The Obama Administration is likely to present major regulatory challenges to the business community. As the confirmation of agency leadership proceeds and new staff begins to pervade mid-level policy positions, existing legislation giving regulatory agencies broad authorities and “public interest” mandates in areas such as environmental regulation, consumer safety protection, communications regulation and food and drug regulation may provide the quickest path to “change” satisfying the Administration’s principal constituencies. Businesses need carefully to assess and exercise the legal tools available to them to influence the Administration’s agenda and to temper potential excesses. It is to this end that we have decided to initiate a series of administrative law bulletins that will focus on emerging issues under the Administrative Procedure Act (“APA”) and significant judicial rulings on review of agency action.

Executive Summary

The first Supreme Court administrative law decision of the Obama era, FCC v. Fox Television Stations, No. 07-582 (Sup. Ct. 4/28/08), is disappointing because it removes what might have been a significant impediment to reversal or modification of prior agency positions and because the majority included those Justices generally considered most hospitable to business interests. Fox overturned prior Circuit opinions, including D.C. Circuit precedent, that held that more stringent “arbitrary and capricious” judicial review of agency action was appropriate when an agency was departing from its prior policies. Under Fox, agencies will survive “arbitrary and capricious” challenges if they can demonstrate that a new policy is permissible under the statute, that there are good reasons for it and that the agency believes (subjectively) it to be better. That tolerance for change standard was supported by Justices Scalia (author of the Opinion), Kennedy, Thomas, Alito and Chief Justice Roberts. The generally-viewed-as-liberal dissenters, while adhering to the view that an agency must explain its reasons for change as well as the considerations supporting its new policy, seemed as much motivated by their anti-censorship distaste for the FCC’s crackdown on “fleeting expletives” than by administrative law concerns. Thus, it seems unlikely that the Court will take the “review of changed policy” issue up again in the near future and business opponents of regulatory changes would be well advised to supplement their policy arguments at the agency level with careful scrutiny of how a proposed change may conflict with statutory and/or constitutional provisions.

The Court’s Decision in Fox

The Commission action in Fox concerned enforcement of the statutory ban on broadcasting “indecent” language. 18 U.S.C. § 1464. As a result of prior staff-level decisions and guidance, as well as Commission dicta, it had been generally understood that the fleeting or isolated use of certain expletives would not violate that statutory prohibition, absent other aggravating circumstances.

The Commission’s order addressed isolated expletives from Cher during the 2002 Billboard Music Awards and from Nicole Richie during the 2003 Billboard Music Awards. The order explicitly reversed the Commission’s prior “regime of immunity for isolated indecent expletives” and held instead that even the “isolated or fleeting” use of a single expletive could violate the indecency standard and come within the statutory prohibition. Slip op. at 8.

The Second Circuit overturned the Commission’s action. In doing so, it relied in part on its precedent “requiring a more substantial explanation for agency action that changes prior policy.” Slip op. at 10. In particular, the Second Circuit had previously ruled that the APA and an earlier Supreme Court decision required agencies to make clear “why the original reasons for adopting the [displaced] rule or policy are no longer dispositive” as well as “why the new rule effectuates the statute as well as or better than the old rule.” Id.

The Supreme Court reversed, with Justice Scalia writing the majority opinion, “find[ing] no basis in the Administrative Procedure Act or in our opinions for a requirement that all agency change be subjected to more searching review.” Id. The Court emphasized that “the [APA] makes no distinction . . . between initial agency action and subsequent agency action undoing or revising that action” (slip op. at 11) and set forth the following test:

[T]he agency must show that there are good reasons for the new policy. But it need not demonstrate to a court’s satisfaction that the reasons for the new policy are better than the reasons for the old one; it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better, which the conscious change of course adequately indicates.

Slip op. at 11 (emphasis in original). The Court did note that it would be “arbitrary and capricious” to ignore situations where, for example, the new policy “rests upon factual findings that contradict those which underlay [the] prior policy” or where the prior policy “has engendered serious reliance interests,” so an agency would need to address any such instances. Slip op. at 11-12. Nevertheless, the quoted test is now the basic standard for APA review of agency decisions changing established policies.1

The Significance of Fox for Future Regulatory Changes

After Fox, agencies will have a freer hand in departing from the policies of the past Administration and less concern that courts will hold their feet to the fire when the justification for change is a rebalancing of interests rather than new developments. A demonstration that a new policy contradicts, without adequate explanation, a factual underpinning of the prior policy or that the change would unduly disturb interests arising from justifiable reliance on the prior policy may still lay a foundation for setting aside a regulatory change, but winning “arbitrary and capricious” judicial challenges will be an uphill battle.

What Does Fox Mean for Your Approach in Future Administrative Proceedings

In confronting proposed agency actions that change prior policies, business interests may find it useful to focus additional energy on how the agency’s statutory mandate constrains its discretion and/or how a proposed change raises significant constitutional issues. While Chevron deference protects reasonable agency interpretations of statutory authority, courts are likely to be more comfortable in dealing with flaws in statutory interpretation than in appearing to second-guess agency policy judgments. The Fox decision itself expressly reserved the question whether the FCC’s new policy, even if not arbitrary and capricious, violated the First Amendment and was thus contrary to law within the meaning of the APA.