## United States Court of Appeals for the Federal Circuit

2007-5174 AMERICAN AIRLINES, INC., Plaintiff-Appellee,

v. UNITED STATES, Defendant-Appellant.

Adam P. Feinberg , Miller & Chevalier Chartered, of Washington, DC, argued for plaintiff-appellee. Kyle E. Chadwick , Senior Trial Counsel, Commerc ial Litigation Branch, United States Department of Justic e, of Washington, DC, argued for defendant-appellant. With him on the brief were Jeffrey S. Bucholtz , Acting Assistant Attorney General; and Jeanne E. Davidson , Director. Of counsel on the brief were Andrew S. Kosegi , Attorney, U.S. Customs and Border Protection, of Indianapolis, Indiana; and Cynthia A. Koch , Senior Counsel, United States Department of Agriculture, of Washington, DC. Appealed from: United States Court of Federal Claims Judge Susan G. Braden

## United States Court of Appeals for the Federal Circuit

2007-5174

AMERICAN AIRLINES, INC., Plaintiff-Appellee,

v. UNITED STATES, Defendant-Appellant.

Appeal from the United States Court of Federal Claims in Case No. 04-CV-1736, Judge Susan G. Braden.

_______________ ___________ DECIDED: December 22, 2008

_______________ ___________ Before NEWMAN, MAYER and SCHALL, Circuit Judges. NEWMAN, Circuit Judge

. This action was brought by American Air lines, Inc. (“American”) in the United States Court of Federal Claim s, claiming that the United States unl awfully required American to pay to the government the full amount of “user fees” that American had been unable to collect from passengers. The Court of Federal Claims ruled that the government illegally exac ted these sums from the airli ne, American Airlines, Inc. v. United States , 68 Fed. Cl. 723 (2005), and that the amount exacted should be refunded,with interest, American Airlines, Inc. v. United States , 77 Fed. Cl. 672 (2007). The government appeals both rulings. BACKGROUND At issue are two fees imposed on pe rsons entering the United States: the Immigration Inspection User Fee and the Agricultur al Quarantine Inspection User Fee. Both fees are based on the prin ciple that government services should be paid for by the users of the services. The purpose of the Immigration Inspection User Fee is to cover the cost of various immigration inspection services. T he authorizing statute, 8 U.S.C. §1356(d)-(k), was enacted in 1986 and provides (with certai n exceptions not here relevant) that each passenger entering the United States on a commercial carrier shall pay a fee for immigration inspection. See 8 U.S.C. §1356(d) (“In additi on to any other fee authorized by law, the Attorney Gener al shall charge and collect $7 per individual for the immigration inspection of each passenger a rriving at a port of entry in the United States . . . .”). Generally the fee is collecte d by the issuer of the ticket at the time of issuance. Id. §1356(f)(1). If the ticket is issued in a foreign country and the fee is not collected at ticketing, then the carrier is r equired to collect the fee at the time the passenger departs from t he United States. Id. §1356(f)(2). The person who collects the fees pursuant to §1356(f)(1) or (2) is required to remit the collected fees quarterly to the Attorney General. Id. §1356(f)(3). All commercial tickets are required to be marked to show the user fee status. Id. §1356(f)(1)(B); 8 C. F.R. §286.4(b).

2007-5174 2The regulations provide further details about the Immigration User Fee, at 8 C.F.R. §§286.1-286.7. The regulations relevant to the issues herein include the following (with emphases added): 8 C.F.R. §286.4 Fee co llection responsibility (a) It is the responsibility of the air or sea carriers , travel agents, tour wholesalers, or other parties, which issue tickets or documents for transportation on or after December 1, 1986, to collect the fee set forth in §286.2 of this part from all passengers transported to the United States who are not excepted under §286.3 of this part. (b) Tickets and documents for transpor tation shall be marked by the collector of the fee to indicate that the required fee has been collected. Such markings shall be in accordanc e with the procedures set forth in the ARC Industry Agents Handbook, the SATO Ticketing Handbook, or compatible procedures se t forth in the operations manual of individual collectors. (c) It is the responsibility of the carrier transporting a passenger from the United States to collect the fee upon departure , if the passenger was not excepted under §286.3 of this part and tickets or documents for transportation of the passenger do not re flect collection of the fee at the time of issuance. If at the time of departure such a passenger refuses to pay the fee , the carrier shall record the full name, complete address, nationality, passport number , and alien file num ber, if any, of the passenger and immediately notify t he Associate Commissioner, Finance

. 8 C.F.R. §286.5 Remittanc e and statement procedures (a) The air or sea carrier whose ticket stock or document for transportation reflects collection of the fee is responsible for remittance of the fee to the Service. The travel agent, tour wholesaler, or other entity, which issues their own non-carrier related ticket or document for transportation to an air or sea passenger who is not except ed from the fee pursuant to §286.3 of this part, is res ponsible for remittance of the fee to the Service, unless by contract the carrier will remit the fee. The regulations also require an air carrier to maintain records of fees collected and remitted, 8 C.F.R. §286.6, and provide the government with enforcement powers including independent audits, id. §286.5(f), subpoena power, id. §286.5(g), and penalties against the carrier fo r noncompliance, specifically , termination of contracts

2007-5174 3and suspension of enroute inspec tions or preinspections, id. §286.7. The regulations do not provide a penalty against passenger s who refuse to pay the fees. The second fee at issue is the Agricultural Quarantine Inspecti on (AQI) User Fee, enacted in 1990 and codified at 21 U.S.C. §136a. Th is fee is intended to cover the cost of providing agricultural quarantine and inspection servic es to airline passengers entering the United States . 21 U.S.C. §136a(a); see 7 C.F.R. §354.3(f)(1) (“[E]ach passenger aboard a commercial aircraft who is subject to inspection . . . upon arrival from a place outside of the cu stoms territory of the United States, must pay an AQI user fee.”). Much like th e Immigration User Fee provisio ns, the AQI regulations require collection of the fee by the carrier or other agent, and remittance as instructed. See 7 C.F.R. §354.3(f)(4)-(5). Agai n, tickets are marked to show collection of the fee. Id. §354.3(f)(4)(i)(A). The relevant regulations include the following (with emphases added): 7 C.F.R. §354.3(f)(4) Collection of fees (i) Any person who issues tickets or travel documents on or after May 13, 1991, is responsible for collecting the AQI user fee from all passengers transported into the customs territory of the United States to whom the AQI user fee applies. (A) Tickets or travel documents must be marked by the person who collects the AQI user f ee to indicate that the required AQI user fee has been co llected from the passenger. (B) If the AQI user fee applies to a passenger departing from the United States and if the passenger’s tick ets or travel documents were issued on or after May 13, 1991, but do not reflect collection of the AQI user fee at the ti me of issuance, then the carrier transporting the passenger from the Un ited States must collect the AQI user fee upon departure

. 7 C.F.R. §354.3(f)(5) Remitt ance and statement procedures (i) The carrier whose ticket stock or travel document reflects collection of the AQI user fee must remit the fee to the U.S. Bank, United States Department of Agricultur e (USDA), APHIS, AQI, P.O. Box 979044, St. Louis, MO 63197-9000. The trav el agent, United States-based

2007-5174 4wholesaler, or other entity, which iss ues its own non-carrier related ticket or travel document to a passenger w ho is subject to an AQI user fee under this part, must remit the fee to APHIS , unless by contract the carrier will remit the fee. A “compliance” provision a llows the Animal and Plant Health Inspection Service (APHIS) to verify the a ccuracy of fees that are collected and remitted. Id. §354.3(f)(7). American has duly collected and made regular remittances of both of these user fees. American explains that typically a ve ry small percentage of user fees is not collected, for various reasons. For example, some tickets are issued by foreign travel agents in countries that prohibit ticket agents fr om collecting United States user fees at the time of ticketing. While the user fee st atutes and regulations pr ovide that the airline shall collect any unpaid fees before such a passenger boards an aircraft to leave the United States, American states that the airlines cannot force passengers to pay the user fees at the point of departure because the airlines are not authorized to refuse to board ticketed passengers who refuse to pay these fees. American’s records and payments were a udited by the government on an annual or biannual basis. Accordi ng to the government’s audit methodology, a sampling of tickets from American’s flights during a specif ic time period was checked for marking or other evidence that the user fees were coll ected. Tickets lacking such evidence were placed on a list of “potential errors,” wh ich American then researched to determine whether any other evidence show ed that the user fees were collected for the “potential error” tickets. Any ticket whose fee status was not resolved after such further research was deemed a “confirmed error,” which the government audit treated as a ticket for which user fees were not coll ected. The error rate, measur ed as the ratio of “confirmed error” tickets to the total num ber of sampled tickets, was then multiplied by the total

2007-5174 5dollar amount of fee remittances by American during the relevant time period, to approximate the shortfall in co llected user fees. During the audit periods at issue, the aggregate error rate for these user fees as audited was less than 1%. The government assessed American for the amount of the approximated shortfalls in collected user fees as audited, and Americ an paid the assessed amounts for each audit period. American objected to the user fee assessments in October 2003, and wrote the responsible agen cies requesting refunds. T he agencies declined the requests in August 2004. In De cember 2004, American filed suit in the Court of Federal Claims. American’s complaint states that the assessments were “illegally exacted by the defendant under the pretence t hat statutory and regulatory authority relating to the remittance of Immigration User Fees and Anim al and Plant Health Inspection Service Fees by airline carriers requires the carriers to remit a 100 percent collection rate of such fees or assume secondary liability or guarantor status for such uncollected fees.” Compl., preamble. The complaint, as ame nded, presents the details of the audit-based assessments from October 1998 to August 2004, with a total of $2,267,974 in payments. American requested recovery of this sum, pl us interest and penalties. Both parties filed dispositive motions on the question of liability for illegal exactions, deeming it to be a ma tter of law. The Court of Federal Claims granted partial summary judgment to American, ruling that the carrier is required to remit to the government only those fees that are actually collected from passengers. The court found the user fee statutes and regulations unambiguous, and explained that liability for payment of the user fees “is imposed on the passenger, not upon commercial airlines that are required only to collect and to re mit any fees collected .” American Airlines , 68

2007-5174 6Fed. Cl. at 732. The court held that t he government’s liability theory imposes an unauthorized penalty on the carrier . After a period of discovery on damages, during which the court granted a protective order precluding certain of the government’s broad discovery requests, reported at 75 Fed. Cl. 237, 241 (2006), and after briefing and argument, the court accepted the unopposed damages calculati on by American’s expert and awarded American a to tal of $2,601,373 in damages and interest. On this appeal, the government argues t hat the Court of Federal Claims erred both in holding that the assessments were il legal exactions and, even if the liability ruling were correct, in measuring recovery by the amounts that were assessed and paid based on the government’s audits. Thes e arguments are addressed in turn. I LIABILITY The government argues that the user fee statutes and regulations, correctly interpreted, obligate the carriers not only to collect user fees from all passengers and to remit all fees collected, but also to pay th e fees that the airlines do not collect. The government states that the tw o agencies that administer t hese fees have construed the statutes and regulations in this way for mo re than a decade, and hence, to the extent the governing provisions are deemed to be ambiguous, these agency interpretations are entitled to deference. The Court of Federal Claims hel d that the statutes and regulations are not ambiguous , and that they have been inco rrectly applied. The government acknowledges that the interpretation of stat utes and regulations is a question of law, which we review independently, e.g. , Demko v. United States , 216 F.3d 1049, 1052 (Fed. Cir. 2000), and argues that judici ally crafted doctri nes of deference to

2007-5174 7agency interpretations require reversing t he judgment and sustaining the agencies’ view. In construing a statute or regulation, we begin by reviewi ng its language to ascertain its plain meaning. Glover v. West , 185 F.3d 1328, 1332 (Fed. Cir. 1999). When a statute is not clear on its face or does not speak directly to an issue, the interpretation provided by the relevant agency’s regulations warrants deference, in keeping with Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. , 467 U.S. 837, 842-45 (1984). On t he other hand, when the statutory text is clear, we need look no further. Id. at 842-43 (“If the in tent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.”); see also , e.g. , Shoshone Indian Tribe of the Wind River Reservation v. United States , 364 F.3d 1339, 1345-46 (Fed. Cir. 2004). When the language of a regulation is ambiguous or susceptible to more than one plausible reading, we defer to the agency’s interpretati on of its own regulations, as discussed in Bowles v. Seminole Rock & Sand Co. , 325 U.S. 410, 414 (1945). See also Thomas Jefferson Univ. v. Shalala , 512 U.S. 504, 512 (1994) (“[ W]e must defer to the Secretary’s interpretation unless an alternativ e reading is compelled by the regulation’s plain language or by other indications of t he Secretary’s intent at the time of the regulation’s promulgation.” (c itation and quotation marks omi tted)). As explained infra , we agree with the Court of F ederal Claims that the plai n language of the user fee provisions at issue here in both the stat ute and regulations is clear on its face, and accordingly no deference is owed to the agencies’ interpretations.

2007-5174 8The Immigration User Fee statute states that the Immigration User Fee is imposed on the passenger, not on carriers. 8 U.S.C. §1356(d) (“In addi tion to any other fee authorized by law, the Atto rney General shall charge and co llect $7 per individual for the immigration inspection of each passenger arriving at a port of entry in the United States . . . .”). The statute provi des two avenues for collection: upon passenger ticketing for travel to the United States or, for thos e who did not pay the fee upon ticketing, then prior to boarding a fli ght departing the Un ited States. See id. §1356(f)(1)-(2). The responsibility to collect t he fees is typically on the carrier or agent, as the “person who issues a document or ticket” in the first case, or upon “the person providing transportation to such passenger” in the second. Id. The Court of Federal Claims observed that t he plain language of the statute requires the carrier or agent that collects fees in these ways to remit only the fees that are actually collected: “The person who collects fees under par agraph (1) or (2) shall remit those fees . . . .” Id. §1356(f)(3). The words “those fees” plainly re fer to the fees coll ected under paragraph (1) or (2), not a theoretical total of all f ees for all passengers w hether or not collected. The regulations promulgated under the Immigration User Fee statute are also unambiguous. They require the carrier to re mit a fee when the carrier’s “ticket stock or document for transportation reflects collection of the fee,” 8 C.F. R. §286.5(a), with the date of remittance governed by the time at which “the fees are collected,” id. §286.5(b)(1). These regulations explicit ly recognize the possibility that some passengers may refuse to pay the fee, as shown in the emphasized language in 8 C.F.R. §286.4(c), ante , and for such instances the regulat ions require that the carrier

2007-5174 9record the name and other identifying info rmation of each refusing passenger and immediately inform the Asso ciate Commissioner, Finance. 1 The regulations impose detail ed obligations on the air ca rriers, and state specific penalties for noncompliance, bu t do not impose upon the carri ers the obligation to pay uncollected fees. The regulations require recordkeeping as to the fee imposition and collection and marking on the tickets, id. §286.5(c), and provide for government audits and other enforcement mechanisms, id. §286.5(f)-(g); these prov isions would have no purpose if the statute simply required the carriers to pay the fees for all passengers, whether or not they are collected. The regu lations are wholly cons istent with the plain meaning of the statute as held by the Court of Federal Claim s, and inconsistent with the interpretation pressed by the government. The AQI User Fee statute is somew hat less detailed than the Immigration Inspection User Fee statute, but the regulations prescr ibed by the Secretary of Agriculture, as authoriz ed by 21 U.S.C. §136a(a),(d), are unambiguous in their imposition of the obli gation to pay the AQI fee directly on the passenger. 7 C.F.R. §354.3(f)(1) (“[E]ach passenger aboard a commercial aircraft who is subject to inspection . . . upon arrival from a place outsi de of the customs territory of the United States, must pay an AQI user f ee.”). The AQI regulations stat e that the carrier or ticket agent “is responsible for collecting” the fees from passengers, id. §354.3(f)(4), and require remittance of fees that are actually collected, id. §354.3(f)(5)(i) (“The carrier whose ticket stock or travel document reflects collection of the AQI user fee must remit

1 This title refers to a position in the Immigration and Naturalization Service, which was dissolved in 2003. Customs and Bo rder Protection, a component of the Department of Homeland Security, now has re sponsibility for the i mmigration inspection process. See 6 U.S.C. §§251(5), 291(a). 2007-5174 10the fee to the U.S. Bank, [USDA], APHIS . . . .”). The regulations also require documentation of the fees that are collected and remitted, id. §354.3(f)(5)(iii), and include “compliance” provisi ons allowing “APHIS personnel to verify the accuracy of the AQI user fees collected and remitted,” id. §354.3(f)(7). Again, t hese detailed provisions would serve no purpose if the Secretary could simply asse ss air carriers for the total number of passengers carried. American points out that AP HIS itself acknowledged th is clear meaning when it amended the AQI user fee regul ations in 1992, in respons e to complaints that a separate aircraft inspection fee alongside the A QI User Fee constitut ed “double billing.” APHIS explained, as to t he existing AQI user fee: It is also relevant that passengers them selves pay the APHIS user fees for passengers. Airlines are not res ponsible for paying passenger fees, though they collect the fee along with the price of the ticket, taxes, and any other charges that apply, and t hen remit the APHIS user fee to APHIS. User Fees—Agricultural Quarant ine and Inspection Services, Phytosanitary Certificates, Animal Quarantine Services, Veterinary Diagnos tics, Export Health Certificates, 57 Fed. Reg. 755, 764 (Jan. 9, 1992) (c odified at 7 C.F.R. pt. 354; 9 C.F.R. pt. 130). This statement by the responsible agency directly undermines the government’s position, pressed on this appeal, that the agency has always understood that the airlines are responsible for paying uncollected pass enger fees. Even were some deference appropriate, an agency interpretation that conflicts with any earlier agency “interpretation is ent itled to considerably less deference than a consistently held agency view.” Thomas Jefferson Univ. , 512 U.S. at 515 (quotat ion marks omitted). Nonetheless, the government argues that the AQI regulations require that the

2007-5174 11airlines “must remit” A QI user fees “from all passengers . . . to whom the AQI user fee applies.” United States Br. 29. The government thus argues that t he airlines’ obligation is to pay fees for every passenger, regar dless of whether every passenger paid the fees. The government arrives at this reading by splicing words and clauses to present a reading divergent from the clear language of the stat ute. That is not a proper method of statutory interpretation. The government also argues that American and other air carriers acquiesced for several years in the agencies’ interpretati ons, and paid the assessments for uncollected fees for many years without seeking legal re lief. The government states that this acquiescence supports the reasonableness of t he agencies’ interpretations. Indeed, deference is owed to a reasonable agency interpretation of its own regulations, unless it is contrary to the plain language or “other indi cations of the Secretary’ s intent at the time of the regulation’s promulgat ion.” Thomas Jefferson Univ. , 512 U.S. at 512 (quoting Gardebring v. Jenkins , 485 U.S. 415, 430 (1988)). But here both the plain language of the regulations and APHIS’s prior inconsistent statements upon amending the AQI user fee regulations in 1992, see 57 Fed. Reg. at 764, wei gh against the government’s interpretation. The government is corre ct that the reasona bleness of an agency interpretation is supported when it has been consistent over time, see, e.g. , Good Samaritan Hosp. v. Shalala , 508 U.S. 402, 417 (1993), but a period of acquiescence does not of itself support enhanced deference. American points ou t that in the tax context, refund claims are allowed for severa l years after the tax was paid, even if no objection was previously raised.

2007-5174 12Failure to challenge an im proper agency action does not ratify such action or insulate it from later obj ection and litigation. See Swift & Courtney & Beecher Co. v. United States , 111 U.S. 22, 29 (1884) (“illegal fees exacted by a collector, though sanctioned by a long-continued usage and practice in t he office, under a mistaken construction of the statute, even when paid without protest, might be recovered back on the ground that the pay ment was compulsory and not voluntary” (citing Ogden v. Maxwell , 18 F. Cas. 613 (C.C.S.D.N.Y. 1855))). By referring to American’s apparent acquiescence for some years before raising its objection, the gov ernment appears to be suggesting that American waived the right to object. This question was raised, unsuccessfully, before the Cour t of Federal Claims. See American Airlines , 77 Fed. Cl. at 681. We discern no reason to disturb the court’s holding. The issue of secondary liability for moni es air carriers are assigned to collect from passengers has arisen before, primarily in tax cases. For example, in Air Tour Acquisition Corp. v. United States , 781 F. Supp. 669 (D. Haw. 1991), which relates to an excise tax imposed on the “buyer” of air transportation under 26 U.S.C. §4261, the court held that the “seller,” Air Tour, was not liable for underpayment of tax because a plain reading of the statute and Internal Revenue Service (IRS) rulings “all indicate that the buyer, and not the seller, of the transportation is liable for the tax.” 781 F. Supp. at 672. The court similarly he ld that related statutes requiring providers of air transportation to “collect” any taxes due under §4261 and to hol d any amount so collected in trust did not impose liability on th e transportation provider for taxes it did not collect. Id. at 673-74. The Court of Appeals for the First Circuit reached a similar conclusion in Turks Head Club v. Broderick , 166 F.2d 877 (1st Cir. 1948), which

2007-5174 13involved a social club’s collection of ta xes on club dues, imposed under the thenexisting Tax Code. The statute provided that the club receivin g dues “shall collect from such members the amount” of t he tax and that “taxes collected . . . shall be paid to” the IRS. I.R.C. §1715(a),(b), 53 Stat. 1, 192 (1939) . The club collected and paid the taxes to the IRS, but sued for a refund. The cour t concluded that only th e members could file for a refund, in the absence of a power of attorney authoriz ing the club to act on their behalf, because “[t]he tax in question is laid upon the dues-paying members, . . . not upon the club. . . . [T]he cl ub is not liable for the tax if a member refuses to pay it or if for any other reason the tax cannot be collect ed from such member.” 166 F.2d at 881 (citations omitted). American states that these authorities supp ort its position, for the statutory texts of the regimes for collecting and remitting ta xes in these cases are analogous to the user fee provisions at issue here. The government responds that these tax cases are inapplicable because user fees are not taxes, and thus tax la w authorities do not apply; however, the plain language of analogous statutory language is normally read in the same way. In the only other Court of Feder al Claims decision to discuss the user fees at issue here, the court held that Air Tour was persuasive authority, based on the similarity of the tax statute there at issue to the user fee statutes. See Continental Airlines, Inc. v. United States , 77 Fed. Cl. 482, 483-84, 486 (2007). American points out that the statute in Air Tour was amended in 1997 to make ai r carriers liable for excise taxes they fail to collect; the amended st atute continues to impose the tax on passengers, 26 U.S.C. §4261, but also provides that if the tax “is not paid at the time payment for transportation is made” and not otherwise paid by the passenger, then

2007-5174 14“such tax shall be paid by the carrier providing the initial segment.” Id. §4263(c). Similarly, a statute imposing a new security fee after the events of September 11, 2001 calls for the air carrier to collect the fee, but expressly states t hat if the fee “is not collected from the passenger, the amount of the fee shall be paid by the carrier.” 49 U.S.C. §44940(d)(2). American states, and we agree, that t hese clear examples of the imposition of liability on the ca rriers are quite distinct from the statutory language here at issue. We affirm the ruling that the statutes and regulations governi ng the Immigration User Fee and the AQI User F ee do not impose liabilit y on the carrier for payment of the fees that are not actually collected from passengers.
II REMEDY The government next argues that the Cour t of Federal Claims erred in its damages ruling. The government does not all ege error in the award calculation itself, based on the damages theory adopted by the court, but rather asserts that the theory of damages was unduly restricted, as implem ented by a discovery ruling precluding discovery requests that extended beyond t he government’s audit results and reached more broadly into American’s internal met hodology for collecting and accounting for fees. The government contends that it was improper to limit the damages inquiry to the audit results upon which its unlawful exactions were actually based, and that the proper focus should have been on the entirety of American’s f ee collection and remittance process to determine whether Am erican’s payments truly exceed ed its overall liabilities. In the Court of Federal Claims the government sought broad discovery on

2007-5174 15damages, arguing that it should not be bound to its earlier audit results. It requested that its damages firm be allo wed “ordinary civil discovery” to examine, on a sampling basis, American’s methodology and controls for it s collection of user fees. The Court of Federal Claims granted the gove rnment’s request for additional discovery, but limited it to three months. During this period, American moved for a protective order with respect to certain of the discovery requests, in wh ich the government sought to examine the way American allocated taxes and fees that were encoded on some of its tickets using certain indeterminate code letters. The gover nment focused on what is described as American’s allocation methodology for its composite “XT” and “ZZ” codes. American explained that it uses the industry standard method for indicating collected fees on its tickets , as the government auditors had recognized, and that the extensive additional information the governm ent sought was unnecessary as well as unduly burdensome. American ex plained that in accordance with the industry standard, it uses two-letter codes on its tickets to denote when various taxes, fees, or charges have been collected. For inst ance, the AQI and Immigration User Fees are denoted by “XA” and “XY” respectively. However, t he standard ticketing format provides space for only three such codes; when more than three separate taxes or fees are collected for a particular ticket, then, pursuant to the standar d instructions promulgated by the airline industry association, American uses a compos ite code to represent multiple taxes or fees that cannot be separately listed. Two such composite codes, “XT” and “ZZ,” and the methodology American uses to allocate various funds represented by those composite codes, were the subject of t he challenged discovery requests. American uses a sampling methodology for the small num ber of tickets for which the funds pooled

2007-5174 16under a composite code cannot be properly assigned based on other documentation. American researches a sample of these tickets to figure out which specific fees or taxes were associated with the tickets, and uses this sampling data to prop ortionally allocate all funds accounted for under indeterminate co mposite “XT” and “ ZZ” codes among the proper tax or fee account s. American argued t hat all of this information had previously been provided to the governmen t auditors, who found no erro r in American’s allocation methodology, and that this allocation met hodology had no relation to the count of “confirmed error” tickets on which the cha llenged illegal exactions had been predicated. The Court of Federal Claim s granted American’s protective order, precluding the government from further probing into Am erican’s allocation methodology for the composite “XT” and “ZZ” codes. The court stated that the gover nment had filed an Answer, after repeated extensio ns, without pleading any setoff defense or counterclaim, and that the time to seek discovery to es tablish a minimum factual basis for pursuing such a setoff against American’s damages had lo ng since passed, rendering any such defense or counterclaim waived. The court thus ruled that the damages question was limited to the actual amou nt that American had paid pursuant to post-audit assessments; that is, the amounts paid based on the audit of “uncollected” fees. The government conceded that the calc ulations based on the analysis of American’s damages expert, David Williams, were correct on the information available. Mr. Williams reviewed the “confirmed erro r” tickets on which the unlawful assessments were predicated, and i dentified one group of tickets fo r which additional inquiry showed that the user fees had act ually been collected, which accounted for $38,611 of the assessed amounts. Williams accordingly subt racted this $38,611 sum from the audited

2007-5174 17total of $2,627,974 to arrive at a net of $2,589,363 in payments for uncollected fees. The government did not present any expert testimony or documentary evidence on the damages question, and declined to depose or cross-examine Mr. Williams. Accordingly, the court aw arded American $2,589,363 in principal am ount and $12,010 in pre-judgment interest, resultin g in a total judgment of $2,601,373. The government argues that the damages inquiry should not have focused solely on the amounts assessed based on the aud its, but should have provided the government with the opportunity to reinvestigat e all of American’s fee collections and remittances, which totaled more than $558 mi llion over the relevant period. The government contends that such a broader inquiry might have uncovered other errors in American’s procedures, not identified during t he audits, which could have resulted in underpayments of fees that it had actually collected. T he government argues that its prior audits are not conclusive, and shoul d not have prevented the requested broad discovery. The government analogizes to tax refund cases, where the plaintiff bears the burden of establishing that its total payments exceeded its tota l liabilities for its entire tax return. Thus the governm ent argues that American had the burden of establishing that the audits were correct. American responds that this is not a tax refund case, and there is no general authority for allowing the gov ernment to disavow its own audits and revisit every payment of fees, without some concrete and positive evidence that its own audits were incorrect. American argues that no such s howing has been made, even in a preliminary manner. The methodology by which the prior audits were conducted had been designed by the government auditors, and no question had been raised by the

2007-5174 18government as to the correctne ss of the audits that it had c onducted. American states that the same processes into which the government sought renewed discovery were within the scope of the prior audits, and t hat the government had never raised any concerns with American’s allocation methods for composite codes. American thus argues that the Court of Feder al Claims did not abuse its discr etion in limiting discovery, and did not err in its damages award. The government relies on tax refund princi ples, wherein, although the taxpayer may have disputed only one specific aspect, the entire tax liability may be reopened by the government. This practice derives from Lewis v. Reynolds , 284 U.S. 281, 283 (1932), in which the Court held that the IRS can offset a taxpayer’s claim for refund based on an improperly denied deduction, by showing that a separate deduction in the same tax return had been impr operly allowed. The Lewis offset rule applies even where the statute of limitations would have pr evented the Commissioner from reassessing the tax to recover the improperly allowed deduction. Id. The Court held that this offset rule was “necessarily implied” by t he specific statutes providing fo r refund suits. In Dysart v. United States , 340 F.2d 624, 628 (Ct. Cl. 1965), the Court of Claims explained that under the Lewis rule, the Commissioner has the ri ght to raise setoff defenses to challenge the taxpayer’s assertion that he overpaid his tax. The government draws analogy between American’s “illegal exaction ” claim and a claim that taxes have been improperly collected, which is “the classic illegal exaction claim,” Norman v. United States , 429 F.3d 1081, 1095 (Fed. Cir. 2005), and ar gues that the law and practice of tax cases, including the placement of the bur dens of proof and the principle of setoff, should be applied here.

2007-5174 19There is considerable tension in the analogy to tax refu nd cases, for the government flatly asserts that the user fees are not “taxes ,” but are fees imposed on the users of certain services to cover the cost of providing those serv ices. Indeed, in its discussion of the liability ruling, the governm ent states: “There is no reason to construe or apply user fee provisions as if they were parts of the Tax Code or Treasury Regulations. User fees are not taxes.” United States Brief 25. In Pacific Gas & Electric Co. v. United States , 417 F.3d 1375 (Fed. Cir. 2005), this co urt specifically declined to extend Lewis and Dysart to apply outside of the “integrated and comprehensive statutory scheme for assessing, collecting, and refunding taxe s, deficiency interest, and penalties” under the tax code. Id. at 1383. There is no suppor t in tax principles or precedent for the government’s proposal to redo its audits during litigation. The question in this case is quite diffe rent. The question is not whether the government is entitled to verify, by government audit, the procedures employed by American and the results thereof. That has been done. The question is whether, having done so, regularly and repeatedly, the government has the absolute right during litigation to redo its own audits in order to search for po ssibly overlooked information. We have been directed to no rationale for such redundancy, no apparent error or flaw in the government’s methodology, or other basis fo r expecting that significant adjustment in favor of the government would ensue. Even in the tax refund claim context, the government “must possess ‘concrete and positive evidence’ before it initiates discovery into matters relevant only as to establis hment of offsets.” Mahoney v. United States , 223 Ct. Cl. 713, 718 (1980) . As the Mahoney court further stated, in an order amending its prior decision, “[t]here is no magic about o ffsets to make it less of an abuse to assert

2007-5174 20offsets, supported only by a hope to substantiate them by di scovery, than it would be to assert any other claim or defense with only a similar hope.” 224 Ct. Cl. 668, 669 (1980). The government had ample opportunity to broaden the scope of the litigation by raising good-faith allegations by way of counterclaim or affirmative defense, but chose not to do so. The government simply has not rais ed any well-grounded allegat ion of a deficiency in any of the quarterly remittances Americ an made that would ju stify the invasive discovery it seeks into the accounting procedures underlying those remittances. The government argued in the Court of Federal Claims, and repeats on this appeal, that it shoul d not be bound by its own audit s and the absence of a pleaded counterclaim or setoff defense in order to support the requested discovery into matters previously audited by the government. However, the government has made no reasonable showing that it possesses “concrete and positive evidence, as opposed to a mere theoretical argument,” Sa ra Lee Corp. v. United States , 29 Fed. Cl. 330, 338 (1993) (quoting Missouri Pac. R.R. v. United States , 338 F.2d 668, 672 (Ct. Cl. 1964)), to justify wide-ranging discovery on a quest fo r setoffs. No error has been identified in the government auditor’s methodology, despite t he three months of additional discovery that the court afforded. The Court of Federal Claims did not abuse its discretion in the limitations that the court plac ed on additional discovery. See Forest Products, Northwest, Inc. v. United States , 453 F.3d 1355, 1359 (Fed. Cir. 2006) (discovery rulings are within the trial court’s discretion). The amounts assessed were based on the government’s periodic audits, and the assessments were paid by American. Am erican’s damages expe rt, reviewing the results during this proceeding, identified a sm all error in the government’s favor, and the

2007-5174 212007-5174 22 claim was reduced accordingly. The cour t’s damages award was based on this expert report, which the government st ipulated was accurate. No error has been shown in the judgment of the Court of Federal Claims.
AFFIRMED