Regulated entities love guidance when they agree with it or are ambivalent about it. It is valuable information to have. Not surprisingly, however, if they disagree with the substance of the guidance, and the guidance will impose costs of one sort or another on them, they do not like it. They have a choice in this situation: they can either comply with the guidance or ignore it. Professor Parrillo has done a masterful job in identifying why regulated entities may comply with the guidance rather than ignore it. He proceeds from the assumption that guidance is supposed to be used “flexibly,” but his study found that agencies often, if not usually, follow their guidance rigidly, which results in the guidance becoming practically binding, even if by definition it is not legally binding. In effect, regulated entities are coerced into complying with guidance they disagree with and that costs them. Professor Parrillo’s suggestion is that agencies should not be so rigid, but should instead adopt “principled flexibility” to make exceptions to guidance. As he describes it, however, the agency would not be making exceptions as much as changes to the guidance, because the exception would become precedent for like situations.
Under the APA, persons may petition an agency for the adoption, amendment, or repeal of a rule. Guidance constitutes a rule under the APA, so regulated entities already have available a means of triggering agency reconsideration of existing guidance. Of course, filing a petition will not stay the effect of the guidance, and even if the agency engages in principled flexibility, one can imagine that most petitions would be denied. This is not much solace to the regulated community.
If the costs to the regulated entity are great enough, and its lawyers believe they have a fighting chance, the entity may try to sue to overturn the guidance. However, these two conditions are often not met. Currently, two hurdles stand in the way of a successful resolution of the suit. First, at least in the D.C. Circuit, interpretive rules and statements of policy by an agency are not final agency action and therefore are not reviewable. Second, at least until the Supreme Court overrules Auer v. Robbins and Bowles v. Seminole Rock & Sand Co., even if the regulated entity can obtain review, the court will give great deference to the agency’s interpretation. There is, however, a work-around: challenge the guidance not on the basis of its substance, but on the basis of its lack of procedure. That is, if the court can be persuaded that the “guidance” is not really guidance but instead an actually binding regulation, then the “guidance” will be deemed an invalid legislative rule, because it did not go through notice and comment.
Knowing this, the agency will usually sprinkle its guidance with assurances that it is not binding at all, and of course, as a legal matter it cannot be. This results in courts having to engage in the difficult task of trying to determine whether this non-legally binding guidance is actually binding to the extent that it cannot be considered a statement of policy or interpretive rule, but must be considered a legislative rule that was adopted without following the required procedures. There is an irony in this, because invariably what the regulated entity is upset about is not its inability to comment on the guidance before it was adopted. Rather it is upset about the substance of the guidance.
Professor Parrillo’s statement that guidance is supposed to be used flexibly suggests that inflexibility is evidence that the “guidance” is not really guidance but an improperly promulgated legislative rule. At different places in his article, he suggests that when an agency is assured of the correctness of its guidance, “that is the archetypal scenario for legislative rulemaking.” Or, “[i]f an agency thinks a policy must be rigidly followed and reconsideration foreclosed simply because the policy is right, that is the archetypal scenario calling for legislative rulemaking.” No citation is given for these statements.
Certainly nothing in the Attorney General’s Manual describing interpretative rules or general statements of policy suggests that either must be tentative as opposed to the agency’s considered opinion. Moreover, the Supreme Court has never established or suggested such a principle. However, in Pacific Gas & Electric Co. v. Federal Power Commission [506 F.2d 33 (D.C. Cir. 1974], the D.C. Circuit did say: “A policy statement announces the agency’s tentative intentions for the future.” [Id., at 38] In context, however, this sentence is less about tentativeness than about the fact that a policy statement is not legally binding. The court went on to say “[T]he agency’s express purpose may be to establish a binding rule of law not subject to challenge in particular cases. On the other hand the agency may intend merely to publish a policy guideline that is subject to complete attack before it is finally applied in future cases.”[Id., at 39] That is, in any agency adjudication or before any court, the agency cannot rely on a policy statement, “it must be prepared to support the policy just as if the policy statement had never been issued. An agency cannot escape its responsibility to present evidence and reasoning supporting its substantive rules by announcing binding precedent in the form of a general statement of policy.”[Id., at 38-39] Nevertheless, the sentence in Pacific Gas as to the necessity of tentativeness has become D.C. Circuit blackletter law, if not blackletter law as contained the Blackletter Statement of Federal Administrative Law as adopted by the Administrative Law and Regulatory Practice Section of the ABA. Even in the D.C. Circuit, however, this precedent only applies to statements of policy, not interpretive rules. That is, even in the D.C. Circuit, courts do not ask whether the agency’s interpretation is only tentative in determining whether the claimed interpretive rule is rather an invalid legislative rule.
The fact that the agency believes, indeed strongly believes, its policy or interpretation to be correct is neither a reason to adopt it as a legislative rule nor reason to deny the exception from notice-and-comment rulemaking. If it does not believe in the correctness of its policy or interpretation, it should not be adopting it at all. To believe in the correctness of something when adopted, however, does not necessarily mean one has an unalterably closed mind on the matter. Legislative rules are amended or repealed upon reconsideration of facts and policy, no matter how sure the agency was at the time of original adoption. Guidance, because it is easier to change procedurally, is even more likely to be changed or repealed upon reconsideration.
The use of guidance to coerce regulated entities to engage in action preferred by the agency, but as to which the agency has not through legislative rule required regulated entities to take, is a problem that needs a solution. The question is whether the proper solution is to enjoin the use of the guidance on the ground that it is an invalid legislative rule, not having gone through notice and comment. Or, whether the proper solution is to allow judicial review of the substance of the guidance. The former methodology requires courts to ascertain if the guidance is so binding practically that it magically transforms what clearly cannot have legally binding effect into a legislative rule invalidly promulgated. As Professor Parrillo notes, and Professor Ronald Levin in his exhaustive article, Rulemaking and the Guidance Exception, explains at length, discerning this line is problematical at best. And if it is difficult for courts to draw the line in a principled fashion, it is even more difficult for agencies to discern at the time of drafting the guidance. The alternative would be for courts to assess the validity of the substance of the interpretive rule or statement of policy, a traditional exercise interpreting legal texts and judging an agency’s reasoned decisionmaking. Moreover, this would focus on the real issue of concern to the regulated entities as well as regulatory beneficiaries – whether the claimed interpretation is indeed a valid interpretation or whether the statement of policy is actually authorized by law or regulation and is the product of reasoned decisionmaking.
The weight of the case law in the circuits, as well as much of the scholarship, favors the former approach, but the Supreme Court has not directly addressed this issue. In recent years, however, the Court has not hesitated to reject the view of the D.C. Circuit and even the consensus view of the lower courts regarding judicial review of agency action. Indeed, in Perez v. Mortgage Bankers Ass’n the Court rejected the D.C. Circuit’s requirement that changes to guidance must undergo notice-and-comment rulemaking. The Court noted that courts may not impose procedural requirements not required by the APA. Instead, the Court went on, entities upset by guidance are not without recourse; they may challenge it on its merits. The same could be said for guidance that has practically binding effect. And there is a growing body of scholarship supporting this approach [Peter Strauss, Domesticating Guidance; Mark Seidenfeld, Substituting Substantive for Procedural Review of Guidance Documents; William Funk, Legislating for NonLegislative Rules; William Funk, When is a “Rule” a Regulation?: Marking a Clear Line Between Nonlegislative Rules and Legislative Rules]. Thus, it is premature to say that the train has left the station.
The “practical binding effect” test has its place, but that place is in determining whether the guidance qualifies as final agency action sufficient for judicial review of the substance of the guidance. It is not the proper test for determining whether guidance is an invalid legislative rule.
William Funk is the Lewis & Clark Distinguished Professor of Law Emeritus at Lewis & Clark Law School. He is the author or co-author of several books on constitutional law and administrative law as well as numerous articles on those subjects. He is a past Chair of the ABA’s Administrative Law and Regulatory Practice Section and of the AALS’ Administrative Law Section.
This post is part of a symposium on federal agency guidance. The rest of the posts in this symposium can be viewed here.