Ninth Circuit Strikes Down California Union-Neutrality Legislation

By Jackson Lewis P.C.
Apr 20, 2004

In a much anticipated decision, on April 20, 2004 the Ninth Circuit Court of Appeals invalidated key provisions of a California law effectively mandating employer neutrality in the face of union organizing. Under the neutrality law, countless employers receiving state funds are prohibited from using any of those funds to "assist, promote, or deter union organizing." Cal. Govt. Code § 16645(a).

The Ninth Circuit concluded in Chamber of Commerce v. Lockyer (9th Cir. 2004) 2004 U.S. App. LEXIS 7578, 174 L.R.R.M. 2876, that California's neutrality legislation fundamentally alters the robust exchange of speech and ideas during union organizing which is critical to our national labor relations policy. The court found such spending restrictions are preempted by the National Labor Relations Act ("NLRA") under the Supreme Court's decision in Int'l Assn of Machinists and Aerospace Workers v. Wisconsin Employment Relations Comm'n. ("Machinists") (1976) 427 U.S. 132, 140, 96 S. Ct. 2548 and its progeny. Machinists preemption generally prohibits states from disrupting the "free play of economic forces" between employers and unions which Congress intended to be left unregulated.

In reaching its decision, the court rejected the state's argument that as a market participant, California could dictate how its money is spent. The court concluded that spending restrictions which are not designed or intended to result in better or more efficient procurement of services are not saved by the market participant doctrine.

California's Neutrality Legislation Is Part Of A Broader National Campaign

Under the delicate balance of employer and union speech rights established under the NLRA, unions historically win about 50% of secret ballot elections conducted by the National Labor Relations Board ("NLRB"). On the other hand, a 1999 AFL-CIO study determined that unions win 84% of elections when employers are bound by one-sided neutrality clauses.

Over the past several years, unions have shifted their focus from seeking neutrality agreements with specific employers, to obtaining legislation 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, unions previously attempted to enact neutrality legislation. During the 1999 legislative session, 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.

California's Neutrality Law

Assembly Bill 1889 was enacted by the California Legislature as an addition to the Government Code as sections 16645 through 16649. Generally, the law prohibits 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 spending restrictions imposed by AB 1889 apply to every employer expense related to opposing a union organizing campaign. Cal. Govt. Code §16646(a). The statute not only covers "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, but also funds spent consulting with attorneys regarding the myriad of restrictions governing communications with employees during organizing drives.

AB 1889 requires employers to maintain financial records demonstrating that state funds are completely segregated, which must be provided to the California Attorney General upon request. The law also imposes an irrebuttable presumption of improper expenditures as a result of commingling regardless of whether employers have sufficient private funds so that no state funds were, in fact, actually expended.

The law grants unions the authority, as private taxpayers supposedly pursuing the public interest, to commence lawsuits demanding to audit an employer's financial records, and to obtain injunctive relief, damages and civil penalties. AB 1889 imposes severe penalties for even innocent violations. Several employer classifications must reimburse the state for misspent funds and are also subject to 200% penalty. Other employer classifications are subject to a $1,000 civil penalty per employee, per meeting held to oppose union organizing. AB 1889 has been used by unions as part of corporate campaigns to harass employers during union organizing.

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.

The Plaintiffs' Group argued that to comply with AB 1889, employers would be forced to establish and administer two accounting systems for receipt and disbursement of state and private funds, including duplicate payroll systems. Furthermore, because AB 1889 requires employers to certify compliance before receiving state funds, AB 1889 effectively requires employers to comply with these onerous burdens before any actual union organizing. In addition to the practical hurtles, the specter of union enforcement actions and draconian penalties serves to chill employer opposition to union organizing efforts.

Based on these and other arguments, the employers' groups argued that legislation effectively mandating employer neutrality in the face of union organizing is preempted by the NLRA under the Garmon and Machinists preemption doctrines.

Garmon and Machinists Preemption

The United States Supreme Court has developed two preemption doctrines which invalidate state or local regulations that infringe on the uniform federal system of labor relations set forth in the NLRA.

A. Garmon Preemption

First, the NLRA preempts state or local enactments that regulate conduct arguably protected or prohibited by the NLRA. San Diego Building and Trades Council v. Garmon (1973) 359 U.S. 236, 242-244, 79 S.Ct. 1278. "[I]f the conduct at issue is arguably prohibited or protected, otherwise applicable state law and procedures are ordinarily pre-empted." Local 926, International Union of Operating Engineers v. Jones (1983) 460 U.S. 669, 676, 103 S.Ct. 1453.

The Plaintiffs' Group argued that section 8(c) of the NLRA confers speech rights to employers. 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.

B. Machinists Preemption

In Machinists v. Wisconsin Employment Relations Commission (1976) 427 U.S. 132, 140, 96 S.Ct. 2548, the Supreme Court overturned a state court injunction that prohibited a union from refusing to work overtime during collective bargaining negotiations. The 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. (1971) 404 U.S. 138, 144, 92 S.Ct. 373).

The Plaintiffs' Group argued that by limiting employers' ability to refute 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 (1966) 383 U.S. 53, 58, 86 S.Ct. 657. 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. (1953) 102 NLRB 1153, 1158 ). 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)).

AB 1889's Proponents Defended AB 1889 As A Spending Restriction

The AFL-CIO and the California Attorney General's office sought to avoid Machinists preemption by arguing that as a market participant, California has the power to dictate how its funds are spent. In the years following Machinists, federal courts have recognized a limited right of state or local governments to act as "market participants" without triggering NLRA preemption.

For example, in Building & Constr. Trades Council v. Associated Builders and Contractors of Mass. ("Boston Harbor") (1993) 507 U.S. 218, 113 S.Ct. 1190, the Massachusetts Water Resources Authority required contractors cleaning up the Boston harbor to sign a Project Labor Agreement, which generally requires subcontractors to join a previously negotiated collective bargaining agreement. The Supreme Court upheld the requirement despite its effect on employers' ability to remain non-union, finding "[t]here is no question but that MWRA was attempting to ensure an efficient project that would be completed as quickly and effectively as possible at the lowest cost." Id. at 231-232.

In Wisconsin Dep't of Indus., Labor and Human Relations v. Gould (1986) 475 U.S. 282, 288-289, 106 S.Ct. 1057, the Supreme Court criticized broad application of the market participant doctrine. Gould involved a Wisconsin law that barred contractors with a history of labor violations from contracting with the state. Id. at 283-84. Wisconsin defended the legislation, claiming as a market participant, it had the right to condition how its funds were spent. Id. at 287. The Court disagreed, noting Wisconsin's reliance on the market participant doctrine "seems to us a distinction without a difference . . . because on its face the disbarment statute serves plainly as a means of enforcing the NLRA." Id.

The Supreme Court in Gould summarized its holding as follows: "[W]e cannot believe that Congress intended to allow States to interfere with the 'interrelated federal scheme of law, remedy, and administration,' . . . as long as they did so through exercises of the spending power." Id. at 290 (internal citations omitted). While private contractors could choose not to conduct business with labor offenders, "government occupies a unique position of power in our society, and its conduct, regardless of form, is rightly subject to special restraints." Id. at 290.

The Ninth Circuit has recognized that the market participant doctrine may apply when states act for proprietary purposes on specific projects. In Dillingham Construction N.A., Inc. v. County of Sonoma (9th Cir. 1999) 190 F.3d 1034, the court acknowledged that the market participant doctrine applies when state or local governments apply spending restrictions to specific projects which are founded on procurement concerns such as efficiency. Id. at 1038 ("In contrast to [Boston Harbor] and [Associated Builders & Contractors, Inc. v.] City of Seward[, 966 F.2d 492 (9th Cir 1992)] and as noted above, the State in this case did not establish the . . . law specifically for the detention facility project and the State was not motivated by management concerns . . . .").

District Court Proceedings

In May 2002, the Plaintiffs' Group filed a motion for summary judgment, arguing that AB 1889 is preempted by the NLRA. On September 23, 2002, the District Court granted summary judgment in part, finding sections 16645.2 and 16645.7 preempted under the NLRA. Based on procedural challenges as to standing, the District Court did not reach preemption for the remaining employer classifications. The District Court further held that public employers subject to section 16645.6 could not raise an NLRA preemption argument in federal court. The court issued an injunction, precluding the Attorney General's office, the AFL-CIO "and those persons in active concert or participation with them who receive actual notice of [the] Order" from taking any action to enforce sections 16645.2 or 16645.7.

Ninth Circuit Upholds Preemption

In order to obtain expedited appellate review, the Plaintiffs' Group stipulated to a partial final judgment, thereby permitting interlocutory appeal. The parties agreed to stay the remaining portions of the challenge pending a final determination from the Ninth Circuit on sections 16645.2 and 16645.7.

In a rare act, the NLRB filed an amicus brief before the Ninth Circuit Court of Appeals, supporting the Plaintiffs' Group's argument that AB 1889 is preempted under both Garmon and Machinists. In September 2003, the Ninth Circuit heard oral argument and on April 20, 2004, the Honorable Raymond C. Fisher issued the court's opinion.

The court initially focused on the market participant doctrine, stating that "[t]he NLRA 'does not preempt actions taken by a state when it . . . acts as a mere proprietor or market participant.'" Chamber of Commerce, supra, 2004 U.S. App. LEXIS 7578 at *8 (quotingDillingham, supra, 190 F.3d at 1037. The court applied a two-part analysis previously utilized by the Fifth Circuit Court of Appeals. SeeCardinal Towing & Auto Repair, Inc. v. City of Bedford (5th Cir. 1999) 180 F.3d 686, 693. First, courts determine whether the challenged action reflects an entity's own interest in efficient procurement. The market participant doctrine protects state spending policies that are "essentially proprietary." Second, courts must determine whether the inference of preemption is overcome by the scope of the challenged action. The court intimated that the market participant doctrine may protect policy-driven spending decisions, so long as the decisions do not effectuate "broader social regulation." Chamber of Commerce, supra, 2004 U.S. App. LEXIS 7578 at *13-15.

After applying the Cardinal Towing test, the Ninth Circuit rejected the market participant exception as applied to AB 1889. The court noted that the statute's preamble clearly establishes the law was not based on proprietary interests, but rather a stated intention not to allow state funds to be utilized for influencing employee choice about unionizing. The court also noted that "there is no question but that sections 16645.2 and 16645.7 are designed to have a broad social impact, by altering the ability of a wide range of recipients of state money to advocate about union issues." Id. at *14-15. As such, the presumption of social regulation was not defeated and the market participant doctrine did not apply.

After rejecting the market participant doctrine, the court concluded that sections 16645.2 and 16645.7 were preempted under the Machinists doctrine because AB 1889 "both substantially and purposefully alters the balance of forces in the union organizing process, interfering directly with a process protected by the NLRA." Id. at *30.

The court focused on the importance of maintaining an "open and robust" exchange of ideas during union organizing campaigns. As the court explained, "[a]lthough a state's ability to control the use of its funds is an important state interest, regulation that specifically targets and substantially affects the NLRA bargaining process will be preempted, even if such regulation comes in the form of a restriction on the use of state funds." Id. at *28.

The court concluded that AB 1889 "is on its face designed to interfere directly with the NLRA's own system for the promotion or deterrence of union organizing by employers and employees. The statute will alter the NLRA process of collective bargaining and union organizing, because an employer who decides against neutrality will incur both compliance costs and litigation risk." Id. at *29. The court took particular note of the liquidated damage provisions, finding that punitive penalties are "of particular concern in the NLRA context." Id. at *30.

The court did not decide whether the NLRA creates "an affirmative right" for employers to engage in an "open debate on unionization." Id. at *22, fn 6. As such, the court declined to rule on Garmon preemption.

Further Appellate Proceedings

At the time this article went to press, further appeals of the Ninth Circuit's decision are pending. Given the change of political environment following Governor Schwarzenegger's election, the Plaintiffs' Group had hoped the Attorney General's office would have allowed the Ninth Circuit's decision would become final, thereby conserving the State's sparse resources. However, both the Attorney General's office and the AFL-CIO have filed requests for the court's decision to be reheard en banc.

The Plaintiffs' Group is optimistic that the well-reasoned decision by the three-judge panel – containing both Democrat and Republican appointees -- will withstand any further challenge.

Far-Reaching Implications

The Ninth Circuit's decision is an enormous victory for employers and will likely have far reaching implications and consequences. Given the breadth of the court's decision, the Plaintiffs' Group is confident that the remaining sections of AB 1889 will be invalidated once brought before the District Court.

This decision is being closely monitored in New York, where a group of employers have filed a lawsuit challenging the New York law which effectively mandates employer neutrality through spending restrictions. An employer challenge to the newly enacted Massachusetts law, which effectively requires neutrality in the long term healthcare industry, is likely forthcoming. Hopefully, legislatures in other states will now resist union pressure to enact spending limits which interfere with our federal scheme of labor relations.

This decision marks an important turning point in reestablishing open and honest communication regarding potential unionization.