9th Circuit Throws Lifebuoy to California Drowning In Workers’ Compensation Liens

The United States Court of Appeals for the Ninth Circuit resuscitated a contentious provision of California’s SB 863. In a unanimous decision on June 29, 2015, the court in Angelotti Chiropractic, Inc. v. Christine Baker, et al., 2015 U.S. App. LEXIS 11063 removed a preliminary injunction imposed against, and held to be constitutional, the provision of California Labor Code Section 4903.06 that requires certain lien claimants to pay an activation fee in order to obtain payment for their services through the workers’ compensation system.

California enacted Senate Bill 863 as part of a comprehensive plan to trim costs deemed to be out of control in its workers’ compensation program. One provision of the reform, LC §4903.6, imposes a $100 “activation fee” for liens filed prior to January 1, 2013, which must be paid at the time that a declaration of readiness is filed for a lien conference. Any lien for which the activation fee is not paid by January 1, 2014 is dismissed by operation of law. Health care service plans, group disability insurers, self-insured employee welfare benefit plans, Taft-Hartley health and welfare funds, or a publicly funded program providing medical benefits on a nonindustrial basis are exempted from paying the fee. The Labor Code provision was attacked by several lien claimants, including chiropractors, interpreters, copy services and medical clinics, who asserted that the provision violated the U.S. Constitution by denying their businesses equal protection of law, and constituted an illegal taking or violated the Due Process Clause.

The U.S. District Court, Central District of California on November 12, 2013, sided with the plaintiffs and ordered a halt to collecting the activation fee. The U.S.D.C. held that a preliminary injunction was warranted because the law violated the plaintiff’s Equal Protection rights. The Judge agreed that exemption of certain entities, other than plaintiffs, from having to pay the lien activation fee violated the Equal Protection Clause. The Judge further agreed that strict scrutiny of the court must be applied to evaluate the exemption because the activation fee infringes a fundamental right of access to the courts.

The 9th Circuit Court of Appeals disagreed entirely. The court held that it must evaluate the legitimacy of economic legislation only to ensure that there is a rational basis to support distinctions drawn by the statute. “Under rational basis review, legislation that does not draw a distinction along suspect lines such as race or gender passes muster under the Equal Protection Clause as long as ‘there is any reasonably conceivable state of facts that could provide a rational basis for the classification.’” Citing FCC v. Beach Comm’cns, Inc., the court ruled that SB 863 seeks the “plausible policy” goal of clearing “the lien backlog by forcing lienholders to consider whether a lien claim is sufficiently meritorious to justify spending $100 to save it from dismissal.” Additionally, the plaintiff had the burden to “negate every conceivable basis which might have supported the distinction between exempt and non-exempt entities.”

The court also addressed the plaintiff’s argument that the statute violated the Takings Clause of the Fifth Amendment which prohibits the taking of private property without just compensation. The court explained that the constitutional provision applies to only “vested” property interests, not to “contingent,” “speculative” or “discretionary” property rights. It concluded that “[s]ince an injured workers’ right to benefits does not vest until final judgment, the same is true for the liens at issue here, which are derivative of the underlying workers’ compensation claim.”

As to the plaintiff’s argument that the provision violated their Due Process rights, the court held that the activation fee is not a “weighty societal concern” which requires court protection. “The lien activation fee here is more akin to filing fees in conventional litigation scenarios, in which the Supreme Court has rejected due process challenges.”

Finally, the court reversed the District Court’s denial of the defendant’s motion to dismiss the Due Process issues that remained pending while the injunction was in place. This means that the only avenue for further action left to the plaintiffs is before the United States Supreme Court.

In its opinion, the 9th Circuit accepts that California’s workers’ compensation system is struggling to avoid drowning in liens. Recent data from the Division of Workers’ Compensation shows that lien claims are again burgeoning, even as the Division of Workers’ Compensation collects $150 filing fees imposed on liens filed for services rendered after January 1, 2013. Plaintiffs in Angelotti are expected to seek certiorari from the United States Supreme Court. We may thus see California’s lien crises argued on the national stage.

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July 2, 2015