Foothill Church, a California Non-Profit Corporation v. Mary Watanabe

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FOOTHILL CHURCH, a California
Non-Profit Corporation; CALVARY
CHAPEL CHINO HILLS , a California
Non-Profit Corporation; SHEPHERD
OF THE HILLS CHURCH, a California
Non-Profit Corporation,
Plaintiffs-Appellants,
v.
M ARY W ATANABE*, in her official
capacity as Director of the California
Department of Managed Health
Care,
Defendant-Appellee.
No. 19-15658
D.C. No.
2:15-cv-02165-
KJM-EFB
ORDER
Argued and Submitted November 20, 2020
Submission Vacated November 24, 2020
Resubmitted July 19, 2021
San Francisco, California
Filed July 19, 2021
* Mary Watanabe is substituted for her predecessor, Michelle
Rouillard, as Director of the California Department of Managed Health
Care. Fed. R. App. P. 43(c)(2).

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2 FOOTHILL CHURCH V . W ATANABE
Before: Jacqueline H. Nguyen, Andrew D. Hurwitz, and
Daniel A. Bress, Circuit Judges.
Order;
Dissent by Judge Bress
SUMMARY**
Constitutional Law
In light of the U.S. Supreme Court’s decision in Fulton
v. City of Philadelphia, No. 19-123, 2021 WL 2459253
(June 17, 2021) (holding that the refusal of the City of
Philadelphia to contract with Catholic Social Services for the
provision of foster care services unless the agency agreed to
certify same-sex couples as foster parents violated the Free
Exercise Clause of the First Amendment), the panel vacated
the district court’s rulings on the Free Exercise and Equal
Protection claims, and remanded for further consideration.
The panel addressed appellant’s Establishment Clause
claim in a concurrently filed memorandum.
Judge Bress dissented because he would hold that the
panel should not have vacated and remanded without
providing any guidance. He wrote that the panel’s remand
was a poor use of judicial resources that undervalued the
significant constitutional injuries that the churches alleged.
He would decide the appeal, and hold that the district court
** This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.

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FOOTHILL CHURCH V . W ATANABE 3
erred in applying rational basis review, and the churches
clearly stated a claim for relief under the Constitution’s Free
Exercise and Equal Protection Clauses. He would hold what
the law pre- and post-Fulton plainly required: the Director
of the California Department of Managed Care’s broad
discretionary authority to issue individualized exemptions
from the abortion coverage obligation meant that the court
must apply strict scrutiny to California’s requirement that the
churches’ health plans cover elective abortions.
COUNSEL
Jeremiah J. Galus (argued), Kristen K. Waggoner, and Kevin
Theriot, Alliance Defending Freedom, Scottsdale, Arizona;
John J. Bursch and David A. Cortman, Alliance Defending
Freedom, Washington, D.C.; Alexander M. Medina, Medina
McKelvey LLP, Roseville, California; for Plaintiffs-
Appellants.
Karli A. Eisenberg (argued), Joshua N. Sondheimer, and
Hadara R. Stanton, Deputy Attorneys General; Gregory D.
Brown, Supervising Deputy Attorney General; Cheryl L.
Feiner, Senior Assistant Attorney General; Office of the
Attorney General, Sacramento, California; for Defendant-
Appellee.

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4 FOOTHILL CHURCH V . W ATANABE
ORDER
We VACATE the district court’s rulings on the Free
Exercise and Equal Protection claims and REMAND for
further consideration in light of Fulton v. City of
Philadelphia, No. 19-123, 2021 WL 2459253 (June 17,
2021).
We address Appellant’s Establishment Clause claim in a
concurrently filed memorandum.
BRESS, Circuit Judge, dissenting:
The Director of the California Department of Managed
Health Care requires that plaintiff churches offer elective
abortions as part of their group health plans for church
employees. The churches maintain that this violates their
sincerely held religious beliefs. But the district court
dismissed the churches’ Free Exercise Clause claim,
applying only deferential rational basis review under
Employment Division, Department of Human Resources of
Oregon v. Smith, 494 U.S. 872 (1990). The court today
vacates the district court’s order and remands for further
consideration in light of the Supreme Court’s recent decision
in Fulton v. City of Philadelphia, 141 S. Ct. 1868 (2021).
The court’s order is a small step in the right direction. But it
does not go nearly far enough—or move nearly fast
enough—to address the significant constitutional violation
that the churches plead and the patent legal error in the
decision below.
Well before Fulton, the law was clear: when, as here, a
government official has the discretionary power under a
“good cause” standard to exempt a regulated entity from an

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FOOTHILL CHURCH V . W ATANABE 5
otherwise generally applicable regime (here, the requirement
to include elective abortions in health plans), we must apply
strict scrutiny to the government’s determination to enforce
its rule over a religious objection. Fulton neither created nor
changed this long-established principle; it simply applied it.
Vacating in light of Fulton without providing any guidance,
as the court now does, effectively orders a re-do in the court
below with no intervening change in the law. This is a poor
use of judicial resources that undervalues the significant
constitutional injuries that the churches allege. And it will
inevitably produce even further delay in this protracted case,
which the churches filed in 2015 and which was appealed to
us in 2019.
We should have decided the appeal that was properly
before us and held what the law pre- and post-Fulton plainly
requires: the Director’s broad discretionary authority to issue
individualized exemptions from the abortion coverage
obligation means that we must apply strict scrutiny to
California’s requirement that the churches’ health plans
cover elective abortions. Because our court declines to
decide that clear issue of law and thereby prolongs the
churches’ efforts to obtain relief, I respectfully dissent.
I
This appeal arises from the district court’s grant of
California’s motion to dismiss. I therefore recite the facts as
stated in the churches’ operative complaint. See Nguyen v.
Endologix, Inc., 962 F.3d 405, 408 (9th Cir. 2020).
The plaintiffs are three Christian churches in Southern
California: Foothill Church, Calvary Chapel Chino Hills,
and Shepherd of the Hills Church. The churches each
employ more than fifty full-time employees. They allege
that under federal law they must therefore provide health

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insurance for their employees. As part of the teachings that
govern their religious missions, the churches believe that
elective abortion is a sin. In their view, because “all human
life is sacred from the moment of conception to natural
death,” “abortion destroys an innocent human life and
therefore violates biblical teachings.” The issue in this case
is whether California may nonetheless require the churches
to include elective abortions in their employee health plans,
which the churches maintain forces them to subsidize and
facilitate conduct that violates their religious convictions.
Under California’s Knox-Keene Health Care Service
Plan Act of 1975, health care plans must provide coverage
for “basic health care services.” Cal. Health & Safety Code
§ 1367(i). The Director of the California Department of
Managed Health Care (DMHC) interprets, administers, and
enforces the Knox-Keene Act. DMHC regulations
implementing the Act provide that “basic health care
services” means “medically necessary” services. Cal. Code
Regs. tit. 28, § 1300.67. Health plans generally provide for
both medically necessary and elective abortions in plan
contracts. But before August 22, 2014, DMHC had long
allowed religious employers to purchase plans that did not
cover elective abortions.
Things began to change in late 2013. In response to
learning that two Catholic universities in California had
removed elective abortion coverage from their employee
health plans, abortion advocates urged the DMHC to stop
permitting health plans under which religious employers
could offer more limited abortion coverage options.
Yielding to this request, the DMHC’s Director eventually
agreed to make a policy change.
On August 22, 2014, the Director sent letters to seven
health plans that served religious organizations, instructing

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FOOTHILL CHURCH V . W ATANABE 7
that the plans now had to cover elective abortions. The
Director explained she had determined that DMHC had
“erroneously approved or did not object” to plan language
limiting coverage for elective abortions, limitations that
appeared only in health plans “covering a very small fraction
of California health plan enrollees.” The plan limitations on
abortion coverage, the Director wrote, violated the Knox-
Keene Act and other California laws.
The Director instructed the health plans promptly to
remove from plan documents any limitations or exclusions
on lawful elective abortions. This “include[d], but [was] not
limited to, any exclusion of coverage for ‘voluntary’ or
‘elective’ abortions and/or any limitation of coverage to only
‘therapeutic’ or ‘medically necessary’ abortions.” Health
plans were required to file revised health plan documents
with the DMHC within 90 days. The Director also rejected
pending approval requests for health plans that did not
provide coverage for elective abortions.
Although the Director issued her August 22, 2014
directive to the health plans, it most directly affected
religious employers like the churches. Indeed, the complaint
alleges that the DMHC was not aware of any non-religious
employer that had purchased plans that limited coverage for
elective abortions.
In August 2014, the Life Legal Defense Foundation
wrote to the DMHC and asked it to reconsider its position.
The Director responded that California law compelled its
approach and that DMHC “will not reverse its position on
the scope of required abortion coverage.” In response to a
November 2014 letter from a Commissioner on the U.S.
Commission on Civil Rights, the Director again reiterated
her view that California law required that health plans cover
elective abortions.

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In October 2015, the churches sued the Director
challenging, as applied to them, the Director’s interpretation
of the Knox-Keene Act requiring the churches’ employee
health plans to provide coverage for elective abortions. As
relevant to their Free Exercise Clause claim, the churches
cited the Director’s statutory authority to grant
individualized exemptions from the Knox-Keene Act’s
“basic health services” requirement. These statutes, which
are critical to the Free Exercise Clause analysis and which I
will discuss further below, allow the Director to grant an
exemption when there is “good cause” or when “in the public
interest.”
The churches also alleged that in October 2015, the
Director had in fact used her discretionary authority to
exempt another religious organization from the elective
abortion requirement. That religious organization, unlike
the plaintiff churches, teaches that elective abortions are
permissible when a pregnancy results from rape or incest.
Based on the Director’s statutory discretionary exemption
authority, the churches alleged that “[t]he Knox-Keene Act,
as interpreted and applied by [the Director], is neither neutral
nor generally applicable.”
The district court twice dismissed the churches’
complaint under Federal Rule of Civil Procedure 12(b)(6)
but each time gave the churches leave to amend their Free
Exercise Clause and related Equal Protection Clause claim.
After the churches filed a second amended complaint, the
district court dismissed it again, this time with prejudice.
The district court held that the DMHC’s elective abortion
requirement was subject to rational basis review under
Employment Division v. Smith because it was premised on a
“neutral law of general applicability.”

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FOOTHILL CHURCH V . W ATANABE 9
The district court acknowledged the Director’s authority
to issue individualized exemptions from the abortion
coverage requirement. But the court determined that strict
scrutiny did not apply because the churches’ “allegations do
not support a reasonable inference that the Director
deliberately sought to give preference to one set of religious
beliefs regarding abortion over others because reasonable
alternate non-discriminatory explanations exist for the
Director’s actions.” (Quotations omitted).
The churches filed their notice of appeal in April 2019.
This appeal was fully briefed by January 2020, and we heard
oral argument in November 2020. Shortly after oral
argument, we issued an order vacating submission pending
the Supreme Court’s forthcoming decision in Fulton. The
Supreme Court decided Fulton in June 2021.
Each side then submitted status reports on Fulton
consistent with our prior order. In their status report, the
churches ask that we now issue a decision reversing the
district court and allowing the churches’ lawsuit to proceed.
In their view, “[a]nything else would waste judicial
resources and prolong the irreparable harm being suffered by
the churches for over six years now.” For its part, California
asks us to vacate the district court’s decision in light of
Fulton, so that “the district court can consider which
standard of review to apply following Fulton.”
Our court today goes with California’s preferred
approach. I respectfully disagree with that. And I am quite
concerned that California has been giving the churches the
run-around in an area where great sensitivity is warranted.
The legal issue before us is straightforward. And merely
vacating in light of Fulton unnecessarily prejudices the
churches even further. I would have held that under
longstanding precedent, the district court erred in applying

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rational basis review. The churches have clearly stated a
claim for relief under the Constitution’s Free Exercise and
Equal Protection Clauses.
II
The key feature of California’s regime that takes it
outside of rational basis review and places it squarely into
strict scrutiny is the Director’s broad discretion to grant
exemptions from the Knox-Keene Act’s “basic health care
services” requirement. Under the Act, “[a] health care
service plan contract shall provide to subscribers and
enrollees all of the basic health care services . . . , except that
the director may, for good cause, by rule or order exempt a
plan contract or any class of plan contracts from that
requirement.” Cal. Health & Safety Code § 1367(i)
(emphasis added). Under another provision, the Director
may exempt persons or plans from relevant requirements
when “in the public interest and not detrimental to the
protection of subscribers, enrollees, or persons regulated
under this chapter.” Id. § 1343(b); see also id. § 1344(a)
(substantially similar authority to waive requirements “in the
public interest”).
California fully agreed in its briefing before us that the
Director possesses what California itself describes as
“Individualized Exemption Authority.” As California
explained to us in its answering brief:
The Director has authority to exempt Plan
contracts from the requirement that they
cover “all” basic health services for good
cause. § 1367(i). And under certain
circumstances, she may exempt Plans and
Plan contracts from the Act or waive the

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FOOTHILL CHURCH V . W ATANABE 11
requirements of any rule or form issued by
the DMHC. §§ 1343(b), 1344(a).
Indeed, California clarified, the Director is authorized “to
allow a Plan to exclude or limit coverage of particular
services.” Nevertheless, California maintained that the
Director’s discretionary exemption authority did not
“mandate application of strict scrutiny under an
‘individualized assessments exception to [Employment
Division v.] Smith.” According to California, “[t]his
purported exception to Smith has no application here.”
California’s position, which the district court adopted, is
clearly wrong. Under the Supreme Court’s decision in
Employment Division v. Smith, the right to freely exercise
one’s religion “does not relieve an individual of the
obligation to comply with a valid and neutral law of general
applicability on the ground” that it burdens religious
exercise. 494 U.S. at 879. Such laws “need not be justified
by a compelling governmental interest even if the law has
the incidental effect of burdening a particular religious
practice.” Church of the Lukumi Babalu Aye, Inc. v. City of
Hialeah, 508 U.S. 520, 531 (1993) (discussing Smith).
Instead, they are subject to rational basis review. E.g.,
Stormans v. Wiesman, 794 F.3d 1064, 1075–76 (9th Cir.
2015).
But Smith identified an important (and not “purported”)
exception to its general approach: even in the context of
otherwise generally applicable requirements, “where the
State has in place a system of individual exemptions, it may
not refuse to extend that system to cases of religious hardship
without compelling reason.” Smith, 494 U.S. at 884
(quotations omitted). Indeed, Smith specifically identified
“good cause” as a standard that “created a mechanism for

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individualized exemption” that would, in turn, demand strict
scrutiny in its relevant applications. Id. (quotations omitted)
(discussing Sherbert v. Verner, 474 U.S. 398 (1963)). As the
Court later reiterated in Church of the Lukumi Babalu Aye,
“in circumstances in which individualized exemptions from
a general requirement are available, the government may not
refuse to extend that system to cases of religious hardship
without compelling reason.” 508 U.S. at 537 (quotations
omitted).
Under these precedents, there is no doubt that given the
Director’s discretionary authority to issue exemptions for
“good cause” and when “in the public interest,” a decision
requiring the churches to have health plans that cover
elective abortions must be reviewed under strict scrutiny. As
our court has previously recognized, “an open-ended, purely
discretionary standard like ‘without good cause’ easily could
allow discrimination against religious practices or beliefs.”
Stormans, 794 F.3d at 1081. That is precisely why the
Supreme Court treats laws with individualized exemption
options differently than neutral laws of general applicability.
And it further explains why the former must be reviewed
under our most exacting constitutional standards when the
allegation is that religious practice is burdened. Indeed, the
“good cause” standard in California’s Knox-Keene Act is
exactly the same open-ended standard that Smith identified
as the classic discretionary standard that takes a law outside
of Smith’s general rule. See Smith, 494 U.S. at 884.
The district court did not apply Smith’s exception for
individualized exemptions on the theory that the churches
did not sufficiently allege that the Director “deliberately
sought to give preference to one set of religious beliefs
regarding abortion over others.” But such a showing of
“deliberate” discrimination was not required. Instead,

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FOOTHILL CHURCH V . W ATANABE 13
Smith’s exception—and therefore strict scrutiny—applies
“where the State has in place a system of individual
exemptions” and “refuse[s] to extend that system to cases of
religious hardship.” Smith, 494 U.S. at 884 (quotations
omitted); see also Church of the Lukumi Babalu Aye,
508 U.S. at 537–38 (strict scrutiny applies if the government
makes individualized exceptions “available”). The churches
have clearly alleged such a system here.
The district court therefore erred in dismissing the
churches’ Free Exercise Clause (and parallel Equal
Protection Clause) claims under a rational basis analysis.
The churches plainly stated a claim for relief, so that their
lawsuit should have been allowed to proceed. And
California should have been put to its rigorous strict scrutiny
burden of showing a compelling interest in refusing the
churches a religious accommodation—a compelling interest
California has never identified.1
1 At oral argument, California appeared to suggest that the problem
here was simply that the churches’ plans had never asked for exemptions
on behalf of the churches. That position is meritless. The Director
repeatedly stated in writing that she would not revisit the position set
forth in her August 22, 2014 letters. And the parties in this case have
been engaged in hard-fought litigation for nearly six years on the
churches’ Free Exercise Clause claim. There is no sense in which this
long legal battle somehow stems from a miscommunication over whether
California would grant the exemption the churches desire. It is obvious
California is unwilling to do so. California’s argument that the churches
lack standing and that the case is not ripe is also squarely foreclosed by
our recent decision in Skyline Wesleyan Church v. California Dep’t of
Managed Health Care, 968 F.3d 738, 747–53 (9th Cir. 2020). (I agree,
however, that the district court properly dismissed the churches’
Establishment Clause claim; California has established no kind of state
religion here, nor would a reasonable observer so conclude. See, e.g.,
Trinity Lutheran Church of Columbia, Inc. v. Comer, 137 S. Ct. 2012,

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While unnecessary to state its Free Exercise and Equal
Protection claims, I note that the churches nevertheless did
allege that the Director had issued exemptions from the
elective abortion requirement in a discriminatory manner.
Specifically, the churches alleged that in October 2015—the
same month the churches filed this lawsuit—the DMHC
approved (for a different religious employer) a plan
exemption that excluded elective abortions except for rape
and incest and to save the life of the mother.
California in its briefing fully acknowledged that “the
Director has since disclosed that the DMHC had granted the
exemption allowing a Plan to offer coverage to ‘religious
employers’ that limited coverage of abortion.” But
California tries to use this point in its favor, claiming that it
shows the Director’s “willingness to accommodate, rather
than target, religious objection to abortion.”
That is non-responsive to the issue here. The churches
have a stricter prohibition on elective abortions than the
religious employer who has already received an exemption,
and whose exemption would thus not address the churches’
particular religious objection. The churches can therefore
rightly ask what lawful basis could support California’s
differential treatment of two sets of religious beliefs about
abortion. This too required strict scrutiny, even as the
churches did not need to allege such differential treatment
for strict scrutiny to apply.
2019 (2017) (noting “that there is ‘play in the joints’ between what the
Establishment Clause permits and the Free Exercise Clause compels”)
(quotations omitted); Harris v. McRae, 448 U.S. 297, 319–20 (1980).
The Establishment Clause is not the right doctrinal box for the problem
before us. The churches’ briefs unsurprisingly devote limited attention
to this claim.)

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FOOTHILL CHURCH V . W ATANABE 15
What I have yet to mention so far, of course, is Fulton.
But that is because Fulton adds nothing new to the analysis.
In Fulton, the Supreme Court considered Philadelphia’s
decision to stop referring children to a Catholic foster care
agency because the agency, due to its religious beliefs about
marriage, would not certify same-sex couples as foster
parents. See 141 S. Ct. at 1874. One of the questions in
Fulton was whether the Supreme Court should revisit
Employment Division v. Smith. We therefore acted
appropriately in staying this case pending Fulton, which
could have substantially altered the Free Exercise Clause
analysis.
But the Supreme Court in Fulton chose not to revisit
Smith. Instead, it viewed Philadelphia’s regime as
unconstitutional under Smith’s individualized exemption
exception. Fulton held that Philadelphia had not applied a
neutral, generally applicable law under Smith because its
foster care contract required agencies to not reject
prospective foster parents based on their sexual orientation
unless Philadelphia’s Commissioner of the Department of
Human Services granted the agency an “exception,” which
the Commissioner could do in her “sole discretion.” Fulton,
141 S. Ct. at 1878. Fulton’s holding and analysis thus turns
on Smith’s well-worn exception that “‘where the State has in
place a system of individual exemptions, it may not refuse to
extend that system to cases of ‘religious hardship’ without
compelling reason.’” Id. at 1877 (quoting Smith, 494 U.S.
at 884). Fulton held that this exception applied because the
“sole discretion” standard, “[l]ike [a] good cause provision,”
“incorporates a system of individual exemptions.” Id.
at 1878.
Although the Justices in Fulton disagreed as to whether
the case presented an appropriate opportunity for

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reconsidering Smith, they unanimously agreed that under
existing law, strict scrutiny must apply because Philadelphia
had created a system of individualized exemptions. The
majority opinion located that exception to Smith in long-
existing case law: Smith itself and Sherbert v. Verner. See
id. at 1877. Justice Barrett in a three-Justice concurrence
similarly explained that “[a] longstanding tenet of our free
exercise jurisprudence—one that both pre-dates and
survives Smith—is that a law burdening religious exercise
must satisfy strict scrutiny if it gives government officials
discretion to grant individualized exemptions.” Id. at 1883
(Barrett, J., concurring). Justice Alito concurring in the
judgment questioned whether this exception in fact pre-
dated Smith. Id. at 1892 n.25 (Alito, J., concurring in the
judgment). But Justice Alito (along with two more Justices)
fully agreed that “Smith’s holding about categorical rules
does not apply if a rule permits individualized exemptions.”
Id. at 1887. Indeed, California in its supplemental status
report itself agrees that Fulton did not change preexisting
precedent.
How the Supreme Court decided Fulton—as a fact-
bound error-correction under existing law—means that
merely vacating and remanding this case in light of Fulton is
not a sound or equitable approach. It was clear before Fulton
that California’s understanding of the law, which the district
court adopted, was manifestly incorrect. Fulton does
nothing except confirm this.
Yet as noted, California in its supplemental status report
suggests that it will remain for the district court to decide
“which standard of review to apply following Fulton.” Quite
clearly, that is not an open question. And I would have held
accordingly now. That would have set this case on a truer
path that properly respected both the governing precedents

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FOOTHILL CHURCH V . W ATANABE 17
and the churches’ significant interest in seeking appropriate
relief under the Free Exercise Clause.

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