Opinion ID: 200439
Heading Depth: 2
Heading Rank: 1

Heading: Standards for Arm-of-the-State Analysis

Text: We review de novo the conclusion that PRCCCC is not entitled to Eleventh Amendment immunity. Arecibo Cmty. Health Care, Inc. v. Puerto Rico, 270 F.3d 17, 22 (1st Cir. 2001). The question of whether PRCCCC is an arm of the Commonwealth and entitled to share its Eleventh Amendment immunity is a question of federal law. Regents of the Univ. of Cal. v. Doe, 519 U.S. 425, 429 n.5 (1997). The Commonwealth of Puerto Rico is treated as a state for Eleventh Amendment purposes. P.R. Ports Auth. v. M/V Manhattan Prince, 897 F.2d 1, 9 (1st Cir. 1990). Here the Commonwealth itself is not a party nor has it sought to express its views in this litigation as a party or amicus; PRCCCC is the party and is attempting to cloak itself in the Commonwealth's Eleventh Amendment immunity under the theory that it is an arm of the state. PRCCCC, the entity asserting Eleventh Amendment immunity, bears the burden of showing it is an arm of the state. had decided the appeal. PRCCCC's claim was false. PRCCCC suggested that the parties would engage in arbitration at the district court's behest, before the appeal was decided, and that this was the equivalent of a trial date. In fact, no steps had been taken by either side to initiate arbitration. No date for arbitration had been set, and an arbitrator had not been contacted. Because nothing had changed since the issuance of the November 6 order, this court denied the motion for reconsideration on December 19, 2002. -6- Wojcik v. Mass. State Lottery Comm'n, 300 F.3d 92, 99 (1st Cir. 2002). The arm-of-the-state doctrine arises in connection with at least three types of entities.4 The first is a political subdivision of the state, such as a city or county. Political subdivisions are not entitled to Eleventh Amendment immunity. See, e.g., Bd. of Trustees of Univ. of Ala. v. Garrett, 531 U.S. 356, 369 (2001) (citing Lincoln County v. Luning, 133 U.S. 529, 530-31 (1890)); see also Moor v. County of Alameda, 411 U.S. 693, 717-721 (1973) (political subdivision not arm of the state for diversity jurisdiction purposes). The second entity is established by two (or more) states by compact and approved by Congress. The third, the type at issue here, involves a special-purpose public corporation established at the behest of a state. Multi-state compact entities and special-purpose public corporations established by a state sometimes share the state's Eleventh Amendment immunity. The arm of the state analytical doctrine has moved freely amongst these three categories, applying common principles. 4 PRCCCC does not argue that it is simply acting as an agent of the state, such as a private corporation acting under contract as a fiscal intermediary for a health insurance program for state employees. See Shards Teaching Hosp. & Clinics, Inc. v. Beech St. Corp., 208 F.3d 1308 (11th Cir. 2000). Nor would the record support any such argument. -7- The Supreme Court's modern arm-of-the-state jurisprudence starts with Mt. Healthy City School District Board of Education v. Doyle, 429 U.S. 274 (1977), which rejected the school board's claim that it was an arm of the state and not a political subdivision. In Mt. Healthy, the Supreme Court looked in part to state law to consider the nature of the entity created by law. Id. at 280. It concluded that state law rendered the board more like a county or city, and thus not an arm of the state. The court considered a balance of factors: The board obtained guidance and extensive monies from the state, but that was offset by the board's revenueraising power, including its power to issue bonds and levy taxes. Id. It was unclear whether the Court was using state law as an indication of the state's intention with respect to school bonds or as a structural feature that the Court would look to regardless of the state's intention. Morris v. Wash. Metro. Area Transit Auth., 781 F.2d 218, 223 (D.C. Cir. 1986). This court, as discussed below, has chosen to ask the question in terms of how the state structured its relationship to the entity. The Mt. Healthy decision was followed by Lake Country Estates, Inc. v. Tahoe Regional Planning Agency, 440 U.S. 391 (1979), which, by contrast, involved a bi-state agency, and thus raised different concerns, including the interests of the federal government under the Compact Clause. There the court held: -8- [S]ome agencies exercising state power have been permitted to invoke the Amendment in order to protect the state treasury from liability that would have had essentially the same practical consequences as a judgment against the State itself. Id. at 400-01. Lake Country also considered several facts as pertinent to the analysis.5 That was the state of the doctrine in 1993, when this court decided Metcalf & Eddy, 991 F.2d at 939-40. For the past decade the courts of this circuit, under Metcalf & Eddy, have assessed an entity's arm-of-the-state status by focusing on whether 5 The Court in Lake Country identified the following facts as germane to the arm-of-the-state status of the Tahoe Regional Planning Agency (TRPA): 1. the designation in the interstate compact of the TRPA as a separate legal entity and a political subdivision; 2. the power that resided in counties to appoint six of the ten governing members of the TRPA whereas the states appointed only four members; 3. the funding of the TRPA exclusively by the counties; 4. the express pronouncement in the compact that obligations of the TRPA were not binding on either state; 5. the function of the TRPA, which was to regulate land use; and 6. the failure of the states to preserve veto power over rules promulgated by the TRPA. See 440 U.S. at 401-02. Thus, the analysis considered (a) how the entity is characterized under state law; (b) the level of control exercised by the state; (c) the entity's relationship to the public treasury (both the relative size of its government appropriation and whether the government is legally liable for the entity's debts); and (d) whether the entity performs a state function. See generally A.E. Rogers, Note, Clothing State Governmental Entities With Sovereign Immunity: Disarray in the Eleventh Amendment Arm-of-the-State Doctrine, 92 Colum. L. Rev. 1243 (1992) (criticizing the Court's continuing use of a multifactor approach). -9- the structure established by the state reveals that the agency is an arm of the state; if the structure does not resolve the question, then the primary focus is on whether the action is in essence one for recovery from the state. Because answers are not always clear, we have encouraged the use of a non-exclusive list of factors, and identified at least seven areas of inquiry.6 These multi-factor tests, as we noted in Neo Gen Screening, Inc. v. New England Newborn Screening Program, 187 F.3d 24, 27 (1st Cir. 1999), are not easy to apply. Still, Metcalf & Eddy presciently predicted the ways in which the Supreme Court would view the issue. In the intervening decade since Metcalf & Eddy there have been two Supreme Court decisions addressing arm-of-the-state issues: Hess v. Port Authority Trans-Hudson Corp., 513 U.S. 30, 33 (1994), involving a bi-state entity, which updated and clarified 6 These areas, each of which can be mined for information that might clarify the institution's structure and function, include: (1) whether the agency has the funding power to enable it to satisfy judgments without direct state participation or guarantees; (2) whether the agency's function is governmental or proprietary; (3) whether the agency is separately incorporated; (4) whether the state exerts control over the agency, and if so, to what extent; (5) whether the agency has the power to sue, be sued, and enter contracts in its own name and right; (6) whether the agency's property is subject to state taxation; and (7) whether the state has immunized itself from responsibility for the agency's acts or omissions. Id. at 939-940. -10- the arm-of-the-state doctrine; and Auer v. Robbins, 519 U.S. 452, 456 n.1 (1997), which briefly applied Hess to an intra-state entity. Additionally, in that time, a number of important Supreme Court decisions have reshaped Eleventh Amendment doctrine. The question is raised then as to whether those opinions cause us to reshape the Metcalf & Eddy test. We start with the larger Eleventh Amendment doctrine. Several points, at least, are informative to our analysis. The first is that the Supreme Court has said that it is not just the state's interest in its public treasury which is at stake in the assertion of Eleventh Amendment immunity. The state also has a dignity interest as a sovereign in not being haled into federal court. Fed. Mar. Comm'n v. S.C. State Ports Auth., 535 U.S. 743, 122 S. Ct. 1864, 1874-75 (2002). These twin goals of the Eleventh Amendment -- protection of the state's treasury and of its dignitary interests -- explicitly govern the arm-of-the-state analysis. Hess, 513 U.S. at 39-41. The changes in Eleventh Amendment doctrine have created different consequences for a finding that an entity partakes of Eleventh Amendment immunity as an arm of the state. The Eleventh Amendment has always acted to restrict the jurisdiction of the federal courts to entertain claims against the state when the underlying source of federal jurisdiction is diversity jurisdiction. See Univ. of R.I. v. A.W. Chesterton Co., 2 F.3d -11- 1200, 1202-03 (1st Cir. 1993). The Amendment also restricts the jurisdiction of the federal courts to hear private claims based on federal causes of action created by the Congress, see Edelman v. Jordan, 415 U.S. 651, 662-64 (1974), subject to the Ex Parte Young exception for injunctions against state officers, Ex Parte Young, 209 U.S. 123, 159 (1908). Importantly, the Court has recently held that the Amendment's inherent notions of state sovereign immunity impose restrictions on the power of Congress, acting under certain Article I powers, to create privately enforced federal causes of action against the states. Seminole Tribe v. Florida, 517 U.S. 44 (1996). Where the Eleventh Amendment bars jurisdiction over a claim in federal court, the states may decline on sovereign immunity grounds to entertain such an action. Alden v. Maine, 527 U.S. 706, 731-32 (1999). While this case is a diversity action for breach of contract, the criteria for rules about what is an arm of the state have not varied with whether the basis for federal jurisdiction is diversity or federal question. Accordingly, any arm-of-the-state conclusion here has implications for the enforceability of federal laws enacted under Article I in suits by private persons against PRCCCC. Thus, where an entity claims to share a state's sovereignty and the state has not clearly demarcated the entity as -12- sharing its sovereignty, there is great reason for caution. It would be every bit as much an affront to the state's dignity and fiscal interests were a federal court to find erroneously that an entity was an arm of the state, when the state did not structure the entity to share its sovereignty. The consequences of an armof-the-state finding are considerable. For example, where a state consents to suit in its own courts, such an arm-of-the-state finding may pose a threat to the state treasury, even if the state has not structured the entity so as to put its treasury at risk. In an era when many states face budget crises and impose cutbacks on recognized state agencies, yet another claimant on the treasury may not be welcomed. Not all entities created by states are meant to share state sovereignty. Some entities may be part of an effort at privatization, representing an assessment by the state that the private sector may perform a function better than the state. Cf. Richardson v. McKnight, 521 U.S. 399, 405-07 (1997) (discussing advantages of private sector entities performing government functions and role of private contractors in prison administration). Some entities may be meant to be commercial enterprises, viable and competitive in the marketplace in which they operate. Such enterprises may need incentives to encourage others to contract with them, such as the incentives of application of usual legal standards between private contracting parties. The -13- dollar cap on recovery found in many state sovereign immunity statutes would be a powerful disincentive to a private party to contract with an entity, unless the private party first obtained a waiver of immunity from the entity. See generally Defendini Collazo v. Commonwealth of P.R., 134 D.P.R. 28 (1993), available at 1993 WL 839857 (discussing limited waivers of sovereign immunity under Puerto Rico law). In Puerto Rico, a breach of contract action against the Commonwealth is capped at $75,000. 32 P.R. Laws Ann. § 3077(c) (2001). A conclusion that the entity is beyond the control of privately enforced Article I legislation enacted by the Congress may also be undesirable to a state. A state may not have intended, for example, that the employees of the entity be unable to privately enforce the Fair Labor Standards Act, 29 U.S.C. §§ 201219 (2000), see Alden, 527 U.S. at 712 (dismissing FLSA lawsuit by state employees on grounds that Congress, acting pursuant to its Article I powers, could not abrogate the sovereign immunity of states in state court); or Title I of the Americans with Disabilities Act, 42 U.S.C. §§ 12111-12117 (2000), see Garrett, 531 U.S. at 360 (holding that suits by state employees to recover money damages for a state's failure to comply with the provisions of Title I of the ADA are barred by the Eleventh Amendment); or the Age Discrimination in Employment Act, 29 U.S.C. §§ 621-634, see Kimel v. Fla. Bd. of Regents, 528 U.S. 62, 82-83 (2000) (holding -14- that ADEA's purported abrogation of the states' sovereign immunity is invalid because ADEA is not appropriate legislation under section five of the Fourteenth Amendment); or provisions of the Family and Medical Leave Act, 29 U.S.C. §§ 2601-2654, see Laro v. New Hampshire, 259 F.3d 1, 4 (1st Cir. 2001) (invalidating on Eleventh Amendment grounds a private cause of action for money damages against the state under the personal medical leave provision of the FMLA). A state could adjudge that those effects may be unwanted disincentives to people who might otherwise seek employment with the entity, or that it is unwise to differentiate the entity's employees from those in the private sector. In sum, states set up entities for many reasons. An erroneous arm-of-thestate decision may frustrate, not advance, a state's dignity and its interests. Against that context of the serious consequences on both sides of this issue, it is the developments in the arm-of-the-state case law from the Supreme Court which bind us here. The most recent full discussion of the doctrine is in Hess. Hess, like Lake Country before it, involves an entity created by two states under the Compact Clause of the Constitution. A closely divided court in Hess held that the Port Authority Trans-Hudson Corporation was not an arm of the state. As noted above, the Hess analysis explicitly recognizes the Eleventh Amendment's twin interests: protection of the fisc and the dignity of the states. 513 U.S. at 39-40, 47. -15- As to bi-state Compact Clause entities, the Hess court continued the general approach taken in Lake Country: We would presume the Compact Clause agency does not qualify for Eleventh Amendment immunity unless there is good reason to believe that the States structured the new agency to enable it to enjoy the special constitutional protection of the states themselves and that Congress concurred in that purpose. Id. at 43-44 (quoting Lake Country, 440 U.S. at 401). Putting aside the question of presumption, Hess requires a two-step analysis. Accord Harter v. Vernon, 101 F.3d 334, 337 (4th Cir. 1996). The first step of the analysis concerns how the state has structured the entity. This step, we think, pays deference to the state's dignitary interest in extending or withholding Eleventh Amendment immunity from an entity. After all, a state may easily make clear by statute its view that an entity is to share the state's immunity. Where the state has not made a clear statement, its dignity interests are nonetheless protected by an examination of the structure the state has chosen to establish. In evaluating whether the state had structured an agency to be an arm of the state, Hess looked at various indicators of immunity or the absence thereof.7 513 U.S. at 44. 7 Among the indicators Hess considered were: 1. extent of state control including through the appointment of board members and the state's power to veto board actions or enlarge the entity's responsibilities; 2. how the enabling and implementing legislation characterized the entity and how the state courts have viewed the entity; 3. whether the entity's functions are readily classifiable as state functions or local or non-governmental functions; and -16- If the structural indicators point in different directions, then the second stage of analysis comes into play. At this stage, the vulnerability of the state's purse is the most salient factor in the Eleventh Amendment determination.8 Where it is clear that the state treasury is not at risk, then the control exercised by the state over the entity does not entitle the entity to Eleventh Amendment immunity. See id. at 47-49.9 4. whether the state bore legal liability for the entity's debts. See 513 U.S. at 44-46. 8 This Hess vulnerability inquiry includes examination of these, among other, factors: whether the state laws impose an obligation on the state to be responsible for payment of judgments against the entity (on this point federal courts are not free to assume that a state will voluntarily assume the payment of the entity's debts if the entity is in need); other sources of revenue for the entity; and whether the agency is so structured that, as a practical matter, the state anticipated budget shortfalls that would render the entity constantly dependent on the state. Id. at 49-50. 9 Although the dissent in Hess would reach a different conclusion on the facts there, it agrees that the key initial question is whether the State has structured the entity in the expectation that immunity will inhere. Id. at 58 (O'Connor, J., dissenting). The dissent also agrees that if the entity's liabilities are funded by the taxpayers' dollars, then there is Eleventh Amendment immunity. Id. at 60-61. The Hess dissent did not agree that the converse was true: that if the state treasury was not directly implicated, then there would be no immunity. The dissent would then ask whether the state possesses sufficient control over an entity performing governmental functions that the entity may properly be called an extension of the State itself. Id. at 61. If the lines of oversight are clear and substantial -- for example, if the state appoints and removes an entity's governing personnel and retains veto or approval power over an entity's undertakings -- then, on the dissent's reasoning, the entity should be deemed an arm of the state for Eleventh Amendment purposes. Id. -17- In the aftermath of Hess, the circuits almost uniformly find that, when there is an ambiguity about the direction in which the structural analysis points, the potential payment from the state treasury is the most critical factor in determining whether an entity is operating as an arm of the state. See 17A J.W. Moore et al., Moore's Federal Practice § 123.23(4)(b), at 123-60 & n.51 (3d ed. 2000) [hereinafter Moore's] (collecting cases). The question for the lower federal courts becomes what parts of Hess govern the analysis of an intra-state entity such as PRCCCC. Compact Clause entities by their nature involve different federalism concerns than intra-state entities. Several objections might be made to applying Hess here. The presumption announced in Hess may be limited to multi-state entities. It might also be thought that the two-step Hess analysis applies only to multi-state Compact Clause entities, and so not to a public corporation formed by the Commonwealth alone. Or it might be thought, more generally, that Hess is inconsistent with later Eleventh Amendment case law, and so should not be taken as establishing doctrine controlling now. Hess itself noted there was reason to treat Compact Clause entities somewhat differently. 513 U.S. at 42 (There is good reason not to amalgamate Compact Clause entities with agencies of one of the United States for Eleventh Amendment purposes.) (internal quotation omitted); accord Hadley v. N. Ark. Cmty. -18- Technical Coll., 76 F.3d 1437, 1439 (8th Cir. 1996) (interpreting Hess). As part of the federal plan prescribed by the Constitution, the States agreed to the power sharing, coordination, and unified action that typify Compact Clause creations. . . . [T]he federal tribunal cannot be regarded as alien in this cooperative, tri-governmental arrangement. Hess, 513 U.S. at 4142. Here, by contrast, the federal government is not a party to the arrangement. As a result, we think the presumption announced in Hess -- a presumption against an entity being an arm of the state -- applies only to Compact Clause entities, and the logic of it does not extend to the two other categories of cases. We conclude, however, that the two-step analysis of Hess is not limited to Compact Clause entities. Several reasons support this conclusion. First, Hess is founded on the twin reasons underlying the Eleventh Amendment, reasons common to all categories of cases. Further, the Hess court cited Metcalf & Eddy, which did not involve a multi-state Compact Clause entity, among cases supporting the point that the vulnerability of the State's purse [is] the most salient factor in Eleventh Amendment determinations. Hess, 513 U.S. at 48. Hess also cited cases from four other circuits adhering to that principle when the entities involved included intra-state authorities, as well as political subdivisions and bi-state entities. Id. at 48-49. There is no indication the court intended to differentiate in the application of its major -19- tests depending on the nature of the entity. Thus, Metcalf & Eddy foreshadowed Hess's determination that when there is ambiguity from the structure about whether an entity is an arm of the state, the primary focus is on the risk to the state treasury. Next, the circuits have also viewed Hess as applying to political subdivision and intra-state corporation cases. Mancuso v. N.Y. State Thruway Auth., 86 F.3d 289, 293 (2d Cir. 1996) (Although Hess involved a bi-state entity, we nevertheless believe that it is the proper starting place for our Eleventh Amendment inquiry in this case, involving an intra-state entity); see, e.g., Harter, 101 F.3d at 337-40 (applying Hess to determine whether an entity should be characterized as a political subdivision or a state agency). Finally, Auer v. Robbins, a case involving an intra-state entity, the Board of Police Commissioners, supports our reading that the two-step analysis applies beyond Compact Clause entities. In a footnote, the Court held the Board was not an arm of the state because the state was not responsible for the Board's financial liabilities and the only form of state control was the governor's power to appoint four of five Board members. 519 U.S. at 456 n.1. The Court did not cite to its earlier precedent, such as Mt. -20- Healthy, but rather to its bi-state compact cases, Hess and Lake Country.10 As to the more general concern, some have questioned Hess's viability in light of Seminole and its aftermath. See Thiel v. State Bar, 94 F.3d 399, 401-03 (7th Cir. 1996) (viewing Hess as implicitly limited by Seminole). Hess's emphasis on protection of the state fisc as a primary component of an arm-of-the-state analysis has been criticized as not entirely consistent with the broader Eleventh Amendment interests established by other and later cases. See C.M. Vazquez, What Is Eleventh Amendment Immunity?, 106 Yale L.J. 1683, 1731-32 (1997); see also Thiel, 94 F.3d at 401-02. One response would be that Hess was concerned with an entirely different problem. Seminole and its progeny are addressed to what protection is given the state by the Eleventh Amendment. Hess is concerned with who is entitled to share that protection. When the state has not made it clear through structure that an entity is to share its immunity, there is reason not to reach a 10 In Regents of the University of California v. Doe, the Court said generally: Of course, the question of whether a money judgment against a state instrumentality or official would be enforceable against the State is of considerable importance to any evaluation of the relationship between the State and the entity being sued. 519 U.S. at 430. -21- result inconsistent with what the state has apparently hoped to effectuate (that is, an independent entity) unless there is a risk to the state fisc. Another response would be that Seminole and its progeny affirm the longstanding view, operationalized in Hess, that the Eleventh Amendment exists to protect the fiscal and dignity interests of the state. Seminole, 517 U.S. at 58. The first prong of Hess pays considerable deference to the dignity interests of the state, focusing on both explicit and implicit indications that the state sought to cloak an entity in its Eleventh Amendment immunity. Finally, even were the criticism to have force, Hess binds us and has not been overruled. To the contrary, it has been consistently cited by the Court.11 We must follow it until the Supreme Court decides otherwise. State Oil Co. v. Khan, 522 U.S. 3, 20 (1997) ([I]t is this Court's prerogative alone to overrule one of its precedents.); Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 484 (1989). Accordingly, in the aftermath of Hess, Auer and Regents of the University of California, we think the Hess analysis governs and has refined the Metcalf & Eddy analysis, which is consistent 11 E.g., Solid Waste Agency v. U.S. Army Corps of Eng'rs, 531 U.S. 159, 174 (2001); Alden, 527 U.S. at 746; Seminole, 517 U.S. at 58. -22- with Hess. We view Hess as involving two key questions, with many factors instructive on each: 1. Has the state clearly structured the entity to share its sovereignty? This evaluation is undertaken12 in light of the different factors described in Hess, Lake Country and Metcalf & Eddy. 2. If the factors assessed in analyzing the structure point in different directions, then the dispositive question concerns the risk that the damages will be paid from the public treasury. This is the rule of Metcalf & Eddy, valid today as well. 12 Lest our focus on the structure created by the state be misunderstood, whether an entity is entitled to partake of a state's Eleventh Amendment immunity is a question of federal law, not state law: Ultimately, of course, the question whether a particular state agency has the same kind of independent status as a county or is instead an arm of the State, and therefore one of the United States within the meaning of the Eleventh Amendment, is a question of federal law. But that federal question can be answered only after considering the provisions of state law that define the agency's character. Regents of the Univ. of Cal., 519 U.S. at 429 n.5. The Supreme Court has adverted to state law, but has not defined what role it is to play. See, e.g., Mt. Healthy, 429 U.S. at 280. In Hess itself the majority declined to adopt the state court's characterization of the agency. See 513 U.S. at 45 (holding that the Port Authority does not enjoy Eleventh Amendment immunity despite the fact that [s]tate courts . . . repeatedly have typed the Port Authority an agency of the States rather than a municipal unit or local district). -23- This analysis focuses on whether the state has legally or practically obligated itself to pay the entity's indebtedness. The control asserted by the state is an important guide to the initial inquiry. But where the evidence is that the state did not structure the entity to put the state treasury at risk of paying the judgment, then the fact that the state appoints the majority of the governing board of the agency does not itself lead to the conclusion that the entity is an arm of the state.