Opinion ID: 410287
Heading Depth: 2
Heading Rank: 2

Heading: The Standard of Conduct--Interpretation v. Amendment.

Text: 27 Wards contends that the Commission's decision was not the mere fleshing out of a general rule through its application to specific facts. Wards urges that the Commission has instead fashioned a new rule and retroactively applied it, thus invalidating Wards's efforts to comply with the old one. Wards contends that creation of a new rule is proper only through formal rule-making procedures, and that the Commission's decision, therefore, was an abuse of discretion. 9
28 It is well settled that the decision whether to proceed by adjudication or rule-making lies in the first instance within the [agency's] discretion. NLRB v. Bell Aerospace Co., 416 U.S. 267, 294, 94 S.Ct. 1757, 1771, 40 L.Ed.2d 134 (1974). Such a grant of discretion, however, does not preclude judicial review when that discretion has been abused. The scope of review section of the Administrative Procedure Act requires that a reviewing court set aside agency action ... found to be ... arbitrary, capricious, [or] an abuse of discretion.... 5 U.S.C. Sec. 706(2)(A). See Phelps Dodge Corp. v. Federal Mine Safety and Health Review Commission, 681 F.2d 1189, 1192 (9th Cir.1982) (applying section 706(2)(A)). We must decide, therefore, whether the Commission's decision amended the pre-sale rule in such a way that the use of adjudication to achieve that end constituted an abuse of discretion.
29 The Supreme Court has consistently ruled that new administrative policy may be announced and implemented through adjudication. In SEC v. Chenery Corp., 332 U.S. 194, 202, 67 S.Ct. 1575, 1580, 91 L.Ed. 1995 (1947), the Court noted: 30 Not every principle essential to the effective administration of a statute can or should be cast immediately into the mold of a general rule. Some principles must await their own development, while others must be adjusted to meet particular, unforeseeable situations. In performing its important functions in these respects, therefore, an administrative agency must be equipped to act either by general rule or by individual order. To insist upon one form of action to the exclusion of the other is to exalt form over necessity. 31 Chenery involved securities trading by management during the reorganization of a public utility holding company. The SEC's order restricted management's ability to profit from its trading. The defendants protested that the SEC's adjudicatory decision had invented a new standard of conduct and retroactively applied it to their detriment. The Court, however, rejected their position: 32 [W]e refuse to say that the Commission, which had not previously been confronted with the problem of management trading during reorganization, was forbidden from utilizing this particular proceeding for announcing and applying a new standard of conduct. That such action might have a retroactive effect was not necessarily fatal to its validity. Every case of first impression has a retroactive effect, whether the new principle is announced by a court or by an administrative agency. But such retroactivity must be balanced against the mischief of producing a result which is contrary to a statutory design or to legal and equitable principles. If that mischief is greater than the ill effect of the retroactive application of a new standard, it is not the type of retroactivity which is condemned by law. 33 Chenery, 332 U.S. at 203, 67 S.Ct. at 1580-81 (citations omitted). 34 Thus, when a new problem is presented to an administrative agency, the agency may act through adjudication to clarify an uncertain area of the law, so long as the retroactive impact of the clarification is not excessive or unwarranted. 35 While the general policy considerations raised in Chenery are fundamental to an analysis of the propriety of an agency's adjudicatory lawmaking, its result is not controlling. The case at hand does not involve the filling of a void in the law. Here, a rule, describing in some detail the required conduct, recently had been promulgated, and Wards arguably had acted in reliance on the plain meaning of that rule. This case involves an adjudicatory restatement of previously articulated law. 36 While the Supreme Court has addressed adjudicatory changes in administrative case law, 10 and adjudicatory interpretations of law developed in administrative manuals, 11 we have not been directed to, nor does there appear to be, any case where the Court has addressed an adjudicatory change in a recently promulgated rule.
37 The issue is whether an adjudicatory restatement of the conduct required by a rule is an interpretation or an amendment of the rule. Adjudication allows an agency to apply a rule to particular factual circumstances and to provide an interpretation of the required conduct in light of those circumstances. An adjudicatory restatement of the rule becomes an amendment, however, if the restatement so alters the requirements of the rule that the regulated party had inadequate notice of the required conduct. 12 An amendment is proper only when adequate notice is provided to affected parties pursuant to appropriate rule-making procedures. See 5 U.S.C. Sec. 553 (rule-making as required by the Administrative Procedure Act); Ruangswang v. INS, 591 F.2d 39, 45 (9th Cir.1978) (adjudication of a new requirement into a regulation held to be an abuse of discretion because of lack of notice). 38 Thus, to determine if the choice of procedure made by the agency was an abuse of discretion, we look, in part, to the extent that the standards applied in the adjudication vary from the plain language of the rule. Ruangswang, 591 F.2d at 43; see NLRB v. St. Francis Hospital of Lynwood, 601 F.2d 404, 414 (9th Cir.1979) (NLRB policy, announced in adjudication, inconsistent with congressional purpose). We also look at the agency's prior use of rule-making and the current adjudication to see if the agency's conduct in the latter is consistent with the proceedings in the former. In Patel v. INS, 638 F.2d 1199 (9th Cir.1980), we noted that by adjudication, the Board attempted to add a requirement to the 1973 regulation which had been expressly discarded during its rule-making proceedings. Patel, 638 F.2d at 1202 (footnote omitted). That inconsistent behavior by the INS was significant in our decision to reverse the agency's ruling on the requirements of the regulation at issue there. 13 39