ReadyLink Healthcare, Inc. v. State Compensation Insurance Fund , 754 F.3d 754 ( 2014 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
READYLINK HEALTHCARE, INC., a No. 12-56248
Nevada Corporation, on behalf of
itself and others similarly situated, D.C. No.
Plaintiff-Appellant, 2:11-cv-09934-
PSG-PJW
v.
STATE COMPENSATION INSURANCE OPINION
FUND; DAVE JONES, Insurance
Commissioner, in his official
capacity,
Defendants-Appellees.
Appeal from the United States District Court
for the Central District of California
Philip S. Gutierrez, District Judge, Presiding
Argued and Submitted
April 10, 2014—Pasadena, California
Filed June 12, 2014
Before: Jerome Farris and Andrew D. Hurwitz, Circuit
Judges, and Paul L. Friedman, District Judge.*
Opinion by Judge Hurwitz
*
The Honorable Paul L. Friedman, District Judge for the U.S. District
Court for the District of Columbia, sitting by designation.
2 READYLINK HEALTHCARE V. SCIF
SUMMARY**
Abstention/Issue Preclusion
Affirming the dismissal of an action challenging a
decision of the Commissioner of the California Department
of Insurance, the panel held that the district court erred by
abstaining, but that issue preclusion barred the plaintiff’s
claim that the Commissioner’s decision was preempted by
Internal Revenue Service regulations.
The panel held that under Sprint Communications, Inc. v.
Jacobs, 134 S. Ct. 584 (2013), Younger abstention was not
appropriate because parallel state court proceedings were not
criminal proceedings, the Commissioner’s and the state
court’s orders were not “core” orders involving the
administration of the state judicial process, and the
proceedings were not civil enforcement proceedings akin to
a criminal prosecution.
The panel held that the plaintiff’s preemption claim was
barred by issue preclusion under California law because while
this appeal was pending, the California Court of Appeal
rejected the preemption claim, and the California Supreme
Court denied review.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
READYLINK HEALTHCARE V. SCIF 3
COUNSEL
Seth A. Rafkin (argued) and Jennifer M. Bogue, Cooley LLP,
San Diego, California, for Plaintiff-Appellant.
Kamala D. Harris, Attorney General of California, Paul D.
Gifford, Senior Assistant Attorney General, Felix E.
Leatherwood, Supervising Deputy Attorney General, Brian D.
Wesley (argued), Deputy Attorney General, Los Angeles,
California, for Defendant-Appellee Dave Jones, California
Insurance Commissioner, in his official capacity.
Bruce D. Celebrezze (argued) and Benjamin E. Shiftan,
Sedgwick LLP, San Francisco, California; LaDonna Wallace,
Jody A. DeBernardi, and Judith D. Sapper, State
Compensation Insurance Fund, Santa Ana, California, for
Defendant-Appellee State Compensation Fund.
OPINION
HURWITZ, Circuit Judge:
This case involves parallel judicial proceedings, one in
state court and the other in federal court. Each was initiated
by ReadyLink Healthcare, Inc. (ReadyLink), and each
contended that a decision by the Commissioner of the
California Department of Insurance (Commissioner) was
preempted by Internal Revenue Service (IRS) regulations.
The federal district court abstained, relying on Younger v.
Harris, 401 U.S. 37 (1971). While this appeal from the
district court judgment was pending, the California Court of
4 READYLINK HEALTHCARE V. SCIF
Appeal rejected ReadyLink’s preemption claim, and the
California Supreme Court denied review.1
Applying the Supreme Court’s guidance in Sprint
Communications, Inc. v. Jacobs, 134 S. Ct. 584 (2013), we
find that the district court erred by abstaining. However,
because issue preclusion now bars ReadyLink’s claim, we
affirm the judgment dismissing the complaint.
I. Background
ReadyLink provides temporary nurses for medical
facilities. From 2000 to 2006, ReadyLink purchased
workers’ compensation insurance from the State
Compensation Insurance Fund (SCIF). See Cal. Ins. Code
§§ 11770, 11773. Although a creature of California statutes,
“SCIF is an ‘insurer’ on the same basis as any private carrier
offering workers’ compensation insurance.” P. W. Stephens,
Inc. v. State Comp. Ins. Fund, 27 Cal. Rptr. 2d 107, 108 (Ct.
App. 1994).
When SCIF audited ReadyLink for the 2005 policy year,
it found that ReadyLink had failed to report certain per diem
payments to employees as payroll, and billed ReadyLink for
an additional premium of $555,327.53. ReadyLink appealed
that decision to the California Department of Insurance, see
Cal. Ins. Code § 11737(f), and an administrative law judge
(ALJ) approved SCIF’s premium calculation.
1
We grant both parties’ motions for judicial notice of the California
state court proceedings. See Fed. R. Evid. 201; Trigueros v. Adams,
658 F.3d 983, 987 (9th Cir. 2011).
READYLINK HEALTHCARE V. SCIF 5
The ALJ first found that the California Workers’
Compensation Uniform Statistical Reporting Plan (USRP),2
which SCIF used to calculate ReadyLink’s premium rates,
exempts payments for “additional living expenses not
normally assumed” from payroll. Because ReadyLink’s per
diem payments were not tied to the expenses that nurses
accrued while working away from their homes, the ALJ
concluded that the payments were actually wages. In doing
so, the ALJ rejected ReadyLink’s argument that the USRP
should be interpreted consistently with IRS per diem
reporting rules. The Commissioner affirmed and designated
the decision as precedential.
ReadyLink then petitioned the Los Angeles Superior
Court for a writ of administrative mandamus pursuant to
California Code of Civil Procedure § 1094.5. It alleged,
among other things, that the Commissioner should have
followed IRS reporting rules in interpreting the USRP. The
Superior Court denied relief. ReadyLink appealed to the
California Court of Appeal, expressly arguing that IRS
regulations preempted the Commissioner’s decision.
While the state court appeal was pending, ReadyLink
filed this putative class action against SCIF and the
Commissioner in the Central District of California. The
federal complaint alleged that IRS regulations preempted the
Commissioner’s decision, requested both declaratory and
2
The USRP is a “compendia of administrative rules and regulations
governing the issuance of workers’ compensation coverage by SCIF and
other carriers. They set forth classifications, rates and rating systems
approved by the Commissioner pursuant to sections 11658 and 11730 et
seq. and have been incorporated by reference into the California Code of
Regulations.” Allied Interstate, Inc. v. Sessions Payroll Mgmt., Inc.,
137 Cal. Rptr. 3d 516, 522 (Ct. App. 2012).
6 READYLINK HEALTHCARE V. SCIF
injunctive relief, and asserted various state-law damage
claims. After SCIF moved to dismiss the complaint, the
district court ordered supplemental briefing to address
possible abstention under Younger and Colorado River Water
Conservation District v. United States, 424 U.S. 800 (1976).
The district court then dismissed the federal preemption claim
on Younger grounds and declined to exercise supplemental
jurisdiction over the remaining state-law claims. ReadyLink
appealed.
As ReadyLink’s appeal to this court was pending, the
California Court of Appeal affirmed the Superior Court’s
denial of mandamus, expressly holding that the
Commissioner’s decision was not preempted by federal law.
ReadyLink HealthCare, Inc. v. Jones, 148 Cal. Rptr. 3d 881,
886–92 (Ct. App. 2012). The California Supreme Court
denied ReadyLink’s subsequent petition for review.
II. Younger Abstention
A.
The district court had jurisdiction over ReadyLink’s
complaint under 28 U.S.C. § 1331, see Verizon Md. Inc. v.
Pub. Serv. Comm’n of Md., 535 U.S. 635, 642 (2002), and we
have jurisdiction over this appeal under 28 U.S.C. § 1291, see
Agriesti v. MGM Grand Hotels, Inc., 53 F.3d 1000, 1000–01
(9th Cir. 1995). We review the district court’s Younger
determination de novo. Gilbertson v. Albright, 381 F.3d 965,
982 n.19 (9th Cir. 2004) (en banc).
READYLINK HEALTHCARE V. SCIF 7
B.
In Younger v. Harris, the Supreme Court reaffirmed the
long-standing principle that federal courts sitting in equity
cannot, absent exceptional circumstances, enjoin pending
state criminal proceedings. 401 U.S. at 43–54. The Court,
citing comity concerns, later extended the Younger principle
to civil enforcement actions “akin to” criminal proceedings,
Huffman v. Pursue, Ltd., 420 U.S. 592, 604 (1975), and to
suits challenging “the core of the administration of a State’s
judicial system,” Juidice v. Vail, 430 U.S. 327, 335 (1977).
The Court’s subsequent opinion in Middlesex County
Ethics Committee v. Garden State Bar Ass’n, 457 U.S. 423(1982), found abstention appropriate when (1) there is “an
ongoing state judicial proceeding,” (2) those “proceedings
implicate important state interests,” and (3) there is “an
adequate opportunity in the state proceedings to raise
constitutional challenges.” Id. at 432. Our ensuing decisions
concluded that the three Middlesex factors controlled Younger
abstention in civil actions. See, e.g., Meredith v. Oregon,
321 F.3d 807, 816–17 (9th Cir. 2003); Fresh Int’l Corp. v.
Agric. Labor Relations Bd., 805 F.2d 1353, 1357–62 (9th Cir.
1986). And, although not a threshold element, we identified
a fourth requirement: The requested relief must seek to
enjoin—or have the practical effect of enjoining—ongoing
state proceedings. AmerisourceBergen Corp. v. Roden,
495 F.3d 1143, 1149 (9th Cir. 2007); Gilbertson, 381 F.3d at977–78 (citing Samuels v. Mackell, 401 U.S. 66, 72 (1971)).
But, our post-Middlesex decisions have sent mixed signals
on whether Younger remains limited to criminal cases, quasi-
criminal actions, and orders involving the administration of
a state’s judicial system. A number of our opinions suggested
8 READYLINK HEALTHCARE V. SCIF
that, notwithstanding Middlesex, Younger applies only to
those three types of proceedings. See, e.g., Logan v. U.S.
Bank Nat. Ass’n, 722 F.3d 1163, 1167–69 (9th Cir. 2013);
Potrero Hills Landfill, Inc. v. Cnty. of Solano, 657 F.3d 876,
883–85 & n.7 (9th Cir. 2011); Martori Bros. Distribs. v.
James-Massengale, 781 F.2d 1349, 1354–56 (9th Cir. 1986),
abrogated on other grounds, Ohio Civ. Rights Comm’n v.
Dayton Christian Schs., Inc., 477 U.S. 619, 627 n.2 (1986).
Others, however, implied that district courts must abstain in
any action when the Middlesex factors are present. See, e.g.,
Delta Dental Plan of Cal., Inc. v. Mendoza, 139 F.3d 1289,
1295 (9th Cir. 1998); Fresh Int’l Corp., 805 F.2d at 1358.
We also have been less than clear on whether Younger
applies only to state-initiated proceedings. Compare Potrero
Hills, 657 F.3d at 883 n.7 (“[O]ur case law clearly
demonstrates that the first Younger prong may be satisfied
even when the ongoing state proceeding involves only private
litigants.”), with San Jose Silicon Valley Chamber of
Commerce Political Action Comm. v. City of San Jose,
546 F.3d 1087, 1093 (9th Cir. 2008) (“We must abstain under
Younger if four requirements are met: (1) a state-initiated
proceeding is ongoing . . . .”).
Sprint resolved these interpretive dilemmas, squarely
holding that Younger abstention is limited to the “three
exceptional categories” of cases identified in New Orleans
Public Service, Inc. v. Council of New Orleans (NOPSI),
491 U.S. 350, 367–68 (1989). Sprint, 134 S. Ct. at 592.
Those cases are: (1) “parallel, pending state criminal
proceeding[s],” (2) “state civil proceedings that are akin to
criminal prosecutions,” and (3) state civil proceedings that
“implicate a State’s interest in enforcing the orders and
judgments of its courts.” Id. at 588.
READYLINK HEALTHCARE V. SCIF 9
For orders at the “core” of the judicial process, the
underlying state proceeding plainly need not have been
initiated by the state. See Juidice, 430 U.S. at 329–30,
335–36; Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 4–5, 12–14
(1987). For civil enforcement actions that are akin to
criminal proceedings, however, “a state actor is routinely a
party to the state proceeding and often initiates the action,”
the proceedings “are characteristically initiated to sanction
the federal plaintiff . . . for some wrongful act,” and
“[i]nvestigations are commonly involved, often culminating
in the filing of a formal complaint or charges.” Sprint, 134 S.
Ct. at 592.
In civil cases, therefore, Younger abstention is appropriate
only when the state proceedings: (1) are ongoing, (2) are
quasi-criminal enforcement actions or involve a state’s
interest in enforcing the orders and judgments of its courts,
(3) implicate an important state interest, and (4) allow
litigants to raise federal challenges. See Sprint, 134 S. Ct. at593–94; Gilbertson, 381 F.3d at 977–78. If these “threshold
elements” are met, we then consider whether the federal
action would have the practical effect of enjoining the state
proceedings and whether an exception to Younger applies.
See Gilbertson, 381 F.3d at 978, 983–84. Each element must
be satisfied, AmerisourceBergen, 495 F.3d at 1148, and the
date for determining whether Younger applies “is the date the
federal action is filed,” Gilbertson, 381 F.3d at 969 n.4.
C.
The state proceedings here did not fall within the three
exceptional categories of cases identified in Sprint and
NOPSI. First, obviously they were not parallel state criminal
proceedings.
10 READYLINK HEALTHCARE V. SCIF
Second, neither the Commissioner’s approval of SCIF’s
premium calculation nor the Los Angeles Superior Court’s
affirmance was an order at “the core of” California’s court
system, Juidice, 430 U.S. at 335, implicating the “State’s
interest in enforcing the orders and judgment of its courts,”
Sprint, 134 S. Ct. at 588. “Core” orders involve the
administration of the state judicial process—for example, an
appeal bond requirement, Pennzoil Co. v. Texaco, Inc.,
481 U.S. at 12–14, a civil contempt order, Juidice, 430 U.S.
at 335–36, or an appointment of a receiver, Lebbos v. Judges
of the Superior Court, 883 F.2d 810, 815 (9th Cir. 1989).
This case, in contrast, involves a “single state court
judgment” interpreting an insurance agreement and state law,
not the process by which a state “compel[s] compliance with
the judgments of its courts.” Potrero Hills, 657 F.3d at 886.
If the mere possibility of inconsistent federal and state court
judgments justified Younger abstention, Younger would
swallow whole both Colorado River abstention and
preclusion. See AmerisourceBergen, 495 F.3d at 1150.
Third, the state court proceedings here do not “rank as an
act of civil enforcement . . . ‘akin to a criminal prosecution’
in ‘important respects.’” Sprint, 134 S. Ct. at 592 (quoting
Huffman, 420 U.S. at 604). Even assuming arguendo that the
Commissioner’s decision and the subsequent state court
review was a “unitary proceeding,” see San Jose Silicon
Valley, 546 F.3d at 1093, it plainly was not a civil
enforcement proceeding. SCIF, acting as a private party,
audited and billed ReadyLink for its yearly premium.
ReadyLink, a private party, requested agency review of that
decision. The Commissioner adjudicated the dispute between
ReadyLink and SCIF by interpreting state law, and
ReadyLink then requested judicial review.
READYLINK HEALTHCARE V. SCIF 11
SCIF and the Commissioner argue that the state
proceedings were akin to a criminal prosecution because the
Commissioner “convened” an administrative hearing and
issued an opinion interpreting state regulations. The assertion
proves too much. If the mere “initiation” of a judicial or
quasi-judicial administrative proceeding were an act of civil
enforcement, Younger would extend to every case in which
a state judicial officer resolves a dispute between two private
parties. This would render meaningless the “virtually
unflagging obligation of the federal courts to exercise the
jurisdiction given them,” Colorado River, 424 U.S. at 817,
and “would extend Younger to virtually all parallel state and
federal proceedings, at least where a party could identify a
plausibly important state interest,” Sprint, 134 S. Ct. at 593.
That the Commissioner interpreted a California regulation is
similarly irrelevant: In nearly every civil case, litigants
request that a court or a quasi-judicial agency interpret a
statute, a regulation, or the common law.
The district court therefore erred by abstaining. But,
things have changed since the district court’s decision: The
California courts have now directly rejected ReadyLink’s
preemption claim. We turn to the consequences of that
rejection.
III. Preclusion
A.
Because the California Court of Appeal rejected
ReadyLink’s preemption claim after the federal district court
entered its judgment, neither party addressed preclusion
below. However, we may consider issue preclusion, a
question of law, for the first time on appeal. Clements v.
12 READYLINK HEALTHCARE V. SCIF
Airport Auth., 69 F.3d 321, 329–30 (9th Cir. 1995). Issue
preclusion “bars ‘successive litigation of an issue of fact or
law actually litigated and resolved in a valid court
determination essential to the prior judgment,’ even if the
issue recurs in the context of a different claim.” Taylor v.
Sturgell, 553 U.S. 880, 892 (2008) (quoting New Hampshire
v. Maine, 532 U.S. 742, 748–49 (2001)).
We determine the preclusive effect of a state court
judgment by applying that state’s preclusion principles.
28 U.S.C. § 1738; Migra v. Warren City Sch. Dist. Bd. of
Educ., 465 U.S. 75, 81 (1984). State law governs even if the
state court action challenged “administrative decisions under
section 1094.5, California’s administrative mandamus
statute,” White v. City of Pasadena, 671 F.3d 918, 926 (9th
Cir. 2012), and the federal court action alleges a
constitutional violation, Allen v. McCurry, 449 U.S. 90, 98
(1980).
California law bars relitigation of an issue of law or fact
if five requirements are met:
First, the issue sought to be precluded from
relitigation must be identical to that decided in
a former proceeding. Second, this issue must
have been actually litigated in the former
proceeding. Third, it must have been
necessarily decided in the former proceeding.
Fourth, the decision in the former proceeding
must be final and on the merits. Finally, the
party against whom preclusion is sought must
be the same as, or in privity with, the party to
the former proceeding.
READYLINK HEALTHCARE V. SCIF 13
Lucido v. Superior Court, 795 P.2d 1223, 1225 (Cal. 1990)
(en banc). If these threshold requirements are satisfied, a
court then determines whether preclusion would be consistent
with the “preservation of the integrity of the judicial system,
promotion of judicial economy, and protection of litigants
from harassment by vexatious litigation.” Id. at 1227.
B.
Applying the California issue preclusion test, we conclude
that the decision of the California Court of Appeal bars
ReadyLink’s preemption claim.
First, the California court resolved the very issue that
ReadyLink raised in the district court—whether the
Commissioner’s decision creates an obstacle to federal tax
law. Jones, 148 Cal. Rptr. 3d at 888–89. The state court held
that ReadyLink’s preemption argument was a misguided
attempt “to compare two distinct areas of law,” and
concluded that the Commissioner may impose more
demanding per diem reporting requirements for workers’
compensation purposes than the IRS imposes for federal tax
purposes. Id. at 888–90.
Second, ReadyLink actually litigated the issue. “For
purposes of collateral estoppel, an issue was actually litigated
in a prior proceeding if it was properly raised, submitted for
determination, and determined in that proceeding.”
Hernandez v. City of Pomona, 207 P.3d 506, 514 (Cal. 2009).
ReadyLink’s state briefing asserted that IRS reporting
regulations preempted the Commissioner’s decision. The
California Court of Appeal disagreed.
14 READYLINK HEALTHCARE V. SCIF
Issue preclusion applies even if the Commissioner himself
had no authority to declare the USRP unenforceable in the
underlying administrative proceedings. See Cal. Const. art
III, § 3.5. We do not today consider the preclusive effect of
the Commissioner’s findings. See Univ. of Tenn. v. Elliott,
478 U.S. 788, 796–99 (1986); Miller v. Cnty. of Santa Cruz,
39 F.3d 1030, 1033 (9th Cir. 1994). Rather, we address the
holding of the Court of Appeal, which in the first instance
rejected ReadyLink’s preemption claim. Jones, 148 Cal.
Rptr. 3d at 888–89; see also Turnbow v. Pac. Mut. Life Ins.
Co., 934 F.2d 1100, 1103 (9th Cir. 1991) (holding that state
court preemption rulings are entitled to preclusive effect).
ReadyLink insists that it could not fully present its
preemption claim without conducting discovery or presenting
evidence to a trial court. ReadyLink, however, made the
same point to the California Court of Appeal, which
determined as a matter of law that the Commissioner’s
decision would not frustrate the purpose of federal reporting
regulations. Jones, 148 Cal Rptr. 3d at 888–89. This satisfies
the “actually litigated” requirement. See Lucido, 795 P.2d at
1225 (requiring “the opportunity to present full cases”); see
also Kremer v. Chem. Const. Corp., 456 U.S. 461, 481 (1982)
(“[S]tate proceedings need do no more than satisfy the
minimum procedural requirements of the Fourteenth
Amendment’s Due Process Clause in order to qualify for the
full faith and credit guaranteed by federal law.”). Preemption
is almost always a legal question, the resolution of which is
rarely aided “by development of a more complete factual
record.” Hotel Emps. & Rest. Emps. Int’l Union v. Nev.
Gaming Comm’n, 984 F.2d 1507, 1513 (9th Cir. 1993).
Thus, we have granted preclusive effect to a Rule 12(b)(6)
dismissal of a conflict preemption claim, see Stewart v. U.S.
Bancorp, 297 F.3d 953, 956, 959 (9th Cir. 2002), and have
READYLINK HEALTHCARE V. SCIF 15
approved the dismissal of claims on the basis of obstacle
preemption at the pleading stage, see Pub. Util. Dist. No. 1 of
Grays Harbor Cnty. v. IDACORP Inc., 379 F.3d 641, 650
(9th Cir. 2004); Fireman’s Fund Ins. Co. v. City of Lodi,
302 F.3d 928, 949–51 (9th Cir. 2002). California courts have
done the same. See, e.g., Yarick v. PacifiCare of Cal.,
102 Cal. Rptr. 3d 379, 386–87 (Ct. App. 2009) (sustaining a
demurrer on the basis of obstacle preemption); Pollock v.
Univ. of S. Cal., 6 Cal. Rptr. 3d 122, 132 (Ct. App. 2003)
(granting preclusive effect to a “purely legal” judgment
sustaining a demurrer).
The third, fourth, and fifth requirements for issue
preclusion under California law are not subject to debate.
The state court necessarily decided the preemption issue, as
“the resolution of the issue was not ‘entirely unnecessary to
the judgment in the initial proceeding.’” Zevnik v. Superior
Court, 70 Cal. Rptr. 3d 817, 821 (Ct. App. 2008) (quoting
Lucido, 795 P.2d at 1226). The California Court of Appeal’s
decision was on the merits, and became final after review was
denied. See Abelson v. Nat’l Union Fire Ins. Co., 35 Cal.
Rptr. 2d 13, 19 (Ct. App. 1994). And, the parties in the state
and federal actions were the same.
Moreover, applying issue preclusion would preserve “the
integrity of the judicial system” by promoting judicial
economy. Lucido, 795 P.2d at 1229. There is no reason for
a federal court to tackle anew the precise legal issue resolved
by the California Court of Appeal.
Contrary to ReadyLink’s assertion, giving the California
Court of Appeal’s decision preclusive effect does not close
federal courts to constitutional claims against California
agencies. Had ReadyLink not made its Supremacy Clause
16 READYLINK HEALTHCARE V. SCIF
claim in the mandamus action, the Court of Appeal’s opinion
would not have precluded a federal suit raising that claim.
See Honey v. Distelrath, 195 F.3d 531, 533 (9th Cir. 1999);
Gallagher v. Frye, 631 F.2d 127, 129–30 (9th Cir. 1980).
ReadyLink also could have avoided claim preclusion by
initially requesting both administrative review and
declaratory relief in federal court. Cf. City of Chi. v. Int’l
Coll. of Surgeons, 522 U.S. 156, 163–69 (1997) (holding that
federal district courts have supplemental jurisdiction over
state law claims arising under a state administrative review
statute); Duchek v. Jacobi, 646 F.2d 415, 419 (9th Cir. 1981)
(“However extensive their power to create and define
substantive rights, the states have no power directly to enlarge
or contract federal jurisdiction.”). But, ReadyLink instead
voluntarily chose to litigate the Supremacy Clause claim in
the state mandamus action, and the appellate court’s decision
therefore has preclusive effect.
IV. Conclusion
For the foregoing reasons, the judgment of the district
court dismissing the complaint is AFFIRMED.