Third Circuit Says City is Regulatory, not Market Participant, When Awarding Tax Subsidies

Steven D. Schwinn, John Marshall Law School

The Third Circuit ruled in Associated Builders v. City of Jersey City that the City's efforts to enforce labor standards through its tax subsidies is subject to challenge under the National Labor Relations Act, ERISA, and the dormant Commerce Clause. In particular, the court said that Jersey City acted as a regulator, not a market participant, when in awarded tax subsidies to developers on the condition that they enter into certain agreements with labor unions that bind the developers to negotiate with a union and cover employees in union negotiations, even if employees aren't a members.

The ruling only says Jersey City's practice is subject to NLRA, ERISA, and dormant Commerce Clause challenge--not that the practices violates them. That's now the question on remand.

The case arose when a developer challenged Jersey City's practice of offering tax subsidies on the condition that a developer execute a project labor agreement ("PLAs"), an agreement that requires developers to abide by a pre-hire collective bargaining agreement that covers all employees during the term of the project. As such, a PLA is an agreement between the developer and a labor union, and, because it's entered into with a labor union, it requires a developer to negotiate with the union and requires that all employees be represented by that union in negotiations--even if the developer doesn't ordinarily employ unionized labor, and even if the employees are not union members.

Jersey City argued that it fell under the "market participant" exception to the NLRA, ERISA, and the dormant Commerce Clause, and that therefore those provisions didn't apply.

But the Third Circuit disagreed. The court ruled that Jersey City wasn't a market participant, because, under the circuit test, "the City lacks a proprietary interest in Tax Abated Projects." The court ruled that Camps Newfound/Owatonna, Inc. v. Town of Harrison dictated the result. In that case, the Supreme Court held that Maine wasn't acting as a market participant when it provided "general exemption from real estate and personal property taxes for 'benevolent and charitable institutions incorporated' in the state, but provided more limited or no tax benefits to charities benefiting residents of other states. The court also distinguished Dep't of Revenue v. Davis, saying that in that case Kentucky sold the bonds, whereas Jersey City isn't selling anything.

The ruling sends this case back to the district court for a ruling on the merits.