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Seattle ordinance allowing gig drivers to collectively bargain, price fix, not protected from Sherman Act preemption under ‘state-action immunity’

By Lorene D. Park, J.D.

In an action by the U.S. Chamber of Commerce challenging a Seattle ordinance that permits independent-contractor drivers to collectively bargain with driver coordinators like Uber or Lyft to agree on the “nature and amount of payments to be made by, or withheld from, the driver coordinator to or by the drivers,” the Ninth Circuit has revived a claim that the ordinance is preempted by Section 1 of the Sherman Antitrust Act because it allows price-fixing of ride-referral service fees by private cartels of independent-contractor drivers. The appeals court held that the state-action immunity doctrine did not exempt the ordinance from preemption by the Sherman Act because the state had not clearly articulated a policy authorizing private parties to price-fix the fees that for-hire drivers pay for ride-referral services. In addition, the active-supervision requirement for state-action immunity applied, and was not met. On the other hand, the appeals court affirmed the dismissal of the Chamber’s claims that the ordinance was preempted by the NLRA (Chamber of Commerce of the United States of America v. City of Seattle, May 11, 2018, Smith, M., Jr.).

In January 2016, City of Seattle Ordinance 124968 came into effect. The first of its kind in the nation, the ordinance provides a mechanism through which for-hire drivers in Seattle can collectively bargain with “driver coordinators” like Uber, Lyft, and Eastside for Hire. The ordinance applies only to for-hire drivers who are independent contractors, not employees.

Under the ordinance, a union may request approval from the city to be a qualified driver representative. If approved it notifies the driver coordinator, which must then provide the contact information for all “qualifying drivers.” The driver representative then contacts drivers to solicit interest and, if a majority of drivers express interest, the city will certify the entity as the “exclusive driver representative” (EDR) for all drivers associated with that company, which must then negotiate with the union over: vehicle equipment standards, safe driving practices, “the nature and amount of payments to be made by, or withheld from, the driver coordinator to or by the drivers;” minimum hours of work; and other matters.

If an agreement is reached, it is submitted for approval by the city’s director of finance and administrative services. The director reviews to ensure the agreement “promotes the provision of safe, reliable, and economical for-hire transportation services and otherwise advance[s] the public policy goals set forth in Chapter 6.310 and in the [Ordinance].” The director may gather other evidence and conduct hearings during the review process. Once approved, the agreement is final and binding on all parties.

Pursuant to the procedures set forth in the ordinance, a Teamsters local union notified three Chamber of Commerce members (Eastside For Hire, Lyft, Inc., and Uber Technologies) that it would like to represent their drivers in collective bargaining. Acting on behalf of its members, the Chamber filed this suit arguing that the ordinance violates and is preempted by the Sherman Antitrust Act and is preempted by the NLRA, among other claims not at issue on appeal.

In August 2017, after finding that the Chamber of Commerce had standing to challenge the ordinance, a federal district court in Washington dismissed all claims. Finding the city enacted the ordinance under a clearly articulated and affirmatively expressed state policy that allowed it to displace competition in the regulation of privately operated for-hire transportation services, the court found that the city was immune from antitrust liability. It also found that the NLRA did not preempt the ordinance.

Not immune from Sherman Act Preemption. Reversing in part, the Ninth Circuit noted the lower court dismissed the antitrust claims solely based on state-action immunity, so the appeals court focused its analysis on that issue. State-action immunity doctrine derives from the Supreme Court’s 1943 decision in Parker v. Brown, which held that “because ‘nothing in the language of the Sherman Act… or in its history’ suggested that Congress intended to restrict the sovereign capacity of the States to regulate their economies, the Act should not be read to bar States from imposing market restraints ‘as an act of government.’”

After Parker, the High Court in some circumstances extended immunity from federal antitrust laws to “nonstate actors carrying out the State’s regulatory program,” but state-action immunity is “disfavored” given the “national values of free enterprise and economic competition.” Thus, immunity is only applied if the challenged restraint is “clearly articulated and affirmatively expressed as state policy,” and if the policy is “actively supervised by the State.”

No clearly-articulated state policy. Here, the Seattle Ordinance failed on the first prong because the State of Washington has not clearly articulated a state policy authorizing private parties to price-fix the fees for-hire drivers pay to companies like Uber and Lyft for ride-referral services. In enacting the ordinance, the city council relied on Wash. Rev. Code §§ 46.72.001, 46.72.160, 81.72.200, and 81.72.210. Examining these statutes, the appeals court found that none “plainly show” the state legislature contemplated allowing for-hire drivers to price-fix compensation. Nor was such an anticompetitive result foreseeable. Indeed the “very concept of digital ridesharing services was probably well beyond the imaginations of lawmakers two to three decades ago, much less foreseeable,” said the court. While the advancement of technology was not by itself a dispositive factor, the court pointed out that “it is not our role to make policy judgments properly left to the Washington state legislature.” With all that in mind, the court held that the clear-articulation requirement was not met.

No active state supervision either. The appeals court further concluded that the ordinance does not meet the active-state-supervision requirement, which is also a prerequisite for exemption from antitrust laws where, as here, municipal regulation by a private party is involved (here, private drivers and driver coordinators set rates collectively and seek the director’s approval). It was undisputed that the State of Washington plays no role in supervising or enforcing the terms of the Seattle ordinance. And while the city argued that the word “State” is simply “shorthand for the State and all its agents, including municipalities,” it cited to no controlling authority to support the argument and the appeals court was not convinced. To the contrary, noted the court, “the distinction between states and municipalities is of crucial importance for purposes of state-action immunity.” For these reasons, the court reversed dismissal of the claims that the ordinance violates, and is preempted by, Section 1 of the Sherman Antitrust Act.

Not preempted by NLRA. However, the court affirmed dismissal of the Chamber’s claims that the ordinance was preempted by the NLRA under the Supreme Court’s 1976 ruling in Machinists and 1959 ruling in Garmon.

Machinists preemption “forbids both the National Labor Relations Board (NLRB) and States to regulate conduct that Congress intended ‘be unregulated because left to be controlled by the free play of economic forces.’” The Chamber argued that Congress’s choice to exclude independent contractors from the NLRA’s definition of “employee” left independent-contractor arrangements to the free play of economic forces and implicitly preempted local labor regulation through collective bargaining. Disagreeing, the appeals court recounted the history of the definition of “employee” and found that legislative history showed otherwise. Indeed, the House Report relied on by the Chamber actually referred to “supervisors,” not “independent contractors.” Moreover, the fact that a group of workers is excluded from the definition of “employee” does not compel a finding of Machinists preemption, said the appeals court, noting that agricultural laborers and public employees are also excluded from the definition but are subject to state regulation.

Garmon preemption is intended to preclude state interference with the NLRB’s “interpretation and active enforcement of the ‘integrated scheme of regulation’ established by the NLRA,” and forbids states from regulating “activity that the NLRA protects, prohibits, or arguably protects or prohibits.” The Chamber argued that the ordinance is preempted because it “requires local officials and state courts to decide whether for-hire drivers are employees under the NLRA,” a determination the Chamber argued was within the exclusive jurisdiction of the NLRB. Unswayed, the court noted that the ordinance expressly disclaims any determination of legal status as employees or independent contractors. Nor did the Chamber put forth enough evidence to conclude the activity was “arguably” subject to the NLRA, merely making a conclusory assertion of pre-emption did not make it arguable.