# Appendix — Fisher v. Berkeley

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1986
- **Citation:** 475 U.S. 260

## Text

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
@- 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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0318%3A03. Public record. Not legal advice.