ReadyLink Healthcare, Inc. v. State Compensation Insurance Fund

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

READYLINK HEALTHCARE, INC., a No. 12-56248

Nevada Corporation, on behalf of

itself and others similarly situated, D.C. No.

Plaintiff-Appellant, 2:11-cv-09934-

PSG-PJW

v.

STATE COMPENSATION INSURANCE OPINION

FUND; DAVE JONES, Insurance

Commissioner, in his official

capacity,

Defendants-Appellees.

Appeal from the United States District Court

for the Central District of California

Philip S. Gutierrez, District Judge, Presiding

Argued and Submitted

April 10, 2014—Pasadena, California

Filed June 12, 2014

Before: Jerome Farris and Andrew D. Hurwitz, Circuit

Judges, and Paul L. Friedman, District Judge.*

Opinion by Judge Hurwitz

*

The Honorable Paul L. Friedman, District Judge for the U.S. District

Court for the District of Columbia, sitting by designation.

2 READYLINK HEALTHCARE V. SCIF

SUMMARY**

Abstention/Issue Preclusion

Affirming the dismissal of an action challenging a

decision of the Commissioner of the California Department

of Insurance, the panel held that the district court erred by

abstaining, but that issue preclusion barred the plaintiff’s

claim that the Commissioner’s decision was preempted by

Internal Revenue Service regulations.

The panel held that under Sprint Communications, Inc. v.

Jacobs, 134 S. Ct. 584 (2013), Younger abstention was not

appropriate because parallel state court proceedings were not

criminal proceedings, the Commissioner’s and the state

court’s orders were not “core” orders involving the

administration of the state judicial process, and the

proceedings were not civil enforcement proceedings akin to

a criminal prosecution.

The panel held that the plaintiff’s preemption claim was

barred by issue preclusion under California law because while

this appeal was pending, the California Court of Appeal

rejected the preemption claim, and the California Supreme

Court denied review.

**

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

READYLINK HEALTHCARE V. SCIF 3

COUNSEL

Seth A. Rafkin (argued) and Jennifer M. Bogue, Cooley LLP,

San Diego, California, for Plaintiff-Appellant.

Kamala D. Harris, Attorney General of California, Paul D.

Gifford, Senior Assistant Attorney General, Felix E.

Leatherwood, Supervising Deputy Attorney General, Brian D.

Wesley (argued), Deputy Attorney General, Los Angeles,

California, for Defendant-Appellee Dave Jones, California

Insurance Commissioner, in his official capacity.

Bruce D. Celebrezze (argued) and Benjamin E. Shiftan,

Sedgwick LLP, San Francisco, California; LaDonna Wallace,

Jody A. DeBernardi, and Judith D. Sapper, State

Compensation Insurance Fund, Santa Ana, California, for

Defendant-Appellee State Compensation Fund.

OPINION

HURWITZ, Circuit Judge:

This case involves parallel judicial proceedings, one in

state court and the other in federal court. Each was initiated

by ReadyLink Healthcare, Inc. (ReadyLink), and each

contended that a decision by the Commissioner of the

California Department of Insurance (Commissioner) was

preempted by Internal Revenue Service (IRS) regulations.

The federal district court abstained, relying on Younger v.

Harris, 401 U.S. 37 (1971). While this appeal from the

district court judgment was pending, the California Court of

4 READYLINK HEALTHCARE V. SCIF

Appeal rejected ReadyLink’s preemption claim, and the

California Supreme Court denied review.1

Applying the Supreme Court’s guidance in Sprint

Communications, Inc. v. Jacobs, 134 S. Ct. 584 (2013), we

find that the district court erred by abstaining. However,

because issue preclusion now bars ReadyLink’s claim, we

affirm the judgment dismissing the complaint.

I. Background

ReadyLink provides temporary nurses for medical

facilities. From 2000 to 2006, ReadyLink purchased

workers’ compensation insurance from the State

Compensation Insurance Fund (SCIF). See Cal. Ins. Code

§§ 11770, 11773. Although a creature of California statutes,

“SCIF is an ‘insurer’ on the same basis as any private carrier

offering workers’ compensation insurance.” P. W. Stephens,

Inc. v. State Comp. Ins. Fund, 27 Cal. Rptr. 2d 107, 108 (Ct.

App. 1994).

When SCIF audited ReadyLink for the 2005 policy year,

it found that ReadyLink had failed to report certain per diem

payments to employees as payroll, and billed ReadyLink for

an additional premium of $555,327.53. ReadyLink appealed

that decision to the California Department of Insurance, see

Cal. Ins. Code § 11737(f), and an administrative law judge

(ALJ) approved SCIF’s premium calculation.

1

We grant both parties’ motions for judicial notice of the California

state court proceedings. See Fed. R. Evid. 201; Trigueros v. Adams,

658 F.3d 983, 987 (9th Cir. 2011).

READYLINK HEALTHCARE V. SCIF 5

The ALJ first found that the California Workers’

Compensation Uniform Statistical Reporting Plan (USRP),2

which SCIF used to calculate ReadyLink’s premium rates,

exempts payments for “additional living expenses not

normally assumed” from payroll. Because ReadyLink’s per

diem payments were not tied to the expenses that nurses

accrued while working away from their homes, the ALJ

concluded that the payments were actually wages. In doing

so, the ALJ rejected ReadyLink’s argument that the USRP

should be interpreted consistently with IRS per diem

reporting rules. The Commissioner affirmed and designated

the decision as precedential.

ReadyLink then petitioned the Los Angeles Superior

Court for a writ of administrative mandamus pursuant to

California Code of Civil Procedure § 1094.5. It alleged,

among other things, that the Commissioner should have

followed IRS reporting rules in interpreting the USRP. The

Superior Court denied relief. ReadyLink appealed to the

California Court of Appeal, expressly arguing that IRS

regulations preempted the Commissioner’s decision.

While the state court appeal was pending, ReadyLink

filed this putative class action against SCIF and the

Commissioner in the Central District of California. The

federal complaint alleged that IRS regulations preempted the

Commissioner’s decision, requested both declaratory and

2

The USRP is a “compendia of administrative rules and regulations

governing the issuance of workers’ compensation coverage by SCIF and

other carriers. They set forth classifications, rates and rating systems

approved by the Commissioner pursuant to sections 11658 and 11730 et

seq. and have been incorporated by reference into the California Code of

Regulations.” Allied Interstate, Inc. v. Sessions Payroll Mgmt., Inc.,

137 Cal. Rptr. 3d 516, 522 (Ct. App. 2012).

6 READYLINK HEALTHCARE V. SCIF

injunctive relief, and asserted various state-law damage

claims. After SCIF moved to dismiss the complaint, the

district court ordered supplemental briefing to address

possible abstention under Younger and Colorado River Water

Conservation District v. United States, 424 U.S. 800 (1976).

The district court then dismissed the federal preemption claim

on Younger grounds and declined to exercise supplemental

jurisdiction over the remaining state-law claims. ReadyLink

appealed.

As ReadyLink’s appeal to this court was pending, the

California Court of Appeal affirmed the Superior Court’s

denial of mandamus, expressly holding that the

Commissioner’s decision was not preempted by federal law.

ReadyLink HealthCare, Inc. v. Jones, 148 Cal. Rptr. 3d 881,

886–92 (Ct. App. 2012). The California Supreme Court

denied ReadyLink’s subsequent petition for review.

II. Younger Abstention

A.

The district court had jurisdiction over ReadyLink’s

complaint under 28 U.S.C. § 1331, see Verizon Md. Inc. v.

Pub. Serv. Comm’n of Md., 535 U.S. 635, 642 (2002), and we

have jurisdiction over this appeal under 28 U.S.C. § 1291, see

Agriesti v. MGM Grand Hotels, Inc., 53 F.3d 1000, 1000–01

(9th Cir. 1995). We review the district court’s Younger

determination de novo. Gilbertson v. Albright, 381 F.3d 965,

982 n.19 (9th Cir. 2004) (en banc).

READYLINK HEALTHCARE V. SCIF 7

B.

In Younger v. Harris, the Supreme Court reaffirmed the

long-standing principle that federal courts sitting in equity

cannot, absent exceptional circumstances, enjoin pending

state criminal proceedings. 401 U.S. at 43–54. The Court,

citing comity concerns, later extended the Younger principle

to civil enforcement actions “akin to” criminal proceedings,

Huffman v. Pursue, Ltd., 420 U.S. 592, 604 (1975), and to

suits challenging “the core of the administration of a State’s

judicial system,” Juidice v. Vail, 430 U.S. 327, 335 (1977).

The Court’s subsequent opinion in Middlesex County

Ethics Committee v. Garden State Bar Ass’n, 457 U.S. 423

(1982), found abstention appropriate when (1) there is “an

ongoing state judicial proceeding,” (2) those “proceedings

implicate important state interests,” and (3) there is “an

adequate opportunity in the state proceedings to raise

constitutional challenges.” Id. at 432. Our ensuing decisions

concluded that the three Middlesex factors controlled Younger

abstention in civil actions. See, e.g., Meredith v. Oregon,

321 F.3d 807, 816–17 (9th Cir. 2003); Fresh Int’l Corp. v.

Agric. Labor Relations Bd., 805 F.2d 1353, 1357–62 (9th Cir.

1986). And, although not a threshold element, we identified

a fourth requirement: The requested relief must seek to

enjoin—or have the practical effect of enjoining—ongoing

state proceedings. AmerisourceBergen Corp. v. Roden,

495 F.3d 1143, 1149 (9th Cir. 2007); Gilbertson, 381 F.3d at

977–78 (citing Samuels v. Mackell, 401 U.S. 66, 72 (1971)).

But, our post-Middlesex decisions have sent mixed signals

on whether Younger remains limited to criminal cases, quasi-

criminal actions, and orders involving the administration of

a state’s judicial system. A number of our opinions suggested

8 READYLINK HEALTHCARE V. SCIF

that, notwithstanding Middlesex, Younger applies only to

those three types of proceedings. See, e.g., Logan v. U.S.

Bank Nat. Ass’n, 722 F.3d 1163, 1167–69 (9th Cir. 2013);

Potrero Hills Landfill, Inc. v. Cnty. of Solano, 657 F.3d 876,

883–85 & n.7 (9th Cir. 2011); Martori Bros. Distribs. v.

James-Massengale, 781 F.2d 1349, 1354–56 (9th Cir. 1986),

abrogated on other grounds, Ohio Civ. Rights Comm’n v.

Dayton Christian Schs., Inc., 477 U.S. 619, 627 n.2 (1986).

Others, however, implied that district courts must abstain in

any action when the Middlesex factors are present. See, e.g.,

Delta Dental Plan of Cal., Inc. v. Mendoza, 139 F.3d 1289,

1295 (9th Cir. 1998); Fresh Int’l Corp., 805 F.2d at 1358.

We also have been less than clear on whether Younger

applies only to state-initiated proceedings. Compare Potrero

Hills, 657 F.3d at 883 n.7 (“[O]ur case law clearly

demonstrates that the first Younger prong may be satisfied

even when the ongoing state proceeding involves only private

litigants.”), with San Jose Silicon Valley Chamber of

Commerce Political Action Comm. v. City of San Jose,

546 F.3d 1087, 1093 (9th Cir. 2008) (“We must abstain under

Younger if four requirements are met: (1) a state-initiated

proceeding is ongoing . . . .”).

Sprint resolved these interpretive dilemmas, squarely

holding that Younger abstention is limited to the “three

exceptional categories” of cases identified in New Orleans

Public Service, Inc. v. Council of New Orleans (NOPSI),

491 U.S. 350, 367–68 (1989). Sprint, 134 S. Ct. at 592.

Those cases are: (1) “parallel, pending state criminal

proceeding[s],” (2) “state civil proceedings that are akin to

criminal prosecutions,” and (3) state civil proceedings that

“implicate a State’s interest in enforcing the orders and

judgments of its courts.” Id. at 588.

READYLINK HEALTHCARE V. SCIF 9

For orders at the “core” of the judicial process, the

underlying state proceeding plainly need not have been

initiated by the state. See Juidice, 430 U.S. at 329–30,

335–36; Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 4–5, 12–14

(1987). For civil enforcement actions that are akin to

criminal proceedings, however, “a state actor is routinely a

party to the state proceeding and often initiates the action,”

the proceedings “are characteristically initiated to sanction

the federal plaintiff . . . for some wrongful act,” and

“[i]nvestigations are commonly involved, often culminating

in the filing of a formal complaint or charges.” Sprint, 134 S.

Ct. at 592.

In civil cases, therefore, Younger abstention is appropriate

only when the state proceedings: (1) are ongoing, (2) are

quasi-criminal enforcement actions or involve a state’s

interest in enforcing the orders and judgments of its courts,

(3) implicate an important state interest, and (4) allow

litigants to raise federal challenges. See Sprint, 134 S. Ct. at

593–94; Gilbertson, 381 F.3d at 977–78. If these “threshold

elements” are met, we then consider whether the federal

action would have the practical effect of enjoining the state

proceedings and whether an exception to Younger applies.

See Gilbertson, 381 F.3d at 978, 983–84. Each element must

be satisfied, AmerisourceBergen, 495 F.3d at 1148, and the

date for determining whether Younger applies “is the date the

federal action is filed,” Gilbertson, 381 F.3d at 969 n.4.

C.

The state proceedings here did not fall within the three

exceptional categories of cases identified in Sprint and

NOPSI. First, obviously they were not parallel state criminal

proceedings.

10 READYLINK HEALTHCARE V. SCIF

Second, neither the Commissioner’s approval of SCIF’s

premium calculation nor the Los Angeles Superior Court’s

affirmance was an order at “the core of” California’s court

system, Juidice, 430 U.S. at 335, implicating the “State’s

interest in enforcing the orders and judgment of its courts,”

Sprint, 134 S. Ct. at 588. “Core” orders involve the

administration of the state judicial process—for example, an

appeal bond requirement, Pennzoil Co. v. Texaco, Inc.,

481 U.S. at 12–14, a civil contempt order, Juidice, 430 U.S.

at 335–36, or an appointment of a receiver, Lebbos v. Judges

of the Superior Court, 883 F.2d 810, 815 (9th Cir. 1989).

This case, in contrast, involves a “single state court

judgment” interpreting an insurance agreement and state law,

not the process by which a state “compel[s] compliance with

the judgments of its courts.” Potrero Hills, 657 F.3d at 886.

If the mere possibility of inconsistent federal and state court

judgments justified Younger abstention, Younger would

swallow whole both Colorado River abstention and

preclusion. See AmerisourceBergen, 495 F.3d at 1150.

Third, the state court proceedings here do not “rank as an

act of civil enforcement . . . ‘akin to a criminal prosecution’

in ‘important respects.’” Sprint, 134 S. Ct. at 592 (quoting

Huffman, 420 U.S. at 604). Even assuming arguendo that the

Commissioner’s decision and the subsequent state court

review was a “unitary proceeding,” see San Jose Silicon

Valley, 546 F.3d at 1093, it plainly was not a civil

enforcement proceeding. SCIF, acting as a private party,

audited and billed ReadyLink for its yearly premium.

ReadyLink, a private party, requested agency review of that

decision. The Commissioner adjudicated the dispute between

ReadyLink and SCIF by interpreting state law, and

ReadyLink then requested judicial review.

READYLINK HEALTHCARE V. SCIF 11

SCIF and the Commissioner argue that the state

proceedings were akin to a criminal prosecution because the

Commissioner “convened” an administrative hearing and

issued an opinion interpreting state regulations. The assertion

proves too much. If the mere “initiation” of a judicial or

quasi-judicial administrative proceeding were an act of civil

enforcement, Younger would extend to every case in which

a state judicial officer resolves a dispute between two private

parties. This would render meaningless the “virtually

unflagging obligation of the federal courts to exercise the

jurisdiction given them,” Colorado River, 424 U.S. at 817,

and “would extend Younger to virtually all parallel state and

federal proceedings, at least where a party could identify a

plausibly important state interest,” Sprint, 134 S. Ct. at 593.

That the Commissioner interpreted a California regulation is

similarly irrelevant: In nearly every civil case, litigants

request that a court or a quasi-judicial agency interpret a

statute, a regulation, or the common law.

The district court therefore erred by abstaining. But,

things have changed since the district court’s decision: The

California courts have now directly rejected ReadyLink’s

preemption claim. We turn to the consequences of that

rejection.

III. Preclusion

A.

Because the California Court of Appeal rejected

ReadyLink’s preemption claim after the federal district court

entered its judgment, neither party addressed preclusion

below. However, we may consider issue preclusion, a

question of law, for the first time on appeal. Clements v.

12 READYLINK HEALTHCARE V. SCIF

Airport Auth., 69 F.3d 321, 329–30 (9th Cir. 1995). Issue

preclusion “bars ‘successive litigation of an issue of fact or

law actually litigated and resolved in a valid court

determination essential to the prior judgment,’ even if the

issue recurs in the context of a different claim.” Taylor v.

Sturgell, 553 U.S. 880, 892 (2008) (quoting New Hampshire

v. Maine, 532 U.S. 742, 748–49 (2001)).

We determine the preclusive effect of a state court

judgment by applying that state’s preclusion principles.

28 U.S.C. § 1738; Migra v. Warren City Sch. Dist. Bd. of

Educ., 465 U.S. 75, 81 (1984). State law governs even if the

state court action challenged “administrative decisions under

section 1094.5, California’s administrative mandamus

statute,” White v. City of Pasadena, 671 F.3d 918, 926 (9th

Cir. 2012), and the federal court action alleges a

constitutional violation, Allen v. McCurry, 449 U.S. 90, 98

(1980).

California law bars relitigation of an issue of law or fact

if five requirements are met:

First, the issue sought to be precluded from

relitigation must be identical to that decided in

a former proceeding. Second, this issue must

have been actually litigated in the former

proceeding. Third, it must have been

necessarily decided in the former proceeding.

Fourth, the decision in the former proceeding

must be final and on the merits. Finally, the

party against whom preclusion is sought must

be the same as, or in privity with, the party to

the former proceeding.

READYLINK HEALTHCARE V. SCIF 13

Lucido v. Superior Court, 795 P.2d 1223, 1225 (Cal. 1990)

(en banc). If these threshold requirements are satisfied, a

court then determines whether preclusion would be consistent

with the “preservation of the integrity of the judicial system,

promotion of judicial economy, and protection of litigants

from harassment by vexatious litigation.” Id. at 1227.

B.

Applying the California issue preclusion test, we conclude

that the decision of the California Court of Appeal bars

ReadyLink’s preemption claim.

First, the California court resolved the very issue that

ReadyLink raised in the district court—whether the

Commissioner’s decision creates an obstacle to federal tax

law. Jones, 148 Cal. Rptr. 3d at 888–89. The state court held

that ReadyLink’s preemption argument was a misguided

attempt “to compare two distinct areas of law,” and

concluded that the Commissioner may impose more

demanding per diem reporting requirements for workers’

compensation purposes than the IRS imposes for federal tax

purposes. Id. at 888–90.

Second, ReadyLink actually litigated the issue. “For

purposes of collateral estoppel, an issue was actually litigated

in a prior proceeding if it was properly raised, submitted for

determination, and determined in that proceeding.”

Hernandez v. City of Pomona, 207 P.3d 506, 514 (Cal. 2009).

ReadyLink’s state briefing asserted that IRS reporting

regulations preempted the Commissioner’s decision. The

California Court of Appeal disagreed.

14 READYLINK HEALTHCARE V. SCIF

Issue preclusion applies even if the Commissioner himself

had no authority to declare the USRP unenforceable in the

underlying administrative proceedings. See Cal. Const. art

III, § 3.5. We do not today consider the preclusive effect of

the Commissioner’s findings. See Univ. of Tenn. v. Elliott,

478 U.S. 788, 796–99 (1986); Miller v. Cnty. of Santa Cruz,

39 F.3d 1030, 1033 (9th Cir. 1994). Rather, we address the

holding of the Court of Appeal, which in the first instance

rejected ReadyLink’s preemption claim. Jones, 148 Cal.

Rptr. 3d at 888–89; see also Turnbow v. Pac. Mut. Life Ins.

Co., 934 F.2d 1100, 1103 (9th Cir. 1991) (holding that state

court preemption rulings are entitled to preclusive effect).

ReadyLink insists that it could not fully present its

preemption claim without conducting discovery or presenting

evidence to a trial court. ReadyLink, however, made the

same point to the California Court of Appeal, which

determined as a matter of law that the Commissioner’s

decision would not frustrate the purpose of federal reporting

regulations. Jones, 148 Cal Rptr. 3d at 888–89. This satisfies

the “actually litigated” requirement. See Lucido, 795 P.2d at

1225 (requiring “the opportunity to present full cases”); see

also Kremer v. Chem. Const. Corp., 456 U.S. 461, 481 (1982)

(“[S]tate proceedings need do no more than satisfy the

minimum procedural requirements of the Fourteenth

Amendment’s Due Process Clause in order to qualify for the

full faith and credit guaranteed by federal law.”). Preemption

is almost always a legal question, the resolution of which is

rarely aided “by development of a more complete factual

record.” Hotel Emps. & Rest. Emps. Int’l Union v. Nev.

Gaming Comm’n, 984 F.2d 1507, 1513 (9th Cir. 1993).

Thus, we have granted preclusive effect to a Rule 12(b)(6)

dismissal of a conflict preemption claim, see Stewart v. U.S.

Bancorp, 297 F.3d 953, 956, 959 (9th Cir. 2002), and have

READYLINK HEALTHCARE V. SCIF 15

approved the dismissal of claims on the basis of obstacle

preemption at the pleading stage, see Pub. Util. Dist. No. 1 of

Grays Harbor Cnty. v. IDACORP Inc., 379 F.3d 641, 650

(9th Cir. 2004); Fireman’s Fund Ins. Co. v. City of Lodi,

302 F.3d 928, 949–51 (9th Cir. 2002). California courts have

done the same. See, e.g., Yarick v. PacifiCare of Cal.,

102 Cal. Rptr. 3d 379, 386–87 (Ct. App. 2009) (sustaining a

demurrer on the basis of obstacle preemption); Pollock v.

Univ. of S. Cal., 6 Cal. Rptr. 3d 122, 132 (Ct. App. 2003)

(granting preclusive effect to a “purely legal” judgment

sustaining a demurrer).

The third, fourth, and fifth requirements for issue

preclusion under California law are not subject to debate.

The state court necessarily decided the preemption issue, as

“the resolution of the issue was not ‘entirely unnecessary to

the judgment in the initial proceeding.’” Zevnik v. Superior

Court, 70 Cal. Rptr. 3d 817, 821 (Ct. App. 2008) (quoting

Lucido, 795 P.2d at 1226). The California Court of Appeal’s

decision was on the merits, and became final after review was

denied. See Abelson v. Nat’l Union Fire Ins. Co., 35 Cal.

Rptr. 2d 13, 19 (Ct. App. 1994). And, the parties in the state

and federal actions were the same.

Moreover, applying issue preclusion would preserve “the

integrity of the judicial system” by promoting judicial

economy. Lucido, 795 P.2d at 1229. There is no reason for

a federal court to tackle anew the precise legal issue resolved

by the California Court of Appeal.

Contrary to ReadyLink’s assertion, giving the California

Court of Appeal’s decision preclusive effect does not close

federal courts to constitutional claims against California

agencies. Had ReadyLink not made its Supremacy Clause

16 READYLINK HEALTHCARE V. SCIF

claim in the mandamus action, the Court of Appeal’s opinion

would not have precluded a federal suit raising that claim.

See Honey v. Distelrath, 195 F.3d 531, 533 (9th Cir. 1999);

Gallagher v. Frye, 631 F.2d 127, 129–30 (9th Cir. 1980).

ReadyLink also could have avoided claim preclusion by

initially requesting both administrative review and

declaratory relief in federal court. Cf. City of Chi. v. Int’l

Coll. of Surgeons, 522 U.S. 156, 163–69 (1997) (holding that

federal district courts have supplemental jurisdiction over

state law claims arising under a state administrative review

statute); Duchek v. Jacobi, 646 F.2d 415, 419 (9th Cir. 1981)

(“However extensive their power to create and define

substantive rights, the states have no power directly to enlarge

or contract federal jurisdiction.”). But, ReadyLink instead

voluntarily chose to litigate the Supremacy Clause claim in

the state mandamus action, and the appellate court’s decision

therefore has preclusive effect.

IV. Conclusion

For the foregoing reasons, the judgment of the district

court dismissing the complaint is AFFIRMED.