A recent Florida court decision that focused on the definition of “smokable tobacco” illustrates how businesses can successfully challenge unadopted agency policies that affect them adversely.
Our state Legislature passes laws and then often gives agencies the authority to write the rules for enforcing the laws – the fine print of the law. Many regulations protect the public and ensure fairness and competition. However, unfortunately, good intentions can sometimes get agencies into trouble if they do not follow the proper procedures. If a generally-applicable policy that affects people’s rights is being utilized and it has not been adopted as a “rule” through the prescribed rulemaking process, it could result in being invalidated and the agency may be on the hook for the challenging party’s attorney fees.
That’s what happened in the recent tobacco tax case, Grabba-Leaf LLC v. Department of Business and Professional Regulation, when a distributor won a ruling at the First District Court of Appeal.
Dean Mead attorney Will Hall has seen agency rules from both sides. As the former chief attorney for the Division of Pari-Mutuel Wagering within the Florida Department of Business and Professional Regulation, he enforced rules and defended them from challenges. Now, as an attorney in Dean Mead’s Tallahassee office, he represents both private clients and, sometimes, state agencies themselves as outside counsel.
Unadopted rules can be successfully challenged
The first step to determining whether an unadopted rule is in place, said Hall, is to determine whether a policy was adopted in the formal rulemaking process. Florida law requires regulatory agencies to publish a proposed rule, followed by public hearings and a comment period. “The idea is for industries or anyone affected by a rule to have ample opportunity to provide feedback so that agencies don’t write rules that are unreasonable,” explained Hall. That can be a long process – months or even years – so there is a temptation for agencies to move forward without being slowed by such inefficiency, said Hall.
In fairness to state agencies, Hall said it’s not always clear what constitutes a “rule,” and the law allows agencies to make statements or formulate guidance if it merely reiterates or says what is “readily apparent” from the text of a law. Any number of things can be a rule, said Hall, including a verbal statement by an agency official, as well as internal manuals, letters and contracts. Many agency rules fall into a gray area where reasonable people might disagree over whether they should have been subject to the formal rulemaking process.
For those affected by an unadopted rule, the state has provided a process to challenge those policies. That process begins by sending a letter to the agency requesting that it rescind the unadopted rule or start the formal process to officially adopt it. If the agency stands by the unadopted rule, it can be challenged in an administrative law court. Either side can then appeal to a district court of appeal. If a private party wins litigation challenging the unadopted rule, the agency may be on the hook for up to $50,000 of attorney fees.
Tobacco distributor wins at court in contest of rule
The tobacco case, the latest in a line of decisions that grapple with rule challenges, was a good example of how a rule that falls into a gray area can be successfully overturned. At issue was whether whole leaf tobacco wraps should be exempt from taxes. In 2016, the Florida Department of Business and Professional Regulation issued a memo that said it would no longer tax “homogenized tobacco wraps” because of a recent court decision but said it would continue taxing “whole leaf” tobacco wraps as “tobacco products.” As the state saw it, whole leaf was suitable for smoking, making it a tobacco product. But homogenized wraps or “blunts” – fragments of scrap tobacco held together with adhesive – are not smokable and therefore not tobacco products. This may seem like a distinction without a difference since both products wrap around tobacco or other smoking botanicals, but a lot of money was at stake for the sellers of tobacco leaf wraps.
Grabba-Leaf LLC, a distributor of tobacco wraps, challenged the rule, reasoning that all wraps do the same thing and should be treated equally for tax purposes. The department’s memo, which changed tax policy, was an unadopted rule, Grabba-Leaf argued. An administrative law judge sided with the state, ruling that whole leaf clearly was a taxable tobacco product, and thus the department was only “applying the plain meeting of a clear and unambiguous statute.”
On appeal, the First District agonized over the difference between the wraps and conceded that it couldn’t resolve the question of whether blunt wraps were suitable for smoking. But it did recognize an unadopted rule when it saw one. The department had created two classes of tobacco wraps – one taxable and one not taxable – not contemplated by the law and not “readily apparent” from the law’s text, the court said. The court ruled that this was an unadopted rule and could not be enforced.
Hall cautions that private parties should be aware of the basis for any state action against them, and agencies should be careful to abide by the rulemaking process. “If any agency takes action against you or you believe a policy would affect your rights, it’s worth asking, ‘What is the basis of the policy?’” said Hall. Contesting an unadopted rule is complicated, Hall said, but it can also be necessary to protect a party’s rights. Further, as already noted, the state often must pay reasonable attorney fees to successful challengers.
Hall said an assessment of a potential claim begins by determining whether an agency policy qualifies as a rule. If it does, it’s a simple matter from there to see if it was promulgated through the formal rulemaking process and if it adversely affects the potential challenger. “Don’t just accept an onerous rule or fine or sanction without asking an attorney to assess whether the regulation was adopted through the right process,” advised Hall.