The opinion of the court was delivered by: FOGEL
In this action filed by Tasty Baking Company, (the Company), to set aside and enjoin enforcement of Decisions and Orders of the Cost of Living Council, (the Council), issued pursuant to Phase II of the Economic Stabilization Program, we are asked to adjudicate the cross-motions for summary judgment filed by the parties. Plaintiff's motion challenges the action of the Council, because of the alleged failure of that agency to comply with the controlling sections of the Economic Stabilization Act of 1970, as amended, and with certain provisions of the Administrative Procedure Act. Defendants' motion seeks affirmance of the decision reached by the Council and approval of the regularity of its proceedings. We have concluded that summary judgment should be entered in favor of the Council.
The procedural history of this litigation may be summarized as follows: Tasty Baking Company, a diversified corporation engaged in the sale of small cakes and pies, cookies, toys, and graphic arts materials, filed an application dated October 23, 1972, with the Office of Exceptions Review of the Price Commission, in which that company sought permission to adjust its base period profit margin from 6.64 per cent to 7.63 per cent, in order to reflect the effect of divestitures by the Company of its Potato Chip-Pretzel Division and Silver Nitrate Division.
On February 5, 1973, the Council issued a Decision and Order which permitted the Company to restate its base period profit margin, "effective with the start of the Company's 1973 fiscal year."
On February 22, 1973, the Company filed a "Request for Reconsideration -- Exception" with the Exceptions Review Office of the Price Monitoring Division of the Council, seeking modification of the Decision and Order of February 5, 1973, in order to enable it to restate the profit margin for the 1972 fiscal year.
A second Decision and Order of the Council was issued on April 2, 1973, which acknowledged that the Company had "made a prima facie showing as required by 6 CFR 305.36(a)(3) that the Cost of Living Council's initial action was erroneous in fact or in law;" that order allowed a pro tanto restatement of the base period profit margin to reflect the effect upon the company of the divestiture of the Potato Chip and Pretzel Division, retroactive to the commencement of its 1972 fiscal year. The Decision and Order of the Council did not permit similar adjustment for divestiture of the Silver Nitrate Division; the refusal to do so was based upon the finding of the Council that "divestiture of this division was not completed until fiscal year 1972."
Thereafter, on June 22, 1973, the Company received a Notice of Probable Violation, dated June 19, 1973, from the Office of Price Monitoring of the Council setting forth that a determination had been made as to a probable violation of 6 CFR §§ 300.12 and 300.13; this action was based upon the thesis that the Company had apparently exceeded the base period profit margin which had been restated in accordance with the Decision and Order of April 2, 1973, for the fiscal year 1972.
The Company responded in writing to the Notice of Probable Violation;
a meeting was subsequently held with representatives of the Council on July 2, 1973.
The Company thereafter filed a Request for Recission and asked for a stay of the August 2, 1973 Order;
a stay was subsequently granted by the Council.
On September 28, 1973, the Council denied the Request for Recission, and substantially reaffirmed its August 2, 1973 Order.
Thereafter, the instant action was filed in this Court on October 3, 1973, pursuant to the jurisdictional grant contained in § 211 of the Economic Stabilization Act of 1970, as amended, 12 U.S.C. § 1904 n.;
the Company seeks declaratory and injunctive relief to set aside, annul, declare unlawful, and enjoin enforcement of the Orders of the Council of September 28, 1973 and August 2, 1973.
After this suit was filed, counsel for the parties entered into an agreement whereby the Company's theretofore unsuccessful request for "exceptions" relief was reopened for administrative review, and the Company was permitted to submit additional materials for the Council's consideration in connection with that action.
On February 11, 1974, the Council issued an extensive Decision and Order which reaffirmed its prior Decision and Order of April 2, 1973.
Another round of letters between the Company and the Council followed,
and minor amendments to the February 11, 1974 Decision and Order were issued on April 10, 1974.
There can be no doubt, based upon the procedural and substantive history of this matter, that the Company has fully exhausted its administrative remedies.
Hence, we are satisfied that the controversy is one which is ripe for judicial review.
The Company asserts four general grounds in support of its prayer for injunctive and declaratory relief in this Court; its contentions may be summarized as follows:
First : that the Council's failure to grant the request of the Company for an exception to adjust its base period profit margin for the fiscal year 1972 constituted arbitrary action by that agency, which also exceeded its authority in ruling as it did.
Second : that there is a lack of substantial evidence to support the Council's ruling.
Third : that the Council violated the provisions of 5 U.S.C. § 555(e) when it rendered its Decisions and Orders denying the Company's request for "exceptions" relief, and thereafter issued the orders that are the subject of this appeal.
Fourth : that the Council's determination is invalid because of the alleged fatal defect which permeates all of its pertinent regulations, a defect that is charged to stem from the Agency's failure to comply with the rule-making provisions of the Administrative Procedure Act, 5 U.S.C. § 553.
We will discuss these contentions, seriatim.
1. Was the action of the Council in denying the request of the Company for an exception to adjust its base period profit margin for fiscal 1972 arbitrary, or in excess of the authority of the agency, or both?
Sections 211(d) and (e) of the Economic Stabilization Act of 1970, as amended by the Economic Stabilization Act Amendments of 1971, P.L. 92-210, 85 Stat. 743 (December 22, 1971), (the "Amended Act"), contain the following provisions with respect to District Court review of orders of the Council:
(d)(1) Subject to paragraph (2), * * * no order [of any agency exercising authority under this title] shall be enjoined or set aside, in whole or in part, unless a final judgment determines that such order is in excess of the agency's authority, or is based upon findings which are not supported by substantial evidence.
(d)(2) A district court of the United States * * * may enjoin temporarily or permanently the application of a particular * * * order issued under this title to a person who is a party to litigation before it. * * * (e)(1) Except as provided in subsection (d) of this section, no interlocutory or permanent injunction restraining the enforcement, operation, or execution of * * * any * * * order issued [under this title], shall be granted by any district court of the United States or judge thereof. Any such court shall have jurisdiction to declare * * * (B) that an order of [an agency exercising authority under this title] is invalid upon a determination that the order is in excess of the agency's authority, or is based upon findings which are not supported by substantial evidence. * * *
While the statutory criteria for review appear to be limited to orders which are either in excess of the authority of the agency, or based upon findings which are not supported by substantial evidence, the Temporary Emergency Court of Appeals has concluded that "the power of the court to correct arbitrary action is implicit in Section 211(d)(1)", Associated General Contractors of America, Inc., Oklahoma Chapter-Builders' Division v. Laborers International Union of North America, supra, 476 F.2d at 1400-1401, n. 20. The standards which control in arriving at a determination with respect to the existence of substantial evidence to support Council action are discussed in Part 2, infra. At this point, our inquiry is directed to the charge that the Council acted either arbitrarily, or in excess of its authority, or was in fact guilty of both transgressions.
(b) In carrying out the authority vested in him by subsection (a), the President shall issue standards to serve as a guide for determining levels of wages, salaries, prices, rents, interest rates, corporate dividends, and similar transfers which are consistent with the purposes of this title and orderly economic growth. Such standards shall --
(2) provide for the making of such general exceptions and variations as are necessary to foster orderly economic growth and to prevent gross inequities, hardships * * *.
On October 4, 1972, the Price Commission promulgated regulations with respect to the grant or denial of exceptions in general; specific regulations dealing with the standards for exceptions in cases in which there had been acquisitions or divestitures by firms applying for such exceptions are particularly relevant in this regard.
37 Fed. Reg. 20828. In the preamble to these regulations, the Price Commission stated:
The purpose of these amendments is to add a new § 300.203 to the regulations of the Price Commission to provide guidance for accounting information for business combinations, in the filing of reports or other documents with the Price Commission. The purpose of the new section is to provide that, when there are changes in the business structure, the quarterly information submitted on Form PC-51 is consistent with the base period information reported on Form PC-50. A new Subpart D "Exceptions" is also added to consolidate provisions relating to that subject and to provide a specific procedure for the consideration of requests for exceptions to restate base period profit margins to reflect acquisitions or divestitures that are not poolings of interests, spin-offs, or split-offs.
The new § 300.203 states generally that accounting information for business combinations may be restated only in accordance with generally accepted accounting principles, consistently applied. Restatement of prior accounts is required for changes accounted for as a pooling of interests, a spin-off, or a split-off, but is generally not authorized for other acquisitions or divestitures.
The Commission recognizes, however, that for sound business reasons, a large number of acquisitions and divestitures are not accounted for as poolings of interests, spin-offs, or split-offs although such transactions may have substantially the same economic impact on the acquiring or divesting firm. If the impact of the transaction on a company's base period profit margin is substantial, the difference in treatment accorded such transactions may be inequitable in certain cases.
Therefore, provision has been made in §§ 300.371, 300.373, and 300.375 to establish the specific requirements for the filing of a request for an exception for the purpose of restating a base-period profit margin to reflect acquisitions and divestitures that may not normally be used for such a restatement. Special provision is made for processing, on a 10-day basis, a request for an exception to reflect proposed acquisitions or divestitures of sole proprietorships, corporations, subsidiaries, or other separate legal entities, if they will cause a 10-percent net change (on a pro forma basis) in the base-period profit margin, and certain other specific requirements will be met. Those requests not eligible for processing under the 10-day provision as a proposed acquisition or divestiture will be given the normal processing accorded other requests for exceptions.
Since the purpose of these amendments is to provide immediate guidance and information with respect to compliance with price stabilization rules, it is hereby found that notice and public procedure is impracticable and that good cause exists for making them effective less than 30 days after publication in the Federal Register. 37 Fed. Reg. 20828 (October 4, 1973) (emphasis added).
The regulation governing the grant of exceptions in general was codified in 6 C.F.R., Part 300, Subpart D, § 300.355(a). That provision reads as follows:
§ 300.355 Grant of Exception: general.
(a) The Chairman of the Price Commission or any person to whom he delegates the authority may grant such exceptions to this part as may be necessary to prevent or correct a serious hardship or gross inequity, or to allow a restatement of base period profit margin under § 300.371.
With respect to divestitures, which were defined
as sales, exchanges, or other dispositions of entities
other than by means of a spin-off or a split-off,
§ 300.371 states in pertinent part:
§ 300.371 Exception for adjustment of base period profit margin to reflect acquisition or divestiture.
(a) Each person requesting an exception for adjustment of its base period profit margin to reflect the acquisition or divestiture of an entity must comply with § 300.373.
Section 300.373 requires the applicant to demonstrate that the divestiture has caused, or would cause loss of control of the divested entity, and specifies certain information which must be included with the application for exceptions relief.
Finally, § 300.203 sets forth the general rule that restatement of prior accounts is not appropriate when a disposition other than a spin-off or a split-off has occurred, at least in the absence of exceptions relief, such as that provided for in subpart D.
In applying this statutory and regulatory scheme to the facts of the instant case, we find that the Company divested itself of the Potato Chip and Pretzel Division during 1970, and the Silver Nitrate Division during 1972. Each of these divestitures was accounted for in the Company's financial statements as a sale of operating assets,
and therefore, under § 300.203, restatement of prior accounts to reflect such divestitures was proscribed. For this reason, the Company applied to the Office of Exceptions Review of the Price Commission, requesting an exception "pursuant to the authority set forth in Title 6 C.F.R. §§ 300.371--300.373,"
in order to permit it to adjust its base period profit margin to reflect the divestitures of these two divisions. This relief was granted for both divisions for the fiscal year 1973, and later was broadened to permit the Company to restate its profit margin based upon the divestiture of the Potato Chip and Pretzel Division for the fiscal year 1972, as well. The Council has consistently refused, however, to permit restatement of the base period profit margin for fiscal 1972 to reflect divestiture of the Silver Nitrate Division. Procedurally, this refusal has taken the form of a denial of "exceptions" relief, a Notice of Probable Violation, and ultimately an order to make price reductions pursuant to § 300.54.
The Company argues that the Council has acted arbitrarily, and has also exceeded its authority; its contentions run as follows: The Council, explicitly in its Decision and Order of April 2, 1973, and implicitly in its subsequent Decisions and Orders, based its refusal to grant "exceptions" relief solely upon its finding that the divestiture of the Silver Nitrate Division was not completed until fiscal 1972. In so doing, it not only ignored the statutory mandate, but the standards set by its own regulations, which require the grant of "exceptions" relief, whenever serious hardship, or gross inequity is established, irrespective of the actual date upon which a divestiture is technically a fait accomplit. Plaintiff claims that the Council has exalted form over economic substance, in violation of the applicable provisions of the statute itself and, indeed, of its own regulations. Thus, the Company concludes that the Council has acted capriciously, and in excess of its authority as an administrative agency, because of the agency's failure to abide by the standards which it must apply as a matter of law in adjudicating the factual and legal issues that were presented to it in the instant case.
In order to assess the force of the Company's argument, we must examine in detail the various Decisions and Orders of the Council; in this connection, we will focus upon the legal foundation for the Council's conclusions.
The Company places great reliance upon the fact that the Council's Decision and Order of April 2, 1973 stated that "the divestiture of the Silver Nitrate Division also has substantial impact upon the Phase II base period profit margin, but that divestiture of this division was not completed until fiscal year 1972."
This finding, eo ipso, does not imply that the Council was in fact relying solely upon the date when the divestiture was legally accomplished. The statement is equally compatible with a conclusion by the Council to deny the exception because it had determined that the divestiture was not completed in an economic sense prior to 1972; i.e., that the operations of the division were significant enough economically to warrant a denial of "exceptions" relief during the 1972 fiscal year. Indeed, the February 11, 1974 Decision and Order of the Council clearly establishes that just such a conclusion was intended. Hence, its decision did not rest upon a dry formulation of the precise date upon which all of the technicalities of divestiture were legally consummated; it was bottomed instead upon its own determination of the economic realities of divestiture. While the Company may quarrel with the conclusion, it cannot challenge the fact that the Council tackled the issue, even though it arrived at a different result.
While Tasty may have operated the Silver Nitrate Division on a limited basis during 1972, to the extent that no new orders were taken and only outstanding, long-term contracts with established customers were processed, the data submitted by Tasty indicated that the Division's actual operating level during the year 1972 when measured by silver volume (total ounces of silver handled) equaled approximately 70 percent of the Division's level of transactions during the 1968-1969 base years. That data also indicated that conversion fees charged by the Silver Nitrate Division (calculated by subtracting total silver costs from total annual sales) for the year 1972 were at a level in excess of 78 percent of the base period level.1 Consequently, the Council concluded that Tasty's management actions did not result in an early 1972 termination of the Silver Nitrate Division and that the Division's actual operating level was substantial as compared to the base period level.
It is clear from these excerpts that the Council based its denial of "exceptions" relief upon its conclusion, derived from data supplied by the Company, that the Silver Nitrate Division's "actual operating level [during 1972] was substantial as compared to the base period level," and that "the Division's actual operating volume did not decline significantly in 1972."
A careful analysis of the Company's arguments, the economic data presented to us and to the Council, and that agency's decision, establishes that the crux of the objection to the denial of "exceptions" relief is not the Council's purported reliance upon an overly technical legal definition of divestiture; indeed, there is no support in the record for such a contention. The Company's actual dispute with the Council, which is adumbrated in footnote #1 to the Decision and Order of February 11, 1974, supra, is that it objects to the Council's method of computing the operating volume of the Silver Nitrate Division during 1972.
The Company argued before the Council, and now argues before us, that there was a significant change in the operations of the Silver Nitrate Division during 1972 because of an asserted switch to "tolling", that is, the requirement that the customers themselves provide the silver for processing, in contrast to the prior practice, whereby it purchased silver on the market, and then charged customers for the cost of the metal as well as for the cost of the processing. The Company states that this change in modus operandi made it primarily a processor. The Council made the following findings with respect to this practice:
* * * Using cost and volume data furnished by Tasty, the Council has calculated the probable impact which would have resulted if Tasty's level of "tolling" operations in 1972 had been at the base period level. On the basis of Tasty's "weighted average" cost of silver in "non-tolling" transactions during 1972, the result would have been to decrease Tasty's actual 1972 profit margin by an absolute amount of 0.12 percent, a net change equal to only 1.6 percent of Tasty's actual 1972 profit margin.
We may summarize the Council's rationale as follows:
First: it was calculated that, during the base period years (1968-1969), the level of "tolling" was twenty-seven percent of all silver transactions, while during 1972, "tolling" accounted for seventy-six percent of all silver operations.
Second: the business of that division for the year 1972 was treated as though "tolling" constituted twenty-seven percent of all silver transactions, the same level which the Council concluded prevailed during the base period years. Thus, additional silver purchases were hypothesized for 1972, based upon the weighted average cost of silver actually purchased by the Company in that year. The dollar figure for these hypothetical silver purchases was then added to the total sales for 1972, reducing the Company's 1972 profit margin by an absolute amount of 0.12 percent.
Third: The Council then analyzed this relatively small change in the 1972 profit margin within the context of the economic data which had been calculated previously; that analysis was based upon the following considerations: (1) the total quantity of silver handled by the Silver Nitrate Division during 1972 was approximately seventy percent of the average quantity handled during the base period years; (2) the conversion fees charged during 1972 were at a level in excess of seventy-eight percent of the average charged during the base period years. On the basis of all of these factors, the Council concluded:
* * * neither the phase out of the Silver Nitrate Division in 1972 nor the extent of "tolling" operations conducted by the Division in 1972, represented a significant change in the character, nature or scope of the firm's operations for 1972 as compared to base year levels.
(emphasis in original; footnote omitted)
In essence, therefore, the Company seeks to have us reject the method employed by the Council,
one that was not only reasonable, but in fact was based upon the very economic information supplied by the Company itself; stripped to its essentials, the Company would have us substitute an alternative method which happens to be more favorable to it under the factual circumstances presented in this case. Such a result is not only clearly beyond the limited scope of our review of administrative orders of the Council, but would entangle us in a thicket of judicial second guessing which Courts should avoid in a case such as the one at bar, involving as it does an agency's rational choice among competing economic and accounting theories in a highly technical field.
The proper scope of District Court review of orders of the Cost of Living Council was stated in Jennings v. Schultz, 355 F. Supp. 1198, 1206-1208 (D.D.C. 1973), a case favorably cited by the Temporary Emergency Court of Appeals. The Court said, in pertinent part: