 United States Court of Appeals for the Federal Circuit


                                        06-3050



                                ROBERT H. LARY, JR.,

                                                            Petitioner,

                                           v.


                         UNITED STATES POSTAL SERVICE,

                                                            Respondent.



        Paul F. Prentiss, Timmermier, Gross & Prentiss, of Omaha, Nebraska, argued for
petitioner.

       Ray E. Donahue, Attorney, Law Department Civil Practice, United States Postal
Service, of Washington, DC, argued for respondent. With him on the brief were Peter D.
Keisler, Assistant Attorney General, Civil Division, United States Department of Justice,
of Washington, DC, and Lori J. Dym, Chief Counsel, Law Department Civil Practice,
United States Postal Service, of Washington, DC. Of counsel were David M. Cohen,
Director, James D. Colt and Kathryn A. Bleecker, Attorneys, Commercial Litigation
Branch, Civil Division, United States Department of Justice, of Washington, DC.


Appealed from: United States Merit Systems Protection Board
 United States Court of Appeals for the Federal Circuit


                                         06-3050


                                 ROBERT H. LARY, JR.,

                                                             Petitioner,

                                             v.


                         UNITED STATES POSTAL SERVICE,

                                                             Respondent.

                            ___________________________

                            DECIDED: December 21, 2006
                            ___________________________


Before NEWMAN, DYK, and PROST, Circuit Judges.

DYK, Circuit Judge.

       Robert H. Lary, Jr. (“Lary”) seeks review of the decision of the Merit Systems

Protection Board (“Board”) in DE0752020233-C-1, denying his petition for enforcement

of a prior settlement agreement with the United States Postal Service (“the USPS”).

Because we hold that the USPS breached the settlement agreement by not providing

needed documents in a timely fashion and that the breach was material, we vacate the

Board’s decision and remand for entry of a decree of specific performance and an order

of back pay and other relief consistent with this opinion.
                                    BACKGROUND

      Lary, a longtime employee of the USPS, suffers from Obstructive Sleep Apnea, a

disorder that affects his breathing and thereby disrupts his sleep, often causing

excessive drowsiness. As a consequence of this disorder, Lary was frequently late for

his job as a Tour 2 Window Technician at the Benson United States Postal Station in

Omaha, Nebraska.

      On February 6, 2002, the USPS issued Lary a Notice of Proposed Removal

charging him with “Unacceptable Conduct—Failure to Maintain a Regular Work

Schedule/Tardy”. On March 4, 2002, Lary was removed from his position effective

March 8, 2002.    Pursuant to 5 U.S.C. § 8337(b), Lary had until one year after his

effective termination date, or March 8, 2003, to file a disability retirement application

with the Office of Personnel Management (“OPM”).

      On or about April 5, 2002, Lary appealed his removal to the Board, charging the

USPS with violating the Americans with Disabilities Act of 1990, 42 U.S.C. §§ 12101-

12213 (2000), and the Family and Medical Leave Act of 1993, 29 U.S.C. §§ 2601-2654

(2000).   On July 12, 2002, the parties entered into a “Stipulation and Settlement

Agreement,” pursuant to which Lary agreed to withdraw with prejudice his appeal and

all other claims filed, never to seek or accept reinstatement to the USPS, and to accept

a non-disciplinary removal for medical inability to perform his job duties due to sleep

apnea.

      The USPS made a number of return promises in the agreement. It agreed to

vacate the March 4, 2002, Decision Letter removing Lary and the earlier Notice of

Proposed Removal, and it agreed that those documents would be “removed &




06-3050                                 2
expunged from [Lary]’s Official Personnel Folder and all other official files of the

Agency.” Resp’t App. 26. The USPS also agreed to “issue a new PS Form 50 that will

indicate medical inability to perform as the reason for [Lary]’s removal.” Id. Crucially,

the USPS agreed to provide Lary three documents “in connection with [Lary]’s

application for disability retirement within two weeks” of the execution of the settlement.

Id. at 27 (emphasis added). Those documents were the Supervisor’s Statement, the

Agency Certification of Reassignment and Accommodation Efforts and the Disability

Retirement Checklist.      Under the disability retirement regulations, these three

documents are required       “in order to determine whether the individual meets the

eligibility requirements set forth in [5 C.F.R.] § 844.103.” 5 C.F.R. § 844.203(a) (2006);

see also OPM Standard Form 3112, “Documentation in Support of Disability Retirement

Application” (1995),   available at http://www.opm.gov/forms/html/sf.asp (requiring the

forms as part of the disability retirement application process).

       The USPS thus agreed to provide Lary, in the documents, with the statements

necessary for Lary to meet the eligibility requirements of 5 C.F.R. § 844.103, including

that the applicant was being removed for medical reasons; that accommodation efforts

had been futile; that Lary’s performance was deficient; and that the deficiency in Lary’s

performance was expected to continue indefinitely.        See 5 C.F.R. § 844.103.     The

parties agreed to cooperate and communicate in good faith to implement the terms of

the settlement. Pursuant to 5 C.F.R. § 1201.41(c)(2)(i) (2006), the Board accepted the

settlement agreement into the appellate record and retained jurisdiction to enforce the

terms of the agreement.




06-3050                                   3
      The USPS, as called for in the settlement agreement, issued a new PS Form 50

indicating medical inability to perform as the reason for removal.       However, it is

undisputed that the USPS did not provide the three documents in connection with Lary’s

disability retirement application within two weeks of the settlement agreement, as

provided for by the agreement. In fact, the agency did not provide the three documents,

completely and correctly filled out, until May 13, 2003, well after the March 8, 2003,

deadline for Lary’s disability retirement application, and after Lary’s counsel had

contacted the USPS several times to request the documents.

      Ultimately the USPS itself filed Lary’s disability retirement application with OPM,

but this was not until May 13, 2003. On August 26, 2003, OPM rejected the application

by letter because it was filed more than one year from Lary’s separation on March 8,

2002. Lary did not seek review of OPM’s decision. However, on July 16, 2003, Lary

filed a petition for enforcement with the Board, alleging that the USPS had breached its

obligations under the settlement agreement.

      The Administrative Judge (“AJ”) rejected all of Lary’s claims. The AJ held that

the USPS’s failure to provide the needed documents in a timely fashion was not

material because Lary was ultimately responsible for prosecuting his retirement

application and, under OPM regulations, he could have filed an incomplete application

with OPM before expiration of the one-year deadline and that application would still

have been timely. The AJ also rejected Lary’s claim that the USPS violated the terms of

the settlement agreement when, in the new PS Form 50, the USPS referenced the first

Board decision, which, in turn, had made reference to Lary’s being removed for




06-3050                                4
attendance-related reasons. The AJ reasoned that the settlement agreement did not

contain language precluding the USPS from referencing the first Board action.

      Lary appealed the AJ’s decision to the full Board, and an equally divided Board

affirmed.    Board member Sapin dissented, urging that the USPS had materially

breached the agreement because it had prevented Lary from timely applying for

disability retirement benefits, which was the “essential purpose” of the settlement

agreement.    Pet’r App. at 28. Addressing the question whether Lary unreasonably

delayed in filing his application, Board member Sapin reasoned that the agency did

nothing to inform Lary that he alone was responsible for making the one-year deadline

and that Lary reasonably believed that the agency would file his application for him.

Lary timely appealed to this court.      We have jurisdiction pursuant to 28 U.S.C.

§ 1295(a)(9) (2000).

                                     DISCUSSION

      The Board’s decision must be affirmed unless it is found to be arbitrary,

capricious, an abuse of discretion, or otherwise not in accordance with law; obtained

without procedures required by law, rule, or regulation; or unsupported by substantial

evidence. 5 U.S.C. § 7703(c) (2000); Yates v. Merit Sys. Prot. Bd., 145 F.3d 1480,

1483 (Fed. Cir. 1998). “A settlement agreement is a contract, and its construction is a

question of law which this court reviews de novo.” Conant v. Office of Pers. Mgmt., 255

F.3d 1371, 1376 (Fed. Cir. 2001). The question whether a breach of a contract is

material is a mixed question of law and fact. Gilbert v. Dep’t of Justice, 334 F.3d 1065,

1071 (Fed. Cir. 2003). At the same time, “[w]here, as here, the facts are undisputed,




06-3050                                 5
the determination of whether there has been material non-compliance with the terms of

a contract . . . necessarily reduces to a question of law.” Id. at 1072.

                                              I

       We first consider whether there was a material breach of the settlement

agreement.        That there was a breach is clear, and the government itself does not

dispute this fact. The government failed to provide the three documents referenced in

the agreement within the specified two-week timeframe. Thus the question becomes

whether the breach was material.

       In determining materiality courts often look to whether the breached obligation is

an important part of the contract. See Thomas v. Dep’t of Hous. and Urban Dev., 124

F.3d 1439, 1442 (Fed. Cir. 1997) (“A breach is material when it relates to a matter of

vital importance, or goes to the essence of the contract.”) (citing 5 Arthur L. Corbin,

Corbin on Contracts § 1104 (1964)). Here the government’s failure to timely provide the

three documents was central to the settlement agreement. The agreement expressly

stated that the USPS would complete the required documents “in connection with

[Lary]’s application for disability retirement.” Resp’t App. at 27. The documents were

the very same ones that OPM required the USPS to complete before Lary’s application

could be considered complete.        See OPM Standard Form 3112, “Documentation in

Support      of     Disability   Retirement   Application”    (1995),      available   at

http://www.opm.gov/forms/html/sf.asp (listing the forms as required).       Under these

circumstances it is clear that the government breached an important obligation.

       In determining whether a breach is material, we have also considered the

Restatement factors:




06-3050                                   6
       In determining whether a failure to render or to offer performance is
       material, the following circumstances are significant:
       (a) the extent to which the injured party will be deprived of the benefit
       which he reasonably expected;
       (b) the extent to which the injured party can be adequately compensated
       for the part of that benefit of which he will be deprived;
       (c) the extent to which the party failing to perform or to offer to perform
       will suffer forfeiture;
       (d) the likelihood that the party failing to perform or to offer to perform will
       cure his failure, taking account of all the circumstances including any
       reasonable assurances;
       (e) the extent to which the behavior of the party failing to perform or to
       offer to perform comports with standards of good faith and fair dealing.

Restatement (Second) of Contracts, § 241 (1981); see also Hansen Bancorp, Inc. v.

United States, 367 F.3d 1297, 1311-1312 (Fed. Cir. 2004).               Here Lary has been

deprived of the opportunity to timely file for disability retirement benefits, which he could

reasonably expect from the settlement agreement. Since the Board does not have

authority to grant damages, the second factor is also not met. See Wonderly v. Dep’t of

the Navy, 68 M.S.P.R. 529, 532 (1995). There is no risk that the government will suffer

forfeiture, and the government is not likely to take steps to cure its failure. Finally, under

the fifth factor, the government offers no justification for failing to perform in a timely

way.

       The AJ nonetheless held, and the government argues on appeal, that the breach

was not material because, under OPM regulations, Lary could have filed an incomplete

application and avoided missing the deadline.          See 5 C.F.R. § 844.201(a)(3) (“An

application . . . that is filed . . . within 1 year after the employee’s separation, and that is

incompletely executed . . . is deemed timely filed.”); see also OPM Standard Form 3112

(“OPM must receive your application not more than one year after the date you




06-3050                                    7
separated from your position. If you are unable to get all the information requested, do

not delay submitting your Standard Form 3112A to OPM.”).

      We reject this conclusion for two reasons. First, the argument that Lary could

have timely filed an incomplete application is relevant only to the question whether he

could have mitigated damages and not to the materiality of the breach.        Even the

detailed Restatement factors on materiality nowhere suggest that the nonbreaching

party’s failure to take steps that could mitigate damages is relevant to determining

whether the breach was material. The government has cited no authority suggesting

that the failure to take mitigation steps bears on the materiality of the breach. As the

government did not make a mitigation argument below, and does not make one on

appeal, we hold that the AJ erred in considering this ground.

      The second reason we reject the government’s argument is that, even if Lary had

filed an incomplete application and thus avoided missing the one-year deadline, he

would still have been irreparably harmed by the government’s breach. This is because

disability benefits do not begin to accrue until all application requirements have been

met and the application is complete. OPM Standard Form 3112-2, at 7 (“Disability

annuity benefits begin accruing on the first day after your pay as an employee stops and

disability and service requirements have been met.”) (emphasis added); see also OPM

Standard Form 3112 (describing the documents that the USPS agreed to provide in the

settlement as required). Thus the government’s delay here cost Lary retirement benefits

which he had no way of recouping. The breach was clearly material.1



      1
              Lary also argues that the USPS materially breached the contract by
referencing the first Board action in the new PS Form 50 that it issued pursuant to the
settlement agreement. Here the AJ found that the USPS did not violate its obligations


06-3050                                 8
                                             II

       We now consider which remedy is appropriate here. The government admits

that the MSPB can order rescission of the agreement and reinstatement of petitioner’s

claim on appeal or enforce the agreement. See Wonderly, 68 M.S.P.R. at 532 (1995).

       “In a rescission, the parties are restored to their respective positions prior to the

transaction.”   Blanco v. United States, 602 F.2d 324, 327 (Ct. Cl. 1979).            Here

rescission is not an adequate remedy.        Rescinding the settlement agreement and

reinstating Lary’s appeal would not change the fact that Lary has missed the OPM

deadline, since he had only one year from his separation date of March 8, 2002, to file

his application with OPM.

       The second remedy that the government agrees is available in this case is

enforcement of the agreement. Enforcement by specific performance is intended to

have “the same effect that the performance due under a contract would have produced.”

Restatement Second of Contracts § 357 cmt. a; see also id. at § 358(1) (“An order of

specific performance . . . will be so drawn as best to effectuate the purposes for which

the contract was made.”). We hold that the appropriate remedy in this case is specific

performance.    An order of specific performance does not have to order the exact

performance contemplated by the contract. The order “will be so drawn as best to

effectuate the purposes for which the contract was made and on such terms as justice

requires. It need not be absolute in form and the performance that it requires need not



under the settlement agreement because the agreement “did not contain language
precluding the agency from referencing the Board as the authority for the removal for
medical-inability-to-perform reasons.” Resp’t App. 19. In light of our holding that the
USPS committed a material breach by withholding the documents, we need not address
Lary’s alternate argument on breach, as it would not affect the result.


06-3050                                  9
be identical with that due under the contract.” Id. § 358(1); McFarland v. Gregory, 322

F.2d 737, 739 (2d Cir. 1963) (“In framing such a decree the performance that it requires

need not be identical with that promised in the contract.”). Rather, [t]he court should so

mold its decree as best to effectuate the purposes for which the contract was made.”

12 Margaret N. Kniffin, Corbin on Contracts § 1137 (Joseph M. Perillo ed., rev. ed.

1993); see also Restatement (Second) of Contracts § 358 cmt. a (describing the goal of

“assur[ing] the expectations of the parties”).

       Here, it is simply impossible to order that the documents be timely provided.

Rather, in order to effectuate the purpose of the settlement agreement, which was to

give Lary the opportunity to timely file for disability retirement with the full support of the

USPS, the MPSB should order the USPS to take again all steps contemplated by the

original agreement. Thus the MSPB should order the USPS to vacate any and all of

Lary’s prior removals, proposed removal letters and PS Form 50’s and expunge them

from the records, and to issue a new letter of decision removing Lary (effective on the

date the new letter issues) and a new PS Form 50 indicating medical inability to perform

as the reason for removal.       It should further order the USPS to provide the three

documents (the Supervisor’s Statement, the Agency Certification of Reassignment and

Accommodation Efforts and the Disability Retirement Checklist) within two weeks of the

order of specific performance. These newly-issued documents should reference only

the date of the removal entered pursuant to the order of specific performance, and not

any earlier removals. Under OPM policy, Lary will then be able to file for disability

retirement benefits within one year of the new removal entered pursuant to the decree

of specific performance.




06-3050                                   10
       Since Lary’s previous removals will be expunged, the agency on remand should

also award Lary any back pay and other relief that he may be due under 5 U.S.C.

§ 5596 (2001). See also 5 C.F.R §§ 550.801 et seq. (2006). In order to avoid a windfall

to Lary, any back pay should not exceed the amount of disability payments that Lary

would have received in the relevant time period if the USPS had complied with the

settlement agreement.2 See Old Stone Corp. v. United States, 450 F.3d 1360, 1378

(Fed. Cir. 2006) (“[T]he non-breaching party should not be placed in a better position

through the award of damages than if there had been no breach.”) (internal citations

and quotation marks omitted).3

                                     CONCLUSION

       For the foregoing reasons, we vacate and remand to the Board for the entry of a

decree of specific performance and an order of back pay and other relief consistent with

this opinion.

                              VACATED AND REMANDED

                                         COSTS

       No costs.




       2
               Of course, in the event that OPM determines, on the merits, that Lary is
not entitled to disability retirement payments, Lary shall not be entitled to back pay.
       3
                The government alternatively contends that we should deny relief because
Lary’s petition for enforcement was untimely, on the theory that Lary did not file within a
reasonable time because he did not file promptly after the settlement agreement’s two-
week deadline for providing the documents had elapsed. We see no basis for holding
that his petition was untimely.



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