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Federal Regulations Advisor Insight and Commentary on U.S. Government Regulatory Affairs

Monday Morning Regulatory Review – 8/4/14: Obamacare Tax Subsidies Intercircuit Conflict & COOL First Amendment Regulations

Posted in Constitutional Issues in Regulations, Judicial Review & Remedies

Little new and unexpected agencies activity compels review in the last week, but the courts were fully engaged on two very different, critical regulatory issues.  The intercircuit conflict over whether the Internal Revenue Service (IRS) may adopt regulations extending Obamacare tax credits beyond the 16 State-established Obamacare exchanges to include the federal-established exchanges in 34 States advanced in different directions with new filings.  In a more esoteric issue, the United States Court of Appeals for the District of Columbia expanded exceptions to the United States Constitution’s First Amendment guarantee of free speech or silence for agency regulations that compelled public disclosure of facts.

Obamacare Tax Subsidies Intercircuit Conflict:  Plaintiffs in King v. Burwell petitioned the United States Supreme Court for certiorari to review the decision of the United States Court of Appeals for the Fourth Circuit and the Department of Justice (DOJ) one day later in Halbig v. Burwell petitioned for rehearing en banc before the D.C. Circuit.

The core disputed provision in Obamacare (Patient Protection and Affordable Care Act or PPACA) grants tax credit subsidies to individuals covered by an “exchange established by the State under section 1311” of Obamacare – the State exchange provision.  The intercircuit conflict, at its barest, lies between:

  1. the D.C. Circuit’s Halbig holding that the statutory language is unambiguous under Chevron Step 1, and the Internal Revenue Service (IRS) may not, by regulation, expand the language to apply beyond the 16 States that established Obamacare exchanges; and
  2. the Fourth Circuit’s King holding that the language is ambiguous and the IRS can interpret it broadly under Chevron Step 2 to expand the tax credits availability to the 34 States that did not create health care exchanges and are relying on the federal exchanges.

Both sides pressed the immediacy of the need for further review – complex taxing implications become effective in the next reporting cycle starting January 1, 2015, and the conflicting decisions could create chaos in the federal tax system.  The D.C. Circuit ordered a response to the petition for rehearing en banc in Halbig within 15 days.

  The intercircuit conflict could (should) quickly mature into a SCOTUS review of the canons of statutory interpretation as a premise to Chevron’s edict to defer to agency interpretation of ambiguous language.  DOJ seems interested in avoiding a direct conflict before SCOTUS, preferring a perceived more favorable judicial lineup in an en banc D.C. Circuit (particularly in light of recent appointments), but time may not permit that extra step.  An early announcement that DOJ intended to seek en banc review may have pushed petitioners in King to speed their filing and press the Solicitor General to respond in SCOTUS within 30 days.  Expect Halbig to strongly oppose en banc review in the D.C. Circuit if for no other reason than that an order granting en banc review will vacate the panel opinion and eviscerate the intercircuit conflict – at least temporarily.

Although the Halbig – King conflict presents an opportunity for greater clarity in the canons of statutory interpretation and the implementation of Chevron, the only sure result here is that the issue will continue to grace these posts over the next several months.

COOL First Amendment Regulations:  DOJ’s preference for D.C. Circuit en banc review may be supported by the D.C. Circuit’s en banc expansion the government’s ability to require factual speech by regulated industries in the recent decision in American Meat Institute v. Department of Agriculture, or AMIAMI centers on the Department of Agriculture (DOA)’s Country of Origin Label (COOL) regulations (with their own complicated history) that require final packaging labels to show the specific countries of birth, raising, and slaughter of the animal meat in the package, and consequently, a costly animal-by-animal segregation, tracking, information collection, and transfer process that will be reflected at the grocery check-out counter.

Primer:  The United States Constitution’s First Amendment guarantee of the right to freedom of speech includes both the right to speak freely and the right to refrain from speaking at all – speech compelled by the government is subject to strict judicial scrutiny in most circumstances.  To pass First Amendment muster, compelled commercial speech, however, is generally evaluated under a less-strict Central Hudson intermediate scrutiny that requires the government regulation of speech to (1) directly advance a substantial government interest and (2) be no more extensive than is necessary to serve that interest.  Compelling speech of “purely factual and uncontroversial information” is evaluated under an even lower Zauderer standard that a statute or regulation need only be reasonably related to the government’s interest in preventing deception of consumers to pass muster.

AMI focuses on whether the Central Hudson intermediate scrutiny or the Zauderer reasonableness standard applies to the COOL final rule’s compelled disclosure of production information – the birth, raising, and slaughter locations.  The en banc D.C. Circuit took an expansive view of Zauderer to permit agencies to compel disclosure of factual information without running afoul of the First Amendment – not merely to avoid deception or fraud, but generally.  The court therefore affirmed the district court decision that AMI was unlikely to prevail on the merits of its claim that the COOL regulations violated the First Amendment by improperly compelling speech.

  Fully understanding the contours of AMI requires a careful reading of the district court and panel opinions in terms of the procedural posture on denial of a preliminary injunction and the doctrinal background (and we provide the reader with a trail to prior decisions).  The implications of AMI are much clearer:  Most statutory delegations of regulatory authority do not specify the means that the agency must use to regulate and AMI permits an expansive new tool to require regulated parties to disclose facts in a wide range of situations without running afoul of the Constitution’s First Amendment free speech bar and its corollary bar to compelled speech.  Variations on this theme are arising more frequently – such as the Securities and Exchange Commission (SEC)’s Conflict Minerals Rule.  Expect AMI to seek review by SCOTUS.