BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON
          BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT
                              Senator Jerry Hill, Chair
                                2015 - 2016  Regular 

          Bill No:            SB 1228         Hearing Date:    April 11,  
          2016
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          |Author:   |Runner                                                |
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          |Version:  |February 18, 2016                                     |
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          |Urgency:  |No                     |Fiscal:    |Yes              |
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          |Consultant|Nicole Billington                                     |
          |:         |                                                      |
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           Subject:  Small business:  California Small Business Regulatory  
                                    Fairness Act


          SUMMARY:  Authorizes a court to grant a small business relief  
          from a final order of a state agency based on mitigating  
          factors.  Requires state agencies to provide 30 days notice and  
          an opportunity to comply with the law before imposing a civil  
          penalty or administrative fine on a small business.  Requires  
          state agencies to assist small businesses in achieving  
          compliance with regulations and establish a policy to guide the  
          reduction of penalties for small businesses. 

          Existing law:
          
          1)Requires, by the Administrative Procedure Act, that a state  
            agency make available to the public facts, evidence,  
            documents, testimony, or other evidence on which the state  
            agency relied to support the agency's determination that the  
            proposed action will not have a significant adverse impact on  
            business.  (Government Code (GC) §§ 11346-11348)

          2)Establishes the Office of Small Business Advocate within the  
            Governor's Office of Business and Economic Development  
            (GO-Biz) and establishes the duties and functions of the  
            Director of the Office of Small Business Advocate including  
            representing the views and interests of small businesses  
            before other state agencies whose policies and activities may  
            affect small businesses.  (GC §§ 12098-12098.9)







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          3)Requires each state agency that significantly regulates or  
            impacts small business to designate at least one person who is  
            required to serve as a small business liaison. (GC § 11148.5) 

          4)Requires, under the federal Small Business Regulatory  
            Enforcement Fairness Act, that federal agencies must have a  
            penalty reduction policy for small businesses, involve small  
            businesses in the development of some proposed rules through  
            Small Business Advocacy Review Panels, produce Small Entity  
            Compliance Guides for some rules, and be responsive to small  
            business inquiries about compliance with the agency's  
            regulations.  (Title 5 U.S.C. Ch. 6 §§ 601-612)

          This bill:

          1)For purposes of the relief and notice provided to small  
            businesses, defines "small business" as having the same  
            meaning as set forth in Government Code § 14837. 

          2)Excludes the Franchise Tax Board and the State Board of  
            Equalization from consideration as a "state agency" for the  
            purposes of the small business relief outlined in the bill. 

          3)Requires a state agency to assist a small business: 

             a)   In achieving compliance with statutes and regulations  
               administered by the state agency.

             b)   During an enforcement action by the state agency.

             c)   With participating in the rulemaking process required by  
               the Administrative Procedure Act (commencing with GC §  
               11340), which must include providing a small business with  
               information on how to participate in the rulemaking process  
               and the contact information of any ombudsman or small  
               business liaison that can assist the small business,  
               including, but not limited to, the Office of Small Business  
               Advocate.

          4)Requires a state agency to include all of the following  
            information on any notice of regulatory violation, penalty  
            assessment, or other punitive action sent to a small business:









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             a)   How the small business can comply with the law or remedy  
               the violation, pursuant to proposed GC § 11367.2.

             b)   All administrative and judicial remedies available to  
               the small business.

             c)   The Internet Web site, if available, and contact  
               information for all of the following:

               i)     The Office of Small Business Advocate.

               ii)    Any applicable ombudsman that may assist the small  
                 business.

               iii)   The small business liaison for the state agency.

          5)Requires a state agency, before imposing any civil penalties  
            or administrative fines on a small business, to provide no  
            less than 30 days actual notice to the small business and  
            provide the small business with an opportunity to comply with  
            the law or remedy the violation of the law if ignorance of the  
            violation is reasonable under the circumstances and the  
            violation does not constitute a crime or a basis for strict  
            liability before, notwithstanding any other law.

          6)Requires all other notices of regulatory violation, which  
            result in penalty assessment or other punitive action, sent to  
            a small business to be delivered as expeditiously as possible  
            to allow the small business to comply with the law and  
            mitigate any losses.

          7)Requires notices mandated under this proposed section (GC §  
            11367.2) to be delivered to the small business in person by an  
            authorized agent of the state agency or by certified mail.

          8)Requires a state agency to establish a policy to provide for  
            reduction, and under certain circumstances waiver, of civil  
            penalties for a small business based upon principles of equity  
            and fairness no later than December 31, 2017. 

          9)Requires a state agency to consider factors when adopting the  
            policy including, but not limited to:

             a)   The small business has not been subject to previous  








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               enforcement actions by the agency.

             b)   The violation by the small business did not involve  
               willful or criminal conduct.

             c)   The violation by the small business did not pose an  
               imminent health, safety, or environmental threat.

             d)   The violation by the small business was committed  
               inadvertently or without knowledge of the requirements for  
               compliance with the law.

             e)   The small business is unable to pay the penalty or the  
               penalty would impair the ability of the small business to  
               conduct business or compete effectively.

             f)   The small business has a low degree of culpability when  
               its conduct is judged in light of its size, length of  
               operation, and the sophistication of its owners or  
               managers.

             g)   The small business cooperated during any investigation  
               by the state agency.

             h)   The small business engaged in subsequent action to  
               correct the violation.

          10)Establishes that a small business shall not be required to  
            meet all of the mitigating factors adopted by a state agency  
            to receive relief under the policy and a state agency shall  
            not require the mitigating factors to be weighed equally when  
            granting relief to a small business under the policy.

          11)Allows a court, after administrative remedies are exhausted,  
            to grant equitable relief to a small business from a final  
            order of a state agency in the interest of justice.

          12)Provides mitigating factors for the court to consider when  
            granting equitable relief under this section including, but  
            not limited to:

             a)   The small business has not been subject to previous  
               enforcement actions by the state agency.









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             b)   The violation by the small business did not involve  
               willful or criminal conduct.

             c)   The violation by the small business did not pose an  
               imminent health, safety, or environmental threat.

             d)   The violation by the small business was committed  
               inadvertently or without knowledge of the requirements for  
               compliance with the law.

             e)   The small business is unable to pay the penalty or the  
               penalty would impair the ability of the small business to  
               conduct business or compete effectively.

             f)   The small business has a low degree of culpability when  
               its conduct is judged in light of its size, length of  
               operation, and the sophistication of its owners or  
               managers.

             g)   The small business cooperated during any investigation  
               by the state agency.

             h)   The small business engaged in subsequent action to  
               correct the violation.

          13)Does not require the courts to weigh the mitigating factors  
            equally. 

          14)Requires the court to review all evidence and facts de novo  
            and make its own independent decision when granting relief  
            under this section.

          15)Allows a small business to seek judicial review and a stay of  
            an order of a state agency without exhausting administrative  
            remedies, notwithstanding any other law, if either of the  
            following apply:

             a)   The small business would suffer irreparable harm in the  
               absence of the court granting a stay on the order of the  
               state agency.

             b)   The state agency issuing the order that is before the  
               court has not established the policy required by Section  
               11367.4 of the Government Code. 








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          16)Deems a small business to have exhausted all administrative  
            remedies and requires the case to be heard by the court  
            sitting without a jury, if a court grants relief to a small  
            business under this section.

          17)Specifies that the decision of the court to decline review or  
            deny relief under this section is not appealable.

          
          FISCAL EFFECT:  Unknown.  This bill is keyed "fiscal" by  
          Legislative Counsel.  
          

          COMMENTS:
          
          1.Purpose.  The  Author  is the Sponsor of this bill. According to  
            the Author, California has routinely ranked as last among the  
            states in providing a business friendly environment.   
            Exasperated small business owners are stymied by delays and  
            expenses incurred in trying to comply with a vast array of  
            state and local regulations. Neither state regulatory agencies  
            nor California courts have statutory discretion to waive or  
            lower regulatory penalties based upon mitigating factors or in  
            the interest of justice. While punitive action should be  
            leveled at those who engage in egregious conduct, regulatory  
            agencies often cast a wide net.  When a state agency is called  
            upon to enforce a law or regulate an industry, it often relies  
            upon a statutory formula which provides no discretion in the  
            imposition of penalties.  Once put into motion a state  
            regulatory agency is not subject to legislative oversight and  
            cannot be restrained by the courts until administrative  
            appeals are exhausted.  For some small businesses, fragile by  
            nature, this is too late.

            SB 1228 would require California state agencies to assist  
            small business in crafting and complying with state  
            regulations.  The bill would require each state agency to  
            adopt rules to permit reductions or waivers of small business  
            penalties based upon a variety of mitigating factors.   
            Additionally, SB 1228 would give California courts broader  
            jurisdiction to reduce regulatory penalties based upon  
            principles of equity and in the interest of justice to  
            intervene when disputed regulatory action would do  








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            inappropriate or irreparable harm to a small business.

          2.Role of Small Business within the California Economy.  
            California's dominance in many economic areas is based, in  
            part, on the significant role small businesses play in the  
            state's $2.2 trillion economy.  Among other advantages, small  
            businesses are crucial to the state's international  
            competitiveness and are an important means for dispersing the  
            positive economic impacts of trade within the California  
            economy. According to a 2015 U.S. Small Business  
            Administration report, California has more than 3.6 million  
            small businesses, over 1.2 million more than any other state.   
            The report also noted that California's small businesses  
            employed half of the state's private workforce in 2012 (6.5  
            million employees).  According to the U.S. Census Bureau,  
            small businesses made up 99.2 percent of all employers in the  
            state for the same year. 

            In difficult economic times, smaller size businesses often  
            function as economic engines.  The trend continued in the  
            recession with the number of non-employer firms increasing  
            from 2.6 million firms ($137 billion in revenues) for 2008 to  
            2.8 million firms ($138 billion in revenues) for 2010.  In the  
            post-recession economy, small businesses are expected to  
            become increasingly important due to their ability to be more  
            flexible and better suited to meet niche market needs.  Their  
            small size, however, results in certain challenges in meeting  
            regulatory requirements, accessing capital, and marketing  
            their goods and services.  California's network of technical  
            assistance providers assist businesses with a range of  
            services, including access to quality training, one-on-one  
            counseling, mentoring, marketing data, and other business  
            development resources.

          3.Governor's Office of Business and Economic Development  
            (GO-Biz) Small Business Assistance.  Since its inception,  
            GO-Biz has served thousands of businesses, 95 percent of which  
            are small.  The most frequent types of assistance include help  
            with permit streamlining, starting a business, relocation and  
            expansion of businesses, and regulatory challenges.  In  
            addition to economic development programs, GO-Biz is  
            responsible for specialized assistance to small businesses  
            through the Office of Small Business Advocate (OSBA).  OSBA  
            has four primary focus areas: Advocacy, Information  








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            Gathering/Dissemination, Agency Coordination, and Business  
            Assistance.  OSBA directly engages with the small business  
            community through email communication, the GO-Biz website,  
            social media, live events, webinars, radio shows, and  
            teleconferences, among other methods.  OSBA also manages an  
            Interagency Working Group, in partnership with the Permit  
            Assistance Unit at GO-Biz, which convenes small business  
            officers and advocates from various state agencies to discuss  
            new or changed regulations or to discuss small business  
            programmatic concerns.  OSBA oversees the Capital Infusion  
            Program, which enables the California Small Business  
            Development Center (SBDC) Networks to expand their one-to-one,  
            no-cost, confidential consulting to small business owners.  In  
            its first year, the Capital Infusion Program resulted in  
            roughly $202.6 million in documented capital infusion and  
            served just over 9,700 small business owners across the state.  
             In 2015, GO-Biz launched a new California Business Portal;  
            the site includes a Business Navigator feature, which provides  
            custom information regarding permits, licenses, and incentives  
            that relate specifically to the user's business.    

          4.Current Administrative Penalty Appeal Process. Generally,  
            before a court is authorized to inquire into the validity of  
            any final administrative order or decision, a business must  
            first exhaust the entire appeal process at the agency that  
            took the original action.  Only after that can a court issue a  
            stay of an order of a state agency. The petitioner, in this  
            case a business, bears the cost of preparing the court records  
            and filing a petition.  Currently, a court's inquiry in these  
            cases extends only to the questions of whether the agency  
            proceeded without or in excess of its jurisdiction, whether  
            the agency appeal process was executed correctly, and whether  
            there was any prejudicial abuse of discretion.  Neither state  
            regulatory agencies nor California courts have statutory  
            discretion to waive or lower regulatory penalties based upon  
            mitigating factors or in the interest of justice.

          5.Prior Related Legislation.  SB 606  (Nielsen) of 2015 would have  
            established the Small Business Appeals Board and authorized  
            the board to grant a hearing and review the order, ruling,  
            action, or failure to act of any state agency upon petition of  
            any small business affected and to grant any remedy or impose  
            any penalty authorized under existing law governing  
            administrative procedures.  (  Status:  This bill died in the  








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            Senate Committee on Governmental Organization.)

             AB 19  (Chang) of 2015 would have required GO-Biz to review  
            regulations affecting small businesses to determine whether  
            the regulations need to be amended in order to become more  
            effective, less burdensome, or to decrease the cost impact to  
            affected sectors.  (  Status:  This bill died in Assembly  
            Appropriations.)
                          
             AB 1711  (Cooley, Chapter 779, Statutes of 2014) required an  
            economic impact assessment to be included in the Initial  
            Statement of Reasons that a state agency submits to the Office  
            of Administrative Law when adopting, amending, or repealing a  
            non-major regulation.

             AB 2723  (Medina) of 2014 would have added statutory  
            protections to ensure that the costs of major regulations on  
            the state's smallest size businesses are considered when state  
            agencies undertake their economic impact assessment for major  
            regulations.  (  Status:  This bill was vetoed by the Governor.)

             SB 1099  (Wright, Chapter 295, Statutes of 2012) revised the  
            dates in which a regulation or order of appeal becomes  
            effective and requires the Office of Administrative Law (OAL)  
            to post certain information in its website for at least six  
            months. 

             AB 1409  (Pérez) of 2012 would have clarified the nature of the  
            reasonable alternatives to be considered by an agency when  
            they are preparing their Initial Statement of Reasons a  
            regulatory change and would have required the Initial  
            Statement of Reasons to also include any reasonable  
            alternative submitted by the public of the Office of the Small  
            Business Advocate.  (  Status:  This bill died in the Senate  
            Rules Committee.)

             SB 828  (Runner) of 2011 was nearly identical to SB 606  
            (Nielsen) of 2015 above. (  Status:  This bill died in the Senate  
            Committee on Business, Professions and Economic Development.)

             AB 29  (Pérez, Chapter 475, Statutes of 2011) established  
            GO-Biz within the Governor's Office for the purpose of serving  
            as the lead entity for economic strategy and marketing of  
            California on issues relating to business development, private  








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            sector investment, and economic growth.  

             SB 560  (Wright) of 2011 would have required an agency, if it  
            does not or is unable to consult with impacted businesses  
            during the process of considering a regulatory change, to  
            inform the Office of Small Business Advocate and the  
            Department of Finance in writing of the reasons for not  
            consulting the impacted businesses.  (  Status:  This bill died  
            in the Senate Committee on Environmental Quality.)

             SB 688  (Wright) of 2011 would have required an economic impact  
            statement for a proposed regulation to include a detailed  
            estimate of the total actual costs of compliance for affected  
            businesses and individuals and would have required the  
            adopting agency to postpone the effective date and notify  
            specified committees of the Legislature if the estimated total  
            costs of compliance exceed $10 million.  (  Status:  This bill  
            died in the Senate Committee on Environmental Quality.)

             SB 356  (Wright) of 2009 would have required state agencies  
            subject to the APA to make additional findings and  
            determinations regarding the impact their regulations may have  
            on small businesses, to consult with small businesses during  
            the regulatory process and provide additional information,  
            statements and justification for the adoption, amendment or  
            repeal of regulations which may have an impact on small  
            businesses.  (  Status:  This bill died in the Assembly Committee  
            on Rules.)

             SB 1505  (McClintock) of 2004 would have amended the  
            Administrative Procedure Act to require a small business  
            impact statement and written 30 day notice to the California  
            Small Business Advocate before adopting, amending, or  
            repealing regulation.  (  Status:  This bill failed passage in  
            the Senate Judiciary Committee.)

          6.Arguments in Support.  Small Business California  and other  
            small business advocacy groups support SB 1228, arguing that  
            California law does not allow much discretion to agencies and  
            courts when levying fines against a small business. They  
            believe that imposing penalties on business owners for a minor  
            violation is too harsh a penalty for minor cases where  
            noncompliance was unintended. SB 1228, they state, creates  
            flexibility by allowing courts to reduce penalties and  








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            requiring agencies to adopt rules allowing for penalty  
            reduction based on mitigating factors. 

          
          SUPPORT AND OPPOSITION:
          
           Support:  

          California Association of Health Services at Home
          California Manufacturers and Technology Association
                                           Industrial Environmental Association
          National Federation of Independent Business
          Small Business California

           Opposition:  None on file as of April 5, 2016.


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