Joseph R. ELLIOTT, Plaintiff-Appellee, v. BOARD OF SCHOOL TRUSTEES OF MADISON CONSOLIDATED SCHOOLS, Defendant-Appellant, and State of Indiana, Intervenor-Appellant.
No. 16-4168
United States Court of Appeals, Seventh Circuit.
Argued September 6, 2017, Decided December 4, 2017
876 F.3d 926
HAMILTON, Circuit Judge.
Michelle L. Cooper, Sara R. Blevins, Karen Glasser Sharp, Attorneys, Lewis & Kappes, Indianapolis, IN, for Defendant-Appellant.
Thomas M. Fisher, Attorney, Office of the Attorney General, Indianapolis, IN, for Intervenor-Appellant State of Indiana.
Julie C. Tolleson, Attorney, Office of the Attorney General, Colorado Department of Law, Denver, CO, for Amicus Curiae State of Colorado.
Luther Strange, Attorney, Office of the Attorney General, State of Alabama, Montgomery, AL, for Amicus Curiae State of Alabama.
Jeff Landry, Attorney, Louisiana Department of Justice, Baton Rouge, LA, for Amicus Curiae State of Louisiana.
Brad D. Schimel, Attorney, Wisconsin Department of Justice, Special Litigation and Appeals, Madison, WI, for Amicus Curiae State of Wisconsin.
Bill Schuette, Office of the Attorney General, State of Michigan, Lansing, MI, for Amicus Curiae State of Michigan.
Leon Dayan, Attorney, Bredhoff & Kaiser, PLLC, Washington, DC, for Amicus Curiae Jesse Rothstein.
Before BAUER, EASTERBROOK, and HAMILTON, Circuit Judges.
HAMILTON, Circuit Judge.
The Contract Clause of the United States Constitution prohibits States from passing laws “impairing the Obligation of Contracts.”
The Supreme Court of the United States held in 1938 that the Indiana teacher tenure statute created contractual rights protected by the Contract Clause. Indiana ex rel. Anderson v. Brand, 303 U.S. 95, 104, 58 S.Ct. 443, 82 L.Ed. 685 (1938). From 1927 to 2012, that contract included job security when school districts needed to reduce their teaching staffs: as long as they were qualified for an available position, tenured teachers had a right to be retained over non-tenured teachers. The new Indiana law eliminates that right and orders school districts to base layoff choices on performance reviews without regard for tenure status.
In 2012, defendant Board of Trustees for Madison Consolidated Schools relied on the new law to lay off plaintiff Joseph Elliott, a teacher who earned tenure fourteen years before the new law took effect, while it retained non-tenured teachers in positions for which Elliott was qualified. Elliott sued, claiming that the amendment violated the Constitution when applied to him. The district court granted summary judgment in Elliott‘s favor. Elliott v. Board of School Trustees of Madison Consolidated Schools, 2015 WL 1125022 (S.D. Ind. March 12, 2015). We affirm.
I. Legal and Factual Background
A. Indiana‘s Teacher Tenure Law
Indiana enacted its teacher tenure law as the Act of March 8, 1927, Laws of the State of Indiana 259-62 (1927) (“the Act“). The Act established how and when a
Unlike tenure statutes in many other States, Indiana‘s law has been treated as forming “an employment by contract between the teacher and the school corporation.” School City of Elwood v. State ex rel. Griffin, 203 Ind. 626, 180 N.E. 471, 474 (1932); see also Anderson, 303 U.S. at 107, 58 S.Ct. 443 (distinguishing Indiana law from other States’ laws). A teacher who had “serve[d] under contract as a teacher in any school corporation in the State of Indiana for five or more successive years” achieved tenure upon entering a sixth successive one-year contract.
The core terms of the Act limit the reasons and procedures for firing or laying off tenured teachers. To cancel a tenured teacher‘s contract, a school must provide written notice and, upon demand, a comprehensive hearing before the school board.
B. Senate Bill 1
The job security provisions in Indiana‘s tenure law remained unchanged until 2011. Compare
Starting with the 2012-13 academic year, Senate Bill 1 requires schools to implement annual teacher-evaluation plans.
These annual evaluations affect teacher pay, student placement, and—most relevant here—selection of teachers for layoff during reductions in force. Under Senate Bill 1, a school district may no longer consider tenure status when reducing its teaching staff. Schools laying off teachers must now cancel teacher contracts “on the basis of performance rather than seniority.”
C. Plaintiff‘s Employment History
Plaintiff Joseph Elliott taught at Dupont Elementary School, part of Madison Consolidated Schools, for nineteen years. In 1998, Elliott entered his sixth successive contract with the school district and became a tenured teacher under the Act. He continued to teach at Dupont for fourteen more years. As is the norm in Indiana, Elliott signed a series of annual contracts, the last of which was for the 2011-12 school year. In 2012, Elliott‘s colleagues elected him president of the local teachers union.
During Elliott‘s time at Dupont Elementary, the school‘s evaluation policy assessed teachers across fourteen skills. Elliott received ten of these evaluations. In all but one, he received ratings of “strength” or “satisfactory“—the two highest ratings—in all fourteen skills. The exception was 2002, ten years before he was laid off, when he received “needs improvement” in the three skills related to “interpersonal relationships” and a comment that he sometimes had “difficulty accepting, graciously, a different point of view.” In a few more recent evaluations, Elliott received critiques about his interpersonal skills but always earned ratings of satisfactory or above. Dupont evaluated Elliott for the last time in 2012 and found him satisfactory or better in all skills. Toward the end of the 2011-12 school year, Dupont‘s principal reviewed the evaluation and recommended Elliott for contract renewal.
D. Defendant‘s 2012 Layoffs
In the summer of 2012, however, the Madison school district faced declining enrollment and a corresponding reduction in state funding. The district decided to close two schools and to reduce its teaching staff effective that fall. The district had recently implemented a new retention policy that incorporated Senate Bill 1. Since we are reviewing a grant of summary judgment for plaintiff, we assume that the district properly followed that policy (though Elliott disputes the point). Elliott and five other teachers were notified that the district was laying them off.
As Indiana law provided, Elliott demanded a conference with the superintendent and then a full hearing with the Board. After the hearing, the Board made factual findings about Elliott. The findings in 2012 pointed to the 2002 evaluation that had rated Elliott low in interpersonal-relationship skills. The 2012 findings also cited a few comments from evaluators over the years suggesting that Elliott could be more compassionate. The Board also concluded that Senate Bill 1 allowed the district to cancel Elliott‘s contract during a justifiable reduction in force. The Board
E. Procedural History
Elliott sued the school district in state court in January 2013 alleging four state-law claims: (1) that Senate Bill 1 violated the Indiana Constitution; (2) that the district applied Senate Bill 1 before its effective date; (3) that the district applied Senate Bill 1 incorrectly; and (4) that his layoff was not supported by sufficient evidence. He also alleged that Senate Bill 1 impaired his contractual rights in violation of the United States Constitution. The Board removed the case to the federal district court, and the State of Indiana later intervened to defend the new law‘s constitutionality. See
The district court concluded that the layoff provisions of Senate Bill 1 violate the Contract Clause when applied retroactively to a teacher like Elliott who earned tenure before the new law took effect. Applying Supreme Court and Indiana precedent, Judge Lawrence concluded that tenured Indiana teachers have contractual rights to be retained over non-tenured teachers in a reduction in force. He then found that Senate Bill 1 “completely destroyed” this right and was a substantial impairment under the Contract Clause. Finally, he rejected the argument that this impairment was constitutionally permissible as a reasonable and necessary exercise of the State‘s power.
The State and the Board sought permission to take an interlocutory appeal under
II. Analysis
The issue is whether the district court correctly decided that the layoff provisions of Senate Bill 1 violate the Contract Clause when applied retroactively to a teacher who earned tenure before the new statute took effect. We review the district court‘s decision de novo. Daniels v. Area Plan Comm‘n of Allen County, 306 F.3d 445, 458 (7th Cir. 2002) (reviewing de novo a summary judgment order that declared a state law unconstitutional).
At the outset, we note but bypass a potentially difficult issue. Elliott sought, and the district court awarded, damages under
Turning to the merits, the Contract Clause prohibits States from passing any “Law impairing the Obligation of Contracts,”
A. Substantial Impairment of Contractual Rights?
We consider first whether applying Senate Bill 1 to Elliott substantially impaired his tenure contract. This issue itself can be divided into three parts: (1) whether there is a contractual relationship; (2) whether a change in law impairs that contract; and (3) whether the impairment is substantial. General Motors, 503 U.S. at 186, 112 S.Ct. 1105.
1. The Contractual Relationship
Statutes typically create regulatory rights not subject to the Contract Clause. See, e.g., Phelps v. Board of Education of West New York, 300 U.S. 319, 323, 57 S.Ct. 483, 81 L.Ed. 674 (1937) (New Jersey tenure law did not create contract rights for teachers protecting them from salary reductions during Great Depression). But when a legislature uses contractual language that induces public reliance, it can create an enforceable contract, as the Supreme Court held Indiana‘s teacher tenure law did. Indiana ex rel. Anderson v. Brand, 303 U.S. 95, 100, 105, 58 S.Ct. 443, 82 L.Ed. 685 (1938). The defendants do not dispute this general point, but they dispute the scope of the contractual relationship and the obligations it imposes on the State and school districts.3
The scope of the contractual obligations determines whether Senate Bill 1 impairs any contractual right. The State makes two main arguments on this point. First, it argues that the Act‘s job-security provisions are not part of the tenure contract but are variable terms that annual teaching contracts can change. See Def. Br. at 23-24. Therefore, goes the argument, amendments to the job-security terms cannot violate the Contract Clause. Second, the State argues that even if job security is part of the tenure contract, the Act has protected teachers only against dismissal without cause. Firing teachers based on performance is still firing for cause, the State argues, so that Senate Bill 1 does not impair any existing contractual right. We reject both of those arguments, which essentially try to rewrite Indiana law and history.
The State makes much of the fact that a tenured teacher works under two contracts, in effect: an indefinite statutory one that provides tenure and an annual one that governs variable terms like salary and hours. Just as annual contracts can change salary, the State argues, they can change the degree of job security that tenure provides without violating the Contract Clause. But Anderson and the Act itself squarely block this argument. In Anderson, a teacher challenged an amendment to the Act that eliminated job security for teachers in township schools. 303 U.S. at 97-98, 58 S.Ct. 443. Anderson considered “the existence and nature” of the Indiana teacher tenure law and found that it created a “binding and enforceable contract against school districts.” Id. at 100, 105, 58 S.Ct. 443. The Supreme Court ultimately determined that the statutory amendment impaired the tenure contract when it changed the “admissible grounds of cancellation” by revoking the State‘s statutory promise to tenured township teachers. Id. at 105, 58 S.Ct. 443. If the grounds of cancellation were subject to change through annual teaching contracts, the Court in Anderson could not have concluded that repealing job-security provisions impaired the tenure contract. The Act—not the annual contracts—granted Elliott his contractual tenure rights. Under Anderson, these rights became enforceable the year Elliott earned tenure. A decrease in job security necessarily impairs his rights under that contract.
It is also well established under Indiana law that the Act protects against more than at-will termination. As noted, the Act allows schools to dismiss a tenured teacher during a “justifiable decrease in the number of teaching positions,”
3. “Substantial” Impairment
Laws impairing contracts violate the Contract Clause only if the impairment is substantial, though substantial impairment does not require a complete destruction of the contractual relationship. Energy Reserves, 459 U.S. at 411, 103 S.Ct. 697. The issue is whether the impairment disrupts reasonable contractual expectations. Id. at 413-16, 103 S.Ct. 697; Allied Structural Steel, 438 U.S. at 245, 98 S.Ct. 2716. The Supreme Court‘s decisions under the Contract Clause show that reliance interests are key to this inquiry. The analysis must “reflect the high value the Framers placed on the protection of private contracts.” Allied Structural Steel, 438 U.S. at 245, 98 S.Ct. 2716. Contracts “enable individuals to order their personal and business affairs,” and once arranged, “those rights and obligations are binding under the law, and the parties are entitled to rely on them.” Id.
Based on our reading of the Court‘s cases, we break this inquiry into two questions. First, was the impaired term a “central undertaking” of the bargain such that it “substantially induced” teachers to enter their contracts? See City of El Paso v. Simmons, 379 U.S. 497, 514, 85 S.Ct. 577, 13 L.Ed.2d 446 (1965). Second, was the change in law foreseeable, meaning that the risk of change was reflected in the original contract? Energy Reserves, 459 U.S. at 413-16, 103 S.Ct. 697. Put another way, we ask whether this change substantially disrupted teachers’ important and reasonable reliance interests. Id.
a. Central Undertaking
Legislation causes a substantial impairment if it alters a “central undertaking” of the contract that “substantially induced” a party to enter the bargain. Simmons, 379 U.S. at 514, 85 S.Ct. 577 (finding no substantial impairment when it could not “seriously be contended that the buyer was substantially induced to enter into the[] contracts” on the basis of the impaired term). In other words, an impairment is substantial if it disrupts actual and important reliance interests. Here, the term at issue is narrow but important. When Elliott decided to become a tenured teacher, the State and school district promised him a substantial degree of job security: during a downsizing, Elliott‘s job would be more secure than that of a non-tenured teacher.
The promise of job security, especially during layoffs, lies close to the core of teacher tenure. Having job security, even in tough economic times, was a central term to induce people to become teachers and seek tenure in Indiana. It is a term with significant value to teachers, who as a matter of economics have traded higher salaries for the protections that tenure offers over the course of a career. Teachers earn lower salaries than similarly educated professionals. They receive part of their their compensation through other benefits, including better job security, which includes a reduced risk of termination dur
An impairment is even more substantial when it disrupts expectations “in an area where the element of reliance was vital.” Allied Structural Steel, 438 U.S. at 246, 98 S.Ct. 2716. In that case, the Court considered how severely a change in pension law disrupted an employer‘s expectations about pension obligations. Id. at 246-47, 98 S.Ct. 2716. The Court found this reliance particularly important. Here we consider not an employer‘s but employees’ expectations, yet the same reasoning applies. Just as an employer relies on a stable pension regime to fund its pension program properly, so too teachers rely on a stable job-security scheme to plan their personal and professional lives, their investments of time and money, and their retirements. Senate Bill 1 substantially disrupted tenured teachers’ expectations about job security. It is not fair to change the rules so substantially when it is too late for the affected parties to change course. Tenured teachers cannot have do-overs in their careers, either to earn more money to make up for the lost job security or to find better job security in another school district or in another field entirely.
b. Foreseeability
There is a second requirement for the impairment to be substantial: the parties must not have anticipated the change in law. We have said that the “foreseeability of the [new] law when the original contract was made” is of “great” and even “controlling” importance. Chrysler Corp. v. Kolosso Auto Sales, Inc., 148 F.3d 892, 894 (7th Cir. 1998). If the parties anticipated a change in the law, then their bargain would reflect the risk of a future impairment. Id. at 894-95 (“[W]hat was foreseeable then will have been taken into account in the negotiations over the terms of the contract.“). If the new law was foreseeable, then reliance on the impaired terms may have been unreasonable so that a disruption to the relationship would not be deemed substantial.
The Supreme Court has found that a change in law was foreseeable in at least two contexts. In the first, the Court pointed to the history of “extensive and intrusive” regulation in the affected industry. Energy Reserves, 459 U.S. at 413-16, 103 S.Ct. 697 (new price controls on natural gas did not disrupt the supplier‘s reasonable expectations when the industry was heavily regulated and supplier “knew its contractual rights were subject to alteration by state price regulation“). In the second, the Court reasoned that because the original law had only a temporary goal, the parties must have anticipated a future legislative change. Simmons, 379 U.S. at 516, 85 S.Ct. 577 (change in land-sale law did not impair contracts when goal of law shifted from settlement of Texas frontier to “efficient utilization of public lands“).
Senate Bill 1 was thus not a “small and predictable step” in the evolution of the Act, see Chrysler Corp., 148 F.3d at 895, at least as applied to already-tenured teachers. For teachers who have built their entire careers relying on those contractual rights as protected in Anderson, Senate Bill 1 amounts to unforeseeable backtracking by the State. This change in the fundamental trade-off of job security for money is not comparable to shifting pricing arrangements for natural gas markets. Nor are attracting qualified teachers and improving public education merely temporary goals that Indiana no longer pursues. Retroactive application of the layoff provisions of Senate Bill 1 to already-tenured teachers is not a foreseeable change that restricts “a party to those gains reasonably to be expected from the contract.” Simmons, 379 U.S. at 515, 85 S.Ct. 577.
Indiana itself created the binding obligation on which tenured teachers have relied for decades—and from which the State itself has benefitted. This is not a case where private parties “whose rights are subject to state restriction” attempt to “remove” themselves “from the power of the State by making a contract about them.” Blaisdell, 290 U.S. at 437-38, 54 S.Ct. 231. Rather, Indiana established the teachers’ contractual rights by statute. When a State enters a binding commitment, the other party‘s reliance on that commitment is even more justified. Energy Reserves, 459 U.S. at 412-13, 412 n.14, 103 S.Ct. 697. At any time after Anderson, Indiana could have amended its teacher tenure law prospectively, changing it from contractual to regulatory. Indiana declined to do so. This retroactive change to tenure‘s job protections was not foreseeable. Applying the layoff provisions of Senate Bill 1 substantially impaired Elliott‘s tenure contract rights by disrupting his reasonable contractual expectations.
B. Reasonable and Necessary to Serve Important Public Purpose?
Still, not even all substantial impairments of contracts are unconstitutional. If the impairment is both reasonable and necessary for an important public purpose, then the law does not violate the Contract Clause. United States Trust, 431 U.S. at 25, 97 S.Ct. 1505. Analyzing Senate Bill 1 within this framework, we agree with the district court that the amendment, though enacted for a legitimate and important public purpose, is unconstitutional as applied to an already-tenured teacher because it was not necessary or reasonable.
As a preliminary matter, the parties disagree about the extent of any deference we might owe the state legislature‘s policy decision to restrict tenure rights. Courts owe at least some deference to legislative determinations of reasonable
The State argues that heightened scrutiny under United States Trust applies only when a State itself enters into a financial obligation and not when the State exercises its police power. But that is not the only context in which a State can have a self-interest. “In almost every case, the Court has held a governmental unit to its contractual obligations when it enters financial or other markets.” Energy Reserves, 459 U.S. at 412 n.14, 103 S.Ct. 697 (emphasis added). Also, self-interest is not the only justification for a more searching review. When a State makes an express commitment to private businesses or individuals, reliance may be highly justified. Id., citing Note, A Process-Oriented Approach to the Contract Clause, 89 Yale L. J. 1623, 1647-48 (1980). The State therefore must have a substantial reason for breaking its own promise. Id.
We do not owe complete deference to the state legislature here. The impairment is substantial, the contract is an express commitment between the State and the teachers, and the State‘s self-interest is at stake. Under the Indiana Constitution, public education is ultimately the State‘s responsibility, even if it delegates execution to local school districts. See
The Supreme Court refined modern Contract Clause jurisprudence in a series of challenges to state laws during the “unprecedented emergencies” of the Great Depression. Allied Structural Steel, 438 U.S. at 242, 98 S.Ct. 2716. Thus in Home Building & Loan Ass‘n v. Blaisdell, 290 U.S. 398, 54 S.Ct. 231, 78 L.Ed. 413 (1934), the Court upheld a Minnesota law that temporarily suspended mortgage foreclosures. The Court explained that an “emergency existed” that “furnished a proper occasion for the exercise of the reserved power of the State to protect the vital interests of the community.” Id. at 444, 54 S.Ct. 231. It compared the economic crisis to a “fire, flood, or earthquake.” Id. at 439, 54 S.Ct. 231. An emergency is not a requirement for a State to impair contracts but remains relevant to whether an impairment is appropriate. United States Trust, 431 U.S. at 22 n.19, 97 S.Ct. 1505. With this context in mind, we assess whether the State‘s decision to impair con
Improving teacher quality and public-education outcomes are both important public interests of the highest order. But even important goals and good intentions do not justify this substantial impairment of the tenure contract for already-tenured teachers. See United States Trust, 431 U.S. at 21, 97 S.Ct. 1505 (“the existence of an important public interest is not always sufficient to overcome [the Contract Clause‘s] limitation“). When a State impairs its own contracts, the impairment must be “clearly necessary” or “essential,” not merely convenient or expedient. Simmons, 379 U.S. at 516, 85 S.Ct. 577 (upholding law that impaired a contract between Texas and purchasers of land when “clearly necessary” to achieve an important public goal); United States Trust, 431 U.S. at 29-30, 97 S.Ct. 1505 (invalidating law that impaired contract between States and bondholders when the impairment was not “essential“). A substantial impairment is not necessary if the State could achieve the goal through “a less drastic modification” or “without modifying” the contract “at all.” Id.
Indiana has not shown it needs to impose this retroactive impairment of its earlier promises of job security to improve teacher quality. Senate Bill 1 does not change the State‘s power to fire ineffective teachers. School districts have had that power before and after 1927 to the present day. See
The Contract Clause does not saddle the State forever with a teacher-tenure system that its policymakers have come to think is bad for public education. The Constitution does not prevent the State from changing the promises it makes on a prospective basis to new teachers. Also, if the State were to conclude that retroactive changes to tenure are necessary, the Contract Clause would give the State the option (much like the Takings Clause) of paying the individuals who would otherwise lose out from the change. (After all, a party to a contract is ordinarily free to breach the contract as long as it is willing to pay damages to the other party.) The State can make the changes it wants, but it cannot foist the costs onto private parties, other than through general taxes. Having restricted tenure for new teachers, the State and its school districts were and are free to buy out the tenure rights of more senior ones.
Finally, the retroactive impairment is not reasonable. Contractual impairments can be reasonable if either (1) the statute “had effects that were unforeseen and unintended” when originally adopted, or (2) “subsequent changes” in circumstances “caused the covenant to have a substantially different impact” than
The judgment of the district court is AFFIRMED.