## United States Court of Appeals for the Federal Circuit

06-3050

ROBERT H. LARY, JR., Petitioner,

v.

UNITED STATES POSTAL SERVICE, Respondent.

Paul F. Prentiss , Timmermier, Gross & Prentiss, of Omaha, Nebraska, argued for petitioner. Ray E. Donahue , Attorney, Law Department Civil Practice, United States Postal Service, of Washington, DC, argued for respondent. With him on the brief were Peter D. Keisler , Assistant Attorney General, Civil Divisi on, United States Depar tment of Justice, of Washington, DC, and Lori J. Dym , Chief Counsel, Law Department Civil Practice, United States Postal Service, of Washington, DC. Of counsel were David M. Cohen , Director, James D. Colt and Kathryn A. Bleecker , Attorneys, Commercial Litigation Branch, Civil Division, United States Departm ent of Justice, of Washington, DC.

Appealed from: United States Merit Systems Protection Board

## United States Court of Appeals for the Federal Circuit

06-3050

ROBERT H. LARY, JR., Petitioner,

v.

UNITED STATES POSTAL SERVICE, Respondent.

___________________________ DECIDED: December 21, 2006

___________________________ Before NEWMAN, DYK, and PROST, Circuit Judges

. DYK, Circuit Judge

. Robert H. Lary, Jr. (“Lary”) seeks review of the decision of the Merit Systems Protection Board (“Board”) in DE0752020233-C-1, denying his petition for enforcement of a prior settlement agreement with the Un ited States Postal Service (“the USPS”). Because we hold that the USPS breached t he settlement agreement by not providing needed documents in a timely fashion and that the breach was material, we vacate the Board’s decision and remand for entry of a decree of specific performance and an order of back pay and other relief consistent with this opinion.BACKGROUND Lary, a longtime employee of the USPS, suffers from Obstructive Sleep Apnea, a disorder that affects hi s breathing and thereby disrupt s his sleep, often causing excessive drowsiness. As a consequence of this disorder, Lary was frequently late for his job as a Tour 2 Window Technician at t he Benson United States Postal Station in Omaha, Nebraska. On February 6, 2002, the USPS iss ued Lary a Notice of Proposed Removal charging him with “Unacceptable Conduct—Fa ilure to Maintain a Regular Work Schedule/Tardy”. On March 4, 2002, Lary wa s removed from his position effective March 8, 2002. Pursuant to 5 U.S.C. § 8337(b), Lary had until one year after his effective termination date, or March 8, 2003, to file a disability retirement application with the Office of Personnel Management (“OPM”). On or about April 5, 2002, Lary appealed hi s removal to the Board, charging the USPS with violating the Americans with Disabilities Act of 1990, 42 U.S.C. §§ 12101- 12213 (2000), and the Family and Medical Leave Act of 1993, 29 U.S.C. §§ 2601-2654 (2000). On July 12, 2002, the parties entered into a “Stipulation and Settlement Agreement,” pursuant to which Lary agreed to withdraw with prejudice his appeal and all other claims filed, never to seek or a ccept reinstatement to the USPS, and to accept a non-disciplinary removal for medical inabili ty to perform his job duties due to sleep
apnea. The USPS made a number of return prom ises in the agreement. It agreed to vacate the March 4, 2002, Decision Letter removing Lary and the earlier Notice of Proposed Removal, and it agreed that those documents would be “removed &

06-3050 2expunged from [Lary]’s Official Personnel Fol der and all other offi cial files of the Agency.” Resp’t App. 26. The USPS also agreed to “issue a new PS Form 50 that will indicate medical inability to perform as the reason for [Lary]’s removal.” Id. C r u c i a l l y , the USPS agreed to provide Lary three doc uments “in connection with [Lary]’s application for disability retirem ent within two weeks ” of the execution of the settlement. Id. at 27 (emphasis added). T hose documents were the Supervisor’s Statement, the Agency Certification of Reassignment and Accommodation Efforts and the Disability Retirement Checklist. Under the disabili ty retirement regulations, these three documents are required “in order to det ermine whether the i ndividual meets the eligibility requirements set forth in [5 C. F.R.] § 844.103.” 5 C.F. R. § 844.203(a) (2006); see also OPM Standard Form 3112, “Documentation in Support of Disability Retirement Application” (1995), available at http://www.opm.gov/forms/html/sf.asp (requiring the forms as part of the disability retirement application process). The USPS thus agreed to provide Lary, in the documents, with the statements necessary for Lary to meet the eligibility requirements of 5 C.F. R. § 844.103, including that the applicant was being removed for m edical reasons; that accommodation efforts had been futile; that Lary’s performance was def icient; and that the deficiency in Lary’s performance was expected to continue indefinitely. See 5 C.F.R. § 844.103. The parties agreed to cooperate and communicate in good faith to implement the terms of the settlement. Pursuant to 5 C.F.R. § 1201.41(c)(2)(i) ( 2006), the Board accepted the settlement agreement into the appellate record and retained jurisdiction to enforce the terms of the agreement.

06-3050 3The USPS, as called for in the settl ement agreement, issued a new PS Form 50 indicating medical inability to perform as the reason for removal. However, it is undisputed that the USPS did not provide t he three documents in connection with Lary’s disability retirement application within two weeks of the settlement agreement, as provided for by the agreement. In fact, t he agency did not provide the three documents, completely and correctly filled out, until Ma y 13, 2003, well after the March 8, 2003, deadline for Lary’s disability retirement application, and after Lary’s counsel had contacted the USPS several times to request the documents. Ultimately the USPS itself filed Lary’s dis ability retirement application with OPM, but this was not until May 13, 2003. On August 26, 2003, OPM rejected the application by letter because it was filed more than one year from Lary’s separation on March 8, 2002. Lary did not seek review of OPM’s decision. However, on July 16, 2003, Lary filed a petition for enforcement with the Board, alleging that the USPS had breached its obligations under the settlement agreement. The Administrative Judge (“AJ”) rejected a ll of Lary’s claims. The AJ held that the USPS’s failure to provide the needed documents in a timely fashion was not material because Lary was ultimately res ponsible for prosecuting his retirement application and, under OPM regulations, he c ould have filed an incomplete application with OPM before expiration of the one-year deadline and that application would still have been timely. The AJ also rejected Lary’s claim that the USPS violated the terms of the settlement agreement when, in the new PS Form 50, the USPS referenced the first Board decision, which, in turn, had m ade reference to Lary’s being removed for

06-3050 4attendance-related reasons. The AJ reas oned that the settlement agreement did not contain language precluding the USPS from re ferencing the first Board action. Lary appealed the AJ’s decision to the full Board, and an equally divided Board affirmed. Board member Sapin dissent ed, urging that the USPS had materially breached the agreement because it had prev ented Lary from timely applying for disability retirement benefits, which was the “essential purpose” of the settlement agreement. Pet’r App. at 28. Addressing the question whether Lary unreasonably delayed in filing his application, Board member Sapin reasoned that the agency did nothing to inform Lary that he alone was responsible for making the one-year deadline and that Lary reasonably believed that the agency would file his application for him. Lary timely appealed to this court. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(9) (2000). DISCUSSION The Board’s decision must be affirmed unless it is found to be arbitrary, capricious, an abuse of discretion, or other wise not in accordance with law; obtained without procedures required by law, rule, or regulation; or unsuppor ted by substantial evidence. 5 U.S. C. § 7703(c) (2000); Yates v. Merit Sys. Prot. Bd. , 145 F.3d 1480, 1483 (Fed. Cir. 1998). “A settlement agreement is a contract, and its construction is a question of law which this court reviews de novo.” Conant v. Office of Pers. Mgmt. , 255 F.3d 1371, 1376 (Fed. Cir. 2001). The question whether a breach of a contract is material is a mixed question of law and fact. Gilbert v. Dep’t of Justice , 334 F.3d 1065, 1071 (Fed. Cir. 2003). At the same time, “[ w]here, as here, the facts are undisputed,

06-3050 5the determination of whether there has been ma terial non-compliance with the terms of a contract . . . necessarily reduces to a question of law.” Id. at 1072. I We first consider whether there wa s a material breach of the settlement agreement. That there was a breach is clear, and the gov ernment itself does not dispute this fact. The government failed to provide the three documents referenced in the agreement within the specified two-week timeframe. Thus the question becomes whether the breach was material. In determining materiality courts often look to whether the breached obligation is an important part of the contract. See Thomas v. Dep’t of Hous. and Urban Dev. , 124 F.3d 1439, 1442 (Fed. Cir. 1997) (“A breach is ma terial when it rela tes to a matter of vital importance, or goes to the essence of the contract.”) (citing 5 Arthur L. Corbin, Corbin on Contracts § 1104 (1964)). Here t he government’s failure to timely provide the three documents was central to the settl ement agreement. The agreement expressly stated that the USPS would complete t he required documents “in connection with [Lary]’s application for disability retirement.” Resp’t App. at 27. The documents were the very same ones that OPM required the USPS to complete before Lary’s application could be considered complete. See OPM Standard Form 3112, “Documentation in Support of Disability Retirement A pplication” (1995), available at http://www.opm.gov/forms/html/sf.asp (listing the forms as required). Under these circumstances it is clear that the gov ernment breached an impor tant obligation. In determining whether a breach is ma terial, we have also considered the Restatement factors:

06-3050 6In determining whether a failure to render or to offer performance is material, the following circ umstances are significant: (a) the extent to which the injur ed party will be deprived of the benefit which he reasonably expected; (b) the extent to which the in jured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party fail ing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. Restatement (Second) of Contracts, § 241 (1981); see also Hansen Bancorp, Inc. v. United States , 367 F.3d 1297, 1311-1312 (Fed. Cir. 2004). Here Lary has been deprived of the opportunity to timely file for disability retirement benefits, which he could reasonably expect from the settlement agr eement. Since the Board does not have authority to grant damages, the second factor is also not met. See Wonderly v. Dep’t of the Navy , 68 M.S.P.R. 529, 532 (1995). There is no risk that the government will suffer forfeiture, and the government is not likely to take steps to cure its failure. Finally, under the fifth factor, the government offers no just ification for failing to perform in a timely
way. The AJ nonetheless held, and the gover nment argues on appeal, that the breach was not material because, under OPM regulations, Lary could have filed an incomplete application and avoided missing the deadline. See 5 C.F.R. § 844.201(a)(3) (“An application . . . that is filed . .

. within 1 y ear after the employee’s separation, and that is incompletely executed . . . is deemed timely filed.”); see also OPM Standard Form 3112 (“OPM must receive your application not more than one year after the date you

06-3050 7separated from your position. If you are unable to get all the information requested, do
not delay submitting your Standard Form 3112A to OPM.”). We reject this conclusion for two reasons. First, the argument that Lary could have timely filed an incomplete application is relevant only to the question whether he could have mitigated damages and not to the materiality of the breach. Even the detailed Restatement factors on materi ality nowhere suggest that the nonbreaching party’s failure to take steps that could mitigate damages is relevant to determining whether the breach was material. The government has cited no authority suggesting that the failure to take mitigation steps bear s on the materiality of the breach. As the government did not make a mitigation argument below, and does not make one on appeal, we hold that the AJ erred in considering this ground. The second reason we reject the governm ent’s argument is that, even if Lary had filed an incomplete application and thus avoided missing the one-year deadline, he would still have been irreparably harmed by the government’s breach. This is because disability benefits do not begin to accrue until all application requirements have been met and the application is complete. OP M Standard Form 3112-2, at 7 (“Disability annuity benefits begin accruing on the first day after your pay as an employee stops and disability and service requirements have been met.”) (emphasis added); see also OPM Standard Form 3112 (describing the documents that the USPS agreed to provide in the settlement as required). Thus the government ’s delay here cost Lary retirement benefits which he had no way of recouping. The breach was clearly material. 1

1 Lary also argues that the USPS ma terially breached the contract by referencing the first Board action in the new PS Form 50 that it issued pursuant to the settlement agreement. Here the AJ found that the USPS did not viol ate its obligations

06-3050 8II We now consider which remedy is appropriate here. The government admits that the MSPB can order resci ssion of the agreement and rein statement of petitioner’s claim on appeal or enforce the agreement. See Wonderly , 68 M.S.P.R. at 532 (1995). “In a rescission, the parties are restored to their respective positions prior to the transaction.” Blanco v. United States , 602 F.2d 324, 327 (Ct. Cl. 1979). Here rescission is not an adequate remedy. Re scinding the settlement agreement and reinstating Lary’s appeal would not change t he fact that Lary has missed the OPM deadline, since he had only one year from his separation date of March 8, 2002, to file his application with OPM. The second remedy that the government agr ees is available in this case is enforcement of the agreement. Enforcement by specific performance is intended to have “the same effect that the performanc e due under a contract would have produced.” Restatement Second of Contracts § 357 cmt. a; see also id. at § 358(1) (“An order of specific performance .

. . will be so drawn as best to effectuate the purposes for which the contract was made.”). We hold that the appr opriate remedy in this case is specific performance. An order of specific performance does not have to order the exact performance contemplated by t he contract. The order “will be so drawn as best to effectuate the purposes for which the contra ct was made and on such terms as justice requires. It need not be absolute in form and the performance that it requires need not

under the settlement agreement because t he agreement “did not contain language precluding the agency from referencing the B oard as the authority for the removal for medical-inability-to-perform reasons.” Resp’t App. 19. In light of our holding that the USPS committed a material breach by wit hholding the documents, we need not address Lary’s alternate argument on breach, as it would not affect the result.

06-3050 9be identical with that due under the contract.” Id. § 358(1); McFarland v. Gregory , 322 F.2d 737, 739 (2d Cir. 1963) (“In framing such a decree the performanc e that it requires need not be identical with that promised in the contract.”). Rather, [t]he court should so mold its decree as best to e ffectuate the purposes for which the contract was made.” 12 Margaret N. Kniffin, Corbin on Contracts § 1137 (Joseph M. Perillo ed., rev. ed. 1993); see also Restatement (Second) of Contracts § 358 cmt. a (describing the goal of “assur[ing] the expectations of the parties”). Here, it is simply impossible to order that the documents be timely provided. Rather, in order to effectuate the purpose of the settlement agreement, which was to give Lary the opportunity to timely file for disability retirement with the full support of the USPS, the MPSB should order the USPS to take again all steps contemplated by the original agreement. Thus t he MSPB should order the USPS to vacate any and all of Lary’s prior removals, proposed removal letters and PS Form 50’s and expunge them from the records, and to issue a new lette r of decision removing Lary (effective on the date the new letter issues) and a new PS Form 50 indicating medical inability to perform as the reason for removal. It should furt her order the USPS to provide the three documents (the Supervisor’s Statement, the Agency Certification of Reassignment and Accommodation Efforts and the Disability Retire ment Checklist) within two weeks of the order of specific performance. These newly-issued documents should reference only the date of the removal enter ed pursuant to the order of specific performance, and not any earlier removals. Under OPM policy, Lary will then be able to file for disability retirement benefits within one year of the new removal entered pursuant to the decree of specific performance.

06-3050 10Since Lary’s previous removals wi ll be expunged, the agency on remand should also award Lary any back pay and other re lief that he may be due under 5 U.S.C. § 5596 (2001). See also 5 C.F.R §§ 550.801 et seq. (2006). In order to avoid a windfall to Lary, any back pay should not exceed the amount of disability payments that Lary would have received in the relevant time period if the USPS had complied with the settlement agreement. 2 See Old Stone Corp. v. United States , 450 F.3d 1360, 1378 (Fed. Cir. 2006) (“[T]he non-breaching party should not be placed in a better position through the award of damages than if there had been no breac h.”) (internal citations and quotation marks omitted). 3
CONCLUSION For the foregoing reasons, we vacate and remand to the Board for the entry of a decree of specific performance and an order of back pay and other relief consistent with this opinion. VACATED AND REMANDED COSTS No costs.

2 Of course, in the event that OPM determines, on the merits, that Lary is not entitled to disability retirement paym ents, Lary shall not be entitled to back pay.

3 The government alternatively contends that we should deny relief because Lary’s petition for enforcement was untimely, on the theory that Lary did not file within a reasonable time because he did not file prom ptly after the settlement agreement’s twoweek deadline for providing the documents had elapsed. We see no basis for holding that his petition was untimely.

06-3050 11