Please forgive the long delay since my last post. I'm back with some interesting Fifth Circuit administrative-law cases to tell you about. Stay tuned this weekend for at least one more update.

This post will discuss two cases. The first presents a Step-Zero puzzle. The second posits an interesting theory regarding the significance of Supreme Court silence on Chevron in certain cases.  

Frey v. United States Department of Health and Human Services, 2019 WL 1511516 (5th Cir. April 8, 2019) (Wiener, Dennis, Owen)

Petitioner Chris Frey was a regional vice president for Health Management Systems (HMS), a company that contracts with state health agencies to help them recover improperly paid Medicaid funds.  In 2009, Frey disclosed to supervisors that he believed some of HMS's billing practices were unlawful. HMS fired him in 2013.

Frey filed a whistleblower complaint under the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (Recovery Act or Act), alleging that he was fired because of his disclosures. The Office of the Inspector General  (OIG) for the Department of Health and Human Services (HHS) investigated Frey's claim and submitted a report to HHS. The report concluded that (1) Frey had made protected disclosures and (2) the HMS supervisors who made the decision to fire Frey knew about those disclosures when they decided to fire him. Yet OIG concluded that (1) the disclosures were not a "contributing factor" in HHS's decision to fire Frey and (2) HMS would have fired him even absent the disclosures.

HHS adopted the OIG report and denied Frey's whistleblower claim. Frey petitioned the Fifth Circuit for review, arguing that HHS (1) misapplied § 1553 of the Recovery Act, which governs the use of circumstantial evidence in whistleblower proceedings and (2) did not consider countervailing evidence that supported his claim.

The Fifth Circuit denied Frey's petition. The panel's discussion of the standard of review merits some discussion. Although HHS was the respondent, the Court declared that it would "review [the agency's] legal conclusions and interpretations of the statute de novo" because "the HHS is not charged with administering § 1553."  Though the Court doesn't mention United States v. Mead Corp., 533 U.S. 218 (2001), its determination that Chevron deference doesn't apply to HHS's interpretations of the Recovery Act is a textbook example of Mead's "Step Zero" analysis in action.

I wish the panel had explained this point a bit. In particular, I wonder what led it to conclude that HHS is not charged with administering § 1553. I reviewed the briefs in the case, and as far as I can tell, none of the parties addressed the issue. Nor did it come up during oral argument (I listened to the audio).

I'm pretty sure that HHS has the authority to make rules with the force and effect of law under other provisions of the Recovery Act. See, e.g., Recovery Act § 13402(j) ("To carry out this section, the Secretary of Health and Human Services shall promulgate interim final regulations by not later than the date that is 180 days after the date of the enactment of this title."); id. § 13410(b)(2) ("Not later than 18 months after the date of the enactment of this title, the Secretary of Health and Human Services shall promulgate regulations to implement such amendments."); see also Modifications to the HIPAA Privacy, Security, Enforcement, and Breach Notification Rules Under the Health Information Technology for Economic and Clinical Health Act, 78 FR 5566-01 (Jan. 25, 2013) (HHS Final Rule implementing Recovery Act). And as every real admin-law nerd knows, in City of Arlington v. FCC, a majority of the Supreme Court led by Justice Scalia rejected the vision of Mead championed by the Chief Justice's dissent because it "would have [required] court[s] [to] search provision-by-provision to determine 'whether [that] delegation covers the "specific provision" and "particular question" before the court.'” 569 U.S. 290, 306 (2013) (quoting 569 U.S. at 322-23) (Roberts, C.J., dissenting)).  Help me here: Why isn't that enough to overcome a Step-Zero objection to HHS's entitlement to Chevron deference in this case?

As for the standard of review applicable to HHS's factual findings, Frey and HHS argued that substantial evidence review applied. HMS, though, insisted that the arbitrary or capricious standard controlled. The Court agreed with HMS. It explained that Section 1553(c)(5) of the Recovery Act makes the judicial review standards of Chapter 7 of the APA applicable to HHS decisions in whistleblower proceedings like this one. Under the APA, substantial evidence review only applies where a statute requires an agency to conduct an on-the-record hearing before arriving at the findings or conclusions under review. Unlike other whisteblower statutes, the Court noted, the Recovery Act does not allow a complainant to request a hearing. And, unsurprisingly, neither HHS nor OIG conducted a hearing before denying Frey's claim. Accordingly, the Court held that HHS's factual findings were subject to arbitrary and capricious review.

Moving to the merits, the panel rejected Frey's argument that HHS misinterpreted Section 1553(c)(1)(A)–the Act's circumstantial evidence provision. Here is the statutory language:

(i) IN GENERAL.—A person alleging a reprisal under this section shall be deemed to have affirmatively established the occurrence of the reprisal if the person demonstrates that a disclosure described in subsection (a) was a contributing factor in the reprisal.
(ii) USE OF CIRCUMSTANTIAL EVIDENCE.—A disclosure may be demonstrated as a contributing factor ... by circumstantial evidence, including
(I) evidence that the official undertaking the reprisal knew of the disclosure; or
(II) evidence that the reprisal occurred within a period of time after the disclosure such that a reasonable person could conclude that the disclosure was a       contributing factor in the reprisal

Frey contended that HHS misinterpreted that provision by requiring both knowledge of the protected disclosure and temporal proximity. HHS and HMS respond that although both knowledge of a protected disclosure and temporal proximity have some bearing on the contributing factor element, a finder of fact may reasonably conclude that one of those factors alone does not always establish that element. In other words, "[t]he parties' dispute c[ame] down to whether § 1553’s circumstantial-evidence provision is mandatory or permissive." Noting that no court had previously considered that particular question, the panel concluded that HHS and HMS had the better of the argument:

§ 1553(c)(1)(A)(ii) sets out “two non-exclusive ways” that a petitioner may use circumstantial evidence to show that a protected disclosure contributed to a decision to fire him. The types of circumstantial evidence include, but are not limited to, (a) an employer’s knowledge of a protected disclosure or (b) a reasonable temporal relationship between the disclosure and the firing. The statute states that a reprisal “may be demonstrated by circumstantial evidence”; it does not say that whenever either of those factors is present, a disclosure shall or must be deemed a contributing factor. Congress’s use of “shall” in the immediately preceding subsection bolsters this interpretation.

Finally, the Court rejected Frey's challenge to HHS's conclusion that even if Frey’s disclosures were a contributing factor in HMS’s decision to fire him, HMS had nonetheless established by clear and convincing evidence that it would have fired him in the absence of the disclosures. In particular, HMS offered evidence that it had actually fired Frey because of his poor performance or as part of a reduction-in-force. Frey argued that in reaching that conclusion, HHS had failed to consider countervailing evidence that contradicted HMS’s explanation.

After discussing the evidence, however, the Court concluded that

The OIG’s summary of its interviews with Frey’s supervisors and several other HMS employees sufficiently supported the HHS’s conclusion that HMS fired Frey because of his poor performance or as part of a reduction-in-force. True, some employees were complimentary of Frey and there was some inconsistent testimony about the reduction-in-force. But the arbitrary and capricious standard is highly deferential and requires only a “rational connection” between the facts found and the agency’s decision. Given that the OIG considered some facts that supported its conclusions and other facts that did not, we must defer to the HHS’s decision to deny Frey’s claim.

The Inclusive Communities Project, Inc. v. Lincoln Property Company, 2019 WL 1529692 (5th Cir. Apr. 9, 2019) (Davis, Jones, Engelhardt)

To get this case, you need some context. The Federal Government provides low-income housing tax credits that are distributed to developers through designated state agencies. 26 U.S.C. § 42. Congress has directed States to develop plans identifying selection criteria for distributing the credits. § 42(m)(1). The Texas Department of  Housing and Community Affairs (the Department) is the state agency responsible for distributing these credits.  

In 2008, the Inclusive Communities Project, Inc. (ICP), a fair housing focused nonprofit, sued the Department, alleging, among other things, a claim for disparate treatment under the Fair Housing Act. See 42 U.S.C. §§ 3601, et seq. By that time, the Fifth Circuit had already held that the Fair Housing Act permitted disparate-impact claims, but it had not yet decided what legal standards should apply to such claims. Without any binding Fifth Circuit precedent to follow, the district court applied the Second Circuit's burden-shifting framework from Huntington Branch, NAACP v. Town of Huntington, 844 F.2d 926 (2d Cir. 1988), which required defendants to (1) justify their actions with a compelling governmental interest and (2) prove that there were no less discriminatory alternatives. Concluding that the Department had failed to make that showing, the district court ruled in favor of ICP on its disparate-impact claim.

The Department appealed to the Fifth Circuit, but while the appeal was pending, the United States Department of Housing and Urban Development (HUD) passed regulations interpreting the Fair Housing Act to encompass disparate-impact liability. See Implementation of the Fair Housing Act's Discriminatory Effects Standard, 78 Fed.Reg. 11460 (2013). The regulation also established a burden-shifting framework for disparate-impact claims. 24 CFR § 100.500(c) (2014).

The Fifth Circuit adopted HUD's regulation and, as a result, held that it was improper for the district court to have placed the burden on the Department to prove there were no less discriminatory alternatives for allocating low-income housing tax credits. The Inclusive Communities Project, Inc. v. Texas Dep’t of Hous. and Cmty. Affairs, 747 F.3d 275, 282 (5th Cir. 2014). In a concurring opinion, Judge Jones stated that on remand the District Court should reexamine whether the ICP had made out a prima facie case of disparate impact. Id. at 284 (Jones, J., specially concurring). She suggested the District Court incorrectly relied on bare statistical evidence without engaging in any analysis about causation. She further observed that, if the federal law providing for the distribution of low-income housing tax credits ties the Department's hands to such an extent that it lacks a meaningful choice, then there is no disparate-impact liability. Id. at 283-84 (Jones, J., specially concurring).

The Department filed a petition for certiorari, which listed two questions presented: (1)  Are disparate-impact claims cognizable under the Fair Housing Act? and (2) If disparate-impact claims are cognizable under the Fair Housing Act, what are the standards and burdens of proof that should apply? The Supreme Court granted the Department's petition but only as to the first question presented.

The Court had tried to answer this question twice before. It had granted certiorari in Magner v. Gallagher, 565 U.S. 1013  (2011), but the parties settled that case before oral argument (and, suspiciously, almost immediately after HUD promulgated its regulation establishing the burden-shifting standard). The same thing happened again a year later in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., 571 U.S. 904 (2013). The Department's case against ICP did not settle, however, and the Supreme Court was finally able to address disparate-impact liability under Fair Housing Act. The Court held that the Act does, in fact, permit disparate-impact claims, and, for that reason, affirmed the underlying Fifth Circuit decision.

The fact that the Court had granted cert only on the first question presented didn't stop the parties from debating the standards and burdens of proof that ought to apply to disparate-impact claims under the Fair Housing Act (the second question presented). HUD and ICP urged the Court to defer to the standard HUD had announced in its recent regulation under Chevron. The Department argued that Chevron deference was inappropriate because HUD's regulation contradicted the plain text of the Act.

Nevertheless, the Supreme Court never addressed the Chevron debate. Instead, without expressly adopting or rejecting HUD's regulation, the Court simply announced several "safeguards" for lower courts to apply when addressing disparate-impact claims. Texas Dep't of Hous. & Cmty. Affairs v. Inclusive Communities Project, Inc., 135 S. Ct. 2507, 2523 (2015). Debate in the lower courts predictably ensued. Some courts held that the Supreme Court had adopted HUD's standard; others insisted that the Court had modified or even rejected it altogether.

In the meantime, ICP was already busy litigating another disparate-impact claim under the Fair Housing Act, this time against the owners and management company of several Dallas-area apartment complexes that had declined to participate in the federal "Section 8" Housing Voucher Program. That case led eventually to the April 9, 2019, panel opinion that I'm finally getting around to summarizing here.

ICP alleged that the defendants' policy of declining to negotiate with or rent to voucher holders disparately impacts black households as evidenced by statistics establishing that more than 80% of the voucher holders in the Dallas area are black. Bound by the Fifth Circuit's earlier decision adopting the HUD regulation, the district court purported to apply the burden-shifting framework established in that regulation. Prudently, though, the district court also acknowledged the importance of the "safeguards" that the Supreme Court had directed lower courts to apply when assessing disparate-impact claims. Ultimately, the district court concluded that ICP had not carried its burden to make the "robust causation" showing that had featured prominently in the Supreme Court's enigmatic ICP opinion. Accordingly, it granted the defendants' motion to dismiss under Rule 12(b)(6). ICP appealed.

The Fifth Circuit affirmed, but the interesting part of the majority opinion is its discussion of the standards applicable to disparate-impact claims in the wake of the Supreme Court's ICP decision. After discussing the state of the debate among lower courts on the issue at some length, the panel majority concluded that "the Supreme Court’s opinion in ICP . . . . undoubtedly announce[d] a more demanding test than that set forth in the HUD regulation." Indeed, the panel majority went further, declaring that "[a] careful review of the Supreme Court’s analysis in ICP . . . reveals its modification of HUD’s test to be both purposeful and significant."

Along the way, the panel majority discussed the Supreme Court's ICP opinion at great length, and I encourage anyone interested in this area of law to read that discussion in full.  For brevity's sake, though, I'll omit it from this already-lengthy summary. What I can't omit, however, is this little aside that the panel majority slipped into a footnote at the very end of that discussion: "[t]he Supreme Court’s modification of the HUD standard is further evidenced by its omission of any discussion of deference, pursuant to Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), and its failure to explicitly adopt the HUD regulation." More on that momentarily.

Applying the souped-up standard announced by the Supreme Court in ICP, the panel majority agreed with the district court that ICP had not made the "robust" showing of causation required to establish a prima facie case of discrimination under the Fair Housing Act.

Judge Davis "strongly dissented" to the majority's holding that ICP had not demonstrated a prima facie case of disparate-impact liability. In his view, the majority's tortured interpretation of what "robust causation" requires will "render disparate-impact liability under the FHA a dead letter." Both opinions are worth reading in full. This will almost certainly not be the final word on the issue.

Now back to whether the Supreme Court's failure to mention Chevron or expressly adopt HUD's regulation in ICP counts as evidence that the Court intended to modify HUD's standard. Isn't it equally possible that the ICP majority didn't address Chevron or the HUD regulation because the HUD regulation and HUD's related interpretation of the Fair Housing Act were not before the Court ? After all, the Court only granted cert to decide whether the Fair Housing Act permitted disparate-impact claims. It declined review as to the second question presented, which dealt with the standards that should apply to disparate-impact claims (assuming the Fair Housing Act permitted them). Or perhaps the majority agreed with Justice Alito's dissent, which rejected Chevron's applicability for a different (but very interesting) reason:

The principal respondent and the Solicitor General—but not the Court—have one final argument regarding the text of the FHA. They maintain that even if the FHA does not unequivocally authorize disparate-impact suits, it is at least ambiguous enough to permit HUD to adopt that interpretation. Even if the FHA were ambiguous, however, we do not defer “when there is reason to suspect that the agency's interpretation ‘does not reflect the agency's fair and considered judgment on the matter in question.’” Christopher v. SmithKline Beecham Corp., 567 U.S. ––––, ––––, 132 S.Ct. 2156, 2166, 183 L.Ed.2d 153 (2012).
Here, 43 years after the FHA was enacted and nine days after the Court granted certiorari in Magner (the “rodent infestation” case), HUD proposed “to prohibit *2543 housing practices with a discriminatory effect, even where there has been no intent to discriminate.” Implementation of the Fair Housing Act's Discriminatory Effects Standard, 76 Fed.Reg. 70921 (2011). After Magner settled, the Court called for the views of the Solicitor General in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., 568 U.S. ––––, 133 S.Ct. 569, 184 L.Ed.2d 336 (2012), another case raising the same question. Before the Solicitor General filed his brief, however, HUD adopted disparate-impact regulations. See Implementation of the Fair Housing Act's Discriminatory Effects Standard, 78 Fed.Reg. 11460 (2013). The Solicitor General then urged HUD's rule as a reason to deny certiorari. We granted certiorari anyway, 570 U.S. ––––, 133 S.Ct. 2824, 186 L.Ed.2d 883 (2013), and shortly thereafter Mount Holly also unexpectedly settled. Given this unusual pattern, there is an argument that deference may be unwarranted. Cf. Young v. United Parcel Service, Inc., 575 U.S. ––––, ––––, 135 S.Ct. 1338, 1352, 191 L.Ed.2d 279 (2015) (refusing to defer where “[t]he EEOC promulgated its 2014 guidelines only recently, after this Court had granted certiorari” (discussing Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944))).
There is no need to dwell on these circumstances, however, because deference is inapt for a more familiar reason: The FHA is not ambiguous. The FHA prohibits only disparate treatment, not disparate impact. It is a bedrock rule that an agency can never “rewrite clear statutory terms to suit its own sense of how the statute should operate.” Utility Air Regulatory Group, 573 U.S., at ––––, 134 S.Ct., at 2446. This rule makes even more sense where the agency's view would open up a deeply disruptive avenue of liability that Congress never contemplated.

ICP, 135 S. Ct. at 2542-43 (Alito, J., dissenting). Notably, the ICP majority called Justice Alito's dissent "the well-stated principal dissenting opinion in this case." Id. at 2524. So perhaps it agreed with him that Chevron didn't apply because the Fair Housing Act was unambiguous and/or the HUD regulation didn't reflect the considered view of the agency. There are other possible explanations, too, but I'll leave it there for now.

Fifth Circuit Update Number 2
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