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    Challenging a State Agency Regulation

    When a client is confronted with an onerous agency rule, the best recourse may be found in challenging the rule’s legal validity.

    J. Wesley Webendorfer

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    The Wisconsin Legislature often delegates the nitty-gritty details of administering statutory requirements to unelected agency officials, by directing the agencies to promulgate administrative rules. This practice has resulted in the creation of thousands of rules across dozens of state agencies. It should not come as a surprise, therefore, that agency rules are where the rubber meets the road in shaping the behavior of individuals and entities residing or doing business in Wisconsin.

    Agency rules are not mere suggestions or advice for regulated individuals and entities. Rather, rules have the force and effect of law,1 often carry severe penalties for their violation,2 and govern a wide swath of contemporary society, including everything from building codes to farming practices to employee wages.3 Because of the significance and breadth of agency rulemaking, it is important for any lawyer whose clients interact with state agencies to understand how to challenge the legal validity of an agency rule.

    This article discusses the substantive grounds and declaratory judgment procedure for challenging the legality of a state agency rule in Wisconsin courts.4 Where appropriate, it notes common-law developments and amendments to the Wisconsin Administrative Procedure Act that may aid a lawyer when challenging a rule in court.

    Substantive Grounds to Invalidate an Agency Rule

    When a client is burdened by a rule and seeks its elimination, the first step for a lawyer is to develop a theory of the case, including the substantive legal basis (or bases) for the challenge. Wisconsin’s Administrative Procedure Act limits a rule challenge to only three grounds: 1) violation of a constitutional provision, 2) failure to comply with statutory rulemaking procedures, and 3) exceeding the statutory authority of the agency.5 If a challenger is successful on any one of these grounds, the reviewing court must declare the rule invalid.6 Regardless of the substantive basis, invalidating a rule is not a simple matter.

    Violation of a Constitutional Provision

    Challenging an agency rule on constitutional grounds requires the development of facts and legal arguments showing that a detailed, narrowly focused administrative rule runs afoul of the guiding principles set forth in the state or federal constitution or both.7 This is the most difficult substantive basis on which to invalidate a rule. A party challenging a rule on constitutional grounds carries a heavy burden and faces presumptions that are not in her favor. For instance, a rule challenger must:

    • Prove unconstitutionality beyond a reasonable doubt.8 “It is not sufficient that the challenger show that there is doubt as to the rule’s constitutionality”9 and

    • Convince the reviewing court that the agency’s interpretation of the rule should be afforded little or no deference.10 Although a reviewing court is not bound by an agency’s conclusions of law, courts often defer to the agency’s interpretation of a rule.11

    It must be noted, however, that at the time this article is published, the Wisconsin Supreme Court is considering, in Tetra Tech EC Inc. v. DOR, whether the practice of deferring to agency interpretations of statutes is an unconstitutional delegation of judicial power.12 Depending on the outcome of Tetra Tech, judicial deference to agency interpretations of administrative rules could also be affected.

    J. Wesley Webendorfercom jww dewittross J. Wesley Webendorfer, Loyola University Chicago 2012 cum laude, is an associate at DeWitt Ross & Stevens S.C., Madison. His practice focuses on administrative law and litigation with an emphasis in environmental matters.

    In addition to these burdens and presumptions, a court reviewing an agency rule for an alleged constitutional violation will not analyze the rule’s merits or “the wisdom underlying the agency’s decision in adopting [it].”13 The court only looks to “whether there is any reasonable basis for the exercise of the rulemaking power.”14 If so, the court is “obliged to uphold the agency’s action.”15 For these reasons, a judicial finding that an agency rule is unconstitutional is rare.

    The factual basis necessary to establish that a rule is unconstitutional has been loosened (slightly) in recent decades. At one time, Wisconsin courts would “presume that facts exist[ed] which sustain the challenged regulation” and would place the burden on the rule challenger “to rebut the presumption.”16

    This is no longer the law in Wisconsin. The Wisconsin Supreme Court overturned this presumption and stated that such a requirement reduced the judicial review of agency rules to a mere “rubber-stamping.”17 In setting aside this presumption, the supreme court noted that a circuit court must be free to accept relevant evidence to supplement the agency record if it appears necessary for the court to perform its judicial review function.18 Therefore, these slightly relaxed evidentiary requirements may provide some comfort to a lawyer challenging a rule on constitutional grounds.

    Failure to Comply with Statutory Rulemaking Procedures

    Historically, lawyers seeking to invalidate a rule for lack of compliance with statutory rulemaking procedures have found somewhat greater success than with constitutional challenges. Invalidating a rule based on an agency’s procedural misstep, however, still pre-sents a difficult task for several reasons.

    First, although the rule promulgation process is complex and arduous,19 it is uncommon for an agency to overlook a required procedure. The independent Legislative Council is tasked with ensuring that the agency follows the promulgation procedures under the Administrative Procedure Act.20

    Second, similar to a constitutional challenge, legal presumptions are not in the rule challenger’s favor.21 Courts are directed to presume that the rule in question was properly promulgated by the agency and that all statutory rulemaking procedures were followed.22 The challenger carries the burden to rebut this presumption.23 Even if a lawyer alleges an inconsistency in the agency’s adherence to statutory rulemaking procedures, courts have historically afforded some degree of leeway to state agencies.24 As a result, seeking the invalidity of a rule on this substantive ground might be almost as difficult as a constitutional challenge.

    Wisconsin’s Administrative Procedure Act limits a rule challenge to only three grounds: 1) violation of a constitutional provision, 2) failure to comply with statutory rulemaking procedures, and 3) exceeding the statutory authority of the agency.

    Identifying Agency Rule Hiding as a Guidance Document. Although agencies do not often make procedural mistakes when promulgating a rule, lawyers have invalidated rules based on an agency’s failure to adhere to statutory rulemaking procedures showing that the agency did not go through any rulemaking procedures and instead, administered statutory provisions through the issuance of “guidance documents.”

    As regulatory and compliance lawyers know, a guidance document is “regulatory material” that an agency may use “to manage internal operations and to communicate with outside parties.”25 A guidance document may set forth an agency’s interpretations of existing rules, outline how an agency intends to regulate a developing policy area, or take the form of a training manual or compliance document for agency staff or the public.26

    In general, guidance documents do not have the force of law; however, they might have the effect of imposing general standards of policy on a class of individuals or entities that creates the same practical effect of a fully promulgated rule. If that is the case, then the guidance document is, in essence, a rule in disguise, and courts will permit a party to challenge the guidance document’s validity based on the agency’s failure to follow statutory rulemaking procedures.27

    Invalidating a Guidance Document as a Rule. Invalidating a guidance document requires the challenger to demonstrate that the guidance fits the definition of a “rule” in the Administrative Procedure Act. The guidance must 1) be a regulation, standard, statement of policy, or general order; 2) be of general application; 3) have the effect of law; 4) be issued by an agency; and 5) implement, interpret, or make specific legislation enforced or administered by such agency.28 Courts have given the most attention to the “effect of law” and “general application” elements.29

    To show that an agency guidance document has the “effect of law,” lawyers should search for language in the document in which the agency speaks with an “official voice intended to have the effect of law” rather than in an advisory, informational, discretionary, or descriptive manner.30 A lawyer can further bolster her argument that an agency guidance document has the effect of law if she can demonstrate that enforcement of the guidance could result in 1) criminal or civil sanctions, 2) denial or revocation of licensure, or 3) a detrimental impact on a class of individuals or entities.31 A guidance document is of “general application” if the class of individuals or entities subject to the guidance “is described in general terms and new members can be added to the class.”32

    As agencies continue to issue guidance documents as a means to establish policy without undertaking the multi-year rulemaking process, lawyers challenging agency rules should take note that courts are somewhat receptive to arguments that a rule may be hiding behind the façade of a guidance document.33

    Exceeding the Statutory Authority of the Agency

    The third substantive basis on which a lawyer may challenge an agency rule is to argue that the agency exceeded its statutory authority.34 This might be the most promising ground on which to challenge a rule.35 This is due, in part, to the courts’ application of a de novo standard of review.36 Some commentators and courts have even stated that “a statutory authority challenge favors the challenger.”37

    An administrative rule exceeds statutory authority if it conflicts with the language or intent of a statute or if the agency lacks the power to promulgate the rule.38 In analyzing whether an agency has exceeded its statutory authority, courts first look to the enabling statute to determine “whether the legislature expressly or impliedly authorized the agency to create the rule.”39

    The rules that may be most susceptible to legal challenges are those based on implied agency power.40 Lawyers challenging an agency rule promulgated pursuant to implied statutory authority may be aided by recent changes to Wisconsin’s Administrative Procedure Act. In 2011, the Legislature enacted 2011 Wis. Act 21, which significantly changed the rule promulgation process in Wisconsin.41 Among other things, the Legislature intended that Act 21 would:

    • Eliminate implied agency rulemaking authority;42 and

    • Deny agencies the ability to divine rulemaking authority from a statutory declaration of policy or a provision describing the agency’s general powers and duties.43

    Moreover, the Wisconsin Attorney General issued an opinion in May 2016 stating that “Act 21 makes clear that … rulemaking may no longer be premised on implied agency authority.”44 The express language of Act 21 and the Attorney General Opinion, therefore, provide rule challengers with strong arguments when attempting to invalidate a rule promulgated pursuant to implied agency authority. It remains unclear, however, how courts will react to Act 21. Even after the issuance of the Attorney General Opinion, courts have continued to state that agencies may divine rulemaking authority from reasonable implications in statutory grants of power.45

    Procedure to Challenge a Rule

    Once a lawyer develops a substantive legal basis on which to challenge an agency rule, the next step is consideration of procedural matters. Challenging an agency rule requires strict adherence to a distinct and unique statutory process. Close attention to these procedures is critically important. An unwary lawyer can easily be tripped up by the Administrative Procedure Act’s confusing procedural requirements – procedures that one Wisconsin court has referred to as a “labyrinth.”46 Although the requirements of the Administrative Procedure Act are generally controlling, a lawyer challenging an agency rule should always check whether a more specific statute details different or additional procedures that may apply.47

    Declaratory Judgment Complaint. The primary manner contemplated by the Administrative Procedure Act to challenge an agency rule is an action for declaratory judgment in a Wisconsin circuit court.48 Within the complaint for declaratory judgment, it is common for lawyers to include a request for injunctive relief to prohibit enforcement of the rule during the pendency of the action.49

    Although this article focuses on the procedures relating to the preparation of a declaratory judgment complaint, the Administrative Procedure Act sets forth numerous additional judicial proceedings in which the validity of a rule may be determined.50

    A court reviewing an agency rule for an alleged constitutional violation will not analyze the rule’s merits or ‘the wisdom underlying the agency’s decision in adopting [it].’ The court only looks to ‘whether there is any reasonable basis for the exercise of the rulemaking power.’

    Preparation of the declaratory judgment complaint requires attention to statutory and common-law requirements. By statute, a lawyer must demonstrate standing, that is, facts showing that the rule or its threatened application interferes with or impairs (or threatens to interfere with or impair) the plaintiff’s legal rights and privileges.51 Wisconsin courts have, however, added their own common-law gloss to these statutory requirements to ensure that a plaintiff seeking the invalidity of a rule clarifies her case so as to prevent a “shotgun approach” to rule challenges.52 For example, courts require a plaintiff to conspicuously state the following on the face of the declaratory judgment complaint:

    • The type of challenge asserted (that is, constitutional, failure to comply with rulemaking procedures, exceeding statutory authority);

    • Facts demonstrating the basis for each challenge (for example, in a constitutional due-process challenge, facts showing that the rule is not reasonably related to a legitimate governmental purpose); and

    • The applicable standard of review.53

    A circuit court may render judgment in a declaratory action even if the plaintiff has not requested that the agency first address the rule’s validity.54 In other words, exhaustion of administrative remedies is not required.

    Necessary Parties and Service. When preparing the declaratory judgment complaint, joining necessary parties and effectuating proper service can easily cause confusion and doom the lawsuit if not completed properly. The correct party defendant to the declaratory complaint is either the officer or state agency whose rule is the subject of the action.55

    Service of the declaratory judgment complaint is unlike a typical civil action and must be made on the following entities: 1) the defendant officer or state agency at issue; 2) the attorney general; and 3) the Joint Committee for Review of Administrative Rules (JCRAR).56 Service on the JCRAR is mandatory and should be effectuated within 60 days.57 Service is to be made on the co-chairs of the JCRAR or their designated agents;58 it is not necessary to serve every JCRAR committee member. The purpose of service on the JCRAR is to ensure that the committee has a choice of whether to discontinue the challenged rule or to defend it in litigation.59 Noncompliance with these strict service provisions results in the court lacking jurisdiction and the dismissal of the case.60

    Venue. Choosing the appropriate venue for a declaratory judgment action is an important strategic decision. Before the passage of Act 21, venue was exclusively in Dane County Circuit Court. After Act 21, venue is now proper in the county where the party asserting the invalidity of the rule resides or has its principal place of business.61 If the party is a nonresident or does not have its principal place of business in Wisconsin, then venue is in the circuit court for the county where the dispute arose.62 Depending on the circumstances of the case, a lawyer may have strategic options as to the proper venue. Additionally, and as other commentators have noted, the expanded venue provisions in Act 21 allow for litigants to challenge agency rules in their home counties, saving expenses on travel and litigation time.63

    Conclusion

    Challenging an agency rule in court is not a simple task. It requires careful adherence to detailed statutory and common-law procedural requirements and creative legal thinking to develop a successful substantive theory that will overcome burdens and presumptions that may not be in the rule challenger’s favor. As agency rules continue to be a driving force in regulating the behavior of individuals and businesses in Wisconsin, lawyers will continue to be asked to evaluate and challenge rules. Recent changes to the Administrative Procedure Act and agency use of guidance and interpretive documents may provide opportunities for lawyers to successfully challenge agency rules.

    Endnotes

    1 Burrus v. Goodrich, 194 Wis. 2d 654, 662, 535 N.W.2d 85 (Ct. App. 1995) (“[A]dministrative rules enacted pursuant to an agency’s statutory powers have the force and effect of law.”).

    2 See, e.g., Wis. Admin. Code § NR 205.07(1)(a) (cross-referencing civil and criminal penalties for certain permit violations).

    3 See, e.g., Wis. Admin. Code chs. SPS 361-366; Wis. Admin. Code chs. ATCP 20-54; Wis. Admin. Code ch. DWD 272.

    4 Except for the discussion regarding challenges to the validity of agency guidance documents, this article only addresses challenges to existing, fully promulgated rules.

    5 Wis. Stat. § 227.40(4)(a).

    6 Id.

    7 See Josam Mfg. Co. v. State Bd. of Health, 26 Wis. 2d 587, 602, 605-06, 133 N.W.2d 301 (1965) (affirming trial court decision finding that detailed regulation relating to installation of plumbing fixtures violated broad constitutional right to sell legitimate product and carry on a business).

    8 Wisconsin Citizens Concerned for Cranes & Doves v. DNR, 2004 WI 40, ¶ 10 n.6, 270 Wis. 2d 318, 677 N.W.2d 612.

    9 Burrus, 194 Wis. 2d at 662.

    10 Pfeiffer v. Board of Regents, 110 Wis. 2d 146, 154-55, 328 N.W.2d 279 (1983) (noting that courts often defer to administrative agency interpretations of rules).

    11 Id.

    12 Tetra Tech EC Inc. v. DOR, 2017 WI App 4, 373 Wis. 2d 287, 890 N.W.2d 598 (review granted). The Wisconsin Supreme Court has asked the parties to brief the following question: “Does the practice of deferring to agency interpretations of statutes comport with Article VII, Section 2 of the Wisconsin Constitution, which vests the judicial power in the unified court system?”

    13 Burrus, 194 Wis. 2d at 662.

    14 Id.

    15 Id.

    16 Wisconsin State Tel. Ass’n v. Public Serv. Comm’n of Wis., 105 Wis. 2d 601, 611, 314 N.W.2d 873 (Ct. App. 1981).

    17 Liberty Homes Inc. v. DILHR, 136 Wis. 2d 368, 383, 401 N.W.2d 805 (1987).

    18 Id. at 379.

    19 Under the Wisconsin Administrative Procedure Act, rule promulgation involves, among other things, a scope statement, economic impact analysis, fiscal estimate, public hearing and comment period, Legislative Council review, and review by legislative standing committees, the Joint Committee for Review of Administrative Rules, and the governor. Additionally, recently enacted 2017 Wis. Act 57 provides for increased legislative oversight of the rule promulgation process.

    20 Wis. Stat. § 227.15(2)(b).

    21 Wis. Stat. § 227.20(3)(a)-(d).

    22 Wis. Stat. § 227.20(3)(a), (c).

    23 Wisconsin Realtors Ass’n v. Public Serv. Comm’n of Wis., 2015 WI 63, ¶ 66, 363 Wis. 2d 430, 867 N.W.2d 364.

    24 HM Dist. of Milwaukee Inc. v. Department of Agriculture, 55 Wis. 2d 261, 269, 198 N.W.2d 598 (1972) (finding that tape recording of hearing satisfied statutory requirement of “minutes or [a] record of a hearing”).

    25 Connor N. Raso, Strategic or Sincere? Analyzing Agency use of Guidance Documents, 119 Yale L.J. 782, 788 (2010).

    26 Id.

    27 Heritage Credit Union v. Office of Credit Unions, 2001 WI App 213, ¶ 24, 247 Wis. 2d 589, 634 N.W.2d 593; Cholvin v. Wisconsin Dept. of Health & Family Servs., 2008 WI App 127, ¶ 22, 313 Wis. 2d 749, 758 N.W.2d 118 (holding that functional screen document used by the Department of Health and Family Services (DHFS) was invalid because DHFS did not use statutorily required rulemaking procedures to promulgate directive).

    28 Wis. Stat. § 227.01(13).

    29 Cholvin, 2008 WI App 127, ¶¶ 23-29, 313 Wis. 2d 749; County of Dane v. Winsand, 2004 WI App 86, ¶¶ 9-11, 271 Wis. 2d 786, 679 N.W.2d 885.

    30 Winsand, 2004 WI App 86, ¶ 11, 271 Wis. 2d 786; Cholvin, 2008 WI App 127, ¶ 29, 313 Wis. 2d 749 (noting that phrase “should use” in instruction manual created a mandatory duty with effect of law).

    31 Cholvin, 2008 WI App 127, ¶ 26, 313 Wis. 2d 749.

    32 Id. ¶ 23.

    33 The use of guidance documents by administrative agencies has recently received heightened scrutiny. In 2011, the governor signed Executive Order 50 with the intent of reducing the number of guidance documents that push the boundaries of having the force of law. Executive Order 50 created the Office of Regulatory Compliance and directed it to analyze any agency document “interpreting, clarifying, or explaining statutes and rules that regulate individuals or entities or local governmental units.” This increased scrutiny has likely reduced the scope and power of agency guidance documents, and, in turn, the number of guidance documents that private litigants challenge in court. See Relating to Guidelines for the Promulgation of Administrative Rules, Exec. Order No. 50.

    34 Wis. Stat. § 227.40(4)(a).

    35 Wisconsin Ass’n of State Prosecutors v. Wisconsin Employment Relations Comm’n, 2016 WI App 85, ¶ 23, 372 Wis. 2d 347, 888 N.W.2d 237 (holding that “the Commission exceeded its statutory authority by enacting these particular provisions”); Seider v. O’Connell, 2000 WI 76, ¶ 79, 236 Wis. 2d 211, 612 N.W.2d 659 (“The agency rule conflicts with the language of the valued policy law and, more broadly, its legislative intent. We therefore find that Wis. Admin. Code § INS 4.01(2)(e) exceeds the statutory authority of the OCI, and under Wis. Stat. § 227.40(4)(a) we are required to invalidate it.”).

    36 Debeck v. DNR, 172 Wis. 2d 382, 386, 493 N.W.2d 234 (Ct. App. 1992) (“We conclude that a de novo standard of review should be used in ‘exceeds statutory authority’ cases under sec. 227.40(4)(a), Stats.”).

    37 Steve Levine, How to Review an Administrative Rule, 56 Wis. B. Bull at 42 (Oct. 1983); Wisconsin Citizens Concerned for Cranes & Doves, 2004 WI 40, ¶ 10 n.6, 270 Wis. 2d 318.

    38 Seider, 2000 WI 76, ¶ 72, 612 N.W.2d 659; Conway v. Board of Police & Fire Comm’rs, 2003 WI 53, ¶ 19, 262 Wis. 2d 1, 662 N.W.2d 335.

    39 Conway,2003 WI 53, ¶ 19, 662 N.W.2d 335.

    40 The general and well-accepted rule is that an agency has “only those powers which are expressly conferred or which are necessarily implied by the statutes under which it operates.” Wisconsin Citizens Concerned for Cranes & Doves, 2004 WI 40, ¶ 14, 270 Wis. 2d 318; DOR v. Hogan, 198 Wis. 2d 792, 816, 543 N.W.2d 825 (Ct. App. 1995) (noting an agency’s express and implied powers). Although implied rulemaking power is scrutinized by the courts, for decades there has been a common-law recognition that agencies have the power to promulgate rules based on implied statutory authority. Wisconsin Citizens Concerned for Cranes & Doves,2004 WI 40, ¶ 32, 270 Wis. 2d 318 (“We conclude that the statutes are not in conflict because § 29.039(1) implicitly empowers the DNR to set open seasons for ‘nongame species.’”); Lake Beulah Mgmt. Dist. v. DNR, 2011 WI 54, ¶ 23, 335 Wis. 2d 47, 799 N.W.2d 73 (recognizing implied agency power).

    41 See 2011 Wis. Act 21 (amending, repealing, and recreating rulemaking procedures under Wis. Stat. ch. 227).

    42 See id. § 1r (“No agency may implement or enforce any standard, requirement, or threshold … unless ... [it] is explicitly required or explicitly permitted by statute or by a rule that has been promulgated in accordance with this subchapter.”).

    43 Id. § 3.

    44 Opinion of Wis. Att’y Gen. to Robin Vos, Chairperson, Assembly Committee on Org., OAG-01-16, at ¶ 29 (May 10, 2016).

    45 An example is Wisconsin Ass’n of State Prosecutors, 2016 WI App 85, ¶ 16, a decision filed on Oct. 12, 2016, in which the court of appeals stated that “[a]dministrative agencies … have ‘only those powers which are expressly conferred or which are necessarily implied by the statutes under which [they] operate.’”

    46 All Star Rent A Car Inc. v. Wisconsin Dep’t of Transp., 2006 WI 85, ¶ 52, 292 Wis. 2d 615, 716 N.W.2d 506.

    47 State ex rel. Hensley v. Endicott, 2001 WI 105, ¶ 21, 245 Wis. 2d 607, 629 N.W.2d 686 (noting that Wisconsin’s Prisoner Litigation Reform Act trumped Wis. Stat. section 227.40(1)’s provisions and required exhaustion of administrative remedies before challenging validity of agency rules regarding prison conditions).

    48 Wis. Stat. § 227.40(1).

    49 See LeClair v. Natural Res. Bd., 168 Wis. 2d 227, 232, 483 N.W.2d 278 (Ct. App. 1992).

    50 Wis. Stat. § 227.40(2)(a)-(f).

    51 Wis. Stat. § 227.40(1).

    52 Liberty Homes, 136 Wis. 2d at 377.

    53 Id.

    54 Wis. Stat. § 227.40(1).

    55 Id.

    56 Id.; Wis. Stat. §§ 801.11(3), 227.40(5).

    57 Wis. Stat. § 227.40(5); Richards v. Young, 150 Wis. 2d 549, 557, 441 N.W.2d 742 (1989) (citing Wis. Stat. section 893.02 for proposition that in a declaratory judgment action, “JCRAR must be served within 60 days after filing the summons and complaint”). Since publication of the Richards case, the deadline for service under Wis. Stat. section 893.02 has been extended to 90 days. See 1997 Wis. Act 187, § 18.

    58 See Wis. Stat. §§ 13.56, 806.04(11).

    59 Richards, 150 Wis. 2d at 555.

    60 Mata v. Wisconsin Dep’t of Children & Families, 2014 WI App 69, ¶ 10, 354 Wis. 2d 486, 849 N.W.2d 908 (“Unfortunately, the consequence for Mata’s failure to properly serve the Joint Committee is lack of jurisdiction to hear the case”).

    61 Wis. Stat. § 227.40(1).

    62 Id.

    63 Ronald Sklansky, Changing the Rules on Rulemaking, 84 Wis. Law. 10 (Aug. 2011).