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Eighth Circuit rules on hedge-to-arrive

In two opinions issued the same day, the Eighth Circuit has held that the hedge-to-arrive
(HTA) contracts at issue were valid cash forward contracts and were therefore excluded from
regulation under the Commodity Exchange Act (CEA), 7 U.S.C. §§ 1-25. Grain Land Coop
v. Kar Kim Farms, Inc., No. 98-3217, 1999 WL 1179095 (8th Cir. Dec. 15, 1999); Haren v.
Conrad Cooperative, No. 98-3803, 1999 WL 1161525 (8th Cir. Dec. 15, 1999). The litigation,
which arose during the period of high grain prices in the mid-1990s, pitted several Iowa and

INSIDE Minnesota cooperatives against some of their respective member-farmers in a dispute over
whether the HTA contracts between them were enforceable under the CEA.
The CEA requires transactions in commodity futures contracts to occur only under the
rules of a board of trade that has been designated by the Commodity Futures Trading
• Water rights in Wyoming Commission (CFTC). However, it exempts from regulation contracts for “any sale of a cash
commodity for deferred shipment or delivery.” 7 U.S.C. § 1a(11). Such contracts are
commonly known as cash forward contracts. In the disputes before the Eighth Circuit, the
• Animal confinement farmers contended that the contracts were regulated futures contracts while the cooperatives
unit permits in asserted that the contracts were unregulated cash forward contracts.
South Dakota The contracts at issue in the two cases were materially similar, though the court described
only the Grain Land contract in detail. As described by the court, the Grain Land contract
• Legal effects of federal required the farmer to deliver a specified quantity and quality of grain to the cooperative at
an unspecified time. At the contract’s inception, the parties designated a Chicago Board of
agency pronouncements Trade (CBOT) futures contract price for the grain to serve as a reference point in determining
the grain’s sale price. The sale price would be CBOT futures contract price, plus or minus the
grain’s “basis,” with the basis being the difference between the grain’s futures contract price
and its cash price. Though the futures contract price was set at the contract’s inception, the
basis was not set until the individual farmer elected to set it. If the farmer did do so by a
specified time, the cooperative could set the basis and thereby set the grain’s sales price.
Because basis can fluctuate, HTA contracts placed “basis-risk” on the farmer. For a fee,
however, the farmer could either “roll” the contract into another futures contract period or
Solicitation of articles: All AALA cancel the contract. Nonetheless, the contract specified that the grain had to be delivered
members are invited to submit ar- to the cooperative “sometime” for the farmer to collect any gain.
ticles to the Update. Please include In the mid-1990s, while the contracts at issue were in effect, grain prices rose to the point
copies of decisions and legislation Continued on page 2
with the article. To avoid duplica-
tion of effort, please notify the Edi-
tor of your proposed article.
Cotenants claiming by adverse possession
In Buchanan v. Rediger, 975 P.2d 1235 (Kan. Ct. App. 1999), the plaintiffs are brother and
sister. The plaintiffs’ mother became the owner of 157 acres of farmland after the plaintiffs’

IN FUTURE grandmother died. In 1968, the plaintiffs’ mother granted the plaintiffs’ father a life estate
in the farmland with the remainder to the plaintiffs. The mother died later in 1968, and the
father remarried in 1969. In 1977, the plaintiffs’ father died survived by his second wife and

I SSUES the plaintiffs. Thus, after the father’s death, the plaintiffs’ remainder interest became a
present possessory interest. The father’s second wife died in 1988 leaving her nieces and
nephews, the defendants in this case.
While attempting to obtain title insurance for the farmland in 1996, the plaintiffs
discovered a 1955 deed conveying the farmland to the plaintiffs’ parents as tenants in
• The myth of the common. As a result, the defendants claimed that the plaintiffs’ father died owning only a
estate planning tax one-half interest in the property, and that the plaintiffs only had a remainder interest in one-
half of the property. Therefore, according to the defendants, upon the intestate death of the
plaintiffs’ father in 1977, one-half of his interest passed to his second wife that survived him,
and one-half passed to the plaintiffs. Thus, upon the father’s death, the plaintiffs owned a
three-fourths interest in the real estate. When the father’s second wife died in 1988, her one-
quarter interest in the tract passed to the defendants.
Continued on page 3

that the price of grain for immediate delivery guishing an unregulated cash forward con- whether the contract’s terms are individual-
exceeded the futures contract price for a later tract from a regulated futures contract. A ized, rather than standardized.” Id. (citations
delivery. In response to this price “inversion,” review of the CEA’s legislative history was omitted).
the farmers sold their grain at the cash price more fruitful, for there the Eighth Circuit Under this approach, the Eighth Circuit
and “rolled-over” their HTA contracts. When found in the fact that regulated futures con- held that the HTA contracts at issue were
this happened, the cooperatives, which had tracts are not normally settled by the actual unregulated cash forward contracts, even
hedged their obligations under the contracts delivery of the commodity support for the though they had features that differentiated
by taking a “short” or sell position on the proposition that it is “the contemplation of them from traditional cash forward contracts.
CBOT equal to their HTA buy obligations, physical delivery of the subject commodity In the course of reaching this conclusion, the
experienced losses in their short futures po- that is the hallmark of an unregulated cash- court noted that the parties were either in the
sitions. As a result, they were forced to add forward contract.” Grain Land Coop v. Kar business of producing or receiving grain and
to their margin accounts. Seeking to stem Kim Farms, Inc., 1999 WL 1179095 at *4 that the HTAs bore little resemblance to
these losses, the cooperatives took various (footnote omitted). In light of this proposi- futures contracts traded on the CBOT in that
steps. Grain Land, for example, terminated tion, the court commented that “[i]n order to they were not offered to the general public
its outstanding HTA contracts and required determine whether a transaction is an un- and were individually negotiated and not
farmers to sign new contracts that offered regulated cash-forward contract, we must standardized.
protection to the cooperative against such decide ‘whether there is a legitimate expecta- The court also found that the “roll-over”
losses. The farmers who later became liti- tion that physical delivery of the actual com- feature merely postponed delivery and did
gants against Grain Land declined to sign a modity by the seller to the original contract- not negate a delivery obligation altogether.
new contract. ing buyer will occur in the future.’” Id. (quot- While the cancellation feature in the Grain
Though various state law claims were at ing Andersons, Inc. v. Horton Farms, Inc., Land contract could negate delivery, the
issue, the central issue was whether the CEA 166 F.2d 308, 318 (6th Cir. 1998)) (other court observed that the contract provided
applied to the contracts. Turning first to the citations omitted). that no gains could be realized by the farmer
CEA itself, the Eighth Circuit found scant As to the method for resolving whether unless the grain was delivered. As to both of
guidance in the Act’s language for distin- actual physical delivery of the commodity these features, the court rejected the conten-
was contemplated, the Eighth Circuit adopted tion “that a mutually enforceable delivery
an individualized multi-factor approach used obligation is necessary to place a transaction
by other courts in HTA and other disputes. In outside the reach of the CEA.” Id. at *6
general, the factors considered include “the (citations omitted). Such a “purely contract-
intentions of the parties, the terms of the based analysis,” the court reasoned, “would
contract, the course of dealing between the expand the gravitational pull of the CEA
parties, and any other relevant factors....” Id. beyond what is suggested by the congres-
at *5. More specifically, this approach “scru- sional policies underlying the vague text of
tinizes each transaction for such characteris- [the cash forward contract exclusion].” Id.
VOL. 17, NO. 1, WHOLE NO. 194 December 1999 tics as whether the parties are in the business On the other hand, the court found that a
of obtaining or producing the subject com- contractual obligation to deliver was suffi-
AALA Editor..........................Linda Grim McCormick
Rt. 2, Box 292A, 2816 C.R. 163
modity; whether they are capable of deliver- cient to bring the contract within the cash
Alvin, TX 77511 ing or receiving the commodity in the quan- forward contract exclusion, notwithstanding
Phone: (281) 388-0155 tities provided for in the contract; whether
FAX: (281) 388-0155
the farmer’s lack of subjective intent to de-
E-mail: there is a definite date of delivery; whether liver the commodity. Haren v. Conrad Coop-
American Agricultural Law Association website: http:// the agreement explicitly requires actual deliv- erative, 1999 WL 1161525 at *1.
ery, as opposed to allowing the delivery ob- —Christopher R. Kelley, Assistant
Contributing Editors: Roger A. McEowen, Kansas State ligation to be rolled indefinitely; whether Professor of Law, University of Arkansas,
University; Christopher R. Kelley, University of Arkansas.
For AALA membership information, contact William P.
payment takes place only upon delivery; and Of Counsel, Vann Law Firm, Camilla, GA
Babione, Office of the Executive Director, Robert A. Leflar
Law Center, University of Arkansas, Fayetteville, AR 72701.

Agricultural Law Update is published by the American

Agricultural Law Association, Publication office: Maynard Legal effects/Cont. from page 7
Printing, Inc., 219 New York Ave., Des Moines, IA 50313.
All rights reserved. First class postage paid at Des Moines, IA Professors Davis and Pierce also note that Finally, in the 1999 Supplement to their
50313. the Court is not always consistent in its treatise, Professors Davis and Pierce observe
This publication is designed to provide accurate and
invalidation of an agency’s interpretation of that “[n]umerous circuit courts have distin-
authoritative information in regard to the subject matter covered. one of its legislative rules. For example, they guished Stinson and held that a policy state-
It is sold with the understanding that the publisher is not engaged
in rendering legal, accounting, or other professional service.
note that in Thomas Jefferson University v. ment [or interpretive rule] does not bind a
If legal advice or other expert assistance is required, the services Shalala, 114 S. Ct. 2381 (1994), the Court court if it does not interpret a legislative rule.
of a competent professional should be sought. ruled that “a court can reject an agency In that situation, the policy statement has
Views expressed herein are those of the individual authors
and should not be interpreted as statements of policy by the interpretation only if an ‘alternative reading only a potential persuasive effect on a court.”
American Agricultural Law Association. is compelled by the regulation’s plain lan- 1 Id. § 6.2 (Supp. 1999)(citing United States v.
Letters and editorial contributions are welcome and should
guage or by other indications of the Secretary’s Hill, 48 F.3d 228 (7th Cir. 1995); United States
be directed to Linda Grim McCormick, Editor, Rt. 2, Box intent at the time of the regulation’s promul- v. Mathena, 23 F.3d 87 (5th Cir. 1994); United
292A, 2816 C.R. 163, Alvin, TX 77511. gation.’” 1 id. § 6.10 (Supp. 1999). Yet in States v. Sparks, 19 F.3d 1099 (6th Cir. 1994);
Copyright 1999 by American Agricultural Law Director, OWCP v. Greenwich Collieries, United States v. Anderson, 15 F.3d 278 (2d
Association. No part of this newsletter may be reproduced or 114 S. Ct. 2251 (1994), the Court found the Cir. 1994); United States v. O’Neill, 11 F.3d
transmitted in any form or by any means, electronic or
mechanical, including photocopying, recording, or by any regulation interpreted by the agency to be 292 (1st Cir. 1993); United States v. Levi, 2
information storage or retrieval system, without permission in “too vague and ambiguous to support the F.3d 842 (8th Cir. 1993); and United States v.
writing from the publisher.
agency’s interpretation,” thus, according to Hooker, 993 F.2d 898 (D.C. Cir. 1993).
Professors Davis and Pierce, making it “dif- In summary, therefore, only legislative rules
ficult, if not impossible, to reconcile the ma- have binding effect on private parties, the
jority opinion in Greenwich with the majority courts, and agencies. Nonetheless, where an
opinion in Thomas Jefferson.” Id. Legal effects/Cont. on page 3


Water rights in Wyoming
In Rennard v. Vollmar, 977 P.2d 1277 (Wyo. rights as well as access to the irrigation ditch. On appeal, the Wyoming Supreme Court
1999), the parties own adjoining tracts of land The plaintiffs experienced difficulty in re- reversed, citing Frank v. Hicks, 4 Wyo. 502, 35
that were a single unified tract until being ceiving water as it passed through the defen- P. 1025 (Wyo. 1893), for the rule that a water
divided in 1973. The plaintiffs’ tract was used dants’ property, and a subsequent investiga- right becomes appurtenant to the land upon
for farming before 1973, and the plaintiff tion revealed that the defendants had placed which the water is used, and the ditch, water
continued that use. Likewise, the plaintiffs’ irrigation head gates on two reservoirs and pipe, or other conduit for the water becomes
tract has always been irrigated and received were taking water from the ditch. The defen- attached to the land, either as appurtenant or
water from an irrigation ditch that originally dants denied the plaintiffs access to the de- instant to the land, and necessary to its
crossed the entire property, part of which is fendants’ property for maintenance and use beneficial enjoyment, and therefore becomes
now the defendants’ land. The plaintiffs of the ditch, believing that the plaintiffs had part and parcel of the land. Accordingly, the
purchased their tract in order to farm it and no ownership interest in the ditch. The plain- plaintiffs had exclusive ownership of the
intended to irrigate their fields. The sale tiffs sued for intentional destruction of prop- ditch, and the defendants were not entitled
contract provided that the plaintiffs were to erty, conversion, negligence, and prescriptive to divert any water from the ditch to their
be given written permission for access to all easement. The trial court framed the issue as reservoir. In addition, the plaintiff’s owner-
the irrigation ditches for the purposes of one of whether the plaintiffs had an implied ship of the ditch permitted them to enter the
cleanup and preventative work. However, no easement in the ditch, and ultimately found defendant’s land to maintain and use the
written permission was provided to the plain- that the plaintiffs’ use was permissive, that it existing ditch.
tiffs, nor was an easement for the ditches was feasible for the plaintiffs to build their —Roger A. McEowen,
included in the deed. The deed containing own ditch, and that no implied easement was Kansas State University
the property was silent with respect to water intended at the time of the property division.

Animal confinement unit permits in South Dakota

In Coyote Flats, LLC v. Sanborn County traffic, and that additional trucks would dam- motives or on false information. The court
Commission, 596 N.W.2d 347 (S.D. 1999), in age roads and cause loss in value of neighbor- also noted that there was substantial relevant
1997 the defendant received an application ing land. The defendant concluded the facil- evidence in the record to support the
from the plaintiff for a special use permit to ity would be detrimental to the health, safety, defendant’s determination. In particular, the
construct a hog confinement facility that and general welfare of the people residing in proposed facility was to be erected within a
would contain approximately 6,000 hogs. the area near the proposed site and would be township that a heavy population concentra-
Simultaneously, the defendant attempted to a nuisance. The plaintiff again appealed to tion and that roads in the area would be
enact new county ordinances to amend the the circuit court. The circuit court determined severely damaged from increased large truck
existing county zoning ordinance. The that the defendant’s decision was arbitrary traffic. Likewise, adjacent properties would
amendments dealt with requirements for and capricious and remanded the case back to be devalued because of the location of the
animal confinement units. Based on the new the defendant. The court also ordered the facility, and the facility would create noxious
ordinances, the defendant denied the defendant to meet as a planning commission odors and raise the potential of water pollu-
plaintiff’s permit application. The plaintiff and approve the special use permit. The de- tion.
appealed to the circuit court, which struck fendant appealed with the issue on appeal Two justices dissented on the basis that
down the new ordinances as not properly being whether the trial court erred in ruling the defendant’s definition of a commercial
enacted. The court then remanded the per- that the defendant’s denial of a special use feedlot was vague in that the ordinance failed
mit issue to the commission to consider the permit was “arbitrary and capricious.” to state how many animals were required
application under the existing county ordi- The South Dakota Supreme Court re- before an operation was considered a com-
nance that had been in effect since the early versed the trial court’s decision, noting a near mercial feedlot. As such, the dissent argued,
1970s. total absence of evidence in the record that the ordinance could not be uniformly ap-
On remand, a hearing before the defen- would allow the court to label the defendant’s plied.
dant was held in early 1998, and the plaintiff findings as arbitrary and capricious. Specifi- —Roger A. McEowen,
was again denied the special use permit. The cally, the court noted that there was no Kansas State University
defendant found the proposed facility would evidence that the defendant’s action was
create significant odor, and would increase based on personal, selfish or fraudulent

Legal effects/Continued from page 2 Cotenants/Continued from page 1 which recognized the possibility that a co-
interpretive rule is interpreting a legislative The plaintiffs claimed full ownership of the tenant who is granted what appears to be the
rule, a court will give the interpretive rule real estate under the theory of adverse pos- entire interest in property may hold it adverse
“great” deference. This deference may be the session, and the defendants claimed a one- to undisclosed co-tenants. The court rea-
same as, or nearly the same as, Chevron quarter interest in accordance with the 1955 soned that the case was consistent with Kan.
deference. Consequently, through deference, deed. The trial court ruled that the plaintiffs Stat. Ann. § 60-503, which allows a claim of
interpretive rules can have a legally binding were co-tenants with the defendants and adverse possession based upon a good faith
effect, notwithstanding the fact that they do that a co-tenant could not acquire title by belief of ownership of the disputed property
not have to be promulgated through the adverse possession absent a clear ouster. The for a period of fifteen years. Accordingly, the
rulemaking processes specified in the APA. trial court also ruled that without knowledge plaintiffs were awarded title to the tract as
of the co-tenancy the plaintiffs’ possession tenants in common.
could not be adverse. —Roger A. McEowen,
The Kansas Court of Appeals reversed, Kansas State University
citing a 1905 Kansas Supreme Court case


The legal effects of federal agency pronouncements
By Christopher R. Kelley

Most federal administrative agencies have determining whether to make new law by agency statement of general or particular
been given the authority by Congress to rulemaking or by adjudication. NLRB v. Bell applicability and future effect designed to
make rules that legally bind private parties, Aerospace Co., Div. of Textron, Inc., 416 U.S. implement, interpret, or prescribe law or policy
the courts, and the agency itself. See gener- 267, 293-94 (1974). The APA, however, dis- or describing the organization, procedure, or
ally Cornelieus M. Kerwin, Rulemaking: tinguishes “rulemaking” from “adjudica- practice requirements of an agency,” the APA
How Government Agencies Write Law and tion.” Under the APA, adjudications result in definition of a “rule,” “if read literally, is
Make Policy (1994)(developing the thesis “orders,” not “rules.” 5 U.S.C. § 551(7). broad enough to encompass virtually any
that rulemaking is the single most important “Rules” and “rulemaking” are potentially statement an agency might make in any
function performed by agencies). Not all confusing subjects for at least two reasons. context.” 1 Kenneth Culp Davis & Richard J.
pronouncements that an agency might char- First, agencies make rules in several ways. Pierce, Jr., Administrative Law Treatise § 6.1
acterize or treat as binding “rules” are legally These include “formal” or “on the record” (1994)[Davis & Pierce](citations omitted).
binding, yet federal agencies sometimes treat rulemaking under APA §§ 553, 556, and 557; Or, as Professor Anthony notes:
nonbinding rules as if they were legally bind- “informal” or “notice and comment” Issuances encompassed by this definition
ing. Consequently, private parties and the rulemaking under APA § 553; and rulemaking come in a myriad of formats and bear a
courts often must draw the distinction be- through adjudication. Agencies also an- myriad of labels: legislative rules, interpre-
tween nonbinding and legally binding rules. nounce what they characterize as “rules” by tive rules, opinion letters, policy statements,
This article offers an overview of the law publishing press releases, internal handbooks, policies, program policy letters, Dear Col-
governing this distinction. and other guidances, the contents of which league letters, regulatory guidance letters,
The beginning point for any discussion of do not also appear in the Federal Register, a rule interpretations, guidances, guidelines,
federal agency rules is the Administrative process sometimes referred to as “publica- staff instructions, manuals, questions-and-
Procedure Act (APA). In relevant part, the tion rulemaking.” Peter L. Strauss, The answers, bulletins, advisory circulars, mod-
APA provides that a “rule” is “the whole or Rulemaking Continuum, 41 Duke L.J. 1463, els, enforcement policies, action levels,
a part of an agency statement of general or 1467 (1992)[Strauss](footnote omitted). press releases, testimony before Congress,
particular applicability and future effect de- Agencies often resort to such “publication and many others.
signed to implement, interpret, or prescribe rulemaking” or “nonrule rulemaking” be- Anthony, supra, at 1320 (footnote omitted).
laws or policy or describing the organization, cause of real and perceived delays and diffi- Obviously not every statement an agency
procedure, or practice requirements of an culties associated with APA rulemaking. might make in any context is a “rule” within
agency....” 5 U.S.C. § 551(4). As suggested by Thomas O. McGarity, Some Thoughts on the meaning of APA § 551(4). As a practical
this definition, unless Congress specifically “Deossifying” the Rulemaking Process, 41 matter, private parties who deal with federal
authorizes otherwise, rules must be prospec- Duke L.J. 1385, 1393 (1992); see also 1 George agencies are concerned primarily, if not exclu-
tive in effect, not retroactive. Bowen v. C. Coggins, Public Natural Resources Law § sively, with rules that have a legally “binding
Georgetown Univ. Hospital, 488 U.S. 204 7.03[2][d] (1990)(discussing the evolution of effect” on the public, the courts, and the
(1988). Thus, in general, a legally binding rule the USDA Forest Service Manual and the agency. If any statement regarding agency
“‘regulates the future conduct of either groups legal status of its contents). When agencies rules can be made with certainty, it is that
of persons or a single person; it is essentially attempt to enforce “rules” made through this valid “legislative rules” have that effect.
legislative in nature, not only because it op- form of rulemaking, the distinction between Nonetheless, as previously noted, agencies
erates in the future but also because it is nonbinding and legally binding rules is invari- sometimes treat nonlegislative rules as if they
primarily concerned with policy consider- ably an issue. were legislative rules. Professor Anthony
ations.’” Administrative Conference of the A second source of potential confusion is characterizes such rules as “spurious rules.”
United States, A Guide to Federal Agency the common division of “rules” into four Robert A. Anthony, “Interpretive” Rules,
Rulemaking 40 (2d ed. 1991)[Federal Agency categories: legislative rules; general state- “Legislative” Rules and “Spurious” Rules:
Rulemaking](quoting Attorney General’s ments of policy; interpretive (or interpreta- Lifting the Smog, 8 Admin. L.J. 1, 10
Manual on the Administrative Procedure tive) rules; and rules of agency organization, (1994)(“Such rules have no legal force, but
Act 14-15 (1947)). procedure, or practice. Although some courts because they are treated as binding by the
Agency rules are the product of agency and commentators equate legislative rules agency, they are spuriously given the appear-
rulemaking. The APA defines “rulemaking” with substantive rules, others maintain this ance of legal force.” (footnote omitted)).
as the “process for formulating, amending, or synonymous treatment is misleading. See Therefore, the determination of whether a
repealing a rule.” 5 U.S.C. § 551(5). “The Robert A. Anthony, Interpretive Rules, Policy “rule” has the legally binding effect of a
object of the rule making proceeding is the Statements, Guidances, Manuals, and the legislative rule requires distinguishing legis-
implementation or prescription of law or policy Like—Should Federal Agencies Use Them lative rules from “spurious rules” and other
for the future, rather than the evaluation of To Bind the Public?, 41 Duke L.J. 1311, 1321- statements issued by an agency.
a respondent’s past conduct.’” Federal Agency 27 (1992)[Anthony]. Professor Anthony ob-
Rulemaking, supra, at 40 (quoting Attorney serves that substantive standards can be found Legislative rules
General’s Manual on the Administrative Pro- in legislative rules, interpretive rules, and A legislative rule is a substantive rule imple-
cedure Act 14-15 (1947)). This objective and policy statements. As discussed below, the menting a statute that the agency is statuto-
the provision of rulemaking procedures in the latter two categories are not, by definition, rily empowered to make and that is duly
APA notwithstanding, the United States legislative rules. promulgated under APA § 553. Professor
Supreme Court has held that agencies are Notwithstanding the fact that rules can be Anthony would add that the agency also
generally free to use their own judgment in divided into four categories, the APA does must intend to make a legislative rule, not an
not expressly define the differences between interpretive rule or a policy statement. An-
legislative rules, interpretive rules, policy state- thony, supra, at 1322 (listing six requirements
Christopher R. Kelley is Assistant Professor ments, and procedural rules. It does not even that must be met by a legislative rule). See also
of Law, University of Arkansas and is Of use the term “legislative rules.” Instead, by American Mining Congress v. Mine Safety &
Counsel to the Vann Law Firm, Camilla, GA. defining a “rule” as “the whole or part of an Health Admin., 995 F.2d 1106, 1109 (D.C.


Cir. 1993)(discussing the limited utility of the uninsurable for federal crop insurance pur- conformity on the part of the public’” (cita-
“intent to exercise legislative power” test for poses. tion omitted)). The discussion that follows
identifying legislative rules). Thus, a “‘legis- The APA § 553(a)(2) exemption no longer defines these categories of agency state-
lative rule is the product of an exercise of applies to the USDA because in 1971 the ments and discusses whether and to what
delegated legislative power to make law USDA waived the exemption. 36 Fed. Reg. extent they have a binding effect.
through rules.’” Id. (citation omitted). 13,804 (1971). See generally Rodway v.
A valid legislative rule is binding on private United States Dep’t of Agriculture, 514 F.2d Rules of agency organization,
parties, the courts, and the agency. It has the 809, 813-14 (D.C. Cir. 1975)(discussing the procedure, or practice
same force and effect as a statute; that is, it USDA’s waiver of the exemption). As a Rules of agency organization, procedure,
has “the force and effect of law.” Chrysler result, the USDA is “fully bound ... to comply or practice are usually collectively referred to
Corp. v. Brown, 441 U.S. 281, 302 (1979). ... with the procedural demands of the APA” as “procedural rules.” Jeffrey S. Lubbers &
“This binding effect is the chief identifying when making legislative rules. Id. at 814. Nancy G. Miller, The APA Procedural Rule
feature of a legislative rule: its nature and Most rulemaking is by “notice and com- Exemption: Looking for a Way To Clear the
purpose is to alter citizens’ legal rights in a ment” under APA § 553. Although the “no- Air, 6 Admin. L.J. 481, 482 n.10 (1992)[Lub-
decisive fashion.” Ernest Gellhorn & Ronald tice and comment” requirements of APA § bers & Miller]. Though a convenient collec-
Levin, Administrative Law and Process in a 553 will not apply in some circumstances, tive description, “the term ‘procedural rule’
Nutshell 315-16 (3d ed. 1990)[Gellhorn & such as when “good cause” is demonstrated has no clear definition.” Id. at 482 (footnote
Levin](noting that “to say that such a rule has under APA § 553(b)(B), legislative rulemaking omitted).
‘the force and effect of law’ does not mean at least requires the giving of notice and an The procedural rule exemption from com-
that it is immune from judicial review; courts opportunity for public comment. Moreover, pliance with the rulemaking procedures of
can entertain challenges to the rule on vari- all legislative rules must be published in the APA § 553 “has generally covered matters
ous grounds”). Nonetheless, while valid leg- Federal Register. Unless “good cause” is such as agency rules of practice governing the
islative rules bind the issuing agency, United shown under APA § 553(d)(3) or the rule conduct of its proceedings and rules delegat-
States v. Nixon, 418 U.S. 683, 694-96 (1974), “grants or recognizes an exemption or re- ing authority or duties within an agency.”
an agency “may be able to waive them in lieves a restriction” under APA § 553(d)(1), Federal Agency Rulemaking, supra, at 49. In
appropriate cases for the benefit of individual publication must occur thirty days before the addition to covering matters such as the time
members of the public, at least if the rights of rule becomes effective. Legislative rules pub- period for competing railroads to file applica-
third parties are not prejudiced thereby.” lished as final rules in the Federal Register tions responding to proposed mergers,
Arthur Earl Bonfield & Michael Asimow, appear the following year in the Code of Lamoille Valley R.R. Co. v. ICC, 711 F.2d
State and Federal Administrative Law 249 Federal Regulations. 295, 328 (D.C. Cir. 1983), the exemption has
(1989)(citing American Airlines, Inc. v. Civil Unlike legislative rules, interpretive rules, been held to cover agency instructions, guide-
Aeronautics Bd., 359 F.2d 624 (D.C. Cir.)(en general statements of policy, and rules of lines, and procedures, including relatively
banc), cert. denied, 385 U.S. 843 (1966)). agency organization, procedure, and practice specific standards for determining what kinds
Legislative rules must be congressionally do not have to be promulgated under the of activities would result in enforcement
authorized and “reasonably related to the APA. APA § 553(b)(A) provides that “notice reviews under the Medicare program’s peer
purposes of the enabling legislation.” Mourn- and comment” rulemaking does not apply to review organization program, American
ing v. Family Publications Serv., 411 U.S. 356, such statements. 5 U.S.C. § 553(b)(A). Be- Hosp. Ass’n v. Bowen, 834 F.2d 1037, 1043-
369 (1973). “[A]n agency has the power to cause such rules are not legislatively promul- 52 (D.C. Cir. 1987).
issue binding legislative rules only if and to gated, they are not legislative rules. In essence, the exemption:
the extent Congress has authorized it to do Interpretive rules, general statements of requires agencies and courts to distinguish
so.” 1 Davis & Pierce, supra, § 6.3 (citations policy, and rules of agency organization, between procedural rules and substantive
omitted). Moreover, legislative rules must be procedure, or practice do not have the same rules. There are many rules that are easy to
consistent with the controlling statute. Brown legally binding effect as legislative rules. As categorize, e.g., a rule specifying the time
v. Gardner, 115 S. Ct. 552, 554-57 (1995). In discussed below, however, interpretive rules limit for filing a response to a complaint is
other words, legislative rules are subject to may be accorded sufficient deference by the procedural, while a rule imposing a new
challenge on grounds other than the proce- courts to make them outcome determinative. binding obligation on regulatees is sub-
dures under which they were promulgated. When this happens, it is the court, not the stantive. Unfortunately, however, there
Unless they apply to a matter exempted interpretive rule, that imposes the legally are many rules that can as easily bear one
under APA § 553(a) and the exemption has binding effect to the contents of the interpre- characterization as another.
not been waived by the agency, legislative tive rule. See Sims v. United States, 252 F.2d 1 Davis & Pierce, supra, § 6.4. As the District
rules must be legislatively adopted under the 434, 438 (4th Cir. 1958)(“Administrative in- of Columbia Circuit recently confessed, “we
APA. One of the two categorical exemptions terpretations are not absolute rules of law have struggled with the distinction between
in APA § 553(a) is the exemption provided for which must necessarily be followed in every ‘substantive’ and ‘procedural’ rules....” JEM
in APA § 553(a)(2) pertaining to “public prop- instance, but are only helpful guides to aid Broadcasting Co., Inc. v. FCC, 22 F.3d 320,
erty, loans, grants, benefits, or contracts.” courts in their task of statutory construc- 326 (D.C. Cir. 1994). See also 1 Davis &
This exemption would apply to some of the tion.”), aff’d, 359 U.S. 108 (1959). While not Pierce, supra, § 6.4 (“There are scores of lower
USDA’s rulemaking including, for example, binding by definition, general statements of court opinions that apply the procedure sub-
domestic commodity program rules and fed- policy may have coercive effect as a practical stance distinction to a wide variety of agency
eral crop insurance contracts. For example, in matter. Moreover, rules of agency organiza- rules that are difficult to classify. They form
Rainbow Valley Citrus Corp. v. Federal Crop tion, procedure, or practice can affect parties an untidy body of law that defies accurate
Ins. Corp., 506 F.2d 467, 468-69 (9th Cir. outside the agency in both insignificant and summary treatment. Given the inherent dif-
1974), this exemption was invoked to uphold significant ways. See Batterton v. Marshall, ficulty of the enterprise, the boundary be-
a 1970 rule adopted without compliance with 648 F.2d 694, 707 (D.C. Cir. 1980)(observing tween substantive rules and procedural rules
APA § 553 that reclassified certain lands as that “‘even office hours ... necessarily require Continued on page 6


is likely to remain murky.”). In determining whether a proposed rule 1 Davis & Pierce, supra, § 6.2. Whether the
Courts have developed various tests for falls within the statutory exception for result of sloppiness or the product of strategic
determining whether a rule is a procedural rules of agency “procedure or practice,” choice, an agency may use ambiguous or
rule but none of these tests has been univer- agencies should apply the following stan- inconsistent language (such as variously us-
sally accepted. If there is a rule of thumb, it dard: A rule is within the terms of the ing “must” and “should”), thus leaving un-
may be that “[t]he likelihood that a regula- exception when it both (a) relates solely to certainty over the pronouncement’s intended
tion will pass muster as ‘procedural’ is in direct agency methods of internal operations or effect. Nonetheless,
proportion to its insignificance.” Gary J. Edles of interacting with regulated parties or the [t]he beauty of the “binding effect” test lies
& Jerome Nelson, Federal Regulatory Pro- public, and (b) does not (i) significantly in its ability to frustrate agency attempts to
cess: Agency Practices and Procedures § 4.2II affect conduct, activity, or a substantive use ambiguity to further illegitimate strate-
(2d ed. 1994). interest that is the subject of agency juris- gic goals. A court may interpret an ambigu-
One test “depends simply upon whether diction, or (ii) affect the standards for ous statement as binding or not binding,
[the rule] addresses some sort of agency eligibility for a government program. but the agency cannot have it both ways. If
procedure.” Lubbers & Miller, supra, at 485 Id. at 496 (quoting ACUS Recommendation the court concludes that the agency state-
(citing as an example Southern California 92-1, 1 C.F.R. § 305.92-1)(footnote omitted ment is binding in some important respect,
Edison Co. v. Federal Energy Regulatory defining “program” to include “those involv- it will hold that the statement is a “rule”
Comm’n, 770 F.2d 779 (9th Cir. 1985)). This ing benefits, contracts, licenses, permits, and that can be promulgated only through the
test, however, “is unhelpful because sub- loan guarantees”)). use of rulemaking procedures and that is
stance can be masked as procedure.” Id. at potentially reviewable to the same extent
489. Recognizing this, other courts have used Policy statements as any other rule. If instead the court
a “substantial impact” test. Id. at 485 (citing A general statement of policy is neither concludes that the statement is a general
as an example National Motor Freight Ass’n legally binding on the public or the courts nor statement of policy, courts will not permit
v. United States, 268 F. Supp. 90 (D.D.C. judicially enforceable against an agency. In the agency to give its statement binding
1967)(three-judge panel), aff’d mem., 393 other words, it does not establish a “binding effect on members of the public.
U.S. 18 (1968)). This test focuses on the norm.” Pacific Gas & Electric Co. v. FPC, 506 1 id. § 6.2.
magnitude of a rule’s impact, not on the F.2d 33, 38 (D.C. Cir. 1974). Instead, a general Although not legally binding, general state-
impact’s nature. At some “undefined level,” statement of policy states how the agency ments of policy may, as a practical matter,
the rule becomes subject to APA § 553. Id. at intends to use its lawmaking power in the have a coercive effect. That is, “[t]o the extent
485-86. future but does not attempt to bind anyone that an agency possesses significant discre-
The District of Columbia Circuit has looked immediately.” Gellhorn & Levin, supra, at tionary power over a class of regulatees or
to whether a particular rule “‘encodes a sub- 318. See also Federal Agency Rulemaking, beneficiaries, many are likely to ‘comply’ ‘vol-
stantive value judgment or puts a stamp of supra, at 58 (“Policy statements are issued by untarily’ with an agency’s ‘nonbinding’ state-
approval or disapproval on a given type of an agency to advise the public prospectively ment of its preferred policies.” 1 id. § 6.2.
behavior.’” Id. at 486 (citing American Hos- of the manner in which the agency proposes
pital Ass’n v. Bowen, 834 F.2d 1037, 1047 to exercise a discretionary power in subse- Interpretive rules
(D.C. Cir. 1987)). As that Circuit recently quent adjudications or through rulemaking. Strictly defined, “an interpretive rule dif-
indicated, an aspect of that test examines Often policy statements are issued to guide fers from a legislative rule in that it is not
whether the rule changes “substantive stan- agency personnel in administering laws, and intended to alter legal rights, but to state the
dards.” JEM Broadcasting, 22 F.3d at 327 sometimes they are addressed to the public.” agency’s view of what existing law already
(emphasis in original). More broadly, the (footnote omitted)). requires.” Gellhorn & Levin, supra, at 317.
court observed: Once a pronouncement is determined to “[T]he courts do not treat interpretations as
Our oft-cited formulation holds that the be a general statement of policy, two prin- making new law, on the theory that they
“critical feature” of the procedural excep- ciples follow: (1) The policy statement can be merely restate or explain the preexisting leg-
tion “is that it covers agency actions that do adopted without compliance with APA § 553, islative acts and intentions of Congress.”
not themselves alter the rights or interests and (2) the policy statement is not legally Anthony, supra, at 1324 (footnote omitted).
of parties, although it may alter the manner binding. The more difficult issue, however, is Rules that make “new law” are not interpre-
in which the parties present themselves or determining whether a pronouncement is a tive; rather, they are legislative and must have
their viewpoints to the agency.” ... “Of general policy statement. This issue most been promulgated as legislative rules before
course, procedure impacts on outcomes often arises in the context of a pronounce- they can be given binding effect. “Rules have
and thus can virtually always be described ment that has not been promulgated in com- been found to make ‘new law,’ and thus to be
as affecting substance, but to pursue that pliance with APA § 553. In this context, legislative, where they fill a statutory gap by
line of analysis results in the obliteration of the proper question ... is not whether the imposing a standard of conduct, create an
the distinction that Congress demanded.” policy document is a legislative rule. Rather, exemption from a general standard of con-
... The issue, therefore, “is one of degree,” the proper question is whether the duct, establish a new regulatory structure or
and our task is to identify which substan- nonlegislative document should have been otherwise complete an incomplete statutory
tive effects are “sufficiently grave so that issued as a legislative rule in the circum- design.” Federal Agency Rulemaking, supra,
notice and comment are needed to safe- stances. The key to that question is ...: Did at 62 (citing Michael Asimow, Nonlegislative
guard the policies underlying the APA.” the agency intend the document to bind? Rulemaking and Regulatory Reform, 1985
Id. at 326-27 (citations omitted). Has the agency given it binding effect? If Duke L.J. 381, 394).
The District of Columbia Circuit’s approach the answer to either of these questions is The distinction between legislative and
has been characterized as “problematic” be- “yes,” the document should have been interpretive rules has been characterized as
cause “[c]ourts have either not engaged in issued as a legislative rule. “fuzzy.” Avoyelles Sportsman’s League, Inc.
useful analysis or they have used the test in Anthony, supra, at 1327. v. Marsh, 715 F.2d 897, 909 (5th Cir. 1983).
a way that could effectively eliminate the As Professors Davis and Pierce observe, Nonetheless, the District of Columbia Cir-
statutory distinction between procedural and determining whether an agency pronounce- cuit recently offered the following reconcili-
substantive rules.” Lubber & Miller, supra, at ment has a binding effect is not always easy. ation of its case law:
489. For its part, the now-defunct Adminis- Courts will examine, but not necessarily fol- Accordingly, insofar as our cases can be
trative Conference of the United States low, an agency’s representations concerning reconciled at all, we think it almost exclu-
(ACUS) recommended as follows: the intended effect of a pronouncement. See sively [is] on the bases of whether the


purported interpretive rule has “legal ef- binding effect to the position taken by an on common sense. A court should con-
fect”, which in turn is best ascertained by agency in an interpretative rule, but it is the sider adopting the position taken in an
asking (1) whether in the absence of the court that provides the binding effect of law agency interpretative rule because there
rule there would not be an adequate legis- through its process of statutory interpreta- are reasons to believe that agency posi-
lative basis for enforcement action or other tion; the agency’s interpretative rule serves tions are wise and correct.
agency action to confer benefits or ensure only the function of potentially persuading 1 Davis & Pierce, supra, § 6.3 (noting also that
the performance of duties, (2) whether the the court that the agency’s interpretation is “[t]he Skidmore opinion states that defer-
agency has published the rule in the Code correct.” 1 Davis & Pierce, supra,at § 6.3. See ence due interpretative rules is based solely
of Federal Regulations, (3) whether the also Federal Agency Rulemaking, supra, at on their potential power to persuade”).
agency has explicitly invoked its general 65 (“An agency issuing an interpretive rule Notwithstanding the rule that interpretive
legislative authority, or (4) whether the (i.e., an interpretation which merely reminds rules interpreting statutes are not binding on
rule effectively amends a prior legislative parties of existing law or interprets a statute the courts, Professors Davis and Pierce note
rule. If the answer to any of these questions without creating new rights and duties) may that “an interpretative rule binds federal courts
is affirmative, we have a legislative, not an well intend that its interpretation bind its own when it explains or interprets a legislative rule
interpretive rule. personnel, and it may expect compliance unless the interpretative rule is inconsistent
American Mining Congress v. Mine Safety & from regulated individuals or entities. None- with the legislative rule, violates the Consti-
Health Admin., 995 F.2d 1106, 1112 (D.C. theless, the agency cannot expect the inter- tution or a federal statute, or is plainly erro-
Cir. 1993). With regard to the fourth criteria, pretation to be binding in later proceedings; neous.” 1 id. § 6.3 (relying on Stinson v.
the court noted: because it does not have the force of law, United States, 113 S. Ct. 1913 (1993)). As
A rule does not, in this inquiry, become an parties can challenge the interpretation.”). more often stated, an “administrative inter-
amendment merely because it supplies When a legislative rule “interprets” an pretation is controlling unless plainly errone-
crisper and more detailed lines than the ambiguous statute that the agency has been ous or inconsistent with the regulation. 1 id.
authority being interpreted. If that were so, delegated authority to implement, the at § 6.10 (relying on Bowles v. Seminole Rock
no rule could pass as an interpretation of a agency’s interpretation is binding on a court Co., 325 U.S. 410 (19945)). Underlying this
legislative rule unless it were confined to if it offers a “permissible construction of the principle is the notion that “[t]he agency
parroting the rule or replacing the original statute.” Chevron v. Natural Resources typically is in a superior position to determine
vagueness with another. Council, Inc., 467 U.S. 837, 842-43 (1984). what it intended when it issued a rule, how
Id. When the interpretation is found in an inter- and when it intended the rule to apply, and
Professors Davis and Pierce have praised pretive rule, not a legislative rule, a different the interpretation of the rule that makes the
the guidance offered by the American Min- degree of deference applies: “a court is not most sense given the agency’s purposes in
ing Congress criteria. They maintain, how- required to give effect to an interpretative issuing the rule.” 1 id. at § 6.10.
ever, that “[t]he second criterion—publica- regulation. Varying degrees of deference are Professors Davis and Pierce are critical of
tion in the Code of Federal Regulations accorded to administrative interpretations, Stinson because the non-legislatively-issued
(CFR)—should not be used in any attempt to based on such factors as the timing and administrative “commentary” in which the
distinguish between a legislative rule and an consistency of the agency’s position, and the interpretation was found did not claim to
interpretative rule....” 1 Davis & Pierce, supra, nature of its expertise.” Batterton v. Francis, have binding effect: “The Stinson Court
§ 6.3 (Supp. 1999). 432 U.S. 416, 425 n.9 (1977) (citations omit- held... that courts must give the commentary
A note of caution: Not all rules that “inter- ted). See also Davis & Pierce, supra, at § 6.3 greater authoritative effect than the [agency]
pret” are interpretive rules. Legislative rules (“Both Congress and the courts have long claimed for it.... That part of the reasoning
can be “interpretive.” The distinction be- recognized... that ‘interpretive rules,’ exempt seems wrong.” 1 Davis & Pierce, supra, § 6.10
tween a legislative rule that interprets a stat- from the notice and comment procedure by (citation omitted). On the other hand, they
ute or another rule and an interpretive rule is APA § 553, do not have binding effect on suggest that Stinson can be interpreted
found in the definition of a legislative rule— citizens or on courts. Thus, the Chevron test “merely as a reaffirmation of long-standing
that is, the agency has the statutory power to does not apply to interpretive rules.”). principles,” including the principle articulated
make the rule and it exercises that power in The deference accorded to interpretive in Udall v. Tallman, 300 U.S. 1 (1965). 1 id. §
compliance with APA § 553. As noted above, rules, sometimes called “Skidmore defer- 6.10.
unlike legislative rules, “[i]nterpretive rules ence” based on Skidmore v. Swift & Co., 323 Udall v. Tallman stands for the proposition
do not require notice and comment....” U.S. 134 (1944), is weaker than the “Chevron that courts must give “great” deference to an
Shalala v. Guernsey Memorial Hospital, 115 deference” accorded to legislative rules that agency’s interpretation of its own regula-
S. Ct. 1232, 1239 (1995); see also Hoctor v. interpret. In Skidmore, the agency had not tions. “The classic statement of the rule is the
United States Dep’t of Agric., 82 F.3d 165, been given the power to make legislative ‘plainly erroneous’ standard: if the language
167 (7th Cir. 1996)(“There are no formalities rules. Hence, the agency could not make of a regulation is ambiguous, a court must
attendant upon the promulgation of an inter- rules that were legally binding on a court. accept an administrative construction of it
pretive rule, but this is tolerable because such Professor Davis and Pierce describe the dis- that is not ‘plainly erroneous or inconsistent’
a rule is ‘only’ an interpretation.”). This ex- tinction between Chevron deference and with the language of the regulation.” Russell
emption for interpretive rules from compli- Skidmore deference as follows: L. Weaver, Judicial Interpretation of Admin-
ance with APA § 553 is “to allow agencies to [T]he judicial deference to be accorded a istrative Regulations: An Overview, 53 U.
explain ambiguous terms in legislative enact- legislative rule [Chevron deference] is a Cin. L. Rev. 681, 722 (1984) (footnote omit-
ments without having to undertake cumber- strong form of deference attributable to ted). See also Russell L. Weaver, Challeng-
some proceedings.” American Hospital Ass’n the fact that the agency is exercising legis- ing Regulatory Interpretations, 23 Ariz. St.
v. Bowen, 834 F.2d 1037, 1045 (D.C. Cir. lative power granted it by Congress using L.J. 109 (1991). In this regard, as Professors
1987). the procedures Congress authorized for Davis and Pierce note, “[a]n interpretation of
that purpose.... Skidmore deference is not a rule inconsistent with the language used by
The binding effect of interpretive based on the institutional legitimacy of the the agency in a legislative rule fails to satisfy
rules agency pronouncement; an interpretative the requirement that citizens have adequate
Interpretive rules, as such, are not binding rule cannot have binding effect because notice of permissible and impermissible con-
on private parties or the courts, nor are they Congress has not authorized any agency duct.” 1 Davis & Pierce, supra, § 6.10.
judicially enforceable against the agency. to issue an interpretative rule with binding Legal effects/Cont. on page 2
However, “[a] court may choose to give effect. Skidmore deference is based solely


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