APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA (D.C. Civil No. 73-594).
Seitz, Chief Judge, and Aldisert and Hunter, Circuit Judges. Hunter, Circuit Judge, dissenting.
This appeal presents the narrow issue whether the Pennsylvania Workmen's Compensation Act, as amended, PA. STAT. ANN. tit. 77, § 671 (Purdon's Supp. 1976), requires that an employer pay a percentage of the counsel fees incurred by an employee in a successful action against a third party when the employer has been joined and held liable as a third party defendant. The Pennsylvania statute provides for reimbursement of a plaintiff-employee's counsel fees under the heading "SUBROGATION OF EMPLOYER":
§ 671. Subrogation of employer to rights of employee against third persons; subrogation of employer or insurer to amount paid prior to award
Where the compensable injury is caused in whole or in part by the act or omission of a third party, the employer shall be subrogated to the right of the employe, his personal representative, his estate or his dependents, against such third party to the extent of the compensation payable under this article by the employer; reasonable attorney's fees and other proper disbursements incurred in obtaining a recovery or in effecting a compromise settlement shall be prorated between the employer and employe, his personal representative, his estate or his dependents. The employer shall pay that proportion of the attorney's fees and other proper disbursements that the amount of compensation paid or payable at the time of recovery or settlement bears to the total recovery or settlement. Any recovery against such third person in excess of the compensation theretofore paid by the employer shall be paid forthwith to the employe, his personal representative, his estate or his dependents, and shall be treated as an advance payment by the employer on account of any future instalments of compensation.
As amended 1956, Feb. 28, P.L. (1955) 1120 § 1; 1959, Dec. 28, P.L. 2034, § 4; 1961, Sept. 30, P.L. 1762, § 2; 1972, March 29, P.L. 159, No. 61, § 20, eff. May 1, 1972.
When it was enacted in 1915, § 671 made no mention of counsel fees. The section codified the employer's subrogation rights to prevent double recovery by the employee, Skoda v. National Mines Corp., 213 Pa. Super. 489, 249 A.2d 829 (1968), and to encourage participation in the then-voluntary program by limiting the employer's indemnification liability. O'Neill v. United States, 450 F.2d 1012, 1017 (3d Cir. 1971). In the original scheme, the employer recouped 100% of its prior compensation payments but effectively reduced the employee's recovery by contributing nothing to the cost of obtaining the fund. This inequity was corrected in 1937 by an amendment which allowed subrogation in the amount of compensation benefits, "less reasonable attorney's fees." Conrad v. Aero-Mayflower Transit Co., 152 Pa. Super. 477, 33 A.2d 91 (1943). A further refinement, which survived subsequent amendments to the section, provided that attorney's fees be prorated between employer and employee in the manner quoted above.
Under Pennsylvania law, an employer joined as a defendant and found liable may not recover prior compensation payments. Appellant, the unlucky employer in the proceedings below, argues that "subrogation" under § 671 applies only when the employer actually recovers part of the employee's fund. Notwithstanding that its liability to the original defendant may not exceed amounts paid or payable under the Workmen's Compensation Act, Burke v. Duquesne Light Co., 231 Pa. Super. 412, 332 A.2d 544, 547 (1974), appellant protests that it has realized no benefit from the employee's endeavors and should not be required to subsidize them.
This court last discussed § 671 in Dowhy v. Harvey B. Moyer, Inc., 278 F.2d 753 (3d Cir.), aff'g per curiam 184 F. Supp. 31 (E.D. Pa. 1960). In Dowhy the employer's entire liability for compensation benefits had not yet been determined when it was joined and held liable as a defendant in the employee's action against a third party. The district court held that the accepted formula for satisfaction of the judgment against the original defendant, Maio v. Fahs, 339 Pa. 180, 14 A.2d 105 (1940), was inappropriate where the employer's payments were unliquidated. If the employer were given credit for the partial payments already made, the original defendant would actually receive the counsel fees due the employee. Since attorney's fees could not be prorated until compensation was fully paid, the court directed the original defendant to pay the verdict in full and enforce his judgment for contribution against the employer in a subsequent action, at which time "the employer will then recover from the employee such sum as he is entitled to." 184 F. Supp. at 33.
For our purposes, the reasoning in Dowhy is more relevant than the result. As this court stated in its affirmance:
It is perfectly clear that by virtue of the amendment, the employee is entitled to a pro rata counsel fee measured by the amount of the employer's liability to him for compensation whether the compensation has been paid or not. Soliday v. Hires Turner Glass Co., 1958, 187 Pa. Super. 44, 142 A.2d 425, allocatur refused. The statute makes no exception for the case where the employer has been found liable for contribution as a joint tortfeasor. Appellant would have us construe the statute to require an innocent employer to pay counsel fees but allow one who was at fault to recover in full. . . . The statutory amount that the employer can recover under this [subrogation] right is the amount of payments of compensation less a pro rata share of counsel fees.
278 F.2d at 754-55. See also DiVirgilio v. Norton Co., 344 F. Supp. 552 (W.D. Pa. 1972); Curtis v. Simpson Chevrolet, 348 F. Supp. 1062, 1064 (E.D. Pa. 1972); Quinones v. Township of Upper Moreland, 199 F. Supp. 758 (E.D. Pa. 1961). Section 671 clearly applies to situations in which the employer is a joint tortfeasor: "Where the compensable injury is caused in whole or in part by . . . a third party . . . reasonable attorney's fees. . . incurred in obtaining a recovery . . . shall be prorated between the employer and employe . . .." The employer benefits even when it does not actually recoup the compensation actually paid, since its exposure as a tortfeasor and, therefore, its liability to other defendants, is expressly limited. Having benefitted from the employee's action in the proportion of compensation paid to the total recovery, the employer should be responsible for counsel fees to that extent.
The judgment of the district court will ...