Petition for Writ of Certiorari — Bradshaw v. G & G Fire Sprinklers, Inc.

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UrhiCe OF THE

In The CLERK

Supreme Court of the United States

October Term, 1998

VICTORIA L. BRADSHAW, an individual, in her official

capacity as Labor Commissioner of the State of California;

LLOYD W. AUBRY, JR., an individual, in his official capacity as

Director of the Department of Industrial Relations of the State

of California; DANIEL DELLAROCCA, an individual, in his

official capacity as Deputy Labor Commissioner of the State of

California; ROGER MILLER, an individual in his official

capacity as Deputy Labor Commissioner of the State of

California; ROSA FRAZIER, an individual in her official

capacity as Deputy Labor Commissioner of the State of

California; DIVISION OF LABOR STANDARDS

ENFORCEMENT, an agency of the State of California;

DEPARTMENT OF INDUSTRIAL RELATIONS,

an agency of the State of California,

Petitioners,

G & G FIRE SPRINKLERS, INC.,

Respondent.

On Petition For A Writ Of Certiorari To The United States

Court Of Appeals For The Ninth Circuit

PETITION FOR A WRIT OF CERTIORARI

Mires E. Locker, Chief Counsel

Counsel of Record

Division of Labor Standards

Enforcement

Department of Industrial Relations

State of California

45 Fremont Street, Suite 3220

San Francisco, CA 94105

Telephone: (415) 975-2060

Attorney for Petitioners

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831 2% e?

QUESTION PRESENTED

Is a commercial contractor who claims that a public

agency breached a contract by failing to make payment

entitled by the Due Process Clause of the Fourteenth

Amendment to anything more than the opportunity to

pursue its contract claim through an ordinary state court

lawsuit?

TABLE OF CONTENTS

Page

OPINIONS: BELAIW ask seas eka hae ee vs Os 1

JURISDECTION 05.0. c 2005 cows Bet ean dae keen 2

CONSTITUTIONAL PROVISIONS AND STATUTES

INVOLVED... «oie s cs kaks jueyee seh ee eee 2

STATEMENT OF THE CAS@ oc co cciciee i ceeestes 2

A. Facts... ice conse cen wana sana aaa 2

B. Proceedings Gelowss socio sc cheek es eosin 7

REASONS FOR GRANTING THE WRIT ........... 11

A. Conflict Exists Among the Circuits as to Whether

Constitutionally Protected Property Rights Can

Be Founded Upon a Commercial Contract With a

State ASency «oo. si. s con ussewe habs saueeuned uae 12

B. The Ninth Circuit’s Holding that the State, In

Enforcing the Provisions of a Public Works Con-

tract, Acts as a Regulator Rather than a Market

Participant, Conflicts With Applicable Supreme

Court PreceGeat< ss ivsea seetaveaaseseapanes 5 18

C. Conflict Exists Among the Circuits as to Whether

a Breach of Contract Action to Recover Amounts

Purportedly Due Under a Contract With a Public

Agency Provides a Sufficient Remedy.......... 23

CONCLUSEIN .. .iaek0k cack uenne wae eeee eens eenes 30

APPENDIX 6). 60 scs SaaS ep eka een eee, ae eens A-1

Rip aioe top Siete Ct aemlgnth oA ner ea

iil

TABLE OF AUTHORITIES

Page

CASES

Atkin v. Kansas, 191 U.S. 207, 24 S.Ct. 124, 48 L.Ed.

St a Guage aide oo ire tere ayraee on gee nearer yur k etree 20, 22

Bleeker v. Dukakis, 665 F2a 401 (1st Cir. 1981)....... 13

Board of Regents v. Roth, 408 U.S. 564, 92 S.Ct. 2701,

ee etn I CEE RS bas C5 6 bx ks 60 4N S RA Soo ee 17

Brown v. Brienen, 722 F.2d 360 (7th Cir. 1983)..... 13, 25

Building & Construction Trades Council v. Associated

Builders and Contractors, 507 U.S. 218, 113 S.Ct.

Re ee Be RL) es ee vs by

Christ Gatzonis Electrical Contractor, Inc. v. New

York City School Construction Authority, 23 F.3d

ee NE eS ec iein Gea weeds heeds 42,37

Daniels v. Williams, 474 U.S. 327, 106 S.Ct. 662, 88

SUR I RAR ons sas cae kS pas ps tarsubeawcsars 26

G & G Fire Sprinkers, Inc. v. Bradshaw, 136 F.3d 587,

amended by 156 F.3d 893 (9th Cir. 1998)...... passim

Hudson v. Palmer, 468 U.S. 517, 104 S.Ct. 3194, 82

eS eS |) aR a are eres 27, 28

Ingraham v. Wright, 430 U.S. 651, 97 S.Ct. 1401, 51

Ss SEE." | eR Ret ree gactan iy eer ea aipeD 27

Legal Tender Cases, 79 U.S. (12 Wall.) 457, 20 L.Ed.

BF Ree cn bcc bier oS cpr W See R whee Kees Gaus 3% 16

Linan-Faye Construction Co., Inc. v. Housing Author-

ity of the City of Camden, 49 F.3d 915 (3rd Cir.

| SSE eee nr ern ay Pe eee eee re ee 14

TABLE OF AUTHORITIES — Continued

Page

Logan v. Zimmerman Brush Co., 455 U.S. 422, 101

S.Ct. 1448, 71 L-Ed.2d 265 (1962). 0.05 ies 18, 28, 29

Martz v. Village of Valley Stream, 22 F.3d 26 (2nd

Cie: BOGGS Ss 5 hia vo is ree 12

Mathews v. Eldridge, 424 U.S. 319, 96 S.Ct. 893, 47

LBB 18 (1976) 6 io civnadvcn cheese yee 28, 29

New Energy Company of Indiana v. Limbach, 486 U.S.

269, 108 S.Ct. 1803, 100 L.Ed.2d 302 (1993)........ 21

O’Bannon v. Town Court Nursing Center, 447 U.S.

773, 100 S.Ct. 2467, 65 L.Ed.2d 506 (1980)......... 16

Parratt v. Taylor. 451 U.S. 527, 101 S.Ct. 1908, 68

k.Bette G20: (ISSN). iit sacel ete eens 26, 27, 28, 29

Perkins v. Lukens Steel Co., 310 U.S. 113, 60 S.Ct.

$69, 84 L.Ed. 1108 C1960) 2s eee ee vearecases 20, 22

Reeves, Inc. v. Stake, 447 U.S. 429, 100 S.Ct. 2271, 65

Leh ees REO CLP ek inca cil own nh dacenes te ce een 21

Reich v. Beharry, 883 F.2d 239 (3rd Cir. 1989) ..... 14, 25

S & D Maintenance Co. v. Goldin, 844 F.2d 962 (2nd

COE SI aire kines heaton cee eee 12, 13, 17

San Bernardino Physicians’ Services Medical Group,

Inc. v. County of San Bernardino, 825 F.2d 1404

OU Rit. SOB 6 ooo ocr se ate hs eae 14,

Sniadach v. Family Finance Corp., 395 U.S. 337, 89

S.Ct. 1820, 23 L.bd 2a SOP (1968)... ss ev sas

TABLE OF AUTHORITIES - Continued

Page

Stanislaus Pump, Machinery & Construction Corp. v.

City of Modesto, 200 Cal.App.3d 1442, 246

RE eels: OUR CR 558s beeen kk oe ce a ens bao bad 25

United States Fidelity & Guaranty Co. v. Oak Grove

School District, 205 Cal.App.2d 226, 22 Cal.Rptr.

SEL ROOD i 6 iia 5 oo be eo hO USERS LCR eae ee OLGA cE: 25

Zinermon v. Burch, 494 U.S. 113, 110 S.Ct. 975, 108

Aptiaeit BOG (I99G). oc ci sci nnsevkes scab ee lie 28, 29

CONSTITUTIONAL PROVISIONS

U.S. Constitution, Fourteenth Amendment

Vhids es habad ss SEaeA daa K ASE ETC eS 2, 8, 11, 13, 14, 15

STATUTES

California

Ch Sees Se Se i a ccc ae cae oho 2, 7, 24

cel. SOUES SG BSR ns bo ac ea ees ba we 2, 7, 24

Cah Givin Ce © ANG ccc ioc hae ccs wkceen 2; Tian

Rh. ROVE RO As 6 ok vce Ko vet hah cBdasd bheaees 2,7

COME SVE Oe © ts oss cw esas cdatissdankes a 2. ae

Ce Re Oe ATO, gs vce cae eke ce cedancsa ees a3

Mee ROR SA AE BPO Ns so oo cae a MONE See ES 2; 373, 6

Cathar Code 8 1729... nk sen ennnaerucines 2, 4, 6, 24

Cal. Labor Code § 1730............. he Or 0; Fy Oe. OO

TABLE OF AUTHORITIES —- Continued

Page

Cal. Labor Code © 27986 cess ines ave 2, 5, 6, 7, 8, 24, 30

Cal. Labor Coge: § 27526. v0 ia sta ous 2, 5, 6, 7, 8, 24, 30

Cal. Labor Code & 27505555 snes divs wien tunica cae passim

Cal. Laban Come Ss ba cess apy vy op een ne aaes aa 9

Cal. Lames 4GG S isles civks iN ike ee < i

Cal. Canon Cate B07 a eins Gos iwc: baa a, 2, &

Cal. Labor Comet Bio get cond cis beans vn ean bee 2

Cal. Labor Code © 3776.5 6.50. o kh VER ees 2

Cal; Leber Code & 1975s 5. oo eee 2, 4, 8

Cal. Later Ge SFr 65s dea cee eans 2, 4, 8

Cal. £AnOr COGe © BGG iis ssc cece nse i vena ckave ya iy

Federal

PO Beha: DS LPOG) ie asc dk basen pe keeneaweeeasete 2

Fe Ais Te RAG 6 oka ob chan hs ba Fins os Cee Reade 7

2B US. BP ooo Ss ca ode See kkes eas ewe wees 7

42 SISA. OTs oss. cae eee 2, 7, 12, 14, 28

ACADEMIC COMMENTARY

Kreynin, Breach of Contract as a Due Process Viola-

tion: Can the Constitution Be a Font of Contract

Law?, 90 Colum. L. Rev. 1098 (1990) .............. 26

PETITION FOR A WRIT OF CERTIORARI

Petitioners Victoria L. Bradshaw!, Lloyd W. Aubry,

Jr.2, Daniel Dellarocca, Roger Miller, Rosa Frazier, the

Division of Labor Standards Enforcement, and the

Department of Industrial Relations of the State of Califor-

nia, pray that a writ of certiorari issue to review the

judgment of the United States Court of Appeals for the

Ninth Circuit entered in the above action on September

10, 1998.

OPINIONS BELOW

The judgment of the District Court, entered on

November 9, 1995, is not reported but is reprinted in the

appendix to this petition at A-72. The original opinion of

the United States Court of Appeals for the Ninth Circuit

is reported at 136 F.3d 587 (9th Cir. 1998) and is reprinted

at A-39. The Ninth Circuit issued a subsequent order and

amended opinion on September 10, 1998, reported at 156

F.3d 893 (9th Cir. 1998), and reprinted at A-1. On October

28, 1998, the Ninth Circuit issued an order denying the

State’s petition for rehearing, reprinted at A-75.

1 Victoria L. Bradshaw was sued in her official capacity as

Labor Commissioner of the State of California, a position she

held when this litigation commenced. The position is presently

unfilled, and the duties of that office are currently being

performed by Jose Millan, the Chief Deputy Labor

Commissioner.

2 Lloyd W. Aubry, Jr., was sued in his official capacity as

Director of the Department of Industrial Relations of the State of

California, a position he held when this litigation commenced.

Stephen J. Smith is the current Director.

JURISDICTION

The Ninth Circuit issued its amended opinion and

judgment on September 10, 1998. A timely petition for

rehearing and rehearing en banc was denied on October

28, 1998. This petition for writ of certiorari is filed within

ninety days of the denial of rehearing. This Court has

jurisdiction under 28 U.S.C. § 1254(1).

CONSTITUTIONAL PROVISIONS AND

STATUTES INVOLVED

The Fourteenth Amendment of the United States

Constitution provides, in relevant part, “No State shall

... deprive any person of life, liberty, or property, with-

out due process of law... . ” :

42 U.S.C. § 1983 provides, in relevant part, “Every

person who, under color of any statute, ordinance, regu-

lation, custom, or usage, of any State . . . subjects, or

causes to be subjected any citizen of the United States or

other person within the jurisdiction thereof to the depri-

vation of any rights, privileges, or immunities secured by

the Constitution and laws, shall be liable to the party

injured in an action at law, suit in equity, or other proper

proceeding for redress.”

The relevant California statutory provisions are

reproduced in the appendix at A-77, and include Califor-

nia Labor Code sections 1720, 1727, 1729, 1730, 1731,

1732, 1733, 1771, 1772, 1773, 1773.2, 1774, 1775, 1776, and

1813, and California Civil Code sections 3103, 3181, 3184,

3186, 3210.

STATEMENT OF THE CASE

A. Facts

Petitioners are state officials and the state agencies,

the Division of Labor Standards Enforcement (“DLSE”)

7 i ha ent ae

Le ee pee ae

and the Department of Industrial Relations, responsible

for the enforcement of California’s prevailing wage law.

Respondent, G & G Fire Sprinklers, Inc. (“G & G”), is a

fire protection company that installs fire sprinkler sys-

tems. G & G both contracts directly with building owners

or, as here, does not contract directly with the building

owner but instead, agrees to perform the specialized

sprinkler installation as a subcontractor for a prime con-

tractor. When the building owner is a California govern-

mental entity, the construction work is a “public work.”

On public works, the prime contractor agrees, in its con-

tract with the governmental entity, that its construction

workers, and those of the subcontractors whom it later

selects to execute the contract, will be paid “prevailing

wages.”* (A-9,10.)

This case arose when DLSE, pursuant to California

Labor Code § 1727, and following investigations of pre-

vailing wage law violations concerning three separate

projects, issued notices to withhold public works contract

payments from the prime contractors because G & G, a

subcontractor, failed to pay prevailing wages to its

workers on all three projects, and in one of those projects

failed to provide DLSE with certified payroll records.

Following issuance of the notices to withhold, the award-

ing bodies for each of the projects withheld money from

the prime contractors. The prime contractors, in turn,

3 The term “public work” is defined at Cal. Labor Code

§ 1720 to include “construction, alteration, demolition, or repair

work done under contract and paid in whole or in part out of

public funds. ...”

4 Prevailing wages are fixed for each construction craft or

classification in the locality in which the public work is

performed. The procedure for determining prevailing wages is

set out at Cal. Labor Code § 1773.

withheld payments otherwise due under their sub-

contracts from G & G, as authorized by California Labor

Code § 1729.

The obligation to pay prevailing wages on a public

works project, and to provide DLSE with certified payroll

records, is founded upon both statute and contract. Cali-

fornia Labor Code sections 1771 and 1774 require contrac-

tors and subcontractors to pay prevailing wages to all

workers employed on a public works project. The

requirement to pay prevailing wages must be included as

an express stipulation in any such public works contract.

(Cal. Labor Code § 1773.2 and 1775).

In order to ensure the proper payment of prevailing

wages, all public works contractors and subcontractors

are required to keep certified payroll records showing the

names, job classifications, hours worked, and wages paid

to all workers employed on the project. (Cal. Labor Code

§ 1776(a)). These certified payroll records must be made

available, by the contractor and subcontractor, to DLSE

upon request. (Cal. Labor Code § 1776(b)). Every public

works contract must contain express stipulations con-

cerning the requirements to maintain and furnish DLSE

with copies of these certified payroll records. (Cal. Labor

Code § 1776(h)).

California Labor Code § 1775 provides for penalties if

workers are paid less than the prevailing wage, and

requires that every public works contract contain provi-

sions authorizing the imposition of these penalties. Like-

wise, as a matter of state law, all public works contracts

must contain provisions authorizing the imposition of

penalties for failure to provide DLSE with certified pay-

roll records. (Cal. Labor Code § 1776(g) and (h)). Further,

contractors and subcontractors are subject to a penalty if

any worker employed on a public works project is

required or permitted to work more than eight hours in

no es

FDS Se RR a ie lM RRR se

Te A a APD. dee AAT ss Dok ah

one day or 40 hours in one week. Here too, every public

works contract must contain a provision for the imposi-

tion of such penalties. (Cal. Labor Code § 1813).

Thus, all of the prime contractors that subcontracted

work to G & G had agreed to the following contractual

provisions in their public works contracts with the

respective awarding bodies: (1) that prevailing wages

would be paid to all workers employed on the project by

the prime contractor and its subcontractors, (2) that certi-

fied payroll records would be kept, and provided to

DLSE upon request, showing the hours worked and

wages paid to all workers employed on the project by the

prime contractor and its subcontractors, and (3) that the

public agencies that had awarded the contracts could

withhold contract payments to cover unpaid wages and

penalties if the agreements were breached. (A-19)

Pursuant to California Labor Code § 1727, the public

entity that awarded the contract must “withhold and

retain therefrom all wages and penalties which have been

forfeited pursuant to any stipulation in a contract for

public work, and the terms of this chapter.” The with-

holding must be preceded by a “full investigation” by

either DLSE or by the awarding body, except in the case

of a final payment.

A withholding of payments from a prime contractor

for unpaid prevailing wages and penalties can be chal-

lenged by filing a lawsuit to recover the withheld funds.®

(Cal. Labor Code § 1730-1733.) Any such funds withheld

> The public agency which is buying the construction work

(pursuant to the various specifications, including the agreement

to pay the prevailing wage) is buying the construction work

from the prime contractor — not its subcontractors, who may be

unknown to the public agency at the time the contract is

awarded. The withholding under Cal. Labor Code § 1727 is only

from payments to the prime contractor.

from a public works contractor must be retained by the

awarding body for 90 days following the completion of

the contract. During that period, the contractor or his or

her assignee may file a state court breach of contract

action against the awarding body to recover the withheld

funds. This breach of contract action “is the exclusive

remedy of the contractor or his or her assignees” for the

recovery of withheld wages and penalties. (Cal. Labor

Code § 1732.) The action may be filed “without permis-

sion from the state or other authority,” and it is “limited

to the recovery of the wages or penalties” without preju-

dice to any other rights or issues arising under the con-

tract. (Cal. Labor Code § 1733.) DLSE may defend the

lawsuit upon the request of the awarding body. If an

action is not brought within this retention period, the

awarding body must transfer the withheld funds to

DLSE, and DLSE in turn disburses the withheld unpaid

wages to the underpaid workers. If an action is brought

within the retention period, the money is held in escrow

until its resolution. These statutory provisions have been

in effect for over sixty years.

Pursuant to California Labor Code § 1729, a prime

contractor who has had a payment withheld by a public

agency, as a result of a subcontractor’s failure to comply

with its prevailing wage obligations, can in turn withhold

that amount from the funds the prime contractor would

otherwise owe to the subcontractor under the sub-

contract. With an assignment from the prime contractor,

the subcontractor can then file a breach of contract action

under California Labor Code § 1730-1733 to recover these

funds from the public agency. If the subcontractor pro-

ceeds by way of assignment, that lawsuit is the sub-

contractor’s exclusive remedy for the recovery of the

withheld funds. (Cal. Labor Code § 1732.) But if the

PETRA ETON RS Se ih iy nsyi chase Vis eladeaiainaania eared

subcontractor does not obtain an assignment, the sub-

contractor can pursue an alternative statutory remedy

under the California Civil Code, consisting of the right to

file a “stop notice”, setting forth the amount owed by the

prime contractor to the subcontractor for work performed

under the subcontract. The stop notice is filed with the

public agency that awarded the contract. (Cal. Civil Code

§ 3103, 3181, 3184.) Upon receipt of a timely stop notice,

the public agency is obligated to withhold from the prime

contractor an amount sufficient to pay the claim stated by

the subcontractor. (Cal. Civil Code § 3186.) The sub-

contractor may file “an action against the [prime] contrac-

tor and the public entity to enforce payment of the claim

stated in the stop notice . . . at any time after 10 days from

the date of the service of the stop notice upon the public

entity... . ” (Cal. Civil Code § 3210.)

The record herein contains no evidence (and no party

has alleged) that either G & G, or any of its prime

contractors, filed any state court actions claiming that

G &G had not violated the contract specifications so as to

be entitled to payment of the withheld amounts with

respect to the three public works contracts on which

funds were withheld. The evidence and pleadings do not

reveal that any breach of contract actions to recover the

withhheld amounts were filed pursuant to California

Labor Code § 1730-1733, or that G & G filed any stop

notices under the Civil Code in connection with any of

these public works contracts.

B. Proceedings Below

G & G brought this action for declaratory an@ injunc-

tive relief under 42 U.S.C. § 1983 and 28 ~ S.C.

§ 2201-2202, claiming that the issuance of the notices to

withhold without a prior hearing constitutes a depriva-

tion of property without due process of law, in violation

of the Fourteenth Amendment. The state responded with

a motion to dismiss, and G & G later filed a motion for

summary judgment. The district court denied the state’s

motion to dismiss and granted G & G’s motion for sum-

mary judgment. The district court’s judgment declared

sections 1727, 1730-1733, 1775, 1776(g) and 1813 of the

California Labor Code unconstitutional, and enjoined the

state from enforcing those statutes against G & G.

On February 3, 1998, Judge Hawkins, joined by Judge

Reinhardt, issued an opinion, in part affirming and in

part reversing the district court, and remanding the case

for further proceedings consistent with the opinion.

Judge Kozinski vigorously dissented. The panel majority

held that due process requires that the state provide a

subcontractor with either a pre- or prompt post-depriva-

tion hearing when withholding payments from a public

works contractor for unpaid wages or penalties. This

holding is founded upon the majority’s view that a sub-

contractor “has a property interest in being paid in full

for the construction work it completed,” and that this

interest, which “arises from its® public works contract,” is

protected by the due process clause. (A-50, italics and

footnote added.)” The panel concluded, however, that the

district court’s injunction was overbroad in that the chal-

lenged withholding provisions, while unconstitutional as

applied, were not facially invalid.

¢ No party contended at any stage in this litigation that

G &G, with respect to the three public works contracts at issue

herein, was anything but a subcontractor — i.e., that it (rather

than the prime contractors) had entered into any contracts with

these public agencies.

7 This quote is also found at A-17 in the Amended Opinion

that the Ninth Circuit issued on September 10, 1998. Subsequent

citations will refer only to the Amended Opinion.

In his dissent, Judge Kozinski protested the major-

ity’s “categorical approach that turns every right to

receive payment on a public works contract into a prop-

erty right protected by due process.” (A-35) Instead,

Judge Kozinski insisted that any rights arising under

commercial contracts, such as service contracts, material

supply contracts, and construction contracts, are not pro-

tected by the due process clause.

Judge Kozinski warned that the majority decision not

only conflicts with the opinions of other circuits, but that

it is “very bad policy” because it saddles the state, when

it engages in “the purely commercial activity of construc-

tion”, with “a burden not suffered by private builders”,

who routinely put provisions for payment withholdings

for failure (or suspected failure) of performance into their

private construction contracts. (A-36) Judge Kozinski

explained that payment withholdings are consistent with

the awarding bodies’ activities as market participants,

and that any contractor or subcontractor who objects to

provisions for withholdings is free not to do business

with the state. Consequently, a dispute over withholdings

is nothing more than a “run-of-the-mill contract dispute”,

for which the subcontractors’ remedy lies in a state court

breach of contract action against the prime contractor, or,

as an assignee of the prime contractor, against the award-

ing body. (A-37)

Finally, Judge Kozinski cautioned that drastic conse-

quences would result from the majority decision, as due

process requirements would inexorably apply to any

withholding of payments under a commercial contract

with the state, be it a withholding for failure to pay

prevailing wages, or in more mundane instances, a failure

to complete a project on time or a failure to comply with

applicable building codes.

The state petitioned for rehearing. This petition was

granted, and on September 10, 1998, the panel issued an

amended opinion and order. Once again, the panel split

with Judge Kozinski in the minority. The only significant

change in the majority’s opinion is its concession that

“the state’s interest in ensuring payment of prevailing

wages is sufficiently important to justify the withholding

of funds pending the outcome of whatever kind of hear-

ing may be afforded.” (A-22, internal citation and quota-

tion omitted.) Thus, the majority concluded that a pre-

deprivation hearing is not required, but that a prompt

post-deprivation hearing is necessary to satisfy due pro-

cess requirements.

In his dissent to this amended opinion, Judge

Kozinski found that under California law, every sub-

contractor who wishes to challenge a withholding has an

adequate state law remedy. Under California Labor Code

§ 1733, a subcontractor with an assignment from the

contractor can file a breach of contract action against the

awarding body to recover sums withheld.* Furthermore,

Judge Kozinski noted, any subcontractor unable to obtain

an assignment but whose payment had been withheld by

the prime contractor could bring suit against the award-

ing body under the theory of equitable subrogation.

The panel majority, however, concluded that even if

the aggrieved subcontractor could bring an action on the

contract, that would not be sufficient. While conceding

that the U.S. Supreme Court has held that in certain

circumstances, a post-deprivation state court action may

fulfill the requirements of due process, the majority held

* G & G never alleged that any of its prime contractors

refused, or for that matter, were ever asked to assign their rights

to G & G to bring contract actions against the awarding bodies

for the recovery of the withheld funds.

that the right to bring a breach of contract action to

recover withheld payments, when the withholding was

carried out by state officials pursuant to state policy, does

not provide adequate due process.

The state filed a timely petition for rehearing and

suggested rehearing en banc. On October 28, 1998, the

court entered an order denying the petition for rehearing,

though indicating that Judge Kozinski had voted to grant

the petition for rehearing and to accept the suggestion for

rehearing en banc.

REASONS FOR GRANTING THE WRIT

The Ninth Circuit held in this case that a commercial

contractor who claims that a public agency that has

breached a contract by failing to make payment is enti-

tled to more by the Fourteenth Amendment's Due Pro-

cess Clause than the opportunity to litigate its contract

dispute through an ordinary breach of contract lawsuit.

This novel holding is in conflict with the decisions of

every other circuit that has considered this issue. Both the

doctrinal and practical consequences of the holding make

this case worthy for review.

The impact of this Ninth Circuit decision carries far

beyond California’s borders. The issues of whether a

constitutionally protected property right can be founded

upon a commercial contract with a public entity, and if so,

whether existing state law breach of contract remedies

provide adequate due process, are of enormous conse-

quence to every state, county, city, school district, and

special use district in the nation. The G & G decision

constitutes an enormous departure from the conclusions

that every other circuit has reached when faced with

these questions. The Supreme Court has never addressed

these issues before. Determination of these issues by this

Court is now imperative.

A. Conflict Exists Among the Circuits as to

Whether Constitutionally Protected Property

Rights Can Be Founded Upon a Commercial

Contract With a State Agency.

There is a direct conflict between the decision of the

Ninth Circuit in this case and the decisions of the Second

Circuit in S & D Maintenance Co. v. Goldin, 844 F.2d 962

(2nd Cir. 1988), Martz v. Village of Valley Stream, 22 F.3d 26

(2nd Cir. 1994), and Christ Gatzonis Electrical Contractor,

Inc. v. New York City School Construction Authority, 23 F.3d

636 (2nd Cir. 1994). In each of these Second Circuit cases,

contractors? filed actions under 42 U.S.C. § 1983 against

public agencies that had withheld contract payments,

asserting that the withholdings without hearings consti-

tuted a violation of due process. The Second Circuit held

that the contractual relationship between a contractor and

a public agency does not create a constitutionally pro-

tected interest in the payment of sums allegedly due

pursuant the contract. In a nuanced analysis that distin-

guishes between ordinary contract rights and property

rights that are protected under the Due Process Clause,

the Second Circuit reasoned:

“An interest in enforcement of an ordinary com-

mercial contract with a state is qualitatively dif-

ferent from the interests the Supreme Court has

thus far viewed as “property” entitled to pro-

cedural due process protection. . . . [T]he Due

Process Clause is invoked to protect something

more than an ordinary contractual right. Rather,

°S & D Maintenance had a contract to maintain city

parking meters, Martz was a private attorney with a contract to

provide legal services for a municipality, and Christ Gatzonis

Electrical Contractor had construction contracts with the public

agency that oversees construction and repair work at city

schools.

cag sk i eh i gaa aad soe SNS, - Sioa thy La ae

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RA lh lateatin Buna s) asta prpeeentiass TEA ae

procedural protection is sought in connection

with a state’s revocation of a status, an estate

within the public sphere characterized by a

quality of either extreme dependence in the case

of welfare benefits, or permanence in the case of

tenure, or sometimes both, as frequently occurs

in the case of social security benefits. ... But we

hesitate to extend the doctrine further to consti-

tutionalize contractual interests that are not

associated with any cognizable status of the

claimant beyond its temporary role as a govern-

mental contractor.” S & D Maintenance Co.,

supra, 844 F.2d at 966-67.

This analysis, distinguishing ordinary contract rights

from the sort of property that is protected by due process,

resonates in the decisions of several other circuits. Justice

Breyer, then on the First Circuit, wrote: “A mere breach of

a contractual right is not a deprivation of property with-

ovt constitutional due process of law. . . . Otherwise

virtually every controversy involving an alleged breach

of contract by a government or governmental institution

or agency or instrumentality would be a constitutional

case.” Bleeker v. Dukakis, 665 F.2d 401, 403 (1st Cir. 1981).

The Seventh Circuit, in affirming the dismissal of a sec-

tion 1983 action brought by county employees asserting

that the county violated their due process rights by its

refusal to abide by a contract to permit time off in com-

pensation for overtime hours worked, cautioned that

“It]here is reason to doubt whether the Fourteenth

Amendment was intended to allow every person with a

breach of contract claim against a state to bring that claim

in federal Court”, and that the Amendment was “not

intended to shift the whole of the public law of the states

into the federal courts.” Brown v. Brienen, 722 F.2d 360,

364 (7th Cir. 1983).

The Third Circuit has likewise observed that “if

every breach of contract by someone acting under color

of state law constituted a deprivation of property for

procedural due process purposes, the federal courts

would be called upon to pass judgment on procedural

fairness of the processing of a myriad of contractual

claims against public entities,” and that the “wholesale

federalization of state public contract law seems far afield

from the great purposes of the due process clause.” Reich

v. Beharry, 883 F.2d 239, 242 (3rd Cir. 1989). Following this

analysis, the Third Circuit upheld a summary judgment

against a building contractor as to a section 1983 claim

asserting a protectable property interest in its contract

with a city housing authority, while permitting the con-

tractor’s claim for unpaid compensation for work

allegedly performed under the contract to proceed under

the state public contract law. Linan-Faye Construction Co.,

Inc. v. Housing Authority of the City of Camden, 49 F.3d 915

(3rd Cir. 1995). The court further held that whatever

severe consequential damages the contractor may have

suffered as a result of the housing authority’s allegedly

wrongful retention of the contractor’s performance bond,

that fact “cannot convert a contract claim into a depriva-

tion of liberty.” Ibid., at 932.

With its decision in G & G, the Ninth Circuit became

the only circuit to find a property right, protectable under

the Fourteenth Amendment, in a contract between a pub-

lic agency and a contractor. The Second and Third Cir-

cuits have both directly held otherwise in cases involving

public contractors’ claims for payment of amounts pur-

portedly owed pursuant to their contracts. The First and

Seventh Circuits have also reached conclusions contrary

to the holding of the G & G panel majority. Moreover, as

Judge Kozinski observed in his dissent, the Ninth Circuit

itself is now in disagreement on this issue. Prior to G & G,

the Ninth Circuit had stood in the mainstream of circuit

law on the issue. In San Bernardino Physicians’ Services

Medical Group, Inc. v. County of San Bernardino, 825 F.2d

1404, 1408 (9th Cir. 1987), the court explained “[e]ven

though every contract may confer some legal rights

under state law, that fact alone need not place all con-

tracts within federal due process protection.” In drawing

the line between those government contracts that may

create rights that are protected by the Fourteenth Amend-

ment and those that do not, the court focused on the

distinction between employment contracts and ordinary

commercial contracts, such as contracts to perform a con-

struction project or to supply the state with services or

materials. “The right of an individual not to be deprived

of employment that he or she has been guaranteed is

more easily characterized as a civil right, meant to be

protected by section 1983, than are many other contrac-

tual rights.” Ibid. at 1409. Consequently, “the farther the

purely contractual claim is from an interest as central to

the individual as employment, the more difficult it is to

extend it constitutional protection without subsuming the

entire state law of public contracts.” Ibid. Stemming from

this analysis, the court held that a corporation’s contract

to supply medical services to a county hospital does not

implicate any constitutionally protected interest, and that

such a “contract to supply services to the state cannot

sensibly be distinguished from construction contracts or

even purely material supply contracts, for purposes of

federal protection.” Ibid. at 1410.

The G & G panel majority abandoned this restrained

approach in favor of a sweeping expansion of property

rights and due process protections. Its holding rests

squarely on the existence of a public contract, a fact

common to all of the cases discussed above in which

every other circuit found no constitutionally protected

property rights. G & G’s constitutional claim, according

to the panel majority, “arises from its public works con-

tract; it has a property interest in being paid in full for the

construction work it has completed.”!° (A-17) Assuming,

arguendo, that a subcontractor that lacks privity of con-

tract with an awarding body can nonetheless assert a

claim based on the awarding body’s contract with the

prime contractor, the question that must be carefully

analyzed is whether, under either the public works con-

tract or applicable state law, there is an entitlement to

prompt payment in full once the job is purportedly com-

pleted. The answer to this question is that under the

California prevailing wage law, and under the contracts

that G & G rely on as a basis for its due process claim,

there is no entitlement to payment of sums withheld for

unpaid wages and penalties. These contracts expressly

provide for the withholding of payments to cover unpaid

wages and penalties. (A-19) The contractor’s right to

payment in full is contingent not only on completion of

10 Of course, the public works contracts upon which G & G

asserts this “property interest” were contracts between public

agencies and prime contractors, who in turn subcontracted part

of the work to G & G. The sums withheld by the public agencies

were withheld from the prime contractors in accordance with

the agencies’ contracts with the prime contractors. The fact that

there was no privity between G & G and the awarding bodies

was of no consequence to the panel majority. The decision is

thus fundamentally at odds with O’Bannon v. Town Court

Nursing Center, 447 U.S. 773, 788-789, 100 S.Ct. 2467, 2477, 65

L.Ed.2d 506 (1980), where, in holding that nursing home

residents had no constitutional right to a hearing to challenge a

government revocation of the nursing home’s authority to

provide them with nursing care at government expense, the

Supreme Court observed that in the Legal Tender Cases, 79 U.S.

(12 Wall.) 457, 551, 20 L.Ed. 287 (1870), “[o]ver a century ago this

Court recognized the principle that the due process

provision .. . does not apply to the indirect adverse effects of

governmental action.”

the work, but also on the contractor’s and its subcontrac-

tors’ compliance with prevailing wage and certified pay-

roll record keeping requirements.

In both S & D Maintenance and Christ Gatzonis Electri-

cal Contractor, the Second Circuit held that there can be

“‘no legitimate claim of entitlement’ to funds allegedly

due” pursuant to a “contract [that] vested the municipal

official with the discretion to withhold interim pay-

ments.” Christ Gatzonis Electrical Contractor, Inc., supra, 23

F.3d at 640. This holding stems from the application of the

well known test adopted in Board of Regents v. Roth, 408

U.S. 564, 576-78, 92 S.Ct. 2701, 2708-09, 33 L.Ed.2d 548

(1972). Under this test, “Property interests, of course, are

not created by the Constitution. Rather, they are created

and their dimensions are defined by existing rules or

understandings that stem from an independent source

such as state law... .” 408 U.S. at 577, 92 S.Ct. at 2709.

In contrast, the Ninth Circuit G & G panel majority

looks beyond state law, and beyond the state’s contracts,

to the Constitution as an independent source of property

rights. Ultimately unable to find any basis for G & G’s

asserted property interest in the provisions of the public

works contracts or in state law, the panel majority relies

on Sniadach v. Family Finance Corp., 395 U.S. 337, 89 S.Ct.

1820, 23 L.Ed.2d 349 (1969), to conclude that although

G & G has no right to prompt payment (and no right to a

deprivation hearing) under the state’s statutory scheme

(A-19), any withholding under this scheme is constitu-

tionally infirm. Sniadach, however, does not provide any

basis for peremptorily resolving this circuit conflict in

favor of the G & G panel majority. In a garnishment case

such as Sniadach, a creditor seeks to seize funds that are

indisputably owed by a third party to the debtor. The

funds being seized are the debtor’s property. In contrast,

in a public works contract case such as this, there is a

substantive dispute between the immediate parties to the

contract as to whether the contract requires payment of

the amounts withheld. The awarding body did promise to

make the payment; but the contractor promised that pre-

vailing wages would be paid and that certified payroll

records would be kept and made available as conditions

precedent to receiving payment. To say that the contrac-

tor is entitled to the withheld funds, and therefore that

the state’s failure to make payment has deprived the

contractor of its “property” without due process of law, is

to decide the merits of the substantive dispute — a dispute

founded upon a breach of contract claim — between the

contracting parties.

The Ninth Circuit mischaracterized the nature of the

“property interest” in this dispute. When the parties to a

bilateral contract dispute whether certain sums are owed

under that contract, those sums cannot fairly be said to be

the “property” of either party until the dispute is

resolved. The most that can be said is that the contractor

has a due process property interest in its claim for breach

of contract. See Logan v. Zimmerman Brush Co., 455 U.S.

422, 101 S.Ct. 1148, 71 L.Ed.2d 265 (1982). And, as dis-

cussed in subsection C, infra, a lawsuit in state court - a

-remedy that is available to any public works contractor or

subcontractor — is an adequate means of resolving the

disputed claim.

B. The Ninth Circuit’s Holding that the State, in

Enforcing the Provisions of a Public Works

Contract, Acts as a Regulator Rather than a

Market Participant, Conflicts With Applicable

Supreme Court Precedent.

Underlying the panel majority’s refusal to character-

ize this payment withholding as nothing more than a

garden-variety contract dispute is its insistence that

because the contractual provisions authorizing the with-

holding were required by state law, the state here is

acting as regulator, rather than as a mere party to a

contract. The majority thus recasts this contract dispute

as “a direct constitutional challenge to the state’s regula-

tory power as embodied in these statutes.” (A-19) And

that, for the majority, becomes dispositive — because the

contractual provisions for withholding payments had to

be inserted in the contracts as a matter of state law, the

state is precluded from enforcing these provisions with-

out a deprivation hearing. Since states, and their subordi-

nate parts, normally promulgate their standard contract

requirements by some official public means — statutes,

regulations, ordinances, or resolutions — the implications

of the Ninth Circuit’s holding are truly enormous. Judge

Kozinski’s dissent underscores the novelty of this hold-

ing, and the ways in which it subjects the state, in its role

as a market participant, to burdens not shared by any

private property developer.

Prevailing wage laws only apply to public works

projects, that is, to projects owned and funded by the

State or one of its political subdivisions. As Judge

Kozinski aptly pointed out in his dissent, in the area of

public works, the state is engaged in a commercial activ-

ity, and in that context, the state should be free to contract

under whatever terms it wishes, much the same as any

private builder, subject of course, to the same prohibi-

tions against unlawful discrimination that would apply to

any builder. The state should have the same freedom as

private parties to put both “traditional” and “exotic”

terms into a construction contract — terms that may

include the construction specifications, completion dates,

health and safety codes, building codes, record keeping

requirements, prevailing wage requirements, and pay-

ment withholdings for a breach of any of these terms. The

private builder who believes that a contractor has failed

to perform some part of the contract — for example, the

plumbing that was installed does not comply with the

applicable building code — may resort to “the standard

remedy” of withholding payments. There is no reason to

allow the state any less. As Judge Kozinski explained, the

fact that the California Labor Code requires the inclusion

of prevailing wage and payment withholding provisions

in all public works contracts is of no consequence,

because no contractor or subcontractor is forced to com-

ply unless he agrees to do business with the state.

Judge Kozinski’s dissent is founded upon the long

acknowledged right of a state to dictate the terms and

conditions for the performance of public works contracts.

In Atkin v. Kansas, 191 U.S. 207, 24 S.Ct. 124, 48 L.Ed. 148

(1903), the Supreme Court upheld a state law providing

for maximum hours of work and requiring minimum

rates of pay on public works projects. The Court stated:

“It cannot be deemed a part of the liberty of any

contractor that he be allowed to do public work

in any mode he may choose to adopt, without

regard to the wishes of the state. On the con-

trary, it belongs to the state, as the guardian and

trustee for its people, and having control of its

affairs, to prescribe the conditions upon which it

will permit public work to be done on its behalf,

or on behalf of its municipalities. No court has -

authority to review its action in that respect.”

191 U.S. at 222-223, 24 S.Ct. at 127-128.

In Perkins v. Lukens Steel Co., 310 U.S. 113, 127, 60

S.Ct. 869, 876, 84 L.Ed. 1108 (1940), the Court, in uphold-

ing the Public Contracts Act, observed, “[l]ike private

individuals and businesses, the government enjoys the

unrestricted power to . . . determine those with whom it

will deal, and to fix the terms and conditions upon which

it will make needed purchases.”

In commerce clause cases, the Court has recognized

this distinction between the special role of the state as a

“market participant” and its more general role as a regu-

lator, so that when the state is operating as a market

participant, buying or selling goods or services, “its busi-

ness methods .. . are of no greater constitutional concern

than those of a private business.” New Energy Company of

Indiana v. Limbach, 486 U.S. 269, 277, 108 S.Ct. 1803, 1809,

100 L.Ed.2d 302 (1993). These cases highlight “the sim-

ilarities of private businesses and public entities when

they function in the marketplace,” and hold that “when

acting as proprietors, States should similarly share exis-

ting freedoms from federal constraints. . . .” Reeves, Inc. v.

Stake, 447 U.S. 429, 439, 100 S.Ct. 2271, 2278-79, 65

L.Ed.2d 244 (1980).

Likewise, in its analysis of the preemptive effect of

certain federal laws, the Supreme Court has not hesitated

to distinguish between state proprietary and regulatory

functions, recognizing that, as a general matter, federal

statutes are not to be construed as preempting state

actions that are undertaken in its proprietary capacity.

Thus, in Building & Construction Trades Council v. Assoct-

ated Builders and Contractors, 507 U.S. 218, 113 S.Ct. 1190,

122 L.Ed.2d 565 (1993) [“Boston Harbor”], the Court

explained:

“To the extent that a private purchaser may

choose a contractor based upon that contractor’s

willingness to enter into [specific contractual

terms], a public entity as purchaser should be

permitted to do the same. .. . In the absence of

any express or implied indication by Congress

that a State may not manage its own property

when it pursues its purely proprietary interests,

and where analogous private conduct would be

permitted, this Court will not infer such a

restriction.” 507 U.S. at 231-232, 113 S.Ct. at

1198. (emphasis in original.)

Thus, when purchasing construction services, a public

entity that requires contractors to enter into a specific

agreement in order to obtain the contract, “does not

‘regulate’ the workings of the market forces . . . it exem-

plifies them.” Ibid., 507 U.S. at 233, 113 S.Ct. at 1199,

quoting from the Court of Appeals dissent authored by J.

Breyer in the case below.

In withholding payments in the amount of any

unpaid wages plus pre-established penalties, pursuant to

express contractual provisions, the state’s public agencies

were only doing what any private builder could have

done. The well-settled principles enunciated in Atkin,

Lukens, and the more contemporary cases spring from a

simple concept: when the state is operating in the mar-

ketplace in the same manner as a private business, it will

function at a disadvantage, to the detriment of the citi-

zens it serves, if it is held to a different standard, in the

conduct of its proprietary functions, than a private busi-

ness. The G & G decision is fundamentally at odds with

this concept.

In failing to see this dispute for what it is — a contract

dispute between a public works subcontractor and public

agencies in their role as market participants, the panel

majority has opened the floodgates to a deluge of consti-

tutional claims involving contractors’ and subcontractors’

newly created property rights. As Judge Kozinski makes

clear, under the logic of this decision, deprivation hear-

ings will invariably be required whenever a_ public

agency seeks to withheld contract payments as a conse-

quence of the contractor’s breach. And as long as the

contract provisions at issue are required or inserted pur-

suant to state law or local ordinances (e.g., workplace

health and safety laws, anti-discrimination laws, building

and fire codes, workers’ compensation insurance require-

ments, licensing and bonding requirements, etc.), the

Ninth Circuit would find not a contract dispute, but “a

direct constitutional challenge to the state’s regulatory

power.” (A-19) The ostensible limits placed on this deci-

sion by the majority are not limits at all, and in short

order, virtually every commercial contract dispute involv-

ing a public agency will be cloaked in constitutional

trappings.

C. Conflict Exists Among the Circuits as to

Whether a Breach of Contract Action to Recover

Amounts Purportedly Due Under a Contract

With a Public Agency Provides a Sufficient

Remedy.

The G & G panel majority held that a state court

breach of contract action to recover the withheld funds

does not provide adequate due process. Because the

Court of Appeal viewed the availability of a breach of

contract lawsuit as insufficient to satisfy due process, it

failed to focus on what should have been the dispositive

issue in this case: whether state law does provide such a

remedy to a public works subcontractor. G & G claimed

that state law provided it with no remedy at all in the

hypothetical event of a contractor refusing to assign its

contract claiin. The Ninth Circuit expressed “doubt” that

a subcontractor without an assignment would have any

remedy, based on the absence of state law on this issue.

(A-24) The question, though, in a due process case is

whether the plaintiff has been denied due process, not

whether such a denial might theoretically occur. And a

plaintiff certainly does not sustain its burden in a facial

due process attack on state statutes merely by demon-

strating ambiguity, even if that ambiguity leads to some

“doubt” as to whether the state scheme would meet con-

stitutional standards in practice. Rather, considerations of

judicial restraint and respect for state sovereignty require

that the plaintiff actually prove the non-existence of an

adequate state procedural remedy, or at the very least,

allege that some attempt was made to secure its rights

through existing state remedies.

Here, there is no evidence in the record (nor any

allegation in the pleadings) that G & G attempted to

obtain the assignments from the prime contractors that it

claimed to need. Nor does the record contain any evi-

dence (or allegation) that G & G sought to pursue any of

its state law remedies in the absence of such an assign-

ment. Three separate state law remedies were available.

First, G & G could have sued its prime contractors for

breach of contract to recover the withheld payments. Cal.

Labor Code § 1729 does no more than permit a prime

contractor to withhold payments from a subcontractor

“on account of the subcontractor’s failure to comply with

the terms of this chapter” — it does not permit the with-

holding absent such a failure to comply, nor does it make

the withholding unchallengeable. Second, as noted by

Judge Kozinski, a subcontractor whose payments are

withheld can bring an action against the awarding body

under Cal. Labor Code § 1730-1733 under a theory of

equitable subrogation, by operation of law and without a

formal assignment. Lastly, a subcontractor without an

assignment has an unconditional statutory right, under

the California Civil Code, to file a “stop notice” with the

awarding body, setting forth the amount owed by the

public works prime contractor for work performed under

the subcontract. (Cal. Civil Code § 3103, 3181, 3184.) The

subcontractor may file “an action against the [prime]

contractor and the public entity to enforce payment of the

claim stated in the stop notice.” (Cal. Civil Code § 3210.)

Thus, the majority's finding that “the Labor Code does not

grant subcontractors the right to any type of hearing to

contest a withholding” (A-15, italics added), even if cor-

rect, misses the fact that the Civil Code already provides

subcontractors with such a remedy. The effectiveness of

the stop notice as a remedy is well established under

California law See, e.g., United States Fidelity & Guaranty

Co. v. Oak Grove Union School Dist., 205 Cal.App.2d 226, 22

Cal.Rptr. 907 (1962) [the filing of a stop notice imposes a

trust obligation on the public agency in favor of the

claimant]; Stanislaus Pump, Machinery & Construction

Corp. v. City of Modesto, 200 Cal.App.3d 1442, 246

Cal.Rptr. 601 (1988) [public entity has an absolute statu-

tory duty to pay the valid amounts to stop notice claim-

ants and to no one else}.

The Ninth Circuit panel majority’s most critical fail-

ing, however, is not its misreading of California law, but

rather, its holding that even had G & G obtained assign-

ments to file breach of contract lawsuits against the

awarding bodies, that would not constitute adequate due

process. (A-23) In this regard too, this decision stands in

conflict with the law of other circuits. In Brown v. Brienen,

supra, 722 F.2d 360, the Seventh Circuit held that even if a

county’s denial of time off for overtime worked by

county employees could be said to implicate any property

rights (a proposition the court found extremely doubtful),

the availability of a post-deprivation state court action for

breach of contract which could make the employees

whole for any losses provided an adequate remedy that

satisfied the requirements of due process. Likewise, in

Reich v. Beharry, supra, 883 F.2d 239, 242-243, the Third

Circuit, after expressing “considerable doubt” that a pri-

vate attorney had a protectable property interest in the

payment of amounts allegedly due as a result of work he

had performed under a contract with a county, held that

the availability of a breach of contract remedy in state

court under which he could be made whole for the

unpaid fees provides “all the process that was constitu-

tionally due.”

The panel majority, while acknowledging that the

state has an overwhelming interest in ensuring that con-

tract funds will be available to pay amounts believed to

be due to employees for wage underpayments, and that

this interest is sufficiently important to justify the with-

holding of funds without a pre-deprivation hearing,

nonetheless holds that an administrative hearing must be

afforded promptly following the withholding, and that a

post-deprivation lawsuit fails to provide the requisite due

process.

The adequacy of post-deprivation state court

remedies is an issue that has come before this Court on a

number of occasions. This case presents the Court with an

opportunity, for the first time, to address this issue in the

context of an alleged deprivation of property founded

upon a commercial contract with a state entity."

In Parratt v. Taylor, 451 U.S. 527, 101 S.Ct. 1908, 68

L.Ed.2d 420 (1981), overruled in part on other grounds by

Daniels v. Williams, 474 U.S. 327, 106 S.Ct. 662, 88 L.Ed.2d

662 (1986), the Court recognized that under certain cir-

cumstances, “postdeprivation remedies made available

by the State can satisfy the Due Process Clause.” 451 U.S.

at 538, 101 S.Ct. at 1914. The Court reasoned that, “either

the necessity of quick action by the State or the imprac-

ticality of providing any meaningful predeprivation pro-

cess, when coupled with the availability of some

meaningful means by which to assess the propriety of the

'! An academic commentator’s detailed examination of this

issue concluded that “[cjontractual interests, though protected

by the Constitution, receive adequate protection in state court

post-deprivation proceedings.” Kreynin, Breach of Contract as a

Due Process Violation: Can the Constitution Be a Font of Contract

Law?, 90 Colum. L. Rev. 1098, 1122 (1990).

State’s action at some time after the initial taking, can

satisfy the requirements of procedural due process.” 451

U.S. at 539, 101 S.Ct. at 1915. The Court held that

although an action under section 1983 might provide

more relief than a state tort action, the available state

remedies “could have fully compensated the respondent

for the property loss he suffered, and we hold that they

are sufficient to satisfy the requirements of due process.”

451 U.S. at 544, 101 S.Ct. at 1917.

In Hudson v. Palmer, 468 U.S. 517, 104 S.Ct. 3194, 82

L.Ed.2d 393 (1984), like Parratt, the Court found the avail-

ability of a post-deprivation state tort action that could

provide compensation for the loss constitutes sufficient

due process with respect to prisoners’ claims of wrongful

destruction of property by prison officers. To be sure,

part of the rationale behind these decisions was that the

alleged destruction of the property did not stem from the

proper implementation of an established state procedure,

but rather, from the unauthorized and unanticipated acts

of state employees.

But the fact that the challenged state action is autho-

rized by state law and implemented in an anticipated

way by state employees consistent with established

methods does not necessarily mean that a state court

post-deprivation remedy is inadequate. For example, in

Ingraham v. Wright, 430 U.S. 651, 97 S.Ct. 1401, 51 L.Ed.2d

711 (1977), the Court held that state tort remedies pro-

vided adequate process for students subjected to corporal

punishment in school. Having concluded that a pre-disci-

plinary administrative hearing was not required, the

Court could have insisted on a post-disciplinary hearing.

it did not, as a post-disciplinary tort action could ade-

quately compensate the student for the wrongful imposi-

tion of discipline.

In cases where the Supreme Court has distinguished

Parratt and Hudson, the available state court remedy

could not provide adequate compensation for the depri-

vation. Thus, in Logan v. Zimmerman Brush Co., 455 U.S.

422, 435-37, 101 S.Ct. 1148, 1157-58, 71 L.Ed.2d 265 (1982),

the Court, after observing that a post-deprivation tort

remedy was not capable of making the plaintiff whole,

held that the availability of such a remedy did not satisfy

the requirements of due process. The deprivation consis-

ted of a state administrative agency’s wrongful failure to

proceed on a claim that was filed, within the agency’s

jurisdiction, against an employer for having discharged

the claimant in violation of the state’s anti-discrimination

laws. The Court noted that reinstatement was not an

available remedy under a tort claim, and thus, even a

successful lawsuit could not provide him with the relief

that would have been available but for the state’s depri-

vation of his right to proceed on his anti-discrimination

claim.

Likewise, in Zinermon v. Burch, 494 U.S. 113, 110 S.Ct.

975, 108 L.Ed.2d 100 (1990), a sharply divided Court held

that allegations in a mental patient’s complaint, that

employees of a state mental treatment facility admitted

him to the facility as a voluntary patient without taking

any steps to ascertain whether he was mentally compe-

tent to sign admission forms, were sufficient to state a

section 1983 claim, notwithstanding the availability of

post-deprivation tort remedies. In ascertaining the ade-

quacy of the state’s post-deprivation tort remedies, the

Court applied the familiar tripartite test set forth in

Mathews v. Eldridge, 424 U.S. 319, 335, 96 S.Ct. 893, 903, 47

L.Ed.2d 18 (1976), weighing the following factors:

“First, the private interest that will be affected

by the official action; second, the risk of an

erroneous deprivation of such interest through

the procedures used, and the probable value, if

any, of additional or substitute procedural safe-

guards; and finally, the Government's interest,

including the function involved and the fiscal

and administrative burdens that the additional

or substitute procedural requirement would

entail.” Zinermon v. Burch, supra, 494 U.S. at 127,

110 S.Ct. at 984.

Not surprisingly, in applying this test to a situation where

the deprivation consisted of an extremely lengthy stay in

a mental institution, the Court concluded that the state’s

post-deprivation tort remedy was inadequate.

In contrast to plaintiffs’ injuries in Logan and Ziner-

mon, the nature of the deprivation allegedly suffered by G

& G is wholly compensable through the state’s post-

deprivation breach of contract remedy. Having concluded

that a pre-deprivation hearing is not required under the

Mathews test, the Ninth Circuit nonetheless insists upon a

post-deprivation administrative hearing, despite the fact

that such a process offers no remedy beyond what could

be attained by a state court breach of contract action.

Here, as in Parratt, the necessity for quick action is cou-

pled with the availability of a “meaningful means” by

which to assess the propriety of the state’s challenged

action. The statutory remedy offers a streamlined process

for obtaining a judicial determination of the dispute. As

set out at California Labor Code § 1733, an action is

“limited to the recovery of the wages and penalties with-

held,” and “no other issues shall be presented to the

court.” Thus, the awarding body is precluded from rai-

sing counterclaims concerning any other alleged failure

of performance. It is a one issue case that may be brought

“without the permission of the state or other authority.”

(Cal. Labor Code § 1733.) And although there is no reason

to believe (and no evidence or even allegation in the

record) that a subcontractor without a formal assignment

from its prime contractor has ever been prohibited from

pursuing an action under California Labor Code

§§ 1730-1733, the availability of the Civil Code stop notice

procedures provide guaranteed access to court for every

such subcontractor seeking to pursue a breach of contract

claim.

The Ninth Circuit’s refusal to follow the holdings of

those other circuits that have concluded that a state court

breach of contract action provides a sufficient remedy,

and all the process that is due to a contractor challenging

the state’s failure to make payments allegedly owed

under a commercial contract, will result in an enormous

burden to states, counties, cities, and all other public

agencies that award contracts. Sadly, this burden on the

federalist value of allowing states to choose between an

administrative or judicial remedy is unnecessary, as such

administrative hearings will provide nothing to contrac-

tors and subcontractors beyond what they can already

obtain through existing state court remedies.

CONCLUSION

For the reasons stated above, this Petition for Writ of

Certiorari should be granted.

Respectfully submitted,

Mixes E. Locker, Chief Counsel

Division of Labor Standards Enforcement

Department of Industrial Relations

State of California

45 Fremont Street, Suite 3220

San Francisco, California 94105

(415) 975-2060

A-l

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

G & G Fire Sprinkcers, INc.,

Plaintiff-Appellee,

- No. 95-56639

Victoria L. BRADSHAW, an D.C. No

individual, in her capacity as On sere}

Labor Commissioner of the State CV-95-04899-MLR

of California; LLoyp W. Ausry, Jr., ORDER AND

Director; Danie. DeLLARoOccA, an AMENDED

individual, in his official capacity OPINION

)

as Deputy Labor Commissioner of

the State of California; Rocer

Miter, an individual in his official

capacity as Deputy Labor

Commissioner of the State of

California; Rosa Frazier, an

individual in her capacity as

Deputy Labor Commissioner of

the State of California,

Defendants-Appellants.

A-2

G & G Fire Sprinkters, INc.,

Plaintiff-Appellee,

Victoria L. BRADSHAW, an

individual, in her official capacity

as Labor Commissioner of the

State of California; LLoyp W.

Aupsry, Jr., an individual, in his

official capacity as Director of the

Department of Industrial Relations

of the State of California; DANrEL

DeELLAROCCA, an individual, in his

official capacity as Deputy Labor

Commissioner of the State of

California; RoGer MILLER, an

individual in his official capacity

as Deputy Labor Commissioner of

the State of California; Rosa

Frazier, an individual in her

official capacity as Deputy Labor

Commissioner of the State of

California; Division or Lasor

STANDARDS ENFORCEMENT, an agency

of the State of California;

DEPARTMENT OF INDUSTRIAL

RELATIONS, an agency of the

State of California,

Defendants-Appellants.

No. 96-55194

D.C. No.

CV-95-04839-R

Appeals from the United States District Court

for the Central District of California

Manuel L. Real, Chief District Judge, Presiding

A-3

No. 95-56639

Argued and Submitted

May 7, 1996 — Pasadena, California

No. 96-55194

Submitted August 27, 1997*

Pasadena, California

Filed February 3, 1998

Amended September 10, 1998

Before: Stephen Reinhardt, Alex Kozinski and

Michael Daly Hawkins, Circuit Judges.

Opinion by Judge Hawkins; Dissent by Judge Kozinski

COUNSEL

Thomas S. Kerrigan, State of California Department of

Industrial Relations, Los Angeles, California for the

defendants-appellants.

Stephen A. Seideman, Levin, Stein, Chyten & Schneider,

Los Angeles, California, for the plaintiff-appellee in No.

95-56639.

Thomas J. McDermott and Harvey Rochman, Manatt,

Phelps & Phillips, Los Angeles, California, for the plain-

tiff-appellee in No. 96-55194.

William P. Gemmill, Gascou, Gemmill & Thornton, Los

Angeles, California, for the plaintiff-appellee on rehear-

ing.

*The panel finds this case appropriate for submission

without argument pursuant to Fed. R. App. P. 34(a) and Ninth

Circuit Rule 34-4.

A-4

Scott A. Kronland, Altshuler, Berzon, Nussbaum, Berzon

& Rubin, San Francisco, California, for the amici curiae

on rehearing.

ORDER

The Opinion filed on February 3, 1998, and appearing

at 136 F.3d 587 (9th Cir. 1998), is amended as follows:

(1) Page 591, second column — the counsel listing is

revised as follows:

Thomas S. Kerrigan, State of California Department of

Industrial Relations, Los Angeles, California for the

defendants-appellants.

Stephen A. Seideman, Levin, Stein, Chyten & Schneider,

Los Angeles, California, for the plaintiff-appellee in No.

95-56639.

Thomas J. McDermott and Harvey Rochman, Manatt,

Phelps & Phillips, Los Angeles, California, for the plain-

tiff-appellee in No. 96-55194.

William P. Gemmill, Gascou, Gemmill & Thornton, Los

Angeles, California, for the plaintiff-appellee on rehear-

ing.

Scott A. Kronland, Altshuler, Berzon, Nussbaum, Berzon

& Rubin, San Francisco, California, for the amici curiae

on rehearing.

(2) Page 596, first column, lines 29-31 — revise sen-

tence to read “This case thus involves a direct constitu-

tional challenge to the state’s regulatory power as

embodied in these statutes, not a mere contractual dis-

pute.”

A-5

(3) Page 597, second column, between the first full

paragraph and the second full paragraph — insert:

Here, we have no doubt that the state’s

interest in ensuring the payment of prevailing

wages is sufficiently “important,” see Mallen, 486

U.S. at 240, to justify the withholding of funds

pending the outcome of whatever kind of hear-

ing may be afforded. Whether a hearing is

before or after the giving of notice or the actual

withholding is a matter for the state to deter-

mine on the basis of the practical considerations

involved. See, e.g., Gilbert v. Homar, 117 S. Ct.

1807, 1812 (1997) (citing Morissey v. Brewer, 408

U.S. 471, 481 (1972)).

(4) Page 597, second column, second full paragraph,

line 1 — insert “however,” between “case,” and “sub-

contractors”

(5) Page 598, first column, first paragraph — delete

paragraph beginning “What specific type of process” and

ending “payments and assessing penalties.10” and substi-

tute in its place:

Although the decision as to which specific

type of hearing will be afforded subcontractors

may depend upon the factual circumstances, the

state must, upon determining that a subcontrac-

tor has failed to pay prevailing wages, provide

the contractor with a reasonably prompt hearing

of some sort.!° Pending the outcome of such a

hearing, the state may withhold payments and

penalty funds.!!

A-6

The corresponding footnotes are as follows:

10 The question of when a post-deprivation

hearing is adequate is separate from the ques-

tion of what constitutes a sufficient post-depri-

vation procedure. The Supreme Court has made

it clear that no single model is required in all

cases, but that the nature of the deprivation and

the other underlying circumstances dictate how

much process is due. See Logan v. Zimmerman

Brush Co., 455 U.S. 422, 434 (1982) (citing Mem-

phis Light, Gas & Water Div. v. Craft, 436 US. 1,

19 (1978); Goss v. Lopez, 419 U.S. 565, 579 (1975)).

‘1 Contrary to the state’s concerns, our deci-

sion today does not affect the validity of the

Davis-Bacon Act, 40 U.S.C. §§ 276a et seq., upon

which the California law was patterned, because

the Davis-Bacon Act provides for an extensive

hearing and appeal structure through its imple-

menting regulations. Within 30 days after a

withholding, either the prime contractor or the

subcontractor may request an administrative

hearing to review the findings of the Adminis-

trator of the Wage and Hour Division of the

Department of Labor. 29 C.F.R. § 5.11. The find-

ings and rulings of the administrator may be

appealed to an administrative law judge

(“ALJ”), whose decision may be appealed to the

Wage Appeals Board. Id. Ultimately, the Board’s

decision may be appealed to the federal court. 5

U.S.C. § 704.

(6) Page 598, footnote 9, second paragraph - delete

paragraph beginning “Moreover, even if Parratt and Hud-

son were” and ending “have no such independent right”

and substitute in its place:

A-7

Moreover, we doubt the viability of a sub-

contractor’s hypothetical suit against a prime

contractor based on theories of breach of the

covenant of good faith and fair dealing or equi-

table subrogation. The state and amici curiae

have been unable to cite a single California case

utilizing either theory in this context. The prime

contractor could easily defeat any breach of cov-

enant suit by demonstrating that its withholding

of payment was authorized by law. See § 1729.

And the facts of this case clearly do not meet the

traditional elements of equitable subrogation.

See Caito v. United California Bank, 576 P.2d 466,

471 (Cal. 1978).

OPINION

HAWKINS, Circuit Judge:

This case requires us to decide whether certain Cali-

fornia Labor Code provisions, authorizing the state to

seize money and impose penalties for a subcontractor’s

failure to comply with prevailing wage requirements,

violate the Due Process Clause of the Fourteenth Amend-

ment because no notice or hearing is required before such

adverse action is taken. Specifically, Victoria L. Bradshaw,

Labor Commissioner of the State of California, and others

appeal the district court’s order granting summary judg-

ment in favor of G & G Fire Sprinklers, Inc. (“G & G”),

the public works subcontractor here, and permanently

enjoining Bradshaw from enforcing California Labor

Code §§ 1727, 1730-33, 1775, 1776(g) and 1813 against

G & G for alleged violations of California prevailing wage

laws. We hold that G & G has standing to maintain this

action and that due process requires either a pre- or post-

A-8

deprivation hearing, but that the district court’s injunc-

tion should be narrowed to apply only until such time as

the state may adopt by regulation or otherwise appropri-

ate procedures affording such hearings.

I. Facts

A. The Parties

Appellee G & G is a fire protection company that

installs fire sprinkler systems. G & G has performed

numerous public works projects as a contractor or sub-

contractor. Appellants are the California Division of

Labor Standards Enforcement (“DLSE”), Department of

Industrial Relations, and officials thereof (collectively

“the state”).

B. The California Labor Code

The California Labor Code requires contractors and

subcontractors on public works projects to pay a state-

determined prevailing wage to’ all their workers. Cal.

Lab. Code § 1771. To enforce this requirement, the body

awarding the contract (“the awarding body”) is allowed

to withhold funds from a prime contractor should it

determine that the contractor or one of its subcontractors

has violated the prevailing wage law. § 1727. The state is

authorized to withhold an amount equal to the total

amount that all the workers have been underpaid, as well

as up to $50 per day, per worker in fines for each instance

in which the contractor fails to pay the prevailing wage.

§ 1775. A withholding order can only be issued after a

full investigation by DLSE or the awarding body, unless

A-9

the withholding is from the final payment to be made to

the prime contractor. § 1727. If the violator is a sub-

contractor, the prime contractor is authorized to withhold

an equivalent amount from its payments to the sub-

contractor~§ 1729. All of these provisions must be incor-

porated into all public works contracts. Cal. Admin.

Code, Title 8, § 16430.

A notice to withhold to an awarding body is a stan-

dard procedure utilized by DLSE, but no notice or hear-

ing is required prior to its issuance. DLSE is not required

to produce any evidence of a violation of the law, no

specific standard is applied in determining whether to

issue a notice to withhold, and no procedure exists to

guard against the issuance of improper or excessive

notices to withhold. Moreover, while DLSE has no formal

procedures for conducting investigations, as a general

rule, information from a witness/informant must be veri-

fied with an independent source. In addition, recommen-

dations to withhold must be reviewed by a supervisor.

The exclusive remedy after withholding is a lawsuit

by the prime contractor against the awarding body for

wcovery of the money withheld. §§ 1730-33. Such a suit

must be filed within 90 days of the withholding, and the

contractor bears the burden of establishing that there was

no violation. § 1733. DLSE may defend the lawsuit upon

request by the awarding body. Id. Subcontractors are not

given the right to bring suit, although a prime contractor

is allowed to assign its right to sue. Id. If a suit is not

brought within 90 days, the state disburses the withheld

funds to the underpaid workers; if a suit is brought

within this period, then the money is held in escrow until

its resolution. § 1731.

A-10

C. The Dispute

This case arose when DLSE issued three withholding

notices against G & G for a total of at least $120,000. The

notices were for three separate projects on which G & G

had served as a subcontractor.! The awarding bodies for

each of the projects have withheld money from the prime

contractors, who in turn have withheld payment from

G & G. No evidence in the record explains in detail the

basis for the state’s decision to withhold funds from

G &G.

The issuance of the notices to withhold has a sub-

stantial detrimental effect on G & G's ability to do busi-

ness, as their effect is to reduce, or cut off, payments for

work performed and to damage G & G’s reputation in the

industry. Inasmuch as G & G intends to perform further

public works projects in the future, the issuance of addi-

tional improper notices to withhold also could impair

G & G’s cash flow and ability to do business.

G & G filed this action for declaratory and injunctive

relief, claiming that the issuance of the notices to with-

hold without a prior hearing constitutes a deprivation of

property without due process of law in \.olation of the

Fourteenth Amendment. The state responded with a

motion to dismiss, and G & G later filed a motion for

summary judgment. The district court granted G & G’s

motion for summary judgment and denied the state’s

motion to dismiss. The district court’s judgment declares

' Withholding notices had also been issued on projects on

which G & G had served as the prime contractor, but those

notices were withdrawn before this suit ensued.

A-11

sections 1727, 1730-33, 1775, 1776(g) and 1813 of the Cali-

fornia Labor Code and the state’s practices thereunder

unconstitutional and enjoins the state from enforcing

these sections against G & G.

II. Standing

We first address whether G & G has standing to

maintain this action.? The state argues G & G does not

have standing because subcontractors lack privity of con-

tract with the state under the Labor Code and because the

state withheld monies from the prime contractors, not

G & G, thus precluding any direct causal connection

between G & G's alleged injury and the state’s conduct.

Standing is a question of law that we review de novo.

Sahni v. American Diversified Partners, 83 F.sa 1054, 1056

(9th Cir. 1996). To establish standing, a federal plaintiff

must show (1) an injury in fact; (2) a causal connection

2 We note at the outset that whether a party has standing is

a separate question from whether a party has an interest

protected by the Due Process Clause — here, a property interest.

“Standing to bring a state court claim of deprivation of property

rights does not establish a protected property interest.” Kim

Constr. Co. v. Board of Trustees, 14 F.3d 1243, 1249 (7th Cir. 1994).

Moreover, that a party has no constitutionally protected

property interest under a statute does not mean that it has no

standing to bring a claim under that statute. See id.

Accordingly, cases such as O’Bannon v. Town Court Nursing

Ctr., 447 U.S. 773 (1980), and San Bernardino Physicians’ Servs.

Med. Group, Inc. v. County of San Bernardino, 825 F.2d 1404 (9th

Cir. 1987), which the state cites to argue that G & G has no

standing, are inapposite because they address whether parties

have protectible property interests, not standing.

A-12

between the injury and the conduct complained of; and

(3) that it is ikely, as opposed to speculative, that the

injury will be redressed by favorable decision. Lujan v.

Defenders of Wildlife, 504 U.S. 555, 560-61 (1992).

To establish injury in fact, a plaintiff must demon-

strate that the injury is “concrete and particularized” and

that it is “actual or imminent, not conjectural or hypo-

thetical.” Id. at 560. The injury here is both concrete and

actual. As a result of the state’s withholding procedures,

G & G has not been paid approximately $120,000, to

which it claims it is entitled. G & G meets the first

requirement for standing.

A plaintiff must also show that the injury “fairly can

be traced to the challenged action of the defendant” and

that it does not result “from the independent action of

some third party not before the court.” Simon v. Eastern

Kentucky Welfare Rights Org., 426 U.S. 26, 41-42 (1976). The

Supreme Court detailed the methodology to be followed

in determining causation in a case of this type:

When the suit is one challenging the legality of

government action or inaction, the nature and

extent of the facts that must be averred (at the

summary judgment stage) .. . in order to estab-

lish standing depends considerably upon

whether the plaintiff is himself an object of the

action (or forgone action) at issue. If he is, there

is ordinarily little question that the action or

inaction has caused him injury, and that a judg-

ment ... will redress it. When ... a plaintiff's

asserted injury arises from the government's

allegedly unlawful regulation (or lack of regula-

tion) of someone else, much more is needed. In

that circumstance, causation and redressability

A-13

ordinarily hinge on the response of the regu-

lated (or regulable) third party to the govern-

ment action or inaction .. . it becomes the

burden of the plaintiff to adduce facts showing

that those choices [of the third party] have been

or will be made in such manner as to produce

causation and permit redressability of injury.

Lujan, 504 U.S. at 561-62 (emphasis in original).

The state contends that G & G cannot establish causa-

tion because this case involves the state’s regulation of a

third party, the prime contractors, whose own indepen-

dent choices are an intervening cause of G & G’s injury.

Specifically, the state cites California Labor Code § 1729,

which states that “[i]t shall be lawful for any contractor to

withhold from any subcontractor under him sufficient

sums to cover any penalties withheld from him”

(emphasis added), in support of its argument that the

prime contractors were not required to withhold money

from G & G and that their decision to do so was the true

cause of G & G's injury.

This argument elevates form over substance. The

state’s action here is targeted at G & G; the p-vime contrac-

tors’ only role in the dispute is that of a conduit, not some

third party whose independent choices caused G & G’s

injury. The state investigated G & G’s conduct, not the

prime contractors’, and the withholding notices explicitly

named G & G as the violator of the California Labor

Code. G & G was clearly the “object of the action” as the

Supreme Court used the term. As such, the state’s con-

duct is the cause of G & G’s injury: the money would not

A-14

have been withheld but for the state’s actions.* That was

the intended result of the state’s action, in accordance

with the overarching purpose of its regulatory scheme to

ensure that prime contractors and subcontractors pay

their workers the state-determined prevailing wage.

Even if we somehow assume that G & G is not itself

the object of the action, but is indirectly affected by the

state’s regulation of the prime contractors, our conclusion

would be the same. That the harm to G & G may have

resulted indirectly does not in itself preclude standing.

As the Supreme Court stated in Warth v. Seldin, 422 U.S.

at 505:

When a governmental prohibition or restriction

imposed on one party causes specific harm to a

third party, harm that a constitutional provision

or statute was intended to prevent, the indirect-

ness of the injury does not necessarily deprive

the person harmed of standing to vindicate his

rights.

* This case differs from those in which the Supreme Court

has found the requisite “but for” causation lacking. See, e.g.,

Asarco, Inc. v. Kadish, 490 U.S. 605 (1989) (individual taxpayers

and teachers’ organization lacked standing to challenge Arizona

land management statute when only alleged injuries were

increased taxes and reduced school funding because of

impossibility of showing statute had direct causal impact on

taxes or school funding); Simon, 426 U.S. at 26 (plaintiffs lacked

standing to sue due to inability to establish causal relationship

between IRS ruling and hospitals’ decisions not to provide

treatment); Warth v. Seldin, 422 U.S. 490 (1975) (plaintiffs

asserting inability to find homes in city based on exclusionary

zoning practices failed to establish causation).

A-15

Furthermore, G & G can show that the prime contractors’

(third party) choices “have been or will be made in such a

manner as to produce causation and permit redressability

of injury.” Lujan, 504 U.S. at 562. Here, the prime contrac-

tors have withheld payment from G & G, completing the

causal link between G & G's injury and the state’s action

and permitting redressability. Accordingly, G & G’s injury

can be directly traced to the state’s conduct and the

second requirement for standing is also satisfied.

To meet the third requirement for standing, a plaintiff

must show that his injury will be redressed if he prevails

in his legal action. In this case, G & G’s injury will be

redressed by this suit because if G & G prevails, the

withheld money will be released to the prime contractors,

who will be obligated by contract to pay it to G & G.

That G & G as a subcontractor lacks privity of con-

tract with the state only bolsters our conclusion. Under

California’s Labor Code, subcontractors cannot sue the

state for withholding funds; only prime contractors can.

A subcontractor theoretically could sue the prime con-

tractor, but the latter has a defense of withholding the

funds pursuant to state law. In addition, the Labor Code

does not grant subcontractors the right to any type of

hearing to contest a withholding. Therefore, if a prime

contractor chooses not to contest a withholding or to

assign its rights to sue to the subcontractor, the sub-

contractor is left holding a quite empty bag.4

4 The state cites Lloyd v. Stewart & Nuss, Inc., 327 F.2d 642,

645-46 (9th Cir. 1964), for the proposition that a subcontractor

has no property right to funds withheld by an awarding body

A-16

G & G has standing to maintain this suit.

III. Due Process Claim

A due process claim has two elements: (1) a depriva-

tion of a protectible interest, and (2) denial of adequate

procedural protections. See Goldberg v. Kelly, 397 U.S. 254

(1970). We consider each of these elements in turn.

A. Protectible Interest

To determine whether G & G has suffered a depriva-

tion of a protectible interest, we must evaluate (1) what

type of interest has been deprived, and (2) whether that

and hence has no standing to challenge such a withholding. We

reject this argument for several reasons.

First, Lloyd is a bankruptcy case holding that amounts

withheld from a prime contractor by the state upon request of a

trucking service doing work for a subcontractor did not

constitute property owned or possessed by the debtor

subcontractor and hence the bankruptcy court had no summary

jurisdiction over the property. The case does not even involve

constitutional issues, let alone due process concerns, and it

never discusses standing. Second, even if we were to deem Lloyd

remotely relevant to this case, its decision that the subcontractor

debtor had no property right in the debt owed to the prime

contractor by the state sheds no light on whether a

subcontractor has a protectible property interest in wages

withheld from it pursuant to state law. In fact, Lloyd

acknowledges that the subcontractor and the trucking service

“both possessed the right to claim against the fund, but only in

the event they were not paid by their respective principal

obligors.” Id. at 646. Here, G & G was not paid by its respective

principal obligor, the prime contractor, and it is asking for an

opportunity to contest that deprivation.

A-17

interest is protected by the Due Process Clause. Board of

Regents of State Colleges v. Roth, 408 U.S. 569-70 (1972).

G & G's interest arises from its public works contract; it

has a property interest in being paid in full for the

construction work it has completed. See Sniadach v. Family

Finance Corp., 395 U.S. 337, 342 (1969) (holding that Wis-

consin’s garnishment procedure allowing wages to be

frozen upon request of creditor’s lawyer constituted

“obvious” deprivation of property). The state’s withhold-

ing of over $120,000 has deprived G & G of its interest in

full payment for services rendered.

The state quite properly notes, however, that not all

property interests are protected by the Due Process

Clause. While both federal and California law recognize

that a contract with the state can create a constitutionally

protected property interest, Perry v. Sindermann, 408 U.S.

593, 601 (1972); Walker v. Northern San Diego County Hosp.

Dist., 185 Cal. Rptr. 617, 620 (1982), not all public con-

tracts give rise to a protectible due process interest. See

San Bernardino Physicians’ Servs. Med. Group, Inc., 825 F.2d

at 1408. Indeed, because any breach of contract claim

against the state logically can be construed as a due

process claim, “ ‘we must bear in mind that the Four-

teenth Amendment was not intended to shift the whole of

the public law of the states into the federal courts.’ ” Id.

(quoting Brown v. Brienen, 722 F.2d 360, 364 (7th Cir.

1983)).

Even though every contract may confer some

legal rights under state law, that fact alone need

not place all contracts within federal due pro-

cess protection. Although the underlying sub-

stantive interest is created by an independent

A-18

source such as state law, federal constitutional

law determines whether that interest rises to the

level of a legitimate claim of entitlement pro-

tected by the Due Process Clause.

Id. at 1408-09 (internal quotations omitted).

Drawing on these principles, the state asserts that

because the withholding procedure at issue is contained

in G & G's contract, this case is nothing more than a

contractual dispute that does not rise to the level of a

constitutional claim. Moreover, the state argues that con-

struing this case to present a constitutional claim would

result in the “federalization” of state contract law by

giving G & G and all others who contract with the state

an opportunity to have their grievances reviewed in fed-

eral court when they should be confined to their contrac-

tually bargained-for remedies under state law. This

argument, however, misses the mark. Unlike the cases

cited by the state, this case does not involve a breach of

contract claim or a challenge to the contract itself.5 G & G

° All the cases cited by the state to support its argument

that G & G's interest is not constitutionally protected involve

due process claims arising from an alleged breach of contract.

See, e.g., Unger v. National Residents Matching Program, 928 F.2d

1392, 1399 (3d Cir. 1991) (termination of residency program after

plaintiff's acceptance into program failed to implicate due

process rights because contract with university hospital did not

confer protected status and did not include provision of for-

cause termination only); S & D Maintenance Co. v. Goldin, 844

F.2d 962, 968-69 (2d Cir. 1988) (contractor alleging state

breached contract by withholding funds pending result of

criminal investigation failed to establish due process claim

because neither contract nor state law contained for-cause

termination provision or right to prompt payment); San

A-19

concedes that the express terms of the contract grant the

state the authority to withhold funds for wage violations;

the withholding is not a breach of contract.® Instead,

G & G challenges the constitutionality of several provi-

sions of the California Labor Code as violative of its

federal due process rights.’ Those provisions, incorpo-

rated by state law into all public works contracts, autho-

rize the state to withhold payment of money owed to

contractors or subcontractors for alleged violations of the

state prevailing wage law. This case thus involves a direct

constitutional challenge to the state’s regulatory power as

embodied in these statutes, not a mere contractual dis-

pute.

The state, relying on O'Bannon, 447 U.S. at 773, also

contends that G & G’s property interest is not protectible

because this case involves the indirect effects of state

action. In O'Bannon, the Supreme Court reiterated the

principle that “the due process provision of the Fifth

Amendment does not apply to the indirect adverse effects

Bernardino Physicians’ Servs. Med. Group, Inc., 825 F.2d at 1406

(physicians’ group’s challenge to termination of service contract

with state did not implicate due process interest because status

of employees depended entirely upon their contracts with

group, not upon contracts between group and state).

* G &G points out that a prime contractor has none of the

usual breach of contract remedies. It may not declare a material

breach by the awarding body for withholding payments and it

may not rescind the contract. The prime contractor must

continue to perform, to pay for labor and materials, even if

payments have been cut off. The exclusive remedy is a lawsuit.

Cal. Labor Code §§ 1731-33.

7G & G's complaint seeks declaratory relief from the

“facial unconstitutionality of state laws.”

A-20

of governmental action.” 447 U.S. at 789. Specifically, the

Court held that residents of a nursing home that had its

license revoked did not have a right to a hearing because

the revocation “did not directly affect the patients’ legal

rights or deprive them of any constitutionally protected

interest in life, liberty, or property.” Id. at 790. It further

stated, “[T]he fact that the decertification of a home may

lead to severe hardship for some of its elderly residents

does not turn the decertification into a governmental

decision to impose that harm.” Id. at 789. In a footnote,

however, the Court expressly noted:

We of course need not and do not hold that a

person may never have a right to a hearing

before his interests may be indirectly affected by

government action. Conceivably, for example, if

the Government were acting against one person

for the purpose of punishing or restraining

another, the indirectly affected individual might

have a constitutional right to some sort of hear-

ing. But in this case the Government is enforcing

its regulations against the home for the benefit

of the patients as a whole and the home itself

has a strong financial incentive to contest its

enforcement decision; under these circum-

stances the parties suffering an indirect adverse

effect clearly have no constitutional right to par-

ticipate in the enforcement proceedings.

Id. at n.22.

The state’s reliance on O'Bannon is misplaced.*

Unlike the nursing home residents in that case, G & G is

* The other cases cited by the state are similarly inapposite.

See Castaneda v. United States Dept. of Agric., 807 F.2d 1478 (9th

Cir, 1987) (employee of convenience store who was fired after

A-21

the target of the state’s action here. Hence there is no

“indirect” governmental action despite the presence of

the prime contractors in the chain of causation. Even if

we were to accept the state’s contention that its withhold-

ing of funds constitutes indirect action, such action

would fall within the category expressly left open by the

O'Bannon Court — action taken by the government against

one party for the purpose of punishing or restraining

another. Either way, we hold that G & G has suffered a

deprivation of a protectible property interest as a result

of the state’s action.

B. Process Due

We now examine whether the state accorded G & G

due process when it effected this deprivation. As a gen-

eral rule, the Due Process Clause requires that individ-

uals rereive notice and a meaningful opportunity to be

heard before the government deprives them of property.

United Stu.es v. James Daniel Good Real Prop., 510 U.S. 43,

48 (1993). Twenty five years ago, the Supreme Court

announced an exception to this rule for “extraordinary

situations where some valid governmental interest is at

stake.” Fuentes v. Shevin, 407 U.S. 67, 82 (1972) (quoting

Boddie v. Connecticut, 401 U.S. 371, 378-79 (1971)). More

store was disqualified from food stamp program did not have

right to hearing even though employee's fraudulent conduct

was cause of termination); Grove City College v. Bell, 687 F.2d 684

(3d Cir. 1982), aff'd, 465 U.S. 555 (1984) (students of college that

refused to comply with requirements of federal student aid

program did not have right to hearing before college's eligibility

to receive student aid was revoked).

A-22

recently, the Court has refined the exception: “An impor-

tant government interest, accompanied by a substantial

assurance that the deprivation is not baseless or unwar-

ranted, may in limited cases demanding prompt action

justify postponing the opportunity to be heard until after

the initial deprivation.” Federal Deposit Ins. Corp. v. Mal-

len, 486 U.S. 230, 240 (1988). Over the years, the Court has

broadened this exception considerably, frequently hold-

ing a post-deprivation hearing to be sufficient. Compare

Board of Regents, 408 U.S. at 570 n.7 (describing use of

exception as “rare”), with e.g., Barry v. Barchi, 443 U.S. 55

(1979) (holding that state’s interest in preserving integrity

of sport of horse racing justifies lack of pre-deprivation

hearing), and Mallen, 486 U.S. 230 (holding that state’s

interest in maintaining public confidence in bank man-

agement justifies post-deprivation hearing for removal of

bank manager).

Where extraordinary circumstances justify dispens-

ing with a pre-deprivation hearing, however, a prompt

post-deprivation hearing must be provided. See Mallen,

486 U.S. at 242. In determining whether a post-depriva-

tion hearing procedure is reasonably prompt, a court

should “examine the importance of the private interest

and the harm to this interest occasioned by delay; the

justification offered by the Government for delay and its

relation to the underlying governmental interest; and the

likelihood that the interim decision may have been mis-

taken.” Id.

Here, we have no doubt that the state’s interest in

ensuring the payment of prevailing wages is sufficiently

“important,” see Mallen, 486 U.S. at 240, to justify the

withholding of funds pending the outcome of whatever

A-23

kind of hearing may be afforded. Whether a hearing is

before or after the giving of notice or the actual withhold-

ing is a matter for the state to determine on the basis of

the practical considerations involved. See, e.g., Gilbert v.

Homar, 117 S. Ct. 1807, 1812 (1997) (citing Morrissey v.

Brewer, 408 U.S. 471, 481 (1972)).

In this case, however, subcontractors like G & G are

afforded neither a pre- nor post-deprivation hearing

when payments are withheld. Once the state determines

that a violation of the prevailing wage law has occurred,

it may withhold and disburse money directly to the

workers and may impose fines both without providing

any hearing at which the subcontractor might challenge

the validity of the state’s finding. Accordingly, sub-

contractors have no opportunity to be heard at a mean-

ingful time in a meaningful manner. See Fuentes, 407 U.S.

at 80. This scheme violates the Due Process Clause of the

Fourteenth Amendment.’

% Cal. Lab. Code §§ 1730-33. The state’s argument that due

process is satisfied because an aggrieved party may bring a suit

on the contract is unavailing. The state relies on Parratt v. Taylor,

451 U.S. 527 (1981), overruled in part on other grounds by Daniels v.

Williams, 474 U.S. 327 (1986), and Hudson v. Palmer, 468 U.S. 517

(1984), which held that in certain circumstances, a post-

deprivation remedy under state law may fulfill the require-

ments of due process. We have stated, however, that “[wJe

apply Parratt and Hudson only when the state administrative

machinery did not and could not have learned of the

deprivation until after it occurred, not when state officials acted

pursuant to state policy and followed state procedures they

believed were proper.” Knudson v. City of Ellensburg, 832 F.2d

1142, 1149 (9th Cir. 1987) (internal quotations omitted). There is

no question here, and the state does not contest, that the officials

A-24

Although the decision as to what specific type of

hearing will be afforded subcontractors may depend

upon the factual circumstances, the state must, upon

determining that a subcontractor has failed to pay pre-

vailing wages, provide the contractor with a reasonably

prompt hearing of some sort.!° Pending the outcome of

such a hearing, the state may withhold payments and

penalty funds.!!

in this case acted pursuant to state policy and followed state

procedures. Thus, Knudson forecloses the state’s argument.

Moreover, we doubt the viability of a subcontractor’s

hypothetical suit against a prime contractor based on theories of

breach of the covenant of good faith and fair dealing or

equitable subrogation. The state and amici curiae have been

unable to cite a single California case utilizing either theory in

this context. The prime contractor could easily defeat any

breach of covenant suit by demonstrating that its withholding

of payment was authorized by law. See § 1729. And the facts of

this case clearly do not meet the traditional elements of

equitable subrogation. See Caito v. United California Bank, 576

P.2d 466, 471 (Cal. 1978).

!0 The question of when a post-deprivation hearing is

adequate is separate from the question of what constitutes a

sufficient post-deprivation procedure. The Supreme Court has

made it clear that no single model is required in all cases, but

that the nature of the deprivation and the other underlying

circumstances dictate how much process is due. See Logan v.

Zimmerman Brush Co., 455 U.S. 422, 434 (1982) (citing Memphis

Light, Gas & Water Div. v. Craft, 436 U.S. 1, 19 (1978); Goss v.

Lopez, 419 U.S. 565, 579 (1975)).

1! Contrary to the state’s concerns, our decision today does

not affect the validity of the Davis-Bacon Act, 40 U.S.C. §§ 276a

et seq., upon which the California law was patterned, because

the Davis-Bacon Act provides for an extensive hearing and

appeal structure through its implementing regulations. Within

30 days after a withholding, either the prime contractor or the

A-25

IV. Other Issues Raised by the State

The state asserts that G & G’s summary judgment

motion was premature and hence should have been

denied. Federal Rule of Civil Procedure 56(a) allows a

motion for summary judgment to be made any time more

than twenty days after commencement of the action.

G & G’s motion complied with this rule and with the

notice requirements under Local Rule 7.4.!2 Moreover, the

state did not file a Rule 56(f) declaration indicating why it

needed discovery and the facts it hoped to discover.

Given the state’s receipt of adequate notice and an oppor-

tunity to respond to the motion, and its failure to file a

Rule 56(f) declaration, the di. trict court did not err in

considering the summary judgment motion.

The state also contends that the individual defen-

dants in this case are entitled to qualified immunity.

“Qualified immunity is an affirmative defense to damage

liability; it does not bar actions for declaratory or injunc-

tive relief.” American Fire, Theft & Collision Managers, Inc.

v. Gillespie, 932 F.2d 816, 818 (9th Cir. 1991) (internal

subcontractor may request an administrative hearing to review

the findings of the Administrator of the Wage and Hour

Division of the Department of Labor. 29 C.F.R. § 5.11. The

findings and rulings of the administrator may be appealed to an

administrative law judge (“ALJ”), whose decision may be

appealed to the Wage Appeals Board. Id. Ultimately, the Board’s

decision may be appealed to the federal court. 5 U.S.C. § 704.

2G & G points out that it had filed essentially the same

motion in a prior case, relying om the same authorities cited

here. Thus, the state was aware of G & G’s argument and the

authorities on which it relied.

A-26

quotation omitted) (emphasis added). Therefore, the indi-

vidual defendants cannot claim qualified immunity as an

affirmative defense to this action seeking declaratory and

injunctive relief.

In addition, the district court did not err in denying

the state’s motion to dismiss. The state asserts that

defects on the face of the complaint mandated its dis-

missal, but these alleged defects relate to issues such as

standing, whether G & G was deprived of any constitu-

tional right, and the qualified immunity defense. To the

extent that we have decided all of these issues in G & G’s

favor, we affirm the district court’s decision.

V. The Injunction

The district court’s judgment declared seven separate

provisions of the California Labor Code unconstitutional

and enjoined the state from enforcing any of those provi-

sions against G & G. The state argues that the injunction

is overbroad, and we agree.

When a federal court holds that a constitutional vio-

lation has occurred, the nature of the remedy it grants

must be determined by the nature and the scope of the

constitutional violation. Milliken v. Bradley, 433 U.S. 267,

280 (1977); see also Califano v. Yamasaki, 442 U.S. 682, 701

(1979) (“[T]he scope of injunctive relief is dictated by the

extent of the violation established. ... ”). In devising a

remedy for constitutional violations by state agencies or

officials, the court “must take into account the interests of

state and local authorities in managing their own affairs,

consistent with the Constitution.” Id.

A-27

The district court’s injunction here was overbroad in

two respects. First, by invalidating all California Labor

Code provisions relating to the withholding procedure,

the district court created a remedy beyond what was

required to address the constitutional violation — the

state’s failure to provide subcontractors like G & G a pre-

or post-deprivation hearing as required by the Due Pro-

cess Clause. Declaring the withholding provisions to be

unconstitutional as applied is sufficient relief, as it allows

the state to remedy the violation by adopting regulations

providing for a pre- or post-deprivation hearing and to

manage its own affairs in a manner consistent with the

Constitution. See Milliken, 433 U.S. at 280.

Second, the district court issued a permanent injunc-

tion prohibiting the state from enforcing the withholding

provisions against G & G. The sweeping nature of this

relief suggests that even if the state were to provide

G & G with an extensive hearing procedure, it still would

be enjoined from penalizing G & G for noncompliance

and noncooperation, from obtaining the disputed funds

from the awarding body, and from disbursing back wages

to underpaid workers even if G & G did not contest the

withholding. In short, the district court has simply pro-

hibited the state from enforcing the prevailing wage law

against G & G. The appropriate course in this case, given

all the circumstances, would be to enjoin the state from

enforcing the withholding provisions against G & G

unless within a reasonable period it chooses to adopt

procedures that afford G & G and others either a pre- or

post-deprivation hearing, and to specify the time within

which the state must do so.

A-28

We vacate the district court’s injunction and remand

for a modification in the manner stated.

VI. Attorney Fees

in a companion appeal that has been submitted on

the briefs and consolidated with this case, the state con-

tests the district court’s award of attorney fees toG & G

following its grant of a permanent injunction in G & G’s

favor. Specifically, the state asserts that the district court

abused its discretion in (1) determining that G & G was

the prevailing party under 42 U.S.C. § 1988; (2) awarding

attorney fees in light of G & G’s alleged failure to satisfy

the applicable criteria for such relief; and (3) awarding

attorney fees to G & G for work performed in a previous

lawsuit alleging identical claims for relief against the

same defendants.

A. Procedural History

In December 1994, G & G filed a lawsuit entitled

G & G Fire Sprinklers, Inc. v. Juan Garza et al., No.

CV-94-8542 R (“the Garza lawsuit”). G & G’s claims in the

Garza lawsuit were the same as those presented in this

case. The Garza lawsuit ended in a settlement agreement

providing that G & G could refile the lawsuit if the state

took further action against G & G, which is precisely

what happened. The s\ate’s further action — a subsequent

notice to withhold — prompted G & G to file the present

action.

After the district court’s grant of the injunction, the

state filed a motion to stay the judgment in this Court,

A-29

which was denied by a motions panel. Next, the district

court issued an attorney fees award totaling $25,830.28,

which is the subject of this appeal. Subsequently, we

reconsidered our previous denial of the motion to stay

the judgment, granted a stay pending appeal, and set the

case for an early hearing on the merits.

B. Prevailing Party

The state argues that G & G is not a prevailing party

under 42 U.S.C. § 1988 because while it received the relief

it requested — an injunction — the staying of that injunc-

tion somehow nullified its legal effect or its mandate that

the state alter its unlawful conduct. We reject this argu-

ment.

In Farrar v. Hobby, the Supreme Court held that to be

considered a prevailing party, a plaintiff must “obtain an

enforceable judgment against the defendant from whom

fees are sought, or comparable relief through a consent

decree or settlement.” 506 U.S. 103, 111 (1992) (citations

omitted). “In short, a plaintiff ‘prevails’ when actual relief

on the merits of his claim materially alters the legal

relationship between the parties by modifying the defen-

dant’s behavior in a way that directly benefits the plain-

tiff.” Id. at 111-12.

Here, G & G obtained an injunction from the district

court, which materially altered the legal relationship

between the parties by prohibiting the state from depriv-

ing G & G of property without any hearing. Certainly that

change benefitted G & G and it is the prevailing party. See

Herrington v. County of Sonoma, 883 F.2d 739, 744 (9th Cir.

1989) (injunction, which appellate court upheld, rendered

A-30

plaintiffs prevailing parties despite vacatur of damage

award); see also Baumgartner v. Harrisburg Hous. Auth., 21

F.3d 541, 543 (3d Cir. 1994) (plaintiff who has received

injunctive relief has prevailed for purposes of section

1988). That a stay was issued after the district court's

grant of the injunction does not alter G & G’s status as the

prevailing party in the district court, as the district

court’s judgment is a statement of the rights of the parties

unless and until that judgment is altered by a higher

court. We have decided not to do so.

C. General Award of Fees

The state also claims that the district court erro-

neously awarded attorney fees based solely on the decla-

ration of Stephen A. Seideman (“Seideman declaration”),

G & G’s attorney in the district court.'> More specifically,

the state argues that the Seideman declaration fails to

discuss many of the factors discussed in Kerr v. Screen

Extras Guild, Inc., 526 F.2d 67, 69-70 (9th Cir. 1975), to be

considered by a district court in awarding attorney fees.

These include: (1) the time and labor required; (2) the

novelty and difficulty of the questions; (3) the skill requi-

site to perform the legal services properly; (4) the preclu-

sion of other employment due to acceptance of the case;

(5) the customary fee; (6) the contingent or fixed nature of

the fee; (7) the limitations imposed by the client or the

case; (8) the amount involved and the results obtained;

13 The state does not dispute any specific items, such as the

services provided or the hourly rate, or the total amount of fees;

it simply asserts that G & G's evidence was not sufficient to

support an award of fees.

A-31

(9) the experience, reputation, and ability; (10) the unde-

sirability of the case; (11) the nature of the professional

relationship with the client; and (12) awards in similar

cases.

A district court, however, need not discuss each and

every factor separately in making its decision. Rather, a

strong presumption exists that the lodestar (reasonable

number of hours times reasonable hourly rate) represents

a reasonable fee, and “many of these factors usually are

subsumed” within the lodestar calculation. Jordan v. Mult-

nomah County, 815 F.2d 1258, 1262 (9th Cir. 1987) (quoting

Hensley v. Eckerhart, 461 U.S. 424, 434 (1983)). Thus, G&G

only had to prove that its hourly rate was reasonable and

that the total number of hours expended was reasonable.

See Dennis v. Chang, 611 F.2d 1302, 1308 (9th Cir. 1980)

(award of attorney fees properly granted where based

solely on skill and experience of counsel, rates of com-

pensation “typical” of those charged by attorneys for

comparable service, and reasonable amount of time

spent).

Nevertheless, we agree with the state that G & G did

not satisfy its “burden of producing satisfactory evidence,

in addition to the affidavits of its counsel, that the requested

rates are in line with those prevailing in the community

for similar services of lawyers of reasonably comparable

skill and reputation.” Jordan, 815 F.2d at 1263 (emphasis

added). The only evidence in the record about the hourly

rate is Mr. Seideman’s statement in his declaration that

“[t]he hourly rates which I billed Plaintiff are equal to or

less than those generally billed by attorneys in Los

Angeles for similar services,” and a similar statement

A-32

with regard to the paralegal’s hourly rates. These state-

ments constitute an “insufficient basis from which to

conclude that the rates requested are ‘reasonable.’ ”

Southerland v. International Longshoremen’s and Warehouse-

men’s Union, 845 F.2d 796, 801 (9th Cir. 1987). Therefore,

while G & G certainly is entitled to fees, we remand to

the district court the issue of whether the claimed hourly

rates are reasonable. On remand, both G & G and the

State should be allowed to supplement the record with

additional evidence so that the district court can reevalu-

ate the reasonableness of the fees requested.

In addition, we do not find persuasive the state's

related argument that the California Division of Labor

Standards Enforcement (“DLSE”) and the Department of

Industrial Relations were not made parties to the present

suit until the First Amended Complaint on September 7,

1995 and hence should not be held accountable for any

fees incurred prior to that time. We hold that these parties

are jointly and severally liable for the fees, given that the

work involved aided in the preparation of the case

against all the defendants and the case was not one in

which the claims against each defendant varied or one

defendant was more culpable than another. See Woods v.

Graphic Communications, 925 F.2d 1195, 1207 (9th Cir.

1991) (defendant liable for fees previously incurred

where fees assisted in preparing case against defendant

and served as developmental work for case).

A-33

D. Award of Fees for Work Performed in Previous Law-

suit

The state asserts that the district court should not

have allowed G & G to recoup attorney fees from the

Garza lawsuit given that it did not prevail in that lawsuit.

We uphold the district court’s decision.

In Webb v. Board of Educ., 471 U.S. 234, 243 (1985), the

Supreme Court affirmed a district court’s decision to

deny attorney fees for time spent pursuing optional

administrative remedies, specifically school board pro-

ceedings. But the Court noted that the petitioner in that

case “made no suggestion below that any discrete portion

of the work product from the administrative proceedings

was work that was both useful and of a type ordinarily

necessary to advance the civil rights litigation to the stage

it reached before settlement,” id., suggesting that if that

had happened, maybe the result would have been differ-

ent. We followed the Supreme Court’s lead in Rock Creek

Ltd. Partnership v. State Water Resources Control Bd., 972

F.2d 274, 279 (9th Cir. 1992), holding that a sponsor of a

hydroelectric project was not entitled to attorney fees

under §§ 1983 and 1988 for administrative proceedings

before FERC. We reasoned that the FERC proceeding was

not a condition precedent to plaintiff’s entry to federal

court, nor was it a part of a continuing federal court

action. Because the FERC proceeding was not related or

dependent, it could not form the basis for attorney fees.

Id.

Cases from other circuits have addressed sin ilar fee

issues in non-administrative contexts. For example, the

Third Circuit held in Keenan v. City of Philadelphia, 983

A-34

F.2d 459, 474 (3d Cir. 1992), that the district court did not

abuse its discretion in including the time spent in labor

arbitration in its fee calculation. It based its decision on

the following interpretation of Webb by the Third Circuit:

“IFjor the time spent pursuing optional administrative

proceedings properly to be included in the calculation of

a reasonable attorney's fee, the work must be ‘useful and

of a type ordinarily necessary’ to secure the final result

obtained from the litigation.” Pennsylvania v. Delaware

Valley Citizens’ Council for Clean Air, 478 U.S. 546, 561

(1986). In addition, the Eighth Circuit briefly addressed a

similar situation in Perkins v. Cross, 728 F.2d 1099, 1100

(8th Cir. 1984), an action by picketers against municipal

officials for violation of their civil rights. The court held

that fees could be awarded for any “time the lawyer

spent defending the plaintiffs in the original municipal

court proceeding to the extent, if any, that research or

investigation done in connection with that proceeding

proved directly relevant to the successful prosecution of

[their] later civil rights claims.” Id.

Here, G & G made a showing that the work done in

the Garza lawsuit was directly related to the present

action — the atlegations in that suit were identical to those

made here. Counsel for G & G stated that the legal

research and analysis performed in Garza were necessary

for this action and accordingly saved him from expending

more time on this lawsuit. Thus, unlike the Rock Creek

case, the prior proceeding here was related to the present

action. The two can even be viewed as a continuum of

proceedings necessary to achieve the relief finally

granted, given that the Garza case ended in a settlement

stating that if the state took further action, G & G could

A-35

refile the lawsuit, which is what happened. Moreover,

caselaw reveals no requirement that a party must have

prevailed in a prior proceeding to use that as a basis for

attorney fees in another action.

AFFIRMED IN PART, REVERSED AND REMANDED

IN PART. Costs to Appellee G & G Fire Sprinklers, Inc.

KOZINSKI, Circuit Judge, dissenting.

In San Bernardino Physicians’ Services Medical Group v.

County of San Bernardino, 825 F.2d 1404 (9th Cir. 1987), we

held that “[iJt is neither workable nor within the intent of

section 1983 to convert every breach of contract claim

against a state into a federal claim.” Id. at 1408 (footnote

omitted). While we recognized that any contract with the

state gives rise to what could be characterized as a prop-

erty interest, we held that thi: alone is not a basis for

invoking the protections of due process. Rather, the inter-

est in question must fall within a narrow category that

might fairly be characterized as a civil right, see id. at

1409, a right in public employment being the quintessen-

tial example. See id. (citing Board of Regents v. Roth, 408

U.S. 564 (1972), and Perry v. Sindermann, 408 U.S. 593

(1972)). San Bernardino said that “construction contracts

[and] purely material supply contracts” — contracts like

the one we have here - do not create rights protected by

the due process clause. Id. at 1410.

The majority abandons San Bernardino’s nuanced

framework in favor of a categorical approach that turns

every right to receive payment on a public works contract

into a property right protected by due process: “G & G’s

interest arises from its public works contract; it has a

property interest in being paid in full for the construction

A-36

work it has completed.” Maj. op. at 10658. The opinion

thus conflicts with San Bernardino, as well as the opinions

of two other circuits. See Mid-American Waste Sys., Inc. v.

City of Gary, 49 F.3d 286, 291 (7th Cir. 1995); Walentas v.

Lipper, 862 F.2d 414, 418 (2d Cir. 1988); S & D Maintenance

Co. v. Goldin, 844 F.2d 962, 966 (2d Cir. 1988).

It is also very bad policy. The state here is engaged in

a commercial activity; it holds no special sway over other

parties by virtue of its regulatory powers. In carrying out

its project, the state has bargained for the construction to

be done according to plan, on schedule, and consistent

with health and safety codes; these are ordinary terms

just like the ones private parties put into their construc-

tion contracts. The state has also bargained for a more

exotic term, namely that contractors and subcontractors

pay a prevailing wage to their employees. While this

differs from what ordinarily appears in private construc-

tion contracts, it is not an exercise of the state’s regula-

tory power; rather, it is a term that any private party

could equally well put into its contract. If the contractor

or subcontractor doesn’t like the term, he can refuse to do

business with the state.'

Here the state determined that G & G did not comply

with its prevailing wage obligation, and thus withheld

payments. This is no different from a builder’s refusal to

make progress payments when he discovers (or believes

he has discovered) a failure of performance on any other

term of a standard construction contract - for example,

1 That the prevailing wage term appears in the California

Labor Code doesn’t matter. No one is forced to comply unless he

agrees to do business with the state.

A-37

that the plumbing isn’t up to code. Withholding pay-

ments under such circumstances is the standard remedy.

Even if the general contractor were to take the position

that the subcontractor could not recover from it because

of Cal. Labor Code § 1729, see maj. op. at 10663 n.9, the

subcontractor would be able to proceed against the state.

Labor Code § 1733 provides that suit may be breught by

the contractor or the contractor’s assignee against the

awarding body to recover sums withheld. If the contrac-

tor refuses to assign its right to sue for the money with-

held to the subcontractor, the subcontractor could sue

under the theory of equitable subrogation, which the

California Supreme Court has held “is broad enough to

include every instance in which one person, not acting as

a mere volunteer or intruder, pays a debt for which

another is primarily liable, and which in equity and good

conscience should have been discharged by the latter.”

Caito v. United California Bank, 20 Cal. 3d 694, 704 (1978)

(quoting Rhine v. Kemmerrer, 114 Cal. App. 2d 810, 814

(1952)) (internal quotation marks omitted). This is a run-

of-the-mill contract dispute just like thousands routinely

handled by the state courts without federal intervention.

In lieu of this common sense solution — which also

complies with binding precedent - the majority invokes

the full panoply of federal due process, including the

requirement of a pre-deprivation or prompt (whatever

that litigation-inviting term means) post-deprivation

hearing, whenever the state wishes to withhold payments

for what it believes is defective performance under the

contract. While the opinion addresses only the prevailing

wage term, its logic carries much farther: If the state

discovers any other type of breach - for example, failure

A-38

to complete the project on time or to comply with appli-

cable safety codes — it must provide such a hearing as an

added price for the standard remedy of withholding pay-

ment. This gravely burdens the state’s most potent rem-

edy for dealing with recalcitrant contractors and

subcontractors. Why the state should be saddled with this

yoke when it engages in the purely commercial activity of

construction — a burden not suffered by private builders -

is beyond me.? San Bernardino clearly teaches that com-

mercial contract rights must be vindicated in state cour:

using state remedies. By ignoring this teaching the major-

ity creates not just an intra-circuit and inter-circuit con-

flict but also a wholly unwarranted burden on the

thousands of states, counties, cities and special use dis-

tricts governed by our law. Government is too unwieldy

already; there is no justification for adding this heavy

layer of red tape. I respectfully dissent.

2 We can’t always expect the government to act with

unbounded compassion, patience and generosity. Indeed, when

the government is acting as a commercial entity, taxpayers

cajole it to act with all the ferociousness the marketplace

demands. Certain limits must always apply: The government

cannot, for example, use public works contracts to discriminate

on the basis of race or sex. But when the government bargains

over the commercial terms of the contract it should enjoy the

same ability as private builders to draw up the deal as it likes

and seek the best price and the best terms the marketplace

allows.

A-39

G & G Fire Sprinkters, Inc.,

Plaintiff-Appellee,

Victoria L. BRADSHAW, an

individual, in her official capacity

as Labor Commissioner of the

State of California; Ltoyp W.

Ausry, Jr., an individual, in his

official capacity as Director of the

Department of Industrial Relations

of the State of California; Daniet

DetLtarocca, an individual, in his

official capacity as Deputy Labor

Commissioner of the State of

California; Rocer Miter, an

individual in his official capacity

as Deputy Labor Commissioner

of the State of California; Rosa

Frazier, an individual, in her

official capacity as Deputy Labor

Commissioner of the State of

California; Division or Lasor

STANDARDS ENFORCEMENT, an agency

of the State of California;

DEPARTMENT OF INDUSTRIAL RELATIONS,

an agency of the State of

California,

No. 96-55194

D.C. No.

CV-95-04839-R

Defendants-Appellants.

eee ee em ee ee ee eee ee ee ee ee

Appeals from the United States District Court

for the Central District of Califorina

Manuel L. Real, Chief District Judge, Presiding

No. 95-56639

Agrued and Submitted

May 7, 1996 — Pasadena, California

A-40

No. 96-55194

Submitted August 27, 1997*

Pasadena, California

Filed February 3, 1998

Before: Stephen Reinhardt, Alex Kozinski and

Michael Daly Hawkins, Circuit Judges.

Opinion by Judge Hawkins; Dissent by Judge Kozinski

COUNSEL

Thomas S. Kerrigan, State of California Department of

Industrial Relations, Los Angeles, California, for the

defendants-appellants.

Stephen A. Seideman, Levin, Stein, Chyten & Schneider,

Los Angeles, California, for the plaintiff-appellee in No.

95-56639.

Thomas J. McDermott and Harvey Rochman, Manatt,

Phelps & Phillips, Los Angeles, California, for the plain-

tiff-appellee in No. 96-55194.

OPINION

: .WKINS, Circuit Judge:

This case requires us to decide whether certain Cali-

fornia Labor Code provisions, authorizing the state to

seize money and impose penalties for a subcontractor’s

failure to comply with prevailing wage requirements,

*The panel finds this case appropriate for submission without

agrument pursuant to Fed. R. App. P. 34(a) and Ninth Circuit

Rule 34-4.

A-41

violate the Due Process Clause of the Fourteenth Amend-

ment because no notice or hearing is required before such

adverse action is taken. Specifically, Victoria L. Bradshaw,

Labor Commissioner of the State of California, and others

appeal the district court’s order granting summary judg-

ment in favor of G & G Fire Sprinklers, Inc. (“G & G”),

the public works subcontractor here, and permanently

enjoining Bradshaw from enforcing California Labor

Code §§ 1727, 1730-33, 1775, 1776(g) and 1813 against

G & G for alleged violations of California prevailing wage

laws. We hold that G & G has standing to maintain this

action and that due p. ocess requires either a pre- or post-

deprivation hearing, but that the district court’s injunc-

tion should be narrowed to apply only until such time as

the state may adopt by regulation or otherwise appropri-

ate procedures affording such hearings.

I. Facts

A. The Parties

Appellee G & G is a fire protection company that

installs fire sprinkler systems. G & G has performed

numerous public works projects as a contractor or sub-

contractor. Appellants are the California Division of

Labor Standards Enforcement (“DLSE”), Department of

Industrial Relations, and officials thereof (collectively

“the state”).

B. The California Labor Code

The California Labor Code requires contractors and

subcontractors on public works projects to pay a state-

determined prevailing wage to all their workers. Cal.

A-42

Lab. Code § 1771. To enforce this requirement, the body

awarding the contract (“the awarding body”) is allowed

to withhold funds from a prime contractor should it

determine that the contractor or one of its subcontractors

has violated the prevailing wage law. § 1727. The state is

authorized to withhold an amount equal to the total

amount that all the workers have been underpaid, as well

as up to $50 per day, per worker in fines for each instance

in which the contractor fails to pay the prevailing wage.

§ 1775. A withholding order can only be issued after a

full investigation by DLSE or the awarding body, unless

the withholding is from the final payment to be made to

the prime contractor. § 1727. If the violator is a sub-

contractor, the prime contractor is authorized to withhold

an equivalent amount from its payments to the sub-

contractor. § 1729. All of these provisions must be incor-

porated into all public works contracts. Cal. Admin.

Code, Title 8, § 16430.

A notice to withhold to an awarding body is a stan-

dard procedure utilized by DLSE, but no notice or hear-

ing is required prior to its issuance. DLSE is not required

to produce any evidence of a violation of the law, no

specific standard is applied in determining whether to

issue a notice te withhold, and no procedure exists to

guard against the issuance of improper or excessive

notices to withhold. Moreover, while DLSE has no formal

procedures for conducting investigations, as a general

rule, information from a witness/informant must be veri-

fied with an independent source. In addition, recommen-

dations to withhold must be reviewed by a supervisor.

The exclusive remedy after withholding is a lawsuit

by the prime contractor against the awarding body for

A-43

recovery of the money withheld. §§ 1730-33. Such a suit

must be filed within 90 days of the withholding, and the

contractor bears the burden of establishing that there was

no violation. § 1733. DLSE may defend the lawsuit upon

request by the awarding body. Id. Subcontractors are not

given the right to bring suit, although a prime contractor

is allowed to assign its right to sue. Id. If a suit is not

brought within 90 days, the state disburses the withheld

funds to the underpaid workers; if a suit is brought

within this period, then the money is held in escrow until

its resolution. § 1731.

C. The Dispute

This case arose when DLSE issued three withholding

notices against G & G for a total of at least $120,000. The

notices were for three separate projects on which G & G

had served as a subcontractor.! The awarding bodies for

each of the projects have withheld money from the prime

contractors, who in turn have withheld payment from

G & G. No evidence in the record explains in detail the

_basis for the state’s decision to withhold funds from

G &G.

The issuance of the notices to withhold has a sub-

stantial detrimental effect on G & G’s ability to do busi-

ness, as their effect is to reduce, or cut off, payments for

work performed and to damage G & G’s reputation in the

industry. Inasmuch as G & G intends to perform further

' Withholding notices had also been issued on projects en

which G & G had served as the prime contractor, but those

notices were withdrawn before this suit ensued.

A-44

public works projects in the future, the issuance of addi-

tional improper notices to withhold also could impair

G & G's cash flow and ability to do business.

G & G filed this action for declaratory and injunctive

relief, claiming that the issuance of the notices to with-

hold without a prior hearing constitutes a deprivation of

property without due process of law in violation of the

Fourteenth Amendment. The state responded with a

motion to dismiss, and G & G later filed a motion for

summary judgment. The district court granted G & G’s

motion for summary judgment and denied the state’s

motion to dismiss. The district court’s judgment declares

sections 1727, 1730-33, 1775, 1776(g) and 1813 of the Cali-

fornia Labor Code and the state’s practices thereunder

unconstitutional and enjoins the state from enforcing

these sections against G & G.

Il. Standing

We first address whether G & G has standing to

maintain this action.? The state argues G & G does not

* We note at the outset that whether a party has standing is

a separate question from whether a party has an interest

protected by the Due Process Clause — here, a property interest.

“Standing to bring a state court claim of deprivation of property

rights does not establish a protected property interest.” Kim

Constr. Co. v. Board of Trustees, 14 F.3d 1243, 1249 (7th Cir. 1994).

Moreover, that a party has no constitutionally protected

property interest under a statute does not mean that it has no

standing to bring a claim under that statute. See id.

’ Accordingly, cases such as O'Bannon v. Town Court Nursing

Ctr., 447 U.S. 773 (1980), and San Bernardino Physicians’ Servs.

Med. Group, Inc. v. County of San Bernardino, 825 F.2d 1404 (9th

A-45

have standing because subcontractors lack privity of con-

tract with the state under the Labor Code and because the

state withheld monies from the prime contractors, not

G & G, thus precluding any direct causal connection

between G & G's alleged injury and the state’s conduct.

Standing is a question of law that we review de novo.

Sahni v. American Diversified Partners, 83 F.3d 1054, 1056

(9th Cir. 1996). To establish standing, a federal plaintiff

must show (1) an injury in fact; (2) a causal connection

between the injury and the conduct complained of; and

(3) that it is likely, as opposed to speculative, that the

injury will be redressed by favorable decision. Lujan v.

Defenders of Wildlife, 504 U.S. 555, 560-61 (1992).

To establish injury in fact, a plaintiff must demon-

strate that the injury is “concrete and particularized” and

that it is “actual or imminent, not conjectural or hypo-

thetical.” Id. at 560. The injury here is both concrete and

actual. As a result of the state’s withholding procedures,

G & G has not been paid approximately $120,000, to

which it claims it is entitled. G & G meets the first

requirement for standing.

A plaintiff must also show that the injury “fairly can

be traced to the challenged action of the defendant” and

that it does not result “from the independent action of

some third party not before the court.” Simon v. Eastern

Kentucky Welfare Rights Org., 426 U.S. 26, 41-42 (1976). The

Cir. 1987), which the state cites to argue that G & G has no

standing, are inapposite because they address whether parties

have protectible property interests, not standing.

A-46

Supreme Court detailed the methodology to be followed

in determining causation in a case of this type:

When the suit is one challenging the legality of

government action or inaction, the nature and

extent of the facts that must be averred (at the

summary judgment stage) . . . in order to estab-

lish standing depends considerably upon

whether the plaintiff is himself an object of the

action (or forgone action) at issue. If he is, there

is ordinarily little question that the action or

inaction has caused him injury, and that a judg-

ment .. . will redress it. When . . . a plaintiff's

asserted injury arises from the government's

allegedly unlawful regulation (or lack of regula-

tion) of someone else, much more is needed. In

that circumstance, causation and redressability

ordinarily hinge on the response of the regu-

lated (or regulable) third party to the govern-

ment action or inaction . . . it becomes the

burden of the plaintiff to adduce facts showing

that those choices [of the third party] have been

or will be made in such manner as to produce

causation and permit redressability of injury.

Lujan, 504 U.S. at 561-62 (emphasis in original).

The state contends that G & G cannot establish causa-

tion because this case involves the state's regulation of a

third party, the prime contractors, whose own indepen-

dent choices are an intervening cause of G & G's injury.

Specifically, the state cites California Labor Code § 1729,

which states that “[i]t shall be lawful for any contractor to

withhold from any subcontractor under him sufficient

sums to cover any penalties withheld from him”

(emphasis added), in support of its argument that the

prime contractors were not required to withhold money

A-47

from G & G and that their decision to do so was the true

cause of G & G's injury.

This argument elevates form over substance. The

state’s action here is targeted at G & G; the prime contrac-

tors’ only role in the dispute is that of a conduit, not some

third party whose independent choices caused G & G’s

injury. The state investigated G & G’s conduct, not the

prime contractors’, and the withholding notices explicitly

named G & G as the violator of the California Labor

Code. G & G was clearly the “object of the action” as the

Supreme Court used the term. As such, the state’s con-

duct is the cause of G & G’s injury: the money would not

have been withheld but for the state’s actions. That was

the intended result of the state’s action, in accordance

with the overarching purpose of its regulatory scheme to

ensure that prime contractors and subcontractors pay

their workers the state-determined prevailing wage.

Even if we somehow assume that G & G is not itself

the object of the action, but is indirectly affected by the

state’s regulation of the prime contractors, our conclusion

3 This case differs from those in which the Supreme Court

has found the requisite “but for” causation lacking. See, e.g.,

ASARCO, Inc. v. Kadish, 490 U.S. 605 (1989) (individual

taxpayers and teachers’ organization lacked standing to

challenge Arizona land management statute when only alleged

imjuries were increased taxes and reduced school funding

because of impossibility of showing statute had direct causal

impact on taxes or school funding); Simon, 426 U.S. at 26

(plaintiffs lacked standing to sue due to inability to establish

causal relationship between IRS ruling and hospitals’ decisions

not to provide treatment); Warth v. Seldin, 422 U.S. 490 (1975)

(plaintiffs asserting inability to find homes in city based on

exclusionary zoning practices failed to establish causation).

A-48

would be the same. That the harm to G & G may have

resulted indirectly does not in itself preclude standing.

As the Supreme Court stated in Warth v. Seldin, 422 US.

at 505:

When a governmental prohibition or restriction

imposed on one party causes specific harm to a

third party, harm that a constitutional provision

or statute was intended to prevent, the indirect-

ness of the injury does not necessarily deprive

the person harmed of standing to vindicate his

rights.

Furthermore, G & G can show that the prime contractors’

(third party) choices “have been or will be made in such a

manner as to produce causation and permit redressability

of injury.” Lujan, 504 U.S. at 562. Here, the prime contrac-

tors have withheld payment from G & G, completing the

causal link between G & G’s injury and the state’s action

and permitting redressability. Accordingly, G & G’s injury

can be directly traced to the State’s conduct and the

second requirement for standing is also satisfied.

To meet the third requirement for standing, a plaintiff

must show that his injury will be redressed if he prevails

in his legal action. In this case, G & G’s injury will be

redressed by this suit because if CG & G prevails, the

withheld money will be released to the prime contractors,

who will be obligated by contract to pay ittoG &G.

That G & G as a subcontractor lacks privity of con-

tract with the state only bolsters our conclusion. Under

California’s Labor Code, subcontractors cannot sue the

state for withholding funds; only prime contractors can.

A subcontractor theoretically could sue the prime con-

tractor, but the latter has a defense of withholding the

A-49

funds pursuant to state law. In addition, the Labor Code

does not grant subcontractors the right to any type of

hearing to contest a withholding. Therefore, if a prime

contractor chooses not to contest a withholding or to

assign its rights to sue to the subcontractor, the sub-

contractor is left holding a quite empty bag.4

G & G has standing to maintain this suit.

* The state cites Lloyd v. Stewart & Nuss, Inc., 327 F.2d 642,

645-46 (9th Cir. 1964), for the proposition that a subcontractor

has no property right to funds withheld by an awarding body

and hence has no standing to challenge such a withholding. We

reject this argument for several reasons.

First, Lloyd is a bankruptcy case holding that amounts

withheld from a prime contractor by the state upon request of a

trucking service doing work for a subcontractor did not

constitute property owned or possessed by the debtor

subcontractor and hence the bankruptcy court had no summary

jurisdiction over the property. The case does not even involve

constitutional issues, let alone due process concerns, and it

never discusses standing. Second, even if we were to deem Lloyd

remotely relevant to this case, its decision that the subcontractor

debtor had no property right in the debt owed to the prime

contractor by the state sheds no light on whether a

subcontractor has a protectible property interest in wages

withheld from it pursuant to state law. In fact, Lloyd

acknowledges that the subcontractor and the trucking service

“both possessed the right to claim against the fund, but only in

the event they were not paid by their respective principal

obligors.” Id. at 646. Here, G & G was not paid by its respective

Principal obligor, the prime contractor, and it is asking for an

opportunity to contest that deprivation.

A-50

Ill. Due Process Claim

A due process claim has two elements: (1) a depriva-

tion of a protectible interest, and (2) denial of adequate

procedural protections. See Goldberg v. Kelly, 397 U.S. 254

(1970). We consider each of these elements in turn.

A. Protectible Interest

To determine whether G & G has suffered a depriva-

tion of a protectible interest, we must evaluate (1) what

type of interest has been deprived, and (2) whether that

interest is protected by the Due Process Clause. Board of

Regents of State Colleges v. Roth, 408 U.S. 569-70 (1972).

G & G’s interest arises from its public works contract; it

has @ property interest in being paid in full for the

construction work it has completed. See Sniadach v. Family

Finance Corp., 395 U.S. 337, 342 (1969) (holding that Wis-

consin’s garnishment procedure allowing wages to be

frozen upon request of creditor’s lawyer constituted

“obvious” deprivation of property). The state’s withhold-

ing of over $120,000 has deprived G & G of its interest in

full payment for services rendered.

The state quite properly notes, however, that not all

property interests are protected by the Due Process

Clause. While both federal and California law recognize

that a contract with the state can create a constitutionally

protected property interest, Perry v. Sindermann, 408 U.S.

593, 601 (1972); Walker v. Northern San Diego County Hosp.

Dist., 185 Cal.Rptr. 617, 620 (1982), not all public contracts

give rise to a protectible due process interest. See San

Bernardino Physicians’ Servs. Med. Group, Inc., 825 F.2d at

1408. Indeed, because any breach of contract claim

A-51

against the state logically can be construed as a due

process claim, “ ‘we must bear in mind that the Four-

teenth Amendment was not intended to shift the whole of

the public law of the states into the federal courts.’ ” Id.

(quoting Brown v. Brienen, 722 F.2d 360, 364 (7th Cir.

1983)).

Even though every contract may confer some

legal rights under state law, that fact alone need

not place all contracts within federal due pro-

cess protection. Although the underlying sub-

stantive interest is created by an independent

source such as state law, federal constitutional

law determines whether that interest rises to the

level of a legitimate claim of entitlement pro-

tected by the Due Process Clause.

Id. at 1408-09 (internal quotations omitted).

Drawing on these principles, the state asserts that

because the withholding procedure at issue is contained

in G & G's contract, this case is nothing more than a

contractual dispute that does not rise to the level of a

constitutional claim. Moreover, the state argues that con-

struing this case to present a constitutional claim would

result in the “federalization” of state contract law by

giving G & G and all others who contra.‘ with the state

an opportunity to have their grievances reviewed in fed-

eral court when they should be confined to their contrac-

tually bargained-for remedies under state law. This

argument, however, misses the mark. Unlike the cases

cited by the state, this case does not involve a breach of

A-52

contract claim or a challenge to the contract itself.5G & G

concedes that the express terms of the contract grant the

state the authority to withhold funds for wage violations;

the withholding is not a breach of contract. Instead,

G & G challenges the constitutionality of several provi-

sions of the California Labor Code as violative of its

° All the cases cited by the state to support its argument

that G & G’s interest is not constitutionally protected involve

due process claims arising from an alleged breach of contract.

See, e.g., Unger v. National Residents Matching Program, 928 F.2d

1392, 1399 (3d Cir. 1991) (termination of residency program after

plaintiff’s acceptance into program failed to implicate due

process rights because contract with university hospital did not

confer protected status and did not include provision of for-

cause termination only); S & D Maintenance Co. v. Goldin, 844

F.2d 962, 968-69 (2d Cir. 1988) (contractor alleging state

breached contract by withholding funds pending result of

criminal investigation failed to establish due process claim

because neither contract nor state law contained for-cause

termination provision or right to prompt payment); San

Bernardino Physicians’ Servs. Med. Group, Inc., 825 F.2d at 1406

(physicians’ group’s challenge to termination of service contract

with state did not implicate due process interest because status

of employees depended entirely upon their contracts with

group, not upon contracts between group and state).

usual breach of contract remedies. It may not declare a material

breach by the awarding body for withholding payments and it

may not rescind the contract. The prime contractor must

continue to perform, to pay for labor and materials, even if

payments have been cut off. The exclusive remedy is a lawsuit.

Cal. Labor Code §§ 1731-33.

A-53

federal due process rights? Those provisions, incorpo-

rated by state law into all public works contracts, autho-

rize the state to withhold payment of money owed to

contractors or subcontractors for alleged violations of the

state prevailing wage law. This case thus involves a direct

constitutional challenge to these statutes, not a mere con-

tractual dispute.

The state, relying on O'Bannon, 447 U.S. at 773, also

contends that G & G’s property interest is not protectible

because this case involves the indirect effects of state

action. In O'Bannon, the Supreme Court reiterated the

principle that “the due process provision of the Fifth

Amendment does not apply to the indirect adverse effects

of governmental action.” 447 U.S. at 789. Specifically, the

Court held that residents of a nursing home that had its

license revoked did not have a right to a hearing because

the revocation “did not directly affect the patients’ legal

rights or deprive them of any constitutionally protected

interest in life, liberty, or property.” Id. at 790. It further

stated, “[T]he fact that the decertification of a home may

lead to severe hardship for some of its elderly residents

does not turn the decertification into a governmental

decision to impose that harm.” Id. at 789. In a footnote,

however, the Court expressly noted:

We of course need not and do not hold that a

person may never have a right to a hearing

before his interests may be indirectly affected by

government action. Conceivably, for example, if

the Government were acting against one person

7G & G’s complaint seeks declaratory relief from the

“facial unconstitutionality of state laws.”

A-54

for the purpose of punishing or restraining

another, the indirectly affected individual might

have a constitutional right to some sort of hear-

ing. But in this case the Government is enforcing

its regulations against the home for the benefit

of the patients as a whole and the home itself

has a strong financial incentive to contest its

enforcement decision; under these circum-

stances the parties suffering an indirect adverse

effect clearly have no constitutional right to par-

ticipate in the enforcement proceedings.

Id. at n.22.

The state’s reliance on O'Bannon is misplaced.®

Unlike the nursing home residents in that case, G & G is

the target of the state’s action here. Hence there is no

“indirect” governmental action despite the presence of

the prime contractors in the chain of causation. Even if

we were to accept the state’s contention that its withhold-

ing of funds constitutes indirect action, such action

would fall within the category expressly left open by the

O'Bannon Court — action taken by the government against

one party for the purpose of punishing or_restraining

another. Either way, we hold that G & G has suffered a

® The other cases cited by the state are similarly inapposite.

See Castaneda v. United States Dept. of Agric., 807 F.2d 1478 (9th

Cir. 1987) (employee of convenience store who was fired after

store was disqualified from food stamp program did not have

right to hearing even though employee’s fraudulent conduct

was cause of termination); Grove City College v. Bell, 687 F.2d 684

(3d Cir. 1982), aff'd, 465 U.S. 555 (1984) (students of college that

refused to comply with requirements of federal student aid

program did not have right to hearing before college's eligibility

to receive student aid was revoked).

A-55

deprivation of a protectible property interest as a result

of the state’s action.

B. Process Due :

We now examine whether the state accorded G & G

due process when it effected this deprivation. As a gen-

eral rule, the Due Process Clause requires that individ-

uals receive notice and a meaningful opportunity to be

heard before the government deprives them of property.

United States v. James Daniel Good Real Prop., 510 U.S. 43,

48 (1993). Twenty five years ago, the Supreme Court

announced an exception to this rule for “extraordinary

situations where some valid governmental interest is at

stake.” Fuentes v. Shevin, 407 U.S. 67, 82 (1972) (quoting

Boddie v. Connecticut, 401 U.S. 371, 378-79 (1971)). More

recently, the Court has refined the exception: “An impor-

tant government interest, accompanied by a substantial

assurance that the deprivation is not baseless or unwar-

ranted, may in limited cases demanding prompt action

justify postponing the opportunity to be heard until after

the initial deprivation.” Federal Deposit Ins. Corp. v. Mal-

len, 486 U.S. 230, 240 (1988). Over the years, the Court has

broadened this exception considerably, frequently hold-

ing a post-deprivation hearing to be sufficient. Compare

Board of Regents, 408 U.S. at 570 n.7 (describing use of

exception as “rare”), with e.g., Barry v. Barchi, 443 U.S. 55

(1979) (holding that state’s interest in preserving integrity

of sport of horse racing justifies lack of pre-deprivation

hearing), and Mallen, 486 U.S. 230 (holding that state’s

interest in maintaining public confidence in bank man-

agement justifies post-deprivation hearing for removal of

bank manager).

A-56

Where extraordinary circumstances justify dispens-

ing with a pre-deprivation hearing, however, a prompt

post-deprivation hearing must be provided. See Mallen,

486 U.S. at 242. In determining whether a post-depriva-

tion hearing procedure is reasonably prompt, a court

should “examine the importance of the private interest

and the harm to this interest occasioned by delay; the

justification offered by the Government for delay and its

relation to the underlying governmental interest; and the

likelihood that the interim decision may have been mis-

taken.” Id.

In this case, subcontractors like G & G are afforded

neither a pre-nor post-deprivation hearing when pay-

ments are withheld. Once the state determines that a

violation of the prevailing wage law has occurred, it may

withhold and disburse money directly to the workers and

may impose fines both without providing any hearing at

which the subcontractor might challenge the validity of

the state’s finding. Accordingly, subcontractors have no

opportunity to be heard at a meaningful time in a mean-

ingful manner. See Fuentes, 407 U.S. at 80. This scheme

violates the Due Process Clause of the Fourteenth

Amendment.’

* Cal. Lab. Code §§ 1730-33. The state’s argument that due

process is satisfied because an aggrieved party may bring a suit

on the contract is unavailing. The state relies on Parratt v. Taylor,

451 U.S. 527 (1981), overruled in part on other grounds by Daniels v.

Williams, 474 U.S. 327 (1986), and Hudson v. Palmer, 468 U.S. 517

(1984), which held that in certain circumstances, a post-

deprivation remedy under state law may fulfill the

requirements of due process. We have stated, however, that

“[wle apply Parratt and Hudson only when the state

A-57

What specific type of process must be afforded sub-

contractors is for the state to decide. We hold only that

the state must provide for either a pre- or prompt post-

deprivation hearing when withholding payments and

assessing penalties.!°

administrative machinery did not and could not have learned of

the deprivation until after it occurred, not when state officials

acted pursuant to state policy and followed state procedures

they believed were proper.” Knudson v. City of Ellensburg, 832

F.2d 1142, 1149 (9th Cir. 1987) (internal quotations omitted).

There is no question here, and the state does not contest, that the

~~ officials in this case acted pursuant to state policy and followed

state procedures. Thus, Knudson forecloses the state’s

argument.

Moreover, even if Parratt and Hudson were applicable, they

would not alter our conclusion because only prime contractors

are granted the right to bring suit on the contract against the

state. Subcontractors may sue only if the prime contractor is

willing to assign them its right. Therefore, even if this right to

sue could somehow be held to satisfy due process, it would not

satisfy due process for the subcontractors who have no such

independent right.

not affect the validity of the Davis-Bacon Act, 40 U.S.C. §§ 276a

et seq., upon which the California law was patterned, because

the Davis-Bacon Act provides for an extensive hearing and

appeal structure through its implementing regulations. Within

30 days after a withholding, either the prime contractor or the

subcontractor may request an administrative hearing to review

the findings of the Administrator of the Wage and Hour

Division of the Department of Labor. 29 C.E.R. § 5.11. The

findings and rulings of the administrator may be appealed to an

administrative law judge (“ALJ”), whose decision may be

appealed to the Wage Appeals Board. Id. Ultimately, the Board's

decision may be appealed to the federal court. 5 U.S.C. § 704.

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IV. Other Issues Raised by the State

The state asserts that G & G’s summary judgment

motion was premature and hence should have been

denied. Federal Rule of Civil Procedure 56(a) allows a

motion for summary judgment to be made any time more

than twenty days after commencement of the action.

G & G’s motion complied with this rule and with the

notice requirements under Local Rule 7.4.1! Moreover, the

state did not file a Rule 56(f) declaration indicating why it

needed discovery and the facts it hoped to discover.

Given the state’s receipt of adequate notice and an oppor-

tunity to respond to the motion, and its failure to file a

Rule 56(f) declaration, the district court did not err in

considering the summary judgment motion.

The state also contends that the individual defen-

dants in this case are entitled to qualified immunity.

“Qualified immunity is an affirmative defense to damage

liability; it does not bar actions for declaratory or injunc-

tive relief.” American Fire, Theft & Collision Managers, Inc.

v. Gillespie, 932 F.2d 816, 818 (9th Cir. 1991) (internal

quotation omitted) (emphasis added). Therefore, the indi-

vidual defendants cannot claim qualified immunity as an

affirmative defense to this action seeking declaratory and

injunctive relief.

In addition, the district court did not err in denying

the state’s motion to dismiss. The state asserts that

11 G & G points out that it had filed essentially the same

motion in a prior case, relying on the same authorities cited

here. Thus, the state was aware of G & G’s argument and the

authorities on which it relied.

a I i BT hh a Ny Bia a.

A-59

defects on the face of the complaint mandated its dis-

missal, but these alleged defects relate to issues such as

standing, whether G & G was deprived of any constitu-

tional right, and the qualified immunity defense. To the

extent that we have decided all of these issues in G & G’s

favor, we affirm the district court’s decision.

V. The Injunction

The district court’s judgment declared seven separate

provisions of the California Labor Code unconstitutional

and enjoined the state from enforcing any of those provi-

sions against G & G. The state argues that the in

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