Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_02-cv-03894/USCOURTS-cand-3_02-cv-03894-24/pdf.json

Nature of Suit Code: 365
Nature of Suit: Personal Injury - Product Liability
Cause of Action: 28:1332 Diversity-Personal Injury

---

United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

CHARTER OAK FIRE INSURANCE

COMPANY, et al.,

Plaintiffs,

 v.

 SODEXHO MARRIOTT, et al.,

Defendant. /

No. C 02-03894 CRB

ORDER

Charter Oak Fire Insurance Company (“Charter Oak”) has paid $444,588.92 to Karen

Whyman (“Whyman”) in satisfaction of a claim for workers’ compensation. The question

now pending before this Court is whether, for what purpose, and to what extent, this payment

may be adduced by Charter Oak as evidence in support of its lawsuit against Sodexho

Marriott (“Sodexho”), a third party that allegedly caused Whyman’s injuries.

BACKGROUND

Karen Whyman claims that she was electrocuted by a toaster. Because this accident

occurred at a café in an office building where she works, Whyman has obtained $444,588.92

under a workers’ compensation policy issued by Charter Oak. In addition, Whyman initiated

this lawsuit against two parties whose conduct may have led to her electrocution. These two

alleged tortfeasors are: Hamilton Beach, the manufacturer of the toaster, and Sodexho, the

Case 3:02-cv-03894-CRB Document 237 Filed 03/13/07 Page 1 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

company that runs the café where the accident took place. A third potential tortfeasor--

Hewlett Packard, which owns the office building where Whyman works--was not named as a

defendant in the case.

Charter Oak also brought a claim against these two alleged tortfeasors. The basis for

the insurer’s claim was Section 3852 of the California Labor Code. This statute provides that

an insurer who becomes obligated to pay a claim for workers’ compensation due to the

negligent conduct of a third party may bring suit against that third party for reimbursement.

Whyman and Charter Oak then settled their respective claims against the toaster

manufacturer, Hamilton Beach. Under the terms of a settlement agreement, Hamilton Beach

agreed to pay $500,000, of which $400,000 was paid to Whyman and $100,000 was paid to

Charter Oak. Next, Whyman individually settled her claims against Sodexho, the café

operator. Charter Oak was not covered by that settlement agreement. See Cal. Labor Code

§§ 3859(b), 3860. As a result, the only claim remaining in this action is Charter Oak’s

subrogation claim against Sodexho.

In two pre-trial motions, Charter Oak and Sodexho each raised questions about the

evidentiary value and legal effect of the $444,588.92 payment made by Charter Oak to

Whyman pursuant to her workers’ compensation claim. On the one hand, Charter Oak filed

a motion in limine arguing that the Court should allow it to introduce evidence of the

payments it made to Whyman. Charter Oak claims that such evidence is necessary to prove

the amount of its “damages” and thereby to establish the extent of Sodexho’s liability. On

the other hand, Sodexho has filed a motion in limine to exclude all evidence of workers’

compensation payments. Sodexho claims that, because such payments are based a workers’

compensation policy and California labor law, they are not relevant to the central issues of

this action--namely, whether Sodexho’s negligence caused injury to Whyman, and what

injuries she may have suffered as a result of that negligence.

DISCUSSION

California law sets forth a statutory remedial scheme for employees who are injured

on the job. In general, “when a worker is entitled to workers’ compensation benefits for an

Case 3:02-cv-03894-CRB Document 237 Filed 03/13/07 Page 2 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

injury, those benefits constitute the worker’s exclusive remedy against his or her employer

for injuries sustained in the course of employment.” Phelps v. Stostad, 16 Cal. 4th 23, 30

(1997) (citing Cal. Labor Code § 3602(a)). An injured worker, however, is not limited to

bringing claims against an employer. To the contrary, the worker also may bring suit against

any third party who may be responsible for the worker’s injuries. Id. (citing Cal. Labor Code

§ 3852). “Likewise, an employer who pays or becomes obligated to pay workers’

compensation benefits to an injured employee may seek reimbursement from the third party.” 

Id. (citing Cal. Labor Code § 3852). An “employer,” which under California law is defined

to include an “insurer” such as Charter Oak, see Cal. Labor Code § 3850(b), may seek

reimbursement in one of three ways--either by pursuing a claim against the third party on its

own, see id. §§ 3852, 3856(a); by pursuing a claim in conjunction with a lawsuit by the

employee, see id. §§ 3853, 3856(c); or by asserting a lien against any recovery obtained by

the employee in a separate action, see id. § 3856(b). See generally Employers Mut. Liab.

Ins. Co v. Tutor-Saliba Corp., 17 Cal.4th 632 (1998); County of San Diego v. Sanfax Corp.,

19 Cal.3d 862 (1977); Quinn v. State of California, 15 Cal.3d 162 (1975).

The question now presented in this case--which formerly involved an employee but

now involves only an insurer’s subrogation claim--relates to the evidentiary value and legal

effect of Charter Oak’s payment to Whyman of $444,588.92 in workers’ compensation. This

question is directly addressed by the California Labor Code, which states:

If the action is prosecuted by the [insurer] alone, evidence of any amount

which the [insurer] has paid or become obligated to pay by reason of the

injury or death of the employee is admissible, and such expenditures or

liability shall be considered as proximately resulting from such injury or

death in addition to any other items of damage proximately resulting

therefrom.

Cal. Labor Code § 3854. Based on this statute, Charter Oak argues that its payment of

$444,588.92 is “the minimum damages suffered by the [insurer] once the tortfeasor’s

negligence has been established” and that Sodexho “is not entitled to challenge the amount of

the payments made.” Pl. Charter Oak and Fire Insurance Co.’s Opp. to Sodexho’s Mot. in

Limine No. 1, at 2-3. In the same vein, Charter Oak contends that Sodexho may only

challenge whether it acted negligently, and whether its negligence caused injury to Whyman. 

Case 3:02-cv-03894-CRB Document 237 Filed 03/13/07 Page 3 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

Charter Oak argues that the amount of its recovery is not subject to challenge, and that if it is

found to have been negligent and to have caused injury to Whyman, Sodexho must reimburse

Charter Oak for the full amount of the workers’ compensation payments it made. 

The California Supreme Court, however, has considered and explicitly rejected this

construction of the statute. In Breese v. Price, 29 Cal. 3d 923 (1981), the court stated:

[The insurer] argues that the proper interpretation of section 3854 is that

payments made pursuant to workers’ compensation proceedings are

conclusively established as “proximately resulting” from the tortfeasor’s

conduct and therefore automatically recoverable against the tortfeasor. (See

State Compensation Insurance Fund v. Williams (1974) 38 Cal.App.3d 218

[112 Cal.Rptr. 226]; Board of Administration v. Ames (1963) 215 Cal.App.2d

215 [29 Cal.Rptr. 917].)

Section 3854 does not compel the construction urged by [the insurer].

The statute identifies the evidence which is admissible in tort actions as being

of payments made “by reason of the injury or death of the employee” and

provides that “such expenditures . . . shall be considered as proximately

resulting from such injury . . . .” (Italics added.) In so describing the

admissible evidence, the statute, in our view, clearly contemplates

reimbursement for those payments only which were made “by reason of” the

injury. The statutory language does not suggest any abandonment of the

traditional concepts of “proximate cause” or “reasonableness” in defining the

damages recoverable by an employer within this context. It does not purport

to impose absolute liability on the third party tortfeasor for any expenses of the

employer without the traditional nexus between those expenses and the

tortfeasor’s conduct. Any contrary holding which denied defendant an

opportunity to be heard on the causation and reasonableness issues would

contain serious due process implications.

In our view, section 3854’s mandate that the employer’s expenditures

“shall be considered as proximately resulting from [the employee’s] injury”

reasonably can be read as a legislative direction (1) that the intervening act of

an employer’s payment to the employee of compensation shall not be

construed as breaking the chain of causation which is essential to a plaintiff’s

recovery under traditional negligence principles; and (2) that the employer is

entitled to full reimbursement provided defendant’s tort liability, in an amount

equal to or in excess of the employer’s expenditures, is otherwise established.

Id. at 928-29. The interpretation of the statute now advanced by Charter Oak is identical to

the one advanced by the insurer, and rejected by the California Supreme Court, in Breese v.

Price. To the extent that Charter Oak suggests that such an interpretation of the statute is

appropriate, it simply misreads Breese.

To be sure, there are strong arguments that may be advanced in support of Charter

Oak’s preferred interpretation of Section 3854. After all, questions about the admissibility

and legal effect of workers’ compensation payments in subsequent legal proceedings raise

Case 3:02-cv-03894-CRB Document 237 Filed 03/13/07 Page 4 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

thorny policy questions. On the one hand, Charter Oak rightly points out that its preferred

interpretation of the statute helps ensure that “the third party is liable for all the wrong his

tortfeasance brought about,” Smith v. County of Los Angeles, 276 Cal.App.2d 156, 162

(1969); promotes “a clear legislative policy militating in favor of reimbursement whenever

possible,” C.J.L. Constr., Inc. v. Universal Plumbing, 18 Cal.App.4th 376, 384 (1993); and

supports “a corresponding public policy to reduce the cost of compensation insurance by

allowing carriers to recoup payments” without the necessity of litigating those claims

repeatedly, Abdala v. Aziz, 3 Cal.App.4th 369, 376-377 (1992). 

On the other hand, a rule of automatic reimbursement raises the danger that an insurer

and an employee could arrange for collusive compensation payments, knowing that a thirdparty tortfeasor would eventually be required to foot the entire bill. The California Supreme

Court articulated precisely this concern in Breese, whose facts gave rise to at least the

inference of such collusion. See 29 Cal. 3d at 926, 931 (noting that the insurer in the case

had given “no explanation” for the disparity between the employee’s estimated medical

damages and the greater amount paid by the insurer, and observing that “a guarantee of

reimbursement . . . would, in our view, inevitably tend to lessen the incentive [of the insurer]

to dispute questionable claims”). As the court noted, it would be “manifestly unfair” and

would raise “serious due process [concerns]” if a rule of absolute reimbursement were

imposed on a third party that is not present when the extent of his liability is being

determined. Moreover, the Supreme Court observed that this dilemma is not limited to cases

such as Breese that involve apparent collusion. Because the moral hazard raised by a rule of

absolute reimbursement exists in every case, and not merely those where the facts suggest

intentional collusion--as the California Supreme Court said, the problem “is more one of

degree than of kind,” Breese, 29 Cal. 3d at 931--that court concluded that it was appropriate

to construe the statute in a manner that requires an insurer to be vigilant in guarding against

spurious claims.

The two sides of this policy debate are rehearsed at length in many California cases,

which demonstrate a conceptual struggle between some courts that characterize an insurer’s

Case 3:02-cv-03894-CRB Document 237 Filed 03/13/07 Page 5 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

claim against a third-party tortfeasor as rooted in principles of equitable subrogation, and

other cases that characterize the insurer’s claim more as a claim rooted in principles of

indemnity. See, e.g., Fremont Comp. Ins. Co. v. Sierra Pine, Ltd., 121 Cal. App. 4th 389,

397-400 (2004) (discussing various cases in which these two conceptions of an insurer’s or

employer’s claim have been in conflict, and suggesting that the Supreme Court’s decision in

Breese was rooted in a flawed understanding of the insurer’s claim). It is not for this Court,

however, to determine which side has the better argument in this policy debate. Nor is it the

task of this Court to determine which side offers an interpretation of Section 3854 that is

most consistent with the text and structure of the remedial scheme set forth by the California

legislature. The California Supreme Court has already squarely addressed that issue, at least

as it relates to the proper interpretation of Section 3854. See Breese v. Price, 29 Cal. 3d at

929 (stating that, insofar as the law permits a carrier to seek reimbursement from a thirdparty tortfeasor, California law “does not enlarge the tort remedy of a compensation carrier

beyond that of the injured employee”). Of course, the California Supreme Court’s

construction of Section 3854 is binding on this Court. See Vestar Dev. II, LLC v. Gen.

Dynamics Corp., 249 F.3d 958, 960 (9th Cir. 2001) (“When interpreting state law, federal

courts are bound by decisions of the state's highest court.”). 

Charter Oak has offered no persuasive authority, and this Court has identified none,

that undermines or calls into question the California Supreme Court’s decision in Breese. As

noted above, Charter Oak’s citation to Fremont is inapposite. That case aptly demonstrates

the conceptual tension between the narrow understanding of the insurer’s claim espoused in

Breese and the broader understanding of an insurer’s claim for subrogation set forth in many

other California decisions. But Fremont does not say anything about the narrow legal issue

presented here, i.e. the legal effect of its workers’ compensation payments on a subsequent

claim for subrogation. Charter Oak’s citation to Mendenhall v. Curtis, 102 Cal. App. 3d 786

(1980), is also unavailing. The Mendenhall case supports the two propositions for which it

was cited and approved by the California Supreme Court in Breese--namely, that the

insurance carrier must demonstrate the defendant acted negligently, and that such negligence

Case 3:02-cv-03894-CRB Document 237 Filed 03/13/07 Page 6 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

was the proximate cause of injury to the employee. As to the more narrow issue presented

here--whether the carrier’s payments under a compensation plan constitute conclusive

evidence of the employee’s injuries once causation is established--the Mendenhall decision is

at odds with the California Supreme Court’s subsequent ruling in Breese. Compare

Mendenhall, 102 Cal. App. 3d at 791 (holding that “the amount of workers’ compensation

benefits which the employer has paid or has been obligated to pay constitutes the minimum

damage suffered by the employer and that the third party is precluded from litigating the

reasonableness of that amount”), with Breese, 29 Cal. 3d at 930-31 (holding that “an

employer seeking reimbursement for compensation payments bears the burden of

establishing that a defendant’s negligence is the proximate cause of an employee’s injuries

and the amount of tort damages reasonably resulting therefrom,” and stating that “[n]o valid

public policy would be served” by “a guarantee of reimbursement”). Between these two

decisions, the California Supreme Court’s subsequent decision in Breese is controlling.

The only post-Breese authority provided by Charter Oak that actually supports its

position is a treatise on workers’ compensation. Unfortunately for Charter Oak, the treatise

is so incoherent on the issue presented here that its text directly supports the other side’s

position as well. Compare California Civil Practice Workers’ Compensation § 16:26

(“[Section 3854] means that the full amount paid by the compensation carrier is deemed to

have been reasonable.” (emphasis added)), with id. (“The employer must, however, still be

prepared at the time of the trial to prove the reasonableness and necessity of the workers’

compensation expenditures made to the injured employee.” (emphasis added)). This Court

concludes that the treatise’s second statement, rather than its first, is the accurate description

of California law.

Conversely, however, Sodexho has offered no authority for the proposition that

evidence of workers’ compensation payments must be excluded. To begin, the statutory text

clearly states otherwise. See Cal. Labor Code § 3854 (“[E]vidence of any amount which the

[insurer] has paid or become obligated to pay by reason of the injury or death of the

employee is admissible . . . .” (emphasis added)). Moreover, in Breese, the Supreme Court

Case 3:02-cv-03894-CRB Document 237 Filed 03/13/07 Page 7 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

G:\CRBALL\2002\3894\order2.wpd 8

noted that, in response to an insurer’s or employer’s claim for reimbursement of workers’

compensation payments, an alleged tortfeasor must have “the opportunity of presenting

evidence to the contrary.” 29 Cal. 3d at 931. This begs the question: to the contrary of

what? By implication, the California Supreme Court’s decision in Breese affirms that the

alleged tortfeasor must submit its evidence in opposition to the workers’ compensation

payments offered by the employer or insurer as evidence of the employee’s injury. Thus,

both Section 3854 and the Breese decision compel the conclusion that evidence of Charter

Oak’s payments are admissible, but not incontrovertible, proof of Whyman’s injuries.

The Court therefore holds that Charter Oak’s payment of Whyman’s workers’

compensation claim is admissible evidence to prove the extent of the damages caused by

Sodexho’s alleged negligence. The Court also holds that such payments are admissible to

establish the maximum amount recoverable by Charter Oak against third-party tortfeasors,

including Sodexho. The Court further holds, however, that such evidence does not

automatically establish the scope of Charter Oak’s recovery. Instead, the Court holds that

Charter Oak must “otherwise establish[]” the extent of the injuries that were caused by

Sodexho’s alleged negligence, Breese, 29 Cal. 3d at 929, and that Sodexho “must be

permitted the opportunity of presenting evidence” to challenge “the amount of tort damages

reasonably resulting therefrom,” id. at 931, including whether such damages were caused by

or should be paid by other potential tortfeasors. For these reasons, Sodexho’s motion in

limine to exclude evidence of Whyman’s workers’ compensation award is DENIED. For the

same reasons, Charter Oak’s motion in limine is GRANTED, insofar as it seeks to introduce

evidence of payments made to Whyman under its workers’ compensation policy, but

DENIED insofar as it seeks to introduce such evidence as conclusive proof of the amount of

Charter Oak’s recovery.

IT IS SO ORDERED.

Dated: March 13, 2007 

CHARLES R. BREYER

UNITED STATES DISTRICT JUDGE

Case 3:02-cv-03894-CRB Document 237 Filed 03/13/07 Page 8 of 8