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By Steven G. Mehta

A very interesting arbitration case just came down in California.  It holds that even if you are a nonsignatory to the arbitration agreement, you may be able to enforce the agreement if is within the basis of the arbitration agreement.  In addition, non-signatories to the arbitration agreement may also be forced to be subjected to arbitration.

This is a novel case and even looking  at the opinion, hotly contested by the Justices themselves.  Here is the opinion.

Filed 3/29/11

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

JSM TUSCANY, LLC et al., Petitioners, v. THE SUPERIOR COURT OF LOS ANGELES COUNTY, Respondents;

NMS PROPERTIES, INC., et al.,

Real Parties in Interest.

B227360

(Los Angeles County

Super. Ct. No. BC432260)

ORIGINAL PROCEEDINGS in mandate. Kevin C. Brazille, Judge. Petition denied with directions.

Tourtelot & Butler and Robert H. Tourtelot for Petitioners.

No appearance for Respondents.

Manly & Stewart, John C. Manly and Morgan A. Stewart for Plaintiffs and Real Parties in Interest.

_______________________________________

In these writ proceedings, we consider the trial court’s denial, without prejudice, of petitioners’ motion to compel arbitration pursuant to the provisions of three separate, but substantially identical, real estate purchase contracts. Petitioners are twelve of the twentyseven defendants named in the first amended complaint (the operative pleading before us) filed by the four plaintiffs, N. Neil Skekhter; NMS Properties, Inc.; 15394 NM, LLC; and NMS/JSM San Lorenzo, LLC.

Plaintiffs’ complaint, although pleading some sixteen causes of action, essentially seeks recovery of damages and other relief from the several defendants for their breach of the three real estate sales contracts (hereinafter, PSAs) and the failure of some of the defendants to meet the requirements of three related Deed Restriction agreements that those defendants had entered into with the City of Santa Monica, and as to one of which two of the plaintiffs, 15394 NM and NMS/JSM San Lorenzo, claim to be third-party beneficiaries.

The three PSAs each contained a broad arbitration clause which the petitioners moved to enforce. The trial court denied the motion to compel arbitration on the grounds that not all of the plaintiffs and only a small number of the defendants were actually signatories to the PSAs. In addition, the Deed Restriction agreements entered into by several of the defendants and the City of Santa Monica contained no arbitration clause, and the trial court concluded that those agreements were not dependent on or intertwined with the PSAs, thus giving rise to non-arbitrable disputes.

After reviewing the record in this factually complex matter, we conclude that the trial court did not have before it sufficient information to determine whether plaintiffs should be compelled to arbitrate and therefore properly denied the motion to compel without prejudice. We will therefore deny the petition and remand the matter with directions.

FACTUAL AND PROCEDURAL BACKGROUND

Preliminarily, we note that while, in broad outlines, this case appears to be a dispute between Jones and Jones-related entities on one side and Shekhter and Shekhter-related entities on the other, this is not necessarily the case. The Jonesrelated entities generally include “JSM” in their names, while the Shekhter-related entities begin with “NMS.” One of the plaintiffs, however, is named NMS/JSM San Lorenzo, a name which suggests that, perhaps, at one point, Jones and Shekhter may have been in business together. In any event, it is apparent that the NMS/JSM San Lorenzo entity is now aligned with Shekhter and the other Shekhter-related plaintiffs.

JSM Construction, a Jones-related entity, was an active real estate developer in the City of Santa Monica (the City). In or about 2004 and 2005, JSM Construction was granted administrative approval to develop four mixed-use buildings, each to include dozens of residential rental units. The properties were to be located at 626 Broadway, 1548 Sixth Street, 1418 Seventh Street, and 1539 Fourth Street in the City. The City’s administrative approvals were subject to certain conditions, one of which related to the provision of affordable housing units. JSM Construction could satisfy these conditions by paying a in-lieu fee, dedicating on-site affordable housing units in each of the projects, constructing off-site affordable housing units, or acquiring land for affordable housing. As we shall soon discuss, JSM Construction chose to satisfy this obligation by means of the construction of off-site affordable housing units.

At approximately the same time, Jones contracted to sell to Shekhter, for $4,000,000, a “deed restricted” affordable housing apartment building in the City. The contract was originally dated November 11, 2004, and pertained to the sale of “1244 [Sixth] Street, or, in the sole discretion of Seller, such other property reasonably comparable in size and location developed by Seller [with a deed restricted affordable housing apartment building].” On or about September 15, 2005, the agreement was amended to designate the property to be sold as the property located at 711 Colorado. Pursuant to the 711 Colorado PSA, Shekhter paid a $500,000 deposit toward the total purchase price of $4,000,000. The PSA provided that Jones was to develop and construct a low-income deed restricted apartment building on the 711 Colorado property, and that escrow would close on the sale to Shekhter within 60 days after the City issued a certificate of occupancy for the project.

JSM Construction then agreed with the City that it would satisfy its affordable housing requirements with respect to the properties at 626 Broadway, 1548 Sixth Street, 1418 Seventh Street, and 1539 Fourth Street, by constructing the necessary amount of affordable housing units at 711 Colorado. Pursuant to the City’s requirements, a deed restriction was to be recorded on the property to insure that the off-site affordable housing units would be maintained for 55 years.

JSM Construction’s agreement with the City was memorialized in a Deed Restriction agreement dated April 2, 2007. Pursuant to the Deed Restriction agreement, JSM Construction and JSM Modena, the Jones-related entity which, by this time, owned 711 Colorado, agreed to “provide and maintain” 26 affordable housing units on the 711 Colorado property. However, the Deed Restriction agreement did not set forth any particular schedule for performance; it did not indicate when (if ever) the affordable housing units would be built. Instead, the Deed Restriction agreement provided that it ran with the property, and would “apply to and bind the heirs, successors and assigns of all the parties hereto and shall run with and burden the 711 Colorado Property for the benefit of the City, the public, and surrounding landowners . . . .  [JSM Modena] shall expressly make the conditions and covenants contained in this Agreement a part of any deed or other instrument conveying any interest in the property.”

By this Deed Restriction agreement, JSM Construction was permitted to develop the four properties at 626 Broadway, 1548 Sixth Street, 1418 Seventh Street, and 1539 Fourth Street as market-rate rental apartment buildings, as the City’s requirements relating to affordable housing were to be satisfied by the affordable housing to be constructed on JSM Modena’s property at 711 Colorado. For this reason, we refer to the four properties as the Modena-benefitted properties, and 711 Colorado as the Modena affordable housing property. Two of the Modena-benefitted properties, 1548 Sixth Street and 1539 Fourth Street, are now owned by two (Shekhter-related) plaintiffs in this case, NMS/JSM San Lorenzo and 15394 NM, respectively. The remaining two Modena-benefitted properties are owned by Jones-related entities (JSM Lugano and JSM Genoa). The record does not indicate how or when the Shekhterrelated plaintiffs became owners of two of the Modena-benefitted properties.

The affordable housing project was never constructed on the 711 Colorado property; the parties eventually agreed that the cost of construction would exceed the $4,000,000 original purchase price. On May 18, 2009, the parties entered into an amendment and assignment of the PSA. The amendment indicated that the sellers were now Jones and JSM Modena, while the buyer became Shekhter-related entity (and plaintiff) NMS Properties. Pursuant to the terms of the amendment, Jones would no longer construct the affordable housing project on 711 Colorado. Instead, the property to be conveyed would consist of the property itself, all plans and specifications for the construction of the affordable housing project, any development rights related to the development project, and Jones’s rights under agreements with architects, engineers, and consultants regarding the project. The purchase price was to consist solely of buyer’s assumption of a note (and security documents) on the property, and the $500,000 deposit was to be refunded at closing. Moreover, the parties would subsequently agree on a payment to be made by sellers to buyer to cover the costs of construction in excess of the original purchase price. Escrow was to close within five days of buyer giving notice that it was prepared to close, but not later than November 1, 2009.

We pause at this moment for two important points. First, the amendment indicates that, if there was no agreement reached on the amount of the excess costs to be paid by the sellers, the buyer could unilaterally terminate the terms of amendment, which would reinstate the terms of the initial agreement. There is no allegation, or evidence, that this was done. Instead, plaintiffs filed suit on the PSA as amended. Second, as expressed above, the Deed Restriction ran with the land. Thus, it was apparently contemplated at this point that NMS Properties, as the future owner of 711 Colorado, would be responsible for constructing the affordable housing project on that property in accordance with the Deed Restriction.

We have set forth the factual history of this dispute with regard to the 711 Colorado property. The dispute repeated with respect to two additional parcels, with one important difference: none of the properties benefitted by the other contemplated affordable housing projects are owned by plaintiffs; instead, they are all owned by defendants. We discuss these properties briefly.

In November 2004, Jones agreed to sell to Shekhter the property at 1514 Seventh Street (which, before the transfer, became owned by JSM Tuscany) on which there was to be constructed a deed restricted affordable housing project, for $3,750,000, including a $500,000 deposit. On March 15, 2007, JSM Construction and JSM Tuscany entered into a Deed Restriction agreement with the City similar in terms to the Modena Deed Restriction. In this case, the four Tuscany-benefitted projects were located at 606 Broadway, 1420 Fifth Street, 1442 Fifth Street, and 507 Wilshire Boulevard. These projects are all owned by Jones-related entities, JSM Positano, JSM San Marco and JSM Arrezo. On May 18, 2009, the 1514 Seventh (Tuscany) PSA was amended in terms virtually identical to that of the 711 Colorado (Modena) PSA — the sellers were now Jones and JSM Tuscany; the buyer was now NMS Properties; the property to be conveyed was the 1514 Seventh property with all plans, development rights, and other paperwork; the sale price would be the assumption of an existing note; the deposit would be returned; there would be an additional payment from the seller for the construction costs in excess of the original sales price; and the agreement would close five days after buyer was prepared to do so, but no later than November 1, 2009.

In November 2006, Jones agreed to sell to Shekhter the property at 1437 Fifth Street (which, before the transfer, became owned by JSM Spoleto) on which there was to be constructed a deed restricted affordable housing project, for $4,250,000, including a $750,000 deposit. On May 18, 2009, the 1437 Fifth PSA was amended in terms virtually identical to that of the other two PSAs — the sellers were now Jones and JSM Spoleto; the buyer was now NMS Properties; the property to be conveyed was the 1437 Fifth property with all plans, development rights, and other paperwork; the sale price would be the assumption of an existing note; the deposit would be returned; there would be an additional payment from the seller for the construction costs in excess of the original sales price; and the agreement would close five days after the buyer was prepared to do so, but no later than November 1, 2009. On June 18, 2009, JSM Construction and JSM Spoleto entered into a Deed Restriction agreement with the City similar in terms to the Modena and Tuscany Deed Restrictions. In this case, the three Spoleto-benefitted projects were located at 1241 Fifth Street, 1427 Seventh Street, and 525 Broadway. These projects are all owned by Jones-related entities, JSM Roma, JSM Lucca and a Prudential/JSM entity, respectively.

According to plaintiffs, defendants breached the amended PSAs, by failing to turn over the properties and related documents as agreed, and failing to refund the deposits. This is not meant, however, to be a comprehensive enumeration of defendants’ alleged wrongdoing.

Because the facts of this case are so complex, we now briefly summarize the roles played by all parties. (1) Plaintiff Shekhter was the original buyer in all three PSAs; by amendment to the PSAs, he assigned his rights under each PSA to NMS Properties. Although Shekhter appears to have an interest in the other plaintiff entities, it is not entirely clear on what basis he seeks relief as an individual – particularly with respect to his breach of contract causes of action. (2) Plaintiff NMS Properties was, by virtue of assignment from Shekhter, the buyer of the three (Modena, Tuscany and Spoleto) affordable housing properties (land only), pursuant to the amended PSAs. (3) Plaintiffs 15394 NM and NMS/JSM San Lorenzo owned Modena-benefitted properties, identified in the Modena Deed Restriction agreement as properties which could be developed as market-rate rentals without affordable housing units due to the construction of the Modena affordable housing project at 711 Colorado.

We now discuss the defendants and petitioners. (1) Defendant and petitioner Jones was a seller of the three affordable housing properties, pursuant to the original and amended PSAs; he also has an interest in the other defendants and petitioners. (2) Defendants and petitioners JSM Modena, JSM Tuscany and JSM Spoleto were additional sellers of the three affordable housing properties, pursuant to the amended PSAs; they were also parties to the Deed Restriction agreements with the City. (3) Defendant and petitioner JSM Construction was a party to the Deed Restriction agreements with the City. (4) The remaining defendants and petitioners each own properties, identified in the Deed Restriction agreements, which were to be benefitted by the affordable housing projects. JSM Lugano and JSM Genoa were Modenabenefitted properties; JSM Positano, JSM San Marco and JSM Arrezo were Tuscany-benefitted properties; and JSM Roma and JSM Lucca were Spoleto-benefitted properties. These benefitted property defendants were sued on the basis that they received wrongfully-diverted funds (the deposits made by plaintiffs under the PSAs) and for breach of the Deed Restriction agreements.

The plaintiffs filed this action on February 24, 2010. The first amended complaint (which is the one with which we are concerned) was filed on April 30, 2010. Plaintiffs’ 66-page first amended complaint alleges 16 causes of action, sounding in tort and contract. Plaintiffs’ opposition to the motion to compel, and their opposition to petitioners’ writ petition, narrow their focus to four bases for relief: (1) claims for breach of the PSAs; (2) claims for breach of the Deed Restriction agreements; (3) claims that defendants used the wrongfully-retained deposit amounts (from the PSAs) to develop their other projects; and (4) claims that defendants wrongfully encumbered the Tuscany and Modena properties (recording deeds of trust in favor of Robhana, Inc. and Charles Dunn Capital, Inc.) which should have been clear of trust deeds and transferred to plaintiffs pursuant to the amended PSAs. Plaintiffs also named as a defendant Integrated Lender Services, the trustee on that deed of trust. We refer to these three defendants collectively as the Trust Deed Defendants. Plaintiffs allege that all defendants but the three Trust Deed Defendants have an alter ego relationship with Jones and are allegedly merely conduits through which he conducts his construction and development business.

On April 16, 2010 (two weeks prior to the filing of the first amended complaint), the Prudential defendants filed a motion to compel arbitration, based on the arbitration clause in the PSAs. Petitioners filed a notice of joinder in that motion on June 17, 2010. Each of the PSAs contained the same very broad arbitration clause: “Any disagreement or dispute between the Parties with reference to the interpretation, performance or breach of any provisions of the Agreement, this Addendum, or any Exhibit to the Agreement or this Addendum, shall, at the request of either Party, be resolved by binding arbitration, and any award shall include reasonable attorney’s fees and costs to the prevailing party. The arbitrator shall apply California substantive law and the California Evidence Code to the proceeding. The arbitrator shall not have the power to commit errors of law or legal reasoning, nor shall the arbitrator have the power to make an award that would not have been available in a Court of Law had the Parties chosen to litigate rather than arbitrate. The award may be vacated or corrected pursuant to California Code of Civil Procedure, Sections 1286.2 or 1286.6 for any such error or for any such award in excess of the arbitrator’s power. Each Party to such arbitration shall have all rights of discovery permitted by the California Code of Civil Procedure, and in this regard, the Parties hereby incorporate and make a part hereof the provisions of Code of Civil Procedure, Section 1283.05 and 1283.1.

“NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED HEREIN DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED HEREIN. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.” (Italics added.)

The trial court ruled on the motion to compel arbitration on July 22, 2010. Noting that only two of the four plaintiffs and five of the twenty-seven defendants were signatory parties to one or more of the PSAs (the only agreements containing an arbitration clause) and concluding that some of the claims asserted by the plaintiffs did not arise from conduct involving the PSAs, the trial court denied the motion, without prejudice. It explained its reasoning, in part, as follows:

“Here, it is clear that the claims generally concern the [PSAs]. However, there are claims which also concern the restricted deed agreements entered with the [C]ity, which do not contain an arbitration clause, and cannot be deemed to fall within the ambit of the purchase and sale agreements. Thus, some claims are clearly arbitrable, while others are not. And, some parties are subject to arbitration, while others are not. This case is not one where application of the doctrine of equitable estoppel makes sense, given the existence of wholly distinct contract claims which are not subject to arbitration. Further, there is a very real possibility of conflicting rulings as to the entities which are not parties to these motions, and are not parties to the arbitration agreements. As such, this case is appropriately one where the Court must deny arbitration under CCP § 1281.2(c).”

Petitioners did not notice an appeal, but rather filed the pending petition for writ relief. Their petition raises issues involving unusual, if not novel, circumstances concerning the application of Code of Civil Procedure, section 1281.2, subdivision (c) as well as the needs of judicial economy.

ISSUES PRESENTED

There are essentially four issues presented by these writ proceedings. First, is relief by writ of mandate, rather than appeal, appropriate in the particular circumstances of this case? We conclude that it is. Second, may defendants who are not signatories to the agreements containing an arbitration clause enforce the arbitration clause contained therein against signatory party plaintiffs who have filed suit on claims arising under the agreements? Existing law establishes that they may. Third, may nonsignatory plaintiffs who have joined in the action to assert claims based upon or arising out of the alleged breach of the contracts containing the arbitration clauses also be compelled to arbitrate, even by defendants who are not themselves signatory parties to the contracts containing the arbitration clauses? We conclude, as a matter of first impression, that they may. Finally, are all of the causes of action alleged by plaintiffs, including those for breach of the Deed Restriction agreements, inextricably intertwined with the obligations under the PSAs? We conclude that, on the record before us, a definitive answer to that question is not possible.

DISCUSSION

1. Standard of Review

There are two different critical written agreements before us and there is no dispute as to their provisions. We are thus presented with legal issues to resolve, not factual ones. When “the language of an arbitration provision is not in dispute, the trial court’s decision as to arbitrability is subject to de novo review.” (Gravillis v. Coldwell Banker Residential Brokerage Co. (2006) 143 Cal.App.4th 761, 771.) Thus, in cases where “no conflicting extrinsic evidence is introduced to aid the interpretation of an agreement to arbitrate, the Court of Appeal reviews de novo a trial court’s ruling on a petition to compel arbitration.” (California Correctional Peace Officers Assn. v. State of California (2006) 142 Cal.App.4th 198, 204.)

This principle finds expression in many cases. (See, for extensive list of such authorities, Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 707.) Thus, we review the trial court’s order under a de novo standard.

2. Review By Writ Is Appropriate

In Powers v. City of Richmond (1995) 10 Cal.4th 85, 113, our Supreme Court stated, “Mandate is available to review an appealable judgment only when the remedy by appeal would be inadequate or the issues presented are of great public importance and must be resolved promptly.” (Italics added.) The “or” is significant here, as it implies that even when the remedy by appeal would be adequate, writ review may nonetheless be available if the issues are important enough to require prompt resolution. Subsequent cases have confirmed this interpretation.

In Rodrigues v. Superior Court (2005) 127 Cal.App.4th 1027, the court was considering a writ petition from an order granting a motion to set aside a default and default judgment under Code of Civil Procedure section 473, subdivision (b). The order had granted relief based on a declaration of attorney fault by an attorney who was not licensed to practice in California. The issue was whether the mandatory relief provisions of Code of Civil Procedure section 473, subdivision (b) applied to foreign attorneys. (Rodrigues v. Superior Court, supra, 127 Cal.App.4th at p. 1029.) The court acknowledged that an order vacating a default judgment and setting aside the default is itself appealable. (Id. at p. 1032.) “However,” the court stated, “writ review of an appealable order is appropriate where it is necessary to resolve an issue of first impression promptly and to set guidelines for bench and bar. [Citations.] For these reasons, writ review is appropriate in the present case.” (Ibid.) Similarly, in Elden v. Superior Court (1997) 53 Cal.App.4th 1497, 1504, the court allowed writ review of an order denying a petition to confirm an arbitration award, as the petition raised a novel issue of law. The issues raised by the instant petition are similarly novel and important, rendering writ review appropriate.

3. Signatory Parties May Be Compelled To Arbitrate Their Claims
Against NonSignatory Parties.

 

“Generally speaking, one must be a party to an arbitration agreement to be bound by it or invoke it.” (Westra v. Marcus & Millichap Real Estate Investment Brokerage Co., Inc. (2005) 129 Cal.App.4th 759, 763 (Westra); Rowe v. Exline (2007) 153 Cal.App.4th 1276, 1284 (Rowe).) “There are exceptions to the general rule that a nonsignatory to an agreement cannot be compelled to arbitrate and cannot invoke an agreement to arbitrate, without being a party to the arbitration agreement.” (Westra, supra, 129 Cal.App.4th at p. 765; Rowe, supra, 153 Cal.App.4th at p. 1284.)

One pertinent exception is based on the doctrine of equitable estoppel. (Boucher v. Alliance Title Co., Inc. (2005) 127 Cal.App.4th 262, 268 (Boucher); Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 220 (Goldman); see generally, Knight, et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group 2009) ¶¶ 5:266.10-5:266.25, pp. 5-189 to 5-192.) Under that doctrine, as applied in “both federal and California decisional authority, a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are ‘intimately founded in and intertwined’ with the underlying contract obligations.” (Boucher, supra, 127 Cal.App.4th at p. 271; Goldman, supra, 173 Cal.App.4th at pp. 217-218.) “By relying on contract terms in a claim against a nonsignatory defendant, even if not exclusively, a plaintiff may be equitably estopped from repudiating the arbitration clause contained in that agreement.” (Boucher, supra, 127 Cal.App.4th at p. 272; Goldman, supra, 173 Cal.App.4th at p. 220.) “The rule applies to prevent parties from trifling with their contractual obligations.” (Turtle Ridge Media Group, Inc. v. Pacific Bell Directory (2006) 140 Cal.App.4th 828, 833 (Turtle Ridge).)

In Boucher, supra, 127 Cal.App.4th 262, the plaintiff sued Alliance Title Company, Inc. (Alliance), and Financial Title Company (Financial) in connection with a purported breach of his employment agreement with Financial. (Id. at p. 265.) Both defendants petitioned to compel arbitration under an arbitration clause in the employment agreement. The trial court denied Alliance’s petition, on the ground that it was not a signatory to the employment agreement. The Court of Appeal reversed. The Boucher court concluded that, under federal law, a signatory to an arbitration clause may be compelled to arbitrate against a nonsignatory when the relevant causes of action rely on and presume the existence of the contract containing the arbitration provision. (Id. at p. 269.) In other words, a plaintiff who relies on the contractual terms in a claim against a nonsignatory may be precluded from repudiating the arbitration clause in the contract. (Id. at p. 272.) The court held that the plaintiff in Boucher was estopped from avoiding arbitration with Alliance, because his claims against Alliance relied on, made reference to, and presumed the existence of the employment agreement. (Id. at pp. 272273.)

Other California courts, applying federal law, have embraced the estoppel theory, holding that a signatory plaintiff who sues on a written contract containing an arbitration clause may be estopped from denying arbitration if he sues nonsignatories as related or affiliated persons with the signatory entity. (Turtle Ridge, supra, 140 Cal.App.4th at p. 833; Metalclad Corp. v. Ventana Environmental Organizational Partnership (2003) 109 Cal.App.4th 1705, 1713-1714, 1716-1717 (Metalclad).) As the court in Turtle Ridge explained: “ ‘[T]he equitable estoppel doctrine applies when a party has signed an agreement to arbitrate but attempts to avoid arbitration by suing nonsignatory defendants for claims that are “ ‘based on the same facts and are inherently inseparable’ ” from arbitrable claims against signatory defendants.’ ” (Turtle Ridge, supra, at p. 833, quoting Metalclad, supra, at pp. 1713-1714.) Claims that rely upon, make reference to, or are intertwined with claims under the subject contract are arbitrable. (Boucher, supra, 127 Cal.App.4th at pp. 269-270.)

Thus, a nonsignatory defendant may compel a signatory plaintiff to arbitrate under the doctrine of equitable estoppel. For the doctrine to apply, “the claims plaintiff asserts against the nonsignatory must be dependent upon, or founded in and inextricably intertwined with, the underlying contractual obligations of the agreement containing the arbitration clause.” (Goldman, supra, 173 Cal.App.4th at pp. 217-218.) “This requirement comports with, and indeed derives from, the very purposes of the doctrine: to prevent a party from using the terms or obligations of an agreement as the basis for his claims against a nonsignatory, while at the same time refusing to arbitrate with the nonsignatory under another clause of that same agreement.” (Id. at p. 221.) Application of the doctrine in a proper case is not unfair to signatory plaintiffs resisting arbitration: Not only have such plaintiffs “decided the theories on which to sue” the nonsignatory, they also have “consented to arbitrate the claims against [the signatory defendant] anyway.” (Rowe, supra, 153 Cal.App.4th at p. 1290.)

“Courts applying equitable estoppel against a signatory have ‘looked to the relationships of persons, wrongs and issues, in particular whether the claims that the nonsignatory sought to arbitrate were “ ‘ “intimately founded in and intertwined with the underlying contract obligations.” ’ ” ’ ” (Metalclad, 109 Cal.App.4th at p. 1713.) Application of “the estoppel doctrine in this context does not require a conscious or subjective intent to avoid arbitration, but turns upon the nexus between the contract and the causes of action asserted.” (Rowe, supra, 153 Cal.App.4th at p. 1289.) “The focus is on the nature of the claims asserted by the plaintiff against the nonsignatory defendant.” (Boucher, supra, 127 Cal.App.4th at p. 272.) “Claims that rely upon, make reference to, or are intertwined with claims under the subject contract are arbitrable.” (Rowe, at p. 1287.)

“Because equitable estoppel applies only if the plaintiffs’ claims against the nonsignatory are dependent upon, or inextricably bound up with, the obligations imposed by the contract plaintiff has signed with the signatory defendant, we examine the facts alleged in the complaints.” (Goldman, 173 Cal.App.4th at pp. 229230.)

Based on these authorities, it is clear that the signatory plaintiffs, Shekhter and NMS Properties, can be compelled to arbitrate all of their claims against signatory and nonsignatory defendants alike, to the extent that those claims are dependent upon, or inextricably intertwined with, the obligations imposed by the PSAs. We will turn to this latter question after we first consider whether the nonsignatory plaintiffs can also be compelled to arbitrate such claims.

4. Nonsignatory Plaintiffs May Be Required to Arbitrate Claims Arising
From Contract Containing Arbitration Clause

 

The novel question raised by this writ petition is whether the nonsignatory plaintiffs (15394 NM and NMS/JSM San Lorenzo) can also be required to arbitrate their claims which are dependent upon, or inextricably intertwined with, the obligations imposed by the PSAs. We conclude that the rationale of the authorities discussed above applies equally to nonsignatory plaintiffs who bring such causes of action.

We are concerned with the doctrine of equitable estoppel. When a plaintiff brings a claim which relies on contract terms against a defendant, the plaintiff may be equitably estopped from repudiating the arbitration clause contained in that agreement. (Boucher, supra, 127 Cal.App.4th at p. 272; Goldman, supra, 178 Cal.App.4th at p. 220.) There is no reason why this doctrine should not be equally applicable to a nonsignatory plaintiff. When that plaintiff is suing on a contract – on the basis that, even though the plaintiff was not a party to the contract, the plaintiff is nonetheless entitled to recover for its breach, the plaintiff should be equitably estopped from repudiating the contract’s arbitration clause. (Cf. Crowley Maritime Corp. v. Boston Old Colony Ins. Co. (2008) 158 Cal.App.4th 1061, 1070-1071 (Crowley) [indicating federal law applies estoppel in such circumstances when the nonsignatory received direct benefits under the contract]. See also NORCAL Mutual Ins. Co. v. Newton (2000) 84 Cal.App.4th 64, 84 [stating that no person can be permitted to adopt that part of a contract which is beneficial to him or her and simultaneously reject its burdens, including the burden to arbitrate].)

This is particularly true where, as appears to be the case here, all of the plaintiffs, signatory and nonsignatory, are related entities. A nonsignatory can be compelled to arbitrate when a preexisting relationship existed between the nonsignatory and one of the parties to the arbitration agreement, making it equitable to compel the nonsignatory to arbitrate as well. (Crowley, supra, 158 Cal.App.4th at pp. 1069-1070.) Additionally, a nonsignatory can be compelled to arbitrate when it is suing as a thirdparty beneficiary of the contract containing the arbitration clause (id. at p. 1069); this too weighs in favor of enforcing the arbitration clause in this case.

All plaintiffs in this case are apparently pursuing the cause of action for breach of the PSAs, although the legal basis on which each plaintiff is pursuing that cause of action is not entirely clear. The Modena-benefitted property plaintiffs, 15394 NM and NMS/JSM San Lorenzo, who are admittedly not signatories to the PSAs, seek to recover for breach of the Modena PSA, which required JSM Modena to transfer the Modena affordable housing property to signatory NMS Properties. Perhaps, as properties which would have been benefitted by the construction of the affordable housing on the Modena affordable housing property, the Modena-benefitted properties are proceeding on a third-party beneficiary theory. What is clear, however, is that the Modena-benefitted property plaintiffs are seeking to recover against JSM Modena for JSM Modena’s alleged breach of the Modena PSA; these plaintiffs cannot assert that they are entitled to recover according to the terms of that agreement, while simultaneously repudiating the arbitration clause contained therein.

Moreover, we believe that there is no rational basis to limit this conclusion to claims expressly based on the breach of the PSAs. The equitable estoppel doctrine extends to claims that are dependent upon or inextricably intertwined with the obligations imposed by the contract containing the arbitration clause. As with signatory plaintiffs, when nonsignatory plaintiffs are pursuing such claims, they should be bound by the arbitration clause in the contract which is integral to their claims.

Thus, resolution of the motion to compel arbitration should not involve, as plaintiffs would have it, counting up the number of nonsignatory plaintiffs and nonsignatory defendants, and denying the motion if there appear to be many of them. A nonsignatory plaintiff can be compelled to arbitrate a claim even against a nonsignatory defendant, when the claim is itself based on, or inextricably intertwined with, the contract containing the arbitration clause. We now turn to an analysis of plaintiffs’ claims.

5. The Record is Insufficient to Enable Resolution of the Motion to
Compel Arbitration

 

We are thus required to analyze the causes of action alleged in the complaint, to determine whether the claims asserted by the plaintiffs are dependent upon, or inextricably intertwined with, the obligations imposed by the PSAs. As discussed above, plaintiffs pursue four types of claims: (1) claims for breach of the PSAs; (2) claims for breach of the Deed Restriction agreements; (3) claims that defendants used the wrongfully-retained deposit amounts (from the PSAs) to develop their other projects; and (4) claims that defendants wrongfully encumbered the Tuscany and Modena properties. It is readily apparent that the first, third, and fourth category of claims are all dependent upon the PSAs. Obviously, claims for breach of the PSAs are dependent upon the PSAs. Claims for misuse of the wrongfully-retained deposits are dependent upon the PSAs; the obligation to return the deposits was imposed by the amendment to the PSAs and nothing else. Claims for wrongfully encumbering the Tuscany and Modena properties similarly are dependent upon the PSAs; any obligation not to encumber the properties was imposed solely by the PSAs, which required the properties to be sold to NMS Properties. Thus, all of these claims, whether asserted by signatory or nonsignatory plaintiffs, and whether asserted against signatory or nonsignatory defendants, are based upon the obligations created by the PSAs and therefore subject to the arbitration clauses therein.

The problem lies with the second category of claims – those for breach of the Deed Restriction agreements. Preliminarily, as stated above (see footnote 12, ante), it is difficult for this court to determine the theory of liability asserted by plaintiffs against the benefitted-property defendants for breach of the Deed Restriction agreements. While the issue of whether plaintiffs can ultimately state a claim for relief against these defendants will be for the trial court or arbitrator to determine, some clear explication of plaintiffs’ Deed Restriction-based causes of action against these defendants is necessary for court resolution of the motion to compel arbitration – as it must be determined whether the obligation purportedly breached is one inextricably intertwined with the obligations set forth in the PSAs. Moreover, given that, under the amendment to the PSAs, NMS Properties was to receive the affordable housing properties and construct the affordable housing projects there itself, we question the basis on which any plaintiffs can assert any cause of action against defendants for breaching the Deed Restriction agreements. The Deed Restriction agreements run with the land; NMS Properties would therefore be legally obligated to meet the requirements that such agreements imposed on the property owners. Plaintiffs should not be permitted to avoid an arbitration obligation by manufacturing baseless causes of action purportedly based on a contract without an arbitration clause. In short, even if defendants were initially obligated by the Deed Restriction agreements to construct the affordable housing projects on the three properties at issue, plaintiffs agreed (by amendments to contracts containing arbitration clauses) that they would take on the obligation to construct those projects. Under those circumstances, it is difficult to believe that plaintiffs can simultaneously sue defendants for breaching the Deed Restriction agreements by not constructing the projects, and harder still to believe that the issue should not be resolved by arbitration.

Beyond these substantial concerns, it is simply unclear as to whether the PSAs and the Deed Restriction agreements are inextricably intertwined. Certainly, a persuasive argument can be made that they are. The PSAs initially provided that Jones would construct “deed restricted” affordable housing projects on the properties; obtaining the Deed Restriction agreements could simply be seen as compliance with the obligations imposed by the PSAs. Even if the Deed Restriction agreements are seen as confirming the defendants’ intention to build those projects (and setting forth benefits that would be granted to other properties once the affordable housing projects were built), the initial construction obligation (and, certainly, any obligation flowing toward plaintiffs) was imposed by the PSAs.

An alternative argument also exists, at least with respect to the two Modenabenefitted property plaintiffs. These plaintiffs could conceivably assert that the Modena PSA was irrelevant. As owners of properties to be benefitted by the construction of affordable housing at Modena, by the terms of the Deed Restriction agreement, they could argue that JSM Construction’s failure to construct that affordable housing harmed them – regardless of whether Jones had also promised Shekhter in the PSA that the affordable housing project would be built and/or sold to Shekhter.

Resolution of the issue of whether the Deed Restriction agreement causes of action are inextricably intertwined with the obligations under the PSAs would be dramatically aided by evidence regarding the economic benefits to be gained by Shekhter and the remaining plaintiffs by entering into the transactions at issue. With respect to the Tuscany and Spoleto projects, Shekhter had no interest in any of the properties to be benefitted by the construction of the affordable housing projects; Shekhter was simply to own (through NMS Properties) the affordable housing projects themselves. Was Shekhter intending to operate the Tuscany and Spoleto affordable housing projects at a profit? Or did he expect to gain some economic benefit from the fact that the affordable housing projects would benefit other properties, in which he apparently had no interest? If Shekhter intended to receive an economic benefit from the fact that other properties were benefitted from the operation of the affordable housing projects he agreed to operate, this would strongly suggest that the PSAs and Deed Restriction agreements were inextricably intertwined. If, to the contrary, Shekhter simply intended to benefit from operating the affordable housing projects themselves, the Deed Restriction agreements would arguably appear to be separate and apart from the PSAs.

While the analysis is somewhat different with respect to the Modena project, as Shekhter owned two of the Modena-benefitted properties, this simply raises further questions. Did Shekhter acquire ownership of the Modena-benefitted properties before or after the Deed Restriction agreement? Did he acquire ownership before or after the PSAs? Was his acquisition of the properties an element of the consideration for agreeing to operate the Modena affordable housing project, or completely independent of it? Indeed, was it consideration for agreeing to operate all three affordable housing projects, resulting in a conclusion that the three projects were interrelated, perhaps inextricably so?

In conclusion, it is possible – perhaps even likely – that all causes of action in this case are based on, or inextricably intertwined with, the obligations imposed by the PSAs which contained the arbitration clauses. However, the record before us (and before the trial court) is insufficient to enable that determination. Thus, the trial court did not err in denying the motion to compel arbitration without prejudice. On remand, should defendants seek to renew such motion, they must support the motion with exhibits and, if necessary, declarations, demonstrating that all causes of action – particularly those based on breach of the Deed Restriction agreements – are inextricably intertwined with the obligations imposed by the PSAs.

DISPOSITION

The petition for a writ of mandate is denied. The matter is remanded for further proceedings consistent with this opinion. Each of the parties shall bear their own costs.

 

CERTIFIED FOR PUBLICATION

 

 

CROSKEY, Acting P. J.

We Concur:

 

 

KITCHING, J.

 

 

ALDRICH, J.

 The petitioners are Craig D. Jones; JSM Modena, LLC; JSM Tuscany, LLC; JSM Spoleto, LLC; JSM Lugano, LLC; JSM Genoa, LLC; JSM Roma, LLC; JSM Lucca, LLC; JSM Arrezo, LLC; JSM Positano, LLC; JSM San Marco, LLC; and JSM Construction, Inc. (collectively, petitioners). It appears that these entities are all owned and/or controlled by Jones.

 

 It appears that Shekhter owns and/or controls each of the other three plaintiff entities.

 The facts that we recite are taken primarily from the plaintiffs’ first amended complaint and the exhibits attached thereto. As discussed in greater detail below, there are substantial gaps in the documentation.

 

 The operative complaint is of no assistance in this regard, alleging only that NMS/JSM San Lorenzo is “a California limited liability company” which “is, and at all times mentioned herein, was qualified to do business and doing business in the State of California, with its principal place of business in the County of Los Angeles, City of Los Angeles, California.” The next sentence of the complaint, which was perhaps intended to explain this entity’s role in the dispute, is instead a repeat of the sentence describing the role of 15394 NM, a different plaintiff.

 

 The Administrative Approval Permit numbers are AA05-004, AA04-027, AA04018 and AA04-026. We assume the first two digits of the numbers refer to the year that the permits were issued.

 Although the record before us indicates that the other two Deed Restriction agreements at issue in this case were recorded, there is no indication in the record as to whether this Deed Restriction agreement was recorded.

 The properties are alleged to be owned by JSM Lugano, PRU/JSM Lugano, JSM Genoa and PRU/JSM Genoa. The “PRU/JSM” entities include the involvement of Prudential Investment Management, Prudential Financial Services, Inc., and/or Prudential Real Estate Investors, Inc. There are a total of nine Prudential-related entities that are named as defendants in this case. They originally brought a motion to compel arbitration which was denied; they did not seek writ review. As they are not parties to this writ proceeding (although they apparently fully support petitioners’ position), we discuss their involvement only as related to petitioners’ motion to compel arbitration.

 We do not know, for example, if any transfer from Jones to Shekhter of two of the Modena-benefitted properties was part of the overall transaction which was intended to transfer the Modena affordable housing property to Shekhter. Nor do we know if any transfer of the Modena-benefitted properties made reference to an obligation to construct the affordable housing at Modena. Moreover, as referenced above, the San Lorenzo entity which owns one of the Modena-benefitted properties has a name, “NMS/JSM San Lorenzo,” which suggests, at least, that Jones may have had an interest in the entity at one time.

 Plaintiffs’ complaint does not identify an owner of the 1442 Fifth Street property.

 We note here that the Deed Restriction agreement was entered into after the parties had agreed that it would be NMS Properties, not JSM Construction, that would construct the affordable housing project at 1437 Fifth.

 

 The copy of the Spoleto Deed Restriction agreement provided to this court in petitioners’ exhibits in support of their petition is cut off after the eighth page; the other two Deed Restriction agreements are 23 pages in length.

 Try as we might, this court cannot determine on what basis plaintiffs could possibly recover against the benefitted-property defendants for breach of the Deed Restriction agreements. By the language of the Deed Restriction agreements themselves, these defendants were, at best, third-party beneficiaries of the Deed Restriction agreements, and owed no duties under the agreements to anyone. Plaintiffs, who were to have been the eventual owners of the affordable housing projects which would have benefitted the benefitted-property defendants, and (with respect to the Modena Deed Restriction agreement) were two other third-party beneficiaries of the Deed Restriction agreements, do not clearly explain the basis on which they can recover against third-party beneficiaries for breach of the Deed Restriction agreements. In the operative complaint, plaintiffs variously allege that these defendants “received a favorable deed restriction”; breached the Deed Restriction agreements “by failing to construct the properties as required”; were developed (if developed) “at the benefit and to the detriment of” the related affordable-housing projects; and “received market rate housing units, without an affordable component.” While plaintiffs’ allegations are not clear as to whether the benefitted properties were, in fact, developed (as the benefitted-property defendants are apparently sued both for failing to develop and for developing their properties), we fail to see how a third-party beneficiary of a contract can be liable for breaching that contract simply by receiving (or not receiving) the benefits to which it was entitled under the contract.

 

 Apparently, the defendants not only sought to compel arbitration, but also filed a demurrer to the first amended complaint, which was sustained with leave to amend. The plaintiffs filed their second amended complaint on September 13, 2010. That pleading, however, is not before us and is not relevant to the issues presented by the pending petition for a writ of mandate.

 

 In their opposition to the writ petition, plaintiffs argue, for the first time, that their cause of action seeking injunctive relief under Business and Professions Code section 17200 cannot be subject to arbitration. As this argument was never raised before the trial court, we decline to address it.

 The PSAs were standard form contracts, with the bulk of the preprinted provisions stricken and a separately-drafted addendum attached. The arbitration clause was contained in the separately-drafted addendum. There is no suggestion that the clause was not intentionally agreed-upon by the parties.

 Code of Civil Procedure, section 1281.2, provides, in relevant part as follows: “On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: [¶] . . . [¶] (c) A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact. . . .  [¶] If the court determines that a written agreement to arbitrate a controversy exists, an order to arbitrate such controversy may not be refused on the ground that the petitioner’s contentions lack substantive merit. [¶] If the court determines that there are other issues between the petitioner and the respondent which are not subject to arbitration and which are the subject of a pending action or special proceeding between the petitioner and the respondent and that a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues or until such earlier time as the court specifies. [¶] If the court determines that a party to the arbitration is also a party to litigation in a pending court action or special proceeding with a third party as set forth under subdivision (c) herein, the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action or special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding.”

 Moreover, we note that there are substantial issues of urgency when the case involves the development of property. In an environmental case involving issues under the California Environmental Quality Act (CEQA), the court noted that in such cases, “time is money. A project opponent can ‘win’ even though it ‘loses’ in an eventual appeal because the sheer extra time required for the unnecessary appeal (with the risk of higher interest rates and other expenses) makes the project less commercially desirable, perhaps even to the point where a developer will abandon it or drastically scale it down.” (County of Orange v. Superior Court (2003) 113 Cal.App.4th 1, 6.) We have an analogous concern here.

 Where the equitable estoppel doctrine applies, the nonsignatory has a right to enforce the arbitration agreement. (Rowe, supra, 153 Cal.App.4th at p. 1290.) In such cases, the nonsignatory is not a “third party” within the meaning of section 1281.2, subdivision (c), and that provision simply does not apply. (Laswell v. AG Seal Beach, LLC (2010) 189 Cal.App.4th 1399, 1407-1408.)

 Shekhter asserts that, as he assigned his rights under the PSAs to NMS Properties, he is no longer a signatory to those agreements. However, plaintiffs’ complaint makes no effort to exclude Shekhter from the plaintiffs suing on the PSAs, and, at one point, appears to allege a breach of the initial PSAs, rather than the amended PSAs. (Plaintiffs allege Jones, JSM Modena, JSM Tuscany and JSM Spoleto breached the PSA by failing to develop the affordable housing projects – an obligation required by the initial PSAs, but not the amended ones.) As Shekhter is suing on the PSAs, and appears to, at least in part, assert breach of the initial PSAs to which he was a party, we conclude that he is necessarily a signatory.

 In our analysis, we place the greatest emphasis on the theory of (1) equitable estoppel of a plaintiff suing on a contract rather than the (2) binding of entities that are in some way related to a signatory party or are third-party beneficiaries of the contract, although we note that the two approaches are ultimately nearly identical. This is so because it is difficult to conceive of a situation in which a nonsignatory party can state a valid claim based on the contract, without having some legal relationship with a signatory to the contract or being a third-party beneficiary of the contract.

Thus, for example, in County of Contra Costa v. Kaiser Foundation Health Plan, Inc. (1996) 47 Cal.App.4th 237, the court considered the situation in which a plaintiff, who had been hit by a car, sued her health insurer for medical malpractice as well as other defendants allegedly liable for the accident. The codefendants brought claims for equitable indemnity against the insurer, who moved to compel arbitration of the plaintiff’s action and the co-defendants’ crossactions. While the plaintiff’s action against the insurer was clearly arbitrable, as the insurance contract contained an arbitration clause, the codefendants’ cross-actions were not. The court concluded that the co-defendants could not be compelled to arbitrate because there was no preexisting relationship between the co-defendants and the insured plaintiff which would have enabled the insured plaintiff to bind them when she agreed to the arbitration clause. (Id. at p. 243.) Yet, the same result could have been reached on the theory that the codefendants’ cross-actions against the health insurer were not based on the contract between the insurer and the plaintiff.

Consider also the language in Crowley Maritime Corp. v. Boston Old Colony Ins. Co., supra, 158 Cal.App.4th 1061, in which defendant insurers, faced with an equitable contribution claim from a plaintiff insurer which had indemnified the common insured, sought to compel arbitration on the basis of arbitration clauses in defendant insurers’ insurance policies. The appellate court concluded arbitration could not be compelled, because a cause of action for equitable contribution is not based on the insurance policies, but arises in equity. (Id. at p. 1064.) The court rejected the defendant insurers’ argument that they were simply trying to “ ‘stand in the shoes’ ” of the insured, noting that a “common theme in [those] cases is that the party seeking relief was suing on the contract itself, not a statute or some other basis outside the contract.” (Id. at p. 1071.) In contrast, however, when a nonsignatory to a contract is attempting to seek relief for breach of the contract itself, that nonsignatory must be doing so by means of either a third-party beneficiary argument, or a legal theory which entitles that nonsignatory to “stand in the shoes” of a party to the agreement – either by virtue of a preexisting relationship, or as an assignee or successor in interest.

 This is particularly true with respect to the Spoleto Deed Restriction agreement, which was not even executed until after the Spoleto PSA had been amended, providing that it would be NMS Properties that would develop the Spoleto affordable housing project.

 Was there, for example, a contemplated agreement whereby Shekhter would be compensated by the benefitted properties for his continued operation of the affordable housing projects which enable the benefitted properties to continue to operate as market-rate rentals?

 The Modena and Tuscany PSAs, at least, were simultaneously executed, as were the amendments to all three PSAs.

 

 A renewed motion would, obviously, be directed to the newly-filed second amended complaint. At the hearing on the motion to compel arbitration, defendants suggested that they might renew their motion if they succeeded on demurrer with respect to some causes of action. Given our concerns regarding the breach of Deed Restriction agreement causes of action as alleged in the first amended complaint, such a demurrer may be appropriate.

 The issue of third parties must also be addressed. It appears from the first amended complaint that the Prudential defendants would have arguments similar, if not identical, to those of the petitioners here. The Trust Deed Defendants, however, are not similarly situated. Should the trial court determine that petitioners are otherwise entitled to arbitration, the trial court should consider whether to stay the action against the Trust Deed Defendants pending completion of the arbitration pursuant to Code of Civil Procedure section 1281.2, subdivision (c). (Laswell v. AG Seal Beach, LLC, supra, 189 Cal.App.4th at p. 1405.)

 

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By Steven G. Mehta

The court of appeal recently decided a case involving elder abuse and professional negligence.  Although it is an unpublished case, it has some interesting analysis.



HANEY v. ESKATON PROPERTIES, INC.

DENNIS HANEY, Plaintiff and Appellant,

v.

ESKATON PROPERTIES, INC., Defendant and Respondent.

 

No. C063376.

 

Court of Appeals of California, Third District, Sacramento.

 

 

Filed March 28, 2011.

NOT TO BE PUBLISHED

HULL, J.

Following the death of his mother, Doris Hilton, plaintiff brought this action against defendant Eskaton Properties, Inc., the operator of a long term care facility where Hilton lived the last three months of her life, asserting elder abuse, wrongful death, and survivor claims. The trial court sustained defendant’s demurrer to the elder abuse and survivor claims without leave to amend and granted defendant’s motion for summary judgment on the wrongful death claim. Plaintiff appeals the ensuing judgment for defendant. We conclude the trial court properly granted summary judgment on the wrongful death claim but erred in sustaining the demurrer to the elder abuse and survivor claims. We therefore reverse the judgment.

FACTS AND PROCEEDINGS

Because this matter involves both an order sustaining demurrers and an order granting summary judgment, we accept as true all material allegations of the complaint (Hensler v. City of Glendale (1994) 8 Cal.4th 1, 8, fn. 3; Shoemaker v. Myers (1990) 52 Cal.3d 1, 7) and view the evidence presented on the summary judgment motion in the light most favorable to plaintiff (Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1107).

Defendant is in the business of providing long term care as a 24-hour health care facility. Plaintiff is the sole surviving heir and successor of Doris Hilton.

On or about August 11, 2006, Hilton was admitted to defendant’s facility in Fair Oaks, California. She was 78 years old. Hilton remained at the facility until November 26, 2006, when she was transferred to a Kaiser hospital, where she died on November 28.

Plaintiff brought this action against defendant on March 5, 2008. The first cause of action for elder abuse alleged defendant breached its duty to provide Hilton with care, comfort and safety by, among other things, failing to follow, implement and adhere to physician orders, failing to monitor Hilton’s condition, and failing to maintain accurate records on her condition. Defendant demurred to the first cause of action, and the trial court sustained the demurrer with leave to amend.

Plaintiff filed a first amended complaint, and defendant again demurred to the first cause of action for elder abuse. The trial court sustained the demurrer with leave to amend.

Plaintiff filed a second amended complaint containing three causes of action. In the first elder abuse claim, plaintiff again alleged breach of duty to provide care, comfort and safety, but this time with more specificity. In the second cause of action, plaintiff alleged wrongful death as a result of defendant’s actions. The third cause of action alleged a survivor claim on behalf of Hilton.

Defendant demurred to the first and third causes of action, and the trial court sustained the demurrers, this time without leave to amend. Defendant then moved for summary judgment on the sole remaining claim for wrongful death. The trial court granted the motion, both on the basis of the statute of limitations and on undisputed evidence that defendant acted within the applicable standard of care. The court thereafter entered judgment for defendant.

Further facts shall be provided in connection with plaintiff’s contentions on appeal.

DISCUSSION

I

Elder Abuse and Survivor Claims

The first cause of action of the second amended complaint is untitled. However, it purports to state a claim under the Elder Abuse and Dependent Adult Civil Protection Act (Welf. & Inst. Code, § 15600 et seq.) (Elder Abuse Act or Act). (Further undesignated section references are to the Welfare and Institutions Code.) The third cause of action, titled “SURVIVAL ACTION,” repeats all prior allegations and further alleges plaintiff is the successor in interest of Doris Hilton. Hence, this claim has no viability independent of the first two and stands or falls on the strength of those claims.

The Elder Abuse Act is intended “to protect a particularly vulnerable portion of the population from gross mistreatment in the form of abuse and custodial neglect.” (Delaney v. Baker (1999) 20 Cal.4th 23, 33 (Delaney).) The original focus of the Act was on reporting abuse and neglect. (Ibid.) However, later amendments shifted the focus to private, civil enforcement. (Ibid.)

Under the Elder Abuse Act, “heightened remedies are available to plaintiffs who successfully sue for dependent adult abuse. Where it is proven by clear and convincing evidence that a defendant is liable for neglect or physical abuse, and the plaintiff proves that the defendant acted with recklessness, oppression, fraud, or malice, a court shall award attorney fees and costs. Additionally, a decedent’s survivors can recover damages for the decedent’s pain and suffering.” (Sababin v. Superior Court (2006) 144 Cal.App.4th 81, 88 (Sababin).)

Abuse of an elder or a dependent adult is defined under the Act as “[p]hysical abuse, neglect, financial abuse, abandonment, isolation, abduction, or other treatment with resulting physical harm or pain or mental suffering” (§ 15610.07, subd. (a)) or “[t]he deprivation by a care custodian of goods or services that are necessary to avoid physical harm or mental suffering” (id., at subd. (b)). “Neglect includes the failure to assist in personal hygiene, or in the provision of food, clothing, or shelter; the failure to provide medical care for physical and mental health needs; the failure to protect from health and safety hazards; and the failure to prevent malnutrition or dehydration. (§ 15610.57.) Physical abuse means, inter alia, assault, battery, prolonged deprivation of food or water, unreasonable physical restraint, or sexual assault. (§ 15610.63.)” (Sababin, supra, 144 Cal.App.4th at p. 88.)

To obtain the remedies available under the Elder Abuse Act, a plaintiff must prove culpability beyond mere negligence. He or she must demonstrate by clear and convincing evidence that the defendant is guilty of recklessness, oppression, fraud, or malice. (Delaney, supra, 20 Cal.4th at p. 31.) Recklessness refers “to a subjective state of culpability greater than simple negligence, which has been described as a `deliberate disregard’ of the `high degree of probability’ that an injury will occur.” (Ibid.) Oppression, fraud and malice “involve `intentional,’ `willful,’ or `conscious’ wrongdoing of a `despicable’ or `injurious’ nature.” (Ibid.) Conduct giving rise to the enhanced remedies available under the Elder Abuse Act is “essentially equivalent to conduct that would support recovery of punitive damages.” (Covenant Care, Inc. v. Superior Court (2004) 32 Cal.4th 771, 789 (Covenant Care ).)

The Elder Abuse Act does not encompass liability for professional negligence. Section 15657.2 provides that “any cause of action for injury or damage against a health care provider, as defined in Section 340.5 of the Code of Civil Procedure, based on the health care provider’s alleged professional negligence, shall be governed by those laws which specifically apply to those professional negligence causes of action.” In particular, “MICRA, the Medical Injury Compensation Reform Act of 1975, refers to several statutes that restrict or place conditions upon causes of action and remedies directed at `health care providers’ for `professional negligence.’ (See Code Civ. Proc., § 364 [requiring 90-day notice prior to bringing lawsuit]; id., § 667.7 [permitting periodic payment of any judgment against the provider]; id., § 1295 [requiring a certain type of notice for providers’ mandatory arbitration provisions]; Bus. & Prof. Code, § 6146 [providing caps on attorney contingency fees]; Civ. Code, § 3333.1 [making admissible evidence of workers’ compensation or disability payments]; and id., § 3333.2 [providing a $250,000 cap on noneconomic damages].)” (Delaney, supra, 20 Cal.4th at pp. 28-29, fn. 2.)

Thus, while “[i]t is true that statutory elder abuse includes `neglect as defined in Section 15610.57′ [citation], which in turn includes negligent failure of an elder custodian `to provide medical care for [the elder’s] physical and mental health needs’ [citation],” such neglect “covers an area of misconduct distinct from `professional negligence.’ As used in the Act, neglect refers not to the substandard performance of medical services but, rather, to the `failure of those responsible for attending to the basic needs and comforts of elderly or dependent adults, regardless of their professional standing, to carry out their custodial obligations.’ [Citation.] Thus, the statutory definition of `neglect’ speaks not of the undertaking of medical services, but of the failure to provide medical care.” (Covenant Care, supra, 32 Cal.4th at p. 783.) In other words, while negligently providing health care is not covered by the Elder Abuse Act, doing so recklessly, oppressively, fraudulently or maliciously is.

In his opposition to defendant’s demurrers, plaintiff argued the complaint seeks relief from defendant in defendant’s role as a health care facility, not as a health care provider. Plaintiff argued there is no allegation in the complaint that defendant’s conduct “fell below the standard of care for a medical or healthcare practitioner.” According to plaintiff, “the function of the healthcare provider is distinct from that of an elder custodian, and the fact that some healthcare institutions, such as nursing homes, perform custodial functions and provide professional medical care does not mean that the functions of the two are the same.”

In its order sustaining defendant’s demurrers, the trial court agreed the first cause of action is not couched in terms of professional negligence but nevertheless concluded it does not state a claim for elder abuse. The court explained: “Plaintiff is correct that he pleads neglect, not professional negligence. In other words, `it speaks not of the undertaking of medical services, but of the failure to provide medical care.’ [Citation.] Once again, however, the court agrees with defendant that the allegations regarding defendant’s alleged neglect sounds in negligence, not the higher standard of elder abuse.”

In other words, according to the trial court, the first cause of action alleges no greater culpability than negligence. Furthermore, the negligence alleged is not that of a medical professional providing substandard care but of a care custodian failing to provide any care. As we shall explain, we disagree with both conclusions.

Plaintiff contends the trial court erred in concluding the first cause of action fails to allege the higher level of culpability required for elder abuse. He argues the complaint alleges specific instances of neglect that violate a number of nursing home regulations. It further alleges those acts of neglect were “intentional and/or in reckless disregard for the probability that severe injury and/or suffering would result from their failure to carefully adhere to their duties” and that defendant “knew, or should have known, that there was a probability that disease, injury, or death would result from their failure to adhere to their duties.”

Defendant counters that the individual acts of neglect alleged by plaintiff, such as failure to follow, implement and adhere to physician’s orders, failure to monitor Hilton’s condition and report meaningful changes, and failure to react to emergent conditions, are alleged in conclusory fashion, relate to the undertaking of medical care rather than custodial care, and “simply do not rise to the level of egregious elder abuse.”

As we shall explain in the next section, the parties’ arguments as to whether the complaint’s allegations relate to medical or custodial care are beside the point. Whether the conduct alleged amounts to medical care or custodial care, the question remains whether that conduct rises to the level of culpability required by the Elder Abuse Act.

As for defendant’s argument that the individual acts of neglect are alleged in a conclusory fashion, we disagree. A complaint must state “the facts constituting the cause of action, in ordinary and concise language.” (Code Civ. Proc., § 425.10, subd. (a).) Although the general rule requires statutory causes of action to be pleaded with particularity (Covenant Care, supra, 32 Cal.4th at p. 790), the plaintiff need only set forth the essential facts of the case with reasonable precision and particularity sufficient to acquaint the defendant with the nature of the claim (Youngman v. Nevada Irrigation Dist. (1969) 70 Cal.2d 240, 245). “The particularity required in pleading facts depends on the extent to which the defendant in fairness needs detailed information that can be conveniently provided by the plaintiff; less particularity is required where the defendant may be assumed to have knowledge of the facts equal to that possessed by the plaintiff.” (Jackson v. Pasadena City School Dist. (1963) 59 Cal.2d 876, 879.)

In paragraph 8 of the complaint, plaintiff sets forth various regulatory requirements for health care facilities. In paragraph 9, plaintiff alleges defendant violated those regulations. In particular, plaintiff alleges defendant intentionally failed to:

“a.) Follow, implement and adhere to physician’s orders by failing to give Doris Hilton antibiotics that had been prescribed for the treatment of a kidney infection that Defendants knew she was suffering from, in deliberate indifference to her worsening physical condition and her obvious signs of physical and mental distress and decline.

“b.) Monitor Doris Hilton’s condition and report meaningful changes therein and in particular, or deliberately failed to document her physical condition as required to monitor emergent and/or worsening conditions and in particular a diagnosed kidney infection for which Defendants had stopped providing Doris Hilton prescribed medication and for which the proper record keeping would have provided the information necessary for her evaluation by licensed practitioners and which records were required for her care.

“c.) Note and properly react to emergent conditions and to timely transfer Doris Hilton to an acute care facility or otherwise appropriately act when conditions so warrant it. Defendants, or through deliberate indifference [sic], failed to summon or arrange for proper medical treatment of Doris Hilton’s kidney infection, failed to follow through with and implement her treating doctor’s orders and waited until it was too late to transfer her to a hospital for medical treatment.

“d.) Maintain accurate records of Doris Hilton’s condition and activity as described above.

“e.) Treat Doris Hilton as an individual with respect, without abuse by failing to properly care for her urgent physical and mental conditions by administering prescribed medications despite her obvious suffering and physical and mental decline, by failing to properly safeguard her personal possessions such that Defendants lost Doris Hilton’s dentures that she required for eating and then compounded the problem by failing, with deliberate indifference to their duty to do so, to assist her in eating or provide her with proper nutrition.

“g.) [sic] Properly and accurately administer medication by failing to give her prescribed medication to Doris Hilton as described above.”

It is readily clear from the foregoing that plaintiff does not merely allege “in a conclusory fashion” that defendant breached its various duties, as defendant asserts. Plaintiff does not allege simply that defendant failed to follow, implement and adhere to physician orders. Plaintiff alleges defendant did so “by failing to give Doris Hilton antibiotics that had been prescribed for the treatment of a kidney infection that Defendants knew she was suffering from, in deliberate indifference to her worsening physical condition and her obvious signs of physical and mental distress and decline.” Likewise, plaintiff does not allege simply that defendant failed to note and properly react to emergent conditions and timely transfer Hilton to an acute care facility. He alleges defendant “failed to summon or arrange for proper medical treatment of Doris Hilton’s kidney infection, failed to follow through with and implement her treating doctor’s orders and waited until it was too late to transfer her to a hospital for medical treatment.”

Defendant contends the alleged conduct nevertheless does not rise to the level of elder abuse. In support of this contention, defendant cites a number of cases where the court found the conduct of the health care provider sufficiently grievous to amount to elder abuse. For example, in Delaney, supra, 20 Cal.4th 23, 88-year-old Rose Wallien was admitted to the defendant’s facility after fracturing her ankle and died less than four months later. At the time of her death, Wallien had stage III and stage IV bedsores on her ankles, feet and buttocks, and there was evidence that she was frequently left lying in her own urine and feces for extended periods. The evidence also showed numerous violations of monitoring and recordkeeping regulations. (Id. at p. 27.) The state high court indicated there was substantial evidence to support the jury’s determination that the defendant neglected Wallien and that its conduct was reckless. (Id. at p. 41.)

In Mack v. Soung (2000) 80 Cal.App.4th 966, Girtha Mack resided at Covenant Care Nursing and Rehabilitation Center where she was attended by Dr. Lian Soung. While at Covenant, Mack was left in a bedpan for 13 consecutive hours and developed an untreatable stage III bedsore. Covenant and Dr. Soung concealed the condition until forced by an ombudsman to reveal it. Dr. Soung also opposed hospitalization for Mack until her condition worsened, at which time he abruptly abandoned Mack as a patient. (Id. at p. 969.) Mack’s survivors filed suit against Dr. Soung for elder abuse and intentional infliction of emotional distress. Dr. Soung demurred to the elder abuse claim, and the trial court sustained the demurrer without leave to amend. (Id. at p. 970.)

On appeal to this court, we reversed. Regarding Dr. Soung’s argument that the complaint alleged professional negligence rather than elder abuse, we explained: “We have no trouble concluding that a doctor who conceals the existence of a serious bedsore on a nursing home patient under his care, opposes her hospitalization where circumstances indicate it is medically necessary, and abandons the patient in her dying hour of need commits neglect within the meaning of the [Elder Abuse] Act. Further, if it can be proved by clear and convincing evidence that such acts were committed with recklessness, oppression, fraud, or malice, the heightened remedies of section 15657 will apply.” (Mack v. Soung, supra, 80 Cal.App.4th at p. 973.)

In each of the foregoing cases, the court indicated the issue of whether the conduct rose to the level of elder abuse, i.e., whether the conduct was reckless, oppressive, fraudulent or malicious, was for the trier of fact.

Defendant also relies on Covenant Care, supra, 32 Cal.4th 771. There, the plaintiffs alleged the defendant left their father, Juan Inclan, in his bed, unattended and unassisted, for long periods of time and failed to provide him with assistance in feeding and hydration, thereby causing Inclan to become malnourished and to lose much of his body weight. (Id. at p. 778.) As Inclan deteriorated, he showed signs of starvation, dehydration, neglect and abuse, but the defendant deliberately failed to report his condition to the proper authorities and misrepresented his condition to the plaintiffs. (Ibid.) When Inclan reached a point of needing immediate medical intervention, he was not transferred to an acute care facility but instead was sent to a 24-hour care setting, where he languished and deteriorated further. (Ibid. )

The issue in Covenant Care was not whether the foregoing conduct rose to the level of elder abuse but whether the plaintiffs were restricted by the procedures outlined in Code of Civil Procedure section 425.13 in seeking punitive damages. The court concluded that section does not apply to an elder abuse claim. (Covenant Care, supra, 32 Cal.4th at p. 790.) The case provides no assistance here.

Another case addressing the level of conduct sufficient for a claim of elder abuse is Sababin. Arlene Renteria was diagnosed with Huntington’s chorea, a disease that subjected her to the risk of skin deterioration. (Sababin, supra, 144 Cal.App.4th at pp. 83-84.) She had aphasia and dysphagia and was dependent on others for nutrition and hydration. (Id. at p. 85.) On June 16, 2000, Renteria was transferred to Covina Rehabilitation Center (Covina). Her care plan required Covina employees to monitor her skin daily for redness and breakdown and report any skin problems to a physician for a treatment order. (Id. at p. 85.) In February 2003, Renteria developed diarrhea and, when her condition did not improve, she was transferred to a hospital. When admitted to the hospital, Renteria had lacerations on her toes and feet, had poor skin condition on her buttocks, a pustule on her left hand and reddened skin on her sacral area. Covina had no documentation of these conditions, nor had a physician been notified for a treatment order. (Id. at p. 85.) Renteria died two months later. (Id. at p. 84.)

Renteria’s survivors brought this action against Covina for, among other things, elder abuse. (Sababin, supra, 144 Cal.App.4th at p. 84.) Covina moved for summary adjudication of the elder abuse claim, and the trial court granted the motion. The court concluded the evidence showed nothing more than ordinary negligence. (Id. at p. 87.)

The Court of Appeal reversed. The appellate court indicated the evidence showed Covina’s employees failed to follow Renteria’s care plan by failing to check her skin condition on a daily basis and failing to notify a physician of any problems that arise. (Sababin, supra, 144 Cal.App.4th at p. 90.) This created an issue of fact as to whether the employees’ conduct was neglect within the meaning of section 15610.57. Moreover, the court concluded, “when the evidence and inferences are liberally construed,” “there is a triable issue as to whether Covina’s employees acted with recklessness, oppression or malice.” (Sababin, at p. 90.) According to the court: “A trier of fact could find that when a care facility’s employees ignore a care plan and fail to check the skin condition of a resident with Huntington’s chorea, such conduct shows deliberate disregard of the high degree of probability that she will suffer injury.” (Ibid.)

In the present matter, the complaint alleges defendants failed to follow a physician’s orders by not giving Hilton prescribed antibiotics for a known urinary tract infection (UTI), failed to monitor Hilton’s condition and report meaningful changes to her physician, failed to document Hilton’s condition as necessary for proper evaluation by licensed practitioners, failed to note and properly react to emergent conditions, failed to arrange for proper medical treatment of Hilton’s UTI, and failed to assist Hilton with eating after she lost her dentures. Plaintiff further alleges the foregoing acts were “intentional and/or in reckless disregard for the probability that severe injury and/or suffering would result from their failure to carefully adhere to their duties” and that defendant “knew, or should have known, that there was a probability that disease, injury, or death would result from their failure to adhere to their duties.” Finally, the complaint alleges: “The conduct of defendants was outrageous. Doris Hilton was forced to endure great pain, mental anguish, humiliation, feelings of helplessness and desperation due to their acts and omissions of deliberate indifference. She was neglected and without care or attention, without assistance in feeding or toileting, and was left without medication for a diagnosed urinary infection until she became confused and incoherent. During this time, her cries of pain and for assistance prompted no response from defendants, who had allocated knowingly inadequate resources to provide proper staffing to care for Doris Hilton. Accordingly, defendants were unwilling and/or unable to react to Doris Hilton’s complaints or follow orders for therapeutic action from her attending physician so that her condition worsened until her death . . . .”

When reviewing a judgment dismissing a complaint after a successful demurrer, we assume the complaint’s properly pleaded or implied factual allegations are true, and we give the complaint a reasonable interpretation, reading it in context. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) The complaint must be liberally construed and given a reasonable interpretation, with a view to substantial justice between the parties. (Amarel v. Connell (1988) 202 Cal.App.3d 137, 140-141.) We treat as true not only the complaint’s material factual allegations, but also facts which may be implied or inferred from those expressly alleged. (Id. at p. 141.)

None of the cases cited by the parties involve a situation where the court concluded the alleged conduct was insufficient to amount to elder abuse. Hence, they provide no guidance on the outer reach of the Act. Nevertheless, like the Court of Appeal in Sababin, we find the allegations of the complaint here sufficient to withstand demurrer. Construed liberally, the complaint alleges, among other things, that defendant failed to adhere to a physician’s orders to administer antibiotics for a known UTI and failed to monitor, document and react appropriately to Hilton’s worsening condition. In addition, “her cries of pain and for assistance prompted no response from defendant[], who had allocated knowingly inadequate resources to provide proper staffing.” Although not expressly alleged, it may be inferred from this that Hilton did in fact cry out in pain and for assistance but received no response. We conclude plaintiff should be given an opportunity to try and prove, by clear and convincing evidence, that such conduct amounted to recklessness, oppression, fraud or malice.

Having so concluded, we likewise conclude the trial court erred in sustaining defendant’s demurrer to the third cause of action, the survivor claim. To the extent plaintiff is able to establish a claim for elder abuse, he would be entitled to recover for the pain and suffering endured by Hilton. (See Sababin, supra, 144 Cal.App.4th at p. 88.)

II

The Wrongful Death Claim

The trial court granted defendant’s motion for summary judgment on plaintiff’s wrongful death claim. The court gave two alternate bases for its ruling: (1) the claim is one against a health care provider and plaintiff failed to file his complaint within one year of discovering the injury, as required by Code of Civil Procedure section 340.5; and (2) defendant presented uncontradicted expert testimony that it met the applicable standard of care.

Plaintiff contends the trial court applied an incorrect standard in ruling on defendant’s motion for summary judgment. Plaintiff argues the trial court applied a standard of care applicable to professional negligence claims, whereas his claim is based on “the failure of the defendant to meet the applicable standard of care of a skilled nursing facility.” Plaintiff argues the proper standard of care is that specified in the California regulations for skilled nursing facilities. (Cal. Code of Regs., tit. 22; see Norman v. Life Care Centers of America, Inc. (2003) 107 Cal.App.4th 1233, 1244.) Plaintiff “disagrees with the trial court that the failure to order a test that had already been determined should be performed would fall under the guise of a failure of professional judgment rather than custodial neglect.” According to plaintiff, “[t]here is a distinction between deciding on what medical test should be performed and failing to obtain a test when it has already been decided that the test should be performed.”

Although left unsaid, we may surmise the point of plaintiff’s arguments is that the trial court erred in applying the one-year statute of limitations applicable to actions against health care providers for professional negligence. Also left unsaid, plaintiff apparently contends as well that, because this is not a professional negligence claim, the trial court erred in concluding expert testimony is necessary to prove a breach of the applicable duty of care. However, as we shall explain, these contentions are based on an overly restrictive view of what constitutes professional negligence by a health care provider.

Code of Civil Procedure section 340.5 reads: “In an action for injury or death against a health care provider based upon such person’s alleged professional negligence, the time for the commencement of action shall be three years after the date of injury or one year after the plaintiff discovers, or through the use of reasonable diligence should have discovered, the injury, whichever occurs first. . . .” It is undisputed defendant is a “health care provider” within the meaning of the foregoing. “Professional negligence” is defined as “a negligent act or omission to act by a health care provider in the rendering of professional services, which act or omission is the proximate cause of a personal injury or wrongful death . . . .” (Code Civ. Proc., § 340.5, subd. (2).)

“Generally `negligence’ is the failure `”to exercise the care a person of ordinary prudence would exercise under the circumstances.”‘ [Citation.] `Professional negligence’ is one type of negligence, to which general negligence principles apply. `With respect to professionals, their specialized education and training do not serve to impose an increased duty of care but rather are considered additional “circumstances” relevant to an overall assessment of what constitutes “ordinary prudence” in a particular situation. Thus, the standard for professionals is articulated in terms of exercising “the knowledge, skill and care ordinarily possessed and employed by members of the profession in good standing . . . .”‘ [Citation.]” (Delaney, supra, 20 Cal.4th at p. 31.)

In Bellamy v. Appellate Department (1996) 50 Cal.App.4th 797, the Court of Appeal considered whether injuries sustained by the plaintiff when she fell off a rolling X-ray table that had been left unsecured and unattended amounted to ordinary or professional negligence for purposes of the applicable statute of limitations. The court concluded it was the latter, explaining: “That the alleged negligent omission was simply the failure to set a brake on the rolling X-ray table or the failure to hold the table in place, neither of which requires any particular skill, training, experience or exercise of professional judgment, does not affect our decision. We presume that during the course of administering an examination or therapy like that which Bellamy underwent, an X-ray technician may perform a variety of tasks, such as assisting the patient onto the table, manipulating the table into one or more desired positions, instructing the patient to move from one position to another, activating the X-ray machine, removing the photographic plates, assisting the patient from the table, etc. Some of those tasks may require a high degree of skill and judgment, but others do not. Each, however, is an integral part of the professional service being rendered. Trying to categorize each individual act or omission, all of which may occur within a space of a few minutes, into `ordinary’ or `professional’ would add confusion in determining what legal procedures apply if the patient seeks damages for injuries suffered at some point during the course of the examination or therapy.” (Id. at p. 808.)

In Canister v. Emergency Ambulance Service, Inc. (2008) 160 Cal.App.4th 388, the defendant was a licensed ambulance service and the plaintiff was a police officer who was injured when the ambulance in which he was accompanying an arrestee hit a curb. The question presented was whether any of the MICRA statutes applied to this situation, which turned on whether the case was one for professional or ordinary negligence. The court found the matter involved professional negligence, explaining: “The MICRA statutes define `”professional negligence”‘ as that negligence that occurs while the health care provider is providing services that are `within the scope of services for which the provider is licensed.’ [Citations.] The relevant test is not the degree of skill required, but whether the negligence occurred in the rendering of services for which a provider is licensed. [Citations.] Although the act of operating an ambulance may be performed by someone having no special knowledge, skill or care as a member of the medical profession, this does not mean the employees here in question were not acting as health care providers in transporting the patient to a medical facility.” (Id. at p. 404.)

In the present matter, while the failure to conduct a test that had previously been ordered by a physician or the failure to administer medication previously prescribed by a physician may or may not require any particular medical skills, these acts are nevertheless integral parts of the health care provided to Hilton by defendant. Those acts cannot be artificially segregated from other discrete acts performed by defendant that required more extensive medical training. We conclude the trial court correctly ruled plaintiff’s wrongful death claim is one for professional negligence and is subject to the one-year statute of limitations in Code of Civil Procedure section 340.5. And because it is undisputed plaintiff failed to bring this action within one year of discovering the injury, the trial court properly concluded defendant is entitled to summary judgment on the wrongful death claim.

Given our resolution of the statute of limitations issue, we are not called upon to decide whether the trial court was correct in deciding the applicable standard of care that applies to this matter.

DISPOSITION

The judgment is reversed. The matter is remanded to the trial court with directions to vacate its orders sustaining defendant’s demurrers to the first and third causes of action of the second amended complaint and granting summary judgment and to enter a new order overruling the demurrers and granting summary adjudication on plaintiff’s wrongful death claim. The parties shall bear their own costs on appeal.

We concur:

NICHOLSON, Acting P. J.

MAURO, J.

By Steven G. Mehta

A new case , Wherry v. Award Inc., recently came down on arbitration clauses. An arbitration clause was found to be procedurally unconscionable where plaintiffs were given the agreement when at the beginning of the relationship with defendants; were told they were required to sign it if they wanted to work for defendants and were only given a few minutes to review and sign the agreement.  The plaintiffs were also not given an opportunity to ask questions; nor were they given a copy of the document.  Further, the clause authorizing the arbitrator to award costs, including the arbitration fee, on the losing party, was substantively unconscionable.

The full copy of the decision is set forth below.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

 

FOURTH APPELLATE DISTRICT

 

DIVISION THREE

 

 

KARENA WHERRY et al.,

 

Plaintiffs and Respondents,

 

v.

 

AWARD, INC., et al.,

 

Defendants and Appellants.

 

 

G042404

 

(Super. Ct. No. 30-2008-00108123)

 

O P I N I O N

 

Appeal from an order of the Superior Court of Orange County, Kirk H. Nakamura, Judge.  Affirmed

Law Office of Michael A. Conger, Michael A. Conger; and Richard H. Benes for Defendants and Appellants Award, Inc., Award-Superstars and Century 21 Superstars.

Duckor Spradling Metzger & Wynne, John C. Wynne and Rose M. Huelskamp for Defendant and Appellant Gregory Britton.

Law Offices of Jason L. Oliver, Jason L. Oliver; Law Offices of John W. Dalton and John W. Dalton for Plaintiffs and Respondents.

 

Defendants Award, Inc., Award-Superstars, Century 21 Superstars and Gregory Britton appeal from an order denying their petition to arbitrate the complaint for gender discrimination and sexual harassment filed by plaintiffs Karena Wherry and Rocelyn Traieh.  Defendants assert the petition should have been granted for a variety of reasons, including that in the contract executed by the parties they agreed to arbitrate all disputes, including those under FEHA (California Fair Employment and Housing Act; Gov. Code, § 12900 et seq.), and the terms of arbitration were not unconscionable.  We determine the arbitration provisions were unconscionable and therefore unenforceable and affirm.

 

FACTS AND PROCEDURAL HISTORY

 

In mid-2006 each plaintiff entered into an Independent Contractor Agreement (agreement) with defendant Award, Inc. to act as a salesperson; defendant Britton signed the contracts as the office manager.  Both agreements contain an arbitration provision, which states, “All disputes or claims between [plaintiff] and other licensee(s) associated with [defendant], or between [plaintiff] and [defendant] arising from or connected in any way with this [a]greement, which cannot be adjusted between the parties involved, shall be submitted to the Association of REALTORS®

(CAR) . . . pursuant to the provisions of its Bylaws, as may be amended from time to time, which are incorporated as part of this [a]greement by reference.  If the Bylaws of the Association do not cover arbitration of the dispute, or if the Association declines jurisdiction over the dispute, then arbitration shall be pursuant to the rules of California law.  The Federal Arbitration Act . . . shall govern this [a]greement.”

The relationships between plaintiffs and defendants were terminated in the spring and summer of 2007.  After plaintiffs filed a complaint for gender discrimination, sexual harassment, and retaliation, defendants filed a petition to compel arbitration, which the court granted.  Plaintiffs petitioned our court for a writ of mandate seeking to reverse the grant of the arbitration petition.  Subsequently we issued an alternative writ of mandate ordering the superior court to vacate its order compelling arbitration and enter a new order denying the motion or show cause in this court.  The trial court vacated its order and denied the motion without any explanation.   Additional facts are set out in the discussion.

 

DISCUSSION

 

1.  Introduction

Unconscionable arbitration agreements are not enforceable.  (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114-121 (Armendariz).) To be voided on this ground, the agreement must be both procedurally and substantively unconscionable.  (Ibid.)  “‘[T]he former focus[es] on “‘oppression’” or “‘surprise’” due to unequal bargaining power, the latter on “‘overly harsh’” or “‘one-sided’” results.’  [Citation.]”  (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071.)  But the two elements need not exist to the same degree.  The more one is present, the less the other is required.  (Armendariz, supra, 24 Cal.4th at p. 114.)

“The procedural element of an unconscionable contract generally takes the form of a contract of adhesion, “‘which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.”’  [Citation.]”  (Little v. Auto Stiegler, Inc., supra, 29 Cal.4th at p. 1071.)  “Substantively unconscionable terms may take various forms, but may generally be described as unfairly one-sided.”  (Id. at pp. 1071-1072.)  In the case before us both elements were present.

 

2.  Procedural Unconscionability

Procedural unconscionability may be proven by showing oppression, which is present when a party has no meaningful opportunity to negotiate terms or the contract is presented to them on a take it or leave it basis.  (Lhotka v. Geographic Expeditions, Inc. (2010) 181 Cal.App.4th 816, 821; Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094, 1100.)

The record reveals that is what occurred here.  Both plaintiffs filed declarations stating that they were given the agreement when they first contracted with defendants and were told they were required to sign it if they wanted to work for defendants.  No one described the agreement’s contents and plaintiffs were given but a few minutes to review and sign it, without any time to ask questions.  Further they were never given a copy of the document.

Defendants provided no evidence to the contrary.  That plaintiffs initialed every page and signed the document does not vitiate plaintiffs’ lack of time to review the agreement or have a lawyer look at it.  This is similar to Ontiveros v. DHL Exp. (USA), Inc. (2008) 164 Cal.App.4th 494, where, in a FEHA action, the court held an arbitration provision in an employment contract was procedurally unconscionable because the employee did not know she had agreed to arbitrate, the agreement was buried in a stack of other documents, the employee had no time to review it, and no one explained it to her.  (Id. at p. 508.)  Defendants attempt to discount this evidence by claiming plaintiffs were “sophisticated.”  But again, they point to no evidence.

Defendants also dispute that it was a take it or leave it agreement, claiming there were “numerous material terms” “not pre[]printed[] and either handwritten or typed by the parties.”  A review of the record does not bear this out.  Each agreement was a preprinted form titled “Independent Contract Agreement” (capitalization omitted) provided by the CAR that did contain some blanks.  But the spaces to be filled in generally were not material:  the date of the agreement, the name of the agent, the realty associations of which the broker was a member, the multiple listing services to which it subscribed, the address of the office, the amount of auto insurance plaintiffs were required to carry, and signature blocks.

One additional blank was an indemnity and hold harmless provision, which referred to one of three exhibits attached to the agreements.  These exhibits also appear to be preprinted although they do not bear the CAR name.  In addition to indemnity the exhibits deal with compensation.  Besides the signature lines, the only handwritten portions filled in blanks stating the beginning commission rate and an anniversary date.  While compensation is material, there is no evidence that term or any other was negotiated, and in fact plaintiffs’ declarations at least imply if they do not actually state the information was filled in before the agreements were presented to them.  In sum, nothing in the record supports defendants’ argument the agreements were negotiated rather than presented as take it or leave it.

Further, contrary to defendants’ claim, the fact there were other real estate firms where plaintiffs could have contracted to work does not necessarily vitiate the unconscionability, especially given the fact that as a CAR form, it is highly likely most if not all other brokerage firms would be using it.  (Szetala v. Discover Bank, supra, 97 Cal.App.4th at p. 1100; Gatton v. T-Mobile USA, Inc. (2007) 152 Cal.App.4th 571, 583.)  It merely means additional procedural unconscionability or a greater degree of substantive unconscionability must be shown.  (Gatton v. T-Mobile USA, Inc., supra, 152 Cal.App.4th at pp. 583-584.)  “[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required . . . and vice versa.”  (Armendariz, supra, 24 Cal.4th at p. 114.)

 

3.  Substantive Unconscionability

“Substantive unconscionability addresses the fairness of the term in dispute.  It ‘traditionally involves contract terms that are so one-sided as to “shock the conscience,” or that impose harsh or oppressive terms.’  [Citation.]”  (Szetela v. Discover Bank, supra, 97 Cal.App.4th at p. 1100.)  Plaintiffs claim there are several provisions that are substantively unconscionable, including that there is no provision for discovery, plaintiffs are subject to fees and costs prohibited by FEHA, and the limitations period is less than what is allowed by statute.

In Armendariz, supra, 24 Cal.4th 83, the court held that a mandatory “arbitration agreement cannot be made to serve as a vehicle for the waiver of statutory rights created by the FEHA.”  (Id. at pp. 101, 103, fn. 8.)  To be valid, at minimum the arbitration agreement must require a neutral arbitrator, sufficient discovery, and a written decision adequate enough to allow judicial review.  Further, it must include all remedies available in a judicial action and the employee may not be required to pay unreasonable costs or fees.  (Id. at p. 102.)  Elimination of or interference with any of these basis provisions makes an arbitration agreement substantively unconscionable.

The terms of the arbitration manual violate Armendariz.  That case directs, among other things, that where employment is conditioned on mandatory arbitration, the employer cannot impose on the employee costs he or she would not normally have to pay if the case were litigated in a court.  (Armendariz, supra, 24 Cal.4th at pp. 110-111.)  Thus, an employee will not be prevented from filing a FEHA suit because of extraordinary costs of litigation.  (Ibid.)  Here the manual does just that by providing the arbitrator may impose costs, including the arbitration fee, on the losing party.

Defendants argue that the arbitration manual does not require plaintiffs to pay costs.  Nevertheless it empowers the arbitrator to impose them, in violation of Armendariz.  Defendants maintain that the arbitration panel “is able to award costs and attorney[] fees consistent with . . . Armendariz.”  But again, nowhere in the agreements or the arbitration manual is that protection provided.

In a similar vein defendants assert this is not a ground on which to invalidate arbitration because Armendariz held that a “mandatory employment arbitration agreement that contains within its scope the arbitration of FEHA claims impliedly obliges the employer to pay all types of costs that are unique to arbitration.”  (Armendariz, supra, 24 Cal.4th at p. 113.)  So it did but in that case there was no provision at all as to who would bear the costs, contrary to the terms here that expose plaintiffs to the risk of paying costs.  That plaintiffs are independent contractors and not employees makes no difference in this context.  The contract by which they were to work for defendants contained a mandatory arbitration provision.

In an FEHA case, unless it would be unjust, a prevailing plaintiff should recover attorney fees, but a prevailing defendant is awarded fees only if the case was frivolous or filed in bad faith.  (Chavez v. City of Los Angeles (2010) 47 Cal.4th 970, 985.)  Here, the agreements provide that the prevailing party is entitled to attorney fees, without any limitation for a frivolous action or one brought in bad faith.  This violates Armendariz.  (Trivedi v. Curexo Technology Corp. (2010) 189 Cal.App.4th 387, 394-395.)  Defendants argue this merely means the arbitrator has the authority to impose attorney fees in line with FEHA.  But nothing in the agreement or the arbitration manual supports this claim.  Moreover, the arbitration manual explicitly states that if the agreement provides for an award of attorney fees, they may be included as part of the award.

In addition, the arbitration manual provides an arbitration must be filed within 180 days of the event triggering the action.  This is far shorter than the minimum one-year statute for FEHA claims.  (Gov. Code, § 12960, subd. (d); see Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1283 [180-day statute of limitations period one factor supporting finding of substantive unconscionability].)  Defendants claim that because plaintiffs filed their complaint within 180 days of receiving their right to sue notices, this issue is irrelevant.  But protections under FEHA are for the benefit of the entire public, not just these plaintiffs.  Thus, a mandatory arbitration provision required as part of an employment relationship cannot waive the statutory rights.  (Armendariz, supra, 24 Cal.4th at pp. 100-101.)

As a backup argument, defendants assert that if the terms of the arbitration manual are unconscionable, the court can somehow disregard them and rely on statutory rules of arbitration (Code Civ. Proc., § 1280 et seq.) based on the agreement’s provision that if CAR declines to arbitrate the case or its CAR’s bylaws “do not cover arbitration of the dispute,” California law will be used.  This does not persuade.

First, there is no evidence the bylaws “do not cover” the claims in the complaint.  Rather, some of the rules covering it are unconscionable.  Second, the language of the provision does not lend itself to an interpretation that it is a fallback in the event defendants’ arbitration rules are found unconscionable.  Third, Code of Civil Procedure section 1280 et seq. does not deal with all of the requirements under Armendariz necessary to enforce an arbitration agreement covering a FEHA dispute.

We also reject defendants’ claim plaintiffs had to prove the CAR would not agree to arbitrate the dispute.  Whether the CAR decided to arbitrate was completely within its discretion; the provision was entirely one-sided.  According to the terms of the agreement, plaintiffs had no power to control this.

In sum, the arbitration agreement was procedurally and substantively unconscionable, leading to the inevitable conclusion it is unenforceable.

 

4.  Severance

Relying on Civil Code section 1670.5, subdivision (a) defendants argue we may simply sever the unconscionable provisions and enforce the remainder of the agreement.  That section does give the court the discretion to do so but it also authorizes the court to reject the entire agreement.  In determining whether to sever, the court must consider the interests of justice.  (Armendariz, supra, 24 Cal.4th at p. 124.)  “[M]ultiple defects [in an agreement] indicate a systematic effort to impose arbitration on [a weaker party] . . . as an inferior forum that works to [the stronger party’s] advantage.”  (Ibid.)  Here, based on the several unconscionable provisions detailed above “the arbitration agreement is so ‘“permeated” by unconscionability [it] could only be saved, if at all, by a reformation beyond our authority.’  [Citations.]”  (Martinez v. Master Protection Corp. (2004) 118 Cal.App.4th 107, 119.)

We agree with defendants that the general rule does favor arbitration and terms should be interpreted liberally (Gravillis v. Coldwell Banker Residential Brokerage Co. (2006) 143 Cal.App.4th 761, 771), but when the agreement is rife with unconscionability as here, the overriding policy requires that the arbitration be rejected (Armendariz, supra, 24 Cal.4th at p. 1278).

 

DISPOSITION

 

The order is affirmed.  Respondents are entitled to costs on appeal.

 

 

 

 

 

RYLAARSDAM, ACTING P. J.

 

WE CONCUR:

 

 

 

ARONSON, J.

 

 

 

IKOLA, J.

 

 

Filed 2/23/11

 

 

 

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

 

FOURTH APPELLATE DISTRICT

 

DIVISION THREE

 

KAREN WHERRY et al,

 

Plaintiffs and Respondents,

 

v.

 

AWARD, INC., et al.,

 

Defendants and Appellants.

 

 

G042404

 

(Super. Ct. No. 30-2008-00108123)

 

ORDER CERTIFYING OPINION

FOR PUBLICATION

Respondents and McGuinn, Hillsman & Palefsky, counsel for California Employment Lawyers Association, each requested that our opinion filed on February 9, 2011, be certified for publication.  It appears that our opinion meets the standards set
forth in California Rules of Court, rule 8.1105(c).  The request is GRANTED.  The opinion is ordered published in the Official Reports.

 

 

 

 

RYLAARSDAM, ACTING P. J.

 

WE CONCUR:

 

 

 

ARONSON, J.

 

 

 

IKOLA, J.

 

 

By Steven G. Mehta

An appellate court in California has added another decision that will either help or hurt the debate on the issue of whether medical bills can be recovered by plaintiffs in personal injury cases based on the amount billed or actually paid.

The Website Law.com has reported on the decision recently.  Here is a brief excerpt of the article.

Plaintiffs lawyers are celebrating the second appeal court ruling in seven months that lets individuals recover the full cost of medical care even if the insurer paid only a smaller, negotiated amount.

The ruling by San Francisco’s 1st District Court of Appeal was handed down Thursday, adding support to an opinion issued by the 4th District’s San Diego branch in November. The California Supreme Court granted review in the latter case by a unanimous vote in March.

The fact that both rulings favor plaintiffs didn’t worry David Ettinger, a partner with Encino’s Horvitz & Levy who was on the losing side of Thursday’s opinion.

“Really,” he said, “until the Supreme Court speaks I don’t think we can make any judgments.”

In Thursday’s ruling in Yanez v. SOMA Environmental Engineering Inc., A123893, the 1st District held that an Alameda County judge erred by reducing a negligence award from $150,000 in damages — including more than $44,500 for past medical expenses — to about $18,000. The lower amount represented the actual payment plaintiff Ana Yanez’s doctors accepted under their contracts with the woman’s insurers.

The appeal court invoked the collateral source rule, which says damages shouldn’t be reduced simply because the victim receives benefits from other sources, such as insurance companies.

“The rule,” Justice Sandra Margulies wrote, “reflects a policy preference favoring the tort victim over the wrongdoer since not applying the rule allows the wrongdoer to profit from the victim’s investment in purchasing insurance or from the generosity of those who come to the victim’s aid.”

Click here to read the full article.

Here is the actual case in its entirety courtesy of Leagle.com:

YANEZ v. SOMA ENVIRONMENTAL ENGINEERING, INC.

ANA SILVA YANEZ, Plaintiff and Appellant,
v.
SOMA ENVIRONMENTAL ENGINEERING, INC., et al., Defendants and Respondents.

No. A123893.

Court of Appeals of California, First District, Division One.

Filed June 24, 2010.

Certified for Publication

Law Office of Paul B. Kemp, Paul B. Kemp and Dan C. Schaar for Plaintiff and Appellant.

Hinton, Alfert & Sumner, Scott H.Z. Sumner and Jeremy Lateiner for Consumer Attorneys of California as Amicus Curiae for Plaintiff and Appellant.

Horvitz & Levy, H. Thomas Watson and David S. Ettinger; Toschi, Sidran, Collins & Doyle, Steve Toschi and Sumair S. Sandhu for Defendants and Respondents.

MARGULIES, Acting P.J.

Plaintiff Ana Yanez sued defendants SOMA Environmental Engineering, Inc., Mansour Sepehr, and Brian Tims (collectively SOMA) for injuries she suffered in an automobile accident. A jury found that SOMA’s negligence caused Yanez’s injuries, and returned a special verdict awarding her $150,000 in damages, including $44,519.01 in damages for past medical expenses. After judgment was entered, SOMA moved to reduce the award for medical expenses to $18,368.24, which was the amount actually accepted by Yanez’s medical providers as payment in full under their contracts with Aetna and Healthnet, her private health insurers. The trial court granted the motion and entered an amended judgment reducing Yanez’s damage award.

Yanez appeals from the amended judgment, contending the trial court erred in reducing the jury’s award, and in denying Yanez her post-offer costs and interest under Code of Civil Procedure section 998. We reverse the amended judgment and remand the case back to the trial court to (1) enter a new judgment restoring the original amount of damages awarded by the jury, and (2) redetermine Yanez’s entitlement to an award of costs and prejudgment interest.

I. BACKGROUND

Yanez sued SOMA for injuries suffered in an October 2005 automobile accident. The individual defendants were the driver of the pickup truck that collided with Yanez’s automobile and the owner of SOMA Environmental Engineering, Inc.

Over SOMA’s objections, the trial court granted Yanez’s motion to allow into evidence the amounts billed by her health care providers for her medical treatment, without regard to the amount of the billed expenses that were actually paid (by Yanez or her health insurers) or were still considered owing by the provider. SOMA contended unpaid amounts were irrelevant to its liability but conceded the trial court had no choice but to grant the motion in light of Greer v. Buzgheia(2006) 141 Cal.App.4th 1150 (Greer).1 ]

Over Yanez’s objection, the court ruled it would conduct a posttrial hearing to determine if her medical expense damages should be reduced to the amount of the expenses actually paid to her providers by Yanez or her insurance carriers, and accepted by the providers as payment in full for their services.

The trial was limited to the issues of causation and damages. During the trial, Yanez submitted documentary evidence of her past medical bills to the jury and her surgeon testified that the surgery bill for approximately $17,000 was reasonable. Regarding past medical expenses, the jury was instructed to award damages in an amount that would compensate Yanez for “the reasonable cost of reasonably necessary medical care that she has received.” The jury returned a special verdict of $150,000, which included an award of $44,519.01 in damages for past medical expenses for services from 10 different health care providers. The court entered judgment on the verdict for $150,000.

SOMA moved to reduce Yanez’s medical expenses to $18,368.24, the amount actually accepted by her medical providers as payment in full for the services she received. The motion included evidence of medical billings and actual payments, and stated further evidence would be presented through affidavits or live testimony at the posttrial hearing the court had agreed to hold. At the hearing, SOMA’s witnesses, representing several of Yanez’s providers, furnished business records of billings and payments, and testified that each of the providers had written off a substantial amount of what had been billed, pursuant to their contracts with Yanez’s health insurers, Aetna and Healthnet, and that she did not owe the amounts written off. None of the provider-insurer contracts in question were introduced in evidence. Although the witnesses testified that set amounts or percentages were discounted, they did not testify about how the providers and insurers negotiated or arrived at the amount of the discounts. Yanez’s counsel objected to admission of the business records on the grounds their admission violated the collateral source rule and the records were irrelevant. Yanez’s objection was overruled and the court reduced her medical expense damages by a total of $21,355.66, for five different health care providers. The court entered an amended judgment reducing Yanez’s damages award accordingly. The judgment also awarded her all of her recoverable court costs.

Before trial, Yanez had made an offer to settle for $150,000 under Code of Civil Procedure section 998 (hereafter section 998 offer). SOMA did not accept the offer. In her posttrial memorandum of costs, Yanez claimed entitlement to prejudgment interest of $17,133.67 and to $6,992.50 in expert witness fees because, including ordinary trial costs, she recovered more than her settlement offer. (Code Civ. Proc., § 998, subd. (d); Civ. Code, § 3291.) SOMA moved to tax the prejudgment interest and expert witness fees on the ground that if the medical expense award were reduced, the judgment would be less than Yanez’s section 998 offer.2 ] After granting SOMA’s motion to reduce Yanez’s medical expense damages, the trial court held that she did not obtain a judgment exceeding her settlement offer. The court accordingly struck the prejudgment interest cost claim in its entirety and struck $5,992.50 of the expert witness fees claimed by Yanez.

Yanez timely appealed from the amended judgment.

II. DISCUSSION

Yanez contends the trial court erred in (1) reducing the jury’s award of past medical specials to the amounts actually paid by her and her insurers to her medical providers, and (2) finding it had no discretion to award Yanez her post-offer costs and interest under Code of Civil Procedure section 998 due to the reduced amount of her medical specials.

A. Medical Expense Damages Award

Yanez argues the trial court violated the collateral source rule by limiting her recoverable damages to the amounts she and her insurers actually paid for her accident-related medical care. According to Yanez, the portions of the medical bills written off by the providers, totaling $21,355.66, were in fact collateral source benefits that under California’s collateral source rule could not be deducted from her recoverable damages. We begin by reviewing the applicable authorities defining the collateral source rule.

1. The Collateral Source Rule

The collateral source rule provides that the compensatory damages recoverable from a tortfeasor in a personal injury case should not be reduced merely because the tort victim also receives compensatory benefits from independent or collateral sources, such as insurance. The rule has been described as follows: “`[T]he courts generally have held that benefits received by the plaintiff from a source wholly independent of and collateral to the wrongdoer will not diminish the damages otherwise recoverable from the wrongdoer. . . . [T]he wrongdoer cannot take advantage of the contracts or other relation that may exist between the injured person and third persons. Thus, while a plaintiff’s recovery under the ordinary negligence rule is limited to damages which will make him whole, the collateral source rule allows a plaintiff further recovery under certain circumstances even though he has suffered no loss.’ [¶] 22 Am.Jur.2d Damages § 566 (1988) (citations omitted).” (Marsh v. Green (Ala. 2000) 782 So.2d 223, 230.)

California has adopted the collateral source rule. (Lund v. San Joaquin Valley Railroad (2003) 31 Cal.4th 1, 9.) The rationale for it was explained in Helfend v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal.3d 1 (Helfend). The plaintiff inHelfend was injured when a transit district bus driver sideswiped his car. (Id. at pp. 4-5.) The plaintiff sued the bus driver and his public employer. (Id. at p. 5.) At trial, the defendants asked to show that about 80 percent of the plaintiff’s hospital bill had been paid by the plaintiff’s Blue Cross insurance carrier and that some other medical expenses had been paid by other insurance. (Ibid.) The trial court denied the request, and the jury awarded the plaintiff $16,400. (Ibid.) The defendant appealed, claiming the collateral source rule did not apply to tort actions involving public entities. (Id. at p. 14.)

Helfend explained the rationale for the collateral source rule as follows: “Courts consider insurance a form of investment, the benefits of which become payable without respect to any other possible source of funds. If we were to permit a tortfeasor to mitigate damages with payments from plaintiff’s insurance, plaintiff would be in a position inferior to that of having bought no insurance, because his payment of premiums would have earned no benefit. Defendant should not be able to avoid payment of full compensation for the injury inflicted merely because the victim has had the foresight to provide himself with insurance.” (Helfend, supra, 2 Cal.3d at p. 10.) The Helfend court rejected arguments that the rule provides plaintiffs with a double recovery, pointing out plaintiffs rarely receive full compensation for injuries due to the significant portion of the recovery that goes to compensate the plaintiff’s attorney under standard contingent fee agreements. (Id.at p. 12.) According to Helfend, the collateral source rule “partially serves to compensate for the attorney’s share and does not actually render a `double recovery’ for the plaintiff.” (Ibid.) The court further noted the tort victim obtains no double recovery to the extent insurers can recover their outlays from the tort victim via contractual subrogation rights. (Id. at pp. 10-11.)

Nonetheless, the courts apply the collateral source rule even when it unquestionably does confer a windfall benefit on the tort plaintiff. The rule reflects a policy preference favoring the tort victim over the wrongdoer since not applying the rule allows the wrongdoer to profit from the victim’s investment in purchasing insurance or from the generosity of those who come to the victim’s aid. (SeeSmock v. State of California (2006) 138 Cal.App.4th 883, 888.)

California also applies a closely related evidentiary principle that, absent special circumstances, the jury should not hear evidence concerning collateral source benefits received by the plaintiff: “The potentially prejudicial impact of evidence that a personal injury plaintiff received collateral insurance payments varies little from case to case. Even with cautionary instructions, there is substantial danger that the jurors will take the evidence into account in assessing the damages to be awarded to an injured plaintiff. Thus, introduction of the evidence . . . creates the danger of circumventing the salutary policies underlying the collateral source rule. Admission . . . should be permitted only upon a persuasive showing that the evidence sought to be introduced is of substantial probative value.” (Hrnjak v. Graymar, Inc (1971) 4 Cal.3d 725, 732-733, fn. omitted (Hrnjak).)

The Legislature has limited the application of the collateral source rule in certain contexts. Judgments against public entities may be reduced under Government Code section 985, based on services or benefits the plaintiff has received from certain publicly funded sources and private insurance. Civil Code section 3333.1 partially exempts malpractice actions against health care providers from the collateral source rule.

2. California Case Law Concerning Discounted Costs

There is no dispute in this case that the collateral source rule applied to and entitled Yanez to recover the actual amounts paid by her and her insurers to her health care providers for injuries caused by SOMA’s negligence. There was also no dispute that the fact Yanez had insurance coverage for part of the medical costs she incurred as a result of the accident was inadmissible under Hrnjak. The primary question raised by this appeal is whether the collateral source rule entitled Yanez to recover the full amount billed by her providers for her medical care, $44,519.01, or only the discounted amount actually paid out of pocket by her and her insurers, and accepted by her medical providers as payment in full, $18,368.24.

In Hanif v. Housing Authority (1988) 200 Cal.App.3d 635 (Hanif), a Third Appellate District panel held that a plaintiff struck by an automobile, who had no private medical insurance, could not recover amounts for medical services in excess of those paid on his behalf by Medi-Cal. (Id. at p. 640.) The plaintiff had sought to introduce evidence that the reasonable value of the medical services he received exceeded the amounts Medi-Cal had actually paid to his providers. (Id. at p. 639.) Based on the collateral source rule, Hanif held initially that Medi-Cal’s payments did not preclude the plaintiff from recovering as special damages the amount Medi-Cal paid for those services. (Id. at pp. 639-640.) The court stated it was “not unreasonable or unfair in light of Medi-Cal’s subrogation and judgment lien rights” for the plaintiff to be deemed to have personally paid or incurred liability for those amounts for purposes of assessing special damages. (Id. at p. 640.) But, based on its separate analysis of the proper measure of medical expense damages, Hanif went further. The court held that the plaintiff was not entitled to recover any more than the actual amount paid for past medical care and services or for which a liability was incurred. (Ibid.) As will be discussed in further detailpost, the court reasoned that any compensation in excess of the amount actually paid or incurred, plus any discounts furnished as gifts to the plaintiff, would place the plaintiff in a better position than he would have been in had the tort not been committed. (Id. at pp. 640-644.)

Decided by another panel of this court, Nishihama v. City and County of San Francisco (2001) 93 Cal.App.4th 298 (Nishihama ), involved a plaintiff with an employer-sponsored Blue Cross medical plan under which her provider agreed to accept reduced rates as payment in full for its services. (Id. at p. 306.) The defendant conceded its liability to pay the plaintiff the amounts actually paid by Blue Cross to the provider, but objected to the jury’s award of medical damages based on the provider’s higher, normal rates. (Id. at p. 307.) The plaintiff insisted she was entitled to a recovery based on the provider’s normal charges because the provider had filed a lien against her judgment seeking to recover the difference between the Blue Cross payments it received and its normal rates, pursuant to the Hospital Lien Act (HLA) (Civ. Code, § 3045.1 et seq.). (Nishihama, at p. 307.)Nishihama reasoned that the damages awarded should have been limited to the reduced charges Blue Cross actually paid rather than the provider’s normal charges because the provider’s lien rights under the HLA derived from, and could be no greater than, the plaintiff’s rights against the tortfeasor. (Nishihama, at pp. 307-309.) As to the latter, Nishihama simply followed Hanif in holding that the plaintiff could recover no more from the tortfeasor than the amount actually paid or incurred for medical services, whether by the plaintiff herself or by an independent source such as insurance. (Nishihama, at p. 306.) Nishihama did not address whether Hanif should apply outside of the Medi-Cal context, but assumed without discussion that discounted provider reimbursement rates negotiated by private insurance companies were indistinguishable from reduced rates established by publicly funded medical insurance programs like Medi-Cal for purposes of establishing economic damages under the collateral source rule.3 ]

In Greer, the appellate court implicitly accepted Nishihama‘s premise that “it is error for the plaintiff [in a tort action] to recover medical expenses in excess of the amount paid or incurred.” (Greer, supra, 141 Cal.App.4th at p. 1157, italics omitted.) The court nonetheless upheld a judgment awarding the plaintiff tort victim the full amount of the medical expenses billed by his providers because the defendant had failed to preserve his claim for a “Hanif/Nishihama reduction” by not requesting a sufficiently specific special verdict form. (Greer, at pp. 1154, 1157-1159.)

In Olsen v. Reid (2008) 164 Cal.App.4th 200 (Olsen), the plaintiff and amicus curiae asked the appellate court to reconsider the holdings in Hanif and Nishihamathat when a plaintiff has medical insurance, tort damages must be limited to the amount actually paid or incurred. (Olsen, at p. 203.) The court declined to reach that question, however, because it was not clear from the evidence that the plaintiff’s medical providers had in fact discounted or written off part of their medical expense charges. (Id. at pp. 202-203.) Two of the justices, in separate concurring opinions, did reach the issue. Justice Moore argued that, as applied to situations involving private insurance, the Hanif/Nishihama line of cases abrogated the collateral source rule. (Olsen, at p. 213 (conc. opn. of Moore, J.).) She reasoned that under Hanif/Nishihama, an uninsured tort victim would receive a greater recovery from the tortfeasor than a victim with private insurance, a result she viewed as drastically undermining a key policy rationale behind the collateral source rule. (Olsen, at p. 215.) Justice Moore contended a change of this sort to the collateral source rule could only be adopted by legislative action or by endorsement from the California Supreme Court. (Id. at pp. 213-214.) Justice Moore also observed confusion had arisen about the procedures to be followed in reducing a damage award under the Hanif/Nishihama line of cases—over the type of hearing to be held, the burden of proving the amounts actually paid, and the standard of review on appeal—which she attributed to trying to apply “judge-made rules of this kind.” (Olsen, at p. 213, fn. 3.)

Justice Fybel, in his concurring opinion, endorsed the Hanif/Nishihama analysis, which he characterized as “limiting recovery . . . to the amount of actual damages incurred . . . .” (Olsen, supra, 164 Cal.App.4th at p. 216 (conc. opn. of Fybel, J.).) He found the principles underlying these cases to be firmly grounded in several California statutes—Civil Code sections 3281,4 ] 3282,5 ] 3333,6 ]1431.2, subdivision (b)(1)7 ] —as well as the Restatement Second of Torts (Restatement), section 911, comment h.8 ] Justice Fybel contended that Hanifand Nishihama followed the collateral source rule “because the plaintiffs in those cases recovered all medical costs actually incurred, even though the costs were paid by others.” (Olsen, at p. 215.)

SOMA also calls our attention to a recent criminal case—People v. Millard (2009) 175 Cal.App.4th 7. The defendant in Millard was convicted of driving under the influence causing bodily injury to another person, and was ordered to pay restitution for the victim’s medical expenses. (Id. at p. 13.) The People appealed the trial court’s restitution order, arguing in part that the trial court erred by valuing the victim’s medical expenses based on the amount paid by his insurance company rather than the amount billed by his medical providers. (Ibid.) The appellate court upheld the trial court’s methodology, following People v. Bergin (2008) 167 Cal.App.4th 1166, a previous restitution case that had relied on Hanif. Applying an abuse of discretion standard of review to the trial court’s restitution order, theMillard court found that limiting restitution to the amount actually paid by the insurer had a rational basis and was not based on a demonstrable error of law. (Id.at pp. 26, 28-29.) The court observed that a restitution order was not intended to provide the crime victim with a windfall, but only to reimburse the victim for the actual economic loss incurred, even if the amount of the loss is paid by a collateral source such as Medi-Cal or private insurance. (Id. at p. 28.) Because Millard‘s consideration of the issue was limited to whether there was a rational basis for the trial court’s restitution order, we do not find it persuasive in the present context.

The issue of whether amounts written off by a health care provider pursuant to its contract with a private insurer may be recovered as damages under the collateral source rule is now before the California Supreme Court.9 ]

3. Out-of-state Cases

The great majority of decisions from other jurisdictions have concluded that the collateral source rule entitles tort victims to recover the full amount of reasonable medical expenses charged, including amounts written off from their bills pursuant to contractual rate reductions or under Medicaid or Medicare. (See case law reviews in Robinson v. Bates (Ohio 2006) 857 N.E.2d 1195, 1199; Lopez v. Safeway Stores, Inc. (Ariz.Ct.App. 2006) 129 P.2d 487, 495 (Lopez); Scott v. Garfield (Mass. 2009) 912 N.E.2d 1000, 1011-1012; Stanley v. Walker (Ind. 2009) 906 N.E.2d 852, 864; Wills v. Foster (Ill. 2009) 892 N.E.2d 1018, 1025-1029 (Wills).)10 ] 11 ] A few of the states following the majority rule allow such recoveries when the plaintiff is covered by private insurance or Medicare, for which premiums are required to be paid, and limit recovery to the actual amount paid to providers when the plaintiff is covered by Medicaid for which no premium is required. (See Bozeman, supra, 879 So.2d at pp. 703-705; Rose, supra, 78 P.3d at p. 803; Wills, supra, 892 N.E.2d at pp. 1030-1031.)

The Virginia Supreme Court’s reasoning in Acuar, is representative of the majority view: “[Defendant] contends that the collateral source rule is not applicable . . . because [plaintiff] is not, and never will be, legally obligated to pay those portions of his medical bills that were written off, nor were those amounts paid on his behalf. According to [defendant], the amounts written off . . . are not benefits derived from a collateral source, and to allow [plaintiff] to recover such amounts . . . would create a double recovery or windfall in his favor. [¶] . . . [Plaintiff] maintains that, if [defendant’s] position were adopted, she would derive a benefit from [plaintiff’s] health insurance without having paid any consideration for [it], thereby creating a windfall for [defendant]. . . . [¶] . . . [¶] . . . [Defendant’s] argument overlooks the fundamental purpose of the [collateral source] rule . . . to prevent a tortfeasor from deriving any benefit from compensation or indemnity that an injured party has received from a collateral source. . . . [T]he focal point of the collateral source rule is not whether an injured party has `incurred’ certain medical expenses. Rather, it is whether a tort victim has received benefits from a collateral source that cannot be used to reduce the amount of damages owed by a tortfeasor. [¶] [Plaintiff] is entitled to seek full compensation from [defendant]. [Citation.] . . . [Defendant] cannot deduct from that full compensation any part of the benefits [plaintiff] received from his contractual arrangement with his health insurance carrier, whether those benefits took the form of medical expense payments or amounts written off because of agreements between his health insurance carrier and his health care providers. Those amounts written off are as much of a benefit for which [plaintiff] paid consideration as are the actual cash payments made by his health insurance carrier to the health care providers. [They] constitute `compensation or indemnity received by a tort victim from a source collateral to the tortfeasor . . . .'” (Acuar, supra, 531 S.E.2d at pp. 321-323.)

Moorhead exemplifies the minority view that amounts written off by the health care provider pursuant to contract or law may not be awarded as damages under the collateral source rule: “Awarding [plaintiff] the additional amount of $96,500.91 would provide her with a windfall and would violate fundamental tenets of just compensation. It is a basic principle of tort law that `damages are to be compensatory to the full extent of the injury sustained, but the award should be limited to compensation and compensation alone.’ [Citation.] [Plaintiff] never has, and never will, incur the $96,500.91 sum from [defendant] as an expense. We discern no principled basis upon which to justify awarding that additional amount. [¶] . . . [¶] Additionally, we find that the collateral source rule is inapplicable to the additional amount of $96,500.91. The rule `provides that payments from a collateral source shall not diminish the damages otherwise recoverable from the wrongdoer. [Citation omitted]. The principle behind the collateral source rule is that it is better for the wronged plaintiff to receive a potential windfall [than] for a tortfeasor to be relieved of responsibility for the wrong.’ [Citation.] [Plaintiff] relies upon comment b to the Restatement (Second) of Torts § 920A, which provides in pertinent part: `If the plaintiff was himself responsible for the benefit, as by maintaining his own insurance or by making advantageous employment arrangements, the law allows him to keep it for himself. If the benefit was a gift to the plaintiff from a third party or established for him by law, he should not be deprived of the advantage that it confers.’ . . . [¶] Clearly, [plaintiff] is entitled to recover $12,167.40, the amount which was paid on her behalf by Medicare and Blue Cross, the collateral sources. [Citation.] . . . [T]he issue is whether [plaintiff] is entitled to collect the additional amount of $96,500.91 as an expense. [Plaintiff] did not pay $96,500.91, nor did Medicare or Blue Cross pay that amount on her behalf. The collateral source rule does not apply to the illusory `charge’ of $96,500.91 since that amount was not paid by any collateral source. [Citations.]” (Moorhead, supra, 765 A.2d at pp. 790-791.) Moorhead relied in part on Hanif.(Moorhead, at p. 790.)

Finally, a few states take no position as to whether the written off or full amount of the plaintiff’s medical bills is a better measure of the reasonable value of the services rendered, but allow evidence of both to be presented to the jury. (SeeStanley v. Walker, supra, 906 N.E.2d at p. 858; Robinson v. Bates, supra, 857 N.E.2d at pp. 1199-1200.) But courts taking the majority view have criticized this approach on the grounds it undermines the evidentiary component of the collateral source rule by letting jurors know (or inviting them to speculate) that the plaintiff’s bills have been paid by a collateral source. (See Leitinger v. DBart, Inc. (Wis. 2007) 736 N.W.2d 1, 13-14.)

4. Analysis

In our view, the trial court erred in reducing Yanez’s damages to the amounts actually paid by her insurers. Although the court reasonably relied on case law extending Hanif to the private insurance context, we find Hanif used overly broad language and the extension of its holding to private insurance by Nishihama and other cases is inconsistent with the collateral source rule. Consistent with the view taken by the appellate courts in a great majority of the jurisdictions that have considered the issue, we conclude the amounts written off by Yanez’s health care providers constitute collateral benefits of her insurance. Whether the full amounts billed by Yanez’s health care providers reflected the reasonable value of their services is a separate issue that was for the jury, not the court, to decide. Accordingly, we will reverse the judgment and remand the case to the trial court to enter a judgment consistent with the jury’s award of damages and to reconsider its award of costs accordingly.

As an initial matter, we agree with Justice Moore’s concurrence in Olsen that theHanif/Nishihama line of cases are difficult to square with the collateral source rule, at least as applied to private insurance cases. (Olsen, supra, 164 Cal.App.4th at p. 213 (conc. opn. of Moore, J.).) The problem stems from Hanif‘s analysis of the measure of tort damages for medical expenses. Hanif correctly states the traditional rule that a tort victim is entitled to recover “the reasonable value of medical care and services reasonably required and attributable to the tort.” (Hanif, supra, 200 Cal.App.3d at p. 640, italics added.) Focusing on a series of older cases applying this rule, Hanif observes that in each case the issue was whether the medical expenses actually paid or incurred were unreasonably high. (Id. at pp. 641-643.) Hanif generalizes from these cases as follows: “Implicit in the above cases is the notion that a plaintiff is entitled to recover up to, and no more than,the actual amount expended or incurred for past medical services so long as that amount is reasonable.” (Id. at p. 643.) From this, Hanif concludes the term “reasonable value of medical care” must be construed as a “term of limitation” barring tort victims from receiving in damages any sum greater than the amount actually paid for their medical care or for which they or an independent source incurred liability for payment. (Id. at p. 641.) In deference to the collateral source rule, Hanif contemplated only one exception to this rule—if there was “evidence . . . the low rate charged was intended as a gift to the plaintiff.” (Id. at p. 643.)

While Hanif impliedly recognized that a gift of services would have to be valued without regard to the amount incurred or paid, it failed to recognize other circumstances in which a below-value rate might be charged. In particular, Hanifdid not address or appear to contemplate situations in which patients covered by private health insurance are charged reduced rates by the provider for their care as an insurance benefit negotiated between the insurer and the health care provider. We need not decide in this case whether Hanif was wrongly decided on its own facts. Those facts are materially different from ours: the plaintiff tort victim inHanif had not purchased his Medi-Cal coverage by paying premiums and the rates Medi-Cal paid were not established or marketed as a benefit for him, but were set as a matter of legislative policy to balance the interests of providers with the availability of public funds. But, to the extent Hanif‘s holding has been assumed to extend beyond the Medi-Cal context, we do not find its analysis reliable. Because this court’s decision in Nishihama relied on Hanif to reduce a plaintiff’s jury award to the reduced rates paid by her private insurance, we must now reject that aspect of Nishihama‘s reasoning.

In addition to its analysis of the case law concerning the “reasonable value” measure of damages, Hanif (and Justice Fybel’s concurrence in Olsen) also relied on various statutory provisions as well as language from comment h to section 911 of the Restatement in support of the proposition that a tort plaintiff can recover no more than the amounts paid or incurred for medical care. (Hanif, supra, 200 Cal.App.3d at pp. 640-641; Olsen, supra, 164 Cal.App.4th at p. 215 (conc. opn. of Fybel, J.).) The cited statutory sections tell us that (1) damages in a tort action are meant to compensate the victim in money for the detriment caused by the defendant’s tort (Civ. Code, §§ 3281, 3333), but not to put the victim in a better position than he or she would have been in had the wrong not been done; and (2) economic damages are “objectively verifiable monetary losses,” including compensation for “medical expenses,” as opposed to non-economic damages, which are for subjective, nonmonetary losses (Civ. Code, §1431.2, subd. (b)). Based on these sources, Hanif concludes that, unless a gift is involved, an award of damages for past medical expenses in excess of their “actual[] cost” would, of necessity, constitute overcompensation. (Id. at p. 641.) Although this may be a correct inference for an uninsured individual paying directly for his or her own medical care, it is not true of the health care financing model that has evolved in this country, in which the cash paid or liability incurred to medical service providers is often not the entire consideration the providers receive in exchange for their services. As further discussed post, providers receive noncash, pecuniary consideration from their transactions with the patient’s private insurers, which allows and induces them to accept a reduced rate for their services. Making the amount paid or incurred for medical care an absolute ceiling on a plaintiff’s recovery for past medical care ignores this reality.12 ]

Comment h to section 911 of the Restatement is also inapposite. It states in essence that when an injured person pays less than the market rate for services rendered to him by third parties, he can recover no more than the amount paid unless the low rate was intended as a gift. Section 911 deals with tort damages generally. Out-of-state cases addressing the same issue before us have questioned comment h’s applicability to valuing medical services financed by health insurance. (See Moorhead, supra, 765 A.2d at p. 795 (dis. opn. of Nigro, J.); Wills, supra,892 N.E.2d at p. 1028; Bynum v. Magno, supra, 101 P.3d at p. 1159; White v. Jubitz Corp, supra, 219 P.3d at pp. 581-582.) The Restatement comment addressing the collateral source rule seems more on point than comment h: “[Collateral-source benefits] do not have the effect of reducing the recovery against the defendant. The injured party’s net loss may have been reduced correspondingly, and to the extent that the defendant is required to pay the total amount there may be a double compensation for a part of the plaintiff’s injury. But it is the position of the law that a benefit that is directed to the injured party should not be shifted so as to become a windfall for the tortfeasor. If the plaintiff was himself responsible for the benefit, as by maintaining his own insurance . . ., the law allows him to keep it for himself. If the benefit was . . . established for him by law, he should not be deprived of the advantage that it confers. The law does not differentiate between the nature of the benefits, so long as they did not come from the defendant or a person acting for him.” (Rest.2d Torts, § 920A, com. b, p. 514, italics added.) Further, comment f to section 924 of the Restatement instructs: “The value of medical services made necessary by the tort can ordinarily be recovered although they have created no liability or expense to the injured person, as when a physician donates his services.” (Rest.2d Torts, § 924, com. f, p. 527.) To the extent that the rate discounts Yanez’s health care providers accepted for her care were benefits of Yanez’s health insurance, the Restatement, if anything, supports her position that she and not SOMA was entitled to reap their reward.

SOMA’s witnesses at the Hanif hearing all testified that the amounts the providers wrote off of Yanez’s bills were established pursuant to contracts between the providers and Yanez’s health care insurers, Aetna and Healthnet. It is readily apparent that these write-offs are an integral part of the consideration Yanez received for her (or her employer’s) premium payments. That consideration accrued to her in two principal forms. First, the write-offs reduced Yanez’s out-of-pocket costs for any deductible or copayment or coinsurance percentage she was required to pay, or for any medical services subject to the write-off that were not otherwise fully covered under her policies.13 ] Thus, if the central purpose of investing in health insurance is to be protected from having to pay large medical bills, discounted provider charges deliver part of that protection.

Second, and equally important, the discounts reflect noncash, pecuniary savings in the cost of delivering health care services that are financed by Yanez’s premium dollars. This was explained in Stanley v. Walker: “[T]hese contractual discounts confer significant benefits upon medical service providers in addition to just the cash received in discounted payments. In exchange for medical services, providers receive not only the insurer’s payments, but also the pecuniary value of numerous additional benefits, among which are prompt payment, assured collectability, avoidance of collection costs, increased administrative efficiency, and significant marketing advantages. [¶] It is widely recognized that, by agreeing to reduced rates, providers gain significant administrative and marketing advantages, `including a large volume of business, rapid payment, ease of collection, and occasionally advance deposits.’ Lawrence F. Wolper, Health Care Administration: Planning, Implementing, and Managing Organized Delivery Systems 553 (4th ed.2004) . . . .” (Stanley v. Walker, supra, 906 N.E.2d at p. 863 (dis. opn. of Dickson, J.).) In other words, the measure of the collateral benefit Yanez purchased for her premiums includes not only the cash Aetna and Healthnet paid for her medical care but the financial, administrative, and marketing savings the providers obtained that induced and permitted them to accept a discounted rate of payment for their services to her.

Because of these marketplace realities, Hanif’s holding that, as a matter of law, the reasonable value of medical services can never be greater than the cash paid or liability incurred for them cannot sensibly be extended to the private insurance context. Rate discounts negotiated between health insurers and providers must be deemed collateral benefits which, under the collateral source rule, should accrue to the insured plaintiff, not the defendant. Therefore, the trial court erred by reducing Yanez’s economic damages for past medical expenses based on Hanif. To the extent the reasonable value of the provider’s services was greater than the discounted amounts paid or incurred for those services, Yanez was entitled to the entire amount as damages under the collateral source rule. Since the jury found that $44,519.01 in damages for past medical expenses was reasonable, she was entitled to that amount, without reduction.

By so holding, however, we do not mean to suggest that discounted rates negotiated between health insurers and providers are always or even usually below the reasonable value of the services they cover, nor that the undiscounted amounts billed by providers are necessarily closer to reasonable value than the discounted amounts the providers negotiate with private health insurers. The pricing of medical services is a subject of tremendous complexity, and disputes over fair pricing in the health field abound. (See, e.g., Reinhardt, The Pricing of U.S. Hospital Services: Chaos Behind a Veil of Secrecy (2006) vol. 25, No. 1 Health Affairs 57 [suggesting, among other things, that both full and discounted charges established by hospitals for private payors tend to be significantly above true costs, in part to offset losses on Medicaid and uninsured patients]; Hospital Fair Pricing Act, Health & Saf. Code, § 127400 et seq. [requiring hospitals to establish fair pricing policies for uninsured low and moderate income patients].) But in this case, the jury heard evidence concerning the full amounts billed by Yanez’s providers and determined those amounts were reasonable. We are bound by that determination.

It is also true the jury did not hear evidence of the sharply discounted amounts Aetna and Healthnet actually paid to the providers. Jurors might not have found $44,519.01 to be a reasonable damage award for past medical expenses if they had been informed that Yanez’s health care providers had accepted $18,368.24 as full payment for their services. It could be argued that, in fairness, the jury as fact finder should have heard evidence of both the billed and discounted amounts since both are relevant to determining the reasonable value of the services involved. But that issue is beyond the scope of this appeal. First, no such request was made in the trial court. Instead, SOMA simply requested evidence of any unpaid amounts be excluded, while also readily conceding this position was legally untenable. SOMA clearly looked to a postverdict Hanif hearing as its remedy. More importantly, evidence Yanez’s providers had agreed to accept reduced amounts for their services would have run afoul of the collateral source rule since jurors would have had to be given some explanation for how the discounts came about. However unfair it may have been to prevent the jury from hearing that evidence, this court is not empowered to provide redress. The collateral source rule is based on Supreme Court authority. If modifications to that rule are called for as a matter of fairness and good policy, only our Legislature or Supreme Court may make them.

We believe the alternative that has developed in the trial and appellate courts of this state—holding postverdict Hanif hearings in which the trial court hears evidence of the discounted amounts paid by private insurers and reduces the jury’s verdict—lacks a sound foundation as a matter of law or policy.

B. Code of Civil Procedure Section 998 Cost Award

The trial court believed it had no discretion to award Yanez her post-offer costs under Code of Civil Procedure section 998, or prejudgment interest under Civil Code section 3291, because her reduced damage award fell below her section 998 offer. Because Yanez’s original damages award must now be restored, we will remand the case to the trial court to also exercise its discretion under Code of Civil Procedure section 998 and to award prejudgment interest under Civil Code section 3291.

III. DISPOSITION

The judgment is reversed and the case is remanded to the trial court to (1) enter a new judgment reinstating the damages established by the jury’s verdict, (2) award prejudgment interest in accordance with Civil Code section 3291, and (3) exercise its discretion under Code of Civil Procedure section 998 whether to award plaintiff post-offer costs.

I concur:

Dondero, J.

BANKE, J.

I concur in the opinion and judgment, but do so reluctantly and because of the current legal landscape. I write separately to discuss in detail the confusion in the law on the measure of damages for past medical expenses.

A historical overview of the case law reveals the measure of damages, which is fixed by statute, has become entangled with the collateral source rule, a judicially created doctrine that precludes otherwise recoverable damages from being reduced by benefits the plaintiff receives from an independent source. With the exception of damages for gratuitously provided medical services, our Supreme Court has never affirmatively endorsed a measure of damages for past medical expenses nearly certain to result in an economic windfall to the plaintiff—that is, an award that exceeds the dollar amount actually paid or owed (and thus required to be paid in the future) to a provider. As the majority opinion observes, courts in a number of other jurisdictions have either expressly or implicitly adopted a measure giving rise to this result in the context at issue here. And as discussed herein, our high court has given some indication it may also be inclined to take a view of compensatory damages broader than reimbursing the plaintiff for actual monetary loss, and which, instead, places on the defendant the full economic consequences of his or her tortious conduct.

Giving priority to a broader view of compensatory damages here, however, calls into question, once again, the evidentiary aspect of the collateral source rule—and compellingly so, given the realities of present day medical billing and payment practices. The majority opinion suggests it may be time to reexamine this aspect of the rule. I agree and submit it is time to let properly instructed juries make damages awards for past medical expenses based on all the relevant evidence.

“Incurred” Medical Expenses: A Pleading and Proof Issue

Early cases discussing the recovery of damages for past medical expenses often dealt with what was then a rule of pleading and proof, namely that a plaintiff could not prove “he has incurred a physician’s bill under an allegation that he had paid it,” and vice versa. (Donnelly v. Hufschmidt (1889) 79 Cal. 74, 76 [21 P. 546] (conc. opn. of McFarland, J.).) In Donnelly, for example, the plaintiff sufficiently alleged she had incurred medical expenses. The Supreme Court therefore held the trial court did not err in refusing to instruct the jury that “`nothing should be allowed plaintiff . . . for expenses incurred for nursehire, medicines, and doctor’s bills, unless actually paid‘ by her.” (Id. at p. 76, italics added.) The court confirmed, however, that an allegation the plaintiff has incurred medical expenses is sufficient to allow recovery: “The obligation to pay the surgeon for his services still rests on the plaintiff, and compensation for the detriment she has suffered could not be complete unless she was placed in a position to discharge herself from this obligation.” (Ibid.) Under this pass-through rationale there is, of course, no windfall economic recovery by the plaintiff, it being presumed the plaintiff will pay the debt owed the provider, and thus the damages awarded for incurred medical expenses will ultimately rest in the hands of the provider.

In McLaughlin v. Railway Co. (1896) 113 Cal. 590 [45 P. 839], the plaintiff alleged he had paid medical expenses. (Id. at p. 591.) But at trial, he testified only that he had “incurred an indebtedness therefor which was not paid.” (Ibid., italics added.) “[T]here is no doubt,” stated the Supreme Court, “under a proper pleading, the injured party may recover for such necessary medical expenses as he may have become liable to pay, though not in fact paid before suit [is] brought.” (Id. at p. 592.) However, evidence the plaintiff “had incurred a liability to pay [$750] was not admissible under the allegation of his complaint that he had expended such sum.” (Ibid., italics omitted; see also Kimic v. San Jose-Los Gatos etc. Ry. Co.(1909) 156 Cal. 273, 275-276 [104 P. 312] [allegation plaintiff had “`been compelled to pay . . . about [$1,000]’ “in medical expenses sufficient to allow testimony that expenses to which plaintiff “had been put” were “`in the neighborhood of $500 or $600′”; and jury instructions, taken together and consistent with complaint, limited recovery to expenses “actually paid“], italics added.)

“Reasonable Value” of Medical Services

With pleading and proof issues raised by paid and incurred-but-not-paid medical bills largely resolved, the courts turned to issues involving the “reasonable value” of medical services. In Melone v. Sierra Railway Co. (1907) 151 Cal. 113, 115 [91 P. 522], for example, the Supreme Court considered a claim of instructional error where the jury was told it could award as one element of damage: “`Such sum as will compensate [the plaintiff] for the expense, if any, he has paid or incurred in the employment of a physician and the purchase of drugs during the time he was disabled by the injuries, not exceeding the amounts alleged in the complaint.'” (Ibid.) The defendant objected “the correct measure of damage in this regard is not the amount which [the plaintiff] may have paid or become liable for, but the necessary and reasonable value of such services as may have been rendered him.” (Ibid.) The court restated this as “[s]uch reasonable sum, in other words, as had been necessarily expended or incurred in treating the injury” and agreed “[s]uch, unquestionably, is the true rule.” (Ibid.) The court concluded the instructional error was harmless, however, since the “reasonableness of the expenses which plaintiff had incurred was not disputed.” (Ibid.; see also Nelson v. Kellogg (1912) 162 Cal. 621, 623 [123 P. 1115] [“the rule established both in this state and elsewhere in actions for damages for tortiuous injuries, is that recovery may include special damages properly pleaded, consisting of a liability, incurred but not paid, for reasonable and necessary expenses caused by the wrongful act complained of”].)

In numerous cases, the courts addressed the evidentiary significance of the amount paid or incurred on the determination of the “reasonable value” of medical services. In Townsend v. Keith (1917) 34 Cal.App. 564, 565-566 [168 P. 402], the Court of Appeal held the plaintiff was properly allowed to answer a question asking “what bills he had incurred.” (Id. at p. 565.) The court agreed with the defendant “the correct measure of damage is the necessary and reasonable value of the services rendered, rather than the amount which may have been paid for such services.” (Ibid.) “[N]evertheless,” said the court, “the amount paid for the services is some evidence as to their reasonable value.” (Ibid.) The court also agreed the jury instructions were deficient in not telling the jury “to limit its finding to the reasonable value of the expenses incurred.” (Id. at p. 566.) However, because the reasonableness of the expenses was not disputed, the instructional error was harmless. (Ibid.; see also Dewhirst v. Leopold (1924) 194 Cal. 424, 433 [229 P. 30] [rejecting argument no evidence was offered “to show that the amounts paid on account of medical treatment and attention were reasonable” because the “amount[] paid [itself] is some evidence of reasonable value” and where there is “no showing to the contrary such evidence must be held to be sufficient”]; Rogers v. Kabakoff (1947) 81 Cal.App.2d 487, 491 [184 P.2d 312] [evidence plaintiff paid amounts shown on statements of account was “some evidence of reasonable value” of medical services and sufficient to affirm judgment]; Shriver v. Silva (1944) 65 Cal.App.2d 753, 765-767 [151 P.2d 528] [no testimony hospital bills were “reasonable,” but bills were admitted into evidence without objection, were itemized, and other witnesses testified to the seriousness of the plaintiff’s injuries, providing sufficient basis to affirm judgment]; Latky v. Wolfe (1927) 85 Cal.App. 332, 346-347 [259 P. 470] [evidence of medical bills only, without “evidence of [reasonable] value of the services” or that plaintiff paid bills, not sufficient to affirm judgment].)

In Guerra v. Balestrieri (1954) 127 Cal.App.2d 511 [274 P.2d 443], the defendant challenged an instruction concerning the cost of medical care on the ground no evidence of the cost was introduced. The Court of Appeal again stated, “[t]he proper measure is the reasonable value of such services, not the amount paid or incurred therefor, although the amount paid or incurred would be some evidence of value.” (Id. at p. 520.) The court also agreed “[t]here should be some evidence concerning the value of professional services of a physician and surgeon” and acknowledged no such evidence had been presented. (Ibid.) However, the court held the defendant suffered no prejudice because the instruction “expressly limited the recovery for such items to the reasonable value thereof `not exceeding the cost to the plaintiff,’ and there was no evidence of any such cost.” (Ibid.) Since no evidence of cost had been introduced, reasonable value must have been the benchmark of the award. (Ibid.; see also Dimmick v. Alvarez (1961) 196 Cal.App.2d 211, 216 [169 Cal.Rptr. 308] [It is not “necessary that the amount of the [damages] award equal the alleged medical expenses for it has long been the rule that the costs alone of medical treatment and hospitalization do not govern the recovery of such expenses. It must be shown additionally that the services were attributable to the accident, that they were necessary, and that the charges for such services were reasonable.”].)

The assumption in these cases appears to have been that a provider might charge and a plaintiff might pay more than the “reasonable value” of the medical services—thus, the rule that a plaintiff can recover only the “reasonable value” of such services, regardless of the amount paid or liability incurred therefor. These early cases could not, of course, have foreseen what has transpired in our health care delivery system. As the majority opinion notes (maj. opn., ante, at p. 19), the concern that billed amounts may exceed the “reasonable value” of services provided is an acute one, given the realities of current medical billing and payment practices that force providers to anticipate significant write-offs.14 ]

Liability for Medical Expenses Not a Predicate to the Recovery of Damages

In addition to addressing the issue of “reasonable value,” the courts also occasionally dealt with the issue of whether the plaintiff had to have paid, or become liable for, the claimed medical expenses in order to recover damages. This issue, which is entirely separate from the issue of “reasonable value,” has been more problematic for the courts as an analytical matter. Clearly, the courts have been loath to deny damages for medical services required because of a defendant’s negligent conduct, the sentiment being the wrongdoer, rather than the hapless plaintiff or erstwhile medical care provider, should bear the economic consequence of his or her wrongful conduct. The courts have thus invoked presumptions of liability to permit recovery, allowed recovery where liability was contingent upon the recovery of tort damages, and ultimately allowed recovery where the plaintiff had no legal liability at all for the medical service. This is also the issue that has led to the analytical entanglement of the measure of damages and the collateral source rule.

Mathes v. Aggeler & Musser Seed Co. (1919) 179 Cal. 697 [178 P. 713] (Mathes), is one of the earliest cases discussing whether liability for medical services is a predicate to the recovery of damages for their reasonable value. The plaintiff in Mathes was injured as the result of an automobile collision, and the defendants challenged the damages awarded for hospital expenses on the ground “there was no direct evidence of any contract between the plaintiff and the owners of the hospital that she was to pay for such treatment.” (Id. at p. 700.) The Supreme Court rejected the argument, without citation to statutory or case authority. The court simply stated: “The law, of course, in the absence of evidence to show gratuitous service, would imply an agreement by her to pay the reasonable value. It was, therefore, proper for the plaintiff to introduce evidence as to the amount that would be a reasonable charge for the services.” (Ibid.)

Some cases involved minor plaintiffs, who historically were not legally accountable for expenses associated with their maintenance and well being. In McManus v. Arnold Taxi Corp. (1927) 82 Cal.App. 215 [255 P. 755], for example, the minor plaintiff’s father paid some, but not all, of the child’s medical expenses. (Id. at pp. 222-223.) The defendant accordingly challenged the award of damages for past medical expenses made directly to the child. (Ibid.) The usual rule, explained the Court of Appeal, was that the parent could sue to recover medical expenses paid or incurred for the child, and the child could recover only general damages, for example, for his or her own pain and suffering. (Id. at p. 223.) There were exceptions, noted the court, where the child “has paid or is legally bound to pay” the expenses or is under a guardianship, such that the child’s estate is legally liable for the expenses. The court also observed some jurisdictions viewed parents suing as guardians ad litem as having waived personal recovery, “such waiver operating in the nature of an emancipation” and allowing the child to recover. (Id. at p. 224.) Nevertheless, for reasons not pertinent to the discussion here, the appellate court refused to apply any of the exceptions and held the minor could not recover damages for his past medical expenses.

In Galwey v. Pacific Auto Stages, Inc. (1929) 96 Cal.App. 169 [273 P. 866], the defendant similarly challenged an award of damages to the minor plaintiff on the ground the mother “was liable for his necessities, including medical attention.” (Id.at p. 178.) The mother, however, “was not able to pay the expenses and . . . she made no promise to do so.” (Ibid.) Accordingly, the Court of Appeal upheld the award to the minor. “The services were necessary in order to save the life of the plaintiff, who would be liable for their reasonable value. (Civ. Code, [§] 36).”15 ](Ibid.; see also Bauman v. San Francisco (1940) 42 Cal.App.2d 144, 162-163 [108 P.2d 989] [“The parents of a minor are normally responsible for medical and hospital care furnished the minor, and the cause of action to recover these items normally rests with the parents. But the child is also liable for the reasonable value of these expenses. Moreover, where the parents bring the action as guardians ad litem, and the bills have not been paid, and these expenses are pleaded, this constitutes a waiver of the parent’s rights, and at least where contributory negligence of the child is not asserted as a defense, the child may properly recover these items.”].)16 ]

Other cases involved plaintiffs who, absent recovery in a lawsuit, were not otherwise liable for the cost of their medical care. In Reichle v. Hazie (1937) 22 Cal.App.2d 543 [71 P.2d 849] (Reichle), for example, the Court of Appeal considered the recovery of medical expenses by an indigent plaintiff treated at a county hospital. The record in the case indicated there were “two types” of patients from whom the county was supposed to seek reimbursement—” `any patient who is admitted fraudulently . . . and is able to pay his bill'” and any patient who recovered tort damages for his injuries. (Id. at p. 547.) Thus, when a patient could pay, it was “the duty of the county officials to collect such charges from him.” (Ibid.) When, however, a patient was “admitted to a hospital without an express contract to pay for his care and treatment,” the law, “`in the absence of evidence to show gratuitous service, would imply an agreement . . . to pay the reasonable value’ of the services rendered (Mathes[, supra,] 179 Cal. 697 . . .), subject to the limitations set forth in Goodall v. Brite.17 ] (Ibid.) The question of a tort damages recovery by an impecunious patient being “one of first impression,” the court could “see no good reason for denying the recovery of special damages where plaintiff was cared for in a public hospital when such recovery would be sustained had he been cared for and treated in a private hospital. Certainly there is just as sound reason in permitting such recovery where the money will go to a public institution to relieve the burden of public taxes as where it will go to a private institution to increase the profits of its shareholders.” (Id. at pp. 547-548)

Reichle, then, not only relied on the presumption of liability set forth in Mathes—based on an implied agreement to pay for the reasonable value of medical services received—it stretched that presumption to allow the recovery of damages for medical expenses on a more attenuated basis, since the plaintiff’s liability for medical expenses in Reichle was apparently only inchoate and depended upon whether he sued and recovered tort damages. There would be no windfall recovery by the plaintiff, however, since the hospital would ultimately receive the damages awarded for the medical services it had provided.18 ]

In Purcell v. Goldberg (1939) 34 Cal.App.2d 344 [93 P.2d 578] (Purcell), the Court of Appeal addressed the recovery of medical expenses by a plaintiff who was covered by a health care plan, the provisions of which are not detailed in the opinion. The defendant challenged the damages award for past medical expenses on several grounds, including that the plaintiff was covered by the health plan. Citing Reichle, the Court of Appeal stated: “Nor was respondent precluded as a matter of law from recovering the amount of the medical fee incurred for the services of [the physician] merely because she belonged to an association with which he was connected, and which provided in its contract with its members that as such they were liable for the medical services only in case they recovered damages.” (Purcell, at p. 350.) Thus, as in Reichle, the plaintiff’s liability for the physician’s services was apparently inchoate and depended upon whether she sued and recovered damages.

The Supreme Court cited both Reichle and Purcell in a footnote in Helfend v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal.3d 1 [84 Cal.Rptr. 173, 465 P.2d 61] (Helfend ), at the end of a string of case citations illustrating the proposition that the collateral source rule “embodies the venerable concept that a person who has invested years of insurance premiums to assure his medical care should receive the benefits of his thrift.” (Id. at pp. 9-10 & fn. 14.) The court’s use of a “see also” signal before the two case citations appears to acknowledge that whileReichle and Purcell may implicitly illustrate the operation of the collateral source rule, neither case mentioned it. Rather, both cases dealt with the issues before them as damages issues, i.e., whether the claimed medical expenses were legally recoverable damages. (Purcell, supra, 34 Cal.App.2d at p. 350; Reichle, supra, 22 Cal.App.2d at p. 547.) Moreover, both cases grounded their holdings on Mathes(Reichle cited to Mathes, and Purcell cited to Reichle), which also dealt with whether certain medical expenses were legally recoverable damages and in which the Supreme Court invoked a presumption of liability to uphold the damages award. (Mathes, supra, 179 Cal. at p. 700; Purcell, at p. 350; Reichle, at pp. 547-548.)

Finally, there are the cases in which plaintiffs received gratuitous medical services. One of the oldest is Kimball v. Northern Electric Co. (1911) 159 Cal. 225 [113 P. 156] (Kimball ), in which the mother of a teenager severely injured in a train accident sued as his guardian ad litem to recover damages, including for personal injuries. The defendant challenged the damages awarded for the reasonable value of nursing services provided by the mother (who was a registered nurse) on the ground the plaintiff was not obligated to pay for them. (Id. at pp. 231-232.) The Supreme Court upheld the award, again without citation to statutory or case authority. Observing the plaintiff did not live at home, the court stated “the mere fact of their relationship does not remove the presumption that he was bound by the acceptance of her services to pay a reasonable value for them.” (Id. at p. 231.) Thus, Kimball also was predicated on presumed liability for the reasonable value of the medical services the plaintiff received, untethered to any statutory or express contractual obligation, and without regard to whether it was likely the mother would demand payment from her severely injured son.

The Supreme Court also cited Kimball in Helfend as illustrating the difference between a medical provider attempting to recover directly from a tortfeasor (a scenario outside the collateral source rule) and a plaintiff recovering damages where “friends and relatives render assistance to the injured plaintiff with the expectation of repayment out of any tort recovery” (a scenario in which “the [collateral source] rule has been applied”). (Helfend, supra, 2 Cal.3d at p. 6, fn. 5.) But, again, while Kimball may implicitly illustrate the operation of the collateral source rule, it made no mention of it. Rather, the issue in Kimball was whether damages awarded to the son for the reasonable value of the nursing services provided by his mother were legally recoverable. The court held they were by presuming the son “was bound by acceptance of her services to pay a reasonable value for them.” (Kimball, supra, 159 Cal. at p. 231.)

In Fifield Manor v. Finston (1960) 54 Cal.2d 632 [7 Cal.Rptr. 377, 354 P.2d 1073] (Fifield Manor), the Supreme Court considered the attempt of a health care provider to recover the cost of medical services directly from a tortfeasor. The provider had entered into a “life-care contract” with one Ross, who died from injuries sustained in a car accident. The provider claimed a direct right of recovery from the defendant and, alternatively, a subrogated right under the life-care contract. (Id. at p. 634.) In rejecting any direct right against the tortfeasor, the court observed no case supported such a right of action and concluded “to so hold would constitute an unwarranted extension of liability for negligence.” (Id. at pp. 636-637.)

Of interest here is the court’s further observation, “[n]or is it true, as plaintiff argues, that because it paid for the medical care and treatment under its contract, the decedent’s estate has no cause of action for the cost of such treatment against the defendants. The fact that either under contract or gratuitously such treatment has been paid for by another does not defeat the cause of action of the injured party to recover the reasonable value of such treatment from the tortfeasor.” (Fifield Manor, supra, 54 Cal.2d at p. 637.) The Supreme Court cited to Purcelland Reichle (Fifield Manor, at p. 637) which, as discussed above, relied on the presumed obligation to pay for medical services the court articulated in Mathes(and in Kimball) and stretched that presumption to allow recovery where the plaintiff’s legal liability for medical services was inchoate and dependent on a successful lawsuit. (Purcell, supra, 34 Cal.App.2d at p. 350; Reichle, supra, 22 Cal.App.2d at pp. 547-548.) The Supreme Court did not discuss whether the life-care contract specified that Ross would be legally liable to pay for the medical services he received if he recovered damages for such. But even if that were the case, the court’s citation to Purcell and Reichle would not support its inclusion of gratuitously provided medical services among those for which Ross’ estate could seek damages for their reasonable value.

However, the court in Fifield Manor also cited Gastine v. Ewing (1944) 65 Cal.App.2d 131 [150 P.2d 266] (Gastine). The issue in Gastine was whether the plaintiff could recover damages for medical treatment provided by an unlicensed physician. (Id. at p.143.) The Court of Appeal assumed the plaintiff paid for the services. (Ibid.) Accordingly, whether payment of, or liability for, the medical expenses was a predicate to the recovery of damages was not an issue in the case. Nevertheless, in concluding the physician’s licensing status was not a barrier to recovery, the court cited to Purcell and Reichle, as well as several A.L.R. sections, including one specifically addressing the recovery of damages for the reasonable value of gratuitously provided medical services. That section stated: “`In a majority of the cases the position is taken that the [gratuitous] services were rendered for the benefit of the injured plaintiff, that the defendant, the wrongdoer, should not be permitted to profit by any gratuity extended to his victim, and that consequently the reasonable value of such services may be recovered.'” (Gastine,at pp. 143-144, quoting Annot., Damage—Personal Injuries—Gratuitous Care (1940) 128 A.L.R. 686.)

A little over a decade later, the Supreme Court decided Rodriguez v. Bethlehem Steel Corp. (1974) 12 Cal.3d 382 [115 Cal.Rptr. 765, 525 P.2d 669] (Rodriguez I), in which the court recognized a cause of action for loss of consortium by the spouse of an injured plaintiff and reversed a judgment dismissing the wife’s claim following the sustaining of demurrers without leave to amend. (Id. at pp. 387-408.) Of significance here is the court’s discussion of the damages recoverable by the plaintiffs on remand. The court held the wife could not recover the reasonable value of the round-the-clock nursing services she provided to her husband. (Id. at p. 409.) This was because, should the husband “prevail in his own cause of action against these defendants, he will be entitled to recover, among his medical expenses, the full cost of whatever home nursing is necessary.” (Ibid.) To allow the wife to recover for this medical service, as well, would “constitute double recovery.” (Ibid.) The court cited no authority, nor provided any analysis supporting, the husband’s recovery of the reasonable value of the gratuitously provided nursing expenses as compensatory tort damages.

After remand and trial, the defendants appealed from the judgment for the plaintiffs. Rodriguez v. McDonnell Douglas Corp. (1978) 87 Cal.App.3d 626 [151 Cal.Rptr. 399] (Rodriguez II). Among other things, the defendants challenged the award of damages to the husband for the attendant care provided by the wife. (Id.at pp. 660-662.) The Court of Appeal pointed out that in Rodriguez I, the Supreme Court had held the husband was entitled to recover “`among his medical expenses, the full cost of whatever home nursing is necessary.'” (Rodriguez II, at p. 662, quoting Rodriguez I, supra, 12 Cal.3d at p. 409.) The defendants nevertheless argued no recovery was proper because the husband had not paid or incurred liability for the nursing services; rather, they were provided gratuitously. (Rodriguez II, at p. 662.) The court rejected this argument, stating “[i]nsofar as gratuities are concerned, the rule appears to be in keeping with the collateral source rule rationale.” (Ibid.) The court also cited Fifield Manor for the proposition that “`[t]he fact that either under contract or gratuitously such [medical] treatment has been paid for by another does not defeat the cause of action of the injured party to recover the reasonable value of such treatment from the tortfeasor.'” (Rodriguez II, at p. 662, quoting Fifield Manor, supra, 54 Cal.2d at p. 637.)

Thus, in Rodriguez II, the Court of Appeal blurred, if not conflated, the measure of damages and the collateral source rule. The court elsewhere observed in its opinion, however, that, as to the wife, it was “not part of her duties as a wife to render 24-hour-a-day attendant care.” (Rodriguez II, supra, 87 Cal.App.3d at p. 661.) The situation therefore was arguably analogous to that in Kimball, where the Supreme Court held the mother-son relationship did “not remove the presumption that [the son] was bound by the acceptance of [the mother’s nursing] services to pay a reasonable value for them.” (Kimball, supra, 159 Cal. at p. 231.)

This line of cases, beginning with Kimball and Mathes and culminating withRodriguez I and II, is analytically significant for two reasons. First, these cases indicate that whether the plaintiff is liable for claimed medical expenses has ultimately not been a very significant issue, and is an issue that has never barred the recovery of compensatory damages. Where medical services have been provided as a wholly gratuitous matter, these cases make clear the plaintiff need not have paid nor incurred liability for the services to recover compensatory damages for their reasonable value. (See Rodriguez I, supra, 12 Cal.3d at p. 409;Fifield Manor, supra, 54 Cal.2d at p. 637; Mathes, supra, 179 Cal. at p. 700;Rodriguez II, supra, 87 Cal.App.3d at p. 662; Gastine, supra, 65 Cal.App.2d at pp. 143-144.) Where medical services have been provided quasi gratuitously, i.e., with an expectation of payment if the plaintiff recovers damages, the plaintiff likewise need not have paid nor incurred liability for the services to recover compensatory damages for their reasonable value. (See Kimball, supra, 159 Cal. at p. 231;Reichle, supra, 22 Cal.App.2d at p. 547; cf. Helfend, supra, 2 Cal.3d at p. 6, fn. 5.) In all other cases, the plaintiff has paid or been expressly liable for the medical services, or the courts have presumed liability for the reasonable value of such services. (See Mathes, supra, 179 Cal. at p. 700; Kimball, supra, 159 Cal. at p. 231; Bauman v. San Francisco, supra, 42 Cal.App.2d at pp. 162-163; Reichle, supra, 22 Cal.App.2d at p. 547.) In short, by permitting the recovery of compensatory damages for gratuitously provided medical services and recognizing an implied obligation to pay the reasonable value of any non-gratuitously provided medical services, the courts have effectively made the plaintiff’s liability for medical services a non-issue for purposes of recovering compensatory damages for past medical expenses.

Secondly, this line of cases reflects that the courts have embraced a view of compensatory damages for past medical expenses broader than reimbursing amounts actually paid or owed to providers. If compensatory damages werelegally limited to such amounts, the law could not permit the recovery of such damages for the reasonable value of gratuitously provided medical services since, by definition, the plaintiff has neither paid nor incurred liability for such services. Thus, in order to permit the recovery of compensatory damages for gratuitously provided medical services, the courts necessarily had to adopt the view that compensatory damages not only provide economic reimbursement to the plaintiff for actual dollars expended or owed, but also are concerned with placing the full economic consequences of wrongful conduct on the defendant. (See Fifield, supra, 54 Cal.2d at p. 637, citing Gastine, supra, 65 Cal.App.2d at pp. 143-144.) This is, moreover, a matter of legally recoverable damages, and not a consequence of the collateral source rule. The collateral source rule does not create or give rise to damages not otherwise recoverable by statute. Rather, the collateral source rule precludes otherwise recoverable damages from being reduced by benefits received by the plaintiff from a collateral source. (See Helfend, supra,2 Cal.3d at p. 6 [Supreme Court has long adhered to doctrine that collateral benefits “should not be deducted from the damages which the plaintiff would otherwise collect from the tortfeasor”]; Anheuser-Busch, Inc. v. Starley (1946) 28 Cal.2d 347, 349 [170 P.2d 448] [an action “against the wrongdoer for damages suffered is not precluded nor is the amount of damages reduced by the receipt by him of payment for his loss from a source wholly independent of the wrongdoer”].)

The Damages Debate Over Medical Expense Write-Offs

In Hanif v. Housing Authority (1988) 200 Cal.App.3d 635, 637-644 [246 Cal.Rptr. 192] (Hanif), the Court of Appeal addressed the one scenario not addressed by the cases discussed above—where the plaintiff has paid, or incurred express liability for, an amount ostensibly less than the “reasonable value” of the medical services required because of the defendant’s tortious conduct.19 ] Hanifconcluded that, in this context, the measure of damages is not the reasonable value of such services, but the lesser of the reasonable value of such services or the amount the plaintiff paid, or incurred liability, therefor. (Id. at pp. 643-644.)

As the majority opinion recounts, in Hanif, the minor plaintiff was hit by a car and severely injured. During trial, and over the defendant’s objection, the plaintiff introduced evidence the “reasonable value” of the physician services he received was $4,618 (whereas Medi-Cal paid only $2,823) and the “reasonable value” of hospital services was $27,000 (whereas Medi-Cal paid only $16,494). (Hanif, supra, 200 Cal.App.3d at pp. 638-639.) The differences in the amounts were written off by the providers following payment by the government, and there was no evidence the plaintiff was legally liable for the written off amounts. (Id. at p. 639) The trial court, sitting as the trier of fact, awarded the plaintiff the “reasonable value” of the medical expenses. (Ibid.) The defendant appealed, arguing the trial court had “erred in its application of the controlling measure of damages” and the plaintiff’s recovery for these medical services should have been “limited to the amount actually paid.” (Ibid.) The Court of Appeal agreed.

The court began by noting “there is no question here that Medi-Cal’s payment for all injury-related medical care and services does not preclude plaintiff’s recovery from defendant, as special damages, of the amount paid. This follows from the collateral source rule.” (Hanif, supra, 200 Cal.App.3d at pp. 639-640.) Thus, even though the plaintiff was a Medi-Cal beneficiary and could not be said to have been prescient in securing the government payments, the court had no difficulty applying the collateral source rule to this government benefit.20 ] (See Lund v. San Joaquin Valley Railroad (2003) 31 Cal.4th 1, 9-10 [1 Cal.Rptr.3d 412, 71 P.3d 770] [the “`collateral source rule expresses a policy judgment in favor of encouraging citizens to purchase and maintain insurance for personal injuries and for other eventualities'”], quoting Helfend, supra, 2 Cal.3d at p. 10.)21 ]

The court next stated there was no “question about the appropriate measure of recovery: a person injured by another’s tortious conduct is entitled to recover the reasonable value of medical care and services reasonably required and attributable to the tort.” (Hanif, supra, 200 Cal.App.3d at p. 640.) Rather, the question, said the court, concerned the “the application of that measure” and specifically “whether the `reasonable value’ measure of recovery means that an injured plaintiff may recover from the tortfeasor more than the actual amount he paid or for which he incurred liability for past medical care and services.” (Ibid.) It concluded “[f]undamental principles underlying recovery of compensatory damages in tort actions” compelled a “no” answer. (Ibid.) The court cited to sections 3281,22 ]3282,23 ] and 3333,24 ] and Witkin (4 Witkin, Summary of Cal. Law (8th ed. 1974) Torts, § 842, p. 3137), and pointed out tort damages awards are compensatory in character and not intended to provide an economic windfall to the plaintiff. (Hanif, at p. 640-641.)

The Court of Appeal then stated “medical expenses generally fall into the category of economic damages, representing actual pecuniary loss caused by the defendant’s wrong.” (Hanif, supra, 200 Cal.App.3d at p. 641.) In support of this statement, the court cited section 1431.2, subdivision (b)(1). (Hanif, at p. 641.) Section 1431.2 was added to the Civil Code by Proposition 51 and modifies the common law doctrine of joint and several liability. (Evangelatos v. Superior Court(1988) 44 Cal.3d 1188, 1192 [246 Cal.Rptr. 629, 753 P.2d 585].) The statute uses the terminology “economic” and “non-economic” damages, leaving joint and several liability intact as to the former, but imposing only several liability, proportional to fault, as to the latter.25 ] (§ 1431.2, subd. (a); Evangelatos, at p. 1192.) However, while Proposition 51 modified the nature and extent of a defendant’s liability for a plaintiff’s recoverable damages, it did “not purport to alter either the measure or total amount of damages that a plaintiff may recover for a particular tort.” (Evangelatos, at p. 1224; id. at p. 1230, fn. 1 (conc. opn. of Kaufman, J.).)

The Hanif court posited confusion as to the meaning of “reasonable value” may have arisen because of comments to BAJI No. 14.10 which explain the “reasonable value of medical and nursing care may be recovered although rendered gratuitously or paid by a source independent of the wrongdoer.” (BAJI No. 14.10; Hanif, supra, 200 Cal.App.3d at p. 641.) This, said the court, “merely restate[d] the collateral source rule,” which was “not an issue” in the case; rather, the issue was “the import of the term `reasonable value’ when applied to past medical services, to which neither BAJI No. 14.10 nor its comment provide any clue.” (Hanif, at p. 641.) However, as discussed above, the recovery of compensatory damages for the reasonable value of gratuitously provided medical services is a matter of legally recoverable damages, and not a consequence of the collateral source rule which precludes otherwise recoverable damages from being reduced by collateral benefits received by the plaintiff. Accordingly, the BAJI note is not simply a restatement of the collateral source rule; it also recites an established principle of recoverable damages. The court further stated “`[r]easonable value’ is a term of limitation, not of aggrandizement,” citing to section 3359.26 ] (Hanif, at p. 641.)

The Hanif court thus concluded, “when the evidence shows a sum certain to have been paid or incurred for past medical care and services, whether by the plaintiff or by an independent source, that sum certain is the most the plaintiff may recover for that care despite the fact it may have been less than the prevailing market rate.” (Hanif, supra, 200 Cal.App.3d at p. 641.) The court followed this with citations toMelone v. Sierra Railway Co. (1907) 151 Cal. 113 [91 P. 522]; Townsend v. Keith(1917) 34 Cal.App. 564 [168 P. 402]; Castro v. Giacomazzi (1949) 92 Cal.App.2d 39 [206 P.2d 688]; and Guerra v. Balestrieri, supra, 127 Cal.App.2d 511. (Hanif,at pp. 641-643.) “Implicit in” these cases, said the court, “is the notion that a plaintiff is entitled to recover up to, and no more than, the actual amount expended or incurred for past medical expenses so long as that amount is reasonable.” (Id. at p. 643.) As discussed above, the principal concern in these cases appears to have been providers might have charged and plaintiffs might have paid more than the “reasonable value” of the medical services, and therefore regardless of how much the plaintiffs paid or incurred, they were limited to recovering the reasonable value of such services.

The Court of Appeal additionally pointed to a comment on “value” in the Restatement Second of Torts: “`When the plaintiff seeks to recover for expenditures made or liability incurred to third persons for services rendered, normally the amount recovered is the reasonable value of the services rather than the amount paid or charged. If, however, the injured person paid less than the exchange rate, he can recover no more than the amount paid, except when the low rate was intended as a gift to him.'” (Hanif, supra, 200 Cal.App.3d at p. 643, quoting Rest.2d Torts, § 911, com. h, pp. 476-477.)

The Hanif court thus held the trial court erred in awarding the plaintiff “the reasonable value” of the physician and hospital services he had received. (Hanif, supra, 200 Cal.App.3d at p. 644.) Because the defendant did not dispute the amounts paid by Medi-Cal were “reasonable,” the court did not reverse, but modified the judgment to award only those amounts as the recoverable damages for physician and hospital services. (Ibid.)

The Court of Appeal then turned to the minor plaintiff’s recovery of damages for the reasonable value of the home attendant care provided by his parents. (Hanif, supra, 200 Cal.App.3d at pp. 644-646.) The plaintiff had not, of course, paid or incurred liability for this medical service. Echoing the Restatement section and comment on “value” it had quoted earlier, the court stated “[i]t is established that `[t]he reasonable value of nursing services required by the defendant’s tortiuous conduct may be recovered from the defendant even though the services were rendered by members of the injured person’s family and without an agreement or expectation of payment. . . .'” (Id. at pp. 644-645, quoting 22 Am.Jur.2d Damages, § 207, pp. 288-289 & citing Rodriguez II, supra, 87 Cal.App.3d at p. 662.)

Thus, Hanif is a rather unique case. As to medical services for which a plaintiff has paid or expressly incurred liability, the court held compensatory damages are limited to the lesser of the reasonable value of such services or the amount the plaintiff paid or incurred liability therefor. Thus, in this context, the Court of Appeal gave priority to that aspect of compensatory damages that insures the plaintiff is reimbursed for actual economic loss. As to gratuitously provided medical services, however, the court agreed a plaintiff is entitled to recover the reasonable value of such services. In this context, the court necessarily gave priority to that aspect of compensatory damages that places on a defendant the full economic consequence of his or her wrongful conduct.

As the majority opinion recites, this court applied Hanif’s measure of damages analysis as to nongratuitous medical services in Nishihama v. City and County of San Francisco (2001) 93 Cal.App.4th 298, 306-307 [112 Cal.Rptr.2d 861] (Nishihama ). In Nishihama, the plaintiff presented evidence of the “normal rates” charged by the hospital for the care she received. However, pursuant to its contractual arrangement with the plaintiff’s health care plan, the hospital accepted a significantly lower amount as payment in full. The jury, unaware of the payment because of the evidentiary aspect of the collateral source rule, returned a verdict based on the “normal rates.” (Ibid.) The defendant appealed, arguing the trial court erred in permitting the jury to award damages based on the provider’s “normal rates” rather than on the amount paid. (Id. at p. 307.) The plaintiff argued she was entitled to an award based on the “normal rates” because the hospital had filed a lien under the state’s Hospital Lien Act (HLA). (Ibid.) The court rejected this argument, holding the extent of such a lien is limited to the amount a hospital is “entitled to receive” as payment for its services, which “turns on any agreement it has with . . . the injured person’s insurer.” (Id. at pp. 307-308.) The court further held the HLA does not create an independent cause of action in favor of hospitals; rather, the statutory lien is based on a “`debt owed by plaintiff to the [h]ospital.'” (Id. at p. 308, quoting Grauberger v. St. Francis Hospital (N.D.Cal. 2001) 149 F.Supp.2d 1186, 1191, vacated on unrelated ground by Grauberger v. St. Francis Hospital (N.D.Cal. 2001) 169 F.Supp.2d 1172, 1180.) The Supreme Court agreed with this construction of the HLA in Parnell v. Adventist Health System/West(2005) 35 Cal.4th 595, 600-609 [26 Cal.Rptr.3d 569, 109 P.3d 69] (Parnell).

Because the plaintiff owed no debt to the hospital, it having accepted the insurer’s payment as payment in full, the hospital had no valid lien. The plaintiff therefore could not rely on the HLA, and the Nishihama court held the trial court erred in allowing the jury to award damages based on the hospital’s “normal rates,” citingHanif. (Nishihama, supra, 93 Cal.App.4th at pp. 306, 309.) The court concluded the error was harmless, however, because “[t]here is no reason to assume that the usual rates provided a less accurate indicator of the extent of the plaintiff’s injuries than did the [insurer’s] specially negotiated rates.” (Ibid.) Indeed, the court stated “the opposite is more likely to be true”—the hospital’s “normal rates” may more accurately indicate the extent of the plaintiff’s injuries. (Ibid.) Following Hanif’sapproach, the court modified the judgment to award as past medical expenses only those amounts paid by the insurer. (Nishihama, at p. 309.)

Hanif and Nishihama thus gave rise to the postverdict, damages reduction procedure known as a “Hanif/Nishihama” motion. (Greer v. Buzgheia (2006) 141 Cal.App.4th 1150, 1155 [46 Cal.Rptr.3d 780].) In Greer, the defendant argued the jury should not be allowed to hear evidence “that the reasonable value of the medical services exceeded the amount actually paid, since no one will be obligated to pay the difference,” the bills having been settled in full by the plaintiff’s employer. (Id. at p. 1154.) The trial court allowed the evidence, but with the proviso that if the medical expenses awarded exceeded the amount paid, it would entertain a postverdict motion for reduction pursuant to Hanif. (Greer, at p. 1154.) The defendant, however, failed to request a special verdict form that segregated out past medical expenses, and the trial court therefore refused to reduce the award. (Id. at pp. 1154-1155.) The defendant appealed, arguing the trial court initially erred in allowing evidence of the reasonable value of the medical expenses to be presented to the jury and further erred by failing to reduce the verdict. (Id. at pp. 1156-1157.) The Court of Appeal (the same court that decided Hanif) held the trial court did not abuse its discretion in allowing the evidence. (Greer, at p. 1157.) “The [trial] court’s ruling was correct. Nishihama and Hanif stand for the principle that it is error for the plaintiff to recover medical expenses in excess of the amount paid or incurred. Neither case, however, holds that evidence of the reasonable cost of medical care may not be admitted. Indeed, Nishihama suggests just the opposite . . . .” (Id. at p. 1157.) As for postverdict reduction of the award, the court held the defendant waived the issue by failing to request a verdict that segregated medical expenses. (Id. at pp. 1157-1158.) “[I]t was for all practical purposes, impossible to calculate a Hanif/Nishihama reduction.” (Id. at p. 1158.)

As the majority opinion further discusses, Hanif was subsequently discussed inOlsen v. Reid (2008) 164 Cal.App.4th 200 [79 Cal.Rptr.3d 255] (Olsen). In Olsen,the plaintiff introduced evidence her providers billed $62,475.81 for medical services. (Id. at p. 202.) The defendant sought to introduce evidence of the amounts actually paid by the plaintiff’s insurance carriers. (Ibid.) The trial court refused to allow this evidence, and instead reduced the jury’s $250,000 award for “`past economic loss, including medical expenses,'” by $57,394.24, supposedly the amount written off by the providers after receiving payment from the carriers. (Ibid.) The Court of Appeal reversed. The majority opinion concluded that regardless of whether a Hanif/Nishihama reduction might otherwise be permissible, the record did not allow it because “it was far from clear” what medical expenses were paid and what amounts were written off. (Olsen, at p. 203.)

Two concurring opinions expressed differing views on the Hanif/Nishihamapostverdict reduction procedure. The first concurring opinion, by Justice Moore, sounded “the bell of alarm” that Hanif had “divorced the collateral source rule from the complicated area of medical insurance.” (Olsen, supra, 164 Cal.App.4th at p. 204 (conc. opn. of Moore, J.).) She suggested Hanif did not see “the connection between `reasonable value’ and the long line of cases on the collateral source rule,” since Hanif “simply stat[ed], without analysis, that the collateral source rule did not apply.” (Olsen, at p. 210.) In her view, Hanif “changed the emphasis from a plaintiff’s entitlement under the collateral source rule [citations] to `a plaintiff is entitled to recover up to, and no more than, the actual amount expended or incurred for past medical services so long as that amount is reasonable.” (Olsen, at p. 210.) She observed our Supreme Court has not yet addressed the issue and that “[m]uch has changed since the collateral source rule first entered our jurisprudence,” including in the area of billing and paying for medical services and the enactment of legislation eliminating the collateral source rule in medical malpractice cases. (Id. at pp. 212-213.) She therefore would reject theHanif/Nishihama postverdict reduction procedure in cases involving private insurance, and leave it to the Legislature to make any further changes in the collateral source rule. (Olsen, at pp. 213-214.) What Justice Moore’s concurrence does not address is the analytical distinction between the measure of damages and the collateral source rule.

The second concurring opinion, by Justice Fybel, endorsed the reasoning of Hanifas “soundly based on California statutes—Civil Code sections 3281, 3282, 3333, and 1431.2, subdivision (b)(1)—and the Restatement Second of Torts, section 911, comment h.” (Olsen, supra, 164 Cal.App.4th at p. 215, fns. omitted (conc. opn. of Fybel, J.).) In his view, Hanif and Nishihama also correctly followed the collateral source rule “because the plaintiffs in those cases recovered all medical costs actually incurred, even though the costs were paid by others (e.g., a health plan).” (Olsen, at pp. 215-216.) What Justice Fybel’s concurrence does not address is the tension between that aspect of compensatory damages that insures the plaintiff is reimbursed for any actual economic loss, and that aspect of compensatory damages that places on a defendant the full economic consequences of his or her wrongful conduct.

Supreme Court Cases Involving Medical Expense Write-Offs

Our Supreme Court has not addressed the measure of damages for past medical expenses where the plaintiff has paid, or incurred express liability for, an amount ostensibly less than the reasonable value of the services rendered, and specifically has not addressed the issue of medical expense write-offs in this context. Nevertheless, the court has decided several cases that bear mention in this regard.

The first is Fein v. Permanente Medical Group (1985) 38 Cal.3d 137 [211 Cal.Rptr. 368, 695 P.2d 665] (Fein). In Fein, the court upheld the validity of section 3333.1, subdivision (a), which was enacted as part of the Medical Injury Compensation Reform Act (MICRA). Section 3333.1 permits a defendant in a medical malpractice case to introduce evidence of collateral source benefits received by the plaintiff. The plaintiff, in turn, can introduce evidence of amounts he or she has paid (in insurance premiums, for example) to secure the benefits. (Fein, at p. 164.)

What is of interest with respect to the measure of damages, is the court’s observation that while section 3333.1, subdivision (a), allows the introduction of evidence of collateral source benefits, the statute “does not specify how the jury should use the evidence.” (Fein, supra, 38 Cal.3d at pp. 164-165.) “`Earlier drafts of section 3333.1, subdivision (a) required the trier of fact to deduct such collateral source benefits in computing damages, but—as enacted—subdivision (a) simply provides for the admission of evidence of such benefits, apparently leaving to the trier of fact the decision as to how such evidence should affect the assessment of damages.'” (Id. at p. 165, fn. 21, quoting Barme v. Wood (1984) 37 Cal.3d 174, 179, fn. 5 [207 Cal.Rptr. 816, 689 P.2d 446].) “Although section 3333.1, subdivision (a)—as ultimately adopted—does not specify how the jury should use such evidence, the Legislature apparently assumed that in most cases the jury would set the plaintiff’s damages at a lower level because of its awareness of plaintiff’s `net’ collateral source benefits.” (Fein, at pp. 164-165.) The court noted, however, the parties and trial court apparently had assumed, incorrectly, that section 3333.1, subdivision (a), required collateral source benefits to be deducted from a damages award. (Fein, at p. 165, fn. 21.) Not so, explained the court. The statute “simply authorizes the reduction of damages on the basis of collateral source benefits, but does not specifically mandate such a reduction.” (Ibid.; see also Hernandez v. California Hospital Medical Center (2000) 78 Cal.App.4th 498, 505-506 [93 Cal.Rptr.2d 97].)

Thus, under section 3333.1, subdivision (a), in determining the amount of damages for past medical expenses in a medical malpractice case, the jury can hear all the evidence relevant to determining the “reasonable value” of the medical services—both evidence of amounts charged by providers and amounts paid thereto by the plaintiff or collateral sources (and no doubt often accepted as payment in full). Because the statute does not specify how the jury is to evaluate or use such evidence, it also leaves open the possibility of damages awards for past medical expenses that exceed the amounts paid to providers (and accepted as payment in full), as well as awards that are less than initial provider billings. UnderHanif’s measure of damages analysis, however, a damages award exceeding amounts paid to and accepted by providers as payment in full would exceed what is legally recoverable.27 ]

The second case of interest is Olszewski v. Scripps Health (2003) 30 Cal.4th 798 [135 Cal.Rptr.2d 1, 69 P.3d 927] (Olszewski). In Olszewski, the Supreme Court invalidated on federal preemption grounds two state statutes (former Welf. & Inst. Code, §§ 14124.791 & 14124.74) that allowed providers to file liens against tort recoveries obtained by Medi-Cal beneficiaries. (Id. at p. 826.) “While federal law requires the state Medicaid agency to obtain full reimbursement of Medicaid payments whenever possible [achieved by way of mandatory assignment of a beneficiary’s right to recover damages for medical expenses from third parties], it strictly limits the ability of providers to obtain reimbursement for their services. Even though Medicaid payments are typically lower than the amounts normally charged for their services [citations], `[a] State plan must provide that the Medicaid agency must limit participation in the Medicaid program to providers who accept, as payment in full, the amounts paid by the agency plus any deductible, coinsurance or copayment required by the plan to be paid by the individual’ [citation].” (Olszewski, at p. 812.) Providers are thus prohibited from collecting any amounts from beneficiaries, except for very limited amounts defined in the federal statute. (Id. at pp. 812, 819.) Because the state lien statutes allowed providers to recover their “full customary charge” from beneficiaries, the court held the statutes directly conflicted with the federal statutory limitations on provider recoveries from Medicaid beneficiaries. (Id. at pp. 820-822, italics omitted.)

Of interest with respect to the measure of damages, is the court’s discussion of a policy directive issued by the Acting Director of the Medicaid Bureau that would permit additional provider recovery from a beneficiary’s tort recovery. “`Federal law would not preclude the practice of providers pursuing payment in tort situations in excess of Medicaid reimbursement’ as long as a state satisfies two conditions. First, the state must assure that Medicaid is made whole before the provider recovers any money. Second, the state must protect the assets of Medicaid beneficiaries by limiting provider recovery to the portion of the award specifically allocated for the beneficiary’s medical expenses.” (Olszewski, supra, 30 Cal.4th at pp. 821-822.) While the state lien laws met the first requirement, they did not meet the second because they did not limit recovery to the portion of recovery allocated to medical expenses. (Id. at p. 822)

The court therefore invalidated the state lien laws, but did so “reluctantly.” (Olszewski, supra, 30 Cal.4th at p. 826.) “By invalidating liens filed pursuant to section 14124.791, we give the third party tortfeasor a windfall at the expense of the innocent health care provider. Because the provider may no longer assert a lien for the full cost of its services, the Medicaid beneficiary may only recover the amount payable under Medicaid as his or her medical expenses in an action against a third party tortfeasor. (See Hanif[, supra,] 200 Cal.App.3d 635, 639-644 . . . [where the provider has relinquished any claim to additional reimbursement, a Medicaid beneficiary may only recover the amount payable under the state Medicaid plan as medical expenses in a tort action].) As a result, the tortfeasor escapes liability for the full amount of the medical expenses he or she wrongfully caused.” (Id. at pp. 826-827.)

The court “urge[d] the Legislature to remedy this anomaly in a manner consistent with federal law.” (Olszewski, supra, 30 Cal.4th at p. 827.) This exhortation suggests the court may not share Hanif’s view of the measure of damages, regardless of its citation to the case. As noted above, provider reimbursement from a tort recovery is permissible under federal Medicaid law if (a) Medicaid is made whole before the provider recovers any money and (b) the assets of Medicaid beneficiaries are protected by limiting provider reimbursement to that portion of a tort recovery specifically allocated to the beneficiary’s medical expenses. (Olszewski, at p. 822.) There is no suggestion the beneficiary must also be “liable” for the amounts recouped by the provider. Nor could there be such a requirement given the statutory mandate that Medicaid beneficiaries cannot be pursued for any amount above that paid by the government and any recoverable copayment. Thus, in advocating that providers be able to recover amounts exceeding Medicaid reimbursement from third party tortfeasors, the court seemed to be endorsing ameasure of damages not dictated by the plaintiff’s liability or the amount actually paid to and accepted by a provider as payment in full, but rather, reflecting the principle underlying the recovery of compensatory damages for gratuitously provided medical services—that compensatory damages also serve to place on the defendant the full economic consequence of his or her wrongful conduct.

The third case of interest is Parnell, supra, 35 Cal.4th 595. The plaintiff in Parnellwas injured in an automobile accident and received treatment at a community hospital. (Id. at pp. 598-599.) He had health insurance through a work-related plan which paid the hospital at “preferred provider” rates, which the hospital, in turn, accepted as payment in full. (Ibid.) The plaintiff subsequently sued the driver of the vehicle that hit the taxicab in which he was riding, and the hospital filed a lien to recover the difference between the “actual” cost of the medical services it provided and the amount it received from the plan. (Ibid.) The plaintiff then sued the hospital, challenging its lien. (Id. at p. 600.) As noted above, the Supreme Court agreed the lien was invalid, concluding the HLA does “not give a hospital an independent cause of action against [a] third party tortfeasor” (id. at p. 603) and “a lien under the HLA requires the existence of an underlying debt owed by the patient to the hospital.” (Id. at p. 605.)

The court reached this conclusion by examining the legislative history of the statute. “The HLA was originally enacted in 1961 to allow hospitals to recoup losses suffered when a patient `failed to discharge any portion of the hospital bill’ even though that patient had `collected upon a cause of action against another.'” (Parnell, supra, 35 Cal.4th at pp. 603-604, quoting Pope Enrolled Bill Rep. Mem. for Governor Edmund Brown on Sen. Bill No. 1140 (1961 Reg. Sess.) July 17, 1961, p. 1, italics added.) “The Legislature was therefore concerned with uninsured patients who failed to pay any part of their debt to the hospital and enacted the HLA to give hospitals the ability to collect on this debt.” (Parnell, at p. 604.) Because the hospital had accepted the amount paid by the plaintiff’s insurer as payment in full, his “entire debt to the hospital ha[d] therefore been extinguished.” (Id. at p. 609.) Because the plaintiff no longer owed a debt to the hospital for its services, the hospital could “not assert a lien under the HLA against [his] recovery from the third party tortfeasor.” (Ibid.)

The court observed its holding might “result in a significant hardship” for hospitals, and it had “no doubt,” as the hospital claimed, “`hospitals negotiate and enter into discounted rate agreements with the expectation that they will be entitled to recover additional funds from other payors who have an obligation to pay for the hospital’s services.'” (Parnell, supra, 35 Cal.4th at p. 611.) The court, however, could only construe the statutes “in accordance with the Legislature’s intent and controlling case law.” (Ibid.) As such, hospitals needed to look to the Legislature for a different outcome. (Ibid.) The court did not exhort the Legislature to take action to allow hospital liens on recoveries from third party tortfeasors for the difference between amounts billed and amounts accepted as payment in full, as it did in Olszewski. However, the court’s suggestion hospitals could look to the Legislature in this regard, despite having accepted payment from a collateral source as payment in full, again indicates the court may take a more expansive view of the measure of damages than Hanif. Indeed, the court appears to have viewed the plaintiff as having been indebted—or liable—to the hospital for the amount it initially billed, before applying all discounts, credits and payments (negotiated and made by the plaintiff’s health care plan), which “extinguished” the plaintiff’s “entire debt.” (Parnell, at pp. 599, 609.) The court also suggested hospitals could, in any event, contractually “preserve their right to recover the difference between usual and customary charges and the negotiated rate through a lien under the HLA.” (Id. at p. 611.)

The court concluded by noting that because its holding relied “solely on the absence of a debt underlying the lien,” it did not reach and was expressing no opinion on several issues, including “whether Olszewski[, supra,] 30 Cal.4th 798 . . . and Hanif[, supra,] 200 Cal.App.3d 635 . . . apply outside the Medicaid context and limit a patient’s tort recovery for medical expenses to the amount actually paid by the patient notwithstanding the collateral source rule . . . .” (Parnell, supra, 35 Cal.4th at p. 611, fn. 16.)

The fourth case of note is Prospect Medical Group, Inc. v. Northridge Emergency Medical Group (2009) 45 Cal.4th 497 [87 Cal.Rptr.3d 299, 198 P.3d 86] (Prospect). The issue in Prospect was whether providers of emergency medical services who do not have contracts with health maintenance organizations (HMOs) can bill HMO members for the difference between what they bill the HMO for their services and what the HMO pays—in other words, whether emergency room providers can “balance bill” HMO patients. (Id. at pp. 503-504.) Given the statutory and regulatory controls on the delivery of emergency medical services and on the payments to providers by HMOs, the court held providers of emergency medical services who have direct recourse against HMOs cannot “balance bill” HMO members, but must resolve billing and payment disputes directly with the HMOs. (Id. at pp. 504-508.)

The court summarized the statutory and regulatory scheme as follows: Emergency room medical personnel are statutorily required to provide treatment necessary to stabilize a patient, without first inquiring into the patient’s ability to pay. (Prospect, supra, 45 Cal.4th at pp. 504, 507.) Emergency patients are statutorily required either “to agree to pay for the services or to supply insurance information.” (Id. at p. 507.) If emergency services are provided to an HMO member by an “out-of-network” provider, the HMO is statutorily required to pay for the services. (Id. at pp. 504, 507.) HMOs must have a dispute resolution mechanism accessible to noncontracting providers to resolve billing and payment disputes. (Id. at pp. 506-507.) In addition, some emergency services providers are statutorily entitled to sue HMOs directly over billing disputes. (Ibid.) “Interpreting the statutory scheme as a whole,” the court concluded emergency services providers who have direct recourse against an HMO must resolve payment disputes directly with the HMO. (Id. at p. 507 & fn. 5.) The provider cannot involve the patient in the billing dispute and cannot “balance bill” the patient for any amount above that paid by the HMO. (Id. at p. 507.)

In the course of its analysis, the court made several significant comments about medical billing and payment. It stated several times emergency room doctors are “entitled to reasonable payment for their services.” (Prospect, supra, 45 Cal.4th at pp. 502, 509.) It also recognized, however, “[b]y the very nature of things” legitimate disputes can arise regarding “how much the emergency room doctors may charge and how much the HMO must pay for emergency services.” (Id. at pp. 504-508.) Moreover, even though HMOs are required by regulation to pay the “`reasonable and customary value for health care services rendered based upon statistically credible information that is updated at least annually,'” how this amount is determined “can create obvious difficulties.” (Id. at p. 505.) “In a given case,” stated the court, “a reasonable amount might be the bill the doctor submits, or the amount the HMO chooses to pay, or some amount in between.” (Ibid.)

The court’s holding in Prospect is also of interest with respect to the “liability” an HMO patient “incurs” for emergency services provided by a non-network provider. As the court explained, emergency medical personnel cannot condition treatment on ability to pay. An emergency patient is not required to agree to pay the provider’s usual and customary charges, but can simply supply insurance information. And where the patient is covered by an HMO against which the provider has recourse, the HMO patient cannot be charged for any amount above that recovered by the provider from the HMO. An HMO patient’s “liability” for emergency medical services provided by an out-of-network provider is thus limited by virtue of a comprehensive statutory and regulatory scheme to the amount paid to the provider by the HMO—not unlike a Medi-Cal beneficiary’s “liability” for medical services is limited by a comprehensive statutory scheme to the amount paid to the provider by the government.

Clarifying the Measure of Damages

Having granted review in Howell v. Hamilton Meats & Provisions, Inc. (2009) 179 Cal.App.4th 686 [101 Cal.Rptr.3d 805], review granted March 10, 2010 No. S179115, the Supreme Court is poised to address the question identified but not reached in Parnell—whether Olszewski and Hanif “apply outside the Medicaid context and limit a patient’s tort recovery for medical expenses to the amount actually paid by the patient notwithstanding the collateral source rule.” (Parnell, supra, 35 Cal.4th at p. 611, fn. 16.) The threshold issue that needs clarification, however, is the measure of damages for past medical expenses.

As discussed above, in every context except that addressed in Hanif, the measure of damages has been articulated as the reasonable value of the medical services required because of the defendant’s tortious conduct. Where the plaintiff has paid, or expressly incurred liability for, an amount exceeding the reasonable value of past medical services, recovery is limited to their reasonable value. Where the plaintiff is presumed to be liable for the reasonable value of such services, recovery is perforce for their reasonable value. And where the plaintiff receives gratuitously provided medical services, recovery may be had for their reasonable value. Whether this measure of damages, or the modified measure articulated inHanif, applies where the plaintiff has paid, or incurred liability for, an amount ostensibly less than the reasonable value of the medical services, would seem to depend on which view of compensatory damages is given priority—that focusing on reimbursing the plaintiff for actual economic loss, or that focusing on placing on the defendant the full economic consequence of his or her tortious conduct.

If priority is given to that aspect of compensatory damages focusing on reimbursing the plaintiff for actual economic loss, the measure of damages for past medical expenses must be as stated by Hanif—that is, the plaintiff is entitled to recover the lesser of the reasonable value of the medical services, or the amount he or she has paid, or incurred liability, therefor. As applied in Hanif, this measure resulted in a damages award for the amounts actually paid to the hospital and physicians by the government and which the government could recoup through assignment and lien rights. Putting aside the effect of the collateral source rule (which is necessary to analyze the threshold issue of the measure of damages), the plaintiff in Hanif thus recovered damages for the amount that would otherwise have passed through to the providers had they not been paid and because the providers were paid, would pass through to the payor. This result is consistent with the original rationale for allowing the recovery of damages for “incurred” medical expenses—to enable the plaintiff to pay the provider. And in such case, there is no windfall recovery by the plaintiff.

Even under the measure of damages articulated in Hanif, however, damages awards will vary significantly, depending on how the courts define the plaintiff’s “liability” for medical services. As subsequent cases, including this one, reflect, this determination can turn on a combination of sometimes highly complex factors, including who or what entity provided the medical services, who or what entity paid for them, statutory and regulatory controls on the providers and payors, and the contractual relationships between the providers, the plaintiff and payors. How courts come out on the “liability” issue will also reflect the divergent views of compensatory damages that have emerged in the case law, as well as the inherent tension between the two.

For example, in Hanif, the Court of Appeal concluded the minor plaintiff, a Medi-Cal beneficiary, was not “liable” for the amounts written off by the hospital and his physicians because state Medi-Cal and federal Medicaid statutes and regulations required the providers to accept government payment as payment in full and prohibited the providers from seeking additional amounts from the plaintiff. (Hanif, supra, 200 Cal.App.3d at pp. 639-640; see also Olszewski, supra, 30 Cal.4th at pp. 810-813, 817-820.) Arguably, a similar “liability” conclusion would follow under Prospect, as to an HMO member who received emergency services from an out-of-network provider. As discussed, the Supreme Court concluded inProspect that the statutory and regulatory scheme governing emergency care providers and HMOs does not require the patient to agree to pay the provider’s normal and customary charges, requires the provider to look to the HMO for payment, and prohibits the provider from seeking any additional amounts from the patient. (Prospect, supra, 45 Cal.4th at pp. 504-507.) This kind of “liability” analysis focuses on the actual dollars paid or owed (and required to be paid in the future) to the provider, thereby keeping the measure of damages focused on reimbursing the plaintiff for actual economic loss.

The court in Hanif did not indicate whether the plaintiff (or his parents) signed admission or intake paperwork agreeing to pay the providers’ usual and customary charges. But if they did, did the plaintiff thereby “incur liability” for the providers’ usual and customary charges—a “liability” which was subsequently discharged by a collateral source, i.e., the Medi-Cal program, through a combination of reduced rates and payment? Or, because the providers had previously agreed to participate in the Medi-Cal program, and thus obligated themselves to accept government payment as payment in full and to comply with statutory prohibitions against further recovery from beneficiaries, did that effectively vitiate any “liability” predicated on the providers’ standard admission or intake paperwork? Similarly, where the plaintiff has private health care insurance and signs standard admission or intake paperwork agreeing to pay the provider’s usual and customary charges, does he or she thereby “incur liability” for such charges—a “liability” that is subsequently discharged by the collateral source, i.e., the health care insurer, through a combination of reduced rates and payment? If the provider has entered into a preexisting contract with the insurer requiring the provider to accept payment at reduced rates as payment in full, does the plaintiff “incur” any real “liability” for the provider’s usual and customary charges?

In Holmes v. California State Auto. Assn. (1982) 135 Cal.App.3d 635, 637-638 [185 Cal.Rptr. 521] (Holmes), the Court of Appeal took the view that by signing the hospital’s standard admission paperwork, the plaintiff (a Medicare beneficiary) had “incurred” liability for the hospital’s full charges. (Id. at p. 639 [plaintiff “at the time of her admission to the hospital expressly undertook personal liability for the expenses about to be incurred”].) The court held the plaintiff was thus entitled to recover that full amount under the medical payments clause of an automobile policy providing the insurer would “`pay all reasonable expenses incurred by the insured [as the result of an automobile accident].'” (Id. at p. 637.) The court rejected the insurance company’s argument that the Medicare statutes and provider’s preexisting agreement with the government had “the effect of precluding” the plaintiff from “incurring” any hospital expenses within the meaning of the policy. (Id. at pp. 637-639.)

While Holmes is a first party insurance case, it nevertheless illustrates the view that by signing standard admission and intake paperwork promising to pay, a patient (indeed, even a Medicare patient) “incurs liability” for a provider’s usual and customary charges. (Holmes, supra, 135 Cal.App.3d at p. 639.) This is the analysis of “incurred liability” urged by plaintiff here. And, as noted in the majority opinion, it is also the view implicitly, if not expressly, taken by most other courts addressing damages and collateral source rule issues involving medical expense write-offs. (Maj. opn., ante, at pp. 11-14.)

Using the Holmes analysis to pinpoint the plaintiff’s “incurred liability” for past medical expenses, however, necessarily means that, in write-off cases, the damages award will almost invariably exceed the actual dollar amount paid or owed to the provider (or subject to recoupment by the payor).28 ] Accordingly, this analysis of “incurred liability” is at odds with the view of compensatory damages focusing on reimbursing the plaintiff for actual economic loss. It also is at odds with the original pass-through rationale for allowing the recovery of damages for “incurred” medical expenses—to enable the plaintiff to pay providers what is owed and thus discharge his or her liability. And it inherently results in an economic windfall to the plaintiff. Moreover, this windfall not only consists of dollars for medical services that have not been, and never will be, paid for such services, but also dollars arising solely, and ironically, by virtue of tools intended tocontrol escalating medical costs—rate reductions and medical expense write-offs.

The Holmes analysis is consistent, however, with the view of compensatory damages focusing on placing on the defendant the full economic consequences of his or her tortious conduct. Nevertheless, except in the context of gratuitously provided medical services (which appear to be a very small percentage of the medical services for which tort recovery is sought), the California courts have never expressly endorsed a measure of damages that results in the recovery of dollars, and potentially very significant dollars, for past medical expenses that will never be passed on to a provider to pay for medical services (or be subject to recoupment by a payor), but instead, will be retained by the plaintiff as an economic windfall. Indeed, in Helfend, where the Supreme Court reaffirmed California’s adherence to the collateral source rule, the court suggested even those who gratuitously provide medical services reasonably expect re-payment from a tort recovery—again reflecting a pass-through rationale for the damages award, mitigating against an economic windfall. (Helfend, supra, 2 Cal.3d at p. 6, fn. 5; see also Kimball, supra, 159 Cal. at p. 231.)

If the view of compensatory damages focusing on placing on the defendant the full economic consequences of his or her tortious conduct is nonetheless given priority in this context—as the majority of courts appear to have done—there would seem to be no reason to engage in any excruciating analysis as to the “liability” the plaintiff “has incurred” for medical services. The measure of damages consistent with this view of compensatory damages is simply the reasonable value of the medical services required because of the defendant’s tortious conduct, because that measure places at the defendant’s door the full economic consequence of his or her wrongful conduct. And under that measure, the scope of the plaintiff’s “incurred liability” for medical services is immaterial—as evidenced by the recovery of damages for gratuitously provided medical services. (See, e.g., Rodriguez II, supra, 87 Cal.App.3d at p. 661; Gastine, supra, 65 Cal.App.2d at pp. 143-144.)

For years, the courts have charged juries with determining “[t]he reasonable value of medical . . . care, services and supplies reasonably required and actually given in the treatment of the plaintiff to the present time” (BAJI No. 14.10), or stated another way, the “reasonable cost of reasonably necessary medical care that [the plaintiff] has received.” (CACI No. 3903A.) Under such charge, juries have not been required to find, as a predicate determination, the extent of the plaintiff’s “incurred liability.” Rather, juries simply determine the “reasonable value” of past medical services based on the evidence presented at trial, and neither the provider’s billed amount (reflecting usual and customary charges), nor the amount paid to the provider, definitively fixes the amount of recoverable damages. This approach remains fully apropos today, given the realities and complexities of health care billing and payment practices. While there is a constituency that believes amounts paid by health care plans do not reasonably compensate providers (see, e.g.,Parnell, supra, 35 Cal.4th at p. 611), there is also a constituency that believes present day medical billing and payment practices have resulted in inflated charges that both anticipate a significant write-off and ultimately insure payment that adequately compensates the provider. (See citations at fn. 1, ante.) As it has always been, determining the “reasonable value” of past medical services is a consummate task for the jury.

Applying a standard “reasonable value” measure of damages in medical expense write-off cases will, of course, likely result in damages awards in line with the providers’ initial billings, which may be for amounts significantly greater than the “reasonable value” of the services provided. (See citations at fn. 1, ante; see alsoProspect, supra, 45 Cal.4th at p. 505.) But this result is not a consequence of the measure of damages. Rather, it is a consequence of the evidentiary aspect of the collateral source rule. As the majority opinion suggests (maj. opn., ante, at pp. 19-20), it is time to take a critical look at that rule, which generally bars evidence of amounts paid to providers.

In California, the evidentiary aspect of the collateral source rule is not an outright ban on such evidence, but leaves its admission to the sound discretion of the trial court. (Hrnjak, supra, 4 Cal.3d 725 at pp. 729-734.) The Supreme Court has expressed concern that “[e]ven with cautionary instructions, there is substantial danger that the jurors will take the evidence into account in assessing the damages.” (Id. at pp. 732-733.) Thus, “[a]dmission despite such ominous potential should be permitted only upon a persuasive showing that the evidence sought to be introduced is of substantial probative value.” (Ibid.)

In the ensuing decades since these concerns were first voiced, however, the courts have exhibited a markedly heightened regard for the ability of juries to deal with complex and sophisticated legal and factual problems, including heeding limiting instructions in connection with otherwise highly prejudicial evidence. (See, e.g., People v. Kelly (2007) 42 Cal.4th 763, 782-787 [68 Cal.Rptr.3d 531, 171 P.3d 548] [evidence of prior improper financial dealings with other women, of prior assault on a woman, and of rapes of three other women admitted in capital rape/murder case for limited purposes of showing identity, common plan or design and intent]; People v. Roldan (2005) 35 Cal.4th 646, 704-707 [27 Cal.Rptr.3d 360, 110 P.3d 289] [evidence of prior robbery admitted in capital robbery/murder case for limited purposes of showing identity, motive and intent]; Pisciterli v. Salesian Society (2008) 166 Cal.App.4th 1, 7-13 [evidence of cleric’s prior felony sexual abuse conviction admitted in civil action against priesthood for failure to protect plaintiff against sexually predatory priest for limited purposes of impeaching witness and to show bias]; Rufo v. Simpson (2001) 86 Cal.App.4th 573, 597-599, & fn. 6 [evidence of Nicole Brown Simpson’s telephone calls to battered women’s shelter, diary entries and letter referring to prior incidents of domestic violence admitted in civil wrongful death and survival action for limited purpose of showing Nicole’s state of mind about her relationship with O.J. Simpson].)29 ]

If properly instructed juries can handle this kind of potentially prejudicial evidence in very serious—even life and death—cases, surely juries can consider, with proper instruction, evidence of amounts paid to health care providers on the issue of the “reasonable value” of health care services. (Cf. Gersick v. Shilling (1950) 97 Cal.App.2d 641, 649-650 [218 P.2d 583] [error in admitting evidence of payments by plaintiff’s medical insurer and of disability benefits “cured” by instruction that plaintiff was entitled to recover damages for all expenses incurred and the amount of damages should not be reduced by the receipt of payments from sources wholly independent of the wrongdoer].)

The ensuing decades have also brought us the medical billing and payment practices that now make evidence of what providers are paid highly relevant on the issue of the “reasonable value” of medical services. The Supreme Court recognized as much in Prospect when it stated: “In a given case, a reasonable amount might be the bill the doctor submits, or the amount the HMO chooses to pay, or some amount in between.” (Prospect, supra, 45 Cal.4th at p. 505; see also citations at fn. 1, ante.) Thus, it seems beyond cavil that such evidence “is of substantial probative value.” (See Hrnjak, supra, 4 Cal.3d at p. 733.)

It is time therefore to trust juries to heed limiting instructions in this context, as in others, and to let juries hear all the relevant evidence on the “reasonable value” of medical services.30 ]

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