Ramzi, Inc., et al. v. Department of Public Health (Lawyers Weekly No. 11-053-14)

SULLIVAN, J.  Ramzi, Inc., doing business as North End Market, Nahed Benyamin, and Emad Benyamin (collectively, Ramzi) appeal from a judgment of the Superior Court affirming, in pertinent part, a decision of the Division of Administrative Law Appeals (DALA) upholding a determination of the Department of Public Health (department) to disqualify Ramzi as a WIC vendor for three years and to terminate Ramzi’s WIC vendor status.  On appeal, Ramzi contends that the judge erred as a matter of law in affirming the DALA decision.  We conclude that an amendment to the governing statute, and ensuing regulatory changes, require a remand to DALA for further consideration of so much of its decision disqualifying Ramzi for a three-year period.  Accordingly, we affirm in part and reverse in part.

Background.  The undisputed facts are set forth in the administrative record and are summarized as follows.

1.  The regulatory scheme.  WIC is a federally funded supplemental food program for income-eligible women, infants, and children.  The program, which is administered by the States, provides WIC checks redeemable in grocery stores, pharmacies, and farmers’ markets for approved foods.  See 42 U.S.C. § 1786 (2012); 7 C.F.R. § 246.1 (2009).  In the Commonwealth, WIC is administered by the department, subject to regulations promulgated by the United States Department of Agriculture (Department of Agriculture).  See 42 U.S.C. § 1786(b)(12) & (f); 7 C.F.R. §§ 246.1 & 246.3(b).

2.  Vendor agreements and compliance monitoring.  The department’s vendor agreement incorporates pertinent regulatory requirements applicable to WIC vendors.  The department and Ramzi entered into a vendor agreement, which outlines the responsibilities of a WIC vendor and potential violations and penalties for those violations, as set forth in the Federal regulations.  7 C.F.R. § 246.12(h)(1)(i) & (h)(3)(i)-(xxv).  Upon entering into the vendor agreement, Ramzi became a qualified WIC vendor and was authorized to sell WIC-approved items to WIC recipients according to the protocol set out in the vendor agreement.  Ibid.

Federal regulations require that the department routinely monitor State-approved WIC vendors for “compliance with program requirements.”  7 C.F.R. § 246.12(j)(1).  Violations of the standards set forth in the vendor agreement may result in sanctions up to and including suspension or termination from the WIC program.  The vendor agreement sets out four classes of violations, ranging from Class I to Class IV.  Each class represents a different and more serious degree of violation (Class I being the highest), and carries penalties of increasing severity.  See 7 C.F.R. § 246.12(l)(1)(ii)-(iv) & (l)(2)(i).

3.  The covert buys.  The department sent an undercover compliance buyer (buyer) to the North End Market (market) on four separate occasions in September and October of 2009.  See 7 C.F.R. §§ 246.2 & 246.12(j)(4)(i)-(ii).  During the first visit, the buyer purchased items using two types of WIC checks.  The cashier asked the buyer to sign the WIC checks before the cashier wrote the total amount of the buyer’s purchase on the checks, a Class IV violation.  See 7 C.F.R. § 246.12(l)(2)(i).  After the visit, Ramzi submitted the checks to the department for reimbursement for an amount greater than the actual amount of the items purchased by the buyer, a Class II violation.  See 7 C.F.R. § 246.12(l)(1)(iii)(C).  This conduct was repeated on each of the three subsequent visits to the market by the buyer.  The department also determined that Ramzi failed to disclose prices of WIC-approved items offered for sale on two occasions, posted a price for a WIC item that was higher than the price Ramzi had on file with the department, and failed to enter the amount of the purchase before the buyer countersigned the check on four occasions, all Class IV violations.  See 7 C.F.R. § 246.12(l)(2)(i).

4.  The sanctions.  Based on the Class II violations, the department imposed the sanctions set forth in the Federal regulations and incorporated in the vendor agreement.  The department terminated Ramzi’s vendor agreement and disqualified Ramzi from participating as a WIC vendor for three years.  See 7 C.F.R. §§ 246.12(l)(1)(iii).  The department also assessed seventy sanction points for the Class IV violations that occurred during the 2009 investigation.  The penalty for the Class IV violations was a one-year disqualification.  See 7 C.F.R. § 246.12(l)(2).  Because the State agency must disqualify the vendor for the period corresponding to the most serious mandatory violation, the three-year disqualification for the Class II violation was imposed.  See 7 C.F.R. § 246.12(l)(1)(xii).

Discussion.  Our view of the order allowing judgment on the pleadings is governed by G. L. c. 30A, § 14.  We “may overturn or modify the agency’s decision only on narrow grounds, such as if it is ‘[u]nsupported by substantial evidence’ or ‘[b]ased upon an error of law.’”  Gauthier v. Director of the Office of Medicaid, 80 Mass. App. Ct. 777, 783 (2011), quoting from G. L. c. 30A, § 14(7), as appearing in St. 1973, c. 1114, § 3.

1.  The Class II violations.  The vendor agreement specifies that Class II violations include, among other things, “a pattern of . . . [o]vercharging . . . by writing in a price on the WIC check that is higher than . . . [what was] actually purchased” and “a pattern of . . . [c]harging . . . a set price by check type instead of pricing each check for actual, authorized WIC products actually purchased.”  This definition mirrors the Federal regulation.  7 C.F.R. § 246.12(l)(1)(iii)(C) & (E).  The vendor agreement defines a pattern “as two or more incidences of a violation.”  The department found, and DALA concluded, that Ramzi committed multiple Class II violations by (1) overcharging the department on four separate occasions, and (2) charging a set price by check type instead of charging the actual price of the items purchased on four separate occasions.

a.  Notice.  On appeal, Ramzi does not contest the sufficiency of the evidence of the violations.  Rather, Ramzi contends that it did not receive written notice of the initial violation in contravention of the clause in the vendor agreement that requires the department to “notify a vendor in writing when an investigation reveals an initial violation for which a pattern of violations must be established in order to impose a sanction, before another such violation is documented, unless the [department] determines that notifying the vendor would compromise its investigation” (emphasis original).  Ramzi contends that in the absence of notice, it was improper to find that there was a pattern of violations.  The department contends, and the judge found, that no notice was required because there was an ongoing covert operation that fell within the exception in the vendor agreement.

As noted above, the vendor agreement is a creature of Federal law and regulation.  See 7 C.F.R. § 246.12(h)(1)(i) & (h)(3)(i)-(xxv).  By its terms, and the provisions of the governing regulations, the vendor agreement must be construed in accordance with applicable law.  Similarly, while “we give ‘substantial deference’ to an agency’s interpretation of those statutes which it is charged with enforcing,” Souza v. Registrar of Motor Vehicles, 462 Mass. 227, 228-229 (2012), quoting from Providence & Worcester R.R. v. Energy Facilities Siting Bd., 453 Mass. 135, 141 (2009), the department may not enforce the vendor agreement in a manner violative of the Federal mandate.

b.  Congressional action.  The notice provision in the vendor agreement is a result of the passage of § 203(c)(5) of the Child Nutrition and WIC Reauthorization Act of 2004, Pub. L. No. 108-265, 118 Stat. 773 (2004) (Act).  The Act, which was effective October 1, 2004, amended the Child Nutrition Act of 1966 to require notice of an initial violation where sanctions are based on a finding of a pattern of occurrences, unless notice would compromise the investigation.  See 42 U.S.C. § 1786(f)(26).  In December of 2004 and April of 2005, the Department of Agriculture issued policy memoranda to the State agencies.  Those memoranda explained that the new legislation superseded previous regulations, and imposed the written notice requirement.  See WIC Final Policy Memorandum # 2005-1, Implementation of Certain WIC Vendor Provisions of P.L. 108-265 (Dec. 6, 2004) (“Vendor agreements and sanction schedules need to be reviewed and amended as appropriate to reflect this new requirement”); WIC Final Policy Memorandum # 2005-1A, Implementation of Certain WIC Vendor Provisions of P.L. 108-265 (Apr. 20, 2005).

c.  Regulatory proceedings.  The December 6, 2004, Memorandum suggested that a covert operation was sufficient to justify an exception to the notification requirement.  After issuance of a proposed regulation and the ensuing notice and comment period, the Department of Agriculture rejected a categorical approach to covert operations in the final regulation.  The comments and the final regulation, like the proposed regulation, state that determinations must be made on a case-by-case basis, and that the agency must either issue a written notice after the first violation, or document in the vendor file the “reason(s) for determining that such notice would compromise an investigation.”  74 Fed. Reg. 551 (2009).  7 C.F.R. § 246.12(l)(3)(i).  By way of further explanation, the background section to the final rule also states, “§ 246.12(l)(3) of the final rule, unchanged from the proposed rule, does not permit the State agency to exclude an investigation from the notification requirement on the sole basis that the investigation is covert” (emphasis added).  74 Fed. Reg. 550.

d.  Impact of the final regulations.  Although the parties briefed and argued the issue of notice on appeal, neither party initially addressed the existence of the Act or the ensuing regulations.  Ramzi confined his arguments to the vendor agreement; the department relied on regulations in effect on January 1, 2009, which stated that no notice was required.  As noted above, this regulation was explicitly superseded by the statutory amendment; the Department of Agriculture’s December 6, 2004, Memorandum; and the final regulations, effective March 9, 2009.

After supplemental briefing, Ramzi asserts that the notice requirement has not been satisfied and is applicable to all violations.  The notice requirement, while clearly applicable to Class II violations, is not applicable to Class IV violations under the regulations, because the Class IV violations do not require proof of a pattern.  See note 9, supra.  Accordingly, we consider the notice requirement only with respect to the Class II violations.

The department asserts that the presence of a covert operation coupled with the wilful nature of the initial violations is sufficient to justify the lack of notice with respect to Class II violations.  At the same time, the department now correctly points out that Pub. L. No. 108-265 and the final regulations (effective March 9, 2009) governing the notice issue were not addressed at DALA or in the Superior Court.  The record is inadequate to address the department’s exercise of discretion, or whether a statement of reasons is documented in Ramzi’s vendor file.  The applicable law and regulations were not provided to the judge of the Superior Court, or to DALA, and neither party has provided us with the DALA transcript from which to ascertain the presence of other factors, or the kind of case-by-case analysis suggested in the regulations.  However, based on the applicable law, it is clear that the judge’s conclusion that the presence of a covert investigation is in and of itself sufficient to invoke the exception to the notice requirement is in conflict with the governing regulation and therefore cannot stand.  We therefore reverse this portion of the judgment and remand the case for further proceedings.

2.  The Class IV violations.  A State agency may provide further sanctions for certain violations not specified in the Federal regulations provided that the sanctions are included in the State agency’s sanction schedule.  See 7 C.F.R. § 246.12(l)(2)(i) (defining “State agency vendor sanctions”).  Here the vendor agreement outlines in detail the Class IV State agency violations, and levies sanction points for specified Class IV violations.  The vendor agreement specifies that “[t]he accumulation of twenty (20) or more Sanction Points based on Class IV violation(s) shall constitute sufficient grounds to disqualify a Vendor for one (1) year.”  No pattern need be established to sustain a one-year suspension based on State agency vendor sanctions.  See ibid.; 74 Fed. Reg. 551-552.

The department levied a total of eighty sanction points for various Class IV violations.  Of the eighty points, seventy points were assessed for violations during the four 2009 compliance buys, and ten points were previously assessed in 2008 during a separate investigation.  On appeal, Ramzi argues that the 2008 violation notice was insufficient to serve as notice of a pattern of Class IV violations in 2009.  Neither the regulations nor the vendor agreement require that a pattern be established based on the accumulation of sanction points.  See note 9, supra.  “The State agency has the discretion to define such violations and the resulting sanctions, including the number of violative incidents required[, provided that] the resulting disqualifications may not exceed one year.”  74 Fed. Reg. 552.

We need not reach Ramzi’s argument that there was a deprivation of due process because it was not afforded an opportunity to appeal the 2008 violation notice.  As the administrative magistrate stated, the department’s “case on the Class IV violations noted during the compliance buyer’s 2009 store visits sufficed to show that a one-year disqualification from the WIC Program was mandatory under the Vendor Agreement” without reference to the 2008 violation.  The judge was correct in upholding DALA’s determination that the department did not err in disqualifying Ramzi as a WIC vendor for one year.

Ramzi also challenges the sufficiency of the evidence to support DALA’s determination that the department’s decision to impose a one-year suspension, rather than a monetary penalty, was appropriate.  This factual question turns on the department’s findings regarding whether disqualification would result in inadequate participant access to WIC vendors.  See 7 C.F.R. § 246.12(l)(1)(ix) & (l)(8).  On the basis of the record before us, and the limited arguments made on appeal, we conclude that this contention is without merit.

Conclusion.  The portion of the judgment affirming the termination of Ramzi’s vendor agreement and disqualification as a WIC vendor for a three-year period is reversed and remanded to the Superior Court with instructions to remand the matter to DALA for further consideration consistent with this opinion.  The remaining portion of the judgment is affirmed.

So ordered.

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