R. E. Spriggs, Inc. v. Industrial Accident Commission , 42 Cal. 2d 785 ( 1954 )

EDMONDS, J.

The Industrial Accident Commission credited against an award of compensation only $1,400 of the amount received by Augustus Chiarello in settlement of his claim against an asserted third party tort feasor. His employer and its insurance carrier contend that they are entitled to the entire amount obtained by the settlement without deduction of attorney’s fees.

Chiarello was employed by R. E. Spriggs, Inc. He claimed to have sustained injuries while he was delivering merchandise to the Panorama Market. Without filing suit or notifying either his employer or its insurer, he made a settlement with Panorama for $2,100 and executed a full release of all claims against it.

In the proceeding before the commission, after allowing a credit of $2,100, on its own motion the commission reopened the matter for reconsideration. By the new decision, the commission credited against the compensation award only $1,400, “being the amount recovered by the applicant . . . after payment of attorney’s fee of $700.00, which sum is found to constitute a reasonable attorney’s fee for services rendered in effecting recovery for the benefit of the employer. ’ ’

As grounds for annulling the award, the employer asserts that there is no statutory authority for the commission to withhold from a credit against an award of compensation the attorney’s fees paid by an employee to effect a settlement. But even if that contention is incorrect, the argument continues, attorney’s fees should be allowed only when fixed by a court or by an agreement between the employee’s attorney and the employer or its insurer. Another contention is that in the present case there is no evidentiary support for a finding either that Chiarello paid out $700 for an attorney’s fee, or that such a fee is a reasonable one for the services rendered.

It is agreed by all of the parties that the decisive question in this proceeding is the effect of certain amendments to the Labor Code, made in 1949. (Stats. 1949, ch. 120, pp. 355-356.) Prior to the amendments, the provisions of that code were construed in Dodds v. Stellar, 30 Cal.2d 496 [183 P.2d 658], It was concluded that three remedies are available to an employer to recover, from a negligent third party, the expenses of compensation to which an injured employee is entitled. The employer may bring an independent suit against the third party (Lab. Code, § 3852) or he may consolidate his action with, or join with the employee in, an action against the third party (Lab. Code, § 3853). If he has pursued neither of these remedies, he may claim in the employee’s action a first lien in the amount of his expenditures for compensation ‘‘ against the entire amount of any judgment for damages recovered by the employee.” (Lab. Code, §3856.)

In the Dodds case, the employee sued the third party and joined the employer and its insurer as defendants. The employer sought as a lien against the judgment in that action an amount equal to its costs of compensating the employee. Upon appeal, the employee contended that the trial court should have deducted from the amount payable by the judgment to the employer in satisfaction of its lien, the attorney’s fees paid by the injured workman in prosecuting the action. This contention was rejected. It was pointed out that the statutory provisions relating to an employer’s right of reimbursement define the rights of the parties and completely cover the field.

Although, under the statutes then in effect, provision was made for reimbursing an employer for its attorney’s fees expended when prosecuting an action alone (Lab. Code, § 3854), there was no similar provision for compensating an employee when he sued in an action which benefited the employer. Both in cases where recovery was obtained as the result of a suit against the tort feasor (Lab. Code, § 3856) and where a settlement was effected (Lab. Code, § 3860) the “entire amount” of such judgment or settlement was subject to the employer’s full claim for reimbursement for his compensatiou expenditures and liability. Similar provisions were stated in section 3861, which deals with a proceeding before the commission instituted after a judgment or settlement has been obtained.

The 1949 amendments consist of changes to sections 3854, 3856, 3861, and the addition of section 3863. Only those amendments affecting sections 3856 and 3861 are pertinent to the present proceeding.^* The new legislation, with the amended portions in italics, reads:

Section 3861: “The commission is empowered to and shall allow, as a credit to the employer to be applied against his liability for compensation, such amount of any recovery by the employee for his injury, either by settlement or after judgment, as has not theretofore been applied to reimburse the employer, or has not been applied to the payment of an attorney’s fee to the employee’s attorney, pursuant to the provisions of section 3856 of this code.”

Section 3856: “The court shall first apply, out of the entire amount of any judgment for any damage recovered by the employee, a sufficient amount to reimburse the employer for the amount of his expenditures for compensation. If the employer has not joined in the action or has not brought action, or if his action has not been consolidated, the court, on his application shall allow, as a first lien against the entire amount of any judgment for any damages recovered by the employee, the amount of the employer’s expenditures for compensation; provided, however, that where the employer has failed to jom in said action and to be represented therein by his own attorney, or where the employer has not made arrangements with the employee’s attorney to represent him in said action, the court shall fix a reasonable attorney’s fee, which shall be fixed as a share of the amount actually received by the employer, to be paid to the employee’s attorney on account of the services rendered by him in effecting recovery for the benefit of the employer, which said fee shall be deckioted from any amounts due to the employer.”

As the employer points out, the purpose of these amendments was to correct the statutory inequity which allowed an employer reimbursement for attorney’s fees expended in the prosecution of an independent action although the full amount of a judgment in favor of an employee, under converse circumstances, might be allowed as a credit against compensation. But when the third party’s liability has been settled, either by the employee or the employer, there is no provision for reimbursement to either of them for his legal expenses. A deduction for that expense is allowed by section 3861 only “pursuant to the provisions of section 3856 of this code.” Section 3856 applies only to a situation in which a lien is sought against a judgment, where the employer “has failed to join in said action” or has not arranged with the employee’s attorney “to represent him in said action,” in which case “the court shall fix a reasonable attorney’s fee.” It is clear from these provisions that a judicial proceeding is contemplated.

On the other hand, section 3860, which deals with settlements before judgment or without suit, is unaffected by the statutory change. It continues to provide that “ [t]he entire amount of such settlement, or of any settlement without suit, is subject to the employer’s full claim for reimbursement for his compensation expenditures and liability.”

The commission construes the amendments discussed as repealing section 3860 by implication, and in its order accompanying its decision upon rehearing states that a lack of an express provision for that purpose “would appear to be due to a failure to correlate and to amend all the applicable sections.” The amendments show no legislative intention to alter the reimbursement provisions relating to settlements, and there is nothing in them to warrant a conclusion that a failure to amend the applicable sections was due to a legislative oversight.

Several policy arguments have been advanced. The commission insists that a construction of the amendments denying to it the power to fix a reasonable attorney’s fee for effecting a settlement and to deduct that amount from the employer’s credit against an award will tend to discourage settlements, a result which the law disfavors. The petitioners assert that such a construction will compel the employer and employee to work harmoniously in prosecuting the claim, whereas a contrary reading of the statute would invite the employee to effect an independent settlement contrary to the best interests of the employer.

There is a clear distinction between a suit to enforce the employee’s cause of action against a third party, and a settlement which is made by the employee. The employee or employer who commences an action “shall forthwith give to the other written notice of the action, and of the name of the court in which the action is brought. ...” (Lab. Code, § 3853.) In that manner, each of them is afforded an opportunity to exert some control over the prosecution of the action if he believes it to be desirable. The parties may make arrangements for the payment of attorney’s fees; if they do not do so, or if they refuse to cooperate in bringing the action, a reasonable attorney’s fee for each may be fixed by the court. (Lab. Code, § 3856.)

But the Legislature has not made provision for either notice to the other party when a settlement is contemplated or for the determination of the amount of an attorney’s fee when it is effected. The employee’s purpose is to recover an amount in addition to his compensation award; the employer is interested primarily in the recovery below that amount. When the chances of recovery are most favorable, the amount of the settlement obtained generally will be larger and the expense of an attorney’s fee less. Ordinarily the employee will have greater incentive to press for a favorable recovery. But when the claim is doubtful, the converse situation is presented. And there may be little incentive for the employee to press a claim whose proceeds would inure only to the benefit of the employer.

In short, to extend the provisions for recoupment of attorney’s fees beyond their application to a judicial action would be to do so without the safeguards applicable to them. The clear and literal construction of the new amendments does not support such an extension, and, as stated in Dodds v. Stellar, supra, “ [i]f there is to be any change in these statutory provisions defining the rights of the parties, the suggestion for such change should be addressed to the Legislature rather than to the courts.” (30 Cal.2d at 506.)

Other contentions are based upon the assumption that a deduction for attorney’s fees may be allowed from a settlement and require no discission.

That portion of the award which gives to California Compensation Insurance Company a credit of only $1,400 is annulled with directions to the commission to allow a credit of $2,100; in all other respects the award is affirmed.

Shenk, J., Traynor, J., Sehauer, J., Spence, J., and Bray, J. pro tern.,^* concurred.

* A clause was added to section 3854 to specify that the attorney’s fees allowed an employer who prosecutes an independent action shall be based “ solely upon the services rendered by the employer’s attorney in effecting recovery for the benefit of the employee.”

Section 3863 provides: "No provision of this chapter shall be deemed to impair the right of the employee and his attorney to contract as between themselves for attorney’s fees to be paid by the employee for prosecuting any action or claim against any person other than the employer.”

* Assigned by Chairman of Judicial Council.