Court Opinion

ID: 4125349
Source: CourtListenerOpinion
Date Created: 2017-02-10 22:03:34.416817+00
Date Added: 2024-06-11T14:49:36.157960
License: Public Domain

Filed 2/10/17
                               CERTIFIED FOR PUBLICATION

                IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
                                THIRD APPELLATE DISTRICT
                                             (Sacramento)
                                                 ----

MERCURY CASUALTY COMPANY,                                       C077116, C078667

                  Plaintiff and Appellant,                        (Super. Ct. No.
                                                            34201380001426CUWMGDS)
        v.

DAVE JONES, as Insurance Commissioner, etc.,

                  Defendant and Respondent;

PERSONAL INSURANCE FEDERATION OF
CALIFORNIA et al.,

                  Interveners and Appellants;

CONSUMER WATCHDOG,

                  Intervener and Respondent.

       APPEAL from a judgment of the Superior Court of Sacramento County,
Shelleyanne W.L. Chang, Judge. Affirmed.

                                                  1
       Hinshaw & Culbertson, Richard G. De La Mora and Spencer Y. Kook, for
Plaintiff and Appellant.

      Kamala D. Harris, Attorney General, Diane S. Shaw, Senior Assistant Attorney,
Stephen Lew, Supervising Deputy Attorney General, for Defendant and Respondent.

      Hogan Lovells, Vanessa O. Wells, Victoria C. Brown, Jenny Q. Shen, Lisa K.
Swartzfager, for Interveners and Appellants.

      Harvey Rosenfield, Pamela M. Pressley, Jonathan Phenix; Zohar Law Firm,
Daniel Y. Zohar and Todd M. Foreman, for Intervener and Respondent.

       This appeal arises out of an application Mercury Casualty Co. (Mercury) filed in
2009 to increase its homeowners’ insurance rates. In denying the increase Mercury
requested, the California Insurance Commissioner (the commissioner) made two
decisions that are at issue on appeal. First, the commissioner determined that under
subdivision (f) of section 2644.10 of title 10 of the California Code of Regulations, which
disallows, for ratemaking purposes, all “[i]nstitutional advertising expenses,” Mercury’s
entire advertising budget had to be excluded from the calculation of the maximum
permitted earned premium because “Mercury[] aims its entire advertising budget at
promoting the Mercury Group as whole” rather than “seek[ing] to obtain business for a
specific insurer and also provid[ing] customers with pertinent information” about that
specific insurer.1 Second, the commissioner determined that Mercury did not qualify for

1      Section 2644.10 provides that certain expenses “shall not be allowed for
ratemaking purposes.” Subdivision (f) of that section identifies “[i]nstitutional
advertising expenses” as one category of disallowed expenses and defines “[i]nstitutional
advertising” as “advertising not aimed at obtaining business for a specific insurer and not
providing consumers with information pertinent to the decision whether to buy the
insurer’s product.”

       We will refer to this regulation as section 2644.10(f); other undesignated section
references are also to title 10 of the California Code of Regulations.

                                             2
a variance from the maximum permitted earned premium under subdivision (f)(9) of
section 2644.27 because “Mercury failed to demonstrate the rate decrease [that resulted
from application of the regulatory formula] results in deep financial hardship.”2
       Mercury and certain insurance trade organizations referred to collectively as the
Trades3 unsuccessfully sought to challenge the commissioner’s decision in the superior
court. On appeal from the superior court’s judgment against them, Mercury and the
Trades raise three main issues. First, Mercury and the Trades contend the commissioner
and the superior court erred in interpreting and applying section 2644.10(f) with regard to
what constitutes institutional advertising expenses. Second, the Trades contend section
2644.10(f) violates the First Amendment to the United States Constitution because the
regulation imposes a content-based financial penalty on speech. Third, Mercury and the
Trades contend the commissioner and the superior court erred in determining that
Mercury did not qualify for the constitutional variance because the commissioner and the
court wrongfully applied a “deep financial hardship” standard instead of a “fair return”
standard.

2      Subdivision (f)(9) of section 2644.27 provides that one valid basis for requesting a
variance is “[t]hat the maximum permitted earned premium would be confiscatory as
applied. This is the constitutionally mandated variance articulated in 20th Century v.
Garamendi (1994) 8 Cal.4th 216 which is an end result test applied to the enterprise as a
whole.”

       We will refer to this regulation as section 2644.27(f)(9) and to the variance
described therein as the constitutional variance or the confiscation variance.
3      The Trades consist of the following organizations: Personal Insurance Federation
of California, American Insurance Association, Property Casualty Insurers Association of
America dba Association of California Insurance Companies, National Association of
Mutual Insurance Companies, and Pacific Association of Domestic Insurance
Companies.

                                             3
       Finding no merit in these arguments, or any of the other arguments offered to
overturn the judgment, we affirm.
                   FACTUAL AND PROCEDURAL BACKGROUND
       We begin with some brief background on the area of the law involved here. “At
the November 8, 1988, General Election, the voters approved an initiative statute that was
designated on the ballot as Proposition 103. The measure made numerous fundamental
changes in the regulation of automobile and other forms of insurance in California.
Formerly, the so-called ‘open competition’ system of regulation had obtained, under
which ‘rates [were] set by insurers without prior or subsequent approval by the Insurance
Commissioner . . . .’ [Citation.] Under that system, ‘California ha[d] less regulation of
insurance than any other state, and in California automobile liability insurance [was] less
regulated than most other forms of insurance.’ [Citation.] The initiative contained,
among others, provisions relating to the rollback of rates for insurance within its coverage
for the period extending from November 8, 1988, through November 7, 1989. (For
purposes here, a rate is the price or premium that an insurer charges its insureds for
insurance.)” (20th Century Ins. Co. v. Garamendi (1994) 8 Cal.4th 216, 239-240 (20th
Century).) “For the period extending from November 8, 1988, through November 7,
1989 (hereafter sometimes the rollback year or simply 1989), as a temporary regulatory
regime of rate reduction and freeze evidently designed to allow the setting up of a
permanent regulatory regime to follow, Proposition 103 itself sets a maximum rate for
covered insurance at 80 percent of the rate for the same insurance in effect on
November 8, 1987 (hereafter sometimes the 1987 rate). [¶] For the period extending
from November 8, 1989, into the future, Proposition 103 institutes a permanent
regulatory regime comprising the ‘prior approval’ system, under which, in the words of
Insurance Code section 1861.05, subdivision (a), the Insurance Commissioner must
approve a rate applied for by an insurer before its use, looking to whether the rate in
question is ‘excessive, inadequate, unfairly discriminatory or otherwise in violation of’

                                             4
specified law -- considering the ‘investment income’ of the individual insurer and not
considering the ‘degree of competition’ in the insurance industry generally.” (20th
Century, at p. 243.)
       “In Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805 [258 Cal.Rptr. 161, 771
P.2d 1247] (hereafter sometimes Calfarm), [the Supreme Court] upheld, inter alia,
Proposition 103’s provision requiring rate rollbacks.” (20th Century, supra, 8 Cal.4th at
p. 240.) The court “reviewed Proposition 103 against challenges under the United States
and California Constitutions, including a claim that the rate rollback requirement
provision was on its face invalid as confiscatory and arbitrary, discriminatory, or
demonstrably irrelevant to legitimate policy in violation of the takings clause of the Fifth
Amendment and article I, section 19 and the due process clause of the Fourteenth
Amendment and article I, sections 7 and 15. In the course of [the court’s] analysis, [the
court] rejected the point.” (20th Century, at pp. 243-244, fn. omitted.)
       Five years after Calfarm, in 20th Century, the Supreme Court “review[ed] the
implementation of Proposition 103’s rate rollback requirement provision by the Insurance
Commissioner.” (20th Century, supra, 8 Cal.4th at p. 240.) The court ultimately upheld
the commissioner’s actions. (Id. at p. 329.)
       With that background in mind, we turn to the facts of the present case. In May
2009, Mercury filed an application with the Department of Insurance to increase its rates
on its homeowner’s multi-peril line of insurance, which consists of policy form HO-3
(residential homeowners’ insurance), policy form HO-4 (renters and tenants insurance),
and policy form HO-6 (insurance for condominium owners). Originally, Mercury sought
an overall rate increase of 3.9 percent. As the administrative proceeding regarding
Mercury’s application continued, however, Mercury filed updated applications, so that
Mercury ultimately sought an overall rate increase of either 8.8 percent or 6.9 percent.
(The reason for the difference is not material here.)

                                               5
       In June 2009, Consumer Watchdog submitted a petition to intervene in the
proceeding, combined with a petition for a hearing on Mercury’s application. The
commissioner granted the petition to intervene in July 2009 but deferred ruling on the
petition for a hearing until two years later, when, in May 2011, the commissioner issued a
notice of hearing on his own motion and on Consumer Watchdog’s petition.
       In October 2011, Mercury submitted the prefiled direct testimony of various
witnesses, including Robert S. Hamada and David Appel. As a financial economist,
Hamada was asked “to provide an economic application of th[e] variance . . . in [section
2644.27(f)(9)], and to determine whether the maximum permitted return is quantitatively
‘confiscatory’ to the providers of Mercury’s capital.” Hamada asserted that “[t]o do this,
it is necessary to lay out an economic interpretation of ‘fair’ return to use as a benchmark
to quantify whether a statutorily-determined return is ‘confiscatory.’ ” For his part,
Dr. Appel was also asked to opine (among other things) whether it was appropriate for
Mercury to seek a variance under section 2644.27(f)(9).
       The commissioner and Consumer Watchdog filed motions to strike some of
Mercury’s prefiled direct testimony, including the testimony of Hamada and some of the
testimony of Appel. In ruling on those motions, the administrative law judge (ALJ)
explained that to qualify for the variance under section 2644.27(f)(9), Mercury had to
“demonstrate [that] the maximum earned premium under the ratemaking formula results
in an inability to operate successfully. Put differently Mercury is permitted to show the
maximum rate will cause deep financial hardship to Mercury’s enterprise as whole.”
Finding that neither Hamada nor Appel “provide[d] evidence that the regulatory rate, as
applied to Mercury, prevents Mercury from operating successfully,” the ALJ struck
Hamada’s “statements pertaining to confiscation” and those portions of Appel’s
testimony contending that the “regulatory rate of return is confiscatory.” The ALJ later
made similar rulings as Mercury tried several more times to offer testimony from
Hamada and Appel concerning “fair return.”

                                             6
       In its posthearing brief, Consumer Watchdog argued that all of Mercury’s
advertising expenses should be excluded from the rate calculation as institutional
advertising expenses because the evidence showed that none of Mercury’s advertising in
California was aimed at obtaining business for a particular insurer; instead, “Mercury’s
ads and campaigns promote a fictional entity called ‘Mercury Insurance Group.’ ”
       For its part, Mercury argued that under the language of section 2644.10(f),
“advertising is not ‘institutional advertising’ if it is aimed at obtaining business for an
insurer or it provides consumers with information pertinent to the decision whether to
buy the insurer’s product.” Mercury further argued that “Mercury’s advertisements are
all aimed at obtaining business for Mercury or its affiliate insurance companies and
providing information to consumers on why they should buy a Mercury product.”
       In its posthearing brief, the Department of Insurance argued that under 20th
Century, “[c]onfiscation occurs when proposed regulatory action would impose deep
financial hardship on the regulated entity.” The department further argued that its “rate
proposal, far from convincingly demonstrating deep financial hardship and an inability to
operate successfully, would allow Mercury to successfully operate in California” because
“[a]ccording to Mercury’s own calculations, the [department’s] proposal would result in
$3,670,645 of expected operating profit” -- a “ ‘total return of less than 5%’ ” -- and such
a return “would not constitute deep financial hardship.”
       For its part, Mercury argued that under 20th Century, “in deciding whether rates
produced by the formula are ‘confiscatory,’ courts are required to determine if they
would deny an insurer the opportunity to earn a ‘just, reasonable and fair return.’ ”
       In January 2013, the ALJ submitted her proposed decision, which the
commissioner adopted in full in February 2013. As relevant here, the commissioner
found that “Mercury General Corporation is the parent company for Mercury Casualty
and 21 other entities. Mercury General provides no services to customers and receives all
its operating resources directly from its insurance affiliates, most notably Mercury

                                               7
Casualty.” “In 2008, 2009 and 2010 Mercury General Corporation’s advertising
expenses totaled $26 million, $27 million, and $30 million respectively.” “Mercury
General and all its affiliates advertise under the name ‘Mercury Insurance Group,’ ” and
“Mercury does not allocate advertising expenditures to specific insurance affiliates nor
does the advertising department distinguish between insurance entities when generating
advertising campaigns.” Based on these findings, the commissioner determined that
under section 2644.10(f), “Mercury’s entire advertising budget must be excluded from
the rate application” because “Mercury[] aims its entire advertising budget at promoting
the Mercury Group as whole” rather than “seek[ing] to obtain business for a specific
insurer and also provid[ing] customers with pertinent information” about that specific
insurer. The commissioner also determined that Mercury did not qualify for the
constitutional variance under section 2644.27(f)(9) because “Mercury failed to
demonstrate the rate decrease results in deep financial hardship.” Based on these (and
other) determinations, the commissioner denied Mercury’s application for an overall rate
increase of 8.8 percent and instead approved an 8.18 percent rate decrease for policy form
HO-3, a 4.32 percent rate increase for policy form HO-4, and a 29.44 percent rate
increase for policy form HO-6.
       In March 2013, Mercury filed a petition for writ of mandate and complaint for
declaratory relief in the superior court seeking review of the commissioner’s decision.
Consumer Watchdog and the Trades successfully petitioned for leave to intervene.
       In June 2014, the superior court issued its ruling denying Mercury’s writ petition.
As relevant here, the court rejected Mercury’s argument that the commissioner “applied
the wrong standard to assess whether Mercury could show confiscation to entitle Mercury
to a variance.” Disagreeing with Mercury that the commissioner “should have assessed
whether Mercury could earn a ‘fair rate of return’ under the rate order,” the court instead
agreed with the commissioner “that the test for confiscation is ‘deep financial hardship’ ”
and “Mercury did not demonstrate ‘deep financial hardship’ to support its request for a

                                             8
confiscation variance.” The court also rejected Mercury’s argument that the
commissioner “misinterpreted the regulation defining ‘institutional advertising.’ ”
       In August 2014, Mercury appealed from the superior court’s June ruling denying
its writ petition, even though judgment had not yet been entered. In January 2015, the
court issued a formal order denying Mercury’s writ petition and dismissing Mercury’s
complaint for declaratory relief. The court also denied or dismissed all of the causes of
action in the Trades’ complaint in intervention. In doing so, the court addressed and
rejected the Trades’ argument that section 2644.10(f) violates the First Amendment.
       In February 2015, the court entered judgment against Mercury and the Trades.
Mercury and the Trades timely appealed from that judgment.
                                       DISCUSSION
                                              I
                      Section 2644.10(f) -- Institutional Advertising
       Section 2644.10(f) provides that “[i]nstitutional advertising expenses” “shall not
be allowed for ratemaking purposes” and that “ ‘[i]nstitutional advertising’ means
advertising not aimed at obtaining business for a specific insurer and not providing
consumers with information pertinent to the decision whether to buy the insurer’s
product.”
       In disallowing all of Mercury’s advertising expenses as institutional advertising
expenses, the commissioner explained that “institutional advertising is image advertising
which strives to enhance a company’s reputation or improve corporate name recognition.
Such advertising does not promote a specific product or service but instead attempts to
obtain favorable attention to the company as whole.” (Fns. omitted.) The commissioner
then made the following findings regarding Mercury’s advertising: “Mercury General
and all its affiliates advertise under the name ‘Mercury Insurance Group.’ The Mercury
Insurance Group is not a legal entity in any state and not a licensed insurer in California.
Mercury General’s advertising department supports all of Mercury’s affiliates and

                                              9
Mercury guides all its prospective customers to one telephone number. Mercury does not
allocate advertising expenditures to specific insurance affiliates nor does the advertising
department distinguish between insurance entities when generating advertising
campaigns. All Mercury companies share a common website which identifies the
company as Mercury Insurance Group.” (Fns. omitted.)
       The commissioner concluded that section 2644.10(f) “permits [in the context of
ratemaking] only [expenses for] advertising that seeks to obtain business for a specific
insurer and also provides customers with pertinent information. As Mercury[] aims its
entire advertising budget at promoting the Mercury Group as a whole, . . . Mercury’s
entire advertising expenditures must be removed from the ratemaking formula.”
       The superior court concluded that the commissioner’s interpretation of
section 2644.10(f) was “reasonable and consistent with Proposition 103’s goals of
consumer protection.” “Thus, if Mercury wished to include its advertising expenses in
the ratemaking calculation, it was required to show that (1) its advertising was aimed at
obtaining business for a specific insurer and (2) provided consumers with information
pertinent to the decision whether to buy the insurer’s product.” The court further
concluded that the commissioner “properly concluded that Mercury’s advertising was not
directed at a ‘specific insurer’ ” and for that reason the commissioner correctly excluded
all of Mercury’s advertising expenses from the rate calculation.
                                               A
                              Mercury’s Arguments On Appeal
       On appeal, Mercury contends the commissioner erred in disallowing all of
Mercury’s advertising expenses because the commissioner erroneously held that
advertising qualifies as institutional advertising if either of the two criteria in
section 2644.10(f) is met, when the regulation requires that both criteria be met.
According to Mercury, “[t]he [c]ommissioner . . . improperly substituted the word ‘or’
for the word ‘and’ in the regulation.”

                                               10
       We find no merit in this argument because section 2644.10(f) does not set forth
two criteria that are to be separately analyzed and applied. Instead, the regulation sets
forth a singular, unified definition of what constitutes “[i]nstitutional advertising.”
Specifically, advertising is institutional if it is not aimed at obtaining business for a
specific insurer and does not provide consumers with information pertinent to the
decision whether to buy that insurer’s product.
       Here, the commissioner concluded that all of Mercury’s advertising qualified as
institutional advertising within the meaning of section 2644.10(f) because Mercury aims
its entire advertising budget at promoting the Mercury Insurance Group as a whole and
the Mercury Insurance Group is not a specific insurer. If the commissioner was correct in
his characterization of Mercury Insurance Group (which we address below), then the
commissioner was also correct in his conclusion that all of Mercury’s advertising
qualifies as institutional advertising within the meaning of section 2644.10(f) because
advertising that is aimed entirely at promoting an entity that is not a specific insurer is
advertising that is not aimed at obtaining business for a specific insurer and does not
provide consumers with information pertinent to the decision whether to buy that
insurer’s product.
       That brings us to Mercury’s argument that the commissioner erred in concluding
that Mercury’s advertising was not aimed at obtaining business for a specific insurer
because “all of Mercury’s advertising was conducted under the name trade name
‘Mercury’ rather than the technical corporate name ‘Mercury Casualty Company.’ ”
Mercury contends the commissioner was wrong in this regard “for several reasons.”
Before addressing those reasons, however, we pause to more fully set forth the
commissioner’s exact ruling on this subject.
       Contrary to Mercury’s argument, the commissioner did not conclude that
Mercury’s advertising was not aimed at obtaining business for a specific insurer because
all of that advertising was conducted under the trade name “Mercury” rather than the

                                              11
technical corporate name “Mercury Casualty Company.” Instead, the commissioner’s
ruling was far more comprehensive and nuanced than Mercury’s argument
acknowledges. First, the commissioner found, by a preponderance of the evidence, “the
following facts with regard to Mercury’s advertising expenditures and methods”:
       “Mercury General and all its affiliates advertise under the name ‘Mercury
Insurance Group.’[4] The Mercury Insurance Group is not a legal entity in any state and
not a licensed insurer in California. Mercury General’s advertising department supports
all of Mercury’s affiliates and Mercury guides all its prospective customers to one
telephone number. Mercury does not allocate advertising expenditures to specific
insurance affiliates nor does the advertising department distinguish between insurance
entities when generating advertising campaigns. All Mercury companies share a
common website which identifies the company as Mercury Insurance Group.
       “In 2008, 2009 and 2010, Mercury General Corporation’s advertising expenses
totaled $26 million, $27 million and $30 million respectively. Mercury allocates its
advertising budget among a variety of media, including television, radio, direct mail and
sports sponsorship. Mercury’s Annual Report states the company ‘believes that its
advertising program is important to create brand awareness and to remain competitive in
the current insurance climate.’ ” (Fns. omitted.)
       Based on these findings, the commissioner reached the following conclusions:
       “Mercury defines institutional advertising as advertising that is not designed to
generate business or provide customers with information. This definition of institutional
advertising is both narrow and impracticable, and would render all advertising expenses
chargeable to the ratepayer; a fact Mercury concedes. Instead, the Regulation permits
only advertising that seeks to obtain business for a specific insurer and also provides

4      Elsewhere, the commissioner found that “Mercury General Corporation is the
parent company for Mercury Casualty and 21 other entities.”

                                             12
customers with pertinent information. As Mercury[] aims its entire advertising budget at
promoting the Mercury Group as a whole, the [commissioner] concludes that Mercury’s
entire advertising expenditures must be removed from the ratemaking formula.
       “[¶] . . . [¶]
       “Mercury admits its advertising does not seek to obtain business for a specific
insurer. In fact, Mr. Thompson acknowledges that all of Mercury’s advertising is
designed for the insurance group and not for a specific affiliate or company within
Mercury. This fact is further confirmed when analyzing Mercury’s advertisements. Both
print and radio advertisements urge consumers to contact the ‘Mercury Insurance Group’
through a common website and telephone number. Consumers do not contact the specific
insurance affiliates directly, nor do any of Mercury’s specific insurers engage in their
own advertising. While Mr. Thompson argues the advertising is ‘insurance’ specific, the
Regulation requires the promotion be aimed at generating business for a specific insurer,
not a specific industry
       “[¶] . . . [¶]
       “Nor can Mercury argue that the ‘Mercury Insurance Group’ is a specific insurer.
The Mercury Insurance Group is not a legal entity, nor is there any consensus as to the
makeup of the Mercury Insurance Group. Mr. Thompson testified the Mercury Insurance
Group is comprised of Mercury Casualty, Mercury Insurance Company, and California
Automobile. But Mr. Yeager testified the Mercury Insurance Group includes all 22 legal
entities that make up the consolidated Mercury General Corporation. What is certain is
that Mercury General does not advertise for its specific insurers and instead engages in
advertising on behalf of the organization as a whole.
       “[¶] . . . [¶]
       “Mercury urges the Commissioner to interpret ‘specific insurer’ to mean ‘a
specific group of affiliated insurers.’ Yet such an interpretation is contrary to the clear
regulatory intent and inconsistent with the purpose of [the] provision.

                                             13
       “The rules governing statutory interpretation also apply to the Commissioner’s
Regulations. The first rule in statutory construction requires the interpreter to examine
the regulation’s language. If the regulation’s words, given their usual and ordinary
meaning and read in context, are clear and unambiguous, the conclusion must be that the
adopting authority meant what it said, and the plain meaning of the regulation applies.
       “Regulation 2644.10, subdivision (f) contains clear and unambiguous language.
The Regulation defines institutional advertising as advertising not aimed at obtaining
business for a specific insurer. Had the Commissioner intended to charge consumers for
affiliate or group advertising, he could have eliminated the reference to ‘a specific’
insurer. But the Commissioner[’s] decision to include the ‘specific insurer’ requirement
renders the Regulation’s meaning unmistakable. Advertising which generates business
for a group of insurance companies, regardless of affiliation, is not advertising for a
specific insurer.
       “Mercury also argues the Regulation is arbitrary. Mercury contends there is no
logical reason to penalize an insurer for advertising under a group insurance name. But
such an argument is defeated when one considers the Regulation’s intent. Consumers are
obligated to pay only expenses necessary in the offering of an insurance product or that in
some way provide them benefit. Mercury may not charge consumers for advertising that
promotes corporate identity, enhances public opinion, or increases name and brand
awareness. Mercury chose to direct its advertising budget towards its entire group of
affiliates. In so doing, Mercury does not distinguish between those expenses chargeable
to Mercury Casualty customers and those chargeable to affiliated ratepayers. As such,
Mercury cannot require its Mercury Casualty policyholders to fund its advertising for
other Mercury companies. In addition, Mercury does not explain why Mercury Casualty
policyholders, as opposed to shareholders, should shoulder the expense of advertising for
Mercury General since that does not benefit them in any fairly discernible and direct way.

                                             14
This failure means Mercury’s entire advertising budget must be excluded from the rate
application.” (Fns. omitted.)
       With this more complete understanding of the commissioner’s ruling, we turn
back to Mercury’s arguments. Eschewing even any pretense of arguing about the
meaning of the term “specific insurer” in light of the various well-known rules of
statutory construction, Mercury offers four ad hoc reasons why the commissioner’s
determination that the term “specific insurer” does not embrace “ ‘a specific group of
affiliated insurers’ ” should be deemed “wrong.” First, Mercury contends the
commissioner’s ruling “unreasonably forces insurers to advertise under their technical
corporate names” because it “would generate confusion as consumers shop for coverage
among insurers known to them by trade names such as Farmers, State Farm, and Allstate
and not by obscure technical corporate names.” Second, Mercury contends “the
Commissioner’s interpretation does not allow an insurance company, such as Mercury, to
take into account its allocated share of expenses incurred for advertising that solicits
business for affiliated insurers operating as part of a single insurance holding company
system,” and “[s]uch a result would be absurd and contrary to the Regulations, which in
numerous places -- including the consideration of ‘excluded expenses’ such as
‘institutional advertising’ -- require the assessment of data at the group level.” Third,
Mercury contends “the ‘technical corporate name only’ interpretation will lead to results
that are contrary to one of the primary goals of the prior approval laws -- to ensure that
rates are not excessive. [Citation.] To achieve this goal the prior approval laws should
be construed to encourage, not penalize, cost-effective business practices such as trade
name advertising.” Fourth, Mercury contends that “recognizing the cost of ‘trade name
advertising’ in the formula would be consistent with those provisions of Proposition 103
that require the consideration of insurer groups as a single insurer for marketing,
underwriting, and rating purposes.”

                                             15
       In our view, none of Mercury’s arguments on this point is cognizable with respect
to how the term “specific insurer” should be interpreted under the various well-known
canons of statutory interpretation. Instead, Mercury’s arguments are really directed at
why the regulation never should have included the term “specific insurer” in the first
place. In other words, these are policy arguments that should have been (and, indeed,
may have been) directed at the commissioner when he promulgated section 2644.10(f) in
the first place. But we are not a legislative or quasi-legislative body, and it is not within
our power to decide what terms the regulation should have included. We can only
interpret what is already there, and inasmuch as Mercury’s arguments on this point are
not addressed to any interpretation that reasonably could be affixed to the existing term,
“specific insurer,” we have no cause to consider those arguments further.
       Finally, Mercury contends that “[b]ecause the [c]ommissioner . . . erroneously
construed section 2644.10(f) in the disjunctive and then found that Mercury’s trade name
advertising did not meet the ‘specific insurer’ requirement,” the commissioner did not
consider or weigh “the evidence to determine if Mercury’s ads met the ‘pertinent
information’ requirement” of the second criterion in the regulation. This argument need
not detain us long. We have concluded already that section 2644.10(f) does not set forth
two criteria that are to be separately analyzed and applied. Instead, the regulation sets
forth a singular, unified definition of what qualifies as “[i]nstitutional advertising.”
Having found that Mercury aims its entire advertising budget at promoting the Mercury
Insurance Group as a whole and having concluded that the Mercury Insurance Group is
not a specific insurer within the meaning of section 2644.10(f), the commissioner
properly excluded all of Mercury’s advertising expenses from the rate calculation
pursuant to the regulation because Mercury’s advertising was not aimed at obtaining
business for a specific insurer and did not provide consumers with information pertinent
to the decision whether to buy that insurer’s product. Accordingly, all of Mercury’s

                                              16
challenges to the commissioner’s rulings with respect to Mercury’s advertising expenses
are without merit.
                                               B
                              The Trades’ Arguments On Appeal
          For their part, the Trades contend the commissioner’s interpretation of
section 2644.10(f), “endorsed by the trial court -- is inconsistent with the language of the
regulation, and is incorrect.” The Trades also contend that the exclusion of institutional
advertising expenses from the rate formula violates the First Amendment by imposing a
content-based penalty on speech. We address these arguments in turn.
          1.     Interpretation Of Section 2644.10(f)
          To fully understand the Trades’ argument that the commissioner and the superior
court erred in interpreting section 2644.10(f) , further explanation of the regulatory
scheme, and the superior court’s decision, is required.
          Expenses that are excluded from the rate calculation, including institutional
advertising expenses, are entered on pages 13a and 13b of the rate application. These
pages provide for calculation of a three-year average “[e]xcluded [e]xpense [f]actor,”
which is a percentage determined by dividing total excluded expenses by direct earned
premiums. For example, Mercury’s updated application showed a 0.20 percent excluded
expense factor for 2008, which resulted from dividing total excluded expenses of
$5,703,498 by direct earned premiums of $2,808,839,000.
          Section 2644.10 -- the regulation governing excluded expenses -- provides that the
excluded expense factor is “the ratio of the insurer’s national excluded expenses to its
national direct earned premium.” (§ 2644.10, italics added.) Consistent with this, the
application calls for the use of “[c]ountrywide direct earned premium” and
“[c]ountrywide” institutional advertising expenses in calculating the excluded expense
factor.

                                               17
       In framing the issue regarding the commissioner’s interpretation of
section 2644.10(f), the superior court stated that “[t]he dispute is whether the term
‘specific insurer’ means only the rate applicant (in this case, Mercury Casualty Company)
or whether it encompasses advertising on behalf of a group of affiliated entities, which
are not rate applicants.” The court then concluded as follows: “The Commissioner’s
interpretation of the regulation’s term ‘specific insurer’ was reasonable. The advertising
did not relate specifically to Mercury Casualty Company, the rate applicant. Rather it
related a large group of affiliates, that were not applying for a rate reduction, and that
may or may not do business in the state. Accordingly, the Commissioner’s interpretation
protects consumers from underwriting advertising expenses of other entities that may not
operate in California, and were not applying for the rate adjustment.”
       Construing the superior court’s conclusion to be that the term “specific insurer” in
section 2644.10(f) “means the applicant,” the Trades argue that “[t]his construction [of
the regulation] is not acceptable” because it “does not match what is calculated as the
excluded expense factor.” Noting that the regulation calls for nationwide, or
“groupwide,” data to calculate the excluded expense factor, the Trades argue that “[i]f all
advertising for other group affiliates is counted as an excluded expense in the numerator,
the numerator and denominator do not contain like data.” In other words, the Trades
posit that under the superior court’s construction of the regulation, the denominator will
consist of the national direct earned premium from all insurers within the group but the
numerator will consist of all advertising expenses except those relating to the applicant,
including advertising expenses related to “specific insurers” other than the applicant. The
Trades contend that “the result of such a mismatch is not a proper allocation to a
California line of insurance of its proper share of countrywide group expense.”
       The commissioner responds that “advertising for specific affiliates [other than the
applicant] is not excluded under [section] 2644.10[(f)].” “Advertising for a specific
affiliate -- any affiliate -- is not considered institutional and therefore any such expenses

                                              18
are not excluded. So long as the advertising is targeted to a specific insurer, it does not
matter what affiliate it is for.” Moreover, the commissioner points out that “there [wa]s
no evidence that any advertising expenses for any specific insurer were excluded” here.
       This last point is dispositive of the Trades’ argument. The commissioner
specifically found that “Mercury[] aims its entire advertising budget at promoting the
Mercury Group as a whole” and that “Mercury General does not advertise for its specific
insurers and instead engages in advertising on behalf of the organization as a whole.”
The Trades point to no evidence to the contrary. Accordingly, it is apparent that here the
numerator in the calculation of the excluded expense factor contained no expenses for
advertising that related to any “specific insurer,” whether the applicant (Mercury
Casualty Company) or any other affiliate within the insurance group. Thus, the Trades’
argument that the numerator and denominator did “not contain like data” is without merit.
       The Trades next argue that the commissioner’s interpretation of section 2644.10(f)
“is inconsistent with the reality of consumer perception” because “[i]f an advertisement
makes a point about homeowner’s insurance, and says ‘Mercury’, it is an advertisement
‘aimed at obtaining business for [the] specific insurer’ writing Mercury homeowner’s
insurance.” Even if this were true, however, the Trades point to no evidence that
Mercury’s excluded advertising expenses included expenses for any such advertisement.
Accordingly, the Trades have failed to fully develop this argument, and we need not
consider it further.
       The Trades also argue that “an advertisement may be ‘aimed at obtaining
business’ for more than one affiliated ‘specific insurer[]’.” This argument goes nowhere
because the commissioner found that Mercury’s advertising was not aimed at obtaining
business for any specific insurer, and the Trades point to no evidence to the contrary.
       In summary, none of the Trades’ attacks on the commissioner’s interpretation and
application of section 2644.10(f) has any merit.

                                             19
       2.     First Amendment Challenge To Section 2644.10(f)
       The Trades contend that because expenses for advertising that is deemed
“institutional” are excluded from the rate formula, thereby reducing the “permitted earned
premium,” and because the determination of whether advertising qualifies as
“institutional” is based on the content of the advertisements, the institutional advertising
regulation amounts to a constitutionally impermissible content-based penalty on speech.
We are not persuaded.
       At the outset, we reject the argument by the commissioner and Consumer
Watchdog that section 2644.10(f) does not implicate the First Amendment. For his part,
the commissioner asserts that the regulation “does not in any way ban speech or compel
specific content.” This may be so, but that does not mean the regulation is immune from
scrutiny under the First Amendment. The United States Supreme Court “has recognized
. . . that the ‘Government’s content-based burdens [on speech] must satisfy the same
rigorous scrutiny as its content-based bans.’ ” (Sorrell v. IMS Health Inc. (2011) 564
U.S. 552, 565-566 [180 L.Ed.2d 544, 556].) “Imposing a financial burden on a speaker
based on the content of the speaker’s expression is a content-based restriction of
expression and must be analyzed as such.” (Pitt News v. Pappert (3d Cir. 2004) 379 F.3d
96, 106.) Thus, if section 2644.10(f) imposes a content-based burden on Mercury’s
speech, it does not matter that the regulation does not ban speech or compel specific
content; it is nonetheless subject to First Amendment scrutiny.
       For its part, Consumer Watchdog contends section 2644.10(f) does not place any
financial burden on speech, but we disagree. Here, the regulation burdened Mercury
financially because its effect was to exclude all of Mercury’s advertising expenses from
the rate formula, which necessarily resulted in a lesser maximum premium rate than
Mercury would have been allowed if its advertising expenses had been included in the
formula. As Mercury points out, “[i]f advertising expense is excluded from the dollars
permitted in the rate, there is no revenue source from which it can be paid. The insurer

                                             20
can either pay for such advertising out of profit, or stop the advertising.” Thus, assuming
two otherwise identically situated insurers, one of which engaged solely in institutional
advertising and the other of which engaged solely in noninstitutional advertising, the
advertiser that engaged only in noninstitutional advertising would reap a greater profit
because of section 2644.10(f) than the advertiser that engaged only in institutional
advertising. For this reason, as the Trades contend, “the regulation burdens . . . speech”
based on the content of that speech and thus implicates the First Amendment.
       The next question is whether section 2644.10(f) encompasses only commercial
speech or whether, as the Trades argue, it encompasses both commercial and
noncommercial speech. This matters because different levels of scrutiny are implicated
depending on whether commercial or noncommercial speech is involved. “ ‘[T]he
[federal] Constitution accords less protection to commercial speech than to other
constitutionally safeguarded forms of expression.’ [Citation.] [¶] For noncommercial
speech entitled to full First Amendment protection, a content-based regulation is valid
under the First Amendment only if it can withstand strict scrutiny, which requires that the
regulation be narrowly tailored (that is, the least restrictive means) to promote a
compelling government interest. . . . [¶] ‘By contrast, regulation of commercial speech
based on content is less problematic.’ [Citation.] To determine the validity of a content-
based regulation of commercial speech, the United States Supreme Court has articulated
an intermediate-scrutiny test.” (Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 952.)
       We reject the argument by the commissioner and Consumer Watchdog that the
speech to which section 2644.10(f) applies qualifies as commercial speech simply
because the regulation pertains to “advertising.” In Bolger v. Youngs Drug Products
Corp. (1983) 463 U.S. 60 [77 L.Ed.2d 469], the United States Supreme Court held that
even though certain pamphlets “were conceded to be advertisements, that fact alone did
not make them commercial speech because paid advertisements are sometimes used to
convey political or other messages unconnected to a product or service or commercial

                                             21
transaction.” (Kasky v. Nike, Inc., supra, 27 Cal.4th at p. 956, citing Bolger, at p. 66 [77
L.Ed.2d at p. 477].) The Bolger court “identified three factors -- advertising format,
product references, and commercial motivation -- that in combination supported a
characterization of commercial speech in that case,” but the court also “rejected the
notion that any of these factors is sufficient by itself” to support such a characterization
and “also declined to hold that all of these factors in combination, or any one of them
individually, is necessary to support a commercial speech characterization.” (Kasky, at
p. 957.)
       Here, as the Trades argue, section 2644.10(f) primarily singles out advertising that
may qualify as noncommercial speech for the excluded expense penalty. As we have
explained, under the regulation an insurer cannot pass on to the consumer the cost of
advertising that is not aimed at obtaining business for a specific insurer and/or that does
not provide consumers with information pertinent to the decision whether to buy that
specific insurer’s product. Thus, the less commercial the speech is, the more likely it is
to fall within the exclusion of section 2644.10(f). It is at least possible that an insurer
might engage in advertising that would, at least in some part, be deemed noncommercial
speech for First Amendment purposes. Thus, as the Trades contend, section 2644.10(f)
may sweep within its ambit both commercial and noncommercial speech. For this
reason, the regulation is subject to strict scrutiny. (See Dex Media West, Inc. v. City of
Seattle (9th Cir. 2012) 696 F.3d 952, 953, 954 [holding that an ordinance that imposed
“substantial conditions and costs on the distribution of yellow pages phone directories”
was subject to strict scrutiny because, “[a]lthough portions of the directories are
obviously commercial in nature, the books contain more than that”].)
       We conclude that section 2644.10(f) survives that scrutiny. Under strict scrutiny,
“ the regulation [must] be narrowly tailored (that is, the least restrictive means) to
promote a compelling government interest.” (Kasky v. Nike, Inc., supra, 27 Cal.4th at
p. 952.) In arguing that the regulation would not survive even the intermediate scrutiny

                                              22
that applies to commercial speech, the Trades admit that the regulation serves a
“legitimate governmental purpose.” We have no problem going further and concluding
that the regulation promotes a compelling governmental interest. As Consumer
Watchdog characterizes it, it is the “interest in prohibiting excessive [insurance] rates . . .
by making sure ‘that only “the reasonable costs of providing insurance” [are] included in
the rates.’ ” More precisely, the regulation promotes the compelling government interest
in ensuring that insurers like Mercury pass on to consumers through their insurance
premiums only expenses for advertising that directly benefits consumers by providing
them with information pertinent to the consumers’ decision whether to buy a specific
insurer’s product. We further conclude that section 2644.10(f) is narrowly tailored to
serve that purpose. The regulation does not ban insurers like Mercury from engaging in
advertising that does not directly benefit consumers: that is, advertising that is not aimed
at obtaining business for a specific insurer and does not provide consumers with
information pertinent to the decision whether to buy the specific insurer’s product.
Instead, the regulation simply prohibits the insurer from passing the cost of such
advertisements on to the consumer. That is, in fact, the least restrictive means available
to promote the specific interest at issue. Thus, the regulation is narrowly tailored to
promote the compelling government interest the regulation serves.
       For the foregoing reasons, the Trades’ constitutional challenge to
section 2644.10(f) is without merit.
                                               II
                   Section 2644.27(f)(9) -- The Constitutional Variance
       Section 2644.27(f)(9) provides that one valid basis for requesting a variance from
the maximum rate obtained by applying the regulatory formula is “[t]hat the maximum
permitted earned premium would be confiscatory as applied. This is the constitutionally
mandated variance articulated in 20th Century v. Garamendi (1994) 8 Cal.4th 216 which
is an end result test applied to the enterprise as a whole.” The commissioner determined

                                              23
that Mercury did not qualify for the constitutional variance under section 2644.27(f)(9)
because “Mercury failed to demonstrate the rate decrease results in deep financial
hardship.” The superior court agreed with the commissioner “that the test for
confiscation is ‘deep financial hardship’ ” and “Mercury did not demonstrate ‘deep
financial hardship’ to support its request for a confiscation variance.”
       On appeal, Mercury and the Trades assert various errors in this aspect of the
commissioner’s and superior court’s rulings. First, Mercury asserts that the
commissioner and superior court erred in holding that rates are constitutionally
confiscatory only if they result in financial distress, rather than simply in the inability to
earn a fair return. The Trades make a similar argument. Second, Mercury asserts that the
commissioner and the superior court erred in determining that “the relevant enterprise”
“in assessing confiscation” “was not Mercury’s homeowners’ insurance line, but Mercury
as a whole.” Again, the Trades make a similar argument. Mercury and the Trades also
make some other arguments we will identify more fully below. And the Trades argue
that the superior court applied the wrong standard of review in addressing the
constitutional variance.
       The last argument by the Trades can be disposed of briefly. Inasmuch as
section 2644.27(f)(9) expressly incorporates principles of constitutional law, and because
“where the action of an administrative agency infringes constitutionally granted rights,
independent judicial review must be invoked” (Kerrigan v. Fair Employment Practice
Com. (1979) 91 Cal.App.3d 43, 51), it does not matter for our purposes whether, as the
Trades argue, the superior court improperly deferred to the commissioner in construing
and applying section 2644.27(f)(9). Engaging in our own independent judicial review, as
we must, we will not defer to either the commissioner or the superior court. Thus, any
error the superior court might have made in this regard was necessarily harmless.
       With that out of the way, we turn to the remaining arguments presented on the
constitutional variance in section 2644.27(f)(9).

                                              24
                                               A
                       Deep Financial Hardship Versus Fair Return
       Because section 2644.27(f)(9) expressly refers to 20th Century, it is appropriate to
begin there. As we have noted, in 20th Century the California Supreme Court
“review[ed] the implementation of Proposition 103’s rate rollback requirement provisions
by the Insurance Commissioner.” (20th Century, supra, 8 Cal.4th at p. 240.) As relevant
here, the superior court had “determined that the rate regulations as to rollbacks [we]re
invalid on their face with respect to the ratemaking formula” (id. at p. 282) because,
among other things, the ratemaking formula the commissioner adopted “preclude[d] a
return covering the insurer’s cost of service plus 10 percent of its capital base,” and
“through such preclusion, the formula [wa]s . . . confiscatory” (id. at p. 288). In support
of this latter conclusion, the superior court also determined that “confiscation does not
require ‘deep financial hardship’ within the meaning of Jersey Central [Power & Light
Co. v. F.E.R.C. (D.C. Cir. 1987) 810 F.2d 1168].” (20th Century, at p. 288)
       The Supreme Court concluded that “[i]n this regard . . . , the superior court’s
conclusion is substantially erroneous.” (20th Century, supra, 8 Cal.4th at p. 288.) In
determining “the ratemaking formula . . . [wa]s . . . not confiscatory,” the high court
began by noting that it “would do well to rehearse, and elaborate on, the principles set out
in Calfarm.” (20th Century Ins. Co., at p. 291.) The court then explained as follows:5
       “The crucial question under the takings clause is whether the rate set is just and
reasonable. [Citation.] If it is not just and reasonable, it is confiscatory. [Citation.] If it
is confiscatory, it is invalid. [Citation.] ‘[I]t is the result reached not the method

5       We set forth the Supreme Court’s discussion from 20th Century at length because,
as will become apparent hereafter, that discussion directly answers the arguments by
Mercury and the Trades on what standard applies in determining whether a rate is
constitutionally confiscatory.

                                              25
employed which is controlling.’ [Citations.] The method may of course be traditional,
and may involve case-by-case ratemaking using data reflecting the condition and
performance of the regulated firm as an individual entity. But it may also be novel
[citation.], and may implicate formulaic ratemaking [citation] using data reflecting the
condition and performance of a group of regulated firms [citations]. It is not subject to
piecemeal examination: ‘The economic judgments required in rate proceedings are often
hopelessly complex and do not admit of a single correct result. The Constitution is not
designed to arbitrate these economic niceties.’ [Citation.] And, of course, courts are not
equipped to carry out such a task. [Citations.] ‘[S]o long as rates as a whole afford [the
regulated firm] just compensation for [its] over-all services to the public,’ they are not
confiscatory. [Citation.] That a particular rate may not cover the cost of a particular
good or service does not work confiscation in and of itself. [Citation.] In other words,
confiscation is judged with an eye toward the regulated firm as an enterprise.
       “The answer to the question whether the rate set is just and reasonable depends on
a balancing of the interests of the producers of the goods or services under regulation and
the interests of the consumers of such goods or services.
       “[¶] . . . [¶]
       “[T]he consumer has a legitimate interest in freedom from exploitation.
       “[F]or its part, the producer ‘has a legitimate concern with [its own] financial
integrity. . . . From the investor or company point of view it is important that there be
enough revenue not only for operating expenses but also for the capital costs of the
business. These include service on the debt and dividends on the stock. [Citation.] By
that standard the return to the equity owner should be commensurate with returns on
investments in other enterprises having corresponding risks. That return, moreover,
should be sufficient to assure confidence in the financial integrity of the enterprise, so as
to maintain its credit and to attract capital.’ [Citation.]

                                               26
       “It must be emphasized that the foregoing describes an interest that the producer
may pursue and not a right that it can demand. That interest is ‘only one of the variables
in the constitutional calculus of reasonableness.’ [Citation.] ‘A regulated [firm] has no
constitutional right to a profit . . . .’ [Citations.] Indeed, such a firm has no constitutional
right even against a loss. [Citation.]
       “In balancing the relevant producer and consumer interests for a just and
reasonable rate, one is concerned with a ‘broad zone of reasonableness’ and not with any
particular point therein. [Citation.] So long as the rate set is within that zone, ‘there can
be no constitutional objection . . . .’ [Citation.]
       “In attempting to balance producer and consumer interests, one may of course
arrive at a rate that disappoints one or even both parties. But a striking of the balance to
the producer’s detriment does not necessarily work confiscation. Indeed, it can threaten
confiscation only when it prevents the producer from ‘operating successfully’ -- as that
phrase is impliedly defined in prior opinions and is expressly used in this, viz., operating
successfully during the period of the rate and subject to then-existing market conditions.
       “[¶] . . . [¶]
       “Thus, a producer may complain of confiscation only if the rate in question does
not allow it to operate successfully. . . . In a word, the inability to operate successfully is
a necessary -- but not a sufficient -- condition of confiscation.
       “In Jersey Central, the United States Court of Appeals for the District of
Columbia Circuit, sitting in bank, and speaking through Judge Bork, explained:
‘. . . [T]he only circumstances under which there is a possibility of a taking of investors’
property by virtue of rate regulation is when a [regulated firm] is in the sort of financial
difficulty described [as] ‘deep financial hardship.’ [Citation.] The firm may experience
such hardship when it does not earn enough revenue for both ‘operating expenses’ and
‘the capital costs of the business,’ including ‘service on the debt and dividends on the
stock,’ of a magnitude that would allow a ‘return to the equity owner’ that is

                                               27
‘commensurate with returns on investments in other enterprises having corresponding
risks’ and ‘sufficient to assure confidence in the financial integrity of the enterprise, so as
to maintain its credit and to attract capital.’ [Citation.] ‘But absent [that] sort of deep
financial hardship . . . there is no taking . . . .’ [Citation.] This follows from the fact that
. . . a regulated firm may claim that a rate is confiscatory only if the rate does not allow it
to operate successfully. In such circumstances, the firm is not inaptly characterized as
experiencing ‘deep financial hardship’ as a result of the rate.
       “[¶] . . . [¶]
       “[T]he law under the due process clause of article I, sections 7 and 15 of the
California Constitution and the takings clause of article I, section 19 of that same
instrument is in accord with the foregoing principles.” (20th Century, supra, 8 Cal.4th at
pp. 292-297, fns. omitted.)
       In the course of the foregoing discussion, our Supreme Court also included the
following footnote: “In Guaranty Nat. Ins. Co. v. Gates (9th Cir. 1990) 916 F.2d 508,
515, there is language that may be read to erroneously state that the producer is
constitutionally ‘guarantee[d]’ a ‘ “fair and reasonable return [,]” ’ and that such a return
must necessarily be above the ‘break even’ level. We will not indulge in such a reading.”
(20th Century, supra, 8 Cal.4th at p. 294, fn. 18.)
       Turning back to the superior court’s ruling, the California Supreme Court
explained that the ratemaking formula could not be “deemed confiscatory” because the
terms of the formula “do not themselves impose a rate . . . that inflicts on insurers ‘. . .
deep financial hardship . . . .’ ” (20th Century, supra, 8 Cal.4th at p. 297.) The court
then continued as follows:
       “This point is crucial. It deserves special emphasis. The superior court committed
fundamental error. At least in the general case, such as this, confiscation does indeed
require ‘deep financial hardship’ within the meaning of Jersey Central, i.e., the inability
of the regulated firm to operate successfully -- meaning, again, the inability of the

                                               28
regulated firm to operate successfully during the period of the rate and subject to then-
existing market conditions. [Citation.] Hence, it does not arise, as the superior court
erroneously believed, whenever a rate simply does not ‘produce[] a profit which an
investor could reasonably expect to earn in other businesses with comparable investment
risks and which is sufficient to attract capital.’ Profit of that magnitude is, of course, an
interest that the producer may pursue. But it is not a right that it can demand. It is ‘only
one of the variables in the constitutional calculus of reasonableness.’ [Citation.] . . .
[T]he ‘notion that [a regulator] is required to maintain, or even allowed to maintain to the
exclusion of other considerations, the profit margin of any particular [regulated firm] is
incompatible . . . with a basic precept of rate regulation. “The fixing of prices, like other
applications of the police power, may reduce the value of the property which is being
regulated. But the fact that the value is reduced does not mean that the regulation is
invalid.” ’ ” (20th Century, supra, 8 Cal.4th at pp. 297-298.)
       With the foregoing understanding of the constitutional concept of confiscation, we
turn back to the arguments presented by Mercury and the Trades, and we find no merit in
them. Mercury contends the commissioner and the superior court erred in rejecting the
“fair rate of return” standard of confiscation in favor of the “deep financial hardship”
standard, but we find no such error. The Supreme Court explained in no uncertain terms
in 20th Century that “the inability to operate successfully is a necessary . . . condition of
confiscation” (20th Century, supra, 8 Cal.4th at p. 296), and the court soundly rejected
the contrary assertion that a regulated business is “constitutionally ‘guarantee[d]’ a ‘ “fair
and reasonable return” ’ ” (id. at p. 294, fn. 18). The “fair rate of return” standard
espoused by Mercury contravenes both of these principles.
       The Trades’ arguments fare no better. The Trades first argue that in Lingle v.
Chevron (2005) 544 U.S. 528 [161 L.Ed.2d 876], the United States Supreme Court
reached the conclusion that “a Takings analysis is not a vehicle for invalidating a price
control statute or regulation, or agency order. It is a basis for compensation by

                                              29
government when government has legitimately exercised its power to ‘take’, subject to
the duty to compensate. It is the Due Process analysis -- which is ‘logically prior to and
distinct’ from the Takings analysis -- that determines whether a specific price regulation
may be invalid as transgressing constitutional limits on the state’s power to regulate
price.” However, if by this argument the Trades mean to suggest that the “deep financial
hardship” test for confiscation under takings clause that was articulated and explained in
20th Century is no longer valid, we cannot agree. The question in Lingle was whether
language originating in Agins v. City of Tiburon (1980) 447 U.S. 255 [65 L.Ed.2d 106],
declaring that “government regulation of private property ‘effects a taking if [such
regulation] does not substantially advance legitimate state interests,’ ” was “an
appropriate test for determining whether a regulation effects a Fifth Amendment taking.”
(Lingle, at pp. 531, 532 [161 L.Ed.2d at pp. 883, 884].) The Supreme Court concluded it
was not. (Id. at p. 532 [161 L.Ed.2d at p. 884].) Lingle was not a price control case at
all, and the court therein never considered or addressed the “deep financial hardship”
standard for determining whether a price control is constitutionally confiscatory.
Accordingly, Lingle is of no assistance to the Trades here.
       The Trades next argue that the superior court “placed undue reliance on 20th
Century” because that case: “(1) did not involve a separate due process analysis; (2) can
and should be read consistently with Calfarm; and (3) is based on unique facts
conclusively distinguishing the current context.” None of these arguments is persuasive.
The first argument depends on the Trades’ assertion that Lingle foreclosed any continuing
analysis of a price control under the takings clause and instead substituted a separate due
process analysis. We have rejected that argument already; Lingle had nothing to do with
price controls.
       The Trades’ second argument -- that “20th Century can be harmonized with
Calfarm” -- is one with which we agree, but not in the way the Trades would like. We
have already shown how our Supreme Court expressly stated that the extended discussion

                                             30
from 20th Century set forth above regarding the “deep financial hardship” standard was a
“rehears[al of], and elaborat[ion] on, the principles set out in Calfarm.” (20th Century,
supra, 8 Cal.4th at p. 291.) In that manner, 20th Century and Calfarm are harmonious.
The Trades’ attempt to explain how the Calfarm court, “ruling on the state and federal
due process clauses, conducted an analysis in line with Lingle’s pronouncement of the
Due Process standard,” and how the 20th Century court can be understood to have
“equated ‘deep financial hardship,’ as used in the opinion, with more traditional notions
of confiscation centered on the absence of a fair rate of return,” amounts to little more
than hocus pocus.
       The Trades’ third argument -- that “20th Century’s ‘deep financial hardship’ test is
inextricably tied to its retrospective context,” e.g., examination of the regulations
applying to the rollback period rather than those applying to the prior approval system
that followed the rollback -- does not carry the day either. Nothing in the Supreme
Court’s extended discussion of the “deep financial hardship” standard suggests that it
would apply only to a retrospective price control rather than a prospective price control.
Again, the Trades’ argument is smoke and mirrors -- nothing more.
       For the foregoing reasons, we find no error in the application by the commissioner
and the superior court of the “deep financial hardship” standard to determine whether a
price control is constitutionally confiscatory.
                                              B
                                  The Relevant Enterprise
       Mercury next contends that “[h]aving adopted a constitutionally deficient
‘financial distress’ test, the Commissioner and Superior Court compounded that error by
applying that test to . . . Mercury as a whole, including unregulated enterprises and
activities.” In Mercury’s view, “the ‘enterprise’ subject to the regulated rate” should
have been “Mercury’s homeowners’ line.” The problem with this argument is that it is
inextricably intertwined with the argument we have rejected already -- that the

                                             31
commissioner should have used a “fair rate of return” standard for determining
confiscation. Mercury itself admits that the standard the commissioner used “dictated the
use of data related to Mercury as a whole rather than to Mercury’s homeowners’ line,”
while use of a “fair rate of return” standard would have easily allowed the commissioner
“to calculate the rate of return yielded by the homeowners’ premium as determined under
the formula.” Because we have determined that the commissioner used the correct, “deep
financial hardship” standard, and correctly eschewed the “fair rate of return” standard
proffered by Mercury, it follows that there is no basis for us to further consider Mercury’s
argument that the commissioner did not consider the correct “enterprise.”
       The Trades offer a similar argument, contending that “[t]he ‘enterprise as a whole’
concept is inextricably linked to” the standard the commissioner used, while “the fair rate
of return standard inherently belongs to examination of the regulated investment.” But
given that we have determined already that the commissioner used the correct standard, it
follows that he used the correct “enterprise” as well, and the Trades’ claim to the contrary
is without merit.
       The Trades also contend that allowing the commissioner to apply the standard of
constitutional confiscation to Mercury as a whole necessarily allows him to consider
“insurers’ revenue generated outside his jurisdiction,” which “unconstitutionally extends
the powers of a single state.” We do not agree. By considering whether the rate formula
in California allows an insurer that operates nationwide to avoid “deep financial
hardship,” the commissioner is not exercising his power outside the bounds of the state,
as his determination of the permissible range of rates in California has no bearing on
what the insurer is permitted to charge in any other state.
       The Trades also contend that allowing the commissioner to apply the standard of
constitutional confiscation to Mercury as a whole wrongfully applies the standard “to all
lines of insurance even though the prior-approval structure provides for rate regulation by
line of insurance.” In making this argument, however, the Trades merely returns to its

                                             32
own “fair rate of return” standard, by arguing that “[t]he insurer . . . will be deprived of
the property devoted to the regulated line of business if not allowed the opportunity to
earn a fair return” and thus, “the only sensible test is one that looks to the regulated
property.” As we have rejected the Trades’ proffered standard already, we have no basis
for accepting the “lines of insurance” argument based on that rejected standard.
       To the extent either Mercury or the Trades can be understood to offer other
reasons why the standard the commissioner applied is “[i]llogical” or “[u]nworkable,” we
simply say that it is not for us to question the logic or workability of our Supreme Court’s
decisions in Calfarm and 20th Century. We can only follow them. (See Auto Equity
Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455.)
                                              C
                                   Remaining Arguments
       Mercury contends the commissioner and the superior court erred by applying the
standard for constitutional confiscation to “historical financial data that related to a period
when the rates were not in effect.” Mercury makes no effort to show, however, what data
they should have applied the standard to, nor any effort to show that application of the
standard to such other data would have resulted in a more favorable result for Mercury.
Accordingly, we need not consider this argument further.
       Mercury and the Trades also both contend that the commissioner and/or the
superior court erred in holding that the “re-litigation ban” in section 2646.4,
subdivision (c) precluded Mercury from offering evidence showing that application of the
rate formula would deny Mercury a fair return.6 But again, this argument fails at the

6      The regulation in question provides as follows: “Relitigation in a hearing on an
individual insurer’s rates of a matter already determined either by these regulations or by
a generic determination is out of order and shall not be permitted. However, the
administrative law judge shall admit evidence he or she finds relevant to the
determination of whether the rate is excessive or inadequate (or, in the case of a

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outset because it depends on their advocacy of a “fair rate of return” standard. As we
understand it, the ALJ precluded the evidence Mercury offered on the constitutional
variance because Mercury’s evidence did not have any tendency to show “deep financial
hardship” that would arise from application of the rate formula, but instead went only
toward showing that the rate formula would deny Mercury a “fair return.” We have
already concluded the commissioner (and the ALJ whose proposed decision the
commissioner adopted) applied the correct standard. Thus, we perceive no error in the
ALJ’s use of that standard in justifying the exclusion of the evidence Mercury proffered.
       Finally, Mercury asserts that “[b]ased on its erroneous legal rulings, the Superior
Court refused to exercise its independent judgment on the evidence establishing that
[application of the rate formula] failed to yield a “ ‘fair return.’ ” We have already
concluded, however, that the superior court’s rulings with respect to the applicable
standard of constitutional confiscation were not erroneous. Consequently, the further
assertion of error Mercury offers is necessarily without merit as well.7

proceeding under Article 5, relevant to the determination of the minimum
nonconfiscatory rate), whether or not such evidence is expressly contemplated by these
regulations, provided the evidence is not offered for the purpose of relitigating a matter
already determined by these regulations or by a generic determination.” (§ 2646.4,
subd. (c).)
7       Mercury has filed a request that we take judicial notice of certain materials, and
the Trades have filed three such requests. In addition, the commissioner has requested
that we strike certain portions of the Trades’ reply brief. Because we find the materials
that are the subject of the various requests for judicial notice are not relevant to our
decision, we deny those requests. And because we are affirming the trial court’s decision
and thereby disposing of this appeal favorably to the commissioner, we deny his request
to strike as moot.

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                                      DISPOSITION
       The judgment is affirmed. The commissioner and Consumer Watchdog shall
recover their costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1).)

                                                 /s/
                                                 Robie, J.

We concur:

/s/
Raye, P. J.

/s/
Mauro, J.

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