Retroactive rulemaking.

• Author: Weien, Geoffrey C.

INTRODUCTION

Can a federal agency create a new rule and use it to penalize past actions? Can the Department of Health and Human Services change Medicare reimbursement rules and use the new rules to force a hospital to refund amounts it was paid several years in the past? (1) Can the FCC set new rules reducing the scope of cellular telephone frequency licenses that it has already issued? (2) Can an application for Social Security benefits be denied because of a rule change that occurred after the application was made? (3) In Bowen v. Georgetown University Hospital, (4) the Supreme Court held that agencies could not adopt retroactive rules without explicit congressional authorization. (5) In the years since Bowen, however, courts of appeals have not applied this rule consistently. Consistent application has been difficult because of conflicting definitions of "retroactivity." These conflicting definitions flow from fundamental disagreements about the nature of "fair notice," the extent of the rights and actions that an anti-retroactivity presumption should protect, the temporal scope of such a presumption, and the necessity of reconciling retroactivity restraints with the principle of strong judicial deference to agencies. (6)

Twelve years ago the Supreme Court affirmed the longstanding principle that federal legislation should affect future rather than past actions, noting that "the presumption against retroactive legislation is deeply rooted in our jurisprudence, and embodies a legal doctrine centuries older than our Republic." (7) The Court noted that the Constitution itself prohibits at least some forms of retroactive action by the government, pointing to the Ex Post Facto Clause, the Contracts Clause, the Takings Clause, and the Bills of Attainder Clause as examples. (8) In addition to these express provisions, Congress is constrained by a judicially-created presumption that all laws will be interpreted to have only future effect unless the text of the statute explicitly states otherwise. (9) The Supreme Court remains active in clarifying--and perhaps modifying--this statutory presumption. (10)

Administrative agencies exercise power delegated by Congress and are required to act both within the limits given by their enabling (or organic) act and within the procedural limits established by the Administrative Procedure Act (APA). (11) The APA classifies agency actions into two main categories: rules, which are analogous to legislative acts; (12) and orders, which are analogous to judicial decisions. (13) Agencies are also able to adopt nonlegislative rules that purport to interpret or clarify existing regulations or statutes without following the notice-and-comment procedures required of other rulemaking. (14)

As noted, Congress is subject to certain restraints regarding retroactive action, but it is not immediately clear that identical restraints bind administrative agencies. Two differences between Congress and administrative agencies support an intuition that there must be an administrative retroactivity doctrine distinct from statutory doctrine. First, the APA's definition of "rule" includes the words "future effect," but its definition of "order" does not, which suggests that the APA itself may constrain retroactive rulemaking in the agency context. (15) Second, agencies can act in both a judicial fashion (adjudication resulting in orders) and a legislative fashion (rulemaking resulting in rules), but Congress is capable of acting only legislatively.

The Supreme Court explained the agency-specific retroactivity doctrine in Bowen, which is commonly cited for the proposition that agency rules are presumed not to have retroactive effect unless Congress has explicitly given the agency such power. (16) Justice Scalia's concurrence (17) and the opinion of the D.C. Circuit (18) in Bowen are also frequently cited for the even more restrictive principle that the APA's rule-order dichotomy independently prohibits rules from having retroactive effect. (19) Bowen, however, has not been a very powerful tool for plaintiffs: most Bowen-based challenges in the courts of appeals fail. Additionally, the federal appeals courts analyzing challenges under Bowen have not done so in a uniform way, resulting in a confusing legal landscape for agencies, regulated parties, and the public.

Part I demonstrates that most post-Bowen challenges to agency application of retroactive rules have failed. Part II describes the main theoretical difficulties courts of appeals have had in applying Bowen, mainly stemming from problems defining "retroactivity." Part III concludes with two assertions: first, that retroactivity analysis should focus on the existence (or absence) of rights, and second, that the presumption against retroactivity should be applied to all agency action, not just rulemaking.

1. ATTEMPTS TO CONSTRAIN RETROACTIVE APPLICATION OF AGENCY RULES

   Given the Supreme Court's holding in Bowen and its long history of aversion to retroactive legislation, (20) one might expect a fairly consistent set of lower court derisions rigorously applying the principle. Instead, it appears that most cases challenging agency action under Bowen at the appellate level result in agency victories, (21) and that the courts of appeals have used different analytical frameworks to evaluate retroactivity challenges. (22)

   It is important to distinguish three categories of cases from the "agency victory" cases. In the first category, the agencies themselves cited Bowen to disclaim the power to act as the plaintiff demanded. One recent example is Sierra Club v. Whitman, in which the Sierra Club sought to force the EPA to backdate a rulemaking that found St. Louis to be a "nonattainment" area under the Clean Air Act. (23) Another example is Motion Picture Association of America, Inc. v. Oman, in which the MPAA sought to force the Copyright Office to apply a rule concerning interest on late royalty payments retroactively. (24) In both cases, the court agreed with the agency that such actions were prohibited under Bowen. Although these cases seem to be straightforward applications of Bowen, they do not represent an independent constraint on agency power. Even in the absence of Bowen, they likely would have resulted in agency victories under principles of deference to agency policymaking. (25)

   The second category is composed of cases in which the agency was not a party to the case and consequently expressed no preference as to whether the rule be applied retroactively. These cases, generally between private parties, do not implicate the same concerns of agency power and discretion that underpin the APA and modern administrative law. Courts typically use other judicially crafted principles of notice and fairness--for example, from tort or contract law--to decide whether the new rule should be applied retroactively. In Jahn v. 1-800-FLOWERS.COM, Inc., for instance, the Seventh Circuit refused to void a contract for sale of a toll-free number when the FCC later banned the sales of these numbers. (26) Similarly, in Sweet v. Sheahan, the Second Circuit refused to apply a duty to warn about lead-based paint in lease agreements that predated the regulation creating the duty. (27) Because the agency was not a party in these disputes, these cases do not involve the same issues of judicial constraints upon agency power. (28)

   The final category concerns retroactive application of nonlegislative rules. Under the prevailing jurisprudence in this area, interpretative nonlegislative rules do not create new policy but merely clarify and restate what the law "is and always has been." (29) The general judicial presumption against retroactive rulemaking has no effect against such a restatement. In these cases, the APA-based presumption (30) is also fatally weakened. The APA-based presumption rests on the presence of the term "future effect" in the definition of "rule." (31) Because nonlegislative rules restating or clarifying existing law are either interpretative rules or non-binding general statements of policy, (32) true nonlegislative rules cannot have any exclusively future effect. The effect of a nonlegislative rule exists either in the past and the future, in the case of an interpretive rule, or it does not exist at all, if it is a non-binding statement of policy. Challenges to nonlegislative rules nearly always result in an agency victory because, as stated earlier, courts will generally defer to agency interpretation of statutes and regulations under the principles of Chevron (33) and Seminole Rock, (34) respectively. (35)

   There are three clear cases, however, in which a Bowen-based challenge has succeeded against an agency. In Cort v. Crabtree, the Ninth Circuit held that the Bureau of Prisons could not retroactively apply a new definition of "nonviolent offense" to render certain prisoners ineligible for a sentence reduction program. (36) In Rock of Ages v. Secretary of Labor, the Second Circuit held that the Federal Mine Safety and Health Review Commission could not hold a mining company liable for actions that violated the requirements of a regulation adopted a year later. (37) Finally, in National Mining Association v. Department of Labor, the D.C. Circuit held that the Department of Labor could not apply certain new rules affecting claims under the Black Lung Benefits Act to claims filed before the new rules were adopted. (38)

2. THE VARIOUS THEORETICAL APPROACHES USED IN APPLYING BOWEN

   The Supreme Court's sweeping language describing the risks of retroactive legislation and rulemaking clearly indicates that important principles are at stake, even if they are hard to define. (39) It is also evident from the disparate outcomes of the cases in lower courts that these principles are not easily applied. This Part describes the way the Supreme Court and courts of appeals have analyzed those principles.

   1. The APA

      Both Justice Scalia's concurrence in Bowen...