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SCOTUS Ruling Has Fiduciary Rule Implications

Regulatory Compliance

A recent decision by the nation’s highest court could have implications for the Labor Department’s fiduciary rule.

The case itself (Kisor v. Wilkie) didn’t have anything to do with the fiduciary rule, or even the Labor Department. The plaintiff here was James Kisor, a Vietnam War veteran who sought disability benefits from the Department of Veterans Affairs (VA) in 1982, alleging that he had developed post-traumatic stress disorder from his military service. The VA denied his initial request, but in 2006, Kisor moved to reopen his claim, at which point the VA agreed he was eligible for benefits, but it granted those benefits only from the date of his motion to reopen, not (as Kisor had requested) from the date of his first application. The Board of Veterans’ Appeals – a part of the VA – affirmed that retroactivity decision, based on its interpretation of an agency rule governing such claims, a decision subsequently affirmed by the Court of Appeals for Veterans Claims – and by a federal circuit court – but it did so by applying a doctrine called Auer, established in yet another case (Auer v. Robbins, 519 U. S. 452).

Simply stated, under the Auer standard, courts deferred to an agency’s reasonable reading of its own genuinely ambiguous regulations. In the Kisor case, the Court of Appeals concluded that the VA regulation at issue was ambiguous, and it therefore deferred to the Board’s interpretation of the rule. Kisor wanted the Supreme Court to overrule Auer (as well as a predecessor case, Bowles v. Seminole Rock & Sand Co., 325 U. S. 410).

Current Case

A mixed Supreme Court declined to overrule those prior decisions, but did craft a new standard – “guidance” on when to apply Auer’s deference, with Justice Elena Kagan’s majority opinion laying out five separate criteria for when deference is warranted.

Now, as Justice Kagan explained, this Auer deference is “rooted in a presumption that Congress would generally want the agency to play the primary role in resolving regulatory ambiguities,” in no small part because the agency that promulgated a rule is in the “better position [to] reconstruct” its original meaning.

Citing precedent from a key ERISA case, Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, 843, n. 9), she wrote that a court should not afford Auer deference unless, after exhausting all the “traditional tools” of construction, the regulation is genuinely ambiguous. To make that determination, she wrote that one must carefully consider the text, structure, history, and purpose of a regulation before resorting to deference – and, even then (the second test), if genuine ambiguity remains, the agency’s reading must still fall “within the bounds of reasonable interpretation” – based on a court’s “independent inquiry into whether the character and context of the agency interpretation entitles it to controlling weight.”

Third, the interpretation must be the agency’s authoritative or official position, rather than an “ad hoc interpretation” from lower-level officials, including administrative law judges. Fourth, the interpretation by the agency must “implicate its substantive knowledge,” which is to say that deference should not be given to an agency interpretation that it outside its area of expertise (this, by the way, includes situations where a regulation merely repeats the statutory text – where Kagan noted that a court is in the better position to interpret the regulation).

Finally, the interpretation must reflect “fair and considered judgment,” going on to caution regarding concern for a “disruption of expectations,” and noting that a court “may not defer to a new interpretation, whether or not introduced in litigation, that creates ‘unfair surprise’ to regulated parties.”

The Upshot

“The upshot of all this goes something as follows,” Kagan writes. “When it applies, Auer deference gives an agency significant leeway to say what its own rules mean. In so doing, the doctrine enables the agency to fill out the regulatory scheme Congress has placed under its supervision. But that phrase ‘when it applies’ is important – because it often doesn’t.” Where does this leave us? Kagan comments that, “What emerges is a deference doctrine not quite so tame as some might hope, but not nearly so menacing as they might fear.”

Kagan notes that in order to prevail, Kisor “…must first convince us that Auer deference is wrong. And even then, he must overcome stare decisis – the special care we take to preserve our precedents.” Not that he managed to do so. “None of his arguments provide good reason to doubt Auer deference. And even if that were not so, Kisor does not offer the kind of special justification needed to overrule Auer, and Seminole Rock, and all our many other decisions deferring to reasonable agency constructions of ambiguous rules.”

Dissenting Concurrences

Chief Justice John Roberts wrote a concurring opinion (joined by Justice Kavanaugh, joined by Justice Alito), both wrote separate concurring opinions, agreeing both with the decision not to overturn precedents, and with regard to the new bounds of the Auer deference. Mostly he did so to “suggest that the distance between the majority and Justice Gorsuch is not as great as it may initially appear.” As for Justice Gorsuch, while he technically concurred with the decision, it reads more like he (and he was joined in different parts by Justice Thomas, Justice Kavanaugh and Justice Alito) agreed to disagree.

Gorsuch cautioned that Auer “requires judges to accept an executive agency’s interpretation of its own regulations even when that interpretation doesn’t represent the best and fairest reading,” a result that he claims “creates a “systematic judicial bias in favor of the federal government, the most powerful of parties, and against everyone else.” Gorsuch went on to express frustration that what he called “Auer’s biased rule” was something invented by the Supreme Court “almost by accident and without any meaningful effort to reconcile it with the Administrative Procedure Act or the Constitution.” This, despite what he characterized as the calls of “a legion of academics, lower court judges, and Members of this Court – even Auer’s author” to abandon Auer. “Yet today a bare majority flinches, and Auer lives on.” Gorsuch chose to characterize the decision as “more a stay of execution than a pardon,” noting that “the Court cannot muster even five votes to say that Auer is lawful or wise. Instead, a majority retains Auer only because of stare decisis.” 

Not that he saw the deferral standard as status quo; “…far from standing by that precedent, the majority proceeds to impose so many new and nebulous qualifications and limitations on Auer that the Chief Justice claims to see little practical difference between keeping it on life support in this way and overruling it entirely.” This, he concludes, leaves the doctrine “maimed and enfeebled – in truth, zombified.”

What This Means 

While in a very real sense (Justice Gorsuch’s sentiments notwithstanding), Kisor would seem to leave in place the courts’ traditional deference to reasonable senior agency interpretations of ambiguous regulations that pertain to their area of focus. But that has implications for a potential revisiting of the Labor Department’s fiduciary rule.

In vacating the Labor Department’s revised fiduciary rule, the 5th Circuit relied on the Supreme Court’s Chevron decision. Speculation had been that the fiduciary rule eventually wind up before the courts, thereby teeing up Chevron for reexamination; numerous current and former Supreme Court justices have expressed disfavor of Chevron deference, and some states have recently abandoned their previous adherence to it as well. However, as we now know, the Labor Department opted not to appeal the 5th Circuit case.

Remember that in the 5th Circuit challenge, the majority’s opinion focused on the DOL’s long-established five-factor test for determining whether a service provider is an ERISA fiduciary, and found that the DOL’s 2016 fiduciary rule violated the Chevron doctrine and the Administrative Procedure Act. The Supreme Court’s decision in Kisor, of course, leaves Chevron in place. 

Remember too that in that decision, the 5th Circuit found that the fiduciary rule was unreasonable for numerous reasons, including for being illogical and inconsistent, and for infringing on “SEC turf.” The court concluded that the fiduciary rule bore all the hallmarks of an unreasonable regulation and an arbitrary and capricious exercise of administrative power – and, under Kisor, these remain the considerations.

The Labor Department has indicated that it intends to reconsider a new fiduciary standard. If so, it stands to reason that 5th Circuit’s opinion will be a factor in shaping it – and, in the aftermath of Kisor, it seems likely that the Labor Department would be mindful to more closely observe its customary statutory territory.

More broadly, Auer and other recent Supreme Court cases highlight the considerable controversy that has arisen over Chevron deference. Litigation over the fiduciary rule was a reminder that the U.S. Supreme Court soon may be asked to reconsider current rules regarding deference to the executive branch as it has in other contexts recently. In 2018, for example, the court declined to give Chevron deference to an IRS interpretation, where “in light of all the textual and structural clues” before the court the majority found that the Code was “clear enough.” [Wisconsin Central Ltd. v. U.S., 138 S. Ct. 2067, 2074 (2018)] This case stands out from recent Chevron cases in that even as the court acknowledged challenges with the meaning of the statute, the agency’s interpretation did not receive deference. Regardless, for now, Chevron’s precedence stands, as illustrated by a very recent headline: “Judge Blocks Trump Rule Requiring Pharma Companies to Disclose Drug Prices in TV Ads.” In finding that HHS exceeded its rulemaking authority, the court explained simply, “Chevron controls.” [Merck & Co., Inc., et al. v. U.S. Dept. of Health and Human Serv., No. 19-cv-01738 (D.D.C. July 8, 2019)]

Nevin E. Adams, JD, is the Chief Content Officer of the American Retirement Association (ARA). Allison Wielobob is the ARA’s General Counsel.