Wash. Trucking Associations, Nonprofit Corp. v. State

188 Wash.2d 198

393 P.3d 761

WASHINGTON TRUCKING ASSOCIATIONS, a Washington nonprofit corporation; Eagle Systems, Inc., a Washington corporation, Gordon Trucking, Inc., a Washington corporation; Haney Truck Line, Inc., a Washington corporation; Jasper Trucking, Inc., a Washington corporation; PSFL Leasing, Inc., a Washington corporation; and System TWT Transportation d/b/a System TWT, a Washington limited liability company, Respondents,

v.The STATE of Washington, EMPLOYMENT SECURITY DEPARTMENT; Paul Trause, individually and in his official capacity as the former Commissioner of the Employment Security Department, and Jane Doe Trause, husband and wife and the marital community composed thereof; Bill Ward, individually and in his official capacity, and Jane Doe Ward, husband and wife and the marital community composed thereof; Lael Byington, individually and in his official capacity, and Jane Doe Byington, husband and wife and the marital community composed thereof; Joy Stewart, a single individual, individually and in her official capacity; Melissa Hartung, a single individual, individually and in her official capacity; Alicia Swangwan, a single individual, individually and in her official capacity, Petitioners.

NO. 93079-1

Supreme Court of Washington.

Argued Jan. 19, 2017

Filed April 27, 2017

Eric Daniel Peterson, Dionne Padilla-Huddleston, Office of the Attorney General, 800 Fifth Ave., Ste. 2000, Seattle, WA, 98104-3188, for Petitioners.

Philip Albert Talmadge, Thomas M. Fitzpatrick, Talmadge/ Fitzpatrick/Tribe, 2775 Harbor Ave. S.W., Third Floor, Ste. C, Seattle, WA, 98126-2138, Aaron Paul Riensche, Ogden Murphy Wallace PLLC, 901 5th Ave., Ste. 3500, Seattle, WA, 98164-2008, for Respondents.

Milton G. Rowland, Foster Pepper PLLC, 618 W. Riverside Ave., Ste. 300, Spokane, WA, 99201, as Amicus Curiae on behalf of Washington State Association of Municipal Attorneys.

STEPHENS, J.

¶1 The principal issue in this case is whether taxpayers may bring federal or state tort claims to challenge tax assessments, or instead must rely on the normal state tax appeals process. The taxpayers here are trucking companies that were assessed unemployment taxes after the Washington State Employment Security Department audited and reclassified their employment relationship with owner-operators who own and lease out their own trucking equipment. The trucking companies, joined by their trade organization, Washington Trucking Associations, brought this suit in Thurston County Superior Court, asserting a civil rights claim under 42 U.S.C. § 1983 and a state common law claim for tortious interference with business expectancies.

¶2 The superior court dismissed the suit, holding that the trucking companies must challenge the tax assessments through the state tax appeals process. The Court of Appeals reversed in part, holding that the comity principle precludes the section 1983 claim only "to the extent that [Washington Trucking Associations] and the [trucking companies] seek damages based on the amounts of the assessments, but not to the extent that they seek damages independent of the assessment amounts." Wash. Trucking Ass'n v. Emp't Sec. Dep't, 192 Wash.App. 621, 641, 369 P.3d 170 (2016). The appeals court further held that the exclusive remedy provision of Washington's Employment Security Act, RCW 50.32.180, bars the tort claim only "to the extent that the claim is based on an allegation that the reclassification of owner/operators as employees was improper." Wash. Trucking Ass'n, 192 Wash.App. at 650, 369 P.3d 170.

¶3 We reverse the Court of Appeals and reinstate the superior court's dismissal of both the federal and state claims.

BACKGROUND FACTS AND PROCEDURAL HISTORY

¶4 Washington's Employment Security Act (ESA), Title 50 RCW, provides for the "compulsory setting aside of unemployment reserves to be used for the benefit of persons unemployed through no fault of their own." RCW 50.01.010. Under the ESA, "employers" pay " ‘contributions,’ " i.e. taxes, for persons engaged in "employment," i.e., employees.

RCW 50.24.010 ; RCW 50.04.072, .100. Persons engaged in "employment" include independent contractors so long as they perform "personal services" under a contract and an exemption does not apply. RCW 50.04.100, .140, .145. Consistent with the statutory mandate for liberal construction, RCW 50.01.010, courts construe exemptions to the ESA narrowly. See Shoreline Cmty. Coll. Dist. No. 7 v. Emp't Sec. Dep't, 120 Wash.2d 394, 406, 842 P.2d 938 (1992).

¶5 The ESA authorizes the commissioner of the Washington State Employment Security Department (Department) to administer the State's unemployment compensation system, which includes auditing employers. RCW 50.04.060 ; RCW 50.12.010 ; Clerk's Papers (CP) at 220. Pursuant to that power, the Department audited commercial trucking companies (Carriers¹ ) that lease trucks from and secure the driving services of independent contractors (owner-operators). The Department reclassified the owner-operators as Carrier employees, resulting in additional unemployment tax assessments on the Carriers. CP at 222; see also RCW 50.24.070.

¶6 The Carriers timely appealed the assessments to the Office of Administrative Hearings pursuant to RCW 50.32.030. In that tribunal, they filed a consolidated motion for summary judgment, arguing that the owner-operators are independent contractors or otherwise exempt from coverage; that federal law preempts the ESA with respect to the owner-operators; and that the tax assessments were based on biased, predetermined, and politically motivated audits.²

¶7 An administrative law judge (ALJ) denied the Carriers' motion, concluding that the owner-operators are in employment of the Carriers at least for their personal driving services, and rejecting the Carriers' preemption argument as a matter of law. The ALJ further stated that the Carriers' challenges to the audits should be addressed at a hearing on the merits. He subsequently remanded the matter to the Department with instructions to reassess the taxability of the payments attributable to (1) equipment rental, (2) out-of- state driving services, and (3) corporate services.³ CP at 299-301, 303-04; see also RCW 50.04.110, .165, .320(2).

¶8 After the ALJ's remand order, the Carriers and the Department entered into settlement negotiations. Believing a settlement had been reached, the Carriers brought a motion to enforce the agreement before the ALJ. After the ALJ ruled he lacked authority to enforce the agreement, the Carriers obtained an ex parte show cause order from Pierce County Superior Court. The superior court concluded that a settlement had been reached and entered an order enforcing the agreement.

¶9 The Department appealed that order to Division Two of the Court of Appeals, and the Court of Appeals reversed on jurisdictional grounds. Eagle Sys., Inc. v.Emp't Sec. Dep't, 181 Wash.App. 455, 457, 326 P.3d 764 (2014). Neither party sought review of that decision.

¶10 Shortly after the Department filed its appeal of the Pierce County order, the Carriers and Washington Trucking Associations (WTA)⁴ filed the present action in Spokane County Superior Court against the Department and six of its current and former employees. Upon the Department's motion, the case was transferred to Thurston County Superior Court. The Carriers repeated the allegations raised in their administrative appeals, and along with WTA asserted a section 1983 claim against named Department employees as well as a claim against the Department for tortious interference with contracts and business expectancies.⁵ WTA and the Carriers requested compensatory damages under both claims, as well as punitive damages and attorney fees under the section 1983 claim.

¶11 Thurston County Superior Court dismissed the action with prejudice on the Department's motion under CR 12(b)(6), failure to state a claim, and CR 12(c), judgment on the pleadings. That court orally ruled that (1) the Carriers must exhaust administrative remedies before challenging their tax assessments, (2) WTA lacks standing to sue under section 1983, and (3) the elements of tortious interference are not met as a matter of law. Verbatim Report of Proceedings (VRP) (June 13, 2014) at 39-40.⁶

¶12 WTA and the Carriers sought direct review, but this court denied the request and instead transferred the case to Division Two of the Court of Appeals. Order, Wash. Trucking Ass'n v. State, No. 90584-3 (Wash. June 3, 2015). At the Court of Appeals, WTA and the Carriers challenged only the superior court's dismissal of their section 1983 claim and their tortious interference with business expectancies claim. See Br. of Appellants at 1 n.2.

¶13 The Court of Appeals reversed in part and remanded to the superior court for further proceedings on the surviving claims. Wash. Trucking Ass'n, 192 Wash.App. at 630, 369 P.3d 170. That court stated four relevant holdings: First, comity does not bar WTA's and the Carriers' section 1983 claim to the extent the damages sought are unrelated to the amount of the unemployment tax assessments. Second, whether WTA has associational standing to file a section 1983 claim cannot be determined without further factual development. Third, neither RCW 50.32.180 nor the doctrine of exhaustion of administrative remedies bars the Carriers' claim for tortious interference so long as the claim is based on allegations that the Department had improper motives or used improper means in imposing its assessments. Fourth, the Carriers state a claim for tortious interference with contracts and business expectancies.

¶14 The Department and its current and former employees then filed a petition for review in this court, which we granted. Wash. Trucking Ass'ns v. Emp't Sec. Dep't, 186 Wash.2d 1016, 380 P.3d 522 (2016).

ANALYSIS

¶15 We review CR 12(b)(6) and CR 12(c) dismissals de novo. FutureSelect Portfolio Mgmt., Inc. v. Tremont Grp. Holdings, Inc., 180 Wash.2d 954, 962, 331 P.3d 29 (2014) ; P.E. Sys., LLC v. CPI...