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State Division of Services For the Blind v. United States Department of Education Rehabilitation Services Administration

United States District Court, M.D. North Carolina

August 23, 2019

STATE OF NORTH CAROLINA DIVISION OF SERVICES FOR THE BLIND, Plaintiff,
v.
UNITED STATES DEPARTMENT OF EDUCATION, REHABILITATION SERVICES ADMINISTRATION, and LLOYD CHADWICK HOOKS, Defendants.

          MEMORANDUM OPINION AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE

          L. Patrick Auld, United States Magistrate Judge

         Moving pursuant to the Randolph-Sheppard Act, 20 U.S.C. §§ 107-107f (the “RSA”), and the Administrative Procedure Act, see 5 U.S.C. §§ 701-706, the State of North Carolina Division of Services for The Blind (the “Plaintiff” or “NCDSB”) seeks judicial review of an “Opinion and Award” dated September 26, 2017 (the “Arbitration Award”). (See Docket Entry 1 (the “Complaint/Petition”) at 1.)[1] In response, Lloyd Chadwick Hooks (the “Defendant”), a blind vendor under the RSA, seeks confirmation of both the Arbitration Award and a supplemental arbitration award dated January 2, 2018 (the “Supplemental Award”). (See Docket Entry 14 at 8.) For the reasons that follow, the Court should affirm in part and vacate in part the Arbitration Award and affirm the Supplemental Award as specified herein.

         BACKGROUND

         This dispute arises from the procedures used to award a vending contract at a federal rest area along Interstate 85 in Davidson County, North Carolina (the “I-85 Rest Stop”). (See Docket Entry 1-1 at 1-5 (detailing procedural background in Arbitration Award); Docket Entry 19-1 at 10-13 (summarizing same matters in Plaintiff's opening memorandum); see also Docket Entry 20 at 8 (setting forth Defendant's agreement that Plaintiff's opening memorandum adequately summarized procedural history).) Prior to the underlying arbitration, Plaintiff and Defendant “stipulated to the following facts” (A.R. 341)[2] of relevance to this proceeding:

         “[Plaintiff] is the State Licensing Agency [(the “SLA”)] responsible for administering the [RSA] and for implementing related regulations.” (Id.) “[Defendant] is a licensed operator in [Plaintiff's] Business Enterprises Program” (the “BEP”). (Id.) “Around August 2014, [BEP] operators were notified of an opening at the I-85 [Rest Stop].” (A.R. 342.) Defendant and other operators “submitted their application[s] to be considered for the I-85 [Rest Stop].” (Id.) “An interview panel comprised of Clay Pope ([BEP] Chief), Steve Noble (Location Counselor), and Ron Eller (Vice-Chair of the Elected Committee of Blind Vendors) conducted all interviews . . . .” (Id.) “As part of the established interview process, discretionary points were awarded to all interviewees.” (Id.) “Panel members Pope, Noble and Eller scored [Defendant] 8, 6, and 5 respectively on discretionary points.” (Id.) “Panel members Pope, Noble and Eller scored the prevailing candidate 8, 6, and 8 respectively on discretionary points.” (Id.)

         “[Defendant] filed a written appeal to the Operator Relations Committee [(the “ORC”)], which is a required step for an appeal in the [BEP].” (Id.) “[The ORC] entered a decision denying [Defendant's] appeal.” (Id.) Next, “the [NCDSB] Director[] entered a decision upholding the ORC's determination.” (Id.) “[Defendant] requested a Full Evidentiary hearing and one was held before [a] Hearing Officer . . . .” (A.R. 343.) “At the hearing, [Defendant] contended the established interview procedures were not followed and challenged the award of discretionary points by Mr. Eller.” (Id.) “The hearing officer . . . den[ied Defendant's] appeal.” (Id.) Thereafter, “[Defendant] filed a complaint with the United States Department of Education” (the “DOE”). (Id.)

         The DOE convened an arbitration panel to adjudicate Defendant's complaint. (A.R. 327.) Defendant “submitted transcripts of the interviews conducted by the interview panel, ORC hearing, and the transcript of the Full Evidentiary hearing to the Arbitration Panel.” (A.R. 343.) A three-person arbitration panel[3] conducted a hearing on Defendant's complaint, at which counsel for Plaintiff and Defendant appeared and Defendant testified as a witness. (See A.R. 368-70.) After the hearing, a divided panel issued the Arbitration Award.

         As relevant to this matter, the Arbitration Award found that “the SLA failed to conduct a give and take interview as a basis for awarding discretionary points [in] violat[ion of] 10A [North Carolina Administrative Code] § 63C.0204(d)(5)(F).” (A.R. 1161.) As a result, it ordered (i) that “[a]ll of the discretionary points awarded for filling the I-85 [Rest Stop] under subsection (5)(F) shall be deleted from the scoring records of all applicants;” (ii) that “[Plaintiff] shall reconstitute the original interview panel with the same members, interview all of the original eight applicants, record and transcribe all interviews as well as award points in accordance with subsection (5)(F) and its 5 5 practice;” and (iii) that “[Plaintiff] conduct the reconstituted interview within sixty (60) days following its receipt of th[e Arbitration Award].” (Id.) It further ordered (i) Plaintiff to “provide licensees with access to all relevant financial data including, but not limited to, gross sales, gross profit, costs of goods sold, overhead expenses and net profit for the I-85 [Rest Stop] in accordance with 20 U.S.C. § 107b-1;” and (ii) the DOE and Plaintiff to “set aside all regulations prohibiting or restricting licensee access to relevant financial data under 20 U.S.C. § 107b-1.” (Id.)

         Finally, the arbitration panel ordered that, “[i]n the event [Defendant] has the highest point total after points are awarded by the reconstituted interview panel, he shall be assigned the I-85 [Rest Stop] and recover compensatory damages from [Plaintiff];” and that, “[a]s the prevailing party in his section (5)(F) claim, [Defendant] shall recover attorney fees, ” in an amount to be determined after further briefing. (A.R. 1162.) The Supplemental Award subsequently directed “the SLA [to] pay [Defendant's] attorney fees, expenses and costs in the amount of $52, 965.02.” (Docket Entry 14-1 at 24.)

         DISCUSSION

         I. Relevant Standards

         Under the RSA, “[a]ny blind licensee who is dissatisfied with any action arising from the operation or administration of the vending facility program may submit to a[n SLA] a request for a full evidentiary hearing.” 20 U.S.C. § 107d-1. “If such blind licensee is dissatisfied with any action taken or decision rendered as a result of such hearing, he may file a complaint with the [DOE] who shall convene a panel to arbitrate the dispute . . . .” Id. “[T]he decision of such panel shall be final and binding on the parties except, ” id., that the decision “shall be subject to appeal and review as a final agency action for purposes of chapter 7 of such Title 5, ” 20 U.S.C. § 107d-2(a), “that is, to judicial review in accordance with the Administrative Procedure Act ([the] ‘APA'), 5 U.S.C. § 500 et seq., and, specifically, 5 U.S.C. § 706, ” Jones v. DeNotaris, 80 F.Supp.3d 588, 591 (E.D. Pa. 2015). See also Sauer v. United States Dep't of Educ., 668 F.3d 644, 650 (9th Cir. 2012) (“An arbitration decision under the [RSA] is ‘subject to appeal and review as a final agency action' under the standards set forth in the [APA].” (quoting 20 U.S.C. § 107d-2(a))); Browder v. United States Dep't of Educ., No. 99-2290, 238 F.3d 410 (table), 2000 WL 1724027, at *2 (4th Cir. Nov. 20, 2000) (“The underlying arbitration panel decision we review today is deemed a final agency action under the [APA].”).[4]

         The APA provides that, “[t]o the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.” 5 U.S.C. § 706. As relevant here, the reviewing Court shall also

hold unlawful and set aside agency action, findings, and conclusions found to be -
(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;
(B) contrary to constitutional right, power, privilege, or immunity;
(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;
(D) without observance of procedure required by law;
(E) unsupported by substantial evidence . . .; or
(F) unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court.

5 U.S.C. § 706(2). “In making [such] determinations, the [C]ourt shall review the whole record or those parts of it cited by a party, and due account shall be taken of the rule of prejudicial error.” 5 U.S.C. § 706.

         In other words, as the United States Court of Appeals for the Fourth Circuit has explained, the Court “must uphold [an RSA arbitration panel] decision if it is supported by ‘substantial evidence,' and is not ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.'” Browder, 2000 WL 1724027, at *2 (quoting 5 U.S.C. § 706(2)(A), (E)). Further, “[i]n determining whether final agency action, ” such as an RSA arbitration award, “violates [S]ection 706(2)(A) of the APA, ‘[the Court] perform[s] only the limited, albeit important, task of reviewing agency action to determine whether the agency conformed with controlling statutes, and whether the agency has committed a clear error of judgment.'” Id. (some internal quotation marks omitted) (quoting Maryland Dep't of Human Res. v. United States Dep't of Agric., 976 F.2d 1462, 1475 (4th Cir. 1992)).

         II. Sovereign Immunity Challenge

         In its first assignment of error, Plaintiff asserts that the arbitration panel erred in awarding compensatory damages to Defendant if he wins the I-85 Rest Stop after the reconvened interview, arguing that “[t]he Eleventh Amendment of the United States Constitution prohibits th[e a]rbitration [p]anel from awarding compensatory relief and bars enforcement of such awards in federal court.” (Docket Entry 1 at 9; see also id. at 8.)[5]Plaintiff makes the same contention regarding the award of attorney's fees. (See id. at 9.) In Plaintiff's view, “[t]he [a]rbitration [p]anel's decision to award attorneys' fees and compensatory damages violates the State of North Carolina's sovereign immunity.” (Docket Entry 19-1 at 16.) Conversely, Defendant maintains that, “[a]s several Circuit courts have held, the [arbitration p]anel's award of compensatory damages and attorneys' fees is enforceable because North Carolina waived its Eleventh Amendment immunity when it voluntarily agreed to be an SLA under the RSA.” (Docket Entry 20 at 9-10.)[6]

         A. RSA Background

         Congress enacted the RSA in 1936 “‘for the purpose of providing blind persons with remunerative employment, enlarging the economic opportunities of the blind, and stimulating the blind to greater efforts in striving to make themselves self-supporting.'” Delaware Dep't of Health & Soc. Servs., Div. for Visually Impaired v. United States Dep't of Educ., 772 F.2d 1123, 1125 (3d Cir. 1985) (quoting Pub. L. No. 74-732, ch. 638, 49 Stat. 1559, 1560 (1936) (codified as amended at 20 U.S.C. §§ 107-107f)). To accomplish these objectives, the RSA (as originally enacted) authorized “blind persons licensed under the provisions of this Act . . . to operate vending stands in” certain “Federal and other buildings in [each participating] State.” Id. (internal quotation marks omitted). Section 3 of the original RSA envisioned the participation of States in the program through SLAs, by providing that “[a] State commission for the blind or other State agency desiring to be designated as the agency for licensing blind persons for the operation of vending stands as provided in this Act shall, with the approval of the governor of the State, make application to the Commissioner of Education and agree” to certain specified requirements. Id. at 1125-26. “Thus, as first enacted, the [RSA] contemplated a contractual relationship between participating states and the federal government.” Id. at 1126.

         In 1954, Congress “substantially” amended the RSA. Id. As part of this amendment, Congress increased the requirements for designation as an SLA. See id. As amended, Section 3 of the RSA mandated that “‘[a] State commission for the blind or other State agency desiring to be designated as the licensing agency shall, with the approval of the chief executive of the State, make application to the Secretary and agree, '” inter alia, “‘(6) to provide to any blind licensee dissatisfied with any action arising from the operation or administration of the vending stand program an opportunity for a fair hearing.'” Id. at 1126-27 (quoting Vocational Rehabilitation Amendments of 1954, Pub. L. No. 83-565, ch. 655, 68 Stat. 663, 664).

         As the United States Court of Appeals for the Third Circuit has explained:

The 1954 amendment thus carried forward the contractual relationship feature of the original Act and added [a] requirement that the state agree that blind vendors have certain property interests in the businesses established pursuant to the [RSA]. The blind vendors became, in effect, third party beneficiaries of the agreements between the participating states and the federal government. Moreover the states applying to participate in the program undertook in [S]ection 3(6) to provide for blind licensees dissatisfied with the operation of the program “an opportunity for a fair hearing.” The 1954 amendment did not, however, specify the nature of the hearing or the relief which should be afforded as a result of such a hearing. Nevertheless, it is clear that by authorizing the federal government to contract with the states on the terms specified in [S]ection 3, Congress intended to confer legally enforceable rights on the blind beneficiaries of the program. The term “fair hearing” cannot otherwise be understood than as an expression of the intention to require participating states to provide a mechanism of dispute resolution to effectively enforce those rights. States participating in the program after 1954 are so bound. In consideration of the states' undertakings, the federal government grants to state agencies the right to license federal sites to blind vendors.

Id. at 1127.

         Twenty years later, Congress found, “[a]fter review of the operation of the blind vending stand program authorized under the [RSA], that the program has not developed, and has not been sustained, in the manner and spirit in which the Congress intended at the time of its enactment, and that, in fact, the growth of the program has been inhibited by a number of external forces.” Rehabilitation Act Amendments of 1974, Pub. L. No. 93-516, 88 Stat 1617, 1617 (all-cap font omitted). Congress further found “that at a minimum [certain] actions must be taken to insure the continued vitality and expansion of the Randolph-Sheppard Program, ” including “establish[ing] administrative and judicial procedures under which fair treatment of blind vendors, state licensing agencies, and the federal government is assured.” Id. (all-cap font omitted). To that end, Congress added arbitration provisions to “provid[e] a means by which aggrieved vendors and State agencies may obtain a final and satisfactory resolution of disputes under the RSA.” Kentucky, Educ. Cabinet, Dep't for the Blind v. United States, 424 F.3d 1222, 1226 (Fed. Cir. 2005) (internal quotation marks omitted) (observing that, “prior to the [1974] amendment[, ] blind vendors and state licensing agencies had no neutral forum in which to press claims of violations of the RSA that did not involve violations of contract rights or federal procurement provisions”).

         Accordingly, Congress revised Section 3(6) to require agreement

to provide to any blind licensee dissatisfied with any action arising from the operation or administration of the vending facility program an opportunity for a fair hearing, and to agree to submit the grievances of any blind licensee not otherwise resolved by such hearing to arbitration as provided in section 5 of this Act [20 U.S.C. § 107d-1].

Delaware Dep't of Health, 772 F.2d at 1127 (emphasis and brackets in original). In other words, Congress retained the Section 3 mandate that “states desiring to participate must ‘make application to the Secretary and agree-'” to specified requirements, “add[ing] to [S]ection (3)(6) the requirement that participating states ‘agree to submit the grievance of any blind licensee not otherwise resolved in a fair hearing to arbitration' as provided in a new section of the [RSA].” Id. at 1128 (internal brackets omitted).

         Notably, “[w]hen Congress in 1974 provided that states desiring to gain access to blind vendor locations in federal facilities must agree to submit to arbitration their disputes with blind vendors, the term arbitration had a well-recognized meaning.” Id. at 1136; see also id. (observing that, “[s]ince contract arbitration was in 1974 a legal concept with a well-settled content, there is no ambiguity in [Congress's] choice of the term”). More specifically, by 1974, “arbitrators proceeding under the authority of the [FAA] or under the authority of the Uniform Arbitration Act, as a matter of course[, ] awarded retrospective compensatory relief in appropriate cases.” Id. In addition, “awards of back pay in arbitrations under collective bargaining agreements were, by then, commonplace.” Id.

         B. Compensatory Damages Challenge

         Against this backdrop, Defendant urges the Court to find that “North Carolina waived its sovereign immunity regarding [compensatory damages] when it voluntarily agreed to be an SLA.” (Docket Entry 20 at 10.)[7] In turn, Plaintiff maintains that “the Eleventh Amendment bars compensatory damages . . . against a state in a Randolph-Sheppard Arbitration.” (Docket Entry 19-1 at 20.)[8]

         Both positions find support in appellate decisions outside the Fourth Circuit. See, e.g., Tyler v. United States Dep't of Educ. Rehab. Servs. Admin., 904 F.3d 1167, 1193 (10th Cir. 2018) (finding that SLA “has not waived its sovereign immunity to a damages award from an RSA arbitration panel” (citing as a “[b]ut see” example Delaware Dep't of Health, 772 F.2d at 1138 (finding that SLA waived sovereign immunity through RSA participation)), cert. denied sub nom. Altstatt v. Fruendt, __ U.S. __, 139 S.Ct. 1214 (2019); Sauer, 668 F.3d at 654 (explaining that in Premo v. Martin, 119 F.3d 764 (9th Cir. 1997), the court “held that the [SLA] had waived its sovereign immunity by agreeing to participate in the Randolph-Sheppard program and that the arbitration panel was authorized to award compensatory damages”); Tennessee Dep't of Human Servs. v. United States Dep't of Educ., 979 F.2d 1162, 1165-69 (6th Cir. 1992) (concluding that RSA arbitrators possessed authority to award retroactive monetary damages, but eleventh-7(...continued) Ramsey, 366 F.3d 1, 15 (1st Cir. 2004) (“A state can waive its Eleventh Amendment immunity to suit . . . by consent to or participation in a federal program for which waiver of immunity is an express condition . . . .”). amendment immunity precluded enforcement of such award in federal court); McNabb v. United States Dep't of Educ., 862 F.2d 681, 683-84 (8th Cir. 1988) (concluding that RSA arbitration panel could award prospective, but not retrospective, compensatory damages); see also McNabb, 862 F.2d at 685 (Lay, C.J., concurring & dissenting) (“agree[ing] with the Third Circuit's conclusion that the [E]leventh [A]mendment is not a bar to awarding compensatory relief against state agencies under the [RSA], ” but finding, instead of waiver, that Congress “abrogate[d] sovereign immunity of the participating states” under the RSA).

         Plaintiff and Defendant agree that the Fourth Circuit has not yet determined whether eleventh-amendment immunity precludes compensatory damages awards against an SLA in RSA proceedings. (See Docket Entry 19-1 at 18; Docket Entry 20 at 11.) However, in an unpublished decision twenty-nine years ago, the Fourth Circuit briefly addressed the applicability of the Eleventh Amendment to compensatory damages awards in the RSA context. See Morris v. Maryland, No. 89-1013, 908 F.2d 967 (table), 1990 WL 101396, at *6 (4th Cir. July 11, 1990).[9] There, blind vendors sued under the RSA for, inter alia, the State's alleged improper collection of set-aside charges. See id. at *1. The district court dismissed the vendors' suit for failure to exhaust administrative remedies. See id. On appeal, the vendors argued, in part, that “an administrative proceeding would have caused irreparable injury, ” id. at *2, on the theory that, “if the[ vendors] exhaust their administrative remedies, they would be required to pay [the] set-aside in the interim, but upon a later victory, recovery of the charges would be precluded by the State's eleventh amendment immunity, ” id. at *6.

         The Fourth Circuit disposed of that argument as follows:

But the set-aside currently being collected has now been approved by the Secretary; thus, it seems unlikely that the amount is being collected in violation of the [RSA]. The real issue in the merits of their case is whether the State properly collected set-aside prior to the Secretary's approval - any irreparable injury in that regard has already occurred.
It is also doubtful whether eleventh amendment immunity would be available to the State if the vendors do eventually file for a review of the administrative proceedings. See Delaware Dep't of Health . . ., 772 F.2d [at] 1136-37 . . . (eleventh amendment does not bar recovery from state pursuant to Randolph-Sheppard because the [RSA] requires the states to submit to arbitration, where damages are commonplace; hence, relationship is essentially contractual); Committee of Blind Vendors [v. District of Columbia], 695 F.Supp. [1234, ] 1240-41 [(D.D.C. 1988)] (agreeing with the Third Circuit's analysis on the issue). We, therefore, do not consider it “likely” that the vendors will suffer irreparable injury as a result of the exhaustion requirement.

Morris, 1990 WL 101396, at *6.

         The Third Circuit's decision cited in Morris analyzed both the RSA arbitration panel's authority to award compensatory damages and the Eleventh Amendment's impact on such damages awards. As to the first issue, the Third Circuit concluded that, in light of the well-recognized practice of awarding compensatory damages in arbitration proceedings when Congress added the arbitration requirement to the RSA, the “unambiguous” statutory language, and the absence of “legislative history support[ing] any reading of the term arbitration other than the conventional one, ” RSA arbitration panels possessed authority “to award compensatory damages.” Delaware Dep't of Health, 772 F.2d at 1136-37. The Third Circuit then rejected the State's argument that the Eleventh Amendment barred such awards. See id. at 1137 (“Thus Delaware's only remaining argument in support of vacating the arbitrators' award is that the eleventh amendment somehow authorizes it to withdraw unilaterally from an arbitration agreement which it made with the United States, acting in the interest of blind vendors. That contention lacks merit.”). As to the latter issue, the Third Circuit concluded that Delaware “plainly . . . waived” eleventh-amendment immunity “when, after full notice of the [RSA's] requirements, one of which was an agreement to arbitration, it voluntarily made application with the Secretary to participate in the Randolph-Sheppard program. The waiver of sovereign immunity with respect to arbitration could hardly have been made more clearly.” Id. (citations omitted).

         Since the Morris and Delaware Department of Health decisions, however, the United States Supreme Court has clarified the standards for finding waivers of eleventh-amendment immunity. See Sossamon v. Texas, 563 U.S. 277, 284-86 (2011) (finding that States did not waive sovereign immunity as to monetary damages under statute authorizing “appropriate relief against a government”). In particular, the Supreme Court explained that “a waiver of sovereign immunity will be strictly construed, in terms of its scope, in favor of the sovereign.” Id. at 285 (internal quotation marks omitted). As such, “[w]aiver may not be implied.” Id. at 284. Moreover, “a waiver of sovereign immunity to other types of relief does not waive immunity to damages[.]” Id. at 285. Rather, “[t]he waiver of sovereign immunity must extend unambiguously to such monetary claims.” Id. (internal quotation marks omitted). Thus, “where a statute is susceptible of multiple plausible interpretations, including one preserving immunity, [a court] will not consider a State to have waived its sovereign immunity.” Id. at 287.

         As relevant here, the RSA provides:

A State agency for the blind or other State agency desiring to be designated as the licensing agency shall, with the approval of the chief executive of the State, make ...

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