piers at the same time i was chief judge so we had the opportunity to work together a great that she's highly respected highly experienced has chose been chosen by the chief justice of the united states to serve on at least two very distinguished committees that i am familiar with and we always on this court benefit greatly when we get experience district judges to sit with us and we're very pleased and appreciative they are called the first case which is the georgia department of education versus united states department of education i think your honor may please the court andrew penson for the petitioner the georgia department of education this court should vacate the secretary's decision below for two main reasons first the secretary exceeded her statutory authority by barring georgia from seeking an equable offset of a two million dollars refund demand based on a novel unclean hands theory that is precluded by the statutory language second the secretary's decision was arbitrary  because using a grantees culpability to bar across that departs from an unbroken line of twenty five years of agency president and the department failed to acknowledge much less explain that departure and its  because the l day and the secretary both failed to apply the proper determination of equable offset and indeed failed to make any factual findings with respect to the offsetting claims we think the proper course here is to vacate secretar remain and to apply the correct test for a little offset as as i read the statute it is there is a mandatory duty to do some offset when there are mitigating circumstances but the statute describes that very narrowly as when to indicate that when the recipient actually unreasonably relied on iranians written guidance from the department of education or sought guidance from the department the department just never got back to them that would be a mandatory circumstance there's nothing like that here is there so the mitigating circumstances provision and you're right judge carnes is a narrow circumstance about reasonable reliance but the actual offset concept is not situated in that provision it's actually part of the initial determination of the harm to the identifiable federal interest and it's actually a necessary part of that initial and statutory determination the harm to the federal interest by the violation is one piece but the second piece is that if the state can show that in fact part of that harm is mitigated by actually other expenditures that further the exact same purposes of the same grant the harm is actually less than what the violation itself otherwise seemed to show so that so i do think it is in fact a part of that statute and it's a part of that initial determination not the mitigating circumstances piece of it when you say the secretary failed to make factual findings you're talking about with respect to the funds ought to be offset right because the secretary did make find factual findings with respect to the misconduct and that's right judge carnes under under the the proper analysis of  offset that focuses on those offsetting expenditures and there were no factual findings made there because the secretary instead disqualified georgia from using at the last set before it ever got to that type of determination and so so again starting with the statutory argument i think it is important to reiterate that this is a although it's called equitable offset it's a doctrine that is in fact part of this initial determination of the harm that's that shown just by the logic of the situation where you have a harm to the federal interest but a harm that's not in fact as great as it could have been because the state has in fact spent its own funds to offset that harm not to offset the harm but in fact to further the federal interest the same federal interest that are at issue in the grant would you agree that as an equitable offset there is some discretion in applying it there is so equable offset there is discretion in applying it but not i think in the way that the secretary's doing it here i should know that echo lost that as the agency has applied it for twenty five years is not simply carving in the equitable doctrine of set off wholesale or or doing equity as a whole it's a very specific doctrine keyed specifically to the particular determinations of refund amounts it does not say you can bring any claim that the state has against the federal government and we'll deal with that all together it's a specific claim that when when funds have been disallowed under a particular grant program you can look at whether the state has expended its own funds to further the same purposes of that same grant program so it's a it's a narrow doctrine and not necessarily the same equitable one that brings and sort of the rest of equity with it and so that to the extent that there is discretion in applying it it's discretion that goes to looking at those those claims for acquittal offset and saying is this actually tied to the purpose of the same grant the right amount of money do you think would have been the you think you should have gotten a free ride on the entire well actually this five million dollars is misspent but based on the improper bidding process but because of the statute of limitations you are only going to be required to pay two point one million are you saying you get a free ride on the whole two point one million because somewhere else in your budget you spent two point one million dollars also judge barnes i wouldn't consider it a free ride first because both of these considerations that reduce the amount that we would be required to pay are part of the statutory scheme so th e statute of limitations is in the statute and that's that three million dollars that is passed the statute of limitations that was stipulated so certainly that's it's not one of our you saying you don't have to pay anything you don't have you're totally it's a wash you don't the question whether we pay nothing in the end is really a question for him and you want your position to be on remand zero will be your not our position on remand would be zero but we can't say here right now with only all that's been done with respect to the offsetting funds is the state has presented evidence and the department has made some arguments against it but there hasn't been a factual determination there haven't been evidentiary hearings there hasn't been a determination whether all of those funds actually meet the purpose of the grant in question so it may be in the end that the amount that the state pays back is less than that but that brings me back to the the main point which is that to the extent that the state is able to offset in the amount comes to zero that's only because the statute permits the statute does not permit the department to get back its entire refund amount based on just any violation that was the old statute  amendments the department was permitted however slight variation from grant conditions to ask for and get the entire refund amount that's what the supreme court said and that's what this court said in the fort valley state but in the with the hundred eighty eight amendments congress change that congress specifically says now the department can only get an amount that is proportionate to the extent of the harm to an identifiable federal interest and equitable offset provides that the harm to that federal interest is actually less than what the violation itself otherwise would have caused because the state actually has provided to the department at least some portion of what the department asked for when it provided the grant funds well to the identify there are several identifiable federal interest and that are listed are complying with expenditure requirements and preserving the integrity of the application requirements those interests were totally undermined by the improper process that  was would it not be within the discretion of the secretary to decide that the only way we can stop this in the future is to be pretty strict about the refund otherwise states could go through do this every time and not get caught they say will bother why look at this entry in the budget you know we spent more money that would be very little disincentive for a state to be lax as happened in those cases so the crimes i think a couple points there the secretary certainly has discretion under the statute to make an initial determination of the amount that it leaves the violations farm with federal interests the department then actually provides the state and it's through its regulations an opportunity to dispute that and say you know under proportionality or other pieces that that interest is lower the other point is that this is not a statute that is meant to punish there's no indication in the statute that this that the secretary can make a determination characterization of it as as egregious particularly compared to some of the other cases that the department has dealt with its three former employees of fourteen hundred one out of seventy grant programs and yes there were there was some ex intentional manipulation of this grant program but the program actually eat even those grant funds putting aside the i think two hundred thousand or so in expenditures that the department disallowed for other reasons those just but overall this day every now and then you have some bad apples the state's conduct was not great their conduct was certainly i think we've conceded intentional and you're not challenging the factual findings of the secretary with respect to underlying misconduct no our point is that the underlying misconduct and the fact that it was intentional right whatever language about culpability that you want to put on that conduct cannot increase the amount of harm under the statute that is keyed to the amount of the refund determination nothing in the statute is not in the identifiable federal interest or elsewhere is there any indication that the secretary has discretion to say we're going to keep this harm at this level and not let you bring in evidence that the harm was lowered based simply on culpability or the intentionality of the actors involved with respect to the president as i understand your argument the say your argument is based on what the secretary has always done meaning considering where where the funds went and whether they benefited the government program certain certain our second argument certainly is based on the fact that the secretary has always done it in this particular way is there any precedent that specifically says that the secretary cannot consider the misconduct with respect to equitable offset there's no direct president that says that what the president says is in i believe it's eight administrate of decisions all talking about ethical offset over the twenty five years until you get to the pennsylvania decision every single one of them says i could offset is is not a matter of right but it is considered and would we will give it if these two conditions are met right that it's a expenditure of non federal funds or at least not the federal funds that are part of the grant and if the expenditure furthers the same purposes as the grant there's never been any consideration even in cases where you have significant fraud like the arizona case that that that actually factors into the equitable offset determination in the arizona case the parties agreed there should be an equitable and the only question was the amount that's right although pennsylvania's characterization of arizona is totally unsupported in terms of the court looking to those as a factor but that's right i see my time is up also if the rest  good morning your honour's i'm lewis yeah and i'm here from the department of justice here today on behalf of the united states department of education your honors the georgia department of education conflates two very different standards a statutory standard for determining a measure of repayment based on the harm to the federal interest and a separate administrative standard for determining equitable offset now in explaining the distinction between those two standards i think it would be helpful if i may to briefly step through how the secretary determined the harm to the federal interest in this case the united states has a right and an obligation to control the manner in which federal grant money is spent spent in this case there is no dispute that because of the fraud of employees of the state of georgia georgia expended five point seven million dollars on sub grantees that were not qualified to receive the funding in the peer review process these  sixteen of the organizations scored lower than other organizations and a seventeenth received additional funding that it was not entitled to now the secretary found that that mis expenditure of funding frustrated a key objective of the grant program the objective being providing supplemental education experience enrichment for students at low performing schools i think it's helpful to understand why secretary made that finding when we consider the nature of the grant program subgraph and t s identify different activities for different locations for different sets of beneficiaries so in this case the state of georgia awarded sub grants to grantees that provided unauthorized services at unauthorized locations to unauthorized beneficiaries now that's way more about it than to students who weren't an underperforming school would not have been an adult so there is a dispute the department the united states department of education does not believe that the funds that were relevant here i'm sorry let me take one step back and answer more directly there may have been students who were at underperforming schools but the question is whether or not the subgraph tease identified activities which were properly part of would further the grant program just as a general matter providing any sort of enrichment to any sort of student at an underperforming school doesn't satisfy the requirements of the grant program that's exactly why there was this pure apple give me an example your worst example of a service reform that should not have been long i'm sorry your honor i don't have specific examples in mind what i can refer your honor to is the discussion of the peer review process and the fact that these were sixteen organizations that scored much lower and so were not qualified in comparison to the organizations that scored much higher by the independent peer review process now it was because funds were not expended pursuant to the grant requirements that the secretary determined that the funding here the the expenditure here undermined the integrity of the application process and undermined the accountability for the use of funds those  but one shouldn't so i apologize i understand the state's argument to be narrower than what you just described the state argues that the secretary made no finding as to offset the secretary made plenty of findings as to inappropriate expenditure of funding through sub grantees that were not qualified and there if you can't think of examples right now but you're saying if we go through the records secretary will have discussed at length the problem in the no i'm sorry your hon r i think that the secretary didn't say this program was inappropriate because what the secretary did was make a finding that is amply supported by the record and not disputed by the state that the sixteen gran awarded funding were not qualified to receive the funding so with respect your honor there was no need to go on further and examine each program program by program because there is no dispute in this case that those sixteen  organizations were not qualified to receive the funding and so made unqualified expenditures now what the state does argue is that the secretary made no finding as to whether or not that the monies the state has identified qualified as an equitable offset that is correct your honor that is correct but it's also beside the point and here's where the distinction between the statutory standard for determining the measure of harm and the administrative standard for determining equitable offset becomes critically important through a long line of decisions which were summarized in the pennsylvania case which is in an addendum to our brief the secretary has identified the equitable offset doctrine as a non statutory remedy an administrative remedy that the department applies after it makes a determination of the measure the statutory measure of damages and it undertakes an analysis considering a number of factors now one threshold requirement for any equitable off said is that the state identify funds that it spent that would be pursuant to the purposes of the federal program at issue that is improper grantees that are now to persuade on the equitable that's precisely right your honor and the state's objection here is that the secretary did not make findings as to whether the funds the state identified offset the missing expenditure of fund and that is correct the secretary did not make that finding and the reason is because the secretary determined that the state was not entitled to an equitable offset in light of other considerations  now i'd like to repeat because it's important in any consideration of equitable offset a state must establish that the monies it has identified further the purpose of the federal program so that is a necessary but not sufficient condition for receiving an equitable offset the secretary's administrative decisions show that there are other equitable considerations including the nature and the scope of the violation which go into a determination of whether or not equitable offset is appropriate now in the filings before the secretary the state of knowledge that the secretary's interpretation of the department's own administrative entitled to deference that's in our supplemental appendix at page four the secretary has interpreted the equitable offset doctrine which is an administrative doctrine as containing a number of these equitable considerations including as i said the nature and the scope and there has been no case zero cases in which the secretary has afforded an equitable offset where the scope and nature of the violation were as agreed just as here in the arizona case  which the state the georgia department of education heavily relies the violation involved two hundred fourteen thousand dollars over three years the violation here and bought five point seven million dollars in fiscal year that in the arizona case the missed scope for the nature of the misconduct was not considered with respect to the equitable offset and i write about that i think that's not entirely right your honor the department supported equitable offset but if you look in the pennsylvania decision which describe the arizona decision or if you oppose an account as i read the pennsylvania decision misconstrued arizona i don't as turning on the misconduct when in reality the parties agree that there should be enough equitable and the question was how much was properly expended and no i think that's exactly right your honor i guess i would resist the characterization of pennsylvania as miss describe because i think what pennsylvania did was explained that there was intentional misconduct that is the employees in arizona intentionally misused travel funds for improper purposes but other considerations again the equitable offset doctrine is a fact intensive determination which considers numerous factors other considerations including the fact that in that case arizona promptly acknowledged fault disciplined or fired the employees and immediately  repaid the amount said issue were sufficiently strong on the other side of the balance and as your honor alluded to the u s department of education supported offset all of those were factors supporting the application of an equitable offset but arizona does note in its analysis that the intent that the violations were intentional that was a consideration here and i would say you know right this question you agree with your opponent that before pennsylvania there was no case in which the misconduct was expressly considered as a reason not to allow the a set as to not allow the officer i think that's a fair characterization your honor i also think however in an equitable with any sort of equitable doctrine which applies principles to the facts of the case there will be new facts that arise and the department of education the united states department of education had never seen a violation as egregious as this particular one again a five point seven million dollars in one fiscal year and fraud which in which required a criminal referral as to one of the employees now i appreciate that georgia says this was only three employees out of the large program but i'm sorry it's just simply not credible to say that the conduct of the state's employees is not attributable to the state it's also quite passing odd suggestion that an equitable doctrine can't consider the fraudulent nature of the conduct of the state employees in determining whether or not equity would support an offset of the statutory harm i'd like your honour's to art the calculation that georgia didn't have  that we were discussing before i think it's perfectly fine if the court deems it appropriate to address the merits of that question we do however think that error that georgia has waived that argument because it did not press  the nature of the of the misconduct of the mis expenditure before the secretary georgia quotes in its reply brief significant portions of the administrative record mixing some of its own filings with some of the discussion of the chief administrative law judge in this case but in no case will you find any statement from georgia saying that that as an equitable matter the secretary may not consider the scope and the nature of the violation in determining that equitable offset is not appropriate now the reason i believe that the state of georgia does that is because again it's conflating the statutory standard and the administrative standard georgia says in its reply brief well we argued all the time the secretary could not take you know had to provide us an offset as a statutory matter but this is soon this argument that we're now making assumes as a given that this is an administrative doctrine as the secretary has described it repeatedly in a uniform line of cases since nineteen late one nine hundred eighty s not a statutory matter and again that's a determination an factor with respect your honor we're supposed to consider the scope and the nature are are factors that the secretary has identified from the earliest days of this doctrine the scope here was off the charts the nature here was uncontested fraud and so i really would like to emphasize that the criteria that the secretary applied our criteria that the you will find in these administrative adjudications going back and in any event the secretary's interpretation of the department's own adjudications is entitle to substantial deference thank you very much describe to us that has traditionally always having been a two part test and then noted that the new factors in pennsylvania but in considering what georgia did below you have to consider that throughout this litigation georgia was essentially at the whims of the agencies various changing positions throughout it right you have he started with this pennsylvania decision which came down right before the l j for the first time creating these new factors going through it going through a briefing  until pennsylvania for twenty five years the agency has provided just two factors is that a is it a non federal expenditure and of the expenditures the actual offset expenditures for the purpose of the original grant there was never any indication express or otherwise that the agency was considering some other factor you get to pennsylvania and pennsylvania sets out a brand new seven factor test that you will not find in any previous decision citing for decisions that do not say what pennsylvania says they say including arizona which certainly did not make any mention of other factors or the culpability of the actors and determining whether there was offset because as judge pryor pointed out in arizona the department agreed to offset there despite the intentional fraud over a period of four years where those employees in arizona worse simply taking those miscast expenditures for their own gain a situation where certainly if the department had wanted to try to impose this new factor that would be a case where you might do it and yet they didn't so this is not a case about new facts showing for the first time that the department needs to exercise some new power if you agree that the standards are regions the standard for a second argument is arbitrary and capricious because it's hard because it's a question whether the agency has departed explanation from its prior precedent in the first argument is not arbitrary capricious it's the novo because it's a statutory argument i see my time is up and for those reasons we've asked that the court vacate the decision below and