Agency Authority, Judicial Oversight, and the Fate of Chevron Deference

Introduction

Two pending U.S. Supreme Court cases call into question the judicial deference granted to agency rulemaking. Loper Bright Enterprises v. Raimondo (Loper Bright) and Relentless, Inc. v. U.S. Dept. of Commerce (Relentless) will address the level of deference courts must apply to administrative agency decision-making (Chevron deference). The issue presented in the consolidated cases is whether the U.S. Supreme Court should overrule the landmark administrative law case Chevron v. NRDC or narrow it to provide that statutory silence in one part of the statute concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring agency deference.

Case Summary

On May 1, 2023, the U.S. Supreme Court granted certiorari in Loper Bright, a case involving a federal law granting the National Marine Fisheries Service (NMFS) the power to require that certain fishing vessels carry federal monitors onboard to enforce fishing-related regulations. The NMFS interpreted the law to also require that the fishing companies pay the salaries of the federal monitors on both foreign and domestic fishing vessels, although federal law is silent on the issue with respect to domestic fishing vessels.

On October 13, 2023, the Court granted certiorari in Relentless, a case that addresses the same issue. It is suspected the reason for granting certiorari in Relentless was to allow Justice Ketanji Brown Jackson, who had recused herself in the Court’s decision on Loper Bright, to participate in what is anticipated to be a significant landmark in the agency deference landscape.

The Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act or the Act) provides the authority for NMFS to require commercial fishing boats to carry official observers to ensure compliance with fishing regulations. The NMFS, through its rulemaking authority, determined in 2020 that midwater herring trawlers were required to have independent observers on every trip to monitor fishing operations and to establish guidelines for weighing and sampling their catch. The NMFS, which operates as part of the U.S. Department of Commerce, exercised its rulemaking authority to require that the herring fishermen cover the cost of those at-sea monitors, noting that the Act uses both “quartering” and “carry” and interpreting that to cover more than just “providing space.”

In Loper Bright and Relentless, a number of fishing companies affected by the regulation filed suit in U.S. District Court for the D.C. Circuit and U.S. District Court for the District of Rhode Island, respectively. The District Courts determined in both cases that clear statutory text and legislative history rebutted plaintiffs’ arguments and that the government agency was acting within the bounds of its statutory authority in promulgating the rule. The D.C. Circuit and First Circuit affirmed the lower court opinions, and the fishing companies appealed to the U.S. Supreme Court.

The NMFS announced it would suspend the monitoring program in April 2023 due to lack of funds to cover administrative costs. The appeal seeks to prevent mandatory monitoring payments in the future. asserts it had to charge observer costs to fulfill its congressional mandate under the Act. NMFS also noted that Congress had spoken to the precise issue in the Act by including multiple provisions that assume industry funding. The petitioner fishing companies counter that there is no specific authority to impose the fee, claiming that Congress should allocate funding for the program. They contend that Chevron has allowed Congress to outsource its legislative duties to the executive branch and that it is an unconstitutional limit on judicial oversight. Both sets of petitioning parties are pointedly asking the Court to rule, at the very least, that a federal law cannot be ambiguous when it is silent with respect to the topic at the center of the rule.

The Court heard consecutive oral arguments in the cases on January 17, 2024. A decision is expected from the Court in June 2024.

Implications

Although the Loper Bright and Relentless cases arise under the Act, Chevron is taking center stage as the Court considers whether to set aside four decades of judicial deference to agency rulemaking. Before judicial intervention in the form of agency deference, when a regulation was challenged, courts focused their inquiry on whether agencies had express statutory authority for their rulemaking. They also looked to the Administrative Procedure Act for procedural and substantive requirements for agency actions. However, it was unclear what courts should do if a statute or law was silent or ambiguous. As part of an evolution of judicial review of IRS rules and regulations, the Court created the Chevron two-step test for agency deference in a 1984 case involving the Clean Air Act.

The Chevron test asks first whether Congress “directly addressed the precise question at issue.” If the meaning of the statute is clear, the court must “give effect” to that congressional intent, and both court and agency must defer to Congress. However, if a statute is silent or ambiguous with respect to the specific issue, the second step of Chevron requires asking if the agency’s construction is reasonable. If the answer is yes, courts will give “controlling weight” to the agency’s reasonable interpretation. Courts may not substitute their own interpretation of a statutory provision for an agency construction that is reasonable.

Because agency regulations have the force of law, Chevron deference has been accused of shifting law-making power from Congress to the executive branch. The IRS has lost a number of recent cases regarding its rulemaking authority, and the outcome of Loper Bright and Relentless could make it more difficult for the IRS to rely on Chevron deference in defending Treasury regulations.

Potential Outcome

Current justices on the Court have taken a silent stance against Chevron in recent years. In American Hospital Association v. Becerra, Justice Kavanaugh wrote the unanimous opinion rejecting a change to the method established by the Department of Health and Human Services for calculating reimbursement rates for hospitals providing prescription drugs. He concluded the traditional tools of statutory interpretation supported the hospitals’ interpretation rather than the agency’s interpretation. What is notable in the opinion is that there is no reference to Chevron. In Becerra v. Empire Health, Justice Kagan, writing for the majority, concluded that an HHS regulation correctly construed language in the Medicare law, although she did not cite Chevron or any other doctrine addressing agency deference.

Other cases have shown an outspoken disdain among the Court’s current justices for Chevron deference. In Michigan v. EPA, Justice Thomas noted in a concurring opinion that Chevron “raises serious separation-of-powers questions” and that judges should not be precluded from interpreting federal statutes, even ambiguous ones. While on the Tenth Circuit, Judge Gorsuch wrote the majority opinion in Gutierrez-Brizuela v. Lynch, and took the opportunity to also write a concurring opinion arguing against Chevron deference. According to Justice Gorsuch’s concurrence, courts are increasingly incapable of fulfilling their constitutional duty to interpret the law when restrained by Chevron deference.

The Court has relied increasingly on Auer deference, by which an agency’s interpretation of its own regulation is “controlling unless plainly erroneous or inconsistent with the regulation.” Through recent case law, the Court has added qualifications to the Auer standard including that a court should not uphold an agency’s interpretation if it would either 1) undermine the principle that agencies should provide parties fair warning of the conduct a regulation prohibits or requires, or 2) result in unfair surprise. On other recent occasions, the Court has leaned in the direction of Skidmore deference, in which courts evaluate an agency’s decision based on four factors: 1) the thoroughness of the agency’s consideration, 2) the validity of its reasoning, 3) the consistency of its interpretation over time, and 4) other persuasive powers of the agency.

Oral Argument

At oral argument on the cases, the justices appeared split as to whether goals of stability and administrability were better served by allowing the courts and judges with lifetime appointments to interpret statutes or by deferring to the subject-matter experts in administrative agencies within an ever-changing executive branch. During oral arguments in Loper Bright, Justice Coney-Barrett suggested that without Chevron, federal regulations in every sector of the economy could be limited or called into question where statutory language is less than clear. She noted the “flood of litigation” that would ensue as a result. Justice Kavanaugh, however, argued that the Chevron framework creates instability and “ushers in shocks to the system every four to eight years when a new administration comes in.” In questioning counsel for petitioners, Justice Roberts postulated that perhaps there is no need to go beyond Chevron’s first step, and thus agency deference is not required to resolve the issue at hand. Justice Kagan focused on congressional direction and asserted that the issue is not whether the court could interpret the statute, it is who Congress wants to have the responsibility for interpretation when the statute is ambiguous. She also questioned whether Congress could codify Chevron to require agency deference. Justice Gorsuch noted that both parties were arguing they would win under step one of Chevron and that this sort of statutory interpretation is best left to the judiciary.

With Justice Jackson recused in Loper Bright, it may be Relentless that ends up in the history books if the Court is split 4-4 without her vote. Justice Jackson remarked during Relentless oral arguments that Chevron helps protect the separation of powers and expressed concern over the courts becoming “uber-legislators” if Chevron were overturned.

Action Item—Protective Refund Claims

If Chevron is overturned, a number of IRS rules and regulations may become susceptible to attack on the basis that deference should not apply. These include the corporate alternative minimum tax, the excise tax on stock buybacks, foreign tax credit regulations, issued and forthcoming regulations under the Tax Cuts and Jobs Act, Employee Retention Credit guidance and regulations, and renewable energy credits. Taxpayers should consider whether protective refund claims may be warranted to preserve client rights to claim refunds pending such administrative rulemaking challenges.