Ninth Circuit Finds Property Rights in Unemployment Benefits
When the COVID-19 pandemic swept through the United States in early 2020, millions of Americans suddenly found themselves out of work. To cushion the blow, Congress passed the CARES Act, which created the Pandemic Emergency Unemployment Compensation (PEUC) program. For many, PEUC benefits meant the difference between keeping food on the table and facing economic catastrophe. Unfortunately, for many workers, governmental audits, calculations, and offsets made receiving these benefits anything but simple.
One such unemployed worker, Damario Sterling, whose PEUC benefits stopped following a governmental payroll audit of his former employer, sued on behalf of himself and a class of similarly situated unemployed workers, claiming deprivation of his rights in violation of the Due Process Clause. The federal district court for the Western District of Washington granted summary judgment for the State, holding that Sterling had no constitutionally protected property interest in the PEUC benefits.
Damario Sterling
Damario Sterling was a professional restorer in Washington State until the pandemic cost him his job in 2020. Like other workers, he turned to unemployment insurance. At first, the Washington Employment Security Department (ESD) approved his claim, paying him $551 per week in state benefits. When those benefits ran out, Mr. Sterling applied for and received federal supplemental (PEUC) benefits.
But in early 2021, problems began to arise for Sterling. After auditing the payroll of his employer, ESD recalculated his benefits, finding that some wage reports were wrong. Based on these findings, the agency sent Sterling confusing and contradictory notices—sometimes on the same day—telling him that he had been overpaid, that he owed thousands of dollars back to the government, or that he might have his benefits denied entirely. The notices each had inconsistent amounts and different deadlines for appeal.
While Sterling scrambled to make sense of these notices, the State began offsetting his PEUC payments, essentially reducing his weekly checks by hundreds of dollars before he even had a meaningful chance to contest the decision. By the time an administrative law judge stepped in and ruled that the notices from State were legally inadequate, Sterling had lost a significant sum in benefits.
From District Court to the Ninth Circuit
In 2022, Sterling brought a class action lawsuit under 42 U.S.C. § 1983, alleging that the actions of the State violated his Fourteenth Amendment right to due process and the fair hearing requirement of the Social Security Act.
The district court agreed that Sterling had a constitutionally protected property interest in regular state unemployment benefits, but held that he had no such interest in federally funded PEUC benefits because the PEUC was a temporary emergency program. And since states could opt in or out of the PEUC program at will, the court found that property interests in allocated benefits never fully materialized. Recipients could not claim a legitimate entitlement.
Acknowledging that the issue was one of first impression and agreeing to hear the case on interlocutory appeal, the Ninth Circuit certified a single question: Do unemployment claimants have a constitutionally protected property interest in PEUC benefits?
The Ruling of the Ninth Circuit
In a panel decision by Judge Jennifer Sung, the Ninth Circuit decisively answered yes. The panel held that PEUC benefits are a constitutionally protected property interest, explaining:
- Mandatory Statutory Language: The CARES Act required states that opted in the PEUC to pay benefits to claimants who met specific eligibility criteria (e.g., exhaustion of regular benefits, ability and availability to work). Once eligibility was established, benefits were required, not discretionary.
- Objective Eligibility Standards: Like regular unemployment insurance, PEUC relied on clear, objective criteria. These criteria created a “legitimate claim of entitlement” for qualified claimants.
- Analogies to Other Federal Programs: The court compared PEUC to other federal-state programs that are voluntary for states to join, but once a state participates, beneficiaries have enforceable property interests.
- Temporary Nature Does Not Defeat Constitutional Protection: That the PEUC was an emergency, time-limited program did not mean claimants lacked constitutional protection. For the period of state participation, claimants had the same due process rights as those receiving regular benefits.
Why This Case Matters: Property Rights and Procedural Rights
The Ninth Circuit’s ruling is significant for several reasons:
- Broader Protection of Property Rights: The ruling breathes life into the property rights protections inherent in the Due Process Clause, companion to the Just Compensation Clause in the Fifth Amendment. Property rights protection has long been viewed as the bulwark for individual rights and liberty against arbitrary, confiscatory, and overreaching government actions.
- Unmasks Government Actions That Destroy Property Rights: Government agencies cannot hide behind the temporary or discretionary nature of federal programs to evade accountability. Once they agree to administer such programs, they must honor the due process rights of claimants.
- Validation of Procedural Rights: In a refreshing decision that recognizes the importance of fair procedures, the Ninth Circuit reaffirmed that claimants are entitled not just to benefits, but to fair procedures.
