Rehearings and Rehearing En Banc Denied November 20, 1985.
OPINION OF THE COURT
GIBBONS, Circuit Judge:
Robert Albanese, a blind vendor licensed to operate a vending site under the Randolph-Sheppard
The Statutory Scheme
The Randolph-Sheppard Act first became law in 1936. Pub.L. No. 74-732, ch. 638, 49 Stat. 1559 et seq. (1936) (codified as amended at 20 U.S.C. §§ 107-107f (1982)). As originally enacted, the Act provided in relevant part:
49 Stat. at 1560. By its terms the Act afforded to state agencies responsible for rehabilitation of blind persons the opportunity to gain access to sites in federal buildings if the agencies were willing to cooperate with the federal Commissioner of Education in a rehabilitation program for such persons. Manifestation of a state's willingness to enter the program, which applied to both federal and "other buildings in [the] [s]tate," id at 1559, required that the state agency "make application to the Commissioner of Education and agree" to federal requirements. Id. at 1560. Thus, as first enacted, the Randolph-Sheppard Act contemplated a contractual relationship between participating states and the federal government.
In the Vocational Rehabilitation Amendments of 1954, Pub.L. No. 83-565, ch. 655, 68 Stat. 663, section 3 of the Randolph-Sheppard Act was substantially amended,
68 Stat. at 664. The 1954 amendment thus carried forward the contractual relationship feature of the original Act and added the foregoing requirement that the state agree that blind vendors have certain property interests in the businesses established pursuant to the Act. The blind vendors became, in effect, third party beneficiaries of the agreements between the participating states and the federal government. Moreover the states applying to participate in the program undertook in section 3(6) to provide for blind licensees dissatisfied with the operation of the program "an opportunity for a fair hearing." The 1954 amendment did not, however, specify the nature of the hearing or the relief which should be afforded as a result of such a hearing. Nevertheless, it is clear that by authorizing the federal government to contract with the states on the terms specified in section 3, Congress intended to confer legally enforceable rights on the blind beneficiaries of the program. The term "fair hearing" cannot otherwise be understood than as an expression of the intention to require participating states to provide a mechanism of dispute resolution to effectively enforce those rights. States participating in the program after 1954 are so bound. In consideration of the states' undertakings, the federal government grants to state agencies the right to license federal sites to blind vendors.
Senator Jennings Randolph, the longtime chairman of the Subcommittee on Handicapped Workers of the Senate Committee on Labor and Public Welfare, dissatisfied with the workings of the program, in 1969 proposed legislation which would require binding arbitration between grieving blind vendors and state agencies and between state agencies and the federal government. S. 2461, 91st Cong.2d Sess. (1969). Hearings were held on S. 2461 in both the Senate and the House of Representatives, but the 91st Congress adjourned without considering it further. Senator Randolph introduced a similar bill, S. 2506, in the 92d Congress in September of 1971. A renamed Subcommittee on the Handicapped reported S. 2506 to the full committee, but agreed to a resolution directing a study of the program by the Comptroller General of the United States. That study, entitled Review of Vending Operations on Federally Controlled Property, No. B-176886, was presented to Congress in September 1973. Senator Randolph introduced S. 2581 which reflected some of the findings contained in the Comptroller General's report. S. 2581, 93d Cong. 1st Sess. (1973). Following hearings, S. 2581 was reported favorably by the Subcommittee on the Handicapped. A House Bill, H.R. 14225, substantially similar to S. 2581, was passed over a presidential veto and became law on November 21, 1974. Pub.L. No. 93-651, 89 Stat. 2-3 (1974).
Section 5(a) of the 1974 Act provides:
20 U.S.C. § 107d-1(a) (1982). This provision thus defines the "fair hearing" which the state must agree to provide as "a full evidentiary hearing." Section 5(a) continues:
20 U.S.C. § 107d-1(a) (1982). Thus the arbitration to which a participating state agrees by virtue of the 1974 amendment to section 3 occurs, if requested, following an evidentiary hearing at the state agency level. The arbitration is conducted before a panel convened by the Secretary of Health, Education and Welfare. Section 6(b) of the 1974 Act specifies the makeup of the arbitration panel. 20 U.S.C. § 107d-2(b).
Section 6(a) of the 1974 Act provides in relevant part:
20 U.S.C. § 107d-2(a) (1982). The cross-references to Chapters 5 and 7 of Title 5 are to the administrative procedure and judicial review provisions of the Administrative Procedure Act. In this respect section 6(a) is unique, in that it provides for a scope of judicial review considerably broader than that available under the Federal Arbitration Act. 9 U.S.C. §§ 9, 10. Under that Act, arbitrators' decisions on the merits are generally regarded as substantially unreviewable so long as the decisions draw their essence from the contractual undertaking to arbitrate. Ludwig Honold Manufacturing Co. v. Fletcher, 405 F.2d 1123, 1128 (3d Cir.1969). By contrast, 5 U.S.C. § 706 (1982) permits the reviewing court to set aside agency adjudicative actions which are: arbitrary, capricious, an abuse of discretion or otherwise not in accordance to law, without observance of procedures required by law, or unsupported by substantial evidence.
A careful review of the evolution of this unique statutory review scheme suggests the reasons why it was chosen by Congress. Originally, in S. 2461 in 1969 and S. 2506 in 1971, Senator Randolph proposed merely to amend Section 3(6) dealing with arbitration between operators and the state so it would read:
Arbitration between the states and the federal government was provided for in a separate
By the fall of 1973, when the Subcommittee on the Handicapped held hearings on S. 2581, the arbitration clauses were, for practical purposes, in their present form.
Randolph-Sheppard Act for the Blind Amendments of 1973: Hearings on S. 2581 Before the Subcomm. on the Handicapped of the Senate Comm. on Labor and Public Welfare at 47-48, 93d Cong., 1st Sess. (1973) (Testimony of Charles Hoehne, Executive Director, National Council of State Agencies for the Blind). In his prepared statement Mr. Hoehne noted:
Id. at 84. Thus the spokesperson for the state agencies participating in the Randolph-Sheppard program strongly supported the concept of arbitration of disputes, quarreling only with the composition of the arbitration panels when the dispute was between a blind vendor and a state agency.
Mr. Hoehne also commented on the judicial review provision:
Id. at 85-86. Mr. Hoehne's technical point was that judicial review to the extent provided in the Administrative Procedure Act made arbitration somewhat less binding than usual. Probably as a result of his comment the word "binding" which appears in S. 2581 was omitted from the bill as enacted. The endorsement of the judicial review provision by the National Council of State Agencies for the Blind reinforces our conclusion that the scope of judicial review of arbitral awards was broadened because of the perceived delicacy in subjecting governmental agencies, both state and federal, to enforcement of such awards.
Except for the unique judicial review provision, there is no indication in the text of the legislation or in any legislative history suggesting that Congress used the term arbitration in any manner different from its conventional usage in other contexts such as the Federal Arbitration Act. No witness in hearings on S. 2581, and no member of Congress ever suggested that the scope of relief which could be awarded in these arbitration proceedings, agreed to by virtue of a state's voluntary participation in the Randolph-Sheppard program, was in any degree different than that available in other arbitration proceedings.
For purposes of this case, Delaware, like all states participating in the Randolph-Sheppard program, made application and "agree[d] to submit the grievances of any blind licensee not otherwise resolved by [a fair hearing] to arbitration as provided in section 107d-1 of this title." 20 U.S.C. § 107b(6). In 1979, acting pursuant to 20 U.S.C. § 107b(5) and the Department of Education's Regulation, 34 C.F.R. 395.4 (1984), the Delaware Division of the Visually Impaired and the Delaware Committee of Blind Vendors developed rules and regulations governing the operation of the Randolph-Sheppard blind vendor program in Delaware. The rules, which set forth Delaware's responsibilities under the Act, were signed by Norman Balot, Director of the Delaware Committee of Blind Vendors
App. 18. Thus, in its own regulations Delaware has acknowledged its contractual obligation to the United States to submit disputes with blind vendors to binding arbitration.
The Albanese Dispute
Albanese is, as noted above, a blind vendor licensed by the Delaware Division of the Visually Impaired for participation in the Randolph-Sheppard program. Delaware has exercised the option, permitted by the federal regulations, of initially stocking each location, and retaining ownership of the equipment at each location. See 34 C.F.R. § 395.4(c) (1984). A federal regulation requires that state licensing agencies establish in writing and maintain policies which govern transfer, promotion, and financial participation of vendors. 34 C.F.R. § 395.7(c) (1984). In compliance with that regulation, Delaware's rules set forth a comprehensive scheme for the distribution
App. 15. (emphasis supplied).
In August of 1979 the Delaware Division of Visually Impaired solicited applications for management of its food vending facility at the Paramount Poultry Company, in Georgetown, Delaware. Two applicants responded. Albanese claimed to be the most senior qualified applicant, but the Division of Visually Impaired in October, 1979 appointed a less senior applicant. Albanese, pursuant to the Delaware regulations, mandated by 20 U.S.C. § 107b(6) and 34 C.F.R. 395.13(a) (1984), filed a grievance, which resulted in a full evidentiary hearing before a state hearing examiner on February 24, 1981.
The hearing examiner found that Albanese was the most senior qualified applicant, and ordered the Delaware Division of Visually Impaired to install him as manager of the Georgetown facility. Albanese commenced work there on April 1, 1981. The hearing examiner also ordered the state agency to pay a portion of Albanese's legal expenses but disallowed $1,254 of such expenses. The hearing examiner declined, however, to award Albanese the increased income he would have earned between the time he should have been appointed and April 1, 1981, when he commenced work.
Pursuant to 20 U.S.C. § 107d-1(a) Albanese filed a complaint with the Secretary of Education alleging his dissatisfaction with the failure of the state hearing examiner to award back pay and full legal expenses. The only relief sought in the complaint is:
In response to Albanese's complaint to the Secretary, the Delaware Division for the Visually Impaired on October 26, 1981 filed a somewhat astonishing "answer," in which after admitting to being the licensing agency designated to administer the Randolph-Sheppard Act blind vendor program, it challenged the merits of the hearing examiner's ruling. Although neither 20 U.S.C. § 107d-1(a) nor the implementing federal regulations make any provisions for review by the Secretary or for arbitration of a State agency's claim that a state fair hearing examiner granted too much relief to a blind vendor, the Division for the Visually Impaired requested that "[t]he hearing examiner's decision on the merits of this case placing Albanese in the management position at Paramount Poultry ... be overturned as violative of the rules and regulations of the Division for the Visually Impaired...." It is not clear whether this request was for relief from the Secretary, or from the arbitrator the Secretary would appoint pursuant to 20 U.S.C. § 107d-2(b). It is clear that with regard to disputes between blind vendors and state licensing agencies the statute confers on the Secretary only the authority to convene an ad hoc arbitration panel. Moreover arbitration of such disputes is available only to a blind licensee dissatisfied with the decision of a state hearing examiner. 20 U.S.C. § 107d-1(a). The Division for the Visually Impaired, in the form of an "affirmative defense," also objected to the only relief sought by Albanese, alleging:
App. 27. Thus the State of Delaware, acting through its highest official, the Governor, having solemnly entered into an agreement with the United States, that in consideration for access to vending sites on federal property it would grant to all blind vendors fair hearings, and that it would submit to arbitration the claims by blind vendors dissatisfied with the outcome of such hearings, now asserted that the agreement was meaningless. At the same time, however, Delaware sought from some federal authority — either the Secretary or an arbitration panel — relief even from the limited award made by its own hearing examiner.
Unfruitful settlement negotiations followed. On May 13, 1982 the United States Department of Education ruled:
Letter from George A. Conn, Commissioner, Rehabilitation Services Administration, Office of the Assistant Secretary for Special Education and Rehabilitation Services, United States Department of Labor, to Jacob Kreshtool, Attorney for Robert Albanese (May 13, 1982). Thus the agency charged with the responsibility for determining whether to convene an arbitration panel made two rulings: (1) that Delaware's claim that Albanese should not have been placed in the Georgetown job is not arbitrable; and (2) that Albanese's claim for retrospective relief in the form of a monetary award is arbitrable. Such compensatory relief is the only relief Albanese sought, and the only claim submitted to arbitration. Thus the Agency charged with administration of the Randolph-Sheppard Act in effect rejected Delaware's contention that sovereign immunity barred an arbitration award of retrospective damages.
An arbitration panel was duly convened, and before that panel Delaware once again contended that despite its agreement with the United States, it could assert sovereign immunity against Albanese's claims. The arbitrators unanimously rejected that contention, reasoning:
App. 51-52. The arbitrators therefore awarded Albanese monetary damages in the form of back pay for the period of October 1, 1979 through March 31, 1981.
The arbitrators also addressed the claim for counsel fees. With respect to the state hearing officer's grant of a fee award the arbitrators made the following observations:
App. 56-57. We do not read the last quoted sentence as an exercise by the arbitrators of any assumed authority to review the attorney's fee award already in place as a result of the state hearing examiner's ruling. To that extent the award was not within the scope of the arbitration, because Albanese was not "dissatisfied" with it. 20 U.S.C. § 107d-1(a). Rather, the arbitrators merely cited the hearing examiner's award as authority for an award for fees incurred in the pre-arbitration proceedings. That is made clear by the arbitrators' award:
App. 57. Thus the arbitrators awarded the $1,254 in fees which the state hearing examiner disallowed.
The arbitration decision was received by the United States Department of Education on December 28, 1982. On January 6, 1983 that Department forwarded a copy to the Delaware Division for the Visually Impaired, and to Albanese advising them that they could seek judicial review pursuant to 20 U.S.C. § 107d-2(a).
District Court Proceedings
The Delaware Division for the Visually Impaired filed a complaint against the United
Complaint, ¶ 15, App. 7. The second claim avers that the award "is contrary to the constitutional rights, powers, privileges or immunities to which D.V.I. is entitled under Article I, Section 9 of Delaware's Constitution and the Eleventh Amendment to the United States Constitution." Complaint, ¶ 16, App. 7. It is unclear in what manner this second claim differs from the first, since state sovereign immunity and the Eleventh Amendment are the sole basis for the claim that the award is arbitrary, capricious, an abuse of discretion or not in accordance with law. Finally, a third claim maintains that the fee award is unlawful because of the provision in the Randolph-Sheppard Act which states that "[t]he Secretary shall pay all reasonable costs of arbitration under this section in accordance with a schedule of fees and expenses he shall publish in the Federal Register." 20 U.S.C. § 107d-2(d). Complaint ¶ 17, App. 7-8.
The United States Department of Education filed an answer which is in some respects internally inconsistent. First, the Department denied that it had adopted in its January 6, 1983 letter the decision of the arbitrators.
Answer ¶ 14, App. 77. The Department also pleaded that 20 U.S.C. § 107d-2(d) does not authorize the Secretary of Education to pay attorney's fees of blind vendors as part of "the reasonable costs of arbitration." Answer ¶ 17, App. 77. Thus the United States took the position that the dispute was one between Albanese and the Division for the Visually Impaired, except to the extent that the latter might attempt to shift the fee award to it. Instead of resting on the claim that it was the action of the arbitrators, not that of the Department, that was under review, and thus that the United States was not a proper party, the Department gratuitously, and for reasons which are unfathomable, decided to align itself with Delaware in opposing the award to Albanese. It pleaded:
Answer ¶ 15, App. 77. In its prayer for relief the United States asked the court to "[r]everse the disputed arbitration panel decision for the reasons set forth above." Answer, App. 78. This pleading is quite mysterious in that it is entirely inconsistent with the position that the Department took when it convened the arbitration panel for the sole purpose of considering Albanese's claim for retrospective monetary relief.
Thus, following the filing of the federal defendants' answer, it is doubtful that there was a genuine case or controversy over the validity of the arbitration award, since the state plaintiffs and the federal defendants were in complete agreement that Albanese, not yet a party, should lose. See Moore v. Charlotte-Mecklenburg Board of Education, 402 U.S. 47, 91 S.Ct. 1292, 28 L.Ed.2d 590 (1971); United States v. Johnson, 319 U.S. 302, 63 S.Ct. 1075, 87 L.Ed.
A. Compensatory Relief
When Congress in 1974 provided that states desiring to gain access to blind vendor locations in federal facilities must agree to submit to arbitration their disputes with blind vendors, the term arbitration had a well-recognized meaning. Congress was surely aware that arbitrators proceeding under the authority of the Federal Arbitration Act or under the authority of the Uniform Arbitration Act, as a matter of course awarded retrospective compensatory relief in appropriate cases. See generally, G. Wilner, Domke on Commercial Arbitration, § 30.02 (rev. ed. 1984). Furthermore, awards of back pay in arbitrations under collective bargaining agreements were, by then, commonplace. See, e.g., United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 80 S.Ct. 1358, 4 L.Ed.2d 1424 (1960).
The Randolph-Sheppard Act has specified, since 1936, the terms upon which participating states may contract with blind vendors. The contractual relationship is both analogous to and different from the relationship resulting from a collective bargaining agreement or a single person employment contract. It is analogous because the participating state, like a typical employer, maintains a large degree of control over the activities of the vendor. It is different because the vendor is compensated only out of the revenues which are generated at the site to which he is assigned. Nevertheless the relationship between the blind vendor and the state, like conventional employment relationships, is essentially contractual. The terms of the contract are standardized by virtue of the agreement between the participating states and the United States. Thus, since 1974 each blind vendor enjoys the benefit of the arbitration undertaking specified in 20 U.S.C. § 107b(6).
Since contract arbitration was in 1974 a legal concept with a well-settled content, there is no ambiguity in Senator Randolph's choice of the term. Moreover there is not one iota of legislative history suggesting that, insofar as it dealt with the relief which arbitrators could award, the term was understood by any member of Congress to have any meaning other than the conventional one.
The provision in 20 U.S.C. § 107d-2(a) for a scope of judicial review broader than that ordinarily available under the Federal Arbitration Act or the Uniform Arbitration Act does not suggest otherwise. The judicial review provision is applicable to any form of relief ordered by the arbitrators. Thus that provision lends no support for the distinction drawn by the district court between prospective and compensatory
Delaware can prevail, therefore, only if there is legal authority for it to welsh on its contractual undertaking to arbitrate Albanese's claim for compensatory damages. It relies for such authority on provisions of the Delaware Constitution and on the eleventh amendment. Neither lend support to the state.
The Delaware Constitution, and Delaware law generally, is in our view irrelevant. Delaware has entered into a contractual relationship with the United States, and is thus bound under the terms of the Randolph-Sheppard Act to arbitrate Albanese's claim. Federal law governs the extent of liability of parties to a contract with the United States. Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943). There is no indication in the Randolph-Sheppard Act, which authorizes the United States to contract with the states, that the program was intended to be subject to the vagaries of state law. See, e.g., Reconstruction Finance Corp. v. Beaver County, 328 U.S. 204, 66 S.Ct. 992, 90 L.Ed. 1172 (1946) (federal consent to local real estate taxes incorporates local definition of fixtures); United States v. Yazell, 382 U.S. 341, 86 S.Ct. 500, 15 L.Ed.2d 404 (1966) (Small Business Administration disaster loans subject to local married women laws respecting capacity to contract). Indeed it is inconceivable that Congress in 1936 or in 1974 could have intended to condition its grant of states' access to vending sites on federal properties on terms which could be rendered meaningless by state laws permitting default on those very terms. But in any event, Delaware law does not authorize the state to renege on an arbitration agreement. That law provides:
Del.Code Ann. tit. 10, § 5723 (1975). The reference to "this chapter" is to Delaware's version of the Uniform Arbitration Act. Id. § 5701 et seq. That Act provides that "[i]f the arbitration agreement provides a method of appointment of arbitrators, this method shall be followed." Id. § 5704. Delaware has agreed to the method of appointment provided in 20 U.S.C. § 107d-2(b). Thus Delaware law unequivocally authorized the state to contract with the United States on terms that would require it to arbitrate the claims of blind vendors, and to contract for arbitration with Albanese.
Thus Delaware's only remaining argument in support of vacating the arbitrators' award is that the eleventh amendment somehow authorizes it to withdraw unilaterally from an arbitration agreement which it made with the United States, acting in the interest of blind vendors. That contention lacks merit. Our rejection of the eleventh amendment's application in this case does not require that we review the nuances, complexities, historical inaccuracies, and errors which have bedeviled that amendment since its ratification.
Thus, the district court's vacation of the award of back pay cannot be affirmed on the theory that the eleventh amendment authorized Delaware to renege on the arbitration agreement.
B. Attorneys' Fees
The attorneys' fee dispute presents a narrow issue. We are not dealing with attorneys' fees incurred during the course of an arbitration proceeding.
As noted in Part II above, the arbitrators reviewed the time and billing rate and found both to be reasonable. Thus if an award of attorneys' fees was legally permissible, on any basis, for the services performed through the state level fair hearing, we could not find arbitrary or capricious action or an abuse of discretion. Indeed, the district court ruled against Albanese not on the basis that the arbitrators abused a discretion which they possessed respecting the amount of fees, but solely on the basis that any award was prohibited by the American Rule, as delineated in Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975) and Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U.S. 714,
While the American Rule generally prevents a successful federal litigant from recovering attorneys' fees in the absence of statutory authority or an explicit contractual term providing for an award to the prevailing party, the rule does not, however, address the question of whether an award of attorneys' fees is an appropriate element of compensatory damages for breach of contract. See Summit Valley Industries, Inc. v. Local 112, United Brotherhood of Carpenters and Joiners, 456 U.S. 717, 102 S.Ct. 2112, 72 L.Ed.2d 511 (1982). An award of attorneys' fees as an element of damages in a contract action would, of course, require the applicant for such an award to have prevailed in the lawsuit by proving breach. However, the source of authority for the award would be the contractual undertaking rather than any judge-made or statutory rule imposing fees in the nature of costs. Moreover, since most contracts derive their legal sanction from state law, the rules with respect to the availability of attorneys' fees as damages for breach, are, generally at least, state law rules. In this unique situation, however, the Randolph-Sheppard Act prescribes the terms and conditions on which the participating states may contract with blind vendors, and thus a federal rule of contract damages is appropriate, if not mandated. See id.; F.D. Rich Co., Inc. v. United States ex rel. Industrial Lumber, 94 S.Ct. 2157, 40 L.Ed.2d 703 (1974).
If this were an arbitration award reviewed under the standard applicable to Federal Arbitration Act cases, we would not hesitate to defer to the arbitrators' determination that a fee award is an appropriate contract damages remedy, since it would be within the authority of the arbitrators to decide both legal and factual questions. Because under 20 U.S.C. § 107d-2(a) and 5 U.S.C. § 706(2)(A) our decision on legal questions is plenary, on this question we owe the arbitrators no deference.
The question whether, as a matter of federal law, attorneys' fees are an appropriate element of damages for breach of contract between a blind vendor and a Randolph-Sheppard state licensing agency is entirely novel. It must be answered by determining what Congress intended — or perhaps might have said had the precise issue been addressed — when it required participating states to contract on the terms it specified. Summit Valley, 456 U.S. 717, 102 S.Ct. 2112, 72 L.Ed.2d 511. The overall congressional intent is clear enough, and is characterized by an unusually heightened concern for persons handicapped by blindness who could, with help, become self-sufficient. The evolution of the Randolph-Sheppard Act from 1936 through 1974 shows increasing concern that the contractual remedies available to those vendors be expeditious and completely effective. Although the statute does not deal specifically with pre-arbitration legal expenses, the overall scheme strongly suggests that the states must undertake to make blind vendors whole for breaches of the contractual obligations imposed on them by virtue of participation in the Federal Blind Vendors Program. Unlike the back pay remedy discussed in part III A, the fee question is, in our judgment, a close one. We conclude on balance that the undertaking of the states participating in the Randolph-Sheppard program is to make blind vendors whole for state breaches of contract, and that an award of attorneys' fees as contract damages is, in this unique circumstance, an appropriate means to that end.
The judgment vacating the arbitration award will be reversed and the case remanded for the entry of an order confirming it in full. 9 U.S.C. § 9 (1980).
The minor changes made to the original version of section 5(b) are not relevant to this appeal.
S.Rep. No. 937 to accompany S. 2581, 93d Cong., 2d Sess. 20 (1974).
U.S. Const. amend. XI.