UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 93-5109
JOBS, TRAINING AND SERVICES, INC., ET AL.,
Plaintiffs-Appellees,
versus
EAST TEXAS COUNCIL OF GOVERNMENTS, ET AL.,
Defendants,
EAST TEXAS COUNCIL OF GOVERNMENTS,
Defendant-Cross Claim
Plaintiff-Appellee,
versus
TEXAS DEPARTMENT OF COMMERCE,
Defendant-Cross Defendant and
Cross Claim Plaintiff-Appellant,
versus
UNITED STATES DEPARTMENT OF LABOR,
Defendant and Cross Defendant-
Appellee-Appellant.
Appeals from the United States District Court
for the Eastern District of Texas
(April 17, 1995)
Before WISDOM, DeMOSS and STEWART, Circuit Judges.
DeMOSS, Circuit Judge:
This is an appeal from summary judgment granted in favor of
plaintiffs in this declaratory judgment action. The principal
issue is whether certain non-profit entities are entitled to keep
(i) contractual revenues in excess of cost and (ii) interest income
earned on federal funds dispersed to them under the Job Training
Partnership Act (JTPA), 29 U.S.C. § 1501 et. seq. (West 1985).
There are three competing interests in this tug of war over federal
funds. Holding the first rope is the Department of Labor (DOL) in
its capacity as federal administrator of the JTPA. Holding the
second is the Texas Department of Commerce (TDOC) in its capacity
as state recipient of the federal funds, which it disburses in
furtherance of JTPA objectives. Holding the third, as well as the
money, are two non-profit private corporations, Jobs, Training, and
Services, Inc. (JTS) and East Texas Employment and Training, Inc.
(ETI), who provided job training services to local citizens under
the Act. Aligned with JTS and ETI, though technically a defendant,
is the East Texas Council of Governments (ETCOG), who received the
funds from the state and issued the JTS and ETI subcontracts.
Because we find that the dispute was not ripe for judicial
resolution in a federal court, we will vacate and remand with
instructions.
2
RELEVANT FACTS
Under the JTPA, DOL disburses job training grants to
individual states pursuant to agreements between the secretary of
labor and the governor. In Texas, TDOC acts for the governor and
is the initial recipient of JTPA funds.1 TDOC, in turn,
distributes the money to "service delivery areas", which are
geographic regions of the state designated by the governor pursuant
to the Act. See 29 U.S.C. § 1511-1512. Since 1983 ETCOG has acted
as the subrecipient and administrative unit under the JTPA in the
East Texas Service Delivery Area. In that role ETCOG receives JTPA
funds from TDOC pursuant to a written contract. ETCOG, in turn,
enters into subcontracts with private and public entities for the
delivery of job training services. ETCOG's primary subcontractors
since 1983 have been the two non-profit private corporations that
are the plaintiffs in this suit, JTS and ETI (subcontractors).
Since 1984 ETCOG's subcontracts with JTS and ETI have provided for
compensation on the basis of performance rather than cost
experience. Payment is made on a negotiated-in-advance "fixed
price" or a "single unit charge", depending on the service
provided. Neither form of payment is subject to adjustment based
on the actual cost experience of the subcontractor.
During 1990 and early 1991, TDOC and DOL officials conducted
separate reviews of ETCOG's procurement practices and examined
1
Prior to September 1987, the Texas Department of Community
Affairs acted for the Governor as initial grant recipient. We will
refer to the State of Texas defendant as TDOC, without
differentiating which agency was acting at a given time.
3
ETCOG's relationship with JTS and ETI. The reviewing officials
found that between 1984 and 1989 JTS and ETI received substantial
federal revenues in excess of their program costs, and that part of
that excess had been invested and was earning interest. Alarmed by
what they believed was an inappropriate accumulation of federal
funds in the East Texas job training program, DOL and TDOC
officials met on several occasions to discuss state and federal
grounds for recapture. The DOL, through the Office of the
Inspector General (OIG), initiated a financial audit to determine
whether the program costs reported by ETCOG, JTS and ETI were
reasonable. In October 1992, the OIG released a preliminary
report, concluding that an inadequate procurement system and
unreasonable program costs had enabled JTS and ETI to accumulate
large amounts of excess revenue from the JTPA program. However,
the DOL grant officer has made no initial or final determination
against any party regarding the allowability of the costs
questioned by the audit.
Meanwhile TDOC, with the help of DOL, pursued its own audit
and enforcement measures. In February 1991, TDOC issued an initial
and then a final determination against ETCOG stating that JTS and
ETI, as non-profit corporations, were not entitled to retain
interest earned on an advance of federal funds. The final
determination ordered ETCOG to recover $585,951.00 from JTS and
$256,548.00 from ETI and advised them that failure to take
appropriate action could result in the suspension of ETCOG's
contract or the withholding of funds. TDOC also issued an initial
4
determination as to the excess revenues. In that letter, ETCOG was
directed to recover excess revenues in the amount of $2,078,379.00
from JTS and $1,192,853.00 from ETI within thirty days. DOL
concedes that it supported TDOC's effort to find a way to recapture
the funds on state law grounds and that it participated in the
drafting of the determination letters issued to ETCOG. In August
1991, enforcement of the state determinations was stayed, at DOL's
request, pending resolution of the federal audit and administrative
process.
PROCEDURAL HISTORY
In September 1991, JTS and ETI filed this action against ETCOG
and TDOC in state court, seeking a declaratory judgment that the
contested funds were not subject to recapture. Almost immediately
ETCOG filed a notice of removal to the U.S. District Court,
asserting federal question jurisdiction based on the JTPA. After
the action was removed to federal court, TDOC moved to dismiss,
arguing that the DOL was an indispensable party. The district
court denied the motion but ordered the plaintiffs to add DOL to
the suit. Thereafter, ETCOG filed cross-claims against TDOC and
DOL, basically aligning itself with the plaintiff subcontractors.
TDOC, which did not want to be caught in the middle, filed: (1)
cross- and counter-claims against JTS, ETI and ETCOG seeking
judgment that state law allowed it to recapture the funds; and (2)
a cross-claim against DOL seeking judgment that DOL's right to
recover from TDOC was contingent upon TDOC's right to recover from
the subcontractors.
5
In June 1992, DOL filed a motion to dismiss for lack of
subject matter jurisdiction, which the court denied. Thereafter,
JTS and ETI moved for summary judgment against TDOC and DOL. ETCOG
adopted that motion in toto, and TDOC adopted that motion to the
extent it sought judgment that DOL could not recapture the funds.
TDOC also filed its own motion for partial summary judgment against
JTS and ETI, claiming that state law allowed it to recapture the
funds. In May 1993 the district court granted summary judgment in
favor of JTS, ETI, and ETCOG, holding that neither TDOC nor DOL
could recapture the contested funds. The court did not, however,
grant TDOC any relief on its motion for summary judgment against
DOL on the cross-claims. TDOC appeals the court's failure to
expressly grant that relief, arguing that it was an oversight on
the part of the district court. TDOC does not appeal the district
court's summary judgment against it on the substantive issue of
whether state law allows recapture of the contested funds. DOL
appeals all aspects of the district court's order granting summary
judgment.
NATURE OF THE DISPUTE
Prior to July 1989, DOL had no published policy regarding
whether non-profit entities could retain revenue received in excess
of costs under performance-based contracts. Agency notices
indicate that those revenues were often retained by the
subcontractors and could be used for any purpose consistent with
the non-profit charter. See, e.g., 53 Fed. Reg. 7989, 7992 (1988).
In March 1989, DOL published an official interpretation of the
6
requirements for acceptable performance-based contracts. 54 Fed.
Reg. 10459 (1989). That policy, which became effective July 1,
1989, required non-profit subcontractors to treat revenue in excess
of costs as "program income," which could not be used for purposes
other than to provide additional services in furtherance of JTPA
objectives. Id. at 10467.
Subcontractors filed this suit seeking a judgment that the
contested funds were properly earned and could not be recaptured by
either DOL or TDOC. From the record it is clear that the primary
issue at that time was whether DOL, or TDOC as their proxy, could
apply the July 1989 "no-excess-revenues-for-non-profits" policy
retroactively to reach the revenues generated by JTS and ETI in the
years 1984 through 1989. Both DOL and TDOC have subsequently
conceded that the July 1989 policy cannot be applied retroactively,
but have sought to preserve their right to determine whether those
revenues were otherwise properly earned under state and federal
law. DOL characterizes this suit as a premature attack on a non-
final DOL enforcement action. As such, DOL claims that JTPA
sections 1576(a) and 1578(a)(1) provide the exclusive avenue for
administrative and judicial review of DOL action.2 Under those
2
JTPA § 1576(a) provides that: (1) any applicant for
financial assistance who is dissatisfied because the Secretary
determines not to award financial assistance; (2) and any recipient
upon whom a corrective action or a sanction has been imposed can
request a hearing before a DOL administrative law judge. 29 U.S.C.
§ 1576(a). The section further states that, aside from those two
claims and discrimination claims under § 1577, "all other disputes
arising under this chapter shall be adjudicated under grievance
procedures established by the recipient or under applicable law
other than this chapter." Id. JTPA § 1578(a)(1) provides that any
party to a proceeding which resulted in a final order under § 1576
7
provisions, the subcontractors have no recourse until the agency
actually issues a sanction. Additionally, the subcontractors would
be required to exhaust the administrative remedies provided in
section 1576, after which exclusive review of the agency's
determination would be vested in the court of appeals pursuant to
section 1578.
The subcontractors and ETCOG, on the other hand, claim that
DOL and TDOC's contention that the money can be recaptured on other
state or federal law grounds is nothing more than a sham, designed
to conceal what is in fact a secret and unlawful attempt to enforce
the July 1989 policy on a retroactive basis in violation of their
contract, state law, the JTPA and the Due Process and Equal
Protection Clauses of the United States Constitution. Thus, the
subcontractors characterize their claims as statutory or
constitutional challenges to DOL's method of JTPA enforcement.
Those claims, the subcontractors and ETCOG argue, can be reviewed
under section 704 of the Administrative Procedure Act.3
We need not decide who has the better view of the case.
Regardless of whether the JTPA or the APA provides the avenue for
review, the dispute cannot now be heard in federal court. Our
can obtain judicial review of that order in the United States Court
of Appeals. 29 U.S.C. § 1578(a)(1).
3
The APA effects a broad waiver of sovereign immunity and
allows any person adversely affected or aggrieved by agency action
to seek judicial review. 5 U.S.C. § 702. Section 704 specifies
what actions can be reviewed: "[a]gency action made reviewable by
statute and final agency action for which there is no other
adequate remedy in a court are subject to judicial review." 5
U.S.C. § 704.
8
review requires consideration of the district court's authority to
hear two separate issues: (1) whether the funds are subject to
capture on the basis of federal law (the federal law claims) and
(2) whether the funds are subject to dispute on the basis of state
law (the state law claims).
FEDERAL LAW CLAIMS
JTPA Preemption
DOL first argued that the district court lacked jurisdiction
because JTPA sections 1576 and 1578 provide a comprehensive and
exclusive means of administrative and judicial review of DOL action
under the JTPA. We disagree. Section 1576 encompasses only a very
narrow class of DOL actions: determinations to deny financial
assistance and the imposition of corrective action or sanctions
against a "recipient." DOL regulations define a "recipient" to
mean the state entity receiving funding directly from the DOL. 29
C.F.R. § 626.5 (1994). Contrary to DOL's position here, it has
argued in other courts that substate grantees are not "recipients"
and have no recourse under § 1576, except perhaps the right to
intervene when in fact administrative proceedings are pending
between DOL and the state. See Northwest Pennsylvania Training
Partnership Consortium, Inc. v. United States Dep't of Labor, No.
89-3670 (3d Cir. 1990)(substate grantee was not a recipient and had
no right to an administrative hearing although DOL had issued
sanctions ordering the state to collect funds from the plaintiff);
see also County of Los Angeles v. United States Dep't of Labor, 891
F.2d 1390 (9th Cir. 1989) (leaving open issue of whether substate
9
grantee was recipient and holding that, because DOL did not
sanction plaintiff directly, plaintiff had no recourse under § 1576
but could intervene in pending DOL/state administrative
proceedings); City of New Orleans v. United States Dep't of Labor,
825 F. Supp. 120 (E.D. La. 1993)(court lacked jurisdiction but
substate grantee could intervene in pending DOL/state
administrative proceedings). Furthermore, section 1576 contains a
broad savings clause which makes plain that other disputes are
governed by state law grievance procedures or other non-JTPA law.
29 U.S.C. § 1576. Therefore, in our view, sections 1576 and 1578
do not provide an exclusive avenue for all claims and all
plaintiffs challenging DOL action under the JTPA. Compare Thunder
Basin Coal Co. v. Reich, 114 S. Ct. 771 (1994) (language,
structure, purpose and legislative history of the Federal Mine
Safety Act evidence Congress' intent to streamline enforcement by
directing ordinary challenges through a single review process).
This case does not require that we decide the precise scope of
sections 1576 and 1578. If section 1576 applies to ETCOG and these
subcontractors, the district court lacked jurisdiction both because
there has been no DOL sanction imposed and because section 1578
vests exclusive jurisdiction in the Court of Appeals after
administrative process. If section 1576 does not apply, there has
been no final action as required by the APA.
APA Finality
The APA permits review of agency action when authorized by
statute, which is not the case here, or when there has been "final
10
agency action" and there is no other adequate remedy in a court.
Veldhoen v. United States Coast Guard, 35 F.3d 222, 225 (5th Cir.
1994). "If there is no `final agency action' as required by the
controlling statue, a court lacks subject matter jurisdiction."
Id. at 225. DOL has not made any determination or imposed any
sanction against any party to this suit with regard to JTS and
ETI's excess revenues that can be considered "final agency action"
within the meaning of any provision of the JTPA or DOL's
implementing regulations.
Subcontractors and ETCOG argue that DOL's conduct in the
investigation, and in particular its work with TDOC in attempting
to disallow the revenues on the basis of state law, sufficiently
establishes final agency action. However, "an agency's initiation
of an investigation does not constitute final agency action."
Veldhoen, 35 F.3d at 225. Likewise, "[a]n attack on the authority
of an agency to conduct an investigation does not obviate the final
agency action requirement." Id. "Normally, the plaintiff must
await resolution of the agency's inquiry and challenge the final
agency decision." Id.
The subcontractors offered evidence that DOL assisted in
drafting TDOC determination letters and that DOL believed at one
point that the July 1989 policy could be applied retroactively to
reclaim JTS and ETI revenues. The Supreme Court has identified
four pragmatic factors for determining when agency action is final.
Those factors include: (1) whether the challenged action is a
definitive statement of the agency's position; (2) whether the
11
action has the status of law with penalties for noncompliance; (3)
whether the impact on the plaintiff is direct and immediate; and
(4) whether immediate compliance is expected. Abbott Laboratories
v. Gardner, 87 S. Ct. 1507, 1516-17 (1967). Although TDOC's
determinations, were they enforced, could have the status of law,
we refuse to accept the subcontractors invitation to impute TDOC's
enforcement actions to DOL. Cooperation between the state and
federal agencies implementing a federal statute is neither unusual
nor insidious. Likewise, as long as those agencies are acting in
good faith, they should be free to explore every potentially
legitimate basis for carrying out the duties assigned to them by
Congress. The judiciary should intervene to review agency action
only when, and to the extent, that such action has an "actual or
immediately threatened effect." Lujan v. National Wildlife
Federation, 110 S. Ct. 3177, 3191 (1990); Taylor-Callahan-Coleman
Counties v. Dole, 948 F.2d 953, 958-59 (5th Cir. 1991). DOL has
taken no action against JTS and ETI which has the force of law and
demands immediate compliance. In fact, what DOL seeks to protect
in this suit is its right to reach a definitive position. See
Abbott Laboratories, 87 S. Ct. at 1515 (ripeness doctrine, which
incorporates the finality requirement, is intended to protect
"agencies from judicial interference until an administrative
decision has been formalized and its effects felt in a concrete way
by the challenging parties").
We sympathize with the district court's frustration that,
although it has been five years since the audit and over two years
12
since the OIG report, DOL still has no final position concerning
ETCOG's procurement system and JTS and ETI's revenues. This is
not, however, an enforcement action. DOL's bureaucratic sloth in
making any final determination in this matter does not convert what
is essentially pre-enforcement investigation into final agency
action. Given the absence of final agency action, the district
court was without subject matter jurisdiction to entertain any of
the subcontractors' or ETCOG's claims against DOL.
Ripeness
Even if the finality requirement did not preclude district
court jurisdiction over the claims against DOL, we would still hold
that the claims against both DOL and TDOC which seek relief on the
basis that the revenues were properly earned under the JTPA are not
ripe for judicial resolution. Ripeness is a function of an issue's
fitness for judicial resolution as well as the hardship imposed on
the parties by delaying court consideration. Merchant's Fast Motor
Lines, Inc. v. I.C.C., 5 F.3d 911, 919-20 (5th Cir. 1993). Factors
governing whether an issue is ripe, in addition to the APA's
finality requirement (which applies only to DOL), include: (1)
whether the issues presented are purely legal; (2) whether the
impact on the petitioners is direct and immediate; and (3) whether
resolution will foster effective administration of the JTPA. Id.
at 919.
Determining whether the funds in issue are subject to
recapture under the JTPA or its implementing regulations is not a
purely legal inquiry. Rather, the issue is fact-bound, and
13
resolution will depend upon the particulars of ETCOG's procurement
system and the specific costs reported by JTS and ETI. The facts
offered to support JTS, ETI and ETCOG's claim that the funds in
dispute were properly earned relate primarily to whether DOL and
TDOC were retroactively applying the July 1989 "no-excess-revenues
for-non-profits" policy. The record is insufficient, and agency
expertise will be required, to rule out other possible grounds for
recapture under federal law. As of yet, neither TDOC nor DOL has
issued any determination or taken any action disallowing costs on
the basis of federal law. TDOC's initial and final determinations
were based on state law grounds for disallowing revenues in excess
of costs under Texas' regulations implementing the JTPA. There
has, therefore, been no state or federal agency action which has a
direct or immediate impact on the subcontractors or ETCOG as to
their claims seeking relief on the basis of federal law. DOL is
continuing its investigation into the facts relevant to the broader
determination of whether the revenues were proper on any basis.
Judicial intervention at this stage will deter rather than foster
effective administration of the statute. The subcontractors' and
ETCOG's claims against DOL and TDOC seeking a declaration that the
revenues are not subject to recapture under any provision of
federal JTPA law are not ripe for judicial resolution.
JTS and ETI contend that their claims are not subject to
finality or ripeness requirements because they are based on the
Constitution. The subcontractors' constitutional claims, to the
extent they are even colorable, relate to the issue of whether DOL
14
or TDOC can apply the July 1989 "no-excess-revenue-for-non-profits"
policy retroactively. Both the DOL and TDOC have repeatedly
conceded that revenues in excess of costs prior to July 1, 1989 are
not program income and may be retained by the contractor, provided
that those revenues were otherwise properly earned under the Act
and its implementing regulations. There is therefore no
justiciable issue on the retroactivity point. In any event, the
rule excusing constitutional challenges from the finality and
ripeness doctrines is not mandatory. See Thunder Basin Coal Co. v.
Reich, 114 S. Ct. 771 (1994). The subcontractors and ETCOG are not
immediately threatened with any agency action based on retroactive
application of the July 1989 policy and those claims are therefore
not ripe for judicial resolution.
The subcontractors' claims that the DOL and TDOC secretly
enforced the policy by finding independent state or federal law
grounds to disallow the revenues is nonsensical. If, in fact,
adequate and independent state or federal law grounds exist for
disallowing the JTS and ETI revenues, then DOL is not relying on
the objectionable policy. Should the DOL decide to sanction the
contractors directly, the agency will have to disclose the basis of
that decision. A fact-intensive review of that decision can then
occur, either under the JTPA or the APA. Therefore, there can be
no covert retroactive enforcement of the 1989 policy.
We will not risk condoning the misexpenditure of millions of
dollars in federal grant money by adjudicating, in advance of final
action by the responsible federal agency, whether the funds in
15
question were properly earned. The district court lacked subject
matter jurisdiction to entertain JTS and ETI's claims against DOL.
Allowing these parties to proceed with the identical claims, based
on federal law, against the responsible state agency would be
interfering unnecessarily with the administrative process. JTS,
ETI and ETCOG have not demonstrated any hardship or detriment to
their interests which justifies that intervention. To the extent
the subcontractors and ETCOG sought relief against TDOC based on
violation of federal law, those claims are not ripe for judicial
resolution.
STATE LAW CLAIMS
What remains are the subcontractors' and ETCOG's claims
against TDOC for breach of contract and violation of the state law
implementing the JTPA. We conclude that these claims do not fall
within the limited jurisdiction of the federal courts. Federal
question jurisdiction does not exist unless a right or immunity
created by federal law is an essential element of the plaintiff's
cause of action. Carpenter v. Wichita Falls Indep. Sch. Dist., 44
F.3d 362, 366 (5th Cir. 1995) (quoting Gully v. First Nat'l Bank,
299 U.S. 109, 111 (1936)). The subcontractors' and ETCOG's claims
do not require construction of any provision of the JTPA. Compare
City of Independence v. Bond, 765 F.2d 615, 618 (8th Cir. 1985)
(holding jurisdiction existed because claims went beyond contract
and required construction of JTPA § 1512). Both the statutory
language and the legislative history of the JTPA indicate that
Congress did not intend for JTPA contracts at the state level to be
16
"creations of federal law" that granted federal rights. See
Jackson Transit Authority v. Transit Union, 102 S. Ct. 2202, 2260-
08 (1982) (court must examine statutory language and legislative
history to determine whether Congress intended for contract
contemplated by federal statute to set forth federal claims); City
of Independence, 756 F.2d at 618-19 (distinguishing the case as
involving more than an interpretation of the state-level JTPA
contract). JTPA section 1554 requires state-level participants to
maintain grievance procedures. 29 U.S.C. § 1554. In addition, the
broad savings clause in JTPA section 1576 specifies that state law
grievance procedures or other non-JTPA law will govern resolution
of all but a narrow class of disputes. 29 U.S.C. § 1576. By
passing the JTPA, Congress departed from the policy in the
predecessor legislation, the Comprehensive Employment and Training
Act (CETA), and intended to delegate the "basic supervisory role
previously performed by the federal government" to the state,
"where it really belongs." S. REP. NO. 469, 97th Cong. (1982),
reprinted in 1982 U.S.C.C.A.N. 2336, 2638. Recognizing that job
training programs had been overregulated at the federal level under
CETA, Congress wanted to make the state the "key actor" charged
with ensuring financial responsibility and compliance with federal
mandates. Id. Thus, the JTPA holds the states directly
responsible for proper expenditure of grant money and delegates to
the state the authority for establishing fiscal control procedures
to assure the proper expenditure of JTPA funds. See 29 U.S.C. §
1574. We do not hold that a state-level dispute can never "arise
17
under" the JTPA. When as here, however, the plaintiffs' claims do
not require construction of any provision of federal law, the fact
that the contract or state law alleged to have been breached is a
creation of, or exists as the result of, a federal statute is
insufficient to confer federal jurisdiction.
CONCLUSION
The district court lacked jurisdiction to hear the
subcontractors' and ETCOG's federal law claims against the DOL,
which amounted to pre-enforcement attacks on non-final agency
action. For similar reasons, the district court should have
declined to entertain the federal law claims against TDOC as not
ripe for judicial resolution. Finally, the district court lacked
jurisdiction to consider the subcontractors' and ETCOG's claims
seeking relief that the disputed funds were not subject to
recapture on the basis of contract or state JTPA law. Accordingly,
the district court's order granting summary judgment in favor of
JTS, ETI and ETCOG will be vacated and the case remanded to the
district court with instructions. As a result of this decision,
both the state and federal agencies charged with administering the
JTPA remain free to pursue to final agency action regarding whether
the subcontractors' costs and excess revenues were reasonable and
necessary under ordinary agency standards and procedures existing
prior to July 1989. Given our conclusion that the district court
should not have heard the case, TDOC's contention on cross-appeal
that the district court neglected to enter summary judgment in its
favor against DOL is moot.
18
The district court's order granting summary judgment in favor
of JTS, ETI and ETCOG is VACATED, and the cause is REMANDED with
instructions (i) to dismiss all actions asserted against the DOL
and any claim under federal law against TDOC and (ii) to remand to
the state court from which this action was removed all remaining
state law claims and causes of action.
wjl\opin\93-5109.opn
ves 19