The United States Supreme Court (SCOTUS) decision in United States Army Corps of Engineers v. Hawkes Co. last Monday reverberated on Friday in United States Court of Appeals for the District of Columbia Circuit in dynamic Fair Labor Standards Act (FLSA) litigation. In two different district courts, expected litigation challenged another Department of Labor (DOL) assertion – the complex of rules defining fiduciary under the Employee Retirement Income Security Act (ERISA). A complaint, and highly unusual, challenged the annual determination of Great Lakes pilotage rates, and the new methodology used for this small sector. A complaint challenging an agency’s failure to respond to a petition for rulemaking may soon raise issues of standing particularity and concreteness within statutory requirements of the Administrative Procedure Act (APA). On the regulatory docket, the Consumer Financial Protection Bureau (CFPB) released its payday loan proposal that will generate high interest.
Warning Letter Finality: A D.C. Circuit panel, in Rhea Lana, Inc. v. DOL, may have applied the SCOTUS decision in Hawkes for the first time.
Rhea Lana uses volunteers for its tag sales of used children’s toys, clothing, and furniture – its business model relies on volunteering mothers and grandmothers. DOL, to the contrary, has long read the FLSA to prohibit for-profit, private sector entities from using volunteer workers – for-profit entities must pay workers under the FLSA. DOL sent Rhea Lana a letter stating that its use of volunteers, and failure to pay FLSA wages, violated the FLSA. Rhea Lana sought pre-enforcement declaratory and injunctive relief against DOL’s determination that it was not complying with the FLSA. The district court dismissed because, the court believed, the letter was more akin to agency advice letters previously held to be unreviewable, non-final agency action.
To simplify the D.C. Circuit’s decision:
We conclude that the Department’s letter to Rhea Lana is final agency action because it is more than mere agency advice. By notifying Rhea Lana that the company was in violation of its wage-and-hour obligations, the letter rendered knowing any infraction in the face of such notice, and made Rhea Lana susceptible to willfulness penalties that would not otherwise apply. The letter thus transmitted legally operative information with a “legal consequence” sufficient to render the letter final. We therefore reverse the district court’s dismissal.
“Willfulness” violation penalties are substantially higher than non-willful violation penalties. The D.C. Circuit acknowledged that Hawkes supports its result, “The DOL letter at issue here, like the jurisdictional determination in Hawkes, has the kind of ‘direct and appreciable legal consequences’ on potential liability that count for purposes of finality.” The panel reversed and remanded to the district court for merits briefing and a decision.
► Many different types of agency communications can become final agency actions, particularly when a distinction lies between negligent or unknowing violations and willful violations when the agency communication can be the basis for proving knowledge and willfulness. Agencies now need to be more aware of the content of warning letters because they may lead directly to litigation on a point that the agency is not fully prepared to defend. Experience suggests that many of these cases will revolve more on the agency’s implementing regulations (e.g. regulatory classification letters) than directly on the statutory language, which further complicates the agency’s choices. Although Hawkes itself might have a short life, its regulatory implications are growing.
Untrusted Fiduciary Rule Tested: Two new, expected filings challenge the DOL Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice final rule and associated rules on a variety of grounds. DOL’s complex of rules become effective tomorrow, and the exemption rules issue tomorrow, but the rules do not become applicable until April 10, 2017.
Chamber of Commerce of the United States v. Perez, N.D. TX No. 3:16-cv-01476-G, ECF 1 (filed June 1, 2016), alleges that DOL’s rules violate the First Amendment to the United States Constitution, cannot be reconciled with the authorizing statutes, and additional constitutional, statutory, and APA grounds. Among other things, the suit claims that DOL
- exceeded its authority by exercising authority vested in the Securities and Exchange Commission (SEC);
- modified the definition contrary to Congress’ ratification of the prior regulations in subsequent legislation;
- improperly created a private right of action in some of the exemption rules without statutory authorization;
- failed to provide advance notice and an opportunity for public comment on studies relied upon in the final rule;
- failed to respond to substantive comments on the proposed rule;
- barred certain arbitration clauses without statutory authority to vitiate the Federal Arbitration Act; and
- reached arbitrary and capricious conclusions based on fatally flawed analysis.
National Association of Fixed Annuities v. Perez, D.D.C. No. 1:16-cv-01035 (RDM), ECF 1 (filed June 2, 2016), makes a number of similar claims in a narrower context. The complaint focuses also on a change in the treatment of fixed indexed annuities from one proposed rule to another final rule, and claims that DOL failed to comply with the Regulatory Flexibility Act (RFA) by not considering the impact on small businesses. Plaintiffs noted the Chamber of Commerce suit as a related case (albeit out of district) and requested preliminary relief; the court has scheduled a status conference for today.
► Both suits seek both vacatur and injunctive relief, but the fixed annuities plaintiffs have requested interim relief in the form of a “preliminary injunction to stay” the April 10, 2017, applicability date, but actually argues that the rule should not go into effect (tomorrow). Two arguments that will be of particular interest focus on (1) whether the DOL or the SEC has regulatory jurisdiction in certain circumstances (and one may expect an appearance by the SEC), and (2) whether a proposal in one rule can create a logical outgrowth in another rule within the same complex of proposals, though not the same rule.
Once again, the United States faces regulatory litigation in multiple district courts where a single loss could result in vacatur of a rule. The Department of Justice (DOJ) may seek to transfer a case, but plaintiffs’ preferred venue (and venue shopping) weighs heavily in the balance of factors a court considers. The stress of multi-jurisdiction litigation exacerbates the stress of short timeframes for seeking a status quo stay of the effective date for the rules (tomorrow). Motions for preliminary injunctions to bar agency enforcement produce less stress because the compliance dates are 10 months away, more than ample time for a district court to resolve the litigation on cross-motions for judgment on the administrative record.
Great Lakes Pilotage Foundering: An interesting challenge to the Great Lakes Pilotage Rates – 2016 Annual Review and Changes to Methodology commenced last week in American Great Lakes Ports Association v. Zukunft, DDC No. 1:2016cv01019, ECF 1 (filed May 31, 2016). The suit challenges both the annual pilotage rates and changes it the rate methodology used by the Department of Homeland Security (DHS)’s United States Coast Guard (USCG) in formulating pilotage rates. The complaint suggests additionally that the USCG failed to respond to substantive comments.
Great Lakes pilotage is compact, specialized and unique. Vessel pilotage cover the entire Great Lakes requires an expertise different from other harbor and berthing pilots. The USCG manages Great Lakes pilotage rather than a port authority, state agency, or even local company and a memorandum of understanding establishes the division of pilotage between the United States and Canadian pilots. United States pilotage rates are set annually by regulation for the “season.” The affected population is quite small – USCG authorized only 36 pilots in the 2015 season (and the system needs nearly 60), overseeing the navigation of 126 vessels transiting the Great Lakes system. The pilotage rate is an hourly cost of time in transit when the pilot is available to supervise navigation.
► The complaint is likely to be amended because several aspects require clarification. Some prayers ask for relief beyond the bounds of regulatory litigation, such as request that the court direct a pilotage rate decrease (20.6%), but asks also only that the court remand the rule, without vacatur, to the USCG. Small suits can raise interesting issues in regulatory litigation.
Oyster Illness Hazard Petition Grounding: Also of interest, Center for Science in the Public Interest v. FDA, D.D.C. No. 1:16-cv-0995 (RDM), EDF 1 (filed May 25, 2016), charges that the Department of Health and Human Services (HHS) Food and Drug Administration (FDA) failed to respond to a citizen petition for regulation of raw shellfish. CSPI filed a petition for rulemaking on February 9, 2012, and FDA allegedly has neither responded nor published the petition for public comment, which CPSI argues constitutes agency action unlawfully withheld or unreasonably delayed in violation of the APA.
► As to standing, plaintiffs argue that (with data from the complaint provided): “CSPI’s [(610,000)] members will continue to be exposed to bacteria that can result in serious illness [(30 / yr / US)] or death [(15 / yr / US)] or, to avoid such exposure, must avoid eating molluscan shellfish altogether.” The APA does not require more than a statutory fault, so the question may arise whether CPSI has established sufficient concreteness and particularization for Article III standing. Expect the government to raise this issue more frequently in the wake of the SCOTUS decision in Spokeo, Inc. v. Robins.
Payday Loans Proposal Interest: The CFPB released its draft proposed Payday, Vehicle Title, and Certain High-Cost Installment Loans. The draft proposed rule would regulate loans with a term of 45 days or less, and loans with a term of more than 45 days that have an “all in” annual percentage rate of greater than 36% and require direct payment from the consumer’s bank account or security with the consumer’s vehicle. CFPB is proposing to exclude from those broad definitions: (1) vehicle and consumer goods purchases secured by the purchased property; (2) home mortgages and other real property-secured loans; (3) credit cards; (4) student loans; (5) non-recourse pawn loans; and (6) overdraft services and lines of credit. The draft proposed rule is premised on the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) enacted six years ago. The draft stipulates that public comments are due on or before September 14, 2016, although the rule has not been filed for public inspection by the Office of the Federal Register. The CFPC plans also to request information on products that do not fall within the draft proposed rule but are of like kind.
► Regulation of these high-risk-to-all-parties loans is novel and high-risk. Examples of “abuse” are plentiful, and the question here boils down to whether the regulation of the industry will simply end the industry by pushing the cost of compliance beyond the market capacity. Concerns have already been raised about the impact on small businesses under the RFA (who appear to dominate the industry) and the impact on consumers who may depend on this margin industry if it disappears. In any event, expect a deluge of comments when the public comment period opens.
The post Monday Morning Regulatory Review – 6/6/16: Warning Letter Finality; Untrusted Fiduciary Rule Tested; Great Lakes Pilotage Foundering; Oyster Illness Hazard Petition Grounding & Payday Loans Proposal Interest appeared first on Federal Regulations Advisor.