Jobs, Training & Services, Inc. v. East Texas Council of Governments

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