As noted in this PubCo post, SCOTUS recently heard oral argument in Kisor v. Wilkie, a case involving the interpretation of a regulation issued by the Department of Veteran's Affairs. In Kisor, a Vietnam vet, suffering from service-related PTSD, sought retroactive disability benefits from the VA. Interpreting the meaning of the term "relevant" as used in one of its own regs, the VA denied his claim for retroactive benefits. Why is this case important to public companies? Because the question presented to the Court was whether to continue the decades-long deference of courts to the reasonable interpretations by agencies (such as the SEC) of their own ambiguous regulations, often referred to as Auer deference (or Seminole Rock deference, referring to Auer's antecedent). The decision, expected by this summer, could narrowly restrict, or even completely undo, that deference.

The case represents yet another example of concentrated efforts to dismantle or severely limit the administrative state—or the "deep state," depending on your point of view. As explained in the opening of the amicus brief of the Cato Institute, quoting Chief Justice Roberts in dissent, "[o]verturning Auer would be a modest but important check on the 'the danger posed by the growing power of the administrative state.' City of Arlington, Tex. v. F.C.C." What's more, in his cert. petition, Kisor argued that "'[r]evisiting Auer deference [would be] an appropriate place to begin' a more complete 'reconsideration' of 'existing doctrines of agency deference,' including under Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc." (quoted from the amicus brief of a group of Professors of Administrative Law and Federal Regulation in support of neither party). [citations omitted throughout.]

In Auer v. Robbins, Justice Scalia, analyzing whether certain employees were exempt from overtime pay requirements under the Secretary of Labor's regulations, held that "[b]ecause the [particular test in question] is a creature of the Secretary's own regulations, his interpretation of it is, under our jurisprudence, controlling unless 'plainly erroneous or inconsistent with the regulation' Robertson v. Methow Valley Citizens Council, quoting Bowles v. Seminole Rock Sand Co.)."

Following Auer, in Kisor, the Federal Circuit Court found that both the petitioner and the VA offered reasonable interpretations of the term in question, concluding as a result that the regulation was ambiguous and applying Auer to defer to the VA's interpretation.

Cert was granted on this question: "Whether the Court should overrule Auer and Seminole Rock."

In oral argument, counsel for Kisor, the petitioner, argued in favor of overturning Auer, viewing it as a circumvention of the notice-and-comment process required under the APA and other statutes. The Solicitor General, along with members of the current Justice Department, on behalf of the VA, attempted to make Auer irrelevant, contending that the regulation was not ambiguous, and even if it was, the VA certainly offered the best interpretation of that regulation. Interestingly, however, the SG argued that Auer was "not well grounded historically" and advocated against retaining Auer as it currently stands. Instead, the SG contended that the Court should retain the doctrine "at its core," but impose a number of limitations that would substantially narrow the application of Auer, particularly with respect to agency interpretation and guidance. Justice Kagan, with perhaps a sardonic note, questioned whether the case presented a problematic "lack of adversarialness."

Deference to expertise. Justice Ginsburg pointed out that, under the Auer doctrine, agency deference is not blindly invoked: to apply Auer deference, the court must view the rule to be ambiguous and the agency interpretation a reasonable one. Justice Breyer described the concept of deference as at least partly based on agency expertise:

"I mean, there are hundreds of thousands, possibly millions of interpretive regulations. I mean, they give an example, one of them, where the Court deferred to the understanding of the FDA that a particular compound should be treated as a single new active moiety, which consists of a previously approved moiety, joined by a non-ester covalent bond to a lysine group. Do you know how much I know about that? .... But what you're doing is saying, instead of paying attention to people who know about that, but rejecting it if it's unreasonable, the judges should decide. I mean, I want to parody it, but, I mean, this sounds like the greatest judicial power grab since Marbury versus Madison, which I would say was correctly decided."

Judges have a lot of power under Auer, he observed,

"to reject unreasonable rules, inappropriately considered rules, they didn't think about it, rules that change position, rules that are not clear, all these interpretations, you don't have to take Auer literally, and later cases have not. And so do you—what is your real objection to taking those later cases and saying, of course, judges are in control; of course, they reject what is unreasonable; of course, they reject what is inadequately considered; of course, they reject things that are just changed without explanation, but, in general, recognize that the FDA knows more about moieties than you do, Judge, and there are 800 judges, and they all think moiety means something different."

The petitioner countered again that the public may also have expert insight into these issues, but they are not heard through the notice-and-comment process. Justice Breyer argued that employing that process for millions of interpretations was hardly expeditious and would likely take many years. Justice Alito responded that the word "relevant" was not a word that an agency would necessarily be better suited to interpret than a court.

Stare decisis. Justice Kagan asked why it was appropriate to overrule these two decisions, along with 10 or 12 others that reference those cases, especially given that Congress could easily have changed the Court's rule. SCOTUS takes stare decisis "superseriously," she said, and, to overturn a prior decision, looks to something that has happened that makes it "grievously wrong." The petitioner pointed to its inconsistency with the APA. Chief Justice Roberts asked, in light of "the limitations on Auer that—you know, that have accumulated over the years... I just wonder exactly how much of a change at the end of the day you're talking about." Justice Gorsuch commented that "nobody left before us alive is willing to take Auer literally and it's just a matter of how—how much revision to it we've already made. Is it enough? How much further should we go? Or should we just give up on it altogether?"Justice Ginsburg asked, if Auer were overruled, what would happen with the hundreds of cases that had been decided on that basis in the lower courts?

Proposed limitations on the doctrine. The SG argued that Seminole Rock should be saved only in its core application. For example, he viewed Auer's vesting of decision-making authority in a single party, the agency, as opposed to multiple courts, to be beneficial to regulated parties by providing some consistency. The case, he said, has been "on the books for decades, it has significant practical benefits, its practical problems can be addressed by reinforcing reasonable limitations on the doctrine." That is, the SG advocated that SCOTUS impose "limitations on the edge that simply recognize that, in the course of practical application, practical issues have been identified." What are these limitations? As Justice Gorsuch described them, the test the SG proposed would have six elements: "We have to decide whether the—the regulation is ambiguous, whether the interpretation's reasonable, whether it's consistent, whether it was made by someone at a high level, whether there was fair notice, and whether it was made by somebody with expertise." However, he asked "Is that a—a recipe for stability and predictability in the law, or is that a recipe for the opposite?... And I—I—I guess I'm just wondering, at what point does this whole edifice just fall upon itself?"

In his oral argument, the SG expanded on those limitations, clarifying that "we don't think the agency should get Seminole Rock deference for secret, private interpretations"; rather, public notice should be required. And why not require comment also, Justice Gorsuch asked: the "benefits of notice and comment are, among other things, people will know prospectively what rules govern them and not be sideswiped later by a bureaucracy." Justice Kavanaugh asked whether notice-and-comment rule-making had just become too difficult through various requirements that had been imposed through the lower courts. In addition, the SG suggested that, even if you establish ambiguity, "you only defer if the determination reflects the considered judgment of the agency as a whole." Justice Gorsuch characterized that concept as a decision regarding "how considered" the interpretation was—interjecting "wow" at that point and asking whether that didn't involve "a bit of inter-branch disrespect?" The SG later revised his characterization of the concept as "whoever issues the decision on which we are seeking deference has to be able to speak for the agency as a whole."

With regard to the separation-of-powers issue, the SG did not think it was a significant issue, in part, "because the agencies are, in fact, subject to substantial control by both Congress and by the courts."

Justice Gorsuch was also skeptical of the SG's claim of benefit for regulated parties, observing that private parties had actually requested that the Court eliminate the rule altogether. And what if, Justice Kavanaugh asked, the judge really thinks that the agency's interpretation is wrong but feels compelled by the case to defer? Justice Sotomayor responded that, in that case, if it's wrong, then it's unreasonable, which would be covered under the Auer standard.

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