Supreme Court Decision Underscores The Importance Of Administrative Law

Administrative law is one of the most useful subjects that someone can take in law school.  I say that as someone who has taught the subject.  Earlier this week, the California Supreme Court issued an opinion that illustrates exactly why it can be very helpful to know about Administrative Law.

Western States Petroleum Ass’n v. State Bd. of Equalization, 2013 Cal. LEXIS 6646 (S. Ct., Aug. 5, 2013) involved a trade group’s challenge to a rule adopted by the Board of Equalization.  The group managed to win summary judgment on two grounds, one substantive and the other procedural.  The Court of Appeal affirmed the judgment.

The Supreme Court, in an opinion by Justice Goodwin Liu first addressed what deference should be accorded to the agency in promulgating the rule.  Justice Liu noted that when a rule is challenged on the grounds that it is not “reasonably necessary to effectuate the purpose of a statute”, a court’s inquiry is limited to whether: (i) the rule is arbitrary, capricious or without rationale basis.  See Yamaha Corp. of America v. State Bd. Equalization, 19 Cal. 4th 1, 11 & fn. 4 (1998); and (ii) substantial evidence supports the agency’s determination that the rule is reasonably necessary.  If the rule is challenged on the grounds that it is “in conflict with the statute” or does not “lay within the lawmaking authority delegated by the legislature”, then the issue is a question of law on which a court exercises its independent judgment.  Applying these standards, the Supreme Court rejected the trade association’s substantive challenge.

All was not lost, however, because the trade group also challenged the procedure by which the rule was adopted.  In particular, it claimed that the agency failed to assess adequately the economic impact of the rule as required by the Administrative Procedure Act.  Government Code Section 11350(a) provides that a rule may be declared invalid “for a substantial failure to comply with” the APA.   Justice Liu noted that several sections of the APA obligate agencies to assess the economic impact of new regulations (Cal. Gov. Code §§ 11346.2, 11346.3, 11346.5(a)(8), and 11346.5(a)(9)).  He described the APA’s requirements as follows:

The requirement is intended to ensure that such information is provided early in the rulemaking process and then refined based on public comment and further consideration in the later stages. Specifically, an economic impact assessment of a proposed regulation has three phases.  First, the agency makes an initial, provisional determination of whether the proposed rule will have a significant adverse economic impact on businesses.  Second, during the public comment period, affected parties may comment on the agency’s initial determination and supply additional information relevant to the issue.  Third, when the agency issues its final decision and statement of reasons, it must respond to the public comments and either change its proposal in response to the comments or explain why it has not.

He then invalidated the rule on the grounds that the agency had failed to make a reasoned effort to make an initial assessment of the economic impact of its rule.

Several lessons can be learned from this case:

  • If you don’t like a rule, you may be able to use the APA to get it set aside.
  • If you mount a substantive challenge, the standard of review will be important.  The arbitrary and capricious standard is going to present a higher hurdle than the independent judgment standard.
  • Procedural challenges can sometimes be winners.  However, you need to understand the APA in order to find noncompliance on the part of the agency.