Court Opinion

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Opinions of the United
2008 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

12-11-2008

Natl Taxpayers Union v. HHS
Precedential or Non-Precedential: Non-Precedential

Docket No. 07-3381

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                                                            NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT

                                    No. 07-3381

                         NATIONAL TAXPAYERS UNION

                                                   Petitioner

                                         v.

           UNITED STATES SOCIAL SECURITY ADMINISTRATION;
                  OFFICE OF THE INSPECTOR GENERAL

                                                   Respondent

                      Petition for Review of Final Decision of
                   Commissioner of Social Security Administration
                                    (HHS-1:07-43)

                             Argued November 20, 2008
                                  ____________

            Before: FUENTES, HARDIMAN, and GARTH, Circuit Judges.
                          (Filed: December 11, 2008)

Michael Geltner           [ARGUED]
Geltner & Associates
105 North Virginia Avenue
Suite 305
Falls Church, VA 22046
Counsel for Petitioner

Nicholas J. Bagley           [ARGUED]
Mark B. Stern
United States Department of Justice
950 Pennsylvania Avenue, N.W.
601 D Street, N.W.
Washington, DC 20530
Counsel for Respondent

                                OPINION OF THE COURT

FUENTES, Circuit Judge:

         The National Taxpayers Union (“NTU”) petitions for review of a decision of the

Department of Health and Human Services Departmental Appeals Board that upheld a

determination by an administrative law judge (“ALJ”) who found that NTU mailed

correspondence that used “social security” in a manner that violated Section 1140 of the

Social Security Act, 42 U.S.C. § 1320b-10. The Appeals Board also affirmed the ALJ’s

imposition of a civil penalty of $274,582 against NTU. Because we find that Section

1140(a)(1) is neither unconstitutional as-applied, nor unconstitutionally overbroad, and

that the ALJ’s decision is supported by substantial evidence, we deny the petition for

review.1

I.         Facts

         NTU is a not-for-profit taxpayer advocacy organization. In 2001, NTU sent

thousands of direct mail pieces to consumers to solicit donations. The brochures

included language in large, red, bold type that stated, “Official National Survey on Social

Security.” The brochures also included the statement that it was “commissioned by the

NTU for the Social Security Administration, White House, and Congress of the United

     1
         We have jurisdiction pursuant to 42 U.S.C. § 1320a-7a(e).

                                             2
States.” The Social Security Administration (“SSA”) received a complaint, and the

Inspector General of the SSA determined that the mailing violated Section 1140 of the

Social Security Act. Section 1140 prohibits the use of nineteen phrases, including

“social security,” in a manner that either (1) the writer knows or should know, or (2) the

reader could reasonably perceive as conveying the false impression of official

endorsement of the material by the SSA or the government. The Inspector General sent a

cease-and-desist letter to NTU, and NTU responded with an apology. SSA subsequently

received an additional complaint, and determined that the basis of the new complaint was

a slightly altered version of the same brochure which NTU mailed after the cease-and-

desist letter. The SSA Inspector General sent another letter to NTU, demanding that

NTU provide written confirmation of its intent to comply with Section 1140 within ten

days. Instead of complying, NTU filed a lawsuit in United States District Court,

claiming that Section 1140 was unconstitutional.2 While the action was pending, NTU

mailed a third version of the brochure, which SSA also considered misleading and in

violation of Section 1140.

       The SSA Inspector General wrote NTU, stating that it planned to impose a penalty

in the amount of $274,582, or $.50 per offending direct mail piece.3 NTU requested a

   2
    The District Court ultimately dismissed NTU’s complaint, and the Fourth Circuit
affirmed.
   3
    The statute provides for a “civil money penalty not to exceed . . . $5,000” for each
piece of mail that contains the prohibited language. 42 U.S.C. § 1320b-10(b)(1).

                                             3
hearing in front of an ALJ, who found that NTU violated both prongs of Section 1140.

Specifically, the ALJ found that NTU knew that the language used in the brochures

would induce recipients to read it because the language conveyed the false impression

that the SSA authorized the mailing. Similarly, the ALJ found that recipients could

reasonably interpret the language on the brochure as conveying the false impression that

the SSA authorized the mailing. Finally, the ALJ found that the proposed penalty was

reasonable. NTU appealed the ALJ’s decision to the Appeals Board of the Department

of Health and Human Services, which refused to review the decision, thereby adopting

the ALJ’s decision as final. NTU petitions this Court for review of the agency’s final

decision.

       In its petition for review, NTU asserts several arguments. First, NTU challenges

the constitutionality of Section 1140, arguing that it violates NTU’s First Amendment

rights as-applied, and that it is facially overbroad. Second, NTU argues that the

monetary penalty imposed is “criminal in nature” and that it is “excessive” and prohibited

by the Eighth Amendment. Finally, NTU urges this Court to apply Daubert principles to

administrative proceedings and to strike the expert testimony from the ALJ proceeding.

                                     II. Discussion

       A.     First Amendment4

   4
    We review NTU’s constitutional claims de novo. See, e.g., CBS Corp. v. FCC, 535
F.3d 167, 174 (3d Cir. 2008).

                                            4
              1.      As-Applied Challenge

       NTU first argues that Section 1140 violates the First Amendment as-applied

because such application penalizes the organization’s speech without finding “actual

intent to defraud.” In other words, according to NTU, government may not limit speech

unless that speech intends to defraud or deceive the reader or listener. This assertion

requires little analysis, because it is based on an incorrect reading of Vill. of Schaumburg

v. Citizens for a Better Env’t, 444 U.S. 620 (1980). Contrary to NTU’s assertions,

Village of Schaumburg acknowledged that a “direct and substantial limitation on

protected activity” is constitutional if “it serves a sufficiently strong, subordinating

interest.” Id. at 636. Here, the government has a substantial interest in protecting Social

Security recipients from deceptive mailings. For millions of Americans, Social Security

is a vital, if not their only, source of income. Mail that appears to be from the SSA

piques beneficiaries’ interest and induces them to read and respond accordingly.

Congress enacted Section 1140 to protect seniors and other beneficiaries from fraud, and

to ensure that when the SSA sends legitimate mail to beneficiaries, the recipients will

open it and not perceive it as “junk mail.” HOUSE COMM. ON WAYS AND MEANS, 102D

CONG., REPORT ON DECEPTIVE SOLICITATIONS 5 (Comm. Print 1992). Section 1140

requires only that charities refrain from using deceptive language when soliciting.

Therefore, Section 1140 is constitutional as-applied because it serves a “strong,

subordinating interest.”

                                               5
              2.     Facially Overbroad

       Section 1140 regulates two types of conduct. The first type of conduct relates to

the intentions of the speaker. This prong states that a speaker cannot use nineteen

phrases, including “social security,” “in a manner which such person knows or should

know would convey . . . the false impression that such item is approved, endorsed or

authorized by” SSA. 42 U.S.C. § 1320b-10(a). The second type of conduct is objective

with regard to the reader, and prohibits the use of the proscribed phrases “in a manner

which reasonably could be interpreted or construed as conveying the false impression

that such item is approved, endorsed or authorized” by SSA. Id. Both prongs also cover

communications that convey the false impression that the author has “some connection

with the SSA.” Id.

       This Court has held that it will strike down a regulation of speech on its face “if its

prohibitions are sufficiently overbroad–that is, if it reaches too much expression that is

protected by the Constitution.” DeJohn v. Temple Univ., 537 F.3d 301, 314 (3d Cir.

2008). In other words, this Court must find that the very existence of the regulation at

issue “will inhibit free expression to a substantial extent.” Id. (quotation marks omitted)

(emphasis added); see also Ashcroft v. Free Speech Coalition, 535 U.S. 234, 246-44

(2002) (invalidating the Child Pornography Prevention Act as facially overbroad because

the statute reached a “substantial” amount of protected speech, such as speech that neither

appealed to the prurient interest nor was patently offensive, including speech that had

                                              6
serious “literary, artistic, political, and scientific value”); Broadrick v. Oklahoma, 413
U.S. 601, 615 (1973) (“[T]he overbreadth of a statute must not only be real, but

substantial as well, judged in relation to the statute’s plainly legitimate sweep.”); 181

South Inc. v. Fischer, 454 F.3d 228, 235 (3d Cir. 2006) (“The overbreadth claimant bears

the burden of demonstrating, from the text of the law and from actual fact, that

substantial overbreadth exists.”).

       In United States v. Williams, 128 S. Ct. 1830 (2008), the Supreme Court implied

that it disfavors facial challenges, preferring to review circumstances under which the

challenged statute actually infringes protected speech. The Court noted that the

overbreadth doctrine tends “to summon forth an endless stream of fanciful hypotheticals”

that may potentially implicate the infringement of protected speech. Id. at 1843. The

Court further stated that the “‘mere fact that one can conceive of some impermissible

applications of a statute is not sufficient to render it susceptible to an overbreadth

challenge.’” Id. at 1844 (quoting Members of City Council of Los Angeles v. Taxpayers

for Vincent, 466 U.S. 789, 800 (1984)). The Court described hypothetical scenarios

discussed at oral argument, and noted that if those situations came to pass, the affected

parties could bring an as-applied challenge. Id.; see also Washington State Grange v.

Washington State Republican Party, 128 S. Ct. 1184, 1191 (“Facial challenges are

disfavored for several reasons. Claims of facial invalidity often rest on speculation. . . .

Facial challenges also run contrary to the fundamental principle of judicial restraint that

                                              7
courts should not . . . formulate a rule of constitutional law broader than is required by

the precise facts to which it is to be applied.”).

       As previously discussed, the first prong of Section 1140 prohibits the use of

words such as “social security” in a manner that the speaker “knows or should know

would convey” the false impression of government approval or endorsement. Like other

forms of public deception, fraudulent charitable solicitation is unprotected speech.

Illinois v. Telemarketing Assocs., Inc., 538 U.S. 600, 611-12 (2003). Therefore, the

prong of Section 1140 that contains the “knowing” standard is not unconstitutionally

overbroad. Likewise, the First Amendment does not protect a speaker who uses the

prohibited language in such a way that he or she “should know” that the message will

mislead or deceive the reader.

       The second part of Section 1140 requires closer analysis because it does not

require that the speaker “know” or “should know” that the language could mislead the

reader. Rather, the second prong of the statute prohibits the use of the language in such a

way that the reader could reasonably interpret as conveying governmental endorsement.

Because this prong does not have a scienter requirement for the speaker, it could possibly

reach some protected speech. However, it is wholly unclear that such non-deceptive

speech reaches a “substantial” amount of protected speech. NTU has failed to provide

any significant examples of protected speech falling under the statute and its counsel

essentially disavowed the overbreadth claim at oral argument. Given the lack of

                                               8
evidence of the second prong’s “substantial” burden on protected speech, we find that

the objective prong of Section 1140 is not overbroad.

       We note that the Fourth Circuit has also examined a similar facial challenge to

Section 1140 in United Seniors Ass’n, Inc. v. Soc. Sec. Admin., 423 F.3d 397, 406-07

(4th Cir. 2005). As in this case, the Fourth Circuit held that, while the objective prong of

Section 1140 could reach some protected speech, any such speech constituted, “at most, a

minuscule portion of the speech reached by the statute.” Id. at 407.

       For these reasons, we reject NTU’s facial challenge.

       B.     Monetary Fine5

       NTU next challenges the penalty imposed by the ALJ, arguing that it is criminal in

nature and “excessive” in violation of the Eighth Amendment.

       In Myrie v. Comm’r, N.J. Dept. of Corr., this Court examined the issue of whether

a surcharge at a prison commissary was civil or criminal in nature, and whether the

surcharge was excessive. This Court explained that the first step in such an inquiry is to

determine whether the legislature, “‘in establishing the penalizing mechanism, indicated

either expressly or impliedly a preference for one label or the other.’” 267 F.3d 251, 256

(3d Cir. 2001) (quoting Hudson v. United States, 522 U.S. 93, 99 (1997)). This inquiry is

clear, because Section 1040 expressly permits a “civil money penalty” for violation of the

   5
    An appellate court reviews the question of whether a fine is constitutionally
excessive under a de novo standard. United States v. Bajakajian, 524 U.S. 321, 337 n.10
(1998).

                                             9
statute. 42 U.S.C. § 1320b-10(b) (emphasis added).

       Under Myrie, the Court next examines whether the “statutory scheme [i]s so

punitive either in purpose or effect . . . as to ‘transfor[m] what was clearly intended as a

civil remedy into a criminal penalty.’” Myrie, 267 F.3d at 256 (quoting Hudson, 522 U.S.

at 99-100) (internal citations omitted). This inquiry requires the Court to apply the seven

criteria identified in Kennedy v. Mendoza-Martinez, 372 U.S. 144, 168-69 (1963).

These criteria include

       Whether the sanction involves an affirmative disability or restraint, whether
       it has historically been regarded as a punishment, whether it comes into
       play only on a finding of scienter, whether its operation will promote the
       traditional aims of punishment-retribution and deterrence, whether the
       behavior to which it applies is already a crime, whether an alternative
       purpose to which it may rationally be connected is assignable for it, and
       whether it appears excessive in relation to the alternative purpose assigned
       ....

Id.

       Applying these criteria to NTU’s penalty of $.50 per unit that violated Section

1140, we conclude that the criteria do not support NTU’s contention that the penalty is

criminal in nature. First, NTU concedes that the penalty does not involve an “affirmative

disability or restraint.” (App. Br. at 32.) Second, the Supreme Court has stated that

monetary penalties have not “historically been viewed as punishment.” Hudson, 522
U.S. at 104. Next, as discussed in Section II.A.2., supra, a violation of Section 1140

does not necessarily require a finding of scienter. Although Section 1140’s monetary

penalty likely promotes the traditional ends of punishment, retribution and deterrence, to

                                             10
some degree, that alone is not enough to characterize the penalty as penal in nature,

rather than civil. See id. at 105 (“[T]he mere presence of [deterrence] is insufficient to

render a sanction criminal, as deterrence may serve civil as well as criminal goals.”)

(internal citation and quotation marks omitted). In fact, one of the alternative purposes of

the sanction is to reimburse the Social Security Trust Fund for the cost of policing

deceptive practices. STAFF OF H.R. COMM. ON WAYS AND MEANS, 102D CONG., REPORT

ON DECEPTIVE SOLICITATIONS,     at 7 (Comm. Print 1992). In addition, Section 1140 is not

consistent with criminal behavior, because a civil penalty reaches negligent conduct,

whereas actual fraud is required for a crime. With regard to “whether an alternative

purpose to which it may rationally be connected is assignable for it,” this Court has

interpreted this inquiry to ask “whether an asserted ‘sanction’ may be reasonably

regarded as having a purpose other than punishment.” Myrie, 267 F.3d at 261. As

previously noted, the legislative history demonstrates that aside from punishment, there

are the additional goals of deterrence, as well as funding the cost of enforcement of

Section 1140. STAFF OF H.R. COMM. ON WAYS AND MEANS, 102D CONG., REPORT ON

DECEPTIVE SOLICITATIONS, at 9 (Comm. Print 1992). Finally, the fine at issue is not

“excessive in relation to the alternative purpose assigned.” When compared to the cost to

the government to enforce Section 1140, the $.50 per unit fine is not excessive.

Moreover, it is far less than the maximum fine of $5,000 per violation that the statute

permits.

                                             11
       Likewise, we find NTU’s contention that the fine violates the Excessive Fines

Clause of the Eighth Amendment meritless. To violate the Excessive Fines Clause, the

fine must be both “excessive” and a “fine.” Tillman v. Lebanon County Corr. Facility,

221 F.3d 410, 420 (3d Cir. 2000). For the reasons noted above, the penalty at issue is

neither “excessive” nor a “fine,” which more commonly refers to a penalty for a criminal

offense. Id. (citing Browning-Ferris Indus. of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S.
257, 265 (1989)).

       C.     Expert Testimony6

       NTU asks this Court to endorse the application of Daubert to administrative

proceedings and to strike the testimony of Professor William Arnold, the expert who

testified for the government before the ALJ. Daubert sets forth rules for determining

whether expert witnesses who testify in federal trials are reliable and relevant as required

by the Federal Rules of Evidence. Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579

(1993). Here, NTU argues that Professor Arnold’s testimony was “sloppy and

unscientific” and should have been excluded from the administrative hearing under

Daubert. However, neither the Federal Rules of Evidence nor Daubert apply to

administrative hearings. See, e.g., 20 C.F.R. § 498.217(b) (“[T]he ALJ will not be

bound by the Federal Rules of Evidence, but may be guided by them in ruling on the

   6
    This Court will defer to fact determinations by the agency “if supported by substantial
evidence on the record considered as a whole.” 42 U.S.C. § 1320a-7a(e) (incorporated
by reference in 42 U.S.C. § 1320b-10(c)(1)).

                                             12
admissibility of evidence.” (emphasis added)); Bayliss v. Barnhart, 427 F.3d 1211, 1218

n.4 (9th Cir. 2005) (explaining that Daubert does not govern the admissibility of

evidence before an ALJ). But see Niam v. Ashcroft, 354 F.3d 652, 660 (7th Cir. 2004)

(applying the “spirit of Daubert” to administrative proceedings).

       We find NTU’s arguments without merit. Not only did the ALJ explain the

Professor’s extensive credentials in her opinion, but she conceded that she did not rely on

his testimony in reaching her decision. Specifically, the ALJ noted that “much of

Professor Arnold’s testimony simply states the obvious. Interpreting the plain meaning of

the language on such blatantly deceptive mailers does not require great expertise.” (App.

at 17 n.9.) Even without considering the testimony of Professor Arnold, we find that

there is substantial evidence in the record to support the ALJ’s determination.

       For the foregoing reasons, we will deny NTU’s petition.

                                            13