Petitioner is an Idaho company that was authorized by the Department of Human Services (DHS) to prepare and package meals for distribution to eligible elderly persons and disabled Medicaid participants. In a contested case hearing, DHS found that petitioner had violated an agreement to abide by certain nutritional and delivery standards, and, as a result, the agency revoked petitioner’s status as an approved provider. On judicial review, petitioner argues thаt the standards at issue were invalid because they had not been promulgated according to the Administrative Procedures Act (APA), ORS 183.310 to 183.690. DHS responds that, under
Coats v. ODOT,
To be authorized (and receive payment) as a home-delivery meal provider under a cooperative state and federal program, a company or agency must obtain a Medicaid provider number by signing an agreement with DHS to аbide by its nutritional and other requirements. In 2005, petitioner obtained a Medicaid provider number from DHS and began furnishing meals to Medicaid recipients in Oregon by shipping the meals to them once or twice per month via United Parcel Service.
In Novembеr 2008, DHS sent a letter to all home-delivery meal providers, including petitioner, notifying them that DHS had published new “Nutrition Program Standards” and enclosing a copy of those standards. Among other requirements, the standards include providing five hot meals per week, providing nutrition education to participants, performing routine food-temperature checks, and training delivery personnel to check on participants’ welfare at the time of delivery. DHS’s letter informed providers that they were requirеd to submit the new provider enrollment application that was included with the letter if they wished to renew their provider number and remain eligible for payment. The *601 letter informed providers that, “[b]y signing the provider enrollment form, providers agree to meet the Division of Medical Assistance Program general provider standards as well as the attached Nutrition Program Standards.” At the end of November 2008, petitioner signed and returned the provider agreement despite the fact that, contrary to the nеw standards, it was not delivering the minimum number of hot meals, ensuring that recipients’ meals contained the required minimum nutritional allowance, meeting the delivery driver requirements, or adequately monitoring food temperature.
In April 2009, DHS determined that petitioner had breached the provider agreement by failing to meet the required nutrition program standards and issued a notice to petitioner revoking its Medicaid provider number pursuant to OAR 407-120-0360(4), which provides, in part:
“When the Department determines the provider fails to meet one or more of the Department’s requirements governing participation in its programs the Department may impose discretionary sanctions. Conditions that may result in a discretionary sanction include, but are not limited to when а provider has:
“(v) Breached the terms of the provider contract or agreement!.]”
Petitioner requested a hearing before an administrative law judge (ALJ). At the hearing, petitioner argued that the nutrition program standards were unenforceable because they constituted invalidly promulgated rules and that, for that reason, petitioner had no enforceable obligation to adhere to the provider agreement. The ALJ ruled in favor of the agency on the ground that, regardless of thе rules’ validity or invalidity, the agreement was an enforceable contract and petitioner had breached its terms:
“I find no authority that prevents an agency from including terms in a contract that can be construed as unpromulgated rules. While the nеw * * * standards do meet the statutory definition of rules, because the Department is attempting to enforce the standards as contractual terms in this matter I do not address their validity as rules under the APA.”
*602 DHS issued a final order adopting the ALJ’s proposed order and revoking petitioner’s provider number. Petitioner now seeks review of that final order.
DHS acknowledged at oral argument that the guidelines should have been promulgated according to the APA. We agree. DHS is subject to the rulemaking provisions оf the APA. ORS 409.050. The APA defines a rule as
“any agency directive, standard, regulation or statement of general applicability that implements, interprets or prescribes law or policy, or describes the procedure or practice requirеments of any agency.”
ORS 183.310(9). “An administrative action may be a rule subject to judicial review, even if the agency does not call it a rule.”
McCleery v. Board of Chiropractic Examiners,
That conclusion necessarily means that, if DHS had simply revoked petitioner’s provider number for violating the rules, petitiоner would have prevailed in a challenge to that action. ORS 183.400;
Minor v. AFSD,
In Coats, the plaintiff had a contract with the Oregon Department of Transportation (ODOT). Id. at 589. One term of the contract required the plaintiff to abide by a Burеau of Labor and Industry (BOLI) rule regarding prevailing wages. Id. at 589-90. The plaintiff failed to do so. Id. at *603 591. BOLI then threatened to declare the plaintiff ineligible to bid on future public works projects, and ODOT withheld payments on the contract. Id. at 591-92. The plaintiff initiated a breach of contract actiоn in circuit court against ODOT, arguing, among other things, that ODOT could not withhold payment based on an alleged violation of BOLTs prevailing wage rule because that rule was invalid. Id.
The Supreme Court ultimately held that the circuit court did not have jurisdiction to adjudicate the rule challenge.
Id.
at 597. In the process of reaching that decision, the court rejected the plaintiffs argument that the circuit court had jurisdiction under the rule of
Hay v. Dept. of Transportation,
“Plaintiff argued in circuit court that the Hay exception applies here because he has placed the validity of BOLI’s rules ‘at issue’ in a sepаrate civil action for breach of contract. In other words, plaintiff claimed that judicial review of the validity of BOLI’s rules is necessary to resolve whether plaintiff or ODOT breached the parties’ contract. Plaintiff, however, is mistaken. He seеks to challenge the validity of state agency rules that, earlier, he had agreed to as contract terms. Even if plaintiff could not be forced to comply with those rules by operation of law, he nonetheless could bind himself to do so by cоntract, as he did here. See Vulcan Arbor Hill Corp. v. Reich,81 F3d 1110 , 1115 (DC Cir 1996) (federal prevailing wage statute enforceable against party, regardless of whether applicable by force of law, when party had agreed to application of statute by contract); Woodside Village v. Sec. of U.S. Dep’t of Labor, 611 F2d 312, 315 (9th Cir 1980) (same). Instеad, the only relevant question is whether BOLI’s rules are applicable to plaintiff as contract terms. The validity of BOLI’s rules, therefore, is not relevant to, or ‘at issue’ in, plaintiffs breach of contract action.”
Coats,
Despite some broad language that would support DHS’s position, we disagree for several reasons. First, we conclude that there is a differencе between a rule that maybe invalid because it results from an agency’s misinterpretation of a statute, the situation in Coats, and a rule that is invalid because it was never promulgated — in effect, a nonrule. And we believe that the difference is in kind, not in degreе. In Coats, the most that could be said against BOLI was that its statutory interpretation of the prevailing wage law was potentially erroneous. Here, the agency failed completely to comply with one of the basic precepts of administrative law: A rule that can be brought to bear so as to impose serious disabilities on citizens must, at the least, be subjected to some level of public scrutiny before it goes into effect. 1 Second, and relatedly, the allegedly invalid contract term thаt the agency in Coats incorporated into its contract with the plaintiff was a provision obligating the contractor to pay wages in excess of the minimum established by the prevailing wage law. Id. at 590-91. In agreeing to obey that rule, the contractor agreed only to continue doing what it was already doing, only to a greater degree. Here, the standards that DHS incorporated into its agreement with petitioner obligated petitioner to cease doing what it had lawfully done in the past and to begin doing something entirely different. In other words, the invalid new standards in this case were significantly more burdensome than the allegedly invalid rule in Coats. Third, the focus in a breach of contract action is on whether the parties to the contract have honored the mutual obligations that they have undertaken. In a rule challenge that is part of the defense to an agency action to enforce a rule, on the other hand, the focus is on whether the agency’s rule is within its authority, and the fact that the rule has been rebranded as a contract term does not alter that basic fact.
Fourth, and most significantly,
Coats
is at bottom based on the assertion that “[t]he validity of BOLI’s rules
*605
* * * is not relevant to, or ‘at issue’ in, plaintiffs breach of contract action.”
Id.
at 597. In an action in circuit court, brought by a plaintiff alleging that the defendant agency has breached a contract by threatening to withhold payment due to the plaintiffs alleged violation of another agency’s invalid rule, the connection between the validity of the rules and the question whether the defendant has breached a contract is attenuated. In an agency action to enforce a contract term
that is itself sen.
invalid rule, the connection is direct; indeed, the invalidity of the rule and the legitimacy of the contract enforcement are, in reality, the same question. Put another way, the validity of the DHS rule in this case is not only “at issue” in DHS’s enforcement action, it
is the issue.
As the APA recognizes, the validity of rules is frequently an issue, if not
the
issue, in contested cases. Thus, ORS 183.400(1) acknowledges that, if the validity of a rule is or could be at issue in a contested case, a party to that contested case may obtain an adjudication of the rule’s validity
in that case
only or on judicial review of that case; the party may not independently and directly seek judicial review in the Court of Appeals.
Minor,
Reversed and remanded.
Notes
We do not mean to imply that, in bypassing rulemaking procedures, DHS intended to avoid public comment or scrutiny.