Agreeing with the position taken by Jackson Lewis before the Ninth Circuit Court of Appeals, the United States Supreme Court has ruled that key provisions of California’s so-called labor relations neutrality statute run afoul of federal labor law and are unenforceable.  The ruling emphasizes that robust debate on issues concerning union representation is a fundamental policy embodied in our national labor law and that a state statute cannot interfere with it.  Chamber of Commerce v. Brown, No. 06-939 (June 19, 2008).

Indisputably, union representation has been declining steadily.  It has dropped from 35 percent of the workforce in the 1950s to about 12 percent today.  Facing a steady erosion in membership and dues income, a source of funding for organizing campaigns, labor unions increasingly have spurned traditional secret ballot elections in favor of card-check recognition and neutrality agreements.  According to one account, unions prevail in approximately 85 percent of organizing campaigns when employers are bound to neutrality clauses.  Of course, employers typically are unwilling to agree on neutrality, absent coercion or outside pressure.  Well aware of the advantages provided by neutrality agreements, unions have resorted to lobbying state and local governments to pass legislation encouraging or mandating employer neutrality.  California’s neutrality law resulted from such political efforts.  

Concluding that the California statute “impermissibly predicates benefits on refraining from conduct protected by federal labor law and chills one side of the robust debate which has been protected under” the National Labor Relations Act, the Supreme Court may have signaled an end to state and local legislative attempts to silence private sector employers through the imposition of spending restrictions unrelated to any governmental proprietary purpose.

The California Law

Assembly Bill 1889, drafted by unions and signed by former Governor Gray Davis, prohibited employers receiving state grants or more than $10,000 per year for a state program from using any of those funds to “assist, promote, or deter union organizing.”  The statute’s ban broadly encompassed “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.”  AB 1889, however, did not preclude covered employers from using state funds to enter into voluntary recognition agreements or to negotiate collective bargaining agreements.

The Bill’s enforcement provisions were severe.  AB 1889 granted unions, as private taxpayers, the authority to commence lawsuits demanding an audit of employers’ financial records, and to obtain injunctive relief, damages and civil penalties.  Further, the law imposed severe penalties for even innocent violations, including reimbursement for misspent funds and a 200 percent penalty.  The State also could seek legal recourse.  Not surprisingly, unions invoked their authority under AB 1889 as part of corporate campaigns to organize employees.

The Fight Begins

In response to employer outcry, the United States Chamber of Commerce, the California Association of Health Facilities, the California Healthcare Association and other employer groups (the “Employer Groups”) brought a lawsuit in federal district court against the California Attorney General’s Office (the “California AG”), arguing legislation mandating employer neutrality is preempted by the National Labor Relations Act (“NLRA”).  The Employer Groups selected Jackson Lewis to represent them.

The Employer Groups argued that AB 1889 should be struck down under two “preemption” doctrines recognizing the supremacy of federal law.  Under the first, Garmon preemption, state and local governments are precluded from interfering with what Congress actually or arguably prohibited or protected through passage of the NLRA.  Under the second, Machinists preemption, states are prohibited from regulating areas that Congress intended to be left to the “free play of economic forces.” 

In 2002, the United States District Court for the Central District of California granted summary judgment to the Employer Groups, agreeing that the NLRA preempted certain provisions of AB 1889.  The California AG, along with the California Labor Federation and the AFL-CIO, appealed the decision to the Ninth Circuit Court of Appeals.  In a rare move, the NLRB filed briefs in support of the Employer Groups at the intermediate appellate level. 

A unanimous Ninth Circuit panel upheld the district court’s ruling in April 2004, concluding that AB 1889 fundamentally altered the robust exchange of speech and ideas during union organizing which is critical to our national labor relations policy.  According to the Ninth Circuit, the spending restrictions at issue were subject to Machinists preemption.  The court rejected the state’s argument that as a “market participant,” California could dictate how its money is spent.  The court panel recognized that spending restrictions not designed or intended to result in better or more efficient procurement of services are not saved by the market participant doctrine.

Thereafter, in an unusual turn of events, the Ninth Circuit granted defendants’ petition for rehearing and issued another decision in the fall of 2005.  This time, the court ruled that AB 1889 was subject to both Garmon and Machinists preemption.  The court concluded, “Although cast nominally as an effort to ensure state neutrality, the California statute, by discouraging employers from exercising their protected speech rights, operates to significantly empower labor unions as against employers. In doing so, the California statute runs roughshod over the delicate balance between labor unions and employers as mandated by Congress through the National Labor Relations Act.” 

In late 2006, the Ninth Circuit was once again asked to reconsider its decision.  Sitting en banc, the 15-judge court decided contrary to the court’s two prior decisions and upheld AB 1889. Although the court recognized that California passed AB 1889 with a regulatory purpose and not a proprietary one, the court nonetheless ruled that AB 1889 was not preempted either by Garmon or Machinists preemption.  Indeed, according to the Ninth Circuit’s full court decision, the statute was a permissible exercise of state authority because it did not fundamentally restrict employer communication protected by federal law.  Ignoring the profound inhibiting effect of AB 1889, the court noted that, technically, AB 1889 permits employers to spend private funds to oppose organizing. 

The Final Round

In a 7-2 decision delivered by Justice John Paul Stevens, the Supreme Court squarely rejected California’s attempt to encourage unionization and stifle opposition through regulatory spending restrictions in disregard of the NLRA.  AB 1889 is preempted under the Machinists preemption doctrine, the Court ruled, because it “imposes a targeted negative restriction on employer speech about unionization” which cuts directly against “congressional intent.”    

At a fundamental level, the Court recognized that through AB 1889, California made a “policy judgment that partisan employer speech necessarily ‘interferes with an employee’s choice about whether to join or to be represented by a labor union.’”  The high court also made clear that federal labor law has been carefully crafted “to encourage free debate on issues dividing labor and management.”

The Court rejected each reason advanced for upholding AB 1889, including the Ninth Circuit’s conclusion that AB 1889 should be spared because it restricts use and not receipt of state funds.  The Court concluded, “California may not indirectly regulate [noncoercive speech about unionization] by imposing spending restrictions on the use of state funds.”  Whether the regulation was delivered via a use restriction or a spending restriction was immaterial, the Court held, as it is simply “beyond dispute” that California enacted AB 1889 to regulate labor relations on behalf of unions. 

The Court similarly rejected a union argument that AB 1889 imposes the same type of spending restrictions found in a few federal grant statutes.  That argument, which had a certain degree of surface appeal, in the Court’s view, ignored the fundamental Supremacy Clause issue underlying this challenge.  “Congress has the authority to create tailored exceptions to otherwise applicable federal policies and (unlike the States) it can do so in a manner that preserves national uniformity without opening the door to a 50-state patchwork of inconsistent labor policies,” the Court concluded. 

Because the Court struck down AB 1889 under a Machinists analysis, it did not consider the question of whether the law is also preempted under Garmon, or a broader conflict preemption doctrine advanced by the NLRB. 

The case was remanded to the District Court for further proceedings.     

The Decision’s Significance

Legislation similar to California’s neutrality law has been proposed in at least 15 other states.  Thus, the Supreme Court’s decision is of enormous significance to both employers in California and in other states facing the threat of similar legislation.  Although this decision marks the end of one chapter in unions’ attempts to alter the balance of labor relations by enlisting the assistance of local and state governments, many more conflicts loom on the horizon.  

Other battle grounds will likely involve an increasing web of local ordinances intended to encourage union organizing through the imposition of spending restrictions or the outright requirement of neutrality.  The Supreme Court has reaffirmed that federal labor law is premised on employees being given information about unions through a free and robust debate.  State or local attempts to prevent employees from having the benefit of that debate are now clearly subject to challenge.    

In addition to the push at the state and local level, organized labor has also leveraged the power of the purse in the federal arena.  The Employee Free Choice Act (“EFCA”), if passed, would significantly tilt the playing field of labor relations to the detriment of all, except organized labor.  Most important, the Act would deprive employees of the chance to make a considered choice on union representation by eliminating an employer’s right to require a Government-conducted secret ballot election.  

This decision is a huge victory for employers and an important step in preserving the “delicate balance” established by the federal government when it enacted the NLRA.  As Brad Kampas, one of the Jackson Lewis partners representing the Employer Groups explained, “This decision marks the end of a long and important battle in reaffirming that employee free choice about whether to join a union can only be assured by allowing both unions and employers the opportunity to present their views.” 

Scott Oborne, another Jackson Lewis partner representing the Employer Groups, added, “We hope this decision will help frame the debate as Congress is pressed to consider again passage of the so-called Employee Free Choice Act.  The Supreme Court has reminded us that the proposed Act is misnamed.  Silencing employers does not foster ‘free choice.’ It defeats it.”