Step Two of Chevron v. Natural Resources Defense Council
ABA Administrative Law Section
Project on the Administrative Procedure Act, Scope of Judicial Review Section
Elizabeth Magill, University of Virginia School of Law
Third Draft: June 2001
- When a court considers an agencys interpretation of a statute and determines that the statute is silent or ambiguous with respect to the question at issue, the court is required to defer to the agencys interpretation of the statute if it is reasonable or permissible.
In Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984), the Supreme Court held that an administrative agencys construction of the statute it administers should be considered under a now-familiar two part test. The court first must determine whether the statute resolves the question. If a court determines that Congress has not addressed the question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agencys answer is based on a permissible construction of the statute. Id. at 843. According to the reasoning put forward in Chevron, if a statute does not resolve the question, Congress has impliedly delegated that question to the agency. Id. at 844-45. In that context, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency. Id. at 844. The Chevron Court provided two reasons for this rule of deference: agency expertise and the superior democratic accountability of agencies when compared to courts. Id. at 844-45, 865-66; Food and Drug Admin. v. Brown & Williamson Tobacco Corp., 120 S.Ct. 1291, 1300 (2000). Some critics question the wisdom of and basis for the rule of deference embodied in the second step of Chevron.[1] Nonetheless, Chevron, including the requirement of deference at step two of the test, remains the presumptive doctrinal framework governing cases in which agencies interpret statutes.
II.Courts consider a variety of factors to determine whether an agencys interpretation of a statute is reasonable or permissible. These factors include an examination of the agencys reasoning process and statutory materials.
Once a court reaches the second step of Chevron, the Supreme Court has instructed that the court must defer to an agencys reasonable or permissible construction of the statute. 467 U.S. at 843, 845. Defining precisely what constitutes a reasonable or permissible construction of a statute, or what materials a court is required to consider in making that determination, is no simple enterprise. That lack of clarity exists in part because once a reviewing court reaches the second step of this framework, the agency interpretation of the statute is usually sustained, often in a perfunctory way. With perhaps one exception, AT&T Corp. v. Iowa Utilities Bd., 119 S.Ct. 721, 734-36 (1999), commentators have observed that the Supreme Court has never invalidated an agency construction of a statute at step two of Chevron. See Lisa Schultz Bressman, Schechter Poultry at the Millennium: A Delegation Doctrine for the Administrative State, 109 Yale L.J. 1399, 1400 and n.5 (2000). The lower court Chevron step two cases follow a similar, though not as overwhelming, pattern. See Orrin S. Kerr, Shedding Light on Chevron: An Empirical Study of the Chevron Doctrine in the U.S. Courts of Appeals, 15 Yale J. on Reg. 1 (1998). Consequently, opinions rarely contain a self-conscious explanation of exactly what a court should examine at step two. Because Chevron step two invalidations are extremely rare, it is also difficult to determine the relative importance of the many factors that courts can rely on when they uphold interpretations.
There is some guidance on the task a court must undertake at step two. Chevron itself clarified two points. A reviewing court must affirm an agencys interpretation even if it is not the best interpretation of a statute or the interpretation that the court would have devised. See Chevron, 467 U.S. at 843 n.11. Also, while there are occasional statements to the contrary, a change in an agencys interpretation does not, by itself, mean that the interpretation is unreasonable. Id. at 863-64; see also Rust v. Sullivan, 500 U.S. 173, 186-87 (1991); Independent Bankers Assn v. Farm Credit Admin., 164 F.3d 661, 668 (D.C. Cir. 1999).
Beyond this guidance, however, the analysis a court seeking to follow Chevron should conduct at step two is not well defined. Examination of cases reveals that courts engage in two types of analysis when they assess whether an agencys interpretation of a statute is reasonable or permissible. As this Part will describe, courts sometimes examine the agencys reasoning process and they sometimes look to statutory materials.
As this Part will also discuss, when courts look to statutory materials at step two, their inquiry is awkward in large part because such analysis appears to duplicate the evaluation conducted at step one. The difficulties of such step two analysis have prompted Professor Ron Levin to suggest that the examination of statutory materials be confined to step one of Chevron, where courts evaluate whether the statute permits the interpretation the agency has adopted. If this reform were adopted, all statutory materials would be examined at step one and step two would consist of an examination of the reasoning that supports the agencys interpretation. For the reasons discussed below, this report endorses that suggested reform.
A.Courts examine the agencys reasoning process at step two of Chevron. This analysis is akin to review conducted under the arbitrary and capricious standard of the Administrative Procedure Act.
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Courts at step two of Chevron sometimes examine the reasoning process that leads to the agencys interpretation. When they do so, their review is indistinguishable from arbitrary and capricious review conducted under the rubric of the Administrative Procedure Act (APA). Section 706 of the APA requires that a court hold unlawful and set aside agency action that is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 5 U.S.C. 706(2)(A). Arbitrary and capricious review, as it has developed in the courts, requires the court to determine whether the agency exercised its discretion in a reasoned way. Among other things, the agency must demonstrate to the court that it has examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choice made. Motor Vehicles Mfrs. Assn v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168 (1962)); see also Kenneth Culp Davis & Richard J. Pierce, Jr., Administrative Law Treatise, at 7.4 (3d. ed., 2000). The D.C. Circuit first developed this understanding--often called hard look review--of the requirements of the APA and the Supreme Court endorsed that review in State Farm.
The doctrinal relationship between arbitrary and capricious review and Chevron step two is the source of confusion in lower federal courts and it will be considered in Part II.C. As a matter of pure description, however, it is clear that courts do sometimes apply a reasoned decisionmaking requirement when they evaluate an agencys interpretation at step two of Chevron. As Ron Levin has observed, Chevron itself offers some doctrinal support for this understanding of step two. Levin, 72 Chi-Kent L. Rev. at 1267-69. In upholding the agencys interpretation, the Court there observed that the agency advanced a reasonable explanation for its conclusion that the regulations serve the environmental objectives of the Clean Air Act and its reasoning is supported by the public record developed in the rulemaking process, as well as by certain private studies. 467 U.S. at 863 (footnotes omitted). Subsequent Supreme Court case law has also suggested that examination of the logic of an agencys interpretation is part of step two of Chevron. Smiley v. Citibank, 517 U.S. 735, 741 (In its logic, at least, the line [the agency has drawn] is not `arbitrary [or] capricious, and thereby disentitled to deference under Chevron.).
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Many of the lower court opinions that reverse the agency at step two do so based on weaknesses in the logic of the agencys interpretation. See Davis & Pierce, Jr., Administrative Law Treatise, at 3.6, p. 118 (3d. ed., 2000 Cumulative Supp.) (observing that lower court Chevron step two reversals often are functionally indistinguishable from reversals predicated on an agencys failure to engage in reasoned decisionmaking and collecting cases); Natural Res. Def. Council v. Daley, 209 F.3d 747 (D.C. Cir. 2000) (Chevron step two analysis that examines arbitrariness); Kennecott Utah Copper Corp. v. United States Dept. of Interior, 88 F.3d 1191, 1206 (D.C. Cir. 1996) (Chevron step two requires determination whether the agency considered the matter in a detailed and reasoned fashion and whether the interpretation is arguably consistent with the underlying statutory scheme in a substantive sense) (internal quotation marks omitted);Consumer Fedn of Am. v. Dept. of Health and Human Servs., 83 F.3d 1497 (D.C. Cir. 1996) (step two analysis that examines logic of agencys position); Envtl. Def. Fund v. EPA, 82 F.3d 451 (D.C. Cir. 1996) (upholding variety of agency interpretations, inter alia, because agency adequately explained why it chose particular interpretations); Republican Natl Comm. v. Fed. Election Commn, 76 F.3d 400, 406-07 (D.C. Cir. 1995) (invalidating one portion of FEC regulation based on errors in the agencys reasoning as well as its understanding of the statute); Madison Gas & Elec. v. EPA, 25 F.3d 526, 529 (7th Cir. 1994) (although, under Chevron, agency can adopt any reasonable interpretation of ambiguous term in statute, it must exhibit the reasons for its choice and those reasons must at least be plausible).
Consumer Federation illustrates this style of step two analysis. There, the D.C. Circuit considered a challenge to U.S. Department of Health and Human Service (HHS) regulations implementing the Clinical Laboratory Improvement Amendments (CLIA). The court first considered a challenge to the agencys personnel qualifications for clinical labs. Saying that the challenge was governed by Chevron, the court applied step one of Chevron and determined that the statute did not preclude the agencys approach. 83 F.3d at 1503. It then proceeded to step two, where its analysis looked very much like arbitrary and capricious review. The court sustained the agencys regulations because it found the agencys explanation to be a reasonable one and that the agency had provided, in response to the challengers argument, a coherent explanation for why a particular criterion was not useful or manageable. Id. at 1504. The court then considered a challenge to another part of the regulationa provision that tested the proficiency of cytologists who processed slides. The challenger pointed out that the statute required that the proficiency testing occur under normal working conditions and that there was a disjunction in the regulations between the maximum daily work rate for cytologists (up to 12.5 patient slides an hour), and the proficiency testing protocol, which required cytologists to review only 10 slides every two hours. Id. at 1505. Because it concluded that the statute was ambiguous, the court proceeded to step two and, again, its analysis adhered to typical arbitrary and capricious review. Id. at 1505-06. After examining the agencys reasons for its design of the proficiency testing protocol, the court rejected the agencys approach, noting that its explanation [was] simply too terse to explain the difference between the maximum daily work rate and the work rate for the proficiency testing, id. at 1506; the agency provide[d] no reason for choosing a particular states program as a prototype, id; and that without further definition of normal working conditions and an explanation of why the testing protocol it has selected conforms to these conditions...we are at a loss to understand how HHSs proficiency testing regulations reflect a reasonable interpretation of the relevant CLIA provisions, id. Finally, the court refused to sustain that portion of the regulation based on an explanation subsequently proffered by the agency because the courts review of the regulation had to be based only on the administrative record, not on `some new record made initially in the reviewing court. Id. at 1506-07 (quoting Camp v. Pitts, 411 U.S. 138 (1973)). As this review indicates, the Consumer Federation courts step two analysis closely tracked typical arbitrary and capricious review.
B.Courts examine statutory materials at step two to determine whether the agencys interpretation is reasonable or permissible.
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The conventional understanding of Chevron step two is that the task of the court is to compare the agencys proffered interpretation to the statute that the agency administers. See Chevron, 467 U.S. at 843 (at step two, the question for the court is whether the agencys answer is based on a permissible construction of the statute) This statutory understanding of step two works as follows. At step one, a court determines whether the statute is silent or ambiguous with respect to the question before the agency. Thus, for example, a court might ask whether the National Bank Act defines interest so as to include or exclude late fees paid on credit cards. Smiley v. Citibank, 517 U.S. 735 (1996). Then, having determined that the statute is ambiguous with respect to the question, the court at step two evaluates whether the agencys interpretation is a permissible one under the statute. To illustrate with the same example, once the court determines that the statute does not resolve whether interest includes or excludes late fees, the court would decide whether an interpretation that such fees are included within the term interest is reasonable or permissible. In theory, this step two inquiry does not duplicate step one. A determination that the statute does not answer the question means that a range of interpretations are available to the agency, but that does not mean that any interpretation is within the confines of the statute; some interpretations may be so out of bounds as to be inconsistent with the statute. Hence, ambiguity about the meaning of the term interest (determined at step one) does not mean that any interpretation of that term will comport with the statute (the analysis conducted at step two). Under this understanding, a court looks to statutory materials at step two in order to determine whether the interpretation the agency selected is within the range of possible interpretations that the ambiguous statutory provisions permit.
Many cases follow this statutory understanding of Chevron step two. These cases do not require that courts consult any particular set of statutory materials. In fact, the materials that courts examine at step two are those that courts might also examine at step one. These include all the conventional statutory sources: the terms or sections of the text of the statute; the overall structure of the statute; the legislative history; the courts understanding of the purpose of the statute. See, e.g. Your Home Visiting Nurse Servs. Inc. v. Shalala, 525 U.S. 449, 452-57 (1998) (examining statutory purpose of one provision and consistency with other provisions of relevant statute); Smiley v. Citibank, 517 U.S. 735, 745 (1996) (examining judicial, common usage, and legal dictionary definitions of key term at time of passage of relevant act); Babbitt v. Sweet Home Chapter of Cmtys for a Greater Ore., 515 U.S. 687, 697-704 (1995) (examining dictionary definition of key term; broad purposes of the relevant act; structure of statute, including amendment of act; legislative history); NationsBank of N.C. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 259-261 (1995) (examining, inter alia, the terms of the act); Rust, 500 U.S. at 184-85, 188-90 (examining language of statute; legislative history; congressional intent); Republican National Committee v. Federal Election Commn, 76 F.3d 400, 406 (D.C. Cir. 1996) (examining statute; legislative history; purpose of the statute); Strickland v. United States Dept. of Agric., 48 F.3d 12, 21 (1st Cir. 1995) (examining purpose of statute). The range of statutory materials relied upon thus varies, and the comprehensiveness of the examination varies as well. Compare the abbreviated discussion in Smiley, 517 U.S. at 745; NationsBank, 513 U.S. at 259-61 with the more comprehensive discussion in Sweet Home, 515 U.S. at 697-704.
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Those relatively rare cases in which courts reverse an agency at step two based on an examination of statutory materials follow a similar pattern. In those cases, the courts rely on statutory materials that might be consulted at step one. Consider AT&T Corp. v. Iowa Utils Bd., 119 S.Ct. 721 (1999), where the Supreme Court invalidated an aspect of the Federal Communication Commissions (FCC) order implementing the 1996 Telecommunications Act. At issue was a FCC determination that incumbent local exchange carriers be required to make available a minimum of seven of their network elements to requesting carriers. The objection by the incumbent carriers was that, in compiling the list of network elements incumbents had to make available to requesting carriers, the FCC had failed to take account of the statutes requirements that the elements be made available only if access was necessary and where lack of access to such elements would impair an entrants ability to provide local service. The Supreme Court held that the FCC did not adequately consider the necessary and impair standards of the statute when it required blanket access to seven network elements. 119 S.Ct. at 734-36. In its portion of the opinion invalidating this aspect of the FCC order, the Court does not cite Chevron. Id. The Court does, however, use language that implies a holding based on Chevron step two, id. at 736, and this portion of the opinion has been read--by other members of the Iowa Utilities Board Court and some commentators--to be an invalidation of the agencys position at step two of Chevron, see 119 S.Ct. at 739-41 (Souter, J., dissenting from this portion of the Courts opinion); Bressman, 109 Yale L.J. at 1399-1400; Michael Herz, Developments in Administrative Law and Regulatory Practice 1998-1999, p. 52-54. If one reads this portion of the opinion as based on Chevron step two, the Court invalidates the FCCs determination on a variety of statutory grounds: as not in accord with the ordinary and fair meaning of the statutory terms, 119 S.Ct. at 735, as reading the necessary and impair provision out of the statute, id., and as based on a misunderstanding of another provision of the statute, id. at 736.
One pattern evident in step two cases is that the comparison between the agencys interpretation and the statute often occurs at a high level of generality. As the Supreme Court once explained the task at step two: If the administrators reading fills a gap or defines a term in a way that is reasonable in light of the legislatures revealed design, we give the administrators judgment controlling weight. NationsBank, 513 U.S. at 257 (citing Chevron, 467 U.S. at 844) (emphasis added); see also Sweet Home, 515 U.S., at 698 (observing that broad purpose of the Endangered Species Act supports agency interpretation). In the lower courts, a comparison between the agencys interpretation and an overall purpose of the statute is common. As Chief Judge Posner observed, without clear guidance from the legislature, about all the court can do is determine whether the agencys action is rationally related to the objectives of the statute containing the delegation. Mueller v. Reich, 54 F.3d 438, 442 (7th Cir. 1995); see also Bankers Life and Casualty Co. v. United States, 142 F.3d 973, 988 (7th Cir. 1998) (upholding Treasury regulation regarding valuation of life insurance companys distribution of real property to shareholders where, inter alia, the agencys approach is reasonable given the origin and purpose of the three-phase taxation scheme that operates with respect to life insurance companies); Strickland, 48 F.3d at 21 (upholding food stamp regulation in light of the [Food Stamp] Acts avowed purpose of supplementing the purchasing power of those unable to afford nutritionally adequate diets); Natl Recycling Coalition v. EPA, 984 F.2d 1243, 1251 (D.C. Cir. 1993) (upholding EPA guidelines because they reasonably furthe[r] the purposes addressed in the legislative history of the relevant statute). Using a statutory approach, this feature of Chevron step two analysis may be inevitable. Because the statute does not answer the precise question before the agency, the court must necessarily rely on a more generalized statutory inquiry to determine whether the agencys construction of the statute is reasonable.