Distinction Between APA Arbitrary and Capricious Review and Chevron Interpretive Reasonableness Review (6/19/20; 7/24/20)

In DHS v. Regents of the University of California, ___ U.S. ___, 140 S.Ct. 1891 (6/18/20), Sup. Ct. here and GS here, the Court held that the DHS rescission of DACA was procedurally defective (arbitrary and capricious) for failure to satisfy the reasoned decisionmaking requirement of the APA, as interpreted.  (Also often referred to as the State Farm standard.)  DHS v. Regents has created quite a stir in the national political discussion (most of the stir being rhetoric).

I have not dealt much with the State Farm standard on this blog.  But,  I have noted, for example, that failure to satisfy the arbitrary and capricious/ State Farm standard is Altera’s principal argument on petition for certiorari in Altera Corp. v. Commissioner, 145 T.C. 91 (2015), rev’d 926 F.3d 1061 (9th Cir. 2019), reh. en banc den. 941 F.3d 1200 (9th Cir. 2019), petition for cert. pending, No. 19-1009 (filed 2/10/20).  See Altera Reply Brief on Petition for Certiorari (Federal Tax Procedure Blog 6/7/20; 6/11/20), here.

I won’t get further into either DHS v. Regents or Altera today (except as an aside at the end), but I did pick up a new case, that  makes a nice (and correct) distinction between Chevron review for interpretive regulations and arbitrary and capricious review applicable to both legislative and interpretive regulations.  The case is:  Natural Resources Defense Council, Inc. v. U.S. EPA, 961 F. 3d 160 (2d Cir. 2020), GS here.  The relevant excerpt is (pp. 169-171) (cleaned up). I bold face parts that I think require particular attention):

II. Legal Standard 

            "We evaluate challenges to an agency's interpretation of a statute that it administers within the two-step Chevron deference framework." Catskill Mountains Chapter of Trout Unlimited, Inc. v. EPA, 846 F.3d 492, 507 (2d Cir. 2017).  At Chevron Step One, we ask "whether Congress has directly spoken to the precise question at issue." If Congress's directive is unambiguous, both the agency and the courts are bound by that mandate. If, instead, "the statute if silent or ambiguous with respect to the specific issue," the analysis proceeds to Chevron Step Two. At that step, "the question for the court is whether the agency's answer is based on a permissible construction of the statute."  

            In evaluating reasonableness at Chevron Step Two, "we will accord deference to the agency's interpretation of the statute so long as it is supported by a reasoned explanation, and `so long as the construction is a reasonable policy choice for the agency to make.'" Catskill Mountains, 846 F.3d at 507. Because "a statute's ambiguity constitutes an implicit delegation from Congress to the agency to fill in the statutory gaps," the agency's interpretation must only be reasonable, and need not be the sole permissible or even most reasonable interpretation of the statute.

            When a petitioner challenges the procedure by which an agency engaged in rulemaking, rather than the substance of the rule, we assess whether the agency's "action, findings, and conclusions" are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," pursuant to the Administrative Procedure Act. 5 U.S.C. § 706(2), (2)(A). Challenges to agency procedure are evaluated under the standard set out in Motor Vehicle Manufacturers Association of the United States, Inc. v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29, 43 (1983). Under that standard, we defer to an agency's determinations so long as the agency "give[s] adequate reasons for its decisions," in the form of a "`satisfactory explanation for its action including a rational connection between the facts found and the choice made.'" Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2125 (2016) (quoting State Farm, 463 U.S. at 43). 

            "State Farm and Chevron provide for related but distinct standards for reviewing rules promulgated by administrative agencies." Catskill Mountains, 846 F.3d at 521. "Much confusion" stems from the fact that "both standards purport to provide a method by which to evaluate whether an agency action is `arbitrary' or `capricious,' and . . . often, though not always, take the same factors into consideration." Id. at 522. The Supreme Court and this Court have clarified that the reasonableness of "[a]n agency's initial interpretation of a statutory provision should be evaluated only under the Chevron framework," which looks to whether the interpretation is substantively reasonable. By contrast, "State Farm is used to evaluate whether a rule is procedurally defective as a result of flaws in the agency's decisionmaking process" and applies, inter alia, "when an agency changes its interpretation of a particular statutory provision." Catskill Mountains, 846 F.3d at 521, 523. 

            The Mercury Reporting Rule is EPA's initial interpretation of § 8(b)(10) of the TSCA, as amended by Congress in 2016. See 15 U.S.C. § 2607(b)(10). Petitioners assert that the exemptions for importers and manufacturers of assembled products contained in 40 C.F.R. § 713.7(b)(2) and (b)(3) contravene the TSCA and thus exceed EPA's rulemaking authority. These are substantive challenges to EPA's initial act of statutory interpretation through rulemaking. Accordingly, we review the reasonableness of § 713.7(b)(2) and (b)(3) under Chevron. Petitioners challenge the partial exemption for high-volume manufacturers contained in 40 C.F.R. § 713.9(a) both as an unreasonable interpretation of the TSCA and as the product of flawed rulemaking procedures. Accordingly, we evaluate their substantive [interpretive] challenge to § 713.9(a) under Chevron and their procedural challenge to that provision under State Farm.

This excerpt draws substantially on the Second Circuit’s prior opinion in Catskill Mountains Chapter of Trout Unlimited, Inc. v. EPA, 846 F.3d 492 (2d Cir. 2017), cert. denied sub nom New York v. EPA, 583 U.S. ___, 138 S.Ct. 1164 (2018), which made the same points.

I think the excerpt is particularly helpful for those considering challenges to interpretive regulations under the State Farm arbitrary and capricious standard and Chevron.  Although some read—really misread—the Supreme Court’s footnote dalliance in Judulang v. Holder, 565 U.S. 42, 53 n.7 (2011), here, as indicating that the two tests are the same, in fact they are not as the Second Circuit clearly holds.  For more detail on that, see John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration 94-97 (SSRN last revised 1/25/20), here.  (The treatment of the two steps as the same is related to the erroneous claim that regulations, particularly tax regulations, that simply interpret ambiguous statutory text within the Chevron zone of ambiguity, are legislative regulations rather than interpretive regulations, which, if true, would mean that they are subject only to arbitrary and capricious / State Farm review.)

An Aside on Altera:  The Altera petition for cert (with related documents) was distributed to the Supreme Court for the conference yesterday, June 18, 2002.  See SCOTUSBlog docket here.  Presumably, unless the Court relists the Altera petition for a later conference, we will know something when the results are listed on Monday, June 22.  If the Court does grant the petition in Altera, the Court will have another opportunity to thrash around on APA issues, but that won't be until the next term after briefing and oral argument.  As I noted in the posting linked above, however, I just don't see a reason for the Court to take cert.  But, then, does the Court really need a reason, so long as 4 Justices vote to take certiorari for whatever reason(s) they individually or collectively imagine?

Added 6/21/20 12:00pm:  I add this comment I made on a post Susan C. Morse and Stephen E. Shay (Guest Bloggers), In Altera Reply Brief, Taxpayer Doubles Down on Flawed Argument That the Government Changed Its Tune (Procedurally Taxing Blog 6/11/20), here.  The Comment dated 6/15/20 is:

I don’t know enough about Supreme Court procedure, so I will just ask the question that comes to my mind. 

On June 1, Altera filed its Reply brief. On June 2, the case was distributed for conference on June 18. As I understand the procedure (from a SCOTUSBlog posting titled Supreme Court procedure):  

 Once all of the cert stage briefs — the cert petition, the BIO [Brief in Opposition] (if any), the reply brief (if any) and the amicus briefs (if any) — are filed, they are distributed to the justices’ chambers. Seven of the current justices participate in the cert pool, which is a labor-saving device in which a cert petition is first reviewed by one law clerk in one of the seven chambers. That clerk prepares a memorandum about the case that includes an initial recommendation as to whether the court should review the case; the memorandum is circulated to all seven chambers, where it is reviewed by the clerks and possibly the justices there. Justices Samuel Alito and Neil Gorsuch do not participate in the cert pool. Instead, their law clerks review the incoming cert petitions on their own and make recommendations directly to their respective justices. 

 Based on these reviews, the justices decide to add Lyon v. Animal House Zoo to the discuss list, a short list of cases they plan to talk about at their next private meeting, or conference. (If no justice had asked to add Lyon to the discuss list, it would have been put on the “dead list,” and certiorari would automatically have been denied without the justices having ever discussed the case or voted on it.) At least four justices vote to grant review in Lyon, and the court announces this decision as part of an order list, which will generally be released on the Monday morning after the conference. 

JAT Comment: So, because it is on the conference list, presumably there is some interest. But what intrigues me is that there was only one day before the case was put on the conference list for just 16 days off, which I would not think would have allowed time for the cert pool or review process noted above. Perhaps no inference can be drawn from that. Or perhaps, that quick processing would permit an inference that there is already some interest in granting certiorari.

 Any thoughts?

A Further Aside on Textualism:  In DHS v. Regents of the University of California, the battle between the authors of the majority and dissenting opinions was over the textualist strategy of statutory interpretation.  (That strategy is closely aligned with original or ordinary public meaning, playing prominently in the opinions.)  Textualism is an interpretive strategy closely aligned with conservative judges, inspired by the late Justice Scalia, but in some respects, as Justice Kagan famously proclaimed in 2015, “We’re all textualists now.”  What exactly does being a textualist mean.  Probably not much, as we can see from the competing opinions in where supposed hard core textualists (Gorsuch, Thomas and Kavanaugh) reached different results.  I think that the imagination that textualism would constrict judges in interpreting the law may in fact offer judges great leeway in reaching results consistent with their policy preferences, which may vary from judge to judge.  Of course, nobody would think that Justice Gorsuch’s  policy preferences would be the same as the liberal wing Justices joining his majority opinion, but policy preferences under the rubric of textualism may be what got that liberal wing to sign onto Gorsuch’s opinion.  And, of course, policy preferences for the conservative judges dissenting certainly made them comfortable with their application of textualism.  See Buchanan, Neil H. and Dorf, Michael C., A Tale of Two Formalisms: How Law and Economics Mirrors Originalism and Textualism (2020). 106 Cornell Law Review, Forthcoming; Cornell Legal Studies Research Paper No. 20-20. Available at SSRN: https://ssrn.com/abstract=3553508.

Addendum on 6/24/20 7:00 pm:

Today, the Tax Court (Judge Kerrigan) issued two virtually identical opinions conflating the distinction between arbitrary and capricious review and Chevron review.  Lumpkin HC, LLC v. Commissioner, T.C. Memo. 2020-95, here; Lumpkin One Five Six, LLC v. Commissioner, T.C. Memo. 2020-94, here.  I will just quote from one of the opinions (same in both opinions) and urge the readers to spot either Judge Kerrigan's error or my error:

 Petitioner contends that respondent’s interpretation of the proceeds regulation is incorrect. We have decided that respondent’s interpretation is correct and that the deed does not comply with the regulation. Petitioner further contends [*11] that if respondent’s interpretation is correct, then the proceeds regulation is arbitrary and capricious and is therefore invalid. 

 When considering whether a regulation is arbitrary and capricious, we generally employ the two-part inquiry established by Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). The first part is to inquire “whether Congress has directly spoken to the precise question at issue.” Id. at 842. If the intent of Congress is clear, there is no further inquiry. Id. Pursuant to section 170(h)(5)(A) the conservation purpose must be “protected in perpetuity.” However, Congress did not address specifically the allocation of extinguishment proceeds. See Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. at ___ (slip op. at 26).  

 We now consider whether the proceeds regulation “is based on a permissible construction of the statute.” See Chevron, 467 U.S. at 843. Since the statute is silent, we must give deference to the interpretation embodied in the agency’s regulation unless it is “arbitrary, capricious, or manifestly contrary to the statute.” Id. at 844; see United States v. Mead Corp., 533 U.S. 218, 227 (2001). We will uphold the regulation if it represents a “reasonable interpretation” of the law Congress enacted. See Chevron, 467 U.S. at 844; see also SIH Partners LLLP v. Commissioner, 150 T.C. 28, 50 (2018), aff’d, 923 F.3d 296 (3d Cir. 2019).

Readers wanting more on this might also consider my earlier blog discussing similar confusion in a T.C. opinion.  Tax Court Sustains Key Conservation Easement Regulation But Wobbles on Legislative/Interpretive Regulation Issue (Federal Tax Procedure Blog 5/14/20; 5/26/20), here.

Added 7/24/20 8:34am:

Further on the point that Chevron and 706/State Farm "arbitrary and capricious review are not the same regardless of some misreadings of the Supreme Court's footnote in Judulang, in Grace v. Barr, 965 F. 3d 883 (D.C. Cir. 7/17/20), GS here, the Court said (pp. 896-897) cleaned up and emphasis supplied):

As both sides acknowledge, it is well settled that principles of Chevron deference are applicable to the Attorney General's interpretation of the INA. Accordingly, to the extent the challenged policies represent the Attorney General's interpretations of that statute, "we ask whether Congress has directly spoken to the precise question at issue." Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842 (1984). If the intent of Congress is clear, that is the end of the matter; for we, as well as the Attorney General, must give effect to the unambiguously expressed intent of Congress. 

For those policies that are "not . . . interpretation[s] of any statutory language," however, "the more apt analytic framework . . . is standard `arbitrary [or] capricious' review under the APA." Judulang v. Holder, 565 U.S. 42, 52 n.7 (2011) (alterations in original). Under this narrow standard of review, a court is not to substitute its judgment for that of the agency, but instead to assess only whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment. "That task involves examining the reasons for agency decisions—or, as the case may be, the absence of such reasons." Judulang, 565 U.S. at 53.

The key point, in my mind, is that the Chevron review is not the same as 706/State Farm arbitrary and capricious review for procedural regularity.