Appeals Court Affirms Dismissal of COLA Dispute
After a $232,500,000 settlement agreement was executed in 2000 that also mandated that the United States Office of Personnel Management issue new regulations governing the Cost of Living Adjustment (“COLA”) program, plaintiff federal employees filed suit alleging that the government breached the settlement agreement and both the express and implied covenant of good faith and fair dealing.
After the claims court dismissed the plaintiffs’ suit for failure to state a claim upon which relief could be granted, the plaintiffs appealed to the United States Court of Appeals for the Federal Circuit, which affirmed the claims court’s dismissal on May 30, 2017.
A portion of the settlement agreement alleged to be breached by the plaintiffs included a provision that it would be “expected, but nor required by this settlement, that the New Regulations will be consistent with the Conforming Methodology.” Conforming Methodology was defined as then-current regulations and published methodology, subject to revisions made by the New Regulations.
After the case settled in 2000, the President of the United States signed Executive Order 13,207, which authorized OPM to, in part, fulfill the terms of the settlement agreement regarding COLA rules. In 2002 and 2007, Congress declined to enact legislation proposed by the Office of Personnel Management that would replace COLA over time with locality pay. On October 28, 2009, Congress passed the Non-Foreign AREA Act of 2009, a law that reduced COLA by 65 percent of locality pay received by an employee. OPM published interim regulations on the locality pay program, and waived notice, putting the regulations into effect on November 1, 2010. The regulations in part “placed non-foreign areas in the ‘Rest of U.S.’ locality pay area,” and established separate locality pay areas for Hawaii and Alaska. OPM invited public comments, and class counsel for the plaintiffs submitted a comment objecting to the 2010 Interim Regulations on the grounds that they violated the terms of the Settlement Agreement.
In 2016, OPM published a Notice that rejected the comments and suggestions made by the plaintiffs’ class counsel, and stated that the 2010 Interim Regulations would become final as a “final rule, with minor changes.” Plaintiffs filed the aforementioned suit, and the claims court dismissed the claim. On appeal, plaintiffs argued that the government was required to consult with the Survey Implementation Committee and Technical Advisory Committee, two committees created by the settlement agreement to assist in the development, implement, and revise new regulations regarding COLA.
The appeals court found that both the Survey Implementation Committee and Technical Advisory Committee were created to be temporary entities to be dissolved after a period of time that had now passed.
The plaintiffs also argued that the government breached the settlement agreement by failing to give notice to the class members that it “no longer intended to be bound by the Conforming Methodology.” The specific language in the settlement agreement read that “[i]f at any time, OPM determines that it no longer wishes to be bound by the Conforming Methodology, it will publish notice to the class members of its decision. OPM may then revise its regulations or set COLA rates in a manner that is not consistent with the Conforming Methodology.”
But the appeals court found that OPM’s publishing of the 2010 Interim Regulations in the Federal Register constituted adequate notice, citing Higashi v. United States, 225 F.3d 1343 (Fed. Cir. 2000), which found, in part, that the “publication of rules and regulations in the Federal Register gives legal notice of their contents and those subject to, or affected by them, regardless of actual knowledge of what is in the [r]egulations or of the hardship resulting from innocent ignorance.” The appeals court also noted that class counsel’s comment to OPM showed that plaintiffs received not just legal, but actual, notice.
Plaintiffs’ final argument went to the core of the issue, which is whether the government violated the implied and express covenants of good faith by eliminating COLA payments in favor of locality pay. The plaintiffs argued that their “continued receipt of COLA payments was the underlying premise of the entire Settlement Agreement.” Plaintiffs contended that the government did not have discretion to eliminate COLA. The appeals court disagreed, finding that plaintiffs “did not bargain for the COLA regulatory regime to be maintained in perpetuity.” Instead, the appeals court found, the plaintiffs bargained for a “one-time lump-sump payment to satisfy backpay claims prior to October 1, 1990, and for a Conforming Methodology that OPM was ‘expected, but not required,’ to follow when determining COLA.”
For the above stated reasons, the United States Court of Appeals for the Federal Circuit affirmed the decision of the Court of Federal Claims to dismiss the plaintiffs’ claim.
Read the full case: Caraballo v. United States
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