On April10, 1998, the Federal District Court of Northern California issued its opinion in the case of the Air Transport Association of Americav. The City and County of San Francisco contesting the San Francisco ordinance requiring parties who contract with the City to provide benefits to domestic partners (hereafter, the parties are referred to as "ATA" and the "City"). Air Transport Assn., No. 97-1763 CW (N.D. Cal. April10, 1998). The suit was brought by members of the ATA (the major air carriers) in connection with their leases and other activities at the San Francisco airport. The ruling was in response to the parties' cross-motions for summary judgment. The opinion is 95 pages long and extremely complex.
In summary, the district court judge found that the City violates the United States Constitution because it impermissibly regulates out-of-state conduct that is not related to the purpose of a contract with the City. Additionally, the ordinance is preempted by the Employee Retirement Income Security Act ("ERISA") as it relates to the plaintiffs in this case.1 The court carved out a narrow exception to ERISA preemption for the unusual circumstances in which the City wields no more economic power than an ordinary consumer. The ordinance also is preempted by the Air Deregulation Act if the burden of complying with the otherwise valid portions of the ordinance is so burdensome that air carriers would practically be forced to stop using the San Francisco airport.
DISCUSSION
The court first held that the ordinance was a proper act of the City's authority under the State Constitution and the City Charter. The court then considered the effect of the ordinance on interstate commerce.
The court concluded that the ordinance violates the "dormant" Commerce Clause to the extent that it impermissibly regulates extraterritorial commerce and that the City is not shielded by a so-called market participant exception2 to the Commerce Clause. The dormant Commerce Clause prohibits states and localities from enacting and enforcing laws that have the effect of regulating commerce wholly outside the boundaries of a state. The court found that the City was attempting to regulate certain extraterritorial practices of City contractors. Unless there is a market participant exception, the ordinance must fail as to its out-of-state reach. The court noted that, while the City was acting as a market participant in implementing the ordinance, the City inappropriately reached beyond the sphere of economic activity in which it is participating in an attempt to regulate commerce beyond its borders. The court noted that, under the ordinance, the contractors would face penalties, termination of the contract, a two-year bar from contracting with the City, and forfeiture of moneys owed by the City under the contract. Such consequences are substantial enough to create a regulatory effect on the contractors' out-of-state activities which is action beyond those permitted under the market participant exception. Therefore, the ordinance is void to the extent it attempts to regulate a contractor's behavior that is unrelated to the contract and is outside of the state.3
The court then discussed ERISA preemption. ERISA provides that state laws (including local ordinances) are preempted insofar as they "relate to any employee benefit plan." 29U.S.C. '1144(a), ERISA '514(a). The court found that the Supreme Court has retreated from an expansive interpretation of ERISA's preemption clause in two recent cases-Travelers and Dillingham.4 The district court stated there are two standards of analysis regarding whether a state statute relates to an employee benefit plan. (Citing Dillingham, which discussed two prongs of the "relates to" test - a "reference to" prong and a "connection with" prong.) The court found that a law "refers to" an ERISA plan if it acts immediately and exclusively upon ERISA plans or if the existence of ERISA plans is essential to the law's operation. (Citing Dillingham.) The in "connection with" test is a purpose and effects test to determine if the law conflicts with ERISA's objectives.
In the case at hand, the court found that the San Francisco ordinance did not directly relate to ERISA plans. The ordinance does not refer exclusively to ERISA plans because many of the benefits required to be provided to domestic partners are non-ERISA benefits. The court noted that membership or membership discounts, moving expenses and travel benefits are not ERISA benefits. The court also found that the existence of ERISA plans was not essential to the law's operation, again, because non-ERISA benefits were included. The court then analyzed whether the ordinance is in "connection with" ERISA plans. The court found that the effect of the ordinance was to require City contractors to modify their plans in order to provide nondiscriminatory ERISA-type benefits. Thus, the ordinance mandates employee benefits structures. The court concluded that the ordinance had a connection with ERISA plans because it mandates employee benefits structures for contractors and the effect of the ordinance conflicts with ERISA's objectives of permitting uniform national administration of employee benefit plans and eliminating the need to comply with conflicting state and local regulations. Absent any exception to ERISA preemption, the court held that the ordinance must be preempted with respect to ERISA benefits.
Exception to ERISA Preemption
The court then considered whether there was a market participant exception to preemption under ERISA. The court noted that the Supreme Court has not ruled on the existence of such an exception. The court further noted that the Ninth Circuit has twice rejected such an exception; however, those decisions predate the Supreme Court decisions in Travelers and Dillingham. The court concluded, by taking a few leaps of judicial logic, that, in light of these recent Supreme Court decisions, the current law of the Ninth Circuit must be interpreted to recognize a narrow market participant exception to ERISA preemption. The court reached this conclusion even though neither Travelers nor Dillingham expressly addressed the market participant exception to ERISA preemption.
The court studied the previous Ninth Circuit decisions rejecting the market participant exception and concluded that those opinions were based on a broad application of ERISA preemption. The court summarily concluded that, following the Supreme Court decisions in Travelers and Dillingham, in which the Supreme Court narrowed the application of ERISA preemption, the previous Ninth Circuit grounds for rejecting the market participant exception is no longer good law.
The court further concluded (with no analysis) that there was no reason to distinguish the application of a market participant exception under the National Labor Relations Act ("NLRA") and ERISA. The court then applied the reasoning of the Supreme Court in a case involving a market participant exception to the NLRA. (Citing Building& Trades Councilv. Associated Builders (referred to as Boston Harbor) 507U.S. 218 (1993).) In citing Boston Harbor, the court noted that state and local governments, when they are participating in the marketplace, are not free to take any action that a private party could take in that role. The focus must be on whether the local action is based on a policy concern rather than a profit motive. A policy concern as motivation removes the local action from a market participant arena. Given that the City clearly intended to attain a policy goal with this ordinance, the court ruled that the Boston Harbor analysis did not save the ordinance from ERISA preemption.
The court then took the final leap to find an exception to the Boston Harbor test. The court found a Ninth Circuit opinion involving the City of Oakland that the court stretched to apply in this case. Alameda Newspapers, Inc.v. City of Oakland, 95F.3d 1406 (9th Cir. 1996).
The case involved the City of Oakland's support of a public boycott of the newspaper due to its labor practices. The Ninth Circuit found such public support of a boycott based on its labor policies was not preempted by the NLRA. The Ninth Circuit noted that boycotts were a time-honored tradition of political expression and that canceling subscriptions and advertising was a symbolic gesture because the city had purchased only 13subscriptions and had never been a significant advertiser in the newspaper. The Ninth Circuit specifically held in the Alameda Newspaper case that the city's actions were not regulatory acts and, therefore, were not preempted under the authority of Boston Harbor.
The district court found that this "market participant" exception applied to the San Francisco ordinance to the extent the City wields no more power than the ordinary consumer in its contracting relationships. (The Alameda Newspaper case is more fully discussed below.) The court then found that the City exerts more economic power at an airport than the ordinary consumer, due to its position as a proprietor of a property with monopoly status, and that the ordinance is preempted by ERISA as it applied to airport contracts. The bottom line on ERISA preemption under the district court opinion, is that contractors who provide services or goods to the City when the City wears an ordinary consumer hat remain subject to the ordinance as enacted. In most cases, however, where the City wields more economic power than an ordinary consumer, ERISA preempts the ordinance and ERISA benefits need not be provided to domestic partners.
Clearly, the decision of the Ninth Court in Alameda Newspapers, a case under the NLRA, was the linchpin in the court's decision to find a "market participant" exception to ERISA preemption and provides guidance on how narrow the exception is. The case is factually distinguishable in that the City of Oakland passed a nonbinding resolution and cancelled subscriptions in support of a boycott. The City of San Francisco adopted an ordinance that affects all parties who contract with the City. Further, the Ninth Circuit noted the acts of the City of Oakland had such insubstantial economic effect that such acts alone could not be viewed as presenting any real impact or influence on the parties to the dispute. The Ninth Circuit stated in the case of Alameda Newspapers that:
[A] more difficult question may exist in the case in which a city is not simply one of a large number of consumers but a significant patron of the boycotted business. In such case a city may be exercising the aggregate purchasing power of its citizens-for instance, when a city buys a product to be used on behalf of its citizens that they have no need to buy for themselves-garbage trucks, fire hoses, or a police dispatch system. Then, it might be possible to argue that the city through its power of the purse is able to exercise what is effectively regulatory power. Similarly, it might be argued that the city's conduct is potentially regulatory when the city purchases an unusually large quantity of a given product. In such cases, the city, drawing on its powers to tax and spend, is acting in a manner that a typical consumer cannot; so it's conduct might be argued to be both coercive and governmental in nature.
Alameda Newspapers at 1417.
This discussion certainly indicates the types of action that would fall outside of the exception. Thus, the exception carved out by the Ninth Circuit and relied on by the district court should be narrowly construed to apply only when the City is not acquiring goods to use in its exercise of governmental authority or is purchasing small quantities of a product or service. The City, however, in press releases has shown no sign that it recognizes the narrow path of this exception.
The court also analyzed whether the plaintiffs' cause of action under the Airline Deregulation Act ("ADA") defeated the effects of the ordinance. The court noted that ADA preemption may be broad; however, some state actions are too tenuous, remote or peripheral to have preemptive effect. Citing Moralesv. Trans World Airlines, Inc., 504U.S. 374 (1992). Under ADA, in order to be preempted, the ordinance must affect a carrier's service, price or routes. The court ruled that the ordinance did not affect a carrier's services or ticket prices. As to routes, the court ruled the ordinance would be preempted as to route only if the ordinance established such a significant barrier that carriers would have to cease operations at the San Francisco airport. The court further noted that the ordinance had this effect only if the potential cost or other burden of bringing a carrier's benefit plan into compliance is so great that the carriers are coerced into changing their routes.5 The court ruled that ADA does not preempt the ordinance unless an airline can show that the ordinance would force it to change its routes.
One last point with respect to collective bargaining agreements should be noted. The court rejected the plaintiffs' argument that the Railway Labor Act (which applies to the airlines) preempted the ordinance. The court noted that the ordinance applied to both union and non-union employers and, therefore, doesn't project any preference for collective bargaining or attempt to alter the bargaining process. However, in reaching the conclusion, the court noted that the Human Rights Commission regulation requiring changes to benefits covered by collective bargaining agreements could not force employers unilaterally to change their benefits plans but instead must be interpreted as only a part of the requirements for taking advantage of a special transition rule and only when that unilateral action is not prohibited by federal law.6
CONCLUSION
- The court ruled that the ordinance cannot be applied to activities outside the state unless those activities are connected to a contract with the City.
- Second, the court ruled that ERISA benefit must not be provided under the Ordinance except in narrow circumstances where the City is acting as an ordinary consumer.
- Third, non-ERISA benefits must be provided under the terms of the Ordinance. Non-ERISA benefits include things such as memberships, membership discounts, moving and relocation expenses, travel benefits, family and medical leave, bereavement leave and other benefits paid out of general assets are not preempted by ERISA.
- The ATA members do not have to comply with the Ordinance if they can overcome the heavy burden of proving the Ordinance is coercive enough to force them to close routes to the San Francisco Airport.
- Finally, in connection with benefits under a collectively-bargained agreement, the Ordinance is not preempted by the federal labor law that applies to the airlines (which is similar to the National Relations Act).
ENDNOTES:
1 As discussed below, the court restricted the reach of ERISA preemption.[^]
2 As is discussed further in this memorandum, the "market participant" exception generally applies to avoid preemption by federal law when a state or local government is acting as a consumer rather than as a regulator. [^]
3 The nondiscrimination requirements of the ordinance appear to remain applicable to a contractor's operations in San Francisco, operations on real property outside of San Francisco owned or leased by the City if the contractor's presence on the property is connected to the contract, where work is performed by a contractor for the City within the United States and any contractor's operations that are inside the state. S.F. Admin. Code '12B.1(d). Thus, it appears from the opinion that the ordinance remains applicable to all employees of the contractor within the State of California. [^]
4 N.Y. State Conference of Blue Cross& Blue Shieldv. Travelers Ins. Co., 514U.S. 645 (1995) and Cal. Div. of Labor Standards Enforcementv. Dillingham Constr., N.A., Inc., 117S.Ct. 832 (1997). These two cases indicated that there is a limit, albeit not defined, to ERISA preemption. [^]
5 This issue had not been briefed and therefore could not be decided by the court. [^]
6 The Human Rights Commission regulation allows employers a transition period for complying with the ordinance with respect to collective bargaining agreements. The regulation allows an employer until the expiration of current collectively-bargained agreements if the employer meets the following requirements:
a. benefits are governed by the CBA;
b. the employer takes all reasonable measures to end discrimination in benefits by either (1) requesting that the Union(s) agree to reopen the CBA so the employer can take "whatever steps necessary" to end discrimination in benefits or (2) by ending discrimination without reopening the CBA; and
c. the employer provides a cash equivalent to employees with domestic partners beginning the date the Union refuses to reopen the CBA, but no later than three months after the contract with the City is entered into. As mentioned, the proposed regulations provide that cash equivalent need not be paid if such payment would violate federal or state law.
Thus, under the court's ruling, the transition period cannot be conditioned on actions prohibited by federal law. [^]