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CHAMBER OF ARGENTINE-PARAGUAYAN PRODUCERS v. HOLDER

August 5, 2004.

CHAMBER OF ARGENTINE-PARAGUAYAN PRODUCERS OF QUEBRACHO EXTRACT, et al., Plaintiffs,
v.
CORNEL A. HOLDER, Administrator, Defense National Stockpile Center, et al., Defendants.



The opinion of the court was delivered by: ELLEN S. HUVELLE, District Judge

MEMORANDUM OPINION

Plaintiffs, the Chamber of Argentine-Paraguayan Producers of Quebracho Extract and the Chamber's two members, Unitan and Indunor, seek to enjoin the Defense National Stockpile Center from selling its stockpiled quebracho, alleging that such sales violate the Strategic and Critical Materials Stock Piling Act, 50 U.S.C. § 98 et seq. (the "Stock Piling Act"). Defendants have moved for summary judgment, claiming that their sales decisions were not arbitrary or capricious, but instead had a rational basis as required by the Administrative Procedures Act, 5 U.S.C. § 706(2)(A). Because the government has failed to demonstrate the basis for its decision that its proposed sales would not unduly disrupt the quebracho market, the Court will enter judgment on behalf of plaintiffs and remand to the agency for further action consistent with this Opinion. BACKGROUND

Quebracho is an extract from the South American quebracho tree and is used for tanning leather, primarily for shoe soles. The members of the Chamber operate three quebracho factories and are the only quebracho producers participating in international markets. The United States Department of Defense's National Defense Stockpile, which retains strategic and critical materials in an effort to preclude United States' dependence upon foreign nations for supplies in the event of a national emergency, acquired a significant amount of quebracho from South America during the Korean War. See Stock Piling Act, 50 U.S.C. § 98 et seq. Beginning in 1993, Congress authorized the Defense National Stockpile Center (DNSC) to relinquish its supply of quebracho, as it was no longer needed for defense purposes.*fn1 Stockpiled materials are usually disposed of by sale on the commodities market, but the funds earned from such sales are generally only to be used for the acquisition, maintenance, and disposal of materials in the stockpile. See id. § 98h(b)(2).

  The Stock Piling Act requires the government, when disposing stockpiled materials, to make efforts "[t]o the maximum extent feasible . . . to avoid undue disruption of the usual markets of producers, processors, and consumers of such materials and to protect the United States against avoidable loss." Id. § 98e(b)(2). Pursuant to the Act, the DNSC prepares an Annual Materials Plan (AMP) each year regarding the commodities in the stockpile. See id. § 98h-2(b). The AMP includes an upper limit on the quantity of stockpiled materials that may be disposed of each fiscal year. The Market Impact Committee (MIC), co-chaired by representatives from the Department of State and the Department of Commerce, makes recommendations as to the AMP limits and provides advice about how to dispose of stockpiled commodities consistent with the Act. See id. § 98h-1(c).

  The AMP began listing quebracho as a commodity in 1993. Between 1993 and 2001, DNSC sold between 689 and 5000 long tons (LT)*fn2 of quebracho annually, which amounted to between 1% and 7% of the world market. (See Def.'s Facts ¶ 4.) In May 2000, when the stockpile still had approximately 100,000 LT of quebracho, DNSC initiated a study to analyze the cost effectiveness of continuing quebracho sales compared to disposing of the remaining quebracho by burying it. (See Deister Dec. ¶ 10.) The resulting Business Case Analysis (BCA), finalized in December 2000, considered nine alternatives for the disposition of the remaining quebracho. (Def.'s Facts ¶ 7.) While the BCA's recommended course of action was to landfill the entire quantity in one year, DNSC could not afford to devote the funds to burying all the quebracho at one time. (Deister Dec. ¶ 13-14.) Instead, DNSC proposed, and MIC approved, AMP quantities for 2001 and 2002 of 50,000 LT each year, maintaining authority each year to sell 10,000 LT and to bury 40,000. (Id. ¶ 14; see also Administrative Record (hereinafter "AR") 143-45 [April 25, 2001 letter from MIC co-chairs to DNSC].) This AMP quantity, with the same restrictions, was also approved for 2003. (See AR 152-55 [December 18, 2001 letter from MIC co-chairs to DNSC].) Since the government began selling its stockpiled quebracho, it had been communicating with the Chamber, and the Argentine Embassy on behalf of the Chamber, regarding the Chamber's concerns relating to DNSC's participation in the quebracho market. (See Deister Dec. ¶ 3; AR 1-110, 1359-1432.) In the course of this correspondence, MIC informed the Argentine Ambassador of DNSC's plan to bury 80,000 LT of the stockpiled quebracho and sell the remaining 20,000 LT. (See April 26, 2001 letter from MIC to Argentine Ambassador.) The Chamber subsequently offered to purchase DNSC's stockpiled quebracho for sale, reiterating its previously expressed concern that "[u]nder the present conditions of international recession and severe economic problems in Argentina, any significant disposal [of quebracho by DNSC] would present severe economic consequences to the industry," and relaying its hope that "DNSC incinerate[] or bur[y] all its quebracho beyond the FY03 sales." (AR 892-93 [December 14, 2001 letter from the Chamber to DNSC].) In February 2002, Chamber member Unitan entered into a contract with DNSC to purchase the 20,000 LT of quebracho available in 2002 and 2003. (See Def.'s Facts ¶ 10.)

  DNSC simultaneously began burying quebracho. By the end of fiscal year 2003, it had buried approximately 60,000 LT at a cost of approximately six million dollars. (Def.'s Facts ¶ 11.) However, "[s]ince landfilling costs had been larger than anticipated," DNSC did not bury the entire quantity of remaining quebracho, and still had approximately 17,000 LT in its inventory. (Deister Dec. ¶ 28.) DNSC decided to again put its quebracho into the market, because it "had begun receiving inquiries from companies interested in purchasing DNSC quebracho." (Id.) In setting the future AMP amounts, MIC authorized the sale of up to 6,000 LT for fiscal year 2004, and proposed the sale of 6,000 LT in 2005 as well. (See id. ¶ 29-30; see also AR 173-78 [December 16, 2003 letter from MIC co-chairs to DNSC].)*fn3

  In March 2004 DNSC received an offer from Lyons & Volpi Leather Company, owned and controlled by the Italian firm Volpi Guiseppe, and on March 19, DNSC awarded Lyons & Volpi a contract for approximately 3,000 LT of quebracho at a price of $112 per LT ($0.05 per pound). (See AR 823-30, 1354-56 [March 18, 2004 Sales Contract].) The contract includes an option for an additional 2,200 LT for 2005, contingent upon the AMP limit being approved for that year. On April 15, 2004, the government solicited bids for the remainder of their sales limit, and on May 4, it awarded a contract for approximately 2,600 LT to Westan Tanning Company at the same price. (See AR 1357-58 [May 3, 2004 Sales Contract].) The government has reached its recommended sales limit for 2004 and has thus suspended further quebracho sales until fiscal year 2005.*fn4

  Plaintiffs claim that the government's sales of stockpiled quebracho in 2004, and the proposed sales for 2005, violate the Stock Pile Act since they would unduly disrupt the quebracho market. The 6,000 LT sold by DNSC this year is approximately fifteen percent of the world market share, and the price at which it was sold is well below the market price of $800 per LT. (See Compl. ¶ 14.) Plaintiffs are concerned that the sale of substantial quantities of stockpiled quebracho below the market price will leave them without sufficient purchasers and will drive down the market price to unprofitable levels, thereby causing their factories to close.*fn5 Their complaint requests a permanent injunction prohibiting DNSC from selling stockpiled quebracho unless and until adequate measures are taken to avoid undue market disruption as required by the Stock Pile Act. (Compl. ¶¶ 44, 49.) As a means of permanently avoiding the economic disruption they anticipate from the government's quebracho sales, they also seek to require the government to proceed with its earlier plan to bury the remaining quebracho. (See id; see also Opp. at 12-17.)

  On March 18, 2004, the day before DNSC awarded a contract to Lyons & Volpi, plaintiffs filed a motion for preliminary injunction. The Court issued an oral ruling on plaintiffs' motion at the hearing held on May 17, 2004, limiting delivery of quebracho under the DNSC contracts to 3,000 LT (as opposed to 6,000 LT) until a decision on the merits could be reached. As explained by the Court, this quantity was more in line with the government's prior quebracho sales history, especially given the uncertainty as to whether sales to Westan Tanning Company constituted domestic or international sales.*fn6 (Transcript of May 17, 2004 hearing ["Tr."] at 53-58.) By virtue of this ruling, the government was given the opportunity to file the administrative record and to brief its claim that it had a rational basis for concluding that the sale of 6,000 LT of quebracho per year at a price of about $110 per LT would not unduly disrupt the quebracho market.*fn7 The government's motion for summary judgment is now before the Court, and as set forth below, because the administrative record is devoid of any evidence reflecting a consideration by defendants of the impact their sales would have on the quebracho market, the government's motion will be denied and judgment will be entered for plaintiffs.

  ANALYSIS

  I. Standard of Review

  Since DNSC's action is governed by the "arbitrary and capricious" standard of the Administrative Procedures Act (APA), it cannot be set aside unless it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). This inquiry requires a court to consider whether the agency's decision was within its authority under the Stock Piling Act, as well as whether that decision was "based on a consideration of the relevant factors" reflecting no "clear error of judgment." Associated Metals & Minerals Corp. v. Carmen, 704 F.2d 629, 633 (D.C. Cir. 1983) (quoting Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971)). The Court cannot substitute its judgment for that of the agency if a rational basis has been provided for its decision. See id.; see also Sloan v. Dep't of Housing & Urban Dev., 231 F.3d 10, 15 (D.C. Cir. 2000).

  Deference to agency decisionmaking, however, does not require the Court to accept an agency's failure to consider relevant factors or accept its clear errors of judgment. Sloan, 231 F.3d at 15 (citing Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). The "agency must cogently explain why it has exercised its discretion in a given manner, and that explanation must be sufficient to enable [the Court] to conclude that the agency's action was the product of reasoned decisionmaking." A.L. Pharma, Inc. v. Shalala, 62 F.3d 1484, 1491 (D.C. Cir. 1995) (internal citations and quotation marks omitted). An agency's action may be deemed arbitrary and capricious if its rationale does not appear in the administrative record so that its decisionmaking "path may reasonably be discerned." See Sierra Club v. EPA, 167 F.3d 658, 665 (D.C. Cir. 1999) (quoting Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc., 419 U.S. 281, 286 (1974)); see also Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 654 (1990) (an agency's action is arbitrary and capricious if it has not taken "whatever steps it needs to provide an explanation that will enable the court to evaluate the agency's rationale at the time of decision"). If an agency merely "parrots the language of a statute" without providing a rational — much less reasoned — explanation for its result, the agency has not met its burden. Dickson v. Sec'y of Def., 68 F.3d 1396, 1404-05 (D.C. Cir. 1995).*fn8 II. DNSC's Decision

  In order to demonstrate that the government's decision to sell quebracho at the quantity and price it has chosen was not "arbitrary and capricious," the administrative record must provide evidence that the government considered the impact on the quebracho market and had a rational basis for concluding that its sales would not create undue disruption in the market.*fn9 At the preliminary injunction stage, the government relied on boilerplate statements made by MIC in the letters in 2002 and 2003 that issued AMPs and annual sales quantities for stockpiled materials. These letters state: We thoroughly examined current market conditions, background information, data, and analysis pertaining to each material and the proposed disposal quantities. We also considered price trends, stock levels, changing trade patterns (including net imports), other relevant data, the public comments, and DNSC efforts to protect the U.S. Government from ...


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