Opinion ID: 168138
Heading Depth: 2
Heading Rank: 2

Heading: Indem nification and R estitution

Text: In a separate ruling, the district court ordered the City to return payments it received under the indemnification provision found unlawful in Wessel I. Both the union defendants and the City challenge the propriety of restitution since the district court never made a finding that the City’s policies violated the First Amendment. Before we address the merits of this claim, we must first clarify what is and is not at stake here. 1 The district court articulated another reason for concluding the union defendants evidence did not satisfy Lehnert: the fact that “union employees gain . . . experience . . . does not justify the union charging non-members for otherwise non-chargeable extra-unit activities.” Op. at 13. The court reasoned that this expertise would not “ultimately inure to the benefit of the members of the local union,” as required by Lehnert. See 500 U.S. at 524. W e disagree— such expertise could inure to Local 624’s benefit at some later date, even if it does not do so “in any particular membership year.” See id. “The 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.” Id. at 523. -15- In Wessel I, we held the indemnification agreement between the City and Local 624 was void as contrary to public policy because it would allow the City to seek indemnification “for its own unconstitutional practices and policies.” 299 F.3d at 1199 n.4. In particular, the agreement required Local 624 to indemnify the City “against any and all claims, demands, suits or other forms of liability, including payments of reasonable attorney fees and costs . . . for any claim or challenge to the imposition of an agency fee.” Id. at 1197. Pursuant to this provision, Local 624 had reimbursed the City for some of its legal expenses in this case. Relying on our holding in Wessel I, the district court ordered the City to return to Local 624 the indemnification it had received. [O p. at 22.] The court also enjoined the City from seeking future indemnification from Local 624 under this provision. [Id.] Neither the City nor Local 624 challenge the prospective injunction— they argue only that the court erred by ordering restitution of payments made to the C ity for the cost of litigation in these matters. Thus, this is not a case where w e are asked to prospectively “permit enforcement of those [voided] provisions,” as plaintiffs argue. Aple. Br. at 38. Rather, the only issue before us is whether restitution is required where one party has performed on a contract that was later voided as contrary to public policy. The non-union employees argue that restitution is also necessary here to prevent the City from benefitting from the voided contractual provision. -16- The parties agree the general rule is that restitution is not proper where one party has performed on a contract later voided for public policy reasons. See, e.g., Hogue v. Superior Utils., 210 P.2d 938, 940 (N.M . 1949); Restatement (Second) of Contracts § 197. Under this rule, the court “will simply leave both parties as it finds them, even though this may result in one of them retaining a benefit that he has received as a result of the transaction.” Id. § 197, cmt. a. This rule is subject to various exceptions. Hogue, 210 P.2d at 940 (stating that “where the public interest is involved . . . affirmative relief will not be denied, although one of the guilty parties may benefit”); Restatement (Second) of Contracts § 197 (authorizing restitution in all cases where “denial of restitution would cause disproportionate forfeiture”); id. § 198(b) (authorizing restitution where the party seeking restitution “was not equally in the wrong with the promisor”); id. § 199(b) (authorizing restitution where the claimant “did not engage in serious misconduct” and “allowance of the claim would put an end to a continuing situation that is contrary to public policy”). A more recent formulation of the exceptions identified in the Restatement (Second) of Contracts is found in the Restatement (Third) of Restitution, currently under consideration by the American Law Institute. 2 It points to restitution as appropriate in circumstances w here one party is unjustly enriched at 2 In relation to the Restatement (Second) of Contracts, cited above, this section “reformulates the applicable rules without proposing to alter specific outcomes.” Restatement (Third) of Restitution § 32 cmt. a (T.D. No. 3, 2004). -17- the expense of the other, even “under an agreement that is illegal or otherwise unenforceable for reasons of public policy.” § 32 (T.D. No. 3, 2004). 3 Another circumstance where restitution might be appropriate is where it will deter future misconduct. The draft Restatement suggests courts look to a variety of factors to assess the need for restitution, including (1) the nature of the illegality; (2) the extent of the party’s culpability; (3) w hether illegal conduct was central or merely tangential to the performance of the contract; and (4) the strength of the deterrent effect of the decision. Id. The question here then is whether restitution is necessary to (1) prevent unjust enrichment of the City, or (2) deter future misconduct by the City or other municipalities. The first factor does not appear to apply: the union defendants are not seeking reimbursement, rather the non-member employees are seeking disgorgement of the indemnification proceeds. 3 It reads in full: (1) Restitution will be allow ed, whether or not necessary to prevent unjust enrichment, if restitution is required by the policy of the underlying prohibition. (2) Restitution will also be allow ed, as necessary to prevent unjust enrichment, if the allowance of restitution will not defeat or frustrate the policy of the underlying prohibition. There is no unjust enrichment if the claimant receives the counterperformance specified by the parties’ unenforceable agreement. (3) Restitution will be denied, notwithstanding the enrichment of the defendant at the claimant’s expense, if a claim under subsection (2) is foreclosed by the claimant’s inequitable conduct. Restatement (Third) of Restitution § 32 (T.D. No. 3, 2004) -18- The deterrence rationale might apply, however. That rationale may generally be appropriate in at least two circumstances in the context of unconstitutionally collected fair share fees. First, where the City knowingly participated or acquiesced in the unconstitutional conduct of the union defendants. Second, even if the City did not knowingly allow the violation, where it failed to exercise reasonable prudence to ensure the union defendants’ fair share procedures w ere constitutional. Knowing Participation. The first consideration is w hether the City knowingly participated or acquiesced in the constitutional violation. In Wessel I, we declared the indemnification provision void on the ground that the City should not be indemnified “for its own unconstitutional practices and policies.” Wessel I, 299 F.3d at 1199. W e also held “[t]hat a public employer has certain obligations within the fair share deduction framew ork established by courts.” Id. at 1197. These duties include a duty to establish procedures that protect dissenters’ rights, minimize impingement on non-union employees’ constitutional rights, and ensure that the union’s notice is adequate. See id. at 1198. Furthermore, we stated that “[i]f the City consistently made no effort to ensure that the Union’s fair share procedures complied with [Chicago Teachers Union Local, No. 1 v. Hudson, 475 U.S. 292 (1986)], such a failure would likely be cognizable under § 1983 and covered by the indemnification.” Id. at 1199 n.4. -19- Because the breadth of the indemnification clause would cover the types of violations described above, we found it contrary to public policy in Wessel I. W e did not conclude, however, that the City had violated the First A mendment in its implementation of its fair share policies. W e found only that the indemnification provision would allow payments for knowing violations of the constitutional notice requirements of Hudson, or conscious disregard of its basic fair share procedures. Thus, we did not conclude as a factual matter that the City had knowingly participated or acquiesced in the union defendants’ First Amendment violation. Nor did the district court make a finding on remand that the City violated the First Amendment. Reasonable Prudence. On this record, however, the district court concluded there is some support that the second consideration had been met— the City failed to exercise reasonable prudence in ensuring the union defendants’ fair share program satisfied constitutional standards. The district court found the nonmember employees had “suffered irreparable injury . . . due to the City’s failure to fulfill its obligation to protect them.” Op. at 21. It concluded “inasmuch as the legally inadequate fair share notice and the collection of the fair share fees violated the Plaintiffs’ First Amendment rights, [] the City could not possibly have fulfilled its obligation to ‘provide procedures that minimize that impingement [on non-members’ First Amendment rights] and. . . facilitate a -20- nonunion employee’s ability to protect his rights.’” Op. at 20 n.5 (quoting Hudson, 475 U.S. at 307 n.20). In reaching this conclusion on remand, the district court did not apply the legal framew ork discussed above. Its conclusions were made in the context of a motion for preliminary injunction that principally sought prospective relief. In light of our discussion of the applicable framew ork, it is now appropriate for the district court to make the equitable determination of restitution in the first instance. W e therefore remand for further proceedings on whether restitution should be ordered in light of the principles discussed above.