A. I would file a civil action seeking review of the ASRP rule under the Administrative Procedure Act. Section 701 of the Act, reinforced by Overton Park, establishes a strong presumption in favor of judicial review, and there is nothing in the facts to suggest statutory foreclosure of review or commitment to agency discretion so as to foreclose review under Section 701 (a). Sovereign immunity is not a problem because Section 702 waives sovereign immunity in actions for injunction, and that’s all we seek. Because the organic statute does not specify the Court of Appeals as the venue, we will go to United States District Court, which has jurisdiction under Section 1331 of the Judicial Code.
Our only problem in review ability at this point is that the agency will surely argue that we are not entitled to pre enforcement review, citing Gardner v. Toilet Goods. But our case is more like Abbott Labs where pre enforcement review was allowed. Most of our challenges are legal rather than factual, so they are well suited for review now. Also, our challenger will suffer concrete injury if he must comply with the rule—incurring the cost of studying for the test, or ceasing to practice his profession. We have a strong Abbott Labs argument for pre enforcement review.
Once we get to court, we have very strong Section 706 (2)(A), (C), and (D) arguments. Subsections 706 (2)(B), (E), and (F) are not implicated because this is not covered by Section 554, because I see no constitutional violation yet, and because there is no hint that the District Court is supposed to engage in fact finding.
The agency decision is arbitrary and capricious. The agency has made no effort to link the content of its rule to the statutory factors, especially including consideration of cost, objections with respect to which were explicitly raised in the comments. Nor has the agency explained the rationality of using a standardized test to ensure competence or explained its decision to include all accountants rather than just CPAs. Moreover, it has not explained its decision to stretch the boundaries of the statute beyond corporations to all enterprises. The ex parte communications with the test company and with the AICPA are of no help to the agency in defending against the arbitrary and capricious attack. Overton Park makes it clear that only those matters in the record can be considered in support of the rationality of an agency’s decision.
The agency’s decision also is invalid under Section 706 (2)(D) for failure to observe procedures required by law. The procedures required here were those defined by Section 553. The decision is clearly quasi legislative: It applies to a group of persons; it involves predictions about future facts; it requires further procedures before becoming concretely operative against an individual person or firm. There is no hint of any “magic language,” triggering the condition subsequent of Section 553 (c). Accordingly, this is “informal rulemaking,” to which Section 553 applies.
Although the agency issued a notice of proposed rulemaking, the notice was so different from the final rule that it essentially deprived the public of adequate notice of the final rule and of an opportunity to comment on the factors and elements that conditioned and defined the final rule. There was no notice of the agency’s consideration of the possibility of extending the rule to all accountants and bookkeepers rather than just to CPAs. There was no notice of the agency’s considering the possibility of extending the rule to accounting services for all firms, including partnerships and sole proprietorships, rather than just services for corporations; there was no notice of the agency’s contemplation of dropping the alternative procedure for showing competence and instead relying entirely on the standardized test. There also was no notice of the test validation studies or of a possible inclusion in the test of material on corporation law and fiduciary responsibility. All of these omissions deprived the public and my client of a chance to provide comments on matters that turned out to be very important in the final rule. As in Nova Scotia Food Products, this made the notice-and-comment procedure a sham, not in compliance with the requirements of Section 553.
A further, more general, procedural flaw is that the agency apparently did not offer a concise statement of basis and purpose in conjunction with the rule, which is explicitly required by Section 553.
The rule is ultra vires and therefore must be set aside under Section 706 (2)(C). The agency is authorized to issue only those rules that are “necessary.” As in the Benzine case, the agency has failed to establish necessity and therefore lacks authority to promulgate the rule. The agency’s power also was circumscribed by the requirement to consider cost, and there is no indication that it did so, even in the face of the comments suggesting that the costs imposed by the proposed rule were unwarranted. Perhaps most seriously, the agency exceeded the bounds of the statute by regulating accounting services for all enterprises rather than just those services for public corporations. This vastly increases the universe of activities covered by the rule beyond that authorized by the statute.
The agency likely will argue that my client failed to exhaust his administrative remedies because he did not submit a comment. Our response—likely to be successful—is that he didn’t submit a comment because he didn’t think the rule would apply to him; the proposed rule did not apply to him. Moreover, I don’t know of any case law supporting the proposition that failure to comment deprives one of an opportunity to challenge a rule for violation of the APA. We might do some further research on this.
Likely agency responses to our arbitrary and capricious, Nova Scotia, and ultra vires arguments are so weak as to border on the frivolous. It is important to understand the relationship between the ultra vires challenge and the arbitrary and capricious challenge. If the agency had carefully explained why it believed it was necessary to extend regulation to all accountants and bookkeepers and to all enterprises rather than limiting its focus to accounting services provided corporations in order to fulfill the statutory purpose of protecting investors in public corporations, it also would have protected itself against arbitrary and capricious attack and at the same time would have supported a possible agency argument that Chevron deference to agency interpretation of statutory provisions should result in deference to its explanation. But in the absence of explanation, the agency has a very weak position.
B. Now that my client has taken—and flunked—the test, we no longer need to fear a ripeness argument under Toilet Goods. This is post-enforcement review; not pre enforcement review (I suppose it’s conceivable that the agency might argue that my client must ignore the test results and the rule, continue to perform accounting services, and wait for the agency, or the police, or somebody to fine him or otherwise impose penalties, but there is absolutely no support in the analysis of Abbott Labs or Toilet Products for the proposition that someone must wait for enforcement procedures to get that far before challenging the validity of a rule or a particularized adjudication.
I would seek review in District Court under the APA as explained in my answer to Sub Question (A).
I would reiterate the same arguments I made in Sub Question (A) because the rule still suffers the same flaws. If I can invalidate the rule, there is no basis for the test or for any other limitation on my client’s privilege of practicing his profession.
This is adjudication. The preexisting rule is being applied to my client who is an individual, based on facts that exist now (his competence to offer accounting services), and this is the last step in applying the law to him. Although this is adjudication, Section 554 (a) does not apply because there is no magic language of any kind. Nevertheless, Section 558 subjects “initial licensing” to the adjudicatory procedures of the APA and that may be an alternative route to formal adjudication under the APA. Even if this alternative route to formal adjudication under the APA works, the agency will argue that Section 554 (a)(3) make these statutory procedures inapplicable because a test or examination is being employed to ascertain my client’s competence. In other words, the test is the adjudicatory procedure prescribed by the APA.
In sum, my Section 706 (2)(D) argument that the agency has failed to follow formal adjudication procedures prescribed by the APA is weak.
But I have a stronger Section 706 (2)(D) argument premised on constitutional due process. The Fifth Amendment of the United States Constitution also prescribes procedures, and failure to follow those constitutional procedures requires setting the agency decision aside under Section 706 (2)(D). But in order to trigger these constitutional procedures for informal adjudication, which is what we have here, we must show that the government is depriving my client of life liberty or property. He can argue that his privilege of practicing his accounting profession is a liberty interest (I would want to do more research on whether we can sustain this position), and we also can argue that property interests are involved because he had a reasonable expectation of being able to earn a living as an accountant. This property argument probably is weak because the legislature has the power to extinguish legal expectations.
Assuming we can establish a liberty or property deprivation, then we argue that the combination of the Matthews v. Eldridge formula and Judge Friendly’s “shopping list” shows that administering the standardized test alone, without affording an opportunity for a more individualized assessment of my client’s competence violated the constitutional minimum procedure.
In making these arguments, we must sustain the basic position that the test was constitutionally insufficient even though the agency can argue plausibly that the test provided notice in the form of the test questions, provided us an opportunity to respond by answering the test questions, and that it was a scientifically accurate way of determining competence. We would have to argue that, because the test questions were inappropriate in substantial degree because they covered fiduciary duty, state corporation law, and federal securities law, and because of the inherent limitations of standardized tests, they would produce a very high error rate in assessing accounting competence. Allowing my client to call witnesses and make argument would produce a much lower likelihood of error. We can buttress our argument by pointing out that the stakes for my client are very high—his ability to earn a living is at stake.
That would leave the third factor of the Matthews v. Eldridge formula: burden on the agency. The agency can certainly argue that if it had to have a live hearing in every case that would enormously increase the burden, compared with simply administering a standardized test to everyone. We can meet that argument by saying that the agency need not have a live hearing in every case, but only when an individual requests an exception or challenges a failing result on the test. Such an exceptions procedure would greatly reduce the burden on the agency, causing the formula to tilt in favor of requiring the agency to afford my client a live hearing.
We might offer the hypothesis of an accountant who is blind, and argue that the agency surely would not prevail if it denied some kind of exceptional inquiry into the competence of a blind applicant rather than requiring him to take the standardized written test which he obviously could not do.
Independent of the 706 (2)(D) argument we would argue that denying my client a license is arbitrary and capricious and therefore should be set aside under 706 (2)(A). The test validation results are not part of any official record. They were not placed in the rule making record, and if there is no adjudicatory procedure other than simply administering the test to my client then the validation results are not in the adjudicatory record either. Overton Park makes it quite clear that, in informal adjudication, the agency has the burden of sustaining the rationality of its decision by evidence developed contemporaneously. The test validation results may constitute a contemporaneous record supporting the test, but if it is not offered to support the decision in the case of my client, we would argue that he fails to pass muster under Overton Park. Moreover, we would argue that the agency has the burden of demonstrating the relationship between professional accounting competence and testing well on fiduciary obligation, state corporation law, and federal securities law. It has not done this, and therefore its decision to deny my client a license based on the test result alone is arbitrary and capricious.
The agency’s strongest argument is that the test is like the decisional matrix in Hechler, which stands for the proposition that agencies may narrow the scope of adjudication by making rules, and that in this case the agency simply has narrowed the scope of adjudication through the test-oriented rule to the point that the test is the adjudication.
While a broad argument that agencies may never apply rules to individual cases by administering standardized tests would be hard to sustain, I think we have a fairly strong argument that agencies must have exceptions procedures when they use standardized tests, and that they may use standardized tests only when they have validated those tests as a part of the public record.
C. The arbitration procedure clearly is an administrative procedure that must be exhausted before we can get judicial review unless there is some argument we can make that going to arbitration would be futile our would inflict undue injury. I do not think we can do that. It is essential, however, that in the arbitration preceding my client explicitly assert all of the challenges to the rule and the adjudication that he eventually wants to make in a reviewing court. He also must explicitly assert the argument—to be developed further in the answer to this sub question—about why the essential attributes of judicial power must be retained in an Article III court. He must present these arguments to the arbitrator so he does not waive them.
There is every reason to suppose that arbitration under the AAA rules will be a fairly formal type of adjudicatory procedure, which is what my client wants.
But he also wants his day in court—in a real court.
We will argue that Section 701 and the subsequent sections of the APA give a right of action in an Article III court to review agency decision making. Even if the Congress could limit this review, as it surely can for public rights and maybe for private rights closely connected with disputes over public rights (see Thomas v. Union Carbide), an agency cannot circumscribe judicial review. The source of the arbitration review mechanism here is the agency, and not the Congress.
When we get to court, assuming we do not like the arbitration outcome, we will argue that separation of powers as interpreted by Crowell v. Benson and Thomas v. Union Carbide, requires that the essential attributes of judicial power be retained in the reviewing court. That means that the very limited standards of judicial review of arbitration awards set forth in the Federal Arbitration Act cannot be applied. Rather, we are entitled to have a reviewing Article III court decide questions of law de novo, to determine questions of ultra vires decision making de novo and to determine whether an adequate basis for factual decisions existed. Because application of Section 706 of the APA is a purely legal question, the essential attributes requirement opens the door for a full fledged APA challenge in court.
With respect to the public rights/private rights distinction, we should argue that the government is not granting a new right by statute; it is curtailing an existing right—to practice accounting—that existed at common law in 1789.
If for some reason we really do not want to exhaust the arbitration remedy, the only grounds for avoiding it is to claim that, while an agency may establish administrative appeal processes that must be exhausted, the usual administrative appeal process involves consideration by a principal or subordinate officer of the United States government; not by a private person such as an arbitrator. To require us to exhaust this private procedure, we would argue, impermissibly encroaches on presidential appointment power under Article II. But while this argument might be strong if it were the Congress that had required my client to go to a private administrative appeal, here it is the agency, which threatens presidential power less, and is tantamount to an agency contracting out some of its functions, which sure is permissible as long as review by a judicial or executive officer is available. As long as judicial review is available, reserving the essential attributes of the judicial power to an Article III court, the private nature of the arbitration process is permissible.
A. This question involves, not some independent foreign government seeking to exercise authority; it involves persons exercising U.S. governmental authority. The Iraq Council of State and the police officer and American soldier applying its rule and enforcing its order are doing so only because they purport to be authorities of the United States. As with any exercise of governmental authority, I want to challenge the validity of their authority to do what they are trying to do: to collect a $100,000 fine imposed by or in the name of the ICOS.
My starting point is to attack the validity of the statute setting up this whole apparatus. I have three strong attacks. First, the statute is unconstitutional because it impermissibly delegates legislative power through the Secretary of Defense to the ICOS. “All governmental power” is about as broad as you can get. There is none of the types of restraint or channeling that validated broad delegations of legislative power in Meat Cutters and Yakus: no ascertainable standard in the statute, no self imposed restriction by the Secretary of Defense, no historical practice (I would argue this, but I also would want to research the experience of U.S. military government in the past, which might undercut this part of my delegation argument; the government would argue that the historical practices have been so uniform and so formal, that a full array of constraints on the exercise of power under the Iraq Model Democracy Act are available, thus satisfying Meat Cutters.)
Second, the statute is unconstitutional because it delegates, through the Secretary of Defense, judicial power in derogation of Article III. There is nothing in the statute that reserves the essential attributes of judicial power in an Article III court, and the decrees issued under the unlimited authority passed on by the Secretary of Defense appear to make the ICOS the final authority for appeals, thus impliedly denying review in an Article III court.
Third, the statute is unconstitutional because it vests the appointment of principal officers (the members of the ICOS) in a department head, thus intruding upon the appointment power of the President in Article II. If anyone is a principal officer, persons exercising all executive, judicial, and legislative power are. Because they have such broad powers and because the powers derive from the United States Congress, the members of the ICOS must be appointed by the President by and with the advice and consent of the Senate.
I do not have in my legislative delegation argument the situation found in Schecter where legislative power was being given to private parties. In this case, the Secretary of Defense is appointing the council members, thus avoiding that particular difficulty with Schecter. But I have enough without this to invalidate the legislative delegation.
Even if the statute were valid, the Secretary of Defense has acted ultra vires by failing to consider the opinion of the Secretary of State. The Secretary of Defense is not bound by the views of the Secretary of State; he only must “consider” them. But there is no indication that he did, and the Benzine case and Overton Park, even if one severs their linkage to the Administrative Procedure Act, suggest that agency compliance with law must be judged based on the agency’s own contemporaneous explanation and supporting evidence, and there is none here.
Even if, despite these arguments, the authority given the ICOS is somehow valid, its rulemaking and adjudicatory decisions are subject to attack.
Because the ICOS exists only by virtue of appointment by an American cabinet officer, transferring authority to it under a federal statute, we have a strong argument that the ICOS is an “authority of the United States,” and therefore is an agency subject to the Administrative Procedure Act. As such, its decision to adopt the fee, clearly legislative in character, is invalid under Section 706 (2)(D) because it failed to follow any of the procedures required by Section 553. That fee rule also is invalid under Section 706 (2)(A) because it is wholly unexplained and thus arbitrary and capricious under Motor Vehicle Manufacturers and Overton Park.
It is far less clear that that the adjudicatory procedures available to the in-country Initiative Iraq personnel are equally vulnerable. There is no magic language in any statute that would trigger formal adjudication under Section 554 (a), and most of the elements of procedure from Judge Friendly’s list appear to be available. In any event, any challenge to the adjudicatory procedures is probably not ripe because no one has sought to invoke them in this case yet.
The government and the ICOS will have some fairly strong counterarguments with respect to my APA arguments, in particular that the ICOS is explicitly outside the definition of agency because it is either the government of a U.S. territory (§ 551 (1)(C)), or because it is the exercise of military authority in occupied territory (§ 551 (1)(G)). (I would want to do research on the interpretation of these exceptions to the agency definition.) As to the Paragraph (G) argument, I would argue that what is involved here is not the exercise of military authority, but civil legislative, executive, and judicial authority, in the express words of the Secretary of Defense.
But even if these arguments by the defendants undercut my APA arguments, I still would have substantive and procedural due process arguments. Money is property and I cannot be deprived of $100,000 without due process of law. Substantive due process requires decisional rationality, and the ICOS has offered no rationale at all for its fee rule. It thus is invalid because it violates substantive due process. While Londoner v. Denver and Bimetallic Investment Corp. define a fairly relaxed procedural due process standard for quasi legislative decision making, procedural due process still has meaning in the rulemaking context. At least, the ICOS should have given some kind of notice of its intent to impose the fee and provided some opportunity for affected parties to offer their views to the ICOS before it made a final decision—something in the nature of a legislative hearing. Having not done so, ICOS cannot now enforce the rule consistent with procedural due process.
We can expect the government and the ICOS to launch a frontal assault on our effort to apply U.S. constitutional and statutory law to obtain review in a U.S. court of decisions which they will claim are essentially governmental decisions by a foreign state which, they will argue, are not subject to the U.S. constitution or U.S. administrative law. Intuitively, we can expect these arguments to have some appeal in whatever tribunal we seek review, as explained in the answer to Sub Question (B).
We have two counterarguments. First, we argue as suggested in the foregoing parts of the answer to this sub question, that the effort to collect the fee is an effort to assert authority under an American statute; it is not an effort justified only or primarily by inherent sovereignty in the Iraqi people or their transfer of that sovereignty to any indigenous authority.
Second, we should argue that the persons suffering legal wrong or adversely effected are American citizens, some of whom have—in the relevant time period—never left the United States. By analogy, we would claim that what is being attempted here is like revoking a contract right of an American citizen, like the welfare benefit in Goldberg. v. Kelly or the employment tenure expectancies in Sindermann and Roth because of something someone did in another country. We may not be able to apply U.S. law to the conduct occurring in the other country, but we surely can apply U.S. law to the curtailment of the contract benefit because that is a U.S.-defined benefit, and the curtailment is occurring in the United States.
B. The hardest part of this probably will be obtaining judicial review in an Article III court.
My preferred avenue of review is under the Administrative Procedure Act, pursuant to which, as in my answer to Question I, I have a waiver of sovereign immunity, presumptive reviewability, and the grant of a form of action. I also have in Section 706 bases for judicial invalidation of the fee order on each and every one of the substantive grounds I asserted in my answer to Sub Question (A).
The problem is that judicial review under the APA enables the government’s and the ICOS’s best argument. While I can sidestep the argument that the ICOS is not an agency under Section 551 because the Secretary of Defense manifestly is an agency, I still must confront two problems. First, and less problematic, are the territorial and military-authority exceptions to judicial review in Section 701 (b). Second is the exception for matters committed to agency discretion by law, which under Justice Scalia’s opinion in Webster v. Doe, surely extends to the foreign affairs category of decisions beyond judicial review. My only counterarguments are those expressed already in the answer to this question that the decisions we object to are civilian matters under a congressional statute, and not something within the traditional inherent martial law power of the President and the military forces. I am dubious about our probability of success here.
That means we also must identify other avenues for judicial review. The best of these is to challenge the threat by the Secretary of Defense to offset the $100,000 against existing government contracts, under the Tucker Act. The Tucker Act explicitly empowers the United States Court of Federal Claims to consider breach of contract arguments.
We also might file an action under the Federal Tort Claims Act, arguing that the Defense Department is committing the tort of intentional interference with contractual relations by interposing the Iraqi fee assessment against the law school’s contract rights. I would need to do further research on the exemption under the Federal Tort Claims Act for intentional torts.
We also could file a Bivens action against the Secretary of Defense and/or against the Army personnel seeking to collect the fee, on the grounds that they are acting to deprive the law school of its constitutional rights under the Fifth Amendment without valid authority of law. A Bivens action does not lie when there are other remedial channels, and I would expect that the government would argue that the tribunals in Iraq and/or the Administrative Procedure Act represents such alternative channels. Here, we would use our Article III separation of powers argument to reinforce our entitlement to having an Article III court exercise the essential attributes of judicial power rather than accepting the apparent preclusion of judicial review in the ICOS decree.
Regrettably, we are not likely to benefit from the possibility usually available to someone confronted with a governmental assessment of money penalties—refusing to pay the penalty and waiting for the government to go to court to collect it. In this case, the Army is apparently prepared to use coercive measures in Iraq to collect the penalty or at least to prevent the continued operation of Initiative Iraq without further judicial execution orders. Moreover, the Defense Department has custody over monies due under government contracts and need not go to court to withhold these monies.
I think our Tucker Act argument is the strongest. We would need to do intensive legal research on the relationship between access to Article III courts in conditions of martial law and other forms of military occupation in order to evaluate fully the strength of the other arguments for judicial review.