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Manor v. Nestle Food Co.

March 13, 1997


Appeal from Superior Court, Adams County. 93-2-00044-1. Honorable Richard W. Miller, Judge.

Authored by Philip A. Talmadge. Concurring: Barbara Durham, James M. Dolliver, Charles Z. Smith, Richard P. Guy, Charles W. Johnson. Dissenting: Barbara A. Madsen, Gerry L. Alexander, Richard B. Sanders.

The opinion of the court was delivered by: Talmadge


TALMADGE, J. -- Nestle Food Company (Nestle), a self-insured employer, paid more than $455,000 in medical and time-loss benefits to Paul Manor for a workplace injury he sustained. Now Manor wants to sue Nestle for the same injury. He asserts WAC 296-15-023(2), which declares Nestle to be Manor's employer, is invalid. Employing the standard of review set forth in our State's Administrative Procedure Act (APA), we hold the regulation is valid, and Nestle is therefore immune to suit by Manor under the exclusive remedy provision of the Industrial Insurance Act (IIA).


1. Does WAC 296-15-023(2) make Nestle Manor's employer for purposes of the Industrial Insurance Act?

2. Is WAC 296-15-023(2) valid under RCW 34.05.570(2)?


On January 15, 1992, while working as a truck driver for Carnaco Transport, Inc. (Carnaco), Paul Manor went to the Carnation processed potato plant in Othello, Washington, to pick up a load. While at the plant, a forklift ran over Manor's foot. As a result of the industrial injury, Manor developed Guillain-Barre syndrome and became paralyzed. He finally was able to leave the hospital in November 1992, but required additional care at home.

The Carnation Company (Carnation) became a self-insurer under the IIA for itself and its various subsidiaries in 1979. Carnaco was a subsidiary of Carnation and maintained facilities in Moses Lake. Carnation also owned the processed potato plant in Othello, Washington, where Manor was injured. From 1979 forward, Carnation treated all of its employees, including those at the processed potato plant in Othello and its Carnaco employees, as employees under its certificate of self-insurance with the Department of Labor & Industries (Department). In 1985, Carnation became a wholly-owned subsidiary of Nestle Holdings, Inc., and its name was eventually changed to Nestle Food Company. *fn1 Manor filed a claim with Carnaco for industrial insurance benefits, listing Carnaco as his employer. The Department allowed the claim by order of February 14, 1992. Manor did not appeal the order. Ultimately, Nestle paid Manor medical benefits of $437,187.02, and time-loss benefits of $18,646.66.

Manor filed a personal injury action against Nestle in April 1993. He alleged Nestle was liable for its own negligence and, under the principle of respondeat superior, for the negligence of the forklift operator who ran over his foot. Nestle argued it was immune under Title 51 RCW because the forklift operator was Manor's fellow employee.

Nestle moved for dismissal. Manor argued, under the common law, the forklift operator was not a fellow Nestle employee. The trial court granted the motion to dismiss because Manor's injury was caused by a fellow employee and Nestle was immune under the IIA. The trial court also held the designation of Nestle as Manor's employer in the Department's February 14, 1992 order had preclusive effect.

Manor appealed and the Court of Appeals reversed, holding a self- insured parent corporation is not, as a matter of law, the employer of employees working for a subsidiary, and material issues of fact remained as to whether Nestle should be considered Manor's employer. The Court of Appeals also disagreed with the trial court on the preclusive effect of the Department's decision. Manor v. Nestle Food Co., 78 Wash. App. 5, 895 P.2d 27 (1995). We granted review.


An employer may comply with the requirements of the IIA either by insuring with the State Industrial Insurance Fund or qualifying as a self- insurer under Title 51 RCW. Self-insurers must pay the claims of their injured workers. Therefore, self-insurers obtain the same immunity from actions by employees as state fund employers. RCW 51.04.010 (exclusive remedy provision); RCW 51.32.010. Although an injured worker may not sue his or her employer for a workplace injury, RCW 51.24.030(1) authorizes suit against a third person at fault for the worker's injury, provided the third person is not in the worker's same employ.

The central issue in this case is whether Manor and the forklift operator who ran over his foot were "in the same employ" for purposes of RCW 51.24.030(1). The dispositive regulation is WAC 296-15-023(2). Promulgated under the Department's authority to regulate self-insurers, WAC 296-15-023(2) states: "One certificate will be issued to an approved self- insurer, including all subsidiaries or divisions. The entities will be considered as one employer for all purposes of Title 51 RCW." (Emphasis added.) This regulation addresses and cures a serious coverage problem under the Act. In the absence of a mandate that an employer include all of its subsidiaries or divisions within its certificate of self-insurance, the self-insured employer could structure its business so that it was self- insured for employees in its low risk activities, while employees in its high risk activities were covered by the state fund, skewing the cost to employers in the state fund. WAC 296-15-023(2) makes Manor and the forklift operator employees of the same self-insured employer, Nestle. However, the Court of Appeals held the regulation invalid.

A. Standard for Judicial Review of an Agency Regulation

WAC 296-15-023(2) provides that Nestle is to be treated as an employer for all purposes under Title 51. While this is a regulation and not a statute, "it has been established in a variety of contexts that properly promulgated, substantive agency regulations have the 'force and effect of law.' " Chrysler Corp. v. Brown, 441 U.S. 281, 295, 99 S. Ct. 1705, 60 L. Ed. 2d 208 (1979); "[a] legislative rule has the force and effect of law, if promulgated in accordance with a legislative delegation." 2 Am. Jur. 2d, Administrative Law sec. 160, at 182 (1994).

The Court of Appeals, in holding the regulation invalid, gave it short shrift, deciding it is "not reasonably consistent" with its enabling legislation because "[it] may result in the denial of a worker's right to bring a third-party claim against the parent company of his employer merely because the parent chose to self-insure." Manor, 78 Wash. App. at 10. The Court of Appeals did not further articulate how WAC 296-15-023, first promulgated in 1983 and unaltered by legislative amendment since then, *fn2 was somehow an irrational or aberrational exercise of delegated legislative authority. The Court of Appeals simply concluded the regulation is invalid without reference to the APA standard for judicial review of the validity of an agency regulation, or to our leading decision interpreting that APA standard. A proper APA analysis reveals no reason to invalidate WAC 296-15- 023(2). *fn3

The Legislature enacted the APA in 1988, Laws of 1988, ch. 288, and added "a new criterion which significantly expands the review process." Neah Bay Chamber of Commerce v. Department of Fisheries, 119 Wash. 2d 464, 469, 832 P.2d 1310 (1992). The Legislature set forth the standard of review for agency regulations in RCW 34.05.570(2)(c):

In a proceeding involving review of a rule, the court shall declare the rule invalid only if it finds that: The rule violates constitutional provisions; the rule exceeds the statutory authority of the agency; the rule was adopted without compliance with statutory rule-making procedures; or the rule is arbitrary and capricious.

This Court extensively analyzed and interpreted the new statute in Neah Bay. There, we considered the former version of the statute, which differed significantly only in the last phrase, "could not conceivably have been the product of a rational decision-maker," a phrase now replaced by "arbitrary and capricious." We held:

In sum, the "product of a rational decision-maker" standard adopted by the Legislature at RCW 34.05.570(2)(c) involves an inquiry into the reasonableness of regulations analogous to the application of the arbitrary and capricious standard. To decide if a regulation should be overturned because it could not conceivably be the product of a rational decision-maker, we hold that the proper analysis is the 3-part test suggested by amicus, Professor Andersen, and utilized by the federal courts. See Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 77 L. Ed. 2d 443, 103 S. Ct. 2856 (1983). The court's task is to determine if a given regulation is reasonable without substituting this court's judgment for that of the agency. First, the court inquires if the agency's explanation of its own rule is clear. Second, the court must ask if the agency utilized the appropriate statutory framework, whether it used correct factors in deciding the rule, and if it avoided improper factors. Third, the court must decide if a decision-maker could have reached the Conclusion reached by the agency (taking the foregoing into account) by some reasonable process.

This analysis requires the court to review the administrative record to determine the factors employed by the agency and the quality of its reasoning. The court must scrutinize the record to determine if the result was reached through a process of reason, not whether the result was itself reasonable in the judgment of the court.

Neah Bay, 119 Wash. 2d at 473. The Court thus equated the "product of a rational decision-maker" standard with the "arbitrary and capricious" standard. The Legislature later acquiesced in this interpretation in 1995 when it changed the language of the final phrase to "arbitrary and capricious." Laws of 1995, ch. 403, sec. 802. See 1995 Final Legislative Report, EHSB 1010, at 7 (February 1, 1995) ("The current 'conceivably the product of a rational decision maker' standard of review is changed to 'arbitrary and capricious' ").

B. Analysis of WAC 296-15-023(2) Under the Statutory Standard of Review

RCW 34.05.570(1) places the burden of demonstrating the invalidity of a rule on the party asserting invalidity. Although Manor did not undertake this responsibility, the following analysis, mandated by ...

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