Cumbre, Inc. v. State Compensation Ins. Fund

Filed 5/14/07 Cumbre, Inc. v. State Compensation Ins. Fund CA4/2

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION TWO

APPEAL from the Superior Court of San Bernardino County. Craig S. Kamansky, Frederick A. Mandabach and Shahla Sabet, Judges. Affirmed in part and reversed in part.

Nossaman, Guthner, Knox & Elliott, James C. Powers, Charles M. Calderon and Melissa A. Poole for Plaintiffs and Appellants.

Sheppard, Mullin Richter & Hampton, Andre J. Cronthall, Whitney Jones Roy; Charles Savage, Jody Debernardi and Lori Oesterreich for Defendant and Respondent.

1. Introduction

Plaintiffs Cumbre, Inc. and its wholly owned subsidiary, Coachella Valley Insurance Service, Inc., (collectively Cumbre) were preferred brokers for defendant State Compensation Insurance Fund (State Fund). In 2003, State Fund unilaterally terminated its preferred broker agreements with certain brokers, including Cumbre, who had a loss ratio above 80 percent for the years 1999, 2000, and 2001. Cumbre sued State Fund for various causes of action, including a breach of contract, a violation of the Unfair Competition Law (UCL) (Bus. & Prof. Code, 17200 et seq.), and a violation of the common law doctrine of fair procedure. In 2004, State Fund offered to reinstate the brokers on condition that the brokers were not engaged in litigation with State Fund. Cumbre declined the offer and amended its complaint by adding a claim under section 1983 of title 42 of the United States Code (section 1983) for encumbering its access to the courts. In response to the parties pretrial motions, the trial court largely ruled in State Funds favor, sustaining its successive demurrers and granting its motion for summary judgment.

This appeal primarily addresses the question of whether the common law doctrine of fair procedure applied to State Funds decision to terminate Cumbres broker agreement. Cumbre claims that the doctrine applies because State Funds decision involved an important public interest and adversely affected Cumbres substantial economic interests. Cumbre raises a number of arguments, including that State Funds reliance on Insurance Code section 769 provided no defense to its fair procedure claim. Cumbre also challenges the trial courts decisions sustaining State Funds demurrers on its breach of contract and section 1983 causes of action and granting State Funds motion for summary judgment on its cause of action under the UCL.

We conclude that the common law doctrine of fair procedure may preclude State Fund from unilaterally terminating its broker agreements without affording basic procedural rights where such termination affected the brokers substantial economic interests. There remains, however, triable issues of material fact as to whether the rule applied under the circumstances in this case and, if so, whether State Fund failed to provide fair procedure in deciding to terminate the agreement and in considering Cumbres appeal from that decision. For this reason and for the reasons discussed below, we reverse the trial courts judgment in part and affirm in part.

2. Factual and Procedural History

State Fund is a public enterprise fund and a state agency under the Department of Industrial Relations. (Ins. Code, 11773; Lab. Code, 56.) State Fund provides employers with workers compensation insurance and operates as a self-supporting business. (Ins. Code, 11775.) State Fund insures over 50 percent of the states employers. State Fund operates by issuing policies to employers both directly and through authorized brokers. State Fund enters into one-year broker agreements with its authorized brokers. State Fund currently has contracts with 4,000 brokers.

Cumbre is an insurance broker, specializing in workers compensation insurance. In 1995, Cumbre became an authorized broker for State Fund. In 1999, Cumbre also qualified to participate in State Funds preferred broker program, which entitled brokers, who had a large volume of business, to additional commissions over and above the standard commissions. In addition to their Broker Agreement, Cumbre and State Fund executed a one-year Preferred Broker Agreement. For the year 2003, as in the previous years, Cumbre and State Funds business relationship was defined by the standard broker agreement and the preferred broker agreement.

Because State Fund was created, in part, to ensure that all employers had access to workers compensation insurance, State Fund provided insurance to employers who otherwise may not have been able to obtain policies from private insurers. In recent years, many private insurers, either voluntarily or because of insolvency, have left the market, resulting in an increase in business for State Fund. This also has resulted in a decline in State Funds premium to surplus ratio. In order to maintain or improve its financial strength, State Fund implemented a new program to terminate its relationships with brokers who had an average combined loss ratio in excess of 80 percent during the years 1999, 2000, and 2001.

The 2003 broker agreement provides that the agreement can be terminated [b]y either party after not less than sixty (60) days prior written notice to the other, such termination to be effective as of the date designated in the notice. The agreement does not require cause for termination.

On April 2, 2003, State Fund sent Cumbre a letter stating its new program and informing Cumbre that, according to State Funds records, Cumbre had a three-year combined average loss ratio in excess of 80 percent. The termination was effective August 1, 2003. The letter also informed Cumbre that it had the option to appeal the termination in writing. Cumbre submitted a written appeal, which was evaluated by State Fund and rejected.

After the termination, Cumbre was not permitted to place new business with State Fund. Cumbre, however, was allowed to maintain its existing policies. In the year before the termination, Cumbres policies produced over $16,500,000 in premiums, resulting in over $1,425,000 in commissions. After the termination, Cumbre continued to receive commissions on the existing policies, estimated at about $580,000.

Cumbre filed its original complaint on July 2, 2003. Cumbres complaint included causes of action for breach of contract, negligence, breach of the implied duty of good faith and fair dealing, unfair business practices under the UCL, and declaratory relief.

In 2004, State Fund offered to reinstate all of the terminated brokers. The letter offering reinstatement provided the following condition: Brokerages engaged in litigation with State Fund which arises in whole or part out of State Funds termination of any brokers or State Funds broker rehabilitation program are not eligible for reinstatement.

Unwilling to relinquish its claim for damages incurred during its termination, Cumbre proceeded with the lawsuit. After the court sustained the demurrer with leave to amend on the first four of its complaints, Cumbre, with new counsel, filed its fourth amended complaint. In its fourth amended complaint, Cumbre for the first time alleged a violation of its rights under the common law doctrine of fair procedure. Cumbre also alleged causes of action for breach of contract, interference with prospective economic advantage, unfair business practices, and a violation of section 1983 based on the infringement of Cumbres constitutional rights. State Fund demurred and the trial court sustained the demurrer only as to Cumbres breach of contract and section 1983 claims.

In its fifth amended complaint, which was filed on April 29, 2005, Cumbre omitted the breach of contract claim and amended its claim under section 1983. State Fund demurred, arguing only that Cumbre failed to allege facts sufficient to support its fifth cause of action. The trial court sustained the demurrer without leave to amend. Thereafter Cumbre unsuccessfully petitioned this court for writ of mandate. (Cumbre, Inc. v. State Compensation Insurance Fund (E038876, petn. for writ of mandate denied Oct. 6, 2005).)

Cumbre filed a motion for summary adjudication to resolve the issues related to its claim under the common law doctrine of fair procedure. State Fund also filed a motion for summary judgment or summary adjudication. The trial court heard both motions on December 1, 2005, and later issued its statement of decision denying Cumbres motion and granting State Funds motion.

The trial court entered judgment for State Fund.

3. Cause of Action for Fair Procedure

The main issue in this case is whether the doctrine of fair procedure applied to State Funds decision to terminate Cumbres preferred broker agreement. We, therefore, begin our discussion by reviewing the trial courts rulings on the parties motions for summary judgment or summary adjudication, which involved this issue.

A. Standard of Review

A trial court may grant a motion for summary judgment when the moving party has shown that there is no triable issue of fact and that the moving party is entitled to judgment as a matter of law. (Code Civ. Proc., 437c, subd. (c); Kahn v. East SideUnionHigh School Dist. (2003) 31 Cal.4th 990, 1002-1003.) Similarly, a court may grant a motion for summary adjudication if it completely disposes of a cause of action, affirmative defense, claim for damages, or an issue of duty. (Code Civ. Proc., 437c, subd. (f)(1); Marie Y. v. General Star Indem. Co. (2003) 110 Cal.App.4th 928, 949.) In both cases, a reviewing court evaluates the record and ruling de novo and applies the same standard used by the trial court -- i.e., we consider all the uncontradicted evidence and the undisputed inferences reasonably drawn from that evidence and we determine whether the moving party was entitled to judgment as a matter of law. (See Kahn v. East Side Union High School Dist., supra, at pp. 1002-1003.)

In regards to the trial courts rulings, Cumbre preliminarily argues that the court failed to consider State Funds motion for summary judgment and summary adjudication separately from Cumbres motion for summary adjudication. Specifically, Cumbre argues that the trial court erroneously considered evidence presented in support of its motion for summary adjudication when it ruled on State Funds motion for summary judgment. According to Cumbre, the court should have relied solely on the evidence cited in the separate statements submitted with State Funds motion for summary judgment.

In making this argument, Cumbre relies on the Golden Rule. While the Golden Rule is that the separate statement must set forth all the facts necessary for the summary judgment (see United Community Church v. Garcin (1991) 231 Cal.App.3d 327, 335), courts have viewed this rule as permissive and not mandatory (see, e.g., San Diego Watercrafts, Inc. v. Wells Fargo Bank (2002) 102 Cal.App.4th 308, 315-316; accord, Zimmerman, Rosenfeld, Gersh & Leeds LLP v. Larson (2005) 131 Cal.App.4th 1466, 1478; Fenn v. Sherriff (2003) 109 Cal.App.4th 1466, 1480-1481). Code of Civil Procedure section 437c affords trial courts discretion in evaluating motions that are not accompanied by adequate statements of undisputed facts. (Code Civ. Proc., 437c, subd. (b); Zimmerman, Rosenfeld, Gersh & Leeds LLP v. Larson, supra, at p. 1478.) Therefore, rather than a mechanical application of the Golden Rule, the use of evidence not referenced in the moving partys separate statement should be left to the trial courts sound discretion. (San Diego Watercrafts, Inc. v. Wells Fargo Bank, supra, at p. 315.)

In this case, because both State Fund and Cumbre filed motions for summary judgment or summary adjudication involving many of the same issues, it was not an abuse of discretion to consider evidence presented by both parties to resolve the issues. In reviewing the trial courts decision de novo, we likewise have the same discretion to consider the evidence together, rather than the evidence presented with each motion separately, to determine whether either or any party was entitled to judgment as a matter of law. (See Fenn v. Sherriff, supra, 109 Cal.App.4th at p. 1481.)

B. Common Law Doctrine of Fair Procedure

The common law doctrine of fair procedure is similar to the constitutional doctrine of due process. While due process applies only to government actions (see Santa Monica Beach, Ltd. v. Superior Court (1999) 19 Cal.4th 952, 978), fair procedure also applies to the decisions of private organizations (see Potvin v. Metropolitan Life Ins. Co. (2000) 22 Cal.4th 1060, 1066).

Based on one description of the rule, [t]he common law right to fair procedure protects an individual from arbitrary exclusion or expulsion from membership in a private entity affecting the public interest where the exclusion or expulsion has substantial adverse economic ramifications. [Citation.] The purpose of the common law right to fair procedure is to protect, in certain situations, against arbitrary decisions by private organizations. [Citation.] When the right to fair procedure is found to apply, the decisionmaking must be both substantively rational and procedurally fair. [Citation.] (Kim v. Southern Sierra Council Boy Scouts of America (2004) 117 Cal.App.4th 743, 746-747, citing Potvin v. Metropolitan Life Ins. Co., supra, at pp. 1070-1072, 1066, respectively.)

Procedural fairness usually requires certain components, including notice, an impartial decision maker, and a meaningful opportunity to respond or to be heard. (See Youngblood v. Wilcox (1989) 207 Cal.App.3d 1368, 1373-1374; Curran v. Mount Diablo Council of the Boy Scouts (1983) 147 Cal.App.3d 712, 720; Hackethal v. California Medical Assn. (1982) 138 Cal.App.3d 435, 442.) However, [f]air procedure does not compel proceedings with the formalities of a court trial. The minimum requirements are described in varying ways and may depend upon the action contemplated by the organization and the effect of that action on the individual. (Hackethal v. California Medical Assn., supra, at p. 442.)

Courts have applied the common law right to fair procedure in a few different contexts. The large majority of fair procedure cases have involved medical and dental professionals and the decisions made by private hospitals, medical groups, health insurance companies, and professional associations. Courts have imposed certain procedural requirements in making the following decisions: rejecting a physicians application for employment (Ascherman v. Saint Francis Memorial Hosp. (1975) 45 Cal.App.3d 507, 514); dismissing a physician from a residency program (Ezekial v. Winkley (1977) 20 Cal.3d 267, 275); denying, suspending, or revoking a physicians staff privileges (see, e.g., Miller v. Eisenhower Medical Center (1980) 27 Cal.3d 614, 626; Rosenblit v. Superior Court (1991) 231 Cal.App.3d 1434, 1445; Huang v. Board of Directors (1990) 220 Cal.App.3d 1286, 1295; Applebaum v. Board of Directors (1980) 104 Cal.App.3d 648, 660); reviewing a physicians grievances (Payne v. Anaheim Memorial Medical Center, Inc. (2005) 130 Cal.App.4th 729, 737-744); removing a physician from an insurance companys preferred provider list (Potvin v. Metropolitan Life Ins. Co., supra, 22 Cal.4th at pp. 1070-1072); reducing the fees paid to a dentist by an insurance company (Delta Dental Plan v. Banasky (1994) 27 Cal.App.4th 1598, 1605-1606); and excluding or censuring an orthodontist from a professional association (see, e.g., Pinsker v. Pacific Coast Society of Orthodontists (1974) 12 Cal.3d 541 (Pinsker II); Pinsker v. Pacific Coast Soc. of Orthodontists (1969) 1 Cal.3d 160; Salkin v. California Dental Assn. (1986) 176 Cal.App.3d 1118, 1125; Hackethal v. California Medical Assn., supra, 138 Cal.App.3d at pp. 441-442).

The doctrine of fair procedure also has been applied in the context of other private professional organizations. Courts originally appealed to a basic concept of fairness in an effort to protect individuals from arbitrary exclusion from unions and other professional associations. (See Otto v. Tailors P. & B. Union (1888) 75 Cal. 308; Von Arx v. San Francisco G. Verein (1896) 113 Cal. 377.) Since then, courts have developed a common law doctrine of fair procedure and have held that the right to fair procedure requires certain procedural protections in making decisions affecting a persons union membership. (See, e.g., Cason v. Glass Bottle Blowers Assn. (1951) 37 Cal.2d 134, 143-144; James v. Marinship Corp. (1944) 25 Cal.2d 721, 731, 740; Ellis v. American Federation of Labor (1941) 48 Cal.App.2d 440, 443-444.) One court explained the reason for imposing such procedural requirements: Where a union has, as in this case, attained a monopoly of the supply of labor by means of closed shop agreements and other forms of collective labor action, such a union occupies a quasi public position similar to that of a public service business and it has certain corresponding obligations. It may no longer claim the same freedom from legal restraint enjoyed by golf clubs or fraternal associations. Its asserted right to choose its own members does not merely relate to social relations; it affects the fundamental right to work for a living. (James v. Marinship Corp., supra, at p. 731; see also Ezekial v. Winkley, supra, 20 Cal.3d at p. 271.)

Despite language in some decisions, courts also have extended the doctrine of fair procedure to cases involving membership in private organizations that do not have any direct effect on ones ability to earn a living or pursue a particular profession. The doctrine of fair procedure has been applied to golf clubs, fraternal societies, and other mutual benefit associations. These cases sometimes involve other fundamental rights. (See, e.g., Warfield v. Peninsula Golf & Country Club (1989) 214 Cal.App.3d 646, 658 [denial of golf club membership to a divorced woman]; Curran v. Mount Diablo Council of the Boy Scouts, supra, 147 Cal.App.3d 712 [expulsion from the Boy Scouts because of homosexuality].) Some of these cases, however, simply recognize that even private organizations cannot make decisions affecting a persons membership arbitrarily or against its own bylaws and regulations. (See Von Arx v. San Francisco G. Verein, supra, 113 Cal. at pp. 379-380 [mutual aid society]; Taboada v. Sociedad Espanola etc. (1923) 191 Cal. 187, 191 [fraternal society]; Supreme Lodge, etc. v. L.A. Lodge No. 386 (1917) 177 Cal. 132, 136 [same]; Youngblood v. Wilcox, supra, 207 Cal.App.3d at p. 1374 [country club membership].) The underlying theme of these decisions, variously stated, is that membership in an association, with its associated privileges, once attained, is a valuable interest which cannot be arbitrarily withdrawn. Thus, they comport with the broader principle that one on whom an important benefit or privilege has already been conferred may enjoy legal protections not available to an initial applicant for the same benefit. [Citation.] (Ezekial v. Winkley, supra, 20 Cal.3d at p. 273.)

Although the right to fair procedure is a common law doctrine, the Legislature has recognized the need for procedural protections and, accordingly, has codified the right to fair procedure in certain contexts, including physician peer review (Bus. & Prof. Code, 809 et seq.) and membership in unincorporated associations (Corp. Code, 18320). While the common law still applies, courts also may rely on the uniform procedures provided in these statutes. (See Kaiser Foundation Hospitals v. SacramentoCounty Superior Court (2005) 128 Cal.App.4th 85, 100, fn. 13, 102.)

From the above cases, it appears that the courts have applied the right to fair procedure to private entities involved in medical and dental care, unions and other professional organizations, and mutual benefit societies. When the courts have confronted the question of whether the doctrine of fair procedure applies in a new context, they have not always been consistent. While some courts have been reluctant to extend the doctrine of fair procedure (see King v. Meese (1987) 43 Cal.3d 1217, 1231, fn. 15; King v. Regents of University of California (1982) 138 Cal.App.3d 812, 817), other courts have applied the common law doctrine rather liberally (see Warfield v. Peninsula Golf & Country Club, supra, 214 Cal.App.3d at p. 658).

In King v. Regents of University of California, the Third District held that a teacher was not entitled to a hearing before being removed from a tenure track position because the university did not exert sufficient control over his right to pursue his profession. (King v. Regents of University of California, supra, 138 Cal.App.3d at p. 817.) In other words, not achieving tenure at a university did not have the same consequences as losing staff privileges at a hospital. The Third District also noted that, before achieving tenure, the teacher had not been deprived of an important benefit or privilege that already had been conferred upon him. (Ibid.) Therefore, unlike members of mutual benefit societies, the teacher was not losing something that he already had. The Third District, therefore, refused to extend the common law right of fair procedure to a universitys decision to deny tenure. (Ibid.)

By contrast, in Warfield v. Peninsula Golf & Country Club,supra, 214 Cal.App.3d 646, the club terminated a womans membership after her divorce based on the clubs bylaws, which required that regular memberships be issued to men only. The woman sued and raised a number of claims, including one under the common law doctrine of fair procedure. She argued that her membership was important to her work as a real estate agent because of the contacts she had made through use of the club facilities. The club argued that the right to fair procedure applies only where the organization holds monopoly power over a particular trade or profession. The club argued that the plaintiff failed to show that the termination of membership adversely affected her right to pursue her profession as a real estate agent.

The First District rejected the clubs attempt to limit application of the common law right of fair procedure only to unions and professional organizations. The court specifically stated: Although most of the recent decisions concerning the right to fair procedure have arisen in the context of trade union or professional membership claims, the Supreme Courts language has been much broader in scope: However, the application of the common law rule does not depend on the existence of monopoly power. [Citations.] The judicial inquiry, rather, has consistently been focused on the practical power of the entity in question to affect substantially an important economic interest. Plaintiff has alleged such power in the matter before us. [Citation.] (Warfield v. Peninsula Golf & Country Club, supra, 214 Cal.App.3d at pp. 658-659, fn. omitted.) The court recognized that, because the golf club membership was awarded to her as a community property interest, the plaintiff could establish that she had a valuable property interest in her golf club membership. (Id. at p. 659.)

After surveying the fair procedure cases, it is apparent that the law is not entirely clear and the application of the law has not always been consistent. We can, however, discern two common elements. As in the majority of the cases described above, the person seeking fair procedure must show both (1) that the private entity functions as a quasi-public agency, performs a public purpose, or otherwise significantly affects the public interest, and (2) a violation of a fundamental right or an infringement upon a substantial economic interest.

As noted by Cumbre, a few of the cases do not include a discussion of the public interest requirement. (See Oskooi v. Fountain Valley Regional Hospital (1996) 42 Cal.App.4th 233, 245-250 (conc. opn. of Sills, J.) [observing a trend toward reliance on only the element of substantial economic interest].) However, even the cases that do not identify a public interest involve matters that affect the public in a significant way. The California Supreme Court reaffirmed the public interest requirement in Potvin v. Metropolitan Life Ins. Co.: The private organizations in our Marinship-Pinsker-Ezekial cases (respectively, a labor union; local, regional, and national associations of orthodontists; and a hospital offering a surgical residency program) all shared an attribute of significance in our determination that they were subject to the common law right to fair procedure. Each one was a private entity affecting the public interest. As has been recognized: [C]ertain institutions and enterprises are viewed by the courts as quasi-public in nature: The important products or services which these enterprises provide, their express or implied representations to the public concerning their products or services, their superior bargaining power, legislative recognition of their public aspect, or a combination of these factors, lead courts to impose on these enterprises obligations to the public and the individuals with whom they deal, reflecting the role which they have assumed, apart from and in some cases despite the existence of a contract. [Citation.] (Potvin v. Metropolitan Life Ins. Co., supra, 22 Cal.4th at p. 1070.)

Moreover, the public interest requirement is necessary to safeguard against unwarranted government intrusion into purely private affairs. While many decisions of private entities may affect individual rights, not all decisions should be subject to judicially-imposed procedural requirements. Only those affecting the public interest warrant the imposition of procedures that may not otherwise be afforded under any existing laws or agreements that govern the parties relationship. If the case does not involve a matter of great public importance, there is no legitimate basis for burdening the judiciary and interfering with the autonomy of private corporations and associations. (See California Dental Assn. v. American Dental Assn. (1979) 23 Cal.3d 346, 353-354.)

As to the second criteria, the person demanding fair procedure must show that the private entitys decision adversely affects a fundamental right. Often the liberty interest involved is the ability to earn a living. The California Supreme Court has held that, the right to practice a lawful trade or profession is sufficiently fundamental to require substantial protection against arbitrary administrative interference, either by government [citations] or by a private entity [citation]. (Ezekial v. Winkley, supra, 20 Cal.3d at p. 272; see also Tiholiz v. Northridge Hospital Foundation (1984) 151 Cal.App.3d 1197, 1202.)

The common law doctrine of fair procedure protects not only ones right to earn a living, but also ones right to practice fully ones profession. (Pinsker II, supra, 12 Cal.3d at p. 554.) In Delta Dental Plan v. Banasky,supra, 27 Cal.App.4th 1598, two dentists signed contracts with Delta Dental to be members of its panel of participating dentists. When Delta Dental discovered that the two dentists were associated with SmileCare Dental Group, Delta Dental decided to reduce their fees to that of SmileCare. After unsuccessfully appealing the decision to the membership action committee, the dentists demanded arbitration. When Delta Dental refused, the dentists filed a complaint for declaratory and injunctive relief. The trial court denied relief on the ground that the dentists had agreed to be bound by the committees decision.

In determining whether Delta Dental was entitled to judicial review, Division Three of the Second District relied on the common law right to fair procedure. The court explained, [f]air procedure comes into play where private organizations are tinged with public stature or purpose or attain a quasi-public significance, as contrasted with purely private associations which have no larger purpose or stature than pleasant, friendly and congenial social relationships. [Citation.] [Citation.] Further, the right to fair procedure with respect to membership actions is not limited to matters of exclusion or expulsion. [Citations.] (Delta Dental Plan v. Banasky, supra, 27 Cal.App.4th at p. 1607, citing Salkin v. California Dental Assn., supra, 176 Cal.App.3d at p. 1125 [involving censure, not termination].) Delta Dentals decision did not prevent the dentists from pursuing a particular profession, but involved only the amount of the dentists usual and customary fees. The court nevertheless held that the right to fair procedure applied to the determination of the dentists fees. (Delta Dental Plan v.Banasky, supra, at p. 1608.) Therefore, the case was not about whether the dentists could continue to practice their profession, but whether they would receive adequate payment for their services.

While the cases often involve the right to earn a living, the fundamental right need not be tied to ones profession. Rather, the person demanding fair procedures must establish some substantial liberty or property interest. For example, even if the case involves a quasi-public entity or a matter of great public interest, the courts will not intervene and impose additional procedural requirements where the individual cannot demonstrate an infringement upon a fundamental right or substantial economic interest. (See, e.g., Kim v. Southern Sierra Council Boy Scouts of America, supra, 117 Cal.App.4th at p. 747 [refusal to promote to the rank of Eagle Scout does not affect a substantial economic interest].) Without a showing of both elements, private entities should be entitled to govern themselves without judicial interference.

We turn now to the question of whether the threshold elements were present in this case.

C. Public Interest

As stated earlier in this opinion, the public interest element is essential to a claim of fair procedure because it guards against unwarranted government intrusion into purely private affairs. The public interest element is concerned with whether the private entity performs a function that affects the public interest. In this case, however, before making this determination, we must address the more basic question of whether the common law doctrine of fair procedure has any application where the defendant is not a private entity, but a public agency functioning as a private insurer. During oral argument, State Fund contended that the common law doctrine did not apply because State Fund is not a private entity that performs a function that affects the public interest. After having requested supplemental briefing on this issue and reviewed the parties arguments, we conclude that, although State Fund is an agency of the state, this status does not preclude it from being treated as a private entity subject to the common law doctrine of fair procedure. Furthermore, because State Fund has been entrusted with an important public function, the public interest element is amply supported by the facts in this case.

State Fund is appropriately described as a quasi-public agency. (Tilbury Constructors, Inc. v. State Compensation Ins. Fund (2006) 137 Cal.App.4th 466, 478, fn. 2.) State Fund was created by the Workmens Compensation Insurance and Safety Act of 1913. Its organization and power are designated by statute. (Ins. Code, 11770.) It is an agency under the Department of Insurance and its board members are appointed by the governor. (Tilbury, supra, at p. 478, fn. 2.)

Although State Fund is an agency of the state, it also functions as a private insurance carrier. (Gilmore v. State Comp. Ins. Fund (1937) 23 Cal.App.2d 325, 329; Notrica v. State Comp. Ins. Fund (1999) 70 Cal.App.4th 911, 918-919.) As one court noted, [T]he Legislature has established the [State] Fund as a proprietary enterprise. (Maxon Industries, Inc. v. State Compensation Ins. Fund (1993) 16 Cal.App.4th 1387, 1394, citing Courtesy Ambulance Service v. Superior Court (1992) 8 Cal.App.4th 1504, 1511-1512.) State Fund was created to operate as a self-supporting entity authorized to conduct business like any other insurance company. (Ins. Code, 11775; Notrica, supra, at p. 918.) State Fund was entrusted with the responsibility of providing workers compensation insurance to employers in order to secure sufficient compensation for injured employees and their dependents. (Gilmore, supra, at pp. 328-329.)

Because it operates as a proprietary enterprise, State Fund is liable in tort and contract as any other private insurer. Insurance Code section 11783, subdivision (a), provides that the State Fund may [s]ue and be sued in all actions arising out of any act or omission in connection with its business of affairs. Courts have held that State Fund could be liable under contract theories, tort theories, and other common law theories, including the implied duty of good faith and fair dealing. (MacGregor Yacht Corp. v. State Comp. Ins. Fund (1998) 63 Cal.App.4th 448, 453, 456-459; Tricor California, Inc. v. State Compensation Ins. Fund (1994) 30 Cal.App.4th 230, 242.) Courts also have held that State Fund could be liable for punitive damages. (See, e.g., Courtesy Ambulance Service v. Superior Court, supra, 8 Cal.App.4th 1504.) Courts uniformly have rejected State Funds attempt to avoid liability or assert immunities as a state agency. (See, e.g., Courtesy Ambulance Service, supra, at p. 1514; accord Maxon Industries, Inc. v. State Compensation Ins. Fund, supra, 16 Cal.App.4th at pp. 1391-1394.)

While State Fund is statutory defined as an agency of the state, it is to be treated no differently than a private insurer. Under Insurance Code section 11873, the general rule is that, aside from a few exceptions, State Fund is not subject to the Government Code provisions applicable to other state agencies, unless specifically provided. There are no other such specific provisions. (Notrica v. State Comp. Ins. Fund, supra, 70 Cal.App.4th at p. 941; Courtesy Ambulance Service v. Superior Court, supra, 8 Cal.App.4th at p. 1514.) It is apparent that the Fund sought to cast itself as a private enterprise rather than a public entity when it sponsored the 1979 legislation. It should be treated that way, receiving both the benefits and the disadvantages of that status. (Maxon Industries, Inc. v. State Compensation Ins. Fund, supra, 16 Cal.App.4th at p. 1392; see also Courtesy Ambulance Service, supra, at p. 1517.)

As with other private insurers, State Fund already is subject to government regulation in almost every aspect of its business. (20th Century Ins. Co. v. Superior Court (2001) 90 Cal.App.4th 1247, 1265, fn. 19.) The business of insurance is clothed with a public interest, and therefore subject to be controlled by the public for the common good. [Citation.] Especially in California, the insurance industry is a highly regulated industry. [Citation.] [] The field of insurance so greatly affects the public interest that the industry is viewed as a quasi-public business, in which the special relationship between the insurers and insureds requires special considerations. (Id. at p. 1265 [fns. omitted].)

But, unlike other private insurers, State Fund has over 50 percent of the market share. Most California employers obtain their workers compensation insurance through State Fund. Ordinarily, the public interest element is satisfied when the organization involved is one affected with a public interest, such as a private hospital. (Applebaum v. Board of Directors, supra, 104 Cal.App.3d at p. 657.) We conclude that State Fund qualifies as a private entity affected with a public interest.

As noted by the parties, the California Supreme Courts analysis of the public interest requirement in Potvin v. Metropolitan Life Ins. Co., supra, 22 Cal.4th 1060 (hereafter Potvin) suggests that Cumbre also must show that State Funds relationship with its brokers also affected the public interest. In Potvin, Metropolitan Life Insurance Company removed the plaintiff, a physician, from its preferred provider lists without an explanation or a hearing. The court held that, under the common law doctrine of fair procedure, the physicians removal from the insurance companys preferred provider list must be both substantively rational and procedurally fair. [Citation.] (Potvin, supra, 22 Cal.4th at p. 1072.)

In arriving at this conclusion, the court in Potvin explained that the relationship between the insurers and their preferred provider physicians had a significant effect on the public interest. The court laid out two specific effects: One practical effect of the health care revolution, which has made quality care more widely available and affordable through health maintenance organizations and other managed care entities, is that patients are less free to choose their own doctors for they must obtain medical services from providers approved by their health plan. The Managed Health Care Improvement Task Force stressed in its 1997 report to the California Legislature that the provision of health care has a special moral status and therefore a particular public interest. [Citation.] But an even greater public interest is at stake when those medical services are provided through the unique tripartite relationship among an insurance company, its insureds, and the physicians who participate in the preferred provider network. As the New Hampshire Supreme Court noted recently in Harper v. Healthsource New Hampshire (1996) 140 N.H. 770 [674 A.2d 962, 966], the removal of a physician from a preferred provider list affects more than just [the doctors] own interest, adding that [t]he public has a substantial interest in the relationship between health maintenance organizations and their preferred provider physicians. (Potvin, supra, 22 Cal.4th at p. 1070.)

The court in Potvin discussed both the general nature of health care as being entrusted with a public interest and the specific concerns involved in the relationships among the insured, insurer, and physicians, particularly, the concern as to the insureds ability to choose his physician. (Potvin, supra, 22 Cal.4th at p. 1070.) The New Hampshire case cited by the court addresses the additional concern of the cost of healthcare. (Harper v. Healthsource New Hampshire, supra, 674 A.2d at p. 966.) Although it is sufficient to show that the private entity is affected with a public interest, as in the cases prior to Potvin, these other concerns provide additional justification for government involvement. In each case, the court must evaluate the relevant facts to determine whether the private business is so affected with a public interest that the government may intervene and demand fair procedure when there is infringement upon a substantial interest. The facts will vary from case to case.

In this case, State Funds quasi-public nature, dominant market share, and important public function justify the application of the requirements of fair procedure. In dispensing its public duty to be competitive and self-supporting, State Fund decided to maintain a network of brokers and preferred brokers. Even if some of these relationships did not prove to be economically advantageous, State Fund initially made use of them to fulfill its statutory mandate and, presumably, to expand its reach beyond its own capacity. While the concerns over an individuals choice of doctor and the rising costs of healthcare, obviously, are not involved in this case, we are nonetheless dealing with business relationships that affect the public interest.

D. Substantial Economic Interest

The second threshold requirement to establish that State Fund owed Cumbre a duty under the common law doctrine of fair procedure is that the private entitys decision infringed upon a fundamental right or substantial economic interest. Although we cannot say as a matter of law that Cumbre had a substantial economic interest in its preferred brokerage agreement with State Fund, we reject State Funds argument that Cumbre was incapable of making such a showing.

In its motion for summary judgment or summary adjudication, State Fund argued that the doctrine of fair procedure applies primarily in cases involving an individuals right to practice his or her profession. State Fund contends that only individuals and not corporations like Cumbre are capable of claiming a fundamental right sufficient to trigger the requirements of fair procedure.

While the fair procedure cases usually involve an individual asserting his or her right to certain procedural protections, State Fund provides no adequate basis for distinguishing between individuals and corporate entities. Although Cumbre represents two brokerage firms, it also represents the interests of the brokers employed by those firms. A brokerage firm is a collective singularity, i.e., a single entity representing multiple individuals.

Moreover, in the analogous context of due process, courts have long recognized that private corporations are persons for purposes of the Fourteenth Amendment.^[1] (Gamet v. Blanchard (2001) 91 Cal.App.4th 1276, 1285, citing Pembina Consol. Silver Mining & Milling Co. v. Pennsylvania (1888) 125 U.S. 181, 188-189; see also Genesis Environmental Services v. San Joaquin Valley UnifiedAir Pollution Control Dist. (2003) 113 Cal.App.4th 597, 605, fn. 9.) Government interference with the interests of a corporation, therefore, can constitute a violation of due process. (See, e.g., Golden Day Schools, Inc. v. State Dept. of Education (2000) 83 Cal.App.4th 695, 707-709 (Golden Day); Stacy & Witbeck, Inc. v. City and County of San Francisco (1995) 36 Cal.App.4th 1074, 1087, fn. 6; see also Marvin Lieblein, Inc. v. Shewry (2006) 137 Cal.App.4th 700, 720.)

Also in the context of due process, one court, in rejecting a claim similar to the one offered by State Fund, explained: The definition of liberty under the Fifth or Fourteenth Amendments has never been stated with exactness. Nevertheless, it is clear that the concept encompasses more than mere freedom from bodily restraint, and includes the right of the individual to contract, to engage in any of the common occupations of life, to acquire useful knowledge, to marry, establish a home and bring up children, to worship God according to the dictates of his own conscience, and generally to enjoy those privileges long recognized at common law as essential to the orderly pursuit of happiness by free men. [Citation.] Admittedly, a corporation may not be bodily seized. Nor may it marry or bring up children. But a corporation may contract and may engage in the common occupations of life, and should be afforded no lesser protection under the Constitution than an individual to engage in such pursuits. (Old Dominion Dairy v. Secretary of Defense (D.C. Cir. 1980) 631 F.2d 953, 962, emphasis added.)

If sufficient to invoke constitutional protection, a corporations liberty interest also may be protected under the common law doctrine of fair procedure. The constitutional and common law principles differ as to their origin, but not as to the scope of their protection of individual rights. (Anton v. San Antonio Community Hosp. (1977) 19 Cal.3d 802, 829.)

In Golden Day, the State Department of Education debarred Golden Day Schools, a child care contractor, which precluded it from applying for further three-year contracts. When Golden Day Schools appealed the debarment, the agency provided a hearing but not before an impartial decision maker. Before addressing Golden Day Schoolss specific complaints concerning the procedural defects with the hearing afforded by the agency, the court determined the nature of the private interest at stake. Because of the stigma associated with debarment, which usually is based on the contractors wrongful conduct, the court found that government debarment implicates a liberty interest. (Golden Day, supra, 83 Cal.App.4th at pp. 705-706.)

A corporation may assert a fundamental right sufficient to trigger the requirements of fair procedure. As in Golden Day, courts have recognized that corporations may have a cognizable liberty interest in their participation in certain government programs. (See, e.g., Golden Day, supra, 83 Cal.App.4th at pp. 707-709 [child care provider]; Marvin Lieblein, Inc. v. Shewry, supra, 137 Cal.App.4th at p. 720 [Medi-Cal provider].) Although this case does not involve a debarment for wrongful conduct, the point is that a corporate entity may assert a liberty interest.

Furthermore, to show an infringement upon a liberty interest, the person claiming a right to fair procedure need not establish a complete termination. The duty to comply with the common law right to fair procedure arises where the private entity possesses sufficient power such that its decision or action significantly impairs the practice of ones profession or affects a substantial economic interest. (Potvin, supra, 22 Cal.4th at p. 1071.) The private entitys decision may affect the persons substantial economic interest without completely severing the business relationship. As stated above, courts have imposed the duty of complying with the requirements of fair procedure where the private entitys decision prevented a person from practicing his profession fully or earning his full salary. (See Delta Dental Plan v. Banasky, supra, 27 Cal.App.4th at p. 1607; Applebaum v. Board of Directors, supra, 104 Cal.App.3d at p. 658.)

In a case where a hospital only limited, rather than suspended, a physicians staff privileges, the court explained: The hospitals action did not completely eliminate plaintiffs staff privileges or remove him from staff membership. There is no indication in the record that his use of hospital facilities other than those in the obstetrical department was affected by the investigation and adjudication. Since plaintiff testified that about 40 percent of his income was derived from his obstetrical practice, his interest in obstetrical privileges was substantial and we do not find that a partial exclusion of this magnitude merits any less procedural protection than revocation of full staff membership . . . . (Applebaum v. Board of Directors, supra, 104 Cal.App.3d at p. 658.)

In this case, although Cumbre was able to continue brokering insurance policies, it lost its preferred status with State Fund. In his declaration, Michael Holzman, Cumbres Chief Operating Officer, explained that workers compensation insurance accounted for over 60 percent of Cumbres total revenue. After State Fund terminated the preferred broker agreement, Cumbre was not permitted to place new lines of insurance with State Fund. According to Holzman, in 2003, Cumbres policies produced over $16,500,000 in premiums, resulting in over $1,425,000 in commissions. After the termination, in 2005, Cumbres commissions for the existing policies resulted in an estimated $580,000 in commissions. Certain policies were affected particularly by the change in status. Because State Fund was the only workers compensation insurance carrier for construction, trucking, and farming employers, Cumbre observed a 50 percent reduction in commissions on policies issued to these types of businesses. This evidence supports Cumbres claim that, although it was able to continue providing insurance brokerage services, State Funds decision had a substantial effect on Cumbres economic interests.

In challenging this factual claim, State Fund cited a part of Holzmans deposition describing the effect of the termination of preferred broker status on Cumbres revenues. While Holzmans testimony may be read consistently with his statements in his declaration, there is some indication that Cumbres decline in revenues was a result of a business trend, not some external decision by State Fund, and that the trend was not as drastic as indicated by the numbers cited above.

Because there remains a disputed issue of material fact as to whether State Funds decision to terminate Cumbres preferred broker status had a significant effect on Cumbres substantial economic interest, we conclude that the trial court erred in granting State Funds motion for summary judgment.

E. Violation of Fair Procedure

Once a plaintiff establishes the threshold elements, he may present his case that the defendants decision violated his right to fair procedure. But the question of whether a violation occurred in this case also cannot be determined as a matter of law.

The common law doctrine of fair procedure has both a substantive and procedural component. First, the decision must be substantively rational. (Potvin, supra, 22 Cal.4th at p. 1072, citing Pinsker II, supra, 12 Cal.3d at p. 550.) While, as here, the business relationship may be governed by a contract that provides for termination at will and without cause, the contractual provision remains subject to the common law requirement of fair procedure. (See Potvin, supra, at p. 1073.) A decision violates this requirement when it is arbitrary, capricious, discriminatory, or in some other way irrational. (See Gill v. Mercy Hospital (1988) 199 Cal.App.3d 889, 897; James v. Marinship Corp., supra, 25 Cal.2d at pp. 736-737.) Second, the decision must be procedurally fair. (Potvin, supra, at p. 1072, citing Pinsker II, supra, at p. 550.) At minimum, procedural fairness requires notice and an opportunity to be heard. (Payne v. Anaheim Memorial Medical Center, Inc., supra, 130 Cal.App.4th at p. 741.)

Cumbre argues that State Funds decision violated its right to fair procedure as a matter of law. Cumbre specifically contends that State Funds termination program was substantively irrational because it would not have produced its desired effect of reducing its liabilities or losses. As the insurer of last resort, State Fund was obligated to insure high-risk employers. State Funds decision did not involve the cancellation of any existing policies with high-risk employers. Although the program might have eliminated the broker fees for future high-risk policies, Cumbre notes that the preferred broker agreements already permitted State Fund to modify commissions according to adverse risk characteristics. The termination program, Cumbre argues, was not necessary to accomplish the goal of reducing losses.

Cumbre also argues that State Funds use of retroactive criteria was inherently unfair. Borrowing from the principle against the retroactive application of new laws, Cumbre contends that State Funds use of retroactive criteria as the basis for its decision to terminate certain preferred brokers was unfair. By retroactive criteria, Cumbre apparently means the use of past factors (i.e., loss ratios for the years 1999, 2000, and 2001) to make the current decision to terminate its preferred broker agreements without prior notice (e.g., warning before 1999 that the loss ratio from that year will be considered in making the termination decision). Cumbre argues that, without prior notice, a brokerage firm could do nothing to improve its loss ratio and prevent the termination. Cumbre thus argues that State Funds use of retroactive criteria violated its right to fair procedure.

On the other hand, State Fund argues that the undisputed facts establish that its decision and procedures were fair. State Fund notes that its decision was based on Cumbres unprofitability. State Fund also notes that it provided 120 days notice and an internal appeals process. Although Cumbre was allowed to appeal only in writing and the panel deciding Cumbres appeal consisted of State Fund employees, State Fund maintains that not all disputes require a full-blown hearing before an independent decision maker. After receiving Cumbres written appeal, State Fund employees evaluated the complaints and responded to them in writing, explaining its reasons for affirming its original decision.

Cumbre challenges the fairness of State Funds internal appeals process. Cumbre argues that it should have been afforded a hearing and an opportunity to confront and cross-examine its accusers and examine and refute the evidence. Cumbre also argues that, although State Fund developed criteria to evaluate the appeals, it refused to disclose the criteria to the brokers, which would have assisted them in preparing for their appeals. Cumbre notes that, during his deposition, Ingo Coolins, a State Fund supervisor, testified that, even if Cumbres overall loss ratio was below 80 percent, it still would have been terminated based on its loss ratios in specific areas.

In evaluating these claims, we note that the doctrine of fair procedure protects against arbitrary decisions and unfair procedures. It is not designed to impose impractical and unworkable standards on private entities. The California Supreme Court observed: [T]his court should not attempt to fix a rigid procedure that must invariably be observed. Instead, the associations themselves should retain the initial and primary responsibility for devising a method which provides an applicant adequate notice of the charges against him and a reasonable opportunity to respond. In drafting such procedure, and determining, for example, whether an applicant is to be given an opportunity to respond in writing or by personal appearance, the organization should consider the nature of the tendered issue and should fashion its procedure to insure a fair opportunity for an applicant to present his position. Although the association retains discretion in formalizing such procedures, the courts remain available to afford relief in the event of the abuse of such discretion. (PinskerII, supra, 12 Cal.3d at pp. 555-556, fn. omitted.)

In regards to State Funds initial act of implementing its termination program, the court must defer to State Funds expertise and discretion. Under the broker agreement, either party was able to terminate the agreement with 60 days written notice prior to termination. The agreement does not require any specific cause for termination. Where the decision is not arbitrary, discriminatory, or otherwise irrational, the court cannot intervene and rewrite the agreement to include provisions that were not bargained for by the parties.

In support of its motion for summary judgment, State Fund submitted a copy of Renee Korens declaration. Renee Koren was State Funds Vice President. Koren explained that State Fund provided insurance to employers who were unable to obtain insurance from other private insurers. Also, as other private insurers withdrew from the market or became insolvent, employers, including high-risk employers, sought insurance with State Fund. Koren asserted that the increase affected State Funds premium to surplus ratio. To address this issue, the California Department of Insurance and State Fund decided to implement a termination program to sever ties with brokers who brought unprofitable business to State Fund. Koren noted that State Fund typically lost money on accounts where the policyholder had a loss ratio above 80 percent. Koren also noted that, in addition to losing money, State Fund often paid commissions to the broker who placed the line of insurance with State Fund. Although insuring high-risk employers may be unavoidable, State Fund instituted the termination policy to stop paying additional commissions on unprofitable accounts. Koren also explained that State Fund did not implement its termination program arbitrarily, but applied its criteria uniformly and treated all brokers considered for termination in the same manner. These facts, if true, should be more than sufficient to satisfy the requirement of being substantively rational. The doctrine of fair procedure does not require perfect decisions, but only ones that are not arbitrary.

Furthermore, there is nothing inherently unfair about the application of retroactive criteria. Cumbre has failed to provide any relevant authority to restrict State Fund from considering retroactive criteria or historical facts in making its business decisions. Cumbres reliance on the principles involved in the retroactive application of rules is unavailing. The retroactive application of rules is not inherently unfair, but is unfair because it violates the parties vested rights or settled expectations based on existing law or the parties agreement. (See Savnik v. Hall (1999) 74 Cal.App.4th 733, 739; In re Marriage of Lachenmyer (1985) 174 Cal.App.3d 558, 561.) As stated above, the agreement between the parties in this case did not require any specific cause for termination. Where the contract does not provide otherwise, it would be unreasonable to impose upon State Fund the requirement tha