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.