Appendix — Fisher v. Berkeley

8 4 2 i 538 Office -Supreme Court, US. |

FILED

MAR_27_ 1985

ALEXANDER L. STEVAS,

No. | CLERK

IN THE

Supreme Court of the United States

OcrosBer TERM, 1984

ALEXANDRA FISHER, an individual;

MARGUERITE JACOBS, an individual;

Mort BAKER, an individual;

RICHARD LAWHORN, an individual;

ANTHONY KERSHAW, an individual;

and LEVIN-ZEMEL, INC., a corporation,

Appellants,

vs.

CrTy OF BERKELEY, CALIFORNIA, a municipal corporation;

THE BERKELEY CrTy COUNCIL; THE BERKELEY RENT

STABILIZATION BOaRD; Does I through XX, inclusive,

Appellees.

On Appeal from the Supreme Court

of the State of California

APPENDIX TO

JURISDICTIONAL STATEMENT

, 3 yor

Peter J. DONNICI —JaMES R. ParrineLic*

UNTVERSITY OF SAN FRANCISCO JOHN E. MUELLER

SCHOOL OF LAW CHRISTIANE T. RIESS,

2130 Fulton Street NIELSEN, HODGSON,

San Francisco CA 94117 PARRINELLO & MUELLEK

Telephone: (415 ) 666-6220 650 Califon.ia Street

Suite 2650

San Francisco, CA 94108

Telephone: (415) 989-6800

*Counsel of Record Attorneys for Appellants

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

Appendix F

Appendix G

Appendix H

Table of Contents

—Dissenting Opinion .........................

Opinion of the California Court of Appeal

Temporary Restraining Order of Superior

Court, Alameda County, CA..................

Preliminary Injunction Order of Superior

Coun, Alameda County, CA..................

Judgment on the Pleadings of Superior

Court, Alameda County, CA...................

PO a i edicttnctnitncesiccmecseevemccenseee

Tenants Rights Amendments Act of 1982

e.g ERE

Rental Housing In California: Obstacles

and Opportunities. Bay Area Council,

SE CE vile, Seinbibcdeinactinhetinsnemennonnes

A-|

APPENDIX A

IN THE

Supreme Court of California

S.F. No. 24675

Super. Ct. No. 536602-6

ALEXANDRA FISHER et al.,

Plaintiffs and Appellants,

vs.

Crry OF BERKELEY, et al.

Defendants and Respondents.

[Filed December 27, 1984]

OPINION

Plaintiffs, a group of landlords who own property in the

City of Berkeley, appeal from a judgment of the Alameda

County Supenor Court holding defendants’ rent control ordi-

nance constitutional on its face. We substantially affirm the

judgment.

Plaintiffs claim that defendants’ ordinance conflicts with,

and hence is preempted by, federal antitrust law because it is a

combination that unreasonably restrains interstate commerce in

violation of section 1 of the Sherman Antitrust Act (Act or

Sherman Act). (15 U.S.C.) They also claim that it constitutes

monopolization, or attempted monopolization, in violation of

section 2 of the Act. (Ibid.) Although price fixing by private

business ¢ *’ ‘rprises is clearly illegal per se, we hold that the per

se rule of isegality does not apply to the municipal defendants’

A-2

price-fixing ordinance in this case. Nor can such a municipal

regulation be reviewed pursuant to the traditional rule of

reason, under which validity would be judged solely by the

regulation’s effect on competition. Instead, we have determined

that when the validity of an ordinance is challenged under the

federal antitrust laws, courts must adapt traditional antitrust

rules in order to accommodate municipal governments’ legiti-

mate interest in enacting economic and social regulations

concerning local health, safety and welfare. We conclude that

if a municipal regulation has a proper local purpose, is ration-

ally related to the municipality’s legitimate exercise of its police

power, and operates in an even handed manner, it must be

upheld against a claim that it conflicts with section | or 2 of the

Sherman Act unless the plaintiff demonstrates that the city’s

purpose could be achieved as effectively by means that would

have a less intrusive impact on federal antitrust policies. No

such means have been proposed. Under the foregoing test the

ordinance in question has not been shown to conflict with

federal antitrust laws.

We also conclude that defendants’ ordinance is facially

constitutional under both the federal and state due process

clauses: a rent control ordinance is valid if it guarantees each

landlord a fair return on his investment; it need not guarantee a

fair return on the value of property. Furthermore, the ordi-

nance on its face provides for reasonably prompt access to

adjustment procedures for those landlords seeking to increase

rents. Additionally, we conclude that the rent withholding

provisions of the ordinance do not violate landlords’ due

process rights, nor are such provisions preempted by general

state law. Finally, however, we have determined that the

ordinance is invalid to the extent it purports to create an

evidentiary presumption affecting the burden of proof in regard

to retaliatory evictions, but that such a provision is severable,

and does not affect the validity of the remainder of the

ordinance.

A-3

BACKGROUND AND PROCEDURE

In June 1980 the Berkeley electorate enacted initiative

“Measure D,” the “Rent Stabilization and Eviction for Good

Cause Ordinance,” (hereafter ordinance). The ordinance

affects approximately 23,000 rental units.

Section 3 sets out the purpose of the ordinance: It is

intended “to regulate residential rent increases in the City of

Berkeley and to protect tenants from unwarranted rent increas-

es and arbitrary,. discriminatory, or retaliatory evictions, in

order to help maintain the diversity of the Berkeley community

and to ensure compliance with legal obligations relating to the

rental of housing. This legislation is designed to address the

City of Berkeley’s housing crisis, preserve the public peace,

health and safety, and advance the housing policies of this City

with regard to low and fixed income persons, minorities,

students, handicapped, and the aged.”

Section 5 exempts from the ordinance government-owned

units, transient umits, cooperatives, hospitals, certain small

owner-occupied buildings, and all newly constructed buildings.

Section 6 establishes a rent stabilization board ( Board) of nine

commissioners, and sets out its powers, duties, rules and

procedures, as well as a means of ending rent control if the

city’s vacancy rate surpasses 5 percent. Section 8 requires

landlords to register with the Board, furnish specified informa-

tion, and pay a registration fee for each unit.

Section 10 establishes base rent ceilings' that landlords

may not exceed except as permitted by the Board under

sections 11 and 12. Section 11 provides for annual general

adjustment of rent ceilings to cover increases or decreases

relating to utilities and taxes. In making such general adjust-

ment, the Board is given authority to adopt a general formula

based on available data relating to such expenses. If a landlord

is not satisfied with this general increase, he may petition the

'. The base rent ceiling is the rent as of May 31. 1980. Regarding rental

units for which there was no penodic rent in effect on that date, or during the

six months preceding that date, the base rent ceiling is a “good faith estimate”

of the median rent in effect for comparable units in the City of Berkeley on

May 31, 1980.

A-4

Board for an individual adjustment under section 12. In ruling

on this petition the Board must consider many nonexclusive

factors, including a landlord’s individual costs, but in no event

may it deny a rent increase needed to allow a landlord a “fair

return on investment.”

Section 13 prohibits evictions except for enumerated fac-

tors constituting “good cause.” Section 14 prohibits retaliatory

evictions, and states that any eviction action taken against a

tenant within six months of the tenant’s assertion of rights

under the ordinance shall be “presumed” to be retaliatory.

Section 15 sets out remedies, including rent withholding,

both for a landlord’s violation of rent ceilings and failure to

register. Section 16 is a severability clause. Section 17 declares

that the provisions of the ordinance may not be waived.

Section 18 provides for judicial review of any act of the Board.

Plaintiffs filed suit in August 1980 seeking injunctive and

declaratory relief against enforcement of the ordinance. They

alleged the ordinance is unconstitutional on its face and as

applied. The trial court granted defendants’ motion for judg-

ment on the pleading, declaring the ordinance constitutional on

its face. The court granted plaintiffs leave to amend to allege

facts showing that the ordinance is unconstitutional as applied,

but plaintiffs subsequently dismissed this aspect of the com-

plaint. Plaintiffs appeal from the trial court’s order granting

defendants judgment on the pleadings. The sole question

before us, therefore, is whether the ordinance is invalid on its

face.2

After the case was fully briefed on the merits in the Court

of Appeal, but before that court rendered its decision, the

United States Supreme Court decided Community Commu-

2 While the case was pending on appeal the Berkeley electorate enacted

the “Tenants’ Rights Amendments Act of 1982,” revising certain sections of

the ordinance, including two sections relevant to our inquiry in this case:

section 11, quoted post at page *, footnote 44, and section 14, quoted post at

page **, footnote 54. Although the amendment was not before the trial

court at the time it held the ordinance facially constitutional, any issues that

may arise as a result of the amendments are questions of law and thus may be

properly resolved by this court in determining facial valicity. Therefore we

will review the regulation as amended.

* Infra A-47.

** Infra A-54.

A-5

nications Co. v. City of Boulder (1982) 455 U.S. 40, holding a

home rule municipality subject to federal antitrust scrutiny. We

granted hearing, and soon thereafter the issue of the effect of

Boulder, and antitrust law generally, was raised for the first

time by amicus curiae. Both parties and additional amici curiae

for both parties were granted leave to file, and have filed,

supplemental briefs addressing inter alia antitrust issues gener-

ally, and the Boulder issue specifically.

Therefore, although plaintiffs claim the ordinance is fa-

cially invalid in whole or in part on due process and statutory

grounds, they also assert that an alleged conflict between the

ordinance and federal antitrust law presents a threshold issue

dispositive of this appeal. Defendants likewise request that we

address and resolve plaintiffs’ antitrust contentions.? Because of

the extreme importance of the issues presented, we proceed to

analyze plaintiffs’ antitrust claims.

3 It is well settled that a court will consider on appeal a new point of law

decided while the appeal is pending. (Claremont Imp. Club v. Buckingham

(1948) 89 Cal.App.2d 32, 33.) Although prior to Boulder there existed a

plausible basis for alleging a municipal regulation ito be in conflict with

antitrust laws pursuant to City of Lafayette v. Louisiana Power & Light Co.

(1978) 435 U.S. 389 (discussed post, pp. - *°), that case involved

proprietary, rather than regulatory conduct, and hence such a claim could not

reasonably have been expected to survive demurrer. In a real sense,

cuoseihianciiin cietiiens 42 Gallivein cients af etatiiead tidianndy eden tin

arose in Boulder.

It is also established that on appeal from judgments granting or denying

an injunction, the court applies the law that is current at the time of the

decision: ( Cal-Dak Co. v. Sav-On Drugs, Inc. (1953) 40 Cal.2d 492, 496-497

[congressional amendment of antitrust laws while appeal pending given

effect to exempt a manufacturer from Sherman Act §1 charges]; see also

M Restaurants, Inc. v. San Francisco Local Joint Exec. Bd. Culinary etc.

Union (1981) 124 Cal.App.3d 666, 673.) Further, we have held that parties

may advance new theories on appeal when the issue posed is purely a

question of law based on undisputed facts, and involves important questions

of public policy. (Frink v. Prod (1982) 31 Cal.3d 166, 170 (plurality

decision ); Carman v. Alvord (1982) 31 Cal.3d 318, 324; UFITEC, S.A. v.

Carter (1977) 20 Cal.3d 238, 249, fn. 2; Wong v. Di Grazia ( 1963) 60 Cal.2d

525, 532, fn. 9; Tyre v. Aetna Life Ins. Co. (1960) 54 Cal.2d 399, 405;

Burdette v. Roilefson Construction Co. (1959) 52 Cal.2d 720, 725-726.) In Di

Grazia, supra, we rejected defendants’ contention that because an issue

regarding the rule against perpetuities had not been raised at trial, it would be

improper for this court to address the question on appeal. Justice Tobriner,

writing for the court, suggested that defendants’ contention was meritless, and

that “in any event, the issue as to the rule against perpetuities [is of]

( Footnotes continued on following page)

A-6

L

Antitrust Issues

In Birkenfeid v. City of Berkeley (1976) 17 Cal.3d 129, we

held Berkeley’s former rent control ordinance facially uncon-

stitutional because its procedures for rent adjustment were

“inexcusably cumbersome” and would have deprived landlords

of due process if permitted to take effect. (Id. at p. 173.)

Before reaching that conclusion, however, we addressed the

threshold question of the city’s power to provide for rent

control. We observed that our Constitution confers on all cities

and counties the power to “make and enforce within [their]

limits all local, police, sanitary, and other ordinances and

regulations not in conflict with the general laws” (Cal. Const.,

art. XI, § 7) and noted that “j a] city’s police power under this

provision can be applied only within its own territory and is

subject to displacement by general state law but otherwise is as

broad as the police power exercisable by the Legislature itself.”

(17 Cal.3d at p. 140.) Although there is extensive regulation

governing various aspects of landlord-tenant relations, “Cali-

fornia has no state rent control statute.” (Id. at p. 141.) We

therefore concluded that the Berkeley ordinance was within the

city’s police power: there was “no legislative indication of ‘a

paramount state concern [which] will not tolerate further or

additional local action.’ ” (Id. at p. 142, quoting Jn re Hubbard

(1964) 62 Cal.2d 119, 128.)

Conceding that local rent control is not preempted by state

law, plaintiffs champion federal antitrust law in order to attack

Birkenfeld’s premise that the police power of a city is as broad

as that power exercisable by the Legislature.

Plaintiffs observe that although our state Constitution

grarts cities police power equal to that of the state, we are duty-

( Footnotes continued from preceding page)

considerable public interest; it has been fully argued before this court; we,

accordingly, dispose of the issue on its merits.” (60 Cal.2d 525, 532, fn. 9.)

We believe that the validity of municipal rent controls under antitrust law

raises extremely significant issues of public policy and public interest. (See,

e.g., Goodrich, The Limits of Municipal Power (Mar. 1984) 4 Cal. Law. 26;

Speigel, Local Governments and the Terror of Antitrust (1983) 69 A.B.AJ.

163.)

A-7

bound under the supremacy clause of the federal Constitution

(art. VI, §2) to invalidate a municipal regulation that on its

face violates paramount federal law. ( Sail’er Inn, Inc. v. Kirby

(1971) 5 Cal.3d i, 10-11.) They argue that (1) the city’s

ordinance, on its face, conflicts with federal antitrust law; that

(2) under Boulder, the. ordinance is not exempt from antitrust

scrutiny, and hence (3) defendants have no authority to

enforce the regulation in question. We clearly have jurisdiction

to decide such claims. (Rice v. Norman Williams Co. (1982)

458 U.S. 654, 659-661; see Rice v. Alcoholic Beverage Control

Appeals Bd. (1978) 21 Cal.3d 431, 439-446 [state retail price

maintenance scheme for distilled lLquor invalidated under § 1

of the Sherman Act]; Midcal Aluminum, Inc. v. Rice (1979) 90

Cal.App.3d 979, 982-984 [enjoining enforcement of. state

wholesale price maintenance scheme for wine as invalid under

§ 1 of the Act], affd. sub nom. California Retail Liquor Dealers

Ass'n v. Midcal Aluminum, Inc. (1980) 445 U.S. 97; Capiscean

Corp. v. Alcoholic Beverage Control Appeals Bd. (1979) 87

Cal.App.3d 996, 999-1000 [invalidating state retail price

maintenance scheme under Rice v. Alcoholic Beverage Control,

supra ]}.)4

A. State Action, Municipal Action, and Federal Antitrust

Law

In order to prohibit private businesses from practicing

various anticompetitive activities in interstate commerce, nearly

a century ago the United States Congress exercised its broad

authority under the commerce clause (U.S. Const., art. I, § 8,

subd. (3)) to enact the Sherman Act. (Pub. L. No. 51-190, 26

4 We are aware that some decisions broadly declare that “state courts

have no jurisdiction to construe or enforce the federal antitrust laws.””

(Classen v. Weller (1983) 145 Cal.App.3d 27, 34, fm. 2 [concession by

counsel]; Union Oil v. Chandler (1970) 4 Cal.App.3d 716, 726.) Plaintiffs in

this case, however, do not seek a private remedy against defendants; instead,

they seek to enjoin enforcement of a local regulation alleged to be facially

unconstitutional under the supremacy clause. It is clear that state courts may

doth construe and “enforce” the federal antitrust statutes for the purpose of

ruling on such facial attacks. ( Rice v. Norman Williams Co. ( 19&2) 458 U.S.

654, 658, fn. 4, revg. on other grounds Norman Williams Co. v. Rice (1980)

108 Cal.App.3d 348, 354, fn. 2.) We do not construe Classen or Union Oil to

suggest that state courts lack jurisdiction to review facial attacks premised on

alleged conflict with federal antitrust laws.

A-8

Stat. 209 (1890) codified as amended at 15 U.S.C. §§ 1-7; see

Parker v. Brown (1943) 317 U.S. 341, 351, citing Remarks of

Sen. Sherman, 21 Cong. Rec. 2457, 2562 (1890).) Two

sections of the Act are relevant to the present case. Section |

declares that all contracts, combinations or conspiracies in

restraint of interstate commerce to be illegal. Section 2 declares

that the act of monopolizing, or attempting to monopolize any

part of interstate commerce is illegal. Quite obviously, if

defendants’ ordinance conflicts with the Act, and further, if it is

not exempt from antitrust scrutiny, the supremacy clause of the

federal Constitution requires that we declare the ordinance

invalid.

Over 40 years ago, the Supreme Court in 7arker, supra,

held this state’s raisin marketing program, which restricted

competition and maintained prices in order to protect the local

raisin market, tvas not subject to federal antitrust scrutiny. The

court found “nothing in the language of the Sherman Act or in

its history which suggests that its purpose was to restrain a state

or its officers or agents from activities directed by its legislature.

In a dual system of government in which, under the Con-

stitution, the states are sovereign, save only as Congress may

constitutionally subtract from their authority, an unexpressed

purpose to nullify a state’s control over its officers and agents is

not lightly to be attributed to Congress. [1] The Sherman Act

makes no mention of the state as such, and gives no hir* that it

was intended to restrain state action or official action d: ‘ected

by a state.... [9] There is no suggesuon of a purpose to

restrain state action in the Act’s legislative history.” (317 U.S.

at pp. 350-351.) The Parker court concluded that “(t]he state

in adopting and enforcing the ... program ... as a sovereign,

imposed the restraint as an act of government which the

Sherman Act did not undertake to prohibit.” (Id. at p. 352.)

iu a series of cases over the last decade the United States

Supreme Court has considered the extent to which private, or

nongovernmental, business enterprises may come under the

protection conferred in Parker.5 And in two recent decisions,

the court has addressed the conditions under which local

5 In Goldfarb v. Virginia State Bar (1975) 421 U.S. 773, the court held

minimum fee schedules for lawyers enforced by the state bar subject to

scrutiny under the Act. The state bar’s status as an agent of the state supreme

(Footnotes continued on following page)

A-9

governments may gain Parker protection. The first case, City of

Lafayette v. Louisiana Power & Light Co. (1978) 435 US. 389,

involved two Louisiana municipalities that owned and operated

their own electric utility systems. Louisiana Power alleged that

the municipalities had engaged in illegal tying arrangements

with their customers.

(Footnotes continued from preceding page)

court did not make its fee schedule “state action” because such anticompeti-

tive conduct was not “compelled by direction of the State acting as a

sovereign.” (Id. at p. 791.) The court again denied protection from antitrust

scrutiny in Cantor v. Detroit Edison Co. (1976) 428 U.S. 579. In that case the

state public utility commission approved an anticompetitive tariff requiring

the defendant to provide its customers “free” light blubs. Rejecting the

utility’s argument that commission approval “compelled” it to operate the

light bulb distribution program despite its anticompetitive effects, the court

held that mere approval was insufficient to invoke state action protection

ee toward the conduct in question. (Id.

at p. 585.

In the following year, the court recognized state action protection in

Bates v. Staite Bar of Arizona (1977) 433 U.S. 350. In Rates the state

supreme court, acting as the state’s ultimate authority over the practice of law,

promulgated American Bar Association-sponsored disciplinary rules banning

lawyer adverising. The United States Supreme Court held that “| a ]ithough

the State Bar plays a part in the enforcement of the rules, its role is completely

defined by the court; the [State Bar) acts as the agent of the court under its

continuous supervision.” (Id. at p. 361.) The court concluded that the state’s

anticompetitive policy was “clearly and affirmatively expressed” (id. at p.

362), and that the state bar’s conduct was sufficiently compelled by the state

to warrant protection from antitrust scrutiny. (Id. at p. 363.)

In New Motor Veh. Bd. of Cal. v. Orrin W. Fox, Co. (1978) 439 U.S. 96,

and California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc. (1980)

445 US. 97, the court again addressed the state action exemption as it applies

to private business enterprises. In Orrin Fox the court held that a state-

imposed scheme that restricted intrabrand competition in the sale of new

automobiles was exempt from scrutiny under the antitrust laws because the

program operated under “clearly articulated and affirmatively expressed”

legislative guidelines. (439 U.S. at p. 109.) In Midcal, on the other hand, the

court held that a state-imposed maximum resale price maintenance system,

affecting all wine producers and wholesalers in this state, was not exempt

from antitrust laws. Although the scheme was “ ‘clearly articulate’ and

affirmatively expressed as state policy,’ it was not “ ‘actively supervised’ by

the State itself.” (445 U.S. 105, quoting Lafayette, supra, 435 U.S. 389, 410

(plur. opn. ).)

Most recently, in Hoover v. Ronwin (1984) __U.S.__, 104 S.Ct. 1989,

the court, on a 4-3 vote, found Arizona state bar examiners exempt from

antitrust scrutiny. The majority held the examiners’ actions constituted action

of the sovereign itself, and hence exempt from antitrust scrutiny under Parker

(id. at pp. , 104 S.Ct at p. 1995). Therefore, the majority found it

unnecessary to consider whether the alleged anticompetitive policy was

Bony A articulated” or “actively supervised.” (Id. at p. ; 104S.Ct. at pp.

. .)

A-10

The majority rejected the municipalities’ contention that

antitrust laws were intended to protect only against abuses by

private businesses and are not applicable to municipalities that

“exist to serve the public weal.” (Id. at p. 403.) The court

observed that the defendants were not motivated solely by

desire to benefit the public. Instead, like “[e]very business

enterprise” (ibid.), their decisions may be motivated by the

goal of “realizing maximum benefits to [themselves] without

regard to extraterritorial impact and regional efficiency.” (Id.

at p. 404.) A majority therefore rejected the argument that the

two municipalities—both of which “act[ed] as owners and

providers of services” (id. at p. 408), were immune from

antitrust scrutiny.

A plurality opinion by Justice Brennan then rejected the

contention that municipalities, simply by reason of their status

as such, are exempt from antitrust laws. “ Parker’s limitation of

the exemption ... to ‘official action directed by [the] state,’

arises from the basis for the ‘state action’ doctrine—that given

our ‘dual system of government in which, under the Con-

stitution, the states are sovereign, save only as Congress may

constitutionally subtract from their authority,’ 317 U.S., at 351,

a congressional pr pose to subject to antitrust control the

States’ acts of government will not lightly be inferred. To

extend that doctrine to municipalities would be inconsistent

with that limitation. Cities are not themselves sovereign; they

do not receive all the federal deference of the States that create

them.” (435 U.S. at pp. 411-412.) Still, the plurality suggested,

a municipality could come under the Parker exemption if it acts

pursuant to state policy to displace competition with regulation

or monopoly public service. Deviating slightly from the court’s

requirement in the private business enterprise cases that the

state must have “compelled” the conduct in order for the

activity to come within the Parker exemption (ante, p. 7.

fn. 5), the plurality stated that state direction or authorization

of the anticompetitive conduct would be sufficient to tngger the

exemption for municipalities. (Id. at p. 417.)®

6 Four justices dissenting, led by Justice Stewart, maintained that ex-

emption applied because “petitioners are governmental bodies, not private

persons, and their actions are ‘act(s}] of government’ which Parker v. brown

held are not subject to the Sherman Act.” (435 U.S. at p. 426.)

A-11

In a concurrence, Chief Justice Burger emphasized his view

that the municipalities’ ownership and operation of utility

companies constituted business activities pursuant to their pro-

prietary functions (id. at p. 422-425), and hence any question

of exemption should meet the more stringent “compulsion”

standard applicable to private parties seeking the protection of

Parker. The Chief Justice appeared to suggest that municipal-

ites ‘onproprietary activities should be exempt from antitrust

scrutiny.

Four years later the United States Supreme Court decided

Community Communications Co. v. City of Boulder, supra, 455

U.S. 40. The city, apparently acting in its regulatory capacity,

placed a moratorium on expansion of plaintiff's cable television

service for three months in order to allow competing companies

to make bids to enter a new geographic market under a

proposed model ordinance.’ Plaintiff sued to enjoin the morato-

rium, claiming inter alia that it constituted a conspiracy be-

tween the city and a potential competitor, and that it restrained

trade in violation of section 1 of the Sherman Act. The district

court granted an injunction, rejecting the city’s argument that

its actions were protected as a valid exercise of its police power,

or that it was exempt from antitrust scrutiny under Parker. A

divided Tenth Circuit Court of Appeals reversed, distinguishing

Lafayette on the ground that, in contrast to the activity in that

case, “no proprietary interest of the City is here involved.” (630

F.2d 704, 708.) The United States Supreme Court in turn

reversed, holding over the dissent of Justice Rehnquist that the

city’s ordinance “cannot be exempt from antitrust scrutiny

unless: it constitutes the action of the State... itself in its

sovereign capacity, see Parker, or unless it constitutes municipal

action in furtherance or implementation of clearly articulated

and affirmatively expressed state policy, see City of La-

fayette . ...” (Boulder, supra, 455 U.S. 40, 52.) The court

rejected the city’s argument that merely because the state.

under its home rule amendment, had vested the city with

“" “every power theretofore possessed by the legislature . . . in

7 Plaintiff was assignee of a 20-year, revocable, nonexclusive permit to

conduct a cable television business within the city limits. (455 U.S. at p. 44.)

A-12

local and municipal affairs”’” (id. at p. 52, emphasis in

original ), regulation of cable television was therefore an “ ‘act

of government’ performed by the city acting as the state in local

matters... .” (Id. at p. 53, emphasis in original.) Granting of

home-rule power, the court reasoned, merely indicates neutral-

ity respecting the challenged actions, and does not satisfy the

“ ‘clear articulation and affirmative expression’ ” of state policy

requirement. (Id. at p. 55.) The court reiterated the Lafayette

plurality’s view that the Parker exemption is premised on

sovereignty, and that because municipalities are not sovereign,

they fall sutside the exemption. (Id. at pp. 50-51.)

Accordingly, much of the parties’ energy in the present

case has been directed toward arguing their respective views i's

to whether defendants’ ordinance falls within or without the

Boulder state action exemption.® Consideration of Boulder’s

exemption standarc at this siage in our analysis, however, is

premature. Applicaton of the state action exemption principle

becomes necessary only after we determine that there is “truly a

conflict between the Sherman Act and the challenged regu-

latory scheme.” ( First American Title Co. of South Dakota v.

South Dakota Land Title Ass’n (8th Cir. 1983) 714 F.2d 1439,

1452; see also Rice v. Norman Williams Co., supra, 458 U.S.

654, 662, fn. 9; Midcal, supra, 445 U.S. 97, 102; Parker, supra,

317 U.S. 341, 350; Rice, supra, 21 Cal.3d 431, 439-446; Lewis-

Westco & Co. v. Alcoholic Beverage Control Appeals Bd. (1982)

136 Cal.App.3d 829, 834-837.)

® Justice Rehnquist, writing for the dissent in Boulder, correctly noted

that the Parker court cast its decision in the language of preemption. ( Parker,

supra, 317 U.S. 341, 351.) Parker, which was a suit to enjoin enforcement of

a State statute, has been characterized by Boulder and Lafayette, however, as

establishing a state action exemption from antitrust laws. (455 U.S. 40, 43;

435 U.S. 389, 394.) Unlike Parker, both of these latter cases were private

antitrust suits for damages, not invalidation of a regulation. In the court's

most recent case in this area. Rice v. Norman Williams Co. (1982) supra, 458

U.S. 654, the plaintiffs sought to enjoin enforcement of one of this state's

liquor statutes. Consistently with Parker, the court framed its analysis in

terms of preemption. In view of these cases, we agree with plaintiffs and

amici that the question in the present appeal is whether defendants’ regulation

conflicts with, and hence is preempted by, the Sherman Act.

A-13

B. Facial Validity of the Ordinance Under Section 1 of the

Sherman Act

Plaintiffs contend that the ordinance, on its face, conflicts

with, and hence is preempted by, section 1 of the Sherman Act.

(See ante, fn. 8.) That section states: “Every contract, com-

bination ... or conspiracy, in restraint of trade or commerce

— ry several States...is declared to be illegal.” (15

Defendants and amici broadly respond that no provision

of the Act was intended to apply to city ordinances designed to

protect or further local health, safety, or general welfare, and

hence the ordinance in question cannot violate the antitrust

laws. They suggest that only local legislation designed to

achieve commercial or proprietary interests—either from city

ownership of property or through fees or taxes pursuant to

franchise awards—are properly subject to antitrust scrutiny.

Although defendants’ view has rational appeal, we are

bound by the United States Supreme Court’s implicit rejection

of that theory in Lafayette and Boulder. In both of those cases

the court addressed the applicability of state action exemption

to municipal defendants. However, in order to reach the

question of exemption from antitrust laws, in both decisions the

court necessarily assumed that each case presented a violation

of antitrust laws. (E.g., First American Title Co., supra, 714

F.2d 1439, 1451-1452.) While standing alone, Lafayette could

be read to support defendants’ view that only the commercial

activities of municipalities are subject to antitrust scrutiny

(Lafayette, 435 U.S. 389, 418-426, Burger, C.J., conc.), we

must conclude that Boulder forecloses any argument that the

Act does not apply to a municipality’s “noncommercial” activi-

ties. The alleged anticompetitive activity in that case concerned

merely the imposition of a three-month moratorium on ex-

pansion of petitioner’s cable television franchise while the city

studied the need for increased regulation. Whereas the facts of

Boulder strongly suggest that the moratorium was imposed

pursuant to the city’s regulatory authority, still the court’s

resolution of the state action exemption issue necessarily as-

sumed an antitrust violation; moreover, the court did not even

A-14

mention the possibility of a broader, preliminary exemption

from antitrust scrutiny for “nonproprietary” municipal activity.®

Therefore, we must conclude that the United States Su-

preme Court necessarily and implicitly rejected defendants’

view in Boulder. (McMahon, Recent Significant Developments

in “State Action” and Noerr-Pennington Exemptions: From

Boulder to the “Sham” Exception (1983) Toledo L.Rev. 531,

540-541.) As we shall explain below, however, defendants are

correct when they assert that the antitrust laws are aimed

chiefly at commercial activities. And, as demonstrated below,

this fact must influence the question of how, and to what extent,

traditional antitrust rules apply to municipal defendants.

We turn now to plaintiffs’ claim under section | of the

Sherman Act. To prove a facial conflict with section | in the

present case, plaintiffs must establish as a matter of law (a) that

two or more “persons” acted in concert, (b) that the activities

complained of affect interstate commerce, and (c) that the

action constitutes an unreasonable restraint on commerce.’ A

court may invalidate an ordinance in the abstract “only if it

mandates or authorizes conduct that necessarily constitutes a.

violation of the antitrust laws in all cases, or if it places

irresistible pressure on a private party to violate the antitrust

laws in order to comply with the statute.” (Rice v. Norman

Williams Co., supra, 458 U.S. 654, 661.)

®In this regard, we must also reject defendants’ attempt to distinguish

Boulder on the ground that the city in that case stood to acquire revenues from

its franchise awards. Again, it must be noted that the challenged activity in

Boulder concerned not collection of franchise fees, but merely the city’s

imposition, under its regulatory powers, of a three-month moratonum on

expansion of petitioner’s franchise. Nowere in the court’s majority, con-

curring, or dissenting opinions is it even suggested that resolution of the case

rested on defendants’ “revenue generating” theory. If in fact the United

States Supreme Court had found that city’s apparent interest in collecting fees

for its franchise awards to be determinative, we believe that court would have

said so somewhere in its opinion.

10 Plaintiffs and amici argue that a local enactment is preempted by

federal law not only when its operation would bring it expressly within the

federal statute, but also whenever its operation would frustrate the broad

objectives that underlie federal legislation. (See Hines v. Davidowitz (1941)

312 US. 52, 67 (the test of preemption is whether the state law stands “as an

obstacle to the accomplishment ...of the full purposes and objectives of

Congress”).) See generally, Posner, The Proper Relationship Between Siate

( Footnotes continued on following page )

A-15

. Both parties vigorously contest whether in this case plain-

tiffs can or cannot prove the requisite concerted action and

effect On interstate commerce. Although we do not agree with

plainuffs’ suggestion that these “technical” requirements should

be ignored in a facial attack seeking “mere invalidation”

instead of damages (ante, fn. 10), we need not address these

issues now"! because we have determined that, in any event,

plaintiffs cannot prove that the ordinance on its face mandates

an unreasonable restraint of trade and hence irreconciliably

conflicts with section | of the Sherman Act. (458 US. at

p. 661.) 12

1. Unreasonable Restraint

a. Application of Traditional Antitrust Law to Municipal

Defendants. We recognize at the onset that this case reme d

to wander off the map and travel cross country without the

benefit of trail or compass. Although Boulder clearly held

municipalities subject to antitrust laws, the court specifically

declined to address the issue of the applicability of traditional

antitrust rules or standards against which municipal defendants

are to be judged. (Boulder, supra, 455 U.S. 40, 56, fn. 20.)

Significantly, however, the Boulder court strongly suggested

( Footnotes continued from preceding page)

Regulation and the Federal Antitrust Laws (1974) 49 N.Y.U.L.Rev. 69

703 ( suggesting that the federal policy of free and open competition ye

applied to prevent the operation of state law that clearly transgresses the

spirit of the Sherman Act,” “even if the conflict is not within the express

language of the federal statute”). We are not convinced that such a broad

view is warranted or that the United States Supreme Court has embraced it.

Indeed, the court has recently indicated that it will not follow plaintiffs’

approach: the court stated that “[a] state statute is not pre-empted by the

federal antitrust laws simply because the state scheme might have an

anticompetitive effect” ( Rice v. Norman Williams Co., supra, 458 U.S. 654

659) and suggested that it will invalidate state legislation in the abstract “only

if it mandates . . . a violation of the antitrust laws in all cases... .” (Id. at p.

661, emphasis added. ) Because it is necessary to prove the requisite

concerted acuon and interstate commerce elements in order to prove a

violation of section |, the court's statement must reasonably be construed to

require proof of those elements even in a facial attack such as this.

"It is therefore unnecessary to discuss either the “intraenterprise” or the

eee a a raised in the briefs.

mpare, Comment, Sherman Act “Jurisdiction” in Hospi

Exclusion Cases (1983) 132 U.Pa.L.Rev. 121, 142. ood

A-16

that municipalities and private business enterprises may be

subject to different standards: the court repeated Lafayette's

suggestion that “‘[i]t may be that certain activities which

might appear anticompetitive when engaged in by private

parties, take on a different complexion when adopted by a local

government.’” (Ibid., citing Lafayette, supra, 435 US. 389,

417, fn. 48.) Similarly, the Boulder dissent observed that under

the majority’s rule, the courts “must now adapt antitrust

principles to adjudicate Sherman Act challenges to local regu-

lation of the economy.” (455 US. at p. 65.) Amticompetitive

conduct by a municipality in exercise of its legitimate police

power is indeed of a “different complexion” than similar

conduct engaged in by private business enterprises and there-

fore, as the Boulder court suggested, courts must adapt or

modify the application of traditional antitrust rules when

reviewing the acts of municipal defendants.

The United States Supreme Court has often noted that the

purpose of antitrust law is the regulation of anticompetitive

business practices. The Sherman Act relates to “ “business

competition’” (Apex Hosiery Co. v. Leader (1940) 310 US.

469, 493, fn. 15) and is designed to regulate “combinations of

business and capital organized to suppress commercial com-

petition....” (United States v. SouthEastern Underwriters

Ass'n (1944) 322 U.S. 533, 553; see also Parker, supra, 317

US. 341, 351; 1 Kintner, Federal Antitrust Law (1980) § 4.18

[ summarizing an exhaustive analysis of the legislative histery of

the Act]; cf. Bork, Legislative Intent and the Policy of the

Sherman Act (1966) 9 J.L. & Econ. 7.) One commentator has

observed that “[t}]he Court has been reluctant to apply antitrust

laws to the conduct of those who are not engaged in com-

mercial activities.” (Vanderstar, Liability of Municipalities

Under the Antitrust Laws: Litigation Strategies (1983) 32

Cath.U_L. Rev. 395, 397-398.) Indeed, the court has said that

the Act “is aimed primarily at combinations having commercial

objectives and is applied only to a very limited extent to

organizations, like labor unions, which normally have other

objectives.” ( Klor’s, Inc. v. Broadway-Hale Stores, Inc. ( 1959)

359 US. 207, 213, fn. 7.) Similarly, the court noted in

Goldfarb, supra, that it would be “unrealistic” to

OE he ie

A-17

“automatically -.. apply to the professions antitrust concepts

which originated in other areas.” (421 U.S. 773, 788, fn. 17.)

Traditional antitrust rules have been fashioned over the

years in the context of private business regulation. Many of the

rules are premised implicitly, sometimes explicitly, on assump-

tions about how rational business competitors behave in their

quest for greater profit. Municipal governments, on the other

hand, most often act on the basis of different motives. Unlike a

private business, a municipal government’s decision to displace

competition is generally moxivated by the purpose of furthering

local health, safety or welfare. When acting in its regulatory

capacity, a local government is both authorized to act in

accordance with, and entrusted with the duty of serving, the

public weal. Just as courts should proceed cautiously lest they

might unnecessarily interfere with rights of local self-

governance (Frug, The City as a Legal Concept (1980) 93

Harv.L.Rev. 1059; Cirace, An Economic Analysis of the “State-

Municipal Action” Antitrust Cases (1982) 61 Tex.L.Rev. 481,

490, fn. 50, 514; 1 DeTocqueville, Democracy in America

(Mayer ed., Lawrence trans. 1969) pp. 90-91 and passim), so

too courts must be attentive and sensitive to the legitimate

motives behind municipal regulations. Therefore, contrary to

the urging of plaintiffs and amici, we will not mechanically

apply to municipalities rules of law fashioned exclusively in the

different context of private business regulation. Such standards

will no doubt be helpful in formulating rules for the application

of antitrust principles to municipalities, but if unbending appli-

cation of traditional standards would prove too inflexible to

accommodate legitimate governmental objectives that motivate

municipal regulation, we will not hesitate to cautiously depart

from traditional rules. (Shenefield, The Parker v. Brown State

Action Doctrine and the New Federalism of Antitrust ( 1983) 51

Antitrust L.J. 337, 346; Note, The Application of Antitrust Laws

to Municipal Activities (1979) 79 Colum.L.Rev. 518, 539-543;

Note, Home Rule and the Sherman Act After Boulder: Cities

Between a Rock and a Hard Place (1983) 49 Brooklyn L.Rev.

259, 291-297 [hereinafter cited Home Rule]; The Supreme

Court, 198] Term (1982) 96 Harv.L.Rev. 268, 272-276.) 13

'3 See also authorities cited post, page *, footnote 24.

* Typed opinion page 43.

A-18

b. The Two Traditional Standards: The Rule of Reason,

and the Rule of Per Se Illegality. Although the prohibition in

section | of “[e]very contract, combination . . . or conspiracy,

in restraint of trade” was at first applied literally to invalidate

all such restraints (e.g., United States v. Trans-Missouri Freight

Ass’n (1897) 166 U.S. 290, 328 [“the plain and ordinary

meaning of . . . [section 1] is not limited to that kind of contract

alone which is an unreasonable restraint of trade. but all

contracts are included .. .” within the section’s proscription] ),

the court soon retreated from this manichean view of the Act,

holding it was not intended to strike down restraints merely

ancillary or incidental to another legitimate purpose. ( United

States v. Addyston Pipe & Steel Co. (6th Cir. 1898) 85 F. 271,

282, mod. and affd. sub nom. Addyston Pipe & Steel Co. v.

United States (1899) 175 U.S. 211, 244.) In Standard Oil Co.

v. United States (1911) 221 U.S. 1, the court announced that

the Act “evidenced the intent not to restrain the right to make

and enforce contracts... which did not unduly restrain inter-

state or foreign commerce, but to protect that commerce from

being restrained by methods... which would constitute an

interference that is an undue restraint.” (Id. at p. 60; see also

United States v. American Tobacco Co. (1911) 221 U.S. 106,

179 (“restraint of trade” covers only those acts that “injuriously

restrain{ ] trade”].) Today, under what has become termed

the “rule of reason,” many restraints are analyzed in light of

their economic effects on market conditions, and may be upheld

if “reasonable,” i.e., if the restraint “merely regulates and

perhaps thereby promotes competition” instead of suppressing

or destroying competition. (Chicago Bd. of Trade v. United

States (1918) 246 U.S. 231, 238.)

Some types of restraints, however, were never given such

accomodating review. Cartels—agreements among producers

to set prices above the competitive level by lowering produc-

tion—were early declared illegal “per se,” and the courts

refused to consider arguments that prices set by a cartel were

“reasonable.” (Note, Fixing the Price Fixing Confusion: A

Rule of Reason Approach (1983) 92 Yale L.J. 706, 710-712

[hereinafter Price Fixing Confusion].) Whereas these cases

focused on cartel behavior (e.g., United States v. Trenton

agin en oP

A-19

Potteries Co. (1927) 273 U.S. 392; see Price Fixing Confusion,

supra, at p. 712, fn. 38; Comment, The Per Se Illegality of

Price-Fixing—Sans Power, Purpose, or Effect (1952) 19

U.Chi.L.Rev. 837, 855) and refused to consider economic

reasonableness on the assumption that cartels were themselves

evils to be eradicated (e.g., Bork, supra, 9 J.L. & Econ. at

p.11), the United States Supreme Court in 1940 significantly

expanded the universe of price-related agreements subject to an

irrebuttable presumption of illegality. In United States v.

Socony-Vacuum Oil Co. (1940) 310 U.S. 150, the court,

through Justice Douglas, inferred the existence of a cartel from

the defendants’ agreement to buy surplus oil. Socony, however,

focused on price fixing itself rather than the inferred cartel; the

court stated that whether the parties actually could or did

succeed in fixing prices was irrelevant, and broadly character-

ized the proscribed conduct of price fixing: “Under the Sher-

man Act a combination formed for the purpose and with the

effect of raising, depressing, fixing, pegging, or stabilizing the

price of a commodity ... is illegal per se....[] [T]he ma-

chinery employed ...is immaterial.” (Id. at p. 223.) “Any

combinatior which tampers with price structures is engaged in

an unlawful activity.” (Id. at p.221.)

The focus of attention since Socony has been on whether

defendants have in any way agreed on a course of conduct

affecting prices: if the label “price fixing” is found to fit the

conduct in question,’* the courts have mechanically declared

such conduct illegal “even though no invidious purpose or

harmful economic consequences have been established, and

even though the economic results of the conduct may be of net

benefit to consumers.” ( Price Fixing Confusion, supra, 92 Yale

L.J. at p. 714; see Arizona v. Maricopa County Medical Soc y

‘4 The court has at times declined to treat as ille r se, conduct

seemingly within Socony’s broad price-fixing — (Es. Broadcast

Music, Inc. v. Columbia Broadcasting Sys., Inc. (1979) 441 U.S. 1, 20

[ blanket licenses not illegal per se even though music associations “fixed”

license prices, because such licenses created a market efficiency, i.e., a product

different from individually licensed compositions].) It has been suggested

— Proc) oe > no more _ a label given to arrangements that have

n fo per se.” (Easterbrook, Maximum Pri xi

48 U.Chi.L.Rev. 886, 887 } ——

A-20

(1982) 457 U.S. 332 [member physicians’ “foundations” to set

maximum fees charged to insurance plan Patients illegal per se

price fixing]. ) The per se rule reflects an irrebuttalbe presump-

tion that, if the court were to subject the conduct in question to

a full-blown inquiry, a violation would be found under the

traditional rule of reason. (Id. at p. 344; Northern Pac. Ry. v.

United States (1958) 356 U.S. 1, 5.) .

Although the price-fixing illegal per se Tule has its ad-

herents, and is asserted to be economically reliable and admin-

istratively efficient,'5 it has also suffered steady and growing

criticism as an often arbitrary, mechanical, and inconsistently

applied rule that ignores the realities of market power and net

economic effects.1® Of course, we are not here concerned with

the wisdom or efficacy of the per se rule as it applies to price

fixing in the typical case against private business defendants.

'SE.g., Kaysen & Turner, Antitrust Policy: - An —— and —_

Analysis (1959) page 142 (rule is relatively clear, self. ee a

ste iy 31 abreast Soa

ance (2d ed. page d |

te complex litigation, and undue burdens on tw = oy?

trative agencies ); Redlich, The Burger Court and the Per Se R ( —

Alb.L.Rev. 1 (rule a oe Se o ——— —

pared ey Ty soe ive (1962) 57 Nw.U.L-Rev. 137 (rule een Sa

clear guide for business conduct and a simplified approach = 5 ving

cases); Adams, The “Rule of Reason”: Workable Compeition phy mag

Monopoly? (1954) 63 Yale L.J. 348 (cnucizing attacks on the = -

(1983) 57 Tulane L.Rev. 994 ——— properly reaffirmed per

i i ing agreements ).

mee edhe Maximum Price Fixing (1981) U.Chi.L.Rev. 886

(maximum price fixing is almost always beneficial to consumers, and poe

should not be subject to per se analysis); Elman, “Petrified _wwry -_

Competitive Realities (1966) 66 Colum.L.Rev. 625 (per se rule shoul by oes

mechanically applied to vertical maximum resale price —— he

The Rule of Reason and the Per Se Concept: Price Fixing oad

Division pt. II (1965) 75 Yale L.J. 373 (use of per se rules outside — a

honzontal price-fixing agreements destroys efficiency and — -

sources ); von Kalinowski, The Per Se Doctrine—An Emerging losophy

Antitrust Law (1964) 11 UCLA L. Rev. 569 (cautioning gy tengeen pr a

application and adopiion of per se rules); Director & Levi, J ane

Future: Trade Regulation (1956) 51 Nw.U.L.Rev. 281 ——— + me

fixing should not be condemned as illegal per se unless it affects dp r

Jaffe & Tobriner, The Legality of Price-Fixing Agreements Ub on

Harv.L.Rev. 1164 (proposing abolition of the “arbitrary” per se in. -

price fixing, in favor of the rule of reason); Price Fixing Confusion, supra,

Yale L.J. at p. 714, & passim.

A-21

Nevertheless, we question whether the rule should be extended

to cover the municipal defendants in this case. Therefore,

although plaintiffs urge us to declare the ordinance facially

invalid because it represents blatant, albeit government-

imposed, vertical and horizontal 17 fixing of maximum prices,

we must first pause to consider whether these municipai

defendants should be subject to the per se rule, the rule of

reason, Or a more accommodating standard.

c. Purpose and Applicability of the Per Se Rule Against

Price Fixing. Of course, “it is... improper to dispose of an

antitrust case by invoking a per se rule unless the challenged

practice really fits the policy and rationale of the rule.” (Elman,

“Petrified Opinions” and Competitive Realities (1966) 66

Colum.L.Rev. 625, 627; ef., Boulder, supra, 455 U.S. 40, 65,

Rehnquist, J., dis. [ questioning whether per se rules of legality

will apply to municipal defendants in the Same manner as they

apply to private business defendants ].) Because we determine

below that the two principal justifications for the rule’s appli-

cation to private business enterprises—economic reliability and

ease of administration'®—are not implicated in the situation

before us, we must conclude that the per se rule has no place in

this case.

(i) Economic Reliability

The per se rule is thought to be economically reliable

because, the courts assume, Price fixing almost aiways has

anticompetitive effects and almost never has procompetitive

effects or “redeeming virtue.” Although it is unquestionable

that the United States Supreme Court has long viewed price

fixing by private business enterprises as illegal por se (e.g.,

Monsanto Co. v. Spray-Rite Service Corp. (1984) _____ US.

: , 104 S.Ct. 1464, 1469), we note that the court has

never addressed the question whether the same rule applies to

the same conduct by municipalities. Moreover, jusi as the

Supreme Court in the past has declined to apply the per se rule

7 Plaintiffs assert that the ordinance creates a coercive vertical com-

bination between the Board and individual landlords and furthermore that it

creates a homzontal combination among al! covered landlords.

‘8 Maricopa, supra, 457 U.S. at Pages 343-354.

A-22

in circumstances that pose previously unaddressed questions of

economic effect (cf. White Motor Co. v. United States (1963)

372 U.S. 253, 261 [refusing to apply a new per se rule J; but see,

Maricopa, supra, 457 U.S. 332, 349 [applying an established

per se rule to a “new” industry]), we too are reluctant to

announce at this early stage, and without the benefit of any

evidence regarding the economic consequences of locally im-

posed rent controls, that price fixing implemented by a local

government necessarily produces negative net anticompetitive

effects or that it lacks “any redeeming virtue.” ( Continental

T.V., Inc. v. GTE Sylvania Inc. (1977) 433 U.S. 36, 50; see

post,p. ,* fn. 20.) |

The court’s conclusion that price fixing by private business

defendants is “invariably anticompetitive,” is based on a fear

that even if prices are reasonable when set, by sanctioning such

behavior the courts would facilitate fixing of unreasonable

prices in the future. ( Socony, supra, 310 U.S. 150, 221; Trenton

Potteries, supra, 273 U.S. 392, 397.) In the context of price

fixing by a cartel, the Trenton Potteries court observed that

“(t]he aim and result of every price-fixing agreement, if

effective, is the elimination of one form of competition. The

power to fix prices, whether reasonably exercised or not,

involves power to control the market and to fix arbitrary and

unreasonable prices. The reasonable price fixed today may

through economic and business changes beco:ne the unreason-

able price of tomorrow. Once established, it may be main-

tained unchanged because of the absence of competition se-

cured by the agreement for a price reasonable when fixed.

(273 U.S. 392, 397.) The Socony court echoed this copcern.

noting that “[{t}hose who controlled the prices would control or

effectively dominate the market. And those who were in that

strategic position would have it in their power to destroy or

drastically impair the competitive system.” (310 U.S. 150,

221.)

The court’s fear of facilitating such “predatory” activity 1s

grounded on assumptions about how unrestrained business

competitors will act if given the opportunity. These assump-

tions have no place in the present case, however. There ts

* Infra A-25

+ lla

A-23

nothing to suggest that the named defendants are acting for

their own selfish purposes with a view toward securing market

control and hence price control in the future. Quite the

contrary, defendants’ sole and only legitimate purpose is to

serve the public welfare as described in section 3 of the

ordinance. When that purpose no longer exists—i.e., when

annual average citywide rental vacancies exceed 5 percent over

a six-month period—the ordinance provides for lifting of rent

controls until the vacancy rate again falls below 5 percent.

(§ 6, subd.(q).) We therefore conclude that neither the pre-

sumption that price fixing is invariably anticompetitive, nor the

fear of facilitating “predatory” practices—both concerns that

have been expressed by the United States Supreme Court in the

context of analyzing the conduct of private business defend-

ants—justifies application of the per se rule to municipalities

acting in their legitimate governmental capacities.

(ii) Ease of Administration

The per se rule is also said to be justified by its ease of

judicial administration. Both the 7renton Potteries and the

Socony courts further explained refusal to inquire into the

reasonableness of set prices on the ground that such a review

would necessitate constant detailed supervision and analysis by

the government to assure that reasonable prices remain reason-

able as economic conditions vary. (273 U.S. 392, 397-398; 310

U.S. 150, 221.)'® Recently, the Maricopa court stated that the

high costs associated with “elaborate inquiry into ... reason-

ableness” was a major justification for analyzing maximum

price fixing in the health care industry under the per se rule.

(457 U.S. 332, 343-344.)

Certainly, the judicial task is easier when the question is

changed from “does the conduct unreasonably restrain com-

petition” to “have defendants engaged in price fixing.” Resort

to this rule of administrative ccnvenience, however, can be

jusufied only if the costs “of formulating the rule, and of the

overinclusiveness that inevitably accompanies it—are less than

® Likewise, it has long been recognized that courts are poorly suited to

judge the reasonableness of prices set by businesses. ( United States v. Trans-

Missouri Freight Ass'n (1897) 166 U.S. 290, 331-332.)

A-24

the attendant savings in administrative costs.” (Price Fixing

Confusion, supra, 92 Yale L.J. at p. 709; see also United States

v. Container Corp. of America (1969) 393 U.S. 333, 341

(Marshall, J., dis. ); Ehrlich & Posner, An Economic Analysis of

Legal Rulemaking (1974) 3 J. Legal Stud. 257, 264-273;

Easterbrook, Maximum Price Fixing (1981) 48 U.Chi.L.Rev.

886, 909-910; Bohling, A Simplified Rule of Reason for Vertical

Restraints: Integrating Social Goals, Economic Analysis, and

Sylvania (1979) 64 lowa L.Rev. 461, 490-491.)

The potential for overinclusiveness in the present case is

apparent. Whereas the United States Supreme Court in

Trenton Potteries and Socony based its refusal to consider

whether private business defendants had set reasonable prices

largely on the absence of administrative supervision and on the

impracticality of constant judicial review of such prices, the

present case presents a different situation. By express provision

of the ordinance, it is the Board’s duty constantly to review and,

if necessary, to adjust rents in order to assure each landlord a

“fair return on his investment.” On the face of the ordinance,

rents would “be subject to continuous administrative super-

vision and readjustment in light of changed conditions” ( So-

cony, supra, 310 U.S. 150, 221) without requiring any in-

volvement by the courts unless a landlord chooses to exercise

his right to appeal his individual adjustment. Moreover, costs

of administering the program are borne by the local agency:

the ordinance is designed to allow the Board efficiently to

address and resolve adjustment disputes and to be financially

self-supporting.

We therefore must conclude that application of the “ease

of administration” justification for the per se rule would, in the

present case, improperly remove from judicial scrutiny an

elaborate government-enforced maximum price control and

adjustment scheme not contemplated by the court’s previous

cases dealing with private business defendants. (See Posner,

The Proper Relationship Between State Regulation and the

Federal Antitrust Laws (1974) 49 N.Y.U.L.Rev. 693, 706.)

We cannot say that probable economic harm, together with

social costs resulting from absence of a per se rule, Suzweighs

the risk of condemning, without any detailed inquiry, a local

A-25

government's heretofore presumed legitimate exercise of i

police powers. ( Cf. Bohling, supra, 64 lowa L.Rev. at p. pod | "J

In our view, maximum rents price fixing, implemented by local

government, is simply not of the same character as price fixing

among private business defendants.20

Because we find neither the economic reliability justi

ie! ty justifica-

tion nor the ease of administration justification applicable to

municipal defendants’ alleged anticompetitive behavior, we

decline to subject these defendants to analysis under the per se

. 20 Surely, the ordinance at issue here is not a nak

with no purpose except stifling of competition. (See age afd —

Under Boulder (1984) 34 Case Western Res. L.Rev. 303, 332-333.) In this

regard, the dissent recognizes that per se rules are inapplicable if the

challenged restraint has “any redeeming virtue” (post, p._____;* Continental

ri V. Inc. v. GTE Sylvania Inc. (1977) 433 U.S. 36, 50, quoting Northern

Pacific, supra, 356 U.S. at p. 5), but proceeds to ignore this extablished test, in

favor of its own subjective inquiry into whether the ordinance’s anticompeti-

uve effects ‘overnde”™ its redeeming virtue. This unprecedented eedibenion

of Northern Pacific-Sylvania renders the dissent’s analysis internally con-

tradictory: at the ‘same ume the dissent recognizes the impropriety of

balancing local policy against antitrust policy (post, p.____**), it plun

head-on to do just that by balancing a local policy’s redeeming virtue aon

its anuicompetutive effects. ( Post, p. ***) Thus—through i tie

veiled guise of its revised standard of review—the dissent would engage in ral

i ee analysis that It purposrts to disclaim, in order to accom-

~ e desired result: judicial veto of local economic regulation deemed to

unwise. (Indeed, one need look no further that the titles of the dissent’

we to see that this is the ultimate objective. ) ;

_ Furthermore, even if the dissent might somehow be read to avoi

—— its analysis would be plainly circular. In order to ome a

the per se rule of illegality of price fixing—itself a presumption—-applies here

= dissent would apparently create a foundational presumption that munici-

, rh sg fixing lacks “any redeeming virtue”; in other words, according to the

- nt, municipal price fixing is per se illegal because it is per se meritless

This effectively guts the Northern Pacific-Sylvania holdings that presence of

redeeming virtue renders per se analysis inapplicable. Finally, the dissent’s

Suggestion that failure to apply a per se rule would somehow violate federal

policy is curious at best. The Sherman Act says nothing of per se rules. The

> se rule Is a procedural device created by the federal courts largely for their

administrative convenience; it is not a substantive rule of law. (Northern

Pacific, supra, 356 US. at p. 3; Maricopa, supra, 457 U.S. at p. 344.) A state

court violates no federal policy by declining to extend per se analysis to an

unprecedented attack on municipal regulation.

* Dissenting vpinion infra A-83.

= Dissenung opinion infra A-85.

*** Dissenting opinion infra A-86.

A-26

rule.21 We turn, instead, to the rule of reason. If this were a

typical case in which it was determined that a per se rule did

not apply to a claim of facial conflict with the Sherman Act, our

inquiry would end here and the parties would be left to litigate

their antitrust claims at trial under the rule of reason. ( Rice v.

Norman Williams Co., supra, 458 U.S. 654, 661.) We cannot

take that course in this appeal, however, because, as we

conclude below, the rule of reason as presently formulated is

inapplicable to review of alleged conflict between municipal

regulation and the Sherman Act.

d. Applicability of the Rule of Reason. In National Soc. of

Professional Engineers v. United States (1978) 435 U.S. 679

the court held a professional association’s price maintenance

scheme illegal per se. Before reaching that conclusion, how-

ever, the court reviewed the defendant’s claim that its conduct

was legal under the rule of reason because it was motivated by

a desire to forestall decreased quality, and hence public harm,

that might result if there was unrestrained competitive bidding

among engineers. The court rejected the defendant’s p»blic

welfare argument: “[cJontrary to its name, the Rule [of

Reason] does not open the field of antitrust inquiry to any

argument in favor of a challenged restraint that may fall within

the realm of reason. Instead, it focuses directly on the

challenged restraint’s impact on competitive conditions.” (Id.

at p. 688; Chicago Bd. of Trade, supra, 246 U.S. 231, 238;

Standard Oil, supra, 221 U.S. 1, 58.) The court made clear that

214 third possible justification for application of per se rules, closely

related to the ease of administration justification, relates to predictability.

This justifiction, in turn, assumes clearly defined judicial pronouncements on

prohibited and permissible conduct—an assumption that has no basis with

respect to the novel question of potential federal antitrust conflict with a

municipality's exercise of its police powers.

For yet another reason, the per se rule is not applicable in this case. The

per se rule is itself dependent on the applicability of the rule of reason. (E.g..

Note, Antitrust Standing, Antitrust Inquiry, and the Per Se Standard (1984)

93 Yale L.J. 1309, 1311.) As noted above, the per se rule reflects an

irrebuttable presumption that, if the court were to subject the conduct in

question to a full-blow inquiry, a violation would be found under the

traditional rule of reason. If, as we conclude below, the traditional rule of

reason must be modified or rejected in order to accommodate municipal

defendants, it follows that traditional per se analysis cannot be applied to

those defendants. (Home Rule, supra, 49 Brooklyn L.Rev. at pp. 294-296.)

A-27

under the rule of reason, inquiry is limited to whether the

challenged conduct promotes or suppresses competition. (435

U.S. at p. 691.) The parties will not be heard to argue, and a

court may not consider, whether a policy favoring competition

is in the public interest. (Id. at p. 692.)

As stated above, however, we will not mechanically apply

to municipal defendants rules of law developed exclusively in

the context of determining private business antitrust liability.

Whereas Private business is motivated chiefly by the goal of

increasing profits, the only legitimate purpose for municipal

action is promotion of public health, safety and welfare. If

courts were to judge municipal conduct under the rule of reason

as it applies to private business enterprises, i.e., solely by the

effect of the restraint on competition, most municipal actions

would be found to violate the law: “[c]ompetition simply does

not and cannot further the interests that lie behind most social

welfare legislation.” (Boulder, supra, 455 U.S. 40, 66,

Rehnquist, J., dis.) At the least, such regulations would be

declared void; at worst, local governments might be subject to

treble damages.22 We cannot believe that Congress intended

such results to flow from a municipality’s heretofore presumed

legitimate exercise of its police power.23 (Id., at p. 67 [“If

municipalities are permitted only to enact ordinances that are

consistent with the procompetitive policies of the Sherman Act,

a municipality’s power to regulate the economy would be all

but destroyed.”]; Vanderstar, supra, 32 Cath.U.L.Rev. at pp.

397-400; Handler, The Current Attack on the Parker v. Brown

State Action Doctrine (1976) 76 Colum.L.Rev. 2, 15; Hov-

enkamp, Tying ‘rrangements in the Real Estate Market:

Federal Antitrust Law and Local Land Development Policy

(1981) 33 Hastings L.J. 325, 335.)

22 See Boulder, supra, 455 U.S. 40, 56, footnote 20 (“we do not confron

. . . . . ° t

the issue of remedies appropriate against municipal officials”) (but see

Rehnquist, J., dis. at p. 65, fn. 2); Lafayette, supra, 435 U.S. 389, 401-402

(same ); Areeda, Antitrust Law (Supp. 1982) par. 212.2b: Home Rule, supra,

‘aaa oe at pages 297-299; Comment, Antitrust Trebel Damages as

ied to Local Government Entities: Does the Punishment Fi -

ent? 1980 Ariz.St.L.J. 411. : alee

3 See Birkenfeld, supra, 17 Cal.3d 129, 153-164.

&

A-28

To prevent unwarranted interference with a municipal

government’s legitimate exercise of its police power, and to

accommodate for the motives that underlie local government

regulation (cf. e.g., Elzinga, The Goals of Antitrust Law: Other

Than Competition and Efficiency, What Else Counts? (1977)

125 U.Pa.L.Rev. 1191), courts must develop tests that recog-

nize a public welfare “defense” to alleged violation of the

antitrust laws by municipalities. (Boulder, supra, 455 U.S. at

pp. 66-67, Rehnquist, J., dis.; Home Rule, supra, 49 Brooklyn

L.Rev. at pp. 294-295; Note, The Application of Antitrust Laws

to Municipal Activities (1982) 96 Harv.L.Rev. 268, 275.)

e. Facial Validity of the Ordinance Under a Modified

Standard. We do not mean to suggest that rejection of the

traditional rule of reason. test in this case harkens return to “the

same wide-ranging, essentially standardless inquiry into the

reasonableness of iocal regulation” reminiscent of Lochner v.

New York (1905) 198 U.S. 45. ( Boulder, supra, 455 US. at

p. 67, Rehnquist, J., dis.) Whereas the primary evil of the

Lochner approach was an overly strict emphasis on the ends-

means nexus that in turn allowed judges wide latitude to

impose their own standards of reasonableness on economic and

social legislation, such jurisprudence has no place in our

24 See also McMahon, supra, 14 Toledo L.Rev. at pp. 544-545; James,

Municipal Defenses to Antitrust Liability (1983) 6 U.Ark. Little Rock LJ.

273. 290-296; Klitzke, Antitrust Liability of Municipal Corporations: The Per

Se Rule vs. The Rule of Reason—A Reasonable Compromise 1980 Ariz. St.

L.J. 253, 265-273; Freilich et al., Antitrust Liability and Preemption of

Authority: Trends and s in Urban, State and Government

Law (1983) 15 Urban Law. 705, 711-713; Brame & Feller, Immunity of

Local Governments and Their Officials From Antitrust Claims After City of

Boulder (1982) 16 U. Richmond L.Rev. 705, 715-717; Comment, Community

Communications Co. v. City of Boulder: Denial of Parker Exemption to ——

Rule Cities 1983 Utah L.Rev. 139, 159-160; Comment, Affiliated a

Corp. v. City of Houston: Local Governments and Antitrust Immunity ( —

35 Baylor L. Rev. 791, 816-818; cf. Levin, The Antitrust Challenge to -

“Government Protection of che Central Business District (1983)

U.Col.L.Rev. 21, 64-79; Note, Post Lafayette Municipal Liability for ~—

to Zone Outlying Development (1981) 59 Wash.U.L.Q. 485, s00-S16 ae

Antitrust Liability for Municipal Airport Operations: Will It Fly? (1983) J.

Air L. & Commerce 245, 280-282; Marticorena, Municipal Cable oo

Regulation: Is There Life After Boulder? ( 1982) 9 Western St.U.L.Rev. 113,

166-167.

A-29

analysis of a municipal regulation’s potential conflict with the

antitrust laws.25

In articulating an appropriate test by which to review

municipal actions alleged to conflict with the federal antitrust

laws, we seek on the one hand a test that is sufficiently flexible

to accommodate the interest of local government in promoting

public health, safety and welfare programs or regulations. At

the same time, we favor a standard that is not toothless; mere

incantation of a purpose to promote the public welfare should

not insulate municipal regulations from invalidiation under the

supremacy clause. Local governments should not be judged

under a standard that will guarantee validity even for improp-

erly motivated or implemented? anticompetitive municipal

regulations or commercial enterprises that plainly undermine

the objectives of the federal antitrust laws.

25 For the same reason we decline to analyze municipal conduct under a

so-called “municipal rule of reason.” (See, ¢.g., James, supra, 6 U.Ark. Little

Rock L.J. at pp. 296-296 | proposing such an approach }; Comment, supra, 35

Baylor L.Rev. at pp. 816-818 [same].) Whereas the rule of reason as

presently formulated focuses solely on the policy of promoting competition

( Professional Engineers, supra), recognition of a municipal public policy

“defense” within the framework of the rule of reason would drastically alter

the nature of a court's rule of reason inquiry: a court would apparently be

called on to balance the “amount” of anticompetitive restraint against a

municipality’s interest in effectuating a desired local purpose. If the rule of

reason were so modified, it would be no more than a means for judges to

impose their own policy judgments on municipal actions. (See Boulder, 455

U.S. at pp. 67-68, Rehnquist, J., dis.; Civilexti, The Fallour from Community

Communications Co. v. City of Boulder: Prospects for a Legislative Solution

(1983) 32 Cath. U.L.Rev. 379, 386-337; Comment, Alternative Approaches to

Municipal Antitrust Liability (1982) 11 Fordham Urban LJ. 51, 81-82; cf

Marticorena, supra, 9 Western St. U.L.Rev. at pp. 166-167.) We therefore

reject a modified rule of reason; instead, we adopt a test that prevents judicial

second-guessing of local decisions to accomplish proper local purposes. (see

Post, p. *, fn. 28.)

* Infra A-31.

6 Certainly, official misconduct or conflict of interest should not be

immune from condemnation under the antitrust laws. See Note, supra, 79

Colum.L.Rev. at page 538; compare, Cirace, supra, 61 Tex.L.Rev. at page

498 (arguing that municipalities should be exempt from antitrust scrutiny if

(a) displacement of competition is no broader than the scope of the

substanual market failure, imperfection, or instability at which it is directed,

and (b) implementation involves no official misconduct, discrimination, or

conflict of interest ).

A-30

We turn for initial guidance to the United States Supreme

Court’s commerce clause cases. State or local regulation will be

upheld against commerce clause attack if the regulation (1)

does not discriminate against interstate commerce and (2)

bears a rational relationship to a legitimate local purpose. In

addition, the extent to which the court will permit burdens on

interstate commerce depends on (3) the nature of the local

interest, and whether it could be promoted with a lesser impact

on interscate activities. Once these elements are satisfied, the

court applies a balancing test: a regulation will be upheld unless

its incidental burdens on interstate commerce are clearly ex-

cessive in reiation to the putative local benefits. (E.g., Edgar v.

MITE Corp. (1982) 457 U.S. 624, 643-646 [striking down state

business takeover act]; Kassel v. Consolidated Freightways

Corp. (1981) 450 U.S. 662, 671-679 [striking down state truck

length statute]; Minnesota v. Clover Leaf Creamery Co. (1981)

449 U.S. 456, 471-474 [upholding state law banning plastic and

nonreturnable milk containers]; Hughes v. Oklahoma (1979)

441 U.S. 322, 336-338 [striking down state regulation of

minnow trade]; Pike v. Bruce Church, Inc. (1970) 397 US.

137, 142 [striking down state law on packaging of cantalopes];

Dean Milk Co. v. City of Madison (1951) 340 U.S. 349, 353-

356 [striking down local milk regulation]. )

With appropriate modifications, we believe that a test

modeled after the court’s commerce clause cases will provide a

workable standard for judging alleged conflict between munici-

pal ordinances and the federal antitrust laws. We will,

however, depart from the United States Supreme Court’s

commerce clause test in one significant respect. We will not

apply the wide-ranging, essentially standardless cost-benefit

analysis employed in the court’s recent “balancing” decisions.

(See, e.g., MITE Corp., supra, 457 U.S. 624; Kassel, supra, 450

U.S. 662; Clover Leaf Creamery, supra, 449 U.S. 456; see

generally, Eule, Laying the Dormant Commerce Clause to Rest

(1982) 91 Yale L.J. 425 [criticizing the court’s balancing

approach, and proposing an alternate standard]; Maltz, How

Much Regulation is too Much—An Examination of Commerce

Clause Jurisprudence (1981) 50 Geo.Wash.L.Rev. 47 [same];

Tushnet, Rethinking the Dormant Commerce Clause 1979

a ee

A-31

Wis.L.Rev. 125 [same].) Balancing a municipality’s

particular local health, safety and welfare ——, pha

rams against often incommensurable alleged anticompetitive

effects is a task for which courts are not well suited. On the

other’ hand, a standard applicable to municipalities must be

capable of considering those economic efficiency factors that

underlie federal antitrust policy.

Adapting the court’s commerce clause test to this facial

section | attack on a municipal rent control ordinance, we

conclude that if a municipal regulation has a proper local

purpose, is rationally related to the municipality’s legitimate

exercise of its police power,27 and operates in an even handed

manner, it must be upheld against a claim that it conflicts with

section | of the Sherman Act unless the plaintiff demonstrates

that the city’s purposes could be achieved as effectively by

means that would have a less intrusive impact on federal

antitrust policies.2®

Applying this test to the present case, we first observe that

our decision in Birkenfeld forecloses any suggestion that the

_® This formulation would not rest determination o permissi

anticompetitive municipal conduct on findings that the 4. pena

engaged in “traditional,” or “integral” functions, nor would an ordinance’s

validity turn on the distinction between “governmental” as opposed to

Proprietary” activities. Framing permissible conduct in terms of a munici-

pality’s exercise of its legitimate police powers, on the other hand, encom-

passes all local actions rationally related to promotion of local health, safety

ween. ( Home Rule, supra, 49 Brooklyn L.Rev. at p. 294, fn. 191.)

We recognize that this standard calls on courts to make difficult

determinations as to whether proposed alternative means of accomplishing a

legitimate local purpose would do so (1) as effectively as the challenged

means and (2) through means that intrude less on the policies of the federal

anutrust laws. Regardless the difficulty of these determinations, however. this

standard is preferable to a so-called “municipal rule of reason,” because it

would not require a court to balance competing—and often incommen-

surable— policies. (See ante, p. *, fm. 25.) Instead, the standard we

embrace today prevents judicial second-guessing of legitimate local purposes

However, although a court may not invalidate local legislation by balancing

the propriety of (or need for) a legitimate local purpose against federal

antitrust policies, a court may invalidate a municipality’s means of achieving a

local policy if the local goal is sought to be advanced through discriminatory

Or irrational means, or if it could be achieved as effectively by means that can

be demonstrated to likely intrude less on federal antitrust policies.

* Infra A-29.

A-32

regulation is not supported by a legitimate purpose. There are

no allegations of conflict of interest or illegal collusion in the

enactment or drafting of the ordinance. Moreover, “[i]t has

long been settled that {municipal police] power extends to

objectives in furtherance of the public peace, safety, morals,

health and welfare and ‘is not a circumscribed prerogative, but

is elastic and, in keeping with the growth of knowledge and the

belief in the popular mind of the need for its application,

capable of expansion to meet existing conditions of modern

life.”” (17 Cal.3d 129, 160.)

Nor can it be suggested at this late date that rent control is

not rationally related to the municipality’s legitimate exercise of

its police power. We observed in Birkenfeld that, as in the

present case, “(t]he charter amendment includes in its stated

purposes for imposing rent control the alleviation of the ill

effects of the exploitation of a housing shortage by the charging

of exorbitant rents to the detriment of the public health and

welfare of the city and particularly its underprivileged groups.

[ Citation. ] The amendment thus states on its face the existence

of conditions in the city under which residential rent controls

are reasonably related to promotion of the public health and

welfare and are therefore within the police power.” ( Ibid.)

Furthermore, Birkenfeld very clearly establishes that, even

absent a so-called “housing emergency,” local regulation of

rents for the purposes stated in section 3 of the present

ordinance is a rational exercise of the municipality’s police

power. (Id. at pp. 153-164; Carson Mobilehume Park Owners’

Assn. v. City of Carson (1983) 35 Cal.3d 184, 189, fn. 4.)

Neither can plaintiffs demonstrate that the regulation fails

to operate in an even handed manner. The only possible theory

of discriminatory treatment of similarly situated landlords

concerns section 5, subdivision (f), of the ordinance. When the

regulation was passed, this provision exempted “[r]jental units

in a residential property which is divided into a maximum of

four (4) units where one of such units is occupied by the

landlord as his/her principal residence,”2® but limited the

29 This subdivision was amended in 1982 to limit the exemption to rental

property divided into two units. See ante, page *, footnote 2.

* Infra A-4.

A-33

exemption to “rental units that would have been exempt under

the provisions of this Ordinance had this Ordinance been in

effect on December 31, 1979.” Plaintiffs do not challenge the

exempuon itself; instead, they challenge subdivision (f), to the

extent that it excludes from the exemption any property that

became owner-occupied after December 31, 1979.

As defendants point out, however, the challenged ex-

clusion from the exemption bears a debatable rational

relationship to the purposes of the ordinance. The Berkeley

electorate could reasonably have determined that the exclusion

was desirable to prevent some landlords from avoiding appli-

cation of the ordinance by evicting tenants and moving into

their rental property after the provisions of the proposed

ordinance became known. (See Baar, Guidelines for Drafting

Rent Contro! Laws: Lessons of a Decade (1983) 35 Rutgers

L.Rev. 723, 758 & fn. 128 [suggesting that in jurisdictions

without the exemption limitation, such abuse is wide-

spread J. )%° Because the disparate treatment afforded similarly

situated landlords is supported by a debatable rational basis

this aspect of plaintiffs’ challenge must also be rejected. (Clo-

Po bony & ge supra, 449 U.S. 456, 464; New Orleans v.

ukes ) 427 U.S. 297, 303; Hale v.

Cal.3d 388, 395.) arya

Finally, plaintiffs suggest no alternative, equally effective

approach to achieving defendants’ legitimate local Purposes by

means that would have a less intrusive impact on federal

antitrust policies. Indeed, such a showing could be made only

after extensive evidence has been taken in the trial court. We

therefore hold that plaintiffs have failed to establish that the

par on its face conflicts with section | of the Sherman

ct.

% Although plainiiffs argue that any landlords so disposed would

have taken such measures because rental propeorty of = or fewer oe nn

already exempt from rent control by the terms of a prior ordinance (the

Temporary Rent Stabilization Ordinance, passed by the Berkeley City

Counci! eff. Dec. 30, 1979), this response ignores the fact that the ordinance

now in question is far more comprehensive than its recent predecessor.

A-34

C. Facial Validity of the Ordinance Under Section 2 of the

Sherman Act

Plaintiffs also assert that the ordinance on its face violates

section 2 of the Act. That section provides inter alia that

“fe]very person who shall monopolize, or attempt to monopo-

lize, or combine or conspire with any other person or persons, to

monopolize any part of the trade or commerce among the

several States ... shall be deemed guilty of a felony. .. .” (15

U.S.C. § 2.)

In the context of reviewing the legality of private business

conduct, the United States Supreme Court has established that

the “offense” of monopolization consists of two elements: (1)

possession of “monopoly power” in the relevant market, and

(2) willful acquisition of that power. ( United States v. Grinnell

Corp. (1966) 384 U.S. 563, 570-571.) “Monopoly power” has

been defined as the “power to control prices or exclude

competition.” ( United States v. du Pont Co. (1956) 351 U.S.

377, 391 & fn. 18.) The existence of such power may be

inferred from a defendant’s predominant share of the relevant

market. (Grinnel, supra, 384 1).S. at p. 571 [87 percent of

market is monopoly power}; American Tobacco Co. v. United

States (1946) 328 U.S. 781, 797 [two-thirds to 80 percent of

market is monopoly power} ) Seizing on these principles,

plaintiffs claim the ordinance is “obviously” invalid because it

represents a willful acquisition of power to control prices of all

covered rental units in Berkeley—23,000 of the 27,000 units in

that city.

Although plaintiffs’ claim would likely have merit if de-

fendants were private business parties and if the restraint was

proved to affect interstate commerce, for reasons discussed

above we will not mechanically apply to municipal defendants,

rules of law fashioned exclusively in the context of private

business regulation. Instead, and assuming, over defendants’

vehement protestations, that section 2 of the Act applies to a

party that is not itself a competitor in the relevant market that it

is accused of monopolizing, we apply the test articulated ante,

at page *.

* Infra A-31\ to 32.

—_

A-35

As expiained previously, the stated objectives of the ordi-

nance indicate a legitimate local purpose. Plaintiffs do not

contend that the ordinance was implemented through mis-

conduct, conflict of imierest, or in order to affect dis-

crimination —all factors that would tend to rebut defendants’

claim of a legitimate purpose. (See Cirace, supra, 61

Tex.L.Rev. at p. 498.) It is established that the means invoked

by defendants’ ordinance is a rational exercise of the municipal-

ity’s police power. Plaintiffs have cited no evidence tending to

show that the ordinance fails to regulate similarly situated

competitors in a reasonably evenhanded manner. Finally, they

suggest no equally effective alternative to accomplish these

legitimate local purposes by means that would have a less

intrusive impact on federal antitrust policies. We therefore

conclude that plaintiffs have failed to establish that the ordi-

nance on its face conflicts with section 2 of the Sherman Act.

Because we determine that plaintiffs have not established a

conflict with the Act, we do not address whether the ordinance

may be exempt from antitrust scrutiny under Boulder. (Rice v

Norman Williams Co., supra, 458 U.S. at p. 662, fn. 9.) We

proceed to analyze plaintiffs’ additional constitutional and

Statutory contentions.

Y

é

:

Rent Control Issues?"

A. Facial Validity of the Ordinance’s “Fair Return”

Standard

The primary dispute in the tral court and one of the

primary substantive questions posed on this appeal concerns

whether a rent control ordinance is facially constitutional if ii

provides that a landlord is to receive a fair return on his

investme~t rather than a fair return on the value of his

property.32 The parties, assisted by amici curiae on both sides of

imi j intiffs” im that it was

31 As preliminary matter, we reject plaintiffs procedural claim th '

improper for the court to grant judgment on the yosap Hanger ys this ——

them the opportunity to present evidence as to their claims o con. -_ .

denial of equal protection, and unlawful restraint on alien~uon. On a defense

motion for judgment on the pleadings, all facts alleged in the ae an

deemed admitted. ( Sullivan v. County of Los Angeles (1974) !2 Cal. Aen b

714, fn. 3; Colberg, Inc. v. State of California ex rel. Dept. Pub. Wks. (1967)

67 Cal.2d 408, 411-412.) There was no need for plaintiffs to present any

evidence. Further, although they claim that judgment on the pleadings

denied them a declaration as to facial invalidity, the judgmen. expressly

declared the ordinance “valid on its face.” It is well established that a —

for judgment on the pleadings “may be used in an acuion for declaratory -—

to obtain a declaratory judgmeni on the merits in favor of the defendant ra ~

than a dismissal of the plaintiff's suit.” (4 Witkin, Cal. Procedure ( = ‘

1971), Proceedings Without Trial, § 161, p. 2817, emphasis in — .)

Finally, although plaintiffs claim they should have been granted leave to

amend their complaint, any amendment to make further factual —-

would only be applicable to the claim that the ordinance was inv , as

applied. They were granted leave to amend as to this claim, but later

ismi the amended complaint. a

“a reality, defendants’ ordinance , employs = — stan-

r setting maximum rents. As discussed post a - ;

peas \ een for annual rent adjustment, but precludes the Board from

granting such citywide rent adjustment except to offset certain increases -

genera! costs. This is, in essence, a variation on the so-called nee ©

net operating income,” or “cost passthrough approach. (See Baar, ph

Rutgers L.Rev. at pp. 809-816.) Section 12, subdivision (c), on the ~

hand, provides for individual rent increases based on “all mye _

including (but not limited to): .... (8) the landlord’s rate of retu

investment,” as well as the landlord’s costs.

* Infra A-47 to 49.

A-37

the issue, have vigorously briefed and argued their respective

views. We must stress at the outset, however, the limited scope

of our inquiry in facial challenges such as this. As we made

clear in Birkenfeld, whether rental regulations are fair or

confiscatory depends ultimately on the result reached. (17

Cal.3d 129, 165.) That determination, of course, can only be

made by analyzing a challenge to the regulation as applied.

Nevertheless, we will declare a regulation invalid on its face

“when its terms will not permit those who administer it to avoid

confiscatory results in its application to the complaining

parties.” (Id. at p. 165; see also Cotati Alliance for Better

Housing v. City of Cotati (1983) 148 Cal.App.3d 280, 287, 291:

Hutton Park Gardens v. Town Council (N.J. 1975) 350 A.2d 1,

14-16.)

For more than a decade, rent control agencies throughout

this state and the nation have employed a veritable smorgas-

bord of administrative standards by which to determine rent

ceilings. (Carson, supra, 35 Cal.3d 184, 188 [“‘just, fair and

reasonable” }; Cotati Alliance, supra, 148 Cal.App.3d at p. 286

(“fair and reasonable return on investment”]; Palos Verdes

Shores Mobile Estates, Lid. v. City of Los Angeles (1983) 142

Cal.App.3d 362, 371 [“just and reasonable return” based on

the “maintenance of profit” approach]; Gregory v. City of San

Juan Capistrano (1983) 142 Cal.App.3d 72, 86 [ interpreting

“return On investment” as requiring a “just and reasonable

return on the fair market value of [landlords’] property”; see

also Baar, Guidelines for Drafting Rent Control Laws: Lessons

of a Decade (1983) 35 Rutgers L.Rev. 723, 781-817 [ describ-

ing and analyzing the following standards: (1) cash

flow/return on gross rent; (2) return on equity (investment);

(3) return on value; (4) percentage net Operating income; and

(5) maintenance of net operating income ]; Comment, Rethink-

ing Rent Control: An Analysis of “Fair Return” (1981) 12

Rutgers L.J. 617, 640-648 [hereinafter cited Fair Return};

Comment, Rent Control and Landlords’ Property Rights: The

Reasonable Return Doctrine Revived (1980) 33 Rutgers I. 165

[hereinafter cited Reasonable Return Doctrine}.) As we re-

cently stressed in Carson, “[rjent control agencies are not

obliged by either the state or federal Constitution to fix rents by

A-38

application of any particular method or formula.” (35 Cal.3d

at p. 191, citing Power Comm’n v. Pipeline Co. ( 1942) 315 US.

575, 586; Power Comm’n v. Hope Gas Co. (1944) 320 U.S. 591,

601-602. )

In view of this oft-quoted and oft-followed principle, we

are not persuaded by plaintiffs’ and amici’s apparent contention

that the much criticized return on value standard**—or any of

33 Whereas the return on investment standard determines “just and

reasonable return” by focusing on the landlord’s investment, the return on

value standard determines fair return by focusing on the market value of the

landlord’s property. The fair return on market value standard advocated by

plaintiffs and amici was used by the United States Supreme Court in an early

railroad rate case, Smyth v. Ames (1898) 169 U.S. 466, decree mod., 171 U.S.

361. in which the court held that railroads were entitled to rates sufficient,

after deducting reasonable operating expenses, to produce a fair return on the

fair market value of their assets. (169 U.S. at p. 547.) The Supreme Court

later changed its position, and approved use of an approach designed to

ensure a fair return on investment. (Hope Gas, supra, 320 U.S. at pp. 599-

605; see Siegel, Understanding the Lochner Era: Lessons From the Con-

troversy Over Railroad and Utility Rate Regulation ( 1984) 70 Vir.L.Rev. 187,

215-259.) Rejecting the idea that rates set by the Federal Power Commission

must be based on the present “fair value” of property, the Hope Gas court

observed: “[t}he heart of the matter is that rates cannot be made to depend

upon ‘fair value’ when the value of the going enterprise depends on earnings

under whatever rates may be anticipated.” (Id. at p. 601.) Implicit in this

statement is the suggestion that a return on fair value standard is circular and

unworkable. “Value” is the current worth of future benefits that may be

derived from an investmert. The “value” of a utility company, for example,

depends in part on the rates that the utility company may charge for its

product. Thus, to set rates by reference to the company’s “value” is a circular

process. ( Siegel, supra, 70 Vir.L.Rev. at p. 246 & fn. 253.)

The same circularity problem exists when fair market value concepts are

applied in the rent control context. (See Helmsley v. Borough of Fort Lee

(N.J. 1978) 394 A.2d 65, 71-72; Baar; supra, 35 Rutgers L.Rev. at pp. 798-

803: Reasonable Return Doctrine, supra, 33 Rutgers L.Rev.) “Value is an

expression of a building’s potential capacity to generate rental income and

incidental or intangible benefits of ownership during its useful life.” ( Fair

Return, supra, 12 Rutgers L.J. at p. 640.) The current “value” of a rental

property thus depends in large part on the amount of rental income the

property is expected to generate. As in the utility rate cases, the process of

using value to determine what rental income shall be permitted becomes

circular. (Accord, Cotati Alliance, supra, 148 Cal.App.3d 280, 287-289; Palos

Verdes Estates, supra, 142 Cal.App.3d 362, 370-371.) The Corati Alliance

court thus rejected a landlord’s claim that a return on value standard is

mandated for an ordinance to be facially constitutional: “The fatal flaw in the

return on value standard is that income property most commonly is valued

through capitalization of its income. Thus. the process of making individual

(Footnotes continued on following page)

i

es

POO LM tek Sl ela ole, ate ee he Le de

A-39

its varlations*4—is required to be employed by the Board in the

present case. We reiterate that selection of an administrative

standard by which to set rent ceilings is a task for local

governments—in this case the voters themselves—and not the

courts. Our only concern in this appeal is whether defendants’

fair return on investment standard, on its face, will not permit

those who administer it to avoid confiscatory results.°5 ( Birken-

feld, supra, 17 Cal.3d at p. 165; Power Comm’n v. Pipeline Co

supra, 315 U.S. at pp. 585-586; Hutton Park, supra, 350 A.2d at

(Footnotes continued from preceding page)

rent adjustments on the basis of a return on value standard i i

because it is inevitably circular: value is determined by omed conan

amount of which is in turn set according to value. Use of a return on value

standard would throughly undermine rent control, since the use of uncon-

trolled income potential to determine value would result in the same rents as

which would be charged in the absence of regulation. Value (and

a prone ) — increase in a never-ending spiral.” (148 Cal.App.3d at p.

a coord, . lelmsley supra, 394 A.2d at pp. 71-72; Niles v. Boston Rent

ar Administrator (Mass. App. 1978) 374 N.E.2d 296, 300-303. )

Amicus for plainuffs suggests adoption of the “public utility in-

vestment standard, which, it is urged, would result in a base rent com-

mensurate with the value of the regulated property at the time rent controls

—_ imposed. (Cf. Southern California Gas Co. v. Public Utilities Com

(1979) 23 Cal.3d 470, 474.) Aside from the questionable propriety of

applying public utility law to the very different area of local regulation of

private economic transactions, it has been observed that “if there was a

housing shortage which caused rents to be artifically high, use of prerent

control value as the measure [for calculating fair return] will perpetuate

aruficially inflated rents. Rent control utilizing this standard is no rent cuntrol

at = é. Cotati Alliance, supra, 148 Cal.App.3d 280, 287.)

is apparently conceded by both parties, it would

problematic for us to attempt to articulate, in the fetirene od ape pee

the constitutional test against which specific applications of various adminis.

trative standards are to be judged. We will face that question when we review

a challenge to rent control as applied to particular plaintiffs. It is sufficient in

this case to measure defendants’ fair return on investment standard against

the general Proposition that an administrative standard must be such that it

will —— who administer it to avoid confiscatory results.

“ 4 jimilar point, we also wish to dispel suggestions based on dictum in

irkenfe that we have previously established, as a constitutional test, a

requirement that rent controls must provide landlords a “just and reasonable

return on their property.” (17 Cal.3d at p. 165.) This statement was made in

the context of a broader discussion of the legitimate exercise of local police

power, and was most certainly not intended to articulate a constitutional

standard. Birkenfeld’s reference to the term “property” should therefore be

viewed with caution; it would be inappropriate to suggest that the Birkenfeld

statement can be used to predict the specific constitutional standard that we

will articulate when we review a challenge to rent conirol as applied.

A-40

pp. 13-16.) If we conclude that the fair return on investment

standard affords the Board sufficient flexibility to avoid con-

fiscatory results, we must uphold the ordinance. ( Cotati

Alliance, supra, 148 Cal.App.3d at pp. 289-291.)

Plaintiffs and amici posit a number of due process obs-

tacles and practical difficulties that the Board may face in

administering the return on investment standard, but none will

prevent the Board from avoiding confiscatory results.

1. Adjustment of Landlords’ Frozen May 1980 Profit

Amount, and Consideration of the Effect of Inflation. One of

plaintiff's primary complaints is that section 11 of the ordinance

locks landlords into the fixed dollar amount of profit they

earned in May 1980,%¢ and that in order for the board to avoid

confining those landlords who invested long ago with pre-

inflation dollars to their May 1980 profit amount, it must be

free under section 12 of the ordinance to take into consideration

the effect of inflation on individual landlords’ investments?’ and

award fair returns based on “adjusted” investment figures.*

3€ Plaintiffs demonstrate this point by the following hypothetical: In May .

of 1980, a landlord’s gross rental income is $10,000; his operating expenses

total $9,000, as follows: mortgage payment of $6,000; property taxes of

$1.000; utility bills of $2,000. Thus his net return ( profit) is $1,000. In May

of 1982 his expenses remain the same except that utility costs increase by $500

to $1,500, thereby reducing his net return to $500. Under these circumstances

the section 11 annual general adjustment mechanism allows the Board to

provide for a 5 percent increase in rent, to $10,500, so that the landlord’s

profit amount would be the same number of dollars ($1,000) as it was two

years earlier. However, no relief is or can be provided under section |! for

the erosionary effect of two years of inflation on the $1,000 base income, the

purchasing power of which has been diminished.

37 The “effect of inflation” issue was apparently raised for the first time at

oral argument in the Court of Appeal. On July 21, 1983, the appellate court

vacated submission of the case in order to receive defendants’ written

concession of July 5, 1983, that the term “fair return on investment” in section

12, subdivisions (c) and (i), may reasonably be interpreted to permit the

Board to consider and allow for any decrease in the purchasing power of the

landlord’s return caused by inflation. Both the court’s order and defendants’

letter, as well as plaintiffs’ response thereto, are part of the record before us on

appeal. The issue has been briefed and responses have been filed.

38 Plaintiffs’ point can best be explained by a hypothetical example.

Assuming that the Board were to fix a “fair return on investment” at 10

percent for all landlords, the following might occur: Recent investor A has

invested $70,000 since 1979, and he earned a profit of $6,000 in 1980. In

1984 he petitions the Board under section 12 for an increase in his return on

(Footnotes continued on following page )

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)

A-41

Clearly, if the fixed amount of a landlord’s profit remains

the same year after year his return will in time diminish in real

value: it is obvious that a $1,000 “profit” in 1990 will have a

much lower value than the same dollar amount of profit in

1980. Furthermore, although a fixed profit amount may pro-

duce a reasonable or fair return on investment for low-risk

investments such as bonds, we must agree with plaintiffs that

investment in rental units contemplates a higher risk and hence,

in times of high inflation and when viewed in the long term,

demands more than mere maintenance of an existing profit

amount. (Cotati Alliance, supra, 148 Cal.App.3d at p. 295;

Hutton Park Gardens v. Town Council (N.J. 1975) 350 A.2d 1.

15 [a just and reasonable return on investment is one that is

generally commensurate with returns on investments in other

enterprises having comparable risks].) Therefore, although

defendants’ ordinance may properly restrict landlords’ profits

on their rental investments, it may not indefinitely freeze the

dollar amount of those profits without eventually causing

confiscatory results. (Cotati Alliance, supra, at p. 293 [“If the

net operating profit of a landlord continues to be the identical

number of dollars, there is in time a real diminution to the

landlord which eventually becomes confiscatory.”’}.)

In determining the facial validity of the ordinance against

plaintiffs’ claim that it must be interpreted to require the Board

to account for the effect of inflation on investment in determin-

ing a landlord’s amount of profit or return, we adhere to the

(Footnotes continued from preceding page)

investment. Under its 10 percent return on investment standard

may grant A an increase of $1,000, so that his 1984 amount of south S000.

Additional contributions to capital could, of course, also yield a 10 percent

return.

In contrast, long-term investor B has invested $40,000 si 9

he, 100, earned a profit of $6,000 in 1980. However, when in 1984 he

petitions the Board under section 12 for an increase in his return on

investment, he will be turned down if the Board mechanically multiplies his

$40,000 investment by a 10 percent return. Hence, B would be limited to his

frozen May 1980 amount of return—$6,000. Only if (as plaintiffs suggest is

mandatory) the Board takes into account the effect of inflation on his

investment, and “adjusts” his investment figure accordingly, or if (as $12

subd. (ey(8), seems to allow (see post, p. —*, fn. 39)) the Board assigns

ma r rate of return, may he secu i

aap coe ha y re an increase in the amount of profit

* Infra A-42.

A-42

rule earlier stressed, that whether a regulation produces a return

that is confiscatory or fair depends ultimately on the result, and

that we will invalidate an ordinance on its face only if its terms

preclude avoidance of confiscatory results.

First, it is not apparent that the ordinance on its face

precludes alternative means of adjusting landlords’ frozen May

1980 profit amounts.3® Moreover, even assuming arguendo that

a confiscatory result might occur in a future individual case if

the Board fails to invoke measures necessary to adjust the

dollar amount of a landlord’s May 1980 profit, this would still

provide us no basis on which to invalidate the entire ordinance,

or its administrative “fair return on investment” standard.

Unlike Birkenfeld, in which we determined that inherent and

unnecesary procedural defects inevitably deprived all landlords

of due process “except perhaps for a lucky few” (17 Cal.3d at

p. 172), in this case, by contrast, it is unknown what percentage

of landlords might be able to prove unconstitutional con-

fiscation if the Board fails to consider the effect of inflation on

dollars invested in order to adjust a landlord’s frozen profit

amount. Nor do we have before us any evidence to suggest that

when faced with such a prospect, the Board will decline to

invoke measures within its powers to adjust individual profit

amounts. In this regard we observe that “[i]t is to be presumed

that the board will exercise its powers in conformity with the

requirements of the Constitution; and if it does act unfairly, the

fault lies with the board and not the statute.” ( Butterworth v

Boyd (1938) 12 Cal.2d 140, 149.) Until we are required to

review a specific challenge to the Board’s application of the

ordinance, we note simply that, as defendants themselves

concede (ante, p. * fn. 37), the ordinance is not drawn so

narrowly as to preclude consideration of the effect of inflation

39 For example, nothing in the ordinance precludes the Board from

adjusting the rate ( percentage ) of return on investment in order to increase a

landlord’s amount of profit. Indeed, the ordinance seems to contemplate ad

hoc adjustment of individual landlord's rates of return in order to reach this

result: section 12, subdivision (c)(8), provides that in making individual

adjustments the Board shall consider “[t}he landlord’s rate of return on

investment.” (Emphasis added.) See section 12, subdivision (c), set out

post, page **, footnote 46.

* Infra A-40.

** Infra A-49.

Radin thi tally Sls ha NS 8 at Be gt ak’ elles oe

A-43

on a landlord’s investment in those cases in which the Board

might deem it necessary to take that factor into account in order

to avoid causing a confiscatory result.4

2. Irrational Discrimination. P\aintiffs also argue that the

investment standard denies equal protection because it will

result in different rent ceilings for comparably valued rental

units. This issue was raised and properly decided in Cotati

Alliance, in which the court observed that such disparate

treatment bears a debatable rational relationship to a legitimate

public purpose: the voters could have reasonably concluded

that the investment standard, more effectively than a value-

based standard, ensures noninflated, reasonable rents for citi-

zens in times of high inflation. (Cotati Alliance, supra, 148

ey 280, 292; see Hale v. Morgan (1978) 22 Cal.3d

, -)

. 3. Ascertaining the Extent of a Landlord’s “Investment”.

Plaintiffs next predict problems applying the investment stan-

dard to landlords who, for various reasons, have made little or

no cash investment.. However, those who purchased with no

down payment, improved property years ago with “preinflation

dollars,” or who obtained property through gift or inheritance,

need not be deprived of a fair return simply because they made

no initial monetary investment. The ordinance does not confine

“imvestment” to such a restrictive definition. The Board,

therefore, is not precluded, in appropriate cases, from consid-

ering as “investment,” a landlord’s personal labor in improving

his property. (Cotati Alliance, supra, 148 Cal.App.3d at pp.

“ Nothing in the ordinance requires the Board to fix a landiord’s

based only on his “actual” investment. Further, although aioe 1.

subdivision (c), contains a list of “relevant factors” to be considered by the

Board in determining the appropriate amount of a landlord’s rents. these

factors are expressly nonexclusive. And perhaps most significant, subsection

(8) of subdivision (c), permits the Board to consider “all relevant factors” in

determining the “landlord’s rate of return on investment.” See section 12

subdivision (c), set out post at page __*, footnote 46.

* Infra A-49.

We read Cotati Alliance to be consistent with our determination today.

That case merely suggests that a rent board “may” consider the effect of

inflation if doing so is necessary to assure a landlord a fair return, and hence

avoid a confiscatory result, in a specific case. (148 Cal.App.3d at p. 289.)

A-44

387, 289.) Nor is the Board precluded from imputing the

transferor’s “investment,” adjusted as might be necessary, to

landlords who obtained property by gift or inheritance. (Ibid.;

Fair Return, supra, 12 Rutgers L.J. at p. 645.) Furthermore, the

ordinance does not preclude the Board from considering “forms

of investment such as mortgage payments toward principal,

[or] cash invested in later improvements in the property”

(Cotati Alliance, 148 Cal.App.3d at p. 287), or, with certain

exceptions,‘’ the terms of a landlord’s individual financing

obligations. In fact, the ordinance directly provides for such

flexible application of the investment standard. Subdivision (i)

of section 12 provides that “[no]o provision of this Ordinance

shall be applied so as to prohibit the Board from granting an

individual rent adjustment that is demonstrated necessary by

the landlord to provide the landlord with a fair return on

investment.”

4. Deprivation of Full Long-Term Appreciation. Finally,

amicus for plaintiffs appears to argue that the ordinance’s

investmeat standard is unconstitutional on its face because it

unfairly deprives landlords of full long-term appreciation on

the value of their regulated property. The thrust of this

contention is apparently aimed at establishing that, as a matter

of due process, rent control ordinances must guarantee all

landlords a fair return on the full market value of their

property. This issue was also raised in Corati Alliance, in which

the court observed that “[s]ome lessening of appreciation is a

necessary consequence of any rent control, since future appre-

ciation is to a significant extent a function of increased rental

income. [{Citation.] It is one of the very sources of long-term

appreciation—inflated rents—that rent control measures are

intended to restrict.” (148 Cal.App.3d at p.290. )4?

The fallacy of plaintiffs’ contention is readily apparent.

Any price-setting regulation, like most other police power

regulations of property rights, has the inevitable effect of

41 See section 12, subdivisions (d) and (¢), set out post, page —.

footnote 53.

* Infra A-52.

42 The Court further noted: “[1]andlords also argue that the ordinance

unfairly denies long-time landlords any appreciation from the time of

acquisition to the date when rents were first controlled, but the ordinance did

not reduce rents when it was enacted, and thus, did not affect preordinance

appreciation.” (Id. at pp. 290-291 (emphasis in original ). )

de lin ——

A-45

reducing the value of regulated properties. But it has long been

held that such reduction in property value does not by itself

render a regulation unconstitutional. Police power legislation

results in a confiscatory “taking” only when the owner has been

deprived of substantially all reasonable use of the property.

(Agins v. City of Tiburon (1979) 24 Cal.3d 266, 277, affd.

( 1980 ) 447 U.S. 255.) Even a significant diminution in value is

insufficient to establish a confiscatory taking. (Euclid v. Ambler

Realty Co. (1926) 272 U.S. 365 [75 percent reduction in value

because of zoning law insufficient to establish a taking};

Hadacheck v. Sebastian (1915) 239 US. 394 [nearly 90

percent reduction in value because of use restriction insufficient

to establish a taking].) As the United States Supreme Court

noted in Hope Gas Co., supra, 320 U.S. at page 601, “[t]he

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.” (Accord, Penn. Central Transp. Co. v.

New York City (1978) 438 U.S. 104, 131 [diminution in

property value, standing alone, cannot establish a “taking”];

Permian Basin Area Rate Cases (1968) 390 U.S. 747, 769

(“No constitutional objection arises from the imposition of

maximum prices merely because . . . the value of regulated

property is reduced as a consequence of regulation.” }.)

Thus, although we need not articulate in this facial attack

the precise constitutional standard that all administrative rent

control standards must meet (ante,p. ‘*, fn. 35), we can state

with certainty that a rent control ordinance need not provide for

d fair return on the value of a landlord’s property in order to

survive a facial challenge. We conclude that defendants’ fair

return on investment standard will not preclude the Board from

avoiding confiscatory results, and hence the administrative

standard established in the ordinance is constitutionally valid n

its face. (Cal.Const., art. I, § 7; accord, Oceanside Mobilehome

Park Owners’ Assn. v. City of Oceanside (1984) 157 Cal.App.3d

887, 897-900; Corati Alliance, supra, 148 Cal.App.3d at pp.

288-289, and cases and authorities cited. )43

43 To the extent it is contrary to this determination, G Ci

Juan ‘iene 1983) 142 Cal.App.3d 72, 85-86 is Gaagganeead a

* Infra A-39. ,

A-46

B. Facial Validi:y of the Ordinance’s Rent Adjustment

Procedures

As we observed recently in Carson, “[when] rent ceilings

of an indefinite duration are established, a mechanism must be

provided for granting those increases necessary to permit

landlords a just and reasonable return. ‘The mechanism is

sufficient for the required purpose only if it is capable of

providing adjustments in maximum rents without a substan-

tially greater incidence and degree of delay than is practically

necessary.”” (35 Cal.3d at p. 191, quoting Birkenfeld, supra,

17 Cal.3d at p. 169.) As plaintiffs observe, “[p]roperty may be

as effectively taken by long-continued and unreasonable delay

in putting an end to confiscatory rates as by an express

affirmance of them. . .” ( Smith v. Illinois Bell Tel. Co. (1926)

270 U.S. 587, 591.)

Of course, some delays are inherent in any rent control

scheme. But, “only those delays which are longer than

practically necessary to achieve the legitimate purposes of the

legislation are constitutionally proscribed.” (Carson, supra, 35

Cal.3d at p. 192; Birkenfeld, supra, 17 Cal.3d at pp. 169, 173.)

The test used to review the facial validity of defendants’

adjustment procedures is the same one used above to review the

ordinances’ administrative standard for individual maximum

rent adjustments under section 12. We will declare the

adjustment procedures invalid only if the ordinance on its face

will not permit the Board to avoid confiscatory results.

Although in Birkenfeld we found Berkeley’s former ordinance

facially unconstitutional on this basis because, by its terms, it

precluded reasonably prompt action in most cases, the ordi-

nance before us now contains none of the problems found in

the former regulation.

The prior ordinance had no provision for “general rental

adjustments for all or any class of rental units based on

generally applicable factors such as property taxes.” ( Birken-

feld, \7 Cal.3d at p. 171) Although we recently recognized in

Carson that a rent control ordinance need not have'a general

adjustment provision to pass constitutional muster (35 Cal.3d

at p. 194), such a mechanism will be required when the

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A-47

“magnitude of the job to be done” ( Birkenfeld, at p. 169) so

demands. Since we decided Birkenfeld the number of rental

units in Berkeley subject to rent control has increased to 23,000.

However, the exact mechanism found wanting in 1976 is

present in the ordinance before us now in section 1]44—a

“ Section 11, as amended in 1982 (see ante, p. *, fn. 2),

in full (deletions are stricken with a horizon ios ie addins ase te hein

“a. Once each year, the Board shall consider setting and adjusting the

rent ceiling for ali rental units covered by this Ordinance in general and/or

particular categories of rental units covered by this Ordinance deemed

appropriate by the Board. The Board shall hold at least two public hearings

Prior to making any annual general adjustment of the rent ceilings. Phe res

the first ennual-gonerel edjusement-shett b- mede no leter then-Decem ber 3+-

+980. The Board shall publish and publicize notices of the date, time, and place

of the public hearings at least thirty (30) days prior to the hearing date. The

two required public hearings shall be conducted and the annual general

adjustment shall be set between September | and October 31, of each year. The

annual adjustment shall become effective the following January 1.

a“ In making annual general adjustments of the rent ceiling, the Board

“(1) Adjust the rent ceiling upward by granting those landlords

who pay for utilities a utility adjustment for increases in the City of

Berkeley for utilities.

“(2) Adjust the rent ceiling upward by granting landlords a

Property tax, maintenance and operating expense increase adjustment

( exclusive of utilities ) for increases in the City of Berkeley for property

taxes and maintenance and operating expenses.

“(3) Adjust the rent ceiling downward by requiring landlords to

—- rents for any decreases in the City of Berkeley for property

“(4) Adjust the rent ceiling downward by requiring landlords who

pay for utilities to decrease rents for any decreases in the City of Berkeley

Sor utilities.

“In adjusting rents ceilings under this subsection, the Board shall adopt a

formula or formulas 2f general application. This formula will be based upon

@- <usvey-or the annual rent registration forms, surveys, information and

testimonies presentec' at public hearings, and other available data indicating

increases or decreases in the expenses relating to the rental housing market in

the City of Berkeley set forth in this subsection. For maintenance and

operating expense adjustments, the Board may also use survey data from

surrounding communities where appropriate. The Board shall make no more

than one annual adjustment of rent ceilings per rental units per year.

“Adoption of a formula greater than forty-five percent (45%) of the

increase in the Consumer Price Index for the twelve months ending the previous

June 30 shall require the affirmative vote of six (6) Commissioners, other

provisions notwithstanding. Adoption of such a formula shall be a specific and

special exception to the requirement of only five (5) affirmative votes !o make a

decision. For the purposes of this subsection, the Consumer Price Index shall

* Infra A-4.

( Footnotes continued on following page)

BEST AVAILABLE COPY

A-48

comprehensive scheme that provides for annuals across the

board adjustment based on “cost” factors. . :

The adjustment for all landlords under section if is

designed to allow landlords to retain the generally same ve ar

amount of profit in subsequent years that they received in May

ee aan te all urban consumers in San Fran-

the Consumer Price Index for

precey Pene all items (1967 equals 100), as reported by the oe ~ »A

Labor Statistics of the U.S. Department of Labor, as it pertains to ¢ ity

= An upward general adjustment in rent ceilings i does not ene

cally evil Oe ae ae iiah tome cinaive only ober te nélord

ral upward adjustment

eves the tenant at least a thirty (30) days written notice of such rent increase

nee Board makes a downward general adjustment in the rent

ceilings, . landlords of rental units w> which tis atjusumen copies oe!

tenants of such rental units written notice of the rent decrease to wi hoy

are entitled. Such rent decreases shall take effect not later than thirty ad

days after the effective date set by the Board for the downw gene

| t. . . .

a “e. If the maximum allowable rent specified under this —— Je

rental unit is greater than the rent specified for such unit im ‘age

agreement, the lower rent specified in the rental agreemen pate

maximum allowable rent until the rental agreement expires. 1! ——

allowable rent specified under this Ordinance for a rental unit is less

rent specified for such unit in the rental agreement, the lower rent specified

under this Ordinance shall be the maximum allowable rent. eiiies

“f No rent increase pursuant to an upward general adjustment 0

ili be effective if the landlord:

nae: ona) ) Has continued to fail to comply, after order of the Board, —

any provisions of this Ordinance and/or orders or regulations iss

aes ) Has failed to bring the rental unit into compliance with the

implied warranty of habitability, or

" “(3) Has failed to make repairs as ordered by the Housing In-

tion Services of the City of Berkeley, or

mee( 4) Has failed to —— register by September 1, except as

| in Subsection | 1.g. below.

tag ed phn t of an upward general adjustment for which —

shall be eligible shall decrease by ten (10) percent per month for ea

beyond December | for which the landlord fails to register. raw

“h. A landlord who is ineligible to raise rents under an upw =

adjustment for an entire calendar year shall not be cligible to raise rents

adjustment in future years." ;

oo Shean — by amicus that general adjustments under —_ y+

in the past four years have been as follows: 1981, 5 percent (6. Ae

landlord provided space heating); 1982, 9 perceat; 1983, 5 percent; —

increase (apparently because of the low inflation rate for 1983). See >

supra, 35 Rutgers L.Rev. at pages 779-780.

4

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,

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A-49

1980. In order to acquire rent increases that reflect cost

increases not imposed on other landlords generally, or in order

to seek an increase in dollar amount of return (i.e., the dollar

amount of profit), a landlord must secure an individual adjust-

ment pursuant to section 12, subdivision (c).4¢ And, as ob-

served ante at pages - *, unless landlords have reasonable

access to such individual adjustments, the ordinance has the

potenual for producing unconstitutional results.

“* Section 12, subdivision (c), provides in full:

“In making individual adjustments of the rent ceiling, the Board or

the hearing examiner shall consider the purposes of this Ordinance and

shall specifically consider all relevant factors, including (but not limited

to):

“(1) Increases or decreases in property taxes;

“(2) Unavoidable increases or any decreases in maintenance and

operating expenses;

“(3) The cost of planned or completed capital improvements to the

rental unit (as distinguished from ordinary repair, replacement and

maintenance) where such capital improvements are necessary to bring

the property into compliance or maintain compliance with applicable

local code requirements affecting health and safety, and where such

capital improvement costs are properly amortized over the life of the

improvement;

“(4) Increases or decreases in the number of tenants occupying the

rental unit, living space, furniture, furnishings, equipment, or other

housing services provided, or occupancy rules;

“(5) Substantial deterioration of the controlled rental unit other

than as a result of normal wear and tear.

“(6) Failure on the part of the landlord to provide adequate

housing services, or to comply substantially with applicabie state rental

housing laws, local housing, health and safety codes, or the rental

agreement;

“(7) The pattern of recent rent increases or decreases;

“(8) The landlord’s rate of return on investment. In determining

such return, all relevant factors, including but not limited to the following

shall be considered: the landlord’s actual cash down payment, method of

financing the ,,roperty, and any federal or state tax benefits accruing to

landlord as a result of ownership of the property;

“(9) Whether or not the property was acquired or is held as a long-

term or short-term investment; and

“(10) Whether or not the landlord has received rent in violation of

the terms of this Ordinance or has otherwise failed to comnly with the

Ordinance.

“It is the intent of this Ordinance that individual upward adjust-

ments in the rent ceilings on units be made only when the landlord

demonstrates that such adjustments are necessary to provide the landlord

with a fair return on investment.”

* Infra A-40 to 43.

A-50

In compaiison to the procedures for individual adjustment

in eutine’ former regulation—which, we said, “put 7

Board in a procedural strait jacket” ( Birkenfeld, supra, ‘

Cal.3d at p. 171)—the ordinance before us now Is ae, re)

due process. The initiative drafters apparently studied Bi > st

feld, and took it to heart: every major procedural failing -

we noted in the former ordiaance has been addressed, “wr

additional procedural protections not previously menticne

ve been included. Az

" The previous Berkeley ordinance found invalid in Birken-

feld (1) did not allow a landlord to file a petition for er

adjustment unless it was accompanied by a certificate oO

building code compliance from the city’s building code al

ment; (2) gave the Board no power to consolidate petitions =

units in the same building, unless the tenants consented; an :

(3) gave the Board (five members each paid a maximum re)

$2,400 per year) no power to delegate the holding of —

to hearing officers, or even to members or panels of the Boar :

(17 Cal.3d at pp. 170-171.) As defendants point out, none o

these “defects” appear in the new ordinance: (1) there is no

requirement that a landlord’s petition be accompanied ad

certificate from the building department, or from anyone else;

(2) the Board is expressly given the power to consolidate a

landlord’s petitions for units in the same building —whether or

not the tenants consent; and (3) the ordinance expressly gives

the Board the power to appoint hearing officers to hold

47 Section 12, subdivision (a) provides in full: “Petitions. Upon receipt

of a petition by a landlord and/or tenant, the rent ceiling of individual

controlled rental units may be adjusted upward or downward gee -

with the procedures set forth elsewhere in this Section. a on

on the form provided by the Board. Lovcb eigen dre nina ag - =

fee based upon the expenses of processing the petiuon to mnt Ming

petitioner at the time of filing. No petiuon shall be filed ee =

1980. Notwithstanding any other provision of this Section, Board

revious six months.” a As or

: 48 Section 12, subdivision (b)(9) provides in full: a oo

landlord petitions pe jining 10 wenants in the same building &&

consolidated for hearing, and all petitions filed by tenants — 7” owe

building shall be consolidated for hearing unless there is a showing

cause not to consolidate such petitions.”

a oe -

A-51

hearings,“ and the hearing officers are authorized to issue

decisions that are final unless appealed to the Board.5° Addi-

tionally, the new ordinance imposes a time limit of 120 days on

all decisions on landlord petitions.5'

Defendants’ new ordinance clearly avoids the confiscatory

delays inherent in the former regulation’s unit-by-unit proce-

dure. It provides for general citywide increases to cover

common costs, and its individual adjustment procedures are

designed to assure reasonably prompt consideration of land-

lords’ claims.52 These procedures are reasonably related to

“* Section 12, subdivision (b)(1) provides in fuil: “Hearing Examiner.

A hearing examiner appointed by the Board shall conduct a hearing to act

upon the petition for individual adjustments of rent ceilings and shall have the

power to administer oaths and affirmations.”

% Section 12, subdivision (b)(11) provides in full: “Finality of Deci-

sion. The decision of the hearing examiner shall be the final decision of the

Board in the event of no appeal to the Board. The decision of the hearing

examiner shall not be stayed pending appeal; however, in the event that the

Board or panel reverses or modifies the decision of the hearing examiner, the

Board shall order the appropriate Party to make retroactive payments to

restore the parties to the position they would have occupied had the hearing

examiner’s decision been the same as that of the Board’s.”

5" Section 12, subdivision (b)( 12) provides in full: “Time for Decision.

The rules and regulations adopted by the Board shall provide for final Board

action on any individual rent adjustment petition within one hundred and

twenty (120) days following the date of filing of the individual rent ceiling

adjustment petition, unless the conduct of the petitioner or other good cause is

responsible for the delay.” As defendants point out, it is clear that the 120-

day rule also applies to petition determinations that are appealed to the

Board.

52 Like the 105-day provision that we recently reviewed in Carson, we do

not believe that the time allowed for review under section 12 is excessive.

Within the 120-day time limit, “the Board must ( 1) review all information

provided by the applicants, including complex financial and tax data, (2)

review comments received from tenants, and (3) hold a hearing at which the

interested parties are permitted to testify. [7] Careful review of the

information provided to the Board is important. The financial and tax data

submitted by the applicant reveals whether the owner’s profits have increased

or decreased, whether the property taxes or operating costs associated with

the [property] have increased or decreased, and whether any capital

improvements have been made. Review of the information supplied by the

tenants helps the Board determine whether there has been any increase or

decrease in the services provided by the [landlord}.” (35 Cal.3d at pp. 193-

194.)

We stress that only the facial validity of the ordinance is currently before

the court. Whether individual landlords might prove a denial of due process

because of delays exceeding the 120-day time limit is a question of great

concern, but it is not before us at this time.

A-52

achievement of the ordinance’s stated purpose of, inter alia,

preventing excessive rents. By its own terms, the ordinance will

permit the Board to avoid confiscatory results; we therefore

conclude that the ordinance, on its face, guarantees plaintiffs

due process. (Cal.Const., art I, § 7; Birkenfeld, supra, 17

Cal.3d at pp. 165, 173.)

C. Unreasonable Restraint on Alienation

At the same time that mechanical application of the fair

return on investment standard may have the potential to

produce confiscatory results in some individual cases (ante, pp.

- *) it is also recognized that the standard has the potential

for awarding windfall returns to recent investors whose pur-

chase prices and interest rates are high. If this latter aspect

were unregulated, use of the investment standard might defeat

the purpose of rent price regulation. To prevent this result,

defendants’ ordinance, like others in the state (see Baar, supra,

35 Rutgers L.Rev. at p. 788, fn. 249), contains two “antispecu-

lation” clauses that prohibit the Board from considering certain

increases in mortgage interest payments when those increases

occur after adoption of the ordinance. (Id. at pp. 788, 792.)

Thus, ex¢ept when refinancing is necessary to make capital

improvements or in cases of individual hardship to buyers,

section 12, subdivisions (d) and (e),59 preclude the Board from

* Infra A-40 to 43.

83 These subdivisions provide in full: “d. No individual upward

adjustment of a rent ceilins, shall be authorized by the Board by reason of

increased interest or other :xpenses resulting from the landlord’s refinancing

the rental unit if, at the time the landlord refinanced, the landlord could

reasonably have foreseen that such increased expenses could not be covered

by the rent schedule then in existence, except where such refinancing is

necessary for the landlord to make capital improvements which meet the

criteria set forth in Section 12.c.(3). This paragraph shall only apply to that

portion of the increased expenses resulting from the refinancing that were

reasonably foreseeable at the time of the refinancing of the rental unit and

shall only apply to rental units refinanced after the date of adoption of this

Ordinance. [%] e. Except for cases of individual hardship as set forth in

Subsection 12.i. of this Ordinance, no individual upward adjustment of a rent

ceiling shall be authorized by the Board because of the landlord’s increased

interest or other expenses resulting from the sale of the property, if at the ume

the landlord acquired the property, the landlord could have reasonably

foreseen that such increased expenses would not be covered by the rent

schedule then in effect. This Subsection (12.e.) shall only apply to rental

units acquired after the date of adoption of this Ordinance.”

iT a se

A-53

authorizing an individual rent increase because of increased

interest or other expenses resulting from sale or refinancing of

rental property, if the landlord could reasonably have foreseen

that such increased expenses could not be covered by the

“existing” rent schedule.

Plaintiffs do not challenge the constitutional reason-

ableness of the classification created by these restrictions;

instead, they claim these provisions constitute unreasonable

restraints on alienation in that they will inhibit sales of rental

property at a fair market value in violation of Civil Code section

711. That section states simply, “[c]onditions restraining

alienation, when repugnant to the interest created, are void.”

Plaintiffs’ contention, however, ignores ordinance section 12,

subdivision (i), which cautions, “[n]o provision of this Ordi-

nance shall be applied so as to prohibit the Board from granting

an individual rent adjustment that is demonstrated necessary by

the landlord to provide the landlord with a fair return on

investment. ” This safety valve overrides all other provisions of

the ordinance and averts any danger that subdivisions (d) and

(e) might prevent a purchaser from realizing a fair return, and

thus prevents any unreasonable restraint on alienation. (See

generally Wellenkamp v. Bank of America (1978) 21 Cal.3d

943, 948.)

Furthermore, even if the two subdivisions were assumed to

create an unreasonable restraint, we are persuaded by defend-

ants’ contention that Civil Code section 711 does not, and was

never intended to, apply to municipal ordinances. Our review

of that statute and the many cases that apply it reveals that it

addresses only private restraints on alienation, and not govern-

ment regulations. (Cf. 3 Witkin, Summary of Cal. Law (8th

ed. 1973) Real Property, § 314, p. 2024 [the rule against

restraints on alienation “is directed against the provisions in

contracts or conveyances. It has no application to disabling

restraints established by express statute.” ]; Rest., Property, pp.

2377, 2381.) None of the cases cited by plaintiffs or amici

supports a contrary view.

A-54

D. Retaliatory Eviction Presumption

Typically, rent control schemes include eviction controls

that require “good cause” in order for a landlord to bring an

eviction action. Without such controls, “the security of tenure

objectives of rent control laws could be undermined and the

threat of eviction could be used to nullify the operation of rent

regulations.” (Baar, supra, 35 Rutgers L.Rev. at p. 833.)

Accordingly, section 14 of the ordinance™ restates this

court’s established holding that a landlord’s retaliation against

a tenant for the tenant’s assertion or exercise of rights is a

defense to eviction. (Schweiger v. Superior Court (1970) 3

Cal.3d 507, 517.) The section then provides that, in an action

by the landlord to recover possession or in an affirmative action

taken by the tenant for damages, “evidence of the assertion or

exercise by the tenant of rights under this Ordinance within six

months prior to the alleged act of retaliation shall create a

presumption that the landlord’s act was retaliatory.” As origi-

nally enacted, the section provided that “‘[p]resumption’

means that the Court must find the existence of the fact

presumed unless and until evidence is introduced which would

support a finding of its nonexistence.” After the trial court’s

judgment in this case the latter sentence was amended in 1982

(see ante, p. *, fn 2) to read, “‘[p]resumption’ means that

54 As amended in 1982 (see ante, p. *. fm. 2), the section provides

(deletions are stricken with a horizontal line; additions are in italics): “No

landlord may threaten to bring, or bring, an action to recover possession,

cause the tenant to quit the unit involuntarily, serve any notice to quil or notice

of termination of tenancy, decrease any services or increase the rent where the

landlord’s intent is retaliation against the tenant for the tenant’s assertion or

exercise of rights under this Ordinance. Such retaliation shall be a defense to

an action to recover possession, or it may serve as the basis for an affirmative

action by the tenant for actual and punitive damages and injunctive relief. In

an action by or against a tenant, evidence of the assertion or exercise by the

tenant of rights under this Ordinance within six months prior to the alleged

act of retaliation shall create a presumption that the landlord’s act was

retaliatory. ‘Presumption’ means that the Court must find the existence of the

fact presumed unless and until evidence-is-imroduced-wineh would suppon-e

finding of ite-nenexinenee iis nonexistence is proven by a preponderance of the

evidence. A tenant may assert retaliation affirmatively or as a defense to the

landlord’s action without the aid of the presumption regardless of the period of

time which has elapsed between the tenant's assertion or exercise of rights

under this Ordinance and the alleged act of retaliation.”

* Infra A-4.

A-55

the Court must find the existence of the fact presumed unless

and until its nonexistence is proven by a preponderance of the

evidence.”

1. Classification of the Presumption. Plaintiffs claim that

section 14 purports to create a presumption affecting the burden

of proof, and that such presumptions created by municipal

ordinance are preempted by state law. (Evid. Code, § 500.)

Defendants apparently respond that section 14 creates merely a

presumption affecting the burden of producing or going for-

ward with evidence, and that, even if it does create a presump-

tion affecting the burden of proof, section 500 and other

relevant sections of the Evidence Code allow such a presump-

tion.

a. Presumption Affecting the Burden of Producing Evi-

dence. The burden of producing evidence refers to a party’s

obligation to introduce evidence sufficient to establish a prima

facie case, or, in other words, sufficient to avoid nonsuit. (Evid.

Code, § 110.) “A presumption affecting the burden of produc-

ing evidence is a presumption established to implement no

public policy other than to facilitate the determination. of the

particular action in which the presumption is applied.” (Evid.

Code, § 603.) The code makes clear that the purpose of such a

rebuttable presumption relates solely to judicial efficiency, and

does not rest on any public policy extrinsic to the action in

which it is invoked. A presumption affecting the burden of

producing evidence is based on an underlying logical inference

that the presumed fact very likely follows from the proved fact:

the presumption is designed to avoid unnecessary proof of facts

likely to be true if not disputed. Especially relevant to the

present case, such a rebuttable presumption is designed to place

the responsibility for establishing the nonexistence of certain

facts on the party most able to do so. As observed in the

California Law Revision Commission’s comment on section

603, “(t]he presumptions described in [that section] are not

expressions of policy; they are expressions of experience. They

are intended solely to eliminate the need for the trier of fact to

A-56

reason from the proven or established fact to the presumed fact

and to forestall argument over the existence of the presumed

fact when there is no evidence tending to prove the nonexis-

tence of the presumed fact.”

If the presumption established in section 14 affects the

burden of producing evidence, a tenant who shows an assertion

or exercise of rights under the ordinance within six months of

an eviction proceeding will have established either (1) a prima

facie defense to eviction (and will hence avoid nonsuit), or (2)

a prima facie case for damages, uniess the landlord rebuts the

presumption by evidence supporting its nonexistence by a

preponderance of the evidence. (Evid. Code, §§ 110, 604.) As

noted in the Assembly Committee on the Judiciary’s comment

on section 604, “[s]uch a presumption is merely a preliminary

assumption in the absence of contrary evidence.”

b. Presumption Affecting the Burden of Proof. The burden

of proof, on the other hand, refers to a party’s obligation to

establish by evidence a requisite degree of belief concerning a

fact in the mind of the trier of fact. (Evid. Code, § 115.)

Unlike presumptions affecting the burden of producing evi-

dence, which exist merely to expedite resolution of disputes,

“(a] presumption affecting the burden of proof is a presump-

tion established to implement some public polity other than to

facilitate the determination of the particular action in which the

presumption is applied, su h as the policy in favor of the

legitimacy of children, the validity of marriage, the stability of

titles to property. . . .” (Evid. Code, § 605.) The purpose of

such a rebuttable presumption relates to public policy goals

“other than or in addition to the policy of facilitating the trial of

actions.” (Cal. Law Revision Com. com. on Evid. Code,

§ 605.) As the California Law Revision Commission observes,

“[(f]requently, presumptions affecting the burden of proof are

designed to facilitate determination of the action in which they

are applied. Superficially, therefore, such presumptions may

appear merely to be presumptions affecting the burden ; of

producing evidence. What makes a presumption one affecting

the burden of proof is the fact that there is always some further

reason of policy for the establishment of the presumputon. It is

the existence of this further basis in policy that distinguishes a

presumption affecting the burden of proof from a presumption

affecting the burden of producing evidence.” ( Ibid. )

i

s

y

»

A-57

If a presumption affecting the burden of proof is estab-

lished by section 14, a tenant who shows an assertion or

exercise of rights under the ordinance within six months of the

eviction proceeding will effectively shift to the landlord the

burden of disproving the tenant’s defense or case for damages,

by requiring the landlord to prove to the trier of fact, by a

preponderance of the evidence, that eviction was not retali-

atory. (Evid. Code, §§ 115, 606.) In other words, unlike

presumptions affecting the burden of producing evidence,

which would merely protect a tenant against nonsuit, a pre-

sumption affecting the burden of proof would shift the ultimate

responsibility of persuasion to the landlord.

c. Presumption Created by the Amendment. Defendants

concede that it is difficult to classify the presumption created by

section 14. Plaintiffs implicitly recognize the same problem:

although they characterized the amended presumption in ear-

lier briefs as a valid presumption affecting the burden of

producing evidence, in recent briefs they claim it is an invalid

presumption affecting the burden of proof.

Viewing the section’s language in the context of the entire

ordinance, and in light of the earlier preamendment version, we

must agree with plaintiffs that the amended section 14 pre-

sumption affects the burden of proof. Regarding the latter

point first, we note that the preamendment language paralleled

Evidence Code section 604’s description of the effect of a

presumption affecting the burden of producing evidence: for-

mer section 14 specified that “the Court must find the existence

of the fact presumed unless and until evidence is introduced

which would support a finding of its nonexistence.” Evidence

Code section 604 similarly provides that a presumption affect-

ing the burden of producing evidence “require[s] the trier of

fact to assume the existence of the presumed fact unless and

until evidence is introduced which wouid support a finding of

its nonexistence.”

It thus seems reasonably clear that the former section

established a presumption affecting the burden of producing

evidence. It would also be reasonable to assume that the

amendment was intended to change, rather than simply restate

or clarify, the original presumption. First, the amendment

A-58

specifically omitted reference to introduction of evidence that

would support a finding of the presumed fact’s nonexis-

tence—and therefore it departs from the express language of

Evidence Code section 604. Moreover, to the extent the

amendment was intended to clarify and restate the previous

presumption that affected only the burden of producing evi-

dence, the new section would quite obviously be a fail-

ure—because its language describes that kind of presumpuon

even less clearly than did its predecessor.

The suggestion that the amendment was intended to

implement a presumption affecting the burden of proof, and not

merely one affecting the burden of producing evidence, is

further supported by defendants’ own description of the pur-

pose of the amended presumption. Defendants claim the

presumption is intended to further the municipality’s policy

against retaliatory evictions and to promote the policy of

encouraging tenants to exercise their rights under the ordinance.

In view of the previous section’s subsequent amendment—and

because, as defendants admit, section 14 is designed to further

policies extrinsic to, or in addition to, the policy of facilitating

determination of particular eviction actions—we must conclude

that the amended section creates a presumption affecting the

burden of proof.

2. Direct Preemption by the Evidence Code. Although

municipalities have power to enact ordinances creating substan-

tive defenses to eviction (Birkenfeld, supra, 17 Cal.3d 129,

149), such legislation is invalid to the extent it conflicts with

general state law. (Id. at p. 152; Cal.Const., art XI, § 7.)

Plaintiffs claim that section 14, as amended, directly conflicts

with Evidence Code section 500, which states: “Except as

otherwise provided by law, a party has the burden of proof as

to each fact the existence or nonexistence of which is essential to

the claim for relief or defense that he is asserting.” They note

that under section 14, proof of retaliation is “essential” to

establishing the tenant’s defense or claim for relief; therefore,

they argue, Evidence Code section 500, requires that the tenant

prove the fact of retaliation.

es ae

Sats 2a Ane patie Minin, at

A-59

Defendants respond that Evidence Code section 500 by its

own terms does not apply to situations “otherwise provided

[for] by law.” Plaintiffs, in turn, maintain that this exception

does not contemplate local ordinances or charter amendments.

The term “law,” as used in Evidence Code section 500, is

defined as including “constitutional, statutory, and decisional

law.” (Evid. Code, § 160.) Defendants contend that section

160 was not intended to exclude local ordinances as a source of

“law,” but was merely intended to make clear that the term

“law” includes judicial decisions. (See Cal. Law Revision

Com. to § 160.) They therefore invite us to construe “statutory”

as including ordinances.

Indeed, there have been cases in which courts have

suggested that the term “statutes” embraces local ordinances.

( City of Los Angeles v. Belridge Oil Co. (1954) 42 Cal.2d 823,

833-834; King Mfg. Co. v. Augusta (1928) 277 U.S. 100, 102-

114.) Neither of those cases, however, assists defendants. In

Belridge we observed that a city licensing ordinance could be

construed as a statute under the statute of limitations; in King

the United States Supreme Court construed an ordinance as a

statute for the purpose of satisfying jurisdiction. But, in neither

case did the court address issues remotely approaching the

question posed here: whether a local ordinance can be deemed

a “statute” for purposes of deviating from the established rules

of evidence relating to burden of proof.

The answer to this question would seem so settled that, like

other firm rules of law, few courts have recently had occasion to

address the issue. Long before enactment of Evidence Code

sections 500 and 160, we suggested that municipal governments

have no authority to depart from the common law of evidence.

(Orena v. City of Santa Barbara (1891) 91 Cal. 621, 629 [an

“ordinance is void . . . [to the extent that it purports to] lay

down rules of evidence . . .”].) Similarly, commentators have

maintained that, “[ without express authority the general rules

of evidence or procedure may not be changed by ordinance by

a municipal corporation” (9 McQuillin, Municipal Corpo-

rations (3d ed. 1978) § 27.45, p. 670; see also 2 Dillon,

Municipal Corporations (Sth ed. 1911) § 643, p. 983), and

A-60

that, “[u]nlike the legislature, the governing body of a munici-

pal corporation has no power to prescribe rules of evidence for

the guidance of courts. Therefore, a municipal ordinance. . .

concerning the burden of proof [is void].” (31 Cal.Jur.3d,

Evidence, § 5, at p. 37.) See also Cohen v. St. Louis Merchants’

Bridge Terminal Ry. (Mo.Ct.App. 1916) 181 S.W. 1080, 1081-

1082 (“ ‘The City cannot by ordinance in any wise change or

alter the ordinary rules of evidence applicable in this court’ ”’);

Fitch v. Pinckard (Ill. 1842) 4 Scam. 69, 78 (5 Ill. 72, 81)

(“[{T]he [municipal] corporation exceeded its powers, in

declaring that the collector’s deed should be evidence of a

compliance with all the prerequisites of the ordinance. The

legislature alone possesses the power to make, change, or alter

the rules of evidence.”); cf., The City Council v. Dunn (S.C.

1821) 1 McCord 333 (in absence of statutory provision to the

contrary, an ordinance may not depart from the common law

rules of evidence ).

Given this background, we cannot believe that the Legisla-

ture, when it enacted Evidence Code sections 500 and 160 in

1965, ever intended municipal ordinances to come within the

exception clause of Evidence Code section 500. Whether the

Evidence Code directly or by implication preempts a local

ordinance that purports to create a presumption shifting the

burden of producing evidence is a separate issue, on which we

reserve decision. (See Evid. Code, § 550, subd. (b).) For now,

we conclude that the Legislature deliberately excluded ordi-

nances from those sources of law that may change the tradition-

al allocation of the burden of proof, and that the presumption

in section 14 shifting the burden of proof, on its face, directly

conflicts with the Evidence Code. (§ 500.) To that extent, the

ordinance is invalid.

A-61

E. Due Process and Preemption Challenges to the

Ordinance’s Rent Withholding Provisions

Section 1555 sets out remedies for landlords’ violations of

the ordinance—e.g., failure to register pursuant to section 8,5¢

or charging of rents above those permitted under sections 11

and 12. Section 15, subdivision (a), provides for tenant-

initiated remedies: under subsection (1) of that subdivision, a

tenant may petition the Board for permission to withhold rent

until the landlord complies with the ordinance. Subsection (2)

permits the same withholding remedy, even without Board

permission, and provides a defense to unlawful detainer if the

tenant believes in good faith that the landlord has not complied

with the ordinance.57 Subsection (3) permits a tenant to sue for

injunctive relief, and subsection (4) permits a tenant to sue the

landlord for money damages.

55 This section provides in full:

“a. For Violation of Rent Ceilings or Failure to Register. If a

landlord fails to register in accordance with Section 8 of this Ordinance,

or if a landlord demands, accepts, receives or retains any payment in

excess of the maximum allowable rent permitted by this Ordinance, a

tenant may take any or all of the following actions until compliance is

achieved:

“(1) A tenant may petition the Board for appropriate relief. If

the Board, after the landlord has proper notice and after a hearing,

determines that a landlord has wilfully and knowingly failed to

register a rental unit covered by this Ordinance or violated the

provisions of Sections 10, 11 and 12 of this Ordinance, the Board

may authorize the tenant of such rental unit to withhold all or a

portion of the rent for the unit until such time as the rental unit is

brought into compliance with this Ordinance. After a rental unit is

brought into compliance, the Board shall determine what portion, if

any, of the withheld rent is owed to the landlord for the period in

which the rental unit was not in compliance. Whether or not the

Board allows such withholding, no landlord who has failed to

comply with the Ordinance shall at any time increase rents for a

rental unit until such unit is srought into compliance.

“(2) A tenant may withhold up to the full amount of his or her

periodic rent which is charged or demanded by the landlord under

the provisions of this Ordinance. In any action to recover possession

based on nonpayment of rent, possession shail not be granted where

the tenant has withheld rent in good faith under this Section.

“(3) A tenant may seek injunctive relief on behalf of herself or

himself to restrain the landlord from demanding or receiving any

rent on the unit until the landlord has complied with the terms of

this Ordinance.

( Footnotes continued on following page)

A-62

Subdivision (c) permits the city attorney to sue landlords

for injunctive relief, and subdivision (d) permits the Board to

do the same. Subdivision (e) permits the Board to settle claims

on behalf of tenants.

Plaintiffs focus on the rent withholding provisions of

subdivision (a), subsections (1) and (2), which they claim are

preempted by state law. Additionally, plaintiffs assert that

( Fooinotes continued from preceding page)

“(4) A tenant may file a damage suit against the landlord for

actual damages when the landlord receives or retains any rent in

excess of the maximum rent allowed under this Ordinance. Upon

further proof of a bad faith claim by the landlord or the landlord's

retention of rent in excess of the maximum rent allowed by this

Ordinance, the tenant shall receive a judgment of up to seven

hundred and fifty dollars ($750.00) in addition to any actual

dam 4 . . .

“b. for Violation of Eviction Proceedings. If it is shown in the

appropriate court that the event which the landlord claims as grounds to

recover possesssion under Subsection 13.a.(7), Subsecuon 13.a.(8),

Subsection 13.a.(9), or Subsection 13.a.(10) is not initiated within two

months after the tenant vacates the unit, or it is shown the landlord's

claim was false or in bad faith, the tenant shall be entitled to regain

possession and to actual damages. If the landlord’s conduct was willful,

the tenant shall be entitled to damages in an amount of $750 or three

times the actual damages sustained, whichever is greater.

“c. The City Attorney may bring an action for injunctive relief on

behalf of the City or on behalf of tenants seeking compliance by

landlords with this Ordinance. .

“d. The Board may seek injuctive relief to restrain or enjoin any

violation of this Ordinance or of the rules, regulations, orders and

isions of the Board. or

a eee fails to bring a civil or administrative action within

one hundred and twenty (120) days from the date of the first occurrence

of a violation of this Ordinance, the Board may either settle the claim

arising from the violation or bring such action. Thereafter, the tenant on

whose behalf the Board acted may not bring an action against the

landlord in regard to the same violation for which the Board has made a

settlement or brought an action. In the event the Board settles the claim

it shall be entitled to retain from any payments made by the landlord, the

costs it incurred in settlement, and the tenant aggrieved by the violation

entitled to the remainder.”

= Pub tonien provides, inter alia, that by a specified date landlords must

file a rent registration form showing rents in effect on certain prior dates for

ach rental unit covered by the ordinance. .

” - Defendants point out that although the subsection (2) remedy might

be more e

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