United Auto. v. FortuÑo

• Decision Date: 27 January 2011
• Docket Number: No. 10–1069.,10–1069.
• Citation: 633 F.3d 37
• Parties: UNITED AUTOMOBILE, AEROSPACE, AGRICULTURAL IMPLEMENT WORKERS OF AMERICA INTERNATIONAL UNION, et al., Plaintiffs, Appellants,v.Luis FORTUÑO, et al., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

633 F.3d 37

190 L.R.R.M. (BNA) 2065

UNITED AUTOMOBILE, AEROSPACE, AGRICULTURAL IMPLEMENT WORKERS OF AMERICA INTERNATIONAL UNION, et al., Plaintiffs, Appellants,

v.Luis FORTUÑO, et al., Defendants, Appellees.

No. 10–1069.

United States Court of Appeals, First Circuit.

Heard Dec. 8, 2010.Decided Jan. 27, 2011.

Miguel Simonet Sierra with whom Manuel A. Rodriguez Banchs was on brief for appellants.Paul R.Q. Wolfson with whom Irene S. Soroeta–Kodesh, Solicitor General, Leticia Casalduc–Rabell, Acting Deputy Solicitor General, Zaira Z. Girón–Anadón, Acting Deputy Solicitor General, and Susana I. Peñagaricano–Brown, Assistant Solicitor General, were on brief for appellees.

Before BOUDIN, STAHL, and HOWARD, Circuit Judges.

STAHL, Circuit Judge.

The plaintiffs, a collection of labor organizations and public employees, sued Governor Luis A. Fortuño and a number of other Puerto Rico government officials (collectively “defendants”) in the United States District Court for the District of Puerto Rico. The plaintiffs alleged, among other claims, that Puerto Rico's Act No. 7 violates the Contract Clause in Article I, Section 10 of the United States Constitution. The district court, pursuant to Federal Rule of Civil Procedure 12(b)(6), dismissed the plaintiffs' claims. Because we find that the plaintiffs' third amended complaint (“complaint”) failed to state a claim for a violation of the Contract Clause, we affirm.

I. Facts and Background

When reviewing a Rule 12(b)(6) dismissal, “we must assume the truth of all well-pleaded facts and give the plaintiff the benefit of all reasonable inferences therefrom.” Thomas v. Rhode Island, 542 F.3d 944, 948 (1st Cir.2008). “Under Rule 12(b)(6), the district court may consider only facts and documents that are part of or incorporated into the complaint....” Trans–Spec Truck Serv., Inc. v. Caterpillar Inc., 524 F.3d 315, 320 (1st Cir.2008). That said, “when a complaint's factual allegations are expressly linked to—and admittedly dependent upon—a document (the authenticity of which is not challenged), that document effectively merges into the pleadings and the trial court can review it....” Id. (internal marks and citation omitted).

In 1998, Puerto Rico enacted Act No. 45, which gave employees “the right to negotiate a collective bargaining agreement [ (‘CBA’) ] with the agency through its exclusive representative....” P.R. Laws Ann. tit. 3, § 1451j. Act No. 45 also established procedures for resolving impasses in collective bargaining negotiations, and for addressing disputes arising under the CBAs. See id. et seq. By the time the plaintiffs filed this suit, fifty Puerto Rico government agencies had negotiated CBAs covering over 50,000 public employees.

On March 9, 2009, Governor Fortuño signed Act No. 7—entitled the “Law Declaring a Fiscal State of Emergency and Establishing a Comprehensive Fiscal Stabilization Plan to Save Puerto Rico Credit”—into law.¹ See 2009 P.R. Laws Act No. 7. According to the “Public Policy Statement of Purpose” included in the bill, Act No. 7 was intended to eliminate Puerto Rico's $3.2 billion structural deficit. Id. ch. I, § 2.

As a cost-saving measure purportedly aimed at addressing this deficit, Act No. 7 laid out a three-phase plan to reduce the government payroll. See id. ch. III, § 35. Phase I established a voluntary “permanent workday reduction program” for certain senior employees, and it provided financial incentives for all employees to resign voluntarily. Id. ch. III, § 36. Phase II authorized involuntary, seniority-based layoffs upon a determination that Phase I had failed to create the necessary savings on its own. Id. ch. III, § 37. Although various categories of employees were exempted, if Phase II was to be implemented it could result in as many as 40,000 layoffs. Finally, Phase III temporarily suspended, for a period of two years, a plethora of statutory, contractual, and other provisions governing the conditions of employment for the remaining affected public employees. Id. ch. III, § 38. This phase effectively froze salaries and suspended other benefits and protections within the CBAs.

The complaint characterized Act No. 7's impact as substantially impair [ing] all statutory covenants and contractual obligations included in the extant [CBAs] between the exclusive bargaining representatives and the government agencies related to, inter alia, promotions, demotions, transfers; retention and lay-offs; reduction in work force and any requirement prior to order a reduction in force; reinstatement and registry of illegibility; any cross utilization, prohibition to use employees from another appropriate units; any prohibition to consolidate job duties and job classifications; any limitation to management rights; any disposition that the agency has to comply with contract obligations in conflict with Act No. 7; seniority, if in conflict with Act No. 7; dispute resolution process, reviews and appeals if in conflict with Act No. 7.

Act No. 7 did not, however, rely solely on cost-cutting measures to address Puerto Rico's deficit, but also included revenue increases. To name just a few examples, Act No. 7 eliminated various tax credits and exemptions; increased the excise tax on cigarettes and certain alcoholic beverages; levied new taxes on certain banks and insurers; and added a residential property tax. 2009 P.R. Laws Act No. 7, pmbl.

Although the complaint acknowledged that Puerto Rico's purported reason for enacting Act No. 7 was “an alleged fiscal crisis and the potential degradation of government bonds,” it contended that “the averred purpose is neither significant nor legitimate” and “some or all the obligations of contracts impaired by [Act No. 7] are not character appropriate to the declared purpose....” Similarly, the complaint stated that “there were other available alternatives with lesser impact to the paramount constitutional rights affected by this legislation.” It did not, however, attach or describe in detail the contracts allegedly impaired, or specify any “other available alternatives.” The complaint did aver that “[t]he suspension of rights and impairment of contractual obligations for two (2) years, is unreasonable, particularly considering the life of all [CBAs] can only extend to three (3) years.”

On December 14, 2009, the district court granted the defendants' Rule 12(b)(6) motion, dismissing all of the plaintiffs' federal claims and declining to exercise supplemental jurisdiction over the plaintiffs' Puerto Rico law claims. With respect to the Contract Clause claim on appeal, the district court held that the plaintiffs failed to sufficiently allege that Act No. 7's impairments of the CBAs were unreasonable or unnecessary to an important government interest, and it therefore rejected the claim that those impairments ran afoul of the Contract Clause.²

II. Discussion

This court reviews de novo a district court's Rule 12(b)(6) dismissal. Thomas, 542 F.3d at 948.

“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, ––– U.S. ––––, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Facial plausibility is shown “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. Plausibility “is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. (internal quotation marks omitted). Under this standard, “A pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.’ ” Id. (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955).

The Contract Clause provides that “No State shall ... pass any ... Law impairing the Obligation of Contracts....” ³ U.S. Const. art. I, § 10, cl. 1. Despite its unequivocal language, this constitutional provision “does not make unlawful every state law that conflicts with any contract....” Local Div. 589, Amalgamated Transit Union v. Massachusetts, 666 F.2d 618, 638 (1st Cir.1981). Rather, “A court's task is ‘to reconcile the strictures of the Contract Clause with the essential attributes of sovereign power necessarily reserved by the States to safeguard the welfare of their citizens.’ ” Mercado–Boneta v. Administracion del Fondo de Compensacion al Paciente, 125 F.3d 9, 14 (1st Cir.1997) (quoting U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 20, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977)); accord Energy Reserves Grp., Inc. v. Kan. Power & Light Co., 459 U.S. 400, 410, 103 S.Ct. 697, 74 L.Ed.2d 569 (1983).

To that end, Contract Clause claims are analyzed under a two-pronged test. Parella v. Ret. Bd. of R.I. Emps.' Ret. Sys., 173 F.3d 46, 59 (1st Cir.1999). The first question “is ‘whether the state law has ... operated as a substantial impairment of a contractual relationship.’ ” Energy Reserves Grp., 459 U.S. at 411, 103 S.Ct. 697 (quoting Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978)); accord Parella, 173 F.3d at 59. If the contract was substantially impaired, the court next turns to the second question and asks whether the impairment was “reasonable and necessary to serve an important government purpose.” ⁴ See U.S. Trust, 431 U.S. at 25, 97 S.Ct. 1505; accord Parella, 173 F.3d at 59. Where the state is alleged to have impaired a public contract to which it is a party, “less deference to a legislative determination of reasonableness and necessity is required, because the State's self-interest is at stake.” Parella, 173 F.3d at 59 (internal quotation marks and citation omitted).

Assuming arguendo that the plaintiffs pled sufficient facts to satisfy the substantial impairment inquiry, we turn to the...