State of California v. United States Department of Labor et al

Filing 57

ORDER signed by Judge Kimberly J. Mueller on 7/22/2014 ORDERING 9 Motion to Dismiss plaintiffs Spending Clause and Declaratory Judgment Act claims is GRANTED; and plaintiffs' amended complaint to the extent allowed in this Order is due within 14 days of the date of this Order. (Waggoner, D)

1
2
3
4
5
6
7
8

UNITED STATES DISTRICT COURT

9

FOR THE EASTERN DISTRICT OF CALIFORNIA

10
11
12
13
14

STATE OF CALIFORNIA, acting by and
through the CALIFORNIA
DEPARTMENT OF
TRANSPORTATION; and
SACRAMENTO REGIONAL TRANSIT
DISTRICT,

17
18
19

ORDER

Plaintiffs,

15
16

No. 2:13-cv-02069-KJM-DAD

v.
UNITED STATES DEPARTMENT OF
LABOR; and THOMAS E. PEREZ, in his
official capacity as SECRETARY OF
LABOR,
Defendants.

20
21

This matter is before the court on defendants’ motion to dismiss or in the

22

alternative for summary judgment. ECF No. 9. At hearing on May 29, 2014, Stephen Higgins

23

and Kathleen Kraft appeared for plaintiffs Sacramento Regional Transit District (SacRT) and the

24

California Department of Transportation (CalTrans); Susan Ullman and Ryan Parker appeared for

25

defendants Perez and the Department of Labor (DOL).

26

Because plaintiffs have filed a motion for summary judgment to be heard on

27

August 28, 2014, the court declines to address defendant’s motion to dismiss or in the alternative

28

for summary judgment on claims one, two and four at this time and will consider those claims in
1

1

conjunction with plaintiffs’ motion. This order addresses only the motion to dismiss the

2

Spending Clause and declaratory judgment claims. After considering the parties’ arguments, the

3

court GRANTS the motion, but gives plaintiffs leave to amend their Spending Clause claim.

4

I.

5

PROCEDURAL BACKGROUND
Under Section 13(c) of the Urban Mass Transportation Act (UMTA), now codified

6

at 49 U.S.C. § 5333(b), state and local governments seeking federal grants for transit assistance

7

must seek certification from the Department of Labor that the “interests of employees affected by

8

the assistance” are protected by “fair and equitable” arrangements. These employee protective

9

arrangements are called 13(c) agreements.

10

In their complaint, filed October 4, 2013, plaintiffs SacRT and CalTrans challenge

11

DOL’s determination that California’s enactment of its Public Employees’ Pension Reform Act

12

of 2013 (PEPRA), CAL. GOV’T CODE §§ 7522, et seq., prevented 13(c) certification. The

13

complaint raises five claims: (1) DOL’s interpretation of PEPRA and Section 13(c) was arbitrary

14

and capricious in violation of the APA; (2) DOL acted in excess of statutory authority in denying

15

13(c) certification; (3) DOL’s refusal to grant 13(c) certification is inconsistent with limits on

16

federal power embodied in the Spending Clause and violates the state’s fiscal sovereignty in

17

violation of the Tenth Amendment; (4) DOL prejudged the merits of the issues before it and

18

denied plaintiffs due process in violation of the Administrative Procedure Act (APA); and (5)

19

they are entitled to a declaratory judgment, 28 U.S.C. § 2201. Compl., ECF No. 1 at 15-23.

20

Defendants filed the motion to dismiss or for summary judgment along with the

21

administrative record on December 9, 2013. ECF Nos. 9, 9-2, 9-3, 9-4, 9-5. On January 9, 2014,

22

they filed a notice of omissions from the administrative record and provided the omitted

23

documents. ECF No. 12.

24

On January 15, 2014, plaintiffs filed a motion to complete and supplement the

25

administrative record and for limited discovery and on January 26, they filed their opposition to

26

the motion to dismiss. ECF Nos. 18, 21. The court continued the hearing on the motion to

27

dismiss pending the decision on the motion to supplement the record. ECF No. 23.

28

/////
2

1
2

On April 24, 2014, the court granted the motion to supplement in part and denied it
in part and gave the parties the opportunity to file supplemental briefs. ECF No. 41.

3

On May 15, 2014, plaintiffs filed a supplemental brief in opposition to the motion

4

to dismiss and a response to Amalgamated Transit Union’s (ATU) amicus brief. ECF Nos. 43,

5

44. Defendants filed their reply on May 15, 2014.

6

II.

FACTUAL ALLEGATIONS

7

A. SacRT

8

SacRT is a regional transit district formed under California law, CAL. PUB. UTIL.

9

CODE §§ 10200, et seq., based in Sacramento. ECF No. 1 ¶ 27. It “relies heavily on federal

10

funding . . . for its capital expenditures.” Id. ¶ 36. SacRT employs approximately 942 people,

11

492 of whom are represented by the ATU. Id. ¶ 37.

12

On November 15, 2012, SacRT submitted an application to the Federal

13

Transportation Agency (FTA) for funding of approximately fifty percent of the costs to extend

14

the south corridor (Blue Line) of its light rail system and to construct new stations and a major

15

transit center at Cosumnes River College, planning to use the funds as reimbursement of capital

16

expenditures made before January 1, 2013. Id. ¶¶ 36, 43. FTA designated the application as CA-

17

03-0806-03. Id. ¶ 43.

18

On December 12, 2012, DOL notified SacRT and its unions of the Department’s

19

intent to certify the pending grant on the basis of the existing 13(c) Agreement unless it received

20

an objection. Id. ¶ 44. ATU timely objected, citing the impact of PEPRA on collective

21

bargaining for pensions and other retirement issues, among other things. Id. ¶ 46.

22

As the parties were unable to resolve the issues, each filed its final proposal with

23

DOL on February 12, 2013. Id. ¶ 51. On April 18, 2013, DOL declined to issue an interim

24

certification, noting the potential impact of PEPRA. Id. ¶ 53. On September 4, 2013, DOL

25

issued its final determination, concluding among other things that “[f]ederal labor policy, rather

26

than state law, defines the substantive meaning of the collective bargaining rights that must be

27

continued for purposes of section 13(c). Where a state statute forecloses negotiation between

28

management and labor over mandatory subjects of collective bargaining, the Secretary cannot
3

1

certify. Here, there can be no dispute that pensions are a mandatory subject of bargaining.” Id.,

2

Ex. A at 36. It concluded that “[m]eaningful collective bargaining does not exist when a state

3

mandates changes in what the parties have previously negotiated, dictates results, or removes

4

relevant issues from consideration”; so, “the effects of PEPRA render it legally impermissible,

5

under current circumstances, for the Department to certify fair and equitable employee protective

6

conditions for grants to SacRTD.”1 Id., Ex. A at 41-42.

7

B. CalTrans

8

Caltrans is an executive department within the state of California, with

9

headquarters in Sacramento. ECF No. 1 ¶ 26. Under California Government Code § 14030,

10

CalTrans has the authority to assist local transit agencies in the development and operation of

11

mass transit and the application for and use of federal funds. Id. ¶ 33. It ensures the availability

12

of funds for public transit programs by serving as the direct recipient of federal funds under a

13

number of FTA funding programs. Id. ¶ 34.

14

As part of this assistance, CalTrans sought FTA funds for Monterey-Salinas

15

Transit’s (MST) Mobility Management Project, submitting an application on September 20, 2013;

16

this was denominated CA-90-Z117-00. Id. ¶ 35. DOL denied this application on September 30,

17

2013, incorporating its denial of MST’s earlier grant application for funding to update its trolley

18

system. Id. ¶ 62 & Ex. A at 44-45. This final determination “contained language and reasoning

19

nearly identical to that in the Department’s final determination for SacRTD.” Id. ¶ 62.

20

In addition to these grants, DOL has failed to certify most grants to California

21

transit agencies, resulting in over $1 billion of funding withheld. Id. ¶ 63.

22

/////

23

/////

24

/////

25

/////

26

/////

27
28

1

SacRTD is an alternative shorthand for SacRT.
4

1

III.

2
3

Section 13(c) of the Urban Mass Transportation Act of 1964, 49 U.S.C. § 5333(b)
(UMTA), provides in pertinent part:

4

(b) Employee protective arrangements.--(1) As a condition of
financial assistance . . . the interests of employees affected by the
assistance shall be protected under arrangements the Secretary of
Labor concludes are fair and equitable. The agreement granting the
assistance . . . shall specify the arrangements.

5
6
7

(2) Arrangements under this subsection shall include provisions that
may be necessary for—

8

(A) the preservation of rights, privileges, and benefits (including
continuation of pension rights and benefits) under existing
collective bargaining agreements or otherwise;

9
10

(B) the continuation of collective bargaining rights . . . .

11
12

LEGAL BACKGROUND

49 U.S.C. § 5333(b)(1), (2)(A), (B).

13

In 2012, California’s Governor signed the PEPRA into law “to reform California’s

14

public employee pension systems and to bring the staggering cost of funding such systems under

15

fiscal control.” ECF No. 1 ¶ 6. Under PEPRA, employees hired after January 1, 2013 (“new

16

employees”) must contribute at least 50 percent of the normal costs of their defined benefit plan.

17

PEPRA establishes a cap on the amount of compensation that can be used to calculate a

18

retirement benefit for new and “classic” employees, to use the parties’ term of art. See CAL.

19

GOV’T CODE §§ 7522.30(a), 7522.10(c).

20

IV.

ANALYSIS

21

A. Standard for a Motion to Dismiss

22

Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a party may move to

23

dismiss a complaint for “failure to state a claim upon which relief can be granted.” A court may

24

dismiss “based on the lack of cognizable legal theory or the absence of sufficient facts alleged

25

under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir.

26

1990).

27
28

Although a complaint need contain only “a short and plain statement of the claim
showing that the pleader is entitled to relief,” FED. R. CIV. P. 8(a)(2), in order to survive a motion
5

1

to dismiss this short and plain statement “must contain sufficient factual matter . . . to ‘state a

2

claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting

3

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A complaint must include something

4

more than “an unadorned, the-defendant-unlawfully-harmed-me accusation” or “‘labels and

5

conclusions’ or ‘a formulaic recitation of the elements of a cause of action.’” Id. (quoting

6

Twombly, 550 U.S. at 555). Determining whether a complaint will survive a motion to dismiss

7

for failure to state a claim is a “context-specific task that requires the reviewing court to draw on

8

its judicial experience and common sense.” Id. at 679. Ultimately, the inquiry focuses on the

9

interplay between the factual allegations of the complaint and the dispositive issues of law in the

10
11

action. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984).
In making this context-specific evaluation, this court must construe the complaint

12

in the light most favorable to the plaintiff and accept as true the factual allegations of the

13

complaint. Erickson v. Pardus, 551 U.S. 89, 93-94 (2007). This rule does not apply to “‘a legal

14

conclusion couched as a factual allegation,’” Papasan v. Allain, 478 U.S. 265, 286 (1986) quoted

15

in Twombly, 550 U.S. at 555, nor to “allegations that contradict matters properly subject to

16

judicial notice” or to material attached to or incorporated by reference into the complaint.

17

Sprewell v. Golden State Warriors, 266 F.3d 979, 988-89 (9th Cir. 2001). A court’s

18

consideration of documents attached to a complaint or incorporated by reference or matter of

19

judicial notice will not convert a motion to dismiss into a motion for summary judgment. United

20

States v. Ritchie, 342 F.3d 903, 907-08 (9th Cir. 2003); Parks Sch. of Bus. v. Symington, 51 F.3d

21

1480, 1484 (9th Cir. 1995); compare Van Buskirk v. Cable News Network, Inc., 284 F.3d 977,

22

980 (9th Cir. 2002) (noting that even though court may look beyond pleadings on motion to

23

dismiss, generally court is limited to face of the complaint on 12(b)(6) motion).

24

B. Spending Clause Arguments

25

Plaintiffs allege that DOL’s interpretation and application of Section 13(c) has

26

coerced California to change PEPRA even though regulation of public pensions is the state’s

27

prerogative. ECF No. 1 ¶¶ 92-93. They also allege that by compelling them to change the

28

pension reform legislation or forgo over $1 billion of federal transit grants, the agency has
6

1

undermined California’s legislative and fiscal sovereignty. Id. ¶ 94. They contend that DOL’s

2

interpretation of section 13(c) conditions the receipt of federal funds on ambiguous requirements

3

that do not directly relate to the objectives of the grant program. Id. ¶ 95. In plaintiffs’ view, this

4

coercion exceeds Congress’s power under the Spending Clause and violates the Tenth

5

Amendment by invading California’s fiscal sovereignty. Id. ¶ 96.

6

Defendants argue similar claims were rejected in City of Macon v. Marshall, in

7

which a district court concluded the UMTA only induces but does not coerce transit agencies to

8

maintain workers’ collective bargaining rights. 439 F. Supp. 1209 (M.D. Ga. 1977). They

9

contend plaintiffs’ claim of ambiguity is puzzling in light of plaintiffs’ long-standing compliance

10

with section 13(c) as part of the process for securing federal transportation funds and that the

11

protection of collective bargaining rights at the core of section 13(c) relates directly to how

12

federal grant money is spent. ECF No. 9-1 at 22-23.

13

Plaintiffs counter that DOL’s interpretation of section 13(c) in fact conditions the

14

receipt of funds on ambiguous requirements: although California has accepted federal funds in

15

the past, neither section 13(c) itself nor DOL’s prior decisions clearly prevent a state’s

16

modification of its public pension laws. DOL’s interpretation now retroactively changes the

17

“contract” in violation of the Spending Clause. ECF No. 21 at 22. Plaintiffs also argue that the

18

loss of $1 billion in transit funds would have a negative impact not only on transit systems’

19

services but also on California’s transportation network and air quality goals, rendering the

20

condition coercive. They contend that the conditions do not relate to the grants because the

21

purpose of the UMTA is solely to assist in the development of mass transit and so the

22

requirements relating to collective bargaining are impermissible fiscal “strings” that violate the

23

Spending Clause. Id. at 25.

24

Amicus ATU argues that plaintiffs’ claims that the DOL’s interpretation of section

25

13(c) invades California’s fiscal sovereignty are not supported by their cited authority and suggest

26

that California may retain its sovereignty by rejecting federal transit funds and paying for

27

upgrades through the state’s savings from pension reform. ECF No. 25 at 21.

28

In reply, defendants contend plaintiffs’ claims about ambiguity and lack of relation
7

1

to the mass transit grants are only conclusorily pleaded. ECF No. 45 at 8. They also argue that

2

plaintiffs’ claim that California will lose $1 billion in transit funds is insufficient by itself to

3

establish coercion. ECF No. 45 at 9.

4

C. Spending Clause Analyzed

5

“The Spending Clause of the Federal Constitution grants Congress the power ‘[t]o

6

lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common

7

Defence and general Welfare of the United States.” Agency for Int’l Dev. v. Alliance for Open

8

Soc’y Int’l, Inc., ___ U.S. ___, 133 S.Ct. 2321, 2327 (2013) (quoting U. S. CONST., ART. I, § 8, CL.

9

1). Although the federal government’s authority is broad, the Spending Clause does impose

10
11
12
13
14
15
16

limits:
First, the exercise of the spending power must be in the pursuit of
the general welfare. Second, the conditions on receipt of federal
funds must be reasonably related to the articulated goal. Third,
Congress’ intent to condition funds on a particular action must be
authoritative and unambiguous, “enab[ing] the States to exercise
their choice knowingly, cognizant of the consequences of their
participation.” Fourth, the federal legislation may be invalid if an
independent constitutional provision bars Congressional actions.
The independent constitutional bar rule “stands for the
unexceptionable proposition that the power may not be used to
induce the States to engage in activities that would themselves be
unconstitutional.

17

Nevada v. Skinner, 884 F.2d 445, 447 (9th Cir. 1989) (citations omitted). In South Dakota v.

18

Dole, the Supreme Court suggested another limit on spending authority: “in some circumstances

19

the financial inducement offered by Congress might be so coercive as to pass the point at which

20

‘pressure turns into compulsion.’” 483 U.S. 203, 211 (1987) (quoting Steward Mach. Co. v.

21

Davis, 301 U.S. 548, 590 (1937)). In Dole, the Court found that Congress’s conditioning of the

22

receipt of highway funds on South Dakota’s raising its drinking age to 21 did not reach the point

23

of compulsion when the penalty for refusing would be the loss of only five percent of highway

24

grant funds. Id. at 211.

25

In Skinner, the Ninth Circuit questioned the viability of the coercion theory, noting

26

it “has been much discussed but infrequently applied in federal case law and never in favor of the

27

challenging party”; the Circuit suggested this result has flowed from the “elusiveness” of the

28

theory. 884 F.3d at 448; see also Constantine v. Rectors & Visitors of George Mason Univ., 411
8

1

F.3d 474, 493 (4th Cir. 2005) (“Although there might be a federal funding condition that is

2

unconstitutionally coercive, neither the Supreme Court nor any federal court of appeals has yet

3

identified one.”).

4

More recently, however, the Supreme Court upheld a Spending Clause challenge

5

to the Medicaid expansion portion of the Affordable Care Act. In National Federation of

6

Independent Business v. Sibelius (NFIB), the Court found the federal government’s financial

7

inducement was coercive when Congress threatened to withhold Medicaid funding, in light of the

8

fact that Medicaid spending “accounts for over 20 percent of the average State’s total budget.”

9

___ U.S. ___, 132 S.Ct. 2566, 2604 (2012). It contrasted Dole’s “‘relatively mild

10

encouragement’” to the threatened loss of all of a State’s Medicaid funding, which it described as

11

“a gun to the head.” Id. (quoting Dole, 483 U.S. at 211). The Court continued:

12
13
14
15
16

It is easy to see how the Dole Court could conclude that the
threatened loss of less than half of one percent of South Dakota’s
budget left that State with a ‘prerogative’ to reject Congress’s
desired policy, “not merely in theory but in fact.” The threatened
loss of over 10 percent of a State’s overall budget, in contrast, is
economic dragooning that leaves the States with no real option but
to acquiesce in the Medicaid expansion.
NFIB, 132 S.Ct. at 2604-05 (citation omitted).

17

Plaintiffs have pled they will lose over $1 billion in transit funds if they do not

18

exempt transit workers from PEPRA. ECF No. 1 ¶ 63. While a “billion here, a billion there”

19

may be real money, with apologies to Senator Everett Dirksen, the court cannot evaluate whether

20

plaintiffs have adequately pled the underlying coercive effect of DOL’s interpretation of section

21

13(c) given its intersection with PEPRA, without more information about the relationship

22

between the loss of funds and the total state transit budget or total state budget. Moreover, to the

23

extent plaintiffs are alleging DOL’s interpretation impinges on the state’s fiscal sovereignty, the

24

complaint does not provide sufficient information for the court to determine whether the

25

allegation states a claim. See Skinner, 884 F.3d at 448 (“The purpose of the coercion test is to

26

protect state sovereignty from federal incursions.”).

27
28

To the extent plaintiffs’ Spending Clause claim is based on ambiguity and the
imperfect relationship between the requirements of section 13(c) and the UMTA, these claims are
9

1

similarly inadequately pleaded. As defendants point out, the claims are addressed in a single

2

paragraph, which states in conclusory fashion that DOL’s interpretation of section 13(c) “operates

3

to condition the receipt of federal funds on ambiguous requirements, and the conditions imposed

4

do not directly relate to the objectives of the federal grant program.” ECF No. 1 ¶ 95. Although

5

plaintiffs have expanded on these claims in their points and authorities, the information they

6

argue is not part of the complaint.

7

Moreover, it is not clear whether plaintiffs are raising a separate Tenth

8

Amendment challenge to DOL’s interpretation or whether their reference to the Tenth

9

Amendment is part of their claim that the interpretation’s coercive impact runs afoul of the

10

Spending Clause. Plaintiffs will be given leave to amend the substance of their Spending Clause

11

claim, if they are able, and to clarify whether the Tenth Amendment claim is separate.

12

C. Declaratory Judgment

13

Plaintiffs allege “[t]here is an actual controversy of sufficient immediacy and

14

concreteness relating to the legal rights and duties of Plaintiffs and their legal relations with the

15

Department . . . ” and ask for a judgment clarifying the legal relations of the parties. Id. ¶¶ 111-

16

112. Defendants argue that the Declaratory Judgment Act does not provide a basis for a separate

17

claim nor does it confer subject matter jurisdiction. ECF No. 9-1 at 24. Plaintiffs agree the

18

Declaratory Judgment Act creates a remedy, but say courts have approved claims based on the

19

Act. ECF No. 21 at 25.

20

Under the Declaratory Judgment Act, 28 U.S.C. § 2201(a), a court may declare the

21

rights of an interested party who seeks the declaration, whether or not further relief could be

22

sought. A district court has the discretion to hear a declaratory judgment claim. See Wilton v.

23

Seven Falls Co., 515 U.S. 277, 288 (1995). “The Declaratory Judgment Act gives the Court the

24

authority to declare the rights and legal relations of interested parties, but not a duty to do so.”

25

Leadsinger, Inc. v. BMG Music Pub., 512 F.3d 522, 533 (9th Cir.2008). When the relief sought

26

“will neither serve a useful purpose in clarifying and settling the legal relations in issue nor

27

terminate proceedings and afford relief from uncertainty and controversy faced by the parties,” a

28

court need not grant declaratory relief. United States v. State of Washington, 759 F.2d 1353, 1357
10

1

(9th Cir.1985). In this case, the relief plaintiffs seek under the Declaratory Judgment Act mirrors

2

the relief they seek in their other claims. This claim is dismissed without leave to amend.

3

IT IS THEREFORE ORDERED that:

4

1. Defendants’ motion to dismiss plaintiffs’ Spending Clause and Declaratory

5
6

Judgment Act claims is granted; and
2. Plaintiffs’ amended complaint to the extent allowed above is due within

7

fourteen days of the date of this order.

8

DATED: July 22, 2014.

9
10
11

UNITED STATES DISTRICT JUDGE

12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
11