Opinion
No. 1 CA-CV 13-0391
07-22-2014
BUBBA'S DRIVE THRU, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF HEALTH SERVICES; WILL HUMBLE, in his official capacity, Defendants/Appellees.
Gammage & Burnham PLC, Phoenix By John R. Dacey, Heather J. Boysel Counsel for Plaintiff/Appellant Arizona Attorney General's Office, Phoenix By Aubrey Joy Corcoran Counsel for Defendants/Appellees
NOTICE: NOT FOR PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION DOES NOT CREATE
LEGAL PRECEDENT AND MAY NOT BE CITED EXCEPT AS AUTHORIZED.
Appeal from the Superior Court in Maricopa County
No. LC2012-000132-001
The Honorable Crane McClennen, Judge
AFFIRMED
COUNSEL
Gammage & Burnham PLC, Phoenix
By John R. Dacey, Heather J. Boysel
Counsel for Plaintiff/Appellant
Arizona Attorney General's Office, Phoenix
By Aubrey Joy Corcoran
Counsel for Defendants/Appellees
MEMORANDUM DECISION
Judge Maurice Portley delivered the decision of the Court, in which Presiding Judge Lawrence F. Winthrop and Judge Andrew W. Gould joined. PORTLEY, Judge:
¶1 Bubba's Drive Thru ("Bubba's") had a contract with the Arizona Department of Health Services ("ADHS") to be an authorized vendor in the Special Supplemental Food and Nutrition Program for Women, Infants, and Children ("WIC"). ADHS, however, terminated the contract, which was affirmed by the superior court. Bubba's appeals and raises three arguments: (1) ADHS improperly shifted the burden to Bubba's to prove that it did not commit violations of the requirements vendors must satisfy to continue participating in WIC; (2) ADHS's disciplinary action is unsupported by the evidence presented at the administrative hearing; and (3) ADHS failed to provide Bubba's with sufficient notice of the alleged violations. For the reasons that follow, we affirm.
BACKGROUND
¶2 WIC is a federal program that provides cost-free nutrition education and supplemental food to low income "pregnant women, breastfeeding women, postpartum women, infants, . . . children . . . and the breastfed infants of . . . breastfeeding women." 7 C.F.R. § 246.2. Through a grant from the United States Department of Agriculture, ADHS administers WIC in Arizona. Under WIC, ADHS provides a voucher to qualifying individuals that lists specific items of food the individual is allowed to receive free of charge from an authorized WIC vendor. When the WIC participant presents the vendor with a voucher in exchange for some or all of the listed food products, the cashier is required, among other things, to write on the voucher at the time of the transaction the total amount of listed goods purchased. See id. § 246.12(h)(3)(v-vi). After such a transaction occurs, the vendor seeks reimbursement from ADHS for the cost of the goods given to the customer. Id. § 246.12(h)(3)(viii).
We cite to the current version of applicable regulations and statutes absent changes material to this decision.
WIC participants are not required to purchase all the items listed on the voucher except for baby formula. ADHS's investigations in this case did not involve vouchers for baby formula.
¶3 Federal regulations require ADHS to "design and implement a system to review food instruments and cash-value vouchers submitted by vendors for redemption . . . to detect . . . suspected vendor overcharges" ("Vendor Overcharge"). Id. § 246.12(k)(1). Specifically, ADHS "must conduct routine monitoring visits on a minimum of five percent . . . of [WIC authorized] vendors." Id. § 246.12(j)(2). The "monitoring visits" that occurred in this case are referred to as "compliance buys." Id. § 246.12(j)(4). The manual that ADHS distributes to authorized WIC vendors ('Vendor Manual") and the vendors' WIC contracts with ADHS specifically alert vendors that ADHS (or an authorized contractor) may conduct random compliance buys.
"Compliance buy means a covert, on-site investigation in which a representative of the [WIC] Program poses as a participant, parent or caretaker of an infant or child participant, or proxy, transacts one or more food instruments or cash-value vouchers, and does not reveal during the visit that he or she is a program representative." 7 C.F.R. § 246.2.
¶4 The Vendor Manual sets forth various violations for which vendors can be sanctioned. The applicable federal regulations require ADHS to terminate a vendor's WIC contract and disqualify the vendor for WIC reauthorization for three years if the vendor commits a pattern of overcharging. Id. § 246.12(l)(1)(iii)(C), (E), (l)(9). Pursuant to the Vendor Manual, a pattern is defined as three instances of overcharging. Ariz. Dep't of Health Servs., WIC Program Policy and Procedure Manual, 18-66 (Apr. 2014). There are two types of sanctionable Vendor Overcharging found in the Vendor Manual that are applicable to this case. One of those is "Violation #4": "Charging the WIC program more for supplemental food than non-WIC customers or charging the WIC program more than the current shelf price." The other, "Violation #5," prohibits a vendor from "[c]harging the WIC program for supplemental food not received by the participant [i.e., customer]." Thus, Violation #5 applies to situations where a WIC participant (i.e., ADHS investigator) does not receive from the vendor all of the food items listed on the voucher and the vendor nonetheless requests reimbursement from ADHS for the combined cost of all the items.
The vendor contract incorporated by reference the Vendor Manual and furthermore, in a separate provision, Bubbas's agreed to comply with the Vendor Manual.
¶5 Bubba's, a small convenience store, contracted with ADHS to become a WIC-authorized vendor effective October 1, 2010, to September 30, 2013. In its vendor contract, Bubba's agreed not to commit either type of Vendor Overcharging. To investigate compliance with WIC reimbursement requirements, ADHS conducted four compliance buys at Bubba's from November 6, 2010, to June 8, 2011. In all four instances, ADHS determined Bubba's sought reimbursement for an amount greater than the goods ADHS's investigators received from Bubba's. After each of the first two incidents, ADHS sent notices on December 1, 2010, and February 3, 2011, informing Bubba's of the Vender Overcharges and specifically cited Violation #4. In the notices, ADHS also informed Bubba's that a third overcharge would result in mandatory termination of Bubba's WIC contract. See id. § 246.12(l)(1)(iii)(C), (l)(1)(vi) (after a pattern of Vendor Overcharges, state agency must terminate the offending vendor's WIC contract); see also Ariz. Dep't of Health Servs., WIC Program Policy and Procedure Manual, 18-66 (Apr. 2014) (defining a pattern as three instances of overcharging). After the fourth incident, ADHS informed Bubba's on July 1, 2011, that it was terminating Bubba's WIC contract and disqualifying the store as an authorized WIC vendor for three years based on the recurring incidents of Violation #4. The letter also informed Bubba's that it could appeal the disciplinary action and request a hearing. Bubba's appealed, and a hearing was conducted before an Administrative Law Judge ("ALJ") at the Office of Administrative Hearings.
For reasons that are not clear from the record, Bubba's has been a WIC-authorized vendor since January 15, 2010.
ADHS's special investigations supervisor testified at the hearing that she did not send Bubba's a termination notice after the third Vendor Overcharge "[b]ecause I wanted to give the benefit of the doubt that . . . [overcharge] number two could have been an actual error in pricing. With it only being two cents, I felt that that means that, I just wanted to give the benefit of the doubt because it was such a trivial amount."
¶6 The ALJ issued her recommended decision on November 8, 2011 ("ALJ Decision") and found the hearing evidence did not support a determination that Bubba's committed Violation #4. The ALJ did find, however, the evidence supported a finding that Bubba's violated other WIC regulations, including instances of Violation #5, but because these violations were not charged by ADHS in its termination notice to Bubba's, the ALJ recommended the ADHS grant Bubba's appeal.
¶7 ADHS issued its Final Decision on December 7, 2011, rejecting the ALJ Decision. Consequently, ADHS denied Bubba's appeal, terminated Bubba's WIC contract, and disqualified it for three years as a WIC vendor. Bubba's sought judicial review in superior court pursuant to Arizona Revised Statutes ("A.R.S.") sections 12-902, -905, and -910 to -911, and the court affirmed the Final Decision. Bubba's appealed, and we have jurisdiction pursuant to A.R.S. § 12-2101(A)(1).
DISCUSSION
I. Standard of Review
¶8 In contested agency proceedings, and as correctly recognized by the ALJ, the agency makes the final decision and may adopt, reject, or modify an ALJ's recommended decision. Id. § 41-1092.08(B). Thus, ADHS was not bound by the ALJ's factual findings or legal conclusions. See Ritland v. Ariz. State Bd. of Med. Exam'rs, 213 Ariz. 187, 191-92, ¶¶ 12, 18, 140 P.3d 970, 974-75 (App. 2006) ("[A]n agency has the authority to make independent findings of fact. . . . An agency may only depart from [the ALJ's] findings if substantial evidence supports such departure."). In fact, ADHS had a duty to independently review the administrative record prior to rendering its Final Decision. See id. at 191, ¶ 14, 140 P.3d at 974 ("[T]he [Arizona State Board of Medical Examiners] must independently review the administrative record prior to making its findings of fact.").
¶9 In reviewing an administrative agency's decision, the superior court "shall affirm the agency action unless after reviewing the administrative record and supplementing evidence presented at the evidentiary hearing the court concludes that the action is not supported by substantial evidence, is contrary to law, is arbitrary and capricious or is an abuse of discretion." A.R.S. § 12-910. Arbitrary and capricious agency action has been described as "unreason[ed] action, without consideration and in disregard for facts and circumstances." Petras v. Ariz. State Liquor Bd., 129 Ariz. 449, 452, 631 P.2d 1107, 1110 (App. 1981) (quoting Tucson Pub. Sch., Dist. No. 1 of Pima Cnty. v. Green, 17 Ariz. App. 91, 94, 495 P.2d 861, 864 (1972)). The superior court must defer to the agency's factual findings and affirm them if supported by substantial evidence. See DeGroot v. Ariz. Racing Comm'n, 141 Ariz. 331, 336, 686 P.2d 1301, 1306 (App. 1984) (quoting Webster v. State Bd. of Regents, 123 Ariz. 363, 365-66, 599 P.2d 816, 818-19 (App. 1979)). If an agency's decision is supported by the record, substantial evidence exists to support the decision even if the record also supports a different conclusion. Id.
¶10 We engage in the same process as the superior court when we review its ruling affirming an administrative decision. Webb v. State ex rel. Ariz. Bd. of Med. Exam'rs, 202 Ariz. 555, 557, ¶ 7, 48 P.3d 505, 507 (App. 2002). Thus, we reach the underlying issue of whether the administrative action constituted reversible error. See Havasu Heights Ranch & Dev. Corp. v. Desert Valley Wood Prods., Inc., 167 Ariz. 383, 386-87, 807 P.2d 1119, 1122-23 (App. 1990).
¶11 Whether substantial evidence exists is a question of law for our independent determination. See id. at 387, 807 P.2d at 1123. Although we are not bound by an agency's or the superior court's legal conclusions, Sanders v. Novick, 151 Ariz. 606, 608, 729 P.2d 960, 962 (App. 1986), we view the evidence in the light most favorable to upholding an administrative decision. Special Fund Div. v. Indus. Comm o n of Ariz., 182 Ariz. 341, 346, 897 P.2d 643, 648 (App. 1994). "That a judge of the superior court, or that this court, might be of the opinion that a different order should have been entered than that which the [agency] did enter, does not, of itself, warrant reversal of the [agency]." Ariz. Water Co. v. Ariz. Corp. Comm'n, 217 Ariz. 652, 659, ¶ 23, 177 P.3d 1224, 1231 (App. 2008) (quoting Ariz. Corp. Comm'n v. Fred Harvey Transp. Co., 95 Ariz. 185, 189, 388 P.2d 236, 238 (1964)) (internal quotation marks omitted). We similarly review issues concerning statutory construction de novo. City of Tucson v. Clear Channel Outdoor, Inc., 218 Ariz. 172, 178, ¶ 5, 181 P.3d 219, 225 (App. 2008). However, "we give deference to an agency's interpretation and application of statutes that it implements." Bridgestone Retail Tire Operations v. Indus. Comm'n of Ariz., 227 Ariz. 453, 456, ¶ 12, 258 P.3d 271, 274 (App. 2011).
II. Substantial Evidence of Violation #4
¶12 In this case, the first compliance buy at Bubba's on November 6, 2010, revealed instances of three separate administrative violations and an incident of Violation #4, which resulted in an overcharge to ADHS of $12.98. On December 26, 2010, a second compliance buy revealed a second incident of one of the previous administrative violations and the second incident of Violation #4. The overcharge was $0.02. Bubba's paid ADHS a $100 fine for the repeated administrative violation.
ADHS presented testimony that $.02 "[a]ccording to . . . the feds . . . would be an overcharge."
¶13 The third compliance buy occurred on April 16, 2011, and exposed repeated administrative violations and an overcharge to ADHS of $3.00, thereby constituting the third incident of Violation #4. The fourth and final compliance buy took place on June 8, 2011, and ADHS documented a third incident of a prior administrative violation and a fourth occurrence of Violation #4. Bubba's overcharged ADHS $8.00. In all four compliance buys, the investigators did not purchase all the items set forth in the respective voucher.
¶14 Bubba's position at the hearing, and apparently adopted by the ALJ, was that the overcharge amounts reflected items listed on the vouchers that were not purchased by the investigators, thus indicating instances of Violation #5, which was not charged by ADHS. At the hearing, Bubba's did not challenge ADHS's allegation that Bubba's committed the four incidents of overcharging; rather, Bubba's argued it "never charged any WIC participant a price for an item that is any different than what they would charge non-WIC customers. If that ever happened, it was solely the result of human error." In support of its argument, Shamiran Joseph, who owns Bubba's with her husband, testified that the store's cashiers in three of the compliance buys did not, as required by ADHS and federal regulations, complete the vouchers with the amount of the "sale" at the time of the transaction; rather, she would fill in the total amount later, including the prices of items not purchased by the investigators, because she did not know what specific WIC items were purchased. See 7 C.F.R. § 246.12(h)(3)(v-vi).
Joseph admitted she was the cashier during the second compliance buy.
¶15 ADHS rejected Bubba's argument, based in part on its finding that Bubba's essentially presented an affirmative defense and failed to provide evidence of the prices of the items that were not purchased during the compliance buys. Therefore, ADHS concluded "Bubba's did not meet its burden of proof as to the affirmative defense." ADHS also concluded generally that the results of the compliance buys "meet the definitions of 'vendor overcharge' and 'vendor violation' in the WIC regulations." Consequently, ADHS denied Bubba's appeal, terminated Bubba's WIC vendor contract, and disqualified Bubba's for three years as a WIC vendor.
We note that burden of "proof" is a somewhat inaccurate description of the burden a party bears when asserting an affirmative defense. The appropriate burden is one of "production;" that is, the party has the burden to present evidence that establishes its defense. See Ariz. Admin. Code ("A.A.C.") R2-19-119(B)(2); see also Black's Law Dictionary 209 (8th ed. 2004) (defining burden of production). The burden of "persuasion" remains on the charging party, here ADHS, to prove by a preponderance of evidence the allegations as to which Bubba's was purportedly affirmatively defending. See A.A.C. R2-19-119(B)(1); see also Palicka v. Ruth Fisher Sch. Dist. No. 90 of Maricopa Cnty., 13 Ariz. App. 5, 9, 473 P.2d 807, 811 (1970) ("The burden of proof never shifts, although the burden of going forward with the evidence may shift from time to time during the course of the trial."); Black's Law Dictionary 209 (8th ed. 2004) (defining burden of persuasion). ADHS clearly understood that it had the "burden to establish by a preponderance of the evidence that the [ADHS's] decision to terminate Bubba's WIC Vendor Contract and to disqualify Bubba's for three years as a WIC vendor was correct and according to law." Because the Final Decision shows that ADHS recognized the distinction between the burdens of proof and production — despite its unartful description of Bubba's burden — we reject Bubba's argument that ADHS improperly shifted the burden of proof to Bubba's. In any event, based on our conclusion infra ¶¶ 17-19 that the hearing evidence substantially supports a finding that Bubba's committed Violation #4 at least three times, we need not address the "burden-shifting" issue because it relates to Violation #5.
As defined by 7 C.F.R. § 246.2: "Vendor violation means any intentional or unintentional action of a vendor's current owners, officers, managers, agents, or employees (with or without the knowledge of management) that violates the vendor agreement or Federal or State statutes, regulations, policies, or procedures governing the Program." (Emphasis added.)
¶16 On appeal, Bubba's reiterates its argument that, because there was no evidence at the hearing showing Bubba's charged the ADHS investigators more for particular items than Bubba's would have charged non-WIC customers, ADHS could not prove the occurrences of Violation #4. According to Bubba's, in order to sustain ADHS's burden in proving such violations, the investigators were required to purchase all of the items listed on the vouchers so a determination could be made that the overcharge amounts did not reflect the non-purchased items' prices, but rather that the overcharge amounts reflected improperly inflated prices on the goods that were actually purchased.
¶17 "Vendor overcharge means intentionally or unintentionally charging the State agency more for authorized supplemental foods than is permitted under the vendor agreement." Id. § 246.2 (emphasis added). Thus, based on the plain reading of 7 C.F.R. § 246.2, Violation #4 occurs when the vendor unintentionally seeks reimbursement from ADHS for an amount greater than the amount it would have charged a non-WIC customer for the same items giving rise to the reimbursement request. See Fragoso v. Fell, 210 Ariz. 427, 430, ¶ 7, 111 P.3d 1027, 1030 (App. 2005) (noting we first look to the statute's plain language as the best indicator of legislative intent, and when statutory language is clear and unambiguous, we give effect to it and do not use other methods of statutory interpretation). Committing a Violation #4 infraction simply does not necessarily require that the offending vendor charge the ADHS investigators (i.e., WIC customers) more than a non-WIC customer for a particular item.
¶18 Here, the administrative hearing evidence amply demonstrates that Bubba's overcharged ADHS in connection with the items purchased during the compliance buys. ADHS presented testimony that, when determining whether a Vendor Overcharge has occurred, it looks to "[t]he difference from what the . . . vendor has submitted" and compares that to the dollar amount of the goods actually purchased. Joseph admitted that during the compliance buys the cashiers did not properly note the price of the purchased items on the vouchers at the time of the transactions. Because Joseph testified she would later fill out the purchase prices assuming the transactions at issue involved purchases of all the items listed on the vouchers, Bubba's charged ADHS a greater amount for the purchased items than Bubba's would have charged a non-WIC customer for the same items. Indeed, the ADHS's special investigations supervisor specifically testified that the four amounts for which Bubba's requested reimbursement from ADHS were greater than what a non-WIC customer would have paid for the same items the investigators purchased during the compliance buys. On this record, we cannot conclude ADHS's Final Decision was unsupported by the evidence, or was otherwise arbitrary and capricious or contrary to law.
Joseph did not testify that she sought to clarify, either with the cashiers or through some other means, the actual amount of the compliance buy purchases.
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III. Notice
¶19 Bubba's contends ADHS did not provide notice that instances of Violation #5 occurred, and because ADHS "fail[ed] to prove any offense under Violation #4," the notices ADHS sent to Bubba's regarding the violations resulting from the compliance buys were insufficient. Based on our conclusion that the hearing evidence supports that Bubba's committed at least three instances of Violation #4, we need not address the issue.
CONCLUSION
¶20 The superior court's judgment affirming ADHS's decision to terminate Bubba's WIC vendor contract and disqualify Bubba's status as a WIC-approved vendor for three years is affirmed. Because Bubba's did not prevail on appeal, we deny its request for attorneys' fees.