How Many Steps Has Chevron Got? Encino Motorcars LLC v Navarro, 579 US ________ (2016)

American public lawyers have found themselves a little bit short of material in recent times. With Antonin Scalia’s seat on the Supreme Court of the United States still unfilled months after his death, the eight-member Court has released few high-profile decisions. For instance, in the eagerly anticipated litigation on President Obama’s immigration reforms, the Court split four-four and, as a result, affirmed the lower-court decision. It is perhaps natural in such straitened times to search thin gruel closely for interesting academic morsels. Last summer, the Court issued a 6-2 decision in Encino Motorcars LLC v Navarro, 579 US ________ (2016).

The underlying issue was whether so-called service advisors in car dealerships are entitled to overtime pay when they work more than 40 hours a week. Service advisors liaise with customers about repair and maintenance issues: they could be said to function as middlemen between those who sell cars (salesmen) and those who fix them (mechanics). Under the Fair Labor Standards Act, the general rule is that employees must be paid at least 1.5 times their basic salary when on overtime. But there are exceptions, including one for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements”.

The Department of Labor, which administers the Act, adopted an interpretive regulation in 1970, defining “salesman” as “an employee who is employed for the purpose of and is primarily engaged in making sales or obtaining orders or contracts for sale of the vehicles or farm implements which the establishment is primarily engaged in selling”. But in an opinion letter in 1978, prompted by adverse court decisions, it reversed its position and promised to promulate a new regulation. The new regulation was a long time in the writing. In 2008, the Department proposed a new regulation, which would be in line with the opinion letter. Yet when the regulation finally appeared in 2011, it took the opposite position, the one that the Department had initially set out in 1970. But it “gave little explanation for its decision to abandon its decades-old practice” (slip op. at p. 5).

Something that seems to have escaped comment so far is that a change of President occurred between the proposal and adoption of the new regulation. In 2008, the Department was under the control of President GW Bush, a Republican but by 2011 it was in the hands of President Obama, a Democrat.

Giving the majority opinion, Kennedy J. refused to accord Chevron deference to the Department’s interpretation. As he explained, Chevron deference should not be accorded “where the agency errs by failing to follow the correct procedures in issuing the regulation” (slip op. at p. 8). The “basic procedural requirement” flouted here was that “an agency must give adequate reasons for its decisions” (slip op. at p. 9). The absence of a “reasoned explanation” of its change of position rendered the Department’s decision arbitrary and capricious (slip op. at p. 9):

In promulgating the 2011 regulation, the Department offered barely any explanation. A summary discussion may suffice in other circumstances, but here—in particular because of decades of industryreliance on the Department’s prior policy—the explanation fell short of the agency’s duty to explain why it deemed itnecessary to overrule its previous position (slip op. at p. 10).

Back the case went to the Court of Appeals for the Ninth Circuit to interpret the statute without deference.

So what’s the big deal? Nothing, according to Adrian Vermeule:

Whatever the merits of the larger background debates, Encino adds nothing and changes nothing. The Court’s central point was that the agency had failed to adequately justify a change in its regulation, in light of reliance interests — a point established long ago and confirmed in FCC v. Fox and Perez v. Mortgage Bankers. Encino summarizes its own holding by announcing that regulations that are arbitrary and capricious are unlawful and — the Court adds — do not receive deference (slip op., at 10). Given that arbitrary regulations are invalid, to say that they receive no deference is a sort of lesser-included observation, not an innovation that is worth a flurry of attention.

What is somewhat misleading and confusing about Encino is that Justice Kennedy’s opinion arrives at its banal conclusion via an oddly circuitous, sideways route. Seeing that Chevron has been partly tied to procedure, and that an inadequately justified regulation can in some sense be called procedurally defective, Kennedy says that Chevron deference is not owed to procedurally defective regulations (one imagines a Eureka! moment in chambers). But this is like the grade schooler who solves a math problem by multiplying both sides of the equation by 10, dividing both by 10, and then solving the original problem. Arbitrary regulations are directly invalid; and although that does also entail they should receive no deference, one hardly needs to say so, and there is no need at all to comment on it. Let’s move on.

But Daniel Hemel and Michael Pollack see in Encino the elaboration of a “Chevron Step 0.5″ (to go with the familiar two steps and the “Step Zero” added by Cass Sunstein):

At the risk of carrying the choreographic metaphor a step too far, we suggest that Encino is indeed a different move — a move we’ll call “Chevron step 0.5.” If Chevron step zero asks whether Congress intended for the agency to fill gaps in the relevant statute, Chevron step 0.5 asks whether the agency has followed the proper procedure in filling the gap. If not, then it’s not enough for Congress to have intended for the agency to have gap-filling authority. Even if the agency has that power, it hasn’t used it.

To put the point starkly, imagine an agency had been granted the authority to engage in notice-and-comment rulemaking and wrote a new regulation (on a matter within its jurisdiction and expertise) on the back of a napkin nailed to a signpost outside the White House. The regulation contains an interpretation of an ambiguous statutory provision, again within the agency’s jurisdiction. If that agency then claimed its interpretation written on that napkin was entitled to Chevron deference, it would (we think) be laughed out of court. But why? Congress intended for the agency to fill gaps in the statute (Chevron step zero) and the statute is indeed ambiguous (Chevron step one). Suppose, too, that the interpretation adopted by the agency on the napkin is entirely reasonable (indeed, maybe even the best reading of the statute), and that the agency actually explained its reasoning quite thoroughly despite the napkin’s surface-area limits. So the interpretation should pass muster at Chevron step two — and would even satisfy State Farm’s reason-giving requirement. But no one (we don’t think) believes that an agency can get Chevron deference for a position taken on a napkin. Why not? Because the agency failed to follow the proper procedure for exercising its gap-filling authority. The napkin rule flunks at Chevron step 0.5.

What’s most remarkable about Encino is therefore not that it announced this step 0.5 but that, in over 30 years of Chevron jurisprudence, the Court had never made this step explicit before. (At least, to the best of our knowledge, step 0.5 had never been made explicit before, and the Court cited no case for the proposition.) Why did it take so long?

There is certainly some truth in this proposition, because there are a variety of situations in which Chevron deference is not accorded for procedural reasons (where, for example, the agency’s position was advanced for the first time in litigation). But as Vermeule observes, an interpretation which is procedurally defective will not be able to dance its way through the Chevron two-step in any event; no court would have great difficulty in shredding the napkin Hemel and Pollack evoke. Adding another step to the Chevron analysis would add to the workload of lower-court judges, litigators and litigants, a high price to pay for the marginal benefits of increased analytical sophistication. I think the most interesting (though by no means novel) aspect of Encino is that the change of President did not, on its own, justify an unexplained change of policy.

While we are on the subjectof how many steps Chevron should have, also of interest is a recent paper by Hemel and Aaron Neilson, “Chevron Step One-and-a-Half“:

The Supreme Court says that Chevron has two steps: Is the statute ambiguous (Step One) and if so, is the agency’s interpretation of the ambiguous provision a permissible one (Step Two)? Yet over the last three decades, the D.C. Circuit has inserted an intermediate step between Steps One and Two: Did the agency recognize that the statutory provision is ambiguous? If not, then the D.C. Circuit refuses to proceed to Chevron Step Two and remands the matter to the agency. This doctrine — which we dub “Chevron Step One-and-a-Half” — has led to dozens of agency losses in the D.C. Circuit and D.C. federal district court, but it has gone entirely unmentioned in administrative law casebooks and is rarely referenced in the academic literature. The few who have not ignored the doctrine have treated it with skepticism. Chief among those skeptics is now-Chief Justice John Roberts, who while a D.C. Circuit judge sternly criticized his colleagues for applying the doctrine.

This article presents a more sympathetic account of Chevron Step One-and-a-Half. After providing an overview of the Chevron Step One-and-a-Half doctrine, we offer several theories as to why Chevron Step One-and-a-Half cases continue to arise, even though agencies can easily avoid the doctrine by stating that they would hew to their view regardless of whether the relevant statutory provision is ambiguous. Some number of Chevron Step One-and-a-Half cases might be explained by the fact that agencies are ignorant of the doctrine or ambivalent about their own policies, but we suggest that there also may be strategic reasons why agency actors might maintain that a statute is unambiguous. For instance, agency lawyers with a preference for a particular reading (or with patrons who have such a preference) might seek to increase influence over policy by declaring that a statute can be interpreted only one way. Alternately, an agency might claim that a statute is unambiguous in order to reduce the probability that the White House’s Office of Information and Regulatory Affairs will second-guess the agency’s choice. In a similar manner, an agency might attempt to evade political accountability for an unpopular policy by claiming that the choice was compelled by Congress. Finally, an agency might maintain that a statute is unambiguous in order to “lock in” an interpretation so that future administrations cannot undo it. After identifying the potential causes of Chevron Step One-and-a-Half cases, we consider how courts ought to respond to the potential for strategy agency behavior. We suggest that when viewed in this light, Chevron Step One-and-a-Half helps to uphold the theoretical justifications for Chevron deference. While Chevron Step One-and-a-Half remands also impose undeniable costs on administrative agencies, we argue that these costs ought to be evaluated against the considerable benefits that the doctrine potentially brings.

Very interesting stuff, though I am coming increasingly to the view that we would be better off with fewer steps in judicial review cases, even if the results would be less analytically satisfying.

This content has been updated on January 28, 2017 at 17:29.