State Government Watch

The Courts Say a Rule Is a Rule, Not a ‘Guidance Document’

It should go without saying that when a state agency wants to impose a new regulation on business and industry, the agency should follow the well-established procedures in state law for promulgating new rules. You know, the agency publishes a notice outlining its regulatory intentions, public hearings are held, effected parties are given the opportunity to comment – those procedures. But it has become apparent in recent years that state regulators frequently flout those procedures by saying the new rule isn’t really a rule at all. The regulators call them “policies,” “guidance documents,” “interpretations,” “positions,” “programs,” “agency memoranda” and other similar euphemisms.

Now the N.C. Court of Appeals has called a spade a spade by saying that a state regulation is a state regulation regardless of what the regulators may call them. The decision stems from a suit against the N.C. Department of Health and Human Services over the way it implemented the state’s Work First welfare reform program, but lawyers say the ruling should have its biggest impact in the business world.

In the case, Arrowood v. N.C. Department of Health and Human Services (No. COA99-940), the appeals court held that North Carolina agencies must follow the rulemaking requirements of the state Administrative Procedure Act (the APA) regardless of what they call the action or position they are taking. At issue in the Arrowood case was DHHS’s action to replace the state’s previous welfare program with Work First, a key characteristic of which was an incentive for recipients to get back into the workforce by limiting to 24 months the time that such benefits could be received.

DHHS did this by fiat, saying it had broad federal authority to do so. But the essential point in Arrowood is that, although North Carolina properly requested and received permission from Washington to implement the Work First Program, DHHS did not then adopt the program as a rule under the APA. The agency neglected to do this even though it would not required a lot of time or effort. As the opinion notes, “the burden placed on (DHHS) to comply with the APA is not heavy. Indeed (DHHS) could have simply incorporated its Work First manual into a rule promulgated under the APA as ‘adopted to meet a requirement of the federal government.’”

In particular, the Arrowood case has significant implications for many regulatory programs applicable to business, such as environmental, health and safety rules, zoning and land use, labor and employment, taxation, and public contracting. Observers say the case affirmed the principal that, if an agency is going to implement or apply something that has the effect of a rule, that action must be adopted as a rule using the procedures under the APA. Simple as that sounds, the decision has caused several state agencies to begin a broad review to determine if any of their “policies,” “guidance documents,” “interpretations,” “positions,” “programs” or “agency memoranda” are susceptible to Arrowood-like challenges.

The APA contains a broad definition of “rule” as “any agency regulation, standard, or statement of general applicability which implements or interprets an enactment of the General Assembly or Congress or a regulation adopted by a federal agency, or that describes the procedure or practice requirements of an agency.” In spite of this broad definition of a rule, agencies have – in Lewis Caroll fashion – either ignored this definition, or, if challenged, have relied on the APA’s list of exclusions from the definition to claim that many rules are not really rules. Typical are the exclusions regulators use for statements concerning only the internal management of an agency; nonbinding interpretative statements within the delegated authority of an agency that merely define, interpret or explain the meaning of a statute or rule; forms; and statements of agency policy made in the context of another proceeding.

The opinion was written by Judge John Martin and concurred in by Judge John Lewis Jr. Judge Ralph Walker dissented. The decision is being appealed to the North Carolina Supreme Court.

In his ruling, Judge Martin swept away the semantics that agencies have used to avoid the rulemaking procedures. The court interpreted the APA’s provisions to say that a rule is any “limitation (that) clearly creates a binding standard of general applicability that describes respondent’s procedures and practice requirements.” The court’s holding looks at the substance of the action or position of the agency, rather than what the title given to the action, and is entirely consistent with the tenants of administrative law that such generally applicable standards should be adopted and enforced only after undergoing the examination and input involved in the APA’s requirements for notice and comment rule-making.

Agencies have increasingly sought to avoid the rigors of the notice and hearing for permanent rules. There are understandable reasons for this trend. Under the 1995 APA reforms enacted by the General Assembly, permanent rulemaking takes a longer period of time to complete. In addition, those 1995 reforms granted increased rulemaking powers to the Rules Review Commission, which it has exercised to question and block some rules. Finally, NCCBI and others in the regulated community have, on occasion, challenged the agencies’ overreliance on temporary rules, which are only to be utilized under specific circumstances.

However, the Arrowood case makes clear that the agencies must comply with the APA’s rulemaking requirements. There may be ways in which the process of adopting rules can be shortened, at least for certain non-controversial rules. It may also be possible make the legislative oversight process extend over a longer portion of the legislative session, which could ease the existing constraints that rules must be adopted by a certain time in advance of each legislative session. However, unless and until the agencies can persuade the General Assembly to make these changes, the agencies should expect challenges to their “policies,” “guidance documents,” and other similar actions that have not been properly adopted as rules under the APA.

-- by Charles Case and Steve Tuttle