This post is the second in a two-part series by Professor Sharkey. The first post can be found here.
My proposed Chevron–State Farm conceptual framework comes at a critical time for Chevron. The particular form of Chevron retreat I envision — one that widens the space for the application of State Farm — is fundamentally distinct from setting Chevron aside. While we are in a time of renewed critique of Chevron, injecting State Farm review seems preferable to jettisoning Chevron altogether and/or enlarging what has come to be known as Chevron Step Zero.
A. Why the Chevron-State Farm Framework Matters
What precisely is significant about the incorporation of State Farm into the Chevron framework? A natural challenge to my model is that it may not matter that Chevron Step Two is lax or defunct, so long as it is followed by a sufficiently robust State Farm arbitrary and capricious review as a kind of Step Three in the overall analysis. But several courts have taken the position that only a narrow subset of agency rules — either those with “procedural defects” or those where the agency has changed its prior position — are subject to an additional layer of independent State Farm review (either pre- or post-Chevron review). Exacerbating this trend, some litigants do not bring independent State Farm challenges in Chevron statutory interpretation cases. My model, on the other hand, would expand the reach of State Farm review, widening the berth of agency rules subject to hard look review.
Perhaps most significantly, my model would play a role even where the Chevron interpretive issue arises between private parties, when the agency is not a party and thus litigants cannot raise a direct State Farm challenge to the rulemaking. Incorporating State Farm into Chevron Step Two would allow for an indirect State Farm challenge to the agency’s decisionmaking even in these cases.
B. Why the Time is Ripe for the Chevron-State Farm Framework
We are at an important crossroads. Scholars and courts have sharply differing views about where the U.S. Supreme Court stands with respect to Chevron generally, and, more specifically, the extent to which an agency must support its statutory interpretation with factual materials or cost-benefit analyses in order for its interpretation to be considered reasonable.
In a progression of recent cases, the U.S. Supreme Court has, in various ways, signaled a reluctance to defer to federal agencies’ interpretations of statutes. While scholars have seized upon these cases to signal the demise or retreat of Chevron, they have missed another possibility. As I argue in my forthcoming article, Michigan v. EPA and Encino Motorcars LLC v. Navarro could hint at a new Chevron–State Farm conceptual framework, which directs courts to scrutinize the factual premises and underlying policy reasons supporting an agency’s interpretive position.
If so, the present moment of Chevron retreat may be ushering in meaningful judicial scrutiny at Step Two. In other words, State Farm arbitrary and capricious review under APA § 706(2)(A) at Chevron Step Two may now become a doctrinal reality (decades after some scholars first proposed it). Moreover, the realm of indirect State Farm challenges to agency rules in private party litigation implicating Chevron statutory interpretation issues (a concept I pioneered in earlier work) could expand.
In Michigan v. EPA, the EPA made a threshold determination that it was “appropriate and necessary” to regulate certain emissions under the Clean Air Act without considering costs. Industry groups and twenty-one states challenged the emissions standards, arguing that the EPA’s interpretation of the Clean Air Act was unreasonable and that its ultimate decision that it was “appropriate and necessary” to regulate the emissions was arbitrary and capricious. The D.C. Circuit rebuffed the challenges and upheld the regulations, applying Chevron and ruling that the EPA’s interpretation was “clearly permissible.”
In a narrow (5-4) decision, the U.S. Supreme Court reversed. Justice Antonin Scalia, writing for the majority, reasoned that while “Chevron directs courts to accept an agency’s reasonable resolution of an ambiguity in a statute that the agency administers,” the EPA had “strayed far beyond th[e] bounds [of reasonable interpretation]” in concluding that it could ignore costs when making threshold determinations as to whether regulation would be appropriate.
Michigan v. EPA means different things to different people. But what is remarkable is the extent to which there is broad agreement on one point: that, in the words of Justice Elena Kagan, in dissent, “sensible regulation requires careful scrutiny of the burdens that potential rules impose.” Indeed, the majority proclaims (with no need for any citation whatsoever): “Agencies have long treated cost as a centrally relevant factor when deciding whether to regulate” (emphasis added). The majority elaborates: “Against the backdrop of this established administrative practice, it is unreasonable to read an instruction to an administrative agency to determine whether ‘regulation is appropriate and necessary’ as an invitation to ignore cost.” Cass Sunstein heralds the case as a “ringing endorsement of cost-benefit analysis by government agencies.”
To date, no one has yet highlighted what I find to be the most intriguing feature of the case — namely the citation of State Farm in the midst of the Chevron inquiry. At the outset, the majority frames its analysis as follows:
Federal administrative agencies are required to engage in “reasoned decisionmaking.” Not only must an agency’s decreed result be within the scope of its lawful authority, but the process by which it reaches that result must be logical and rational. It follows that agency action is lawful only if it rests “on a consideration of the relevant factors” (emphasis added) [State Farm].
After previewing its conclusion that the EPA’s interpretation fails under Chevron, the majority cites State Farm once again in the course of its own statutory interpretation analysis, reasoning that “[a]lthough th[e] [statutory] term [‘appropriate’] leaves agencies with flexibility, an agency may not ‘entirely fai[l] to consider an important aspect of the problem’ when deciding whether regulation is appropriate. [State Farm].”
The Court’s citations of State Farm are concededly cryptic. During oral argument, Justice Scalia offered a potentially far-reaching view: namely, that unless the statute prohibits considerations of cost, State Farm arbitrary and capricious review under the APA requires it. This goes farther than I would. However, where agencies perform cost-benefit analysis — as they are often obliged to do pursuant to executive order — it is fair game for judicial review. More generally, my reading of Michigan v. EPA is that the Court deploys the Chevron–State Farm conceptual framework to subject to heightened judicial scrutiny the EPA’s policy choice to disregard costs when making its threshold determination that it was “appropriate” to regulate.
Encino Motorcars, LLC v. Navarro — a case from 2016 that is back before the U.S. Supreme Court this Term — likewise supports my reading of Michigan v. EPA as signaling the era of a new Chevron–State Farm conceptual framework. Moreover, it highlights the significance of the framework for expanding the scope of indirect State Farm challenges to agency rules in private party litigation.
The key statutory interpretation issue in Encino Motorcars arose from an overtime pay dispute between several auto service advisors and their employer car dealership. The defendant car dealership argued that service advisors were exempt from overtime requirements under the Fair Labor Standards Act, which exempts “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements.” According to the defendant, a service advisor is a “salesman” who “service[s] automobiles” and thus fits within the exemption. The Department of Labor, however, had promulgated a 2011 rule (via notice-and-comment rulemaking) that defined the statutory terms and also specifically excluded service advisors from the statutory exemption. The Ninth Circuit acceded to the plaintiffs’ demand to defer to the agency’s interpretation at Chevron Step Two. Specifically, the court noted that “[b]ecause we consider here a regulation duly promulgated after a notice-and-comment period, Chevron’s ‘reasonableness’ standard applies.” And — consistent with many other courts’ lax Step Two review — the court readily found “where there are two reasonable ways to read the statutory text, and the agency has chosen one interpretation, we must defer to that choice.”
The U.S. Supreme Court, however, more closely scrutinized the agency’s policy-inflected statutory interpretation choice. The Court probed the regulatory record and found the agency’s reasoning wanting: “[T]he Department said almost nothing. It stated only that it would not treat service advisors as exempt because ‘the statute does not include such positions and the Department recognizes that there are circumstances under which the requirements for the exemption would not be met.’ It continued that it ‘believes that this interpretation is reasonable’ and ‘sets forth the appropriate approach.’” This cursory, wholly legalistic justification did not pass muster with the Court.
Read against the background of the Ninth Circuit decision that it reverses — namely a ringing endorsement of a permissive Step Two approach to deferring to the regulatory agency — and considering how the Court invokes State Farm (hitherto absent from the lower courts’ Chevron analyses) to review the sufficiency of the agency’s reasons for its statutory interpretation choice, I read Encino Motorcars as yet another instance of the Supreme Court’s embrace of a new Chevron–State Farm conceptual framework.
I also recognize that Encino Motorcars is susceptible to different interpretations. To begin, in concluding that “the 2011 regulation was issued without the reasoned explanation that was required in light of the Department’s change in position and the significant reliance interests involved,” the Court highlighted the relevance to its ultimate holding of two somewhat related variables, namely the change in agency position and industry reliance. According to the Court, the 2011 rule represented an abrupt about-face by the DOL in light of its “decades-old practice of treating service advisors as exempt.” And “[i]n light of this background [of reliance on the part of the retail automobile and truck dealership industry], the Department needed a more reasoned explanation for its decision to depart from its existing enforcement policy.” Read in this light, the DOL was denied deference not because it failed to provide policy-based justifications for its interpretation, but because it failed to justify its interpretation against decades of contradictory practice. Thus, while Encino Motorcars holds that agency reason-giving of some kind is required at Chevron Step Two, the requirement — absent an abrupt about-face and concomitant thwarted reliance interests — may be minimal (i.e., simply more than “almost nothing”).
Next, focusing on the Court’s multiple invocations of State Farm has led some to conclude that Encino Motorcars is really a State Farm, not Chevron case. Thus, Adrian Vermeule characterized the case as banal, standing for the proposition that “[a]rbitrary regulations are directly invalid; and although that does also entail they should receive no deference, one hardly needs to say so, and there is no need at all to comment on it.” In a similar vein, the Second Circuit in Catskill Mountains read the case “to stand for the proposition that where a litigant brings both a State Farm challenge and a Chevron challenge to a rule, and the State Farm challenge is successful, there is no need for the reviewing court to engage in Chevron analysis.”
But this overlooks a significant feature of the Encino litigation — namely, that it was between private parties, neither of which invoked State Farm as a direct challenge to the agency’s 2011 rulemaking. Instead, by importing State Farm into the Chevron framework, the U.S. Supreme Court in effect sanctioned an indirect challenge to the agency’s rulemaking in a private lawsuit where the agency was only an amicus. This particular feature — namely the potential for increasing the scope of pre-enforcement review of agency rules in cases between private parties — may be the most novel component of the new Chevron–State Farm conceptual framework.
C. CONCLUSION: What the Future Holds
While the heightened judicial scrutiny of my proposed model is most closely associated with imposing fact-finding and cost-benefit analysis requirements upon agencies, it can just as readily be used by courts to scrutinize deregulatory actions by agencies, when their downgrading of regulations is not justified by sufficient and specific policy-relevant facts.
The incorporation model is thus non-partisan in nature; it is aimed at good governance. Its time has come.
