“Truly bizarre,” is how U.S. Chamber of Commerce General Counsel Stephen Bokat characterizes the series of rulings, withdrawals and re-hearings that led to a recent appeals court decision in Chamber of Commerce v. Lockyer.

The 9th Circuit Court of Appeals’ decision reinstates a contentious California law–AB 1889–that prohibits private employers from spending state funds to fight union organizing campaigns. The Chamber of Commerce sued to block the law in 2002, arguing the National Labor Relations Act (NLRA) preempted it.

Before the en banc court reinstated the bill, however, two separate 9th Circuit panels, in 2004 and 2005, came to a different conclusion–they upheld summary judgment for the Chamber of Commerce and killed AB 1889. Later, the court withdrew those judgments and allowed an en banc review.

“Even a second panel decision is exceptionally rare,” Bokat says. “Never in more than 30 years practicing law have I heard of a circuit court ruling on the same case three times.”

The tortuous history in Chamber of Commerce v. Lockyer belies the complexity of its legal questions. Namely: Does the NLRA prohibit states from regulating private spending of state money if doing so creates administrative requirements and litigation risks for private employers? And do such burdens chill the speech rights of employers facing labor-organization campaigns?

“AB 1889 does not regulate employee speech or conduct, nor does it regulate labor relations,” says Angela Sierra, supervising deputy attorney general with the California Department of Justice, who argued the case before the 9th Circuit. “As a majority in the en banc panel recognized, employers can engage in assisting or deterring union organization and still receive state funds. They just can’t use the funds for that purpose.”

If the 9th Circuit’s reasoning survives a pending challenge before the Supreme Court, it will not only resurrect a California law that was thought to be dead, but also will raise the stakes in a growing battle over state-spending neutrality.

Impossible Box

California’s AB 1889 is part of a national trend of state legislation that forces companies that receive state contracts to be neutral toward union organizing campaigns. Bills similar to AB 1889 have emerged in numerous states and municipalities, but only one other state–New York–has enacted such a law so far. New York’s law faced the same legal challenges that beset AB 1889, and a district court struck it down in May 2005.

Employer groups are fighting these laws, arguing they limit employers’ free speech rights and create litigation risks. Companies that rely heavily on state funds are particularly wary of the laws.

Several nursing home operators, for instance, joined the California suit as co-plaintiffs with the Chamber of Commerce. The nursing home operators argued that AB 1889 would effectively prohibit them from opposing unions because they rely on state Medicare payments for most of their funding.

“That’s where this statute has the maximum impact,” Bokat says. “It puts health care providers into an impossible box where they are forced into silence because they have no other funds to speak out in opposition to the union.”

The plaintiffs argued that federal labor law prohibits state governments from regulating employer speech in this manner. Specifically, the plaintiffs referred to Section 8(c) of the NLRA, which expressly allows employers to voice their opinions about unions during an organizing campaign.

The U.S. Supreme Court established in its 1959 decision in San Diego Building Trades Council v. Garmon that state governments and federal courts must defer to the “exclusive competence” of National Labor Relations Board when regulating any activity that is subject to Sections 7 or 8 of the NLRA. Because Section 8(c) allows employers to speak out about unions, the plaintiffs argued that California couldn’t limit employer speech with AB 1889.

However, the 9th Circuit ruled that AB 1889 did not prohibit employers from voicing their opinions on unions, but rather only prohibited them from using state funds to do so. Therefore, it held AB 1889 did not conflict with the NLRA. That decision surprised many labor lawyers.

“I find the 9th Circuit’s analysis troubling,” says John Kloosterman, a shareholder with Littler Mendelson in San Francisco. “They are saying Section 8(c) of the NLRA doesn’t grant free-speech rights, but the context and legislative history shows it definitely does.”

Pre-emption Precedent

The 9th Circuit called the plaintiffs’ argument “peculiar,” citing Hotel Employees Local 2 v. Marriott Corp. for the proposition that Section 8(c) doesn’t grant speech rights, but rather says only that “an employer does not commit an unfair labor practice by expressing its views regarding unionization.”

The more important standard, the court said, comes from Rust v. Sullivan, which established states’ right to restrict public funding for abortions.

“Just as the government has the right to control its purse with respect to abortion matters, the 9th Circuit is saying the state can withhold funds from a union-organizing campaign,” says Stephen Befort, a professor at the University of Minnesota Law School.

If that reasoning stands, AB 1889 will go back into effect. However, the Chamber of Commerce has petitioned to stay the 9th Circuit order pending appeal to the Supreme Court. Given the fractious history of the case, the High Court seems likely to accept the petition, and California probably will be enjoined from enforcing AB 1889 for the time being.

AB 1889 also faces challenges on other bases, for which the plaintiffs were unable to establish standing in this case. Even if the Supreme Court overturns AB 1889, Chamber v. Lockyer could have a lasting impact on labor law.

“This is part of a bigger battle,” Befort says. “Pre-emption questions come up in many different guises.”

If the Supreme Court upholds the 9th Circuit’s ruling, employers will need to update their understanding of federal pre-emption law. And in some jurisdictions, they may need to begin paying and accounting for labor relations costs separately if they don’t already.