As noted in this PubCo post, SCOTUS recently heard oral argument in Kisor v. Wilkie, a case involving the interpretation of a regulation issued by the Department of Veteran’s Affairs. In Kisor, a Vietnam vet, suffering from service-related PTSD, sought retroactive disability benefits from the VA. Interpreting the meaning of the term “relevant” as used in one of its own regs, the VA denied his claim for retroactive benefits. Why is this case important to public companies? Because the question presented to the Court was whether to continue the decades-long deference of courts to the reasonable interpretations by agencies (such as the SEC) of their own ambiguous regulations, often referred to as Auer deference (or Seminole Rock deference, referring to Auer’s antecedent). The decision, expected by this summer, could narrowly restrict, or even completely undo, that deference.

The case represents yet another example of concentrated efforts to dismantle or severely limit the administrative state—or the “deep state,” depending on your point of view. As explained in the opening of the amicus brief of the Cato Institute, quoting Chief Justice Roberts in dissent, “[o]verturning Auer would be a modest but important check on the ‘the danger posed by the growing power of the administrative state.’ City of Arlington, Tex. v. F.C.C.” What’s more, in his cert. petition, Kisor argued that “‘[r]evisiting Auer deference [would be] an appropriate place to begin’ a more complete ‘reconsideration’ of ‘existing doctrines of agency deference,’ including under Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc.” (quoted from the amicus brief of a group of Professors of Administrative Law and Federal Regulation in support of neither party). [citations omitted throughout.]

SideBar

Auer deference should not be confused with the similar concept referred to as “Chevron deference.” “Chevron deference” refers to the well-worn two-step test for determining whether deference should be accorded to federal administrative agency actions interpreting a statute (as opposed to its own regulation), first articulated by SCOTUS in 1984 in Chevron v. Natural Resources Defense Council. Generally, the doctrine established in that case mandated that, if there is ambiguity in how to interpret a statute, courts must accept an agency’s interpretation of a law unless it is arbitrary or manifestly contrary to the statute. For example, in a 2016 decision, Monica Lindeen v. SEC, the D.C. Circuit applied Chevron to uphold the SEC’s rules adopted under Reg A+ against a challenge by two state securities regulators. And, as another example, the D.C. District Court applied Chevron in initially upholding the SEC’s conflict minerals rules in 2013 in Nat’l Ass’n of Mfrs. v. SEC. National Association of Manufacturers v SEC, which was subsequently reversed on other grounds. (See this Cooley News Brief.)

Like Auer deference, Chevron deference has also been highly politicized and come under attack in an effort to restrict the actions of the administrative state. You might recall that, in 2016, the Financial Choice Act, which passed the House but not the Senate, provided that, in any action for judicial review of agency action (including action by the SEC) authorized under any provision of law, the reviewing court shall determine the meaning or applicability of the terms of an agency action and decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by an agency. See this PubCo post. (Note, however, that in the Financial Choice Act Version 2.0, the repeal of the “Chevron deference” doctrine would have been delayed for two years. See this PubCo post.) Similar provisions were included in quite a number of bills that passed the House but not the Senate in 2017. (See this PubCo post.)

As discussed in the SideBar below, concerns regarding the longevity of Chevron led some of the amici to focus their briefs on distinguishing Chevron from Auer.

In Auer v. Robbins, Justice Scalia, analyzing whether certain employees were exempt from overtime pay requirements under the Secretary of Labor’s regulations, held that “[b]ecause the [particular test in question] is a creature of the Secretary’s own regulations, his interpretation of it is, under our jurisprudence, controlling unless ‘plainly erroneous or inconsistent with the regulation’ Robertson v. Methow Valley Citizens Council, quoting Bowles v. Seminole Rock Sand Co.).”

Following Auer, in Kisor, the Federal Circuit Court found that both the petitioner and the VA offered reasonable interpretations of the term in question, concluding as a result that the regulation was ambiguous and applying Auer to defer to the VA’s interpretation.

Cert was granted on this question: “Whether the Court should overrule Auer and Seminole Rock.”

In oral argument, counsel for Kisor, the petitioner, argued in favor of overturning Auer, viewing it as a circumvention of the notice-and-comment process required under the APA and other statutes. The Solicitor General, along with members of the current Justice Department, on behalf of the VA, attempted to make Auer irrelevant, contending that the regulation was not ambiguous, and even if it was, the VA certainly offered the best interpretation of that regulation. Interestingly, however, the SG argued that Auer was “not well grounded historically” and advocated against retaining Auer as it currently stands. Instead, the SG contended that the Court should retain the doctrine “at its core,” but impose a number of limitations that would substantially narrow the application of Auer, particularly with respect to agency interpretation and guidance. Justice Kagan, with perhaps a sardonic note, questioned whether the case presented a problematic “lack of adversarialness.”

Deference to expertise. Justice Ginsburg pointed out that, under the Auer doctrine, agency deference is not blindly invoked: to apply Auer deference, the court must view the rule to be ambiguous and the agency interpretation a reasonable one. Justice Breyer described the concept of deference as at least partly based on agency expertise:

“I mean, there are hundreds of thousands, possibly millions of interpretive regulations. I mean, they give an example, one of them, where the Court deferred to the understanding of the FDA that a particular compound should be treated as a single new active moiety, which consists of a previously approved moiety, joined by a non-ester covalent bond to a lysine group. Do you know how much I know about that? …. But what you’re doing is saying, instead of paying attention to people who know about that, but rejecting it if it’s unreasonable, the judges should decide. I mean, I want to parody it, but, I mean, this sounds like the greatest judicial power grab since Marbury versus Madison, which I would say was correctly decided.”

Judges have a lot of power under Auer, he observed,

“to reject unreasonable rules, inappropriately considered rules, they didn’t think about it, rules that change position, rules that are not clear, all these interpretations, you don’t have to take Auer literally, and later cases have not. And so do you—what is your real objection to taking those later cases and saying, of course, judges are in control; of course, they reject what is unreasonable; of course, they reject what is inadequately considered; of course, they reject things that are just changed without explanation, but, in general, recognize that the FDA knows more about moieties than you do, Judge, and there are 800 judges, and they all think moiety means something different.”

The petitioner countered again that the public may also have expert insight into these issues, but they are not heard through the notice-and-comment process. Justice Breyer argued that employing that process for millions of interpretations was hardly expeditious and would likely take many years. Justice Alito responded that the word “relevant” was not a word that an agency would necessarily be better suited to interpret than a court.

Stare decisis. Justice Kagan asked why it was appropriate to overrule these two decisions, along with 10 or 12 others that reference those cases, especially given that Congress could easily have changed the Court’s rule. SCOTUS takes stare decisis “superseriously,” she said, and, to overturn a prior decision, looks to something that has happened that makes it “grievously wrong.” The petitioner pointed to its inconsistency with the APA. Chief Justice Roberts asked, in light of “the limitations on Auer that—you know, that have accumulated over the years… I just wonder exactly how much of a change at the end of the day you’re talking about.” Justice Gorsuch commented that “nobody left before us alive is willing to take Auer literally and it’s just a matter of how—how much revision to it we’ve already made. Is it enough? How much further should we go? Or should we just give up on it altogether?”Justice Ginsburg asked, if Auer were overruled, what would happen with the hundreds of cases that had been decided on that basis in the lower courts?

Proposed limitations on the doctrine. The SG argued that Seminole Rock should be saved only in its core application. For example, he viewed Auer’s vesting of decision-making authority in a single party, the agency, as opposed to multiple courts, to be beneficial to regulated parties by providing some consistency. The case, he said, has been “on the books for decades, it has significant practical benefits, its practical problems can be addressed by reinforcing reasonable limitations on the doctrine.” That is, the SG advocated that SCOTUS impose “limitations on the edge that simply recognize that, in the course of practical application, practical issues have been identified.” What are these limitations? As Justice Gorsuch described them, the test the SG proposed would have six elements: “We have to decide whether the—the regulation is ambiguous, whether the interpretation’s reasonable, whether it’s consistent, whether it was made by someone at a high level, whether there was fair notice, and whether it was made by somebody with expertise.” However, he asked “Is that a—a recipe for stability and predictability in the law, or is that a recipe for the opposite?… And I—I—I guess I’m just wondering, at what point does this whole edifice just fall upon itself?”

In his oral argument, the SG expanded on those limitations, clarifying that “we dont think the agency should get Seminole Rock deference for secret, private interpretations”; rather, public notice should be required. And why not require comment also, Justice Gorsuch asked: the “benefits of notice and comment are, among other things, people will know prospectively what rules govern them and not be sideswiped later by a bureaucracy.” Justice Kavanaugh asked whether notice-and-comment rule-making had just become too difficult through various requirements that had been imposed through the lower courts. In addition, the SG suggested that, even if you establish ambiguity, “you only defer if the determination reflects the considered judgment of the agency as a whole.” Justice Gorsuch characterized that concept as a decision regarding “how considered” the interpretation was—interjecting “wow” at that point and asking whether that didn’t involve “a bit of inter-branch disrespect?” The SG later revised his characterization of the concept as “whoever issues the decision on which we are seeking deference has to be able to speak for the agency as a whole.”

With regard to the separation-of-powers issue, the SG did not think it was a significant issue, in part, “because the agencies are, in fact, subject to substantial control by both Congress and by the courts.”

Justice Gorsuch was also skeptical of the SG’s claim of benefit for regulated parties, observing that private parties had actually requested that the Court eliminate the rule altogether. And what if, Justice Kavanaugh asked, the judge really thinks that the agency’s interpretation is wrong but feels compelled by the case to defer? Justice Sotomayor responded that, in that case, if it’s wrong, then its unreasonable, which would be covered under the Auer standard.

SideBar

To provide a flavor of the argument taking place on the sidelines, below are excerpts from some of the amici on opposite sides of the issue:

In his amicus brief, Rhode Island Senator Sheldon Whitehouse argued as follows:

“Administrative agencies perform a key role in the constellation of American government, protecting the public from forces of immense political power and influence. They bring a special combination of technical substantive expertise, focused persistence and adaptiveness in face of complex problems, and relative independence from raw political pressure…. Congress set up administrative agencies to balance the interests of the public against the self-interest of these powerful forces. In our complex, modern economy, Congress does not have the time to address the multiplicity and variety of issues that come before these agencies; Congress also lacks the expertise to address the complex and often technical questions raised; and Congress is often under too much political pressure to address these questions reliably in the public interest, particularly in the present dark-money-driven, post-Citizens-United era. So Congress built administrative agencies that have both the time and expertise to balance public and private interests knowledgeably; and built into these agencies a bulwark of protections to assure they would do so fairly: statutory direction, congressional oversight, judicial review, procedural transparency, public notice and comment, and rules encouraging sound, fair and evidence-based decision-making. For decades, it has all worked remarkably well. The challenge presented by this case is a solution in search of a problem.”

Arguing the other side, the amicus brief from the Cato Institute contended that

“[t]o be clear, this case is important because process matters. Those who hold the reins of political power will not always be benevolent, self-restrained public servants—and the procedural safeguards that seem frustrating and counterproductive in one instance may very well be necessary bulwarks in another. Auer undermines these safeguards by concentrating lawmaking and law-interpretation in regulatory agencies, in a manner that both offends separation of powers principles and facilitates procedural shortcuts. Accordingly, Auer deference deprives regulated entities of fair notice, which is fundamental to the integrity of the law. Similarly, Auer deference robs administrative policy-making of legitimacy by allowing agencies to avoid public participation in the formulation of their rules….Affording controlling deference to agency interpretations of their own regulations gives executive agencies the power both to write the regulations they are charged with enforcing and later to declare just what the ambiguous words of those regulations say—a task traditionally left to courts. In effect, Auer deference allows for the concentration of legislative and judicial authority into the hands of relatively unaccountable administrative agencies. In this manner, the doctrine undermines the separation of powers at the center of our constitutional structure.”

The Chamber of Commerce’s amicus brief argued that

Auer deference creates a strong incentive for agencies to adopt vague regulations that they can later interpret however they see fit. This practice upsets the expectations of regulated parties and deprives them of the notice provided through rulemaking…. Experience demonstrates the harmful real world effects Auer has on businesses. In many cases, Auer deference has led courts to uphold agency interpretations that appear in obscure locations and do not comport with the best reading of the regulations in question. The result is increased compliance costs and staggering damages claims that cannot be predicted fairly from the rules. Auer and Seminole Rock should be overruled because they violate separation-of-powers principles and conflict with the Administrative Procedure Act.”

In the amicus brief submitted by a group of administrative law scholars, the group contended that the

“presumption that reviewing courts should defer to agency interpretations of their own regulations, as set forth in Auer v. Robbins, is sound and should be maintained. As this Court has recognized for more than a century, see United States v. Eaton, deference to an administrative agency’s interpretation of ambiguities in the regulations it implements is amply justified on pragmatic grounds and as a matter of principle. Agencies possess technical and policy expertise that reviewing courts generally lack. They are therefore in a far better position to discern which interpretation of an ambiguous regulation will best advance the policy objectives the agency is charged with achieving in a variety of complex regulatory and factual contexts. At the same time, deference promotes democratic accountability by ensuring that these discretionary and inevitably policy-inflected judgments are made by an elected Executive that can be held responsible for its judgments and actions, rather than by unelected judges…. Auer deference is hardly an abdication of the judicial role. Reviewing courts decide whether an agency regulation at issue is ambiguous; whether the agency’s interpretation is within the scope of interpretive choices that ambiguity affords; whether the interpretation is arbitrary or unreasonable; whether there is reason to suspect that the agency’s interpretation does not reflect its fair and considered judgment; whether the interpretation creates a risk of unfair surprise because it conflicts with a prior interpretation of the agency or appears to be nothing more than a convenient litigating position; whether the agency has explained its reasoning; and whether its reasoning is arbitrary and capricious.”

Interestingly, the amicus brief submitted by Public Citizen, while largely supportive of Auer, also took issue with its application in some circumstances:

“These principles [procedural constraints on agency action] are as applicable to agency regulatory interpretations as to other agency pronouncements. A regulatory interpretation that is not the result of a lawful exercise of authority delegated by Congress to resolve issues through a particular type of agency action should not qualify for review under the deferential standard of the APA. This court thus has likely extended Seminole Rock/Auer deference too far in applying it to statements of an agency’s position by staff or lawyers, including statements in legal briefs.”

At least two of the amici, the group of Professors (referred to above) and Public Citizen, both of which indicated support of neither party in the case, aimed their briefs at distinguishing Chevron from Auer, implicitly suggesting perhaps that they believe Auer could well be overturned and are apprehensive that Chevron would be the next target on the hit list. In its amicus brief, Public Citizen’s first entreaty to the Court was, whatever its decision about overruling Auer and/or Seminole Rock, not to

“call into question Chevron’s deference to the lawful exercise of agency authority to fill gaps in regulatory schemes created by statute. Properly understood and applied, Chevron is fully consistent with the requirement that courts interpret statutes; Chevron commands deference only when a court has determined that what a statute means is that an agency has discretion to resolve a particular matter through regulations or other actions with the force of law. And where Chevron is triggered, its deferential standard implements—indeed, is commanded by—the APA’s standard of review for discretionary agency action…. Chevron is not at issue in this case. Because, however, the Court’s discussion of the arguments about Auer/Seminole Rock may have implications for Chevron, the Court should be clear in avoiding characterizations of the doctrines that suggest that Chevron may be illegitimate.”

Similarly, the Professors’ amicus brief does not

“address whether Auer should be overruled. Rather, Amici respectfully submit that, in considering the continuing viability of Auer, the Court should not lose sight of the fact that Auer and Seminole Rock rest on very different conceptual and legal foundations than does Chevron…. Reconsidering Auer is not, and should not be, a ‘first step’ to reconsidering Chevron. The two doctrines are fundamentally distinct, and Chevron deference remains appropriate even if Auer deference to an agency’s interpretation of its own regulations is reconsidered…. Chevron is about Congress’s delegation of subsidiary policymaking authority, whereas Auer is about how best to interpret a legal instrument—the agency’s regulation. Auer therefore has nothing to say on the matter Chevron addresses.”