Joseph R. Elliott v. Board of School Trustees of Ma

In the

United States Court of Appeals

For the Seventh Circuit

____________________

No. 16-4168

JOSEPH R. ELLIOTT,

Plaintiff-Appellee,

v.

BOARD OF SCHOOL TRUSTEES

OF MADISON CONSOLIDATED SCHOOLS,

Defendant-Appellant,

and

STATE OF INDIANA,

Intervenor-Appellant.

____________________

Appeal from the United States District Court for the

Southern District of Indiana, Indianapolis Division.

No. 13-cv-319 — William T. Lawrence, Judge.

____________________

ARGUED SEPTEMBER 6, 2017 — DECIDED DECEMBER 4, 2017

____________________

Before BAUER, EASTERBROOK, and HAMILTON, Circuit

Judges.

2 No. 16-4168

HAMILTON, Circuit Judge. The Contract Clause of the

United States Constitution prohibits States from passing laws

“impairing the Obligation of Contracts.” Art. I, § 10, cl. 1. The

prohibition is not absolute, but it imposes substantial limits

on laws that would undermine existing contractual rights. In

2012, an Indiana law took effect amending the State’s teacher

tenure law to cut back on the rights of tenured teachers in

layoffs. The issue in this appeal is whether the new law vio-

lates the Contract Clause rights of a teacher who had tenure

before the law took effect.

The Supreme Court of the United States held in 1938 that

the Indiana teacher tenure statute created contractual rights

protected by the Contract Clause. Indiana ex rel. Anderson v.

Brand, 303 U.S. 95, 104 (1938). From 1927 to 2012, that contract

included job security when school districts needed to reduce

their teaching staffs: as long as they were qualified for an

available position, tenured teachers had a right to be retained

over non-tenured teachers. The new Indiana law eliminates

that right and orders school districts to base layoff choices on

performance reviews without regard for tenure status.

In 2012, defendant Board of Trustees for Madison Consol-

idated Schools relied on the new law to lay off plaintiff Joseph

Elliott, a teacher who earned tenure fourteen years before the

new law took effect, while it retained non-tenured teachers in

positions for which Elliott was qualified. Elliott sued, claim-

ing that the amendment violated the Constitution when ap-

plied to him. The district court granted summary judgment in

Elliott’s favor. Elliott v. Board of School Trustees of Madison Con-

sol. Schools, 2015 WL 1125022 (S.D. Ind. March 12, 2015). We

affirm.

No. 16-4168 3

I. Legal and Factual Background

A. Indiana’s Teacher Tenure Law

Indiana enacted its teacher tenure law as the Act of March

8, 1927, Laws of the State of Indiana 259–62 (1927) (“the Act”).

The Act established how and when a teacher earns tenure, the

“principal purpose” of which is “to secure permanency in the

teaching force.” Watson v. Burnett, 23 N.E.2d 420, 423 (Ind.

1939). Permanency was intended to promote “the public good

through the creation of a competent cadre of teachers in the

state.” Stewart v. Fort Wayne Community Schools, 564 N.E.2d

274, 278 (Ind. 1990). With the enactment, Indiana joined a na-

tional trend in the early twentieth century of offering job se-

curity to attract better teachers.

Unlike tenure statutes in many other States, Indiana’s law

has been treated as forming “an employment by contract be-

tween the teacher and the school corporation.” School City of

Elwood v. State ex rel. Griffin, 180 N.E. 471, 474 (Ind. 1932); see

also Anderson, 303 U.S. at 107 (distinguishing Indiana law

from other States’ laws). A teacher who had “serve[d] under

contract as a teacher in any school corporation in the State of

Indiana for five or more successive years” achieved tenure

upon entering a sixth successive one-year contract. Ind. Code

§ 26-6967.1 (1927). 1 Once tenured, teachers have an “indefi-

nite contract” that entitles them to employment contracts each

year unless the employer has good cause to fire them. Id.; Lost

Creek School Township v. York, 21 N.E.2d 58, 64 (Ind. 1939). The

annual employment contracts can adjust variable terms like

salary, hours, and the length of the school year, but they must

1 The original Act referred to “permanent” teachers, but we use the

more common term “tenured.”

4 No. 16-4168

always comply with the Act. Lost Creek, 21 N.E.2d at 64. In

case of a conflict, the indefinite contract terms set by statute

supersede the annual employment contract. School City of

Lafayette v. Highley, 12 N.E.2d 927, 930 (Ind. 1938) (parties can-

not circumvent Act by relying on written contract).

The core terms of the Act limit the reasons and procedures

for firing or laying off tenured teachers. To cancel a tenured

teacher’s contract, a school must provide written notice and,

upon demand, a comprehensive hearing before the school

board. Ind. Code § 20-28-7.5-2; Ind. Code § 26-6967.2 (1927).

Schools can fire tenured teachers only for incompetence, in-

subordination, neglect of duty, immorality, a justifiable de-

crease in the number of teaching positions, or other good

cause. Ind. Code § 20-28-7.5-1; Ind. Code § 6967.2 (1927). Rec-

ognizing a possible loophole, Indiana courts have long held

under the Act that if a school district must reduce the number

of its teachers, the district must retain qualified tenured teach-

ers over non-tenured teachers. Watson, 23 N.E.2d at 423.

B. Senate Bill 1

The job security provisions in Indiana’s tenure law re-

mained unchanged until 2011. Compare Ind. Code § 26-

6967.1 (1927) with Ind. Code § 20-28-7-1 (2010); and Ind. Code

§ 26-6967.2 (1927) with Ind. Code § 20-28-7-2 (2010). In 2011,

Indiana amended the Act through Senate Bill 1, which took

effect in 2012. As relevant here, Senate Bill 1 established a

mandatory teacher-evaluation regime and removed the pro-

tection for tenured teachers in layoffs. 2

2 Senate Bill 1 also changed the terminology from “permanent

teacher” to “established teacher.” Any difference between the two labels

is irrelevant here, so we continue to use the general term “tenured.”

No. 16-4168 5

Starting with the 2012–13 academic year, Senate Bill 1 re-

quires schools to implement annual teacher-evaluation plans.

Ind. Code § 20-28-11.5-4(a). Each year, schools must assess

their teachers based on performance evaluations, “Objective

measures of student achievement and growth,” and “Rigor-

ous measures of effectiveness.” Ind. Code § 20-28-11.5-4(c).

Schools must then assign each teacher a rating: highly effec-

tive, effective, improvement necessary, or ineffective. Ind.

Code § 20-28-11.5-4(c)(4).

These annual evaluations affect teacher pay, student

placement, and—most relevant here—selection of teachers

for layoff during reductions in force. Under Senate Bill 1, a

school district may no longer consider tenure status when re-

ducing its teaching staff. Schools laying off teachers must now

cancel teacher contracts “on the basis of performance rather

than seniority.” Ind. Code § 20-28-7.5-1(d). To decide between

teachers with the same performance ratings, schools may con-

sider other factors, including experience, additional degrees

or credit hours, leadership roles, and the school’s academic

needs. Ind. Code §§ 20-28-7.5-1(d), 20-28-9-1.5(b).

C. Plaintiff’s Employment History

Plaintiff Joseph Elliott taught at Dupont Elementary

School, part of Madison Consolidated Schools, for nineteen

years. In 1998, Elliott entered his sixth successive contract

with the school district and became a tenured teacher under

the Act. He continued to teach at Dupont for fourteen more

years. As is the norm in Indiana, Elliott signed a series of an-

nual contracts, the last of which was for the 2011–12 school

year. In 2012, Elliott’s colleagues elected him president of the

local teachers union.

6 No. 16-4168

During Elliott’s time at Dupont Elementary, the school’s

evaluation policy assessed teachers across fourteen skills. El-

liott received ten of these evaluations. In all but one, he re-

ceived ratings of “strength” or “satisfactory”—the two high-

est ratings—in all fourteen skills. The exception was 2002, ten

years before he was laid off, when he received “needs im-

provement” in the three skills related to “interpersonal rela-

tionships” and a comment that he sometimes had “difficulty

accepting, graciously, a different point of view.” In a few

more recent evaluations, Elliott received critiques about his

interpersonal skills but always earned ratings of satisfactory

or above. Dupont evaluated Elliott for the last time in 2012

and found him satisfactory or better in all skills. Toward the

end of the 2011–12 school year, Dupont’s principal reviewed

the evaluation and recommended Elliott for contract renewal.

D. Defendant’s 2012 Layoffs

In the summer of 2012, however, the Madison school dis-

trict faced declining enrollment and a corresponding reduc-

tion in state funding. The district decided to close two schools

and to reduce its teaching staff effective that fall. The district

had recently implemented a new retention policy that incor-

porated Senate Bill 1. Since we are reviewing a grant of sum-

mary judgment for plaintiff, we assume that the district

properly followed that policy (though Elliott disputes the

point). Elliott and five other teachers were notified that the

district was laying them off.

As Indiana law provided, Elliott demanded a conference

with the superintendent and then a full hearing with the

Board. After the hearing, the Board made factual findings

about Elliott. The findings in 2012 pointed to the 2002 evalua-

tion that had rated Elliott low in interpersonal-relationship

No. 16-4168 7

skills. The 2012 findings also cited a few comments from eval-

uators over the years suggesting that Elliott could be more

compassionate. The Board also concluded that Senate Bill 1

allowed the district to cancel Elliott’s contract during a justi-

fiable reduction in force. The Board ordered Elliott’s contract

cancelled as of the end of the 2011–12 school year. The school

district retained six non-tenured teachers in positions that El-

liott was licensed to teach.

E. Procedural History

Elliott sued the school district in state court in January

2013 alleging four state-law claims: (1) that Senate Bill 1 vio-

lated the Indiana Constitution; (2) that the district applied

Senate Bill 1 before its effective date; (3) that the district ap-

plied Senate Bill 1 incorrectly; and (4) that his layoff was not

supported by sufficient evidence. He also alleged that Senate

Bill 1 impaired his contractual rights in violation of the United

States Constitution. The Board removed the case to the federal

district court, and the State of Indiana later intervened to de-

fend the new law’s constitutionality. See 28 U.S.C.

§ 2403(b). The parties filed cross-motions for summary judg-

ment, and the district court ruled in favor of Elliott.

The district court concluded that the layoff provisions of

Senate Bill 1 violate the Contract Clause when applied retro-

actively to a teacher like Elliott who earned tenure before the

new law took effect. Applying Supreme Court and Indiana

precedent, Judge Lawrence concluded that tenured Indiana

teachers have contractual rights to be retained over non-ten-

ured teachers in a reduction in force. He then found that Sen-

ate Bill 1 “completely destroyed” this right and was a substan-

tial impairment under the Contract Clause. Finally, he re-

jected the argument that this impairment was constitutionally

8 No. 16-4168

permissible as a reasonable and necessary exercise of the

State’s power.

The State and the Board sought permission to take an in-

terlocutory appeal under 28 U.S.C. § 1292(b). The district

court granted permission but we did not. The district court

then entered final judgment for Elliott and awarded him back

pay under 42 U.S.C. § 1983 and attorney fees under 42 U.S.C.

§ 1988. Although the district court based its final judgment

only on Elliott’s federal-law theory and not his state-law the-

ories, Elliott received the full relief that his state-law theories

could have provided, so nothing more needed to be decided.

The State and the Board appealed the final judgment.

II. Analysis

The issue is whether the district court correctly decided

that the layoff provisions of Senate Bill 1 violate the Contract

Clause when applied retroactively to a teacher who earned

tenure before the new statute took effect. We review the dis-

trict court’s decision de novo. Daniels v. Area Plan Comm’n of

Allen County, 306 F.3d 445, 458 (7th Cir. 2002) (reviewing de

novo a summary judgment order that declared a state law un-

constitutional).

At the outset, we note but bypass a potentially difficult is-

sue. Elliott sought, and the district court awarded, damages

under 42 U.S.C. § 1983. In Carter v. Greenhow, 114 U.S. 317

(1885), the Supreme Court found that there was no federal

question jurisdiction over the plaintiff’s Contract Clause

claim. Using a predecessor of § 1983, the plaintiff challenged

a state law that affected his state-issued bonds by prohibiting

him from using his coupons to pay his property taxes. Id. at

321–23. Some courts have read Carter broadly as prohibiting

No. 16-4168 9

any Contract Clause claims under § 1983. See Kaminski v.

Coulter, 865 F.3d 339, 347 (6th Cir. 2017); Crosby v. City of Gas-

tonia, 635 F.3d 634, 640 (4th Cir. 2011). But Supreme Court and

other opinions reflect another view, reading Carter as based

more narrowly on the way the particular claim in that case

was pled and the failure to satisfy the amount-in-controversy

requirement applicable at the time. See Dennis v. Higgins, 498

U.S. 439, 451 n.9 (1991), quoting Chapman v. Houston Welfare

Rights Org., 441 U.S. 600, 613 n.29 (1979); Southern California

Gas Co. v. City of Santa Ana, 336 F.3d 885, 886–87 (9th Cir. 2003)

(per curiam); see also White v. Greenhow, 114 U.S. 307, 307–08

(1885) (allowing claim for damages for violation of Contract

Clause in companion case to Carter); Kaminski, 865 F.3d at 350

(Moore, J., dissenting) (arguing for limited scope of Carter).

We need not take sides on this question. It does not affect our

subject matter jurisdiction, and the defendants have waived

this potential defense. They did not raise it in the district

court, and the State told us at argument that the defendants

do not rely on Carter.

Turning to the merits, the Contract Clause prohibits States

from passing any “Law impairing the Obligation of Con-

tracts,” U.S. Const. art. I, § 10, cl. 1, but not all laws affecting

contracts are unconstitutional. The Contract Clause prohibits

changes in law only if they operate “as a substantial impair-

ment of a contractual relationship.” General Motors Corp. v. Ro-

mein, 503 U.S. 181, 186 (1992), quoting Allied Structural Steel

Co. v. Spannaus, 438 U.S. 234, 244 (1978). This standard bal-

ances individual rights to organize personal affairs against

the States’ “necessarily reserved” sovereign power to protect

the general welfare. United States Trust Co. of New York v. New

Jersey, 431 U.S. 1, 21 (1977). The Supreme Court has harmo-

nized these interests by applying a two-step analysis, asking

10 No. 16-4168

first whether a change in state law has substantially impaired

a contractual relationship, Energy Reserves Group v. Kansas

Power & Light Co., 459 U.S. 400, 411 (1983), and second

whether the impairment is reasonable and necessary for a le-

gitimate public purpose. United States Trust, 431 U.S. at 25; Al-

lied Structural Steel, 438 U.S. at 247.

A. Substantial Impairment of Contractual Rights?

We consider first whether applying Senate Bill 1 to Elliott

substantially impaired his tenure contract. This issue itself can

be divided into three parts: (1) whether there is a contractual

relationship; (2) whether a change in law impairs that con-

tract; and (3) whether the impairment is substantial. General

Motors, 503 U.S. at 186.

1. The Contractual Relationship

Statutes typically create regulatory rights not subject to the

Contract Clause. See, e.g., Phelps v. Board of Education of West

New York, 300 U.S. 319, 323 (1937) (New Jersey tenure law did

not create contract rights for teachers protecting them from

salary reductions during Great Depression). But when a leg-

islature uses contractual language that induces public reli-

ance, it can create an enforceable contract, as the Supreme

Court held Indiana’s teacher tenure law did. Indiana ex rel. An-

derson v. Brand, 303 U.S. 95, 100, 105 (1938). The defendants do

not dispute this general point, but they dispute the scope of

the contractual relationship and the obligations it imposes on

the State and school districts. 3

3The State does, however, ask us to treat Anderson as an obsolete relic

based arbitrarily on the particular language used in the 1927 Act. That is

not for us to say. And regardless of any shift in how the Supreme Court

No. 16-4168 11

2. Impairment of Contractual Rights

The scope of the contractual obligations determines

whether Senate Bill 1 impairs any contractual right. The State

makes two main arguments on this point. First, it argues that

the Act’s job-security provisions are not part of the tenure

contract but are variable terms that annual teaching contracts

can change. See Def. Br. at 23–24. Therefore, goes the argu-

ment, amendments to the job-security terms cannot violate

the Contract Clause. Second, the State argues that even if job

security is part of the tenure contract, the Act has protected

teachers only against dismissal without cause. Firing teachers

based on performance is still firing for cause, the State argues,

so that Senate Bill 1 does not impair any existing contractual

right. We reject both of those arguments, which essentially try

to rewrite Indiana law and history.

The State makes much of the fact that a tenured teacher

works under two contracts, in effect: an indefinite statutory

one that provides tenure and an annual one that governs var-

iable terms like salary and hours. Just as annual contracts can

change salary, the State argues, they can change the degree of

job security that tenure provides without violating the Con-

tract Clause. But Anderson and the Act itself squarely block

this argument. In Anderson, a teacher challenged an amend-

ment to the Act that eliminated job security for teachers in

township schools. 303 U.S. at 97–98. Anderson considered “the

existence and nature” of the Indiana teacher tenure law and

found that it created a “binding and enforceable contract

against school districts.” Id. at 100, 105. The Supreme Court

might interpret the Contract Clause today, generations of Indiana teachers

have relied on Anderson and the teacher tenure law it interpreted.

12 No. 16-4168

ultimately determined that the statutory amendment im-

paired the tenure contract when it changed the “admissible

grounds of cancellation” by revoking the State’s statutory

promise to tenured township teachers. Id. at 105. If the

grounds of cancellation were subject to change through an-

nual teaching contracts, the Court in Anderson could not have

concluded that repealing job-security provisions impaired the

tenure contract. The Act—not the annual contracts—granted

Elliott his contractual tenure rights. Under Anderson, these

rights became enforceable the year Elliott earned tenure. A

decrease in job security necessarily impairs his rights under

that contract.

It is also well established under Indiana law that the Act

protects against more than at-will termination. As noted, the

Act allows schools to dismiss a tenured teacher during a “jus-

tifiable decrease in the number of teaching positions,” Ind.

Code § 26-6967.2 (1927), without much qualification. But early

on, the Indiana courts concluded that reducing teaching staff

does not permit schools to lay off whichever teachers they

please. In Watson v. Burnett, 23 N.E.2d 420, 423 (Ind. 1939), a

school district laid off a tenured teacher who was qualified to

teach positions that non-tenured teachers continued to teach.

When challenged, the school district relied on its authority to

fire tenured teachers when reducing teaching staff. The Indi-

ana Supreme Court held that the Act did not permit this re-

sult, reasoning that if “a justifiable decrease in the number of

teaching positions should be held to give the [district] the

power to choose between tenure and non-tenure teachers,”

then the district would have “the power to nullify the Teach-

ers’ Tenure Act.” Id. This holding answers our question di-

rectly: before Senate Bill 1, the Act granted a qualified tenured

No. 16-4168 13

teacher an enforceable contractual right to be retained over

non-tenured teachers during a reduction in force.

From the enactment of the Act in 1927, Indiana teachers

thus benefitted from enforceable contractual rights when they

became tenured. These contractual rights included job secu-

rity rights in a layoff. Senate Bill 1, when applied retroactively

to a teacher like Elliott who earned tenure before 2012, im-

pairs those job security rights and the tenure contract. See

United States Trust, 431 U.S. at 19 n.17 (law adjusting the “ex-

press terms of an agreement” is more likely to be an unconsti-

tutional impairment).

3. “Substantial” Impairment

Laws impairing contracts violate the Contract Clause only

if the impairment is substantial, though substantial impair-

ment does not require a complete destruction of the contrac-

tual relationship. Energy Reserves, 459 U.S. at 411. The issue is

whether the impairment disrupts reasonable contractual ex-

pectations. Id. at 413–16; Allied Structural Steel, 438 U.S. at 245.

The Supreme Court’s decisions under the Contract Clause

show that reliance interests are key to this inquiry. The anal-

ysis must “reflect the high value the Framers placed on the

protection of private contracts.” Allied Structural Steel, 438 U.S.

at 245. Contracts “enable individuals to order their personal

and business affairs,” and once arranged, “those rights and

obligations are binding under the law, and the parties are en-

titled to rely on them.” Id.

Based on our reading of the Court’s cases, we break this

inquiry into two questions. First, was the impaired term a

“central undertaking” of the bargain such that it “substan-

tially induced” teachers to enter their contracts? See City of El

14 No. 16-4168

Paso v. Simmons, 379 U.S. 497, 514 (1965). Second, was the

change in law foreseeable, meaning that the risk of change

was reflected in the original contract? Energy Reserves, 459

U.S. at 413–16. Put another way, we ask whether this change

substantially disrupted teachers’ important and reasonable

reliance interests. Id.

a. Central Undertaking

Legislation causes a substantial impairment if it alters a

“central undertaking” of the contract that “substantially in-

duced” a party to enter the bargain. Simmons, 379 U.S. at 514

(finding no substantial impairment when it could not “seri-

ously be contended that the buyer was substantially induced

to enter into the[] contracts” on the basis of the impaired

term). In other words, an impairment is substantial if it dis-

rupts actual and important reliance interests. Here, the term

at issue is narrow but important. When Elliott decided to be-

come a tenured teacher, the State and school district promised

him a substantial degree of job security: during a downsizing,

Elliott’s job would be more secure than that of a non-tenured

teacher.

The promise of job security, especially during layoffs, lies

close to the core of teacher tenure. Having job security, even

in tough economic times, was a central term to induce people

to become teachers and seek tenure in Indiana. It is a term

with significant value to teachers, who as a matter of econom-

ics have traded higher salaries for the protections that tenure

offers over the course of a career. Teachers earn lower salaries

than similarly educated professionals. They receive part of

their compensation through other benefits, including better

job security, which includes a reduced risk of termination

during staff reductions. This lower risk has material value

No. 16-4168 15

and was a primary consideration that teachers could rely

upon when seeking tenured employment. 4

An impairment is even more substantial when it disrupts

expectations “in an area where the element of reliance was vi-

tal.” Allied Structural Steel, 438 U.S. at 246. In that case, the

Court considered how severely a change in pension law dis-

rupted an employer’s expectations about pension obligations.

Id. at 246–47. The Court found this reliance particularly im-

portant. Here we consider not an employer’s but employees’

expectations, yet the same reasoning applies. Just as an em-

ployer relies on a stable pension regime to fund its pension

program properly, so too teachers rely on a stable job-security

scheme to plan their personal and professional lives, their in-

vestments of time and money, and their retirements. Senate

Bill 1 substantially disrupted tenured teachers’ expectations

about job security. It is not fair to change the rules so substan-

tially when it is too late for the affected parties to change

course. Tenured teachers cannot have do-overs in their ca-

reers, either to earn more money to make up for the lost job

4 A recent report by the Economic Policy Institute found that public

school teachers in the United States earn 11% less on average than simi-

larly educated professionals. See Sylvia A. Allegretto & Lawrence Mishel,

“The Teacher Pay Gap is Wider than Ever,” at 17–18 (2016), accessible at

http://www.epi.org/publication/the-teacher-pay-gap-is-wider-than-ever-

teachers-pay-continues-to-fall-further-behind-pay-of-comparable-work-

ers/. This estimate takes into consideration non-wage benefits such as pen-

sion, insurance, and paid leave, but not job security. Id. at 14–17. A 2015

report by the Organisation for Economic Cooperation and Development

found that in the United States, public school teachers earn 67% to 71% of

the salary of the average professional with similar education. Education

at a Glance 2015: OECD Indicators at 442, accessible at

http://dx.doi.org/10.1787/eag-2015-en.

16 No. 16-4168

security or to find better job security in another school district

or in another field entirely.

b. Foreseeability

There is a second requirement for the impairment to be

substantial: the parties must not have anticipated the change

in law. We have said that the “foreseeability of the [new] law

when the original contract was made” is of “great” and even

“controlling” importance. Chrysler Corp. v. Kolosso Auto Sales,

Inc., 148 F.3d 892, 894 (7th Cir. 1998). If the parties anticipated

a change in the law, then their bargain would reflect the risk

of a future impairment. Id. at 894–95 (“[W]hat was foreseeable

then will have been taken into account in the negotiations

over the terms of the contract.”). If the new law was foresee-

able, then reliance on the impaired terms may have been un-

reasonable so that a disruption to the relationship would not

be deemed substantial.

The Supreme Court has found that a change in law was

foreseeable in at least two contexts. In the first, the Court

pointed to the history of “extensive and intrusive” regulation

in the affected industry. Energy Reserves, 459 U.S. at 413–16

(new price controls on natural gas did not disrupt the sup-

plier’s reasonable expectations when the industry was heav-

ily regulated and supplier “knew its contractual rights were

subject to alteration by state price regulation”). In the second,

the Court reasoned that because the original law had only a

temporary goal, the parties must have anticipated a future

legislative change. Simmons, 379 U.S. at 516 (change in land-

sale law did not impair contracts when goal of law shifted

from settlement of Texas frontier to “efficient utilization of

public lands”).

No. 16-4168 17

These contexts are quite different from teacher tenure.

One can anticipate that any state law may change in the fu-

ture, but retroactive application to impair existing contract

rights and reliance interests is another question. Retroactive

application of legislation like Senate Bill 1 was unforeseeable

when teachers like Elliott became tenured. Indiana has histor-

ically regulated teacher compensation, but “a history of regu-

lation is never a sufficient condition” by itself. Chrysler Corp.,

148 F.3d at 895. The question is whether the nature of the reg-

ulation puts the party “on notice that an entirely different

scheme” would likely be imposed. Id. Although Indiana has

regulated teacher tenure since 1927, the Supreme Court held

in 1938 that those regulations were contractual, protected by

the Contract Clause. Anderson, 303 U.S. at 105. The State did

not materially amend those terms for more than eighty years.

Senate Bill 1 was thus not a “small and predictable step”

in the evolution of the Act, see Chrysler Corp., 148 F.3d at 895,

at least as applied to already-tenured teachers. For teachers

who have built their entire careers relying on those contrac-

tual rights as protected in Anderson, Senate Bill 1 amounts to

unforeseeable backtracking by the State. This change in the

fundamental trade-off of job security for money is not compa-

rable to shifting pricing arrangements for natural gas mar-

kets. Nor are attracting qualified teachers and improving

public education merely temporary goals that Indiana no

longer pursues. Retroactive application of the layoff provi-

sions of Senate Bill 1 to already-tenured teachers is not a fore-

seeable change that restricts “a party to those gains reasona-

bly to be expected from the contract.” Simmons, 379 U.S. at

515.

18 No. 16-4168

Indiana itself created the binding obligation on which ten-

ured teachers have relied for decades—and from which the

State itself has benefitted. This is not a case where private par-

ties “whose rights . . . are subject to state restriction” attempt

to “remove” themselves “from the power of the State by mak-

ing a contract about them.” Blaisdell, 290 U.S. at 437–38. Ra-

ther, Indiana established the teachers’ contractual rights by

statute. When a State enters a binding commitment, the other

party’s reliance on that commitment is even more justified.

Energy Reserves, 459 U.S. at 412–13, 412 n.14. At any time after

Anderson, Indiana could have amended its teacher tenure law

prospectively, changing it from contractual to regulatory. In-

diana declined to do so. This retroactive change to tenure’s

job protections was not foreseeable. Applying the layoff pro-

visions of Senate Bill 1 substantially impaired Elliott’s tenure

contract rights by disrupting his reasonable contractual ex-

pectations.

B. Reasonable and Necessary to Serve Important Public Pur-

pose?

Still, not even all substantial impairments of contracts are

unconstitutional. If the impairment is both reasonable and

necessary for an important public purpose, then the law does

not violate the Contract Clause. United States Trust, 431 U.S. at

25. Analyzing Senate Bill 1 within this framework, we agree

with the district court that the amendment, though enacted

for a legitimate and important public purpose, is unconstitu-

tional as applied to an already-tenured teacher because it was

not necessary or reasonable.

As a preliminary matter, the parties disagree about the ex-

tent of any deference we might owe the state legislature’s pol-

icy decision to restrict tenure rights. Courts owe at least some

No. 16-4168 19

deference to legislative determinations of reasonableness and

necessity. United States Trust, 431 U.S. at 22–23; East New York

Savings Bank v. Hahn, 326 U.S. 230, 234 (1945). The degree of

deference differs depending on the severity of the impairment

and on the State’s self-interest. Allied Structural Steel, 438 U.S.

at 245 (“The severity of the impairment measures the height

of the hurdle the state legislation must clear.”); United States

Trust, 431 U.S. at 25–26 (“[C]omplete deference to a legislative

assessment of reasonableness and necessity is not appropriate

because the State’s self-interest is at stake.”).

The State argues that heightened scrutiny under United

States Trust applies only when a State itself enters into a finan-

cial obligation and not when the State exercises its police

power. But that is not the only context in which a State can

have a self-interest. “In almost every case, the Court has held

a governmental unit to its contractual obligations when it en-

ters financial or other markets.” Energy Reserves, 459 U.S. at 412

n.14 (emphasis added). Also, self-interest is not the only justi-

fication for a more searching review. When a State makes an

express commitment to private businesses or individuals, re-

liance may be highly justified. Id., citing Note, A Process-Ori-

ented Approach to the Contract Clause, 89 Yale L. J. 1623, 1647–

48 (1980). The State therefore must have a substantial reason

for breaking its own promise. Id.

We do not owe complete deference to the state legislature

here. The impairment is substantial, the contract is an express

commitment between the State and the teachers, and the

State’s self-interest is at stake. Under the Indiana Constitu-

tion, public education is ultimately the State’s responsibility,

even if it delegates execution to local school districts. See Ind.

Const. art. 8, § 1. The State is thus not acting solely as a market

20 No. 16-4168

participant here, for teacher tenure involves much more than

impairment of “an isolated private contract.” See East New

York Savings Bank, 326 U.S. at 232 (deferring to legislative de-

cision that impaired private financial contract following mar-

ket collapse). The tenure contract has been a public promise,

and the job security provisions are at the core of the economic

bargain between the State and the teachers of local school dis-

tricts. We need not scrutinize the legislature’s decision in

great detail to find it lacking, nor should we make the kind of

“utilitarian comparison between public benefit and private

loss” the Supreme Court has warned against. United States

Trust, 431 U.S. at 29. Complete deference is unwarranted, and

review of the impairment is appropriate.

The Supreme Court refined modern Contract Clause juris-

prudence in a series of challenges to state laws during the

“unprecedented emergencies” of the Great Depression. Allied

Structural Steel, 438 U.S. at 242. Thus in Home Building & Loan

Ass’n v. Blaisdell, 290 U.S. 398 (1934), the Court upheld a Min-

nesota law that temporarily suspended mortgage foreclo-

sures. The Court explained that an “emergency existed” that

“furnished a proper occasion for the exercise of the reserved

power of the State to protect the vital interests of the commu-

nity.” Id. at 444. It compared the economic crisis to a “fire,

flood, or earthquake.” Id. at 439. An emergency is not a re-

quirement for a State to impair contracts but remains relevant

to whether an impairment is appropriate. United States Trust,

431 U.S. at 22 n.19. With this context in mind, we assess

whether the State’s decision to impair contracts of already-

tenured teachers was reasonable and necessary.

Improving teacher quality and public-education outcomes

are both important public interests of the highest order. But

No. 16-4168 21

even important goals and good intentions do not justify this

substantial impairment of the tenure contract for already-ten-

ured teachers. See United States Trust, 431 U.S. at 21 (“the ex-

istence of an important public interest is not always sufficient

to overcome [the Contract Clause’s] limitation”). When a

State impairs its own contracts, the impairment must be

“clearly necessary” or “essential,” not merely convenient or

expedient. Simmons, 379 U.S. at 516 (upholding law that im-

paired a contract between Texas and purchasers of land when

“clearly necessary” to achieve an important public goal);

United States Trust, 431 U.S. at 29–30 (invalidating law that im-

paired contract between States and bondholders when the im-

pairment was not “essential”). A substantial impairment is

not necessary if the State could achieve the goal through “a

less drastic modification” or “without modifying” the con-

tract “at all.” Id.

Indiana has not shown it needs to impose this retroactive

impairment of its earlier promises of job security to improve

teacher quality. Senate Bill 1 does not change the State’s

power to fire ineffective teachers. School districts have had

that power before and after 1927 to the present day. See Ind.

Code § 26-6967.2 (1927); Anderson, 303 U.S. at 108. Instead, the

impairing legislation requires schools to consider small dif-

ferences in performance among teachers who are not ineffec-

tive. Here, the Madison school district needed to lay off a

handful of teachers to save money. Shortly after deciding to

renew Elliott’s contract (and shortly after he was elected pres-

ident of the local teachers union), the school district chose him

for layoff. He had never been found ineffective. If he had

been, the school district could have fired him without relying

on Senate Bill 1. Ten years ago, Elliott was found to need im-

22 No. 16-4168

provement in one skill-set, and he apparently made that im-

provement. That stale problem is the proffered rationale for

laying off him instead of a non-tenured teacher. Distinguish-

ing between qualified and effective teachers on such a meager

basis is not necessary to achieve Indiana’s goals, at least as

applied to teachers who earned tenure before Senate Bill 1

took effect.

The Contract Clause does not saddle the State forever with

a teacher-tenure system that its policymakers have come to

think is bad for public education. The Constitution does not

prevent the State from changing the promises it makes on a

prospective basis to new teachers. Also, if the State were to

conclude that retroactive changes to tenure are necessary, the

Contract Clause would give the State the option (much like

the Takings Clause) of paying the individuals who would oth-

erwise lose out from the change. (After all, a party to a con-

tract is ordinarily free to breach the contract as long as it is

willing to pay damages to the other party.) The State can

make the changes it wants, but it cannot foist the costs onto

private parties, other than through general taxes. Having re-

stricted tenure for new teachers, the State and its school dis-

tricts were and are free to buy out the tenure rights of more

senior ones.

Finally, the retroactive impairment is not reasonable. Con-

tractual impairments can be reasonable if either (1) the statute

“had effects that were unforeseen and unintended” when

originally adopted, or (2) “subsequent changes” in circum-

stances “caused the covenant to have a substantially different

impact” than anticipated. United States Trust, 431 U.S. at 31–

32. In trying to meet this standard, the State emphasizes that

No. 16-4168 23

public education is important and that teacher quality im-

proves student achievement. We agree on the first point and

have no reason to disagree on the second, but these points

were surely as true in 1927, 1957, and 1987 as they are now. In

fact, creating “a competent cadre of teachers” was the precise

goal when Indiana established teacher tenure. Stewart v. Fort

Wayne Community Schools, 564 N.E.2d 274, 278 (Ind. 1990). We

see no changed circumstances that impose “unforeseen ad-

vantages or burdens” on the parties. Simmons, 379 U.S. at 515.

The judgment of the district court is AFFIRMED.