CDA Dairy Queen, Inc. v. State Insurance Fund

IN THE SUPREME COURT OF THE STATE OF IDAHO
Docket No. 38492
CDA DAIRY QUEEN, INC., and )
DISCOVERY CARE CENTRE, LLC OF )
SALMON, ) Boise, August 2012 Term
)
Plaintiffs-Appellants, ) 2013 Opinion No. 6
)
v. ) Filed: January 23, 2013
)
STATE INSURANCE FUND, JAMES M. ) Stephen Kenyon, Clerk
ALCORN, in his official capacity as its )
manager, and WILLIAM DEAL, WAYNE )
MEYER, GERALD GEDDES, JOHN )
GOEDDE, ELAINE MARTIN, MARK )
SNODGRASS, RODNEY A. HIGGINS, )
TERRY GESTRIN, and MAX BLACK, and )
STEVE LANDON, in their capacity as )
members of the Board of Directors of the )
State Insurance Fund, )
)
Defendants-Respondents. )
Appeal from the District Court of the Third Judicial District of the State of Idaho,
Canyon County. Hon. Renae J. Hoff, District Judge.
The judgment of the district court is reversed and the case is remanded for
proceedings consistent with this opinion.
Lojek Law Offices, Chtd., Boise, and Gordon Law Offices, Chtd., Boise, for
appellants. Bruce Bistline and Donald Lojek argued.
Duke Scanlan & Hall, PLLC, Boise, for respondents. Keely Duke argued.
_______________________________________________
HORTON, Justice.
CDA Dairy Queen, Inc. and Discovery Care Centre, LLC of Salmon (collectively, Dairy
Queen) filed a class action against the Idaho State Insurance Fund (SIF) seeking a declaratory
judgment that SIF violated Idaho Code § 72-915 by failing to distribute premium rate
readjustments on a pro rata basis. The district court granted SIF’s motion for summary judgment,
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finding that the Idaho Legislature’s retroactive repeal of Idaho Code § 72-915 was constitutional
and that Dairy Queen’s action was thereby barred. Dairy Queen timely appeals and argues that
the retroactive repeal violates article I, § 16 of the Idaho Constitution. Dairy Queen asks this
Court to reverse the decision of the district court and remand for further proceedings consistent
with the determination that the retroactive repeal is unconstitutional. We reverse.
I. FACTUAL AND PROCEDURAL BACKGROUND
In Farber v. Idaho State Insurance Fund, 147 Idaho 307, 311, 208 P.3d 289, 293 (2009)
(Farber I), this Court held that Idaho Code § 72-915 required SIF to distribute any refund of its
policyholders’ premiums on a pro rata basis, considering each policyholder’s proportion of total
premiums paid. In response, the Legislature repealed Idaho Code § 72-915 retroactively to
January 1, 2003. The repeal provided that its purpose was to address the Farber decision and
maintain the continued viability of SIF as an efficient insurance provider. The repeal legislation
was signed on May 6, 2009, and the Farber I decision became final on May 27, 2009.
Dairy Queen filed a class action complaint against SIF, seeking declaratory relief and
damages. Dairy Queen then moved for partial summary judgment on the grounds that, if applied
retroactively, the repeal violates article I, § 16 of the Idaho Constitution. SIF also filed a motion
for summary judgment on the ground that the retroactive repeal does not violate the constitution
of either Idaho or the United States. The district court denied Dairy Queen’s motion and granted
SIF’s motion. A judgment dismissing Dairy Queen’s claims with prejudice was entered on
January 4, 2011.
II. STANDARD OF REVIEW
“Both constitutional questions and questions of statutory interpretation are questions of
law over which this Court exercises free review.” Stuart v. State, 149 Idaho 35, 40, 232 P.3d 813,
818 (2010) (citing Federated Publ’ns, Inc. v. Idaho Bus. Rev., Inc., 146 Idaho 207, 210, 192 P.3d
1031, 1034 (2008)). “The party challenging a statute or ordinance on constitutional grounds
bears the burden of establishing that the statute or ordinance is unconstitutional and must
overcome a strong presumption of validity.” State v. Korn, 148 Idaho 413, 416, 224 P.3d 480,
483 (2009) (citing State v. Reyes, 146 Idaho 778, 203 P.3d 708 (Ct.App.2009)). “The judicial
power to declare legislative action unconstitutional should be exercised only in clear cases.” Am.
Falls Reservoir Dist. No. 2 v. Idaho Dep’t Water Res., 143 Idaho 862, 869, 154 P.3d 433, 440
(2007) (citation omitted).
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III. ANALYSIS
As a preliminary matter, we note that SIF argues that this Court should affirm the district
court’s finding that the retroactive repeal of Idaho Code § 72-915 does not violate article I, § 10
of the United States Constitution. While neither party raised this as an issue on appeal, Dairy
Queen appeals from both the district court’s judgment in favor of SIF and from its order denying
Dairy Queen’s motion for summary judgment. In that order, the district court found the
retroactive repeal constitutional under both the state and federal constitutions. Thus, it appears
that SIF requests this relief to prevent Dairy Queen from raising the issue in a subsequent appeal
on federal grounds. Although the district court’s conclusion regarding the federal constitution is
inconsistent with our holding today, we will not address this issue. Under the Idaho Appellate
Rules, “an appellant’s failure to include in his initial appellate brief a fair statement of an issue
presented for review results in waiver of the issue.” Weisel v. Beaver Springs Owners Ass’n, Inc.,
152 Idaho 519, 525, 272 P.3d 491, 497 (2012); Rule 35(a)(4). Because Dairy Queen did not
address this issue in its opening brief, the issue is waived.
A. This Court will apply federal contract clause principles when determining whether a
statute violates article I, § 16 of the Idaho Constitution.
Dairy Queen argues that the retroactive repeal of Idaho Code § 72-915 to January 1,
2003, violates article I, § 16 of the Idaho Constitution because it impairs valid contracts that
existed at the time the repeal was enacted. SIF responds that the retroactivity does not violate the
Idaho Constitution because, even if some contract rights were affected, there was no substantial
impairment of any right. However, before we can make this determination, the threshold
question of whether the federal contracts clause analysis applies must be decided.
SIF contends that the analytical framework federal courts use when deciding federal
contracts clause cases is applicable in Idaho courts to determine whether a legislative act violates
the contracts clause of the Idaho Constitution. Dairy Queen argues that the federal methodology
is not relevant in challenges based upon the state constitution because Idaho precedent
demonstrates that the Idaho Constitution provides greater protection than the United States
Constitution. We hold that Idaho courts should apply federal analytical principles when deciding
challenges under article I, § 16 of the Idaho Constitution because the state constitution is not
more protective of contracts than the federal constitution.
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1. This Court follows federal precedent and uses federal methodology when analyzing
state constitutional issues unless the Idaho Constitution clearly provides greater
protection than the United States Constitution.
Generally, the federal framework is appropriate for analysis of state constitutional
questions unless the state constitution, the unique nature of the state, or Idaho precedent clearly
indicates that a different analysis applies. We explained the policy basis for this Court’s
preference for consistent interpretations of the state and federal constitutions in State v. Donato:
Although the United States Supreme Court establishes no more than the floor of
constitutional protection, this Court has found there is “merit in having the same
rule of law applicable within the borders of our state, whether an interpretation of
the Fourth Amendment or its counterpart-Article I, § 17 of the Idaho Constitution-
is involved. Such consistency makes sense to the police and the public.
135 Idaho 469, 471, 20 P.3d 5, 7 (2001) (quoting State v. Charpentier, 131 Idaho 649, 653, 962
P.2d 1033, 1037 (1998)). Thus, this Court will consider federal rules and methodology when
interpreting parts of the Idaho Constitution that have an analogous federal provision.
However, it is clear that the state constitution sometimes provides greater protection than
the federal constitution. In those cases, this Court does not “blindly apply United States Supreme
Court interpretation and methodology” when interpreting the state constitution. State v. Newman,
108 Idaho 5, 11 n.6, 696 P.2d 856, 862 n.6 (1985) (citing Oregon v. Hass, 420 U.S. 714, 719
(1975)), holding modified by State v. Bitt, 118 Idaho 584, 798 P.2d 43 (1990). For example, in
Donato, the defendant admitted that the State’s search of trash he placed on the curb for
collection was valid under federal interpretation of the Fourth Amendment, but argued that the
search violated the prohibition against unreasonable searches and seizures found in article I, § 17
of the Idaho Constitution because the state constitution provides greater protection against
searches. 135 Idaho at 470-71, 20 P.3d at 6-7. In its analysis, this Court recognized that article I,
§ 17 of the Idaho Constitution “in some instances, provides greater protection than the parallel
provision in the Fourth Amendment of the U.S. Constitution.” Id. at 472, 20 P.3d at 8 (citations
omitted). However, we then limited the circumstances in which we would find this kind of
greater protection. In examining the cases where this Court had found greater protection in
article I, § 17, we explained that “in these cases, we provided greater protection to Idaho citizens
based on the uniqueness of our state, our Constitution, and our long-standing jurisprudence.” Id.
The Court found that those factors did not apply in the context of searches of trash placed out in
public, and adopted the federal rule as the proper interpretation of article I, § 17. Id. at 474, 20
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P.3d at 10. Therefore, when interpreting the Idaho Constitution, this Court will use federal rules
and methodology unless clear precedent or circumstances unique to the state of Idaho or its
constitution indicates that Idaho’s constitution provides greater protection than the analogous
federal provision.
2. Idaho’s contracts clause does not provide greater protection than the contracts
clause in the United States Constitution.
There is no clear evidence that article I, § 16 of the Idaho Constitution provides greater
protection of contracts than article I, § 10 of the United States Constitution. First, the language of
the Idaho contracts clause employs the language found in the federal contracts clause, albeit in a
different sequence. The United States Constitution provides: “No State shall . . . pass any Bill of
Attainder, ex post facto Law, or Law impairing the Obligation of Contracts . . . .” U.S. Const. art.
I, § 10, cl. 1. In Idaho’s Constitution, the provision is: “No bill of attainder, ex post facto law, or
law impairing the obligation of contracts shall ever be passed.” Idaho Const. art. I, § 16. Dairy
Queen contends that the Idaho drafters’ addition of the word “ever” demonstrates that they found
the protection provided by the federal contracts clause insufficient. However, there is no
substantial basis for this argument. Read literally, both provisions absolutely ban laws that would
impair “the obligation of contracts,” and an absolute prohibition cannot be made “more
absolute.” The inclusion of an extra word, which merely makes the implicit duration of the ban
into an explicit duration, does not suggest the drafters’ intent to provide greater protection. More
importantly, the framers themselves apparently did not find the word “ever” to be remarkable.
When article I, § 16 was adopted at the Idaho constitutional convention, there was no discussion
of its language; the provision was read and adopted without debate. I.W. Hart, Proceedings &
Debates of the Constitutional Convention of Idaho 1889 vol. I at 371; vol. II at 1634 (Caxton
1912).
Next, Idaho’s “uniqueness” does not have the same significance with respect to contracts
that it does in the context of expectations of privacy. In State v. Webb, this Court held that when
an Idaho trial court determines the extent of the curtilage in search and seizure cases, it should
consider the factors used by federal courts, but “should apply them in the context of the setting or
locality of the residence itself” and “take into consideration the differences in custom and terrain
within different areas of the state when contemplating particular expectations of privacy.” 130
Idaho 462, 467, 943 P.2d 52, 57 (1997). The Court then announced a “broader test” than used by
federal courts, which provides greater protection of Idahoans’ reasonable expectations of
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privacy. Id. at 468, 943 P.2d at 58. Our interpretation of article I, § 17 in Webb was based upon
“the unique rural tradition and custom in Idaho that defines Idahoans’ sense of protected space,
and expectation of privacy, within their property.” Donato, 135 Idaho at 472, 20 P.3d at 8.
However, while we recognized that “the differences in a rural and suburban home for the
purposes of defining curtilage is a special consideration in Idaho,” we held that protecting
discarded trash is not such a consideration. Id. In this case, nothing about Idaho’s rural nature or
in the geographical particulars of the state obviously supports a reading of its constitution that
includes enhanced protection of contracts.
Finally, no “long-standing” jurisprudence clearly suggests that the Idaho Constitution
contains an absolute prohibition against any impairment of contracts. Dairy Queen does not cite
any cases in which this Court has expressly held that the Idaho Constitution provides more
protection than the federal constitution. Instead, it argues that Idaho precedent establishes an
“absolutist” interpretation of article I, § 16, to which there are “no exceptions,” and that has
remained “unquestioned” for 89 years. This argument is not persuasive as this Court has both
recognized exceptions and generally followed federal interpretation of the contracts clause.
There is at least one recognized exception to the constitutional protection of contracts.
For almost 100 years, this Court has recognized the police power exception to the contracts
clause in the context of regulating labor contracts and public utilities. 1 In 1916, the Court upheld
an Idaho statute permitting employees to claim up to thirty days’ wages from employers as a
penalty for non-payment of wages due, even if the labor contract between those parties did not
contemplate such a penalty. 2 The Court held that as “a legitimate exercise of the police power of
the state,” the statute did not violate article I, § 16 of the Idaho Constitution. Olson v. Idora Hill
1
Like labor and public utilities, the insurance industry is highly regulated and its contracts are subject to the state’s
police power because “[the insurance] business is affected with the public interest and the private rights of contract
in relation thereto must be and are subjected to the valid exercise of the police power by the legislature.” Penrose v.
Comm. Travelers Ins. Co., 75 Idaho 524, 537, 275 P.2d 969, 976 (1954) (citing Intermountain Lloyds v. Diefendorf,
51 Idaho 304, 5 P.2d 730 (1931)).
2
The law at issue provided that:
Whenever any employer of labor shall hereafter discharge or lay off his or its [employees] without
first paying them the amount of any wages or salary then due them, in cash, lawful money of the
United States, or its equivalent, or shall fail or refuse on demand to pay them in like money, or its
equivalent, the amount of any wages or salary at the time the same becomes due and owing to
them under their contract of employment, whether employed by the hour, day, week or month,
each of his or its [employees] may charge and collect wages in the sum agreed upon in the contract
of employment for each day his employer is in default until he is paid in full, without rendering
any service therefor: Provided, however, he shall cease to draw such wages or salary thirty (30)
days after such default.
Act of March 7, 1911, Session Laws 1911, Chapter 170 at 565.
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Mining Co., 28 Idaho 504, 518, 155 P. 291, 296 (1916). In an earlier case, the Court stated that
franchise contracts between the state and a public utility “must be held not to be protected by any
provision of the state or federal Constitution against the proper exercise by the state of its police
power.” Idaho Power & Light Co. v. Blomquist, 26 Idaho 222, 258, 141 P. 1083, 1094 (1914).
The Court reiterated this exception in Agricultural Products Corporation v. Utah Power & Light
Company, holding that the state’s regulation of utility rates pursuant to its police power,
including statutory alteration of rates set by private contracts, was “not a violation of the
constitutional prohibition against impairment of contractual obligations.” 98 Idaho 23, 29, 557
P.2d 617, 623 (1976) (citing Law v. R.R. Comm’n of Calif., 184 Cal. 737, 195 P. 423 (1921)). Of
course, the police power is not unlimited, “and the state may not interfere with a utility contract
unless it finds that the rate ‘is so low as to adversely affect the public interest-as where it might
impair the financial ability of the public utility to continue its service, cast upon other consumers
an excessive burden, or be unduly discriminatory.’” Bunker Hill Co. v. Wash. Water Power Co.,
98 Idaho 249, 253, 561 P.2d 391, 395 (1977) (quoting Fed. Power Comm’n v. Sierra Pac. Power
Co., 350 U.S. 348, 355 (1956)). Thus, the Court has recognized a limited exception, based upon
the state’s police power, to the protection provided by article I, § 16 of the Idaho Constitution.
Idaho cases also indicate that this Court does not interpret Idaho’s contracts clause more
strictly than federal courts interpret article I, § 10 of the United States Constitution. In early
cases, this Court consistently cited federal precedent when deciding challenges under article I, §
16 of the Idaho Constitution. Highway Dist. No. 1 of Fremont Cnty. v. Fremont Cnty., 32 Idaho
473, 476, 185 P. 66, 67 (1919) (“The obligation of a contract, in the constitutional sense, is the
means provided by law by which it can be enforced; by which the parties can be obliged to
perform it.”) (quoting State of Louisiana v. City of New Orleans, 102 U.S. 203 (1880)); In re
Fidelity State Bank of Orofino, 35 Idaho 797, 811, 209 P. 449, 453 (1922) (holding that statutes
causing material changes to a contract are void, as are laws that affect available remedies so as
“substantially to impair and lessen the value of the contract . . .”) (quoting Edwards v. Kearzey,
96 U.S. 595, 607 (1877)); Sanderson v. Salmon River Canal Co. 45 Idaho 244, 263 P. 32, 36
(1927) (holding that laws affecting the value of a contract may nonetheless be constitutional
because not “every statute which affects the value of a contract impair[s] its obligation”)
(quoting Curtis v. Whitney, 80 U.S. 68, 69 (1871)); Steward v. Nelson, 54 Idaho 437, 443, 32
P.2d 843, 846 (1934) (stating that a law denying or obstructing “the rights accruing by a contract,
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though professing to act only on the remedy, is directly obnoxious to the prohibition of the
Constitution”) (citing Brine v. Hartford Fire Ins. Co., 96 U.S. 627 (1877)).
Dairy Queen argues that in Penrose v. Commercial Travelers Insurance Company, 75
Idaho 524, 275 P.2d 969 (1954), this Court recognized that federal precedent was trending
toward allowing limited exceptions to contracts clause protections and decided not to adopt this
new federal framework. The relevant issue in Penrose was the applicability of a statute requiring
insurance companies to pay reasonable attorney fees to its policy holders in cases where the
policyholder prevailed in an action to recover benefits. 75 Idaho at 529, 275 P.2d at 971. In that
case, the policyholder prevailed in an action to recover certain policy benefits and was awarded
attorney fees pursuant to the challenged statute, even though his policy was issued before the
statute was enacted. Id. at 537, 275 P.2d at 976. On appeal, this Court vacated the award of
attorney fees, holding that application of a statute enacted after the policy was issued would
impair the obligation of the contract and thus violate article I, § 16. Id. at 540, 275 P.2d at 978.
A few months prior to the Penrose decision, a federal court considered the same Idaho
statute and held that it did not violate the federal contracts clause. In that case, the federal court
held that all contracts are executed with the parties’ understanding of the state’s police power,
and therefore, if the legislature determines “that the public good demands that an insurance
company unsuccessfully resisting payment should pay attorneys’ fees, there is no constitutional
objection to their doing so.” Midwest Steel & Iron Works Co. v. Henly, 117 F. Supp. 928, 932 (D.
Idaho 1954). The analysis in Midwest Steel indicates that the court considered the statute to act
upon the “enforcement of the obligations assumed by the parties and to the giving of suitable
relief for non-performance,” which it held did not affect the obligation of the contract because
“parties make their contract with reference to the existence of the power of the state to provide
remedies for enforcement and to secure adequate redress in case of breach.” Id. at 931 (citing
Henley v. Myers, 215 U.S. 373 (1910); Osborn v. Ozlin, 310 U.S. 53 (1940)).
Dairy Queen thus contends that the decision in Penrose, in which this Court cited
Midwest Steel while reaching the opposite conclusion, demonstrates that Idaho courts interpret
article I, § 16 to provide more protection than the federal provision. Neither Penrose nor our
decisions since support this argument. In Penrose, the dissent by Justice Givens was the majority
on the contracts clause issue. 75 Idaho at 540, 275 P.2d at 978-79. However, Justice Givens
merely states that the statute “impairs the obligation of contract,” and neither he nor the Justices
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concurring with him cite any case or provide any other information regarding their underlying
reasoning. Id. Instead, he writes that “[a]uthorities supporting this proposition [that the
challenged statute impairs the obligation of contract] are cited in the majority opinion and it is
unnecessary to add thereto, although there are others to like effect.” Id. at 540, 275 P.2d at 979.
While the majority opinion does cite some cases in support of what it terms “the minority rule,”
none of those cases are from Idaho. Id. at 538-39, 275 P.2d at 977-78. Without some explanation
of the rationale for the decision, Penrose is simply a case in which this Court disagreed with a
federal court’s interpretation of the Idaho Constitution. Consequently, Dairy Queen’s assertion –
that Penrose signals a departure from this Court’s past adherence to federal precedent because
Idaho’s contracts clause is more protective than the federal provision – is not supported by the
conclusory analysis in the Penrose dissent.
Further, in cases since Penrose, the Court has continued to cite federal precedent and has
given no indication that it finds the state constitution more protective of contracts than the
federal constitution. For example, in State v. Korn, we began our analysis of the defendant’s
contracts clause claim by quoting Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 241
(1978). 148 Idaho 413, 415-16, 224 P.3d 480, 482-83 (2009). Additionally, in the context of the
police power exception, we cited the United States Supreme Court in holding that a public utility
commission may “annul or supersede contract rates between utilities and their customers.” 3
Agric. Prods. Corp., 98 Idaho at 29, 557 P.2d at 623 (citing Midland Realty Co. v. Kansas City
Power & Light Co., 300 U.S. 109 (1937); Atlantic C. L. R. Co., v. Goldsboro, 232 U.S. 548
(1914)). The following year, we again cited the Supreme Court of the United States in noting that
the contracts clause limits that exception. Bunker Hill, 98 Idaho at 253, 561 P.2d at 395 (quoting
Fed. Power Comm’n v. Sierra Pac. Power Co., 350 U.S. 348 (1956)). In none of these cases did
our contracts clause analysis refer to Idaho authority. 4 Consequently, because neither the
constitution of Idaho, the nature of the state, nor long-standing precedent demonstrate that the
3
In addition to citing federal authority, the Court quoted article I, § 16 and explained that by its application, “[a]ny
contract is thus assured some measure of protection from governmental interference.” Agric. Prods. Corp., 98 Idaho
at 28-29, 557 P.2d at 622-23 (emphasis added). This language indicates that the Court interprets article I, § 16 as
providing something less than absolute protection.
4
In Agricultural Products, the Court did cite Idaho authority for the proposition that the state may regulate public
utilities. 98 Idaho at 29, 557 P.2d at 623 (citing Sandpoint Water & Light Co., Ltd., v. City of Sandpoint, 31 Idaho
498, 173 P. 972 (1918)). Bunker Hill subsequently cited Agricultural Products. Neither case cited Idaho contracts
clause precedent.
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protection provided by the Idaho Constitution is greater than the protection provided by the
United States Constitution, we hold that challenges based upon article I, § 16 should be
evaluated under the federal framework and rules.
B. The retroactive repeal of Idaho Code § 72-915 violates the Idaho Constitution because it
substantially impairs existing contracts.
The federal framework for determining whether a legislative act violates the contracts
clause is a three-step analysis. The first step is to determine whether the challenged legislative
enactment “has ‘operated as a substantial impairment of a contractual relationship.’” Gen.
Motors Corp. v. Romein, 503 U.S. 181, 186 (1992) (quoting Allied Structural Steel, 438 U.S. at
244). This threshold inquiry also has three parts: 1) whether a contractual relationship exists, 2)
whether the challenged legislative enactment impairs that relationship, and 3) whether that
impairment is substantial. Id. When considering whether a contractual relationship exists, the test
is not merely whether the parties have some contractual relationship, “but whether there was a
‘contractual agreement regarding the specific . . . terms allegedly at issue.’” Id. at 187; see also
Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470, 504 (1987) (holding that the
analysis begins “by identifying the precise contractual right that has been impaired.”). Therefore,
a legislative act does not violate the contracts clause unless there is a contractual relationship
between the parties regarding the specific terms at issue, the challenged act impairs an obligation
under that contract, and that impairment is substantial.
If the challenged legislative action is found to substantially impair a contract, the analysis
then proceeds to the remaining two steps: whether the act serves “an important public purpose,”
and whether the act is “reasonable and necessary” to advance that purpose. United States Trust
Co. of New York v. New Jersey, 431 U.S. 1, 25 (1977). First, substantial impairment may be
permissible where there is “a significant and legitimate public purpose behind the regulation,
such as the remedying of a broad and general social or economic problem.” Energy Reserves
Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411 (1983) (citations omitted).
However, even if a legitimate public purpose exists, the Court must still determine whether the
act is based “upon reasonable conditions and [is] of a character appropriate to the public purpose
justifying its adoption.” U.S. Trust Co., 431 U.S. at 22 (citing Home Bldg. & Loan Ass’n v.
Blaisdell, 290 U.S. 398, 445-47 (1934)). Thus, even substantial impairment may be permissible,
but only where it is reasonable and necessary to advance a legitimate public purpose.
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1. The retroactive repeal of Idaho Code § 72-915 substantially impairs Dairy Queen’s
contract rights.
Dairy Queen argues that its policy with the SIF includes a contractual right to a premium-
based pro rata share of any dividends and that retroactive repeal of I.C. § 72-915 constituted a
substantial impairment of that right. The SIF contends that there was no contractual right to
dividends based upon that methodology, or alternatively, that if such a right did exist, the repeal
did not substantially impair the contract. We hold that the retroactive repeal substantially impairs
Dairy Queen’s contractual rights because the dividend is a part of the consideration.
a. The retroactive repeal impairs a contractual right.
A contractual relationship exists regarding the specific term at issue in this case. The
United States Supreme Court has recognized the principle that “the laws which subsist at the
time and place of the making of a contract . . . enter into and form a part of it . . . .” Gen. Motors,
503 U.S. 181, 188 (1992) (quoting Home Bldg. & Loan Ass’n, 290 U.S. at 429-430). That Court
also noted that in general, the only laws incorporated into a contract, absent the parties’
agreement, are those that affect “the validity, construction, and enforcement of” the contract. Id.
at 189 (citing U.S. Trust Co., 431 U.S. at 19 n.17). In this case, Idaho’s workers’ compensation
statutes create statutory contract rights related to SIF’s premium structure and rate readjustment
procedures. We recently held that the premium provision set forth in Idaho Code Chapter 9, Title
72, “are written into, and become an integral part of, SIF’s workers’ compensation insurance
policies.” Farber v. State Ins. Fund, 152 Idaho 495, 498, 272 P.3d 467, 470 (2012) (Farber II).
The statutes are essential to the contracts and their enforcement because the actual SIF policies
do not mention the premium amount or how it is calculated and no valid contract could exist
without the statutes. Id. at 497-98, 272 P.3d at 469-70. Thus, Dairy Queen’s contractual
relationship with SIF includes the premium structure and dividend distribution provision as part
of the consideration.
The next question is whether the retroactive repeal of Idaho Code § 72-915 impairs the
contractual relationship between Dairy Queen and SIF. To impair a contract is to “diminish the
value of” the contract. Black’s Law Dictionary 819 (9th ed. 2009). In this case, under former
Idaho Code § 72-915, the decision to offer a dividend or rate readjustment was within the
Manager’s discretion. Former I.C. § 72–915 (Repealed by act effective May 6, 2009, ch. 294, §
1(6)). Even so, repealing the statute that provides for the possibility of a premium refund reduces
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the maximum possible value of the contract to Dairy Queen. Therefore, the retroactive repeal
impairs the contract.
b. The impairment is substantial.
If a court determines that a legislative act has impaired a contract, the final step in the
threshold inquiry is to decide whether the contractual impairment is substantial. In making this
determination, courts consider several factors, such as whether the impairment eliminates an
important contractual right, defeats an expectation of the parties, or creates a significant financial
hardship for one party. Thus, in United States Trust Co., the United States Supreme Court
invalidated the retroactive repeal of a statutory covenant that New York and New Jersey enacted
to limit the Port Authority’s ability to use its reserves to pay future deficits created from
operation of new facilities. 431 U.S. at 32. The statute was enacted to protect the interest of the
holders of the bonds sold to finance the Port Authority and to promote investor confidence. Id. at
9-10, 18. The Court held that the statute was a contract between the bondholders and the states
and that its retroactive repeal substantially impaired the contract by eliminating an important
security provision. Id. at 19. In another case involving bonds, voters in Washington State passed
an initiative that restricted a state municipal corporation’s contractually-granted ability to sell
bonds. Cont’l Ill. Nat. Bank & Trust Co. of Chicago v. Wash., 696 F.2d 692, 695-96 (9th Cir.
1983). The Ninth Circuit held that the statute substantially impaired the contract because the
ability to issue bonds “is essential to the performance of its contracts,” and restricting that ability
“defeats the expectations of the parties under their contracts.” Id. at 700 (citing Allied Structural
Steel Co., 438 U.S. at 246-48); see also S. Cal. Gas Co. v. City of Santa Ana, 336 F.3d 885, 890-
92 (9th Cir. 2003) (holding that because the statute affected “a right at the heart of the
[contract],” the impairment was substantial even though the financial impact was “relatively
small . . .”).
In another case, the Ninth Circuit held that a statute constituted a substantial impairment
of an employment contract because the statute permitted the state to delay its employees’ pay
dates and excepted the provision from the negotiation process. Univ. of Haw. Prof'l Assembly v.
Cayetano, 183 F.3d 1096, 1099 (9th Cir. 1999). The court agreed with the district court’s
conclusion that a “pay lag would likely impose a substantial hardship on many employees who
would not be able to meet their financial obligations such as mortgage payments in a timely
manner,” reasoning that the employees had the right to rely on timely payment and that “[e]ven a
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brief delay in getting paid can cause financial embarrassment and displacement . . . .” Id. at
1104-06. Idaho cases have also considered impairments that affected important terms or involved
the complete elimination of an important right. See, e.g., Curtis v. Firth, 123 Idaho 598, 610, 850
P.2d 749, 761 (1993) (holding that a change to the statute governing actions on notes secured by
deeds of trust was unconstitutional because it eliminated one remedy, the right to sue on the note
without first foreclosing on the deed of trust); Steward v. Nelson, 54 Idaho 437, 442-43, 32 P.2d
843, 845 (1934) (holding that statutes that reduced the time during which a mortgage-holder
could foreclose, even if the debt was still owing, violated the contracts clause because they
would “take away the remedy of foreclosure . . . and leave[] no remedy of equal or similar value”
to replace it, effectively destroying “the prevailing consideration for the contracts in so far as the
mortgagee was concerned”). Thus, impairment may be substantial where a legislative act impairs
essential rights, defeats a party’s expectations, or has significant financial consequences for a
party.
In this case, Dairy Queen argues that retroactive repeal of I.C. § 72-915 substantially
impairs its contracts because the dividend payments are essentially a partial refund of the
consideration Dairy Queen paid for the insurance. SIF contends that the contracts are primarily
about insurance in exchange for premiums and that partial, discretionary refunds are not an
important part of the contracts. We held in Farber II that the statutes in Chapter 9, Title 72 “are
essential to establish the consideration to be paid by the insured, and to be received by SIF,”
without which “there could be no valid contract.” Farber II, 152 Idaho at 498, 272 P.3d at 470
(citing Vanderford Co., Inc. v. Knudson, 150 Idaho 664, 672, 249 P.3d 857, 865 (2011)).
Consideration is a necessary element to forming a valid contract. Sirius LC v. Erickson, 150
Idaho 80, 85, 244 P.3d 224, 229 (2010). Consequently, the legislative act at issue in this case, as
in U.S. Trust and Continental Illinois, adversely affects an essential element of the contracts
between the parties. We therefore hold that the retroactive repeal of Idaho Code § 72-915
substantially impairs those contracts.
2. The retroactive repeal of Idaho Code § 72-915 is not reasonable and necessary to
support a significant and legitimate public purpose.
This Court has held that SIF serves a “public purpose.” Selkirk Seed Co. v. Forney, 134
Idaho 98, 103-04, 996 P.2d 798, 803-04 (2000) (quoting State ex rel. Williams v. Musgrave, 84
Idaho 77, 85, 370 P.2d 778, 782 (1962)). However, to survive application of the contracts clause
where a state law substantially impairs a contract, the law must have a “significant and legitimate
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public purpose,” to ensure that it is an exercise of the state’s police power and not merely
“providing a benefit to special interests.” RUI One Corp. v. City of Berkeley, 371 F.3d 1137,
1147 (quoting Energy Reserves, 459 U.S. at 412). Thus, the legislative act under review must
itself be reasonable and necessary to advance an important public purpose.
Here, we cannot glean a legitimate public purpose for the retroactive repeal from the
legislative history. The statement of purpose in the act repealing Idaho Code § 72-915 indicates
that the repeal was in response to this Court’s decision in Farber I, which required that rate
readjustments be paid on a pro rata basis, in order to “clarify the law regarding the payment of
dividends . . . .” In text of the repeal itself, the legislative intent is “that the State Insurance Fund
should operate like an efficient insurance company . . . .” The statutes governing SIF require its
board of directors to “direct the policies and operation of the state insurance fund to assure that
the state insurance fund is run as an efficient insurance company, remains actuarially sound and
maintains the public purposes for which the state insurance fund was created.” I.C. § 72-901(3).
While SIF itself exists to serve a public purpose, the same cannot be said of the repeal of Idaho
Code § 72-915.
IV. CONCLUSION
We reverse the district court’s order finding the repeal of Idaho Code § 72-915
constitutional and its judgment dismissing all of Dairy Queen’s claims and remand this case for
proceedings consistent with this opinion. Costs to Dairy Queen.
Chief Justice BURDICK and Justices J. JONES, W. JONES and Justice Pro Tem
KIDWELL CONCUR.
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