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A rule operates retroactively if it takes away or impairs vested rights. The critical question is whether the interpretation established by the new rule changes the legal landscape. If a new rule is substantively inconsistent with a prior agency practice and attaches new legal consequences to events completed before its enactment, it operates retroactively. Even where a rule merely narrows a range of possible interpretations to a single precise interpretation, it may change the legal landscape in a way that is impermissibly retroactive.
Under the terms of the Montreal Protocol, the United States was required to phase out 35% of its historic HCFC production (measured by 1989 levels) by 2004; 65% by 2010, 90% by 2015; 99.5% by 2020, and 100% by 2030. In 2003, the Environmental Protection Agency (EPA) promulgated a final rule for a cap-and-trade regulatory system, allocating hydrochlorofluorocarbons (HCFCs) allowances on a one-time basis to each participating company and authorizing those companies to expend their baseline allowance during each control period (a calendar year). The 2003 Rule allowed the participating companies to trade their allocations, subject to EPA approval, between companies and between regulated HCFCs on an annual or permanent basis. Preparing for the intermediate reduction in hydrochlorofluorocarbons (HCFC) production in 2010, the EPA then initiated a new rulemaking wherein it outlined five possible approaches, one of which was to continue the existing cap and trade system and reduce caps pro rata. In the Final Rule, however, the EPA chose to honor only inter-company transfers of baseline allowances and to disallow permanent baseline changes resulting from inter-pollutant trades. Arkema Inc. ("Arkema"), Solvay Flourides, LLC, and Solvay Solexis, Inc. ("Solvay") (collectively, petitioners), filed a consolidated action arguing that the Final Rule was arbitrary and capricious and has an impermissibly retroactive effect as to their HCFC baseline allowances.
Did the Final Rule have an impermissibly retroactive effect as to the petitioners’ HCFC baseline allowances?
Inter alia, the court held that the Final Rule was a successive iteration in a long-running regulatory regime, and the effect of refusing to include petitioners' inter-pollutant transfers in their baseline allowances was to undo what the EPA had approved under the prior rule. As the EPA's interpretation of § 607 of the Clean Air Act (CAA), 42 U.S.C.S. § 7671f, in the Final Rule contradicted its past practice, narrowing the range of options and altering the legal landscape, the EPA’s refusal to account for the Petitioners' baseline transfers of interpollutant allowances in the Final Rule was impermissibly retroactive. The court, however, held that the Final Rule was properly promulgated under the Administrative Procedure Act, and there was no reason to vacate it on that ground. Nevertheless, the court averred that the Final Rule could not have retroactive effect.