Court Opinion

ID: 9474169
Source: CourtListenerOpinion
Date Created: 2023-08-05 04:49:47.050412+00
Date Added: 2024-06-11T17:43:56.340153
License: Public Domain

WALD, Circuit Judge,
dissenting.
The majority holds that this mundane contract dispute between a municipal agency in Chicago, Illinois, and a bus manufacturer over the bus manufacturer’s delivery in Chicago of allegedly defective buses should be resolved before a court in Chicago, not before a federal agency in Washington.1 I agree with the agency’s view *350that this result is sensible policy. But good policy is not always good law. Reluctantly, I conclude that the “White Book” is a regulation binding on the agency until revoked, and that the only reasonable interpretation of the White Book requires the agency to hold a hearing and decide this dispute. I therefore respectfully dissent.
I.
The Urban Mass Transportation Act was passed in part “to provide assistance to State and local governments and their instrumentalities in financing [mass transportation] systems, to be operated by public or private mass transportation companies as determined by local needs.” 49 U.S.C. app. § 1601(b)(3). To carry out that broad purpose, Congress authorized the Secretary of Transportation to make grants “on such terms and conditions as the Secretary may prescribe” to local governments for the development of mass transportation facilities, 49 U.S.C. app. § 1602(a)(1), and to approve or disapprove the acquisition of mass transit equipment by local governments with federal funds “on such terms and conditions as he may prescribe.” 49 U.S.C. app. § 1604(d)(1). The Secretary may also “issue such regulations as he deems necessary to administer” the urban mass transit grant program established by the statute. 49 U.S.C. app. § 1604(d)(2).
In 1977, the Urban Mass Transit Authority (UMTA), acting on behalf of the Secretary of Transportation, proposed for notice and comment a regulation directing UMTA to develop uniform technical specifications and certain other contractual provisions to be used by local governments in purchasing advanced design buses (ADBs) with UMTA grant funds. As ultimately adopted, the regulation required recipients to include terms and specifications to be developed by UMTA in federally subsidized bus purchases.
Acting under the authority conferred by this regulation, UMTA developed the “White Book,” a list of contractual provisions, technical specifications, quality control provisions, and warranties that were mandatory in UMTA-subsidized purchases of ADBs. Among the provisions that the White Book required local governments to include in subsidized bus purchase agreements was a clause titled “Disputes.” That clause read:
2.17 DISPUTES
Except as otherwise provided in this contract, any dispute concerning a question of fact arising under this contract which is not disposed of by agreement shall be decided by the Contracting Officer, who shall reduce his decision to writing and mail or otherwise furnish a copy thereof to the Contractor. The decision of the Contracting Officer shall be final and conclusive unless within 30 days from the date of receipt of such copy, the Contractor mails or otherwise furnishes to UMTA a written appeal. The decision of UMTA’s duly authorized representative for the determination of such appeals shall be final and conclusive unless determined by a court of competent jurisdiction to have been fraudulent, or capricious, or arbitrary, or so grossly erroneous as necessarily to imply bad faith, or not supported by substantial evidence. In connection with any appeal proceeding under this clause, the Contractor shall be afforded an opportunity to be heard and to offer evidence in support of its appeal. Pending final decision of a dispute hereunder, the Contractor shall proceed diligently with the performance of the contract and in accordance with the Contracting Officer’s decision.
This clause does not preclude consideration of law questions in connection with decisions provided for in this clause, provided that nothing in this contract shall be construed as making final the decision of any administrative official, representative, or board on a question of law.
Baseline Advanced Design Transit Coach Specifications at 1-27 to 1-28, J.A. at 351— 52.
*351In Batterton v. Marshall, 648 F.2d 694 (D.C.Cir.1980), this court explained the general distinction between agency rules and non-binding agency action:
“[L]egislative” or “substantive” rules can be issued only if Congress has delegated to the agency the power to promulgate binding regulations in the relevant area. Legislative rules thus implement congressional intent; they effectuate statutory purposes. In so doing, they grant rights, impose obligations, or produce other significant effects on private interests. They also narrowly constrict the discretion of agency officials by largely determining the issue addressed. Finally, legislative rules have substantive legal effect____
Non-binding action, in contrast, merely expresses an agency’s interpretation, policy, or internal practice or procedure. Such actions or statements are not determinative of issues or rights addressed. They express the agency’s intended course of action, its tentative view of the meaning of a particular statutory term, or internal house-keeping measures organizing agency activities. They do not, however, foreclose alternate courses of action or conclusively affect rights of private parties. Although an agency empowered to enact legislative rules may choose to issue non-legislative statements, an agency without legislative rulemaking authority may issue only non-binding statements. Unlike legislative rules, non-binding agency statements carry no more weight on judicial review than their inherent persuasiveness commands.
Id. at 701-02 (footnotes omitted); see also Columbia Broadcasting System, Inc. v. United States, 316 U.S. 407, 62 S.Ct. 1194, 86 L.Ed.2d 1563 (1942). Under this standard, it is plain that the White Book, as well as the UMTA regulation requiring grant recipients to use White Book specifications in federally subsidized ADB purchases, qualifies as a binding regulation. The Urban Mass Transportation Act clearly delegates legislative rulemaking authority to the Secretary of Transportation, which he explicitly invoked both in promulgating the regulation requiring the use of certain uniform specifications and terms in ADB purchases, and in setting out those specifications and terms in the White Book.2 The White Book established mandatory and binding conditions on grant recipients, which were plainly intended to have the force of law. UMTA must therefore obey its terms.
II.
I turn next to the crux of this case. UMTA has decided that under the Disputes Clause, it need not determine the merits of disputes between grant recipients and their contractors de novo unless, in the agency’s view, some interest of the federal government is at stake. The majority devotes only a single, conclusory sentence to this central question: it declares that “[a]s we read the Disputes Clause, it is entirely consistent with the language of the clause for UMTA not to afford a full-blown arbitral forum for a garden-variety, non-federal dispute.” Maj.Op. at 345. However, the Disputes Clause has a much longer history in the law than the White Book. For many years before the White Book was promulgated, the clause had been used in con*352tracts between federal agencies and their contractors. In that context, the clause was universally understood to require that agencies give independent consideration to a contractor’s claims. I believe that the language of the clause, particularly when read against the acknowledged meaning of the clause in federal procurement contracts, compels us to hold UMTA’s interpretation of the Disputes Clause unreasonable and therefore unlawful.
A
When the White Book was first proposed, UMTA tentatively settled on use of the standard Disputes Clause in contracts between federal agencies and their contractors.3 Some bus manufacturers then commented that the Disputes Clause gave them too little protection; in particular, the manufacturers objected that reviewing courts should be able to set aside UMTA determinations if “ ‘erroneous,’ ” rather than only if “ ‘so grossly erroneous as necessarily to imply bad faith.’ ” See Statement of Rationale for UMTA Response to Manufacturer Comments and Requests on April 4, 1977 Issue of ADB Specifications at 4, J.A. at 356. UMTA replied that the Disputes Clause “is based on procedures for handling disputes in Federal Government contracts, and does provide to the Contractor the protection being sought.” Id. (emphasis added). UMTA’s reply was plainly a reference to the substantial body of law interpreting the Disputes Clause in federal procurement contracts; under those cases, the courts have given considerable protection to government contractors by, for example, steadfastly enforcing the separate provision in the clause that reserves questions of law to determination by the court. UMTA reassured the bus manufacturers by noting, in effect, that established procedures for the enforcement of the Disputes Clause in government procurement contracts would carry over to enforcement of the clause in contracts between federal grantees and their contractors.
Thus, UMTA interpreted the Disputes Clause at the time it was issued to incorporate the extensive law governing the meaning of the very same words in government procurement contracts. That interpretation is entitled to considerable weight here. Even more important, however, that interpretation reinforces the clear implications of UMTA’s deliberate decision to require, word-for-word, the use in ADB contracts of a clause with so settled a history of judicial interpretation. The text of the clause is virtually a term of art writ large in government procurement law; every phrase has been carefully parsed, and scores of judicial and administrative decisions have been issued explaining exactly what these phrases mean. In these circumstances, the message in UMTA’s decision to require use of the very same text in ADB purchase contracts is absolutely clear: the law governing the Disputes Clause in the White Book is the firmly established law interpreting the clause in procurement contracts. The majority comments that UMTA’s interpretation of the Disputes Clause is entitled to great deference. See Maj.Op. at 347 n. 7. But that claim is a little like the argument that because the phrase “joint tenancy” has no plain meaning on its face, an agency should be entitled to interpret it, long after it was employed in a regulation, as really meaning “tenancy in common.” The fact is that the basic meaning of the Disputes Clause was settled in the law long before UMTA promulgated the White Book. By adopting this clause, UMTA must be understood to have adopted the meaning its words had long been given in the law.
Under that accepted meaning, there is no question but that UMTA was required to hold a hearing before deciding the dispute between the Chicago Rapid Transit Authority (CRTA) and Grumman Ohio Corpora*353tion. In 1969, for example, the Court of Claims stated that:
The “Disputes” article under which these Board decisions were rendered, does not countenance a rubber-stamping of the contracting officer’s decision. Under the “Disputes” article, his decision enjoys no presumptive validity whatever. It is vacated by the appeal to the [agency]. The latter then owes the contractor a de novo hearing and a de novo decision based on the applicable law, the contract terms, and a preponderance of the evidence. The Board cannot abdicate that responsibility by applying Wunderlich Act-type tests to the contracting officer’s decision. Those tests are reserved for a court engaged in any subsequent judicial review of a Board decision.
Southwest Welding & Mfg. Co. v. United States, 413 F.2d 1167, 1184-85 (Ct.Cl.1969) (footnote omitted).4 There are many cases in accord, including a substantial number decided before UMTA issued the White Book. See, e.g., Schnip Building Co. v. United States, 645 F.2d 950, 960 (Ct.Cl.1981); Lykes Bros. S.S. Co. v. United States, 459 F.2d 1393, 1403 (Ct.C1.1972). These cases cannot be meaningfully distinguished on the ground that they concern agreements between federal agencies and their contractors, rather than an agreement between the recipient of a federal grant and its contractor. The essential point is that UMTA deliberately took language with an unquestioned meaning in procurement contracts, transposed precisely that language into grant recipient contracts, and reassured worried bus manufacturers at the time of promulgation that the procedures accompanying use of the clause in procurement contracts would govern the relationship between grant recipients and bus manufacturers. UMTA cannot now be allowed to say that in making these explicit and implicit representations, it was only fooling.
B
In my judgment, the text of the Disputes Clause further weakens UMTA’s position. The clause first requires that “any dispute concerning a question of fact arising under this contract which is not disposed of by agreement” be submitted to the contracting officer, who is always employed by the federal procurement agency or grant recipient and is therefore an interested party. The contractor — here, Grumman — may then appeal the decision of the Contracting Officer to UMTA, which must afford the contractor “an opportunity to be heard and to offer evidence.” UMTA’s decision, in turn, may be reviewed in court only to determine whether it was “fraudulent, or capricious, or arbitrary, or so grossly erroneous as necessarily to imply bad faith, or not supported by substantial evidence” or incorrectly decided a “question of law.”
UMTA’s “interpretation” of the clause creates a completely different scheme. Under it, UMTA first separates issues raised by a contractor’s appeal into those “primarily local in nature” and those “primarily Federal in nature.” For local issues, UMTA will determine only whether the contracting officer’s decision was “reasonable”; for federal issues, UMTA will reconsider the decision de novo.5 Letter from Arthur E. Teele, Jr., to William K. Sweeney at 3 (Mar. 30, 1983), J.A. at 79. UMTA’s new scheme therefore denies the contractor an administrative decision by an unbiased tribunal on local issues. The text of the clause allows only very narrow judi*354cial review of all UMTA decisions on grievances presented by a contractor. But if this limitation on judicial review were enforced with respect to UMTA decisions on local issues, the contractor would be entirely deprived of any unbiased de novo consideration of its claims. Cf. Grumman Aerospace Corp. v. United States, 579 F.2d 586, 592 (Ct.C1.1978) (de novo proceeding before board of contract appeals or court “is the first in which the contractor is afforded due process”). Even UMTA does not urge this extreme result; instead, UMTA apparently suggests that courts, despite the express language of the Disputes Clause, should evaluate de novo UMTA decisions on matters UMTA found to be local.
Thus, UMTA first invented two completely different levels of review — a distinction that has no basis at all in the language of the clause. UMTA then decided that for local issues, the contractor would receive only deferential appellate review of an ex parte decision by a biased party before the tribunal with an obligation to afford the contractor “an opportunity to be heard and to offer evidence”; and that the contractor would later receive de novo review of its grievance before a judicial tribunal supposedly limited to deferential appellate review of the agency decision.6 I cannot accept this unrestrained rewriting of the Disputes Clause under the guise of interpretation.
III.
There is no doubt that an agency is bound by its legislative regulations until they are altered or revoked. In this case, UMTA has in fact altered its regulations: recipients of UMTA grants for the purchase of ADBs are no longer required to use White Book specifications, although they may do so if they wish. See 47 Fed. Reg. 44,457 (1982); 46 Fed.Reg. 49,038 (1981). In abolishing mandatory use of the White Book, UMTA did not state whether it intended to affect the future resolution of disputes under contracts signed when the use of White Book specifications was mandatory for the recipients of UMTA grants. In any event, UMTA did not decide this dispute based on any theory that it has changed its regulations. Its claim from the start has been that the White Book “was never intended to apply to issues relating to performance or damages arising out of post-delivery problems.” Letter from Arthur E. Teele, Jr., to William K. Sweeney at 2 (Mar. 30, 1983), J.A. at 78A. Because we may uphold the agency’s decisions only on the rationale it set forth, I consider only whether the agency’s interpretation of its regulation is reasonable. I express no view on any authority the agency may have to alter its regulation as applied to disputes arising under contracts signed when the use of the White Book in UMTA-subsidized purchases of ADBs was mandatory.
Conclusion
I close where I began, with an expression of sympathy for UMTA’s efforts to prevent local contract fights between municipalities and private corporations from becoming enmeshed in federal administrative machinery far from the place of the dispute. But when UMTA promulgated the White Book, it failed to recognize the reasons supporting local resolution of local controversies in the text of the Disputes Clause. UMTA’s decision was based only on an interpretation of the unaltered text of the Disputes Clause, and in my view that interpretation *355was plainly unreasonable. I would reverse the judgment of the district court, and remand the case to the district court with instructions to set aside the decision of the agency and to direct the agency to conduct further proceedings consistent with this opinion.

. I agree that this case arises under federal law and that we therefore have jurisdiction under 28 U.S.C. § 1331, although for slightly different reasons than those stated by the majority. The majority suggests that federal common law governs, primarily because the basic claim of the plaintiff, Grumman Ohio Corporation (Grumman), turns on "'equitable rights generated by [the agency’s] course of activities pursuant to federal statutes, including the contracts it has sponsored, and prescribed for others, as a condition of federal aid.' ’’ Maj.Op. at 344 (quoting Trans-Bay Engineers & Builders, Inc. v. Hills, 551 F.2d 370, 377 (D.C.Cir.1976)). But in this case, unlike Trans-Bay, a putative federal regulation rather than equitable rights created by a federal agency is directly at stake. Grumman’s basic claim is that the Disputes Clause is a federal regulation; that under the Disputes Clause the agency obligated itself to provide Grumman with a full adjudicatory hearing on its complaint against the Chicago Rapid Transit Authority; and that Grumman is “aggrieved” within the meaning of the Administrative Procedure Act by reason of the agency’s failure to follow its own regulation. As UMTA’s cause of action derives from the Administrative Procedure Act and the substantive rule of decision is provided *350by a putative federal regulation, Grumman’s action plainly arises under federal law.

. The White Book, unlike the regulation requiring the use of White Book specifications in UMTA-subsidized ADB purchases, was not formally proposed for notice and comment by publication in the Federal Register. The White Book was, however, developed only after informal consultations with bus manufacturers and others; and because regulations concerning government grants and contracts are not subject to the notice and comment provisions of the Administrative Procedure Act, see 5 U.S.C. § 553(a)(2), the agency’s decision not to conduct a full-scale notice and comment proceeding in promulgating the White Book does not suggest that the White Book is not a regulation.
The majority never quite decides whether the White Book is a regulation, although its statement that no "formally promulgated regulations” require UMTA to provide an arbitral forum apparently gives some weight to UMTA’s decision not to propose the White Book for notice and comment. For the reasons stated above, that fact is not entitled to weight here.

. UMTA considered alternative versions of the Disputes Clause in connection with a separate rulemaking dealing with specifications for a different line of buses. See Transbus Procurement Requirements at 1-20 (1976), J.A. at 269. However, the rationale quoted in the text was the one UMTA supplied for including the Disputes Clause in the White Book.

. The Wunderlich Act, ch. 199, 68 Stat. 81 (1954) (codified at 41 U.S.C. §§ 321-322), provides for judicial review of certain administrative decisions in contracts disputes to which the United States is a party to determine only if the decision "is fradulent [sic] or capricious or arbitrary or so grossly erroneous as necessarily to imply bad faith, or is not supported by substantial evidence," id. § 1, or if the decision is erroneous on “a question of law,” id. § 2. The Disputes Clause provides that these same standards are to govern judicial review of administrative decisions under the clause. See supra at p. 340.

. UMTA argues strenuously that the Disputes Clause should not be enforced against it because it is not equipped to provide the full adjudicatory hearing Grumman has requested, but UMTA’s willingness to decide federal issues de novo casts considerable doubt on its argument.

. The majority finds support for UMTA’s position in a separate provision of the contract between UMTA and CRTA, titled “No Government Obligations to Third Parties." See Maj.Op. at 346. This paragraph does not appear in the White Book, although a somewhat similar statement appears in a document called the "External Operating Manual,” which is cited in the White Book. See id. at 346. But as the majority acknowledges, these statements are simply general denials that the government has any obligations or liabilities to those who contract with the recipients of federal grants. See id. at 346. They are most naturally read to mean that the federal government has no derivative liability for the contractual and legal duties of the grant recipient. In my judgment, these highly general statements cannot reasonably be read to modify the federal government’s independently assumed and specifically described responsibilities under the Disputes Clause.