The Environmental Trust: Will The Exception Swallow The "Rule?"
In The Environmental Trust v. Department of Environmental Protection [1], the court affirmed a final order dismissing a challenge to agency memos as unadopted rules, and it held that an agency statement explaining how an existing rule of general applicability will be applied in a particular set of facts is not itself a rule. [2] In so holding, did the court establish the exception that "swallows the rule" or otherwise do great damage to the Legislature's repeated efforts to require agencies to adopt their policies as rules?
Background
When the Legislature amended the Florida Administrative Procedure Act (APA) in 1974, it created a detailed rulemaking process for state agencies. [3] It did not, however, expressly require agencies to use the rulemaking process to formalize policy positions into rules before applying these policies in specific cases. The initial judicial reaction was to force rulemaking by permitting a person against whom an unadopted policy was being applied to challenge the validity of the policy in a rule challenge proceeding. [4] If the policy was found to be a "rule" as that term was defined in the APA, and if the policy had not been adopted as a rule following the prescribed rulemaking procedures, then the policy was invalidated and could not be used as a basis for agency action until it was properly adopted. [5]
In McDonald v. Department of Banking & Finance, [6] the court created an exception to the general rule that the formal rulemaking process must be used when an agency seeks to implement delegated authority. In McDonald, the court held that state agencies are not required to adopt all of their emerging or "incipient" policies as rules. The court reasoned that agencies may choose not to adopt those policies as rules and instead may explain, support, and defend such policies in each case in which the policies are applied.
However, as the late Professor Pat Dore observed, the limited McDonald exception soon "swallowed the rule" because the courts allowed the agencies themselves to determine whether and when they were ready to proceed to rulemaking. [7]
The Legislature Expresses a Clear Preference For Rulemaking
In 1991, the Legislature amended the APA to create Section 120.535, Florida Statutes. That section provided that rulemaking is not a matter of agency discretion, and it required agencies to adopt their policies through rulemaking as soon as "feasible and practicable." [8] That section also provided a remedy that permits substantially affected persons to attack agency statements that have not been adopted as rules. [19] In 1996, the Legislature reaffirmed its preference for rulemaking, by adding teeth to those remedies designed to force agencies to adopt their policies as rules. [10]
What is a "Rule"?
These remedies require the petitioner to show that the challenged policy is both "unadopted" and a "rule." Determining whether the statement has been "adopted" in accordance with the rulemaking requirements of the APA is relatively simple. The more difficult question is whether the statement is, in fact, a "rule." The APA defines a "rule" as "each statement of general applicability that implements, interprets, or prescribes law or policy or describes the procedure or practice requirements of an agency." [11]
The Environmental Trust
The Environmental Trust and Sarasota Investors submitted 45 applications for reimbursement for site rehabilitation work. The cost of the work was financed in each case by a "factoring" agreement. In at least 30 of the projects, the site rehabilitation work was completed by a subcontractor under an agreement with a general contractor. The general contractor had no substantial involvement with the project until the work was completed. At that point, the general contractor performed a site inspection for which it claimed a 15% "markup."
The Department of Environmental Protection (DEP) had in place a rule concerning the necessary qualification for reimbursement, but the rule did not expressly address the "factoring" or "markup" expenses. In two intra-agency memoranda, DEP stated its position on factoring discounts and markups by a general contractor. Applying the policy expressed in these memos, DEP denied the claims for reimbursement of these factoring and markup expenses.
The ALJ's Ruling
The Environmental Trust and Sarasota Investors filed petitions for an administrative hearing under Section 120.57 to contest the denial of their claims. They also filed petitions in each case under Section 120.535 for a determination that the agency memoranda regarding the factoring and markup policies had the effect of unadopted rules. The cases were consolidated.
Administrative Law Judge (ALJ) Suzanne Hood entered two orders. The first was a recommended order in the Section 120.57 proceeding, determining that the applications were properly denied. The recommended order was adopted by DEP [12], and the petitioners appealed. The second order was a final order in the Section 120.535 proceeding. In that order, the ALJ held that DEP policies had the effect of unadopted rules. However, the order dismissed the petitions based on a finding that DEP had initiated rulemaking to adopt rules as soon as practicable or feasible. [13] The Environmental Trust and Sarasota Investors appealed. DEP cross-appealed, arguing that the memos did not have the effect of unadopted rules.
The Appellate Court's Holding
With respect to the challenge to non-rule policy, the appellate court affirmed ALJ Hood's ruling dismissing the petition challenging the memos as unadopted rules. However, the majority opinion by Judge Padovano rejected ALJ Hood's conclusion that the challenged statements of policy were unadopted "rules." Significantly, the majority held that "[a]n agency statement explaining how an existing rule of general applicability will be applied in a particular set of facts is not itself a rule."
714 So. 2d at 498 (emphasis added). Judge Benton concurred in the result, but dissented in part. He would have affirmed ALJ Hood's ruling, as he was persuaded that the challenged memoranda should be treated as unpromulgated rules. [14]
Will the Exception Swallow the Rule?
Does the majority ruling do great damage to the Legislature's repeated efforts to force agencies to codify their policies as rules? In other words, may an agency now defend a challenge to policy statements, by simply arguing that the unadopted policy is not a "rule" because it is merely an "explanation" of how an existing rule of general applicability applies in a particular set of facts? Will the majority ruling become the exception that "swallows the rule," as Professor Dore said about the decision in McDonald? [15]
The majority ruling in The Environmental Trust seems relatively simple to follow in most cases that involve the mere "explanation" of a very clear application of an existing, adopted rule to very specific facts. Of course, these easy cases are not the ones that typically generate challenges to unadopted rules.
But what about cases where an agency is implementing a very broadly written rule, the application of which is not clear and unambiguous? For example, what about a rule that requires that a project be "clearly in the public interest" or that an activity not "adversely affect the public health safety or welfare."? Aren't agency statements of general applicability "explaining" these rules more likely to be "interpretations" of law that fall within the definition of a "rule?"
And what about cases where an agency announces its "interpretation" of a rule in a broadly distributed statement that clearly is intended to have very general application to a broad class of facts? We've all seen these kinds of statement; they often take the form of "industry bulletins" or "technical bulletins" or the like. Aren't these statements clearly intended to interpret or prescribe law, and don't they therefore fall within the definition of a "rule?"
Conclusion.
If the holding in The Environmental Trust is limited to those narrow circumstances where the agency truly is "explaining" a fairly straightforward application of a rule to a specific set of facts, then the holding probably does not become the exception that swallows the "rule" or otherwise do great damage to the Legislature's efforts to require agencies to adopt their policies as rules. [16] If, however, the holding in The Environmental Trust is applied expansively by other courts and ALJs -- and if it does in fact become the exception that swallows the "rule" -- then look for the Legislature to give serious consideration to the passage of corrective legislation. [17]
1. 714 So. 2d 493 (Fla. 1st DCA 1998).
2. Id. at 498.
3. This rulemaking process is codified at Section 120.54, Florida Statutes.
4. See Patricia A. Dore, Florida Limits Policy Development Through Administrative Adjudication and Requires Indexing and Availability of Agency Orders, 19 Fla. St. L. Rev. 437 (1991).
5. Department of Administration v. Stevens, 344 So. 2d 290 (Fla. 1st DCA 1977).
6. 346 So. 2d 569 (Fla. 1st DCA 1977).
7. Dore, supra note 5, at 437.
8. Section 120.535(1), Florida Statutes (1991). In 1996, this section was moved to Section 120.54(1)(a).
9. Section 120.535. In 1996, this provision was moved to Section 120.56(4).
10. In 1996, the Legislature revised this provision to provide additional "incentives" for forcing agencies to adopt their policies as rules. These new incentives take two forms. First, the law now provides that when an administrative law judge (ALJ) enters a final order that all or part of an agency's statement violates the rulemaking requirement, the agency shall immediately discontinue all reliance upon the statement or any substantially similar statement as a basis for agency action. Section 120.54(4)(d), Florida Statutes. (The agency may avoid this result by publishing proposed rules prior to the entry of a final order. Section 120.56(4)(e), Florida Statutes.) Second, following the entry of such a final order, the ALJ is required to award reasonable costs and reasonable attorney's fees to the petitioner. Section 120.595(4), Florida Statutes. For an overview of the changes adopted in 1996, see Wade L. Hopping, Lawrence E. Sellers, Jr., and Kent Wetherell, Rulemaking Reforms and Nonrule Policies: A "Catch-22" for State Agencies?, 21 Fla. B. J. 20 (March 1997); Wade L. Hopping and Kent Wetherell, The Legislature Tweaks McDonald (Again): The New Restrictions on the Use of "Unadopted Rules" and "Incipient Policies" by Agencies in Florida's Administrative Procedure Act, 48 Fla. L. Rev. (1996).
11. Section 120.52(8), Florida Statutes (emphasis added).
12. 97 ER FALR 43 (DEP 1997).
13 96 ER FALR 165 (DOAH 1996).
14. 714 So. 2d at 501.
15. See supra note 5.
16. In The Environmental Trust case, the challenges to non-rule policy were filed before the 1996 amendments to the APA became effective (although ALJ's Hood order was entered shortly after the October 1, 1996, effective date). As such, it appears that the court did not apply the 1996 amendments in this case. The 1996 amendments may have an effect on whether other courts and ALJs apply the ruling in The Environmental Trust to future cases. Newly-created Section 120.57(1)(e) requires the agency to essentially "prove up" its policy when the application of that policy is challenged in a Section 120.57 proceeding. Among other things, the agency is now required to show that the unadopted rule is not being applied to the substantially affected party "without due notice." If the agency's "explanation" (or "interpretation") of an existing rule or statute is not sufficiently obvious that all substantially affected parties are implicitly on notice of the policy, then courts and ALJs likely will be unwilling to apply the holding in The Environmental Trust to conclude that the challenged policy is not a "rule."
17. Indeed, as this article was submitted for publication, the Legislature was considering legislation designed to "correct" another holding in The Environmental Trust. See Amendment 11 to § 3, HB 107 (1998) (amending s. 120.54(1)(f) to expressly provide that "an agency may not adopt retroactive rules, including retroactive rules intended to clarify existing law, unless that power is expressly authorized by statute").