Kreschollek v. Southern Stevedoring (3d Cir. 2000)

Filed July 28, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 99-5599

CARL KRESCHOLLEK,
Appellant

SOUTHERN STEVEDORING COMPANY; LUMBERMEN'S
MUTUAL CASUALTY COMPANY; ROBERT REICH,
Individually, and in his capacity as Secretary of Labor
and Industry of the United States of America;
DAVID LOTZ, Individually, and in his capacity as D irector
of the Office of Workers' Compensation

NATIONAL ASSOCIATION OF WATERFRONT EMPLOYERS
AND THE SHIPBUILDERS COUNCIL OF AMERICA,
Intervener-Plaintiff in D.C.

Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 93-cv-03903)
District Judge: Honorable Joseph H. Rodriguez

Argued: June 14, 2000

Before: BECKER, Chief Judge, ALDISERT, Circuit Judge
and O'KELLEY, District Judge.*

(Filed: July 28, 2000)

_________________________________________________________________
* Honorable William C. O'Kelley, United States District Judge for the
Northern District of Georgia, sitting by designation.

David M. Linker (argued)
Freedman & Lorry
400 Market Street
9th Floor
Philadelphia, PA 19106

Attorney for Appellants

Shannen W. Coffin (argued)
Mark F. Horning
Steptoe & Johnson
1330 Connecticut Avenue, N.W.
Washington, D.C. 20036

Attorneys for private Appellees
Southern Stevedoring and
Lumbermen's Mutual

Allen H. Feldman
Nathaniel I. Spiller
Gary K. Stearman (argued)
Andrew D. Auerbach
United States Department of Labor
Office of the Solicitor
200 Constitution Avenue, N.W.
Washington, D.C. 20210

Attorneys for Appellee
Secretary of Labor

Andrew D. Auerbach
United States Department of Labor
Office of the Solicitor
200 Constitution Avenue, N.W.
Washington, D.C. 20210

Attorney for Appellee
Director OWCP

OPINION OF THE COURT

ALDISERT, Circuit Judge.

The issue on appeal is whether the Longshoreman and
Harbor Workers' Compensation Act ("LHWCA"), 33 U.S.C.
SS 901-950 (2000), is unconstitutional on its face because
it allows employers and their insurance carriers to
terminate payment of workers' compensation benefits
without notice. Specifically, we must decide whether
Appellant Carl Kreschollek's employer, Southern
Stevedoring Co., and its insurance carrier, Lumbermen's
Mutual Casualty Co., violated his right to due process when
it terminated his workers' compensation payments without
notice.

The Court decided a similar issue relating to state
worker's compensation benefits in American Mfr. Mut. Ins.
Co. v. Sullivan, 526 U.S. 40 (1999). The Court teaches in
Sullivan, that (1) "an insurer's decision to withhold payment
and seek utilization review of the reasonableness and
necessity of particular medical treatment is not fairly
attributable to the State," id. at 58, and (2) employees do
not have a property interest in workers compensation
benefits when they have not demonstrated that they are
entitled to them and a state statute requires that they prove
"that an employer is liable for a work-related injury, and
. . . that the particular medical treatment at issue is
reasonable and necessary." Id. at 61. We must therefore
determine whether the teachings of Sullivan apply to
LHWCA procedures and the case at bar. We hold that they
do and will affirm the judgment of the district court
dismissing Kreschollek's claim.

The district court had federal question jurisdiction
pursuant to 28 U.S.C. S 1331. This court has appellate
jurisdiction over the final decision of the district court
pursuant to 28 U.S.C. S 1291. Kreschollekfiled a timely
notice of appeal under Rule 4(a), Federal Rules of Appellate
Procedure.

The district court treated a motion brought under Rule
12(b)(6), Federal Rules of Civil Procedure, as a one for

summary judgment because the court looked outside the
pleadings in making its decision. We review a grant of
summary judgment by applying the same criteria used by
the district court in the first instance. Olson v. General Elec.
Astrospace, 101 F.3d 947, 951 (3d Cir. 1996). We will
affirm the judgment if "there is no genuine issue as to any
material fact [and] the moving party is entitled to a
judgment as a matter of law." Rule 56(c), Federal Rules of
Civil Procedure; see Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 248 (1986).

Kreschollek contends on appeal that the LHWCA is
unconstitutional on its face because it allows private
companies to halt workers' compensation benefits at will,
when there has been no formal compensation award. The
statute provides:

Upon making the first payment, and upon
suspension of payment for any cause, the employer
shall immediately notify the deputy commissioner, in
accordance with a form prescribed by the Secretary,
that payment of compensation has begun or has been
suspended, as the case may be.

(d) Right to compensation controverted

If the employer controverts the right to compensation
he shall file with the deputy commissioner on or before
the fourteenth day after he has knowledge of the
alleged injury or death, a notice, in accordance with a
form prescribed by the Secretary, stating that the right
to compensation is controverted, the name of the
claimant, the name of the employer, the date of the
alleged injury or death, and the grounds upon which
the right to compensation is controverted.

33 U.S.C. S 914(c), (d).

The Court has made clear, however, that a facial attack
on a statute must also satisfy the same requirements as an
attack on a private individual's actions: (1) the
"constitutional deprivation [must be] caused by the exercise
of some right or privilege created by the State or by a rule

of conduct imposed by the State or by a person for whom
the state is responsible, and [2] the party charged with the
deprivation must be a person who may fairly be said to be
a state actor." Sullivan, 526 U.S. at 50 (internal quotations
and citations omitted).

Appellant Carl Kreschollek suffered a work-related injury
on March 20, 1990 while employed by Appellee Southern
Stevedoring Company. As a result of his injury he was
unable to work as a stevedore. His employer, Southern
Stevedoring, and its insurer, Appellee Lumbermen's Mutual
Casualty Company, voluntarily initiated disability
payments. Southern and Lumbermen's filed a Form LS-206
(payment of compensation with award) informing the
district director of the Office of Workers Compensation
Programs ("OWCP") that they voluntarily began making
payments to Kreschollek. See 33 U.S.C. S 914(a). On
October 29, 1992, Appellees stopped making the
compensation payments and, pursuant to 33 U.S.C.
S 914(c), (d), filed notice of their decision with the district
director. The director then sent Kreschollek a notice on
November 2, 1992 that Appellees terminated his benefits
because he was fit to return to work.

Kreschollek contested the termination of compensation
payments and, on November 24, 1992, he requested that
the district director hold an informal conference with the
parties pursuant to 20 C.F.R. S 702.261 ("Where the
claimant contests an action by the employer . . .
terminating benefits . . . he should immediately notify the
office of the district director . . . and set forth the facts
pertinent to his complaint."). The director conducted the
conference on December 16, 1992, but the parties were
unable to resolve their differences. On January 7, 1993,
Kreschollek filed a pre-hearing statement and a request for
the director to transfer the case for a formal hearing before
a Department of Labor Administrative Law Judge. The ALJ
held a hearing in December 1993, in which he agreed with
the employer and determined that the benefits termination
was proper. Kreschollek unsuccessfully petitioned the
Benefits Review Board for review of the ALJ's decision. We

denied the petition for review. See Kreschollek v. Southern
Stevedoring Co., 129 F.3d 1255 (3d Cir. 1997) (table cite).

On December 2, 1993, while his appeal was underway,
Kreschollek filed a complaint in the district court alleging
that Appellees violated his rights to due process and equal
protection when they suspended payment of compensation
benefits to him without first affording him notice or a
hearing. He also facially attacked the LHWCA, contending
that the provisions of the Act that permit private employers
and their insurers to suspend the voluntary payment of
compensation benefits violated his Fifth Amendment due
process rights. The district court granted the director's
motion to dismiss for lack of subject-matter jurisdiction to
consider a constitutional challenge to LHWCA procedures,
but on appeal we reversed the dismissal and held that the
district court possessed the necessary jurisdiction. See
Kreschollek v. Southern Stevedoring Co., 78 F.3d 868 (3d
Cir. 1996).

The director again renewed his motion to dismiss, but in
an opinion filed September 30, 1997, relying on Barksalary
v. Smith, 579 F. Supp. 218 (E.D. Pa. 1984), the district
court denied the motion. The court ruled that the private
Appellees were "state actors" as a result of their purported
"joint participation" with federal officials in the suspension
of benefits and that Kreschollek had a protected property
interest in the continuation of benefits.

All of these proceedings took place before March 1999,
when the Court handed down its decision in Sullivan,
which held there is no state action when an employer
terminates voluntary payment of benefits, 526 U.S. at 51,
and that an employee has no property interests in
unadjudicated benefits under a Pennsylvania workers'
compensation statute. 526 U.S. at 59-61. The district court
subsequently withdrew its decision and filed a new
judgment on June 26, 1999 in which it held that
withdrawal of benefits by the employer was not state action
and that Kreschollek did not have a property interest in the
continued receipt of benefits. Dist. Ct. Op. at 6. Kreschollek
now appeals.

II.

We believe that the Court's teachings in Sullivan control
this case. In that case the plaintiffs filed suit under 42
U.S.C. S 1983 against various Pennsylvania officials, a self-
insured public school district and a number of private
workers' compensation insurers, alleging that the
withholding of benefits without notice and an opportunity
to be heard deprived them of property in violation of due
process. Pennsylvania law permits insurers to delay paying
a medical bill under the workers' compensation act until a
review has been made of the claim to ensure that it is
medically necessary. The insurer is required tofile a form
with the state Workers' Compensation Bureau requesting a
utilization review of the procedure. The Bureau makes no
attempt to address the legitimacy of the request, but rather
simply ensures the form was filled out correctly before
forwarding the request to a randomly selected utilization
review organization.

The Court held that the respondent satisfied thefirst
requirement of showing a violation of due process because
"it may fairly be said that private insurers act with the
knowledge of and pursuant to the state statute . . .."
Sullivan, 526 U.S. at 50 (internal quotations omitted). The
Court explained, however, that the respondents failed to
establish the second requirement inasmuch as "the party
charged with the deprivation [was not] a person who may
fairly be said to be a state actor." Id. (internal quotations
and citations omitted). Because the decision to refuse
payment was made by the insurer alone without state
approval or standards, there was no state action. The Court
identified "the specific conduct of which the plaintiff
complains [as] a private insurer's decision to withhold
payment for disputed medical treatment." Id. at 51 (internal
citations and quotations omitted). The Court determined
that "[t]he decision to withhold payment . . . is made by
concededly private parties, and turns on judgments made
by private parties without standards established by the
State." Id. at 52 (internal quotations and citations omitted).
The Court described the process as one where the state
purposefully did not become involved in the dispute:

The State's decision to allow insurers to withhold
payments pending review can just as easily be seen as
state inaction, or more accurately, a legislative decision
not to intervene in a dispute between an insurer and
an employee over whether a particular treatment is
reasonable and necessary.

Id. at 53 (internal citations omitted).

The benefit suspension provision of the LHWCA is an
analogue to the Pennsylvania worker's compensation
statute. It provides that the insurer may suspend the
payment of benefits "for any cause" whatsoever. 33 U.S.C.
S 914(c). Moreover, the notice of benefits termination
afforded to a district director is not a "request" for anything;
it is purely an administrative function and is not even
reviewed for procedural correctness.1 The specific conduct
Appellant complains of is "a private insurer's decision to
withhold payment for disputed medical treatment." Id. at
51. The Act provides:

33 U.S.C. S 914(d).
_________________________________________________________________

1. The Department of Labor substituted the designation "district director"
for the statutory term "deputy commissioner" in 1990.

Wherever the statute refers to Deputy Commissioner, these
regulations have substituted the term District Director. The
substitution is purely an administrative one, and in no way effects
the authority of or the powers granted and responsibilities imposed
by the statute on that position.

20 C.F.R. 702.105. We use the designation "district director."

In the Pennsylvania plan a form is filed with the Worker's
Compensation Bureau of the Department of Labor and
Industry. Upon filing the form, an insurer may withhold
payment to health care providers for the particular services
being challenged. The Bureau then notifies the parties that
utilization review has been requested and forwards the
request to a "utilization review organization" (URO). If the
URO finds in favor of the insurer, the employee then may
appeal to a worker's compensation judge for a de novo
review. See Sullivan, 526 U.S. at 46-47.

Under provisions of the LHWCA, upon receipt of notice
than an employer has disputed its liability under the Act or
that it has suspended payment, the district director must
attempt to resolve the parties' disagreement.2 The district
director typically holds an informal conference and
embodies any agreement reached through the conference in
an enforceable written memorandum. 20 C.F.R.
S 702.315(a). If the parties do not reach agreement at the
informal conference or if no conference is held, then the
district director will transfer the case to the Office of the
Chief Administrative Law Judge for a formal evidentiary
hearing. 33 U.S.C. S 919(c)-(d); 20 C.F.R.S 702.301, .316.
After conducting a hearing, the ALJ makes findings of fact
and conclusions of law and issues an enforceable
compensation order, which is filed with the district director.
33 U.S.C. S 919(c); 20 C.F.R. S 702.348-.349. The
government becomes active only after "concededly private
_________________________________________________________________

2. The Act provides:

The deputy commissioner (1) may upon his own initiative at any
time in a case in which payments are being made without an award,
and (2) shall in any case where right to compensation is
controverted, or where payments of compensation have been
stopped or suspended, upon receipt of notice from any person
entitled to compensation, or from the employer, that the right to
compensation is controverted, or that payments of compensation
have been stopped or suspended, make such investigations, cause
such medical examinations to be made, or hold such hearings, and
take such further action as he considers will properly protect the
rights of all parties.

33 U.S.C. S 914(h).

parties" choose to terminate payment of workers
compensation benefits. See Sullivan, 526 U.S. at 52.

Thus, the similarities are clear and apparent when we
examine the essential Pennsylvania and LHWCA procedures
prior to submission to a state worker's compensation judge
or a federal ALJ.

Additionally, provisions governing suspension of benefits
payments under the LHWCA and those under the
Pennsylvania statute are analogous. The Director OWCP
does not set standards for halting disability payments nor
approves their termination. The statute provides:
"Compensation under this chapter shall be paid
periodically, promptly, and directly to the person entitled
thereto, without an award, except where liability to pay
compensation is controverted by the employer." 33 U.S.C.
S 914(a). The director merely receives notice and attempts
to mediate disputes. There is no state action resulting from
"a private party's mere use of the State's dispute resolution
machinery, without the overt, significant assistance of state
officials." Sullivan, 526 U.S. at 54.

We therefore reject Appellant's contention that because
there is pervasive regulation of workers' compensation by
the LHWCA there is necessarily state action. "The mere fact
that a business is subject to state regulation does not by
itself convert its action into that of the State for purposes
of the Fourteenth Amendment." Jackson v. Metropolitan
Edison Co., 419 U.S. 345, 350 (1974). As in Sullivan, the
actions taken by Appellant's employers cannot be fairly
attributed to the federal government because there is no
federal government action involved in an insurer's
unilateral decision to terminate benefits. 526 U.S. at 51.
The government, therefore, did not deny Appellant's rights
secured by the due process clause.

* * * * *

In the view we take it is not necessary to reach other
issues presented by the parties. The judgment of the
district court will be affirmed.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit