Motor carriers subject to state unfair competition law

Until recently, in the context of motor carriers/transportation law, it was uncertain whether California's Unfair Competition Law (UCL) was preempted by the omnibus Federal Aviation Administration Authorization Act of 1994 (FAAAA). In People ex rel. Harris v. Pac Anchor Transportation Inc., 2014 DJDAR 9863 (July 28, 2014), the state Supreme Court concluded that a state court UCL action based on labor and insurance law violations was not expressly preempted by the FAAAA when the action was not based on regulations "related to a price, route, or service of any motor carrier ... with respect to the transportation of property."

In Harris, the state filed an action against defendants Pac Anchor Transportation Inc., a trucking company, and Alfredo Barajas, its owner, for violations of the UCL based on the defendants' alleged improper classification of its drivers as independent contractors rather than employees. The state asserted that, through this misclassification, the defendants illegally lowered their costs of doing business and engaged in acts of unfair competition including, among other things, failing to pay unemployment insurance taxes, withhold state income taxes, provide workers' compensation, and ensure payment of minimum wage.

The trial court found that the FAAAA preempted the state's action, reasoning that a similar provision of the earlier Airline Deregulation Act (ADA) of 1978 (now the FAAAA) preempted UCL actions for alleged wage and rest or meal break violations because such actions related to an airline's "price, route, or service" (see Fitz-Gerald v. SkyWest Inc., 155 Cal. App. 4th 411, 423 (2007)), that requiring the defendants to treat truck drivers as employees would increase their operational costs which affects carriers' prices, and that the state's action would discourage independent contractors from competing in the trucking market. The Court of Appeal reversed, finding that a UCL cause of action based on violations of the state's labor and employment laws was not preempted under the FAAAA.

Relying on Fitz-Gerald, the defendants argued that UCL claims against motor carriers are facially preempted because they regulate the effect that unfair business practices have on the quality and price of goods and services. The state argued that the UCL's application did not interfere with the FAAAA's regulations because the act only preempted state regulations that specifically related to the price, route or service of motor carriers for violations involving transportation of property.

Further, the defendants challenged the state's action as applied under the FAAAA, arguing that the state was seeking to regulate motor carrier competition directly by pairing the UCL with provisions under the Unemployment Insurance Code, Labor Code and an Industrial Welfare Commission Wage Order. The state countered that the UCL claim was independent of the defendants' prices, routes or services with respect to transportation of property as the claim addressed defendants' evasion of financial and administrative responsibilities under these regulations.

Like the ADA, the FAAAA was enacted based on Congress' determination that competition would lead to lower prices and better service. Similarly, to ensure that states would not enact regulations undoing federal deregulation, Congress included a preemption provision which, under the FAAAA, forbade states from enacting or enforcing laws "related to a price, route, or service of any motor carrier ... with respect to the transportation of property," such as laws regulating prices or the types of commodities carried by motor carriers. In drafting the FAAA, Congress noted that 10 jurisdictions had not enacted laws to regulate intrastate prices, routes or services despite seven of them having wage and hour provisions like California's, which was evidence that Congress did not intend to preempt those regulations. See Californians for Safe Dump Truck Transp. v. Mendonca, 152 F.3d 1184 (9th Cir. 1998). Similarly, the Harris court observed that all 10 of those states had unfair competition or deceptive trade practices laws and eight had laws determining when a worker is an independent contractor or an employee in force at the time Congress passed the FAAAA, indicating that Congress did not intend to preempt such laws.

The state Supreme Court also relied on several U.S. Supreme Court decisions addressing ADA and FAAAA preemption clauses, which have similar language. The court observed that, under the ADA and FAAAA, a state regulation could not have a significant effect on fares or pricing such as by effectively creating a right to an advertising fare or requiring carriers to offer different services to tobacco distributors. See Morales v. Trans World Airlines Inc., 504 U.S. 374 (1992); Rowe v. New Hampshire Motor Transp. Assn., 552 U.S. 364 (2008). In particular, the state Supreme Court relied on Dan's City Used Cars Inc. v. Pelkey, 133 S. Ct. 1769 (2013), for the proposition that for a law to be preempted under the FAAA it must relate to a motor carrier's "transportation of property," not merely affect prices, routes or services.

Here, the state Supreme Court found that the FAAA does not preempt the UCL, facially or as applied. The court reasoned that the UCL is a law of general application that does not regulate motor carriers' transportation of property, and thus the UCL is not subject to preemption on its face. Similarly, the FAAAA does not preempt the generally applicable Labor Code and Unemployment Insurance Code upon which the state's UCL claim was based as such laws make no reference to motor carriers or the transportation of property. Additionally, the Industrial Welfare Commission Wage Order only regulated wages, hours and working conditions in the transportation industry, only indirectly affecting motor carriers' prices, routes or services. Thus, the state's UCL claim was not preempted as applied.

After Harris, motor carriers can expect to fact UCL actions, especially related to employment and insurance claims. Additionally, courts in other states may follow the California's lead and find that their state's laws are not preempted by the FAAAA, provided that such laws are of general application and do not have a significant effect on motor carriers' prices, routes, or services. In light of these potentially far-reaching effects, a federal challenge may result.