California Supreme Court Upholds the "California Rule" in Permitting Modifications Narrowly Focused on Abuses and Loopholes

On July 30, 2020, the California Supreme Court issued its long-awaited ruling on the “California Rule” in Alameda County Deputy Sheriffs' Association, et al. v. Alameda County Employees' Retirement System, et al. ("ACDSA"). The opinion permits the Legislature to address perceived pension abuses, even if the modification reduces some employee benefits, while upholding the requirement of the California Rule that detrimental changes otherwise must be accompanied by offsetting new advantages. Under the standard articulated by the Court, pension reforms advocated by former San Jose Mayor Chuck Reed to reduce pension costs would almost certainly be held unconstitutional.

Although the Court denied the pensioners' claims by upholding PEPRA's anti-spiking provisions, the ruling affirms and strengthens the California Rule. Carving a narrow exception from the requirement to offset detrimental modifications of pension benefits with new advantages, the Court held PEPRA's limitations on the inclusion certain leave payments, on-call pay, and other payments to enhance pension benefits were “enacted for the constitutionally permissible purpose of closing loopholes and preventing abuse of the pension system.” The Court also ruled that terminal pay was never includable. The Court then declined to apply equitable estoppel to enforce the Ventura settlement agreements providing for the inclusion of the disputed items in pension benefits.

The Court articulated a two-part test for evaluating pension modifications under the California Rule. First, the Court must determine whether the modifications impose an economic disadvantage and, if so, whether those disadvantages are offset in some manner by comparable new advantages. The Court must then determine whether the government's articulated purpose was sufficient, for constitutional purposes, to justify any impairment of pension rights. 

The Court recognized PEPRA resulted in a detriment to the Plaintiffs in this case but held the Legislature's purpose justified the modifications. In the unanimous ruling, Chief Justice Tani Cantil-Sakauye explained, prior contracts clause jurisprudence delineated what is not a constitutionally permissible purpose, including modifications to address revenue shortfalls and rising pension costs.  The Chief Justice noted, “we have never addressed the circumstances under which such advantages need not be provided.”

The Court also resolved the confusion over whether plan modifications that that result in disadvantages to employees "must" or "should" be accompanied by new advantages. During oral arguments, David E. Mastagni asserted that the distinction made little difference. The Court largely agreed. "Should" is the proper test, but "should" cannot "be disregarded as merely precatory" and generally, "modifications of public employee pension plans "should" preserve the value of plan participants' pension rights."

In short, the California Rule “requires the level of pension benefits to be preserved if it is feasible to do so without undermining the Legislature's permissible purpose in enacting the pension modification.” Here, the Court found PEPRA's reforms pigeonholed this narrow exception. “The Legislature's decision to impose financial disadvantages on public employees without providing comparable advantages will be upheld under the contract clause only if providing comparable advantages would undermine, or would otherwise be inconsistent with, the modification's constitutionally permissible purpose. We conclude that the PEPRA amendment survives this constitutional scrutiny.” (Emphasis added.)

"Given our past decisions, we have no difficulty finding that the PEPRA amendment was enacted to maintain the integrity of the pension system." The Court further explained, "it would defeat this proper objective to interpret the California Rule to require county pension plans either to maintain these loopholes for existing employees or to provide comparable new pension benefits that would perpetuate the unwarranted advantages provided by these loopholes." 

Additionally, the Court rejected the argument that the employees acquired a contractual right to the inclusion of the disputed pay items because their contributions to the county pension fund were based on an actuarial calculation that included the additional benefit costs attributable to the inclusion of the disputed items. However, in footnote 18, the Court held that by paying for the inclusion of the disputed items, the employees might be entitled to a partial refund of their contributions.

The Court severely limited the power to modify pension benefits in the future, expressly holding the California Rule “remains the law of California.” Rejecting the State's contention it possessed sweeping police powers to reduce pension benefits, the Court upheld the long-standing principle that pension rights vest upon commencement of employment. The State attempted to evade Contracts Clause analysis by arguing the changes only operated prospectively.

In repudiating the State's contention that PEPRA's changes were only prospective, the Court agreed with Mr. Mastagni's argument that PEPRA's amendment applies to all pension rights, regardless of when they were accrued. The Court characterized the State’s argument as "misguided" and explained that the law in effect at the end of an employee's career is used to determine all pension benefits, resulting in a "profoundly retroactive impact."

The 90-page Opinion is nuanced and complicated. While the outcome is a disappointment to the plaintiffs, in this case, the standard upheld by the Court is a major win for all public employees in California. Any future pension modifications must be analyzed under the California Rule and the validity of the modifications will be determined based upon the facts of each case. Simply put, the employers and the state cannot terminate or modify your retirement plans to address increasing pension costs as Governor Brown stated that he had hoped to do.

Mastagni Holstedt clients with any questions regarding this case should contact David E.Mastagni at davidm@mastagni.com.  David argued the appeal on behalf of the Alameda County Deputy Sheriffs' Association.

Client Advisory: Legislative Attacks on Qualified Immunity

In recent weeks, there has been a public debate about the long-established doctrine of qualified immunity. However, much of the media coverage on the subject is confusing and even inaccurate. The purpose of this bulletin is to provide more information on qualified immunity (QI), indemnification, and the changes proposed by the legislature.

In reality, eliminating QI will not make individual officers personally liable for monetary damages in civil lawsuits. Employing agencies are required by law to defend and indemnify their officers. Thus, eliminating QI would primarily increase the liability of agencies and local governments. However, eliminating QI would increase liability risk somewhat, because public entities are not required to (but often do) indemnify punitive damages.  The elimination of QI would increase the risks of punitive damages, by making it more difficult to get out of the case early.   Although QI is an important protection, the consequences of its elimination are not as dire as removing or limiting indemnification as Colorado recently did.

What is Qualified Immunity?

QI is a legal doctrine that protects certain government employees—including law enforcement officers—from personal liability in a civil rights lawsuit. As long as the officer’s conduct does not violate a “clearly established” right, QI shields the officer from civil lawsuits seeking damages. QI protects officers from federal lawsuits under Section 1983 and state lawsuits under the Bane Act.

QI is not just a defense to liability. Rather, it safeguards officers from facing trial or other burdens of litigation. For this reason, QI usually leads to an early dismissal of civil rights cases. If an officer’s actions are covered by QI, there is no need to go through the lengthy process of litigation.

What is the duty to indemnify?

QI and indemnification are two separate and distinct concepts. California Government Code Sections 825 and 995 require government employers to defend and indemnify their employees in any lawsuit that arises out of an act or omission in the course of their employment. Meaning, even without QI, individual police officers cannot be held personally liable for monetary damages in a lawsuit; it is the agency that is ultimately financially responsible. These code sections apply to all public employees, not only to law enforcement officers.

What are punitive damages?

The one exception to duty to indemnify is that is that the employing agency is not required to pay punitive damages. Punitive damages can be awarded at the discretion of the judge for behavior that they find particularly egregious or harmful. These damages are awarded to punish the defendant or serve as an example rather than to compensate the plaintiff.

Under the Section 825, the employing agency is not required to pay punitive damages. However, they can choose to do so if: 1) the judgement is based on conduct that occurred in the course of employment, 2) the employee was acting in good faith, and 3) payment of the damages would be in the best interest of the agency.

Is the California Legislature going to eliminate QI?

California cannot eliminate qualified immunity under 42 U.S.C. § 1983.

SB 731 was introduced to the State Senate in February of 2019 and aims to eliminate California immunities to the Thomas Bane Civil Rights Act, codified in California Civil Code Section 52.1, which protects against conduct aimed at interfering with rights secured by federal or California law, where the interference is carried out “by threats, intimidation, or coercion.” Unlike under 42 U.S.C. § 1983, the federal doctrine of qualified immunity does not apply to claims brought under the Act. However, California statutory immunities do apply. S.B. 731 would apparently eliminate the applicability of those statutory immunities, as well as codify the inapplicability of qualified immunity. It prohibits interference or attempted interference with a person’s rights under federal or California law by “threats, intimidation, or coercion.” Cal. Civ. Code § 52.1(a). To bring a claim under the Bane Act, the plaintiff must establish (1) intentional interference or attempted interference with a state or federal constitutional or legal right, and (2) that the interference or attempted interference was by threats, intimidation, or coercion. Allen v. City of Sacramento, 234 Cal. App. 4th 41, 67 (2015). The Act is narrower than what might be considered its federal counterpart, 42 United States Code Section 1983, which provides a cause of action for recovery for “the deprivation of any rights, privileges, or immunities secured by the Constitution and laws.” 42 U.S.C. § 1983. The Act provides for the recovery of compensatory and punitive damages, injunctive relief, civil penalties, and attorney’s fees. Cal. Civ. Code § 52.1(i).

What are S.B. 731’s three major changes to the Act? 

According to the bill’s text, “[t]he threat, intimidation, or coercion required under this section need not be separate or independent from, and may be inherent in, any interference or attempted inference with a right.” S.B. 731 § 52.1(b)(2). “Intentional conduct to interfere or attempt to interfere with a constitutional right, or deliberate indifference or reckless disregard for a constitutional right that interferes or attempts to interfere with that right, is sufficient,” where “a person acts ‘intentionally’ when the person acts with a conscious objective to engage in particular conduct.” S.B. 731 § 52.1(b)(2). This appears to be a broader definition of intent than current law.

The bill would also “eliminate immunity provisions for public employees involved in a violation of the act.” S.B. 731 § 52.1(1). Excepting “judicial and prosecutorial immunity” for prosecutors, “state immunity provisions shall not apply to any cause of action brought against any employee or agent of a public entity, or directly against a public entity, under this section.” S.B. 731 § 52.1(n). Since federal qualified immunity is already not applicable to claims under the Bane Act since Venegas II, this would apparently make unavailable statutory immunities. In Venegas, Judge Baxter expressed concern that the expansive scope and vague language of the Act would result in an explosion of cases which “could prove crippling” to deep-pocketed defendants. Venegas, 32 Cal. 4th 820 at 844 (Baxter, J., concurring). The elimination of all immunities would further exacerbate this. Finally, the bill would allow a cause of action “for the death of a person caused by a violation of the act.” S.B. 731(1).

 Is the U.S. Legislature going to eliminate QI? 

On June 4, 2020, Representative Justin Amash introduced H.R. 7085, the “Ending Qualified Immunity Act”. This bill eliminates the defense of qualified immunity in civil actions for deprivation of rights. The bill provides that under the statute allowing a civil action alleging deprivation of rights under color of law, it shall not be a defense or immunity to any such action that (1) the defendant was acting in good faith or believed that his or her conduct was lawful at the time it was committed; (2) the rights, privileges, or immunities secured by the Constitution or laws were not clearly established at the time of their deprivation; or (3) the state of the law was such that the defendant could not reasonably have been expected to know whether his or her conduct was lawful. As of June 30, 2020, the Ending Qualified Immunity Act has 64 cosponsors, all but one of whom are Democrats. The White House says reducing immunity for police is a non-starter. The Supreme Court declined to grant review in a recent appeal seeking to challenge qualified immunity.

What is at stake with limiting QI? 

There are two major concerns with limiting QI. First, without QI, lawsuits could not be quickly dismissed at the start of litigation. Without the shield of QI, officers could be exposed to a barrage of lawsuits that drag on for years. Second, eliminating QI would give officers greater exposure to punitive damages if the case proceeds. QI prevents judges and juries from second-guessing officers’ split-second decisions. If QI is eliminated and more cases proceed to trial, officers are at risk of having punitive damages imposed. As discussed above, punitive damages are not always indemnified by the employing agency. However, limiting QI does not eliminate indemnification. Even without the protection of QI, government employers would still be required under Sections 825 and 995 to defend and indemnify their employees. Therefore, employing agencies (and not individual officers) would be the ones to bear the real costs if QI is eliminated.

 Is indemnification going to be eliminated?

 There is nothing to suggest that the legislature is contemplating eliminating indemnification under Sections 825 and 995. This is because eliminating indemnification would result in serious adverse and unwanted consequences. Without indemnification, officers would be forced to purchase private errors and omissions insurance. This would essentially disincentivize policing to the point where no officer would intervene to save a victim if a mistake (or a runaway jury) could force them into bankruptcy. Additionally, even without the statutory protections of indemnification, employers would still bear the majority of the costs in civil lawsuits. This is due to two concepts of civil law: respondeat superior and joint and several liability. The common law doctrine of respondeat superior says that an employer is liable for the acts and omission of their employees during the scope of their employment.

This principle is not unique to government or law enforcement; it applies to all employee/employer relationships. Joint and several liability holds that more than one defendant in a civil case can be held liable for all of the victim’s damages. This means that if one defendant cannot pay, the other defendants are on the hook for the full amount. In light of these two concepts, employers are going to be primarily financially responsible for damages regardless of statutory indemnification. If a large judgment was rendered against the employing agency and the employee officer, the individual officer would likely be forced to file bankruptcy and the employer would be responsible for paying all damages.

Takeaways 

QI is an important means of protecting officers from frivolous litigation and the possibility of punitive damages. However, eliminating QI would not eliminate indemnification. Government employers will still bear the vast majority of the costs that could come with eliminating QI.