On October 10, 2003, Governor Davis signed Assembly Bill 17 (“AB-17”), which made California the first state in the nation to prohibit its contractors from discriminating in the provision of benefits

between employees with spouses and employees with domestic partners, and between the domestic partners and spouses of employees. Effective for contracts executed or amended on or after January 1, 2007,1 AB-17 requires state contractors to provide the same type and level of benefits to employees with domestic partners as they do to those employees with spouses. Equal benefits must also be provided with respect to benefits that are offered directly to spouses or domestic partners.

Domestic Partnership Requirements

Although an employer may already have internal Domestic Partnership registration requirements in place, the provisions of AB-17 only apply to those employees and Domestic Partners whose Domestic Partnerships meet the requirements of California Family Code §297 and that have been properly registered with the Secretary of State.

Coverage Requirements

The law covers single contracts that are worth at least $100,000 and contracts with a cumulative amount of $100,000 or more per contractor in each fiscal year. The law also requires state contractors to certify their compliance with AB-17. The law, for the most part, mirrors the provisions of the Domestic Partner Ordinance (the “Ordinance”) adopted in 1996 by the City and County of San Francisco, the first local government which mandated equal benefits of its business partners. Under AB-17, a state contractor must provide equal benefits to employees located at operations that occur:

• within California;
• on real property located outside California if the property is owned by California or is rightfully occupied by California, provided the contractor’s presence at the location is connected to a contract with the state; and
• any other location in the United States where work relating to a state contract is being performed.

Deemed Compliance

State contractors may be deemed to be in compliance with AB-17 if the contractor does any of the following:

• Offers equal benefits to employees with domestic partners and employees with spouses and equal benefits to the domestic partners and spouses of its employees;
• Elects to provide the same benefits to individuals that are provided to employees’ spouses and employees’ domestic partners;
• Elects to provide benefits on a basis unrelated to an employee’s marital status or domestic partnership status, including, but not limited to, allowing each employee to designate a legally domiciled member of the employee’s household as being eligible for benefits; or
• Elects not to provide benefits to employees based on their marital status or domestic partnership status, or elects not to provide benefits to employees’ spouses and to employees’ domestic partners.

Exceptions to Compliance

In certain circumstances, after a state agency has undertaken all reasonable measures to locate a contractor that can comply with AB-17, a state agency may enter into a contract with a contractor that does not comply with the requirements of AB-17. The provisions of AB-17 may be waived in the following instances:

• Whenever there is only one prospective contractor willing to enter into a specific contract with the state agency (the “sole source exemption”);
• If the contract is necessary to respond to an emergency, as determined by the state agency, that endangers the public health, welfare or safety, or the contract is necessary for the provision of essential services, and no entity which complies with the requirements of AB-17 is immediately available to respond to the emergency;
• Where the provisions of AB-17 violates or are inconsistent with terms or conditions of a grant, subvention, or agreement, provided the state agency has made a good faith attempt to change the terms or conditions of such grant, subvention or agreement to allow for compliance with AB-17; and
• Certain contracts regarding the provision of, conveyance or transmission of, or ancillary services relating to wholesale or bulk water, power or natural gas.

The provisions of AB-17 also describe circumstances when a state contractor may not be deemed to have discriminated in the provision of benefits. A state contractor may be found to be compliant with AB-17 even if it is unable to provide a certain benefit on a nondiscriminatory basis if the contractor has taken reasonable measures to obtain and provide the benefit. In addition, a state contractor will be deemed to be in compliance if it provides a certain benefit for which there is a difference in cost in providing the benefit to a domestic partner or spouse if the contractor permits employees to pay the difference in cost or pays the difference itself.

Penalties

In the event a state contractor falsely certifies that it is in compliance with the provisions of AB-17 the contractor will be subject to the remedies and/or penalties contained in Public Contract Code § 10420 et seq. including voidance of the contract, damages imposed by a state court, and/or liability for a criminal misdemeanor or felony. These penalties may be avoided if the state contractor provides proof that it has complied or is in the process of complying with AB-17.

ERISA Preemption and Constitutional Challenges

Contractors may argue that AB-17 is preempted by ERISA or is invalid under the United States and California Constitutions or other applicable federal or state law because it requires employers to provide benefits to domestic partners in the same manner that benefits are provided to spouses of employees. Although this new law has not yet been challenged, the cases construing the San Francisco Domestic Partner Ordinance may be instructive in determining whether AB-17 will withstand an ERISA preemption challenge, Constitutional challenge or other federal or state challenge. The first case, Air Transport Association of America v. City and County of San Francisco, 992 F. Supp. 1149 (N.D. Cal. 1998), was brought by various airlines in connection with airport contracts. The other cases, S.D. Myers, Inc. v. City and County of San Francisco, 253 F. 3d (9th Cir. 2001) and S.D. Myers Inc. v. City and County of San Francisco, 336 F. 3d 1174 (9th Cir. 2003), were brought by an Ohio-based corporation that submitted a bid to service electrical transformers for the City of San Francisco. In that case, Myers refused to comply with the Ordinance on grounds that it conflicted with the company’s religious and moral principles. These cases addressed ERISA preemption, various federal laws, constitutional challenges under the California and United States Constitutions and California state laws governing domestic partnerships. This article briefly discusses the courts’ analyses of ERISA preemption and the Commerce Clause of the United States Constitution as these challenges may be generally applicable to contractors subject to AB-17.

Air Transport Association of America

In Air Transport Association of America, the District Court analyzed whether the Ordinance had a “connection with” ERISA plans. The court found that because the Ordinance required a specific employee benefit structure, the Ordinance conflicted with ERISA’s objective of providing for a uniform set of rules governing employee benefit plans. Consequently, the court determined that the Ordinance had an impermissible “connection with” ERISA plans and therefore was preempted by ERISA to extent that it impacted ERISA plans.

The court, however, reintroduced an exception to ERISA preemption which was previously denounced by the Ninth Circuit Court of Appeals. Concluding that the Ninth Circuit case law rejecting the exception was superceded by later United States Supreme Court rulings, the court recognized a limited “market participant exception” to ERISA preemption. Under this exception, an ordinance which required equal benefits would not be preempted in cases where the City was acting as a “market participant” and wielded no more power than an ordinary customer. Because the City contracts concerned the City’s airport, the court found that the City, as the airport proprietor, exercised monopolistic authority and therefore wielded more economic power than an ordinary customer would under the circumstances. Consequently, the market participant exception did not save the Ordinance from ERISA preemption as to the airport contracts.

The court in Air Transport Association also considered the validity of the Ordinance under the dormant Commerce Clause of the United States Constitution. Under the dormant Commerce Clause, state and local laws are invalid to the extent that they have the extraterritorial effect of regulating commerce that occurs wholly outside the boundaries of a state. The court found that because the Ordinance requires City contractors to provide nondiscriminatory benefit packages to its employees anywhere in the United States, it regulated the extraterritorial practices of City contractors. The court also dismissed the applicability of the market participant exception to the dormant Commerce Clause violations on the ground that the Ordinance reached beyond the “sphere of economic activity” in which the City participated and therefore regulated commerce beyond the City’s borders. As such, the court determined that the Ordinance violated the dormant Commerce Clause with regard to its regulation of out-of-state conduct that is unrelated to purposes of a City contract.

The court also analyzed whether the burdens imposed by the Ordinance outweighed the City’s interest in combating sexual orientation discrimination. The court determined at the outset that the Ordinance burdened interstate commerce because out-of-state companies that provide discriminatory benefit packages are barred from obtaining certain City contracts. In weighing this burden against the City’s interest in dissociating itself from discrimination, the court found that the burdens imposed by the Ordinance in requiring contractors to modify discriminatory benefit packages were minor as applied to conduct in San Francisco and contract-related conduct. Thus, the court found that the Ordinance did not violate the dormant Commerce Clause as an excessive burden on interstate commerce, but only to the extent that it did not violate the dormant Commerce Clause’s bar against extraterritorial regulation (see paragraph above).

S.D. Myers, Inc. v.
City and County of San Francisco

In Myers, the Ninth Circuit Court of Appeals did not address ERISA preemption or the market participant exception because it found that Myers lacked standing to argue ERISA preemption. Myers lacked such standing because it was unwilling to comply with the City’s equal benefits requirements. As such, Myers would not be eligible to enter into a contract with the City or be able to show any injury under ERISA.

The Ninth Circuit, however, analyzed the constitutionality of the Ordinance under the Commerce Clause. Unlike the lower court in Air Transport Association, the Ninth Circuit analyzed whether the Ordinance was facially invalid in addition to weighing its effect on interstate commerce against the City’s interest in barring sexual orientation discrimination. The Ninth Circuit applied a two-tiered approach to analyze whether the Ordinance violated the Commerce Clause:

• If a state law directly regulates or discriminates against interstate commerce or when its effect favors in-state economic interests over out-of-state interests, the law violates the Constitution’s Commerce Clause; and
• If a state law has only an indirect effect on interstate commerce and regulates evenhandedly, the court will examine whether the state’s interest is legitimate and whether the burden on interstate commerce clearly exceeds the local benefits.

Under the first tier of this approach, the Ninth Circuit rejected each of Myers’s arguments and found that the Ordinance was facially valid under the Commerce Clause. The Ninth Circuit made the following determinations:

• The language of the Ordinance did not explicitly or implicitly target out-of-state entities or entities engaged in interstate commerce. Rather, the Ordinance applied indiscriminately to all contractors with the City.
• Although the provision requiring out-of-state contractors to provide equal benefits to all employees at an out-of-state location if any employees at the location worked on a City contract could be interpreted to require an employer to provide nondiscriminatory benefits to all employees at a non-City location, the court determined that this requirement could also be read to require contractors to comply only as to those employees working on a City contract, no matter where they are located. As such, the Ordinance did not directly discriminate against interstate commerce as it required a nexus to the City. (This analysis differs from the analysis in Air Transport Association which distinguished out-of-state work from work performed within the City and work directly related to a City contract.)
• The Ordinance only affected out-of-state entities after they affirmatively chose to subject themselves to the Ordinance by contracting with the City. Thus, the City “impose[s] the Ordinance through contract rather than by legislative fiat” and therefore does not directly regulate or discriminate against interstate commerce.
• The Ninth Circuit refused to address the Ordinance’s “practical effect” on the regulatory regimes of other state and local governments on the ground that Myers could not produce any actual or pending legislation that conflicted or would have conflicted with the Ordinance.

In analyzing the second tier, the Ninth Circuit determined whether the burdens imposed by the Ordinance clearly outweighed the benefits enjoyed by the City. The Ninth Circuit found that Myers introduced only conclusory statements regarding burdens the Ordinance imposed on the free flow of goods and services through the states. The Ninth Circuit indicated that while it did not require an estimate of the costs that the Ordinance will have on interstate commerce, it needed specific details as to how the costs of the Ordinance burdened interstate commerce. As such, the Ninth Circuit could not weigh the benefits of the Ordinance against the burdens it imposed. (We note that the court in Air Transport Association did not require evidence of any economic injury prior to determining whether the City’s interests were outweighed by the burdens on interstate commerce. That court found that the inability of out-of-state companies which provided discriminatory benefits to obtain City contracts constituted a “burden” on interstate commerce.) The Ninth Circuit also rejected Myers’s contention that the purported benefits of the Ordinance were illegitimate. Myers asserted that the inclusion of the “sole source exemption” to the Ordinance demonstrated that the City’s interest behind the Ordinance was illegitimate. The Ninth Circuit determined that the “sole source exemption” was a rational response to the problems that might arise if the exclusive source of a needed or desired product refused to contract with the City on account of the Ordinance.

Conclusions

Since the San Francisco Domestic Partner Ordinance was challenged on Constitutional grounds, AB 17 may likely face a similar challenge, as the provisions of AB 17 basically parallel the provisions of the Ordinance. Similarly, it may face an ERISA preemption challenge wherein the state may argue that AB 17 is saved from ERISA preemption by application of the market participant exception. While the reintroduction of this exception may be suspect, state contractors may be required to provide equal benefits to their employees until the Ninth Circuit or the United States Supreme Court expressly invalidates this exception.