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AIR TRANSP. ASS'N OF AMERICA v. CITY & COUNTY OF S

April 10, 1998

AIR TRANSPORT ASSOCIATION OF AMERICA, AIRLINE INDUSTRIAL RELATIONS CONFERENCE, and FEDERAL EXPRESS CORPORATION, Plaintiffs,
v.
CITY AND COUNTY OF SAN FRANCISCO, SAN FRANCISCO HUMAN RIGHTS COMMISSION, SAN FRANCISCO AIRPORT COMMISSION, Defendants.



The opinion of the court was delivered by: WILKEN

 SUMMARY

 For more than twenty five years, the City and County of San Francisco has required City contractors, as a condition of doing business with the City, to pledge that they will not discriminate against their employees on the basis of sexual orientation. That policy is not challenged in this lawsuit and is not addressed by this order. In 1996 and 1997, the City took steps to make the nondiscrimination requirements more concrete, enacting an ordinance barring the City from contracting with companies whose employee benefit plans discriminate between employees with spouses and employees with domestic partners. These nondiscrimination requirements apply to the contractors' activities throughout the United States. The issue before the Court is whether the City has reached beyond the limits of its power within the federal system of government 1) by applying these nondiscrimination requirements specifically to employee benefit plans, and 2) by attempting to regulate City contractors' conduct throughout the United States. On both counts, the answer largely is yes. Congress has explicitly restricted local governments' ability to regulate employee benefit plans. Moreover, the United States Constitution prevents local governments from regulating commerce that takes place entirely in other States. These two principles largely invalidate the Ordinance.

 The Court disposes of the legal challenges to the Ordinance as follows. First, the City properly exercised the power given it under the California Constitution to enact the Ordinance. Second, the Board of Supervisors did have the power under the San Francisco City Charter to enact the Ordinance as it applies to the San Francisco International Airport. Third, however, the Ordinance violates the United States Constitution because it impermissibly regulates out-of-State conduct that is not related to the purpose of a contract with the City. Fourth, the Ordinance is preempted by the Employee Retirement Income Security Act (ERISA) insofar as it affects ERISA plans providing ERISA-covered benefits and insofar as the Ordinance is applied to Airport contracts. ERISA-covered benefits include health and pension plans, family medical leave an bereavement leave, but do not include memberships and membership discounts, moving expenses, or free or discounted airline travel benefits. Fifth, the Ordinance as applied to Airport contracts is not preempted by the Airline Deregulation Act (the ADA) unless the burden of complying with the otherwise-valid portions of the Ordinance is so onerous that air carriers would practically be forced to stop using the Airport. Finally, the Ordinance is not preempted by the Railway Labor Act (the RLA), the federal law regulating labor relations in the air transportation industry. The Court construes the regulations implementing the Ordinance so as to avoid the only possible conflict with this law, and thus rejects this preemption argument.

 In sum, the Ordinance is unconstitutional as applied to out-of-State conduct that is unrelated to the purpose of a City contract. It is federally preempted as applied to Airport contracts insofar as it affects ERISA plans providing ERISA-covered benefits. With respect to other benefits, the Ordinance is also federally preempted if the burden of complying with the otherwise-valid portions of the Ordinance practically forces air carriers to stop using the Airport.

 PROCEDURAL BACKGROUND

 Plaintiffs move for summary judgment on all of their claims that the San Francisco Ordinance is invalid, except on their claim that it violates the dormant Commerce Clause because it imposes an undue burden on interstate commerce. (Docket # 60-1) *fn1" Defendants oppose Plaintiffs' motions for summary judgment and move for summary judgment on all of Plaintiffs' claims, including their claim that the Ordinance violates the dormant Commerce Clause. (Docket # 63-1) Defendants also request that the Court deny or continue Plaintiffs' motions for summary judgment pursuant to Federal Rule of Civil Procedure 56(f) because Defendants have not had an adequate opportunity to depose Plaintiffs' declarants or complete discovery. Plaintiffs oppose Defendants' motions and their application for a Rule 56(f) continuance. The Court grants Plaintiffs' motions for summary judgment in part, grants Defendants' motions for summary judgment in part, and denies summary judgment as to the remaining issue.

 FACTUAL BACKGROUND

 I. The Parties

 Defendant City and County of San Francisco (the City) owns and operates San Francisco International Airport (the Airport), which is located in San Mateo, California, outside the City's borders. As of the summer of 1997, sixty nine airlines operated at the Airport, including forty regularly-scheduled passenger airlines, seventeen cargo airlines, eight seasonal or charter airlines, and four commuter airlines.

 The San Francisco City Charter (the Charter) confers on Defendant Airport Commission power over the "construction, management, supervision, maintenance, extension, operation, use and control of all property [at the Airport], as well as the real, personal and financial assets which are under the Commission's jurisdiction." Charter § 4.115. The Charter confers on the City's Board of Supervisors the power to set overall objectives for the Airport Commission to follow, and to prescribe "other powers and duties" for the Commission in addition to those specifically enumerated in the Charter. Charter § 4.102(1), (8). The Charter generally prohibits interference by members of the Board of Supervisors in the administration of City commissions, but this section specifically exempts legislation regarding administrative matters "other than specific contract and personnel decisions." Charter § 2.114.

 Defendant Human Rights Commission (the HRC) of the City holds power under the Charter to "implement the provisions of ordinances prohibiting discrimination in all contracts and subsequent subcontracts, franchises, leases, concessions or other agreements for or on behalf of" the City, which includes the power to promulgate implementing regulations. Charter § 4.107(6), (7).

 Plaintiff Air Transport Association (the ATA) is the principal trade organization for airlines based in the United States. One of its purposes is to advocate the industry's positions before State and local governments and in the courts. As of the summer of 1997, sixteen members of ATA flew into the Airport, including United Airlines (United) and Federal Express.

 Plaintiff Airline Industrial Relations Conference (AIRCON) is another airline trade organization formed to exchange labor relations information and advocate for the industry in government, judicial and agency proceedings relating to labor relations. As of the summer of 1997, fifteen members of AIRCON flew into the Airport, including United and Federal Express.

 II. The Ordinance and the Implementing Regulations

 Since 1972, the San Francisco Administrative Code has barred the City from contracting with companies that discriminate on the basis of sexual orientation. See S.F. Admin. Code Chap. 12B. In a series of legislative actions beginning in the fall of 1996 and extending through the spring of 1997, the City's Board of Supervisors passed ordinances amending Chapter 12B. These amendments (collectively referred to hereinafter as the Ordinance) restrict the City from contracting *fn2" with companies that do not provide benefits to their employees' domestic partners to the same extent they provide benefits to employees' spouses.

 Specifically, the Ordinance bars any company that discriminates in the provision of benefits "between employees with domestic partners and employees with spouses, and/or between the domestic partners and spouses of such employees, where the domestic partnership has been registered with a governmental entity pursuant to state or local law authorizing such registration." S.F. Admin. Code § 12B.1(b). The Ordinance also requires that every City contract incorporate language whereby the prime contractor agrees that it will not discriminate in the provision of employee benefits during the term of the contract. Id. at § 12B.2(b). The Ordinance applies to any employee benefits, but it includes a non-exclusive illustrative list: "bereavement leave, family medical leave, health benefits, membership and membership discounts, moving expenses, pension and retirement benefits or travel benefits." Id. at §§ 12B.1(b), 12B.2(b).

 The Ordinance provides that a potential contractor will not be deemed to discriminate in the provision of benefits in two situations. First, if a contractor's actual cost of providing a certain benefit for the domestic partner of an employee exceeds that of providing the benefit to a spouse and the contractor provides the benefit on the condition that the employee pay the excess cost, the contractor is not deemed to discriminate. Id. The same rule applies if the cost of providing benefits for spouses exceeds that of providing benefits for domestic partners. Id. Second, if a contractor is unable to provide a certain benefit that it provides to employees' spouses also to employees' domestic partners or vice versa, despite taking reasonable measures to do so, but the contractor provides the affected employees with a cash equivalent of the benefit, the contractor is not deemed to discriminate. Id.

 The Ordinance's nondiscrimination requirements apply to:

 
(i) any of a contractor's operations within San Francisco;
 
(ii) a contractor's operations on real property outside of San Francisco owned by the City or which the City has a right to occupy if the contractor's presence at that location is connected to a contract or property contract with the City;
 
(iii) where the work is being performed by a contractor for the City within the United States; and
 
(iv) any of a contractor's operations elsewhere in the United States.

 Id. at § 12B.1(d). (Hereinafter, subsection (i) will be referred to as San Francisco conduct, subsections (ii) and (iii) as contract-related conduct, and subsection (iv) as extraterritorial conduct.) The Ordinance includes a severability clause that provides that the Ordinance should be "construed so as not to conflict with applicable federal or state laws, rules or regulations" and so as not to confer powers or duties on the City that exceed the limitations on municipal authority imposed by federal law. Id. at § 12B.6. The clause provides that if a court holds any part of the Ordinance invalid, the remainder of the Ordinance should remain in effect. Id.

 The Ordinance states that the City's intent in requiring the contractual nondiscrimination guarantees is to "equalize to the maximum extent legally permitted" the total compensation provided to similarly-situated employees with spouses and employees with domestic partners. Id. at § 12B.2(b). Defendants state that the City's goal in passing the Ordinance is to add a concrete requirement to its condition that contractors not discriminate on the basis of sexual orientation.

 Defendant HRC has promulgated regulations implementing the Ordinance. See id. at § 12B.2(g)(9) (authorizing HRC to promulgate implementing regulations); HRC Rules of Procedure for the Nondiscrimination in Contracts: Equal Benefits Provisions of Chapter 12B of the San Francisco Administrative Code, dated May 8, 1997 (hereinafter, HRC Rules of Procedure) . These rules, as relevant here, provide that no contractor will be deemed out of compliance with the Ordinance until the contractor's current collective bargaining agreement has expired, provided that the agreement governs the benefits, that the contractor takes all reasonable steps in the meantime to end discrimination, including asking the union to reopen the contract, and that the contractor provides cash equivalents. Id. at § II.D(1). The rules explicitly permit contractors to avoid discrimination by providing benefits to neither employees' spouses nor employees' domestic partners. Id. at § II.D(3)(c).

 DISCUSSION

 I. Summary Judgment Standard

 Summary judgment is properly granted when no genuine and disputed issues of material fact remain, and when, viewing the evidence most favorably to the non-moving party, the movant is clearly entitled to prevail as a matter of law. Fed. R. Civ. P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986); Eisenberg v. Ins. Co. of North America, 815 F.2d 1285, 1288-89 (9th Cir. 1987).

 II. Standing

 The Court only has jurisdiction to decide issues that Plaintiffs have standing to raise in federal court. Plaintiffs argue that they have standing to raise these claims on behalf of their members. An association has standing to bring such claims when:

 
(a) its members would otherwise have standing to sue in their own right;
 
(b) the interests it seeks to protect are germane to the organization's purpose; and
 
(c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.

 Hunt v. Washington State Apple Advertising Comm'n, 432 U.S. 333, 343, 53 L. Ed. 2d 383, 97 S. Ct. 2434 (1977). The first and second requirements are easily satisfied here. Therefore, Plaintiffs' standing turns on whether the participation of individual members is necessary to resolve any issues in this case. For most of Plaintiffs' claims, the participation of individual members is not required and the Court can rule on the claims in this Order. Regarding one aspect of ADA preemption, the participation of individual carriers might be required. Because the parties have not briefed this particular issue, however, the Court does not decide it in this Order. See CONCLUSION, infra. Therefore, Plaintiff associations have standing to litigate all of the issues decided in the present Order.

 III. State Constitutional and City Charter Restrictions on the City's Authority to Enact the Ordinance

 Plaintiffs contest whether the City has the authority under the California Constitution or the San Francisco City Charter to legislate with respect to Airport contracts.

 Plaintiffs argue that the City lacked the power under the California Constitution to enact the Ordinance because the Ordinance is impermissibly extraterritorial and because it is preempted by conflicting State laws.

 Municipalities ordinarily derive their power to regulate from their police power over their physical territory. The California Constitution provides that a "county or city may make and enforce within its limits all local, police, sanitary, and other ordinances and regulations not in conflict with general laws." Cal. Const. art. XI, § 7. The Ninth Circuit has specifically recognized, however, that the City has proprietary power over the San Francisco International Airport, even though the Airport lies outside its boundaries, and that this power includes the ability to enter into commercial relationships. Air Cal, Inc. v. City and County of San Francisco, 865 F.2d 1112, 1117 (9th Cir. 1989). Because the Ordinance reaches beyond the boundaries of San Francisco only by placing conditions on who may enter into Airport-related contracts with the City, it falls within the City's proprietary powers. Although Plaintiffs clearly anticipate that the Ordinance will have extraterritorial effects, for example, by inducing an airline to offer domestic partner benefits nationwide, these possible effects do not establish that the City has acted beyond its powers under the California Constitution.

 Plaintiffs also argue that the Ordinance is preempted by conflicting State law because it does not address strictly "municipal affairs." Local regulations are generally subject to preemption by State law. The California Constitution creates an exception, however, for charter city provisions addressing "municipal affairs." Cal. Const. art. XI § 5 (City charter provisions "with respect to municipal affairs shall supersede all laws inconsistent therewith," but "in respect to other matters they shall be subject to general laws."). The California Supreme Court has "rejected a static and compartmentalized description of 'municipal affairs' in favor of a more dialectical one . . . [in which] the counterpoint of 'statewide concern' [is] the conceptual limitation on the scope of 'municipal affairs.'" California Federal Savings & Loan v. Los Angeles, 54 Cal. 3d 1, 13, 283 Cal. Rptr. 569, 812 P.2d 916 (1991).

 
If [a reviewing court] is persuaded that the subject of the state statute is one of statewide concern and . . . the statute is reasonably related to its resolution, then the conflicting city charter measure ceases to be a 'municipal affair' pro tanto and the Legislature is not prohibited . . . from addressing the statewide dimension by its own tailored enactments.

 Id. at 17. The court's duty is to "'allocate the governmental powers in the most sensible and appropriate fashion as between local and state legislative bodies,'" id. (citation omitted), considering the particular factual circumstances in the case before it, id. at 18, and being careful not to destroy municipal home rule. Id. Where possible, courts should avoid making this difficult choice "by carefully ensuring that the purported conflict [between the local and state regulations] is in fact a genuine one, unresolvable short of choosing between one enactment and the other." Id. at 17.

 Plaintiffs claim that the Ordinance conflicts with a Statewide policy of managing airports in a manner that secures the benefits of commerce and tourism for the people of California. Cal. Pub. Util. Code § 21690.5(e) ("Legislative findings and declarations"). There is no "genuine" and "unresolvable" conflict between this sweeping policy statement and the Ordinance. Plaintiffs offer no evidence that the State interprets this policy in a way that would preclude the Ordinance, nor any evidence that the State has implemented this policy through "tailored enactments" that conflict with the Ordinance.

 Defendants, therefore, are entitled to prevail on summary adjudication of Plaintiffs' claim that the Ordinance is invalid under the California Constitution.

 B. City Charter

 Plaintiffs also argue that the Ordinance is invalid insofar as it applies to Airport-related contracts, because under the San Francisco City Charter the Board of Supervisors may not interfere with contracting decisions by the Airport Commission. Defendants respond that the Ordinance is valid under charter provisions adopted in 1995 that give the Board of Supervisors the power to set overall objectives for commissions through legislation.

 The powers and duties of San Francisco commissions are defined in Article IV of the City Charter. The Airport Commission is specifically given "charge of the construction, management, supervision, maintenance, extension, operation, use and control of all property . . . [and] assets which are under the Commission's jurisdiction." Charter § 4.115. All commissions are required to devise plans, programs and policies "consistent with the overall objectives of the City and County, as established by the Mayor and by the Board of Supervisors through the adoption of City legislation." Charter § 4.102(1). Section 2.114 of the Charter generally prohibits interference by members of the Board of Supervisors in the administration of City commissions, but this section specifically exempts legislation regarding administrative matters "other than specific contract and personnel decisions."

 The Ordinance modifies twenty-five-year-old City-wide policy of contracting only with companies that do not discriminate on the basis of sexual orientation in their personnel policies. This legislation sets an "overall objective" for the City, and the City Charter requires the Airport Commission to pursue a consistent policy as it exercises its powers to manage the operations of the Airport. The Ordinance does not refer to a specific contract, and so is not barred by section 2.114 of the charter.

 Plaintiffs rely on Air Cal, Inc. v. City and County of San Francisco, 865 F.2d 1112 (9th Cir. 1989), to argue that the Board of Supervisors lacks the power to dictate conditions of Airport-related contracts. In Air Cal, the Ninth Circuit concluded that under the then-current City Charter, San Francisco had delegated all of its proprietary powers over the Airport to the Airport Commission. Id. at 1118. The Ninth Circuit relied on section 2.401, which then, as now, prohibited interference by members of the Board of Supervisors with administrative matters of the commissions. Id. at 1119. As of 1995, however, section 2.401 specifically empowers the Board to pass legislation on administrative matters other than specific contract or personnel decisions. Id. Therefore, the Ninth Circuit's conclusion in 1989 that the Board of Supervisors lacked the power to pass ordinances affecting contract administration at the Airport does not govern this case.

 Defendants, therefore, are entitled to prevail on summary adjudication of Plaintiffs' claim that the Ordinance is invalid as an improper exercise of legislative power under the San Francisco City Charter.

 IV. Constitutional Challenges

 Plaintiffs claim that the Ordinance is invalid under the United States Constitution as an attempt by the City to regulate conduct performed beyond its borders. Plaintiffs cite cases that rely on three separate bases for striking down State action as impermissibly extraterritorial: the Due Process Clause of the Fourteenth Amendment, principles of State sovereignty and comity, and the dormant Commerce Clause. Defendants dispute that the Ordinance is impermissibly extraterritorial and also argue that it does not violate the dormant Commerce Clause by imposing undue burdens on interstate commerce.

 The Court concludes that the Ordinance violates the dormant Commerce Clause to the extent that it impermissibly regulates extraterritorial commerce; therefore, the Court need not consider Plaintiffs' due process extraterritoriality arguments. The Court concludes, however, that the Ordinance does not otherwise violate the dormant Commerce Clause by imposing undue burdens on interstate commerce.

 A. Applicability of the Dormant Commerce Clause

 The Commerce Clause of the United States Constitution, Art. I, § 8, cl. 3, empowers Congress to "regulate Commerce with foreign Nations, and among the several States." The Supreme Court has interpreted the clause not only to grant legislative power to Congress, but also impliedly to limit the power of State and local governments to enact laws affecting foreign and interstate commerce. See Healy v. Beer Institute, 491 U.S. 324, 326 n.1, 105 L. Ed. 2d 275, 109 S. Ct. 2491 (1989). The implied limitation on State and local powers is referred to as the dormant Commerce Clause.

 Defendants argue that the dormant Commerce Clause is not relevant to this case because it restricts State action only in the absence of Congressional authorization of such action. "When Congress has struck the balance it deems appropriate, the courts are no longer needed to prevent States from burdening commerce, and it matters not that the courts would invalidate the state tax or regulation under the Commerce Clause in the absence of congressional action. Courts are final arbiters under the Commerce Clause only when Congress has not acted." Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 154-55, 71 L. Ed. 2d 21, 102 S. Ct. 894 (1982) (citation omitted). Defendants cite five cases in which courts rejected dormant Commerce Clause arguments because Congress had acted in the relevant field of regulation, but in each of these cases Congress had specifically authorized the challenged State action. See id. at 155 (challenged tax had been approved by federal officials); see also, Northeast Bancorp, Inc. v. Bd. of Govs. of the Fed. Reserve Sys., 472 U.S. 159, 174, 86 L. Ed. 2d 112, 105 S. Ct. 2545 (challenged State laws authorized in federal statute); W. & S. Life Ins. Co. v. State Bd. of Equalization of California, 451 U.S. 648, 653, 68 L. Ed. 2d 514, 101 S. Ct. 2070 (same); Panhandle E. Pipe Line Co. v. Public Serv. Comm'n, 332 U.S. 507, 520-21, 92 L. Ed. 128, 68 S. Ct. 190 (1947) (same). Defendants argue that by enacting the proprietary powers exception to ADA preemption, Congress has authorized laws such as the Ordinance and thus the Court does not have the power to review the Ordinance under the dormant Commerce Clause. Cf. Sea Air Shuttle Corp. v. Virgin Islands Port Authority, 800 F. Supp. 293, (D.V.I. 1992) (port authority's actions were authorized under the proprietary powers exception to ADA preemption and therefore did not violate the dormant Commerce Clause). The Court, however, concludes below that the Ordinance does not fall within the proprietary powers exception to the ADA. See Section V.C.4, infra.

 The Court concludes, therefore, that the Ordinance is subject to the strictures of the dormant Commerce Clause.

 B. Extraterritoriality

 The dormant Commerce Clause precludes State and local laws that have the extraterritorial effect of regulating "commerce occurring wholly outside the boundaries of a State." Healy, 491 U.S. at 336. "When a state statute directly regulates . . . interstate commerce, . . . we have generally struck down the statute without further inquiry." Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U.S. 573, 579, 90 L. Ed. 2d 552, 106 S. Ct. 2080 (1986). This strict bar is based both on the dormant Commerce Clause and on principles of State sovereignty: "The principles guiding this assessment . . . reflect the Constitution's special concern both with the maintenance of a national economic union unfettered by state-imposed limitations on interstate commerce and with the autonomy of the individual States within their respective spheres." 491 U.S. at 335; see also BMW of North America, Inc. v. Gore, 517 U.S. 559, 116 S. Ct. 1589, 1597, 134 L. Ed. 2d 809 (1996) ("one State's power to impose burdens on the interstate market for automobiles is not only subordinate to the federal power over interstate commerce, . . . but is also constrained by the need to respect the interests of other States").

 In Brown-Forman, the Court struck down a State statute that required distillers to post prices for in-State sales of their products during a certain month and to guarantee that they would not sell the product at a higher price elsewhere in the United States during that month. Brown-Forman, 476 U.S. at 575-76. The Court held that this law "regulates out-of-state transactions in violation of the Commerce Clause. Once a distiller has posted prices in New York, it is not free to change its prices elsewhere in the United States during the relevant month. . . . While New York may regulate the sale of liquor within its borders, . . . it may not 'project its legislation into [other States] by regulating the price to be paid' for liquor in those States." Id. at 582-83 (quoting Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 521, 79 L. Ed. 1032, 55 S. Ct. 497 (1935)). See also, Gore, 116 S. Ct. at 1597 (a State cannot penalize "conduct that was lawful where it occurred and that had no impact on [the State] or its residents").

 The Ordinance has a similar effect. Once a company signs a City contract, it cannot provide discriminatory benefit packages to its employees anywhere in the United States without facing penalties imposed by the City. In other words, the City effectively regulates certain extraterritorial practices of City contractors. Unless shielded by the market participant exception to the dormant Commerce Clause, discussed below, the Ordinance is unconstitutional as applied to out-of-State conduct. See S.F. Admin. Code § 12B.1(d)(iv). Although contract-related conduct, see 12B.1(d)(ii), (iii), might also occur beyond the State's borders, it would not be "commerce occurring wholly outside the [City's] borders" because the City would have entered into the contract. San Francisco conduct, that is, conduct described in § 12B.1(d)(i), takes place only on territory covered by the City's police powers and thus that section raises no extraterritoriality concerns. The Ordinance, therefore, potentially violates this aspect of the dormant Commerce Clause only with respect to the out-of-State conduct covered by section 12B.1(d)(iv).

 C. Marketplace Participation Exception

 Defendants argue that, despite the Ordinance's extraterritorial reach, it does not conflict with the dormant Commerce Clause because the City is acting as a market participant when it imposes conditions on its contractors. The Supreme Court first recognized a market participant exception to the dormant Commerce Clause in Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 49 L. Ed. 2d 220, 96 S. Ct. 2488 (1976). "Nothing in the purposes animating the Commerce Clause prohibits a State, in the absence of congressional action, from participating in the market and exercising the right to favor its own citizens over others." Id. at 810. In White v. Massachusetts Council of Construction Employers, Inc., 460 U.S. 204, 75 L. Ed. 2d 1, 103 S. Ct. 1042 (1983), the Supreme Court upheld a Boston mayoral executive order that required all construction projects funded in whole or in part by city funds to be performed by a work force at least half of which consisted of city residents. Id. at 206. "Insofar as the city expended only its own funds in entering into construction contracts for public projects, it was a market participant" and the order was valid under the Commerce Clause. Id. at 214-15. The Court rejected as irrelevant arguments that the order would have a significant impact on out-of-State workers and that the order swept too broadly, creating more of a burden than was necessary to accomplish its objectives. Id. at 209-10. "If the city is a market participant, then the Commerce Clause establishes no barrier." Id. at 210. In a footnote, however, the Court stated,

 Id. at 211 n.7.

 In South-Central Timber Development, Inc. v. Wunnicke, 467 U.S. 82, 81 L. Ed. 2d 71, 104 S. Ct. 2237 (1984), a plurality of the Court held that Alaska had exceeded the limits of the market participant exception, but Justice Rehnquist, author of the White opinion, vehemently dissented. In Wunnicke, Alaska had conditioned the sale of State-owned timber on a commitment that the primary manufacture of the timber take place in Alaska. Id. at 84. The plurality held that this law violated the dormant Commerce Clause and could not be saved by the market participant exception: "The limit of the market-participant doctrine must be that it allows a State to impose burdens on commerce within the market in which it is a participant, but allows it to go no further. The State may not impose conditions, whether by statute, regulation, or contract, that have a substantial regulatory effect outside of that particular market." Id. at 97. The plurality rejected an interpretation of the doctrine that would "validate under the Commerce Clause any contractual condition that the State had the economic power to impose." Id. at 97 n.10. In his dissent, Justice Rehnquist stated that the plurality's distinction between market participation and market regulation invoked antitrust principles inapplicable to a Commerce Clause analysis, and noted that Alaska could achieve the same result by modifying its law so that it clearly fell within the doctrine. Id. at 101-103 (Rehnquist, J., dissenting).

 There is no question that the City is acting as a market participant when it implements the Ordinance: when the City enters into contracts that are subject to the Ordinance, it is directly participating in the marketplace by purchasing services or leasing property. The only question before the Court, therefore, is whether, by implementing the Ordinance, the City inappropriately reaches beyond the sphere of economic activity in which it is participating in an attempt to regulate commerce beyond its borders.

 The Court concludes that the Ordinance reaches too far to be shielded by the market participant exception. Contractors must guarantee that, throughout the term of the contract, they will not provide discriminatory employee benefit packages in "any of [their] operations elsewhere within the United States." S.F. Admin. Code § 12B.1(d)(iv). Technically, subsection (iv) does not "reach beyond the immediate parties with which the government transacts business," White, 460 U.S. at 211 n.7, because only companies that sign contracts with the City are affected. However, this class of economic activity encompasses much more than that in which the City is a "major participant," id., and the individuals affected by the Ordinance could hardly be described, even informally, as "working for the city. " Id. Under the plurality's test in Wunnicke, section 12B.1(d)(iv) of the Ordinance surely fails as applied to out-of-State conduct. This section applies to contractor conduct that is not related to the purpose of the contract. Cf. § 12B.1(d)(iii) (contract-related conduct carried out anywhere in the United States). By operation of this subsection, a contractor may face penalties, termination of the contract, a two-year bar from contracting with the City, and forfeiture of moneys owed by the City under the contract. These consequences are certainly substantial enough to create a regulatory effect on the contractors' out-of-State activities. The Ordinance, therefore, has "a substantial regulatory effect outside of [the] particular market" in which the City participates. Chief Justice Rehnquist's criticisms of the plurality's approach in Wunnicke do not apply here. There is no way that the City could modify this portion of the Ordinance so that it would meet the requirements of the marketplace participant doctrine. The Court concludes, therefore, that the imposition of national nondiscrimination guarantees pursuant to the Ordinance is not shielded by the market participant exception.


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