Pertinent case facts and procedural history
In State Water Resources Control Board v. Baldwin & Sons, Inc., the Fourth District Court of Appeal, relying on state and federal supreme court precedent, decided that the Board’s administrative investigation was similar to “a grand jury proceeding” and it could “investigate merely on suspicion that the law is violated, or even just because it wants assurance that it is not.” (45 Cal. App. 5th 40.) The court affirmed the trial court’s decision that Baldwin & Sons, Inc. (Baldwin) had to comply with the Board’s subpoena and turn over, among other things, income tax filings, loan agreements, bank and financial statements, and economic reports and sales projections. Baldwin was not the developer of the project under investigation for alleged violations of state and federal water regulations. Rather, it was suspected of paying for project-related expenses.
The case concerns construction of a large-scale development project in the Portola Hills Community in Lake Forest, California. During construction, the Board began investigating whether the developer had violated the federal Clean Water Act (33 U.S.C. § 1251 et seq.) and California’s Porter-Cologne Water Quality Control Act (Wat. Code, § 13000 et seq.) The Board issued notices of violation to four entities, including Baldwin. The notices alleged that federal and state water quality laws had been violated because discharges from the project adversely affected neighboring creeks and their tributaries. These discharges, according to the Board, violated the developer’s permit coverage under the state’s Construction General Permit, which is California’s National Pollutant Discharge Elimination System (NPDES) Permit. Importantly, Baldwin was not an owner, contractor, or permittee in relation to the project.
The purpose of the Board’s investigation was to determine if an administrative civil liability (ACL) complaint was warranted against responsible entities.
The Board’s first round of subpoenas did not target Baldwin. Instead, it sought documents from the permittees under the Construction General Permit. After discovering that there was a relationship between the permittees and “other entities who appeared to be paying for project related expenses,” the Board issued a subpoena to Baldwin. That subpoena sought: financial documents detailing the entities’ interrelationship, financial documents related to the entities’ corporate management, documents related to the development project including lease agreements and project operations, and documents related to the financial ability of responsible entities to pay any administrative civil liability imposed during enforcement proceedings. It also sought income tax filings, loan agreements, bank and financial statements, and economic reports and sales projections related to the development of the project (Financial Documents).
In response, Baldwin refused to comply with the subpoena on grounds that the Financial Documents were protected from disclosure under common law and a constitutional right to privacy. Baldwin also claimed that the documents were not reasonably relevant to the investigation and, thus, constituted an illegal search and seizure.
The Board filed a court action to seek an order compelling compliance with the subpoena. The trial court largely granted the Board’s petition and ordered Baldwin and the other appellants to turn over their records. It also directed entry of a protective order to limit disclosure of the Financial Documents. The appeal followed.
The court of appeal’s decision
The appellate court considered three main contentions by appellants: (1) their Financial Documents were not reasonably relevant to the Board’s investigation; (2) compelling production of the Financial Documents violated their right to privacy; and (3) a protective order did not adequately protect against disclosure of the Financial Documents to third parties. The court rejected all three contentions.
In considering the relevance of the documents sought, the court explained that there is a broad relevance requirement for administrative investigations, similar to those of a grand jury proceeding “which does not depend on a case or controversy in order to get evidence but can investigate ‘merely on suspicion that the law is violated, or even just because it wants assurance that it is not.’” (Brovelli v. Superior Court (1961) 56 Cal.2d 524, 529, citing United States v. Morton Salt Co. (1950) 338 U.S. 632, 642–643.)
In applying this broad standard, the court held that the Financial Documents were reasonably relevant to the investigation. The Financial Documents were needed in order for the Board to identify individuals responsible for the alleged violations of environmental laws during construction of the development project. Moreover, they were relevant to the determination of appropriate administrative penalties if the Board determined that an ACL complaint was warranted against one or more entities.
The Board needed the Financial Documents, according to the court’s decision, before filing an ACL complaint because it needed to specify a proposed amount of penalties in the complaint. In order to do so, the Board had to know what figure would eliminate any economic advantage Baldwin and the other appellants would obtain from non-compliance with relevant environmental laws. In other words, the Board was entitled to subpoena and obtain financial records from these entities not for determining whether the allegations of non-compliance with the Construction General Permit were accurate (i.e., sediment discharges and stormwater drainage requirements), but whether the proposed penalties would be stiff enough to deter the entity from non-compliance in the future.
Citing Water Code section 13385, the court found that the Board “is statutorily required to assess administrative civil liability, at a minimum, at a level that recovers the economic benefits, if any, derived from the acts that constitute the violation.” (Baldwin, 45 Cal. App. 5th at p. 24 [internal citations omitted] [emphasis added].) An “economic benefit,” according to the Board’s enforcement policy, is “any savings or monetary gain derived from the act or omission that constitutes the violation.” (Id at p. 53.) “It includes delayed costs and avoided costs, as well as ‘any other economic benefits’ gained by the discharger. Every administrative liability imposed must account for the economic benefit derived from the violation.” (Id.)
To determine any economic benefits Baldwin and the other appellants might have obtained from non-compliance with the Construction General Permit, the Board had to know, among other things, the financial condition of the subpoenaed parties and the business relationships among them. As such, the Financial Documents were reasonably relevant to the Board’s investigation. This holding is significant because it demonstrates how broad an administrative agency’s subpoena power is. Recall that Baldwin was not an owner, developer, or permittee for the project and was only suspected of contributing money to the project. The Baldwin decision makes clear that the relevance test in this context is far more expansive than in a civil action where discovery must either be related to the subject matter of the action or reasonably calculated to lead to the discovery of admissible evidence. And oftentimes the question of penalties (i.e., punitive damages) is reserved until after liability is established. In contrast, relevance in the context of administrative enforcement can be based on suspected wrongdoing and the need to establish proposed penalty amounts at the outset of the action.
Privacy rights and protective orders
The court also rejected Baldwin’s privacy arguments. Baldwin argued that any requirement that it disclose the Financial Documents would be a violation of its common law and constitutional right to privacy. The trial court, in considering this argument, allowed Baldwin and the other appellants to withhold their tax returns but required them to produce the balance of the subpoenaed Financial Documents. The trial court also issued a protective order to limit the use of the Financial Documents produced in response to the subpoena.
On appeal, appellants again argued that compelling disclosure of the Financial Documents violated their right to privacy, and because the documents were not relevant to the Board’s investigation, there was no basis upon which to overcome their privacy interests. The court upheld the trial court’s determination that the documents should be produced. The court noted that the subpoenas satisfied the three-part Brovelli test, and thus the documents were relevant. Additionally, the competing interests of the Board’s access to the documents and appellants’ privacy concerns were appropriately addressed by issuing a protective order.
The protective order provided that protected material would not be subject to the state’s Public Records Act or requests for production of documents in any subsequent litigation. At a hearing on the matter, the Board stated that the Financial Documents produced in response to the subpoena would be considered “protected material.” Furthermore, on appeal, appellants failed to show that the confidentiality provisions of the protective order were in any way insufficient to protect their interests. Thus, a protective order with such confidentiality provisions is sufficient to protect the privacy interests of an entity that is subject to an investigative subpoena by an administrative agency.
Implications of Baldwin
This decision will have an effect on all administrative agencies in California. As previously mentioned, the court heavily relied on Brovelli, which concerned a subpoena issued on a manufacturer of concrete in connection with an investigation commenced by the state attorney general to determine whether the Cartwright Act or the Unfair Practices Act was being violated by the concrete block industry. Furthermore, this case concerned a petition brought under California Government Code section 11187, which allows the head of all state agencies, in the event of non-compliance with a subpoena, to petition the superior court for an order requiring the production of documents in response to that subpoena.
Moreover, this case could signal to administrative agencies in other states that their subpoena powers could be equally as expansive, to the extent they are not already. While Baldwin is, of course, only persuasive authority in other jurisdictions, it provides a helpful roadmap to U.S. Supreme Court authority for the basic proposition that state agencies have investigative power akin to a grand jury.
The court in Baldwin cited McLane, a U.S. Supreme Court case concerning a subpoena issued by the Equal Employment Opportunity Commission in connection with an ongoing employment discrimination investigation. (McLane Co. v. EEOC (2017) 137 S. Ct. 1159, 1169.) The subpoena, seeking “pedigree information” such as the names, Social Security numbers, addresses, and telephone numbers of a number of employees, was upheld as seeking information relevant to the investigation.
Furthermore, in Oklahoma Press Publication Company, the labor agency administrator’s subpoena for investigation of labor practices in violation of the Fair Labor Standards Act by newspaper companies, was judicially enforced where the records sought were reasonably related to respondents’ investigations and did not violate petitioners’ constitutional rights. (Oklahoma Press Pub. Co. v. Walling, (1946) 327 U.S. 186.)
The Baldwin court also relied on Morton Salt Company as establishing the three-part Brovelli standard. (Morton Salt Co., 338 U.S. at pp. 642–643.) There, the U.S. Federal Trade Commission sought documents from certain corporations demonstrating that they complied with a decree by a federal appellate court enforcing the Commission’s cease and desist order, in addition to those reports required by the decree itself.
This trio of U.S. Supreme Court cases, which paved the way for the Baldwin decision, may be a basis to help other states reach a similar result, if they haven’t already.
Recommendations
In light of the expansive reach of Baldwin, private companies that are asked to produce sensitive financial information should keep the following recommendations in mind:
- Carefully gauge whether it is prudent to resist an administrative subpoena seeking financial records or other sensitive documents if those records are being sought to establish proposed administrative penalties; such a battle may be futile.
- Negotiate with the administrative agency to see if it is possible to narrow the scope of its subpoena and eliminate requests for documents that will not help the agency establish proposed penalties.
- Seek maximum protection of financial records and other sensitive documents, if produced to an administrative agency, through a detailed protective order.
- Limit the likelihood of inadvertent public disclosures through the use of encrypted and/or password protected electronic files which prohibit copying and printing.
Client Alert 2020-157
