Legislative Adjudicatory "Rulemaking?" (3/14/20; 3/16/20)

I write today on a wrinkle that I recently discovered relating to an argument that I made in an article, The Report of the Death of the Interpretive Regulation Is an Exaggeration (last revised 1/25/20), posted on SSRN, here.  In that article, I stated (p. 104) that

The APA confers no legislative rulemaking authority on agency adjudicatory bodies, whether courts or the BIA or any other agency tribunal. Under the APA, the exercise of delegated legislative authority requires the regulations process of Notice in the Federal Register, receipt and consideration of Comments from the affected or interested public, publication in final in the Federal Register with a reasoned explanation of the comments and the decisions made, and an effective date 30 days after publication in final. BIA opinions are not subject to Notice and Comment, are not published in the Federal Register, and are not prospective only (e.g., at a minimum, they can apply the interpretations in the case); this suggests that BIA opinions are interpretive rather than legislative in character at least for APA purposes.

I made that statement in the context of critiquing then Judge Gorsuch’s opinions (panel and concurring) in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142 (10th Cir. 2016), here.  Judge Gorsuch treated the Board of Immigration Appeals decision as legislative adjudicatory rulemaking.  Perhaps adjudicatory rulemaking is an oxymoron but hang with me for now.

My statement was not nuanced.  I learned that from recently reading the following draft article:  Kristin E. Hickman and Aaron Nielson, Narrowing Chevron’s Domain (February 28, 2020). 70 Duke Law Journal (2021, Forthcoming) (SSRN here) which focused my attention on SEC v. Chenery Corp., 332 U.S. 194 (1947) (often referred to as Chenery II), here.  Professors Hickman and Nielson explain Chenery II as follows (pp. 13-14, here, footnotes omitted):

Agencies can deliberately create policy through either rulemaking or adjudication. This surprising reality was blessed by the Supreme Court in 1947, in a foundational case known as Chenery II. There, following the agency’s decision on remand from Chenery [I] (which held that nothing in the common law, which is all the agency had cited, prohibited the corporate [*14] transactions at issue), the Court allowed the Securities and Exchange Commission (“SEC”) to delineate what was and was not lawful for corporate reorganizations case-by-case through adjudication, rather than through rulemaking. The Court, over Justice Jackson’s dissent, explained that although rulemaking has important advantages and should be preferred, an agency may announce policy in a common-law fashion through adjudication. Thus, the Court explained that there is “a very definite place for the case-by-case evolution of statutory standards. And the choice between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency.” The upshot, the Court later explained, is that “adjudication [thus can] operate[] as an appropriate mechanism not only for factfinding, but also for the exercise of delegated lawmaking powers, including lawmaking by interpretation.” And because adjudication is retroactive (indeed, that is a key dividing line between rulemaking and adjudication), it follows that agencies can make policy through adjudication, and policies so developed are then applied against individual parties based on past conduct. The Court has often reiterated this principle.

There is a lot to unpack there.  The framework that I use is the APA distinction between legislative rulemaking which generally must be prospective and interpretive rulemaking which generally may be retroactive to the date of the enactment of the ambiguous statutory text.  In my article, I develop that distinction, using tax examples–(i) consolidated return regulations for legislative rulemaking and (ii) the away from home sleep or rest regulation approved in  United States v. Correll, 389 U.S. 299 (1967), here, for interpretive rulemaking.  If we overlay that framework (at least by analogy) to the adjudication context, I submit that legislative rulemaking (or its equivalent by adjudication) must be by notice and comment regulation under the APA and that adjudication, with retroactive effect, can only be by interpretation of the existing ambiguous statutory text.

I don’t think that is the thrust of Professors Hickman and Nielson’s draft article, but there may be some semantical issues involved.  The key quote from above is: “The upshot, the Court later explained, is that “adjudication [thus can] operate[] as an appropriate mechanism not only for factfinding, but also for the exercise of delegated lawmaking powers, including lawmaking by interpretation.”  (bold-face supplied by JAT.) The semantics, using the APA categories, is that interpretive regulations may, in some non-APA sense, be “lawmaking” if given Chevron deference.  But, as I argue at length in my article, that is not the sense that the APA uses in distinguishing between legislative and interpretive rulemaking, with prospectivity required for legislative rulemaking and retroactivity allowed for interpretive rulemaking.
Of course, interpreting statutes can involve making policy choices but merely making policy through interpretive choices is not lawmaking in the APA sense.  I will dig deeper into Chency II below, but first let me illustrate in a famous tax case.  In United States v. Boyle, 469 U.S. 241 (1985), § 6651(a)(1) imposed a penalty for late filing a return unless the late filing is “due to reasonable cause and not due to willful neglect.”  The focus was on “reasonable cause,” a very broadly worded standard.  The Court said: “We granted certiorari to resolve a conflict among the Circuits on whether a taxpayer's reliance on an attorney to prepare and file a tax return constitutes ‘reasonable cause’ under § 6651(a)(1) of the Internal Revenue Code, so as to defeat a statutory penalty incurred because of a late filing.”  The Court noted the conflicting holdings but held that “The time has come for a rule with as 'bright' a line as can be drawn consistent with the statute and implementing regulations.” Focusing on policy considerations to locate that line inside the ambiguous standard of "reasonable cause," the Court said (pp. 249-250, footnotes omitted)

Deadlines are inherently arbitrary; fixed dates, however, are often essential to accomplish necessary results. The Government has millions of taxpayers to monitor, and our system of self-assessment in the initial calculation of a tax simply cannot work on any basis other than one of strict filing standards. Any less rigid standard would risk encouraging a lax attitude toward filing dates. Prompt payment of taxes is imperative to the Government, which should not have to assume the burden of unnecessary ad hoc determinations. 

Congress has placed the burden of prompt filing on the executor, not on some agent or employee of the executor. The duty is fixed and clear; Congress intended to place upon the taxpayer on obligation to ascertain the statutory deadline and then to meet that deadline, except in a very narrow range of situations. Engaging an attorney to assist in the probate proceedings is plainly an exercise of the "ordinary business care and prudence" prescribed by the regulations, 26 CFR § 301.6651-1(c)(1) (1984), but that does not provide an answer to the question we face here. To say that it was "reasonable" for the executor to assume that the attorney would comply with the statute may resolve the matter as between them, but not with respect to the executor's obligations under the statute. Congress has charged the executor with an unambiguous, precisely defined duty to file the return within nine months; extensions are granted fairly routinely. That the attorney, as the executor's agent, was expected to attend to the matter does not relieve the principal of his duty to comply with the statute.

So, the Court from an ambiguous statutory standard discerned the bright line it drew, The Court did that by interpretation and, clearly, by making policy choices in the interpretation.  In Chevron jargon, the Court had ambiguous/uncertain statutory text and simply adopted an interpretation based on administration considerations.  The Court was interpreting, not making law (although, in a sense, once it interpreted, the interpretation was the law).  (A similar analysis can apply at the agency level for an agency drawing of a line from otherwise ambiguous statutory text in Correll.)

Now, let’s go to Chenery II (SEC v. Chenery Corp., 332 U.S. 194 (1947), here).  The SEC rejected a proposed utility reorganization plan that prohibited corporate insiders from profiting from the purchase of preferred shares which they had acquired during the period of the reorganization.  The SEC’s action was (pp. 204-209; I apologize for the length of the quote but the nuance is important):

The Commission concluded that it could not find that the reorganization plan, if amended as proposed, would be "fair and equitable to the persons affected thereby" within the meaning of § 11 (e) of the Act, under which the reorganization was taking place. Its view was that the amended plan would involve the issuance of securities on terms "detrimental to the public interest or the interest of investors" contrary to §§ 7 (d) (6) and 7 (e), and would result in an "unfair or inequitable distribution of voting power" among the Federal security holders within the meaning of § 7(e). It was led to this result "not by proof that the interveners [Federal's management] committed acts of conscious wrongdoing but by the character of the conflicting interests created by the interveners' program of stock purchases carried out while plans for reorganization were under consideration." 

The Commission noted that Federal's management controlled a large multi-state utility system and that its influence permeated down to the lowest tier of operating companies. The financial, operational and accounting policies of the parent and its subsidiaries were therefore under the management's strict control. The broad range of business judgments vested in Federal's management 205*205 multiplied opportunities for affecting the market price of Federal's outstanding securities and made the exercise of judgment on any matter a subject of greatest significance to investors. Added to these normal managerial powers, the Commission pointed out that a holding company management obtains special powers in the course of a voluntary reorganization under § 11 (e) of the Holding Company Act. The management represents the stockholders in such a reorganization, initiates the proceeding, draws up and files the plan, and can file amendments thereto at any time. These additional powers may introduce conflicts between the management's normal interests and its responsibilities to the various classes of stockholders which it represents in the reorganization. Moreover, because of its representative status, the management has special opportunities to obtain advance information of the attitude of the Commission. 

Drawing upon its experience, the Commission indicated that all these normal and special powers of the holding company management during the course of a § 11(e) reorganization placed in the management's command "a formidable battery of devices that would enable it, if it should choose to use them selfishly, to affect in material degree the ultimate allocation of new securities among the various existing classes, to influence the market for its own gain, and to manipulate or obstruct the reorganization required by the mandate of the statute." In that setting, the Commission felt that a management program of stock purchase would give rise to the temptation and the opportunity to shape the reorganization proceeding so as to encourage public selling on the market at low prices. No management could engage in such a program without raising serious questions as to whether its personal interests had not opposed its duties "to exercise disinterested judgment in matters pertaining to subsidiaries' accounting, budgetary and dividend policies, to present 206*206 publicly an unprejudiced financial picture of the enterprise, and to effectuate a fair and feasible plan expeditiously." 

The Commission further felt that its answer should be the same even where proof of intentional wrongdoing on the management's part is lacking. Assuming a conflict of interests, the Commission thought that the absence of actual misconduct is immaterial; injury to the public investors and to the corporation may result just as readily. "Questionable transactions may be explained away, and an abuse of investors and the administrative process may be perpetrated without evil intent, yet the injury will remain." Moreover, the Commission was of the view that the delays and the difficulties involved in probing the mental processes and personal integrity of corporate officials do not warrant any distinction on the basis of evil intent, the plain fact being "that an absence of unfairness or detriment in cases of this sort would be practically impossible to establish by proof." 

Turning to the facts in this case, the Commission noted the salient fact that the primary object of Federal's management in buying the preferred stock was admittedly to obtain the voting power that was accruing to that stock through the reorganization and to profit from the investment therein. That stock had been purchased in the market at prices that were depressed in relation to what the management anticipated would be, and what in fact was, the earning and asset value of its reorganization equivalent. The Commission admitted that the good faith and personal integrity of this management were not in question; but as to the management's justification of its motives, the Commission concluded that it was merely trying to "deny that they made selfish use of their powers during the period when their conflict of interest, vis-a-vis public investors, was in existence owing to their purchase program." Federal's management had 207*207 thus placed itself in a position where it was "peculiarly susceptible to temptation to conduct the reorganization for personal gain rather than the public good" and where its desire to make advantageous purchases of stock could have an important influence, even though subconsciously, upon many of the decisions to be made in the course of the reorganization. Accordingly, the Commission felt that all of its general considerations of the problem were applicable to this case. 

The scope of our review of an administrative order wherein a new principle is announced and applied is no different from that which pertains to ordinary administrative action. The wisdom of the principle adopted is none of our concern. See Board of Trade v. United States, 314 U.S. 534, 548. Our duty is at an end when it becomes evident that the Commission's action is based upon substantial evidence and is consistent with the authority granted by Congress. See National Broadcasting Co. v. United States, 319 U.S. 190, 224. 

We are unable to say in this case that the Commission erred in reaching the result it did. The facts being undisputed, we are free to disturb the Commission's conclusion only if it lacks any rational and statutory foundation. In that connection, the Commission has made a thorough examination of the problem, utilizing statutory standards and its own accumulated experience with reorganization matters. In essence, it has made what we indicated in our prior opinion would be an informed, expert judgment on the problem. It has taken into account "those more subtle factors in the marketing of utility company securities that gave rise to the very grave evils which the Public Utility Holding [Company] Act of 1935 was designed to correct" and has relied upon the fact that "Abuse of corporate position, influence, and access to information may raise questions so subtle that the law can deal with them effectively only by prohibitions 208*208 not concerned with the fairness of a particular transaction." 318 U.S. at 92. 

Such factors may properly be considered by the Commission in determining whether to approve a plan of reorganization of a utility holding company, or an amendment to such a plan. The "fair and equitable" rule of § 11 (e) and the standard of what is "detrimental to the public interest or the interest of investors or consumers" under § 7 (d) (6) and § 7 (e) were inserted by the framers of the Act in order that the Commission might have broad powers to protect the various interests at stake. 318 U.S. at 90-91. The application of those criteria, whether in the form of a particular order or a general regulation, necessarily requires the use of informed discretion by the Commission. The very breadth of the statutory language precludes a reversal of the Commission's judgment save where it has plainly abused its discretion in these matters. See United States v. Lowden, 308 U.S. 225; I.C.C. v. Railway Labor Assn., 315 U.S. 373. Such an abuse is not present in this case. 

The purchase by a holding company management of that company's securities during the course of a reorganization may well be thought to be so fraught with danger as to warrant a denial of the benefits and profits accruing to the management. The possibility that such a stock purchase program will result in detriment to the public investors is not a fanciful one. The influence that program may have upon the important decisions to be made by the management during reorganization is not inconsequential. Since the officers and directors occupy fiduciary positions during this period, their actions are to be held to a higher standard than that imposed upon the general investing public. There is thus a reasonable basis for a judgment that the benefits and profits accruing to the management from the stock purchases should be prohibited, regardless of the good faith involved. And 209*209 it is a judgment that can justifiably be reached in terms of fairness and equitableness, to the end that the interests of the public, the investors and the consumers might be protected. But it is a judgment based upon public policy, a judgment which Congress has indicated is of the type for the Commission to make. 

The Commission's conclusion here rests squarely in that area where administrative judgments are entitled to the greatest amount of weight by appellate courts. It is the product of administrative experience, appreciation of the complexities of the problem, realization of the statutory policies, and responsible treatment of the uncontested facts. It is the type of judgment which administrative agencies are best equipped to make and which justifies the use of the administrative process. See Republic Aviation Corp. v. Labor Board, 324 U.S. 793, 800. Whether we agree or disagree with the result reached, it is an allowable judgment which we cannot disturb.

The Court approved the SEC action in the same type action undertaken by the Court itself in Boyle.  In Boyle the Court adopted and applied retroactively in adjudication a prophylactic rule based on an ambiguous statutory standard and administrative policy considerations.  In Chenery II, the Court approved the SEC adoption in adjudication of a prophylactic rule based on the ambiguous statutory standards and administrative policy considerations.  If Boyle is not legislative adjudication (the Supreme Court has no power to legislate), then certainly the SEC adjudication in Chenery II is not legislative adjudication.  Rather, in both cases, the rulemaking by adjudication is making policy choices within the zone of the statutory ambiguity.  As interpretation, the interpretation can apply to conduct occurring before the adjudication, specifically in the case at hand.

Now, I do want address very briefly the Hickman-Nielson argument that one reasonable way to respond to current concerns about Chevron might be to adopt the rule that Chevron cannot apply in adjudications.  The argument (p. 59) is: “Especially now, when the entire Chevron framework is being debated, dropping deference for agency adjudications represents a sensible middle ground—preserving Chevron deference for notice-and-comment regulations—where Chevron is most defensible—while eliminating it in those contexts for which Chevron is undertheorized and also most dangerous.”

With due respect, I think that argument is not persuasive.  Keep in mind that we are talking about interpretations of a statute.  Chevron actually controls in a narrower sliver of cases.  If the statute is clear, the statute controls and retroactivity is permitted.  Similarly, if the statute is ambiguous, Chevron permits the agency interpretation to control only if (i) it is a reasonable interpretation within the zone of statutory ambiguity and (ii) the court thinks another interpretation is more reasonable.  As I say in the article, “ Adopting and applying one of the reasonable interpretations that was in the ambiguous statute text from its effective date is not unfair to regulated parties (taxpayers in the context here), because the regulated parties could have had no settled expectations upon which they relied.”  The footnote for that comment (footnote 222) is:

fn222 E.g., United States v. Home Concrete & Supply, LLC, 566 U.S. 478, 504 (2012) (Kennedy, J., dissenting, although there is no indication that the plurality or Justice Scalia in concurrence disagreed with this point; indeed, the argument was about whether the law was clear (Chevron Step One for the plurality) or, for Justice Scalia, whether the Treasury interpretation was unreasonable (depending upon how formulated can be either Chevron Step One or Two); the point is that, if the Treasury interpretation were reasonable and not foreclosed by prior Supreme Court precedent, then the governed parties (taxpayers) would have had no settled expectations that are violated by the interpretation). Thus, interpretations of a statute within the scope of the statute’s ambiguity do not upset settled expectations and can apply to the effective date of the statute.
   An extreme iteration of the settled expectation concept is: “Implicit in the doctrine that notice-and-comment procedures are not required for interpretations is a notion that affected parties are in some sense continuously on notice of any imaginable interpretation, and that it is their business (or their counsel’s) to anticipate and guard against all possibilities. This statement would seem to be in serious tension with the fair notice concerns embodied in recent case law on due process and abuses of discretion.” (Ronald M. Levin, Rulemaking and the Guidance Exemption, 79 Admin. Law Review, 263, 327-328 (2018) (cleaned up, but quoting Robert A. Anthony, Interpretive Rules, Policy Statements, Guidances, Manuals, and the Like—Should Federal Agencies Use Them to Bind the Public?, 41 Duke L.J. 1311 (1992). I think Justice Kennedy assumes that the agency interpretation must be a reasonable one–not just an imaginable interpretation–for ambiguous statutory text. As a reasonable interpretation among one or more other reasonable interpretations, taxpayers would be on fair notice, just as they are when courts choose reasonable interpretations that apply retroactively.

To be sure there are times when interpretations of statutes retroactively even within the zone of ambiguity are unfair.  Courts and agencies have sometimes dealt with that issue to take out the unfairness.  (And, indeed, the Judge Gorsuch in Gutierrez-Brizuela could have dealt with the troubling retroactive problem short of having to shoehorn the exercise into a legislative rulemaking characterization.)

Finally, I do recommend Justice Jackson's dissent in Chenery II.  He writes passionately about unfairness from the lack of notice to the inside preferred shareholders in that case because the rule had not been announced prior to their conduct.  That was true in Boyle and Correll and is true in all of the judicial or agency interpretations making reasonable choices within the zone of ambiguity.  If that alone made retroactivity objectionable, entire swaths of cases would be suspect.

Added 3/16/20:

One of the authors of the article that triggered this blog entry, Professor Aaron Nielson, has written on Chenery II as a target for Federalist Society hand-wringing about the administrative state.  Aaron L. Nielson, D.C. Circuit Review – Reviewed: “I vote for Chenery I, not Chenery II” (Notice & Comment 11/24/17), here.  The blog offering spends considerable space on Justice Jackson’s dissent which echoes themes near and dear to persons fearing the administrative state.  My impression is that that offering is a bit exaggerated, but felt readers wanting to pursue the issue might want to read it.

Also, I am currently considering the discussion of Chenery II and its permutations in a leading administrative law treatise, Kristin E. Hickman & Richard J. Pierce, Jr., Administrative Law Treatise § 4.7 (Walters Kluwer 6th ed. 2019).  After considering that source further, its claims and some of the authority cited to support its claims, I may discuss the claims either as an additional addendum to this blog or a separate blog entry.