Author: Aaron Gott
California Governor Gavin Newsom recently signed AB 1340 into law, a bill that purports to give more than 800,000 California rideshare drivers the right to unionize and bargain collectively over pay and working conditions. Some are celebrating the statute as a political and policy breakthrough.
In press statements, supporters called the measure a victory for “dignity and fairness” and proof that government can “deliver” where federal leaders cannot. Governor Gavin Newsom framed it as an antidote to “chaos,” praising California for “giving drivers the power to unionize.” Some might call it political theater. Others, compromise.
The Deal Behind the Law
AB 1340 emerged from a late-summer negotiation among Uber, Lyft, Governor Newsom, and organized labor. The companies backed the bill as part of a broader package that also reduced their insurance obligations. In exchange, the state created a legally sanctioned structure for “sectoral bargaining” among app-based drivers.
Beneath that compromise lies a legal problem that could, and likely should, prove fatal: the law is an attempt by one state to exempt a specific cartel of competitors from federal antitrust liability. But that is not something any state has the power to do.
What AB 1340 Does
The new law creates a sector-wide bargaining framework for app-based drivers. Drivers remain classified as independent contractors under California’s voter-approved Proposition 22, but AB 1340 allows them to elect a union-like representative to negotiate with Uber, Lyft, and other platforms.
The Public Employment Relations Board (PERB) oversees the process: it will certify representatives, set ground rules for bargaining, facilitate mediation, and approve final agreements. The bill expressly states that this system is intended to displace competition among drivers and “the state action antitrust exemption shall apply.”
In short, California has authorized independent centers of decisionmaking in the market to coordinate on price and output—the very conduct that, absent a special exemption, is per se illegal under Section 1 of the Sherman Act.
Why did lawmakers believe such a statute was necessary? Because everyone in the room—union leaders, legislators, and company executives—understood that a “union” of independent contractors is, in the eyes of federal law, just another word for a cartel. Without some form of immunity, sectoral bargaining among gig drivers would expose everyone involved in this horizontal cartel to treble damages and potential criminal liability. AB 1340 tries to solve that problem by legislating immunity.
That strategy faces serious constitutional limits—and might even be subject to a facial constitutional challenge. But, at a minimum, a federal court properly applying the law is unlikely to find that state action immunity applies to a gig-drivers’ cartel that seeks protection under AB 1340.
The Purpose of the State Action Immunity Doctrine
Since Parker v. Brown (1943), the Supreme Court has recognized that the Sherman Act does not apply to restraints imposed directly by a state acting as sovereign. The reasoning is grounded in federalism: Congress did not intend to subject state legislation itself to antitrust review.
But when a state authorizes others to restrain trade, the exemption applies only if two demanding conditions are met under California Retail Liquor Dealers Ass’n v. Midcal Aluminum Inc. (1980):
- The state must clearly articulate and affirmatively express a policy to displace competition; and
- The conduct must be actively supervised by the state itself.
As the Court later explained in FTC v. Phoebe Putney Health System (2013), these safeguards ensure that the restraint “is truly the action of the State,” not the product of private choice.
North Carolina State Board of Dental Examiners v. FTC (2015) tightened the second requirement further: supervision must be substantive. The state must actually review the competitive merits of the conduct and have authority to veto or modify it if inconsistent with state policy.
Why AB 1340 Fails the Test
AB 1340’s declaration that “the state action antitrust exemption shall apply” may seem to check the box for “clear articulation,” but it totally misses the point. As the Court explained in the OG state action immunity case of Parker v. Brown—all the way back in 1943—states cannot “give immunity to those who violate the Sherman Act by authorizing them to violate it”. The Court’s most recent foray into the doctrine, in NC Dental (2015), reaffirmed this principle: a state cannot simply grant market participants a free pass to commit antitrust violations, as states’ “power to attain an end does not include the lesser power to negate the congressional judgment embodied in the Sherman Act.”
Put another way, a clearly articulated policy to displace competition means a policy that displaces competition with regulation, not a policy that purports to displace antitrust law with an exemption.
AB 1340 also likely fails the active-supervision requirement. PERB’s role is to certify, mediate, and formalize collective agreements. Nothing in the statute directs the Board to analyze whether an agreement advances state policy or to assess its competitive effects. There is no requirement that PERB determine whether proposed wage scales or contract terms are consistent with any articulated state goal. The Board’s authority is procedural, not substantive.
Under NC Dental, that is not “active supervision.” The Court was explicit: a supervisor must review the substance of anticompetitive decisions, not merely the procedures that produce them, and must exercise power to ensure the conduct serves the state’s own policy rather than private interests. AB 1340 offers none of that.
The Constitutional Boundary
The deeper problem is constitutional. Federal antitrust law embodies Congress’s judgment that competition—not coordination—is the default rule of the American economy. States may replace competition with regulation when acting as sovereigns, but they may not nullify federal law by statute.
As Parker itself warned, a state “does not give immunity to those who violate the Sherman Act by authorizing them to violate it, or by declaring that their action is lawful.” That is exactly what AB 1340 purports to do. Legislative declarations of immunity cannot substitute for judicial findings that the conduct is, in substance, an act of the state.
Put simply, California may choose to regulate driver pay and working conditions directly, just as it regulates utility rates or hospital pricing. What it cannot do is delegate that power to private parties and declare their resulting coordination exempt from federal scrutiny.
If California’s approach were accepted, any state could insulate private collusion simply by enacting a statute that, in effect, opts out of the Sherman Act. The exception would swallow the rule, and the Magna Carta of free enterprise would be a dead letter.
Next Up: Conflict Preemption
In the next post, I will look at the issue from a different angle—or rather the other side of the antitrust federalism coin. Apart from the state-action immunity doctrine, AB 1340 conflicts directly with the Sherman Act itself, raising questions of federal preemption. That analysis suggests a clear path for companies affected by the law to challenge it before it takes effect.
Image by Mohamed Hassan from Pixabay