Joseph Elliott v. Board of School Trustees of Ma
Filed opinion of the court by Judge Hamilton. AFFIRMED. William J. Bauer, Circuit Judge; Frank H. Easterbrook, Circuit Judge and David F. Hamilton, Circuit Judge. [6887885-1]  [16-4168]
United States Court of Appeals
For the Seventh Circuit
JOSEPH R. ELLIOTT,
BOARD OF SCHOOL TRUSTEES
OF MADISON CONSOLIDATED SCHOOLS,
STATE OF INDIANA,
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 13-cv-319 — William T. Lawrence, Judge.
ARGUED SEPTEMBER 6, 2017 — DECIDED DECEMBER 4, 2017
Before BAUER, EASTERBROOK, and HAMILTON, Circuit
HAMILTON, Circuit Judge. The Contract Clause of the
United States Constitution prohibits States from passing laws
“impairing the Obligation of Contracts.” Art. I, § 10, cl. 1. The
prohibition is not absolute, but it imposes substantial limits
on laws that would undermine existing contractual rights. In
2012, an Indiana law took effect amending the State’s teacher
tenure law to cut back on the rights of tenured teachers in
layoffs. The issue in this appeal is whether the new law violates the Contract Clause rights of a teacher who had tenure
before the law took effect.
The Supreme Court of the United States held in 1938 that
the Indiana teacher tenure statute created contractual rights
protected by the Contract Clause. Indiana ex rel. Anderson v.
Brand, 303 U.S. 95, 104 (1938). From 1927 to 2012, that contract
included job security when school districts needed to reduce
their teaching staffs: as long as they were qualified for an
available position, tenured teachers had a right to be retained
over non-tenured teachers. The new Indiana law eliminates
that right and orders school districts to base layoff choices on
performance reviews without regard for tenure status.
In 2012, defendant Board of Trustees for Madison Consolidated Schools relied on the new law to lay off plaintiff Joseph
Elliott, a teacher who earned tenure fourteen years before the
new law took effect, while it retained non-tenured teachers in
positions for which Elliott was qualified. Elliott sued, claiming that the amendment violated the Constitution when applied to him. The district court granted summary judgment in
Elliott’s favor. Elliott v. Board of School Trustees of Madison Consol. Schools, 2015 WL 1125022 (S.D. Ind. March 12, 2015). We
I. Legal and Factual Background
A. Indiana’s Teacher Tenure Law
Indiana enacted its teacher tenure law as the Act of March
8, 1927, Laws of the State of Indiana 259–62 (1927) (“the Act”).
The Act established how and when a teacher earns tenure, the
“principal purpose” of which is “to secure permanency in the
teaching force.” Watson v. Burnett, 23 N.E.2d 420, 423 (Ind.
1939). Permanency was intended to promote “the public good
through the creation of a competent cadre of teachers in the
state.” Stewart v. Fort Wayne Community Schools, 564 N.E.2d
274, 278 (Ind. 1990). With the enactment, Indiana joined a national trend in the early twentieth century of offering job security to attract better teachers.
Unlike tenure statutes in many other States, Indiana’s law
has been treated as forming “an employment by contract between the teacher and the school corporation.” School City of
Elwood v. State ex rel. Griffin, 180 N.E. 471, 474 (Ind. 1932); see
also Anderson, 303 U.S. at 107 (distinguishing Indiana law
from other States’ laws). A teacher who had “serve[d] under
contract as a teacher in any school corporation in the State of
Indiana for five or more successive years” achieved tenure
upon entering a sixth successive one-year contract. Ind. Code
§ 26-6967.1 (1927). 1 Once tenured, teachers have an “indefinite contract” that entitles them to employment contracts each
year unless the employer has good cause to fire them. Id.; Lost
Creek School Township v. York, 21 N.E.2d 58, 64 (Ind. 1939). The
annual employment contracts can adjust variable terms like
salary, hours, and the length of the school year, but they must
The original Act referred to “permanent” teachers, but we use the
more common term “tenured.”
always comply with the Act. Lost Creek, 21 N.E.2d at 64. In
case of a conflict, the indefinite contract terms set by statute
supersede the annual employment contract. School City of
Lafayette v. Highley, 12 N.E.2d 927, 930 (Ind. 1938) (parties cannot circumvent Act by relying on written contract).
The core terms of the Act limit the reasons and procedures
for firing or laying off tenured teachers. To cancel a tenured
teacher’s contract, a school must provide written notice and,
upon demand, a comprehensive hearing before the school
board. Ind. Code § 20-28-7.5-2; Ind. Code § 26-6967.2 (1927).
Schools can fire tenured teachers only for incompetence, insubordination, neglect of duty, immorality, a justifiable decrease in the number of teaching positions, or other good
cause. Ind. Code § 20-28-7.5-1; Ind. Code § 6967.2 (1927). Recognizing a possible loophole, Indiana courts have long held
under the Act that if a school district must reduce the number
of its teachers, the district must retain qualified tenured teachers over non-tenured teachers. Watson, 23 N.E.2d at 423.
B. Senate Bill 1
The job security provisions in Indiana’s tenure law remained unchanged until 2011. Compare Ind. Code § 266967.1 (1927) with Ind. Code § 20-28-7-1 (2010); and Ind. Code
§ 26-6967.2 (1927) with Ind. Code § 20-28-7-2 (2010). In 2011,
Indiana amended the Act through Senate Bill 1, which took
effect in 2012. As relevant here, Senate Bill 1 established a
mandatory teacher-evaluation regime and removed the protection for tenured teachers in layoffs. 2
Senate Bill 1 also changed the terminology from “permanent
teacher” to “established teacher.” Any difference between the two labels
is irrelevant here, so we continue to use the general term “tenured.”
Starting with the 2012–13 academic year, Senate Bill 1 requires schools to implement annual teacher-evaluation plans.
Ind. Code § 20-28-11.5-4(a). Each year, schools must assess
their teachers based on performance evaluations, “Objective
measures of student achievement and growth,” and “Rigorous measures of effectiveness.” Ind. Code § 20-28-11.5-4(c).
Schools must then assign each teacher a rating: highly effective, effective, improvement necessary, or ineffective. Ind.
Code § 20-28-11.5-4(c)(4).
These annual evaluations affect teacher pay, student
placement, and—most relevant here—selection of teachers
for layoff during reductions in force. Under Senate Bill 1, a
school district may no longer consider tenure status when reducing its teaching staff. Schools laying off teachers must now
cancel teacher contracts “on the basis of performance rather
than seniority.” Ind. Code § 20-28-7.5-1(d). To decide between
teachers with the same performance ratings, schools may consider other factors, including experience, additional degrees
or credit hours, leadership roles, and the school’s academic
needs. Ind. Code §§ 20-28-7.5-1(d), 20-28-9-1.5(b).
C. Plaintiff’s Employment History
Plaintiff Joseph Elliott taught at Dupont Elementary
School, part of Madison Consolidated Schools, for nineteen
years. In 1998, Elliott entered his sixth successive contract
with the school district and became a tenured teacher under
the Act. He continued to teach at Dupont for fourteen more
years. As is the norm in Indiana, Elliott signed a series of annual contracts, the last of which was for the 2011–12 school
year. In 2012, Elliott’s colleagues elected him president of the
local teachers union.
During Elliott’s time at Dupont Elementary, the school’s
evaluation policy assessed teachers across fourteen skills. Elliott received ten of these evaluations. In all but one, he received ratings of “strength” or “satisfactory”—the two highest ratings—in all fourteen skills. The exception was 2002, ten
years before he was laid off, when he received “needs improvement” in the three skills related to “interpersonal relationships” and a comment that he sometimes had “difficulty
accepting, graciously, a different point of view.” In a few
more recent evaluations, Elliott received critiques about his
interpersonal skills but always earned ratings of satisfactory
or above. Dupont evaluated Elliott for the last time in 2012
and found him satisfactory or better in all skills. Toward the
end of the 2011–12 school year, Dupont’s principal reviewed
the evaluation and recommended Elliott for contract renewal.
D. Defendant’s 2012 Layoffs
In the summer of 2012, however, the Madison school district faced declining enrollment and a corresponding reduction in state funding. The district decided to close two schools
and to reduce its teaching staff effective that fall. The district
had recently implemented a new retention policy that incorporated Senate Bill 1. Since we are reviewing a grant of summary judgment for plaintiff, we assume that the district
properly followed that policy (though Elliott disputes the
point). Elliott and five other teachers were notified that the
district was laying them off.
As Indiana law provided, Elliott demanded a conference
with the superintendent and then a full hearing with the
Board. After the hearing, the Board made factual findings
about Elliott. The findings in 2012 pointed to the 2002 evaluation that had rated Elliott low in interpersonal-relationship
skills. The 2012 findings also cited a few comments from evaluators over the years suggesting that Elliott could be more
compassionate. The Board also concluded that Senate Bill 1
allowed the district to cancel Elliott’s contract during a justifiable reduction in force. The Board ordered Elliott’s contract
cancelled as of the end of the 2011–12 school year. The school
district retained six non-tenured teachers in positions that Elliott was licensed to teach.
E. Procedural History
Elliott sued the school district in state court in January
2013 alleging four state-law claims: (1) that Senate Bill 1 violated the Indiana Constitution; (2) that the district applied
Senate Bill 1 before its effective date; (3) that the district applied Senate Bill 1 incorrectly; and (4) that his layoff was not
supported by sufficient evidence. He also alleged that Senate
Bill 1 impaired his contractual rights in violation of the United
States Constitution. The Board removed the case to the federal
district court, and the State of Indiana later intervened to defend the new law’s constitutionality. See 28 U.S.C.
§ 2403(b). The parties filed cross-motions for summary judgment, and the district court ruled in favor of Elliott.
The district court concluded that the layoff provisions of
Senate Bill 1 violate the Contract Clause when applied retroactively to a teacher like Elliott who earned tenure before the
new law took effect. Applying Supreme Court and Indiana
precedent, Judge Lawrence concluded that tenured Indiana
teachers have contractual rights to be retained over non-tenured teachers in a reduction in force. He then found that Senate Bill 1 “completely destroyed” this right and was a substantial impairment under the Contract Clause. Finally, he rejected the argument that this impairment was constitutionally
permissible as a reasonable and necessary exercise of the
The State and the Board sought permission to take an interlocutory appeal under 28 U.S.C. § 1292(b). The district
court granted permission but we did not. The district court
then entered final judgment for Elliott and awarded him back
pay under 42 U.S.C. § 1983 and attorney fees under 42 U.S.C.
§ 1988. Although the district court based its final judgment
only on Elliott’s federal-law theory and not his state-law theories, Elliott received the full relief that his state-law theories
could have provided, so nothing more needed to be decided.
The State and the Board appealed the final judgment.
The issue is whether the district court correctly decided
that the layoff provisions of Senate Bill 1 violate the Contract
Clause when applied retroactively to a teacher who earned
tenure before the new statute took effect. We review the district court’s decision de novo. Daniels v. Area Plan Comm’n of
Allen County, 306 F.3d 445, 458 (7th Cir. 2002) (reviewing de
novo a summary judgment order that declared a state law unconstitutional).
At the outset, we note but bypass a potentially difficult issue. Elliott sought, and the district court awarded, damages
under 42 U.S.C. § 1983. In Carter v. Greenhow, 114 U.S. 317
(1885), the Supreme Court found that there was no federal
question jurisdiction over the plaintiff’s Contract Clause
claim. Using a predecessor of § 1983, the plaintiff challenged
a state law that affected his state-issued bonds by prohibiting
him from using his coupons to pay his property taxes. Id. at
321–23. Some courts have read Carter broadly as prohibiting
any Contract Clause claims under § 1983. See Kaminski v.
Coulter, 865 F.3d 339, 347 (6th Cir. 2017); Crosby v. City of Gastonia, 635 F.3d 634, 640 (4th Cir. 2011). But Supreme Court and
other opinions reflect another view, reading Carter as based
more narrowly on the way the particular claim in that case
was pled and the failure to satisfy the amount-in-controversy
requirement applicable at the time. See Dennis v. Higgins, 498
U.S. 439, 451 n.9 (1991), quoting Chapman v. Houston Welfare
Rights Org., 441 U.S. 600, 613 n.29 (1979); Southern California
Gas Co. v. City of Santa Ana, 336 F.3d 885, 886–87 (9th Cir. 2003)
(per curiam); see also White v. Greenhow, 114 U.S. 307, 307–08
(1885) (allowing claim for damages for violation of Contract
Clause in companion case to Carter); Kaminski, 865 F.3d at 350
(Moore, J., dissenting) (arguing for limited scope of Carter).
We need not take sides on this question. It does not affect our
subject matter jurisdiction, and the defendants have waived
this potential defense. They did not raise it in the district
court, and the State told us at argument that the defendants
do not rely on Carter.
Turning to the merits, the Contract Clause prohibits States
from passing any “Law impairing the Obligation of Contracts,” U.S. Const. art. I, § 10, cl. 1, but not all laws affecting
contracts are unconstitutional. The Contract Clause prohibits
changes in law only if they operate “as a substantial impairment of a contractual relationship.” General Motors Corp. v. Romein, 503 U.S. 181, 186 (1992), quoting Allied Structural Steel
Co. v. Spannaus, 438 U.S. 234, 244 (1978). This standard balances individual rights to organize personal affairs against
the States’ “necessarily reserved” sovereign power to protect
the general welfare. United States Trust Co. of New York v. New
Jersey, 431 U.S. 1, 21 (1977). The Supreme Court has harmonized these interests by applying a two-step analysis, asking
first whether a change in state law has substantially impaired
a contractual relationship, Energy Reserves Group v. Kansas
Power & Light Co., 459 U.S. 400, 411 (1983), and second
whether the impairment is reasonable and necessary for a legitimate public purpose. United States Trust, 431 U.S. at 25; Allied Structural Steel, 438 U.S. at 247.
A. Substantial Impairment of Contractual Rights?
We consider first whether applying Senate Bill 1 to Elliott
substantially impaired his tenure contract. This issue itself can
be divided into three parts: (1) whether there is a contractual
relationship; (2) whether a change in law impairs that contract; and (3) whether the impairment is substantial. General
Motors, 503 U.S. at 186.
1. The Contractual Relationship
Statutes typically create regulatory rights not subject to the
Contract Clause. See, e.g., Phelps v. Board of Education of West
New York, 300 U.S. 319, 323 (1937) (New Jersey tenure law did
not create contract rights for teachers protecting them from
salary reductions during Great Depression). But when a legislature uses contractual language that induces public reliance, it can create an enforceable contract, as the Supreme
Court held Indiana’s teacher tenure law did. Indiana ex rel. Anderson v. Brand, 303 U.S. 95, 100, 105 (1938). The defendants do
not dispute this general point, but they dispute the scope of
the contractual relationship and the obligations it imposes on
the State and school districts. 3
The State does, however, ask us to treat Anderson as an obsolete relic
based arbitrarily on the particular language used in the 1927 Act. That is
not for us to say. And regardless of any shift in how the Supreme Court
2. Impairment of Contractual Rights
The scope of the contractual obligations determines
whether Senate Bill 1 impairs any contractual right. The State
makes two main arguments on this point. First, it argues that
the Act’s job-security provisions are not part of the tenure
contract but are variable terms that annual teaching contracts
can change. See Def. Br. at 23–24. Therefore, goes the argument, amendments to the job-security terms cannot violate
the Contract Clause. Second, the State argues that even if job
security is part of the tenure contract, the Act has protected
teachers only against dismissal without cause. Firing teachers
based on performance is still firing for cause, the State argues,
so that Senate Bill 1 does not impair any existing contractual
right. We reject both of those arguments, which essentially try
to rewrite Indiana law and history.
The State makes much of the fact that a tenured teacher
works under two contracts, in effect: an indefinite statutory
one that provides tenure and an annual one that governs variable terms like salary and hours. Just as annual contracts can
change salary, the State argues, they can change the degree of
job security that tenure provides without violating the Contract Clause. But Anderson and the Act itself squarely block
this argument. In Anderson, a teacher challenged an amendment to the Act that eliminated job security for teachers in
township schools. 303 U.S. at 97–98. Anderson considered “the
existence and nature” of the Indiana teacher tenure law and
found that it created a “binding and enforceable contract
against school districts.” Id. at 100, 105. The Supreme Court
might interpret the Contract Clause today, generations of Indiana teachers
have relied on Anderson and the teacher tenure law it interpreted.
ultimately determined that the statutory amendment impaired the tenure contract when it changed the “admissible
grounds of cancellation” by revoking the State’s statutory
promise to tenured township teachers. Id. at 105. If the
grounds of cancellation were subject to change through annual teaching contracts, the Court in Anderson could not have
concluded that repealing job-security provisions impaired the
tenure contract. The Act—not the annual contracts—granted
Elliott his contractual tenure rights. Under Anderson, these
rights became enforceable the year Elliott earned tenure. A
decrease in job security necessarily impairs his rights under
It is also well established under Indiana law that the Act
protects against more than at-will termination. As noted, the
Act allows schools to dismiss a tenured teacher during a “justifiable decrease in the number of teaching positions,” Ind.
Code § 26-6967.2 (1927), without much qualification. But early
on, the Indiana courts concluded that reducing teaching staff
does not permit schools to lay off whichever teachers they
please. In Watson v. Burnett, 23 N.E.2d 420, 423 (Ind. 1939), a
school district laid off a tenured teacher who was qualified to
teach positions that non-tenured teachers continued to teach.
When challenged, the school district relied on its authority to
fire tenured teachers when reducing teaching staff. The Indiana Supreme Court held that the Act did not permit this result, reasoning that if “a justifiable decrease in the number of
teaching positions should be held to give the [district] the
power to choose between tenure and non-tenure teachers,”
then the district would have “the power to nullify the Teachers’ Tenure Act.” Id. This holding answers our question directly: before Senate Bill 1, the Act granted a qualified tenured
teacher an enforceable contractual right to be retained over
non-tenured teachers during a reduction in force.
From the enactment of the Act in 1927, Indiana teachers
thus benefitted from enforceable contractual rights when they
became tenured. These contractual rights included job security rights in a layoff. Senate Bill 1, when applied retroactively
to a teacher like Elliott who earned tenure before 2012, impairs those job security rights and the tenure contract. See
United States Trust, 431 U.S. at 19 n.17 (law adjusting the “express terms of an agreement” is more likely to be an unconstitutional impairment).
3. “Substantial” Impairment
Laws impairing contracts violate the Contract Clause only
if the impairment is substantial, though substantial impairment does not require a complete destruction of the contractual relationship. Energy Reserves, 459 U.S. at 411. The issue is
whether the impairment disrupts reasonable contractual expectations. Id. at 413–16; Allied Structural Steel, 438 U.S. at 245.
The Supreme Court’s decisions under the Contract Clause
show that reliance interests are key to this inquiry. The analysis must “reflect the high value the Framers placed on the
protection of private contracts.” Allied Structural Steel, 438 U.S.
at 245. Contracts “enable individuals to order their personal
and business affairs,” and once arranged, “those rights and
obligations are binding under the law, and the parties are entitled to rely on them.” Id.
Based on our reading of the Court’s cases, we break this
inquiry into two questions. First, was the impaired term a
“central undertaking” of the bargain such that it “substantially induced” teachers to enter their contracts? See City of El
Paso v. Simmons, 379 U.S. 497, 514 (1965). Second, was the
change in law foreseeable, meaning that the risk of change
was reflected in the original contract? Energy Reserves, 459
U.S. at 413–16. Put another way, we ask whether this change
substantially disrupted teachers’ important and reasonable
reliance interests. Id.
a. Central Undertaking
Legislation causes a substantial impairment if it alters a
“central undertaking” of the contract that “substantially induced” a party to enter the bargain. Simmons, 379 U.S. at 514
(finding no substantial impairment when it could not “seriously be contended that the buyer was substantially induced
to enter into the contracts” on the basis of the impaired
term). In other words, an impairment is substantial if it disrupts actual and important reliance interests. Here, the term
at issue is narrow but important. When Elliott decided to become a tenured teacher, the State and school district promised
him a substantial degree of job security: during a downsizing,
Elliott’s job would be more secure than that of a non-tenured
The promise of job security, especially during layoffs, lies
close to the core of teacher tenure. Having job security, even
in tough economic times, was a central term to induce people
to become teachers and seek tenure in Indiana. It is a term
with significant value to teachers, who as a matter of economics have traded higher salaries for the protections that tenure
offers over the course of a career. Teachers earn lower salaries
than similarly educated professionals. They receive part of
their compensation through other benefits, including better
job security, which includes a reduced risk of termination
during staff reductions. This lower risk has material value
and was a primary consideration that teachers could rely
upon when seeking tenured employment. 4
An impairment is even more substantial when it disrupts
expectations “in an area where the element of reliance was vital.” Allied Structural Steel, 438 U.S. at 246. In that case, the
Court considered how severely a change in pension law disrupted an employer’s expectations about pension obligations.
Id. at 246–47. The Court found this reliance particularly important. Here we consider not an employer’s but employees’
expectations, yet the same reasoning applies. Just as an employer relies on a stable pension regime to fund its pension
program properly, so too teachers rely on a stable job-security
scheme to plan their personal and professional lives, their investments of time and money, and their retirements. Senate
Bill 1 substantially disrupted tenured teachers’ expectations
about job security. It is not fair to change the rules so substantially when it is too late for the affected parties to change
course. Tenured teachers cannot have do-overs in their careers, either to earn more money to make up for the lost job
A recent report by the Economic Policy Institute found that public
school teachers in the United States earn 11% less on average than similarly educated professionals. See Sylvia A. Allegretto & Lawrence Mishel,
“The Teacher Pay Gap is Wider than Ever,” at 17–18 (2016), accessible at
http://www.epi.org/publication/the-teacher-pay-gap-is-wider-than-everteachers-pay-continues-to-fall-further-behind-pay-of-comparable-workers/. This estimate takes into consideration non-wage benefits such as pension, insurance, and paid leave, but not job security. Id. at 14–17. A 2015
report by the Organisation for Economic Cooperation and Development
found that in the United States, public school teachers earn 67% to 71% of
the salary of the average professional with similar education. Education
at a Glance 2015: OECD Indicators at 442, accessible at
security or to find better job security in another school district
or in another field entirely.
There is a second requirement for the impairment to be
substantial: the parties must not have anticipated the change
in law. We have said that the “foreseeability of the [new] law
when the original contract was made” is of “great” and even
“controlling” importance. Chrysler Corp. v. Kolosso Auto Sales,
Inc., 148 F.3d 892, 894 (7th Cir. 1998). If the parties anticipated
a change in the law, then their bargain would reflect the risk
of a future impairment. Id. at 894–95 (“[W]hat was foreseeable
then will have been taken into account in the negotiations
over the terms of the contract.”). If the new law was foreseeable, then reliance on the impaired terms may have been unreasonable so that a disruption to the relationship would not
be deemed substantial.
The Supreme Court has found that a change in law was
foreseeable in at least two contexts. In the first, the Court
pointed to the history of “extensive and intrusive” regulation
in the affected industry. Energy Reserves, 459 U.S. at 413–16
(new price controls on natural gas did not disrupt the supplier’s reasonable expectations when the industry was heavily regulated and supplier “knew its contractual rights were
subject to alteration by state price regulation”). In the second,
the Court reasoned that because the original law had only a
temporary goal, the parties must have anticipated a future
legislative change. Simmons, 379 U.S. at 516 (change in landsale law did not impair contracts when goal of law shifted
from settlement of Texas frontier to “efficient utilization of
These contexts are quite different from teacher tenure.
One can anticipate that any state law may change in the future, but retroactive application to impair existing contract
rights and reliance interests is another question. Retroactive
application of legislation like Senate Bill 1 was unforeseeable
when teachers like Elliott became tenured. Indiana has historically regulated teacher compensation, but “a history of regulation is never a sufficient condition” by itself. Chrysler Corp.,
148 F.3d at 895. The question is whether the nature of the regulation puts the party “on notice that an entirely different
scheme” would likely be imposed. Id. Although Indiana has
regulated teacher tenure since 1927, the Supreme Court held
in 1938 that those regulations were contractual, protected by
the Contract Clause. Anderson, 303 U.S. at 105. The State did
not materially amend those terms for more than eighty years.
Senate Bill 1 was thus not a “small and predictable step”
in the evolution of the Act, see Chrysler Corp., 148 F.3d at 895,
at least as applied to already-tenured teachers. For teachers
who have built their entire careers relying on those contractual rights as protected in Anderson, Senate Bill 1 amounts to
unforeseeable backtracking by the State. This change in the
fundamental trade-off of job security for money is not comparable to shifting pricing arrangements for natural gas markets. Nor are attracting qualified teachers and improving
public education merely temporary goals that Indiana no
longer pursues. Retroactive application of the layoff provisions of Senate Bill 1 to already-tenured teachers is not a foreseeable change that restricts “a party to those gains reasonably to be expected from the contract.” Simmons, 379 U.S. at
Indiana itself created the binding obligation on which tenured teachers have relied for decades—and from which the
State itself has benefitted. This is not a case where private parties “whose rights . . . are subject to state restriction” attempt
to “remove” themselves “from the power of the State by making a contract about them.” Blaisdell, 290 U.S. at 437–38. Rather, Indiana established the teachers’ contractual rights by
statute. When a State enters a binding commitment, the other
party’s reliance on that commitment is even more justified.
Energy Reserves, 459 U.S. at 412–13, 412 n.14. At any time after
Anderson, Indiana could have amended its teacher tenure law
prospectively, changing it from contractual to regulatory. Indiana declined to do so. This retroactive change to tenure’s
job protections was not foreseeable. Applying the layoff provisions of Senate Bill 1 substantially impaired Elliott’s tenure
contract rights by disrupting his reasonable contractual expectations.
B. Reasonable and Necessary to Serve Important Public Purpose?
Still, not even all substantial impairments of contracts are
unconstitutional. If the impairment is both reasonable and
necessary for an important public purpose, then the law does
not violate the Contract Clause. United States Trust, 431 U.S. at
25. Analyzing Senate Bill 1 within this framework, we agree
with the district court that the amendment, though enacted
for a legitimate and important public purpose, is unconstitutional as applied to an already-tenured teacher because it was
not necessary or reasonable.
As a preliminary matter, the parties disagree about the extent of any deference we might owe the state legislature’s policy decision to restrict tenure rights. Courts owe at least some
deference to legislative determinations of reasonableness and
necessity. United States Trust, 431 U.S. at 22–23; East New York
Savings Bank v. Hahn, 326 U.S. 230, 234 (1945). The degree of
deference differs depending on the severity of the impairment
and on the State’s self-interest. Allied Structural Steel, 438 U.S.
at 245 (“The severity of the impairment measures the height
of the hurdle the state legislation must clear.”); United States
Trust, 431 U.S. at 25–26 (“[C]omplete deference to a legislative
assessment of reasonableness and necessity is not appropriate
because the State’s self-interest is at stake.”).
The State argues that heightened scrutiny under United
States Trust applies only when a State itself enters into a financial obligation and not when the State exercises its police
power. But that is not the only context in which a State can
have a self-interest. “In almost every case, the Court has held
a governmental unit to its contractual obligations when it enters financial or other markets.” Energy Reserves, 459 U.S. at 412
n.14 (emphasis added). Also, self-interest is not the only justification for a more searching review. When a State makes an
express commitment to private businesses or individuals, reliance may be highly justified. Id., citing Note, A Process-Oriented Approach to the Contract Clause, 89 Yale L. J. 1623, 1647–
48 (1980). The State therefore must have a substantial reason
for breaking its own promise. Id.
We do not owe complete deference to the state legislature
here. The impairment is substantial, the contract is an express
commitment between the State and the teachers, and the
State’s self-interest is at stake. Under the Indiana Constitution, public education is ultimately the State’s responsibility,
even if it delegates execution to local school districts. See Ind.
Const. art. 8, § 1. The State is thus not acting solely as a market
participant here, for teacher tenure involves much more than
impairment of “an isolated private contract.” See East New
York Savings Bank, 326 U.S. at 232 (deferring to legislative decision that impaired private financial contract following market collapse). The tenure contract has been a public promise,
and the job security provisions are at the core of the economic
bargain between the State and the teachers of local school districts. We need not scrutinize the legislature’s decision in
great detail to find it lacking, nor should we make the kind of
“utilitarian comparison between public benefit and private
loss” the Supreme Court has warned against. United States
Trust, 431 U.S. at 29. Complete deference is unwarranted, and
review of the impairment is appropriate.
The Supreme Court refined modern Contract Clause jurisprudence in a series of challenges to state laws during the
“unprecedented emergencies” of the Great Depression. Allied
Structural Steel, 438 U.S. at 242. Thus in Home Building & Loan
Ass’n v. Blaisdell, 290 U.S. 398 (1934), the Court upheld a Minnesota law that temporarily suspended mortgage foreclosures. The Court explained that an “emergency existed” that
“furnished a proper occasion for the exercise of the reserved
power of the State to protect the vital interests of the community.” Id. at 444. It compared the economic crisis to a “fire,
flood, or earthquake.” Id. at 439. An emergency is not a requirement for a State to impair contracts but remains relevant
to whether an impairment is appropriate. United States Trust,
431 U.S. at 22 n.19. With this context in mind, we assess
whether the State’s decision to impair contracts of alreadytenured teachers was reasonable and necessary.
Improving teacher quality and public-education outcomes
are both important public interests of the highest order. But
even important goals and good intentions do not justify this
substantial impairment of the tenure contract for already-tenured teachers. See United States Trust, 431 U.S. at 21 (“the existence of an important public interest is not always sufficient
to overcome [the Contract Clause’s] limitation”). When a
State impairs its own contracts, the impairment must be
“clearly necessary” or “essential,” not merely convenient or
expedient. Simmons, 379 U.S. at 516 (upholding law that impaired a contract between Texas and purchasers of land when
“clearly necessary” to achieve an important public goal);
United States Trust, 431 U.S. at 29–30 (invalidating law that impaired contract between States and bondholders when the impairment was not “essential”). A substantial impairment is
not necessary if the State could achieve the goal through “a
less drastic modification” or “without modifying” the contract “at all.” Id.
Indiana has not shown it needs to impose this retroactive
impairment of its earlier promises of job security to improve
teacher quality. Senate Bill 1 does not change the State’s
power to fire ineffective teachers. School districts have had
that power before and after 1927 to the present day. See Ind.
Code § 26-6967.2 (1927); Anderson, 303 U.S. at 108. Instead, the
impairing legislation requires schools to consider small differences in performance among teachers who are not ineffective. Here, the Madison school district needed to lay off a
handful of teachers to save money. Shortly after deciding to
renew Elliott’s contract (and shortly after he was elected president of the local teachers union), the school district chose him
for layoff. He had never been found ineffective. If he had
been, the school district could have fired him without relying
on Senate Bill 1. Ten years ago, Elliott was found to need im-
provement in one skill-set, and he apparently made that improvement. That stale problem is the proffered rationale for
laying off him instead of a non-tenured teacher. Distinguishing between qualified and effective teachers on such a meager
basis is not necessary to achieve Indiana’s goals, at least as
applied to teachers who earned tenure before Senate Bill 1
The Contract Clause does not saddle the State forever with
a teacher-tenure system that its policymakers have come to
think is bad for public education. The Constitution does not
prevent the State from changing the promises it makes on a
prospective basis to new teachers. Also, if the State were to
conclude that retroactive changes to tenure are necessary, the
Contract Clause would give the State the option (much like
the Takings Clause) of paying the individuals who would otherwise lose out from the change. (After all, a party to a contract is ordinarily free to breach the contract as long as it is
willing to pay damages to the other party.) The State can
make the changes it wants, but it cannot foist the costs onto
private parties, other than through general taxes. Having restricted tenure for new teachers, the State and its school districts were and are free to buy out the tenure rights of more
Finally, the retroactive impairment is not reasonable. Contractual impairments can be reasonable if either (1) the statute
“had effects that were unforeseen and unintended” when
originally adopted, or (2) “subsequent changes” in circumstances “caused the covenant to have a substantially different
impact” than anticipated. United States Trust, 431 U.S. at 31–
32. In trying to meet this standard, the State emphasizes that
public education is important and that teacher quality improves student achievement. We agree on the first point and
have no reason to disagree on the second, but these points
were surely as true in 1927, 1957, and 1987 as they are now. In
fact, creating “a competent cadre of teachers” was the precise
goal when Indiana established teacher tenure. Stewart v. Fort
Wayne Community Schools, 564 N.E.2d 274, 278 (Ind. 1990). We
see no changed circumstances that impose “unforeseen advantages or burdens” on the parties. Simmons, 379 U.S. at 515.
The judgment of the district court is AFFIRMED.
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