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Subrogation of Injured Worker Lawsuit Awards, But not Settlement Proceeds, Ruled Unconstitutional

2003-0664. Modzelewski v. Yellow Freight Sys., Inc., 2004-Ohio-2365.
Summit App. No. 21205, 151 Ohio Ap.3d 666, 2003-Ohio-827. Judgment affirmed.
Resnick and F.E. Sweeney, JJ., concur.
Pfeifer, J., concurs and concurs in judgment only.
Moyer, C.J., and O'Connor, J., concur in judgment only.
Lundberg Stratton and O'Donnell, JJ., dissent.
Opinion: http://www.supremecourt.ohio.gov/rod/newpdf/0/2004/2004-Ohio-2365.pdf

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(May 26, 2004) The Supreme Court of Ohio today ruled unconstitutional a state law that required injured workers to subrogate (pay back) Workers' Compensation benefits they received from the state or their employer for job-related injuries from the proceeds of any civil damage award the worker recovered for those same injuries by suing a third party. Because the court found no rational basis for the law's mandate of subrogation from damage awards obtained through lawsuits, while imposing no subrogation requirement for third-party damages recovered without filing a lawsuit, the justices held 5-2 that the statute was invalid and unenforceable under equal protection provisions of the state constitution.

In an earlier (2001) decision, Holeton v. Crouse Cartage Co., the court ruled unconstitutional a former version of the state workers' compensation statute enacted in 1995. That law had required workers to pay back workers' compensation benefits to the state or to a self-insured employer from the total proceeds of any out of court settlement the worker accepted from a third party, but had allowed workers who filed third-party lawsuits and took them to judgment to have amounts in their damage award earmarked as compensation for items not covered by workers' compensation benefits (e.g., pain and suffering) – and by doing so to exempt those amounts from subrogation by the state or an employer.

As a result of Holeton, which effectively repealed the 1995 code section, state law reverted to the previous version of the workers' compensation statute. That version, enacted in 1993, imposed “automatic subrogation” of workers' compensation payments in cases where an injured worker recovered a damage award through a lawsuit, but imposed no subrogation requirement in cases where an employee recovered damages from a third party without initiating a court action.

Today's Supreme Court action invalidates the subrogation provisions of the 1993 statute. The majority opinion, authored by Justice Alice Robie Resnick, was joined by Justices Francis E. Sweeney and Paul E. Pfeifer. Chief Justice Thomas J. Moyer and Justice Maureen O'Connor concurred in judgment only. Justice Terrence O'Donnell entered a dissenting opinion that was joined by Justice Evelyn Lundberg Stratton.

The case involved Gregory Modzelewski of Akron, an employee of United Parcel Service who applied for workers' compensation benefits and also sued Yellow Freight for workplace injuries he suffered when he was pinned against a loading dock by a backing Yellow Freight truck. He also named UPS as a defendant. In responding to Modzelewski's suit, UPS, a self-insured employer, asserted its right under the 1993 statute to recover the workers' compensation disability benefits and medical expenses it had paid to Modzelewski or on his behalf from any court-awarded damages he might collect from Yellow Freight.

Modzelewski sought and was granted summary judgment in the Summit County Common Pleas Court denying UPS any recovery of its workers' compensation outlays from the proceeds of Modzelewski's suit against Yellow Freight. Applying the Supreme Court's rationale in Holeton to the 1993 version of the subrogation statute, the trial court held that that law's disparate treatment of workers who sued for damages and those who received third party compensation without filing a suit violated equal protection requirements and rendered the law invalid. The 11th District Court of Appeals upheld the trial court's ruling.

Writing for the Supreme Court in today's decision, Justice Resnick noted that the 1993 subrogation statute “embodies a distinction similar to that of (the 1995 statute struck down by Holeton), only it favors out-of-court settlement over litigation. Under (the 1993 law) claimants who institute lawsuits against third-party tortfeasors are treated differently from claimants who settle their third-party claims without filing suit, as only the former claimants' tort recovery is subjected to the reimbursement right … ,” she wrote.

Rejecting arguments by UPS that the 1993 statute authorizes subrogation of a worker's tort award only to the extent that the award duplicates compensation the worker has already received from the state or his employer, Justice Resnick wrote: “To the contrary, (the statute) expressly provides that the subrogee, for the amount of compensation and benefits paid, ‘is subrogated to all of the rights of that employee against a third-party tortfeasor'…”

“We need not consider whether (the 1993 statute) is unconstitutional solely because it tends to penalize those claimants who, due to no fault of their own, are unable to settle their third-party claims …” wrote Justice Resnick. “Under the rational relationship test, and for the reasons stated in Holeton , (the 1993 statute) is unconstitutional because it precludes claimants who are parties to actions against third-party tortfeasors from showing that their tort recovery or portions thereof do not duplicate their workers' compensation recovery and, therefore, do not represent a double recovery.”

While concurring in the majority holding that the statute is unconstitutional, Chief Justice Moyer entered a separate opinion joined by Justice O'Connor in which he advanced a different legal rationale than that cited by Justice Resnick.

“The subrogation contemplated in (the 1993 statute) occurs only if the employee filed a lawsuit (an ‘action'). If the employee settled prior to filing a lawsuit, the employee could retain the full settlement amount; but if the employee filed a complaint and then settled the following day, the employee would be forced to ‘share' that recovery with the employer that paid his or her workers' compensation benefits,” wrote the Chief Justice.

“In view of this disparate treatment, the dispositive issue in this case is simply whether the government has a rational basis for distinguishing between claimants who settle their claims … before initiating lawsuits and claimants who settle after initiating a lawsuit. No rational basis for this distinction has been offered to us by the parties or by the dissent. I therefore conclude that the statute is unconstitutional because the filing of a legal action … bears no rational relationship to whether a portion of the claimant's recovery should be paid to the claimant's employer.” Justice Pfeifer also concurred with the Chief Justice's opinion, “except to the extent that it is critical of Holeton v. Crouse Cartage .”

In a dissenting opinion, joined by Justice Stratton, Justice Terrence O'Donnell wrote that the majority ignored several U.S. Supreme Court decisions, including Federal Communications Commission v. Beach Communications, which have held that, when classifications in a law do not involve fundamental rights or protected classes of citizens, the legislature's distinction between classes “must be upheld against equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification.”

Quoting from Beach Communications, Justice O'Donnell wrote that “‘equal protection is not a license for courts to judge the wisdom, fairness or logic of legislative choices' – even if wisdom dictates the irrationality of favoring claimants who settle over those who litigate. … By failing to accord a strong presumption of validity to classifications that involve neither fundamental rights nor suspect classes, the majority has ignored long-standing equal-protection jurisprudence, under which the determination of the wisdom of a statute ‘must come from [the legislature], not the courts.'”

Kathleen K. McKinley, 330.493.1570, for Christina Skilton.

Richard W. Ross and Rachel A. Leier, 614.485.2010, for Perry Local School District.