On October 10, 2003, just three days after California voters recalled him, Governor Gray Davis signed a bill into law requiring contractors with the State of California to provide benefits to domestic partners equal to those provided to spouses.While it was novel for the State to enact such a law, the City of San Francisco passed a substantially similar ordinance seven years prior.1That ordinance forbade the City from using contractors that did not provide benefits to domestic partners. However, a short time later the Federal District Court of Northern California found that the Ordinance overstepped the City's governing powers, and the court subsequently limited the reach of that ordinance.
With the reality of California's new law, A.B. 17,2 state contractors must review their benefits programs and begin making decisions-or do they? Undoubtedly the State's new law is similar in nature to San Francisco's Ordinance that the Ninth Circuit ultimately impeded in terms of application.Will the State's law be contested with similar success?
This paper looks specifically at how the Federal Employee Retirement Income Savings Act (ERISA) limited the reach of San Francisco's Ordinance and will explore the differences between that ordinance and the State's new law. With that information, contractors will then be better suited to decide whether they need to begin making adjustments or whether they can write off California's new law as a lame bill signed by a lame-duck governor.
ERISA Preemption 101 [top]
In 1974, the United States Congress enacted the Employee Retirement Income Security Act (ERISA) and thereby took upon itself the regulation of employee pensions and benefits. As part of the Act, Congress specifically stated in § 514(a) that "the provisions of this title shall supercede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan…."3This preemption clause has been the source of a great deal of litigation since many states have been unable or, as may be the case with California, unwilling to refrain from exercising control over employee pensions and benefits.
The United States Supreme Court has strictly interpreted § 514 and honed in on the words "relate to" in determining whether a state law is preempted by ERISA. However, deciding when something "relates to" an employee benefit plan has not been easy for the court to consistently decide. The Supreme Court has struggled to come up with a meaningful method for making this determination but has settled on two key factors in establishing how broadly "relate to" will be interpreted. The Court has decided that a law "relates to" an employee benefit plan if there was 1) a "reference to" or 2) a "connection with" an employee benefit plan.4However, the Court noted that if the effect of the law on benefit plans was "too tenuous, remote, or peripheral," then a finding that it was preempted would be incorrect.5By interpreting "relate to" so broadly, the Court in effect suggested that almost any state law that had anything to do with employee benefits would be preempted by ERISA.6
More recently, in Travelers Insurance,7 the Court began to take a more narrow approach when interpreting "relate to." In order to do so, the Court changed its focus from basing its decisions on the literal wording of § 514 and began looking instead to the purpose of ERISA and what effect the state law at issue would have on Congress's goals when it enacted ERISA.8It is noteworthy that in taking this new approach, the court failed to overturn any prior decisions and continued to address the "relates to" language of § 514 by asking whether the state law makes "reference to" or has a "connection with" employee benefit plans.9The Court recognized that the purpose of the § 514 was to "avoid a multiplicity of regulation in order to permit the nationally uniform administration of employee benefit plans."10Nevertheless, the Court went on to hold that the New York law was not preempted simply because it indirectly caused additional expenses to qualified benefit plans.11Later, in Dillingham,12 the Court found that mere inducement of a plan to do something was not enough effect to cause preemption, whereas the compulsion of a plan to do something would be.13
San Francisco's Domestic Partner Ordinance [top]
In 1996, San Francisco passed an ordinance that required all contractors rewarded city bids to offer benefits to any domestic partners of its employees equal in extent to those benefits offered to spouses of its employees. The Ordinance applied to all employee benefits.The City began requiring language in all its contracts stating that the contractor agreed that it would not discriminate in providing employee benefits during the duration of the contract. In order to qualify, the domestic partner had to be registered pursuant to state or local law authorizing such registration.
San Francisco's ordinance did provide some exceptions on when an employer would not be held in violation of the discrimination language contained within their contracts.Most notably, the contractor would not be in breach of the contract if the contractor was unable to provide a benefit that it provides spouses and instead provided the domestic partner with the cash equivalent of the benefit.14
ERISA's Preemption of San Francisco's Ordinance [top]
An association of airlines that contracted for use of the City's airport brought suit against the City claiming that the Ordinance was preempted by ERISA.In Air Transport, a federal district court found that San Francisco's ordinance requiring airlines to offer benefits to domestic partners in order to continue operation at the City's airport was preempted by § 514. Despite the City's claims, the district court found that the plan "related to" employee benefits because there was a "connection with" the plan.The Ordinance's purpose-to eliminate discrimination in benefits-directly interfered with ERISA's goals of providing a uniform set of laws under which plans may operate. Since the Ordinance "related to" employee benefit plans and would consequently be preempted, the City argued that the market participant exception caused the Ordinance to be valid despite its relation to employee benefit plans. The City argued that it acted as an ordinary consumer with respect to choosing whom the City would do business with. However, in the end, the court concluded that the market participant exception did not apply in this case and that the Ordinance was still preempted.15
The Market Participation Doctrine is premised upon the idea that as a purchaser, the City, has the right to choose with whom it wants to deal, and that by choosing certain contractors the City is simply expressing its preferences without actually legislating.16Prior to Air Transport, the Market Participant Doctrine was widely used as an exception to preemption under the National Labor Relations Act (NLRA) and remained unadopted in the context of ERISA preemption. Air Transport was the first time a court adopted the Market Participant Doctrine in the context of ERISA, and the Supreme Court has yet to affirm its adoption.17Specifically, the doctrine relates to § 415 in that the statute says that only "state laws" will be preempted.The idea behind the court's ruling is that if a city is acting as a mere consumer, then its contracts did not amount to "state laws" and thus there is nothing to be preempted.18
However, in Boston Harbor,19 the Market Participant Doctrine was limited in its application to city governments. Boston Harbor states that a city is a market participant when proprietary interests (e.g. efficiency and cost-effectiveness) rather than policy interests induce its actions.20In Boston Harbor the City was found to be a market participant because the City proceeded out of proprietary interests in ensuring that the job would be completed quickly, efficiently and cheaply rather than acting out of any policy concerns relating to labor unions.21
Relying on Boston Harbor, the Air Transport court held that San Francisco's ordinance was preempted because the City acted more out of policy concerns than it did out of proprietary interests. Air Transport points out that the City stated that its intent was to stop discrimination in the provision of employee benefits.22The court stated that "the City undoubtedly passed the Ordinance with policy goals in mind. This goal …conflicts with ERISA's intent that ERISA permit uniform national employee benefit plan administration."23
The Ninth Circuit, at least as to NLRA preemption, has established an exception to the market participant exception: a city may act based on policy interests without losing its market participant status if the city exercises no more influence than an ordinary consumer.24Key in the Alameda Newspapers decision was the fact that when the City of Oakland cancelled its 13 newspaper subscriptions to participate in a boycott of the paper for policy reasons, the City's actions had no "real effect" greater than any ordinary consumer. In other words, the City was no different from any other ordinary subscriber.25
Air Transport denied San Francisco's argument that the City was an ordinary consumer. Consequently, the City could not use the Market Participant Doctrine to save its proprietary interest-driven ordinance from ERISA preemption.The court pointed to the fact that the City had a monopoly over airports in the Cit y and that it therefore was much more than an ordinary consumer.The City caused a very real impact on the Airline Association when it forced them to adhere to its ordinance: they either had to comply or completely forgo operations at San Francisco International Airport.
The application of Air Transport on employers contracting with the City was as follows:
1. Employers were still subject to the Ordinance with respect to benefits that were not covered under ERISA. Such benefits included moving expenses, memberships, travel discounts and bereavement leave.
2. Employers offering ERISA-covered benefits from non-ERISA plans (such as family medical and bereavement leave paid out of general assets) were not preempted.
3. Qualified ERISA benefit plans were completely exempt from the application of the Ordinance so long as the City exercised more economic power than an ordinary consumer could.26
California's New Statute [top]
Recently, Governor Davis signed A.B. 17 into law as California's first domestic partner benefits law.27The statute will be in effect primarily for contracts entered into or amended after January 1, 2007. The statute provides that:
"no state agency may enter into any contract for the acquisition of goods or services in the amount of one hundred thousand dollars ($100,000) or more with a contractor who, in the provision of benefits, discriminates between employees with spouses and employees with domestic partners…."28
Each contract entered into by the State with a contractor must include language stating that the contractor is in compliance with A.B. 17.Employers will be exempt from providing the equal benefits for various reasons listed in the bill. Most notably, employers will not be found to be in violation of this law if they provide any employee's domestic partner with the cash equivalent of the benefits offered to its employees' spouses instead of offering the benefits.29
ERISA's Preemption of California's New Law [top]
Because A.B. 17 is so similar to San Francisco's Ordinance, any court is likely to rely on Air Transport to find that A.B. 17 "relates to" an employee benefit plan.Air Transport found that San Francisco's Ordinance bore a "connection with" employee benefit plans after considering how the Ordinance affected the realization of Congress's purpose for enacting § 514. Similarly, A.B. 17 will be found to bear a "connection with" employee benefit plans once the effects of Congress's intentions are analyzed.A.B. 17 contradicts Congress's goal of providing a uniform set of rules regulating employee benefits by dictating that within California, certain benefits must be provided based upon certain benefits being offered to others.This confers a duty on national benefit plans to make themselves aware of California's own law regarding benefits and then causes the plans to operate differently in California than they might in another state.Since the effects of the State's new law hinders the purpose of ERISA, it will be said that a "connection with" employee benefit plans exists.Because California's new law has a "connection with" employee benefits, the state law "relates to" an employee benefit plan.
Even though A.B. 17 will be found to "relate to" employee benefits, one must not assume that it will automatically be preempted.The next step is to determine whether the market participant exception will apply so as to allow the State's new law to take effect despite its relation to employee benefit plans. As in Air Transport, there can be little doubt that the State's policy concerns regarding discrimination based on sexual orientation were the primary reasons for enacting the new law.The State has no substantial proprietary interests in requiring its contractors to extend benefits to domestic partners.Thus the market participant exception will not apply unless Alameda Newspapers' exception to the exception will apply.The Alameda Newspapers exception applies only if the State is acting in a role that produces effects equal to or less than that of an ordinary consumer.The determination of whether the State is creating de minimus effects equal to or less than that of an ordinary consumer is the key determination that contractors must make when deciding whether they will have to comply with California's new law.
Because both Air Transport and Alameda Newspapers analyzed the specific relationships between the respective cities and contractors, it is likely that other courts will do the same.In sum, whether or not the State will be considered an ordinary consumer will vary based upon the facts and circumstances of each case.The fact that the State enters into hundreds of thousands of contracts30 totaling about seven billion dollars each year31 is not enough to justify a blanket labeling of the State as something more than an ordinary consumer.
Because the Alameda Newspapers exception has not been used elsewhere, there is little guidance as to when a state is acting as an ordinary consumer and when it is not. Current cases on the matter have only served to demonstrate the extremes of when a governmental entity is an ordinary consumer and when it isn't. For example, Air Transport makes clear that a city is not an ordinary consumer when it has a monopoly and contractors must deal with it if they wish to obtain contracts from the city.Rarely will there be situations in which the State has a similar monopoly.32However, it will be unusual for the State to have as little an impact as did the City of Oakland in Alameda Newspapers when it canceled its 13 newspaper subscriptions.Because A.B. 17 does not even apply to contracts below $100,000, it is possible that the State may never have a situation where the regulatory affects of A.B. 17 are as de minimus as they were in Alameda Newspapers. It is completely unclear how far beyond the Alameda Newspapers example in terms of de minimus effects a city or state may go and still be considered an ordinary consumer. What is clear is that when the State acts in a monopolistic fashion like San Francisco did in Air Transport, the State is no longer acting as an ordinary consumer. Thus contractors are left with little guidance as to when the State will be considered an ordinary consumer or not.
So how should a contractor decide whether the State is acting as an ordinary consumer? One way to simplify the inquiry is as follows: a city or state qualifies as an ordinary consumer only when it is 1) purchasing a small quantity of goods or services or 2) acquiring goods outside of its governmental authority-the authority to tax and purchase on behalf of the citizens of the state, goods for which they by themselves would have no need.33For example, if the State is purchasing only a small number of pencils for one of its offices, it is likely to qualify as an ordinary consumer because it is purchasing a small quantity of a product or service.Conversely, were the State to be ordering pencils to supply all its employees throughout the state, it would be much less likely to qualify as an ordinary consumer. Similarly, if the State is contracting for new tanks for its national guard or for new highways, it is not likely to qualify as an ordinary consumer because it is using its taxing and spending powers to purchase goods that consumers normally would have no need for.
Arguments can also be made that California fails to act like an ordinary consumer in most of its contracts because it receives a leveraged price for most of its purchases.Ken Hunt of the Media Relations Section of the State's Department of General Services suggests that most of the contracts the State enters into involve some sort of price discount or leveraged purchase because the State's contracts are so valuable to contractors.34Such evidence suggests that the State is clearly exercising a power greater than that of an ordinary consumer when it can demand lower prices/bids.Thus, when the State uses its leverage to obtain lower prices/bids, it will find that A.B. 17 is likely preempted with respect to that contractor.
Fortunately for contractors, the mandates of A.B. 17 do not take effect until January 1, 2007. There is plenty of time for contractors to assess their relationships with the State and to determine whether they must comply with the demands of A.B. 17. This delay also allows time for other cases regarding ERISA preemption to arise, and hopefully the courts will take the opportunity to bring clarity to this issue. However, because of the complexity of creating a test to determine exactly when the State is acting as an ordinary consumer, courts may base their decisions on other grounds and never reach this issue.35In addition, there is hope that the Supreme Court will address the exception created by Alameda Newspapers and determine whether it is a valid exception with respect to ERISA preemption.Currently only the Ninth Circuit has adopted the exception to the market participant exception found in Alameda Newspapers. Hopefully, by the time A.B. 17 comes into effect in 2007, the courts will have established concrete rules for determining when a government entity, particularly the State, is acting as an ordinary consumer.
When deciding whether they will be subject to A.B. 17, employers must remember what preemption meant in Air Transport. Even though A.B. 17 is likely to be preempted by ERISA, employers offering non-ERISA benefits will still likely be subject to the provisions of A.B. 17 with respect to the administration of those benefits. Also, ERISA-covered benefits administered by non-ERISA plans are still likely to have to comply with the new law.
Nevertheless, ERISA's preemption clause is certain to protect numerous contractors with ERISA plans from having to comply with the new demands of A.B. 17.However, Alameda Newspapers and the ordinary consumer exception created therein may still cause a fair number of employers with ERISA benefit plans to remain subject to this new law.The trick for contractors will be to analyze their contractual relationships with the State under the principles established by Air Transport and Alameda Newspapers to determine whether ERISA provides them any protection from the new law. Essentially, contractors must decide whether the State is exercising its regulatory power or whether it is simply acting like any other ordinary consumer.
1 San Francisco's Administrative Code, Chapter 12B, had supposedly prevented the city from contracting with contractors that discriminate on the basis of sexual orientation since 1972. However, it wasn't until 1996 when the city began to amend Chapter 12B that contractors were required to provide equal benefits to domestic partners in order to obtain contracts. See Air Transp. Assoc. of Am. v. City of San Francisco, 992 F.Supp. 1149, 1156-57 (N.D. Cal., 1998).
6 Some ERISA scholars believe that Shaw established ERISA preemption to be so far reaching that any law having to do with benefits would automatically be preempted. See Langbein, John H. and Wolk, Bruce A., Pensions and Employee Benefit Law, 3rd. Ed. Foundation Press, New York, 2000, pg. 506.
31 Telephone interview with Pat Jones, State of California Department of General Services (Oct. 29, 2003); confirmed by telephone interview with Ken Hunt, California Department of General Services, (Oct 30, 2003).
32 It is difficult to identify where California operates a monopoly and consequently where its regulatory actions are the extreme opposite of those of an ordinary consumer. Professor Bruce Wolk, law professor at the University of California Davis School of Law, speculates that the state would operate a monopoly over the companies that sell the machines to run a statewide lottery. Other than that, Professor Wolk believes it is difficult to identify an area where the state operates in such a monopolistic fashion. Professor Wolk's speculation is confirmed by two employees of the State of California Department of General Services-a department heavily involved in the regulation of the state's contracts. Both employees after having thought on the matter at least overnight were unable to come up with an idea of when the state is acting in a monopolistic fashion. This information comes from three interviews: 1) interview with Bruce Wolk, Professor of Law, UC Davis, in Davis, Cal. (Nov 4, 2003); 2) telephone interview with Pat Jones, California Department of General Services (Oct. 29, 2003); and 3) telephone interview with Ken Hunt, California Department of General Services (Oct 30, 2003).
33 See Hiatt, Constance M., "District Court Carves Out 'Market Participant' Exception to ERISA Preemption for Domestic Partner Benefits," Pension & Benefits Week Newsletter, 4/27/1998 RIA-PBW. Ms. Hiatt was an attorney for Pillsbury, Madison & Sutro LLP in San Francisco at the time she published this article.
35 One Ninth Circuit Court did just that in S.D. Meyers, Inc. v. City and County of S.F., 253 F.3d 461 (2001). There the court had before it the opportunity to decide whether San Francisco's ordinance could lawfully require a contractor providing electrical transformers to provide benefits to the domestic partners of its employees. The court however refused to address ERISA preemption and the Alameda Newspapers exception because if found the defendant lacked standing to bring such a claim. The court held that the defendant lacked standing because the defendant stipulated that it would not offer the benefits even if the city's ordinance was found to be valid, and the defendant consequently lost all its contracts with the city. See Id. at 466.