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Ninth Circuit Finds California "Labor Neutrality" Law Preempted by Federal Labor Law

April 25, 2004

On April 20, 2004, the U.S. Court of Appeals for the Ninth Circuit affirmed a federal district court decision striking down a California statute prohibiting the use of state funds to encourage or discourage union organizing activity, on the grounds that the statute is preempted by the National Labor Relations Act ("NLRA"). Chamber of Commerce of U.S. v. Lockyer, No. 03-55166, 2004 WL 835364 (9th Cir. 2004).

Under the California law, recipients of state grants and employers receiving state funds in excess of $10,000 per year were prohibited from using the state-provided money to "assist, promote or deter union organizing." Cal. Gov. Code ยงยง 16645.2 and 16645.7. The California statute also required employers to certify that no state funds would be used for any of the prohibited purposes. Employers that violated the statute were required to return the state funds and pay civil penalties of $1,000 per violation and/or an amount equal to twice the amount of the state funds.

The U.S. District Court for the Central District of California found that the law was preempted by the NLRA because it undermined federal labor policy by altering the Congressional design for the collective bargaining process. Chamber of Commerce of U.S. v. Lockyer, 2002 WL 31207130, 170 L.R.R.M. (BNA) 3185 (C.D. Cal. Sep. 16, 2002). Specifically, the district court cited section 8(c) of the NLRA, the so-called "free speech" section, which provides that the "expressing of any views, argument, or opinion, or the dissemination thereof" does not violate the NLRA (provided that the communication includes no "threat of reprisal or force or promise of benefit").

In affirming the district court's ruling, the Ninth Circuit held that the California statute was preempted by the NLRA under the theory set forth by the Supreme Court in Machinists v. Wisconsin Employment Relations Comm'n , 427 U.S. 132 (1976). In Machinists, the Supreme Court ruled that state regulation of activities not explicitly protected or regulated by the NLRA is prohibited if Congress intended those activities to remain unregulated and to be left to the free play of economic forces. Because the California statute "both explicitly targets and directly regulates processes controlled by the NLRA" and "it interferes with an area Congress intended to leave free of state regulation," the Ninth Circuit found that the statute violated the Machinists doctrine. According to the Ninth Circuit, "the [California] statute has both the explicit purpose and the substantive effect of interfering with the NLRA's system for organizing labor unions." A state-imposed requirement of labor neutrality, the Ninth Circuit reasoned, is inconsistent with federal law "when it directly targets and substantially affects open employer discussion about unionization, even if such regulation comes in the form of a restriction on state funds."

The California Law contains provisions very similar to those contained in New York's "labor neutrality" law, an amendment to Section 211-a of New York's Labor Law, which went into effect in December 2002. See New York Labor Neutrality Law Enacted (October 7, 2002) and Bill Prohibiting Employers From Using State Funds To Oppose Union Organizing Passes New York State Assembly and Senate (July 23, 2002). The New York law prohibits employers who receive funds from New York State from using those funds to "train managers, supervisors or other administrative personnel regarding methods to encourage or discourage union organization, or to encourage or discourage an employee from participating in a union organizing drive." Significantly, this prohibition extends to the use of State money to "hire or pay attorneys, consultants or other contractors," and the use of State money to "hire employees or pay the salary and other compensation of employees whose principal job duties are to encourage or discourage union organization . . ."

Like the California statute, New York 's "labor neutrality" law has been challenged in a lawsuit in federal court, Healthcare Association of New York State , et al. v. George Pataki, et al., No. 03-CV-0413, in which the U.S. Chamber of Commerce, the lead plaintiff in the Lockyer case, has submitted an amicus brief. In defending this lawsuit New York will likely argue, as did California in Lockyer , that in enacting the "labor neutrality" law the State was merely "controlling the use of state funds" and acting in a proprietary manner as a "market participant," citing the Supreme Court's decision in Building & Trades Council v. Associated Builders, 507 U.S. 218 (1993). In Associated Builders, the U.S. Supreme Court ruled that the NLRA did not preempt a state authority's enforcement of a requirement that contractors on a state construction project conform to the terms of a pre-negotiated project labor agreement intended to ensure labor peace throughout the term of the project. Both the district court and the Court of Appeals in Lockyer rejected this argument, however, and ruled that because the California statute was not specifically tailored to one particular project, the state was exercising its regulatory power, not merely its spending power. Therefore, the California statute did not fall within the market participation exception to Machinists preemption under the NLRA.

It remains to be seen whether the courts will find that New York 's Labor Neutrality Law, which is clearly not limited to one particular project, is a permissible proprietary action regarding the use of state funds, or a prohibited regulatory action preempted by the NLRA. Developments in the New York case will be reported on this website.