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U.S. Supreme Court Report: Argument in Clean Air Act Case on the Obligation to Consider Regulatory Cost and Court Upholds Agency Use of Interpretive Rules

April 8, 2015

The U.S. Supreme Court’s 2014-15 term is now in full swing. In contrast to the past several years, the Court has only one high profile environmental issue on the docket—a Clean Air Act (“CAA”) case, on which the Court heard oral argument the last week in March. However, the Court recently decided a case concerning the Administrative Procedure Act (“APA”),[1] which may well affect the way federal environmental agencies administer their regulations. Both cases may influence the breadth of agencies’ discretion in imposing new or reinterpreted administrative burdens on the entities they regulate.

On March 9, 2015, the U.S. Supreme Court ruled that federal agencies may change an interpretation of their own regulations without resorting to formal notice and comment rulemaking procedures under the APA, if those procedures were not utilized in the initial interpretation. Perez v. Mortgage Bankers Association and Nickols v. Mortgage Bankers Association (collectively, “Perez”).[2] Perez involved an APA challenge to a so-called “interpretive rule” issued by the Department of Labor and Industries (“DOL”) without formal notice and comment. Interpretive rules are “issued by an agency to advise the public of the agency’s construction of the statutes and rules which it administers.”[3] The DOL interpretive rule at issue in Perez significantly revised the agency’s earlier interpretation of its own regulation, which was also issued in the form of an interpretive rule. In Perez, a unanimous Supreme Court reversed the D.C. Circuit, thereby rejecting that circuit’s precedent announced in Paralyzed Veterans of America v. D.C. Arena L.P. (“Paralyzed Veterans”).[4] Perez required formal notice and comment rulemaking where an agency has issued a “definitive interpretation” of its regulations, and later “significantly revises” that prior interpretation. The Supreme Court concluded that the so-called Paralyzed Veterans doctrine imposed obligations on federal agencies beyond the “maximum procedural requirements” specified in the APA that are “contrary to the clear text of the APA’s rulemaking provisions.”[5] The breadth of the Court’s decision will allow federal agencies (including environmental agencies) to change their previous interpretations of the rules they administer through interpretive rules, rather than formal notice and comment rulemaking under the APA.

On March 25th, the Court heard oral arguments in three related environmental cases involving a series of challenges by states and industry groups to the U.S. Environmental Protection Agency’s (“EPA”) rule limiting emissions of mercury and other toxic air pollutants from coal and oil-fired power plants under the CAA. See Util. Air Regulatory Grp. v. EPA; Michigan v. EPA; Nat’l Mining Ass’n v. EPA (collectively, “Utility Air Regulatory Group”).[6] Petitioners in Utility Air Regulatory Group argue that EPA should have considered the regulatory cost when determining whether the regulation was “appropriate and necessary.” They characterize EPA’s rule as one of the most costly and far reaching regulations ever issued under the CAA.

Perez v. Mortgage Bankers Association & Nickols v. Mortgage Bankers Association

The dispute in Perez centered on DOL’s interpretation of whether mortgage loan officers qualified for an administrative exemption to the overtime pay requirement under the Fair Labor Standards Act (“FLSA”).[7] In 2006, DOL issued an “opinion letter” concluding that a typical loan officer was exempt from overtime pay under the administrative exemption. In 2010, DOL reversed itself in an “Administrator’s Interpretation,” which concluded that the typical loan officer did not qualify for the administrative exemption to the FLSA’s overtime requirement and rescinded the 2006 opinion letter. Both interpretations were informal, i.e., issued without formal notice and comment. A trade association, the Mortgage Bankers Association (“MBA”), challenged the 2010 Administrator’s Interpretation in federal district court, arguing that DOL was required to conduct notice and comment rulemaking before revising its 2006 interpretation.

Section 4 of the APA requires agencies to: (1) provide notice of a proposed rule in the federal register; (2) give “interested persons” the opportunity to participate in the rulemaking process by submitting written comments on the proposed rule; and (3) consider those comments before promulgating the final rule.[8] This process is generally known as “notice and comment” rulemaking. However, not all agency pronouncements are subject to these formal requirements—Section 4 exempts “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice” from the notice and comment requirements.[9] Thus, the APA on its face does not require formal notice and comment rulemaking for so-called “interpretive” rules.

The D.C. Circuit had formulated a test for determining when an agency must conduct notice and comment rulemaking to revise prior interpretations of its regulations, even if the revision comes in the form of an interpretive rule. In Paralyzed Veterans,[10] the D.C. Circuit concluded that when an agency has given a regulation a “definitive interpretation” and later “significantly revises” that interpretation, it must use notice and comment rulemaking to do so. The Court focused on Section 1 of the APA, which defines “rule making” to include not only the issuance of new rules, but also the agency process for “amending” or “repealing” a rule.[11] Several other Circuit Courts of Appeals have followed the D.C. Circuit’s lead, while other Circuit Courts of Appeals have decided that changes in agency interpretations do not require notice and comment because both the original and current positions constitute interpretative rules.[12]

The district court in Perez dismissed the MBA’s challenge on summary judgment, agreeing with DOL that MBA had failed to demonstrate that it “substantial[ly] and justifiabl[y] reli[ed] on a [prior] well-established agency interpretation.”[13] The district court concluded that cases decided prior to Paralyzed Veterans’ imposed a third, independent requirement—that the plaintiff not only show that the agency had a “definitive interpretation” that was later “significantly revised,” but must also show the agency had “substantially and justifiably” relied on the earlier interpretation.[14]

On appeal, a three-judge panel in the D.C. Circuit reversed the district court. The panel concluded that substantial and justifiable reliance was not an independent third element in the Paralyzed Veterans analysis. The Court explained that only two elements need be met to require notice and comment rulemaking: an agency must give its regulation a “definitive interpretation” and later “significantly revise” that interpretation.[15] “Reliance,” according to the Court, was not an independent requirement, but merely a factor that could be assessed in relation to the first element: whether an agency interpretation qualifies as “definitive.”[16] The panel explained, while “reliance can elevate an otherwise non-definitive interpretation into a definitive interpretation,” the D.C. Circuit has never treated “reliance as a separate and independent third element” required to overturn an agency’s change in interpretation.[17] Since DOL conceded that the 2006 opinion letter was a definitive interpretation of its regulations that was significantly revised in the 2010 Administrator’s Interpretation, the D.C. Circuit vacated the 2010 Administrator’s Interpretation for DOL’s failure to conduct notice and comment rulemaking.

On March 9th, 2015, the Supreme Court reversed the D.C. Circuit, concluding that DOL may use an interpretive rule to change a pre-existing interpretation if the pre-existing interpretation was issued without formal notice and comment. In doing so, the Court rejected the Paralyzed Veterans doctrine, under which the D.C. Circuit had required notice and comment where an agency significantly revised an earlier definitive regulatory interpretation.

The Court ruled that APA Section 4 specifically exempts interpretive rules from notice and comment procedures. Although Section 1of the APA defines what rulemaking is, it does not “say what procedures an agency must use when it engages in rulemaking.”[18] Thus, if an agency does not use notice and comment rulemaking to issue an initial interpretive rule, the APA does not require formal notice and comment when the agency amends or repeals that interpretation. The Court stressed that the APA sets forth the “full extent of judicial authority” to review agency action and courts are not free to impose their own “notion of which procedures are ‘best’ or most likely to further some vague, undefined public good.”[19] In Paralyzed Veterans, the Court explained, the D.C. Circuit created “just such a judge-made procedural right.” While it might be “wise policy” to require an agency to provide notice and comment when changing a regulatory interpretation, the Court concluded that imposing such an obligation is “the responsibility of Congress or the administrative agencies themselves, not the courts.”[20]

The Court rejected MBA’s argument that when DOL significantly altered its interpretation of the administrative exemption regulation, notice and comment was required because the agency “effectively amended the regulation itself.”[21] Since an interpretive rule lacks the force and effect of law, the Court concluded that the agency could “interpret” the regulation without effectively amending the underlying source of law. The Court also found MBA’s amendment argument impossible to square with Paralyzed Veterans, since the doctrine only requires notice and comment when an agency changes a previous regulatory interpretation. If an agency “amended” a regulation by interpreting it, and notice and comment were required for all such amendments, the formal procedures would be required when the agency interpreted the regulation in the first instance—not just when the agency revised its prior interpretation.

The Court also rejected MBA’s policy justifications for notice and comment rulemaking. MBA argued that APA’s goal of “procedural fairness” should prevent agencies from unilaterally and unexpectedly altering their interpretation of important regulations. According to the Court, the APA contains a “variety of constraints” on an agency that issues an interpretive rule out of a desire to avoid the APA’s more onerous notice and comment procedures. These include the requirement that agency decision not be “arbitrary and capricious” and the requirement that an agency provide more “substantial justification” when “its new policy rests upon factual findings that contradict those which underlay its prior policy; or when its prior policy has engendered serious reliance interests that must be taken into account.”[22]

Utility Air Regulatory Group v. EPA

Utility Air Regulatory Group v. EPA involves industry and state challenges to EPA’s final standards for hazardous air pollutants emitted from “electric utility steam generating units” (i.e., power plants), which are referred to in regulatory parlance as EGUs. Industry and state petitioners argue that EPA failed to adequately take cost into consideration when it decided to regulate hazardous air pollutants from coal and oil-fired EGUs. The result according to petitioners was “one of the most far-reaching and costly rules—if not the most costly rule—ever imposed under the CAA.”[23] In support, petitioners argue that the regulatory costs imposed on EGUs by EPA’s regulation outweigh the environmental and health benefits by almost two thousand to one.

The 1990 amendments to the CAA[24] required EPA to identify hazardous (toxic) air pollutant sources by category, and to use information on the best performing sources in each category to determine the “maximum achievable control technology” (“MACT”) for new and existing sources in their category. Over the last twenty years, EPA has adopted more than 100 MACT standards.[25] However, EPA’s attempt to develop MACT standards for coal and oil-fired EGUs has been among the more controversial of these rules.[26]

Congress’ 1990 CAA amendments included special provisions concerning EPA’s regulation of emissions of hazardous air pollutants from EGUs. In § 7214(n)(1)(A), Congress directed EPA to conduct a study of the health effects associated with hazardous air pollutant emissions from EGUs and to regulate those emissions if it found that regulation was “appropriate and necessary” based on the results of the study.[27] In December 2000, the outgoing Clinton Administration placed coal and oil-fired EGUs on the Section 112 (hazardous air pollutant) source category list, based on a study of their mercury emissions.[28] The Bush Administration removed the EGU source category from the Section 112 list in 2005.[29] Following a successful court challenge to the removal of EGUs from the source category list,[30] EPA issued a final rule regulating hazardous air pollutants from coal and oil-fired EGUs in February 2012.[31] In the rule, EPA concluded that hazardous air pollutant regulations were necessary and appropriate for the EGU source category. EPA then promulgated MACT standards for EGUs. In doing so, the agency determined it was not required to consider the cost of implementing emissions standards on EGUs when determining whether regulation was “necessary and appropriate” under 42 U.S.C. § 7412(n)(1)(A). EPA did, however, consider the costs of regulation when setting MACT standards.

Several states and various industry groups challenged the regulation in the D.C. Circuit, but the Court upheld the regulation—agreeing with EPA that the agency was not required to consider cost when determining whether to regulate hazardous air pollutant emissions from EGUs.[32] Employing the familiar two-step Chevron test, relating to agency interpretation of statutes they oversee, the panel first determined whether Congress had directly spoken to the precise question at issue—in this instance, whether Congress directed EPA to consider costs in § 7412(n)(1)(A).[33] Since § 7412(n)(1)(A) neither “requires EPA to consider costs nor prohibits EPA from doing so,”[34] the panel proceeded to the second Chevron step, and concluded that EPA’s interpretation was permissible. The Court noted that since other provisions of § 7412 specifically direct the agency to consider regulatory cost, Congress could not “by using only the broad term ‘appropriate’ . . . have intended . . . that costs be considered.”[35] Judge Kavanaugh issued a scathing dissent, in which he concluded that taking the benefits and costs of the regulation into account when determining whether it was appropriate to go forward with a regulation was “common sense and sound government practice.”[36]

The Supreme Court granted review on the following question: “Whether [EPA] unreasonably refused to consider costs in determining whether it is appropriate to regulate hazardous air pollutants emitted by electric utilities.” Highlighting Judge Kavanaugh’s dissenting opinion, petitioners argue that the breadth of the term “appropriate’ normally indicates Congress’ expectation that costs will be taken into consideration,”[37] and EPA should not be free to “pick and choose” what factors it should consider when determining whether the regulation was appropriate. The petitioners framed the case as an issue of first impression for regulatory decision-making: “if an agency is not expressly precluded by Congress from taking costs into consideration in adopting rules to implement a regulatory statute, how far does the agency’s discretion extend not to take costs into consideration in adopting those rules, given the agency’s fundamental obligation ... to engage in reasoned decision-making.”[38]

On March 25, 2015, the Supreme Court heard oral argument in the case, apparently to decide whether an agency must consider regulatory cost when determining whether the regulation was “appropriate and necessary.”[39] From the Court’s questions to counsel it appears the Court is split over whether EPA should have considered cost in promulgating the mercury regulations. Arguing for the petitioners, Michigan Solicitor General Aaron Lindstrom asserted that the term “appropriate” required EPA to consider the cost of implementing the mercury rule. Justices Sotomayor, Kagan, and Ginsberg seemed to disagree. Justice Sotomayor inquired: When the term “appropriate” is undefined by Congress, “why do you get to pick what it means?” Justice Ginsberg agreed, noting that the term “appropriate” is often a signal that an expert agency may use its discretion regarding what factors to consider. Mr. Lindstrom disagreed, arguing that Congress didn’t grant EPA the discretion to “ignore an essential part of the problem.” By ignoring regulatory costs, according to Lindstrom, EPA could not, by definition, be engaged in reasoned decision-making. Justice Kagan stated that Congress explicitly requires EPA to consider costs in other parts of the statute, but did not here. Thus, finding a requirement that EPA consider costs from Congress’ silence on the subject seemed to Justice Kagan “a pretty big jump.”

The questioning from the conservative Justices on the bench was equally pointed for Solicitor General Donald Verrilli, representing the federal defendants. In response to questioning from Justice Roberts, Mr. Verrilli conceded that the term “appropriate” did not preclude EPA from considering costs at the listing stage, but asserted that EPA’s “best interpretation” of the statutory provision at issue was that “it didn’t provide for the consideration of costs” at that stage. Justice Roberts queried whether the agency “deliberately tied its hands” in refusing to consider costs at the listing stage. Mr. Verrilli disagreed, and noted that the agency would consider costs at the standard setting phase, it just did not consider costs in the decision whether or not to regulate. To this, Justice Kennedy responded that “at that point, the game is over.”

Conclusion

The Perez decision approved federal agencies’ use of interpretive rules to interpret regulations without utilizing formal notice and comment rulemaking. It has the potential to affect the way all federal agencies, including EPA and other federal environmental regulators issue interpretations of their own regulations under the APA.

Utility Air Regulatory Group offers the Court the opportunity to review EPA’s authority to interpret the CAA when determining whether to issue a costly and far reaching regulation. If the questioning at oral argument is any indication, the decision may be a split decision.

For more information, contact any member of our Environmental Litigation practice group.

[1] 5 U.S.C.§ 551 et seq.

[2] 135 S. Ct. 1199 (Mar. 9, 2015). The Court’s decision is available here. The merits briefs are available here.

[3] Perez, 135 S. Ct. at 1204 (quoting Shalala v. Guernsey Memorial Hospital, 514 U.S. 87, 99 (1995)).

[4] 117 F.3d 579 (D.C. Cir. 1997).

[5] Perez, 135 S. Ct. at 1206.

[6] Case Nos. 14-46, 14-47, 14-49.

[7] 29 U.S.C. § 201 et seq.

[8] 5 U.S.C. § 553(b), (c).

[9] 5 U.S.C. § 553(b)(A).

[10] 117 F.3d 579 (D.C. Cir. 1997).

[11] Id. at 586 (citing 5 U.S.C. § 551(5)).

[12] 720 F.3d 966, 969 n.3 (D.C. Cir. 2013) (noting circuit split).

[13] Mortg. Bankers Ass’n v. Solis, 864 F. Supp. 2d 193, 206-08 (D.D.C. 2012) (quoting MetWest Inc. v. Sec’y of Labor, 560 F.3d 506, 511 (D.C. Cir. 2009)), rev’d sub nom. Mortg. Bankers Ass’n v. Harris, 720 F.3d 966 (D.C. Cir. 2013).

[14] Id. (citing MetWest, 560 F.3d at 506; Alaska Prof’l Hunters Ass’n v. FAA, 177 F.3d 1030 (D.C. Cir. 1999)).

[15] 720 F.3d at 971-72.

[16] Id. at 970.

[17] Id. at 969, 971.

[18] Perez, 135 S. Ct. at 1206.

[19] Id. 135 S. Ct. at 1207 (quoting Vt. Yankee Nuclear Power Corp. v. Natural Res. Def. Council, Inc., 435 U.S. 519, 549 (1978)).

[20] Id. at 1207.

[21] Id. at 1207-08.

[22] Id. at 1209.

[23] Utility Air Regulatory Group Petition for Cert at 5.

[24] 42 U.S.C. § 7412.

[25] See 40 C.F.R. Part 63.

[26] See Obama Administration Withdraws Proposed Ozone Standard; Fight Over Air Toxics and Other EPA Rules Expected This Fall Marten Law Environmental News (Sept. 6, 2011) (summarizing regulatory history of EPA rulemaking for hazardous air pollutants from EGUs).

[27] See 42 U.S.C. § 7412(n)(1)(A).

[28] 65 Fed. Reg. 79,826 (Dec. 20, 2000).

[29] 70 Fed. Reg. 15,994 (Mar. 29, 2005).

[30] New Jersey v. EPA, 517 F.3d 574 (D.C. Cir. 2008).

[31] 77 Fed. Reg. 9304 (Feb. 16, 2012).

[32] White Stallion Energy Ctr., LLC v. EPA, 748 F.3d 1222, 1236-41 (D.C. Cir. 2014).

[33] Id. at 1234 (citing Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842–43 (1984)).

[34] Id. at 1237.

[35] Id. at 1237-38.

[36] Id. at 1259 (Kavanaugh, dissenting).

[37] Utility Air Regulatory Group Petition for Cert at 23.

[38] Id.

[39] The oral argument transcript is available here.

 

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