January 2015

Yesterday’s guilty verdict is the trial of former Ironworkers’ Union President, Joe Dougherty, is a monumental decision with far reaching ramifications.  First, there is no longer any question that union bosses enjoy no immunity from federal racketeering and extortion laws.  Second, the decision clears the way for contractors to employ what has been called the “thermonuclear device” of litigation, civil RICO, against trade unions.

1.  Enmons is Dead.

Thanks to a 1973 U.S. Supreme Court case, U.S. v. Enmons, for over 40 years union bosses and their minions enjoyed de facto immunity from federal criminal charges for actions that would otherwise be criminal so long as they were in furtherance of a “legitimate union objectives.”  Until recently, courts had been loath to reel in the breadth of Enmons.  That changed in 2011 in a decision from the federal court in New York in the case U.S. v. Larson, where the court refused to dismiss an indictment of members of the Operating Engineers Union, who engaged in activity similar to that in the Ironworkers case.  In that case, the court distinguished Enmons and said that decision was never meant to apply to acts of violence and extortion against non-union construction companies and project owners, who chose to build non-union.  That decision paved the way for a series of guilty pleas from members of Operators in the case.  In the Ironworkers’ case, Judge Baylson reached a similar conclusion and it paved the way for the conviction of Joe Dougherty.

Thus, there is now no question that acts of violence and extortion are no longer protected under U.S. v. Enmons and unions can no longer hide behind that decision in escaping prosecution for their crimes.  Last year, it was reported that the U.S. Attorney in Philadelphia was making cases, like the Ironworkers case, a priority. Moreover, at the news conference initially announcing the indictment over a year ago, the U.S. Attorney was explicit that the case may not stop with the Ironworkers’ Union.  Indeed, as any non-union contractor working in Philadelphia knows, the allegations against the Ironworkers’ Union were hardly unique to that specific union.  There is no doubt that Ironworkers’ case was a test case for the Department of Justice here in Philadelphia and we should not be surprised if similar indictments are unsealed against other members of the building trades.

I am sure there is a bit of Hoya paranoia happening in the Philadelphia building trades right now, but that paranoia may soon spread nationally because U.S. Attorneys’ like to bring “copy cat” cases in other jurisdictions.

2.  Civil RICO Claims.

What is perhaps the bigger ramification of the Ironworkers’ conviction is contractors are now “cleared hot” to bring civil RICO claims against trade unions.  Joe Dougherty was prosecuted under the Racketeer Influenced and Corrupt Organizations Act, otherwise known as RICO.  RICO is a Nixon era body of laws that was passed with the intention of fighting the mafia and other organized crime syndicates.  The RICO act has both a criminal and civil component.  The civil component requires a plaintiff to prove most of the same elements of a criminal RICO claim. The civil component also permits the court to award a plaintiff trebel (triple) damages and attorneys fees.

The reason why contractors did not likely have a viable RICO claim before the Ironworkers’ conviction involves a bit of background on what is required to prove a RICO claim.  (RICO is a very complex area of the law. The complexity of RICO is probably why it took the jury in the Ironworkers case a few days to come back with a verdict.)  A fundamental element of a RICO claim is that the defendants must have committed a RICO “predicate act” which are set forth in the RICO act.  Simply put, if you have no predict act you have no RICO claim.  Predict acts include murder, gambling, mail fraud, wire fraud, and money laundering.

The RICO predicate act most likely triggered by union strong arm tactics is the Hobbs Act, which makes it a federal crime to conspire to commit extortion.  For example, Joe Dougherty was convicted of violating the Hobbs Act.  The problem before the Ironworkers’ conviction was that the Enmons case foreclosed a civil RICO claim against a trade organization because Enmons held that the Hobbs Act was not violated so long as a union was furthering legitimate objectives.  However, now that Enmons is dead and a violation of the Hobbs Act does occur when unions commit extortion against non-union contractors and the owners that hire them, the path is cleared for contractors subjected to that extortion to bring a civil RICO claim against the union.  Civil RICO claims are expensive to defend and they give aggrieved contractors the first real weapon with teeth to combat union intimidation.   I would not be surprised if the contractors that were harmed by the Ironworkers do not file civil RICO claims against the Ironworkers’ Union in the near future.

In short, no.  However, that short answer is not so simple and does not mean you can run and opening a non-union company.  Almost all construction industry collective bargaining agreement contain clauses that attempt to prevent a signatory firm from operating a non-union firm.  These clauses are commonly known as anti-dual shop or double-breasting clauses.  However, whether such clauses are valid and enforceable depends on a two part test.

First, the clause in question must seek to preserve work performed by the employees represented by the union.  In other words, the clause seeks to prevent an employer from circumventing its bargaining obligations.  Second, the contracting employer must have control over the non-union entity.  This second prong is called the “right of control” test.

Determining whether an anti-dual shop clause is facially valid – that means whether it can even be applied – often depends on the nuanced language of the clause and whether the clause is being interpreted by a court or the NLRB.  For example, in N.L.R.B. v. Central Regional Counsel of Carpenters, the Third Circuit Court of Appeals (which governs NJ, PA, DE, and the Virgin Islands) invalided the following anti-dual shop clause:

“The employers stipulated that any of their subsidiaries or joint venture to which they may be parties when such subsidiaries or joint venture engage in multiple dwelling, commercial, industrial, or institutional building construction work shall be covered by the terms of this agreement.”

In that case, the Court held that the clause failed the first prong of the test because it broadly applied to all “construction work” in various types of dwellings.  The Court held that it violated the second prong because it applied to all subsidiaries or joint ventures not just those the employer controlled.

Conversely, the NLRB in Rd. Sprinkler Fitters, Local 669 (Cosco Fire Protection), the NLRB held that an anti-dual shop clause that applied to separate entities that the signatory employer “established and maintained” was facially valid because it passed the second prong right of control test.

Yet, whether an anti-dual shop clause is facial valid does not end the inquiry because a union seeking to enforce the clause would still bear the burden of proving that employer “controlled” the non-union affiliated entity.  Thus, even in the face of an anti-dual shop clause, a non-union entity can still be established if it is truly independent from the union firm.  The factors the Courts and the NLRB use to determine whether the two operations are intertwined include (a) whether the primary purpose of the establishing of the non-union firm was to circumvent the CBA, (b) common ownership, (c) common management, (d) common employees, and (e) common location.

As we enter the New Year, here is a look at 5 areas that will be a hot bed of legal activity for contractors and their attorneys.

1.   Aggressive Union Activity.

Decreasing membership and market share, will cause Big Labor to ramp up efforts to “persuade” public and private owners to use an all union workforce.  This means increased picketing, bannering, and “ratting” of projects using non-union subcontractors.  On public projects, labor will continue to lobby government officials for the use of union only project labor agreements.  Owners and contractors need to be ready to combat labor’s tactics.

Union shop firms must be aware of their contribution requirements under their CBA.  The 2008 stock market crash (from which union pension funds have never full recovered), increasing vested liabilities from an aging workforce, and decreasing membership have lead many union health and welfare funds to be underfunded.  In fact, union pension funds may be the next big Washington bailout.  In the meantime, unions will aggressively pursue delinquent  contractors for contributions to health and welfare funds.

In Philadelphia (and perhaps around the country), eyes will be on jury’s verdict in the Ironworkers extortion trial involving former Ironworkers head, Joseph Dougherty.  A conviction could lead to a wave of indictments against union leaders that have engaged in similar tactics across the country.

2.  Increased Regulation of Contractors.

President Obama’s policy of creating a regulation nation continues unabated.  In 2014, the Obama administration issued 78,978 pages of new federal regulations many which impact contractors.  Any contractor or subcontractor performing work on a project receiving any form of federal funding assistance must be aware of the regulations that apply to them.

3.  Rising Default Rates.

With the federal reserve signaling the era of free money coming to an end, interest rates will rise.  Rising rates will make borrowing costs higher for both owners and contractors. Increased borrowing costs could lead many contractors to fail, especially firms that saw rapid expansion following the recession.  Owners may increasingly default as projects are increasingly difficult to finance.  Moreover, rising rates should slow the rapid increase in asset values, such as real estate.  This could make development projects less attractive leading to many proposed projects being shelved.  Bottom line for contractors, know you lien and bond rights.

4.  Growing Comfort with Public Private Partnerships.

Cash strapped state and local governments will continue to look to public private partnerships (PPP) as a way to fund infrastructure projects.  The success of high profile (and dollar) PPP projects in Florida, Pennsylvania, and Delaware will likely determine if the use of PPP as a source of infrastructure funding will increase in coming years.

5.  Continued Growth in Health Care and Institutional Construction.

Whether you agree with it or not, our current public policy is that everyone has a right to a college degree and healthcare.  Accordingly, the federal government has heavily subsidized higher education and healthcare.  Increased dollars in the hands of administrators in higher education and healthcare has lead to a building boom in these two sectors.  Eventually the music will stop, but in the near term contractors can expect increased work in these areas.