Opinion ID: 1293583
Heading Depth: 1
Heading Rank: 1

Heading: Unlawful Proceedings (Procedures)

Text: We next address the question whether the Commissioner's action was made upon unlawful proceedings or procedures as contemplated by G.S. 58-9.6(b)(3) and G.S. 150A-51(3). We first note that, while the prohibition against agency action in excess of statutory authority, G.S. 58-9.6(b)(2) and G.S. 150A-51(2), and one made upon unlawful procedure, G.S. 58-9.6(b)(3), see also G.S. 150A-51(3), appear redundant, the distinction is significant indeed. The former refers to the general authority of an administrative agency to properly discharge its statutorily assigned responsibilities. The latter refers to the procedures employed by the agency in discharging its statutorily authorized acts. We have held above that the Commissioner had the general statutory authority to require audited data in this proceeding. We are now compelled to hold, however, that he did not follow lawful procedure in attempting to do so. The rulemaking power of an administrative agency is restricted by law apart from the statute conferring power and an agency having authority to effectuate the policies of a particular statute may not effectuate such policies so singlemindedly that it wholly ignores other and equally important legislative objectives. 1 Am.Jur.2d, Administrative Law § 72. See also Edgerton v. International Company, 89 So.2d 488, 490 (Fla.1956). This is especially true in the case of agencies which have both accusatorial and judgmental powers. The potential for unfairness and abuse is obvious in a situation in which an administrative officer is vested with broad rulemaking powers, determining the admissibility and weight of evidence in hearings and making the final determination on the merits of an action, as is the Commissioner of Insurance in ratemaking cases. Indeed, one of the fundamental purposes in the creation of administrative procedure acts was to minimize the potential of unfairness in embodying in one person or agency these various functions. See generally 1 Am.Jur.2d, Administrative Law § 78. Since an administrative agency is vested with powers both quasi-judicial and quasi-legislative, such procedural safeguards are essential. Our Legislature, in providing that agency action is unauthorized if made upon unlawful procedure was clearly sensitive to the potential abuse mentioned above. This provision authorizes a court to reverse or modify agency action that is not in accordance with the procedural requirements specified in the NCAPA; or with those required under another statute governing agency procedure. Daye, supra at 914. We therefore turn to a consideration of lawful agency procedures in general and the North Carolina Administrative Procedure Act in particular. Appellants argue, albeit briefly and without citation of authority, that the Commissioner converted a ratemaking case into a rulemaking hearing and thereby violated the terms of the North Carolina Administrative Procedure Act (NCAPA), G.S. 150A-1 et seq. The Commissioner's response is equally terse: He argues that this proceeding is exempt from the NCAPA by virtue of certain of its provisions. A determination of the applicability of the NCAPA to this proceeding is therefore necessary to resolve the question whether the Commissioner acted upon unlawful procedure in finding and concluding that unaudited data presented in a ratemaking hearing is unreliable and incredible. We think that the NCAPA is applicable and that the Commissioner violated its rulemaking requirements. G.S. 150A-9 provides in pertinent part: It is the intent of this Article to establish basic minimum procedural requirements for the adoption, amendment, or repeal of administrative rules. Except for emergency rules . . ., the provisions . . are applicable to the exercise of any rule-making authority conferred by any statute, . . . . No rule hereafter adopted is valid unless adopted in substantial compliance with this Article. G.S. 150A-10 then defines rule to mean each agency regulation, standard or statement of general applicability that implements or prescribes law or policy, or describes the organization, procedure, or practice requirements of any agency. The term includes the amendment or repeal of a prior rule . . . . The statute then lists six exclusions to the rule definition including the following two, interpretations of which are crucial to the issue before us: (4) Statements of policy or interpretations that are made in the decision of a contested case; . . . (6) Interpretative rules and general statements of policy of the agency. The Commissioner argues that either of the quoted exclusions would relieve him of NCAPA requirements with respect to his determination that audited data is essential in a ratemaking hearing. G.S. 150A-2(2) does specifically provide that a ratemaking proceeding is a contested case within the meaning of the NCAPA. The primary question, therefore, revolves around the meaning of interpretative rules and statements of policy. It becomes readily apparent from the statutory definition of rule, which includes six exceptions, that different types of rules were contemplated. This is crucial in the issue confronting us here for two reasons: (1) The distinction is important in determining the requirements that will be imposed in establishing the procedures used in adopting and promulgating the rule, and (2) the distinction between different types of rules is important in determining the validity and legal effect of a challenged rule. While the distinctions are sometimes blurred and rules often serve two or more purposes simultaneously, agency rules may be grouped into three general categories: procedural rules, interpretive rules, and legislative rules. 1 F. Cooper, State Administrative Law 173 (1965); Daye, supra at 851-53. (1) Procedural rules are those which describe how the agency will discharge its assigned functions and the requirements others must follow in dealing with the agency. These are the fundamental rules of agency procedures and are essential to efficient agency operation. Generally these rules deal with such matters as forms, instructions and availability for public inspection of all agency rules and policy. See, e. g., G.S. 150A-11(1). Clearly, then, the requirement that data presented in a ratemaking hearing be audited is more than a procedural rule. (2) Legislative rules are those established by an agency as a result of a delegation of legislative power to the agency. Legislative rules fill the interstices of statutes. They go beyond mere interpretation of statutory language or application of such language and within statutory limits set down additional substantive requirements. Daye, supra at 852-53. (3) Interpretative rules have been defined as those that interpret and apply the provisions of the statute under which the agency operates. No sanction attaches to the violation of an interpretative rule as such; the sanction attaches to the violation of the statute, which the rule merely interprets. Thus, for example, most of the regulations of the Internal Revenue Service are interpretative. 1 Cooper, supra at 174-75. The crucial determination to be made here is whether the Commissioner's conclusion that data be audited is a legislative or interpretative rule. This is so because interpretative rules and general policy statements of agencies are excluded from the NCAPA rulemaking provisions by G.S. 150A-10(6) and statements of policy or interpretations made in the decision of a contested case are excluded by G.S. 150A-10(4). On the other hand, substantive legislative rules are not excluded from the NCAPA, unless one of the other exclusions applies. We note that none of the remaining exclusions is applicable here. The Commissioner contends that the auditing requirement is interpretative and therefore within the stated exclusions. However, we are not limited to the label placed on a rule by an agency, but must look instead to the substance of the rule in question. Lewis-Mota v. Secretary of Labor, 469 F.2d 478 (2d Cir. 1972); Pharmaceutical Manufacturers Association v. Finch, 307 F.Supp. 858 (D.Del.1970); Gibson Wine Company v. Snyder, 194 F.2d 329 (D.C.Cir.1952). As Professor Daye stated in his helpful article analyzing the NCAPA: It should be emphasized that careful scrutiny of the substance of the rule in question is critical, since the interpretative-rule exclusion, if not confined to proper boundaries, could well subsume the rulemaking provisions. Daye, supra at 853. [2] In applying the stated definitions to the record before us, we conclude that the Commissioner's requirement of audited data amounts to a legislative rule and is therefore subject to the rulemaking provisions of the NCAPA. We are so persuaded because his new requirement clearly goes beyond a mere interpretation of the statute under which the agency he heads operates and sets up new substantive requirements. One has only to read the lengthy and learned briefs of appellants and amici curiae to know this is true. Furthermore, unlike an interpretative rule, this is certainly a rule with sanctions. Indeed, the Commissioner has dramatized the sanction for violation of his auditing rule: He has denied the requested rate increase for failure of appellants to comply with his newly established rule. Put another way, the Commissioner's enunciated rule was established as a result of a delegation of legislative power to his agency. G.S. 58-9(1) empowers the Commissioner to make rules and regulations . . . to enforce, carry out and make effective the provisions of this Chapter, and to make such further rules and regulations not contrary to any provision of this Chapter. . . . The Commissioner may likewise, from time to time, withdraw, modify or amend any such regulation. Hence, the Commissioner's rule here is clearly legislative in nature. It fills the interstices of the statue, and within the statutory limits, it sets down additional substantive requirements. Our holding that the Commissioner's auditing requirement is tantamount to a legislative rule and therefore not excluded from the NCAPA is not, however, dispositive of the issue. The Commissioner correctly argues that a second mode by which administrative agencies can establish rules is through the case-by-case process of administrative adjudication. He relies primarily on the following language in the landmark case of Securities & Exchange Commission v. Chenery Corporation, 332 U.S. 194, 67 S.Ct. 1575, 91 L.Ed. 1995 (1947): To hold that the Commission had no alternative in this proceeding but to approve the proposed transaction, while formulating any general rules it might desire for use in future cases of this nature, would be to stultify the administrative process. That we refuse to do.       There is thus a very definite place for case-by-case evolution of statutory standards. And the choice made between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency. Id. at 202-03, 67 S.Ct. at 1580, 91 L.Ed. at 2002. The scope of our review of an administrative order wherein a new principle is announced and applied is no different from that which pertains to ordinary administrative action. The wisdom of the principle adopted is none of our concern [citations omitted]. Our duty is at an end when it becomes evident that the Commission's action is based upon substantial evidence and is consistent with the authority granted by Congress. [Citations omitted.] Id. at 207, 67 S.Ct. at 1582, 91 L.Ed. at 2004-2005. Clearly, the consequences of the choice between general rulemaking and ad hoc, case-by-case adjudication is of enormous significance. 1 Cooper, supra at 177-78. As noted by one commentator, the whole tenor of APA procedures is different when establishing rules in the adjudication of contested cases, rather than following rulemaking procedures: (1) The type of notice is different. (2) The form of hearing is different. (3) The mechanics of decision-making are different. (4) The scope of judicial review is different. (5) Most importantly, APA-established rules are normally prospective in operation, while decisions in adjudicatory matters are normally (like judicial decisions) retroactive. Id. The discretion vested in administrative agencies in choosing between the two methods of establishing rules is not, however, unbridled. Indeed, the U.S. Supreme Court in Chenery provided qualifying guidelines in stating the quoted general rule. Ad hoc rulemaking in adjudication is necessary where: problems may arise in a case which the administrative agency could not reasonably foresee, problems which must be solved despite the absence of a relevant general rule. Or the agency may not have had sufficient experience with a particular problem to warrant rigidifying its tentative judgment into a hard and fast rule. Or the problem may be so specialized and varying in nature as to be impossible of capture within the boundaries of a general rule. 332 U.S. at 202-03, 67 S.Ct. at 1580, 91 L.Ed. at 2002. Applying the foregoing to the record before us, we note: (1) the lack of unaudited data was not a problem unforeseen by the Commissioner, (2) absence of a relevant general rule was not prohibitive of this ratemaking, (3) here, the Commissioner had sufficient experience with the problem, and (4) certainly the problem of auditing is not so specialized and varying in nature as to be impossible of capture within the boundaries of a general rule. Indeed, with respect to the latter, one of the problems with the Commissioner's sudden order to audit data was its vagueness, a problem which could have been avoided had the rule been promulgated in the orderly NCAPA process. The Chenery Court also added: Since the Commission, unlike a court, does have the ability to make new law prospectively through the exercise of its rule-making powers, it has less reason to rely upon ad hoc adjudication to formulate new standards of conduct within the framework of the Holding Company Act. The function of filling in the interstices of the Act should be performed, as much as possible, through this quasi-legislative promulgation of rules to be applied in the future. 332 U.S. at 202, 67 S.Ct. at 1580, 91 L.Ed. at 2002. Decisions by the U.S. Supreme Court subsequent to Chenery have been less than helpful. For example, on the question whether an administrative agency can, through adjudication, overrule its prior clear rules when private parties have acted in reliance on the overruled decisions, NLRB v. Wyman-Gordon Company, 394 U.S. 759, 89 S.Ct. 1426, 22 L.Ed.2d 709 (1969), goes in one direction while NLRB v. Bell Aerospace Company, 416 U.S. 267, 94 S.Ct. 1757, 40 L.Ed.2d 134 (1974), goes in the opposite direction. Moreover, the Court has held that an agency, even when it had opened the way by first adopting an interpretative rule, could make law only through a legislative rule and not through ad hoc decisions based on the interpretative rule. Morton v. Ruiz, 415 U.S. 199, 94 S.Ct. 1055, 39 L.Ed.2d 270 (1974). Yet, just two months later, in NLRB v. Bell Aerospace Company, supra , the Court unanimously held that the NLRB, even without first issuing an interpretative rule, could make new law in an adjudication. It has been stated that the Morton v. Ruiz decision was clearly excessive, though in the right direction. 2 K. Davis, Administrative Law Treatise § 7.27 at 140 (2d ed. 1979). [3] We think the superior rule was stated by Professor Cooper some fifteen years ago and generally adopted by numerous court decisions since: The general rule that should guide the agencies in making the choice between rule making and ad hoc adjudication might be formulated as follows: where an agency faces the alternative of proceeding by rule making or by adjudication, the process of rule making should be utilized except in cases where there is a danger that its utilization would frustrate the effective accomplishment of the agency's functions. Where such danger exists, e. g., where the agency may not have had sufficient experience with a particular problem to warrant rigidifying its tentative judgment into a hard and fast rule, or where the problem is so specialized and varying in nature as to be impossible of capture within the boundaries of a general rule, the advantages to the agency of utilizing the ad hoc adjudication technique must be balanced against the possible deleterious public consequences resulting from the retroactive application of a new standard of general application to large numbers of parties who have had no opportunity to be heard as to what the standard should be. Unless the balance clearly preponderates in favor of the ad hoc adjudication method, the agency should utilize rule-making procedures. The suggestion was well phrased in an A.B.A. committee report which recommended that: Administrative agencies shall (1) as a fixed policy prefer and encourage rule making to reduce to the minimum the necessity for case-by-case administrative adjudications; and . . . (4) shall promptly formulate, incorporate and promulgate as a rule or statement of policy any and all general principles, not otherwise published as rules or specified in statutes, enumerated in any specific case decision. More specifically, it has been well suggested that while the practice of working out policy piecemeal by ad hoc adjudication may be justified in the initial stages of administrative regulation of a new field, yet when time and experience have served to sharpen and focus the problems involved, then the agency should utilize rule-making procedures to lay down general rules for the future guidance of all parties affected. 1 Cooper, supra at 181-82 (footnotes omitted). For decisions in accord with the stated rule, see generally, NLRB v. E. & B. Brewing Company, 276 F.2d 594 (6th Cir. 1960), cert. denied, 366 U.S. 908, 81 S.Ct. 1083, 6 L.Ed.2d 234 (1961); NLRB v. Guy F. Atkinson Company, 195 F.2d 141 (9th Cir. 1952); Gonzalez v. Freeman, 334 F.2d 570 (D.C.Cir.1964); Harnett v. Board of Zoning, Subdivision and Building Appeals, 350 F.Supp. 1159 (D.V.I.1972). We think the policy favoring rulemaking rather than ad hoc adjudication comports with the intent of our Legislature in enacting G.S. 150A-10. The exclusion of policy statements or interpretations made in the decision of a contested case included in G.S. 150A-10(4) clearly was not intended to embrace substantive rules with anticipated future applicability. This is so because of the difference between interpretative and legislative rules discussed above and because G.S. 150A-10(6) which excludes interpretative rules and general statements of policy of the agency would be unnecessary if G.S. 150A-10(4) were intended to apply to matters beyond the contested case in question. Professor Daye has correctly analyzed the exclusion: [I]t would appear that if the agency, based on the result in a contested case, desired to promulgate a general rule to govern a matter in the future based on a given set of facts, the promulgation would constitute a rule subject to rulemaking requirements unless within another exclusion. Daye, supra at 851, note 84. The rationale for the rule we adopt has been stated as follows: Rule-making provides the agency with a forum for soliciting the informed views of those affected in industry and labor before adopting a new policy. Giving the agency discretion to embark on the new course in an adjudication limits the views presented to those of the parties in the particular case. . . . Chenery [ supra ] may allow adjudication as a vehicle for formulation of new agency policy. But the same license should not exist where the new policy revolutionizes long-established patterns of conduct. Where those affected have justifiably relied upon an agency-engendered belief in an established policy, the agency should not be permitted to change the policy except through rule-making. An agency decision branding as unfair the conduct always previously stamped fair should raise judicial hackles sufficiently to lead the court to refuse to follow Chenery and order the agency to engage in rule-making. B. Schwartz, Administrative Law § 66 at 189-90 (1976). Applying the stated rule to the record before us, we first note that the Commissioner clearly intended for the auditing requirement contemplated in his order to apply both retroactively to the case at bar and prospectively to future filings. This is apparent from his finding of fact No. 32 which prescribes the minimum reasonable audit features  to be performed by ISO, NAII and the Bureau.  (Emphasis added.) Moreover, he rejected another automobile insurance rate filing on the same grounds only seven months after this filing. State ex rel. Commissioner of Insurance v. North Carolina Rate Bureau, 41 N.C.App. 327, 255 S.E.2d 567 (1979), on appeal to this Court and decided today as 300 N.C. 460, 269 S.E.2d 538, and in other subsequent filings, see State ex rel. Commissioner of Insurance v. North Carolina Rate Bureau, 44 N.C.App. 191, 261 S.E.2d 671 (1979) decided by this Court today as 300 N.C. 474, 269 S.E.2d 595; State ex rel. Commissioner of Insurance v. North Carolina Rate Bureau, 44 N.C.App. 75, 259 S.E.2d 926 (1979) decided by this Court today as 300 N.C. 485, 269 S.E.2d 602. Moreover, we find that in attempting to establish the auditing requirement the Commissioner's following of normal NCAPA rulemaking requirements would have presented no danger that . . . utilization [of the NCAPA] would frustrate the effective accomplishments of the agency's functions. In this connection, we note: (1) This is not a situation where the Commissioner may not have had sufficient experience with a particular problem to warrant an NCAPA established rule. Indeed, the record discloses that the Commissioner intended to establish a hard and fast rule. (2) The rule was not so specialized and varying in nature as to be impossible of capture within the boundaries of a general rule. Present regulations filed by the Commissioner pursuant to the NCAPA are easily adaptable to accomplish the Commissioner's desired goal. See 11 NCAPA 10.301. (3) In balancing the advantages of the Commissioner's application of the ad hoc technique against the possible deleterious public consequences resulting from the retroactive application of a new standard of general application to a large number of parties who have had no opportunity to be heard as to what the standard should be, we think the scales tip in favor of appellants. The record discloses that the new requirement would be far reaching. It would instantly require a change in long-established procedure in this State and one utilized in practically every other state in the nation. No attempt has been made to determine the ultimate cost of the new requirement, an expense we suspect would ultimately be borne by rate payers in one way or another. No attempt was made to determine if the order was even capable of performance. For example, the audit requirement would obviously require an examination of original source documents of the many member groups reporting to the Rate Bureau. No attempt was made to determine where such records are kept by the national companies involved, whether the required information could possibly be retrieved within the time limits required by statute in rate filings or for what period of time such records are or should be maintained. These and other critical questions could properly be answered at a rulemaking hearing held pursuant to the NCAPA. We think it the only orderly and legally proper way to approach the promulgation of a rule so far reaching as that the Commissioner seeks to establish. In summary, we hold that the practical operation of the Commissioner's change of policy, when incorporated in the order now before us, is to work hardship upon appellants altogether out of proportion to the public ends to be accomplished. The inequity of such an impact of policy upon appellants presents a striking example of the very reason for the enactment of administrative procedure acts across the land. The Commissioner has ample ways of instituting, through the Legislature or pursuant to the NCAPA, rules he deems essential for the proper discharge of his duties. We therefore hold that the Commissioner's attempt to establish a rule requiring audited data in this ratemaking hearing was made upon unlawful procedure as contemplated by G.S. 58-9.6(b)(3) and G.S. 150A-51(3).