Texas Neighborhood Services v. HHS
16-5150
| D.C. Cir. | Aug 8, 2017Background
- Texas Neighborhood Services (Neighborhood Services) received Head Start grant funds and paid $1.332 million in employee performance bonuses during FY 2010–2012.
- OMB Circular A-122 (codified at 2 C.F.R. Pt. 230 at the time) permits incentive bonuses only if overall compensation is reasonable, bonuses are pursuant to a prior agreement or consistently followed plan, and payments are adequately documented.
- HHS’s Administration for Children and Families monitored Neighborhood Services and concluded the bonuses were unreasonable and inadequately documented, issuing a Disallowance Letter requiring repayment.
- The Departmental Appeals Board (DAB) sustained the disallowance, finding: (1) Neighborhood Services failed to show overall compensation was reasonable given the mix of low base pay and large bonuses; (2) bonus amounts did not correlate with performance matrix scores, suggesting favoritism; and (3) documentary evidence showed the plan was not followed consistently or was insufficient to demonstrate compliance.
- Neighborhood Services sought reconsideration, sued under the APA after the DAB denied relief, and the district court granted HHS summary judgment. The D.C. Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper standard for "reasonable" compensation | The DAB should have applied the compensation-specific standard (comparability to local market) and the wage comparability study proves overall compensation was reasonable | DAB relied on general "prudent person" reasonableness and looked to the reasonableness of bonus share of compensation | Court: DAB’s failure to engage the specific comparability definition was arbitrary but harmless because other valid grounds supported disallowance |
| Whether DAB advanced an unbriefed theory (partiality/notice) | DAB relied on theory that bonuses violated internal policies without HHS briefing it; Neighborhood Services lacked opportunity to rebut | HHS argued bonus documentation and discrepancies were in its briefs; DAB resolved an issue that was fully briefed | Held: Issue was briefed; DAB did not deprive Neighborhood Services of notice or opportunity to respond |
| Adequacy of documentation | Neighborhood Services says it submitted the same kinds of documents accepted in Seaford DAB precedent and met DAB/Disallowance Letter requirements | HHS says submitted documents showed inconsistencies and prima facie failure to follow the plan; more detail was reasonably requested | Held: DAB reasonably concluded Neighborhood Services’ documents suggested the plan was not followed; treating parties differently from Seaford was justified by different documentary record |
| Whether DAB had to assess each bonus individually | Neighborhood Services: If any single bonus complied, it should be allowed (bonus-by-bonus review required) | HHS: Widespread failures to follow the plan tainted all bonuses; a collective disallowance was appropriate | Held: DAB reasonably declined a bonus-by-bonus analysis given pervasive evidence the plan was not followed in practice; all bonuses disallowed |
Key Cases Cited
- Motor Vehicle Mfrs. Ass'n of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (agencies must examine relevant data and articulate a rational connection between facts and choices)
- FCC v. Fox Television Stations, Inc., 556 U.S. 502 (agency must consider existing rules and explain departures)
- RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (specific statutory provisions can displace general ones)
- Nevada v. Dep't of Energy, 400 F.3d 9 (D.C. Cir.) (same principle on specific vs. general rules)
- Bally's Park Place, Inc. v. NLRB, 646 F.3d 929 (D.C. Cir.) (agency decisions with multiple grounds can be sustained if one valid ground supports outcome)
- Etelson v. Office of Pers. Mgmt., 684 F.2d 918 (D.C. Cir.) (challenge when government treats similarly situated parties differently)
- Muwekma Ohlone Tribe v. Salazar, 708 F.3d 209 (D.C. Cir.) (agency need not treat regulated parties identically where record differences justify disparate treatment)
- Partington v. Houck, 723 F.3d 280 (D.C. Cir.) (due process requires meaningful opportunity to respond during agency proceedings)