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American Federation of Labor and Congress of industrial Organizations v. Chao

July 16, 2007


The opinion of the court was delivered by: John D. Bates United States District Judge


The American Federation of Labor and Congress of Industrial Organizations ("AFL-CIO" or "plaintiff") challenges for the second time a Department of Labor rule establishing a new annual reporting requirement for labor organizations. In the first round of litigation, the U.S. Court of Appeals for the District of Columbia Circuit vacated a portion of a 2003 rule that required unions to file, under the Labor-Management Reporting and Disclosure Act ("LMRDA"), 29 U.S.C. §§ 401-531, annual reports on certain trusts in which those unions had an interest. AFL-CIO v. Chao, 409 F.3d 377, 387 (D.C. Cir. 2005). The Department then reissued the rule in modified form without providing notice and an additional period for interested parties to comment. See Labor Organization Annual Financial Reports for Trusts in Which a Labor Organization is Interested, Form T-1, 71 Fed. Reg. 57,716 (Sept. 29, 2006) (to be codified at 29 C.F.R. § 403.2) ("2006 Rule").

In late 2006, the AFL-CIO filed this new action against the Secretary of Labor ("the Secretary") contesting the validity of the rule as reenacted. Advancing procedural and substantive challenges, the AFL-CIO argues in its motion for summary judgment (1) that the absence of notice and a fresh comment period following the D.C. Circuit's 2005 decision violated the Administrative Procedure Act ("APA"), 5 U.S.C. § 553; and (2) that the 2006 rule is substantively infirm because the Secretary failed to provide a reasoned explanation for a parenthetical instruction that, the AFL-CIO believes, contradicts the Secretary's stated goal of narrowing the scope of the new reporting requirement. The Secretary counters that any procedural infirmity was harmless and that the 2006 rule constitutes a straightforward application of the D.C. Circuit's previous ruling. Agreeing with the AFL-CIO that the Secretary was required either to follow the APA's notice-and-comment procedure or to invoke the statutory good-cause exception and that this procedural error was not harmless, the Court will grant the AFL-CIO's motion for summary judgment, deny the Secretary's cross-motion for summary judgment, and vacate the 2006 rule.


The details of the LMRDA's statutory scheme and the rulemaking process leading to the 2003 rule are set forth fully in the D.C. Circuit's 2005 opinion. See AFL-CIO, 409 F.3d at 379-80. What follows is a brief sketch of that history and a summary of the key events that have occurred since the D.C. Circuit's decision.

Under the LMRDA, all labor organizations (hereinafter "unions") are required to file annual financial reports with the Secretary. 29 U.S.C. § 431(b). Union officers and employees, as well as employers and labor-relations consultants, are subject to similar reporting obligations.

Id. §§ 432-433. The Secretary's authority is not limited, however, to requiring the specific disclosures listed in the statute. Rather, the Secretary also has the authority to promulgate rules and regulations prescribing the form and publication of reports required to be filed under [Title II of the LMRDA] and such other reasonable rules and regulations (including rules prescribing reports concerning trusts in which a labor organization is interested) as he may find necessary to prevent the circumvention or evasion of such reporting requirements.

Id. § 438. A "trust[] in which a labor organization is interested" is defined in the statute as a fund or organization that was created or established by a union, "or one or more of the trustees or one or more members of the governing body of which is selected or appointed by a [union]," and "a primary purpose of which is to provide benefits for the members of [the union] or their beneficiaries." Id. § 402(l).

The Secretary exercised this statutory authority soon after the LMRDA was enacted in 1959, requiring unions to file their annual reports on the Department's Form LM-2. See 25 Fed. Reg. 433, 434 (Jan. 20, 1960) (later codified at 29 C.F.R. § 403.3). This requirement remained virtually unchanged between the early 1960's and the end of the century. Then, in late 2002, the Secretary issued a notice of proposed rulemaking ("NPRM") in which she announced her intention to amend the Form LM-2 and to require unions to submit a new report on a separate Form T-1 if certain conditions were met. 67 Fed. Reg. 79,280 (Dec. 27, 2002). Unions with annual receipts of $200,000 or more would be required to file a Form T-1 for each "significant trust" in which that union had an interest -- in short, trusts that met the statutory definition set forth above and to which the union had contributed at least $10,000 over the course of the year. Id. at 79,284. This additional report, in the Secretary's view, was necessary "to discourage circumvention or evasion of the reporting requirements in title II" and would "impos[e] minimal burden." Id.

The Secretary invited comments on a number of different subjects related to the rule, ranging from the general ("whether the procedures for reporting trusts are appropriate and sufficient, and whether there are alternate or additional means to achieve full disclosure while minimizing the burden on reporting entities") to the specific (whether the so-called "single entity test" was viable, useful, and more easily managed than the proposed rule). Id. at 79,285. Among the numerous labor organizations that submitted comments was the AFL-CIO. Def.'s Combined Mem., Exh. 2. In the fourteen pages of its submission addressing the Form T-1 proposal, the AFL-CIO first raised concerns over what it perceived as the expansive conception of "trusts in which a labor organization is interested" adopted by the Secretary in the NPRM. Id. at 97-100. The AFL-CIO dedicated the bulk of its filing, however, to arguing that the Form T-1 requirement exceeded the Secretary's authority under the LMRDA. This was so, the AFL-CIO maintained, because the statute authorized the Secretary to enact rules that would prevent a union from circumventing or evading specific reporting requirements, something that the union could not do unless it had "de facto, or actual, control over a trust's financial management." Id. at 101-02. Notwithstanding the objections of the AFL-CIO and other labor organizations, the Secretary enacted regulations largely along the lines of the ones proposed in the 2002 NPRM. 68 Fed. Reg. 58,374 (Oct. 9, 2003) ("2003 rule").

The promulgation of the 2003 rule marked the end of the rulemaking process and the beginning of litigation. Promptly challenging the final rule, the AFL-CIO argued (as is relevant here) that the Secretary had exceeded her statutory authority by imposing a general trust reporting requirement not limited to preventing circumvention or evasion of the reporting obligations imposed by the LMRDA. See AFL-CIO, 409 F.3d at 378. The court of appeals began its analysis by unanimously declining to adopt the AFL-CIO's narrow reading of the statutory phrase "trusts in which a union has an interest," concluding that the phrase "is sufficiently broad to encompass trusts that are neither financed nor controlled by unions," so-called Taft-Hartley trusts that are jointly funded and administered by employers and unions. Id. at 387. That was so, the court explained, because "the union ha[d] used its bargaining power" to set up the trust and define its purposes, and union members thus had an interest in knowing how funds that otherwise might be paid to them directly were being spent. Id. (citing 2002 NPRM, 67 Fed. Reg. at 79,283). Resolving the AFL-CIO's second argument, a divided panel agreed with the unions that the Secretary had exceeded her statutory authority by requiring a report that "reaches information unconnected to the circumvention or evasion of union Title II reporting requirements." Id. at 390. The panel majority recognized that the Secretary had "identified circumstances where union reporting requirements under Title II may be circumvented or evaded," but held that Form T-1 was an impermissible exercise of the Secretary's authority under 29 U.S.C. § 438 because it went "further to require general trust reporting." Id. at 387. Although then-Circuit Judge Roberts would have upheld the rule in its entirety, id. at 395 (Roberts, J., concurring in part and dissenting in part), the court instead "vacate[d] the provisions of the final rule relating to Form T-1." Id. at 391.

After unsuccessfully seeking rehearing before the panel and the full D.C. Circuit, the Secretary went back to the drawing board in late 2005. She returned in September of 2006 with a final rule entitled "Labor Organization Annual Financial Reports for Trusts in Which a Labor Organization is Interested, Form T-1." 71 Fed. Reg. 57,716 (Sept. 29, 2006) ("2006 rule"). No prior notice of the proposed rule was provided, nor was a new round of comments sought. The 2006 rule purported to adhere to the limits set forth by the D.C. Circuit and "to narrow the scope" of the 2002 NPRM, as revised in the 2003 rule. Id. at 57,727; id. at 57,733. The rule continues to apply where the union (or someone on its behalf) contributed at least $10,000 during the year and the trust has annual receipts of at least $250,000. But the reporting requirements kick in only where either (1) the union (or multiple unions together) appoints a majority of the trust's governing board, or (2) the union's contributions (alone or together with those of other unions) constitute more than half of the trust's revenues for that fiscal year. Id. at 57,737 (to be codified at 29 C.F.R. § 403.2(d)(1)). In modifying the rule, the Secretary expressed her intention to follow the D.C. Circuit's 2005 ruling, at the same time addressing concerns that had been raised by the comments to the 2002 NPRM. Id. at 57,719-57,727. The new criteria, the Secretary explained, cured the earlier deficiencies by "rel[ying] on principles of management control and financial domination," id. at 57,724, and thus furthered the rule's goal of "clos[ing] a reporting gap" that had previously existed. Id. at 57,719.

One final aspect of the 2006 rule is relevant to this suit. The Secretary included in and appended to the Federal Register notice official instructions for filling out the Form T-1. Although they will not be codified in the Code of Federal Regulations, the instructions are part of the final rule. See 71 Fed. Reg. at 57,728, 57,737, 57,746. The relevant instruction, included under the heading "Who Must File," details the conditions under which a Form T-1 must be filed, and tracks almost exactly the explanation given above. A parenthetical statement in the last clause, however, adds the gloss that "contributions by an employer on behalf of the union's members as required by a collective bargaining agreement are considered to be contributions of the union as are any contributions otherwise made on the union's behalf." Id. at 57,728. The Secretary did not directly explain the basis for the parenthetical statement or why the statement, although included in the instruction, was omitted from the regulation itself.

Returning to court, the AFL-CIO filed this suit challenging the 2006 rule, and particularly the parenthetical instructions regarding treatment of employer contributions. Count I of the Complaint asserts that the Secretary violated the APA, 5 U.S.C. § 553, by issuing the rule without first providing notice and an opportunity for interested parties to comment. Compl. ¶¶ 19-21. In Count II, the AFL-CIO argues that the rule is invalid under the APA both because the Secretary failed to provide a reasoned explanation "for treating contributions by an employer on behalf of a union's members as required by a collective bargaining agreement as contributions of the union itself," and because treating employer ...

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