by William Funk⁽¹⁾

Chevron and Zone-of-Interests Test

In the course of a month, the Supreme Court decided three administrative law cases. The one thatreceived the most press was National Credit Union Administration v. First National Bank & Trust Co., --- S. Ct. --- (1998). There, the Court held that the NCUA had incorrectly interpreted the Federal Credit Union Act when it allowed federal credit unions to accept as members persons from multiple unrelated employer groups. This was notable because it puts in question the legal status of some 3,600 credit unions that have added approximately 20 million members from about 150,000 unrelated employer groups since the NCUA first ruled such membership permissible 16 years ago. As this issue of the News goes to press, there are intimations that Congress may act to ratify the NCUA's interpretation. In reaching its conclusion, the Court applied a standard analysis under Chevron v. NRDC, 467 U.S. 837 (1984). As had the D.C. Circuit below and the Sixth Circuit as well, First City Bank v. National Credit Union Administration Bd, 111 F.3d 433 (1997), the Court found that the inquiry stopped at the first Chevron step -- the language of the Act that "Federal credit union membership shall be limited to groups having a common bond of occupation or association" clearly foreclosed allowing a federal credit union from having members from more than one occupation or association with a common bond.

While the decision on the merits may have captured the headlines, it was not the important administrative law issue, the one that split the Court 5-4. That issue was one of prudential standing, an issue the Court had addressed only last year in Bennett v. Spear, --- S.Ct. --- (1997). To bring an action under the Administrative Procedure Act, a plaintiff must show that it is "adversely affected or aggrieved by agency action within the meaning of a relevant statute." 5 U.S.C. § 702 (emphasis added). The question, therefore, is whether "the interest sought to be protected by the complainant is arguably within the zone of interests to be protected or regulated by the statute . . . in question." Ass'n of Data Processing Service Organizations, Inc. v. Camp, 397 U.S. 150, 153 (1970). Here, the challenge had been brought by national banks, competitors of credit unions. Accordingly, if the purpose of the limitation on credit union membership had been to protect other banks from competition from credit unions, the prudential standing, or zone-of-interests, test would clearly be met. But that had not been the purpose of the membership limitation. Rather the limitation was made to protect the financial solvency of credit unions, because at the time (in 1934) it was believed that credit unions had weathered the financial problems of the depression better than banks precisely because of their limited membership.

Justice Thomas, writing for the majority, nevertheless found that the banks were within the zone of interests of the credit unions' membership limitations. He reviewed the history of the prudential standing test from Data Processing in 1970 through Arnold Tours, Inc. v. Camp, 400 U.S. 45 (1970), Investment Company Institute v. Camp, 401 U.S. 617 (1971), and Clarke v. Securities Industry Assn., 479 U.S. 388 (1987). In each the Court had held that persons injured in their competitive interests by an agency interpretation of a relaxed limitation on banks' activities had prudential standing to challenge the agency's interpretation, seemingly analogous to the credit union situation. Moreover, it was essentially conceded that in these earlier cases the purpose of limiting banks's activities had not been to protect competitors from banks, but to assure the financial soundness of the banks -- again, almost identical to the purpose of the limitation on credit unions. Justice Thomas explained that in the earlier cases the plaintiffs had been arguably within the zone of interests, because Congress's purpose had been to limit competition (for whatever reason), and the plaintiffs were asserting the interest of limiting that competition. So also in NCUA, "one of the interests 'arguably . . . to be protected' by [the limitation] is an interest in limiting the markets that federal credit unions can serve. This interest is precisely the interest of respondents affected by NCUA's interpretation of [the Act]."

The dissent, written by Justice O'Connor and joined by Justices Souter, Stevens, and Breyer, rejected the conclusion that the situation in NCUA was analogous to the situations in the earlier cases. There, the limitations all had been on the activities banks could conduct; they literally kept the banks out of the market. Moreover, Congress's purpose had been to limit banks' activities, because of a belief that non-banking activities had made banks more financially vulnerable prior to the depression. Here, however, the limitation on credit unions' membership did not (at least theoretically) limit the number of members a credit union could have; every person was a potential customer of some credit union, and therefore, the limitation did not limit competition for customers between banks and credit unions. In addition, Congress's intent was not to limit the spread of credit unions; indeed, the whole purpose of the Act was to facilitate their growth. Consequently, the purpose of the limitation in the Federal Credit Union Act did not reflect any desire to limit competition, and thus, its purpose was entirely different from the purpose of the limitations in the various banking laws considered in the earlier cases. The fact that banks benefitted by the common-bond limitation was simply an incidental benefit.

The Court's line up is most unusual. Three "conservative" justices (Rehnquist, Scalia, and Thomas) who are often identified with restricting the ability of litigants to get to court vote to open the courthouse door, while three "liberal" justices (Breyer, Souter, and Stevens) vote to close it. At least in part this must be due to the Court's inconsistency (if not incoherency) with respect to the zone-of-interests test.

The Court's most recent prudential standing cases, Bennett v. Spear and Air Courier Conference v. Postal Workers, 498 U.S. 517 (1991), had suggested a certain rigor to the zone-of-interests test. They indicated, not that Congress must have intended to protect any particular entity or type of entity, but that at least the interest the claimant was protecting must be an interest that Congress had intended to protect. The claimant must not be merely an incidental beneficiary. Air Courier Conference was a case in point. There, the Postal Service intended to give up part of its postal monopoly to private express carriers, and this decision was challenged by postal workers' unions. They demonstrated that they would be economically injured by the action (satisfying constitutional standing requirements), and they pointed to other parts of the postal laws indicating a congressional interest in protecting postal workers. The Court, however, said that to establish prudential standing one had to represent an interest intended to be protected by the particular provision alleged to be violated. The postal monopoly provision did not relate to any interest in protecting postal workers, but instead related to protecting the financial well-being of the Postal Service. In Bennett, while the Court found prudential standing on behalf of ranchers alleging a violation of the Endangered Species Act, it did so only after determining that the provision allegedly violated was intended "to avoid needless dislocation produced by agency officials zealously but unintelligently pursuing their environmental objectives."

These most recent cases, however, were arguably in tension with the earlier cases. The case immediately before Air Courier Conference was Clarke, and there the Court reversed the court of appeals' strict application of the zone of interests test and stated that "the test is not meant to be especially demanding," denying a right of review only if the plaintiff's interests are so "marginally related to or inconsistent with the purposes implicit in the statute."

Reconciling these two lines of cases is difficult, to say the least. Justice Thomas relies on the bank cases and attempts to distinguish Air Courier, albeit less than fully successfully. Justice O'Connor, on the other hand, relies on Air Courier and Bennett and attempts to distinguish the bank cases, similarly falling short of the mark. One can be cynical and say that the Court finds standing for commercial interests but not for labor unions, but such an analysis is impeached by Justice Brennan's vote to deny prudential standing to the union in Air Courier and his vote to find prudential standing for the securities dealers in Clarke. One could read NCUA as returning to the Clarke line of cases and the less-than-demanding zone-of-interests test, but the fragile majority in NCUA suggests no such consensus has been reached. Rather, one can imagine that the factual similarities between NCUA and the banking cases was enough to tip the balance, and that the zone-of-interests test in the years ahead is likely to remain uncertain terrain.

Arbitrary and Capricious Review and Substantial Evidence Review

As much press as NCUA received, Allentown Mack Sales and Service, Inc. v. National Labor Relations Board, --- S.Ct. --- (1998), received none at all, totally ignored by the Washington Post. The case involved an employer conducting an internal poll of its employees to determine if the union still had employee support. Under NLRB precedent, such polls may be undertaken only when an employer already has "a good faith reasonable doubt based on objective considerations" that the union still has majority support. Board precedent applies the same standard to employer withdrawal of recognition from a union and to an employer's request for a formal, Board-supervised election. Allentown Mack conducted a poll, and the union lost. Thereafter, it filed an unfair labor practice charge with the Board. The Board sustained the charge, finding that Allentown did not have an "objective reasonable doubt," as necessary to justify the poll. The court of appeals enforced the Board's order, finding its decision supported by substantial evidence.

The first issue in the case was whether the Board's rule was arbitrary and capricious, in that it required the same level of doubt on the part of the employer for a poll as well as for requiring an election or simply a withdrawal of recognition. Three courts of appeal had concluded that the polling rule was irrational and arbitrary and capricious, while the D.C. Circuit below had sustained the rule. It split the Court 5-4. Justice Scalia wrote for the Court, joined by Justices Breyer, Stevens, Souter, and Ginsburg, upholding the Board's rule. The second issue in the case was whether the Board's determination under this rule was supported by substantial evidence. Again, the Court split 5-4, and again Justice Scalia wrote for the Court, but this time joined by Chief Justice Rehnquist and Justices O'Connor, Kennedy, and Thomas, holding that there was no substantial evidence support for the Board's conclusion.

With respect to the polling rule, Justice Scalia conceded that it was "in some respects a puzzling policy," because on its face it is not clear why an employer would ever want to poll informally its employees about their support of the union, when it could on the basis of the same evidence require a formal election with binding results. Nevertheless, he concluded that it was not "so irrational as to be 'arbitrary [or] capricious' within the meaning of the Administrative Procedure Act." Perhaps, he opined, an employer might prefer in the face of uncertainty to undertake an informal poll rather than undergo the expense of a formal election. Chief Justice Rehnquist's opinion for the dissent not only expressed the belief that the rule was totally irrational, but it also stated that the rule was beyond the NLRB's statutory authority. Because the NRLB's authority derives from its power to prohibit practices that "interfere with, restrain, or coerce employees" in the exercise of their collective bargaining right, polling could be prohibited only if it could have that effect. Properly supervised, the dissent concluded, polling would not interfere with employees' collective bargaining rights.

The principal problem in the second issue was discerning precisely what evidence an employer needs before it can have a "good faith reasonable doubt" about the union's majority support. First, there was a dispute over words. The Board asserted that "doubt" meant "disbelief," but Justice Scalia, displaying his penchant for dictionaries, cited three for his determination that "doubt" means "uncertainty." There was no discussion as to whether any deference was due the Board's interpretation of a term it had itself created, a fact noted by the dissent in an opinion authored by Justice Breyer. To interpret the term "doubt" to mean actual disbelief would be "linguistic revisionism," the Court said, not a permissible interpretation.

Still, application of the "substantial evidence" test to the record posed difficulties. The employer argued that the Board, despite its public, "reasonable doubt" rule, in fact utilized a test amounting to requiring employers to have clear and convincing evidence that a majority of the employees have rejected the union. And that it applied this test by discounting any evidence other than actual statements by a majority of union members (and, indeed, discounting in some circumstances even actual statements). Justice Scalia assessed the evidence and decided that no reasonable jury could find as the Board found. "The Board's finding to the contrary rests on a refusal to credit probative circumstantial evidence, and on evidentiary demands that go beyond the substantive standard the Board purports to apply."

Justice Breyer's opinion for the dissent also reviews the evidence in the record, but through the lens used by the Board, and finds the Board's order supported by substantial evidence. He then goes on to defend the lens used by the Board, saying "[n]or is it procedurally improper for an agency, rather like a common law court, (and drawing upon its accumulated expertise and exercising its administrative responsibilities) to use adjudicatory proceedings to develop rules of thumb about the likely weight assigned to different kinds of evidence."

It is not that the majority is unwilling to defer to the Board's expertise, but what Justice Scalia's opinion tries to make clear is that the expertise to which courts are to defer is expertise used in the setting of policy (and perhaps, but not explicitly addressed in the opinion, the application of facts to law). Indeed, this is reflected in his highly deferential opinion upholding the polling rule and reiterated in his discussion of the substantial evidence test. Moreover, he says, the substantial evidence test is itself deferential -- because it requires a court to uphold the agency decision that a fact exists, not on the basis that the evidence is sufficient to satisfy the court, but on the basis that it "could satisfy a reasonable factfinder." "This is an objective test, and there is no room within it for deference to an agency's eccentric view of what a reasonable factfinder ought to demand." The deference called for by the dissent, Justice Scalia says, is "a regime in which inadequate factual findings become simply a revision of the standard that the Board's (adjudicatorily adopted) rules set forth, thereby converting those findings into rule-interpretations to which judges must defer." The fundamental requirement of the Administrative Procedure Act, its procedures and provisions for judicial review, is for agencies to engage in "reasoned decisionmaking." However, "[i]t is hard to imagine a more violent breach of that requirement than applying a rule of primary conduct or a standard of proof which is in fact different from the rule or standard formally announced. [T]he evil of a decision that applies a standard other than the one it enunciates spreads in both directions, preventing both consistent application of the law by subordinate agency personnel (notably administrative law judges) and effective review of the law by the courts."

In short, Justice Scalia's opinion calls for a clear segregation between determinations of fact and determinations of law or policy. In determinations of the existence of a fact, he suggests that "agency expertise" has no place. If the agency wishes to make use of its accumulated wisdom regarding the implausibility of certain types of testimony, Justice Scalia invites the agency to adopt a rule "to create higher standards of evidentiary proof." The point is transparency. If the agency clearly articulates what its standards are, regulated entities may adjust their behavior accordingly to come into compliance, but if the standards are opaque, they must guess at what is expected.

Whether this segregation amounts to a departure from "the half-century old legal standard governing this type of review," as Justice Breyer alleges, the confusion between substantial evidence review and review of policy determination has its own half-century tradition. The companion case to Universal Camera Corp. v. NLRB was O'Leary v. Brown-Pacific-Maxon, Inc., 340 U.S. 504 (1951), where in a 6-3 decision the dissent berated the majority for treating a legal issue as a factual issue, so as to obtain substantial evidence review. Justice Breyer also stated that he feared the majority opinion would "weaken the system for judicial review of administrative action that this Court's precedents have carefully constructed over several decades." I am doubtful. Several considerations suggest that Allentown Mack will become "just another NLRB case," not a major administrative law case. First, the narrow and split majority suggests hesitation in ascribing much weight to Justice Scalia's opinion. Second, the dispute is perhaps really understandable only among administrative law nerds like Justices Scalia and Breyer, so the fine points of the analysis are likely to be lost in the translation to the courts below. Third, this is not the first attempt to provide a bright line between questions of fact and questions of policy and to direct agencies and courts to respect that line, but success has eluded others before Justice Scalia, and given the nature of the enterprise is likely to be elusive here as well.

Chevron Analysis

The Court's third administrative law case was another dispute over the proper accounting for Medicare reimbursement of hospitals' graduate medical education expenses. Prior to 1986, the Department of Health and Human Services had determined the appropriate amount of reimbursement on the basis of an annual audit. In that year, however, Congress amended the law to replace the annual audit with the establishment of 1984 as a base year, to be adjusted for inflation. Specifically, the statute directed the Secretary to "determine, for the hospital's cost reporting period that began during the fiscal year 1984, the average amount recognized as reasonable under this subchapter for direct graduate medical education costs. . . ." (emphasis added). In the implementing regulations, first published in 1989, the Secretary directed that each hospital's base-year costs be verified before they could be used for current and future reimbursement. In other words, HHS would go back and determine what were reasonable costs in 1984 and then use those possibly adjusted costs as the base for computing present costs under the new statute. In Regions Hospital v. Shalala, --- S.Ct. --- (1998), as a result of this rule, the hospital's 1984 costs were audited and a substantial percentage of those costs were disallowed as unreasonable and, accordingly, were not included as base-year costs. The hospital challenged the lawfulness of this regulation, asserting that it was a prohibited retroactive rule or, in the alternative, that it was not authorized by the statute. The first claim was easily dismissed. The Court cited Landgraf v. USI Film Products, 511 U.S. 244 (1994), for the rule that so long as a regulation applies only to present and future conduct, it is not made retroactive "merely because it draws upon antecedent facts for its operation." Here, the reaudit did not change amounts of reimbursement already made; it was used only for determining costs to be reimbursed in the future.

The harder question was whether the regulation was authorized by the statute. It had split the circuits, and it split the Court 6-3. Justice Ginsburg's opinion for the Court applied the "now familiar" formulation of Chevron v. NRDC. The first step is to determine whether Congress expressed a clear intention on the precise question at issue. Here that issue was whether the language -- "determine . . . costs . . . recognized as reasonable" -- necessarily meant the costs originally recognized as reasonable and reimbursed in 1984 or could "plausibly be read to mean, in light of the new methodology making 1984 critical for all subsequent years, an 'amount recognized as reasonable' through a reauditing process designed to catch errors that, if perpetuated, could grossly distort future reimbursements." As phrased, the answer was obvious, and the Court held that the hospital's interpretation was not the only possible interpretation, and given the impact of freezing an incorrect cost assessment into the base year, the agency's interpretation to avoid that result was reasonable.

What provided the difficulty was the fact that ordinarily HHS is limited to three years in which to conduct reaudits, and here the reaudit was five years back. These normal reaudits, however, do adjust the payments for the past period, whereas this special reaudit would only affect payments made in the future based upon the reaudited base year. Nevertheless, when Congress passed the statute in 1986, it may well have believed that HHS still had sufficient time to reaudit the 1984 base year within the normal three-year period. What was the proper resolution of the effect of Congress's miscalculation? For the majority, the answer was clear; Congress would not have wanted to freeze inaccurate cost amounts into the base year, especially because one of the reasons for the amendment was to limit Medicare reimbursements.

Justice Scalia's dissent, joined by Justices Thomas and O'Connor, concluded differently. Using the Chevron analysis, Justice Scalia could reach no other conclusion but that "recognized as reasonable" means "recognized as reasonable in 1984 and not adjusted by a normal reaudit." In response to the majority's question, what would Congress have wanted had it known that HHS would not have time to do the normal reaudit, Justice Scalia inveighed: "The answer to that question is easy. But it is the wrong question." What Congress would have wanted, but did not enact into law, is not law. "[I]t is not the province of this Court to distort [the law's] fair meaning (or to sanction the Executive's distortion) so that a better law will result."

Administratively imposed monetary penalties and occupational debarment do not implicate the Double Jeopardy Clause

Regulatory enforcement today is increasingly carried out by administratively imposed sanctions, with criminal enforcement reserved for particularly egregious cases. Because the federal criminal process generally moves more slowly than the administrative process, it may not be uncommon for regulatory violators to be first sanctioned administratively and then to find themselves subject to criminal prosecution. In Hudson v. United States, 118 S.Ct. 488 (1997), the Court unanimously rejected a claim that this constituted Double Jeopardy prohibited by the Fifth Amendment, although the majority opinion garnered only five votes, and the case generated five different opinions. Traditionally, only successive criminal proceedings implicated the Double Jeopardy Clause, but in United States v. Halper, 490 U.S. 435 (1989), the Court held that successive "punishments" were what were prohibited by the Double Jeopardy Clause. Whether a particular civil sanction constituted such punishment depended upon whether it served primarily the traditional goals of punishment, retribution and deterrence. This formulation has engendered a substantial amount of litigation, and the Court called a halt to it by overruling Halper. The Court thus returns to the traditional notion that only successive criminal prosecutions can violate the Clause. Whether an action is criminal or civil is governed by a two-part test. The first part is how Congress has denominated it; when Congress places the imposition of the penalty in an agency, this is "prima facie evidence that Congress intended to provide for a civil sanction." The second part of the test is whether, despite the denomination, the "statutory scheme [is] so punitive either in purpose or effect as to transform what was clearly intended as a civil remedy into a criminal penalty." And establishment of such a scheme can only be shown by "the clearest proof." The Court held that "neither monetary penalties nor debarment have historically been viewed as punishment." Moreover, even prohibiting someone from continuing in his career or profession "is certainly nothing approaching the infamous punishment of imprisonment." In addition, there is no scienter requirement, which normally would be present in a criminal penalty. Finally, the mere fact that an administrative penalty may deter conduct is not sufficient to suggest it is a criminal sanction.

Removal to Federal court of judicial review of state administrative proceeding

The International College of Surgeons owns two properties in Chicago that were declared historic properties under the city's historical landmark ordinance. The effect of the designation was to limit the College's development of the property, so the College sought judicial review in state court of the denial of its development permits. Its complaint raised a number of state administrative law issues, but it also raised several Federal constitutional claims, including that the ordinance is unconstitutional on its face and as applied and that the College was denied due process in the administrative proceeding. The defendant City of Chicago, for unexplained reasons, removed the case to Federal court on the basis of federal question jurisdiction. The district court granted summary judgement to the City on all the claims, exercising supplemental jurisdiction over the state law claims. The Seventh Circuit reversed, finding no jurisdiction in the district court on removal to review state administrative proceedings. The Supreme Court, in City of Chicago v. International College of Surgeons, 118 S.Ct. 523 (1997), reversed the court of appeals. The general rule, of course, is that a case can be removed to federal court if it could have been filed originally in federal court. Here, ICS had raised federal constitutional claims, which could have been brought in a federal court. Thus, this case fell squarely within normal removal standards. The complicating factor was that the case removed was judicial review under the state administrative procedure act, including state law claims, which under the state APA would call for on-the-record, deferential review of the agency's decisions, rather than a de novo action. Viewed in this light, the judicial review of the administrative action was not really an original action (subject to being removed), but an integral part of the state administrative process, specifically the appellate review of the agency decision. Just as one could not remove to federal court a state administrative proceeding, even if a party was raising federal constitutional claims therein, one should not be able to remove to federal court a state judicial proceeding that was really an extension of the administrative process. The problem with this argument, however, is that it would foreclose any ability to have the federal claims litigated in federal court (short of the Supreme Court). The purpose of the removal law, the Supreme Court suggested, is to assure that a defendant can have a federal court initially decide federal claims that the plaintiff could have brought in federal court. Only by allowing removal here was this purpose protected. This still left the question of how to deal with the state law claims, especially where under state law they would be on-the-record, judicial review of agency action. The Court stated that as to these claims, whether and to what extent they were to be decided by the federal court depended on the law applicable to supplemental jurisdiction, 28 U.S.C. § 1367(a). Nothing therein suggests that on-the-record review of administrative action is incompatible with federal district court functions, a function specifically assigned to district courts by the federal APA with respect to federal administrative actions. Moreover, the fact that supplemental jurisdiction can extend to judicial review of state administrative actions does not compel that the jurisdiction be exercised. District courts, the Court said, retain their broad equitable powers to decline to exercise supplemental jurisdiction in light of the "values of judicial economy, convenience, fairness, and comity." Moreover, district courts also must take account of traditional rules of abstention. Because neither the district court's exercise of its discretion nor its consideration of abstention issues had been addressed below the Court remanded for the court of appeals to consider them in the first instance.

1. Professor, Lewis & Clark Law School; Editor, Administrative & Regulatory Law News.