Canonsburg General Hospital v. Sylvia Mathews Burwell

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 21, 2015 Decided December 1, 2015
No. 13–5370
CANONSBURG GENERAL HOSPITAL,
APPELLANT
v.
SYLVIA MATHEWS BURWELL, SECRETARY,
U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 1:09–cv–02385)
Sven C. Collins argued the cause for the appellant.
Stephen P. Nash was with him on brief.
Benjamin M. Shultz, Attorney, United States Department
of Justice, argued the cause for the appellee. Benjamin C.
Mizer, Principal Deputy Assistant Attorney General, Vincent
H. Cohen, Jr., Acting United States Attorney and Michael S.
Raab, Attorney, were with him on brief. R. Craig Lawrence,
Assistant United States Attorney, entered an appearance.
Before: HENDERSON, Circuit Judge, and EDWARDS and
SENTELLE, Senior Circuit Judges.
2
Opinion for the Court filed by Circuit Judge HENDERSON.
KAREN LECRAFT HENDERSON, Circuit Judge: To
administer Medicare reimbursements to healthcare providers,
the Congress authorized the Secretary (Secretary) of the
Department of Health and Human Services (HHS) to
promulgate regulations setting the maximum cost amount HHS
may reimburse a healthcare provider for services provided a
Medicare beneficiary. Pursuant to this authority, the
Secretary issued regulations setting out reasonable cost limits
(RCLs) for specified medical services and establishing certain
exceptions to those limits. Canonsburg General Hospital
(Canonsburg) was the beneficiary of one such exception for
many years beginning in 1987. Then, in 1998, it alleged that
the Secretary’s revised calculation of the exception unlawfully
created a “reimbursement gap”, which unfairly deprived it of
the reasonable costs of its services. In 2001, Canonsburg
contested the recalculation in a lawsuit brought in federal
district court in Pennsylvania. Canonsburg Gen. Hosp. v.
Thompson (Canonsburg I), No. 00-cv-0284, 2001 WL
36339671 (W.D. Pa. Feb. 28, 2001). The district court upheld
the Secretary’s action. See id. at *5. In this case,
Canonsburg continues to claim that the Secretary has violated
the Administrative Procedure Act (APA), 5 U.S.C. §§ 551 et
seq., because her method of calculation is inconsistent with
governing regulations and was promulgated without notice and
comment. In light of Canonsburg I, the district court granted
the Secretary’s motion for summary judgment, concluding that
issue preclusion barred Canonsburg’s suit. Canonsburg Gen.
Hosp. v. Sebelius (Canonsburg II), 989 F. Supp. 2d 8, 30
(D.D.C. 2013). For the reasons set forth below, we affirm.
3
I. BACKGROUND
A. REASONABLE COST LIMITS AND THE ATYPICAL
SERVICES EXCEPTION IN MEDICARE REIMBURSEMENT
Through the Centers for Medicare and Medicaid Services
(CMS), the Secretary provides for the reimbursement of the
reasonable costs of healthcare services for Medicare
beneficiaries. See 42 U.S.C. § 1395f(b)(1)(A). Two aspects
of the reimbursement scheme are relevant here.
The first is the system for managing the costs of
reimbursement. Healthcare providers submit requests for
reimbursement for services provided to Medicare
beneficiaries, subject to the RCLs the Secretary has calculated
based on statutory and regulatory restrictions. See 42 U.S.C.
§§ 1395c–1395g; see also St. Francis Health Care Ctr. v.
Shalala, 205 F.3d 937, 939–43 (6th Cir. 2000) (explaining how
the Secretary calculates RCLs). The Secretary may adjust
RCLs according to certain exceptions and allow skilled nursing
facilities (SNFs) to be reimbursed above the established RCLs.
See 42 U.S.C. § 1395yy(c); 42 C.F.R. § 413.30(e).
One such exception is the “atypical services” exception,
which generally allows a healthcare provider to be reimbursed
above the RCLs if the service it provides is, inter alia,
“atypical in nature and scope.” 1 42 C.F.R. § 413.30(e)(1).
1
The “atypical services” exception initially provided for an
upward adjustment to an RCL if “[t]he provider can show that the:
(i) Actual cost of items or services furnished by a
provider exceeds the applicable limit because such
items or services are atypical in nature and scope,
compared to the items or services generally
furnished by providers similarly classified; and
4
For years, both hospital-based and freestanding SNFs 2
received full reimbursement for atypical services under this
exception. See Canonsburg II, 989 F. Supp. 2d at 13. In
1994, however, that changed. In order to effect
congressionally directed cost savings, the Secretary altered the
calculation for the atypical services exception for
hospital-based SNFs. The new calculation, set forth in section
2534.5 of the Medicare Provider Reimbursement Manual
(section 2534.5), created a reimbursement “gap” for
hospital-based SNFs. Ctrs. for Medicare & Medicaid Servs.,
Provider Reimbursement Manual Part I § 2534.5, available at
http://wayback.archive-it.org/2744/20111201152312/http://w
ww.cms.gov/Manuals/PBM/list.asp (last visited Nov. 16,
2015). Whereas freestanding SNFs continued to receive
reimbursement for the full cost of their atypical services,
hospital-based SNFs were reimbursed below full cost. St.
Francis, 205 F.3d at 941–43 (explaining section 2534.5 gap
created for hospital-based SNFs).
(ii) Atypical items or services are furnished because
of the special needs of the patients treated and are
necessary in the efficient delivery of needed health
care.”
42 C.F.R. § 413.30(f)(1) (1996) (currently promulgated with
non-material alterations at 42 C.F.R. § 413.30(e)(1)); see also
Limitations on Coverage of Costs Under Medicare, 39 Fed. Reg.
20,164, 20,165 (June 6, 1974) (describing original atypical services
exception). As discussed infra n.3, the 1996 regulation is the
version relevant to this appeal.
2
In calculating RCLs, the Secretary categorized healthcare
providers into four groups depending on whether the provider’s
facility is freestanding or hospital-based and on whether the facility
is urban or rural. 42 U.S.C. § 1395yy(a).
5
The second relevant aspect of the Medicare
reimbursement scheme involves the claims process itself.
Under that process, an SNF submits a claim for reimbursement
to a private intermediary, which processes the claim and
provides reimbursement under CMS’s authority. See 42
U.S.C. § 1395kk-1(a). The provider can appeal an
unfavorable reimbursement decision to the Provider
Reimbursement Review Board (PRRB), id. § 1395oo(a),
whose members are appointed by the Secretary, id.
§ 1395oo(h). All proceedings before the PRRB are between
the provider and the intermediary—neither the Secretary nor
CMS is a party to the proceedings and the Secretary can
participate only by filing an amicus brief or by providing
counsel for the intermediary. 42 C.F.R. § 405.1843(a)–(d).
The Secretary, however, has the discretionary authority to
reverse, affirm or modify the PRRB’s decision. See 42 U.S.C.
§ 1395oo(f)(1). The provider can seek review of the PRRB’s
decision—or the Secretary’s decision if she exercises her
discretion—in the district court “for the judicial district in
which the provider is located” or in the “District Court for the
District of Columbia”. Id.
B. WESTERN DISTRICT OF PENNSYLVANIA LITIGATION
Canonsburg is a hospital-based SNF that has participated
in the Medicare reimbursement program since 1984.
Beginning in fiscal year 1987, Canonsburg applied for, and
obtained, the atypical services exception for costs exceeding its
RCLs. In 1994, however, the Secretary’s revised gap
methodology interpretation of section 2534.5 began to limit
Canonsburg’s reimbursements. 3
3
The Congress has since eliminated retrospective cost-based
reimbursements for all SNFs and replaced that system with a
prospective payment scheme. See Balanced Budget Act of 1997,
6
In 2001, Canonsburg appealed a final reimbursement
decision of the Secretary in the Western District of
Pennsylvania, challenging section 2534.5 as applied to its
reimbursements for fiscal years 1987 through 1990 and 1993.
See Canonsburg I, 2001 WL 36339671, at *1. Canonsburg
alleged that section 2534.5 was arbitrary, capricious and
inconsistent with statutory language because it (1) “violate[d]
the applicable cost limit statu[t]e, 42 U.S.C. § 1395yy(c), and
regulation, 42 C.F.R. § 413.30(f)”; (2) was procedurally
invalid because “it is a substantive r[u]le, yet it was not passed
pursuant to the notice and comment requirements” of the APA;
and (3) unreasonably discriminated between freestanding and
hospital-based SNFs “in the exception process.” Canonsburg
I, 2001 WL 36339671, at *3–4. The district court rejected all
of Canonsburg’s arguments, relying heavily on a Sixth Circuit
decision upholding section 2534.5. See Canonsburg I, 2001
WL 36339671, at *4–5 (citing St. Francis Health Care Ctr. v.
Shalala, 205 F.3d 937 (6th Cir. 2000)). The court first
concluded that the statutory language (42 U.S.C. § 1395yy), as
well as the regulatory language (42 C.F.R. § 413.30), regarding
reasonable costs was permissive, not mandatory, and that the
Secretary’s interpretation of the language was reasonable.
See Canonsburg I, 2001 WL 36339671, at *4. The court also
viewed section 2534.5 as an interpretative rule, not a
substantive rule, and thus concluded that it did not require
notice and comment. See id. Finally, the court found no
merit in Canonsburg’s discrimination argument, holding that
Pub. L. No. 105-33, § 4432(a), 111 Stat. 251, 414–20 (codified at 42
U.S.C. § 1395yy(e)). The amendments to the cost-based
reimbursement system for SNFs applied to cost reporting periods
beginning on or after July 1, 1998, see 42 U.S.C. § 1395yy(e)(2)(D);
accordingly, Canonsburg’s petition for review of its fiscal year 1996
reimbursement requires analysis of the earlier retrospective
cost-based reimbursement system.
7
the Congress treated freestanding and hospital-based SNFs the
same once it removed the excess costs from the hospital-based
RCLs. See id. Canonsburg did not appeal the district court’s
grant of summary judgment in favor of the Secretary.
C. ADMINISTRATIVE PROCEEDINGS
In the late 1990s—and separate from the Canonsburg I
litigation—Canonsburg began an administrative challenge to
its reimbursement for fiscal year 1996. Canonsburg included
in its reimbursement request a disallowance of $470,528,
corresponding to the gap created by section 2534.5, but
nevertheless claimed that it should be entitled to those funds.
The Medicare intermediary granted Canonsburg the atypical
services exception in a May 4, 1998 decision but disallowed
the $470,528 in costs corresponding to the section 2534.5 gap.
The intermediary also disallowed an additional $46,765 of
offset costs that, according to its calculations, should have been
included in the section 2534.5 gap but were not listed in the
disallowance filed with Canonsburg’s reimbursement request.
Canonsburg appealed the $526,293 4 of disallowed costs to the
4
Canonsburg claimed an amount in controversy of $526,293
in its complaint. Compl. 15, ECF No. 1, Canonsburg II,
No. 1:09-cv-02385 (D.D.C. Dec. 17, 2009). The complaint lists a
self-disallowance amount of $470,528 and further disallowance of
$46,765 by the intermediary. Id. ¶¶ 37–38. Canonsburg states that
the intermediary disallowed $529,943 total in costs, see id. ¶ 39, but
Canonsburg appealed only $526,293 to the PRRB, see id. The sum
of the $470,528 in self-disallowance and $46,765 in additional
intermediary disallowance is $517,293—the record does not
manifest why the amount in controversy differs from the sum of the
disallowances.
8
PRRB, which reversed the intermediary’s decision. 5
Canonsburg made the same arguments before the PRRB that it
had made in Canonsburg I in 2001 and also relied on more
recent decisions invalidating section 2534.5 as arbitrary and
capricious. See St. Luke’s Methodist Hosp. v. Thompson, 315
F.3d 984, 988–89 (8th Cir. 2003) (striking down section
2534.5 because HHS misconstrued reimbursement for typical
and atypical services costs); Montefiore Med. Ctr. v. Leavitt,
578 F. Supp. 2d 129, 133–34 (D.D.C. 2008) (finding
section 2534.5 violated APA because HHS failed to provide
notice and comment in promulgating section 2534.5); Mercy
Med. Skilled Nursing Facility v. Thompson, No.
C.A.99-2765TPJ, 2004 WL 3541332, at *2–3 (D.D.C. May 14,
2004) (same). Canonsburg did not mention Canonsburg I in
its PRRB filings. The PRRB found section 2534.5 to be
“illogical[],” concluding that the Secretary confused typical
and atypical services costs in her section 2534.5 calculation
and created a gap inconsistent with statute and regulation. See
Provider Reimbursement Review Board Decision 41–42. The
PRRB further concluded that section 2534.5 was procedurally
infirm, reasoning that it was either a substantive rule
promulgated without notice and comment or a revision to an
interpretative rule which, because it constituted a “fundamental
modification” of HHS’s previous interpretation and was
implemented without notice and comment, violated the
holding in Paralyzed Veterans of America v. D.C. Arena L.P.,
117 F.3d 579, 586–88 (D.C. Cir. 1997) (requiring agencies to
use notice and comment rulemaking when substantively
revising interpretative rule), abrogated by Perez v. Mortgage
Bankers Ass’n, 135 S. Ct. 1199 (2015).
5
Canonsburg timely appealed the intermediary’s decision to
the PRRB but the PRRB did not decide Canonsburg’s appeal until
August 2009, almost a decade later.
9
On discretionary review of the PRRB decision, the CMS
Administrator reversed the PRRB. 6 The Administrator
concluded that section 2534.5 is “reasonable and appropriate,
as [it] closely adhere[s] to” the statutory and regulatory
language establishing RCLs and “in no way alters, or revises,
Medicare policy as set forth in the regulations” implementing
the atypical services exception. Decision of the Administrator
13–14. She further determined that section 2534.5 does not
“constitute . . . a change in policy requiring notice and
comment rule-making under 5 U.S.C. § 552.” Id. at 15–16.
D. PROCEEDINGS IN D.C. DISTRICT COURT
Canonsburg timely filed the instant suit in district court
seeking judicial review of the CMS Administrator’s decision.
As in Canonsburg I, Canonsburg argued that section 2534.5 is
arbitrary and capricious because it is inconsistent with the
governing statute and regulations, represents an arbitrary
change to the Agency’s longstanding interpretation of the
regulations, was promulgated without required notice and
comment and discriminates in favor of freestanding SNFs.
The Secretary answered, raising issue preclusion as an
affirmative defense. See generally FED. R. CIV. P. 8(c)(1)
(listing res judicata as an affirmative defense). The Secretary
subsequently moved for summary judgment, repeating her
issue-preclusion argument and defending section 2534.5 on the
merits. Canonsburg opposed summary judgment, arguing
that the Secretary had waived issue preclusion by failing to
6
The Secretary did not review the PRRB decision directly
because her review authority is delegated under 42 U.S.C.
§ 1395oo(f) to the CMS Administrator. See generally 42 C.F.R.
§ 405.1875 (“Administrator . . . . may immediately review any
decision of the Board . . . .”). The Administrator’s review
represents HHS’s final action in Canonsburg’s appeal.
10
raise it during the administrative proceedings and that equity
strongly disfavored application of issue preclusion in this case
because none of the policy rationales that traditionally support
issue preclusion applied to Canonsburg’s suit. 7
On October 17, 2013, the district court granted the
Secretary’s motion for summary judgment on the issue
preclusion ground. See Canonsburg II, 989 F. Supp. 2d at 30.
The court noted that Canonsburg did not dispute that the
validity of section 2534.5 had been raised and contested, and
actually and necessarily decided, in Canonsburg I. See id. at
17. It rejected Canonsburg’s waiver and equity arguments.
See id. at 18–19, 24–27. The court held “that, because the
parties and issues are identical to those in Canonsburg I, . . .
the plaintiff had a full and fair opportunity to litigate with
adequate incentives to do so, and the application of issue
preclusion would not inflict a fundamental unfairness on the
plaintiff,” Canonsburg was barred from relitigating the issues
resolved in Canonsburg I. Id. at 30. Canonsburg timely
appealed.
II. ANALYSIS
We review a grant of summary judgment de novo. Dist.
Hosp. Partners v. Burwell, 786 F.3d 46, 54 (D.C. Cir. 2015).
Summary judgment is granted “if the movant shows that there
is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a).
“In reviewing a grant of summary judgment, we must view the
7
Canonsburg also argued that the legal landscape regarding
the Paralyzed Veterans doctrine had changed since Canonsburg I,
thus preventing application of issue preclusion. Recognizing the
Supreme Court’s abrogation of the Paralyzed Veterans doctrine in
Perez, 135 S. Ct. at 1206–07, during the pendency of the appeal, we
instructed the parties to omit the argument from their briefs.
11
evidence in the light most favorable to the nonmoving party
and draw all reasonable inferences in its favor.” Woodruff v.
Peters, 482 F.3d 521, 526 (D.C. Cir. 2007) (internal quotation
marks omitted). “[I]n a case like the instant one, in which the
[d]istrict [c]ourt reviewed an agency action under the APA, we
review the administrative action directly[,] according no
particular deference to the judgment of the [d]istrict [c]ourt.”
Ass’n of Private Sector Colls. & Univs. v. Duncan, 681 F.3d
427, 440–41 (D.C. Cir. 2012) (quoting Holland v. Nat’l Mining
Ass’n, 309 F.3d 808, 814 (D.C. Cir. 2002)).
Under our precedent, a party is barred from relitigating an
issue if three conditions are met:
First, the same issue now being raised must
have been contested by the parties and
submitted for judicial determination in the prior
case. Second, the issue must have been
actually and necessarily determined by a court
of competent jurisdiction in that prior case.
Third, preclusion in the second case must not
work a basic unfairness to the party bound by
the first determination.
Yamaha Corp. of Am. v. United States, 961 F.2d 245, 254 (D.C.
Cir. 1992), cert denied, 506 U.S. 1078 (1993) (citations
omitted). Canonsburg claims that, under Poulin v. Bowen,
817 F.2d 865 (D.C. Cir. 1987), the Secretary waived her issue
preclusion affirmative defense by failing to raise it during the
administrative proceedings. Canonsburg further argues that,
because the Secretary did not raise issue preclusion before
asserting it as an affirmative defense in district court, the
Chenery doctrine barred the district court’s consideration of it
in the first instance. Although Canonsburg does not dispute
that the first two Yamaha requirements for issue preclusion are
12
met, conceding that it raised the same issues in Canonsburg I
and that the Canonsburg I court actually and necessarily
decided them, Arg. Recording at 2:58–3:30, it claims that issue
preclusion works a basic unfairness to it because it is contrary
to the policy underpinnings of the defense.
A. ADMINISTRATIVE WAIVER UNDER POULIN
Canonsburg argues that, under Poulin, the Secretary’s
failure to raise issue preclusion before the PRRB—or on the
Administrator’s discretionary review of the
PRRB—constitutes waiver of the defense in district court.
We disagree.
In Poulin, the plaintiff filed for Social Security disability
benefits in 1974 but his claim was denied by the Social
Security Administration. See 817 F.2d at 868. He refiled his
disability-benefits application in 1980 and the administrative
law judge (ALJ), the Social Security Administration Appeals
Council and the district court all rejected his application on the
merits. Id. Although the Social Security Act, Pub. L. No.
74-271, 49 Stat. 620 (1935) (codified as amended at 42 U.S.C.
§§ 301 et seq.), and HHS regulations gave the ALJ discretion
to apply issue preclusion, 8 the ALJ declined to do so and
instead reached the merits of the benefits decision. See
8
“An administrative law judge may dismiss a request for a
hearing under any of the following conditions: . . . (c) The
administrative law judge decides that there is cause to dismiss a
hearing request entirely or to refuse to consider any one or more of
the issues because—(1) The doctrine of res judicata applies in that
we have made a previous determination or decision under this
subpart about your rights on the same facts and on the same issue or
issues, and this previous determination or decision has become final
by either administrative or judicial action . . . .” 20 C.F.R.
§ 404.957 (1986) (emphasis added).
13
Poulin, 817 F.2d at 868–69. After filing its answer in district
court, HHS argued for the first time in its motion for judgment
of affirmance that the denial of Poulin’s 1974 benefits
application meant that his 1980 application was barred by issue
preclusion. See id. at 869. “The [d]istrict [c]ourt did not
even address this tardy [issue preclusion] claim.” Id. On
appeal, we held that, if a claim has “been reconsidered on the
merits to any extent and at any administrative level, it is . . .
properly treated as having been, to that extent, reopened as a
matter of administrative discretion” and “is also subject to
judicial review to the extent of the reopening.” Id. (quoting
McGowen v. Harris, 666 F.2d 60, 65–66 (4th Cir. 1981)).
Because HHS “expressly waived applicability of
administrative res judicata” at the administrative stage, we
concluded, “it may not now advance this doctrine as an
alternate basis for its decision.” Id. We further indicated that
HHS’s res judicata defense was “also waived” because it
failed to raise the defense in its answer in district court as
Federal Rule of Civil Procedure 8(c) requires. 9 Id. Thus,
“[t]he failure to plead res judicata, coupled with the express
waiver at the administrative level, precludes its application
now.” Id.
Poulin makes two uncontroversial points. First, an
agency’s failure to raise issue preclusion in its answer in
federal court may constitute waiver under Federal Rule of
Civil Procedure 8(c). See id. Second, an agency may not
rely on issue preclusion to the extent it “express[ly]” exercises
its discretion to reopen an earlier decision on the merits. Id.
Both points are inapplicable here. First, the Secretary plainly
raised issue preclusion in her answer to Canonsburg’s federal
9
“In responding to a pleading, a party must affirmatively state
any avoidance or affirmative defense, including: . . . res
judicata . . . .” FED. R. CIV. P. 8(c).
14
complaint. Moreover, the Secretary did not reopen
Canonsburg I, “express[ly]” or otherwise, id., during the
administrative proceedings. In Poulin, the first decision was
an administrative decision and thus one that HHS had the
power to revisit. See id. In this appeal, Canonsburg I is an
earlier judicial decision which the Secretary is without
authority to affect.
Even assuming the Secretary had the power to reopen
Canonsburg I, 10 this appeal is a far cry from Poulin. The
PRRB, which, according to the record, appears to have been
unaware of Canonsburg I, interpreted section 2534.5 in the
first instance on the basis of a circuit decision to which
Canonsburg was not a party. See Provider Reimbursement
Review Board Decision 43–44 (citing St. Luke’s, 315 F.3d at
988–89). Moreover, the Secretary, unlike the Poulin ALJ, did
not explicitly decline to apply issue preclusion but instead
reversed the PRRB. Because the Secretary did not—and
could not—reconsider Canonsburg I and, at the same time, she
complied with Rule 8(c), Poulin is inapposite.
Our more recent precedent also defeats Canonsburg’s
argument that we have adopted a robust administrative waiver
10
The Congress by statute authorizes the Secretary to
administer reimbursements but it cannot authorize the reopening of a
final judicial decision. See generally Plaut v. Spendthrift Farm,
Inc., 514 U.S. 211, 218–19 (1995) (“[T]he Framers crafted this
charter of the judicial department with an expressed understanding
that it gives the Federal Judiciary the power, not merely to rule on
cases, but to decide them, subject to review only by superior courts
in the Article III hierarchy . . . .”); see id. (“A legislature without
exceeding its province cannot reverse a determination once made, in
a particular case; though it may prescribe a new rule for future
cases.” (quoting THE FEDERALIST No. 81, at 545 (Alexander
Hamilton) (J. Cooke ed. 1961))).
15
doctrine in light of Poulin. In Morris v. Sullivan, 897 F.2d
553 (D.C. Cir. 1990), we explained that Poulin is “applicable
only when the agency has clearly stated or otherwise
demonstrated that it has in fact reopened the original case on
the merits and consequently has held a mandatory . . . hearing
to reconsider the prior claim afresh.” Id. at 558; cf. Sendra
Corp. v. Magaw, 111 F.3d 162, 167 (D.C. Cir. 1997) (under
Poulin, agency decision is reviewable on the merits if it
exercises discretion to reopen claim). In Morris, we noted
that Poulin is limited to cases in which the agency fails to raise
issue preclusion as an affirmative defense in district court or it
expressly declines to apply issue preclusion when available
during administrative proceedings. Morris, 897 F.2d at 557
n.8 (“Morris readily concedes, however, that factually, Poulin
is distinguishable . . . in two important ways. First . . . [the
Poulin ALJ] declined to exercise his discretion to dismiss” on
the basis of res judicata and, second, “the Secretary in Poulin
failed to plead res judicata as a defense, thereby waiving his
right to interpose it” (some alteration in original)); see
generally Nixon v. United States, 978 F.2d 1269, 1297 (D.C.
Cir. 1992) (Henderson, J., concurring) (in Poulin, court “did no
more than state that parties waive their own right to raise res
judicata by failing to plead it”). And in Stanton v. District of
Columbia Court of Appeals, 127 F.3d 72 (D.C. Cir. 1997), we
declared, citing Poulin, that “[r]es judicata is an affirmative
defense that may be lost if not pleaded in the answer; it may not
ordinarily be asserted for the first time on appeal.” Id. at 76;
see also U.S. Postal Serv. v. NLRB (USPS), 969 F.2d 1064,
1069 (D.C. Cir. 1992) (“[C]ourts do not force preclusion pleas
on parties who choose not to make them . . . .”). Other
circuits have also refrained from developing any
administrative waiver doctrine for issue preclusion that
extends beyond our analysis in Poulin. See, e.g., Chavez v.
Bowen, 844 F.2d 691, 692–93 (9th Cir. 1988) (allowing res
judicata claim on appeal despite ALJ failing to consider res
16
judicata defense in subsequent administrative decision); cf.
Kane v. Heckler, 776 F.2d 1130, 1132 (3d Cir. 1985)
(“[W]here the administrative process does not address an
earlier decision, but instead reviews the entire record in the
new proceeding and reaches a decision on the merits, the
agency has . . . waived application of res judicata.”). At most,
one circuit has included an unsupported statement in a footnote
regarding administrative waiver. See, e.g., Mun. Resale Serv.
Customers v. FERC, 43 F.3d 1046, 1052 n.4 (6th Cir. 1995)
(stating, in footnote without citation to other authority, court
would not recognize res judicata defense because defense was
not invoked before agency).
In sum, the Secretary did not waive her issue preclusion
affirmative defense by not raising it at the administrative
stage; 11 moreover, she asserted it, expressly and properly, in
district court and we are thus free to affirm the district court’s
application of the doctrine to Canonsburg’s complaint.
B. ISSUE PRECLUSION AND CHENERY
Next, Canonsburg argues that the district court violated
the Chenery doctrine by considering the Secretary’s issue
preclusion defense even though issue preclusion was not raised
during the administrative proceedings. We disagree.
In SEC v. Chenery Corp. (Chenery I), 318 U.S. 80 (1943),
the Supreme Court explained that “the courts cannot exercise
their duty of review unless they are advised of the
11
Our analysis does not encompass agency adjudications that
require, by express regulation, that affirmative defenses be raised
before the agency. See, e.g., Canady v. SEC, 230 F.3d 362, 365
(D.C. Cir. 2000) (failure to raise statute of limitations affirmative
defense before SEC constituted waiver based on pleading
requirements set forth in SEC regulations).
17
considerations underlying the action under review.” Id. at 94.
When an agency action rests upon “an exercise of judgment in
an area which Congress has entrusted to the agency . . . the
orderly functioning of the process of review requires that the
grounds upon which the administrative agency acted be clearly
disclosed and adequately sustained.” Id.; see also id. at 88
(“If an order is valid only as a determination of policy or
judgment which the agency alone is authorized to make and
which it has not made, a judicial judgment cannot be made to
do service for an administrative judgment.”). The Supreme
Court further elucidated the Chenery doctrine in SEC v.
Chenery Corp. (Chenery II), 332 U.S. 194 (1947):
[A] reviewing court, in dealing with a
determination or judgment which an
administrative agency alone is authorized to
make, must judge the propriety of such action
solely by the grounds invoked by the agency.
If those grounds are inadequate or improper, the
court is powerless to affirm the administrative
action by substituting what it considers to be a
more adequate or proper basis. To do so
would propel the court into the domain which
Congress has set aside exclusively for the
administrative agency.
Id. at 196. Neither Chenery I nor Chenery II addressed
judicial doctrines such as issue preclusion. The Court did
explain, however, that Chenery applies to “a determination or
judgment which an administrative agency alone is authorized
to make,” Chenery II, 332 U.S. at 196 (emphasis added); in
other words, to an agency’s “exercise of judgment in an area
which Congress has entrusted to the agency,” Chenery I, 318
U.S. at 94. Issue preclusion is not a determination specially
entrusted to an agency’s expertise; it is instead the sort of
18
antecedent determination that a court usually makes. Simply
put, Chenery does not apply to legal principles like issue
preclusion. See Chenery II, 332 U.S. at 196; Chenery I, 318
U.S. at 94.
Our precedent is in accord. We have explained that
Chenery only limits judicial review of “factual
determination[s] or . . . policy judgment[s] that [the agency]
alone is authorized to make.” Shea v. Dir., Office of Workers’
Comp. Programs, 929 F.2d 736, 739 n.4 (D.C. Cir. 1991). 12
Indeed, we held in Horne v. Merit Systems Protection Board
that “[t]he rule established in Chenery only applies to agency
actions that involve policymaking or other acts of agency
discretion.” 684 F.2d 155, 158 n.4 (D.C. Cir. 1982); cf.
Athlone Indus., Inc. v. Consumer Prod. Safety Comm’n, 707
F.2d 1485, 1489 (D.C. Cir. 1983) (explaining that exhaustion
of administrative remedies should not apply where “strictly a
legal issue” is in dispute, “[n]o factual development or
application of agency expertise will aid the court’s decision”
and “a decision by the court [will not] invade the field of
agency expertise or discretion” (citations omitted)).
Moreover, other circuits have declined to interpret Chenery as
Canonsburg would have it. See, e.g., In re Comiskey, 554
F.3d 967, 974 (Fed. Cir. 2009) (“In [Chenery I], the Supreme
12
In USPS, we relied on Chenery I in denying an intervenor’s
attempt to press an issue preclusion defense on appeal. See 969
F.2d at 1069 (“[W]e reject [the intervenor’s] endeavor to achieve
disposition of this case on a rationale [not] set forth by the agency
itself.” (internal quotation marks omitted) (some alteration in
original) (citing, inter alia, Chenery I, 318 U.S. at 93–95)). But the
USPS intervenor attempted to raise preclusion for the first time on
appeal. See U.S. Postal Serv., 303 N.L.R.B. 463 (1991) (declining
to address any potential issue preclusion argument). Here, the
Secretary, not an intervenor, timely asserted the defense in district
court. For this reason, we find USPS inapposite.
19
Court made clear that a reviewing court can (and should)
affirm an agency decision on a legal ground not relied on by
the agency if there is no issue of fact, policy, or agency
expertise.”); RNS Servs., Inc. v. Sec’y of Labor, 115 F.3d 182,
184 n.1 (3d Cir. 1997) (explaining that Chenery I does not
apply if “no factual or other determination that Congress
sought to exclusively entrust to the [Federal Mine Safety and
Health Review] Commission is being intruded upon by the
courts.” (internal quotation marks omitted)). 13
Canonsburg claims that the only recognized exception to
the Chenery doctrine applies to the agency reaching a result
mandated by statute but for the wrong reason. See United
Video, Inc. v. FCC, 890 F.2d 1173, 1190 (D.C. Cir. 1989)
(“Hence, Chenery reversal is not necessary where, as here, the
agency has come to a conclusion to which it was bound to
13
The Federal Circuit stated in dicta in an unpublished
opinion, Cabrera v. OPM, 980 F.2d 743, 1992 WL 279390, at *1 n.1
(Fed. Cir. 1992) (per curiam) (unpublished table disposition), that it
“appear[ed]” that an agency’s decision could not be upheld on res
judicata grounds because the defense had not been raised before the
agency. But that decision, besides being nonprecedential,
conflicted with an earlier precedential Federal Circuit decision. See
Spears v. Merit Sys. Prot. Bd., 766 F.2d 520, 523 (Fed. Cir. 1985)
(Chenery doctrine did not prevent court from dismissing appeal on
res judicata grounds even though agency did not analyze res
judicata in first instance because “any action by the MSPB would
not involve policymaking or discretion”); see also Deckers Corp. v.
United States, 752 F.3d 949, 964 (Fed. Cir. 2014) (“[A] panel of this
court . . . is bound by the precedential decisions of prior panels
unless and until overruled by an intervening Supreme Court or en
banc decision.”). Cabrera thus has little, if any, persuasive power.
In addition, the Sixth Circuit’s similar treatment of the Chenery
doctrine in Municipal Resale Service Customers, supra at 16,
contained little analysis. See 43 F.3d at 1052 n.4.
20
come as a matter of law, albeit for the wrong reason, and
where, as here, the agency's incorrect reasoning was confined
to that discrete question of law and played no part in its
discretionary determination.”). But Canonsburg fails to
recognize that the court’s consideration of a judicial doctrine
like issue preclusion does not constitute an exception to
Chenery—Chenery simply does not apply to the issue in the
first place. See Horne, 684 F.2d at 158 n.4 (“The rule
established in Chenery only applies to agency actions that
involve policymaking or other acts of agency discretion.”
(emphasis added)).
In light of the Supreme Court’s plain language in Chenery
I and II, our own construction of the Chenery doctrine and no
persuasive case law to the contrary, we conclude that the
Chenery doctrine does not prohibit raising issue preclusion as
an affirmative defense in district court even if the party raising
the defense was not a party to the administrative proceeding or
was otherwise unable to assert the defense at the administrative
stage.
C. EQUITABLE CONSIDERATIONS
Finally, Canonsburg argues that applying issue preclusion
here is unfair to it. It maintains that equity strongly supports
its position because the Secretary has allegedly engaged in a
pattern of settling litigation challenging section 2534.5 at the
district court level before we can rule on its validity.
“There is no general public policy exception to the
operation of res judicata.” Apotex, Inc. v. FDA, 393 F.3d 210,
219 (D.C. Cir. 2004); see also Federated Dep’t Stores, Inc. v.
Moitie, 452 U.S. 394, 401 (1981) (“There is simply no
principle of law or equity which sanctions the rejection by a
federal court of the salutary principle of res judicata.” (internal
quotation marks omitted)). We limit equitable exceptions to
21
issue preclusion to certain limited circumstances, none of
which applies here. First, we have explained that issue
preclusion is inappropriate if there has been an intervening
“change in controlling legal principles.” See Apotex, 393 F.3d
at 219. Second, we have recognized that issue preclusion
would be unfair “if the party to be bound lacked an incentive to
litigate in the first trial, especially in comparison to the stakes
of the second trial.” Otherson v. Dep’t of Justice, 711 F.2d
267, 273 (D.C. Cir. 1983) (citing Blonder-Tongue Labs., Inc. v.
Univ. of Ill. Found., 402 U.S. 313, 333 (1971)). In Yamaha,
we clarified that, in weighing a party’s incentive to litigate, we
should be concerned with whether “the losing party clearly
lacked any incentive to litigate the point in the first trial, but the
stakes of the second trial are of a vastly greater magnitude.”
961 F.2d at 254. Similarly, application of issue preclusion is
inappropriate if the “prior proceedings were seriously
defective.” Martin v. Dep’t of Justice, 488 F.3d 446, 455
(D.C. Cir. 2007) (quoting Blonder-Tongue Labs., 402 U.S. at
333).
We have been reluctant to expand these equitable
exceptions. For example, we have recognized that even a
“patently erroneous” first judgment is insufficient to bar issue
preclusion. Otherson, 711 F.2d at 277; see id. (“erroneous”
first judgment does not demonstrate unfairness sufficient for
court to decline to give judgment preclusive effect); see also
City of Arlington v. FCC, 133 S. Ct. 1863, 1869 (2013) (“A
court’s power to decide a case is independent of whether its
decision is correct, which is why even an erroneous judgment
is entitled to res judicata effect.”). And, if there is mutuality
of parties in successive litigation, we explained that “courts
should refuse to give the first judgment preclusive effect on
grounds that the party lacked adequate incentive to litigate in
the first proceeding only upon a compelling showing of
unfairness.” Otherson, 711 F.2d at 277 (emphases added)
22
(internal quotation marks omitted). Thus, if the parties have
the same incentive to litigate in both the earlier and the
subsequent litigation, if there is no change in the controlling
law and if there is no concern about procedural defects in the
first litigation, the application of issue preclusion is unlikely to
result in a “compelling” showing of unfairness to the party
against which it is asserted. See, e.g., Venetian Casino Resort,
LLC v. NLRB, 484 F.3d 601, 610 (D.C. Cir. 2007) (“We can
discern no difference between the incentives that the [plaintiff]
may have had in its [earlier] litigation and its incentives here.
The stakes in its attempt before that court were no less than
they are now.”).
As the district court correctly concluded, Canonsburg’s
incentive to fully litigate the validity of section 2534.5 in
Canonsburg I was at least equal to its incentive in Canonsburg
II. See Canonsburg II, 989 F. Supp. 2d at 19. In fact, the
amount in controversy in Canonsburg I was over twice the
amount in controversy in Canonsburg II. Compare Compl.
15, ECF No. 1, Canonsburg II, No. 1:09-cv-02385 (D.D.C.
Dec. 17, 2009) (claiming $526,293 as amount in controversy),
with Compl. 15, ECF No. 1, Canonsburg I, No. 2:00-cv-00284
(W.D. Pa. Feb. 11, 2000) (claiming $1,123,755 as amount in
controversy).
Issue preclusion protects the functioning of the courts by
promoting finality and avoiding the unnecessary expenditure
of judicial resources, see Stanton, 127 F.3d at 78, regardless of
the possibility that an agency decision might later be found to
be superfluous. 14 Canonsburg argues that Mercy Medical and
14
We reject Canonsburg’s claim that, had the district court
reached the merits, it would have likely not resulted in inconsistent
judicial decisions. Even though the Sixth and Eighth Circuits have
split on the question of section 2534.5’s validity, compare St.
Francis, 205 F.3d at 944–48 (upholding Secretary’s interpretation),
23
Montefiore Medical are cases in which the district court found
section 2534.5 invalid under the APA but the Secretary settled
both before we could consider the merits of the Secretary’s
interpretation of the atypical services exception. Although we
agree with the district court that the settlements have prevented
a definitive resolution of the Secretary’s interpretation of the
atypical services exception in section 2534.5, we also agree
that they are largely irrelevant to our issue preclusion analysis.
See Canonsburg II, 989 F. Supp. 2d at 29. First, Canonsburg
itself chose not to appeal Canonsburg I to the Third Circuit so
that its opposition to HHS’s settlement practice rings hollow.
Second, we have long recognized the public interest in, and
importance of, settlement of litigation. See Am. Sec. Vanlines,
Inc. v. Gallagher, 782 F.2d 1056, 1060 (D.C. Cir. 1986) (“Few
public policies are as well established as the principle that
courts should favor voluntary settlements of litigation by the
parties to a dispute.”); see also Williams v. First Nat’l Bank,
216 U.S. 582, 595 (1910) (“Compromises of disputed claims
are favored by the courts . . . .”). Finally, the Secretary’s
decision to settle unrelated cases does not result in any
particular harm to Canonsburg beyond the costs of this
litigation.
with St. Luke’s, 315 F.3d 988–89 (rejecting Secretary’s
interpretation), the fact that another district court decision on the
merits would merely add to, but not create, an inconsistency does not
support declining to apply issue preclusion. Further, a merits
decision here could result in inconsistent decisions involving these
two parties, a concern that issue preclusion is intended to prevent.
RESTATEMENT (SECOND) OF JUDGMENTS § 28 cmt. c (1982) (“[T]he
outcomes of similar legal disputes between the same parties at
different points in time should not be disparate.”).
24
For the foregoing reasons, we affirm the district court’s
grant of summary judgment to the Secretary.
So ordered.