No Notice, No Deference: Agency Deference After Christopher v. SmithKline Beecham Corp.
by Elbert Lin and Brendan J. Morrissey, Wiley Rein LLP
In a recent article, we noted that Christopher v. SmithKline Beecham Corp., 2012 BL 150189, 80 U.S.L.W. 4463 (U.S. 2012), presented the U.S. Supreme Court with the opportunity to limit the significant deference afforded to agencies’ interpretations of their own ambiguous regulations, i.e., Seminole Rock or Auer deference. See Elbert Lin & Brendan J. Morrissey, Christopher v. SmithKline Beecham: Will the Supreme Court Limit the Deference Afforded to an Agency’s Interpretation of Its Own Regulations?,80 U.S.L.W. 1268 (Mar. 20, 2012). Discussing longstanding case law in the U.S. Court of Appeals for the District of Columbia Circuit, we predicted that the Supreme Court might limit such deference in circumstances where deference to the agency’s view would result in retroactive liability and unfair surprise to the regulated entity. Consistent with that prediction, and referencing the same line of D.C. Circuit cases, the Supreme Court in Christopher refused to accord Seminole Rock deference to an interpretation by the U.S. Department of Labor of its own regulation largely because that interpretation would have imposed massive retroactive liability on regulated parties without notice.
The Supreme Court’s decision in Christopher is representative of a trend this past term, in which federal agencies suffered a string of defeats for what amounted to overreaching. In Federal Communications Commission v. Fox Television Stations Inc., 2012 BL 153978, 80 U.S.L.W. 4494 (U.S. 2012), the Supreme Court found that the Federal Communications Commission had violated due process by changing its “fleeting expletives” policy and finding, without fair notice, that two television networks had violated the new policy. In United States v. Home Concrete & Supply LLC, 2012 BL 101632, 80 U.S.L.W. 4347 (U.S. 2012), the court rebuffed the Internal Revenue Service’s effort to read a regulation in a manner different from the court’s interpretation of identical regulatory language 54 years ago. And in a third case, the court unanimously rejected the Environmental Protection Agency’s attempt to insulate from judicial review a “compliance order” that, in the government’s own view, exposed the regulated persons to double daily penalties in any future enforcement action. See Sackett v. Environmental Protection Agency, 2012 BL 67234, 80 U.S.L.W. 4240 (U.S. 2012).
In this article, we focus again on Christopher, which should have a significant practical effect going forward. While it remains to be seen the extent to which Christopher and the other decisions this past term affect agency action, lower courts will surely take note of the Supreme Court’s message on fair notice, as should regulated parties who find themselves on the opposite side of agencies in litigation.
A Brief History of Deference
For years, federal courts have wrestled with the problem of reviewing agency interpretations both of the statutes that they implement and enforce and the regulations they promulgate. Christopher is the latest in a long line of important Supreme Court cases addressing those questions—Skidmore v. Swift Co., 323 U.S. 134 (1944); Bowles v. Seminole Rock & Sand Co.; 325 U.S. 410 (1945); Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984); Auer v. Robbins, 519 U.S. 452 (1997);United States v. Mead Corp., 533 U.S. 218 (2001); and National Cable & Telecommunications Association v. Brand X Internet Services, 545 U.S. 967 (2005).
Over time, the Supreme Court has generally given federal agencies increasing leeway to interpret the statutes they administer. For many years, courts reviewed agency interpretation of statutes under the Skidmore standard, evaluating the agency’s views according to their “power to persuade.” Chevron changed that approach entirely, requiring courts instead to give significant deference to agency interpretations of ambiguous statutory provisions. Although the Supreme Court placed some limitations on Chevron deference in its Mead decision, it reaffirmed a highly deferential approach to agency statutory interpretation in Brand X, holding that the responsible agency has the ultimate say over any court in interpreting ambiguous statutory language.
The vast catalog of rules and regulations promulgated by federal agencies has similarly required the courts to establish a standard for reviewing agencies’ interpretations of their own ambiguous regulations. The longstanding Seminole Rock rule is that courts must give an agency’s interpretation of its own ambiguous regulation “controlling weight unless it is plainly erroneous or inconsistent with the regulation.” 325 U.S. at 414. Various rationales supporting the Seminole Rock principle have emerged, including that the issuing agency has the expertise necessary to resolve ambiguities and inconsistencies in complex regulatory schemes, see Thomas Jefferson University v. Shalala, 512 U.S. 504, 512 (1994); that it is preferable for a politically accountable agency to interpret ambiguous regulations, see Pauley v. Bethenergy Mines Inc., 501 U.S. 680, 696-97 (1991); and that an agency has special insight into the meaning of regulations that it promulgated, see Martin v. Occupational Safety & Health Review Commission, 499 U.S. 144, 152-53 (1991).
Even before Christopher, the Supreme Court imposed some limits on the availability of Seminole Rock deference. The rule does not apply to an agency’s interpretation of an unambiguous regulation, Christensen v. Harris County, 529 U.S. 576, 588 (2000), or a regulation that simply “parrot[s]” statutory language, Gonzalez v. Oregon, 546 U.S. 243, 257 (2006). Courts also will not accord Seminole Rock deference to an agency interpretation that is a “post hoc rationalization advanced … to defend past agency action against attack,” Auer, 519 U.S. at 462 (quotation omitted), or a changed interpretation that creates “unfair surprise,” Long Island Care at Home Ltd. v. Coke,551 U.S. 158, 170-71 (2007).
These limits rarely come into play, however. In fact, even as the Supreme Court developed these limitations, Seminole Rock deference simultaneously became more widely known by the name of the 1997 case that greatly expanded its applicability—Auer. In Auer, the Supreme Court held that Seminole Rock deference applies even when an agency’s interpretation “comes to [a court] in the form of a legal brief.” 519 U.S. at 462. Since then, obtaining the support of the agency has become critical for private parties involved in litigation that turns on the meaning of an agency regulation. Indeed, as the Supreme Court noted in Christopher, DOL had developed an amicus “program” based on the Auer principle, inviting interested parties to solicit the agency’s amicus support in interpreting the agency’s rules. Slip op. at 8 n.11.
Doubts About Deference
Despite the substantial deference agencies have continuously enjoyed in interpreting their own ambiguous regulations, doubts about the wisdom and validity of Seminole Rock deference have percolated over the years. In a dissenting opinion in Thomas Jefferson University, Justice Clarence Thomas expressed concerns about the consequences of encouraging agencies to promulgate vague regulations: “[A]gency rules should be clear and definite so that affected parties will have adequate notice concerning the agency’s understanding of the law.” 512 U.S. at 525 (Thomas, J., dissenting, joined by Stevens, O’Connor, and Ginsburg, JJ.).
Just last year, two other members of the Supreme Court expressed some reservations with the doctrine. Justice Antonin Scalia, the author of the majority opinion in Auer, acknowledged in his concurring opinion in Talk America Inc. v. Michigan Bell Telephone Co., 2011 BL 157472, 79 U.S.L.W. 4442 (U.S. 2011), that he has come to have doubts about the validity of the Seminole Rock rule. It is, he explained, “contrary to fundamental principles of separation of powers to permit the person who promulgates a law to interpret it as well.” Id. (Scalia, J., concurring). And in oral arguments in Chase Bank USA NA v. McCoy, 2011 BL 17215, 79 U.S.L.W. 4060 (U.S. 2011), Justice Elena Kagan questioned whether deference to an interpretation announced in an agency amicus brief is consistent with Mead, in which the Supreme Court declined to apply Chevron deference to agency statutory interpretation in opinion letters and other documents lacking the force of law. In both cases, the Supreme Court nevertheless reaffirmed the Seminole Rock rule without dissent.
After Talk America and Chase Bank, the grant of the writ of certiorari in Christopher—another case involving an agency amicus brief interpreting an agency regulation—suggested that the Supreme Court was ready to cut back Seminole Rock deference. This time, at least, such predictions were accurate.
Fair Notice Required
At issue in Christopher was whether a pharmaceutical detailer (an employee of a pharmaceutical company who visits doctors and engages in marketing efforts relating to pharmaceutical products) is an “outside salesman” as defined in the Fair Labor Standards Act and DOL regulations. The FLSA places minimum wage and maximum hour requirements on employers, but it exempts from those requirements workers employed “in the capacity of outside salesman.” By regulation, DOL defines “outside salesman” as “any employee … [w]hose primary duty is … making sales within the meaning of [29 U.S.C. §203(k)]” and “[w]ho is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty.” 29 C.F.R. §541.500(a)(1)-(2). In turn, Section 203(k) defines “sale” as “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” DOL regulations then further define “[s]ales” to include “the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property.” 29 C.F.R. §541.501(b).
The petitioners, detailers for SmithKline Beecham, sued the company under the FLSA for failure to compensate them for overtime work. The company prevailed on summary judgment, arguing that the petitioners were “employed … in the capacity of outside salesman.” Slip op. at 6-7. The Ninth Circuit affirmed, refusing to give “controlling deference” to an amicus brief from DOL that interpreted the relevant regulations in favor of the detailers. Id., slip op. at 7.
Writing for a five-justice majority, Justice Samuel A. Alito Jr. likewise declined to apply the Seminole Rock rule to DOL’s interpretation of its regulations. Id., slip op. at 10-11. Noting the previous limitations on Seminole Rock deference, Justice Alito concluded that the facts of Christopher presented yet another. The rule also does not apply when an “interpretation of ambiguous regulations [would] impose potentially massive liability on [a regulated entity] for conduct that occurred well before that interpretation was announced.” Id. According such an interpretation Seminole Rock deference “would seriously undermine the principle that agencies should provide regulated parties ‘fair warning of the conduct [a regulation] prohibits or requires.’” Id. (quoting Gates & Fox Co. v. Occupational Safety and Health Review Commission, 790 F.2d 154, 156 (D.C. Cir. 1986) (Scalia, J.)). Although there are often good reasons to defer to agency interpretations, Justice Alito recognized, it is unreasonable “to require regulated parties to divine the agency’s interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding.” Id., slip op. at 14.
Justice Alito concluded that under the facts of the case, according controlling deference to DOL’s interpretation would amount to an “unfair surprise” and violate the principle of “fair warning.” Pharmaceutical companies had long treated their detailers as outside salesmen under the FLSA, and the text of the statute and regulations did not provide “clear notice” to the contrary. Id., slip op. at 11. Nor had DOL ever initiated an enforcement action suggesting that the practice was unlawful. Id., slip op. at 12. “[W]here, as here, an agency’s announcement of its interpretation is preceded by a very lengthy period of conspicuous inaction, the potential for unfair surprise is acute.” Id., slip op. at 13.
Applying Skidmore deference instead, Justice Alito ultimately ruled against the detailers and DOL. Finding DOL’s interpretation unpersuasive, he turned to “traditional tools of interpretation.” Id. at 2170. Under his own reading of the statute and relevant regulations, Justice Alito concluded that the “petitioners made sales for purposes of the FLSA and therefore are exempt outside salesmen within the meaning of the DOL’s regulations.” Id., slip op. at 16.
Joined in dissent by three other justices, Justice Stephen G. Breyer did not contest the majority’s unwillingness to defer to DOL. Id., slip op. at 2 (Breyer, J., dissenting) (“I also agree that we should not give the Solicitor General’s current interpretive view any especially favorable weight.”). Instead, undertaking his own “independent examination of the statute’s language and the related … regulations,” he simply reached the opposite conclusion about detailers’ status as outside salesmen under the FLSA. Id. Justice Breyer noted that he based his decision not to defer on the fact that DOL’s interpretation changed between its Ninth Circuit amicus brief and the one filed in the Supreme Court. Id. It is not clear to what extent the dissenters accept the majority’s limitation on Seminole Rock deference.
Life After Christopher
This much is clear: Christopher is a significant limitation on Seminole Rock deference and brings the doctrine more closely in line with traditional notions of due process. And though it arose in the context of an agency amicus brief, its holding would seem to apply more broadly to any agency interpretation of an ambiguous regulation. But several open questions remain. We discuss a few below.
How much retroactive liability must be at stake?
In Christopher, Justice Alito specifically noted that the petitioners invoked DOL’s interpretation to impose “potentially massive [retroactive] liability,” id., slip op. at 10 (majority opinion), and concluded that it would be inappropriate to apply Seminole Rock deference in “this circumstance,” id. (emphasis added). See also Brief of Pharmaceutical Research and Manufacturers of America (PhRMA) as Amicus Curiae at 17 n.7 (“[T]he industry faces billions of dollars of potential liability from suits like these.”). It is not clear whether these statements were intended to cabin the Christopher principle only to cases involving significant retroactive liability. Some evidence suggests that they were not.
The lower court cases cited by Justice Alito do not include such a limitation. For example, in Gates & Fox, the regulated entity had received a “citation” for violating a safety regulation issued by the Occupational Safety and Health Administration. Without discussing the nature or consequences of the citation, the D.C. Circuit refused to accord controlling deference to the agency’s interpretation of its own regulation: “Where the imposition of penal sanctions is at issue, … the due process clause prevents that deference from validating the application of a regulation that fails to give fair warning of the conduct it prohibits or requires.” 790 F.2d at 156. Similarly, in Phelps Dodge Corporation v. Federal Mine Safety and Health Review Commission, the Ninth Circuit did not place any special emphasis on the nature of the “citation” or the amount of the “fine.” 681 F.2d 1189, 1190 (9th Cir. 1982). The court simply held that “the application of a regulation in a particular situation may be challenged on the ground that it does not give fair warning that the allegedly violative conduct was prohibited.” Id. at 1192. The other cases are similar. See Christopher, slip op. at 11 n.15.
The Supreme Court’s decision just a few days later in Fox also suggests that, in a future case, the court would not require a significant amount of retroactive liability. In Fox, the court concluded that a regulated entity need not be subject to a monetary forfeiture to have suffered sufficient harm for due process purposes. Reputational injury resulting from an agency’s finding of wrongdoing is enough. Slip op. at 14.
What constitutes unfair surprise?
Justice Alito relied in Christopher not only on the lack of “clear notice” in the statute and regulations, but also on the “[e]ven more important” fact that DOL “conspicuous[ly]” failed to take any enforcement action during the industry’s “decades-long practice” of treating detailers as exempt outside salesmen. Slip op. at 13. The opinion does not decide whether an ambiguous regulation alone is enough to cause an unfair surprise or whether there must be some kind of settled expectations among regulated parties. Exactly how important was DOL’s own inaction? The answer is less than clear.
On one hand, the lower court cases cited in Christopher hold that ambiguous regulatory language alone is enough for a court to find a lack of fair notice and to overcome Seminole Rock deference. In those cases, the courts of appeals determined only whether the regulatory language made apparent with “ascertainable certainty” that the conduct at issue was unlawful. Gates & Fox, 790 F.2d at 156 (quotation marks omitted); see also Phelps Dodge Corp., 681 F.2d at 1192-93; Dravo Corp. v. Occupational Safety & Health Review Commission, 613 F.2d 1227, 1231-33 (3d Cir. 1980); Diamond Roofing Co. v. Occupational Safety & Health Review Commission, 528 F.2d 645, 648-49 (5th Cir. 1976).
On the other hand, though it arose in a different context, the Supreme Court’s decision in Fox turned entirely on the expectations stemming from the agency’s own actions. Similar to Christopher, the Supreme Court in Fox stressed that “[a] conviction or punishment fails to comply with due process if the statute or regulation under which it is obtained ‘fails to provide a person of ordinary intelligence fair notice of what is prohibited.’” Slip op. at 12 (quoting United States v. Williams, 553 U.S. 285, 304 (2008)). The court then concluded that the procedural history showed that the broadcasters lacked fair notice. The FCC had changed its longstanding “fleeting expletive” policy after certain allegedly unlawful broadcasts, but nevertheless sought to apply the new policy to those broadcasts. Id., slip op. at 13. That violated due process.
Can DOL adhere to its interpretation on a forward-looking basis?
Another interesting question is whether DOL may now promulgate a forward-looking interpretation of “outside salesman” that codifies the agency’s litigating position and contradicts the Christopher court’s construction of the statute and regulations. To the extent DOL does so by interpreting the statute directly, Brand X would appear to permit the agency to override the Supreme Court’s interpretation. But the result is not nearly as clear if DOL instead purports to interpret its existing regulations (through some kind of formal guidance short of notice-and-comment rulemaking).
Should the logic of Brand X—that an agency may interpret an ambiguous provision of a statute differently than a federal court did previously—apply to an agency interpretation of an ambiguous regulation that a federal court has already interpreted? At least two federal courts of appeals have answered that question in the affirmative, finding “no reason why [Brand X] principles should not apply equally to the interpretation of a regulation.” Levy v. Sterling Holding Co. LLC, 544 F.3d 493, 502, 77 U.S.L.W. 1217 (3d Cir. 2008); see also In re Lovin, 652 F.3d 1349, 1353-54 (Fed. Cir. 2011). Christopher did not resolve this issue, but Justice Scalia in Talk America suggested that there is a significant difference between deferring to an agency interpretation of a statute than to an agency interpretation of its own regulation. See slip op. at 1-2 (Scalia, J., concurring).
Is the end of Seminole Rock deference in sight?
Whether Christopher foretells a further scaling back, or even the demise, of Seminole Rock deference is unclear. The majority in Christopher, which includes Justice Scalia, was not prepared to go as far as he suggested in Talk America. See slip op. at 3 (Scalia, J., concurring) (stating that he would be “receptive” to “reconsider[ing]” Seminole Rock deference). It did, however, acknowledge Justice Scalia’s criticism that the Seminole Rock rule “creates a risk that agencies will promulgate vague and open-ended regulations that they can later interpret as they see fit, thereby ‘frustrat[ing] the notice and predictability purposes of rulemaking.’” Christopher, slip op. at 13, (quoting Talk America, slip op. at 3 (Scalia, J., concurring)). The dissent’s failure to disagree may suggest that most, if not all, of the justices harbor some doubts about the propriety of the Seminole Rock rule.
Until Next Time
After years of expressing discomfort with the significant deference afforded to agency interpretations of their own ambiguous regulations, the Supreme Court has adopted a clear and potentially far-reaching limitation on Seminole Rock deference. Questions remain, however. As is often the case when the Supreme Court announces a new rule, the difficult work of ironing out the details will be left for the time being to the lower courts.
Elbert Lin is a partner in Wiley Rein LLP’s Appellate and Communications Practices. He can be reached at (202) 719-7460 or firstname.lastname@example.org.
Brendan J. Morrissey is an associate in the firm’s Appellate and Communications Practices. He can be reached at (202) 719-7163 or email@example.com.
The authors acknowledge significant contributions from summer associate Stephen J. Kenny.
This article by Wiley Rein attorneys provides general news about recent legal developments and should not be construed as providing legal advice or legal opinions. You should consult an attorney for any specific legal questions.