Ninth Circuit Rules California’s AB5 Will Apply to Motor Carriers

In a blow to motor carriers statewide, the Court reversed the previously ordered injunction against the application of AB5 to California’s motor carriers, holding that AB5 is not preempted under the FAAAA. The full opinion in the case of California Trucking Association v. Bonta  can be found here. Our previous alert discussing this issue can be found here.

Background

In its 2018 decision, Dynamex Operations W. v. Superior Court, 4 Cal.5th 903 (2018), the California Supreme Court replaced an earlier, more lenient test for independent contractor status with the more onerous ABC test. Shortly thereafter, the California legislature passed AB5, which codified the ABC test. Under AB5, a person is presumed to be an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact. (B) The person performs work that is outside the usual course of the hiring entity’s business. (C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Just one day before AB5 would have gone into effect, the District Court entered a temporary restraining order, precluding the application of AB5 to any motor carrier in California. California Trucking Association v. Becerra. 433 F. Supp. 3d 1154 (S.D. Cal. 2020)(the case name has since changed to California Trucking Association v. Bonta, to reflect the state’s new attorney general). The Court found that the B-prong of the AB5 test meant that drivers could never be considered independent contractors in California. As a result, the District Court ruled that AB5 likely was preempted by the F4A. On January 16, 2020, the Court issued a preliminary injunction.

The decision was appealed by the then-state attorney general, Xavier Becerra, and the Teamsters union, which intervened in the case. The Ninth Circuit Court of Appeals heard oral argument on September 1, 2020 and issued its opinion on April 28, 2021.

The Majority Opinion

In a 2-1 opinion, the Ninth Circuit held that “because AB-5 is a generally applicable labor law that affects a motor carrier’s relationship with its workforce and does not bind, compel, or otherwise freeze into place the prices, routes, or services of motor carriers, it is not preempted by the FAAAA.”

In reaching this conclusion, the majority first noted that the F4A’s express preemption clause must be considered under the Supremacy Clause of the constitution, pursuant to which federal law “shall be the supreme Law of the Land.” Courts will find preemption only where it is the clear and manifest intent of Congress when it enacted the law. Here, the FAAAA expressly preempts any state law “related to a price, route, or service of any motor carrier … with respect to the transportation of property.” 49 U.S.C. § 14501(c)(1).

The majority next explained the distinction between laws “that are significantly related to rates, routes, or services, even indirectly, and thus are preempted, and those that have only a tenuous, remote, or peripheral connection to rates, routes, or services, and thus are not preempted.” After a lengthy analysis, the court distilled its reasoning as follows:

[A] a generally applicable state law is not “related to a price, route, or service of any motor carrier” for purposes of the F4A unless the state law “binds the carrier to a particular price, route or service” or otherwise freezes them into place or determines them to a significant degree. We have generally held that the state law at issue does not have such a binding or freezing effect unless it compels a result at the level of the motor carrier’s relationship with its customers or consumers. Such a law does not have a binding or freezing effect, and thus is not preempted, merely because a motor carrier must take the law into account when making business decisions, or merely because the law increases a motor carrier’s operating costs.

The majority reached the conclusion that AB5 is a generally applicable law because it applies to all employers and  does not single out motor carriers. Rather, the majority reasoned, motor carriers are affected solely in their capacity as employers. The majority ruled that AB5 is not “related to a price, route, or services” of the motor carriers because it only affects the way motor carriers must classify their workers, and therefore compels a result at the level of the relationship with the workforce. It does not compel a specific result in the relationship with consumers.

The Court was not swayed by CTA’s arguments that the application of AB5 would have an indirect, but significant, effect on prices, routes, or services because it would fundamentally change the way that motor carriers do business, driving up costs, requiring consolidation or elimination of routes, and necessarily passing costs along to the consumer. The Court pointed to its decisions in the prevailing wage and meal and rest break context to support the finding that any such impact would not amount to “impermissible effects,” as required for preemption.

The Court also distinguished its decision from those previously reached in the First and Third Circuits in favor of preemption. For example, in Schwann v. FedEx Ground Package Sys., Inc., the First Circuit found that “Prong 2 of Massachusetts’ ABC test (which is identical to Prong B of the California ABC test codified in AB-5) sufficiently relates to a motor carrier’s services and routes, because it interferes with the employer’s decision whether to use an employee or an independent contractor and thus could prevent a motor carrier from using its preferred methods of providing delivery services, raise the motor carrier’s costs, and impact routes. 813 F.3d 429 (1st Cir. 2016). The Ninth Circuit noted that in its own jurisdiction, “we have previously concluded that such indirect consequences have “only a tenuous, remote, or peripheral connection to rates, routes or services.”

The Dissent

In his dissent, Judge Bennett argued that a law such as AB5, which affects both motor carrier’s relationships with their workers and also significantly impacts the services motor carriers are able to provide to their customers, should be preempted.

Judge Bennett distinguished the prevailing wage and meal and rest break cases upon which the majority relies by noting that these laws did not acutely interfere with the motor carriers’ businesses and would lead to only modest increases in costs. On the other hand, AB5 will significantly interfere with motor carriers’ operations at the point at which they provide a service to their customers because it determines the means of providing those services. For example, it will diminish the specialized transportation services motor carriers can provide and eliminate flexibility to accommodate fluctuations in supply and demand.

Judge Bennett closed his opinion with a warning: “California will now be free to enforce its preempted law. CTA’s members will now suffer irreparable injury. And the damage to the policies mandated by Congress will likely be profound.”

Takeaway

The Ninth Circuit has now staked its position alongside the Seventh Circuit, which likewise found no preemption under the FAAAA in a 2016 decision. See Costello v. BeavEx, Inc., 810 F.3d 1045, 1048 (7th Cir. 2016). On the other side of the aisle are the First and Third Circuits, both of which did find preemption. See Schwann v. FedEx Ground Package Sys., Inc., 813 F.3d 429 (1st Cir. 2016) and Bedoya v. Am. Eagle Express Inc., 914 F.3d 812, 816 (3d Cir. 2019), cert. denied, 140 S. Ct. 102 (2019). This split among the circuits makes the issue of preemption under the F4A ripe for consideration by the US Supreme Court. With the current conservative majority, it is certainly conceivable that the Supreme Court would find that the FAAAA preempts application of state misclassification statutes to truck drivers.

Many motor carriers operating in California use the independent contractor model in conducting their business. The Ninth Circuit’s ruling will have a profound effect upon their business operations and may also result in higher prices to consumers. Motor carriers operating in California should consult with experienced counsel to consider their options.