GT Alert

Ninth Circuit Rules that California’s “Neutrality Statute” Barring Employers from Spending “State Funds” on Union-Related Speech is Preempted by the National Labor Relations Act

September 2005

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On September 6, 2005 the U.S. Court of Appeals for the Ninth Circuit issued an important ruling regarding employers’ rights of free speech with respect to union organization under the National Labor Relations Act (“NLRA”). In Chamber of Commerce v. Lockyer, No. 03-55166 (9th Cir. 2005), the Ninth Circuit held that California’s so-called “Neutrality Statute,” which prohibited employers who receive grants of “state funds” from using the funds to “assist, promote, or deter union organizing,” was preempted by the NLRA and therefore unenforceable. The Ninth Circuit based its conclusion on findings that the California statute not only impermissibly regulated activities expressly protected by the NLRA, but also sought to regulate activities that Congress, in enacting the NLRA, had intended to remain unregulated by the states.

California Assembly Bill 1889

California’s “Neutrality Statute” — California Assembly Bill (“CAB”) 1889 — was signed into law in 2000 by former California Governor Gray Davis. Although purportedly enacted to insure State neutrality in union organization campaigns, the statute had the practical effect of forcing employers who received grants from the State of California to remain neutral in such campaigns.

CAB 1889 prohibited recipients of grants of state funds from using any of those funds to, “assist, promote, or deter union organizing.” The statute barred private employers who received more than ten thousand dollars of state funds in a calendar year from using any of those funds to, “assist, promote, or deter union organizing.” The statute defined “assisting, promoting or deterring” as encompassing, any employer speech designed to influence the decision of its employees or those of its subcontractors regarding whether to support or oppose a labor organization, regardless of whether such speech was neither threatening nor coercive. Notably, CAB 1889’s prohibitions on the use of state funds to assist, promote or deter union organizing did not apply to several types of pro-union activities and expenses by employers.

The compliance, enforcement and penalty provisions of CAB 1889 placed significant burdens on the rights of employers who accepted state funds to engage in non-coercive speech regarding union organization. The statute required employers who had received grants of state funds to maintain burdensome and detailed records conclusively demonstrating that none of these funds had been used for speech related to union organization; and it created a presumption, where state and non-state funds were commingled, that state funds were used to assist, promote or deter unionizing. CAB 1889 also authorized the Attorney General of California and private taxpayers, including labor unions, to file lawsuits against suspected violators, for injunctive relief, treble damages, and attorneys’ fees and costs.1 Given that few employers wish for their employees to vote for union representation, and fewer still actually expend resources to assist or promote union organization, the statute’s primary effect was to place significant restrictions on employers’ rights to expend money on otherwise legal, non-coercive, campaigns designed to deter union activity.

Perhaps most disturbingly, the statute’s enforcement provisions were being used by labor unions to obtain bargaining leverage in labor disputes, rather than recover on claims for allegedly misspent funds. There were numerous instances in which labor unions had sent threatening complaints to employers and the Attorney General, many of which simply alleged violations of CAB 1889 without providing any factual support. In one case, a union threatened an employer with action for alleged violations of the California statute (for which the union provided no factual support), but offered to settle the claim if the employer agreed to enter into a neutrality agreement with the union. In another case a union alleged a violation by an employer who did nothing more than fail to make arrangements to pay for legal services incurred in connection with a union organization campaign from funds that were conclusively derived from a source other than the state. In other instances unions abused the enforcement provisions of the statute to pursue fishing expeditions or otherwise distract or deter employers from exercising their rights to freely express their views on union organizing to their employees during union campaigns.

Against this backdrop, the U.S. Chamber of Commerce, the California Chamber of Commerce, and several employers and employer associations (“Appellees”) filed suit in the U.S. District Court for the Central District of California seeking declaratory and injunctive relief to prevent the State of California, California Attorney General Bill Lockyer, and several state and national labor unions (“Appellants”) from enforcing CAB 1889. Appellees moved for summary judgment on the grounds that CAB 1889 impermissibly intruded on employers’ rights under the NLRA to articulate their views regarding union organization in a non-coercive manner, and was therefore preempted by federal law. The District Court granted summary judgment and enjoined enforcement of the statute. Appellants appealed the decision to the Ninth Circuit.

The Ninth Circuit’s Decision

On appeal, the Ninth Circuit affirmed the District Court’s decision that CAB 1889 was preempted by the NLRA and therefore invalid under the Supremacy Clause of the United States Constitution. The Ninth Circuit found that CAB 1889 had the purpose and effect of deterring non-coercive employer speech on union organization that was expressly permitted by both Section 8(c) of the NLRA and the general policies of the NLRB regarding debate in union campaigns. The Ninth Circuit found that the statute’s “compliance burdens, strict accounting requirements, threat of lawsuits, and onerous penalties” discouraged employers who receive grants from the state from exercising their rights to speak freely with their employees regarding the merits of unionization. The Court went on to find that the language of Section 8(c) of the NLRA, precluding non-coercive employer speech from constituting an unfair labor practice, expressly granted employers the freedom to discuss with their employees in a non-coercive manner their general views about unionism or their specific views about a particular union. Based on these findings, and citing the U.S. Supreme Court’s decision in San Diego Building Trades Council v. Garmon, 359 U.S. 236, 243-44 (1959), the Court held that CAB 1889 was preempted by the NLRA because it constituted an impermissible attempt by California to regulate conduct (employer speech on unions) that was expressly protected by Section 8(c) of the NLRA.

The Ninth Circuit further held that CAB 1889 was also preempted by the NLRA under the principles set forth in the Supreme Court’s decision in Machinists v. Wisconsin Employment Relations Commission, 471 U.S. 132 (1976). In Machinists, the Supreme Court had held that the NLRA preempts states from regulating activities not expressly regulated by the NLRA if Congress intended for those activities to remain unregulated. The Ninth Circuit found that both the NLRB and Congress had expressly adopted a policy of refusing to restrict or regulate the right of any party to inform employees of the advantages and disadvantages of unions as long as such information is imparted to employees in a non-coercive manner. Having already determined that CAB 1889’s primary purpose was to deter employers from engaging in anti-union speech, the Court found that the statute constituted an impermissible attempt to regulate conduct that Congress had intended to remain unregulated. Accordingly, the Ninth Circuit held that CAB 1889 was preempted by the NLRA under the rule set forth in Machinists.

The Ninth Circuit further held that because CAB 1889 applied broadly to employers and grantees who receive state funds, and was intended to shape the overall labor market in a pervasive, nonproprietary manner, the statute was not saved from preemption by the “market participant” exception to the Machinists preemption principle. The “market participant” exception provides that states are not preempted from passing legislation or otherwise taking action with regard to labor union organization where the state’s actions are proprietary, such as when the state acts as a private purchaser of services. The Court found that in cases such as Lockyer, where the state passes legislation that, through the exercise of the state’s spending power, broadly shapes the conduct of its citizens, the state is engaged in regulation and not simply acting as a “market participant.” Accordingly, the Ninth Circuit found that CAB 1889 was not saved from preemption under the “market participant” exception to the Machinists preemption principle.

Finally, the Ninth Circuit rejected Appellants’ contention that CAB 1889’s core spending prohibitions could be saved from preemption by severing them from the statute’s enforcement and penalty provisions. The Court found that regardless of whether enforcement of the spending provisions were limited to the Attorney General, the statute would still provide substantial disincentives to employers’ exercise of their rights to speak freely on the merits of union organizing. Specifically, the Court noted that were Appellants’ suggestion adopted, unions would retain the power to press the Attorney General to investigate alleged claims of misuse of state funds, thereby deterring employer free speech about union organizing. The Court also noted that the significant burdens of record keeping and accounting imposed by the statute would similarly deter employers from exercising their rights to inform their employees of their stance on union organizing.

Effect of the Decision

In holding that CAB 1889 was preempted by the NLRA, the Ninth Circuit has freed employers of California’s substantial restrictions on their right to free speech on the merits of union organizing. The decision in Lockyer effectively levels the playing field in often hotly contested union organizing campaigns in California, by allowing employers to present their views on union organization to their employees without fear of thereby incurring significant penalties and expenses. No longer will California employers who receive state funds be placed at risk of fending off costly litigation and substantial penalties for communicating their own position with regard to union organization to their employees. The Ninth Circuit’s decision assures California employers that they maintain the freedom to inform their employees of both the advantages and disadvantages of union organization, so long as such information is communicated in a non-coercive manner.

This decision also signals to other states that legislation burdening employers’ rights to speak freely with their employees during union organizing campaigns impermissibly restricts rights guaranteed by the NLRA. Prior to the Ninth Circuit’s decision in Lockyer the legislatures of New York2 and Massachusetts had passed laws similar to CAB 1889. Additionally, a number of local governmental entities, such as Milwaukee County,3 have passed regulations to the same effect. Proposals for so-called “neutrality statues” like CAB 1889 have also been introduced in the legislatures of Arizona, Connecticut, Missouri, Maryland, Florida, Georgia, Illinois, Indiana, Iowa, Louisiana, Maine, Missouri, New Hampshire, North Dakota, Oregon, and Pennsylvania. The Ninth Circuit’s decision in Lockyer may very well signal the end of this trend of state regulation of employers’ rights to communicate with their employees regarding union organization.

Footnotes

1 While CAB 1889 provided for awards of attorneys’ fees and costs to prevailing plaintiffs, it provided for no such awards to prevailing employers.

2 On May 17, 2005 the U.S. District Court for the Northern District of New York held that New York’s “union neutrality act,” (which like CAB 1889 prohibited private companies who received grants from the state from using these funds to encourage or discourage union organization) was preempted by the NLRA under the Machinists preemption principle. Healthcare Ass’n of NY State, Inc. v. Pataki, No. 1:03-CV-0413 (N.D.N.Y. May 17, 2005). The District Court in Healthcare Ass’n of NY State found, as did the Ninth Circuit in Lockyer, that by preventing employers from communicating with their employees in a non-coercive manner regarding their position on union organization, the law interfered with processes protected by the NLRA — namely, the NLRA’s general policy of insuring free and vigorous debate between unions and employers during union organization campaigns.

3  In February of this year the U.S. District Court for the Eastern District of Wisconsin upheld a Milwaukee County ordinance requiring contractors from whom the County purchases care, treatment or transportation services for the elderly or disabled, having an aggregate value of more than $250,000, to enter into a neutrality agreement with labor unions that seek to organize the contractors’ County funded employees and request such an agreement. Metropolitan Milwaukee Ass’n of Commerce v. Milwaukee County, 359 F.Supp.2d 749 (E.D. Wis. 2005) (holding that Milwaukee’s neutrality ordinance serves the County’s proprietary goals and therefore is not subject to NLRA preemption).

This Alert was written by Matthew H. Sorensen and John Scalia of the Tysons Corner office. Please contact Mr. Sorensen or Mr. Scalia at (703) 749-1300 or your Greenberg Traurig liaison if you have any questions regarding the subject matter of this Alert.

© 2005 Greenberg Traurig

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