• Ninth Circuit Court of Appeals Rules That AB 1889 Is Preempted by the National Labor Relations Act. AB 1889 Would Have Prohibited California Employers That Receive More Than $10,000 in State Funding Annually From Using Any State Money to Promote or Deter Unionization.
  • May 2, 2004 | Author: Barry S. Landsberg
  • Law Firm: Manatt, Phelps & Phillips, LLP - Los Angeles Office
  • The United States Court of Appeals for the Ninth Circuit has ruled that the National Labor Relations Act preempts California's AB 1889, enacted by the California Legislature in 2000, which would have prohibited employers that receive more than $10,000 in state funding annually from spending any of that state money on activities to assist, promote, or deter union organizing. Chamber of Commerce of the United States v. Lockyer, No. 03-55169 (April 20, 2004); 2004 WL 835364.

    The Ninth Circuit noted that the case required it to decide whether the state's legitimate interest in controlling how its money is spent was trumped by the federal government's interest in implementing national labor policy. The preamble to the law at issue, California Government Code Sections 16645-49 ("section 16445" or the "statute"), stated that it is California's policy not to interfere with an employee's choice about labor union representation, so the state should not "subsidize efforts by an employer to assist, promote, or deter union organizing." Therefore, the Legislature intended section 16445 to prohibit employers from using state funds to influence employees regarding unionization. The statute also imposed certification and record-keeping requirements on employers, as well as fines and penalties for violations, and it created a private right of action (by any taxpayer) for violations.

    In April, 2002, a group of business organizations and healthcare facilities (collectively, the "Chamber of Commerce" or "plaintiffs") brought suit against the California Attorney General and the Department of Health Services (along with two of its officials) to challenge the statute on a variety of grounds, including preemption by the National Labor Relations Act ("NLRA"). Over the next several months, both sides moved for summary judgment, and the district court granted partial summary judgment to the Chamber of Commerce on NLRA preemption grounds. The district court also issued an injunction to prevent the state from enforcing the law.

    On appeal, the Ninth Circuit first had to determine whether the statute constituted a "regulation" of labor relations, or alternatively, whether the state's action fell within the "market participant" exception to NLRA preemption. The court interpreted prior precedent as establishing that the state does not act as a "market participant" when it uses its spending power to implement broad labor policy, as opposed to furthering its interest in "efficient procurement of goods and services" or in achieving some other narrow goal. The court concluded that in enacting section 16445, the state was not acting to procure goods and services, and it intended to create a statewide labor policy affecting all employers who receive more than $10,000 in state funds. The law was not a narrow attempt to achieve a specific objective, but rather was designed to alter "the ability of a wide range of recipients of state money to advocate about union issues."

    The Ninth Circuit concluded that the market participant exception did not apply, and ruled that section 16445 was preempted by the NLRA. The court applied the U.S. Supreme Court's decision in Lodge 76, International Association of Machinists & Aerospace Workers v. Wisconsin Employment Relations Commission, 427 U.S. 132 (1976) (Machinists preemption, which prohibits states from interfering with the Congressionally established balance of power between management and labor).

    In Machinists, the Supreme Court held that Congress intended any part of the collective bargaining process not specifically regulated by the NLRA to be unregulated by the states as well, and subject instead to the "free play of economic forces." According to the Ninth Circuit, the extensive case law on the balancing of speech interests in this context emphasizes that the collective bargaining process requires "open and robust advocacy by both employers and employees." Therefore, a state regulation that specifically targets the union bargaining process is preempted, even if it does so by restricting the use of state funds.

    The Ninth Circuit held that section 16445 was clearly preempted, because its stated purpose and its effect were to interfere with and limit employers' participation in the bargaining process. An employer that decided to be anything other than neutral with respect to union organizing would incur record-keeping costs, and would be exposed to substantial liability for violating the statute -- including not only equitable relief and compensatory damages, but also punitive civil penalties.

    The court was not persuaded by the state's argument that the plaintiffs' challenge to the statute did not meet the high standard for facial attacks, i.e., that there is no set of circumstances under which the law would be valid. The court found that the facial versus as-applied distinction was irrelevant, because the statute directly targeted and conflicted with NLRA union-organizing processes. Therefore, there could be no circumstances under which the statute would be valid as applied to NLRA-covered employers, and it was preempted regardless of whether the challenge was considered facial.

    The court also rejected an argument that under First Amendment jurisprudence, the government can limit the use of public funds to subsidize speech or conduct, which is what the state was doing with section 16445. The court observed that the issue was not whether California has the constitutional authority to control use of its funds, but whether it could exercise its spending power in this particular way, consistent with Congress's intent in enacting the NLRA. First Amendment analysis generally does not apply in the NLRA context, because the NLRA imposes its own unique constraints on speech. Moreover, under Machinists, speech that is not expressly regulated by the NLRA cannot be regulated by the states. Similarly, limitations on the use of federal grant or program funds to advocate for or against unionization also did not alter the conclusion that Congress did not intend to allow the states to interfere with employers' prerogatives to support or oppose union organizing. None of those federal limitations involve the kind of penalty scheme incorporated in section 16445, nor do they allow for private civil actions. The state statute clearly constrained employers' freedom to advocate, and thus it was preempted.

    The Ninth Circuit's Chamber of Commerce decision invalidating AB 1889 will be welcomed by any business that meets the definition of a state contractor, and which actually or potentially employs union workers. For healthcare providers, the decision means that California employers who participate in Medi-Cal need not be concerned about keeping records of union-related expenditures for the state, or about substantial liability exposure for participating in robust debate over unionization -- as Congress intended. It remains to be seen whether the state will seek or obtain Supreme Court review of the Chamber of Commerce decision.