UNITED STATES FIDELITY & GUARANTY CO., еt al., Plaintiffs, v. W. Fox McKEITHEN, etc., et al., Defendants
No. 99-30475
United States Court of Appeals, Fifth Circuit
Sept. 15, 2000
226 F.3d 412
v.
W. Fox McKEITHEN, etc., et al., Defendants,
W. Fox McKeithen, Louisiana Secretary of State; Ken Duncan, Louisiana State Treasurer; Glynn Voisin, Judge, Director of Workers’ Compensаtion of Louisiana; James H. Brown, Louisiana Commissioner of Insurance; Madlyn B. Bagneris, Secretary of Social Services of Louisiana, in their official capacities as members of the Louisiana Workers’ Compensation Second Injury Board; Chris Weaver, Acting Secretary, Louisiana Department of Labor, Defendants-Appellees.
Erich Phillip Rapp (argued), Robert Mark Hoyland, Kean, Miller, Hawthorne, D‘Armond, McCowan & Jarman, Baton Rouge, LA, for Defendants-Appellees.
EDITH H. JONES, Circuit Judge:
Plaintiffs, United States Fidelity & Guaranty Company and various other рrivate insurance companies, appeal the district court‘s summary judgment upholding a Louisiana statute that altered the funding formula for the Louisiana Workers’ Compensation Second Injury Fund. Because, as applied to the plaintiffs, the statute in question violates the Takings Clause of the United States Constitution, we REVERSE the judgment and REMAND for further proceedings.
I. BACKGROUND
In 1974, the Louisiana legislature established the Workers’ Compensation Second Injury Fund (“SIF“). See 1974 La. Acts, No. 165, § 1 (the “1974 Act“). The SIF‘s stated purpose was to encourage the hiring and retention of disabled workers. Under the previous workers’ compensation system, an employee‘s current employer was responsible for payment of disability benefits even though the worker‘s disability was partly attributable to a prior accident or disability not involving the current employer. As a result, an employer faced higher insurance costs when hiring a previously disabled worker than it would for an able-bodied worker, and the hiring of previously-injured employees was concomitantly discouraged.
The SIF removed from the ordinаry course of insurance an employer‘s hiring of previously-injured workers. Under the SIF, if an employer became liable to pay compensation to a disabled worker as a result of a second injury, the SIF reimbursed the employer (if the employer was self-insured) or the employer‘s workers’ compensation insurer (if the employer was insured) for benefits paid to the employee. As designed, the SIF was cost-neutral to workers’ compensation insurers while spreading the costs of second injury benefits among all employers in the State of Louisiana. This policy was implemented in two ways. First, when an injured worker filed a second injury claim with an insurer, the insurer paid the claim but obtained reimbursement from the SIF. The insurer was thus an intermediary, with the SIF serving as the ultimate payor of benefits. Claims for serial injuries no longer formed part of an employer‘s loss profile on which its worker‘s compensation premiums were directly based.
Second, the insurer acted as a conduit through which the SIF passed on reimbursement costs and administrative expenses to insured employers. (The SIF assessed self-insured employers directly.) Under the 1974 Act, insurers were assessed a legislatively-fixed percentage of workers’ compensation insurance premiums collected during the applicable year. See
In 1995, the Louisiana legislature enacted Act 188, which amended the 1974 Act. See 1995 La. Acts, No. 188 (“Act 188“), codified at
In addition to changing the SIF‘s assessment formula, Act 188 was made retroactive to insurance policies written before the Act‘s passage. Thus, Act 188 applies to any policy written before its effective date2 if that policy resulted in the payment of benefits after the effective date. Act 188 was also made expressly applicable to workers’ compensation insurers who, prior to the Act‘s passage, had withdrawn from the Louisiana market or had substantially reduced their underwriting in the state.3
The plaintiffs represent the class of insurers that, prior to 1995, withdrew from the Louisiana market or substantially reduced their underwriting in the state.4 In April 1996, they initiated this action, alleging that application of Act 188 to pre-enactment insurance contracts violated the Takings Clause, the Contract Clause, and the Equal Protection Clause of the U.S. Constitution. They named as defendants, in their official capacities, the members of the Louisiana Workers’ Compensation Second Injury Board (the “Board“), the Louisiana Secretary of Labor, and the State‘s Commissioner of Insurance (collectively, the “state officials“), all of whom are responsible for implementing or enforcing Act 188.5 The complaint sought declaratory and injunctive relief.
The parties filed cross-motions for summary judgment, and the case was referred to a magistrate judge, who recommended that the state officials’ motion be granted on the Contract Clausе and Equal Protection claims and that the plaintiffs’ motion be granted on the Takings Clause claim. After timely objections by the parties, the district court granted summary judgment in favor of the state officials on all claims and dismissed the case.
Plaintiffs now appeal the disposition of their Contract Clause and Takings Clause claims.6
The Takings Clause of the Fifth Amendment provides: “[N]or shall private property be taken for public use, without just compensation.”
This case does not present a classic taking in which the government directly appropriates private property for its own use. See Eastern Enterprises, 524 U.S. at 522. Rather, the alleged taking arises from an economic regulation—a “public program adjusting the benefits and burdens of economic life to promote the common good.” Id., citing Penn Central Transp. Co. v. New York City, 438 U.S. 104, 124, 98 S.Ct. 2646, 2659, 57 L.Ed.2d 631 (1978). The inquiry into a challenged regulation‘s constitutionality involves an evaluation of the “justice and fairness” of the government action. Id. at 523, 118 S.Ct. 2131. Although this inquiry involves no set formula and is necessarily ad hoc and fact intensive, the Supreme Court has identified three factors of “particular significance” to a regulatory takings clause analysis: (1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with reasonable investment-backed expectations; and (3) the character of the government action. Id. at 523, 524, 98 S.Ct. 2646, citing Connolly v. Pension Benefit Guaranty Corp., 475 U.S. 211, 224-25, 106 S.Ct. 1018, 1026, 89 L.Ed.2d 166 (1986).
It must be acknowledged that a plaintiff bears a substantial burden in proving that government action inflicts an unconstitutional taking. See United States v. Sperry Corp., 493 U.S. 52, 60, 110 S.Ct. 387, 107 L.Ed.2d 290 (1989). Further, the complexity of the issue manifests itself in the variety of relevant Supreme Court decisions. See, e.g., Eastern Enterprises, 524 U.S. at 541-42 (KENNEDY, J., concurring in the judgment and dissenting in part and citing numerous cases). Nevertheless, a review of the justice and fairness of Act 188 in light of the three listed factors leads to the same conclusion reached by the magistrate judge: as applied to the plaintiffs’ insurance contracts entered into before the lаw‘s effective date, Act 188 unconstitutionally takes the plaintiffs’ property without just compensation.8
A. Economic Impact
In examining the economic impact of Act 188, not only the financial burden it imposes but also the proportionality between that burden and the insurers’ experience with the SIF must be considered. See Eastern Enterprises, 524 U.S. at 530. Additionally relevant are any parts of Act 188 by which plaintiffs can “moderate and mitigate” the economic impact. Id., 524 U.S. at 527, 118 S.Ct. 2131.
There is no doubt that Act 188 imposes a considerable, novel financial burden on the plaintiffs. Under the SIF funding scheme established by the 1974 Act, insurers paid a net amount of zero for claims made on the Second Injury Fund and col-
The defendants contend, however, that plaintiffs have suffered no negative impact because plaintiffs in 1995 received a total reimbursement benefit of over six million dollars thanks to Act 188. This is specious. The reimbursement touted by defendants did not cover the assessments now paid by the plaintiff insurers. Even after the passage оf Act 188, insurers or self-insured employers continue to be reimbursed by the SIF for the benefits they have paid to reinjured workers. The fundamental structure of the SIF has not been altered, but the imposition of part of its cost upon insurers without opportunity for pass-through is new.
In essence, the State of Louisiana is the troll under the bridge, extracting money from businesses whose sole activity is sending money into the state: This amounts to a transfer of plaintiffs’ assets to the state or to third parties for public use.
The newly-created liability reflects nо proportionality to the plaintiffs’ experience with the SIF. For over twenty years before Act 188, plaintiffs were an intermediary for the SIF. They collected assessments from employers and received SIF reimbursement for payment of second injury benefits. They received no net benefits and incurred no net costs. Defendants do not argue that the policy and purpose of the SIF have changed since its inception in 1974. But under Act 188, plaintiffs must make significant net contributions to the fund. Act 188 thus imposes costs on parties that never profited from the SIF.
Defendants argue that the plaintiffs are still receiving SIF reimbursement even though, if Act 188 is invalidated, they would no longer be paying assessments to SIF. Again, defendants ignore that, under both the 1974 and 1988 Acts, entitlement to reimbursement arises from payment of second injury benefits, not from assessments. The purpose of the SIF program has consistently been to remove the direct cost of serial injuries from the risk-adjusted insurance market and to replace it by pay-as-you go funding. Even the insurers that no longer do business in Louisiana incur no windfall from this program, as they receive no net profit from SIF reimbursements and never in the past collected premiums for the risk of second injuries.
Defendants also fail to show that plaintiffs could have mitigated or moderated the impact of Act 188. Act 188 offered no gradual phase-in period. If plaintiffs refuse to pay the assessments, they are subject to substantial penalties, including a civil penalty equal to 20 percent of the
B. Interference with Reasonable Investment-Backed Expectations
Retroactivity is generally disfavored in the law. See Eastern Enterprises, 524 U.S. at 532 (citing Bowen v. Georgetown Univ. Hospital, 488 U.S. 204, 208, 109 S.Ct. 468, 469-70, 102 L.Ed.2d 493 (1988)). Retroactive legislation, as opposed to the prospective kind, can present more severe problems of unfairness because it can upset legitimate expectations and settled transactions. See General Motors Corp. v. Romein, 503 U.S. 181, 191, 112 S.Ct. 1105, 1112, 117 L.Ed.2d 328 (1992).
The magistrate judge found that Act 188‘s retroactive application reached back at least twenty years to upset the plaintiffs’ reliance on the cost-neutrality of the 1974 funding scheme. We agree.10
Defendants do not dispute the extent of the reach-back. Instead, they assert that the companies’ alleged economic expectations are unreasonable because the insurance industry is heavily regulated and because the plaintiffs knew of the SIF‘s need for annual funding and knew that benefits-based assessments are prescribed in many other states.
None of these factors—extensive regulation, SIF‘s pay-as-you-go status, or other states’ policies—made it objectively reasonable to expect that Louisiana would decide to shift the cost of funding the SIF from in-state employers to insurers who had withdrawn, wholly or partly, from writing insurance in Louisiana and who could not recoup the costs of this forced underwriting. While plaintiffs might have been on notice that there could be a change awаy from premium-based assessments, there was no evidence that the plaintiffs should have suspected abandonment of cost-neutrality.11 There was no evidence that the cost of financing the SIF was ever intended to be borne by insurers, that there existed any rationale or policy for imposing the cost on insurers, or that the state was contemplating shifting the burden of funding onto insurers.
And while the majority of states do not use the premium-based assessment method for their SIF‘s, and that method might have posed certain administrative problеms for Louisiana, insurers could hardly have foreseen the retroactive imposition of a benefits-based method.
Finally, the mantra that insurance is a regulated industry will not cover all sins of retroactivity. The coal industry had been heavily regulated with respect to miners’ health benefits, but the Supreme Court was not persuaded that the retroactive liability in Eastern Enterprises could have been anticipated. See Eastern Enterprises, 524 U.S. at 534-36. Here, Louisiana‘s abandonment of cost-neutrality has shifted onto these plain-
In short, there was no pattern of conduct on the state‘s part that could have given the plaintiffs sufficient notice that cost-neutrality would end. See Eastern Enterprises, 524 U.S. at 498 (examining the government‘s pattern of involvement in the regulated field in order to determine whether plaintiff had sufficient notice of the challenged regulation).
The magistrate judge also found, and we agree, that the defendants failed to show an adequate justification for the retroactive application of Act 188. There are no indications in the law itself, in the legislative history, or in the record of this case that the SIF was financially insecure, or that employers were having trouble bearing the costs of operating the SIF. Defendants justified Act 188 by relying on evidence of administrative difficulties in computing premium-based assessments for self-insureds, but they do not explain how retroactive application of Act 188 helps to alleviate this problem.
C. Nature of the Government Action
The district court found that Act 188 was “a rational attempt by the state to impose the costs inherent in a certain type of business activity on those who have profited from the fruits of the business in question.” This characterization, as has been repeatedly explained, is wrong. Insurers were perhaps the only party that did not benefit from the 1974 SIF funding scheme. Employers profited from the creation of the SIF because the costs of second-injury benefits were spread across all employers. Workers, especially disabled workers, profited because the SIF made it cheaper to hire them. Thе State of Louisiana profited because the SIF furthered state policy on the employment of disabled workers. But insurers did not profit from the SIF, though neither did they suffer any detriment.
The district court also erred in finding that Act 188 provides for “just compensation.” Act 188 does not prohibit insurers from recovering the costs of assessments through the rate-making process, but the district court overlooked that plaintiffs cannot avail themselves of the rate-making process. As applied to the plaintiffs’ pre-enactment contracts, the statute does not provide “just compensation.”
The nature of the government action here is thus unusual. Without identifying a compelling problem, such as the financial insecurity of the SIF, the state enacted a solution that “singles out certain [parties] to bear a burden that is substantial in amount, based on the [parties‘] conduct far in the past, and unrelated to any commitment that the [parties] made or to any injury they caused....” Eastern Enterprises, 524 U.S. at 537.
III. CONCLUSION
A final word is in order about the controlling caselaw. We have applied principles еspoused in a series of Supreme Court cases, each of which goes out of its way to emphasize the fact-specific nature of a Takings Clause decision. See, e.g., Eastern Enterprises, 524 U.S. at 523; Connolly, 475 U.S. at 224. While Eastern Enterprises seems factually closest to this case—because of its long period of retroactivity, the imposition of unforeseen liability, and application
The defendants rely on Connolly v. Pension Benefit Guaranty Corp., 475 U.S. 211, 106 S.Ct. 1018, 89 L.Ed.2d 166 (1986), as the closest-fitting case to this one. In Connolly, however, the Court noted that employers were continuously aware, during the entire period of retroactivity, not only that Congress was studying the funding mechanism for multiemployer pension plans but also that statutory withdrawal liability might be required. See Connolly, 475 U.S. at 226-27. In addition, the employers in Connolly were held responsible for pension plans for their employees or employees subject to multiemployer plans, see id. at 225, 106 S.Ct. 1018. These plaintiffs, having previously been mere conduits for payments from and assessments to the SIF, are uniquely being forced to defray the cost of the SIF for other people‘s employees. Finally, there was rough proportionality in Connolly between an employer‘s assessment and its experience with the plan to which it had contributed, and provisions of the retroactive law moderated and mitigated its potential unfairness. See id. at 225-26, 106 S.Ct. 1018. No such proportionality or mitigation exists in this case.
Act 188 as applied to plaintiffs’ pre-enactment contracts retroactively imposes a heavy economic burden on those who could not reasonably anticipate the liability. The extent of the liability is disproportionate to the plaintiffs’ experience with the SIF, and the legislation is unnecessary to substantially advance a legitimate state interest. See Eastern Enterprises, 524 U.S. at 528-29. To this extent, the statute effects an unconstitutional taking of plaintiffs’ property without just compensation. The judgment of the district court is REVERSED, and the case is REMANDED for entry of appropriate injunctive relief.
REVERSED and REMANDED.