Court of Appeal Upholds Strict Regulatory Review Mandate

Loren Kaye
President of the California Foundation for Commerce and Education

State agencies must take seriously the requirement to conduct a timely, accurate economic analysis of major regulations, according to a recently-released opinion by the 5th District Court of Appeal.

In a unanimous opinion upholding the trial court, the appellate justices found that the final economic impact analysis used in rulemaking must be based on evidence, as must the responses to public comments regarding nonspeculative economic impacts which introduce new evidence into the rulemaking file.

According to the Court, comments by affected businesses are “not mere speculation and in similar contexts, specific testimonial evidence from the public has been readily identified as substantial evidence supporting the need for a response.”

This single sentence hammers home the importance of regulated businesses and industries presenting their comments to regulatory agencies about economic impacts of regulations. Not only must agencies respond to these comments, their responses must be supported by evidence in the record.

The court also ruled that a state agency must address both intrastate and interstate economic competitiveness impacts and concerns: “Nothing in the language of the relevant statutes suggests the economic interests relevant to the Administrative Procedures Act analysis are solely inter-state interests.”

In deciding this case, the appellate court rejected the application of a deferential standard of review to the state agency’s interpretation of its obligations under the Administrative Procedures Act (APA). In effect, the court held that the agency doesn’t get to decide for itself what the Legislature meant by holding the agency accountable.

The APA ruling in this dispute, John R. Lawson Rock & Oil, Inc. and California Trucking Association v. California State Air Resources Board et al, Case No. F074003, centered around the adequacy of the economic analysis conducted by the Air Resources Board (ARB) when it adopted an amendment to a rule regulating diesel truck engines.

The California Trucking Association successfully argued that the analysis was a “rosy scenario without merit,” and that the economic analysis “merely evaluated the Amendments’ ‘benefits,’ and did not include any analysis of the Amendments’ potential ‘adverse economic impact[s]’ on affected businesses.”

The appellate court found that behavior unacceptable.

The court also rejected the agency’s willful ignorance of evidence of additional economic impacts, developed through the APA’s iterative regulatory analysis and review process.

That is, once an agency is made aware of relevant economic information—especially potentially adverse economic impacts—then it must address those impacts in good faith as it completes its final economic analysis.

The requirement that agencies conduct rigorous economic impact analyses was enacted by the Legislature in 2011. Business interests, including the California Chamber of Commerce were key supporters of the legislation and also worked closely with the Department of Finance to develop the rules by which agencies must comply with these requirements.

Ten business organizations filed a friend-of-the-court brief in the case.

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