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January 30, 1984

American Federation of Labor and Congress of Industrial Organizations, et al., Plaintiffs
Raymond J. Donovan et al., Defendants

Gasch, D.J.

The opinion of the court was delivered by: GASCH


The plaintiff has brought this suit to challenge certain regulations promulgated pursuant to the Service Contract Act of 1965 ("SCA"), 41 U.S.C. § 351 et seq. The plaintiff seeks a declaration that the regulations are arbitrary, capricious, an abuse of discretion and otherwise not in accordance with the SCA and asks the Court to enjoin their implementation.

 The challenged regulations were to have gone into effect on December 27. The parties reached an agreement that the effective date for the regulations would be put off until January 27, 1984. In the interim the parties submitted cross-motions for summary judgment, and the Court scheduled and held an expedited hearing of oral arguments.


 The Service Contract Act of 1965, as amended, 41 U.S.C. § 351 et seq., establishes labor standards for the performance of any contract, the principal purpose of which is to furnish services to the federal government. Under the SCA, contractors must pay their employees minimum wages and fringe benefits determined by the Secretary of Labor to be prevailing rates for such employees in the community where the contract is performed. 41 U.S.C. § 351(a)(1), (2). *fn1" Moreover, a contractor that undertakes to provide services previously provided under a covered contract may not pay less than the predecessor paid if the predecessor's employees were paid pursuant to a collective bargaining agreement. 41 U.S.C. § 353(c).

 Section 7 of the SCA, 41 U.S.C. § 356, expressly exempts certain employees from the SCA's coverage. Included among the employees expressly exempt from the Act are those working under contract subject to the Davis-Bacon Act, 40 U.S.C. § 276a et seq., and employees working under any contract exempted by the Secretary pursuant to Section 4(b) of the Act, 41 U.S.C. § 353(b). Any work required to be done in accordance with the Walsh-Healey Public Contracts Act, 41 U.S.C. § 35 et seq., is also exempt. The Act authorizes withholding of accrued payments and contract termination in the event of violations, 41 U.S.C. § 352.

 The plaintiffs present eight challenges to the new regulations. Six of these challenges address limitations the regulations impose on the Act's coverage. They challenge exclusion from the Act's coverage of service activities that are part of contracts whose principal purpose is not provision of services, sections 4.110, 4.132 48 Fed. Reg. 49777, 49783-84 (1983). *fn2" They challenge two regulations excluding from the Act contracts the principal purpose of which is sale of the removed structures and the principal purpose of which is the sale of timber, sections 4.116(b), 4.131, 48 Fed. Reg. 49779-80, 49783 (1983). They further challenge limitation of the Act's coverage to contracts performed significantly or substantially in the United States, sections 4.110-4.113, 48 Fed. Reg. 49777-79 (1983). Plaintiffs oppose a regulation that lists criteria for ascertaining when repair and overhaul of equipment rises to the level of "manufacturing," and thus is within the coverage of the Walsh-Healey Public Contracts Act, 41 U.S.C. § 35 et seq., and when it is merely service work, thus within the SCA's coverage, section 4.117, 48 Fed. Reg. 49780. The plaintiffs also object to an exemption in the regulations for contracts for commercial product support services of high technology companies. Sections 4.123(e)(1), (2), & (3), 48 Fed. Reg. 49781-82.

 The plaintiffs have also raised two questions on regulations implementing the Act's "locality of prevailing wage" provisions. The plaintiffs object to the Secretary's two-step procedure for wage determinations when locality of performance is unknown at bidding, sections 4.3, 4.4, 4.53, 48 Fed. Reg. 49764-66 (1983). The plaintiff also objects to the Secretary's limiting the successorship provisions of Section 4(c) of the Act to situations where the successor performs in the same locality as the predecessor contractor, section 4.163(i), 48 Fed. Reg. 49789-90 (1983).

 The plaintiffs argue that these regulations delete from coverage contracts previously consistently covered by the SCA and that no sufficient justification for that deletion has been demonstrated. The plaintiffs also contend that the Secretary has inappropriately relied on cost factors where the Congress has evidenced an intent that a statute be remedial. Plaintiffs object to the limitation of coverage to contracts peformed substantially in the United States, section 4.112(b), 48 Fed. Reg. 49778 (1983), on the additional grounds that changes made in the section between announcement of the proposed regulation and promulgation of the final regulation violated the notice and comment provision of the Administrative Procedure Act ("APA").

 Standard for Review

 As two recent cases make clear, however, this deferential review standard does not mean the Secretary need not enunciate valid rationales for changing regulations. Most recently, in ILGWU v. Donovan, 722 F.2d 795 (D.C. Cir. 1983), the Court vacated a decision by the Secretary of Labor to rescind a regulation forbidding homework in the knitted outerwear industry under the Fair Labor Standards Act of 1938, 29 U.S.C. §§ 201-219. The Court found that the regulation in question forbidding homework had been in effect for many years and embodied the agency's "informed judgment that restricting homework would best carry out the policy dictated by Congress" in the Act. 722 F.2d at 813. The Court required a "'substantial and searching inquiry to ensure that the agency's decisions are the product of reasoned thought and based upon a consideration of relevant factors.'" Id. The Court found fault with the Secretary's recision because the record failed to show that the Secretary had considered alternatives less drastic than recision and why those alternatives were not preferable to complete recision. *fn3"

 In its decision, the Court of Appeals relied principally on the recent Supreme Court case of Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29, 103 S. Ct. 2856, 77 L. Ed. 2d 443 (1983). The Supreme Court in that case reviewed recision by the National Highway Traffic Safety Administration of a regulation requiring installation of passive restraints. The court rejected the Motor Vehicle Manufacturers Association's argument "that recision of an agency rule should be judged by the same [lenient] standard a court would use to judge an agency's refusal to promulgate a rule in the first place." Id. at 2866. The Court cited Atchison, T. & S.F. R. Co. v. Wichita Bd. of Trade, 412 U.S. 800, 37 L. Ed. 2d 350, 93 S. Ct. 2367 (1973), for the proposition that there is a presumption that Congressional policies can best be fulfilled if the "settled rule" is adhered to. 103 S. Ct. at 2866. The Court made clear that, despite the narrowness of the arbitrary and capricious standard, the agency must be shown to have examined the relevant data and articulated a satisfactory explanation for its action including a rational connection between facts found and choice made. Id. at 2866-67.

 The plaintiffs suggest that the regulations here at issue represent changes in settled interpretation of the SCA and are thus within the purview of these recent decisions. The Court agrees that several of the new regulations represent departures from past practices. Nevertheless, the Court finds that the language of the SCA and the scope and content of deliberations preceding the promulgation of the final regulations form a sufficient foundation for the regulations and indicate that the regulations were the product of reasoned consideration of available alternatives. The plaintiffs' requests for declaratory and injunctive relief must therefore be denied.

 Section 2(a) of the Service Contract Act, 41 U.S.C. § 351(a) et seq., provides that "every contract (and any bid specification therefor) entered into by the United States . . ., the principal purpose of which is to furnish services in the United States through the use of service employees shall contain [certain minimum wage provisions and other protections]." The plaintiffs have raised the issue of whether the parenthetical language, "any bid specification" refers to individual line items that are principally for services in nonservice contracts or to the bid solicitation documents and the resulting contract as a whole. The language of the statute suggests to the Court that the parenthetical language is not intended to expand the Act's protections to include contracts, the principal purpose of which is not provision of services. Some regulations previously promulgated by the Department of Labor have taken both positions. Compare 29 C.F.R. § 4.132 (1968) with 29 C.F.R. § 4.111 (1968).

 New sections 4.110 and 4.132, 48 Fed. Reg. 49777, 49783-84 (1983), provide that the SCA is applicable to a contract only if the principal purpose of the contract is to furnish services. The regulations thus limit the SCA's coverage to contracts the entire purpose of which is provision of services, and exclude from coverage services provided pursuant to line-items in non-service contracts. This interpretation resolves problems of inconsistency and multiplicity of interpretations that have characterized this provision of the SCA. It also is based on a proper understanding of the statute's language and legislative history.

 The current regulations construing this section of the SCA are inconsistent. Current section 4.111 states that the SCA does not apply if a contract's "principal purpose is to provide something other than services . . . and any . . . services . . . performed are only incidental to the performance of a contract for another purpose." Current section 4.132, by contrast, provides for SCA coverage of specifications for services in contracts where services and nonservices are combined into one contract. Current practice is that separate line items for services in contracts not principally for furnishing services are considered covered. 48 Fed. Reg. ...

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