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Finding that a June decision by the U.S. Supreme Court has “dramatically altered” the way courts must analyze the validity of regulations issued by federal agencies, a federal judge has reversed herself and upheld a proposed regulation by the Equal Employment Opportunity Commission that would allow employers to reduce health care benefits for retirees as soon as they become eligible for Medicare. In Tuesday’s 41-page decision in AARP v. EEOC, U.S. District Judge Anita B. Brody vacated a decision she handed down in March in which she struck down the proposed regulation on the grounds that it directly conflicted with a 2000 decision by the 3rd U.S. Circuit Court of Appeals that explicitly barred such a practice. The EEOC had appealed Brody’s decision but returned to her court in June just two days after the U.S. Supreme Court handed down its decision in National Cable and Telecommunications Association v. Brand X Internet Services. Brody quickly agreed to entertain a motion for reconsideration in light of Brand X, and the 3rd U.S. Circuit Court of Appeals issued an order that stayed the appeal. In her March ruling, Brody concluded that the EEOC regulation was not entitled to “deference” under the Supreme Court’s 1984 decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council because it directly conflicted with the 3rd Circuit’s decision in Erie County Retiree Association v. County of Erie. In Erie County, the 3rd Circuit held that allowing employers to give retirees who are 65 or older health benefits that are inferior to the health benefits given to younger retirees violates the Age Discrimination in Employment Act. Ironically, the EEOC had participated in the Erie County case as an amicus and urged the 3rd Circuit to rule the way it did. But after the decision was announced and the EEOC began to enforce it, the commission said it learned that the ruling was having the “unintended consequence” of discouraging employers from providing any retiree health benefits — which employers are not required by law to provide — so as not to run afoul of the ADEA. That concern led the EEOC to propose a regulation that would create an exemption to allow employers, without restriction, to reduce or terminate retiree health benefits when the retiree reaches age 65. But before the rule was published, the AARP and four of its members filed suit under the Administrative Procedure Act. Attorneys Stephen G. Console of Philadelphia, along with Christopher G. Mackaronis and Michael J. Schrier of Bell Boyd & Lloyd in Washington and in-house AARP attorney Laurie McCann, argued that the EEOC had no power to propose a regulation that directly conflicts with a statute and an appellate court’s ruling. Although those arguments proved persuasive in March, Brody has now concluded that the Supreme Court’s decision in Brand X “cast grave doubts upon the basis for my ruling.” In Brand X, the justices were forced to decide whether the Federal Communications Commission had properly decided whether cable modem service should be regulated as a voice telephone service — called a telecommunications service under Title II of the 1934 Communications Act, as amended by the 1996 Telecommunications Act — or an information service. Reversing a decision by the 9th Circuit, the justices ruled in a 6-3 decision that the FCC’s conclusion that broadband cable modem companies are exempt from mandatory common-carrier regulation “is a lawful construction of the Communications Act under Chevron and the Administrative Procedure Act.” Specifically, the Brand X majority concluded that the 9th Circuit had erred by relying on one of its own rulings and concluding that its prior interpretation of the statute foreclosed a later, contrary construction by an administrative agency. Now Brody has concluded that the Brand X decision “altered the underpinnings” of her March ruling. In Brand X, Brody found, the justices “clarified the Chevron standard,” and held that a federal agency’s interpretation of a statute is entitled to deference — even if it conflicts with a judicial precedent — unless that precedent held that the statute “unambiguously forecloses the agency’s interpretation.” “Put differently,” Brody wrote, “ Brand X states that the only court decision that forecloses a later, contrary interpretation of a statute by an agency is a decision that determines the only permissible reading of the statute, not merely the best of several alternatives.” Brody found that the 9th Circuit’s Brand X decision — which the Supreme Court reversed — was “in many ways parallel to my own decision.” Just as the 9th Circuit had relied on the controlling effect of one of its own precedents in striking down the FCC regulation, Brody found that she, too, had relied on the controlling effect of a 3rd Circuit decision. But the justices’ decision in Brand X, she said, invalidates that approach. “ Brand X did not merely command the lower courts to apply Chevron rather than their own circuit’s precedents. Rather, Brand X stands for the broader proposition that a prior court interpretation of a statute cannot trump a subsequent agency interpretation unless the court holds that its interpretation is the only permissible, not merely the best, construction of the statute,” Brody wrote. As a result, Brody reviewed the 3rd Circuit’s decision in Erie County to determine whether it truly prohibits the EEOC’s proposed regulation. In Erie County, the 3rd Circuit found that Medicare-eligibility is an “age-based criterion” and that Erie County’s policy of reducing health care benefits when retirees became eligible for Medicare violated the ADEA. But Brody concluded that the 3rd Circuit’s ruling was not the “only possible” interpretation of the ADEA. Instead, Brody said, the 3rd Circuit admitted in Erie County that it was faced with a “difficult task of statutory interpretation” because of “ambiguous statutory language” and “contradictory legislative history.” As a result, Brody concluded that Erie County was merely the 3rd Circuit’s “best” interpretation of the ADEA as a statute that prohibits employers from reducing health care benefits for retirees as soon as they become eligible for Medicare. “ Erie County‘s reading of Section 4(a)(1) of the ADEA — that it applies to retiree benefits generally and prohibits Medicare coordination of retiree healthcare benefits — is not the ‘only permissible’ construction of the ADEA,” Brody wrote. “Thus, the EEOC has the flexibility to decide whether retiree benefits are covered by the act at all.” Under � 9 of the ADEA, Brody found, the EEOC is allowed to “establish such reasonable exemptions to and from any or all provisions of this chapter as it may find necessary and proper in the public interest.” Read together, Brody said, � 4(a)(1) and � 9 “allow the EEOC to interpret the ADEA to cover retiree benefits generally while exempting the practice of Medicare coordination of health benefits.” By limiting its exemption to health care benefits, Brody said, “the EEOC is merely interpreting Section 4(a)(1) of the ADEA to apply to retiree benefits (which is within its authority to do), while at the same time forbearing from exercising its regulatory authority with respect to a subset of retiree benefits (which � 9 allows it to do).” In Brand X, Brody said, the justices instructed that the premise of Chevron deference “is that it is for agencies, not courts, to fill statutory gaps.” Applying that logic, Brody found “there is a gap in Section 4(a)(1), which the EEOC has chosen to fill by interpreting the section to apply to retiree benefits generally, while carving out an exception for health benefits under its Section 9 authority. Because this combination of sections 4 and 9 is a reasonable way for the EEOC to fill the statutory gap, it passes the second step of the Chevron test.” Finally, Brody concluded that the proposed regulation passed the third and final step in the Chevron test because it is not “arbitrary and capricious.” “The EEOC’s in-depth study of retiree health benefits, as well as its consideration of various viewpoints in the stakeholder meetings, demonstrate that the EEOC ‘considered the relevant factors’ before promulgating the regulation at issue,” Brody wrote. Lawyers for the AARP argued the regulation was arbitrary and capricious because the EEOC has no special competence to make health care policy. Brody disagreed, saying “because the question that the EEOC’s regulation addresses — i.e., which employee benefits are covered by the ADEA — is surely within the agency’s purview, it is irrelevant that the regulation may have consequences for the provision of health care generally.” “Indeed,” Brody said, “it is a rare agency regulation that does not have some consequences in fields outside of the issuing agency’s statutory mandate.”

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