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Debate This: Admin Law
Debate This: Admin Law
Chapter 37, p. 888
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.
Would a court be likely to give Chevron deference to the SEC’s interpretation of the law on insider trading? Why or why not?
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. 1
Sarbanes-Oxley Act
Name
Institutional Affiliation
Course
Instructor
Date
2
1. If Shuebke’s review was conducted in good faith and conformed to generally
accepted accounting principles, could Superior hold Shuebke Delgado liable for
negligently failing to detect material omissions in Chase’s audit? Why or why not?
Yes, although Shuebke Delgado conducted the review in good faith and conformed to the
general accepted accounting principle, he may be held responsible for the negligence to detect
material omission in the chase audit by judicial decision and statute. The reason is that
negligence practices by an accountant during an audit review of the company the client wants to
purchase leads to the client making the wrong decision. a wrong decision causes damage that the
client suffers, and the accountant is held liable for the damage and negligence. In this case, if
Shuebke had been careful during the audit review, he would not have neglected the exaggerated
figures made by Norman Chase.
2. According to the rule adopted by the majority of courts to determine accountants’
liability to third parties, could Chase be liable to Superior? Explain.
Yes, Chase is liable to a superior company. In auditing, the third party involved may also be
liable if they fail to deliver good services under the common law. When a professional is
involved in negligence practices, whether indirectly or directly, he or she is often subject to
liability. In this case, Chase partnered with the Regal executive chief officer in overstating the
inventory and understating the company tax liability. Chase acted in negligence, resulting in the
superior making the wrong decision. Chase should be liable for this according to the statute and
judicial decision.
3
3. Generally, what requirements must be met before Superior can recover damages
under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5?
Can Superior meet these requirements?
Superior needs to show that Shuebke, Chase, and Regal executive officer made material
omissions and misstatements. Omissions and misstatements should show that they were intended
to defraud and manipulate. Superior also need to show that they relied on the material omission
made. Lastly, the superior must show that the omission caused loss or damage. The company can
meet this requirement where it is evident that there is a material omission made. The
misstatement provided by Chase and Regal’s executive officer aimed to deceive the superior. The
company purchase was not well of causing loss to the superior for purchasing the company more
money than it is worth.
4. Suppose a court determined that Chase had aided Regal in willfully understating its
tax liability. What is the maximum penalty that could be imposed on Chase?
If Chase was found guilty of willful violation, the penalty includes a fine of up to $10,000,
five years imprisonment, or both.
Debate This: Only the largest publicly held companies should be subject to the SarbanesOxley Act.
Sarbanes Oxley act of 2002 applies to all American companies that are public and private.
There has been a misconception that the Act only applies to large public companies. However,
some provisions of the Act are applicable to private enterprises and companies. This
misconception has led to many private companies lacking Sarbanes Oxley Act compliance
4
programs. Violation of the Act by a private company carries a severe fine penalty and up to
twenty years imprisonment. For instance, retaliation against a law enforcer with accurate
37
Learning Objectives
The five Learning Objectives below are designed to help improve your under- standing. After reading this chapter, you should be able to
answer the following questions:
1.
2.
3.
4.
5.
What is the difference between how statutory law and adminis- trative law are created?
How do the three branches of government limit the power of administrative agencies?
What sequence of events must normally occur before an agency rule becomes law?
What is the importance of the Chevron case?
In what way has federal leg- islation made agencies more accountable to the public?
AdministrativeLaw Thebody of law created by administrative agencies in order to carry out their duties and responsibilities.
872
Administrative Law
“Perhaps more values today are affected by [admin- istrative] decisions than by those of all the
courts.”
As the chapter-opening quotation suggests, government agencies established to administer the law have a
signifi- cant 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 to a crisis. For instance, after the latest financial
crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other
things, this statute created the Financial Stability Oversight Council to iden-
5
Robert H. Jackson
1892–1954
(Associate justice of the United States Supreme Court, 1941–1954)
tify 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
Mark Van Scyoc/ShutterStock.com
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.
37–1a AdministrativeAgenciesExistatAllLevelsofGovernment
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.
Exhibit 37–1 Executive Departments and Important Subagencies
Administrative Agency
A federal or state government agency established to perform a specific function.
CHAPTER 37: Administrative Law
873
DEPARTMENT NAME
SELECTED SUBAGENCIES
6
State
Treasury
Interior
Justicea
Agriculture
Commerceb
Laborb
Defensec
Housing and Urban
Development
Transportation
Energy
Health and Human
Servicesd
Educationd
Veterans Affairs
Homeland Security
Passport Office; Bureau of Diplomatic Security; Foreign Service; Bureau of Human Rights and
Humanitarian Affairs; Bureau of Consular Affairs; Bureau of Intelligence and Research
Internal Revenue Service; U.S. Mint
U.S. Fish and Wildlife Service; National Park Service; Bureau of Indian Affairs; Bureau of Land
Management
Federal Bureau of Investigation; Drug Enforcement Administration; Bureau of Prisons; U.S.
Marshals Service
Soil Conservation Service; Agricultural Research Service; Food Safety and Inspection Service;
Forest Service
Bureau of the Census; Bureau of Economic Analysis; Minority Business Development Agency;
U.S. Patent and Trademark Office; National Oceanic and Atmospheric Administration
Occupational Safety and Health Administration; Bureau of Labor Statistics; Employment
Standards Administration; Office of Labor-Management Standards; Employment and Training
Administration
National Security Agency; Joint Chiefs of Staff; Departments of the Air Force, Navy, Army;
service academies
Office of Community Planning and Development; Government National Mortgage Association;
Office of Fair Housing and Equal Opportunity
Federal Aviation Administration; Federal Highway Administration; National Highway Traffic
Safety Administration; Federal Transit Administration
Office of Civilian Radioactive Waste Management; Office of Nuclear Energy; Energy Information
Administration
Food and Drug Administration; Centers for Medicare and Medicaid Services; Centers for Disease
Control and Prevention; National Institutes of Health
Office of Special Education and Rehabilitation Services; Office of Elementary and Secondary
Education; Office of Postsecondary Education; Office of Vocational and Adult Education
Veterans Health Administration; Veterans Benefits Administration; National Cemetery
Administration
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.
Learning Objective 1
7
What is the difference between how statutory law and administrative law are created?
874 UNIT SIX: Government Regulation
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 inde- pendent 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 AgenciesProvideaComprehensiveRegulatoryScheme
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 appro- priate pollution-control standards. ■
Legislation and regulations have benefits. At the same time, these benefits entail consid- erable 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 substan- tial. (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
Determines policy with respect to interest rates, credit availability, and the money
Board of Governors (the Fed) supply.
Federal Trade Commission Prevents businesses from engaging in purported unfair trade practices; stops the
(FTC)
formation of monopolies in the business sector; protects consumer rights.
Regulates the nation’s stock exchanges, in which shares of stock are bought and sold;
Securities and Exchange
enforces the securities laws, which require full disclosure of the financial profiles of
Commission (SEC)
companies that wish to sell stock and bonds to the public.
Federal Communications
Regulates all communications by telegraph, cable, telephone, radio, satellite, and
Commission (FCC)
television.
National Labor Relations
Protects employees’ rights to join unions and bargain collectively with employers;
Board (NLRB)
attempts to prevent unfair labor practices by both employers and unions.
Equal Employment
Works to eliminate discrimination in employment based on religion, gender, race, color,
Opportunity Commission
disability, national origin, or age; investigates claims of discrimination.
(EEOC)
Environmental Protection
Undertakes programs aimed at reducing air and water pollution; works with state and
Agency (EPA)
local agencies to help fight environmental hazards.
8
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.
Dealing with Administrative Law
Whether you work for a large corporation 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.
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.
37–2a EnablingLegislation—AnExample
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.
2.
3.
4.
5.
6.
7.
Create“rulesandregulationsforthepurposeofcarryingouttheAct.”
Conductinvestigationsofbusinesspractices.
Obtainreportsfrominterstatecorporationsconcerningtheirbusinesspractices.
Investigatepossibleviolationsoffederalantitruststatutes.(TheFTCsharesthistaskwiththe Antitrust
Division of the U.S. Department of Justice.)
Publish findings of its investigations.
Recommendnewlegislation.
Holdtrial-likehearingstoresolvecertainkindsoftradedisputesthatinvolveFTCregulationsor federal
antitrust laws.
9
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.
“Laws and institutions, like clocks, must occasionally be cleaned, wound up, and set to true time.”
CHAPTER 37: Administrative Law
875
Linking Business Law to Corporate Management
Henry Ward Beecher
1813–1887
(American clergyman and abolitionist)
1. 15 U.S.C. Sections 41–58.
10
Learning Objective 2
How do the three branches of government limit the power of administrative agencies?
876
UNIT SIX: Government Regulation
LegislativeRule Anadministrative agency rule that carries the same weight as a congressionally enacted statute.
DelegationDoctrine Adoctrine, 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 Theorganizational structure, consisting of government bureaus and agencies, through which the government implements
and enforces the laws.
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 AgencyPowersandtheConstitution
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 gov- ernment. 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 bind- ing 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 inde- pendently. 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 congres- sional 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
11
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 inves- tigate 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, pro- vides 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
ExhaustionDoctrine In administrative law, the principle that a complaining party normally must have exhausted all available
administrative remedies before seeking judicial review.
CHAPTER 37: Administrative Law 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 TheAdministrativeProcedureAct
Sometimes, Congress specifies certain procedural requirements in an agency’s enabling legislation. In the
absence of directives from Congress concerning a particular agency pro- cedure, the Administrative
Procedure Act (APA)2 applies. The APA sets forth rules and reg- ulations 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, capri- cious, 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.
2.
3.
4.
5.
Failedtoprovidearationalexplanationforitsdecision.
Changeditspriorpolicywithoutjustification.
Consideredlegallyinappropriatefactors.
Failedtoconsiderarelevantfactor.
Renderedadecisionplainlycontrarytotheevidence.
The following case involved a challenge to the boundaries of a protected wild and scenic
12
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
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
13
(Continues )
Simmons v. Smith
United States Court of Appeals, Eighth Circuit, 888 F.3d 994 (2018).
878 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 geograph- ical
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 identify- ing 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.
14
Fair Notice The APA also includes many requirements concerning the notice that regu- 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 inde- cency 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 broad- casts 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?
15
4. Federal Communications Commission v. Fox Television Stations, Inc., 567 U.S. 239, 132 S.Ct. 2307, 183 L.Ed.2d 234 (2012).
steinphoto/iStock Unreleased/ Getty Images
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 appli- cability 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. Noticeoftheproposedrulemaking. 2. Acommentperiod.
3. Thefinalrule.
Notice-and-comment is the most common rulemaking procedure. Example 37.4 The Occupational Safety and
Health Act authorized the Occupational Safety and Health Admin- istration (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. ■
16
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 gov- ernment 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.
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 com- ments 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 Transpor- tation 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
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 Anadministrative rulemaking procedure that requires notice, opportunity for comment, and a
published draft of the final rule.
CHAPTER 37: Administrative Law
879
5. 5 U.S.C. Section 551(4).
17
Learning Objective 3
What sequence of events must normally occur before an agency rule becomes law?
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?
Ethical Issue
880
UNIT SIX: Government Regulation
InterpretiveRule Anadministrative agency rule that explains how
the agency interprets and intends
to apply the statutes it enforces.
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 “con- cise 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.
18
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. ■
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 interpre- tive 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.
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.
19
6. 5 U.S.C. Section 555(c).
Mike Flippo/Shutterstock
Although agency rulemaking must comply with the requirements of the Administrative Proce- dure
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 inves- tigations 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 through on-site
inspections. Sometimes, inspecting an office, a factory, or some other busi- ness 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
20
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 main- tain 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 admin- istrative agency may use either type of subpoena.
There are limits on what an agency can demand. To determine whether an agency is abus- ing its discretion in
pursuing information as part of an investigation, a court may consider such factors as the following:
1. Thepurposeoftheinvestigation.Aninvestigationmusthavealegitimatepurpose.Harassmentisan 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.
CHAPTER 37: Administrative Law 881
21
Bob Zahn/Conde Nast
882
UNIT SIX: Government Regulation
Adjudication Aproceedingin 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.
Exhibit 37–3 The Process of Formal Administrative Agency Adjudication
2. Therelevanceoftheinformationbeingsought.Informationisrelevantifitrevealsthatthelawis being violated or if it assures
the agency that the law is not being violated.
3. Thespecificityofthedemandfortestimonyordocuments.Asubpoenamust,forexample,adequately describe the material being
sought.
4. Theburdenofthedemandonthepartyfromwhomtheinformationissought.Forinstance,thecostof copying requested
documents or providing digital information may become burdensome. (Note that a business generally is protected from
revealing information such as trade secrets.)
22
Search Warrants The Fourth Amendment protects against unreasonable searches and seizures by
requiring that in most instances a physical search for evidence must be con- ducted 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 require- ment does apply to the
administrative process.9
Nevertheless, agencies can conduct warrantless searches in several situations. Warrants are not required to
conduct searches in highly regulated industries. Firms that sell fire- arms or liquor, for instance, are
automatically subject to inspections without warrants. Sometimes, a statute permits warrantless searches of
certain types of hazardous opera- tions, such as coal mines. Also, a warrantless inspection in an emergency
situation is normally considered reasonable.
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 con- ducted 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 nego- tiations 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 unco- operative 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 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 admin- istrative 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).
Complaint
Answer
Hearing before Administrative Law Judge
Order of Administrative Law Judge
Appeal to Governing Board of Agency
Final Agency Order
Court Review
23
Court Order
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 prosecut- ing 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 pro- ceedings. For instance,
the APA requires that the ALJ be separate from the agency’s inves- tigative 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.
Hearing Procedures Hearing procedures vary widely from agency to agency. Admin- istrative agencies
generally exercise substantial discretion over the type of procedure that will be used.
Frequently, disputes are resolved through informal adjudication proceedings that resem- ble 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, interrog- atories, 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 enforce- ment proceeding is placed on the
agency. During the hearing, the parties may give testimony, present other evidence, and cross-examine
adverse witnesses.
24
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.
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.
CHAPTER 37: Administrative Law
883
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.
884 UNIT SIX: Government Regulation Case 37.2
Craker v. Drug Enforcement Administration
United States Court of Appeals, First Circuit, 714 F.3d 17 (2013).
25
Can the DEA restrict marijuana supplies to be used in research?
Background and Facts Dr. Lyle Craker, a
professor in the University of Massachusetts’s
Department of Plant, Soil and Insect Sciences,
applied to the Drug Enforcement Administration
(DEA) for permission to register to manufacture
marijuana for clinical research. He stated that “a
second source of plant material is needed to facilitate privately funded Food and Drug Administration (FDA)–approved research into medical uses of
marijuana, ensuring a choice of sources and an adequate supply of quality, research-grade
marijuana for medicinal applications.”
An administrative law judge recommended that Craker’s appli- cation be granted, but a DEA deputy
administrator issued an order denying his application. Under the DEA’s interpretation, the Controlled Substances Act (CSA) requires an applicant to prove both that effective controls against
diversion of the marijuana for unap- proved purposes are in place and that its supply and the
competi- tion to supply it are inadequate. The administrator determined that the professor had not
proved that effective controls against the marijuana’s diversion were in place or that supply and
competition were inadequate. Craker petitioned the U.S. Court of Appeals for the First Circuit to
review the order.
In the Words of the Court
HOWARD, Circuit Judge. *** *
Since 1968, the National Center for Natural Products Research (“NCNPR”) at the University of
Mississippi has held the necessary registration and a government contract to grow marijuana for
research purposes. The contract is administered by the National Institute on Drug Abuse (“NIDA”),
a component of the National Institutes of Health (“NIH”), which, in turn, is a component of the [U.S.]
Department of Health and Human Services (“HHS”). The con- tract is opened for competitive
bidding every five years. The NCNPR is the only entity registered by the DEA to manufacture
marijuana.
*** *
Dr. Craker’s argument with respect to competition is essentially that there cannot be “adequately
competitive conditions” when there is only one manufacturer of marijuana.
26
The Administrator * * * observed that NIDA had provided mari- juana manufactured by the
University of Mississippi either at cost or free to researchers, and that Dr. Craker had made no
showing of
how he could provide it for less * * * . Additionally, the Administrator noted that Dr. Craker is free to
bid on the contract when it comes up for renewal.
We see nothing improper in the Administrator’s approach. The [CSA’s] term “adequately competi- tive
conditions” is not necessarily as narrow as the petitioner suggests. * * * That the current regime may
not be the most competitive situation possible does not render it “inadequate.” [Emphasis added.]
*** *
In finding that Dr. Craker failed to demonstrate that the cur- rent supply of marijuana was not
adequate and uninterrupted, the Administrator observed that there were over 1,000 kilograms of
marijuana in NIDA possession, an amount which far exceeds present research demands and “any
foreseeable” future demand. Dr. Craker does not dispute this finding, or that the current amount is
more than ninety times the amount he proposes to supply. Instead, he argues that the adequacy of
supply must not be measured against NIDA-approved research, but by whether the supply is
adequate to supply projects approved by the FDA. But even if we were to accept his premise—
which we don’t—Dr. Craker fails to demonstrate that the supply is inadequate for those needs,
either. He merely states that certain projects were rejected as “not bona-fide” by NIDA, a claim
which does not address the adequacy of supply. The fact that Dr. Craker disagrees with the method
by which marijuana research is approved does not undermine the substantial evidence that
supports the Administrator’s conclusion.
Decision and Remedy The U.S. Court of Appeals for the First Circuit denied Craker’s petition to
review the agency’s order “because the Administrator’s interpretation of the CSA is per- missible
and her findings are reasonable and supported by the evidence.”
Critical Thinking
• Economic Why should a court wait to review an agency’s order until the order has gone through
the entire procedural pro- cess and can be considered final?
• Legal Environment Did the court in this case appear to agree with the DEA’s interpretation of
the Controlled Substances Act? Why or why not?
AP Images/Brennan Linsley
CHAPTER 37: Administrative Law 885 37–4
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 espe- cially 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
27
should. By so ruling, the Court created a standard of broadened deference to agencies on questions of legal
interpretation.
37–4a TheHoldingoftheChevronCase
At issue in the Chevron case was whether the courts should defer to an agency’s interpreta- tion 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 interpre- tation 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 inter- pretation
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.
2.
DidCongressdirectlyaddresstheissueindisputeinthestatute?Ifso,thestatutorylanguage prevails.
Ifthestatuteissilentorambiguous,istheagency’sinterpretation“reasonable”?Ifitis,acourt should uphold
the agency’s interpretation even if the court would have interpreted the law differently.
37–4b WhenCourtsWillGiveChevronDeference 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.
28
10. 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984).
