Supreme Court to Regulatory Agencies: Due Process Requires “Fair Notice” of Agency Interpretations

July 1, 2012

By JP Ellison & Jennifer M. Thomas

If you have ever sat in a meeting, received a letter or brief, or otherwise heard an interpretation from a regulatory agency that surprised, confounded or frustrated you, then you should read the Supreme Court’s recent decisions in Christopher v. SmithKline Beecham Corp., No. 11-204, 567 U.S. — (June 18, 2012) and FCC v. Fox Television Stations, Inc., No. 10-1293 (June 21, 2012).  If you don’t have the time or inclination to wade into these decisions, we will explain why they are significant rulings for companies regulated by FDA and other federal agencies. 

Both decisions give teeth and expanded reach to the often-cited principle that the Due Process Clause of the Fifth Amendment to the United States Constitution requires that federal agencies provide “fair warning” or “fair notice” of required or prohibited conduct.  While neither decision involved an agency before which we regularly appear, the cases should have significant implications for FDA, FTC, DEA, and other regulatory agencies. 

Companies frequently battle with government agencies when: (1) A company disagrees with an agency interpretation of law that the agency put forth after the company engaged in some business practice or decision without the benefit of knowing the agency’s current interpretation; or (2) the government files an enforcement action against the company alleging violations of law, but the government did not set forth its interpretation before the company engaged in the allegedly unlawful conduct. 

In Christopher v. SmithKline Beecham Corp., the question before the Court was the interpretation of the statutory phrase “in the capacity of outside salesman” with respect to pharmaceutical detailers.  The task of interpreting that phrase was delegated to the Department of Labor ("DOL"), which had issued regulations.  Those regulations did not address how the phrase applied to pharmaceutical detailers.  In 2009, in an amicus brief, the DOL first articulated its view that pharmaceuticals detailers were not employed in the capacity of outside salespersons, and thus were entitled to overtime pay.  The agency later altered its interpretation on several occasions.  Despite acknowledging that the regulation at issue was ambiguous, and that Supreme Court precedent typically calls for deference to an agency’s interpretation of its own ambiguous regulations, the Court withheld giving the agency’s decision any deference.  The Court ruled:

Petitioners invoke the DOL’s interpretation of ambiguous regulations to impose potentially massive liability on respondent for conduct that occurred well before that interpretation was announced. To defer to the agency’s interpretation in this circumstance would seriously undermine the principle that agencies should provide regulated parties fair warning of the conduct [a regulation] prohibits or requires. 

The Court cited cases that had applied the “fair warning” principle in the context of enforcement or penalty actions brought by a federal regulatory agency.  However, notably, in Christopher v. SmithKline Beecham Corp., there was no agency enforcement action.  Instead, the issue of the agency’s interpretation arose in the context of potential  “massive liability” in a private lawsuit.  The Court also noted that when an agency announcement of its interpretation of a statute or regulation is preceded by a very lengthy period of “conspicuous inaction” in terms of government enforcement actions, “the potential for unfair surprise is acute.”  This enforcement inactivity by the government in the face of a practice that may be occurring in an entire industry suggests, according to the Court, that the practice was not even unlawful.  This is often the case in many FDA interpretations.  

In addition, the Court criticized the practice of government agencies promulgating “vague and open-ended regulations that they can later interpret as they see fit, thereby ‘frustrat[ing] the notice and predictability purposes of rulemaking.’”

The Court also warned that it “is one thing to expect regulated parties to conform their conduct to an agency’s interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency’s interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demand deference.”

The application by the Court of the “fair warning” doctrine in this context demonstrates that it can be validly raised outside the traditional enforcement context, and that various types of significant expenses could trigger “fair warning” scrutiny.  For example, a change in agency practice or position that requires additional expense in obtaining an approval might raise these same constitutional concerns.  Certainly, civil or criminal penalties, injunctions, or forfeiture actions would continue to be subject to the fair warning requirement.  We are confident that the Court’s ruling would apply in many other contexts.

FCC v. Fox Television Station, Inc. concerned whether the FCC could apply its current position — that the fleeting use of expletives violates the FCC’s indecency standards—to conduct that occurred before the FCC articulated that new policy.  The Court concluded that under the FCC’s “old” policy, fleeting expletives were not actionable.  The Court had previously concluded that the FCC’s decision to modify its policy was not arbitrary and capricious.  On its second review of the case, the Court reached the constitutional question.  The Court held that the FCC’s enforcement actions were invalid because they ran afoul of the fair notice/fair warning constitutional requirement.  The Court explained: “[a]  conviction or punishment fails to comply with due process if the statute or regulation under which it is obtained ‘fails to provide a person of ordinary intelligence fair notice of what is prohibited, or is so standardless that it authorizes or encourages seriously discriminatory enforcement.’”  In further describing the constitutional underpinnings of this doctrine, the Court explained that it was animated by “two connected but discrete due process concerns: first, that regulated parties should know what is required of them so they may act accordingly; second, precision and guidance are necessary so that those enforcing the law do not act in an arbitrary or discriminatory way.”

Significant to the Fox decision is the Court’s mandate that due process not only demands some level of clarity by the agency, but also that even if clear, the standard must be sufficiently precise as to not promote arbitrary or discriminatory enforcement.  Query whether, for example, a corporate defendant could argue that the misdemeanor provisions of the FDC Act fail to satisfy this standard for a prosecution against a regulated entity or whether responsible corporate officer facing a Park prosecution could argue that FDA’s guidance in the Regulatory Procedures Manual for a such prosecutions, does not pass constitutional muster. 

A company or individual might argue that because it is entirely within the government’s discretion whether an alleged FDC violation should result in enforcement discretion,  a warning letter, consent decree, or criminal prosecution is, in this regard,  “so standardless that it authorizes or encourages seriously discriminatory enforcement.”  Similarly, why can not companies facing these FDA actions defend by arguing that the conduct the government now claims is unlawful was not preceded by a prior clear public articulation of the government’s position?

Indeed, we expect that particularly in the context of a criminal case, a defendant facing charges now stands a much better chance of acquittal by articulating the principles set forth in these cases.  Individuals and companies will have increased incentives to take their chances at trial, much like as occurred in a decision that we explained in a recent post.     

In Fox, the Court also addressed an argument by the government that there was no constitutional violation because no penalty had been assessed against Fox, and moreover, the FCC had represented that “it would not consider the indecent broadcasts  “in any context.”  Despite this “policy of forbearance”—akin to FDA “enforcement discretion” the Court found that the constitutional issue was appropriately before the Court.  In reaching that conclusion, the Court noted that because the agency had the statutory authority to consider the conduct, its representation that it would not was “insufficient to remedy the constitutional violation.”  The Court’s analysis in this regard is important because it suggests that a constitutional “fair notice” challenge can be brought against agency action even when there is no immediate injury to the regulated person or entity, if the agency has the authority to later cite it against the company—such as when FDA recites prior 483 observations, in a later complaint for a permanent injunction.  When coupled with the Court’s decision in Sackett earlier this term regarding when allegedly non-final agency action can be challenged (see our previous post here), this aspect of Fox should provide additional support for companies seeking to challenge new or novel interpretations by regulatory agencies.

Christopher v. SmithKline Beecham Corp. and FCC v. Fox Television Stations, Inc., provide clear and dramatic support for arguments that can be brought to bear to challenge unwarranted agency action.  Because neither case involved FDA, the Court rulings’ application in the FDA context is somewhat uncertain.  However, these rulings present opportunities for companies and individuals and their counsel to carefully craft legal and factual arguments to challenge the government when it violates these Due process “fair notice” requirements.  

Categories: Enforcement