Can States Grant Federal Antitrust Immunity? Part 2 : The Sherman Act vs. Sacramento: Why AB 1340 Is Preempted by Federal Law

Author: Aaron Gott

In my last post, I discussed how California’s newly enacted AB 1340—which allows independent contractor gig drivers to form a “union” and engage in sectoral bargaining against rideshare companies such as Uber and Lyft—likely does not provide the federal antitrust immunity that it purports to provide. This week, I’d like to discuss the other problem with AB 1340: it is likely unconstitutional.

In 2018, the Ninth Circuit decided Chamber of Commerce v. City of Seattle, striking down a Seattle ordinance that authorized rideshare drivers to engage in collective bargaining with Uber and Lyft.

So why did California just enact essentially the same law? AB 1340 revives nearly the same structure—and the same constitutional defect—under a new label, in a different locale.

Now, there is a key factual difference between the Seattle ordinance and AB 1340. Can you spot it?

The difference is that California is a state, and Seattle is a mere political subdivision. And that difference matters, because we have a dual federalist system: states on the one hand, and the federal government on the other. Cities? They are not sovereign and are irrelevant for federalism purposes. (But don’t shed any tears for municipalities: they get an ill-reasoned exemption from the active supervision prong set forth in Town of Hallie v. City of Eau Claire, plus the Local Government Antitrust Act of 1984, which immunizes them from antitrust damages and fees, thus freeing them to pursue all sorts of anticompetitive schemes with reckless abandon.)

Still, this factual difference does not save AB 1340 from the same fate as Seattle’s ordinance.

The problem is that California’s AB 1340 is not a genuine act of state regulation, but merely an attempt to declare private coordination immune from federal law.

Under Supreme Court precedent, naked attempts to immunize anticompetitive conduct are foreclosed not only by the state-action immunity doctrine. They are also subject to federal preemption.

From Seattle to Sacramento

Seattle’s ordinance authorized “qualified representatives” of for-hire drivers—eventually, the Teamsters—to bargain collectively with companies such as Uber and Lyft. Everyone agreed the ordinance facilitated private price-fixing, and the city defended it on state-action grounds. The Ninth Circuit rejected that defense.

The court held that Washington’s general authorization to regulate for-hire transportation did not clearly articulate a policy to displace competition in the ride-referral market, and that a statutory declaration purporting to exempt local regulation from the Sherman Act was not a policy to displace competition—it was an impermissible attempt to exempt municipal conduct from federal law altogether. Finally, the court confirmed that the “municipal exception” to active supervision is narrow: when private actors participate in the restraint, active state supervision is required, and cities are not “the state itself.”

The Ninth Circuit emphasized that “authority to regulate a market is not the same as authority to authorize anticompetitive conduct.” That observation speaks directly to the structure of AB 1340, even if California, unlike Seattle, acts here as the sovereign rather than its subdivision.

What the Ninth Circuit Actually Held

Two features of Chamber v. Seattle are particularly relevant.

First, the Ninth Circuit drew a sharp line between a policy to regulate and a policy to displace competition. The state statute there authorized municipalities to regulate for-hire transportation for safety and reliability reasons, but said nothing about replacing market competition with collective bargaining. The resulting ordinance therefore lacked the “clear articulation” required by Midcal.

Second, the court rejected the notion that the legislature could “immunize” municipalities from the Sherman Act by fiat. Citing Parker v. Brown, it reiterated that “states cannot give immunity to those who violate the Sherman Act by authorizing them to violate it.” A declaration of exemption, even one framed as explicit legislative intent, is not a substitute for a true regulatory program.

And in footnote 9, the court made a related and important point:

“The City’s argument that the presumption against preemption applies here is misplaced. State-action immunity is a defense to preemption.”

That is, the doctrines are not separate. If state-action immunity fails, federal law preempts.

AB 1340 and the Limits of State Sovereignty

California’s position differs from Seattle’s in one respect: a state itself has enacted the challenged framework. That distinction matters under Parker, which recognizes that the Sherman Act does not bar a state acting as sovereign from imposing market restraints “as an act of government.” But AB 1340’s flaw is not that it delegates authority to a city; it’s that it authorizes private competitors to collude and then declares their collusion immune from federal scrutiny.

That structure is inconsistent with Parker and a number of subsequent Supreme Court cases. The statute’s declaration that the “state-action antitrust exemption shall apply” does not transform private collusion into sovereign regulation. It is simply a legislative announcement that California intends to exempt certain conduct from federal law—something it cannot do. The Constitution allows states to regulate, but not to negate federal statutes.

From Failed Immunity to Federal Preemption

When a state statute exceeds the narrow boundary of Parker, the question becomes one of federal preemption. The Supreme Court’s decisions in Rice v. Norman Williams Co., 458 U.S. 654 (1982); 324 Liquor Corp. v. Duffy, 479 U.S. 335 (1987); and Costco Wholesale Corp. v. Maleng, 522 F.3d 874 (9th Cir. 2008), all apply the same principle: state law is preempted when it mandates or authorizes conduct that necessarily constitutes a violation of the antitrust laws or places irresistible pressure on a private party to violate them.

AB 1340 does exactly that. It:

1. Mandates a collective-bargaining process among independent contractors;
2. Authorizes them to coordinate prices and output; and
3. Declares that such coordination is lawful and exempt from the Sherman Act.

Each step conflicts with Congress’s judgment that competition is the governing principle of the national economy.

Hybrid Restraints and the Conflict Doctrine

Federal courts describe such schemes as hybrid restraints—systems in which a state delegates to private parties the power to fix prices under color of state law. In Costco, for example, Washington’s liquor-pricing regime was preempted because it compelled private wholesalers to set resale prices. The court reasoned that “the involvement of private actors in setting prices removes the system from the category of state regulation and places it in conflict with federal law.”

AB 1340 creates a similar hybrid. The Public Employment Relations Board’s procedural role—certifying representatives and formalizing agreements—does not convert private bargaining into public regulation. The Board neither sets the prices nor reviews them for consistency with any articulated state policy. The state has thus authorized, but not supervised, private price coordination.

Under the law, that is enough for conflict preemption.

Two Kinds of Challenges

A federal court could address AB 1340 in two types of challenges.

• Facial preemption challenge. When a state statute mandates or authorizes per se illegal conduct, a pre-enforcement facial challenge is appropriate. Rice, 458 U.S. at 661. Such a challenge would test whether AB 1340’s very structure—its authorization of collective bargaining and declaration of immunity—conflicts with the Sherman Act.
• As-applied challenge. Once an agreement is reached under the statute, the resulting contract would constitute a horizontal restraint among competitors, subject to ordinary § 1 analysis. But as the Ninth Circuit recognized in Chamber v. Seattle, waiting for implementation is unnecessary when the statute itself compels or authorizes the violation.

Either path would likely turn on the same conclusion: state-action immunity fails, and federal law preempts.

The Federal Boundary

The Ninth Circuit’s footnote in Seattle captured the relationship succinctly: state-action immunity is a defense to preemption. When the defense fails, federal supremacy governs. The result is not a close call. AB 1340 does not replace competition with regulation; it replaces it with private collusion, then declares that collusion lawful. That is precisely the type of state-created conflict the Supreme Court’s preemption jurisprudence forbids.

A facial challenge to AB 1340 before implementation would thus rest on solid ground. The statute’s structure and purpose conflict directly with the Sherman Act and the Supremacy Clause. As Chamber v. Seattle illustrates, courts remain willing to enforce that boundary when governments—state or local—attempt to erase it.

From Seattle to Sacramento

The Seattle ordinance was straightforward. It allowed independent drivers to “collectively bargain” against app-based “driver coordinators” such as Uber and Lyft. The City appointed the Teamsters as the designated representative to negotiate rates and terms. Everyone agreed that this amounted to private price-fixing—a per se violation of the Sherman Act—but the City argued it was immune because Washington law allowed municipalities to regulate for-hire transportation services.

The Ninth Circuit rejected that argument on every front. The court held that:

1. Washington’s general authorization to regulate for-hire transportation did not clearly articulate a policy to displace competition in the ride-referral market.
2. A statutory declaration purporting to exempt local regulation from federal antitrust law was not a policy to displace competition—it was an invalid attempt to exempt state and local conduct from federal law.
3. The “municipal exception” to the active-supervision requirement is narrow: when private actors participate in the restraint, state supervision is required.

As the court put it, state law authority “to regulate a market is not the same as authority to authorize anticompetitive conduct.”

That reasoning applies squarely to AB 1340. California’s statute authorizes the same kind of horizontal coordination and then declares the result immune. It is, in substance, Seattle 2.0—a legislative replay of a theory the Ninth Circuit has already rejected.

Why AB 1340 Raises the Same (and Worse) Problems

Like Seattle’s ordinance, AB 1340 authorizes private competitors—rideshare drivers—to coordinate on pricing and output decisions. And, just as Seattle did, California attempts to pre-emptively declare that conduct exempt from federal scrutiny: “the state-action antitrust exemption shall apply.”

The Ninth Circuit in Chamber v. Seattle could not have been clearer that this move “turns federalism on its head.” States possess residual regulatory authority, but they do not possess the power to nullify federal law. A statute that purports to “permit” anticompetitive conduct without actually displacing competition through state regulation is, as the court put it, not a policy to regulate the market—it’s an attempt to override Congress’s judgment that markets should remain competitive.

In Seattle, that defect was fatal to the city’s claim of state-action immunity. In California’s case, it creates an even broader problem, because the state itself—not a subordinate municipality—has now enacted the same structure and declared it immune.

From Immunity to Preemption

The doctrine of Parker v. Brown sets the outer boundary of state authority under the Sherman Act. But when a statute like AB 1340 steps beyond that boundary, the issue becomes one of federal preemption.

Under the Supremacy Clause, state law is preempted when it “mandates or authorizes conduct that necessarily constitutes a violation of the antitrust laws” or “places irresistible pressure on a private party to violate them.” Rice v. Norman Williams Co., 458 U.S. 654, 661 (1982). That principle has been reaffirmed in 324 Liquor Corp. v. Duffy, TFWS, Inc. v. Schaefer, and Costco Wholesale Corp. v. Maleng.

AB 1340 meets that definition three times over. It:

1. Mandates a collective-bargaining process among independent contractors;
2. Authorizes them to coordinate their prices and output; and
3. Declares their resulting conduct lawful and exempt from the Sherman Act.

That is a direct conflict with the federal law’s core command that “every contract, combination, or conspiracy in restraint of trade” is unlawful. Congress has already decided that horizontal price coordination among competitors is not a legitimate form of economic organization. A state cannot reverse that judgment by statute.

Hybrid Restraints and Federal Conflict

Courts often describe this kind of regime as a hybrid restraint—a system in which the state authorizes private parties to impose or enforce anticompetitive rules. In Costco, for example, Washington’s liquor-pricing system was preempted because it compelled or authorized private wholesalers to fix resale prices. The same reasoning applies here: AB 1340 is a hybrid restraint because it delegates to private parties the power to set prices under color of state authority.

As the Supreme Court explained in 324 Liquor, such hybrid restraints are “plainly inconsistent with federal policy.” Whether the state compels price-fixing or merely permits it, the effect is the same: private coordination replaces market competition. The fact that AB 1340 adds a layer of procedural formality through the Public Employment Relations Board does not cure the conflict. The Board’s role is administrative, not substantive; it does not regulate prices or review them for competitive merit.

That makes AB 1340 more vulnerable than the Seattle ordinance. The Seattle law at least attempted to frame its process as a municipal program under delegated authority. California’s law, by contrast, is a direct act of state legislation that declares private coordination lawful. That pushes the statute squarely into preemption territory.

Facial vs. As-Applied Challenges

A federal court evaluating AB 1340 would have two paths. The first—and likely cleaner—approach is a facial challenge brought before implementation. Under Rice and Costco, facial preemption is appropriate when a state statute compels or authorizes per se unlawful conduct. AB 1340 does both.

An as-applied challenge would also be available once the law is implemented and a sector-wide agreement is reached. At that point, the resulting collective-bargaining contract would itself constitute a horizontal agreement among competitors in violation of § 1. But there is little reason to wait. A pre-enforcement declaratory judgment under 28 U.S.C. §§ 2201 and 1331 could resolve the issue before the law takes effect, avoiding uncertainty and potential criminal exposure for market participants.

The Broader Lesson

Federal antitrust law is not merely a default rule that states may override when convenient. It is a national economic policy enacted by Congress under the Commerce Clause. States retain wide latitude to regulate, but they must operate within that framework.

The Ninth Circuit’s decision in Chamber v. Seattle reaffirmed that boundary. AB 1340 crosses it. The statute does not replace competition with state regulation; it replaces it with private coordination and then declares that coordination legal. That is not regulation—it is nullification.

A facial challenge to AB 1340 would therefore stand on solid ground. The law’s structure and purpose directly conflict with the Sherman Act and the Supremacy Clause. And as the Ninth Circuit has already shown, courts remain willing to enforce that boundary when states or municipalities try to erase it.