wood_allisonFeatured Expert Column

Allison D. Wood, Hunton & Williams LLP

Guidance documents and letters setting forth so-called “agency-policy” present unique challenges to industry, particularly in the context of permitting.  Rather than undergo notice-and-comment rulemaking, which would be subject to judicial review, EPA has instead developed a practice of issuing “guidance”–often in the form of memoranda–that set forth requirements that EPA expects states and EPA regions to follow in issuing permits.  The dilemma arises because courts often find that these documents cannot be challenged, and a permit applicant then faces an unpleasant choice:  agree to permit conditions that may not be required by law to obtain the permit, or have the permit application denied and head into uncertain and expensive litigation.  When the permit is critical for business operations, this really presents a Hobson’s Choice and almost all permit applicants capitulate and accept the terms.

The U.S. Court of Appeals for the Eighth Circuit recently offered some relief to those seeking to challenge guidance documents.  In Iowa League of Cities v. EPA, some cities that owned wastewater treatment facilities challenged two EPA letters that responded to inquiries by Senator Charles Grassley about certain Clean Water Act (CWA) requirements for wastewater treatment facilities involving “bacteria mixing zones” and “blending.”  The cities contended that EPA’s letters were new rules promulgated without notice-and-comment rulemaking in violation of the Administrative Procedure Act.  EPA countered that the letters were merely agency guidance which the court lacked jurisdiction to review.

The court began by examining whether EPA’s act of sending the letters could be considered a “promulgation” of a rule under the CWA.  The court adopted the three factor test set forth in Molycorp, Inc. v. EPA, 197 F.3d 543, 545 (D.C. Cir. 1999), for determining whether an agency action constitutes promulgation of a regulation:  “(1) the Agency’s own characterization of the action; (2) whether the action was published in the Federal Register . . . .; and (3) whether the action has binding effects on private parties or the agency.”  The court said that the third factor “should be the touchstone of our analysis,” because “plac[ing] any great weight on the first two . . . factors potentially could permit an agency to disguise its promulgations through superficial formality, regardless of the brute force of reality.”

Because the letters had a binding effect on regulated entities, the court found that they were rule promulgations that gave the court jurisdiction under the CWA.  The cities had previously sought judicial review of six EPA documents in 2010 involving CWA issues, and the court in that case dismissed the cases for lack of subject matter jurisdiction.  The court contrasted the documents at issue in 2010 to the letters at issue in the instant case to show why the letters (but not the previous documents) represented promulgations of rules.

With regard to bacteria mixing zones, the court noted that a previous memorandum addressing the issue had been described by EPA in the 2010 case “as nothing but ‘one office director’s view of a regulatory requirement.’”  In the 2011 letter to Senator Grassley, however, EPA stated that the memorandum “reflect[ed] ‘the EPA’s position.’”  The letter also unequivocally said that mixing zones “should not be permitted.”  The court said “the type of language used to express ‘the EPA’s position’—‘should not be permitted’—is the type of language we have viewed as binding because it ‘speaks in mandatory terms.’”

EPA argued that the letter did not constitute a prohibition on mixing zones and that states had discretion to allow them under certain circumstances.  The court rejected this argument, saying that “[i]n effect, the EPA asks us to agree that when it couches an interdiction within a pro forma reference to state discretion, the prohibition is somehow transformed into something less than a prohibition.  We decline to accept such Orwellian Newspeak.”

With regard to blending, the court found that EPA’s letter constituted a rule because it applied a 2005 draft policy in a binding manner.  EPA tried to argue that the 120-day time limit to challenge the 2005 draft policy had expired, but the court said that EPA never announced the finality of the 2005 policy until the letter to Senator Grassley and that applying “EPA’s approach to the period for seeking appellate review would eviscerate the direct appellate review provisions of the CWA by enabling an agency to announce consideration of a proposal and then wait 121 days before treating the proposal as binding.”  EPA also argued the 2005 draft policy was subject to change, but the court noted that “all regulations are susceptible to alteration.  Hedging a concrete application of a policy within a disclaimer about hypothetical future contingencies does not insulate regulated entities from the binding nature of the obligation and similarly cannot serve to innoculate the agency from judicial review.”

EPA stated that finding the letters to be judicially reviewable would have “a chilling effect on the informal channels of communication between agencies and regulated entities.”  Although the court “acknowledge[d] the great value in such modes of communication,” it cautioned that “when agencies veer from merely advisory statements or interpretations into binding proclamations, they become susceptible to judicial review.”

The court also found that the letters were legislative rules that were ripe for review.  The court said it was confident it was “not wading into the abstract” because EPA’s statements in the letters were “quite concrete.”  Importantly, for future permit applicants, the court recognized that “[p]ostponing our review until the EPA has denied a permit application . . . renders a hardship on municipal water authorities, who already would have invested irretrievable funds into their applications.”

This case represents a good step toward holding EPA accountable and requiring it to undergo notice-and-comment rulemaking before issuing binding requirements on industry in the guise of “guidance.”

The full text of the court’s opinion can be viewed here.