Petition for Writ of Certiorari — Shaler Area Education Ass'n v. Emory

03 ~

No. 03-__ oe > ae

TIT 1 row

IN THE

Supreme Court of the Anited States

SHALER AREA EDUCATION ASSOCIATION,

Petitioner,

V.

F. NAYLOR EMORY, DENNIS A. ERB,

ROBERT K. GILBERT, JAMES W. LOSSELL,

BARBARA J. MCALLEY, and WESLEY S. SEMPLE,

Respondents.

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Third Circuit

PETITION FOR WRIT OF CERTIORARI

MARK P. WIDOFF ROBERT H. CHANIN

400 North Third Street JOHN M. WEST *

P.O. Box 1724 LAURENCE GOLD

Harrisburg, PA 17105 BREDHOFF & KAISER, P.L.L.C.

(717) 255-7046 805 Fifteenth Street, N.W.

Suite 1000

Washington, DC 20005

* Counsel of Record (202) 842-2600

Counsel for Petitioner

August |, 2003

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 -— WASHINGTON, D.C. 20001

® <P 00

QUESTIONS PRESENTED

1. Whether, as the Third Circuit held in conflict with the

Ninth Circuit, this Court’s decision in Chicago Teachers

Union v. Hudson invariably requires a small local union, as a

precondition for collecting a statutorily authorized “fair-

share” fee from nonmembers whom it represents in collective

bargaining, to submit audited financial statements—-regard-

less of the local’s size and the complexity of its financial

transactions, and even if the cost of conducting such an audit

would far exceed the amount of fair-share fees at stake.

2. Whether, if audited financial statements are not invari-

ably required, petitioner fulfilled its obligation under Hudson

to give its fair-share feepayers “sufficient information to

gauge the propriety of the union’s fee” by providing a

statement of the prior-year expenditures on which its fee

calculation was based, broken down into chargeable and

nonchargeable categories, along with the opportunity to

inspect the union’s ledger of itemized expenditures from

which the categorical breakdown was derived.

(i)

il

PARTIES

In addition to petitioner Shaler Area Education Associa-

tion, the defendants/appellants/cross-appellees in the court

below included the Pennsylvania State Education Association

and the National Education Association. In addition to the

respondents listed in the caption, Marsha Otto was a

plaintiff/appellee/cross-appellant in the court below.

TABLE OF CONTENTS

APR eee a FIND PREIS BUD so secccesssesennssssessevensavereses Sates

tari ics ah bach abelsshsia vaenbsncaneseneshasasennunervansansoass

ET sais ncicaiveicinsdnses saan tiaiisenbecevenconnirsasneenns

CONSTITUTIONAL PROVISION INVOLVED..........

ee ET GPE COUR Cece scnsncssescncvessssessesovesoessvese

REASONS FOR GRANTING THE WRIT...................

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APPENDIX A

Opinion of the United States Court of Appeals for the

pe a.)

APPENDIX B

Order respecting rehearing of the United States Court

of Appeals for the Third Circuit (May 8, 2003).........

APPENDIX C

Opinion (withdrawn) of the United States Court of

Appeals for the Third Circuit (April 3, 2003), with

RESUS (Att tl BY ZF S).....00...00scecessessesrcsccseesnseseees

APPENDIX D

Opinion of the United States District Court for the

Middle District of Pennsylvania (July 3, 2000).........

APPENDIX E

Report and Recommendation of the United States

Magistrate Judge (January 28, 1999) 0... eens

(111)

Page

26a

29a

55a

iv

TABLE OF AUTHORITIES

CASES Page

Abood v. Detroit Bd. of Educ., 431 U.S. 209

EET 10 icuccoumsinidaniiacaeiataenaemmaddiaiiitaedian 9, 20

Bromley v. Michigan Educ. Ass’n, 82 F.3d 686

SEG aie Se vcinecndussinitenisnidenetendetoteeeaiaiiin 19

Browne v. Wisconsin Employment Relations

Comnti'n, 485 N.W.2d 376 (Wis. 1992)............. 6, 13

Chicago Teachers Union v. Hudson, 475 U.S.

FE Ce encistsiensniahigenieniensemasnmnaiiniiaie passim

Dashiell v. Montgomery County, 925 F.2d 750

a Se i ccctiiencticcscstsiininiannvtniniasiciieiaadiaiatabiands 19

Gilpin v. AFSCME, 875 F.2d 1310 (7th Cir.

FIND nesissileapiitiancticcnd Mnbidanoniaaabanensenennantsiun 17,19

Harik v. California Teachers Ass’n, 326 F.3d

1042 (9th Cir. 2003), petition for cert. filed

sub nom. Sheffield v. Aceves (No. 03-89)

CGOCIOOG FURY BG, BI sceisseseievseeserenccecsvesericsens passim

Hohe v. Casey, 956 F.2d 399 (3d Cir. 1992) ......... 14

International Ass'n of Machinists v. NLRB, 133

Fee ee 1 SEE oitlctratineenteeieneins 6, 14

Lehnert v. Ferris Faculty Ass’n, 500 U.S. 507

i ee Disncovsivesiatsapaghiacenanecsamancaicenodmaiiasimuaiiaaieh 3,9

Lowary v. Lexington Local Bd. of Educ., 903

Fae Oe Ce GE CE ceersininsdecincinnineintaictine i4

Mathews v. Eldridge, 424 U.S. 319 (1976)............ 18

Prescott v. County of El Dorado, 177 F.3d 1102

(9th Cir. 1999), vacated, 528 U.S. 1111,

reinstated in pertinent part, 204 F.3d 984 (9th

CE Fe iiinicsineiceinnentennnatie onekanh 14

Thomas v. NLRB, 212 F.3d 651 (D.C. Cir. 2000).. 6, 14

Wareham Educ. Ass’n v. Labor Relations

Comm'n, 713 N.E.2d 363 (Mass. 1999)............ passim

Wareham Educ. Ass’n, 24 Mass. Labor Cases 23

(Mass. Labor Rel. Comm’n 1997) 0.0... eee 12

Vv

TABLE OF AUTHORITIES—Continued

Page

Wiutley County Teachers Ass'n v. Bauer, 718

N.E.2d 1181 (Ind. Ct. App. 1999)... ceeeeeeees 6, 13

STATUTES

2B USC. § 12SEC) ocececevecesserersocsresconsnevsrssseonencesens 2

2B UGC. & USF cocccerscieseceiersevverioverensssnenesneninteseotes 4

2B U.S.C. § 1543...cevecveressssceesonssoseevnnessevesonssasesscenss 4

2 UBC. & UGGS .nreccreessvescsonrveescorovsessvccesnesessnesonces 4

10 Pa. Stat. Amer. 8 16Z.SCE) .nscesssccssecssvrcccersssessesenee 18

15 Pa. Cons. Stat. § TS3G(O) .......servessesseroreveesssvorers 18

20 Pa. Cons. Stat. § SSST ...vcerecccvesersssvesescersnseonnsoves 18

66 Pa. Cons. Stat. § $16(8)........cssccosssersccorccceseesesees 18

68 Pa. Cons. Stat. § 332009) ............cccrssresreeereseees 18

T1 Pa. Stat. Ann. § S75 ....cccccsossorrssscosvsesssesecessnneees 2

71 Pa. Stat. Ann. § S75(a)...........c.sccccccccrvcererevessesees 3

MISCELLANEOUS

Financial Accounting Standards Board, State-

ments of Financial Accounting Concepts

(DOE) ociecssanesserinsonrvarennnstresipennnnenenennnimmints 18

Audits of States, Local Governments, and Non-

Profit Organizations, 62 Fed. Reg. 35278

(June 30, 1997)....00-ccrvccsveccosscsopenssnnvonssoesessnnenrees 18

aes re ~* cand SE TRIO CPT NL mr ae = . . . . - rene eee a ac A a

IN THE

Supreme Court of the United States

No. 03-___

SHALER AREA EDUCATION ASSOCIATION,

Petitioner,

¥,.

F. NAYLOR EMORY, DENNIS A. ERB,

ROBERT K. GILBERT, JAMES W. LOSSELL,

BARBARA J. MCALLEY, and WESLEY S. SEMPLE,

Respondents.

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Third Circuit

PETITION FOR WRIT OF CERTIORARI

Petitioner Shaler Area Education Association respectfully

requests that a writ of certiorari issue to review the judgment

of the United States Court of Appeals for the Third Circuit

entered on May 8, 2003, in Otto v. Pennsylania State

Education Ass’n, 330 F.3d 125 (3d Cir. 2003).

OPINIONS BELOW

The amended opinion of the United States Court of

Appeals for the Third Circuit is reported at 330 F.3d 125, and

is reproduced in the Appendix to this Petition (“App.”) at la.

The order of the Third Circuit denying rehearing en banc and

granting panel rehearing is reported at 328 F.3d 715, and is

reproduced at App. 26a. The initial opinion of the Third

2

Circuit, subsequently withdrawn, is reproduced at App. 29a.

The opinion of the United States District Court for the Middle

District of Pennsylvania is reported at 107 F. Supp. 2d 615,

and is reproduced at App. SSa. The report and

recommendation of the magistrate judge is reported at 161

L.R.R.M. (BNA) 2036, and is reproduced at App. 76a.

JURISDICTION

The judgment of the United States Court of Appeals for the

Third Circuit was initially entered on April 3, 2003. A timely

petition for rehearing was granted, the judgment and opinion

of April 3 withdrawn, and an amended opinion issued, on

May 8, 2003. The jurisdiction of this Court is invoked

pursuant to 28 U.S.C. § 1254(1).

CONSTITUTIONAL PROVISION INVOLVED

The First Amendment to the United States Constitution

provides in pertinent part that “Congress shall make no law

... abridging the freedom of speech... .”

STATEMENT OF THE CASE

Petitioner Shaler Area Education Association (“SAEA”) is

a typical small public-sector :ocal union. SAEA has 344

members and annual revenues of $22,000 derived entirely

from dues and fees. The union has no employees but is

governed and administered entirely by volunteer member-

officers—full-time teachers employed in the bargaining

unit—who are elected by their fellow members.

SAEA acts as the exclusive bargaining representative for

355 educators employed by the Shaler Area School District.

As authorized by the Pennsylvania Public Employe Fair

Share Fee Law, 71 Pa. Stat. Ann. § 575, the collective

bargaining agreement between SAEA and the school district

contains a provision pursuant to which bargaining-unit

3

educators who opt not to join the union are required to pay a

fair-share fee (also called an “agency fee”) to offset their pro

rata share of the union’s costs of representation.

In Chicago Teachers Union v. Hudson, 475 U.S. 292

(1986), this Court ruled that unions entitled to a fair-share fee

must, as a first step in securing payment, provide the

nonmember feepayers with “an adequate explanation of the

basis for the fee.” /d. at 310. SAEA and its state and national

affiliates, the Pennsylvania State Education Association

(“PSEA”) and the National Education Association (“NEA”),

annually send to each feepayer a “Notice to Fair Share

Feepayers”—commonly referred to as the “Hudson notice.”

This notice sets out the amount of the fair-share fees assessed

by SAEA, PSEA, and NEA, explains how each of the unions

calculated that amount on the basis of its prior-year

expenditures, and informs the feepayer of the procedures

through which she can challenge the amount of the fee.

The Hudson notice contains PSEA’s and NEA’s audited

statements of their chargeable and nonchargeable expen-

ditures for the previous school year. The notice also contains

(i) SAEA’s unaudited statement of its prior-year expendi-

tures, broken down into eleven categories of chargeable and

six categories of nonchargeable expenditures; (ii) SAEA’s

' This Court has held that the First Amendment prohibits unions from

charging fair-share feepayers, over their objection, for the portion of union

dues that goes for activities not germane to the union’s collective

bargaining function. See generally Lehnert v. Ferris Faculty Ass'n, 500

U.S. 507 (1991). SAEA, like other unions, therefore calculates its fair-

share fee by determining which of its activities are chargeable and which

are nonchargeable to objecting feepayers, and calculating the percentage

of its prior-year expenditures that went for the former. That percentage,

applied to the union’s regular membership dues, yields the fair-share fee

constitutionally chargeable to objecting nonmembers. (By statute, Penn-

sylvania limits the fair-share fee for all public-sector feepayers in a way

that is roughly equivalent to the constitutional limitation for objectors.

See 71 Pa. Stat. Ann. § 575(a).)

4

budget for the current year; and (iii) an invitation to SAEA

feepayers to inspect SAEA’s ledger of prior-year expendi-

tures on which its fee calculation is based.

The plaintiffs-respondents were, during the 1994-95 and

1995-96 school years, SAEA-represented bargaining-unit

educators but not members of the union. They brought this

litigation as a class action under 42 U.S.C. § 1983

challenging the fair-share fees assessed by SAEA, PSEA, and

NEA. In their complaint the plaintiffs alleged inter alia that

SAEA’s fair-share fee was unconstitutionally assessed be-

cause its Hudson notice did not contain an audited statement _

of SAEA’s prior-year expenditures on which the fee

calculation was based. The district court’s jurisdiction was

predicated on 28 U.S.C. §§ 1331 and 1343.

After the district court denied class certification, the parties

agreed to a partial settlement that resolved all claims for

damages, as well as all claims for declaratory and injunctive

relief except with respect to three discrete legal questions,

including the one at issue here. The parties also agreed to a

stipulation of facts as the basis for litigating the three re-

maining issues on cross-motions for summary judgment. On

July 3, 2000, Senior Judge Muir, adopting the recommen-

dation of the magistrate judge, see App. 76a-90a, granted

summary judgment in favor of plaintiffs on the issue

presented here, holding “that the constitution requires Shaler

Area Education Association to provide nonmembers a

financial statement of its expenses that has been audited.”

App. 66a.

A panel of the Third Circuit affirmed this portion of the

district court’s judgment. App. 35a-42a. The court held “that

every union collecting fair-share fees from non-members

| must subject its disclosed financiai information to inde-

pendent auditor verification,” App. 38a, through “audits of

their financial statements.” App. 39a.

eee —

5

SAEA petitioned for rehearing, bringing to the Third

Circuit’s attention the intervening decision in Harik v.

California Teachers Ass'n, 326 F.3d 1042 (9th Cir. 2003),

petition for cert. filed sub nom. Sheffield v. Aceves (No. 03-

89) (docketed July 16, 2003), in which the Ninth Circuit held

that a small local union—one much like SAEA—was not

required by Hudson to make its disclosure through audited

financial statements to the exclusion of other alternatives.

Over the dissenting votes of Chief Judge Becker and Judge

Nygaard, the full Third Circuit denied rehearing en banc.

The panel, without changing the result, granted rehearing,

vacated its previous opinion, and issued an amended opinion.

App. 26a-28a.

In its revised opinion, the Third Circuit analyzed and stated

its disagreement with the Harik decision, App. 8a-1 1a,

explaining that while “something less rigorous for small local

unions than independent auditor verification” might well be

appropriate were it “writing on a clean slate,” App. Ila,

consideration of any such alternative was foreclosed by this

Court’s decision in Hudson. Id.

REASONS FOR GRANTING THE WRIT

In Chicago Teachers Union v. Hudson, 475 U.S. 292, 306

(1986), this Court held that a union that assesses members of

a represented bargaining unit a fair-share fee must, in orde™ to

enable the feepayers to make an informed determination on

whether to challenge the amount of the fee, provide them

with “sufficient information to gauge the propriety of the

union’s fee.”

In decisions only weeks apart, the Ninth Circuit—in Harik

v. California Teachers Ass'n, 326 F.3d 1042 (9th Cir. 2003),

petition for cert. filed sub nom. Sheffield v. Aceves (No. 03-

89) (docketed July 16, 2003)—and the third Circuit, in the

instant case, came to diametrically opposed answers to the

6

following question: Whether small local unions like SAEA—

a local teachers’ union with some 350 members and $22,000

in annual income—can only meet the Hudson disclosure

requirement by providing feepayers with fully audited

financial statements, and not in any other manner.

In Harik, the Ninth Circuit read Hudson to permit a small

local union to “provide its feepayers with either the full

financial material necessary to verify, or an independently

sanctioned verification of, the local union’s chargeable and

non-chargeable expenditures,’ explaining that “providing

financial reports along with full and fair access to bills, check

stubs, canceled checks, account balances, and _ related

materials may be more cost-efficient than an external

review.” 326 F.3d at 1049 (emphasis added). :

In the instant case the Third Circuit held, to the contrary,

that Hudson mandates that “local unions, regardless of their

size, are required to obtain audits of their financial

statements.” App. 13a.

While the conflict between these Third and Ninth Circuit

decisions is the most obvious manifestation of the lower

courts’ confusion over what Hudson requires, that is not the

full extent of the division over this question. The two state

appellate courts that have addressed the exact question

presented here are similarly divided. See Wareham Educ.

Ass’n v. Labor Relations Comm’n, 713 N.E.2d 363 (Mass.

1999); Whitley County Teachers Ass’n v. Bauer, 718 N.E.2d

1181, 1191-92 (Ind. Ct. App. 1999) (discussed infra pp. 12-

13). And, in addressing a closely analogous question two

circuits and one state appellate court have rejected the Third

Circuit’s reading of the Hudson disclosure requirement. See

Browne v. Wisconsin Employment Relations Comm'n, 485

N.W.2d 376, 393-94 (Wis. 1992); Thomas v. NLRB, 213 F.3d

651 (D.C. Cir. 2000); International Ass’n of Machinists v.

NLRB, 133 F.3d 1012, 1016-18 (7th Cir. 1998) (discussed

infra pp. 13-15).

ee ee a ee ee ee eee Pe ee a een NUT

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7

This is a conflict that only this Court can resolve and that

urgently calls for this Court’s attention.

First, the conflict among the lower courts has not been

generated by differing views on whether audited financial

statements are necessary to provide feepayers with proper

disclosure or are otherwise required by the legal principles

governing the agency fee system outlined in Hudson.

The conflict is, rather, the product of the lower courts’

disagreement over how to read Hudson—specifically whether

the Hudson Court’s discussion of the disclosure requirement,

475 US. at 306-07 & n.18, is properly understood as an

across-the-board mandate of audited financial statements in

every circumstance.

Only this Court can state with authority what its Hudson

opinion means in this regard. And, only this Court is entirely

free to do so by focusing on the merits question of what kind

of disclosure properly effectuates Hudson’s purpose of

“devis[ing] a way of preventing compulsory subsidization of

ideological activity by employees who object thereto without

restricting the Union’s ability to require every employee to

contribute to the cost of collective-bargaining activities.” /d.

at 302.

Second, the question raised by this petition is one that has

the most direct and serious impact on thousands of local

unions.

The Third Circuit’s decision threatens the ability of small

local unions in Pennsylvania, New Jersey, and Delaware to

collect any fair-share fee at all. As a result of the injunction

entered by the trial court—which prohibits SAEA from

collecting fair-share fees from plaintiffs without providing

them with an independent auditor’s verification of SAEA’s

calculation of those fees-—-SAEA has been forced to

suspended collection of its fair-share fees.

8

The same is true of nearly all of the other local unions—the

vast majority of which have fewer than 400 members—

affiliated with the Pennsylvania State Education Association

(which advised its affiliated locals to comply with the in-

junction’s terms). Of PSEA’s 603 locals that have bargained

fair-share provisions, only 16 were able to obtain an audit and

to collect their fair-share fees during the 2002-03 school year.

The hundreds of small local affiliates of other unions

within the Third Circuit’s jurisdiction will also be subject

to the same constraint, if the decision here is not reviewed

and reversed.

Beyond the jurisdictions covered by the Third Circuit’s

holding, small local unions in other jurisdictions will suffer

from the legal uncertainty as to Hudson’s requirements

created by the conflicting lower court decisions. The

National Education Association alone has over 7,000 affil-

iated local unions of fewer than 400 members in the 19 states

that have public-sector agency fee statutes. And NEA, of

course, charters only a fraction of the local unions in the

country entitled to negotiate fair-share provisions.

All of these local unions will be faced with a stark choice if

this Court declines to clarify its Hudson opinion: the local

can either acquiesce in the Third Circuit’s holding and cease

its collection of agency fees where the audit costs outrun the

collectible fees; or the local can continue to proceed by

making other forms of verifiable disclosure not involving an

audit, at the risk of highly expensive litigation.

Given the lower courts’ division on how to read the

Hudson disclosure requirement, given the importance of that

requirement in the effectuation of the overall agency fee

system, and given the serious effect of the conflict on many

thousands of local unions, the Court should grant review

—

9

to provide an authoritative answer to the question that

has confounded the lower courts and that is presented by

this petition.

I.

The constitutionality of legislation allowing a public-sector

union to collect a fair-share fee from nonmember employees

whom the union represents in collective bargaining is well

established—as is the nonmember’s First Amendment right to

object to paying for political and other expenditures not

germane to the union’s collective bargaining function. Abood

v. Detroit Bd. of Educ., 431 U.S. 209 (1977); Lehnert v.

Ferris Faculty Ass’n, 500 U.S. 507 (1991).

In Hudson, supra, this Court established certain pro-

phylactic requirements intended to ensure that collection of

the fair-share fee does not impair the nonmember’s First

Amendment right to refuse to pay for “nonchargeable” union

expenditures. In particular, Hudson required that nonmem-

bers “be given sufficient information to gauge the propriety

of the union’s fee,” 475 U.S. at 306, in order to permit the

nonmember to make an informed decision about whether to

accept the union’s calculation of its fair-share fee or to

exercise her right under Hudson to challenge the fee before an

independent decisionmaker.

In a footnote elaborating on this requirement the Court

observed that the petitioner union there—a 27,000-member

union with annual revenues exceeding $4.1 million—was not

required to provide “an exhaustive and detailed list of all its

expenditures,” but that “adequate disclosure surely would

include the major categories of expenses, as well as

verification by an independent auditor.” /d. at 307 n.18.

The question presented by this petition is whether Hud-

son’s requirement that unions disclose “sufficient information

to gauge the propriety of the union’s fee” requires a small

10

local union—like the %50-member SAEA with annual

revenues of some $22,600 -to provide its Hudson disclosure

through audited financial siuiements.

Rather than obtaining an auditor’s verification of its

financial statements—at a cost of over $1,000, which would

be more than twice the total of $495 due from its eleven

nonmember feepayers, see App. 80a-8la—SAEA has

attempted to fulfill its disclosure obligation under Hudson in

two ways.

First, SAEA prepares from its ledger of itemized expen-

ditures an unaudited breakdown of its actual prior-year

expenditures in eleven categories of chargeable and six

categories of nonchargeable activities; which it provides to its

feepayers as part of its annual Hudson notice.”

Second, SAEA supplements this statement of its major

categories of chargeable and nonchargeable expenditures by

offering its feepayers the opportunity to inspect its ledger of

itemized expenditures from which the categorical breakdown

is derived and on which SAEA’s fee calculation is based.

SAEA’s contention is that, in the context of a small local

union whose financial records are neither complex nor

extensive, such disclosure is well tailored to providing fair-

share feepayers with “sufficient information to gauge the

propriety of the union’s fee,” 475 U.S. at 306, as Hudson

requires.

II.

A. As noted above, the Third Circuit in this case and the

Ninth Circuit in Harik reached diametrically opposed answers

to the question of what Hudson requires of small local unions

by way of disclosure.

* While this statement of expenditures was not heretofore attested to by

a local union officer under penalty of perjury, SAEA represented to the

court below i.s intent to provide such sworn verification in future years.

1]

Harik involved a teachers’ union whose size and circum-

stances were substantially identical in all relevant respects to

those of SAEA, and which attempted to satisfy its Cisclosure

obligation under Hudson in much the same way as does

SAEA—by providing feepayers with a sworn, but unaudited,

statement of the major categories of its chargeable and

nonchargeable expenditures, supplemented by an invitation to

inspect the union’s checkbook and cancelled checks. 326

F.3d at 1047."

The Ninth Circuit held that audited financial statements

were not required under these circumstances:

For the smallest affiliates, providing financial reports

along with full and fair access to bills, check stubs,

canceled checks, account balances, and related materials

may be more cost-efficient than an external review; we

need not dictate the particular procedure as long as it is

sufficiently reliable to ensure that a nonmember can

independently verify that the union spent its money

where it claimed that it did.

Id. at 1049.

The Ninth Circuit’s holding is squarely in conflict with the

Third Circuit’s holding in this case that, in order to comply

with Hudson’s disclosure requirement, “local unions, regard-

less of their size, are required to obtain audits of their

financial statements.” App. 13a.

These two recent court of appeals decisions, decided on

facts that cannot be distinguished in any meaningful way,

> While the Ninth Circuit’s opinion does not provide specific infor-

mation about Dinuba Teachers Association (“DTA”), the record in that

case reveals that during the relevant school year DTA had 231 members

and revenue of about $29,000, that it employed no professional staff, that

it collected just over $600 in agency fees from its seven nonmembers, and

that the cost of an audit would have been $2,800. Supplemental Excerpts

of Record 109, 134-36, 173, Case No. 01-15590 (9th Cir.).

———————————

12

thus present an irreconcilable conflict with respect to the

application of Hudson’s disclosure requirement to small

local unions.

B. Two state appellate courts, both applying federal law,

have also addressed the question whether small local unions

can meet Hudson’s requirements by providing feepayers with

complete, albeit unaudited, disclosure of the expenditures that

constitute the basis for the union’s fair-share fee. Like the

Ninth and Third Circuits, these state courts are equally

divided on the question.

In line with the Third Circuit, the Massachusetts Supreme

Judicial Court has answered the question in the negative,

holding flatly that a small local union “must accompany any

demand for agency fees with an independently audited

verification of its major expenses.” Wareham Educ. Ass'n v.

Labor Relations Comm’n, 713 N.E.2d 363, 368 (Mass. 1999).

Like the Third Circuit, the Massachusetts court concluded

that Hudson’s reference to verification by an independent

auditor controlled and that any other form of disclosure was

insufficient. /d. at 367-68.

The Massachusetts court reached that conclusion in a case

involving three local unions that represented bargaining units

ranging from 116 to 205 employees, with annual expenditures

of between $9,400 and $29,000. The one to seven non-

members in those bargaining units were charged agency fees

of no more than $45. /d. at 365. The unions provided their

feepayers with breakdowns of their major categories of

chargeable and onchargeable expenditures, sworn to under

penalty of perjury, and they offered the feepayers in addition

the opportunity either to obtain an itemized listing of all of

their local’s expenditures or to examine personally the

union’s expenditure records. See id. at 364-65; Wareham

Educ. Ass’n, 24 Mass. Labor Cases 23 (Mass. Labor Rel.

Comm’n 1997). The Massachusetts court rejected that form

of disclosure as inconsistent with Hudson, requiring the

13

unions instead, as a condition for continuing to collect agency

fees, to obtain audited statements of their expenditures—at a

projected cost for each local of between $2,200 and $4,100.

713 N.E.2d at 366.

The Indiana Court of Appeals reached the opposite

conclusion, holding—in a case involving-a small local union

with an annual budget of under $3,500—that audited finan-

cial statements were not required under the circumstances.

Whitley County Teachers Ass'n v. Bauer, 718 N.E.2d 1181,

1191-92 (Ind. Ct. App. 1999). The court explained that

Hudson’s reference to “verification by an independent

auditor” was “justified in that case ‘by that particular union’s

size and the amount of money involved.”” /d. at 1192.

C. The Third Circuit’s holding that that a small local union

can never satisfy its Hudson disclosure obligation in any way

other than through audited financial statements also conflicts

with multiple decisions of other courts that have upheld,

under Hudson, forms of local-union financial disclosure

that did not include an independent audit of the local’s

expenditures.

Two well-reasoned decisions have accepted the use of a

“local presumption,” under which the local unions do not

provide feepayers with any actual expenditure information—

audited or not—and instead rely on an empirically supported

presumption that the chargeable portion of their expenditures

is greater than the chargeable portion of the parent union’s

expenditures (as shown on the parent union’s audited

financial statements).

The Wisconsin Supreme Court has approved the use of an

empirically based local presumption in the public sector,

holding that Hudson does not require an audit of every local

union’s expenditures. Browne v. Wisconsin Employment

Relations Comm’n, 485 N.W.2d 376, 393-94 (Wis. 1992).

14

More recently, the D.C. Circuit upheld reliance on an

empirically supported local presumption in the private sector,

Thomas v. NLRB, 213 F.3d 651 (D.C. Cir. 2000), holding that

“petitioners|’] conten[tion] that the use of a local presumption

can never be squared with Hudson” “rests on a reading of

Hudson that this circuit has rejected.” Id. at 659-60."

The Seventh Circuit’s decision in /nternational Ass’n of

Machinists v. NLRB, 133 F.3d 1012, 1016-18 (7th Cir.

1998)—-which approved a system of financial disclosure

under which the local unions’ statements of expenditures

were “audited” by lay employees of the parent union—also

conflicts with the Third Circuit’s holding that nothing other

than an audit by an independent accountant can ever satisfy a

union’s disclosure requirement under Hudson.

While Thomas and Machinists were National Labor Rela-

tions Act cases, the courts focused their analysis on whether

the challenged disclosure was in conformity with the Hudson

requirements which—in both the D.C. Circuit and the Sev-

enth Circuit—govern NLRA cases by analogy. See Thomas,

213 F.3d at 658 (“Although Hudson involved constitutional

concerns, this court has applied the basic protections of

Hudson to the Beck-defined DFR cases involving private

sector employees.”); Machinists, 133 F.3d at 1017 (while

Hudson was a constitutional rather than a statutory case, “[i]t

is not obvious why this should make a difference’’).

Browne, Thomas, and Machinists thus all stand for the

proposition that Hudson does not invariably require small

* By contrast, reliance on an unsupported local presumption has gener-

ally been held insufficient to meet Hudson’s disclosure requirements. See

Hohe v. Casey, 956 F.2d 399, 410 (3d Cir. 1992); Prescott v. County of El

Dorado, 177 F.3d 1102, 1108 (9th Cir. 1999), vacated, 528 U.S. 1111,

reinstated in pertinent part, 204 F.3d 984 (9th Cir. 2000); see also Lowary

v. Lexington Local Bd. of Educ., 903 F.2d 422, 430-31 (6th Cir. 1990)

(striking down a local presumption that went beyond an evidentiary

assumption and purported to bind the independent arbitrator).

15

local unions to provide financial statements verified by an

independent auditor as the only possible way of making

adequate disclosure. They are, in short, irreconcilable with

the Third Circuit’s holding in this case, and that of the

Massachusetts court in Wareham, that a local union, regard-

less of its size and circumstances, can only satisfy Hudson’s

disclosure requirement through audited financial statements.

If.

What is particularly striking about the decision below—

and the Wareham decision in Massachusetts—is the absence

of any reasoned justification for an audit requirement that

threatens to render collection of any fair-share fee pro-

hibitively expensive for small locals like SAEA. In point of

fact, what divides the lower courts is not any debate about

what kind of financial disclosure requirement for small loca!s

serves the overall agency fee procedural system set cuit in

Hudson, but only disagreement about the extent to which the

courts are bound by this Court’s reference, in //udson’s

footnote 18, to “verification by an independent auditor.”

The Ninth Circuit in Harik accepted the proposition that

there could be more “cost-efficient” ways than an audit for

small local unions to provide feepayers with proper infor-

mation that would permit them to make an informed decision

about whether to challenge the fair-share fee. 326 F.3d at

1049. Acknowledging that view, the Third Circuit implied its

agreement: “Were we writing on a clean slate, we might well

require something less rigorous for small local unions than

independent auditor verification.” App. Ila. But the Third

Circuit believed its hands to be tied by Hudson:

But the slate is not clean. We are bound by the Supreme

Court’s decision in Hudson, and its directive of “veri-

fication by an independent auditor” means just that.

Hudson implied no intent to make the audit requirement

16

depend on the size of the reporting union. Absent a

counter directive by the Supreme Court, we likewise

make no exception.

Id.

It is very much to the point that the Third Circuit did not

offer any reason why providing audited financial statements

was the only way in which a small local union like SAEA—a

local with few members and limited expenditures—could

give feepayers “sufficient information to gauge the propriety

of the union’s fee.” Hudson, 475 U.S. at 306. The same is

true of the Wareham decision that reached the same result.

See 713 N.E.2d at 367-68. In both cases, the court’s only

justification for its holding was Hudson’s reference, 475 U.S.

at 307 n.18, to “verification by an independent auditor.”

Nor is any other rationale readily apparent. As we have

noted, the Chicago Teachers Union—the union party in Hud-

son—had some 27,000 members, annual revenues exceeding

$4.1 million, a substantial staff, a wide range of expenditures,

and, of necessity, complex financial books and records. It is

safe to assume that such an organization would routinely

obtain an annual audit of its expenditures, and it is equally

clear that a rank-and-file nonmember, even if given full

access to the union’s books, would be overwhelmed by the

task of verifying that the union’s statement of its “major

categories of expenses” accurately captured its expenditures

in each category. It was, therefore, unsurprising for the

Hudson Court to opine that—in the context of a union of this

size——“‘adequate disclosure surely would include the major

categories of expenses, as well as verification by an

independent auditor.” 475 U.S. at 307 n.18.

But that does not mean that nothing short of audited

financial statements can be adequate disclosure in the context

of a small organization with no employees, a $22,000 annual

budget, and a financial ledger recording its expenditures. As

the Ninth Circuit held in Harik, a small local union can

17

provide feepayers with sufficient information to gauge the

propriety of its fee either through audited financial statements

or by giving its feepayers “the full financial material

necessary to verify . . . the local union’s chargeable and non-

chargeable expenditures.” 326 F.3d at 1049. Thus, as the

Harik court put it, a small local’s disclosure obligation could

be met by “providing financial reports along with full and fair

access to bills, check stubs, canceled checks, account

balances, and related materials.” /d.

This form of financial disclosure is eminently well suited

to small local unions like SAEA, whose expenditures are

sufficiently few in number that an interested feepayer can, in

essence, be given the union’s checkbook and allowed to see

for herself what the union’s money went for. SAEA’s

statement of its major categories of expenditures is compiled

from materials that essentially speak for themselves, which

local-union feepayers can understand. The relative simplicity

and transparency of these financial records can afford

feepayers a reasonable measure of assurance that the union’s

funds went for the purposes described in the union’s

statement of its major categories of expenditures.

Indeed, it is hardly too much to suggest that the typical

feepayer, who may be unfamiliar with audited financial

statements, may well derive a better understanding of the

local union’s expenditures from this kind of financial

disclosure than from a formal auditor’s report. Cf. Gilpin v.

AFSCME, 875 F.2d 1310, 1316 (7th Cir. 1989) (suggesting

that an agency fee notice “as long and complicated as an

SEC prospectus” does not necessarily serve the interests of

feepayers).

The recognition that alternative forms of verification can

be appropriate in the case of small organizations is hardly a

novei one. It is, in fact, commonplace for governmental audit

requirements to be waived or relaxed for smaller entities,

where the cost of an audit is often disproportionate to what is

18

at stake.” It may be the case, as the Third Circuit observed,

999

that “an audit ‘make[s] assurance double sure,” App. 13a

(quoting Shakespeare), but to apply that principle blindly

without regard to the balance between the additional cost of

such a requirement and the additional value, if any, to be

gained from that requirement makes little sense. Cf Mathews

v. Eldridge, 424 U.S. 319, 335 (1976) (looking, in the due

process context, to “the probable value, if any, of additional

or substitute procedural safeguards”).

As the Financial Accounting Standards Board has ex-

plained in its Statements of Financial Accounting Concepts,

“[{t]here are usually alternative ways of handling an issue,”

and it is fully appropriate to consider whether “one of them

[is] less costly and only slightly less effective.” Financial

Accounting Standards Board, Statements of Financial

Accounting Concepts 83 (2002) (Statement of Financial

Accounting Concepts No. 2, 4143). Thus, “[iJn order to

justify requiring a particular disclosure, the perceived benefits

to be derived from that disclosure must exceed the perceived

costs associated with it.” /d. at 32.

* For example, federal regulations requiring audits of nonprofit recip-

ients of federal funds exempt from that requirement entities that expend

less than $300,000 a year in federal awards. Audits of States, Local

Governments, and Non-Profit Organizations, 62 Fed. Reg. 35278, 35291

(June 30, 1997). Similar examples culled from Pennsylvania law include

the following: 10 Pa. Stat. Ann. § 162.5(f) (exempting from audit require-

ment charitable organizations receiving contributions of less than

$50,000, and allowing “review” instead of audit for those with contribu-

tions of less than $125,000); 15 Pa. Cons. Stat. § 7536(b) (allowing audits

of agricultural cooperatives with sales of less than $100,000 to be

performed by non-CPA members of the association); 20 Pa. Cons. Stat.

§ 3531 (allowing distribution of decedents’ estates of less than $25,000

without formal proceedings including audit); 66 Pa. Cons. Stat. § 516(a)

(requiring audits of utilities, but only if plant value exceeds $10 million);

68 Pa. Cons. Stat. § 3320(9) (allowing declarant’s warranty rather than

audit of condominium associations of less than 12 units).

19

Consideration of the relative costs and benefits of alterna-

tive forms of financial disclosure in these circumstances is

particularly appropriate in view of the limited purpose of the

financial disclosure Hudson requires. Disclosure of the

union’s major categories of expenditures is not a matter of

proving the union’s entitlement to the fee it seeks. That step

comes later, when—if any feepayer challenges the fee—the

union is required to prove to an independent decisionmaker

its entitlement to the amount of the fee it has assessed. See

Hudson, 475 U.S. at 307-08. The purpose of the disclosure

requirement is simply to enable the feepayer to make an

informed decision about whether to accept the union’s

calculation of its fair-share fee or exercise her right to

challenge the fee before an independent decisionmaker. See

Wareham, 713 N.E.2d at 368; Dashiell v. Montgomery

County, 925 F.2d 750, 756 (4th Cir. 1991).

The feepayer deciding whether to take the step of chal-

lenging the fee is contemplating an act that—in contrast to

many other endeavors undertaken in reliance on audited

financial statements—is virtually cost-free and risk-free: if in

doubt, the feepayer need only file her challenge, which costs

nothing but a 37-cent stamp. As the Seventh Circuit has

noted, “mounting a challenge is for all practical intents and

purposes free.” Gilpin, 875 F.2d at 1316.° The suggestion

that feepayers of a small local union like SAEA can only be

given sufficient information for that purpose through audited

financial statements is inconsistent with the limited purpose

of the disclosure requirement.

° By filing a challenge, the feepayer becomes a party to the annual

Hudson arbitration of fair-share fee challenges. While the arbitrator’s

decision is binding on the union, it does not preclude the feepayer from

challenging the fair-share fee on a de novo basis in court. Hudson, 475

U.S. at 308 n.21; Bromley v. Michigan Educ. Ass'n, 82 F.3d 686, 691-95

(6th Cir. 1996). Thus, filing a challenge to the fair-share fee neither costs

the feepayer anything nor has any adverse effect on her litigation options.

20

It is also inconsistent with the emphasis in this Court’s

agency fee cases on striking a balance between the com-

peting interests involved. Abood, 431 U.S. at 237, Hudson,

475 U.S. at 302. Reading Hudson’s dicta as invariably

requiring audited financial statements even in the case of the

smallest local unions is not only unnecessary to protect the

interests of feepayers; it would impose heavy transaction

costs on small locals with limited resources.

The difficulty is readily apparent on the stipulated facts of

this case, where the cost to SAEA of obtaining an audit would

be more than twice the amount of the total fair-share fees

SAEA could collect from its 11 nonmembers. It should not

be surprising, therefore, that as a result of the district court’s

injunction, affirmed by the Third Circuit, SAEA and almost

all of its sister locals in Pennsylvania have been obliged to

forgo their statutory and contractual right to collect fair-share

fees from the nonmembers they represent—contrary to this

Court’s stated goal of protecting the interests of feepayers

“without restricting the Union’s ability to require every

employee to contribute to the cost of collective-bargaining

activities.” Hudson, 475-U.S. at 302.

A small local union like SAEA can, in short, meet

Hudson’s disclosure requirement in ways that are more “‘cost-

efficient than an external review.” Harik, 326 F.3d at 1049.

For such a union, requiring an audit by an independent

accountant serves only to drive up the union’s transaction

costs to the point at which collecting any fair-share fee

becomes prohibitively expensive. Courts that have nonethe-

less required such an audit—the Third Circuit in this case,

and the Massachusetts Supreme Judicial Court in Wareham—

have cited no reason for doing so other than their reading of

Hudson. It is important, therefore, that the Court revisit this

issue and clarify the disclosure requirement it articulated

in Hudson.

vee eee

21

IV.

As noted above, literally thousands of small local unions

are seriously impacted by the decision of the Court below

either because they are directly bound by the Third Circui ’s

decision, or because of the chilling effect that flows from the

legal uncertainty engendered by the conflicting decisions of

the Third and Ninth Circuits. It is urgent that this Court

resolve that legal uncertainty by granting review to clarify

Hudson’s disclosure requirement as applied to small local

unions like SAEA.

This case is a fully appropriate vehicle for that review. The

facts are undisputed, indeed stipulated; the legal issue is

squarely presented; no jurisdictional problem or extraneous

legal issue would prevent the Court from reaching this issue;

and counsel on both sides are highly experienced in the law

of agency fee and have litigated the issue presented here in

multiple cases. The issue has been fully ventilated in the

lower courts, and this Court should now decide it.

~ CONCLUSION

The Petition for Writ of Certiorari should be granted.

Respectfully submitted,

MARK P. WIDOFF ROBERT H. CHANIN

400 North Third Street JOHN M. WEST *

P.O. Box 1724 LAURENCE GOLD

Harrisburg, PA 17105 BREDHOFF & KAISER, P.L.L.C.

(717) 255-7046 805 Fifteenth Street, N.W.

Suite 1000 ;

. Washington, DC 20005

* Counsel of Record (202) 842-2600

Counsel for Petitioner

August 1, 2003

6 URIS ae oN