Liberty Mut. Ins. Co. v. Friedman, 80-1078

Citation639 F.2d 164
Decision Date09 January 1981
Docket NumberNo. 80-1078,80-1078
Parties24 Fair Empl.Prac.Cas. 1168, 24 Empl. Prac. Dec. P 31,457, 28 Cont.Cas.Fed. (CCH) 81,027 LIBERTY MUTUAL INSURANCE COMPANY, Liberty Mutual Fire Insurance Company, and Liberty Mutual Life Assurance Company of Boston, Plaintiffs-Appellants, v. Everett FRIEDMAN, Chief of the Insurance Compliance Staff, Social Security Administration; F. Ray Marshall, Secretary of Labor, United States Department of Labor; Weldon J. Rougeau, Director, Office of Federal Contract Compliance Programs; James Cardwell, Commissioner, Social Security Administration, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)

Kalvin M. Grove, Chicago, Ill. (Jeffrey S. Goldman, Martin K. Denis, Fox & Grove, Chicago, Ill., John K. Dane, Boston, Mass., on brief), for appellants.

Joseph Scott, Civ. Div., Dept. of Justice, Washington, D. C. (Carin Clauss, Sol. of Labor, James D. Henry, Associate Sol., Louis G. Ferrand, Jr., Dept. of Labor, Alice Daniel, Asst. Atty. Gen., Washington, D. C., Russell T. Baker, Jr., U. S. Atty., Baltimore, Md., William Kanter, Civ. Div., Dept. of Justice, Washington, D. C., on brief), for appellees.

Joel L. Finger, Barry Asen, Thomas C. Greble, Jackson, Lewis, Schnitzler & Krupman, New York City, on brief for American Ins. Assn., amicus curiae.

Edwin M. Zimmerman, William H. Allen, John B. Jones, Jr., Alex Kozinski, Covington & Burling, Washington, D. C., on brief for Alliance of American Insurers and Nat. Assn. of Independent Insurers, amicus curiae.

Thompson Powers, Martin D. Schneiderman, Christopher T. Lutz, John D. Bates, Steptoe & Johnson, and Douglas S. McDowell, McGuiness & Williams, Washington, D. C., on brief for Equal Employment Advisory Council, amicus curiae.

Before HAYNSWORTH, Chief Judge, and BUTZNER and PHILLIPS, Circuit Judges.

JAMES DICKSON PHILLIPS, Circuit Judge:

Liberty Mutual Insurance Company and two related insurance companies (Liberty) challenge the district court's conclusion that defendant Rougeau 1 validly issued a determination by letter that the companies are government subcontractors and thus subject to the recordkeeping and affirmative action requirements of Executive Order 11,246. 2 We conclude that defendants' action was outside any statutory authorization and reverse.

I

Under § 202 of Executive Order 11,246, as amended, contractors and subcontractors 3 with the government are prohibited from discriminating in employment on the basis of "race, color, religion, sex, or national origin" and are required to take affirmative action to ensure equal employment opportunity. Section 201 of the Executive Order provides that the Secretary of Labor shall administer and enforce the order and grants rulemaking power to the Secretary. The Department of Labor's Office of Federal Contract Compliance Programs (OFCCP) has promulgated regulations that require government contractors and subcontractors to furnish reports and other information about their affirmative action programs. 4

Liberty underwrites workers' compensation insurance for many companies that contract with the government. Ordinarily, this type of insurance provides blanket coverage for all employees of the insured company whether or not the employees are performing work under a government contract or subcontract. During the time period involved in this case, Liberty has not written any insurance policies for any federal governmental agency and has not signed any contracts or subcontracts that include the antidiscrimination or affirmative action clauses required to be included in covered contracts by Executive Order 11,246.

In October 1977, defendant Friedman notified Liberty that Liberty was a government subcontractor under the definition found in 41 C.F.R. § 60-1.3 and therefore subject to the requirements of Executive Order 11,246. Section 60-1.3 defines subcontract as:

any agreement or arrangement between a contractor and any person (in which the parties do not stand in the relationship of an employer and an employee):

(1) For the furnishing of supplies or services or for the use of real or personal property, including lease arrangements, which, in whole or in part, is necessary to the performance of any one or more contracts; or

(2) Under which any portion of the contractor's obligation under any one or more contracts is performed, undertaken, or assumed.

Because all states in the United States have enacted workers' compensation laws, and employers, including government contractors, are obligated by statute to provide workers' compensation insurance, defendant determined that Liberty was providing a service necessary to the performance of the federal contract and was, therefore, covered under subsection 1 of the definition above.

Liberty contested the Government's determination that providers of workers' compensation insurance to government contractors are government subcontractors and brought this declaratory judgment action under 28 U.S.C. §§ 2201, 2202. The district court rejected the challenge to defendants' authority to classify Liberty as a subcontractor and entered judgment for defendants.

On this appeal Liberty argues that it is outside the definition of subcontractor found in the regulations; that, if Liberty is found to be within the subcontractor definition, the regulation is either outside the scope of Executive Order 11,246 or beyond the legislative grant of authority of Congress; that, if Executive Order 11,246 covers the insurance policies issued by Liberty, Executive Order 11,246 is an unlawful delegation of legislative authority; and that the Government may not bind Liberty to a contractual obligation to which it did not consent. Because we conclude that, although the regulatory definition of subcontract includes workers' compensation insurance contracts, application of the Executive Order to Liberty is outside the scope of any grant of legislative authority, we need not address Liberty's other contentions.

II

Though we reject it, Liberty's first contention, that it is not a subcontractor within the meaning of the regulations, merits brief discussion. Specifically, the argument characterized by the district court as an "imaginative, linguistic" one is that in the definition of subcontract set out above the phrase "is necessary" in subsection 1 refers to "agreement." Although employers, including government contractors, must provide workers' compensation insurance, most states allow employers to self-insure. Because self-insurance is an option, an agreement with another company is not necessary to the performance of the government contract. The Government contends in its brief that "is necessary" refers to the phrase "(f)or the furnishing of supplies or services." This construction, of course, would absorb the definition in subsection 2. At oral argument the Government asserted that subsection 1 applied only to the furnishing of legally necessary supplies and services. This last construction is apparently the one the Government has used in applying subsection 2 and is reflected in the determination letter sent to Liberty. In that letter the Government stated that Liberty was covered by Executive Order 11,246 because it issues workers' compensation insurance, which all states require employers to provide. According to the Government, then, the furnishing of workers' compensation is legally necessary whether an employer supplies its own insurance or purchases a policy from an insurance company, and Liberty, because it furnishes the legally necessary insurance, is a subcontractor under subsection 1. Although the definition found in the regulations is hardly a model of clarity, the Government's construction is far more reasonable than that urged by Liberty. The difficulty with Liberty's argument that "is necessary" refers to "agreement," as aptly stated by the district court, is that "contractors engage 'subcontractors' to provide supplies or services for economic or other reasons. It is a rare instance in which a primary contractor has no choice but to engage the services of a subcontractor." Under this construction subsection 1 would rarely, if ever, apply.

We conclude, as did the district court, that Liberty's workers' compensation policies issued to government contractors are subcontracts under the regulations.

III

Liberty's second argument, that the broad definition of subcontractor, with its attendant consequences for meeting the recordkeeping and affirmative action requirements of Executive Order 11,246, is outside the scope of the Order or beyond any legislative grant of authority presents a more difficult question.

The history of Executive Order 11,246 is discussed in detail in Contractors Association v. Secretary of Labor, 442 F.2d 159, 168-71 (3d Cir. 1971), and need not be recounted here. Executive Order 11,246, as amended, "charge(s) the Secretary of Labor with ensuring that corporations that benefit from government contracts provide equal employment opportunity regardless of race or sex." Chrysler Corp. v. Brown, 441 U.S. 281, 286, 99 S.Ct. 1705, 1709, 60 L.Ed.2d 208 (1979) (footnote omitted). Although the Executive Order is written in broad terms, the prohibition against discrimination in employment is clearly intended to cover both government contractors and their subcontractors. Section 202(7) of the Order specifically requires contractors to include in all subcontracts the antidiscrimination, affirmative action, and recordkeeping provisions required by Executive Order 11,246. Subcontract is not defined within the Executive Order, but § 201 provides that the Secretary of Labor "shall adopt such rules and regulations ... as are deemed necessary and appropriate to achieve the purposes" of the Order. Those purposes, as declared by the Supreme Court in Chrysler, "are an end to discrimination in employment by the Federal Government and those who deal with the Federal Government." 441 U.S. at...

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