By Kenneth R. Dolin

In SDBC Holdings v. NLRB, reversing Stella D’Oro Biscuit Co., 355 NLRB No. 158 (2010), the Court of Appeals for the Second Circuit recently reversed the National Labor Relations Board and held that an employer acted lawfully and did not engage in unfair labor practices by failing to give a union an audited financial statement that it had sought during collective bargaining. 

The NLRB Decision

During contract negotiations, the employer repeatedly discussed operating losses and the need to reduce labor costs.  The Board, by a 2-1 vote, held that the employer “effectively” claimed that it was unable to pay the costs of the expiring collective bargaining agreement, and therefore obligated itself to furnish the union with the requested documentation of that claim, even though the employer did not “expressly” plead an inability to pay.  Further, the Board held that the employer failed to comply with its obligation by refusing to turn over to the union a copy of its audited financial statement, even though it provided a summary of this document to the union; showed the union the loss figures in its audited financial statement and matched them with the financial summary document it had provided to the union earlier; and offered to allow the union to examine this entire document at a location where it would remain in the employer’s possession.

This unlawful refusal, the Board concluded, precluded a lawful bargaining impasse, and accordingly the employer was not free to unilaterally implement the terms of its final offer that it had done.  Consequently, the strikers’ offer to return to work under the pre-impasse terms was a valid unconditional offer requiring the employer to reinstate them immediately.  By refusing to reinstate the strikers, the employer acted unlawfully and was ordered to reinstate the strikers immediately and make them whole for any lost wages and benefits from and after the employer’s receipt of their offer.

The Board found that the employer had effectively claimed an inability to pay, relying on the following employer statements to the union: that it could not continue to run the business at a loss; that it could not survive under the current labor contract and had to reduce those costs to stay in business; that the concessions it sought were needed for the survival of the company and if it did not obtain them it would close; that it required savings in its labor costs; and that it did not have the money to go forward with the business unless it implemented the cost reductions it proposed.  The Board adopted the administrative law judge’s finding that these statements constituted a claim of an inability to pay because they linked the employer’s need for labor cost concessions with its unprofitability and, in turn, with its very survival.

The Court Found Insufficient Evidence That The Employer Asserted An “Inability To Pay”

The Court of Appeals overturned the Board and held that the employer had only asserted an “unwillingness” to pay the union’s demands, not an “inability” to do so; that its bargaining strategy was founded upon its business objectives rather than an empty bank account; and that its statements indicated that the owner, a private-equity investment firm, had the funds to operate the business, but was unwilling to deploy them without labor-cost concessions.  The court found, as the employer had argued, that the employer indicated that the owner possessed ample funds but would choose not to pay absent labor cost concessions –- a bargaining strategy based on what the employer would pay, not what it could pay.  Given such evidence, the Court agreed with then-Member Schaumber’s dissent that the employer “plainly was not contending that it lacked funds to meet the [u]nion’s contract demands.”

Moreover, the court found that the Board’s characterization of the owner’s commitment to fund the employer’s losses as “emphatically short-term” was unsupported by any evidence in the record, much less substantial evidence.

The court further concluded that the Board acted “arbitrarily” in its treatment of relevant Second Circuit precedent, namely Stoehmann Bakeries, Inc. v. NLRB, 95 F.3d 218 (1996), where the court previously had disagreed with the Board’s finding that the employer there had claimed an inability to pay, reasoning that “[o]nce [the employer] contended that it had access to capital sufficient to continue [the operation], without change, the union’s need for financial information to bargain intelligently was virtually non-existent.”  Moreover, the court found that prior to this case, the Board had not hinged its analysis on whether the employer expressly denied an inability to pay, but rather placed the burden on the union to establish that the employer claimed an inability to pay.  In a concurring opinion, Judge Cabranes wrote that the Board order could not be enforced due to its failure to explain its reasons for not following Stroehmann Bakeries, but suggested that the Board might be able to produce a “more precise ruling” in the future by explaining that an employer claiming during bargaining that it is unprofitable due to labor costs is effectively claiming an inability to pay for such costs.

The Employer Adequately Substantiated Its Assertions

Even assuming that the employer had an obligation to provide the financial statements to the union, the court found that the employer fully complied with this objective by affording the union multiple opportunities to examine and make notes on the financial statements the union had requested.  The court reasoned that the union is not automatically entitled to substantiating information in the exact manner requested in every case where the employer claims an inability to pay.  The court concluded, on this record, that the Board’s conclusion — that only a photocopy could afford the union sufficient access to the financial statements to substantiate the employer’s claims regarding its unprofitability — lacked substantial evidence.  The court found the Board’s conclusion inadequately took into account all of the evidence demonstrating the employer‘s willingness to provide the document in multiple venues for the union to examine and take notes.

Practical Consequences

It is unlikely that this Second Circuit decision will significantly impact how the Obama Board views union information requests in this context, though it very well might follow the suggestion contained in Judge Cabranes’s concurrence to spell out a position that an employer claiming its operations are unprofitable due to labor costs is effectively arguing its inability to pay for such costs.  Accordingly, it is still necessary for practitioners to consider the Board decision in Stella D’oro, while recognizing that a court of appeals may very well reverse the Obama Board’s position on union information requests where such a decision is unsupported by substantial evidence and contrary to precedent. 

Employers that are losing money can best avoid the obligation to provide financial information by not making statements that they are losing money in any context, but especially not in the context of linking their unprofitability to their inability to survive currently or during the life of the contract under negotiation.  Unprofitable employers should certainly not link their investors’ continued willingness to support the employer financially to the union accepting their proposals if it wants to avoid the Obama Board finding that it has “effectively” asserted an “inability to pay.”  An unprofitable employer that conveys to the union that it would go out of business without an investor willing to fund its losses should, at a minimum, expressly deny that it is claiming an inability to pay and consider expressly referencing that the investor has the funds and desires to retain its investment in the employer and therefore is willing to bail the employer out financially.

As to an employer’s failure to provide the actual financial document that a union requests, it is undoubtedly the case that the Obama Board, if not the Second Circuit, had heightened the employer’s burden of proof when asserting confidentiality and will continue to require that the actual financial document be furnished by photocopy, except in very limited cases in which the employer can prove substantial inconvenience or a strong need for confidentiality.  Accordingly, employers refusing to provide a copy of the actual document requested by the union must now assess whether any confidentiality claim it may assert is sufficiently strong and whether compelling reasons to support limited disclosure really exist.  An employer in bargaining should continue to scrutinize all of its responses to union information requests closely to ensure that it affirmatively makes a reasonable, good-faith offer to accommodate the union’s right to obtain the requested information.  Employers should continue to attempt to reach an accommodation through good-faith bargaining.

Perhaps the most significant issue in the decision for practitioners was whether there was a valid impasse.  It was difficult to reconcile the Obama Board’s finding that no valid impasse was reached with the evidence that the union, by the second bargaining session, had fully corroborated the financial data contained in the summary document and had all the information it needed to confirm the employer’s assertion that it was losing money.  Nevertheless, practitioners should recognize that, with the Obama Board, even a hypertechnical refusal to provide information in the bargaining context can preclude it from finding the existence of a valid impasse and can result in it finding the existence of an unfair labor practice strike with significant back pay liability for any subsequent refusal to reinstate the strikers.  However, as this case demonstrates, it is worthwhile to recognize that the Courts of Appeal can, at least on occasion, provide employers with relief against the excesses of the Obama Board.

Portions of this article were excerpted from Mr. Dolin’s article, which was published in the May 23, 2011 edition of The National Law Journal, reprinted with permission.  ©2013 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.