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AMERICAN FEDERATION OF LABOR v. CHAO

January 22, 2004.

AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS, Plaintiff,
v.
ELAINE L. CHAO, Secretary of Labor, Defendant



The opinion of the court was delivered by: GLADYS KESSLER, District Judge

MEMORANDUM OPINION

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 ("OMB") pursuant to the Paperwork Reduction Act, 44 U.S.C. § 3501, et Page 2 seq.,*fn2 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 for a decision on the merits.*fn3 Upon consideration of the entire record herein, including Defendant's Motion for Reconsideration/Clarification of the Preliminary Injunction, and for the reasons stated below, Plaintiff's request for permanent relief setting aside the Rule and enjoining its implementation is granted in part and denied in part.

  In summary, the Court concludes that the Secretary has the statutory authority to issue the Rule. The Court also concludes that the Rule is reasonable, adequately explained, and not arbitrary or capricious under the APA.

  The Court finds, however, that the Secretary's imposition of a January 1, 2004 effective date for the Rule is arbitrary and capricious and in violation of the APA because it gives those unions that use a fiscal year beginning January 1 less than two months to develop new accounting systems, purchase new computers Page 3 and software, and train their staff, in order to comply with the new Rule. As to those unions that use a fiscal year beginning on or after July 1, however, the Court finds that the rulemaking record does not support enjoining the Rule's effective date, provided that the Department makes available a fully tested version of its electronic reporting software at least ninety dates before that July date.

  Based on these findings, the Court enjoins the Secretary from imposing the Final Rule until July 1, 2004, or ninety days after the Department makes available a fully tested version of its electronic reporting software, whichever is later. The Court recognizes, as did the Government in its Motion for Reconsideration/Clarification of the Preliminary Injunction, that those unions using a fiscal year that begins January 1 will not need, as a practical matter, to track the financial information required by the new Rule until January 1, 2005.

 I. BACKGROUND

  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 Page 4 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 of Labor a financial report which accurately discloses their "financial condition and operations" for the preceding fiscal year. 29 U.S.C. § 431(b). On January 20, 1960, James Mitchell, Secretary of Labor under President Dwight D. Eisenhower, promulgated the first regulations implementing § 201(b) of the LMRDA. 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 their report 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 LM-2. Page 5

  B. The Requirements of the Final Rule

  On December 27, 2002, the Secretary issued her Notice of Proposed Rulemaking ("NPRM") initiating the formal process that resulted in the Final Rule now in issue. See 67 Fed. Reg. 79280 (Dec. 27, 2002). On October 9, 2003, approximately nine months later, the Secretary promulgated the Final Rule. See 68 Fed. Reg. 58374 (Oct. 9, 2003). As already noted, the Rule did not become binding until November 10, 2003, when it received final approval from the OMB pursuant to the Paperwork Reduction Act, 44 U.S.C. § 3501, et seq., The Final Rule provides that it will become effective January 1, 2004, a little less than two months after OMB's approval.

  In promulgating the Final Rule, the Secretary used a cost-benefit analysis to determine its appropriateness. 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 on the proposed rule, 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,*fn4 see id. at 58383, 58429; (2) setting the dollar threshold for "major" receipts and disbursements at $5,000, see id. Page 6 at 58388-90; (3) making the Rule effective a little less than two months after its publication rather than, as initially proposed, immediately after publication; and (4) limiting the Form T-1 requirement to those unions that are required to file the Form LM-2.*fn5

  The Final Rule will apply prospectively to financial reports filed by unions using a fiscal year that begins on or after January 1. See 68 Fed. Reg. at 58374. There are 4,778 unions (about 19 percent of all unions covered under the LMRDA) that will be required to file a Form LM-2 under the new Rule. Approximately two-thirds of these unions (3,185) have fiscal years that begin on January 1. See id. at 58423; Jardine Decl., ¶ 8. The first report containing the information required under the Rule for unions using a fiscal year beginning January 1 will be due on March 31, 2005. See id. at 58413. Unions using a fiscal year that begins on a date other than January 1 will have a concomitant amount of time to comply with the Rule. See id.

  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 id. 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 Page 7 Form T-1 for the trust's most recent fiscal year that ended during the union's reporting year. See id.

  1. The Form LM-2

  The Rule requires unions with total annual receipts of $250,000 or more 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.*fn6 Unions with annual receipts of less than $250,000 are required to submit a Form LM-3. Those with annual receipts of less than $10,000 are required to submit a Form LM-4. Both the Form LM-3 and LM-4 require far less information than the 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 ("electronic reporting software"). This software, which has yet to be made available to the covered Page 8 unions,*fn7 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);*fn8 (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 on the Form LM-2 the existence of the trust and the amount of the union's contribution or the contribution made on the union's behalf. See 68 Fed. Reg. at 58430. Page 9

  Unions will not have to file a Form T-1 for organizations that meet the statutory definition of a trust if (1) the trust files a report pursuant to 26 U.S.C. § 527;*fn9 (2) the trust files a report pursuant to the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001, et seq.; (3) the organization is a Political Action Committee ("PAC") and files publicly available reports with a Federal or state agency; or (4) an independent audit has been conducted in accordance with the standards prescribed in the Final Rule.*fn10 For the first three categories, the exception is complete, i.e., no Form T-1 is required. For the fourth category, a union must file the Form T-1, but can file the independent audit in lieu of providing the financial information otherwise required by the Form T-1. See 68 Fed. Reg. at 58413.

  C. The Instant Challenge to the Final Rule

  On November 26, 2003, the AFL-CIO filed the instant action seeking a Preliminary Injunction postponing the effective date of Page 10 the Rule, as well as permanent relief setting aside the Rule and enjoining its implementation. On December 31, 2003, the Court granted Plaintiff's Motion for a Preliminary Injunction on the grounds that the AFL-CIO was likely to prevail on the merits of its claim that the January 1, 2004 effective date set out in the Final Rule was arbitrary and capricious. See AFL-CIO v. Chao, No. 03cv2464 (GK), December 31, 2003, Mem. Op.,

  The AFL-CIO maintains that it is entitled to permanent relief setting aside the Rule and enjoining its implementation 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 58376. The AFL-CIO also argues that § 208 of the statute does not authorize the Secretary to require unions to report on the finances of trusts that the union does not control.

  Second, Plaintiff claims that the Secretary's action in issuing the Rule is arbitrary and capricious because (1) she set a January 1, 2004 effective date, thus giving those unions that use a fiscal year beginning January 1 a little less than two months to develop the new accounting systems, purchase the new computer hardware and software, and train their staff to comply with the new Rule; (2) she underestimated the increased costs of compliance Page 11 associated with the Rule; and (3) she failed to adequately explain her cost estimates.

 II. STANDARD OF REVIEW

  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, 416 (1971).

  The reviewing court "must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment." Id. Because the court's role is merely to ensure that the agency based its decision on relevant factors and was not a "clear error of judgment," the court may not substitute its judgment for that of the agency. Id. "It is particularly important to adhere to [this] standard when [as here,] an agency has been called upon to weigh the costs and benefits of alternative policies." Competitive Enter. Inst. v. Nat'l Highway Traffic Safety Admin., 901 F.2d 107, 120 (B.C. Cir. 1990). If the "agency's reasons and policy choices . . . conform to certain minimal standards of rationality' . . . the [agency decision] is reasonable and must be upheld." Small Refiner Lead Phase-Down Task Force v. EPA, 705 F.2d 506, 521 (D.C. Cir. 1983) (internal citation omitted); see Kisser v. Cisneros, 14 F.3d 615, 619 (B.C. Cir. 1994) Page 12 (noting that "[t]he court must determine whether the agency has articulated a `rational connection between the facts found and the choice made.'") (internal citation omitted). This standard presumes the validity of agency action. See Ethyl Corp. v. EPA, 541 F.2d 1, 34 (D.C. Cir. 1976) (en banc).

  In order for agency action 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, 197 (D.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'") (internal citation omitted).

  This does not mean that an agency's decision must be a model of analytical precision to survive a challenge. The extent to which an agency must explain its decision was described in City of Vernon, Cal. v. FERC, 845 F.2d 1042, 1046 (B.C. Cir. 1988), where our Circuit stated:

  The basis upon which an agency action is grounded must be set forth with such clarity as to be understandable. It will not do for a court to be compelled to guess at the theory underlying the agency's action; nor can a court be expected to chisel that which must be precise from what the agency has left vague and indecisive. In other Page 13 words, `We must know what a decision means before the duty becomes ours to say whether it is right or wrong.'

 Id. at 1046 (citing SEC v. Chenery Corp., 332 U.S. 194, 196-97 (1947) (internal citation omitted)).

 III. ANALYSIS

  The AFL-CIO's principal argument is that the Rule is unlawful because it is predicated on an erroneous construction of §§ 201(b) and 208 of the LMRDA. Since this case involves the question of the Secretary's interpretation of provisions of the LMRDA, the Court proceeds according to the familiar two-step inquiry of Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984).

  Under the first step of Chevron, the reviewing court must ascertain the plain meaning of the statute. To that end, a court "must first exhaust the `traditional tools of statutory construction,' to determine whether Congress has spoken to the precise question at issue." Natural Res. Def. Council, Inc. v. Browner, 57 F.3d 1122, 1125 (B.C. Cir. 1995) (quoting Chevron, 467 U.S. at 843 n.9). In particular, a court considers the text of the particular provision under examination, its statutory context, and its purpose. Consumer Electronics Ass'n v. FCC, 347 F.3d 291, 297-99 (D.C. Cir. 2003); Am. Bankers Ass'n v. Nat'l Credit Union Admin., 271 F.3d 262, 265 (B.C. Cir. 2001); County of Los Angeles v. Shalala, 192 F.3d 1005, 1014 (B.C. Cir. 1999); Southern California Edison Co. v. FERC, 116 F.3d 507, 515 (B.C. Cir. 1997). Page 14 If this search yields a clear result, then Congress has expressed its intention as to the question, and deference is not appropriate. See Qi-Zhuo v. Meissner, 70 F.3d 136, 140 (D.C. Cir. 1995) ("Where . . . the plain language of the statute is clear, the court generally will not inquire further into its meaning.").

  If, however, "the statute is silent or ambiguous with respect to the specific issue," Congress has not spoken clearly, and the court proceeds to the second step of Chevron. Chevron, 467 U.S. at 843. "[T]he fact that the provision can support two plausible interpretations renders it ambiguous for purposes of Chevron analysis." AFL-CIO v. Fed. Election Comm'n, 333 F.3d 168, 174 (D.C. Cir. 2003). At that stage, a permissible agency interpretation of the statute merits judicial deference. Id. Specifically, the issue is "(1) whether the statute unambiguously forbids the Agency's interpretation, and, if not, (2) whether the interpretation for other reasons, exceeds the bounds of the permissible." Barnhart v. Walton, 535 U.S. 212, 218 (2002).

  A. Section 201(b) of the LMRDA Authorizes the Secretary to Require Itemized Reporting

  Plaintiff asserts that the plain meaning of § 201(b) of the LMRBA prohibits the Secretary from requiring unions "to report every receipt and disbursement, in any amount, and in any categories prescribed by the Secretary." 68 Fed. Reg. at 58376. Specifically, Plaintiff maintains that the Secretary's interpretation of the statute fails at Chevron step one because it Page 15 is contrary to (1) the text of § 201(b) of the LMRDA; (2) the statute's legislative history; (3) the longstanding administrative construction of § 201(b); and (4) § 201(c) of the statute.

  1. The Text of § 201(b)

  The first "traditional tool of statutory construction" is always examination of the text of the statute. Section 201(b) provides in full:
Every labor organization shall file annually with the Secretary a financial report signed by its president and treasurer or corresponding principal officers containing the following information in such detail as may be necessary accurately to disclose its financial condition and operations for its preceding fiscal year
(1) assets and liabilities at the beginning and end of the fiscal year;
(2) receipts of any kind and the sources thereof;
(3) salary, allowances, and other direct or indirect disbursements (including reimbursed expenses) to each officer and also to each employee who, during such fiscal year, received more than $10,000 in the aggregate from such labor organization and any other labor organization affiliated with it or with which it is affiliated, or which is affiliated with the same national or international labor organization;
(4) direct and indirect loans made to any officer, employee, or member, which aggregated more than $250 during the fiscal year, together with a statement of the purpose, security, if any, and arrangements for repayment;
(5) direct and indirect loans to any business enterprise, together with a statement of the purpose, security, if any, and arrangements for repayment; and
(6) other disbursements made by it including the purposes thereof
all in such categories as the Secretary may prescribe. Page 16 29 U.S.C. § 431 (b) (emphasis added).

  The plain language of § 201(b) shows clearly that Congress gave the Secretary broad authority to require the filing of financial reports. It also shows that Congress delegated to the Secretary the exclusive authority to determine the level of "detail as may be necessary" for accurate disclosures. 29 U.S.C. § 431 (b). Thus, on its face, §§ 201(b) vests the Secretary with the discretion to determine "the format in which the information required by the statute must be provided, as well as the detail in which the information must be reported." 68 Fed. Reg. at 58376.

  Plaintiff contends that the statutory terms "financial condition" and "operations" are terms of art in the field of accounting and, in accounting parlance, mean "balance sheet" and "income statement," respectively. It asserts that, in the field of accounting, both a balance sheet and an income statement "are documents that are characterized by the aggregation of the information being reported into appropriate homogenous categories and not by lengthy itemized lists of numerous individual receipts, disbursements, assets, or liabilities." Pl.'s Mot., at 12. It argues that, since Congress has "deliberately" chosen to invoke these terms of ...


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