United States District Court for the District of Columbia
December 31, 2003.
AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS, Plaintiff,
ELAINE L. CHAO, Secretary of Labor, Defendant
The opinion of the court was delivered by: GLADYS KESSLER, District Judge
Plaintiff, the American Federation of Labor and Congress of
Industrial Organizations ("Plaintiff" or "AFL-CIO")*fn1, brings this
action under the Administrative Procedure Act ("APA"), 5 U.S.C.
§ 701, et seq., for judicial review of the Final Rule
entitled "Labor Organization Annual Financial Reports" ("Rule" or "Final
Rule") issued by Defendant Elaine L. Chao, Secretary of Labor
("Secretary"), on October 9, 2003, 68 Fed. Reg. 58374. The Rule did not
become binding until November 10, 2003, when it received final approval
from the Office of Management and Budget pursuant to the Paperwork
Reduction Act, 44 U.S.C. § 3501, et seq., Plaintiff filed
suit on November 26, 2003, alleging that the Secretary's action in issuing the Rule was "arbitrary and capricious."
5 U.S.C. § 706(2)(a).
This matter is before the Court on Plaintiff's Motion for Preliminary
Injunction.*fn2 Upon consideration of the Motion, Opposition, Reply, the
amicus curiae brief of the National Right to Work Legal Defense
Foundation,*fn3 the oral arguments presented December 30, 2003, and the
entire record herein, and for the reasons stated below, Plaintiff's
Motion for Preliminary Injunction is granted.
In summary, the Court concludes that Plaintiff will suffer irreparable
harm if forced to start complying with the requirements of the new
reporting Rule by January 1, 2004. The Department of Labor has allowed
the unions covered by the statute less than two months to make the
extensive and sophisticated accounting, computer, and employee training
changes that are necessary in order to bring them into compliance with
the Rule. A one-year postponement of the effective date of the new Rule
will cause no harm to either the Department of Labor or to union members.*fn4
Given the fact that the present regulations, which the Department of
Labor has maintained in effect for more than 40 years, will continue in
effect, there will be no discernable harm to the public interest. The
Court will soon be issuing a final dispositive Opinion on the broader
issues presented in Plaintiff's request for permanent injunctive and
declaratory relief. It must be emphasized that those broader issues are
not being decided at this time. Much of the background information
presented herein will also be relevant to that final decision on the
A. History of the Reporting Requirements
In 1959 Congress enacted the Labor-Management Reporting and Disclosure
Act, 29 U.S.C. § 401 et seq., ("LMRDA"), requiring unions,
among other things, to file annual reports with the Secretary of Labor
disclosing detailed information about their financial transactions.
Congress imposed this financial reporting requirement to protect the
rights of union members, to guard against corruption, and to prevent
"other failures to observe high standards of responsibility and ethical
conduct" in the course of labor-management activities. See
29 U.S.C. § 401(a)-(c). Specifically, Section 201(b) of the LMRDA requires unions covered by
the statute to file annually with the Secretary a financial report which
accurately discloses their financial condition and operations for the
preceding fiscal year. See 29 U.S.C. § 431(b). Under that
provision, James Mitchell, Secretary of Labor under President Dwight D.
Elsenhower, promulgated the first regulations implementing the LMRDA on
January 20, 1960. See 25 Fed. Reg. 433 (1960);
29 C.F.R. § 403. Those regulations, with only minor modifications,
have been in place for forty-three years.
The first implementing regulations required unions with $20,000 or more
in annual receipts to submit their financial report on a "Form LM-2."
Smaller unions were required to submit theirs on a simpler "Form LM-3."
In 1962, the Department of Labor ("Department") raised the filing
threshold for the Form LM-2 to $30,000; in 1981, it raised it to
$100,000; and in 1994, it raised it again to $200,000. See 67
Fed. Reg. 79280, 79293 (Dec. 27, 2002). Under the $200,000 filing
threshold, 79 percent of all covered unions were eligible to file the
simpler Form LM-3, and only 21 percent were required to file the Form
B. The Rulemaking Process
1. The Notice of Proposed Rulemaking
On December 27, 2002, the Department issued a Notice of Proposed
Rulemaking ("NPRM"), initiating the formal process that resulted in the Final Rule now in issue. See 67 Fed. Reg.
79280-414 (Dec. 27, 2002).
The NPRM described the increasing trend away from small, independent
unions and toward larger unions that tend to resemble modern corporations
in their structure and complexity. The NPRM noted that these large unions
manage full-featured benefit plans for their
members, maintain close business relationships
with financial service providers such as insurance
companies and investment firms, offer multiple
compensation opportunities to their senior
executives and officials, operate
revenue-producing subsidiaries, conduct extensive
government lobbying, and participate in
foundations and charitable activities.
67 Fed. Reg. at 79280.
The Department determined that, despite these operational and
structural changes in the nature of unions, the forms on which the unions
reported financial transactions remained essentially unchanged and were a
barrier to full and transparent reporting. See 67 Fed. Reg. at
79280. The Department noted that the forms allowed the reporting of
"large expenditures for generalized purposes" without providing any
detail. 67 Fed. Reg. at 79281. "Recent [F]orm LM-2 reports filed with the
Department disclosed, for example, expenditures of $7,805,827 for `Civic
Organizations,' and $3,927,968 for `Sundry Expenses,' and $7,863,527 for
`Political Education.'" 67 Fed. Reg. at 79281.
The Department observed that "the current [Form LM-2] does not require
the union to disclose the identity of the recipient of the funds, making it difficult to determine whether these amounts were
actually spent for the described activities," and difficult for union
members to know "whether or not their dues were spent appropriately." 67
Fed. Reg. at 79282. The Department also noted that Office of Labor
Management Standards' ("OLMS") investigations of fraud and embezzlement
revealed that the "broad aggregated categories on the existing forms made
it possible to hide embezzlements, self-dealing, overspending and
financial mismanagement." 67 Fed. Reg. at 79282.
The Department also found that similar problems surrounded "trust[s] in
which a labor organization is interested," as defined in § 3(1) of
the LMRDA, 67 Fed. Reg. at 79282. Specifically, the Department noted that
unions have substantial dealings with their affiliated entities, and that
if a union transfers funds to such an entity, "union members may have no
way to determine whether the funds in question were actually spent for
the benefit of members." 67 Fed. Reg. at 79282. The Department pointed
out, for example, that "joint training funds have been used to pay union
officials supplementary salaries or host extravagant parties for
trustees." 67 Fed. Reg. at 79283.
The proposed rule mandated, inter alia, (1) that receipts,
disbursements, and accounts payable and receivable in excess of a
threshold amount be individually reported on the Form LM-2; (2) that all
such expenditures be reported in new "functional" categories;*fn5 (3) that unions estimate and report on the Form
LM-2 the time each officer and member spends on activities corresponding
to the functional categories; (4) that unions report the number of
members in specific categories; (5) that unions report the assets,
liabilities, receipts, and disbursements of all "significant trusts" in
which they have an interest on the Form T-1; (6) that unions file the
Form LM-2 electronically.
At the outset of the rulemaking process, the Secretary acknowledged
that additional burdens would be imposed by the new reporting
requirements. In weighing the burden that the changes would entail, she
noted that she would rely primarily on data provided by affected parties.
"Information regarding the burden imposed by making the proposed changes
and the benefit to be gained is most likely to be obtained by proposing
the changes for comment so that unions who file these reports, union
members, and other groups that represent workers can express their
views." See 67 Fed. Reg. at 79282.
2. Comments on the Proposed Rule
During the ninety-day comment period, the Department received over
35, 000 comments. Although a majority of these comments were form
letters, approximately 1, 200 individualized comments, including a
lengthy, substantive, and detailed empirical analysis from the AFL-CIO, were received from union members, unions,
employers and trade organizations, public interest groups, accountants
and accounting firms, academics, and members of Congress. A majority of
the comments the Department received opposed the proposed reporting
requirements, asserting that compliance would be overly burdensome.
See Def.'s Opp'n at 6.
The AFL-CIO's study of the burdens of the proposed rule was prepared by
economist Ruth Ruttenberg ("Ruttenberg Report"). See Pl.'s Ex.
3, Tab A. The Ruttenberg Report concluded that the Secretary's initial
$14.7 million estimate of the economic burden that the proposed rule
would place on reporting unions was too low. See id. at 4. It
estimated, using median-per-union cost figures, that the total costs of
implementing the new form LM-2 electronic filing system for AFL-CIO
affiliates would be approximately $712 million. This figure did not
include either the compliance costs attributable to the Form LM-2 filers
which are not AFL-CIO affiliates, or the costs of completing other
proposed reporting forms, such as the Form T-1 for "significant trusts."
Id. at 31.
The AFL-CIO's study also addressed the issue of the lead time needed
for compliance, concluding that, depending on the size and resources of
the union, unions would require between six months and one year before
the beginning of the first reporting period to which the Rule would apply
to adjust their accounting and information technology systems in order to accurately collect and
record the mandated new information. See id. at 18.
C. The Requirements of the Final Rule
On October 9, 2003, approximately nine months after publishing the
NPRM, the Secretary promulgated her final rule implementing the new Form
LM-2, see 68 Fed. Reg. 58374 (Oct. 9, 2003), which, as already
noted, did not become binding until November 10, 2003, when it was
approved by the Office of Management and Budget ("OMB").*fn6 The Final
Rule provides that it will become effective January 1, 2004, some seven
weeks after 0MB's approval.
In promulgating the Final Rule, the Secretary used a cost-benefit
analysis to determine the appropriateness of the Rule. See 68
Fed. Reg. at 58409 ("the real question is whether an increase in cost,
once it is accurately measured, is justified by the increased benefits to
union members"). However, in response to concerns expressed by
commenters, the Department modified numerous provisions including,
inter alia, (1) raising the Form LM-2 filing threshold from
$200,000 to $250,000 in total annual receipts,*fn7 see 68 Fed. Reg. at 58383, 58429; and (2) setting the dollar threshold
for "major" receipts and disbursements at $5,000, see 68 Fed.
Reg. at 58388-90.
The Final Rule will apply prospectively to financial reports filed by
unions with fiscal years beginning on or after January 1, 2004.
See 68 Fed. Reg. at 58374. There are 4, 778 labor organizations
that will be required to file a Form LM-2 under the new Rule, and
two-thirds of them (3, 185 or 19% of all labor organizations covered
under the LMRDA), have fiscal years that begin on January 1, 2004.
See 68 Fed. Reg. at 584121; Decl. of Linda Jardine ¶ 8. The
first report containing the information required under the Rule for
fiscal year 2004-2005 will be due on March 31, 2005. See 68
Fed. Reg. 58410-12. Unions that have fiscal years that begin on a date
other than January 1 (such as April 1 or July 1) will have a concomitant
amount of additional time to comply with the Rule.*fn8 See 68
Fed. Reg. at 58412.
A union covered by the statute must file its Form T-1, or qualifying
audit in lieu of the Form T-1, simultaneously with the union's filing of
its Form LM-2. See 68 Fed. Reg. at 58418. The Form T-1,
however, covers the trust's, not the union's, fiscal year. At the time a union files its Form LM-2, the covered union
must provide a Form T-1 for the trust's most recent fiscal year that
ended during the union's reporting year. See 68 Fed. Reg. at
1. The Form LM-2
The Rule requires unions with total annual receipts greater than
$250,000 to provide an itemized accounting of all receipts,
disbursements, and accounts payable and receivable in excess of $5,000 on
a Form LM-2 if the receipt, disbursement, or account payable or
receivable falls into one of five designated "functional"
categories.*fn9 Labor organizations with annual receipts under $249,000
are required to submit a Form LM-3. Unions with annual receipts under
$10,000 are required to submit a Form LM-4. Both Forms LM-3 and LM-4
require far less information than Form LM-2.
Unions must file the Form LM-2 electronically. The Department is
developing software that will enable each union to file its financial
data electronically. This software, which has not yet been made available
to the covered unions, will be offered without charge. See 68
Fed. Reg. at 58411.
2. The Form T-1 The Final Rule requires a union to file a Form T-1 if (1) it has an
interest in a trust, as defined in the LMRDA § 3(1),
29 U.S.C. § 402 (1);*fn10 (2) the union and the trust each
have annual receipts of $250,000 or more; and (3) the union makes
a financial contribution to the trust, or a contribution is made on the
union's behalf, of $10,000 or more. If a union's financial contribution
to a trust, or a contribution made on the union's behalf, is less than
$10,000 or the union has an interest in a trust that has annual receipts
of less than $250,000, the union only has to report the existence of the
trust and the amount of the union's contribution or the contribution made
on the union's behalf.
D. The Instant Challenge to the Rule
On November 26, 2003, the AFL-CIO filed the instant action seeking a
Preliminary Injunction postponing the effective date of the Rule, as well
as permanent relief setting aside the Rule and enjoining its
The AFL-CIO maintains that it is entitled to relief on two grounds.
First, it claims that the Secretary lacks the statutory authority under
§§ 201(b) and 208 of the LMRDA to issue the Rule, and that she is not authorized "to require labor organizations to
report every receipt and disbursement, in any amount." 68 Fed. Reg. at
Second, Plaintiff claims that the Secretary's action in issuing the
Rule is arbitrary and capricious because (1) she gave unions covered by
the statute less than two months to make the significant changes to their
computer hardware, software programs, accounting systems, and employee
training programs necessary to comply with the January 1, 2004 effective
date; (2) she underestimated the increased costs of compliance associated
with the Rule and (3) she failed to adequately explain her cost
II. PLAINTIFF IS ENTITLED TO ISSUANCE OF A PRELIMINARY
A. Legal Standard for Preliminary Injunctive Relief
The case law in this Circuit is well established that when considering
a plaintiff's request for a preliminary injunction, the court must
examine whether (1) there is a substantial likelihood of success on the
merits, (2) Plaintiff will be irreparably injured if the requested
injunction is denied, (3) an injunction will substantially injure the
opposing party and (4) the public interest will be furthered by issuance
of the injunction. Davenport v. International Brotherhood of
Teamsters, AFL-CIO, 166 F.3d 356, 360 (D.C. Cir. 1999); Serono
Labs, v. Shalala, 158 F.3d 1313, 1317-18 (D.C. Cir. 1998);
Washington Metropolitan Transit Commission v. Holiday Tours, Inc., 552 F.2d 841, 843 (D.C. Cir. 1977).
As Judge Garland noted in Davenport, "[t]hese factors
interrelate on a sliding scale and must be balanced against each other."
166 F.3d at 360-61. Moreover, a particularly strong showing on one factor
may compensate for a weaker showing on one or more of the other factors.
Serono, 158 F.3d at 1318. "The necessary `level' or `degree' of
possibility of success will vary according to the court's assessment of
the other factors." New Mexico v. Richardson, 39 F. Supp.2d 48,
50 (D.D.C. 1999).
In addition, it is essential to recognize that preliminary injunctions
are extraordinary forms of judicial relief and therefore must be granted
sparingly. As the Supreme Court has recently noted "[i]t frequently is
observed that a preliminary injunction is an extraordinary and drastic
remedy, one that should not be granted unless the movant, by a clear
showing, carries the burden of persuasion." Mazurek v.
Armstrong, 520 U.S. 968, 972 (1997).
Keeping all of these principles in mind, the Court concludes for the
following reasons that Plaintiff, AFL-CIO, has clearly demonstrated that
the particular provision of the Rule establishing its effective date as
of January 1, 2004 will cause enormous irreparable harm to those
affected. Moreover, there is a substantial likelihood of Plaintiff
succeeding on the merits of its argument that imposition of the January
1, 2004 effective date, with less than two months' notice to all concerned, is arbitrary,
capricious and in violation of the APA. Finally, neither the Secretary of
Labor nor the public interest will be injured by a one year delay in
implementation of the Rule, especially in light of the fact that the
existing reporting requirements which have been in effect, largely
unchanged, for more than 40 years, will remain in effect.*fn11
B. Irreparable Injury
As noted earlier, despite the fact that the Rule did not become binding
until November 10, 2003, it becomes effective January 1, 2004. As a
practical matter, what this means is that as of January 1, 2004, with
less than two months' notice, all of the covered unions will have to
change the reporting mechanisms and protocols which have complied with
federal regulations for more than forty years, so as to meet the detailed
requirements of the new Rule. In order to do this, the unions will have
to take numerous irreversible steps.
The Secretary's own cost assessment for meeting the demands of the
Final Rule (a cost assessment which Plaintiff maintains is far too low)
is $80 million for the first year of implementation. Moreover, the vast
bulk of the costs for start-up planning, purchasing and staff training associated with the Final Rule must
be borne during the initial phase of compliance. These initial compliance
steps must be taken as early as possible because, if a union does not
have the benefit of professional advice from experienced accountants,
lawyers and information technology experts, if it does not have its new
accounting system in place, if it does not have its employees trained,
and if it does not have its new computers purchased and its new software
installed before the beginning of its fiscal year, it will face an
untenable situation in which it will lose ground every day because the
new systems are not in place.
The AFL-CIO submitted a lengthy declaration from an experienced
Certified Public Accountant, who has for more than 30 years performed
accounting and auditing services for non-profit organizations, more than
half of which have been unions and employee benefit plans. See
Jardine Decl., ¶¶ 1, 2. She, of course, performs her work in
accordance with Generally Accepted Auditing Standards. Jardine Decl.,
¶ 3. In her affidavit, she concluded that:
1) unions do not currently record all of the key
data required under the new rule because such data
do not serve the traditional purposes of a union
accounting system; 2) unions will have to make
major changes to their accounting systems in order
to record and report such data; 3) each union must
make these changes before its fiscal year begins
in order to track and report the required data
accurately; 4) these changes will be costly and
time-consuming; 5) failure to begin the fiscal
year with the necessary changes in place will
cause unions to spend considerably more time and money trying
to comply with the requirements of the new rule
than if they began the fiscal year with the
necessary changes; 6) such failure will jeopardize
the accuracy of the financial data unions must
record and report under the new rule.
Jardine Decl., ¶ 9.*fn12
She further concluded that "most unions will have to extensively or
significantly revise their accounting systems." Jardine Decl., ¶ 35.
As she explained, "[r]evisions to an accounting system of the sort
described in the preceding paragraph require special training and
supervision of all personnel with responsibility for processing
expenditures . . . including those in other departments [than
accounting] who are responsible for procuring services and approving
invoices or other requests for payment." Jardine Decl., ¶ 36.
As noted earlier, the Final Rule requires, for the first time, the use
of a new functional category approach. According to the Jardine
Declaration, ¶ 44, adding a new functional category approach into a
union's existing accounting system is a difficult and time-consuming
process.*fn13 Based on her experience as a CPA, Jardine concluded that: any organization, whether or not it is a
union, that decides to make modifications to its
existing accounting system or replace its
accounting system altogether, needs to spend
considerable time researching and comparing the
available options with respect to suitability and
cost. Many of my clients who have undertaken such
purchases have been able to do so only by
consulting with outside experts in information
technology and accounting. Moreover, migrating to
an entirely new system requires months of
preparation in order to ensure that the system
functions properly and there is no loss of
historical data. This implementation usually
involves a substantial number of parallel test
runs before the organization converts officially
to the new or modified system. Similarly, making
the transition to a modified system may take a
substantial amount of time and preparation to
ensure the proper functioning of the system.
Jardine Decl., ¶ 47 (emphasis in original).
The Jardine Declaration also pointed out, at ¶¶ 50-54, that until
the transition system a union adopts in order to comply with the Final
Rule is completed, that system will be burdened with a continually
expanding backlog of improperly processed data. Once that system is
completed, then the improperly processed data will have to be
individually corrected and recoded, provided that the software package
chosen by the union allows users to modify or recode previously entered
Finally, despite the fact that the Final Rule becomes effective on
January 1, 2004, and despite the fact that it is essential that the
unions change their accounting and computer systems as early as possible,
the Department has not yet distributed the reporting software that it has
promised in order to implement the mandated electronic filing provisions
of the new Rule. At oral argument, the Government indicated that it expected
to have such software ready for distribution within the first quarter of
the fiscal year. However, as the Jardine Declaration points out in ¶
61, if a union discovers several months after the beginning of
its fiscal year that it has not designed its query and report system
correctly in light of the reporting software distributed by the
Department, that union may be faced with having to redesign and
re-execute all of its queries and reports or having to manually "cut and
paste" information from its internal accounting reports into the LM-2
form at the end of the fiscal year. In either event, the options are
"expensive, resource-intensive, and time-consuming." Id.
As the foregoing demonstrates, the AFL-CIO and its associated unions
will indeed suffer irreparable harm if there is a subsequent ruling on
the merits which invalidates the Final Rule. Nothing can be done to
restore the unions to their previous position. This result is exacerbated
by the fact that it is essential for the unions to undertake the great
majority of the steps necessary to change their accounting systems in the
very early stages of the fiscal year, during the exact period when the
Court may be deliberating about the merits of the controversy.*fn14
Finally, if the Court were to deny preliminary injunctive relief and
later invalidate the Final Rule, the unions would then have to expend
additional unrecoverable money, resources and staff time in transitioning
back to comply with the previously existing LM-2 regulations.
C. Likelihood of Success on the Merits
Under the APA, an agency's action may be set aside only if it is
"arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law." 5 U.S.C. § 706(2)(A). "The arbitrary and
capricious standard [of the APA] is a narrow standard of review."
Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402,
In order for an agency to survive arbitrary and capricious review under
the APA, the agency must adequately explain its result. Public
Citizen, Inc. v. FAA, 988 F.2d 186, 187 (B.C. Cir. 1993); Fed.
Election Comm'n v. Rose, 806 F.2d 1081, 1088 (B.C. Cir. 1986).
See also Pension Ben. Guar. Corp. v. LTV Corp., 496 U.S. 633,
654 (1990) (an agency must "provide an explanation that will enable the
court to evaluate the agency's rationale at the time of the decision");
Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co.,
463 U.S. 29, 43 (1983) (an agency's explanation must minimally contain "a
rational connection between the facts found and the choice made") (citing
Burlington Truck Lines, Inc. v. U.S., 371 U.S. 156, 158
(1962)). In this case, the Department has given the covered unions less than two
months to make the enormous changes necessary to their accounting,
computer, software and staff training to comply with the new Rule. The
Secretary acknowledges that "some interim period will be needed for
unions to adapt their recordkeeping systems to the new requirements," 68
Fed. Reg. at 58411, and that "filers will need to study and understand
the new requirements, make adjustments to the union's recordkeeping
system, and train staff." Id. However, she offers no record
support which would justify selection of a brief two month transition
period to bring covered unions into compliance with the new Rule. In
order to do all of the tasks necessary to bring a union's systems into
compliance with the new Rule, it is clear that a period of seven weeks
(seven weeks which included the Thanksgiving and Christmas holidays) was
Significantly, the Secretary offers no rebuttal or counter-declaration
to that filed by Jardine. Nor did the Government at oral argument offer
any substantive explanation as to how the covered unions would be able to
meet their obligations under the Final Rule in the brief period of time
allotted. The lengthy Jardine Declaration rested on a firm factual basis,
was extremely detailed, and well reasoned. Nothing in the record
contradicted the very practical considerations presented in that
affidavit. Interestingly, back in 1992, when the Secretary adopted a
financial reporting rule with some changes similar to those contained in
the present Final Rule, she ultimately postponed its effective date for
a year after concluding that the initially proposed two months'
transition time was not sufficient for the unions to modify their
This regulation has been under consideration for just under a year.
Given that fairly lengthy period of time, the fact that existing
regulations are now and will remain in effect, and the extensive systems
modifications described as necessary in the Jardine Declaration, the
Court concludes there is a substantial likelihood that Plaintiff will
prevail in its argument that a two month transition period is arbitrary,
capricious and in violation of the APA. The Secretary has simply failed
to offer any reasonable justification for requiring such far-reaching
changes to take place in a period of seven weeks, especially when that
seven week period encompasses two of the major holiday periods of the
D. Injury to the Secretary and the Public Interest
There is no evidence whatsoever that a temporary stay of the
implementation of the Final Rule will cause any significant harm to the
Secretary, to union members, or to the public. It is noteworthy that the
Secretary, in choosing the January 1, 2004 effective date, did not claim
any particular need for extraordinary urgency. While it may well be that
there is justification for the Final Rule adopted by the Secretary, there
is certainly good reason to preserve the status quo as it existed before the effective date
of the new regulation, especially when that status quo has been deemed
acceptable by the Department of Labor for over 40 years.
For all the foregoing reasons, the Court concludes that the Motion for
a Preliminary Injunction should be granted.