On June 20, 2016, the U.S. Supreme Court issued a 6-2 opinion in Encino Motorcars, LLC v. Navarro et al., holding that the U.S. Department of Labor (Labor Department) was not entitled to receive Chevron deference with respect to its 2011 regulation addressing overtime exemptions in the auto industry.  No. 15-415, slip op. (June 20, 2016).  So-called “Chevron deference” arose out of a 1984 Supreme Court decision holding that agency regulations receive deference where a statute is ambiguous and the agency’s interpretation is reasonable.  Chevron U.S.A. Inc. v. Natural Resource Defense Counsel, Inc., 467 U.S. 837, 842-844 (1984).

Justice Kennedy, writing the majority opinion, examined a 2011 regulation that departed from nearly 40 years of agency practice.  After issuing a proposed rule in 2008 that codified an agency position taken since 1978, the Labor Department issued a final rule taking an opposite position.  Petitioners were car dealerships whose employees had sued under the 2011 rule for violations of the Federal Labor Standards Act overtime provisions.  The district court granted summary judgment in favor of the car dealerships, but the U.S. Court of Appeals for the Ninth Circuit reversed, deferring to the Labor Department’s 2011 rule.  The Supreme Court disagreed with the Ninth Circuit’s finding that the rule was entitled to Chevron deference, and instead concluded that “where the agency has failed to provide even that minimal level of analysis, its action is arbitrary and capricious and so cannot carry the force of law.”  Slip op. at 9.  Justice Kennedy further explained that:

When an agency changes it existing position, it ‘need not always provide a more detailed justification than what would suffice for a new policy created on a blank slate’ . . . .  But the agency must at least ‘display awareness that it is changing position’ and ‘show that there are good reasons for the new policy.’   

Id. (internal citations omitted).  The Court found that the 2011 rulemaking provided minimal explanation, and in light of the decades of industry reliance on the prior policy, “the explanation fell short of the agency’s duty why it deemed it necessary to overrule its previous position.”  Id.at 10.

Concurring and joined by Justice Sotomayor, Justice Ginsburg clarified that nothing in the majority opinion was meant to disturb well-established law.  Rather, an agency:

[N]eed not demonstrate to a court’s satisfaction that the reasons for the new policy are better than the reasons for the old one; it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better, which the conscious change of course adequately indicates.

Id. at 2 (Ginsburg, J., concurring).  In the dissent, joined by Justice Alito, Justice Thomas agreed with the denial of Chevron deference, but expressed disappointment with the majority’s decision to “punt” on the substance of the regulation.  Id. at 1 (Thomas, J. dissenting).

This case has potentially significant implications for environmental regulations.  Whether an agency is entitled to Chevron deference can greatly impact the outcome of a challenge to an agency’s regulation.  The regulated community and environmental organizations both frequently rely on Chevron deference arguments in lawsuits involving challenges to agency rules and the rulemaking process.  This case may impact challenges to agency rules, particularly those that depart from long-standing policies or where an agency issues a final rule differing significantly from a proposed rule.