This case, before the court on the district court's certification pursuant to 28 U.S.C. Sec. 1292(b) (1982), presents the question whether appellees (hereinafter "Detectives"), who are police detectives employed by appellant, The Port Authority of New York and New Jersey (hereinafter "Port Authority"), are covered by the wage and hour provisions of the Fair Labor Standards Act, 29 U.S.C. Secs. 201-19 (1982) (hereinafter "FLSA"). In Garcia v. San Antonio Metropolitan Transit Authority, --- U.S. ----, 105 S. Ct. 1005, 83 L. Ed. 2d 1016 (1985), which was decided after this court granted the Port Authority's petition for leave to appeal, the Supreme Court overruled its earlier decision in National League of Cities v. Usery, 426 U.S. 833, 96 S. Ct. 2465, 49 L. Ed. 2d 245 (1976), and held that all state and municipal employees are covered by FLSA. For the reasons set forth in this opinion, we hold that Garcia should not be accorded retroactive application on the facts presented by this case and therefore that the Detectives do not fall within the coverage of FLSA. We will reverse the district court's denial of the Port Authority's motion to dismiss and will remand the case to the district court accordingly, with directions to dismiss this civil action.

The Detectives are persons employed by the Port Authority as police detectives assigned to the Authority's Investigating Unit. They are authorized by the laws of New York and New Jersey to act as police officers, N.Y.Crim.Proc.L. Sec. 1.20, subdivision 34(k) (McKinney 1981); N.J.Stat.Ann. Sec. 32.2-25 (West 1963), and have the same powers as police directly employed by the two states. See State v. Cohen, 73 N.J. 331, 337, 375 A.2d 259, 264 (1977).1 The Port Authority is a municipal instrumentality of New York and New Jersey created by a compact between these two states with the consent of Congress (hereinafter "Compact"). See 1921 N.Y.Laws Ch. 154; 1921 N.J.Laws Ch. 151, pp. 412-22; S.J.Res. 88, 42 Stat. 174 (1921).2

This case had its origins in a collective bargaining dispute between the Detectives and the Port Authority over the latter's alleged refusal to pay the Detectives one and one-half times their regular hourly rate for hours worked in excess of forty hours a week. On October 10, 1980, in the midst of contract negotiations, the Detectives filed a complaint in the district court alleging that the refusal to pay this overtime rate violated Port Authority regulations. They later amended the complaint to allege that the Port Authority's refusal to pay overtime constituted a violation of FLSA.3

On December 2, 1980, the Detectives and the Port Authority signed a collective bargaining agreement that took retroactive effect as of July 9, 1978. This agreement provided that the Detectives would be paid time and one-half for hours worked on a regular day off or vacation day, but not if they simply worked more than a certain number of hours in a given week.4 Under the agreement, the Detectives were paid 25% more an hour than regular police officers employed by the Port Authority. During the course of the contract negotiations between the two parties, the Port Authority had contended that this 25% premium wage was being paid to the Detectives because they were often required to work overtime for which they received no increased hourly wage. The Detectives asserted, however, that they were entitled to the 25% premium because they performed duties in addition to those performed by regular Port Authority police officers and that the 25% premium therefore did not represent payment in lieu of time and one-half for overtime. The contract settlement thus did not end the overtime dispute, and the agreement contained no provision for the termination of the present lawsuit.5

Following a period of limited discovery, the Port Authority moved to dismiss the complaint, contending that the Supreme Court's decision in National League of Cities v. Usery, 426 U.S. 833, 96 S. Ct. 2465, 49 L. Ed. 2d 245 (1976), exempted state employees such as the Detectives from FLSA because they performed a "traditional governmental function." The Detectives responded by moving for partial summary judgment. The district court held a hearing on both motions. On September 29, 1982, the district court filed an opinion and order denying the Port Authority's motion to dismiss. The court based its ruling on this court's earlier decision in Kramer v. New Castle Area Transit Authority, 677 F.2d 308 (3d Cir.1982), cert. denied, 459 U.S. 1146, 103 S. Ct. 786, 74 L. Ed. 2d 993 (1983), which held that a mass transit authority was not an integral operation in an area of a state's "traditional governmental functions" and, therefore, that its bus drivers were not exempted from coverage under FLSA. Id. at 310. Reasoning that the Port Authority is engaged in the business of mass transit, the district court concluded that its employees, including the Detectives, are not exempt from FLSA coverage under National League of Cities.6

Because the case revolved around a potentially dispositive legal question, viz., whether the Detectives are covered by FLSA, the Port Authority requested that the district court amend its September 29 order to certify the question for interlocutory appeal under 28 U.S.C. Sec. 1292(b) (1982). The court agreed, and on May 23, 1983, it amended its September 29 order accordingly. Shortly thereafter this court granted the Port Authority's petition for leave to file an interlocutory appeal pursuant to Fed.R.App.P. 5(a).7

Prior to the date on which the case was to be heard in this court, the Supreme Court heard argument in consolidated appeals of Garcia v. San Antonio Metropolitan Transit Authority, --- U.S. ----, 105 S. Ct. 1005, 83 L. Ed. 2d 1016, and Donovan v. San Antonio Metropolitan Transit Authority, --- U.S. ----, 105 S. Ct. 1005, 83 L. Ed. 2d 1016, which presented the question whether the minimum-wage and overtime provisions of FLSA may be constitutionally applied to employees of publicly owned and operated mass transit systems. Because of the similarity between the question presented to the Supreme Court and the one presented here, we decided to hold this case under advisement pending the Court's decision. On February 20, 1985, the Supreme Court decided the Garcia and Donovan cases by overruling National League of Cities v. Usery, 426 U.S. 833, 96 S. Ct. 2465, 49 L. Ed. 2d 245 (1976), and holding that no state employees should be exempted from coverage under FLSA. See Garcia v. San Antonio Metropolitan Transit Authority, --- U.S. ----, 105 S. Ct. 1005, 1020, 83 L. Ed. 2d 1016 (1985). We then requested the parties to submit supplemental briefs addressing the question whether Garcia controlled this case. The parties disagreed as to the propriety of applying Garcia retroactively to serve as the governing law in this suit. This is the principal question we must now decide.

Before determining whether to apply Garcia retroactively so as to govern this case, we will review the state of the law prior to Garcia to explain how and why Garcia changed such law.

In 1974, Congress amended FLSA to subject almost all persons employed by the states and their political subdivisions to its wage and hour provisions. Fair Labor Standards Amendments of 1974, Pub.L. No. 93-259, 88 Stat. 55, 59. The National League of Cities and the National Governors' Conference challenged the amendments, contending that they unconstitutionally infringed upon states' sovereignty. The Supreme Court agreed that the determination of state employees' wages is an attribute of state sovereignty, National League of Cities v. Usery, 426 U.S. at 845, 96 S.Ct. at 2471, and held that Congress may not use the Commerce power to impose upon the states its choices regarding essential decisions in areas of traditional governmental functions. Id. at 855, 96 S.Ct. at 2476. The Court thus declared FLSA unconstitutional to the extent that it purported to apply to state employees performing such functions. Id. at 852, 96 S.Ct. at 2474. The National League of Cities principle was clarified in a later decision, Hodel v. Virginia Surface Mining & Recl. Assoc., 452 U.S. 264, 101 S. Ct. 2352, 69 L. Ed. 2d 1 (1981), which set out a three-part test for determining when congressional regulation of state conduct exceeded its Commerce Clause power:

"First, there must be a showing that the challenged statute regulates the 'States as States.' Second, the federal regulation must address matters that are indisputably 'attribute[s] of state sovereignty.' And third, it must be apparent that the States' compliance with the federal law would directly impair their ability 'to structure integral operations in areas of traditional governmental functions.' "

Id. at 287-88, 101 S.Ct. at 2366 (citations omitted).

The question presented to the Court in Garcia concerned an application of the third part of the Hodel test. The Court was asked to determine whether applying FLSA to employees of the San Antonio Metropolitan Transit Authority would constitute an impairment of San Antonio's ability to operate in an area of traditional governmental functions. Garcia, 105 S. Ct. at 1007. Although the Court in National League of Cities had identified certain types of state operations, such as police protection and fire prevention, as "traditional governmental functions," 426 U.S. at 851, 96 S.Ct. at 2474, the Court left to the lower courts the task of determining whether other state operations were traditional.

In Garcia, rather than deciding whether a state's mass transit operations are traditional and thus exempt from FLSA, the Court overruled National League of Cities. Garcia, 105 S. Ct. at 1021. Writing for the majority, Justice Blackmun stated that, contrary to the Court's determination in National League of Cities, nothing in FLSA is destructive of state sovereignty or violative of the Constitution. Id. at 1020. Because the states participate in the federal system, he wrote, they can sufficiently protect themselves from federal laws that unduly infringe upon their sovereignty. Id.

We now turn to an analysis whether the law of Garcia or that of National League of Cities should be applied to the Detectives' claim.

It is a time-honored principle that courts will apply the law in effect at the time they decide a case. See United States v. The Schooner Peggy, 5 U.S. (1 Cranch) 102 (1801).8 As a result, a recent decision is generally applied even to a dispute that arose prior to the court's holding. This approach reinforces the rubric advanced by Blackstone "that judges do not make but merely 'discover' law." Marino v. Bowers, 657 F.2d 1363, 1365 (3d Cir.1981) (in banc) (citing Linkletter v. Walker, 381 U.S. 618, 622-29, 85 S. Ct. 1731, 1733-38, 14 L. Ed. 2d 601 (1965)). However, at times application of this retroactivity precept produces inequitable results, penalizing parties who ordered their affairs in reasonable reliance on a rule of law that was later invalidated. Such inequity is undesirable, not only because of the harm to the party involved, but also because it discourages adherence to contemporary laws. Consequently, it has been held that courts in certain circumstances appropriately may determine not to apply a decision retroactively.

The Supreme Court, in its decision in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S. Ct. 349, 30 L. Ed. 2d 296 (1971), adopted the following three-part analysis for determining the retroactive effect of new law in civil cases:

"In our cases dealing with the nonretroactivity question, we have generally considered three separate factors. First, the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which litigants have relied, see e.g., Hanover Shoe v. United Shoe Machinery Corp., [392 U.S. 481, 496, 88 S. Ct. 2224, 20 L. Ed. 2d 1231 (1968) ], or by deciding an issue of first impression whose resolution was not clearly foreshadowed, see, e.g., Allen v. State Board of Elections, [393 U.S. 544, 572, 89 S. Ct. 817, 835, 22 L. Ed. 2d 1 (1969) ]. Second, it has been stressed that 'we must ... weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation.' Linkletter v. Walker, [381 U.S. 618, 629, 85 S. Ct. 1731, 1738, 14 L. Ed. 2d 601 (1965) ]. Finally, we have weighed the inequity imposed by retroactive application, for '[w]here a decision of this Court could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the "injustice or hardship" by a holding of nonretroactivity.' Cipriano v. City of Houma, [395 U.S. 701, 706, 89 S. Ct. 1897, 1900, 23 L. Ed. 2d 647 (1969) ]."

Chevron, 404 U.S. at 106-07, 92 S.Ct. at 355. We therefore analyze this case under each of Chevron's three factors to determine whether Garcia should be given retroactive effect.

In this case, the defendant reasonably relied on the law in force at the time it conducted labor negotiations, and it is unfair to make it suffer because of an unforeseen change in that law. For this reason, we conclude that the decision in Garcia v. San Antonio Metropolitan Transit Authority, --- U.S. ----, 105 S. Ct. 1005, 83 L. Ed. 2d 1016 (1985), should not be applied retroactively to this case.

The first part of the Chevron analysis counsels against retroactive application of a judicial decision if that decision establishes a new principle of law, either by overruling clear past precedent on which parties may have relied or by deciding an issue of first impression, the resolution of which had not been foreshadowed. Chevron, 404 U.S. at 106, 92 S.Ct. at 355. The Port Authority claims that the Garcia case clearly overturned the prior law governing this case, and that applying Garcia now would be inequitable because it relied on the prior law in taking the position during collective bargaining that the Detectives were not entitled to time and one-half for overtime.

As the Port Authority structured its contract with the Detectives, it was not in compliance with certain aspects of FLSA. The Port Authority's conclusion that the terms of this contract were exempt from FLSA was based on the Port Authority's assessment of two questions of law. First, the Port Authority, an entity created by bi-state compact, is a state for the purposes of the Tenth Amendment and the National League of Cities case. Second, the Detectives were performing a traditional state function because they were engaged in the activity of police protection. In order for the 1980 contract between the Port Authority and the Detectives to be exempt from FLSA under the National League of Cities doctrine, the Port Authority must be regarded as a state and the work of the Detectives must be a police protection activity. When Garcia overruled National League of Cities, these two issues became moot because all state activities became subject to FLSA.

We observe initially that the mere fact that the Supreme Court renders a decision overruling prior law is insufficient to satisfy the first part of the Chevron test. The party seeking nonretroactive application of the new decision must have relied on the prior law. Moreover, such reliance must have been reasonable. Bronze Shields, Inc. v. N.J. Dept. of Civil Serv., 667 F.2d 1074, 1085 (3d Cir.1981), cert. denied, 458 U.S. 1122, 102 S. Ct. 2510, 73 L. Ed. 2d 1384 (1982); Singer v. Flying Tiger Line Inc., 652 F.2d 1349, 1353 (9th Cir.1981).

We have concluded that the Port Authority reasonably relied on the law prior to Garcia in determining that the instant contract would not be subject to FLSA. Neither party has cited case law holding that an authority created by a bi-state compact was not a state for the purposes of the Tenth Amendment. Moreover, as discussed in part IV(A) below, there are analogous cases under the Eleventh Amendment treating similar entities as states. It was reasonable for the Port Authority to rely on the statement in National League of Cities that police protection is a traditional state function9 and to conclude that the Detectives are involved in police protection activity.10 The dissent insists that because the Port Authority operates mass transit systems, and the status of such functions under National League of Cities has been unclear, the Authority was at risk in relying on the protection of that decision. However, the fact that the Authority includes mass transit among its many activities does not mean that the status of all its employees was in doubt. Even states and municipalities control entrepreneurial and other nontraditional public entities, but this does not affect the status of their traditional functions such as police protection. Indeed, the command of National League of Cities is to distinguish among those employees who perform traditional functions and those who do not.

We conclude that the Garcia decision, by overturning National League of Cities, overruled clear past precedent on which the Port Authority may have relied. Thus, the first prong of the Chevron test weighs against retroactive application of the Garcia decision.

The second Chevron factor (404 U.S. at 106-07, 92 S. Ct. at 355-56) requires us to consider the prior history of the new rule in question, and its purpose and effect, to determine if retroactive application will further or retard its operation.

The Port Authority contends that retroactive application of the Garcia decision is not necessary to insure future adherence to the decision. Now that the Supreme Court has ruled explicitly that no state employees are exempt from FLSA coverage, the Port Authority maintains, there is no reason to believe that states and municipalities will not comply in the future. We agree. The Garcia decision makes the law clear that, in the future, states must comply with FLSA. Regardless of how we decide this case, there is no reason to suspect that states would refuse to be bound by FLSA. This situation leaves us free to decide the instant case on its facts and equitable principles without concern for furthering or retarding the operation of Garcia. This second Chevron factor neither favors nor opposes the retroactive application of the Garcia decision.C.

The third prong of the Chevron test requires us to consider any inequities that would result from retroactively applying the new law (404 U.S. at 107, 92 S. Ct. at 355). If retroactive application of Garcia would be inequitable, then this prong of the Chevron test would counsel against its retroactive application. As discussed above, the Port Authority apparently structured the contract with the Detectives based on the assumptions that it was a state for the purposes of National League of Cities, and that the Detectives were engaged in traditional state functions. In Part IV of this opinion, we decide that these assumptions are consistent with our interpretation of the law. In this section of the opinion, we analyze the Port Authority's actions when the employment agreement was entered into in 1980 to determine whether it would be inequitable to retroactively apply the Garcia opinion.

We decided in Part III(A) above that the two assumptions made by the Port Authority were reasonable.11 The Port Authority was faced with a situation where it had to predict what the law was on two different issues. It made a decision and based its contract thereon. As discussed below, we think that not only was the Port Authority's assessment of the law reasonable, it was also correct. Over four years later, the Garcia decision overruled the entire relevant body of case law. Applying Garcia retroactively would punish the Port Authority for having made a decision which we agree is based on an accurate assessment of the law at the time such decision was made. In the normal business setting, a party must take action and cannot wait indefinitely for precise judicial resolutions; courts should recognize this fact and not punish unfairly those who engage in reasonable business decision-making.

Any public or private organization must manage its revenues to most efficiently provide services at the lowest cost. When involved in labor negotiations, the organization possesses estimates of how many hours it thinks the employees will work and how much money it has to compensate them. Within those parameters, the organization may opt for various pay structures. For example, some employees may be paid more than others; some compensation may be deferred; or employees may get a higher base pay in return for reduced overtime pay. It appears that the last situation was present in the instant case. Reasonably believing itself to be unshackled from the restrictions of FLSA, the Port Authority offered an attractive base pay that was balanced by lower overtime compensation. The Detectives agreed to this arrangement. The retroactive application of Garcia to this situation would give the Detectives increased overtime pay without any reduction in base pay. To allow the Detectives to get a pay raise premised on retroactive application of an unforeseen decision that was made almost two years after the end of the contract period would be inequitable to the Port Authority and would constitute a windfall to the Detectives. See Morrison, Inc. v. Donovan, 700 F.2d 1374, 1376 (11th Cir.1983).

Inasmuch as the Port Authority encountered an unresolved issue of law, on which it took a reasonable position, retroactive application of Garcia to foreclose its reliance on National League of Cities is not equitable. Employing the rule of Garcia in this case is thus contrary to both the first and third prongs of the Chevron test. See Smith v. City of Pittsburgh, 764 F.2d 188, 196 (3d Cir.1985); see also Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 88, 102 S. Ct. 2858, 2880, 73 L. Ed. 2d 598 (1982) (plurality opinion); id. at 92, 102 S.Ct. at 2882 (Rehnquist, J., concurring).IV.

We now turn to the National League of Cities case and its progeny to see if the Port Authority is exempt from FLSA with respect to overtime payments to the Detectives for the period from July 9, 1978, until July 3, 1983. As discussed above, the National League of Cities principle was clarified in Hodel v. West Virginia Surface Mining & Recl. Assoc., 452 U.S. 264, 101 S. Ct. 2352, 69 L. Ed. 2d 1 (1981), where the Court said:

"First, there must be a showing that the challenged statute regulates the 'States as States.' Second, the federal regulation must address matters that are indisputably 'attribute[s] of state sovereignty.' And third, it must be apparent that the States' compliance with the federal law would directly impair their ability 'to structure integral operations in areas of traditional governmental functions.' "

Id. at 287-88, 101 S.Ct. at 2366 (citations omitted). We examine each of these three requirements and conclude that the Detectives in the instant case are not covered by FLSA for the above period.

The first requirement of the Hodel test is that the challenged regulation must regulate "States as States." We must decide whether the Port Authority, an entity created by a bi-state compact, is a state for the purposes of the Tenth Amendment. This determination requires analysis because the Port Authority possesses certain federal incidents that a typical state agency lacks. However, after considering its federal traits and comparing them with its state traits, we conclude that the Port Authority is a "state" for the purposes of the first requirement of the Hodel test.

Article I, section 10, of the United States Constitution provides in relevant part: "No State shall, without the Consent of Congress, ... enter into any Agreement or Compact with another State...." U.S. Const. art. I, Sec. 10. When the Port Authority was created in 1921, Congress consented to it. 42 Stat. 174 (1921). Similarly, when the Port Authority produced its Comprehensive Plan, it too was consented to by Congress. 42 Stat. 822 (1922). While Congress has not been involved in the structure or management of the Port Authority since 1922, there is language in both the Compact and the Comprehensive Plan that could be interpreted to provide for continuing control by Congress.12 Arguably, this language could justify congressional control of the Port Authority through FLSA.

A similar issue was before the District of Columbia Circuit in Tobin v. United States, 306 F.2d 270 (D.C.Cir.), cert. denied, 371 U.S. 902, 83 S. Ct. 206, 9 L. Ed. 2d 165 (1962). In that case, the District of Columbia Circuit reversed the conviction of the Executive Director of the Port Authority for contempt of Congress for failure to fully comply with a subpoena. The appellant argued that Congress lacked the power under the Compact Clause of the Constitution to "alter, amend or repeal"13 its consent to the Compact which was the stated purpose of the investigating subcommittee. The court reversed the conviction, finding that the appellant had adequately complied with the subpoena. The court admitted its reluctance to resolve the issue of whether Congress could "alter, amend or repeal" the Compact.14 We recognize the District of Columbia Circuit's reluctance and believe that this issue need not be resolved in this opinion. Our research has revealed no case holding that Congress possesses such a power.15 We note today only that the power of Congress to "alter, amend or repeal" is not currently part of the federal tradition. Since we are basing our conclusion that the Port Authority is a state for the purpose of the Hodel test on a balancing of its state and federal attributes, we feel it is not inappropriate to leave the resolution of Congress' power to "alter, amend or repeal" in this situation to another day.

One minor federal attribute of an interstate compact is that the compact itself becomes federal law. Texas v. New Mexico, 462 U.S. 554, 564, 103 S. Ct. 2558, 2565, 77 L. Ed. 2d 1 (1983). But see Petty v. Tennessee-Missouri Comm'n, 359 U.S. 275, 285, 79 S. Ct. 785, 791, 3 L. Ed. 2d 804 (1959) (Frankfurter, J., dissenting). This characterization serves not to allow Congress to sidestep the Tenth Amendment but rather to give the federal courts federal question jurisdiction (see Cuyler v. Adams, 449 U.S. 433, 438, 101 S. Ct. 703, 706, 66 L. Ed. 2d 641 (1981)) and makes available the doctrine of preemption to prevent states from avoiding their compact obligations by citing contrary state law (see West Virginia ex rel. Dyer v. Sims, 341 U.S. 22, 28, 71 S. Ct. 557, 560, 95 L. Ed. 713 (1951).16

These few federal attributes notwithstanding, we have concluded that the Port Authority possesses sufficient state attributes to qualify as a state entity for the purposes of the first prong of the Hodel test. From its inception sixty-five years ago, the Port Authority has been an entity of the two compacting states. New York and New Jersey each appointed commissioners to investigate the possibility of an agreement. 1917 N.Y.Laws Ch. 426, p. 1325; 1917 N.J.Laws Ch. 130, p. 288. A joint report of the commissioners was submitted to the respective governors in 1920. The following year the states appointed commissioners to negotiate a compact. 1921 N.Y.Laws Ch. 203, p. 841; 1921 N.J.Laws Ch. 151, p. 412. The Compact was ratified by the states before being sent to Congress for consent. 1921 N.Y. Laws Ch. 154, p. 492; 1921 N.J.Laws Ch. 151, p. 412. The Comprehensive Plan was also drafted and ratified by the states before consent was given by Congress. 1922 N.Y.Laws Ch. 43, p. 61; 1922 N.J.Laws Ch. 9, p. 25. The history of the Port Authority reveals little federal involvement beyond its mere consent to the Compact and the Comprehensive Plan.

Moreover, the Port Authority is administered as a state agency. Each state appoints six commissioners who are to be residents of the respective states. N.J.Rev.Stat. Sec. 32:1-5 (1963); N.Y.Unconsol.Laws Sec. 6405 (McKinney 1979). There is no provision for the federal government to appoint commissioners. Since 1922, Congress has not consented to any state legislation regarding the Port Authority's structure and functions.17 We view the Port Authority as an entity run as an independent state agency with little or no supervision by the federal government.

Although the issue we face today has not been resolved in the context of the Tenth Amendment and the National League of Cities case, there are cases involving the Eleventh Amendment18 that we find instructive. Courts have held that entities created by compact qualify as a state for the purpose of enjoying the immunity of the Eleventh Amendment. For example, in Howell v. Port of New York Authority,19 34 F. Supp. 797 (D.N.J.1940), the court was faced with the argument that the Port Authority was a municipal corporation and not a state agency. The court discussed the composition of the Port Authority and its role of serving primary governmental functions of the states before concluding:

"The Port Authority, a bi-state corporation, ... is a joint or common agency of the states of New York and New Jersey. It performs governmental functions which project beyond state lines, and it is immune from suit without its consent.

34 F.Supp. at 801.

More recently, the Second Circuit was faced with the same issue involving the Palisades Interstate Park Commission, an entity formed by compact between New York and New Jersey. The court noted that any judgment would have to be paid from the state treasuries and stated: "We fail to perceive any reason why a bi-state commission cannot, when sued in the federal court, enjoy the Eleventh Amendment immunity of its signatory states." Trotman v. Palisades Interstate Park Com'n, 557 F.2d 35, 38 (2d Cir.1977).

The Supreme Court had opportunity to address the issue in Petty v. TennesseeMissouri Comm'n, 359 U.S. 275, 79 S. Ct. 785, 3 L. Ed. 2d 804 (1959), but instead assumed, arguendo, that the suit be treated one as against a state. The Court then found that the commission had waived any immunity it might have had.20 In the Eighth Circuit, in the same case, the court had reached the issue and found "the defendant Commission was the agency or instrument of the two States and not an entity separate and apart from the States." Petty v. Tennessee-Missouri Bridge Commission, 254 F.2d 857 (8th Cir.1958), rev'd on other grounds, 359 U.S. 275, 79 S. Ct. 785, 3 L. Ed. 2d 804 (1959).

These Eleventh Amendment cases demonstrate that the courts are willing to treat entities created by interstate compacts as states.21 We agree that in the analogous situation presented in this case that the Port Authority, an entity created by an interstate compact, should be treated as a state for the purposes of the National League of Cities doctrine.22

The second requirement of the Hodel test is that the federal regulation must address matters that are indisputably attributes of state sovereignty. 452 U.S. at 287-88, 101 S.Ct. at 2365-66. The attribute in question in the instant case is overtime wages paid to employees. The National League of Cities case makes clear that overtime wages are an attribute of state sovereignty. The Court concluded: "Our examination of the effect of [applying FLSA] to the States and their political subdivisions, satisfies us that both the minimum wage and the maximum hour23 provisions will impermissibly interfere with the integral governmental functions of these bodies." 426 U.S. at 851, 96 S. Ct. at 2474. We conclude that the second requirement of the Hodel test is met.

The third requirement of the Hodel test is that it must be apparent that the states' compliance with the federal law would directly impair their ability to structure integral operations in areas of traditional governmental functions. 452 U.S. at 288, 101 S.Ct. at 2366. We conclude that the Detectives are engaged in a traditional governmental function.

In National League of Cities, the Court stated:

"[The application of FLSA to the States will] significantly alter or displace the States' abilities to structure employer-employee relationships in such areas as fire prevention, police protection, sanitation, public health, and parks and recreation. These activities are typical of those performed by state and local governments in discharging their dual functions of administering the public law and furnishing public services. Indeed, it is functions such as these which governments are created to provide, services such as these which the States have traditionally afforded their citizens."

426 U.S. at 851, 96 S. Ct. at 2474 (emphasis added) (footnote omitted). Thus, we are instructed that police protection is a traditional governmental function. If the Detectives are performing a police function, then the third requirement of the Hodel test (452 U.S. at 288, 101 S. Ct. at 2366) is satisfied.24

Notwithstanding the fact that the Detectives are not uniformed patrolmen, we believe that they are clearly involved in the activity of police protection. The detective who appears at the scene of the crime, interviews witnesses, and pursues suspects is at the very heart of our system of police protection. Webster's New Collegiate Dictionary (p. 882, 1979 ed.) defines "police" to include "the department of government charged with prevention, detection and prosecution of public nuisance and crimes." This language indicates a scope encompassing more than just a patrolman--it includes the people investigating reported crimes.25 Moreover, as members of the Port Authority police force, the Detectives "have all the powers conferred by law on police officers or constables in the enforcement of laws of this state and the apprehension of violators thereof." N.J.Stat.Ann. Sec. 32:2-25 (1963). Accord, N.Y.Crim.Proc.L. Sec. 1.20, subdivision 34(k) (McKinney 1981); State v. Cohen, 73 N.J. 331, 337, 375 A.2d 259, 262 (West 1977). See also Grand Rapids & I. Ry. Co. v. King, 41 Ind.App. 701, 707, 83 N.E. 778, 780 (1908) (a detective is a "policeman whose business is to detect rogues by adroitly investigating their haunts and habits") (citing Webster's Dict.); Com., Hum. Rela. Com'n v. Beaver Falls City Council, 469 Pa. 522, 527, 366 A.2d 911, 914 (1976). For these reasons, we conclude that plaintiffs as detectives are engaged in police protection which is a traditional governmental function for the purposes of the third requirement of the Hodel test.

In light of our decision that all three requirements of the Hodel test are satisfied, we hold that the application of the overtime wage provisions of the Fair Labor Standards Act to the plaintiff-Detectives during the period from 1978 to 1983 would be a violation of the doctrine announced by the Supreme Court in National League of Cities v. Usery, 426 U.S. 833, 96 S. Ct. 2465, 49 L. Ed. 2d 245 (1975). We will reverse the district court's denial of the Port Authority's motion to dismiss and will remand the case to the district court with directions to dismiss this civil action (No. 80-03307, D.N.J.).

BECKER, Circuit Judge, dissenting.

I believe the majority has misapplied the Chevron test to this case. Unlike my colleagues, I find that application of the first and second prongs of the test weighs in favor of retroactive application of Garcia. In my view, only the third prong may favor non-retroactive application, but, in weighing the equities as the third prong requires, I do not find them definite or significant enough to tip the balance. Because I conclude that Garcia should be the governing law in this case, I respectfully dissent.I.

As the majority has noted, the fact that the Supreme Court renders a decision overruling prior law is insufficient to satisfy the first part of the Chevron test. Rather, the party seeking nonretroactive application of the new decision must have relied on the prior law, and such reliance must have been reasonable. Where application of prior law has been erratic and inconsistent, a subsequent decision overruling that law cannot be said to have overruled clear past precedent on which the parties may reasonably have relied. See Smith v. City of Pittsburgh, 764 F.2d 188, 194 (3d Cir.1985); Perez v. Dana Corp., Parish Frame Div., 718 F.2d 581, 585 (3d Cir.1983).

Here, although the Supreme Court's decision in Garcia to overrule National League of Cities was hardly predictable, the application of the National League of Cities principle to cases involving state employees not specifically identified by the Court as performing traditional governmental functions had been quite erratic and inconsistent. Indeed, this inconsistency in application served as a primary reason for the Court's decision to overrule National League of Cities.1 Id. 105 S.Ct. at 1016. The Court observed that under the traditional governmental function test set forth in National League of Cities and elaborated upon in Hodel v. West Virginia Surface Mining and Recl. Assoc., 452 U.S. 264, 101 S. Ct. 2352, 69 L. Ed. 2d 1 (1981), courts had experienced insurmountable difficulties identifying those governmental functions that were traditional and those that were not and that, as a result, they had come to fundamentally inconsistent conclusions.

The majority is unmoved by the erratic prior law on this point. It points to language in National League of Cities and subsequently promulgated Department of Labor regulations which explicitly consider "police protection" as a "traditional governmental function," and concludes that the detectives were clearly excluded from coverage of the FLSA. Therefore, the majority concludes, the Port Authority's reliance on National League of Cities (and the Department of Labor regulations) in denying overtime pay to the detectives was reasonable.

For me, the matter is not so simple. The Port Authority acts to a significant extent as a transit authority.2 Department of Labor regulations existing prior to the execution of the collective bargaining agreement at issue here specifically identified the operation of local mass transit systems as not being a traditional governmental function.3 Subsequent decisional law confirmed this position. See United Transportation Union v. Long Island R. Co., 455 U.S. 678, 686, 102 S. Ct. 1349, 1354, 71 L. Ed. 2d 547 (1982); Kramer v. New Castle Area Transit Authority, 677 F.2d 308, 310 (3d Cir.1982), cert. denied, 459 U.S. 1146, 103 S. Ct. 786, 74 L. Ed. 2d 993 (1983). The majority suggests that the Port Authority should be treated like a state or municipality, with its employees treated disparately according to their functions. While this approach is plausible, it is by no means self-evident, and there is no caselaw support for it. Thus there was no clear authority for the proposition that the detectives were excluded from FLSA coverage.

Moreover, although appellees are authorized to serve as law-enforcement officers by statutes of New York and New Jersey, they are employed by the Port Authority and not by the two states or any of their municipalities. As such, they perform some duties that would not be performed by policemen working directly for New York, New Jersey, or a municipality therein, including conducting character investigations of Port Authority employees, enforcing Port Authority regulations, and investigating complaints against Port Authority personnel. Thus, appellees are not necessarily the type of policemen that the Supreme Court intended to exclude from coverage of the FLSA by the National League of Cities decision.4

In view of the inconsistent prior law, see supra note 1, and the strong indication in the case law that transit workers were not covered, the Port Authority should have recognized the precariousness of its position that its detectives were exempt from FLSA coverage under National League of Cities jurisprudence. By failing to comply with the FLSA's overtime requirements, the Authority was at risk that it might be found liable for overtime pay by a subsequent judicial determination that the detectives were covered by the FLSA.

I conclude, therefore, that it was not reasonable for the Port Authority to have relied on the law as it existed prior to Garcia for the position that its police detectives were exempt from FLSA coverage. The first of the Chevron factors thus weighs in favor of the retroactive application of the Garcia decision.

The second Chevron factor requires us to consider the prior history of the new rule in question, and its purpose and effect, to determine if retroactive application will further or retard its operation.

The majority's analysis of the second prong of Chevron is limited to whether that retroactive application of the Garcia decision would discourage future adherence to the decision. I agree with the majority that, given the Supreme Court's explicit ruling that no state employees are exempt from FLSA coverage, there is no reason to believe that states and municipalities will not comply in the future. This finding does not, however, exhaust the inquiry as to whether retroactive application of Garcia will retard or further the operation of that holding.

I believe that non-retroactive application of Garcia results in the unseemly spectacle of the court's deciding this case under a pre-existing analytical framework that the Supreme Court has found to be unsound in principle and unworkable in practice.5 Garcia, 105 S. Ct. 1016. Thus, in Part IV of its opinion the majority is forced to apply an analysis that the Supreme Court has denigrated as "not faithful to the role of federalism in a democratic society" and "disserve[ing] principles of democratic self-governance." Id. at 1015, 1016. Moreover, this court's continued recognition of exemptions in the coverage of the FLSA that were created solely by the judicial branch and have since been invalidated would constitute an unjustifiable intrusion into the legislative branch's authority and an unwarranted divergence from congressional intent.

For these reasons, I believe that retroactive application would further the operation of the new rule; the second prong of the Chevron test, therefore, also points strongly in the direction of retroactive application of Garcia.6

Part III of the Chevron test requires consideration of any inequities that would result from retroactively applying the new law. First, the Port Authority argues that it relied in good faith on National League of Cities, as well as Department of Labor regulations, in maintaining its position that plaintiffs were not covered under the FLSA, and thus that it would be inequitable for the court to now enforce the FLSA retroactively. As I have explained, given the uncertainty of the pre-existing law, the Port Authority was at risk that the detectives might not be exempted from FLSA coverage; hence it would not be manifestly unjust if the Authority were found liable under the FLSA as a result of our directing the district court to apply Garcia in this case.7

Second, the Port Authority contends that a backpay award compensating appellees one and one-half times their regular hourly rate for past overtime hours is inappropriate because it would constitute a windfall. According to the Port Authority, the police detectives were paid 25% an hour more than other Port Authority police and accepted this premium in exchange for not receiving time and one-half for overtime, which was being paid to the other police. Thus, Port Authority maintains that retroactive application of Garcia would result in a financial windfall to the detectives. See Morrison, Inc. v. Donovan, 700 F.2d 1374, 1376 (11th Cir.1983). The detectives deny that their premium hourly rate of pay was made in lieu of overtime, asserting that this rate was greater than that of other Port Authority police because they performed extra duties.

It is thus unclear whether retroactive application of Garcia would result in a windfall (though the majority, without explanation, adopts the Port Authority's position on this point). This poses no problem in any event because retroactive application of Garcia does not require that we stipulate the base hourly rate that the district court should use in determining a backpay award for overtime compensation if the Port Authority is found to be liable. Rather, I believe the district court should determine whether the detectives agreed to a higher hourly rate in lieu of time and one-half for overtime and, therefore, that the parties would have agreed to a different base pay had overtime been included in the wage package. The court would take such facts into account when determining the appropriate base rate with which to calculate overtime compensation. My proposed application of Garcia to this case, therefore, would not subject the Port Authority to an unjustly large assessment of damages and provide the detectives with a windfall.8

Finally, the majority believes that a lump-sum backpay award to the detectives for past overtime would be inequitable to the Port Authority. I recognize that the potential liability of Port Authority may be significant, and I do not consider this factor lightly. Nevertheless, the amount of such liability is highly speculative at this stage,9 and ought to be balanced against the inequities to workers occasioned by their lower wages, a situation resulting from the subsequently overturned National League of Cities holding. Moreover, my concern about Port Authority's potential financial liability is tempered by the two-year limitations period for FLSA actions of this sort, see supra n. 6. Thus, the potential financial hardship imposed on the Port Authority is not definite or significant enough to tip the balance in favor of a non-retroactive application of Garcia.

I conclude, therefore, that application of the Chevron test dictates that the Supreme Court's Garcia decision should serve as the governing law in this case. I would thus answer the district court's certified question by holding that the wage and hour provisions of the FLSA apply to the class of Port Authority employees consisting of police detectives represented by the plaintiffs.