AIDS Healthcare Foundation v. State Department of Health Care Services

Filed 10/13/15 AIDS Healthcare Foundation v. Cal. Dept. of Healthcare Services CA2/7
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SEVEN

AIDS HEALTHCARE FOUNDATION B252710
et al.,
(Los Angeles County
Plaintiffs and Appellants, Super. Ct. No. BS142406)

v.

CALIFORNIA DEPARTMENT OF
HEALTHCARE SERVICES et al.,

Defendants and Respondents.

APPEAL from a judgment of the Superior Court of Los Angeles County.
Robert H. O’Brien, Judge. (Retired Judge of the L.A. Sup. Ct. assigned by the Chief
Justice pursuant to art. VI, § 6 of the Cal. Const.) Affirmed.

Law Office of Andrew F. Kim and Andrew F. Kim; AIDS Healthcare
Foundation, Thomas A. Myers and Samantha Azulay for Plaintiffs and Appellants.

Kamala D. Harris, Attorney General, Julie Weng-Gutierrez, Senior
Assistant Attorney General, Jennifer M. Kim and Kenneth K. Wang, Deputy Attorneys
General, for Defendants and Respondents.
___________________________________
 INTRODUCTION

AIDS Healthcare Foundation and AHF Healthcare Centers (collectively AHF)
appeal from the judgment of dismissal entered after the trial court sustained without leave
to amend the demurrer by the California Department of Health Care Services and its
director Toby Douglas (collectively the Department) to AHF’s petition for a writ of
administrative mandamus. AHF sought a writ directing the Department (1) to withdraw
its order rejecting and remanding an administrative law judge’s proposed decision on
AHF’s administrative claims against the Department, and (2) to adopt as the “Final
Decision” certain portions of the administrative law judge’s proposed decision and to
reject other portions. The trial court concluded that AHF was not entitled to judicial
review because it had failed to exhaust its administrative remedies and that there was no
applicable exception to the exhaustion requirement. We conclude that the exhaustion
requirement bars AHF’s petition because AHF’s administrative claim is not final and that
the Department’s administrative processes and procedures were legally adequate and did
not violate the law. Therefore, we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Contract
AHF had a contract with the Department to provide health care services in Los
Angeles County to beneficiaries of California Medical Assistance Program (Medi-Cal)
suffering from acquired immune deficiency syndrome. The contract stated that AHF
would provide certain services to the Medi-Cal beneficiaries and receive payment based
on the amount that Medi-Cal would have expended had it provided health care for a
similar population through a fee-for-service delivery system.1 The Department also

1
The “traditional ‘fee-for-service’ delivery system” is where Medicare (or, in this
case, Medi-Cal) beneficiaries “consult private physicians and use private hospitals, and
bills for services rendered are sent by the healthcare providers to Medicare for payment.

2
agreed to give AHF an incentive payment (called a “Savings Share”) of 50 percent of any
savings that resulted from the arrangement. The contract also required the parties to
resolve any disputes pursuant to the administrative hearing and review procedures
described in Health and Safety Code section 100171.

B. The Administrative Proceedings
In 2009 a dispute arose between the parties over the Department’s rates of
payment to AHF for 2009 and 2010 and the Savings Share incentive payments owed to
AHF for 2007 and 2008. The Department rejected AHF’s claims. AHF appealed and
asked the Department to conduct an administrative review hearing under Health and
Safety Code section 100171.
The Department selected Administrative Law Judge (ALJ) Dwight V. Nelsen, an
ALJ on the staff of the Department’s administrative hearings and appeals office, to hear
the appeal. ALJ Nelsen, acting as the sole hearing officer, conducted the hearing at the
Department’s hearing offices.
In December 2012 ALJ Nelsen issued a proposed decision, which ruled in favor of
AHF in part and in favor of the Department in part. ALJ Nelsen recommended that the
Department adopt his proposed decision as the Department’s final decision.
Douglas, the Director of the Department, delegated the agency’s authority to act
on ALJ Nelsen’s proposed decision to the Department’s Chief ALJ Sharon Stevenson. In
a February 15, 2013 letter to the Department and AHF, Chief ALJ Stevenson stated she
was considering rejecting ALJ Nelsen’s proposed decision and “either alternating it or
remanding this matter for further hearing and a revised decision.” On March 1, 2013
Chief ALJ Stevenson issued an order entitled, “Rejection of Proposed Decision and
Remand to Take Additional Evidence,” citing Government Code section 11517,

Medicare determines whether it will pay all or part of the fee (rates of reimbursement are
based on the particular medical procedure and the geographic area in which the services
are rendered) and any noncovered balance (including any deductible) is the patient’s
responsibility.” (Solorzano v. Superior Court (1992) 10 Cal.App.4th 1135, 1140.)

3
subdivision (c)(2)(D).2 The order remanded the matter to Department ALJ Patricia
Freeman (ALJ Nelsen retired from the Department a week after he issued his proposed
decision) to consider additional evidence and to conduct further proceedings.
On April 2, 2013 AHF wrote to Chief ALJ Stevenson objecting to her order. AHF
pointed out that the Department’s ALJ Nelsen had originally conducted the proceedings,
and argued therefore that “agency itself” had heard the matter under Government Code
section 11517, subdivision (b), not Government Code section 11517, subdivision (c).3
AHF asserted that, because Chief ALJ Stevenson “did not hear any of the evidence” in
the matter, under Government Code section 11517, subdivision (b), she did not have “any
right to have any input into the decision” and therefore “lacked the power to issue the
Rejection/Remand Order.” AHF asked the Department to adopt or “confirm” ALJ
Nelsen’s Proposed Decision as the Department’s final decision.

2
Government Code section 11517, subdivision (c)(2)(D), provides, in pertinent
part: “(2) Within 100 days of receipt by the agency of the administrative law judge’s
proposed decision, the agency may act as prescribed in subparagraphs (A) to (E) . . . .
[¶¶] (D) Reject the proposed decision and refer the case to the same administrative law
judge if reasonably available, otherwise to another administrative law judge, to take
additional evidence. If the case is referred to an administrative law judge pursuant to this
subparagraph, he or she shall prepare a revised proposed decision, as provided in
paragraph (1), based upon the additional evidence and the transcript and other papers that
are part of the record of the prior hearing. . . .”
3
Government Code section 11517, subdivision (b), provides, in pertinent part:
“(b) If a contested case is originally heard before an agency itself, all of the following
provisions apply: (1) An administrative law judge shall be present during the
consideration of the case and, if requested, shall assist and advise the agency in the
conduct of the hearing. (2) No member of the agency who did not hear the evidence
shall vote on the decision. (3) The agency shall issue its decision within 100 days of
submission of the case.” Government Code section 11517, subdivision (c), provides, in
pertinent part: “(c) If a contested case is originally heard by an administrative law judge
alone, he or she shall prepare within 30 days after the case is submitted to him or her a
proposed decision in a form that may be adopted by the agency as the final decision in
the case.”

4
 C. The Trial Court Proceedings
On April 2, 2013, the same day AHF objected to Chief ALJ Stevenson’s order,
AHF filed a petition for a writ of administrative mandamus in the superior court. AHF
sought an order directing the Department to withdraw Chief ALJ Stevenson’s order and
to adopt certain portions of ALJ Nelsen’s proposed decision and to reject other portions.
AHF argued that the Department had exceeded its jurisdiction and violated the
Administrative Procedures Act (Gov. Code, § 11340 et seq.; APA) by using Department
ALJ’s to conduct proceedings and decide the matter. AHF further contended that, to the
extent that the Department had jurisdiction, the proposed order was an abuse of
discretion. AHF also argued that it was entitled to seek judicial review of the
Department’s proceedings because it had pursued unsuccessfully all available
administrative remedies, and it was “not required to exhaust any remaining administrative
remedy because the administrative process itself is the cause of the harm that AHF
alleges . . . .”
The Department filed a demurrer to the petition, arguing that AHF had “failed to
exhaust their administrative remedies and obtain a final decision by the Department and
the Director before seeking judicial relief.” The Department argued that, because the
matter was still pending before ALJ Freeman, AHF’s petition for judicial relief was
premature. The Department also defended its practice of using Department ALJs to
conduct administrative proceedings, arguing that the Department acted within its
statutory authority under both the Health and Safety Code and the APA.
The trial court sustained the Department’s demurrer without leave to amend. The
court ruled that AHF had not stated a cause of action because the administrative decision
was not final and therefore AHF had not exhausted its administrative remedies, and that
there was “no exception [to] the exhaustion rule nor [was] there any substance to the
futility argument because it [was] speculative.” Therefore, the court dismissed the
petition. AHF timely appealed.

5
 DISCUSSION

A. Standard of Review and Principles of Statutory Interpretation
“In reviewing an order sustaining a demurrer, we independently evaluate whether
the operative complaint states facts sufficient to state a cause of action.” (Alborzian v.
JPMorgan Chase Bank, N.A. (2015) 235 Cal.App.4th 29, 34; see Zelig v. County of Los
Angeles (2002) 27 Cal.4th 1112, 1126; Brown v. County of Los Angeles (2014) 229
Cal.App.4th 320, 322.) Where, as here, the trial court sustained the demurrer without
leave to amend, we determine whether there is a reasonable possibility that the plaintiff
can cure the defect by amendment. (Loeffler v. Target Corp. (2014) 58 Cal.4th 1081,
1100.)
This appeal involves the interpretation of statues in the Government Code and
the Health and Safety Code. “Statutory interpretation is a question of law that we review
de novo.” (Bruns v. E-Commerce Exchange, Inc. (2011) 51 Cal.4th 717, 724.) “In doing
so, ‘it is well settled that we must look first to the words of the statute, “because they
generally provide the most reliable indicator of legislative intent.” [Citation.] If the
statutory language is clear and unambiguous our inquiry ends. “If there is no ambiguity in
the language, we presume the Legislature meant what it said and the plain meaning of the
statute governs.” [Citations.] In reading statutes, we are mindful that words are to be
given their plain and commonsense meaning. . . . Only when the statute’s language is
ambiguous or susceptible of more than one reasonable interpretation, may the court turn
to extrinsic aids to assist in interpretation. [Citation.]’ [Citation.]” (Kirby v. Immoos
Fire Protection, Inc. (2012) 53 Cal.4th 1244, 1250.) These extrinsic or “secondary rules
of construction” include “maxims of construction, which express familiar insights about
conventional language usage; the legislative history; and the wider historical
circumstances of a statute’s enactment.” (Joannou v. City of Rancho Palos Verdes
(2013) 219 Cal.App.4th 746, 752.)
Finally, “[i]f the ambiguity is not resolved by these secondary rules of
construction, we then apply reason, practicality, and common sense. [Citation.] When

6
doing so, we must consider the potential consequences of a particular interpretation. This
includes not just the words chosen by the Legislature, but also matters such as context,
the problem to be remedied, the history of the times, legislation on the same subject,
public policy and contemporaneous construction. [Citation.] These other matters are
important because they elevate our analysis from an abstract exercise in semantics to the
only reason we engage in the process at all – to determine the Legislature’s intent in order
to carry out the purpose of the law.” (Joannou v. City of Rancho Palos Verdes, supra,
219 Cal.App.4th at p. 752.)

B. Exhaustion of Administrative Remedies
The trial court sustained the Department’s demurrer without leave to amend,
ruling that AHF had failed to exhaust its administrative remedies because the decision of
the Department was not final and that AHF had not demonstrated any applicable
exception to the rule requiring exhaustion. The trial court was right on both counts.

1. Exhaustion and Finality
A party must exhaust its administrative remedies before it seeks judicial review.
An administrative remedy is exhausted only upon termination of all available
administrative review procedures. (See City of San Jose v. Operating Engineers Local
Union No. 3 (2010) 49 Cal.4th 597, 609 [exhaustion requires “‘a full presentation to the
administrative agency upon all issues of the case and at all prescribed stages of the
administrative proceedings’”]; accord, Coachella Valley Mosquito & Vector Control
Dist. v. California Public Employment Relations Bd. (2005) 35 Cal.4th 1072, 1080
(Coachella Valley).) “‘The exhaustion doctrine is principally grounded on concerns
favoring administrative autonomy (i.e., courts should not interfere with an agency
determination until the agency has reached a final decision) and judicial efficiency (i.e.,
overworked courts should decline to intervene in an administrative dispute unless
absolutely necessary).’” (Coachella Valley, supra, 35 Cal.4th at p. 1080, quoting,
Farmers Ins. Exchange v. Superior Court (1992) 2 Cal.4th 377, 391.)

7
 The doctrine of finality “‘is closely related to” the requirement of exhaustion of
administrative remedies. (O.W.L. Foundation v. City of Rohnert Park (2008) 168
Cal.App.4th 568, 582.) “‘A decision attains the requisite administrative finality when the
agency has exhausted its jurisdiction and possesses “no further power to reconsider or
rehear the claim.”’ [Citation.] Finality may be defined either expressly in the statutes
governing the administrative process or it may be determined from the framework in the
statutory scheme. [Citation.] Until a public agency makes a ‘final’ decision, the matter is
not ripe for judicial review.” (California Water Impact Network v. Newhall County
Water Dist. (2008) 161 Cal.App.4th 1464, 1485.)
AHF argues that the doctrine of exhaustion of administrative remedies does not
bar its petition because the decision of the Department was final at the time AHF sought
judicial review.4 Specifically, AHF asserts that Chief ALJ Stevenson’s order rejecting
and reconsidering ALJ Nelsen’s proposed decision violated both the APA and the Health
and Safety Code provisions governing the Department’s administrative adjudications, and
that therefore ALJ Nelsen’s proposed decision became “final” by operation of law.
Assessment of AHF’s finality argument requires an examination of the statutory
framework of the APA and the relevant provisions in the Health and Safety Code that
apply to the Department.

a. The APA
The APA is a detailed and comprehensive collection of statutes governing
administrative procedures in California, divided into several categories, including statutes
that govern the Office of Administrative Hearings (OAH) (Gov. Code, § 11370 et seq.)

4
There are some analytic differences between the doctrines of exhaustion of
administrative remedies and finality. (See California Water Impact Network v. Newhall
County Water Dist., supra, 161 Cal.App.4th at pp. 1485-1490; Marquez v. Gourley
(2002) 102 Cal.App.4th 710, 715.) Those differences are not significant in this case,
however, because AHF argues that it exhausted its administrative remedies because ALJ
Nelsen’s decision was final.

8
and statutes that govern the adjudication of administrative claims involving state
agencies. The provisions of the Government Code governing administrative
adjudications are contained in Chapter 4.5 (Gov. Code, § 14000 et seq.), which provides
the general provisions for the adjudication of administrative claims,5 and Chapter 5
(Gov. Code, § 15000 et seq.), which describes the specific procedures for formal
hearings.

(i) The Applicability of the APA
In general, the APA governs evidentiary hearings conducted by all state agencies.
(See Gov. Code, § 11410.20.) The APA applies “to a decision by an agency if, under the
federal or state Constitution or a federal or state statute, an evidentiary hearing for
determination of facts is required for formulation and issuance of the decision.” (Gov.
Code, § 11410.10.)
Certain agencies, however, conduct administrative hearings pursuant to enabling
statutes or implementing regulations for those agencies that prescribe the relevant
procedures and do not incorporate the APA. (See Cal. Law Revision Com. com., 32D
West’s Ann. Gov. Code (2005 ed.) foll. § 11410.20, p. 271;6 see e.g., Department of

5
In addition to the general provisions for administrative procedures that apply to
most administrative proceedings, Chapter 4.5 also contains provisions governing
informal hearings, emergency proceedings, and alternative dispute resolution. (See Gov.
Code, § 11400 et seq.)
6
The California Law Revision Commission Comment to Government Code section
11410.20 provides in part: “This chapter is not applicable to specified proceedings of the
following state agencies: Alcoholic Beverage Control Appeals Board (Bus. & Prof.Code
§ 23083)[;] University of California (Educ.Code § 92001)[;] Public Employment
Relations Board (Gov’t. Code §§ 3541.3, 3563)[;] Commission on State Mandates
(Gov’t. Code § 17533)[;] Agricultural Labor Relations Board (Lab.Code § 1144.5)[;]
Military Department (Mil. & Vet.Code § 105)[;] Department of Corrections, Board of
Prison Terms, Youth Authority, Youthful Offender Parole Board, and Narcotic
Evaluation Authority (Pen.Code § 3066; Welf. & Inst.Code §§ 1788, 3158)[;] Public
Utilities Commission (Pub.Util.Code § 1701)[.]”

9
Corrections v. Office of Admin. Hearings (1997) 53 Cal.App.4th 780, 786 [APA does not
apply to the hearing procedures used by the Department of Corrections and Rehabilitation
and the Department of Mental Health because the enabling statutes of these agencies do
not incorporate the APA].) Still other agencies, pursuant to their respective governing
statutes, follow only selected provisions of the APA. (See, e.g., Gov. Code, § 19578
[requiring the State Personnel Board to follow provisions of Gov. Code, § 11513, which
contains the rules of evidence that apply to administrative proceedings].)
Thus, whether the APA applies to a particular agency and its administrative
proceedings in whole or in part depends on the relevant agency’s particular statutory and
regulatory scheme. (See Gov. Code, § 11501, subd. (a) [Gov. Code,
§ 11500 et seq. apply “to any agency as determined by the statutes relating to that
agency”]; see also Gov. Code, § 11415.10, subd. (a) [“[t]he governing procedure by
which an agency conducts an adjudicative proceeding is determined by the statutes and
regulations applicable to that proceeding,” and “[i]f no other governing procedure is
provided by statute or regulation, an agency may conduct an adjudicative proceeding
under the administrative adjudication provisions of the Administrative Procedure Act”].)
Moreover, where statutes prescribe hearing provisions “for various individual agency
proceedings, those provisions prevail over the more general provisions of the APA”
(Usher v. County of Monterey (1998) 65 Cal.App.4th 210, 217; see Department of
Alcoholic Beverage Control v. Alcoholic Beverage Control Appeals Bd. (2002) 99
Cal.App.4th 880, 884), and a statute applicable to a particular agency controls over a
conflicting or inconsistent provision of the APA. (See Gov. Code, § 11415.20 [“[a] state
statute or a federal statute or regulation applicable to a particular agency or decision
prevails over a conflicting or inconsistent provision”].)

(ii) Administrative Contests Under the APA
Contested administrative hearings under the APA are conducted pursuant to
procedures outlined in Government Code section 11517. Subdivision (a) provides that
“[a] contested case may be originally heard by the agency itself . . . . Alternatively, at

10
the discretion of the agency, an administrative law judge may originally hear the case
alone . . . .” (Gov. Code, § 11517, subd. (a), italics added.) The agency’s choice in
subdivision (a) of whether to hear the case “itself” or have an administrative law judge
“originally” hear it has significant procedural implications; specifically, the procedures of
subdivision (b) apply when the agency hears the case “itself,” and the procedures of
subdivision (c) apply when an administrative law judge originally hears the case.
Whether subdivision (b) or (c) applies is one of the main issues in this appeal.

(a) Proceedings Heard by the “Agency Itself”
The term “agency itself” as used in Government Code section 11517 means the
“head of the agency” or its “governing body.” (Usher v. County of Monterey, supra, 65
Cal.App.4th at p. 218; accord, Langan v. City of El Monte (2000) 79 Cal.App.4th 608,
617-618.) Pursuant to Government Code section 11500, subdivision (a), the term
“agency” includes state boards, commissions, and officers. Where the statute refers to
the “agency itself,” “the power to act shall not be delegated unless the statutes relating to
the particular agency authorize the delegation of the agency’s power to hear and decide.”
(Gov. Code, § 11500, subd. (a).) Thus, if an “agency itself” must hear and decide the
matter the agency may not delegate the hearing and decisionmaking authority to a
subordinate agency hearing officer (i.e., an employee who is neither the agency head nor
a member of its governing body), unless the agency’s enabling statutes allow the
delegation. (Usher v. County of Monterey, supra, 65 Cal.App.4th at p. 218; see, e.g.,
Greer v. Board of Education (1975) 47 Cal.App.3d 98, 112-113 [school board, rather
than district hearing officer, was required to determine certain issues reserved for the
board].)
As noted, if an “agency itself” hears the matter, then Government Code
section 11517, subdivision (b), governs the proceedings. Subdivision (b) provides:
“(1) An administrative law judge shall be present during the consideration of the case
and, if requested, shall assist and advise the agency in the conduct of the hearing. [¶]
(2) No member of the agency who did not hear the evidence shall vote on the decision.

11
[¶] (3) The agency shall issue its decision within 100 days of submission of the case.”
(§ 11517, subd. (b).) Interpreting section 11517 soon after the section became effective,
the court in Hohreiter v. Garrison (1947) 81 Cal.App.2d 384 explained that “[o]ne of the
primary purposes of the Legislature in passing . . . the legislation was to remedy the evils
in connection with hearings before administrative boards frequently composed of laymen,
untrained in procedure. To this end there was created the position of hearing officer.
Such officer is a civil service employee and must be an experienced lawyer.” (Id. at
p. 394.) Thus, “[i]f the case is heard by the hearing officer and the agency, the agency
decides the case with the assistance and advice of the hearing officer.” (Id. at p. 395.)

(b) Proceedings Heard by an ALJ Alone
If an administrative law judge originally hears the case alone, then Government
Code section 11517, subdivision (c), governs the proceedings. Subdivision (c) provides
that the ALJ prepare a proposed decision in the form that the agency may adopt as the
final decision. The agency may delegate its authority to review and act on the ALJ’s
proposed decision. (See Gov. Code, § 11500, subd. (a) [use of the term “agency itself” in
Chapter 5 of APA means the agency generally may not delegate the power to act; use of
the term “agency” alone means the agency may delegate the power to act]; Gov. Code,
§ 11440.10, subd. (a) [“[t]he agency head may do any of the following with respect to a
decision of the presiding officer or the agency,” including “[d]elegate its review authority
to one or more persons”].)
Government Code section 11517, subdivision (c)(2), lists the actions the agency
may take with respect to the ALJ’s proposed decision. The agency may:

“(A) Adopt the proposed decision in its entirety.
“(B) Reduce or otherwise mitigate the proposed penalty and adopt the
balance of the proposed decision.
“(C) Make technical or other minor changes in the proposed decision and
adopt it as the decision. . . .

12
 “(D) Reject the proposed decision and refer the case to the same
administrative law judge if reasonably available, otherwise to another
administrative law judge, to take additional evidence. . . .
“(E) Reject the proposed decision, and decide the case upon the record,
including the transcript, or upon an agreed statement of the parties, with or
without taking additional evidence.”

An “administrative law judge” as used in 11517 means an ALJ “qualified” under
Government Code 11502. (See Gov. Code, § 11500.) Government Code section 11502,
subdivision (b), describes the qualifications: “Each administrative law judge shall have
been admitted to practice law in this state for at least five years immediately preceding
his or her appointment and must possess any additional qualifications established by the
State Personnel Board for the particular position involved.” (Gov. Code, § 11502,
subd. (b).)
ALJs can come from the OAH or from within an agency. In general, an ALJ on
the staff of the OAH and appointed by the director of the OAH must conduct all hearings
under the APA. Government Code section 11502 provides: “(a) All hearings of state
agencies required to be conducted under this chapter shall be conducted by administrative
law judges on the staff of the Office of Administrative Hearings. This subdivision
applies to a hearing required to be conducted under this chapter that is conducted under
the informal hearing or emergency decision procedure provided in Chapter 4.5
(commencing with Section 11400). [¶] (b) The Director of the Office of Administrative
Hearings has power to appoint a staff of administrative law judges for the office as
provided in Section 11370.3.” Only the Director of the OAH can appoint ALJ’s from the
staff of the OAH. Government Code section 11370.3 provides: “The director shall
appoint and maintain a staff of full-time, and may appoint pro tempore part-time,
administrative law judges qualified under Section 11502 which is sufficient to fill the
needs of the various state agencies. The director shall also appoint any other technical
and clerical personnel as may be required to perform the duties of the office. The

13
director shall assign an administrative law judge for any proceeding arising under
Chapter 5 (commencing with Section 11500) and, upon request from any agency, may
assign an administrative law judge to conduct other administrative proceedings not
arising under that chapter and shall assign hearing reporters as required. Any
administrative law judge or other employee so assigned shall be deemed an employee of
the office and not of the agency to which he or she is assigned.”
Nevertheless, certain California agencies maintain their own administrative
hearing offices and employ and appoint “in-house” ALJ’s to conduct administrative
adjudications rather than using ALJs from the OAH. (See, e.g., Gov. Code, § 18671
[civil service hearings]; Veh. Code, § 14100 et seq. [hearings to suspend or revoke
driver’s licenses]; Welf. & Inst. Code, § 10953 [social service entitlement claims
conducted by ALJ’s on the staff of the Department of Social Services]; Bus. & Prof.
Code, § 24210, subd. (a) [claims involving applications for and revocations of alcohol
licenses].) And, where a statute authorizes an agency to select one of its in-house ALJ’s
to conduct administrative proceedings, that statute controls over the APA statutes that
require an ALJ on the staff of the OAH to conduct the proceedings. (See County of San
Diego v. Alcoholic Beverage Control Appeals Bd. (2010) 184 Cal.App.4th 396, 402 [“the
general provisions under the APA that a hearing must be conducted by an administrative
law judge on the staff of the Office of Administrative Hearings can be trumped by
specific provisions governing a particular state agency”]; Department of Alcoholic
Beverage Control v. Alcoholic Beverage Control Appeals Bd., supra, 99 Cal.App.4th at
pp. 884-885 [“‘[t]he governing procedure by which an agency conducts an adjudicative
proceeding is determined by the statutes and regulations applicable to that proceeding,’”
and “‘[a] state statute . . . applicable to a particular agency . . . prevails over a conflicting
or inconsistent provision of’” the APA].)

b. Health and Safety Code Administrative Adjudications
Pursuant to their contract, Health and Safety Code section 100171 governed the
resolution of the dispute between AHF and the Department. Section 100171, which

14
describes the procedures and law that apply to adjudicative proceedings conducted by the
Department, essentially incorporates some of the provisions of the APA and opts out of
others. The statute provides: “Notwithstanding any other provision of law, whenever the
department is authorized or required by statute, regulation, due process . . . or a contract,
to conduct an adjudicative hearing leading to a final decision of the director or the
department, the following shall apply: (a) The proceeding shall be conducted pursuant to
the administrative adjudication provisions of Chapter 4.5 (commencing with Section
11400) and Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2
of the Government Code, except as specified in this section.” (Health & Saf. Code,
§ 100171, subd. (a).) Health and Safety Code section 100171 specifies certain
exemptions from the provisions of the APA and incorporates other sections of the APA.7
It also contains administrative adjudication procedures that differ in some respects from
those in the APA.
Relevant in this case, subdivision (b) of Health and Safety Code section 100171
exempts the Department from Government Code section 11502, which relates to the
appointment of ALJ’s from the OAH staff, and instead requires that the Department
select an administrative law judge to conduct any administrative hearing at the

7
For example, the statute includes an exemption from the timeframes contained in
Government Code section 11517. (See Health & Saf. Code, § 100171, subd. (e) [“[t]he
specific timelines specified in Section 11517 of the Government Code shall not apply to
any adjudicative hearing conducted by the department to the extent that the department
has, by regulation, specified different timelines for the particular type of hearing at
issue.”].) Health and Safety Code section 100171, subdivision (d)(1), also adopts certain
provisions of the APA: “Unless otherwise specified in this section, the following
sections of the Government Code shall apply to any adjudicative hearing conducted by
the department only if the department has not, by regulation, specified an alternative
procedure for the particular type of hearing at issue: Section 11503 (relating to
accusations), Section 11504 (relating to statements of issues), Section 11505 (relating to
the contents of the statement to respondent), Section 11506 (relating to the notice of
defense), Section 11507.6 (relating to discovery rights and procedures), Section 11508
(relating to the time and place of hearings), and Section 11516 (relating to amendment of
accusations).”

15
Department’s hearing office. Section 100171, subdivision (b) provides:
“Notwithstanding Section 11502 of the Government Code, whenever the department
conducts a hearing under Chapter 4.5 (commencing with Section 11400) or Chapter 5
(commencing with Section 11500) of . . . the Government Code, the hearing shall be
conducted before an administrative law judge selected by the department and assigned to
a hearing office that complies with the procedural requirements of Chapter 4.5
(commencing with Section 11400) of Part 1 of Division 3 of Title 2 of the Government
Code.” Although Health and Safety Code section 100171 does not state that the
Department must maintain an in-house staff of Department ALJ’s, the statutory scheme,
including the reference in subdivision (c) to the Department’s “staff assigned to the
hearing office of the department” (italics added), implies that the Department has an
internal staff of ALJs. (See § 100171, subd. (c) [“whenever the department conducts a
hearing . . . the time and place of the hearing shall be determined by the staff assigned to
the hearing office of the department”].)

c. The Administrative Adjudication in This Case
To hear AHF’s claims, the Department, pursuant to Health and Safety Code
section 100171, selected an in-house ALJ from the Department staff, ALJ Nelsen, who,
acting pursuant to Government Code section 11517, subdivision (c), heard the matter
alone and rendered a proposed decision.8 Thereafter, Director Douglas delegated the

8
There is no evidence in the record that AHF objected to the assignment of ALJ
Nelsen. AHF did not complain that his selection was improper because he was employed
and assigned by the Department rather than the OAH. Nor is there any evidence that
AHF objected that ALJ Nelsen did not have the requisite qualifications under the APA to
serve as an ALJ. AHF apparently never complained to ALJ Nelsen that, because he was
a Department employee, he lacked authority to hear the matter alone under Government
Code section 11517, subdivision (c), or that, if proceeding under Government Code
section 11517, subdivision (b)(1), an ALJ from OAH had to be present to assist during
the hearing. AHF did not raise the issue of ALJ Nelsen’s status until Chief ALJ
Stevenson rejected ALJ Nelsen’s proposed decision, at which point AHF argued for the
first time that the Department had erred in proceeding under Government Code section

16
agency’s authority to act on ALJ Nelsen’s proposed decision to the Department’s Chief
ALJ Sharon Stevenson. Stevenson, relying on Government Code section 11517,
subdivision (c)(2)(D), rejected the proposed decision and remanded the matter to ALJ
Freeman to develop more evidence and for further consideration.
The Department asserts that the administrative proceedings concerning AHF’s
claims complied with Health and Safety Code section 100171 and Government Code
section 11517. Therefore, according to the Department, its adjudication of AHF’s claims
was not final when AHF sought judicial review, and the trial court properly concluded
that AHF had failed to exhaust its administrative remedies.
AHF argues that the Department’s adjudicative process violated the APA in
various respects and, as a result, ALJ Nelsen’s proposed decision effectively became the
“final decision” of the Department. To that end, AHF contends that, pursuant to Health
and Safety Code section 100171, the Department had the option of selecting an ALJ from
the OAH or an ALJ from the Department. AHF contends that where, as here, the
Department selects an in-house ALJ from its own staff, rather than one appointed by the
director of the OAH from the OAH’s staff of ALJ’s, then the proceedings were or should
be deemed conducted by the “agency itself.” Therefore, AHF argues, because the
“agency itself” heard the matter, the Department was required to proceed according to
Government Code section 11517, subdivision (b), which provides that only members of
the agency who heard the evidence can “vote” on the decision. As a result, according to
AHF, the Department was not allowed to designate the Department’s Chief ALJ
Stevenson to review and reject ALJ Nelsen’s proposed decision. AHF also contends that

11517, subdivision (c), rather than subdivision (b). Thereafter, to bolster its argument
that the Department was required to proceed under Government Code section 11517,
subdivision (b) (because the “agency itself” had heard the matter), AHF initially argued
that Health and Safety Code section 100171 provided an exemption to the requirement in
Government Code section 11517, subdivision (b)(1), that an administrative law judge
must be present when the agency itself conducts the proceedings. In its reply brief,
however, AHF argues that it “waived” (by operation of law) any requirement under
Government Code section 11517, subdivision (b)(1), that another ALJ assist ALJ Nelsen.

17
Chief ALJ Stevenson lacked authority to remand the matter to a new ALJ – ALJ Freeman
– to conduct additional proceedings.9 AHF reasons that, because the Department did not
follow the proper procedures under Government Code section 11517, subdivision (b), the
decision of ALJ Nelsen became “final” and the Department had to adopt and implement
it.

(i) Interpretation of Health and Safety Code Section 100171
AHF’s argument is based on an incorrect interpretation of the applicable statutes,
including Health and Safety Code section 100171. Considered together with the statutory
scheme in the APA and the provisions of Health and Safety Code section 100171
governing the appointment of ALJs, section 100171 does not give the Department an
option to choose either an ALJ from the Department staff or an ALJ from the staff of the
OAH. It requires the Department to select an ALJ from its in-house staff of ALJ’s.
It is clear that Health and Safety Code section 100171, subdivision (b), mandates
that an ALJ conduct the proceedings and that the Department select the ALJ. Health and
Safety Code section 100171, subdivision (b), states that “[n]otwithstanding Section
11502” the hearing “shall be conducted before an administrative law judge selected by
the Department” and assigned to a Department hearing office. (Health & Saf. Code,
§ 100171, subd. (b), italics added.) Consistent with the requirement that the Department
select the ALJ, subdivision (b) exempts the Department from the requirement of
Government Code section 11502, subdivision (b), that the director of the OAH select the
ALJ. In addition, because Health and Safety Code section 100171, subdivision (b), does
not authorize the Department director, any Departmental body, or any non-ALJ

9
AHF does not challenge the delegation by Douglas of his authority to Chief ALJ
Stevenson. AHF’s complaint centers on Chief ALJ Stevenson’s exercise of that authority
by rejecting the proposed decision and remanding the matter to develop additional
evidence.

18
Department representative to conduct the hearings, the “agency itself” cannot hear the
matter.
It is not entirely clear, however, whether this exemption in subdivision (b) also
excuses the Department from the requirement of Government Code section 11502,
subdivision (a), that the ALJ must be selected from the OAH ALJ staff. The more
reasonable interpretation of this ambiguity in the statute, however, is that it does. The
reference in Health and Safety Code section 100171, subdivision (b), to Government
Code section 11502 is the broad and all-inclusive “[n]otwithstanding section 11502,”
which suggests that hearings under Health and Safety Code section 100171 proceed in
spite of the procedures set forth in all of Government Code section 11502. (See Davis v.
Fresno Unified School District (2015) 237 Cal.App.4th 261, 281 [“the ordinary meaning
of the word ‘notwithstanding’ is ‘in spite of’”]; accord, In re G.Y. (2015) 234
Cal.App.4th 1196, 1201.) In addition, there is no other language in Health and Safety
Code section 100171 that implies the Department may select an ALJ from the OAH staff.
In fact, the APA does not authorize anyone other than the director of the OAH to select
and appoint ALJ’s on OAH staff to hear administrative matters that, like this one, are
conducted (at least in part) under Chapter 5 of the APA. (See Gov. Code, § 11370.3.) As
reflected in Health and Safety Code section 100171, the Department is among the state
agencies, such as the Department of Social Services, the Alcoholic Beverage Control
Appeals Board, and the Department of Motor Vehicles, that maintain a staff of ALJ’s and
hearing offices.
Thus, Health and Safety Code section 100171 requires all adjudicative hearings be
heard by an in-house ALJ appointed by the Department. And, in light of APA’s
provisions governing the appointment of ALJs in general, Health and Safety Code
section 100171 requires the Department to assign an ALJ from its staff of ALJ’s.10

10
Equally unconvincing is AHF’s proposed interpretation of Health and Safety
Code section 100171 as merely exempting the Department from the requirement in
Government Code section 11517, subdivision (b)(1), that an ALJ be present when the

19
 In any event, even assuming the Department was authorized to select an ALJ from
the OAH staff, its failure to do so in this case does not mean, as AHF argues, that the
“agency itself” conducted the hearing under Government Code section 11517,
subdivisions (a) and (b). Rather, the failure to select an appropriate ALJ simply means
that the wrong hearing officer conducted the proceedings. Nor does the fact that ALJ
Nelsen worked for the Department (rather than the OAH) lead to the conclusion that the
“agency itself” conducted the hearing. ALJ Nelsen was not qualified to act as the
“agency itself” because, as noted, in this context the phrase “agency itself” means
“governing body” or “agency head.” (See Usher v. County of Monterey, supra, 65
Cal.App.4th at p. 218, accord Langan v. City of El Monte, supra, 79 Cal.App.4th at
pp. 617-618.) ALJ Nelsen held neither of these positions in the Department.
Moreover, nothing authorizes the Department to delegate its power to ALJ Nelsen
to hear and decide the matter. (See Gov. Code, 11500, subd. (a) [“wherever the words
‘agency itself’ are used the power to act shall not be delegated unless the statutes relating
to the particular agency authorize the delegation of the agency’s power to hear and
decide”].) Although Health and Safety Code section 100171 requires an ALJ to conduct
the hearings, the power to “decide” is reserved for the director of the Department. (See
(Health & Saf. Code, § 100171 [describing administrative proceedings “leading to a final
decision of the director”].) Thus, in view of the definition of “agency itself,” and the
limitations placed on ALJ Nelsen’s authority under Health and Safety Code
section 100171, the Department’s selection of ALJ Nelsen to hear the matter cannot
mean that the “agency itself” conducted the proceedings under Government Code
section 11517, subdivisions (a) and (b).

“agency itself” hears the matter. Health and Safety Code section 100171, subdivision (a),
states that all proceedings under section 100171 must be conducted pursuant to the
administrative provisions of the APA except as specified in the section. (Health & Saf.
Code § 100171, subd. (a).) There is no exemption in Health and Safety Code
section 100171 for the requirement in Government Code section 11517, subdivision
(b)(1).

20
 (ii) Interpretation of Government Code Section 11517
AHF’s argument also misconstrues Government Code section 11517,
subdivisions (a) and (c). AHF’s proposed interpretation of the statute is based on the
faulty assumption that only an ALJ on staff at OAH and assigned by the OAH director
may “hear the case alone” under Government Code section 11517, subdivisions (a) and
(c). As support for this interpretation, AHF points to the definition of “administrative law
judge” in Government Code section 11500, which states: “In this chapter unless the
context or subject matter otherwise requires: [¶] . . . [¶] (d) ‘Administrative law judge’
means an individual qualified under Section 11502.” (Gov. Code, § 11500, subd. (d),
italics added.) Being “qualified” under Government Code section 11502, however,
relates to basic qualifications for the ALJ position described in detail in Government
Code section 11502. (See Gov. Code, § 11502, subd. (b) [the ALJ “shall have been
admitted to practice law in this state for at least five years immediately preceding his or
her appointment” and possess other qualifications established by the State Personnel
Board].) Government Code section 11500, subdivision (d), does not refer to who
appoints the ALJ or to the office that employs the ALJ. Based on the reference in
Government Code section 11500, subdivision (d), to “an individual qualified” under
Government Code section 11502, Government Code section 11500, subdivision (d),
incorporates only the “qualifications” described under Government Code section 11502,
and not the other provisions of Government Code section 11502. Had the Legislature
intended to incorporate the entirety of Government Code section 11502 into Government
Code section 11500’s definition of ALJ, the Legislature would have done so. Thus, an
ALJ, other than one from the staff of the OAH appointed by the director of the OAH,
may “hear the case alone” under Government Code section 11517. (See, e.g.,
Automotive Management Group, Inc. v. New Motor Vehicle Bd. (1993) 20 Cal.App.4th
1002, 1013-1014 [ALJ employed and appointed by the Department acting alone presided
over the matter pursuant to Government Code section 11517].)

21
 Our conclusion that the Department’s in-house ALJ’s can hear matters alone under
Government Code section 11517, subdivisions (a) and (c), finds further support in
another subdivision provision of Health and Safety Code section 100171. (See
Outfitter Properties, LLC v. Wildlife Conservation Bd. (2012) 207 Cal.App.4th 237, 244
[court construes “words in context, keeping in mind the statutory purpose, and
harmonizes statutes or statutory sections relating to the same subject, both internally and
with each other, to the extent possible”].) Subdivision (f) of Health and Safety Code
section 100171 refers to the Department proceeding pursuant to Government Code
section 11517, subdivision (c). (See Health & Saf. Code, § 100171, subd. (f) [“[i]n the
case of any adjudicative hearing conducted by the department, ‘transcript,’ as used in
subdivision (c) of Section 11517 of the Government Code, shall be deemed to include
any alternative form of recordation”].) Although the issues in this case do not involve
the use of transcripts or alternative forms of recordation, the fact that Health and Safety
Code section 100171, subdivision (f), refers to Government Code section 11517,
subdivision (c), is significant. The reference in subdivision (f) of Health and Safety Code
section 100171 to subdivision (c) of Government Code section 11517 is a tacit
acknowledgement that the Department is empowered to conduct proceedings under
subdivision (c) of section 11517 of the Government Code (i.e., the Department’s ALJs
hear contested matters alone). (See Gov. Code, § 11517, subd. (c)(1) [contested case is
originally heard by an administrative law judge alone]. ) Thus, the fact that Health and
Safety Code section 100171 refers to proceedings under Government Code section
11517, subdivision (c), confirms that the Legislature intended Department ALJs to act
alone to hear matters pursuant to Government Code section 11517, subdivision (c). (See
Regents of University of California v. Superior Court (2013) 220 Cal.App.4th 549, 566.)
Finally, even if AHF were correct that the Department failed to use the appropriate
ALJ to conduct the proceedings in the case, such a failure would not mean that the
decision reached by ALJ Nelsen becomes “final.” Instead, it would mean that, because
an unauthorized ALJ conducted the proceedings, the matter must be returned to the
agency for consideration by an authorized, appropriately-appointed ALJ. (See Absmeier

22
v. Simi Valley Unified School District (2011) 196 Cal.App.4th 311, 320 [“‘[f]ailure to
provide an administrative law judge where one is required is a ground for nullifying the
agency’s action for lack of jurisdiction,’” and “‘[i]n such a case the reviewing court
should remand the matter to the agency for further consideration’”], citing Usher v.
County of Monterey, supra, 65 Cal.App.4th at p. 219.) AHF does not ask for this
remedy.

(iii) Conclusion
Therefore, based on our interpretation of the relevant sections of the APA and
Health and Safety Code section 100171, we conclude that the Department’s
administrative proceedings complied with the APA and the Health and Safety Code. The
Department properly selected ALJ Nelsen to conduct the adjudicative hearing alone. The
designee of the Department director, Chief ALJ Stevenson, acting pursuant to
Government Code section 11517, subdivision (c)(2)(D), properly considered and rejected
the proposed decision, and remanded the case to ALJ Freeman because ALJ Nelsen was
no longer available. Because the Department had not made a final determination on
AHF’s claims, the doctrine of exhaustion barred AHF’s petition for writ of administrative
mandamus.

2. Exceptions to Exhaustion of Administrative Remedies
AHF also contends, in the alternative, that exceptions to the exhaustion
requirement apply to its petition. Courts recognize several exceptions to the exhaustion
of administrative remedies doctrine, including where seeking the administrative remedy
is futile or the remedy is inadequate. (Coachella Valley, supra, 35 Cal.4th at p. 1080;
Paulsen v. Local No. 856 of Internat. Brotherhood of Teamsters (2011) 193 Cal.App.4th
823, 829.) AHF argues that both of these exceptions apply here. Neither does.
The futility exception applies when “resort to the administrative process would be
futile because it is clear what the agency’s decision would be.” (Green v. City of
Oceanside (1987) 194 Cal.App.3d 212, 222; accord, Cummings v. Stanley (2009) 177

23
Cal.App.4th 493, 506, fn. 8; see, e.g., Automotive Management Group, Inc. v. New Motor
Vehicle Bd. (1993) 20 Cal.App.4th 1002, 1015-1016 [automobile dealer objecting to the
termination of its franchise was not required to pursue additional administrative remedies
where the administrative law judge stated, “‘There shall be no further proceedings in this
cause before the Board’”].) AHF asserts that the futility exception applies because the
Department’s decision to reject its claim is a foregone conclusion. The outcome of the
proceedings, however, has not been determined or predetermined. One ALJ found in
favor of AHF on some of its claims, and the Department has not made a final decision.
The Department did not, pursuant to Government Code section 11517, subdivision
(c)(2)(E), reject ALJ Nelsen’s proposed decision and decide the case, but instead,
pursuant to Government Code section 11517, subdivision (c)(2)(D), rejected ALJ
Nelsen’s proposed decision and referred the case for additional evidence and
consideration. The futility exception to the exhaustion doctrine does not apply. (See
Coachella Valley, supra, 35 Cal.4th at pp. 1080-1081 [“‘[t]he futility exception requires
that the party invoking the exception “can positively state that the [agency] has declared
what its ruling will be on a particular case”’”], quoting, Jonathan Neil & Assoc., Inc. v.
Jones (2004) 33 Cal.4th 917, 936.)
AHF also argues it was not required to exhaust its administrative remedies because
the remedy was inadequate. “If an administrative remedy fails to satisfy the standards of
due process, the exhaustion requirement is excused.” (Imagistics Intern., Inc. v.
Department of General Services (2007) 150 Cal.App.4th 581, 591; see Jonathan Neil &
Associates, Inc. v. Jones, supra, 33 Cal.4th at p. 936, fn. 7 [“‘“[i]f the [administrative]
remedy provided does not itself square with the requirements of due process the
exhaustion doctrine has no application”’”].) The administrative remedy is also
inadequate where the challenged administrative procedures “‘“are the very source of the
asserted injury”’” for which the plaintiff sought a remedy. (Brown v. City of Los Angeles
(2002) 102 Cal.App.4th 155, 168; see Unnamed Physician v. Board of Trustees of Saint
Agnes Medical Center (2001) 93 Cal.App.4th 607, 621 [“‘[a] party is not required to
exhaust the available administrative remedies when those administrative procedures are

24
the very source of the asserted injury’”]. In particular, exhaustion of administrative
remedies is not required where the plaintiff is challenging the adequacy of administrative
appeal procedures. (Brown v. City of Los Angeles, at p. 168.) “‘This rule is merely
another facet of the inadequate administrative remedy exception to the exhaustion rule.’”
(Unnamed Physician v. Board of Trustees, at p. 621; see Bollengier v. Doctors Medical
Center (1990) 222 Cal.App.3d 1115, 1127.)
AHF challenges the Department’s administrative process, which AHF asserts is
legally inadequate and violates the APA. AHF argues that the Department’s
administrative adjudication effectively denied it a full and fair determination on the
merits. Thus, according to AHF, the Department’s procedures “‘“are the very source of
the asserted injury”’” for which AHF seeks a remedy. (Brown v. City of Los Angeles,
supra, 102 Cal.App.4th at p. 168; see Chrysler Corp. v. New Motor Vehicle Bd. (1979) 89
Cal.App.3d 1034, 1038-1039.)
The inadequate remedy exception does not apply. First, as discussed, the
Department’s adjudicative proceedings did not violate the APA or the Health and Safety
Code, and therefore its procedures are not the “source of” AHF “injury.” Second, AHF’s
petition was not limited to an attack on the legal adequacy of the Department’s
administrative processes. Although AHF’s arguments on appeal focus exclusively on the
legal adequacy of the Department’s adjudicative procedures, AHF’s claims before the
trial court did not. Instead, AHF’s claims in the trial court were also about the underlying
merits of its contract dispute with the Department, and AHF sought to obtain a reversal of
those portions of the ALJ’s order that AHF contended were wrongly decided. The
principal sources of the injury alleged in the petition were AHF’s claims that ALJ Nelsen
had refused to award AHF “not less than $966,881.50” on its 2007 Savings Share claim
and had refused to order the Department to recalculate its 2008 Savings Share “using
actuarially sound methodologies, principles and practices.” Such claims do not render an
administrative remedy legally inadequate under the exhaustion doctrine; an
administrative remedy is not inadequate simply because it is not the result desired. (See
Campbell v. Regents of University of California (2005) 35 Cal.4th 311, 322-323 [“courts

25
have found the [exhaustion requirement] inapplicable only when the agency lacks
authority to hear the complaint, not when the administrative procedures arguably limit the
remedy the agency may award”].) Therefore, AHF’s claims do not fall within the
“legally inadequate remedy” exception to the exhaustion of the administrative remedies
doctrine. 11

DISPOSITION

The judgment is affirmed. Respondents are entitled to costs on appeal.

SEGAL, J.

We concur:

ZELON, Acting P. J.

BECKLOFF, J.*

11
AHF has not suggested, nor do we discern, how further amendment could cure the
defect in its petition. (See Zelig v. County of Los Angeles, supra, 27 Cal.4th at p. 1126
[party opposing the demurrer has the burden of showing a reasonable possibility of cure
by amendment].)
*
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.

26