UNITED STATES DEPARTMENT OF EDUCATION

OFFICE OF SPECIAL EDUCATION AND REHABILITATIVE SERVICES REHABILITATION SERVICES ADMINISTRATION

December 17, 2001

Ms. Catherine Campisi, Director

California Department of Rehabilitation

2000 Evergreen Street

Sacramento, California 95815

Re: California Department of Rehabilitation v. United States Postal Service, Case No. R-S/OO-4

Dear Ms. Campisi

The decision of the arbitration panel in the matter of California Department of Rehabilitation, petitioners v. United States Postal Service, respondent, has been received in the Rehabilitation Services Administration, Division for the Blind and Visually Impaired.

Pursuant to Section 15(c) of the “Policies and Procedures for Convening and Conducting an Arbitration", we are enclosing a copy of that decision. Please note that the arbitration panel has retained jurisdiction for the purpose of implementing the final award.

If you have questions, please contact me. My telephone number is (202) 205-8536.

Sincerely,

Suzette E. Haynes

Management & Program Analyst

Enclosure

400 MARYI-AND AVE., S.W. WASHINGTON, D.C. 20202

www.ed.gov

Our mission is to ensure equal access to education and to promote educational excellence throughout the Nation.

A MATTER IN ARBITRATION

In a Matter Between:

Grievance: Alleged Breach of

Contract

CALIFORNIA DEPARTMENT OF

REHABILITATION Case No. R-S/00-4

(Complaintant) Hearing: May 4, 2001

and Award: November 30, 2001

UNITED STATES POSTAL SERVICE McKay Case No. 00-270

(Respondent)

DECISION AND AWARD

MARGARET W. CRAWFORD, ARBITRATOR

ROBERT HUMPHREYS, ARBITRATOR

GERALD R. McKAY, ARBITRATOR

Appearances By:

Complainant: Gwynne Pratt, Esq.

California Department of Rehabilitation

Office of Legal Affairs

2000 Evergreen Street

Sacramento, CA 95815-3832

Respondent: Neva Watson, Esq.

Legal Policy Section

United States Postal Service

475 L 'Enfant Plaza SW, Room 1813

Washington, DC 20260-4261

A MATTER IN ARBITRATION

In a Matter Between:

Grievance: Alleged Breach of

Contract

CALIFORNIA DEPARTMENT OF

REHABILITATION Case No. R-S/00-4

(Complaintant) Hearing: May 4, 2001

and Award: November 30, 2001

UNITED STATES POSTAL SERVICE McKay Case No. 00-270

(Respondent)

STATEMENT OF PROCEDURE

This matter arises under the terms of the Randolph-Sheppard Act as administered by the United States Department of Education through the Rehabilitation Services Administration. A Panel of Arbitration pursuant to the law in the regulations was established by the Rehabilitation

Services Administration and confirmed in August 2000. A hearing was convened on May 4, 2001 in Long Beach, California. The parties had an opportunity during the course of the hearing to present evidence and to cross-examine the witnesses. At the conclusion of the hearing, the parties agreed to file written briefs in argument of their respective positions. Briefs were received by the Panel from both sides on or before July 30, 2001. The California Department of Rehabilitation chose to file a reply brief, which was received by the Panel on or about September 2, 2001. The Postal Service contacted the Chairman of the Panel sometime toward the middle of October 2001 to inform

Re: Alleged Breach of Contract Page 3

him that she would not be submitting a brief. The record was declared closed by the Panel. The Panel has now had an opportunity to review the record and is prepared to issue its decision.

ISSUE

Did the Postal Service actions referred in paragraph 3 and paragraph 5 of Joint Exhibit 2 violate the terms of the Randolph-Sheppard Act? If so, what is the appropriate remedy?^l

APPLICABLE STATUTORY AUTHORITY

20 U.S.C. Section 107(b) provides in pertinent part as follows:

(b) Preferences regulations; justification for limitation on operation

In authorizing the operation of vending facilities on Federal property, priority shall be given to blind persons licensed by a State agency as provided in this chapter; and the Secretary, through the Commissioner, shall, after consultation with the Administrator of General Services and other heads of departments, agencies, or instrumentalities of the United States in control of the maintenance, operation, and protection of Federal property, prescribe regulations designed to assure that -

(1) the priority under this subsection is given to such licensed blind persons. .., and

(2) wherever feasible, one or more vending facilities are established on all Federal property to the extent that any such facility or facilities would not adversely affect the interest of the United States

Any limitation on the placement or operation of a vending facility based on a finding that such placement would adversely affect the interests of the United States shall be fully justified in writing to the Secretary, who shall determine whether such limitation is justified. A determination made by the Secretary pursuant to this provision shall be binding on any department, agency, or instrumentality of the United States affected by such determination. The Secretary shall publish such determination, along with supporting documentation, in the Federal Register.

¹ Transcript page 5

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IMPLEMENTING REGULATIONS

34 C.F .R. Part 395 provides in pertinent part as follow:

Section 395.16 Permit for the establishment of vending facilities

...The State licensing agency shall submit an application for a permit setting forth the location, the amount of space necessary for the operation of the vending facility; the type of facility and equipment, the number, location and type of vending machines and other terms and conditions desired to be included in the permit. Such application shall be submitted for the approval of the head of the Federal property managing department, agency or instrumentality. When an application is not approved, the head of the Federal property. ..shall advise in writing and shall indicate the reasons for the disapproval.

Section 395.30 The location and operation of vending facilities for blind vendors on Federal property.

(a) Each department, agency, or instrumentality of the United States in control of. .. Federal property shall take all steps necessary to assure that, wherever feasible, in light of appropriate space and potential patronage, one or more vending facilities for operation by blind licensees shall be located on all Federal property. Provided that the location or operation of such facility or facilities would not adversely affect the interests of the United States. ..

(b) Any limitation on the location or operation of a vending facility for blind vendors by a department, ...based on a finding that such location or type of operation would adversely affect the interests of the United States shall be fully justified to the Secretary who shall determined whether such limitation is warranted. ..The Secretary shall publish such determination in the FEDERAL REGISTER along with supporting documents directly relating to the determination. ..

Section 395.34 Application for permits.

Application for permits for the operation of vending facilities other than cafeterias shall be made in writing on the appropriate form, and submitted for the review and approval of the head of the Federal property managing department, agency or instrumentality.

Section 395.35 Terms of permit.

Every permit shall describe the location of the vending facility including any vending machines located on other than the facility premises and shall be subject to the following provisions:

Re: Alleged Breach of Contract Page 5

(a) The permit shall be issued in the name of the applicant State licensing agency which shall:

(1) Prescribe such procedures as are necessary to assure that in the selection of vendors and employees for vending facilities there shall be no discrimination. ..; and

(2) Take the necessary action to assure that vendors do not discriminate against any person or persons in furnishing, or by refusing to furnish, to such person or persons the use of any vending facility, including any and all services, ...

(b) The permit shall be issued for an indefinite period of time subject to suspension or termination on the basis of compliance with agreed upon terms.

(1) No charge shall be made to the State licensing agency for normal cleaning, maintenance and repair of the building structure in the adjacent to the vending facility areas;

(2) Cleaning. ..and maintenance of vending machines in an orderly condition. .and the installation, maintenance, ...and removal of vending machine equipment shall be without cost to the department, agency or instrumentality responsible for the maintenance of the Federal property; and

(3) Articles sold at vending facilities operated by blind licensees may consist of newspapers, ...confections, tobacco products, foods, beverages, chances of any lottery authority by State law. ..and other articles of services as determined by the State licensing agency, in consultation with the on-site official responsible for the Federal property. ..Such articles and services may be dispensed automatically or manually and may be prepared on or off the premises in accordance with all applicable health laws.

(d) The permit shall further provide that vending facilities shall be operated in compliance with applicable health, sanitation and building codes or ordinances.

(e) The permit shall further provide that installation. ..removal and renovation of vending facilities shall be subject to the prior approval and supervision of the on-site official responsible for the Federal property. .., and the State licensing agency; and that costs of relocations initiated by the department. ..shall be born by the department. ..

Section 395.36 Enforcement procedures.

(a) The State licensing agency shall attempt to resolve day-to-day problems pertaining to the operation of the vending facility in an informal manner with the participation of

Re: Alleged Breach of Contract Page 6

the blind vendor and the on-site official responsible for the property of the property managing department...

(b) Unresolved disagreements concerning the terms of the permit, the Act, or the regulations in this part and any other unresolved matters shall be reported in writing to the State licensing agency supervisory personnel by the Regional or other appropriate official of the Federal property managing department. ..in an attempt to resolve the issue.

Section 395.337 Arbitration of State licensing complaints.

. . .

(d) If the panel finds that the acts or practices of any department. ..are in violation of the Act or of this part, the head of any such department. ..(subject to any appeal under paragraph (b) of this section) shall cause such acts or practices to be terminated promptly and shall take such other action as may be necessary to carry out the decision of the panel.

BACKGROUND

In June 1996, the United States Postal Service (USPS) provided the California Department of Rehabilitation (DOR) information concerning the Long Beach Processing and Distribution Center and Branch Offices which contained vending machines. The DOR reviewed the information provided by the USPS and determined, pursuant to 34 C.F.R. Section 395.31, that a satisfactory site for a blind vending facility should be created by combining food service at the Processing and Distribution Center with the nine satellite vending machines locations to comprise a vending route which would be serviced by a DOR blind vendor. This proposal was made to the USPS representative in charge, Mr. Dwight L. Graham, who agreed with DOR to create the combined vending route as DOR proposed. On February 20, 1997, DOR and the USPS entered into a Permit Agreement pursuant to the Randolph-Sheppard Regulation 34 C.F .R.

Re: Alleged Breach of Contract Page 7

Section 395.16. The Agreement established the blind vending facility in the form requested by

DOR for an indefinite period.²

In reliance on the Agreement which is signed with the USPS, DOR purchased vending machines and other equipment in the amount of $181,000 specifically to establish the new facility and provide food service in accordance with the Permit Agreement. In September 1997, a selection committee, comprised of both DOR and USPS representatives, selected a blind vendor to operate the facility. Shortly before the selection was made, however, the USPS notified the DOR that the blind vendor would not be allowed to operate the nine satellite vending machine locations but could operate the main Processing and Distribution Center facility. The actions of the USPS directly violated the terms of the Permit Agreement, which it had signed on February 20, 1997. The DOR disagreed with the actions taken by the USPS. Nevertheless, the USPS proceeded to solicit bids from private vending concession companies and awarded a contract for the operation of the satellite location vending machines.³

On September 22, 1997, representatives of DOR and the USPS conducted a conference call which included Mr. Stephen A. Leavey, Manager for Corporate Personnel Management, USPS. During the course of that conference, Mr. Leavey informed DOR that USPS did not permit blind vending routes but, instead, required blind vendors to be on the premises at the locations where their services were provided. DOR informed Mr. Leavey that this position was contrary to the terms of the Randolph-Sheppard Act and regulations. Mr. Leavey acknowledged that he had no direct authority over Mr. Graham, the individual who signed the contract on behalf of the USPS, and also acknowledged that he was the one who gave the directive that the

__________________________

² Joint Exhibit #1 (Exhibit 1 of Complaint)

³ Respondent's Exhibit A

Re: Alleged Breach of Contract Page 8

vending route would not be permitted.⁴ Mr. Leavey acknowledged, during cross-examination, that part of his reason for invalidating the contract with DOR involved the fact that there was no commission being paid by DOR to the USPS for operating the vending machines.⁵ The USPS informed DOR that if DOR paid to the USPS an annual fee of $8,400, it would be permitted to operate the nine facility route, which the USPS had agreed to allow DOR to operate for no cost under the Agreement it signed with DOR.

A blind vendor was selected and did operate the vending facility at the Long Beach Processing and Distribution Center. The individual selected was Timothy Bolis. In anticipation of operating the nine facility vending route, Mr. Bolis hired an employee to assist him and rented a storage box to provide warehouse space for servicing the vending machines. As a result of the decision of USPS to terminate the Agreement as it applied to the nine facilities, Mr. Bolis incurred the costs associated with hiring the employee and renting the storage box. In addition, Mr. Bolis lost the income which he anticipated to be generated as a result of the nine facility vending route. At no point has the USPS attempted to terminate or modify the underlying permit, which included the satellite machines at the nine facilities. The USPS action in terminating the vending route was unilateral.

Mr. Leavey testified, during the course of the arbitration, that the USPS policies require an on-site full-time blind vendor. He stated:

"Well, there's Postal policy that indicates that for every permit there should be an on-site full-time blind vendor. We interpreted it as being a self-supporting opportunity, somewhat like the on-site entrepreneur of the running establishment. We don't believe that if you tie up all things that are in branches and give to --

_________________________

⁴ Transcript page 43

⁵ Transcript pages 50-51

Re: Alleged Breach of Contract Page 9

and authorize that under a permit, that meets the definition of how we had interpreted an on-site blind vendor.

It also doesn't come into play in terms of the service, the customer service as well as the food service obligations we think the blind vendor has regarding their customers.

So, we believe that if a site is an eligible site, namely that the building's more than 15,000 square feet or has more than 100 employee on Tour 2, and know the normal work hours and the state licensing agency believes it wants to operate a blind vending facility, then they'll put a blind vendor --a licensed blind vendor that meets all the requirements at that site to operate that establishment."

It was Mr. Leavey’s opinion that the USPS policy, which he interpreted as to preclude blind vending routes, were approved by the Department of Education.⁶

Mr. Leavey acknowledged that the USPS does have routes in various locations in the United States with blind vendors where blind vendors are not on premises. He testified:

"Well, sometimes we are --we get an adverse decision from the arbitrator and the route becomes allowed or sometimes it would be mutually beneficial to have a route with the State because no one else wants to bid on the contract. But for the most part, it's not an everyday occurrence and it's still rather unusual."⁷

The commission which the USPS receives from private vending services that provide vending service is deposited into the Sunshine Fund. These funds are used to send flowers or gifts to employees who are sick or employees who have new babies, according to Mr. Leavey. The funds are used for everybody in the facility where the vending machines are located. These funds, according to Mr. Leavey, build up morale and camaraderie. The funds are provided in this fashion rather than asking employees to make donations.⁸

_______________________

⁶ Transcript pages 10-11

⁷ Transcript page 14

⁸ Transcript page 15

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On cross-examination, Mr. Leavey asserted that the only reason the USPS would have vending routes under the Randolph-Sheppard Act is because (1) an Arbitrator ordered them to do so; (2) no one else was willing to bid on the vending service; or (3) he personally hasn’t found out about the vending route yet.

According to Mr. Leavey, his interpretation of the Randolph-Sheppard Act relating to self-supporting means that a blind vendor must be able to support himself on one site 8 hours a day,⁹ He acknowledged that this was the USPS' interpretation and that other organizations such as the Department of Defense, Veteran's Administration and GSA interpreted it differently.

Mr. Leavey was asked whether the USPS policy required private vendors to be on the premises to operate vending machines as the USPS is requiring blind vendors under the Business

Enterprise Program (BEP). In response, Mr. Leavey stated:

"The standard that we ask the blind vendor to occur --to have is the same standard we apply to the private concessionaire, except for the fact that we don't require the private concessionaire to be there because they don't have a permit for life. They compete for that business. The State doesn't compete."

Mr. Leavey went on to explain why it is that he imposes a higher standard on the State under the Randolph-Sheppard Act than he does on private vendors. He testified:

"If the state license agency wants to raise the price, they don't negotiate the price increase. They --they raise the price.

If the State wants to change the realigning of equipment to something else, we don't have a say in that.

If the States wants to distribute --we're paying the operating fee that we have in the building, the utility charge. I mean, those are some things that we subsidize for the State that the commercial vendor pays.

____________________

⁹ Transcript page 20

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And I just don't think its appropriate to start nickel and diming the situation. The State gets the permit for life. We have to implement --by the same token, we -- well, obviously, we differ.

We think that a blind vendor opportunity with a vending site is a self-supporting business and that you yourself, if you're operating business, should be there. And as far as the commercial vendor is concerned, it's not necessarily the same thing. It's part of the larger enterprise."

Mr. Joe Smith, the Administrator of the BEP for California testified that as of the date of the arbitration hearing, there were three Postal Facility vending routes in California under Randolph-Sheppard Agreements with the State.¹⁰ One of these routes is located in San Jose, California, one in San Francisco, and one in Oakland. The San Francisco route has 18 facilities. ¹¹

POSITION OF THE PARTIES

COMPLAINANT

The DOR asserted that the USPS violated the Randolph-Sheppard Act and its regulations by failing to abide by the terms of the Agreement, which it signed in February 1997. According to DOR, Section 395.35 of the regulations, does not require that a blind vendor always be on the premises of a vending facility. The regulations do not prohibit the establishment of vending routes. The regulations provide that a permit is to be issued for an indefinite period of time and can only be terminated if the terms of the permit have been violated. Mr. Stephen Leavey, the principal witness for the USPS acknowledged that DOR did not fail in any way to comply with

_______________________

¹⁰ Transcript page 93

¹¹Transcript page 96

Re: Alleged Breach of Contract Page 12

the terms and conditions of the permit. USPS made no effort to terminate or modify the permit. USPS simply ignored the permit.

After choosing to ignore the permit and refusing to allow the operation of the nine satellite vending locations, the USPS contracted with a private company to service the vending machines at those locations. The USPS received a commission from the private vending service. The private vending company is not required to attend each of the nine locations as the USPS is attempting to require blind vendors to do through DOR. Furthermore, the USPS would allow the blind vendors to operate the service as a route if DOR paid the USPS $8,400 per year. The position that Mr. Leavey has taken is that that Food Service Operations Handbook for the USPS should be followed even if it is in conflict with Department of Education Regulations governing the Randolph-Sheppard program. Even though the USPS asserts that it has a policy prohibiting vending routes, the USPS has three vending routes in California, including San Jose, San Francisco, and Oakland. The policies of the USPS which conflict with the Randolph-Sheppard Act have no force or effect.

As a result of the breach of contract by USPS, DOR and the blind vendor selected to provide the service both suffered losses. DOR incurred storage costs for vending equipment and a loss of set-aside fees that should have been generated from Mr. Bolis' income derived from the nine satellite vending locations. Mr. Bolis lost income, incurred payroll expenses and storage costs, and cost savings he was not able to realize from bulk purchases. DOR asked that the Panel award both DOR and Mr. Bolis the losses which they have suffered and direct the USPS to honor the terms of the permit which it signed in February 1997.

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RESPONDENT

The USPS acknowledged that it entered into a permit with the DOR State Licensing Agency. The USPS asserted that the individual who signed the Agreement on behalf of USPS was not the Installation Head and did not have management control of the facilities covered by the Agreement. After the Agreement was signed, USPS discovered that there were vending routes which violated USPS policy. It informed DOR that it could not operate the nine facilities as a vending route. The Randolph-Sheppard regulations exempt from inclusion as vending facility sites buildings with populations of fewer than 100 employees or which have an interior space of less than 15,000 square feet. Most of the nine vending facility locations fall under the size requirements provided in the Randolph-Sheppard Act.

The USPS requirement that a blind vendor be in attendance at a vending site is a reasonable exercise of its discretion. The Department of Education has reviewed the USPS regulations and has not objected in writing to the USPS requirement. The argument of that USPS has placed a limitation on a vending facility without obtaining a determination from the Secretary of Education that the facility would be adverse to the interest of the United States has no merit because the USPS has not submitted a request and the Secretary has nothing on which to make a determination. Even if the USPS had imposed a limitation on the placement or operation of a vending facility, when the Secretary issued a determination, the determination would be subject to review by an arbitration panel and the panel has wide ranging powers to settle disputes.

The 1974 amendments to the Randolph-Sheppard Act, according to the USPS, represent a compromise balancing competing interests. The USPS should retain some discretion over how vending is to be operated within its facilities. To deny the USPS the opportunity to obtain

Re: Alleged Breach of Contract Page 14

commissions from the operation of the vending machines would impact on the morale of the locations where the vending machines are situated because those funds are used by the employees for gifts and other morale boosting activities. For all these reasons, the USPS asked that the complaint be dismissed.

DISCUSSION

The evidence establishes without contradiction that the USPS entered into a Permit Agreement with DOR in February 1997. The Agreement set forth the arrangements by which DOR would provide vending services in the Long Beach USPS area. There would be one main facility and nine satellite facilities. This Agreement was negotiated between DOR and USPS and signed by both sides. Nine months later, Mr. Leavey, who has no direct relationship to the Long Beach operation, abrogated the Agreement for USPS by asserting the Agreement violated USPS policies. His decision was to eliminate the nine satellite facilities. The reason he abrogated the Agreement, according to Mr. Leavey, was because USPS requires a blind vendor to be present at each facility where the blind vendor is operating.

Mr. Leavey's explanations for why the contract which the USPS signed with DOR should not be enforced has no merit for several reasons. First, the Randolph-Sheppard Act does not prohibit vending routes where blind vendors are not present at all times. Secondly, the USPS only requires blind vendors to be present at vending facilities, not commercial vendors. The explanation for the distinction, Mr. Leavey stated, relates to the fact that the State has an advantage over private vendors. In addition, Mr. Leavey made clear that private vendors have to pay the USPS a commission for operating the vending machines and the DOR does not. Mr.

Re: Alleged Breach of Contract Page 15

Leavey's reasons for opposing DOR's operation of the satellite facilities not only are inconsistent, but they are entirely in contravention of the basic policies reflected in the Randolph-Sheppard Act. The purpose of the Act is to provide employment opportunities for blind persons. If the law was intended to maximize the profit every federal facility could obtain from providing food service for its employees, there would be no blind vending program. The fact that DOR does not pay commissions to USPS, but uses the money to run the blind vending program is what the Randolph-Sheppard Act anticipated. The loss of funds for use by the employees' recreational activities is not something that Congress determined to have greater merit than the benefits obtained by blind vendors.

The USPS will have to find a different way to fund the employee recreational program other than taking the money from blind vendors. USPS may not unilaterally withdraw its participation in a vending facility permit. The Agreement between the USPS and DOR is a contract which may not be breached except by its own terms. Furthermore, the Randolph-Sheppard regulations in 34 C.F.R. Section 385.35(b) requires that, "The permit shall be issued for an indefinite period of time subject to suspension or termination on the basis of compliance with agreed upon terms." The USPS conceded that DOR has not failed to comply with the agreed upon terms. The USPS has not allowed the permit to take effect as it is written. The USPS has not sought to amend, modify, or terminate the permit, or even request that DOR do so. USPS unilaterally ignored a portion of the permit and denied DOR the opportunity to obtain the benefit of its bargain.

The permit entered by the parties on February 20, 1997 unequivocally included the satellite locations as part of the vending facility and a blind vendor was selected to operate that facility. Any restriction on the operation of that vending facility would be a violation of the Act and regulations, unless USPS sought a determination from the Secretary of Education that the facility as constituted would be adverse to the United States' interests. Unless the Secretary