ArtI.S10.C1.4.5.3 State Laws Creating New Contractual Obligations

Article I, Section 10, Clause 1:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

Although the Supreme Court has not had occasion to consider many Contract Clause challenges in the modern era, it has refined the test for private contracts it developed in Blaisdell, focusing on whether the challenged state legislation is broadly applicable, was foreseeable, and has a legitimate purpose. For example, in the 1978 case Allied Structural Steel Co. v. Spannaus, the Court determined a state law that regulated private pension contracts violated the Contract Clause because it sought to address a limited societal problem through the imposition of a substantial new and retroactive payment obligation on a narrow class of companies.1

In Allied Structural Steel Co., the Minnesota legislature enacted the Private Pension Benefits Protection Act, requiring certain companies having offices in the state and offering pension plans to employees to pay a fee to cover full pensions for employees who worked at least ten years if the employer terminated its pension plan or closed a Minnesota office.2 The Court considered whether it would violate the Contract Clause to apply the law to the appellant, an Illinois steel corporation that closed a Minnesota office.3 Minnesota charged the company $185,000 under the Act to cover the cost of pensions for eligible discharged employees.4 In response, the company maintained the fee “unconstitutionally impaired its contractual obligations to its employees under its pension agreement.” 5

The Supreme Court held the Act impaired the company’s employment contracts because it substantially increased the company’s obligation to fund pensions beyond the terms of the existing contracts it had entered into with its employees.6 However, the Court noted it had to further examine whether such an impairment violated the Contract Clause.7 Although noting the Contract Clause does not “obliterate” the states’ police powers,8 the Court determined the Minnesota law amounted to a significant impairment that could not be justified for public policy reasons.9

First, the employer relied on the payment terms of the existing pension plan when determining how to allocate its resources, and the Act retroactively required the company to pay more to its employees than the company had foreseen because the company closed its office.10 There was no indication in the record that the state targeted an issue of pressing social need by enacting sweeping legislation covering a variety of employers and circumstances.11 Rather, the Act targeted for the first time a narrow societal problem by imposing on a specific class of companies a substantial retroactive and permanent payment obligation unforeseen at the time of the pension plans’ creation and contrary to the company’s employment agreements.12 These factors, the Court held, amounted to a violation of the Contract Clause.13 Allied Structural Steel Co. stands for the notion that a state law may impair the obligation of contracts not only when it abrogates contractual obligations, but also when it imposes substantial new and retroactive legal obligations on a specific subset of entities.

See 438 U.S. 234, 247–50 (1978). back
Id. at 238. back
See id. at 236, 239. back
Id. at 239. back
Id. at 239–40 back
See id. back
See id. back
Id. at 241. back
See id. at 246–50. back
See id. at 247 ( “[T]he statute in question here nullifies express terms of the company’s contractual obligations and imposes a completely unexpected liability in potentially disabling amounts.” ). back
See id. at 247–48. back
Id. at 249–50; cf. Gen. Motors Corp. v. Romein, 503 U.S. 181, 183–88 (1992) (rejecting a Contract Clause challenge to a 1987 Michigan law that essentially required automobile companies to repay workers’ compensation benefits withheld in reliance on a 1981 law, because the collective bargaining agreements entered into before the 1981 law did not address workers’ compensation terms specifically and it could not be deemed to have been incorporated by law into the contracts, and thus there was no relevant contractual interest to impair). back
See Allied Structural Steel Co., 428 U.S. at 250. back