Data Marketing Partnership v. LABR

Citation: Not availableDocket: 20-11179

Court: Court of Appeals for the Fifth Circuit; August 17, 2022; Federal Appellate Court

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The United States Court of Appeals for the Fifth Circuit is reviewing Case No. 20-11179, involving plaintiffs Data Marketing Partnership, LP and LP Management Services, LLC against defendants the United States Department of Labor and Martin Walsh, Secretary of the Department. The court addresses three key questions: 

1. The Department of Labor's advisory opinion qualifies as a reviewable "final agency action" under the Administrative Procedure Act, which it does.
2. The Department's action is determined to be arbitrary, capricious, or otherwise contrary to law, affirming the district court's findings.
3. The court affirms the district court's decision to vacate the agency's action but vacates and remands the injunction for further consideration.

The legal context includes the Employee Retirement Income Security Act of 1974 (ERISA), which preempts state laws related to employee benefit plans. Under ERISA, an "employee welfare benefit plan" can be offered by employers to provide health insurance. The definitions of "participant," "employee," and "employer" under ERISA are outlined, noting that a "working owner" or "bona fide partner" can qualify as an employee. The Department of Labor's procedure for providing guidance includes advisory opinions, which interpret ERISA in specific situations, and information letters, which do not apply to specific facts. The factual background indicates that LP Management Services requested an advisory opinion regarding a health insurance plan for its limited partnerships in November 2018 to ensure compliance with ERISA.

Data Marketing's business model involves capturing, segregating, aggregating, and selling electronic data from limited partners, who provide this data through specific software. Limited partners enter into a joinder agreement, gaining a 'Limited Partnership Interest' that allows participation in management through voting and receipt of income distributions categorized as guaranteed payments subject to employment taxes. Following a delay in the Department's issuance of an advisory opinion, plaintiffs sued, asserting their plan's ERISA coverage and seeking to prevent a contrary opinion. Subsequently, the Department issued an advisory opinion stating the plan was not ERISA-covered, arguing that limited partners were neither working owners nor bona fide partners due to insufficient engagement and financial stakes, labeling the structure as a sham aimed at circumventing state insurance laws.

The plaintiffs amended their complaint in response, leading to cross-motions for summary judgment. The district court ruled in favor of the plaintiffs, declaring the advisory opinion a final agency action due to the lack of further review and its impact on the plaintiffs' regulatory status. The court found the opinion arbitrary, capricious, and contrary to law, determining that the limited partners qualified as 'working owners' or, alternatively, 'bona fide partners' based on a substantial relationship with Data Marketing. The Department appealed, and appellate jurisdiction was established under 28 U.S.C. 1291, with de novo review of the summary judgment and abuse of discretion review for the injunction and agency action vacatur. The appellate court plans to assess the finality of the advisory opinion, its adherence to statutory and regulatory interpretations, and the appropriate remedy.

Final agency action is subject to judicial review under the Administrative Procedure Act (APA) when there is no other adequate remedy in court, as outlined in 5 U.S.C. § 704. The circuit court treats finality as a jurisdictional prerequisite for such review, requiring that (A) the action completes the agency’s decision-making process and is not tentative or interlocutory, and (B) the action determines rights or obligations or results in legal consequences. 

In this case, both requirements are satisfied. (A) The advisory opinion marked the culmination of the Department's decision-making process, as it is not subject to further agency review, and previous arguments suggesting otherwise have been rejected by the Supreme Court. The potential for the agency to reconsider its position does not negate the finality of the action. (B) The advisory opinion also altered legal rights and obligations by withdrawing the Department's discretion, allowing requestors to rely on the opinion under specific circumstances. The Department’s argument, which claims it retains discretion due to preconditions on reliance, does not affect the finality of the advisory opinion. The loss of discretion occurs once the conditions for reliance are met, regardless of any future events or external regulatory influences.

The Department's focus on how plaintiffs might use the existing advisory opinion, rather than the one they sought, is incorrect. The completion of the advisory opinion procedure denies the plaintiff a legal right that would have been available with a favorable outcome, justifying judicial review. The applicable regulation recognizes that failing to obtain an advisory opinion can lead to "unusual hardship," indicating that advisory opinions are practically binding and final. Unlike non-binding information letters, advisory opinions reflect the Department's authoritative interpretation of ERISA and can be relied upon in specific situations.

The Department opted for final agency action through the advisory opinion, which carries significant implications. The advisory opinion is deemed arbitrary and capricious under the Administrative Procedure Act (APA), which mandates that agency actions be reasonable and well-explained. Courts must ensure that agencies operate within a "zone of reasonableness" and properly consider relevant factors. Review is limited to the reasoning provided by the agency at the time of the decision, and any post hoc justifications may indicate that the action is arbitrary and capricious. The court will frame interpretive questions for the district court's consideration upon remand.

The FDA's need to revise its Order with new arguments indicates a lack of reasoned justification for its actions. The court's review is substantive, especially following precedents that emphasize the importance of agencies considering relevant factors and providing clear explanations for their actions. The Department failed to adequately address its previous advisory opinions on the term "working owner," which defined it as someone with equity ownership actively engaged in a business, contrasting this with a "passive" owner. The Department's current definition of "working owner" deviates significantly from these earlier opinions, suggesting an arbitrary and capricious shift in agency practice. Moreover, the Department justified its disregard for the earlier definitions by citing a Supreme Court decision, but this reasoning is flawed as the 1999 opinion had been referenced in later advisory opinions and was acknowledged in relevant case law. The Department also neglected to consider an existing regulation that provided a definition of "working owner," which had been justified in detail during its promulgation. These failures collectively render the Department's advisory opinion arbitrary and capricious.

The Department of Labor adopted a definition that contradicts an existing regulation concerning a specific term, which was cited by Data Marketing in their request. The Department did not explain its choice of definition or acknowledge the relevant regulation, raising questions about the reasonableness of its actions. The response brief included extensive justifications for the Department's position and references to previous advisory opinions, but these were not part of the final agency action, rendering them as "post hoc rationalizations" that indicate arbitrary and capricious decision-making.

The court is tasked with interpreting two terms: "working owner" and "bona fide partners," and will remand these issues for initial consideration. A prior district court ruling in 2019 deemed the Department's definition of "working owner" unreasonable, particularly because it included individuals without employees. Despite appealing this decision, the Department failed to adequately address the regulation in its advisory opinion.

The Supreme Court's ruling in Yates established that a "working owner" may qualify as both an "employee" and a "participant" under ERISA, although it did not clearly define the class of "working owners." This ruling indicates that courts should assess whether ERISA's text offers specific guidance on such classifications, based on all relevant provisions of ERISA and the Internal Revenue Code. The district court did not apply this analytical framework, mistakenly interpreting Yates as providing comprehensive guidance for all working-owner classifications rather than focusing on the specific question of their eligibility as participants.

The guidance provided does not adequately address all questions regarding working owners’ qualifications as plan participants under ERISA and the IRC. The remand question focuses on whether the Yates factors collectively establish the working owners as plan participants. The regulation clarifies that for group health plans, bona fide partners are included as both employers and employees, with the determination of bona fide status relying on a totality-of-the-circumstances analysis, particularly considering the individual's service to the partnership. The district court incorrectly applied a narrower standard, leading to an erroneous classification of limited partners as bona fide partners. The case is remanded for the district court to apply the comprehensive analysis required by the regulation.

Additionally, the district court must decide if the Department's interpretation deserves Auer deference, while noting that the Government did not invoke Chevron deference, which is therefore not considered. Regarding remedies, the Administrative Procedure Act (APA) empowers courts to set aside unlawful agency actions, meaning the district court's vacatur of the June 1 Termination Decision nullified the agency's action retroactively. Vacatur serves to expunge past agency actions rather than merely block their enforcement, making it a default and appropriate remedy in this context.

Remand with vacatur is the default remedy for unlawful agency actions, as established in United Steel v. Mine Safety and Health Admin. The Department did not sufficiently argue that the district court erred in applying this default rule, resulting in forfeiture of that argument. Consequently, the court upheld the vacatur. Additionally, the district court issued a permanent injunction preventing the Department from denying the ERISA status of the Plan or recognizing Limited Partners as working owners of Data Marketing. However, this injunction is vacated pending further interpretative consideration by the district court on remand. The Supreme Court emphasizes that the Government must act in good faith in its dealings. The Department's failure to comply with this standard contributed to the ruling. Therefore, the district court's judgment is affirmed in part, vacated in part, and remanded for further proceedings.