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notice-and-comment rulemaking nor would it have followed the particular demands of the NFMA and NEPA. The court
prepare an EIS.
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 44.2
If it turned out that the helicopter-skiing operation had paid a substantial sum to the Forest Service official
who prepared the EIS to influence the official’s findings, would the court have been able to consider this fact
and invalidate the permit? Why or why not? Yes. A payment to influence agency findings is not a “relevant factor”
that an agency official should consider in preparing an EIS, or in taking any other agency action. Such a payment is
illegal and unethical. Even if the EIS was otherwise proper and the permit would have been issued on consideration of
the environmental factors under a reasonable interpretation of the NFMA and the NEPA without the payment, the
court would have invalidated the permit on the basis of the payment.
V. Enforcement and Adjudication
A. INVESTIGATION
During the rulemaking process, an investigation obtains information about a certain individual, firm, or industry to
avoid issuing a rule that is arbitrary and capricious and instead is based on a consideration of relevant factors.
After final rules are issued, agencies conduct investigations to monitor compliance.
ANSWER TO CRITICAL THINKING QUESTION IN THE FEATURE—
INSIGHT INTO ETHICS
Do pharmaceutical companies have an ethical responsibility to correct erroneous information about their
products on sites such as Wikipedia? To be sure, drug companies are better off if there is correct information about
their products everywhere on the Web. Whether they actually have an ethical responsibility to correct erroneous
1. Inspections
An on-site inspection may be the only way to obtain evidence to prove a regulatory violation. Sometimes, an
inspection or test is used in place of a formal hearing to correct or prevent an undesirable condition. If a firm
or individual refuses to cooperate with a request for an inspection or for information, an agency may use a
subpoena or a search warrant.
CHAPTER 44: ADMINISTRATIVE LAW 1083
ENHANCING YOUR LECTURE—
WHAT TO DO WHEN OSHA
INSPECTS YOUR COMPANY
The Occupational Safety and Health Act of 1970a requires employers to furnish a workplace free of hazards likely
to cause death or serious injury and to comply with safety and health regulations that the Occupational Safety and
Health Administration (OSHA) issues. There are literally hundreds of OSHA standards covering all aspects of the
workplace: ladders, stairs, exits, noise, safety devices, and so on.
To determine whether an employer is complying with the standards, an OSHA inspector can enter a workplace at
any reasonable time. The employer may refuse to permit the inspector to enter, but a refusal only postpones the
inevitable—the inspector can obtain a search warrant and return.
When an OSHA inspector arrives, he or she must show official credentials, including identification with a serial
number and his or her photograph. Normally, an inspector will explain the purpose of a visit and give the employer a
copy of any employee complaints.
KEEP YOUR RECORDS AND WORKPLACE IN ORDER
KNOW THE PROCEDURE FOR VIOLATIONS
If an inspector finds a violation, he or she may informally discuss it with the employer or issue a formal citation.
Even a violation that can be corrected immediately may be the basis for a citation and a penalty. A citation—which
may be issued any time within ninety days of an inspection—normally includes an allegation of a violation, a proposed
penalty, and a deadline for correcting the violation.
A citation must be posted in the area of the violation for at least three days. Violations must be corrected, and
OSHA must be notified of the corrections. If an employer decides to fight a citation, a penalty, or a correction deadline,
1084 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
Occupational Safety and Health Review Commission (OSHRC).
The OSHRC may grant the employer a temporary variance for up to a year (which may be renewed twice) or a
permanent variance. The employer must show that it cannot make a correction because of a lack of personnel,
materials, equipment, or a need to alter facilities. The employer must also show that what it is doing is safe and
healthful.
CHECKLIST FR OSHA INSPECTIONS
1. Insist on proper identification, which should include a serial number and a photograph of the OSHA inspector. If a
3. If a citation is issued, post it, but if a correction is not possible, or if the condition is already safe and healthful, seek
a variance from compliance.
2. Subpoenas
There are two basic types of subpoenas: the subpoena ad testificandum (an ordinary subpoena, compelling
3. Searches during Site Inspections
a. Search Warrant Usually Required
The Fourth Amendment protects against unreasonable searches and seizures by government officers. In
most instances, a physical search for evidence must be conducted under the authority of a search
1. Negotiated Settlements
2. Formal Complaints
3. The Role of an Administrative Law Judge
The text explains that an ALJ presides over a trial-like hearing, with the power to administer oaths, take
4. Hearing Procedures
Hearing procedures vary from agency to agency. Disputes are often resolved through informal proceedings. A
5. Agency Orders
Either party may appeal the ALJ’s decision to the board or commission that governs the agency. If the party
against whom the complaint was filed is dissatisfied with the commission’s decision, it may appeal the
decision to a federal court of appeals. If no party appeals (or if review is denied), the ALJ’s decision is the final
order.
VI. Public Accountability
Several laws to make agencies more accountable through public scrutiny.
A. FREEDOM OF INFORMATION ACT
Enacted in 1966, the Freedom of Information Act (FOIA) requires federal agencies to disclose certain “records” to
“any person” on request. An agency’s failure to comply may be challenged in a federal district court. All federal
agencies must make documents available electronically within a year after their creation and provide a clear index.
CASE SYNOPSIS—
Case 44.3: United Technologies Corp. v. U.S. Department of Defense
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United Technologies Corp. owns Sikorsky Aircraft Corp. and Pratt and Whitney. Both subsidiaries contract with the
U.S. Department of Defense (DoD). Within the DoD, the Defense Contract Management Agency (DCMA) monitors
contractors’ compliance. The DCMA may issue a Corrective Action Request (CAR) to a contractor to remedy a problem.
A reporter submitted a Freedom of Information Act (FOIA) request to the DCMA for copies of all CARs that had been
issued to Sikorsky during the previous year. Another reporter requested information concerning a Pratt facility.
Sikorsky and Pratt objected that the documents were exempt. The DCMA ruled otherwise. Sikorsky and Pratt filed suits
in a federal district court against the DoD, arguing that this decision was arbitrary, capricious, and contrary to the
Administrative Procedure Act. The court issued judgments in favor of the DoD. Sikorsky and Pratt appealed.
…………………………………………………………..……………………………………………………………………
Notes and Questions
Some individuals or organizations prefer to sue an agency before it takes formal action. Why it this?
Individuals or organizations may prefer to take the offensive to gain such advantages as the choice of forum. Also,
waiting for an agency to act first can be expensive. A party can face the cost of the agency action, which includes
litigation expenses (plus whatever sanction, in the case of a loss), or as in this case the cost of the consequences of an
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 44.3
Sikorsky and Pratt also argued that if the documents were released, their competitors would use the
documents to discredit them in the eyes of current and potential customers. Would such actions amount to a
“substantial competitive harm”? Explain. The court answered this question in the negative. As the court noted in
CHAPTER 44: ADMINISTRATIVE LAW 1087
B. GOVERNMENT IN THE SUNSHINE ACT
Enacted in 1976, the Government-in-the-Sunshine Act requires “every portion of every meeting of an agency” to
be open to “public observation.” Closed meetings are permitted when (1) the subject of the meeting concerns
accusing any person of a crime, (2) open meetings would frustrate implementation of future agency actions, or (3)
the subject of the meeting involves matters relating to future litigation or rulemaking.
TEACHING SUGGESTIONS
1. This chapter is somewhat different from preceding chapters and the other chapters in this unit. The material is
2. What are the advantages of a long-standing bureaucracy consisting of agencies made up of individuals
who hold their jobs regardless of changes in the political winds? What are the disadvantages?
3. What role does common sense play in the application and review of administrative rulings?
Cyberlaw Link
Should the use of the Internet be regulated by the same agencies that regulate other aspects of our lives
(for example, the Federal Communications Commission regulates telephones), or should a new agency be
set up? How do the Freedom of Information Act and other open-government laws apply to cyberspace?
1. How is an administrative agency created? To create an agency, Congress passes enabling legislation, which
2. What is “the administrative process”? Enforcement, rulemaking, and adjudication are the basic functions of most
3. How does an agency use its investigative powers? Agencies need information concerning activities and
4. Why are most disputes resolved at, or soon after, the investigatory stage of an agency action? Most actions
5. What is a major advantage of agency rulemaking? The major advantage of rulemaking is that it can resolve in one
6. Given that an administrative law judge is a member of the agency prosecuting a case, what safeguards
promote fairness? Under the APA, an administrative law judge (ALJ) is separated from the investigative and prosecutorial
7. How do courts hold agency authority in check? Under the APA, courts provide a direct avenue for review of most
8. Identify and briefly describe laws that make agencies more accountable through public scrutiny. Freedom of
Information Act. The Freedom of Information Act (FOIA) of 1966 requires the federal government to reveal certain “records”
to “any person” on request. A request may consist of no more than a reasonable description of the information sought. Failure
to comply with a request may be challenged in federal district court. Some records are exempt, but a person cannot compel an
9. How might the Internet expedite formal rulemaking procedures? The use of the Internet might effectively speed
the formal rulemaking process by, for example, allowing interested parties to submit proposed findings and oppose the stated
bases of tentative agency decisions. The agency might also find it expeditious to issue formal rulings on each finding, conclusion,
or exception on the Web.
ACTIVITY AND RESEARCH ASSIGNMENT
Historical and political information is easier to understand than much of the material in this chapter and for that
reason may help to bring some of the concepts to life. Have students bring to the class news articles about current business-
related problems being dealt with by agencies. This can illustrate the relevancy of the material.
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 9: Members of the Hemp Industries Association (HIA) import and distribute hemp and products made
from hemp that contain only non-psychoactive trace amounts of tetrahydrocannabinols (THC). In 2001, the U.S. Drug
Enforcement Administration (DEA) published an interpretive rule declaring that “any product that contains any amount of THC
is a schedule I controlled substance.” On the same day, the DEA proposed two legislative rules. One rule—DEA-205F —amended
the listing of THC in “Schedule I” to include natural THC. The second rule—DEA-206F—exempted from control non-psychoactive
hemp products that contain trace amounts of THC not intended to enter the human body. In 2003, without following formal
rulemaking procedures, the DEA declared that these rules were final. This effectively banned the possession and sale of the
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commercial products that use hemp oil or seed include roasted hulled seed, nutrition bars, tortilla chips, pretzels, beer, candy
bars, margarine, sauces, salad dressings, cereal, vegetarian burgers, waffles, and non-dairy versions of milk and cheese.
Could the rules at issue in this case have been issued if the appropriate procedures had been followed? Yes,
at least according to the holding in this case, because that was the chief ground on which the court based its refusal to enforce
the rules. No, because the substances are already permitted by statute, which would take an act of Congress to change. On this
Footnote 11: The Harmonized Tariff Schedule of the United States authorizes the U.S. Customs Service to classify
and fix the rate of duty on imports under rules issued by the secretary of the treasury. “Ruling letters” set tariff classifications
for particular imports. Mead Corp. imported “daily planners,” which had been tariff free for several years. The Customs Service
issued a ruling letter reclassifying them as bound diaries, subject to a tariff. Mead filed a suit in the U.S. Court of International
Trade against the federal government. From a decision in the defendant’s favor, Mead appealed to the U.S. Court of Appeals for
the Federal Circuit, which reversed, reasoning that the ruling letters should not receive “Chevron deference” because they
were not promulgated pursuant to notice-and-comment rulemaking. The government appealed. In United States v. Mead
Corp., the United States Supreme Court vacated the lower court’s judgment and remanded. The Supreme Court recognized
that some lesser standard of deference than that of Chevron might be appropriate. “On the face of the statute, to begin with,
the terms of the congressional delegation give no indication that Congress meant to delegate authority to Customs to issue
classification rulings with the force of law.”
Is it ethical for an administrative agency to reverse or otherwise alter its policy when the change increases the
financial burden on the regulated parties? Explain. An agency may act within ethical—and legal—bounds when it alters a
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What are the conditions to judicial review of an agency enforcement action? An action must be reviewable (the
2. How does Congress hold agency authority in check? Congress can abolish an agency or take away agency power.
Congress’s taxing and spending powers also give it influence over agency policy, because Congress must authorize appropriation
of funds to an agency, and what Congress authorizes it can change. Congress can investigate the implementation of laws that it
enacts and agencies that it creates. Individual legislators may affect policy through “casework,” which involves helping
constituents deal with agency staff.
REVIEWING—
ADMINISTRATIVE LAW
Assume that the Securities and Exchange Commission (SEC) has a rule that it will enforce 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 an enforcement action against an individual even if she or he
does not personally profit from the insider trading. In making the new rule, the SEC does not conduct a rulemaking
proceeding but simply announces its new decision. 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. Ask your students to answer the following questions, using the
information presented in the chapter.
1. Is the SEC an executive agency or an independent regulatory agency? Does it matter to the outcome of
this dispute? Explain. The SEC is an independent regulatory agency, because the president does not have the power
2. Suppose that the SEC asserts that it has always had the statutory authority to pursue persons for insider
trading regardless of whether they personally profited from the transaction. This is the only argument the SEC
makes to justify changing its enforcement rules. Would a court be likely to find that the SEC’s action was
arbitrary and capricious under the Administrative Procedure Act (APA)? Why or why not? The new rule is likely
3. Would a court be likely to give Chevron deference to the SEC’s interpretation of the law on insider
trading? Why or why not? The SEC will probably not get Chevron deference and the courts will give careful review to
4. Now assume that a court finds that the new rule is merely “interpretive.” What effect would this
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determination have on whether the SEC had to follow the APA’s rulemaking procedures? Interpretive rules are
not subject to the same level of judicial review as are new substantive rules.
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. It is unfair to give an ALJ so much power within any administrative
agency. After all, each ALJ works for the administrative agency that she or he is supposed to judge in any dispute.
How can we assume that an ALJ will be unbiased? There will always be a tenancy for ALJs to favor the actions of