HR 4510, by Florida Democrat Alan Grayson, to extend the ban on contributions and expenditures by foreign nationals to domestic corporations in which foreign principals have an ownership interest. HR 4517, sponsored by New York Democrat John Hall, HR 4522, sponsored by New Jersey Democrat Bill Pascrell, and HR 4523, sponsored by Virginia Democrat Tom Perriello, each of which amends the Federal Election Campaign Act in a comparable fashion.

HR 4511, also by Alan Grayson, to prohibit corporations which employ or retain registered lobbyists from making expenditures for electioneering communications.

But the earliest response of which we are aware came from Democratic Representative Leonard Boswell. Within hours of the announcement of Citizens United last week, Rep. Boswell proposed a constitutional amendment to prohibit corporations and labor organizations from using operating funds for advertisements in connection with any campaign for Federal office.

A Summary of the Opinions in Citizens United v. Federal Election Commission

As promised, we offer our detailed analysis of the opinions in Citizens United v. Federal Election Commission, the Supreme Court's landmark opinion on corporate campaign expenditures.

The majority opinion was written by Justice Kennedy and joined by Chief Justice Roberts and Justices Scalia, Alito and Thomas. Pursuant to Federal law (2 USC 441b), corporations and unions are forbidden from using general treasury funds to make independent expenditures for speech defined as an electioneering communication, or for speech expressly advocating the election or defeat of any candidate. Citizens United -- which accepts a small portion of its funds from for-profit corporations -- made and released Hillary: The Movie. Citizens United wanted to release the movie on video-on-demand, and to promote the video release of the movie with short advertisements.

The majority considered and rejected each of the lesser grounds upon which Citizens United attacked the statute: (1) that Section 441b did not apply to Hillary as a matter of statutory interpretation; (2) that the statute should not be applied to video-on-demand or similar technologies; and (3) that the statute should not be applied to nonprofits funded overwhelmingly by individual contributions. The majority also concluded that Citizens United did not waive its facial challenge to Section 441b. Thus, the Court construed Citizens United's position as requesting that the Court overrule Austin v. Michigan Chamber of Commerce, 494 US 652 (1990) and, to the extent it reaffirmed Austin, McConnell v. Federal Election Comm'n, 540 US 93 (2003).

The majority construed Section 441 as an outright ban on speech, backed by criminal sanctions. According to the court: "We find no basis for the proposition that, in the context of political speech, the Government may impose restrictions on certain disfavored speakers."

The majority rejected each of the rationales proposed for restricting corporate election communications. The Government argued that corporate speech could be restrained in order to prevent corporate wealth from distorting political discourse. The majority rejected the anti-distortion rationale on the grounds that it permitted government to suppress speech simply because the speaker had taken the corporate form. The majority rejected the view that anything other than quid pro quo corruption -- the exchange of concrete benefits for campaign contributions -- was a legitimate interest justifying restrictions. The court commented that the fact that a speaker might have influence over or access to elected officials did not mean that those officials were corrupt, nor would the appearance of such influence risk a loss of faith in democracy. Finally, the Government attempted to defend Austin on grounds of the need to protect shareholders from in effect being forced to finance speech with which they disagreed. To the extent it was supported by the shareholder protection rationale, the court found the statute both over-inclusive, since it applied to all corporations, and under-inclusive, since it applied to corporations owned by single shareholders. In sum, the court concluded that Austin was inconsistent with prior and subsequent First Amendment precedent; the court overruled Austin and, to the extent it reaffirmed Austin, McConnell. Since Section 441b's restrictions on corporate independent expenditures were invalid, they could not be applied to the proposed advertisements for Hillary.

The court held that the disclosure, disclaimer and reporting requirements incorporated in the statute were constitutional, however. The majority concluded that the public had a legitimate interest in knowing who is speaking about a candidate just prior to an election. The court noted the argument that disclosure invited intimidation, but found that the record contained no evidence that Citizens United's own contributors had ever been subjected to intimidation.

Chief Justice Roberts and Justice Alito filed a concurring opinion. They argued that if the Government's theory were correct, logically it would follow that the Government could prohibit newspapers owned by corporations from publishing editorials. According to Chief Justice Roberts and Justice Alito, stare decisis did not support the retention of Austin for several reasons; according to the Justices, Austin was a departure from the Court's tradition of robust protection for political speech, it had remained a subject of dispute since it was filed, and the decision was uniquely destabilizing even outside its factual context.

Justice Thomas filed an opinion concurring in part and dissenting in part. Justice Thomas joined in the majority opinion invalidating the spending limits of Section 441b, but argued that the disclosure, disclaimer and reporting requirement were invalid as well. Justice Thomas argued that the majority's view that the disclaimer and disclosure requirements did not prevent anyone from speaking was clearly incorrect in view of the evidence in the record that certain entities had begun combining and disseminating contributors' information for the specific purpose of preempting speech.

Justice Scalia filed a concurring opinion, which Justice Thomas joined in part. Justice Scalia argued that the dissent presented no evidence that the original understanding of the First Amendment permitted the censoring of corporate speech. He pointed out that the First Amendment makes no distinction between types of speakers, and that the right to speak has always been understood to encompass the right to speak in association with others, even if that association takes corporate form.

Justices Stevens, Ginsburg, Breyer and Sotomayor joined in a spirited dissent. According to the dissenters, there were a number of different limited grounds upon which the court could have resolved the case. Moreover, the minority argued that there was clearly an insufficient record upon which the court could fairly decide a facial challenge to the statute.

The dissent argued that the majority and concurrences were based on a fundamental misconception: Section 441b was not a ban of corporate or union speech. Rather, the statute was more fairly akin to a time, place and manner restriction, applying in a viewpoint-neutral fashion to a narrow subset of advocacy. The court has approved a number of similar restrictions, such as allowing state-run broadcasters to exclude independent candidates from televised debates and banning displays of campaign materials near a polling place. According to the minority, not only is there no evidence to suggest that the framers of the First Amendment would have understood the Amendment to protect corporations, but restrictions on corporate election spending had been part of statute law since 1907.

The dissenters argued that each of the three justifications accepted in Austin remained valid. According to the dissenters, the court has long recognized that the court had a legitimate interest in fighting the appearance of undue influence beyond strictly quid pro quo corruption; in fact, the record contained evidence that soft money donations to parties or issue campaigns could generate more influence than direct campaign contributions. With respect to the "antidistortion" rationale, the dissenters found that corporate expenditures could actually drown out the overall scope of discourse by drowning out other forms of speech. Finally, the dissenters viewed the need to protect shareholders as sufficient to justify the statutory preference for PACs, financed by voluntary corporations, over corporate contributions through general treasury funds.