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Massachusetts Manufacturing Extension Partnership v. Locke

July 7, 2010

MASSACHUSETTS MANUFACTURING EXTENSION PARTNERSHIP, ET AL., PLAINTIFFS,
v.
GARY LOCKE, SECRETARY, UNITED STATES DEPARTMENT OF COMMERCE, DEFENDANT.



The opinion of the court was delivered by: Paul L. Friedman United States District Judge

OPINION

Plaintiffs Massachusetts Manufacturing Extension Partnership ("MassMEP"), Florida Manufacturing Extension Partnership ("Florida MEP"), and Maine Manufacturing Extension Partnership ("Maine MEP") allege that the Secretary of the United States Department of Commerce ("Commerce") has violated the Administrative Procedure Act, 5 U.S.C. §§ 701 et seq. ("APA"), in administering the Hollings Manufacturing Extension Partnership Program ("MEP program"). On July 29, 2009, the defendant moved to dismiss the plaintiffs' complaint. While that motion was pending, the plaintiffs filed an amended complaint. Because the filing of the amended complaint rendered the defendant's motion to dismiss moot, the Court will deny that motion.

Also pending before the Court are the parties' cross-motions for summary judgment, which are ripe for review. After consideration of the parties' arguments, the relevant authorities, and the entire record in this case, the Court will grant the defendant's motion for summary judgment in part and deny it in part, dismissing one of plaintiffs' claims as moot and entering judgment for the defendant as to the remaining claims. The plaintiffs' cross-motion for summary judgment will be denied.*fn1

I. BACKGROUND

A. The MEP Program

The National Institute of Standards and Technology ("NIST"), a unit within the Department of Commerce, "provide[s] assistance for the creation and support of Regional Centers for the Transfer of Manufacturing Technology [("MEP centers")]." 15 U.S.C. § 278k(a). These centers, operated by nonprofit affiliates, facilitate the "transfer of manufacturing technology and techniques developed at [NIST]" to manufacturing companies by disseminating information about useful technologies and advising businesses on how to improve their operations by adapting and implementing those technologies. Id. § 278k(a)(1)-(5). The centers are also designed to secure the "participation of individuals from industry, universities, State governments, other Federal agencies, and, when appropriate, [NIST] in cooperative technology transfer activities." Id. § 278k(a)(2).

The activities of MEP centers are funded by contributions from both the public and private sectors. See 15 U.S.C. § 278k(c)(1)-(3). NIST provides significant financial support to the centers, but the level of that support is limited by statute; if a center has been in operation for more than six years, the maximum amount of annual financial assistance it may receive from NIST is equal to "one third of [its] capital and annual operating and maintenance costs." Id. § 278k(c)(5). The remaining share of the center's budget - the "host share" or "cost share" - must be supplied by the center's "host organization," "a U.S.-based nonprofit institution or organization" that operates the center. See 15 C.F.R. § 290.4(c); id. § 290.3(a). That host organization may raise its share in more than one way: by accepting fees for services and for the licensing of technology, by receiving "dollar contributions from state, county, city, industrial, or other services," or by taking "in-kind contributions." Id. § 290.4(c)(1)-(3). Third parties, such as universities or private businesses, may make in-kind contributions by dedicating full- or part-time personnel to the center's work or by donating equipment, office space, or "other related contributions." Id. § 290.4(c)(5).

Pursuant to a regulation first promulgated by Commerce in 1990 and amended in 1994, a MEP center may fund no more than half of its cost share using in-kind contributions other than full-time personnel ("the in-kind contribution cap"). Id. The other half of its share therefore must derive from either (1) cash or (2) the value of full-time personnel contributed by third-parties. See id. § 290.4(a)(1)-(5). This framework divides the funding for each center's annual budget into thirds: a third of the center's costs may be paid by NIST; a third may be provided by third parties making in-kind contributions of resources other than full-time personnel; and at least a third must derive from third-party (non-NIST) contributions of either cash or full-time personnel.

MEP centers receive financial assistance from NIST on an annual basis. PSMF ¶ 14; Def.'s Resp. ¶ 14. To do so, each center "develops a draft operating plan for the upcoming funding cycle, which includes the operating budget and all of the proposed agreements between the Center and" third parties ("partners") providing goods, services, and/or contributions to the center. PSMF ¶ 15; Def.'s Resp. ¶ 15. NIST reviews the proposed plan and may recommend revisions. PSMF ¶ 16; Def.'s Resp. ¶ 16. Once the plan has been revised by the center and ultimately approved by NIST, NIST supplies the center's financial assistance award and issues a cooperative agreement that establishes the center's contractual relationship with NIST. PSMF ¶ 17; Def.'s Resp. ¶ 17.

Two policy documents developed and adopted by NIST govern the relationship between the agency and the MEP centers. First, a document called the "MEP Operating Plan Guidelines and Format" describes the "recommended format and details" for the proposed operating plans submitted to NIST each year by the centers. Simpson Decl. ¶ 12; DSMF ¶ 6; Pl.'s Resp. ¶ 6. Second, a set of "General Terms and Conditions" applies to all centers that receive financial assistance awards from NIST. 2009 GTCs at 1; DSMF ¶ 6; Pl.'s Resp. ¶ 6. The Operating Plan Guidelines and the General Terms and Conditions outline and explain such matters as the type of records with which centers must document their cost share and the way in which various third-party partners of the centers should be categorized.

Of particular relevance to this litigation is Commerce's treatment of the term "subrecipient." As defined by NIST's current Operating Plan Guidelines, a "subrecipient" is "the legal entity to which a subaward is made [by a center] and which is accountable to the [center] for the use of the funds provided." 2009 OPG at 18. A subaward is "an award of financial assistance in the form of money, or property in lieu of money, made under an award [from NIST] by [a center] to an eligible subrecipient. . . ." Id. Because a subrecipient receives money or property from a center in exchange for its legal assumption of certain of the center's obligations under its cooperative agreement with NIST, the subrecipient must extensively document its costs and expenditures and submit that documentation to the center, which in turn may be required to provide that documentation to NIST. Id. at 18-19; 2009 GTCs at 8. In contrast, a "third party in-kind contributor" provides "non-cash contributions" such as personnel or equipment to the center, but does not receive cash or property in return. 2009 OPG at 19-20; 2009 GTCs at 7. A third-party in-kind contributor is not subject to the same stringent documentation requirements applicable to subrecipients. See 2009 GTCs at 8.

B. The Plaintiffs

Plaintiffs MassMEP, Florida MEP, and Maine MEP are three nonprofit organizations that serve as hosts for a MEP center in each of their respective states. PSMF ¶ 8. Each was formed in the 1990s to participate in the MEP, and since then each has received a financial assistance award from NIST every year. Id. ¶¶ 9-11.

In August of 2006, Commerce's Office of the Inspector General ("OIG") initiated an audit of MassMEP's finances for the period between July 1, 2005 and June 30, 2006. PSMF ¶ 38. OIG issued its final report on the audit in March of 2009. See 2009 MassMEP Audit Report at 1. According to OIG, the audit showed that MassMEP had "received $1,294,073 in excess federal funding" during the fiscal year in question. Id. at 2. OIG reached that conclusion based in part on its finding that roughly $4.2 million in program costs allegedly incurred by subrecipients could not be substantiated by proper documentation. Id. at 1. OIG recommended that Commerce recover the $1.3 million in "excess federal funding" from MassMEP. Id. at 16.

In May of 2007, OIG initiated an audit of Florida MEP's finances for the period beginning on July 1, 2005, and ending on March 31, 2007. PSMF ¶ 39. The report containing the results of that audit, like the report on the audit of MassMEP, was issued in March of 2009. See Florida MEP Audit Report at 1. OIG concluded, among other things, that Florida MEP had claimed approximately $11.4 million in costs incurred by subrecipients that could not be verified by appropriate documentation. Id. at 2. Because of that and other errors, Florida MEP had, by OIG's calculation, received "$2,868,393 in excess federal funds" recoverable by Commerce. Id.

Unlike its co-plaintiffs MassMEP and Florida MEP, Maine MEP does not claim to have been subject in recent years to an unfavorable audit by OIG. Nevertheless, it asserts an interest in the regulation of the MEP program by Commerce. See Am. Compl. ¶ 15.

C. Procedural Posture

The plaintiffs filed their initial complaint on April 30, 2009. All three plaintiffs alleged that (1) Commerce had failed to promulgate regulations "compliant with . . . 15 U.S.C. § 278k," Compl. ¶ 80; (2) Commerce had "improperly defined Plaintiffs' partners' as 'subrecipients' and disqualified those partners' contributions on the ground that the partners do not meet federal accounting cost principles applicable to recipients," id. ¶ 86; (3) the audit reports concerning the finances of MassMEP and Florida MEP "reflect an arbitrary, capricious, and unreasonable interpretation" of applicable statutory provisions, id. ¶ 95; and (4) Commerce had breached its cooperative agreements with the plaintiffs by "seeking . . . to disrupt Plaintiffs' relations with their partners." Id. ¶ 100. Commerce responded by filing a motion to dismiss in which it stated that the first three counts of the plaintiffs' complaint related to the MassMEP and Florida MEP audit reports, which were not yet final agency action and so not subject to review under the Administrative Procedure Act. MTD at 1. The defendant also argued that the Court lacked jurisdiction over the plaintiffs' breach of contract claim. Id. at 2.

In response, the plaintiffs, without objection from the defendant, filed an amended complaint presenting significantly different claims. Instead of openly challenging the audit reports, the plaintiffs allege in the amended complaint that Commerce "is enforcing reporting requirements on the MEP centers that are significantly more burdensome" than regulations dictate, Am. Compl. ¶ 69, and is "imposing financial management and other standards applicable to subrecipients on plaintiffs' partnering organizations, even when those partnering organizations are not receiving a subaward." Id. ¶ 72. They also allege that Commerce has violated the APA by "den[ying]" the plaintiffs "a proper and lawful interpretation of the America COMPETES Act," and that Commerce's in-kind contribution cap is invalid in light of that statute. Am. Compl. ¶¶ 66, 78. A fifth claim, Count IV of the Amended Complaint, has since been abandoned by the plaintiffs. See id. ¶¶ 74-76; Pl.'s Reply at 2 n.1. The plaintiffs request declaratory and injunctive relief. See Am. Compl. at 22. The parties have filed cross-motions for summary judgment.

II. DISCUSSION

The plaintiffs make four main arguments in their motion for summary judgment:

(1) the in-kind contribution cap imposed by Commerce in its regulations, see 15 C.F.R. § 290.4(c)(5), is facially invalid in light of legislation passed by Congress in 2007, PMSJ at 15; (2) NIST has violated its own regulations by "impos[ing] upon the Centers unduly burdensome recordkeeping requirements," id. at 20; (3) NIST unlawfully "expanded the definition of subrecipient in a manner that threatens to harm Florida MEP and MassMEP in their pending audit resolutions, id. at 24; and (4) Commerce "has adopted an interpretation [of statutory law that is] of general applicability, without publication in the Federal Register" in violation of the Freedom of Information Act, 5 U.S.C. § 552. Id. at 13. Also included in the plaintiffs' motion or their reply memorandum are three arguments that do not appear to be based on claims made in the amended complaint at all: (1) Commerce has adopted documentation requirements without engaging in notice-and-comment proceedings, in violation of the APA, id. at 24-25; (2) Commerce has imposed a new definition of "subrecipient" on the ...


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