The opinion of the court was delivered by: KIMBA M. WOOD
On October 15, 1993, the court issued an Order enjoining defendant Securities and Exchange Commission ("SEC") from issuing any no-action letter in which the SEC takes a position at variance with the understanding of the "ordinary business operations" exception adopted by the SEC on November 22, 1976, until such time as the SEC adopts such a position in a rule-making proceeding pursuant to public notice and comment. The court's factual and legal findings are set forth below.
Plaintiffs challenge a change in the SEC's enforcement policy concerning whether shareholders can require companies to include in their proxy materials shareholder proposals regarding equal employment opportunity matters. Plaintiff New York City Employees' Retirement System ("NYCERS") asked Cracker Barrel Old Country Store, Inc. ("Cracker Barrel") to include in its 1992 proxy material a proposal that Cracker Barrel implement an employment policy prohibiting discrimination on the basis of sexual orientation. NYCERS submitted its proposal in response to an announcement by the company of a policy of discrimination in employment against gay men and lesbians.
Cracker Barrel sought the SEC's views on the company's intention to omit NYCERS' proposal from its proxy material. The SEC advised Cracker Barrel that it would not bring an enforcement action against Cracker Barrel for excluding NYCERS' proposal, because the proposal dealt with matters relating to Cracker Barrel's "ordinary business operations" pursuant to SEC Rule 14a-8(c)(7).
The SEC stated that it had reconsidered its past position, which viewed employment policies and practices that were tied to a significant social issue as outside of the "ordinary business operations" exception. The SEC announced that, because it had become increasingly difficult to identify those employment-related proposals that were includable by virtue of their social policy implications, all employment-based shareholder proposals that did not involve senior executives or directors could thereafter be excluded as relating to a company's ordinary business operations.
See Cracker Barrel Old Country Stores, Inc., 1992 SEC No-Act. LEXIS 984 (Oct. 13, 1992) ("CrackerBarrel"). In announcing this new position, the SEC reversed the position that it had taken consistently as recently as two years earlier. For example, in 1990, the SEC advised AT&T that AT&T could not omit a proposal that the company eliminate its affirmative action programs. See AT&T, 1990 SEC No-Act. LEXIS 20 (Jan. 5, 1990).
Much of the historical and regulatory background of shareholders' right to submit proposals for inclusion in a corporation's proxy material is recounted in this court's opinion in Amalgamated Clothing & Textile Workers Union v. Wal-Mart Stores, Inc., 821 F. Supp. 877, 881-83 (S.D.N.Y. 1993) ("ACTWU"), and will be noted here only briefly. The SEC, rather than Congress, has been primarily responsible for the development of the shareholder proposal right under the proxy rules. The SEC was the first to conclude that a shareholder proposal rule was necessary in order to prevent proxy material from being misleading if such materials failed to disclose that shareholders intended to raise certain proposals at the annual meeting. See id. at 882 (citing authorities); Securities and Exchange Commission Division of Corporate Finance, Staff Report on Corporate Accountability: A Reexamination of Rules Relating to Shareholder Communications, Shareholder Participation in the Corporate Electoral Process and Corporate Governance Generally, 96th Cong. 2d Sess. (Comm. Print) (Comm. on Banking, Housing and Urban Affairs of the U.S. Senate), at 144-45 & n.32 (1980).
SEC Rule 14a-8(a) requires a company to include a shareholder's proposal in the company's proxy statement. See 17 C.F.R. § 240.14a-8(a).
This rule, adopted in 1942, established the communication and franchise rights of shareholders to receive information about proposals submitted by fellow stockholders in advance of the annual meeting and to cast a vote on those proposals by proxy. In 1953, the SEC proposed adding to the rule several grounds for excluding proposals, including "if the proposal consists of a recommendation or request that management take action with respect to a matter relating to the conduct of the ordinary business operations of the issuer." The Commission explained that this ground for exclusion "relieve[s] management of the necessity of including in its proxy material security holder proposals which relate to matters falling within the province of management. . . ." Securities Exchange Act Release No. 4950 (Oct. 20, 1953); 18 Fed. Reg. 6646, 6647 (1953). After a notice and comment period, the SEC adopted the amendment in 1954. The "ordinary business operations" exception was codified as Rule X-14a-8(c)(5). See Securities Exchange Act Release No. 4979 (Jan. 14, 1954); 19 Fed. Reg. 246, 247 (1954).
In 1976, the SEC again proposed amendments to Rule 14a-8 and to the ordinary business operations exception. After more than twenty years of experience with the exception, the Commission concluded that the ordinary business operations exception "frequently has been relied upon by issuers to exclude proposals that involve matters of considerable importance to the issuer and its security holders." Proposed Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Securities Exchange Act Release No. 12,598 (July 7, 1976); 41 Fed. Reg. 29,982, 29,984 (1976) ("Proposed 1976 Amendments"). To remedy this perceived flaw, the SEC proposed deleting subparagraph (c)(5) and replacing it with a new subparagraph (c)(7) that would provide a basis for excluding a proposal "if the proposal deals with a routine, day-to-day matter relating to the conduct of the ordinary business operations of the issuer." Id. The SEC also proposed an alternative formulation: "if the proposal deals with a matter that the governing body of the issuer (such as the Board of Directors) is not required to act upon pursuant to the applicable State law or the issuer's governing instruments (such as the Charter or By-Laws)." Id. The Commission invited comment on which formulation, if any, the SEC should adopt. After studying the comments it received, the SEC concluded that although an "ordinary business operations" exception should be retained, both of the proposed formulations would be difficult to administer. See Adoption of Amendments Relating to Proposals by Security Holders, Securities Exchange Act Release No. 12,999 (Nov. 22, 1976); 41 Fed. Reg. 52,994, 52,997 (1976) ("Adoption of 1976 Amendments"). In lieu of these proposed formulations, the SEC chose a modified version of the 1954 language. The amendment that was adopted took the form of a facially insignificant change; the new language permits exclusion of a proposal if it "deals with a matter relating to the conduct of the ordinary business operations of the issuer."
Id. at 52,998. However, the SEC simultaneously explained that notwithstanding the similarity between the old and new rules, the amended rule was intended to signal an SEC shift in position and that it would henceforth prohibit exclusion of proposals involving substantial policy considerations, even if they otherwise could be said to deal with "ordinary business operations." The SEC explained its decision as follows:
. . . . Thus, where proposals involve business matters that are mundane in nature and do not involve any substantial policy or other considerations, the subparagraph may be relied upon to omit them.
Id. at 52,998 (emphasis added). In this release, the SEC acknowledged that all proposals could be seen as involving some aspect of ordinary business operations; however, a proposal could not be excluded on that basis unless it raised no substantial policy consideration. See ACTWU, 821 F. Supp. at 890.
From 1976 until 1992, the SEC and its staff applied the standard articulated in the Adoption of 1976 Amendments to shareholder proposals pertaining to companies' equal employment opportunity policies. On at least seven occasions from 1978 through January 1992, the SEC staff took the position that proposals urging companies to adopt equal employment opportunity policies with respect to their employees in Northern Ireland and South Africa could not be excluded in reliance on Rule 14a-8(c)(7). See Dow Chemical Company, 1978 SEC No-Act. LEXIS 788, *6-*7 (Mar. 1, 1978); Dresser Industries, Inc, 1980 SEC No-Act. LEXIS 2647, *6 (Jan. 3, 1980); Texaco, Inc., 1984 SEC No-Act. LEXIS 1846, *3-*4 (Feb. 28, 1984); Texaco, Inc., 1985 SEC No-Act. LEXIS 1885, *6-*7 (Mar. 15, 1985); TRW, Inc., 1986 SEC No-Act. LEXIS 1661, *1-*2 (Jan. 28, 1986); Mobil Oil Corp., 1990 SEC No-Act. LEXIS 167, *1-*2 (Feb. 7, 1990); Mobil Oil Corp., 1992 SEC No-Act. LEXIS 43, *1-*2 (Jan. 14, 1992).
Also during this period, the SEC advised AT&T three times that it could not rely on the ordinary business operations exception to exclude a proposal to phase out the company's affirmative action policies designed to benefit individuals from any particular racial or ethnic group. See AT&T, 1988 SEC No-Act. LEXIS 118, (Jan. 25, 1988); AT&T, 1988 SEC No-Act. LEXIS 1703 (Dec. 21, 1988); AT&T, 1990 SEC No-Act. LEXIS 20 (Jan. 5, 1990). The proposal was submitted by the National Alliance, a white supremacist organization that a court had found advocates the "violent expulsion and separation" of racial, religious or ethnic groups from society in order to protect against "black savagery" and "jewish manipulation." AT&T, 1988 SEC No-Act. LEXIS 1703 *7-*9 (Dec. 21, 1988), quoting National Alliance v. United States, 228 U.S. App. D.C. 357, 710 F.2d 868, 871-73 (D.C. Cir. 1983).
Then on October 13, 1992, the SEC staff issued the Cracker Barrel no-action letter. The SEC stated that Cracker Barrel could rely on the "ordinary business operations" exception to exclude NYCERS' proposal that Cracker Barrel adopt a nondiscrimination policy with respect to sexual orientation. On January 15, 1993, the full Commission affirmed the staff no-action letter to Cracker Barrel. Complaint Ex. B. Since then, the SEC staff has followed its new position in at least six no-action letters, all of which involved types of proposals as to which the SEC had, in the past, taken a contrary position. See, e.g., Mobil Oil Corp., 1993 SEC No-Act. LEXIS 168 (Feb. 4, 1993) (extension of affirmative action program to include Vietnam war veterans); United Technologies Corp., 1993 SEC No-Act. LEXIS 288 (Feb. 19, 1993) (adoption of "MacBride Principles" opposing employment discrimination on the basis of religion at companies with operations in Northern Ireland); Unisys Corp., 1993 SEC No-Act. LEXIS 270 (Feb. 19, 1993) (same); GTE Corp., 1993 SEC No-Act. LEXIS 322 (Feb. 25, 1993) (information about company's equal employment opportunity and affirmative action policies); Wal-Mart Stores, Inc., 1993 SEC No-Act. LEXIS 584 (Mar. 26, 1993) (same).
The SEC maintains in its memorandum of law in this case that, in issuing the Cracker Barrel no-action letter, it "determined no longer to apply the 1976 interpretation to employment-related proposals." Memorandum of Law in Support of Motion by Defendant Securities and Exchange Commission to Dismiss the Complaint or, in the Alternative, For Summary Judgment ("SEC Brief") at 38 n.21; Memorandum of Law of the Securities and Exchange Commission (1) in Opposition to Plaintiffs' Cross-Motion for Summary Judgment and (2) in Further Support of the Commission's Motion for Dismissal and Summary Judgment ("SEC Reply Brief") at 14-15 n.7. For non-employment-related proposals, the SEC appears still to adhere to the standard it articulated in 1976. SEC Br. at 38 n.21; Grimes v. Ohio Edison Co., 992 F.2d 455, 457 (2d Cir.), cert. denied 126 L. Ed. 2d 419, 114 S. Ct. 467 (1993). Thus, the current SEC position is that shareholders have no right of access to management's proxy material to communicate with one another on employment-related proposals involving rank and file employees, even where such proposals involve substantial policy considerations. This case raises the issue not fully addressed in ACTWU8 -- with which procedures must the SEC comply before it can substitute a new standard for the one it announced in 1976? Plaintiffs argue that the procedures required are the public notice and comment provisions of the APA.
The SEC offers four arguments for dismissing plaintiffs' complaint and entering summary judgment in favor of the SEC.
First, the SEC argues that plaintiffs are seeking review of its determination not to commence an enforcement action against Cracker Barrel, which is a determination that is not subject to judicial review. Second, the SEC claims that plaintiffs have an adequate alternative legal remedy in court in the form of a suit directly against a corporation that refuses to include their proposal, and that the existence of such an alternative remedy precludes a cause of action under the APA. Third, the SEC argues that even if its actions are reviewable, the position embodied in Cracker Barrel is an interpretive, rather than legislative, rule, and thus is not subject to the notice and comment procedures of the APA. Finally, the SEC asserts that the position expressed in Cracker Barrel is not arbitrary or capricious. Plaintiffs challenge the SEC's characterization of their claims and argue that the SEC errs in its reading of the decisions construing the APA. The court addresses the SEC's arguments in turn.
I. Availability of Judicial Review.
The SEC mischaracterizes plaintiffs' claims. Plaintiffs here do not seek an order directing the SEC to commence an enforcement action against Cracker Barrel or any other corporation to whom the SEC subsequently issued a no-action letter restating the language of Cracker Barrel. Rather, plaintiffs claim that in the course of advising Cracker Barrel that the SEC would not commence an enforcement action against it if it excluded NYCERS' proposal, the SEC announced a new rule pertaining to an entire category of shareholder proposals without first following the public notice and comment requirements imposed by the APA. As is discussed below, NYCERS' challenge to a rule making is distinguishable from the attack on an enforcement decision involved in Chaney.
As a threshold matter, in order to determine whether plaintiffs have successfully distinguished Chaney, the court must determine whether the no-action letter to Cracker Barrel announced a "rule" that could be subject to notice and comment requirements. The APA defines a "rule" as "the whole or part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy . . . ." 5 U.S.C. § 551(4). Cracker Barrel contains statements of general applicability about how the employment-related proposal at issue was viewed by the SEC and how the SEC intends to treat a broad range of similar proposals in the future. The court finds that the SEC's position as stated in Cracker Barrel is a rule within the APA's broad definition of that term. See American Postal Workers Union v. United States Postal Service, 227 U.S. App. D.C. 351, 707 F.2d 548, 558 n.8 (D.C. Cir. 1983), cert. denied, 465 U.S. 1100, 80 L. Ed. 2d 126, 104 S. Ct. 1594 (1984); Batterton v. Marshall, 208 U.S. App. D.C. 321, 648 F.2d 694, 700 (D.C. Cir. 1980).
Having concluded that the Cracker Barrel position is a rule, the court considers whether it may review the rule even though the rule was adopted in the context of an agency's determination whether to exercise its prosecutorial discretion. In determining the availability of judicial review, courts since Chaney have explicitly noted the distinction between the reviewability of an agency's decision not to take an enforcement action, and the reviewability of an agency's "pronouncement of a new statutory interpretation in an opinion explaining the nonenforcement decision. . . ." International Union, United Auto., Aerospace & Agric. Implement Workers of America v. Brock, 251 U.S. App. D.C. 239, 783 F.2d 237, 239 (D.C. Cir. 1986) ("Int'l Union"). In Int'l Union, the union filed an administrative complaint with the Department of Labor ("DOL"), alleging that Kawasaki Motor Corporation and others attempted to thwart the union's organizing drives and then failed to report the corporation's activities to the DOL as required by § 203 of the Labor-Management Reporting and Disclosure Act of 1959 ("LMRDA"). See id. at 241. In declining to prosecute Kawasaki, the DOL based its enforcement position in part on its determination that the LMRDA does not require reporting of the two practices alleged in the administrative complaint. See id. at 242-43. The Court of Appeals held that Chaney barred review of DOL's decision not to take enforcement action against Kawasaki, but that nothing in Chaney precluded review of the agency's statutory interpretation announced in its opinion explaining the enforcement decision. Id. at 245. The opinion reasoned that "when a legal challenge focuses on an announcement of a substantive statutory interpretation, courts are emphatically qualified to decide whether an agency has acted outside the bounds of reason." Id.12 The court of appeals remanded the case to the district court to consider whether the challenged statutory interpretations were arbitrary, capricious or otherwise contrary to law. See id. at 239.
The distinction recognized in Int'l Union between the enforcement decision itself and a substantive statutory interpretation propounded in the context of that decision has been relied upon by the Ninth Circuit, as well as other panels of the D.C. Circuit. See Montana Air Chapter No. 29 v. Federal Labor Relations Authority, 898 F.2d 753, 756, 758 (9th Cir. 1990) (Chaney poses no bar to judicial review of a new interpretation of the Labor-Management Relations Act announced in a decision refusing to issue unfair labor practice complaint); Edison Electric Institute v. U.S. EPA, 302 U.S. App. D.C. 60, 996 F.2d 326, 333 (D.C. Cir. 1993) (finding EPA's "Enforcement Policy Statement" reviewable because petitioners challenged EPA's interpretation of statute and its implementing regulations, and not "the manner in which the EPA has chosen to exercise its enforcement discretion"); Nat'l Wildlife Federation v. U.S. EPA, 298 U.S. App. D.C. 388, 980 F.2d 765, 772-73 (D.C. Cir. 1992) (Chaney is inapplicable because plaintiff raises a facial challenge to the EPA's statutory interpretation and does not contest a particular enforcement decision). The SEC has cited no decision that rejects the logic of Int'l Union.13 To accept the SEC's argument that the Cracker Barrel rule is shielded from judicial review because it is contained in a no-action letter would, as noted by the D.C. Circuit Court of Appeals, hand agencies "carte blanche to avoid review by announcing new interpretations of statutes only in the context of decisions not to take enforcement action." Int'l Union, 783 F.2d at 246. The court rejects the SEC's argument and concludes that the court may review the rule announced by the SEC in its Cracker Barrel no-action letter.
II. Other Adequate Remedy in Court.
The SEC also argues that plaintiffs' action against it must be dismissed because the APA requires plaintiffs to pursue an alternate remedy where one is available. The APA states that "[a] person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof." 5 U.S.C. § 702. The APA also states that "final agency action for which there is no other adequate remedy in a court [is] subject to judicial review." 5 U.S.C. § 704. From the face of the statute, in order for a cause of action against a third party to be an adequate, alternative remedy to redress an injury caused by the agency, that cause of action would have to offer the plaintiff a remedy for the injury caused by the agency.
The SEC asserts that plaintiffs' true concern is getting their proposals included in the proxy materials of those companies in which they own stock. Thus, the SEC claims, a suit against each corporation resisting inclusion of plaintiffs' proposals would provide an alternative, adequate remedy for plaintiffs' injury that bars judicial review of the SEC's action under the APA.
The SEC's argument relies on an erroneous view of the injury plaintiffs are alleging here. Plaintiffs are not complaining that Cracker Barrel omitted NYCERS' proposal in 1992 and will do so again this year. That issue was before another judge in this court
and was before the district court in Tennessee.
Rather, in this action, plaintiffs complain that they have been deprived of their right to participate in rule-making proceedings required under § 553 of the APA prior to adoption of a legislative rule affecting their interests.
For reasons stated below, the court finds that plaintiffs have no adequate alternative remedy for the claim they raise here.
Section 553 of the APA provides in relevant part that "(b) general notice of proposed rule making shall be published in the Federal Register" and "(c) . . . the agency shall give interested persons an opportunity to participate in the rule making." 5 U.S.C. §§ 553(b) - (c) (emphasis added). In enacting what is now § 553, Congress sought to promote two goals by requiring agencies to follow the notice and comment provisions. First, Congress sought "to reintroduce public participation and fairness to affected parties after governmental authority has been delegated to unrepresentative agencies." American Hospital Assn. v. Bowen, 266 U.S. App. D.C. 190, 834 F.2d 1037, 1044 (D.C. Cir. 1987) (citations and internal quotation marks omitted). Second, Congress sought "to assure that the agency will have before it the facts and information relevant to a particular administrative problem, as well as suggestions for alternative solutions." Id.; see also White v. Shalala, 7 F.3d 296, 303 (2d Cir. 1993); Alcaraz v. Block, 746 F.2d 593, 612 (9th Cir. 1984).
In Air Transport Ass'n v. DOT, 283 U.S. App. D.C. 385, 900 F.2d 369 (D.C. Cir. 1990), vacated on other grounds, 498 U.S. 1077 (1991), the D.C. Circuit aptly summarized the importance of the ...