A split federal appeals panel ruled against San Francisco regarding an ordinance forcing all airlines using the city’s airport to offer workers certain health insurance benefits.
After the San Francisco City Council enacted its Healthy Airport Ordinance in 2020, the airline industry group Airlines for America sued the city and San Francisco County, alleging the act of adopting the ordinance effectively amended the carriers’ contract with San Francisco International Airport in a way that improperly positioned the city as a government regulator of interstate air travel.
The airlines said this means the city ordinance is preempted by federal law.
San Francisco, instead, argued they should be considered a "market participant," not a regulator, because SFO competes with other airports.
On the question of whether federal law preempts the ordinance, U.S. District Judge Edward Chen initially granted summary judgment in favor of the city and county.
Airlines for America challenged that ruling before the U.S. Ninth Circuit Court of Appeals, which issued its decision Aug. 29. Judge Consuelo Callahan wrote the majority opinion, joined by Judge Patrick Bumatay. Judge Mary Schroeder dissented.
According to Callahan, the city and county own SFO. Since 1970, the San Francisco Airport Commission has operated the airport as a self-sustaining enterprise not reliant on tax revenue. In 1999, the city developed a Quality Standards Program setting certain requirements for airport-based employers, such as hiring and compensation standards, affecting workers who have airfield operations area access or are directly involved with passenger or facility safety and security.
Callahan said the city enacted the ordinance as a response to the Covid pandemic, which municipal leaders considered akin to other expansions of the 1999 standards program, such as the 2009 inclusion of a Health Care Accountability Ordinance. The overall standards program has a provision holding any covered employer that defaults on a standard is subject to daily a fine of $1,000 per violation or affected employee. The 2009 accountability ordinance added damages of up to $100 per employee for each one-week pay period without minimum medical coverage.
Other relevant documents include 24 10-year lease and use agreements the city reached with airlines taking effect in 2011. All Airlines for America members executed one of those agreements, which Callahan said “obligated the signatory airlines to pay substantial amounts to SFO for use of the facilities and obligated the City to manage and operate SFO using 'commercially reasonable efforts' to maximize non-airline revenues."
The primary dispute centers on the 2020 ordinance requiring all affected employers to offer at least one “platinum” health care plan or to pay $9.50 for covered employees to the city’s Health Access Program, making such workers eligible to participate in municipal medical reimbursement accounts.
In March 2021, Callahan said, the city and airlines opted to modify the 2011 leases instead of executing new agreements. The parties extended the deals by two years and reserved rights concerning legal challenges involving the HAO. Airlines for America filed its lawsuit at the end of that month. That August the parties called for first resolving, on summary judgment, whether the government acted as a market participant or regulator.
The majority determined an ordinance that has civil penalties alone can “render a government entity a regulator rather than a market participant." The judges said that reading squares with the findings of other federal appeals circuits, as well as the California Supreme Court. It noted the ordinance allows the airport director to impose fines and allows the city to collect liquidated damages.
Callahan further wrote the quality standards program and the accountability ordinance have civil penalty provisions, which the city gave itself power to invoke to enforce the HAO, including through administrative proceedings before the Office of Labor Standards Enforcement. Although the airlines have abided by the civil penalty structure since at least 1999, Callahan continued, that doesn’t mean the penalties aren’t coercive or unable to be challenged.
The majority opinion reversed Judge Chen’s summary judgment and remanded the complaint for further proceedings.
In her dissent, Schroeder wrote the majority opinion “represents either a distortion or a fundamental misunderstanding of preemption principles.” She noted there are legal distinctions between government regulation and a public body functioning as a proprietor and said there are circumstances under which a government can issue regulations that do not conflict with the National Labor Relations Act.
“The city is operating an airport and acting pursuant to a contract with the airlines that use the airport,” Schroeder wrote. “It is not regulating conduct outside the airport and has not explicitly incorporated state law into the contract.”
Schroeder further said the airlines acknowledged the Healthy Airlines Ordinance has no criminal enforcement provisions and argued the majority’s conception of the law’s liquidated damages provisions as coercive “imposes a standard that has nothing to do with state law or state regulation, and consists of an adjective that could describe any number of provisions in private as well as public contracts.”
At most, she concluded, the ordinance’s penalty clause may be unenforceable. But she rejected the majority’s opinion that the existence of the clause itself positions the city as a regulator.
“This decision makes the airport less safe,” Schroeder wrote, “but perhaps more important, adversely affects the stability of all state and local contracts by creating the threat of litigation over previously unremarkable boilerplate.”
Airlines for America is represented by attorneys Parker Rider-Longmaid, Hanaa Khan, Shay Dvoretzky, Jason D. Russell, Zachary M. Faigen and Mitchell A. Hokanson, of Skadden Arps Slate Meagher & Flom; and Patricia N. Vercelli and Riva Parker, of Airlines for America.
San Francisco was represented by attorneys Melissa C. Allison, Scott P. Lewis, Austin P. Anderson, Paul M. Kominers and Annie E. Lee, of Anderson & Kreiger; and city attorneys Wayne K. Snodgrass and David Chiu.