Opinions of the United
1997 Decisions States Court of Appeals
for the Third Circuit
12-30-1997
Williams v. Secretary of Labor
Precedential or Non-Precedential:
Docket 97-3127
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Filed December 30, 1997
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 97-3127
BERT WILLIAMS,
Petitioner
v.
CYNTHIA METZLER, Acting Secretary, U.S. Department of
Labor and PUBLIC SERVICE, ELECTRIC AND GAS
COMPANY,
Respondents
ON PETITION FOR REVIEW OF A FINAL DECISION
AND ORDER OF THE SECRETARY OF LABOR
DATED JANUARY 15, 1997
(ARB Case No. 96-160)
Argued October 30, 1997
Before: NYGAARD, McKEE, and WEIS, Circuit Judges.
Filed December 30, 1997
David R. Culp, Esquire (ARGUED)
BERRY AND CULP, P.C.
7000 Crittenden Street
Philadelphia, PA 19119
Attorneys for Petitioner
Ellen R. Edmond, Esquire (ARGUED)
William J. Stone, Esquire
United States Department of Labor
200 Constitution Avenue N.W.
Washington, D.C. 20210
Attorneys for Secretary of Labor
Robert M. Rader, Esquire (ARGUED)
WINSTON & STRAWN
1400 L Street, N.W.
Washington, D.C. 20005
Attorneys for Public Service Electric
and Gas Company
OPINION OF THE COURT
WEIS, Circuit Judge.
In this case, we hold that the Secretary of Labor does not
have the authority, even with the consent of the parties, to
enforce a settlement agreement resolving a retaliation claim
brought by an employee/whistleblower against his
employer under the Energy Reorganization Act. We also
conclude that, as a matter of law, the Secretary
misconstrued the agreement when he found no breach of
the agreement by the employer. Accordingly, we will grant
the petition for review and remand for further proceedings.
Petitioner Bert Williams filed a complaint with the
Department of Labor under the Energy Reorganization Act
pursuant to 42 U.S.C. S 5851. He alleged that his employer,
Public Service Electric and Gas Company ("the company"),
had retaliated against him for raising a nuclear safety
violation that ultimately resulted in an $80,000 penalty
against the company. A preliminary investigation by the
2
Regional Office of the Department favored Williams. The
company sought an administrative hearing, but before the
retaliation claim reached an ALJ, Williams and the
company arrived at a settlement.
Williams was 62 years of age at the time of the
settlement, and it was decided that Williams would take an
early retirement. The agreement recited that he would
immediately receive benefits as if he had continued to work
until normal retirement at age 65. The Secretary approved
this settlement on June 8, 1994 and dismissed the
complaint with prejudice.
When the company began sending monthly payments in
amounts less than Williams anticipated, he asserted a
breach of the settlement agreement. He prepared and filed
a "Motion for Sanctions and to Enforce Settlement" with the
ALJ to whom the original complaint had been assigned in
which he asked the Secretary to enforce the agreement or,
in the alternative, bring an enforcement action in the
district court on his behalf.
The parties agree that the company had purchased an
annuity policy from an insurance company to fund its
obligations under the settlement agreement and that, on its
face, the policy would have paid the required amount per
month. However, because of the way the company
structured the annuity, withholding taxes reduced the
monthly payments substantially below the amount specified
in the agreement. It appears that the company unilaterally
selected the method of providing the retirement benefits,
but in defending its action, the company asserted that the
funding had been complicated by the Employee Retirement
Income Security Act, 29 U.S.C. S 1001 et seq., (ERISA) and
the withholding provisions of the Internal Revenue Code.
When presented with Williams' motion, the ALJ ruled
that he no longer had jurisdiction because the case had
previously been forwarded to the Secretary. Williams then
asked the Secretary either to remand the matter to the ALJ
"for enforcement of the terms of the Agreement and Order
or initiate, or join in, an action in the District Court to
enforce your Order."
3
The then Secretary, Robert Reich, rejected the company's
argument that enforcement "must be sought in the United
States District Court" and found that he had authority to
consider enforcement under the agreement's express
provision that "the Department of Labor shall retain
jurisdiction of this matter for purposes of enforcement of
this Agreement." Moreover, the agreement gave Williams the
"right to seek enforcement of the Agreement through the
Department of Labor" in the event of a material breach by
the company.
Remarking that "[i]t is clear that [the company] has not
paid Williams the agreed amount reflecting an annuity with
a survivor benefit," the Secretary questioned"whether [the
company] was required to make all the [tax] deductions up
front." He therefore remanded to an ALJ to "receive
evidence regarding the appropriate tax treatment of the
annuity and whether [the company] breached the
Agreement."
Before the ALJ, Williams contended that the company
had promised him full retirement benefits payable at age 62
rather than at age 65, and therefore he should pay taxes in
the same manner as other retirees. He said that he had
never applied for an annuity policy, nor had he been given
the option for a lump sum payment as is customary with
such contracts. To combat any suggestion that the
company's action had been dictated by applicable law,
Williams submitted an expert's report that explored
alternative means for funding that would have yielded the
agreed upon monthly benefits without running afoul of
ERISA or the Internal Revenue Code.
In defense, the company first explained the tax
consequences of purchasing a lump sum annuity. Next, the
company said it chose to buy an annuity policy rather than
make monthly payments from company funds because that
method might have subjected future payments to the risk
of the company's insolvency. The company never submitted
that option or any others, however, to Williams for his
consideration.
The ALJ concluded that the company had not breached
the agreement and denied Williams' motion. The
4
Administrative Review Board, authorized by the Secretary
to issue final decisions, affirmed.1
I.
Since resolution of many of the issues raised by this
appeal turns on the nature of the proceedings that occurred
before the agency, we think it helpful to begin by observing
that the record is subject to two characterizations. Williams
asked the Secretary to enforce the agreement, or in the
alternative, to "initiate, or join in" an action in the district
court. At various points in our discussion, we consider
whether the Secretary asserted authority to enforce the
agreement himself or held a preliminary fact-finding
proceeding simply to inform his decision whether to pursue
enforcement on Williams' behalf. Overall, either
characterization raises concerns about the nature of the
Secretary's action in this case.
With this clarification, we preliminarily raise, sua sponte,
the issue of subject matter competence -- that is, the
authority of the Secretary of Labor to enforce a settlement
agreement. The Act provides that either the Secretary or a
party may seek enforcement of a settlement in the district
court. 42 U.S.C. S 5851(d),(e). See also 24 C.F.R. S 24.8.
There is, however, no language authorizing the Secretary to
enforce without resorting to the district court.
In Macktal v. Secretary of Labor, 923 F.2d 1150, 1153
(5th Cir. 1991), the court recognized that the Act authorizes
the Secretary to act in one of three ways -- to grant or deny
the relief sought in a complaint, or to approve a settlement.
The Court explicitly rejected proffered analogies to civil
litigation in determining the extent of the Secretary's
jurisdiction: "[w]hile such analogies may be helpful, an
analogy cannot give the Secretary authority withheld by the
words of the statute, nor can analogies deprive the
Secretary of authority provided by the words of the statute."
Id. Thus, the Court held that the Secretary is authorized to
_________________________________________________________________
1. The Administrative Review Board designated its order as "final." The
Secretary of Labor has delegated authority to the Board to issue final
agency orders under the Energy Reorganization Act. 29 C.F.R. S 2.8.
5
approve or disapprove a settlement by the parties, but
cannot modify its terms without their consent. Id. at 1154.
Like the court in Macktal, we are faced with an action by
the Secretary beyond the scope of his statutorily prescribed
authority. Unlike in Macktal, however, the parties here do
not question the Secretary's authority to assert jurisdiction.
The question is whether the matter is of any consequence.
We think that it is.
A suit for breach of contract is a common law action of
ancient vintage and is properly cognizable in Article III
courts. In Commodity Futures Trading Commission v. Schor,
478 U.S. 833 (1986), the Supreme Court held that
Congress could authorize an administrative agency to
adjudicate a common law claim between two individuals in
connection with a regulatory proceeding. The Court noted
that a litigant having a personal right to an impartial and
independent federal court adjudication could waive that
right. Id. at 848. In Schor, the record demonstrated that the
complainant had elected to seek relief before the agency
rather than proceeding to judgment in a state or federal
court on his claim. Id. at 849-50.
Despite the waiver, however, the court discussed whether
the Commodities Exchange Act violated the Separation of
Powers Doctrine, which prevents "the encroachment or
aggrandizement of one branch at the expense of the other."
Id. at 850, quoting Buckley v. Valeo, 424 U.S. 1, 122 (1976)
(per curiam). In this context, the Court observed, "[t]o the
extent that this structural principle is implicated in a given
case, the parties cannot by consent cure the constitutional
difficulty for the same reason that the parties by consent
cannot confer on federal courts subject-matter jurisdiction
beyond the limitations imposed by Article III, S 2." Id. at
850-51.
In this case, the parties are attempting to vest
consensual jurisdiction in the Secretary to perform a
function that Congress has explicitly placed in the district
court. The issue is thus based on a statutory allocation of
powers rather than a constitutional one. We believe,
however, that Schor provides the guiding principle in these
circumstances. Allowing the parties' waiver to grant power
6
to an executive agency where the statute places that
authority in the judicial branch impermissibly flies in the
face of the intent of the statute. Congress could have given
the Secretary the jurisdiction that the parties assert here,
but chose not to do so.
It is significant that the Secretary does not claim a
general power to adjudicate disputes over the terms of
settlement agreements. In the proceedings of Pillow v.
Bechtel Construction, Inc., ARB Case No. 97-040, 1997 WL
563822 (Sept. 11, 1997), the Administrative Review Board
agreed "with the general proposition that after afinal
decision has been issued, the Board lacks jurisdiction over
a dispute about the proper interpretation of a settlement
agreement." Id. at *2. In making that pronouncement, the
Board cited and distinguished the case before us as an
example where jurisdiction was retained by an express
provision in the agreement. Id.
In the order remanding this case to the ALJ, the
Secretary concluded that "the retention of jurisdiction
clause [in the agreement] authorizes the Department to
hold further administrative proceedings prior to either the
Department or a party seeking enforcement in the district
court . . . [T]here is a genuine dispute whether [the
company] has breached the Agreement and I will exercise
my retained jurisdiction to resolve that dispute."
The Secretary cited Kokkonen v. Guardian Life Insurance
Company of America, 511 U.S. 375 (1994), for support. In
that case, the Court held that federal district courts have
no inherent authority to enforce a settlement once a final
judgment has been entered, but may do so if the agreement
expressly retains jurisdiction in the court for enforcement
purposes. Id. at 381. Unlike a district court, however, the
Secretary has no power to enforce under this Act and
therefore has no jurisdiction to retain. The Secretary's
authorization is limited to seeking enforcement in the
district court.
We can perceive the value to the Secretary of having an
explanation of the parties' dispute in the interest of making
an informed decision whether to proceed in the district
court. See Vermont Yankee Nuclear Power Corp. v. Natural
7
Resources Defense Council, Inc., 435 U.S. 519, 543 (1978)
(agencies should be free to devise methods of inquiry
capable of permitting them to discharge their multitudinous
duties). That explanation, however, does not support the
Secretary's authority in other situations to make a formal
adjudication entitled to preclusive effect in subsequent
district court actions. See United States v. Utah Constr. and
Mining Co., 384 U.S. 394, 422 (1966) (res judicata may
attach to issues resolved in adjudicative administrative
proceeding); Thompson v. United States Dep't of Labor, 885
F.2d 551, 556-57 (9th Cir. 1989) (same).
If the Secretary's decision serves to block full
consideration of the merits in the district court, then the
Secretary has done indirectly what is ultra vires if done
directly. For example, should the Secretary decide that one
party has breached a settlement agreement, the other party
in a subsequent enforcement action in the district court
could invoke claim preclusion to bar a complete
determination on the merits by the district court.2 Such a
result could effectively make the district court proceeding
superfluous.
In sum, the Secretary may utilize an informal fact
gathering proceeding preliminary to enforcement. But since
the Act does not authorize direct enforcement or indirect
enforcement by the Secretary, a formal adjudicative
proceeding cannot limit the scope of a district court
enforcement suit.
II.
From the outset, the company has challenged this
Court's jurisdiction to review the Secretary's order denying
Williams' motions and we now turn our attention to that
issue.
_________________________________________________________________
2. At oral argument, counsel for the Company stated that it would assert
res judicata and the "election of remedies" doctrine. Counsel for the
Secretary contended that as a result of the agency action, Williams
would be barred from seeking enforcement in the district court should
he decide to bring suit there. But see Richard B. Stewart and Cass R.
Sunstein, Public Programs and Private Rights, 95 Harv. L.Rev. 1195,
1216, 1289 (1982).
8
In this case, jurisdiction to review administrative agency
orders has been established by the statute authorizing
agency action. Under 42 U.S.C. S 5851(b)(2)(A), the
Secretary of Labor, upon receipt of a whistle blower
complaint, must issue an order either granting relief,
denying relief, or approving a settlement agreement. Such
agreements are entered into by the Secretary and the
offending party with the participation and consent of the
complainant. Subsection (c)(1) provides that "[a]ny person
adversely affected or aggrieved by an order issued under
subsection (b) . . . may obtain review of the order in the
United States court of appeals for the circuit in which the
violation . . . occurred."
The company mounts two attacks on our jurisdiction.
The first is straightforward. Section 5851(b) authorizes the
Secretary to issue three types of orders:
1. an order granting relief;
2. an order denying the complaint; and
3. an order settling the dispute.
The company contends that because the order Williams
would have us review is none of these three designated
types, it does not come within our jurisdiction.
Adopting the company's position would impose a
cramped interpretation on the scope of judicial review of
administrative decisions. As the Supreme Court remarked
in Lindahl v. Office of Personnel Management, 470 U.S. 768
(1985): "We have often noted that `only upon a showing of
clear and convincing evidence of a contrary legislative
intent should the courts restrict access to judicial review.' "
Id. at 778, quoting Abbott Labs v. Gardner, 387 U.S. 136,
141 (1967); see also Bowen v. Michigan Academy of Family
Physicians, 476 U.S. 667, 670 (1986); Dunlop v. Bachowski,
421 U.S. 560, 568 (1975) (even where review is limited,
agency must explain its action). We start then with the
presumption that judicial review is available. Only in
unusual circumstances will a party aggrieved by an agency
decision be denied access to the courts.
As we observed in Vineland Chemical Co. v. United States
Environmental Protection Agency, 810 F.2d 402, 405 (3d
9
Cir. 1987), "[w]hile a statutory basis for jurisdiction is
required," case law "caution[s] this court not to construe
appellate review provisions too narrowly. To avoid
unintended and anomalous results, statutes authorizing
review of specified agency actions should be construed to
allow review of agency actions which are `functionally
similar' or `tantamount to' those specified actions."
Similarly, in Modine Manufacturing Corp. v. Kay, 791 F.2d
267, 270 (3d Cir. 1986), we stated that where a statute
allows for some appellate review of agency action, the
"jurisdictional provisions should be construed generously
absent clear and convincing evidence of a contrary
congressional intent."
We have found nothing in the legislative history of the
Energy Reorganization Act to indicate that Congress
intended to restrict judicial review of rulings made in the
course of administrative proceedings. Additionally, as we
noted in Passaic Valley Sewerage Commissioners v. United
States Department of Labor, 992 F.2d 474, 479 n.8 (3d Cir.
1993), several federal statutes contain whistleblower
protection provisions identical or similar to those of the
Energy Reorganization Act. See, e.g., 33 U.S.C. S 1367
(Federal Water Pollution Control Act); 42 U.S.C. S 7622
(Clean Air Act); 42 U.S.C. S 9610 (Comprehensive
Environmental Response, Compensation, and Liability Act);
42 U.S.C. S 300j-9(i) (Safe Water Drinking Act); 42 U.S.C.
S 6971 (Resource Conservation and Recovery Act); 15
U.S.C. S 2622 (Toxic Substances Control Act); 30 U.S.C.
S 815(c)(1) (Federal Mine Safety and Health Act); 29 U.S.C.
S 158(a)(4) (National Labor Relations Act); 45 U.S.C. S 441(a)
(Federal Railroad Safety Authorization Act). Nothing in the
legislative history or judicial interpretation of these similar
provisions causes us to question application of the general
principle favoring judicial review of agency decision-making.
Opinions from other Courts of Appeals addressing
jurisdiction under the Energy Reorganization Act provide
little guidance in the circumstances here. In Carolina Power
and Light v. United States Department of Labor, 43 F.3d 912
(4th Cir. 1995), the Court was asked to review an order of
the Secretary remanding a proposed settlement to an ALJ.
The Court held that the order was not subject to judicial
10
review because it was not final and not entered under
subsection (b) of S 5851. Id. at 914-15. In Macktal, the
Court disapproved the action of the Secretary in striking
certain provisions from a settlement previously arrived at
by the employee and the employer. 923 F.2d at 1154.
Jurisdiction to review was assumed with little discussion.
Id.
In Ellis Fischel State Cancer Hospital v. Marshall, 629
F.2d 563 (8th Cir. 1980), an employer petitioned for review
of the Secretary's order granting relief to an employee. The
employee intervened, requesting enforcement. Id. at 566.
The Court denied review of the Secretary's order as to the
employer, but concluded that the employee's motion for
enforcement should have been brought in the district court.
Id.
In the absence of persuasive authority adopting a limited
reading of the Act's review provisions, we read them broadly
in conformity with the philosophy expressed in our case
law. In Vineland, we concluded that statutory provisions for
judicial review of the Secretary's action "issuing, denying,
modifying, or revoking" a permit extended to all orders
terminating interim status under the Resource
Conservation and Recovery Act. 810 F.2d at 408. Similarly,
in Modine, we held that appellate jurisdiction for review of
effluent standards promulgated under the Clean Water Act
extended to rulings on the applicability of those standards
to a specific discharger. 791 F.2d at 271. In both Vineland
and Modine, the governing statutory provisions did not
specifically cover the orders presented for review.
Nevertheless, we assumed jurisdiction. See Dart v. United
States, 848 F.2d 217, 221, 223 (D.C. Cir. 1988) (judicial
review is favored when an agency is acting beyond its
authority).
Those precedents provide guidance here. We consider the
ruling of the Secretary an adjudicatory construction of the
previously approved settlement agreement. See Macktal,
923 F.2d at 1154. That action resulted in the Secretary's
decision to forego enforcement in the district court. In the
circumstances here, we conclude that the petition for
review falls within the appellate jurisdiction authorized by
the Act.
11
The second part of the jurisdictional attack is focused on
the company's view that the Secretary's order represents a
decision not to begin a suit in the district court. As such,
the company argues that the Secretary's action is akin to
the decision not to enforce which was held to be
discretionary and unreviewable in Heckler v. Chaney, 470
U.S. 821 (1985).
The proceeding also bears a resemblance to that in
Dunlop, 421 U.S. at 562-65. There, the Supreme Court held
that the Secretary of Labor's decision not to request the
district court to set aside a union election was judicially
reviewable and that the Secretary should submit a
statement of his reasons for nonaction. Id. at 566-68.
The situation presented here is distinguishable from
Chaney. There, the Court held that the Food and Drug
Administration's refusal to enforce the substantive
prohibitions in its enabling act was nonreviewable. The
Court noted the important differences between an agency's
decision to enforce and one declining to do so. 470 U.S. at
831-32. Although acknowledging that administrative
concerns such as allocation of resources and policy
considerations must enter into the balance, the Court
discussed another factor affecting the enforcement decision:
"[W]hen an agency refuses to act it generally does not
exercise its coercive power over an individual's liberty or
property rights, and thus does not infringe upon areas that
courts often are called upon to protect." Id . at 832
(emphasis in original). In contrast, where the agency does
move to enforce, that action provides a focus for judicial
review and can at least "be reviewed to determine whether
the agency exceeded its statutory powers." Id.
The Secretary's decision not to seek enforcement in this
case is fundamentally different from the non-action
examined in Chaney. Here, the Secretary has taken
affirmative steps to adjudicate a breach of contract claim.
Because that proceeding ultimately determined the amount
of the monthly payments to be made to Williams, it directly
affected his property rights.
In contrast to Chaney, the Secretary's decision not to
proceed with enforcement in the district court in this case
12
was not based on consideration of the agency's policy or
resources, but rather upon a contractual construction. See
S.E.C. v. Chaney Corp., 318 U.S. 80, 94 (1943); Florida
Dep't of Labor and Employment Sec. v. United States Dep't
of Labor, 893 F.2d 1319, 1322 (11th Cir. 1990) ("An
important corollary to the general rule that courts will not
substitute their views for the discretionary decisions of an
agency on matters of policy is the recognition that reviewing
courts do have the authority and responsibility to correct
errors of law made by the agency"). The ruling of the
Secretary, if allowed to stand, could have claim or issue
preclusive effect and prevent Williams from obtaining relief
in the district court. See Utah Construction, 384 U.S. at
422; see also Thompson, 885 F.2d at 556-57. Thus, this
case presents agency action that bears on property rights in
an area in which courts typically act.
Adoption of the company's argument that Chaney bars
review here would actually undermine the reasoning in
that case by ignoring the factors that generated its holding.
Our cases that followed Chaney, such as New Jersey
Department of Environmental Protection and Energy v. Long
Island Power Authority, 30 F.3d 403, 418 n.27 (3d Cir.
1994) and Harmon Cove Condominium Ass'n v. Marsh,
815 F.2d 949, 951-52 (3d Cir. 1987), are similarly
distinguishable. We therefore reject the company's
contention that Chaney is applicable here.
We indicated earlier our misgivings about the legitimacy
of the Secretary's conclusions derived from the hearing
to the extent that they could be considered indirect
enforcement. Although there is some basis for
characterizing the proceedings as informal and non-
binding, the stronger indication is that the Secretary
considered them to be a formal adjudication. However,
rather than resting our decision solely on the basis of ultra
vires agency action, in view of the ambiguous state of the
record, the interests of judicial efficiency, and the fact that
the parties fully briefed the issues, we will address the
merits as well. In this connection, we note that there are no
issues of fact in controversy and the administrative record
is fully developed. See Modine, 791 F.2d at 270.
13
III.
Judicial review under the Act is to conform with the
Administrative Procedure Act. 42 U.S.C. S 5851(c)(1). Thus,
we must determine whether the agency ruling is "arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with law." 5 U.S.C. S 706(2)(A).
Basic contract principles apply to settlement agreements.
New York State Electric & Gas Corp. v. F.E.R.C., 875 F.2d
43, 45 (3d Cir. 1989). This settlement agreement involves a
right to sue derived from a federal statute and,
consequently, federal common law principles govern
construction of the contract. See Town of Newton v.
Rummery, 480 U.S. 386, 392 (1987); Macktal, 923 F.2d at
1157 n.32.
It is surely debatable whether a court owes any deference
to an administrative agency's construction of a contract
that lies outside its area of expertise, as is the case here.
See New York State Electric & Gas, 875 F.2d at 45 (contract
principles generally applicable to construction of settlement
agreement unless it is ambiguous and deference to
Commission's interpretation based on specialized industry
knowledge may be appropriate). We need not digress into a
discussion of whether a more extensive scrutiny is
appropriate, however, because whether we apply the
Administrative Procedure Act's standard or that applicable
to the appeal of a district court judgment, we owe no
deference to an erroneous conclusion of law. See , e.g., Dill
v. I.N.S., 773 F.2d 25, 28 (3d Cir. 1985) (on questions of
law, administrative judgment is subject to plenary judicial
review).
IV.
Section 15 of the agreement provides that Williams:
"will receive a retirement benefit based upon a single
life annuity in the amount of not less than [$926.96]
per month and such other benefits as are in
accordance with [the company's] pension plan,
including . . . rights under, the `Medical-Dental
Benefits Plan for Retired Employees'. . . . Mr. Williams
14
is further entitled to increases in his retirement and
other benefits as the company may subsequently grant
to company retirees. [The Company] represents that
this amount meets or exceeds the monthly benefit that
Mr. Williams would have received if he had held a
Grade 14 compensation classification, at a job value of
[$68,618], for the three-year period immediately
preceding April 1, 1994. In order to pay this benefit,
[the company] shall supplement the pension plan
benefits to which Mr. Williams would otherwise be
entitled under the pension plan."
Later, when Williams chose to receive a 50% joint and
survivor annuity rather than a single one, it was agreed
that the monthly amount would be reduced to $782.35. The
settlement agreement does not specify the manner in which
the company was to fulfill its commitment to Williams, nor
touch in any way upon the allocation of taxes. The
company purchased an annuity policy after having been
advised by an insurance agent that, for a cost of
$60,655.85, the policy would provide the agreed monthly
benefit amount of $782.35.
Concluding that the $60,655.85 would be taxable income
to Williams, the company withheld state and federal taxes
due on that sum and used the remaining $37,382.00 to
buy the annuity policy.3 As a result, Williams received
monthly checks of $477.13, rather than the expected
amount of $782.35.
Construction of a contract is different than interpretation
and is purely a question of law subject to de novo review.
Ram Constr. Co. v. American States Ins. Co., 749 F.2d 1049,
1052-53 (3d Cir. 1984). "In determining the legal effect an
agreement will have on an event the parties did not foresee,
the process is construction, not interpretation." Id. at 1053.
See also 3 Corbin on Contracts S 534, at 12 (2nd ed. 1960);
Restatement (Second) of Contracts S 200 cmt. c, at 82
(1981).
_________________________________________________________________
3. Apparently, receipt of other financial consideration included in the
agreement resulted in a ballooning of Williams' income in 1994
catapulting him into the highest tax bracket in that year.
15
Interpretation of the contractual language is the first step
towards proper construction. Corbin S 534, at 9, 11. In the
process of interpreting a contract, the court seeks to
ascertain the intent of the parties. Barco Urban Renewal
Corp. v. Housing Auth., 674 F.2d 1001, 1008 (3d Cir. 1982);
Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d
1001, 1009-1012 (3d Cir. 1980). That inquiry, however,
does not require a search for the subjective intent of the
parties, but rather centers on the intent embodied in the
language that the parties chose to memorialize their
agreement. Barco Urban Renewal, 674 F.2d at 1008-1009;
Mellon Bank, 619 F.2d at 1009.
In the oft quoted words of Justice Oliver Wendell Holmes,
"the making of a contract depends not on the agreement of
two minds, in one intention, but on the agreement of two
sets of external signs -- not on the parties' having meant
the same thing, but on their having said the same thing."
Holmes, The Path of the Law, 10 Harv. L.Rev. 457, 463
(1897) (emphasis in original).
In the process of defining the objective intent of the
parties, a court must examine the entire agreement."A
writing is interpreted as a whole, and all writings that are
part of the same transaction are interpreted together."
Restatement (Second) of Contracts S 202(2). As a corollary
rule, an "ambiguous subsidiary contractual provision must
be given an interpretation consistent with the dominant
purpose of the contract." Barco Urban Renewal, 674 F.2d at
1009. As an additional aid to proper construction, the court
should consider the situation of the parties, the attendant
circumstances and the ends they sought to achieve. Id. at
1007, quoting Atlantic N. Airlines, Inc. v. Schwimmer, 96
A.2d 652, 656 (N.J. 1953); see also Restatement (Second) of
Contracts S 202(1).
The parties chose the term "annuity" in defining the
company's obligation. "Annuity" is defined as "a right to
receive fixed, periodic payments, either for life or for a term
of years . . . A fixed sum payable to a person at specified
intervals for a specific period of time or for life." Black's
Law Dictionary, at 90 (6th ed. 1990). Absent indicia that, at
the time the contract was executed, the parties assigned a
specialized meaning to an otherwise common term, we will
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not alter its accepted usage. See Mellon Bank , 619 F.2d at
1009-10. We refuse to read "annuity" as "annuity policy" or
"annuity contract" in part because these terms have
distinct meanings, Black's Law Dictionary, at 90, and also
because the parties, both represented by counsel during
drafting, could have chosen to make this distinction. Thus,
the settlement agreement does not require the company to
purchase an insurance policy - that was only one of the
options available.4
The ALJ, however, in concluding that no breach had
occurred, apparently misunderstood the agreement and the
meaning of "annuity" when he wrote: "[T]he Settlement's
intent is clear. [The company] was to purchase Mr. Williams
an annuity in order to provide a `retirement benefit' under
the terms of the Agreement." In another passage he wrote,
"if [the company] had not purchased the annuity as stated
in Section 15 of the Agreement, such inaction would have
constituted breach of the Agreement."
The record demonstrates that there is little dispute about
the facts and the parties' intentions in this case. Overall, it
appears that the parties' perceptions of what they had
agreed upon were consistent.
In an affidavit submitted by the company, Richard D.
Quinn, the General Manager -- Compensation and Benefits
for the company, stated that he was contacted by a
company official to "seek assistance in structuring
payments to Mr. Williams as part of an anticipated
settlement. I was advised that Mr. Williams was to receive
a benefit that would be equivalent to an immediately
payable pension, in other words, as if Mr. Williams were
eligible to retire immediately and receive pension benefits
like any other [company] retiree under the [company]
Pension Plan."
Quinn noted that Williams' pension was vested, but he
was not yet eligible to retire, not having reached age 65.
The affidavit continued: Therefore, I was asked to arrange
_________________________________________________________________
4. The modifier "single life" does not alter our reading of the term
"annuity," which is frequently confused with the method or source of its
payment. See In re Estate of Dwight, 134 A.2d 45, 48-49 (Pa. 1957).
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for a separate, immediately payable benefits plan for Mr.
Williams."
Quinn apparently was given a draft of the proposed
settlement agreement that mirrored the form ultimately
executed. He stated: "[when] I saw no direction from these
provisions as to how the annuity was to be created .. . I
began to investigate how this could be accomplished before
the Agreement was signed."
The settlement agreement was executed by the parties on
April 19, 1994 and approved by the Secretary on June 8,
1994. In a letter dated August 12, 1994, outside counsel
advised the company that the purchase of an annuity
policy of approximately $60,000 would, for tax purposes, be
considered a transfer to the employee in that amount in the
current year. The letter suggested that "the prudent course
would be for [the company] to withhold Federal income tax
on the payment for Mr. Williams' benefit of about $60,000
(thus purchasing an annuity for a reduced amount which
provides smaller annuity payments than provided in the
Settlement Agreement), [and] report it on a Form 1099
accordingly . . .."
Robert C. Krueger, Jr., the Director -- Tax Services for
the company, stated in an affidavit that his first
involvement in implementation of the settlement agreement
occurred in August 1994 when he was contacted by Quinn
and Richard Fryling, the company's General Solicitor.
Krueger averred, "I was advised that the Settlement
Agreement required [the company] to create an annuity for
Mr. Williams, the owner/beneficiary of the annuity, that
would provide benefits replicating those to which he would
have been entitled under the [company] Pension Plan if he
had had sufficient years of service to retire at that time."
Krueger and Quinn then discussed the "alternative of
making the required annuity payments out of general
corporate funds as distinct from the purchasing an annuity
from an outside entity." They rejected that option because
it "would not have been `in accordance with' (or, as I
[Krueger] understood the contractual commitment at that
time, `equivalent to') those under [the company's] qualified
pension plan." In addition, Krueger and Quinn reasoned
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that "payment from corporate funds [would be] contingent
on the continued viability" of the company and therefore
such an arrangement would not provide Williams with the
same degree of security as participation in pension funds
held by an external trust.
This evidence makes it clear that at the time of the
agreement's execution Williams and the company both
intended the annuity payments to be "equivalent to an
immediately payable pension . . . as if Mr. Williams were
eligible to retire immediately and receive pension benefits
like any other [company] retiree."
Having discerned that the parties' intentions were
essentially consistent, we now address the agreement's
legal operation. In the process of construction, courts must
often reckon with the effect of events unforeseen or not
contemplated by the parties at the time agreement is
reached. Corbin on Contracts S 534, at 11. Here, the
agreement fails to address the tax consequences of the
parties' arrangement. The record does not reveal whether
this omission resulted from oversight or intention.
Nonetheless, it is necessary for proper construction of the
agreement to attempt to fill what appears to be a gap. See
Restatement (Second) of Contracts S 204. We do so by
examining the agreement's underlying purpose and
integrated provisions.
Under the company's retirement plan, retirees do not pay
taxes "up front," but only as monthly payments are
received. However, under the company's choice of options,
Williams' taxes were paid in advance and at a much higher
rate. Clearly, he fared less favorably than other retirees.
The record discloses other ways of structuring the
settlement that would have avoided this problem while
putting Williams in the same position as other retirees. For
example, the company could have offered him the option of
receiving periodic payments from company funds. Or, as
his expert averred, a different type of annuity insurance
contract with far more favorable tax consequences was
available. Moreover, it appears from the record that if the
company purchased an additional annuity for $25,000, the
stipulated monthly benefit of $782.35 would be attained.
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The main thrust of the agreement was to provide
Williams with benefits equivalent to those enjoyed by other
retirees. That arrangement realistically contemplated
reasonable equivalency in tax liability so that the usable
income Williams received would compare fairly with that of
other company retirees.
The company started off on the right track by considering
an annuity policy that would have provided the agreed
upon amount before taxes, but the company became
distracted by the unusual tax liability created by its plan.
Losing sight of the fact that the agreement required
creation of equivalent benefits, the company nevertheless
pursued its original plan.
Nothing specified or implied in the agreement permitted
the company to deviate from its obligation to provide the
intended benefits because of tax or ERISA complexities.
Those problems made the company's task more difficult,
but far from insurmountable. We are left with no doubt
that the company breached the agreement.
On this record, the ALJ's decision as affirmed was legally
erroneous under basic contract principles. The Secretary's
derivative determination not to seek enforcement was
likewise not in accordance with law.
Accordingly, we grant the petition for review and remand
for further proceedings. The Secretary retains the discretion
whether or not to seek enforcement, but may not consider
the company's actions as set forth in this record to be in
compliance with the settlement agreement. In view of the
Secretary's inability to enforce, Williams is to have the
opportunity to withdraw his motion if he chooses and
pursue an action for enforcement in the district court.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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