Thursday, August 8, 2019

District Court Invalidates Interpretive Regulation at Chevron Step One (8/8/19; 3/11/19)

In Mayo Clinic v. United States (D. Minn. No. 16-cv-03113 Opinion and Order dated 8/6/19), here, the Court invalidated an IRS "interpretive" regulation which interprets the statutory text "educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on."

As an interpretation of the statutory text (an interpretive regulation), the Court applied the Chevron framework.  As I understand the Court's reasoning, it stopped at Chevron Step One, finding that, based upon statutory interpretation in the statutory text in question, the regulations interpretation was not within the scope of ambiguity in the statutory text.

The Court stopped the Chevron inquiry at Step one because Congress "intended not to include' the regulations tests--"primary-function" and "merely-incidental"--in the scope of the statutory text. (Slip Op. 2.)   On that interpretation, the statutory text was not "silent or ambiguous."

Basically, as I understand the reasoning, the Court discerned some intent of Congress (certainly not a stated intent) because it inferred that Congress knew how to articulate in the statute a test such as the regulations' tests and did not do so.  Therefore, the Court reasoned, Congress must have intended that the tests not apply.  Of course, the Court has discussion of other statutes, some related, where Congress in the statutory text specifically articulated some such tests.  The Court found those persuasive that, if Congress meant that Treasury was to have interpretive authority of that nature, Congress would have put it in the statutory text or at least put some ambiguity in the statutory.  Its absence in the statutory text means that the tests were not intended by Congress to be within the scope of ambiguity of the statutory text and therefore the interpretation fails at Chevron Step One.  The Court never reaches Chevron Step Two to determine whether the interpretation was reasonable.  (I guess one could say that an interpretation is not reasonable if it is not within the scope of the ambiguity in the statutory text.)

I don't think the Court's reasoning is compelling.  The conclusion may be right.  I just don't think the reasoning articulated by the Court compels the conclusion that the statutory text does not offer sufficient ambiguity to permit the interpretation adopted by the IRS.

I suspect that there will be an appeal to the Eighth Circuit Court of Appeals.  I won't try to predict an outcome there.
One of my pet issues that presents itself at the periphery in the case is the distinction between legislative and interpretive regulations.  Scholars of some prominence claim that, under the law of the APA as recently interpreted, there is no such thing as interpretive regulations.  The Mayo Clinic Court specifically stated that it was dealing with an "interpretive regulation."  (Slip Op. 7; cf. Slip Op. 9 quoting National Muffler).  I have written on this and refer readers to my recent SSRN article:  Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (June 6, 2019). Available at SSRN: https://ssrn.com/abstract=3400489.

One comment, perhaps irrelevant: The judge, Eric C. Tostrud (see Wikipedia here), is a Trump appointee.  My understanding is that many, perhaps most, Trump appointees were vetted (directly or indirectly through the Federalist Society surrogate) to some extent on the basis of their dislike of Chevron.  See e.g., Jeremy W. Peters, Trump’s New Judicial Litmus Test: Shrinking the Administrative State (New York Times 3/26/18), here; and Christopher J. Walker, The Federalist Society’s Chevron Deference Dilemma (Law & Liberty 4/3/18), here.  Judge Tostrud could not do anything about Chevron.  But, as I note in my article, judges unhappy with Chevron as the paradigm of evil in the evil administrative state, can constrain Chevron at Step One by pronouncing that his or her preferred interpretation is the only reasonable interpretation of the statutory text, thus foreclosing ambiguity at Step One.  I have no idea whether Judge Tostrud dislikes Chevron or any such influence contributed to the outcome in Mayo Clinic.  I simply raise the possibility.

For students of Chevron, the more important point is that statutory interpretation at Step One can do a lot to take away the perceived evils or benefits of the Chevron Framework by constricting the middle of the Chevron Framework.  The middle is where the reasonable agency interpretation controls even if the judge believes that there is a more reasonable interpretation.  At Step One, the judge just has to conclude that his interpretation is the only reasonable interpretation (i.e., at least the statute is not ambiguous within the scope of his interpretation).  By being less willing to find ambiguity in the statutory text in Step One, the middle is constricted.  But, if the interpretive issue gets to Step Two, by being more willing to find that the agency interpretation is unreasonable, the middle is constricted at Step Two. Again, if the judge gets to Step Two, he just has to conclude that his preferred interpretation is the only reasonable interpretation (or that the agency interpretation is unreasonable).  (As I have articulated it, this seems like the same inquiry; indeed, I suspect that most judges interpreting a statute will conclude that his interpretation is reasonable and then it is a very short step to conclude that the agency contrary interpretation is are not reasonable at Chevron Steps One and Two.)  So, in theory opponents of Chevron might achieve much of what they want through aggressive interpretations but that would leave the Framework available to lessen the constrictions later when judges less suspicious of the administrative state ascend in the judiciary (as will happen, but it will take a long time).
Added 8/11/18 2:00pm:  I just finished reading Cass R. Sunstein, Chevron as Law, 107 Geo. L.J. 1613 (2019), here (I actually had read it earlier in draft).  Professor Sunstein discussing this constricting process in the section titled Domesticating Chevron, see particularly pp. 1672-1674, here.
An analogous constricting process for the middle recently occurred for so-called Auer deference in Kisor v. Willkie, ___ U.S. ___, 139 S.Ct. 2400 (2019), here.  See my prior blog, Supreme Court Yet Again Weighs In At the Edges on Legislative and Interpretive Rules (Federal Tax Procedure Blog 6/26/19; 7/2/19), hereAuer deference is the deference given to agency subregulatory interpretation of ambiguous regulations.  (Sort of like Chevron except substituting (i) the regulations text for ambiguous statutory text and (ii) the subregulatory guidance for regulations interpretations.

Isn't this fun?

I will post later at the end of this blog entry other comments on Mayo Clinic as I become aware of them and think that readers might be interested.

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