The Court Awards City Market Participation Trophy, Denies ERISA Preemption of Bidding Ordinances

The 6th Circuit Court of Appeals has spoken: preemption under the Employee Retirement Income Security Act (ERISA) does not apply when a municipality is acting as a market participant. The 6th Circuit upheld certain bidding ordinances for municipal projects that favored companies providing health and pension benefits to employees.

On January 4, 2018, the 6th Circuit decided Allied Constr. Indus. v. City of Cincinnati, et al., Nos. 16-4248 and 4249. In Allied Const., a non-profit trade organization sued Cincinnati claiming ERISA preempted its bidding ordinances. ERISA regulates employee health care benefit and pension plans and preempts similar or conflicting state or local laws. See 29 U.S.C. ยง1144. But preemption only applies when a state or political subdivision acts as a regulator, meaning when it performs a role that is characteristically governmental rather than a role performed by private actors.

Indeed, the city contested ERISA preemption on the basis that it acted as a private actor when it adopted ordinances setting forth guidelines for selecting bidders. These guidelines included the following requirements: (1) bidders must certify whether they provide health and pension benefits to employees; (2) bidders must have an apprenticeship program; and (3) winning bidders must pay $.10 per hour, per worker into a pre-apprenticeship training fund managed by the city. The city argued these guidelines were not preempted by ERISA since they codified a "preference for bidders" and ensured employment of skilled contractors committed to the city's "safety, quality, time and budgetary concerns."

The 6th Circuit agreed, holding that the market participant doctrine applied to ERISA preemption challenges. It also affirmed that the challenged conduct must be proprietary, not regulatory, for the market participant doctrine to apply. Noting that the line between proprietary and regulatory is not always discernable, the court set forth two alternative avenues to becoming a market participant. First, a public entity is a market participant if it acts in its "own interest in the efficient procurement of needed goods and services." Second, a government entity is a market participant if the challenged action addresses a specific proprietary problem rather than encourages a general policy.

The court found that the first avenue applied to the city's bidding ordinances. It determined the city acted as a market participant because it acted in its own interests in adopting bidding ordinances that ensured safe, timely and high-quality projects. The court reasoned: "a municipality might reasonably conclude that a contractor who provides (employee) benefits is less likely to experience significant employee turnover, improving the stability and overall quality of a project." The court also found that when the city adopted the apprenticeship requirements, it had "a strong proprietary interest in developing a skilled workforce for its many future projects." Therefore, the court rejected the plaintiff's ERISA preemption challenge.

Although the 6th Circuit has applied the market participant doctrine to preemption in other areas (e.g., preemption under the NLRB), it previously had not done so in the ERISA preemption context. In reaching its decision, the court followed the direction of the 9th Circuit Court of Appeals in Johnson v. Rancho Santiago Community College Dist., 623 F.3d 1011, (9th Cir.2010), which similarly held that the market participant doctrine applies to ERISA preemption challenges. And while the 6th Circuit's decision might be appealed to U.S. Supreme Court, for now it is law.

The decision in Allied Const. provides municipalities with the ability to consider additional qualifications of a bidder in awarding public contracts. For example, a municipality may enact legislation similar to Cincinnati's favoring bidders that provide health, pension, or other retirement benefits to employees. But before enacting such ordinances, a municipality should familiarize itself with Allied Const. and how the market participant doctrine applies to ERISA preemption challenges.

Brendan Healy is an attorney with Walter | Haverfield who concentrates on public law as well as labor and employment law. He can be reached at bhealy@walterhav.com or at 216-619-7851.