ADMINISTRATIVE & REGULATORY LAW NEWS
Supreme Court News
by William Funk 1.
The end of the October 1995 Term contained its usual spate of controversial constitutional law cases but little in the way of administrative law or regulatory practice cases. Three cases are worthy of mention. Two involved the interaction of preemption and Chevron. Smiley v. Citibank (South Dakota), N.A., 116 S.Ct. 1730, was a short unanimous decision, but for Chevron watchers it contained a substantial discussion and application of Chevron's two-part test authored by Justice Scalia, whose usual discussions of Chevron occur in concurrences or dissents. In Smiley, Citibank (South Dakota) imposed a $15 late fee if persons failed to make their minimum monthly credit card payment by the applicable due date. While such late fees were clearly authorized under South Dakota law, Smiley was a resident of California, and she believed that the late fee violated California law. She brought a class action suit against Citibank (South Dakota). Citibank (South Dakota) asserted that Section 30 of the National Bank Act of 1864, 12 U.S.C. § 85, governed; it states that banks may charge "interest at the rate allowed by the laws of the State . . . where the bank is located." Thus, if the late fee was "interest," South Dakota law controlled. The California Supreme Court, with two justices dissenting, held that the fee was "interest," as did the Supreme Court of Colorado and the First Circuit in other cases. The Supreme Court of New Jersey reached the opposite conclusion.
Justice Scalia began with a routine invocation of Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984). Given the disagreements between the judges considering this issue in the courts below, he said "it would be difficult indeed to contend that the word 'interest' . . . is unambiguous to the point at issue here." While this statement hardly seems revolutionary, Chevron watchers are surprised to see it come from Justice Scalia. After all, Justice Scalia is one known to be more likely to find a statute clear, rather than ambiguous, and who characterized himself as "[o]ne who finds more often . . . that the meaning of a statute is apparent from its text and from its relationship with other laws." Antonin Scalia, Judicial Deference to Administrative Interpretations of Law, 1989 Duke L.J. 511, 521. Moreover, on its face, the term "interest" is not a highly ambiguous term. The mere fact that judges could reach differing conclusions as to its meaning has not stopped Justice Scalia from finding terms unambiguous in the past. For example, in MCI Telecommunications Corp. v. AT&T, 512 U.S. 218 (1994), in which Justice Scalia's opinion for the majority cited to no less than ten dictionaries in finding that the term "modify" was not ambiguous, there were three dissenting justices. But Justice Scalia has not thrown away his dictionaries. Rather than relying upon them to find constraints on the term "interest," he found that their definitions of the term were broad and not limited to charges based upon the amount owed or the time period of delay.
Having established ambiguity, he indicated the Court should defer to a reasonable interpretation by the agency charged with administration of the statute. In this case that agency is the Comptroller of the Currency. Interestingly, however, the Comptroller's interpretation, which explicitly included late fees within the term "interest," was first adopted in a legislative rule after notice and comment in February 1996, two months before the case was argued in the Supreme Court and expressly as a result of the litigation, and 130 years after the statute was adopted. The Court found these facts irrelevant to the question of deference. Acknowledging that courts do not give agencies deference to mere litigating positions, the Court said that was not the case here. While the litigation (generally on this issue, not just this case) may have prompted the Comptroller's action, the Comptroller was not a party to the suit, and there was no question that the interpretation was both authoritative and deliberate. Moreover, Chevron deference does not depend upon a contemporaneous interpretation, because it is rooted in a presumed delegation of legislative authority rather than in some special knowledge of the intent of the enacting Congress. Smiley also claimed that this interpretation was inconsistent with past positions of the Comptroller and therefore was not entitled to deference. While the Court doubted that Smiley had established a true inconsistency, it reminded her that a change of agency position does not by itself undermine the applicability of Chevron deference.
Finally, Smiley argued that because the issue related to the extent of federal preemption of state law Chevron should not apply at all. The Supreme Court has stated that there is a "presumption against . . . pre-emption," Cipollone v. Liggett Group, Inc., 505 U.S. 504, 518 (1992), and that it takes a "clear and manifest" intent of Congress to preempt an area traditionally subject to state regulation. CSX Transportation Corp. v. Easterwood, 507 U.S. 658 (1993). Thus, if the statute is ambiguous as to preemption, there should not be deference to an agency interpretation; the court should simply determine that there is no preemption. The Court concluded that Smiley had confused "the question of the substantive (as opposed to presumptive) meaning of a statute with the question of whether a statute is pre-emptive." There was no question that Section 85 is preemptive. "What is at issue here is simply the meaning of a provision that does not [by its terms] deal with preemption, and hence does not bring into play the considerations petitioner raises."
In a footnote the Court acknowledged an interesting argument Smiley had made in a footnote in her reply brief: that deferring to the Comptroller's interpretation in effect made that rule retroactive in violation of Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (1988). The Court answered it by saying that "there might be substance to this point" if the regulation replaced a prior rule, but with respect to transactions when there was no clear guidance, "it would be absurd to ignore the agency's current authoritative pronouncement of what the statute means."
Ultimately, it is difficult to see in Smiley an important statement about Chevron deference. The purpose of the grant of certiorari was to resolve the litigation in the several states challenging credit card late fees, not to resolve any issue regarding Chevron deference, and the unanimity of the decision suggests a lack of debate or consideration of important issues. Nor does Smiley anything new or different from existing Chevron law. Indeed, its confirmation of that existing jurisprudence is probably its most notable feature.
The other preemption case was more divisive and probably more important, revisiting the issue of federal preemption of state tort law first addressed, but with no majority opinion hardly resolved, in Cipollone. In Medtronic, Inc. v. Lohr, 116 S.Ct. 2240, the Court considered the extent to which the Medical Device Amendments of 1976, requiring the pre-approval of certain medical devices by the Food and Drug Administration, preempt state tort law claims. Again the Court was badly split.
Lora Lohr was implanted in 1987 with a pacemaker to regulate her heartbeat. Three years later it failed, requiring emergency surgery. She filed a state tort action against the manufacturer, Medtronic, alleging negligent design and manufacture, as well as a failure to warn, under negligence and strict liability claims. Medtronic removed the case to federal court and moved to dismiss on the basis that federal law preempted the state tort claims. The federal law states: "[n]o State . . . may establish or continue in effect with respect to a device intended for human use any requirement (1) which is different from, or in addition to, any requirement applicable under [the Medical Device Amendments] to the device, and which relates to the safety or effectiveness of the device or any other matter included in a requirement applicable to the device under [the Amendments]." The provision then authorizes the FDA to grant exemptions from this preemption under certain conditions. The question, therefore, was whether the state tort action would establish "any requirement" "different from, or in addition to, any requirement" applicable under the Amendments.
In Cipollone, very similar language was interpreted by a majority of the members of the Court, and they concluded that state tort actions for damages do impose "requirements." Justice Stevens' opinion for himself and Justices Kennedy, Souter, and Ginsburg distinguished Cipollone on this issue and appeared to back away from its seemingly general conclusion that tort actions impose requirements as much as statutes and regulations. Ultimately, they did not decide that question, because they found that in any case Ms. Lohr's action was not preempted. Justice O'Connor, writing for herself, the Chief Justice and Justices Scalia and Thomas, reiterated the conclusion in Cipollone that tort actions do impose requirements. Justice Breyer, writing separately, agreed with Justice O'Connor's opinion on this issue, but otherwise concurred in Justice Stevens' opinion, providing the fifth vote for the judgement allowing Ms. Lohr's action to go forward in its entirety.
Assuming that state tort actions imposed "requirements," they are preempted only to the extent that those requirements are "different from, or in addition to, any requirement" under the Amendments. This necessitated a determination of what "requirements" the 1976 Amendments made applicable to Medtronic's pacemaker.
Under the Amendments, Class III medical devices (the ones with potentially lethal effects and which include pacemakers) are potentially subject to the strictest controls. New Class III devices must undergo a Premarket Approval process designed to assure that new devices are not marketed unless there is a reasonable assurance that is safe and effective. This process is expensive and drawn out, and a favorable conclusion results in an approval subject to specific requirements adopted with regard to that particular device . Congress when it created this process in 1976 recognized that there were large numbers of devices already in the market and, as a practical matter, they could not be withdrawn from the market prior to obtaining Premarket Approval. Accordingly, Congress grandfathered all existing devices, but authorized the FDA to subject these devices to testing to remove them from the market. In addition, not wishing to eliminate competition in the market of the already existing devices, Congress also exempted from the Premarket Approval process any new device that was "substantially equivalent" to a grandfathered device. Instead, these substantially equivalent new devices go through a "Premarket Notification" process, which is relatively quick and simple. These substantially equivalent devices are then subject only to certain general requirements, such as providing a label containing "information for use, . . . and any relevant hazards, contraindications, side effects, and precautions," and following general "good manufacturing practices" (e.g., instituting a quality assurance program, having an adequate organizational structure, ensuring that personnel are "clean, healthy, and suitably attired, and having "buildings, environmental controls, and equipment of a quality adequate to produce a safe product"). Medtronic's pacemaker was a "substantially equivalent" device subject only to the Premarket Notification and general requirements.
Medtronic claimed that the FDA's substantial equivalence determination was the equivalent of a federal requirement as to the device's design. All nine justices rejected this argument, agreeing that Ms. Lohr's design claim was not preempted, because there was no federal design requirement for substantially equivalent devices. Medtronic also claimed that a tort action to enforce the general federal manufacturing and labelling requirements would be a requirement "in addition" to the federal requirement, because it would be in addition to the federal enforcement mechanisms. Again, all nine justices rejected this argument, finding that an additional remedy for violating federal requirements is not an additional requirement. Finally, Medtronic argued that any tort claims based on manufacturing or labelling were preempted as requirements in addition to or different from the general federal requirements. It was this issue that split the Court.
Ms. Lohr's argument was that the federal "requirement" mentioned in the preemption provision only referred to the specific requirements that would be imposed in the Premarket Approval of a device, not to the general conditions found in the regulations applicable to substantially equivalent devices. Here Chevron came into play, because the FDA in its regulations describing when and under what conditions it would grant exemptions from the preemption provision, as authorized by the Amendments, had defined the nature of the federal "requirements" that preempted state law. These regulations supported Ms. Lohr's argument.
To the dissenters, Chevron deference was inappropriate here. First, citing Smiley of all things, they questioned whether an agency's interpretation regarding the preemptive effect of any federal statute should be entitled to deference. Second, and more confidently, the dissenters said that the language of the statute was clear, so there was no reason to defer to an agency's interpretation. Requirements mean requirements, the dissent maintained; there is nothing to suggest that requirements only mean specific requirements. The dissent did not address the fact that lower courts had split badly on the meaning of the term, which at least in Smiley was evidence of ambiguity. To the majority, however, the term was ambiguous. Justice Stevens' opinion, while citing Chevron did not explicitly invoke its test. Rather at one point he says that the Court's interpretation should be "substantially informed" by the FDA regulations; at another point he says the ambiguity in the statute plus the congressional grant of authority to the FDA "provide a 'sound basis' for giving substantial weight to the agency's view of the statute." Justice Breyer, however, did not shy from applying Chevron to a preemption issue. He articulated reasons why it was particularly appropriate here to infer congressional intent to allow the agency some leeway in defining the extent of preemption. Not only were the traditional Chevron factors present, but the fact that Congress gave the FDA the power to grant exemptions from the preemption provision suggested an intent for the agency to partake in the policy decision as to the extent of preemption.
Because the FDA's definition of the federal preemptive "requirements" did not include the general requirements applicable to the Premarket Notification devices, Ms. Lohr's claims based on manufacture and labelling were not preempted.
Medtronic, unlike Smiley, seems to have broader significance. First, because preemption clauses like the one in the 1976 Amendments occur in a number of statutes, the unanimous decision of the Court that they do not preempt state tort actions based upon violation of federal standards is a significant event. This had been entirely unclear before, and the court below in Medtronic had found such actions preempted. Second, although the Court is still deeply divided, the narrow interpretation of preemption clauses with respect to state tort actions, evidenced in Cipollone, is reaffirmed. Third, with respect to Chevron, it would appear that five justices are willing to extend its application to agency interpretations of preemption statutes themselves, at least where there is evidence of congressional intent that the agency have a role in preemption determinations.
The final regulatory practice case of significance is United States v. Winstar Corp., 116 S.Ct. 2432, the last case decided by the Court. Winstar arose out of the savings and loan debacle of the 1980s. As savings and loan institutions began to fail, and it was clear that the federal insurance fund guaranteeing deposits would be exhausted, the federal regulators encouraged healthy institutions to take over the insolvent thrifts. As a necessary inducement to convince the healthy institutions to take on these new liabilities, the federal regulators agreed to change the accounting rules for determining an institution's reserve capital requirements. Otherwise, the merger would make the healthy institutions insolvent under the federal regulations. In particular, the acquiring institutions were allowed to count the intangible asset of "goodwill" as part of its capital reserves. In addition, other changes were made to the Regulatory Accounting Principles as further agreements to induce take overs. In some cases, these new Regulatory Accounting Principles adopted by the federal regulators were inconsistent with generally accepted accounting principles. As the crisis intensified, Congress reacted with the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). FIRREA completely changed the federal regulatory structure for savings and loans and addressed what Congress perceived to be some of the causes of the crisis, including relaxed capital reserve requirements. Among other things, FIRREA specifically disallowed the use of goodwill as an asset to help meet capital reserve requirements. Immediately, most of the institutions that had acquired failed thrifts subject to federal regulators' agreement to allow goodwill as a capital asset were plunged into insolvency and liquidated by the new Resolution Trust Corporation.
The plaintiffs in this case brought suit in the United States Court of Federal Claims for monetary damages on a contractual theory. In essence, they claimed that their mergers with the failed savings and loans were the product of a contract with the government -- they would take over the failed thrifts if the government provided them certain regulatory changes in return. Congress's elimination of those regulatory changes in FIRREA breached that contract, rendering the government liable for damages. The Supreme Court's response did not produce a majority opinion, but the outcome was to hold for the plaintiffs against the government.
The necessary antecedent question -- whether the government had made a contract with the institutions -- had been decided in the affirmative by the Federal Circuit Court of Appeals, and the Supreme Court limited its grant of certiorari to whether one of the several doctrines, not generally applicable to private contracts, relieved the government of liability for breach of the contract. One of those doctrines is the so-called "unmistakability doctrine," which states that contracts that limit the government's future exercise of regulatory authority are disfavored and therefore will be enforced only when they provide that limitation in unmistakable terms. A second is the related rule that an agent's authority to make a surrender of regulatory authority must be delegated in express terms. A third doctrine holds that the government may not contract away certain reserved powers in any case. Finally, there is a doctrine that the government's sovereign acts do not give rise to a breach of contract with the government.
The plurality opinion by Justice Souter found the first three of these doctrines inapplicable for the simple reason that here the contract did not surrender or give up any sovereign or regulatory powers. The institutions did not claim that the contract barred the government from changing the capital requirements. The payment of damages for breach of contract simply was not the equivalent of surrendering sovereign powers and did not stop the government from exercising its regulatory powers. Justice Scalia, writing for himself and Justices Thomas and Kennedy, believed that the Unmistakability Doctrine applied to this contract, but he found the contract to meet the test of unmistakably intending to surrender the power to change the capital requirements. The Chief Justice and Justice Ginsburg agreed that the Unmistakability Doctrine applied, but they did not believe the contract at issue unmistakably indicated an intent to surrender the ability to change the capital requirements.
The last defense, the Sovereign Acts doctrine, garnered a different response from the plurality. In the only Supreme Court decision to apply this doctrine, the Court described it as insulating the "public and general" acts of government, whether congressional or executive, from creating government liability for breach of contract. See Horowitz v. United States, 267 U.S. 458 (1925). In that case, the Army Ordnance Department had contracted to sell silk to the plaintiff and to ship it within a certain time, but the United States Railroad Administration placed an embargo on all shipments of silk by freight, making performance by the Ordnance Department impossible. Had the Ordnance Department been a private contractor, it would have had the defense of impossibility to an action for breach (absent a specific provision in the contract), but because it was "government" and "government" had caused the impossibility, under general contract principles it would not obtain the benefit of the impossibility defense. In the plurality's view, the Sovereign Acts doctrine simply re-establishes the impossibility defense when the government as contractor cannot perform because the government acting in its "public and general" governmental capacity makes the contract impossible to perform. In the present case, either FIRREA's change in capital requirements was not a "public and general" act, because overturning the regulators' contracts with institutions was a known and intended consequence of FIRREA, or , even if FIRREA's change is a "public and general" act, the doctrine simply does not apply when the government as contractor has allocated the risks of non-performance due to changes in the regulations. For example, if the Ordnance Department had provided in its contract that it would be liable for late shipment due to regulatory restrictions, the Sovereign Acts doctrine would not have insulated it from liability. Here, while there was no express provision in the contract providing for government liability resulting from a regulatory change, the plurality believed it was an implicit part of the bargain. Justice Scalia's opinion also found the Sovereign Acts doctrine unavailing to the government; he too found the statement of the doctrine in Horowitz much broader than the doctrine's purpose, and because he found the regulators' contract with the institutions unmistakably clear in agreeing not to change the regulatory treatment of capital, like Justice Souter, he found that the government in essence has waived its Sovereign Act defense. The dissent found FIRREA to be clearly a "public and general" act and noted that the agreement between the regulators and the institutions said nothing about the risk of new regulations; it found the Sovereign Act doctrine fully applicable.
Winstar is a long and complex case arising out of a unique situation. If the plurality's decision was limited to that situation, it might have little impact beyond the case. Uncharacteristically, however, it was Justice Souter who wrote the expansive opinion, potentially applying to a wide range of "deals" between regulators and regulated entities, whereas Justice Scalia's separate opinion was largely tied to the particular, and hopefully unique, character of the particular agreement in this case. While this case was litigated as a contracts case, it is a strange form of contract, unlike the humdrum contracts involved in the cases cited in all the opinions. Indeed, it is less than self-evident that the "deal" between the regulators and the institutions is a contract, and it is very doubtful that the parties viewed it as such. The document in question was styled a "Supervisory Action Agreement" and constituted the terms of the merger for presentation to the Federal Home Loan Bank Board, which was required to approve all thrift mergers. It is perhaps more like consent agreements or memoranda of agreements that regulatory agencies routinely enter into with regulated entities. So, in the end, Winstar may have more to say about the relations between regulated entities and regulators than about government contract law.
What it has to say about those relations should be heartening administrative and regulatory practice lawyers. Here regulators made a deal with regulated entities and later Congress overrode that deal to the financial harm, and in some cases ruin, of those regulated entities. The Court, however, one characterizes their opinions, held by a substantial majority that the government cannot get away with that kind of dealing.
1. Professor of Law, Lewis and Clark Law School; Editor, Administrative & Regulatory Practice News.
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