Seyfarth Synopsis: Third Circuit rejects market-participant argument, opening the door for preemption challenge to local law tying tax incentives to use of union labor.

The case before the Third Circuit, Associated Builders & Contractors v. City of Jersey City,involves a Jersey City ordinance providing developers with tax abatements when they build projects in certain areas. Developers are eligible for the tax abatements, however, only if they enter into project labor agreements requiring their contractors and subcontractors to use union labor for the duration of the project. The PLAs required by the ordinance specify, among other things, that “there will be no strikes, lock-outs, or other similar actions,” and that the developer and the union will agree to dispute-resolution procedures. The ordinance covers projects that are funded entirely by private investment.

The legal issue before the Third Circuit was application of the “market participant doctrine.” The plaintiffs in the case argued that the ordinance was preempted by both the NLRA and ERISA. They also argued that the ordinance is barred by the dormant Commerce Clause of the U.S. Constitution. The District Court had ruled that these arguments were not cognizable, because it concluded that Jersey City acted as a market participant — and not a regulator — when enforcing the ordinance. The Third Circuit reversed and remanded.

The Third Circuit held that the market-participant doctrine did not apply because Jersey City did not have a “proprietary interest” in the privately funded projects. The Third Circuit reasoned that providing tax incentives does not transform Jersey City into an investor, owner, or financier of a project. The Third Circuit therefore directed the District Court to decide whether the ordinance was preempted or barred. The decision offered “no comment” on whether the ordinance was in fact preempted the NLRA or ERISA or barred by the dormant Commerce Clause.

The decision sets forth a potential road map for all employers — not just developers — to consider whenever confronted with local tax incentives that are only available to employers with a union contract. While the challenge was brought in this case by the developers, employers outside the construction industry may be able to pursue similar arguments. For example, the Third Circuit’s theory should encompass local laws that require hotels have a union for the hotel developer to receive a tax break