USDA’s Food & Nutrition Service (FNS) is authorized to administer the Supplemental Nutrition Assistance Program (“SNAP”). This $80 billion program, formerly known as the food stamp program, provides monthly supplemental nutrition benefits to more than 45 million Americans. SNAP beneficiaries may redeem their monthly benefits at over 250,000 SNAP-authorized retailers across the country. To participate in SNAP, grocery and convenience stores submit applications to FNS seeking authorization. FNS, in turn, is required to timely process those applications in accordance with the Food & Nutrition Act and its own regulations governing authorization of retailers. Typically, this is neither a complicated nor a lengthy process and most applications are promptly granted. Not so for the owner of a small Kentucky grocery store.
K&J’s Grab n’ Bag (“K&J”) is a small retail food store located in Stoney Fork, Kentucky, a remote, rural area located two hours southeast of Lexington. K&J is owned by Kem Warren, a young businessman who opened his store during early 2014 and applied for SNAP authorization shortly thereafter. For many retailers in this and other socio-economically depressed areas, obtaining authorization to accept SNAP is critical to the success of the business because a majority of the store’s customers are often dependent on these federal benefits. More than 60% of K&J’s customers received food stamps. This is not surprising considering the store is located near the boundary of two of the poorest counties in the nation.
In April 2014, FNS denied K&J’s application for SNAP authorization based on its conclusion that its owner lacked “business integrity.” FNS’s regulations permit the agency to deny a retailer’s application for a lack of business integrity if its owners, officer, or managers have a criminal conviction or civil judgment relating to fraud, embezzlement, or violations of federal, state or local consumer protection laws. For sound reasons, all of these provisions relate to conduct that is considered contrary to community standards of justice, honesty or good morals. FNS did not deny K&J’s application for any of those reasons. Instead, the agency permanently denied the store’s application based upon its owner’s misdemeanor marijuana possession conviction. You read that correctly – a governmental agency concluded that a young businessman didn’t have sufficient business integrity to be an authorized food stamp vendor because he pled guilty to a misdemeanor for possession of a small amount of marijuana, a substance that is now legal for recreational use in four states and the District of Columbia and legal for medicinal purposes in more than 20 states.
The facts surrounding Warren’s misdemeanor conviction are striking because of the complete lack of connection between the facts surrounding his marijuana possession charge and the food stamp program. During late 2013, Warren was charged with possession following a traffic stop based on his failure to have an illuminated rear license plate while driving on a rural road in Bell County, Kentucky. Because Kentucky does not view possession of very small amounts of marijuana to be a serious offense, Warren was not arrested. Instead, he was issued a citation for possession and several other minor infractions, including failure to have his rear license plate illuminated and for failing to wear a seat belt. He appeared for his court hearing without an attorney and entered into a plea deal which led to the judge assessing a small fine associated with the misdemeanor possession charge, imposing no jail time or probationary period, and the dismissal of the other charges. Warren agreed to this deal only because the possession charge carried the lowest fine. At the time, Warren did not (and could not) appreciate that his guilty plea could possibly result in the denial of a federal food stamp license related to a store he did not yet own.
Early the next year, Warren opened K&J and applied for a food stamp license from FNS. He truthfully disclosed his conviction on his SNAP application. To his surprise, FNS denied his application based on his possession conviction pursuant to the portion of the agency’s business integrity regulation that mandated denial of SNAP applications following criminal convictions for licensing violations related to alcohol, tobacco, controlled substance, firearms, and gaming. At the time of his conviction, Warren had never owned a grocery or other store and never held any alcohol, tobacco, controlled substance or any other license. It is also important to note that in Kentucky, controlled substance licenses are typically held by pharmacies, not individuals or small grocery stores that do not fill prescriptions. Nonetheless, FNS still concluded that he lacked the business integrity to be a food stamp vendor based on his misdemeanor possession conviction.
Warren retained OFW Law to represent him on his appeal to FNS’s Administrative Review Branch. Retailers that find themselves on the receiving end of a letter from FNS denying their authorization to accept SNAP or charging them with trafficking or other program violations quickly learn that they have entered a Kafka-esque world. For example, FNS refuses to voluntarily provide information in its possession to retailers related to charges it issues. Instead, FNS requires retailers to use the Freedom of Information Act (“FOIA”) and pay substantial fees before releasing some information (but not all) to retailers. To make matters worse, FNS routinely withholds or substantially redacts information requested by a store owner pursuant to a FOIA Request that the agency then relies upon to determine whether to permanently revoke a store’s SNAP license. Frequently, this information is referred to with specificity in FNS’s Final Agency Decision. On the other hand, all of this information will be turned over to the store if it loses the administrative appeal and seeks judicial review in federal or state court. Additionally, FNS is the only USDA agency that does not post redacted Final Agency Decisions on the internet or release them to retailers and other interested parties. Meanwhile, if FNS withdraws a retailer’s SNAP authorization, the store will likely lose most of its customers, especially if it is located in an economically depressed area with high EBT usage, and may close. Simply put, the loss of a store’s SNAP authorization could be its death knell.
During administrative appeal proceedings, OFW attorney Stewart Fried argued that FNS’s interpretation of its business integrity regulation did not apply to Warren’s misdemeanor possession conviction for several reasons, including that it related only to licensing convictions, not all convictions related to alcohol, tobacco, controlled substances, firearms or lotteries. He also noted that Warren’s conviction could not have related to a store that didn’t exist at that time and certainly had nothing to do with the food stamp program. Finally, Fried pointed out that FNS’s interpretation would lead to absurd results, as any retail food store whose owners, officers or managers ever had an alcohol, tobacco, or controlled substance judgment or conviction would arguably result in the permanent denial of that store and all other stores with the same ownership. Under FNS’s tortured logic, this would mean that a supermarket or convenience store chain whose CEO received a citation for drinking a beer in public during college or for trying to purchase cigarettes decades earlier during high school would permanently lose its SNAP authorization for all of its stores. Without basis, FNS rejected all of Warren’s arguments and affirmed the permanent denial of his SNAP application.
U.S. District Court Vacated FNS’s Final Agency Decision as Arbitrary and Capricious
OFW Law filed a complaint against the federal government in the U.S. District Court for the Eastern District of Kentucky on Warren and K&J’s behalf seeking judicial review of FNS’s Final Agency Decision. On September 11, 2015, after more than a year of federal court litigation, the Honorable Gregory Van Taten Hove issued an opinion which concluded that FNS’s arguments were illogical and would lead to an “absurd result.” The Court noted that there was nothing in the legislative history that supported FNS’s contention that its business integrity regulation applied to all drug convictions. To the contrary, FNS’s guidance focused on business-related offenses, including fraud. The District Court drew a clear distinction between general controlled substances convictions and licensing-related controlled substance convictions, concluding that general controlled substance convictions (including those unrelated to a controlled substance license) were outside of the scope of the plain meaning of FNS’s business integrity regulation. Based thereon, Judge Van Taten Hove accepted OFW Law’s arguments that FNS’s business integrity regulations were not applicable to drug possession convictions unrelated to a controlled substance license, determined that FNS’s permanent denial of Warren’s application was arbitrary and capricious, vacated its permanent denial of his SNAP application, and remanded the case back to FNS to conduct a de novo assessment of his application using a plain-meaning application of its business integrity regulation.
FNS’s Broken STARS System and Ultimate Granting of Warren’s SNAP Application
Despite the Court’s clear instructions, FNS did not promptly grant Warren’s SNAP application. To the contrary, FNS initially insisted that Warren submit a new application. FNS’s justification for its position was because its “authorization system is not programmed to allow a permanently denied application to be re-opened and authorized.” After considerable further discussion and faced with the specter of Warren asking the Court to confirm its clear direction to the agency, FNS conducted another review of his SNAP application. Finally, on October 26, 2015, nearly two years after he submitted his application for SNAP application to FNS, K&J was authorized to begin accepting EBT.
Although Warren’s journey through the legal system appears to be complete, he will suffer the financial impacts for years to come. FNS regulations prohibit store owners from recovering from FNS any financial losses resulting from the agency’s baseless denial of a store’s application for participation in SNAP. Those regulations also preclude a retailer from recovering lost revenues or profits associated with a reversed, vacated or withdrawn FNS’s trafficking charge. Moreover, attorneys’ fees are not recoverable during administrative proceedings. Finally, while prevailing parties may be recover attorneys’ fees under the Equal Access to Justice Act (“EAJA”) in cases against the federal government, the hourly rate is limited by statute at a rate far lower than charged by most practitioners in this highly specialized area. Despite these obstacles, Warren has able to recover substantial attorneys’ fees from FNS, one of the few times in recent history that this federal agency opened its coffers to partially remedy the harm it caused to this small business owner in Appalachia.
FNS would be well advised to revise its internal policies related to processing of applications for SNAP authorization in light of the well-reasoned Warren opinion. Failure to do so will likely have catastrophic impacts on retailers across the country with ancient alcohol, tobacco, or controlled substance convictions or civil judgments. If FNS decides to commence rescinding SNAP authorizations for convictions or judgments unrelated to a store’s alcohol, tobacco, or controlled substance license, that will, in turn, has serious impacts on the people that the food stamp program is supposed to help – SNAP beneficiaries. OFW currently represents a Missouri retailer whose SNAP application was permanently denied by FNS pursuant to the same business integrity regulation it relied upon in the Warren case. That retailer, like Warren, has a marijuana possession conviction which also was entirely unrelated to a retail food store or SNAP. Unlike Warren, the Missouri store owner was previously been authorized by FNS to accept SNAP – at two different stores – without any issues. Last month, FNS’s Administrative Review Branch recently dismissed OFW Law’s Request for Administrative Review on grounds of mootness, because FNS “is rescinding its permanent denial letter.” No letter has yet been received despite the passage of more than three weeks. Whether FNS will promptly grant the retailer’s application remains to be seen; a denial, however, will result in another round of federal court litigation and the payment of substantial taxpayer dollars if the retailer again prevails.
OFW Principal Stewart Fried provides regulatory advice to retail food stores regarding SNAP and WIC-related matters. He also represents retailers in administrative and judicial appeals of adverse FNS decisions relating to denials and withdrawals of authorization, trafficking charges and other program-related violations.
