Opinion ID: 3054267
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Heading Rank: 1

Heading: Statutory Background: The Program Integrity

Text: Regulation LSC is a private nonprofit corporation established by the United States for the purpose of providing financial support to individuals who would otherwise be unable to afford legal assistance. 42 U.S.C. § 2996b(a). To accomplish this purpose, LSC provides federal funds to local legal assistance programs throughout the United States. Id. § 2996e(a). See generally Legal Services Corporation Act of 1974 (LSC Act), Pub. L. No. 93-355, 88 Stat. 378 (1974) (codified as amended at 42 U.S.C. §§ 2996-2996l). By regulation, LSC places certain restrictions on the use of its funds. Id. § 2996e(b)(1). These restrictions include, for example, a prohibition on the use of LSC funding for such activities as lobbying, participating in class action lawsuits, and advocating for the redistricting of political districts. 45 C.F.R. §§ 1612.3, 1617.3, 1632.3. Additionally, LSC requires its recipients to maintain “objective integrity and independence from any organization that engages in restricted activities.” Id. § 1610.8(a).1 Requirements for this “objective 1 This regulation was promulgated in response to a constitutional challenge to LSC restrictions on recipients using non-LSC funds for otherwise 120 OREGON v. LEGAL SERVICES CORP. integrity” are codified in what is now denominated the “program integrity” rule or regulation. The requirements include: (1) legal separation of the recipient from the unrestricted organizations; (2) no transfer of LSC funds between the recipient and the unrestricted organization; and (3) the recipient’s physical and financial separation from the unrestricted organization.2 Id. Whether an LSC fund recipient is sufficiently physically and financially separated from non-compliant legal services providers is determined on a case-by-case basis, based upon the totality of the circumstances. Id. § 1610.8(a)(3). The program integrity regulation specifies that “mere bookkeeping separation of LSC funds from other funds is not sufficient.” Id. Other factors, such as having separate personnel, separate accounting and timekeeping records, separate facilities, and distinguishing forms of identification are relevant but not allconstitutional activities. Shortly after the restrictions were amended in 1996 to prohibit certain legal activities, a district court in Hawaii enjoined the LSC from enforcing them “to the extent that they relate to the use of Non-LSC Funds.” Legal Aid Soc’y of Haw. v. Legal Servs. Corp. (LASH), 961 F. Supp. 1402, 1422 (D. Haw. 1997). The district court found that the plaintiffs had a significant likelihood of success in arguing that the restrictions constituted unconstitutional conditions on the receipt of a federal subsidy. Id. at 1416-17. The new rule, codified at § 1610.8, allows recipients to affiliate with organizations that use non-federal funds to engage in restricted activities, subject to preserving “objective integrity” between the two organizations. In so doing, it overcame the constitutional concerns raised in LASH. See Legal Aid Soc’y of Haw. v. Legal Servs. Corp. (LASH II), 145 F.3d 1017, 1021-23 (9th Cir.), cert. denied, 525 U.S. 1015 (1998). 2 These regulations were designed to mirror the program integrity rule promulgated pursuant to Title X of the Public Health Service Act, which withstood constitutional attack in Rust v. Sullivan, 500 U.S. 173 (1991). See 62 Fed. Reg. 27,695-97 (May 21, 1997). LSC’s current regulations have also withstood constitutional challenges. See LASH II, 145 F.3d at 1031; Velazquez v. Legal Servs. Corp. (Velazquez II), 164 F.3d 757, 773 (2d Cir. 1999). OREGON v. LEGAL SERVICES CORP. 121 encompassing. Id. Fund recipients must annually certify to the LSC that they comply with the program integrity regulation. Id. § 1610.8(b). In this appeal, Oregon contends that the program integrity regulation violates its Tenth Amendment rights. II. Factual and Procedural History: Conflict with Oregon’s Guidelines In April 2005, the Oregon State Bar amended its guidelines for Oregon’s legal services program, directing service providers to integrate their operations and staff in places where separate organizations provide services to the same geographic area. While some of Oregon’s service providers are LSC fund recipients, others are not and engage in restricted activities. Legal Aid Services of Oregon (LASO), a legal services provider, is a recipient of LSC funds, which account for approximately 45% of its $6.5 million annual budget. Oregon Law Center (OLC), another large legal services provider, is not an LSC fund recipient and engages in LSC-restricted activities. In response to the State Bar’s amended guidelines, LASO submitted a configuration proposal to LSC that would combine the LASO and OLC corporations into one non-profit corporation. Under the proposal, the newly constituted corporation would have two divisions, one of which would be subject to the LSC restrictions and the other of which would not. The two divisions would also maintain separate financial books and records, and would notify the public of their distinct functions in letterheads, business cards, and signage. However, the two divisions of the proposed new entity would share personnel and equipment, and would operate in the same physical premises. LSC’s Office of Legal Affairs reviewed the proposal and concluded that it would not comply with LSC’s requirements for program integrity. In September 2005, LASO and OLC filed a complaint against LSC in district court, alleging that the LSC restrictions 122 OREGON v. LEGAL SERVICES CORP. violated their First Amendment rights. On the same day and in the same court, Oregon filed this action against LSC alleging that the program integrity regulation effectively thwarted Oregon’s policies governing its legal services program, in violation of the Tenth Amendment. Oregon sought to enjoin LSC from enforcing the program integrity regulation in Oregon. The two suits were consolidated and assigned to a magis-