# United States Court of Appeals for the Federal Circuit

02-7395

CARPENTER, CHARTERED,

> Petitioner,

v\.

SECRETARY OF VETERANS AFFAIRS,

> Respondent.

[Alan M. Grayson]{.underline}, Grayson, Kubli & Hoffman, P.C., of
McLean, Virginia, argued for petitioner. On the brief were [Ira E.
Hoffman]{.underline}, and [James A. McMillan]{.underline}.

[Kyle E. Chadwick]{.underline}, Trial Attorney, Commercial Litigation
Branch, Civil Division, Department of Justice, of Washington, DC, argued
for respondent. On the brief were [David M. Cohen]{.underline},
Director; [Franklin E. White, Jr.]{.underline}, Assistant Director; and
[William C. Peachey]{.underline}, Trial Attorney. Of counsel on the
brief was [Michael J. Timinski]{.underline}, Staff Attorney, Department
of Veterans Affairs, of Washington, DC.

[Jeffrey Wood]{.underline}, of York, Pennsylvania, for amicus curiae
National Organization of Veterans' Advocates.

Appealed from: Department of Veterans Affairs

**United States Court of Appeals for the Federal Circuit**

02-7395

CARPENTER, CHARTERED,

> Petitioner,

v\.

SECRETARY OF VETERANS AFFAIRS,

> Respondent.
>
> \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
>
> DECIDED: September 11, 2003
>
> \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Before RADER, BRYSON, and GAJARSA, [Circuit Judges]{.underline}.

BRYSON, [Circuit Judge]{.underline}.

Since the Civil War era, Congress has limited the fees attorneys may
charge for representing persons who apply for veterans' benefits.
[See]{.underline} Act of July 14, 1862, §§ 6-7, 12 Stat. 566, 568. Those
limitations were originally implemented "to protect the veteran from
extortion or improvident bargains with unscrupulous lawyers" who
overcharged for work that consisted mainly of filing uncomplicated forms
for pension benefits on behalf of veterans with limited literacy skills.
[Walters v. Nat\'l Ass\'n of Radiation Survivors]{.underline}, 473 U.S.
305, 359-62 (1985) (Stevens, J., dissenting).

For more than 120 years, attorney fees for assisting veterans and their
survivors in prosecuting benefit claims were capped at \$10.
[See]{.underline} 38 U.S.C. 3404(c) (1988); [Walters]{.underline}, 473
U.S. at 308, 319. Congress purposely limited the role of lawyers in the
veterans' benefits process in order to protect claimants' benefits from
being diverted to lawyers and to avoid making the claims process
adversarial in nature, particularly in light of the highly effective
representation provided for free by veterans' service organizations.
[Walters]{.underline}, 473 U.S. at 322; S. Rep. No. 97-466, at 49
(1982).

In 1988, as part of the statute that provided for judicial review of
administrative decisions on veterans' claims, Congress repealed the \$10
fee cap and allowed attorneys to charge reasonable fees to represent
claimants, but only under certain circumstances. [See]{.underline}
Veterans' Judicial Review Act, Pub. L. No. 100-687, 102 Stat. 4105
(1988). The 1988 Act permitted attorneys to charge fees for services
rendered after a claim was decided by a regional office of the
Department of Veterans Affairs ("DVA") and the Board of Veterans'
Appeals ("BVA") issued a final decision on the claim. For services
rendered prior to that point in the process, the Act prohibited
attorneys from charging claimants for representation. [See]{.underline}
38 U.S.C. § 5904(c)(1). As was the case before the 1988 Act, however,
the DVA continued to permit attorneys and non-attorney agents to receive
fees or salaries from veterans' service organizations or other
disinterested third parties for prosecuting claims, even in
circumstances in which an attorney could not receive a fee from the
claimant. [See]{.underline} 38 C.F.R. § 20.609(d) (1992). The regulation
addressing disinterested third-party fee payers provides that "\[a\]n
attorney-at-law or agent may receive a fee or salary from an
organization, governmental entity, or other disinterested third party
for representation of a claimant or appellant even though the conditions
set forth in paragraph (c) \[regarding fees for services after a final
decision by the BVA\] have not been met." [Id.]{.underline}

In December 1997 the DVA proposed to amend the disinterested third-party
payer regulation. [Board of Veterans' Appeals: Rules of
Practice---Attorney Fee Matters]{.underline}, 62 Fed. Reg. 64,790 (Dec.
9, 1997). After receiving public comment on its proposed amendment, the
DVA published the final version of the rule on May 23, 2002. [Board of
Veterans' Appeals: Rules of Practice---Attorney Fee
Matters]{.underline}, 67 Fed. Reg. 36,102 (May 23, 2002). The new
regulation continued to permit an attorney or agent to receive a salary
or fee from a disinterested third party, but it contained three
additional provisions with respect to the payment of fees from third
parties for work done prior to the final decision of the BVA. First, it
prohibited an attorney or agent from charging a fee contingent, in whole
or in part, upon whether the matter is resolved favorably to the
claimant or appellant. Second, it established a rebuttable presumption
that the spouse, child, or parent of the claimant, or a person residing
with the claimant, is not a disinterested third party. Third, it
required that all agreements for payment by a third party be in writing,
be filed with the Board, and include a certification by the attorney or
agent that "no agreement, oral or otherwise, exists under which the
claimant or appellant will provide anything of value to the third-party
payer . . . in return for payment of \[the attorney's\] fee or salary,
including, but not limited to, reimbursement of any fees paid." 38
C.F.R. § 20.609(d)(2); 67 Fed. Reg. at 36,104.

Carpenter, Chartered ("Carpenter"), a law firm engaged in representing
veterans' benefits claimants, has petitioned this court under 38 U.S.C.
§ 502 for judicial review of the new regulation. Carpenter asserts that
the new regulation is invalid because it is unauthorized by statute,
because it is arbitrary and capricious, and because it was issued in
violation of the Regulatory Flexibility Act, 5 U.S.C. § 604.

I

Congress granted the Secretary of Veterans Affairs authority "to
prescribe all rules and regulations which are necessary or appropriate
to carry out the laws administered by the Department and are consistent
with those laws." 38 U.S.C. § 501(a). Based on that authority, the DVA
proposed the challenged amendments to the third-party payer regulation
in order to "establish safeguards" relating to the statutory restriction
on the payment of attorney fees for services rendered before the BVA's
first final decision on an issue. [See]{.underline} 62 Fed. Reg. at
64,791.

Carpenter argues that the statutory prohibition on the payment of fees
prior to the first final decision of the BVA, 38 U.S.C. § 5904(c),
applies to fees paid by claimants, not by third parties, and that the
DVA's regulation governing third-party fee payments addresses conduct
outside the scope of the statute and is thus [ultra vires]{.underline}.
Although the language of section 5904(c) is broad, it has been construed
as applying only to fee payments made by recipients of veteran benefits,
and not to payments by disinterested fee payers that are not derived,
directly or indirectly, from the claimant or intended beneficiary.
[See]{.underline} [United States v. Welty]{.underline}, 2 F.2d 562 (6th
Cir. 1924); U.S. Dep't of Justice, Office of Legal Counsel, [Legality of
State Payments to Attorneys Representing Veterans]{.underline}, 10 Op.
Off. Legal Counsel 1, 3 n.10 (1986). Nonetheless, the fact that section
5904(c) does not prohibit payments by disinterested fee payers does not
mean that the DVA may not regulate payments by such fee payers.

The Supreme Court has held that when Congress grants an agency the
authority to make such rules and regulations as may be necessary to
carry out the provisions of a particular statute, a regulation
promulgated pursuant to that authority will be upheld as long as it is
"reasonably related to the purposes of the enabling legislation."
[Mourning v. Family Publ'ns Serv., Inc.]{.underline}, 411 U.S. 356, 369
(1973); [Thorpe v. Hous. Auth. of the City of Durham]{.underline}, 393
U.S. 268, 280-81 (1969). Moreover, a regulation is reasonably related to
the purposes of the legislation to which it relates if the regulation
serves to prevent circumvention of the statute and is not inconsistent
with the statutory provisions. [See]{.underline} [Thomas Int'l, Ltd. v.
United States]{.underline}, 773 F.2d 300, 304-05 (Fed. Cir. 1985)
(upholding a Treasury Department regulation that guards against evasion
of a statutory requirement and is not inconsistent with the statute);
[Clifton v. Fed. Election Comm'n]{.underline}, 114 F.3d 1309, 1312 (1st
Cir. 1997) ("Normally an agency with rulemaking power has a measure of
latitude where it is dealing with the regulated entity . . . and where
the rule is reasonably designed to achieve the statute's goal . . . .
Agencies often are allowed through rulemaking to regulate beyond the
express substantive directives of the statute, so long as the statute is
not contradicted."); [Ohio v. U.S. Dep't of the Interior]{.underline},
880 F.2d 432, 473-74 (D.C. Cir. 1989) (agency's promulgation of
accounting and planning requirements "is a perfectly sensible means of
ensuring that state trustees obey the statutory command"); [Mattes v.
United States]{.underline}, 721 F.2d 1125, 1131 (7th Cir. 1983)
(upholding Agriculture Department's denial of registration to operate a
stockyard where such denial was necessary to prevent circumvention of a
statutory suspension order); [Merged Area X (Educ.) v.
Cleland]{.underline}, 604 F.2d 1075, 1080 (6th Cir. 1979) (the
regulatory "imposition of uniform criteria \[as to the meaning of
'semester hour' as applied to institutions of higher learning where
attending veterans receive educational benefits\] is necessary to
prevent circumvention of the \[statutory\] twelve semester hour limit
which would occur if each institution could define 'semester hour' as it
wished").

In light of those principles, the DVA is authorized to issue rules
governing attorney fee payments by putatively disinterested third-party
payers. In particular, the agency is authorized to issue rules governing
the conduct of third-party fee payers where those rules are designed to
prevent circumvention of the statutory prohibition against attorney fee
payments made by the claimant or from funds intended for the benefit of
the claimant. That is precisely the basis that the DVA gave for adopting
the 2002 amendments to its disinterested third-party payer regulation.
[See]{.underline} 67 Fed. Reg. at 36,103 ("\[T\]hese changes are
necessary to help enforce statutory limitations on payment that are
being violated. . . . \[I\]t is our experience that third-party
agreements are being used to evade those limitations.").

Carpenter contends that the 2002 amendments to the disinterested
third-party payer regulation are contrary to the statute they purport to
implement, 38 U.S.C. § 5904(c), and that the amendments are therefore
invalid. While it is true that the statute has been construed not to
apply by its terms to third-party fee payers, that does not mean that
any regulation of such fee payers is contrary to the statutory policy.
Nothing in the statute suggests that Congress intended to immunize
third-party fee payers from regulation, and to the extent that
third-party payments are used to evade the statutory prohibition against
the direct payment of fees from claimants' assets, the regulation of
such third-party fee payments is consistent with the purposes underlying
the statute.

Contrary to Carpenter's contention, this case is quite different from
[Brown v. Gardner]{.underline}, 513 U.S. 115 (1994). In that case, the
Supreme Court struck down a DVA regulation that required a veteran who
suffered an injury in the course of treatment at a DVA medical facility
to demonstrate that the injury was the result of fault on the part of
the treating personnel or an accident during treatment. The Court held
that the applicable statute, 38 U.S.C. § 1151, required only that the
injury occur as the result of medical treatment or rehabilitation, not
as the result of the veteran's own willful misconduct, and that the
statute did not admit of a construction adding a further requirement
that the injury be the product of fault or accident. 513 U.S. at 120. In
this case, by contrast, there is no inconsistency between the statute,
which prohibits fee payments by claimants, and the regulation, which
seeks to prevent circumvention of the statutory prohibition through the
use of third-party fee payers. Thus, we reject Carpenter's broad
argument that the DVA lacks statutory authority to regulate
disinterested fee payers in any way, or that the DVA's effort to
regulate third-party fee payers is contrary to section 5904(c).

II

We next turn to the question whether the 2002 amendments constituted
reasonable means to guard against the circumvention of the statutory
policies. The DVA stated that the 2002 amendments to the disinterested
third-party payer rule were needed "to help enforce statutory
limitations on payment that are being violated." 67 Fed. Reg. at 36,103.
Based on its experience, the agency found that "the majority of
third-party \[attorney fee\] agreements are rather blatant attempts to
avoid the restriction, imposed by the Veterans' Judicial Review Act
. . . that attorneys may not charge veterans for services which are
rendered before the first final Board decision on an issue." Carpenter
argues that those assertions are unsupported by reason or by the
rulemaking record.

Carpenter first contends that there is no need to regulate third-party
payers in order to prevent circumvention of statutory policy. The DVA,
however, pointed to circumstances that justified an inference that at
least some third-party fees were being paid out of funds that were
intended for the benefit of the claimant. For example, the agency cited
evidence that in many cases involving contingent fee arrangements, the
third-party payer had the same last name as the claimant or was
identified as being a member of the claimant's family. While that
evidence is not conclusive proof that the third parties in question were
not disinterested, it is reasonable to infer that in at least some such
cases attorneys' fees were paid from assets to which the third parties
and the claimants both had access. Moreover, it is unnecessary for an
agency to prove that circumvention has occurred in the past in order
sustain an anti-circumvention regulation as reasonable; a regulation can
be justified by a reasonable expectation that it will prevent
circumvention of statutory policy in the future. [See]{.underline} [FCC
v. Nat'l Citizens Comm. for Broad.]{.underline}, 436 U.S. 775, 813-14
(1978); [Mortgage Investors Corp. v. Gober]{.underline}, 220 F.3d 1375,
1380 (Fed. Cir. 2000). We agree with the DVA that permitting third-party
payers to pay attorney fees in cases in which claimants are barred by
statute from making such payments presents the risk that third-party
payers may be used to circumvent the statutory prohibition. Accordingly,
it was reasonable for the agency to attempt to prohibit such
circumvention.

Carpenter challenges all three of the amendments to the disinterested
third-party payer regulation: the requirement that attorneys certify
that third-party fees do not come from the claimant; the presumption
that a claimant's close family members are not disinterested; and the
prohibition against third-party contingent fee agreements. We are
unpersuaded by the challenges to each of those provisions.

First, it is hard to quarrel with the regulatory requirement that
attorneys who enter into third-party fee agreements certify that the
claimant has not agreed to reimburse or otherwise compensate the third
party for paying the attorney's fee in connection with the claim. That
requirement directly enforces the statutory policy against having
claimants pay attorney fees for work done before the first final BVA
decision, and it is therefore a manifestly reasonable means of avoiding
circumvention.

Similarly, it is reasonable for the agency to define what constitutes a
disinterested third party. Although Carpenter argues that the agency did
not adduce evidence to support its conclusion that there should be a
presumption of interest with respect to a spouse, child, or parent of
the claimant, or a person residing with the claimant, the
characterization of such persons as unlikely to be disinterested is
reasonable on its face and is not the kind of characterization that
needs evidentiary support. As the DVA stated in the rulemaking
proceedings, "persons in such relationships usually have some financial
or other interest in the success of the claim and are therefore unlikely
to be disinterested." The regulation permits the presumption of interest
to be rebutted in the case of such persons. However, the likelihood that
such a person is not acting independently of the claimant and that a
contingent fee payment by such a person will ultimately be derived from
assets that belong to the claimant is sufficiently great that a
presumption of interest is permissible even in the absence of direct
evidentiary support. Accordingly, we cannot agree with Carpenter's
contention that the basis for establishing a rebuttable presumption of
interest is irrational.

Carpenter's principal challenge is to the reasonableness of the DVA's
prohibition of contingent fee agreements with disinterested third
parties for work done prior to a final BVA decision on the issue. The
DVA explained that in its experience contingent fee agreements have been
used to evade the statutory prohibition on claimant-paid attorney fees.
The DVA outlined its experience with the use of contingent fees in
connection with third-party fee payers as follows:

In dealing with \[the third-party fee payer\] exception over the years,
we have reviewed fee agreements that list individuals as "disinterested
third parties" who appear to be no more than "straw men," i.e., nominal
fee payers who really serve as a mere conduit for a prohibited payment
by a claimant or appellant. Typically, such "disinterested third
parties" will agree to pay a fee equal to some percentage of the amount
of any past-due benefits awarded the claimant, contingent upon a
successful outcome. Indeed, some contracts we have reviewed call for
payment of a percentage of the actual past-due benefits by these third
parties, a legally impossible feat because of the nonassignability of
veterans' benefits under 38 U.S.C. 5301.

62 Fed. Reg. at 64,792. The DVA further noted that its experience has
shown that contingency fee arrangements "set the stage for a transfer
from the veteran to the third party to the attorney." [Id.]{.underline}

Carpenter argues that the evidence of record does not show that
third-party contingent fee agreements have been used to contravene the
statutory restrictions. We disagree. Apart from the agency's statements
as to its experience with such agreements, there was evidence in the
rulemaking record from which the agency could reasonably conclude that
third-party contingent fee agreements were being used to circumvent the
statute.

First, the agency analyzed a number of third-party fee agreements and
discovered that the vast majority of those agreements in which the third
party had either the same last name or an identified familial
relationship with the claimant were contingent fee agreements. That
evidence suggests that many third-party fee payers who used contingent
fee agreements were not truly disinterested, and thus that the use of
contingent fees in that setting increased the likelihood that the fees
would be paid from funds that would otherwise be available to the
claimant.

Moreover, several of the comments that the DVA received regarding the
proposed amendments to the third-party payer regulation, although
intended to be critical, actually buttressed the agency's showing that
it had a legitimate concern about the abusive use of contingent fee
agreements by third-party fee payers. For example, one commenter
suggested that the DVA abandon the restrictions on third-party
contingency fee agreements because "people will violate the law anyway,"
which clearly suggests that third-party contingency fee agreements were
being used to circumvent the statutory prohibition.

Another commenter stated that without a contingency fee agreement, "I
charge a third party a fee of \$10,000.00 to handle a case with
potentially large back benefits. The case is lost. The third party now
hounds the veteran for his money. (He is not supposed to, but this is
the real world!)" Implicit in that statement is the recognition that the
contingent fee arrangement with a third party is simply an indirect
mechanism for obtaining a fee from funds that would otherwise go to the
claimant, since in the commenter's view such third parties do not expect
to shoulder the burden of the fee.

Still another commenter suggested that without third-party contingent
agreements claimants would not be able to afford attorneys. That
comment, too, indicates that it is the claimants, not disinterested
third parties, who are actually paying the attorneys. If a disinterested
third party were paying the attorney's fee, the represented claimant's
ability to pay would be irrelevant.

The problem addressed by the amendments to the disinterested third-party
payer regulation is not a new one. More than 75 years ago, the Sixth
Circuit considered the intent of Congress in limiting attorneys' fees
for services rendered in obtaining veterans benefits. [See]{.underline}
[Welty v. United States]{.underline}, 2 F.2d 562 (6th Cir. 1924). The
court determined that a third party (in that case the claimant's
father), "desirous of performing a charitable act" by paying an attorney
on behalf the veteran (his son) would not violate the predecessor of
section 5904(c), as long as the fee arrangement did not in any way
"affect the property interests of the applicant himself."
[Id.]{.underline} at 564. However, the court noted that if the fee
agreement between the third party and the attorney "were more or less of
a subterfuge intended to hide \[an\] actual transaction" involving
payment from the benefit award, the statute would be violated.
[Id.]{.underline} The [Welty]{.underline} case illustrates the kind of
controversy that prompted the DVA regulations and the risk of abuse that
the amendments were intended to address.

In light of the evidence in the rulemaking record and the analysis
provided by the agency in the proposed rulemaking and in connection with
the promulgation of the final rule, we conclude that the 2002 amendments
to the disinterested third-party payer rule are "rational, based on
consideration of the relevant factors, and within the scope of the
authority delegated to the agency by the statute." [Motor Vehicle Mfrs.
Ass\'n v. State Farm Mut. Auto. Ins. Co.]{.underline}, 463 U.S. 29, 42
(1983). While the agency might rationally have drawn different
conclusions about the seriousness of the problem addressed or the
suitability of the particular mechanisms chosen to address the problem,
we cannot say that the agency was unreasonable in concluding that
third-party fee agreements were being used, or were likely to be used,
to circumvent the statutory prohibition on the payment of attorney fees
by claimants, nor can we conclude that the method chosen by the agency
to address that perceived problem was irrational.

Carpenter argues that restrictions on contingency agreements will impair
the ability of claimants to be represented by counsel and will
discourage legitimate claims. That argument, however, is addressed more
to the prohibition against paid representation than to the regulatory
provisions governing third-party payers. When it enacted the 1988
legislation, Congress was aware of the arguments that claimants should
have more ready access to counsel during the early phases of the claims
process, and Congress rejected those arguments. Given Congress's
determination as to that issue, the 2002 amendments to the agency's
disinterested third-party payer regulation cannot be deemed arbitrary
and capricious, and we therefore uphold them.

III

The Regulatory Flexibility Act requires an agency to prepare and publish
an analysis of the impact of proposed rules on small entities. 5 U.S.C.
§§ 603, 604. An agency need not publish such an analysis, however, if
the head of the agency certifies that the rule will not "have a
significant economic impact on a substantial number of small entities."
5 U.S.C. § 605(b). That certification must be published in the Federal
Register and be accompanied by "a statement providing the factual basis
for such certification." [Id.]{.underline} In lieu of a regulatory
flexibility analysis, the Secretary of Veterans Affairs certified that
the disinterested third-party payer rules would "affect only the
processing of claims by VA and will not affect small businesses." 62
Fed. Reg. at 64,792; 67 Fed. Reg. at 36,104.

Carpenter argues that the Secretary's certification was invalid because
the DVA failed to conduct a regulatory flexibility analysis and ignored
the facts regarding the impact of the new rule on small entities. The
DVA, however, viewed the 2002 amendments not as prohibiting fee
arrangements that had previously been permissible, but rather as
providing a means of enforcing a statutory prohibition that was already
in place against the use of claimants' assets to pay attorney fees for
work done prior to the final decision of the BVA on an issue. Thus,
because the effect of the amendments would be to prevent fee
arrangements that were already unlawful under current statutory
standards, they would not have a substantial effect on the legitimate
activities of any small entities.

We uphold the Secretary's conclusion that the amendments are not likely
to have a significant effect on a substantial number of small
businesses. To the extent that the new regulation imposes reporting and
certification requirements, the effect on small businesses is minimal.
To the extent that the new regulation adopts a presumption that close
relatives of the claimant are not disinterested third parties, it merely
provides a mechanism for enforcing a principle that was already implicit
in the statutory prohibition against the payment of attorney fees from a
claimant's assets. Finally, to the extent that the new regulation
prohibits putatively disinterested third parties from entering
contingent fee agreements with attorneys, it was reasonable for the
Secretary to conclude that that prohibition would not have a significant
economic effect on small businesses because---as the Department
explained in its written response to comments on the regulations---there
is no legitimate reason for a truly disinterested third party to enter
into a contingent fee arrangement. [See]{.underline} 67 Fed. Reg. at
36,103 ("By definition, a disinterested third party will receive no
benefit from any award to the veteran, so that the outcome can generate
no funds with which to pay the attorney.").

Even assuming that the disinterested third-party payer regulations will
have an effect on the legitimate economic activities of some lawyers who
represent veterans' benefit claimants, the record does not support
Carpenter's contention that a substantial number of small entities will
be affected by the new regulation. The record does not establish that a
large number of attorneys regularly have contingent fee agreements with
putatively disinterested third parties. Moreover, as noted, the
continued availability of non-contingency fee agreements with
disinterested third parties limits the economic impact that the 2002
amendments may have even on those attorneys who have regularly entered
into contingent fee arrangements with third parties in the past.
Accordingly, in view of the record as a whole, we cannot say that the
Secretary abused his discretion when he certified that the amendments
would not have a significant impact on a substantial number of small
entities. [See]{.underline} S. Rep. No. 96-878, at 14 (1980), [reprinted
in]{.underline} 1980 U.S.C.C.A.N. 2801 (stating Committee's intention
that an agency's certification that a rule will not adversely affect
small businesses, "if made in good faith and based on sound evidence,
shall be granted great deference by the courts"). We therefore conclude
that the challenged regulation was within the DVA's authority to
promulgate and was not issued in violation of the Regulatory Flexibility
Act.

[PETITION DENIED]{.underline}.