Opinion
As Modified on Denial of Rehearing Jan. 23, 1997.
Previously published at 51 Cal.App.4th 1489
Katten, Muchin, Zavis & Weitzman, Charles M. Stern, Valerie E. Kincaid, David P. Kaplan, Los Angeles, Vermes, Charton & Rovenger, Lloyd Charton, Santa Ana, Scott I. Richards, Tustin, for Plaintiff and Appellant.
Shapiro, Posell, Rosenfeld & Close, Edward M. Rosenfeld, Helmut F. Furth, John E. Walker, Los Angeles, for Defendants and Respondents.
CROSBY, Acting Presiding Justice.
The superior court found plaintiff's action barred by the exclusive remedy of the workers' compensation system and imposed sanctions. We affirm the ruling on the merits, but reverse the sanctions order.
I
Compensation for work-related injuries should be swift and sure, employers and workers have agreed. Fraudulent medical-legal claims corrupt this bargain by penalizing insurers who pay medical bills rather than challenge them. The net effect: soaring workers' compensation premiums, higher transaction costs, and reduced benefits for injured workers.
We are sensitive to the delicate balance between combating fraud against employers and providing speedy and adequate compensation to employees. So, too, is the Legislature which, in recent years, has enacted a series of carefully tailored measures to investigate suspicious medical claims and to eliminate fraudulent ones. It is for this reason that we are unwilling to sanction the crude, blunderbuss type of tort weapon plaintiff proposes. Plaintiff, an adjuster for workers' compensation insurers, filed a massive tort lawsuit against a group of medical clinics that allegedly engaged in fraudulent billing practices in 158 separate workers' compensation claims. The trial court sustained the demurrer on the ground that the California workers' compensation system preempted the civil claims. Plaintiff also filed a parallel action for reimbursement for the same 158 claims through the workers' compensation system.
We affirm the judgment of dismissal of the tort suit. The exclusive jurisdiction of the Workers' Compensation Appeals Board (WCAB) is not limited to employees and employers, but extends to all suits over compensation and payment of benefits to injured workers. Just as the WCAB's jurisdiction covers bad faith or fraud claims against workers' compensation carriers, so too it covers fraud claims against medical or medical-legal lien claimants.
Fraudulent workers' compensation claims should be stopped at the source, in the workers' compensation system. Medical clinics that submit false medical-legal evaluations can be detected and halted under existing law, which sets up a tripartite scheme involving the WCAB, the insurance commissioner and public prosecutors.
That said, we do not believe plaintiff engaged in sanctionable misconduct in filing a complaint in tort; and we reverse the trial court's imposition of some $60,000 in sanctions under Code of Civil Procedure section 128.5. The case law on exclusive jurisdiction is complex and in flux. Plaintiff's conduct in filing the civil suit was not objectively unreasonable, nor does the record show bad faith.
We are told that there are other reasons why the sanctions order should be affirmed based primarily upon plaintiffs' misconduct in seeking an ex parte temporary restraining order (TRO). We decline to affirm the sanctions order on this ground. Because of the unusual procedural posture in which sanctions were imposed (on the trial court's own motion and without a detailed specification of the alternative grounds), plaintiff was presented with a moving target, without receiving an adequate notice of the basis for the award sufficient to allow an appropriate response.
II
On December 3, 1993, plaintiff American International Adjustment Company, Inc. (American), filed a verified complaint against Professional Consultation Services and four other Los Angeles medical clinics that allegedly were owned and controlled by a single doctor, Byron Crawford. American, retained to administer workers' compensation claims, remitted to Professional $519,369 in allegedly fraudulent medical billings for medical services to 158 injured employees over a four-year period.
For convenience, we refer to all five clinics as "Professional."
At oral argument, neither party was able to explain why American acted as plaintiff rather than the insurers whose claims it adjusted. Because we affirm the dismissal on other grounds, we need not concern ourselves with whether American's allegation that it "remitted" payments to Professional suffices to confer standing.
The complaint contained no specific allegations about the claims. It generalized there were double billings, unrendered or unauthorized medical services, fraudulent diagnoses and premature medical-legal evaluations that were performed before the employer had received notice of the industrial claim and had an opportunity to respond to it. American allegedly did not discover the fraud until October 1993, when it completed an internal audit of Professional's financial history. American sought compensatory and punitive damages and injunctive relief.
On the same day, American filed an ex parte application for a preliminary injunction, the appointment of a receiver, and a writ of attachment. It attached a declaration from Michael Hjort, a fraud investigator, who explained he had spent more than 250 hours in an 11-month investigation of Professional. Hjort prepared a 39-page spreadsheet for each claimant and listed the status of the claim file and the adjudication (if any) of American sought an ex parte TRO to freeze Professional's assets and to appoint a receiver. The supporting documents questioned Professional's solvency and its ability to continue its operations. By declaration American showed that Professional operated no medical facilities and was currently billing and collecting moneys through post office boxes; a person responding to a telephone call at Professional's listed telephone number said it was "out of business." On December 3, 1993, the superior court (Judge Stock) issued a TRO freezing Professional's assets and setting a contested hearing.
On December 6, 1993, American filed a petition with the WCAB seeking restitution of the same $519,369.
Professional challenged Judge Stock (Code Civ. Proc., § 170.6); the matter was reassigned to Judge Polis. Professional also responded to the TRO, asserting, in an appendix, the WCAB had exclusive jurisdiction.
The next day the court dissolved the TRO and declined to issue a writ of attachment or preliminary injunction. The judge construed Professional's response "as a demurrer requesting [ ] abatement" and set the matter for hearing "[s]o that plaintiffs ought to be given the opportunity to meet the argument on exclusivity of the workers' compensation process."
No receiver had been appointed.
On January 3, 1994, Professional filed an "alternative" demurrer to American's first amended complaint based upon lack of particularity to support causes of action for intentional and negligent misrepresentation. The court dismissed the complaint on jurisdictional grounds; no action was taken on this pleading.
On its own, the court amended Professional's response to request sanctions (Code Civ. Proc., § 128.5). Neither the court's minute order nor the notice of ruling specified a ground for sanctions. The court's statements at the December 14 hearing indicated the court's displeasure with "a plaintiff contesting this matter in two forums. That makes this one look like this one was in bad faith...."
Professional did not file its own motion for section 128.5 sanctions. It filed points and authorities, however, supporting the court's motion on January 26, 1994, two days before the scheduled January 28 hearing, with proposed findings of fact. Professional sought sanctions for its employees' time and attorney fees in opposing the TRO ($38,184), its attorney fees in prosecuting the sanctions motion ($9,170), and its attorney fees for demurring to the first amended complaint ($14,720), for a total of $62,074.
On February 25, 1994, the court sustained the demurrer without leave to amend on the ground the WCAB had exclusive jurisdiction. The court conceded American had argued "with some degree of persuasion" that "there's dual jurisdiction over these kinds of matters...." The court, however, predicted the appellate courts would likely find exclusivity.
The court ordered sanctions on the ground American had "previously elected to present same issue to [the] WCAB by filing same claims with same dollar figure before that body previous to initiating this complaint." The court erroneously stated American had not filed any opposition. It ruled: "Court finds bringing of this complaint alleging the same factual basis and the same dollar amount as previously presented to the WCAB and pretrial extraordinary relief sought was totally groundless and frivolous and in bad faith ... for which defendants are entitled to recover all of their costs and expenses in the sum of $62,074 as set forth in their unopposed motion and declaration papers." (Italics added.)
The court declined to hear oral argument on the issue of sanctions even though American's counsel pointed out that opposition had been filed. It stated, "I'm not inviting oral American noticed an appeal from the judgment of dismissal and the sanctions order. Professional contends that American's appeal from the sanctions order is frivolous and seeks over $68,000 for costs and attorney fees, an outrageous figure on its face.
American fax-served its opposition to defense counsel the night before the hearing. American apparently took literally the court's direction to personally serve the opposition upon defense counsel at the January 28 hearing--a hearing that never was held. Regardless of the technical merits of such an argument (a matter which we do not decide), we do not countenance this departure from ordinary norms of professional courtesy.
III
American labors under three fundamental misconceptions about the relationship between tort law and the workers' compensation system.
First, American reasons that only employers and employees are direct beneficiaries of the so-called "compensation bargain," where employees trade open-ended tort compensation for swifter and more certain recovery for workplace injuries without proof of fault. (Shoemaker v. Myers (1990) 52 Cal.3d 1, 16, 276 Cal.Rptr. 303, 801 P.2d 1054.) Because this bargain neither benefits nor burdens third parties like medical care providers, American argues that the workers' compensation bar does not affect its lawsuit against Professional.
The Supreme Court's decision in Marsh & McLennan v. Superior Court (1989) 49 Cal.3d 1, 259 Cal.Rptr. 733, 774 P.2d 762 directly contradicts American's contention. The Supreme Court held that the workers' compensation system extends to "all disputes over coverage and payment...." (Id. at p. 8, 259 Cal.Rptr. 733, 774 P.2d 762, italics added.)
In Marsh the Supreme Court issued a peremptory writ to compel the dismissal of a widow's tort cause of action against the claims administrator of a self-insured employer based upon the latter's alleged fraud in refusing to pay compensation benefits. The court refused to permit the widow to circumvent the WCAB's jurisdiction by suing a third-party administrator, rather than the employer or the carrier. It stated, "The exclusive remedy doctrine stems also ... from sections 5300 and 5814, which refer to the 'recovery of compensation' and the 'payment of compensation.' [Citation.] These latter terms imply that the workers' compensation system encompasses all disputes over coverage and payment, whether they result from actions taken by the employer, by the employer's insurance carrier or, as occurred in this case, by an independent claims administrator hired by the employer to handle the worker's claim." (Ibid., italics added.)
A panel of this court followed Marsh in Mitchell v. Scott Wetzel Services, Inc. (1991) 227 Cal.App.3d 1474, 278 Cal.Rptr. 474, affirming a judgment of dismissal on demurrer in a worker's fraud lawsuit against an insurance adjuster who allegedly lied while testifying before a workers' compensation judge. We noted that Labor Code section 5300 vested exclusive jurisdiction with the WCAB " '[f]or the recovery of compensation, or concerning any right or liability arising out of or incidental thereto.' " (Id. at 1480, 278 Cal.Rptr. 474, italics in original.)
American's reply brief glosses over Mitchell based upon the opinion's self-declared "reluctance" to rely upon the WCAB's exclusive jurisdiction. (Mitchell, supra, 227 Cal.App.3d at p. 1482, 278 Cal.Rptr. 474.) While we may have been a reluctant bridegroom in Mitchell, we went to the altar nonetheless. (See Auto Equity Sales Inc. v. Superior Court (1962) 57 Cal.2d 450, 455, 20 Cal.Rptr. 321, 369 P.2d 937.)
The workers' compensation bar specifically applies to claims by medical clinics to recover expenses for medical treatment to injured workers. In Hand Rehabilitation Center v. Workers' Comp. Appeals Bd. (1995) 34 Cal.App.4th 1204, 1212, 40 Cal.Rptr.2d 734, the WCAB was called upon to decide such complex issues as whether the medical expenses related to an employee's industrial injuries, whether they were performed by licensed personnel and whether the medical fees were unauthorized or excessive. Similarly, in American Psychometric Consultants, Inc. v. Workers' Comp. Appeals Bd. (1995) 36 Cal.App.4th 1626, 1639, 43 Cal.Rptr.2d 254, the Court of Appeal stated, "[T]he circumstances under which [a claim for medical-legal costs] is properly incurred and must be paid by employers/carriers is wholly within the purview of the Legislature and such delegation of administrative authority as it deems proper."
Second, American misconstrues the workers' compensation system as only extending to disputes about "reasonable" compensation, not to disputes alleging "pervasive insurance fraud." According to American, such practices, which carry potential criminal as well as civil liability, fall outside a "proper" employee-employer relationship and are akin to the insurer's romantic deception of the claimant in Unruh v. Truck Ins. Exchange (1972) 7 Cal.3d 616, 102 Cal.Rptr. 815, 498 P.2d 1063 and the employer's acts in Fermino v. Fedco, Inc. (1994) 7 Cal.4th 701, 30 Cal.Rptr.2d 18, 872 P.2d 559 in forcibly and criminally imprisoning an employee.
The same arguments were made and rejected by the Supreme Court in Marsh and by this court in Mitchell. In Mitchell, for example, we concluded that the complaint alleged "reprehensible" conduct that fell outside the proper role of an insurance adjuster or administrator. Despite these serious allegations, we held that the claims were cognizable within workers' compensation, not elsewhere. We stated, "The same analysis applies to the allegations of perjury before the WCAB. The alleged perjury occurred in the course of a WCAB enforcement proceeding, and was motivated by [the adjuster's] desire to deprive the WCAB of information relevant to possible penalties. It is hard to imagine any matter bearing more directly on enforcement of payments." (Mitchell v. Scott Wetzel Services, Inc., supra, 227 Cal.App.3d at p. 1481, 278 Cal.Rptr. 474.)
American erroneously believes "[t]here are no cases that suggest that uncovering and punishing insurance fraud (as distinguished from determining the reasonable value for legitimate medical services and ensuring compliance with the Workers' Compensation Act generally) is within the province of the WCAB." In settling some of the disputed claims, American stipulated that the WCAB would retain exclusive jurisdiction over any future disputes about Professional's medical-legal or self-procured charges.
The record shows that American reached a settlement for the clinics' medical liens in one such claim (involving injuries to Fred Klammer), where it agreed to pay the clinics for all medical-legal and self-procured liens in accordance with the "reasonableness" provisions of Labor Code section 4626, subject to the WCAB having exclusive jurisdiction over any future disputes: "It is the intention of the parties that in the event of a dispute of medical-legal or self-procured charges that jurisdiction shall remain exclusively with the WCAB, with the applicant held harmless therefrom."
Third, American mistakenly believes that it can simultaneously prosecute its reimbursement claims in tort and through the workers' compensation system so long as one award is offset against the other. Rather than setting up systems of concurrent jurisdiction, where the same issues are simultaneously prosecuted in both workers' compensation and in tort, the Legislature has expressed a strong preference for exclusive jurisdiction within the workers' compensation system. (La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co. (1994) 9 Cal.4th 27, 35, 36 Cal.Rptr.2d 100, 884 P.2d 1048.) It is as unseemly for litigants to simultaneously pursue the same relief before two tribunals as it is for voters to simultaneously cast their ballots in two separate precincts. The doctrine of election of remedies does not stretch this far.
American protests that its workers' compensation remedies are toothless since they will exempt Professional from the bite of punitive damages and other tort remedies. It argues doctors and clinics may "bilk" insurance carriers with impunity by intentionally submitting false claims.
American does not appreciate the deterrent effect of criminal and civil penalties currently available. Penal Code section 550 makes it a crime to submit false workers' compensation claims. Labor Code section 3820, subdivision (d) imposes civil penalties of
Moreover, American ignores the dangers to the stability of the workers' compensation system that would be created by allowing tort lawsuits to reopen or second-guess arcane regulatory determinations about permissible medical-legal evaluations. Citing concerns for "transactional stability," the Court of Appeal in American Psychometric refused to allow the WCAB to conduct an open-ended equitable inquiry into previously-paid medical-legal claims, particularly where the carrier had paid the bills without protest and after negotiating reductions in them. The court stated, "no one can operate a business on receipts only conditionally possessed, and medical providers are no exception." (American Psychometric Consultants, Inc. v. Workers' Comp. Appeals Bd., supra, 36 Cal.App.4th at p. 1647, 43 Cal.Rptr.2d 254.)
Ultimately, the adequacy of the statutory schemes to prevent and deter fraud is for the Legislature. Litigants have been left to their remedies in workers' compensation, even though it may result in the loss of some elements of tort damages. Our Supreme Court has noted, " '[A] failure of [workers' compensation law] to include some element of damage recoverable at common law is a legislative and not a judicial, problem. [Citations.]' " (Livitsanos v. Superior Court (1992) 2 Cal.4th 744, 755, 7 Cal.Rptr.2d 808, 828 P.2d 1195, italics omitted.)
The Legislature has devised some strong medicine to attack workers' compensation fraud. We are unwilling to denounce the cure while the treatment is still being administered.
IV
Code of Civil Procedure section 128.5 provides for the award of sanctions for "bad-faith actions or tactics that are frivolous or solely intended to cause unnecessary delay." "Frivolous" is defined as either "totally and completely without merit" or "for the sole purpose of harassing an opposing party." (§ 128.5, subd. (b)(2).)
American's tort complaint against Professional does not meet these statutory criteria for sanctions. It was not objectively frivolous. To the contrary, American's complaint presented a matter of first impression of arguable merit. Sanctions are not appropriate where there is a lack of uniformity in the governing case law and where there is insufficient evidence to prove that the arguably meritorious action was taken for improper purposes. (Betz v. Pankow (1993) 16 Cal.App.4th 931, 942, 20 Cal.Rptr.2d 841 [sanctions reversed]; Optical Surplus, Inc. v. Superior Court (1991) 228 Cal.App.3d 776, 785, 279 Cal.Rptr. 194 [same].)
The Legislature has not clearly expressed its intent about which intentional torts are preempted by workers' compensation. As the Supreme Court observed, "[t]his lack of legislative clarity" has been compounded by the case law, which holds that "civil actions based on at least some such conduct were not barred by the exclusivity rule." (Fermino v. Fedco, Inc., supra, 7 Cal.4th at p. 710, 30 Cal.Rptr.2d 18, 872 P.2d 559.) The trial court acknowledged the possibility that American's counsel "may actually be right that there is dual jurisdiction over these kinds of matters, one with the WCAB and one with civil courts." The court stated, "[T]his is a particular kind of case, and there are fraud allegations, and it may be that when you deal with fraud, you can get out of the workers' comp." The court implied that the parties were free to stipulate to the superior court's jurisdiction, asserting "[t]hat's perfectly okay with me." American correctly points out that such statements are inconsistent with the trial court's ultimate order sanctioning it for having proceeded in a forum where the court lacked jurisdiction.
One need only look to the Supreme Court's recent grant of review to resolve a conflict within the Second District on the issue of whether workers' compensation preempts a worker's discrimination claim arising out of a work-related injury. (Cammack v. GTE California, Inc., S056183, review granted November 26, 1996; City of Moorpark v. Superior Court, S057121, review granted November 26, 1996.) Sanctions have no place in a thicket if they serve to deter the trailblazers.
The trial court's order recites a myriad of other reasons why sanctions should be imposed, largely stemming from what American did and did not say in its ex parte application for a TRO before Judge Stock. Sanctions appropriately issue against attorneys who improperly seek a TRO on an ex parte basis without making an adequate showing of irreparable injury. (Brewster v. Southern Pacific Transportation Co. (1991) 235 Cal.App.3d 701, 1 Cal.Rptr.2d 89.)
There is much in the conduct of American's trial attorneys that is disquieting. Their decision to seek emergency relief on an ex parte basis is extremely troublesome, based as it was on weak facts and shaky law. We recoil from their venom and vituperation. We are shocked at their failure to serve documents they filed with the court. We are surprised at their passivity in not responding to court documents filed and served by their adversaries.
The Kattan firm and attorneys Stern, Kincaid and Kaplan did not represent American at the trial court level and did not engage in any of the conduct for which sanctions were issued.
But it is equally important that before attorneys are sanctioned for such misconduct, they have a full and fair opportunity to be confronted with the charges and to explain their actions. Due process mandates that "[l]awyers should be given an opportunity to explain their conduct before sanctions are ordered." (Eby v. Chaskin (1996) 47 Cal.App.4th 1045, 1049, 55 Cal.Rptr.2d 517 [sanctions order reversed].)
In Childs v. PaineWebber Incorporated (1994) 29 Cal.App.4th 982, 995, 35 Cal.Rptr.2d 93, the Court of Appeal, in reversing a sanctions award, said, "Constitutional due process principles are offended by summary imposition of sanctions by a superior court. [Citation.] Adequacy of notice is not dependent upon an arbitrary number of days notice but should be determined on a case-by-case basis to satisfy basic due process requirements."
The record establishes that American was denied adequate notice and opportunity to be heard before the trial court imposed sanctions for post-complaint misconduct. On December 14, 1993, the trial court, acting sua sponte, orally put American on notice of its intent to award sanctions, expressing displeasure with American for having invoked the concurrent jurisdiction of both the superior court and the workers' compensation system. The trial court gave American 30 days to file a response to the sanctions issue, and American filed points and authorities on the jurisdictional issue. At the time American had no reason to file a response on any other basis for sanctions.
Professional argues that American subsequently was put on notice about additional sanctionable grounds when Professional filed a local rule 504 statement and proposed findings of fact that raised other areas of alleged misconduct. The detailed findings of fact were filed in late January, two days before the scheduled hearing.
We disagree these documents put American on adequate notice. Professional was never directed to prepare a statement of particulars to which American would respond. Instead, the December 14 order contemplated the very opposite. American was ordered to file the first set of papers (which the trial court called a "reply"), to be followed Rather than using the findings of fact as a back-door mechanism to raise these additional grounds, Professional should have filed its own noticed motion for sanctions in addition to the trial court's motion. This is precisely what Professional did in filing a separate demurrer to the complaint on the grounds of lack of particularity in pleading fraud.
Professional seizes upon the fortuitous one-month postponement of the January hearing as giving American an adequate notice and an opportunity to respond. But while the trial court continued the hearing, it did not reopen the briefing. Although we question American's wisdom in leaving this new matter unanswered, we do not believe it was compelled to do so on pain of conceding the merits.
We analogize to reply briefs. Regrettably, litigants occasionally use reply briefs as a "gamesplaying" maneuver to raise new issues that are not raised in their appellants' opening brief. This is improper. (2 Eisenberg, Horvitz & Wiener, Cal. Practice Guide: Civil Appeals & Writs (The Rutter Group 1996 rev.) Appellate Briefs, p 9:78, p. 9-20.) But respondents are not compelled to file a supplemental brief to respond to these new issues. Instead, they must obtain permission to do so. (Cal.Rules of Court, rule 14, subd. (a).)
The trial court also denied American's due process rights by refusing to permit American's counsel to present oral argument at the hearing on the sanctions, even after the trial court was made aware of its error in believing American had not filed opposition. Despite this, the trial court still declined to permit American to argue the motion, indicating its written order imposing sanctions already had been signed.
In Lesser v. Huntington Harbor Corp. (1986) 173 Cal.App.3d 922, 219 Cal.Rptr. 562, the Court of Appeal reversed a section 128.5 sanction award against a plaintiff's attorney who was found to have frivolously prosecuted a lawsuit. The attorney did not have an adequate opportunity to be heard because the judge's comments in imposing sanctions indicated that he had predetermined the issue before the hearing. Without reaching the issue of the propriety of the sanctions, the Court of Appeal held that the trial court had failed to "maintain objectivity while conducting the hearing." (Id. at pp. 934-935, 219 Cal.Rptr. 562.)
The trial court's actions appear to present a classic case of "judgment first, trial later." The judgment of dismissal on demurrer is affirmed. The order granting sanctions is reversed, and the motion for sanctions on appeal is denied. Plaintiff shall have its costs on appeal.
WALLIN and RYLAARSDAM, JJ., concur.