Fifth Circuit Vacates FTC's CARS Rule: Reinforcing Procedural Requirements in Trade Regulation Rulemaking: 5th Cir.

Introduction

In the landmark case of National Automobile Dealers Association; Texas Automobile Dealers Association v. Federal Trade Commission, decided on January 27, 2025, the United States Court of Appeals for the Fifth Circuit addressed significant procedural challenges in the Federal Trade Commission's (FTC) rulemaking process. The petitioners, representing major automobile dealers' associations, contended that the FTC's Combating Auto Retail Scams Trade Regulation Rule (CARS Rule) should be vacated for failing to adhere to its own procedural regulations. This case underscores the critical importance of procedural compliance in administrative law, particularly concerning the FTC's authority to regulate trade practices within the automotive industry.

Summary of the Judgment

The Fifth Circuit Court of Appeals granted the petition for review filed by the National Automobile Dealers Association (NADA) and the Texas Automobile Dealers Association, thereby vacating the FTC's CARS Rule. The primary grounds for this decision were the FTC's failure to issue an Advance Notice of Proposed Rulemaking (ANPRM), a procedural step mandated by its own regulations under Subpart B of 16 C.F.R. § 1.7. The court found that the substantive authority for the CARS Rule was derived from § 18(a)(1)(B) of the FTC Act, which necessitates compliance with Subpart B procedures, including the issuance of an ANPRM. Consequently, the lack of an ANPRM was deemed a violation of the FTC's procedural requirements, rendering the CARS Rule invalid.

Analysis

Precedents Cited

The court extensively referenced several pivotal cases to elucidate its reasoning:

United States ex rel. ACCARDI v. SHAUGHNESSY, 347 U.S. 260 (1954): Affirmed that agencies must adhere to their own regulations.
CHEVRON OIL CO. v. ANDRUS, 588 F.2d 1383 (5th Cir. 1979): Established the Chevron deference, where courts defer to agency interpretations of ambiguous statutes.
AUER v. ROBBINS, 519 U.S. 452 (1997) and Kisor v. Wilkie, 588 U.S. 558 (2019): Addressed the deference owed to agencies' interpretations of their own regulations.
United States v. Johnson, 632 F.3d 912 (5th Cir. 2011): Discussed the harmless error rule under the Administrative Procedure Act (APA).
Prometheus Radio Project, FCC v. Prometheus Radio Project, 592 U.S. 414 (2021): Highlighted the standard of reasonableness in agency rulemaking.

These precedents collectively emphasize the necessity for agencies to follow their procedural mandates strictly and the limited circumstances under which courts will defer to agency interpretations.

Legal Reasoning

The court's legal analysis centered on the statutory authority under which the FTC promulgated the CARS Rule. While the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 provided the FTC with expanded authority to regulate motor vehicle dealers, the court determined that this authority did not supersede the procedural requirements embedded in § 18(a)(1)(B) of the FTC Act. Specifically:

Substantive Authority: The court concluded that the FTC's authority to issue trade regulation rules under § 18(a)(1)(B) remained intact, thereby mandating adherence to Subpart B procedures.
Procedural Compliance: Subpart B of the FTC's internal regulations explicitly requires an ANPRM before any trade regulation rule proceeding. The FTC's failure to issue an ANPRM before promulgating the CARS Rule constituted a violation of these procedural norms.
Agency Interpretation: The FTC argued that the Dodd-Frank Act allowed it to bypass the ANPRM requirement. However, the court found that the Dodd-Frank Act merely provided an option rather than a mandate to deviate from Subpart B procedures. Additionally, the legislative history did not support the FTC's expansive interpretation of its authority under Dodd-Frank.
Deference Standards: Invoking Auer and Kisor, the FTC sought deference for its interpretation of its procedures. The court, however, identified no genuine ambiguity in the regulations, thereby rejecting the application of Chevron deference in this context.
Harmless Error Doctrine: The FTC contended that the procedural oversight was harmless, drawing parallels to cases like Johnson. The court distinguished the present case by highlighting the substantive and procedural complexities of the CARS Rule, thereby finding that the lack of an ANPRM likely influenced the rule's substance and outcomes.

Ultimately, the court emphasized the primacy of procedural adherence in rulemaking, particularly when agencies are vested with significant regulatory authority.

Impact

This judgment has far-reaching implications for administrative law and regulatory practices:

Stricter Procedural Adherence: Agencies, including the FTC, must rigorously comply with their own procedural regulations when promulgating rules, especially in areas with substantial regulatory impact.
Clarification of Statutory Authority: The decision reinforces that legislative grants of authority do not inherently nullify existing procedural requirements unless explicitly stated.
Future Rulemakings: Regulatory agencies may face increased scrutiny to ensure that all procedural steps are meticulously followed, potentially leading to more comprehensive notice-and-comment periods.
Judicial Oversight: Courts may become more active in reviewing agency procedures, ensuring that agencies do not bypass their internal requirements.
Automotive Industry Regulation: The vacating of the CARS Rule may lead to delays in implementing consumer-protective measures within the auto sales industry, pending the FTC's adherence to procedural norms.

Overall, the judgment underscores the judiciary's role in maintaining the balance between regulatory agency authority and procedural fairness.

Complex Concepts Simplified

To enhance understanding, several complex legal concepts from the judgment are clarified below:

Advance Notice of Proposed Rulemaking (ANPRM)

An ANPRM is a preliminary step in the rulemaking process where an agency publicly announces its intention to propose new regulations. It typically includes a brief description of the issues under consideration and solicits feedback from stakeholders before drafting the formal Notice of Proposed Rulemaking (NPRM). The purpose is to gather input and identify potential alternatives early in the process.

Administrative Procedure Act (APA)

The APA governs the process by which federal agencies develop and issue regulations. It ensures transparency, public participation, and accountability in regulatory actions. Under the APA, agencies must provide notice of proposed rules, allow for public comment, and adhere to specific procedural standards to ensure that regulations are not arbitrary or capricious.

Arbitrary and Capricious Standard

This legal standard, derived from the APA, assesses whether an agency's decision was based on a rational connection between the facts found and the choice made. A rule is considered arbitrary and capricious if it lacks a clear basis or if the agency failed to consider relevant factors. Courts use this standard to evaluate the legitimacy of agency actions.

Chevron Deference

Originating from Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., this principle dictates that courts defer to an agency's interpretation of an ambiguous statute that the agency is responsible for enforcing, as long as the interpretation is reasonable.

Subpart B and Subpart C Procedures

These refer to specific sections within the FTC's internal regulations that outline different procedural pathways for rulemaking:

Subpart B: Governs trade regulation rules under § 18(a)(1)(B) of the FTC Act, requiring an ANPRM before any trade regulation rule proceeding.
Subpart C: Applies to rulemaking under authorities other than § 18(a)(1)(B), not mandating an ANPRM.

Conclusion

The Fifth Circuit's decision to vacate the FTC's CARS Rule serves as a pivotal reminder of the paramount importance of procedural compliance in administrative law. By enforcing the requirement of an ANPRM, the court reinforced the necessity for regulatory agencies to adhere strictly to their internal procedural frameworks. This judgment not only impacts the FTC's approach to future rulemaking but also sets a precedent that underscores judicial vigilance in overseeing agency actions. As regulatory landscapes evolve, this case exemplifies the delicate balance between empowering agencies to regulate effectively and ensuring that such regulation is conducted with due process and transparency.

Fifth Circuit Vacates FTC's CARS Rule: Reinforcing Procedural Requirements in Trade Regulation Rulemaking