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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Stone v. Fluid Air Components of Alaska (11/12/99) sp-5201

Stone v. Fluid Air Components of Alaska (11/12/99) sp-5201

     Notice:  This opinion is subject to correction before publication in
the Pacific Reporter.  Readers are requested to bring errors to the attention of
the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone
(907) 264-0608, fax (907) 264-0878.


DUNCAN STONE,                 )
                              )    Supreme Court No. S-8472
             Appellant,       )
                              )    Superior Court No.
     v.                       )    3AN-95-1770 CI
             Appellees.       )    [No. 5201 - November 12, 1999]

          Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Anchorage,
                     Milton M. Souter, Judge.

          Appearances: Steven D. Smith, Law Offices of
Steven D. Smith, P.C., Anchorage, for Appellant.  Donna M. Meyers,
Clay A. Young, Delaney, Wiles, Hayes, Gerety, Ellis & Young, Inc.,
Anchorage, for Appellees.  Randall J. Weddle, James E. Hutchins,
Holmes, Weddle & Barcott, Anchorage, for Amicus Curiae Alaska
National Insurance Company.

          Before:   Matthews, Chief Justice, Fabe,
Bryner, and Carpeneti, Justices. [Eastaugh, Justice, not

          MATTHEWS, Chief Justice.

          This workers' compensation case presents the question of
whether an employer's pro rata share of attorney's fees and costs
due on a recovery from a third party under Alaska Statute
23.30.015(g) should be based on the amount of the compensation
benefits already paid, or on such benefits plus those that would
have been paid in the future if there had been no recovery from a
third party.
          Duncan Stone was injured at work.  He received workers'
compensation payments from Fluid Air Components, his employer,
through Liberty Northwest, the employer's insurance carrier,
(collectively, "the employer") in the amount of approximately
$74,408.  He subsequently recovered a $600,000 judgment in a suit
against a third-party tortfeasor. [Fn. 1]  The employer filed a
petition for reimbursement of the payments already made to Stone. 
Stone filed an answer to the petition, contending that he owed the
employer no money, as the amount of its right to reimbursement was
exceeded by the employer's prorated share of the attorney's fees
and costs based on the total of past and future benefits.  The
employer conceded that its reimbursement should be reduced by a
prorated share of fees and costs, but contended that the
apportionment should be based on past compensation payments alone.
[Fn. 2] The Workers' Compensation Board, citing Cooper v. Argonaut
Ins. Co., [Fn. 3] held that "the proration of attorney fees [should
be] calculated on the employer's total potential liability,"rather
than past benefits actually paid.  The Board retained jurisdiction
to determine the appropriate amount of future liability.  
          In a later hearing, the Board determined, based on the
testimony of Stone, his doctor, and an economist, that Stone's
injury was permanent and would require lifelong medical treatment
costing an estimated $158,371 when reduced to present value.  This
sum represented the employer's "future compensation liability, for
the purpose of prorating litigation costs and expenses." As
attorney's fees and costs apportionable to the past and future
liability exceeded the employer's request for reimbursement, [Fn.
4] Stone owed nothing.  In addition, Stone was awarded attorney's
fees for defending the employer's reimbursement petition.
          The employer appealed to the superior court.  After
briefing and argument, the court reversed the Board, holding that
pro rata fees can only be based on past benefits paid rather than
past benefits and future liability.  The court therefore ordered
reimbursement to the employer of $46,892.  The court further
ordered that the attorney's fees paid by the employer for services
before the Board be repaid.
          The central issue in this case, whether the employer's
pro rata share of attorney's fees and costs should be based on
total potential compensation liability, is a question of statutory
interpretation that does not involve the Workers' Compensation
Board's special expertise.  We apply our independent judgment to
such questions. [Fn. 5]  As to the Board's factual findings
concerning the amount of the employer's total potential
compensation liability, this court will "determine whether there is
substantial evidence in light of the whole record that a reasonable
mind might accept as adequate to support [these findings]."[Fn. 6]
     A.   Is the Employer's Pro Rata Share of Attorney's Fees and
Costs in a Third-Party Tort Case Based Solely on Compensation
Benefits Paid, or on Total Benefits?

          Employees injured on the job are entitled to benefits
from their employers under the Workers' Compensation Act. [Fn. 7] 
These benefits are the exclusive remedy that employees have against
their employers. [Fn. 8]  But employees may sue third parties who
may be legally responsible for on-the-job injuries. [Fn. 9]  If
damages are recovered by an employee in a third-party suit after
compensation benefits have been paid by the employer, the employer
is entitled to reimbursement from the recovery for the benefits
paid, less the employer's prorated share of litigation costs and
attorney's fees. 
          In Cooper v. Argonaut, we interpreted AS 23.30.015(g) to
require this result. [Fn. 10]  This subsection provides in part: 
               If the employee or the employee's
representative recovers damages from the third person, the employee
or representative shall promptly pay to the employer the total
amounts paid by the employer under (e)(1)(A)-(C) of this section
insofar as the recovery is sufficient after deducting all
litigation costs and expenses.  Any excess recovery by the employee
or representative shall be credited against any amount payable by
the employer thereafter. 

We read the language "after deducting all litigation costs and
expenses"to require a pro rata sharing of costs and expenses
between employee and employer. [Fn. 11] 
          In Cooper the question was not presented as to whether
the employer's prorated "share of the recovery"[Fn. 12] against
which its fees would be calculated should include future as well as
past compensation payments.  The accident in Cooper was fatal, so
there were no future unpaid benefits. [Fn. 13]  But the reasons
underlying the Cooper holding support the conclusion that the
employer's prorated share includes all benefits, both past and
          The first reason given by the Cooper court was that
prorating fees and expenses to the employer made subsection (g) of
AS 23.30.015 "harmonious with provisions of the Act which permit
such a deduction by the employer when he brings suit."[Fn. 14] 
Under subsection (e) of AS 23.30.015, an employer who recovers from
a third party can deduct reasonable fees, the cost of benefits
actually paid, and the present value of benefits "to be furnished
later"before remitting any excess to the employee. [Fn. 15]  The
reasonableness of the fee depends in part on the "results
obtained."[Fn. 16]  As past and future benefits are treated
similarly under subsection (e)(1)(B) and (D), the "results
obtained"guideline for subsection (e) fees must refer to total
benefits rather than just to past compensation.  Construing pro
rata fees under subsection (g) to also refer to future benefits
thus makes it harmonious with subsection (e).  
          An additional reason relied on by the Cooper court was
the prevention of unjust enrichment: "If an employer or
compensation carrier is not required to pay its pro rata share to
recover this unanticipated return, the entire burden of the
litigation would be borne by the employee.  The carrier would take
the benefit of both the employer's premium and the employee's
litigation effort."[Fn. 17]  Unjust enrichment occurs whether the
benefits have already been paid or would have been paid in the
future. [Fn. 18]  The unjust enrichment rationale of Cooper
therefore also applies to future benefits.   
          Finally, among the other jurisdictions that prorate fees
between employees and employers in third-party tort recoveries, the
vast majority hold that the employer's pro rata share is calculated
on the total benefits to the employer. [Fn. 19]  Most courts in
these jurisdictions have concluded that since the employer's right
of reimbursement extends to future liability, the employer's
equitable share of the fees and costs involved in the employee's
third-party recovery should likewise be calculated on the
employer's total potential liability. [Fn. 20]
          The employer argues that Alaska's statutory scheme, in
contrast to the majority of jurisdictions, does not include the
right to future reimbursement on the part of the employer. 
However, AS 23.30.015(g) includes future benefits in the employer's
right to reimbursement in the form of a credit.  It provides that
the employee's recovery "shall be credited against any amount
payable by the employer thereafter." In other words, if the
employee recovers an amount in excess of the compensation paid, the
employee can keep it, subject to the employer's credit for future
benefits that would otherwise be paid.  It is as if the employer
were to pay a doctor's bill and be instantaneously reimbursed for
it.  If the "excess"is not sufficient to cover future benefits,
the employer will again be liable. 
          The employer also argues that future benefits to the
employer should be disregarded because they are too speculative to
determine fairly.  For example, if the actual costs of medical care
do not reach the level predicted by the Board, the employer's share
of the attorney's fees might be disproportionately large.  But
under AS 23.30.015(e)(1)(D) the Board has the authority to
determine the present value of future benefits in the context of an
employer's claim against a third party.  If the Board's decision is
supported by evidence that a reasonable person would accept, this
court will not disturb it. [Fn. 21]  Moreover, the problem of
computing future benefits is not conceptually different from
computing future damages in tort cases. [Fn. 22]  That most
jurisdictions require the determination of future benefits in cases
like the present one indicates that the uncertainties inherent in
the process are acceptable. [Fn. 23] 
          Thus, based on the rationale of Cooper, and because the
law of most other states is in accord, we conclude that the
employer's pro rata share of fees and costs should be based on both
past and future benefits to the employer.  In this case the
employee seeks only an offset against the employer's reimbursement
request.  The offset remedy readily fits the language of AS
23.30.015(g) which speaks of "deducting"litigation costs before
reimbursing the employer.  Although the unjust enrichment rationale
of Cooper might support an affirmative recovery from the employer,
and some case law in other jurisdictions supports an affirmative
recovery, [Fn. 24] we need not decide in this case whether such an
affirmative recovery is permissible since one is not requested.
     B.   Did the Evidence Support the Workers' Compensation
Board's Findings on the Amount of Future Compensation Liability?

          The employer contests the Board's determination of the
amount of future medical expenses.  The employer argues that the
future benefits were not properly reduced to present value because
Stone's expert witness first calculated future medical and
associated transportation expenses by assuming that they would be
affected by inflation before using the interest rate described in
the Board's regulations.  Regulation 8 AAC 45.162 defines the
interest rate to be used "[i]n computing the present value of all
future compensation and benefits under AS 23.30.015(e)"as "two
percent less than that set in AS 45.45.010,"or eight and a half
percent.  Stone's expert, Gallela, used this interest rate, but
only after calculating future costs by taking into account
projected inflation.  We find no error in this methodology. 
          In Wainwright v. Wainwright we observed that a party
should not be "denied . . . the benefit of inflation's impact"on
future earnings "while saddling her with the detriment of
inflation's effect on the discount rate."[Fn. 25]  Similarly, AS
09.17.040 (b)(2) -- applicable to common law tort claims --
recognizes that "future anticipated inflation"should be taken into
account before applying a market discount rate.  Gallela's method
did no more than recognize the point made by these authorities: 
since the discount rate is affected by anticipated future
inflation, future inflation also must be considered when
calculating future expenses. [Fn. 26]  
          For the reasons discussed above, we REVERSE the superior
court's decision and direct reinstatement of the decision of the
Workers' Compensation Board, including the Board's award of
attorney's fees.


Footnote 1:

     The total judgment was $750,000, of which $150,000 was
apportioned to Stone's wife and daughter.

Footnote 2:

     The $74,408 in past benefits paid by the employer was 12.4% of
Stone's gross recovery of $600,000.  Stone's attorney's fees and
costs were $221,907; 12.4% of this is $27,516.  This, when deducted
from $74,408, results in an amount of $46,892.  The employer claims
reimbursement for this amount and the parties agree that this
amount is correct if the employer's future liability is not
included in the pro rata calculations.

Footnote 3:

     556 P.2d 525 (Alaska 1976).

Footnote 4:

     The past benefits ($74,408) and future liability ($158,371)
total $232,779.  This sum represents 38.8% of Stone's gross
recovery, such that $86,092.15 is apportionable to the employer.

Footnote 5:

     See Forest v. Safeway Stores, Inc., 830 P.2d 778, 780 n.3
(Alaska 1992) (citing Kodiak Oilfield Haulers v. Adams, 777 P.2d
1145, 1148 (Alaska 1989)).

Footnote 6:

     Kodiak Oilfield Haulers v. Adams, 777 P.2d 1145, 1151 (Alaska
1989) (quoting Fairbanks North Star Borough v. Rogers & Babler, 747
P.2d 528, 533 (Alaska 1987)).

Footnote 7:

     See AS 23.30.005 et seq.

Footnote 8:

     See AS 23.30.055.

Footnote 9:

          AS 23.30.015 provides in relevant part:

                         (a) If on account of disability or death
                    for which compensation is payable under this
                    chapter the person entitled to the
                    compensation believes that a third person
                    other than the employer or a fellow employee
                    is liable for damages, the person need not
                    elect whether to receive compensation or to
                    recover damages from the third person.
                         (b) Acceptance of compensation under an
                    award in a compensation order filed by the
                    board operates as an assignment to the
                    employer of all rights of the person entitled
                    to compensation and the personal
                    representative of a deceased employee to
                    recover damages from the third person unless
                    the person or representative entitled to
                    compensation commences an action against the
                    third person within one year after an award.
                         . . . .
                         (e) An amount recovered by the employer
                    under an assignment, whether by action or
                    compromise, shall be distributed as follows:
                         (1) the employer shall retain an amount
                    equal to
                         (A) the expenses incurred by the employer
                    in respect to the action or compromise,
                    including a reasonable attorney fee determined
                    by the board;
                         (B) the cost of all benefits actually
                    furnished by the employer under this chapter;
                         (C) all amounts paid as compensation and
                    second-injury fund payments;
                         (D) the present value of all amounts
                    payable later as compensation (present value
                    to be computed from a schedule prepared by the
                    board), and the present value of the cost of
                    all benefits to be furnished later under AS
                    23.30.095 (as estimated by the board), the
                    amounts so computed and estimated to be
                    retained by the employer as a trust fund to
                    pay compensation and the cost of benefits as
                    they become due and to pay any finally
                    remaining excess sum to the person entitled to
                    compensation or to the representative; and
                         (2) the employer shall pay any excess to
                    the person entitled to compensation or to the
                    representative of that person.
                         . . . .
                         (g) If the employee or the employee's
                    representative recovers damages from the third
                    person, the employee or representative shall
                    promptly pay to the employer the total amounts
                    paid by the employer under (e)(1)(A)-(C) of
                    this section insofar as the recovery is
                    sufficient after deducting all litigation
                    costs and expenses.  Any excess recovery by
                    the employee or representative shall be
                    credited against any amount payable by the
                    employer thereafter.  If the employer is
                    allocated a percentage of fault under AS
                    09.17.080, the amount due the employer under
                    this subsection shall be reduced by an amount
                    equal to the employer's equitable share of
                    damages assessed under AS 09.17.080(c).
                    Footnote 10:
                         556 P.2d 525, 526 (Alaska 1976).
                    Footnote 11:
                    Footnote 12:
                    Footnote 13:
                         Id. at 525.
                    Footnote 14:
                         Id. at 526.
                    Footnote 15:
                         AS 23.30.015(e)(1)(A), (B) and (D).
                    Footnote 16:
                         Alaska R. Prof. Conduct 1.5(a)(4).
                    Footnote 17:
                         Cooper, 556 P.2d at 527.
                    Footnote 18:
                         See Restatement of Restitution sec. 1
                    (b) (1986) (stating that a person confers a
                    "benefit"on another "not only when he adds to
                    the property of another, but also where he
                    saves the other from expense or loss."); see
                    also Willingham v. Kral Music, Inc., 505 A.2d
                    34, 36 (Del. Super. 1985) (holding that 
                    "benefit"in workers' compensation case
                    includes the vested right to future
                    compensation from the employer's insurer
                    should the third-party payments fail).
                    Footnote 19:
                         The Minnesota Supreme Court has observed
                    that "[t]o hold otherwise would encourage
                    claimants to delay settlements until virtually
                    all workers' compensation benefits had been
                    paid." Cronen v. Wegdahl Coop. Elevator
                    Ass'n, 278 N.W.2d 102, 105 (Minn. 1979).
                    Footnote 20:
                         6 Arthur Larson and Lex K. Larson,
                    Larson's Workers' Compensation Law sec.
                    74.32(a)(4) (1998), at 14:578-79 and cases
                    cited therein. 
                    Footnote 21:
                         See Safeway, Inc. v. Mackey, 965 P.2d 22,
                    27 (Alaska 1998).
                    Footnote 22:
                         See, e.g., Power Constructors, Inc. v.
                    Taylor & Hintze, 960 P.2d 20, 43 (Alaska
                    Footnote 23:
                         Larson's, supra n.19, at 14:578-79.
                    Footnote 24:
                         See, e.g., Teller v. Major Sales, Inc.,
                    313 A.2d 205, 207 (N.J. 1974).
                    Footnote 25:
                         888 P.2d 762, 766 (Alaska 1995).
                    Footnote 26:
                         The employer also argues that the
                    evidence presented as to the amount of Stone's
                    future medical expenses was insufficient.  Its
                    argument in this regard is unpersuasive.  The
                    Board's findings were clearly supported by the
                    evidence, indeed by uncontradicted evidence.