The future of ‘Chenery II’

It is not every day that a sitting justice of the Supreme Court of the United States makes a passing reference to OnlyFans to describe his disappointment with the administrative state.

In his keynote address at the Federalist Society’s 2024 National Lawyers Convention, Justice Neil Gorsuch, alongside retired Justice Stephen Breyer, condemned the recent enforcement action of New York’s Department of Environmental Conservation against P’Nut the Squirrel. Door-kicking armed officers generated a new cause célèbre by swiftly confiscating and euthanizing an internet-famous pet squirrel rescued by a New York-based couple. In jest, Justice Gorsuch described how the New York government was clearly morally inferior to P’Nut’s owners despite the fact that the couple were pornographers who published content on the adult website OnlyFans.

All told, one theme from the Convention was clear: We can expect future decisions to lay bare the administrative state.

Columbia Law School’s own Professor Phillip Hamburger, speaking on a panel the day after Justice Gorsuch’s keynote, marshaled a new era by launching a Veuve Clicquot cork into the ceiling. He saw Loper, Jarkesy, Cargill, Corner Post, Axon, and Cochran, “all the wonderful cases,” as the “end of a beginning” worthy of celebration.

An upcoming case might have similar implications for the administrative state. In FDA v. Wages and White Lion Investments, L.L.C., currently pending before the Supreme Court, the Food and Drug Administration (FDA) is seeking to reverse a Fifth Circuit en banc decision that found the agency’s denial of marketing applications for flavored e-cigarette products to be arbitrary and capricious. The Fifth Circuit ruled that after years of leading e-cigarette manufacturers “on a wild goose chase” to successfully navigate the application process to market their products, the FDA pulled a “volte face” in issuing a blanket denial to over a million applications—changing the criteria for product approval after submission. The change in standards allowed the FDA to ignore key elements of the applications, which the agency previously said were necessary for approval.

The FDA’s denial orders have effectively amounted to a de facto ban on non-menthol flavored e-cigarette products—having done so through ad hoc adjudication (without rulemaking) and what the Fifth Circuit deemed a “(false) promise” that non-menthol flavors could “in theory” receive approval.

Significant investment from the hopeful manufacturers was obliterated in one fell swoop. Although the FDA originally estimated that the average cost of approval would range between $131,643 and $466,563 per product, the handful of companies that have received approval have so far reported their costs to range between $5 and $8 million for each product. It is impossible to measure the market size of the denied applications, but with over a million denials, it is fair to say that over a billion dollars in investments were rendered worthless by the FDA’s change in approval standards.

In its brief, FDA insists that the Fifth Circuit trounced a “hornbook principle” of administrative law inasmuch that an agency may choose to proceed through adjudication rather than rulemaking. The FDA says that this principle is supported by SEC v. Chenery Corp. (Chenery II), permitting the agency’s discretion “to develop a regulatory standard through ‘case-by-case evolution’ rather announcing [sic] a general standard ‘prospectively.’” Since it was decided in 1947, Chenery II has been regularly invoked by agencies to justify rules developed through either case-by-case adjudication or rulemaking when the authorizing statute does not foreclose either path.

Chenery II also allows agencies to enforce new regulations retroactively. Chenery II established a new era of ex post facto administrative regulation and has allowed agencies to enjoy unprecedented flexibility in applying their powers. However, Justice Jackson, who dissented in Chenery II, labeled the plurality opinion as “one of the worst ever.”

A plain reading of the Chenery II decision clearly expresses a preference for general rulemaking versus case-by-case adjudication. The oft-cited “hornbook principle” is given by the following:

The failure of the Commission to anticipate this problem and to promulgate a general rule [did not withdraw] all power from that agency to perform its statutory duty in this case. To hold that the Commission had no alternative [besides] formulating a general rule it might desire for use in future cases of this nature would be to stultify the administrative process.

Chenery II, 332 U.S. at 201-202.

While the plurality held that an agency can proceed to make law on a “case-by-case” basis, no strict standard for when rulemaking should be used in lieu of adjudication was introduced. However, with recent decisions like Loper, the Supreme Court might review current administrative practices, like Chenery II, and restrict broad discretionary powers based on the limitations originally outlined in the decision.

In Chenery II, the plurality observed that an agency, unlike a court, is endowed with prospective rulemaking power and, therefore, has “less reason to rely upon ad hoc adjudication to formulate new standards of conduct.” Additionally, the plurality counseled that agencies should effectuate their statutory commands through prospective rulemaking “as much as possible.”

The court went on to suggest that rulemaking by individual order is confined to three narrow circumstances of specialized problems: such that the agency (1) lacks “sufficient experience,”  (2) “could not reasonably foresee,” or (3) is dealing with circumstances “so specialized and varying in nature” that they are “impossible” to capture with a general rule. In the words of then-Judge Gorsuch in De Niz Robles v. Lynch, “the authority the Court extended to agencies to craft new rules retroactively through adjudication was not boundless.”

With these instructions, the FDA’s basis for retroactive ad hoc adjudication is up for debate. With e-cigarettes entering the U.S. market in 2007 and the deeming rule putting them under FDA authority in 2016, it might be tough to argue that the agency had insufficient experience with their regulation. The FDA has also long warned about the threat flavored nicotine products pose to public health, so one may argue that the agency should have foreseen its objections to flavored e-cigarettes when the agency gave its initial guidance. Preventing (mostly youth) exposure to e-cigarettes does not seem to be a specialized topic.

In the spirit of the plurality in Chenery II, an agency might be expected to explain why such circumstances apply to justify retroactive adjudication. The implications of FDA v. Wages and White Lion Investments, L.L.C. could be much larger than the future of the e-cigarette industry. The case provides an opportunity for the court to standardize agency discretion by clarifying and reaffirming the boundaries set in Chenery II, wherein a preference for prospective rulemaking is clear.

A version of this commentary originally appeared in the Columbia Business Law Review.

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Source: https://reason.org/commentary/the-future-of-chenery-ii/