CA Court Reverses Prior Ruling, Upholds Law Restricting Employer Communications on Union Organizing

Striking a significant blow to non-union employers, on September 21, 2006 the U. S. Court of Appeals for the Ninth Circuit reversed two prior decisions and upheld a California law effectively mandating that employers remain neutral when facing union organizing. Since the statute covers virtually any expense related to union organizing, including payment for legal consultation regarding the rights and restrictions on communications with employees during organizing drives, it is critical that any covered employer wishing to oppose union organizing develop a compliance strategy before union organizing begins.

California's Neutrality Law: An Historical Perspective

California Assembly Bill 1889, known as the "neutrality law," was enacted by the state legislature to prohibit companies from using state funds to "assist, promote, or deter union organizing." Cal. Govt. Code § 16645(a). The law covers a broad array of employers, including: (1) all state contractors who receive reimbursement from the state [§16645.1]; (2) all recipients of state grants [§16645.2]; (3) all state contractors performing services pursuant to a state service contract, including a public works contract [§16645.3]; (4) all state contractors receiving over $50,000 in state funds pursuant to a state contract [§16645.4]; (5) all employers conducting business on state property [§16645.5]; (6) all public employers receiving state funds [§16645.6]; and (7) all employers who receive over $10,000 from any state program [§16645.7]. The breadth of coverage is one result of the influence of unions over California legislators in drafting and passing the onerous provisions of this legislation.

For covered employers, the statutory restrictions apply to virtually any expense related to union organizing, including the "salaries of supervisors and employees, incurred for research for, or preparation, planning, or coordination of, or carrying out" any activity to influence employees about whether to support a union. The statute also covers funds spent consulting with attorneys regarding the myriad of restrictions governing communications with employees during organizing drives. Cal. Govt. Code §16646(a). From payroll dollars allocated to employees attending training meetings to the cost of paper used for any written material distributed to employees, the statute sweeps across the spectrum of necessary expenditures.

Employers partially dependent on state funds may feel the greatest impact of the statutory restrictions in the presumption of non-compliance imposed by the law when any state funds are commingled with funds derived from other sources. Cal. Govt. Code §16646(b). The presumption is irrefutable and a violation automatically occurs unless state and private funds are segregated before a union campaign begins, regardless of whether any state funds were spent. To defeat this commingling presumption, employers are required by AB 1889 to maintain a separate accounting system for expenditures ranging from the salary paid to supervisors during training sessions to the cost of outside consultants and attorneys. Cal. Govt. Code §16645.2(c), §16645.7(c). Those records, which can become a rallying point for unions during organizing campaigns, must be provided to the California Attorney General upon request and to the unions during private enforcement actions. Cal. Govt. Code §16645.8(a).

Under the statute's enforcement structure, unions, as private taxpayers, have the authority to commence lawsuits demanding an audit of an employer's financial records and to pursue damages. Cal. Govt. Code §16645.8(a)-(d). Employers failing to demonstrate they maintain a separate accounting for state funds are subject to treble damages, requiring not only the disgorgement of state funds supposedly used to oppose union organizing, but also a 200% liquidated damage penalty. Cal. Govt. Code §16645.2(d), §16645.7(d). The effect of this enforcement mechanism will be to neutralize employer efforts to communicate with employees through otherwise lawful means about unionization. As summarized by a dissenting member of the Ninth Circuit, Judge Beezer, "[b]y creating seemingly impossible compliance burdens, by means of onerous accounting requirements and the threat of lawsuits, the statute essentially mandates employer neutrality . . . which in turn helps facilitate union organizing." Slip Op. at 11816.

AB 1889 Is Part of Broad National Effort

Under a delicate balance of rights established by the federal National Labor Relations Act, both employers and unions have the ability to communicate with employees about the pros and cons of unionization. Under the federal regulatory scheme of secret ballot elections conducted by the National Labor Relations Board, unions historically win about 50% of such elections. However, the success of unions is much greater when employers are bound by promises not to exercise their free speech rights, known as neutrality agreements, which often are demanded by unions as part of a negotiating strategy or corporate campaign. In fact, a 1999 study conducted by the AFL-CIO determined that unions win 84% of elections when employers have agreed to such one-sided neutrality pacts.

Given the effectiveness of neutrality, over the past several years unions have shifted their focus from seeking neutrality agreements with specific employers, to persuading legislators to enact laws encouraging or mandating employer neutrality at the state and local levels. To date, legislation similar to California's neutrality law has been proposed in at least 18 states; New York and Massachusetts have already passed similar legislation.

In California, the history of union attempts to enact neutrality legislation began with the 1999 legislative session when then Governor Gray Davis vetoed Assembly Bill 442 (A.B. 442, 1999-2000 Reg. Sess.), declaring: "This legislation has the potential to impose an unreasonable burden on businesses [and] also has the potential to significantly increase employers' litigation costs by providing countless opportunities for disgruntled employees to file civil actions . . . ." Undaunted, during the 2000 Legislative Session, the AFL-CIO slightly modified the legislation and reintroduced it as Assembly Bill 1889. On September 28, 2000, Governor Davis signed AB 1889 into law.

Key Employer Groups Rallied to Challenge the Law

In response to employer outcry, several individual employers and employer associations, including the United States Chamber of Commerce, California Chamber of Commerce, Employers Group, California Association of Health Facilities, California Healthcare Association, California Manufacturers and Technology Association, and California Association of Homes & Services for the Aging ("Plaintiffs' Group") challenged AB 1889 in a lawsuit filed against the California Attorney General's office. Shortly after the lawsuit was initiated, the AFL-CIO intervened to defend the legislation. Jackson Lewis represents the Plaintiffs' Group and has argued this case twice before the U. S. Court of Appeals for the Ninth Circuit.

En Banc Judicial Panel Reverses Prior Decisions Invalidating AB 1889

In two prior decisions in 2004 and 2005, the Ninth Circuit struck down the law. In its most recent decision issued on September 21, 2006, the 15-judge panel of the Ninth Circuit decided AB 1889 is a valid exercise of the state's ability to regulate its own spending power. (Prior articles posted on www.JacksonLewis.com, "Ninth Circuit Strikes Down California Union-Neutrality Legislation," posted April 20, 2004, and "Importance of Employer Speech at Heat of Second Blow to California's Union Neutrality Legislation," posted September 14, 2005, analyze the first two opinions from the Ninth Circuit.)

In its third decision, the Ninth Circuit initially acknowledged that through AB 1889, California is attempting to regulate labor relations and that the law is not protected by the market participant doctrine. That doctrine, relied upon by California and the unions in supporting AB 1889, protects certain spending decisions made "as a mere proprietor or market participant," rather than as an attempt to regulate labor relations. Slip Op. at 11777 (citing Dillingham Constr. N.A., Inc. v. County of Sonoma, 190 F.3d 1034, 1037 (9th Cir. 1999)). The court rejected that argument, finding that in enacting AB 1889, California was not attempting to obtain the "efficient procurement of needed good and services," but rather was enacting AB 1889 as part of a broad regulatory scheme. Slip Op. at 11779–17781.

In opposing the statute, the Plaintiffs' Group had argued that the federal NLRA preempted AB 1889. However, the court proceeded to construe narrowly the two NLRA preemption doctrines upon which the Plaintiffs' Group had relied to find AB 1889 was invalid.

In Machinists v. Wisconsin Employment Relations Commission (1976) 427 U.S. 132, 140, the United States Supreme Court declared that certain conduct neither expressly protected nor prohibited by the NLRA was nevertheless protected by federal labor law as "economic weapons in reserve" and "must be free of regulation by the States if the congressional intent in enacting the comprehensive federal law of labor relations is not to be frustrated." Id. at 155. The Supreme Court held these economic weapons must be "'controlled by the free play of economic forces,'" not by state or local regulation. Id. at 140 (quotingNLRB v. Nash-Finch Co., 404 U.S. 138, 144 (1971)).

Applying this reasoning, the Plaintiffs' Group argued that by limiting an employer's ability to counter union rhetoric, AB 1889 fundamentally alters the balance of power during union organizing. As the Supreme Court has noted, union organizing "campaigns are frequently characterized by bitter and extreme charges, countercharges, unfounded rumors, vituperations, personal accusations, misrepresentations and distortions. Both labor and management often speak bluntly and recklessly, embellishing their respective positions with imprecatory language." Linn v. United Plant Guard Workers, 383 U.S. 53, 58 (1966). The NLRB "does not 'police or censor propaganda used in the elections it conducts, but rather leaves to the good sense of the voters the appraisal of such matters, and to opposing parties the task of correcting inaccurate and untruthful statements.'" Id. at 60 (citingStewart-Warner Corp. 102 NLRB 1153, 1158 (1953)). The Ninth Circuit had previously noted that "'[t]he guaranty of freedom of speech and assembly to the employer and to the union goes to the heart of the contest over whether an employee wishes to join a union. It is the employee who is to make the choice and a free flow of information, the good and the bad, informs him as to the choices available.'" TRW-Semiconductor, Inc., 385 F.2d at 760 (9th Cir. 1967) (quotingSouthwire Co. v. NLRB, 383 F.2d 235, 241 (5th Cir. 1967)).

In reversing its two prior decisions and upholding the statute, a majority of the Ninth Circuit narrowly construed both AB 1889 and the Machinists doctrine. The court first questioned whether the doctrine even applies to the organizing context, or is limited to the collective bargaining process, which occurs after unions receive a majority of votes in an election conducted by the NLRB. Slip Op. at 11785 ("[T]hese cases strongly suggest that the Machinists doctrine is not likely to apply to organizing . . . ."). Ultimately, the court declined to rule on whether the Machinists doctrine applies in the organizing context. Instead, the court concluded that regardless of that issue, AB 1889 is permissible because it does not fundamentally restrict employer communication. Slip Op. at 11786 (California enacted AB 1889 to stay neutral in labor disputes and "has not intruded on conduct meant to be left to the free play of economic forces . . . ."). Ignoring the profound practical effect of AB 1889, the court noted that, technically, AB 1889 permits employers to spend private funds to oppose organizing. Consequently, the court held that AB 1889 "does not impede the flow of information to employees by regulating employers' speech." Slip Op. 11787.

The dissenting judges disagreed, arguing that "AB 1889, on its face, directly regulates the union organizing process itself and imposes substantial compliance costs and litigation risk on employers who participate in that process using the statutorily protected self-help mechanisms." Slip Op. at 11821. The dissenting judges recognized AB 1889 for what it is: "A coercive weapon" handed to unions by California which creates "an ever present threat of consuming and expensive litigation should an employer deign to offer its opinion on the merits of unionization. The statute ties the hands of management financially and allows pro-union groups free reign." Slip Op. at 11821.

Under another doctrine, known as Garmon preemption, the National Labor Relations Act preempts state or local enactments that regulate conduct that is arguably protected or prohibited by the federal statute. San Diego Building and Trades Council v. Garmon, 359 U.S. 236, 242-244 (1973). The Plaintiffs' Group argued that section 8(c) of the NLRA gives employers free speech rights, which AB 1889 impermissibly restricts. See e.g., United Technologies Corp., 274 NLRB 1069, 1074 (1985), enf'd 789 F.2d 121 (2nd Cir. 1986) ("an employer has a fundamental right, protected by Section 8(c) of the Act, to communicate with its employees"). The Plaintiffs' Group concluded that because AB 1889 eliminates or significantly impairs protected employer speech rights, the law is subject to Garmon preemption.

The majority of the court disagreed, holding that the NLRA does not protect an employer's ability to communicate its views on union organizing. Slip Op. at 11792 ("[S]ection 8(c) [of the NLRA] does not grant employers speech rights."). Again, the dissenting judges sharply criticized the majority holding. As summarized by Judge Beezer, AB 1889 "stifles employers from fully participating in organizing and exercising the rights that are explicitly granted to them by Congress under the NLRA. The statute rides roughshod over the delicate balance established by Congress between labor unions and employers." Slip Op. at 11808. As Judge Beezer aptly noted, "[a]n overriding principle of the NLRA is that the collective bargaining process cannot function unless both employers and employees have the ability to engage in open and robust debate concerning unionization." Slip Op. at 11822. In short, "Congress' intent, the Supreme Court and Ninth Circuit precedent all lead inextricably to the conclusion that Section 8(c) of the NLRAactually grants and protects speech rights of employers." Slip Op. at 11824.

The majority also held that even if AB 1889 were to regulate protected speech (as the dissenting judges argued), the law falls within a judicially recognized exception for "deeply rooted" local concerns. Slip Op. at 11799-11800 ("[A] state's control of its purse strings is of at least as great a concern to the state as its power to regulate defamatory speech, violence, [and] trespass . . . ."). The court's rationale that state spending is somehow immune from preemption challenge is seemingly at odds with precedent established by the United States Supreme Court: "[W]e cannot believe that Congress intended to allow States to interfere with the 'interrelated federal scheme of law, remedy, and administration,' under the NLRA as long as they did so through exercises of the spending power." Wisconsin Dep't of Indus. v. Gould Inc., 475 U.S. 282, 287 (1986).

Despite compelling arguments raised in the dissenting opinion, a majority of the en banc panel upheld AB 1889 as a valid exercise of California's state spending power. The court also determined that AB 1889 does not violate employers' First Amendment right to free speech. In the end, the court reversed the federal district court's order that invalidated key provisions of the legislation, vacated the pending injunction prohibiting enforcement of the law, and sent the case back to the district court for further proceedings at the district court level.

Further Appeals Likely

Despite the appeals court's order to continue the proceedings at the trial court level, the Plaintiffs' Group is considering asking the United States Supreme Court to review this latest decision. As explained by Bradley Kampas, the Jackson Lewis partner who argued the case for the Plaintiffs' Group, "employers simply cannot sit idly by while their federal right to communicate during union organizing campaigns is silenced by partisan state legislation."

What Employers Can Do Moving Forward

Judge Beezer noted in his dissenting opinion that AB 1889 requires employers to "maintain records demonstrating a complete separation of state funds. These records must identify every expense at all related to a union organizing campaign." Slip Op. at 11817. Under that interpretation, employers wishing to communicate with employees during union organizing consequently "must create and maintain two completely separate accounting and payroll systems." Slip Op. at 11817. It should be noted that Judge Fisher, writing for the majority, argues instead that AB 1889 does not require any specific accounting structure and "leaves employers free to design their accounting and payroll systems however they wish, provided only that they have 'records sufficient to show that state funds have not been used' to assist, promote or deter organizing."

One thing is clear despite these differing interpretations; it is critical that any covered employer wishing to oppose union organizing develop a compliance strategy before union organizing begins. Organizing campaigns are fluid and ever changing, with employers forced to refute union misstatements and rhetoric with little or no notice. Employers simply do not have the luxury of remaining silent for the weeks, days or even hours it may take to establish a compliant accounting system. Moreover, the co-mingling presumption created by AB 1889 likely applies to resources spent to set up the structure; creating an automatic violation for any employer who reacts after organizing begins! Unions, cognizant of the enforcement mechanisms established by AB 1889 and the disruption caused by litigation, will most assuredly be vigorously pursuing enforcement actions as part of their standard campaign tactics.

Jackson Lewis is working with employers covered by AB 1889 to establish accounting systems that appropriately segregate state and private funds. Additionally, the spending restrictions established by AB 1889 underscore the importance of ongoing management training on how appropriately to communicate with employees about unions and the realities of a unionized workplace. Once an organizing campaign is initiated, training sessions fall within the commingling trap and can lead directly to unforeseen liability. We urge any covered employer that may wish to oppose union organizing to consult with competent legal counsel now.