FILED
United States Court of Appeals
Tenth Circuit
December 11, 2008
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
PROTOCOLS, LLC, also known as
Medical Settlement Protocols, LLC;
SAGRILLO HAMMOND DINEEN &
KASTETTER, LLC,
Plaintiffs - Appellants,
v. No. 07-1175
MICHAEL O. LEAVITT, in his
capacity as the Secretary of the
Department of Health and Human
Services; KERRY N. WEEMS, * in his
capacity as Acting Administrator of
the Centers for Medicare and Medicaid
Services,
Defendants - Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. NO. 1:05-CV-1492-BNB)
Jason B.Wesoky (Benjamin A. Kahn, with him on the briefs), Brownstein Hyatt
Farber Schreck, P.C., Denver, Colorado, for Plaintiffs - Appellants.
Michael C. Johnson, Assistant United States Attorney (Troy A. Eid, United States
Attorney, with him on the brief), Denver, Colorado, for Defendants - Appellees.
*
We substitute Kerry N. Weems for the original defendant, Mark B.
McClellan, per Fed. R. App. P. 43(c)(2).
Before TACHA, HARTZ, Circuit Judges, and DEGIUSTI, ** District Judge.
HARTZ, Circuit Judge.
Plaintiff Protocols, LLC and the law firm Sagrillo Hammond Dineen and
Kastetter, LLC (collectively, Protocols) provide consulting services for the
settlement of workers’ compensation claims. Protocols’ claimed expertise is
structuring settlements that comply with Medicare regulations—in particular,
regulations designed to assure that Medicare is treated fairly in settlements of
workers’ compensation claims by persons eligible for Medicare benefits.
Protocols brought this declaratory-judgment action against Defendants Michael O.
Leavitt, the Secretary of the United States Department of Health and Human
Services (HHS), and Dr. Mark B. McClellan, then the Administrator of the
Centers for Medicare and Medicaid Services (CMS), which is an agency within
HHS. The suit claims that a CMS memorandum issued in 2005 misinterprets the
Medicare statute and regulations and exposes Protocols to unexpected liabilities
arising out of settlements it has structured.
Defendants moved for summary judgment on several grounds. The district
court granted the motion but on a ground not raised by Defendants—namely, that
**
Honorable Timothy D. DeGiusti, United States District Court Judge,
Western District of Oklahoma, sitting by designation.
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Protocols lacked constitutional standing because it had not suffered the requisite
injury. Protocols appeals. We reverse because Protocols’ potential liability
presents a sufficient injury to confer standing under Article III of the United
States Constitution. We remand to the district court for further proceedings,
including consideration of Defendants’ other arguments for summary judgment.
I. BACKGROUND
A. The Regulatory Scheme
To explain how Protocols may be exposed to liability arising out of its
consulting services in workers’ compensation cases, we begin by outlining some
of the law governing the relationship between Medicare and workers’
compensation medical benefits. The Medicare Secondary Payer statute, 42 U.S.C.
§ 1395y(b), provides that Medicare will ordinarily not pay medical expenses if
workers’ compensation insurance has paid “or can reasonably be expected to” pay
for the expenses. Id. § 1395y(b)(2)(A)(ii). Medicare may, however, pay for an
expense when the availability of workers’ compensation insurance is unknown or
prompt payment under such coverage is not expected. See id. § 1395y(b)(2)(B)(i)
(permitting conditional Medicare payment when prompt insurance payment is not
expected); 42 C.F.R. § 411.21 (defining conditional payment to include a
Medicare payment made because of lack of knowledge of other coverage). If
such a Medicare payment is made, CMS may seek reimbursement from the insurer
or from one who receives payment from the insurer, if the insurer was responsible
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for the expense. See 42 U.S.C. § 1395y(b)(2)(B)(ii); 42 C.F.R. § 411.22. If
reimbursement is not made, CMS may sue the insurer or the recipient of a
workers’ compensation payment, see 42 U.S.C. § 1395y(b)(2)(B)(iii); 42 C.F.R.
§ 411.24, although CMS may waive its rights in the best interests of Medicare,
see 42 U.S.C. § 1395y(b)(2)(B)(v); 42 C.F.R. § 411.28.
Of course, when a worker makes a workers’ compensation claim, there may
be doubt concerning whether the worker’s medical expenses are compensable.
The insurer may question whether the worker was injured, whether the injury
arose in the course of employment, or whether the medical expense relates to the
injury. Such questions may be litigated, but they are often settled. The
settlement is likely to affect Medicare’s responsibility to pay for the worker’s
medical expenses. So long as workers’ compensation medical benefits are
available, Medicare is relieved of responsibility. But if the settlement limits or
eliminates the duty of the workers’ compensation insurer to pay medical benefits,
Medicare would be responsible for the payment.
As a result, the settling parties have an incentive to structure their
settlement in a way that transfers liability from the insurer to Medicare, because
such an arrangement can make both of them better off. This incentive can result
in a settlement that is “unfair” to Medicare. For example, assume that a “fair”
allocation of the settlement payment would be $X to the worker for lost wages
and $Y set aside to pay for medical benefits. Further assume that the $Y would
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pay for medical services that would otherwise be payable by Medicare, so the
worker gets no benefit from the $Y. The worker and the insurer would be better
off if the settlement is restructured so that no part of the settlement is allocated to
medical benefits and the lost-wages allocation is correspondingly increased (even
if not increased by the full $Y, but by, say, $Y-Z). The worker is better off by
$Y-Z (the increase in lost-wages benefits) and loses nothing by having Medicare,
rather than the insurer, pay medical benefits. The insurer for its part saves $Z
(because it is replacing a payment of $Y in medical benefits by an increase of
$Y-Z in its payment of lost-wages benefits). But Medicare now must incur $Y of
expenses that would have been paid by the insurer under a “fair” allocation of
settlement proceeds.
To avoid this subsidization by Medicare, the regulations under the
Medicare Secondary Payer statute permit CMS to refuse to recognize a workers’
compensation settlement. See 42 C.F.R. § 411.46(b)(2). Medicare then would
not pay for treatment that should have been covered by workers’ compensation.
And if Medicare had paid for such treatment before realizing that workers’
compensation should have paid for it, CMS could seek reimbursement from the
workers’ compensation insurer or from someone who had received part of a
workers’ compensation settlement. Protocols, which typically receives a fee from
the settlement proceeds, might therefore have to relinquish its fee to CMS.
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On the other hand, if CMS recognizes (approves) a workers’ compensation
settlement, the workers’ compensation insurer—and the recipients of the
settlement payment—bear no liability for medical expenses beyond what is
provided in the settlement. One regulation, 42 C.F.R. § 411.47, describes an
acceptable method for apportioning a settlement payment between lost-wage
benefits and medical benefits. For purposes of this appeal, we need not describe
the specifics of § 411.47. Suffice it to say that Protocols asserts that it has
structured settlements involving future medical benefits (that is, payments for
medical expenses that have not been incurred by the time of the settlement) by
following § 411.47.
This suit arose after CMS clearly rejected such use of § 411.47, declaring
that it applies only to medical expenses incurred before the workers’
compensation settlement. In a memorandum issued on July 11, 2005 (the 2005
Memo), it said.
Q11. Compromising of Future Medical Expenses – Does CMS
compromise or reduce future medical expenses related to a [workers’
compensation] injury?
A11. No. Some submitters have argued that 42 C.F.R. § 411.47
justifies reduction to the amount [set aside for Medicare in a
workers’ compensation settlement]. The compromise language in
this regulation only addresses conditional (past) Medicare payments.
The CMS does not allow the compromise of future medical expenses
related to a [workers’ compensation] injury.
App. at 32 (Medicare Secondary Payer (MSP)—Workers’ Compensation (WC)
Additional Frequently Asked Questions memorandum) available at
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http://www.cms.hhs.gov/WorkersCompAgencyServices/Downloads/
71105Memo.pdf (bold type omitted). The 2005 Memo also stated that there is no
appeal from the CMS determination of the proper amount to be set aside for
future medical expenses. See id. at 32–33.
B. Proceedings Below
On August 5, 2005, a month after the issuance of the 2005 Memo, Protocols
filed suit against Defendants in the United States District Court for the District of
Colorado. The Complaint alleged that the 2005 Memo was contrary to the prior
practice of CMS and sought a declaratory judgment that, among other things, the
2005 Memo is invalid because (1) it conflicts with the Medicare Secondary Payer
statute and 42 C.F.R. § 411.47; (2) 42 C.F.R. § 411.47 provides a valid method
for structuring settlements to account for future medical expenses; (3) the
government bears the burden to prove noncompliance with 42 C.F.R. § 411.46
and, contrary to the 2005 Memo, there is a constitutional right to an appeal of an
adverse decision; and (4) the 2005 Memo was promulgated without compliance
with the rulemaking procedures established by the Administrative Procedure Act
(APA). Protocols’ complaint also seeks relief because CMS no longer reduces the
amount to be recovered by Medicare out of a settlement by taking into account
the costs (including legal fees) of procuring the settlement.
Defendants moved for summary judgment. With respect to Protocols’
challenges to the 2005 Memo, they primarily argued that (1) Protocols lacked
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standing, but on prudential, rather than constitutional, grounds; (2) the district
court lacked jurisdiction because the 2005 Memo was not a “final agency action”
under the APA, see 5 U.S.C. § 704; (3) the court also lacked jurisdiction because
42 U.S.C. § 405(g) is the exclusive waiver of sovereign immunity for claims
under the Medicare Act and Protocols failed to exhaust its administrative
remedies as required to proceed under § 405(g); (4) the 2005 Memo is consistent
with 42 C.F.R. § 411.47; and (5) the 2005 Memo merely provides guidance, and
is therefore not subject to the APA’s requirements for promulgation of
regulations. (These grounds may have merit, but the district court did not address
them; nor do we. See Pac. Frontier v. Pleasant Grove City, 414 F.3d 1221, 1238
(10th Cir. 2005) (“Where an issue has been raised, but not ruled on, proper
judicial administration generally favors remand for the district court to examine
the issue initially.”).)
In support of standing, Protocols argued that the 2005 Memo threatens the
company with liability for settlements it has structured in the past. It submitted
affidavits from its founder, Robert L. Sagrillo, and from a certified public
accountant, Daniel Seff, indicating that Protocols had submitted proposed
settlements structured in a manner that appears contrary to the 2005 Memo; that
the manner in which CMS reviews settlements “is not published, is secretive, and
is clearly violative of the applicable law,” App. at 334; that the settlements
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arranged by Protocols exposed it to liability; and that this contingent liability
caused present harm to the financial strength and fiscal planning of the company.
The district court granted summary judgment in favor of Defendants on the
ground that Protocols lacked standing under Article III of the United States
Constitution because its alleged injury was not “concrete and actual or imminent.”
Protocols, LLC v. Leavitt, No. 05-cv-01492, 2007 WL 757644, at *6 (D. Colo.
Mar. 8, 2007) (Protocols). In particular, the court stated that Protocols had not
presented evidence “that Medicare has actually reviewed a proposed set-aside in a
way that is not published, is secretive and is clearly violative of the applicable
law.” Id. (internal quotation marks omitted). As to Protocols’ claim that CMS
was not giving proper credit for the costs of procuring a settlement, the court said
that Protocols had failed to submit any evidence that it had suffered a concrete
injury from the alleged illegality. See id. at *7.
II. DISCUSSION
A. Standard of Review
On the issue of standing we review legal conclusions de novo. See
Wyoming ex rel. Crank v. United States, 539 F.3d 1236, 1241 (10th Cir. 2008).
We ordinarily review any underlying fact finding for clear error. See Preminger
v. Peake, 536 F.3d 1000, 1005 n.3 (9th Cir. 2008); Houston Chronicle Publ’g Co.
v. City of League City, 488 F.3d 613, 617 (5th Cir. 2007); Gen. Instrument Corp.
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v. Nu-Tek Elec. & Mfg., Inc., 197 F.3d 83, 86 (3d Cir. 1999). But because this
appeal is from a summary judgment, there is no fact finding to review.
B. Standing
Article III of the United States Constitution restricts the judicial authority
to deciding “Cases” and “Controversies.” U.S. Const. art. III § 2. The case-or-
controversy requirement “is satisfied only where a plaintiff has standing.” Sprint
Commc’ns Co. v. APCC Servs., Inc., 128 S. Ct. 2531, 2535 (2008). To satisfy the
standing requirement, a plaintiff must have “such a personal stake in the outcome
of the controversy as to assure that concrete adverseness which sharpens the
presentation of issues upon which the court so largely depends for illumination.”
Massachusetts v. EPA, 127 S. Ct. 1438, 1453 (2007) (internal quotation marks
omitted). Accordingly, standing depends on the plaintiff’s showing (1) “an injury
in fact that is both concrete and particularized as well as actual or imminent”; (2)
a causal relationship between the injury and the challenged conduct; and (3) a
likelihood that the injury would be redressed by a favorable decision. Wyoming
ex rel. Crank, 539 F.3d at 1241. This showing “must be supported in the same
way as any other matter on which the plaintiff bears the burden of proof, i.e., with
the manner and degree of evidence required at the successive stages of the
litigation.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). In
particular, to avoid a summary judgment, the plaintiff “must set forth by affidavit
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or other evidence specific facts” supporting standing. Id. (internal quotation
marks omitted). We address each element in turn.
As we understand Protocols’ standing argument, it asserts that over the
years it has arranged for workers’ compensation settlements that were acceptable
to CMS at the time but that CMS now would refuse to recognize under the 2005
Memo. Liability of Protocols could therefore result as follows: When CMS
refuses to recognize a settlement, the settlement does not relieve the workers’
compensation insurer of the obligation to pay postsettlement medical expenses
that would otherwise be covered by workers’ compensation. If Medicare pays for
such an expense, it would then be entitled to reimbursement (and could sue to
collect) from anyone who received part of the settlement paid by the insurer.
Because Protocols received consulting fees out of the settlement payment, it could
be liable to repay that sum. Protocols will not know whether it has a liability,
however, until Medicare pays a postsettlement medical expense and then decides
to seek reimbursement from Protocols. According to affidavits submitted by
Protocols, this potential (contingent) liability hanging over it hampers its business
in several ways: (1) the company’s value is decreased because of contingent
liabilities; (2) the uncertainty of the liability harms Protocols’ ability to plan how
much revenue it may use for capital and operating costs; and (3) the company has
postponed discussions with potential investors while awaiting the outcome of this
lawsuit, because potential investors want to know about contingent liabilities.
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In our view, Protocols has established the three elements of constitutional
standing. The contingent liability it identifies presents an injury in fact, it is
caused by the refusal of CMS to recognize the validity of settlements structured
by Protocols, and a ruling favorable to Protocols would eliminate Protocols’
potential liability and the consequences of that potential liability.
To begin with, courts—including the Supreme Court, both explicitly and
implicitly—have recognized that contingent liability may present an injury in
fact. To be sure, an injury in fact must be “actual or imminent,” Wyoming ex rel.
Crank, 539 F.3d at 1241, and a contingent liability, by definition, may not arise
for a considerable time, if ever. The consequences of a contingent liability,
however, may well be actual or imminent. The explicit recognition of this
proposition is in Clinton v. City of New York, 524 U.S. 417 (1998), which
considered the constitutionality of line-item vetoes. Congress had passed a bill
whose provisions included relief to New York State from liability for as much as
$2.6 billion in health-care-related taxes owed to the federal government. Id. at
422. But President Clinton exercised a line-item veto to eliminate that relief
when he signed the bill. See id. at 422–23. The City, *** which would be assessed
by the State for part of the State’s tax liability if the line-item veto were upheld,
challenged the constitutionality of the veto. The President raised several
***
The City had coplaintiffs in its challenge to the line-item veto, but for
convenience we will refer to all plaintiffs collectively as the City.
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arguments against the City’s standing. One argument was that the City’s injury
was speculative because it still had the right to try to secure a waiver of its tax
liability from the Department of Health and Human Services. See id. at 430. The
Court rejected this argument. The possibility of a waiver did not extinguish the
City’s injury, it said, because the City “suffered an immediate, concrete injury the
moment that the President used the Line Item Veto . . . and deprived [it] of the
benefits of the [vetoed] law.” See id. (internal quotation marks omitted). The
Court analogized the line-item veto to a “judgment of an appellate court setting
aside a verdict for the defendant and remanding for a new trial of a multibillion
dollar damages claim” when the outcome of the second trial is in doubt. Id. at
430–31. It concluded that an injury in fact existed because the “revival of a
substantial contingent liability immediately and directly affects the borrowing
power, financial strength, and fiscal planning of the potential obligor.” Id. at 431.
These immediate and direct effects were certainly actual and imminent.
A second Supreme Court decision offers substantial support for the
proposition that a contingent liability can confer standing, although the Court did
not explicitly speak in terms of standing. In Aetna Life Insurance Co. v.
Haworth, 300 U.S. 227 (1937), the insurer brought a declaratory-judgment action
to determine the validity of disability-insurance policies for which the insured had
ceased to pay premiums. See id. at 237–38. The insured had claimed that he had
been excused from paying premiums, and was entitled to benefits, because he was
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suffering from a disability that had begun before the unpaid premiums were due.
See id. at 238. The insured, however, had not brought suit against the insurer.
See id. at 239. The insurer then filed suit because of its concern about having to
maintain reserves exceeding $20,000 to cover the potential liability and about the
possible loss of evidence over time. See id. Although the Declaratory Judgment
Act at the time permitted actions “‘[i]n cases of actual controversy,’” id. at 236
n.1 (quoting 1934 version of the Act), the district court ruled that Aetna’s
complaint “did not set forth a controversy in the constitutional sense and hence
did not come within the legitimate scope of the statute,” id. at 236 (internal
quotation marks omitted). Aetna petitioned for a writ of certiorari, and the
Supreme Court reversed. The Court agreed with the district court that the
Declaratory Judgment Act’s use of the phrase “‘cases of actual controversy’
manifestly has regard to the constitutional provision and is operative only in
respect to controversies which are such in the constitutional sense.” Id. at
239–40. But it disagreed with the lower court’s view that Aetna had not
presented a controversy. The Court’s discussion invoked concepts now
commonplace in standing analysis, stating for example that a “controversy” must
not be “hypothetical or abstract,” but “must be definite and concrete, touching the
legal relations of parties having adverse legal interests.” Id. at 240–41. And “[i]t
must be a real and substantial controversy admitting of specific relief through a
decree of conclusive character.” Id. at 241; see Surefoot LC v. Sure Foot Corp.,
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531 F.3d 1236, 1240 (10th Cir. 2008) (Declaratory Judgment Act’s “‘actual
controversy’” language imposes “a requirement the Supreme Court has repeatedly
equated to the Constitution’s case-or-controversy requirement”). Aetna’s
complaint presented a controversy because the parties “had taken adverse
positions with respect to their existing obligations,” Aetna Life, 300 U.S. at 242,
and a declaratory judgment could “definitely and finally adjudicate[]” the rights
of the parties, id. at 243. By holding that Aetna’s contingent liability presented a
“controversy” under Article III, the Court necessarily held that standing can be
predicated on such liability. See Sprint, 128 S. Ct. at 2535 (Article III can be
satisfied only if plaintiff has standing).
Several circuit-court opinions further support the proposition that a
contingent liability can present a sufficient injury for Article III standing. See
Lac Du Flambeau Band of Lake Superior Chippewa Indians v. Norton, 422 F.3d
490, 498 (7th Cir. 2005) (“[T]he present impact of a future though uncertain harm
may establish injury in fact for standing purposes.”); Walters v. Edgar, 163 F.3d
430, 434 (7th Cir. 1998) (“A probabilistic harm, if nontrivial, can support
standing.”); see also Jones v. Gale, 470 F.3d 1261, 1267 (8th Cir. 2006) (feedlot
owner had standing to challenge constitutionality of law that would prevent him
from entering into certain contracts with out-of-state corporations; even though he
had not entered into such a contract, the law negatively affected his “ability to
earn income, borrow, and plan for [his] financial future”).
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In light of this precedent, we conclude that Protocols has suffered an actual
injury. It admits that it has arranged settlements that are contrary to what CMS
has declared to be required. As a result, CMS may sometime in the future
demand that Protocols reimburse Medicare for Protocols’ portion of settlement
proceeds. And according to affidavits submitted by Protocols, this potential
liability has a present impact on its business—that is, the contingent liability has
created an actual and imminent injury.
The other elements of standing—causation and redressability—follow
readily from the above. Protocols’ contingent liability is caused by CMS’s
interpretation of the Medicare Secondary Payer statute and the regulations under
that law. And a favorable decision by the court in this case would resolve that
Protocols’ past practice conforms to Medicare law, so Protocols would no longer
be facing possible (contingent) liability.
The district court ruled that Protocols had not shown an actual injury
because it had not shown that the 2005 Memo was inconsistent with CMS’s prior
evaluation of workers’ compensation settlements. On appeal, Defendants have
endorsed that ruling. This view regarding Protocols’ injury is understandable
because Protocols repeatedly speaks of its injury as being the result of the change
effected by the memo. But it is CMS’s present position, regardless of whether
that position was different before 2005, that has created Protocols’ contingent
liability. If the rule stated in the 2005 Memo had been favorable to Protocols’
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prior practice, Protocols would not have cared whether the memo was inconsistent
with prior CMS practice and would not have filed suit. What injures Protocols is
that CMS’s current view, even if consistent with CMS’s prior view, is contrary to
Protocols’ prior practice, thereby exposing Protocols to liability. And Protocols
has made the factual showing necessary to establish that injury. Protocols’ chief
executive undoubtedly would know how Protocols constructed settlements in the
past, and Defendants do not dispute that CMS’s present view of the law is
contrary to Protocols’ understanding and contrary to the manner in which
Protocols has constructed settlements.
Likewise, we believe that the district court missed the mark in stating its
ground for ruling that Protocols lacks standing. The court said that Protocols had
not supported its chief executive’s assertion that CMS is reviewing settlement set-
asides “in a way that is ‘not published, is secretive, and is clearly violative of the
applicable law.’” Protocols, 2007 WL 757644, at *6. The issue relevant to
standing, however, is only whether CMS is taking a position contrary to
Protocols’ past practice. Whether CMS has done so in a secretive manner does
not affect whether Protocols has been injured.
III. CONCLUSION
For the purposes of summary judgment Protocols has established Article III
standing. We therefore REVERSE the judgment below and REMAND to the
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district court for further proceedings, including a decision on Defendants’ other
arguments for summary judgment.
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