Woodland Private Study Group v. State , 109 N.J. 62 ( 1987 )

The opinion of the Court was delivered by

CLIFFORD, Justice.

Plaintiffs, Minnesota Mining and Manufacturing Company and Rohm and Haas Company, known collectively as Woodland Private Study Group, challenge an Administrative Order, AO-69, issued by the Commissioner of the Department of Environmental Protection. Annexed to the order is a “policy statement” regarding “Participation of Responsible Parties in the Development of Remedial Investigations and Feasibility Studies.” Plaintiffs are “Responsible Parties” within the meaning of that policy statement. They contend that AO-69 amounts to rulemaking and hence is subject to the procedural requirements of notice and hearing, whereas the Commissioner views his Order as no more than an intra-agency statement for which no such procedures are required.

The Appellate Division upheld plaintiffs’ challenge to the Commissioner’s Order. On the strength of Metromedia, Inc. v. Director, Division of Taxation, 97 N.J. 313 (1984), the court declared the order invalid, Woodland Private Study Group v. State of New Jersey, 209 N.J.Super. 261 (1986), inasmuch as it was “a rule subject to the procedural requirements for adoption stated in the Administrative Procedure Act,” N.J.S.A. 52:14B-1 to -15, id., at 264 which requirements concededly had not been met by the agency. We granted certification on the State’s petition, 104 N.J. 472 (1986), and now affirm.

I

The underlying dispute between plaintiffs and the Department of Environmental Protection (DEP), well summarized in Woodland Private Study Group v. State of New Jersey, 616 F.Supp. 794, 796-98 (D.N.J.1985), has been brewing for some time. As the federal district court pointed out, during the 1950s and 1960s the Industrial Trucking Service Corporation allegedly deposited at two dump sites in Woodland Township, Burlington County, wastes generated by several manufacturing concerns, including these plaintiffs. Id. at 797. Sampling conducted by the DEP revealed the presence of volatile organics and pesticides at both sites and of ground water contamination at one of them. The hazardous nature of these sites made them priority targets of cleanup efforts by the DEP under the Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 to -23.11z (Spill Act). Ibid.

On August 4, 1983, Industrial Trucking notified the DEP of possibly hazardous discharges at the Woodland sites. Following that notification, appellants and DEP entered into extensive negotiations over the scope of a Remedial Investigation/Feasibility Study (RI/FS) for the sites. Ibid. The RI/FS phase of the cleanup process involves the delineation and analysis of the pollution problems at a site, and makes recommendations for the implementation of various cleanup plans and technologies to remedy the hazardous conditions.

Plaintiffs sought primary responsibility for preparing the RI/FS, with the DEP to exercise an oversight role. Ibid. Initially, DEP appeared ready to accept such an arrangement. However, by letter dated February 17, 1984, DEP informed plaintiffs that a change in agency policy would bar them from controlling the selection of a contractor to perform the RI/FS. DEP also announced that it would require plaintiffs to deposit into a trust fund the full cost of the DEP’s proposed RI/FS for the Woodland sites, plus a twenty percent contingency fee. Plaintiffs refused to comply with DEP’s request. Ibid.

On June 29, 1984, DEP issued AO-69. The Order forbids “responsible parties” (parties alleged to have contributed to or caused contamination at a site) from conducting an RI/FS. The Order further states in part:

In order to insure that a remedial investigation and feasibility study (RI/FS) of a site which is scheduled for a publicly funded RI/FS will be properly and reliably performed and to insure the maximum degree of public confidence in the results of the RI/FS, the * * * [DEP] will conduct all such RI/FS work.

AO-69 does permit private parties to “participate” in the development of an RI/FS under certain specified conditions. The private party must agree: (1) to the scope of work developed by the DEP; (2) that the State will hire the contractor to perform the RI/FS; (3) to pay in advance all the costs of the RI/FS, including the administrative costs of DEP; and (4) to comply with all applicable community relation requirements. Moreover, the agreement between DEP and the responsible party must be reduced to an administrative or judicial consent order.

Private party involvement under AO-69 is limited to minority membership on a committee chaired by a DEP representative. The committee is responsible for selecting the contractor to perform the work, approving the contractor’s work plan, and overseeing the development of the RI/FS.

DEP concedes that AO-69 was not adopted in “substantial compliance” with the rulemaking prodedures of the Administrative Procedure Act (APA) as required by N.J.S.A. 52:14B-4(d). An “administrative rule” can be promulgated only on notice and in compliance with N.J.S.A. 52:14B-4. The APA, in N.J.S.A. 52:14B-2(e), defines an “administrative rule” as

each agency statement of general applicability and continuing effect that implements or interprets law or policy, or describes the organization, procedure, or practice requirements of any agency. The term includes the amendment or repeal of any rule, but does not include: (1) statements concerning the internal management or discipline of any agency; (2) intra-agency and interagency statements; and (3) agency decisions and findings in contested cases.

Thus the latter three categories of administrative actions need not satisfy the notice and hearing requirements of N.J.S.A. 52:14B-4. Agency decisions in “contested cases,” however, are subject to the notice and hearing requirements of N.J.S.A. 52:14B-9. Internal management, intra-agency, and interagency statements need not be preceded by notice and hearing.

The Appellate Division, faced with plaintiffs’ challenge to AO-69 solely on the ground of procedural noncompliance with the requirements of the APA, concluded that the proper characterization of the order was controlled by this Court’s recent opinion in Metromedia, Inc. v. Director, Division of Taxation, supra, 97 N.J. 313. There, the Court established six factors for determining that agency action constitutes an administrative rule, namely, when the determination

(1) is intended to have wide coverage encompassing a large segment of the regulated or general public, rather than an individual or a narrow select group;

(2) is intended to be applied generally and uniformly to all similarly situated persons; (3) is designed to operate only in future cases, that is, prospectively;

(4) prescribes a legal standard or directive that is not otherwise expressly provided by or clearly and obviously inferable from the enabling statutory authorization; (5) reflects an administrative policy that (i) was not previously expressed in any official and explicit agency determination, adjudication or rule, or (ii) constitutes a material and significant change from a clear, past agency position on the identical subject matter; and (6) reflects a decision on administrative regulatory policy in the nature of the interpretation of law or general policy. [Id. at 331-32.]

The Court emphasized that not all of these factors need be present in order for agency action to constitute a rule. Rather, the various factors can be balanced even if some are present and others are not. Id. at 332. The Appellate Division concluded that because AO-69 satisfied all six of the Metromedia factors, the Order was invalid for its failure to comply with the prescribed rulemaking procedures.

II

As is by now apparent, the starting point for analysis of this appeal is our opinion in Metromedia. The threshold question is whether Metromedia controls the outcome here. We think not.

In Metromedia the Director of the Division of Taxation determined that Metromedia’s corporate income tax would be calculated under the “audience share” method, a method never theretofore applied by the Director. Metromedia isolated a number of factors that “either singly or in combination, determine in a given case whether the essential agency action must be rendered through rulemaking or adjudication.” 97 N.J. at 332. Appellants argue that this case does not implicate the rulemaking-adjudication distinction addressed in Metromedia because AO-69 falls within the intra-agency exception of N.J. S.A. 52:14B-2(e)(2).

Metromedia provides standards for determining whether rulemaking requirements apply to or govern an agency decision or particular agency action. Metromedia itself was concerned with whether an agency determination was subject to the criteria of either rulemaking or adjudication, 97 N.J. at 328, 332, 333, although the proceedings attendant to the Director’s determination in that case were also held not to satisfy the “contested case” exception to rulemaking found in N.J.S.A. 52:14B-2(e)(3). Id. at 336. However, the application of the Metromedia criteria is not limited to the determination of whether a particular agency action is either rulemaking or adjudication. The criteria have been applied to determine whether other types of agency actions or determinations should be subject to rule-making procedures.

In In the Matter of the Request For Solid Waste Utility Customer Lists, 106 N.J. 508 (1987), for example, the Metromedia criteria were applied to determine whether an agency order directing solid waste utilities to provide the agency with customer lists was a regulation. Id. at 517-18 (also concluding, id. at 521, that the absence of a factual dispute rendered adjudication inappropriate). In Board of Education, City of Plainfield v. Cooperman, 209 N.J.Super. 174 (App.Div.1986), aff’d, 105 N.J. 587 (1987), the Court applied the Metromedia criteria and held that the Commissioner of Education’s “policy guidelines,” which set forth the criteria that were to inform a local school board’s decision on whether to admit to school a child infected with AIDS, amounted to rulemaking under the Metromedia criteria. 209 N.J.Super. at 204-05. The Metromedia standard also provides the test of whether an agency directive or determination in the form of a statement constitutes rulemaking even if adjudication is not an appropriate or necessary alternative mode for agency decision.

Cooperman and Customer Lists thus applied the Metromedia criteria to distinguish rulemaking not from adjudication but from “informal action,” which has been defined as agency action that is neither adjudication nor rulemaking. Customer Lists, supra, 106 N.J. at 519 (citing 1 K. Davis, Administrative Law Treatise, § 1.4 at 13 (2d ed. 1978)). The Metromedia criteria, although originally formulated in a context that distinguished rulemaking from adjudication, essentially provide a test of when rulemaking procedures are necessary in order to validate agency actions or determinations.

Informal action and adjudication, however, are not coincident with the intra-agency exception to rulemaking codified at N.J.S. A. 52:14B-2(e)(2). An intra-agency statement is not merely the absence of rulemaking or adjudication; it is rather a statement that because of its intra-agency status is accorded an exemption from the notice and hearing requirements. Cf. Diver, The Optimal Precision of Administrative Rules, 93 Yale L.J. 65, 76 (1983) (“Administrative rulemakers typically promulgate two kinds of rules: ‘external’ rules addressed principally to the regulated public, and ‘internal’ rules, addressed to persons charged with the enforcement of the external rules.”).

Metromedia’s criteria, developed to distinguish rulemaking from adjudication, do not necessarily serve to define whether a given agency statement, decision, or determination satisfies the intra-agency exception. As noted in Metromedia not all of the criteria need be met in order for rulemaking procedures to be required. If none of those criteria applies or only a few apply, they must be balanced to determine whether rulemaking procedures are to be invoked. Whether an agency statement or determination constitutes intra-agency action implicates other considerations not expressly addressed in Metromedia. The first Metromedia factor, for example, whether the statement is intended to have wide coverage rather than to affect an individual or select group, is uniquely suited to the rulemaking-adjudication distinction; but that factor arguably may not be determinative here, as procedural protections should not be denied just because an intra-agency statement affects only individuals and select groups (although the subject of AO-69 would embrace a regulated class). The second factor, general and uniform application, again is best directed to rulemaking-adjudication distinction rather than to the intra-agency exception. An interest is no less deserving of procedural protection prior to its deprivation because future parties might be subject to differing treatment. The same is true for Metromedia’s third criterion, prospectivity.

These distinctions suggest that the nature and extent of the coverage or effect of an agency determination or action must also be weighed to determine whether rulemaking procedures are required. The effect or impact of agency conduct is relevant to the determination of the choice between rulemaking procedure and the intra-agency exception, which provides for no procedural protection at all. Even assuming that AO-69 satisfies all of the Metromedia criteria, the inquiry is not complete. The next question is whether AO-69 satisfies those criteria that distinguish a rule from an intra-agency statement.

The term “intra-agency statement” is nowhere defined in the APA. Moreover, no New Jersey case has attempted to provide a principled or abstract definition of the term. See, e.g., Shapiro v. Albanese, 194 N.J.Super. 418, 429 (App.Div.1984) (rejecting contention that a “Circular Letter” sent by agencies to counties was not an “intra-agency statement,” without, however, defining that term.)

The term “intra-agency statement” is not self-defining. Although clearly a statement that is not transmitted within the agency cannot be considered an intra-agency statement, intraagency transmission alone is not enough to constitute an intraagency statement. The intra-agency exception cannot serve as a haven for agency actions that would otherwise require notice and hearing but for the fact that the statement was directed to another agency member.

Conversely, a statement originally directed within the agency does not lose its intra-agency status merely because the information contained in the statement will, when acted upon, have some impact on the regulated community. “[E]ven office hours necessarily require conformity on the part of the public.” E. Freund, Administrative Powers Over Persons and Property 213 (1928). It is the nature of the statement’s impact on affected parties that must be considered in determining whether notice and hearing are required.

The Federal Administrative Procedure Act exempts certain non-binding agency action, as distinguished from “legislative rules,” from the requirements of notice and hearing. 5 U.S.C. § 553(b)(3)(A) (excepting “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice”). In determining whether a given agency action constituted a “rule of agency organization, practice, or procedure,” the Court of Appeals for the District of Columbia, in Batterton v. Marshall, 648 F.2d 694 (1980), observed that the “problem with applying the exception is that many merely internal agency practices affect parties outside the agency — often in significant ways.” Id. at 707. The objective, then, is to distinguish those internal statements that should remain immune from the notice and hearing requirements.

A useful articulation of the exemption’s critical feature is that it covers agency actions that do not themselves alter the rights or interests of parties, although it may alter the manner in which the parties present themselves or their viewpoints to the agency. In this light, the exemption has applied to a freeze placed on the processing of applications for radio broadcast stations, to procedures accelerating the processing of applications for abandoning railroad lines and those for processing discrimination charges, and to a directive specifying that requisite audits be performed by nonagency accountants.

The exemption cannot apply, however, where the agency action trenches on substantial private rights and interests. As the case law demonstrates, substantial rights and interests in this light have come into play when railroads are directed to file proposed schedules of rates and tariffs with subscribers; when applicants for food stamps are subject to modified approval procedures; when drug producers are subject to new specifications for the kinds of clinical investigations deemed necessary to establish the effectiveness of drug products prior to FDA approval; and when motor carriers are subject to a new method for paying shippers. [Id. at 707-08 (footnotes omitted).]

See also Kessler v. F.C.C., 326 F.2d 673, 680 (D.C.Cir.1963) (quoting with approval FCC’s view that rulemaking procedures need not be followed in fashioning rules “dealing with the method of operation utilized by Commission in the dispatch of its business”); Pickus v. United States Bd. of Parole, 507 F.2d 1107, 1113 (D.C.Cir.1974) (in determining whether exemption to rulemaking applies, test is whether the action “substantially affects the rights of persons subject to agency regulation”). “The central question is whether the agency action jeopardized the rights and interests of the parties.” Batterton, supra, 648 F.2d at 708; see also Commonwealth of Pennsylvania v. United States, 361 F.Supp. 208 (M.D.Pa.1973) (applying “substantial impact” test and upholding rule that did not change the substantive law on discontinuance of service); Standard Oil Co. v. Department of Energy, 596 F.2d 1029, 1061 (Temp.Emer.Ct.App.1979) (applying “substantial impact” test and invalidating rule establishing method of costs-recovery under oil price regulations); Chisholm v. F.C.C., 538 F.2d 349, 394 (D.C.Cir.) (Wright, J., dissenting) (collecting cases that have applied “substantial impact” test and arguing that FCC order exempting certain political debates from equal time rule should be invalidated for failure to comply with rulemaking procedures because of its substantial impact on candidates), cert. denied, 429 U.S. 890, 97 S.Ct. 247, 50 L.Ed.2d 173 (1976). But see Rivers v. Becerra, 714 F.2d 887, 890 (9th Cir.1983) (holding that “substantial impact” test should not determine whether notice and hearing are required, because section 553 explicitly excepted “interpretative rules [and] general statements of policy,” an exception not included in our APA); Asimov, Nonlegislative Rulemaking and Regulatory Reform, 1985 Duke L.J. 381, 397 n. 79 (collecting federal cases that have chosen not to apply “substantial impact” test). The “substantial impact” test has received support from commentators as well. E.g., Mayton, The Legislative Resolution of the Rulemaking versus Adjudication Problem in Agency Lawmaking, 1980 Duke L.J. 103, 122-29; Note, “A Functional Approach to the Applicability of Section 553 of the Administrative Procedure Act to Agency Statements of Policy,” 43 U Chi.L.Rev. 430, 443-46 (1976).

Other states have inserted a comparable limitation into the statutory exception for internal memoranda. In Connecticut, for example, statements “concerning only the internal management of an agency and not affecting private rights or procedures available to the public” are exempted from notice and hearing requirements. Conn.Gen.Stat. § 4-166(7); see Persico v. Maher, 191 Conn. 384, 402, 465 A.2d 308, 318 (1983) (exempting from notice and hearing requirements only those statements that do not have “substantial impact on the rights and obligations of parties who appear before the agency in the future”). Michigan, in adopting an intra-agency exception to rulemaking, has codified a similar limitation:

(g) An intergovernmental, interagency, or intraagency memorandum, directive or communication which does not affect the rights of, or procedures and practices available to, the public. [M.S.A. § 3.560(107).]

Some states have placed judicial limitations on the intra-agency exception to notice and hearing. New York’s Constitution contains an exception for statements relating “to the organization or internal management” of an agency. Const. Art. IV, § 8. That provision has been construed to protect an agency order that had not “affected or imposed burdens upon the public generally.” Ingalls Iron Works v. Fehlhaber Corp., 29 A.D.2d 29, 32, 285 N. Y.S.2d 369, 372 (1967). Oregon’s statutory exception for “internal management directives” was subjected to a similar judicial limitation in Burke v. Children’s Services Division, 26 Or.App. 145, 552 P.2d 592 (1976), which interpreted that exception to cover only communications that “affect individuals solely in their capacities as members of the agency involved rather than as members of the general public who may have occasion to deal with the agency.” 26 Or.App. at 151, 552 P.2d at 595; see also Frohnmayer, The Oregon Administrative Procedure Act: An Essay on State Administrative Rulemaking Procedure Reform, 58 Or.L.Rev. 411, 434-45 (1980) [hereinafter Rulemaking Reform] (suggesting that, among other limitations, the intra-management exception should apply only where the communication does not “affect or burden private or public interests”).

The appropriate limitation on the intra-agency exception can be distilled from a comparison of the underlying purposes of the rulemaking procedural requirements and the intra-agency exception. The “essential purpose of * * * notice and comment opportunities is to reintroduce public participation and fairness to affected parties after governmental authority has been delegated to unrepresentative agencies.” Batterton, supra, 648 F.2d at 703. The intra-agency exception is “designed to permit the executive branch to communicate with itself and with other units of government without delay or bureaucratic entanglement.” Rulemaking Reform, supra, 58 Or.L.Rev. at 438-39; see also Asimov, Nonlegislative Rulemaking and Regulatory Reform, supra, 1985 Duke L.J. at 407-08 (agencies may choose not to act rather than devote their limited resources to notice and comment procedure). Intra-agency statements that affect interests beyond the agency implicate precisely the concerns articulated in Batterton, and notwithstanding the agency’s interest in streamlined operation, procedural protections must not be ignored.

We hesitate to adopt the strict rule applied in Burke v. Children’s Services Division, supra, which exempted from procedural requirements only those statements that have no impact on the regulated public. 26 Or.App. at 151, 552 P.2d at 595. Even the most narrowly drawn organizational internal memo has, in a literal sense, some impact on the regulated public. A memo establishing office hours, as noted earlier, or an intra-agency directive ordering staff members not to accept paid lunches with the regulated public has some impact on the regulated public. Thus we conclude that the inquiry adopted by some states and federal courts is appropriate here: whether the agency action has a “substantial impact” on the rights or interests of the parties.

The “substantial impact” test alone may not be sufficient to isolate those internal agency statements that remain immune from the notice and hearing requirements. To take a prior example, an internal agency directive prohibiting agency members from accepting free lunches from the regulated public will have a “substantial impact” on those members of the public with an interest in buying lunch for a regulator. The basis for not requiring rulemaking procedure in that circumstance is not the absence of substantial impact, but rather the fact that the interest that is affected is not sufficiently important or worthy of recognition. See Board of Educ. v. Cooperman, supra, 105 N.J. at 599-600 (the process due is partly a function of the importance of the interest affected).

Where a legally countenanced right of a party is threatened by an internal communication of an agency, rulemaking procedure must be followed. What constitutes an interest that cannot be abridged without rulemaking procedure is not easily defined. The interest alleged must ultimately be legitimate, of justifiable concern. Many internal agency memoranda, for example, relate to prosecutorial discretion. Given limited resources, an agency must make important choices regarding which actions of the regulated public it should monitor or prosecute. In a real sense these communications can have a substantial impact on the regulated public: the memorandum may ultimately determine who is prosecuted, and knowledge of the communication might facilitate illegal conduct. The regulated public cannot be said to have a legitimate interest in frustrating the agency’s enforcement mechanism, and thus public hearing and notice need not precede issuance of the internal memorandum.

The inquiry is whether the agency’s interest in streamlined procedure is outweighed by the importance of the interests that are affected. Generally where the interest implicated is legitimate, the balance will tilt in favor of notice and hearing for internal actions that have a substantial impact on that interest. In light of the foregoing we can define an intra-agency statement as (1) a communication between agency members that (2) does not have a substantial impact on (3) the rights or legitimate interests of the regulated public.

Applying that standard to the facts of this case, we first observe that AO-69 was originally directed to agency members, although ultimately it was forwarded to the regulated public. The fact that the order or its contents were ultimately transmitted to the public does not necessarily negate the intra-agency status of a memorandum. Many strictly internal memoranda— for example, those establishing office hours or effecting organizational changes — require transmission to the public.

The next question is whether AO-69 has a substantial impact on the rights of the regulated public. In respect of responsible party participation in an RI/FS, the Spill Act states only that

[w]henever any hazardous substance is discharged, the department * * * may direct the discharger to remove, or arrange for the removal of, such discharge. [N.J.S.A. 58:10-23.11f(a).]

The Act, then, confers no right on the regulated public to participate in the cleanup procedures developed by DEP.

What cannot be ignored, however, is the vast economic interest implicated in the decisions attending the cleanup procedure. Under N.J.S.A. 58:10-23.11c any person who has discharged a hazardous substance is strictly liable for all cleanup and removal costs. Although DEP is empowered to remove or arrange for the removal of the hazardous substance, N.J.S.A. 58:10-23.-11f(a), any payment by the Spill Fund is ultimately recoverable from the discharger. N.J.S.A. 58:10-23.11q.

The parties that are ultimately liable for the cleanup have considerable incentive to proffer ideas and methods that might facilitate the cleanup procedure. With the important environmental and economic concerns at stake, the opportunity to participate in the cleanup procedures is far from a matter of indifference to the regulated public. The EI/FS phase of the cleanup procedure assesses the pollution problems at a given site and recommends cleanup plans to remedy the hazardous condition. Although AO-69 does not entirely eliminate participation of the regulated public, it imposes severe restrictions and conditions on that participation. AO-69 therefore restricts plaintiffs’ participation in a proceeding that ultimately will determine plaintiffs’ liability. Because AO-69 therefore has a substantial impact on a legitimate interest of the regulated public, it cannot be viewed as an intra-agency statement immune from rulemaking procedures.

The foregoing is not to suggest that DEP must or even should provide for participation of the regulated public in cleanup procedure. That decision remains within the sound discretion of DEP. The only constraint imposed today is that the agency must provide to the affected parties the opportunity for notice and comment in compliance with N.J.S.A. 52:14B-4 prior to determining the scope of the affected public’s participation in the study.

Judgment affirmed.