When union fees go up, must a “Hudson notice” go out?

On January 10, the Court will hear oral arguments in Knox v. Service Employees International Union (SEIU).  At issue in the case is whether a public sector labor union that imposes a temporary mid-year fees increase to be used for political purposes must provide employees with a separate “Hudson notice” that explains how the fees were calculated and gives employees an opportunity to object.  Even before it reaches that question, however, the Court must consider whether the case is still alive or has instead become moot.

Background

The financial backbone of nearly every labor union is the collective bargaining agreement’s “union shop clause,” which does two things. First, it requires union members to pay dues to the union. An additional “agency shop agreement” requires non-members in the bargaining unit to pay a percentage of the dues amount (an “agency fee”) to pay for the union’s expenses of performing services that benefit the bargaining unit. Second, the employer is obligated to fire any employee who does not make these payments. The net result is that both members and non-members must make these payments or else lose their jobs.

For public-sector employees, this arrangement raises First Amendment concerns. Employees cannot be required to pay agency fees that the union uses for ideological purposes not germane to the union’s duties as the collective bargaining agent. To prevent this, public-sector unions must adopt procedures that allow objectors to protect their rights. These procedures require the union to send employees a “Hudson notice” explaining how the union calculated its appropriate share, and requires it to minimize the risk that non-members’ contributions might be temporarily used for impermissible purposes.

The lawsuit: Knox v. SEIU

SEIU and the state of California had a series of agency shop agreements. SEIU sent a Hudson notice annually in July, containing financial information based on the most recent annual audit. The financial information in the July 2005 notice was used to calculate the amount of non-members’ agency fees for the following fee year, July 1 through June 30. In mid-term 2005, SEIU levied a temporary assessment (effectively a dues and fees increase) that took effect at the end of September and ran though December 2006.  On August 31, 2005, the Union sent a notice to employees indicating that the funds would be used to defeat certain state ballot measures. Although the union’s annual notices were proper Hudson notices, the August 2005 notice did not contain the detail required for an annual Hudson notice.

Petitioners represent two classes of non-members, consisting of about 28,000 employees: those who objected to the union’s 2005 Hudson notice and those who did not object. When petitioners sued the union, the federal district court held that the union violated the First Amendment by not sending a Hudson notice in connection with the mid-term fees increase, and it awarded nominal damages of one dollar to each employee. The Ninth Circuit reversed, finding that using the earlier annual Hudson notice was a practical necessity because the Hudson notice must be based on audited financial statements, and any money from the mid-term fee increase used for “non-chargeable” purposes would be refunded after the next annual audit.

Certiorari stage

Knox and the other non-members filed a petition for certiorari, which the Supreme Court granted on June 27, 2011. The petition presented two questions: (1) Whether a state, consistent with the First and Fourteenth Amendments, may condition employment on the payment of a special union assessment intended solely for political and ideological expenditures without first providing a Hudson notice that includes information about that assessment and provides an opportunity to object to its exaction; and (2) whether a state, consistent with the First and Fourteenth Amendments, may condition continued public employment on the payment of union agency fees for purposes of financing political expenditures for ballot measures.

Arguments on the merits

The overall thrust of petitioners’ brief on the merits is that SEIU should have provided employees with a full Hudson-type notice at the time of the fees increase, that added fees could not be collected from employees who previously objected to the 2005 annual notice, and that other employees should have had an opportunity to opt out. Petitioners insist that strict scrutiny should apply to the First Amendment issues in this case because it involves compelled speech and political speech. The brief also argues that it is unconstitutional to compel non-members to support SEIU’s political activities related to the state ballot measure. Finally, petitioners make the simple point that temporary political assessments are not exempt from the detailed requirements of a Hudson notice.

Petitioners describe the situation as one in which California seeks to force employees “to make, out of their monthly wages, a multi-million-dollar political loan to SEIU.” Because this hits the core of the First Amendment, they contend, it is unconstitutional unless it furthers a compelling state interest and is narrowly tailored to achieve that interest. For this reason, they argue that the Ninth Circuit was wrong to apply a balancing test.

In its brief on the merits, SEIU counters that petitioners’ rights will be fully protected through the process of annual Hudson notices because the next annual notice will take into account the temporary fees increase. SEIU argues against applying strict scrutiny for a number of reasons. First, it describes the issue in this case as a “procedural” challenge to the collection of fees, rather than as a “substantive” challenge to the spending of the fees, pointing out that the Supreme Court has never applied strict scrutiny in cases such as Hudson that involve the methods of fee collection or in other cases involving procedural issues (e.g., state defamation suits). Second, it argues, precedents involving compelled expressive association deal with substantive First Amendment rights and therefore do not apply to the procedural issue in this case. Third, SEIU asserts that this is not a compelled speech case because non-members do not lose their ability to express their own messages, nor will the union’s message be attributed to them. Fourth, the union rejects petitioners’ claim that they made an involuntary political loan to the union, emphasizing that objecting employees actually paid less than their proportionate share of chargeable expenses during the relevant time period.

In reply, petitioners insist upon strict scrutiny, saying that a procedural-substantive distinction defies logic, that compelled-fee cases do involve compelled association, and that the Court’s prior fees cases do apply strict scrutiny. They then argue that SEIU’s procedure allows the very evil that Hudson was designed to prevent — forced collection of money for political purposes.

Wait! Is this case moot?

Right in the middle of the briefing process at the Supreme Court, SEIU filed a motion to dismiss the case as moot, based on actions that it took on September 29, 2011. On that day, the union sent a notice to all of the members of the petitioner classes offering to refund to them one hundred percent of the fee increase they paid. Each notice also contained a one-dollar bill glued to it. According to SEIU, the one-dollar bills would satisfy the district court’s award of nominal damages, and the one-hundred-percent refunds would exceed anything to which petitioners would have been legally entitled in the way of a refund. SEIU’s argument is that the entire case is now rendered moot because the Supreme Court could not grant petitioners any additional relief even if it were to rule in their favor. The motion asks the Court to dismiss the case, and it does not object to vacating the Ninth Circuit judgment.

In a hotly worded response, petitioners argue that the case is not moot for three reasons. First, SEIU would remain free to resume the activity being challenged in this case. Second,  mailing a dollar bill does not satisfy the district court’s nominal damages award because SEIU’s September 2011 letter described the money as “corresponding” to the district court’s order rather than as being in satisfaction of the order. Third, SEIU did not give petitioners everything they seek; what petitioners got was an unenforceable promise of future payment, which was conditioned on a number of things that each employee must do to claim a refund.

In reply, SEIU says that petitioners abandoned claims relating to future fees increases, all employees got their one dollar in nominal damages, and it has in fact been making good on its promise to pay refunds.

Conclusion

Both parties have invested enormous intellectual capital in the question of whether or not the Court should apply strict scrutiny in this case. However, the answer to this somewhat abstract question is unlikely to determine the outcome. The Court should be interested in the fact-specific practicalities — the nature and weight of each party’s legitimate interests. The advocates should prepare for these questions: (1) If SEIU is not required to send a mid-term Hudson notice, exactly what impact (both as to kind and degree) will that have on petitioners’ First Amendment rights? (2) If SEIU is required to send a notice, exactly what negative effect will that have on the union’s ability to serve as a collective bargaining representative?

Ross Runkel is editor of Employment Law Memo at LawMemo, Inc., in Portland, Oregon. He is professor of law emeritus at Willamette University College of Law, and is an arbitrator in labor-management disputes.