Governmental and Regulatory Agency Immunities under Arizona Law in Securities Investigations and Proceedings

Sometimes, persons who are named in administrative proceedings brought by governmental or regulatory agencies concerning securities offerings, disagree with having been named in such actions and ask the question: “Can I sue the regulatory agency?” Generally, the answer is "no" or "very unlikely."

As discussed below, if Arizona Corporation Commission (the “ACC”) and its Securities Division is acting within the scope of its judicial or legislative capacity, the ACC is likely entitled to absolute immunity under A.R.S. § 12-820.01(A)(1). Where, however, the ACC is acting in an administrative function that is quasi-judicial or quasi-executive, its subject actions must be examined on a factual, ad hoc basis to determine whether the ACC is entitled to immunity under A.R.S. § 12-820.01(A)(2). If the ACC’s subject actions involve the determination of fundamental governmental policy (i.e., policymaking decision), such as regulating and licensing a profession and occupation like securities dealers or salesmen, the ACC is likely entitled to absolute immunity.  

If the ACC’s subject actions do not involve a policymaking determination, but instead an operational decision, like whether to renew, revoke or suspend the license of a specific security dealer or salesman, the ACC is not necessarily entitled to absolute immunity, but may be entitled to qualified immunity under A.R.S. § 12-820.02(A) and would not be liable except for intentional injurious actions or those constituting gross negligence.

In 1963, the Arizona Supreme Court abolished common law sovereign immunity in Arizona:

Almost 20 years later, given “inconsistencies in [the court’s] previous opinions,” the Arizona Supreme Court returned to and reinforced the spirit of Stone by removing the public/private duty doctrine as follows:

Ryan v. State, 134 Ariz. 308, 310, 656 P.2d 597, 599 (1982). 

In electing to treat the state like a private litigant, the Arizona Supreme Court pointed out that certain areas of immunity would remain, such as legislative immunity, judicial immunity, and high-level executive immunity. Id. at 310-11, 656 P.2d at 599-600. 

However, given difficulties in the quasi-executive and quasi-judicial context, instead of adopting and applying a “discretionary acts” exception like its federal counterpart (the Federal Tort Claims Act), the court adopted an “ad hoc approach":

Id. at 310-11, 656 P.2d at 599-600. 

As a general guide, in employing the spirit of Stone, the Arizona Supreme Court “endorse[d] the use of governmental immunity as a defense only when its application is necessary to avoid a severe hampering of a governmental function or thwarting of established public policy. Otherwise, the state and its agents will be subject to the same tort law as private citizens.” Id. at 311, 656 P.2d at 600. 

The Arizona Supreme Court also invited the legislature to intervene in developing this area of law. Id. at 310, 656 P.2d at 599. Pursuant to that invitation, as well as its constitutional power,[1] approximately one year later in 1984, the Arizona legislature enacted the Actions Against Public Entities or Public Employees Act (the “Act”), and thereby codified sovereign immunity in Arizona.[2] 

Consistent with the Arizona Supreme Court’s ruling in Stone, the express purpose and intent of the Act is as follows:

Schabel v. Deer Valley Unified School Dist. No. 97, 186 Ariz. 161, 164, 920 P.2d 41, 44 (Ct. App. 1996) (quoting 1984 Ariz. Sess. Laws, Ch. 285, § 1).

The Act provides for absolute immunity and qualified immunity, which are discussed in turn in detail below, as well as the requirements for filing a claim against the state. Courts have analyzed and applied these immunity statutes, but “[s]ince immunity is the exception and not the rule . . . consistent with the intention of the legislature . . . judicial construction of immunity provisions in statutes applicable to government entities should be restrained and narrow.” Fidelity Sec. Life Ins. Co. v. State of Arizona, 191 Ariz. 222, 225, 954 P.2d 580, 583 (1998). See also Goss v. City of Globe, 180 Ariz. 229, 232, 883 P.2d 466, 469 (Ct. App. 1994) (immunity statute is viewed as “carving out a narrow exception” to the common law rule that the government is liable for tortious conduct).

Under the Act, a “public entity”[3] has absolute immunity and is not liable for acts and omissions of its “employees”[4] constituting either of the following: (1) the exercise of a judicial or legislative function; or (2) the exercise of an administrative function involving the determination of fundamental governmental policy. A.R.S. § 12-820.01(A).

The determination of a fundamental governmental policy under A.R.S. § 12-820.01(B) involves the exercise of discretion and includes, but is not limited to: 

(1) a determination of whether to seek or whether to provide the resources necessary for the purchase of equipment, the construction or maintenance[5] of facilities, the hiring of personnel, and the provision of governmental services;

(2) a determination of whether and how to spend existing resources, including those allocated for equipment, facilities and personnel;

(3) the licensing and regulation of any profession or occupation; and 

(4) the establishment, implementation and enforcement of minimum safety standards for light rail transit systems. 

A.R.S. § 12-820.01(B) 

Unlike its federal counterpart and other states,[6] the legislature did not intend for courts to make factual determinations as to whether these listed functions are discretionary; rather, as a matter of law, these policy roles under are discretionary and covered by absolute immunity. Bird, 170 Ariz. at 23. See also Fidelity Sec. Life Ins. Co., 191 Ariz. at 225, 954 P.2d at 583 (“To be absolutely immune . . . fundamental governmental policy is the element which, first and foremost, must be present in the decision making process. Once that element is found to exist, the exercise of discretion, under the statute, may be presumed. The term ‘discretion’ is used in the statute only to define an essential characteristic of determinations involving fundamental governmental policy.”).

Examples of those acts falling within A.R.S. § 12-820.01(B), and hence A.R.S. § 12-820.01(A)(2) and qualifying for absolute immunity, include: (1) the Arizona Structural Pest Control Commission’s licensing and regulation of structural pest control operators (see Bird, 170 Ariz. at 24, 821 P.2d at 27); (2) the Arizona Motor Vehicle Division’s adoption of appropriate rules and regulations to enforce the legislature’s mandate of removing drunk drivers from the road (see Evenstad, 178 Ariz. at 582, 875 P.2d at 815); (3) the Arizona Department of Education’s decision to require that teachers be certified, establishing certification requirements, developing an application and establishing procedures for processing applications and investigation applicants (see Doe v. State, 200 Ariz. 174, 177, 24 P.3d 1269, 1272 (2001)); (4) the City of Tempe’s decision to enter into an automatic aid agreement with other cities to coordinate emergency assistance responses and decisions that automatically flowed therefrom, such as which emergency unit would respond (see Myers v. City of Tempe, 212 Ariz. 128, 130-31, 128 P.3d 751, 753-54 (2006)); and (5) the City of Phoenix’s decision to use computer program to prioritize intersections for signalization and decisions that flowed directly therefrom, such as the decision not to install a traffic signal at a certain intersection (Kohl v. City of Phoenix, 215 Ariz. 291, 294-96, 160 P.3d 170, 173-75 (2007)).

Examples of those acts falling outside A.R.S. § 12-820.01(B) and thus not qualifying for immunity under A.R.S. § 12-820.01(A)(2) include: (1) the Tempe School District’s decision regarding placement of bus stop (see Warrington v. Tempe Elementary School Dist. No. 3, 187 Ariz. 249, 928 P.2d 673 (Ct. App. 1996)); (2) the Arizona Department of Insurance’s decision to approve a company’s transfer of domicile and renew its certificate of authority (see Fidelity Sec. Life Ins. Co., 191 Ariz. at 226, 954 P.2d at 584); and (3) the Arizona Department of Education’s application of criteria in processing and issuing a certificate to particular teacher (see Doe, 200 Ariz. at 177, 24 P.3d at 1272).

In comparing these two sets of cases, it is clear that Arizona courts have distinguished between prescribing rules or regulations or policymaking decisions, which are immune under A.R.S. § 12-820.01(A)(2), and the implementation of policy or operational decisions, which are not entitled to such absolute immunity. See Evenstad, 190 Ariz. at 583-84, 875 P.2d at 816-17 (noting courts frequently distinguish between development of rules and implementation of rules); see, e.g., Doe, 200 Ariz. at 177, 24 P.3d at 1272 (distinguishing policy level decision to not issue teaching certificates to persons convicted of certain listed offenses from operational level decision to process particular teaching application and issue a certificate to someone convicted of one of the listed offenses); Schabel, 186 Ariz. at 166, 920 P.2d at 46 (distinguishing policy level decision to construct playground at school and allocate funds for that purpose from operational level decision regarding what specific pieces of equipment to have on playground). See also Meredith K. Marder, Comment, "Kohl v. City of Phoenix: Clarifying the Scope of Absolute Municipal Immunity," 49 Ariz. L. Rev. 1017 (2007).

Prescribing rules or regulations is not a “routine, everyday function. Instead, it is an administrative function conducted at a policy-making level.” Evenstad, 190 Ariz.at 582, 875 P.2d at 815. in addition to those examples set forth in A.R.S. § 12-820.01(B), other examples of policymaking “include such matters as whether the government or its agencies should pursue one general course of action over another, whether an agency of government should construct a particular building or where the building should be located, or a decision as to the direction and focus of an entire regulatory scheme.” Fidelity Sec. Life Ins. Co., 191 Ariz. at 225, 954 P.2d at 583.

“Operational level acts concern routine, everyday matters. They do not require evaluation of broad policy factors.” Evenstad, 190 Ariz.at 582, 875 P.2d at 815. A common issue among operational level decisions is whether the state erred in implementing a decision.

The one designated discretionary function that may be applicable to the ACC is the “licensing and regulation of any profession or occupation.” A.R.S. § 12-820.01(B)(3). Notably, this policy function is not limited to the professions and occupations listed in Title 32 of the Arizona Revised Statutes. See Doe, 200 Ariz. at 178, 24 P.3d at 1273. Accordingly, A.R.S. § 12-820.01(B)(3) probably applies to the licensing and regulation of securities dealers and salesman as set forth in the Arizona Securities Act, A.R.S. § 44-1801, et seq., even though it is not in Title 32. Using the same reasoning the Arizona Court of Appeals applied in Bird, 170 Ariz. at 24, 821 P.2d at 287, it is fairly clear that in governing the registration of dealers and salesman in Article 9 of Chapter 12 of Title 44, as well as the denial, revocation and suspension thereof in Title 10, the State, through the ACC and its Securities Division, licenses a profession or occupation. 

Of note, however, is that A.R.S. § 12-820.01(B)(3) does not extend to include the licensing or regulation of work environments rather than work or workers. See, e.g., De La Cruz v. State of Arizona, 192 Ariz. 122, 125, 961 P.2d 1070, 1073 (Ct. App. 1998) (rejecting State’s contention that Arizona Division of Occupational Safety and Health’s inspection of workplace involves licensing and regulation of profession or occupation, especially since the contracting profession or occupation that it affects are regulated and licensed by the Arizona Registrar of Contractors); Diaz v. Magma Copper Co., 190 Ariz. 544, 553-55, 950 P.2d 1165, 1174-76 (Ct. App. 1997) (denying immunity to State Mine Inspector’s operation and inspection of mines, which does not regulate or license mining as an occupation, but rather regulates the environment in which miners work).

Absolute immunity under A.R.S. § 12-820.01(B)(3) also does not extend to include the certification of a business entity like an insurance company rather than a profession or occupation. See Fidelity Sec. Life Ins. Co., 191 Ariz. at 226, 954 P.2d at 584 (denying immunity to Arizona Department of Insurance who allegedly approved transfer of domicile knowing company was insolvent, failed to adequately supervise company and failed to deny company’s annual requests for renewal of its certificate of authority).

Finally, A.R.S. § 12-820.01(B)(3) does not extend to decisions affecting individual professionals, such as the decision to grant or revoke a license to particular members of a profession; it only extends to professions and occupations. See Doe, 200 Ariz. at 178, 24 P.3d at 1273 (denying immunity to Arizona Department of Education who processed and approved teaching certificate to teacher that allegedly molested child).

The ACC and its Securities Division likely fall within the definition of “state,” and hence “public entity,” and is therefore eligible for absolute immunity under A.R.S. § 12-820.01.

“By virtue of the Arizona Constitution,[7] the [ACC and its] Commissioners function in an Executive capacity, they adopt rules and regulations and thereby functioning in a Legislative capacity, and they also act in a Judicial capacity sitting as a tribunal and making decisions in contested matters.” See Ariz. Const. Art. XV (establishing the Arizona Corporation Commission and its powers).

Thus, if the ACC is acting within the scope of its foregoing judicial or legislative capacity, the ACC is likely entitled to absolute immunity under A.R.S. § 12-820.01(A)(1). 

Where, however, the ACC is acting in an administrative function that is quasi-judicial or quasi-executive capacity, its subject actions must be examined on a factual, ad hoc basis to determine whether the ACC is entitled to immunity under A.R.S. § 12-820.01(A)(2). If the ACC’s subject actions involve the determination of fundamental governmental policy (i.e., policymaking decision), such as the regulation and licensing of a profession and occupation like securities dealers or salesmen, the ACC is likely entitled to absolute immunity. If the ACC’s actions at issue do not involve such a policymaking determination, but instead an operational decision, like whether to revoke the license of a specific security dealer or salesman, the ACC is not necessarily entitled to absolute immunity but may be entitled to qualified immunity, which is discussed next.