The U.S. Food and Nutrition Service (“FNS”) administers the Supplemental Nutrition Assistance Program (“SNAP”). Formerly known as “food stamps,” this important federal nutrition benefit program serves over 45 million Americans by increasing “food purchasing power for all eligible households who apply for participation.” 7 U.S.C. §2011. FNS licenses eligible supermarkets and convenience stores to participate in SNAP as authorized retail food stores. SNAP beneficiaries can redeem their SNAP benefits, which are loaded onto a state-issued Electronic Benefits Transfer (“EBT”) card, at FNS-authorized retailers.
FNS has promulgated regulations designed to effectively and efficiently administer SNAP. Whether its regulations do so is subject to reasonable debate, but there is no dispute that FNS has been aggressive in attempting to combat SNAP fraud, especially in the context of trafficking. Trafficking is generally defined as the exchange of SNAP benefits for “cash or consideration other than eligible food.” 7 U.S.C. §2021, 7 C.F.R. §271.2 If a retail food store engages in trafficking, the penalty is permanent disqualification from SNAP. 7 C.F.R. §278.6(b)(2). The adverse impacts associated with a store’s permanent disqualification cannot be understated – the disqualification is applicable to not just the store, but also to all owners and officers. In community property states, it is even applicable to spouses of owners, even if they have no legal interest in the store. Additionally, a store may be reciprocally disqualified from WIC and other stores with the same owners and/or officers may also be subject to reciprocal disqualification from SNAP. For stores located in impoverished neighborhoods, a permanent disqualification is often fatal to the business as a majority of its customers are likely to be SNAP beneficiaries.
FNS has authorized more than 200,000 stores as SNAP retailers. Each year, FNS issues thousands of charge letters accusing stores of engaging in trafficking. Most store owners are unfamiliar with FNS’s administrative review process and attempt to respond themselves or with the assistance of an accountant or bookkeeper. Unfortunately, these efforts rarely succeed and stores find themselves in receipt of a short letter from FNS advising that they have been permanently disqualified from the food stamp program. Although FNS’s form letter does not provide stores with any insight into why they were disqualified, not all hope is lost because the Food and Nutrition Act of 2008 provides for two processes for appealing FNS’s determination that a store has engaged in trafficking: administrative and judicial review.
A recent decision by a Connecticut federal judge describes the experience of Cecilia’s Market, a small New Haven grocery store charged with trafficking. In Duchimaza v. United States, FNS accused Cecilia’s on engaging in more than three hundred fraudulent SNAP transactions. In a September 30, 2016, Order, the United States District Court for the District of Connecticut upheld FNS’s final agency decision permanently disqualifying the store and its owner from participating in SNAP. The Court noted that FNS does not need direct evidence to charge a store with trafficking; instead, it may determine a store trafficked in food stamps based on statistical analysis of a store’s EBT redemption data.
FNS frequently charges SNAP retailers with SNAP fraud, based on several categories of EBT patterns that it considers suggestive of trafficking. Most frequently, FNS charges stores with trafficking based on too many “same cents” transactions, multiple transactions made from one or more benefit accounts in “unusually short time frames,” and “excessively large purchase transactions” from participant accounts. FNS has never come up with definitions for these categories and stores often are left to guess what they mean. Needless to say, retailers often have difficulty determining how to respond to SNAP trafficking charges.
The Court’s decision in Duchimaza is not surprising based on the case history and the evidence presented during administrative and judicial review proceedings. After the store’s accountant responded to the Charge Letter, FNS permanently disqualified the store. On administrative appeal, FNS’s Administrative Review Branch (“ARB”) rejected the store’s arguments, noting that the store, through its lawyer, submitted the same exhibits previously submitted by the store’s accountant.
Stores that are permanently disqualified from SNAP may appeal to federal or state court within thirty days after ARB issued its Final Agency Decision. Cecilia’s Market sought judicial review by filing a complaint against the federal government in U.S. District Court. The store’s attorney retained a former FNS officer with more than twenty years experience in retailer compliance issues as its expert witness. Unfortunately, this “expert” had retired in 1985, more than thirty years ago and over a decade before nationwide implementation of FNS’s EBT system. Accordingly, the store’s expert had never analyzed EBT data, never worked on a case involving the issuance of a charge letter based on EBT data, and had no training, education, or experience in statistical analysis.
Not surprisingly, the Court concluded that the evidence submitted by Cecilia’s and its expert was insufficient to rebut FNS’s charges that the store engaged in trafficking. As a result, the Court concluded that FNS followed its regulations in determining that Cecilia’s engaged in trafficking and affirmed FNS’s permanent disqualification determination.
One aspect of the Court’s decision merits mentioning. Under FNS’s regulations, stores charged with trafficking may seek the issuance of a civil monetary penalty (“CMP”) in lieu of permanent disqualification. FNS’s regulations provide that a request for a CMP must be submitted within ten days after receipt of the Charge Letter and that such request must include evidence of the store’s pre-existing SNAP training program and SNAP compliance protocol. 7 C.F.R. §278.6(i). Although FNS provides little guidance to stores regarding the establishment of training programs and compliance protocols, stores must satisfy these (and other) mandatory criteria in order to be eligible for imposition of a CMP in lieu of permanent disqualification for trafficking. It is therefore critical for stores to promptly establish and implement SNAP training programs and compliance protocols shortly after receiving their SNAP license from FNS, either in-house or with the assistance of competent counsel. Unfortunately, Cecilia’s did not have a SNAP training program or compliance protocol and therefore didn’t have grounds to submit a request for issuance of a CMP before FNS or the District Court. While the Court held that FNS’s decision to permanently disqualify Cecelia’s was an appropriate sanction, it did note that a narrow legal window remains open for retailers who fail to make a CMP request before FNS but seek to do so for the first time on judicial review. Although this issue remains an open question in the Second Circuit, prudent retailers would be well-advised to establish and implement SNAP compliance protocols and training programs and to train their employees promptly after obtaining their SNAP authorization.
The take-away from the Duchimaza decision is straightforward: SNAP retailers charged with trafficking should promptly retain competent counsel to represent their interests. Failure to do so increases the likelihood that stores (and their owners) will be permanently disqualified from SNAP and WIC. Disqualified stores and owners face a substantial downturn in business following the loss of authorizations to participate in this nutrition benefit programs and also are subject to up to $100,000 in transfer penalties if they sell their stores following disqualification.
OFW Principal Stewart Fried represents retailers on a variety of SNAP and WIC issues ranging from regulatory advice, to preparation of training programs and compliance protocols, to assisting retailers whose applications for authorization are denied and/or those charged with SNAP and WIC program violations before FNS and the federal courts.