WILLIAM THOMAS, et al.
NETWORK SOLUTIONS, INC.
NATIONAL SCIENCE FOUNDATION
BRIEF OF APPELLANTS
Ralph C. Nash, Jr.
1140 23rd Street, N.W.
Washington, D.C. 20037-1439
William H. Bode (113308)
James M. Ludwig (45560)
Daniel E. Cohen (45477)
BODE & BECKMAN, L.L.P.
1150 Connecticut Avenue, N.W., Ninth Floor
Washington, D.C. 20036
Counsel for Appellants
Dated: August 14, 1998
WILLIAM THOMAS, et al.
NETWORK SOLUTIONS, INC.
NATIONAL SCIENCE FOUNDATION
Pursuant to Circuit Rule 28(a)(1), appellants, William Thomas, et al., file this certificate as to parties, rulings, and related cases in this appeal from an Order issued by the United States District Court for the District of Columbia (Hogan J.) on April 6, 1998, in Civil Action No. 1:97CV02412 (TFH).Parties
The appellants, William Thomas, et al., plaintiffs below, are William Thomas; Myhouse Communications; Russell Braen; Thomas V. Howell; Lightning Links Communications, LP; Masseli & Lane; Athene, Inc.; Sartori Associates; and Delta Microsystems.' Appellees, defendants below, are Network Solutions, Inc. and the National Science Foundation.
1/ Appellants have moved to certify the action in the district court as a class action; that motion currently is sub judice in the district court.
The rulings under review are the portions of the Honorable Thomas F. Hogan's April 6, 1998, Order (and Memorandum Opinion) ordering (a) that appellants' motion for summary judgment on Count Three of the Amended Complaint be denied; (b) that appellants' motion for a preliminary injunction against appellee Network Solutions, Inc. be denied; (c) that appellees' motions to dismiss Counts Two through Ten of the Amended Complaint be granted; and (d) that Counts two through Ten of the Amended Complaint be dismissed. The opinion, although not yet published in an official reporter, can be obtained on WESTLAW at 1998 WL 191205 (D.D.C. April 6, 1998).
This case has not previously been before this Court or any other court. However, on April 2, 1998, appellee National Science Foundation filed a notice of appeal from the Honorable Thomas F. Hogan's February 2, 1998, Order (and Memorandum Opinion) granting appellants', William Thomas, et al., motion for a preliminary injunction. On May 7, 1998, appellee National Science Foundation filed a motion in this Court to dismiss the appeal, No. 98-5110, pursuant to
Fed. R. App. P. 42(b). That appeal was dismissed by an Order of this court filed on June 1, 1998. Counsel for appellant William Thomas, et al. are not aware of any other related cases.
Ralph C. Nash, Jr.
1140 23rd Street, N.W.
Washington, D.C. 20037-1439
William H. Bode (113308)
James M. Ludwig (45560)
Daniel E. Cohen (45477)
BODE & BECKMAN, L.L.P.
1150 Connecticut Avenue, N.W., Ninth Floor
Washington, D.C. 20036
Counsel for Appellants
Dated: July 13,1998
I hereby certify that on this day, July 13, 1998, I have served upon the parties listed below, by First Class U.S. Mail, the foregoing Rule 28(a)(1) Certificate Of Counsel As To Parties, Rulings, And Related Cases:
Wilma A. Lewis, United States Attorney
Lisa S. Goldfluss, Assistant United States Attorney
Department of Justice
United States Attorney's Office
District of Columbia
555 Fourth Street, N.W.
Washington, DC 20001
Counsel for Appellee National Science Foundation
Michael Burack, Esq.
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
Counsel for Appellee Network Solutions, Inc.
|STATEMENT OF JURISDICTION||1|
|STATEMENT OF ISSUES PRESENTED FOR REVIEW||1|
|STATUTES AND REGULATIONS||2|
|STATEMENT OF THE CASE||3|
|A.||Nature Of The Action||3|
|B.||Course of Proceedings||4|
|C.||Statement of Facts||5|
|1.||The NSF/NSI Cooperative Agreement||7|
|2.||The 1995 Amendment To The Cooperative Agreement||8|
|3.||The Fees Grossly Exceed The Costs Of Services Provided||9|
|SUMMARY OF ARGUMENT||13|
|I.||STANDARD OF REVIEW||15|
|II.||THE DISTRICT COURT ERRED AS A MATTER OF LAW IN EXEMPTING THE NSF-APPROVED ABOVE-COST FEES FROM THE IOAA AND APA||16|
|A.||NSI Was A Federal Actor In Exacting The Domain Name Fees Under The Mantle Of Authority Conferred By NSF||16|
|B.||The District Court's Rulings Rejecting NSF/NSI's "Program Income" Claim, Accepting Their Contention As To The "Public Contract" Nature Of The NSF-NSI Cooperative Agreement, And Extending Immunity To NSI On All Antitrust Claims Are Irreconcilable With Denying The Registrants Relief On The Basis Of NSI's Private Status||21|
|1.||The District Court's Finding That The Preservation Assessment Is Not Incidental "Program Income" Strips Away The Only Justification NSI Advanced For Retaining Its Windfall Profits||21|
|2.||The District Court's Finding That The Cooperative Agreement Is A "Public Contract" Exempting It From The APA Is Irreconcilable With Its Findings That NSI's Windfall Profits Are Private Funds||23|
|3.||The District Court's Antitrust Rulings Cannot Be Squared With Its Absolving Of NSI Based On Its Private Status||25|
|III.||THE DISTRICT COURT ABUSED ITS DISCRETION IN ASSESSING AND WEIGHING THE INJUNCTION FACTORS OF IRREPARABLE HARM, LIKELIHOOD OF PREVAILING ON THE MERITS, AND THE PUBLIC INTEREST||27|
|A.||The District Court Committed Clear Error In Disregarding The Registrants' Showing Of Immediate And Irreparable Harm||27|
|1.||NSI's Transfer Of Its Windfall Profits Would Irreparably Harm The Registrants||27|
|2.||The Adoption Of The Fees At Issue In Disregard Of APA Requirements Constitutes Irreparable Harm||30|
|B.||The District Court Erred In Its Balancing Of Harms||31|
|C.||The District Court Erred In Its Analysis Of The Merits||32|
|1.||The Above-Cost Charges To Register Or Renew A Domain Name Are In Violation Of The Independent Offices Appropriations Act||33|
|2.||The Domain Name Fees Violate The Requirements Of The APA||36|
|Airlines Reporting Corp. v. Barry, 825 F.2d 1220 (8th Cir. 1987)||29|
|Ammerman v. Miller, 488 F.2d 1285 (D.C. Cir. 1973)||16|
|Berger v. Hanlon, 129 F.3d 505 (9th Cir. 1997)||16, 17, 19|
|Bowen v. Massachusetts, 487 U.S. 879 (1988)||38|
|Bunge Corp. v. United States, 5 C1. Ct. 511 (Cl.Ct. 1984), aff'd 765 F.2d 162 (Fed.Cir. 1985)||35|
|Center For Auto Safety v. Tiemann, 414 F. Supp. 215 (D.D.C. 1976)||36|
|Charles v. Carey, 627 F.2d 772 (D.C. Cir. 1980)||15|
|City of St. Louis v. Western Union Tel. Co., 148 U.S. 92 (1893)||20|
|Connecticut Light and Power Co. v. NRC, 673 F.2d 525 (D.C. Cir. 1982), cert. denied, 459 U. S. 835 (1982)||34|
|Cox v. Brown, 498 F. Supp. 823 (D.D.C. 1980)||32|
|Cuomo v. United States Nuclear Regulatory Commission, 772 F.2d 972 (D.C.Cir. 1985)||15|
|Deckert v. Independence Shares Corp., 311 U.S. 282 (1940)||30|
|Dobyns v. E-Systems, 667 F.2d 1219 (5th Cir. 1982)||16, 17, 19|
|Duke City Lumber Co. v. Butz, 382 F. Supp. 362 (D.C. C. 1974), opinion adopted in part, 539 F.2d 220 (D.C. Cir. 1976), cert. denied 429 U.S. 1039 (1977)||24|
|Electronic Indus. Ass'n v. FCC, 554 F.2d 1109 (D.C. Cir. 1976)||35|
|Engine Mfrs. Ass'n v. EPA, 20 F.3d 1177 (D.C. Cir. 1994)||34, 37|
|Environmental Defense Fund, Inc. v. Gorsuch, 713 F.2d 802 (D.C. Cir. 1983)||36|
|FEC v. Rose, 806 F.2d 1081 (D.C. Cir. 1986)||37|
|Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380 (1947)||20|
|Feit & Drexler Inc. v. Dresler (In re Feit & Drexler, Inc.! 760 F.2d 406 (2d Cir. 1985)||28|
|Foltz v. U.S. News & World Report, 760 F.2d 1300 (D.C. Cir. 1985)||28|
|Foundation on Economic Trends v. Heckler, 756 F.2d 143 (D.C. Cir. 1985)||30, 31|
|Goichman v. Rheuban Motors. Inc. 682 F 2d 1 1320 (7th Cir. 1982)||19|
|Home Box Office, Inc. v. FCC, 567 F.2d 9 (D.C. Cir. 1977)||37|
|Housing Authority of the City of Omaha v. United States Housing Authority, 468 F.2d 1 (8th Cir. 1972) cert. denied., 410 U.S. 927 (1973)||23, 24, 25|
* The Authorities Upon which we chiefly rely are marked with an asterisk.
|Humana of South Carolina. Inc. v. Califano, 590 F.2d 1070 (D.C. Cir. 1978)||24|
|IT&E Overseas, Inc. v. RCA Global Communications, Inc., 747 F. Supp. 6 (D.D.C. 1990)||25, 26|
|Kooritzky v. Reich, 17 F.3d 1509 (D.C. Cir. 1994)||38|
|Maryland Dep't of Human Resources v. Department of Health and Human Resources, 763 F.2d 1441 (D.C. Cir. 1985)||16,38|
|Mova Pharmaceutical Corp. V Shalala 140 F.3d 1060 (D.C. Cir. 1998)||15|
|National Ass'n of Broadcasters v. Home Box Office, Inc., 434 U.S. 829 (1977)||37|
|National Ass'n of Broadcasters v. FCC, 554 F.2d 1118 (D.C. Cir. 1976)||36|
|National Cable Television Ass'n, Inc. v. United States (NCTA I), 415 U.S. 336 (1974)||34, 35|
|National Wildlife Federation v. Burford. 835 F.2d 305 (D.C. Cir. 1987)||16|
|*NCAA v. Tarkanian, 488 U.S. 179 (1988)||17, 19, 20|
|Northeast Construction Co. v. Rornney, 485 F.2d 752 (D.C. Cir. 1973)||16, 23|
|PG Media, Inc. v. Network Solutions, Inc., 97 Civ. 1946 (RPP) (S.D.N.Y.)||16, 26|
|Population Institute v. McPherson, 797 F.2d 1062 (D.C. Cir. 1986)||15, 28|
|Portland Cement Ass'n v. Ruckelshaus, 486 F.2d 375 (D.C. Cir. 1973) cert. denied sub. nom,|
|Portland Cement Corp. v. Administrator EPA, 417 U.S. 921 (1974)||37|
|Public Citizen, Inc. v. FAA, 988 F.2d 186 (D.C. Cir. 1993)||37|
|Rainbow Valley Citrus Corp. v. Federal Crop Ins. Corp., 506 F.2d 467 (9th Cir. 1974)||24, 25|
|Seafarers Int'l Union of North Am. v. United States Coast Guard, 81 F.3d 179 (D.C. Cir. 1996)||34|
|Southern Motor Carriers Rate Conf. v. United States, 471 U.S. 48 (1985)||25,26|
|Tri-State Generation and Transmission Ass'n, Inc. v. Shoshone River Power. Inc., 805 F.2d 351 (10th Cir. 1986)||29|
|United States, v. City of St. Louis, 452 F. Supp. 1147 (E.D. Mo. 1978)||21|
|United States v. Ex ref. Taxpayers Against Fraud v. Singer Co., 889 F. 2d 1327 (4th Cir. 1989)||29|
|United States v. Singer Co., 889 F.2d 1327 (4th Cir. 1989)||21|
|Washington Metro. Area Transit Comm'n v. Holidav Tours. Inc., 559 F.2d 841 (D.D.C. 1977)||32|
|5 U.S.C. §553 et seq.||Passim|
|5 U.S.C. §702||1|
|15 U.S.C. § 1||1|
|15 U.S.C. § 2||1|
|15 U.S.C. § 15||1|
|15 U.S.C. § 26||1|
|15 U.S.C. § 637(a)||1|
|28 U.S.C. § 1292(a)(1)||1|
|28 U.S.C. § 1331||1|
|28 U.S.C. § 1332 (a)||1|
|28 U.S.C. § 1346 (a) (2)||1|
|28 U.S.C. § 1367||1|
|31 U.S.C. § 9701||Passim|
|Article I, § 8||1|
|Article IV, § 3||1|
The issues presented for review in this appeal are as follows:
1. Whether the district court committed reversible error in holding that the domain name registration and renewal fees imposed on the plaintiff-appellant Registrants by defendant- appellee Network Solutions Inc. ("NSI") are exempt from the requirements of the Independent
Offices Appropriation Act, 31 U. S. C. § 9701 (1998) ("IOAA"), and the Administrative Procedure Act, 5 U.S.C. § 553 et seq. (1998) ("APA"), even though NSI functioned as a "federal actor" in that NSI received all of its authority to impose such fees directly from its overseer, the National Science Foundation ("NSF"), and, in closed-door meetings between NSF and NSI, NSF specifically approved the imposition and amount of these fees without (a) adhering to the IOAA requirement that these fees be based on the cost of the services provided; or (b) providing the notice and opportunity for comment as required by the APA.
2. Whether the district court abused its discretion in denying the Registrants' motion for a preliminary injunction requiring defendant-appellee NSI not to spend, dissipate or transfer to its parent the funds it has amassed from domain-name registration/renewal fees imposed on the Registrants, even though the Registrants had clearly shown, inter alia, a likelihood of irreparable harm based on past transfers of large blocks of cash from NSI to its corporate parent SAIC; the likelihood of prevailing on the merits of its claims under inter alia, the IOAA and the APA; and that the preliminary injunction precluding NSI from dissipating its tens of millions of dollars in above-cost registration and renewal fees collected from Registrants throughout the United States is in the public interest.
Statutes implicated in this appeal are as follows:
1. the Independent Offices Appropriation Act, 31 U.S.C. § 9701 ("IOAA");
2. the Administrative Procedure Act, 5 U.S.UPSC. § 553 et. seq. ("APA")
A. Nature Of The Action:
The plaintiff-appellants in this action, the "Registrants" of so-called "domain names" on the Internet, brought this action in the United States District Court for the District of Columbia ("district court") to challenge the legality of various charges that defendant-appellees NSF and NSI have imposed on them in connection with the registration and/or renewal of their domain names. A domain name functions as an electronic address at which Internet communications may be received. NSF maintained and managed the registration of domain names in the early years of the Internet, and did not impose charges on registrants for the service. Thereafter, in 1992 NSF entered into a Cooperative Agreement with NSI granting the latter a monopoly over the registration and renewal of the "top level" domain names (i.e., those names ending with the suffix of ".com," ".org," "edu," ".net" and ".gov"). The Cooperative Agreement allowed NSI to collect registration fees on a cost-plus-fixed-fee basis. In a 1995 amendment to the agreement, however, NSF and NSI decided between themselves - without any public notice or opportunity for comment - to abandon the cost-plus-fee basis of the registration and renewal charges as set forth in the Cooperative Agreement. In place of that arrangement, NSI was given free rein to collect from a Registrant one hundred dollars for each domain name registered, plus fifty dollars per year for renewal - sums far beyond NSI's costs for the services provided.
Seventy percent of these assessments were retained by NSI, which has thereby amassed more than 90 million dollars in windfall profits. The remaining thirty percent was earmarked for NSF, which was to expend these funds - also running into tens of millions of dollars - on the "preservation and enhancement" of the "intellectual infrastructure" of the Internet (this 30%
portion is known as the "Preservation Assessment"). This appeal addresses solely the seventy-percent portion of the fees retained by NSI.
B. Course of Proceedings:
In their Amended Complaint in the district court dated January 30, 1998, the Registrants challenged the lawfulness of the domain name registration and renewal fees under, inter alia, the IOAA and the APA. In its Memorandum Opinion of February 2, 1998 (at 6-7) granting the Registrants' motion for preliminary injunction with respect to the 30% Preservation Assessment, the district court acknowledged inter alia, the Registrants' likelihood of prevailing on the merits of their claim that this "tax" -- which by definition is above and beyond NSF/NSI's costs of providing registration benefits to the Registrants -- is unlawful. 1/ Because the remainder (70%) of the charges collected by NSI are similarly in excess of the amounts required to reimburse and fairly compensate NSI for registration and/or renewal services, the Registrants also sought to enjoin NSF/NSI from continuing to amass such unjustifiable and unlawful windfall profits at the Registrants' expense. Specifically, the Registrants sought, inter alia, the following injunctive relief:
______________________1/ The district court subsequently, in its April 6, 1998 Order now on appeal ("April 6 Mem. "), granted summary judgment on behalf of the Registrants holding that this 30% "Preservation Assessment" is an above-cost "tax" that was congressionally-unauthorized and therefore unconstitutional. Thereafter, congressional staffers inserted language, in the conference committee, into an emergency appropriations bill, H.R. 3579, which purported to ratify the "fee" in question - but did not anywhere reference or address the "tax" struck down by the district court. Indeed, the congressional committees with exclusive jurisdiction over tax issues - House Ways & Means and Senate Finance - were bypassed entirely in this process. A number of congressional leaders from these committees have come forward to express their unequivocal views that the language in question did not ratify or authorize what the district court found to be an unconstitutional tax. Nonetheless, based on the passage of H.R. 3579 NSF has filed a motion to dismiss the Registrants claims with respect to the 30-percent portion of the registration/renewal fees, and this motion is now pending before the district court.
1. that NSI be immediately enjoined from making any disbursements, distributions or transfers of funds of any nature to its parent, SAIC, until such time as directed by this Court;See Plaintiffs' Reply Memorandum In Further Support Of Motion For Preliminary Injunction With Respect To Registration And Renewal Fees (March 12, 1998), at 2 (see App. 8). In its April 6 Order, however, the district court denied the motion in its entirety, which is the basis of this appeal.
2. that defendants NSI and NSF immediately deposit into a Bank Account designated by a Special Master all Renewal Fees, and all 'Reservation" Fees charged for the advanced reservation of Internet domain names;
3. that the Government Accounting Office ("GAO") promptly perform an audit of the books and records of NSI to ascertain the actual costs per Registrant of performing Internet Domain name Registration services under its contract with the NSF; in performing this accounting function, the GAO is to use the accounting procedures and methodology commonly used by accountants in performing cost comparisons and analyses; and
4. that NSI make available to the auditors from the GAO all books and records requested, including but not limited to (a) internal profit and loss statements, (b) internal financial reports to SAIC, (c) internal cash flow projections, and (d) internal budget projections.
C. Statement of Facts:
Until opportunity knocked at its door, NSI was a small telecommunications contracting company participating in the Small Business Administration's "Minority Small Business and Capital Ownership Development Program" under § 8(a) of the Small Business Act, 15 U.S.C. § 637(a). 2/ NSI has since mushroomed into a multi-million dollar company whose NASDAQ traded shares are owned primarily (78.4%) by government-contracting giant SAIC. NSI Prospectus (App. 712). There is no secret to NSI's success: it is the direct result of the tens of
_____________________________2 / See NSI Opposition To Plaintiffs' Motion For Preliminary Injunction With Respect To NSF's Registration And Renewal Fees (March 6, 1998) at 4, n 3 ("NSI Opp.").
millions of dollars of profits it has amassed from domain name assessments, which in turn are the fruits of the monopoly over the domain name registry that NSF has conferred on NSI. As NSI CEO Gabriel A. Battista concedes, 85% of NSI's revenues is derived from domain name fees:
Revenues from registration fees are a central component of Network Solutions' current business model. Fee revenue accounted for more than 85% of the Company's total revenue for 1997.
Battista Declaration, at 4 (App. 63 6).
The registration of domain names, like the registration and assignment of radio wavebands, is a classic governmental regulatory function over an essential public communication facility - the Internet itself. The Inspector General for NSF acknowledges that: "Internet addresses are a unique public resource .... The people, through taxpayer revenue, have invested substantial funds in the development of the Internet and the system now used to register Internet addresses." See NSF Inspector General Report (217197) at 1 (App. 171). NSF's Inspector General has further observed that "[n]o one disputes the importance of the Internet to the government and society":
The people, through their elected representatives, have historically exercised control over these internet addresses. In our view, public administration of this unique public resource should continue.
1. The NSF/NSI Cooperative Agreement
In 1991, NSF assumed support for non-military domain name registration services from the Department of Defense. Id. at 2 (App. 172). After public notice and competitive bidding, on January 1, 1993, NSF entered a "Cooperative Agreement" with NSI under which NSI was to administer domain name registration services on behalf of the government for a five-year period ending March 31, 1998, with provision for a six-month ramp-down period through September 1998. See Cooperative Agreement at App. 188-89. Under the Cooperative Agreement, the Registrants were to be charged no registration or renewal charges of any kind for the registration or renewal of domain names. See id. at 5-7 (App. 196-98). The Cooperative Agreement did provide, however, that if, and to the extent, it were subsequently authorized to collect such fees, they were to be used exclusively to offset costs. See id. at l l (App. 202) (stating that fees "shall be used to defray" project expenses). Performance of the Cooperative Agreement was expected to cost approximately $1.0 million annually. See id. at 6 (App. 197). The estimated amount of NSI's costs for the entire contract term was approximately $5.2 million. Id. at 5 (App. 196).
In its "Statement of Work" provisions, the Cooperative Agreement requires NSI to "provide to non-military users and networks all necessary registration services (which were) previously provided by the Defense Information Systems Agency Network Information Center. " Id. at 2 (App. 193). Specifically, these provisions required NSI to provide, among other things, "Domain Name registration" and '!Domain Name server registration. " Id. at 3 (App. 194).
2. The 1995 Amendment to the Cooperative Agreement
In May 1995, NSI approached NSF with a proposal to change the cost-plus compensation provisions of the "Cooperative Agreement" into a so-called "revenue sharing" scheme by which NSI would assess fees (in a then unspecified amount) against the Registrants, kick back 30% of the fees to NSF, and keep 70% of the fees for itself. The proposal provided:
Network Solutions proposes, as an alternative to the current cost-plus-fixed-fee basis of reimbursement, a revenue sharing concept. Specifically, we propose that, of the revenue generated by the imposition of fees for registration services, Network Solutions pay 30 percent of the amount collected directly to The National Science Foundation and retain 70 percent.
App. 437. NSI's revenue sharing proposal was adopted essentially verbatim in the formal Amendment to the contract known as "Amendment 4." See App. 129-33. In Amendment 4, adopted in September 1995, NSF and NSI fundamentally altered the original Cooperative Agreement by eliminating the cost-plus-fixed-fee basis for NSI's compensation. See id.
In its place - and without any statutory authorization or public notice whatsoever - NSF and NSI radically changed the agreement's compensation provisions, essentially allowing NSI to own and operate the domain name registry as a private "for profit" franchise. Specifically, under the new arrangement, NSF authorized NSI to charge Registrants a $100 fee for each initial domain name Registration and two years of use to be allocated as follows:
• $70 to NSI "as consideration for the services provided;"
• $30 to be administered by NSI in "preserving and enhancing" the Intellectual Infrastructure of the Internet.
____________________3/ The Amendment also provided for a $50 renewal fee to be assessed against Registrants on an annual basis with an allocation of $35 to NSI as consideration for renewal services, and $15 to be credited to the Preservation Assessment fund. App. 129-3 0.
unlawful tax, the Registrants have already been granted a preliminary injunction precluding NSF from spending the revenues amassed in connection with that assessment. See April 6 Mem. at 9 (App 23).
3. The Fees Grossly Exceed the Costs of Services Provided
As detailed below, the actual costs incurred by NSI in registering and renewing domain names do not remotely approximate the charges for these services that have been imposed on the Registrants. Even a conservative analysis of NSI's own data (i.e., including costs of other, unrelated NSI businesses) shows that NSI's cost of registration is no more than $13, yielding NSI approximately $89.7 million in above-cost profits for "registration" alone - on a Cooperative Agreement under which it was contemplated that NSI would receive only $5.2 million. See App. 196. The "renewal" fees have only swollen NSI's coffers further, without adding any appreciable cost to NSI.
Several points bearing directly on NSI's costs (or lack of same) in the registration process should not be overlooked. First, most of the computer hardware and software development expenses incurred in constructing the registration system were paid for by the American public and provided free-of-charge to NSI by NSF. See NSF Inspector General Report App. 179-80). Second, the task initially performed by NSI consisted of little more than hiring telephone operators to type domain name registration information into the Internet computer registry. The registration process is now almost fully automated as revealed by NSI in its Form S-1, Registration Statement (filed with the SEC July 3, 1997), at 4 (App. 211): "The Company's in house registration software includes an automated registration capability which currently processes in excess of 90% of all new registration requests without human intervention. "
Thus it is not surprising that a leading Internet publication states that if competition for domain name registration services happens this year, registration fees will fall to a one-time charge of $ 10. See Laura Kujubu, InterNIC Under Fire. Competition. Complaints Heating Up,
InfoWorld, January 5, 1998 (App. 273-74). Indeed, another potential competitor estimates that it could provide service charging fees ranging between $12.50 and $18.75. See International Top Level Domain Shared Registry Now Active, 1/22/98 PRWIRE 15:53:00 (App.313). Dr. William Black, the Managing Director of Nominet UK (Great Britain's Internet registrar service), has publicly stated that the costs are in the vicinity of 5 pounds per registration. App. 1314. In fact, because of the virtually automated nature of the registration process, the Registrants would be able to prove that NSI's actual costs of registration are less than one dollar.
The heavily-redacted cost data produced by NSI to the Registrants thus far confirms that NSI has reaped over $89 million in unlawful profits from these charges. Indeed, the analysis by Certified Public Accountant Sigmund Sklar of NSI's Prospectus (dated September 30, 1997) and NSI's " 10-Q" (dated September 30, 1997) demonstrates that the current estimated cost of registration cannot possibly exceed, at a maximum, $13. 4/ See Sklar Declaration at 5 (App. 283). By the most conservative analysis - that includes within the result NSI's cost for other businesses unrelated to domain name registration 5/ -- NSI 's costs per registration between 1996 and March 31, 1998 were as follows:
_________________4/ Mr. Sklar, a CPA and management consultant with over thirty years of experience in project finance and financial and business management, performed an analysis of various NSI cost and revenue records produced to Plaintiffs pursuant to FOIA. See App. 275-77.
5/ Domain name registration revenues accounted for 76.5% of NSI's net revenue for the three months ended March 31, 1997. See NSI SEC Form S-1, at 4 (App. 210). NSI also provides Intranet consulting services to clients such as NationsBank; NSI's net revenue from Intranet services for the same period accounted for 23.5% of NSI's net revenue. Id. . The Registrants' expert conservatively included all of NSI's net revenues in determining NSI's registration costs. See Sklar Declaration at 3-5 (App. 277-83).
12 mos ended 12-31-96 $28
12 mos ended 12-31-97 $29
3 mos ended 3 -31 -98 $ 13
reaped nearly $90 million in profits from registrations as follows:
12 mos ended 12-31-96 $25,083,533
12 mos ended 12-31-97 $44,085,002
3 mos ended 3-31-97 $20,610.096
NSI has consistently refused to disclose its costs for registration or renewal of domain names. Instead of producing such data, NSI has simply resorted to argument contending that because it performs both domain name "registrar" and "registry" functions, its costs are higher than if it performed only one of those functions. See NSI Opposition to Plaintiffs' Motion for Preliminary Injunction With Respect to NSI's Registration And Renewed Fees (March 6, 1998), at 10-12. Even putting aside the fact that registry and registrar functions substantially overlap Internet Services Providers ("ISPs") perform both functions - the registry costs at issue here are trivial and should result in a charge of no more than $1.50. See Crocker Declaration (App. 1410-12).
Testimony from William Black that was relied on by NSI below only confirms that the registry function cost is relatively nominal. Mr. Black revealed that the U.K.'s entire domain name registry function is performed for 900,000 pounds, or about $1.55 million. App. 1317.
In short, the "registry" function represents a minor cost item, as does renewal. As Mr. Crocker, an Internet industry expert with twenty-five years of experience in Internet technology, explained
Using an aggressive 3-year amortization of capitalization, the monthly total cost basis for a registry operation would be far less, US$ 150,000.00. Therefore, a cost recovery charge for each registration would comfortably be US$ 1.50. Unless registrations are changed frequently, on going maintenance (renewal) of a registration is much less expensive; therefore a renewal charge of US$ 1.00 is certain to be more than sufficient.
In Mr. Sklar's Supplemental Declaration, he further explains the basis for his findings as to NSI's costs of registration, and shows why the methodology of NSI's proffered expert on the subject, Mr. Aleva, is fatally flawed. 6/ See App. 1367-1405. Mr. Alleva essentially pushed tens of millions of dollars of revenues received by NSI into future years by invocation of the "accrual" accounting methodology. App. 1379-80, 1392. As Mr. Sklar explained, while this methodology may be appropriate for financial reporting purposes, it is entirely inappropriate as a cost accounting technique to determine NSI's actual registration costs. Id. By way of example, if NSI received $70 million in registration fees in 1997 -- as the record shows it did (App. 282) -- Mr. Alleva's analysis would recognize only $24 million in income ($70M x .7 x .5 = $24.5M).
The inescapable conclusion, using every inference favorable to NSI, is that NSI has consistently received windfall profits grossly in excess of its costs in conducting its NSF-sponsored monopoly in the registration and renewal of top-level Internet domain names. See Sklar Supp. Dec. at 10 (App. 1376).
____________________________6/ Mr. Sklar was not charged to prepare alternative financial statements for "external reporting services" which Alleva agrees is the primary purpose for using GAAP. The analysis performed by Sklar was one of cost analysis, not external financial reporting. See App. 1369-70.
The district court has committed a fundamental error of law in premising its denial of the preliminary injunction on NSI's status as a private party. The district court has also abused its discretion in rejecting the Registrants' showing of irreparable harm, likelihood of prevailing on the merits, and the public interest strongly favoring the injunction.First, the district court erred in refusing to recognize that NSI was a "federal actor" in imposing and collecting exorbitantly above-cost domain-name fees at the direction, and under the approval, of the National Science Foundation. This fundamental error undergirds the district court's denial of the preliminary injunction (and, indeed, the dismissal of all claims against NSI). Even though the district court expressly acknowledged that NSI's and NSF's "conduct may bring them within the reach of these [federal actor doctrine] cases," April 6 Mem. at 27 n. 16 (App. 41), the district court refused to apply the doctrine even though NSI acted directly on NSF's behalf, at the direction of NSF, and under NSF's mantle of authority in collecting and amassing every one of the tens of millions of dollars at issue here. This is a grievous error of "form over substance" that the "government action" doctrines were developed to remedy.
It is undisputed that NSF does not and would not have the constitutional or statutory authority to covertly devise and impose such above-cost registration fees on its own; among other things, it would run afoul of the notice-and-comment requirements of the APA, as well as the proscription against above-cost user fees in the IOAA. The district court, by permitting NSF to accomplish these things through a private company - by means of the Cooperative Agreement with NSI - is effectively empowering the agency to accomplish indirectly something that it cannot do directly. NSI is the undeserving beneficiary of the court's largesse; it is the Registrants
who are left without any recourse merely because the exorbitant fees they had to pay are in the coffers of a private company, albeit at the express direction of the government.Second, while the district court's rulings on the Registrants claims against NSI are consistent in letting NSI off the hook, they are inconsistent - and ultimately irreconcilable - with each other. Although the district court properly refused to accept NSF's characterization of the Preservation Assessment (the 30% portion of the fees not at issue here) as incidental "program income," the court inexplicably failed to apply the same analysis to the much greater (70%) portion of the fees retained by NSI - even though NSI specifically relied below on the very same "program income" justification for denying relief to the Registrants with respect to these windfall profits.
The inconsistencies in the district court's April 6 Order on appeal reflect those advanced by NSI itself. As the record shows, NSI has portrayed itself as an arm of the government when it is advantageous to do so, such as in the PG Media lawsuit, where NSI conceded that "Network Solutions was and is acting in accordance with the directives of an agency of the United States . . ." The district court's dismissal of the Registrants' antitrust claims here - based on the finding that NSI was a federal instrumentality - is in step with such a characterization, as is the district court's finding that the cooperative agreement is a "public contract" (exempting it from the APA). These rulings are irreconcilable, however, with the district court's reliance on NSI's status as a private party to deny the injunction under the IOAA and the APA. Such contradictions amount to a clear error of law, and justify reversal of the district court's denial of the injunction.Third, the district court abused its discretion in disregarding the Registrants' strong showing on the requisite elements for the granting of a preliminary injunction: irreparable harm, the likelihood of prevailing on the merits, and the public interest in the injunction. On the issue
of irreparable harm, the Registrants established that, absent the preliminary injunction, the likelihood that NSI will dissipate the tens of millions of dollars in ill-gotten above-cost registration and renewal fees is overwhelming. As the Registrants showed, NSI will simply
transfer these monies to its corporate parent, the government-contractor SAIC, to shield them from future recovery. The Registrants have also met their burden with respect to the requisite likelihood of prevailing on the merits of their claims. The Registrants demonstrated below, for example, that the seventy-percent portion of the fees that was (and continues to be) retained by NSI is so far above the cost of the services provided as to constitute a violation of the IOAA, which requires that user fees be tied to service costs. Moreover, it is undisputed that these exorbitant fees were covertly hatched by NSI and NSF in the first instance, in plain violation of the APA's notice-and-comment requirements.
I. STANDARD OF REVIEW
A district court's grant or denial of an injunction is reviewed under the abuse-of- discretion standard, with de novo review of any legal conclusions. Mova Pharmaceutical Corp. v. Shalala 140 F.3d 1060, 1066 (D.C. Cir. 1998); see also Charles v. Carey, 627 F.2d 772, 776 (D.C. Cir. 1980) ("application of an improper legal standard in determining the likelihood of success on the merits is never within the district court's discretion."). 7/ In determining whether the district court abused its discretion in denying a motion for preliminary injunction, the Court
_________________9/ A party seeking a preliminary injunction must, of course, demonstrate that it is likely to prevail on the merits, that it is likely to suffer irreparable harm if the injunction is not entered, that other parties to the action will not suffer substantial harm if it is entered, and that the public interest would be served by the granting of such relief. Population Institute v. McPherson, 797 F.2d 1062, 1078 (D.C. Cir. 1986). "The test is a flexible one. Injunctive relief may be granted with either a high likelihood of success and some injury, or vice versa " Id. (citing Cuomo v. United States Nuclear Regulatory Commission, 772 F.2d 972, 974 (D.C. Cir. 1985)).
of Appeals must determine whether the appellants are likely to prevail on the merits, and must also determine the "possible irreversible harm" which may result from the denial. Marvland National Capital Park and Planning Commission v. U.S. Postal Service, 487 F.2d 1029, 1035 (D.C. Cir. 1973). Put differently, the clearly erroneous standard does not apply where the district court has committed an error of law which has influenced or controlled its findings of fact. Ammerman v. Miller, 488 F.2d 1285 (D.C. Cir. 1973). Thus, even if the district court did not abuse its discretion, an injunction decision must be reversed if the trial court "has proceeded upon a premise as to the rule of law which the appellate court deems erroneous." Northeast Construction Co. v. Romney, 485 F.2d 752, 756. (D.C. Cir. 1973); see also National Wildlife Federation v. Burford, 835 F.2d 305, 319 (D.C. Cir. 1987) (district court's injunction decision should be overturned "when it rests its analysis on an erroneous premise or is clearly wrong in reaching its conclusions").
II. THE DISTRICT COURT ERRED AS A MATTER OF LAW IN EXEMPTING
THE NSF-APPROVED ABOVE-COST FEES FROM THE IOAA AND APA
A. NSI Was A Federal Actor In Exacting The Domain Name Fees Under The Mantle Of Authority Conferred By NSF
The district court's denial of the preliminary injunction with respect to the Registrants' claims under the APA and the IOAA proceeds from a single premise: that NSI's private status effectively immunizes it from such federal statutes because they, by their terms, govern federal agencies, not private parties. See April 6 Mem. at 22-23, 26-28 (App. 36-37, 40-42); The district court acknowledged, however, that NSI's role here was the very kind of conduct that courts had construed as "federal action" in other contexts:
Plaintiffs argue that a private individual can be considered a de facto federal actor, subject to federal constitutional and statutory constraints. See, e.g., Berger v. Hanlon, 129 F.3d 505 (9th Cir. 1997); Dobyns v. E-Svstems, 667 F.2d 1219 (5th Cir. 1982). However, while defendants' conduct may brine them within the reach of these cases,
the cases do not suggest that a private actor is subject to administrative, agency regulations such [as] the IOAA.
April 6 Mem. at 27 n. 16 (App. 41) (emphasis added).
The district court's refusal to apply the federal actor doctrine is, on this reasoning, inaccurate, internally-inconsistent and ultimately indefensible as a matter of law. It is inaccurate because the IOAA is a federal statute, not a regulation; the Registrants do not assert that NSI has merely evaded NSF regulations, but Congressional statutory requirements applicable not only to NSF but to any entity authorized by NSF to impose fees. It is internally-inconsistent because, if "defendants' conduct may bring them within the reach of. . . cases" such as Berger and Dobyns as the district court concedes, it follows that NSI should be held subject to the IOAA's strictures no less than if NSF devised and charged the exorbitant registration and renewal fees on its own. This was made clear by the Supreme Court stated in NCAA v. Tarkanian, 488 U.S. 179, 192 (1988):
In the typical case raising a state-action issue, a private party has taken the decisive step that caused the harm to the plaintiff, and the question is whether the State was sufficiently involved to treat that decisive conduct as state action. This may occur if the State creates the legal framework governing that conduct [citation omitted], if it delegates its authority to a private actor [citation omitted], or sometimes if it knowingly accepts the benefits derived from unconstitutional behavior. Thus, in the usual case we ask whether the State provided a mantle of authority that enhanced the power of the harm-causing individual actor.
(Emphasis added). 8/ As the district court's statement about the defendants "conduct" concedes, the "mantle of authority" worn by NSI in collecting the domain name fees at issue was provided by the National Science Foundation. Indeed, NSF did not merely "enhance" NSI's
______________________________8/ Although the Supreme Court ultimately held that there was no "state action" in Tarkanian because the State university in question did not delegate authority to the NCAA to impose the sanctions in question upon the university's basketball coach, there is no question here that NSF delegated the authority to NSI, via Amendment 4 to the Cooperative Agreement, to impose the domain name assessments at issue. See App. 129-33.
authority over the domain name registry; NSI had no authority whatsoever over the registry until NSF conferred that authority upon NSI by means of the Cooperative Agreement in general (App. 114-28) and Amendment 4 in particular (App. 129-33). As NSI has recently admitted in defending itself against an antitrust lawsuit in federal district court in New York, it is, in fact, a federal actor:
Some or all of the claims alleged . . . are barred . . . because Network Solutions was and is acting: in accordance with the directives of an agency of the United States government that possessed and continues to possess actual or apparent authority to give such directives to Network Solutions.
NSI's Answer To The Second Amended Complaint of PG Media, Inc., 1117/97, in PG Media, Inc. v. Network Solutions Inc., 97 Civ. 1946 (RPP) (S.D.N.Y.) (emphasis added). NSF requires NSI to submit monthly, quarterly, and annual reports including, inter alia, timely disclosure of "significant problems." See Cooperative Agreement, Article 10 (App. 146). Moreover, NSF has responsibility for "registration services support, support planning, oversight, monitoring, and evaluation." Id., Article 6 (App. 144). NSF also strictly controls NSI's public release of information and commands NSI to "acknowledge the sponsorship of NSF," and, "in the case of news releases or public information, be coordinated with and have the approval of the NSF Program Official before release." Id., Article 14 (App. 147-48). In addition, as demonstrated in Article 15 of the Cooperative Agreement, NSF reserved control over NSI right down to the purse strings in regard to the allocation of registration and renewal fees. See App. 148.
NSI itself repeatedly acknowledged as much in its December 16, 1997 Memorandum of Points And Authorities In Support of Motion To Dismiss Under Rule 12(b)(6):
• "In performing registration services and collecting registration fees NSI was at all times acting . . . at the direction and with the approval of the NSF, a Federal Government agency .... " NSI Mem. at 23.
• "The fees at issue [that NSI charges] are specifically authorized and directed by the Cooperative Agreement, and they required and received the NSF's explicit approval. " NSI Mem. at 26.
• "The Complaint [Plaintiffs' Original Complaint] does not (and could not consistently with Rule 11) allege that NSI has taken any action with regard to the 'Configuration File' or 'NSI Root Nameservers' independently of the Cooperative Agreement or outside the direction of the NSF." NSI Mem. at 27 n.20.
• "NSI collects this sum [the domain name registration fee] under the authority of its agreement with the NSF and as directed by the NSF." NSI Mem. at 30.
NSF thus met the Tarkanian test by delegating its authority over the domain name registry directly and solely to NSI, and NSI stood in the shoes of the government in implementing NSF's will and authority by charging the fees at issue. Accordingly, the IOAA's constraints on user fees should apply to the 70% portion of the fees at issue here, as these fees were directly authorized and approved directly by NSF, and could not have been imposed without that authorization and approval.
The "federal actor" doctrine thus ensures, among other things, that the government may not evade constitutional or federal statutory constraints merely by "laundering" its actions through a private party. 9/ By the same token, a private party acting at the government's behest
_____________________9/ See Berger v. Hanlon, l 29 F.3d 505 (9th Cir. 1997) (members of media who videotaped search of owners' property were "federal actors" for purposes of Fourth Amendment claim, in view of contractual commitment between government and media to participate jointly in execution of search warrant for mutual benefit); Dobyns v. E-Svstems. Inc., 667 F.2d 1219, 1225-26 (5th Cir. 1982) (as E-Systems role as peacekeeper in Sinai was "traditionally exclusively reserved to the State," E-Systems "was the United States Government's operating presence in the Sinai" and thus federal actor for purposes of federal constitutional claims involving searches and discharges, because "[t]o find E-Systems to be merely a government contractor would forsake reality") Goichman v. Rheuban Motors. Inc., 682 F.2d 1320 (9th Cir.
will not be shielded from such constraints merely by virtue of its private status. These principles- both of which apply here - were aptly captured by a hypothetical example set forth in theDeclaration of Professor Richard Cappalli, at 4 (App. 570):
Imagine a Gun Control Agency ("GCA") whose job is to control illegal trafficking in firearms. GCA could not enter homes without search warrants because of the Fourth Amendment; it could not become a drug "czar" because such would exceed its statutory authority; it could not make profits by charging huge fees for firearm permits because of statutory fee controls; and it could not create its own budget and its own grant program by generating sufficient income-producing activities to free itself from legislative appropriation and authorization controls. Noticing that the cooperative agreement instrument allows "substantial involvement" of the donor agency, GCA decides to create a for-profit "branch, " GCA, Inc., by means of a cooperative agreement. This alter ego, this "shadow" government, then does everything GCA cannot do because of legal limits on agency action with GCA controlling GCA, Inc.'s every move by means of conditions in the cooperative agreement and constant monitoring. Can there be any doubt that this evasive technique is illegal and that the technical distinction between GCA and GCA, Inc. must be collapsed?
* * *When one studies NSF Cooperative Agreement NCR-92 18742 and its Amendment 4, one quickly realizes that the frightening scenario hypothesized in the preceding Paragraph 10 has been actualized by NSF.
As these principles (which are squarely in line with the "state action" factors in Tarkanian) make clear, the NSF-approved fees in question should not be exempted from the cost-limitation strictures of the IOAA - or the APA, for that matter - solely on the basis of NSI's private status. 10/ Ironically, during oral argument the district court itself stated that "[I]t concerns
1982) (holding that private towing company acting at the direction of a government law enforcement officer and pursuant to statutory scheme designed to accomplish the government's purpose of enforcing its traffic laws acts under color of state law.)10/ It is axiomatic that a government agency may not delegate authority that it does not possess in the first instance. See, e.g., Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380 (1947) ("[A]nyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act on behalf of the Government stays within the bounds of his authority."); City of St. Louis v. Western Union Tel. Co., 148 U.S. 92, 100-101 (1893) ("No one would suppose that a franchise from the federal government to a corporation, state or national, to construct interstate roads or lines of travel, transportation, or communicafion,
me that NSF can handle what they call this Cooperative Agreement without any type, it seems to me, of controls or ability for the people that wish to use the Internet and reserve domain names or have a domain name to challenge the fees that may greatly exceed the real cost. " March 17, 1998, Hearing Tr. at 29-30 (App. 80-81). Notwithstanding its concern, and notwithstanding its acknowledgement that NSF and NSI's conduct falls squarely within the rationale set forth by the "federal actor" cases cited by the Registrants, the district court ultimately reasoned that the absence of case law precisely on point justified foreclosing all relief to the Registrants for the exorbitant user fees exacted from them by NSI at NSF's behest. See April 6 Mem. at 26-27 (App. 40-41). This alone was error justifying reversal.
B.The District Court's Rulings Rejecting NSF/NSI's "Program Income" claim, Accepting Their Contention As To The "Public Contract" Nature Of The NSF-NSI Cooperative Agreement, And Extending Immunity To NSI On All Antitrust Claims Are Irreconcilable With Denying The Registrants Relief On The Basis Of NSI's Private Status
1. The District Court's Finding That The Preservation Assessment Is Not Incidental "Program Income" Strips Away The Only Justification NSI Advanced For Retainine Its Windfall Profits
The district court also committed reversible error in not applying its analysis of the "program income" issue to NSI's windfall profits. The district court unequivocally (and correctly) rejected the attempt by NSF and NSI to characterize the Preservation Assessment - the 30% portion of the domain name fees earmarked for the "preservation and enhancement" of the Internet (not at issue in this appeal) - as "program income" immune from the Registrants' claims.
would authorize it to enter upon the private property of an individual, and appropriate it without compensation.") (Emphasis added); United States v. City of St. Louis, 452 F. Supp. 1147, 1151 (E.D. Mo. 1978) ("The reason the federal government could not give a franchise 'to enter upon the private property of an individual, and appropriate it without compensation,' is that the federal government itself does not have that power. ").
The Preservation Assessment certainly does not have the incidental characteristics of cafeteria receipts or even of a medical atlas. Under the Cooperative Agreement, collection of fees for registration services is the integral part of NSI's function, and the Preservation Assessment represents approximately 30% of NSI's gross receipts.Therefore the assessment is not an incidental receipt, and neither the caselaw nor the administrative authorities support its characterization as program income.
Significantly, NSI advanced the very same "program income" rationale as the basis for its
shielding the lion's share of the fees it collected - the 70% portion at issue in this appeal - from the reach of the IOAA. See NSI Mem. In Support of Motion To Dismiss (Feb. 24, 1998) at 21- 22 and 21 n. 14 (App. 7) e.g., citing "OMB Circular A-110" statement that "'program income' that an awardee earns during the project period 'shall be retained by the recipient."'). Yet the district court inexplicably did not address the issue in its ruling exempting these funds from the purview of the IOAA. See April 6 Mem. at 26-27 (App. 40-41). This was error. On its face, the 70% portion of the fees collected by NSI - which amount to some $90 million in windfall profits to NSI - are even less "incidental" than the 30% portion for which the district court rejected the "program income" justification. Had the district court applied the analysis it used to debunk NSF's "program income" claim to NSI's very same claim for its huge profits, it would have become manifestly clear that NSI has no justification at all for such a windfall at public expense.
The mere fact that NSI even attempted to pass off as incidental "program income" the tens of millions of dollars it has amassed from the Registrants is telling in itself. It reflects NSI's extreme defensiveness on an indefensible position: a government agency's authorizing a contractor to charge the public (and keep) an exorbitantly above-cost fee - which fee agency
itself would not he permitted to charge - for services that are under the government's control and cannot be obtained by the public from anywhere else. NSI contended that these funds were "program income" because NSI was fully aware that they could not be justified merely as free-market profits; after all, the only authority to collect them came from the government, and there was no competition for the service provided. Without "program income," in other words, NSI has no fig leaf to cover or justify its enrichment at the Registrants' expense. The district court erred as a matter of law in not ruling as much. See Romney, 485 F.2d at 756 (injunction decision must be reversed if the trial court "has proceeded upon a premise as to the rule of law which the appellate court deems erroneous").
2. The District Court's Finding That The Cooperative Agreement Is A "Public Contract" Exempting It From The APA Is Irreconcilable With Its Findings That NSI's Windfall Profits Are Private Funds
In rejecting the Registrants' contentions on the merits of their APA claim, the district court held that "[t]he Cooperative Agreement clearly concerns a public contract. As such, it falls within the §553(a)(2) exception [from APA notice and comment requirements]."
April 6 Mem. at 28 (App. 42). This conclusion is flatly irreconcilable with the district court's conclusion that the "NSI fees are clearly not charged by a federal agency for federal services" and generally with its characterization of NSI (in the context of other claims) as a private actor immune from federal constitutional and statutory requirements. See Mem. at 26, 31 -32 (App. 40, 45-46).
In Housing Authority of the City of Omaha v. United States Housing Authority, 468 F.2d 1, 9 (8th Cir. 1972), cert. denied, 410 U. S. 927(1973) the United States Court of Appeals for the Eighth Circuit properly recognized that limitations on the "public contracts" exception:
The exemptions of matters under Section 553(a)(2) relating to "public benefits" could conceivably include virtually every activity of government. However, since an expansive
reading of the exemption clause could easily carve the heart out of the notice provisions of Section 553, it is fairly obvious that Congress did not intend for the exemptions to be interpreted that broadly. The legislative history tends to support this logic . . . Not only were exempted regulations limited to those where the excepted subjects were directly involved, but also the excepted subjects appear to be limited in their scope to those where the government a "proprietary" or other unique interest.
(Emphasis added). 11/ The court thus held that regulations supplementing the Annual Contribution Contract between HUD and the local housing authority governing public housing qualified for the exception because they "represents] a governmental 'proprietary interest,' in that [they] effectuate the government's stewardship over public housing projects which are purchased with public funds." Id. (emphasis added). In following the Housing Authority decision and rationale, the Ninth Circuit observed that "the government's stewardship over public housing projects" in that case was "hardly akin to a private profit-making enterprise," and thus "a proprietary [governmental] matter within the public contracts exception." Rainbow Valley Citrus Corp. v. Federal Crop Ins.Corp., 506 F.2d 467, 469 n.2 (9th Cir. 1974) (emphasis added).
_______________________________11/ One of the two decisions relied on by the district court, Duke City Lumber Co. v. Butz, 382 F. Supp. 362, 373 (D.D.C. 1974), opinion adopted in part, 539 F.2d 220 (D.C. Cir. 1976), cert. denied, 429 U.S. 1039 (1977), quoted the legislative history of the exception referring to it as one of "proprietary matters":
The exception of proprietary matters is included because the principal considerations in most such cases relate to mechanics and interpretation of policy and it is deemed wise to encourage and facilitate the issuance of rules by dispensing with all mandatory procedural requirements.
The D.C. Circuit decision cited by the district court, Humana of South Carolina Inc. v. Califano 590 F.2d 1070 (D. C. Cir. 1978), is not to the contrary. Although Humana states that the exception applies even if the governmental function is "not strictly proprietary," it also emphasizes that courts should apply the exception "only reluctantly, " and only where one of the enumerated categories ("public property, loans, grants, benefits or contracts") is "'clearly and directly' involved in the regulatory effort at issue." Id. at 1082. Again, any conclusion that Amendment 4 to the Cooperative Agreement "clearly and directly" involves public property or public contracts simply cannot be squared with NSI's making off with tens of millions of dollars in profits in above-cost registration and renewal fees.
The district court cannot have it both ways. To the extent that the Cooperative Agreement providing for the very fees at issue qualifies as a "public contract" under §553(a)(2), its exemption from notice and comment requirements of the APA similarly derives from NSF's "stewardship" over the Internet in general and the domain name registry in particular. See id.; see also Housing Authority, 468 F.2d at 9. Like the public housing in Housing Authority, the Internet and the domain name registry were developed with public funds, and NSF's "stewardship" over it is the antithesis of "a private, profit-making enterprise." See Rainbow Valley, 506 F.2d at 469 n.2. In that light, it becomes clear that either the "public contract" exception does not apply - thus eviscerating the district court's rejecting the Registrants' APA claim - or the district court's shielding of NSI from the Registrants' IOAA claims on the basis of NSI's purported status as a private actor engaged in private profit-making is erroneous as a matter of law. See April 6 Mem at 26-28 (App. 40-42).
3. The District Court's Antitrust Rulings Cannot Be Squared With Its Absolving Of NSI Based On Its Private Status
The district court's ruling that "the federal instrumentality doctrine . . . * * * applies to NSI in the present case" is also directly at odds with the district court's holding that NSI's actions are beyond the reach of federal statutes such as the IOAA and the APA. See April 6 Mem. at 31 (App. 45) (citing Southern Motor Carriers Rate Conf. v. United States, 471 U.S. 48, 56-57 (1985), and IT&E Overseas Inc. v. RCA Global Communications Inc., 747 F. Supp. 6, 11-14 (D.D.C. 1990)). In Southern Motor Carriers, the Supreme Court reiterated its two-part instrumentality test:
In Midcal [445 U. S. at 97] . . . we set forth a two-pronged test for determining whether state regulation of private parties is shielded from the federal antitrust laws. First, the challenged restraint must be "'one clearly articulated and affirmatively expressed as state policy."' [Citation omitted.] Second, the State must supervise actively any private anticompetitive conduct. [Citation omitted.]
471 U.S. at 57 (emphasis added). In the IT&E decision relied on by the district court (see April 6 Mem. at 31 (App. 45)), the court found that the Guam Telephone Authority was a federal instrumentality because "Guam marches squarely to the beat of the federal drummer; the federal government bestows on Guam its powers . . . " 747 F. Supp. at 13. The district court's application of the "federal instrumentality doctrine" to NSI here necessarily implies similar findings here: that NSI is "actively supervised" by the NSF (in accordance with Southern Motor Carriers), and that NSI "marches squarely to the beat of the federal drummer, " from whom NSI derives all of its powers over the domain name registry (in accordance with IT&E). See Cooperative Agreement (App. 11 5, 11 8-22, 125-27); NSI admission in PG Media Brief, supra ("Network Solutions was and is acting in accordance with the directives of an agency of the United States government").
The point here is not the correctness of the district court's application of the federal instrumentality doctrine, but rather that the court's reasoning on the issue necessarily undermines and invalidates its denial of relief to the Registrants' based on NSI's purported status as a private entity. In Tarkanian, 488 U.S. at 194 n.14, the Supreme Court pointed out just such a relationship between antitrust immunity, on the one hand, and its implications with respect to "state action," on the other:
Although by no means identical, analysis of the existence of state action justifying immunity from antitrust liability is somewhat similar to the state action inquiry conducted pursuant to § 1983 and the Fourteenth Amendment. In both contexts for example. courts examine whether the rule in question is a rule of the State.
(Emphasis added.) The "action of the State" purportedly justifying antitrust immunity here undermines the district court's conclusion that NSI's activities are not the "action of the State" for purposes of the IOAA and the APA. As the record clearly shows, all of NSI's authority over the
domain name registry was delegated to it by NSF, and the fees in question were specifically authorized and approved by NSF, which, as NSI concedes, "has and always has had control over the root server system and the addition of top-level domains. " See NSI Reply Mem. In Support of Motion To Dismiss (March 12, 1998), at 22 n. 16 (see App. 8). NSI, in short, was a federal actor in its imposition and collection of the domain name fees at issue - and its actions, as merely the extension of NSF itself, are properly subject to federal constraints on agency action as set forth in the IOAA and the APA.
A. The District Court Committed Clear Error In Disregarding The Registrants' Showing Of Immediate And Irreparable Harm
The likely harm to the Registrants here is two-fold. First and foremost is the looming, well-documented likelihood that the tens of millions of dollars at issue will be transferred from NSI to its parent, thus sequestering these ill-gotten monies from the Registrants' reach. The second irreparable harm lies in the undisputed disregard, by NSF and NSI, of the notice-and-comment requirements of the APA in their secretive haste to fix and impose the vastly above cost registration and renewal fees at issue.
1. NSI's Transfer Of Its Windfall Profits Would Irreparably Harm The Registrants
As the Registrants took pains to demonstrate below, the irreparable harm they are likely to suffer here in the absence of a preliminary injunction is the dissipation of the millions of dollars at issue by NSI's transferring them to its parent, SAIC. NSI's cost data produced to date. indicates that SAIC, NSI's privately held corporate parent with over 80% ownership of NSI, already obtains substantial revenues passed through from NSI through various intracorporate
transactions. See NSI Prospectus at 6 (App. 712). On October 1, 1997, NSI paid SAIC a dividend of 10 million. NSI Form 10-Q (App. 324).
It is precisely this kind of irreparable dissipation of assets that the courts have regularly halted in order to maintain the status quo pending the outcome on the merits. In granting a preliminary injunction pending appeal in Population Institute, 797 F.2d at 1081, this Court specifically recognized as irreparable harm just such a dissipation:
The ultimate relief sought by appellant is an injunction requiring the government to release the $10 million withheld from UNFPA's 1985 appropriation. Although the government has obligated these funds to other organizations, as yet no money has been disbursed. Accordingly, appellant has now sought an injunction preventing such disbursement while the appeal is pending. Appellant argues that it will be irreparably harmed without such an injunction because, if the government releases the funds to others, no funds will remain available to UNFPA if appellant prevails on the merits. For the reasons stated below, we agree that appellant will be irreparably harmed absent an injunction pending appeal if the government in the instant case is permitted to distribute the 10 million to other organizations, the appeal will become moot. Appellant will suffer irreparable injury by the loss of UNFPA funding because this court will be unable to grant effective relief.
(Emphasis in original.)
Similarly, in Foltz v. U.S. News & World Report, 760 F.2d 1300,1309 (D.C. Cir. 1985), this Court upheld the authority of the district court in an ERISA action to enjoin the pay-out of all assets from a profit sharing plan, reasoning that "an equitable remedy designed to freeze the status quo . . . would be entirely in keeping with the principles that undergird equity jurisprudence." Id. This Court aptly noted that: Plaintiffs would . . . have a hollow victory indeed if the Plan remained extant, as a formal matter, but was drained of all or virtually all of its assets, especially if plaintiffs' damage claims . . . were far in excess of any remaining assets."
Battista Declaration (App. 636-37). To date, NSI has amassed over $89 million in profits from the assessment of unlawful regulatory charges on Registrants. See Sklar Declaration (App. 282). 13/ There currently is no impediment to NSI's transfer of these funds to its parent to shield them from the Registrants' claims. To be sure, NSI has already dissipated millions of dollars reaped from unlawful registration and renewal charges. See App. 324. And there is nothing to prevent NSI from simply transferring these assets to its corporate parent SAIC.
Finally, NSI's solvency itself is likely to be threatened when it is exposed, for first time, to competition for registration and renewal services in October 1998. As noted above, NSI's success is attributable almost entirely to its government-conferred monopoly over the registry. See Battista Declaration at 4 (App. 636). When that monopoly is taken away, NSI's ability to
__________________________12/ Other Circuit Courts have likewise upheld preliminary injunctions granted to ensure that damage funds were available. See e.g., United States Exrel. Taxpayers Against Fraud v. Singer Co., 889 F.2d 1327 (4th Cir. 1989) (upholding a preliminary injunction that prevented dissipation of assets where the plaintiffs alleged, infer alia, that the assets were in danger of dissipation and depletion); Airlines Reporting Corp. v. Barry, 825 F.2d 1220, 1226 (8th Cir. 1987) (holding that in a civil RICO, fraud and conversion case that, "[t]he authority of a trial court to issue a preliminary injunction to ensure the preservation of an adequate remedy is well established" and that the plaintiff was "entitled to a preliminary injunction to protect its remedy"); Tri-State Generation and Transmission Ass'n Inc. v. Shoshone River Power. Inc., 805 F.2d 351, 355 (10th Cir. 1986) (holding that a preliminary injunction was appropriate where irreparable harm would result from an inability to collect a money judgment); Feit & Drexler. Inc. v. Drexler (In re Feit & Drexler Inc.), 760 F.2d 406 (2d Cir. 1985) (stating that "even where the ultimate relief sought is money damages, federal courts have found preliminary injunctions appropriate . . .," while holding that an injunction was appropriate to prevent the defendant from making uncollectible any judgment). 13/ It is a matter of public record, as set forth in NSI's recently-released SEC Form 10-Q (for the period ending March 31, 1998), that "the Company's principal source of liquidity was its cash and cash equivalents of $6.8 million and its short-term investments of $78.9 million . . ."
compete on a level playing field is by no means assured, particularly in light of the widespread dissatisfaction with NSI's performance to date. See App. 273, 289. Courts have granted injunctive relief in order to preserve the status quo to ensure the later availability of the monies under similar circumstances. See e.g., Deckert v. Independence Shares. Corp., 311 U.S. 282, 290 (1940) (granting preliminary injunction restraining transfer of funds by trustee where defendant alleged to be insolvent).
2. The Adoption Of The Fees At Issue In Disregard Of APA Requirements Constitutes Irreparable Harm
In addition to the imminent danger of dissipation of the funds at issue, a further, independent irreparable harm arises from NSF and NSI's devising of Amendment 4 in disregard of the APA's notice-and-comment procedures. In upholding a preliminary injunction enjoining a university's genetic engineering experiments that was granted in Foundation on Economic Trends v. Heckler, 756 F.2d 143, 157 (D.C. Cir. 1985), this Court held that NIH's failure in that case to prepare an Environmental Impact Statement as required under the National Environmental Policy Act alone constituted "serious, immediate and irreparable injury." This Court reasoned that "the NEPA duty is more than a technicality; it is an extremely important statutory requirement to serve the public and the agency before major federal actions occur. " Id. (emphasis in original). Much the same can be said for the APA notice-and-comment requirements. The fact that they were disregarded at the only time they would have been meaningful - in this case, before the excessive assessments in question were put in place via Amendment 4 - itself constitutes irreparable harm meriting an injunction precluding NSI's dissipation of these funds. The district court thus erred in holding otherwise. See April 6 Mem. at 21-22 (App. 35-36).
B. The District Court Erred In Its Balancing Of Harms
Finally, on balance any harm to other parties that could result from the preliminary injunction is far outweighed by the harm the Registrants are likely to suffer. See Foundation on Economic Trends, 756 F.2d at 157 (requiring balancing of harms in preliminary injunction analysis). The district court weighed the harm to NSI as well as the harm to the public that could result from the granting of an injunction (thus collapsing the "public interest" analysis with the "balance of harms" analysis). In holding that the harms to NSI and the public outweighed any harm to the Registrants, the district court again abused its discretion.
It bears reiterating that, after receiving NSI's opposition to the Registrants' original motion for preliminary injunction, the Registrants greatly reduced the scope of relief they sought, essentially limiting it to preserving the status quo - primarily so that NSI would not be able to transfer huge blocks of the monies it obtained from the Registrants to its corporate parent SAIC during the pendency of this litigation. See April 6 Mem. at 19 (App. 33). Indeed, the district court conceded that such relief "might not have such a substantial effect [on NSI], especially since NSI maintains that it does not plan any substantial transfers to SAIC in the near future." Id. at 22 (App. 36). The district court ruled, however, that an injunction "would have some deleterious effect, if only by tying NSI's hands in the operation of its business affairs. " Id. There is no support in the record for this conclusion, however. Nor could there be any justification for NSI's rush to place the tens of millions of dollars it has unlawfully obtained from the Registrants beyond their reach prior to the conclusion of this litigation.
The district court similarly abused its discretion in concluding, without justification or support, that the Registrants" 'request [for an injunction] certainly threatens some harm to the general public. " See id. The court reasoned that "[I]f the Court entered an injunction that
affected NSI's business activity and that harmed the domain name registration process, the public might suffer real, tangible injury. " Id. The court concluded that "[a]lthough this injury is not so substantial as to prove dispositive, it certainly tips the scales against plaintiffs' motion." Id. (emphasis added). As the court's own words make clear, "this injury" refers solely to a possibility, not a finding ("If the Court entered an injunction that affected . . .). There is no basis in the record for the underlying assumption that the injunction sought by the Registrants would have any effect whatsoever on the "public, " or on the "domain name registration process. " On the other side of the scale, by contrast, the Registrants have amply demonstrated the clear harm to the public interest that NSI has inflicted, and continues to inflict, by greatly overcharging the public for registration and renewal services. See, e.g., Sklar Dec. (App. 275-83); Sklar Supp. Dec. (App. 1367-1405). Accordingly, the district court abused its discretion in failing to recognize that the balance of harms tips solidly in favor of the Registrants.
C. The District Court Erred In Its Analysis Of The Merits
This Court has provided the following guidelines in assessing a movant's likelihood of success on the merits: "The necessary 'level' or 'degree' of possibility of success will vary according to the court's assessment of the other factors"*** . . . One moving for a preliminary injunction assumes the burden of demonstrating either a combination of probably success and the possibility of irreparable injury or that serious questions are raised and the balance of hardships tips sharply in his favor'. " Washington Metro. Area Transit Comm'n v. Holidav Tours Inc., 559 F.2d 841, 843 (D.D.C. 1977) (citations omitted). This Court has further emphasized that the moving party need not show any certain mathematical probability of success on the merits order to warrant the relief requested. Cox v. Brown, 498 F. Supp. 823, 827 (D.D.(DAD.C. 1980).
By any measure, the district court - which obliterated all of the Registrants' claims against NSI by dismissing them outright, based largely on its unjustified refusal to apply the "federal actor" doctrine - committed error as a matter of law on the "merits" aspect of the preliminary injunction analysis. See April 6 Mem.at 22-23 (App. 36-37).
1. The Above-Cost Charges To Register Or Renew A Domain Name Are In Violation Of The Independent Offices Appropriations Act
The district court's analysis of the merits of the Registrants' IOAA claims begins and ends with its formalistic conclusion that "NSI is clearly not a federal agency." See April 6 Mem. at 26 (App. 40). As shown above, NSI is a federal actor, however - which properly subjects its actions in that capacity to the statutory restrictions governing the agency (NSF) for whom it acts. If the Registrants are correct in that analysis, the merits of the IOAA claim then should have been considered by the district court. They were not. Had they been properly considered, the Registrants strong likelihood of prevailing on the merits of their claim would have - and should have- emerged clearly.
Under the Independent Offices Appropriation Act ("IOAA"), agencies are authorized to charge assessments for services only in limited circumstances and only to a limited extent:
The head of each agency . . . may prescribe regulations establishing the charge for a service or thing of value provided by the agency***Each charge shall be (1) fair; and (2) based on (A) the costs to the government; (B) the value of the service or thing to the recipient; (C) public policy or interest served; and (D) other relevant facts.
31 U.S.C. § 9701. Here, NSF has purported to delegate authority - by means of an Amendment to a Cooperative Agreement entered with NSI - to establish and collect charges for the service of Internet domain name registration. See App. 129-33. This service had for a period been provided by the government itself, and subsequently by NSF, at no charge to the Registrants.
It is beyond dispute that NSF disregarded the APA's notice-and-comment rulemaking procedures required to determine the proper charges for this service. See 5 U.S.C. § 553(b) (requiring agency to give notice of proposed rulemaking); see also Engine Mfrs. Ass'n v. EPA, 20 F.3d 1177 (D.C. Cir. 1994) (applying APA requirements to IOAA); Connecticut Light and Power Co. v. NRC, 673 F.2d 525, 530-31 (D.C. Cir.) (same) cert. denied, 459 U.S. 835 (1982). Instead, NSF quietly agreed - behind closed doors, and with no opportunity for public comment - to amend its agreement with NSI to provide for the charges here at issue.
In addition to (and likely as a result of) NSF's disregard of procedural requirements, the charges in question manifestly fail to meet the IOAA's substantive requirements. In National Cable Television Ass'n Inc. v. United States (NCTA I), 415 U.S. 336, 341 (1974), the Supreme Court made clear that "we read [IOAA] narrowly as authorizing not a 'tax' but a 'fee'. " The Supreme Court then established the following boundaries for such fees:
1.The fee may not exceed the agency's cost of providing the service;
2. The fee must be reasonably related to and may not exceed the value of the service to the recipient, whatever the agency's costs may be; and
3. When the specific agency activity in question produces an independent public benefit the agency must reduce the portion of the agency's costs attributable to the public benefit.
415 U.S. at 343. As subsequent decisions establish, this Court need look no further then application of the first factor here, because in no event may a fee exceed the agency's cost of providing the service. See Engine Mfrs., 20 F.3d at 1180 ("[a]n agency may not charge more than the reasonable cost it incurs to provide a service, or the value to the recipient, whichever is less" (emphasis added)); Seafarers Int'l Union of North Am. v. United States Coast Guard, 81 F.3d 179, 185 (D.C. Cir. 1996) ([I]n short, the measure of the fees is the cost to the government
of providing the service, not the intrinsic value of the service to the recipient"); see also Bunge Corp. v. United States, 5 Cl. Ct. 511, 517 (C1. Ct. 1984) ("If fees charged under the IOAA exceed the cost of providing services, the excesses could well be considered a tax "), 14/ aff'd, 765 F.2d 162 (Fed. Cir. 1985).
As a factual matter, it is beyond dispute that the actual costs for providing registration and renewal services are but a minute fraction of the charges exacted from the Registrants. See App. 273-74 (if competition opens up for domain name registration, fees will fall to one-time charge of $10); Dr. W. Black, Managing Director of Nominet UK (acknowledging that registration costs in fact are about 5 pounds) (App. 1314). Finally, NSI's own self-serving cost data demonstrates that its actual costs are no more than $13 per registration. See Sklar Dec. (App. 283). In fact, due to the virtually entirely-automated nature of the registration process, the Registrants will be able to show that the cost of registration is less than $ 1. Indeed, the district court itself was constrained to admit that "plaintiffs' [Registrants'] allegations that NSI sets its rates substantially in excess of costs might implicate the IOAA. " See April 6 Mem. at 26 (App. 40).
Accordingly, NSI's grossly-excessive $70 registration fee is so far beyond the costs of this service - by any measure - as to demonstrate the Registrants' likelihood of prevailing on the
_____________________14/ In Electronic Indus. Ass'n v. FCC, 554 F.2d 1109, 1117 (D.C. Cir. 1976), the Court further explained that in order to justify a fee, the agency must satisfy the following criteria (which were uniformly disregarded here):
[The agency] must calculate the cost basis for the fee assessed. This involves (a) an allocation of the specific and indirect expenses which form the cost basis for the fee to the smallest practical unit; (b) exclusion of any expenses incurred to serve an independent public interest; and (c) a public explanation of the specific expenses included in the cost basis for a particular fee, an explanation of the criteria used to include or exclude particular terms.
merits of its IOAA claim. It was therefore an abuse of the district court's discretion to deny the injunction on the basis of its erroneous dismissal of the Registrants' claims against NSI. See National Ass'n of Broadcasters v. FCC, 554 F.2d 1118, 1132 (D.C. Cir. 1976) ("NCTA [I] can and will be applied . . . to require refund of fees collected . . . to the extent that they exceeded legally permissible amounts").
2. The Domain Name Fees Violate The Requirements Of The APA
The district court also committed reversible error in dismissing the Registrants' APA claims out of hand. See April 6 Mem. at 27-28 (App. 41-42). The court conceded that "[t]here is no dispute that NSF did not undergo any rulemaking procedures or issue any public findings or statement of reasons to support Amendment 4, which created the present fee structure. " Id. at 27 (App. 41). The district court concluded, however, that the APA is inapplicable for the same reason that "the IOAA does not apply to the NSI fees," and also because of the above-discussed "public contract" exception. Id. at 28 (App. 42).
For the reasons set forth above (at pp. 16-25, supra), the district court erred on both points. It erred in so readily applying the public contract exception; such exemptions are to be narrowly construed, as this Court and others have made clear. See e.g., Environmental Defense Fund Inc. v. Gorsuch, 713 F.2d 802 (D.C. Cir. 1983) (any claim of exemption from rulemaking requirements "will be narrowly construed and only reluctantly countenanced"); Center For Auto Safety v. Tiemann, 414 F. Supp. 215 (D.D.C. 1976) (exemptions narrowly construed). In doing so, moreover, the district court erred further by failing even to consider the merits of the Registrants' APA claim.
NSF and NSI's surreptitious conversion of the original Cooperative Agreement from a cost-plus government contract into a for-profit private corporate franchise flatly violates the
requirements of the Administrative Procedure Act. 5 U. S. C. § 553 et seq. "The APA sets out three procedural requirements: notice of the proposed rulemaking, an opportunity for interested persons to comment, and 'a concise general statement of [the] basis and purpose of the rules ultimately adopted." Home Box Office. Inc. v. FCC, 567 F.2d 9, 35 (D.C. Cir. 1977), cert. denied sub nom. National Ass'n of Broadcasters v. Home Box Office Inc., 434 U.S. 829 (1977). "[T]hese procedural requirements are intended to assist judicial review as well as to provide fair treatment for persons affected by the rule." Id., citing Portland Cement Ass'n v. Ruckelshaus, 486 F.2d 375, 393-94 (D.C. Cir. 1973), cert. denied sub nom. Portland Cement Corp. v. Administrator EPA, 417 U. S. 921 (1974):
To this end there must be an exchange of views, information and criticism, between interested persons and the agency. [citations omitted]. Consequently, the notice required by the APA, or information subsequently provided to the public, must disclose in detail the thinking that has animated the form of a proposed rule and the data upon which that rule is based.
(emphasis added). Indeed, this Court has ruled that the APA's procedural requirements are applicable in the context of fee setting proceedings, particularly in the context of the IOAA. See e.g., Engine Mfrs. Ass'n v. EPA, 20 F.3d 1177, 1181 (D.C. Cir. 1994) ("The Administrative Procedure Act requires the agency to make available to the public, in a form that allows for meaningful comment, the data the agency used to develop the proposed rule***[W]e hold that the agency failed to provide a reasonable explanation of the cost basis for its fee proposal").
This Court has consistently held, moreover, that a rule established in disregard of the APA's notice and comment requirements is arbitrary and capricious as a matter of law. See FEC v. Rose, 806 F.2d 1081, 1088 (D.C. Cir 1986) ('tan agency action accompanied by an inadequate explanation constitutes arbitrary and capricious conduct."); see also Public Citizen Inc. v. FAA, 988 F.2d 186, 197 (D.C. Cir. 1993) ("The requirement that agency action not be arbitrary and
capricious includes the requirement that the agency adequately explain the result, [citation omitted] and respond to 'relevant' and 'significant' public comments.,'). The Registrants have thus shown a likelihood of prevailing on the merits of their claim. See Kooritzky v. Reich, 17 F.3d 1509, 1514 (D.C. Cir. 1994) ("A 'reviewing court shall,' the APA instructs, 'set aside agency action' when the agency has acted arbitrarily or 'without observance of procedure required by law'") (emphasis added); see also Bowen v. Massachusetts, 487 U. S. 879 (1988) (ruling that "specific relief' in the form of reimbursement is available remedy under APA § 702); Maryland Dep't of Human Resources v. Department of Health and Human Resources, 763 F.2d 1441, 1446 (D.C. Cir. 1985) ("[W]hile in many instances an award of money is an award of damages, '[o]ccasionally a money award is also a specific remedy' .... Courts frequently describe equitable actions for monetary relief under a contract in exactly those terms").
For the foregoing reasons, the district court's denial of the Registrants' motion for preliminary injunction should be reversed, and the following relief ordered:
1. that NSI be immediately enjoined from making any disbursements, distributions or transfers of funds of any nature to its parent, SAIC, until such time as directed by the district court;
2.that NSI and NSF immediately deposit all renewal fees into a Bank Account designated by a Special Master;
3. that the Government Accounting Office ("GAO") promptly perform an audit of the books and records of NSI to ascertain the actual costs per Registrant of performing Internet Domain Name Registration services under its contract with the NSF; in performing this accounting function, the GAO is to use the accounting procedures and methodology commonly used by accountants in performing cost comparisons and analyses; and
4.that NSI make available to the auditors from the GAO all books and records requested, including but not limited to (a) internal profit and loss statements, (b) internal financial reports to SAIC, (c) internal cash flow projections, and (d) internal budget projections.
(signed William Bode)
William Bode (20866)
James M. Ludwig (45560)
Daniel E. Cohen (45477)
BODE & BECKMAN, L.L.P.
1150 Connecticut Avenue, N.W.
Washington, D.C. 20036
Counsel for Appellant-Registrants
Dated: August 14, 1998
ADMINISTRATIVE PROCEDURE 5 USCS § 553
§ 553. Rule making
(1) a military or foreign affairs function of the United States; or
(2) a matter relating to agency management or personnel or to public property, loans, grants, benefits, or contracts.
(1) a statement of the time, place, and nature of public rule making proceedings;
(2) reference to the legal authority under which the rule is proposed; and
(3) either the terms or substance of the proposed rule or a description of the subjects and issues involved.
Except when notice or hearing is required by statute, this subsection does not apply—
(A) to interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice; or
(B) when the agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon-are impracticable, unnecessary, or contrary to the public interest.
(C) After notice required by this section, the agency shall give interested persons an opportunity to participate in the rule making through submission of written data, views, or arguments with or without opportunity for oral presentation. After consideration of the relevant matter presented, the agency shall incorporate in the rules adopted a concise general statement of their basis and purpose. When rules are required by statute to be made on the record after opportunity for an agency hearing, sections 556 and 557 of this title apply instead of this subsection.
(D) The required publication or service of a substantive rule shall be made not less than 30 days before its effective date, except—
(1) a substantive rule which grants or recognizes an exemption or relieves a restriction;
(2) interpretative rules and statements of policy; or
(3) as otherwise provided by the agency for good cause found and published with the rule.
(e) Each agency shall give an interested person the right to petition for the issuance, amendment, or repeal of a rule.
(Added Sept. 6, 1966, P. L. 89-554, §1, 80 Stat. 383.)
I hereby certify that on 14th day of August, 1998, two (2) copies of the foregoing Appellant's Brief and one (1) copy of the Appendix was served via hand-delivery (pursuant to agreement between the parties) upon:
Gary D. Wilson Michael Burack Wilmer,
Cutler & Pickering 2445 M Street,
N.W. Washington, D.C. 20037
Counsel for Network Solutions, Inc.
and via first-class mail upon:
Wilma A. Lewis, United States Attorney
Lisa S. Goldfluss, Assistant United States Attorney
Department of Justice
United States Attorney's Office
District of Columbia
555 Fourth Street, N.W.
Washington, D.C. 2000)
Counsel for National Science Foundation
I certify that the foregoing Appellant's Brief contains no more than the number of words (12,500) allowed by Circuit Rule 28(d).
James M. Ludwig (45560)