Sunday, June 26, 2011

Supreme Court This Term Strongly Reaffirms Deference to Agency Interpretation of Regulations

With the SEC and CFTC in the process of adopting a host of regulations to implement the Dodd-Frank Act, the US Supreme Court this term delivered a strong endorsement to the doctrine of judicial deference to an agency’s interpretation of its own regulations, even when the interpretation is delivered in an amicus brief. Three unanimous opinions by the Court strongly reaffirmed the Chevron standard of review for agency regulations and the Auer doctrine for deference to agency amicus briefs. At a time when federal regulators are filling in the gaps of Dodd-Frank and piecing together the interstices to create a mosaic of the complete financial regulatory picture, the Supreme Court appears to have given its strongest endorsement of agency interpretation of regulations since the Administrative State was created by the New Deal.

The first and broadest opinion involved the correct judicial standard of review for a federal tax regulation. In an opinion strongly reaffirming the Chevron standard of review of regulations, and rejecting a special standard for reviewing tax regulations, Chief Justice Roberts said that regulation, like legislation, often requires drawing lines.

If Congress has not directly addressed the precise question at issue, he said, the Court will not disturb a regulation unless it is arbitrary or capricious in substance, or manifestly contrary to the statute. Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984). Noting that the Chevron standard applies with full force in the tax context, the Court refused to apply the additional factors, such as how long the regulation has been in effect, used in National Muffler Dealers Assn., Inc. v. United States, 440 U. S. 472 (1979). Mayo Foundation v. US 09-837.

The Court recognized that filling gaps in the Internal Revenue Code plainly requires regulations at least as complex as the ones other agencies, such as the SEC and CFTC, must make in administering their statutes. The question presented, whether doctors who serve as medical residents are properly viewed as students whose service Congress has exempted from FICA taxes under 26 U. S. C. §3121(b)(10), was one of ambiguity that could be left to regulatory interpretation.

In Chase Bank v. McCoy, Dkt. No. 9-329, the Court, citing Auer v. Robbins, 519 U. S. 452 (1997), said that it would defer to an agency’s interpretation of its own regulation, advanced in a legal brief, unless that interpretation is plainly erroneous or inconsistent with the regulation. Finding Regulation Z to be ambiguous as to the question presented, the Court therefore looked to the Federal Reserve Board’s own interpretation of the regulation for guidance in deciding this case. Justice Sotomayor, writing for the Court, emphasized that just because the Fed’s interpretation of Regulation Z came in a legal brief did not make it unworthy of deference.

In Talk America v. Michigan Bell Telephone, Dkt. No. 10-313, the Court, in the absence of any unambiguous statute or regulation, turned to the FCC’s interpretation of its regulations in its amicus brief. Justice Thomas, writing for the Court, said that the Court will defer to an agency’s interpretation of its regulations, even in a legal brief, unless the interpretation is plainly erroneous or inconsistent with the regulations or there is any other reason to suspect that the interpretation does not reflect the agency’s fair and considered judgment on the matter in question. The Court held that the FCC as amicus curiae has advanced a reasonable interpretation of its regulations, and deferred to its views.

But note that judicial deference to agency amicus briefs is not unlimited. Justice Sotomayor noted that the Court will not apply Auer deference if the regulation in question was unambiguous, and adopting the agency’s contrary interpretation would permit the agency, under the guise of interpreting a regulation, to create de facto a new regulation. In light of Regulation Z’s ambiguity, there was no such danger in the Chase Bank case. But, said the Justice, if the text of a regulation is unambiguous a conflicting agency interpretation advanced in an amicus brief will necessarily be plainly erroneous or inconsistent with the regulation.