Opinion ID: 6938514
Heading Depth: 2
Heading Rank: 2

Heading: The Majority’s New Test

Text: After erroneously concluding that damage to reputation is not a deprivation of business goodwill, the majority contends that a business alleging a deprivation of goodwill must demonstrate that the government “directly interfered” with the business’ customers. Ante at 1318. The majority relies on essentially two lines of argument in support of its new “direct interference” requirement. First, the majority asserts that Soranno’s Gaseo requires a business alleging a violation of § 1983 to show that the government directly contacted or otherwise interfered with the business’ customers. Second, the majority voices concerns about the effects on federalism that allowing WMX’s action to go forward will have. I do not believe either line of argument is persuasive.
Even if the majority’s single-minded emphasis on the facts of Soranno’s Gaseo rather than on California law was appropriate, its analysis of Soranno’s Gasco is not compelling. The majority’s reading of Soranno’s Gasco would require a plaintiff to establish not only that business goodwill was damaged by the government’s disparagement of a business’ reputation, but also that the government “directly interfer[ed] with [plaintiffs] ‘expectation of continued patronage’ by [its] customers.” Ante at 1319. I' cannot join the majority in grafting this new element of goodwill onto the existing body of California property law. The majority’s extraction of a “direct interference” requirement from the facts of Sor-anno’s Gaseo is curious. Our discussion of whether Soranno’s Gaseo had a protected interest in its business goodwill did not focus on the facts of the case at all; indeed, our discussion of goodwill as property did not include a single reference to what the majority characterizes as “direct interference” with Soranno’s Gasco’s customers. See Soranno’s Gasco, 874 F.2d at 1316-17. Instead, we focused on the California legislature’s decision to classify business goodwill as property. See id. at 1316. Without reference to the specific facts of the case, we concluded that because Soranno’s Gaseo alleged a deprivation of goodwill, and goodwill is recognized as property in California, Soranno’s Gaseo had stated a valid § 1983 claim. The same analysis should control this case. An examination of the possible consequences of the majority’s new “direct interference” test exposes the weaknesses inherent in the majority’s contortion of Soranno’s Gasco. As long as the government does not contact a company’s customers directly and disparage a business’ reputation, an individual acting under color of California law could, under the rule announced by the majority today, destroy a company’s reputation without providing a shred of due process. Besides being manifestly unjust, this approach ignores the important role reputation plays in a company’s ability to build and maintain a reservoir of goodwill and violates the principle that a company need not be entirely deprived of a property interest before it is entitled to relief under § 1983. See, e.g. Paul, 424 U.S. at 711, 96 S.Ct. at 1165 (1976) (noting that Court has treated government action as a deprivation of property not only when a property interest created by state law is entirely extinguished, but also when the interest is “significantly alter[ed]”). California law, by protecting business goodwill and recognizing that reputation is a key variable in the goodwill equation, requires us to permit WMX to go forward before customers begin abandoning the company.
The second ground on which the majority seems to base its new rule is federalism. Rather than advancing federalism, however, the majority undermines it in at least two ways.
The majority’s efforts to limit the interpretation of business goodwill run contrary to California’s efforts to insure a liberal interpretation of that term. In addition to the California statutory and case law discussed above, the California legislature expanded the scope of protection for business goodwill in the eminent domain context through the enactment of Cal.Code Civ. Pro. § 1263.510. As a California Court of Appeals explained: Historically, business goodwill was not an element of damages under eminent domain law. As recently as 1975, the California Supreme Court reaffirmed the principle that damage to a business conducted on property condemned for public use was not compensable as a property right under the just compensation clause of the California constitution. But in 1975, the Legislature enacted a comprehensive revision of California's eminent domain law, which, among other things, authorizes compensation for the loss of business goodwill. Asaro, 261 Cal.Rptr. at 233 (internal citation omitted). The majority’s failure to address the development of the law of business goodwill in California belies its implicit claim that the rule it announces today somehow advances federalist interests.
The majority asserts that allowing WMX’s § 1983 action to go forward will encroach on California’s tort system by “superimposing” a federal due process regime over the state law of defamation. The majority’s concern is misguided. It is the majority, by basing its decision on a narrow reading of the facts of Soranno’s Gaseo rather than on an examination of state law, that does violence to federalist sensibilities. Our job is not to create federal common law by interpreting business goodwill solely in concert with our construction of the facts of Soranno’s Gaseo. The real lesson of Soranno’s Gaseo is that the people of California, acting through their elected representatives, have chosen to create a property interest in business goodwill. It is that choice we are bound to respect. Moreover, we have recognized that whatever the wisdom of extending § 1983 to traditional state defamation actions may be, that extension may be inescapable if a state classifies reputational interests as property. In Cooper v. Dupnik, we quoted Sullivan v. State of New Jersey, 602 F.Supp. 1216 (D.N.J.1985), in support of the proposition that “ ‘[i]f a state recognizes reputation as a liberty interest or property right, then the very act of defamation itself infringes on the right and is actionable under § 1983 if performed under color of state law.’ ” 924 F.2d 1520, 1533-34 (9th Cir.1991) (quoting Sullivan, 602 F.Supp. at 1222), aff'd 963 F.2d 1220 (9th Cir.) (en banc), cert. denied, 506 U.S. 953, 113 S.Ct. 407, 121 L.Ed.2d 332 (1992); cf. Paul, 424 U.S. at 710-12, 96 S.Ct. at 1165-66 (implying that § 1983 claim could have gone forward if state law had classified reputation as property). State law, not the facts of Soranno’s Gaseo, controls the scope of property interests protected by § 1983. By ignoring this principle, the majority today does nothing to serve the interests of federalism.
Although I am convinced that state law, Soranno’s Gaseo, and other relevant authorities all establish that damage to business reputation alone is enough to constitute a deprivation of goodwill, WMX should prevail even under the majority’s new “direct interference” test. Miller concluded his report by instructing that WMX’s “history requires extreme caution by the San Diego County Board of Supervisors or any other governmental entity contemplating any contractual or business relationship with Waste Management.’’ (emphasis added). Clearly, Miller’s recommendation of using “extreme caution” in doing business with WMX was directed at two audiences: the San Diego Board of Supervisors and “any other governmental entity” that might contemplate doing business with WMX. Just as clearly, each of these audiences are customers or potential customers of WMX. The San Diego County Board of Supervisors, to which Miller’s report was submitted, solicited the report precisely because it was contemplating entering into a contractual relationship with WMX. 7 When Miller submitted the report to the Board, he was in every sense directly interfering with WMX’s expectation of patronage with its potential customer. Moreover, WMX has contracts with over 1500 governmental entities nationwide. Thus, Miller’s warning to “any other governmental entities” to use extreme caution constituted direct interference with WMX’s expectation of continued patronage in the government contracts sector. 8 In sum, given the message (think twice before doing business with WMX), the messenger (the leading law enforcement official in San Diego County), and the actual and intended audiences (governmental entities in general and the Board of Supervisors in particular), I believe that WMX should survive a 12(b)(6) motion even under a “direct interference” reading of Soranno’s Gaseo. Miller did not make a general public statement or toss some vague, off-the-cuff assertions into the public domain. Rather, Miller, in response to a potential WMX customer’s request in the midst of a well-publicized search for a waste management contractor, submitted a highly damaging report directly to that customer, and added a general warning to other similarly situated potential WMX customers for good measure.