Alaska Airlines, Inc. v. Transportation Security Administration

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 20, 2009 Decided December 11, 2009

No. 09-1062

ALASKA AIRLINES, INC.,

PETITIONER

v.

TRANSPORTATION SECURITY ADMINISTRATION,

RESPONDENT

On Petition for Review of an Order

of the Transportation Security Administration

M. Roy Goldberg argued the cause and filed the briefs for

petitioner.

Jeffrey Clair, Attorney, U.S. Department of Justice, argued

the cause for respondent. With him on the briefs was Scott R.

McIntosh, Attorney.

Before: SENTELLE, Chief Judge, and ROGERS and

KAVANAUGH, Circuit Judges.

Opinion for the Court by Circuit Judge ROGERS.

2

ROGERS, Circuit Judge: Pursuant to the Aviation and

Transportation Security Act, Pub. L. No. 107–71, 115 Stat. 597

(2001)(codified in 49 U.S.C. § 114 and scattered sections of 49

U.S.C.), the Transportation Security Administration (“TSA”) of

the Department of Homeland Security imposed a $2.50 per

passenger “enplanement” fee to pay for the costs of providing

civil aviation security services. 49 U.S.C. § 44940(a)(1)(2009);

49 C.F.R. § 1510.5. Air carriers collect and remit these fees,

and must allow the TSA access to their records to ensure that

security service fees are being properly collected and remitted.

49 U.S.C. § 44940(e); 49 C.F.R. § 1510.19. Based on an audit

of Alaska Airlines’ records for a four-year period, the TSA

determined that the air carrier owed $1,070,726.28 in additional

passenger security fees. Alaska Airlines challenges this decision

on two grounds: (1) The audit was not random and was skewed

by inclusion of two flights on dates during the start and

reinstitution of passenger fee collections; and (2) It is due a

credit of $738,816.00 for passenger fees it paid but did not

collect from passengers. Because Alaska Airlines has failed to

show that the TSA’s decision was arbitrary, capricious, an abuse

of discretion, or contrary to law, we deny the petition for review.

I.

Shortly after the terrorist attacks on September 11, 2001,

Congress enacted the Aviation and Transportation Security Act

establishing the TSA and vesting it with primary responsibility

for maintaining civil air security. 49 U.S.C. § 114. The Act

required the TSA to impose “a uniform fee” on “passengers of

air carriers” originating at airports in the United States to pay for

the costs of providing “civil aviation security services.”

§ 44940(a)(1). The fees are capped at $2.50 per “enplanement,”

defined as “a person boarding in the United States in scheduled

or nonscheduled service on aircraft,” 49 C.F.R. § 1510.3, and

may not exceed $5.00 per one-way trip. 49 U.S.C. § 44940(c).

3

The Act further provides that these fees “shall be collected by

the air carrier . . . that sells a ticket for transportation,” and then

remitted on a timely basis to the TSA. § 44940(e)(1)–(3). If a

passenger fee “is not collected from the passenger, the amount

of the fee shall be paid by the carrier.” § 44940(d)(2). The TSA

may require carriers to submit information that it determines is

necessary to verify that the proper amount of fees have been

timely collected and remitted. § 44940(e)(4).

Pursuant to the implementing regulations, the TSA in

December 2001 set the passenger fee at $2.50. 49 C.F.R.

§ 1510.5. The fee applied to most flight segments originating at

an airport in the United States, but passengers could not be

charged more than two “enplanements” per one-way trip or four

“enplanements” per round trip. Id. The regulations provided

that the air carrier is responsible for collecting the passenger

fees and remitting them to the TSA, and that the fees must be

based on the passenger’s air travel itinerary at the time the ticket

is purchased. § 1510.9, .13. The passenger may be liable for

additional fees or entitled to a refund based on a voluntary

change in itinerary. § 1510.9(b). However, if the passenger is

involuntarily re-routed, the air carrier is solely liable to the TSA

for any additional security service fees resulting from an

increase in the number of “enplanements.” Id.

In 2006, the TSA issued a clarification regarding certain

recurring issues relating to passenger fees. Letter from Michael

Gambone, Acting Dir., Office of Revenue, Transp. Sec. Admin.

(October 24, 2006) (“2006 clarification”). The TSA clarified

both the definition of a one-way trip and its enforcement policy

for additional fees when involuntary re-routes add

“enplanements” to a passenger’s itinerary. The TSA announced

that, although air carriers were “solely liable to TSA” for such

fees, it would not pursue unpaid involuntary re-route fees unless

the air carrier had already collected that fee from passengers.

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Further, air carriers would no longer be liable for collecting and

remitting involuntary re-route fees after January 1, 2007. The

2006 clarification stated:

All Passenger Fees collected in accordance with this

clarification prior to January 1, 2007 must be remitted

to TSA. Funds so remitted and/or collected are not

subject to any refund, credit or offset against any other

amounts due. (emphasis added).

Shortly before the 2006 clarification, Alaska Airlines

received a letter confirming arrangements for two auditors from

U.S. Customs and Border Protection to conduct a compliance

audit on behalf of the TSA. Letter from Anthony Saranchak,

Assistant Field Dir., Regulatory Audit Div., U.S. Customs and

Border Prot., Dep’t of Homeland Sec., to Brett Weiler, Tax

Manager, Alaska Airlines, Inc. (August 10, 2006). The letter

stated the audit would cover the period between February 1,

2002 and April 30, 2006. The methodology of the audit was

straightforward: The auditors first picked twelve flights that in

their judgment would best represent the entire audit period.

They examined the tickets and records for those flights to

determine if Alaska Airlines had in any instances failed to

impose, collect, or remit the passenger security fee to the TSA.

They found that out of 1,413 instances in which the fee should

have been remitted to the TSA, called “qualifying flight

segments,” in twelve instances Alaska Airlines erroneously

failed to either impose or remit the fee. The auditors then

divided the number of errors (12) by the number of qualifying

flight segments (1,413) to arrive at an error rate of 0.85%, and

extrapolated that error rate to the total amount of fees paid

during the audit period.

Based on the audit findings, the TSA assessed Alaska

Airlines an additional $1,070,726.28 in passenger fees. Letter

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from Pamela Pak, Revenue Compliance Manager, Transp. Sec.

Admin., to Kevin Thiel, Dir. of Revenue Accounting, Alaska

Airlines, Inc. (June 5, 2007). The assessment reflected a

reduction of approximately half a million dollars to account for

any errors caused by the air carrier’s confusion about how to

define a multiple one-way trip prior to issuance of the 2006

clarification. Id. The TSA found a recalculated sample error

rate of 0.57%.

Alaska Airlines pursued administrative review on the

grounds that the audit sample was not randomly drawn and so

could not serve as a basis for conclusions about the entire audit

period. It argued that the sample had been structured to include

flights in the months immediately following initial

implementation and post-suspension reimplementation of the

fee,1 and asserted that errors were more likely to occur at those

times. It also claimed that it was entitled to a refund or credit of

fees it had paid for passengers who were involuntarily re-routed

onto additional “enplanements.” Because the TSA had elected

in the 2006 clarification not to enforce this liability against air

carriers who had failed to remit involuntary rerouting fees, it

argued the TSA was obligated to relieve it of this liability.

The TSA affirmed the additional assessment and the denial

of a refund or credit. Letter from David Nicholson, Assistant

Adm’r, Fin. and Admin./Chief Fin. Officer, Transp. Sec.

Admin., to Brett R. Weiler, Alaska Airlines, Inc. (Oct. 19, 2008)

(“Final Decision”). The TSA explained that while the flights

were not randomly drawn, as the audit report had stated, the use

of the auditor’s professional judgment to select a representative

1

See Emergency Wartime Supplemental Appropriations Act,

Pub. L. 108–11, Title IV, 117 Stat. 604, 605 (2003); Temporary

Suspension of the September 11th Security Fee and the Aviation

Security Infrastructure Fee, 68 Fed. Reg. 27,747 (May 21, 2003).

6

sample of flights was an appropriate audit tool: “Judgmental

sampling was used to ensure the data better represented the

entire audit period for the air carrier.” Final Decision at 2. The

TSA rejected the suggestion that the sample was skewed,

observing that Alaska Airlines had “offered no evidence to

support its contention that the actual results were skewed in any

significant way.” Id. The TSA noted Alaska Airlines’ request

for administrative review did not “specifically describe the

manner and extent of the purported skewed results” but “merely

speculated that the auditors’ choice of samples was against its

interests.” Id. Therefore, “[l]acking any real evidence of the

alleged skewed results, we see no reason to make any

adjustments to the methodology.” Id. Regarding the refund or

credit, the TSA explained the 2006 clarification had “clearly

indicated” that “no refund, credit or offset . . . would be

provided where an air carrier had correctly collected and

remitted” such fees and that it had authority to retain such fees

remitted before it suspended enforcement of the regulatory

requirement in 2006. Id. at 2–3. Alaska Airlines petitions for

review.

II.

Alaska Airlines contends that the auditors’ non-random

selection of the flights to audit was based on the higher potential

for passenger fee collection errors in certain time periods and

thus caused the error rate to be overstated. Specifically, it

maintains that out of only twelve flights examined, two were

selected because the auditors assumed there would be a higher

than normal incidence of error when the air carrier was

instituting or reinstituting its collection and remittance

proceedings. It maintains that the sampling methodology thus

improperly extrapolated this allegedly higher error rate over the

entire fifty-one months under review.

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Our review is limited to determining whether the TSA acted

arbitrarily or capriciously, abused its discretion, or acted

contrary to law. Boca Airport, Inc. v. FAA, 389 F.3d 185, 189

(D.C. Cir. 2004); 5 U.S.C. § 706(2)(A); 49 U.S.C. § 46110; see

also Southwest Airlines v. Transp. Sec. Admin., 554 F.3d 1065,

1069, 1073 (D.C. Cir. 2009). Because agency determinations

receive “an extreme degree of deference [when] they involve

complex judgments about sampling methodology and data

analysis that are within the agency’s technical expertise,”

Kennecott Greens Creek Min. Co. v. Mine Safety & Health

Admin., 476 F.3d 946, 956 (D.C. Cir. 2007)(internal quotation

marks omitted), Alaska Airlines must demonstrate that the audit

methodology accepted by the TSA was so flawed that the audit

findings on which the TSA relied bore “no rational relationship

to the characteristics of the data to which it is applied,”

Appalachian Power Co. v. EPA, 249 F.3d 1032, 1052 (D.C. Cir.

2001). This it fails to do.

Alaska Airlines’ technical objection to the use of non-

random judgmental sampling is unfounded. The use of such

sampling is an accepted tool among auditors and a recognized

means of drawing an appropriately representative sample of the

population under study. See American Institute of Certified

Public Accountants, AICPA PROFESSIONAL STANDARDS, AU

§ 350.03–.04, .39 (1995). As the TSA noted, Alaska Airlines

presented no expert evidence challenging the use of judgmental

audits.

Alaska Airlines’ assertion that the audit sample was skewed

toward flights likely to have a high error rate is also unsupported

by record evidence. The auditors’ methodology drew a broad

and varied sample, examining more than 1,400 passenger flight

segments serving airports throughout Alaska Airlines’ route

system and drawn from dates throughout the audit period. This

is consistent with the requirement that “[w]henever sampling is

8

used in an audit . . . sample items [must] be selected in such a

way that they can be expected to be representative of the

population from which they are drawn. . . . If each item in a

population or subpopulation has a chance (not necessarily an

equal chance) of being selected, the resulting sample is

potentially representative of the characteristics contained in the

population or subpopulation.” VINCENT M. O’REILLY ET. AL,

MONTGOMERY’S AUDITING 315 (11th ed. 1990) (hereinafter

“MONTGOMERY’S AUDITING”). Alaska Airlines presented to the

TSA no contrary expert opinion or auditing standard.

The unstated assumption underlying Alaska Airlines’

challenge is that random selection is the only feasible means of

obtaining a sample that fairly represents the audited population

and that any other methodology is invalid for purposes of

deriving conclusions about the population as a whole. However,

the record shows that the TSA engaged auditors with expertise

in the appropriate design of audit investigations and the

evaluation of audit data. The TSA responded to Alaska

Airlines’ challenges by explaining that the sampling was an

“appropriate audit tool” that provided an adequate basis for the

auditors’ conclusions. Final Decision at 2.

The only basis offered by Alaska Airlines for suggesting

that the expert judgment of the auditors was flawed is the

assertion of its Tax Manager, Brett T. Weiler, that during

discussion of the audit “[he] was told that a flight conducted

during the initial implementation of the fee and at the restart of

the fee would be included in the sample because that is where

collection errors would most likely occur.” Letter from Brett T.

Weiler, Tax Manager, Alaska Airlines, Inc., to Patrick

McCracken, U.S. Dep’t of Homeland Sec. (Dec. 14, 2006). The

TSA considered this assertion and concluded, in light of its

requirement that auditors conform to professional standards of

independence and impartiality, that the Tax Manager must have

9

misunderstood the auditor. Final Decision at 2; see also

American Institute of Certified Public Accountants, AICPA

PROFESSIONAL STANDARDS, AU § 220 (1995). The TSA

explained: “[T]he auditor did not say particular flights were

selected to potentially identify an increased number of errors.

The auditor simply discussed that the goal in applying the

methodology was to select a representative sample and to review

sample items for compliance with the specific laws and

regulations.” Final Decision at 2. Viewed as a matter of

credibility, the court will generally defer to the factfinder’s

evaluation. E.g., King Elec., Inc. v. NLRB, 440 F.3d 471, 475

(D.C. Cir. 2006). But there is a further problem for Alaska

Airlines: It offered neither expert opinion nor empirical

evidence to support its assertion that the audit was

impermissibly skewed.

Three types of errors were found by the auditors: (1)

incorrect categorization of a collected fee as a domestic tax and

resulting failure to remit that fee; (2) failure to identify multiple

one-way trips; and (3) failure to impose the fee on all qualifying

flight segments of a round trip itinerary. Without pointing to

record evidence, Alaska Airlines assumes that more errors

occurred during the months immediately following the

institution and reinstitution of the passenger fees than during

other months. Although it had access to its own records, it

presented no evidence to the TSA that the error rate for those

two particular flights in the sample was higher than for flights at

other times. Its attempt on appeal to make up for the absence of

record evidence by relying on precedent involving the

sentencing of criminal defendants misses the mark, for that

precedent supports the auditor’s approach of ensuring that the

sample was fairly representative of the activity during the audit

10

period.2 Likewise its citation to MONTGOMERY’S AUDITING in

its reply brief not only comes too late but fails to demonstrate

that the audit methodology resulted in findings that bore “no

rational relationship to the characteristics of the [flight] data.”

Appalachian Power Co., 249 F.3d at 1052. Rather, the section

of MONTGOMERY’S AUDITING on which Alaska Airlines now

relies states only that sample items should be selected from the

whole population in order to be representative. MONTGOMERY’S

AUDITING at 279, 315–17.

The record evidence shows that the auditors’ sampling

methodology drew broadly from flights in every year during the

audited period and that the sampling was designed to select a

fairly representative sample of the audited population. The

TSA’s rejection of Alaska Airlines’ assertion of deliberate bias

in the sample selection is supported by substantial evidence, and

Alaska Airlines has not supported its assertion with expert or

empirical evidence that the errors found by the auditors were

peculiar to flights during the start-up or reinstitution periods.

To the extent Alaska Airlines now suggests the sample of flights

was too small, it did not raise this issue before the TSA and

offers no excuse for not doing so; that argument is forfeited. 49

U.S.C. § 46110(d); see also ExxonMobil Oil Corp. v. FERC, 487

F.3d 945 (D.C. Cir. 2007). Consequently, having failed to

support its challenge to the audit methodology based on the non-

random selection of the twelve flights by either expert opinion

2

See, e.g., United States v. Culps, 300 F.3d 1069 (9th Cir.

2002)(holding that a district court must base estimates on

demonstrably representative instances); United States v. Rivera-

Maldonado, 194 F.3d 224 (1st Cir. 1999)(remanding for resentencing

where district court’s estimates were clearly miscalculated and not

representative); United States v. Johnson, 185 F.3d 765 (7th Cir.

1999)(holding that district court’s estimate must be based on rigorous

analysis and representative evidence rather than guesswork).

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or empirical evidence, Alaska Airlines has failed to show the

TSA’s decision to adhere to the audit methodology was arbitrary

or capricious, an abuse of discretion, or contrary to law.

III.

Alaska Airlines challenges the denial of its request for a

credit on the ground that the TSA failed to consider that Alaska

did not collect the fees from passengers.3 In the Final Decision

the TSA stated: “[The] TSA clearly indicated in the October 24,

2006 clarification . . . that no refund, credit or offset against any

other amounts due would be provided where an air carrier had

correctly collected and remitted liabilities arising from

involuntary re-routes.” Final Decision at 2–3. Alaska Airlines

points out that it did not collect involuntary re-route fees from

its passengers but paid them itself.

The 2006 clarification interpreted 49 C.F.R. § 1510.9,

which provides that the air carrier is “solely liable to TSA for

additional security service fees imposed because of involuntary

enplanement changes to the itinerary” (emphasis added).

Inclusion of the “and/or” phrase in the 2006 clarification

indicates that the policy change was narrower than Alaska

Airlines suggests. Because the TSA incorporated the 2006

clarification, its Final Decision rejecting the requested credit is

fairly read in keeping with the text of the clarification. The

explanation of the reasons for the policy change demonstrates

the TSA understood that involuntary re-route fees were

frequently paid out of the air carrier’s own funds. See 2006

3

Alaska Airlines no longer claims entitlement to a credit

based on a challenge to the enforcement policy set forth in the 2006

clarification. See Pet’r’s Reply Br. 25; Oral Argument Tape of Oct.

20, 2009 at 28.50–28.56. We therefore treat as abandoned those

portions of its brief.

12

Clarification at 3. As some air carriers had collected involuntary

re-route fees from passengers, the TSA decided that those fees

must be remitted to the TSA notwithstanding the prospective

change in its enforcement policy. Id. The TSA’s decision to

pursue only fees collected from passengers did not modify its

policy that the TSA would not credit or return corporate funds

that had already been remitted for involuntary re-routes.

Alaska Airlines’ objection that the denial of a credit is

inconsistent with the TSA’s refund policy also fails. That

refund policy authorized refunds to the air carrier where it was

obligated to refund the fee to a passenger who never used the

purchased ticket and thus did not ultimately incur a fee liability.

Letter from Randall Fiertz, Acting Dir. of Revenue, Transp. Sec.

Admin., to James A. Hultquist, Managing Dir., Taxes, Air

Trans. Ass’n (Nov. 21, 2002). The TSA could reasonably

distinguish between circumstances in which security service fees

were previously due and those in which no fees had ever been

incurred.

Accordingly, we deny the petition for review.