Brandt v. STATE FARM MUT. AUTO. INS. CO.
| Decision Date | 02 September 1988 |
| Docket Number | No. Civ. S-86-1327 RAR.,Civ. S-86-1327 RAR. |
| Citation | 693 F. Supp. 877 |
| Parties | Tamera K. BRANDT, Plaintiff, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant. |
| Court | U.S. District Court — Eastern District of California |
Thomas Edward Wall, Culver City, Cal., for plaintiff.
William O. Morris, McDonald, Saeltzer, Morris Creeggan & Waddock, Sacramento, Cal., James S. Link, Sray, Could & Bowers, Los Angeles, Cal., for defendant.
On December 4, 1985, the original complaint in the underlying action was filed in the Superior Court of the State of California in and for the County of Los Angeles, bearing case No. C577397. Therein, plaintiff named as defendants STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and DOES ONE through TWENTY. The complaint stated three causes of action: (1) breach of statutory duties contained in the California Insurance Code and in particular violation of California Insurance Code § 790.03(g)(5),1 (2) common law negligence, and (3) negligent infliction of emotional harm. On May 30, 1986, following defendant's motion for change of venue, the case was transferred to the Superior Court of the State of California in and for the County of San Joaquin. Pursuant to order dated September 16, 1986, defendant's demurrers to the second and third causes of action (negligence and negligent infliction of emotional harm) were sustained with leave to amend. Thereafter, plaintiff filed a first amended complaint alleging a single cause of action for breach of statutory duties under the California Insurance Code. Further, pursuant to stipulation and order dated January 28, 1988, all DOE defendants named in the first amended complaint were dismissed with prejudice so that the only remaining defendant was STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY.
The first amended complaint makes the following factual allegations: plaintiff was involved in an automobile accident with one other vehicle in Lodi, California. Plaintiff sustained medical injuries, property damage, and lost wages as a proximate result of said accident. Defendant admitted liability and a settlement in the amount of $15,000.00 was agreed upon. Judgment in the action was entered January 18, 1985. Thereafter, plaintiff alleges that defendant acted in bad faith by submitting a check for $14,900.00 four weeks after entry of judgment and by refusing to pay post-judgment interest on the remaining $100.00. Specifically, the complaint alleges that these acts constitute a violation of California Insurance Code § 790.03(h)(5) because defendant refused to settle the underlying personal injury claim when the liability of the insured had become reasonably clear.2
Defendant filed a petition for removal of the action to the federal court on November 7, 1986. On November 18, 1987, defendant filed the instant motion for judgment on the pleadings pursuant to F.R.Civ. P. 12(c), arguing that Cal.Ins.Code § 790.03(h)(5) is unconstitutional on its face and that because the Code violation is the sole cause of action in plaintiff's complaint, plaintiff has failed to state a claim upon which relief can be granted. A hearing was held on February 8, 1988 wherein the court made its oral ruling denying defendant's motion for judgment on the pleadings. At the conclusion of the hearing, the court upheld the constitutionality of the statute and thereafter signed an order dated February 23, 1988 which briefly summarized its oral ruling. Since the court is unaware of any published opinions addressing the constitutionality of Cal.Ins.Code § 790.03(h)(5), the court herein elaborates on its rationale supporting its February 8, 1988 oral ruling.
Defendant argues that a claim for breach of Cal. Ins. Code § 790.03(h)(5) is facially unconstitutional because (1) it burdens and chills the exercise of free speech guaranteed by the first amendment in that it looks to the subject matter and content of the ideas, opinions and advocacy expressed by defendants and other insurers, including their employees and legal counsel, during the claims settlement, negotiation, and litigation process; and (2) it burdens insurers' first amendment right to petition the government for redress of grievances, and to gain access to the courts in that the statute mandates that defendant forego the exercise of these constitutional rights on pain of severe sanctions.3
At the outset the court notes that facial challenges to statutes under the first amendment are permitted because the chilling effect that a statute might have on the freedoms of expression and association warrant an expedited determination of its constitutionality. See IDK, Inc. v. County of Clark, 836 F.2d 1185, 1190 (9th Cir. 1988). However, facial invalidation is "strong medicine" which should be used "sparingly and only as a last resort." Id. at 1198 (quoting Broadrick v. Oklahoma, 413 U.S. 601, 613, 93 S.Ct. 2908, 2916-2917, 37 L.Ed.2d 830 (1973)).
A facial attack on the constitutionality of a statute may proceed along four axes: (1) the law may impermissibly burden the complainant's rights, (2) it may impermissibly burden the rights of third parties, (3) it may fail to provide adequate notice of what conduct is prohibited, or (4) it may lack sufficient guidelines to prevent arbitrary and discriminatory enforcement. IDK, Inc. v. County of Clark, 836 F.2d 1185 at 1191 (citing Village of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 495-498, 102 S.Ct. 1186, 1191-1193, 71 L.Ed.2d 362 (1982). The first two axes attack the statute as a prior restraint or an invalid time, place, or manner restriction. The second additionally is an attack upon the statute for overbreadth, in which the complainant asserts the rights of third parties, in this case, other insurers.4IDK, Inc. v. County of Clark, 836 F.2d 1185 at 1191. The third and fourth are challenges for vagueness. Id. (citing Grayned v. City of Rockford, 408 U.S. 104, 108-109, 92 S.Ct. 2294, 2298-2299, 33 L.Ed.2d 222 (1972)). Defendant STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY asserts all four axes as grounds for invalidating Cal.Ins.Code § 790.03(h)(5). Additionally, defendant argues that § 790.03(h)(5) violates the equal protection clause of the fourteenth amendment.
The court first addresses the issue of whether Cal.Ins.Code § 790.03(h)(5) impermissibly burdens defendant's first amendment rights. The standard to be applied in making this determination depends upon whether the expression allegedly being suppressed by the regulation is "commercial speech" and therefore accorded a lesser protection than is given to other constitutionally guaranteed expression. See IDK, Inc. v. County of Clark, 836 F.2d 1185, at 1194; Central Hudson Gas v. Public Service Com'n of N.Y., 447 U.S. 557, 562-563, 100 S.Ct. 2343, 2349-2350, 65 L.Ed.2d 341 (1980). The standard to be applied also depends upon whether the statute at issue is a regulation of conduct which only incidentally limits speech and is therefore scrutinized under a more lenient standard. See IDK, Inc. v. County of Clark, 836 F.2d 1185 at 1194; United States v. O'Brien, 391 U.S. 367, 376-377, 88 S.Ct. 1673, 1678-1679, 20 L.Ed.2d 672 (1968). For the reasons as more particularly set forth herein, the court finds that § 790.03(h)(5) is a regulation of a course of conduct which incidentally regulates commercial speech and as such passes both applicable standards of judicial scrutiny.
It appears from the plain language of § 790 that its purpose is to "regulate trade practices in the business of insurance ... by defining or providing for the determination of all such practices in this State which constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices so defined or determined." Cal.Ins.Code § 790. Thus, § 790.03(h)(5) was intended to regulate a course of business conduct, i.e., the practice of settling claims "in good faith once liability has become reasonably clear." Cal.Ins.Code § 790.03(h)(5).
It has never been deemed a violation of freedom of speech to "make a course of conduct illegal merely because the conduct was in part initiated, evidenced or carried out by means of language, either spoken, written, or printed." Cox v. State of Louisiana, 379 U.S. 536, 555, 85 S.Ct. 453, 464-465, 13 L.Ed.2d 471 (1965) (quoting Giboney v. Empire Storage & Ice Co., 336 U.S. 490, 502, 69 S.Ct. 684, 690-691, 93 L.Ed. 834 (1949)). In short, the state does not lose its power to "regulate commercial activity deemed harmful to the public merely because speech is a component of that activity." IDK, Inc. v. County of Clark, 836 F.2d 1185, 1194 (9th Cir.1988) (quoting Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 456-457, 98 S.Ct. 1912, 1918-1919, 56 L.Ed.2d 444 (1978)).
The regulation of conduct which incidentally limits speech is permissible if the following standard is met: (1) the regulation is within the constitutional power of the government, (2) there is an important or substantial governmental interest in regulating the non-speech aspect of the conduct, (3) the governmental interest is unrelated to the suppression of free expression, and (4) the incidental restriction on alleged first amendment freedoms is no greater than is essential to the furtherance of that interest. United States v. O'Brien, 391 U.S. 367, 377, 88 S.Ct. 1673, 1679, 20 L.Ed.2d 672 (1968); Schad v. Borough of Mount Ephraim, 452 U.S. 61, 68 n. 7, 101 S.Ct. 2176, 2182-2183 n. 7, 68 L.Ed.2d 671 (1981).
Unquestionably the police power of the state legitimately extends to the activity of regulating unfair business practices in the insurance industry. See California State Auto Ass'n Inter-Insurance Bureau v. Maloney, 341 U.S. 105, 109-110, 71 S.Ct. 601, 603-604, 95 L.Ed. 788 (1951). The proposition that the police power extends to all the great public needs is "particularly apt when the business of insurance is...
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