Two Regulatory Cases On The Supreme Court's Oral Argument Calendar This Week; Both Raise Constitutional Questions

With the November election approaching and 4 of 7 Supreme Court seats up for grabs, the Court has oral arguments this week. On the calendar are a couple of interesting cases affecting businesses: Robins v. Town of Hillsborough and N.C. Board of Pharmacy v. Rules Review Commission. Both cases involve new government regulations on business. Both cases involve split COA decisions against the regulators. Both cases raise constitutional issues. Both cases are discussed below.

1. Robins v. Town of Hillsborough
(argument on October 16, 2006)

Most businesses will sympathize with Robins. He wanted to construct an asphalt plant in the Town of Hillsborough. He bought property for the facility and applied for site plan approval. At the time Robins filed his application, the zoning ordinance permitted an asphalt plant there, and in reliance on that zoning ordinance, he spent about $100,000 to comply with the ordinance and prepare for the required public hearings. The Town held several public hearings but reached no decision. A fourth hearing was scheduled, but a week before the hearing, the Town adopted a new zoning ordinance imposing an 8-month moratorium on manufacturing and processing facilities involving the use of petroleum products, including, specifically, asphalt plants. The moratorium applied to Robins's pending application. The Town then made the moratorium permanent, amending its zoning ordinance to ban such facilities within the limits of the Town. The ban applied to all pending applications, including Robins's.

Robins sued. The trial court granted summary judgment to the Town, but the COA reversed in a split decision, handing Robbins a victory. Judge Tyson wrote the majority opinion, joined by Judge John. Judge Jackson dissented.

The majority opinion had two holdings. First, on the basis of a common law "vested rights" theory, the majority held that Robins was entitled to rely on, and have his application considered on the basis of, the language of the zoning ordinance that was in effect at the time he applied for the permit. "To hold otherwise would allow compliance with regulations and permitting to become a moving target to ever changing revisions and amendments." In short, the majority essentially recognized a vested right to have a zoning ordinance remain unchanged while an application is pending. The majority thus reversed the grant of summary judgment to the Town.

Having held that Robins was entitled to have his permit application considered (grandfathered) under the zoning ordinance in effect at the time he applied for site approval, unaffected by the later ban, it is unclear why the majority went any further. But it did. The majority proceeded to address a facial challenge to the constitutionality of the Town's ban on manufacturing and processing facilities using petroleum products, a challenge under the "Law of the Land Clause." (The Law of the Land Clause, which is in Article I, Section 19 of the State's Constitution, is analogous to the federal Due Process Clause.) Ruling against the Town, the majority held that a trial is needed on the constitutionality of the ban.

The majority began its constitutional analysis by observing that due process prohibits arbitrary governmental action or action that doesn't reasonably serve a legitimate governmental objective. While this bespeaks rational basis review (where governmental action is presumed constitutional, and the burden falls on the challenger to establish the absence of a rational basis), the majority actually applied heightened scrutiny to this economic regulation. Seizing on the distinction between a zoning ordinance that imposes a total ban on lawful activity and one that imposes a more limited regulation (e.g., confining an activity to a particular location in the community), the majority concluded that the Town's ban was not entitled to a presumption of constitutionality; instead, the burden was on the Town to prove constitutionality - a burden to demonstrate a "substantial relationship" between its ban and a legitimate governmental interest. (The only support cited for this standard consisted of language from Michigan and Pennsylvania cases decided more than 30 years ago.)

Having so held, the majority remanded for a trial because, the majority concluded, a genuine issue of material fact exists as to whether "the public purpose [the Town] sought to accomplish by a total and permanent ban on asphalt plants is legitimate and whether [the Town's] decision to place a permanent ban on asphalt plants was not arbitrary and capricious." "The burden of proof," the majority held, "rests upon defendant [the Town]."

Judge Jackson's dissent contended, among other things, that had Robins received a permit he would've had a vested right, but he never received a permit, and therefore he had no vested right. And, consequently, he had no property interest protected by the Constitution.

It'll be interesting to see whether the Supreme Court embraces the majority's "vested rights" approach and its heightened scrutiny for what is, in essence, a substantive due process challenge to an economic regulation. By shifting the burden of proof to the Town to demonstrate a "substantial relationship" between its new regulation and public health, safety, or welfare, the majority essentially created a standard of intermediate scrutiny for substantive due process and equal protection challenges to exclusionary zoning laws. (This at a time when the Town of Apex is considering a ban on hazmat processing facilities after the recent well-publicized fire at an Apex hazmat facility.)

2. N.C. Board of Pharmacy v. Rules Review Commission
(argument on October 18, 2006)

This case raises questions about the manner in which agency rules become law in N.C. It concerns the constitutionality of the Rules Review Commission (RRC), a statutorily created executive branch agency whose 10 members are appointed by the General Assembly. If the Court invalidates the RRC's role, it could be one of the most significant administrative law decisions ever decided in this State.

By statute, whenever a state agency adopts a rule, the agency must submit the rule to the RRC. The RRC reviews the rule to ensure, among other things: that it's within the statutory authority delegated to the submitting agency; that it's clear and unambiguous; and that it's reasonably necessary to implement or interpret a statute. If the RRC determines that a rule doesn't meet these criteria, it must send a written objection to the agency that adopted it. The agency may revise the rule to meet the RRC's objection and resubmit a revised rule to the RRC. The agency may also seek judicial review by suing the RRC, or the agency may give up.

No rule may become effective or be included in the N.C. Administrative Code unless it has been approved by the RRC. In effect, the RRC blocks every rule it doesn't explicitly approve.

This case arose when the Pharmacy Board adopted a new rule to regulate working hours for pharmacists (the Board was concerned that a pharmacist working too many consecutive hours has an increased risk of making a filling error). The Board submitted the rule to the RRC, and the RRC objected, concluding that the rule exceeded the Board's statutory authority. The RRC declined to remove its objection and returned the rule to the Board, so the rule couldn't become law.

The Board then filed this action for judicial review. The Board sought a declaratory judgment that it does have statutory authority to adopt the rule. The Board also sought a declaratory judgment that the statutes requiring the RRC to review and approve administrative rules violate the separation-of-powers requirement in the North Carolina Constitution. See N.C. Const. Art. I, sec. 6 ("The legislative, executive, and supreme judicial powers of the State government shall be forever separate and distinct from each other.")

The COA, in a split decision, held that the Board exceeded its statutory authority in regulating working hours. Judge Steelman dissented on this question of statutory authority. None of the judges addressed the Board's constitutional challenge to the RRC's role.

On the basis of Judge Steelman's dissent, the Board appealed the statutory authority question to the Supreme Court as a matter of right. Interestingly, the Supreme Court also granted the Board's separate PDR on the constitutional question whether the statutes establishing and defining the RRC's role in administrative rulemaking process violate the separation-of-powers doctrine.

The Board contends that the RRC's role breaches the separation of powers in many respects. For example, the Board says the RRC encroaches on the judicial power because interpreting statutes and deciding the limits of an agency's statutory authority are judicial functions which the General Assembly can't confer on the RRC. The Board also argues that the RRC's power is a legislative power exercised in violation of the "bicameral passage" and "presentment" requirements that the Constitution requires to make or nullify a law. Invoking the specter of an unconstitutional "legislative veto," the Board contends the General Assembly has evaded these requirements by authorizing the RRC to nullify agency rules that otherwise would have the force of law.

The RRC is supported in this case by a vast array of amici curiae representing business and industry. If the Court were to reach the constitutional challenge (it may not) and invalidate the RRC's role, it could be one of the most significant administrative law decisions ever decided in this State.

The Court should proceed with caution. The RRC helps restrain overreaching by administrative agencies before their rules are unleashed on the public, protecting the public from rules that have no statutory authority and relieving regulated persons of the burden of challenging bad rules in court. It gives the executive branch an effective internal mechanism for quality control and uniformity with centralized review undertaken by a neutral commission. While the RRC has nullified only a small percentage of rules enacted by agencies (over the four-year period from 2000 through 2004, the RRC returned only about 1% of about 5,600 rules that agencies filed with the RRC), those statistics don't show the deterrent effect of the RRC. It's difficult to know how many additional rules might've been enacted if agencies didn't have to worry about scrutiny from the RRC.