Seyfarth Synopsis: In August, the Ninth Circuit Court of Appeals revived a challenge by Airlines for America (“A4A”), to San Francisco’s Healthy Airport Ordinance (the “Ordinance”), which requires airlines that use the San Francisco International Airport, which the City runs, to provide enhanced health plan benefits to the airlines’ employees and their dependents.  A4A, an airline trade association, had challenged benefits mandates of the ordinance on ERISA preemption grounds.

The Ordinance requires that private employers, including the airlines, offer a platinum health plan (that is, a plan with at least a 90% actuarial value) at no cost to employees, that covers the employees as well as their spouses and dependents. The plan must also cover all the services provided for under California’s essential health benchmark plan.  Instead of offering coverage, the Ordinance allows an airline to pay a set dollar amount (currently $10.30 per hour, up to $412 per week) into a City fund that employees can use to pay for medical expenses. 

Back in April 2022, the federal District Court held that the requirements of the Ordinance are “functionally equivalent” to business contract terms and do not operate as a regulation. As a result, the airlines could decide whether or not to do business with the City at SFO, knowing that to do so they would be subject to those requirements. Because the Ordinance imposed business terms and the City was acting as a private market participant, the court held that the Ordinance was not preempted. 

A4A then appealed that decision to the Ninth Circuit.  In reversing, the Ninth Circuit held that the City acted as a regulator in enacting the Ordinance. Therefore, the case was sent back to the District Court for consideration of the merits of A4A’s claims. The Ninth Circuit’s decision was based in large part on the ability of the Airport Director to assess hefty civil penalties that the Circuit Court held carried the force of law and therefore made the City a regulator. These penalties include daily fines (with potential increases at the Airport Director’s discretion), and the ability to collect liquidated damages of up to $100 for each one-week pay period for each employee for whom the airline has either not offered compliant health plan benefits or made payments into the fund. The Circuit Court also noted that the City can enforce these provisions in a municipal administrative proceeding. If the City were acting as a market-participant merely managing the airport as a private party, its actions could not be preempted.  However, because the City is acting as a regulator, the District Court’s presumption that the Ordinance cannot be preempted was incorrect and A4A’s challenge can proceed.

This holding is, and the final outcome of this case will be, significant. From time to time, employers and their associations have been stopped by Ninth Circuit courts when they attempted to argue state and local benefits laws are preempted by ERISA and other federal laws due to the market-participant exception to preemption. The Ninth Circuit has now rejected the market-participant exception, at least based on the penalty and enforcement provisions of the Ordinance. As a result, the case may provide a roadmap for employers who want to challenge state and local benefits laws in the future. We will have to wait and see if the ordinance is deemed preempted.

We will continue to monitor this case and provide updates as developments arise.