Changes in Agencies’ Interpretations of their own Regulations and Auer Deference

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Today’s post is from guest blogger Patrick Smith, who is a partner in Ivins, Phillips & Barker’s Washington office. Patrick, in addition to his day job as representing clients as part of a major tax controversy practice, is a prolific author who has written widely on the intersection of administrative law principles and tax procedure. In this piece, which is a summary of a longer article available here, Patrick discusses the Perez v Mortgage Bankers Association case pending before the Supreme Court. As Patrick describes, the case may have broad influence on agency rulemaking. Les

The issue in Perez v. Mortgage Bankers Association, a non-tax case that is currently pending before the Supreme Court, is the propriety of a rule followed by the D.C. Circuit with respect to the notice-and-comment rulemaking requirements of the Administrative Procedure Act. Although this is not a tax case, the resolution of the case will necessarily affect tax cases since, after Mayo, it is clear that the tax world is subject to the same administrative law rules that apply in the case of all other federal agencies. For a discussion on Mayo and its implications on tax see here.

The APA requires that when an agency issues or amends “substantive rules,” ordinarily the agency must follow the notice-and-comment requirements for rulemaking that are set forth in the APA. However, when an agency issues “interpretative rules,” the notice-and-comment requirements need not be followed.

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The D.C. Circuit rule that is at issue in Mortgage Bankers Association is that when an agency has interpreted one of its own “substantive” regulations in a guidance document that would not otherwise itself be considered a “substantive” rule, the agency must nevertheless use notice-and-comment rulemaking to change that interpretation. In the context of the IRS, this rule would mean, for example, that when the IRS has issued a revenue ruling interpreting a substantive regulation issued by the IRS, the IRS would be required to use notice-and-comment procedures to issue a new revenue ruling adopting a different interpretation of the regulation.

When the issue is framed in this way, without adding further background or context, it might seem that the D.C. Circuit rule is clearly at variance with the unambiguous terms of the APA and therefore invalid under the Supreme Court’s decision in Vermont Yankee, which held that courts may not impose additional procedural requirements on agency action beyond those explicitly expressed in the APA. Under the APA, only “substantive” rules are subject to the notice-and-comment requirements, and the premise here is that the agency interpretation of its own “substantive” regulation would not itself be a “substantive” rule.

However, there is relevant background and context that gives considerably more logical force to the D.C. Circuit rule than is apparent from the foregoing statement of the issue. That background and context is the rule applied by the Supreme Court in cases such as Auer v. Robbins that an agency’s interpretations of its own regulations are ordinarily given deference that is similar to the deference that is given under Chevron to certain agency interpretations of statutory provisions. The type of deference that is given to an agency’s interpretation of its own regulations is now usually referred to as Auer deference.

In Mead Corp the Supreme Court held that agency interpretations of statutory provisions that receive deference under Chevron are those that the agency intends to have the force of law, provided the agency has statutory authority to issue rules that have the force of law. In the context of agency rulemaking, as opposed to agency adjudication, the agency interpretations of statutory provisions that the agency intends to have the force of law would ordinarily be those that the agency adopts using notice-and-comment rulemaking pursuant to the APA. For a discussion on a recent case clarifying this point see here.

It is reasonable to say that under the Auer principle, an agency’s interpretation of one of its own regulations has the force of law because it is given the same sort of deference that one of its statutory interpretations that has the force of law receives under Chevron. Under applicable Supreme Court authority, here and here, one way to describe the difference between “substantive” rules – those rules that are ordinarily subject to the APA notice-and-comment rulemaking requirements – and “interpretative” rules – those rules that are not subject to the APA notice-and-comment requirements – is that “substantive” rules have the force of law, while “interpretative” rules do not.

Thus, because of the deference that is given under Auer to an agency’s interpretations of its own substantive regulations, it seems reasonable to conclude that an agency’s interpretation of one of its own substantive regulations is also necessarily a substantive regulation even though it might not otherwise be in that category because under Auer that interpretation is given deference comparable to Chevron deference and accordingly has the force of law. If a rule is given deference by the courts, then the rule is used as the basis for deciding cases, and for that reason has the force of law.

Viewing the D.C. Circuit rule as converting an agency’s interpretations of its own substantive regulations into substantive regulations themselves does not violate Vermont Yankee because this approach is simply a way of applying the APA’s own distinction between substantive rules and interpretative rules, a distinction that is notoriously murky and unclear.

Moreover, if a change in an agency’s interpretation of a substantive regulation is subject to notice-and-comment because that change in interpretation in effect represents an amendment to the regulation being interpreted, it is hard to see why the adoption of the initial interpretation would not likewise be subject to notice-and-comment. Fox Television held that changes in agency interpretations were subject to precisely the same requirements under the APA arbitrary and capricious standard as initial adoptions of agency interpretations, and it is hard to see why a different analysis would apply under the notice-and-comment requirements. The D.C. Circuit rule that is at issue in Mortgage Bankers Association can be harmonized with Fox Television by extending the notice-and-comment requirement to initial agency adoptions of interpretations of the agency’s own substantive regulations.

The Auer deference principle has received negative commentary in recent opinions by three Supreme Court justices. The first was a concurring opinion by Justice Scalia in Talk America, Inc. v. Michigan Bell Telephone Co. The next was Justice Alito’s majority opinion in Christopher v. SmithKline Beecham Corp.

The last opinions in this series are separate opinions by several justices in Decker v. Northwest Environmental Defense Center. The majority opinion in this case applied Auer. Justice Scalia dissented on the grounds that the agency interpretation to which the majority had given Auer deference was not the most natural reading of the regulation that was being interpreted and on the grounds that the Auer principle should be overruled because it encourages agencies to draft vague regulations so that they can later interpret those vague regulations in any way they please. Justice Scalia’s negative views of Auer were supported by two other justices in a concurring opinion by Chief Justice Roberts, which was joined by Justice Alito

One of the concerns expressed about Auer in these separate opinions is that Auer permits agencies to issue vague substantive regulations having the force of law using notice-and-comment rulemaking procedures and then adopt interpretations of those regulations that have the force of law under Auer but that are issued without using notice-and-comment procedures. The D.C. Circuit rule that is at issue in Mortgage Bankers Association would cure that problem with Auer, especially if the rule is extended as described earlier to cover initial agency interpretations of the agency’s own regulations and not just changes in agency interpretations.

EDITOR UPDATE 

For more on the Perez v Mortgage Bankers case, you may wish to check out posts on the case from the Federal Regulations Advisor blog or the Notice and Comment blog.

UPDATE PART 2

Jeffrey Pojanowski at Notice and Comment has a piece discussing Pat Smith’s post and longer article. See here

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