Rewriting the terms: the contract clause and special-interest legislation in RUI One Corp. v. City Of Berkeley.

• Author: Mitchell, Thomas E.

The City Council of Berkeley, California is well known for its energetic adherence to the left wing of American policy and politics. A ready example is its March 2004 determination that Congress should formally censure President Bush and Vice President Cheney; impeachment was the favored recommendation but was deemed impractical. (1) Such quixotic endeavors aside, the City Council has also engaged in an intermittent campaign against property and economic rights. In June 2004, for example, it passed a resolution in support of amendments to the United States and California Constitutions "to declare that corporations are not granted the protections or rights of persons." (2) And in July 2004, the Council amended the City's rent ordinance by adopting a measure that bars landlords from evicting tenants who illegally sublet their apartments. (3)

The subject of this comment is yet another manifestation of the Council's proletarian regulatory impulse. In September 2000, at the behest of a labor union, the Council enacted an amendment to the City's "living wage" ordinance applicable to a very narrow class of businesses operating on publicly leased real estate at the Berkeley Marina. This ordinance infringed important constitutional rights, and its validation by a Ninth Circuit panel majority in RUI One Corp. v. City of Berkeley (4) constitutes a troubling precedent likely to be used by states and municipalities nationwide to justify the singling out and burdening of individual business enterprises. The Contract Clause, despite several narrowing interpretations by the U.S. Supreme Court, ought to shield private citizens from precisely this sort of narrow, opportunistic legislation.

1. FACTUAL BACKGROUND

   Restaurants Unlimited, Inc. ("Restaurants Unlimited") is a Washington corporation and the owner of some thirty restaurants, (5) including the one at issue here, Skates on the Bay ("Skates"). (6) Since November of 1984, Skates has been operated on property at the Berkeley Marina, a facility consisting of fifty-two acres of water with nearby shopping, dining and recreational facilities. (7) The City of Berkeley holds the real estate adjacent to the marina is held in public trust under a 1913 grant from the State of California. (8) In 1967, the City leased the lot on which Skates now does business to the predecessor in interest of Restaurants Unlimited; in 1996, Restaurants Unlimited subleased the property to its subsidiary, RUI One Corporation. ("RUI"). (9) The lease requires RUI to "maintain and operate thereon a major first-class restaurant and cocktail lounge for the convenience and promotion of commerce, navigation and fishery in the Berkeley Marina and for no other purpose." (10) The lease runs for a term of fifty years--until the end of 2017--and requires an annual rental payment of the greater of $11,400 or three percent of Skates' gross receipts. (11) The last renegotiation of the lease took place in 1996 upon the sublease to RUI, at which time RUI agreed to, among other things, an increase in rent reflecting the market value of the public trust land. (12)

   The Berkeley City Council enacted its "living wage" ordinance ("LWO") on June 27, 2000. (13) "Living wage" ordinances such as Berkeley's require the payment of wages considerably higher than the federally imposed minimum; their aim is "to allow covered full-time wage earners to support a family residing in the locality at a subsistence level." (14) The Berkeley LWO requires the payment of a wage of $9.75 per hour if the employer also provides specified medical benefits, or $11.37 per hour without such benefits. (15) The ordinance applies only to "employers that received some form of financial benefit from the City," such as a municipal contract or a lease on public property. (16) It exempts any employer who enters into a collective bargaining agreement expressly providing for the applicable labor union's waiver of the "living wage" requirement. (17) Importantly here, the mandates of the LWO are put into effect by requiring that any municipal contract or lease "contain provisions requiring it to comply with the requirements of this chapter as they exist on the date when the employer entered its agreement with the City or when such agreement is amended." (18) In other words, the requirements of the LWO are enforced only against those parties who voluntarily assume such contractual obligations upon signing or renegotiating a contract or lease with the City. (19) Municipal contractors and lessees are aware ex ante of their obligation to pay a "living wage," and therefore they are able to bargain for rental payments and other terms accordingly. (20) The LWO, in sum, applies prospectively.

   The Berkeley City Council negated this practice on September 19, 2000 when it enacted an amendment to the LWO ("Marina Amendment") regarding employers operating on leased property in the Berkeley Marina. (21) The Marina Amendment makes the requirements of the LWO immediately applicable to "[e]ntities within the boundaries of the Marina Zone which employ six or more employees and generate $350,000 or more in annual gross receipts." (22) Employers subject to this amendment, unlike those subject to the LWO's general provisions, were given no opportunity to negotiate for offsetting reductions in rental payments. The City Council supported its enactment of the Marina Amendment with the following "findings":

   (1) [T]he public interest is served by requiring large Marina employers to pay their employees a living wage because operating a business in the public trust land of the Marina is a privilege, which should not be abused by contributing to the problems associated with inadequate compensation of workers; (2) the City expends considerable resources in maintaining and promoting the Marina, in turn affording Marina businesses significant financial benefits, a reasonable portion of which should be used to provide employees with appropriate wages and benefits; and (3) members of the public who visit the Marina have a limited choice of businesses to patronize in that area, and should not be deterred from visiting the Marina because they do not wish to patronize businesses that do not provide their employees a living wage. (23) The Marina Amendment was justified, then, merely by the employers' possession of a municipal lease on the public trust property; the City Council did not allege that the need for payment of a "living wage" was any greater at the Berkeley Marina than elsewhere in the city. (24)

   Because RUI leases public land at the Berkeley Marina, employs more than six people, generates more than $350,000 in annual gross receipts, and has no collective bargaining agreement in force, the Marina Amendment imposed the requirements of the LWO on RUI's preexisting lease with the City. Of utmost importance here is the Marina Amendment's narrowness; although the ordinance does not single out RUI by name, its provisions are so carefully crafted that they applied to RUI and possibly to no one else. (25)

   Concluding that the Marina Amendment's narrow and retroactive imposition constituted a violation of its federal constitutional rights, RUI filed suit against the City of Berkeley in the United States District Court for the Northern District of California on October 19, 2000, requesting declaratory and injunctive relief.

2. DISTRICT COURT DECISION

   Before the district court, RUI argued that the Marina Amendment violates the Contract Clause, (26) the Equal Protection Clause, (27) and the Due Process Clause. (28) The district court permitted the Hotel Employees & Restaurant Employees Union, Local 2850 ("Local 2850") to intervene on behalf of the City of Berkeley. RUI moved for summary judgment, upon which the district court, in an unpublished opinion, sua sponte granted summary judgment for the City. The court thus rejected each of RUI's claims. (29)

3. NINTH CIRCUIT COURT OF APPEALS DECISION

   1. Majority Opinion

      RUI's arguments fared no better on appeal. Judge Wardlaw, writing for a panel majority of the Ninth Circuit Court of Appeals, (30) rejected its arguments from the Contract Clause and the Equal Protection Clause (31) and thus affirmed the district court's grant of summary judgment for the City of Berkeley.

      The majority wholly rejected RUI's argument under the Contract Clause (32) and found no violation by the City of Berkeley's enacting the Marina Amendment. (33) Its analysis went no further than the first prong of the Contract Clause inquiry: the Marina Amendment "substantially impairs" no contractual relationship between the City and RUI. Quoting General Motors Corp. v. Romein, the court stated, "The first sub-inquiry is not whether any contractual relationship whatsoever exists between the parties, but whether there was a 'contractual agreement regarding the specific ... terms allegedly at issue.'" (34) RUI's claim failed, therefore, because "no specific provision of the lease agreement addresses payment to or employment benefits for RUI's employees." (35) The majority deemed irrelevant any indirect impact of the Marina Amendment on the several express lease terms cited by RUI. (36)

      The court further rejected RUI's argument that implied contractual terms were substantially impaired by the Marina Amendment. (37) It reasoned that no contractual terms--such as an agreement to maintain RUI's existing pay scale--could be implied in fact because the RUI lease contains an integration clause. (38) Moreover, even if there were a relevant contractual term preventing the City from "imposing an economic burden upon RUI during the period of the lease," the majority held that "such a term would be void as against public policy. For 'the legislature cannot bargain away the police power of a State.'" (39)

      RUI's Contract Clause argument gained no traction from the public nature of the Marina lease. (40) The majority held that the stricter scrutiny applicable to a government's impairment of its...