In the recently issued but unpublished decision Reed v. SunRun, Inc. (Los Angeles County Super. Ct. No. BC498002, Feb. 2, 2018), the Second District Court of Appeal ruled that a solar power purchase agreement (“PPA”) provider that only sells solar energy to homeowners is not required to be a licensed California contractor under certain circumstances. Specifically, the court held that where the PPA provider “arranges” installation by a licensed contractor of the solar energy system (“system”) installed on the homeowner’s house but the PPA provider retains ownership of the system and sells the electrical output from the system to the homeowner, the PPA provider does not need to be a licensed contractor.
This ruling is good news for PPA providers in the state, whether they are marketing PPAs for residential or commercial property owners. Further, the ruling does not harm homeowners or other property owners or otherwise run afoul of the regulatory purpose of the Business and Professions Code (“BPC”) where the actual physical installation of the system must still be performed by qualified licensed contractors. This decision, if published, would also benefit the state by the further refinement of several California decisions that otherwise seem to restrict “arrangers” unless they carefully craft their contracts and actual activities within a narrow aspect of non-construction services.
The facts leading to the SunRun decision are familiar to lawyers involved with clients in both the energy sector and the heavily regulated licensing scheme under California law: SunRun sought to facilitate the use of solar in California through a PPA structure that enables homeowners to purchase energy from SunRun-owned solar systems installed on the homeowners’ rooftops. SunRun itself was not a licensed contractor prior to February 2012, but worked with a number of licensed contractors for the installation of the systems. SunRun and a licensed contractor would 1) visit the home and evaluate what was optimally required for the system, 2) the contractor would present a design to the homeowner for approval, 3) the contractor would install the system (using SunRun’s “best practices” and SunRun’s modular parts), 4) SunRun would retain ownership of the system (including maintenance and insurance obligations), 5) the homeowner would agree to buy energy from SunRun for 20 years, with an option to buy the system during that time, and 6) if the homeowner breached the agreement, SunRun had reserved its right to remove the system (which would take about one day). SunRun’s agreement with the homeowner provided that SunRun would “arrange for the design, permitting, construction, installation and testing of the” system, but specified that a separate contractor would “furnish all installation and construction services” and that separate contractor was to be “solely responsible” for all aspects of the installation related to construction. Although SunRun could refuse to pay a contractor if the installation was not satisfactory, the approval was fairly superficial and cursory, taking “15 seconds to two minutes.” SunRun did not oversee installation nor was it physically present at the installation sites.
In August 2011, Reed contracted to purchase power from SunRun pursuant to a PPA styled as a “Solar Power Service Agreement.” Reed made only four of the monthly payments under the PPA and then sold his home. The new owner assumed the SunRun agreement. Later in January 2013, Reed sued SunRun and sought to certify a class on the grounds that SunRun was an unlicensed contractor and engaged in unfair competition. Although abandoning the “solar energy claims” and not pursuing the subclass he originally asserted, Reed still sought to pursue the contractor license violation allegations. Motions for summary adjudication/judgment followed by SunRun in 2014 and 2016. Relevant to the license analysis, in April 2016 after further discovery, the trial court ruled that SunRun was not a “contractor” under BPC 7026 because 1) it “did not direct or supervise its licensed installers’ work at any job site” and any approval was limited “exclusively to ensur[ing] the local designer and installer’s design matched the agreement,” and (2) even if SunRun were a contractor, it fell within the exception under BPC 7045 for a finished product that was not a fixed part of the home. An appeal by Reed followed.
On appeal of that aspect of the ruling, the appellate court affirmed in full the trial court’s determination. Importantly for those navigating California’s licensing regulations was the court’s reiteration of the public policy undergirding the BPC, while yet noting that the penalties that Reed sought to enforce hinged on whether or not SunRun was a “contractor” under BPC 7026. The court emphasized that a “contractor” historically had to 1) actually perform construction services, 2) supervise the performance of services, or 3) agree by contract to be “solely responsible” for construction services. Citing The Fifth Day, LLC v. Bolotin (2009) 172 Cal.App.4th 939, 947-950, the court stated that “[h]owever, a license is not required if a person merely coordinates construction services performed by others.” Rejecting Reed’s counter arguments outright, the court did not find it necessary to reach the alternative ground ruled upon by the trial court: whether SunRun’s system was within the non-fixture exception to licensing under BPC 7045.
Another helpful element of this lengthy litigation, although not at issue on appeal, was the initial motion for summary adjudication by SunRun in February 2014 where the trial court ruled that the applicable statute of limitations under BPC 7031 was one year. As the trial court succinctly stated:
This statute imposes forfeitures. The contractor’s work can be perfect and the client delighted. Then there would be neither damages nor any equitable basis for compensation or a remedy. Yet the legislature put in this provision to get contractors’ attention: get your license, or else. It is the financial equivalent of flogging. That is simple and harsh by design, and it is to drive home a point. A simple and harsh punishment serves “the clear statutory policy of deterring unlicensed contract work.” (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 992; see also id. 995, 996, 997, and 998.) SunRun’s analysis is correct.
While neither the statute of limitations analysis nor the licensing ruling is published, both still serve as very good guidance using common sense in their application under California law. Nevertheless, entities looking to walk that line should be very mindful of the underlying facts and the points highlighted by the appellate court in this case, and ensure that neither their contract language nor their actual activities move them across the line and therefore potentially under the California contractor regulatory scheme found in the BPC.