SEC v. FLRA ( 2009 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 5, 2009 Decided June 12, 2009
No. 08-1256
SECURITIES AND EXCHANGE COMMISSION,
PETITIONER
v.
FEDERAL LABOR RELATIONS AUTHORITY,
RESPONDENT
NATIONAL TREASURY EMPLOYEES UNION,
INTERVENOR
Consolidated with 08-1294
On Petition for Review and Cross-Application for
Enforcement of a Decision and Order
of the Federal Labor Relations Authority
Samuel M. Forstein, Assistant General Counsel, Securities
& Exchange Commission, argued the cause for petitioner. With
him on the briefs were Andrew N. Vollmer, Acting General
Counsel, and Rufus Beatty, Senior Special Counsel. Richard M.
Humes, Associate General Counsel, entered an appearance.
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James F. Blandford, Attorney, Federal Labor Relations
Authority, argued the cause for respondent. With him on the
brief were Rosa M. Koppel, Solicitor, and William R. Tobey,
Deputy Solicitor.
Barbara A. Sheehy argued the cause for intervenor. With
her on the brief were Gregory O'Duden and Elaine Kaplan.
Barbara A. Atkin entered an appearance.
Before: GINSBURG, BROWN and KAVANAUGH, Circuit
Judges.
Opinion for the Court filed by Circuit Judge BROWN.
Concurring opinion filed by Circuit Judge KAVANAUGH.
BROWN, Circuit Judge: This is the sort of dispute that
could only arise between public employees and a governmental
agency. The Securities and Exchange Commission (SEC or
Agency) was eager to pay its employees more money. The
National Treasury Employees Union (NTEU or Union)
complains the SEC implemented the raises too quickly. The
Federal Labor Relations Authority (FLRA or Authority) agrees
with the Union and has ordered the SEC to provide back pay to
atone for the affront. Counterintuitive though it may be, we
agree the FLRA has properly resolved this odd controversy so
we deny the petition for review and grant the Authority’s cross-
application for enforcement.
I.
This is what happened. After years of struggling with high
attrition from the ranks of its professional employees (attorneys,
accountants, and examiners), the SEC began focusing on pay
disparities between itself and other financial regulatory
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agencies, such as the Federal Deposit Insurance Corporation, the
Office of the Comptroller of the Currency, and the Office of
Thrift Supervision. Since 1989, these other agencies had been
authorized to determine their own compensation and benefit
levels without regard to the General Schedule, which continued
to define pay grades for SEC employees. Although the SEC
took advantage of as many compensation and benefit
flexibilities as existing law allowed, including special pay rates
for its most sought-after employees, by 2001—with its workload
increasing dramatically and staffing shortages reaching crisis
levels—the Agency sought legislative relief. Congress
acquiesced. On January 16, 2002, it passed the Investor and
Capital Markets Fee Relief Act, Pub. L. No. 107-123, 115 Stat.
2390 (2002), which gave the SEC authority to set and adjust its
employees’ pay rates without regard to the General Schedule.
Both the Union and SEC management had eagerly
anticipated the passage of this Act. The Union signaled the very
next day, January 17, its willingness to begin bargaining. By
March 6, the Agency had submitted its Implementation Plan to
Congress and, on April 10, the Agency convened initial
discussions with the Union. On April 18, SEC Chairman Pitt
sent out an email to all employees stating the SEC hoped to
implement the new system on May 19. Formal bargaining
began April 22. Negotiations reached an impasse and the Union
filed for assistance with the Federal Services Impasse Panel
(Panel) on May 15. The SEC and the Union were unable to
break the impasse when they met again on May 16 and 17, at
which point management notified employees that it would
unilaterally implement the SEC’s proposed pay plan effective
May 19. The raises became effective as of May 19, but the
actual increased paychecks did not begin to arrive until August.
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On November 8, 2002 the Panel resolved the bargaining
impasse, ordering adoption of the SEC’s proposal with only
slight modifications. On November 18, the NTEU filed two
unfair labor practice charges, alleging the SEC violated Sections
7116(a)(1) and (5) of the Federal Service Labor-Management
Relations Statute (the Statute) by unilaterally implementing the
new pay plan and ending automatic annual within-grade
increases (known as WIGIs) before the completion of the
bargaining process. The General Counsel filed a complaint and,
after a full evidentiary hearing, the ALJ found the SEC had
violated the Statute. The ALJ awarded retroactive within-grade
increases to employees who were entitled to them between May
19 and November 8, and ordered the SEC to recalculate those
employees’ placement on the new pay schedule taking such
within-grade increases into account. The Authority concluded
the record fully supported the ALJ’s findings and that the
recommended remedy was not contrary to the Back Pay Act, 5
U.S.C. § 5596.
The SEC petitions for review; the Authority cross appeals
for enforcement of its order.
II.
We review the FLRA’s conclusion that the SEC engaged in
an unfair labor practice under the familiar arbitrary and
capricious standard; we determine only whether the FLRA has
“offered a rational explanation for its decision, whether its
decision is based on consideration of the relevant factors, and
whether the decision is adequately supported by the facts
found.” Nat’l Ass’n of Gov’t Employees, Local R5-136 v.
FLRA, 363 F.3d 468, 474–75 (D.C. Cir. 2004) (citing, inter alia,
Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co.,
463 U.S. 29, 43 (1983)).
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The FLRA’s conclusion that the SEC engaged in an unfair
labor practice was neither arbitrary nor capricious. As a
preliminary matter, we reject the SEC’s claim it is entitled to
deference from the FLRA with respect to its chosen affirmative
defense, that the unilateral implementation of the new salary
system was necessary to the functioning of the agency. The
SEC concedes it can cite no authority in support of its request.
We conclude any deference to the SEC would be inconsistent
with the defense being an affirmative one; in this matter the
SEC is not an agency entitled to deference, but rather appears as
an employer. Indeed, under the arbitrary and capricious
standard of review that governs, it is the FLRA that receives
deference when we review petitions challenging its conclusions
under the Federal Service Labor-Management Relations Statute.
See, e.g., HHS Family Support Admin. v. FLRA, 920 F.2d 45,
48 (D.C. Cir. 1990) (“[W]e must defer to the FLRA’s
interpretation of its own statute as against competing executive
branch determinations.”) (citing cases).
The SEC simply failed to meet its burden to prove its
chosen affirmative defense—that the unilateral implementation
of the new salary system on May 19, 2002 was necessary to the
functioning of the agency—by a preponderance of the evidence.
As the Authority has explained before, the rule governing this
affirmative defense is that, pending the completion of the
mandatory bargaining process:
[T]he status quo must be maintained to the maximum
extent possible, that is, to the extent consistent with the
necessary functioning of the agency. When an agency
chooses to avail itself of this exception and thus to alter
the status quo, it must be prepared to provide
affirmative support for the assertion that the action
taken was consistent with the necessary functioning of
the agency if its actions were subsequently contested in
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an unfair labor practice proceeding. The Authority has
also indicated that the phrase, “consistent with the
necessary functioning of the agency,” may be accurately
paraphrased as “necessary for the [agency] to perform
its mission.”
Def. Logistics Agency Def. Indus. Plan Equip. Ctr. Memphis
Tennessee, 44 F.L.R.A. 599, 616–17 (1992) (citing Dept of
Justice, U.S. Immigration & Naturalization Serv., U.S. Border
Patrol, Laredo, Texas, 23 F.L.R.A. 90, 90 (1986)) (internal
citations, footnotes and quotations omitted).
The SEC complains the FLRA purported to apply a mere
preponderance burden of proof in determining whether the
Commission sustained its affirmative defense, but effectively
imposed a much more demanding one. In context, though, it
seems clear the ALJ was describing the affirmative defense
itself as demanding, not the employing agency’s burden. From
the Commission’s point of view, this may be a distinction
without a difference. Consider, however, that while the
prosecution in a criminal case always bears the burden of
proving the elements of a crime beyond a reasonable doubt, the
substantive content of the elements to be proven may vary; for
example, from a reckless state of mind to a knowing and
intentional one. While the burden is the same, the standard
itself is different, and it is easier for a litigant to prove some than
others.
To successfully invoke the “necessary functioning”
exception, an agency must show the change is a response to “an
overriding exigency” or similarly compelling need. 22 Combat
Support Group (SAC) March Air Force Base, California, 25
F.L.R.A. 289, 301 (1987) (“While the matter was obviously
important, I do not conclude it was so critical as to create an
overriding exigency or other compelling reason which would
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justify adhering to the January 13 implementation date ….”).
For example, in one case the Authority rejected the defense
because it did not appear that the agency “was in acute danger
of being unable to perform its function without” the unilateral
implementation of the change at issue. Def. Logistics Agency
Def. Indus. Plan Equip. Ctr. Memphis Tennessee, 44 F.L.R.A.
at 617. The SEC observes that a public agency will rarely face
an exigency that threatens its ability to function. But that is
only to say the “necessary functioning” exception will never be
the rule. Exigency still has a role to play in determining
whether the unilateral implementation of a management
proposal is properly exempted from statutory requirements. At
the very least, the proponent of the necessary functioning
defense must establish that the change was necessary for the
agency to effectively perform its mission and that it was
necessary to make the change at the time it was made.
Immigration & Naturalization Serv., 55 F.L.R.A. 892, 904
(1999) (“Respondent has failed to establish that it was
‘necessary’ for it to implement the changes … prior to satisfying
its bargaining obligation.”). As the SEC fails to appreciate,
there is a difference between what an agency finds expedient
and what is necessitated by an “overriding exigency.”
The administrative law judge (ALJ), whose decision was
adopted by the Authority, carefully went through the evidence
presented, analyzed the parties’ arguments, and explained his
findings and conclusions. There is “a reasoned path from the
facts and considerations before the [agency] to the decision it
reached.” NTEU v. FLRA, 466 F.3d 1079, 1081 (D.C. Cir.
2006). The ALJ acknowledged the Agency “was losing key
employees at an alarming and dangerous rate” and needed to act
quickly to reduce attrition by increasing compensation. But, as
the ALJ observed, and as the Authority confirmed,
“management must demonstrate not merely that the change is
necessary to its effective functioning, but also that delaying
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implementation until after the impasse is resolved would
undermine the effective functioning of the agency.” While the
SEC makes a good argument that it urgently needed to recruit
new staff and discourage defections from current employees, it
failed to persuade the administrative law judge, the FLRA, and
ultimately this court that its unilateral implementation of a new
pay system on May 19, 2002—rather than after the completion
of the required bargaining process—was necessary for the
agency to perform its mission. As in previous cases in which
this defense has not been satisfied, here “the record reflects that
the reasons for the change were of long-standing origin and
were merely desirable, rather than being essential or necessary
to the functioning of the agency.” Def. Logistics Agency Def.
Indus. Plan Equip. Ctr. Memphis Tennessee, 44 F.L.R.A. at 618
(quotations and citations omitted).
The SEC also challenges two of the FLRA’s factual
findings. The Authority’s findings of fact are “conclusive” if
“supported by substantial evidence on the record considered as a
whole.” 5 U.S.C. § 7123(c). “This standard requires us to defer
to the Authority’s factual determinations if, taking into account
any record evidence to the contrary, the record contains such
relevant evidence as a reasonable mind might accept as
adequate to support such determinations.” Nat’l Ass’n of Gov’t
Employees, Local R5-136, 363 F.3d at 475 (quotations and
citations omitted). Substantial evidence “is something less than
the weight of the evidence, and the possibility of drawing two
inconsistent conclusions from the evidence does not prevent an
administrative agency’s finding from being supported by
substantial evidence.” Consolo v. Fed. Maritime Comm’n, 383
U.S. 607, 620 (1966); see also Domestic Sec. Inc. v. SEC, 333
F.3d 239, 249 (D.C. Cir. 2003).
The SEC has not shown that the challenged findings of fact
fail under this deferential standard. The SEC first challenges
9
the FLRA’s finding that the Executive Director’s testimony
“directly contradicts the [SEC’s] claim that implementation of
the pay system on May 19 was necessary to assure funding.”
The SEC points to testimony suggesting that if the $25 million
reprogrammed by the Office of Management and Budget was
not legally obligated in FY 2002, the money might be used for
something else. The FLRA draws our attention to other
testimony showing that money would likely be available to pay
for the raises, either from the reprogrammed funds or the
Agency’s regular appropriation process. The SEC also
challenges the FLRA’s finding that the employees did not
receive the salary increases until August and that this delay
weakened the SEC’s argument that implementation in May,
rather than waiting for the Panel decision, was necessary to the
functioning of the Agency. With respect to each of these
findings, there was conflicting evidence in the record. The ALJ
addressed the evidence in his decision, carefully describing
contradictions and making credibility determinations. Such
credibility determinations are almost never disturbed on appeal,
and there is no reason to do so in this case.
III.
We review the FLRA’s ordered remedy under the Back Pay
Act de novo, SSA v. FLRA, 201 F.3d 465, 471 (D.C. Cir. 2000),
and let it stand. To be entitled to an award of back pay, “1) the
employee must have been affected by an unjustified or
unwarranted personnel action; 2) the employee must have
suffered a withdrawal or reduction of all or part of his pay,
allowances, or differentials; and 3) but for the action, the
employee would not have experienced the withdrawal or
reduction.” Id. at 468.
Under our precedent, back pay may be awarded if a
mandatory salary upgrade was denied to an employee because
10
of an unwarranted personnel action; loss of such a mandatory
upgrade meets the “withdrawal or reduction” element of the
Back Pay Act. Brown v. Sec’y of the Army, 918 F.2d 214, 220
(D.C. Cir. 1990). As we described our conclusion in Brown,
“we comprehend the 1978 Back Pay Act definitional
amendment to mean that if an upgrade is mandatory once
specified conditions are met, the Act now affords a retrospective
remedy. If an upgrade is not of that virtually automatic,
noncompetitive kind, the Act affords no relief. Only in the
former case will the employee be treated as one already ‘duly
appointed’ to the higher position, so that the failure to confer the
benefit constitutes a ‘withdrawal or reduction’ in
compensation.” Id. This conclusion controls the outcome of
this case because the within-grade increases were virtually
automatic and non-competitive.
The SEC’s final argument is that awarding back pay may
give some employees an undue windfall. But any factual
questions—such as whether any of the employees who were due
a within-grade increase between May 19, 2002 and November 8,
2002 would actually have received higher pay under the new
system had the SEC not implemented the change before the
bargaining process was complete, and by how much—can be
resolved in compliance proceedings.
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IV.
The petition for review is denied and the cross-application
for enforcement is granted.
So ordered.
KAVANAUGH, Circuit Judge, concurring: I join the
opinion of the Court. I write separately to point out the
constitutional oddity of a case pitting two agencies in the
Executive Branch against one another, and to explain why the
Court can hear this dispute.
The caption of this case – Securities and Exchange
Commission v. Federal Labor Relations Authority – illustrates
an anomaly. Both the SEC and the FLRA are agencies in the
Executive Branch, yet one is suing the other in an Article III
court. This state of affairs is in tension with the constitutional
structure designed by the Framers and set forth in the text of
the Constitution. The Constitution vests the “executive
Power” in one President. U.S. CONST. art. II, § 1, cl. 1. And
the Constitution assigns the President the responsibility to
“take Care that the Laws be faithfully executed.” U.S.
CONST. art. II, § 3. Because Article II provides that a single
President controls the Executive Branch, legal or policy
disputes between two Executive Branch agencies are typically
resolved by the President or his designee – without judicial
intervention. See, e.g., Exec. Order No. 12,146, 44 Fed. Reg.
42,657 (July 18, 1979) (providing for review of certain inter-
agency legal disputes by the Attorney General). Moreover,
because agencies involved in intra-Executive Branch disputes
are not adverse to one another (rather, they are both
subordinate parts of a single organization headed by one
CEO), such disputes do not appear to constitute a case or
controversy for purposes of Article III. See U.S. CONST. art.
III, § 2; see generally Michael Herz, United States v. United
States: When Can the Federal Government Sue Itself?, 32
WM. & MARY L. REV. 893 (1991). In short, judicial
resolution of intra-Executive disputes is questionable under
both Article II and Article III.
This analysis is uncontroversial as applied to disputes
between two traditional Executive Branch agencies. No one
plausibly thinks, for example, that a federal court would
2
resolve a dispute between the Department of Justice and, say,
the Department of Defense or the Department of State.
But the wrinkle is that this case involves a so-called
independent agency. Independent agencies are those agencies
whose heads cannot be removed by the President except for
cause and that therefore typically operate with some
(undefined) degree of substantive autonomy from the
President in a kind of extra-constitutional Fourth Branch. In
Humphrey’s Executor v. United States, the Supreme Court
approved of independent agencies, at least in certain
circumstances. 295 U.S. 602 (1935); see also Morrison v.
Olson, 487 U.S. 654, 689-91 (1988). Consistent with the
post-Humphrey’s Executor understanding that Presidents
cannot (or at least do not) fully control independent agencies,
and that an independent agency therefore can be sufficiently
adverse to a traditional executive agency to create a
justiciable case, the Supreme Court and this Court have
entertained suits between an independent agency and a
traditional executive agency, or as here between two
independent agencies. See, e.g., Dep’t of Treasury, IRS v.
FLRA, 494 U.S. 922 (1990); United States v. Nixon, 418 U.S.
683 (1974); United States v. ICC, 337 U.S. 426 (1949); In re
Lindsey, 158 F.3d 1263 (D.C. Cir. 1998); In re Sealed Case,
146 F.3d 1031 (D.C. Cir. 1998) (Silberman, J., concurring in
denial of rehearing en banc); In re Sealed Case, 121 F.3d 729(D.C. Cir. 1997); NLRB v. FLRA, 2 F.3d 1190 (D.C. Cir.
1993); United States v. FMC, 694 F.2d 793, 796 (D.C. Cir.
1982); see also Barnes v. Kline, 759 F.2d 21, 41, 64 (D.C.
Cir. 1985) (Bork, J., dissenting) (explaining United States v.
ICC: “because the ICC is an independent agency, the
President had no power to terminate the controversy by
ordering the ICC to reverse its decision denying the
government money damages”); William K. Kelley, The
Constitutional Dilemma of Litigation Under the Independent
3
Counsel System, 83 MINN. L. REV. 1197, 1222 (1999)
(“Assuming that it would not constitute good cause for
removal if the head of an agency refused to follow the
President’s directions as to how to execute the law, the
difference between executive and independent agencies thus
seems to make all the difference.”).
Our ability to decide this case thus follows from
Humphrey’s Executor and accords with courts’ previous
handling of disputes between an independent agency and a
traditional executive agency (or another independent agency).
Because this case is justiciable under the governing
precedents and because the Court’s analysis of the merits is
persuasive, I join the opinion of the Court.