By Hilary Cairnie (above) and William DeVinney (below)

In the aftermath of Hurricane Sandy, federal officials, including the President of the United States, stood before television cameras and reporters to assure residents that the federal government would help communities rebuild. Since then, affected communities up and down the Atlantic seaboard have spent millions of dollars clearing debris, repairing infrastructure, and reconstructing buildings damaged by Hurricane Sandy. Now, as those projects near completion, community leaders must turn their attention to securing those promised federal funds. As the saying goes, however, promises are like babies: they are far more easily made than delivered.

Under the Stafford Act, the Federal Emergency Management Agency administers funds to reimburse communities for certain costs, such as expenses for debris removal or reconstructing public buildings or infrastructure, inflicted by federally-declared major disasters. FEMA representatives often work with local officials immediately after a disaster strikes and advise about what work will qualify for public assistance. Unfortunately, that advice does not bind FEMA; many communities have found themselves stuck with debilitating costs after FEMA denied reimbursement for work that other FEMA officials had promised would be eligible for public assistance.   

Until recently, most communities wrongly denied Public Assistance had only one recourse: a two stage appeals process within FEMA itself. Not surprisingly, many applicants believed that the FEMA appellate process strongly favored FEMA because FEMA is both a party and the ultimate arbiter in the same case. For victims of Hurricanes Katrina and Rita, however, Congress has created an arbitration process, conducted by judges from the Civilian Board of Contract Appeals, under which the applicant can proceed to arbitration in lieu of the second stage of the FEMA appeals process.

Congress expected a similar glut of cases to arise from Hurricane Sandy, which trailed only Hurricane Katrina for the most destructive hurricane ever to hit the United States. To help resolve these disputes more efficiently, in the Sandy Recovery Improvement Act (SRIA), Congress directed FEMA to establish an arbitration procedure, similar to the CBCA arbitration process, to resolve disputes over applications for Public Assistance damage inflicted by Hurricane Sandy and other natural disasters. Accordingly, FEMA created its Dispute Resolution Pilot Program, under which a community affected by any disaster declared on Oct. 30, 2012 — the first date on which Hurricane Sandy was declared a major disaster — or later, and whose claims exceed $1,000,000, can arbitrate its dispute. Arbitrations under the Pilot Program will be heard by Administrative Law Judges of the United States Coast Guard.

The Pilot Program will be similar to the CBCA process, but with some important differences. The most important difference is that the SRIA provides for a more deferential standard of review in the Pilot Program than in the CBCA process. The text of the SRIA directs the arbitration panel to “only set aside a decision of the [FEMA] found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” SRIA, § 5(b)(3)(D)(iii). Similarly, in making factual findings, the statute directs the arbitration panel to “consider only evidence contained in the administrative record, as it existed at the time at which the Agency made its initial decision,” and to set aside FEMA’s factual findings only “if the finding is clearly erroneous.” SRIA, § 5(b)(3)(D)(ii), (iv). According to the text of the statute, therefore, the U.S. Coast Guard panel should defer to FEMA’s funding decision unless it finds a significant error.

By contrast, the statute creating the arbitration process for Hurricanes Katrina and Rita was silent on the standard of review. In the first cases to go before the CBCA, FEMA repeatedly argued that the CBCA should apply those standards now enacted in the Pilot Program. The CBCA, however, rejected FEMA’s argument, and instead reviewed FEMA’s initial determinations de novo, granting FEMA no deference for its factual findings or decisions. The standard of review proscribed in the SRIA likely is the product of some intense lobbying on Capitol Hill by FEMA officials.

Although a victory in theory for FEMA, it is unclear how review will play out in practice before the U.S. Coast Guard Administrative Law Judges. The U.S. Coast Guard has yet to decide its first case under the Pilot Program, and arbitration, by design, is a flexible process that gives arbitrators wide latitude in conducting their proceedings and reaching their decisions. Further, in the vast majority of cases, arbitration decisions cannot be challenged in the courts. Thus, how much deference the US Coast Guard panels will actually give to FEMA’s decisions remains to be seen.

Even with a deferential review, an applicant for public assistance funds is likely to be more successful proceeding before an independent panel than within FEMA itself. Regardless of the heightened review proscribed in the SRIA, therefore, the Pilot Program provides an opportunity for any community wrongly denied public assistance for Hurricane Sandy or other disasters.

Hilary Cairnie, a partner at Baker Hostetler, focuses his practice in public contract law, encompassing virtually all aspects of government contract law, including contract formation, performance, administration, and enforcement controversies at the federal and state levels. Cairnie is a frequent public speaker on topics and new developments of interest to the government contracting community, including intellectual property licensing, data rights, patent rights, cost and pricing issues, cost accounting rules and regulations, audit procedures, changes, construction topics, and protests and claim appeals decisions.

William DeVinney serves as counsel at Baker Hostetler and has a broad litigation practice that includes antitrust, intellectual property, commercial class action, securities and other complex commercial litigation. He has extensive trial experience, both as a member of trail teams and as first chair in jury and bench trials, arbitrations proceedings, and regulatory hearings. DeVinney has also argued cases before several federal and state appellate courts. He also counsels clients on antitrust issues.