Chapter 16. Introduction to Rulemaking

Original Authors: Tom Muck, George Beck, and Larry Bakken

Revised in 2014 and 2022 by David Schultz

Download a PDF of Chapter 16

16.1 Definition of a Rule

The Administrative Procedure Act (APA) defines a rule in broad terms as every agency statement of general applicability and future effect adopted to implement or make specific the law enforced or administered by the agency or to govern its organization or procedure.^[1] For a rule to be a valid rule, it must be properly and validly promulgated as defined by the law.^[2] This is especially the case with legislative rules which, if not properly adopted they are not valid or legally enforceable.^[3] In the case of interpretive rules, if they are not properly promulgated they may still be valid but will not carry the force of law and a court will have to decide how much deference they are due.^[4]

That rules are statements of “general applicability” means that the nature of a rule is that it consists of a standard applicable to all.^[5] Rules have thus been said to be analogous to enactments of the legislature.^[6] They can be contrasted with contested cases, which, because they generally involve the application of rules or law to specific parties, have been said to be analogous to the adjudication process of a court.^[7]

As one Minnesota court put it, “[I]t is obvious that the legislative scheme in so defining [the term ‘rule’] was to include agency activities within the general definition of ‘rule’ and then to exclude such specific activity as it deemed beneficial to the concerns of efficient government and public participation.”^[8]

Excepted from this broad definition, and consequently from the requirements of formal rulemaking, are rules governing the internal management of an agency that do not directly affect the rights of or procedures available to the public.^[9] Also excepted are several categories of rules pertaining to specific agencies or to specific programs as to which the legislature has chosen not to require formal rulemaking. Examples include rules of the commissioner of corrections governing inmates, opinions of the attorney general, occupational safety and health standards, and revenue notices and tax information bulletins of the commissioner of revenue.^[10]

Suspensions, repeals, and amendments of existing rules are themselves defined to be rules by the APA^[11] and can therefore be accomplished only by compliance with APA rulemaking procedures.

16.2 Types of Rulemaking Proceedings

There are four types of rulemaking proceedings: rulemaking without a hearing; rulemaking with a hearing; exempt rulemaking, that is rules adopted with legislative exemptions from the APA requirements; and expedited rulemaking, an abbreviated process that must be authorized by the legislature.^[12]

Rulemaking without a hearing (sometimes called noncontroversial rulemaking) is discussed in chapter 20.^[13] In rulemaking without a hearing, the agency, on notice to the public and after publication of the proposed rule and preparation of a statement of need and reasonableness supporting it, may adopt a rule without a hearing unless twenty-five members of the public request a hearing.

In rulemaking with a hearing, the agency gives notice, publishes the proposed rule, prepares a statement of need and reasonableness, and holds a more or less formal public rulemaking hearing on the record.^[14] Rulemaking with a hearing is discussed in chapter 21.

Exempt rules, discussed in chapter 21, is an expedited rulemaking method under which rules may be adopted without a hearing after publication of a notice of intent to adopt rules and expiration of a 30-day public comment period. No statement of need and reasonableness is required for exempt rules. Some exempt rules are limited in their effectiveness to two years.

Expedited rules are discussed at § 21.6. The process is essentially notice and comment rulemaking, without a hearing or a statement of need and reasonableness, but with a legal review by the office of administrative hearings. The legislature must specifically authorize the use of this process for a set of rules and it can also provide that a hearing will be held if 100 people request one.

16.3 Types of Rules

Three specific types of rules have been recognized as falling within the APA’s broad definition of a rule—legislative rules, procedural rules, and interpretative rules.^[15] The three types differ in their purpose. However, regardless of the rule type, all rules are subject to the rulemaking requirements of the APA.^[16]

Legislative rules are those the purpose of which is to make substantive law pursuant to powers delegated to the agency by the legislature.^[17] Legislative rules require specific statutory authority.^[18]

The purpose of procedural rules is to set forth the nature and requirements of formal and informal procedures relative to the administration of official agency duties to the extent that they directly affect the rights of or procedures available to the public.^[19] The most common procedural rules are those governing contested case practice before individual agencies.^[20]

Interpretative rules are not defined in the APA.^[21] Indeed, before their appearance in case law, they were never expressly mentioned in the APA. They have been described in case law as those rules the purpose of which is to make specific the law enforced or administered by the agency,^[22] for example, by making more specific the acts that the agency will deem a violation of the law.^[23] Interpretative rules must be adopted pursuant to the APA.^[24]

16.3.1 Legal Effect of Types of Rules

Substantive, procedural and interpretative rules have the force and effect of laws if adopted pursuant to the APA.^[25] If properly adopted, they should be afforded the same recognition as a statute.^[26] Rules bind not just the public but also the agency itself. An agency is bound by the rules it has adopted and may not disregard them even though their adoption was discretionary with the agency.^[27] The principle that an agency is bound by its own rules is not, however, hard-and-fast. The Minnesota Supreme Court has found that an agency has implicit power to impose reasonable standards to effectuate the purpose of the legislature even though to do so is inconsistent with rules of the agency.^[28] Commentators have observed that underlying factors of justice, prejudice to parties, and policy implications of rigid adherence to rules explain the absence of a firm rule.^[29]

16.3.2 Historical Overview of Interpretative Rules

While procedural and substantive rules have long had the effect of law, it has not always been clear that interpretative rules have had the force and effect of law.^[30] There was no mention of interpretative rules in the APA before their first appearance in dicta in the opinion of the Minnesota Supreme Court in McKee v. Likins^[31] in 1977. Thereafter, in Minnesota-Dakotas Retail Hardware Association v. State,^[32] the Minnesota Supreme Court developed the concept of interpretative rules. There it was said that interpretative rules are mere statements of agency policy and do not have the effect of law.^[33] Their weight and effect as applied to a particular fact situation were therefore to be judicially determined on a case-by-case basis.^[34] In Minnesota-Dakotas, a rule originally adopted to be a legislative rule was found instead to be a legitimate interpretative rule. The court was precluded from finding the rule valid as a legislative rule having the effect of law because of insufficient statutory rulemaking authority.^[35]

After the Minnesota-Dakotas decision, and in response to it, the legislature amended the APA to provide that all rules, whether legislative, procedural, or interpretative, have the force and effect of law.^[36] Since the amendment of the APA and the Minnesota-Dakotas decision, the appellate courts have had other opportunities to discuss interpretative rules and their legal effect, as is discussed in section 16.4.

16.3.3 Retroactivity

No distinction has emerged in Minnesota among the three types of rules in terms of whether they can be retroactive. In a case dealing with substantive rules, the Minnesota Supreme Court observed that rules can be retroactive.^[37] The court there applied the same standard to rules as is applied to statutes—no retroactive effect is presumed unless clearly and manifestly intended by the legislature.^[38] Commentators have observed that the traditional general rule is that legislative rules are prospective in nature because they make law, and interpretative rules are retroactive by nature, since they clarify law that has existed all along.^[39] Constitutional limitations, such as the prohibition against impairment of contract and the requirements of due process, may apply to restrict the retroactivity of a rule.^[40]

16.4 Agency Policymaking as Improper or Illegal Rulemaking

State agencies make policy in a variety of ways. Agency administrators make policy on a daily basis as they make informal decisions. These decisions do not usually involve matters of great public concern, but they constitute the most common form of agency policymaking. As the following section of this chapter explains, agencies also make policy in the course of contested case proceedings, which is the adjudicatory function of the agency. The adoption of new policies through a trial-type hearing procedure is probably more common at the federal level than at the state level. However, the Minnesota Public Utilities Commission frequently adopts new public policy in the course of its ratemaking proceedings, which are conducted as contested cases.

The most procedurally well-defined method for making policy is rulemaking under the APA. The adoption of permanent rules under the APA requires an agency to complete a series of steps allowing for meaningful public input into the substance of the rule being adopted. Rulemaking under the APA, however, can take a substantial amount of time and can be expensive for the agency, at least where the rule is challenged. Consequently, state agencies sometimes seek other methods of disseminating their policy determinations. Agencies must, of course, distribute written information and interpretations to their employees and other agencies and to the public in order to perform their duties properly. Most of these written statements are merely explanations or instructions and are not controversial. However, the issuance of policy statements by state agencies has been described as improper or illegal rulemaking where the appellate courts have discerned a legislative intent to adopt the policy through the APA.^[41]

16.4.1 Guidelines, Bulletins, and Policy Statements

The administrative policymaking device that has sparked both judicial and legislative examination is the issuance of a written statement describing the agency’s policy, outside and apart from rulemaking or adjudication. Such statements are often described as internal guidelines, bulletins, manuals, policy statements, directives, or instructions. The issuance of a policy statement by an agency without recourse to APA rulemaking allows the agency to retain more discretion than if it had adopted a rule for several reasons.^[42] First, the agency is not required to obtain the public input guaranteed by the APA and thus has more latitude to adopt policies of its own choosing. Second, the agency retains greater procedural flexibility by being able to implement, withdraw, or modify its policy statement without an APA proceeding of any type. Third, the agency has greater discretion in whether or not to enforce its policy in every case. However, an agency issuing a policy statement or guideline must accept the less certain effect of such a device as opposed to a duly adopted rule. While rules have the effect of law, policy statements or guidelines do not. The question of whether policy statements are entitled to any deference in a contested case or on judicial review is considered below.

The proliferation of policy statements and guidelines by certain state agencies led to the 1975 revision of the APA, placing on agencies, for the first time, detailed procedural requirements for rulemaking.^[43] The issuance of guidelines and policy statements by state agencies also has provoked critical examination by the courts regarding whether the statements constitute rules within the meaning of the APA. The Minnesota Supreme Court has characterized the issuance of written policy statements or interpretations of rules or statutes as “improper” or “illegal” rulemaking where the legislature intended the policy- making to be governed by the APA.^[44] The inquiry is of greater significance in Minnesota than other jurisdictions because interpretative rules—those that make specific the law enforced by the agency—are required to be adopted through the APA, along with substantive and procedural rules.^[45]

The beginning point for most judicial inquiries about the effect of policy statements is a consideration of whether the statement comes within the definition of a rule. As the first section of this chapter indicates, the definition of rule contained in the APA is very broad. It includes “every agency statement of general applicability and future effect . . . adopted to implement or make specific the law enforced or administered by that agency or to govern its organization or procedure.”^[46] Most policy statements or guidelines fall within this very inclusive definition. The definition does, however, contain an important exception for “rules concerning only the internal management of the agency or other agencies that do not directly affect the rights of or procedure available to the public.”^[47] The courts have found that some policy statements are simply guidelines for internal management of the agency and, as such, are statutorily excepted from the rulemaking procedure.^[48] Internal guidelines are described by the courts as those statements that are “so remote from the public as to be exempt” from the rulemaking process.^[49]

The Minnesota court of appeals found that an “internal guideline” of the commissioner of public safety that determined the length of a driver’s license revocation was within the definition of a rule. Because it had not been adopted through the APA, the guideline could not have the force of law. The court of appeals determined, however, that this only deprived the revocation period in the guideline of “its conclusive presumption of reasonableness that a formal rule would provide.” The court held that the specified revocation period was still presumptively valid but was open to greater scrutiny. The court remanded the case to the trial court for a determination of the appropriate length of the revocation.^[50] In another driver’s license case involving the department of public safety, the court of appeals decided that internal guidelines, although without the force of law, could be followed if the resulting agency action was not arbitrary or unreasonable.^[51] In a similar approach, the Iowa Supreme Court has permitted an unadopted “rule” to be considered as a “relevant factor,” but not as a valid rule with the force of law.^[52]

16.4.2 Permissible Interpretation Versus Improper Adoption

As stated in the previous section, the starting point for most judicial inquiries about the effect of policy statements, or other agency interpretations, is whether the statement comes within the definition of a rule, “every agency statement of general applicability and future effect, adopted to implement or make specific the law enforced or administered by that agency or to govern its organization or procedure.” Because interpretative rules “make specific” the law administered by agencies, they are subject to the rulemaking requirements of the APA, if not they are invalid and cannot be used as the basis for agency action.^[53]

In applying this rule, the question or test considered by the Minnesota appellate courts in cases of alleged illegal rulemaking is whether the agency policy is a permissible interpretation of a rule or statute consistent with its plain meaning, or whether it constitutes the improper adoption of a new rule. The answer to this question requires a judgment by the court about how far the agency interpretation varies from the existing rule or statute.^[54]

Generally the job of the courts is to give meaning to the effect or intent of the legislature, including when interpreting rules.^[55] If an interpretation is consistent with the plain meaning of the rule or statute interpreted, the agency action is authorized by the statute itself, and the fact that no rule was adopted does not render the interpretation invalid, although it does not have the force and effect of law.^[56] The interpretation is valid already based on the rule or statute. The court will look to the plain words of the statute in making this determination. Conversely, if the interpretation is not within the plain meaning of the statute or rule, the agency action is not authorized by the statute itself and the fact that no rule was adopted renders the interpretation invalid.^[57]

In considering whether an agency is merely interpreting a rule, the Minnesota Supreme Court also has held that where the rule is ambiguous and the interpretation advanced by the agency is a long-standing one, the agency is deemed to be interpreting its rule rather than adopting a new rule.^[58] This holding is consistent with the custom of giving judicial deference to an agency’s interpretation of its own rule where the rule is ambiguous and the interpretation is long-standing.^[59] Conversely, if an interpretation has not been consistently applied in the past, a court may cite this as an important factor and find it to be an invalid interpretative rule.^[60] In general, state agency construction of state statutes through agency rules are presumed correct, often because of the agency’s technical expertise.^[61] The Minnesota courts have devised their own rules of deference to state agency construction of state statutes.^[62] Under federal law, federal courts defer to agency construction of federal statutes when it is clear Congress intended to give the agency the authority to make rules.^[63] The basic test for deference is articulated in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.^[64] In cases where Minnesota courts are reviewing state agency construction of federal law in an area of agency expertise, the Minnesota courts appear to follow the Chevron deference rules.^[65]

16.4.2(1) Consistency with Adopted Rule or Statute as a Factor

In a number of cases, the courts have found mere interpretation consistent with the plain meaning of the rule or statute when examining an agency policy. The Minnesota Supreme Court examined a department of public welfare (now the department of human services) policy bulletin that directed counties to consider a recipient’s income tax refund as income available to meet needs. A consequence of this directive would be a reduction in the recipient’s welfare grant. The court determined that the existing substantive federal law already was clear on this point and that the policy bulletin “constitutes merely a restatement of existing welfare policy and a directive concerning internal management requiring notification by county welfare agencies to welfare recipients of the existing policy with respect to income tax refunds.”^[66]

An allegation of improper rulemaking was also raised in litigation involving the St. Paul cable television franchise, where the Minnesota Supreme Court considered the cable communication board’s interpretation of its rule requiring a contested case when an application for a cable franchise is “substantially contested.” The board had employed a three-part test to determine if an application was substantially contested: first, whether the allegations were within the board’s jurisdiction; second, whether each allegation was material to the disposition; and third, whether the board already had sufficient evidence to resolve each allegation. The court held that the board’s interpretation was consistent with the plain meaning of the rule and did not constitute improper rulemaking.^[67] Similarly, where the department of health interpreted a rule requiring “practical plumbing experience” to mean actual experience physically installing plumbing systems, the court simply found that the agency’s interpretation of its rule was “consistent” with the rule and its authorizing statute.^[68] In another department of public welfare case, the supreme court found that the agency’s interpretation of its rule was “reasonable” in light of the statutory directive and the proper and efficient operation of the agency program. Even though the interpretation was different from the literal wording of the rule, the court examined the overall statutory scheme in finding that no illegal rulemaking had occurred.^[69]

Similarly, the supreme court found that the DHS’s interpretation of the “rate limitations” language reflected the plain meaning of the rule, as well as the plain meaning of the statute the rule was adopted to implement and was not improper rulemaking. In this case, no additional rulemaking was required to change the words of a rule into mathematical steps. The court held that the mathematical ratio used by the DHS to adjust property-related costs under temporary Rule 50 did not need to be adopted under the Minnesota Administrative Procedure Act to be valid.^[70]

In Application of Peoples Natural Gas Co.,^[71] the supreme court considered the effect of a policy statement issued by the Public Utilities Commission, which interpreted two statutes. The court, in finding that the MPUC correctly interpreted and applied the statutory provisions in this case, stated:

That MPUC may have articulated its construction of a statute in a rule improperly promulgated does not render a correct interpretation incorrect. (citation omitted) While slavish adherence to a defective rule might well be troublesome, MPUC recognizes that, unlike a properly promulgated rule, its policy statement does not have the force and effect of law. The statement expressly noted that in each case the policy set out in the statement will merely provide the starting point for deliberation, “but the final decision will depend upon the facts of the case.”^[72]

The Minnesota Supreme Court clarified this language in the subsequent cases of St. Otto’s Home v. Minnesota Department of Human Services, and In re Application of Crown CoCo, Inc.^[73] In St. Otto’s Home the court observed that Peoples Natural Gas should not be read to stand for the principle that if the agency’s interpretation of a statute or rule is correct, it is irrelevant that the rule was improperly adopted.^[74] In St. Otto’s Home, the court stated that it normally invalidates an agency’s action when the agency fails to follow proper rulemaking procedures. It proceeded to reverse a medical assistance rate decision of the human services department because the commissioner’s interpretation of a rule constituted unpromulgated rulemaking at variance with the Administrative Procedure Act.^[75] The court distinguished the two cases by stating that in Peoples Natural Gas the PUC issued its policy statement a year in advance and recognized that it did not have the effect of law while DHS’s action was done without notice and had the effect of law because it created new mandatory requirements.^[76]

16.4.2(2) Inconsistency with Adopted Rule or Statute as a Factor

Where the agency’s policy is inconsistent with its adopted rule, the courts have often invalidated that policy or interpretation. The Minnesota Supreme Court invalidated a department of public welfare decision to reduce developmental achievement center services for mentally retarded persons from five days to three days per week. The rule in question required the services to be provided to all persons who needed them in accordance with an individual service plan. Although the plaintiffs clearly needed services five days a week, the department decided to reduce the services to three days a week because of fiscal restrictions. The court held that the reduction violated the rule and that any change in the implementation of the rule had to be channeled through the rulemaking process.^[77] The court in another case also invalidated the department of public welfare’s practice of computing Medicaid cost change implementation on a per diem basis where the department’s rule specified that the patient day figure to be used was that of the prior fiscal year but did not mention taking into account current occupancy rates.^[78] In another approach to a similar situation, the supreme court found that a department of public welfare rule “did not prohibit” a nursing home from receiving payments for nonmedical assistance covered items and services and that the agency policy to the contrary could not stand.^[79] The supreme court has also found that a 1992 DHS Memorandum written to its rate-setting staff regarding the “not-to-exceed-claims-paid policy,” as applied, did not reflect a proper interpretation of Rule 50’s related organization rule and was inconsistent with DHS’s “not-to-exceed-premiums policy.” Accordingly, the court concluded that the Memorandum was an unpromulgated rule that was not entitled to deference.^[80]

A determination of illegal rulemaking does not always weigh against an agency. The court of appeals stated that the interpretation of the nursing home welfare rate rule urged by the nursing home would constitute improper promulgation of a new rule if adopted by the department of public welfare.^[81]

The Minnesota Supreme Court found that the commissioner of public safety’s practice of requiring consent from the owner of a registered brand of intoxicating liquor before that brand could be imported by an out-of-state wholesaler was, in effect, a rule that interpreted the statute. The court observed that the policy could not be found to be a “directive” that merely interpreted a statute, since there was no existing law on the point. The court found that the practice was invalid and stated that the commissioner could not continue enforcing the policy without adopting it under the APA.^[82] Similarly, the supreme court found that the Minnesota Public Utilities Commission had no authority to award an intervenor compensation based on a “statement of policy” it had issued in rate cases. Because the policy had not been adopted through the APA, it had no force of law.^[83] The court of appeals has determined that the long-standing unwritten practice of the transportation regulation board and its predecessors requiring motor carriers to intervene as objectors rather than appearing as witnesses for another objector was an unadopted rule and was therefore not entitled to any deference. The court directed the board to consider the excluded testimony of witnesses who had withdrawn as objectors.^[84]

Other state and federal courts have arrived at similar dispositions. In Michigan, a policy directive of the bureau of correctional facilities allowed a prisoner to transfer only one duffel bag and one footlocker to another prison. Because the policy was not adopted pursuant to the Michigan APA, the court found it to be “without legal authority” and allowed a prisoner to transfer extra briefcases of legal materials with him.^[85] Some case law at the federal level also has assigned no weight to policy statements that have not been published in accordance with the federal APA.^[86] The United States Supreme Court has determined that an interpretative rule in the bureau of Indian affairs manual was ineffective because it limited eligibility for general assistance benefits and had to be accomplished through a legislative rule.^[87]

Professor Auerbach and Professor Davis have criticized judicial dispositions that result in no weight being given to agency policy statements. Professor Auerbach has urged that a general statement of policy by an agency should be entitled to weight on judicial review even though it would not be binding on the court.^[88] Professor Davis states that many nonlegislative “rules” have an actual effect even though not adopted through formal APA rulemaking.^[89] It is generally true that in the federal system, an agency can issue a policy statement that has no binding effect on a court but that may be accorded some weight. The District of Columbia Court of Appeals observed that a general statement of policy was neither a rule nor a precedent but “merely an announcement to the public of the policy which the agency hopes to implement in future rulemakings or adjudications.” The court further stated that the policy was entitled to less deference than a rule or order but that the expertise and experience of the agency should not be ignored.^[90] Additionally, Minnesota courts will give substantial deference to agency fact-finding.^[91]

16.4.2(3) Need for Public Input and Similarity to Other Rule as Factors

Another element that commonly appears in appellate decisions invalidating agency policies is a determination by the court that the policy advanced demands full public input and participation before it is implemented. This principle was strongly set forth by the Minnesota Supreme Court in a 1975 case in which the department of health cited a policy or practice as grounds for denying a requested review of plans for a new nursing home. The department had a policy of not reviewing new nursing home construction plans unless other nursing facilities under the same ownership were free of deficiencies for six months and the metropolitan health board had reviewed the plans for need. While it noted that the department had a duty to use existing laws and regulations in carrying out its duties, the court stated:

We feel compelled further to point out that any regulations of the Department of Health referred to by the department in any proceedings are subject to the Administrative Procedure Act, Minn. [Stat. §§] 15.01, to 15.41, and must be promulgated in accordance with that act. A person dealing with the department is entitled to proper notice of what regulations are being promulgated and are applicable to him. The purpose of the Administrative Procedure Act is to ensure that we have a government of law and not of men. Under that act, administrative officials are not permitted to act on mere whim, nor their own impulse, however well-intentioned they might be, but must follow due process in their official acts and in the promulgation of rules defining their operations.^[92]

The theme of public participation was also involved in a case in which the Minnesota Supreme Court considered a policy bulletin that allowed reimbursement for abortions under the medical assistance program. The court found the policy to be invalid because it was within the definition of a rule and “involved a question of social and political policy so important to the public as a whole as to require that the rulemaking process of the APA be followed.”^[93] Similarly, the Minnesota court of appeals has described an aid to families with dependent children (AFDC) manual setting out welfare guidelines as an adoption of “far-reaching interpretative rules without allowing public input and debate through the procedures provided in the Administrative Procedure Act.”^[94] Underlying the supreme court’s concern that public input is an important element of policymaking is the view that proper notice of new policies or changes in policy is an essential element of due process.^[95]

Another factor of significance to the appellate courts in identifying illegal rulemaking is whether the policy asserted has, in fact, been adopted elsewhere in rule or statute. When the policy advanced by the agency appears in a similar rule administered by the agency, the supreme court has found this to be evidence that it was not intended to be included in the rule under consideration.^[96] Similarly, where the policy asserted by the agency appears in a statute of another state but is absent in a similar statute in Minnesota, the appellate courts have found this to be an indication of an intent not to have such a policy enforced in Minnesota.^[97] Another significant factor is whether or not the authorizing legislation directs the agency in a mandatory fashion to adopt rules. If the statute says the agency head must adopt rules to implement a program, then the establishment of elements of the program outside of rulemaking will not be permitted.^[98]

16.4.3 Conclusion

A state agency advancing an important written policy outside of rulemaking or adjudication, or a private party advocating a particular interpretation of a rule or statute apart from its plain meaning, will face close judicial scrutiny if challenged. An agency must establish that its policy is merely an internal guideline or is consistent with existing law, or is a longstanding administrative interpretation, in order to prevail. Matters of obvious public concern and debate seem likely to be deemed rules requiring APA proceedings. Substantial reinterpretations of rules or statutes that result in implementation of a policy in conflict to some degree with the rule or statute will likely be prohibited. A finding of illegal rulemaking may result in no judicial deference being given to the policy and in a reversal of the agency decision. In some cases, however, the policy may nonetheless be considered as a factor, but without the force of law.

16.5 Rulemaking or Policymaking by Adjudication

16.5.1 Introduction

Formal agency decision-making action usually can be classified as either adjudicatory or rulemaking in nature. Since the procedural rights and the agency obligations differ—depending on whether the action is properly adjudicatory or rulemaking—an important consideration is to determine which process is more appropriate. In most cases, adjudication is a determination of individual rights or duties.^[99] Therefore, the adjudicatory action or the decision in a contested case will be similar to an adversarial process. Adjudication will focus on individuals and questions relating to existing or past facts.^[100] In adjudicatory action by an agency, the agency normally applies existing law or policy to the facts of a particular case with an emphasis on the past.^[101] Rulemaking or quasi-legislative agency action is, on the other hand, the determination of general regulation regarding the future conduct of persons, groups, or classes.^[102]

The absence of a stare decisis rule, which would require the agency to follow previous adjudicatory decisions, permits agencies to establish new policy easily.^[103] Also, the use of adjudication for rulemaking is an advantage to agencies because administrative adjudication may allow the agency to limit external lobbying in regard to proposed rulemaking or to preclude ex parte contacts by special interest groups with agency personnel.^[104] Agencies are often not compelled to provide motives for a specific case decision even though the adjudicatory decision may reflect significant agency policy.

The primary problem that occurs when an agency uses adjudication rather than rulemaking in establishing new policies is the retroactive law making caused by the agency’s adjudicatory decision. In most cases, when an agency decision is made, it guides the future conduct of the agency. However, the retroactive effect of law making through adjudication may cause unfairness to the parties involved in the adjudication. Courts occasionally reverse previous decisions (and such reversal may impose a certain degree of unfairness on the parties). But the retroactive effect of rulemaking through adjudication is particularly troublesome when agencies could, through the use of general rulemaking procedures, give notice and opportunity for comment to the interested parties in advance.

16.5.2 The Federal Doctrine

The United States Supreme Court considered this issue of unfairness and retroactive lawmaking and has concluded in several cases that agencies can legally choose to use adjudication in establishing new policies rather than creating those policies through the rulemaking process. In the first U.S. Supreme Court case dealing with this issue,^[105] the Securities Exchange Commission (SEC) was not barred from establishing a new principle through the use of adjudication even though the agency had the power to announce a new rule in advance through the normal rulemaking process. The SEC had refused to approve a corporation’s reorganization that would allow a profit to its directors who had purchased the corporation’s stock through inside knowledge even though the SEC had not previously objected to such inside dealings. The majority of the court believed it was necessary to approve the agency action in order to ensure that future agency discretion would not be limited or hampered by restricting the use of adjudication.

However, according to Judge Friendly, the Supreme Court indicated in clear language that . . . “it was normally desirable for agencies to lay down new principles through rulemaking rather than adjudication because the administrative process allows for new laws to be created through normal agency rulemaking powers rather than the adjudicatory methods most often used by courts.”^[106] From Judge Friendly’s viewpoint, the Supreme Court believed quasi-legislative rulemaking was the more appropriate approach for agencies to use in establishing rules to be applied in the future.

The United States Supreme Court affirmed its Chenery decision in 1969 when it decided NLRB v. Wyman-Gordon Co.^[107] In that case, the National Labor Relations Board attempted to enforce a decision it had made in a previous case. In the prior case (Excelsior Underwear, Inc.),^[108] the board established a new rule requiring employers to furnish lists of employees to unions involved in elections. The board did not apply the new rule to the Excelsior situation, but it announced that the new rule would apply in the future. In the lower court opinion of Wyman-Gordon, the court held that the new rule created by the NLRB should have been established through the legislative rulemaking process. The lower court, however, was reversed by the United States Supreme Court, which refused to hold that the agency did not have power to establish new rules through the particular adjudicatory process the agency had used. The Supreme Court’s decision in Wyman-Gordon was questionable, since the Excelsior rule was not really established in an adjudicatory setting, nor was it developed as a rule under the APA. Under the Wyman-Gordon plurality opinion, the Excelsior rule was void; however, Wyman-Gordon held that since the employer was directed to submit a list of employees as part of the lower court decision, Excelsior would be upheld as an adjudicatory proceeding. After Wyman-Gordon, agencies had even less incentive to establish rules through their rulemaking process, although federal courts continue to permit agencies to choose formal rule making or ad hoc adjudication as alternative means to articulate rules.^[109]

Five years later, the United State Supreme Court again reversed a lower court decision in which the lower court had refused to enforce an NLRB order that significantly changed the definition of types of workers protected by the National Labor Relations Act.^[110] In the Supreme Court’s holding, rulemaking was not necessary in this situation, and the NLRB was not precluded from announcing the new definition in this adjudicative proceeding. According to the Court, the choice between rulemaking and adjudication was entirely within the agency’s discretion. The Supreme Court implied that if serious or substantial consequences resulted from reliance on the agency’s past decision, or if reliance on the agency pronouncements was substantial, or fines or damages were involved, then a different decision might be reached; however, until such circumstances arise, the agency may decide to proceed in developing its rules or policies in a case-by-case manner rather than through a generalized rulemaking process.

According to the Ninth Circuit in a recent case, the Federal Trade Commission (FTC) could not determine, in a cease-and-desist proceeding, that a particular credit practice generally used in the auto industry was unlawful.^[111] This conclusion by the court rejected the idea that Chenery permitted agencies to make general law by adjudication. In this case, the court stressed that policy should be adopted through the FTC’s rulemaking process. The court held that the FTC should not utilize its adjudication process to alter an existing rule because the rule in question had previous widespread application and because changing the rule through adjudication was unfair.

16.5.3 The Minnesota Approach

According to the Minnesota APA, an agency is any state officer, board, commission, bureau, division, department, or tribunal—other than a judicial branch court and the tax court—having a statewide jurisdiction and authorized by law to make rules or to adjudicate contested cases.^[112] An agency in Minnesota affects the rights of persons through both adjudication and rulemaking. Agency policy may be formulated through general rules developed under Minnesota APA rulemaking procedures or in a case-by-case determination following APA adjudication procedures.^[113] Under Minnesota case law, an agency may exercise its discretion when deciding which method is appropriate in a particular situation in formulating agency policy.^[114] And a failure to adopt rules, even when directed to do so by the legislature, will not necessarily bar later action by the agency unless there is some specific indication that a bar was intended.^[115]

The discretion is not without limits, however.^[116] Minnesota courts have addressed the question of whether the Minnesota Public Utilities Commission can exercise discretion in deciding whether administrative policy should be determined or formulated through the rulemaking process or on a case-by-case basis.^[117] According to the argument presented in Northwestern Bell, the public utilities commission could not adopt a unique accounting rule that might produce desired information without first going through Minnesota APA mandated rule procedures. The court concluded that administrative policy may be formulated either through rulemaking or by a case-by-case determination.

An agency’s discretion to make policy through adjudication was limited somewhat by a 1995 statutory addition which states:

Upon request of any person, and as soon as feasible and to the extent practicable, each agency shall adopt rules to supersede those principles of law or policy lawfully declared by the agency as the basis for its decisions in particular cases it intends to rely on as precedents in future cases. This paragraph does not apply to the Public Utilities Commission.^[118]

This provision is based upon § 2-104 (4) of the Model State Administrative Procedure Act. But the Minnesota statute adds “upon the request of any person” to the model language.^[119]

Administrative agencies are, however, limited in the exercise of their power by statutes created in the Minnesota Legislature. The authority and duties delegated to the agency are created by the legislature to provide or direct administrative action, and although administrative agencies may make rules, agencies may not change substantive law, adopt rules that would change existing or current law, or make new law.^[120]

16.6 Administrative Challenge to Improper Rulemaking

Prior to July 1, 2001, a challenge to an unadopted rule, outside of a contested case proceeding, had to be brought in court. As of that date, however, the APA was amended to provide an administrative process to challenge the enforcement of policies that should be adopted as rules.^[121] Any person may file a petition with the office of administrative hearings seeking an order from an administrative law judge determining that an agency is enforcing or attempting to enforce a policy as though it were a duly adopted rule. The agency must respond to the petition within 10 days and oral argument may be ordered by the ALJ. The ALJ is authorized to issue an order directing the agency to cease enforcement of the unadopted rule and that order is published in the State Register. The costs of the proceeding are borne by the agency unless the ALJ rules in favor of the agency, in which case costs may be assessed against a petitioner under certain circumstances.