When the government needs private companies to participate in a program, it sometimes creates incentives to induce the companies to participate. These incentives are sometimes interpreted by courts as forming enforceable contracts, called implied-in-fact contracts. Enforcement of such contracts protects companies that participate in government programs by letting them recover damages if the government reneges on its obligations. It also serves the government’s interests by making its promises more credible and therefore more likely to induce the desired behavior.
The implied-in-fact contract doctrine was recently tested by the Affordable Care Act, which included a provision that induced insurance companies to participate in its healthcare exchanges by covering their risks—known as the “risk corridor” program. Congress later failed to appropriate enough funds to pay for the program, creating a shortfall of more than twelve billion dollars. Many companies that expected to be covered by the program were left unpaid. Several filed lawsuits to recover against the government for breach of contract.
This Article argues that the Federal Circuit misinterpreted implied-in-fact contract caselaw in its 2018 Moda Health decision, leading it to erroneously conclude that the risk corridor program did not give rise to an implied-in-fact contract. Further, this Article argues that the risk corridor cases illustrate an unresolved conflict between governmental implied-in-fact contracts and Chevron deference. Agencies have an interest in interpreting their way out of liability under implied-in-fact contracts and have discretion to interpret statutes where they do not “speak precisely.” But the law never “speaks precisely” to implied-in-fact contracts—this is what makes them implied rather than express contracts. This Article concludes that courts should not allow agencies to use Chevron deference to escape their obligations under implied-in-fact contracts.
Many federal government programs require the participation of private companies to succeed—including programs that deliver mail, provide healthcare, or stimulate production of products ranging from milk to uranium. The government usually offers some kind of financial incentive for private companies to induce the success of these programs. These incentives are often interpreted by courts as enforceable contracts, known as implied-in-fact contracts, when the incentives meet the other requirements of a valid contract. The implied-in-fact contract doctrine can protect companies that do business with the government while also serving the government’s interests by creating more competition between companies. Despite this, the implied-in-fact contract doctrine has been seemingly overlooked by scholars.
The limits of the doctrine’s applicability were recently tested in the wake of the Patient Protection and Affordable Care Act (ACA). The federal law created a temporary program designed to encourage insurers to set competitive premiums in the exchanges created by the law—rather than higher premiums reflecting uncertainty about the new program—and covered insurer losses below an expected threshold while also taking gains above a higher threshold. Together, these thresholds formed a “risk corridor.” Soon after the program began, however, inflows from profits above the corridor were insufficient to defray costs below the corridor. Congress, subsequently, did not appropriate sufficient funds to cover the difference. As a result, insurance companies participating in the program were left without payments for which they qualified under the risk corridor provision.
Multiple companies impacted by this funding shortfall sought relief in the Court of Federal Claims (COFC) alleging, among other claims, that the government’s failure to reimburse their losses constituted a breach of an implied-in-fact contract per the risk corridor program. The various COFC holdings created a split in authority when one of the court’s judges recognized an implied-in-fact contract in two cases, while another judge rejected the existence of an implied-in-fact contract in a parallel case. The Federal Circuit resolved this split in authority in Moda Health Plan, Inc. v. United States by ruling that the risk corridor program did not create an implied-in-fact contract between participating insurance companies and the government.
The ramifications of this decision were manifold. It threatened to leave health insurers that participated in the ACA with a $12.3 billion shortfall of payments that the risk corridor program provided for. Moreover, the decision raised “a real problem as to the government’s willingness and ability to make good on its promises going forward.”
The case also raised a novel complication in the application of rulings regarding implied-in-fact contracts, which could potentially create a conflict with Supreme Court caselaw. In a prior case, Land of Lincoln, the COFC based its ruling on the Department of Health and Human Services’ (HHS) determination that the risk corridor program was to be revenue neutral, with payments occurring every three years rather than annually. Thus, even if the plaintiff in that case could have established an implied-in-fact contract, the plaintiff would not have been able to establish that HHS breached the contract because the three-year window envisioned by HHS had yet to lapse. The court concluded the HHS determination was entitled to Chevron deference.
The ruling in Land of Lincoln raises an important and unresolved legal question: where Congress has created an implied-in-fact contract by statute, can an agency escape its obligations under the contract by espousing an interpretation of the statute that voids or materially alters the contract?
Under the Chevron doctrine, courts give deference a federal agency’s “reasonable” interpretation of a statute that delegates power to the agency when Congress has not “directly spoken to the precise question at issue.” Congress never “precise[ly]” or “directly” speaks to the existence of implied-in-fact contracts, however—this is what makes them “implied-in-fact” rather than “implied-in-law” or “express” contracts. Furthermore, the Supreme Court has affirmed the right to recover against the government when the government breaches an implied-in-fact contract. While the literature on Chevron deference is rich, no source has yet addressed the potential conflict between Chevron deference and implied-in-fact contracts created when agencies seek Chevron deference in interpreting laws and regulations that give rise to implied-in-fact contracts.
Ultimately, Moda Health was granted certiorari by the Supreme Court and consolidated with two other cases concerning the risk corridor program, in a case that came to be known as Maine Community Health Options v. United States. The Supreme Court ruled that the companies were entitled to payment under the risk corridor program and that “[t]he Government should honor its obligations.” Yet, the Supreme Court rested its decision on a finding that, “[i]n establishing the temporary Risk Corridors program, Congress created a rare money-mandating obligation.” Therefore, the Court declined to reach the merits of the companies’ implied-in-fact contract claim.
This Article argues that the Federal Circuit erred in ruling that the risk corridor program did not establish an implied-in-fact contract between the insurance companies and the government. Moreover, it argues that both the Federal Circuit and the Supreme Court missed an opportunity to resolve the underlying conflict between Chevron deference and the implied-in-fact contract doctrine and clarify the legal status of implied-in-fact contracts with the government going forward. This Article aims to fill an important gap in Chevron deference literature, which has devoted almost no attention to implied-in-fact contracts with the government or considered the dilemma posed by the intersection of these contracts and Chevron deference. Part II discusses relevant caselaw related to implied-in-fact contracts with the government and the underlying legal and policy rationales which guided existing decisions. Part III analyzes the ACA risk corridor cases and concludes that the risk corridor program did create an implied-in-fact contract. Part IV argues that agencies should not be able to use Chevron deference to interpret their way out of valid contracts because it undermines the government’s credibility and contradicts the Supreme Court’s Chevron rationale, as well as its subsequent Winstar decision.
Federal courts have considered on several occasions whether the government’s actions can establish implied-in-fact contracts with businesses. These cases are typically litigated before the COFC, which, like its Court of Claims predecessor, has jurisdiction under the Tucker Act to hear claims upon “any express or implied contract with the United States.” These cases have created a robust line of precedent against which the ACA risk corridor program can be judged.
Baltimore & Ohio is a watershed case in which the Supreme Court found an implied-in-fact contract with the federal government. There, the Court held that implied-in-fact contracts are enforceable against the government as full, valid contracts. The Court distinguished implied-in-fact contracts from implied-in-law and quasi contracts, which it characterized as “fiction[s] of law.” In addition, the Court ruled that an implied-in-fact contract is an agreement “founded upon a meeting of minds, which, although not embodied in an express contract, is inferred, as a fact, from conduct of the parties showing, in the light of the surrounding circumstances, their tacit understanding.”
Baltimore & Ohio stands for the proposition that implied-in-fact contracts are real contracts, with the full characteristics, rights, and force of express contracts—and that such contracts are binding against the government. This decision remains good law and continues to be cited as the foundation of governmental implied-in-fact contract doctrine.
In National Passenger, the Supreme Court considered a dispute between railway companies and the federal government on, among other things, whether the Rail Passenger Services Act of 1970 created a binding contract between the railway companies and the government. The Court held that the statutory provisions establishing Amtrak could not be construed as binding contracts with the government. The National Passenger court maintained a presumption that statutes are policies, not contracts, and that they do not give rise to contractual liability. Explaining its rationale for this presumption, the Court ruled:
For many decades, this Court has maintained that absent some clear indication that the legislature intends to bind itself contractually, the presumption is that “a law is not intended to create private contractual or vested rights but merely declares a policy to be pursued until the legislature shall ordain otherwise.” This well-established presumption is grounded in the elementary proposition that the principal function of a legislature is not to make contracts, but to make laws that establish the policy of the state. Policies, unlike contracts, are inherently subject to revision and repeal, and to construe laws as contracts when the obligation is not clearly and unequivocally expressed would be to limit drastically the essential powers of a legislative body. . . . Thus, the party asserting the creation of a contract must overcome this well-founded presumption.
As the Court’s ruling suggests, a broad inference of contractual liability against the government for all statutes could greatly impair Congress’s ability to legislate by incurring substantial, potentially unpredictable, liabilities every time it enacted or amended legislation. Despite this presumption—and the tension it might seem to create with Baltimore & Ohio—the Court has repeatedly upheld Baltimore & Ohio’s holding that implied-in-fact contracts against the government are a valid basis for recovery. As a result, plaintiffs are able to recover damages for breach if they overcome this presumption.
The Supreme Court’s language in National Passenger is ambiguous as to what “clear indication” is necessary to overcome the presumption against contractual liability. The Court’s reasoning rested on a desire not to “drastically limit” Congress’s power. But, in certain instances, contract enforceability can actually expand a contracting party’s power to induce cooperative behavior by making its commitments more credible. Indeed, this inducement is central to the rationale for contract enforcement as a general matter.
Government contracts potentially add a layer of complication to the problem of credible commitment because the government is both a party to the contract and the enforcer of the contract. The government must not only be able to credibly commit to honor its contractual obligations; it must also be able to commit to interpret its contracts fairly. In government contracts, government promises will be less credible to the extent that the government can “revise and repeal” them, reducing the likelihood each contract will induce the desired behavior. Some literature has recognized the unique role of the independent judiciary as an institution that holds the government accountable to its promises. The judiciary makes the government more powerful by making its promises more credible by acting as an independent check on the government rather than an agent serving its policy preferences.
Since the Supreme Court’s rationale in National Passenger is based on a desire not to “limit . . . the essential powers of a legislative body,” courts should interpret the decisionaccordingly. National Passenger’s holding should not apply to situations where the elements of implied-in-fact contracts are present because liability expands Congress’s power by making its promises more credible in these situations. The National Passenger court never mentioned implied-in-fact contracts or the Court’s holding from Baltimore & Ohio, suggesting that the Court did not aim to disturb the governmental implied-in-fact contract doctrine. Thus, National Passenger can best be understood as preserving implied-in-fact contract doctrine but militating against inferring contractual liability unless the elements of a contract are present.
In Heyer Products, the Court of Claims evaluated the government’s obligations to companies that bid on government contracts. The plaintiff in Heyer Products was a company whose bid on a federal solicitation was not awarded a contract. The plaintiff presented “sufficient allegations to make out a case of discrimination against it, and of favoritism toward [the company which received the bid], at a loss to the Government of several hundred thousand dollars.” The court found that, “[i]f the allegations are true, it would seem impossible to conclude that that bid had been accepted which was most advantageous to the Government.” The government sought to dismiss the suit, arguing that the “plaintiff ha[d] no legal capacity to sue.”
The court agreed with the government that it was “settled beyond controversy that most statutes governing the awarding of bids by governmental agencies are enacted for the benefit of the public who are served by these agencies, and not for the benefit of the bidders, and, therefore, that bidders have no right to sue” on the grounds that the government improperly awarded the contract. Furthermore, the court agreed that, because the plaintiff was not awarded the contract that it sought, it could not “recover the profit [it] would have made out of the contract.”
However, the court found the plaintiff could “recover the expense to which he was put in preparing his bid,” because “it was an implied condition of the request for offers that each of them would be honestly considered, and that that offer which in the honest opinion of the contracting officer was most advantageous to the Government would be accepted.” Indeed, “no person would have bid at all if he had known that ‘the cards were stacked against him’” and “no bidder would have put out $7,000 in preparing its bid . . . if it had known the [government] had already determined to give the contract to [another company.]”
The court, considering the principle of equity, ruled that the plaintiff company “had a right to think” its bid would be “honestly considered” because the government “impliedly promised plaintiff it would be,” thereby “induc[ing] it to spend its money to prepare its bid.” The court found that, if the plaintiff’s allegations were true, they would show that the government had “shamefully broken” that promise. As a result, the court found an “implied contract ha[d] been broken, and plaintiff [could] maintain an action for damages for its breach.”
The Heyer Products court also considered public policy in its decision. Citing the Supreme Court case of Purcell Envelope, the Heyer Products court noted the benefits of competitive bidding for government contracts. Competitive bidding gives the government “the benefit of the competition of the market and each bidder is given the chance of a bargain.” Therefore, competitive bidding is “in the interest of both government and bidder, necessarily giving rights to both and placing obligations on both.” As a result, the court ruled that “it is not out of place to say that the government should be animated by a justice as anxious to consider the rights of the bidder as to insist upon its own.” While the government may have short-term interests in a particular acquisition at odds with the bidder’s interests, the government’s long-term interests are served by maintaining the integrity of competitive bidding.
Today, bid protests are a common part of government contracts practice, governed by statute and regulation, rather than the Heyer Products decision. Nevertheless, Heyer Products remains instructive precedent. In Heyer Products, the court confronted a situation where the government induced private parties to participate in a government program but then reneged on the terms of the program. In this case, the government program was competitive bidding for a formal government contract and the breach was the government’s failure to honestly consider bids. Even though the company clearly had not been awarded a formal contract, the court still allowed it to maintain an action on the theory of an implied-in-fact contract. The court rested its decision on considerations of public policy and fairness. The company was entitled to reasonably rely on the government’s implied promise—and if the government broke that promise, the company was entitled to recover damages.
Radium Mines provides key insights into the rationale for the implied-in-fact contract doctrine. Radium Mines involved the United States Atomic Energy Commission (the Commission), which, pursuant to the Atomic Energy Act of 1946, issued regulations guaranteeing minimum prices for uranium “to stimulate domestic production of uranium and in the interest of the common defense and security of the United States.” The Commission’s regulations set a specific price for each pound of uranium and provided for delivery and refining costs. The regulations also established a procedure for “making an offer” to the Commission by letter or telegram.
The uranium producer argued that the regulation was itself an offer and that the transmission of its “offer” to the Commission actually constituted contractual acceptance of this offer. The Court of Claims agreed, accepting the company’s argument that the regulation was actually an offer, and that the “offer” was actually an acceptance. Nonetheless, the court ultimately rejected the uranium producer’s claim because its uranium did not chemically conform to the regulation’s requirements; therefore, “no contract . . . arose.” The court’s decision rested on its finding that the regulation was intended “to induce persons to find and mine uranium” and, had the uranium conformed to the regulation’s chemical requirements, a contract would have arisen regardless of the government’s acceptance or rejection.
The Radium Mines court clearly rejected the government’s position that the regulation was “a mere invitation to the industry to make offers to the Government, which the Government could then accept or reject as it saw fit.” The government’s regulation met the basic elements of an offer to form an implied-in-fact contract, but the court was willing to find a contract enforceable against the government, provided that the company’s performance conformed to the regulation’s requirements.
The Radium Mines decision is noteworthy because the court looked to the broader context rather than the explicit text of the regulation creating the program to determine whether there was a contract. The regulation specifically described the communication to the Commission as an “offer” and provided for a “contract” only after the offer had been accepted. The court found that the “offer” was actually an acceptance creating a binding contract, noting the regulation’s public policy and the inequity of allowing the government to escape paying a potentially compliant company that fulfilled all the regulation’s requirements based on a strict, formalist reading of the regulation’s text.
This case should provide insight into the underlying motivation for the implied-in-fact contract doctrine: the doctrine serves the government’s purposes by encouraging the behavior that the government wishes to induce, and the doctrine prevents unfair treatment of businesses that participate in government programs. In reaching its decision, the court looked beyond the language of the provisions to the deeper structure of the program.
Radium Mines is also instructive when applied to the risk corridor cases. Radium Mines suggests that courts should consider context and fairness in their determinations about whether implied-in-fact contracts exist. Similar to the Commission making a viable business out of otherwise impractical uranium production to serve the government’s defense and energy interests, the ACA’s risk corridor was intended to make offering affordable premiums on the healthcare exchanges a viable business model.
Another important decision illuminating the implied-in-fact contract doctrine is New York Airways. The case concerned an order of the Civil Aeronautics Board (the Board) issued under the Federal Aviation Act of 1958, which authorized plaintiff helicopter companies to “carry passengers, property, and mail” and “fixing monthly compensation to be paid . . . for transporting mail.” The compensation included both a payment for services and a subsidy. While the Board fixed both rates, the Postmaster General paid for the services and the Board paid for the subsidies. The distinction existed “to remove from the Post Office budget a subsidy item that had no intrinsic relation to the postal mission, so that Congress could maintain an effective review of the subsidy program.” The subsidy program, therefore, was distinct from the direct, Postmaster General service payments.
The Board eventually failed to make subsidy payments because Congress did not appropriate funds for it to do so. Therefore, the court had to consider not only whether the government’s actions created a binding implied-in-fact contract but two further issues: (1) whether the Board was still required to pay under the contract without congressionally appropriated funds, and (2) whether the appropriation act itself—i.e. the one failing to appropriate funds for compensation—constituted an amendment of the government’s obligations under the statute.
The helicopter companies succeeded on both issues. With respect to the first issue, the court ruled that “the actions of the parties support the existence of a contract at least implied in fact” because “the Board’s rate order was, in substance, an offer by the Government to pay . . . for the transportation of mail” that the plaintiffs accepted by transporting the mail. The court found that “once the services are rendered the failure of Congress to grant appropriations would not relieve the Government of its contract obligations to pay carriers.” Congress’s failure to appropriate funds was not fatal; indeed, the court found that “deficiency appropriations are commonly enacted to rectify poor guesses or meet unanticipated developments.”
The court rejected the government’s additional argument that Congress’s failure to appropriate sufficient funds constituted an amendment to the underlying legislation. The court ruled that “where Congress intends to eliminate or curtail subsidies to certain carriers it accomplishes it forthrightly rather than by pursestring inference.” While “the failure to appropriate funds to meet statutory obligations prevents the accounting officers of the Government from making disbursements . . . such rights are enforceable in the Court of Claims,” at least absent an express provision limiting the contractual liability to “available funds.” Congress does have the “power to amend substantive legislation . . . by an appropriation act,” but doing so “is considered undesirable” and “will not readily be inferred.”
New York Airways presents a situation similar to the risk corridor cases. The government’s statements and actions gave rise to an implied-in-fact contract but lacked sufficient appropriated funds or any provision limiting liability to revenues. The New York Airways court upheld a subsidy program designed to encourage a government activity—the carrying of mail—even though it was clearly distinct from the fixed compensation for that purpose.
A potential difference between New York Airways and the risk corridor cases, however, lies in how the relevant agencies interpreted the statutory provisions arguably creating the implied-in-fact contract. In New York Airways, the Board had “repeatedly advised the appropriation committees of Congress . . . that limitations on appropriations for helicopter subsidies would not . . . constitute an amendment or modification” of the Board’s obligations to pay the helicopter companies. While the case was decided long before Chevron, the Board’s determination may have played a role in the court’s reasoning. On the other hand, in the risk corridor cases, HHS was charged with administering the risk corridor program and had arguably interpreted that the program was to be “budget-neutral.”
In ARRA Energy, the COFC considered, inter alia,whether a provision of the American Reinvestment and Recovery Act of 2009, popularly known as the “stimulus package,” created binding contracts between the government and energy companies seeking to avail themselves of reimbursement grants provided by the law. The court explicitly rejected the government’s argument that “a statute can never constitute an offer to enter into a contract.”
In assessing whether the statute created an inference that the government intended to form a contract, the court turned to Radium Mines and a related, more recent case called Grav. Grav concerned a statute that required the Department of Agriculture to create a Milk Diversion Program, which stipulated that the “Secretary shall offer to enter into a contract . . . with any producer of milk in the United States for the purpose of [reducing milk production].” The Grav court interpreted this provision to deny the government “discretion to refuse to enter a contract with any qualified producer.” The ARRA Energy court contrasted the mandatory nature of the Grav contracts and the Radium Mines uranium purchase provisions with the arguably more discretionary nature of the reimbursement grants provided by the stimulus package.
The court further held that even if the payment provisions were mandatory, the provisions would “not automatically lead to the conclusion that the government intended to form a binding contract.” More than an obligation to follow the statute, plaintiffs would need to show there was “mutual intent to enter a contract.” The question is why the ARRA Energy court found that payments for certain activities in furtherance of the government’s purpose of promoting renewable energy did not suffice. It may be because the ARRA Energy court was looking for a specific government program in which the government was intending to induce participation. The ARRA Energy courtdeclined to mention New York Airways and misinterpreted Radium Mines as being about the presence of contract language, when in reality that language in Radium Mines suggested there was not a contract but the court found one anyway.
The critical question is whether implied-in-fact contract doctrine should apply to all statutes that seek to induce behavior with payment in a contractual manner, such as the one in ARRA Energy, or merely those that induce participation in a government program such as the Milk Diversion Program in Grav, the postal mail carrying program in New York Airways, or the uranium purchase program in Radium Mines. While the Moda Health court criticized the ARRA Energy court for reaching the latter conclusion, the line ARRA Energy drew seems at least defensible, even if it is more restrictive than lines drawn in previous caselaw. Courts considering the risk corridor cases need not resolve this question, however, because the risk corridor was designed to induce participation in a government program, the healthcare exchange, so the risk corridor program qualifies as promissory under either approach.
Against the background of caselaw from Part II, the COFC and, subsequently, the Federal Circuit considered whether the ACA risk corridor program constituted an implied-in-fact contract with the government. This included analyzing whether the ACA statute gave rise to an implied-in-fact contract, discussed infra in Part II, and whether HHS’s administrative determination that the program should be revenue-neutral for three years was entitled to deference, thereby voiding plaintiffs’ claims against the government, discussed infra in Part III.
In Moda Health, the COFC ruled that the plaintiff insurer was entitled to summary judgment on its claim against the government because, in addition to prevailing on its statutory entitlement theory, “the Government breached an implied-in-fact contract when it failed to pay.” The court relied heavily upon the Radium Mines and New York Airways decisions to support finding an implied-in-fact contract. The court ruled that both cases determine whether an implied-in-fact contract arises if a statute or regulation “create[s] a program that offers specified incentives in return for the voluntary performance of private parties” and is “promissory.”
The COFC also addressed the question of whether the insurer accepted the government’s offer and satisfied conditions precedent to payment in Moda Health. The court ruled that “because the ACA shows that the government intended to enter into contracts with insurers, it is also an offer on the part of the government.” It found that the language of the statutory offer provided for acceptance by performance, creating a unilateral contract. The condition precedent to payment was whether the insurer offered healthcare and suffered losses below the risk corridor; the court ruled that these conditions were satisfied in this case.
The court also analyzed whether there was consideration and whether the HHS Secretary had actual authority to bind the government. It found that there was consideration because the government offered payments through the risk corridor program and the insurer provided health plans through the government’s exchange. The court found that the HHS Secretary had authority to bind the government because the statute stated “that the Secretary of HHS ‘shall establish’ the risk corridor program and ‘shall pay’ risk corridor payments.” While the government argued that the Anti-Deficiency Act prohibited the Secretary from entering into contracts under the ACA, the court noted that New York Airways rejected this very argument about a similar statute because the making of the contract itself was affirmatively “authorized by law.” Therefore, the court rightly concluded that the elements of an implied-in-fact contract were established.
While the COFC found in favor of the insurance company in Moda Health, other cases before the COFC presenting similar issues found in favor of the government, creating a split in authority between COFC judges. The government appealed the COFC’s decision in Moda Health to the Federal Circuit, which, among other issues, addressed the COFC’s finding that an implied-in-fact contract had been established. In its decision, the Federal Circuit first outlined the elements of a contract and the presumption against contractual liability established in National Passenger. The court asserted that the “centerpiece” of COFC’s opinion and Moda Health’s argument was Radium Mines. It then discussed the merits of the lower court’s ruling exclusively with respect to its interpretation of Radium Mines, largely ignoring its discussion of New York Airways.
The Federal Circuit ruled that Radium Mines was not applicable when resolving the COFC decision splits in its Moda Health ruling because “the overall scheme of the risk corridors program lacks the trappings of a contractual arrangement that drove the result in Radium Mines.” Those trappings included the presence of a government guarantee, an invitation to uranium dealers to make an offer, and a promise to offer a form of contract. But while the uranium program in Radium Mines did have these indicia of a contractual arrangement, the Radium Mines court actually rejected the contractual scheme that the Federal Circuit pointed to, instead determining that a different contractual scheme arose. As the COFC found, the Radium Mines court reached this result by looking to the broader public policy purpose of the program and considerations of fairness to participants rather than “magic words.” The Federal Circuit vaguely addressed this lower court finding, asserting that “the parties in Radium Mines . . . never disputed that the government intended to form some contractual relationship at some time throughout the exchange.” Rather, the Federal Circuit ruled, the “only question [in Radium Mines] was whether the regulations themselves constituted an offer, or merely an invitation to make offers.”
The Federal Circuit’s rationale is unpersuasive. While it is correct that the primary question in Radium Mines was whether the regulations constituted an offer or an invitation to make offers, this was no mere technicality. Rather, this issue turned on a fundamental question about government implied-in-fact contracts: are they created by specific words that are usually associated with formal contracts— “trappings,” to use the Federal Circuit’s language, or “magic words” to use the COFC’s—or by the presence of a scheme to induce participation in a government program?
In Radium Mines, the “trappings” or “magic words” suggested that the government was merely inviting uranium producers to make offers, but the broader scheme suggested that the regulation itself was the offer. The Radium Mines court embraced the latter approach, taking the position that a broader scheme of contractual inducement is the gravamen of an implied-in-fact contract with the government, not specific language. Therefore, while the Federal Circuit may have been technically correct to say that Radium Mines was only about whether the regulation constituted an offer or an invitation, this analysis missed the deeper question lurking beneath.
While the Federal Circuit suggested that Radium Mines was an easier case than the ACA cases because it contained “the trappings of a contractual arrangement,” this argument ignored the fact that those trappings all suggested that the regulations were an invitation to make an offer, not an offer. Yet the Radium Mines court held that the regulations were an offer. Far from being an easier case, Radium Mines was a harder one. While there were“the trappings of a contractual arrangement,” those trappings suggested that an implied-in-fact contract did not exist—yet the Radium Mines court found that there was one for conforming companies anyway.
Indeed, the Federal Circuit quotes from the relevant portions of Radium Mines, providing that the uranium “regulation’s ‘purpose was to induce persons to find and mine uranium,’ when, due to restrictions on private transactions in uranium, ‘no one could have prudently engaged in its production unless he was assured of a Government market.’” By the Federal Circuit’s own account, the position of the uranium miners in Radium Mines is remarkably like that of the health insurers in Moda Health who, due to the creation of the ACA healthcare exchanges and the presence of new regulations, including those dealing with preexisting conditions, could not prudently offer affordable plans on the exchange without some kind of risk insurance.
In its only mention of New York Airways in the context of the implied-in-fact contract claim, the Federal Circuit parenthetically characterized the case as “finding intent to form a contract where Congress specifically referred to ‘Liquidation of Contract Authorization.’” This reveals a fatal misunderstanding of New York Airways which turned on the broader context of the subsidy program and took into consideration its two distinct parts rather than mere congressional reference to contract authorization. Indeed, the very paragraph of New York Airways which the Federal Circuit cites for this proposition makes clear that the decision rested on many factors other than Congress’s reference to “contract authorization.” The implied-in-fact contract in New York Airways arose from the original scheme and the rate order rather than a contract authorization alone.
Indeed, the “Liquidation of Contract Authorization” language was part of two 1965 bills pertaining to the program—but the New York Airways court made clear earlier in the opinion that the implied-in-fact contract was established by the Federal Aviation Act of 1958 and 1964 orders of the Civil Aeronautics Board. The finding of an implied-in-fact contract in New York Airways could not possibly have turned on the “Liquidation of Contract Authorization” language because the court held that the contract had existed before Congress ever used that language. While Congress’s characterization of the program as a “contract” may have been evidence of the contract and certainly made the court’s decision easier, it was not the primary basis of the court’s conclusion. Therefore, the Federal Circuit likely misinterpreted New York Airways by concluding that it turned on Congress’s specific reference to “contract authorization.”
With the foregoing arguments, this Article respectfully suggests that the Federal Circuit erred in ruling that the risk corridor program did not give rise to an implied-in-fact contract. The court’s decision on this issue was based largely upon a mistaken view of Radium Mines and appears to have misunderstood New York Airways, to the extent that it was considered at all.
A novel issue that the risk corridor cases presented is how implied-in-fact contract doctrine should interact with Chevron deference. In Land of Lincoln, another case before the COFC alleging breach of an implied-in-fact contract over the government’s failure to make risk corridor payments, the court ruled that the HHS interpretation, that the risk corridor program is “budget neutral” and does not require annual payments, was reasonable under the Chevron standard of deference. However, the COFC reached the opposite conclusion in Moda Health, where it found that HHS’s regulations themselves required full annual payments under the program, and the issue was whether Congressstill intended for full annual payments after failing to appropriate sufficient funds. The Federal Circuit did not reach the issue in its subsequent Moda Health decision.
This Part argues that there is a fundamental conflict between implied-in-fact contract doctrine and Chevron deference, presented by the risk corridor cases. The COFC’s decision in Moda Health found that HHS’s failure to make full annual risk corridor payments breached an implied-in-fact contract, a position that the COFC later reiterated. Yet Land of Lincoln determined that HHS’s interpretation of the risk corridor to only require payments every three years was reasonable, effectively allowing the agency to use Chevron deference to redefine its contractual obligations in a way that prevented it from being held liable. When an implied-in-fact contract conflicts with an agency interpretation, which prevails? Courts have yet to consider this question—and the Federal Circuit missed an opportunity to do so.
This Part argues that implied-in-fact contracts should prevail. Following the Supreme Court’s decision in Winstar, courts should draw a line between agency interpretations that make policy and are “relatively free of Government self-interest” and decisions that, like HHS’s purported reinterpretation of the risk corridor implied-in-fact contract, are “tainted by a governmental object of self-relief.” This would almost entirely preserve Chevron deference, leaving agencies with broad power to promulgate reasonable interpretations of statutes they administer, while being consistent with the rationales that underlie Chevron. Furthermore, denying agencies discretion to escape their contractual obligations serves the government’s interest by making its promises more credible.
Land of Lincoln ruled that HHS was not obligated to make payments under the risk corridor program unless it received revenues through the program with which to make the payments. Land of Lincoln found that the Congressional Budget Office’s decision to score the program as revenue-neutral and Congress’s decision not to appropriate funds for it supported this interpretation. The court made this ruling primarily in the context of the insurer’s statutory entitlement theory, not its implied-in-fact contract theory. However, this ruling arises in the implied-in-fact context because the court ruled in the alternative that, even if the insurer could show that there wasan implied-in-fact contract, it could not “establish that HHS breached a contractual obligation.” The court found that, if a contract existed, “HHS’s contractual obligations would be defined by [the statute] and the implementing regulations,” and did not “dictate when HHS must make payments.”
In interpreting HHS’s implementing regulations, the court applied the traditional Chevron analysis and concluded that the implementing regulations were entitled to Chevron deference. Because the Land of Lincoln court interpreted HHS’s regulations to envision a three-year, budget-neutral program and ruled that such regulations were entitled to Chevron deference, the court concluded that the insurer could not establish a breach because the “program ha[d] not ended.” Therefore, while the court ruled that there was not an implied-in-fact contract, it also ruled in the alternative that, even if there was such a contract, the government had not breached it because the three-year period had not elapsed. In Moda Health, on the other hand, the COFC interpreted the HHS regulations to require payment and thus did not address this argument. While the Federal Circuit agreed with the Land of Lincoln rationale that there was no implied-in-fact contract in Moda Health, it declined to address Land of Lincoln’s alternative holding concerning Chevron deference.
Land of Lincoln assumed that the contract would be a product of both the statute and the implementing regulations. It failed to consider whether an implied-in-fact contract existed priorto the regulations, as the COFC concluded in Moda Health. The interpretation of the regulations embraced by Land of Lincoln would amount to a breach of the implied-in-fact contract found by the COFC in Moda Health.
This presents the issue of whether a statute that gives rise to an implied-in-fact contract can reasonably be interpreted under Chevron to create a different contract—or no contract at all—by the agency charged with implementing it. The first step in Chevron analysis is to determine if “Congress has directly spoken to the precise question at issue.” If Congress has not done so, a court must defer to the interpretation of an agency delegated to interpret the statute so long as its interpretation is reasonable. But Congress never “precise[ly]” or “directly” speaks to the existence of implied-in-fact contracts—this is what makes them “implied” as opposed to express contracts.
Land of Lincoln’s alternative holding could mean that all implied-in-fact contracts created by statutes are ultimately subject to agency interpretations that may deny the existence of a contract or vitiate the government’s obligations to perform it. This would undermine the implied-in-fact contract doctrine’s purpose of making promises by the government more reliable—and therefore more effective at inducing performance—because it would allow agencies to interpret their way out of contracts. Knowing that agencies had this option, businesses and individuals would be less likely to be induced by implied-in-fact contracts to participate in government programs.
The logic of Chevron deference is that there are certain policy areas in which agency expertise, rather than judicial opinions, should fill in ambiguities in statutes. But the argument for agency expertise may be at its weakest when it comes to enforcing implied contracts against agencies. A leading rationale for Chevron deference is that Congress delegated to agencies some power to interpret laws they are charged with administering. However, no agency is charged with administering the Tucker Act, the legal basis for implied-in-fact contract recovery against the government. When a court determines that an agency has breached an implied-in-fact contract and a private party can recover, it is the authority of the Tucker Act that governs the outcome, not the statute that gave rise to the contract.
Another interpretation of Chevron deference is that it is a common law rule, similar to a canon of construction, that instructs courts to defer to agencies because of their applicable expertise and the executive’s greater flexibility and democratic accountability. But in the context of implied-in-fact contracts with the government, this rationale is considerably weaker.
Like ordinary contracting parties, agencies have an incentive to escape burdensome contractual obligations. But policy interests favor implied-in-fact contract enforcement because it makes government promises more credible in the long run. Weighed against the caselaw affirming the right to enforce implied-in-fact contracts against the government, the weakened rationale for Chevron deference in the context of the risk corridor program simply cannot stand.
While courts have never considered the dilemma posed by implied-in-fact contracts and Chevron deference, the Supreme Court considered a somewhat similar issue in Winstar. This case concerned explicit contracts that had existed between the government and certain participants in the savings and loan industry. Congress later changed the law in a way that made it impossible for the government to fulfill the terms of these contracts. Nevertheless, the Court found that the contracts were enforceable against the government, and that the government was liable for breach.
In Winstar, the government relied upon the sovereign acts doctrine to argue that it was not liable for alleged contract breaches. The sovereign acts doctrine embodies the principle that, “whatever acts the government may do, be they legislative or executive, so long as they be public and general, cannot be deemed specially to alter, modify, obstruct, or violate the particular contracts into which it enters with private persons.” Upon that authority, the government argued that Congress’s changes to the law could not be deemed a breach of contract.
The Court unequivocally rejected this argument. The Winstar Court ruled that “allowing the government to avoid contractual liability merely by passing any ‘regulatory statute’ would flout the general principle that, ‘when the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals.’” The Court found that the sovereign acts doctrine “was meant to serve this principle, not undermine it.” To escape liability under the sovereign acts doctrine, the government would need to show both that it was acting as a sovereign, not a contractor, and that it would be released from the contract under ordinary principles of contract law applicable to private persons.
The position that the government can modify or escape its contractual obligations using Chevron deference is similar to the argument advanced by the government in Winstar, and should be rejected for the same reasons. Both positions rely on the idea that the government’s sovereign authority—Congress’s power to make law in Winstar or the power of agencies to promulgate reasonable interpretations of statutory ambiguities in Chevron—empower it to escape obligations under contracts. In so doing, both arguments implicate the basic problem that governmental implied-in-fact contracts are intended to solve in the first place: how can the government credibly incentivize private actors to participate in its programs when it has the power to decide whether to honor its own incentive scheme?
Courts should resolve the conflict between Chevron deference and implied-in-fact contract doctrine in the same way the Supreme Court resolved the similar issue posed by the sovereign acts doctrine in Winstar. The Winstar Court balanced “the government’s need for freedom to legislate with its obligation to honor its contracts” by ruling that the government, while free to act as sovereign, would be liable for breach of contract “under ordinary principles of contract law.” The Winstar Court ruled that “some line has to be drawn in situations like the one before us between regulatory legislation that is relatively free of Government self-interest and . . . statutes tainted by a governmental object of self-relief.” Even though the government may be motivated by “a public purpose,” it may not “shift the costs of meeting its legitimate public responsibilities to private parties,” forcing them to bear burdens that “should be borne by the public as a whole.”
As the risk corridor cases show, Chevron deference also presents situations where agency interpretations of statutory ambiguities may be “tainted by a governmental object of self-relief.” Even as they act to fulfill their public-spirited goals, agencies interpreting statutes, like the ACA, and administering programs, like the risk corridor, may be tempted to shift costs to businesses, like the insurance company plaintiffs. No matter how innocuous the motivation, cost shifting is unfair to the private parties and undermines the government’s credibility—hampering a program’s long-term effectiveness.
Governmental implied-in-fact contract doctrine has been unjustifiably overlooked by scholars. It deserves serious attention because it implicates fundamental principles of public policy and contract law. The risk corridor cases, as exemplified by Moda Health, illustrate just how important this doctrine is—and how damaging its misinterpretation by courts can be. The Federal Circuit’s decision in Moda Health not only threatened to leave insurers billions of dollars in the hole, but it damaged the credibility of the ACA, a major government program and the centerpiece of U.S. healthcare policy, as well as the credibility of government promises more generally.
Further study in this area should also consider how, nearly a century after being affirmed by the Supreme Court, the implied-in-fact doctrine should interact with modern legal principles, like Chevron deference. As this Article’s analysis shows, difficult conflicts may arise between the principles. Some may even conclude that governmental implied-in-fact contract doctrine is simply not worth the trouble, and that courts should narrow or eliminate it. But in a world where the government increasingly relies on incentivizing private parties to accomplish its policy objectives, limiting implied-in-fact contracts would hamstring vital government programs or force these programs into the formal and burdensome process of explicit government contracts, which is inadequate to perform functions outside of its traditional role of providing goods and services directly to the government. Governmental implied-in-fact contract doctrine remains a promising solution to a fundamental legal problem: the government must make credible promises for many of its programs to succeed, yet is also charged with interpreting those promises and sometimes has an interest in breaking them.
A century ago, Justice Holmes articulated the principle that individuals “must turn square corners when they deal with the Government.” As the risk corridor cases show, courts should also require the government to turn square corners when dealing with citizens and businesses. This not only accords with principles of fairness—it also makes the government more effective by making government promises more credible.
