Looking for “Property” in 9th Circuit Workers Comp “Lien Activation” Case

In another demonstration of the challenges sometimes presented by the need to identify the relevant property interest in a takings case, the U.S. Court of Appeals for the Ninth Circuit recently ruled in Angelotti Chiropractic, Inc. v. Baker that a takings claim failed for lack of a predicate property interest. The case involved an alleged taking based on a California law requiring medical providers to pay an “activation fee” in order to enforce a “lien” covering payment for medical services.

The case arose from the administration of the complicated California Workers’ Compensation System. Not infrequently, there are disputes about whether an employee’s injuries and related medical expenses are covered by the Workers’ Compensation System. When such a dispute arises, and the employer declines to provide medical treatment, the employee can seek medical treatment on his or her own. To protect their ability to obtain payment, medical providers are authorized to file a “lien” in the injured employee’s workers’ compensation case.  If the injured worker ultimately establishes that the injury was work-related and the medical expenses were reasonable, medical providers are entitled to payment under the system based on their liens. While dubbed “liens,” these interests are not the traditional types of liens attached to specific property.  Rather, as the Ninth Circuit put it, these liens are “unsecured” and “act as a placeholder for the possibility of a future recovery.”

To deal with a so-called “lien crisis” in the Workers’ Compensation System, the California legislature passed a law imposing a $100 fee, applicable to liens already in place prior to the law’s enactment, on medical providers holding liens who wish to pursue their claims for reimbursement.   The purpose of the law was to help weed out frivolous claims. Medical producers whose liens were affected by this new law filed suit, claiming a taking, a due process violation as well as a violation of the equal protection clause.

Because the crux of the case was a challenge to the $100 activation fee, one might suppose that the case posed the question whether the imposition of the fee could support a claim of a taking of the $100. But the Ninth Circuit did not address the claim from that perspective. If it had done so, the court almost certainly would have rejected the claim, based on the U.S. Supreme Court’s 1998 decision holding that government demands for the payment of money do not affect “property” within the meaning of the Takings Clause.

Instead, the Ninth Circuit analyzed the takings claim by addressing whether the medical providers’ liens themselves constituted property. The court ruled that they were not. First, the court observed that worker compensation benefits are purely statutory in nature and therefore rights to benefits do not constitute property until they have been reduced to a final judgment. Second, the court reasoned that since a medical provider’s lien interest rises or falls with the claim of the injured worker, a medical provider’s lien is “derivative” of the injured worker’s claim. Thus, the Ninth Circuit concluded, if the worker’s claim for benefits has not matured into a vested property right, then neither has the medical provider’s claim for reimbursement.

The Ninth Circuit also rejected the medical providers’ alternative argument that they suffered “a taking of the services they have already provided to injured workers.” The Ninth Circuit rejected this theory for a combination of reasons, including the medical services were provided to the workers (not the state), the plaintiffs were not under any compulsion to provide the medical services, the system provides a method for medical providers to obtain reimbursement of the activation fee, and in any event the economic impact of the law and its interference with plaintiffs’ expectations were “not sufficiently severe to constitute a taking.”

The Ninth Circuit also rejected the plaintiffs’ due process and equal protection claims.