County of Alameda et al., Plaintiffs-appellees, v. Caspar W. Weinberger, Etc., et al., Defendants-appellants, 520 F.2d 344 (9th Cir. 1975)

The United States Department of Health, Education, and Welfare ("HEW"), claiming that it had overpaid the State of California $11,020,249 in grants under the Social Security Act, deducted a portion of the asserted overpayments from its current quarterly grants to the State.¹  Several counties and the State sued to prevent further deductions and to secure release of monies withheld. The district court granted a preliminary injunction. HEW and the other federal defendants appealed and sought a stay pending determination of the appeal. We expedited the appeal. We affirm the issuance of the preliminary injunction and dismiss as moot the application for a (continued) stay.

In December 1968, the State of California submitted to HEW for its approval a welfare plan involving aid to the aged, the blind, and the disabled, to be effective retroactively to July 1, 1968. The plan included the "formula" that federal financial participation would be 75 percent for "mixed caseload" and "general administrative and overhead" costs.²  On March 19, 1969, the State advised its county welfare agencies that HEW's approval of the plan (including the 75 percent formula) was pending and that if the plan was "not finally approved, retroactive adjustments could be required." On April 21, 1969, HEW, through its Acting Regional Commissioner, indicated that the plan, and specifically the 75 percent formula, had "been accepted for incorporation into the State's approved plan, comments in letter."³  Thereafter HEW paid all of California's claims under the plan for the nine quarters from July 1, 1968, to September 1, 1970.⁴ 

The General Accounting Office ("GAO") began an audit of HEW in the latter half of 1970; sometime later GAO advised HEW that HEW's California claim payment practices were contrary to applicable regulations. On October 28, 1970, HEW informed California officials that the formula was not approved and, in effect, withdrew its approval of April 21, 1969. On October 29, 1971, an audit indicated HEW "overpayments" to California, during the period from July 1, 1968, to September 1, 1970, in the amount of $11,020,249: $7,163,451 for mixed caseload costs and $3,856,798 for general administrative and overhead costs. Those figures were based on the assumption (which plaintiffs dispute) that the two costs were claimable at 50 percent, not 75 percent, under applicable HEW guidelines. HEW unilaterally decided to recoup the overpayment from its current quarterly grants. The first of four anticipated quarterly deductions was made, and this suit followed.⁵ 

Appellants contend that the district court did not have jurisdiction of the subject matter and that, if it had jurisdiction, it abused its discretion in granting the preliminary injunction.

The parties treat HEW's October 29, 1971 disapproval as a "disallowance" within the meaning of 42 U.S.C. § 1316(d), which provides in relevant part:

Whenever the Secretary determines that any item or class of items on account of which Federal financial participation is claimed . . . shall be disallowed for such participation, the State shall be entitled to and upon request shall receive a reconsideration of the disallowance.

Relying on implications it draws from the entire text of 42 U.S.C. § 1316 and from portions of the legislative history of the statute, HEW argues that Congress foreclosed judicial review of disallowance determinations, thereby removing them from the purview of the Administrative Procedure Act (5 U.S.C. § 701(a) (1).)⁶  HEW points out that subsection (a) (3) of § 1316⁷  expressly permits review by direct appeal from the agency to the courts of appeals in "conformity" cases, and the statute is otherwise silent on judicial review. It invokes the maxim expressio unius est exclusio alterius in support of its inference that judicial review is precluded in all instances other than conformity cases. Reference to routine construction aids does not assist HEW because the controlling principle is that judicial review of final agency action shall not be deemed foreclosed unless Congress has forbidden review in unmistakable terms. The jurisdictional "question (should be) phrased in terms of 'prohibition' rather than 'authorization' because . . . judicial review of final agency action by an aggrieved person will not be cut off unless there is persuasive reason to believe that such was the purpose of Congress." (Abbott Laboratories v. Gardner (1967) 387 U.S. 136, 140, 87 S. Ct. 1507, 1511, 18 L. Ed. 2d 681.) HEW has the burden of establishing by " 'clear and convincing evidence' " that Congress, in enacting section 1316, "clearly command(ed)" that review be prohibited. (Barlow v. Collins (1970) 397 U.S. 159, 167, 90 S. Ct. 832, 25 L. Ed. 2d 192.)

The legislative history argument fares no better because it too begins and ends with ambiguity. HEW contends that section 1316 (a part of the Social Security Amendments of 1965) was a response to federal court decisions holding that challenges to HEW approval or disapproval of state welfare plans were barred by the doctrine of sovereign immunity.⁸  HEW concludes that in subsection 1316(a) (3) Congress consented to suit only in respect to conformity decisions, not disallowances. At most, the history suggests that Congress intended that conformity decisions be reviewable, not that review of disallowances be prohibited. Conformity is a more fundamental issue than disallowance; to permit review of the former, but not the latter, would be anomalous from the standpoint of any sovereign-immunity concern.

HEW emphasizes that Senator Jacob Javits, in introducing a bill which was eventually incorporated into 1316(a), included in his remarks a reference to a May 1964 report on public assistance by the Advisory Commission on Intergovernmental Relations. The final paragraph of the report states:

Some states and local officials believe that some form of judicial review should encompass all aspects of the public assistance programs, including matching issues or audit exceptions. However, the much greater concern is for review of decisions regarding plan conformity issues. The Commission believes that to involve audit exceptions or issues other than those of plan conformity in the judicial review process would create many additional problems.

(111 Cong.Rec. 3068 (1965).)

This is only one paragraph in the Commission's report. The import of Senior Javits' mention of the whole report sheds little light on Senator Javits' "intention" regarding district court review of disallowances; it sheds no light at all on any congressional intent regarding such review.⁹ 

HEW argues finally that considerations of public policy militate against judicial review of disallowances, and that we should presume a congressional intent that accords with public policy. HEW warns us that § 1316(d) disallowance questions involve complex accounting matters necessitating the exercise of broad discretion by the Secretary. We are unconvinced that any public policy exists to shield the courts from complex issues or to confer upon the Secretary of HEW broad discretion more heavily insulated from judicial scrutiny than that committed to other lofty administrative heads. (Cf. Citizens to Preserve Overton Park, Inc. v. Volpe (1971), 401 U.S. 402, 410-13, 91 S. Ct. 814, 28 L. Ed. 2d 136.) To the contrary, Congress has expressly conferred jurisdiction in conformity cases which involve issues at least as complex as those in disallowance matters and discretion at least as broad exercised by the same Secretary.

HEW has not carried its burden.¹⁰  Therefore, we hold that a final determination of disallowance under the narrow facts of this case is subject to judicial review under the applicable provisions of the Administrative Procedure Act. (Cf. National Welfare Rights Organization v. Finch (1970) 139 U.S.App.D.C. 46, 56-59, 429 F.2d 725, 735-38; cf. also Kingsbrook Jewish Medical Center v. Richardson (2d Cir. 1973) 486 F.2d 663, 666-68; Aquavella v. Richardson (2d Cir. 1971) 437 F.2d 397, 400-03.)¹¹ 

In reviewing the district court's issuance of a preliminary injunction, we "may only consider whether issuance of the injunction constituted an abuse of discretion." (Brown v. Chote (1973) 411 U.S. 452, 457, 93 S. Ct. 1732, 1735, 36 L. Ed. 2d 420; see also P. v. Riles (9th Cir. 1974) 502 F.2d 963; Sierra Club v. Hickel (9th Cir. 1970) 433 F.2d 24, 33-34.) In issuing preliminary injunctive relief, the district court must decide whether (1) plaintiffs will likely prevail on the merits; (2) plaintiffs, in the absence of preliminary relief, may suffer irreparable harm; and (3) the foreseeable hardship to defendants from a preliminary injunction is less severe than the harm plaintiffs will suffer absent preliminary relief. (E. g., P. v. Riles, supra Sierra Club v. Hickel supra 433 F.2d at 33-34.) The district court resolved each of those issues in plaintiffs' favor. The existence of injury and the balancing of hardship in plaintiffs' favor are not seriously contested on appeal because defendants recognize that the record prevents successful appellate attack on the district court's resolution of those issues. The focal point of challenge is the determination of likelihood that plaintiffs will prevail on the merits. We cannot say that the district court's assessment of probabilities of success so far misses the mark as to be characterized as an abuse of discretion.¹² 

HEW contends that it never approved California's welfare plan, and the plaintiffs should bear the costs of eventual disapproval. It is by no means clear from the record whether HEW approved the plan and thereafter retroactively withdrew approval, or whether it provisionally approved the plan subject to later review and potential disapproval,¹³  or whether statutory authority to do the latter (assuming such authority exists) would support the former action. The correct characterization of HEW's conduct and the extent to which that conduct fell within the ambit of discretion committed by Congress to the agency are sufficiently debatable to prevent our overturning the district court's decision as an abuse of discretion. In this connection, we cannot agree with HEW that its choice of means to effectuate recoupment was clearly within its authority. Although the regulations provide for periodic audits of the operations of a state welfare program (45 C.F.R. § 201.12) and "deductions from subsequent grants made to the State agency" to compensate for "(e) xpenditures in which it is found the Federal Government may not participate" (45 C.F.R. § 201.13(a)), the purpose of such audits and deductions is not to implement a retroactive disapproval of a previously approved plan; rather, the purpose is to:

(1) (Encourage) prudent use of program funds, and

(2) (Provide) a reasonable degree of assurance that funds are being properly expended, and for the purposes for which appropriated and provided for under the related Act and State plan, including¹⁴  State laws and regulations. (45 C.F.R. § 201.12(a).)

HEW emphasizes that its alleged overpayment to California conflicted with its own guidelines. It is HEW's responsibility, in deciding whether to approve a plan, to determine whether the plan meets "the requirements for approval . . . based on relevant Federal statutes and regulations." (45 C.F.R. § 201.3(d).) To the extent that HEW's "guidelines" were in apparent conflict with HEW's approval of California's plan, it is entirely possible that HEW's approval takes precedence over its guidelines.

We conclude that the district court was not unreasonable in deciding that plaintiffs have raised serious and substantial questions, indicating likely success on the merits. (Cf. Columbia Heights Nursing Home & Hospital, Inc. v. Weinberger, supra.)

Affirmed. The application for a stay pending appeal is dismissed.