First Circuit Strikes Down SSA Fee Rules, Forces Agency Rewrite

Marasco & Nesselbush, LLP, a Rhode Island firm that represents Social Security disability claimants, built a substantial caseload on contingency-style fee arrangements authorized under federal law. When clients win benefits, the SSA withholds a portion of past-due payments and forwards the approved fee directly to the attorney of record. That system worked until several M&N associates left the firm to take government jobs.

The SSA took the position that once a lawyer joined a federal agency, any fees tied to cases that associate had worked on were simply forfeited, even when the legal work was already complete and the fee had been earned before the attorney left. The agency also refused to pay fees directly to the law firm itself, insisting that payments could only flow to individual attorneys. The combined effect was that Marasco & Nesselbush was denied approximately $70,000 in fees it had legitimately earned.

The firm sued in federal district court, challenging both practices under the Administrative Procedure Act. After the district court dismissed most of the claims, the firm appealed. The case reached the First Circuit as No. 20-1397, with a panel consisting of Chief Judge Jeffrey R. Howard and Circuit Judges Kermit V. Lipez and O. Rogeriee Thompson.

In a July 16, 2021 opinion authored by Judge Lipez, the court agreed with Marasco & Nesselbush on the core APA claims. The panel found that the SSA's refusal to pay fees for work completed before an associate entered government service had no rational basis under federal ethics statutes and directly contradicted the statutory mandate to pay a reasonable fee. The court also found that the agency's blanket refusal to pay law firms directly, rather than individual attorneys, ignored the practical reality that firms are the actual recipients of fees paid to salaried associates. Both practices were declared arbitrary and unenforceable.

The First Circuit ordered the SSA to release the fees held in escrow, revisit previously denied fee requests for the three departing associates' work, and revise its procedures to provide a reliable mechanism for direct law firm payments. Bloomberg Law reported on the ruling the same day under the headline 'Law Firm Forces Rewrite of Social Security Attorneys' Fee Rules.' The SSA ultimately published a final rule on August 21, 2024, overhauling its claimant-representation regulations in direct response to the First Circuit's decision, citing Marasco & Nesselbush v. Collins as the basis for the changes.