Notice & Comment

Chenery II * May * Pose a Threat to Liberty

It appears my post from last week was not as clear as I had hoped. I hate when that happens! In particular, I don’t think Professor Richard Pierce — who literally wrote the book on administrative law — and I disagree all that much. Yet he says “the threat to liberty McGahn and Nielson ascribe to Chenery II does not exist and never has existed.” I fear we may be talking past each other, at least in part.

Let’s start with some background. Under Chenery II, an agency “is not precluded from announcing new principles in an adjudicative proceeding.” Such “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.” Likewise, unless the agency’s newly-announced law replaces “old law that was reasonably clear,” there is a “presumption of retroactivity for adjudications,” and “a mere lack of clarity in the law does not make it manifestly unjust to apply a subsequent clarification of that law to past conduct.” Thus, agencies can and do use adjudication to announce “new principles” and can and do apply those new principles retroactively, especially if “the new rule [does not] represent[] an abrupt departure from well-established practice.”*

I agree with Pierce that there are many perfectly appropriate applications of Chenery II. As I stated in my post: “On the other hand, not all applications of Chenery II are problematic. There are circumstances in which agencies should not be required to promulgate a regulation first. If the statute itself is sufficiently clear, regulated parties already have fair notice and there is no need for a rule.” I therefore don’t think Chenery II always poses a threat to liberty. Indeed, I suspect Chenery II often is perfectly safe. But that does not mean it never poses a threat to liberty.

For instance, I think Pierce and I agree that Chenery II would be a threat to liberty absent meaningful fair notice. That is why I agree with him that cases like Christopher v. Smithkline Beacham Corp. are so important. (Indeed, I discuss Christopher’s potential to curb possible abuses of Chenery II in my law review article on the subject.) So long as the fair notice doctrine has real teeth and courts reliably enforce it, Chenery II makes a great deal of sense. Otherwise, Chenery II can be dangerous. I don’t think Pierce disagrees.

So the real question is this: Are there instances in which agencies use adjudication to create and retroactively enforce “new principles” contrary to a, well, fair, fair notice approach? Presumably Pierce thinks the answer is no. If so, I disagree. (If he thinks the answer is yes, then maybe we don’t disagree about anything.) After all, isn’t Chenery II itself a good example of unfair retroactivity? Justices Jackson and Frankfurter didn’t think the regulated party in that case had fair notice of what was coming. Were they wrong? Maybe Pierce thinks they were wrong, but Robert Jackson was no fool, and he thought the Court’s decision was unjust. Don McGahn thus finds himself in good company. And because regulated parties know that Chenery II remains good law, isn’t it safe to assume that they sometimes decline to challenge unfair retroactive policy-making because they know that they will have to overcome Chenery II and the presumption of retroactivity? Litigation decisions, after all, occur in the shadow of the law, and litigation is not cheap.

Pierce also focuses on penalties; it is true that courts are less likely to allow agencies to retroactively impose fines and the like. But I don’t think that fair notice concerns only arise in the context of penalties; indeed, I’m not sure that Christopher is a “penalty” case if the term “penalty” is strictly defined. Chenery II certainly was not a penalty case. The SEC just disapproved of management’s reorganization absent modifications that were economically injurious, and did so on the basis of a newly-announced interpretation of vague words like “public interest” and “inequitable” without previously offering any clue as to what it thought those words meant. The SEC didn’t change its position; it simply didn’t have a position before it created one and retroactively applied it. Yet it’s hard to blame management for not guessing beforehand the policy the SEC ended up choosing. Can’t that sort of power sometimes be a threat to liberty? (To be fair to Pierce, McGahn said “enforcement actions,” suggesting penalties. But to be fair to McGahn, he was giving a speech and it is easy enough to colloquially conflate enforcement and adjudication more generally.)

In short, because agencies can exercise policy-making power through retroactive adjudication, we need to be very careful that principles of fair notice are both robust and respected. Agencies may be tempted to say they are simply “clarifying” the law. But “clarification” can be a wiggly word. The line is not always sharp between clarifying the law and making new law altogether. Courts thus should strive to ensure that agencies are not using adjudication to retroactively make significant policy choices, as opposed to minor, garden-variety interpretations that extend statutory or regulatory text in common law fashion to circumstances that parties should reasonably have contemplated.

Finally, when I said that I have “never heard Chenery II discussed,” I meant in a non-specialist context. Of course admin law experts know about it — it is foundational. But McGahn was not speaking to specialists; he was speaking to all sorts of lawyers. That is why I thought it was noteworthy; this aspect of administrative law may be moving beyond the specialists. If so, that is significant.

Many thanks to Professor Pierce. Hopefully this post clears up my position.



* This is one factor in a multi-factor balancing test: “Among the considerations that enter into a resolution of the problem are (1) whether the particular case is one of first impression, (2) whether the new rule represents an abrupt departure from well established practice or merely attempts to fill a void in an unsettled area of law, (3) the extent to which the party against whom the new rule is applied relied on the former rule, (4) the degree of the burden which a retroactive order imposes on a party, and (5) the statutory interest in applying a new rule despite the reliance of a party on the old standard.”

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