9th Cir.: No sovereign immunity for private entities

The Ninth Circuit held that state sovereign immunity does not extend to private entities, including businesses that contract to provide public services for the state. del Campo v. Kennedy, --- F.3d ---, 2008 320772 (9th Cir. Feb. 6, 2008) (No. 07-15048). The court’s adoption of a categorical rule, in a case concerning a privately-run bad check diversion program, is in accord with most circuits. 

 

            The case consolidates two suits on behalf of participants in a Santa Clara County, California bad check diversion program run by American Corrective Counseling Services (ACCS), under contract to the district attorney (DA). The complaint alleged various violations of state and federal law and the Constitution. ACCS asserted sovereign immunity. The parties contested whether, in contracting with ACCS, the DA had acted as a state or county actor, but the court held that regardless, immunity could not extend to ACCS as a private entity.

 

            The court observed that sovereign immunity “is strong medicine”:

Recognizing the sweep and power of the doctrine, the Supreme Court has been cautious in extending state sovereign immunity even to many state-created and quasi-governmental entities….

 

Given this background we should be extremely hesitant to extend this fundamental and carefully limited immunity to private parties whose only relationship to the sovereign is by contract. A contractor like ACCS may perform some functions for the state, but is certainly more removed from state power, and from democratic control, than a county or [an interstate agency administering an interstate compact]. Private entities fit even less readily than those bodies into the theoretical framework supporting state sovereign immunity. It would thus be strange to award private entities sweeping immunity from suit.

The court found its “reluctance” on this point “reinforced” by the fact that extending sovereign immunity would inhibit not only the power of the courts, but that of Congress to regulate private actors.

 

            Under Ninth Circuit law, courts generally apply a five-part test to determine whether a defendant is “an arm of the state” for immunity purposes, asking:

(1)   whether a money judgment would be satisfied out of state funds; (2)

whether the entity performs central governmental functions; (3) whether the

entity may sue or be sued; (4) whether the entity has the power to take

property in its own name or only in the name of the state; and (5) the corporate

status of the entity.

See Mitchell v. Los Angeles Comm. Coll. Dist., 861 F.2d 198 (9th Cir. 1988). The court stated, however, that this functional test

was not meant for, is ill-adapted to, and loses its utility when performed upon a private entity. The negative result it generates will always be the same: Only the second Mitchell factor could ever cut in favor of granting a private entity sovereign immunity…

The court pointed to its decision in U.S. ex rel. Ali v. Daniel, Mann, Johnson, & Mendenhall, 355 F.3d 1140 (9th Cir.2004) (private contractor failed four out of five Mitchell factors), and stated that it would be “a waste of both judicial resources and litigants’ time, to apply the Mitchell factors to private entities. By their nature, such entities are not arms of the state.”

 

            The court noted that other circuits had “more or less categorically” rejected sovereign immunity for private entities. See U.S. ex rel. Sikkenga v. Regence BC/BS  of Utah, 472 F.3d 702 (10th Cir. 2006) ; Takle v. Univ. of Wisconsin Hosp. and Clinics Auth., 402 F.3d 768 (7th Cir. 2005); U.S. ex rel. Barron v. Deloitte & Touche, L.L.P., 381 F.3d 438 (5th Cir. 2004); Fresenius Med. Care Cardiovascular Res., Inc. v. Puerto Rico, 322 F.3d 56, 63 (1st Cir. 2003); Brotherton v. Cleveland, 173 F.3d 552 (6th Cir. 1999). The court found “unpersuasive” the Eleventh Circuit’s decision according immunity to a private administrator of a state health plan, Shands Teaching Hosp. and Clinics, Inc. v. Beech Street Corp., 208 F.3d 1308 (11th Cir. 2000), and noted that that circuit had in any event rejected immunity for ACCS in a similar case. See Rosario v. Amer. Corrective Counseling Serv., Inc., 506 F.3d 1039 (11th Cir. 2007).

 

            The court concluded: “The law makes clear that state sovereign immunity does not extend to private entities.” A concluding footnote, however, stated: “To be clear: Although we hold that private entities cannot be arms of the state, we emphatically do not hold that they cannot act under color of state law for the purposes of 42 U.S.C. § 1983 and similar statutes. The two concepts are distinct.”