Otto v. PA State Ed Assoc

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
5-12-2003
Otto v. PA State Ed Assoc
Precedential or Non-Precedential: Precedential
Docket 01-3858
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PRECEDENTIAL
Filed May 8, 2003
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 01-3858
MARSHA OTTO; F. NAYLOR EMERY; DENNIS A. ERB;
ROBERT K. GILBERT; JAMES W. LOSSELL; BARBARA J.
MCALLEY; WESLEY S. SEMPLE, On behalf of themselves
and all other non-members similarly situated
v.
PENNSYLVANIA STATE EDUCATION ASSOCIATION-NEA;
NATIONAL EDUCATION ASSOCIATION; SHALER AREA
EDUCATION ASSOCIATION, On behalf of themselves and
all other local associations similarly situated
Appellants
No. 01-4110
MARSHA OTTO; F. NAYLOR EMERY; DENNIS A. ERB;
ROBERT K. GILBERT; JAMES W. LOSSELL; BARBARA J.
MCALLEY; WESLEY S. SEMPLE, On behalf of themselves
and all other non-members similarly situated
Appellants
v.
2
PENNSYLVANIA STATE EDUCATION ASSOCIATION-NEA;
SHALER AREA EDUCATION ASSOCIATION, On behalf of
themselves and all other local associations similarly
situated,
NATIONAL EDUCATION ASSOCIATION;
GROVE CITY AREA EDUCATION ASSOCIATION;
JANE CAMPBELL; BARBARA LEIBY
Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. Civil Action No. 96-cv-01233)
District Judge: Honorable Yvette Kane
Argued June 27, 2002
Before: AMBRO and STAPLETON, Circuit Judges,
and O’NEILL*, District Judge
(Filed: May 8, 2003)
Milton L. Chappell, Esquire (Argued)
W. James Young
National Right to Work Legal
Defense Foundation
8001 Braddock Road, Suite 600
Springfield, VA 22160
Attorneys for Appellants/
Cross-Appellees
John M. West, Esquire (Argued)
Laurence Gold
Bredhoff & Kaiser
805 Fifteenth Street, N.W.,
Suite 1000
Washington, D.C. 20005
* Honorable Thomas N. O’Neill, Jr., United States District Judge for the
Eastern District of Pennsylvania, sitting by designation.
3
Mark P. Widoff, Esquire
Pennsylvania State Education
Association
400 North Third Street
P.O. Box 1724
Harrisburg, PA 17105
Attorneys for Appellees/
Cross-Appellants
OPINION OF THE COURT
AMBRO, Circuit Judge:
We consider whether, under the First Amendment,
certain expenses incurred by unions may be charged to
non-members and whether a local union must obtain
independent auditor verification of its charges (and, if so,
what kind of verification we require).
The First Amendment affords public-sector employees the
freedom not to associate with a labor organization. See
Chicago Teachers Union, Local No. 1 v. Hudson, 475 U.S.
292, 301 (1986) (quoting Abood v. Detroit Bd. of Educ., 431
U.S. 209, 222 (1977)). There are limits to this constitutional
freedom, however, in light of organized labor’s important
role in advancing employment conditions. Abood, 431 U.S.
at 225-26. Thus, as a means of curing the so-called “free-
rider” problem posed by its representation of non-members,
a union may charge each non-member employee a fair-
share, or agency, fee equal to his or her per capita share of
the union’s expenses arising from its duties as a collective-
bargaining representative. See id. at 235-36. But a union
may not, consistent with the First Amendment, collect fair-
share dues to support ideological causes or other expenses
insufficiently related to collective bargaining. Id.To ensure that non-members are assessed only for fair-
share fees properly chargeable to them, the Supreme Court
has ruled that unions must adopt procedural safeguards
“carefully tailored to minimize the [First Amendment]
infringement.” Hudson, 475 U.S. at 303. First, the union
must provide a non-member with “sufficient information to
4
gauge the propriety of the union’s fee.” Id. at 306. This
explanation of the basis for the fee is often referred to as a
“Hudson notice.” Second, a non-member must have an
adequate opportunity to object to the fair-share fee
allocation. See id. at 307. The two safeguards are linked;
without the Hudson notice, a non-member would lack a
basis for deciding whether to object to a fair-share fee
calculation. Penrod v. NLRB, 203 F.3d 41, 46 (D.C. Cir.
2000).
When theory meets practice, questions abound. Do the
financial information requirements apply to small local
unions? How much verification of that information must
there be? When a union represents more than one
bargaining unit, can that union include, in the fair-share
fee assessed to non-members of one bargaining unit, costs
associated with another bargaining unit’s litigation? What if
those bargaining units are in different industries?
I. BACKGROUND AND PROCEDURAL HISTORY
Shaler Area Education Association (“SAEA”) is the
exclusive bargaining representative for education
professionals employed by the Shaler Area School District.
SAEA is the local affiliate of the Pennsylvania State
Education Association (“PSEA”) — which represents, inter
alia, both education and healthcare professionals in the
Commonwealth — and the National Education Association
(“NEA,” and collectively with SAEA and PSEA, the
“Unions”). During the 1994-1995 school year, the Shaler
Area School District employed 355 education professionals,
344 of whom were members of the SAEA (and, thereby, the
PSEA and NEA). Because all three Unions provide
collective-bargaining services to the plaintiffs’ bargaining
unit, the eleven non-members paid fair-share fees to the
SAEA, PSEA, and NEA pursuant to 71 Pa. Cons. Stat. Ann.
§ 575 (West 2003).
Seven non-union education professionals brought this 42
U.S.C. § 19831 action to challenge the Unions’ fair-share fee
1. 42 U.S.C. § 1983 states, in relevant part:
5
procedure and assessments.2 After the District Court
confirmed that the plaintiffs had standing to object to the
fair-share fees and the sufficiency of the Unions’ Hudson
notice,3 the parties filed a joint stipulation of facts followed
by cross-motions for summary judgment. The District Court
granted partial summary judgment in favor of the plaintiffs,
declaring that the SAEA must verify its expenditures
through an independent audit and that PSEA4 could not
charge the plaintiffs for expenses incurred in litigation not
relating specifically to the plaintiffs’ own collective-
bargaining unit. However, it also held that the Unions could
assess education-professional plaintiffs for non-litigation
expenditures related to the Unions’ representation of
healthcare professionals.
Both parties appealed, and together they present four
issues for our review: (1) whether, by filing their complaint,
plaintiffs objected properly to the Unions’ fees and
procedures; (2) whether a local union, regardless of size,
must obtain an independent auditor verification of the
expenditures listed in its fair-share calculation notice (and,
Every person who, under color of any statute, ordinance, regulation,
custom, or usage, of any State or Territory or the District of
Columbia, subjects, or causes to be subjected, any citizen of the
United States or other person within the jurisdiction thereof to the
deprivation of any rights, privileges, or immunities secured by the
Constitution and laws, shall be liable to the party injured in an
action at law, suit in equity, or other proper proceeding for redress
. . . .
2. Six of the named plaintiffs are members of the SAEA-represented
bargaining unit. The seventh, Marsha Otto, is a member of the
bargaining unit represented by the Grove City Area Education
Association (“GCAEA”). While GCAEA was a defendant in the original
complaint, it was dismissed from the action in plaintiffs’ amended
complaint.
3. However, the District Court held that, because the plaintiffs did not
use the Unions’ arbitration process, they lacked standing to challenge
the timeliness of that process. Otto v. Pa. State Educ. Ass’n-NEA, 950 F.
Supp. 649, 651-52 (M.D. Pa. 1997).
4. The District Court’s order refers to PSEA and NEA, though it appears
that the Unions argue in their briefing only as to PSEA.
6
if so, we need to decide at what level of auditor inquiry); (3)
whether a union may charge non-members for collective-
bargaining-related litigation costs incurred on behalf of
another bargaining unit pursuant to an expense-pooling
arrangement with that other bargaining unit; and (4)
whether a union may charge non-members for pooled
resources available to all local affiliates even though some
of the affiliates represent employees in different professions.
We rule in favor of plaintiffs as to issues one and two (and
determine the level of verification required) and the Unions
on issues three and four.
II. JURISDICTION AND STANDARD OF REVIEW
The District Court had jurisdiction under 28 U.S.C.
§§ 1331 and 1343. We exercise appellate jurisdiction
pursuant to 28 U.S.C. § 1291.
Whether plaintiffs properly objected to the Unions’ fair-
share fee calculation is a question of standing and is
subject to de novo review. In re RFE Indus., Inc., 283 F.3d
159, 163 (3d Cir. 2002). We also review de novo the District
Court’s grant of summary judgment. Cloverland-Green
Spring Dairies, Inc. v. Pa. Milk Mktg. Bd., 298 F.3d 201, 210
(3d Cir. 2002).
III. DISCUSSION
A. Objection Requirement
The Unions contend that plaintiffs failed to carry their
burden of objecting to the fair-share fee calculation by not
raising a “contemporaneous objection,” i.e., by not objecting
at the time of fee collection. Addressing this issue as a
question of plaintiffs’ standing to sue, the District Court
rejected the Unions’ contention on the ground that
plaintiffs’ complaint satisfied the objection requirement. We
agree.
No Supreme Court case explicitly establishes a
contemporaneous-objection requirement. While
International Association of Machinists v. Street, 367 U.S.
740 (1961), held that each non-member must individually
object to disputed fair-share fees, that requirement merely
7
places the burden on dissenting employees affirmatively to
opt out of fees to which they object, rather than allowing
them to opt into fees with which they agree. See id. at 771(holding that because the individual Street plaintiffs “have
in the course of [this action] made known to their respective
unions their objection to the use of their money for the
support of political causes[,] . . . the respective unions were
without power to use payments thereafter tendered by them
for such political causes”). Since Street, the Court has
reiterated that non-members may raise their initial
objection in a complaint. Abood, 431 U.S. at 239 (“[T]he
requirement in Street that dissent be affirmatively indicated
was satisfied by the allegations in the complaint that was
filed.”) (citation omitted); Bhd. of Ry. & S.S. Clerks, Freight
Handlers, Exps. & Station Employees v. Allen, 373 U.S. 113,
119 n.6 (1963) (citing Street, 367 U.S. at 771) (employees in
Railway Labor Act case “first made known their objection to
the [unions’] political expenditures in their complaint filed
in this action; however, this was early enough”).
Yet the Unions argue that Hudson imposed a more
onerous notice standard and that “post-Hudson cases have
implicitly rejected the notion of objection-by-lawsuit.” Even
assuming arguendo that the Unions are correct, the
contemporaneous-objection principle they espouse would
nonetheless be inapplicable in this case because, as we
explain more fully infra in Section III.B, “the notice
procedures and the fee information given under the
plan were inadequate.” Lowary v. Lexington Local Bd. of
Educ., 903 F.2d 422, 430 (6th Cir. 1990). Thus the
plaintiffs lacked sufficient information to formulate a
contemporaneous objection.
B. Independent Auditor Verification
In Hudson, the Supreme Court held that a local union
representing 27,500 employees and collecting over $4
million in annual dues must provide non-members with
“sufficient information to gauge the propriety of the union’s
fee.” 475 U.S. at 306. The Court went on to explain that
“[t]he Union need not provide nonmembers with an
exhaustive and detailed list of all its expenditures, but
adequate disclosure surely would include the major
categories of expenses, as well as verification by an
8
independent auditor.” Id. at 307 n.18 (emphasis added). We
applied Hudson’s independent auditor requirement in Hohe
v. Casey, 956 F.2d 399 (3d Cir. 1992), and held that the
First Amendment required a state-level exclusive bargaining
representative for approximately 54,000 employees to
obtain independent auditor verification. Id. at 415-16. We
noted that “the purpose of requiring the verification in the
[Hudson] notice is to give the nonmembers some prior
assurance that the [fair-share] fee was properly calculated,”
and “[w]hen nonmembers do not receive that assurance,
their constitutional rights are violated under Hudson.” Id.
at 415.
Today we decide whether Hudson’s independent auditor
requirement applies to SAEA, a much smaller union than
the unions involved in Hudson and Hohe. Plaintiffs argue
that it does. The Unions contend that Hudson’s
independent auditor requirement was merely dictum or
applies only to large unions, like those in Hudson and
Hohe, that can afford an independent auditor. They point
out that SAEA would spend more on an audit than it
collects through fair-share fees. Moreover, the Unions claim
that SAEA’s finances are so simplistic that non-members
can obtain “sufficient information,” Hudson, 475 U.S. at
306, by examining its documents themselves.
The Ninth Circuit has addressed this issue. In Prescott v.
County of El Dorado, 177 F.3d 1102 (9th Cir. 1999),
vacated on other grounds, 528 U.S. 1111 (2000), reinstated
in relevant part, 204 F.3d 984 (2000), the Court held that,
regardless of its accompanying high cost, a state union
must conduct a “true audit.” Id. at 1107-08. However, the
Court left unanswered whether the independent auditor
requirement applied to a small local union. Id. at 1108.
(“We do not decide that each little unit in the [state union]
firmament must necessarily be subjected to a separate
verified audit of its expenditures . . . .”). In a subsequent
case very recently decided, Harik v. California Teachers
Association, Nos. 01-15590, 01-15688, 01-15705, 2003 WL
1873736 (9th Cir. April 15, 2003),5 the Court provided an
5. The Ninth Circuit initially decided Harik on August 1, 2002, but
withdrew its opinion and substituted a revised opinion on April 15,
9
answer: an independent auditor verification is not
necessary. The Harik Court interpreted Hudson to require,
in the context of a local union with under $50,000 in
estimated annual revenues, “either [disclosure of] the full
financial material necessary to verify [a union’s
expenditures], or an independently sanctioned verification
of [ ] the local union’s chargeable and non-chargeable
expenditures.” Id. at *4 (emphasis added). Thus, a small
local union need only provide sufficient information so that
a “nonmember can independently verify that the union
spent its money where it claimed that it did.” Id. In so
doing, the Ninth Circuit shifted the burden of expense
verification from the union to the nonmember. It reasoned
that “[f]or 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.” Id.6
2003. The earlier opinion held that a small local union must obtain
“independent verification” of its expenses, but need not obtain a “formal
audit.” Harik v. Cal. Teachers Ass’n, 298 F.3d 863, 866 (9th Cir. 2002).
The Court did not discuss precisely what “independent verification”
entails and how it differs from the “true audit” Prescott required of larger
unions.
6. Additionally, a state case from Massachusetts, Wareham Education
Association v. Labor Relations Commission, 713 N.E.2d 363 (Mass. 1999),
squarely addressed the question before us and held that “there is no
exception to Hudson’s audit requirement for small local union affiliates.”
Id. at 368. Another state-court case, Whitley County Teachers Association
v. Bauer, 718 N.E.2d 1181 (Ind. Ct. App. 1999), reached the opposite
result, holding that Hudson was not violated when a local union did not
obtain an independent audit of its financial records. Id. at 1191-92. In
Tierney v. City of Toledo, 824 F.2d 1497 (6th Cir. 1987), the Sixth Circuit
wrote that Hudson required “an audited, detailed accounting of local
union payments to affiliated state and national labor organizations.” Id.
at 1503. However, the Court did not make this statement in the context
of a claim that Hudson’s requirements should apply differently to a small
local union, as is the case here.
In Andrews v. Education Association of Cheshire, 829 F.2d 335 (2d Cir.
1987), the Second Circuit also addressed the small union verification
issue, but decided the case without resolving it. It determined that “the
procedures mandated by Hudson are to be accorded all nonmembers of
10
Harik acknowledges that “union costs [for verification] do
not trump non-members’ First Amendment rights,” id., and
thus presumably there is no bye from Hudson’s
requirement of independent auditor verification. But for
“smaller unions” (we assume the Court means those with
estimated annual revenues between $50,000 and
$100,000), it is “confident that [they] can devise flexible and
creative ‘auditor-verifiable methodolog[ies]’, appropriately
tailored to provide their nonmembers with a reasonable
opportunity for meaningful verification, without depleting
the union coffers.” Id. And “[f]or the smallest affiliates” (we
assume those unions with estimated annual revenues
under $50,000), Harik (as already noted) allows the option
of providing financial reports (unaudited and, it appears,
lacking any independent auditor oversight) along with “full
and fair access” to the underlying financial information.
The District Court in that case thus “erred . . . in requiring
more than adequate accessible information using an
auditor verifiable methodology that could verify [the local
union’s] expenditures.” Id. In so doing, Harik excises
“independent auditor” from Hudson’s “verification by an
independent auditor,” 475 U.S. at 307 n.18, at least “[f]or
the smallest [union] affiliates.” Harik, 2003 WL 1873736, at
*4. Instead, “verification” can mean producing “adequate
accessible information using an auditor verifiable
methodology.” Id. We do not find this an available option
unless the Supreme Court tells us otherwise.
Were we writing on a clean slate, we might well require
something less rigorous for small local unions than
agency shops regardless of whether the union believes them to be
excessively costly.” Id. at 339. However, the Court limited this broad
statement in a footnote, in which it pointed out that it was not
addressing whether or how Hudson applies to small local unions because
the local union there was one of “three interlocking organizations”— the
local union, the state union, and the NEA. Id. at 340 n.2 (“[The district
court’s] opinion implies that Hudson might not require an independent
auditor if the union involved were small enough. We need not decide the
issue here.”) (internal citation omitted). While Andrews did not provide
any basis for us to determine whether the local unions at issue were
larger than SAEA, we note that SAEA too is part of “three interlocking
organizations” — SAEA, PSEA, and NEA.
11
independent auditor verification. But the slate is not clean.
We are bound by the Supreme Court’s decision in Hudson,
and its directive of “verification by an independent auditor”
means just that. Hudson implied no intent to make the
audit requirement depend on the size of the reporting union.7
Absent a counter directive by the Supreme Court, we
likewise make no exception. See Agostini v. Felton, 521 U.S.
203, 237 (1997) (stating that “[i]f a precedent of this Court
has direct application in a case . . . the Court of Appeals
should follow the case which directly controls, leaving to
this Court the prerogative of overruling its own decisions”)
(quoting Rodriguez de Quijas v. Shearson/American
Express, Inc., 490 U.S. 477, 484 (1989)) (alteration in
original).
But what level of independent auditor verification does
Hudson require? Broadly speaking, auditors can provide
three different types of accounting services: compilations,
reviews, and audits. A compilation is the “lowest level of
assurance” regarding an entity’s financial statements.
Christian Tregillis, Overview of Services Provided by CPAs,
in Basics of Accounting & Finance: What Every Practicing
7. The Unions note that, in the NLRB context, some courts have
approved what is known as the “local presumption” — an assumption
that the percentage of chargeable to nonchargeable expenses will be the
same for the local union as for the parent union. See, e.g., Finerty v.
NLRB, 113 F.3d 1288, 1292-93 (D.C. Cir. 1997); see also Thomas v.
NLRB, 213 F.3d 651, 659-60 (D.C. Cir. 2000); Price v. Int’l Union, United
Auto., Aerospace & Agric. Implement Workers of Am., 927 F.2d 88, 93-94
(2d Cir. 1991) (approving use of local presumption). Courts presented
with First Amendment questions in the public employer context have not
approved of the local presumption, however. See, e.g., Lowary v.
Lexington Local Bd. of Educ., 903 F.2d 422, 431 (6th Cir. 1990); Prescott,
177 F.3d at 1108. Whatever the validity of the local presumption, it is
irrelevant to the question presented in this case. The local presumption
is merely a method for estimating a local union’s ratio of chargeable to
nonchargeable expenses. At issue here is whether an auditor must verify
the total expenses to which that ratio may be applied. See Hohe, 956
F.2d at 410 (in a case in which a union attempted to apply the local
presumption, holding disclosure to non-members inadequate because
“[t]he notice . . . to nonmembers did not disclose the affiliated locals’
‘major categories of expenses’ nor was there any assertion that the
locals’ categories of expenses mirrored those of [the state union].”).
12
Lawyer Needs to Know 88 (PLI Corp. Law & Practice
Course, Handbook Series No. B-1064, 1998). It expresses
“neither an opinion nor any level of assurance.” Id.When performing a compilation, an accountant need not
“verify or corroborate the financial statement information
provided by the client.” Jane Dillard-Eggers, Understanding
Compilations, Reviews, and Audits, at
http://www.tscpa.com/public/smallbusinessarticles/
understanding_compilations.htm.
A review involves an intermediate level of scrutiny in
which the auditor provides “limited assurance” on the
entity’s financial statements. See id. In so doing, the
auditor indicates that he “is not aware of any material
modifications needed to be in conformity with [generally
accepted accounting principles, also known as GAAP.]”
Tregillis, supra, at 88. In order to provide this “limited
assurance,” the auditor must make some, but not
comprehensive, inquiry into client management, accounting
practices, internal control structure, and analytical
procedures used by the organization. See Dillard-Eggers,
supra. The scope of the “inquiry and analytical procedures
are the major difference between a review and a
compilation.” Larry P. Bailey, GAAS Guide: A
Comprehensive Restatement of Generally Accepted Auditing
Standards 16.31 (1994).
In an audit, which provides “the highest level of
assurance on financial statements,” the accountant
“provides verification of the financial statements’ claims and
assertions” and expresses an opinion on the entity’s
financials. Tregillis, supra, at 85 (emphasis added). Among
other procedures, the accountant “consider[s] and
evaluate[s] . . . the internal control system of the [client]
. . . [and] tests . . . the underlying documentation to
support account balances.” Dillard-Eggers, supra; Bailey,
supra, at 16.51. Annual audits are required for all publicly
traded companies. Tregillis, supra, at 85.
As between a review and an audit, “[a] review may bring
to the accountant’s attention significant matters affecting
the financial statements, but it does not provide assurance
that the accountant will become aware of all significant
matters that would be disclosed in an audit.” 1 John R.
13
Clay et al., Guide to Compilation and Review Engagements
§ 101.5 (24th ed. 2002). This is because “a review does not
contemplate obtaining an understanding of the internal
control structure or assessing control risk; tests of
accounting records and of responses to inquiries by
obtaining corroborating evidential matter through
inspection, observation or confirmation; and certain other
procedures ordinarily performed during an audit.” Id.
We hold that local unions, regardless of their size, are
required to obtain audits of their financial statements.
Compilations and reviews do not provide an adequate basis
for a non-member to decide whether to object to a fair-
share fee. See Prescott, 177 F.3d at 1107 (“[A]n audit, as
opposed to a review, offers at least some verification of the
amounts disclosed in the financial statement. . . . We do
not see how a mere review of the union’s records can offer
the ‘verification’ that the Supreme Court and we have
spoken of.”). Indeed, “verification”— the word used by the
Supreme Court in Hudson, 475 U.S. at 307 n.18, and by at
least one accounting authority in describing an audit, see
Tregillis, supra, at 85 — means authenticating or
confirming the truth or accuracy of a statement. Webster’s
Third New Int’l Dictionary of the English Language
Unabridged 2543 (1971). Put another way, an audit
“make[s] assurance double sure.” William Shakespeare,
Macbeth act 4, sc. 1, line 96 (W.J. Craig, ed., Oxford 1914).
A review does not.8
We take no position on the precise procedures an
accountant must follow when auditing a local union.9 Like
8. We recognize that accountants review rather than audit public
corporations’ interim financial statements, D. Edward Martin, Attorney’s
Handbook of Accounting, Auditing and Financial Reporting § 13.03[1] (4th
ed. 2002), and that investors rely on these unaudited interim financial
statements when making investment decisions. Despite this industry
practice, we believe that, until the Supreme Court tells otherwise,
Hudson forecloses the argument that a review is acceptable in this
context.
9. However, we read literally Hudson’s requirement of auditor
independence and therefore require that the accountant performing the
audit be truly independent of the local union, i.e., not an accountant
14
the Second Circuit in Andrews v. Education Association of
Cheshire, 829 F.2d 335, 450 (2d Cir. 1987), and the Sixth
Circuit in Gwirtz v. Ohio Education Association, 887 F.2d
678, 680 (6th Cir. 1989), we decline to hold either that an
accountant’s audit procedures must constitute the “least
restrictive process imaginable,” Andrews, 829 F.2d at 340,
or that local unions must obtain the “ ‘highest’ possible
level of audit service,” Gwirtz, 887 F.2d at 680. See
generally Prescott, 177 F.3d at 1107 (noting that audits
“may vary in procedures and sampling rates”). We do note,
however, that Hudson does not require absolute precision
within the audit context. See Hudson, 475 U.S. at 307 n.18
(“We continue to recognize that there are practical reasons
why ‘[a]bsolute precision’ in the calculation of the charge to
nonmembers cannot be ‘expected or required.’ ”) (quoting
Allen, 373 U.S. at 122) (alteration in original).10
We recognize that our decision might place high costs on
some local unions. But this is how we read Hudson’s
requirement of “verification by an independent auditor.” Id.employed in-house by the union. See Ferriso v. NLRB, 125 F.3d 865,
871-73 (D.C. Cir. 1997) (holding that Hudson requires an auditor to have
“independence and qualifications [that] conform to prevailing norms for
audits of comparable entities.”). But see Int’l Ass’n of Machinists &
Aerospace Workers v. NLRB, 133 F.3d 1012, 1017 (7th Cir. 1998)
(Posner, J.) (explicitly declining to follow Ferriso because
“ ‘[i]ndependence’ is a slippery term” and cases requiring absolute
independence failed to “consider alternatives” and are “in tension with
cases . . . that hold that dissenters are not entitled to the highest level
of audit services that the market offers”).
10. In this vein, we follow other circuits that have held that the
independent audit requirement does not require the auditor to verify the
local union’s classification of expenses as chargeable or nonchargeable.
See, e.g., Dashiell v. Montgomery County, Md., 925 F.2d 750, 755-56 (4th
Cir. 1991); Gwirtz, 887 F.2d at 682 n.3; Ping v. Nat’l Educ. Ass’n, 870
F.2d 1369, 1374 (7th Cir. 1989); Andrews, 829 F.2d at 340. We agree
with these circuits that chargeability is a legal question. Dashiell, 925
F.2d at 755-56; Gwirtz, 887 F.2d at 682 n.3; Ping, 870 F.2d at 1374;
Andrews, 829 F.2d at 340. To require an accountant to verify that a
union has correctly classified expenditures is “tantamount to requiring
the auditor to give a second legal opinion,” Dashiell, 925 F.2d at 756,
which is clearly beyond the scope of an auditor’s duties.
15
Further, local unions are not without options. For example,
unions without the financial wherewithal to afford the
Hudson-required audit might choose to enter into
combinations with other small unions to achieve necessary
economies of scale. In the alternative, state or national
unions might choose to subsidize the cost of local unions’
audits.
C. Litigation Expenditures
Plaintiffs’ fair-share fees include charges for collective-
bargaining-related litigation conducted by PSEA or its
affiliates but unrelated specifically to the SAEA unit. Such
expenses are known as extra-unit litigation expenses.
Plaintiffs contend that the extra-unit litigation expenses at
issue are nonchargeable. See Ellis v. Bhd. of Ry., Airline &
S.S. Clerks, Freight Handlers, Exps., & Station Employees,
466 U.S. 435, 453 (1984) (holding certain litigation
expenses not incurred on behalf of non-members’
bargaining unit unchargeable to those non-members). The
Unions argue that, because the litigation expenses at issue
are “pooled” across PSEA affiliates, these expenses are
chargeable to non-union members. See Lehnert v. Ferris
Faculty Ass’n, 500 U.S. 507, 524 (1991) (holding that a
union may charge non-members for their pro rata share of
certain expenses incurred pursuant to a cost-sharing
agreement with affiliate unions). This case requires us to
address an expense-chargeability issue that lies in the
intersection of the Ellis and Lehnert holdings: whether a
union may charge non-members for their pro rata share of
expenses that relate to litigation and that were incurred on
behalf of an affiliate union pursuant to a cost-sharing
agreement.
As noted, Ellis holds that a union may not charge non-
union members for certain extra-unit litigation expenses.11
11. Examples of the disputed litigation expenses in Ellis included “the
union’s challenge to the legality of the airline industry’s Mutual Aid Pact,
under which a struck carrier receives substantial financial assistance
from non-struck carriers; the protection of employees’ rights during
bankruptcy proceedings involving an employer; the doctrine of fair
representation; and the defense of suits alleging violation of the non-
discrimination requirements of Title VII.” Ellis v. Bhd. of Ry., Airline &
S.S. Clerks, Freight Handlers, Exps., & Station Employees, 685 F.2d
1065, 1073 (9th Cir. 1982), aff’d in part and rev’d in part, 466 U.S. 435(1984).
16
Ellis, 466 U.S. at 453 (while expenses of collective-
bargaining-related litigation arising from the non-members’
bargaining unit are “clearly chargeable” to that employee,
“[t]he expenses of litigation not having such a connection
with the [non-members’] bargaining unit are not to be
charged to objecting employees”).12 But Ellis did not involve
expenses incurred by an affiliate bargaining unit pursuant
to an expense-pooling arrangement with that affiliate. Here,
PSEA and its affiliates have agreed to pool their litigation
expenses for the unions’ mutual benefit. This presents a
significantly different question than Ellis. Even if a local
union party to such an arrangement does not litigate in any
given year, it still derives a tangible benefit from
participating in an expense-pooling agreement: the
availability of on-call resources greater than those it could
muster individually. Cf. Finerty v. NLRB, 113 F.3d 1288,
1292 (D.C. Cir. 1997) (“It is indisputable that, by pooling its
resources on a union-wide basis, a union, which is the
bargaining representative of all its members, provides some
benefit to members of the various local unions.”) (emphasis
in original). Moreover, it is unclear whether the Ellis Court
would have reached the same result if the extra-unit
litigation at issue were more related to the collective
bargaining activities of the Ellis plaintiffs’ bargaining unit.
In other words, it is unclear whether the Court intended to
state a per se rule against the chargeability of extra-unit
litigation expenses.
In Lehnert, the Supreme Court held that a union may
charge non-union members for their pro rata share of
expenses incurred on behalf of affiliate bargaining units
12. While Ellis interpreted the Railway Labor Act (“RLA”) rather than the
First Amendment, subsequent cases have suggested that RLA cases such
as Ellis “necessarily provide some guidance regarding what the First
Amendment will countenance in the realm of union support of political
activities through mandatory assessments.” Lehnert, 500 U.S. at 516; see
also Romero v. Colegio De Abogados De P.R., 204 F.3d 291, 298 (1st Cir.
2000) (“Although the decision [in Ellis] turned on a statutory
interpretation of the Railway Labor Act, the Court was clear that its
interpretation was required to avoid constitutional difficulty. Later cases
have interpreted Ellis as setting forth constitutional rules . . . .”) (internal
citations omitted).
17
when there is “some indication that the payment is for
services that may ultimately inure to the benefit of the
members of the local union by virtue of their membership
in the parent organization.” Lehnert, 500 U.S. at 524.13 A
majority of the Court in Lehnert reached this conclusion by
applying a three-part test to assess whether a particular
union affiliate’s expense is chargeable to non-members of
the union. “[C]hargeable activities must (1) be ‘germane’ to
collective-bargaining activity; (2) be justified by the
government’s vital policy interest in labor peace and
avoiding ‘free riders’; and (3) not significantly add to the
burdening of free speech that is inherent in the allowance
of an agency or union shop.” Id. at 519.14 However, when
the Lehnert Court attempted to apply this test to a question
similar to the one before us — whether expenses for
reporting on extra-unit litigation, where litigation expenses
are incurred pursuant to a cost-pooling agreement with an
affiliate union, are chargeable to non-members of the local
bargaining unit — no five justices agreed.
Justice Blackmun, joined by Chief Justice Rehnquist and
Justices White and Stevens, noted that dissenting
employees may not be charged for the costs of union
literature reporting on extra-unit litigation because they
cannot be charged for such litigation itself under Ellis. Id.
at 528. He acknowledged that litigation conducted by one
bargaining unit could establish precedents useful to
another bargaining unit. But he concluded that this
potential benefit was too attenuated and that “extraunit
litigation [is] more akin to lobbying [which is not
chargeable] in both kind and effect.” Id.15 Were Justice
13. The dissent also endorsed this result, even though it would have
reached that conclusion through a different analytical path. See Lehnert,
500 U.S. at 561-62 (Scalia, J., concurring in the judgment in part and
dissenting in part).
14. While this test was in a plurality opinion of Chief Justice Rehnquist
and Justices Blackmun, White and Stevens, see Lehnert, 500 U.S. at
519, a fifth justice, Justice Marshall, joined the portion of the plurality
opinion containing the test, see id. at 534 (Marshall, J., concurring in
part and dissenting in part).
15. Justice Marshall, who otherwise concurred in Justice Blackmun’s
opinion, emphasized that Lehnert concerned the chargeability of a
18
Blackmun able to garner five justices’ votes for the
proposition that extra-unit litigation is not chargeable to
non-union members, Lehnert would control here. However,
as we discuss, he wrote only for a plurality of four.
Justice Scalia, joined by Justices O’Connor and Souter,
“agree[d] with the Court’s disposition of many of the
challenged expenditures,” but disagreed with the majority’s
three-part test for evaluating the chargeability of
expenditures. Lehnert, 500 U.S. at 550 (Scalia, J.,
concurring in the judgment in part and dissenting in part).
Rather, Justice Scalia would permit expenses to be charged
to non-members when those expenses are incurred as part
of “the union’s statutory duties as exclusive bargaining
agent.” Id. However, he did not apply his preferred test to
the question whether dissenting employees could be
charged for the expenses of union reporting on extra-unit
litigation (or for the expenses of extra-unit litigation itself).
Justice Kennedy, who endorsed Justice Scalia’s rather
than Justice Blackmun’s chargeability test, wrote
separately to argue that extra-unit litigation expenditures
should be allowed if “undertaken in the course of the
union’s duties as exclusive bargaining representative.”
Lehnert, 500 U.S. at 563 (Kennedy, J., concurring in the
judgment in part and dissenting in part). He criticized
Justice Blackmun’s reliance on Ellis to resolve the question
whether costs of reporting on extra-unit litigation are
chargeable, pointing out that Ellis did not address a
litigation-cost-sharing arrangement. Id. at 564.
Despite the fact that no five justices explicitly agreed on
the chargeability of expenses arising from extra-unit
litigation, plaintiffs insist that Lehnert controls our
disposition of the litigation-expenditures issue. They
union’s reporting on extra-unit litigation. Chargeability of reporting is
different from chargeability of the litigation itself. This disagreement
about the scope of the issues before the Court led Justice Marshall to
dissent on this issue. He would have held reporting on extraunit
litigation expenses chargeable, “particularly since the publication costs
at issue are de minimis” and involved only “a few pennies.” Lehnert, 500
U.S. at 534, 546. (Marshall, J., concurring in part and dissenting in
part).
19
contend that because Justice Scalia was clear when he
disagreed with the Court’s rulings on other expenditures,
he must have agreed with Justice Blackmun’s position that
extra-unit litigation expenditures are not chargeable. We
disagree with the plaintiffs’ interpretation of Justice Scalia’s
opinion, for his silence is inconclusive.16 We are therefore
left without definitive Supreme Court guidance. See
Planned Parenthood of S.E. Pa. v. Casey, 947 F.2d 682, 693
(3d Cir. 1991), aff’d in part and rev’d in part, 505 U.S. 833(1992) (stating that a putative majority standard must
“necessarily produce results with which a majority of the
Court from that case would agree”).
The Sixth Circuit, the Court of Appeals from which
Lehnert was appealed to the Supreme Court, addressed the
issue before us in Reese v. City of Columbus, 71 F.3d 619(6th Cir. 1995). The Court agreed with Justice Marshall
that the Lehnert plurality’s statement on extra-unit
litigation expenses was “no more than dicta” because at
issue was the cost of reporting on extra-unit litigation. Id.
at 623-24. It then proceeded to find that Lehnert not only
allowed, but required, it to approve the charges “because a
majority [in Lehnert] approved of charges for pooled
expenses like those in this case.” Id. at 624. While Reese
16. We note that application of Justice Scalia’s chargeability standard
does not necessarily result in the prohibition against pooled extra-unit
litigation expenses that Justice Blackmun espoused. A union’s incurring
extra-unit litigation expenses might, under some circumstances, be
“essential to [the union’s] discharge of its duties as bargaining agent.”
Lehnert, 500 U.S. at 560 (quoting Ellis, 466 U.S. at 448-49) (Scalia, J.,
concurring in the judgment in part and dissenting in part). Moreover,
Justice Scalia’s willingness to consider as a chargeable expense an
annual fee assessed by a national union to a local bargaining unit to
ensure the availability of on-demand services, id. at 561-62, suggests
that he might also be willing to consider as chargeable a local bargaining
unit’s pro rata share of pooled litigation expenses. That pro rata
assessment is essentially an annual fee to ensure the availability of
litigation resources to the local unit — a form of insurance. We therefore
disagree with the Tenth Circuit’s conclusion in Pilots Against Illegal Dues
v. Air Line Pilots Association, 938 F.2d 1123, 1130 n.4 (10th Cir. 1991),
that a majority of the Lehnert Court would not allow extra-unit litigation
expenses incurred pursuant to a pooling agreement to be charged to
non-union members.
20
overstates Lehnert’s holding, as the Lehnert majority never
held extra-unit litigation expenses incurred pursuant to a
pooling agreement to be chargeable, we nonetheless agree
with the Sixth Circuit’s conclusion.
Moreover, in International Association of Machinists &
Aerospace Workers v. NLRB, 133 F.3d 1012 (7th Cir. 1998),
the Seventh Circuit enforced an NLRB decision in which the
NLRB rejected as a matter of law the proposition that extra-
unit litigation expenses should be treated differently from
other extra-unit expenses and instead “appl[ied] the same
standard for determining the chargeability of litigation
expenses as we are required . . . to apply to all other
expenses.” Cal. Saw & Knife Works, 320 N.L.R.B. 224, 239
(1995). The Seventh Circuit agreed that litigation
expenditures are “analytically identical” to other
expenditures related to collective bargaining. International
Ass’n of Machinists & Aerospace Workers, 133 F.3d at
1016.
We too uphold the chargeability of the extra-unit
litigation expenses at issue by applying the Lehnert
majority’s three-part chargeability test: “chargeable
activities must (1) be ‘germane’ to collective-bargaining
activity; (2) be justified by the government’s vital policy
interest in labor peace and avoiding ‘free riders’; and (3) not
significantly add to the burdening of free speech that is
inherent in the allowance of an agency or union shop.”
Lehnert, 500 U.S. at 519. First, that the litigation expenses
at issue were incurred pursuant to an expense-pooling
arrangement makes the pro rata share of those expenses
charged to SAEA members and non-members akin to
insurance. See id. at 523 (noting that because “[t]he
essence of the affiliation relationship is the notion that the
parent will bring to bear its often considerable economic,
political, and informational resources when the local is in
need of them,” the portion of a local’s fair-share fee that
“contributes to the pool of resources potentially available to
the local is assessed for the bargaining unit’s protection,
even if it is not actually expended on that unit in any
particular membership year”). The “premium” that SAEA
members and non-members pay, in the form of a pro rata
share of litigation expenses, ensures that the local
21
bargaining unit will have sufficient resources at its disposal
should it need, in the future, to engage in collective-
bargaining-related litigation (which would be chargeable to
non-union members). Because the extra-unit litigation
expenditures at issue ensure the availability of resources
for collective-bargaining-related litigation, those
expenditures are germane to collective-bargaining activity.
Applying the second prong of the Lehnert test, we note
that the free-rider concerns applicable to other pooled-
expense arrangements apply with equal force to extra-unit
litigation expenditures.
Third, extra-unit litigation expenses present “little
additional infringement of First Amendment rights beyond
that already accepted,” Ellis, 466 U.S. at 456, where, as
here, the pooled litigation resources are expended on
collective-bargaining-related activities and “may ultimately
inure to the benefit of the members of the local union,”
Lehnert, 500 U.S. at 524. That non-litigation, collective-
bargaining-related expenses for, inter alia, pooled
negotiating advice and informational assistance in Lehnert
are chargeable to objecting employees informs our
conclusion.
Unlike the Justice Blackmun camp in Lehnert, we discern
no compelling reason to treat litigation expenses incurred
pursuant to a pooling agreement differently from other
pooled expenses. Thus we conclude that they are
chargeable to SAEA’s non-members.
D. Multi-occupational representation
In addition to providing services to education
professionals, PSEA’s affiliated local associations also
provide collective-bargaining-related services to healthcare
professionals. When PSEA calculates the expenses
chargeable to fair-share payers, it does not allocate
chargeable costs by profession. Rather, it includes as part
of fair-share fees the expenses incurred on behalf of all
represented employees, i.e., educators and healthcare
professionals. Plaintiffs argue that the First Amendment
bars PSEA from passing onto them costs incurred on behalf
of healthcare professionals because PSEA has not shown
that those costs “may ultimately inure to [their education
22
unit’s] benefit . . . by virtue of [its] membership in [PSEA].”
Lehnert, 500 U.S. at 524.
The District Court granted summary judgment in favor of
the Unions, holding that the plaintiffs failed to allege facts
suggesting that any of the three Lehnert requirements were
not satisfied (to repeat, that the expenditures are not
“ ‘germane’ to collective-bargaining activity,” not “justified
by the government’s vital policy interest in labor peace and
avoiding ‘free riders,’ ” or that they “significantly add to the
burdening of free speech that is inherent in the allowance
of an agency or union shop”). Id. at 519. In so doing, the
District Court improperly placed the burden of proof on the
plaintiffs when it belonged on the Unions. As Lehnert points
out, “[t]he union [bore] the burden of proving the proportion
of chargeable expenses to total expenses.” Id.Because plaintiffs do not challenge any particular
expenditures, we evaluate, as a matter of law, whether
PSEA may pool costs across occupational groups. We
answer this question affirmatively. As discussed above,
Lehnert held that “a local bargaining representative may
charge objecting employees for their pro rata share of the
costs associated with otherwise chargeable activities of its
state and national affiliates, even if those activities were not
performed for the direct benefit of the objecting employees’
bargaining unit,” so long as there is “some indication that
the payment is for services that may ultimately inure to the
benefit of the members of the local union by virtue of their
membership in the parent organization.” Id.In our case, the pooling arrangement confers potential
benefits on the plaintiffs. First, the arrangement generates
economies of scale that redound to their benefit. Second, by
spreading the costs of otherwise-chargeable expenses over
a pool of employees whose chargeable-expense levels are
not perfectly correlated with their own (i.e., healthcare
professionals as well as education professionals), education
professionals reduce their risk of being assessed unusually
high chargeable expenses in any given year. Moreover, this
pooling arrangement does not necessarily increase the
dollar amount of chargeable expenses assessed to plaintiffs
for any particular year. Just as education professionals are
assessed for healthcare professionals’ chargeable expenses,
23
so too healthcare professionals are assessed for education
professionals’ chargeable expenses. As PSEA correctly
points out, this arrangement may result in lower fair-share
fees than those assessed in the absence of such an
arrangement.
We also note that the Lehnert Court did not limit its
holding only to bargaining units within the same industry,
or within related industries. Instead, it stated a broad
principle: “that part of a local’s affiliation fee which
contributes to the pool of resources potentially available to
the local is assessed for the bargaining unit’s protection,
even if it is not actually expended on that unit in any
particular membership year.” Id. at 523. Though this
reasoning was not that employed by the District Court, it
nonetheless supports its ultimate grant of summary
judgment to the Unions.17
* * * * *
We reverse the District Court’s grant of summary
judgment in favor of the plaintiffs on the issue of charging
them fair-share fees for extra-unit litigation expenses. In all
other respects, we affirm.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
17. We may affirm for any reason supported by the record, even if not
relied on by the District Court. Nicini v. Morra, 212 F.3d 798, 805 (3d
Cir. 2000).