1071
Chapter 44
Administrative Law
See Separate Lecture Outline System
INTRODUCTION
Previous chapters were concerned primarily with constraints on business arising from court decisions and state
statutes. This unit deals primarily with constraints arising from federal statutes and administrative regulations.
Most administrative agencies are part of the executive branch and are subject to the authority of the president; some
exist as independent regulatory agencies, and their officials cannot be removed without cause. Most agencies have a broad
range of authority that seems legislative, judicial, and executive in nature and that engenders much controversy. These topics
are discussed in this chapter.
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
1072 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 44.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Real World Legal
• LawFlix
Cinderella Man—Regulatory agencies; ethics (Scene in which Russell Crowe tries to repay the welfare money he
has received after he is back on his feet financially).
CHAPTER OUTLINE
I. The Practical Significance of Administrative Law
Congress delegates some authority to make and implement laws, particularly in highly technical areas, to
administrative agencies.
A. ADMINISTRATIVE AGENCIES EXIST AT ALL LEVELS OF GOVERNMENT
There are federal, state, and local administrative agencies, and they affect all aspects of business—capital
structure and financing, employer-employee relations, production and marketing, and more.
B. AGENCIES PROVIDE A COMPREHENSIVE REGULATORY SCHEME
Agencies at different levels of government may cooperate to create and enforce their regulations. These
regulations can have benefits but also entail costs for businesses. Businesses—and others—thus have a strong
incentive to influence administrative agencies’ decisions.
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ADDITIONAL BACKGROUND—
A History of American Administrative Law
American administrative law is a youthful creature. The modern era of administrative law began only about 120
years ago. Administrative agencies, historically, have been created in response to a sudden crisis or serious social
problem. Politics have been a major factor: the government has often met a public demand that “something be done”
by creating a new agency or by expanding the powers of an existing one.
During its early years, the United States was a predominantly rural society with a relatively simple, nonindustrial
economy. As the economy developed and society became more complex, demands for regulation arose. Near the turn
of the nineteenth century, concern over perceived abuses of powerful corporations and anticompetitive monopolies
gave rise to such agencies as the Interstate Commerce Commission (ICC). The ICC was the first governmental
organization created in the United States that could accurately be characterized as a regulatory agency. Created in
1887 to regulate the railroad industry, its initial task focused principally on setting prices and deciding disputes
between competing companies.
A proliferation of regulatory agencies arose during the Great Depression of the 1930s. Most of these agencies
were part of the New Deal legislation that was aimed at stabilizing the economy and reigning in what were perceived to
century have brought new services and products to consumers, so too new problems have arisen. As in the past, the
government’s response has been to create new agencies. Radio and television broadcasting and nuclear power are but
a few of the new technologies supervised and sometimes promoted by government agencies.
The 1960s and 1970s saw a subtle shift in the focus of regulation. Earlier regulation was primarily concerned with
economic matters—making the free market work with less uncertainty or at least lessening some of the discomfort
that results when markets work in a dynamic and impersonal way. New regulation sought to deal with what are
Administration in 1970, and the Consumer Product Safety Commission in 1972.
surprising that this attitude invoked an era of deregulation during the 1980s. Although the undoing of some regulatory
schemes did occur, a tremendous amount of regulation persists. Some deregulation efforts have been overturned by
courts. Because of the precariousness of its fit within the American tripartite scheme of government, administrative
regulation has always been politically controversial. Accordingly, administrative law has always been a particularly
controversial area of law. The controversy is likely to continue for a long time to come.
* Recommend new legislation
* Hold trial-like hearings to resolve certain kinds of trade disputes that involve FTC regulations or federal
antitrust laws
B. TYPES OF AGENCIES
There are two basic types of agencies—executive agencies and independent regulatory agencies. The significant
1. The Delegation Doctrine
Article I of the U.S. Constitution is generally held to authorize delegating such powers to administrative
agencies. Section 1 grants all legislative powers to Congress and requires Congress to oversee the imple–
mentation of all laws. Section 8 gives Congress the power to make all laws necessary for executing its
specified powers. Under the delegation doctrine, Congress has the power to establish agencies that can
create legislative rules to implement those laws and interpretive rules to declare policy.
ADDITIONAL BACKGROUND—
The Delegation Doctrine
The courts have seriously considered the extent to which Congress can delegate its powers to third parties only in
this century. In 1904, the United States Supreme Court first declared that the test of whether a delegation is proper is
if Congress establishes ascertainable “standards” that outline the limits of the agency’s discretion.
Supreme Court decisions in the 1920s held that Congress could delegate only gap-filling powers to administrative
agencies. In other words, Congress would pass a law expressed in general terms, and the agency would fill in the
ability to oversee directly the implementation of particular laws is limited and that specialized agencies are better able
to regulate areas involving technical questions. The Court extended great deference to such delegations by Congress.
This attitude changed with the 1929 stock market crash and the onset of the Great Depression. The rapid
disintegration of the national economy caused the unemployment rate to rise to 25 percent, and bank failures,
bankruptcies, and foreclosures became commonplace. Public pressure for government action resulted in the creation
was simply exercising its traditional authority to establish a general standard and to delegate authority to enforce it.
The Schechters were convicted on eighteen counts; they appealed.a The appellate court sustained the convictions on
all counts but one. Both parties appealed to the Supreme Court.
In Schechter Poultry Corp. v. United States, 295 U.S. 495, 55 S.Ct. 837, 79 L.Ed. 1570 (1935), the Supreme
Court held that the NIRA’s delegation of legislative power was unconstitutional and that thus the Schechters were not
making of codes to prescribe them, and did not provide adequate standards for the making of the codes.
1. Executive Controls
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2. Legislative Controls
Congress exercises authority over agency power through enabling legislation and subsequent legislation.
3. Judicial Controls
The APA provides for judicial review of most agency decisions.
a. The Exhaustion Doctrine
According to the exhaustion doctrine, a party must have used all potential administrative remedies before
filing a suit.
b. The Ripeness Doctrine
Under the ripeness doctrine, a court will not review an agency’s decision until the parties have standing—
a direct stake in the outcome—and there is an actual controversy at issue.
III. The Administrative Procedure Act
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
The APA provides that courts should set aside agency decisions that are “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with the law.” This includes such factors as the following.
2. Change in prior policy without an explanation.
4. Failure to consider a relevant factor.
Case 44.1: Federal Communications Commission
v. Fox Television Stations, Inc.
The Federal Communications Commission (FCC) polices “indecent” speech—“language that describes, in terms
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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.
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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.
Should an administrative agency be locked into its first interpretation of a statute? Why or why not? No. 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. An agency is not locked into its first interpretation of a statute, however. It can
change course, adopting a new, even entirely inconsistent position. On the challenge to such a change in this case, the
lower courts asked for a reasoned analysis to justify it. Why? Because 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 ruled arbitrary and capricious.
Did the lower appellate court reject the agency’s reasons for its actions because the court disagreed with
those reasons? No. The court explained that it rejected the agency’s reasons for its change of course because those
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
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
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, __ F.3d __, 2010 WL 3274499 (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, __ F.Supp.2d __, 2010 WL 25272685
(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).
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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).
B. RULEMAKING
In enabling legislation, Congress confers an agency’s power to make rules. The text cites the Occupational Health
and Safety Administration (OSHA) and the Occupational Safety and Health 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
2. Comment Period
Interested parties can express their views on the proposed rule in writing or, if a hearing is held, orally. The
3. The Final Rule
The final rule is published in the Federal Register and later compiled in the Code of Federal Regulations
(CFR). Final rules (“legislative rules”) have binding legal effect unless the courts later overturn them.
C. INFORMAL AGENCY ACTIONS
A rule that only states an agency’s interpretation of its enabling statute’s meaning is an “interpretative rule” and
may be issued without formal rulemaking. These rules impose no direct or binding effect.
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
When reviewing an agency’s interpretation of law, a court should ask (1) whether the enabling statute directly
addresses the issue and if not (2) whether the agency’s interpretation is reasonable.
B. WHEN COURTS WILL GIVE CHEVRON DEFERENCE TO AGENCY INTERPRETATION
The extent of this deference has been much debated. If an agency’s decision has resulted from formal rulemaking,
it is more likely to be subject to deference.
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CASE SYNOPSIS—
Case 44.2: Citizens’ Committee to Save Our Canyons v. Krueger
The National Environmental Policy Act of 1969 (NEPA) requires a federal agency to prepare an environmental
impact statement (EIS) for every major action. Wasatch Powderbird Guides (WPG) operates a guided helicopter-skiing
business in the Wasatch-Cache and Uinta National Forests subject to a periodic permit issued by the U.S. Forest Service
(USFS) on a review of the environmental impact in an EIS. The USFS interprets the National Forest Management Act
(NFMA) to allow helicopter skiing as a legitimate use of the forests. Citizens’ Committee to Save Our Canyons and Utah
Environmental Congress—whose members use the forests for non-motorized purposes—filed a suit in a federal district
court, claiming that the USFS’s EIS with respect to WPG’s permit was insufficient. The court upheld the permit. The
plaintiffs appealed.
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Notes and Questions
Should the courts defer entirely to the decisions of administrative agencies on all matters within the
agencies’ purview? Why or why not? No. To always and entirely defer to administrative agencies would be to
accede too much power to the agencies. The judicial branch can review the laws that Congress enacts and the orders
that the executive branch issues, and those bodies can exercise control in various ways over the rulings and the
personnel of the courts. Under our governmental system of checks and balances, it is only reasonable that the
decisions of agencies should likewise be subject to some review.
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 44.2