United States: Decisions Of Interest - Summer 2015

Friedrichs v. California Teachers Association

During its upcoming October 2015 term, the United States Supreme Court will reconsider the seminal case of Abood v. Detroit Board of Education in what could become a significant change in the law governing agency fees and public-sector labor unions. Agency fees are monies paid to unions by nonmembers, who do not wish to join the union, but who nonetheless benefit from a union's collective bargaining efforts on behalf of all employees in a given field. These fees seek to overcome the "free rider" problem; without agency fees, nonmembers would reap the rewards of a union's hard work without providing it any financial support. On June 30, 2015, the Supreme Court agreed to hear the case of Friedrichs v. California Teachers Association, in which the Plaintiffs have asked the Court explicitly to overturn Abood, which had authorized the imposition of agency fees in the public sector. The apparent hostility of a portion of the Supreme Court towards Abood, expressed in Harris v. Quinn, albeit in dicta, makes the granting of certiorari in Friedrichs worrisome.

In Harris v. Quinn, the Court held that only "fully-fledged" public employees fell within the ambit of Abood and could be required by law to pay agency fees, and that the Plaintiffs, home-care personal assistants, whose employment was controlled in large part by the individual customer rather than the State, were not "fully-fledged" public employees.1 Perhaps more notable than the holding of Harris, which found that Abood was inapplicable rather than invalid, was Justice Alito's scathing criticism of Abood and the concept of agency fees. Justice Alito accused the Abood court of inadequately addressing the First Amendment issues implicated by agency fee payments, misunderstanding prior Supreme Court jurisprudence, and failing to foresee practical problems that its holding created.2 As explained in our full discussion of Harris in the Fall 2014 issue of Stroock Reports: Public Employee Law, the Harris dicta all but invited an opportunity to overrule Abood.

Friedrichs unfortunately provides that opportunity, threatening to transform American labor law by invalidating nearly 40 years of Supreme Court jurisprudence surrounding agency fees. The Friedrichs Plaintiffs, ten California teachers, are challenging the validity of the California Educational Employment Relations Act, which permits California unions to utilize agency-shop arrangements.3 Plaintiffs brought their case in the United States District Court for the Central District of California and, for purposes of creating an appeal, sought a judgment on the pleadings in favor of the Defendants, which the District Court granted on the grounds that Abood "foreclose[s] Plaintiffs' claims."4 The Ninth Circuit summarily affirmed on November 18, 2014.

A public-sector union's right to collect agency fees from nonmembers is now at substantial risk. In their Petition for a Writ of Certiorari (i.e., permission for the Supreme Court to hear the case), Plaintiffs presented two questions to the Court: "[w]hether Abood...should be overruled and public-sector 'agency shop' arrangements invalidated under the First Amendment" and "[w]hether it violates the First Amendment to require that public employees affirmatively object to subsidizing nonchargeable speech by public-sector unions, rather than requiring that employees affirmatively consent to subsidizing such speech."5 Notably, Plaintiffs argued, as did Justice Alito in the Harris dicta, "the interests in 'avoiding free-riding' and promoting 'labor peace' cannot justify compelled subsidization of union speech on matters of public concern."6 Briefs amicus curiae were filed in support of the Petitioners by the Pacific Legal Foundation, National Right to Work Legal Defense Foundation, Inc., Mackinac Center for Public Policy, the Attorneys General of Michigan, Alabama, Arizona, Colorado, Georgia, Kansas, Texas, Utah and West Virginia, and former California Governor Pete Wilson and Former California Senate Majority Leader Gloria Romero, among others. Of the nine states whose Attorneys General joined the aforementioned brief amicus curiae, all but Colorado and West Virginia are right to work states. No amicus briefs in opposition appear on the docket.

After the Supreme Court granted Plaintiffs' Petition, leaders of the National Education Association, American Federation of Teachers, California Teachers Association, American Federation of State, County and Municipal Employees and Service Employees International Union released a joint statement condemning the Court's decision and emphasizing unions' dependence upon the fees they collect. The American Federation of Teachers, in an article written by its President Randi Weingarten, pledged to start "a national campaign to mobilize members and communities across the country to fight for an America where everyone's voice matters."7 The potential disruption to labor peace has also brought the Federal Government to the side of labor. Labor Secretary Thomas Perez stated in response to the Court's determination to hear the case:

I think public-sector workers...are some of our most important employees, and I think the ability to have collective bargaining for them is critical. They're not getting rich, they're doing some of the most important work, and I think collective bargaining has been key to their success, and the people who don't want to sign up for those...to pay dues, they actually benefit from those, the work that these unions are doing to get higher wages and fair treatment in the workplace, and so they want to be able to be free-riders, you know, pay nothing but get all the benefits, and states have appropriately said you can require people to pay their fair share. And I think that's the right thing to do and I think the collective bargaining process for public-sector workers is critically important.8

Despite the push-back, proponents of the abolition of agency fees are celebrating the Supreme Court's decision. Deborah La Fetra, Principal Attorney of the Pacific Legal Foundation, declared "[t]he court's decision to take this case is welcome news for everyone who values First Amendment freedom of speech – which includes your freedom not to underwrite a politically active organization that you don't agree with."9

Although in Friedrichs, agency fees arise in the context of a teachers' union, the issue is not limited to that field. The issue transcends all types of civil service across all states and should be of concern to all public sector unions and their members.

The Parties' briefs on the merits are due in September and October 2015, and oral argument is expected to take place during the Court's next term, which commences in October 2015. Unions should consider how best to marshal support for their position, possibly banding together, as well as seeking the assistance of good government entities, to submit to the Court on an issue that may severely alter American labor law.

Morton v. Mulgrew

A union's flexibility in negotiating collectively bargained agreements that balance, in good faith, the sometimes divergent interests of its membership received a boost in a recent decision from Justice Donna Mills of the Supreme Court, New York County. In Morton v. Mulgrew,10 plaintiffs brought a class action suit alleging that the United Federation of Teachers ("UFT"), in its most recently negotiated collective bargaining agreement, breached its duty of fair representation by agreeing to provide retroactive increases only to those who remained active or retired from service. Plaintiffs, a group of former UFT members who had voluntarily quit their jobs with the NYC Board of Education ("DOE"), alleged that their exclusion from these contractual provisions constituted an improper failure to represent their interest.

The UFT moved to dismiss the claims on various grounds, including that the plaintiffs could not satisfy the pleading requirement most recently articulated by the Court of Appeals in Palladino v. CNY Centro Inc.11 and that the mere exclusion of former members who quit their jobs could not state a claim for breach of the duty of fair representation.

In Palladino, the Court of Appeals reaffirmed its prior interpretation that complaints against an unincorporated association – such as the UFT – must allege that all of the individual members of the association authorized or ratified the conduct at issue. Although a significant majority of UFT members ratified the most recent agreement, not all members either voted or approved. Following Palladino, the Court declined to create an exception to the pleading requirement for duty of fair representation claims and concluded that Plaintiffs could not satisfy this requirement.

Moreover, the UFT argued that merely treating differently former members who left their position prior to the UFT reaching agreement with the employer, was not a violation of its duty to fairly represent its members. The UFT pointed out that negotiations are a give and take between the Union and the employer and it is not always possible to have every conceivable demand met. The long and difficult negotiation that spanned two mayoral administrations ultimately had to bridge the distance between the UFT's demand that all current, retired and former members receive retroactive increases and the employer's initial offer that only active employees receive an increase. The parties ultimately agreed to provide the most benefits to the largest group that was mutually acceptable – all actives and retirees. This reflected the normal ebb and flow of bargaining and was consistent with the Union's duty to fairly represent all of its bargaining unit members.

The Court agreed, relying, inter alia, on Matter of Civil Serv. Bar Assn, Local 237 Intl. Bhd. Of Teamsters v. City of New York,12 for the proposition that

[w]here the union undertakes a good- faith balancing of the divergent interest of its membership and chooses to forgo benefits which may be gained for one class of employees in exchange for benefits to other employees, such accommodation does not, of necessity, violate the union's duty of fair representation.13

The Court found that the cursory allegation that the UFT did not bargain on plaintiffs' behalf, was insufficient, particularly in light of the explicit contractual provisions addressing the issue of increases stemming from the 2009-2011 round of bargaining. Plainly, the Union had considered the matter and negotiated regarding it. Next, the Court rejected Plaintiffs' conclusory contention that the UFT acted in a bad faith or discriminatory manner. The Court held that "plaintiffs fail to give any indication that facts indicating the UFT's purported decision could be discovered."14

Accordingly, the Court dismissed all claims against the UFT. But the UFT is not the only union that has been the subject of such challenge to its bargaining authority. A case making virtually the same claims, brought against the New York State Nurses Association, is currently pending before Justice Shlomo Hagler, also in Supreme Court, New York County. There, too, the defendant union has moved to dismiss. The outcome of that motion merits watching.

ADDITIONAL PUBLIC PENSION CASES OF NOTE

In addition to the cases discussed in this issue's lead story "Protecting Pensions and Contract Rights for Public Sector Employees", there are at least two other cases contributing to the legal landscape worth noting as public employees fight to protect against the impairment of their pensions:

In re: City of Stockton

Stockton, California, like Detroit, experienced a catastrophic economic downturn when the housing bubble burst in 2007. For fiscal year 2012, Stockton, a city of approximately 300,000 people, had been able to decrease its deficit to $26 million from a height of over $96 million, but it had over $900 million in unfunded pension liabilities to, among other creditors, the California pension system ("CalPERS"). Unemployment was around 22%, the city's bond rating obtained "junk" status, property values had declined 50% and the crime rate was among the worst in the nation. The city was unable to perform its basic obligation of public safety and had already declared a fiscal emergency on multiple occasions, slashed employment by 25%, implemented furloughs and drastically reduced library and other recreational funds.15

Like the bankruptcy court in Detroit in In re: City of Detroit (a discussion of that case is set out in our lead story, and with similar reasoning), Judge Christopher Klein ruled that Stockton's contractual obligations to its pension system could be altered in Stockton's municipal bankruptcy because "the essence of bankruptcy is impairing the obligation of contract."16 In fact, Judge Klein arguably went further than the Detroit bankruptcy court because the California legislature previously had singled out CalPERS for a special added layer of protection in Chapter 9 bankruptcy cases by (i) forbidding the rejection of any contract between CalPERS and a municipality and (ii) imposing a termination charge backed by a statutory lien, in the event of a termination (from the CalPERS system).

The termination lien in the case of Stockton, for walking away from its liabilities, would have been $1.6 billion, a sum the Court called a "gold handcuff" or "poison pill."17 Ultimately, Judge Klein found that the lien could be avoided under bankruptcy law. Because the Supremacy Clause of the Federal Constitution resolves conflicts between Congress and a contrary state law in favor of Congress, the lien could be avoided and, more generally, municipal contracts and pensions could be impaired under the Federal Bankruptcy Code.18

Judge Klein later confirmed a bankruptcy settlement that did not impair the City's pension obligations.19 As a political solution, the City of Stockton refused to reduce pension benefits "saying that cutting pensions would devastate its ability to retain cops, firefighters, and other public officials."20 A City official stated that retaining the present pension system "was a business decision that we made and it was the right thing for Stockton."21 Though the pensions of workers already in the retirement system were not impaired, pensions and health care benefits for future hires were reduced.22

Carver v. NIFA23

Unlike Detroit and Stockton, California, Nassau County, Long Island is one of the wealthiest counties in the country. Yet, in 2011, through its interim finance authority, the Nassau County Finance Authority ("NIFA"), Nassau County imposed a wage freeze to cure a budgetary deficit occasioned, at least in part, by a change in accounting practices in the County. The County's Police Officer unions brought suit, arguing in NY federal court that a wage freeze unconstitutionally impaired their contractual rights, because despite Nassau County's fiscal difficulties, the wage freeze was used as an initial measure to generate savings, rather than a last resort. In Nassau County, prior to imposing a wage freeze the county had repealed taxes (eliminating more than $70 million in recurring revenue) and had explored budgetary alternatives to closing the budget gap only after the wage freeze was imposed. The Police Officers contended they were the main losers in a budgetary and political stalemate between the County and NIFA, with the breach of their contract having been used as a first, easy step to achieving temporary savings in lieu of conserving other revenue sources or implementing the real, long-term recurring savings necessary to close the County's fiscal gap.

The Police Officers brought two claims, one under the federal Contracts Clause and the other based on a plain reading of the text of the state law that granted the power to freeze wages only for the defined "interim finance period." The NIFA Act, the legislation creating NIFA, had extended that period to 2008. The Police Officers argued that the ability to freeze wages thus ended at that time.

The District Court found that the wage freeze indeed violated state law and, following the time-held maxim of constitutional avoidance, accordingly declined to reach the constitutional issue.24 Unfortunately, the Second Circuit reversed the district court's decision, explaining that the district court improperly reached this state law issue and a lower state court judge subsequently decided the statutory interpretation issue differently than did the federal judge.25 The case is currently on appeal to the Appellate Division, Second Department. The underlying Contracts Clause issue remains before the District Court.


Co-Editors: Alan M. Klinger, Co-Managing Partner, and Dina Kolker, Special Counsel in Stroock's Litigation and Government Relations Practice Groups. The Co-Editors wish to thank Beth A. Norton, Special Counsel, and David J. Kahne, Julie L. Goldman, and Samantha M. Rubin, associates, in Stroock's Litigation and Government Relations Practice Groups. We also acknowledge the contributions of Scott A. Budow who was a summer associate in the Stroock program.


Footnotes

1 Harris v. Quinn, 573 U.S. ____, 134 S.Ct. 2618, 2638 (2014). Alan Klinger & Dina Kolker, Harris v. Quinn: Abandoning Precedent and Undermining Union Shops in the Public Sector, STROOCK REPORTS – PUBLIC EMPLOYEE LAW (Fall 2014), http://www.stroock.com/siteFiles/Pub1542.pdf.

2 Id. at 2632-2633.

3 Complaint at 115a, Friedrichs v. California Teachers Association (filed Apr. 29, 2013), available at https://www.cir-usa.org/wp-content/uploads/2014/02/friedrichs_v_cta_complaint.pdf.

4 Friedrichs v. California Teachers Ass'n, 2013 WL 9825479 at *2 (C.D. Cal., Dec. 5, 2013).

5 Petition for Writ of Certiorari, Friedrichs v. California Teachers Association et al., No. 14-915, at i, available at http://sblog.s3.amazonaws.com/wp-content/uploads/2015/03/Friedrichs-v.-California-Teachers-Association-Cert-Petition.pdf

6 Pet. for Writ. Of Cert., at 20.

7 Randi Weingarten, They want to break our union, AMERICAN FEDERATION OF TEACHERS (July 1, 2015), http://www.aft.org/node/10440

8 Labor Secretary Perez: government unions have the right to require members to pay their 'fair share,' PBS NEWSHOUR (June 30, 2015 at 6:32PM), http://www.pbs.org/newshour/rundown/labor-secretary-obamas-overtime-proposal/

9 PLF Applauds Supreme Court acceptance of teachers-union dues case, PACIFIC LEGAL FUND (June 30, 2015), http://www.pacificlegal.org/releases/release-6-30-15-friedrichs-15-285

10 Decision and Order, Motion Seq. No. 1, Morton v. Mulgrew, Index. No. 652211/2014 (Sup. Ct. N.Y. Cnty. July 23, 2015) (Mills, J.).

11 Palladino v. CNY Centro Inc., 23 NY3d 140, 147-48 (2014).

12 Matter of Civil Serv. Bar Assn, Local 237 Intl. Bhd. Of Teamsters v. City of New York, 64 NY2d 188, 197 (1984)

13 Id.

14 Morton, at 8.

15 In re: City of Stockton, 493 B.R. 772, 779 (Bankr. E.D. Cal. 2013).

16 In re: City of Stockton, 526 B.R. 35 (Bankr. E.D. Cal. 2015).

17 Id. at 48.

18 Id. at 66.

19 Jeff Sistrunk, Stockton Wins Court Approval Of Ch. 9 Plan, LAW360 (Oct. 30, 2014, 6:47PM), http://www.law360.com/articles/592086/stockton-wins-court-approval-of-ch-9-plan?article_related_content=1

20 Cara Salvatore, Stockton Bankruptcy Plan OK'd Despite Holdout, LAW360 (Feb. 5, 2015, 10:33PM), http://www.law360.com/articles/618865/stockton-bankruptcy-plan-ok-d-despite-holdout?article_related_content=1

21 Id.

22 Id.

23 Stroock & Stroock & Lavan LLP was co-counsel to the Nassau County police officer unions in this matter.

24 Carver v. NIFA, 923 F. Supp. 2d 423, 429 (E.D.N.Y. 2013).

25 Carver v. NIFA, 730 F.3d 150 (2d Cir. 2013). 

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