The Surety and the Supremacy Clause
In this Surety Today blog post we will discuss the topic of the surety and the Supremacy Clause and how the clause could provide a potential defense. Over the years, I have been faced many times with the argument that the principal was not properly licensed or authorized to do business in a particular jurisdiction where the bonded project was located. In some jurisdictions, such arguments can result in the principal being barred from defending itself or barred from asserting affirmative claims or even subject to damages and criminal prosecution. These issues add another unwelcome layer of risk and uncertainty to the matter. However, there may be a way to side-step the issue if the bonded project is a federal project. The Supremacy Clause of the U.S. Constitution can come into play on federal projects.
We begin by examining the doctrine of preemption. The Supreme Court has interpreted the doctrine of preemption to mean that “[t]he Supremacy Clause of the United States Constitution, Article VI, Clause 2, invalidates state laws that interfere with or are contrary to federal law.” Cutright v. Metropolitan Life Ins. Co., 201 W. Va. 50, 491 S.E.2d 308 (1997). When it is argued that a state law is preempted by a federal law, the focus of analysis is typically upon congressional intent. Retail Clerks Int’l Ass’n, Loc. 1625, AFL-CIO v. Schermerhorn, 375 U.S. 96, 103 (1963). Congressional intent is primarily discerned from the language of the pre-emption statute and the statutory framework surrounding it. Also relevant, is the structure and purpose of the statute as a whole, as revealed not only in the text, but through the reviewing court’s reasoned understanding of the way in which Congress intended the statute and its surrounding regulatory scheme to affect business, consumers, and the law. Medtronic, Inc. v. Lohr, 518 U.S. 470, 486, 116 S.Ct. 2240, 135 L.Ed.2d 700 (1996); Metro Tristate, Inc. v. Pub. Serv. Comm’n of W. Virginia, 859 S.E.2d 438, 446 (W. Va. 2021).
There are two ways in which preemption may be accomplished: expressly or impliedly. Morgan, 224 W. Va. at 65, 680 S.E.2d at 80. In turn, there are two types of implied preemption: “field preemption” and “conflict preemption.” Implied field preemption occurs where the scheme of federal regulation is so pervasive that it is reasonable to infer that Congress left no room for the states to supplement it. Implied conflict preemption occurs where compliance with both federal and state regulations is physically impossible, or where the state regulation is an obstacle to the accomplishment or execution of congressional objectives. For this discussion, we will focus on implied conflict preemption.
“[c]onventional conflict pre-emption principles require pre-emption ‘where … state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’” Boggs v. Boggs, 520 U.S. 833, 844 (1997) (quoting Gade v. Nat’l Solid Wastes Mgmt. Ass’n, 505 U.S. 88, 98 (1992)). Stated concisely, state laws are preempted when “they would upset federal legislative choices.” Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 551 (2001). Unlike other preemption analysis, under an implied conflict preemption analysis, federal statutory or policy language explicitly signaling an intent to preempt state law is not necessary.
Throughout the years, the Supreme Court has established that state laws, rules and regulations that conflict with or interfere with federal procurement laws and regulations by interfering with federal contractors can result in the state laws being deemed preempted and unenforceable. The Supreme Court has repeatedly said that the Supremacy Clause precludes states from imposing their own requirements on individuals working as federal contractors and chosen according to federal requirements. A century ago, in Johnson v. State of Maryland, 254 U.S. 51 (1920), the Supreme Court considered a case where a state sought to impose licensing requirements on a federal employee. The employee, a worker for the United States Post Office Department, was driving a government truck on a public highway in Maryland when he was arrested, tried, convicted and fined “for so driving without having obtained a license from the State.” Id. at 55. The Supreme Court reversed the conviction and found that a state may not impose regulations that “interrupt the acts of the general government itself.” Id. Moreover, when the federal government chooses to hire what it deems a “competent” employee, the Johnson Court concluded that a State may not impose regulatory requirements that impose separate or additional “competency” requirements. The Supreme Court stated that:
the immunity of the instruments of the United States from state control in the performance of their duties extends to a requirement that they desist from performance until they satisfy a state officer upon examination that they are competent for a necessary part of them and pay a fee for permission to go on. Such a requirement does not merely touch the Government servants remotely by a general rule of conduct; it lays hold of them in their specific attempt to obey orders and requires qualifications in addition to those that the Government has pronounced sufficient. It is the duty of the Department to employ persons competent for their work and that duty it must be presumed has been performed.
Id. at 57.
In Leslie Miller, Inc. v. State of Arkansas, 352 U.S. 187 (1956), the Supreme Court extended its preemption holding in Johnson from federal employees to federal contractors. The United States Air Force solicited bids for the construction of government facilities in Arkansas. A federal law adopted by Congress required that bids could only be submitted by a “responsible bidder,” and regulations promulgated under the law “set forth a list of guiding considerations defining a responsible contractor.” Id. at 188-89. A construction contractor submitted a bid to the Air Force, the bid was accepted, and the contractor began work under the contract. The State of Arkansas, however, tried to impose its own regulations on the contractor, and the State charged and convicted the contractor with working as a contractor “without having obtained a license under Arkansas law for such activity from its Contractors Licensing Board.” Id. at 188.
On appeal, the Supreme Court reversed the conviction and found that federal law preempted the State’s authority to impose its own contractor regulations, and stated: through the act of regulating, the State could declare “irresponsible” a contractor whom a federal agency had previously declared “responsible.” The Leslie Miller Court concluded that preemption arose from the conflict between the license requirement which Arkansas places on a federal contractor and the action which Congress and the Department of Defense have taken to insure the reliability of persons and companies contracting with the Federal Government. Subjecting a federal contractor to the Arkansas contractor license requirements would give the State’s licensing board a virtual power of review over the federal determination of “responsibility” and would thus frustrate the expressed federal policy of selecting the lowest responsible bidder. Id. at 190. There are similar rulings in other jurisdictions. See, e.g., United States Postal Service v. City of Hollywood, 974 F. Supp. 1459, 1462-65 (S.D. Fla. 1997); Gartrell Constr’n, Inc. v. Aubry, 940 F.3d 437, 439-41 (9th Cir. 1991); Electric Constr’n Co. v. Flickinger, 485 P.2d 547, 548-49 (Ariz. 1971); For use of DLM Dev. Grp., Inc. v. RUSH/Consutec Joint Venture, No. 05-22457-CIV, 2006 WL 8433268, at *2–3 (S.D. Fla. Apr. 26, 2006)
For example, in California, the 9th Circuit Court of Appeals in Gartrell Const. Inc. v. Aubry, 940 F.2d 437, 439 (9th Cir. 1991), held that California’s authority to require a general construction contractor, working exclusively for the United States government, to obtain a state contractor’s license was preempted by federal procurement laws.
This preemption analysis under the Supremacy Clause has also been applied to subcontractors on federal projects. In a twist, the Supremacy Clause was used to allow a Miller Act claim. In Airport Constr’n & Materials, Inc. v. Bivens, 649 S.W.2d 830 (Ark. 1983), the United States contracted with a general contractor to repair the roads on an air force base. The general contractor then subcontracted with Bivens for part of the work. Bivens was not licensed under state law to do construction work. Bivens sued the general contractor and bonding company under the Miller Act to recover the amount due for work he performed. The general contractor asserted a defense relying on an Arkansas statute that prohibits an unlicensed contractor from bringing an action in law or equity to enforce a construction contract.
The Arkansas Supreme Court rejected the general contractor’s argument and held that the Miller Act preempted the Arkansas law, and found that the subcontractor could maintain his Miller Act claim. The court observed “[w]ere a government contract subject to interruption because of varying state requirements, when the federal government has already determined that the contractor has the ability to fulfill its requirements and control the project to its satisfaction, the supremacy policy would be largely undermined.” So, if you are faced with an assertion that your principal was not properly licensed or registered or otherwise qualified under state laws while working on a federal project, you should consider the application of the Supremacy Clause and “implied conflict preemption” as a defense.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.
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