A federal appeals court ruled Friday that the Transportation Department unlawfully withheld $73.5 million in highway funding from New York over the state's refusal to cancel thousands of commercial driver's licenses held by noncitizens.
The three-judge panel of the Second U.S. Circuit Court of Appeals found that the Federal Motor Carrier Safety Administration's decision was arbitrary, capricious, or contrary to law. The agency had concluded that New York's licenses violated a federal requirement that a commercial license not outlast the holder's lawful-presence documents. The court found that the regulation in effect contained no such requirement, and that the agency had considered adopting one years ago and declined.
The ruling releases about 4% of New York's federal-aid highway money, the amount the agency withheld under a statutory penalty for states that do not substantially comply with commercial-license rules.
New York filed its challenge directly in the Second Circuit rather than in a district court, and the case moved on an expedited schedule. The panel heard argument this fall and issued a 21-page opinion on Friday.
What the dispute was about
The case began with an audit of New York's non-domiciled commercial driver's licenses, a category issued to drivers who are not domiciled in the state but who meet federal eligibility requirements. The category is a narrow one: the driver is licensed by a state where the driver is not domiciled, and the federal eligibility rules require lawful-presence documentation. The audit sampled 200 licenses and found that 101 remained valid after the holders' lawful-presence documents had expired, according to the appeals court's account. The agency treated that rate as evidence of a systemic problem. The state treated the same numbers as a disagreement about the rules, not a failure to follow them. The agency sought the revocation of roughly 32,600 to 33,000 licenses.
New York issues the licenses with five-year terms initially and eight-year terms on renewal. The state argued that its practice followed the federal rules and that the agency was attempting to impose a new condition after the fact.
The Transportation Department saw it differently. It argued that a commercial license should not remain valid after the holder's legal status changes, and it framed the withholding as a public-safety measure. A department spokesperson said the government had "put a stop to the madness to keep the driving public safe," and the department has said it will keep fighting the ruling.
The rule that was not there
The heart of the decision is a textual question. The regulation governing non-domiciled commercial licenses did not require the license's expiration date to match the expiration of the holder's lawful-presence documents. The agency conceded as much during the litigation, according to the court, and the record showed that the agency had considered adding such a requirement in 2008 and decided not to.
The panel held that imposing the requirement now, through an enforcement action rather than a rulemaking, violated fair-notice principles. The majority described the agency's reasoning as "a textbook post hoc rationalization." Judge Alison J. Nathan wrote the opinion, joined by Judge Sarah A. L. Merriam.
The court did not decide whether the policy the agency wanted is a good idea. It decided that the agency had not followed the process required to make it the rule. That distinction is the ordinary stuff of administrative law, and it is also the reason the case matters beyond New York: an agency cannot use a funding condition to enforce a standard it never adopted.
The standard is deferential, but it is not a blank check. Under the Administrative Procedure Act, a court asks whether the agency examined the relevant data and explained its decision, not whether the court would have reached the same result. An agency can lose that review when it changes position without acknowledging the change, or when its explanation rests on a reading the text cannot bear. The concession that the regulation was silent, followed by the 2008 record showing the agency had considered and rejected the requirement, put the department in exactly that position.
The concurrence and the limits of the ruling
Judge Matthew A. Schwartz agreed with the outcome but not with the majority's reasoning. He concurred in the judgment only, criticizing the panel for what he called gratuitous discussion of the regulation's structure and history. His concern was that the broader language could affect other cases in which the same regulation is at issue.
That concurrence is a warning about how far the decision travels. The holding is narrow: the agency cannot impose an expiration-matching requirement that the text does not contain. The majority's discussion of the regulatory history is broader, and Judge Schwartz would have left more of it unsaid.
Schwartz's concurrence also gives the department an argument on appeal. If the full court takes the case, it could narrow the majority's reasoning while keeping the result, or it could adopt the broader view. The Supreme Court has shown interest in cases about agency authority, and a circuit split would give it a reason to step in. None of that changes Friday's outcome: the withholding is lifted.
The Transportation Department has said it disagrees with the ruling and intends to keep litigating. It had threatened up to $147 million in additional withholdings, according to Courthouse News, and a similar dispute with California is pending in the D.C. Circuit, where arguments were held in September, FreightWaves reported.
California's case is the closest analogue. Its dispute involves the same non-domiciled license category and the same agency, and a decision there could create a split with the Second Circuit, which would raise the odds of Supreme Court review. Other states issue non-domiciled licenses as well, and the agency's theory, if upheld elsewhere, would apply to all of them.
The funding question underneath
Federal highway money comes with conditions. Congress sets many of them in statute, and the Transportation Department administers them through grant agreements and compliance reviews. The commercial-license provision allows the government to withhold up to 4% of a state's federal-aid funds when the state is not substantially complying with federal standards.
The dispute is a reminder that the power to condition funding is not unlimited. The Supreme Court has held that conditions on federal grants must be unambiguous, and that Congress must speak clearly when it attaches policy strings to money. An agency that reads a condition into a statute or a regulation can find itself defending the reading in court, and the defense is harder when the agency previously considered the condition and rejected it.
The statute at issue is a compliance lever Congress built into the commercial-license program. It does not give the agency free rein to decide what compliance means. The agency has to measure the state against the standards Congress and the agency's own regulations set, and when the regulation is silent on a point, the agency cannot fill the gap through an enforcement order. That is the difference between administering a program and rewriting it.
New York's withheld money was a small share of its highway budget but not a trivial sum. The state receives federal-aid highway funds each year under formulas that states plan around, and a 4% withholding reaches road and bridge programs that are scheduled years in advance.
New York's case turned on that history. The state did not have to prove that its licensing policy was wise. It had to show that the federal rule did not say what the agency claimed, and that the agency's attempt to supply the missing words came too late.
The immigration overlay
The underlying dispute involves immigration status, and the public argument around it has been conducted in those terms. The audit looked at whether licenses remained valid after holders lost lawful presence. The agency described its action as protecting the driving public. New York described its practice as compliant with federal standards.
The court's opinion does not resolve that argument. It does not say whether noncitizens should hold commercial licenses, how long those licenses should last, or whether New York's policy is good or bad. It says the federal agency did not follow the rulemaking process needed to impose its preferred version.
That leaves the policy fight where it was. The department can try to write the requirement into a regulation, which would require notice and comment and would give states a chance to respond. It can ask the full Second Circuit or the Supreme Court to review the panel's decision. Or it can pursue the California case, which may produce a different result.
What the ruling changes
For New York, the immediate effect is financial. The state recovers $73.5 million that had been withheld, and the threat of further withholdings is tied up in the appeal.
For other states, the case is a template. A federal agency that wants to attach a new condition to highway money has to point to language that supports it, not to a policy it prefers. The 2008 rulemaking record, in which the agency considered the expiration-matching requirement and declined to adopt it, was the fact that made the case.
For the broader fight over federal funding conditions, the decision is one more data point in a long argument about how much the executive branch can accomplish through the power of the purse. The answer, at least in this case, is that it can withhold money only for the reasons the rules give.
The department has not said whether it will ask for en banc review or petition the Supreme Court. The California case may answer the question first. Until then, New York's highway money is released, and the rule the agency tried to enforce remains one that was never written.
The department can still write that rule, and it can still withhold money when a state violates the rule that exists. What it cannot do is skip the step that would make its policy binding.
Primary sources
- State of New York v. U.S. Department of Transportation, No. 26-1097 (2d Cir. Nov. 13, 2026), via CourtListener.
- Associated Press, "U.S. wrongly withheld New York highway funds over immigrant licenses, appeals court rules," Nov. 13, 2026.
- Courthouse News Service, "Trump admin can't punish New York over immigrant truckers, Second Circuit rules," Nov. 13, 2026.
- FreightWaves, "Denial of funds to NY over non domiciled CDLs overturned: appellate court," Nov. 13, 2026.