First Circuit: Puerto Rico did not violate Contract Clause Through Cost Saving Measure

The “Contract Clause” of Article I, section 10 of the Constitution says that “No State shall . . . pass any . . . Law impairing the Obligation of Contracts.”  On January 27, the First Circuit Court of Appeals issued a decision in the case of United Automobile, Aerospace, Agricultural Implement Workers of America v. Fortuno, which rejected the arguments of a group of public employees and unions that Puerto Rico’s “Act No. 7” violated their rights under the clause.  Act No. 7 provided for a variety of layoffs, furloughs, salary freezes and the like for public employees in order to deal with what the Governor had called a fiscal state of emergency.  The workers and unions argued that the Act violated their rights by interfering with the terms of collective bargaining agreements entered into by the workers and unions with a variety of governmental agencies.

The First Circuit applied the typical two prong test for deciding Contract Clause cases: (1) has the state law substantially impaired a contractual relationship; and (2) if so, was the impairment reasonable and necessary to serve an important government purpose.  The court assumed that requirement #1 had been met but found that the plaintiffs had not met their burden of showing that the impairment was not reasonable and necessary to serve the government’s purpose in trying to deal with Puerto Rico’s monumental deficit.

The really critical issue in the case is who should have the burden of showing #2–the plaintiffs or the state?  The Court assumed that it should be the plaintiffs, but in a separate concurrence, two judges basically called upon the Supreme Court to decide who should bear this burden: “Still, the issue is unsettled. . . . No one short of the Supreme Court is capable of definitively resolving a problem that may well have considerable importance in light of the current financial difficulties confronting state governments.”

Well, Supreme Court, do you have a view on this?

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