Williams v. Secretary of Labor

Opinions of the United

1997 Decisions States Court of Appeals

for the Third Circuit

12-30-1997

Williams v. Secretary of Labor

Precedential or Non-Precedential:

Docket 97-3127

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Filed December 30, 1997

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 97-3127

BERT WILLIAMS,

Petitioner

v.

CYNTHIA METZLER, Acting Secretary, U.S. Department of

Labor and PUBLIC SERVICE, ELECTRIC AND GAS

COMPANY,

Respondents

ON PETITION FOR REVIEW OF A FINAL DECISION

AND ORDER OF THE SECRETARY OF LABOR

DATED JANUARY 15, 1997

(ARB Case No. 96-160)

Argued October 30, 1997

Before: NYGAARD, McKEE, and WEIS, Circuit Judges.

Filed December 30, 1997

David R. Culp, Esquire (ARGUED)

BERRY AND CULP, P.C.

7000 Crittenden Street

Philadelphia, PA 19119

Attorneys for Petitioner

Ellen R. Edmond, Esquire (ARGUED)

William J. Stone, Esquire

United States Department of Labor

200 Constitution Avenue N.W.

Washington, D.C. 20210

Attorneys for Secretary of Labor

Robert M. Rader, Esquire (ARGUED)

WINSTON & STRAWN

1400 L Street, N.W.

Washington, D.C. 20005

Attorneys for Public Service Electric

and Gas Company

OPINION OF THE COURT

WEIS, Circuit Judge.

In this case, we hold that the Secretary of Labor does not

have the authority, even with the consent of the parties, to

enforce a settlement agreement resolving a retaliation claim

brought by an employee/whistleblower against his

employer under the Energy Reorganization Act. We also

conclude that, as a matter of law, the Secretary

misconstrued the agreement when he found no breach of

the agreement by the employer. Accordingly, we will grant

the petition for review and remand for further proceedings.

Petitioner Bert Williams filed a complaint with the

Department of Labor under the Energy Reorganization Act

pursuant to 42 U.S.C. S 5851. He alleged that his employer,

Public Service Electric and Gas Company ("the company"),

had retaliated against him for raising a nuclear safety

violation that ultimately resulted in an $80,000 penalty

against the company. A preliminary investigation by the

2

Regional Office of the Department favored Williams. The

company sought an administrative hearing, but before the

retaliation claim reached an ALJ, Williams and the

company arrived at a settlement.

Williams was 62 years of age at the time of the

settlement, and it was decided that Williams would take an

early retirement. The agreement recited that he would

immediately receive benefits as if he had continued to work

until normal retirement at age 65. The Secretary approved

this settlement on June 8, 1994 and dismissed the

complaint with prejudice.

When the company began sending monthly payments in

amounts less than Williams anticipated, he asserted a

breach of the settlement agreement. He prepared and filed

a "Motion for Sanctions and to Enforce Settlement" with the

ALJ to whom the original complaint had been assigned in

which he asked the Secretary to enforce the agreement or,

in the alternative, bring an enforcement action in the

district court on his behalf.

The parties agree that the company had purchased an

annuity policy from an insurance company to fund its

obligations under the settlement agreement and that, on its

face, the policy would have paid the required amount per

month. However, because of the way the company

structured the annuity, withholding taxes reduced the

monthly payments substantially below the amount specified

in the agreement. It appears that the company unilaterally

selected the method of providing the retirement benefits,

but in defending its action, the company asserted that the

funding had been complicated by the Employee Retirement

Income Security Act, 29 U.S.C. S 1001 et seq., (ERISA) and

the withholding provisions of the Internal Revenue Code.

When presented with Williams' motion, the ALJ ruled

that he no longer had jurisdiction because the case had

previously been forwarded to the Secretary. Williams then

asked the Secretary either to remand the matter to the ALJ

"for enforcement of the terms of the Agreement and Order

or initiate, or join in, an action in the District Court to

enforce your Order."

3

The then Secretary, Robert Reich, rejected the company's

argument that enforcement "must be sought in the United

States District Court" and found that he had authority to

consider enforcement under the agreement's express

provision that "the Department of Labor shall retain

jurisdiction of this matter for purposes of enforcement of

this Agreement." Moreover, the agreement gave Williams the

"right to seek enforcement of the Agreement through the

Department of Labor" in the event of a material breach by

the company.

Remarking that "[i]t is clear that [the company] has not

paid Williams the agreed amount reflecting an annuity with

a survivor benefit," the Secretary questioned"whether [the

company] was required to make all the [tax] deductions up

front." He therefore remanded to an ALJ to "receive

evidence regarding the appropriate tax treatment of the

annuity and whether [the company] breached the

Agreement."

Before the ALJ, Williams contended that the company

had promised him full retirement benefits payable at age 62

rather than at age 65, and therefore he should pay taxes in

the same manner as other retirees. He said that he had

never applied for an annuity policy, nor had he been given

the option for a lump sum payment as is customary with

such contracts. To combat any suggestion that the

company's action had been dictated by applicable law,

Williams submitted an expert's report that explored

alternative means for funding that would have yielded the

agreed upon monthly benefits without running afoul of

ERISA or the Internal Revenue Code.

In defense, the company first explained the tax

consequences of purchasing a lump sum annuity. Next, the

company said it chose to buy an annuity policy rather than

make monthly payments from company funds because that

method might have subjected future payments to the risk

of the company's insolvency. The company never submitted

that option or any others, however, to Williams for his

consideration.

The ALJ concluded that the company had not breached

the agreement and denied Williams' motion. The

4

Administrative Review Board, authorized by the Secretary

to issue final decisions, affirmed.1

I.

Since resolution of many of the issues raised by this

appeal turns on the nature of the proceedings that occurred

before the agency, we think it helpful to begin by observing

that the record is subject to two characterizations. Williams

asked the Secretary to enforce the agreement, or in the

alternative, to "initiate, or join in" an action in the district

court. At various points in our discussion, we consider

whether the Secretary asserted authority to enforce the

agreement himself or held a preliminary fact-finding

proceeding simply to inform his decision whether to pursue

enforcement on Williams' behalf. Overall, either

characterization raises concerns about the nature of the

Secretary's action in this case.

With this clarification, we preliminarily raise, sua sponte,

the issue of subject matter competence -- that is, the

authority of the Secretary of Labor to enforce a settlement

agreement. The Act provides that either the Secretary or a

party may seek enforcement of a settlement in the district

court. 42 U.S.C. S 5851(d),(e). See also 24 C.F.R. S 24.8.

There is, however, no language authorizing the Secretary to

enforce without resorting to the district court.

In Macktal v. Secretary of Labor, 923 F.2d 1150, 1153

(5th Cir. 1991), the court recognized that the Act authorizes

the Secretary to act in one of three ways -- to grant or deny

the relief sought in a complaint, or to approve a settlement.

The Court explicitly rejected proffered analogies to civil

litigation in determining the extent of the Secretary's

jurisdiction: "[w]hile such analogies may be helpful, an

analogy cannot give the Secretary authority withheld by the

words of the statute, nor can analogies deprive the

Secretary of authority provided by the words of the statute."

Id. Thus, the Court held that the Secretary is authorized to

_________________________________________________________________

1. The Administrative Review Board designated its order as "final." The

Secretary of Labor has delegated authority to the Board to issue final

agency orders under the Energy Reorganization Act. 29 C.F.R. S 2.8.

5

approve or disapprove a settlement by the parties, but

cannot modify its terms without their consent. Id. at 1154.

Like the court in Macktal, we are faced with an action by

the Secretary beyond the scope of his statutorily prescribed

authority. Unlike in Macktal, however, the parties here do

not question the Secretary's authority to assert jurisdiction.

The question is whether the matter is of any consequence.

We think that it is.

A suit for breach of contract is a common law action of

ancient vintage and is properly cognizable in Article III

courts. In Commodity Futures Trading Commission v. Schor,

478 U.S. 833 (1986), the Supreme Court held that

Congress could authorize an administrative agency to

adjudicate a common law claim between two individuals in

connection with a regulatory proceeding. The Court noted

that a litigant having a personal right to an impartial and

independent federal court adjudication could waive that

right. Id. at 848. In Schor, the record demonstrated that the

complainant had elected to seek relief before the agency

rather than proceeding to judgment in a state or federal

court on his claim. Id. at 849-50.

Despite the waiver, however, the court discussed whether

the Commodities Exchange Act violated the Separation of

Powers Doctrine, which prevents "the encroachment or

aggrandizement of one branch at the expense of the other."

Id. at 850, quoting Buckley v. Valeo, 424 U.S. 1, 122 (1976)

(per curiam). In this context, the Court observed, "[t]o the

extent that this structural principle is implicated in a given

case, the parties cannot by consent cure the constitutional

difficulty for the same reason that the parties by consent

cannot confer on federal courts subject-matter jurisdiction

beyond the limitations imposed by Article III, S 2." Id. at

850-51.

In this case, the parties are attempting to vest

consensual jurisdiction in the Secretary to perform a

function that Congress has explicitly placed in the district

court. The issue is thus based on a statutory allocation of

powers rather than a constitutional one. We believe,

however, that Schor provides the guiding principle in these

circumstances. Allowing the parties' waiver to grant power

6

to an executive agency where the statute places that

authority in the judicial branch impermissibly flies in the

face of the intent of the statute. Congress could have given

the Secretary the jurisdiction that the parties assert here,

but chose not to do so.

It is significant that the Secretary does not claim a

general power to adjudicate disputes over the terms of

settlement agreements. In the proceedings of Pillow v.

Bechtel Construction, Inc., ARB Case No. 97-040, 1997 WL

563822 (Sept. 11, 1997), the Administrative Review Board

agreed "with the general proposition that after afinal

decision has been issued, the Board lacks jurisdiction over

a dispute about the proper interpretation of a settlement

agreement." Id. at *2. In making that pronouncement, the

Board cited and distinguished the case before us as an

example where jurisdiction was retained by an express

provision in the agreement. Id.

In the order remanding this case to the ALJ, the

Secretary concluded that "the retention of jurisdiction

clause [in the agreement] authorizes the Department to

hold further administrative proceedings prior to either the

Department or a party seeking enforcement in the district

court . . . [T]here is a genuine dispute whether [the

company] has breached the Agreement and I will exercise

my retained jurisdiction to resolve that dispute."

The Secretary cited Kokkonen v. Guardian Life Insurance

Company of America, 511 U.S. 375 (1994), for support. In

that case, the Court held that federal district courts have

no inherent authority to enforce a settlement once a final

judgment has been entered, but may do so if the agreement

expressly retains jurisdiction in the court for enforcement

purposes. Id. at 381. Unlike a district court, however, the

Secretary has no power to enforce under this Act and

therefore has no jurisdiction to retain. The Secretary's

authorization is limited to seeking enforcement in the

district court.

We can perceive the value to the Secretary of having an

explanation of the parties' dispute in the interest of making

an informed decision whether to proceed in the district

court. See Vermont Yankee Nuclear Power Corp. v. Natural

7

Resources Defense Council, Inc., 435 U.S. 519, 543 (1978)

(agencies should be free to devise methods of inquiry

capable of permitting them to discharge their multitudinous

duties). That explanation, however, does not support the

Secretary's authority in other situations to make a formal

adjudication entitled to preclusive effect in subsequent

district court actions. See United States v. Utah Constr. and

Mining Co., 384 U.S. 394, 422 (1966) (res judicata may

attach to issues resolved in adjudicative administrative

proceeding); Thompson v. United States Dep't of Labor, 885

F.2d 551, 556-57 (9th Cir. 1989) (same).

If the Secretary's decision serves to block full

consideration of the merits in the district court, then the

Secretary has done indirectly what is ultra vires if done

directly. For example, should the Secretary decide that one

party has breached a settlement agreement, the other party

in a subsequent enforcement action in the district court

could invoke claim preclusion to bar a complete

determination on the merits by the district court.2 Such a

result could effectively make the district court proceeding

superfluous.

In sum, the Secretary may utilize an informal fact

gathering proceeding preliminary to enforcement. But since

the Act does not authorize direct enforcement or indirect

enforcement by the Secretary, a formal adjudicative

proceeding cannot limit the scope of a district court

enforcement suit.

II.

From the outset, the company has challenged this

Court's jurisdiction to review the Secretary's order denying

Williams' motions and we now turn our attention to that

issue.

_________________________________________________________________

2. At oral argument, counsel for the Company stated that it would assert

res judicata and the "election of remedies" doctrine. Counsel for the

Secretary contended that as a result of the agency action, Williams

would be barred from seeking enforcement in the district court should

he decide to bring suit there. But see Richard B. Stewart and Cass R.

Sunstein, Public Programs and Private Rights, 95 Harv. L.Rev. 1195,

1216, 1289 (1982).

8

In this case, jurisdiction to review administrative agency

orders has been established by the statute authorizing

agency action. Under 42 U.S.C. S 5851(b)(2)(A), the

Secretary of Labor, upon receipt of a whistle blower

complaint, must issue an order either granting relief,

denying relief, or approving a settlement agreement. Such

agreements are entered into by the Secretary and the

offending party with the participation and consent of the

complainant. Subsection (c)(1) provides that "[a]ny person

adversely affected or aggrieved by an order issued under

subsection (b) . . . may obtain review of the order in the

United States court of appeals for the circuit in which the

violation . . . occurred."

The company mounts two attacks on our jurisdiction.

The first is straightforward. Section 5851(b) authorizes the

Secretary to issue three types of orders:

1. an order granting relief;

2. an order denying the complaint; and

3. an order settling the dispute.

The company contends that because the order Williams

would have us review is none of these three designated

types, it does not come within our jurisdiction.

Adopting the company's position would impose a

cramped interpretation on the scope of judicial review of

administrative decisions. As the Supreme Court remarked

in Lindahl v. Office of Personnel Management, 470 U.S. 768

(1985): "We have often noted that `only upon a showing of

clear and convincing evidence of a contrary legislative

intent should the courts restrict access to judicial review.' "

Id. at 778, quoting Abbott Labs v. Gardner, 387 U.S. 136,

141 (1967); see also Bowen v. Michigan Academy of Family

Physicians, 476 U.S. 667, 670 (1986); Dunlop v. Bachowski,

421 U.S. 560, 568 (1975) (even where review is limited,

agency must explain its action). We start then with the

presumption that judicial review is available. Only in

unusual circumstances will a party aggrieved by an agency

decision be denied access to the courts.

As we observed in Vineland Chemical Co. v. United States

Environmental Protection Agency, 810 F.2d 402, 405 (3d

9

Cir. 1987), "[w]hile a statutory basis for jurisdiction is

required," case law "caution[s] this court not to construe

appellate review provisions too narrowly. To avoid

unintended and anomalous results, statutes authorizing

review of specified agency actions should be construed to

allow review of agency actions which are `functionally

similar' or `tantamount to' those specified actions."

Similarly, in Modine Manufacturing Corp. v. Kay, 791 F.2d

267, 270 (3d Cir. 1986), we stated that where a statute

allows for some appellate review of agency action, the

"jurisdictional provisions should be construed generously

absent clear and convincing evidence of a contrary

congressional intent."

We have found nothing in the legislative history of the

Energy Reorganization Act to indicate that Congress

intended to restrict judicial review of rulings made in the

course of administrative proceedings. Additionally, as we

noted in Passaic Valley Sewerage Commissioners v. United

States Department of Labor, 992 F.2d 474, 479 n.8 (3d Cir.

1993), several federal statutes contain whistleblower

protection provisions identical or similar to those of the

Energy Reorganization Act. See, e.g., 33 U.S.C. S 1367

(Federal Water Pollution Control Act); 42 U.S.C. S 7622

(Clean Air Act); 42 U.S.C. S 9610 (Comprehensive

Environmental Response, Compensation, and Liability Act);

42 U.S.C. S 300j-9(i) (Safe Water Drinking Act); 42 U.S.C.

S 6971 (Resource Conservation and Recovery Act); 15

U.S.C. S 2622 (Toxic Substances Control Act); 30 U.S.C.

S 815(c)(1) (Federal Mine Safety and Health Act); 29 U.S.C.

S 158(a)(4) (National Labor Relations Act); 45 U.S.C. S 441(a)

(Federal Railroad Safety Authorization Act). Nothing in the

legislative history or judicial interpretation of these similar

provisions causes us to question application of the general

principle favoring judicial review of agency decision-making.

Opinions from other Courts of Appeals addressing

jurisdiction under the Energy Reorganization Act provide

little guidance in the circumstances here. In Carolina Power

and Light v. United States Department of Labor, 43 F.3d 912

(4th Cir. 1995), the Court was asked to review an order of

the Secretary remanding a proposed settlement to an ALJ.

The Court held that the order was not subject to judicial

10

review because it was not final and not entered under

subsection (b) of S 5851. Id. at 914-15. In Macktal, the

Court disapproved the action of the Secretary in striking

certain provisions from a settlement previously arrived at

by the employee and the employer. 923 F.2d at 1154.

Jurisdiction to review was assumed with little discussion.

Id.

In Ellis Fischel State Cancer Hospital v. Marshall, 629

F.2d 563 (8th Cir. 1980), an employer petitioned for review

of the Secretary's order granting relief to an employee. The

employee intervened, requesting enforcement. Id. at 566.

The Court denied review of the Secretary's order as to the

employer, but concluded that the employee's motion for

enforcement should have been brought in the district court.

Id.

In the absence of persuasive authority adopting a limited

reading of the Act's review provisions, we read them broadly

in conformity with the philosophy expressed in our case

law. In Vineland, we concluded that statutory provisions for

judicial review of the Secretary's action "issuing, denying,

modifying, or revoking" a permit extended to all orders

terminating interim status under the Resource

Conservation and Recovery Act. 810 F.2d at 408. Similarly,

in Modine, we held that appellate jurisdiction for review of

effluent standards promulgated under the Clean Water Act

extended to rulings on the applicability of those standards

to a specific discharger. 791 F.2d at 271. In both Vineland

and Modine, the governing statutory provisions did not

specifically cover the orders presented for review.

Nevertheless, we assumed jurisdiction. See Dart v. United

States, 848 F.2d 217, 221, 223 (D.C. Cir. 1988) (judicial

review is favored when an agency is acting beyond its

authority).

Those precedents provide guidance here. We consider the

ruling of the Secretary an adjudicatory construction of the

previously approved settlement agreement. See Macktal,

923 F.2d at 1154. That action resulted in the Secretary's

decision to forego enforcement in the district court. In the

circumstances here, we conclude that the petition for

review falls within the appellate jurisdiction authorized by

the Act.

11

The second part of the jurisdictional attack is focused on

the company's view that the Secretary's order represents a

decision not to begin a suit in the district court. As such,

the company argues that the Secretary's action is akin to

the decision not to enforce which was held to be

discretionary and unreviewable in Heckler v. Chaney, 470

U.S. 821 (1985).

The proceeding also bears a resemblance to that in

Dunlop, 421 U.S. at 562-65. There, the Supreme Court held

that the Secretary of Labor's decision not to request the

district court to set aside a union election was judicially

reviewable and that the Secretary should submit a

statement of his reasons for nonaction. Id. at 566-68.

The situation presented here is distinguishable from

Chaney. There, the Court held that the Food and Drug

Administration's refusal to enforce the substantive

prohibitions in its enabling act was nonreviewable. The

Court noted the important differences between an agency's

decision to enforce and one declining to do so. 470 U.S. at

831-32. Although acknowledging that administrative

concerns such as allocation of resources and policy

considerations must enter into the balance, the Court

discussed another factor affecting the enforcement decision:

"[W]hen an agency refuses to act it generally does not

exercise its coercive power over an individual's liberty or

property rights, and thus does not infringe upon areas that

courts often are called upon to protect." Id . at 832

(emphasis in original). In contrast, where the agency does

move to enforce, that action provides a focus for judicial

review and can at least "be reviewed to determine whether

the agency exceeded its statutory powers." Id.

The Secretary's decision not to seek enforcement in this

case is fundamentally different from the non-action

examined in Chaney. Here, the Secretary has taken

affirmative steps to adjudicate a breach of contract claim.

Because that proceeding ultimately determined the amount

of the monthly payments to be made to Williams, it directly

affected his property rights.

In contrast to Chaney, the Secretary's decision not to

proceed with enforcement in the district court in this case

12

was not based on consideration of the agency's policy or

resources, but rather upon a contractual construction. See

S.E.C. v. Chaney Corp., 318 U.S. 80, 94 (1943); Florida

Dep't of Labor and Employment Sec. v. United States Dep't

of Labor, 893 F.2d 1319, 1322 (11th Cir. 1990) ("An

important corollary to the general rule that courts will not

substitute their views for the discretionary decisions of an

agency on matters of policy is the recognition that reviewing

courts do have the authority and responsibility to correct

errors of law made by the agency"). The ruling of the

Secretary, if allowed to stand, could have claim or issue

preclusive effect and prevent Williams from obtaining relief

in the district court. See Utah Construction, 384 U.S. at

422; see also Thompson, 885 F.2d at 556-57. Thus, this

case presents agency action that bears on property rights in

an area in which courts typically act.

Adoption of the company's argument that Chaney bars

review here would actually undermine the reasoning in

that case by ignoring the factors that generated its holding.

Our cases that followed Chaney, such as New Jersey

Department of Environmental Protection and Energy v. Long

Island Power Authority, 30 F.3d 403, 418 n.27 (3d Cir.

1994) and Harmon Cove Condominium Ass'n v. Marsh,

815 F.2d 949, 951-52 (3d Cir. 1987), are similarly

distinguishable. We therefore reject the company's

contention that Chaney is applicable here.

We indicated earlier our misgivings about the legitimacy

of the Secretary's conclusions derived from the hearing

to the extent that they could be considered indirect

enforcement. Although there is some basis for

characterizing the proceedings as informal and non-

binding, the stronger indication is that the Secretary

considered them to be a formal adjudication. However,

rather than resting our decision solely on the basis of ultra

vires agency action, in view of the ambiguous state of the

record, the interests of judicial efficiency, and the fact that

the parties fully briefed the issues, we will address the

merits as well. In this connection, we note that there are no

issues of fact in controversy and the administrative record

is fully developed. See Modine, 791 F.2d at 270.

13

III.

Judicial review under the Act is to conform with the

Administrative Procedure Act. 42 U.S.C. S 5851(c)(1). Thus,

we must determine whether the agency ruling is "arbitrary,

capricious, an abuse of discretion, or otherwise not in

accordance with law." 5 U.S.C. S 706(2)(A).

Basic contract principles apply to settlement agreements.

New York State Electric & Gas Corp. v. F.E.R.C., 875 F.2d

43, 45 (3d Cir. 1989). This settlement agreement involves a

right to sue derived from a federal statute and,

consequently, federal common law principles govern

construction of the contract. See Town of Newton v.

Rummery, 480 U.S. 386, 392 (1987); Macktal, 923 F.2d at

1157 n.32.

It is surely debatable whether a court owes any deference

to an administrative agency's construction of a contract

that lies outside its area of expertise, as is the case here.

See New York State Electric & Gas, 875 F.2d at 45 (contract

principles generally applicable to construction of settlement

agreement unless it is ambiguous and deference to

Commission's interpretation based on specialized industry

knowledge may be appropriate). We need not digress into a

discussion of whether a more extensive scrutiny is

appropriate, however, because whether we apply the

Administrative Procedure Act's standard or that applicable

to the appeal of a district court judgment, we owe no

deference to an erroneous conclusion of law. See , e.g., Dill

v. I.N.S., 773 F.2d 25, 28 (3d Cir. 1985) (on questions of

law, administrative judgment is subject to plenary judicial

review).

IV.

Section 15 of the agreement provides that Williams:

"will receive a retirement benefit based upon a single

life annuity in the amount of not less than [$926.96]

per month and such other benefits as are in

accordance with [the company's] pension plan,

including . . . rights under, the `Medical-Dental

Benefits Plan for Retired Employees'. . . . Mr. Williams

14

is further entitled to increases in his retirement and

other benefits as the company may subsequently grant

to company retirees. [The Company] represents that

this amount meets or exceeds the monthly benefit that

Mr. Williams would have received if he had held a

Grade 14 compensation classification, at a job value of

[$68,618], for the three-year period immediately

preceding April 1, 1994. In order to pay this benefit,

[the company] shall supplement the pension plan

benefits to which Mr. Williams would otherwise be

entitled under the pension plan."

Later, when Williams chose to receive a 50% joint and

survivor annuity rather than a single one, it was agreed

that the monthly amount would be reduced to $782.35. The

settlement agreement does not specify the manner in which

the company was to fulfill its commitment to Williams, nor

touch in any way upon the allocation of taxes. The

company purchased an annuity policy after having been

advised by an insurance agent that, for a cost of

$60,655.85, the policy would provide the agreed monthly

benefit amount of $782.35.

Concluding that the $60,655.85 would be taxable income

to Williams, the company withheld state and federal taxes

due on that sum and used the remaining $37,382.00 to

buy the annuity policy.3 As a result, Williams received

monthly checks of $477.13, rather than the expected

amount of $782.35.

Construction of a contract is different than interpretation

and is purely a question of law subject to de novo review.

Ram Constr. Co. v. American States Ins. Co., 749 F.2d 1049,

1052-53 (3d Cir. 1984). "In determining the legal effect an

agreement will have on an event the parties did not foresee,

the process is construction, not interpretation." Id. at 1053.

See also 3 Corbin on Contracts S 534, at 12 (2nd ed. 1960);

Restatement (Second) of Contracts S 200 cmt. c, at 82

(1981).

_________________________________________________________________

3. Apparently, receipt of other financial consideration included in the

agreement resulted in a ballooning of Williams' income in 1994

catapulting him into the highest tax bracket in that year.

15

Interpretation of the contractual language is the first step

towards proper construction. Corbin S 534, at 9, 11. In the

process of interpreting a contract, the court seeks to

ascertain the intent of the parties. Barco Urban Renewal

Corp. v. Housing Auth., 674 F.2d 1001, 1008 (3d Cir. 1982);

Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d

1001, 1009-1012 (3d Cir. 1980). That inquiry, however,

does not require a search for the subjective intent of the

parties, but rather centers on the intent embodied in the

language that the parties chose to memorialize their

agreement. Barco Urban Renewal, 674 F.2d at 1008-1009;

Mellon Bank, 619 F.2d at 1009.

In the oft quoted words of Justice Oliver Wendell Holmes,

"the making of a contract depends not on the agreement of

two minds, in one intention, but on the agreement of two

sets of external signs -- not on the parties' having meant

the same thing, but on their having said the same thing."

Holmes, The Path of the Law, 10 Harv. L.Rev. 457, 463

(1897) (emphasis in original).

In the process of defining the objective intent of the

parties, a court must examine the entire agreement."A

writing is interpreted as a whole, and all writings that are

part of the same transaction are interpreted together."

Restatement (Second) of Contracts S 202(2). As a corollary

rule, an "ambiguous subsidiary contractual provision must

be given an interpretation consistent with the dominant

purpose of the contract." Barco Urban Renewal, 674 F.2d at

1009. As an additional aid to proper construction, the court

should consider the situation of the parties, the attendant

circumstances and the ends they sought to achieve. Id. at

1007, quoting Atlantic N. Airlines, Inc. v. Schwimmer, 96

A.2d 652, 656 (N.J. 1953); see also Restatement (Second) of

Contracts S 202(1).

The parties chose the term "annuity" in defining the

company's obligation. "Annuity" is defined as "a right to

receive fixed, periodic payments, either for life or for a term

of years . . . A fixed sum payable to a person at specified

intervals for a specific period of time or for life." Black's

Law Dictionary, at 90 (6th ed. 1990). Absent indicia that, at

the time the contract was executed, the parties assigned a

specialized meaning to an otherwise common term, we will

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not alter its accepted usage. See Mellon Bank , 619 F.2d at

1009-10. We refuse to read "annuity" as "annuity policy" or

"annuity contract" in part because these terms have

distinct meanings, Black's Law Dictionary, at 90, and also

because the parties, both represented by counsel during

drafting, could have chosen to make this distinction. Thus,

the settlement agreement does not require the company to

purchase an insurance policy - that was only one of the

options available.4

The ALJ, however, in concluding that no breach had

occurred, apparently misunderstood the agreement and the

meaning of "annuity" when he wrote: "[T]he Settlement's

intent is clear. [The company] was to purchase Mr. Williams

an annuity in order to provide a `retirement benefit' under

the terms of the Agreement." In another passage he wrote,

"if [the company] had not purchased the annuity as stated

in Section 15 of the Agreement, such inaction would have

constituted breach of the Agreement."

The record demonstrates that there is little dispute about

the facts and the parties' intentions in this case. Overall, it

appears that the parties' perceptions of what they had

agreed upon were consistent.

In an affidavit submitted by the company, Richard D.

Quinn, the General Manager -- Compensation and Benefits

for the company, stated that he was contacted by a

company official to "seek assistance in structuring

payments to Mr. Williams as part of an anticipated

settlement. I was advised that Mr. Williams was to receive

a benefit that would be equivalent to an immediately

payable pension, in other words, as if Mr. Williams were

eligible to retire immediately and receive pension benefits

like any other [company] retiree under the [company]

Pension Plan."

Quinn noted that Williams' pension was vested, but he

was not yet eligible to retire, not having reached age 65.

The affidavit continued: Therefore, I was asked to arrange

_________________________________________________________________

4. The modifier "single life" does not alter our reading of the term

"annuity," which is frequently confused with the method or source of its

payment. See In re Estate of Dwight, 134 A.2d 45, 48-49 (Pa. 1957).

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for a separate, immediately payable benefits plan for Mr.

Williams."

Quinn apparently was given a draft of the proposed

settlement agreement that mirrored the form ultimately

executed. He stated: "[when] I saw no direction from these

provisions as to how the annuity was to be created .. . I

began to investigate how this could be accomplished before

the Agreement was signed."

The settlement agreement was executed by the parties on

April 19, 1994 and approved by the Secretary on June 8,

1994. In a letter dated August 12, 1994, outside counsel

advised the company that the purchase of an annuity

policy of approximately $60,000 would, for tax purposes, be

considered a transfer to the employee in that amount in the

current year. The letter suggested that "the prudent course

would be for [the company] to withhold Federal income tax

on the payment for Mr. Williams' benefit of about $60,000

(thus purchasing an annuity for a reduced amount which

provides smaller annuity payments than provided in the

Settlement Agreement), [and] report it on a Form 1099

accordingly . . .."

Robert C. Krueger, Jr., the Director -- Tax Services for

the company, stated in an affidavit that his first

involvement in implementation of the settlement agreement

occurred in August 1994 when he was contacted by Quinn

and Richard Fryling, the company's General Solicitor.

Krueger averred, "I was advised that the Settlement

Agreement required [the company] to create an annuity for

Mr. Williams, the owner/beneficiary of the annuity, that

would provide benefits replicating those to which he would

have been entitled under the [company] Pension Plan if he

had had sufficient years of service to retire at that time."

Krueger and Quinn then discussed the "alternative of

making the required annuity payments out of general

corporate funds as distinct from the purchasing an annuity

from an outside entity." They rejected that option because

it "would not have been `in accordance with' (or, as I

[Krueger] understood the contractual commitment at that

time, `equivalent to') those under [the company's] qualified

pension plan." In addition, Krueger and Quinn reasoned

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that "payment from corporate funds [would be] contingent

on the continued viability" of the company and therefore

such an arrangement would not provide Williams with the

same degree of security as participation in pension funds

held by an external trust.

This evidence makes it clear that at the time of the

agreement's execution Williams and the company both

intended the annuity payments to be "equivalent to an

immediately payable pension . . . as if Mr. Williams were

eligible to retire immediately and receive pension benefits

like any other [company] retiree."

Having discerned that the parties' intentions were

essentially consistent, we now address the agreement's

legal operation. In the process of construction, courts must

often reckon with the effect of events unforeseen or not

contemplated by the parties at the time agreement is

reached. Corbin on Contracts S 534, at 11. Here, the

agreement fails to address the tax consequences of the

parties' arrangement. The record does not reveal whether

this omission resulted from oversight or intention.

Nonetheless, it is necessary for proper construction of the

agreement to attempt to fill what appears to be a gap. See

Restatement (Second) of Contracts S 204. We do so by

examining the agreement's underlying purpose and

integrated provisions.

Under the company's retirement plan, retirees do not pay

taxes "up front," but only as monthly payments are

received. However, under the company's choice of options,

Williams' taxes were paid in advance and at a much higher

rate. Clearly, he fared less favorably than other retirees.

The record discloses other ways of structuring the

settlement that would have avoided this problem while

putting Williams in the same position as other retirees. For

example, the company could have offered him the option of

receiving periodic payments from company funds. Or, as

his expert averred, a different type of annuity insurance

contract with far more favorable tax consequences was

available. Moreover, it appears from the record that if the

company purchased an additional annuity for $25,000, the

stipulated monthly benefit of $782.35 would be attained.

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The main thrust of the agreement was to provide

Williams with benefits equivalent to those enjoyed by other

retirees. That arrangement realistically contemplated

reasonable equivalency in tax liability so that the usable

income Williams received would compare fairly with that of

other company retirees.

The company started off on the right track by considering

an annuity policy that would have provided the agreed

upon amount before taxes, but the company became

distracted by the unusual tax liability created by its plan.

Losing sight of the fact that the agreement required

creation of equivalent benefits, the company nevertheless

pursued its original plan.

Nothing specified or implied in the agreement permitted

the company to deviate from its obligation to provide the

intended benefits because of tax or ERISA complexities.

Those problems made the company's task more difficult,

but far from insurmountable. We are left with no doubt

that the company breached the agreement.

On this record, the ALJ's decision as affirmed was legally

erroneous under basic contract principles. The Secretary's

derivative determination not to seek enforcement was

likewise not in accordance with law.

Accordingly, we grant the petition for review and remand

for further proceedings. The Secretary retains the discretion

whether or not to seek enforcement, but may not consider

the company's actions as set forth in this record to be in

compliance with the settlement agreement. In view of the

Secretary's inability to enforce, Williams is to have the

opportunity to withdraw his motion if he chooses and

pursue an action for enforcement in the district court.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

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