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Assume that the Securities and Exchange Commission (SEC) has a rule under which it enforces statutory provisions prohibiting insider trading only when the insiders make monetary profits for themselves. Then the SEC makes a new rule, declaring that it has the statutory authority to bring enforcement actions against individuals even if they did not personally profit from the insider trading. The SEC simply announces the new rule without conducting a rulemaking proceeding. A stockbrokerage firm objects and says that the new rule was unlawfully developed without opportunity for public comment. The brokerage firm challenges the rule in an action that ultimately is reviewed by a federal appellate court. Using the information presented in the chapter, answer the following questions.
1- ***Debate This:Because an administrative law judge (ALJ) acts as both judge and jury, there should always be at least three ALJs in each administrative hearing.
***The 4 questions are not required to be responded. The most important part is to read the above statement in boldface, take a position whether you agree or not and have 3 arguments supporting your position. Please take a look on the attachment because the debate has to be based on chapter (CH 37)***
2- ***The attached picture is a debate from a classmate. Please read his debate and write a reply in a few statements to him.
Quote
The goal is to develop your critical thinking and analytical skills. I do not want you just to say because it is unfair or simply repeat the law. The answer cannot be because the statute says so. I want you to EVALUATE it. What are the public policy reasons behind your answer? Why this specific proposition is or is not a beneficial, efficient, or positive position to take? I want to see 3 arguments supporting your answer. You do not have to answer the questions. You MUST DEBATE the prompt.
Mark Van Scyoc/ShutterStock.com
37
Learning Objectives
The five Learning Objectives below are
designed to help improve your understanding. After reading this chapter, you
should be able to answer the following
questions:
1. What is the difference between
how statutory law and administrative law are created?
2. How do the three branches of
government limit the power of
administrative agencies?
3. What sequence of events
must normally occur before
an agency rule becomes law?
4. What is the importance of the
Chevron case?
5. In what way has federal legislation made agencies more
accountable to the public?
Administrative Law The body
of law created by administrative
agencies in order to carry out their
duties and responsibilities.
Administrative Law
“Perhaps more
values today are
affected by [administrative] decisions
than by those of all
the courts.”
As the chapter-opening quotation suggests, government
agencies established to administer the law have a significant impact on the day-to-day operation of the government
and the economy. In its early years, the United States had a
simple, nonindustrial economy with little regulation. As the
economy has grown and become more complex, the size of
government has also increased, and so has the number
of administrative agencies.
Sometimes, new agencies have been created in response
Robert H. Jackson
1892–1954
to a crisis. For instance, after the latest financial crisis,
(Associate justice of the United
Congress enacted the Dodd-Frank Wall Street Reform and
States Supreme Court, 1941–1954)
Consumer Protection Act. Among other things, this statute
created the Financial Stability Oversight Council to identify and respond to emerging risks in the financial system. It also created the Consumer
Financial Protection Bureau to protect consumers from abusive practices by financial
institutions, including mortgage lenders and credit-card companies.
As the number of agencies has multiplied, so have the rules, orders, and decisions that
they issue. Today, there are rules covering almost every aspect of a business’s operations.
These regulations make up the body of administrative law.
37–1
Practical Significance
Whereas statutory law is created by legislatures, administrative law is created by
administrative agencies. When Congress—or a state legislature—enacts legislation, it
typically adopts a rather general statute and leaves the statute’s implementation to an
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administrative agency. The agency then creates the detailed rules and regulations necessary to
carry out the statute. The administrative agency, with its specialized personnel, has the time,
resources, and expertise to make the detailed decisions required for regulation.
Administrative Agency
A federal or state government agency
established to perform a specific
function.
37–1a Administrative Agencies Exist at All Levels of Government
Administrative agencies are spread throughout the government. At the national level the two
basic types of administrative agencies are executive agencies and independent regulatory
agencies.
Executive agencies exist within the cabinet departments of the executive branch. For
instance, the Food and Drug Administration is within the U.S. Department of Health and
Human Services. Executive agencies are subject to the authority of the president, who has
the power to appoint and remove officers of federal agencies. Exhibit 37–1 lists the cabinet
departments and their most important subagencies.
Learning Objective 1
What is the difference
between how statutory law
and administrative law are
created?
Exhibit 37–1 Executive Departments and Important Subagencies
DEPARTMENT NAME
SELECTED SUBAGENCIES
State
Passport Office; Bureau of Diplomatic Security; Foreign Service; Bureau of Human Rights and Humanitarian
Affairs; Bureau of Consular Affairs; Bureau of Intelligence and Research
Treasury
Internal Revenue Service; U.S. Mint
Interior
U.S. Fish and Wildlife Service; National Park Service; Bureau of Indian Affairs; Bureau of Land Management
Justicea
Federal Bureau of Investigation; Drug Enforcement Administration; Bureau of Prisons; U.S. Marshals Service
Agriculture
Soil Conservation Service; Agricultural Research Service; Food Safety and Inspection Service; Forest Service
Commerce
Bureau of the Census; Bureau of Economic Analysis; Minority Business Development Agency; U.S. Patent and
Trademark Office; National Oceanic and Atmospheric Administration
b
Laborb
Occupational Safety and Health Administration; Bureau of Labor Statistics; Employment Standards
Administration; Office of Labor-Management Standards; Employment and Training Administration
Defensec
National Security Agency; Joint Chiefs of Staff; Departments of the Air Force, Navy, Army; service academies
Housing and Urban
Development
Office of Community Planning and Development; Government National Mortgage Association; Office of Fair
Housing and Equal Opportunity
Transportation
Federal Aviation Administration; Federal Highway Administration; National Highway Traffic Safety
Administration; Federal Transit Administration
Energy
Office of Civilian Radioactive Waste Management; Office of Nuclear Energy; Energy Information
Administration
Health and Human
Servicesd
Food and Drug Administration; Centers for Medicare and Medicaid Services; Centers for Disease Control and
Prevention; National Institutes of Health
Educationd
Office of Special Education and Rehabilitation Services; Office of Elementary and Secondary Education;
Office of Postsecondary Education; Office of Vocational and Adult Education
Veterans Affairs
Veterans Health Administration; Veterans Benefits Administration; National Cemetery Administration
Homeland Security
U.S. Citizenship and Immigration Services; Directorate of Border and Transportation Services;
U.S. Coast Guard; Federal Emergency Management Agency
a. Formed from the Office of the Attorney General.
b. Formed from the Department of Commerce and Labor.
c. Formed from the Department of War and the Department of the Navy.
d. Formed from the Department of Health, Education, and Welfare.
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Independent regulatory agencies are outside the cabinet departments and include the
Federal Trade Commission, the Securities and Exchange Commission, and the Federal
Communications Commission. The president’s power is less pronounced in regard to independent agencies, whose officers serve for fixed terms and cannot be removed without just
cause. See Exhibit 37–2 for a list of selected independent regulatory agencies and their
principal functions.
There are administrative agencies at the state and local levels as well. Commonly, a state
agency (such as a state pollution-control agency) is created as a parallel to a federal agency
(such as the Environmental Protection Agency). Just as federal statutes take precedence over
conflicting state statutes, so do federal agency regulations take precedence over conflicting
state regulations. Because the rules of state and local agencies vary widely, we focus here on
federal administrative law.
37–1b Agencies Provide a Comprehensive Regulatory Scheme
Often, administrative agencies at various levels of government work together and share the
responsibility of creating and enforcing particular regulations.
Example 37.1 When Congress enacted the Clean Air Act, it provided only general directions
for the prevention of air pollution. The specific pollution-control requirements imposed on
business are almost entirely the product of decisions made by the Environmental Protection
Agency (EPA), which was created seven years later. Moreover, the EPA works with parallel
environmental agencies at the state level to analyze existing data and determine the appropriate pollution-control standards. ■
Legislation and regulations have benefits. At the same time, these benefits entail considerable costs for business. The EPA has estimated the costs of compliance with the Clean Air
Act at many tens of billions of dollars yearly. Although the agency has calculated that the
overall benefits of its regulations often exceed their costs, the burden on business is substantial. (See this chapter’s Linking Business Law to Corporate Management feature.)
Exhibit 37–2 Selected Independent Regulatory Agencies
NAME OF AGENCY
PRINCIPAL DUTIES
Federal Reserve System Board
of Governors (the Fed)
Determines policy with respect to interest rates, credit availability, and the money supply.
Federal Trade Commission (FTC)
Prevents businesses from engaging in purported unfair trade practices; stops the formation of
monopolies in the business sector; protects consumer rights.
Securities and Exchange
Commission (SEC)
Regulates the nation’s stock exchanges, in which shares of stock are bought and sold;
enforces the securities laws, which require full disclosure of the financial profiles of
companies that wish to sell stock and bonds to the public.
Federal Communications
Commission (FCC)
Regulates all communications by telegraph, cable, telephone, radio, satellite, and television.
National Labor Relations
Board (NLRB)
Protects employees’ rights to join unions and bargain collectively with employers; attempts to
prevent unfair labor practices by both employers and unions.
Equal Employment Opportunity
Commission (EEOC)
Works to eliminate discrimination in employment based on religion, gender, race, color,
disability, national origin, or age; investigates claims of discrimination.
Environmental Protection
Agency (EPA)
Undertakes programs aimed at reducing air and water pollution; works with state and local
agencies to help fight environmental hazards.
Nuclear Regulatory
Commission (NRC)
Ensures that electricity-generating nuclear reactors in the United States are built and
operated safely; regularly inspects operations of such reactors.
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Whether you work for a large corDealing with Administrative Law
poration or own a small business,
you will be dealing with multiple aspects of administrative law. All federal, state, and local government administrative agencies create rules that have the force of law. As a manager, you probably
will need to pay more attention to administrative rules and regulations than to laws passed by local,
state, and federal legislatures.
The three levels of government create three levels of rules and regulations through their respective administrative agencies. As a manager, you will have to learn about agency regulations that
pertain to your business activities. It will be up to you, as a corporate manager or a small-business
owner, to discern which of those regulations are most important and could create significant liability
if you violate them.
Linking
Business Law
to Corporate
Management
Critical Thinking
Why are owner/operators of small businesses at a disadvantage relative to those of large corporations when they attempt to decipher complex regulations that apply to their businesses?
37–2
Agency Creation and Powers
Congress creates federal administrative agencies. By delegating some of its authority to make
and implement laws, Congress can indirectly monitor a particular area in which it has passed
legislation. Delegation enables Congress to avoid becoming bogged down in the details
relating to enforcement—details that are often best left to specialists.
To create an administrative agency, Congress passes enabling legislation, which specifies the
name, purposes, functions, and powers of the agency being created. Federal administrative
agencies can exercise only those powers that Congress has delegated to them in enabling
legislation. Through similar enabling acts, state legislatures create state administrative
agencies.
Enabling Legislation A statute
enacted by Congress that authorizes
the creation of an administrative
agency and specifies the name,
composition, and powers of the
agency.
37–2a Enabling Legislation—An Example
Congress created the Federal Trade Commission (FTC) in the Federal Trade Commission Act.1
The act prohibits unfair and deceptive trade practices. It also describes the procedures that the
agency must follow to charge persons or organizations with violations of the act, and it provides
for judicial review of agency orders. The act grants the FTC the power to do the following:
1. Create “rules and regulations for the purpose of carrying out the Act.”
5. Publish findings of its investigations.
“Laws and institutions,
like clocks, must
occasionally be
cleaned, wound up, and
set to true time.”
6. Recommend new legislation.
Henry Ward Beecher
2. Conduct investigations of business practices.
3. Obtain reports from interstate corporations concerning their business practices.
4. Investigate possible violations of federal antitrust statutes. (The FTC shares this task with the
Antitrust Division of the U.S. Department of Justice.)
7. Hold trial-like hearings to resolve certain kinds of trade disputes that involve FTC regulations or
federal antitrust laws.
1813–1887
(American clergyman and abolitionist)
1. 15 U.S.C. Sections 41–58.
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The commission that heads the FTC is composed of five members. Each is appointed
by the president, with the advice and consent of the Senate, for a term of seven years. The
president designates one of the commissioners to be the chair. Various offices and bureaus
of the FTC undertake different administrative activities for the agency.
37–2b Agency Powers and the Constitution
Legislative Rule An administrative
agency rule that carries the same
weight as a congressionally enacted
statute.
Delegation Doctrine A doctrine,
based on the U.S. Constitution,
which has been construed to allow
Congress to delegate some of its
power to make and implement laws to
administrative agencies.
Bureaucracy The organizational
structure, consisting of government
bureaus and agencies, through which
the government implements and
enforces the laws.
Learning Objective 2
How do the three branches
of government limit the
power of administrative
agencies?
Exhaustion Doctrine In
administrative law, the principle
that a complaining party normally
must have exhausted all available
administrative remedies before
seeking judicial review.
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Administrative agencies occupy an unusual niche in the U.S. governmental structure,
because they exercise powers that are normally divided among the three branches of government. Agencies’ powers include functions associated with the legislature (rulemaking),
the executive branch (enforcement), and the courts (adjudication).
The constitutional principle of checks and balances allows each branch of government to
act as a check on the actions of the other two branches. Furthermore, the U.S. Constitution
authorizes only the legislative branch to create laws. Yet administrative agencies, to which
the Constitution does not specifically refer, can make legislative rules that are as legally binding as laws that Congress passes.
The Delegation Doctrine Courts generally hold that Article I of the U.S. Constitution
is the basis for administrative law. Section 1 of that article grants all legislative powers to
Congress and requires Congress to oversee the implementation of all laws. Article I,
Section 8, gives Congress the power to make all laws necessary for executing its specified
powers. Under what is known as the delegation doctrine, the courts interpret these passages
as granting Congress the power to establish administrative agencies and delegate to them
the power to create rules for implementing those laws.
The three branches of government exercise certain controls over agency powers and
functions, as discussed next, but in many ways administrative agencies function independently. For this reason, administrative agencies, which constitute the bureaucracy, are
sometimes referred to as the fourth branch of the U.S. government.
Executive Controls The executive branch of government exercises control over agencies
both through the president’s power to appoint federal officers and through the president’s
veto power. The president may veto enabling legislation presented by Congress or congressional attempts to modify an existing agency’s authority.
Legislative Controls Congress exercises authority over agency powers through legislation.
Congress gives power to an agency through enabling legislation and can take power away—
or even abolish an agency altogether—through subsequent legislation. Legislative authority
is required to fund an agency, and enabling legislation usually sets certain time and monetary
limits on the funding of particular programs. Congress can always revise these limits.
In addition to its power to create and fund agencies, Congress has the authority to investigate the implementation of its laws and the agencies that it has created. Congress also has
the power to “freeze” the enforcement of most federal regulations before the regulations
take effect. (Another legislative check on agency actions is the Administrative Procedure
Act (APA), discussed shortly.)
Judicial Controls The judicial branch exercises control over agency powers through the
courts’ review of agency actions. The Administrative Procedure Act, discussed shortly, provides for judicial review of most agency decisions. Agency actions are not automatically
subject to judicial review, however. The party seeking court review must first exhaust all
administrative remedies under what is called the exhaustion doctrine.
Example 37.2 The Federal Trade Commission (FTC) claims that Sysco Industries used
deceptive advertising and orders it to run new ads correcting the misstatements. Sysco
contends that its ads were not deceptive. Under the exhaustion doctrine, Sysco must
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877
go through the entire FTC process before it can bring a suit against the FTC in federal court
to challenge the order. ■
37–2c The Administrative Procedure Act
Sometimes, Congress specifies certain procedural requirements in an agency’s enabling
legislation. In the absence of directives from Congress concerning a particular agency procedure, the Administrative Procedure Act (APA)2 applies. The APA sets forth rules and regulations that govern the procedures administrative agencies follow in performing their duties.
The Arbitrary and Capricious Test One of Congress’s goals in enacting the APA was to
provide for more judicial control over administrative agencies. To that end, the APA provides
that courts should “hold unlawful and set aside” agency actions found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”3 Under this standard,
parties can challenge regulations as contrary to law or so irrational as to be arbitrary and capricious.
The arbitrary and capricious standard does not have a precise definition, but in applying
it, courts typically consider whether the agency has done any of the following:
1. Failed to provide a rational explanation for its decision.
2. Changed its prior policy without justification.
3. Considered legally inappropriate factors.
4. Failed to consider a relevant factor.
5. Rendered a decision plainly contrary to the evidence.
The following case involved a challenge to the boundaries of a protected wild and scenic
river established by the National Park Service. The plaintiff—an owner of land that fell
within those boundaries—claimed that the boundaries were set arbitrarily and capriciously.
2. 5 U.S.C. Sections 551–706.
3. 5 U.S.C. Section 706(2)(A).
Case 37.1
Simmons v. Smith
United States Court of Appeals, Eighth Circuit, 888 F.3d 994 (2018).
Background and Facts The Niobrara River runs through
northern Nebraska before flowing into the Missouri River along
the border between Nebraska and South Dakota. Pursuant to the
Niobrara Scenic River Designation Act, the National Park Service
(NPS)—led by Paul Hedren, an NPS superintendent—established
the boundaries of the Niobrara Scenic River Area (NSRA). The
process involved public meetings, conversations with local
landowners and other stakeholders, and scientific evidence.
The statute required the agency to focus on protecting five
“outstandingly remarkable values” (ORVs)—scenic, recreational,
geologic, fish and wildlife, and paleontological.
Lee Simmons operates a recreational outfitter business on the
Niobrara River. At least twenty-five acres of his land is within the
NSRA’s boundaries. Arguing that the NPS acted arbitrarily and
capriciously in drawing those boundaries, Simmons filed a suit
in a federal district court against Paul Smith, the NPS’s acting
director. The court issued a judgment in Smith’s favor. Simmons
appealed.
In the Words of the Court
KELLY, Circuit Judge:
****
Simmons * * * argues that NPS acted arbitrarily and capriciously
in setting the boundary on his property because it did not identify
specific ORVs that existed in that area. We agree with Simmons’s
premise to a certain extent, but, based on the facts of this case, we
(Continues )
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UNIT SIX: Government Regulation
reach the opposite conclusion. In crafting the boundaries, NPS is
required to use the ORV determinations as a guide to decide which
land should be included within the boundary in order to protect and
enhance the ORVs. But * * * NPS is not required to include only land
with outstandingly remarkable values. * * * NPS explained that [the
placement of the] boundary * * * sought to balance the various ORVs
“as equitably as possible” * * * . Thus, as long as the boundary
placement was rationally connected to the protection of ORVs, NPS
was not required to identify a specific ORV on any specific piece of
property. And Simmons does not allege that NPS acted contrary to
its stated objective of protecting these values. [Emphasis added.]
Moreover, the record amply demonstrates that multiple ORVs
were identified within the boundary line in question. Specifically,
Simmons’s land contains a large portion of viewshed [a geographical area that includes all line-of-site property viewable from that
location] that is directly downstream from Berry Bridge, which is a
common launch point for recreational canoeists on the river. His land
also contains a large and particularly impressive stand of ponderosa
pine trees and habitats that support bald eagle foraging. Indeed,
the final boundary line on Simmons’s property tracks quite closely
the extent of the viewshed and the ponderosa stand. Simmons
does not dispute these facts. Instead, he relies on a statement by
[Paul] Hedren [of the National Park Service]—made during a lengthy
deposition—in which he said that he could not identify specific
features on Simmons’s property. But, read in context, that statement
indicates confusion about the location of Simmons’s property, not
confusion about the existence of ORVs. At various other points in the
deposition, Hedren clearly and specifically identified which ORVs
motivated his boundary determination on this property.
In sum, we see no flaw—either generally or related specifically
to Simmons’s property—in the public, thorough, and comprehensive
process that NPS undertook to establish the boundaries of the NSRA.
Decision and Remedy The U.S. Court of Appeals for
the Eighth Circuit affirmed the judgment of the lower court. The
federal appellate court determined that the NPS engaged “in a
methodical, time-consuming boundary-drawing process” and
that it used “the appropriate statutory standard” when identifying ORVs and drawing the boundary lines to protect those ORVs.
Critical Thinking
• Economic Why would an owner of land that falls within
the boundaries of a wild and scenic river area challenge those
boundaries?
• What If the Facts Were Different? Suppose that instead
of establishing the boundaries of the NSRA to protect ORVs, the NPS
had drawn the boundaries to maintain the area’s acreage at a certain
number. Would the result in this case have been different? Explain.
Fair Notice The APA also includes many requirements concerning the notice that regu-
steinphoto/iStock Unreleased/
Getty Images
latory agencies must give to those affected by its regulations. For example, an agency may
change the way it applies a certain regulatory principle. Before the change can be carried
out, the agency must give fair notice of what conduct will be expected in the future.
Spotlight Case Example 37.3 The 1934 Communications Act established a system of
limited-term broadcast licenses subject to various conditions. One condition was the indecency ban, which prohibits the uttering of “any obscene, indecent, or profane language
by means of radio communication.” For nearly thirty years, the Federal Communications
Commission (FCC) invoked this ban only when the offensive language had been repeated,
or “dwelled on,” in the broadcast. It was not applied to “fleeting expletives” (offensive
words used only briefly).
Then the FCC changed its policy, declaring that an offensive term was actionably indecent even if it was used only once. In 2006, the FCC applied this rule to two Fox Television
broadcasts, each of which contained a single use of the F-word. The broadcasts had aired
before the FCC’s change in policy. The FCC ruled that these broadcasts were indecent,
and Fox appealed. Ultimately, the case reached the United States Supreme Court, which
determined that the FCC’s order should be set aside. Because the FCC had not provided
fair notice that fleeting expletives could constitute actionable indecency before the broadcasts in question, the standards were unconstitutionally vague.4 ■
Was the FCC legally allowed to
fine Fox Television for “fleeting”
swear words that occurred on
broadcasts before an agency
rule change?
4. Federal Communications Commission v. Fox Television Stations, Inc., 567 U.S. 239, 132 S.Ct. 2307, 183 L.Ed.2d 234 (2012).
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37–3
The Administrative Process
All federal agencies have three basic functions: rulemaking, enforcement, and adjudication.
These three functions make up what is known as the administrative process. As mentioned,
the APA imposes requirements that all federal agencies must follow in fulfilling their
functions. Thus, the APA is an integral part of the administrative process.
37–3a Rulemaking
The major function of an administrative agency is rulemaking—the formulation of new regulations, or rules. The APA defines a rule as “an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law and policy.”5
Regulations are sometimes said to be legislative because, like statutes, they have a binding
effect. Thus, violators of agency rules may be punished. Because agency rules have such
significant legal force, the APA established procedures for agencies to follow in creating
(amending, or removing) rules. If an agency fails to follow the required procedures, a court
may find that the resulting rule is invalid.
Many rules must be adopted using the APA’s notice-and-comment rulemaking procedure,
which involves three basic steps:
1. Notice of the proposed rulemaking.
2. A comment period.
Administrative Process The
procedure used by administrative
agencies in fulfilling their basic
functions: rulemaking, enforcement,
and adjudication.
Rulemaking The process by which
an administrative agency formally
adopts a new regulation or amends
or removes an old one.
Notice-and-Comment
Rulemaking An administrative
rulemaking procedure that requires
notice, opportunity for comment, and
a published draft of the final rule.
3. The final rule.
Notice-and-comment is the most common rulemaking procedure. Example 37.4 The
Occupational Safety and Health Act authorized the Occupational Safety and Health Administration (OSHA) to develop and issue rules governing safety in the workplace. When OSHA
wants to formulate rules regarding safety in the steel industry, it has to follow the specific
notice-and-comment procedures outlined by the APA. If the agency fails to follow the APA’s
rulemaking procedures, the resulting rule may not be binding. ■
The impetus for rulemaking may come from various sources, including Congress or the
agency itself. In addition, private parties may petition an agency to begin a rulemaking (or
repeal a rule). For instance, environmental groups have petitioned for stricter air-pollution
controls to combat climate change.
Notice of the Proposed Rulemaking When a federal agency decides to create a new
rule, the agency publishes a notice of the proposed rulemaking proceedings in the Federal
Register. The Federal Register is a daily publication of the executive branch that prints government orders, rules, and regulations. The notice states where and when the proceedings
will be held, the agency’s legal authority for making the rule (usually its enabling legislation),
and the terms or subject matter of the proposed rule. The agency must also make available to
the public certain other information, such as the key scientific data underlying the proposal.
Learning Objective 3
What sequence of events
must normally occur before
an agency rule becomes
law?
Comment Period Following the publication of the notice of the proposed rulemaking
proceedings, the agency must allow ample time for persons to comment on the proposed
rule. The purpose of this comment period is to give interested parties the opportunity to
express their views on the proposed rule in an effort to influence agency policy. The comments may be in writing or, if a hearing is held, may be given orally. All comments become
a public record that others can examine.
Example 37.5 The owner of Brown Trucking learns that the U.S. Department of Transportation is considering a new regulation that will have a negative impact on the company’s
ability to do business and on its profits. A notice of the rulemaking is published in the Federal
5. 5 U.S.C. Section 551(4).
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Mike Flippo/Shutterstock
880
A trucking company will lose profits because of a
newly proposed federal transportation rule. How do
the APA’s procedures allow the company to voice its
concerns about the proposed rule’s negative impact?
Register. Later, a public hearing is held so that proponents and opponents
can offer evidence and question witnesses. At this hearing, Brown’s owner
testifies as to his opinion about the pending rule. ■
The agency need not respond to all comments, but it must respond to any
significant comments that bear directly on the proposed rule. The agency
responds by either modifying its final rule or explaining, in a statement
accompanying the final rule, why it did not make any changes. In some
circumstances, particularly when the procedure being used in a specific
instance is less formal, an agency may accept comments after the comment
period is closed.
The Final Rule After the agency reviews the comments, it drafts the final
rule and publishes it in the Federal Register. A final rule must contain a “concise general statement of . . . basis and purpose” that describes the reasoning
behind the rule.6 The final rule can include modifications based on public
comments. If substantial changes are made, however, a new proposal and a new opportunity
for comment are required. The final rule is later compiled along with the rules and regulations
of other federal administrative agencies in the Code of Federal Regulations.
Final rules have binding legal effect unless the courts later overturn them. If an agency
fails to follow proper rulemaking procedures when it issues a final rule, however, the rule
may not be binding.
Example 37.6 Members of the Hemp Industries Association (HIA) manufacture and sell
food products made from hemp seed and oil. These products may contain trace amounts of
THC, a component of marijuana. Without following formal rulemaking procedures, the Drug
Enforcement Administration (DEA) publishes rules that effectively ban the possession and
sale of HIA’s food products, treating them as controlled substances. A court will most likely
overturn the rules because of the DEA’s failure to follow formal rulemaking procedures. ■
Interpretive Rule An administrative
agency rule that explains how
the agency interprets and intends
to apply the statutes it enforces.
Informal Agency Actions Rather than take the time to conduct notice-and-comment
rulemaking, agencies have increasingly used more informal methods of policymaking.
These methods include issuing interpretive rules and guidance documents.
Unlike legislative rules, defined earlier, interpretive rules are not legally binding. They
simply indicate how an agency plans to interpret and enforce its statutory authority.
Example 37.7 The Equal Employment Opportunity Commission periodically issues interpretive rules indicating how it plans to interpret the provisions of the Americans with Disabilities
Act. ■ Guidance documents advise the public on the agencies’ legal and policy positions.
Informal agency actions are exempt from the APA’s requirements because they do not
establish legal rights. A party cannot be directly prosecuted for violating an interpretive
rule or a guidance document. Nevertheless, an informal action can be important because it
warns regulated entities that the agency may engage in formal rulemaking if they ignore its
informal policymaking.
Ethical Issue
Do administrative agencies exercise too much authority?
Administrative agencies, such as the Federal Trade Commission,
combine in a single governmental entity functions normally divided among the three branches
of government. They create rules, conduct investigations, and prosecute and pass judgment on
violators. Yet administrative agencies’ powers often go unchecked by the other branches. Some
businesspersons have suggested that it is unethical for agencies—which are not even mentioned
in the U.S. Constitution—to wield so many powers.
6. 5 U.S.C. Section 555(c).
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CHAPTER 37: Administrative Law
881
Although agency rulemaking must comply with the requirements of the Administrative Procedure Act (APA), the act applies only to legislative, not interpretive, rulemaking. In addition, the APA
is largely procedural and aimed at preventing arbitrariness. It does little to ensure that the rules
passed by agencies are fair or correct—or even cost-effective. On those rare occasions when an
agency’s ruling is challenged and later reviewed by a court, the court cannot reverse the agency’s
decision unless the agency exceeded its authority or acted arbitrarily. Courts typically are reluctant
to second-guess an agency’s rules, interpretations, and decisions. Moreover, once an agency has
final regulations in place, it is difficult to revoke or alter them.
37–3b Enforcement
Although rulemaking is the most prominent agency activity, rule enforcement is also critical.
Often, an agency itself enforces its rules. After final rules are issued, agencies conduct investigations to monitor compliance with those rules or the terms of the enabling statute.
A typical agency investigation of this kind might begin when the agency receives a report
of a possible violation. Many agency rules also require compliance reporting from regulated
entities, and such a report may trigger an enforcement investigation.
Inspections and Tests In conducting investigations, many agencies gather information
Bob Zahn/Conde Nast
through on-site inspections. Sometimes, inspecting an office, a factory, or some other business facility is the only way to obtain the evidence needed to prove a regulatory violation. At
other times, an inspection or test is used in place of a formal hearing
to show the need to correct or prevent an undesirable condition.
Administrative inspections and tests cover a wide range of
activities. Examples include safety inspections of underground coal
mines, safety tests of commercial equipment and automobiles, and
environmental monitoring of factory emissions. An agency may also
ask a firm or individual to submit certain documents or records to the
agency for examination.
Normally, business firms comply with agency requests to inspect
facilities or business records because it is in any firm’s interest to maintain a good relationship with regulatory bodies. In some instances,
however, a firm may refuse to comply with such a request. That might
happen, for instance, if the firm thinks the request is unreasonable
and may be detrimental to the firm’s interests. In such situations, an
agency may resort to the use of a subpoena or a search warrant.
Subpoenas There are two basic types of subpoenas. The subpoena ad testificandum7
(to testify) is an ordinary subpoena. It is a writ, or order, compelling a witness to appear at
an agency hearing. The subpoena duces tecum8 (bring it with you) compels an individual
or organization to hand over books, papers, records, or documents to the agency. An administrative agency may use either type of subpoena.
There are limits on what an agency can demand. To determine whether an agency is abusing its discretion in pursuing information as part of an investigation, a court may consider
such factors as the following:
1. The purpose of the investigation. An investigation must have a legitimate purpose. Harassment is an
example of an improper purpose. An agency may not issue an administrative subpoena to inspect
business records if the motive is to harass or pressure the business into settling an unrelated matter.
7. Pronounced ad tes-tee-fee-can-dum.
8. Pronounced doo-suhs tee-kum.
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UNIT SIX: Government Regulation
2. The relevance of the information being sought. Information is relevant if it reveals that the law is
being violated or if it assures the agency that the law is not being violated.
3. The specificity of the demand for testimony or documents. A subpoena must, for example, adequately
describe the material being sought.
4. The burden of the demand on the party from whom the information is sought. For instance, the cost of
copying requested documents or providing digital information may become burdensome. (Note that a
business generally is protected from revealing information such as trade secrets.)
Adjudication A proceeding in
which an administrative law judge
hears and decides issues that arise
when an administrative agency
charges a person or a firm with an
agency violation.
Search Warrants The Fourth Amendment protects against unreasonable searches and
seizures by requiring that in most instances a physical search for evidence must be conducted under the authority of a search warrant. An agency’s search warrant is an order
directing law enforcement officials to search a specific place for a specific item and seize it
for the agency. It was once thought that administrative inspections were exempt from
the warrant requirement, but the United States Supreme Court has held that the requireExhibit 37–3 The Process of
ment does apply to the administrative process.9
Formal Administrative Agency
Nevertheless, agencies can conduct warrantless searches in several situations. Warrants
Adjudication
are not required to conduct searches in highly regulated industries. Firms that sell firearms or liquor, for instance, are automatically subject to inspections without warrants.
Sometimes, a statute permits warrantless searches of certain types of hazardous operaComplaint
tions, such as coal mines. Also, a warrantless inspection in an emergency situation is
normally considered reasonable.
Answer
Hearing before
Administrative Law Judge
Order of
Administrative Law Judge
Appeal to Governing
Board of Agency
Final Agency Order
37–3c Adjudication
After conducting an investigation of a suspected rule violation, an agency may initiate an
administrative action against an individual or organization. Most administrative actions
are resolved through negotiated settlements at their initial stages. Sometimes, though, an
action ends in formal adjudication—the resolution of the dispute through a hearing conducted by the agency.
Negotiated Settlements Depending on the agency, negotiations may take the form
of a simple conversation or a series of informal conferences. Whatever form the negotiations take, their purpose is to rectify the problem to the agency’s satisfaction and
eliminate the need for additional proceedings.
Settlement is an appealing option to firms for two reasons: to avoid appearing uncooperative and to avoid the expense involved in formal adjudication proceedings and in
possible later appeals. Settlement is also an attractive option for agencies. To conserve
their own resources and avoid formal actions, administrative agencies devote a great deal
of effort to giving advice and negotiating solutions to problems.
Formal Complaints If a settlement cannot be reached, the agency may issue a formal
Court Review
Court Order
complaint against the suspected violator. Example 37.8 The Environmental Protection
Agency (EPA) finds that Acme Manufacturing, Inc., is polluting groundwater in violation
of federal pollution laws. The EPA issues a complaint against the violator in an effort to
bring the plant into compliance with federal regulations. ■ The basic steps of an administrative agency adjudication process are illustrated graphically in Exhibit 37–3.
The complaint is a public document, and a press release may accompany it. The party
charged in the complaint responds by filing an answer to the allegations. If the charged
party and the agency cannot agree on a settlement, the case will be adjudicated.
9. Marshall v. Barlow’s, Inc., 436 U.S. 307, 98 S.Ct. 1816, 56 L.Ed.2d 305 (1978).
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CHAPTER 37: Administrative Law
Hearings Agency adjudication involves a hearing before an administrative law judge (ALJ).
Under the APA, before the hearing takes place, the agency must issue a notice that includes
the facts and law on which the complaint is based, the legal authority for the hearing, and
its time and place.
The Role of the Administrative Law Judge The ALJ presides over the hearing and
has the power to administer oaths, take testimony, rule on questions of evidence, and
make determinations of fact. Technically, the ALJ, who works for the agency prosecuting the case, is not an independent judge. Nevertheless, the law requires the ALJ to be
unbiased.
Certain safeguards prevent bias on the part of the ALJ and promote fairness in the proceedings. For instance, the APA requires that the ALJ be separate from the agency’s investigative and prosecutorial staff. The APA also prohibits ex parte (private) communications
between the ALJ and any party to an agency proceeding. Finally, provisions of the APA
protect the ALJ from agency disciplinary actions unless the agency can show good cause for
such an action.
883
Administrative Law Judge (ALJ)
One who presides over an
administrative agency hearing and
has the power to administer oaths,
take testimony, rule on questions of
evidence, and make determinations
of fact.
Hearing Procedures Hearing procedures vary widely from agency to agency. Administrative agencies generally exercise substantial discretion over the type of procedure that
will be used.
Frequently, disputes are resolved through informal adjudication proceedings that resemble arbitration. Example 37.9 The Federal Trade Commission (FTC) charges Good Foods, Inc.,
with deceptive advertising. Representatives of Good Foods and of the FTC, their counsel,
and the ALJ meet in a conference room to resolve the dispute informally. ■
A formal adjudicatory hearing, in contrast, resembles a trial in many respects. Prior to the
hearing, the parties are permitted to undertake discovery—involving depositions, interrogatories, and requests for documents or other information. The discovery process usually is
not quite as extensive as it would be in a court proceeding, however.
The hearing itself must comply with the procedural requirements of the APA and must
also meet the constitutional standards of due process. The burden of proof in an enforcement proceeding is placed on the agency. During the hearing, the parties may give testimony,
present other evidence, and cross-examine adverse witnesses.
Trials and agency hearings do differ in some respects. A significant difference is that
normally much more information, including hearsay (secondhand information), can be
introduced as evidence during an administrative hearing.
Agency Orders Following a hearing, the ALJ renders an initial order, or decision, on the
case. Either party can appeal the ALJ’s decision to the board or commission that governs
the agency and can subsequently appeal the agency decision to a federal court of appeals.
Example 37.10 The EPA issues a complaint against Acme Manufacturing, Inc., for polluting
groundwater. The complaint results in a hearing before an ALJ, who rules in the agency’s
favor. If Acme is dissatisfied with the decision, it can appeal to the EPA. If it is dissatisfied
with the EPA’s decision, it can appeal to a federal appellate court. ■
If no party appeals the case, the ALJ’s decision becomes the final order of the agency. The
ALJ’s decision also becomes final if a party appeals and the commission and the court
decline to review the case. If a party appeals and the case is reviewed, the final order comes
from the commission’s decision (or, if that decision is appealed, that of the reviewing
court).
In the following case, a federal appellate court reviewed the Drug Enforcement
Administration’s denial of a university professor’s application to register to cultivate
marijuana.
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Initial Order An agency’s
disposition in a matter other than a
rulemaking. An administrative law
judge’s initial order becomes final
unless it is appealed.
Final Order The final decision of an
administrative agency on an issue.
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UNIT SIX: Government Regulation
Case 37.2
Craker v. Drug Enforcement Administration
United States Court of Appeals, First Circuit, 714 F.3d 17 (2013).
AP Images/Brennan Linsley
how he could provide it for less * * * . Additionally,
Background and Facts Dr. Lyle Craker, a
the Administrator noted that Dr. Craker is free to
professor in the University of Massachusetts’s
bid on the contract when it comes up for renewal.
Department of Plant, Soil and Insect Sciences,
We see nothing improper in the Administrator’s
applied to the Drug Enforcement Administration
approach. The [CSA’s] term “adequately competi(DEA) for permission to register to manufacture
tive conditions” is not necessarily as narrow as the
marijuana for clinical research. He stated that “a
Can the DEA restrict
petitioner suggests. * * * That the current regime
second source of plant material is needed to facilmarijuana supplies to be
used in research?
may not be the most competitive situation possible
itate privately funded Food and Drug Administradoes not render it “inadequate.” [Emphasis added.]
tion (FDA)–approved research into medical uses of
****
marijuana, ensuring a choice of sources and an adequate supply
In finding that Dr. Craker failed to demonstrate that the curof quality, research-grade marijuana for medicinal applications.”
An administrative law judge recommended that Craker’s appli- rent supply of marijuana was not adequate and uninterrupted,
cation be granted, but a DEA deputy administrator issued an order the Administrator observed that there were over 1,000 kilograms
denying his application. Under the DEA’s interpretation, the Con- of marijuana in NIDA possession, an amount which far exceeds
trolled Substances Act (CSA) requires an applicant to prove both present research demands and “any foreseeable” future demand.
that effective controls against diversion of the marijuana for unap- Dr. Craker does not dispute this finding, or that the current amount is
proved purposes are in place and that its supply and the competi- more than ninety times the amount he proposes to supply. Instead,
tion to supply it are inadequate. The administrator determined that he argues that the adequacy of supply must not be measured
the professor had not proved that effective controls against the against NIDA-approved research, but by whether the supply is
marijuana’s diversion were in place or that supply and competition adequate to supply projects approved by the FDA. But even if we
were inadequate. Craker petitioned the U.S. Court of Appeals for were to accept his premise—which we don’t—Dr. Craker fails
to demonstrate that the supply is inadequate for those needs,
the First Circuit to review the order.
either. He merely states that certain projects were rejected as “not
In the Words of the Court
bona-fide” by NIDA, a claim which does not address the adequacy
HOWARD, Circuit Judge.
of supply. The fact that Dr. Craker disagrees with the method by
****
which marijuana research is approved does not undermine the
Since 1968, the National Center for Natural Products Research
substantial evidence that supports the Administrator’s conclusion.
(“NCNPR”) at the University of Mississippi has held the necessary
registration and a government contract to grow marijuana for Decision and Remedy The U.S. Court of Appeals for the
research purposes. The contract is administered by the National First Circuit denied Craker’s petition to review the agency’s order
Institute on Drug Abuse (“NIDA”), a component of the National “because the Administrator’s interpretation of the CSA is perInstitutes of Health (“NIH”), which, in turn, is a component of the missible and her findings are reasonable and supported by the
[U.S.] Department of Health and Human Services (“HHS”). The con- evidence.”
tract is opened for competitive bidding every five years. The NCNPR
is the only entity registered by the DEA to manufacture marijuana.
Critical Thinking
****
• Economic Why should a court wait to review an agency’s
Dr. Craker’s argument with respect to competition is essentially
order until the order has gone through the entire procedural prothat there cannot be “adequately competitive conditions” when
cess and can be considered final?
there is only one manufacturer of marijuana.
The Administrator * * * observed that NIDA had provided mari- • Legal Environment Did the court in this case appear to
juana manufactured by the University of Mississippi either at cost agree with the DEA’s interpretation of the Controlled Substances
or free to researchers, and that Dr. Craker had made no showing of Act? Why or why not?
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37–4
885
Judicial Deference to Agency Decisions
When asked to review agency decisions, courts historically granted some deference to the
agency’s judgment. In other words, the courts tended to accept the agency’s decision, often
citing the agency’s expertise in the subject area of the regulation. This deference seems especially appropriate when applied to an agency’s analysis of factual questions, but should it
also extend to an agency’s interpretation of its own legal authority? In Chevron U.S.A., Inc.
v. Natural Resources Defense Council, Inc.,10 the United States Supreme Court held that it
should. By so ruling, the Court created a standard of broadened deference to agencies on
questions of legal interpretation.
37–4a The Holding of the Chevron Case
At issue in the Chevron case was whether the courts should defer to an agency’s interpretation of the statute giving it authority to act. The Environmental Protection Agency (EPA)
had interpreted the phrase “stationary source” in the Clean Air Act as referring to an
entire manufacturing plant, and not to each facility within a plant. The agency’s interpretation enabled it to adopt the so-called bubble policy, which allowed companies to offset
increases in emissions in part of a plant with decreases elsewhere in the plant—an interpretation that reduced the pollution-control compliance costs faced by manufacturers.
An environmental group challenged the legality of the EPA’s interpretation.
The United States Supreme Court held that the courts should defer to an agency’s
interpretation of law as well as fact. The Court found that the agency’s interpretation of the
statute was reasonable and upheld the bubble policy. The Court’s decision in the Chevron
case created a new standard for courts to use when reviewing agency interpretations of law.
The standard involves the following two questions:
1. Did Congress directly address the issue in dispute in the statute? If so, the statutory language
prevails.
2. If the statute is silent or ambiguous, is the agency’s interpretation “reasonable”? If it is, a court
should uphold the agency’s interpretation even if the court would have interpreted the law
differently.
37–4b When Courts Will Give Chevron Deference
to Agency Interpretation
The notion that courts should defer to agencies on matters of law has been controversial.
Under the holding of the Chevron case, when the meaning of a particular statute’s language
is unclear and an agency interprets it, the court must follow the agency’s interpretation as
long as it is reasonable. This has led to considerable discussion and litigation to test the
boundaries of the Chevron holding.
For instance, are courts required to give deference to all agency interpretations or only
to those that result from adjudication or formal rulemaking procedures? The United States
Supreme Court has held that in order for agency interpretations to be assured Chevron
deference, they must meet the formal legal standards for notice-and-comment rulemaking.
Nevertheless, there are still gray areas, and many agency interpretations are challenged in
court.
The following case concerns a federal agency’s role in determining whether foreign pilots
can be certified to operate large U.S.-registered aircraft.
Learning Objective 4
What is the importance of
the Chevron case?
10. 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984).
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UNIT SIX: Government Regulation
Case 37.3
Olivares v. Transportation Security Administration
United States Court of Appeals, District of Columbia Circuit, 819 F.3d 454 (2016).
Background and Facts Citizens of foreign countries who
seek training and certification from the Federal Aviation Administration (FAA) to operate U.S.-registered aircraft must first
secure clearance by the Transportation Security Administration
(TSA). Alberto Olivares, a citizen of Venezuela, applied to an FAAcertified flight school to learn how to pilot such an aircraft. After
conducting a background check, the TSA determined that Olivares
was a risk to aviation and national security and denied his application for training. The TSA did not offer any explanation of its
action to Olivares. Olivares filed a petition in a federal appellate
court seeking review of the TSA’s decision.
In the Words of the Court
EDWARDS, Senior Circuit Judge:
****
* * * Andrea Vara executed a sworn declaration explaining
TSA’s grounds for denying Petitioner’s application for training.
Ms. Vara is employed by [TSA] as the Alien Flight Student Program
Manager. She has been responsible for managing TSA’s Alien
Flight Student Program, which conducts security threat assessments on individuals who are not U.S. citizens or nationals who
seek flight instruction or recurrent training from FAA-certified
flight training providers.
The Vara Declaration makes it clear that Ms. Vara was
the Government official who made the determination that
Petitioner’s application should be denied * * * . The Vara
Declaration states:
* * * In 2007, Petitioner pled guilty to conspiracy to possess
with intent to distribute controlled substances and the U.S.
District Court for the Northern District of Illinois sentenced him
to eighty (80) months imprisonment. Petitioner’s conviction made
him inadmissible to the United States and led to the revocation
of his FAA Airman’s Certificate. Petitioner was deported to his
home country of Venezuela in March 2010.
A public news article published after Petitioner was deported
provided a U.S. address for Petitioner. Further, records indicated
that Petitioner was a suspected international trafficker in firearms.
There was evidence that Petitioner had previously been involved in
the export of weapons and U.S. currency to Venezuela by private aircraft, was the second pilot of an aircraft from which several weapons and $500,000 was seized by local authorities in Aruba, and that
one of his associates was arrested in Aruba for smuggling firearms.
30301_ch37_hr_871-892.indd 886
This information, viewed as a whole, demonstrated Petitioner’s
willingness to consistently disregard the law and to use an aircraft
for criminal activity, in opposition to U.S. security interests. The information also raised concerns that Petitioner may use his flight training to advance the interests of a criminal enterprise, which could
include an enterprise that seeks to do harm to the United States.
****
What is important here is that, because Congress has entrusted
TSA with broad authority over civil aviation security, it is TSA’s
job—not * * * ours—to strike a balance between convenience
and security. Therefore, in cases of this sort, we must defer to TSA
actions that reasonably interpret and enforce the safety and security
obligations of the agency. * * * Courts do not second-guess expert
agency judgments on potential risks to national security. Rather, we
defer to the informed judgment of agency officials whose obligation
it is to assess risks to national security. [Emphasis added.]
Given TSA’s broad authority to assess potential risks to aviation
and national security, the agency’s clear and reasonable explanation
offered in the Vara Declaration, and the limited standard of review
[under the holding in the Chevron case], we are in no position to
second-guess TSA’s judgment in denying Petitioner’s application.
It is self-evident that TSA’s action against Petitioner was
related to the agency’s goals of improving the safety of air travel.
TSA was not required to show that Petitioner would engage in
activities designed to compromise aviation or national security.
Rather, the agency was merely required to give a reasonable
explanation as to why it believed that Petitioner presented a risk
to aviation or national security. The Vara Declaration satisfies this
legal obligation. [Emphasis added.]
Decision and Remedy The federal appellate court denied
Olivares’s petition and upheld the TSA’s ruling. The court concluded
that the TSA had presented sufficient evidence to support its decision not to allow Olivares to attend the flight school. Therefore,
even though the court found that the TSA had not notified Olivares
of those reasons (as required under the Administrative Procedures
Act), it upheld the agency’s decision.
Critical Thinking
• Legal Environment What impact did the Vara Declaration
have on the court’s ruling in this case?
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CHAPTER 37: Administrative Law
37–5
Public Accountability
As a result of growing public concern over the powers exercised by administrative agencies,
Congress passed several laws to make agencies more accountable through public scrutiny.
Here, we discuss the most significant of these laws.
The Freedom of Information Act (FOIA)11 requires the federal government to disclose certain
records to any person on request, even if no reason is given for the request. Federal government agencies must make their records available electronically on the Internet and in other
electronic formats.
The FOIA exempts certain types of records, such as those involving national security, and
those containing information that is personal or confidential. Example 37.11 Quinn, a reporter
from an online health magazine, makes an FOIA request to the Centers for Disease Control
and Prevention for a list of people who have contracted a highly contagious virus. The
Centers for Disease Control and Prevention will not have to comply, because the requested
information is confidential and personal. ■
For other records, a request that complies with the FOIA procedures need only contain
a reasonable description of the information sought. An agency’s failure to comply with an
FOIA request can be challenged in a federal district court. The media, industry trade associations, public-interest groups, and even companies seeking information about competitors
rely on these FOIA provisions to obtain information from government agencies.
Wellesenterprises/Dreamstime.com
37–5a Freedom of Information Act
When can the Centers for
Disease Control and Prevention
refuse a Freedom of Information
Act request?
37–5b Government in the Sunshine Act
The Government in the Sunshine Act,12 or open meeting law, requires that “every portion of
every meeting of an agency” be open to “public observation.” The act also requires procedures to ensure that the public is provided with adequate advance notice of the agency’s
scheduled meeting and agenda.
Like the FOIA, the Sunshine Act contains certain exceptions. Closed meetings are permitted in the following situations:
Learning Objective 5
In what ways has federal
legislation made agencies
more accountable to the
public?
1. The subject of the meeting concerns accusing any person of a crime.
2. Open meetings would frustrate implementation of future agency actions.
3. The subject of the meeting involves matters relating to future litigation or rulemaking.
Courts interpret these exceptions to allow open access whenever possible.
37–5c Regulatory Flexibility Act
Concern over the effects of regulation on the efficiency of businesses, particularly smaller
ones, led Congress to pass the Regulatory Flexibility Act.13 Under this act, whenever a new
regulation will have a “significant impact upon a substantial number of small entities,” the
agency must conduct a regulatory flexibility analysis. The analysis must measure the cost
that the rule would impose on small businesses and must consider less burdensome
alternatives. The act also contains provisions to alert small businesses about forthcoming
regulations. The act relieved small businesses of some record-keeping burdens, especially
with regard to hazardous waste management.
“Law . . . is a human
institution, created by
human agents to serve
human ends.”
Harlan F. Stone
1872–1946
(Chief justice of the United States
Supreme Court, 1941–1946)
11. 5 U.S.C. Section 552.
12. 5 U.S.C. Section 552b.
13. 5 U.S.C. Sections 601–612.
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UNIT SIX: Government Regulation
37–5d Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act (SBREFA)14 includes various
provisions intended to ease the regulatory burden on small businesses:
1. Federal agencies must prepare guides that explain in plain English how small businesses can comply
with federal regulations.
2. Congress may review new federal regulations for at least sixty days before they take effect, giving
opponents of the rules time to present their arguments.
3. The courts may enforce the Regulatory Flexibility Act. This provision helps to ensure that
federal agencies will consider ways to reduce the economic impact of new regulations on small
businesses.
4. The Office of the National Ombudsman at the Small Business Administration was established to
receive comments from small businesses about their dealings with federal agencies. Based on
these comments, Regional Small Business Fairness Boards rate the agencies and publicize their
findings.
14. 5 U.S.C. Sections 801 et seq.
Practice and Review
Assume that the Securities and Exchange Commission (SEC) has a rule under which it enforces
statutory provisions prohibiting insider trading only when the insiders make monetary profits for
themselves. Then the SEC makes a new rule, declaring that it has the statutory authority to bring
enforcement actions against individuals even if they did not personally profit from the insider
trading. The SEC simply announces the new rule without conducting a rulemaking proceeding.
A stockbrokerage firm objects and says that the new rule was unlawfully developed without opportunity for public comment. The brokerage firm challenges the rule in an action that ultimately is
reviewed by a federal appellate court. Using the information presented in the chapter, answer the
following questions.
1. Is the SEC an executive agency or an independent regulatory agency? Does it matter to the outcome of this dispute? Explain.
2. Suppose that the SEC asserts that it has always had the statutory authority to pursue persons for
insider trading regardless of whether they personally profited from the transaction. This is the only
argument the SEC makes to justify changing its enforcement rules. Would a court be likely to find
that the SEC’s action was arbitrary and capricious under the Administrative Procedure Act (APA)?
Why or why not?
3. Would a court be likely to give Chevron deference to the SEC’s interpretation of the law on insider
trading? Why or why not?
4. Now assume that a court finds that the new rule is merely “interpretive.” What effect would this
determination have on whether the SEC had to follow the APA’s rulemaking procedures?
Debate This
Because an administrative law judge (ALJ) acts as both judge and jury, there should always be at
least three ALJs in each administrative hearing.
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Adjudication is one of the stages of the administrative process. It follows enforcement. A central aspect of adjudication is the administrative hearings.
This is where a dispute is resolved. Administrative hearings are conducted in a way that is similar to trials in the courts. An administrative law judge
presides over these hearings (Miller, 2021). Unlike in the courts, an administrative law judge acts as both a judge and a jury. In light of this, changes
should be made to ensure that there are at least three ALJs in each administrative hearing. When one ALJ acts as a jury, and a judge in a hearing,
unfairness may prevail. The ALJ may make arbitrary decisions (Miller, 2021). With this, ALJ may fail to make factual determinations. As a result, the
determinations will be appealed in a federal court. The probability of arbitrary decisions being made reduces when more ALJs preside at the
administrative hearing. SEC is an executive agency. Being so, the dispute that the agency is implicated in concerning rulemaking can be resolved
through the Administrative Procedure Act (Miller, 2021). In this process, an administrative law judge would preside over the hearing. The outcome of
the dispute would be more decisional independent if more judges are included. When more ALJ judges preside over the dispute, they will weigh the
evidence produced and make a factual determination (Miller, 2021). Although the SEC has statutory authority for pursuing individuals who have been
involved in insider trading, they should follow the law. The enforcement rules should not be changed arbitrarily. As a rule-making procedure, public
comments must be taken. With more ALJ judges in a hearing, a fair decision will be made. This may make appealing the decision unnecessary since the
parties will be satisfied.
