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United Steel, Paper and forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union v. Federal Highway Administration

United States District Court, D. Columbia.

December 22, 2015

United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, et al., Plaintiffs,
v.
Federal Highway Administration, et al., Defendants

          For UNITED STEEL, PAPER AND FORESTRY, RUBBER, MANUFACTURING, ENERGY, ALLIED INDUSTRIAL AND SERVICE WORKERS INTERNATIONAL UNION, NUCOR CORPORATION, MCWANE, INC., EJ USA INC., NEENAH FOUNDRY, D& L FOUNDRY INC., EBAA IRON SALES INC., MUNICIPAL CASTINGS ASSOCIATION, Plaintiffs: David Earl Frulla, Paul Charles Rosenthal, LEAD ATTORNEYS, KELLEY, DRYE & WARREN, LLP, Washington, DC; Shaun Michael Gehan, LAW OFFICE OF SHAUN M. GEHAN, PLLC, Washington, DC.

         For FEDERAL HIGHWAY ADMINISTRATION, RAYMOND H. LAHOOD, in his official capacity as Secretary of Transportation, ANTHONY FOXX, in his official capacity as Secretary of Transporation, Defendants: Jean-Michel Voltaire, LEAD ATTORNEY, U.S. DEPARTMENT OF JUSTICE, Civil Division, Washington, DC.

         MEMORANDUM OPINION

         Amit P. Mehta, United States District Judge.

         I. INTRODUCTION

         To support the domestic steel and iron industries, Congress for decades has required that steel or iron used in federally funded highway programs be sourced from within the United States, a mandate known as the " Buy America" policy. Congress has empowered the Secretary of the U.S. Department of Transportation to administer the Buy America requirement, including granting him the authority to exempt products from the policy where in the public interest. This case concerns the Secretary's exercise of that exemption authority.

         On December 21, 2012, the Secretary, acting through Defendant Federal Highway Administration (" FHWA" ), issued a two-page memorandum (the " 2012 Memorandum" ) announcing that he would not apply the Buy America requirement to two broad categories of products: (1) steel or iron " manufactured" products and (2) " miscellaneous steel or iron" products. As to the first category, a steel or iron " manufactured" product is one that is made up largely, but not entirely, of steel or iron. The 2012 Memorandum exempts from the Buy America mandate steel or iron manufactured products that contain less than 90 percent steel or iron (the " 90-Percent Threshold" ). As a result, a manufactured product that contains no more than 89.9 percent steel or iron now can be obtained from a foreign source. As to the second category of products, the 2012 Memorandum exempts all " miscellaneous steel and iron" products, defined as those products that are available " off-the-shelf" or are " necessary to encase, assemble and construct" manufactured products (the " Miscellaneous Products Exemption" ). So, for instance, a faucet or bolt that is made of 100 percent steel or iron now is exempt from the Buy America requirement.

         The plaintiffs in this case are (1) a workers' union whose members produce steel and iron products--United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union; (2) six individual manufacturers of steel and/or iron products--Nucor Corporation; D& L Foundry Inc.; EBAA Iron Sales Inc.; EJ USA Inc.; Neenah Foundry; McWane, Inc.; and (3) an association of steel and iron products manufacturers--the Municipal Castings Association. They filed suit against the FHWA and the Secretary of the U.S. Department of Transportation, Anthony Foxx, in his official capacity, alleging that both the 90-Percent Threshold and the Miscellaneous Products Exemption violated the Administrative Procedure Act (" APA" ), 5 U.S.C. § 551 et seq., and the Regulatory Flexibility Act, 5 U.S.C. § 601 et seq. Specifically, Plaintiffs assert (1) that both the 90-Percent Threshold and the Miscellaneous Products Exemption are " substantive" rules that should have been subject to notice and comment rulemaking under Section 553 of the APA; (2) that both the 90-Percent Threshold and the Miscellaneous Products Exemption are arbitrary and capricious, are not in accordance with law, and did not observe procedure required by law, in violation of Section 706 of the APA; and (3) that the FHWA failed to publish the regulatory flexibility analyses required by the Regulatory Flexibility Act. On these grounds, Plaintiffs urge the court to declare unlawful and invalidate the 2012 Memorandum.

         Before the court are Plaintiffs' and Defendants' Cross-Motions for Summary Judgment. After considering the parties' arguments and the administrative record, the court finds that both the 90-Percent Threshold and the Miscellaneous Products Exemption violate the APA. The 90-Percent Threshold is invalid because the Secretary failed to subject it to notice and comment rulemaking and because the 90 percent figure is itself arbitrary and capricious. The Miscellaneous Products Exemption likewise is invalid not only because it was not subjected to notice and comment under Section 553 of the APA, but also because it did not undergo a separate notice and comment process for Buy America waivers that is required by law. The court therefore grants Plaintiffs' Motion for Summary Judgment and denies Defendants' Motion for Summary Judgment. The court further vacates the 90-Percent Threshold and the Miscellaneous Products Exemption and remands these rules to the Department of Transportation and the FHWA for further proceedings consistent with this Memorandum Opinion.

         II. BACKGROUND

         A. The Surface Transportation Assistance Acts of 1978 and 1982 and Their Implementing Regulations

         The court begins with the history of the " Buy America" requirement. Two pieces of legislation provide the starting point: (1) the Surface Transportation Assistance Act of 1978 (the " 1978 Act" ), Pub. L. No. 95-599, 92 Stat. 2689 (1978) [hereinafter 1978 Act], and (2) the Surface Transportation Act of 1982 (the " 1982 Act" ), Pub. L. No. 97-424, 96 Stat. 2097 (1983) [hereinafter 1982 Act], which amended the 1978 Act. Congress passed the 1978 Act, in part, " to authorize appropriations for the construction of certain highways." 1978 Act at Preamble. Section 401 of the 1978 Act is the genesis for the Buy America policy at issue in this case. It read, in relevant part:

[T]he Secretary of Transportation shall not obligate any funds authorized to be appropriated by this Act or by any Act amended by this Act and administered by the Department of Transportation, whose total cost exceeds $500,000 unless only such unmanufactured articles, materials, and supplies as have been mined or produced in the United States, and only such manufactured articles, materials, and supplies as have been manufactured in the United States substantially all from articles, materials, and supplies mined, produced, or manufactured, as the case may be, in the United States, will be used in such project.

Id. § 401(a).

         The 1978 Act permitted the Secretary of Transportation to exempt from Buy America coverage products as to which the " application [of Buy America] would be inconsistent with the public interest." Id. § 401(b)(1). The Secretary immediately invoked this public interest exemption, narrowing the coverage of Buy America only to " structural steel," see Buy America Requirements, 43 Fed.Reg. 53717, 53717 (Nov. 8, 1978), which the Secretary defined as " shapes, plates, H-piling, and sheet piling," 23 C.F.R. § 635.410(b)(2) (1978). See also 43 Fed.Reg. at 53717 (" [T]he [Federal Highway] Administrator has determined that it would be in the public interest to temporarily waive the provisions of section 401 as it applies to products and materials, other than structural steel, used in highway construction." ).

         Four years later, Congress passed the 1982 Act, which superseded or amended certain provisions in the 1978 Act. Section 165 of the 1982 Act expressly superseded Section 401 of the 1978 Act and provided that the " Secretary of Transportation shall not obligate any funds [for federal highway construction projects] unless steel, cement[1] and manufactured products used in such project are produced in the United States." 1982 Act § 165(a). The FHWA's implementing regulations, issued in 1983 after notice and comment rulemaking (the " 1983 Regulations" ), significantly expanded the scope of Buy America coverage to include " all steel products," not just " structural steel." As the 1983 Regulation's comments explained:

By denoting " steel" in Section 165 (1982 STAA), Congress called attention to their intent to make the coverage more encompassing. The legislative history is also clear on this point. Congressional concern that Federal money spent to improve highways should also aid U.S. industry is apparent in the first sentence of Section 165 which requires the Secretary of Transportation to ensure that funds authorized for Federal-aid highway projects would only buy U.S. made steel. The FHWA therefore, has expanded the Buy America rule to include all steel products.

         Buy America Requirements, 48 Fed.Reg. 53099-02, 53102 (Nov. 25, 1983) (emphasis added). Various guidances issued by the FHWA since the 1983 Regulations have confirmed the applicability of Buy America to all steel components and subcomponents, regardless of their form and the extent to which they comprise a particular product. See Appendix A.

         Similar to the 1978 Act, the 1982 Act authorized the Secretary to exempt products from the Buy America requirement where the policy's " application would be inconsistent with the public interest." 1982 Act § 165(b)(1). And, in the 1983 Regulations, the Secretary again invoked this authority, " find[ing] that it is in the public interest to waive the application of Buy America to manufactured products other than steel . . . manufactured products." 48 Fed.Reg. at 53102. (emphasis added). The FHWA's explanation for the " waiver" for non-steel manufactured products focused on the difficulty of tracing the materials that comprise such products. " The FHWA agrees with the commenters who noted that it is very difficult to identify the various materials and then trace their origin. A manufactured product such as a traffic controller which has many components is particularly difficult to trace." Id. Notably, the 1983 Regulations did not include a definition of " manufactured products."

         Additional legislative updates brought the Buy America requirement to its present form. In 1991, Congress passed the Intermodal Surface Transportation Efficiency Act of 1991 (the " ISTEA" ), Pub. L. 102-240, 105 Stat. 1914 (Dec. 18, 1991). The ISTEA extended the Buy America preference to domestically produced iron, id. § 1048(a), and the " coating of steel," id. § 1041(a). The ISTEA also included certain reporting requirements to Congress, id. § 1048(e), and added penalty provisions for false certifications, id. § 1048(f). And in 2005, the Buy America law was codified in its present form at 23 U.S.C. § 313, which reads:

Notwithstanding any other provision of law, the Secretary of Transportation shall not obligate any funds authorized to be appropriated to carry out the Surface Transportation Assistance Act of 1982 (96 Stat. 2097) or this title and administrated by the Department of Transportation, unless steel, iron, and manufactured products used in such project are produced in the United States.

23 U.S.C. § 313(a).

         B. The 1997 Memorandum

         On December 22, 1997, the FHWA, through the Chief of its Highway Operations Division, issued a memorandum to FHWA's Chief Counsel, Edward V. A. Kussy[2] with the subject line " Buy America Policy Response" (the " 1997 Memorandum" ). Administrative R., ECF No. 36-1 [hereinafter AR], at 12-13. The 1997 Memorandum addressed the waiver of Buy America for non-steel " manufactured products," as set forth in the 1983 Regulations. First, the 1997 Memorandum defined a manufactured product as " any item that must undergo one or more manufacturing processes before the item can be used in a highway project" and noted that such products " may be usable as a stand-alone product, or as a component within a more complex assembly which would also be considered a manufactured product." Id. at 12. It then attempted to clarify how, in practice, the FHWA applies the manufactured products waiver. " While FHWA does not apply Buy America requirements to 'manufactured products,' [it] do[es] apply the requirements to specific components within those products." Id. at 13. To provide an example, the 1997 Memorandum applied this policy to a bridge bearing, a component that typically provides a resting surface between bridge piers and the bridge deck[3]:

[I]f a bridge bearing was considered only as a manufactured product, it would be exempt from the Buy America requirements. However, FHWA policy has been that the steel components of a predominately steel product must be of domestic manufacture unless the value of the components is less than the minimal use threshold[4] for the project.

Id. (emphasis added). In other words, pursuant to the 1997 Memorandum, if a manufactured product " predominately" consisted of steel, and the narrow, minimal use exception was inapplicable, its steel components were required to be produced in the United States. The 1997 Memorandum did not, however, define the word " predominately."

         C. The 2012 Memorandum

         From the foregoing backdrop emerged the document at the center of this dispute: the 2012 Memorandum issued by the FHWA's Associate Administrator for Infrastructure, John Baxter, to the leaders of the FHWA's Division and Field offices. Like the 1997 Memorandum, the 2012 Memorandum sought to " clarif[y] the [FHWA's] position regarding application of Buy America requirements to manufactured products." AR at 53.

         The 2012 Memorandum is hardly a model of draftsmanship. It began by observing that in the 1983 Regulations " the FHWA found that it was in the public interest to waive application of Buy America to manufactured products other than steel and iron manufactured products." Id. It then noted that the 1997 Memorandum " clarified that, while Buy America does not apply to manufactured products, Buy America does apply to components of 'predominately steel products.'" Id.

         The 2012 Memorandum went on to explain that, as a result of various project reviews, questions had arisen " regarding the scope of the application of the 1983 public interest wavier for manufactured products." Id. " For example," the Memorandum stated, " it has been suggested that nuts, bolts, washers, and other miscellaneous steel and iron parts used in common off-the-shelf products such as toilets and the filaments in light bulbs must be Buy America compliant." Id. Concerned that such an interpretation is " inconsistent with the previous 1983 waiver decision and . . . not cost-effective to administer," the FHWA found it " necessary to clarify the applicability of the waiver for manufactured products." Id. The Memorandum then stated that the " FHWA continues to support the Buy America waiver for manufactured products in the 1983 [Regulations], as clarified by the 1997 [Memorandum]." Id. at 54. That waiver, it noted, " was intended to apply to all manufactured products except for steel and iron manufactured products." Id.

         Thereafter, the logic of the 2012 Memorandum becomes increasingly difficult to follow. Although the preface of the Memorandum identified concerns about the application of Buy America to miscellaneous products, such as bolts and washers, the Memorandum then refers to a different type of product--a traffic controller, which the 1983 Regulations had cited as an example of a complex article whose component parts are difficult to trace. Id.; see also 48 Fed.Reg. at 53102. The 2012 Memorandum did not explain here, or at any other point, how complex articles like traffic controllers are related to miscellaneous products. It then observed that, since the issuance of the 1983 Regulations, some states had subjected " signal heads and other traffic control equipment to Buy America," leading them to seek " project specific ...


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