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February 1, 1984

Richard BAKSALARY, William Jones, Morris Tucker, and Charles Samuel Individually and on behalf of all others similarly situated, Plaintiffs,
Paul J. SMITH, C. John Urling, Jr., William J. Sheppard, Grace M. Sloan, The State Workmen's Insurance Fund, Pennsylvania Manufacturers' Association Insurance Company, American Mutual Liability Insurance Company, The School District of Philadelphia, Bituminous Casualty Corporation, and all other insurance carriers and/or self-insured employers similarly situated, Defendants

The opinion of the court was delivered by: POLLAK


 Plaintiffs initiated this action in 1976, challenging the constitutionality of certain provisions of the Pennsylvania Workmen's Compensation Act, Pa.Stat.Ann. tit. 77, §§ 1-1031 (Purdon 1952 and Supp.1982). In particular, plaintiffs allege that the "automatic supersedeas" provision of section 413 of the Act, Pa.Stat.Ann. tit. 77, § 774 (Purdon Supp.1982), permits employers and insurers to terminate worker's compensation benefits without according due process of law to those whose benefits are terminated, in violation of the Fourteenth Amendment. The automatic supersedeas terminates benefits without notice to the person receiving benefits. It requires only an employer's or insurer's petition reciting that the benefit recipient has returned to work at the same or higher pay or a petition accompanied by a physician's affidavit averring that the recipient has recovered. Plaintiffs make their due process claim in an action under the Civil Rights Act of 1871, 42 U.S.C. § 1983 (Supp. V 1981).

 A decade ago a three-judge panel of this court heard a challenge to section 413's predecessor. In Silas v. Smith, 361 F. Supp. 1187 (E.D.Pa.1973), the court considered the case of an individual whose worker's compensation benefits were terminated by his employer's insurer under the automatic supersedeas provision then in effect. The court found no state action in this termination. The court further stated that even had it found state action, it would not have found a violation of the due process clause. The Silas court, however, faced these questions at a time when employers and employees could opt out of the Pennsylvania Workmen's Compensation Act. Further, the Silas court was not called on to consider the problem of the automatic supersedeas' application to public employees or to employees of employers insured by the State Workmen's Insurance Fund, an insurer administered by state officials. Therefore, as we explain more fully below, the ruling in Silas is not controlling with respect to the claims advanced in the lawsuit now before the court. Because the prior decision in Silas is not controlling here, it was proper that, after this action was commenced, Judge Fogel ordered that "a three-judge court be convened . . . in that, pursuant to 28 U.S.C. §§ 2281 and 2284, the complaint raises substantial constitutional issues and requests as relief the enjoining of the enforcement, operation and execution of a state statute." *fn1"

 On March 27, 1978, an order was entered permitting this case to proceed as a plaintiffs' and defendants' class action under Fed.R.Civ.P. 23(b)(2). The plaintiff class includes "all persons who have been or will be receiving benefits pursuant to the Pennsylvania Workmen's Compensation Act and who have had or will have such benefits terminated, suspended, reduced or otherwise deprived without advance notice and opportunity for a prior evidentiary hearing." The defendant class includes "all insurance companies, mutual associations and employment establishments authorized to insure the payment of Pennsylvania Workmen's Compensation benefits who have acted, or will act, to terminate, suspend, reduce, or otherwise deprive benefits to previously eligible claimants without advance notice and opportunity for a prior evidentiary hearing . . . ."

 Discovery proceeded for five years. Then, after a series of conferences, the court ordered the parties to submit a set of stipulations during the summer of 1982. Plaintiffs presented their evidence by way of stipulations and affidavits in November. Defendants then moved for involuntary dismissal pursuant to Fed.R.Civ.P. 41(b). This court heard oral argument on April 7, 1983. At that time, we deferred decision on the 41(b) motion until defendants' evidence had been submitted. Defendants then put in their evidence by stipulations and affidavits. Because plaintiffs offered no rebuttal evidence, the entire case was before us for decision on the merits. This opinion constitutes our findings of fact and conclusions of law.


 This case involves a challenge to one of the methods by which an employer or insurer obligated to pay benefits under the Pennsylvania Workmen's Compensation Act can cease paying those benefits. Through a set of procedures not pertinent to this action, an individual covered by the Act and injured in the course of his employment can obtain the right to receive weekly benefits payments from his employer. The employer must insure against this obligation. Pa.Stat.Ann. tit. 77, § 501 (Purdon Supp.1982); Stipulations of Fact para. 16. This requirement may be satisfied in one of three ways: (1) the employer may retain a private insurance carrier licensed to provide worker's compensation insurance; (2) the employer may insure through the State Workmen's Insurance Fund, an insurance fund administered by the state; (3) the employer may self-insure. Id. When an employer purchases insurance, the insurer assumes all of the employer's liabilities under the Act and, in effect, stands in the employer's shoes with respect to the employees receiving worker's compensation. See Pa.Stat.Ann. tit. 77, §§ 501, 701 (Purdon Supp.1982); Cease v. Thomas, 155 Pa. Super. 215, 38 A.2d 547 (1944). Thus, in the ordinary case of an insured employer, the employer has little to do with a compensation matter once the insurer has begun to pay compensation benefits.

 Section 413 of the Act, the subject of this lawsuit, deals with the right to compensation between the time an employer or insurer petitions for termination or modification and the time the referee makes a final determination. Section 413, in pertinent part, provides:

The filing of a petition to terminate or modify a notice of compensation payable or a compensation agreement or award as provided in this section shall operate as a supersedeas, and shall suspend the payment of compensation fixed in the agreement or by the award, in whole or to such extent as the facts alleged in the petition would, if proved, require only when such petition alleges that the employe has returned to work at his prior or increased earnings or where the petition alleges that the employe has fully recovered and is accompanied by an affidavit of a physician on a form prescribed by the [Bureau of Worker's Compensation] to that effect which is based upon an examination made within fifteen days of the filing of the petition. In any other case, a petition to terminate or modify a compensation agreement or other payment arrangement or award as provided in this section shall not automatically operate as a supersedeas but may be designated as a request for a supersedeas, which may then be granted at the discretion of the referee hearing the case.

 Pa.Stat.Ann. tit. 77, § 774 (Purdon Supp.1982).

 Thus, in two sorts of cases an employee receiving benefits can have his benefits terminated pending disposition of his employer's or his employer's insurer's petition to terminate or modify those benefits. The first sort of case is one where the petition alleges that the employee has returned to work at the same or higher wages. The second sort of case is one where the petition alleges that the employee has fully recovered from his disability and the petition is accompanied by a doctor's affidavit averring recovery based upon an examination of the employee within the previous fifteen days.

 In either of the two automatic supersedeas situations, the filing of the petition suspends the employer's or insurer's obligation forthwith. Before the employer or insurer can successfully file the petition, however, clerical personnel of the Bureau promptly review the petition

to determine whether [it has] been properly completed and [complies] in form with the requirements of the [Act] and the Bureau's own rules and regulations. If any deficiency as to form is found, the Bureau rejects the petition and returns it, with notice of the nature of any defect, for correction by the party.

 Stipulations of Fact para. 51. This review is addressed to formal issues and involves no consideration of the merits of the petition. Stipulations of Fact para. 52.

 The filing employer or insurer need not serve the employee with a copy of the petition either before or after filing. Instead, the Bureau sends the employee notice of the petition, after filing, at the time (usually no more than five days after receipt of the petition) that the Bureau assigns the matter to a referee. Stipulations of Fact paras. 53, 54.

 The employee has no avenue to contest application of the automatic supersedeas other than his defense on the merits of the petition before the referee. Referees typically take one year or more to decide contested cases. Stipulations of Fact para. 63. Even if he ultimately has his benefits restored retroactively, an employee subject to an automatic supersedeas will find himself without worker's compensation benefits from the time that the Bureau of Worker's Compensation performs its clerical review of his employer's or insurer's petition until the time a referee decides the case. Plaintiffs contend that this constitutes a deprivation of that employee's property interest in his compensation benefits without according the employee due process of law.

 We have permitted this action to proceed as both a plaintiffs' and defendants' class action. The plaintiff class includes those as to whom the automatic supersedeas provision has been or may be invoked. The defendant class includes all those who have invoked or may invoke the automatic supersedeas. Delimination of these classes requires explanation of the Workmen's Compensation Act's coverage.

 The Act covers all "employees" of "employers." An "employee" is defined as any non-casual worker who performs service for another under the other's control. Pa.Stat.Ann. tit. 77, § 22 (Purdon Supp.1982). The Act excludes elected officers of the state or any of its political subdivisions, id., and domestic workers, Pa.Stat.Ann. tit. 77, § 676 (Purdon Supp.1982). "Employers" include "natural persons, partnerships, joint-stock companies, corporations for profit, corporations not for profit, municipal corporations, the Commonwealth, and all governmental agencies created by it." Pa.Stat.Ann. tit. 77, § 21 (Purdon 1952). The Act does not cover federal workers.

To the extent it applies, the [Act] covers all injuries or occupational diseases occurring in Pennsylvania, regardless of the place of hire. The Act also applies to injuries incurred outside of the Commonwealth where the employee is: (1) principally employed in Pennsylvania; (2) hired in Pennsylvania with employment not principally localized in any state; (3) hired in Pennsylvania with employment principally localized in another state which does not cover that injury in its own workers' compensation law; or (4) hired in Pennsylvania for employment outside the United States or Canada.

 Stipulations of Fact para. 5.

 Before 1974, employees and employers had the option of declining coverage under the Act. Employers and employees were presumed to accept application of the Act. They could, however, file a notice with the Bureau and avoid the Act's application to their employment relationship. Pa.Stat.Ann. tit. 77, §§ 461, 462 (Purdon 1952) (repealed and replaced with unrelated language 1974). The Pennsylvania Legislature has since made the statute mandatory. Act No. 263, § 5, 1974 Pa.Laws 782, 784, codified ...

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