Sears, Roebuck & Co. v. United States Postal Service

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 19, 2016 Decided December 20, 2016

No. 15-5330

SEARS, ROEBUCK & CO., ET AL.,

APPELLANTS

v.

UNITED STATES POSTAL SERVICE,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:14-cv-01031)

David M. Levy argued the cause for appellants. With him

on the briefs were John F. Cooney, Moxila A. Upadhyaya, and

Katie M. Wright.

Peter C. Pfaffenroth, Assistant U.S. Attorney, argued the

cause for appellee. With him on the brief were R. Craig

Lawrence, Assistant U.S. Attorney, Stephan J. Boardman, Chief

Counsel, U.S. Postal Service, and Alice L.A. Covington,

Appellate Counsel.

Before: SRINIVASAN and PILLARD, Circuit Judges, and

EDWARDS, Senior Circuit Judge.

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Opinion for the Court filed by Senior Circuit Judge

EDWARDS.

EDWARDS, Senior Circuit Judge: This case arises from

Appellants’—Sears, Roebuck and Co. (“Sears”), Segerdahl

Graphics, Inc. (“Segerdahl”), and Aspen Marketing Services,

LLC (“Aspen”)—use of the United States Postal Service

(“Postal Service”) for delivery of bulk mailings. In 2009,

Appellants mailed over 8.2 million folded self-mailers, i.e., mail

that can be folded and sent without envelopes, for which they

paid postage at a discounted automation rate. To qualify for the

discounted rate, Appellants certified that their mailings met the

applicable sealing requirements for oblong self-mailers. These

requirements stated, in relevant part: “If the piece is 7 inches

long or more, the piece must be sealed on the top and the

bottom.” Domestic Mail Manual (“Manual”) § 201.3.14.1c

(May 11, 2009).

Following an investigation, the Postal Service determined

that Appellants were ineligible for the discounted rate because

their mailers, which exceeded seven inches in length, had been

sealed only on the left edges, and not on the top and bottom

edges. The Postal Service assessed revenue deficiencies against

Appellants for over $1.25 million. The assessments were upheld

by the Postal Service’s Pricing and Classification Service Center

(“PCSC”).

Appellants sued the Postal Service in the District Court to

overturn the decisions of the PCSC. Appellants argued that the

Manual did not specify where along the top and bottom edges

the seals must be placed, and that their seals along the left edge

were close enough to the top and bottom to effectively seal those

edges in compliance with the Manual requirements. Appellants

thus claimed that the Postal Service’s interpretation of the

Manual, and the PCSC’s decisions upholding that interpretation,

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should be set aside as unreasonable. In their appeal to this court,

Appellants additionally contend that, in the arguments presented

to the District Court, counsel for the Postal Service offered a

new interpretation of the Manual that could not be squared with

the PCSC’s decisions. According to Appellants, the District

Court’s reliance on this new interpretation violated the

commands of SEC v. Chenery Corp., 318 U.S. 80 (1943).

We can find no inconsistency in the Postal Service’s

interpretation of the Manual. The PCSC’s decisions clearly held

that, under the applicable 2009 sealing requirements, seven-inch

or longer oblong self-mailers had to be sealed somewhere “on”

the top and bottom edges. The PCSC also found that seals on the

left edge that approached the top and bottom were not “on” the

top and bottom. The Postal Service’s arguments to the District

Court were not at odds with the PCSC’s decisions. We also find

that the Postal Service’s interpretation of the sealing

requirements is perfectly consistent with the terms of the

Manual and entirely reasonable.

For the reasons explained below, we deny Appellants’

challenges to the PCSC’s decisions and affirm the judgment of

the District Court enforcing the revenue deficiencies against

Appellants. However, because the Government has confessed

error with respect to surcharges on the revenue deficiencies, we

reverse and vacate the District Court’s award of surcharges

against Appellants.

I. BACKGROUND

The eligibility requirements for automated rates are codified

in the Manual and incorporated by reference in the Code of

Federal Regulations. See 39 C.F.R. § 111.1. Appellants do not

challenge the Postal Service’s authority to promulgate the

sealing requirements at issue in this case. See 39 U.S.C. §

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401(2). These requirements have been changed since 2009, but

the parties agree that the May 11, 2009 version of the Manual

governs the resolution of this case.

In 2009, the Manual requirements for sealing on the open

edges of folded self-mailers depended upon a mailer’s size,

weight, number of pages, and place of folding. Manual §

201.3.14.1. With respect to mailers folded on the right edge, the

Manual stated:

The left edge (trailing edge) and other open edges must

be secured with at least one tab or a glue line. The

number of tabs required is determined by the final trim

size and paper basis weight of the piece. If the piece is

7 inches long or more, the piece must be sealed on the

top and the bottom.

Manual § 201.3.14.1c.

The Postal Service also published a Quick Service Guide

(“Guide”) that included illustrations showing examples of the

correct use of tabs, seals, and glue strips or spots on folded self-

mailers. Guide § 201b at 2. One illustration depicted a folded

self-mailer folded on the right edge with the trailing (left), top,

and bottom edges open.

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Id. The illustration made it clear that separate sealants must be

placed on the trailing, top, and bottom edges. Id. Although the

illustration showed “tabs” as the method of sealing, the Guide

made it plain that, “[a]s an alternative to tabs or wafer seals, the

open edge of the length of the mailpiece may be continuously

glued or spot glued.” Id. at 1.

In April 2009, an agent for Sears mailed out approximately

5.8 million folded self-mailers (“Sears Mailers”). In August

2009, Sears hired Segerdahl to mail out approximately half a

million folded self-mailers (“Segerdahl Mailers”). In December

2009, Aspen mailed out approximately 1.9 million folded self-

mailers (“Aspen Mailers”). There is no dispute that all three

mailers were subject to the sealant requirements of Manual §

201.3.14.1c.

The Sears and Segerdahl Mailers were sealed by “a pair of

elongated glue dots” parallel to the trailing edge, each elongated

glue dot reaching to within one-half of an inch to one inch from

the top or bottom edge. Joint Appendix (“JA”) 211; see also JA

24, 211–12. The Aspen Mailers were similarly sealed with “two

long glue lines placed at the end of the trailing edge,” JA 394,

and extended “close to the top and bottom edges,” id., or were

“flush” with the top and bottom edges, Br. for Appellants at 11.

Aspen, Segerdahl, and Sears (through its agent) certified that

their mailers complied with the automated standards and paid

the discounted automated rates. See Manual § 607.1.1.

The Postal Service assessed revenue deficiencies against

each Appellant for their respective mailers. The deficiency letter

to Sears stated that its mailers were “not prepared in accordance

with automation design standards but receiv[ed] automation

rates” and assessed a revenue deficiency of $1,033,597.19. JA

22. An Investigative Memorandum accompanying the

deficiency letter stated the trailing edges were sealed, but

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“[t]here were no additional tabs or glue spots on any of the other

open sides,” JA 24, even though the Postal Service required

“that all open sides needed to be sealed with tabs or glue spots,

consistent with the illustration contained within the Quick

Service Guide, section 201b,” JA 25. The Postal Service also

assessed a deficiency of $94,978.27 against Sears for the

Segerdahl mailings and a deficiency of $125,367.01 against

Aspen for its mailers. Each letter stated that the mailers “lacked

appropriate seals (tabbing or glue spot) at the open edges (top

and bottom), as required.” JA 141, 172. Appellants then

appealed to the PCSC to seek review of the deficiency

assessments.

The PCSC confirmed that the Sears Mailers were “secured

by means of two one inch glue lines on the trailing edge one

within one inch of the top edge and the other within one inch of

the bottom edge.” JA 2. The PCSC made it clear, however, that

this arrangement did not satisfy the applicable sealing

requirements. Id. The PCSC noted in passing that the

Investigative Memorandum filed by the Postal Inspector stated

that “the top and bottom edges required a tab at the center of

each edge,” id., but this was not the basis for PCSC’s decision.

Rather, in rejecting Sears’ claim that the trailing edge glue

served to seal the top and bottom, the PCSC stated that the

left edge (trailing edge) and other open edges must

be secured with at least one tab or a glue line. The

number of tabs required is determined by the final

trim size and paper basis weight of the piece. If the

piece is 7 inches long or more, the piece must be

sealed on the top and the bottom . . . . [T]he

placement of the glue lines near the trailing edge did

not serve to secure the top and bottom open edges.

Id.

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As to the Segerdahl Mailers, the PCSC likewise found that

the “placement of the glue lines near the trailing edge did not

serve to secure the top and bottom open edges.” JA 126. As to

the Aspen Mailers, the PCSC rejected the challenge to the

deficiency assessment on the ground that “the top and bottom

edges were not sealed. . . . The standards clearly state that the

top, bottom, and trailing edges must be sealed.” JA 166.

On June 18, 2014, Appellants filed suit in District Court

against the Postal Service to set aside the revenue deficiencies.

Appellants alleged the Postal Service’s decisions violated the

Manual because, “[w]hile the fourth sentence of former

[Manual] § 201.3.14.1.c required that pieces ‘7 inches long or

more’ be sealed ‘on the top and the bottom,’ the rule did not

specify where along the top and bottom edges the seals must be

placed.” JA 226–27. The Postal Service cross-claimed for

enforcement of the revenue deficiencies. Appellants and the

Postal Service then filed cross-motions for summary judgment.

The District Court upheld the PCSC’s decisions and entered

judgment on the Postal Service’s counterclaim under the Federal

Debt Collection Procedure Act, 28 U.S.C. §§ 3001 et seq., and

the Federal Debt Collection Improvement Act, 31 U.S.C. §§

3701 et seq., in the amount of the revenue deficiencies assessed,

plus a ten percent statutory surcharge. Sears, Roebuck & Co. v.

USPS, 134 F. Supp. 3d 365 (D.D.C. 2015). The court found that

the PCSC’s interpretation of the Manual was supported by the

language and purpose of the regulation, and that the Postal

Service had engaged in reasoned decision-making in issuing the

deficiency assessments. The District Court additionally noted

that Appellants’ “problem was not an off-center tab or glue spot;

the problem was that there was essentially no seal on the top and

the bottom.” Id. at 377. On November 20, 2015, Appellants filed

a timely appeal with this court.

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On September 22, 2016, the Postal Service submitted a

letter to the court confessing error as to the ten percent

surcharges. The letter stated, inter alia, that,

upon further consideration, the government has

determined that it is not in fact entitled to a surcharge

under 28 U.S.C. § 3011(a) where, as here, it has not

sought the pre- or post-judgment remedies referenced

in § 3011(a). The government therefore will not collect

the surcharge that the District Court awarded in this

case, and it does not oppose vacatur of the part of the

District Court’s judgment that awarded the surcharge.

Confession of Error Letter at 2 (Sept. 22, 2016), ECF No.

1637245.

II. ANALYSIS

A. Standard of Review

“Apart from two very limited exceptions” that are irrelevant

here, the judicial review provisions of the Administrative

Procedure Act (“APA”) are “not applicable ‘to the exercise of

the powers of the Postal Service.’” Carlin v. McKean, 823 F.2d

620, 622 (D.C. Cir. 1987) (quoting 39 U.S.C. § 410(a)); see also

N. Air Cargo v. USPS, 674 F.3d 852, 858 (D.C. Cir. 2012).

Nevertheless, under the law of this circuit, Postal Service

decisions are still subject to non-APA judicial review in some

circumstances. See, e.g., Nat’l Ass’n of Postal Supervisors v.

USPS, 602 F.2d 420, 432 (D.C. Cir. 1979) (“That the Postal

Service has broad discretion . . . does not mean . . . that its

decisions are entirely insulated from judicial surveillance”). The

scope of non-APA review is narrow, however. See, e.g., Aid

Ass’n for Lutherans v. USPS, 321 F.3d 1166, 1173 (D.C. Cir.

2003) (“[J]udicial review is available when an agency acts ultra

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vires”); see also Mittleman v. Postal Regulatory Comm’n, 757

F.3d 300, 307 (D.C. Cir. 2014) (construing Aid Ass’n for

Lutherans to apply to an analogous provision exempting the

Postal Regulatory Commission from APA review; holding that

judicial review “is available only to determine whether the

agency has acted ‘ultra vires’—that is, whether it has ‘exceeded

its statutory authority’”).

In prior cases, we have construed the scope of non-APA

review to include: (1) “a straightforward question of statutory

interpretation,” Nat’l Ass’n of Postal Supervisors, 602 F.2d at

432; see also N. Air Cargo, 674 F.3d at 858–59; (2) a question

concerning whether a regulation in the Manual was a valid

exercise of the Postal Service’s authority, Nat’l Retired

Teachers Ass’n v. USPS, 593 F.2d 1360, 1363 (D.C. Cir. 1979);

see also Aid Ass’n for Lutherans, 321 F.3d at 1175; and (3) a

question focusing on whether a Postal Service decision was

supported by the agency’s contemporaneous justification or,

instead, reflected counsel’s post hoc rationalization, N. Air

Cargo, 674 F.3d at 859–60 (applying Chenery, 318 U.S. 80).

The Postal Service acknowledges that the applicable

standard of review in this case is “whether the agency has

engaged in ‘reasoned decision-making.’” Br. for Appellee at 18

(citing Greater Bos. Television Corp. v. FCC, 444 F.2d 841, 851

(D.C. Cir. 1970); Motor Vehicle Mfrs. Ass’n v. State Farm

Mutual Auto. Ins. Co. (“State Farm”), 463 U.S. 29, 43 (1983)).

Although the Postal Service argues that “[t]his standard of

review is ‘extremely limited’ and less intrusive than APA

review,” id., the “reasoned decision-making” standard it cites is

the paradigm of APA review, see EDWARDS, ELLIOTT, & LEVY,

FEDERAL STANDARDS OF REVIEW 203–10 (2d ed. 2013)

(discussing the requirement of “reasoned decisionmaking” under

State Farm).

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Arguably, there is a question as to whether reasoned

decision-making review can be squared with the seemingly

more limited scope of review outlined in the court’s decisions in

Aid Ass’n for Lutherans and Mittleman. We need not tarry over

this question, however, because “[t]he judicial review provisions

of the APA are not jurisdictional, so a defense based on

exemption from the APA can be waived by the Government.”

Air Courier Conf. v. Am. Postal Workers Union, 498 U.S. 517,

523 n.3 (1991) (citation omitted). Because the Postal Service

agrees that the reasoned decision-making standard of review

applies, Br. for Appellee at 17–22, we will assume the same.

B. The Agency’s Interpretation of the Sealing

Requirement Has Not Changed over the Course of

These Proceedings.

Under Chenery, “an administrative order cannot be upheld

unless the grounds upon which the agency acted in exercising its

powers were those upon which its action can be sustained.” 318

U.S. at 95. “[T]he orderly functioning of the process of review

requires that the grounds upon which the administrative agency

acted be clearly disclosed and adequately sustained,” so that the

reviewing court can be assured the agency “has exercised the

discretion with which Congress has empowered it.” Id. at 94–95.

Appellants contend that the District Court’s decision flouts

the commands of Chenery. In particular, Appellants argue:

In the briefs of the Postal Service, the construction

of former [Manual] § 201.3.14.1c underwent several

radical changes. The briefs repudiated the legal theory

actually adopted by the PCSC—that former [Manual] §

201.3.14.1c required the top and bottom edges to be

sealed “at the center of each” edge. Appellate counsel

advanced instead a succession of alternative

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interpretations of the rule—several of which the same

counsel in turn abandoned.

Br. for Appellants at 21. We reject this argument because it

misconstrues the record.

As noted above, the PCSC’s decisions noted in passing that

the Postal Inspector’s Investigative Memoranda stated that “the

top and bottom edges required a tab at the center of each edge.”

JA 2, 126. This, however, was not the basis for the PCSC’s

decisions. Rather, the PCSC made it clear that, under the

applicable sealing requirements, the “left edge (trailing edge)

and other open edges must be secured with at least one tab or a

glue line,” and that “the piece must be sealed on the top and the

bottom.” Id. The PCSC did not say that center placement of the

glue or tabs was part of the requirement. Rather, it merely said

that “the placement of the glue lines near the trailing edge did

not serve to secure the top and bottom open edges.” Id.

Before the District Court, counsel for the Postal Service

reasonably referenced the final decisions of the PCSC to “make

clear that the core problem with plaintiffs’ self-mailers was that

there was no seal on the top or bottom at all, not that it was off-

center.” JA 322 n.6. This representation was not at odds with the

PCSC’s decisions, nor did it reflect a post hoc rationalization of

the agency’s interpretation of the Manual. See, e.g., Chiquita

Brands Int’l Inc. v. SEC, 805 F.3d 289, 299 (D.C. Cir. 2015)

(“Chenery does not bar an agency’s counsel from merely

elaborating on the consistent stance the agency articulated

below”).

Appellants seem to suggest that the agency was bound to

the statement in the Investigative Memoranda suggesting that a

center placement of the glue or tabs was part of the sealing

requirement. This is simply wrong. The Investigative

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Memoranda were prepared by the Postal Inspector, whose

authority is to “investigate all allegations of violations of postal

laws or misconduct by all . . . persons [other than postal

employees].” 39 C.F.R. § 233.1(b)(1)(ii). The Postal Inspector

does not serve an adjudicative function. It is the local Post

Office that assesses the initial revenue deficiency. Any dispute

over an assessment must be appealed to the PCSC, which in turn

“issues the final agency decision.” Manual § 607.2.1; see also

id. § 607.2.5.

The separation of investigatory and adjudicatory functions

is a familiar feature in some administrative agencies. For

example, in the Department of Labor, the Occupational Safety

and Health Act of 1970 (“OSH”) “charges the Secretary [of

Labor] with responsibility for setting and enforcing workplace

health and safety standards. . . . If the Secretary (or the

Secretary’s designate) determines upon investigation that an

employer is failing to comply with such a standard, the

Secretary is authorized to issue a citation and to assess the

employer a monetary penalty.” Martin v. Occupational Safety &

Health Review Comm’n, 499 U.S. 144, 147 (1991). However,

the “Commission is assigned to ‘carr[y] out adjudicatory

functions’ under the Act.” Id. (citation omitted); see also RAG

Cumberland Res. LP v. Fed. Mine Safety & Health Review

Comm’n, 272 F.3d 590, 592, 595 (D.C. Cir. 2001) (explaining

division of authority in the Mine Act between inspecting and

issuing citations for violations of the Mine Act, which is the

purview of the Secretary of Labor, and adjudicating disputes

under the Mine Act, “including challenges by mine operators to

citations and orders issued by the Secretary of Labor,” which is

the purview of the Federal Mine Safety and Health Review

Commission).

Here, the Postal Inspector’s purview is even more limited

than the Secretary of Labor under OSH or the Mine Act, for the

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Postal Inspector does not establish regulatory standards. And the

Postal Inspector certainly does not issue decisions that constitute

final agency actions. The Postal Inspector’s Investigative

Memoranda in this case did not even recommend sanctions.

Instead, the Memoranda merely stated that the Postal Inspector

“initiated an investigation of a potential revenue deficiency,” JA

24, and concluded “a revenue loss . . . is attributed to this

mailing,” JA 26. See also JA 174, 176. The initial

determinations regarding assessments for revenue deficiencies

were made by local post offices, and the PCSC issued the final

agency decisions approving the assessments.

What matters here is what the PCSC said in justifying the

assessments against Appellants. As we have explained, the

PCSC did not interpret the Manual to require a center placement

of the glue or tabs. What the PCSC found, and the District Court

confirmed, was that Appellants’ “problem was not an off-center

tab or glue spot; the problem was that there was essentially no

seal on the top and the bottom.” Sears, Roebuck & Co., 134 F.

Supp. 3d at 377. This has been the consistent position of the

Postal Service during the entire course of these proceedings.

Therefore, we reject Appellants’ argument that the District

Court’s decision defies Chenery.

C. The Postal Service’s Interpretation of the Sealing

Requirements Was Reasonable.

Under the applicable standard of review, we are constrained

to defer to the agency’s interpretation of the Manual if it

“sensibly conforms to the purpose and wording of the

regulations.” Fabi Constr. Co. v. Sec’y of Labor, 370 F.3d 29,

36 (D.C. Cir. 2004) (quoting Montgomery KONE, Inc. v. Sec’y

of Labor, 234 F.3d 720, 722 (D.C. Cir. 2000)). In their brief to

this court, Appellants proffer alternative interpretations of the

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sealing requirements in an effort to undercut the PCSC’s

decisions. Their arguments cannot carry the day.

The PCSC’s decisions upholding the Postal Service’s

interpretation of the Manual’s sealing requirements easily

survive review pursuant to the reasoned decision-making

standard. The PCSC held that a self-mailer longer than seven

inches must have one tab (or glue line) on the left edge, one on

the top, and one on the bottom. This holding conforms precisely

to the plain language of the Manual. Likewise, the PCSC’s

holding that the two glue lines on the left edge of Appellants’

mailers were not “on” the top or bottom merely because they

were “near” the top and bottom edges is a perfectly reasonable

construction of the Manual. Indeed, the illustration in the Postal

Service’s Quick Guide – with three separate tabs sealing the left,

top, and bottom edges – gave Appellants clear notice of the

sealing requirements.

Appellants contend that it was not necessary for the Postal

Service to require three tabs or glue lines to prevent hollow,

circular mail pieces that might jam mail sorting equipment. This

is not the point, however. There is no doubt that the sealing

requirements as interpreted by the Postal Service effectively

served to limit jams in mail sorting equipment. It does not

matter that different requirements might have served the same

purpose. What matters here is that the sealing requirements were

reasonable and Appellants had clear notice of what was

necessary in order to qualify for the discounted automation rate.

Therefore, pursuant to the reasoned decision-making standard,

we will not second-guess the Postal Service’s reasonable

judgments regarding Manual requirements. See, e.g., USPS v.

Postal Regulatory Comm’n, 785 F.3d 740, 750 (D.C. Cir. 2015)

(“[W]e review the [Postal Regulatory] Commission’s

interpretation of its own regulations with substantial deference,

allowing that interpretation to control unless plainly erroneous

15

or inconsistent with the regulation” (citation and internal

quotation marks omitted)); Orengo Caraballo v. Reich, 11 F.3d

186, 193 (D.C. Cir. 1993) (“While we require the [Department

of Labor] to offer a reasoned analysis . . ., we do not sit in

review to substitute our judgment for that of the agency”).

Finally, Appellants contend that sealing requirements

adopted after 2009 would not pass muster under the Postal

Service’s construction of the 2009 requirements. This claim is

self-evidently irrelevant because, as we have found, the 2009

requirements were reasonable and we have no occasion here to

assess requirements adopted after 2009.

III. CONCLUSION

We hereby deny Appellants’ challenges to the PCSC’s

decisions and affirm the judgment of the District Court

enforcing the revenue deficiencies against Appellants. We

reverse and vacate the District Court’s award of surcharges

against Appellants.

So ordered.