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VELAZQUEZ v. LEGAL SERVS. CORP.

December 22, 1997

CARMEN VELAZQUEZ, WEP WORKERS TOGETHER!, COMMUNITY SERVICE SOCIETY OF NEW YORK, INC., NEW YORK CITY COALITION TO END LEAD POISONING, CENTRO INDEPENDIENTE DE TRABAJADORES AGRICOLAS, INC., and GREATER NEW YORK LABOR-RELIGION COALITION, on behalf of all similarly situated individuals, organizations and their members; namely, individuals and organizations who are, or wish to be, represented by lawyers employed by entities receiving funds from the Legal Services Corporation, and who wish to assert legal claims as members of a class, or to benefit from some other legal advocacy activity proscribed by Pub. L. 104-208; FARMWORKERS LEGAL SERVICES OF NEW YORK, INC., on behalf of itself, and on behalf of all similarly situated not-for-profit legal services entities; namely, organizations who wish to be eligible to receive funds from the Legal Services Corporation, and who wish to be free to engage in legal advocacy activities that are proscribed by Pub. L. 104-208; LUCY A. BILLINGS, PEGGY EARISMAN, OLIVE KAREN STAMM, JEANETTE ZELHOF, ELISABETH BENJAMIN, JILL ANN BOSKEY, and LAUREN SHAPIRO, on behalf of each, and on behalf of all similarly situated individuals; namely, attorneys employed or formerly employed by entities receiving funds from the Legal Services Corporation who wish to be free to represent indigent individuals in class actions, and to engage in other attorney-client activities that are proscribed by Pub. L. 104-208; and ANDREW J. CONNICK, COUNCILMEMBER C. VIRGINIA FIELDS, COUNCILMEMBER GUILLERMO LINARES, COUNCILMEMBER STANLEY MICHELS, COUNCILMEMBER ADAM CLAYTON POWELL, IV, SENATOR LAWRENCE SEABROOK, and ASSEMBLYMAN SCOTT M. STRINGER, on behalf of themselves and all similarly situated individuals; namely, individuals who have provided public or private non-federal funding to entities that also receive funds from the Legal Services Corporation, and who wish these funds to be used for legal advocacy activities that are proscribed by Pub. L. 104-208, Plaintiffs, against LEGAL SERVICES CORPORATION, Defendant.


The opinion of the court was delivered by: BLOCK

 BLOCK, District Judge:

 Plaintiffs challenge the constitutionality of certain provisions of the Omnibus Consolidated Rescissions and Appropriations Act of 1996, Pub. L. No. 104-134, § 504, 110 Stat. 1321 (1996), which were re-enacted by the Omnibus Consolidated Appropriations Act of 1997, Pub. L. No. 104-208, § 502, 110 Stat. 3009 (1996) (hereinafter collectively referred to as the "Act"), as implemented by regulations which were issued subsequent to the commencement of this lawsuit. The Act prohibits attorneys and organizations that receive federal monies from defendant Legal Services Corporation ("LSC") from engaging in a large number of activities (the "prohibited activities"), such as lobbying, challenging welfare reform legislation, and participating in class action litigation. The Act also provides that such LSC-funded attorney or entity ("recipients") cannot engage in any of the prohibited activities even if funding for the prohibited activity were to come from non-federal sources. However, implementing regulations issued by the LSC after the commencement of the litigation allow recipients to engage in the prohibited activities by affiliating with legal services organizations that do not receive any federal monies from the LSC.

 Presently before the Court is plaintiffs' motion for preliminary injunctive relief pursuant to Rule 65 of the Federal Rules of Civil Procedure. *fn1" Plaintiffs contend that the Act's restrictions, as implemented by the LSC's regulations, are facially violative of the First and Fifth Amendment rights of recipients, as well as attorneys for, clients of, and donors to, those recipients. *fn2" The Court disagrees and, regarding the implementing regulations, holds that they are a permissible construction of the Act and are appropriately tailored to the Government's legitimate interests. The Court accordingly denies the motion for preliminary injunctive relief.

 BACKGROUND

 I. The Legal Services Corporation & The Statutory Restrictions

 Congress created the LSC in 1974 in response to, inter alia, the "need to provide high quality legal assistance to those who would be otherwise unable to afford adequate legal counsel and to continue the present vital legal services program." 42 U.S.C. § 2996(2). The LSC is a nonprofit corporation charged with distributing federal funds, in the form of grants, to recipients nationwide that provide legal assistance to low-income individuals. In 1995, LSC recipient organizations served approximately 1,900,000 indigent clients, encompassing over 1,700,000 matters, which benefitted almost 5,000,000 people living in poverty. *fn3" The LSC has thus been described as "the primary vehicle for insuring that the poor are included in this nation's legal system." *fn4" Recipients generally rely on both LSC funds and monies raised from a variety of public and private sources *fn5" to finance their operations.

 Despite the success of the LSC in meeting the legal needs of the poor, controversy has surrounded the LSC since its inception. This controversy has focused on the extent to which recipients should be limited in their use of LSC funds. At one end of the spectrum, critics of the LSC charge that recipients often use federal funds to advance activist agendas, and that broad limitations are necessary to ensure that LSC funds are spent to meet the basic legal needs of the poor. At the other end, opponents of such restrictions argue that activist litigation is necessary to assist impoverished individuals, and that the vast majority of LSC funds are used to help the poor in so-called "basic" legal proceedings.

 In response to this debate, Congress has repeatedly placed restrictions on the permissible uses of federal funds by recipient organizations. For example, the 1974 Act prohibited the use of LSC funds by any recipient to provide legal assistance in any case seeking to obtain a nontherapeutic abortion. 42 U.S.C. § 2996f(b)(8). The 1974 Act and implementing regulations also restricted recipients from participating in the following areas: political activity, criminal proceedings, training, school desegregation, lobbying, violations of the Military Selective Service Act, and fee-generating cases. 42 U.S.C. §§ 2996f(b)(1)-(4), (6)-(10). In 1989, the LSC extended the restrictions to include redistricting cases. 45 C.F.R. § 1632. The present dispute arises from the latest round of congressional debate and compromise, which resulted in continued funding for the LSC, but with an additional set of restrictions on recipients of LSC funds.

 Although restrictions on LSC funds have been commonplace since Congress created the LSC, the Act is unique because the restrictions apply, for the first time, to recipient activities that are supported by non-federal public funds. Previously, recipients were allowed to use non-federal funds from public sources as they pleased so long as accounting practices documented the segregation of federal and non-federal funds. *fn6" Thus, while the former statute provided that "no funds made available by [LSC] may be used" for any of the prohibited activities, 42 U.S.C. § 2996f(b), the new statute provides that "none of the funds appropriated [by the LSC] may be used to provide financial assistance to any [recipient]" that engages in any of the prohibited activities. Act § 504(a). Furthermore, the new statute states that recipients are free to "use funds received from a source other than the Legal Services Corporation to provide legal assistance . . . except that such funds may not be expended by recipients for any purpose prohibited by this Act . . . ." Act § 504(d)(2)(B).

 Plaintiffs' amended complaint challenges the constitutionality of the following prohibited activities set forth in the Act: *fn7"

 
None of the funds appropriated in this Act to the Legal Services Corporation may be used to provide financial assistance to any [recipient]:
 
(2) that attempts to influence the issuance, amendment, or revocation of any executive order, regulation, or other statement of general applicability and future effect by any Federal, State, or local agency [hereinafter "executive order provision"];
 
(3) that attempts to influence any part of any adjudicatory proceeding of any Federal, State, or local agency if such part of the proceeding is designed for the formulation or modification of any agency policy of general applicability and future effect [hereinafter "agency provision"];
 
(4) that attempts to influence the passage or defeat of any legislation, constitutional amendment, referendum, initiative, or any similar procedure of the Congress or a State or local legislative body [hereinafter "legislation provision"] [subsections (2), (3), and (4) will be referred to collectively as the "lobbying provisions"];
 
(5) that attempts to influence the conduct of oversight proceedings of the [LSC] or any person or entity receiving financial assistance provided by the Corporation [hereinafter "LSC oversight provision"];
 
(7) that initiates or participates in a class action suit [hereinafter "class action provision"];
 
(11) that provides legal assistance for or on behalf of [certain] alien[s] [hereinafter "aliens provision"]; *fn8"
 
(12) that supports or conducts a training program for the purpose of advocating a particular public policy or encouraging a political activity, a labor or antilabor activity, a boycott, picketing, a strike, or a demonstration . . . [hereinafter "training provision"];
 
(13) that claims (or whose employee claims), or collects and retains, attorneys' fees pursuant to any Federal or State law permitting or requiring the awarding of such fees [hereinafter "attorneys' fees provision"];
 
(15) that participates in any litigation on behalf of a person incarcerated in a Federal, State, or local prison [hereinafter "incarcerated client provision"];
 
(16) that initiates legal representation or participates in any other way . . . involving an effort to reform a Federal or State welfare system . . . [hereinafter "welfare reform provision"];
 
(18) unless such person or entity agrees that [it] will not accept employment resulting from in-person unsolicited advice to a nonattorney that such nonattorney should obtain counsel or take legal action . . . [.] [hereinafter "solicitation provision"] . . . .

 Act §§ 504(a)(2)-(5), (7), (11)-(13), (15)-(16), (18).

 II. Evolution of Regulations Establishing Program Integrity Requirements Governing Alternative Channels for Engaging in Prohibited Activities

 A. The Nature of the Regulations at the Time of LASH I

 
[These regulations] incorporate[] the restrictions imposed by the [Act], which apply to both a recipient's LSC funds and its non-LSC funds. Past appropriations acts have applied restrictions contained in those acts only to the funds appropriated thereunder. In contrast, the [Act] prohibits LSC from funding any recipient that engages in certain specified activities or that fails to act in a manner consistent with certain [of the Act's] requirements.

 61 Fed. Reg. 41,960, 41,960 (Aug. 13, 1996). Central to the regulations was the section providing that "[a] recipient may not use non-LSC funds for any purpose prohibited by the LSC Act or for any activity prohibited by or inconsistent with section 504 . . . ." 45 C.F.R. § 1610.3 (1996).

 On December 2, 1996, the LSC promulgated a revised set of regulations, 61 Fed. Reg. 63,749, which included a new regulation entitled "Transfers of recipient funds." It provided that when a recipient transferred any funds, whether from LSC or non-LSC sources, the prohibitions on use of the funds would continue to apply to those transferred funds. 45 C.F.R. § 1610.7 (1996). Comments accompanying the revised regulations explained that applying the restrictions to transferred non-LSC funds was necessary "because otherwise recipients would be able to avoid the conditions on their non-LSC funds by simply transferring the funds." 61 Fed. Reg. 63,749, 63,752 (1996).

 These new and revised regulations left in place a long-standing LSC regulation entitled "Interrelated Organizations," 50 Fed. Reg. 49,276, 49,279 (Nov. 29, 1985), which addressed the circumstances under which another organization would be deemed "controlled" by a recipient. The interrelated organizations regulation stated that "funds held by an organization which . . . is controlled by . . . a recipient . . . are subject to the same restrictions as if the funds were held by the recipient." Id. at 49,279-80. The regulation posited eight non-exclusive factors to be weighed to determine whether control exists. *fn9" The Act's extension of restrictions to non-LSC funds placed heightened importance on the interrelated organizations policy since non-LSC funds of any organization that was "controlled" by a recipient were subject to all of the Act's statutory restrictions.

 B. The Decision in LASH I

 This Court is not the first federal forum to pass on the constitutionality of the Act as implemented by LSC regulations. On February 14, 1997, a federal district court for the District of Hawaii issued an order granting in part and denying in part the plaintiffs' request for preliminary injunctive relief. Legal Aid Society of Hawaii, et al. v. Legal Servs. Corp., 961 F. Supp. 1402 (D. Haw. 1997) (Kay, J.) (hereinafter referred to as " LASH I ").

 In the first phase of its analysis, the LASH I court examined the "laundry list" of constitutional rights plaintiffs argued were implicated by the Act's restrictions. 961 F. Supp. 1402. The court concluded that First Amendment rights to lobby, to associate, and to meaningful court access were implicated by all but three of the challenged restrictions. Specifically, the right to lobby was implicated by the executive order provision, the agency provision, the legislation provision, and the welfare reform provision, id at 1408 (Act § 504(a)(2)-(4), (16)); *fn10" the rights of association and to meaningful court access were implicated by the training provision and the incarcerated client provision. Id. at 1409-10 (Act § 504(a)(12), (15)). *fn11"

 The LASH I court concluded, however, that the aliens, class action, and attorneys' fees provisions did not implicate constitutional rights. The aliens provision did not implicate such rights because "if Congress in its near plenary power over aliens decides that legal aid associations and their lawyers should not represent them, that decision should not be disturbed." Id. at 1410. As for the class actions provision, the LASH I court concluded that adopting plaintiffs' position would in effect constitutionalize Rule 23 of the Federal Rules of Civil Procedure, which it found "imprudent . . . absent any appellate precedent." Id. Finally, in respect to the attorneys' fees provision, the LASH I court concluded that "plaintiffs do not cite any authority that fee-shifting provisions violate Due Process or implicate the First Amendment," and that "because the provision does not implicate a suspect class, under Equal Protection the restriction need only pass rational basis which it clearly does." Id. at 1411.

 Having found that all but three of the challenged restrictions implicated constitutional rights, the LASH I court proceeded to determine whether those restrictions, as implemented by LSC regulations, "not only implicate the First Amendment but whether they also impinge the First Amendment." Id. The court's analysis of the constitutional issue focused on the regulations promulgated by the LSC rather than the restrictions, since those regulations affected the ability of recipients to engage in activities prohibited by the Act through affiliate organizations. The court stated that "the dispositive factor . . . is whether the restrictions [leave] open adequate channels for speech. . . . Therefore, the Plaintiffs' likelihood of success rests on their ability to prove that the LSC restrictions prevent the organizations and lawyers from voicing their un-subsidized opinions." Id. at 1414.

 The LASH I court examined the trilogy of leading Supreme Court cases on unconstitutional conditions -- Rust v. Sullivan, 500 U.S. 173, 114 L. Ed. 2d 233, 111 S. Ct. 1759 (1991); FCC v. League of Women Voters, 468 U.S. 364, 82 L. Ed. 2d 278, 104 S. Ct. 3106 (1984); and Regan v. Taxation with Representation, 461 U.S. 540, 76 L. Ed. 2d 129, 103 S. Ct. 1997 (1983)--and focused its analysis on a comparison between the LSC regulations and the regulations upheld by the Supreme Court in Rust. The Rust case originated from the enactment in 1970 of Title X to the Public Health Service Act, "which provides federal funding for family-planning services." 500 U.S. at 178. The regulations at issue in Rust (" Rust regulations") were promulgated in 1988 pursuant to a provision requiring that "'none of the funds appropriated under this subchapter shall be used in programs where abortion is a method of family planning.'" Id. (quoting 42 U.S.C. § 300a-6). *fn12" The Supreme Court noted "three principal conditions on the grant of federal funds for Title X projects" created by the regulations: "[(1)] a Title X project may not provide counseling concerning the use of abortion as a method of family planning . . . [(2)] a Title X project [may not] engage in activities that encourage, promote or advocate abortion as a method of family planning . . . [and (3)] Title X projects [must] be organized so that they are physically and financially separate from prohibited abortion activities." Id. at 179-80 (internal quotations omitted).

 Although the plaintiffs in Rust raised several grounds for their challenge to the Title X regulations, most pertinent to the present case is the Rust Court's disposition of the claim that the Title X regulations were impermissible "because they condition the receipt of a benefit . . . on the relinquishment of a constitutional right." Rust, 500 U.S. at 196. The Supreme Court summarized the unconstitutional conditions doctrine as follows:

 
Our "unconstitutional conditions" cases involve situations in which the Government has placed a condition on the recipient of the subsidy rather than on a particular program or service, thus effectively prohibiting the recipient from engaging in the protected conduct outside the scope of the federally funded program.

 Id. at 197. The Court upheld the regulations on Title X projects because the regulations "do not force the Title X grantee to give up abortion-related speech; they merely require that the grantee keep such activities separate and distinct from Title X activities." Id. at 196.

 The Title X regulations governing the separateness of projects engaging in restricted activities, referred to as "program integrity" requirements, mandated that to conduct prohibited abortion counseling, the grantee had to maintain separate facilities, personnel, and records for the prohibited activity. The Government defended the program integrity requirements on the grounds that "they are necessary to assure that Title X grantees apply federal funds only to federally authorized purposes ...


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