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Parties Involved:
Federal Labor Relations Authority
Respondent
National Treasury Employees Union
Intervenor for Respondent
Securities and Exchange Commission
Petitioner

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 5, 2009 Decided June 12, 2009 

No. 08-1256 

SECURITIES AND EXCHANGE COMMISSION, 

PETITIONER

v. 

FEDERAL LABOR RELATIONS AUTHORITY, 

RESPONDENT

NATIONAL TREASURY EMPLOYEES UNION, 

INTERVENOR

Consolidated with 08-1294 

On Petition for Review and Cross-Application for 

Enforcement of a Decision and Order 

of the Federal Labor Relations Authority 

Samuel M. Forstein, Assistant General Counsel, Securities 

& Exchange Commission, argued the cause for petitioner. With 

him on the briefs were Andrew N. Vollmer, Acting General 

Counsel, and Rufus Beatty, Senior Special Counsel. Richard M. 

Humes, Associate General Counsel, entered an appearance. 

USCA Case #08-1256 Document #1185216 Filed: 06/12/2009 Page 1 of 14
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James F. Blandford, Attorney, Federal Labor Relations 

Authority, argued the cause for respondent. With him on the 

brief were Rosa M. Koppel, Solicitor, and William R. Tobey, 

Deputy Solicitor. 

Barbara A. Sheehy argued the cause for intervenor. With 

her on the brief were Gregory O'Duden and Elaine Kaplan. 

Barbara A. Atkin entered an appearance. 

Before: GINSBURG, BROWN and KAVANAUGH, Circuit 

Judges. 

Opinion for the Court filed by Circuit Judge BROWN. 

Concurring opinion filed by Circuit Judge KAVANAUGH. 

BROWN, Circuit Judge: This is the sort of dispute that 

could only arise between public employees and a governmental 

agency. The Securities and Exchange Commission (SEC or 

Agency) was eager to pay its employees more money. The 

National Treasury Employees Union (NTEU or Union) 

complains the SEC implemented the raises too quickly. The 

Federal Labor Relations Authority (FLRA or Authority) agrees 

with the Union and has ordered the SEC to provide back pay to 

atone for the affront. Counterintuitive though it may be, we 

agree the FLRA has properly resolved this odd controversy so 

we deny the petition for review and grant the Authority’s crossapplication for enforcement. 

I. 

This is what happened. After years of struggling with high 

attrition from the ranks of its professional employees (attorneys, 

accountants, and examiners), the SEC began focusing on pay 

disparities between itself and other financial regulatory 

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agencies, such as the Federal Deposit Insurance Corporation, the 

Office of the Comptroller of the Currency, and the Office of 

Thrift Supervision. Since 1989, these other agencies had been 

authorized to determine their own compensation and benefit 

levels without regard to the General Schedule, which continued 

to define pay grades for SEC employees. Although the SEC 

took advantage of as many compensation and benefit 

flexibilities as existing law allowed, including special pay rates 

for its most sought-after employees, by 2001—with its workload 

increasing dramatically and staffing shortages reaching crisis 

levels—the Agency sought legislative relief. Congress 

acquiesced. On January 16, 2002, it passed the Investor and 

Capital Markets Fee Relief Act, Pub. L. No. 107-123, 115 Stat. 

2390 (2002), which gave the SEC authority to set and adjust its 

employees’ pay rates without regard to the General Schedule. 

Both the Union and SEC management had eagerly 

anticipated the passage of this Act. The Union signaled the very 

next day, January 17, its willingness to begin bargaining. By 

March 6, the Agency had submitted its Implementation Plan to 

Congress and, on April 10, the Agency convened initial 

discussions with the Union. On April 18, SEC Chairman Pitt 

sent out an email to all employees stating the SEC hoped to 

implement the new system on May 19. Formal bargaining 

began April 22. Negotiations reached an impasse and the Union 

filed for assistance with the Federal Services Impasse Panel 

(Panel) on May 15. The SEC and the Union were unable to 

break the impasse when they met again on May 16 and 17, at 

which point management notified employees that it would 

unilaterally implement the SEC’s proposed pay plan effective 

May 19. The raises became effective as of May 19, but the 

actual increased paychecks did not begin to arrive until August. 

 

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On November 8, 2002 the Panel resolved the bargaining 

impasse, ordering adoption of the SEC’s proposal with only 

slight modifications. On November 18, the NTEU filed two 

unfair labor practice charges, alleging the SEC violated Sections 

7116(a)(1) and (5) of the Federal Service Labor-Management 

Relations Statute (the Statute) by unilaterally implementing the 

new pay plan and ending automatic annual within-grade 

increases (known as WIGIs) before the completion of the 

bargaining process. The General Counsel filed a complaint and, 

after a full evidentiary hearing, the ALJ found the SEC had 

violated the Statute. The ALJ awarded retroactive within-grade 

increases to employees who were entitled to them between May 

19 and November 8, and ordered the SEC to recalculate those 

employees’ placement on the new pay schedule taking such 

within-grade increases into account. The Authority concluded 

the record fully supported the ALJ’s findings and that the 

recommended remedy was not contrary to the Back Pay Act, 5 

U.S.C. § 5596. 

The SEC petitions for review; the Authority cross appeals 

for enforcement of its order. 

II. 

We review the FLRA’s conclusion that the SEC engaged in 

an unfair labor practice under the familiar arbitrary and 

capricious standard; we determine only whether the FLRA has 

“offered a rational explanation for its decision, whether its 

decision is based on consideration of the relevant factors, and 

whether the decision is adequately supported by the facts 

found.” Nat’l Ass’n of Gov’t Employees, Local R5-136 v. 

FLRA, 363 F.3d 468, 474–75 (D.C. Cir. 2004) (citing, inter alia,

Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co.,

463 U.S. 29, 43 (1983)). 

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The FLRA’s conclusion that the SEC engaged in an unfair 

labor practice was neither arbitrary nor capricious. As a 

preliminary matter, we reject the SEC’s claim it is entitled to 

deference from the FLRA with respect to its chosen affirmative 

defense, that the unilateral implementation of the new salary 

system was necessary to the functioning of the agency. The 

SEC concedes it can cite no authority in support of its request. 

We conclude any deference to the SEC would be inconsistent 

with the defense being an affirmative one; in this matter the 

SEC is not an agency entitled to deference, but rather appears as 

an employer. Indeed, under the arbitrary and capricious 

standard of review that governs, it is the FLRA that receives 

deference when we review petitions challenging its conclusions 

under the Federal Service Labor-Management Relations Statute. 

See, e.g., HHS Family Support Admin. v. FLRA, 920 F.2d 45, 

48 (D.C. Cir. 1990) (“[W]e must defer to the FLRA’s 

interpretation of its own statute as against competing executive 

branch determinations.”) (citing cases). 

 The SEC simply failed to meet its burden to prove its 

chosen affirmative defense—that the unilateral implementation 

of the new salary system on May 19, 2002 was necessary to the 

functioning of the agency—by a preponderance of the evidence. 

 As the Authority has explained before, the rule governing this 

affirmative defense is that, pending the completion of the 

mandatory bargaining process: 

[T]he status quo must be maintained to the maximum 

extent possible, that is, to the extent consistent with the 

necessary functioning of the agency. When an agency 

chooses to avail itself of this exception and thus to alter 

the status quo, it must be prepared to provide 

affirmative support for the assertion that the action 

taken was consistent with the necessary functioning of 

the agency if its actions were subsequently contested in 

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an unfair labor practice proceeding. The Authority has 

also indicated that the phrase, “consistent with the 

necessary functioning of the agency,” may be accurately 

paraphrased as “necessary for the [agency] to perform 

its mission.” 

Def. Logistics Agency Def. Indus. Plan Equip. Ctr. Memphis 

Tennessee, 44 F.L.R.A. 599, 616–17 (1992) (citing Dept of 

Justice, U.S. Immigration & Naturalization Serv., U.S. Border 

Patrol, Laredo, Texas, 23 F.L.R.A. 90, 90 (1986)) (internal 

citations, footnotes and quotations omitted). 

The SEC complains the FLRA purported to apply a mere 

preponderance burden of proof in determining whether the 

Commission sustained its affirmative defense, but effectively 

imposed a much more demanding one. In context, though, it 

seems clear the ALJ was describing the affirmative defense 

itself as demanding, not the employing agency’s burden. From 

the Commission’s point of view, this may be a distinction 

without a difference. Consider, however, that while the 

prosecution in a criminal case always bears the burden of 

proving the elements of a crime beyond a reasonable doubt, the 

substantive content of the elements to be proven may vary; for 

example, from a reckless state of mind to a knowing and 

intentional one. While the burden is the same, the standard 

itself is different, and it is easier for a litigant to prove some than 

others. 

To successfully invoke the “necessary functioning” 

exception, an agency must show the change is a response to “an 

overriding exigency” or similarly compelling need. 22 Combat 

Support Group (SAC) March Air Force Base, California, 25 

F.L.R.A. 289, 301 (1987) (“While the matter was obviously 

important, I do not conclude it was so critical as to create an 

overriding exigency or other compelling reason which would 

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justify adhering to the January 13 implementation date ....”). 

For example, in one case the Authority rejected the defense 

because it did not appear that the agency “was in acute danger 

of being unable to perform its function without” the unilateral 

implementation of the change at issue. Def. Logistics Agency 

Def. Indus. Plan Equip. Ctr. Memphis Tennessee, 44 F.L.R.A. 

at 617. The SEC observes that a public agency will rarely face 

an exigency that threatens its ability to function. But that is 

only to say the “necessary functioning” exception will never be 

the rule. Exigency still has a role to play in determining 

whether the unilateral implementation of a management 

proposal is properly exempted from statutory requirements. At 

the very least, the proponent of the necessary functioning 

defense must establish that the change was necessary for the 

agency to effectively perform its mission and that it was 

necessary to make the change at the time it was made. 

Immigration & Naturalization Serv., 55 F.L.R.A. 892, 904 

(1999) (“Respondent has failed to establish that it was 

‘necessary’ for it to implement the changes ... prior to satisfying 

its bargaining obligation.”). As the SEC fails to appreciate, 

there is a difference between what an agency finds expedient 

and what is necessitated by an “overriding exigency.” 

The administrative law judge (ALJ), whose decision was 

adopted by the Authority, carefully went through the evidence 

presented, analyzed the parties’ arguments, and explained his 

findings and conclusions. There is “a reasoned path from the 

facts and considerations before the [agency] to the decision it 

reached.” NTEU v. FLRA, 466 F.3d 1079, 1081 (D.C. Cir. 

2006). The ALJ acknowledged the Agency “was losing key 

employees at an alarming and dangerous rate” and needed to act 

quickly to reduce attrition by increasing compensation. But, as 

the ALJ observed, and as the Authority confirmed, 

“management must demonstrate not merely that the change is 

necessary to its effective functioning, but also that delaying 

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implementation until after the impasse is resolved would 

undermine the effective functioning of the agency.” While the 

SEC makes a good argument that it urgently needed to recruit 

new staff and discourage defections from current employees, it 

failed to persuade the administrative law judge, the FLRA, and 

ultimately this court that its unilateral implementation of a new 

pay system on May 19, 2002—rather than after the completion 

of the required bargaining process—was necessary for the 

agency to perform its mission. As in previous cases in which 

this defense has not been satisfied, here “the record reflects that 

the reasons for the change were of long-standing origin and 

were merely desirable, rather than being essential or necessary 

to the functioning of the agency.” Def. Logistics Agency Def. 

Indus. Plan Equip. Ctr. Memphis Tennessee, 44 F.L.R.A. at 618 

(quotations and citations omitted). 

The SEC also challenges two of the FLRA’s factual 

findings. The Authority’s findings of fact are “conclusive” if 

“supported by substantial evidence on the record considered as a 

whole.” 5 U.S.C. § 7123(c). “This standard requires us to defer 

to the Authority’s factual determinations if, taking into account 

any record evidence to the contrary, the record contains such 

relevant evidence as a reasonable mind might accept as 

adequate to support such determinations.” Nat’l Ass’n of Gov’t 

Employees, Local R5-136, 363 F.3d at 475 (quotations and 

citations omitted). Substantial evidence “is something less than 

the weight of the evidence, and the possibility of drawing two 

inconsistent conclusions from the evidence does not prevent an 

administrative agency’s finding from being supported by 

substantial evidence.” Consolo v. Fed. Maritime Comm’n, 383 

U.S. 607, 620 (1966); see also Domestic Sec. Inc. v. SEC, 333 

F.3d 239, 249 (D.C. Cir. 2003). 

The SEC has not shown that the challenged findings of fact 

fail under this deferential standard. The SEC first challenges 

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the FLRA’s finding that the Executive Director’s testimony 

“directly contradicts the [SEC’s] claim that implementation of 

the pay system on May 19 was necessary to assure funding.” 

The SEC points to testimony suggesting that if the $25 million 

reprogrammed by the Office of Management and Budget was 

not legally obligated in FY 2002, the money might be used for 

something else. The FLRA draws our attention to other 

testimony showing that money would likely be available to pay 

for the raises, either from the reprogrammed funds or the 

Agency’s regular appropriation process. The SEC also 

challenges the FLRA’s finding that the employees did not 

receive the salary increases until August and that this delay 

weakened the SEC’s argument that implementation in May, 

rather than waiting for the Panel decision, was necessary to the 

functioning of the Agency. With respect to each of these 

findings, there was conflicting evidence in the record. The ALJ 

addressed the evidence in his decision, carefully describing 

contradictions and making credibility determinations. Such 

credibility determinations are almost never disturbed on appeal, 

and there is no reason to do so in this case. 

III. 

We review the FLRA’s ordered remedy under the Back Pay 

Act de novo, SSA v. FLRA, 201 F.3d 465, 471 (D.C. Cir. 2000), 

and let it stand. To be entitled to an award of back pay, “1) the 

employee must have been affected by an unjustified or 

unwarranted personnel action; 2) the employee must have 

suffered a withdrawal or reduction of all or part of his pay, 

allowances, or differentials; and 3) but for the action, the 

employee would not have experienced the withdrawal or 

reduction.” Id. at 468. 

Under our precedent, back pay may be awarded if a 

mandatory salary upgrade was denied to an employee because 

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of an unwarranted personnel action; loss of such a mandatory 

upgrade meets the “withdrawal or reduction” element of the 

Back Pay Act. Brown v. Sec’y of the Army, 918 F.2d 214, 220 

(D.C. Cir. 1990). As we described our conclusion in Brown, 

“we comprehend the 1978 Back Pay Act definitional 

amendment to mean that if an upgrade is mandatory once 

specified conditions are met, the Act now affords a retrospective 

remedy. If an upgrade is not of that virtually automatic, 

noncompetitive kind, the Act affords no relief. Only in the 

former case will the employee be treated as one already ‘duly 

appointed’ to the higher position, so that the failure to confer the 

benefit constitutes a ‘withdrawal or reduction’ in 

compensation.” Id. This conclusion controls the outcome of 

this case because the within-grade increases were virtually 

automatic and non-competitive. 

The SEC’s final argument is that awarding back pay may 

give some employees an undue windfall. But any factual 

questions—such as whether any of the employees who were due 

a within-grade increase between May 19, 2002 and November 8, 

2002 would actually have received higher pay under the new 

system had the SEC not implemented the change before the 

bargaining process was complete, and by how much—can be 

resolved in compliance proceedings. 

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IV. 

The petition for review is denied and the cross-application 

for enforcement is granted. 

 So ordered. 

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KAVANAUGH, Circuit Judge, concurring: I join the 

opinion of the Court. I write separately to point out the 

constitutional oddity of a case pitting two agencies in the 

Executive Branch against one another, and to explain why the 

Court can hear this dispute. 

The caption of this case – Securities and Exchange 

Commission v. Federal Labor Relations Authority – illustrates 

an anomaly. Both the SEC and the FLRA are agencies in the 

Executive Branch, yet one is suing the other in an Article III 

court. This state of affairs is in tension with the constitutional 

structure designed by the Framers and set forth in the text of 

the Constitution. The Constitution vests the “executive 

Power” in one President. U.S. CONST. art. II, § 1, cl. 1. And 

the Constitution assigns the President the responsibility to 

“take Care that the Laws be faithfully executed.” U.S.

CONST. art. II, § 3. Because Article II provides that a single 

President controls the Executive Branch, legal or policy 

disputes between two Executive Branch agencies are typically 

resolved by the President or his designee – without judicial 

intervention. See, e.g., Exec. Order No. 12,146, 44 Fed. Reg. 

42,657 (July 18, 1979) (providing for review of certain interagency legal disputes by the Attorney General). Moreover, 

because agencies involved in intra-Executive Branch disputes 

are not adverse to one another (rather, they are both 

subordinate parts of a single organization headed by one 

CEO), such disputes do not appear to constitute a case or 

controversy for purposes of Article III. See U.S. CONST. art. 

III, § 2; see generally Michael Herz, United States v. United 

States: When Can the Federal Government Sue Itself?, 32 

WM. & MARY L. REV. 893 (1991). In short, judicial 

resolution of intra-Executive disputes is questionable under 

both Article II and Article III. 

This analysis is uncontroversial as applied to disputes 

between two traditional Executive Branch agencies. No one 

plausibly thinks, for example, that a federal court would 

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resolve a dispute between the Department of Justice and, say, 

the Department of Defense or the Department of State. 

But the wrinkle is that this case involves a so-called 

independent agency. Independent agencies are those agencies 

whose heads cannot be removed by the President except for 

cause and that therefore typically operate with some 

(undefined) degree of substantive autonomy from the 

President in a kind of extra-constitutional Fourth Branch. In 

Humphrey’s Executor v. United States, the Supreme Court 

approved of independent agencies, at least in certain 

circumstances. 295 U.S. 602 (1935); see also Morrison v. 

Olson, 487 U.S. 654, 689-91 (1988). Consistent with the 

post-Humphrey’s Executor understanding that Presidents 

cannot (or at least do not) fully control independent agencies, 

and that an independent agency therefore can be sufficiently 

adverse to a traditional executive agency to create a 

justiciable case, the Supreme Court and this Court have 

entertained suits between an independent agency and a 

traditional executive agency, or as here between two 

independent agencies. See, e.g., Dep’t of Treasury, IRS v. 

FLRA, 494 U.S. 922 (1990); United States v. Nixon, 418 U.S. 

683 (1974); United States v. ICC, 337 U.S. 426 (1949); In re 

Lindsey, 158 F.3d 1263 (D.C. Cir. 1998); In re Sealed Case, 

146 F.3d 1031 (D.C. Cir. 1998) (Silberman, J., concurring in 

denial of rehearing en banc); In re Sealed Case, 121 F.3d 729 

(D.C. Cir. 1997); NLRB v. FLRA, 2 F.3d 1190 (D.C. Cir. 

1993); United States v. FMC, 694 F.2d 793, 796 (D.C. Cir. 

1982); see also Barnes v. Kline, 759 F.2d 21, 41, 64 (D.C. 

Cir. 1985) (Bork, J., dissenting) (explaining United States v. 

ICC: “because the ICC is an independent agency, the 

President had no power to terminate the controversy by 

ordering the ICC to reverse its decision denying the 

government money damages”); William K. Kelley, The 

Constitutional Dilemma of Litigation Under the Independent 

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Counsel System, 83 MINN. L. REV. 1197, 1222 (1999) 

(“Assuming that it would not constitute good cause for 

removal if the head of an agency refused to follow the 

President’s directions as to how to execute the law, the 

difference between executive and independent agencies thus 

seems to make all the difference.”). 

Our ability to decide this case thus follows from 

Humphrey’s Executor and accords with courts’ previous 

handling of disputes between an independent agency and a 

traditional executive agency (or another independent agency). 

Because this case is justiciable under the governing 

precedents and because the Court’s analysis of the merits is 

persuasive, I join the opinion of the Court. 

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