United States Court of Appeals
For the First Circuit
No. 11-2241
MUNICIPALITY OF MAYAGÜEZ,
Plaintiff, Appellant,
v.
CORPORACIÓN PARA EL DESARROLLO DEL OESTE, INC.,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jay A. Garcia-Gregory, U.S. District Judge]
Before
Lynch, Chief Judge,
Selya and Lipez, Circuit Judges.
Nicolás Nogueras-Cartagena, with whom Jely Cedeño Richiez and
Nogueras Law & Associates were on brief, for appellant.
Bámily López Ortiz for appellee.
August 7, 2013
Lipez, Circuit Judge. This lengthy and heated dispute
involves a contract executed nearly thirty years ago by the
Municipality of Mayagüez and a local development corporation,
Corporación Para el Desarrollo del Oeste ("CPDO"). After many
years of deteriorating relations between the two parties, Mayagüez
filed the instant suit, alleging that CPDO's failure to comply with
several regulations issued by the Department of Housing and Urban
Development ("HUD") amounted to a breach of their contract under
the laws of Puerto Rico.
After review, we conclude that Mayagüez's commonwealth law
claim does not "arise under" federal law within the meaning of 28
U.S.C. § 1331. Therefore, we decline to reach the merits of
plaintiff's appeal, vacate the judgment below, and remand to the
district court with instructions that the plaintiff's claim be
dismissed without prejudice for want of subject matter
jurisdiction.
I.
A. Facts
To determine whether subject matter jurisdiction exists, we
take the following well-pleaded facts from the complaint. See
Pejepscot Indus. Park, Inc. v. Me. Cent. R.R. Co., 215 F.3d 195,
197 (1st Cir. 2000); see also Franchise Tax Bd. v. Constr. Laborers
Vacation Trust, 463 U.S. 1, 10-11 (1983) (discussing the well-
pleaded complaint rule and noting that "a defendant may not remove
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a case to federal court unless the plaintiff's complaint
establishes that the case 'arises under' federal law"); Bernhard v.
Whitney Nat'l Bank, 523 F.3d 546, 551 (5th Cir. 2008) (noting that
it is a "long-established axiom" that "a federal court has original
or removal jurisdiction only if a federal question appears on the
face of the plaintiff's well-pleaded complaint").
In the early 1980s, Mayagüez purchased several parcels of land
with money it had received as part of a Community Development Block
Grant ("CDBG") administered by HUD.1 Mayagüez and CPDO then
executed an instrument known as "Deed 91," under which Mayaguez
ceded the parcels to CPDO with the understanding that the land
would be used for a project called "Villa Sultanita," to be
developed in accordance with HUD's CDBG program guidelines and
regulations.
Deed 91 states in relevant part2:
SEVENTH: The Transferee Corporation . . . meets the
requirements of section Five Hundred Seventy point two,
zero, four (24 C.F.R. 570.204) of the Act known as the
Housing and Community Development Act of nineteen
seventy-four,
. . . .
NINTH: It is an indispensable condition for the
1
The CDBG program was a grant program created and authorized
by Congress as part of the Housing and Community Development Act of
1974, 42 U.S.C. § 5301.
2
Deed 91 was written in Spanish. All references in this
opinion to Deed 91 are references to the certified English
translation provided by the parties.
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transfer herein that the Transferee use the transferred
property solely and exclusively for the construction and
sale of housing, commercial areas, and any other
infrastructure needed. Said project shall be known as
"VILLA SULTANITA," shall have a public purpose, and shall
comply at all times with applicable state and federal
laws, rules, and regulations. Said activity shall be
carried out by the non-profit transferee. The parties
also agree that THE TRANSFEROR . . . may unilaterally,
and at its sole discretion require the following from the
transferee:
. . . .
B) The return of the transferred property if the
transferor determines that it will not be used, or has
not been used, for the specific purposes for which the
transfer has been made;
. . . .
TENTH: The Transferee will diligently and
scrupulously make sure that the "Villa Sultanita Project"
is carried out as per applicable state and federal laws,
. . . .
Development of Villa Sultanita proceeded amicably enough for
several years, until a new mayor of Mayagüez was elected in 1993.
The new administration and CPDO were immediately at odds, and the
relationship between the parties rapidly deteriorated, with each
accusing the other of obstructing progress on the Villa Sultanita
project. CPDO eventually sued Mayagüez in the commonwealth courts
in October 1995. Mayagüez counter-sued. That litigation lasted
for nearly a decade, until both parties agreed to dismiss their
claims in 2004.
At the same time as the relationship between the parties
imploded, HUD's Office of the Inspector General became concerned
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that federal money was being mismanaged in Mayagüez. In 1997, HUD
conducted an independent audit of Mayagüez's CDBG block grant
administration, revealing that millions of dollars in CDBG block
grant funds had been misused in Mayagüez.
The CDBG program's authorizing statute and regulations allow
HUD to demand reimbursement from the grant recipient regardless of
whether a sub-recipient, such as CPDO, was actually responsible for
the mismanagement. See 42 U.S.C. § 5311; 24 C.F.R. § 570.910.
Exercising this authority, HUD demanded that Mayagüez repay
approximately $4 million in misused CDBG funds and barred the city
from receiving further HUD development grants. Mayagüez repaid HUD
and then filed the instant complaint in 2006, seeking compensation
and damages from CPDO.3
In the complaint, Mayagüez alleged that CPDO was actually
responsible for the mismanagement of the Villa Sultanita
development uncovered in the Inspector General's audit. According
to Mayagüez's theory of the case, in violating several HUD
regulations, CPDO breached its promise in Deed 91 that the
3
Though not explained in the complaint, evidence at trial
revealed that in late 2004, Mayagüez's "repayment" agreement with
HUD allowed Mayagüez to resolve the audit findings by "developing
other projects paid for with local municipal funds that met CDBG
criteria," rather than repaying HUD directly with municipal funds.
Mun. of Mayagüez v. Corporación Para el Desarrollo del Oeste, 824
F. Supp. 2d 289, 293 (D.P.R. 2011). By the time HUD eventually
closed its audit in November 2009, Mayagüez had expended "roughly
$4,000,000" on municipal projects as "repayment" to HUD. Id. at
294.
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development of Villa Sultanita would "comply at all times with
applicable state and federal laws." Specifically, Mayagüez alleged
that CPDO's management of Villa Sultanita violated several HUD
regulations by: 1) failing to keep adequate accounting and auditing
systems in place as required by 24 C.F.R. §§ 84.21, .52; 2) using
funds for purposes other than those authorized under 24 C.F.R. §
570.309; 3) failing to comply with bid and competition requirements
under 24 C.F.R. § 84.44; and 4) failing to comply with procurement
requirements under 24 C.F.R. § 84.44.4
B. District Court Proceedings
From the outset of this case, there were serious concerns
about the existence of federal jurisdiction. Early in the
proceedings, CPDO filed a motion under Federal Rule of Civil
Procedure 12(b)(1) alleging that Mayagüez had failed to state a
claim arising under the laws of the United States to establish
federal jurisdiction under 28 U.S.C. § 1331. The district court
referred the matter to a magistrate judge, who concluded that
federal-question jurisdiction in this case was proper under our
decision in Municipality of San Juan v. Corporación Para El Fomento
Económico de la Ciudad Capital, 415 F.3d 145 (1st Cir. 2005)
("COFECC"), a factually similar case concerning a dispute between
4
Mayagüez also brought claims against CPDO under the
Autonomous Municipalities Act of Puerto Rico, 21 L.P.R.A. § 4001.
These Commonwealth law claims are not relevant to the question of
federal jurisdiction. We do not address them.
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a municipality and a local development corporation over the misuse
of HUD grants.
The district court accepted the magistrate judge's
recommendation, and acrimonious pre-trial proceedings continued for
several years, culminating in a week-long bench trial in 2010.
CPDO argued at trial that it had not violated the terms of Deed 91
because it had always managed the Villa Sultanita project in line
with HUD guidelines, and any adverse findings in the HUD audit were
actually the result of Mayagüez's refusal to communicate in any
form with CPDO. According to CPDO, HUD gave Mayagüez the
opportunity to "sanitize" the audit findings if the city could
provide information indicating that the grant money had been spent
in compliance with the CDBG program purposes and guidelines. CPDO
claimed that it could have provided this information to HUD, but
was prevented from doing so by the mayor of Mayagüez. Indeed, CPDO
argued that the mayor's antipathy for CPDO was so great that he
chose to repay nearly $4,000,000 in funds rather than work
cooperatively with CPDO.
In addition to its arguments on the merits, CPDO again moved
to dismiss at trial for lack of subject matter jurisdiction. CPDO
offered evidence that in the years since Mayagüez filed its
complaint, HUD had administratively closed its audit against
Mayagüez. According to CPDO, once the HUD investigation against
Mayagüez was closed and could no longer be challenged, no federal
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issue remained. The district court disagreed, concluding that
Mayagüez's agreement to repay HUD did not resolve the question of
whether CPDO had breached its responsibilities as a sub-grantee,
which were memorialized in Deed 91. In the district court's
opinion, resolving the dispute between CPDO and Mayagüez continued
to "turn[] heavily upon determining whether federal regulations, as
incorporated into the contract between the parties, were complied
with." Mun. of Mayagüez v. Corporación Para el Desarrollo del
Oeste, 824 F. Supp. 2d 289, 294 n.1 (D.P.R. 2011) (emphasis
supplied).
At the same time that the district court denied CPDO's motion
to dismiss for want of jurisdiction, however, the court also
concluded that Mayagüez had failed to demonstrate that CPDO
breached any provisions of Deed 91. As such, the court dismissed
Mayagüez's claims with prejudice. Mayagüez filed this appeal,
challenging the district court's decision on the merits.
After reviewing the parties' initial merits briefs in this
case, we identified a significant question concerning our
jurisdiction. In particular, we believed that our jurisdictional
holding in COFECC, on which the magistrate judge relied, might no
longer be good law in light of the Supreme Court's intervening
opinions in Empire Health Assurance, Inc. v. McVeigh, 547 U.S. 677
(2006), and Gunn v. Minton, 133 S.Ct. 1059 (2013). To our
surprise, neither party raised this thorny jurisdictional issue in
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its merits briefs before us. Therefore, given our unflagging
obligation to determine our own jurisdiction sua sponte, see Am.
Airlines, Inc. v. Cardoza-Rodriguez, 133 F.3d 111, 115 n.1 (1st
Cir. 1998), we requested supplemental briefing from both parties on
the issue of whether this dispute arises under federal law within
the meaning of 28 U.S.C. § 1331.
II.
"Congress has authorized the federal district courts to
exercise original jurisdiction in 'all civil actions arising under
the Constitution, laws, or treaties of the United States.'" Gunn,
133 S.Ct. at 1064 (quoting 28 U.S.C. § 1331). Often called
"federal-question jurisdiction," this type of jurisdiction "is
invoked by and large by plaintiffs pleading a cause of action
created by federal law," such as an action brought under 42 U.S.C.
§ 1983. Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg.,
545 U.S. 308, 312 (2005). There exists, however, a "special and
small category" of cases in which a state law cause of action can
give rise to federal-question jurisdiction because the claim
involves important federal issues. Empire Health Assurance, 547
U.S. at 699.
Though the Supreme Court has repeatedly reaffirmed the
viability of this "special and small category," a precise
definition of its contours remains elusive. Indeed, the
complexity of the inquiry has "kept [the Supreme Court] from
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stating a single, precise, all-embracing test for jurisdiction over
federal issues embedded in state-law claims between non diverse
parties." Grable, 545 U.S. at 314 (internal citation omitted)
(quotation marks omitted)); see also Gunn, 133 S.Ct. at 1065 ("In
outlining the contours of this slim category, we do not paint on a
blank canvas. Unfortunately, the canvas looks like one that
Jackson Pollock got to first.").
We consider first the Supreme Court's most recent
pronouncements on what makes a federal issue sufficiently
"substantial" to warrant federal jurisdiction. We turn then to the
case at bar, considering whether the issue in this case is so
substantial as to "justify resort to the experience, solicitude,
and hope of uniformity that a federal forum offers on federal
issues." Grable, 545 U.S. at 312.
A. A Substantial Federal Issue
Federal jurisdiction will lie over a state law cause of action
if the face of the complaint reveals a "federal issue [that] is:
(1) necessarily raised, (2) actually disputed, (3) substantial, and
(4) capable of resolution in a federal court without disrupting the
federal-state balance of power." Gunn, 133 S.Ct. at 1065.
According to Mayagüez, the federal issue in this case is whether
CPDO's alleged failure to comply with HUD guidelines in managing
the federal grant money and in developing Villa Sultanita amounted
to a breach of its contract with Mayagüez. Assuming, arguendo,
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that Mayagüez is correct in characterizing the federal issue in
this case as necessarily raised, actually disputed, and not
disruptive to the federal-state balance of power, we focus our
analysis on the question at the heart of this jurisdictional
dispute: is this federal issue sufficiently "substantial" to
warrant federal jurisdiction?5
In its most recent pronouncements on the question of
substantiality in this context, the Supreme Court has emphasized
that the "substantiality" inquiry is wholly separate from the
"necessary" inquiry, and demands that a federal question must be
not only important to the parties, but important to the federal
system. In Gunn, for example, the Court explained that for a case
to be "substantial in the relevant sense,"
it is not enough that the federal issue be significant to
the particular parties in the immediate suit; that will
always be true when the state claim 'necessarily raises'
a disputed federal issue . . . . The substantiality
inquiry . . . looks instead to the importance of the
issue to the federal system as a whole.
Gunn, 133 S.Ct. at 1066 (second emphasis supplied).
5
Both before the district court and in its supplemental
briefings before us, CPDO argued that even if a substantial federal
issue existed at the time Mayagüez filed its complaint in 2007,
that issue, and thus federal jurisdiction, was extinguished when
the HUD audit was closed in 2009. We make no judgment on the
viability of the argument that an issue that meets the
substantiality requirement on the face of the complaint can become
insubstantial, and hence incompatible with federal jurisdiction,
during the course of litigation. We decide the "substantiality"
issue on the basis of the complaint.
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But what makes an issue important to the federal system as a
whole? Recent Supreme Court case law has suggested at least two
answers to this question. First, an issue may be substantial where
the outcome of the claim could turn on a new interpretation of a
federal statute or regulation which will govern a large number of
cases. In other words, a case is more likely to be important to
the federal system as a whole if it presents "a nearly 'pure issue
of law . . . that could be settled once and for all'" rather than
an issue that is "fact-bound and situation-specific" and whose
holding will more likely be limited to the facts of the case.
Empire Health Assurance, 547 U.S. at 700-701 (quoting R. Fallon, et
al., Hart and Wechsler's The Federal Courts and the Federal System
65 (2005 Supp.)); see also Gunn, 133 S.Ct. at 1067 (noting that the
federal issue in dispute was not important because its resolution
was unlikely to have any impact on other patent cases).
Second, a federal issue may also be substantial where the
resolution of the issue has "broader significance . . . for the
Federal Government." Gunn, 133 S.Ct. at 1066. That is, because
"[t]he Government has a direct interest in the availability of a
federal forum to vindicate its own administrative action," Grable,
545 U.S. at 315, the Court has repeatedly suggested that a federal
issue is more likely to be substantial where a claim between two
private parties, though based in state law, directly challenges the
propriety of an action taken by "a federal department, agency, or
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service." Empire Health Assurance, 547 U.S. at 700 (discussing
Grable); see also Smith v. Kan. City Title & Trust Co., 255 U.S.
180 (1921) (holding that a shareholder suit seeking to enjoin a
private company from investing in certain federal bonds on the
grounds that the statute authorizing the issuance of those bonds
was unconstitutional presented substantial federal issue).
B. The Federal Issue in this Case
Mayagüez claims that its federal question is substantial
because it turns on an interpretation of federal regulations, and
because it relates to federal funds and a large federal development
program. We think that this characterization seriously overstates
the import of the federal issues in this case.
Though the ultimate question in Mayagüez's contract claim is
whether CPDO failed to comply with federal regulations, and thereby
breached its contract, this dispute is the sort of "fact-bound and
situation-specific" claim whose resolution is unlikely to have any
impact on the development of federal law. Empire Health Assurance,
547 U.S. at 701. Rather than disputes over the meaning of HUD
regulations incorporated in the contract between the parties, the
complaint reveals that the disputes between the parties were
overwhelmingly factual. For example, Mayagüez alleged that certain
parcels of land conveyed to CPDO had never been developed, and that
CPDO had failed to obtain appraisals before it sold certain small
parcels of land. It also claimed irregularities in CPDO's
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accounting systems.
In addition, though the actions of a federal agency hover in
the background of this dispute, HUD's actions are much farther
removed from Mayagüez's breach-of-contract claim than the Internal
Revenue Service's were from the plaintiff's claim in Grable.
Though the plaintiff in Grable sued the individual who ultimately
purchased the land at the tax sale, the allegedly unlawful actions
were taken by the IRS, not the purchaser. Here, the audit
indicated that HUD funds had been mismanaged, but there were never
allegations that HUD itself acted inappropriately in any way. In
other words, HUD's performance was never at issue, and hence,
unlike in Grable, the outcome in this case could not call into
question thousands of other actions undertaken by a federal agency.
Moreover, unlike Grable, the resolution of this case will have
no impact on the ability of HUD or any other federal agency to
carry out its business. Here, there was never any risk that HUD
would not be compensated for the misspent funds, nor was there any
risk that the outcome of the dispute would impact HUD's ability to
demand repayment of federal funds in any future case. Our recent
decision in One & Ken Valley Housing Group v. Maine State Housing
Authority, 716 F.3d 218 (1st Cir. 2013), regarding a state law
contract claim relating to the Section 8 program, is instructive on
this point. We held there that the issue was sufficiently
substantial to warrant federal jurisdiction because, inter alia,
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the dispute turned "on the interpretation of a contract provision
approved by a federal agency pursuant to a federal statutory
scheme," "the alleged breach occurred only because the contractor
was following the federal agency's explicit instructions," and "the
case presents a pure issue of law that will govern numerous cases
nationwide." We explained that the outcome of the case could have
such profound financial consequences for HUD that it "could require
the agenc[y] to scale back the scope of the Section 8 program."
Id. at 225. In this case, HUD did not draft the contract between
the parties or issue instructions that led to the alleged breach,
and there is no legal question that will apply in a host of other
cases. There is simply no comparable risk here to any federal
program.
One final issue remains: the plaintiffs ask us to conclude
that our jurisdictional holding in Municipality of San Juan v.
Corporación Para El Fomento Económico de la Ciudad Capital, 415
F.3d 145 (1st Cir. 2005) ("COFECC"), controls the outcome of this
case. Like the instant case, COFECC was a state law breach-of-
contract claim brought by a municipality against a local
development corporation, alleging that the local development
corporation breached the contract when it misused federal funds
entrusted to it by the municipality. Though neither party briefed
subject matter jurisdiction, we addressed the issue sua sponte,
concluding in a footnote that "[b]ecause the propriety of COFECC's
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conduct turns entirely on its adherence to the intricate and
detailed set of federal regulatory requirements, and the funds at
issue are federal grant monies . . . jurisdiction is proper." Id.
at 148 n.6.
Plaintiff's argument, however, fails to consider the Supreme
Court's intervening opinions in Gunn and Empire Health Assurance,
both of which cast serious doubts on the continued viability of our
jurisdictional holding in COFECC. The Court's rejection of
jurisdiction in Empire Health Assurance is particularly telling.
As here, Empire Health Assurance was a contract dispute
between two private parties -- a private health insurer and a
federal employee.6 The insurer had entered into a contract with
the Office of Personnel Management ("OPM") to provide a fee-for-
service health plan for federal employees, pursuant to the Federal
Employees Health Benefits Act of 1959 ("FEHBA"), 5 U.S.C. § 8901.7
The insured had enrolled in the health insurance plan. As part of
his enrollment, he had agreed to abide by the terms and conditions
6
The employee died before the state court judgment was
entered in his favor, and the suit was filed against his wife as
administrator of his estate. See Empire Health Assurance, 547 U.S.
at 687.
7
FEHBA "establishes a comprehensive program of health
insurance for federal employees. The Act authorizes the Office of
Personnel Management (OPM) to contract with private carriers to
offer federal employees an array of health-care plans." Empire
Health Assurance, 547 U.S. at 682. Approximately 8 million federal
employees, retirees, and dependents are covered by plans created
under the FEHBA program. Id. at 702 (Breyer, J., dissenting).
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in the statement of benefits, which included a reimbursement and
subrogation clause.
The dispute between the parties arose after the employee, who
had been injured in an accident, won a state court tort suit
against the party responsible for his injuries. 547 U.S. at 687.
The insurer claimed that under the terms and conditions established
in the plan that it had negotiated with OPM, the insurer was
entitled to be reimbursed for the money it had spent to cover the
employee's medical bills following the accident.8 Id. The
employee disagreed and refused to repay the insurer. Id.
Despite the involvement of a federal agency in the creation of
the contract terms in dispute and the federal funds involved,9 the
8
Though FEHBA itself does not address reimbursement and
subrogation, the contract between OPM and the insurer provided that
all employees enrolled in the plan "are obligated to all terms,
conditions, and provisions of this contract," and a brochure
appended to the contract explained the insurer's subrogation and
recovery rights. Empire Health Assurance, 547 U.S. at 684-85. The
statement of benefits read in part: "[I]f we pay benefits for [an]
injury or illness, you must agree to the following: All recoveries
you obtain . . . must be used to reimburse us in full for benefits
we paid." Id. at 684.
9
Though private insurers administer the FEHBA plans, the
program is funded through premiums paid jointly by the government
and the employees into a special trust fund in the Treasury.
Claims and benefits for covered services are paid with money from
the fund and "the fund's money belongs, not to the carrier, but to
the federal agency that administers the program." Empire Health
Assurance, 547 U.S. at 703 (Breyer, J., dissenting). "After
benefits are paid, any surplus in the fund can be used at the
agency's discretion to reduce premiums, to increase plan benefits,
or to make a refund to the Government and enrollees." Id. (citing
5 U.S.C. § 8909(b), 5 C.F.R. § 890.5039(c)(2)). All financial risk
is thus borne by the government, not the carrier. See id.
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Supreme Court concluded that the federal issues in the case were
not sufficiently substantial to warrant federal jurisdiction over
the state law reimbursement claim. Id. at 700. Though the Court
admitted that the federal government undoubtedly had an
"overwhelming" interest in attracting and retaining healthy federal
employees, the Court concluded that such an interest did "not
warrant turning into a discrete and costly 'federal case' an
insurer's contract-derived claim to be reimbursed from the proceeds
of a federal worker's state-court-initiated tort litigation." Id.
at 701.
If there is no substantial federal issue in a case
interpreting contract terms negotiated by a federal agency and
applying to policies held by eight million federal employees, it is
difficult to see how the instant dispute between Mayagüez and CPDO
could fit into the "special and small" category of state law cases
that "arise under" federal law. Indeed, the dispute between
Mayagüez and CPDO is notably similar to that in Empire Health
Assurance (a demand for the reimbursement of funds expended by one
of the parties to the contract), differing only insofar as the
federal interest in the instant dispute is less significant.
Unlike the circumstances in Empire Health Assurance, the contract
here –- so far as it appears from the complaint –- was executed
without much oversight from a federal agency. Mayagüez and CPDO
chose to incorporate federal regulations into their private
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agreement, and the level of federal government involvement in the
contracting process was minimal when compared to that in Empire
Health Assurance. Moreover, the statute at issue in Empire Health
Assurance was designed to benefit the federal government by making
the federal government an attractive, competitive employer. The
purpose of the CDBG block grant program, on the other hand, was to
provide assistance to municipalities seeking to improve their
infrastructure.
In short, we think that the Court's holding in Empire Health
Assurance undermines our conclusion in COFECC that compliance with
an "intricate and detailed set of federal regulatory requirements"
and a connection to "federal monies" were sufficient in themselves
to warrant federal-question jurisdiction over a state law breach of
contract claim. Under the Court's opinion in Empire Health
Assurance, to be substantial, the dispute must involve a true risk
to the interests of a federal agency, program, or statutory scheme.
The instant case presents no such risk. Thus, we abrogate the
jurisdictional holding in COFECC and decline to treat that holding
as controlling precedent in this case.
C. Conclusion
Having determined that this case presents primarily factual
disputes and would have little impact on the development of federal
law or the activities of a federal agency, we conclude that the
federal issue in this case is not substantial in the relevant sense
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to warrant federal jurisdiction. As such, plaintiff's claims
should have been dismissed at the outset of this litigation. We
thus vacate the judgment of the district court and remand with
instructions that plaintiff's claim be dismissed without prejudice.
Costs are awarded to the appellee.
So ordered.
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