Chevron and Lenity (8/11/20)

Today, I discuss the related topics of Chevron deference and the rule of lenity.  Both topics deal with ambiguity in statutory text.  Chevron deference means that a court may apply some reasonable agency interpretation of statutory text even if the court is convinced that there is a better interpretation.  In other words, within the zone of ambiguity the interpretive tilt goes to the agency's interpretation.  In lenity, a criminal law concept, however, within the zone of ambiguity, the tilt goes to the defendant.

 I was drawn to this topic by a decision I read today, Gallardo v. Barr, 968 F.3d 1053 (9th Cir. 8/6/20), CA9 Slip Op. here; GS here.  The case involved the BIA’s interpretation of the term “aggravated felony” (and its subset, “obstruction of justice”) was subject to the rule of lenity.  The panel took the traditional view that the rule of lenity was not consistent with Chevron deference.  As thus formulated, the lenity issue would be a so-called Chevron Step Zero question (does the Chevron framework apply at all?) that could pre-empt the Chevron framework at the outset.  The panel sidestepped the question by applying the Chevron framework because a prior panel in an earlier appeal in the case had applied the Chevron framework.  (See Slip Op. 11-17.)  The Court offered this general discussion in a footnote (Slip Op. 14 n. 3, here)

   n3 Statutory ambiguity is a trigger for applying both the rule of lenity and Chevron deference. However, we apply the rule of lenity when a criminal statute is ambiguous so that "legislatures, not courts" define the scope of the statute. Crandon v. United States, 494 U.S. 152, 158 (1990). By contrast, we apply Chevron deference in construing ambiguity in other statutes because the lack of textual clarity is a signal that Congress expected an "agency to be able to speak with the force of law when it addresses [the textual] ambiguity." United States v. Mead Corp., 533 U.S. 218, 229 (2001). In other words, because lenity is a rule we apply to ensure that the legislature has the final say, and Chevron is a rule we apply to permit agencies to fill in the details of a statute, we do not typically apply both principles at the same time. See Whitman, 135 S. Ct. at 354 (Scalia, J., respecting the denial of certiorari) ("[O]nly the legislature may define crimes and fix punishments. Congress cannot, through ambiguity, effectively leave that function . . . to the administrative bureaucracy." (emphasis omitted)); see also Transcript of Oral Argument at 12, Esquivel-Quintana v. Lynch, 137 S. Ct. 1562 (2017) (Chief Justice Roberts stating that the rule of lenity and Chevron cannot "coexist" because, at least in that case, "[t]hey each point in the opposite direction based on the same predicate, which is a degree of ambiguity in the statutory provision"); William N. Eskridge, Jr. & Lauren E. Baer, The Continuum of Deference: Supreme Court Treatment of Agency Statutory Interpretations From Chevron to Hamdan, 96 Geo. L.J. 1083, 1115 (2008) (regarding "anti-deference" in the context of a criminal statute). However, some have discussed ways that the two rules may be harmonized. See Note, William T. Gillis, An Unstable Equilibrium: Evaluating the "Third Way" Between Chevron Deference and the Rule of Lenity, 12 N.Y.U. J.L. & Liberty 352 (2019).

 I offer the following (text only) (Those wanting the footnotes can get them with the text in pdf format here).

            Chevron, the Rule of Lenity and Criminal and Civil Penalties
            John A. Townsend
            (Substantially Drawn from Earlier Article with Major Revisions)
            August 11, 2020

             “The rule of lenity requires ambiguous criminal laws to be interpreted in favor of the defendants subjected to them.”  This sounds like a Chevron Step One inquiry for criminal laws, albeit through another interpretive technique.  Lenity requires that the ambiguous statute be interpreted in the defendant’s favor (against the Government); Chevron, if applicable, would require that the ambiguous criminal statute must be interpreted as the agency (the Government) reasonably interprets it in regulations.  I think that everyone would agree that the agency cannot interpret an ambiguous criminal statute in a way adverse to a criminal defendant without regard to reasonableness.  In that context, lenity trumps Chevron. 

             For example, in the tax area, the IRS could not by a regulation interpret the willfulness element of tax crimes differently from the definition approved by the Supreme Court – intent to violate a known legal duty. Thus, it appears that, in tax crimes requiring willfulness or some equivalent of willfulness, the rule of lenity, if it applied, and the willfulness element as interpreted by the Supreme Court fully or substantially overlap to assure that a defendant cannot be convicted even if the criminal statute were otherwise ambiguous.

            Consider the following example, like a thought experiment, dealing with Foreign Bank Account Reports (“FBARS”) which U.S. persons are required to file if they have foreign bank accounts with an aggregate combined amount exceeding $10,000 in a year.  There are civil and criminal penalties for “willfully” failing to file stated in two different statutory sections, with the text of both sections have the same provenance. Imagine, though, that both penalties were stated in one statute that read as follows: “A person willfully violating the reporting requirement shall be subject to either or both of (i) imprisonment for not more than five years or (ii) a civil penalty of the lesser of $100,000 or 50 % of amount in the account at the time of violation.”  The Supreme Court has said that: (i) “The word ‘willfully’ is sometimes said to be “a word of many meanings” whose construction is often dependent on the context in which it appears;” and (ii) as used in the Bank Secrecy Act criminal provisions (of which the FBAR criminal provisions are a part) requires intentional violation of a known legal duty, i.e., with knowledge that his conduct was unlawful.  If the civil and criminal FBAR willful violation liabilities were, as assumed, stated in the same statute, could “willfully” be interpreted differently for purposes of the civil penalty than the criminal penalty and, if so, could the agency interpret “willfully” different for the civil penalty in a Chevron-entitled regulation?  I think most courts would say no, but surprisingly courts apply a less stringent definition of willfulness for willfulness in the FBAR civil willful statute than for willfulness in the companion criminal statute cut from the same cloth as the criminal provision.  More to the point, Treasury has not defined willfulness in the FBAR civil willful penalty in a Chevron-entitled interpretation, but could the Treasury adopt one of the even more lenient interpretations of willfulness such as willful blindness or recklessness (thus making it easier for the Government to apply the civil willful penalty) and have that interpretation prevail for the civil penalty?

            The finer question is whether an agency could, by regulation interpret a substantive provision with civil consequences that might then cause a violation of a criminal statute.  Focusing on tax crimes with a willfulness element, if the substantive law is not clear (i.e., ambiguous), the taxpayer cannot have intended to violate that law and thus cannot be guilty of a crime requiring willfulness–intent to violate a known and knowable legal duty.  For that reason, the Government only prosecutes where the substantive legal duty allegedly violated is clear (unambiguous).  Here too, the rule of lenity and the criminal tax willfulness element of intent to violate a known and knowable legal duty overlap and assure ambiguous substantive tax provisions are not the basis for criminal prosecution.

            The question then is whether facially ambiguous statutory text setting the civil tax standard can be made unambiguous by an agency regulation entitled to Chevron deference and thus form the basis for a criminal tax prosecution which requires intent to violate a known and knowable legal duty.  For example, the IRS can adopt a regulation interpreting a substantive tax provision, such as § 162 for trade or business expenses, and that interpretation will be entitled to Chevron deference within the Chevron space.  If the regulations’ interpretation resolving the statutory ambiguity is entitled to Chevron deference, does that interpretation then set the legal duty that could give rise to a tax willfulness crime if the taxpayer intentionally violates the law as thus interpreted?  I think the answer to that question is yes but doubt that the interpretive choice even if applicable retroactively for civil tax purposes would be retroactive for criminal tax purposes.  There are many permutations of this issue that I have just not thought through yet, but this should give a sense of the issues involved.

            Consider also civil penalties (such as, in the tax arena, the 20% or 40% accuracy-related penalties in § 6662 and 75% civil fraud penalty in § 6663).  The traditional formulation of the rule of lenity would apply only in criminal law contexts.  There is an analog for civil penalties which the Supreme Court said in a civil tax penalty case:  “The law is settled that ‘penal statutes are to be construed strictly,’ and that one ‘is not to be subjected to a penalty unless the words of the statute plainly impose it’.”

            Does that mean that there is no Chevron space if the Code’s civil penalty provisions have some ambiguity?  The IRS could and does interpret the civil penalty statutory text.  For example, the negligence penalty applies to “Negligence or disregard of rules or regulations.”  The statute mandates that “disregard of rules or regulations” includes “careless, reckless or intentional disregard of rules or regulations.”  Is there Chevron Step One ambiguity in the quoted terms – careless, reckless, intentional disregard, of rules or regulations?  The Regulations provide finer definitions–interpretive choices in Chevron lingo–of those concepts.  And Courts routinely apply the definitions for the application of the penalty.  Accordingly, there seems to be Chevron space in civil tax penalties even in the face of the mandate that civil tax penalties be strictly construed.

             Perhaps more importantly, the statutory command that disregard of “rules or regulations” will attract the civil penalty is clear congressional intention that there is Chevron space for the IRS to adopt rules or regulations not necessarily mandated by the text of the substantive statute (otherwise Congress would have imposed the penalty for violation of that text instead of the rules or regulations). 

            This illustrates that (i) there is Chevron space in the civil penalty provision itself and (ii) there is Chevron space in the substantive law provision, neither of which are affected by the rule of lenity.  But, if either the civil penalty provision or the substantive law to which it points is ambiguous and the ambiguity has not been clarified by regulations (or by prior court cases), the courts will be free to apply interpretive techniques free of the Chevron deference framework to the task of deciding whether the taxpayer is properly subject to the civil penalty.