ANGELOTTI CHALLENGE FAILS

By Julius Young
Boxer & Gerson, LLP

Jun 30, 2015

The U.S. Court of Appeals 9th Circuit has now handed a big win to the architects of the SB 863 reforms.

The case is Angelotti Chiropractic et al v. Baker (see link to the opinion below).

Angelotti was a constitutional challenge to the lien activation fee provisions of SB 863.

At the trial court level in hearings before U.S. District Judge George Wu, the Angelotti plaintiffs lost on their claims that the lien filing provisions of SB 863 violated the Takings Clause and the Due Process Clause of the U.S. Constitution.

However, Judge Wu granted a preliminary injunction based upon the plaintiff’s Equal Protection Clause claim.

The three judge 9th circuit panel reversed Wu as to the Equal Protection Clause injunction, dismissed the Equal Protection Clause claim and upheld Wu’s dismissal of the Takings Clause and Due Process Clause claims.

Conceivably the Angelotti defendants could request rehearing by the 9th Circuit, but the likelihood of success is minimal.

Joining in the unanimous decision was 2012 Obama appointee Jacqueline Nguyen, 1979 Jimmy Carter appointee Mary Schroeder, and 2005 appointee Jack Zouhary (an Ohio U.S. District Court Judge sitting by designation).

The 9th Circuit panel opinion makes extensive reference to the 2011 CHSWC report on liens. That report documented the lien crisis that engulfed several Southern California boards.The court notes that:

….“the Los Angeles Office of the Workers’ Compensation Appeals Board devotes 35 percent of its time to lien-related matters, and even though it resolves liens at the rate of approximately 2,000 per month as of October 2010, the rate of filings is such that the backlog of unresolved liens grows by approximately 2,000 per month, on top of the pre-existing backlog of 800,000. According to the Commission Report, the backlog has two effects. First, frivolous liens remain pending for years rather than being denied outright, resulting in the employer paying to settle just to close the case. Second, meritorious liens are delayed, which means that employers can deny these claims with impunity for years.”

One of the issues raised by the Angelotti plaintiffs was that some entities (for example, union trust funds and group health plans) were exempted from the activation fee.

Applying an inquiry as to whether there was a “rational basis” for this seeming disparate treatment scheme in the lien activation statute (rather than applying a tougher “strict scrutiny” standard), the 9th Circuit panel finds that there was a “rational basis”:

“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.” FCC v. Beach Comm’cns, Inc., 508 U.S. 307, 313 (1993). Thus, a legislative classification must be upheld so long as there is a plausible policy reason for the classification, the legislative facts on which the classification is apparently based rationally may have been considered to be true by the governmental decision maker, and the relationship of the classification to its goal is not so attenuated as to render the distinction arbitrary or irrational.

Here, one “plausible policy” goal, see Nordlinger, 505 U.S. at 11, for the imposition of the lien activation fee is to help clear the lien backlog by forcing lienholders to consider whether a lien claim is sufficiently meritorious to justify spending $100 to save it from dismissal. In turn, the California Legislature’s decision to impose the activation fee on entities like plaintiffs, while exempting other entities, is rationally related to the goal of clearing the backlog because the Legislature might have rationally concluded that the non- exempt entities are primarily responsible for the backlog. In this regard, the Commission Report states that ten of the eleven top electronic lien filers are independent providers. Thus, the Legislature could have rationally found that independent service providers bore primary responsibility for the lien backlog, and therefore elected to focus on those entities in imposing the activation fee.

The Legislature’s approach also is consistent with the principle that “the legislature must be allowed leeway to approach a perceived problem incrementally.” Beach Commc’ns, 508 U.S. at 316; see also Silver v. Silver, 280 U.S. 117, 124 (1929) (stating that “[i]t is enough that the present statute strikes at the evil where it is felt and reaches the class of cases where it most frequently occurs.”). Targeting the biggest contributors to the backlog—an approach that is both incremental, see Beach Commc’ns, 508 U.S. at 316, and focused on the group that “most frequently” files liens, see Silver, 280 U.S. at 124,—is certainly rationally related to a legitimate policy goal. Therefore, on this record, “the relationship of the classification to [the Legislature’s] goal is not so attenuated as to render the distinction arbitrary or irrational.” Nordlinger, 505 U.S. at 11.

Moreover, on rational basis review, the burden is on plaintiffs to negate “every conceivable basis” which might have supported the distinction between exempt and non- exempt entities. See Armour, 132 S. Ct. at 2080–81. The district court did not put plaintiffs to their burden of demonstrating a “likelihood” or “serious question” that they would be able to refute all rationales for this distinction and its relationship to the goal of clearing the backlog. See Winter v. Natural Resources Def. Council, 555 U.S. 7, 20 (2008); Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1134–35 (9th Cir. 2011)……”

The 9th Circuit panel concluded that the District Court abused its discretion in finding the existence of a “serious question” of Equal Protection Clause violation.

Accordingly, the 9th Circuit vacated the preliminary injunction.

But rather than remanding the matter back to Judge Wu for further hearing on the merits, the 9th Circuit went further, dismissing the Equal Protection Clause claim entirely.

Here is the 9th Circuit logic:

“Here, our conclusion that the exemption provision is rationally related to the purpose of clearing the lien backlog amounts to a determination that plaintiffs have no chance of success on the merits because, regardless of what facts plaintiffs might prove during the course of litigation, “a legislative choice is not subject to courtroom fact-finding and may be based on rational speculation unsupported by evidence or empirical data.” See Beach Commc’ns, 508 U.S. at 315. Thus, the presence in the Commission Report of evidence suggesting that non-exempt entities are the biggest contributors to the backlog is sufficient to eliminate any chance of plaintiffs succeeding on the merits. Accordingly, we exercise pendent appellate jurisdiction over the district court’s denial of the motion to dismiss, and reverse.”

It is notable that lien filing declined precipitously after SB 863 although recent reports noted that they had increased again somewhat.

Frankly, it is hard to get worked up about the ruling in Angelotti. Liens in the Southland were in fact out of hand pre SB 863, and included filings from a number of sketchy lien holders, including proponents of old so-called called “zombie liens”.

Here is the decision in Angelotti V. Baker:

WorkersCompAngelotti9thCircuitDecision

And here is a link to the 2011 CHSWC lien report:

www.dir.ca.gov/chswc/Reports/2011/CHSWC_LienReport.pdf

Stay tuned.

Julius Young