Ninth Circuit revives fight over San Francisco airport health insurance mandate

SAN FRANCISCO (CN) — A Ninth Circuit panel on Tuesday found San Francisco acted as a regulator and not a market participant when it required airlines flying in and out of San Francisco International Airport to provide their employees with certain health insurance benefits.

The 24-page ruling reverses U.S. District Judge Edward Chen's 2022 summary judgment in favor of the city. The appeals panel determined that the civil penalty provisions in the Healthy Airport Ordinance (HAO) carried the force of law, making San Francisco — which owns and operates SFO — a regulator.

Airlines for America, an industry trade group, sued San Francisco in 2021 over the implementation of the ordinance.

That ordinance requires private employers at San Francisco International to cover 100% of health care plan costs, offer premium plans and ensure plans cover the spouses and dependents of employees. It applied to about 40% of employees at the airport. 

Airlines for America claims the ordinance overrode collectively bargained employee health plans and could cost airlines more than $100 million per year, making it more expensive for struggling airlines. The group argued the penalties for violating the ordinance make it a regulation, not a set of contractual requirements. The ordinance allows the city to charge violators the cost of employee health benefits plus interest, seek damages of up to $100 per employee per week, cancel contracts with airlines and potentially ban those companies from obtaining contracts to work at the airport in the future.

Chen found the city was furthering its business interests, not acting as a regulator, and granted summary judgment to the city. Airlines for America appealed.

Writing for the panel, U.S. Circuit Judge Consuelo Callahan found the city was acting as a regulator because the civil penalties written into the ordinance resulted in the city “acting in a regulatory rather than proprietary mode.”

“We hold that the civil penalty provisions incorporated into the Healthy Airport Ordinance are unique governmental functions that have the ‘force and effect of law,’ rendering the city a regulator rather than a market participant,” she wrote. Callahan wrote that a section of the airport’s Quality Standards Program (QSP) authorizes the airport director to impose fines of up to $1,0000 per violation/employee per day, and that the fines could be increased at the discretion of the director.

“This is not a liquidated damages provision because the same section states that ‘the Airport’s right to impose such fines shall be in addition to and not in lieu of any and all other rights available to the airport,’” the George W. Bush appointee wrote. “Moreover, because the airport director retains unbridled discretion to increase the fines, the provision is not meant to compensate the city for any contract breach but to penalize the offending employer.”

The $1,000 a day fine per employee, with the airport director having discretion to increase the amount of the fine, is a “coercive mechanism, available to no private party,” Callahan wrote.

In addition, the city can enforce these provisions through a municipal administrative proceeding before the Office of Labor Standards Enforcement, which can assess the ordinance violations, initiate administrative proceedings, and issue final administrative decisions.

“Such a governmental enforcement scheme — a prerequisite to seeking judicial review — is not available to private parties and is similar to other schemes which have been held to be regulatory,” Callahan wrote.

The city argued the ordinance incorporated “long-established penalty provisions” and did not coerce compliance through civil penalties.

“But the airlines’ willingness to abide by these civil penalties in the past does not mean that they are not coercive or that Airlines for America cannot challenge them now. Airlines for America asserts that the HAO substantially changed the cost of doing business at SFO. Higher costs bring the coercive nature of civil penalty provisions into focus,” Callahan wrote.

Senior U.S. Circuit Judge Mary Schroeder dissented from the opinion, writing Chen's ruling was a “thorough opinion.”

“The majority nevertheless reverses the district court and holds that the city was acting as a regulator, not because it regulated conduct or utilized standards that would apply outside the contract, but because the contract included excessive liquidated damages provisions,” Schroeder, a Jimmy Carter appointee, wrote. “Such contractual overreaching is not uncommon, however, and can occur in private contracts as well as government contracts. There is nothing governmental or regulatory about it.”

“The majority says the city was acting as a regulator because the liquidated damages provisions are ‘coercive.’ It thus imposes a standard that has nothing to do with state law or state regulation, and consists of an adjective that could describe any number of provisions in private as well as public contracts,” Schroeder wrote.

Melissa Allison, an attorney for the city of San Francisco, said "We are disappointed by the court's ruling and will assess potential next steps accordingly."

Attorneys for Airlines for America did not reply to a request for comment before press time.

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