WMX Technologies, Inc. v. Miller

80 F.3d 1315, 96 Cal. Daily Op. Serv. 2375, 96 Daily Journal DAR 3950, 1996 U.S. App. LEXIS 6610, 1996 WL 159587

• Court: Court of Appeals for the Ninth Circuit
• Decided: April 8, 1996
• Docket: No. 93-55917
• Status: Published

Opinions

HUG, Chief Judge:

WMX Technologies, Inc. (“WMX”), formerly known as Waste Management, Inc., and its wholly-owned subsidiary, Waste Management of California, Inc. (“Waste Management”), appeal from the district court’s Federal Rule of Civil Procedure 12(b)(6) dismissal of their 42 U.S.C. § 1983 suit against San Diego County District Attorney Edwin Miller. Miller allegedly damaged the plaintiffs’ business reputation and goodwill by preparing and disseminating a report linking the plaintiffs to organized crime. The plaintiffs sued for declaratory and injunctive relief alleging the deprivation of various property and liberty interests without due process, as well as the violation of their First Amendment rights. The district court dismissed all causes of action. We affirm the judgment of the district court.

BACKGROUND

Waste Management, a wholly-owned subsidiary of WMX, is a business which collects, stores, and disposes of solid and liquid waste. Waste Management proposed the development of a new landfill site in San Diego County, which was experiencing a “landfill crisis.” In November 1990, Waste Management filed an application with the San Diego County Board of Supervisors (“Board”) seeking the necessary use permits.

In response to the application, the Board unanimously voted to authorize San Diego County Supervisor Susan Golding to request District Attorney Miller to investigate rumors regarding the plaintiffs’ alleged connections with organized crime and other possible improprieties. In commencing his investigation, Miller asked WMX to waive any possible liability claims of itself or its subsidiaries, including Waste Management. He also requested WMX to provide access to any documents his office sought and to pay for the costs of the investigation. WMX refused and instead offered to provide access to most documents, waive some liability claims, and pay for part of the investigation. No agreement was reached, and Miller proceeded with his investigation without the waiver of liability and agreement to provide documents.

In April 1992, Miller sent his final report (“the report”) to the Board. He also disclosed his report to the press. Section V of the report, entitled “Organized Crime Connections,” is the focus of this appeal. It traces the plaintiffs’ alleged criminal connections with organized crime, concluding that the plaintiffs are connected to the Mafia.

In response to the report, the plaintiffs sued Miller in his official capacity under 42 U.S.C. § 1983. The complaint alleges that section V damaged the plaintiffs’ reputation and business goodwill and that this effect was intended by Miller. According to the complaint, the report’s implication of any impropriety by the plaintiffs is false. The complaint states that Miller disclosed copies of the report to the press and that the dissemination deprived the plaintiffs of their liberty and property interests without due process of law. The specific claims for relief alleged in the complaint are:

1. The defendant deprived the plaintiffs of their business goodwill, a legislatively created property interest in California;

2. The defendant deprived the plaintiffs of liberty by stigmatizing the plaintiffs “plus” distinctly altering their property interest in their business goodwill;

3. The defendant violated Waste Management’s First Amendment right to petition the Government;

4. The defendant deprived. Waste Management of liberty by stigmatizing it in connection with the exercise of its First Amendment right to petition the Government; and

5. The defendant deprived the plaintiffs of liberty by, in effect, making an official and public adjudication of criminal culpability based on the plaintiffs’ alleged involvement with criminal organizations.

The district court entered a Rule 12(b)(6) dismissal of all five causes of action. It dismissed claims one, two, and five with prejudice, but it allowed leave to amend the claims related to alleged First Amendment violations (claims three and four). The plaintiffs chose not to amend and instead to rely on the complaint that was dismissed. The plaintiffs timely appealed.

The district court had jurisdiction pursuant to 28 U.S.C. §§ 1343, 2201. We have jurisdiction under 28 U.S.C. § 1291. Ordinarily, a dismissal without prejudice is not appealable. However, because the plaintiffs elected to stand on the complaint and appeal rather than amend, the district court dismissal is a final appealable order. Carson Harbor Village Ltd. v. City of Carson, 37 F.3d 468, 471 n. 3 (9th Cir.1994) (quoting McGuckin v. Smith, 974 F.2d 1050, 1053 (9th Cir.1992)).

STANDARD OF REVIEW

We review de novo a district court’s Rule 12(b)(6) dismissal. Everest & Jennings, Inc. v. American Motorists Ins., 23 F.3d 226, 228 (9th Cir.1994). In reviewing the sufficiency of the claim, we accept all allegations of material fact as true and construe them in the light most favorable to the nonmoving party. Id.

DISCUSSION

“To make out a cause of action under section 1983, plaintiffs must plead that (1) the defendants acting under color of state law (2) deprived plaintiffs of rights secured by the Constitution or federal statutes.” Gibson v. United States, 781 F.2d 1334, 1338 (9th Cir.1986). Paragraph 8 of the complaint alleges that Miller acted under color of state law. The question remains whether the plaintiffs properly alleged that they have been deprived of constitutionally protected rights. The procedural due process guarantees of the Fourteenth Amendment apply only when a constitutionally protected liberty or property interest is at stake. Board of Regents v. Roth, 408 U.S. 564, 569, 92 S.Ct. 2701, 2705, 33 L.Ed.2d 548 (1972). We look to state law to define the dimensions of protected property interests. Id. at 577, 92 S.Ct. at 2709.

1. Property Interest

We first consider whether the complaint stated a claim that they were deprived of a property interest. The plaintiffs contend that they had a property interest in their business goodwill and that Miller’s report deprived them of business goodwill without due process. They argue that because the standing and reputation of a business is a vital part of the goodwill of a business, injury to the standing and reputation of the business becomes a deprivation of the goodwill of the business. The district court concluded that, under the circumstances of this case, the plaintiffs had no protected property interest in obtaining a permit or in their reputation. We agree.

In making this claim, the plaintiffs rely heavily upon this court’s decision in Soranno’s Gasco, Inc. v. Morgan, 874 F.2d 1310 (9th Cir.1989). In that case, we reviewed a claim for deprivation of property without due process in the context of an alleged injury to business goodwill in California. In Soran-no’s Gaseo, state officials suspended Soran-no’s Gasco’s bulk plant permits and sent letters to its customers informing them that their own permits might be subject to suspension if they continued to receive petroleum from Soranno’s Gaseo. The plaintiffs filed a section 1983 claim contending that suspension of Soranno’s Gasco’s permits and notification of its suspension to its customers deprived the plaintiffs of their property interest in business goodwill without due process. Id. at 1313.

We held in Soranno’s Gasco that in light of the California statute conferring property status to business goodwill, “[t]he goodwill of one’s business is a property interest entitled to protection; the owner cannot be deprived of it without due process.” Id. at 1316. Concluding that the plaintiffs had a protected property interest, we ultimately held that a post-deprivation hearing provided adequate due process. Id. at 1318.

Soranno’s Gaseo, however, does not control this case because in the context of the plaintiffs’ allegations their alleged injury to their business goodwill does not go beyond injury to their business reputation. Soranno’s Gasco clearly involved more than mere injury to reputation. It involved actual, direct interference with business goodwill by the state through letters sent directly to Soranno’s Gasco’s customers. The state threatened Soranno’s Gaseo’s customers with suspension of their own permits if they continued to deal with Soranno’s Gaseo, thereby directly interfering with Soranno’s Gasco’s “expectation of continued patronage” by those customers.

In contrast, this case only involves defamatory remarks made to the public generally which allegedly injured the plaintiffs’ business reputation. This is not sufficient to satisfy the requirement that a constitutionally protected property interest be at stake. Damage to business reputation without more does not rise to the level of a constitutionally protected property interest. See Paul v. Davis, 424 U.S. 693, 96 S.Ct. 1155, 47 L.Ed.2d 405 (1976); Siegert v. Gilley, 500 U.S. 226, 111 S.Ct. 1789, 114 L.Ed.2d 277 (1991). Allowing the plaintiffs’ claim under these circumstances would constitutionalize the state law tort of defamation. We decline to go so far. “The Due Process Clause does not, by its own force, extend individuals a right to be free of injury wherever a state is characterized as the tortfeasor. The Fourteenth Amendment is not a ‘font of tort law to be superimposed upon whatever systems may already be administered by the States.’ ” Johnson v. Barker, 799 F.2d 1396, 1399 (9th Cir.1986) (quoting Paul v. Davis, 424 U.S. 693, 701, 96 S.Ct. 1155, 1160-61, 47 L.Ed.2d 405 (1976)).

2. Liberty Interest In Business Goodwill

The plaintiffs next allege that, under the “stigma-plus” test of Paul v. Davis, 424 U.S. 693, 96 S.Ct. 1155, 47 L.Ed.2d 405 (1976), the stigma caused by the report plus the injury to their business goodwill deprived them of their liberty interest in their good name, honor, and reputation. In Paul, the plaintiffs photograph was included by local police chiefs in a flyer of “active shoplifters,” following the plaintiffs arrest for shoplifting. Id. at 695, 96 S.Ct. at 1158. After the shoplifting charge was dismissed, the plaintiff filed suit under 42 U.S.C. § 1983 against the police chiefs, alleging that the police officials stigmatized his reputation such that his future employment opportunities were impaired, thereby depriving him of liberty interests protected by the Fourteenth Amendment. Id. at 696-97, 96 S.Ct. at 1158-59. The Supreme Court rejected the plaintiffs claim, finding that injury to reputation by itself was not a “liberty” interest protected under the Fourteenth Amendment. Id. at 708-09, 96 S.Ct. at 1164. Instead, the Court required that in addition to the stigma inflicted to one’s reputation, one must also allege the distinct alteration or extinction of a previously recognized right or status. Id. at 711, 96 S.Ct. at 1165. This has become known as the “stigma-plus” test.

The immediate problem with the plaintiffs’ argument in this case is that we have already concluded that under the circumstances present here, the plaintiffs have not alleged an alteration to a previously recognized right or status. At most, they have alleged injury to their business reputation, which we concluded above is not analogous to injury to business goodwill. Reputation alone is not a constitutionally protected property interest. Thus, the plaintiffs have no “distinct alteration or extinction” of a previously recognized right to add to then’ alleged stigmatization.

Furthermore, even if the plaintiffs had established both prongs of the “stigma-plus” test, there is no state action to support the latter prong of the test. The plaintiffs urge us to follow the Fifth Circuit’s lead in Marrero v. City of Hialeah, 625 F.2d 499 (5th Cir.1980), cert. denied, 450 U.S. 913, 101 S.Ct. 1353, 67 L.Ed.2d 337 (1981), and recognize injury to the “plus” even if it depends upon the reactions of third parties, as opposed to resulting from direct governmental action. The plaintiffs in Marrero sued city officials for defamatory remarks which allegedly stigmatized their reputations and injured their business goodwill. The district court dismissed Marrero’s claims for failure to state a claim. In reversing the district court, the Fifth Circuit held that because Florida recognizes business goodwill as a property interest, it cannot be injured without due process. Marrero, 625 F.2d at 514. Therefore, because the alleged defamation caused both injury to reputation and damage to a protected interest, the stigma-plus test was satisfied. Id. at 516. “The fact that the injury to the ‘plus’ here, i.e., to appellants’ protected interest in goodwill, depends upon the reactions of third parties to the defamatory statements made by the government is immaterial.” Id. at 516 n. 23.

However, Marrero is not without criticism. The district court in Sullivan v. New Jersey Div. of Gaming Enforcement, 602 F.Supp. 1216, 1222-23 (D.N.J.1985), aff'd, 853 F.2d 921 (3d Cir.1988), expressly disapproved of Marrero. The plaintiffs in Sullivan argued that the defamation by government officials caused them to lose protected rights in contractual relations with third persons. In rejecting this argument, the court pointed out that the government lacked any direct involvement with the contractual relations.

In short, a sine qua non of a “stigma-plus” suit is that the “plus” must be the result of state action directly affecting the plaintiffs rights or status under the law. The fact that state action may be involved in the “stigma” (i.e., defamation) is not of itself sufficient to maintain the action.

Sullivan, 602 F.Supp. at 1222.

We agree with Sullivan. As we pointed out in Cooper v. Dupnik, 924 F.2d 1520, 1534 (9th Cir.1991), aff'd in relevant part, 963 F.2d 1220 (9th Cir.1992) (en banc), “[i]t seems to us that the result in Sullivan makes better law and is truer to Paul than the result in Marrero.” In dicta, we agreed that state action must accompany both prongs of the “stigma-plus” test. “If plaintiff only has to show that the state defamed him — and not that the state did something else as well — in order to state a claim for deprivation of liberty under § 1983, the effect would be to transmute all defamation actions against state actors in which plaintiff can show some harm resulting from the defamation into § 1983 actions.” Sullivan, 602 F.Supp. at 1223. We conclude today that the “stigma-plus” test requires that the defamation be accompanied by an injury directly caused by the Government, rather than an injury caused by the act of some third party.

In this case, the plaintiffs failed to show that Miller’s report directly interfered with their interest in goodwill. Instead, the plaintiffs complain of potential reactions of third parties to the report. Because this does not follow the intent and spirit of Paul, we reject the plaintiffs’ second claim and refuse to extend constitutional protection to a possible, indirect impairment of business goodwill.

3. Right to Petition

In its third claim, Waste Management alleged that Miller’s report (1) impaired its ability to obtain a use permit for its proposed landfill, (2) was intended to retaliate against Waste Management for exercising its First Amendment right to petition the Government, (3) was intended to chill and did chill its First Amendment right to petition.¹

We affirm the dismissal of Waste Management’s claim because we conclude that its application for a major use permit is not equivalent to a petition to the Government for redress of grievances under the First Amendment. The Supreme Court has limited Petition Clause protection to fact settings where associational or speech interests are also implicated. See The First Amendment Right to Petition Government for a Redress of Grievances: Ctd from a Different Cloth, Julie M. Spanbauer, 21 Hastings Const. L.Q. 15 (1993) (tracing history of Petition Clause and examining Supreme Court doctrine). Neither interest is involved in the present case. Because Waste Management’s application for a use permit does not fall within the constitutional protection of the First Amendment’s Petition Clause, its third claim must also fail.

4. Liberty Interest In First Amendment Rights

Waste Management again relies on the “stigma-plus” test from Paul to argue that Miller’s report deprived it of its liberty without due process. This time Waste Management argues that the stigma occurred “in connection with”² the exercise of its First Amendment right to petition the Government for approval of the permit to develop and operate the landfill. The district court dismissed the claim without prejudice because Waste Management had failed to state a claim in count three for a violation of its First Amendment rights. Without the First Amendment violation, there is no federally protected right to connect with the plaintiffs’ alleged injury to reputation as required under the “stigma-plus” test. See Cooper, 924 F.2d at 1532. Thus, dismissal of the fourth claim is also proper.

5. Quasi-Adjudication of Criminal Conduct Without Due Process

The plaintiffs make their final claim under Jenkins v. McKeithen, 395 U.S. 411, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969). In the complaint, the plaintiffs allege that Miller “exercised a function closely akin to making an official and public adjudication of criminal culpability.” The report allegedly “publicly branded and continues to brand the plaintiffs as connected to organized crime.” The plaintiffs contend that due process entitled them to notice and an opportunity to be heard prior to the dissemination of the report.

In Jenkins, the Supreme Court reviewed the constitutionality of a statute that created a commission of inquiry to make public findings concerning criminal violations in labor management relations. The plaintiffs in Jenkins complained that the commission was an “executive trial agency ‘aimed at conducting public trials concerning criminal law violations’ and that its function was publicly to condemn.” Jenkins, 395 U.S. at 419, 89 S.Ct. at 1847. The Court agreed and held that because the commission clearly exercised an accusatory function, its procedures violated the minimal requirements of due process. Id. at 428, 89 S.Ct. at 1852. Rather than serve a purely investigative function, the commission in Jenkins was meant to “supplement and assist the efforts and activities of the several district attorneys, grand juries and other law enforcement officials and agencies.... ” Id. at 415, 89 S.Ct. at 1845.

The present case is distinguishable from Jenkins. Miller exercised an investigatory, rather than an accusatory, function for the County of San Diego. The Board had asked Miller to investigate allegations of impropriety because Waste Management proposed to own and operate a landfill in San Diego County. In its memorandum to Miller, the Board requested that the plaintiffs’ operating record be “closely examined, and impartially investigated to see how their record compares with other nationwide firms in the waste industry.” We note that the memorandum also cautioned against any “unfounded allegations or hearsay comments [that may] tarnish individual reputations.” Miller merely conducted the investigation and reported his findings to the Board so that further legislative action could be taken and the Board could approve or deny Waste Management’s application. This is a far cry from the accusatory, quasi-adjudicatory commission found in Jenkins.

The plaintiffs cite no authority, and we have found none, that a public official must give notice before disseminating a report under the circumstances of this case. As noted above, this case does not present an accusatory, adjudicatory fact pattern. The plaintiffs have failed to state a claim upon which relief could be granted for a deprivation of liberty in violation of due process.

6. Miller’s Claim of Legislative Immunity

Because we affirm the district court’s dismissal of all claims, we do not address Miller’s claim of legislative immunity.

AFFIRMED.

1 . The First Amendment provides:

Congress shall make no law ... abridging the freedom of speech, or of the press; or the right

of the people peaceably to assemble, and to petition the Government for a redress of grievances.

U.S. Const, amend. I.

2 . In Cooper, we clarified the two ways in which the "stigma-plus" test of Paul could be met. Cooper, 924 F.2d at 1532 (citing Stevens v. Rifkin, 608 F.Supp. 710, 726-27 (N.D.Cal.1984)). First, a plaintiff can allege that the injury to reputation caused the denial of a federally protected right. Cooper, 924 F.2d at 1532. Or, second, a plaintiff can allege the injury to reputation was inflicted in connection with a federally protected right. Id. Waste Management uses the second method to make its claim for liberty interests in the right to petition the Government.