Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-13-05370/USCOURTS-caDC-13-05370-0/pdf.json

Nature of Suit Code: 151
Nature of Suit: Overpayments under the Medicare Act
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 21, 2015 Decided December 1, 2015

No. 13–5370

CANONSBURG GENERAL HOSPITAL,

APPELLANT

v.

SYLVIA MATHEWS BURWELL, SECRETARY,

U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:09–cv–02385)

Sven C. Collins argued the cause for the appellant. 

Stephen P. Nash was with him on brief.

Benjamin M. Shultz, Attorney, United States Department 

of Justice, argued the cause for the appellee. Benjamin C. 

Mizer, Principal Deputy Assistant Attorney General, Vincent 

H. Cohen, Jr., Acting United States Attorney and Michael S. 

Raab, Attorney, were with him on brief. R. Craig Lawrence, 

Assistant United States Attorney, entered an appearance.

Before: HENDERSON, Circuit Judge, and EDWARDS and 

SENTELLE, Senior Circuit Judges.

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Opinion for the Court filed by Circuit Judge HENDERSON.

KAREN LECRAFT HENDERSON, Circuit Judge: To 

administer Medicare reimbursements to healthcare providers, 

the Congress authorized the Secretary (Secretary) of the 

Department of Health and Human Services (HHS) to 

promulgate regulations setting the maximum cost amount HHS 

may reimburse a healthcare provider for services provided a 

Medicare beneficiary. Pursuant to this authority, the 

Secretary issued regulations setting out reasonable cost limits

(RCLs) for specified medical services and establishing certain 

exceptions to those limits. Canonsburg General Hospital

(Canonsburg) was the beneficiary of one such exception for 

many years beginning in 1987. Then, in 1998, it alleged that 

the Secretary’s revised calculation of the exception unlawfully 

created a “reimbursement gap”, which unfairly deprived it of 

the reasonable costs of its services. In 2001, Canonsburg 

contested the recalculation in a lawsuit brought in federal

district court in Pennsylvania. Canonsburg Gen. Hosp. v. 

Thompson (Canonsburg I), No. 00-cv-0284, 2001 WL 

36339671 (W.D. Pa. Feb. 28, 2001). The district court upheld 

the Secretary’s action. See id. at *5. In this case, 

Canonsburg continues to claim that the Secretary has violated 

the Administrative Procedure Act (APA), 5 U.S.C. §§ 551 et 

seq., because her method of calculation is inconsistent with 

governing regulations and was promulgated without notice and 

comment. In light of Canonsburg I, the district court granted 

the Secretary’s motion for summary judgment, concluding that 

issue preclusion barred Canonsburg’s suit. Canonsburg Gen. 

Hosp. v. Sebelius (Canonsburg II), 989 F. Supp. 2d 8, 30 

(D.D.C. 2013). For the reasons set forth below, we affirm.

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I. BACKGROUND

A. REASONABLE COST LIMITS AND THE ATYPICAL 

SERVICES EXCEPTION IN MEDICARE REIMBURSEMENT

Through the Centers for Medicare and Medicaid Services 

(CMS), the Secretary provides for the reimbursement of the 

reasonable costs of healthcare services for Medicare 

beneficiaries. See 42 U.S.C. § 1395f(b)(1)(A). Two aspects 

of the reimbursement scheme are relevant here.

The first is the system for managing the costs of 

reimbursement. Healthcare providers submit requests for 

reimbursement for services provided to Medicare 

beneficiaries, subject to the RCLs the Secretary has calculated 

based on statutory and regulatory restrictions. See 42 U.S.C. 

§§ 1395c–1395g; see also St. Francis Health Care Ctr. v. 

Shalala, 205 F.3d 937, 939–43 (6th Cir. 2000) (explaining how 

the Secretary calculates RCLs). The Secretary may adjust 

RCLs according to certain exceptions and allow skilled nursing 

facilities (SNFs) to be reimbursed above the established RCLs. 

See 42 U.S.C. § 1395yy(c); 42 C.F.R. § 413.30(e).

One such exception is the “atypical services” exception, 

which generally allows a healthcare provider to be reimbursed 

above the RCLs if the service it provides is, inter alia, 

“atypical in nature and scope.” 1

 42 C.F.R. § 413.30(e)(1). 

 1 The “atypical services” exception initially provided for an 

upward adjustment to an RCL if “[t]he provider can show that the:

(i) Actual cost of items or services furnished by a 

provider exceeds the applicable limit because such 

items or services are atypical in nature and scope, 

compared to the items or services generally 

furnished by providers similarly classified; and

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For years, both hospital-based and freestanding SNFs 2

received full reimbursement for atypical services under this 

exception. See Canonsburg II, 989 F. Supp. 2d at 13. In 

1994, however, that changed. In order to effect 

congressionally directed cost savings, the Secretary altered the 

calculation for the atypical services exception for 

hospital-based SNFs. The new calculation, set forth in section 

2534.5 of the Medicare Provider Reimbursement Manual

(section 2534.5), created a reimbursement “gap” for 

hospital-based SNFs. Ctrs. for Medicare & Medicaid Servs., 

Provider Reimbursement Manual Part I § 2534.5, available at 

http://wayback.archive-it.org/2744/20111201152312/http://w

ww.cms.gov/Manuals/PBM/list.asp (last visited Nov. 16, 

2015). Whereas freestanding SNFs continued to receive 

reimbursement for the full cost of their atypical services, 

hospital-based SNFs were reimbursed below full cost. St. 

Francis, 205 F.3d at 941–43 (explaining section 2534.5 gap 

created for hospital-based SNFs).

 

(ii) Atypical items or services are furnished because 

of the special needs of the patients treated and are 

necessary in the efficient delivery of needed health 

care.”

42 C.F.R. § 413.30(f)(1) (1996) (currently promulgated with 

non-material alterations at 42 C.F.R. § 413.30(e)(1)); see also

Limitations on Coverage of Costs Under Medicare, 39 Fed. Reg. 

20,164, 20,165 (June 6, 1974) (describing original atypical services 

exception). As discussed infra n.3, the 1996 regulation is the 

version relevant to this appeal.

2 In calculating RCLs, the Secretary categorized healthcare 

providers into four groups depending on whether the provider’s 

facility is freestanding or hospital-based and on whether the facility 

is urban or rural. 42 U.S.C. § 1395yy(a). 

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The second relevant aspect of the Medicare 

reimbursement scheme involves the claims process itself. 

Under that process, an SNF submits a claim for reimbursement 

to a private intermediary, which processes the claim and 

provides reimbursement under CMS’s authority. See 42 

U.S.C. § 1395kk-1(a). The provider can appeal an 

unfavorable reimbursement decision to the Provider 

Reimbursement Review Board (PRRB), id. § 1395oo(a),

whose members are appointed by the Secretary, id.

§ 1395oo(h). All proceedings before the PRRB are between 

the provider and the intermediary—neither the Secretary nor 

CMS is a party to the proceedings and the Secretary can 

participate only by filing an amicus brief or by providing 

counsel for the intermediary. 42 C.F.R. § 405.1843(a)–(d). 

The Secretary, however, has the discretionary authority to 

reverse, affirm or modify the PRRB’s decision. See 42 U.S.C. 

§ 1395oo(f)(1). The provider can seek review of the PRRB’s

decision—or the Secretary’s decision if she exercises her 

discretion—in the district court “for the judicial district in 

which the provider is located” or in the “District Court for the 

District of Columbia”. Id. 

B. WESTERN DISTRICT OF PENNSYLVANIA LITIGATION

Canonsburg is a hospital-based SNF that has participated 

in the Medicare reimbursement program since 1984. 

Beginning in fiscal year 1987, Canonsburg applied for, and 

obtained, the atypical services exception for costs exceeding its

RCLs. In 1994, however, the Secretary’s revised gap 

methodology interpretation of section 2534.5 began to limit 

Canonsburg’s reimbursements.3 

 3 The Congress has since eliminated retrospective cost-based 

reimbursements for all SNFs and replaced that system with a 

prospective payment scheme. See Balanced Budget Act of 1997, 

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In 2001, Canonsburg appealed a final reimbursement

decision of the Secretary in the Western District of 

Pennsylvania, challenging section 2534.5 as applied to its 

reimbursements for fiscal years 1987 through 1990 and 1993. 

See Canonsburg I, 2001 WL 36339671, at *1. Canonsburg 

alleged that section 2534.5 was arbitrary, capricious and 

inconsistent with statutory language because it (1) “violate[d] 

the applicable cost limit statu[t]e, 42 U.S.C. § 1395yy(c), and 

regulation, 42 C.F.R. § 413.30(f)”; (2) was procedurally 

invalid because “it is a substantive r[u]le, yet it was not passed 

pursuant to the notice and comment requirements” of the APA; 

and (3) unreasonably discriminated between freestanding and 

hospital-based SNFs “in the exception process.” Canonsburg 

I, 2001 WL 36339671, at *3–4. The district court rejected all 

of Canonsburg’s arguments, relying heavily on a Sixth Circuit 

decision upholding section 2534.5. See Canonsburg I, 2001 

WL 36339671, at *4–5 (citing St. Francis Health Care Ctr. v. 

Shalala, 205 F.3d 937 (6th Cir. 2000)). The court first 

concluded that the statutory language (42 U.S.C. § 1395yy), as

well as the regulatory language (42 C.F.R. § 413.30), regarding 

reasonable costs was permissive, not mandatory, and that the 

Secretary’s interpretation of the language was reasonable. 

See Canonsburg I, 2001 WL 36339671, at *4. The court also 

viewed section 2534.5 as an interpretative rule, not a 

substantive rule, and thus concluded that it did not require 

notice and comment. See id. Finally, the court found no 

merit in Canonsburg’s discrimination argument, holding that 

 

Pub. L. No. 105-33, § 4432(a), 111 Stat. 251, 414–20 (codified at 42 

U.S.C. § 1395yy(e)). The amendments to the cost-based 

reimbursement system for SNFs applied to cost reporting periods 

beginning on or after July 1, 1998, see 42 U.S.C. § 1395yy(e)(2)(D); 

accordingly, Canonsburg’s petition for review of its fiscal year 1996

reimbursement requires analysis of the earlier retrospective 

cost-based reimbursement system.

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the Congress treated freestanding and hospital-based SNFs the 

same once it removed the excess costs from the hospital-based 

RCLs. See id. Canonsburg did not appeal the district court’s 

grant of summary judgment in favor of the Secretary.

C. ADMINISTRATIVE PROCEEDINGS

In the late 1990s—and separate from the Canonsburg I 

litigation—Canonsburg began an administrative challenge to 

its reimbursement for fiscal year 1996. Canonsburg included 

in its reimbursement request a disallowance of $470,528, 

corresponding to the gap created by section 2534.5, but 

nevertheless claimed that it should be entitled to those funds. 

The Medicare intermediary granted Canonsburg the atypical 

services exception in a May 4, 1998 decision but disallowed 

the $470,528 in costs corresponding to the section 2534.5 gap. 

The intermediary also disallowed an additional $46,765 of 

offset costs that, according to its calculations, should have been 

included in the section 2534.5 gap but were not listed in the 

disallowance filed with Canonsburg’s reimbursement request. 

Canonsburg appealed the $526,2934 of disallowed costs to the 

 4 Canonsburg claimed an amount in controversy of $526,293 

in its complaint. Compl. 15, ECF No. 1, Canonsburg II, 

No. 1:09-cv-02385 (D.D.C. Dec. 17, 2009). The complaint lists a 

self-disallowance amount of $470,528 and further disallowance of 

$46,765 by the intermediary. Id. ¶¶ 37–38. Canonsburg states that 

the intermediary disallowed $529,943 total in costs, see id. ¶ 39, but 

Canonsburg appealed only $526,293 to the PRRB, see id. The sum 

of the $470,528 in self-disallowance and $46,765 in additional 

intermediary disallowance is $517,293—the record does not 

manifest why the amount in controversy differs from the sum of the 

disallowances.

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PRRB, which reversed the intermediary’s decision. 5 

Canonsburg made the same arguments before the PRRB that it 

had made in Canonsburg I in 2001 and also relied on more 

recent decisions invalidating section 2534.5 as arbitrary and 

capricious. See St. Luke’s Methodist Hosp. v. Thompson, 315 

F.3d 984, 988–89 (8th Cir. 2003) (striking down section 

2534.5 because HHS misconstrued reimbursement for typical 

and atypical services costs); Montefiore Med. Ctr. v. Leavitt, 

578 F. Supp. 2d 129, 133–34 (D.D.C. 2008) (finding 

section 2534.5 violated APA because HHS failed to provide 

notice and comment in promulgating section 2534.5); Mercy 

Med. Skilled Nursing Facility v. Thompson, No. 

C.A.99-2765TPJ, 2004 WL 3541332, at *2–3 (D.D.C. May 14, 

2004) (same). Canonsburg did not mention Canonsburg I in 

its PRRB filings. The PRRB found section 2534.5 to be 

“illogical[],” concluding that the Secretary confused typical 

and atypical services costs in her section 2534.5 calculation 

and created a gap inconsistent with statute and regulation. See 

Provider Reimbursement Review Board Decision 41–42. The 

PRRB further concluded that section 2534.5 was procedurally 

infirm, reasoning that it was either a substantive rule 

promulgated without notice and comment or a revision to an 

interpretative rule which, because it constituted a “fundamental 

modification” of HHS’s previous interpretation and was 

implemented without notice and comment, violated the 

holding in Paralyzed Veterans of America v. D.C. Arena L.P., 

117 F.3d 579, 586–88 (D.C. Cir. 1997) (requiring agencies to 

use notice and comment rulemaking when substantively 

revising interpretative rule), abrogated by Perez v. Mortgage 

Bankers Ass’n, 135 S. Ct. 1199 (2015).

 5 Canonsburg timely appealed the intermediary’s decision to 

the PRRB but the PRRB did not decide Canonsburg’s appeal until 

August 2009, almost a decade later.

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On discretionary review of the PRRB decision, the CMS 

Administrator reversed the PRRB. 6 The Administrator 

concluded that section 2534.5 is “reasonable and appropriate, 

as [it] closely adhere[s] to” the statutory and regulatory 

language establishing RCLs and “in no way alters, or revises, 

Medicare policy as set forth in the regulations” implementing 

the atypical services exception. Decision of the Administrator

13–14. She further determined that section 2534.5 does not 

“constitute . . . a change in policy requiring notice and 

comment rule-making under 5 U.S.C. § 552.” Id. at 15–16.

D. PROCEEDINGS IN D.C. DISTRICT COURT

Canonsburg timely filed the instant suit in district court 

seeking judicial review of the CMS Administrator’s decision. 

As in Canonsburg I, Canonsburg argued that section 2534.5 is 

arbitrary and capricious because it is inconsistent with the 

governing statute and regulations, represents an arbitrary 

change to the Agency’s longstanding interpretation of the 

regulations, was promulgated without required notice and 

comment and discriminates in favor of freestanding SNFs. 

The Secretary answered, raising issue preclusion as an 

affirmative defense. See generally FED. R. CIV. P. 8(c)(1) 

(listing res judicata as an affirmative defense). The Secretary 

subsequently moved for summary judgment, repeating her 

issue-preclusion argument and defending section 2534.5 on the 

merits. Canonsburg opposed summary judgment, arguing 

that the Secretary had waived issue preclusion by failing to 

 6 The Secretary did not review the PRRB decision directly 

because her review authority is delegated under 42 U.S.C. 

§ 1395oo(f) to the CMS Administrator. See generally 42 C.F.R. 

§ 405.1875 (“Administrator . . . . may immediately review any 

decision of the Board . . . .”). The Administrator’s review 

represents HHS’s final action in Canonsburg’s appeal. 

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raise it during the administrative proceedings and that equity 

strongly disfavored application of issue preclusion in this case 

because none of the policy rationales that traditionally support 

issue preclusion applied to Canonsburg’s suit.

7

On October 17, 2013, the district court granted the 

Secretary’s motion for summary judgment on the issue 

preclusion ground. See Canonsburg II, 989 F. Supp. 2d at 30. 

The court noted that Canonsburg did not dispute that the 

validity of section 2534.5 had been raised and contested, and 

actually and necessarily decided, in Canonsburg I. See id. at 

17. It rejected Canonsburg’s waiver and equity arguments. 

See id. at 18–19, 24–27. The court held “that, because the 

parties and issues are identical to those in Canonsburg I, . . . 

the plaintiff had a full and fair opportunity to litigate with 

adequate incentives to do so, and the application of issue

preclusion would not inflict a fundamental unfairness on the 

plaintiff,” Canonsburg was barred from relitigating the issues 

resolved in Canonsburg I. Id. at 30. Canonsburg timely 

appealed.

II. ANALYSIS

We review a grant of summary judgment de novo. Dist. 

Hosp. Partners v. Burwell, 786 F.3d 46, 54 (D.C. Cir. 2015). 

Summary judgment is granted “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). 

“In reviewing a grant of summary judgment, we must view the 

 7 Canonsburg also argued that the legal landscape regarding 

the Paralyzed Veterans doctrine had changed since Canonsburg I, 

thus preventing application of issue preclusion. Recognizing the 

Supreme Court’s abrogation of the Paralyzed Veterans doctrine in 

Perez, 135 S. Ct. at 1206–07, during the pendency of the appeal, we 

instructed the parties to omit the argument from their briefs.

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evidence in the light most favorable to the nonmoving party 

and draw all reasonable inferences in its favor.” Woodruff v. 

Peters, 482 F.3d 521, 526 (D.C. Cir. 2007) (internal quotation 

marks omitted). “[I]n a case like the instant one, in which the 

[d]istrict [c]ourt reviewed an agency action under the APA, we 

review the administrative action directly[,] according no 

particular deference to the judgment of the [d]istrict [c]ourt.” 

Ass’n of Private Sector Colls. & Univs. v. Duncan, 681 F.3d 

427, 440–41 (D.C. Cir. 2012) (quoting Holland v. Nat’l Mining 

Ass’n, 309 F.3d 808, 814 (D.C. Cir. 2002)). 

Under our precedent, a party is barred from relitigating an 

issue if three conditions are met:

First, the same issue now being raised must 

have been contested by the parties and 

submitted for judicial determination in the prior 

case. Second, the issue must have been 

actually and necessarily determined by a court 

of competent jurisdiction in that prior case. 

Third, preclusion in the second case must not 

work a basic unfairness to the party bound by 

the first determination.

Yamaha Corp. of Am. v. United States, 961 F.2d 245, 254 (D.C. 

Cir. 1992), cert denied, 506 U.S. 1078 (1993) (citations 

omitted). Canonsburg claims that, under Poulin v. Bowen, 

817 F.2d 865 (D.C. Cir. 1987), the Secretary waived her issue 

preclusion affirmative defense by failing to raise it during the 

administrative proceedings. Canonsburg further argues that, 

because the Secretary did not raise issue preclusion before 

asserting it as an affirmative defense in district court, the 

Chenery doctrine barred the district court’s consideration of it 

in the first instance. Although Canonsburg does not dispute 

that the first two Yamaha requirements for issue preclusion are 

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met, conceding that it raised the same issues in Canonsburg I

and that the Canonsburg I court actually and necessarily 

decided them, Arg. Recording at 2:58–3:30, it claims that issue 

preclusion works a basic unfairness to it because it is contrary 

to the policy underpinnings of the defense. 

A. ADMINISTRATIVE WAIVER UNDER POULIN

Canonsburg argues that, under Poulin, the Secretary’s 

failure to raise issue preclusion before the PRRB—or on the 

Administrator’s discretionary review of the 

PRRB—constitutes waiver of the defense in district court. 

We disagree.

In Poulin, the plaintiff filed for Social Security disability 

benefits in 1974 but his claim was denied by the Social 

Security Administration. See 817 F.2d at 868. He refiled his 

disability-benefits application in 1980 and the administrative 

law judge (ALJ), the Social Security Administration Appeals 

Council and the district court all rejected his application on the 

merits. Id. Although the Social Security Act, Pub. L. No. 

74-271, 49 Stat. 620 (1935) (codified as amended at 42 U.S.C. 

§§ 301 et seq.), and HHS regulations gave the ALJ discretion 

to apply issue preclusion, 8 the ALJ declined to do so and 

instead reached the merits of the benefits decision. See

 8 “An administrative law judge may dismiss a request for a 

hearing under any of the following conditions: . . . (c) The 

administrative law judge decides that there is cause to dismiss a 

hearing request entirely or to refuse to consider any one or more of 

the issues because—(1) The doctrine of res judicata applies in that 

we have made a previous determination or decision under this 

subpart about your rights on the same facts and on the same issue or 

issues, and this previous determination or decision has become final 

by either administrative or judicial action . . . .” 20 C.F.R. 

§ 404.957 (1986) (emphasis added).

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Poulin, 817 F.2d at 868–69. After filing its answer in district 

court, HHS argued for the first time in its motion for judgment 

of affirmance that the denial of Poulin’s 1974 benefits 

application meant that his 1980 application was barred by issue 

preclusion. See id. at 869. “The [d]istrict [c]ourt did not 

even address this tardy [issue preclusion] claim.” Id. On 

appeal, we held that, if a claim has “been reconsidered on the 

merits to any extent and at any administrative level, it is . . . 

properly treated as having been, to that extent, reopened as a 

matter of administrative discretion” and “is also subject to 

judicial review to the extent of the reopening.” Id. (quoting 

McGowen v. Harris, 666 F.2d 60, 65–66 (4th Cir. 1981)). 

Because HHS “expressly waived applicability of 

administrative res judicata” at the administrative stage, we 

concluded, “it may not now advance this doctrine as an 

alternate basis for its decision.” Id. We further indicated that 

HHS’s res judicata defense was “also waived” because it 

failed to raise the defense in its answer in district court as 

Federal Rule of Civil Procedure 8(c) requires. 9

 Id. Thus, 

“[t]he failure to plead res judicata, coupled with the express 

waiver at the administrative level, precludes its application 

now.” Id.

Poulin makes two uncontroversial points. First, an 

agency’s failure to raise issue preclusion in its answer in 

federal court may constitute waiver under Federal Rule of 

Civil Procedure 8(c). See id. Second, an agency may not 

rely on issue preclusion to the extent it “express[ly]” exercises 

its discretion to reopen an earlier decision on the merits. Id. 

Both points are inapplicable here. First, the Secretary plainly 

raised issue preclusion in her answer to Canonsburg’s federal 

 9 “In responding to a pleading, a party must affirmatively state 

any avoidance or affirmative defense, including: . . . res 

judicata . . . .” FED. R. CIV. P. 8(c). 

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complaint. Moreover, the Secretary did not reopen 

Canonsburg I, “express[ly]” or otherwise, id., during the 

administrative proceedings. In Poulin, the first decision was 

an administrative decision and thus one that HHS had the 

power to revisit. See id. In this appeal, Canonsburg I is an 

earlier judicial decision which the Secretary is without 

authority to affect.

Even assuming the Secretary had the power to reopen 

Canonsburg I,

10 this appeal is a far cry from Poulin. The 

PRRB, which, according to the record, appears to have been 

unaware of Canonsburg I, interpreted section 2534.5 in the 

first instance on the basis of a circuit decision to which 

Canonsburg was not a party. See Provider Reimbursement 

Review Board Decision 43–44 (citing St. Luke’s, 315 F.3d at 

988–89). Moreover, the Secretary, unlike the Poulin ALJ, did 

not explicitly decline to apply issue preclusion but instead 

reversed the PRRB. Because the Secretary did not—and 

could not—reconsider Canonsburg I and, at the same time, she 

complied with Rule 8(c), Poulin is inapposite.

Our more recent precedent also defeats Canonsburg’s 

argument that we have adopted a robust administrative waiver 

 10 The Congress by statute authorizes the Secretary to 

administer reimbursements but it cannot authorize the reopening of a 

final judicial decision. See generally Plaut v. Spendthrift Farm, 

Inc., 514 U.S. 211, 218–19 (1995) (“[T]he Framers crafted this 

charter of the judicial department with an expressed understanding 

that it gives the Federal Judiciary the power, not merely to rule on 

cases, but to decide them, subject to review only by superior courts 

in the Article III hierarchy . . . .”); see id. (“A legislature without 

exceeding its province cannot reverse a determination once made, in 

a particular case; though it may prescribe a new rule for future 

cases.” (quoting THE FEDERALIST No. 81, at 545 (Alexander 

Hamilton) (J. Cooke ed. 1961))).

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doctrine in light of Poulin. In Morris v. Sullivan, 897 F.2d 

553 (D.C. Cir. 1990), we explained that Poulin is “applicable 

only when the agency has clearly stated or otherwise 

demonstrated that it has in fact reopened the original case on 

the merits and consequently has held a mandatory . . . hearing 

to reconsider the prior claim afresh.” Id. at 558; cf. Sendra

Corp. v. Magaw, 111 F.3d 162, 167 (D.C. Cir. 1997) (under 

Poulin, agency decision is reviewable on the merits if it 

exercises discretion to reopen claim). In Morris, we noted 

that Poulin is limited to cases in which the agency fails to raise 

issue preclusion as an affirmative defense in district court or it 

expressly declines to apply issue preclusion when available 

during administrative proceedings. Morris, 897 F.2d at 557 

n.8 (“Morris readily concedes, however, that factually, Poulin 

is distinguishable . . . in two important ways. First . . . [the 

Poulin ALJ] declined to exercise his discretion to dismiss” on 

the basis of res judicata and, second, “the Secretary in Poulin 

failed to plead res judicata as a defense, thereby waiving his 

right to interpose it” (some alteration in original)); see 

generally Nixon v. United States, 978 F.2d 1269, 1297 (D.C. 

Cir. 1992) (Henderson, J., concurring) (in Poulin, court “did no 

more than state that parties waive their own right to raise res 

judicata by failing to plead it”). And in Stanton v. District of 

Columbia Court of Appeals, 127 F.3d 72 (D.C. Cir. 1997), we 

declared, citing Poulin, that “[r]es judicata is an affirmative 

defense that may be lost if not pleaded in the answer; it may not 

ordinarily be asserted for the first time on appeal.” Id. at 76; 

see also U.S. Postal Serv. v. NLRB (USPS), 969 F.2d 1064, 

1069 (D.C. Cir. 1992) (“[C]ourts do not force preclusion pleas 

on parties who choose not to make them . . . .”). Other 

circuits have also refrained from developing any 

administrative waiver doctrine for issue preclusion that 

extends beyond our analysis in Poulin. See, e.g., Chavez v. 

Bowen, 844 F.2d 691, 692–93 (9th Cir. 1988) (allowing res 

judicata claim on appeal despite ALJ failing to consider res 

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judicata defense in subsequent administrative decision); cf. 

Kane v. Heckler, 776 F.2d 1130, 1132 (3d Cir. 1985) 

(“[W]here the administrative process does not address an 

earlier decision, but instead reviews the entire record in the 

new proceeding and reaches a decision on the merits, the 

agency has . . . waived application of res judicata.”). At most, 

one circuit has included an unsupported statement in a footnote 

regarding administrative waiver. See, e.g., Mun. Resale Serv. 

Customers v. FERC, 43 F.3d 1046, 1052 n.4 (6th Cir. 1995) 

(stating, in footnote without citation to other authority, court 

would not recognize res judicata defense because defense was 

not invoked before agency).

In sum, the Secretary did not waive her issue preclusion 

affirmative defense by not raising it at the administrative 

stage;11 moreover, she asserted it, expressly and properly, in 

district court and we are thus free to affirm the district court’s 

application of the doctrine to Canonsburg’s complaint.

B. ISSUE PRECLUSION AND CHENERY

Next, Canonsburg argues that the district court violated 

the Chenery doctrine by considering the Secretary’s issue 

preclusion defense even though issue preclusion was not raised 

during the administrative proceedings. We disagree. 

In SEC v. Chenery Corp. (Chenery I), 318 U.S. 80 (1943), 

the Supreme Court explained that “the courts cannot exercise 

their duty of review unless they are advised of the 

 11 Our analysis does not encompass agency adjudications that 

require, by express regulation, that affirmative defenses be raised 

before the agency. See, e.g., Canady v. SEC, 230 F.3d 362, 365 

(D.C. Cir. 2000) (failure to raise statute of limitations affirmative 

defense before SEC constituted waiver based on pleading 

requirements set forth in SEC regulations).

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considerations underlying the action under review.” Id. at 94. 

When an agency action rests upon “an exercise of judgment in 

an area which Congress has entrusted to the agency . . . the 

orderly functioning of the process of review requires that the 

grounds upon which the administrative agency acted be clearly 

disclosed and adequately sustained.” Id.; see also id. at 88 

(“If an order is valid only as a determination of policy or 

judgment which the agency alone is authorized to make and 

which it has not made, a judicial judgment cannot be made to 

do service for an administrative judgment.”). The Supreme 

Court further elucidated the Chenery doctrine in SEC v. 

Chenery Corp. (Chenery II), 332 U.S. 194 (1947):

[A] reviewing court, in dealing with a 

determination or judgment which an 

administrative agency alone is authorized to 

make, must judge the propriety of such action 

solely by the grounds invoked by the agency. 

If those grounds are inadequate or improper, the 

court is powerless to affirm the administrative 

action by substituting what it considers to be a 

more adequate or proper basis. To do so 

would propel the court into the domain which 

Congress has set aside exclusively for the 

administrative agency.

Id. at 196. Neither Chenery I nor Chenery II addressed

judicial doctrines such as issue preclusion. The Court did 

explain, however, that Chenery applies to “a determination or 

judgment which an administrative agency alone is authorized 

to make,” Chenery II, 332 U.S. at 196 (emphasis added); in 

other words, to an agency’s “exercise of judgment in an area 

which Congress has entrusted to the agency,” Chenery I, 318 

U.S. at 94. Issue preclusion is not a determination specially 

entrusted to an agency’s expertise; it is instead the sort of 

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antecedent determination that a court usually makes. Simply 

put, Chenery does not apply to legal principles like issue 

preclusion. See Chenery II, 332 U.S. at 196; Chenery I, 318 

U.S. at 94.

Our precedent is in accord. We have explained that 

Chenery only limits judicial review of “factual 

determination[s] or . . . policy judgment[s] that [the agency] 

alone is authorized to make.” Shea v. Dir., Office of Workers’ 

Comp. Programs, 929 F.2d 736, 739 n.4 (D.C. Cir. 1991).12 

Indeed, we held in Horne v. Merit Systems Protection Board

that “[t]he rule established in Chenery only applies to agency 

actions that involve policymaking or other acts of agency 

discretion.” 684 F.2d 155, 158 n.4 (D.C. Cir. 1982); cf. 

Athlone Indus., Inc. v. Consumer Prod. Safety Comm’n, 707 

F.2d 1485, 1489 (D.C. Cir. 1983) (explaining that exhaustion 

of administrative remedies should not apply where “strictly a 

legal issue” is in dispute, “[n]o factual development or 

application of agency expertise will aid the court’s decision” 

and “a decision by the court [will not] invade the field of 

agency expertise or discretion” (citations omitted)). 

Moreover, other circuits have declined to interpret Chenery as 

Canonsburg would have it. See, e.g., In re Comiskey, 554 

F.3d 967, 974 (Fed. Cir. 2009) (“In [Chenery I], the Supreme 

 12 In USPS, we relied on Chenery I in denying an intervenor’s

attempt to press an issue preclusion defense on appeal. See 969 

F.2d at 1069 (“[W]e reject [the intervenor’s] endeavor to achieve 

disposition of this case on a rationale [not] set forth by the agency 

itself.” (internal quotation marks omitted) (some alteration in 

original) (citing, inter alia, Chenery I, 318 U.S. at 93–95)). But the 

USPS intervenor attempted to raise preclusion for the first time on 

appeal. See U.S. Postal Serv., 303 N.L.R.B. 463 (1991) (declining 

to address any potential issue preclusion argument). Here, the 

Secretary, not an intervenor, timely asserted the defense in district 

court. For this reason, we find USPS inapposite. 

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Court made clear that a reviewing court can (and should) 

affirm an agency decision on a legal ground not relied on by 

the agency if there is no issue of fact, policy, or agency 

expertise.”); RNS Servs., Inc. v. Sec’y of Labor, 115 F.3d 182, 

184 n.1 (3d Cir. 1997) (explaining that Chenery I does not 

apply if “no factual or other determination that Congress 

sought to exclusively entrust to the [Federal Mine Safety and 

Health Review] Commission is being intruded upon by the 

courts.” (internal quotation marks omitted)).13 

Canonsburg claims that the only recognized exception to 

the Chenery doctrine applies to the agency reaching a result 

mandated by statute but for the wrong reason. See United 

Video, Inc. v. FCC, 890 F.2d 1173, 1190 (D.C. Cir. 1989) 

(“Hence, Chenery reversal is not necessary where, as here, the 

agency has come to a conclusion to which it was bound to 

 13 The Federal Circuit stated in dicta in an unpublished 

opinion, Cabrera v. OPM, 980 F.2d 743, 1992 WL 279390, at *1 n.1

(Fed. Cir. 1992) (per curiam) (unpublished table disposition), that it 

“appear[ed]” that an agency’s decision could not be upheld on res 

judicata grounds because the defense had not been raised before the 

agency. But that decision, besides being nonprecedential, 

conflicted with an earlier precedential Federal Circuit decision. See 

Spears v. Merit Sys. Prot. Bd., 766 F.2d 520, 523 (Fed. Cir. 1985) 

(Chenery doctrine did not prevent court from dismissing appeal on 

res judicata grounds even though agency did not analyze res 

judicata in first instance because “any action by the MSPB would 

not involve policymaking or discretion”); see also Deckers Corp. v. 

United States, 752 F.3d 949, 964 (Fed. Cir. 2014) (“[A] panel of this 

court . . . is bound by the precedential decisions of prior panels 

unless and until overruled by an intervening Supreme Court or en 

banc decision.”). Cabrera thus has little, if any, persuasive power. 

In addition, the Sixth Circuit’s similar treatment of the Chenery 

doctrine in Municipal Resale Service Customers, supra at 16,

contained little analysis. See 43 F.3d at 1052 n.4.

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come as a matter of law, albeit for the wrong reason, and 

where, as here, the agency's incorrect reasoning was confined 

to that discrete question of law and played no part in its

discretionary determination.”). But Canonsburg fails to 

recognize that the court’s consideration of a judicial doctrine

like issue preclusion does not constitute an exception to 

Chenery—Chenery simply does not apply to the issue in the 

first place. See Horne, 684 F.2d at 158 n.4 (“The rule 

established in Chenery only applies to agency actions that 

involve policymaking or other acts of agency discretion.” 

(emphasis added)). 

In light of the Supreme Court’s plain language in Chenery 

I and II, our own construction of the Chenery doctrine and no 

persuasive case law to the contrary, we conclude that the 

Chenery doctrine does not prohibit raising issue preclusion as 

an affirmative defense in district court even if the party raising 

the defense was not a party to the administrative proceeding or 

was otherwise unable to assert the defense at the administrative 

stage. 

C. EQUITABLE CONSIDERATIONS

Finally, Canonsburg argues that applying issue preclusion 

here is unfair to it. It maintains that equity strongly supports 

its position because the Secretary has allegedly engaged in a 

pattern of settling litigation challenging section 2534.5 at the 

district court level before we can rule on its validity.

“There is no general public policy exception to the 

operation of res judicata.” Apotex, Inc. v. FDA, 393 F.3d 210, 

219 (D.C. Cir. 2004); see also Federated Dep’t Stores, Inc. v. 

Moitie, 452 U.S. 394, 401 (1981) (“There is simply no 

principle of law or equity which sanctions the rejection by a 

federal court of the salutary principle of res judicata.” (internal 

quotation marks omitted)). We limit equitable exceptions to 

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issue preclusion to certain limited circumstances, none of 

which applies here. First, we have explained that issue 

preclusion is inappropriate if there has been an intervening 

“change in controlling legal principles.” See Apotex, 393 F.3d 

at 219. Second, we have recognized that issue preclusion 

would be unfair “if the party to be bound lacked an incentive to 

litigate in the first trial, especially in comparison to the stakes 

of the second trial.” Otherson v. Dep’t of Justice, 711 F.2d 

267, 273 (D.C. Cir. 1983) (citing Blonder-Tongue Labs., Inc. v. 

Univ. of Ill. Found., 402 U.S. 313, 333 (1971)). In Yamaha, 

we clarified that, in weighing a party’s incentive to litigate, we 

should be concerned with whether “the losing party clearly 

lacked any incentive to litigate the point in the first trial, but the 

stakes of the second trial are of a vastly greater magnitude.” 

961 F.2d at 254. Similarly, application of issue preclusion is 

inappropriate if the “prior proceedings were seriously 

defective.” Martin v. Dep’t of Justice, 488 F.3d 446, 455 

(D.C. Cir. 2007) (quoting Blonder-Tongue Labs., 402 U.S. at 

333).

We have been reluctant to expand these equitable 

exceptions. For example, we have recognized that even a 

“patently erroneous” first judgment is insufficient to bar issue 

preclusion. Otherson, 711 F.2d at 277; see id. (“erroneous” 

first judgment does not demonstrate unfairness sufficient for 

court to decline to give judgment preclusive effect); see also 

City of Arlington v. FCC, 133 S. Ct. 1863, 1869 (2013) (“A 

court’s power to decide a case is independent of whether its 

decision is correct, which is why even an erroneous judgment 

is entitled to res judicata effect.”). And, if there is mutuality 

of parties in successive litigation, we explained that “courts 

should refuse to give the first judgment preclusive effect on 

grounds that the party lacked adequate incentive to litigate in 

the first proceeding only upon a compelling showing of 

unfairness.” Otherson, 711 F.2d at 277 (emphases added) 

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(internal quotation marks omitted). Thus, if the parties have 

the same incentive to litigate in both the earlier and the 

subsequent litigation, if there is no change in the controlling 

law and if there is no concern about procedural defects in the 

first litigation, the application of issue preclusion is unlikely to 

result in a “compelling” showing of unfairness to the party 

against which it is asserted. See, e.g., Venetian Casino Resort, 

LLC v. NLRB, 484 F.3d 601, 610 (D.C. Cir. 2007) (“We can 

discern no difference between the incentives that the [plaintiff] 

may have had in its [earlier] litigation and its incentives here. 

The stakes in its attempt before that court were no less than 

they are now.”).

As the district court correctly concluded, Canonsburg’s 

incentive to fully litigate the validity of section 2534.5 in 

Canonsburg I was at least equal to its incentive in Canonsburg 

II. See Canonsburg II, 989 F. Supp. 2d at 19. In fact, the 

amount in controversy in Canonsburg I was over twice the 

amount in controversy in Canonsburg II. Compare Compl. 

15, ECF No. 1, Canonsburg II, No. 1:09-cv-02385 (D.D.C. 

Dec. 17, 2009) (claiming $526,293 as amount in controversy), 

with Compl. 15, ECF No. 1, Canonsburg I, No. 2:00-cv-00284 

(W.D. Pa. Feb. 11, 2000) (claiming $1,123,755 as amount in 

controversy).

Issue preclusion protects the functioning of the courts by 

promoting finality and avoiding the unnecessary expenditure 

of judicial resources, see Stanton, 127 F.3d at 78, regardless of 

the possibility that an agency decision might later be found to 

be superfluous.14 Canonsburg argues that Mercy Medical and 

 14 We reject Canonsburg’s claim that, had the district court 

reached the merits, it would have likely not resulted in inconsistent 

judicial decisions. Even though the Sixth and Eighth Circuits have 

split on the question of section 2534.5’s validity, compare St. 

Francis, 205 F.3d at 944–48 (upholding Secretary’s interpretation), 

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Montefiore Medical are cases in which the district court found 

section 2534.5 invalid under the APA but the Secretary settled 

both before we could consider the merits of the Secretary’s 

interpretation of the atypical services exception. Although we 

agree with the district court that the settlements have prevented 

a definitive resolution of the Secretary’s interpretation of the 

atypical services exception in section 2534.5, we also agree 

that they are largely irrelevant to our issue preclusion analysis. 

See Canonsburg II, 989 F. Supp. 2d at 29. First, Canonsburg 

itself chose not to appeal Canonsburg I to the Third Circuit so

that its opposition to HHS’s settlement practice rings hollow. 

Second, we have long recognized the public interest in, and 

importance of, settlement of litigation. See Am. Sec. Vanlines, 

Inc. v. Gallagher, 782 F.2d 1056, 1060 (D.C. Cir. 1986) (“Few 

public policies are as well established as the principle that 

courts should favor voluntary settlements of litigation by the 

parties to a dispute.”); see also Williams v. First Nat’l Bank, 

216 U.S. 582, 595 (1910) (“Compromises of disputed claims 

are favored by the courts . . . .”). Finally, the Secretary’s 

decision to settle unrelated cases does not result in any 

particular harm to Canonsburg beyond the costs of this 

litigation.

 

with St. Luke’s, 315 F.3d 988–89 (rejecting Secretary’s 

interpretation), the fact that another district court decision on the 

merits would merely add to, but not create, an inconsistency does not 

support declining to apply issue preclusion. Further, a merits 

decision here could result in inconsistent decisions involving these 

two parties, a concern that issue preclusion is intended to prevent. 

RESTATEMENT (SECOND) OF JUDGMENTS § 28 cmt. c (1982) (“[T]he 

outcomes of similar legal disputes between the same parties at 

different points in time should not be disparate.”).

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For the foregoing reasons, we affirm the district court’s 

grant of summary judgment to the Secretary. 

So ordered.

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