Unreported / Non-Citable
Background
Plaintiff BHS Law LLP, a law firm owning commercial property in Campbell, California, brought a putative class action against San Jose Water Company (an investor-owned public utility regulated by the CPUC and SWRCB) and its employee Michael Payne. The dispute arose when San Jose Water required Plaintiff to install a reduced pressure backflow prevention mechanism. Plaintiff contested the requirement, requested an extension, and was granted a two-week extension through December 5, 2025, by San Jose Water employee Theresa Arce. Despite this extension, San Jose Water shut off water service to the property no later than December 4, 2025. Plaintiff filed suit asserting seven claims: procedural and substantive due process under 42 U.S.C.
§ 1983, violation of the Bane Act (Cal. Civ. Code § 52.1), negligence, negligent misrepresentation, promissory estoppel, and trespass to property interest. The Court previously denied a preliminary injunction and dismissed the § 1983 and Bane Act claims from the first amended complaint with leave to amend, finding Plaintiff failed to allege state action. Plaintiff filed a second amended complaint (SAC) attempting to cure these deficiencies.
The Court’s Holding
The Court granted Defendants’ motion to dismiss the § 1983 and Bane Act claims with prejudice, holding that Plaintiff failed to adequately allege that Defendants are state actors under either the public function test or the nexus test. The Court found that merely complying with state regulations does not transform a private utility into a state actor under the public function test, citing Single Moms, Inc. v. Mont. Power Co.
and Reinbold v. Alaska Airlines. Under the nexus test, Plaintiff’s allegation that San Jose Water faced potential fines for non-compliance was insufficient to show state coercion or significant encouragement. Because the federal claims were dismissed at an early stage, the Court declined to exercise supplemental jurisdiction over the remaining state law claims (negligence, negligent misrepresentation, promissory estoppel, trespass), dismissing them without prejudice. Plaintiff’s motion for sanctions was terminated as moot, with the Court warning that filing sanctions motions for improper purposes is itself sanctionable.
Key Takeaways
- A private utility’s compliance with state regulatory mandates—even enforcement of backflow prevention requirements—does not constitute state action under the public function test absent an endowment of governmental powers.
- The threat of regulatory fines for non-compliance does not satisfy the nexus test for state action; there must be allegations of specific coercive threats or significant encouragement by government officials directed at the challenged action.
- Failure to cure state action deficiencies after leave to amend warrants dismissal with prejudice of § 1983 and Bane Act claims.
- When all federal claims are dismissed early in litigation, courts routinely decline supplemental jurisdiction over state law claims, dismissing them without prejudice to refiling in state court.
- A plaintiff law firm’s motion for sanctions against opposing counsel for arguing that the amended complaint failed to cure deficiencies was denied as moot and admonished as potentially sanctionable itself.
Why It Matters
This decision reinforces the high bar for establishing state action against regulated private utilities in the Ninth Circuit. It clarifies that neither the public function test nor the nexus test is satisfied merely because a private entity operates under a comprehensive regulatory scheme or faces penalties for non-compliance. The ruling aligns with Supreme Court and Ninth Circuit precedent (Blum v.
Yaretsky, O’Handley v. Weber, Lindke v. Freed) requiring a close nexus or traditional governmental function. Practically, it channels disputes over utility service shutoffs—even allegedly wrongful ones—into state court for resolution under state tort and contract law, unless plaintiffs can allege specific facts showing joint action with the state or coercive state involvement in the challenged conduct.