What is the Substantial Evidence Rule?

Many individuals who have matters pending before administrative agencies do not understand the potential ramifications of going to a contested hearing at the State Office of Administrative Hearings (“SOAH”), much less the subsequent misnamed standard of review (the “substantial evidence rule”) the district court gives to administrative agencies’ final orders based on the recommendations of SOAH.  Under the substantial evidence rule, found at Section 2001.174 of the Texas Government Code, a reviewing court may not substitute its judgment for the judgment of the agency on the weight of the evidence on questions committed to agency discretion.[1]  Indeed, the evidence may actually preponderate against the agency’s finding and the court must still uphold it if enough evidence suggests the agency’s determination was within the bounds of reasonableness (i.e., if substantial evidence supports the agency’s determination).[2]  For that reason, the substantial evidence rule might be better named the little or no evidence rule.

While a contested hearing at SOAH is less formal than those in state and federal courts, it is well established that the rule regarding the standard of proof for any administrative agency finding can never be less than a preponderance of the evidence.[3]  Accordingly, an Administrative Law Judge’s (“ALJ”) findings of fact must also be supported by a preponderance of the evidence.  The preponderance of evidence standard is without meaning unless it is applied by the ALJ hearing the agency matter at SOAH, and enforced by the reviewing courts.  However, the reviewing court may not determine the correctness of the agency’s finding, and therefore enforce the preponderance of evidence standard.  The preponderance of the evidence standard of proof for agency findings at the SOAH level is altogether different from the substantial-evidence scope of review applied by reviewing courts to agency findings.[4] A court that is reviewing purely factual administrative findings may determine only whether substantial evidence supports those findings; it may not review such findings for legal error.[5]  It is for the above reason that, perhaps, the better name for the substantial evidence rule is the little or no evidence rule.  Nevertheless, a party may challenge a finding for lack of substantial evidentiary support at the reviewing court level in two ways.  First, the party may argue the findings of underlying fact stated in the order do not fairly support the agency’s ultimate finding of fact.  Second, the party may argue the findings of underlying fact do not have reasonable support in the evidence adduced at the evidentiary contested hearing at SOAH.[6]  The arguments of the appealing party provide the reviewing court the opportunity to utilize the substantial evidence rule to enforce the preponderance of evidence standard, which is required at the SOAH level.  If the above were done, there truly would be a review of the agency action based on the substantial evidence at the SOAH level.

It is imperative that individuals understand that, more often than not, if they go to a contested hearing at SOAH, they fight a substantial uphill battle from the start because rarely is the preponderance of evidence standard applied to the evidence.  And, more often than not, reviewing courts will uphold the agency’s findings under the substantial evidence rule because it’s such a low standard to satisfy.[7]  Also, it presents less of a challenge to than actually reviewing the SOAH record to determine if the preponderance of evidence standard was applied to the evidence presented at the SOAH level.

Administrative agencies are created by statute and have no inherent authority.[8]  Therefore, they may only exercise those specific powers the law confers upon them in clear and express language.[9]  An agency may also exercise powers necessarily implied from the statutory authority granted or the duties expressly given or imposed.[10]  However, the agency may not, on a theory of necessary implication from a specific power, function, or duty expressly delegated, erect and exercise a new or additional power or power that contradicts the statute.[11]  Nor may it exercise a new power solely for administrative purposes of expediency.[12]  If the agency action implicates the express authority conferred upon the agency by the clear and express language of statute, this is a more viable opportunity to challenge the action taken by the agency.

Regulatory authority is not going away; in fact it’s only going to increase given the recent situations with Enron, Fannie Mae, Lehman Brothers and BP, to name a few.  De Leon & Washburn, P.C. has close to 80 years of collective experience navigating the arcane and ever-changing administrative waters in the context of the substantial evidence rule.  While we strive to achieve the most efficient and cost-effective solution for our clients, we also know that contested hearings and litigation are inevitable in some circumstances and administrative agencies must be held accountable – particularly in those situations where the substantial rights of a party have been prejudiced because the administrative agency findings, inferences, conclusions, or decisions are: in violation of a constitutional or statutory provision; in excess of the agency’s statutory authority; made through unlawful procedure; affected by other area of law; not reasonably supported by substantial evidence considering the reliable and probative evidence in the record as a whole; or arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion.[13]  Administrative law is challenging because of the substantial evidence rule and the tendency of reviewing courts to defer to the action taken by state agencies, but there are instances where a balanced well planned response to an agency action includes going to SOAH and pursuing an appeal from

[1] Tex. Gov’t Code § 2001.174 (West 2008).

[2] Southwestern Pub. Serv. Co. v. Public Util. Comm’n, 962 S.W.2d 207, 215 (Tex. App.—Austin 1998, pet. denied).

[3] Id. at 213.

[4] Id.

[5] Id. at 215 (emphasis in original); see also Lauderdale v. Texas Dep’t of Agriculture, 923 S.W.2d 834, 836-37 (Tex. App.—Austin 1996, no writ) (clarifying that the reviewing court measures agency findings of fact against evidence; the court review’s agency’s legal conclusions for legal error or for statutory authority).

[6] Southwestern Pub. Serv. Co., 962 S.W.2d at 215.

[7] See, e.g., id. (citing Texas Health Facilities Comm’n v. Charter Medical-Dallas, Inc., 665 S.W.2d 446, 452 (Tex. 1984); Railroad Comm’n v. Shell Oil Co., 161 S.W.2d 1022, 1028-29 (Tex. 1942)) (“In fact the court is prohibited from substituting its judgment for the agency’s as to the weight of the evidence on questions committed to agency discretion.”) (emphasis in original).

[8] Ford Motor Co. v. Motor Veh. Bd. of Tex. Dept. of Transp./Metro Ford Truck Sales, Inc., 21 S.W.3d 744, 764 (Tex. App—Austin 2000, pet. denied).

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Tex. Gov’t Code § 2001.174(2) (West 2008).