James T. Cross v. United States ( 1975 )

WINTER, Circuit Judge:

We heard this appeal in banc to resolve the difference in views expressed by the panel in Welch v. United States, 464 F.2d 682 (4 Cir. 1972). The question in Welch, which plaintiff asks us to reconsider here, is whether under the Food Stamp Act of 1964, 7 U.S.C. § 2011 et seq., a district court, in affording a “trial de novo” to determine “the validity of the questioned administrative action in issue”, 7 U.S.C. § 2022(c), may, in a proper case, reduce an administratively imposed sanction, even though it concludes that the Secretary of Agriculture, or his designate, properly found that the Act has been violated and imposed a sanction permitted by the statute and implementing regulations. In Welch, a majority of the court concluded that the district court lacked the power to go beyond the issue of the validity of the disqualification action and to modify the administrative sanction. Although Judge Butzner joined in the judgment because he thought that the administrative sanction was neither arbitrary nor capricious, he expressed the view that the scope of review by the district court extended to modification of the length of time a merchant is disqualified to participate in the food stamp program. In a subsequent unreported case, Shurkin v. United States, 473 F.2d 907 (4 Cir. 1973), the panel agreed that the administrative penalty which was imposed should be sustained, but, again, diverged as to the rationale of the result. Judges Craven and Butzner were of the view that the Secretary should be sustained because his action in fixing the penalty was neither arbitrary nor capricious; but Judge Russell, while agreeing that the Secretary had not abused his discretion, adhered to the majority view in Welch that the district court was powerless to change the penalty period.

We conclude to adopt the minority view in Welch¹ and hold that the scope of judicial review extends to the period of administrative sanction, notwithstanding that the Secretary did not impose a penalty exceeding that permitted by the statute or the regulations. What was said to the contrary in the majority opinion in Welch is no longer to be deemed to be the law of this circuit, although, of course, the judgment in Welch is unaffected. In the instant case, the judgment of the district court that it lacked authority to review the penalty is vacated and the case is remanded for further consideration in the light of the views expressed herein.

I.

Plaintiff, James T. Cross, together with his son, operates a rural South Carolina grocery store. Since 1968, he has been authorized to participate in the federal food stamp program. Two of the requirements of the program are that food stamps be accepted only for eligible food items, 7 C.F.R. § 272.2(b), and that no money be given in exchange for stamps in excess of 49 cents change in a food stamp transaction, 7 C.F.R. § 272.-2(e). On four occasions between 1968 and 1969 plaintiff was visited by program field officers, and twice he was warned that violations of either or both of these requirements could result in his disqualification from participation in the program.

Because of two admitted violations in 1969 and an apparently abnormally high volume of food stamp redemptions, Department of Agriculture agents made five investigatory shoppings of plaintiff’s store in 1971. On each occasion a clerk accepted food stamps for ineligible items² and, on several, the clerk gave change in cash in excess of 49 cents in food stamp transactions. Plaintiff was advised of these violations and told that he could make an oral or written explanation to the Food and Nutrition Service (FNS), Florence, South Carolina. Plaintiff and his son responded promptly by writing to FNS, stating that the offending clerk had a problem of excessive drinking, which rendered him incapable of carrying out his instructions with regard to food stamp transactions, and that the clerk had been discharged since his drinking problem became apparent. Plaintiff added, “I do not think that we have violated any of the terms or provisions of the Food Stamp Program.”

After receipt of plaintiff’s response, the FNS officer in charge of the Florence office recommended that plaintiff be disqualified from participation in the stamp program for ninety days in order to make plaintiff and his son “aware of Program regulations and their obligation to assure that all persons employed in this store were aware of and adhering to the regulations.” The Regional Office concurred in the proposed ninety-day disqualification, but the Acting Director of the Food Stamp Division in Washington increased the disqualification to a period of one year. He explained that the increase resulted from two factors: (1) that “the large number of major nongrocery items sold confirms that it is store policy ... to sell major nongrocery items,” and (2) that “sufficient compliance action had been taken before the investigation” and warnings given so that the case fell within the guidelines for a one-year disqualification which the Department of Agriculture set forth in written instructions for recommending and making final determinations.

Plaintiff’s counsel sought and obtained review by the Food Stamp Review Officer, but he affirmed the propriety of a one-year disqualification. Cross then sought judicial review of the validity of the administrative action. Both in the district court and here, Cross did not dispute that his former clerk had violated the federal food stamp regulations, but plaintiff sought a de novo review of the period of disqualification. The district court characterized the sanction as “harsh,” but, relying on the majority opinion in Welch, it declined to review the severity of the sanction and gave summary judgment enforcing it. The judgment has been stayed pending our review.

II.

The scope of review in an action of this nature is governed by 7 U.S.C. § 2022, and this section grants “a trial de novo well beyond the scope of review available under the general provisions of the Administrative Procedure Act [5 U.S.C. § 706(2)(F)].” Peoples v. United States Dept. of Agriculture, 138 U.S.App.D.C. 291, 427 F.2d 561, 565 (1970). As the several opinions in Welch and Martin v. United States, 459 F.2d 300 (6 Cir. 1972), demonstrate, § 2022, on its face, may be read either to limit the trial de novo to the fact of violation of the Food Stamp Act and its concomitant regulations, or to extend it to review also of the sanction imposed for violation. Other considerations, such as legislative history³ and application of the ordinary canons of statutory construction,⁴ aside, we think that because of the method by which the fact of violation and the penalty are determined, due process requires that § 2022 be construed to give the district court a measure of revisory power over the sanction if it determines that the fact of violation has been proved.

The Act vests in the Secretary the rule-making authority to devise a scheme of enforcement, 7 U.S.C. § 2013(c). The scheme provided for enforcement by the regulations permits an authorized retail food store to be disqualified from participation in the program for not more than three years if FNS finds that the retailer has failed to comply with the Act or the regulations. 7 C.F.R. § 272.6(a). Disqualification is decided on the basis of information gathered by FNS, except that the retailer is given notice of the charges against him and afforded the opportunity “to submit to FNS information, explanation, or evidence concerning any instances of noncompliance before a final determination is made.” 7 C.F.R. § 272.6(b). Any such explanation “shall be reviewed and considered by the Director, Food Stamp Division, who shall then issue his determination,” 7 C.F.R. § 272.6(c), but this consideration falls far short of the usual concept of a “hearing.” There is no confrontation with accusers, no opportunity to cross-examine and to test credibility, and no determination by an impartial fact-finder.

Once the Director, Food Stamp Division, makes his determination — and that determination may include a recommendation of disqualification for a certain period — the retailer may have the determination reviewed by a Food Stamp Officer. 7 C.F.R. §§ 273.3-273.5. If review is sought, the retailer has the right to file “written information in support of its position” and to appear in person, 7 C.F.R. § 273.7. The Food Stamp Review Officer may sustain the action under review, reverse it or modify it; he decides upon information submitted by the Director, Food Stamp Division, FNS, information submitted by the retailer in support of its position, and any additional relevant written information obtained by the Review Officer “from any other person.” 7 C.F.R. § 273.8. Again, it will be seen that the usual attributes of a full “hearing” are not present. In short, as Judge Butzner, concurring in Welch, correctly stated: “The only hearing allowed by the Act is in the district court.” 464 F.2d at 685.

We recognize that disqualification from participation in the food stamp program is not a criminal sanction. At the same time, that disqualification may have grave economic consequences to a retailer engaged in business in a depressed economic area where there is widespread use of food stamps. In such an area one who holds himself out as a retailer of food would be cut off from a substantial segment of the buying public if he is disqualified from engaging in food stamp transactions.

The opportunity to engage in food stamp transactions as a retailer is, of course, a privilege and not a right,⁵ but, under current law, the dichotomy of treatment between privilege and right has been obliterated.⁶ The constitutional guarantee of due process of law applies to both; and we think it applies here, because in a very real sense plaintiff will be deprived of “property” if he is disqualified from participation in the program for any period of time. Thus, we readily conclude that he may not be deprived of participation in the program, on the basis of his alleged wrongdoing, without being afforded procedural due process. Since, as we have shown, full procedural due process is not provided at the administrative levels where the fact and duration of disqualification aré determined, we think that § 2022 must be read to afford it in the district court so as to preserve the regulatory scheme from constitutional attack.⁷ Of course, in the instant case, plaintiff does not contest the fact of violation of the Act and the regulations, but this does not totally oust review. It is the sanction imposed, once a violation of the Act or regulations has been found, that constitutes the deprivation of property, not the mere fact of violation, and the Constitution requires that due process be afforded before that deprivation becomes effective. Moreover, the gravity of the offense and possible mitigating circumstances usually present questions of fact and, in the instant case, they have not yet been determined in a proceeding in which procedural due process has been afforded.

In concluding that the district court must afford review to the sanction of disqualification where, as here, the fact of violation is not contested, or where in other cases the district court finds de novo that a violation occurred, we add a word about the scope of judicial review. Due process on the issue of sanction requires that the punishment follow rationally from the facts,⁸ be authorized by the statute and regulations,⁹ and aim toward fulfillment of the Act’s purposes. The standard of review which is employed in the Administrative Procedure Act, 5 U.S.C. § 706(2)(A), the Welch concurrence, and the Shurkin majority, is that the court shall decide whether the administrative sanction is “arbitrary or capricious.” Section 2022 itself requires the district court to review the sanction for “validity.” As recently reiterated in Butz v. Glover Livestock Commission Co., 411 U.S.182,185-186, 93 S.Ct. 1455, 1458, 36 L.Ed.2d 142 (1973), “the Secretary’s choice of sanction . . . [is] not to be overturned unless . . . it [is] ‘unwarranted in law or . . . without justification in fact ._ . ,.’”¹⁰

We deem all three of these expressions synonymous and they define the due process which we hold must be afforded. To be “valid,” a sanction must not be arbitrary and capricious, and a sanction is arbitrary and capricious if it is unwarranted in law or without justification in fact. Thus, the scope of review of a sanction is not as broad as the scope of review of the fact of violation. The more limited scope of review of a sanction results from the vesting of discretion by Congress in the Secretary to devise and administer a scheme of disqualifications (7 U.S.C. § 2020) for the effective and efficient administration of the food stamp program (7 U.S.C. § 2013(c)). The Secretary has done so, both in his formal regulations, 7 C.F.R. § 272.6(a), and in the instructions of his designate, the Deputy Administrator, FNS, contained in a memorandum dated March 13, 1970 to Regional and Field Offices, Food Stamp Division, setting forth successive periods of disqualification and defining what categories of violations warrant each period of sanction. Thus, the views of the Secretary as to the appropriate sanction in a given case of violation are entitled to very great, if not conclusive, weight.

In the instant case, there may be room to question the validity of the sanction,¹¹ although we hasten to add that we express no view on what was a proper period of disqualification to impose on plaintiff. The district court characterized it as “harsh,” but we do not conceive this to be a test. Rather, only in those instances in which it may be fairly said on the de novo record as a whole that the Secretary, acting through his designates, has abused his discretion by acting arbitrarily or capriciously, would the district court be warranted in exercising its authority to modify the penalty. Even in those instances in which a district court may find on de novo review that the Secretary erred in his determination of the fact and gravity of the violations, it would be incumbent on the district court to prescribe an alternate penalty, not on the basis of what it, in the exercise of its judgment, would consider reasonable and just, but within the guidelines set by the Secretary for the enforcement of the Act.

Since, in the instant case, the district court understandably thought that it lacked power to review the period of disqualification, .we vacate its judgment and remand the case to permit the review to be afforded.

Vacated and remanded.

1 . See also Martin v. United States, 459 F.2d 300, 302-303 (6 Cir. 1972) (dissenting opinion).

2 . These were nonfood items such as toothpicks and pantyhose, beer and dog food, snuff and light bulbs.

3 . The Senate Report accompanying the Food Stamp Act explained that § 2022 “provides for administrative and judicial review of the decision of the Secretary with respect to tfie disqualification of [a retail or wholesale food concern participating in the program] . . 1964 U.S.Code, Cong. & Admin.News, p. 3291. While this statement hardly solves the problem before us, it provides no support for the argument that judicial review may not include reduction of the period of disqualification, where appropriate.

4 . There are two key phrases in § 2022: “trial de novo” and “validity.” The phrase “de novo” means “the court should make an independent determination of the issues.” United States v. First City National Bank of Houston, 386 U.S. 361, 368, 87 S.Ct. 1088, 1093, 18 L.Ed.2d 151 (1967), cited in Farmingdale Supermarket, Inc. v. United States, 336 F.Supp. 534 (D.N.J.1971), a § 2022 case. With this choice of words Congress authorized the reviewing court to engage in its own fact-finding, when, as is not the case in Cross, the agency’s findings are disputed. Limitation on the court’s review of the agency’s sanction can only be derived from Congress’s insertion of the word “validity” into its authorization of judicial review. In a sense, our opinion is an explanation of what we believe “validity” must be held to mean.

5 . See, e. g., Graham v. Richardson, 403 U.S. 365, 374, 91 S.Ct. 1848, 1853, 29 L.Ed.2d 534 (1971) (“[T]his Court now has rejected the concept that constitutional rights turn upon whether a governmental benefit is characterized as a ‘right’ or as a ‘privilege.’ ”)

6 . The word more favored than “right” or “privilege” is “interest.” See Board of Regents v. Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 33 L.Ed.2d 548 (1972).

7 . See Croweil v. Benson, 285 U.S. 22, 62, 52 S.Ct. 285, 76 L.Ed. 598 (1932).

8 . It is not true, however, that similar violations must result in uniform sanctions. “Mere unevenness in the application of the sanction does not render its application in a particular case ‘unwarranted in law.’ ” Butz v. Glover Livestock Commission Co., 411 U.S. 182, 188, 93 S.Ct. 1455, 1459, 36 L.Ed.2d 142 (1973). On the other hand, excessive variance, something more striking than “mere unevenness,” would be evidence of arbitrary or capricious action, because in that instance it may well be concluded that the Secretary failed to observe his own regulations and therefore the sanction was unwarranted in law.

9 . An agency must follow its regulations as well as statutory mandates. See United States ex rel. Accardi v. Shaughnessy, 347 U.S. 260, 74 S.Ct. 499, 98 L.Ed. 681 (1954); United States v. Heffner, 420 F.2d 809 (4 Cir. 1969). Since the statute authorizes the Secretary to determine periods of disqualification for infractions of the Act or the regulations, 7 U.S.C. § 2020, attention must be paid both to the relevant regulation, 7 C.F.R. § 272.6(a), and the Deputy Administrator’s memorandum, referred to in the text, which fleshes out the somewhat general provisions of the regulation.

10 . It should be noted that the sanction in Glover Livestock was arrived at only after full procedural due process was afforded at the administrative level as provided in 9 C.F.R. §§ 202.5-202.22. In such a case, in contrast to that here, one would predict that a district court would be less likely to find that the Secretary had made an incorrect fact determination since the facts were found in an adversary proceeding.

11 . As an example, the Deputy Administrator’s memorandum states that a factor requiring a one-year period of disqualification is evidence that the retailer, “as a matter of store policy,” is, inter alia, engaged in selling ineligible items for coupons, and apparently the Acting Director made that finding in the instant case. Notwithstanding plaintiff’s admission that the violation occurred, it is possible that plaintiff’s explanation of his difficulties with an alcoholic clerk might negate this factor and might indicate the propriety of a lesser sanction as specified in the memorandum.