In Validus Reinsurance Ltd. v. United States, the D.C. Circuit addressed the potential conflict between Chevron and the presumption against the extraterritorial application of statutes. In that case, a foreign company, Validus, reinsured other insurance companies’ policies. Validus then sought protection for its own reinsurance risks, and it purchased reinsurance from other foreign companies. The D.C. Circuit was asked to address whether excise taxes applied to these reinsurance transactions between two foreign companies.
The court concluded that the relevant statutory provisions were ambiguous, and the IRS naturally argued for Chevron deference. However, the court rejected the government’s argument, concluding that the extraterritorial canon trumped agency deference doctrines. It would take more than mere statutory ambiguity to establish that Congress wanted to tax foreign-to-foreign transactions. A clear statement was required.
Validus reflects a somewhat unusual opinion. Although courts commonly use canons of construction to determine ambiguity at Step One of the Chevron analysis, here there was no doubt about the statute’s ambiguity. The court simply used the extraterritorial canon to resolve an ambiguity usually left for an agency to address, and it swept Chevron aside. In fact, the opinion is not even phrased in terms of the familiar two-step analysis.
Validus thus reflects a chink in the government’s Chevron armor. It also embraces a potential change in how we think of Chevron deference. That is, critics of Chevron commonly argue that the Supreme Court should “overrule” Chevron, thereby viewing the case’s statements on deference as part of its holding.
Yet recent judicial statements, as in Validus, suggest that Chevron deference might just be an interpretive canon which need not be formally overruled. That is, if a court wants to depart from an interpretive canon, whether it is the plain meaning rule, the extraterritorial presumption, or anything else, it need not “overrule” a prior case that employed the canon. Instead, interpretive canons are tools of judicial reasoning, not binding law. By treating agency deference as subservient to the extraterritoriality presumption, the D.C. Circuit implicitly viewed Chevron as an interpretive canon. This might diminish the importance of Chevron in other contexts.
Somewhat oddly, the D.C. Circuit left room for the government to eventually vindicate its arguments in Validus. That is, the court denied Chevron deference in part because the IRS’s previous rulings did not address the presumption against extraterritorial application of statutes. This seemingly suggests that if the IRS’s later rulings examine the extraterritorial presumption, the court might eventually defer to the IRS’s (forgone) conclusion.
When it comes to scientific analysis and the like, I can understand why courts might offer deference once the agency has performed further analysis. However, it seems strange to apply this principle when it comes to the legal analysis of an interpretive canon. I’m skeptical that the IRS will make any novel discovery when it accepts the D.C. Circuit’s invitation and writes out a few paragraphs on the extraterritorial presumption. And I’m not sure why the judiciary should defer to an agency’s view on how to apply tools of judicial reasoning. In this way, Validus may have seemingly limited the scope ofChevron, but Round Two might allow for a broad expansion of agency interpretive authority.
By Andy Grewal