The opinion
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
)
TEXAS NEIGHBORHOOD SERVICES, )
)
Plaintiff, )
)
v. ) Civil Action No. 14-cv-1545 (TSC)
)
UNITED STATES DEPARTMENT OF )
HEALTH AND HUMAN SERVICES; )
and SYLVIA M. BURWELL, Secretary, )
)
Defendants. )
)
MEMORANDUM OPINION
Plaintiff Texas Neighborhood Services (“TNS”) brings this action under the
Administrative Procedure Act, 5 U.S.C. § 701 et seq. (the “APA”). TNS alleges that the United
States Department of Health and Human Services (“HHS”)1 violated section 706(2)(A) of the
APA when one of its divisions, the Administration for Children and Families (“ACF”)2
disallowed approximately $1.3 million in incentive compensation charged to TNS’s Head Start
awards for fiscal years 2010, 2011 and 2012 (“FY 2010,” “FY 2011” and “FY 2012”).
TNS moves for summary judgment pursuant to Federal Rule of Civil Procedure 56.
It argues that Defendant’s decision to disallow the aforementioned charges was arbitrary and
1
Secretary of HHS Sylvia Burwell is sued in her official capacity. (See Compl. ¶ 4). Given the
well-established principle that a suit against a public official in her official capacity “is not a suit
against the official but rather is a suit against the official’s office,” this Memorandum Opinion
will refer to HHS as the sole Defendant in this action. Will v. Mich. Dep’t of State Police, 491
U.S. 58, 71 (1989); see also Kentucky v. Graham, 473 U.S. 159, 166 (1985) (“[A]n official-
capacity suit is, in all respects other than name, to be treated as a suit against the entity.”).
2
Unless otherwise noted, references to “Defendant” will encompass HHS, ACF and HHS’s
Departmental Appeals Board (the “Board”).
capricious, contrary to law, and an abuse of discretion because (i) the decision by the Board
upholding the disallowance was based on different grounds than Defendant’s initial disallowance
decision; (ii) the disallowance decision is contrary to Defendant’s prior interpretations of the
relevant cost principles; and (iii) Defendant failed to differentiate between proper and improper
incentive payments during the fiscal years in question, instead disallowing across the board all
incentive payments made during those years. Defendant cross-moves for summary judgment,
arguing that the administrative record supports the disallowance of the aforementioned charges,
and that TNS’s arguments to the contrary are without merit.
Upon consideration of the parties’ briefs, and for the reasons set forth below, TNS’s
motion is hereby DENIED and Defendant’s cross-motion is hereby GRANTED.
I. BACKGROUND
TNS is a private non-profit organization that provides community services, including
Head Start and Early Head Start services, to children in nine Texas counties. Non-profit
organizations that receive federal grants, including Head Start grants, are subject to the cost
principles in Office of Management and Budget Circular A-122, which are now codified at
45 C.F.R. § 75.400 et seq. (the “Cost Principles”).3 The Cost Principles provide that a cost is
allowable under a federal award if, among other things, it is necessary and reasonable for the
performance of the award, allocable thereto and adequately documented. See id. § 75.403.
The Cost Principles also state as follows with regard to incentive compensation:
Incentive compensation to employees based on cost reduction, or efficient
performance, suggestion awards, safety awards, etc., is allowable to the extent that
the overall compensation is determined to be reasonable and such costs are paid or
3
When TNS’s challenge to the disallowance decision at issue in this case was pending before
the Board, the Cost Principles were codified at 2 C.F.R. Part 230. That part has since been
superseded. See 45 C.F.R. § 75.104(a)(6). This Memorandum Opinion will refer only to the
present codification of the Cost Principles and any other relevant federal regulations.
2
accrued . . . pursuant to an established plan followed by the [organization] so
consistently as to imply, in effect, an agreement to make such payment.
Id. § 75.430(f).4
The Cost Principles further provide that a “cost is reasonable if, in its nature and amount,
it does not exceed that which would be incurred by a prudent person under the circumstances
prevailing at the time the decision was made to incur the cost.” Id. § 75.404. Consideration
must be given to the following factors, among others, in determining the reasonableness of a
given cost:
“Whether the cost is of a type generally recognized as ordinary and necessary
for the operation of the [organization] or the proper and efficient performance
of the Federal award”;
“Market prices for comparable . . . services for the geographic area”;
“Whether the individuals concerned acted with prudence in the circumstances
considering their responsibilities”; and
“Whether the [organization] significantly deviates from its established practices
and policies regarding the incurrence of costs.”
Id. If an organization “fails to comply with Federal statutes, regulations, or the terms and
conditions of a Federal award,” an awarding agency is permitted, among other things, to
“[d]isallow (that is, deny both use of funds and any applicable matching credit for) all or part of
the cost of the activity or action not in compliance.” Id. § 75.371(b).
4
The Cost Principles also provide that incentive compensation awards are allowable to the
extent that they are paid “pursuant to an agreement entered into in good faith between the
[organization] and the employees before the services were rendered.” 45 C.F.R. § 75.430(f).
Since neither party contends that such a formal agreement exists here, however, the court’s
discussion of section 75.430(f) will focus only on whether the challenged incentive
compensation awards were made “pursuant to an established plan followed by the [organization]
so consistently as to imply, in effect, an agreement to make such payment.” Id.
3
In 2007, TNS instituted an incentive compensation policy (the “2007 Policy”), the
purpose of which was “to allow TNS personnel to receive increases in salary for consistent or
exemplary job performance in the form of incentive awards paid to individuals pursuant to an
incentive plan approved by the Executive Director of TNS.” (J.A. 136).5 The 2007 Policy also
set forth a number of “Guidelines.” One Guideline states:
To be eligible for incentive compensation awards, TNS managerial staff must
present to the TNS Executive Director a plan of performance, which defines the
measures that must be achieved prior to payment of any incentive award. The
specific measures may include, but [are not] limited to, cost reduction, efficient
performance, safety awards, or other types of measure[s] identified in the
performance plan.
(Id.). Other Guidelines provide that, “[t]o be eligible to receive incentive compensation,
employees must not have received verbal or written performance warnings within 90 days of the
payment of the incentive,” and that “[f]or employees that have been with TNS more than one
year, a current employee evaluation with a satisfactory evaluation must be on file.” (Id.).
In 2009, TNS instituted the “plan of performance” referenced in the 2007 Policy (the
“2009 Plan”). (J.A. 138-42). The 2009 Plan states that “TNS recognizes [that] some of its
employees are higher performers than other employees in similar positions and wishes to
compensate those higher performing employees in a manner [commensurate] with their
contributions to the organization.” (J.A. 139). It also states that
it is the plan of the TNS board of directors to direct the Executive Director to
operate the grants at approx. 95% of full funding by implementing a system of cost
reductions, cost management and efficient purchasing processes. Should the
management of TNS be successful in operating the programs efficiently, then all
staff will be able to share in an incentive plan to help the agency achieve fair and
reasonable compensation for all employees.
(Id.). The 2009 Plan further provides that “[n]ot all incentive compensation should be paid at the
5
Citations to “J.A. __” refer to the Joint Appendix filed by the parties in this case.
4
same percentage of annual salary,” and that “[i]ncentives for superior work performance should
be higher than for average or below average performers.” (Id.). It also dictates that “[n]o
employee compensation will be in excess of the Level II Executive Compensation set by the
Federal Government at the time of the payment,” and that “[t]otal compensation for all
employees will not exceed the maximum compensation for that position” as determined by a
wage comparability study prepared for TNS. (Id.). Additionally, the 2009 Plan contains an
appendix with a matrix for TNS to follow in “determining employee worth to the organization”
when deciding on incentive compensation awards. (J.A. 139, 141-42).6 Lastly, the 2009 Plan
explicitly states that TNS will follow the Cost Principles in making incentive compensation
awards. (J.A. 139-40).
In February 2013, Defendant conducted a triennial monitoring review of TNS’s
expenditure of Head Start grant funds in FY 2010, FY 2011 and FY 2012. (J.A. 123-25). That
review led to an April 2013 monitoring report in which Defendant determined that TNS was out
of compliance with the Cost Principles (the “Monitoring Report”). (J.A. 123-30). The
6
Additionally, as the Board noted, the 2009 Plan’s matrix appears to be inconsistent with the
2007 Policy:
[T]he [2007 Policy] provides that in order to be eligible to receive incentive
compensation, employees “must not have received verbal or written performance
warnings within 90 days of the payment of the incentive.” Yet, one of the rating
criteria in the matrix for every type of employee is the employee’s history of
“[d]isciplinary actions and write-up for issues.” Employees with no disciplinary
actions or write-ups receive 100% of the allotted points for that criterion
(10-20 points, depending on the type of employee), employees with one
disciplinary action or write-up receive 50% of the allotted points, and employees
with two or more disciplinary actions or write-ups receive 0% of the allotted points.
There is nothing in the matrix indicating that an employee could not qualify for
incentive compensation if a performance warning was received within 90 days of
the date the compensation would be paid.
(J.A. 4 n.2) (citations to administrative record omitted).
5
Monitoring Report stated that TNS “did not ensure incentive compensation payments to
employees were allowable to the extent the overall compensation was determined to be
reasonable,” and that TNS “was unable to document the basis for amounts awarded as incentive
compensation.” (J.A. 127).7
In September 2013, Defendant sent TNS a letter disallowing $1,332,698.09 in
unsupported incentive payments for FY 2010, FY 2011 and FY 2012 pursuant to the Cost
Principles (the “Disallowance Letter”) (J.A. 23-26). The Disallowance Letter reiterated the
findings in the Monitoring Report, stating that the incentive compensation payments made
during these three years were unreasonable and insufficiently supported. (J.A. 23-24).
Specifically, it stated that “there was no support to indicate which employee met the
requirements of which band of [performance measure] criteria, nor how much would be paid per
employee for meeting each band,” and that “the amounts paid out as ‘incentives’ were
unreasonable in total based on the high percentage of total incentive payments versus total salary
costs, and unreasonable on a per individual basis for some administrative staff.” (Id.).8
7
As the parties point out in their briefs, the Monitoring Report makes a reference to “plans of
performance” which is somewhat confusing. The 2007 Policy requires the presentation to the
TNS Executive Director of “a plan of performance” defining “the measures that must be
achieved prior to payment of any incentive award.” (J.A. 136). The 2009 Plan is, in fact, that
“plan of performance.” (J.A. 138-42). The Monitoring Report, however, uses the phrase “plans
of performance” to describe missing individualized documentation supporting the incentive
compensation that TNS awarded to its employees in the subject years. (See J.A. 127-28) (stating
that “[t]he grantee was unable to document the basis for amounts awarded as incentive
compensation” and that “individual plans of performance” were needed “to support payments to
employees receiving incentive compensation”). Confusing nomenclature aside, the Monitoring
Report nevertheless makes clear that Defendant determined that TNS had failed “to document
the basis for amounts awarded as incentive compensation.” (Id.).
8
The Disallowance Letter echoes the Monitoring Report’s use of the term “plans of
performance,” discussed supra. As with the Monitoring Report, however, the Disallowance
Letter makes clear that the disallowance was based, in part, on TNS’s failure to provide adequate
documentary support for the challenged incentive compensation awards.
6
TNS timely appealed Defendant’s disallowance decision to the Board. Board precedent
establishes that, under the applicable regulations and Cost Principles, “a grantee bears the burden
of documenting the existence and allowability of its expenditures of federal funds.” Touch of
Love Ministries, Inc., DAB No. 2393, 2011 WL 3251319, at *3 (2011) (citing Benaroya
Research Inst., DAB No. 2197, 2008 WL 4338767, at *2 (2008) (collecting cases)); see also
Recovery Res. Ctr., Inc., DAB No. 2063, 2007 WL 522127, at *8 (2007) (“Being able to account
for the expenditure of federal funds is a central responsibility of any grantee.”) (citations
omitted). Thus, “[o]nce a cost is questioned as lacking documentation, the grantee bears the
burden to document, with records supported by source documentation, that the costs were
actually incurred and represent allowable costs, allocable to the grant.” Northstar Youth Servs.,
DAB No. 1884, 2003 WL 21801698, at *3 (2003) (citations omitted).
The Board issued its decision in May 2014. It found that Defendant “properly disallowed
incentive compensation payments that TNS ha[d] not established are reasonable, supported by
adequate documentation, and made pursuant to a pre-existing agreement or established plan.”
(J.A. 3). TNS subsequently moved the Board to reconsider, making the same three arguments
that it makes in this litigation. (J.A. 87-100). In July 2014, the Board ruled that TNS had failed
to show a clear error of fact or law in the Board’s decision, and declined to reconsider. (J.A.
14-20). TNS then commenced the instant litigation.
II. LEGAL STANDARDS
A. The Administrative Procedure Act
Under the APA, a reviewing court must set aside an agency action that is “arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C.
§ 706(2)(A). “[T]he party challenging an agency’s action as arbitrary and capricious bears the
burden of proof.” San Luis Obispo Mothers for Peace v. U.S. Nuclear Regulatory Comm’n, 789
7
F.2d 26, 37 (D.C. Cir. 1986) (en banc). This court’s limited function in reviewing a final agency
action under the APA is “to determine whether or not as a matter of law the evidence in the
administrative record permitted the agency to make the decision it did.” Kaiser Found. Hosps. v.
Sebelius, 828 F.Supp. 2d 193, 198 (D.D.C. 2011) (quotation and citations omitted); see also
Zevallos v. Obama, 793 F.3d 106, 112 (D.C. Cir. 2015).
The scope of review under the arbitrary and capricious standard is “‘highly deferential.’”
Zevallos, 793 F.3d at 112 (quoting Islamic Am. Relief Agency v. Gonzales, 477 F.3d 728, 732
(D.C. Cir. 2007)). The scope of review is also “narrow,” such that a court “is not to substitute its
judgment for that of the agency.” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut.
Auto. Ins. Co., 463 U.S. 29, 43 (1983). Yet,
courts retain a role, and an important one, in ensuring that agencies have engaged
in reasoned decisionmaking. When reviewing an agency action, [a court] must
assess, among other matters, “‘whether the decision was based on a consideration
of the relevant factors and whether there has been a clear error of judgment.’” That
task involves examining the reasons for agency decisions – or, as the case may be,
the absence of such reasons.
Judulang v. Holder, 132 S. Ct. 476, 483-84 (2011) (quoting State Farm, 463 U.S. at 43) (itself
quoting Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc., 419 U.S. 281, 285 (1974));
see also Pharm. Research & Mfrs. of Am. v. F.T.C., 790 F.3d 198, 209 (D.C. Cir. 2015) (“The
touchstone of arbitrary and capricious review is reasoned decisionmaking.”) (citation and
alteration omitted).
Simply put, “the agency must explain why it decided to act as it did.” Butte Cty. v.
Hogen, 613 F.3d 190, 194 (D.C. Cir. 2010). But this explanation need not be “a model of
analytic precision to survive a challenge.” Coburn v. McHugh, 679 F.3d 924, 934 (D.C. Cir.
2012) (quotation omitted). Rather, a reviewing court must “uphold a decision of less than ideal
clarity if the agency’s path may reasonably be discerned.” Bowman Transp., 419 U.S. at 286
8
(citation omitted). Thus, a reviewing court “will not disturb the decision of an agency that has
‘examined the relevant data and articulated a satisfactory explanation for its action including a
rational connection between the facts found and the choice made.’” MD Pharm., Inc. v. Drug
Enforcement Admin., 133 F.3d 8, 16 (D.C. Cir. 1998) (quoting State Farm, 463 U.S. at 43).
B. Summary Judgment
Summary judgment is an appropriate mechanism for a district court to determine
whether, as a matter of law, an agency’s decision “is supported by the administrative record and
otherwise consistent with the APA standard of review.” Stuttering Found. of Am. v. Springer,
498 F. Supp. 2d 203, 207 (D.D.C. 2007) (citation omitted); see also Deppenbrook v. Pension
Benefit Guar. Corp., 778 F.3d 166, 171 (D.C. Cir. 2015) (stating that a district court’s grant of
summary judgment to an agency should be upheld so long as the agency met the APA’s arbitrary
and capricious standard). When reviewing an agency’s action, the “entire case on review is a
question of law,” Am. Bioscience, Inc. v. Thompson, 269 F.3d 1077, 1083 (D.C. Cir. 2001)
(quotation omitted), and a district court generally may not look outside of the administrative
record. 5 U.S.C. § 706; see also Camp v. Pitts, 411 U.S. 138, 142 (1973) (“In applying that
standard, the focal point for judicial review should be the administrative record already in
existence, not some new record made initially in the reviewing court.”); Hill Dermaceuticals,
Inc. v. FDA, 709 F.3d 44, 47 (D.C. Cir. 2013) (“[I]t is black-letter administrative law that in an
APA case, a reviewing court ‘should have before it neither more nor less information than did
the agency when it made its decision.’”) (quoting Walter O. Boswell Mem’l Hosp. v. Heckler,
749 F.2d 788, 792 (D.C. Cir. 1984)).
In an APA case such as this one, summary judgment may be granted only 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); see also Anderson v. Liberty Lobby, Inc.,
9
477 U.S. 242, 247-48 (1986) (“[T]he mere existence of some alleged factual dispute between the
parties will not defeat an otherwise properly supported motion for summary judgment; the
requirement is that there be no genuine issue of material fact.”) (emphasis in original); Holcomb
v. Powell, 433 F.3d 889, 895 (D.C. Cir. 2006). Summary judgment may be rendered on a “claim
or defense . . . or [a] part of each claim or defense.” Fed. R. Civ. P. 56(a).
“A party asserting that a fact cannot be or is genuinely disputed must support the
assertion by . . . citing to particular parts of materials in the record.” Fed. R. Civ. P. 56(c)(1)(A).
“A fact is ‘material’ if a dispute over it might affect the outcome of a suit under governing law;
factual disputes that are ‘irrelevant or unnecessary’ do not affect the summary judgment
determination. An issue is ‘genuine’ if ‘the evidence is such that a reasonable jury could return a
verdict for the nonmoving party.’” Holcomb, 433 F.3d at 895 (quoting Liberty Lobby, 477 U.S.
at 248) (citation omitted). The party seeking summary judgment “bears the heavy burden of
establishing that the merits of his case are so clear that expedited action is justified.” Taxpayers
Watchdog, Inc., v. Stanley, 819 F.2d 294, 297 (D.C. Cir. 1987).
In considering a motion for summary judgment, “[t]he evidence of the non-movant is to
be believed, and all justifiable inferences are to be drawn in his favor.” Liberty Lobby, 477 U.S.
at 255; see also Mastro v. Potomac Elec. Power Co., 447 F.3d 843, 850 (D.C. Cir. 2006) (“We
view the evidence in the light most favorable to the nonmoving party and draw all reasonable
inferences in its favor.”). The non-moving party’s opposition, however, must consist of more
than mere unsupported allegations or denials, and must be supported by affidavits, declarations
or other competent evidence setting forth specific facts showing that there is a genuine issue for
trial. See Fed. R. Civ. P. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). The
10
non-movant is “required to provide evidence that would permit a reasonable jury to find” in his
favor. Laningham v. U.S. Navy, 813 F.2d 1236, 1242 (D.C. Cir. 1987).
III. ANALYSIS
Incentive compensation awards such as the ones at issue in this litigation are allowable
under the Cost Principles insofar as they are “adequately documented,” 45 C.F.R. § 75.403(g),
“determined to be reasonable,” and paid “pursuant to an established plan followed by [an
organization] so consistently as to imply, in effect, an agreement to make such payment.” Id.
§ 75.430(f). The Board found that TNS “failed to show that its incentive compensation awards
were reasonable,” “failed to follow its policies related to incentive compensation and did not
provide adequate documentation to support its incentive compensation awards.” (J.A. 3, 9).
Given the court’s limited role in reviewing a final agency action under the APA, and the narrow,
deferential scope of that review, the court finds that TNS has not met its burden of establishing
that the disallowance decision was “arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law.” 5 U.S.C. § 706(2)(A).
A. The Board’s Decision Upholding The Disallowance Decision Was
Based On The Same Grounds As The Initial Disallowance Decision
TNS argues that the grounds for disallowance were different as between the
Disallowance Letter and the Board’s decision and that, as a result, it was not provided with
adequate notice as to the ultimate basis for the disallowance decision. (See Pl.’s Br. at 10-14).
The court disagrees, and finds that the Board’s decision is consistent with the Disallowance
Letter. For example, the Disallowance Letter states that TNS “was unable to document the basis
for amounts awarded as incentive compensation,” and that TNS’s incentive compensation
awards for FY 2010, FY 2011 and FY 2012 were “unreasonable and unallowable due to lack of
support.” (J.A. 23). The Board’s decision was based in large part on the same grounds – i.e.,
11
that TNS “failed to show that its incentive compensation awards were reasonable” and “did not
provide adequate documentation to support its incentive compensation awards.” (J.A. 3, 9).9
TNS contends, however, that the Board “sua sponte based its decision on the supposed
absence of documentation not addressed in [the Disallowance Letter], thus depriving [it] of the
opportunity [to] address the reasoning underlying the final agency action.” (Pl.’s Br. at 11).
TNS essentially argues that, because the Disallowance Letter did not explicitly state that it
needed to support the challenged incentive compensation awards with employee-specific
documentation, it should not be faulted for failing to provide the Board with such documentation.
(See id. at 11-14). The court finds a number of flaws in this argument.
First, TNS overlooks the fact that the Board did not base its decision solely on the lack of
employee-specific documentation. The Board also found that the incentive compensation awards
at issue in this litigation were unreasonable, and that they had not been made pursuant to TNS’s
2007 Policy and 2009 Plan. (See J.A. 8-9).
Second, TNS’s argument ignores the well-settled principle that, “[o]nce a cost is
questioned as lacking documentation, the grantee bears the burden to document, with records
9
The Board’s decision also found that TNS “failed to follow its policies related to incentive
compensation” (J.A. 3), thereby violating the Cost Principles’ requirement that incentive
compensation be paid “pursuant to an established plan followed by the [organization] so
consistently as to imply, in effect, an agreement to make such payment.” 45 C.F.R. § 75.430(f).
While the Disallowance Letter did not make the same finding regarding TNS’s failure to follow
its own policies, this would seem to stem from the fact that many, if not all, of the documents
upon which the Board based this finding were only provided to it after the Disallowance Letter
was issued. (See, e.g., Pl.’s Br. at 12) (noting that TNS produced certain charts of employee pay
information and the 2009 Plan “[i]n its submissions to the [Board]”). The court therefore does
not take issue with this minor divergence between the Disallowance Letter and the Board’s
decision, which, in any event, is not challenged by TNS. The court also notes that the extent to
which an organization “deviates from its established practices and policies regarding the
incurrence of costs” is part of the reasonableness calculus under the Cost Principles, and that the
Disallowance Letter clearly stated that the challenged incentive compensation awards were
unreasonable. 45 C.F.R. § 75.404(e).
12
supported by source documentation, that the costs were actually incurred and represent
allowable costs, allocable to the grant.” Northstar, 2003 WL 21801698, at *3 (citations omitted)
(emphasis added). While TNS provided certain pay records to the Board, it simply did not
support those records with the requisite “source documentation.” Id.10
Third, TNS marshals no authority to support the proposition that Defendant was required
to specify precisely which documents were needed to support its incentive compensation awards.
The Disallowance Letter stated that the challenged incentive compensation awards were
“unallowable due to lack of support,” and that “there was no support to indicate which employee
met the requirements of which band of [performance measure] criteria, nor how much would be
paid per employee for meeting each band.” (J.A. 23-24). The court finds that this sufficed to put
TNS on notice regarding the need to provide source documentation to support the challenged
awards.
Fourth, TNS ignores its own 2007 Policy, which requires, among other things, that, “[f]or
employees that have been with TNS more than one year, a current employee evaluation with a
satisfactory evaluation must be on file,” and that, in order “[t]o be eligible to receive incentive
compensation, employees must not have received verbal or written performance warnings within
90 days of the payment of the incentive.” (J.A. 136). Despite these requirements, TNS did not
10
TNS has appended “more than 2,000 pages showing application of the incentive pay matrix for
individual employees for 2010 through 2012” to its reply brief. (Pl.’s Reply Br. at 9). This
would appear to be the missing source documentation for the challenged incentive compensation
awards. As these documents are not part of the administrative record in this case, and as TNS
has not established that the court may review such “extra-record” materials here, the court will
not consider them. See, e.g., Nat’l Min. Ass’n v. Jackson, 856 F. Supp. 2d 150, 156-57 (D.D.C.
2012) (setting forth four exceptions rendering extra-record evidence reviewable by reviewing
court in APA cases, none of which are applicable here) (citing IMS, P.C. v. Alvarez, 129 F.3d
618, 624 (D.C. Cir. 1997); Cape Hatteras Access Pres. Alliance v. U.S. Dep’t of Interior, 667
F.Supp. 2d 111, 115-16 (D.D.C. 2009)).
13
provide Defendant with employee evaluations to support its incentive compensation awards, nor
did it provide any records establishing that the employees who received such awards had not
received any performance warnings within 90 days of receiving those awards. TNS cannot
plausibly argue that it did not know what was required to adequately document the challenged
incentive compensation awards when its own 2007 Policy provided it with the requisite notice.
Fifth, TNS overlooks the fact that the Disallowance Letter cited specific examples of
individual employees whose incentive compensation Defendant considered unreasonable. (See,
e.g., J.A. 23-24) (“the amounts paid out as ‘incentives’ were . . . unreasonable on a per individual
basis for some administrative staff that received incentive payments as high as $39,000 each in
2012 and $25,000 each in 2011”). This should have put TNS on notice regarding the need to
rebut such individualized findings with similarly individualized documentation.
Sixth, Defendant raised the need for employee-specific documentation in its response
brief before the Board. Among other things, Defendant (i) attacked TNS’s claim “that it was not
required to document individual performance” (J.A. 49); (ii) argued that TNS had not
sufficiently documented the challenged incentive compensation awards in part because it “failed
to have specific documentation of how the employees’ performance was measured and how
much would be paid to each employee” (id.); and (iii) pointed out the absence of any “individual
performance evaluations indicating the employees’ contribution to the program” (J.A. 51). Thus,
at the very latest, TNS was aware of Defendant’s position regarding the need for employee-
specific documentation prior to filing its reply brief before the Board, and was by no means
“depriv[ed] . . . of the opportunity [to] address the reasoning underlying the final agency action.”
(Pl.’s Br. at 11).
14
For all of these reasons, the court rejects TNS’s argument that Defendant failed to
provide it with adequate notice regarding the grounds for its disallowance decision prior to the
issuance of the Board’s decision.
B. The Board’s Determination That TNS Failed To Follow The 2007 Policy And 2009
Plan Was Not Arbitrary, Capricious, Contrary To Law Or An Abuse Of Discretion
The Cost Principles provide that incentive compensation awards are allowable insofar as
they are made “pursuant to an established plan followed by the [organization] so consistently as
to imply, in effect, an agreement to make such payment.” 45 C.F.R. § 75.430(f). Together, the
2007 Policy and 2009 Plan form the requisite “established plan.” As noted above, the 2007
Policy provides that in order “[t]o be eligible to receive incentive compensation, employees must
not have received verbal or written performance warnings within 90 days of the payment of the
incentive.” (J.A. 136). It also states that, “[f]or employees that have been with TNS more than
one year, a current employee evaluation with a satisfactory evaluation must be on file.” (Id.).
The 2009 Plan provides that “[n]ot all incentive compensation should be paid at the same
percentage of annual salary,” and that “[i]ncentives for superior work performance should be
higher than for average or below average performers.” (J.A. 139). As mentioned above, the
2009 Plan also contains an appendix with a matrix for “determining employee worth to the
organization” to be used in calculating incentive compensation awards. (J.A. 139, 141-42).
The Board determined that the challenged incentive compensation awards did not follow
the requirements set out in the 2007 Policy and 2009 Plan “so consistently as to imply, in effect,
an agreement to make such” awards. 45 C.F.R. § 75.430(f). Specifically, for FY 2010, the
Board found that non-management employees “received the same rate of incentive
compensation, equal to 160 hours of his or her unit pay hourly rate.” (J.A. 5). Citing the 2009
Plan’s statements that (i) “[n]ot all incentive compensation should be paid at the same percentage
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of annual salary”; (ii) “[i]ncentives for superior work performance should be higher than for
average or below average performers”; and (iii) TNS “will follow a matrix for determining
employee worth to the organization,” the Board concluded that “paying all non-management
employees the same level of incentive compensation without taking into account individual
employee performance . . . directly conflicted with TNS’s incentive compensation policies.
Those awards, therefore, were not made pursuant to TNS’s ‘established plan’ for incentive
compensation, in violation of the cost principles.” (J.A. 5-6).
The Board also noted that some management employees “received less generous
incentive compensation awards, both in terms of actual money awarded and in terms of the
award as a percentage of their annual salaries, than did employees with lower or equivalent
ratings” in FY 2010. (J.A. 6). The Board found that this “call[ed] into question whether TNS
actually used the ratings to determine the amount of incentive compensation awarded,” as the
2009 Plan required, and that none of the records produced by TNS adequately explained these
inconsistent awards. (Id.). The Board also took issue with TNS’s failure to provide the FY 2010
performance evaluations that the 2007 Policy required it to keep on file or any records about its
employees’ disciplinary histories, which the 2007 Policy also deemed relevant. (Id.).11
Similarly, for FY 2011, the Board found that some of TNS’s employees “received less
generous incentive compensation awards, both in terms of actual money awarded and in terms of
the award as a percentage of their annual salaries, than did employees with lower or equivalent
grades,” and that TNS “did not provide any employee-specific documentation substantiating”
11
The Board also found that TNS failed to produce certain memoranda that it was required to
place “in its employees’ files to document that payment of an incentive compensation award was
pursuant to the factors in the plan.” (J.A. 7). The court agrees with TNS, however, that the
“memoranda referenced at pages 10 through 12 of [Defendant’s] opening brief are precisely the
‘memoranda’ that [Defendant] claims to be missing.” (Pl.’s Reply Br. at 10).
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these inconsistent payments, neither of which was in keeping with the 2007 Policy and 2009
Plan. (J.A. 7). As to FY 2012, the Board found that TNS “failed to provide documentation to
substantiate the determination that certain non-management employees met the qualifications to
receive incentive compensation or to justify the varying amounts that they received as awards,”
and “failed to provide documentation substantiating the ratings given to management
employees,” some of whom “received less generous incentive compensation awards, both in
terms of actual money awarded and in terms of the award as a percentage of their annual salaries,
than did employees with lower or equivalent grades and ratings.” (J.A. 8). The Board also
pointed out that one employee who received a “C-/D+” grade was nevertheless paid incentive
compensation, which it considered “difficult to reconcile” with the 2007 Policy’s provision that
incentive compensation was intended to reward “consistent or exemplary performance.” (Id.).
In the court’s view, the Board’s determination that TNS failed to follow the 2007 Policy
and 2009 Plan “so consistently as to imply, in effect, an agreement to make” the challenged
incentive compensation awards was not arbitrary, capricious, contrary to law or an abuse of
discretion. 45 C.F.R. § 75.430(f). The 2009 Plan required TNS to pay incentive compensation
to its employees at different rates depending on the quality of their work performance. The
record demonstrates that this was not done for non-management employees in FY 2010, as they
all received the same rate of incentive compensation. The record also calls into question whether
TNS’s employees were compensated according to the quality of their work performance in any
of the challenged fiscal years, as each year saw lower-rated employees receiving more generous
incentive compensation than higher-rated employees. Nothing in the administrative record
explains these inconsistencies. Additionally, the 2007 Policy required TNS to keep on file
employee evaluations supporting incentive compensation awards, and to ensure that such awards
17
were not paid to any employees who had recently received a performance warning. It was
therefore not arbitrary, capricious, contrary to law or an abuse of discretion for the Board to
require TNS to produce evaluations for employees who received incentive compensation and/or
records demonstrating that such employees had not recently received a performance warning,
which TNS failed to do.
TNS argues that it “followed the plain wording of its policies in the same fashion as
grantees previously found to be in compliance with the cost principles.” (Pl.’s Br. at 18-19). In
support of its FY 2010 incentive compensation awards, where non-management employees all
received the same rate of incentive compensation, TNS points to Washington Cty. Opportunities,
Inc., DAB No. 1464, 1994 WL 321795 (1994), in which the Board upheld “across-the-board
incentive payments made evenly to all the organization’s employees.” (Id. at 19). But TNS’s
argument overlooks the fact that its own 2009 Plan explicitly states that “[n]ot all incentive
compensation should be paid at the same percentage of annual salary,” and that “[i]ncentives for
superior work performance should be higher than for average or below average performers.”
(J.A. 139). As Defendant points out in its cross-motion, the organization in Washington County
Opportunities did not have any policies requiring such individualized incentive compensation
awards. (See Def.’s Br. at 20-21). TNS, however, does not address this important distinction in
its reply brief.
As to FY 2011 and FY 2012, TNS argues that Defendant “makes no claim that [it] failed,
on the whole, to follow its policy. Rather, [the Board’s] decision in fact only vaguely references
‘some’ employees who received inconsistent payments, and specifically references only a single
management employee who received an arguably improper award.” (Pl.’s Br. at 21) (citation
omitted). But aside from minimizing the many issues with the subject awards that Defendant has
18
raised, this argument overlooks the fact that the inconsistencies cited by the Board, which persist
across all the fiscal years in question, clearly demonstrate that TNS did not make the challenged
awards pursuant to an established plan that it followed “so consistently as to imply, in effect, an
agreement to make such payment.” 45 C.F.R. § 75.430(f) (emphasis added). To the contrary,
these inconsistencies demonstrate that TNS “determine[d] incentive awards in what appears to be
an arbitrary manner.” (J.A. 11). This is all that is needed to support the disallowance.
Moreover, TNS misreads the Board’s decision, which was not based solely on a few
employees receiving inconsistent payments. The Board also determined that TNS failed to
produce (i) records sufficient to substantiate any of its incentive compensation awards for the
subject years, including documents justifying the apparently inconsistent awards; (ii) evaluations
for employees who received incentive compensation awards during the fiscal years in question,
even though the 2007 Policy required it to keep such evaluations on file; or (iii) records
demonstrating that such employees had not received a performance warning within 90 days of
receiving such awards. Simply put, TNS has not pointed to anything in the administrative record
demonstrating that these findings were arbitrary, capricious, contrary to law or an abuse of
discretion.
For these reasons, the court finds that the Board’s determination that TNS failed to follow
its own incentive compensation plan was not arbitrary, capricious, contrary to law or an abuse of
discretion.
C. The Board’s Determination That TNS Did Not Provide Adequate
Documentation To Support Its Incentive Compensation Awards Was
Not Arbitrary, Capricious, Contrary To Law Or An Abuse Of Discretion
The Cost Principles provide that costs must “[b]e adequately documented . . . in order to
be allowable under Federal awards.” 45 C.F.R. § 75.403(g). As noted above, the 2007 Policy
requires that, in order “[t]o be eligible to receive incentive compensation, employees must not
19
have received verbal or written performance warnings within 90 days of the payment of the
incentive,” and that, “[f]or employees that have been with TNS more than one year, a current
employee evaluation with a satisfactory evaluation must be on file.” (J.A. 136). For the same
reasons set forth in Section III.B above, it was not arbitrary, capricious, contrary to law or an
abuse of discretion for the Board to require TNS to produce the employee evaluations that the
2007 Policy required it to keep on file in order to substantiate its incentive compensation awards.
Likewise, for the reasons set forth above, it was not arbitrary, capricious, contrary to law or an
abuse of discretion for the Board to require TNS to produce records demonstrating that
employees who had received incentive compensation awards during the subject years had not
received a performance warning within 90 days of receiving such payment.
TNS argues that the Board’s decision disregarded its own past holdings interpreting the
Cost Principles. (Pl.’s Br. at 15-16). In support, TNS cites Seaford Cmty. Action Agency, DAB
No. 1433, 1993 WL 742548, at *4 (1993), where the production of “payroll registers, minutes of
Policy Council meetings, evaluation sheets, and lists of awardees” was deemed sufficient to
demonstrate that the grantee had “an organization-wide salary supplement program in effect.”
TNS claims that the documentation it provided to the Board here “was no different than that
approved by the [Board] in Seaford,” and that it “had no way to ascertain that [the Board] would
require more specific documentation here than it had done in the past when considering a similar
incentive compensation system.” (Pl.’s Br. at 17). As Defendant points out, however, Seaford
did not involve a situation where, as here, the record demonstrated that the organization failed to
make the challenged payments in accordance with the requirements of its own established plan,
20
as is required by 45 C.F.R. § 75.430(f).12 The court therefore finds that the Board did not deviate
from established precedent in finding that TNS failed to adequately document the incentive
compensation awards at issue in this litigation.
D. The Board’s Determination That TNS Failed To Show That
Its Incentive Compensation Awards Were Reasonable Was Not
Arbitrary, Capricious, Contrary To Law Or An Abuse Of Discretion
Under the Cost Principles, incentive compensation “is allowable to the extent that the
overall compensation is determined to be reasonable.” 45 C.F.R. § 75.430(f); see also id.
§ 75.403(a) (costs must “[b]e necessary and reasonable for the performance of the Federal award
. . . in order to be allowable under Federal awards”). The Cost Principles provide that a “cost is
reasonable if, in its nature and amount, it does not exceed that which would be incurred by a
prudent person under the circumstances prevailing at the time the decision was made to incur the
cost.” Id. § 75.404. The Cost Principles further dictate that consideration must be given to the
following factors, among others, in determining the reasonableness of a given cost:
“Whether the cost is of a type generally recognized as ordinary and necessary
for the operation of the [organization] or the proper and efficient performance
of the Federal award”;
“Market prices for comparable . . . services for the geographic area”;
“Whether the individuals concerned acted with prudence in the circumstances
considering their responsibilities”; and
12
TNS also contends, as part of its challenge to the Board’s finding that TNS failed to properly
document the basis for its incentive compensation awards, that a “plain reading” of 45 C.F.R.
§ 75.430(f) “is that the organization must only show that it followed its ‘established plan’ in
awarding incentive compensation.” (Pl.’s Br. at 18). But TNS ignores the regulation’s
requirement that an organization must show that it followed its “established plan . . . so
consistently as to imply, in effect, an agreement to make such payment.” 45 C.F.R. § 75.430(f).
For the reasons cited in Section III.B above, TNS has failed to make such a showing. Moreover,
TNS also ignores the fact that section 75.430(f) also requires that incentive compensation must
be reasonable, and that other sections of the Cost Principles require that any cost under a federal
award be adequately documented. See id. § 75.403(g).
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“Whether the [organization] significantly deviates from its established practices
and policies regarding the incurrence of costs.”
Id.
In support of its determination that TNS’s incentive compensation awards were
unreasonable, the Board found the following:
TNS’s “incentive compensation payments were 9.35% of its total salary costs for
FY 2010, 12.19% of its total salary costs for FY 2011, and 6.99% of its total salary
costs for FY 2012,” and TNS had not proffered any evidence that those percentages
were reasonable (J.A. 9);
One of TNS’s management employees received incentive compensation awards
amounting to almost 50% of her salary from FY 2010 through FY 2012 (id.);
In FY 2011, ten out of TNS’s twelve management employees received incentive
compensation awards in excess of 10% of their salaries (id.);
TNS’s Executive Director received incentive compensation awards ranging from
8.10% to 29.49% of his salary (id.);
TNS “consistently gave larger incentive compensation awards to management
employees than to non-management employees” (J.A. 11); and
TNS “consistently gave different incentive compensation awards, both in terms of
actual money awarded and in terms of the award as a percentage of an employee’s
annual salary, to employees who received the same ratings, and at times gave more
generous awards to employees with lower ratings” (id.).
The Board concluded that a “prudent person would not determine incentive awards in what
appears to be an arbitrary manner.” (Id.).
TNS argues that the Board failed to articulate a satisfactory explanation for its finding of
unreasonableness. (Pl.’s Br. at 22). It also contends that the Board improperly rejected its
evidence supporting the reasonableness of the challenged incentive compensation awards –
namely, that “its payment of incentive compensation did not cause total salaries to exceed the
federal Executive II cap” and “that its salary rates were in line with [a] wage comparability
study” prepared for it in 2009. (Id. at 25). TNS asserts that absent any further showing from
22
Defendant “beyond mere facial claims of unreasonableness,” its evidentiary showing has
sufficiently rebutted Defendant’s “initial baseless finding, especially given that finding was
seemingly based on nothing more than the agency’s ‘gut feeling.’” (Id.).
As noted above, however, “[o]nce a cost is questioned as lacking documentation, the
grantee bears the burden to document, with records supported by source documentation, that the
costs were actually incurred and represent allowable costs, allocable to the grant.” Northstar,
2003 WL 21801698, at *3 (citations omitted). Because a cost must be reasonable in order to be
allowable, see 45 C.F.R. §§ 75.403(a), 75.430(f), TNS bore the burden of showing that the
challenged incentive compensation payments were, in fact, reasonable. The Board determined
that TNS failed to carry its burden because, for all the reasons noted above, it failed to explain
why it “determine[d] incentive awards in what appears to be an arbitrary manner.” (J.A. 11).
This finding is far from a “mere facial claim[] of unreasonableness” (Pl.’s Br. at 25), and nothing
in the administrative record indicates that it was arbitrary, capricious, contrary to law or an abuse
of discretion.
Moreover, merely pointing to the fact that the challenged incentive compensation did not
cause total salaries to exceed Level II Executive cap does not establish the reasonableness of
those payments because, as the Board held, “TNS did not provide any evidence that Level II
Executive positions were comparable to its management positions in terms of duties and
responsibilities and geographic area.” (J.A. 9-10). Similarly, the mere fact that total salaries
were in line with TNS’s wage comparability study does not establish the reasonableness of the
challenged incentive compensation awards because, as the Board found, the study “discusses
only base compensation and does not directly address bonuses or other incentive compensation
awards.” (J.A. 10). Moreover, the court agrees with the Board that the fact that an employee’s
23
“total compensation in a given year did not exceed the maximum in the wage comparison study
does not establish that . . . any incentive compensation award received as part of that total
amount . . . is reasonable for any particular employee.” (Id.). TNS fails to cite anything in the
administrative record demonstrating that these findings were arbitrary, capricious, contrary to
law or an abuse of discretion. Furthermore, nothing in TNS’s arguments regarding the Level II
cap and its wage comparability study comes close to explaining how or why it “determine[d]
incentive awards in what appears to be an arbitrary manner,” as discussed above. (J.A. 11).
The court also notes that the Cost Principles mandate consideration of whether an
organization “significantly deviates from its established practices and policies regarding the
incurrence of costs” in determining whether the costs were reasonable. 45 C.F.R. § 75.404(e).
Accordingly, the court’s finding at Section III.B above affirming the Board’s determination that
TNS failed to follow its 2007 Policy and 2009 Plan also supports affirming the Board’s finding
of unreasonableness.
For these reasons, the court finds that the Board did not abuse its discretion or act
arbitrarily, capriciously or contrary to law in finding that TNS failed to demonstrate that the
challenged incentive compensation awards were reasonable.
E. Defendant Did Not Abuse Its Discretion Or Act Arbitrarily, Capriciously Or
Contrary To Law In Failing To Differentiate Between Proper And Improper
Incentive Compensation Awards During The Fiscal Years In Question
TNS argues that “[t]o the extent that some [of] the incentive compensation payments
charged to [its] grant funds were made properly, while others were not, [the Board] incorrectly
disallowed all incentive payments for the three fiscal years in question rather than remanding . . .
to differentiate proper payments from those that should have been disallowed.” (Pl.’s Br. at 26).
But, as Defendant points out (see Def.’s Br. at 24-25), the Board determined that TNS failed to
establish that any of its FY 2010, FY 2011 or FY 2012 incentive compensation awards were
24
“reasonable, supported by adequate documentation, and made pursuant to a pre-existing
agreement or established plan.” (J.A. 3). Under the Cost Principles, the 2007 Policy and the
2009 Plan, incentive compensation awards must meet all three of these requirements to be
allowable. For the reasons set forth above, the court finds that TNS has not established that any
of the Board’s determinations as to any of these three requirements was arbitrary, capricious,
contrary to law or an abuse of discretion.
Additionally, as is also noted above, TNS’s argument ignores the fact that the facial
inconsistencies in its incentive compensation awards through all three of the subject years
demonstrate that it did not make the awards pursuant to an established plan that it followed “so
consistently as to imply, in effect, an agreement to make such payment.” 45 C.F.R. § 75.430(f).
Therefore, the court finds that it was not arbitrary, capricious, contrary to law or an abuse of
discretion for the Board to determine that the awards, as a whole, violated the Cost Principles.
Moreover, as discussed above, TNS was on notice as to the basis for the Board’s decision,
and had ample opportunity to provide documentation supporting the challenged awards –
including documents supporting the reasonableness of those payments and demonstrating their
adherence to the 2007 Policy and 2009 Plan. The Board did not abuse its discretion or act
arbitrarily, capriciously, or contrary to law in finding that TNS failed to take advantage of that
opportunity.
Because TNS has not established the validity of any of its challenged incentive
compensation awards, TNS cannot establish that the Board abused its discretion or acted
arbitrarily, capriciously or contrary to law in disallowing the incentive compensation awards in
their entirety rather than disallowing only certain of those payments while permitting certain
other payments.
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IV. CONCLUSION
For the reasons set forth above, TNS’s motion is hereby DENIED and Defendant’s
cross-motion is hereby GRANTED.
An appropriate Order accompanies this Memorandum Opinion.
Date: March 28, 2016
Tanya S. Chutkan
TANYA S. CHUTKAN
United States District Judge
26