Inverse Condemnation Remains Viable Cause of Action Against Investor-Owned Utilities
The California Court of Appeal recently issued an opinion in Simple Avo Paradise Ranch, LLC v. Southern California Edison Company, a case arising out of the 2017 Thomas Fire in Southern California, affirming the applicability of inverse condemnation to investor-owned utility companies. The appeal sought to overturn current California law holding that a privately owned public utility could be liable under the Constitution’s inverse condemnation provision. The appeal was naturally of great interest to the subrogation industry and SLS LLP was proud to assist in the review and drafting of the industry’s amicus curiae brief filed through the National Association of Subrogation Professionals (NASP).
Background
The 2017 Thomas Fire litigation was a coordinated proceeding with multiple parties, including individuals and subrogating carriers. As part of the coordinated action plaintiffs jointly filed Master Complaints against Southern California Edison (SCE), which included causes of action for inverse condemnation. Inverse condemnation is a claim brought by a property owner against a public entity when the property has been taken or damaged for a public use without formal eminent domain proceedings. California courts held that investor-owned utility companies constituted public entities for the purpose of inverse condemnation actions; however, SCE demurred to the Master Complaints arguing inverse condemnation should only apply to public entities and not investor-owned utility companies. The trial court overruled the demurrers. Simple Avo, an avocado farm, subsequently sued SCE by adopting the Master Complaint of Individuals.
Appealability
After multiple other parties, including the subrogating carrier group, had resolved and dismissed their claims, SCE and Simple Avo entered into a stipulated judgment whereby SCE agreed to pay $1.75 million subject to its right to appeal the demurrer ruling. An issue on appeal, raised by NASP in its amicus curie brief, was whether the stipulated judgment was properly appealable. The Court of Appeal held the stipulated judgment was appealable under an exception allowing appeals from stipulated judgments when the consent judgment is intended to facilitate appellate review. However, the court expressed serious reservations about the propriety of applying this exception, especially in complex coordinated proceedings like this one involving hundreds of lawsuits. It suggested the California Supreme Court was best suited to revisit the exception to the rule against appealing consent judgments.
Upholding the Trial Court’s Findings
On the merits, the Court of Appeal affirmed the order overruling SCE’s demurrer. The court followed established precedent holding that investor-owned utilities like SCE can be liable for inverse condemnation. It further held the Master Complaint sufficiently alleged that the damage to Simple Avo’s property was substantially caused by an inherent risk in SCE’s deliberate design, construction, or maintenance of its electric distribution system.
SCE argued that as an investor-owned utility, it could not be liable for inverse condemnation. However, the Court of Appeal rejected this argument, following the well-established precedent in Barham v. Southern Cal. Edison Co. (1999) 74 Cal.App.4th 744 and Pacific Bell Telephone Co. v. Southern California Edison Co. (2012) 208 Cal.App.4th 1400. These cases held that investor-owned utility companies can be considered public entities for purposes of inverse condemnation liability when they have the power of eminent domain and provide a vital public service.
The Court of Appeal also considered SCE’s argument that the Master Complaint failed to allege the necessary elements for inverse condemnation liability under City of Oroville v. Superior Court (2019) 7 Cal.5th 1091. Orovilleclarified that inverse condemnation requires a showing that the property damage was substantially caused by an inherent risk in the deliberate design, construction, or maintenance of the public improvement.
The court found the Master Complaint sufficiently alleged these elements. It pointed to allegations that SCE knew its infrastructure was aging and improperly maintained, yet deliberately chose to forgo necessary inspections and repairs to cut costs, resulting in the ignition of the Thomas Fire. The court held these allegations adequately pled that the fire damage was substantially caused by an inherent risk in SCE’s deliberate maintenance (or lack thereof) of its electric distribution system.
However, the Court of Appeal stressed that its ruling simply allowed the case to move forward beyond the pleading stage. It was not a finding on the ultimate merits of the inverse condemnation claim. The court noted that significant factual issues remained to be resolved at trial.
In particular, the court pointed to SCE’s argument that a 2017 decision by the California Public Utilities Commission (CPUC) denying a rate increase to San Diego Gas & Electric for wildfire costs meant SCE would be unable to pass on any inverse condemnation costs to its ratepayers. SCE claimed this defeated the “loss-spreading” rationale underlying inverse condemnation liability for public entities. The Court of Appeal held this CPUC decision did not conclusively bar SCE’s inverse condemnation liability as a matter of law, but rather presented a factual dispute to be resolved at trial. It is thus likely that we will see investor-owned utilities continue to make this argument when faced with inverse condemnation actions in the future.
Throughout its discussion, the Court of Appeal sought to balance the competing policy considerations underlying inverse condemnation liability. On one hand, the doctrine seeks to spread the costs of damage caused by public improvements among the benefitting community rather than imposing them solely on individual property owners. On the other, imposing open-ended liability on public entities could deter beneficial public improvements. The court’s opinion reflected an attempt to strike a balance by allowing the case to proceed while noting the remaining factual hurdles SCE could raise in its defense.
The Road Ahead
Overall, the case reflects the ongoing legal challenges faced by investor-owned utilities in California regarding potential inverse condemnation liability for wildfire damage allegedly caused by their equipment. It also illustrates the procedural complexities that can arise in coordinated proceedings involving numerous parties who may be in different procedural postures. For now, it seems the battle on inverse condemnation has been won by those asserting claims against investor-owned utility companies, but the issue remains far from resolved.
