United Parcel Service, Inc. v. PRCUnited Parcel Service, Inc. v. PRC
Kathleen M. Sullivan argued the cause for petitioner. With her on the briefs was Steig D. Olson.
Michael Shih, Attorney, U.S. Department of Justice, argued the cause for respondent. With him on the brief were Michael S. Raab, Attorney, David A. Trissell, General Counsel, Postal Regulatory Commission,
Eric P. Koetting and Morgan E. Rehrig, Attorneys, U.S. Postal Service, Michael F. Scanlon, John Longstreth, and James Pierce Myers were on the brief for intervenors Amazon.com Services, et al. in support of the Postal Regulatory Commission.
Before: HENDERSON and MILLETT, Circuit Judges, and EDWARDS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge EDWARDS.
EDWARDS, Senior Circuit Judge: This case involves a petition for review filed by United Parcel Service, Inc. (“UPS“), challenging the Postal Regulatory Commission‘s (“Commission“) Order Adopting Final Rules Relating to the Institutional Cost Contribution Requirement for Competitive Products, No. 4963, Dkt. No. RM2017-1 (P.R.C. Jan. 3, 2019) (“Order“), reprinted in Joint Appendix (“J.A.“) 515-712. The disputed Order modifies Commission regulations that are meant to “ensure that all [of the Postal Service‘s] competitive products collectively cover what the Commission determines to be an appropriate share of the institutional costs of the Postal Service.”
The problem is that
UPS argues that the Commission‘s position is contrary to law because “the Order fails to consider . . . costs ‘uniquely or disproportionately associated with any competitive products,’ as the Act requires in section 3633(b).” Br. for Petitioner at 3. UPS also contends that the Commission erred in simply assuming, without adequate explanation, that “there are no institutional costs uniquely or disproportionately associated with competitive products.” Id. We agree.
Two aspects of the Commission‘s Order require a remand. First, the Commission has not adequately explained how the statutory phrases “direct and indireсt postal costs attributable to [a particular competitive] product through reliably identified causal relationships” and “costs . . . uniquely or disproportionately associated with any competitive products” can coincide. It is far from clear that these
The bottom line is that the Commission‘s Order is arbitrary and capricious because it is “largely incomprehensible” with respect to the matters in issue. U.S. Postal Serv. v. PRC, 785 F.3d 740, 753 (D.C. Cir. 2015). Therefore, we are constrained to remand the case for further consideration. On remand, the Commission must adhere to the commands of the statute and address the costs specified in
I. BACKGROUND
A. Statutory Background
The Postal Service offers both “market dominant” and “competitive” products. Market-dominant products, like first-class mail, are “those over which the ‘Postal Service exercises sufficient market power that it can effectively’ raise prices or decrease quality ‘without risk of losing a significant level of business to other firms offering similar products.‘” UPS v. PRC, 890 F.3d 1053, 1055 (D.C. Cir. 2018) (quoting
In 2006, Congress enacted the Postal Accountability and Enhancement Act,
Specifically,
(a) In general.—The Postal Regulatory Commission shall, within 18 months after the date of enactment of this section, promulgate (and may from time to time thereafter revise) regulations to—
(1) prohibit the subsidization of competitive products by market-dominant products;
(2) ensure that each competitive product covеrs its costs attributable; and
(3) ensure that all competitive products collectively cover what the Commission determines to be an appropriate share of the institutional costs of the Postal Service.
As explained in the introduction to this opinion, the Accountability Act defines the term “costs attributable” as “the direct and indirect postal costs attributable to [a particular competitive] product through reliably identified causal relationships.”
The Accountability Act calls for the Commission to periodically review its “appropriate share” determination under
(b) Review of minimum contribution.—Five years after the date of enactment of this section, and every 5 years thereafter, the Postal Regulatory Commission shall conduct a review to determine whether the institutional costs contribution requirement under subsection (a)(3) should be retained in its current form, modified, or eliminated. In making its determination, the Commission shall consider all
relevant circumstances, including the prevailing competitive conditions in the market, and the degree to which any costs are uniquely or disproportionately associated with any competitive products.
In effect, then, the Accountability Act requires the Commission to establish a multi-part “price floor” for its competitive products. See UPS v. PRC, 890 F.3d at 1055-56. First, the Commission must issue regulations to prevent market-dominant products from subsidizing competitive products. Second, the price of “each competitive product” must be set high enough to cover the “direct and indirect postal costs attributable to such product through reliably identified causal relationships.” Third, the Commission must also ensure that “all competitive products collectively” cover what the Commission determines to be an “appropriate share” of the Postal Service‘s institutional (i.e., unattributed) costs. The Commission, in determining what share is appropriate, “shall consider,” among other things, “the degree to which any costs are uniquely or disproportionately associated with any competitive products.”
B. The Commission‘s 2016 Order Addressing § 3633(a)(2)
In 2016, the Commission issued an Order adopting a new method for calculating costs attributable under
First, the court‘s 2018 decision explains several concepts that the Commission uses to sort out the Postal Service‘s costs. To start, the decision explains that “the Commission distinguishes (albeit necessarily imperfectly) between ‘fixed costs,’ . . . which remain constant regardless of overall product volume, and ‘variable costs,’ . . . which vary with the Service‘s production levels.” Id. at 1056 (citing 2016 Order at 6). Examples of fixed costs include executive salaries and product-specific fixed costs like advertising. See id. In addition, the decision explains that the Commission distinguishes between variable costs that are “volume-variable” – i.e., which vary directly with the marginal cost of the cheapest relevant unit and the total number of units, id. at 1057 (citing 2016 Order at 36 n.56) – and variable costs that are not “volume-variable” in this sense, which the Commission calls “inframarginal costs,” id. at 1058 (citing 2016 Order at 35). The concept of inframarginal costs is not entirely intuitive. The basic idea is that, thanks to economies of scale, marginal costs tend to decrease with volume, and the sum of the differences between the marginal cost of earlier, more expensive units and the marginal cost of the last, cheapest unit is the infrаmarginal cost. See id. at 1057-58; 2016 Order at 35-36.
Second, the court‘s 2018 decision holds that the Commission‘s decision to define “institutional costs” as “residual costs” – that is, as any costs not attributed to competitive products through reliably identified causal relationships under
Third, the court‘s 2018 decision upholds the Commission‘s revised method for attributing costs under
Fourth, the court‘s 2018 decision notes that the Commission‘s cautious cost-attribution method leaves somе of the Postal Service‘s inframarginal costs unattributed. See id. at 1060 (“All other costs, including
It is clear, then, that the court‘s 2018 decision in UPS v. PRC upholding the Commission‘s cost-attribution method under
C. The Commission‘s Disputed Order in this Case
On January 3, 2019, the Commission issued the Order modifying its “appropriate share” determination under
For our purposes, however, the details of the Commission‘s formula-based approach are not critical. Instead, our focus in this case is on whether the Commission, in making its determination, adequately discharged its obligation under
In a section of its Order titled “Connection to Section 3633(b) Criteria,” the Commission recited the factors that the Accountability
The Commission has repeatedly found that there are no costs uniquely or disproportionatеly associated with competitive products that are not already attributed to those products under the Commission‘s current cost attribution methodology. As a result, the formula-based approach does not separately account for such costs.
Order at 28-29, J.A. 547-48 (citations omitted).
The Commission‘s conclusion draws on its analysis in earlier notices in the same docket. See Notice of Proposed Rulemaking to Evaluate the Institutional Cost Contribution Requirement for Competitive Products, No. 4402, Dkt. No. RM2017-1 (P.R.C. Feb. 8, 2018) (“Initial Notice“); Revised Notice of Proposed Rulemaking, No. 4742, Dkt. No. RM2017-1 (P.R.C. Aug. 7, 2018) (“Revised Notice“). In its Initial Notice, for instance, the Commission offered an explanation of its thinking:
The Commission finds that there are no costs uniquely or disproportionately associated with competitive products that are not already attributed to competitive products. Under the Commission‘s methodology, any cost that is uniquely or disproportionately associated with any competitive product is identified as an attributable cost because it exhibits a reliably identifiable causal relationship with
a specific competitive product. With regard to costs that are disproportionately associated with competitive products, the Commission‘s cost attribution methodology identifies relationships between costs and cost drivers, which include mail characteristics such as weight and shape (e.g., letters or parcels). . . . In this way, the сosts attributed to products reflect any disproportionate association of those costs with any specific products (including any competitive products).
Under the Commission‘s methodology, the Commission also classifies any cost that is uniquely associated with any product (including any competitive product) as attributable to that product. These costs are often referred to as product-specific costs. For example, advertisements for a specific product and supplies for money orders are unique costs attributed to specific products under the Commission‘s methodology.
. . . .
For the reasons discussed above, the Commission concludes that its costing methodology already accounts for the “the degree to which any costs are uniquely or disproportionately associated with any competitive products.” To the extent that any costs can be attributed to specific competitive products, they are already distributed under the Commission‘s current costing methodology and are not included in the institutional costs of the Postal Service.
Initial Notice at 43-45, J.A. 147-49; see also Revised Notice at 52-53, J.A. 304-05 (summarizing this same point).
Later, in response to comments from UPS and others, the Commission provided a succinct summary of the position it took in its Initial Notice. See Order at 138-162, J.A. 657-81.
In [the Initial Notice], the Commission found that there are no costs uniquely or disproportionately associated with competitive products that are not already attributed to those products. This is because all costs that are uniquely or disproportionately associated with competitive products exhibit a reliably identified causal relationship with a specific competitive product or group of products and are therefore attributed. The Commission
described “unique” costs as product-specific costs and determined that any cost that is uniquely associated with a competitive product is attributed to that product through a reliably identified causal relationship. . . . In addition, the Commission found that any cost disproportionately associated with a competitive product is аttributed to that product through the cost methodology‘s use of cost drivers. . . . In this way, the costs attributed products reflect any disproportionate association of those costs with specific products. As a result, the Commission determined that both types of costs are attributed to the competitive products that cause them.
Order at 138-39, J.A. 657-58 (citing Initial Notice at 43-44).
Finally, in response to UPS‘s comment suggesting that the Commission‘s analysis mistakenly conflates the “associated with” standard and the “reliably identified causal relationships” standard, the Commission concluded that “UPS overlooks key terms in section 3633(b), as well as the context of the statutory
scheme as a whole.” Order at 143, J.A. 662. The Commission emphasized the “dеgree of flexibility . . . inherent in the appropriate share provisions of section 3633” and the lack of any mechanical relationship between the Commission‘s consideration of the statutory factors and the Commission‘s ultimate determination. Id. at 144, J.A. 663. The Commission continued:
For the relevant factor at issue, “the degree to which any costs are uniquely or disproportionately associated with any competitive products,” UPS focuses on only a portion of the statutory language—“disproportionately associated.” However, in reading the relevant factor in its entirety, the use of the words “degree” and “any” plainly contemplate that there may be no uniquely or disproportionately associated competitive product costs. Congress does not require costs to be found; only for the Commission to “consider” whether “any” exist. Nothing in section 3633(b) prevents the Commission from concluding as it has—that all costs uniquely or disproportionately associated with competitive products are, in fact, captured by the costing methodology it currently employs pursuant to section 3633(a)(2).
Order at 144, J.A. 663.
In short, the Commission‘s position appears to be that the statutory phrase “costs . . . uniquely or disproportionately associated with any competitive products” is no broader than the phrase “direct and indirect postal costs attributable to [a particular competitive] product through rеliably identified causal relationships.” And the Commission appears to base that conclusion on the assumption that costs are uniquely or
disproportionately associated with competitive products only if competitive products can be reliably said to cause such costs.
II. ANALYSIS
A. Standard of Review
“‘Because the Congress expressly delegated to the Commission responsibility to implement [the Accountability Act], we review its interpretation’ of that statute under the standards enunciated in Chevron and its progeny.” U.S. Postal Serv. v. PRC, 785 F.3d 740, 750 (D.C. Cir. 2015) (quoting U.S. Postal Serv. v. PRC, 640 F.3d 1263, 1266 (D.C. Cir. 2011)).
Under Chevron‘s First Step, if “Congress has directly spoken to the precise question at issue . . ., that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” If the statute is аmbiguous, Chevron‘s Second Step then requires us to consider whether the Commission has acted pursuant to delegated authority and, if so,
whether its interpretation of the statute is “permissible.”
U.S. Postal Serv. v. PRC, 785 F.3d at 750 (quoting Chevron U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984)). “Even if the statute is ambiguous and does not foreclose the Commission‘s interpretation, however, the Commission‘s exercise of its authority must be ‘reasonable and reasonably explained’ in order to survive arbitrary and capricious review under the Administrative Procedure Act. Mfrs. Ry. Co. v. Surface Transp. Bd., 676 F.3d 1094, 1096 (D.C. Cir. 2012).” Id.; see also
In deciding whether the Commission‘s Order is arbitrary and capricious, we are “reluctan[t] to interfere with [the Commission‘s] reasoned judgments about technical questions within its area of expertise.” UPS v. PRC, 890 F.3d 1053, 1066 (D.C. Cir. 2018) (internal quotation marks omitted) (quoting All. of Nonprofit Mailers v. PRC, 790 F.3d 186, 197 (D.C. Cir. 2015)). At the same time, the Commission must adequately “consider” all the factors that the Accountability Act makes relevant, see Lindeen v. SEC, 825 F.3d 646, 657 (D.C. Cir. 2016), аnd the Commission‘s decision-making must be comprehensible, see U.S. Postal Serv. v. PRC, 785 F.3d 740, 753 (D.C. Cir. 2015); Glob. Tel*Link v. FCC, 866 F.3d 397, 413 (D.C. Cir. 2017).
B. The Commission‘s Disputed Interpretation and Application of § 3633(a)(3)
The dispositive question before the court in this case is whether the Commission, in reviewing its appropriate share determination, adequately discharged its statutory obligation to “consider” the “degree to which any costs are uniquely or disproportionately associated with any competitive products.” We hold that the Commission failed to do this and, therefore, we are constrained to remand the case.
We do not mean to render any decision on what the appropriate share determination under
As detailed above, the Commission‘s position appears to be that the term “costs . . . uniquely or disproportionately associated with any competitive products” in
As noted at the outset of this opinion, there are two significant problems with
with any competitive products.”
1. The Commission‘s Interpretation of Costs “Uniquely or Disproportionately Associated with Competitive Products” Under § 3633(b)
The Commission‘s current analysis of the relationship between costs “attributed through reliably identified causal relationships” and costs “uniquely or disproportionately associated with” is incomprehensible. In the passages from the Commission‘s Order reprinted above, the Commission assumes that the Postal Service‘s costs can be “uniquely or disproportionately associated with” competitive products only if there is a reliably identified causal relationship between those costs and competitive products. See Initial Notice at 43-44, J.A. 147-48; Order at 138-39, 657-58. In its brief to this court and at oral argument, however, the Commission‘s counsel suggests that the Commission gave the phrase “uniquely or disproportionately associated with” a distinct interpretation, and only then proceeded to conclude that there are no costs in that independent category that are not already attributed to competitive products under
At this point, we cannot credit either one of the foregoing interpretations of the Accountability Act. To start, the Commission cannot simply assume that the “uniquely or disproportionately associated with” standard is subsumed by the “reliably identified causal relationships” standard. That would impermissibly conflate the language of
As noted above, the Commission attempted to offer such an explanation in its brief to this court. The Commission belatedly argues that it did not “equate[]” the two statutory phrases “as an interpretative matter.” Br. for Respondent аt 34. Rather, the Commission now contends that it gave independent meaning to the statutory terms “uniquely . . . associated with” and “disproportionately associated with,” using the ordinary tools of statutory interpretation. See id. at 29-34; Tr. of Oral Argument at 54-55. Then, according to counsel, the Commission concluded that “all ‘uniquely associated’ costs and all ’
In any event, as things stand now, “we simply cannot comprehend the [Commissiоn‘s] reasoning” about the meaning and application of
to articulate a comprehensible standard . . . .” U.S. Postal Serv. v. PRC, 785 F.3d 740, 753 (D.C. Cir. 2015). “[W]e owe no deference to an agency determination that is ‘largely incomprehensible.‘” Id. (quoting Coburn v. McHugh, 679 F.3d 924, 926 (D.C. Cir. 2012)). The bottom line is that the Commission has not adequately explained why the statutory phrases at issue here have similar meanings, nor has it demonstrated that these statutory categories, even if distinct in meaning, nevertheless coincide in application. Therefore, the Commission‘s application of
2. The Commission‘s Consideration of “Any” Such Costs Under § 3633(b)
A second problem with the disputed Order is that, in focusing its analysis on costs attributed to competitive products under
The record in this case indicates that the Commission did not follow this statutory mandate. Instead, the Commission, relying on its inadequately explained interpretation of the Accountability Act, focused narrowly on the costs it had considered – and attributed – in promulgating regulations under
An agency Order that is at odds with the requirements of the applicable statute cannot survive judicial review. See, e.g., Michigan v. EPA, 135 S. Ct. 2699, 2706 (2015). “An agency‘s failure to consider and address during rulemaking ‘an important aspect of the problem’ renders its decision arbitrary and capricious. A ‘statutorily mandated factor, by definition, is an important aspect of any issue before an On remand, the Commission must consider all costs uniquely or disproportionately associated with competitive products in setting the appropriate share, even if it has аlready accounted for those costs under Furthermore, the Commission should fully address the issue left open in the court‘s 2018 decision in UPS v. PRC. The court in that decision recognized that, because the costs attributed test under In addition, the Commission must explain the relevance (if any) of costs it may have considered in implementing We do not mean for these examples to exhaust the issues that the Commission must address on remand, only to illustrate some of what a fuller “consider[ation]” of the relevant costs will involve. * * * In sum, the Commission must address the issues highlighted above before we can say whether its formula-based approach to determining the appropriate share under We take no position on this matter. It is not for this court to say that the Commission must account for costs in any specific way under For the reasons set forth above, we grant UPS‘s petition for review and remand the case to the Commission for further consideration consistent with this opinion.III. CONCLUSION