administrative procedure act Archives - The National Law Forum

Lawsuit Challenges CFPB’s ‘Buy Now, Pay Later’ Rule

On Oct. 18, 2024, fintech trade group Financial Technology Association (FTA) filed a lawsuit challenging the Consumer Financial Protection Bureau’s (CFPB) final interpretative rule on “Buy Now, Pay Later” (BNPL) products. Released in May 2024, the CFPB’s interpretative rule classifies BNPL products as “credit cards” and their providers as “card issuers” and “creditors” for purposes of the Truth in Lending Act (TILA) and Regulation Z.

The FTA filed its lawsuit challenging the CFPB’s interpretative rule in the U.S. District Court for the District of Columbia. The FTA alleges that the CFPB violated the Administrative Procedure Act’s (APA) notice-and-comment requirements by imposing new obligations on BNPL providers under the label of an “interpretive rule.” The FTA also alleges that the CFPB violated the APA’s requirement that agencies act within their statutory authority by ignoring TILA’s effective-date requirement for new disclosure requirements and imposing obligations beyond those permitted by TILA. The FTA also contends that the CFPB’s interpretive rule is arbitrary and capricious because it is “a poor fit for BNPL products,” grants “insufficient time for BNPL providers to come into compliance with the new obligations” imposed by the rule, and neglects “the serious reliance interests that [the CFPB’s] prior policy on BNPL products engendered.”

In a press release announcing its lawsuit, the FTA said the BNPL industry would welcome regulations that fit the unique characteristics of BNPL products, but that the CFPB’s interpretive rule is a poor fit that risks creating confusion for consumers. “Unfortunately, the CFPB’s rushed interpretive rule falls short on multiple counts, oversteps legal bounds, and risks creating confusion for consumers,” FTA President and CEO Penny Lee said. “The CFPB is seeking to fundamentally change the regulatory treatment of pay-in-four BNPL products without adhering to required rulemaking procedures, in excess of its statutory authority, and in an unreasonable manner.”

The FTA’s pending lawsuit notwithstanding, BNPL providers may wish to consult with legal counsel regarding compliance with the CFPB’s interpretive rule. Retailers marketing BNPL products should also consider working with legal counsel to implement third-party vendor oversight policies to enhance BNPL-partner compliance with the rule.

US District Court Sets Aside the FTC’s Noncompete Ban on a Nationwide Basis

On August 20, the US District Court for the Northern District of Texas held that the Federal Trade Commission’s (FTC) final rule banning noncompetes is unlawful and “set aside” the rule. “The Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”

The district court’s decision has a nationwide effect. The FTC is very likely to appeal to the Fifth Circuit. Meanwhile, employers need not concern themselves for now with the rule’s notice obligations, and the FTC’s purported nationwide bar on noncompetes is ineffective. Employers do, however, need to remain mindful of the broader trend of increasing hostility to employee noncompetes.

The Court’s Decision

On April 23, the FTC voted 3-2 to publish a final rule with sweeping effects, purporting to bar prospectively and invalidate retroactively most employee noncompete agreements. The court’s decision addressed cross-motions for summary judgment on the propriety of the FTC’s rule. The court denied the FTC’s motion and granted the plaintiffs’ motion for two reasons.

First, the court held that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g) of the FTC Act. In reaching its holding, the court considered the statute’s plain language, Section 6(g)’s structure and location within the FTC Act, the absence of any penalty provisions for violations of rules promulgated under Section 6(g), and the history of the FTC Act and subsequent amendments. Because the FTC lacked substantive rulemaking authority with respect to unfair methods of competition, and hence authority to issue the final noncompete rule, the court did not consider additional arguments regarding the scope of the FTC’s statutory rulemaking authority. Notably, the court did not consider whether the final rule could overcome the major questions doctrine.

Second, the court held that the FTC’s final noncompete rule was arbitrary and capricious under the Administrative Procedure Act (APA) because it was “unreasonably overbroad without a reasonable explanation” and failed to establish “‘a rational connection between the facts found and the choice made.’” The court heavily discounted studies that the FTC had relied upon that purported to measure the impact of statewide noncompete bans because no state had ever enacted a ban as broad as the FTC’s ban: “[t]he FTC’s evidence compares different states’ approaches to enforcing non-competes based on specific factual situations — completely inapposite to the Rule’s imposition of a categorical ban.” “In sum, the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.” The court further held that the FTC failed to sufficiently address alternatives to issuing the rule.

In terms of a remedy, the court “set aside” the FTC’s final noncompete rule. The “set aside” language is drawn verbatim from the APA. The court noted that the FTC’s argument that any relief should be limited to the named plaintiffs in the case was unsupported by the APA. Instead, the court noted that its decision has a nationwide effect, is not limited to the parties in the case, and affects all persons in all judicial districts equally.

Further Litigation

In addition to a likely FTC appeal to the Fifth Circuit, two other cases are pending that likewise challenge the FTC’s final noncompete rule. First, in ATS Tree Services v. FTC, pending in the Eastern District of Pennsylvania, the district court previously denied the plaintiff’s motion for a preliminary injunction. Second, in Properties of the Villages, Inc. v. FTC, pending in the Middle District of Florida, the court enjoined the FTC from enforcing the rule against the named plaintiffs. A final judgment in one of these cases that differs from the result in the Northern District of Texas could eventually reach the courts of appeals and potentially lead to a circuit split to be resolved by the US Supreme Court.

Takeaways for Employers

For now, the FTC’s noncompete rule has been set aside on a nationwide basis, and employers need not comply with the rule’s notice obligations. Noncompetes remain enforceable to the same extent they were before the FTC promulgated its final rule. Depending on how further litigation evolves, the rule could be revived, a temporary split in authority could arise leading to confusion where the rule is enforceable in certain jurisdictions but not in others, or the rule will remain set aside.

An important part of the court’s decision is its rejection of the FTC’s factual findings, which were made in support of the rule, as poorly reasoned and poorly supported. As we discussed in our prior client alerts, we anticipate that employees may cite the FTC’s findings to support challenges to enforceability under state law. The court’s analysis of the FTC’s factual findings may substantially undermine the persuasive authority of the FTC’s findings.

Employers should anticipate that noncompete enforcements in the coming years will remain uncertain as courts, legislatures, and government agencies continue to erode the legal and policy justifications for employee noncompetes. This counsels in favor of a “belt and suspenders” approach for employers to protect their legitimate business interests rather than relying solely on noncompetes.

Down to the Wire for Employers and FTC Noncompete Ban

Compliance Deadline Approaches

Employers are running out of time to comply with the FTC’s purported regulatory ban on non-competition agreements. The ban – announced on April 23, 2024 – is scheduled to take effect on September 4. 2024.

By that date, the regulation requires that employers notify all employees subject to noncompetes that the agreements will no longer be enforced. The only exceptions are existing agreements with “senior executives” who made at least $151,164 in the preceding year; these agreements are grandfathered. See our earlier alerts from April 23, May 14, and July 8 for further discussion on developments relating to the ban.

So Far, No Nationwide Injunction Against FTC’s Ban

As previously reported, a federal court in Dallas issued a preliminary injunction against the regulation on July 3, 2024. The injunction, however, only affects the parties to the lawsuit and the district in which the lawsuit was brought. When she issued that preliminary injunction, Judge Ada Brown committed to rendering a final decision on the plaintiffs’ request for a permanent injunction by August 30,2024.

However, she specifically declined to give her preliminary injunction nationwide effect. In its motion in support of a permanent injunction, the U.S. Chamber of Commerce and other parties are arguing that the court is required to vacate the rule, with nationwide effect, because it was adopted in violation of the Administrative Procedure Act. We cannot predict whether she will do so.

Meanwhile, since the July ruling in Texas, two other federal courts have issued rulings on requests to enjoin the ban, one in Philadelphia in favor of the FTC by denying an injunction, and the other in central Florida in favor of the employer by granting one. As with the Texas case, the Florida injunction is not nationwide. Moreover, that judge has not yet issued an opinion, so we do not yet know his rationale for the injunction.

Now What?

Where does this leave employers? In the absence of a ruling invalidating the FTC ban nationwide, there is nothing to prevent the FTC from enforcing its ban beginning September 4 anywhere outside of Dallas and mid-Florida. As far as we know, only the Northern District of Texas is able to order such a ban when it issues its final decision on or before August 30.

Even though, based on her initial ruling, it is quite likely Judge Brown will enjoin the regulation permanently, it is unclear whether she will take the additional step of giving her injunction nationwide effect.

To comply with the regulation, employers should prepare to act by September 4. We recommend creating a list of all current and former “workers” (defined as any service providers regardless of classification) subject to noncompete agreements and a written communication that meets the regulation’s notice requirements.

Unless a new order appears enjoining enforcement of the ban nationwide before September 4, employers will need to send out that communication in order to be in compliance. The requirements for sending the notice include identifying the “person who entered into the noncompete clause with the worker by name” (we don’t know if this means the individual or the entity) and hand delivering or mailing the notice to the worker’s last known mailing address, or to the last known email address or mobile phone number (by text). The full text of the rule, including a model communication from the FTC, can be found at pages 3850-06 of the May 7, 2024, Federal Register.

Update on FTC Noncompete Ban: Court Challenges Begin

On April 23 we reported on the Federal Trade Commission’s vote to ban almost all non-competition agreements in the United States. Within hours of that vote, Ryan LLC, a global tax consulting firm headquartered in Dallas, filed a lawsuit in the U.S. District Court for the Northern District of Texas challenging the FTC’s authority to issue such a rule.

The U.S. Chamber of Commerce has been allowed to intervene in that case and will join in the challenge to the FTC ban.

Ryan’s claims are that:

The FTC lacks the legal authority to promulgate such a rule.
Even if Congress had granted that authority by statute, such a grant would be an unconstitutional delegation of legislative authority to the executive branch, in violation of Article 1 of the U.S. Constitution.
The FTC Act is unconstitutional because it limits the president’s authority to remove subordinates (in this case, FTC Commissioners).
The FTC promulgated the rule in violation of the Administrative Procedure Act because it failed to establish a factual basis for the rule.
The rule is retroactive in purporting to invalidate all existing non-competition agreements, but the FTC has no authority to issue retroactive rules.

Based on our review of the pleadings filed thus far in the case, we think that the U.S. Chamber and its allies agree that these are the correct arguments and that they will file a brief supporting them.

Ryan is asking the court for two things: a stay of the effective date of the rule, and preliminary and permanent injunctions barring the FTC from enforcing it. The case is on an expedited schedule, with briefing to be completed by June 12 and a ruling expected on the pending motion by July 3.

Given that the rule’s effective date is September 4, if the court can meet that schedule, employers should have sufficient time to take the necessary steps to comply, if the court allows the rule to go into effect.

However, we would advise employers to start identifying all employees who are subject to an existing non-competition agreement, so they can move quickly to meet the notice requirements over the summer, should that become necessary.

2024 Litigation Look Ahead Series: Challenges to Administrative Law Judges, Judicial Review Process Could Limit Executive Power

B&D is pleased to present the third installment of our 2024 Litigation Look Ahead series. (Read part two on the increased application of the major questions doctrine here.) In this section of the compilation, our litigation team highlights two pending Supreme Court cases examining the constitutionality of appointed administrative law judges and the judicial review process under the Administrative Procedure Act. The outcome of these cases could have significant ramifications on the enforcement power of the executive branch and the deadline for challenging final agency actions.

Securities and Exchange Commission v. Jarkesy, No. 22-859

CASE SUMMARY

The Securities and Exchange Commission (SEC) brought a civil enforcement action against George Jarkesy and an investment advisor, alleging securities fraud. SEC utilized the agency’s in-house administrative adjudication procedures to pursue the matter. SEC’s administrative law judge (ALJ) found Jarkesy and his co-defendants liable and ordered various remedies. The defendants pursued administrative appeals, unsuccessfully, and then sought review in the U.S. Court of Appeals for the Fifth Circuit. In May 2022, the Fifth Circuit held that the SEC’s use of ALJs to enforce civil securities laws violates the accused’s Seventh Amendment right to a jury trial. The Fifth Circuit further found the SEC’s administrative courts unconstitutional because the appointed judges are protected from removal, in violation of Article II of the Constitution, and Congress improperly granted the SEC legislative power by allowing the agency to decide whether to sue in administrative or federal court. The SEC petitioned the U.S. Supreme Court for certiorari, which it granted, and oral arguments took place on November 29, 2023.

IMPLICATIONS

The case challenges the constitutionality of appointed ALJs to resolve disputes. While Jarkesy only pertains to the SEC’s use of ALJs to enforce securities laws, EPA and many other federal agencies rely on in-house civil administrative proceedings to enforce laws, in lieu of civil actions in court. If the Supreme Court affirms the Fifth Circuit’s decision, the ruling could have broader impacts by eliminating or restricting the ability of other agencies to use ALJs. Such a result would channel more enforcement cases to the courts, a more time-consuming, resource-intensive, and costly process. Limiting the enforcement power of the executive branch would greatly impact how agencies enforce statutes and their regulations. A ruling in favor of the petitioners could also call into question the past decisions of ALJs. To minimize the enormous consequences of such a decision, the Supreme Court may find a middle ground, focusing on limitations on the Seventh Amendment right to a jury trial in the context of agency enforcement actions.

Corner Post, Inc. v. Board of Governors of the Federal Reserve System, No. 22-1008

CASE SUMMARY

The U.S. Supreme Court is considering a circuit split regarding the six-year statute of limitations for Administrative Procedure Act (APA) challenges, a cornerstone of environmental litigation. Under the APA, any person who claims to have been injured by an agency’s action has the right to go to court to challenge the action, but they must file their action within six years after the “right of action first accrues.”

In this case, Corner Post, Inc., the operator of a convenience store and truck stop, challenged the Federal Reserve’s debit card interchange rules, known as Regulation II, which set the range of fees larger card-issuing banks can charge merchants for processing debit card payments, asserting the rules were promulgated in violation of the APA. The rules were adopted in 2011. Corner Post, which opened for business seven years later in 2018, argued that the statute of limitations does not begin to run until a plaintiff suffers a “legal wrong” or becomes “adversely affected or aggrieved,” as required by 5 U.S.C. § 702. Consequently, the statute of limitations did not apply to bar its claim because the “adverse affect” of the challenged rule did not occur until 2018.

A North Dakota federal district court dismissed the case as untimely because the six-year statute of limitations expired in 2017. The U.S. Court of Appeals for the Eighth Circuit affirmed, holding that the six-year statute of limitations for facial challenges to regulations brought under the APA accrues upon publication of the final rule. In this ruling, the Eighth Circuit followed the majority position that the APA claims first accrued upon publication of the final agency action. Corner Post, Inc. filed a petition for certiorari, which was granted, and the case is now before the Supreme Court.

IMPLICATIONS

The Supreme Court heard oral arguments in the case on February 20, 2024. The precise question before the Court is whether a facial challenge to a regulation, brought under the APA, accrues when the regulation is first published or when the plaintiff first suffers a related “legal wrong” or an “adverse affect.” At oral arguments, the Justices questioned Corner Post’s position. In particular, Justice Ketanji Brown Jackson seemed concerned that a ruling favoring Corner Post would put every agency rule in effect in question, subject to facial challenges whenever a regulated entity claims to have first suffered a related harm.

The outcome of this case could have major impacts on the ability of regulated entities to assert facial challenges to regulations under the APA. If the Supreme Court reverses and holds that the statute of limitations accrues when a party is first injured, plaintiffs will be permitted to challenge a regulation—no matter the promulgation date—so long as they commence the cause of action within six years of the initial harm. Such a holding could open floodgates within the judicial system, creating a pathway for parties to challenge long-settled regulations, leading to perennial regulatory instability.

In Conclusion

The decisions in both Jarkesy and Corner Post could significantly affect the executive branch’s ability to enforce statutes and regulations as well as litigants’ options for bringing judicial challenges. In either case, Supreme Court decisions in favor of the petitioners would magnify the effect of other decisions that may alter how courts approach administrative law questions, such as the pending decisions regarding Chevron deference.

A ruling in favor of the petitioner in Jarkesy could unravel a complex system of administrative adjudication and expedite a litigant’s access to the crowded federal courts. A ruling in favor of the petitioner in Corner Post could change how courts apply the statute of limitations for APA challenges to agency actions and open the door to such claims years, or even decades, after regulations are published. Such rulings would eliminate long-standing obstacles in the path to federal court.

Furthermore, if the Supreme Court strikes down or limits Chevron deference, vastly different criteria would apply when federal courts review agency actions. This combined impact of the three cases could potentially mark a revolution in administrative law litigation, with the landscape fundamentally altered to provide regulated entities more opportunities to challenge agency action in federal court, freed, to some extent, from the agency-favorable doctrine of Chevron deference, allowing the judiciary more opportunity to shape agency action.

Coming Soon in our Litigation Look Ahead Series…

In our 2024 Litigation Look Ahead series, we highlight cases – environmental and otherwise – that could have notable impacts on the regulated community or lead to changed regulatory approaches. Upcoming installments of the series will examine Fifth Amendment takings, the Commerce Clause, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), and natural resource law. In case you missed it, read part two of the series covering the increased application of the major questions doctrine.

Going Beyond: When Can Courts Look Past the Record in an APA Review?

Regulated companies need to understand what material courts can consider when they review administrative decisions. The Administrative Procedure Act generally allows courts to consider only the existing administrative record when reviewing agency decision-making to determine whether agency decisions are arbitrary and capricious. But the Supreme Court recently reminded us that this rule is not absolute by looking beyond the record in Dep’t of Commerce v. New York to block an agency decision that it found to be based on a “contrived,” pretextual rationale.

Regulated companies may be able to ask courts to consider information beyond the administrative record if they can show that the agency acted in bad faith or exhibited improper behavior. A company’s ability to present the court with information beyond a record carefully constructed by an agency can be a powerful tool.

The following cases illustrate that a movant may not need to conclusively prove that the agency behaved improperly to convince a court to review evidence beyond the administrative record. But the evidence must form a picture that gives the court reason to believe there was bad faith or improper behavior. Here’s a breakdown of several case examples:

Dep’t of Commerce v. New York Goes Beyond the Record

Dep’t of Commerce v. New York presented the Court with a challenge to Secretary of Commerce Ross’s decision to add a citizenship question to the 2020 census. In defense of his decision, the Secretary presented a record showing that the Department of Justice had asked that the question be added so it could more effectively enforce the Voting Rights Act. But extra-record discovery revealed that the DOJ’s request was not the real reason that Secretary Ross had added the question. Rather, extra-record discovery showed that the Secretary had planned to add the question all along and had, in fact, solicited the request for the question from the DOJ. Viewed in that light, the Supreme Court determined that the Voting Rights Act rationale was “contrived” and affirmed the lower court’s decision to bar the Department of Commerce from asking the question.

Writing for the majority of a fractured Court, the Chief Justice acknowledged that while “[i]t is hardly improper for an agency head to come into office with policy preferences and ideas . . . and work with staff attorneys to substantiate the legal basis for a preferred policy,” the Court “cannot ignore the disconnect between the decision made and the explanation given.” The Court noted that to confine itself to the administrative record and ignore the Secretary’s extra-record actions would be “to exhibit a naiveté from which ordinary citizens are free.”

To understand why this decision is important, observers need to take a deep-dive into the Court’s decision. Why could the courts look beyond the administrative record here? Because the district court invoked—maybe prematurely in this case—an exception to the rule against extra-record discovery from Citizens to Preserve Overton Park, Inc. v. Volpe. This exception gives courts discretion to go beyond the existing administrative record if the party challenging the agency action makes “a strong showing of bad faith or improper behavior” underlying the agency decision.

**When Do Courts Use Overton Park to Look Beyond the Record?**

While every circuit has recognized the Overton Park exception—and most also recognize other, circuit-specific exceptions that allow for a party challenging an agency decision to supplement the record—the overwhelming majority of courts have declined to use Overton Park’s exception to look beyond the administrative record. In his Dep’t of Commerce v. New York dissent, Justice Thomas followed this school of thought. He disagreed that plaintiffs had made a sufficiently “strong showing” of bad faith or improper behavior by Secretary Ross and noted that the Supreme Court “ha[s] never before found Overton Park’s exception satisfied.”

Given the fact that the APA requires courts to defer to agency decision-making, the courts’ reluctance to embrace Overton Park is unsurprising. Nonetheless, some have looked beyond the record.

In Sokaogon Chippewa Cmty. v. Babbitt, for example, the district court allowed the party challenging the agency decision to supplement the record after it made a strong showing of improper behavior behind a decision of the Department of the Interior. There, three Indian tribes had applied to the United States to convert a greyhound racing facility into an off-reservation casino. When the Department denied the application, citing the “strong opposition of the surrounding communities,” the tribes challenged the decision. The tribes argued that the Department’s reason was pretextual and pointed to unexplained procedural delays; suspicious communications between opposition tribes, senators, lobbyists, and White House staff; and a draft report from the Indian Gaming Management Staff, which had recommended that the application be approved.

The court initially limited its review to the record because plaintiffs had not proven improper behavior. But it then reversed course and granted the plaintiffs’ motion for reconsideration, noting that Overton Park’s “strong showing” requirement did not—and, logically, could not—require conclusive evidence of improper behavior. Instead, the court was satisfied that the plaintiff had “suppl[ied] sufficient evidence . . . as to raise suspicions that defy easy explanations.”

Following Babbitt’s lead, the district court in United States v. Sanitary Dist. of Hammond also allowed extra-record discovery, there after the party challenging an EPA decision had made a sufficient showing of bad faith. In that case, an EPA official recused herself from a dispute to avoid the appearance of partiality. But suspicions were later raised when she, without explanation, reinstated herself after receiving poignant, critical questions from her chosen successor’s counsel. The court allowed extra-record discovery to reveal any potential impropriety behind her decisions. The court noted that while it had “not f[ound] that bad faith or improprieties in fact influenced the [decision],” the defendant had made “a ‘strong showing’ that the evidence of record ‘suggests’ that bad faith or improprieties ‘may have influenced the decision maker.’”

Key Takeaways

A court’s decision to go beyond the record—as explained by the lower court in Dep’t of Commerce v. New York—is most often “based on a combination of circumstances that [when] taken together, [are] most exceptional.” Observers may note that the Court’s decision to go beyond the record in Dep’t of Commerce v. New York seems to conflict with last term’s decision in Trump v. Hawaii. But maybe they can be reconciled. There, the state of Hawaii and three U.S. citizens challenged Presidential Proclamation No. 9645—colloquially referred to as the “travel ban”—which placed elevated immigration restrictions on eight countries, six of which were predominantly Muslim. The plaintiffs argued that the President’s extra-record statements showed that the national security justifications behind the ban were, in fact, pretext for the Proclamation’s true animus: religious discrimination. Given the nature of then-Candidate Trump’s public statements, the case seemed to present the Court with the opportunity to consider evidence of pretext that went beyond the record.

But of course Trump v. Hawaii, unlike Dep’t of Commerce v. New York, did not involve any agency decision-making. It instead involved a challenge leveled directly at the Executive itself on a matter squarely within its traditional province: national security. This distinction compelled the Court to defer to the Executive and limited the Court’s consideration of extra-record material. Thus, the Court applied a rational basis review and found that even if the challenging party could demonstrate pretext, the President’s non-religious justifications rationally supported the entry restrictions.

Ultimately, Dep’t of Commerce v. New York reminds us that an administrative record may be permeable under the right circumstances. And although the “substantial showing” bar remains high, perhaps courts will now be more apt to allow extra-record discovery when reviewing agency decision-making. That willingness could enable companies to more effectively challenge agency decisions based on pretextual reasoning—reasoning that would not be reflected in the administrative record.

Article by J. Michael Showalter and James Cromley of Schiff Hardin LLP.

For more on the Administrative Procedure Act see the Administrative & Regulatory page on the National Law Review.

Supreme Court Broadens the Types of Federal Agency Actions That Can Be Challenged in Court

Recently an article by Jerry Stouck and David B. Weinstein of Greenberg Traurig, LLP regarding the Types of Federal Agency Actions that can be Challenged in Court was published in The National Law Review:

GT Law

The Supreme Court recently held, in Sackett v. Environmental Protection Agency, that “compliance orders” unilaterally issued by the EPA, which the agency contended were informal directives not subject to judicial review, qualify as “final” agency actions that can be challenged in court under the Administrative Procedure Act (APA). The decision is not limited to EPA compliance orders, although many hundreds of those are issued each year, which now will be subject to judicial review. Sackett applies more broadly because it expands the types of federal agency actions that will be deemed final, and thus subject to judicial challenge, under the APA. Any agency action that has coercive legal effect, and no established avenue for agency-level review, is now potentially challengeable under Sackett.

The APA authorizes federal courts to enjoin or set aside agency action that is arbitrary, capricious, or contrary to law, and to compel agency action unlawfully withheld or unreasonably delayed. In any such case, however, it is a jurisdictional requirement that the agency action be “final.” The rationale is that courts should not interfere with ongoing agency decision-making. Such finality is relatively clear when a party challenges a regulation or an order resulting from formal agency adjudications (e.g., license or permit proceedings). But most actions of federal regulatory agencies fall into neither category, and instead constitute what practitioners call “informal” agency adjudication. EPA compliance orders are in that category; they do not result from any well-defined agency proceeding. So are many other types of agency directives and procedures.

Sackett involved a couple who, in the course of developing a residential lot they owned into a home site, filled in part of the lot with dirt and rock. Unbeknownst to the Sacketts, their lot contained wetlands that the EPA considered to be within federal regulatory jurisdiction under the Clean Water Act (CWA). If that were true, the Sacketts could not lawfully fill the wetlands without a federal permit. The EPA issued a compliance order containing “Findings and Conclusions” that the lot did in fact contain wetlands subject to EPA jurisdiction. The order also directed the Sacketts to restore the lot in accordance with an EPA work plan and to provide EPA with access to the lot and to records concerning conditions at the lot.

The Sacketts, who believed their lot did not contain wetlands subject to the CWA, requested a hearing before the EPA, which the agency refused to provide. The Sacketts then filed suit, but the lower courts dismissed it, finding that the compliance order did not qualify as final agency action under the APA. Thus, the Sacketts were unable to initiate a judicial proceeding to resolve the dispute over whether their wetlands were subject to the CWA. But if the EPA later went to court to enforce its compliance order, the government contended that statutory per-day penalties owing from the Sacketts would double, and that obtaining a necessary permit would be more onerous under applicable regulations. In essence, therefore, the EPA compliance order was coercive — if the Sacketts “voluntarily” complied with the order, they would avoid the double penalties and the additional permitting requirements.

That coercive effect was central to the Supreme Court’s reasoning in holding that the compliance order was a final agency action, subject to judicial review. The coercive effect of the EPA compliance order in Sackett is also what makes the decision potentially applicable to other, similarly-coercive agency directives and procedures. Under the test articulated by the Court in a 1997 decision, Bennett v. Spear, agency action is “final” for APA purposes if it both “determines rights and obligations” and marks the “consummation” of the agency’s decision-making process. The Court in Sackett found the former requirement satisfied because “legal consequences” flowed from the compliance order, i.e., the doubling of the statutory penalties and tightening of the wetlands permitting requirements. The government contended, however, that even though the EPA refused the Sacketts’ request for a hearing, the compliance order was not the end of the Agency’s decision-making process. The government pointed to a portion of the order that invited the Sacketts to “engage in informal discussion” with the EPA regarding the order’s terms and requirements and/or any allegations in the order that they believed to be inaccurate. The Court rejected this argument, and found the compliance order sufficiently final, because it conferred no “entitlement” to further Agency review. The Court concluded that the “mere possibility” that an agency might reconsider as a result of informal discussions “does not suffice to make an otherwise final agency action nonfinal.”

Underlying the Sackett decision is a concern, expressly noted by the Court, that agencies should not be allowed to “strong-arm . . . regulated parties into ‘voluntary compliance’ without the opportunity for judicial review.” When regulated parties face such strong-arming at the hands of federal agencies they should now consider whether, pursuant to Sackett, judicial redress is available under the APA.

Tag: administrative procedure act

Lawsuit Challenges CFPB’s ‘Buy Now, Pay Later’ Rule

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