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United States Postal Service v. Postal Regulatory Commission

United States Court of Appeals, District of Columbia Circuit

April 6, 2018

United States Postal Service, Petitioner
v.
Postal Regulatory Commission, Respondent

          Argued January 5, 2018

          On Petition for Review of Orders of the Postal Regulatory Commission

          David C. Belt, Attorney, U.S. Postal Service, argued the cause and filed the briefs for petitioner. Stephan J. Boardman, Chief Counsel, entered an appearance.

          Dana Kaersvang, Attorney, U.S. Department of Justice, argued the cause for respondent. With her on the brief were Michael S. Raab, Attorney, David A. Trissell, General Counsel, Postal Regulatory Commission, and Christopher J. Laver, Deputy General Counsel.

          Before: Pillard, Circuit Judge, and Edwards and Williams, Senior Circuit Judges.

          OPINION

          PILLARD CIRCUIT JUDGE.

         The United States Postal Service proposed to discontinue its Return Receipt for Merchandise (RRM) service in 2014. RRM service offers retail and commercial mailers of merchandise the option to affix to their packages a postcard-style form for the recipient to sign, which the Postal Service then returns to the mailer as confirmation of delivery. Citing a precipitous eighty-six per cent drop in RRM service usage over the three years from 2011 to 2014, the Postal Service argued that RRM service had become outdated and inefficient in the wake of electronic delivery confirmation capacities. The Postal Regulatory Commission agreed. As required by the statute and regulations governing additions to or deletions from the lists of Postal Service products, the Commission considered a range of factors-including price effects and the interests of RRM service users-before it approved the discontinuation.

         In the same orders, however, the Commission took the unprecedented step of holding that the discontinuation of a service on the Postal Service's authorized list of market-dominant products also amounted to a rate increase subject to the statutory rate cap. Despite evidence that former RRM service customers were now more cheaply obtaining electronic signature delivery confirmation, the Commission assumed all remaining RRM customers would continue to insist on physical postcard delivery confirmation which, absent RRM service, would only be available at a higher price, ancillary to Certified Mail service. By treating the discontinuation of RRM service as a price hike subject to the rate cap, the Commission in effect conditioned dropping RRM on the Postal Service's willingness to "pay" hundreds of thousands of dollars via a rate cap application that would force the Postal Service to lower overall prices on its other ancillary services.

         The Postal Service now seeks review of the Commission's orders, arguing that they exceed the Commission's statutory authority and are arbitrary and capricious. We grant the Postal Service's petition for review and hold that the Commission lacks statutory authority to subject the wholesale discontinuation of RRM service to the rate cap applicable to rate increases.

         I.

         A.

         In 2006, Congress enacted the Postal Accountability and Enhancement Act (Act), Pub. L. 109-435, 120 Stat. 3198, to reform U.S. postal laws. In the decades leading up to the Act's passage, Congress had authorized the Postal Service to set its own postage rates, "with the goal of breaking even." See United States Postal Service v. Postal Regulatory Commission, 785 F.3d 740, 744 (D.C. Cir. 2015) (USPS I). Critics objected that, because the Postal Service exercised market power allowing it to pass on increased costs to consumers, it lacked incentives to improve its efficiency. See id. Congress responded with legislation encouraging the Postal Service to reduce costs, increase efficiency, achieve stability in rates, and empowering the Service to act with flexibility to experiment with ways to improve its appeal to customers. 39 U.S.C. § 3622(b)(1)-(9); see also S. Rep. No. 108-318, at 1 (2004). The Act also "guarantees a higher degree of transparency to ensure fair treatment of customers of the Postal Service's and those companies competing with the Postal Service's competitive products." S. Rep. No. 108-318, at 1.

         The parties here invoke two principal sections of the Act: One, Section 3642, governs the Commission's pre-approval, based on a balancing of several criteria, of changes to the composition of "the lists" of competitive and market-dominant products the Postal Service offers. 39 U.S.C. § 3642(a). The Postal Service's competitive products vie with similar products on the open market, while the Postal Service exercises substantial market power or enjoys a legal monopoly over its market-dominant products. Id. The other provision in play, Section 3622, calls on the Commission to enforce a cap on "changes in rates" of market-dominant products and services to ensure that average increases in prices of the group of products within a given classification do not exceed the rate of inflation. Id. § 3622(d)(1)(A). As the Postal Service understands it, the Act confines the Commission's review of product discontinuations to what Section 3642 commands when the Postal Service "change[s] the list[s]" of products. The Commission, for its part, asserts authority to conduct twofold review of a product discontinuation: It argues that some changes to the product lists are also tantamount to rate increases, at least to the extent that discontinuation of a product might funnel customers to a more costly alternative-a form of abuse the Commission asserts Congress authorized it to control by subjecting such product discontinuations to review under both Section 3642 and 3622.

         1. Section 3642 of the Act charges the Postal Regulatory Commission with maintaining and publishing accurate product lists in the Mail Classification Schedule, and authorizes the Commission to "change the list[s]" of market-dominant and competitive products by adding, removing, or transferring products. Id. § 3642(a). Congress fashioned the initial lists of available market-dominant and competitive products in the Act. See 39 U.S.C. §§ 3621, 3631. First-class letter mailing, for example, was characterized as a market-dominant product, while bulk parcel post was deemed competitive. Compare id. § 3621(a)(1), with id. § 3621(a)(3). In addition to letter mailing and parcel delivery, the Postal Service offers a host of ancillary services, including mechanisms for commercial and retail customers to track and verify the receipt of their missives. Ancillary services such as RRM fit within the class of "Special Services" on the Postal Service's list of market-dominant products. See Postal Regulatory Comm'n, Mail Classification Schedule Pt. A, §§ 1500, 1505.14 (2018).

         As it set the initial product lists, Congress also recognized that both supply and demand for a given product would not remain constant in a "rapidly" changing market. See S. Rep. No. 108-318, at 18. The Commission may add, remove, or transfer a listed product "[u]pon request of the Postal Service or users of the mails, or upon its own initiative." 39 U.S.C. § 3642(a). The Act invests the Postal Service with substantial flexibility to manage and innovate with its products, subject to holistic review of additions to or deletions from its lists. See Id. §§ 403(b), 3642; see also S. Rep. No. 108-13, at 18 ("The goal of increased flexibility and increased responsiveness to customers' needs requires that the Postal Service manage its product offerings."). Whenever the Postal Service seeks permission to change the menu of market-dominant products, it must publish a new list in the Federal Register that "indicate[s] how and when any previous lists . . . are superseded." 39 U.S.C. § 3642(d)(2).

         In determining whether to add, remove, or transfer a listed product, the Commission must consider its availability in the private sector, the "views of those who use the product, " and the likely impact of the change on small businesses. Id. § 3642(b)(3). Those factors are capacious, and, as the Commission recognizes, require "careful consideration, " time, and often additional information to evaluate. See Order No. 3670, Order on Price Adjustments for Special Services Products and Related Mail Classification Changes (Dec. 15, 2016), at 10-11. Regulations implementing Section 3642's list-amending authority provide that "the product lists and the Mail Classification Schedule may be modified subject to the procedures specified in this part." 39 C.F.R. § 3020.1. Those procedures include specific requirements of information the Postal Service must provide to the Commission in support of its requested changes, id. at §§ 3020.31-3020.32, and call on the Commission to post any proposed change for public comment, id. at § 3020.33; see id. § 3020.53. The Commission then must scrutinize proposed changes, together with any comments, to ensure that, among other things, the product's suggested list location (competitive or market-dominant), quality, desirability to the public, effect on small business, and its pricing comport with the Act's overall objectives of enhancing the efficiency and competitiveness of the Postal Service and preventing abuse of its market power. Id. at § 3020.32. In sum, in its Section 3642 review of changes to the menu of products the Postal Service offers, the Commission has broad authority to act in the public interest and to prevent the Postal Service from abusing its unique and powerful market position.

         2. With respect to market-dominant products, Congress separately charged the Commission with overseeing and limiting the Postal Service's annual price increases. 39 U.S.C. § 3622. Any price change for a market-dominant product requires the Commission's approval, which can be granted subject to the "rate cap, " that is, an "annual limitation on the percentage changes in rates" tied to the rate of inflation. Id. § 3622(d)(1)(A), (C); see USPS I, 785 F.3d at 744-45; United States Postal Service v. Postal Regulatory Comm'n, No. 16-1284, slip ...


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