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CHAPTER 17
THE REGULATORY PROCESS
ADMINISTRATIVE AGENCIES—Administrative agencies have become a fundamental part
of modern government.
Creating an Administrative Agency—An administrative agency is defined as an authority of
the government (other than a court or a legislature) created to administer a particular law.
Congress gives the agency authority through a legislative delegation. The statute delegating that
authority is called an enabling statute.
Why Create an Agency?—Agencies are generally created when Congress perceives a problem as
requiring a considerable degree of expertise, flexibility, and continuous supervision.
Add. Case: Hadson Gas v. FERC (D.C. Cir., 1996)--Congress passed the Natural Gas
Wellhead Decontrol Act, which eliminated federal control of natural gas prices. The Federal
Energy Reg. Comm., which administered the price controls, then abolished regulations based on
earlier statutory authority that led to 500 pages in the Code of Federal Regulations. Hadson
sued to block FERC from eliminating the regulations, claiming that they had “collateral effects”
that had to be considered before the regulations could be eliminated. That is, some regulations
had been created so the regulatory scheme would be consistent with other federal regulations;
those aspects of the regulatory scheme could not be dropped. FERC rejected this position;
Hadson appealed.
Decision: Petition denied. Although the Decontrol Act did not specifically eliminate every part
of the regulations that had been implemented under the prior laws, passage removed “the
Commission’s sole reason for creating [regulations] and mooting the sole basis [for the
ADMINISTRATIVE LAW—The primary sources of administrative law include (1) enabling
statutes for various agencies, (2) the Administrative Procedures Act, and (3) court decisions that
review the validity of agency actions or decision.
Add. Info: Classifications: Administrative agencies may be separated on the basis of in
organizational structure into either agencies and departments (headed by an administrator or in
cabinet departments, the secretary) or commission and boards (headed by one or more
commissioners or an administrator). Agencies also can be classified on the basis of whether the
agency is attached to a branch of government. Specifically, executive (or dependent) agencies
are a part of the executive branch of government, while the independent agencies are not.
Administrative agencies designated as boards or commissions are generally independent
agencies. Commissioners are appointed by the President, but technically do not serve at the
President's discretion and can be removed only for cause. As a result of this independence, there
is often a restriction that a commission's membership can be made up only of a bare majority
from the same political party. For example, only three commissioners of the five SEC may be
members of the same political party. In executive agencies the person of highest authority is
directly accountable to the President. Also when an administration changes, the heads of
executive agencies are usually replaced.
Add. Info: History of Agency Formation: Agency development began with the regulation of
private economic activity in the late 1800s. The first federal agency was the Interstate
Commerce Commission (which was abolished 100 years later). The largest periods of agency
development occurred during the 1930s and the 1970s, which may be thought of as: New Deal
Agencies—ones developed in response to concerns generated by the Great Depression, including
the SEC and the FCC among others. Most agencies were geared to specific industries. Social
Reform of the 1960s and 1970s—agencies focused on general, not industry specific reform, such
as environmental protection (the EPA), worker health (OSHA), employment discrimination
(EEOC), and consumer product safety (CPSC) among others.
Rule Making—Through its rulemaking power, the agency seeks to develop administrative rules
and to state its regulatory policy. Different agencies call rules by different names, such as
guidelines, opinions, standards, and so forth.
Types of Rules—Administrative rules are classified as being either substantive (legislative),
interpretative, or procedural.
Substantive or Legislative Rules—Legislative are essentially administrative statutes that have the
same force as a law enacted by Congress. (The APA generally requires that the agency provide
interested parties with public notice and the opportunity to comment.) Industry trade associations
actively monitor, and comment on, proposed rules.
Add. Info: Rule requirements—In Hoctor v. USDA (82 F.3d 165, 7th Cir.), the court explained:
“A rule promulgated by an agency that is subject to the Administrative Procedure Act is invalid
unless the agency first issues a public notice of proposed rulemaking, describing the substance
of the proposed rule, and gives the public an opportunity to submit written comments; and if
after receiving the comments it decides to promulgate the rule it must set forth the basis and
purpose of the rule in a public statement. These procedural requirements do not apply, however
to ‘interpretative rules, general statements of policy, or rules of agency organization, procedure,
or practice.’ ... Notice and comment rulemaking is time-consuming, facilitates the marshaling of
opposition to a proposed rule, and may result in the creation of a very long record that may in
turn provide a basis for a judicial challenge to the rule if the agency decides to promulgate it.
There are no formalities attendant upon the promulgation of an interpretive rule, but this is
tolerable because such a rule is ‘only’ an interpretation.”
Interpretative Rules—Interpretative rules are statements issued by an agency to provide both the
agency staff and the public with guidance regarding the interpretation of a statute or regulation.
(These rules are generally exempt from the APA's notice and comment requirements).
Add. Case: Assn. of Washington Business v. State of Washington, Dept. of Revenue (Sup.
Ct., Wash., 2005)—The state of Washington taxing authority issued interpretive regs about how
it would resolve certain tax matters under the state tax code. The business group sued,
contending the agency did not have authority to issue such regulations. The trial court agreed;
the appeals court held for the Dept. of Revenue; plaintiffs appealed.
Decision: Affirmed. A regulation is invalid if it violates the constitution, exceed the statutory
authority of an agency, was adopted without complying with rule-making procedures, or is
arbitrary and capricious. The challenge here was as to statutory authority and if the rule in
Add. Case: United Technologies v. EPA (D.C. Cir., 1987)--Under the Resource Conservation
and Recovery Act (RCRA), operators of hazardous waste treatment, storage, or disposal
facilities must obtain operating permits from EPA. Many waste facilities were in operation when
RCRA was enacted, so Congress allowed them to operate on an “interim status” basis and
amended RCRA later, imposing added requirements on interim facilities. I.e., they were required
to take corrective action for all releases of hazardous waste regardless of when the waste was
placed in the facility. EPA issued new regs to implement the amendments. It issued a final rule,
“to incorporate into the existing [RCRA] regulations a set of requirements from the new RCRA
amendments that became effective as a matter of statute in the short term.” The rule became
effective immediately without notice or comment by interested parties. United argued that the
rule was a legislative rule enacted without notice as required by the APA, so the rule was invalid.
EPA maintained that the rule was interpretative and did not require notice and comment.
Decision: The court agreed with the EPA. The APA states that interpretative rules need not
follow notice and comment procedures. An interpretative rule is intended to set forth what the
Add. Case: Amer. Mining Cong. v. Mine Safety & Health Admin. (D.C. Cir., 1993)--The
Federal Mine Safety and Health Act regulates conditions in mines and empowers Labor to
enforce the statute and relevant regulations. The Mine Safety and Health Admin.has rules called
Part 50 regulations, which cover the “Notification, Investigation, Reports and Records of
Accidents, Injuries, Illnesses, Employment, and Coal Production in Mines.” When occupational
diseases are diagnosed, mine operators must report them to MSHA. It issues Program Policy
Letters (PPLs) to state agency policies and interpretations. In response to inquiries from mine
operators about whether certain x-ray results needed to be reported as diagnoses, the MSHA
stated the meaning of “diagnosis” for purposes of Part 50. This case presents a single issue:
whether PPLs stating the agency’s position that certain x-ray readings qualify as diagnoses of
lung disease within the meaning of agency reporting regulations, are interpretive rules under the
APA.
Decision: The PPLs were interpretative, not legislative rules. This decision is reached on the
basis of whether the interpretive rule has “legal effect.” The legal effect is determined by asking
(1) whether in the absence of the rule there would not be an adequate legislative basis for
enforcement action or other agency action to confer benefits or ensure the performance of
Procedural Rules—Procedural rules identify an agency’s organization; describe its methods of
operation, and detail internal practices. After the enactment of its procedural rules, an agency is
generally bound to comply with them.
Rulemaking Procedure—When an agency makes legislative or substantive rules, which are
usually of most consequence to business, unless specifically directed by Congress to do
otherwise, it follows APA requirements for informal or formal rulemaking procedure. In either
case, there must be public notice of a proposed rule, usually in the Federal Register. Interested
parties submit their positions and rationales to an agency considering a rule and agencies may
seek other relevant sources of information. All information need not be in formal agency records.
The information submitted is in the public record and the agency must consider the information
presented in making the final rule. The Chevron doctrine remains dominant in this area.
CASE: Chevron, USA v. Natural Resources Defense Council (S. Ct., 1984)—The Clean Air
Act requires states with nonattainment areas (dirty air) to have a permit program to regulate new
or modified stationary sources of air pollution. The EPA allowed a plant with multiple sources to
be treated as if it were one sources (the bubble rule) for measuring changes in emissions, rather
than measuring each vent source at a multiple vent location. NRDC challenged the rule as
inconsistent with the Clean Air Act. The Court of Appeals agreed with the NRDC. Appeal was
taken.
Decision: Reversed. When courts review agency actions, they look to the intent of Congress. If a
statute required administrators to interpret the statute, then courts will give deference to the
Questions: 1. Congress did not specify that the EPA could use a “bubble” in measuring pollution
emitted from an industrial facility, so why can EPA come up with such an idea?
Congress did not tie the hands of the agency; it instructed the EPA to get pollution in
2. If the courts did not grant such deference to agencies, what would be the practical result?
The agencies would be subject to even more challenges than they are now, which would likely
Add. Case: Harvey v. Veneman (2nd Cir., 2005)—In the Organic Foods Production Act,
Congress gave USDA power to regulate organic foods and to have regulations to certify that
they met standards needed to be called organic. The USDA adopted rules and was sued by
Harvey, an organic food producer, as violating the intent of Congress by allowing non-organic
foods to be called organic. The district court dismissed the suit; Harvey appealed.
Decision: Reversed. Harvey is correct. The statute states that organic foods will not include
products with added synthetic ingredients, but the regulations allow that to happen. That violates
ENFORCING RULES—Whether a regulation is written by Congress or by an agency, rule
enforcement by agencies is a major part of their function. To enforce rules, they must have
sources of information about possible violations, so they use various sources of information.
Investigative Powers—An agency’s authority to investigative possible violations is one
important characteristic that distinguishes agencies from courts. Most information is obtained
through staff analysis and the agency’s own records. When those sources prove inadequate, the
agency may rely on its statutory authority provided by Congress to seek additional information.
Some of the powers may be limited by the Constitution, and particularly the Fourth Amendment.
The agency may obtain additional information (1) by requiring a business to do self-reporting,
(2) through direct observation of the business, or (3) by using its subpoena power.
Requiring Monitoring and Self-Reporting—Agencies are increasing requiring businesses to self
report, normally at fixed intervals or upon the occurrence of a violation. Failure to self-report can
bring about fines or other sanctions by the agency. The self-incrimination privilege of the Fifth
Amendment does not protect corporations from the reporting requirement.
Cyberlaw: Do Old Regulations Apply to New Forms of Competition?
While common law rules adjust to apply to Internet transactions and such, certain regulatory
powers are specific enough that the grant of power from Congress to agencies does not
automatically give them authority to regulate new technologies and ways of doing business.
Direct Observation by Agencies—Agencies may rely on visual detection (air pollution) and
on-the-spot inspections (worksite safety inspections). Some observations may violate the
constitutional rights of the owner of the business. For example, the Supreme Court held in
Marshall v. Barlow that agencies are ordinarily required to obtain warrants for routine
inspections. No warrant is required if (1) the business owner consents to the search or (2) the
agency’s evidence is obtained from an “open field” observation—the agency is able to obtain
evidence from areas accessible by the general public. Warrants are also not needed if the business
is closely regulated or there is an emergency situation.
Add. Case: Dow Chemical v. U.S. (1986)--Dow sued to stop EPA’s aerial photography of its
industrial complex. EPA had requested an on-site inspection, but Dow refused the request.
Instead of seeking an administrative search warrant, EPA hired an aerial photographer, who
took photos from various altitudes, all of within the lawful airspace. Dow alleged that EPA’s
action violated 4th Amendment protections against unlawful searches and seizures. The district
court granted summary judgment for Dow, but the court of appeals reversed. Dow appealed.
Decision: The Supreme Court concluded that the open areas of an industrial plant complex with
numerous plant structures spread over an area of 2,000 acres are open to the view and
Agency Subpoena Power—Congress has provided some agencies with the power to issue
subpoenas to acquire information. The business is generally required to provide the information
—unless the agencies request is to vague or if the burden imposed on the business far outweighs
the benefits to the agency. Importantly, the agency is able to use its subpoena power to reach
even trade secret.
Add. Case: Trinity Marine Products v. Chao (5th Cir., 2007)--OSHA visited Trinity’s facility to
conduct an inspection. Trinity denied entrance to the inspectors. A month later, the inspectors
returned with an administrative search warrant issued by a U.S. magistrate. Trinity refused
entrance. The inspectors called an Assistant U.S. Attorney who advised Trinity to grant entrance
or a federal marshal would be sent to force entry. Trinity responded that it could contest the
warrant and there could be no force used to execute the warrant. Marshals told Trinity if the
inspectors were not let it, they would arrest Trinity officials. The inspectors were then admitted,
but arguments continued. Trinity filed a motion to enjoin the inspection, contending that OSHA
did not have probable cause to obtain a warrant. OSHA contended that once the warrant was
issued, Trinity had to exhaust its administrative remedies before it could go to court. The ALJ
held that the warrant was proper; OSHA agreed. Trinity petitioned for a review of that order.
Decision: Petition denied. Administrative search warrants issued to OSHA differ from
traditional criminal warrants in that the exhaustion-of-administrative-remedies doctrine applies,
meaning that an employer who wishes to challenge a warrant cannot immediately file a motion
Enforcement Power—Congress normally provides an agency with a variety of enforcement
powers (sanctions) including civil and criminal penalties. Agencies have found that merely the
threat of public exposure of a violation is frequently enough to bring about compliance.
CASE: Black Beauty Coal v. Federal Mine Safety and Health Rev. Comm. (DC Cir. 2012)—
MSHA inspected a Beauty coal mine and believed there was a fire hazard from a coal pile next to
a conveyor belt with a defective guard sheet. He wanted the belt shut down; the mine operator
refused saying the problem would be fixed without a shutdown. Inspector issued a “high
negligence” citation. Beauty refused to accept proposed penalty. ALJ imposed a $70,000 fine.
Beauty appealed.
Decision: Review denied (MSHA position upheld). The regulations regarding exactly when a
hazard required specific action in such an instance is not clear. Judgment must be used about the
Questions: Don’t the people working at the mine and running the mine have more expertise
about safe operations than an inspector?
It depends on the sophistication of the mining operation, but probably so. Nevertheless, the large
2. Why would the company fight the citation rather than pay? The cost of the fight is likely
greater than the fine.
The company had a large number of citations. Evidence of continued problems can lead to larger
Add. Case: Armalite v. Lambert (6th Cir., 2008)-- Armalite has a federal license to sell guns in
Ohio. As such, it was required to comply with record-keeping requirements of the Bureau of
Alcohol, Tobacco, Firearms, and Explosives (ATF). During an inspection of Armalite’s records,
which includes evidence that only qualified purchasers were sold guns, several problems were
found. Armalite was put on notice that further such problems with records would be considered
willful and could result of loss of license. The next year, an inspection showed more record
keeping violations. The ATF recommended loss of license and the ATF hearing officer agreed,
finding willful violations of records requirements. Armalite’s license to sell guns was revoked. It
appealed.
Decision: Affirmed. Failure to provide information required by regulation on the sale of firearms
on six occasions was willful and warrants the loss of license. Armalite had been notified of
problems but failed to take steps to prevent mistakes. What may have been negligent initially
Informal Agency Procedures—Because they lie outside the of the procedural requirements of the
APA, informal procedures provide agencies with considerable discretion in their application.
They generally (1) cost less and (2) require less time. Informal procedures include inspections,
processing applications and permits, settlements, negotiations, and advisory opinions. An
agency’s response is often based on an inspector’s on-the-spot analysis. In some cases, the
agency is able to “coerce” the desired behavior by simply suggesting that it may prosecute the
company.
Add. Case: Invention Submission v. Rogan (4th Cir., 2004)—The Inventors’ Rights Act protects
inventors from invention promotion scams and authorized the Patent and Trademark Office to
publicize complaints. One PTO ad gave testimony from an inventor who paid $13,000 to
Invention Submission Corp., which did nothing for him. The company settled with the inventor
and settled an FTC complaint for $1.2 million, in which it did not admit to doing anything
wrong. The company sued the PTO, contending that the advertising campaign treated it
improperly. District court dismissed the suit. Inventions Submission appealed.
Decision: The district court should not have even accepted the case in order to dismiss it as it
did not have jurisdiction to take the complaint. Under the Administrative Procedure Act, there is
Review of Informal Procedure Decisions: A business dissatisfied with an agency action may seek
review within the agency; if still dissatisfied it can seek review by the federal court, which will
focus on proper procedure and if the regulation is within the legislative intent of Congress.
Add. Case: Rybachek v. U.S. (9th Cir., 1993)--The Rybacheks, Alaskan gold miners, charge
that while enforcing environmental regulations, an EPA official violated their constitutional
rights. The EPA official, Loiselle, conducted harassing helicopter overflights of their mine,
publicly branded them “flagrant violators” of the Clean Water Act, equated Alaskan gold miners
with child molesters, and singled them out for enforcement proceedings, because they are vocal
critics of the EPA practices. Loiselle moved the district court for summary judgment, asserting
qualified immunity. The court held Loiselle was not immune. This is a limited appeal of only the
qualified immunity question.
Decision: Reversed. Loiselle is immune. Government officials performing discretionary
functions are shielded from liability so long as conduct does not “violate clearly established
statutory or constitutional rights of which a reasonable person would have known.” Even if a
constitutional violation occurred, the official is immune if the right asserted by the plaintiff was
Formal Agency Procedures—The two basic formal proceedings used by most federal and state
regulatory agencies are investigatory and adjudicatory hearings.
Adjudicatory Hearings. An adjudicatory hearings is much like a trial court with regard to its
procedures. The outcome of such a hearing is generally limited to the party involved in the
hearing. An adjudicatory hearing (1) begins with the filing of a complaint, (2) the business must
respond, (3) with the response, the agency will make a determination as to whether a hearing is
required, (4) if a hearing is determined to be required, an administrative law judge will be
selected, (5) the agency will be represented by its counsel, and (6) both sides will present their
evidence (witnesses will be cross-examined). While adjudicatory hearings must conform to the
procedural due process guarantees provided by the Constitution, there is no right to a jury trial.
Add. Case: Atlas Roofing v. OSHA (S. Ct., 1977)--Under OSHA, if a company is given an
abatement order, it may challenge the order. An ALJ examines it and renders a decision; the
company may appeal to the full Commission. The agency’s decision is considered final unless the
company appeals to the federal court. Atlas was issued an abatement order and a penalty for
safety violations. It followed agency review procedures and challenged the procedures in court
as in violation of the right to a jury trial (the 7th Amendment). The court of appeals confirmed
the commission’s findings and stated that jury trials are not required in agency findings. The
Supreme Court granted certiorari.
Decision: The Court focused on the wording of the 7th Amendment—“in suits at common law.”
It noted that this was a statutory proceeding created by new “public rights” and not a common
Add. Case: Sasser v. EPA (4th Cir., 1993)--Located on Sasser’s plantation on a river in S.C.
were abandoned dikes that had been breached, creating tidal freshwater wetlands. In 1981,
Sasser applied to the Corps of Engineers for a permit to restore the dikes around a 76-acre field
to impound water for duck hunting. The Corps denied the permit. Later, assuming that a different
permit authorized the work, Sasser built new banks inside the old dike. The Corps discovered the
work and ordered him to tear it out; Sasser refused to restore the property to its previous
condition. The Corps referred the matter to EPA, which issued an order to Sasser. His refusal to
comply with this order led to a complaint charging violation of the Clean Water Act. An ALJ
sustained the complaint and imposed a $125,000 fine. This decision became the Administrator’s
final order. Sasser appealed that the administrative proceedings violated his Seventh Amendment
right to a jury trial.
Decision: The court of appeals ruled that Sasser is not entitled to a jury trial. The Amendment
does not apply to disputes over statutory public rights, “those which arise between the
Government and persons subject to its authority in connection with the performance of the
Issue Spotter: Contest a Regulatory Order?
Accepting the Labor offer means the matter will be over. So long as future violations do not
occur (and employees will be more sensitive to that possibility), there should be no further
consequence to the matter. Even if your company is not wrong, or not as wrong as claimed by
Labor, it still may be the less costly route to settle the matter. A challenge to Labor probably
means publicity that makes the company look bad–violation labor laws and cheating employees
out of wages they are owed. Even if the company is found not responsible, the early publicity in
the matter can be damaging. It also takes management time to dispute such matters and costly
legal assistance to carry legal proceedings forward. Unless the costs of settling are quite high,
and expected to result in more trouble in the future, even if the firm thinks it has been judged
wrongly, it may well take the settlement and be done with the matter. Contesting the regulation
itself would be costly and since it is a long-established regulation, it is highly unlikely that it is
invalid.
International Perspective: Administrative Agencies in Japan
While many administrative agencies in Japan are similar to those in the U.S., there are a number
of important differences in the application of agency power. A particularly interesting difference
is the body of administrative law known as administrative guidance. This term included all of the
procedural tools the Japanese government can use to exert formal and informal pressure on
businesses. Using its power over foreign trade, foreign exchange, and loanable funds,
administrative agencies in Japan may issue guidance in the form of requests, warnings,
encouragement, or suggestions. Businesses that do not comply may find such noncompliance has
consequences in unrelated areas.
JUDICIAL REVIEW—The APA sets forth procedural requirements for a party seeking a court
review of an agency decision. This helps insure agencies do not go beyond the powers they were
granted by Congress or violate due process rights.
When Judicial Review Can Occur—Before a court can review an agency’s action, there are
several threshold procedural requirements that must be satisfied by the party making the request:
1. Jurisdiction
2. Reviewability
3. Standing
4. Ripeness
5. Exhaustion
Jurisdiction—The challenging party must select a court that has authority to hear the case. In
many cases, the statute specifies the appropriate court.
Reviewability—The challenging party must determine if the action is reviewable by the courts.
The APA authorizes the courts to review most agency actions. Judicial review is not available in
some cases.
Review Prohibited by Statute. Congress may specify which court has review power or can
prohibit review of ordinary agency actions. In case of veterans' benefits, the Department of
Veterans affairs has final, nonreviewable, authority.
Agency Action Committed to Agency Discretion. Because some decisions require speed or
secrecy, judicial review may be denied, such as national defense decisions.
Standing—Federal courts cannot hear complaints from parties who have no stake in a real
dispute or who raise only hypothetical questions. The test for standing is whether the agency
action challenged has caused the party seeking review “injury in fact” and whether the interest
sought to be protected falls within the “zone of interests” governed by the statute in question. In
Lujan v. Defenders of Wildlife (1992), an environmental group challenged certain foreign aid
decisions as in violation of the Endangered Species Act—e.g., foreign aid to Egypt helped build
dams which endangered the Nile crocodile. The Supreme Court refused to hear the challenge
