978-1285770178 Lecture Note BL ComLaw 1e IM-Ch23 Part 1

the auspices of the Federal Reserve Board.

2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

whole or in part.

The CFPB—

• Issues rules and regulations for many financial products.

• Has far-reaching powers to prohibit abusive products and practices.

• Oversees banks, mortgage lenders, and credit firms.

The agency’s chief focus is consumer financial protection. The agencies whose consumer protection

functions the CFPB assumed included a similar focus among their purposes, but their functions were spread

across seven government entities—the Federal Reserve Board of Governors, the Federal Deposit Insurance

Corporation, the Federal Trade Commission, the National Credit Union Administration, the Office of the

Comptroller of the Currency, the Office of Thrift Supervision, and the Department of Housing and Urban

Development. Besides mortgages, the CFPB has oversight of credit cards, student loans, payday loans, and

other consumer financial products.

Besides mortgages, the CFPB has oversight of credit cards, student loans, payday loans, and other

consumer financial products. According to the act, the CFPB’s purpose, objectives, and functions are as

follows:

SEC. 1021. PURPOSE, OBJECTIVES, AND FUNCTIONS.

(a) PURPOSE.—The Bureau shall seek to implement and, where applicable, enforce Federal consumer

financial law consistently for the purpose of ensuring that all consumers have access to markets for

consumer financial products and services and that markets for consumer financial products and

services are fair, transparent, and competitive.

(b) OBJECTIVES.—The Bureau is authorized to exercise its authorities under Federal consumer financial

law for the purposes of ensuring that, with respect to consumer financial products and services—

(1) consumers are provided with timely and understandable information to make responsible decisions

about financial transactions;

(2) consumers are protected from unfair, deceptive, or abusive acts and practices and from

discrimination;

(3) outdated, unnecessary, or unduly burdensome regulations are regularly identified and addressed in

order to reduce unwarranted regulatory burdens;

(4) Federal consumer financial law is enforced consistently, without regard to the status of a person as a

depository institution, in order to promote fair competition; and

(5) markets for consumer financial products and services operate transparently and efficiently to facilitate

access and innovation.

(c) FUNCTIONS.—The primary functions of the Bureau are—

(1) conducting financial education programs;

(2) collecting, investigating, and responding to consumer complaints;

(3) collecting, researching, monitoring, and publishing information relevant to the functioning of markets

for consumer financial products and services to identify risks to consumers and the proper functioning

of such markets;

whole or in part.

CHAPTER 23: ADMINISTRATIVE AGENCIES 7

whole or in part.

Administrative process is the administration of law by administrative agencies. The Administrative Procedure

Act (APA) of 1946 imposes procedural requirements that all federal agencies must follow in their rulemaking,

adjudication, and enforcement functions.

A. THE ARBITRARY AND CAPRICIOUS TEST

• Failure to consider a relevant factor.

• Render of a decision plainly contrary to the evidence.

CASE SYNOPSIS—

Case 23.1: Federal Communications Commission

v. Fox Television Stations, Inc.

The Federal Communications Commission (FCC) polices “indecent” speech—“language that describes, in

terms patently offensive as measured by contemporary community standards for the broadcast medium,

sexual or excretory activities and organs.” The FCC had long ignored “fleeting expletives.” During a broadcast

of the Golden Globe Awards, Bono commented “this is really, really, fucking brilliant.” On a complaint about

the broadcast, the FCC held that any use of “the F–Word” inherently has sexual connotation and falls within

the scope of the indecency definition. During broadcasts of other awards shows, similar expletives were used,

and the FCC ruled similarly. Fox Television Stations, Inc., filed for review. The U.S. Court of Appeals for the

Second Circuit vacated the FCC’s order against the broadcasters, and remanded the case. The FCC

appealed.

The United States Supreme Court reversed and remanded. “A court is not to substitute its judgment for

that of the agency” and should “uphold a decision of less than ideal clarity if the agency’s path may

reasonably be discerned.” An agency must show good reasons for a new policy. “But it need not demonstrate

to a court’s satisfaction that the reasons for the new policy are better than the reasons for the old one; it

suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the

agency believes it to be better.” Here, it was “reasonable to determine that it made no sense to distinguish

between literal and nonliteral uses of offensive words” when “a safe harbor for single words would likely lead

to more widespread use of the offensive language.”

………………….………………..……………………………………….………………….………………………………

Notes and Questions

In its reasoning, the U.S. Court of Appeals for the Second Circuit cited uses by “the top leaders of our

government . . . of these expletives in a manner that no reasonable person would believe referenced sexual or

excretory organs or activities.” What were these uses? The court cited President Bush’s remark to British

Prime Minister Tony Blair that the United Nations needed to “get Syria to get Hezbollah to stop doing this shit”

and Vice President Cheney’s widely-reported “Fuck yourself” comment to Senator Patrick Leahy.

8 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

ANSWERS TO THE LEGAL REASONING

QUESTIONS AT THE END OF CASE 23.1

1. Today, children are likely exposed to indecent language in various media far more often than they

were in the 1970s, when the Federal Communications Commission first began to sanction indecent

speech. Does this mean that we need more—or less—stringent regulation of broadcasts? Explain.

The answers to this question given by the Second Circuit Court of Appeals and the United States Supreme

Court, respectively, are illustrative. The Court of Appeals argued that the greater likelihood that today’s

children would hear indecent speech from other media sources supported less (not more) stringent regulation

of broadcast programs. According to the Court of Appeals, the Commission’s decision was “devoid of any

evidence that suggests a fleeting expletive is harmful,” and the Commission certainly did not establish “that

this harm is serious enough to warrant government regulation.” The Supreme Court, however, reached just

the opposite conclusion. According to the Supreme Court, “the Commission could reasonably conclude that

the pervasiveness of foul language, and the coarsening of public entertainment in other media, such as

cable,” justified a more stringent regulation of broadcast programs—so as “to give conscientious parents a

relatively safe haven for their children.”

2. Technological advances have made it easier for broadcasters to “bleep out” offending words in

the programs that they air. Does this development support a more stringent—or less stringent—

enforcement policy by the Federal Communications Commission? Explain. The fact that it is now easier

for broadcasters to bleep out offending words was one of the reasons given by the Federal Communications

Commission for expanding the scope of the Commission’s enforcement activity. Because of this technology,

broadcasters can air an otherwise desirable program without worrying about violating the Commission’s ban

on indecent speech—simply by bleeping out the objectionable words. Thus, in the Commission’s view, the

technological advances support a more stringent enforcement policy. It is hard to imagine that the greater

ease with which indecent speech can be removed from a broadcast could support a less stringent

enforcement policy. Indeed, neither the Second Circuit Court of Appeals nor the Supreme Court disagreed

with this element in the Commission’s reasoning.”

3. Should an administrative agency be locked into its first interpretation of a statute? Why or why

not? No. An administrative agency should not be locked into its first, or any subsequent, interpretation of a

statute. A settled, or consistent, course of conduct indicates an agency’s judgment that, in following that

course, it is carrying out the policies in its enabling statute. But an agency is not locked into an interpretation

of a statute. The agency can change course, and adopt a new, even entirely inconsistent, position.

On the challenge to such a change in the Federal case, the lower courts asked for a reasoned analysis to

justify it. The purpose behind this request is that otherwise an agency‘s failure to reconcile conflicting

precedents may be held to fall short of the requirement of reasoned decision–making, and the agency’s

change in course might then be seen as arbitrary and capricious.

4. In the ruling that the Supreme Court reviewed in this case, did the U.S. Court of Appeals for the

Second Circuit reject the FCC’s reasons for its actions because the court disagreed with those

reasons? Explain. No. The U.S. Court of Appeals for the Second Circuit did not reject the FCC’s reasons for

its actions because the court disagreed with those reasons. The court explained that it rejected the agency’s

reasons for its change of course because those reasons had no support in the record. The agency “has failed

to set forth the required reasoned explanation because its proffered rationale remains unsupported by any

CHAPTER 23: ADMINISTRATIVE AGENCIES 9

whole or in part.

implemented.”

ADDITIONAL CASES ADDRESSING THIS ISSUE —

Recent cases involving the courts considered the application of the arbitrary and capricious standard

to agency actions include the following.

• Modesto Irrigation District v. Gutierrez, 619 F.3d 1024 (9th Cir. 2010) (National Marine Fisheries Service

(NMFS) sufficiently recognized and explained its decision to depart from its past practice of applying its own

policy and to instead apply a policy developed by NMFS with the Fish and Wildlife Service in determining

whether to list populations of West Coast steelhead as a threatened species).

• Air Transport Association of America, Inc. v. National Mediation Board, 719 F.Supp.2d 26 (D.D.C. 2010)

(a new rule issued by the National Mediation Board, providing that, in representation disputes, a majority of

the valid ballots that are actually cast would determine the craft or class representative, without requiring that

a majority of the craft or class participate in the election, was not arbitrary and capricious).

• Handley v. Chapman, 587 F.3d 273 (5th Cir. 2009) (Federal Bureau of Prisons (BOP) complied with the

Administrative Procedure Act when it reclassified felon–in-possession convictions to be categorically ineligible

for early-release incentives—the BOP’s actions constituted a policy change, the BOP had the statutory

authority, there was an obvious public safety rationale for the change, the agency’s path could be readily

discerned from its prior rules, program statements, and consistent litigation position, and, by changing course,

the BOP sought to apply its regulation with uniformity).

• Water Quality Insurance Syndicate v. United States, 632 F.Supp.2d 108 (D.Mass. 2009) (For wholesalers

that sold electricity in regions where they had market power but electricity was ultimately used in regions

where they did not have market power, Federal Energy Regulatory Commission (FERC) sufficiently explained

policy change applying point-of-sale test to ensure that wholesalers sold electricity at cost-based rates).

Administration Act of 1970. The text also mentions interpretive rules. The text traces the procedure of

notice-and-comment rulemaking.

1. Notice of the Proposed Rulemaking

A agency publishes a notice of proposed rulemaking proceedings in the Federal Register, stating

by either modifying its final rule or explaining why it did not make any changes. The comment period

must be at least thirty days but is often longer.

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whole or in part.

3. The Final Rule

The final rule is published in the Federal Register with a statement of the reasoning for the rule.

a. Binding Effect

Later compiled in the Code of Federal Regulations (CFR), final rules (“legislative rules”) have

binding legal effect unless the courts later overturn them.

b. Failure to Follow Rulemaking Procedures

IV. Judicial Deference to Agency Decisions

Courts generally defer to an agency’s factual judgment on a subject within the area of its expertise and its

interpretation of its legal authority.

A. THE HOLDING OF THE CHEVRON CASE

CASE SYNOPSIS—

Case 23.2: Mayo Foundation for Medical Education and Research v.

United States

The Federal Insurance Contributions Act (FICA) requires employees and employers to pay Social

Security taxes on all wages. FICA excludes from its definition of employment any service for a school

“performed by a student who is enrolled and regularly attending classes.” The U.S. Treasury Department

issued a rule providing in effect that an employee who works forty or more hours per week is not a student.

Mayo Foundation for Medical Education and Research offers educational residency programs to doctors who

seek instruction in a chosen specialty. In addition to the instruction, the doctors spend fifty to eighty hours a

week caring for patients. Mayo filed a suit in a federal district court, asserting that the Treasury Department’s

rule was not valid. The court agreed, but the U.S. Court of Appeals for the Eighth Circuit reversed. Mayo

appealed.

The United States Supreme Court affirmed. FICA does not define student nor does it state whether a

medical resident qualifies as a student. Congress gave the Treasury Department the authority to make rules

with respect to the enforcement of the Internal Revenue Code. The full-time employee rule was issued after

notice-and-comment procedures, on a reasonable determination that imposing Social Security taxes on

residents would further the purpose of the statute. The doctors were “the kind of workers that Congress

intended to both contribute to and benefit from the Social Security system.”