Before: GINSBURG and SCALIA, Circuit Judges, and VAN PELT, Senior Judge of the United States District Court for the District of Nebraska.*
UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT 1984.CDC.258
BANKERS CLEARING HOUSE ASSOCIATION, ET AL., Intervenors
Petitions for Review of an Order of the Federal Reserve System
Opinion for the Court filed by Circuit Judge SCALIA.
The Association of Data Processing Service Organizations, Inc. , a national trade association representing the data processing industry, and two of its members petition this court for review of two orders of the Board of Governors of the Federal Reserve System, pursuant to 12 U.S.C. § 1848 (1982). In No. 82-1910, they seek review of the Board's July 9, 1982 order approving Citicorp's application to establish a subsidiary, Citishare, to engage in certain data processing and transmission services. Order Approving Engaging in Data Processing and Data Transmission Activities, 68 Fed. Res. Bull. 505 (1982) ("Citicorp Order"). In No. 82-2108, they seek review of the Board's August 23, 1982 order, entered after notice and comment rulemaking, amending those portions of Regulation Y which dealth with the performance of data processing activities by bank holding companies. Data Processing and Electronic Funds Transfer Activities, 47 Fed. Reg. 37,368 (1982) (as set forth at 12 C.F.R. §§ 225.4 (a)(8), 225.123(e) (1983) ("Regulation Y Order").1 We consolidated the two appeals.
The Bank Holding Company Act of 1956, ch. 240, 70 Stat. 133 (codified as amended at 12 U.S.C. §§ 1841-50 (1982)) (the "Act"), requires all bank holding companies to seek prior regulatory approval before engaging in nonbanking activities. The restrictions do not apply to:
activities . . . which the Board after due notice and opportunity for hearing has determined (by order or regulation) to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. . . . In determining whether a particular activity is a proper incident to banking or managing or controlling banks the Board shall consider whether its performance by an affiliate of a holding company can reasonably be expected to produce benefits the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.
12 U.S.C. § 1843(c)(8). Section 1848, the source of our review authority, provides that "the findings of the Board as to the facts, if supported by substantial evidence, shall be conclusive." Id. at § 1848.
On February 23, 1979, Citicorp applied for authority to engage, through its subsidiary Citishare, in the processing and transmission of banking, financial, and economic related data through timesharing, electronic funds transfer, home banking and other techniques. It also sought permission to sell its excess computing capacity and some computer hardware. The Board published notice of Citicorp's application, which was protested by ADAPSO, and set it for formal hearing. 45 Fed. Reg. 41,533 (July 19, 1980). Before the hearing was held, Citicorp amended its application to add certain activities and to request amendment of Regulation Y to permit the activities it had specified. The Board published an Amended Order for Hearing and invited public comments and participation. 45 Fed. Reg. 76,515 (Nov. 19, 1980). A formal hearing was held before an Administrative Law Judge in which the merits of both the application and the proposed rule were considered. In addition, more than sixty companies and individuals submitted written comments on the proposed rule. On March 29, 1982, the ALJ decided that the activities proposed by Citicorp were closely related to banking and would produce benefits to the public which would outweigh their costs. In re: Application of Citicorp to Engage in Data Processing and Transmission Activities, ALJ Recommended Decision, J.A. B-68 to B-123 ("Recommended Decision"). The ALJ also recommended amendments to Regulation Y that would permit those activities contained in the Citicorp application. On July 9, 1982, the Board adopted the ALJ's recommendation to approve the Citicorp application, with certain restrictions. On August 23, 1982, the Board adopted the ALJ's recommended amendments to Regulation Y, again with certain restrictions. ADAPSO, and two of its members, participants in the actions below, filed these petitions for review. I. STANDARD OF REVIEW
We are faced at the outset with a dispute regarding the proper standard of review. These consolidated appeals call for us to review both an on-the-record adjudication and an informal notice and comment rulemaking. Petitioners contend that the substantial evidence standard, which presumably authorizes more rigorous judicial review, should govern our review of both orders. Petitioners' Reply Brief at 26-28. The Board agrees, noting that § 1848 applies a substantial evidence standard to factual determinations. Respondent's Brief at 22. Intervenor Citicorp contends that while the substantial evidence standard should govern review of the Citicorp order, Regulation Y should be upset only if arbitrary or capricious. Citicorp Brief at 16-17. Intervenor California Bankers Clearing House Association, addressing only Regulation Y, also advocates review under the arbitrary or capricious review standard. CBCHA Brief at 8-14. The parties' submissions on this point reflect considerable confusion, which is understandable when one examines decisions defining the standard of review under this statute.
Both of the Supreme Court's opinions reviewing action of the Board in amending Regulation Y noted that the Board's determination "is entitled to the greatest deference," Board of Governors of the Federal Reserve System v. Investment Company Institute, 450 U.S. 46, 56, 67 L. Ed. 2d 36, 101 S. Ct. 973 (1981) ; Securities Industry Association v. Board of Governors of the Federal Reserve System, 468 U.S. 207, 104 S. Ct. 3003, 3009, 82 L. Ed. 2d 158 (1984) , but neither of them discussed the applicable standard of review, or even referred to 1848.2 The courts of appeals, however, have applied the substantial evidence standard of § 1848 to Board adjudications such as the authorization in the first order here under review, Securities Industry Association v. Board of Governors of the Federal Reserve System, 716 F.2d 92, 101-02 (2d Cir. 1983), aff'd, 468 U.S. 207, 104 S. Ct. 3003, 82 L. Ed. 2d 158 (1984), while applying the arbitrary or capricious standard, despite § 1848, to Board rules, including specifically amendments of Regulation Y, National Courier Association v. Board of Governors of the Federal Reserve System, 170 U.S. App. D.C. 301, 516 F.2d 1229 (D.C. Cir. 1975); Association of Bank Travel Bureaus v. Board of Governors of the Federal Reserve System, 568 F.2d 549 (7th Cir. 1978); see Investment Company Institute v. Board of Governors of the Federal Reserve System, 179 U.S. App. D.C. 311, 551 F.2d 1270, 1281 (D.C. Cir. 1977) (dicta). In fact one appellate opinion has, like this one, addressed precisely the situation in which both an adjudicatory authorization and an amendment of Regulation Y were at issue in the same case -- and applied the § 1848 substantial evidence standard to the latter. Compare Alabama Association of Insurance Agents v. Board of Governors of the Federal Reserve System, 533 F.2d 224, 246 (5th Cir. 1976), with id. at 240. This would make a lot of sense if, as the Board has argued in some cases, § 1848 in its totality applies only to adjudication rather than rulemaking, since it is limited to "orders" of the Board, a word which the Administrative Procedure Act defines to mean the product of an adjudication. See 5 U.S.C. § 551(4), (6) (1982). Such a technical interpretation of the provision, however, has been uniformly and quite correctly rejected. See Investment Company Institute (supra) 551 F.2d at 1276-78; Alabama Association of Insurance Agents (supra) 533 F.2d at 234-35. That leaves the courts with the difficult task of explaining why the last sentence of § 1848, unlike all the rest of it, should be deemed to apply only to adjudication and not to rulemaking. Difficult, because there is nothing in either the text3 or the legislative history of the section to suggest such a result. The courts applying the arbitrary or capricious standard to Board rulemaking (which, as stated above, include all the courts that have confronted the issue) dispose of this problem either by totally ignoring it, see Alabama Association of Insurance Agents (supra) 533 F.2d at 240, 246; cf. Investment Company Institute (supra) 551 F.2d at 1281, or by noting that the parties "do not appear to contest" the point, National Courier, supra,4 516 F.2d at 1235 n.8, or by the ipse dixit that"we interpret [the last sentence of § 1848] to apply to findings of fact 'on the record' in an adjudicatory hearing as contrasted with a rulemaking proceeding," Association of Bank Travel Bureaus (supra) 568 F.2d at 552 n.5.
We think that there is no basis for giving the last sentence of § 1848 anything less than the general application given to the rest of the section. The Supreme Court's pronouncement that the "greatest deference" is to be given to the determinations of the Board, and the court of appeals decisions applying the arbitrary or capricious test to Board rulemaking, seem to us explicable on quite different grounds -- namely, that in their application to the requirement of factual support the substantial evidence test and the arbitrary or capricious test are one and the same. The former is only a specific application of the latter, separately recited in the APA not to establish a more rigorous standard of factual support but to emphasize that in the case of formal proceedings the factual support must be found in the closed record as opposed to elsewhere. We shall elaborate upon this point because it is not uncommon for parties to expend great effort in appeals before us to establish which of the two standards is applicable where in fact their operation is precisely the same.
The "scope of review" provisions of the APA, 5 U.S.C. § 706(2),5 are cumulative. Thus, an agency action which is supported by the required substantial evidence may in another regard be "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" -- for example, because it is an abrupt and unexplained departure from agency precedent. Paragraph of subsection 706(2) -- the "arbitrary or capricious" provision -- is a catchall, picking up administrative misconduct not covered by the other more specific paragraphs. Thus, in those situations where paragraph has no application (informal rulemaking, for example, which is not governed by §§ 556 and 557 to which paragraph refers), paragraph takes up the slack, so to speak, enabling the courts to strike down, as arbitrary, agency action that is devoid of needed factual support. When the arbitrary or capricious standard is performing that function of assuring factual support, there is no substantive difference between what it requires and what would be required by the substantial evidence test, since it is impossible to conceive of a "non-arbitrary" factual judgment supported only by evidence that is not substantial in the APA sense -- i.e., not "'enough to justify, if the trial were to a jury, a refusal to direct a verdict when the conclusion sought to be drawn . . . is one of fact for the jury,'" Illinois Central R.R. v. Norfolk & Western Ry., 385 U.S. 57, 66, 17 L. Ed. 2d 162, 87 S. Ct. 255 (1966) (quoting NLRB v. Columbian Enameling & Stamping Co., 306 U.S. 292, 300, 83 L. Ed. 660, 59 S. Ct. 501 (1939)).
We have noted several occasions that the distinCtion between the substantial evidence test and the arbitrary or capricious test is "largely semantic," Aircraft Owners and Pilots Association v. FAA, 195 U.S. App. D.C. 151, 600 F.2d 965, 971 n.28 (D.C. Cir. 1979); Pacific Legal Foundation v. Department of Transportation, 193 U.S. App. D.C. 184, 593 F.2d 1338, 1343 n.35 (D.C. Cir. 1979); American Public Gas Association v. FPC, 186 U.S. App. D.C. 23, 567 F.2d 1016, 1028-29 (D.C. Cir. 1977), and have indeed described that view as "the emerging consensus of the Courts of Appeals," Pacific Legal Foundation (supra) 593 F.2d at 1343 n.35. See Associated Industries v. Department of Labor, 487 F.2d 342, 349-50 (2d Cir. 1973) (Friendly, J.); National Nutritional Foods Association v. Weinberger, 512 F.2d 688, 705 (2d Cir. 1975) (Lumbard, J., concurring); Paccar, Inc. v. NHTSA, 573 F.2d 632, 636 (9th Cir. 1978) (purporting to avoid the issue, but seemingly not doing so). Leading commentators agree:
Does the extent of required factual support for rules depend in part on whether the standard for review is "substantial evidence" or "arbitrary and capricious"? Although from 1946 until some time during the 1970s the dominant answer probably was yes, a change to a no answer has probably occurred during the 1970s. . . . 1 K. DAVIS, ADMINISTRATIVE LAW TREATISE § 6:13 at 512 (2d ed. 1978).
In review of rules of general applicability made after "notice and comment" rule-making, [substantial evidence and arbitrary or capricious] criteria converge into a test of reasonableness.
Review without an agency record thus comes down to review of reasonableness. he question of reasonableness is also the one which the court must now ask itself in reviewing findings of fact under the post-APA substantial evidence rule.
B.SCHWARTZ, ADMINISTRATIVE LAW 604, 606 (1976).
As noted earlier, this does not consign paragraph of the APA's judicial review section to pointlessness. The distinctive function of paragraph -- what it achieves that paragraph does not -- is to require substantial evidence to be found within the record of closed-record proceedings to which it exclusively applies. The importance of that requirement should not be underestimated. It is true that, as the Supreme Court said in Camp v. Pitts, 411 U.S. 138, 142, 36 L. Ed. 2d 106, 93 S. Ct. 1241 (1973), even informal agency action (not governed by paragraph ) must be reviewed only on the basis of "the administrative record already in existence." But that is quite a different and less onerous requirement, meaning only that whether the administrator was arbitrary must be determined on the basis of what he had before him when he acted, and not on the basis of "some new record made initially in the reviewing court," id. That "administrative record" might well include crucial material that was neither shown to nor known by the private parties in the proceeding -- as indeed appears to have been the situation in Camp v. Pitts itself. It is true that, in informal rulemaking, at least the most critical factual material that is used to support the agency's position on review must have been made public in the proceeding and exposed to refutation. That requirement, however, does not extend to all data, see Administrative Conference of the United States, Recommendation No. 74-4, Preenforcement Judicial Review of Rules of General Applicability, 1 C.F.R. § 305.74-4 (1975); Verkuil, Judicial Review of Informal Rulemaking, 60 VA. L. REV. 185 (1974); and it only applies in rulemaking and not in other informal agency action, since it derives not from the arbitrary or capricious test but from the command of 5 U.S.C. § 533(c) that "the agency . . . give interested persons an opportunity to participate in the rule making." See Portland Cement Association v. Ruckelshaus, 158 U.S. App. D.C. 308, 486 F.2d 375, 393 n.67 (D.C. Cir. 1973).
Consolidated cases such as those before us here -- involving simultaneous review of a rule (whose factual basis is governed only by paragraph 's catch-all control against "arbitrary or capricious" action) and of a formal adjudication dealing with the same subject (whose factual basis is governed by paragraph 's requirement of substantial evidence) -- demonstrate why the foregoing interpretation of the two standards is the only interpretation that makes sense. If the standards were substantial different (and leaving aside for the moment consideration of any special effect of § 1848), the Citicorp order, authorizing one bank holding company's data processing services, would be subject to more rigorous judicial review of factual support than the Regulation Y order which, due to its general applicability, would affect the operations of every bank holding company in the nation. Or, to put the point another way: If the Board had never issued any Regulation Y, and simply determined in the context of a particular application that the provision of timesharing services is "closely related" to banking, that determination, which could be reconsidered and revised in the context of the next adjudication, would require more factual support than the same determination in a rulemaking, which would have immediate nationwide application and, until amended by further rulemaking, would have to be applied to all subsequent applications.
This seemingly upside-down application of varying standards is not an issue in the present case since, as we have observed, § 1848 makes it clear that only one standard -- the substantial evidence test -- applies to review of all Board actions. The relevance of the foregoing discussion here is to determine what the standard means. What we have said suggests that the normal meaning of the "substantial evidence" terminology connotes a substantive standard no different from the arbitrary or capricious test. One cannot dismiss out of hand, however, the possibility that, in this particular statute, a different meaning was intended -- in which case that different standard would govern review of both rulemaking and adjudication. A number of "substantial evidence" review provisions have been attached to rulemaking authority, particularly in recent years. See, e.g., 29 U.S.C. § 655(f) (1982) (Occupational Safety and Health Act); 30 U.S.C. 8116(a) (1982) (Federal Coal Mine Health and Safety Act); 15 U.S.C. 1193(e)(3) (1982) (Flammable Fabrics Act); 15 U.S.C. § 57a(e)(3)(1982) (FTC Improvement Act of 1975). It is conceivable that some of these were intended, as the Fifth Circuit found with regard to such a provision in the Consumer Product Safety Act, 15 U.S.C. § 2060 (1982), to require the courts "to scrutinize [agency] actions more closely than an 'arbitrary and capricious' standard would allow." Aqua Slide 'N' Dive Corp. v. CPSC, 569 F.2d 831, 837 (5th Cir.1978). Congress's unpropitious use of the "substantial evidence" APA language for such a purpose is plausible, since the standard has acquired a reputation for being more stringent.6 One should not be too quick, however, to impute such a congressional intent. There is surely little appeal to an ineffable review standard that lies somewhere in-between the quantum of factual support required to go to a jury (the traditional "substantial evidence" test) and the "preponderance of the evidence" standard that would apply in de novo review. Moreover, 5 U.S.C. § 559 provides that a subsequent statute shall not be held to supersede or modify the APA provisions "except to the extent that it does so expressly." While the provision for "substantial evidence" review where the APA would otherwise require only "arbitrary or capricious" review is unquestionably an "express" alteration, surely the import of the § 559 instruction is that Congress's intent to make a substantive change be clear. This can lead to some fairly convoluted inquiries. Suppose, for example, that Congress clearly intended to switch to a stricter test, but was also clearly operating on the mistaken belief that the existing test ("arbitrary or capricious") was more lenient that the "substantial evidence" standard. Should one give effect to the congressional intent to adopt a stricter standard, or rather to the congressional intent to adopt the "substantial evidence" standard (which is in fact, as we have discussed, no stricter)? Several decisions of this court stand for the proposition that a "substantial evidence" provision in the substantive statute under consideration did not have the effect of requiring increased factual support beyond that demanded by the normal "arbitrary or capricious" rulemaking standard of review. Public Systems v. FERC, 196 U.S. App. D.C. 66, 606 F.2d 973, 980 n.34 (D.C. Cir. 1979) (interpreting the predecessors of § 19(b) of the Natural Gas Act, 115 U.S.C. § 717r(b) (1982), and the corresponding provision of the Federal Power Act, 16 U.S.C. § 825l(b) (1982)); American Public Gas Association v. FPC, supra 567 F.2d at 1028-29 (interpreting the predecessor of § 19(b) of the Natural Gas Act). See also Aircraft Owners and Pilots Association v. FAA (supra) 600 F.2d at 9711 n.28 (not deciding the issue with regard to the "substantial evidence" provision of the Federal Aviation Act, 49 U.S.C. § 1486(e) (1976)).
Fortunately, it is not necessary to engage in these speculations with regard to the "substantial evidence" provision of § 1848. The Supreme Court had evidently rejected the notion that it alters normal APA review requirements, since the Court's opinions reviewing Board action deem the provision unworthy of mention, and specifically accord the Board "the greatest deference." See, e.g., SIA (supra) 104 S. Ct. at 3009; ICI (supra) 450 U.S. at 56-57. See also National Courier (supra) 516 F.2d at 1237. We hold, therefore, that the § 1848 "substantial evidence" requirement applicable to our review here demands a quantum of factual support no different from that demanded by the substantial evidence provision of the APA, which is in turn no different from that demanded by the arbitrary or capricious standard. II. CLOSELY RELATED TO BANKING
This appeal requires us, then, to decide whether the Board of Governors acted arbitrarily or capriciously -- either because no substantial evidence existed to support its factual premises, or in any other resect -- when it concluded, based on the record of the proceedings before it, that the new activities Citicorp proposed were closely related to banking. The test which the Board applied was that developed by this court in National Courier (supra) 516 F.2d at 1237:
As to what kinds of connections may qualify [as closely related to banking], at least the following seem to us ...