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

Monday Morning Regulatory Review – 11/9/15: Obamacare Contraceptive Non-Profit Sequel; Crowdfunding Uncrowded; & Electric Water Effluents

Posted in Judicial Process, Judicial Review & Remedies, Regulatory Flexibility & Small Business

dawn over the capitol aocThe United States Supreme Court (SCOTUS) granted certiorari in seven Obamacare contraceptive coverage cases signaling the return of an agency regulatory compliance issue, not a constitutional or “rights” issue. Still noteworthy, however, are two other recent actions: the Securities and Exchange Commission (SEC) adoption of crowdfunding rules and the Environmental Protection Agency (EPA) publication of effluent limitations on electric generators.

Obamacare Contraceptive Non-Profit Sequel: SCOTUS granted certiorari in seven cases and pared out certain questions presented in its latest consideration of the Patient Protection and Affordable Care Act (PPACA or Obamacare) and its regulations:

  • Zubik v. Burwell, SCOTUS Docket No. 14-1418:
  • Priests for Life v. Department of Health and Human Services, No. 14-1453;
  • Roman Catholic Archbishop of Washington v. Burwell, No. 14-1505;
  • East Texas Baptist University v. Burwell, No. 15-35;
  • Little Sisters of the Poor v. Burwell, No. 15-105;
  • Southern Nazarene University v. Burwell, No. 15-119; and
  • Geneva College v. Burwell, No. 15-191.

The Department of Health and Human Services (HHS), the Department of Labor (DOL), and the Department of the Treasury, Internal Revenue Service (IRS) promulgated a (third) regulation after Burwell v. Hobby Lobby. That version (largely current after a fourth revision) permits a religious-affiliated non-profit organizations to opt out of universal contraceptive coverage by telling HHS that coverage offends their religious principles and the name of their health care provider. HHS would then arrange coverage. The thread through all of SCOTUS’s grants is whether these Obamacare regulations comply with the Religious Freedom Restoration Act (RFRA)’s “least restrictive means of furthering that compelling governmental interest” requirement. The RFRA compliance issue becomes more pointed with SCOTUS’s grant of certiorari as to the second question in Little Sisters of the Poor, focusing directly on “least restrictive” means of further a “compelling interest” because exempting Little Sisters would not achieve contraceptive coverage because their insurer is also exempt.

► Some pundits, scholars, etc. have attempted to turn these cases into more fundamental questions of whether religious organizations may deny contraceptive benefits to employees or whether the government has trampled rights to religious freedom under the First Amendment to the United States Constitution. The issue is not about the organizations or the Constitution, but about the agencies compliance with a statute. The only surprise here is that SCOTUS enumerated which of the questions it would consider and rejected others, but did not reformulate the divergent approaches to the issue into a singular question – such as the one boiled down above.

Some petitioners in these cases suggested a statutory conflict question (Obamacare v. RFRA) that SCOTUS would not normally reach unless they found that Obamacare compelled the exact accommodation in the regulations. But Congress granted HHS, DOL, and the IRS discretion in the terms of Obamacare – the determination of the scope of covered women’s “preventative care.” The regulations fill that gap. The issue, therefore, remains one of whether the agencies have complied with the RFRA. While courts may provide Chevron deference to the agencies interpretation of Obamacare, courts will grant no agency deference in interpreting a general statute applicable government-wide such as the RFRA – or the Administrative Procedure Act (APA), Regulatory Flexibility Act (RFA), or Paperwork Reduction Act (PRA).

The process has also been complicated. Last June, SCOTUS issued an interim order in Zubik providing that if Zubik ensured that HHS possessed the information necessary to verify Zubik’s eligibility for exemption, then the agencies would be enjoined from enforcing against Zubik the challenged provisions of Obamacare and related regulations pending final disposition of petition for certiorari. This Wheaton College-type order appears to address only the first element of the regulations – assertion of exemption – not provision of the name of an applicant’s (non-exempt?) insurer.

As a number of these cases percolated toward SCOTUS, certiorari was unlikely, but the United States Court of Appeals for the Eighth Circuit, on September 17, 2015, decided in Dordt College v. Burwell, and in Sharpe Holdings v. Department of Health & Human Services, on which Dordt College depends, that HHS’s regulations failed the RFRA test. The Eighth Circuit recognized that it conflicted with other circuits in Sharpe Holdings. Because of the intercircuit conflict, the Department of Justice (DOJ)’s Solicitor General changed course and recommended that SCOTUS grant one of the petitions (Roman Catholic Archbishop of Washington from the United States Court of Appeals for the District of Columbia Circuit) as the “most suitable vehicle” for decision and hold the other in abeyance. The Solicitor General has not filed a petition for certiorari in Dordt College or Sharpe Holdings, and may not need to, because the time for filing has not yet run.

SCOTUS asked the parties for a joint briefing proposal by November 16 to tamp down the number of briefs and avoid repetition. SCOTUS is planning a March 2016 oral argument.

► Post-Eighth Circuit, SCOTUS’s grant of certiorari to consider the agency-RFRA compliance issue is hardly a surprise. The Solicitor General’s changed view reflects an honest appraisal of the direct intercircuit conflict over a difficult, important, and repetitive issue, even if his recommended case was not have been selected. The cases continue to pile up in other circuits but further percolation will not clarify the issues.

The impact of this decision could be as broad (or broader) than Hobby Lobby and Hobby Lobby’s still being explored progeny (because 2015 regulations (fifth or sixth version) rely on ownership structure distinctions from tax law). The decision again could affect several million employees.

The petitions, responses, and many other documents in these cases are available through SCOTUSblog.

Crowdfunding Uncrowded: The U.S. Securities and Exchange Commission (SEC) released its Crowdfunding final rule on October 30 (a little past last week, but too much to read in too little time). The key question that the final rule raises is its own practicality. Although the SEC must think its choices are practical, they may be too cumbersome for most start-ups that would consider the crowdfunding alternative.

Under the crowdfunding exemption from registration, the aggregate amount of securities sold in any year may not exceed $1,000,000. Additionally, sales are limited to investors based on income and net worth and, although the preamble does not say so, it seems to require at least 400 median income investors for a $1,000,000 funding. The internal filing costs to comply with the rule appear to range from ±4% to ±12%.

The SEC’s RFA final regulatory flexibility analysis is presumptively necessary – the SEC admits that all entities seeking crowdfunding are likely to assets of $5 million or less. While the SEC made adjustments from the proposed rule in response to public comments, the costs still may be stifling.

► A core reality may be that challenging the rule on arbitrary and capricious grounds is more costly than the challenge could be worth. One of the probable cost underestimates lies in the SEC’s presumed outside attorney fees at $400/hour – quite stale and below the average federal litigation presumptive reasonableness level in a field with one of the highest malpractice risks insurance costs, and fees. The rule and its underlying statute might be well intentioned but doomed by their own complexity and cost.

Electric Water Effluents: The Environmental Protection Agency (EPA) published its Effluent Limitations Guidelines and Standards for the Steam Electric Power Generating Point Source Category on November 3, a little over a month after its release on September 30. This latest regulation of the power industry establishes the nationally applicable limits on the amount of toxic metals and other pollutants steam electric power plants may discharge in wastewater. While the rule applies nationwide, EPA asserts that it will require capital investment only in about 12% of steam generating plants, and that investment appears to be spread between now and 2018 and 2023 deadlines, depending on when a plant needs a new Clean Water Act (CWA) permit. The rule will become effective January 4, 2016.

► The monetized benefits and costs are close to a wash, but effects some transfer by paying for health benefits from electric rate base – not necessarily the same stakeholders. The rule may or may not be challenged, and any challenge will be subject to judicial review before the United States Courts of Appeal, and the random selection for consolidation by the Judicial Panel on Multidistrict Litigation (JPMDL). This judicial review provision is the same one that the DOJ has argued applies to the Army Corps of Engineers and EPA’s Waters of the United States (WOTUS) rule.