462 F.3d 219 (2nd Cir. 2006), 05-0340, Brooklyn Legal Services Corp. v. Legal Services Corp.

Docket Nº:05-0340-cv (L), 05-0360-cv (CON), 05-0787-cv (CON), 05-0792-cv (CON), 05-0925-cv (XAP).
Citation:462 F.3d 219
Party Name:BROOKLYN LEGAL SERVICES CORP. B and Legal Services for New York City, on their own behalf and on behalf of their clients, et al., Plaintiff-Appellee-Cross-Appellants, Community Service Society of New York, Inc., et al., Plaintiff-Cross-Appellants, Carmen Velazquez, et al., Plaintiffs, v. LEGAL SERVICES CORPORATION, Defendant-Appellant-Cross-Appelle
Case Date:September 08, 2006
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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462 F.3d 219 (2nd Cir. 2006)

BROOKLYN LEGAL SERVICES CORP. B and Legal Services for New York City, on their own behalf and on behalf of their clients, et al., Plaintiff-Appellee-Cross-Appellants,

Community Service Society of New York, Inc., et al., Plaintiff-Cross-Appellants,

Carmen Velazquez, et al., Plaintiffs,

v.

LEGAL SERVICES CORPORATION, Defendant-Appellant-Cross-Appellee,

United States of America, Intervenor-Defendant-Appellant-Cross-Appellee.

Nos. 05-0340-cv (L), 05-0360-cv (CON), 05-0787-cv (CON), 05-0792-cv (CON), 05-0925-cv (XAP).

United States Court of Appeals, Second Circuit.

Sept. 8, 2006

Argued Nov. 2, 2005.

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Stephen L. Ascher, New York, N.Y. (Alan Levine, Kronish Lieb Weiner & Hellman LLP, New York, NY, of counsel), for Defendant-Appellant-Cross-Appellee.

Matthew M. Collette, Washington, D.C. (Peter D. Keisler, Assistant Attorney General, Roslynn R. Mauskopf, United States Attorney, Barbara L. Herwig, Civil Division, U.S. Department of Justice, Washington, D.C., of counsel), for Intervenor-Defendant-Appellant-Cross-Appellee.

Burt Neuborne, Brennan Center for Justice, New York, N.Y. (Peter M. Fishbein, Joseph M. Drayton, Kaye Scholer LLP, New York, NY, on the brief; Laura K. Abel, David S. Udell, Rebekah Diller, Brennan Center for Justice at NYU School of Law, New York, NY, of counsel), for Plaintiff-Appellee-Cross-Appellants and Plaintiff-Cross-Appellants.

James D. Liss, New York, N.Y. (James H.R. Windels, James J. Duffy, Davis Polk & Wardwell, New York, NY, of counsel), filed a brief for the National Legal Aid & Defender Association, et al. as Amici Curiae.

Jonathan L. Hafetz, New York, N.Y. (Lawrence S. Lustberg, Gibbons, Del Deo, Dolan, Griffinger & Vecchione, New York, NY, of counsel), filed a brief for the Council on Foundations, Inc., et al. as Amici Curiae.

James L. Quarles III, Washington, D.C. (Elizabeth A. Wilson, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C.; Richard A. Johnston, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, MA, of counsel), filed a brief for the National Association of Iolta Programs as Amicus Curiae.

Jason Brown, New York, N.Y. (George Kendall, Rachel Nash, Holland & Knight LLP, New York, NY, of counsel), filed a brief for the Association of the Bar of the City of New York, et al. as Amici Curiae.

Before CARDAMONE, McLAUGHLIN, and B.D. PARKER, Circuit Judges.

CARDAMONE, Circuit Judge.

When one of the cases of this consolidated appeal was before us seven years ago, we set out some guidance on the law, which the district court either misinterpreted or missed. If the latter, such forgetfulness is understandable because we know that even Homer nodded. 1

We have before us an appeal and several cross-appeals from a preliminary injunction entered in the United States District Court for the Eastern District of New York (Block, J.) on December 21, 2004, and from an order modifying it entered on February 24, 2005. The appeals concern the constitutionality of federal restrictions on local legal assistance programs that receive federal funding through the Legal Services Corporation (LSC). The restrictions apply regardless of whether the recipients receive non-federal funds in addition to LSC funds, and prohibit recipients from, inter alia, participating in class action suits, seeking attorneys' fees, and personally soliciting clients.

Plaintiffs South Brooklyn Legal Services Corp. et al. include local legal assistance programs which provide legal services to low-income New Yorkers, as well as the programs' staff attorneys, clients, and donors. Defendant LSC is a federally-chartered

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nonprofit corporation that awards federal funds appropriated by Congress to recipient legal assistance programs. Congress has charged LSC with ensuring that the federal funds it distributes are not diverted by recipients toward activities Congress specifically desired not to subsidize. The United States has joined LSC as intervenor-defendant in these proceedings to defend the federal statute and regulation challenged by plaintiffs.

In the district court, plaintiffs sought a preliminary injunction against defendant LSC to prevent enforcement of portions of LSC's program integrity regulation, 45 C.F.R. § 1610.8, and § 504 of the Omnibus Consolidated Rescissions and Appropriations Act of 1996 (1996 Act), Pub.L. No. 104-134, 110 Stat. 1321 (1996). In partially granting injunctive relief the district court reasoned that the administrative and financial costs imposed on plaintiffs by LSC's application of the regulation created an undue burden on plaintiffs' right under the First Amendment to use non-federal funds to engage in constitutionally protected activity.

BACKGROUND

I Statutory Background--the Program Integrity Regulation

LSC is a federally-chartered nonprofit corporation created and funded by Congress to serve as a conduit for federal funds that are distributed to local legal assistance programs. 42 U.S.C. § 2996b(a); see Legal Services Corporation Act of 1974 (LSC Act), Pub.L. No. 93-355, 88 Stat. 378 (1974) (codified as amended at 42 U.S.C. §§ 2996-2996l). These recipient programs, like the ones included as plaintiffs to the present appeal, often receive funds from state and local governments and private sources in addition to funds received from Congress through LSC. See S.Rep. No. 104-392, at 2-3 (1996).

In 1996, facing mounting pressure to curtail some of the more controversial activities conducted by some recipient programs, see id. at 1-2, Congress enacted § 504 of the 1996 Act, which supplemented, and in some instances reinforced, the restrictions on LSC-fund recipients with more stringent requirements. See also Science, State, Justice, Commerce, and Related Agencies Appropriations Act, 2006, Pub.L. No. 109-108, tit. V, 119 Stat. 2290, 2331 (2005) (carrying forward restrictions to the present time). For example, three of the 1996 Act restrictions, which also happen to be challenged by plaintiffs in their cross-appeals, prohibit recipients from participating in class action lawsuits, seeking certain types of attorneys' fees, and in-person solicitation of clients. 1996 Act § 504(a)(7), (13), & (18); see 45 C.F.R. pts. 1617, 1638, & 1642.

Shortly following the 1996 Act's enactment, a district court in Hawaii enjoined LSC from enforcing the 1996 Act's restrictions "to the extent that they relate to the use of Non-LSC Funds." Legal Aid Soc'y of Haw. v. Legal Servs. Corp. (LASH), 961 F.Supp. 1402, 1422 (D.Haw.1997). The restrictions, as noted above, apply to LSC-fund recipients regardless of whether they also receive non-federal funds. The district court reasoned that because LSC, in implementing the 1996 Act's restrictions, had effectively foreclosed all avenues by which a recipient program could use non-federal funds to engage in constitutionally protected activities, the federal corporation had imposed an unconstitutional condition on the receipt of a federal subsidy. See id. at 1414-17.

To address the District of Hawaii's injunction, LSC promulgated the program integrity regulation. See Use of Non-LSC Funds, Transfers of LSC Funds, Program

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Integrity, 62 Fed.Reg. 27,695, 27,697 (May 21, 1997) (codified at 45 C.F.R. § 1610.8). The new regulation created an avenue by which a recipient may "affiliate" with an organization that uses non-federal funds to engage in activities restricted by the 1996 Act, and was thus an attempt to cure any constitutional concerns raised by the LASH decision. Id.

Under the regulation, a recipient's relationship with an unrestricted affiliate organization is permissible, provided the recipient maintains "objective integrity and independence from [the] organization that engages in restricted activities." 45 C.F.R. § 1610.8(a). Objective integrity is achieved where the recipient (1) is a legally separate entity from the unrestricted affiliate organization, (2) refrains from transferring LSC funds to the unrestricted affiliate organization, and (3) maintains "sufficient physical and financial separation" from the unrestricted affiliate organization. Id. A recipient uncertain about whether its relationship with a restricted organization satisfies the regulation may "submit [to LSC] all the relevant 'program integrity' information and request a review by [LSC] of any existing or contemplated relationship with an organization that engages in restricted activities." See 62 Fed.Reg. at 27,698.

Determined to insulate the new rule from challenges such as those the District of Hawaii found persuasive, LSC designed the regulation to mirror another such program integrity regulation that had already survived similar constitutional challenges in the Supreme Court in Rust v. Sullivan, 500 U.S. 173, 111 S.Ct. 1759, 114 L.Ed.2d 233 (1991). The endeavor was largely successful, for LSC's regulation has been upheld by every court to have encountered a challenge to its validity--including this one and the initially dubious district court in Hawaii. See Velazquez v. Legal Servs. Corp. (Velazquez II), 164 F.3d 757, 773 (2d Cir.1999), aff'g in relevant part, 985 F.Supp. 323 (E.D.N.Y.1997); Legal Aid Soc'y of Haw. v. Legal Servs. Corp., 145 F.3d 1017, 1031 (9th Cir.1998), aff'g in relevant part, 981 F.Supp. 1288 (D.Haw.1997).

II Prior Proceedings

A. Velazquez I

In 1997, several of the plaintiffs to this appeal, the so-called Velazquez plaintiffs, brought challenges on First Amendment grounds to the program integrity regulation and to certain of the 1996 Act's restrictions relating to a recipient's lobbying and welfare reform activities. Velazquez v. Legal Servs. Corp. (Velazquez I), 985 F.Supp. 323...

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