Management Chapter 6 Accordingly The Court Held That Under Section

Chapter Six

Administrative Law

A Manager’s Dilemma: Putting It into Practice

Getting into Bed with the Regulators

Issue Presented: Are there any legal or ethical barriers to relationships between corporate

officers and members of administrative agencies involved in reviewing or regulating

corporate activity?

This question is ethical and practical, not legal, at least from Dora Reilly’s point of view.

From a legal perspective, she is free to date whomever she pleases, although providing sexual

favors in exchange for favorable treatment by the FDA would constitute bribery, and thus

Questions and Case Problems

Question 1

Issue Presented: Is a statute giving the Department of the Interior the power to allow or

curtail mining within the national forests “as the best interests of all users of the national

forest shall dictate” a valid delegation of legislative power?

A legislative delegation of power to an administrative agency is valid as long as

Congress provides an “intelligible principle” to guide the exercise of the delegated discretion.

Panama Refining and Schechter seem to embody the exceptions rather than the rule

concerning a proper delegation of authority. Indeed, the Supreme Court has not struck down a

delegation of legislative authority since 1935. In the decades since these cases were decided, the

Court has upheld vague standards, such as those requiring rules to be set “in the public

interest,” “for the public convenience, interest or necessity,” to be “reasonably fair,” or “to

prevent unfair methods of competition.” Despite the Court’s relaxed standards, however,

Congress still does not have the ability to delegate “unbridled discretion” to administrative

agencies.

Question 2

Issue Presented: What arguments can Ethyl advance to persuade the court to strike down the

EPA’s regulations? How else might Ethyl affect the EPA’s rulemaking?

In Ethyl Corp v. EPA, 306 F.3d 1144 (D.C. Cir. 2002), Ethyl Corporation argued that the

CAP 2000 regulation promulgated by the EPA violated the Clean Air Act because it provided

for test procedures and methods to be vetted in individual closed proceedings rather than in a

notice-and-comment rulemaking. Ethyl Corporation claimed that the mechanism adopted by

The D.C. Circuit concluded that the requirements of injury were satisfied and fairly

traceable to the CAP 2000 regulation and that the injury was redressable. On the question of

injury, the court wrote: “CAP 2000’s provision for closed-door adoption of emission test

procedures deprives Ethyl of information that might well help it develop and improve its

products with an eye to conformity to emissions needs.”

The court’s opinion illuminates how Ethyl could have affected the EPA’s

rulemaking:

[I]t is true . . . that an open procedure—the very thing mandated by Congress—is

less convenient than a closed one. It may be. Other parties may raise questions or

find fault in procedures that look fine to the agency and the auto makers. But

Question 3

Issue Presented: What is the appropriate standard for reviewing the FDA’s determination not

to imply an exemption from the Federal Food, Drug, and Cosmetic Act for terminally ill

cancer patients?

The appropriate standard of review for administrative interpretations of statutory

language is one of substantial deference, particularly when an agency’s interpretation involves

issues of public concern. See United States v. Rutherford, 442 U.S. 544 (1979).

Once the court has satisfied itself that the statute is “plain and unambiguous,” it will be

highly deferential to an administrative interpretation in accord with the statute’s plain meaning.

Only if the agency’s interpretation gives rise to an absurd result will the court imply an

exception to the statute. Underlying this result is a belief that if Congress has not seen fit to

correct any misperceptions that might arise from the plain meaning of a statute it has enacted

(and if administrative agencies act in accordance with the language, history, and purpose of the

statute), it would be inappropriate for the U.S. Supreme Court to rewrite the statute.

The principal medical justification for this kind of paternalism is that it is often difficult

to tell, except in retrospect, whether conventional therapy will prove effective. However,

doctors can say, with reasonable certainty, that if a cancer patient rejects conventional therapy

in favor of a drug with no demonstrable curable properties, the result is almost certain to be

death. Largely for this reason, the Supreme Court accepted the FDA’s interpretation that even

the terminally ill need to be protected against potentially hazardous drugs.

Question 4

Issue Presented: Was it violation of the constitutional requirement of separation of powers

for Congress to delegate to the Comptroller the duty to calculate budget reductions?

In Bowsher v. Synar, 478 U.S. 714 (1986), the U.S. Supreme Court ruled that the Graham-

Question 5

Issue Presented: Would the U.S. Supreme Court allow warrantless administrative inspections

to occur in the following industries: (a) firearms, (b) mining, (c) pharmaceutical, and (d)

computer software?

As a general matter, the reach of the Fourth Amendment in the administrative law

context depends on the specific enforcement needs and privacy guarantees of the particular

statutes governing the agencies. There is no blanket rule either prohibiting or endorsing

warrantless searches in administrative agency investigations. An exception to the warrant

requirement has been recognized for “closely regulated” industries, but the exception does not

apply simply because a business is engaged in interstate commerce.

When Congress explicitly exempts federal agencies from the warrant requirement, such

an exemption is presumptively valid. However, Congress’s power to exempt agencies from the

Fourth Amendment is not absolute. Under current Supreme Court doctrine, an explicit

exemption from the Fourth Amendment is only permissible in “pervasively regulated” or

particularly hazardous industries.

Question 6

Issue Presented: Did the SEC exceed its rulemaking authority by adopting Rule 14e-3(a)

without requiring a showing that the trading at issue entailed a breach of fiduciary duty?

In United States v. O’Hagan, 521 U.S. 642 (1997), the Supreme Court held that Rule 14e –

3(a) was a proper exercise of the SEC’s prophylactic power under Section 14(e) to “prescribe

means reasonably designed to prevent” fraudulent acts. The Court found it unnecessary to

determine whether the SEC’s “defining power” under Section 14(e) was broader than its fraud–

Question 7

Issue Presented: What determines whether a party has standing under Section 7(a)(2) of the

Endangered Species Act of 1973?

In Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992), the U.S. Supreme Court ruled that

Kelly and Skilbred did not assert sufficiently imminent injury to have standing and that their

claimed injury was not redressable. Regarding the determination of standing, the Supreme

Court explained:

Over the years, our cases have established that the irreducible constitutional

minimum of standing contains three elements. First, the plaintiff must have

suffered an “injury in fact”—an invasion of a legally protected interest which is

(a) concrete and particularized, and (b) “actual or imminent, not ‘conjectural’ or

‘hypothetical.’” Second, there must be a causal connection between the injury

and the conduct complained of—the injury has to be “fairly . . . trace[able] to the

Mses. Kelly and Skilbred. That the women “had visited” the areas of the projects

before the projects commenced proves nothing. As we have said in a related

context, “Past exposure to illegal conduct does not in itself show a present case or

controversy regarding injunctive relief . . . if unaccompanied by any continuing,

present adverse effects.” And the affiants’ profession of an “intent” to return to

the places they had visited before—where they will presumably, this time, be

deprived of the opportunity to observe animals of the endangered species—is

simply not enough. Such “some day” intentions—without any description of

concrete plans, or indeed even any specification of when the some day will be—

do not support a finding of the “actual or imminent” injury that our cases

require.

In Bennett v. Spear, 520 U.S. 154 (1997), the plaintiffs made the following claims about the

Fish and Wildlife regulation:

That (1) the lake-level restrictions (a) would adversely affect the plaintiffs’ use of

water from the project, and (b) were not necessary to protect the fish; (2) the

defendants, by issuing a biological opinion which made unsubstantiated findings

as to the necessity of the restrictions, had violated 7 of the Endangered Species

interests did not fall within the zone of interests sought to be protected by ESA.”

The U.S. Court of Appeals affirmed, then the U.S. Supreme Court reversed and

held that the plaintiffs did have standing:

The first question in the present case is whether the ESA’s citizen–suit provision .

. . negates the zone-of-interests test (or, perhaps more accurately, expands the

Given petitioners’ allegation that the amount of available water will be reduced

and that they will be adversely affected thereby, it is easy to presume specific

facts under which petitioners will be injured—for example, the Bureau’s

distribution of the reduction pro rata among its customers. The complaint alleges

the requisite injury in fact.

The Government also contests compliance with the second and third Article III

standing requirements, contending that any injury suffered by petitioners is

neither “fairly traceable” to the Service’s Biological Opinion, nor “redressable” by

a favorable judicial ruling, because the “action agency” (the Bureau) retains

Given all of this, and given petitioners’ allegation that the Bureau had, until

issuance of the Biological Opinion, operated the Klamath Project in the same

manner throughout the twentieth century, it is not difficult to conclude that

petitioners have met their burden—which is relatively modest at this stage of the

Question 8

Issue Presented: Is a rule promulgated by the SEC excluding fixed indexed annuities (FIA)

from the definition of “annuity contract” within the meaning of the Securities Act valid?

In American Equity Investment Life Insurance Co. v. SEC, 613 F.3d 166 (D.C. Cir. 2010), the

D.C. Circuit held that Rule 151A was invalid.

The insurance companies first argued that the SEC erred in excluding FIAs from the

definition of “annuity contract” under Section3(a)(8) of the Securities Act. Specifically, they

Under Chevron’s first step, the court must determine whether the statute being

interpreted is ambiguous. If the court determines that the statute is either “silent or ambiguous”

with respect to the issue at hand, the first Chevron step is satisfied. In the present case, the court

determined that the Act was ambiguous, or at least silent, on whether the term “annuity

contract” encompassed all forms of contracts that may be described as annuities. Thus, the first

step was satisfied.

Under Chevron’s second step, the court must determine whether the agency’s rule is a

“reasonable” interpretation of the statute. The insurance companies argued that the SEC, in

The insurance companies next argued that the SEC failed to balance the investment risks

assumed by the insurer against those assumed by the purchaser in determining whether an FIA

was an annuity or a security. The court rejected this argument, finding that the SEC had in fact

weighed the investment risks. The SEC noted that annuities include “investment risk–taking” by

the insurer, with minimal risk exposure to the purchaser. FIAs, on the other hand, left a more

than minimal risk upon the purchaser.

The insurance companies further argued that Rule 151A conflicts with Rule 151, which

states that annuity contracts that have interest rates tied to a securities index fall under Section

Although the court determined that the SEC’s interpretation of the statute was valid

under Chevron, the insurance companies further argued that the SEC failed to undertake

properly its statutory responsibility under the Securities Act to consider Rule 151A’s effect on

efficiency, competition, and capital formation. Under the Administrative Procedure Act, a court

must set aside agency action that is “arbitrary, capricious, an abuse of discretion, or otherwise

not in accordance with law.”

The SEC argued that Rule 151A would enhance competition by providing greater clarity

to an area of law that was unclear and would improve efficiency by requiring fuller disclosure

to investors. The court rejected SEC’s claims as overly broad. The court explained that the

This case has important implications for future agency action, because it requires

a more explicit finding of a rule’s “effect on efficiency, competition, and capital information”

than was mandated in earlier cases.