Well, at the time that the 2009 regulation was promulgated … we had lost cases in two courts of appeals.
– Deputy Solicitor General Malcolm Stewart, before the Supreme Court in United States v. Home Concrete and Supply, LLC, January 17, 2012.
Alan Horowitz (Miller & Chevalier) suggested that Home Concrete asked whether the Supreme Court should defer to an agency’s regulatory interpretation of a statute adopted during the litigation in a recent argument recap on SCOTUSblog. “Changing the rules in the middle of the case” is common enough that scrutiny is warranted. The Court needs to reconsider deference that gives the Government a decided advantage at the cost of businesses and individuals litigating against it.
The Issues: As Horowitz explains, Home Concrete asks
(1) whether that statutory language covers overstatements of tax basis, even though the Supreme Court construed the same phrase in a predecessor statute not to do so; and, (2) if the Court does not accept the government’s statutory argument, whether it must defer to a recent Treasury regulation that adopts the government’s proffered interpretation.
I will leave all of the gory details of the tax issue to Horowitz, the tax expert.
The Administrative Law Question: Hiding under the substantive first question is a critical question of whether a final regulation adopted by the IRS reflecting the IRS’s answer to the substantive question is entitled to judicial deference under Chevron v. NRDC. The question is complicated because the Court must decide whether a prior decision left any ambiguity, whether Congress changed the underlying statute to affect a future decision, and, only then, whether to apply a final rule adopted during the litigation. This third, recurring administrative law issue warrants scrutiny because it raises questions about the amount of power that courts will cede to administrative agencies and because it raises fundamental fairness issues.
The Law “Now”: The general rule is that a court must apply the law as it exists at the time of its decision, and regulations, as law, must be applied in the same way. Coupled with the Chevron doctrine that a court defer to the delegated agency’s interpretation of an ambiguous statute, agencies sometimes amend a rule that is being challenged.
Adopting new regulations in response to litigation is more common than most people realize and changing the rules is a tool that the Solicitor General (SG) has favored in some instances. I admit I changed rules in litigation when I worked for the United States.
Smiley: As Justice Scalia pointed out for a unanimous Court in Smiley v. Citibank:
We accord deference to agencies under Chevron, … because of a presumption that Congress, when it left ambiguity in a statute meant for implementation by an agency, understood that the ambiguity would be resolved, first and foremost, by the agency, and desired the agency (rather than the courts) to possess whatever degree of discretion the ambiguity allows. …. Nor does it matter that the regulation was prompted by litigation, including this very suit. Of course we deny deference “to agency litigating positions that are wholly unsupported by regulations, rulings, or administrative practice,” Bowen v. Georgetown Univ. Hospital, 488 U. S. 204, 212 (1988). The deliberateness of such positions, if not indeed their authoritativeness, is suspect. But we have before us here a full-dress regulation, issued by the Comptroller himself and adopted pursuant to the notice-and-comment procedures of the Administrative Procedure Act designed to assure due deliberation, …. That it was litigation which disclosed the need for the regulation is irrelevant.
More cases: As noted above, the practice of adopting regulations to affect the result in litigation is a bit more common than most think, partly because the change in rules may be ignored as unnecessary to the decision, e.g. Jama v Immigration and Customs Enforcement. Similarly, the Solicitor General has asked agencies to adopt regulatory changes when litigation poses a problem that may be difficult to answer and to avoid an adverse decision by the Court – e.g. the Succar – Mouelle circuit split.
More cases? When an agency changes the rule mid-litigation it cannot fairly be said to be undertaking a discrete “rational” analysis in the way the agency initially interprets a statute – it is embedding its established litigation position or avoiding an outcome. The implications for private parties may not be well factored into these regulatory decisions because the agency has already asserted its position in greater clarity than any mere “proposed rule.” I would not argue that these intra-litigation regulations are inherently unfair, but they need greater scrutiny and should provide a clearer than normal explanation of why the agency is changing the rules. The standard for a change in position in this instance needs to be higher than other changes in agency position.
Conceded that an intercircuit conflict – where courts of appeals interpret a statute in opposite ways – is a clear sign of ambiguity in the statute. When an agency exercises its regulatory powers after litigation has commenced, however, it owes the court, the litigants, and the general public a fuller explanation of its decision.
If a circuit split has developed, some litigants’ positions have been settled and a new regulation raises questions of retroactive application to those parties. Retroactive application of the new rule, at the least, should be clearly set out. While litigants may file public comments on a new rule, they remain to their diligence to be aware that settled positions may be challenged and changed by the new rule.
An intervening agency rule may stop the percolation of intercircuit conflicts as readily as the Supreme Court’s resolution of them. Costs of prematurely ending an intercircuit conflict do exist if based on bad facts (which create bad law), and particularly to those who were only at the beginning of the litigation process.
I welcome data on other circuit splits and regulatory interventions.