Hotel Employees & Restaurant Employees Union, Local 57 v. Sage Hospitality Resources, LLC

Citations: 390 F.3d 206; 175 L.R.R.M. (BNA) 3328; 2004 U.S. App. LEXIS 23825; 2004 WL 2579368Docket: 18-1838

Court: Court of Appeals for the Third Circuit; November 14, 2004; Federal Appellate Court

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The case examines whether federal labor law preempts the City of Pittsburgh's requirement that recipients of tax increment financing (TIF) must accept a labor neutrality agreement. The United States Court of Appeals for the Third Circuit ruled that the City is not preempted from imposing this requirement.

In early 1998, Sage Hospitality Resources, LLC sought TIF to support a hotel construction project in Pittsburgh. TIF, authorized under Pennsylvania's Tax Increment Financing Act, allows localities to issue bonds financed by future tax revenues from increased property values in redevelopment areas. The Urban Redevelopment Authority of Pittsburgh approved the Fulton Building TIF District, allocating $3.56 million in TIF support to Sage, with 60% of tax increment revenues dedicated to repaying TIF notes and 40% distributed among the City, School District, and Allegheny County.

Subsequently, on February 2, 1999, the City enacted Resolution 45, requiring Sage to enter into a certified labor agreement with a recognized labor organization. On July 27, 1999, the City further passed Ordinance 22, mandating that contractors and employers engaged in hospitality operations tied to city financial interests must adhere to collective bargaining agreements.

Contractors and employers involved in hospitality operations must sign valid collective bargaining agreements under 29 U.S.C. Section 185 with labor organizations representing hospitality workers as a prerequisite for contracts with the City of Pittsburgh. These agreements must include a "No-Strike Pledge," prohibiting picketing, work stoppages, or economic interference during the repayment period of any public indebtedness related to capital projects or the duration of contracts with the City, whichever is longer. Disputes regarding employment conditions must be resolved through binding arbitration. Contractors are also required to ensure that all work under their City contracts is performed under similar collective bargaining agreements.

By February 2001, although construction of the hotel was complete, Sage had not entered a labor agreement, prompting the City to dissolve the Fulton Building TIF District and withdraw $3.56 million in TIF funds. Shortly thereafter, Sage signed a Neutrality Agreement with the Hotel Employees and Restaurant Employees Union Local 57 (HERE), which included a no-picketing clause and a card-check procedure for union representation, with arbitration for disputes.

After the hotel's opening on March 16, 2001, HERE requested a card count for union recognition, but the City determined that a majority of employees had not designated HERE as their exclusive bargaining representative. HERE sought arbitration regarding the card count outcome, but Sage refused, claiming the Neutrality Agreement was void. On September 20, 2002, HERE filed a complaint in District Court to compel Sage to arbitrate under the Neutrality Agreement, while Sage contended the Agreement was illegal and void from the outset.

In May 2003, both parties filed motions for summary judgment. On September 30, 2003, the District Court ruled in favor of HERE, ordering the parties to arbitrate under the Neutrality Agreement. The court found that: (1) both parties had the right to agree on an alternative method for union representation, specifically card check procedures, which were not illegal under federal law; (2) the Agreement's card check provisions did not violate section 302 of the Labor Management Relations Act (LMRA) regarding "things of value"; and (3) economic duress could not invalidate the Agreement. Sage appealed, claiming that the Agreement was void due to alleged violations of federal law (specifically the National Labor Relations Act), the requirement to provide "things of value," and the assertion that it was void under Pennsylvania's Home Rule Charter. Sage argued that the Neutrality Agreement intruded into an area governed by federal labor law and that Ordinance 22 was preempted by section 7 of the NLRA. The District Court did not address federal preemption, stating it was not necessary for the case's disposition, and instead focused on the Agreement's validity, rejecting Sage's economic duress claim. The court acknowledged that if a neutrality agreement were mandated by a city, the issue of federal preemption would be pertinent, as it could indicate coercion in entering the agreement.

Preemption issues arise when a labor-management agreement is contingent upon a city's public financing requirements. Although the Neutrality Agreement may potentially withstand preemption scrutiny, it is essential to consider the City's ordinance as a starting point for evaluating the Agreement's validity. If the City’s promotion of the Agreement is preempted by federal labor law, the Agreement could be rendered void. 

The National Labor Relations Act (NLRA) has largely supplanted state regulation of labor relations, with Section 7 safeguarding employees' rights to self-organization and collective bargaining. Section 8 defines various unfair labor practices, including interference with these rights and coercive actions regarding labor organization membership.

While the NLRA does not explicitly state preemption, it implies that state or local laws may be preempted if they conflict with federal law or undermine the federal regulatory framework. The Supreme Court has established two doctrines of implied preemption concerning the NLRA. Garmon preemption, the first doctrine, prohibits state and local regulation of activities that are protected by Section 7 or categorized as unfair labor practices under Section 8. When an activity is arguably governed by these sections, both state courts and federal courts must defer to the National Labor Relations Board (NLRB) as the sole authority. This preemption rule aims to avoid conflicts between state/local regulations and the comprehensive federal regulatory scheme established by the NLRA, which designates the NLRB as the appropriate entity for implementing labor laws.

The second preemption principle established in Lodge 76 prohibits state and municipal regulation of labor-management relations that Congress intended to be governed by market forces. This principle reflects Congress's aim to balance power between employers and workers, preventing states from imposing additional restrictions on economic self-help mechanisms like strikes or lockouts unless Congress explicitly allows such restrictions. 

The Garmon and Machinists preemption doctrines primarily address state regulations affecting employer-labor relationships. However, the Supreme Court's decision in Boston Harbor clarified that when a state acts as a market participant—such as an employer or developer—it is not subject to preemption by federal labor statutes like the NLRA. In Boston Harbor, the Massachusetts Water Resources Authority required contractors to sign a prehire collective bargaining agreement with a specific union, which the Court ruled was permissible because the MWRA was acting as a market participant rather than a regulator. 

The Court emphasized that there is no inherent distinction based on whether the purchaser is public or private; both should be able to select contractors based on their willingness to enter into prehire agreements. The MWRA's labor agreement was upheld as a means to ensure project efficiency, not as a regulatory effort. Consequently, preemption analysis arises only when a state's actions constitute regulation. When the state operates as a market participant, it is not subject to NLRA preemption, raising critical questions about distinguishing between regulatory and proprietary actions by the government. The mere imposition of conditions through procurement does not automatically imply a proprietary role immune from preemption scrutiny.

The Supreme Court case Wisconsin Department of Industry, Labor, Human Relations v. Gould, Inc. established that distinctions between state regulation via mandates and through public spending conditions are insufficient. The Wisconsin statute prohibited state procurement officers from purchasing products from firms on a list of labor law violators, regardless of whether the violations were related to state-funded projects. The Court determined that this debarment functioned more like regulation than mere market participation, as it imposed penalties for past misconduct unrelated to state transactions, thus conflicting with the National Labor Relations Act (NLRA). 

The analysis indicates that the line between state regulatory actions subject to preemption and permissible market participation must be drawn with greater nuance than merely distinguishing between mandatory laws and spending powers. The case of Gould involved broad disqualification of firms based on historical violations, reflecting a punitive approach. In contrast, the Boston Harbor case required contractors to enter into a labor agreement specifically tailored to a particular project, serving the municipal authority's interest in labor peace. Thus, while both cases involved spending power, the key difference lies in the scope and intent: Gould's statute pursued broader regulatory goals, while Boston Harbor focused narrowly on protecting the authority's proprietary interests in a specific project.

Appellate courts assessing the regulator/market-participant distinction examine how state requirements align with the state's proprietary interests in specific projects or transactions. In **Chamber of Commerce of the United States v. Reich**, the D.C. Circuit ruled against an Executive Order preventing federal contracts with employers hiring permanent replacements during lawful strikes, finding it overly broad and regulatory in nature, impacting many companies and workers beyond those directly engaged with government contracts. Conversely, in **Building Construction Trades Department v. Allbaugh**, the D.C. Circuit found no preemption for a more narrowly focused Executive Order that mandated neutrality on project labor agreements for federally funded contracts, as it did not regulate behavior in non-government projects. The Ninth Circuit's decision in **Chamber of Commerce of the United States v. Lockyer** involved a California statute that restricted employers receiving state funds from advocating for or against union organizing, determining it had a broad social impact rather than a targeted regulatory goal, thus reflecting a general state position rather than a specific aim. This contrasts with **Cardinal Towing, Auto Repair, Inc. v. City of Bedford**, where a municipal contract award was deemed proprietary and exempt from federal preemption.

The determination of whether a government's funding condition qualifies as market participation under the Boston Harbor exception to preemption review involves a two-step test. First, the condition must advance or preserve the state's proprietary interest in a project as an investor or financier. Second, the scope of the condition must be "specifically tailored" to that proprietary interest. If both criteria are met, the funding condition is deemed market participation and is exempt from preemption review. Conversely, if it does not serve a proprietary interest or is overly broad, it falls under labor law preemption standards.

In evaluating Ordinance 22, the City's interest in the Fulton Building TIF District project is scrutinized. While the City has a financial interest in the anticipated increase in tax revenue, this interest is classified as governmental rather than proprietary since it aligns with the government’s general goal of enhancing tax revenue. Treating this broad interest as proprietary would undermine preemption law.

However, the analysis reveals that Ordinance 22 serves a dual purpose: while it addresses the City’s interest in tax revenue, it also acknowledges the City's role as a partner in the Urban Redevelopment Authority (URA), which holds a genuine proprietary interest in the TIF project. The URA issues TIF bonds and relies on tax revenues to support debt service and other development activities. Therefore, Ordinance 22 is not merely aimed at protecting tax revenues but actively promotes the URA's proprietary financial interest, similar to that of a private developer, by conditioning funding on the elimination of economic disruptions such as picketing and work stoppages.

The financial interest of the City of San Francisco in relation to leasing property is compared to a case involving the Hotel Employees, Restaurant Employees Union, Local 2 v. Marriott Corp., where the city acted to protect its investment by requiring certain labor agreements as a condition of the lease. The court deemed this a proprietary interest, akin to that of a private landowner. Ordinance 22 is designed to safeguard the City's proprietary interest by mandating that contractors and hospitality employers sign no-strike agreements, specifically aimed at preserving the value of tax-revenue-generating properties. This targeted approach is similar to the MWRA's interest in maintaining stability during a project, as upheld by the Supreme Court.

Importantly, the labor agreement requirement is confined to hotels and hospitality projects receiving Tax Increment Financing (TIF) funds, distinguishing it from regulations affecting non-government-funded projects. The City retains a vested interest in financial returns from the TIF project, as it has invested substantially through the Urban Redevelopment Authority (URA). Therefore, the conditions imposed by Ordinance 22 are justified as a reasonable investment strategy and exempt from preemption review.

Sage's claim that the Neutrality Agreement is void due to alleged violations of section 302 of the Labor Management Relations Act (LMRA) is also noted. This section prohibits employers from providing anything of value to employee representatives or labor organizations, highlighting the legal complexities surrounding such agreements.

Congress enacted section 302 to address concerns over corruption in collective bargaining, specifically targeting bribery of employee representatives by employers, extortion by union officials, and the potential abuse of power by union officers over welfare funds. The primary aim is to prevent employers from undermining the loyalty of union officials and to stop union officials from extracting payments from employers. Sage's argument that a valid labor agreement for union recognition constitutes illegal labor bribery is unsupported by legal precedent and the language of section 302, which prohibits the payment, loan, or delivery of valuables. The Neutrality Agreement in question does not involve any such transactions and merely facilitates efficient resolution of disputes, which does not equate to a "thing of value" under the statute.

Additionally, the structure of labor law, particularly the National Labor Relations Act (NLRA), supports arbitration agreements regarding recognition disputes, as established by various court rulings. Sage's interpretation of section 302 would disrupt the balance within labor laws governing union recognition and bargaining. Sage also contends that reaching an arbitration agreement infringes on employees' rights to an election; however, they lack standing to assert these rights, so this argument is not addressed. Consequently, the judgment of the District Court is affirmed.

Garmon identifies two exceptions allowing state actions to avoid federal preemption: when the regulated activity is only a peripheral concern of the Labor Management Relations Act, and when the activity involves local interests deeply rooted in community responsibility, absent compelling congressional guidance. The "local interest" exception typically applies to matters traditionally regulated at the local level, including public order threats and trespass. 

The government asserted that its broad order served its proprietary interests, despite being related to labor disputes on unrelated projects. However, the D.C. Circuit deemed this connection too indirect to satisfy the standards established in Boston Harbor, emphasizing that a direct relationship between procurement conditions and proprietary interests is necessary. 

In Lockyer, the Ninth Circuit's earlier ruling in Alameda Newspapers, where the City of Oakland acted as a market participant by boycotting a newspaper during a labor dispute, was noted, yet its consistency with established precedents was questioned. Lockyer's analysis included subjective legislative motivations but was viewed as unnecessary for assessing compliance with federal standards, which should rely on an objective evaluation of the state ordinance's language and effects.

While not decisive, it was noted that the City of Pittsburgh viewed Ordinance 22 as a means to protect its financial interests in capital projects, aiming to prevent labor disputes from affecting revenues tied to these projects.

The City has determined that labor disputes could jeopardize the continuous operation of hospitality services and asserts that requiring Contractors and Employers to be signatories to collective bargaining agreements, as mandated by 29 U.S.C. sec. 185(a), is the only viable solution. Such agreements ensure uninterrupted service under City contracts since federal law prevents Employers from unilaterally barring unions from initiating work stoppages. A precedent from a District Court case, InMarriott, highlighted that when a city divests its property to a developer under a labor agreement, it cannot justify such a condition as protecting a proprietary interest once its economic interest has ended. Sage contends that it only entered the Agreement due to the City's actions and economic duress, but this argument was not adequately presented on appeal and was therefore not considered. Additionally, Sage's claim that the City's Ordinance 22 and Resolution 45 breached its Home Rule Charter was not raised in the District Court and is thus waived.