A Sweeping Victory in Army Corps v. Hawkes Has Larger Implications for Small Business

But this fiercely independent business did not roll over without a fight. They had good reason to doubt Army Corps’ assertion of jurisdiction over the land because it had no clear connection to traditionally navigable waters. The Corps attempted to draw a connection to justify its assertion of regulatory authority, but the Company pointed out that the Corps officers had made crucial errors in their analysis. Nonetheless the Corps held firm to its position. The agency issued a second “draft jurisdictional determination” concluding that the property was subject to federal wetlands regulation because it was tenuously connected to the Red River (only 120 miles away). 

Army Corps officials repeatedly pressed the company to give-up on the hope of ever using the land, and suggested that it should be voluntarily set aside for conservation. When the company explained that acquisition and use of this property was crucial for its continued peat mining operations, one Army Corp official had the gall to suggest that Hawkes employees should begin looking for other employment opportunities. The clear implication was that there is no way that the company was ever going to be allowed to move forward. 

Ultimately Army Corp issued a final “jurisdictional determination,” which stated definitively that the agency had concluded the property to be subject to regulation under the Clean Water Act. But when the Hawkes Company wanted an opportunity to contest the agency’s assertion of jurisdiction in court, they were told that they had no such right. Army Corps insisted that they could only seek judicial review through indirect means. Of course, this was nothing more than a ploy to avoid fighting on the merits. 

Army Corps argued that the company had two unpalatable—and we argued constitutionally repugnant—options. First, the Corps asserted that they could obtain judicial review by applying for a federal permit—which, as discussed above, would be prohibitively expensive. But such a rule would be absurd because it would require landowners to pursue costly permits that they don’t think they need. For that matter, if the agency is wrong in its assertion that the property contains jurisdictional waters, then it has no authority to insist upon a landowner pursuing a permit. 

In the alternative, Army Corps argued that the owner could proceed without a permit and wait to see if federal regulators will initiate an enforcement action under the Clean Water Act—at which point they would be allowed to contest an assertion of wetlands jurisdiction. But, no reasonable person would risk an enforcement action, especially when federal regulators have already determined that the subject property contains regulated wetlands. To be sure, this would be ruinous. If the agency should decide to drop the hammer, the company would face liabilities of up to $50,000 per day for a knowing violation of the Act, which is significantly higher than the $37,500 per day in penalties that the agencies may assess against landowners for negligent violations—though this too is enough to ruin most landowners. 

Rather than fighting on the merits, the agency was seeking to avoid direct judicial review—likely because it knew that its assertion of jurisdiction was questionable at best. But these have been standard operating procedures for years at Army Corps. And for that matter, the Environmental Protection Agency was dinged for taking a similar position previously in a unanimous 9-0 decision in Sackett v. EPA. 

As NFIB Legal Center argued in an amicus brief, Army Corps’ tactic was designed to immunize the agency from the prospect of ever having to defend its actions in court. Army Corps knows full well the exorbitant costs of pursuing Clean Water Act permits. So its insistent position that a landowner must pursue a dead-end permit before having a chance to go to Court amounts to a major financial burden on the right to have one’s case heard in court. 

And when one thinks about the major costs associated with litigating a case against the federal government, the prospect of fighting for one’s rights seems all the more daunting—especially given that the federal government has a seemingly bottomless litigation budget. As we argued, Army Corps knows that few landowners would have the resources to pursue a permit—let alone to litigate a lawsuit challenging the agencies assertion of jurisdiction. But all of that was part of the plan to coerce landowners into treating their properties as nature preserves, right? 

In an 8-0 decision, the Supreme Court opened the courthouse doors for landowners wishing to contest Army Corps’ assertion of regulatory jurisdiction under the Clean Water Act. The Court ruled that a “final jurisdictional determination” constitutes “final agency action”, which is presumptively subject to judicial review under the Administrative Procedures Act. And importantly, the Court determined that the issuance of a jurisdictional determination had legal consequences for landowners—especially in light of the fact that, with issuance of such a determination, landowners are exposed to heightened penalties if they should proceed with development plans without federally issued permits.  For these reasons the court ruled that landowners have an unqualified right to challenge Army Corps regulatory authority in court without further delay.

This may be the most significant win of the year for small business in the Supreme Court. For one, the opinion included commentary—notably from Justice Kennedy—further highlighting grave concerns over the vague scope of Clean Water Act jurisdiction and associated due process concerns. Accordingly, the decision may portend the eventual demise of the controversial Waters of the United States (WOTUS) Rule through which Army Corps and the Environmental Protection Agency are purporting to redefine their regulatory powers over private property. We’ve called the WOTUS Rule a regulatory land-grab in the past, and the decision in Army Corps of Engineers v. Hawkes gives renewed hope that a majority on the Court will ultimately strike the rule down. 

But the most direct implication is that the decision made clear the standard for determining when an agency’s assertion of regulatory authority is subject to judicial review—which is an issue that comes up time-and-again across all fields of federal regulation (not just in the context of the Clean Water Act). For example, one case that comes to mind (incidentally decided by Judge Merrick Garland) is Holistic Candlers and Consumers Assoc. v. FDA, 664 F.3d 940 (2012), wherein manufacturers and distributors of candles used to remove earwax sought to contest the authority of the Food and Drug Administration to regulate their product as an allegedly misbranded medical device. Judge Garland sided with FDA, ruling that the agency had not come to a final decision subject to judicial review, despite the fact that the agency had sent out letters warning that the agency considered their products to be in violation of federal law. But that conclusion seems to stand in tension with the Supreme Court’s decision this week in Hawkes because these FDA letters implicitly warned that unless the manufacturers and distributors took immediate corrective action they would face the threat of an enforcement action. 

Hawkes would seem to provide strong authority for the proposition that such a warning letter constitutes final agency action—at least if the agency has given indication that it will not reconsider its position. And since Hawkes stressed that final agency action is presumptively subject to judicial review, businesses faced with a letter along these lines are in a much better position today to insist upon their right to judicial review. A key question in any such case may be whether the business faces the risk of heightened penalties if it should choose to ignore a cease and desist letter; however, one would expect, in most regulatory regimes, that an agency is bestowed with discretion to impose heightened penalties for “knowing violations”—as is the case with the Clean Water Act. Accordingly,  the decision in Hawkes may have opened the court house doors not only for landowners seeking to contest assertions of regulation against Army Corps, but for businesses of all stripes seeking to challenge federal assertions of regulatory power under other regimes, enforced by other agencies. 

*Congratulations to Reed Hopper and his team at Pacific Legal Foundation on their win in Hawkes. NFIB Legal Center was pleased to have had the opportunity to offer amicus support. This was a crucial victory for the small business community.