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Millcreek Township School District v. Millcreek Township Educational Support Personnel Association

Supreme Court of Pennsylvania

July 17, 2019

MILLCREEK TOWNSHIP SCHOOL DISTRICT, Appellee
v.
MILLCREEK TOWNSHIP EDUCATIONAL SUPPORT PERSONNEL ASSOCIATION, Appellant

          Argued: April 10, 2019

          Appeal from the Order of the Commonwealth Court entered February 13, 2018 at No. 187 CD 2017, reversing the Order of the Court of Common Pleas of Erie County entered January 30, 2017 at No. 13252-16

          SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.

          OPINION

          DONOHUE JUSTICE.

         In this case, we review whether the Commonwealth Court disregarded the law when it vacated a grievance arbitration award based on its independent interpretation of the parties' collective bargaining agreement ("CBA"). Pursuant to this Court's decisions under the Public Employee Relations Act, 43 P.S. §§ 1101.101-1101.2301[1] ("PERA"), a reviewing court must apply the highly deferential two-prong "essence test" to grievance arbitration awards: first, the court must decide whether the issue is encompassed by the CBA; second, the court must uphold the arbitrator's award if the arbitrator's interpretation can rationally be derived from the CBA. Westmoreland Intermediate Unit #7 v. Westmoreland Intermediate Unit #7 Classroom Assistants Educ. Support Pers. Ass'n, 939 A.2d 855, 863 (Pa. 2007) (plurality) (quoting State Sys. of Higher Educ. (Cheyney University) v. State Coll. Univ. Prof'l. Ass'n., 743 A.2d 405, 413 (Pa. 1999)). As discussed in more detail herein, subject to a narrow exception for awards that violate a dominant public policy, proper application of the essence test prohibits a court from vacating an arbitrator's award unless "the award indisputably and genuinely is without foundation in, or fails to logically flow from, the [CBA]." Id. Because we have no trouble concluding that the award in the instant matter draws its essence from the CBA and because no public policy will be violated by its enforcement, we reverse the decision of the Commonwealth Court.

         Millcreek Township Educational Support Personnel Association (the "Association") and Millcreek Township School District (the "District") are parties to a CBA that became effective on July 1, 2011, and was set to expire on June 30, 2016.[2] The bargaining unit represented by the Association consists entirely of custodians for the District's properties. As pertinent to this appeal, the CBA provides that "[n]o work of the bargaining unit shall be subcontracted for the life of the Agreement." CBA, Art. III, ¶ H (hereinafter, the "no subcontracting provision"). The CBA further provides that "the rights and privileges of the Association and its representatives as set forth in the [CBA] shall be granted only to the Association as the exclusive representative of the employees and to no other organization." Id., Art. III, ¶ E (hereinafter, the "exclusivity provision").

         Negotiations for a successor CBA commenced on January 26, 2016 when the Association offered its initial proposal to the District. Approximately one month later, the District presented a counter proposal in which it sought, among other items, to eliminate the no subcontracting provision. N.T., 8/16/2019, at 24-25; Arbitration Decision, 11/7/2016, at 4. The Association rejected this proposal. N.T., 8/16/2019, at 24-25.

         On March 29, 2016, with successor CBA negotiations ongoing between the Association and the District, the District issued a request for proposals ("RFP") seeking quotes from prospective bidders for the provision of custodial labor services. See RFP Cover Letter, 3/29/2016, at 1. Specifically, the RFP sought quotations for guaranteed pricing during a three-year contract period to begin the day after the current CBA was set to expire, namely from July 1, 2016, through June 30, 2019. Id. Bids were due by 11:00 a.m. on May 2, 2016, at which point they would be publicly opened. Id. All bids were to be submitted to the District in an envelope clearly marked "RFP CUSTODIAL SERVICES LABOR CONTRACT," and all prospective bidders were required to attend a pre-bid meeting on April 28, 2016. Id. Bidders were required to conduct site visits at the District's buildings. Id. The District advertised the RFP announcement in at least two regional newspapers.

         On April 7, 2016, upon learning that the District had issued an RFP to subcontract the bargaining unit's work, the Association filed a grievance with the District.[3] Grievance, 4/7/2016. As set forth in the grievance, the Association alleged that the District "[had] violated the [CBA] by placing in several papers … a Legal Notice that the District [was] accepting bids for custodial labor services" and by announcing the pre-bid meeting scheduled for April 28, 2016. Id. According to the Association, "these actions directly violate[d] the [CBA], and in particular the provision that there will be no subcontracting." Id.[4] The Association requested that the District "cease and desist efforts to subcontract the custodial labor force" and "withdraw all present and scheduled Legal Notices." Id. It further requested that the District "inform any party contacting [it] with questions or actual proposals that there is no subcontracting of custodial labor services" and additionally sought "any other specific relief that the arbitrator deems appropriate." Id.

         Following a grievance hearing on May 11, 2016, before the District's Board of Education (the "Board"), the Board issued a brief decision wherein it stated, "we do not believe that [Mr. Revell] demonstrated that [the District] violated the [CBA] by soliciting RFPs from outside vendors. No member of the bargaining unit lost work hours nor was any work done by an outside vendor. Request for … RFPs [sic] is not the same as outsourcing actual work." Decision of Board, 5/19/2016. The Board also explained its belief that the District "has an obligation to the tax payers to manage its budget and ensure it is paying a competitive price for the services provided." Id. It concluded that "the only way to determine what pricing options are available to [the District] is to ask," and opined that the District did not demonstrate bad faith in its negotiations with the Association by issuing the subcontracting RFP. Id.

         On July 11, 2016, the District advised the Association that Facilities Management Systems ("FMS") had been selected as the successful bidder. Arbitration Decision, 11/7/2016, at 4. The District provided the Association with the bid information it received from FMS but did not in fact enter into a contract with that bidder or any other.

         Pursuant to the grievance procedure set forth in the CBA, the Association appealed its grievance to arbitration, consistent with section 903 of PERA.[5] See CBA, Art. I, ¶ C. Following a hearing before an arbitrator selected by the parties and briefing, the arbitrator granted the Association's grievance in a written decision dated November 7, 2016. See Arbitration Decision, 11/7/2016, at 15. The arbitrator stated that the issue before him was whether "the District violate[d] the CBA by its issuing of a[n RFP] for custodial services in the District," and if so, what the remedy should be. Id. at 8. He also noted that "the primary factor to be determined" was when subcontracting begins. Id.

         As set forth by the arbitrator, the District believed that it was acting within its managerial rights to investigate alternatives when it issued the RFP, conducted building walkthroughs and received bids. The District was also of the view that using this research in CBA negotiations with the Association, either to modify the CBA or to reach impasse and subsequently enter into a subcontract for custodial services, was both permissible under the terms of the CBA and in the best interest of taxpayers. Id. The arbitrator, however, did not credit the District's position because, in his view, it would have been possible to conduct due diligence and compare costs without formally requesting bids, advertising in newspapers, conducting building walkthroughs, and holding a public meeting to open bids. He characterized the District's conduct as a bad faith tactic that had a chilling effect on the negotiation process, noting that "the only step remaining in the outside contracting scheme of the District was to declare 'impasse,' sign the contract of the successful RFP bidder and have them commence work." Id. at 14. He indicated that those "final acts" would merely be the culmination of the subcontracting process which began, at the latest, on March 29, 2016, when the District issued its RFP.

         The arbitrator reached this conclusion based on testimony regarding the parties' long history together. Specifically, the arbitrator made the following findings of fact:

• The parties' history includes the prior subcontracting of school bus drivers' work, which eliminated that work from the bargaining unit;
• this conduct "created raw nerves" and lasting wounds within the Association;
• the Association was aware of this history and its effect on employees;
• this history was the driving force, pursuant to testimony, behind the Association negotiating for the current and former CBA to include the no subcontracting provision.

Id. at 10.

         Addressing the specific question of whether the District had subcontracted work in the instant situation, the arbitrator first concluded that the question was "definitely within the confines of the CBA." He then explained his interpretation of the CBA, as informed by the parties' testimony and history, that subcontracting "begins when the District decides to pursue that outside contracting avenue and then advises the Association and advertises through the use of RFPs." Id. Accordingly, he held that the District's actions had violated the CBA's no subcontracting provision. As relief, he ordered that "the RFPs cannot be used in bargaining with the Association to secure an advantage." Id. He also proscribed the use of "outside contracts which eliminate the Bargaining Unit … unless or until the parties are at a legal impasse" and directed that "any formal selection of prior RFPs are therefore considered to be null and void." Id.

         The District filed a petition to vacate the arbitrator's award in the court of common pleas. That court affirmed the award. Applying this Court's two prong essence test, the trial court concluded that (1) "the issue of subcontracting is within the terms of the CBA" and (2) the arbitrator's interpretation of the subcontracting clause was "derived rationally from the CBA." Trial Court Order, 1/30/2017, at 1; Trial Court Opinion, 4/12/2017, at 4 (pointing to both the no subcontracting provision and the exclusivity provision). The trial court further held that the arbitration award did not pose an unacceptable risk of undermining public policy and would not cause the District to breach its lawful obligations or public duty under PERA. Trial Court Order, 1/30/2017, at 2 (applying the Commonwealth Court's three-step analysis for determining whether an arbitration award that satisfies the essence test nonetheless violates public policy, as set forth in City of Bradford v. Teamsters Local Union No. 110, 25 A.3d 408, 413 (Pa. Commw. 2011)).

         The District appealed and the Commonwealth Court reversed. Millcreek Twp. Sch. Dist. v. Millcreek Twn. Educ. Support Pers. Ass'n, 179 A.3d 1167 (Pa. Commw. 2018). It explained that the issue before the arbitrator was whether the issuance of the RFP violated the CBA, not whether the District had subcontracted out work. Id. at 1172. It then found that because the plain language of the CBA provided that "[n]o work of the bargaining unit shall be subcontracted for the life of the Agreement," and because the CBA is "completely silent" as to RFPs or any other part of the "process" of subcontracting, it was constrained to hold that the issue before the arbitrator did not fall within the terms of the CBA. Id. Based on this same analysis, the Commonwealth Court further concluded that the arbitrator's award was not rationally derived from the CBA and therefore failed the essence test. Id. at 1173.

         Finally, the Commonwealth Court held that even assuming arguendo that the arbitrator's award passed the essence test, it must nonetheless be vacated pursuant to that test's public policy exception. Id. at 1173-74. Tracking it's City of Bradford's three-step analysis, the Commonwealth Court concluded that (1) the conduct leading to the grievance was the District's issuance of an RFP for custodial services; (2) the conduct implicates a "well-defined, dominant" public policy because section 701 of PERA mandates parties to "confer in good faith with respect to wages, hours and other terms and conditions of employment, or the negotiation of an agreement …"; and (3) the arbitrator's award poses an unacceptable risk of undermining the implicated public policy because directing that the RFPs cannot be used in bargaining with the Association contravenes the notion that "such solicitations [are] prerequisites for intelligent bargaining," rather than "inherently coercive." Id. at 1176 (quoting PLRB v. Sch. Dist. of the Twp. of Millcreek, 9 PPER ¶ 9136 (No. PERA-C-10, 439-W, June 7, 1978)).

The Association appealed and we granted allocatur to review:
(1) Whether the Commonwealth Court panel grossly departed from this Court's accepted practices regarding review of labor arbitration awards and abused its discretion when it failed to give proper deference to the arbitrator's factual findings and contractual interpretation.
(2) Whether the Commonwealth Court panel's decision conflicts with numerous decisions of both this Court and the Commonwealth Court applying the deferential essence test and defining the authority of the arbitrator.
(3) Whether the panel erroneously held that the award violated public policy despite the fact that it specifically acknowledges and accounts for the District's legal duty under [PERA].

Millcreek Twn. Sch. Dist. v. Millcreek Twn. Educ. Support Pers. Ass'n, 195 A.3d 562 (per curiam).

         We begin by addressing the first two issues on review, the resolution of which requires us to probe how much deference is expected of a reviewing court pursuant to the essence test. In particular, we must decide the extent to which the essence test requires deference to an arbitrator's interpretation of a contractual provision. As an initial matter, we observe that while the parties do not dispute that the essence test (including its public policy exception) is the governing standard of judicial review, they disagree as to whether the Commonwealth Court properly applied it here.

         The Association argues that the Commonwealth Court failed to give proper deference to the arbitrator's interpretation in applying the essence test and erroneously engaged in a merits review of the award, re-evaluating the evidence and substituting its own judgment. Association's Brief at 19-20. Specifically, the Association argues that an arbitrator is authorized to make findings of fact and to interpret undefined terms in the CBA. The Association posits that a reviewing court is not authorized to undertake an independent factual analysis because an arbitrator's factual findings are unreviewable so long as the arbitrator was "even arguably construing or applying the contract." Id.

         Regarding contract interpretation, the Association urges that an arbitrator is entitled to rely on the CBA's "language, its context, and any other indicia of the parties' intention" and, importantly, that an arbitrator's interpretation of the parties' intent is not cognizable on appeal because it too is considered a finding of fact. Id. (citing Cmty. Coll. of Beaver Cnty v. Cmnty. Coll. of Beaver Cnty., Soc'y of Faculty (PSEA/NEA), 375 A.2d 1267, 1275 (Pa. 1977)) ("Beaver County"). In the Association's view, because the arbitrator here considered the no subcontracting provision together with other provisions of the CBA as well as the parties' previous subcontracting dispute and the inherently destructive effect of the District's actions, his conclusion that the parties intended the no subcontracting provision to prohibit the entire process of subcontracting drew its essence from the CBA. Id. at 22.

         The District urges that because the CBA makes no mention of the issuance of RFPs, and because the term "no subcontracting" unambiguously prohibits "nothing other than the act of removing work from the bargaining unit via entering into a contract with a third party, which the parties agree[] has not happened," the issue is not within the terms of the CBA. District's Brief at 14.[6] In the District's view, the arbitrator impermissibly ignored the plain and unambiguous language of the CBA, adding new provisions that appear nowhere in the contract. Id. at 13-14. For this reason, according to the District, the Commonwealth Court did not err in vacating the award, which derived not from the CBA itself but from these manufactured provisions. Id.[7]

         Although this Court's articulation of the essence test has evolved over time, we first formally adopted the deferential standard of review more than forty years ago in Beaver County. There, we explained that the standard of review applicable to grievance arbitration awards was consistent with the standard of review under federal labor law. Beaver County, 375 A.2d at 1272. In that regard, we discussed with approval the "Steelworkers Trilogy," explaining that the United States Supreme Court had established therein "that arbitration under the collective bargaining agreement is the preferred manner of resolving labor disputes and that the less judicial participation, the better." Id. at 1272 n.6.[8]

         Accordingly, we adopted the policy as articulated in United Steelworks v. Enterprise Wheel and Car Corp., 363 U.S. 593, 596 (1960):

The refusal of courts to review the merits of an arbitration award is the proper approach to arbitration under collective bargaining agreements. The federal policy of settling labor disputes by arbitration would be undermined if courts had the final say on the merits of the awards.
An arbitrator is confined to interpretation and application of the collective bargaining agreement; he does not sit to dispense his own brand of industrial justice. He may, of course, look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the collective bargaining agreement. When the arbitrator's words manifest an infidelity to this obligation, courts have no choice but to refuse enforcement of the award.

Beaver County, 375 A.2d at 1272.

         Of particular relevance to the case at bar, this Court in Beaver County explained that because the task of interpreting a CBA involves determining the intention of the contracting parties, as evidenced by their agreement and the circumstances surrounding its execution, "the arbitrator's award is based on a resolution of a question of fact and is to be respected by the judiciary if 'the interpretation can in any rational way be derived from the agreement, viewed in light of its language, its context, and any other ...


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