Otto v. PA State Ed Assoc

Opinions of the United

2003 Decisions States Court of Appeals

for the Third Circuit

4-3-2003

Otto v. PA State Ed Assoc

Precedential or Non-Precedential: Precedential

Docket 01-3858

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PRECEDENTIAL

Filed April 3, 2003

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 01-3858

MARSHA OTTO; F. NAYLOR EMORY;

DENNIS A. ERB; ROBERT K. GILBERT;

JAMES W. LOSSELL; BARBARA J. MCALLEY;

WESLEY S. SEMPLE, On behalf of themselves

and all other non-members similarly situated

v.

PENNSYLVANIA STATE EDUCATION ASSOCIATION;

NATIONAL EDUCATION ASSOCIATION; SHALER AREA

EDUCATION ASSOCIATION, On behalf of themselves and

all other local associations similarly situated

Appellants

No. 01-4110

MARSHA OTTO; F. NAYLOR EMORY;

DENNIS A. ERB; ROBERT K. GILBERT;

JAMES W. LOSSELL; BARBARA J. MCALLEY;

WESLEY S. SEMPLE, On behalf of themselves

and all other non-members similarly situated,

Appellants

v.

PENNSYLVANIA STATE EDUCATION ASSOCIATION;

NATIONAL EDUCATION ASSOCIATION; SHALER AREA

EDUCATION ASSOCIATION, On behalf of themselves and

all other local associations similarly situated

2

Appeal from the United States District Court

for the Middle District of Pennsylvania

(D.C. Civil Action No. 96-cv-01233)

District Judge: Honorable Yvette Kane

Argued June 27, 2002

Before: AMBRO and STAPLETON, Circuit Judges,

and O’NEILL,* District Judge

(Opinion filed April 3, 2003)

Milton L. Chappell, Esquire (Argued)

W. James Young

National Right to Work Legal

Defense Foundation

8001 Braddock Road, Suite 600

Springfield, VA 22160

Attorneys for Appellants/Cross-

Appellees

John M. West, Esquire (Argued)

Laurence Gold

Bredhoff & Kaiser

805 Fifteenth Street, N.W.,

Suite 1000

Washington, D.C. 20005

Mark P. Widoff, Esquire

Pennsylvania State Education

Association

400 North Third Street

P.O. Box 1724

Harrisburg, PA 17105

Attorneys for Appellees/Cross-

Appellants

* Honorable Thomas N. O’Neill, Jr., United States District Judge for the

Eastern District of Pennsylvania, sitting by designation.

3

OPINION OF THE COURT

AMBRO, Circuit Judge:

We consider whether, under the First Amendment,

certain expenses incurred by unions may be charged to

non-members and whether a local union must obtain

independent auditor verification of its charges (and, if so,

what kind of verification we require).

The First Amendment affords public-sector employees the

freedom not to associate with a labor organization. See

Chicago Teachers Union, Local No. 1 v. Hudson, 475 U.S.

292, 301 (1986) (quoting Abood v. Detroit Bd. of Educ., 431

U.S. 209, 222 (1977)). There are limits to this constitutional

freedom, however, in light of organized labor’s important

role in advancing employment conditions. Abood, 431 U.S.

at 225-26. Thus, as a means of curing the so-called “free-

rider” problem posed by its representation of non-members,

a union may charge each non-member employee a fair-

share, or agency, fee equal to his or her per capita share of

the union’s expenses arising from its duties as a collective-

bargaining representative. See id. at 235-36. But a union

may not, consistent with the First Amendment, collect fair-

share dues to support ideological causes or other expenses

insufficiently related to collective bargaining. Id.

To ensure that non-members are assessed only for fair-

share fees properly chargeable to them, the Supreme Court

has ruled that unions must adopt procedural safeguards

“carefully tailored to minimize the [First Amendment]

infringement.” Hudson, 475 U.S. at 303. First, the union

must provide a non-member with “sufficient information to

gauge the propriety of the union’s fee.” Id. at 306. This

explanation of the basis for the fee is often referred to as a

“Hudson notice.” Second, a non-member must have an

adequate opportunity to object to the fair-share fee

allocation. See id. at 307. The two safeguards are linked;

without the Hudson notice, a non-member would lack a

basis for deciding whether to object to a fair-share fee

calculation. Penrod v. NLRB, 203 F.3d 41, 46 (D.C. Cir.

2000).

4

When theory meets practice, questions abound. Do the

financial information requirements apply to small local

unions? How much verification of that information must

there be? When a union represents more than one

bargaining unit, can that union include, in the fair-share

fee assessed to non-members of one bargaining unit, costs

associated with another bargaining unit’s litigation? What if

those bargaining units are in different industries?

I. BACKGROUND AND PROCEDURAL HISTORY

Shaler Area Education Association (“SAEA”) is the

exclusive bargaining representative for education

professionals employed by the Shaler Area School District.

SAEA is the local affiliate of the Pennsylvania State

Education Association (“PSEA”) — which represents, inter

alia, both education and healthcare professionals in the

Commonwealth — and the National Education Association

(“NEA,” and collectively with SAEA and PSEA, the

“Unions”). During the 1994-1995 school year, the Shaler

Area School District employed 355 education professionals,

344 of whom were members of the SAEA (and, thereby, the

PSEA and NEA). Because all three Unions provide

collective-bargaining services to the plaintiffs’ bargaining

unit, the eleven non-members paid fair-share fees to the

SAEA, PSEA, and NEA pursuant to 71 Pa. Cons. Stat. Ann.

§ 575 (West 2003).

Seven non-union education professionals brought this 42

U.S.C. § 19831 action to challenge the Unions’ fair-share fee

procedure and assessments.2 After the District Court

1. 42 U.S.C. § 1983 states, in relevant part:

Every person who, under color of any statute, ordinance, regulation,

custom, or usage, of any State or Territory or the District of

Columbia, subjects, or causes to be subjected, any citizen of the

United States or other person within the jurisdiction thereof to the

deprivation of any rights, privileges, or immunities secured by the

Constitution and laws, shall be liable to the party injured in an

action at law, suit in equity, or other proper proceeding for redress

. . . .

2. Six of the named plaintiffs are members of the SAEA-represented

bargaining unit. The seventh, Marsha Otto, is a member of the

5

confirmed that the plaintiffs had standing to object to the

fair-share fees and the sufficiency of the Unions’ Hudson

notice,3 the parties filed a joint stipulation of facts followed

by cross-motions for summary judgment. The District Court

granted partial summary judgment in favor of the plaintiffs,

declaring that the SAEA must verify its expenditures

through an independent audit and that PSEA4 could not

charge the plaintiffs for expenses incurred in litigation not

relating specifically to the plaintiffs’ own collective-

bargaining unit. However, it also held that the Unions could

assess education-professional plaintiffs for non-litigation

expenditures related to the Unions’ representation of

healthcare professionals.

Both parties appealed, and together they present four

issues for our review: (1) whether, by filing their complaint,

plaintiffs objected properly to the Unions’ fees and

procedures; (2) whether a local union, regardless of size,

must obtain an independent auditor verification of the

expenditures listed in its fair-share calculation notice (and,

if so, we need to decide at what level of auditor inquiry); (3)

whether a union may charge non-members for collective-

bargaining-related litigation costs incurred on behalf of

another bargaining unit pursuant to an expense-pooling

arrangement with that other bargaining unit; and (4)

whether a union may charge non-members for pooled

resources available to all local affiliates even though some

of the affiliates represent employees in different professions.

We rule in favor of plaintiffs as to issues one and two (and

determine the level of verification required) and the Unions

on issues three and four.

bargaining unit represented by the Grove City Area Education

Association (“GCAEA”). While GCAEA was a defendant in the original

complaint, it was dismissed from the action in plaintiffs’ amended

complaint.

3. However, the District Court held that, because the plaintiffs did not

use the Unions’ arbitration process, they lacked standing to challenge

the timeliness of that process. Otto v. Pa. State Educ. Ass’n-NEA, 950 F.

Supp. 649, 651-52 (M.D. Pa. 1997).

4. The District Court’s order refers to PSEA and NEA, though it appears

that the Unions argue in their briefing only as to PSEA.

6

II. JURISDICTION AND STANDARD OF REVIEW

The District Court had jurisdiction under 28 U.S.C.

§§ 1331 and 1343. We exercise appellate jurisdiction

pursuant to 28 U.S.C. § 1291.

Whether plaintiffs properly objected to the Unions’ fair-

share fee calculation is a question of standing and is

subject to de novo review. In re RFE Indus., Inc., 283 F.3d

159, 163 (3d Cir. 2002). We also review de novo the District

Court’s grant of summary judgment. Cloverland-Green

Spring Dairies, Inc. v. Pa. Milk Mktg. Bd., 298 F.3d 201, 210

(3d Cir. 2002).

III. DISCUSSION

A. Objection Requirement

The Unions contend that plaintiffs failed to carry their

burden of objecting to the fair-share fee calculation by not

raising a “contemporaneous objection,” i.e., by not objecting

at the time of fee collection. Addressing this issue as a

question of plaintiffs’ standing to sue, the District Court

rejected the Unions’ contention on the ground that

plaintiffs’ complaint satisfied the objection requirement. We

agree.

No Supreme Court case explicitly establishes

a contemporaneous-objection requirement. While

International Association of Machinists v. Street, 367 U.S.

740 (1961), held that each non-member must individually

object to disputed fair-share fees, that requirement merely

places the burden on dissenting employees affirmatively to

opt out of fees to which they object, rather than allowing

them to opt into fees with which they agree. See id. at 771

(holding that because the individual Street plaintiffs “have

in the course of [this action] made known to their respective

unions their objection to the use of their money for the

support of political causes[,] . . . the respective unions were

without power to use payments thereafter tendered by them

for such political causes”). Since Street, the Court has

reiterated that non-members may raise their initial

objection in a complaint. Abood, 431 U.S. at 239 (“[T]he

requirement in Street that dissent be affirmatively indicated

7

was satisfied by the allegations in the complaint that was

filed.”) (citation omitted); Bhd. of Ry. & S.S. Clerks, Freight

Handlers, Exps. & Station Employees v. Allen, 373 U.S. 113,

119 n.6 (1963) (citing Street, 367 U.S. at 771) (employees in

Railway Labor Act case “first made known their objection to

the [unions’] political expenditures in their complaint filed

in this action; however, this was early enough”).

Yet the Unions argue that Hudson imposed a more

onerous notice standard and that “post-Hudson cases have

implicitly rejected the notion of objection-by-lawsuit.” Even

assuming arguendo that the Unions are correct, the

contemporaneous-objection principle they espouse would

nonetheless be inapplicable in this case because, as we

explain more fully infra in Section III.B, “the notice

procedures and the fee information given under the plan

were inadequate.” Lowary v. Lexington Local Bd. of Educ.,

903 F.2d 422, 430 (6th Cir. 1990). Thus the plaintiffs

lacked sufficient information to formulate a

contemporaneous objection.

B. Independent Auditor Verification

In Hudson, the Supreme Court held that a local union

representing 27,500 employees and collecting over $4

million in annual dues must provide non-members with

“sufficient information to gauge the propriety of the union’s

fee.” 475 U.S. at 306. The Court went on to explain that

“[t]he Union need not provide nonmembers with an

exhaustive and detailed list of all its expenditures, but

adequate disclosure surely would include the major

categories of expenses, as well as verification by an

independent auditor.” Id. at 307 n.18 (emphasis added). We

applied Hudson’s independent auditor requirement in Hohe

v. Casey, 956 F.2d 399 (3d Cir. 1992), and held that the

First Amendment required a state-level exclusive bargaining

representative for approximately 54,000 employees to

obtain independent auditor verification. Id. at 415-16. We

noted that “the purpose of requiring the verification in the

[Hudson] notice is to give the nonmembers some prior

assurance that the [fair-share] fee was properly calculated,”

and “[w]hen nonmembers do not receive that assurance,

their constitutional rights are violated under Hudson.” Id.

at 415.

8

Today we decide whether Hudson’s independent auditor

requirement applies to SAEA, a much smaller union than

the unions involved in Hudson and Hohe. Plaintiffs argue

that it does. The Unions contend that Hudson’s

independent auditor requirement was merely dictum or

applies only to large unions, like those in Hudson and

Hohe, that can afford an independent auditor. They point

out that SAEA would spend more on an audit than it

collects through fair-share fees. Moreover, the Unions claim

that SAEA’s finances are so simplistic that non-members

can obtain “sufficient information,” Hudson, 475 U.S. at

306, by examining its documents themselves.

No other circuit has clearly resolved this issue.5 In

5. A state case from Massachusetts, Wareham Education Association v.

Labor Relations Commission, 713 N.E.2d 363 (Mass. 1999), squarely

addressed the question before us and held that “there is no exception to

Hudson’s audit requirement for small local union affiliates.” Id. at 368.

Another state-court case, Whitley County Teachers Association v. Bauer,

718 N.E.2d 1181 (Ind. Ct. App. 1999), reached the opposite result,

holding that Hudson was not violated when a local union did not obtain

an independent audit of its financial records. Id. at 1191-92. In Tierney

v. City of Toledo, 824 F.2d 1497 (6th Cir. 1987), the Sixth Circuit wrote

that Hudson required “an audited, detailed accounting of local union

payments to affiliated state and national labor organizations.” Id. at

1503. However, the Court did not make this statement in the context of

a claim that Hudson’s requirements should apply differently to a small

local union, as is the case here.

The Unions note that, in the NLRB context, some courts have

approved what is known as the “local presumption” — an assumption

that the percentage of chargeable to nonchargeable expenses will be the

same for the local union as for the parent union. See, e.g., Finerty v.

NLRB, 113 F.3d 1288, 1292-93 (D.C. Cir. 1997); see also Thomas v.

NLRB, 213 F.3d 651, 659-60 (D.C. Cir. 2000); Price v. Int’l Union, United

Auto., Aerospace & Agric. Implement Workers of Am., 927 F.2d 88, 93-94

(2d Cir. 1991) (approving use of local presumption). Courts presented

with First Amendment questions in the public employer context have not

approved of the local presumption, however. See, e.g., Lowary v.

Lexington Local Bd. of Educ., 903 F.2d 422, 431 (6th Cir. 1990); Prescott,

177 F.3d at 1108. Whatever the validity of the local presumption, it is

irrelevant to the question presented in this case. The local presumption

is merely a method for estimating a local union’s ratio of chargeable to

nonchargeable expenses. At issue here is whether an auditor must verify

9

Andrews v. Education Association of Cheshire, 829 F.2d 335

(2d Cir. 1987), the Second Circuit concluded that “the

procedures mandated by Hudson are to be accorded all

nonmembers of agency shops regardless of whether the

union believes them to be excessively costly.” Id. at 339.

However, the Court limited this broad statement in a

footnote, in which it made clear that it was not addressing

whether or how Hudson applies to small local unions

because the local union there was one of “three interlocking

organizations” — the local union, the state union, and the

NEA.6 Id. at 340 n.2 (“[The district court’s] opinion implies

that Hudson might not require an independent auditor if

the union involved were small enough. We need not decide

the issue here.”) (internal citation omitted).

The Ninth Circuit, in Prescott v. County of El Dorado, 177

F.3d 1102 (9th Cir. 1999), vacated on other grounds, 528

U.S. 1111 (2000), reinstated in relevant part, 204 F.3d 984

(2000), held that, regardless of its accompanying high cost,

a state union must conduct a “true audit.” Id. at 1107-08.

The Court left unanswered, however, whether the

independent auditor requirement applied to a small local

union. Id. at 1108. (“We do not decide that each little unit

in the [state union] firmament must necessarily be

subjected to a separate verified audit of its expenditures

. . . .”). In a subsequent case, Harik v. Chicago Teachers

Association, 298 F.3d 863 (9th Cir. 2002), the Court held

that a small local union must obtain “independent

verification” of its expenses, but need not obtain a “formal

audit.” Id. at 866. The Harik Court did not discuss precisely

what “independent verification” entails and how it differs

from the “true audit” Prescott required of larger unions.

the total expenses to which that ratio may be applied. See Hohe, 956

F.2d at 410 (in a case in which a union attempted to apply the local

presumption, holding disclosure to non-members inadequate because

“[t]he notice . . . to nonmembers did not disclose the affiliated locals’

‘major categories of expenses’ nor was there any assertion that the

locals’ categories of expenses mirrored those of [the state union.]”).

6. While Andrews did not provide any basis for us to determine whether

the local unions at issue were larger than SAEA, we note that SAEA too

is part of “three interlocking organizations” — SAEA, PSEA, and NEA.

10

We hold that every union collecting fair-share fees from

non-members must subject its disclosed financial

information to independent auditor verification. The

Supreme Court’s mandate cannot be bent simply because

the cost to the union is great. The Supreme Court implied

no intent to make the audit requirement depend on the size

of the reporting union. Absent a directive by the Court, we

likewise make no exception.

But what level of independent auditor verification does

Hudson require? Broadly speaking, auditors can provide

three different types of accounting services: compilations,

reviews, and audits. A compilation is the “lowest level of

assurance” regarding an entity’s financial statements.

Christian Tregillis, Overview of Services Provided by CPAs,

in Basics of Accounting & Finance: What Every Practicing

Lawyer Needs to Know 88 (PLI Corp. Law & Practice

Course, Handbook Series No. B-1064, 1998). It expresses

“neither an opinion nor any level of assurance.” Id.

When performing a compilation, an accountant need not

“verify or corroborate the financial statement information

provided by the client.” Jane Dillard-Eggers,

Understanding Compilations, Reviews, and Audits, at

http://www.tscpa.com/public/smallbusinessarticles/

understanding_compilations.htm.

A review involves an intermediate level of scrutiny in

which the auditor provides “limited assurance” on the

entity’s financial statements. See id. In so doing, the

auditor indicates that he “is not aware of any material

modifications needed to be in conformity with [generally

accepted accounting principles, also known as GAAP.]”

Tregillis, supra, at 88. In order to provide this “limited

assurance,” the auditor must make some, but not

comprehensive, inquiry into client management, accounting

practices, internal control structure, and analytical

procedures used by the organization. See Dillard-Eggers,

supra. The scope of the “inquiry and analytical procedures

are the major difference between a review and a

compilation.” Larry P. Bailey, GAAS Guide: A

Comprehensive Restatement of Generally Accepted Auditing

Standards 16.31 (1994).

11

In an audit, which provides “the highest level of

assurance on financial statements,” the accountant

“provides verification of the financial statements’ claims and

assertions” and expresses an opinion on the entity’s

financials. Tregillis, supra, at 85 (emphasis added). Among

other procedures, the accountant “consider[s] and

evaluate[s] . . . the internal control system of the [client] . . .

[and] tests . . . the underlying documentation to support

account balances.” Dillard-Eggers, supra; Bailey, supra, at

16.51. Annual audits are required for all publicly traded

companies. Tregillis, supra, at 85.

As between a review and an audit, “[a] review may bring

to the accountant’s attention significant matters affecting

the financial statements, but it does not provide assurance

that the accountant will become aware of all significant

matters that would be disclosed in an audit.” 1 John R.

Clay et al., Guide to Compilation and Review Engagements

§ 101.5 (24th ed. 2002). This is because “a review does not

contemplate obtaining an understanding of the internal

control structure or assessing control risk; tests of

accounting records and of responses to inquiries by

obtaining corroborating evidential matter through

inspection, observation or confirmation; and certain other

procedures ordinarily performed during an audit.” Id.

We hold that local unions, regardless of their size, are

required to obtain formal audits of their financial

statements. Compilations and reviews do not provide an

adequate basis for a non-member to decide whether to

object to a fair-share fee. See Prescott, 177 F.3d at 1107

(“[A]n audit, as opposed to a review, offers at least some

verification of the amounts disclosed in the financial

statement. . . . We do not see how a mere review of the

union’s records can offer the ‘verification’ that the Supreme

Court and we have spoken of.”). Indeed, “verification” — the

word used by the Supreme Court in Hudson, 475 U.S. at

307 n.18, and by at least one accounting authority in

describing an audit, see Tregillis, supra, at 85 — means

authenticating or confirming the truth or accuracy of a

statement. Webster’s Third New Int’l Dictionary of the

English Language Unabridged 2543 (1971). Put another

way, an audit “make[s] assurance double sure.” William

12

Shakespeare, Macbeth act 4, sc. 1, line 96 (W.J. Craig, ed.,

Oxford 1914). A review — testing merely to be aware of the

need for material modifications to financial disclosures —

does not.7

We take no position on the precise procedures an

accountant must follow when auditing a local union.8 Like

the Second Circuit in Andrews, 829 F.2d at 340, and the

Sixth Circuit in Gwirtz v. Ohio Education Association, 887

F.2d 678, 680 (6th Cir. 1989), we decline to hold either that

an accountant’s procedures must constitute the “least

restrictive process imaginable,” Andrews, 829 F.2d at 340,

or that local unions must obtain the “ ‘highest’ possible

level of audit service,” Gwirtz, 887 F.2d at 680. See

generally Prescott, 177 F.3d at 1107 (noting that audits

“may vary in procedures and sampling rates”). We do note,

however, that Hudson does not require absolute precision.

See Hudson, 475 U.S. at 307 n.18 (“We continue to

recognize that there are practical reasons why ‘[a]bsolute

precision’ in the calculation of the charge to nonmembers

7. We recognize that accountants review rather than audit public

corporations’ interim financial statements, D. Edward Martin, Attorney’s

Handbook of Accounting, Auditing and Financial Reporting § 13.03[1] (4th

ed. 2002), and that investors rely on these unaudited interim financial

statements when making investment decisions. Despite this industry

practice, we believe that, until the Supreme Court tells otherwise,

Hudson forecloses the argument that a review is acceptable in this

context.

8. However, we read literally Hudson’s requirement of auditor

independence and therefore require that the accountant performing the

audit be truly independent of the local union, i.e., not an accountant

employed in-house by the union. See Ferriso v. NLRB, 125 F.3d 865,

871-73 (D.C. Cir. 1997) (holding that Hudson requires an auditor to have

“independence and qualifications [that] conform to prevailing norms for

audits of comparable entities.”). But see Int’l Ass’n of Machinists &

Aerospace Workers v. NLRB, 133 F.3d 1012, 1017 (7th Cir. 1998)

(Posner, J.) (explicitly declining to follow Ferriso because

“ ‘[i]ndependence’ is a slippery term” and cases requiring absolute

independence failed to “consider alternatives” and are “in tension with

cases . . . that hold that dissenters are not entitled to the highest level

of audit services that the market offers”).

13

cannot be ‘expected or required.’ ”) (quoting Allen, 373 U.S.

at 122) (alteration in original).9

We recognize that our decision might place high costs on

some local unions. However, non-members’ First

Amendment freedoms may not be eroded simply because

they are costly to enforce. Further, local unions are not

without options. For example, unions without the financial

wherewithal to afford the Hudson-mandated audit might

choose to enter into combinations with other small unions

to achieve necessary economies of scale. In the alternative,

state or national unions might choose to subsidize the cost

of local unions’ audits.

C. Litigation Expenditures

Plaintiffs’ fair-share fees include charges for collective-

bargaining-related litigation conducted by PSEA or its

affiliates but unrelated specifically to the SAEA unit. Such

expenses are known as extra-unit litigation expenses.

Plaintiffs contend that the extra-unit litigation expenses at

issue are nonchargeable. See Ellis v. Bhd. of Ry., Airline &

S.S. Clerks, Freight Handlers, Exps., & Station Employees,

466 U.S. 435, 453 (1984) (holding certain litigation

expenses not incurred on behalf of non-members’

bargaining unit unchargeable to those non-members). The

Unions argue that, because the litigation expenses at issue

are “pooled” across PSEA affiliates, these expenses are

chargeable to non-union members. See Lehnert v. Ferris

Faculty Ass’n, 500 U.S. 507, 524 (1991) (holding that a

union may charge non-members for their pro rata share of

9. In this vein, we follow other circuits that have held that the

independent audit requirement does not require the auditor to verify the

local union’s classification of expenses as chargeable or nonchargeable.

See, e.g., Dashiell v. Montgomery County, Md., 925 F.2d 750, 755-56 (4th

Cir. 1991); Gwirtz, 887 F.2d at 682 n.3; Ping v. Nat’l Educ. Ass’n, 870

F.2d 1369, 1374 (7th Cir. 1989); Andrews, 829 F.2d at 340. We agree

with these circuits that chargeability is a legal question. Dashiell, 925

F.2d at 755-56; Gwirtz, 887 F.2d at 682 n.3; Ping, 870 F.2d at 1374;

Andrews, 829 F.2d at 340. To require an accountant to verify that a

union has correctly classified expenditures is “tantamount to requiring

the auditor to give a second legal opinion,” Dashiell, 925 F.2d at 756,

which is clearly beyond the scope of an auditor’s duties.

14

certain expenses incurred pursuant to a cost-sharing

agreement with affiliate unions). This case thus requires us

to address an expense-chargeability issue that lies in the

intersection of the Ellis and Lehnert holdings: whether a

union may charge non-members for their pro rata share of

expenses that relate to litigation and that were incurred on

behalf of an affiliate union pursuant to a cost-sharing

agreement.

As noted, Ellis holds that a union may not charge non-

union members for certain extra-unit litigation expenses.10

Ellis, 466 U.S. at 453 (while expenses of collective-

bargaining-related litigation arising from the non-members’

bargaining unit are “clearly chargeable” to that employee,

“[t]he expenses of litigation not having such a connection

with the [non-members’] bargaining unit are not to be

charged to objecting employees”).11 But Ellis did not involve

expenses incurred by an affiliate bargaining unit pursuant

to an expense-pooling arrangement with that affiliate. Here,

PSEA and its affiliates have agreed to pool their litigation

expenses for the unions’ mutual benefit. This case therefore

presents a significantly different question than Ellis. Even if

10. Examples of the challenged litigation in Ellis included “the union’s

challenge to the legality of the airline industry’s Mutual Aid Pact, under

which a struck carrier receives substantial financial assistance from

non-struck carriers; the protection of employees’ rights during

bankruptcy proceedings involving an employer; the doctrine of fair

representation; and the defense of suits alleging violation of the non-

discrimination requirements of Title VII.” Ellis v. Bhd. of Ry., Airline &

S.S. Clerks, Freight Handlers, Exps., & Station Employees, 685 F.2d

1065, 1073 (9th Cir. 1982), aff ’d in part and rev’d in part, 466 U.S. 435

(1984).

11. While Ellis interpreted the Railway Labor Act (“RLA”) rather than the

First Amendment, subsequent cases have suggested that RLA cases such

as Ellis “necessarily provide some guidance regarding what the First

Amendment will countenance in the realm of union support of political

activities through mandatory assessments.” Lehnert, 500 U.S. at 516; see

also Romero v. Colegio De Abogados De P.R., 204 F.3d 291, 298 (1st Cir.

2000) (“Although the decision [in Ellis] turned on a statutory

interpretation of the Railway Labor Act, the Court was clear that its

interpretation was required to avoid constitutional difficulty. Later cases

have interpreted Ellis as setting forth constitutional rules . . . .”) (internal

citations omitted).

15

a local union party to such an arrangement does not

litigate in any given year, it still derives a tangible benefit

from participating in an expense-pooling agreement: the

availability of on-call resources greater than those it could

muster individually. Cf. Finerty v. NLRB, 113 F.3d 1288,

1292 (D.C. Cir. 1997) (“It is indisputable that, by pooling its

resources on a union-wide basis, a union, which is the

bargaining representative of all its members, provides some

benefit to members of the various local unions.”) (emphasis

in original). Moreover, it is unclear whether the Ellis Court

would have reached the same result if the extra-unit

litigation at issue were more related to the collective

bargaining activities of the Ellis plaintiffs’ bargaining unit.

In other words, it is unclear whether the Court intended to

state a per se rule against the chargeability of extra-unit

litigation expenses.

In Lehnert, the Supreme Court held that a union may

charge non-union members for their pro rata share of

expenses incurred on behalf of affiliate bargaining units

when there is “some indication that the payment is for

services that may ultimately inure to the benefit of the

members of the local union by virtue of their membership

in the parent organization.” Lehnert, 500 U.S. at 524.12 A

majority of the Court in Lehnert reached this conclusion by

applying a three-part test to assess whether a particular

union affiliate’s expense is chargeable to non-members of

the union. “[C]hargeable activities must (1) be ‘germane’ to

collective-bargaining activity; (2) be justified by the

government’s vital policy interest in labor peace and

avoiding ‘free riders’; and (3) not significantly add to the

burdening of free speech that is inherent in the allowance

of an agency or union shop.” Id. at 519.13 However, when

12. The dissent also endorsed this result, even though it would have

reached that conclusion through a different analytical path. See Lehnert,

500 U.S. at 561-62 (Scalia, J., concurring in the judgment in part and

dissenting in part).

13. While this test was in a plurality opinion of Chief Justice Rehnquist

and Justices Blackmun, White and Stevens, see Lehnert, 500 U.S. at

519, a fifth justice, Justice Marshall, joined the portion of the plurality

opinion containing the test, see id. at 534 (Marshall, J., concurring in

part and dissenting in part).

16

the Lehnert Court attempted to apply this test to a question

similar to the one before us — whether expenses for

reporting on extra-unit litigation, where litigation expenses

are incurred pursuant to a cost-pooling agreement with an

affiliate union, are chargeable to non-members of the local

bargaining unit — no five justices agreed.

Justice Blackmun, joined by Chief Justice Rehnquist and

Justices White and Stevens, noted that dissenting

employees may not be charged for the costs of union

literature reporting on extra-unit litigation because they

cannot be charged for such litigation itself under Ellis. Id.

at 528. He acknowledged that litigation conducted by one

bargaining unit could establish precedents useful to

another bargaining unit. But he concluded that this

potential benefit was too attenuated and that “extraunit

litigation [is] more akin to lobbying [which is not

chargeable] in both kind and effect.” Id.14 Were Justice

Blackmun able to garner five justices’ votes for the

proposition that extra-unit litigation is not chargeable to

non-union members, Lehnert would control here. However,

as we discuss, he wrote only for a plurality of four.

Justice Scalia, joined by Justices O’Connor and Souter,

“agree[d] with the Court’s disposition of many of the

challenged expenditures,” but disagreed with the majority’s

three-part test for evaluating the chargeability of

expenditures. Lehnert, 500 U.S. at 550 (Scalia, J.,

concurring in the judgment in part and dissenting in part).

Rather, Justice Scalia would permit expenses to be charged

to non-members when those expenses are incurred as part

of “the union’s statutory duties as exclusive bargaining

agent.” Id. However, he did not apply his preferred test to

14. Justice Marshall, who otherwise concurred in Justice Blackmun’s

opinion, emphasized that Lehnert concerned the chargeability of a

union’s reporting on extra-unit litigation. Chargeability of reporting is

different from chargeability of the litigation itself. This disagreement

about the scope of the issues before the Court led Justice Marshall to

dissent on this issue. He would have held reporting on extraunit

litigation expenses chargeable, “particularly since the publication costs

at issue are de minimis” and involved only “a few pennies.” Lehnert, 500

U.S. at 534, 546. (Marshall, J., concurring in part and dissenting in

part).

17

the question whether dissenting employees could be

charged for the expenses of union reporting on extra-unit

litigation (or for the expenses of extra-unit litigation itself).

Justice Kennedy, who endorsed Justice Scalia’s rather

than Justice Blackmun’s chargeability test, wrote

separately to argue that extra-unit litigation expenditures

should be allowed if “undertaken in the course of the

union’s duties as exclusive bargaining representative.”

Lehnert, 500 U.S. at 563 (Kennedy, J., concurring in the

judgment in part and dissenting in part). He criticized

Justice Blackmun’s reliance on Ellis to resolve the question

whether costs of reporting on extra-unit litigation are

chargeable, pointing out that Ellis did not address a

litigation-cost-sharing arrangement. Id. at 564.

Despite the fact that no five justices explicitly agreed on

the chargeability of expenses arising from extra-unit

litigation, plaintiffs insist that Lehnert controls our

disposition of the litigation-expenditures issue. They

contend that because Justice Scalia was clear when he

disagreed with the Court’s rulings on other expenditures,

he must have agreed with Justice Blackmun’s position that

extra-unit litigation expenditures are not chargeable. We

disagree with the plaintiffs’ interpretation of Justice Scalia’s

opinion, for his silence is inconclusive.15 We are therefore

15. We note that application of Justice Scalia’s chargeability standard

does not necessarily result in the prohibition against pooled extra-unit

litigation expenses that Justice Blackmun espoused. A union’s incurring

extra-unit litigation expenses might, under some circumstances, be

“essential to [the union’s] discharge of its duties as bargaining agent.”

Lehnert, 500 U.S. at 560 (quoting Ellis, 466 U.S. at 448-49) (Scalia, J.,

concurring in the judgment in part and dissenting in part). Moreover,

Justice Scalia’s willingness to consider as a chargeable expense an

annual fee assessed by a national union to a local bargaining unit to

ensure the availability of on-demand services, id. at 561-62, suggests

that he might also be willing to consider as chargeable a local bargaining

unit’s pro rata share of pooled litigation expenses. That pro rata

assessment is essentially an annual fee to ensure the availability of

litigation resources to the local unit — a form of insurance. We therefore

disagree with the Tenth Circuit’s conclusion in Pilots Against Illegal Dues

v. Air Line Pilots Association, 938 F.2d 1123, 1130 n.4 (10th Cir. 1991),

that a majority of the Lehnert Court would not allow extra-unit litigation

expenses incurred pursuant to a pooling agreement to be charged to

non-union members.

18

left without definitive Supreme Court guidance. See

Planned Parenthood of S.E. Pa. v. Casey, 947 F.2d 682, 693

(3d Cir. 1991), aff ’d in part and rev’d in part, 505 U.S. 833

(1992) (stating that a putative majority standard must

“necessarily produce results with which a majority of the

Court from that case would agree”).

The Sixth Circuit, the Court of Appeals from which

Lehnert was appealed to the Supreme Court, addressed the

issue before us in Reese v. City of Columbus, 71 F.3d 619

(6th Cir. 1995). The Court agreed with Justice Marshall

that the Lehnert plurality’s statement on extra-unit

litigation expenses was “no more than dicta” because at

issue was the cost of reporting on extra-unit litigation. Id.

at 623-24. It then proceeded to find that Lehnert not only

allowed, but required, it to approve the charges “because a

majority [in Lehnert] approved of charges for pooled

expenses like those in this case.” Id. at 624. While Reese

overstates Lehnert’s holding, as the Lehnert majority never

held extra-unit litigation expenses incurred pursuant to a

pooling agreement to be chargeable, we nonetheless agree

with the Sixth Circuit’s conclusion.

Moreover, in International Association of Machinists &

Aerospace Workers v. NLRB, 133 F.3d 1012 (7th Cir. 1998),

the Seventh Circuit enforced an NLRB decision in which the

NLRB rejected as a matter of law the proposition that extra-

unit litigation expenses should be treated differently from

other extra-unit expenses and instead “appl[ied] the same

standard for determining the chargeability of litigation

expenses as we are required . . . to apply to all other

expenses.” Cal. Saw & Knife Works, 320 N.L.R.B. 224, 239

(1995). The Seventh Circuit agreed that litigation

expenditures are “analytically identical” to other

expenditures related to collective bargaining. International

Ass’n of Machinists & Aerospace Workers, 133 F.3d at

1016.

We too uphold the chargeability of the extra-unit

litigation expenses at issue by applying the Lehnert

majority’s three-part chargeability test: “chargeable

activities must (1) be ‘germane’ to collective-bargaining

activity; (2) be justified by the government’s vital policy

interest in labor peace and avoiding ‘free riders’; and (3) not

19

significantly add to the burdening of free speech that is

inherent in the allowance of an agency or union shop.”

Lehnert, 500 U.S. at 519. First, that the litigation expenses

at issue were incurred pursuant to an expense-pooling

arrangement makes the pro rata share of those expenses

charged to SAEA members and non-members akin to

insurance. See id. at 523 (noting that because “[t]he

essence of the affiliation relationship is the notion that the

parent will bring to bear its often considerable economic,

political, and informational resources when the local is in

need of them,” the portion of a local’s fair-share fee that

“contributes to the pool of resources potentially available to

the local is assessed for the bargaining unit’s protection,

even if it is not actually expended on that unit in any

particular membership year”). The “premium” that SAEA

members and non-members pay, in the form of a pro rata

share of litigation expenses, ensures that the local

bargaining unit will have sufficient resources at its disposal

should it need, in the future, to engage in collective

bargaining-related litigation (which would be chargeable to

non-union members). Because the extra-unit litigation

expenditures at issue ensure the availability of resources

for collective-bargaining-related litigation, those

expenditures are germane to collective-bargaining activity.

Applying the second prong of the Lehnert test, we note

that the free-rider concerns applicable to other pooled-

expense arrangements apply with equal force to extra-unit

litigation expenditures.

Third, extra-unit litigation expenses present “little

additional infringement of First Amendment rights beyond

that already accepted,” Ellis, 466 U.S. at 456, where, as

here, the pooled litigation resources are expended on

collective-bargaining-related activities and “may ultimately

inure to the benefit of the members of the local union,”

Lehnert, 500 U.S. at 524. That non-litigation, collective-

bargaining-related expenses for, inter alia, pooled

negotiating advice and informational assistance in Lehnert

are chargeable to objecting employees informs our

conclusion.

Unlike the Justice Blackmun camp in Lehnert, we discern

no compelling reason to treat litigation expenses incurred

20

pursuant to a pooling agreement differently from other

pooled expenses. Thus we conclude that they are

chargeable to SAEA’s non-members.

D. Multi-occupational representation

In addition to providing services to education

professionals, PSEA’s affiliated local associations also

provide collective-bargaining-related services to healthcare

professionals. When PSEA calculates the expenses

chargeable to fair-share payers, it does not allocate

chargeable costs by profession. Rather, it includes as part

of fair-share fees the expenses incurred on behalf of all

represented employees, i.e., educators and healthcare

professionals. Plaintiffs argue that the First Amendment

bars PSEA from passing onto them costs incurred on behalf

of healthcare professionals because PSEA has not shown

that those costs “may ultimately inure to [their education

unit’s] benefit . . . by virtue of [its] membership in [PSEA].”

Lehnert, 500 U.S. at 524.

The District Court granted summary judgment in favor of

the Unions, holding that the plaintiffs failed to allege facts

suggesting that any of the three Lehnert requirements were

not satisfied (to repeat, that the expenditures are not

“ ‘germane’ to collective-bargaining activity,” not “justified

by the government’s vital policy interest in labor peace and

avoiding ‘free riders,’ ” or that they “significantly add to the

burdening of free speech that is inherent in the allowance

of an agency or union shop”). In so doing, the District Court

improperly placed the burden of proof on the plaintiffs

when it belonged on the Unions. As Lehnert points out,

“[t]he union [bore] the burden of proving the proportion of

chargeable expenses to total expenses.” Id.

Because plaintiffs do not challenge any particular

expenditures, we evaluate, as a matter of law, whether

PSEA may pool costs across occupational groups. We

answer this question affirmatively. As discussed above,

Lehnert held that “a local bargaining representative may

charge objecting employees for their pro rata share of the

costs associated with otherwise chargeable activities of its

state and national affiliates, even if those activities were not

performed for the direct benefit of the objecting employees’

21

bargaining unit,” so long as there is “some indication that

the payment is for services that may ultimately inure to the

benefit of the members of the local union by virtue of their

membership in the parent organization.” Id.

In our case, the pooling arrangement confers potential

benefits on the plaintiffs. First, the arrangement generates

economies of scale that redound to their benefit. Second, by

spreading the costs of otherwise-chargeable expenses over

a pool of employees whose chargeable-expense levels are

not perfectly correlated with their own (i.e., healthcare

professionals as well as education professionals), education

professionals reduce their risk of being assessed unusually

high chargeable expenses in any given year. Moreover, this

pooling arrangement does not necessarily increase the

dollar amount of chargeable expenses assessed to plaintiffs

for any particular year. Just as education professionals are

assessed for healthcare professionals’ chargeable expenses,

so too healthcare professionals are assessed for education

professionals’ chargeable expenses. As PSEA correctly

points out, this arrangement may result in lower fair-share

fees than would have been assessed in the absence of such

an arrangement.

We also note that the Lehnert Court did not limit its

holding only to bargaining units within the same industry,

or within related industries. Instead, it stated a broad

principle: “that part of a local’s affiliation fee which

contributes to the pool of resources potentially available to

the local is assessed for the bargaining unit’s protection,

even if it is not actually expended on that unit in any

particular membership year.” Id. at 523. Though this

reasoning was not that employed by the District Court, it

nonetheless supports its ultimate grant of summary

judgment to the Unions.16

IV. CONCLUSION

We reverse the District Court’s grant of summary

16. We may affirm for any reason supported by the record, even if not

relied on by the District Court. Nicini v. Morra, 212 F.3d 798, 805 (3d

Cir. 2000).

22

judgment in favor of the plaintiffs on the issue of charging

them fair-share fees for extra-unit litigation expenses. In all

other respects, we affirm.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit