SCOTUS Creates Opportunities to Challenge Administrative Regulation: Implications of Kisor v. Wilkie

On Wednesday, June 26, 2019, the Supreme Court issued its decision in Kisor v. Wilkie, addressing the doctrine of Auer deference. When this form of deference applies, courts are obligated to defer to an agency’s construction of its own ambiguous regulation. In Kisor, the Court considered the circumstances in which deference attaches—as well as whether to overturn Auer wholesale. In a fractured 5-4 decision, only part of which commanded a majority of the Justices, the Court declined to overturn Auer. But the Court imposed significant limitations on the doctrine’s applicability.

Substantially Limiting Agency Deference—The “Paper Tiger” of Kisor Deference

The Supreme Court majority declined to reverse Auer wholesale, but the Court imposed stringent controls on its applicability. Recognizing that it had previously sent “mixed messages” about the circumstances when deference is warranted, the court “expand[ed] on” the limitations governing deference to agency interpretations of ambiguous regulations. Now, in what will likely become known as Kisor deference, courts may defer to an agency interpretation only if five criteria are satisfied:

1. Genuine ambiguity: Auer deference is limited to those circumstances where a “regulation is genuinely ambiguous.” To declare a regulation ambiguous, “a court must exhaust all the ‘traditional tools’ of construction.”
2. Reasonable construction: To warrant deference, the agency’s construction of the ambiguous regulation must be “reasonable.” The Court underscored that this is “a requirement an agency can fail.”
3. Proper authority: The agency construction “must be the agency’s ‘authoritative’ or ‘official’ position.” If the decision is “ad hoc,” it does not warrant deference. Likewise, if the interpretation stems from an actor who cannot “make authoritative policy in the relevant context,” no deference is appropriate. In particular, the Court identified that administrative law judges in the Department of Veterans’ Affairs—which number to about 100, issuing 80,000 decisions a year—likely are not sufficiently authoritative to warrant deference.
4. Substantive expertise: Deference is limited to those agency’s constructions that “in some way implicate its substantive expertise.” If the interpretative task is one that “fall[s] more naturally into a judge’s bailiwick,” then deference is not appropriate.
5. No surprises: The agency’s decision “must reflect ‘fair and considered judgment.'” For this reason, “convenient litigating position[s]” and “post hocrationalization[s]” do not trigger deference. Nor does an interpretation that “creates ‘unfair surprise’ to regulated parties.” This often occurs when an agency changes its position, or when a new agency rule imposes retroactive liability.

Justice Gorsuch, joined by Justices Thomas, Alito and Kavanaugh—would have jettisoned Auer deference altogether. He nonetheless demonstrated that little remains of Auer deference. As he colorfully put it, Auer deference is now “maimed and enfeebled—in truth, zombified.” Justice Gorsuch concluded, “today’s ruling . . . has transformed Auer into a paper tiger.”

Although he supplied the fifth vote for the Court’s majority, the Chief Justice wrote to underscore “that the distance between” the majority’s constrained version of deference and Justice Gorsuch’s desire to overturn it wholesale “is not as great as it may initially appear.” According to the Chief, following Kisor, “the cases in which Auer deference is warranted largely overlap with the cases in which it would be unreasonable for a court not to be persuaded by an agency’s interpretation of its own regulation.” That is to say: overturn Auer or not, the Court arrived at the same practical result. Justice Kavanaugh, joined by Justice Alito, wrote separately to agree with this commentary.

A Win for James Kisor

While retaining Auer in name, the Court delivered a significant victory to petitioner James Kisor. Kisor, a Marine veteran, sought disability benefits for PTSD caused by his wartime service. In 1982, the Department of Veteran’s Affairs denied his claim; in so doing, the VA failed to consider records in the government’s possession relating to Kisor’s military service, including records of awards he won for his combat-related activities. In 2006, Kisor reapplied, and the VA agreed that Kisor has had service-connect PTSD since at least the 1980s. Kisor thus asked for a retroactive award, which turns on whether the records that the VA failed to consider are “relevant” to Kisor’s claim within the meaning of a VA regulation. If they are “relevant,” Kisor receives his past benefits.

A VA administrative law judge held that the records were not “relevant.” Rather than define “relevant” evidence “probative” of a material issue (Fed. R. Evid. 401), the judge held that “relevant” is limited to “outcome-determinative” evidence. On appeal, the Federal Circuit concluded that the regulation is ambiguous. And, applying Auerdeference, it adopted the VA’s preferred construction of the regulation.

The Supreme Court unanimously rejected the Federal Circuit’s application of agency deference. As the majority concluded, the court of appeals “jumped the gun in declaring the regulation ambiguous.” And the Court cast significant doubt on whether deference even applies in the circumstances of this case, including whether decisions by an administrative law judge warrant deference. Proceedings will continue on remand.

How to Benefit from Kisor Deference

Kisor provides potent tools to contest overreaching agency regulation across industries. In circumstances where an agency action is adverse to your business, the following considerations are essential:

• Is the agency seeking to enforce a “legislative” rule that was never subject to notice-and-comment? Kisor specifically held that, absent notice-and-comment rulemaking, agency actions cannot bind the public. In all circumstances, “[a]n enforcement action must … rely on a legislative rule, which (to be valid) must go through notice and comment.” There is a complex legal question involved here: if an agency action is “interpretive”—that is, if it brings clarity to an existing policy, but does not create policy—notice-and-comment is not required. But, if the action itself creates policy, an agency is obligated to use notice-and-comment rulemaking. Previously, this distinction was not rigorously enforced. It will be moving forward, supplying opportunity to challenge likely thousands of agency actions across sectors. We have already had success with litigation advancing this argument, and Kisor makes it all the more important.

• Is a regulation (or statute) actually “ambiguous”—and is the agency’s construction a “reasonable” one? As Kisor notes, courts have been quick to find ambiguities in both regulations and statutes, and courts then supply agencies broad latitude in deciding what is a reasonable construction. After Kisor, courts will be far more likely to engage in searching review of agency interpretations. Thus, if an agency construction of a regulation or a statute currently sits uneasy with the regulated public, Kisor will supply new opportunity for judicial challenge.

• Who at the agency acted? Kisor puts a square focus on who at the agency is issuing the action in question. Going forward, we will have powerful arguments that lower-level officials cannot bind the regulated public. It is also unclear whether ALJ constructions of regulations (or even statutes) will command deference. Thus, in considering agency actions, it will be essential to determine the precise actor within an agency and the accompanying source of authority.

• Was there a surprise? In a broad, catch-all category, Kisor requires agencies, when binding the public, to act fairly. In the main, this should preclude an agency from upsetting existing reliance interests—either by adopting a new construction mid-litigation or by issuing an agency action that has retroactive and costly effect. To challenge agency action, it will be important to make a record regarding the ways in which the agency has upset settled expectations to the detriment of the regulated party.

In all, Kisor will offer savvy companies significant ability to remedy agency actions adverse to their interests. Please contact the authors for more information.

In addition, during the week of July 8, McDermott partners will be hosting a three-part webinar series to discuss Kisor and tax, Kisor and health and the next wave of litigation regarding agency deference. Watch for more information to come on the McDermott Events page.