By Craig S. Simon and Mark S. Grotefeld

Last month, the 2nd District Court of Appeal handed down a new inverse condemnation decision, Pacific Bell Telephone Company v. Southern California Edison Co., 2012 DJDAR 12351 (Aug. 30, 2012). This new decision upholds and explains Barham v. Southern California Edison Co., 74 Cal. App. 4th 744 (1999), which concluded that a privately owned public utility could be liable for inverse condemnation.

There are two types of eminent domain cases. The first is the direct, intended condemnation of private property, when a utility or municipality exercises its power of eminent domain to take and pay for private property for a public use. The second, dubbed “inverse condemnation,” refers to situations in which an entity is deemed to have taken property, and is required to pay, where the construction, operation, or maintenance of an improvement dedicated to a “public use” damages or destroys private property. Both have a common goal – to require compensation for those who have been required to bear a burden that should properly be borne by the public, for whose benefit the burden was imposed. It is the basic function of inverse condemnation law to require a supplier of a public service to bear the risks as well as the benefits of its operations.

In the past few years, private utilities have caused major fires, including the San Bruno Explosion, and the wildfires in Southern California given the names Witch, Guejito, Rice, Malibu, Grass Valley, Sesnon and Sayre. Each of these fires resulted in massive litigation since so many were affected. While plaintiffs contended that the utility company’s negligence was the cause of each fire, they have also pursued inverse condemnation.

Among the issues the defense has raised in such litigation is whether privately owned public utilities, such as Pacific Gas & Electric Company, Southern California Edison, San Diego Gas & Electric Company and Southern California Gas Company, can be liable under a theory of inverse condemnation. The utilities consistently argue that inverse condemnation is limited to actions against public entities. The utilities argue that Barham was an aberration, and the other appellate districts should not follow it.

In Pacific Bell, Justices Victoria Gerrard Chaney, Robert M. Mallano and Jeffrey W. Johnson concluded that public utilities, whether privately owned or publicly owned, are liable for inverse condemnation when the operation of their facilities damages private property.

The primary rationale for both Barham and Pacific Bell is that governments have given privately owned public utilities monopolies to provide services that government owned utilities would otherwise provide. The court concluded that entities that have been granted many of the powers and benefits of public entities should assume the responsibility of a public entity to provide just compensation when property has been damaged or “taken” by the operation of the utilities’ facilities.

These two cases did not invent the theory that public utilities are the equivalent of public entities for at least some purposes. Barham relied on Gay Law Students Association v. Pacific Tel & Tel Co., 24 Cal.3d 458 (1979), which held that a privately owned public utility was subject to a provision in the state Constitution prohibiting employment discrimination, even though constitutional provisions only apply to “state action.” The court in Pacific Bell also referred to Eachus v. Los Angeles etc. Ry. Co., 103 Cal. 614 (1894), which held that a railroad could be liable for inverse condemnation on the theory that the railroad had a government “franchise,” defined as an agreement whereby a private company will provide a service that a public entity would generally provide.

Both Barham and Pacific Bell rejected the argument that “private” companies can only be found liable for inverse condemnation in two circumstances: (1) when there was “joint action” between the utility and a public entity, and/or (2) when the utility “exercised” its power of eminent domain. The courts concluded that such circumstances support inverse condemnation, but are not required.

We think it is fair that when private companies want to step into the shoes of public utilities, to make a profit for the shareholders, they should be subject to the same state Constitutional requirements that apply to public entities that provide the same utility service.

The authors encourage privately owned public utilities to improve their prevention programs, rather than rely on a “repair-when-it-breaks” approach as discussed in Pacific Bell v. City of San Diego, 81 Cal. App. 4th 596 (2000). Many of the catastrophic fire damages suffered by California residents could have been prevented with adequate maintenance procedures. An ounce of prevention really is better than a pound of cure.

Holding private companies who provide mainly a public service to the same standard as public entities makes sense.

Craig S. Simon is the managing partner of Berger Kahn ALC. The firm is often involved in cases involving mass tort and inverse condemnation.

Mark S. Grotefeld is the managing partner of Grotefeld, Hoffmann, Schleiter, Gordon & Ochoa LLP. The firm is often involved in cases involving mass tort and inverse condemnation.