Over the years, many federal agencies have issued guidance or policy documents that critics charge should properly be classified as rules. Compared to the more demanding procedures involved in rulemaking, less formal documents have logistical advantages that can tempt agencies to call a pronouncement something other than a rule; not only is it easier to adopt, but guidance is not appealable to a court, since it is not considered “final agency action,” the standard for matters eligible for judicial review under the Administrative Procedure Act (APA). Increasingly, however, those subject to arguably misclassified guidance documents have persuaded courts and other review bodies to take a close look at how a particular directive operates, and in recent weeks three agencies have seen their policy memoranda struck down as rules that were improperly adopted without the benefit of required notice and comment rulemaking or other administrative processes.

The leading case on this issue is Appalachian Power Co. v. EPA, 208 F.3d 1015 (D.C. Cir. 2000). Despite the Environmental Protection Agency (EPA)’s protestations that its “Periodic Monitoring Guidance” was neither final nor binding, the court held that “the entire Guidance, from beginning to end – except the last paragraph – reads like a ukase. It commands, it requires, it orders.” Id. at 1023. Making it clear the court would look past the agency’s characterization, the court held that “if an agency acts as if a document issued at headquarters is controlling in the field, if it treats the document in the same manner as it treats a legislative [formal] rule, if it bases enforcement actions on the policies or interpretations formulated in the document, if it leads private parties or State permitting authorities to believe that it will declare permits invalid unless they comply with the terms of the document, then the agency’s document is for all practical purposes ‘binding.’” Id. at 1021.

Although this “quacks like a duck” test should be simple to follow, agencies are continuing to try imposing new requirements without adhering to rulemaking requirements. Recent efforts that regulated parties have successfully challenged include the following:

  • Occupational Safety and Health Administration (OSHA). On June 6, 2012, an administrative law judge (ALJ) held that OSHA had improperly sought to establish a new performance standard for the use of fire resistant/retardant clothing (FRC), by issuing what it depicted as an enforcement policy as opposed to conducting notice and comment rulemaking. Secretary of Labor v. Petro Hunt, OSHRCJ, No. 11-0873 (June 2, 2012), available at http://www.oshrc.gov/decisions/pdf_2012/11-0873.pdf. The ALJ found that, rather than interpreting an existing requirement as OSHA claimed, “the FRC memo takes a performance standard and imbues it with a specific obligation that FRC must be worn during the enumerated oil and gas operations regardless of the particular circumstances that may be present at any individual facility. By doing this, [OSHA] has changed the requirement of the underlying standard; thus, engaging in improper rulemaking under the aegis of an enforcement standard.” Decision and Order at 14.
  • EPA and U.S. Army Corps of Engineers. On July 31, 2012, the U.S. District Court for the District of Columbia invalidated an EPA-authored guidance document that was “being implemented as binding and having a practical effect on the permitting process for new Appalachian surface coal mining projects.” National Mining Ass’n v. Jackson, 2012 U.S. Dist. LEXIS 106057 (D.D.C. July 31, 2012). Relying heavily on Appalachian Power and rejecting the agencies’ stated position that the guidance was not binding and imposed no obligations, the court used a practical effects test and found that the guidance had “caused EPA field offices and the state permitting authorities to believe that permits should and will be denied if its ‘suggestions’ and ‘recommendations’ are not satisfied.” EPA had conveyed a “comply-or-else attitude” that resulted in a “de facto legislative rule.”
  • Department of Health and Human Services (HHS). In a slightly different context, on September 4, 2012, the Government Accountability Office (GAO) ruled that an Information Memorandum issued by HHS in furtherance of the federal government’s welfare program was in fact a rule and must accordingly be submitted to Congress and the Comptroller General for review under the Congressional Review Act (CRA). The CRA allows Congress to block a rule upon passage of a joint resolution that the President is willing to sign. Noting that the term “rule” for CRA purposes is broader than the definition used under the APA for “legislative rules” – those requiring notice-and-comment proceedings, the issue in the guidance cases discussed above – the GAO had no difficulty concluding that HHS’s Information Memorandum met the two tests of what constitutes a “rule” necessitating CRA review: general applicability and future effect. The GAO did not express an opinion on whether the HHS guidance also qualified as a rule under the APA’s rulemaking requirements, since that issue was not raised, but the GAO’s analysis could encourage closer scrutiny of that question by those subject to the guidance. The GAO letter ruling is available at http://www.gao.gov/products/B-323772.

Pepper Points: Whether more and more regulatory agencies are seeking to circumvent rulemaking requirements through guidance documents, or whether this situation is receiving more attention as greater numbers of regulated entities challenge this practice of circumvented rulemaking is not clear. However, there is no question that many federal regulators – including those in the financial services arena – rely heavily on the use of guidance documents and enforcement policies that may have significant effects. The recent spate of successful challenges suggests that businesses operating in regulatory areas in which guidance is commonly used would be well-advised to give careful review to less formal promulgations, to see if they are really rules in disguise.