Labor & Employment Law Daily Wrap Up, PROCEDURE—1st Cir.: First Circuit declines to stay preliminary injunction against OMB funding freezes, (Mar 28, 2025)

By Jason Albright, J.D.

Alleged harms to the states included the obligation of new debt, impediments to planning, and disruptions to research projects by state universities.

The First Circuit has denied the Trump administration’s request to stay a preliminary injunction barring federal agencies from implementing funding freezes—which impact state governments—under executive orders that President Trump issued in his first week in office and an OMB Directive pursuant to them that was subsequently rescinded. Applying Nken v. Holder, 556 U.S. 418 (2009), the court found that the administration has not shown that it is likely to succeed on appeal in showing that there was no final agency action in the case or that the injunction reaches lawful Article II conduct, that federal agencies are irreparably injured absent a stay, that the states suffer no cognizable injury from the funding freezes, or that a stay of the injunction against them would be in the public interest (State of New York v. Trump, No. 25-1236 (1st Cir. Mar. 26, 2025)).

Funding freezes. This lawsuit challenges Office of Management and Budget (OMB) Memorandum M-25-13 (the OMB Directive), issued on January 27, 2025. It also challenges alleged funding freezes under the OMB Directive and executive orders that President Trump issued in his first week in office in 2025, to which the OMB Directive referred.

States’ lawsuit. The states filed their suit in the District of Rhode Island on January 28, 2025, naming as defendants the President, the OMB and its head, and 11 separate agencies and their heads. The complaint alleged that the OMB Directive, which the complaint asserted was “set to take effect at [5:00 PM] today but [was] actually being implemented even earlier,” was unconstitutional on various grounds. The complaint also alleged that the OMB Directive violated the Administrative Procedure Act (APA), 5 U.S.C. § 701 et seq., because it constituted final agency action that was both contrary to law and arbitrary and capricious.

Rescinded OMB directive. One day after the states filed their initial complaint, OMB rescinded the OMB Directive. Nonetheless, the operative complaint alleges that the funding freezes took place prior to that rescission and continued thereafter.

Preliminary injunction. Ultimately, the states moved for a preliminary injunction, and the federal district court in the case granted their motion on March 6, reasoning that the OMB Directive's rescission did not moot the case. The district court concluded that, under the “voluntary cessation” doctrine, the rescission “was a clear effort to moot legal challenges to the federal funding freeze” and that it was “unreasonable to conclude that the Defendants will not reinstate [the OMB Directive] absent an injunction.”

The preliminary injunction, among other things, bars federal agency defendants from “reissuing, adopting, implementing, giving effect to, or reinstating under a different name the directives in [the OMB Directive] with respect to the disbursement and transmission of appropriated federal funds to the States under awarded grants, executed contracts, or other executed financial obligations.” It also prohibits the agencies from “pausing, freezing, blocking, canceling, suspending, terminating, or otherwise impeding the disbursement of appropriated federal funds to the States….”

The federal government defendants appealed the district court's order granting the preliminary injunction on March 10, 2025. They then moved for a stay pending appeal.

Nken. Applying Nken v. Holder, the court observed that the federal government defendants must: (1) make a “strong showing that [they are] likely to succeed on the merits” in their appeal; (2) show that they “will be irreparably injured absent a stay”; (3) show that “issuance of the stay will [not] substantially injure the other parties interested in the proceeding”; and (4) show that the stay would serve “the public interest.”

Likely to succeed and final agency action? Regarding the first Nken factor, the First Circuit rejected the administration’s argument that the preliminary injunction is “unmoored from any specific agency action” under the APA. The states in the case made clear that they challenge the federal agency defendants’ “actions – following the executive orders and [OMB] Directive -- to implement categorical funding freezes without regard and contrary to legal authority.” And indeed, the record before the district court included numerous notices and emails authored by federal agency defendants that supported the finding that their funding freezes were categorical in nature, rather than being based on “individualized assessments of their statutory authorities and relevant grant terms.”

The states also attached numerous declarations describing pauses, freezes, and sudden terminations of obligated funds that suggested that these actions were taken pursuant to such categorical decisions. Here, the appeals court noted “the familiar proposition that, in reviewing the record, a court is ‘not required to exhibit a naiveté from which ordinary citizens are free.’”

Lawful Article II conduct? Nor were the defendants likely to succeed on their argument that “the preliminary injunction... operates to interfere with the President's authority to supervise federal agencies by providing policy direction in the exercise of each agency's authorities.” Here, the court clarified that the argument is not that the President has Article II authority to order a funding pause in contravention of a statutory directive precluding such a pause. Instead, the First Circuit understood the defendants’ argument to be only that the district court has interfered with the federal agencies’ ability to lawfully carry out the President's directives.

Here, as the appeals court had already noted, the stay motion did not meaningfully address the district court's findings as to the categorical funding freezes adopted by the federal agencies. The defendants thus failed to show that they have a likelihood of success in demonstrating that the injunction reaches lawful Article II conduct, and it followed that they also failed to make “a strong showing that they are likely to succeed in defending what on their own account is a necessary premise of their Article II-based argument.”

Irreparable injury. As to the second Nken factor—concerning their alleged irreparable harm absent a stay—the federal agencies argued that the preliminary injunction “interferes with agencies' ability to exercise their lawful authorities to implement the President's policy directives,” and that the preliminary injunction “undermines the President's unquestioned Article II authority to direct subordinate agencies how to exercise their own authorities, giving rise to an intolerable intrusion on the prerogatives of the Executive Branch.”

Here, however, the appeals court found that the district court's order granting the preliminary injunction does not bar all freezes in funding. “It instead enjoins the discrete final agency actions to adopt the broad, categorical freezes challenged here.” This argument, the First Circuit noted, “thus suffers from the same flaw as the Article II-based argument as to the first Nken factor, as it rests on the same undefended premise about the lawfulness of the enjoined agency actions as that argument does.”

Public interest. Concerning the public interest factor, the court observed that the defendants relied on the same arguments they advanced concerning alleged irreparable injury and thus failed to satisfy their burden here as well.

No substantial injury? Finally, as to the third Nken factor, even setting aside alleged harms to the states’ residents, the First Circuit found that the states articulated a number of harms that they themselves would irreparably suffer in the absence of a preliminary injunction. These included the obligation of new debt; the inability to pay existing debt; impediments to planning, hiring, and operations; and disruptions to research projects by state universities.

Nor did the federal defendants contend that these harms are not “substantial” or “irreparable,” except by asserting that “[the Plaintiff-States] will receive any funds that agencies are legally obligated to disburse.” Here, in the absence of supporting explanations concerning how and when the states could recoup those funds, the court found that the defendants also failed to meet their burden to show that the third Nken factor weighed in favor of a stay.

The motion for a stay pending appeal of the preliminary injunction was thus denied.

The case is No. 25-1236.

Judge: Barron, D.

Attorneys: Letitia James, Attorney General of New York, for State of New York, et al. Yaakov M. Roth, Acting Assistant Attorney General, Sara Miron Bloom, Acting U.S. Attorney, and Eric D. McArthur, Deputy Assistant Attorney General, for Donald Trump, et al.

Cases: Procedure PublicEmployees GovernmentContracts WhiteHouseNews AgencyNews