Commentary

Freedom of Contract at Risk in North Carolina

Hans Bader
By Hans Bader | April 6, 2016 | 11:56 AM EDT

North Carolina Gov. Pat McCrory has said the new law was necessary, but others have painted it as broadly discriminatory and genuinely unneeded, particularly in the way it usurps local authority. (AP Photo)

Virginia’s Dillon rule prevents cities and counties from regulating the employment practices of private businesses. That bars them from setting minimum wages higher than the state or federal minimum wage, or adding new protected classes of employees at businesses’ expense (through anti-bias ordinances). That is good for businesses, promotes freedom of contract, and prevents a confusing patchwork quilt of regulation that varies from city to city and county to county. It is also one reason why Virginia has a better than average business climate.

North Carolina has now enacted legislation giving businesses the same protection (see, e.g., Section 143-422.2(c)). Unfortunately, it is part of House Bill 2, a statute that also addresses a contentious social issue, bathroom use by transgender people (it preempts an ordinance in the City of Charlotte giving people the right to use the bathroom of the gender they identify with, as opposed to their biological sex). CEI took no position on that legislation.

A lawsuit has now been filed challenging not just the controversial bathroom provisions, but also the statute’s general preemption of local employment regulations, which is perfectly legal and constitutional. (See Carcano v. McCrory.)

The challengers argue that its preemption of local anti-bias ordinances is inherently unconstitutional. In paragraph 154 of their complaint, they claim, “By blocking anti-discrimination protections for LGBT people at the local level, H.B. 2 imposes a different and more burdensome political process on LGBT people than on non-LGBT people who have state protection against identity-based discrimination,” in violation of the Equal Protection Clause.

But this is untrue. First, the statute preempts adding any additional protected classifications beyond that provided by state and federal law—not just sexual orientation. It does not single out gays and lesbians.

This matters because left-leaning cities often meddle in hiring decisions by banning employers from sensibly discriminating based on characteristics that are properly considered in hiring, and which, unlike sexual orientation, reflect the content of the applicant’s character. For example, cities like Boston and Washington, D.C., forbid considering an applicant’s history of criminal convictions, treating felons as a protected class. As Chief Justice Rehnquist noted with concern in Boy Scouts v. Dale (2000), “Some municipal ordinances have even expanded to cover criteria such as prior criminal record, prior psychiatric treatment, military status, personal appearance, source of income, place of residence, and political ideology.” This places serious burdens on employers’ ability to hire based on merit, and undermines freedom of association, freedom of contract, and the ability to make a profit.

There is nothing suspect about preventing localities from banning discrimination against new protected classes, since the Constitution does not prohibit private discrimination at all, or require local governments to outlaw it.  (See the Supreme Court’s decisions in San Francisco Arts & Athletics v. United States Olympic Committee (1987), Moose Lodge v. Irvis (1972), United States v. Morrison (2000)).

Nor is this legislation likely to have much long run impact in the area of sexual orientation (an area where I have agreed with these challengers in the past regarding North Carolina law). Sexual orientation discrimination is likely to be banned legislatively at the federal level within a few years—such legislation has previously passed the Senate—and the EEOC claims that such discrimination is already encompassed by federal law’s existing ban on discrimination based on sex, although this is a dubious argument.

Preemption of local employment regulations advances important state interests, and has a compelling economic logic behind it. It thus does not reflect discriminatory “animus” under the Supreme Court’s decision in Romer v. Evans (1996). The North Carolina General Assembly quite properly found that making “that laws and obligations consistent statewide for all  businesses,  organizations,  and  employers  doing  business  in  the  State” will “benefit  the  businesses, organizations, and employers seeking to do business in the state and attracts new businesses, oragnizations, and employers to the State.” As Governor McCrory noted, “North Carolina is one of at least 37 states like Virginia where cities and towns cannot pass rules or regulations that exceed the authority given to them by the state.”

Businesses have no desire to engage in invidious discrimination. They also have no desire to be sued for discrimination and most discrimination lawsuits turn out to be unfounded. Most discrimination lawsuits fail, but not before the innocent business spends thousands and thousands of dollars defending itself in court.

Discrimination lawsuits are very expensive, and bad for business. Years ago, when litigation costs were lower, it was already estimated to cost $250,000 or more for a business to defend itself through the trial stage; $75,000 to dispose of an obviously meritless lawsuit on summary judgment; and $25,000 just to get rid of an even more transparently baseless lawsuit on a motion to dismiss. An innocent employer’s costs can be far higher: Sears, Roebuck & Co. “spent an estimated $20 million in legal fees” to defeat a discrimination lawsuit against it brought by the EEOC, noted The Washington Post on July 9, 1985.

Local anti-bias ordinances are bad news even for businesses that don’t discriminate. Anti-bias ordinances usually contain “heads-I-win, tails-you-lose” attorney’s fee provisions for employees who sue a business. The worker receives attorney’s fees if the worker wins, but the employer doesn’t receive attorney’s fees if it wins. That’s because these attorneys’ fee provisions are generally interpreted as mimicking federal attorney fee provisions, which were construed in the Supreme Court's 1978 Christiansburg Garment decision as mandating such one-way attorney fees.

Moreover, even if the plaintiff's case is so insubstantial that the plaintiff only wins $1 at trial, the employer can still be ordered to pay tens of thousands of dollars in attorney’s fees. For example, an appeals court ruling awarded $42,000 in attorney’s fees to a plaintiff who suffered only $1 in damages. (See Brandau v. Kansas, 168 F.3d 1179 (10th Cir. 1999).) These attorney fee provisions will lead to some employers paying thousands of dollars to plaintiffs just to settle weak or meritless discrimination claims.

Finally, it should be noted that North Carolina’s new law does not involve racial discrimination, which remains banned by federal and state laws (such as 42 U.S.C. § 1981, which bans racial discrimination by even the smallest, one-person businesses). While the Supreme Court has said that states cannot enshrine the right to racially discriminate in their Constitution, Reitman v. Mulkey (1967), racial discrimination is especially disfavored compared to other types of discrimination (and subject to tougher scrutiny than gender and sexual-orientation-based classifications), and states often have the ability to set even race-related policies at the statewide level (see, e.g., Crawford v. Los Angeles Bd. Of Educ. (1982); Schuette v. Coalition to Defend Affirmative Action (2014)).

Hans Bader practices law in Washington, D.C. After studying economics and history at the University of Virginia and law at Harvard, he practiced civil-rights, international-trade, and constitutional law.