The Intersection of Chevron Deference for Agency Interpretation and the Crimnal Rule of Lenity in Statutory Interpretation (12/14/13)

In Carter v. Wells-Bowen Realty, Inc., ___ F.3d ___, 2013 U.S. App. LEXIS 23852 (6th Cir. 2013), here, a nontax case, Judge Sutton in a concurring opinion addresses the intersection of the venerable rule of lenity in interpreting criminal statutes and Chevron deference in the context of interpreting statutes with criminal implications.  Chevron deference plays a prominent role in the interpretation of the Internal Revenue Code which, of course, contains criminal provisions.  Sections 7206 ff.  And, even when the IRS's statutory interpretations do not directly apply to the criminal sections, they may apply to the civil tax sections that, in a criminal case, the Government would have to claim satisfy the Cheek requirement of a known and knowable legal duty.  Let's say, for example, the IRS were to promulgate a regulation taking an IRS friendly view of the doctrine of economic substance -- either the tax common law doctrine or the statutory doctrine -- which would likely, by setting the interpretive legal duty, make it easier to convict for tax shelters violating the adopted regulatory interpretation but not the common law interpretation.  Now, let's go to the Carter opinions.

The majority panel decision opens as follows:

Under the Real Estate Settlement Procedures Act, a title services company may not pay a real estate agent a fee in exchange for a referral. 12 U.S.C. § 2607(a). Exempted from this prohibition are "affiliated business arrangements." Id. § 2607(c)(4). The statute establishes three prerequisites for this safe harbor, and everyone agrees that the defendants in this case (several realty companies and title companies) satisfied them. The plaintiffs (three home buyers) claim that the defendants nevertheless fall outside the safe harbor's coverage because they failed to satisfy a fourth condition announced by the Department of Housing and Urban Development through a policy statement. As that policy statement is not binding on the Department or anyone else and as it is not otherwise entitled to deference, it does not supplement the Act's existing safe-harbor conditions. We affirm.

The majority then telescopes its holding and analysis as follows:

The buyers claim that the profits earned by the owners of Welles-Bowen and WB constitute prohibited referral fees due to their relationship with WB. There is an easy way to look at this claim and a more complicated way to look at it.\ 

The easy way turns on the safe harbor provisions spelled out in § 2607(c)(4). Welles-Bowen's relationship with WB qualifies as an "affiliated business arrangement." The buyers agree that Welles-Bowen had an "affiliate relationship" with WB, that Welles-Bowen made referrals to WB, and that WB in turn provided settlement services. 12 U.S.C. § 2602(7). This relationship also satisfied the three safe-harbor conditions. Welles-Bowen disclosed the arrangement to the buyers, Welles-Bowen allowed them to reject the referrals, and neither Welles-Bowen nor its owners received anything of value from the arrangement apart from a return on their ownership interests. Id. § 2607(c)(4). Welles-Bowen and WB in short did everything the Act asked of them. They thus qualify for the affiliated business arrangement exemption. 

The more complicated way of looking at the claim must account for the policy statement issued by the Department of Housing and Urban Development in 1996. See Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements, 61 Fed. Reg. 29,258 (1996). The statement announced that, despite the three safeguards already contained in § 2607(c)(4), affiliated business arrangements must satisfy a fourth requirement: "[T]he entity receiving the referrals of settlement service business must be a . . . bona fide provider of settlement services." Id. at 29,262. In addition, the statement continues, "[t]he Department will consider" a series of factors "and will weigh them in light of the specific facts" when separating bona fide providers from shams. Id. The ten factors include whether the provider has "sufficient initial capital and net worth," whether it has "its own employees," and whether it is "located at the same business address as one of the parent providers." Id. Claiming that the various companies do not satisfy this ten-factor test, the buyers argue that the statutory safe harbor for an affiliated business arrangement does not apply to them. 

The short answer to this claim is that a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement. The long answer is that the policy statement is not entitled to Chevron deference or Skidmore consideration, and as a result compliance with the three conditions set out in the statute suffices to obtain the exemption. 

Deference under Chevron v. Natural Resources Defense Council comes into play only when an agency offers a binding interpretation of a statute that it administers. 467 U.S. 837, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984). As the government concedes, the policy statement's ten-factor test is not a binding interpretation of the Act. The statement instead informs the public that the Department plans to "consider" these factors when separating bona fide providers from shams. That is another way of saying the statement offers non-binding advice about the agency's enforcement agenda, not a controlling interpretation of the statute. Agency recommendations of this sort, even when cast as policy considerations or preferences, do not bind courts tasked with interpreting a statute.

The majority panel decision thus holds that the policy statement adding factors was simply not the type of interpretation of the law permitting Chevron deference.  Hence, the interpretation does not state the law.  That, for the majority was the end of the discussion.

But not for Judge Sutton.  Judge Sutton wanted to say something about the problem that would arise if the interpretation had been adopted in a pronouncement that was entitled to Chevron deference rather than a policy statement.  Since it was not adopted that way, of course, what Judge Sutton has to say about that issue is dicta and, of course, dicta by a single judge.  Still, I would guess that Justice Scalia would say that the loner dicta would still be persuasive to the extent that it is persuasive.  (Okay, bear with me, guys.)

So, here's how Judge Sutton states the problem and summarizes his solution:

Anyone who violates the Real Estate Settlement Procedures Act's ban on referral fees commits a crime. See 12 U.S.C. § 2607(d)(1). The rule of lenity tells all interpreters to resolve uncertainties in laws with criminal applications in favor of the defendant. But the Department of Housing and Urban Development has resolved an ambiguity in the law against the defendant, and the government insists that we must defer to this understanding. The doctrine of Chevron deference, the government explains, leaves us no choice. This theory would allow one administration to criminalize conduct within the scope of the ambiguity, the next administration to decriminalize it, and the third to recriminalize it, all without any direction from Congress. I am skeptical. 

The court does not go into detail in exploring how the rule of lenity interacts with Chevron because the issue does not drive the outcome of this case. But because this question will return sooner or later, I write to offer some thoughts on how to address it when it does. 

The rule of lenity tells courts to interpret ambiguous criminal laws in favor of criminal defendants. United States v. Wiltberger, 18 U.S. 76, 5 Wheat. 76, 95, 5 L. Ed. 37 (1820). This principle rests on concerns about notice (the state ought to provide fair warning of what violates the criminal laws) and separation of powers (Congress, not agencies or courts, defines crimes). United States v. Bass, 404 U.S. 336, 348, 92 S. Ct. 515, 30 L. Ed. 2d 488 (1971). The Chevron doctrine tells courts to defer to an administrative agency's reasonable interpretation of an ambiguous statute. Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984). This principle rests on the presumption that, when Congress leaves a statutory gap, it means for the agency rather than the court to fill it. Id. at 843-44. 

The two rules normally operate comfortably in their own spheres. The rule of lenity has no role to play in interpreting humdrum regulatory statutes, which contemplate civil rather than criminal enforcement. And Chevron has no role to play in interpreting ordinary criminal statutes, which are "not administered by any agency but by the courts." Crandon v. United States, 494 U.S. 152, 177, 110 S. Ct. 997, 108 L. Ed. 2d 132 (1990) (Scalia, J., concurring in the judgment); see Gonzales v. Oregon, 546 U.S. 243, 264, 126 S. Ct. 904, 163 L. Ed. 2d 748 (2006). 

What happens with a hybrid statute? Today's Act imposes civil and criminal penalties for violating the provision at issue. See 12 U.S.C. § 2607(d). And it empowers an executive agency to administer the provision by making rules and holding hearings. See id. § 2617. As between the rule of lenity and the agency's interpretation, which one resolves statutory doubt? 

One possibility is to apply the rule of lenity in criminal prosecutions and to defer to the agency's position in civil actions. But a statute is not a chameleon. Its meaning does not change from case to case. A single law should have one meaning, and the "lowest common denominator, as it were, must govern" all of its applications. Clark v. Martinez, 543 U.S. 371, 380, 125 S. Ct. 716, 160 L. Ed. 2d 734 (2005). 

United States v. Thompson/Center Arms Co. illustrates the point. The Court had to interpret a law that included a civil tax penalty and a criminal penalty. Even though Thompson/Center Arms was a tax case, the Court applied the rule of lenity. 504 U.S. 505, 518 n.10, 112 S. Ct. 2102, 119 L. Ed. 2d 308 (1992) (plurality opinion); id. at 519 (Scalia, J., concurring in the judgment). "The rule of lenity," the lead opinion explained, "is a rule of statutory construction[,] . . . not a rule of administration calling for courts to refrain in criminal cases from applying statutory language that would have been held to apply if challenged in civil litigation." Id. at 518 n.10 (plurality opinion). Recent cases reaffirm the point. See, e.g., Maracich v. Spears, 133 S. Ct. 2191, 2209, 186 L. Ed. 2d 275 (2013); Kasten v. Saint-Gobain Performance Plastics Corp., 131 S. Ct. 1325, 1336, 179 L. Ed. 2d 379 (2011); Leocal v. Ashcroft, 543 U.S. 1, 11 n.8, 125 S. Ct. 377, 160 L. Ed. 2d 271 (2004); Scheidler v. Nat'l Org. for Women, 537 U.S. 393, 408-09, 123 S. Ct. 1057, 154 L. Ed. 2d 991 (2003). 

Case law thus makes clear that either the rule of lenity prevails across the board or the agency's interpretation does. But which one? The better approach, it seems to me, is that a court should not defer to an agency's anti-defendant interpretation of a law backed by criminal penalties.

Judge Sutton then explains his reasoning and solution.  I strongly urge readers to go and read.

Perhaps one way of saying this is that the type of statutory ambiguity that would permit Step Two of Chevron is precisely the type of statutory ambiguity that should call for the rule of lenity.  The Chevron notion is that Congress is that Congress delegated to the agency the authority to fill in the interstices of the legal duty so to speak.  But Congress surely did not delegate to the agency the authority to add to or take away from the actual elements of the crime that Congress passed.  To be sure, of course, courts do that all the time through -- well -- interpretation.  For example, in United States v. Coplan, 703 F.3d 46 (2d Cir. 11/29/12), cert. denied, the majority opinion concluded that the Supreme Court's opinion in Hammerschmidt v. United States, 265 U.S. 182 (1924) had expanded the scope of the statutory language for the defraud conspiracy (known as a Klein conspiracy in tax settings).  See Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here.  Can courts -- particularly the Supreme Court -- do that but agencies cannot?

Obviously, I don't have the easy answers -- or even tough answers -- for the issues raised by Judge Sutton.  But, I suspect that there will be significant commentary on this issue soon tax authorities on Chevron, including Kristen Hickman and Steve Johnson.

Thanks to the Orin Kerr's blog enty The Rule of Lenity Versus Chevron Deference (The Volokh Conspiracy 11/27/13), here. for calling this to my attention.  That blog entry is short so I just cut and paste it here.

In his concurring opinion today in Carter v. Welles-Bowen Realty, Judge Sutton addresses a very interesting legal question: If an administrative agency is charged with administering a statute with criminal sanctions, and the agency adopts a broad reading of the statute that ordinarily would be entitled to Chevron deference absent the criminal sanctions, does the rule of lenity that applies to the interpretation of criminal statutes change what interpretation the court must give to the statute? 

Great issue. Off the top of my head, I think Judge Sutton’s answer is right. Congress does not delegate the meaning of criminal statutes to the executive branch. If an agency has promulgated an interpretation of the elements of a crime, the rule of lenity trumps Chevron; the agency doesn’t have interpretive authority over the crime, and Chevron is inapplicable. Granted, some Westlaw-surfing reveals an apparently contrary decision dealing with sentencing, Yi v. Federal Bureau of Prisons, 412 F.3d 526, 353 (4th Cir. 2005), but I think Yi is mistaken. Note that the agency’s view would still be controlling when Congress adds a general criminal prohibition that violating an agency regulation is a crime. See, e.g., 16 U.S.C. § 3. In that case, the agency is enacting its own regulation within its zone of delegation, though, not interpreting a statute.

Some additional reading materials that I picked up in quick searches.

• Kristin E. Hickman, Of Lenity, Chevron and KPMG, 26 Va. Tax Rev. 905 (2007), SSRN draft here.
• Note, "Justifying the Chevron Doctrine: Insights From the Rule of Lenity," 123 Harv. L. Rev. 2043 (2010), here.