Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca3-14-04357/USCOURTS-ca3-14-04357-0/pdf.json

Nature of Suit Code: 950
Nature of Suit: Constitutionality of State Statutes
Cause of Action: 

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

______

No. 14-4357 

______

UNITED STEEL PAPER AND FORESTRY RUBBER 

MANUFACTURING ALLIED INDUSTRIAL AND 

SERVICE WORKERS INTERNATIONAL UNION AFLCIO- CLC,

 Appellant

v.

GOVERNMENT OF THE VIRGIN ISLANDS; 

GOVERNOR OF THE VIRGIN ISLANDS;

ANGEL DAWSON, Finance Commissioner; 

DEBRA GOTTLIEB, Director of Management and Budget

______

No. 14-4358 

______

ST. CROIX FEDERATION AFT LOCAL 1826;

ROSA SOTO-THOMAS,

 Appellants

v.

GOVERNOR OF THE VIRGIN ISLANDS; VI COMM. OF 

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FINANCE ANGEL DAWSON, JR.; DIR. OF VIOMB 

DEBRA GOTTLIEB; 29TH LEGISLATURE OF THE 

VIRGIN ISLANDS; VIRGIN ISLANDS DEPARTMENT 

OF EDUCATION; GOVERNMENT OF THE VIRGIN 

ISLANDS

On Appeal from the District Court

of the Virgin Islands

(D.V.I. No. 3-11-cv-00076)

(D.V.I. No. 3-11-cv-00079)

District Judge: Honorable Curtis V. Gomez

______

Argued: December 8, 2015

Before: FISHER, KRAUSE and ROTH, Circuit Judges.

(Filed: November 15, 2016)

Nathan L. Kilbert, Esq. [ARGUED]

Daniel M. Kovalik, Esq.

United Steelworkers of America

Five Gateway Center

60 Boulevard of Allies, Room 807

Pittsburgh, PA 15222

 

Counsel for Appellant United Steel Paper 

and Forestry Rubber Manufacturing Allied Industrial 

and Service Workers International Union AFL-CIOCLC

Amos W. Carty, Jr., Esq.

Law Offices of Richard P. Bourne-Vanneck

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9800 Buccaneer Mall, Suite 9

St. Thomas, VI 00802

Counsel for Appellant St. Croix Federation AFT Local 

1826 and Rosa Soto-Thomas

Joss N. Springette, Esq.

Office of Collective Bargaining

3438 Kronprindsens Gade, Second Floor

St. Thomas, VI 00802

Samuel A. Walker, Esq. [ARGUED]

Office of Attorney General of Virgin Islands

6040 Castle Coakley

Christiansted, VI 00820

Counsel for Appellees

______

OPINION OF THE COURT

______

FISHER, Circuit Judge.

In 2011, the Virgin Islands faced a severe budget crisis 

as a result of the economic recession. In response to this 

crisis, the Government of the Virgin Islands enacted the 

Virgin Islands Economic Stability Act of 2011 (“VIESA”), 

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2011 V.I. Sess. Laws 84, which reduced most Government 

employees’ salaries by 8%. Many of the Government 

employees, however, were covered by collective bargaining 

agreements negotiated on their behalf by their representative 

unions. The collective bargaining agreements, agreed to and 

signed by the Governor on behalf of the Government, set 

forth detailed salary and benefit schedules to be paid to 

covered Government employees. 

The unions brought suit alleging that the salary 

reductions in VIESA constituted an impermissible 

impairment of the collective bargaining agreements, in 

violation of the Contract Clause of the United States 

Constitution. The District Court, after a bench trial, held that 

VIESA did not violate the Contract Clause. We will reverse.

I.

A.

Beginning in 2009, the Virgin Islands experienced a 

fiscal crisis: for the fiscal year 2009, the Government 

projected a budget deficit in excess of $300 million; in 2010, 

the deficit was $275 million; in 2011, after initially predicting 

a small surplus, a revised report projected a $75.1 million 

deficit for 2011 and a $131.5 million deficit for 2012. On 

February 22, 2010, Debra Gottlieb, from the Government’s 

Office of Management and Budget, testified before the Virgin 

Islands Legislature. She warned the Legislature of the 

financial crisis, stating that “the territory’s cash balances are 

precariously low,” App. 321, 328, and that the operating 

deficit for fiscal year 2009 was estimated to be $159 million. 

She predicted that the operating deficit would continue 

throughout fiscal year 2011.

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As an initial response to the crisis, on June 5, 2009, 

the Virgin Islands Legislature authorized the Governor to 

borrow up to $500 million. Despite borrowing, the situation 

continued to worsen, and so from December 30, 2010, to June 

21, 2011, the Government undertook additional measures to 

combat the deficit. It imposed a marine terminal user’s tax of 

$1 per cruise ship passenger; reduced appropriations to the 

executive branch by 3%, or $17.7 million; reduced 

appropriations to the judicial branch by 3%, or $1.1 million; 

increased the tax on all gross receipts from 4% to 4.5%; 

increased the hotel tax from 8% to 10%; increased marriage 

licensing fees, liquor-licensing fees, court filing fees, fines for 

traffic violations, and the motor-vehicle rental surcharge; and 

reduced its expenditures related to its employment functions, 

including limiting energy consumption, freezing all hires, and 

cutting back on training and travel.

Notwithstanding these measures, the Government 

projected a deficit of $17.4 million for 2011, $90.1 million for 

2012, and $49.9 million for 2013. In response, the 

Government considered implementing several additional costcutting measures, including laying off 600 Government 

employees, eliminating some or all of the eighteen paid

Government holidays, instituting furloughs and workweek 

reductions for Government employees, and increasing the 

gross-receipts tax. By June 21, 2011, the Governor had 

exhausted his $500 million statutory borrowing authorization, 

and the Government had made only interest payments on its 

debt.

B.

The Government ultimately rejected these cost-cutting 

measures, and instead adopted VIESA. Under VIESA, all 

employees of the executive and legislative branches of the 

Government whose annual salary exceeded $26,000 would 

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receive an 8% reduction in pay, but no employee’s salary 

would be reduced below $26,000. The legislation also 

allowed any employee who had attained thirty years or more 

of service to retire and receive a one-time payment. As a 

result of VIESA, the Government projected savings of 

approximately $28 million annually. VIESA passed the 

Legislature on June 22, 2011, and was signed into law by the 

Governor on July 5, 2011. The salary reductions contained in 

VIESA expired on July 3, 2013.

C. 

Many of the affected union employees were subject to 

collective bargaining agreements. Relevant for our purposes, 

the Appellants—United Steel, Paper and Forestry, Rubber, 

Manufacturing, Energy, Allied Industrial and Service 

Workers International Union (“USW”), the American 

Federation of Teachers Local 1826 (“AFT”), and one of 

AFT’s vice presidents (collectively, the “Unions”)—had 

negotiated collective bargaining agreements on their 

members’ behalf. 

USW is party to four collective bargaining agreements: 

a Master agreement, which covers all 1,000 employees and 

became effective on October 1, 2009; a Supervisors 

agreement, effective on October 1, 2005 and set to expire on 

September 30, 2008, but later extended on a day-to-day basis; 

a Non-Supervisors agreement, effective on October 1, 2008; 

and an Enforcement Officers agreement, effective on October 

1, 2009. The Master and Non-Supervisors agreements were 

concluded in October 2010.

The USW collective bargaining agreements set forth 

detailed payment schedules that specify the wages or salaries 

and benefits for all of the employees covered in the 

agreements. The Master agreement called for a 2.5% pay 

increase from the previous year. The USW Supervisors, NonCase: 14-4357 Document: 003112462706 Page: 6 Date Filed: 11/15/2016
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Supervisors, and Enforcement Officers collective bargaining 

agreements provide that the Government may reduce the 

workforce through layoffs; they also provide that the member 

employees will not strike during the duration of the 

agreement. Those three agreements further set forth grievance 

and arbitration procedures that allow for adjudication of any 

dispute. The Non-Supervisors and Enforcement Officer 

agreements provide that no modification to the agreement is 

effective unless agreed to in writing by both USW and the 

Government; the Supervisors agreement states that the parties 

are bound by the agreement and will comply with all terms 

and conditions in the agreement. 

AFT is party to three collective bargaining 

agreements—one for each type of employee it represents: 

professionals, paraprofessionals, and support staff. All three 

collective bargaining agreements were effective September 1, 

2007, and set to expire on August 31, 2011, but have been 

extended on a day-to-day basis. These collective bargaining 

agreements were concluded in May 2009, but they were made 

retroactively effective from September 1, 2007.

Like the USW agreements, the AFT collective 

bargaining agreements set forth detailed payment plans for 

wages or salaries and benefits of its members. They provide 

that the employees will not strike for the duration of the 

agreement, and they set forth arbitration procedures for any 

dispute involving the collective bargaining agreements. All of 

the AFT agreements require that any modification be in 

writing and agreed to by all parties. 

D.

Shortly after VIESA’s enactment, USW, AFT, and 

other collective bargaining representatives filed suit in the 

District Court of the Virgin Islands, and their cases were 

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consolidated.1 The Union-plaintiffs alleged that VIESA 

violates the Contract Clause, the Fifth Amendment’s Takings 

Clause, due process, equal protection, the separation-ofpowers doctrine, and 42 U.S.C. § 1983. They also alleged that 

VIESA constitutes a breach of contract and a breach of the 

duty of good faith and fair dealing. 

On December 5, 2011, the District Court held a oneday bench trial. It rendered its judgment on March 29, 2012. 

In its opinion, the District Court first addressed the Unionplaintiffs’ Contract Clause claim and found that, although 

VIESA substantially impaired the collective bargaining 

agreements, such impairment was justified and did not violate 

the Contract Clause. It also held that VIESA did not violate 

the Takings Clause, procedural due process, and substantive 

due process. Accordingly, the District Court dismissed those

federal constitutional claims. 

USW brought an appeal to this Court, which we 

dismissed for lack of jurisdiction because the other Unionplaintiffs’ territorial claims were still pending before the 

District Court. On September 30, 2014, following our 

dismissal of the initial appeal, the District Court dismissed all 

of the territorial claims. The court also dismissed the

separation-of-powers claim because, since no injunctive or 

declaratory relief could be granted as a result of VIESA’s 

expiration, the claim was moot. On all the other claims, 

jurisdiction was proper, but they were nonetheless dismissed. 

AFT and USW timely appealed.

 1 In addition to AFT and USW, several other unions 

brought suit in the District Court. We refer to those plaintiffs 

below as the “Union-plaintiffs.” For purposes of our case, 

only AFT, AFT’s vice president, and USW appealed the 

District Court’s judgment.

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II.

We review the District Court’s findings of fact for

clear error and exercise plenary review over the District

Court’s conclusions of law. Post v. St. Paul Travelers Ins.

Co., 691 F.3d 500, 514-15 (3d Cir. 2012). The District Court 

had jurisdiction under 28 U.S.C. § 1331. We have jurisdiction 

under 28 U.S.C. § 1291.2

The Government argues that this case is moot, thus 

depriving this Court of subject-matter jurisdiction. Because 

Article III of the Constitution limits the jurisdiction of federal 

courts to certain “Cases” or “Controversies,” U.S. Const. art. 

III, § 2; see also Rendell v. Rumsfeld, 484 F.3d 236, 240 (3d 

Cir. 2007), we must determine, before reaching the merits, 

whether this appeal presents a justiciable case or controversy.

The constitutional requirement that the exercise of 

 2 We perceive no obstacle to the Unions’ suit posed by 

the Eleventh Amendment because the Revised Organic Act of 

the Virgin Islands—which extends constitutional provisions 

to the Virgin Islands and does not expressly provide Eleventh 

Amendment protection, see 48 U.S.C. § 1561—authorizes 

suits against the Virgin Islands “arising out of contract,” id. § 

1541(b). Thus, even if the Eleventh Amendment did apply to 

the Virgin Islands—a question we do not decide today—the 

Revised Organic Act indicates that Contract Clause violations 

would fall outside the scope of the Amendment’s protection. 

Cf. United States v. Government of Virgin Islands, 363 F.3d 

276, 286-87 (3d Cir. 2004) (declining to decide whether the 

Eleventh Amendment applies to the Virgin Islands); Fleming 

v. Dep’t of Pub. Safety, 837 F.2d 401, 407 (9th Cir. 1988) 

(concluding the Northern Mariana Islands lack Eleventh 

Amendment immunity because it was not expressly conferred 

upon them).

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judicial power depends upon the existence of a case or 

controversy has three elements: “(1) a legal controversy that 

is real and not hypothetical, (2) a legal controversy that 

affects an individual in a concrete manner so as to provide the 

factual predicate for reasoned adjudication, and (3) a legal 

controversy with sufficiently adverse parties so as to sharpen 

the issues for judicial resolution.” Int’l Bhd. of Boilermakers 

v. Kelly, 815 F.2d 912, 915 (3d Cir. 1987) (quoting Dow 

Chem. Co. v. EPA, 605 F.2d 673, 678 (3d Cir. 1979)). A case 

is moot when “the issues presented are no longer live or the 

parties lack a legally cognizable interest in the outcome.” 

County of Los Angeles v. Davis, 440 U.S. 625, 631 (1979) 

(internal quotation marks omitted). “The central question of 

all mootness problems is whether changes in circumstances 

that prevailed at the beginning of the litigation have 

forestalled any occasion for meaningful relief.” Rendell, 484 

F.3d at 240 (internal quotation marks omitted). “[I]f a case 

becomes moot after the District Court enters judgment, an 

appellate court no longer has jurisdiction to review the matter 

on appeal.” Id. at 241.

The Government argues that this case is moot because, 

since the District Court rendered its judgment, VIESA has 

expired. The Unions present two bases on which, despite 

VIESA’s expiration, we may reach the merits: (A) the 

“capable of repetition, yet evading review” exception to 

mootness applies; and (B) the case is not moot because our

decision here will affect collateral arbitration proceedings 

between the same parties. 

A. 

A case is not necessarily moot simply because the 

challenged law has expired; “if the underlying dispute 

between the parties is one ‘capable [of] repetition, yet 

evading review,’ it remains a justiciable controversy within 

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the meaning of Article III.” N.J. Turnpike Auth. v. Jersey 

Cent. Power & Light, 772 F.2d 25, 31 (3d Cir. 1985) (quoting 

Neb. Press Ass’n v. Stuart, 427 U.S. 539, 546 (1976)). The

“capable of repetition, yet evading review” exception to the 

mootness doctrine applies “only in exceptional situations,

where (1) the challenged action is in its duration too short to 

be fully litigated prior to cessation or expiration, and (2) there 

is a reasonable expectation that the same complaining party 

will be subject to the same action again.” Kingdomware 

Techs., Inc. v. United States, 136 S. Ct. 1969, 1976 (2016)

(brackets and internal quotation marks omitted); see Rendell, 

484 F.3d at 241.

The Unions argue that this case triggers the “capable of

repetition, yet evading review” exception because the short

duration of VIESA means that it, or similar legislation, could

never be reviewed. The continued financial problems facing

the Virgin Islands make it plausible that the Virgin Islands

will enact new wage-reduction legislation despite being party

to collective bargaining agreements.

We agree that the duration of VIESA—two years—is 

too short to be fully litigated prior its expiration. That much is 

clear from the procedural history of this case. The Unions 

filed suit immediately after VIESA was enacted in July 2011, 

and the District Court resolved the federal claims, including 

the Contract Clause claim, on March 29, 2012, and the 

remaining territorial claims on September 30, 2014. The 

Unions timely appealed, but VIESA had expired over a year 

prior to the notice of appeal. 

The more difficult question is whether this case meets 

the second prong of the two-part test: is there a reasonable 

expectation that the Unions will be subject to the same 

action? For the alleged harm to occur again, the Government 

would have to pass another law calling for another round of 

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wage reductions that affects the same Union employees. But 

the mere power to reenact a challenged law is not enough. 

“Rather, there must be evidence indicating that the challenged 

law likely will be reenacted.” Nat’l Black Police Ass’n v. 

District of Columbia, 108 F.3d 346, 349 (D.C. Cir. 1997). 

The Unions claim that new “wage-reduction legislation is 

entirely plausible in view of the fiscal crisis facing the Virgin 

Islands.” Unions’ Supp. Letter Br. 4. For example, the Unions 

point to statements made by the Governor in his State of the 

Territory Address that “our government is teetering on the 

brink of financial collapse,” and “our territory has never been 

in such a state in its history.” Id. (brackets omitted). But these 

statements show only that the Virgin Islands’ economy 

remains in a perilous state; they do not show that this new 

wage-reduction legislation is likely to be enacted. Similarly, 

the Governor’s statement that “even meeting the 

government’s payroll will continue to be a challenge,” id., is 

simply an observation of the financial situation facing the 

Virgin Islands, not evidence that the Legislature might pass 

new legislation similar to VIESA. The Unions provide no 

basis on which we can determine that they could reasonably 

expect to be subject to VIESA-like legislation again. Without 

such evidence, we are left to speculate. That is not enough to 

trigger the “capable of repetition, yet evading review”

exception to the mootness doctrine. 

B. 

Even if this case is not “capable of repetition, yet 

evading review,” the Unions argue that it is not moot because 

this Court’s decision will have collateral legal consequences, 

namely, that it will affect the Unions’ rights in a pending 

arbitration before the Virgin Islands Public Employee 

Relations Board in which the Unions are challenging 

VIESA’s wage cuts.

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An action is not moot if it will have collateral legal 

consequences. Nat’l Iranian Oil Co. v. Mapco Int’l, Inc., 983 

F.2d 485, 490 (3d Cir. 1992). In National Iranian Oil, we 

held that the case was not moot because, inter alia, the district 

court’s order below would have possible collateral legal 

consequences in the form of collateral estoppel in future 

actions. Id. National Iranian Oil had petitioned the district 

court to compel arbitration of a contract dispute with Mapco. 

The district court dismissed National Iranian Oil’s petition as 

untimely based on its holding that the three-year Delaware 

statute of limitations applied to the action, rather than the tenyear Iranian statute of limitations urged by National Iranian 

Oil, who had filed its petition six years after the relevant 

events. In response to this decision, National Iranian Oil filed 

two additional lawsuits in other federal district courts for the 

same breach of contract claim for which it sought arbitration. 

Because the “district court’s holding that the Iranian statute of 

limitations does not apply would have a collateral estoppel 

effect in those actions and could result in their dismissal,” we 

held that the action was not moot. Id.

Likewise, in our case, the District Court’s holding that 

VIESA does not violate the Contract Clause will have 

collateral legal consequences on the binding arbitration 

between the Unions and the Government, which is set to take 

place before the Public Employee Relations Board. In the 

arbitration, the Unions allege that the Government failed to 

pay the covered employees their full wages and salaries due 

to them. The arbitrator’s decision will likely depend on the 

validity of VIESA. But the Public Employee Relations Board 

may not adjudicate the constitutionality of VIESA because it 

lacks the authority to do so. As a result, a decision here is 

necessary to provide a preclusive effect in the binding 

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arbitration.3 Therefore, the case is not moot, and we may 

proceed to the merits.

III.

The Contract Clause provides that no State shall pass 

any law “impairing the Obligation of Contracts.” U.S. Const. 

art. I, § 10.4 Although the Clause speaks in absolute terms, it 

is not “the Draconian provision that its words might seem to 

imply.” Allied Structural Steel Co. v. Spannus, 438 U.S. 234, 

240 (1978). The Contract Clause “does not prevent the State 

from exercising such powers as are vested in it for the 

promotion of the common weal, or are necessary for the 

general good of the public,” even though contracts previously 

entered into may be affected. Id. at 241 (internal quotation 

marks omitted). Thus, the Contract Clause “does not trump 

the police power of a state to protect the general welfare of its 

citizens.” Buffalo Teachers Fed’n v. Tobe, 464 F.3d 362, 367 

(2d Cir. 2006). 

The Supreme Court has developed a three-part analysis 

“for harmonizing the command of the Clause with the 

necessarily reserved sovereign power of the states to provide 

for the welfare of their citizens.” Balt. Teachers Union v. 

Mayor & City Council of Balt., 6 F.3d 1012, 1015 (4th Cir. 

1993) (internal quotation marks omitted). To determine 

whether legislation violates the Contract Clause, this Court 

must analyze whether the law has operated as a substantial 

 3 The Government and Unions both agreed to stay the 

arbitration pending the outcome of this appeal.

4 The Contract Clause was made applicable to the 

Virgin Islands in 1954 through section 3 of the Revised 

Organic Act of the Virgin Islands, 48 U.S.C. § 1561. See 

West Indian Co. v. Government of Virgin Islands, 844 F.2d 

1007, 1016 (3d Cir. 1988).

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impairment of a contractual relationship; whether the 

government entity, in justification, had a significant and 

legitimate public purpose behind the regulation; and whether 

the impairment is reasonable and necessary to serve this 

important public purpose. See Energy Reserves Grp., Inc. v. 

Kan. Power & Light Co., 459 U.S. 400, 411-13 (1983); 

Nieves v. Hess Oil V.I. Corp., 819 F.2d 1237, 1243 (3d Cir. 

1987).

A.

The Government conceded before the District Court

that the collective bargaining agreements entered into with 

the Unions constitute contractual relationships and that, if any 

impairment of the contractual relationship existed, such 

impairment was substantial. App. 32. Therefore, for our 

purposes, we must decide only whether VIESA impaired the

collective bargaining agreements. We have no trouble 

concluding that it did.

To assess whether there has been an impairment of a 

contractual relationship, we ask whether legitimate 

expectations have been thwarted. See Transp. Workers Union

of Am., Local 290 ex rel. Fabio v. Se. Pa. Transp. Auth., 145 

F.3d 619, 622 (3d Cir. 1998). The collective bargaining 

agreements set forth detailed payment and benefits schedules 

at which the Union employees were to be compensated. The 

Government agreed to the collective bargaining agreements

and had already approved the appropriations to pay those 

salaries. In exchange for the agreed-upon salaries, the Union 

employees made various concessions, including their right to 

strike. In return for those concessions, the Union employees 

expected that they would receive the salary provided for in 

the collective bargaining agreements. See Buffalo Teachers 

Fed’n, 464 F.3d at 368 (“The promise to pay a sum certain 

constitutes not only the primary inducement for employees to 

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enter into a labor contract, but also the central provision upon 

which it can be said they reasonably rely.”).5

Moreover, the collective bargaining agreements

provided that they could not be modified without mutual 

assent. As a result, the Government lacked the unilateral 

power to alter the employees’ salaries. The Union employees’ 

expectation that they would receive the benefit of their 

bargain without unilateral modification by the Government 

was therefore a reasonable expectation. Compare Transp.

Workers, 145 F.3d at 622 (holding that, because the 

government retained the power to modify the contracts 

without the plaintiffs’ agreement, the plaintiffs had no 

reasonable expectations that could be thwarted), with Balt. 

Teachers Union, 6 F.3d at 1015 (“Only if the employees’ 

salaries were subject to unilateral adjustment by the City 

under the terms of the contract could it possibly be concluded 

[that there was no impairment of the contracts at issue].”).

We therefore find that VIESA impaired the collective 

bargaining agreements. Because the Government stipulated 

 5 Other courts have consistently found that contracts 

were impaired where compensation levels called for in the 

contracts were reduced. E.g., Balt. Teachers Union, 6 F.3d at 

1018 (finding that “[i]n the employment context, there likely

is no right ... more central to the contract’s inducement” than 

the right to compensation, and holding that salary reductions 

constituted a substantial impairment); Condell v. Bress, 983 

F.2d 415, 419 (2d Cir. 1993) (holding that a payroll lag 

whereby union employees were paid 90% of their salary and 

received the withheld 10% of their pay at the termination of 

their employment constituted a substantial impairment); Ass’n 

of Surrogates & Supreme Court Reporters v. New York, 940 

F.2d 766, 772 (2d Cir. 1991) (same).

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that, should we find the collective bargaining agreements 

were impaired, such impairment was substantial, the first 

prong of the three-part test is met.

B.

Because we find that VIESA substantially impaired the 

collective bargaining agreements, we must next determine 

whether the Government had a significant and legitimate 

public purpose in enacting VIESA. A legitimate public 

purpose is one aimed at remedying a broad and general social 

or economic problem; it need not be addressed to an 

emergency or temporary situation. See Energy Reserves Grp., 

459 U.S. at 411-12. The record in this case is replete with 

evidence that the Virgin Islands faced an immediate fiscal 

problem that needed to be addressed, and the Unions do not 

dispute that VIESA was enacted to address this significant

and legitimate public purpose.

C.

That VIESA was aimed at a significant and legitimate 

public purpose does not end our inquiry. Once a legitimate 

public purpose has been identified, we must then decide 

whether the impairment is both necessary and reasonable to 

meet the purpose advanced by the Government in 

justification. See U.S. Trust Co. v. New Jersey, 431 U.S. 1, 22

(1977) (“Legislation adjusting the rights and responsibilities 

of contracting parties must be upon reasonable conditions and 

of a character appropriate to the public purpose justifying its 

adoption.”); N.J. Retail Merchs. Ass’n v. Sidamon-Eristoff, 

669 F.3d 374, 386 (3d Cir. 2012) (“[T]he court must ascertain 

‘whether the adjustment of the rights of the parties to the 

contractual relationship was reasonable and appropriate in 

light of that purpose.’” (quoting Transp. Workers, 145 F.3d at 

621)).

When determining whether legislation is necessary and 

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reasonable, the State is ordinarily entitled to deference in its 

legislative judgment. However, when the State itself is a 

contracting party, “complete deference to a legislative 

assessment of reasonableness and necessity is not appropriate 

because the State’s self-interest is at stake.” U.S. Trust, 431 

U.S. at 26. If we afforded complete deference to the State in 

such a case, “a State could reduce its financial obligations 

whenever it wanted to spend the money for what it regarded 

as an important public purpose, [and] the Contract Clause 

would provide no protection at all.” Id. For this reason, when 

a State is a contracting party, its “legislative judgment is 

subject to stricter scrutiny than when the legislation affects 

only private contracts.” Nieves, 819 F.2d at 1249. Despite our 

more exacting scrutiny, some deference is appropriate, and 

the inquiry becomes “whether a less drastic modification 

would be sufficient and whether the legislation was 

reasonable in light of changed circumstances.” Keystone 

Bituminois Coal Ass’n v. Duncan, 771 F.2d 707, 717 (3d Cir. 

1985).

1.

We first consider whether VIESA was necessary. To 

determine whether the impairment was necessary, our task is 

two-fold. First, we must ensure that the Government did not 

“consider impairing the obligations of [its] contracts on a par 

with other policy alternatives.” Balt. Teachers Union, 6 F.3d 

at 1020 (quoting U.S. Trust, 431 U.S. at 30-31). Second, we 

must consider whether the Government imposed a drastic 

impairment when an “evident and more moderate course 

would serve its purposes equally well.” Id. (quoting U.S. 

Trust, 431 U.S. at 31). 

We have reason here to be concerned that the 

Government considered impairing the collective bargaining 

agreements on a par with other policy alternatives. While the 

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Government clearly implemented the various measures 

described above in an attempt to raise revenue and alleviate 

the effects of the fiscal crisis before it implemented VIESA 

and the record reflects it considered some additional measures 

as alternatives to VIESA, the record also indicates that 

Government officials did not place impairment of the 

agreements in a category separate from other policy options. 

For example, Debra Gottlieb testified that the Governor’s 

economic policy team gave no “special consideration” to 

policy options that would not alter the agreements, but rather 

“considered all options available to the Government.” App. 

869; see also App. 938 (Member of Governor’s economic 

team indicating the Government never even considered 

eliminating tax breaks before pursuing VIESA, thereby 

placing contractual impairment above other policy options.).

There is also reason for concern here that, as the 

Unions claim, the Government imposed a more drastic 

impairment than was necessary. The Unions argue, for 

example, that the Government could have laid off 600 

Government employees, resulting in $30 million of savings; 

furloughed some employees using the layoff provisions in the 

collective bargaining agreement; and reduced the number of 

paid Government holidays. Tax increases and renegotiation 

of the collective bargaining agreements present other 

alternatives the Government could have explored and, 

perhaps, discarded after thoughtful review. See, e.g., U.S. 

Trust, 431 U.S. at 30 n.29, 32 (raising the possibility that tax 

increases could have been used to avoid impairing a contract); 

Sidamon-Eristoff, 669 F.3d at 388 (considering policies used 

in other States as potential alternatives). In dismissing the 

Unions’ policy alternatives, the District Court observed that 

proposals such as additional taxing, borrowing, furloughs, 

and layoffs could have resulted in a greater net reduction in 

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pay for Government employees, while at the same time 

reducing the Government’s ability to provide basic services.

App. 49-51. The absence of any feasibility studies, which it 

appears were not commissioned by the Government, not only 

deprives us of any meaningful way to corroborate the District 

Court’s assessment, but also reinforces our concern that the 

Legislature indeed may have imposed a more drastic 

impairment than necessary and may not have adequately 

considered alternatives before impairing its contractual 

obligations. 

That said, these are close and difficult decisions for 

any legislature to make in the face of a financial crisis, and 

VIESA provides a close case as to the necessity inquiry. The 

courts are tasked with assessing the necessity of a given 

impairment and do not accord legislatures “complete 

deference,” U.S. Trust, 431 U.S. at 26—particularly where, as 

here, a State or territory is itself a party to the contract it seeks 

to abrogate. But the Contract Clause also “does not require 

the courts ... to sit as superlegislatures,” choosing among 

various options proposed by plaintiffs, as “we [are] illequipped even to consider the evidence that would be relevant 

to such conflicting policy alternatives.” Balt. Teachers Union, 

6 F.3d at 1021-22. 

Fortunately, we need not decide today whether—

despite our concerns—VIESA was necessary because, as 

explained below, we conclude it was unreasonable, which is 

alone sufficient to render it improper under the Contract 

Clause. Thus, for purposes of this analysis, we assume 

without deciding that VIESA was necessary and move on to 

consider its reasonableness.

2.

Even assuming VIESA was necessary, the 

Government is not entitled to impair its contracts at will. The 

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Contract Clause is not toothless. In addition to being a 

necessary impairment, any impairment must also be

reasonable, and it “is not a reasonable one if the problem 

sought to be resolved by an impairment of the contract 

existed at the time the contractual obligation was incurred.” 

Univ. of Haw. Prof’l Assembly v. Cayetano, 183 F.3d 1096, 

1107 (9th Cir. 1999) (internal quotation marks omitted); see 

also U.S. Trust, 431 U.S. at 31. 

In United States Trust, the Supreme Court held that 

New Jersey’s impairment of its covenant was unreasonable 

because, inter alia, the problem the impairment was meant to 

remedy was well known when New Jersey agreed to the 

covenant it impaired. 431 U.S. at 31-32. New Jersey enacted 

the law at issue to repeal a covenant between itself and New 

York that limited the ability of the two states to subsidize 

transportation. Id. at 3, 13-14. New Jersey claimed that doing 

so served an important public purpose—the need for mass 

transportation in the New York metropolitan area. Id. at 29-

30. The Court, however, found that, because the need for 

mass transportation had been well known for many years, 

including when New Jersey entered into the covenant with 

New York, changed circumstances could not justify impairing 

its covenant. Id. at 31-32. Thus, the law at issue was not 

reasonable, and it violated the Contract Clause.

In this case, the Government claims that VIESA was 

necessary because of the economic crisis and severe budget 

deficits. But to pass muster under our Contract Clause 

analysis, the impairment must be reasonable, in addition to

being necessary. Even assuming VIESA was necessary to 

address the economic crisis and severe budget deficits, the 

Government knew of the economic crisis facing the Virgin 

Islands at the time it was negotiating with the Unions and 

when it concluded the collective bargaining agreements with 

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USW and AFT.

As to USW, there is extensive evidence demonstrating 

the Government’s knowledge of the budget crisis at the time 

the Government agreed to provide a 2.5% salary increase to 

USW employees—as indicated by the USW Master 

agreement—on October 23, 2010. Prior to those agreements 

and as early as 2009, the Government had already projected 

significant budget deficits. Revenue had fallen by 30%—

more than $250 million. And on February 22, 2010, Debra 

Gottlieb testified before the Legislature regarding the Virgin 

Islands’ difficult financial situation. Gottlieb warned that the 

Government’s “cash balances are precariously low.” App. 

321. She further cautioned that “the operating deficit is 

expected to continue throughout fiscal year 2011.” App. 322. 

Gottlieb’s testimony expressly indicated that one possibility 

for addressing the crisis was to implement “an across the 

board payroll reduction that equated to a 10% salary 

reduction,” which “would yield approximately $51.7 million 

in expenditure reductions.” App. 325. At this point, as shown 

by Gottlieb’s testimony, both the Governor—who signed the 

agreements—and the Legislature—which later voted to 

impair them—were fully aware from the outset that tax

revenues continued to decline, and that in order to maintain a 

balanced budget, the Virgin Islands would have to 

significantly increase revenue or substantially reduce 

expenditures. And apart from Gottlieb’s presentation, the 

Governor had already been authorized to borrow $500 million 

to alleviate some of the Government’s budget shortfalls, 

which were predicted for the upcoming years. 

With respect to the AFT collective bargaining 

agreements, although these agreements were concluded 

earlier, in May 2009, the timing is nearly as suspect. In May 

2009, the economic recession was in full swing. The 

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Legislature initially authorized the Governor to borrow $500 

million in early June 2009, only a few weeks after the 

Governor signed the AFT agreements. It was obvious then 

that the Virgin Islands’ budget crisis would require legislative 

action. And the Government already knew that revenue had 

dropped sharply. Despite its knowledge of the financial 

difficulties, the Government nevertheless entered into the 

collective bargaining agreements.

Even if the crisis worsened after the collective 

bargaining agreements were approved, we would not alter our 

conclusion. The Government knew it was facing severe 

budget deficits and that the financial condition of the Virgin 

Islands was precarious. That the budget deficit projections 

grew and the financial condition became increasingly dire is 

not a change in the kind of problem that VIESA sought to 

solve. It is a change in degree. Under United States Trust, this 

change in degree is not enough to render the impairment 

“reasonable in light of changed circumstances.” 431 U.S. at 

32.

We are also troubled by the assurances made to Union 

representatives during the negotiations. USW representatives, 

concerned that funding would not be available for the salary 

increases as a result of the financial crisis, asked the 

Government’s chief negotiator if the Government would be 

able to fund the agreements. He responded yes. Rather than 

negotiating lower salaries with the Union employees, the 

Government promised the Union employees certain wages—

even a pay increase for USW employees—in return for their 

making several concessions. Instead of honoring that promise 

or never making it in the first place, the Government chose

the politically expedient route of reducing wages after it had 

received its benefit of the bargain. The Contract Clause is not 

a dead letter, and if it is to continue to have any force, it must 

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prohibit such self-serving, post hoc changes in contractual 

obligations.

We do not fault the Virgin Islands Government for its 

attempt to alleviate the severe budget crisis it was facing. The 

financial crisis required a solution. While we afford 

considerable deference to the Legislature’s decision as to 

what the solution should be—even when the State (or, as in 

this case, the territorial government) is a party to an impaired 

contract—that deference is not absolute, nor can a 

Legislature’s decision to impair a contract stand if it was 

unreasonable. Here, we are asked to decide whether the 

Virgin Islands’ impairment of its contracts with Union 

employees was reasonable in light of the fact that it knew of 

the precarious financial condition when it agreed to the 

contracts. United States Trust requires that we hold that the 

impairment was unreasonable. Because any impairment must 

be both necessary and reasonable, the impairment here does 

not survive Contract Clause scrutiny.6

IV.

Because VIESA substantially impaired the USW and 

AFT collective bargaining agreements, and such impairment 

was unreasonable, we hold that VIESA violates the Contract 

 6 We note, however, that although VIESA substantially 

impaired the collective bargaining agreements, such 

impairment was not unreasonable on its face. Rather, 

VIESA’s impairment of the agreements here was

unreasonable in light of the timeline of events in this 

particular case. The agreements with AFT and USW were 

concluded after the justification for VIESA was known to the 

Government. Thus, VIESA violates the Contract Clause as 

applied only to the USW and AFT collective bargaining 

agreements.

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Clause as applied to those collective bargaining agreements. 

Accordingly, we will reverse the District Court’s order. We 

will also remand to the District Court so that it may 

reconsider its holding with respect to the Unions’ territorial 

claims, specifically the Public Employee Relations Act claim,

in light of this opinion.

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