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Ninth Circuit Court of Appeals Upholds California Labor Neutrality Law

October 11, 2006

Ninth Circuit Court of Appeals Upholds California Labor Neutrality Law

On September 21, 2006, the full 15-member United States Court of Appeals for the Ninth Circuit upheld a California “labor neutrality” statute that prohibits California employers from spending money they receive from the state on resisting union organizing activities.  Chamber of Commerce of U.S. v. Lockyer, 2006 WL 2699472, 180 L.R.R.M. (BNA) 2641 (9th Cir. Sept. 21, 2006).  Overturning a prior ruling of a three-judge panel, the court rejected the contention of employer groups that the law was invalid as preempted by the National Labor Relations Act.

The California Statute

The law, passed in 2000, prohibits state contractors, and other companies that receive more than $10,000 from the state, from using that money to “assist, promote or deter union organizing.” Cal. Gov. Code §§ 16645.2 and 16645.7.  The statute requires covered employers to certify that no state funds will be used for such prohibited purposes, and to maintain “records sufficient to show that state funds have not been used for those expenditures.” §§ 16645.2(c), 16645.7(b), (c).

The statute specifies as prohibited “any expense, including legal and consulting fees and salaries of supervisors and employees, incurred for research for, or preparation, planning, or coordination of, or carrying out, an activity to assist, promote, or deter union organizing.” § 16646(a).  The law expressly does not apply, however, to “activit[ies] performed” or “expense[s] incurred” in connection with “[a]ddressing a grievance or negotiating or administering a collective bargaining agreement” and “[n]egotiating, entering into, or carrying out a voluntary recognition agreement with a labor organization.” § 16647(a), (d).

Violators of the statute are subject to fines and penalties, including disgorgement of the state funds previously received and a civil penalty equal to twice the amount of the state funds.  Both the State Attorney General and private taxpayers may sue employers under the statute, and plaintiffs may recover reasonable attorneys’ fees and costs.

Prior Litigation

When the neutrality statute was passed in 2000, employer associations, including the California Chamber of Commerce, challenged the law and, in 2002, a California federal district court judge blocked its application.  The court found that the law was preempted by the National Labor Relations Act (NLRA) because it regulated employer speech about union organizing that was permitted by the NLRA.  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, 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”).

As previously reported on this website, a panel of the Court of Appeals for the Ninth Circuit affirmed the district court’s opinion in 2004.  Chamber of Commerce of U.S. v. Lockyer, 2004 WL 835364 (9th Cir. 2004).  (See “Ninth Circuit Finds California ‘Labor Neutrality’ Law Preempted by Federal Labor Law,” http://www.kmm.com/articles-library-304.html)  The Court of Appeals then granted requests by unions and the State of California for a rehearing by the full court. 

The Court of Appeals Opinion 

In its September 21, 2006 decision, the Court of Appeals overturned the earlier panel opinion and sustained the California law.  The court found that the California statute does not violate employer freedom of speech or interfere with the federal regulation of labor relations under the NLRA because “[e]mployers remain free to convey their views regarding unionization, and thus to exercise their First Amendment rights, provided only that they do not use state grant and program funds to do so.”

The court also found that, although the purpose of the statute was regulatory in nature (to prevent state funds from being used to subsidize an employer’s efforts to influence employee choice), the law was not 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.  The Ninth Circuit concluded that the California statute was not subject to preemption under Machinists because the legislature was not mandating union neutrality and an employer “has and retains the freedom to spend its own funds however it wishes.”  Rather, “[i]n restricting the use of state funds, California has not made employer neutrality or the substantive terms of employment between employer and employee a condition for the receipt of state funds.” (emphasis in original.) 

The Court of Appeals also ruled that the California statute was not preempted by the NLRA under the theory set forth in another Supreme Court case, San Diego Building Trades Council v. Garmon, 359 U.S. 236 (1959).  The Garmon preemption theory forbids state regulation of conduct which is actually or arguably protected by Section 7 of the NLRA (such as the right to engage in union activity), as well as conduct which constitutes an unfair labor practice under Section 8 of the NLRA (such as discrimination against employees because of union activity or other interference with the rights protected by Section 7).   The Ninth Circuit found that the California statute was not preempted under Garmon because in deciding a case under the statute, a California court would only focus on whether state funds were used to influence employees, not whether the attempt to influence employees violated the NLRA; consequently, there would be no potential overlap between the jurisdiction of the National Labor Relations Board over alleged unfair labor practices and the jurisdiction of a California court in enforcing the labor neutrality law.

New York Labor Neutrality Law

As previously reported on this website, the federal district court for the Northern District of New York ruled in 2005 that an amendment to Section 211-a of New York's Labor Law which was similar to the California legislation was preempted by the NLRA.  Healthcare Association of New York State, Inc. v. Pataki, 2005 WL 1155687 (N.D.N.Y. May 17, 2005).  (See “Judge Rules New York Labor Neutrality Law Preempted by NLRA,” http://www.kmm.com/articles-library-343.html).  In so holding, the New York court found the prior decision by the three-judge panel of the Ninth Circuit Court of Appeals (the decision now vacated by the September 21, 2006 opinion) “particularly instructive.”  An appeal of the district court’s decision was filed, oral arguments were heard before the U.S. Court of Appeals for the Second Circuit on February 10, 2006, and the appellate court’s decision is now pending. 

It remains to be seen whether the Second Circuit will find the Ninth Circuit’s recent decision to be persuasive.  It is likely, however, that the ultimate fate of the labor neutrality measures in California and New York will have to be resolved by the U.S. Supreme Court.