Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—Cal. Sup. Ct.: California Unfair Competition Law not pre-empted by FAA motor carrier rules, (Jul 28, 2014)

By Edward L. Puzzo, J.D.

Unfair competition claims brought by the State of California against a trucking company were not preempted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA), which restricts the enactment of state laws related to the price, route. or service of motor carriers’ transportation of property, the California Supreme Court has ruled (California v. Pac Anchor Transportation, Inc., July 28, 2014, Chin, M.).

The State of California brought an action under the California Unfair Competition Law (UCL) against trucking company Pac Anchor Transportation and its owner Alfredo Barajas, for misclassification of drivers as independent contractors and consequently not paying unemployment, disability, and worker’s compensation taxes and violating state labor and unemployment laws in other ways.

Pac Anchor argued that the state laws were preempted by the FAAAA, which prohibited states from enacting or enforcing laws and regulations “related to a price, route, or service of any motor carrier . . . with respect to the transportation of property.” The trial court ruled for Pac Anchor, the state appellate court reversed, and the issue reached the state supreme court.

Facial preemption. Pac Anchor first argued that UCL claims against motor carriers are facially preempted by the FAAAA because they regulate the effect that unfair business practices have on the quality and price of goods and services.

The FAAAA embodies Congress’s concerns about regulation of motor carriers with respect to the transportation of property; a UCL action that is based on an alleged general violation of labor and employment laws does not implicate those concerns, the court stated. The UCL does not mention motor carriers or any other industry, for that matter, the court continued. It is a law of general application.

The court noted that, per the 1998 Ninth Circuit Mendonca case (152 F. 3d 1184), ten jurisdictions had unfair competition laws or deceptive trade practices statutes in force at the time Congress passed the FAAAA, and that Congress did not perceive those laws as implicating the regulation of prices, routes or services. In the 1995 Travelers Insurance case (514 U.S. 645), the U.S. Supreme Court rejected the notion that Congress intended that ERISA preempt the basic regulation of employment conditions, even though such regulation would inevitably affect the cost and price of services. The court therefore ruled that the FAAAA did not facially preempt UCL claims against motor carriers.

Preemption as applied. Pac Anchor also argued that the state’s UCL claim as applied in this case was preempted by the FAAAA. It contended that California’s claim under the UCL—premised on violations of the unemployment, labor and worker’s compensation laws—actually sought to regulate the prices, routes and services of motor carrier competition.

The court observed that the sections of the Labor Code and Unemployment Code referred to by the state made no reference to motor carriers or the transportation of property; they regulated employer practices in all fields. Pac Anchor countered that the state’s UCL claim would prevent the use of independent contractors and would require reclassification of their drivers as employees, which would drive up their cost of doing business and therefore significantly affect motor carrier prices, routes, and services. The court disagreed, stating that nothing in the state’s action would prohibit the use of independent contractors. They merely would be required to apply the state labor and employment laws appropriately to their drivers.

In the 2013 Dan’s City case (133 S. Ct. 1769), the U.S. Supreme Court observed that the FAAAA was intended to preempt states from substituting their own commands for competitive market forces in determining what services the motor carriers should provide. The limiting phrase “with respect to the transportation of property” in the FAAAA strongly indicates that California labor and insurance laws are not preempted under the FAAAA, the court continued. State laws governing when a worker is an independent contractor and when a worker is an employee were likewise not preempted by the FAAAA, even though those laws may have an indirect effect on prices and services, the court ruled.

Finally, the court rejected Pac Anchor’s assertion that the UCL claim conflicted with Congress’ deregulatory purpose. Congress passed the FAAAA in order to end a patchwork of state regulations regarding motor carriers, the court explained, but not to preempt states’ ability to tax motor carriers, or to enforce labor and wage standards and insurance laws. The court therefore ruled that the state’s UCL claims against Pac Anchor were not preempted by the FAAAA.

The case is Civil Action No. S194388.

Attorneys: Satoshi Yanai, Office of the Attorney General, for Kamala D. Harris. Neil S. Lerner (Cox Wootton Lerner Griffin Hansen Poulos, LLP) and Arthur Alan Severance (Trident Law, PC) for Pac Anchor Transportation, Inc. Neil S. Lerner (Cox Wooton Lerner Giffin Hansen & Poulos, LLP) for Alfredo Barajas.

Companies: Pac Anchor Transportation, Inc.

Cases: StateUnfairTradePractices CaliforniaNews