HEALTH CARE ASS'N WORKERS COMP. FUND v. BUREAU OF WORKER'S …, Docket No. 246050.

• Decision Date: 29 March 2005
• Docket Number: Docket No. 246050.
• Citation: 694 N.W.2d 761,265 Mich. App. 236
• Parties: HEALTH CARE ASSOCIATION WORKERS COMPENSATION FUND, Plaintiff-Appellant, v. Director of the BUREAU OF WORKER'S COMPENSATION, Department of Consumer and Industry Services, Defendant-Appellee.
• Court: Court of Appeal of Michigan — District of US

694 N.W.2d 761

265 Mich. App. 236

HEALTH CARE ASSOCIATION WORKERS COMPENSATION FUND, Plaintiff-Appellant, v. Director of the BUREAU OF WORKER'S COMPENSATION, Department of Consumer and Industry Services, Defendant-Appellee.

Docket No. 246050.

Court of Appeals of Michigan.

Submitted November 10, 2004, at Lansing.

Decided February 15, 2005, at 9:05 a.m.

Released for Publication March 29, 2005.

Foster, Swift, Collins & Smith, P.C. (by Stephen O. Schultz), Lansing, for the plaintiff.

Michael A. Cox, Attorney General, Thomas L. Casey, Solicitor General, and Morrison Zack, Assistant Attorney General, for the defendant.

Before: DONOFRIO, P.J., and MARKEY and FORT HOOD, JJ.

DONOFRIO, P.J.

Plaintiff Health Care Association Workers Compensation Fund, a worker's compensation self-insurer group, brought this suit to challenge the constitutionality of a portion of MCL 500.2016.¹ Specifically, plaintiff challenges the constitutionality of the addition of language to MCL 500.2016(1)(a) and (3) precluding a worker's compensation self-insurer group from conditioning the payment of a dividend, i.e., a payout of money from surplus funds to an employer member, on continued participation in the group. The circuit court denied plaintiff's motion for summary disposition and entered judgment in favor of defendant. Plaintiff appeals as of right, and, although we do not conclude that the statute at issue is unconstitutional on its face or as applied, we do conclude that defendant's interpretation of the statute constitutes retroactive application. We affirm in part, reverse in part, and remand.

Substantive Facts and Procedure

Plaintiff is a self-insurer group that contracts annually with member employers to fund worker's compensation liability. Plaintiff sought in the circuit court to prohibit defendant, the director of the Bureau of Worker's Compensation in the former Department of Consumer and Industry Services (now the Worker's Compensation Agency in the Department of Labor and Economic Growth), from enforcing the additional provisions in MCL 500.2016 (1)(a) and (3). Particularly, in its complaint, plaintiff sought declarative and injunctive relief with regard to its contention that the language in MCL 500.2016 precluding it from withholding dividends, i.e., refunds of surplus funds, from an employer who decided to discontinue participation with plaintiff was unconstitutional, either in its entirety or as applied to contracts that preexisted the enactment of the pertinent statutory language. After entertaining oral argument, the circuit court issued an opinion rejecting plaintiff's challenges to the constitutionality of MCL 500.2016.

Now, on appeal, three of the four issues presented by plaintiff constitute facial challenges to the constitutionality of the relevant provisions of MCL 500.2016, while plaintiff's remaining issue more narrowly challenges the constitutionality of the application of those provisions to contracts that were entered into before January 4, 1999, the effective date of 1998 PA 457. We will reach each of the issues in turn.

Standard of Review

The resolution of a summary disposition motion is reviewed de novo. Corley v. Detroit Bd. of Ed., 470 Mich. 274, 277, 681 N.W.2d 342 (2004). Likewise, we review the constitutionality of a statute de novo. DeRose v. DeRose, 469 Mich. 320, 326, 666 N.W.2d 636 (2003).

I

First, plaintiff argues that the circuit court erred when it denied plaintiff's request for a declaratory judgment that the amendments to MCL 500.2016 create a new obligation in violation of article 1, § 10 of the Michigan Constitution of 1963.

MCL 500.2016 provides, in relevant part:

(1) In addition to other provisions of law, the following practices as applied to worker's compensation insurance including worker's compensation coverage provided through a self-insurer's group are defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance:

(a) As a condition of receiving a dividend for the current or a previous year, requiring an insured to renew or maintain worker's compensation insurance with the insurer beyond the current policy's expiration date or requiring a member to continue participation with a worker's compensation self-insurer group.

* * *

(3) This section also applies to worker's compensation self-insurers' groups.

Const. 1963, art. 1, § 10, the Contract Clause of the Michigan Constitution, provides that no law "impairing the obligation of contract shall be enacted." The federal Contract Clause, U.S. Const., art. I, § 10, similarly provides that no state shall "pass any ... Law impairing the Obligation of Contracts...."

The purpose of the Contract Clause "is to protect bargains reached by parties by prohibiting states from enacting laws that interfere with preexisting contractual arrangements." Studier v. Michigan Pub. School Employees' Retirement Bd., 260 Mich.App. 460, 474, 679 N.W.2d 88 (2004), lv gtd 471 Mich. 875, 688 N.W.2d 500 (2004). However, the Contract Clause prohibition on state laws impairing the obligations of contract is not absolute. Id. Rather, the "prohibition must be `accommodated to the inherent police power of the State to safeguard the vital interests of its people.'" Id., quoting Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 410, 103 S.Ct. 697, 74 L.Ed.2d 569 (1983), quoting Home Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398, 434, 54 S.Ct. 231, 78 L.Ed. 413 (1934).

A three-pronged test is used to analyze Contract Clause issues. The first prong considers whether the state law has operated as a substantial impairment of a contractual relationship. The second prong requires that legislative disruption of contractual expectancies be necessary to the public good. The third prong requires that the means chosen by the Legislature to address the public need be reasonable. In re Certified Question; (Fun `N Sun RV, Inc. v. Michigan), 447 Mich. 765, 777, 527 N.W.2d 468 (1994); Studier, supra at 474-475, 679 N.W.2d 88. In other words, if the impairment of a contract is only minimal, there is no unconstitutional impairment of contract. However, if the legislative impairment of a contract is severe, then to be upheld it must be affirmatively shown that (1) there is a significant and legitimate public purpose for the regulation and (2) that the means adopted to implement the legislation are reasonably related to the public purpose. Wayne Co. Bd. of Comm'rs v. Wayne Co. Airport Auth., 253 Mich.App. 144, 163-164, 658 N.W.2d 804 (2002), citing Blue Cross & Blue Shield of Michigan v. Governor, 422 Mich. 1, 23, 367 N.W.2d 1 (1985).

Obviously, application of MCL 500.2016 to contracts entered into by plaintiff before the effective date of the amendments could impair some contracts that plaintiff had entered into because it precludes plaintiff from enforcing contractual provisions that would allow it to withhold dividends from a former member who has ceased participation with plaintiff. But we conclude it unnecessary to ultimately determine whether the impairment of contract caused by the pertinent language in MCL 500.2016 constitutes a substantial impairment. As we mentioned earlier, even a statute that substantially impairs a contractual provision does not violate the Contract Clause if there is a significant and legitimate public purpose for the regulation and the means adopted to implement the legislation are reasonably related to the public purpose. Wayne Co. Bd. of Comm'rs, supra at 164, 658 N.W.2d 804. Importantly, in the context of resolving a Contract Clause issue, our Supreme Court has noted the principle that "`[a]s is customary in reviewing economic and social regulation ... courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure.'" Romein v. Gen. Motors Corp., 436 Mich. 515, 536, 462 N.W.2d 555 (1990), quoting United States Trust Co. v. New Jersey, 431 U.S. 1, 22-23, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977).

The pertinent language of MCL 500.2016 serves the purpose of fostering competition in the market for worker's compensation coverage by precluding a self-insurer group from conditioning receipt of a dividend, i.e., a refund of surplus funds, on continued participation with the group. While this might not benefit worker's compensation recipients directly, lower costs to employers and competition generally benefit employers throughout the economy and thereby indirectly aid the state economy in the aggregate. Indeed, it seems that the Legislature could reasonably view eliminating unduly anticompetitive practices as serving the public interest. See, e.g., Bristol Window & Door, Inc. v. Hoogenstyn, 250 Mich.App. 478, 486-487, 650 N.W.2d 670 (2002) (discussing existence of common-law rule against enforcing agreements for unreasonable restraint of trade even "before any statutory scheme of business regulation existed in Michigan").

Further, requiring a member of a self-insurer group to forfeit its proportionate share of surplus funds in distribution of dividends as a consequence of leaving the self-insurer group could also reasonably be viewed as an unduly anticompetitive act if a group has no legitimate business interest worthy of protection. Effectively abrogating contractual provisions allowing such a withholding of dividends from employers who cease participation in the group could likewise be viewed by the Legislature as reasonably necessary to bring an immediate end to an unduly anticompetitive practice.

We conclude that the pertinent language of MCL 500.2016 does not violate the federal or Michigan Contract Clause as applied because, granting appropriate deference to legislative judgment, there is a significant and legitimate public purpose for such an impairment of contract and the means adopted to implement the legislation are reasonably related to the public purpose.

Within this issue, plaintiff also makes an argument to the...