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Chapter Eighteen The Law of Administrative Agencies

Introduction to Administrative Law and Administrative Agencies

Administrative Law

For the purposes of this text,  administrative law  is defined broadly as any rule (statute or regulation) that affects, directly or indirectly, an administrative agency. These rules may be procedural or substantive, and they may come from the legislative, executive, or judicial branch of government or from the agencies themselves. Such rules may be promulgated at the federal, state, or local levels. A  procedural rule  generally has an impact on the internal processes by which the agencies function or prescribes methods of enforcing rights. For example, under the Administrative Procedure Act (APA), a federal administrative agency must give adequate notice to all parties involved in an agency hearing. A  substantive rule  defines the rights of parties. An example is an act of Congress that forbids the FTC from applying the antitrust laws to all the Coca-Cola bottlers in the United States. In this instance, the rights and regulations of both the FTC and the Coca-Cola bottlers were defined by Congress.

administrative law

Any rule (statute or regulation) that directly or indirectly affects an administrative agency.

procedural rule

A rule that governs the internal processes of an administrative agency.

substantive rule

A rule that creates, defines, or regulates the legal rights of administrative agencies and the parties they regulate.

Critical Thinking About The Law

As a future business leader, you will certainly encounter many governmental regulations. Congress created administrative agencies, in part, because it could not hope to address the enormous variety and number of concerns that are now covered by administrative agencies. Although you will not learn about every administrative agency in this chapter, you can jump-start your thinking about administrative agencies by answering these critical thinking questions.

1. Your roommate states that people do not have to follow the regulations passed by administrative agencies because these regulations are not laws. She argues that only Congress can make laws. Which critical thinking question could be applied to settle this disagreement?

Clue:  Do you and your roommate agree on the meaning of the words she is using?

2. Some individuals may argue that the creation of regulations by administrative agencies promotes unfair restrictions on business. What ethical norm seems to be behind this thought?

Clue:  If you want fewer restrictions from the government, what ethical norm is influencing your thought? What ethical norm seems to conflict with the wish for fewer governmental regulations?

3. Congress assumes that the administrative agencies will address problems effectively in their respective areas. For example, the EPA ensures compliance with environmental laws. If Matt makes the assumption that environmental problems are so complex and widespread that the EPA could not hope to make a difference, what conclusion do you think Matt would draw regarding administrative agencies?

Clue:  Think about a contrary assumption. If Matt assumed that the administrative agencies were effective, would he be more likely to support the regulations passed by the various agencies?

Administrative Agencies

An  administrative agency  is any body that is created by the legislative branch (e.g., Congress, a state legislature, or a city council) to carry out specific duties. Some agencies are not situated wholly in the legislative, executive, or judicial branch of government. Instead, they may have legislative power to make rules for an entire industry, judicial power to adjudicate (decide) individual cases, and executive power to investigate corporate misconduct. Examples of such independent federal administrative agencies are the EPA, the FCC, and the FTC; at the state level, examples are public utilities commissions and building authorities; at the city level, examples are city planning commissions and tax appeals boards.

administrative agency

Any body that is created by the legislative branch to carry out specific duties.

Types

Administrative agencies are generally classified as independent or executive (see  Table 18-1 ).  Independent administrative agencies , such as the FTC and the SEC, are usually headed by a board of commissioners, who are appointed for a specific term of years by the president with the advice and consent of the Senate. A commissioner can be removed before serving out a full term only for causes defined by Congress, not at the whim of the president—which is why these agencies are called independent. Generally, the majority of a board must be of the sitting president’s party. This is dictated by the Administrative Procedure Act of 1946.

independent administrative agency

An agency whose appointed heads and members serve for fixed terms and cannot be removed by the president except for reasons defined by Congress.

Executive administrative agencies  are generally located within departments of the executive branch of government. For example, the Occupational Safety and Health Administration (OSHA) is located in the Department of Labor, and the National Transportation Safety Board (NTSB) is in the Department of Transportation. Heads and members of these boards have no fixed term of office. They serve at the pleasure of the president, meaning that they can be removed from their positions by the chief executive at any time.

executive administrative agency

An agency located within a department of the executive branch of government; heads and appointed members serve at the pleasure of the president.

Table 18-1 Selected Federal Administrative Agencies

Independent Agencies	Executive Agencies
Commodity Futures Trading Commission (CFTC)	Federal Deposit Insurance Corporation (FDIC)
Consumer Product Safety Commission (CPSC)	General Services Administration (GSA)
Equal Employment Opportunity Commission (EEOC)	International Development Corporation Agency (IDCA)
Federal Communications Commission (FCC)	National Aeronautics and Space Administration (NASA)
Federal Trade Commission (FTC)	National Science Foundation (NSF)
National Labor Relations Board (NLRB)	Occupational Safety and Health Administration (OSHA)
National Transportation Safety Board (NTSB)	Office of Personnel Management (OPM)
Nuclear Regulatory Commission (NRC)	Small Business Administration (SBA)
Securities and Exchange Commission (SEC)	Veterans Administration (VA)
	Department of Homeland Security (DHS)

Reasons for Growth

Administrative agencies have proliferated rapidly since the late 1890s for the following reasons:

1. Flexibility. Unlike the court proceedings presented in  Chapter 3 , administrative agency hearings are not governed by strict rules of evidence. For example, hearsay rules are waived in most cases.

2. Need for expertise. The staff of each of the agencies has technical expertise in a relatively narrow area, gained from concentrating on that area over the years. It would be impossible, for example, for 435 members of the House of Representatives and 100 senators to regulate the television, radio, and satellite communications systems of the United States on a daily basis. Only the FCC staff has that expertise.

3. Prevention of overcrowding in courts. If administrative agencies did not exist, our highly complex, often litigious society would have to seek redress of grievances through the federal and state court systems. As explained in  Chapter 4 , both corporations and individuals are already seeking alternatives to the overburdened court system.

4. Expeditious solutions to national problems. After the 1929 stock market crash and the ensuing Depression, Congress sought to give investors confidence in the securities markets by creating the SEC in 1934. The SEC was intended to be a “watchdog” agency that would ensure full disclosure of material information to the investing public and prevent a repeat of the fraudulent practices that marked the freewheeling 1920s. When the public became concerned about the deterioration of the nation’s water, land, and air, Congress created the EPA to implement air, water, and waste regulations.

All these reasons and more are why administrative agencies exist. These reasons, however, are frequently challenged by proponents of deregulation—or no regulation—of industry.

The debate between advocates of returning to a period in our history when market forces were the sole regulators of business conduct and champions of administrative agency regulation is highlighted throughout Part III of this text. We also now have advocates of reregulation in areas such as the power sector. With rising prices for electricity, for both homes and businesses, calls for reregulation are often heard. Administrative agencies are becoming more important again. This is especially true today, because the current administration’s philosophy includes a belief that federal regulation is necessary to solve national problems.

Creation of Administrative Agencies

Congress creates federal administrative agencies through statutes called  enabling legislation . In general, an enabling statute delegates to the agency congressional  legislative power  for the purpose of serving the “public interest, convenience, and necessity.” Armed with this mandate, the administrative agency can issue rules that control individual and business behavior. In many instances, such rules carry criminal as well as civil penalties. In  Chapter 23 , you will see how the SEC, using its mandate under the 1933 and 1934 Securities Acts, can both fine and criminally prosecute individuals involved in insider trading. The enabling statute also delegates  executive power  to the agency to investigate potential violations of rules or statutes.  Chapter 23  sets out the wide-ranging investigative powers of the SEC staff. Finally, the enabling statutes delegate  judicial power  to the agency to settle or adjudicate any disputes it may have with businesses or individuals. For example, the SEC, using its congressional mandate under the 1933 and 1934 Securities Acts, has prescribed rules governing the issuance of, and trading in, securities by businesses as well as by brokers and underwriters. Administrative law judges are assigned to the SEC adjudicate cases in which individuals or corporations may have violated the rules.

enabling legislation

Legislation that grants lawful power to an administrative agency to issue rules, investigate potential violations of rules or statutes, and adjudicate disputes.

legislative power

The power delegated by Congress to an administrative agency to make rules that must be adhered to by individuals and businesses regulated by the agency; these rules have the force of law.

executive power

The power delegated by Congress to an administrative agency to investigate whether the rules enacted by the agency have been properly followed by businesses and individuals.

judicial power

The power delegated by Congress to an administrative agency to adjudicate cases through an administrative proceeding; includes the power to issue a complaint, have a hearing held by an administrative law judge, and issue either an initial decision or a recommended decision to the head(s) of an agency.

Because the framers of the U.S. Constitution carefully separated the legislative (Article I), executive (Article II), and judicial powers of government into three distinct branches, some people complain that allowing administrative agencies (Article III) to exercise all three powers violates the spirit of the Constitution. Critics go so far as to state that these agencies constitute a “fourth branch of government.” In 1995, the House of Representatives and the Senate overwhelmingly passed a bill that required all administrative agencies (both executive and independent) to do a cost-benefit analysis of any proposed regulation that would cost the economy more than $25 million. All agencies also have to identify possible alternatives to the proposed regulation that would require no government action, as well as varying actions customized for different regions of the country, and “the use of market-based mechanisms.” The Office of Management and Budget (OMB) reviews all proposed rules judged to be “major.” Because the OMB (located in the executive branch) recommends annual budgets to Congress for each administrative agency, it has influence over all rulemaking.

Functions of Administrative Agencies

Administrative agencies perform the following functions: (1) rulemaking; (2) adjudication of individual cases brought before administrative law judges by agency staff; and (3) administrative activities, which include (a) informal advising of individual businesses and consumers, (b) preparation of reports and performance of studies of industries and consumer activities, and (c) issuance of guidelines for the business community and others as to what activities are legal in the eyes of agency staff.

Rulemaking

We said that administrative agencies are authorized to perform the legislative function of making rules or regulations by virtue of their enabling statutes. For example, the enabling statute of the OSHA gave the secretary of labor authority to set “mandatory safety and health standards applicable to businesses affecting interstate commerce.” The secretary was also given the power to “prescribe such rules and regulations that he may deem necessary to carry out the responsibilities under this act.” In some cases, the procedures for implementing the rulemaking function are spelled out in the enabling act. If they are not, agencies follow the three major rulemaking models—formal, informal, and hybrid—outlined in the  Administrative Procedure Act (APA)  of 1946.

Administrative Procedure Act (APA)

Law that establishes the standards and procedures that federal administrative agencies must follow in their rulemaking and adjudicative functions.

Formal Rulemaking

Section 553(c) of the APA requires formal rulemaking when an enabling statute or other legislation states that all regulations or rules must be enacted by an agency as part of a formal hearing process that includes a complete transcript. This procedure provides for (1) an agency notice of proposed rulemaking to the public in the Federal Register; (2) a public hearing at which witnesses give testimony on the pros and cons of the proposed rule, each witness is cross-examined, and the rules of evidence are applied; and (3) the making and publication of formal findings by the agency. On the basis of these findings, an agency may or may not promulgate a regulation. Because of the expense and time involved in creating a formal transcript and record, most enabling statutes do not require agencies to go through a formal rulemaking procedure when promulgating regulations.

Informal Rulemaking

As provided by Section 553 of the APA, informal rulemaking applies in all situations in which the agency’s enabling legislation

Exhibit 18-1 Steps in the Informal Rulemaking Process

or other congressional directives do not require another form. The APA requires that the agency (1) give prior notice of the proposed rule by publishing it in the Federal Register; (2) provide an opportunity for all interested parties to submit written comments; and (3) publish the final rule, with a statement of its basis and purpose, in the Federal Register.  Exhibit 18-1  lays out the five-step process for promulgating a rule according to the informal rulemaking model. Executive and independent agencies are required to set out a cost-benefit analysis in Step 1 of the process.

Informal rulemaking is the model most often used by administrative agencies because it is efficient in terms of time and cost. No formal public hearing is required, and no formal record needs to be established, as in formal rulemaking. Parties opposed to a particular rule arrived at through informal rulemaking, however, often seek to persuade the appellate courts that the agency in question did not take important factors into account when the rule was being made.

Hybrid Rulemaking

 

Interested parties often complained that informal rulemaking gave them little opportunity to be heard other than in writing. Both Congress and the executive branch wanted administrative agencies to do a cost-benefit analysis of proposed regulations. Out of this input, from the public and two branches of government, came hybrid rulemaking, which combines some of the aspects of formal and informal rulemaking. This model requires the agency to give notice of a proposed regulation, set a period for public comments, hold a public hearing, and have a cost-benefit analysis done by an independent executive agency.

Exempted Rulemaking

 

Section 553 of the APA allows the agencies to decide whether there will be public participation in rulemaking proceedings relating to the “military or foreign affairs” and “agency management or personnel,” as well as in proceedings relating to “public property, loans, grants, benefits, or contracts” of an agency. Public notice and comment are also not required when the agency is making interpretive rules or general statements of policy.

It is generally conceded that proceedings dealing with military and foreign affairs often require speed and secrecy, both of which are incompatible with public notice and hearings.

Judicial Review of Rulemaking

 After a regulation is promulgated by an administrative agency and is published in the Federal Register, it generally becomes law. Appellate courts have accepted agency-promulgated regulations as law unless a business or other affected groups or individuals can show that:

1. the congressional delegation of legislative authority in the enabling act was unconstitutional because it was too vague and not limited;

2. an agency action violated a constitutional standard, such as the right to be free from unreasonable searches and seizures under the Fourth Amendment (e.g., if an agency such as OSHA promulgated a rule that allowed its inspectors to search a business property at any time without its owner’s permission and without an administrative search warrant, that rule would be in violation of the Fourth Amendment); and

3. the act of an agency was beyond the scope of power granted to it by Congress in its enabling legislation.

Judicial review of administrative agency action provides a check against agency excesses that can prove very costly to the business community. The landmark case below illustrates this power of judicial review of administrative agencies.

 Case 18-1 City of Arlington v. Federal Communications Commission

United States Supreme Court 133 S. Ct. 1863 (2013)

State and local zoning authorities must approve applications by wireless telecommunications network companies to build new towers, as well as approve applications to place new antennas on existing towers. The Telecommunications Act of 1996 “imposed specific limitations on the traditional authority of state and local governments to regulate the location, construction, and modification” of wireless telecommunications networks. These limitations are incorporated into the Communications Act of 1934, which “empowers the Federal Communications Commission [FCC] to ‘prescribe such rules and regulations as may be necessary in the public interest to carry out its provisions.’” One such provision requires state and local governments to act “within a reasonable period of time” after an application for a wireless tower or antenna site is filed.

An organization representing various wireless service providers petitioned the FCC to clarify the meaning of “reasonable period of time.” In late 2009, the FCC, “relying on its broad statutory authority,” issued a declaratory ruling determining that “a reasonable period of time” is presumptively (but rebuttably) 90 days when the application requests permission to place a new antenna on an existing tower and 150 days for all other applications. Certain state and local governments argue that the FCC did not have authority to issue such a declaratory ruling because the FCC did not have authority to “interpret ambiguous provisions” of the act and because two of the act’s clauses (a saving clause and a judicial review provision) “together display[ed] a congressional intent to withhold from the [FCC] authority to interpret” the phrase “reasonable period of time.” The cities of Arlington and San Antonio, Texas, then petitioned for review of the declaratory order in the U.S. Court of Appeals for the Fifth Circuit.

The Fifth Circuit held that the framework articulated in Chevron U.S.A. Inc. v. National Resources Defense Council, Inc., governed the threshold question of whether the FCC had the statutory authority to adopt the 90- and 150-day time frames. In Chevron, the U.S. Supreme Court held that ambiguities in statutes should be resolved “within the bounds of reasonable interpretation, not by the courts but by the [applicable] administering agency.” After concluding that certain language in the act was “ambiguous,” the court held that the FCC had permissibly construed the statute to determine its statutory authority. The Plaintiff cities appealed.

Justice Scalia

Chevron is rooted in a background presumption of congressional intent: namely, “that Congress, when it left ambiguity in a statute” administered by an agency, “understood that the ambiguity would be resolved, first and foremost, by the agency, and desired the agency (rather than the courts) to possess whatever degree of discretion the ambiguity allows.” Chevron thus provides a stable background rule against which Congress can legislate: Statutory ambiguities will be resolved, within the bounds of reasonable interpretation, not by the courts but by the administering agency. Congress knows to speak in plain terms when it wishes to circumscribe, and in capacious terms when it wishes to enlarge, agency discretion.

The question here is whether a court must defer under Chevron to an agency’s interpretation of a statutory ambiguity that concerns the scope of the agency’s statutory authority (i.e., its jurisdiction). The argument against deference rests on the premise that there exist two distinct classes of agency interpretations: Some interpretations—the big, important ones, presumably— define the agency’s “jurisdiction.” Others—humdrum, run-of-the-mill stuff—are simply applications of jurisdiction the agency plainly has. That premise is false, because the distinction between “jurisdictional” and “nonjurisdictional” interpretations is a mirage. No matter how it is framed, the question a court faces when confronted with an agency’s interpretation of a statute it administers is always, simply, whether the agency has stayed within the bounds of its statutory authority.

In sum, judges should not waste their time in the mental acrobatics needed to decide whether an agency’s interpretation of a statutory provision is “jurisdictional” or “nonjurisdictional.” Once those labels are sheared away, it becomes clear that the question in every case is, simply, whether the statutory text foreclosed the agency’s assertion of authority, or not . . . The federal judge as haruspex, sifting the entrails of vast statutory schemes to divine whether a particular agency interpretation qualifies as “jurisdictional,” is not engaged in reasoned decision-making.

. . . If “the agency’s answer is based on a permissible construction of the statute,” that is the end of the matter.*

The judgment of the Court of Appeals was affirmed.

Adjudication

In carrying out its adjudicative function in individual cases, as opposed to rulemaking for whole industries, an administrative agency usually pursues a four-step process. After receiving a complaint alleging violation of an administrative law, the agency notifies the party against whom the complaint is made and conducts an investigation into the merits of the complaint. If the agency staff finds that the complaint has merit, the agency next negotiates with the party to see if it can get the party to stop the violation voluntarily. If negotiation is unsuccessful, the third step is to file a complaint with an administrative law judge (ALJ). Step 4 consists of a hearing and decision by the ALJ. The party may appeal the ALJ’s decision to the full commission or agency head and ultimately to a federal court of appeals and the U.S. Supreme Court.

All these steps are guided by the APA, which sets out minimum procedural standards for administrative agency adjudication. Enabling statutes that create agencies often add other procedural requirements. Finally, case law arising out of appeals of agency decisions to the U.S. circuit courts of appeal and the U.S. Supreme Court provides further guidelines for agencies in carrying out their adjudicative function. In the following detailed description of the four-step adjudicative process for federal administrative agencies, we use the FTC as a representative agency. You will find it easier to follow our discussion if you look first at the organizational outline of the FTC provided in  Exhibit 18-2  and the summary of adjudication and judicial review of agency decision making given in  Exhibit 18-3 .

Exhibit 18-2 Federal Trade Commission

Source: U.S. Government Manual 2002–2003. Washington, DC: Office of the Federal Register, 2003, 722.

Applying the law to the facts . . .

The EPA is informed of a company dumping waste into Lake Erie, so it contacts the company and attempts to get the company to stop dumping waste into the lake. The company ignores all messages from the EPA. Finally, the EPA files a complaint with an administrative law judge (ALJ). A hearing almost immediately follows. What step did the EPA mistakenly leave out in this scenario?

Investigation and Complaint

The FTC, which includes the Bureau of Competition and the Bureau of Consumer Protection, is obliged to conduct an investigation whenever it receives a complaint from other government agencies, competitors, or consumers. For example, upon receiving a complaint about a mouthwash product that is advertised as killing germs and protecting people from sore throats, the commission examines the product to see if the statement has any scientific validity. Should the commission’s staff find that the advertising is “deceptive” or “unfair” within the meaning of Section 5 of the Federal Trade Commission Act, it will seek to stop the advertising campaign in one of two ways:

1. Voluntary compliance. The staff will ask the corporation to stop the advertising campaign voluntarily. Usually, no penalty is assessed if the company agrees to do this.

1. Exhibit 18-3 Adjudication and Judicial Review of Agency Decision Making

2. Consent order. If voluntary compliance is not obtained, the staff notifies the mouthwash company that it has 10 days to enter into a consent order; otherwise, the staff will issue a formal complaint.

Most cases are closed at this stage because, under a  consent order , the company does not have to admit that it was deceptive or unfair in its advertising; it only has to promise that it will not do such unlawful advertising again and agree to the remedy the commission imposes. The latter may be some form of corrective advertising that tells the public that the mouthwash does not kill germs. A consent order helps the commission staff to obtain a binding cease-and-desist order with limited effort and time. It also benefits the company, because by agreeing to a consent order, the company avoids both an admission of guilt and the cost of litigation and shareholder and consumer lawsuits that might ensue if the next steps in the adjudication process—a formal complaint and a hearing by an ALJ—resulted in an adverse decision for the company.

consent order

An agreement by a business to stop an activity that an administrative agency alleges to be unlawful and to accept the remedy the agency imposes; no admission of guilt is necessary.

Formal Complaint and Hearing

If the case is not settled by voluntary compliance or a consent order, the commission’s staff, usually through the FTC’s Office of the General Counsel (see  Exhibit 18-2 ), will issue a formal complaint listing the charges against the mouthwash company and will request that certain penalties be assessed by the ALJ.  Administrative law judges (ALJs) , who number approximately 1,150, are selected on the basis of a merit examination and are assigned to specific administrative agencies. They usually come from within the federal administrative bureaucracy and are given life tenure. Administrative law judges are noted for their independence, even though they may be assigned to a particular independent or executive agency for a number of years. 3

3  See “Administrative Law Judges Are Washington’s Potent Hybrids,” New York Times, Dec. 3, 1980 and “Symposium: Administrative Law Judges,” Western New England Law Review 6: 1 (1984).

administrative law judge (ALJ)

A judge, selected on the basis of a merit exam, who is assigned to a specific administrative agency.

A hearing before an ALJ may take several months or years. It resembles a judicial proceeding in that it includes notice to the parties, discovery, the presentation of evidence by both the staff of the commission and the accused party (the respondent), direct examination and cross-examination of the witnesses, and presentation of motions and arguments to the ALJ. There is, however, no jury at these hearings, and they are more informal than court proceedings. For instance, an ALJ will often intervene to ask questions and to take note of evidence that neither of the parties has introduced. At times in fact, the ALJ becomes a severe questioner of both parties, especially in hearings involving disability and welfare claims. Thus, adjudicative proceedings are less adversarial and more investigative, or inquisitorial, than court proceedings.

Initial or Recommended Decision

After the hearing is completed, both the commission staff and the respondent submit proposed findings of facts and conclusions of law. Under the APA, the ALJ must then prepare an initial or recommended decision. An initial decision becomes the final agency action unless an appeal is taken to the full commission by either the staff or the respondent. In contrast, a recommended decision is not final; it has to be acted on by the full commission or by the head of the agency. Agency heads and commissions are not required to defer to the ALJ’s factual findings. It is important to remember that commissioners and agency heads are political appointees of the president and may have political or policy reasons for overruling an ALJ’s decision. Should either the staff or the respondent appeal a full commission’s decision to a federal circuit court of appeals, the court is likely to give deference to the ALJ’s factual findings, because the ALJ is the person who actually heard the witnesses testify and read the submitted exhibits.

Appeal to the Full Commission

If the losing party (the agency staff or the respondent) does not agree with the ALJ’s decision, it may appeal to the full commission in the case of the FTC or to the head of an executive department (or agency) in the case of an executive agency. In the mouthwash case used as an example, a majority of the commission members must rule in favor of one of the parties on the basis of a  preponderance of the evidence  standard (51 percent or more). The APA requires that the commission state factual, legal, and policy bases for its decision. This requirement makes the agency responsible for its decision both to the public and to the courts that may later review it.

preponderance of the evidence

A legal standard whereby a bare majority (51 percent) of the evidence is sufficient to justify a ruling.

Judicial Review of Adjudicative Proceedings

If the party that loses at the full-commission or agency-head level in an adjudicative proceeding wishes to appeal, it must file a motion for appeal with the federal circuit court of appeals that has jurisdiction in the case. Briefs are filed by both parties, and the court hears oral argument. The court also reviews the whole record, including the ALJ’s findings, in the case. It does not review the commission’s factual findings as long as they are supported by substantial evidence in the record. (The substantial evidence rule requires that the court find that a reasonable person, after reviewing the record, would make the same findings the agency did.) Rather, it reviews the commission’s legal findings to ensure that (1) it acted in a constitutionally approved way, (2) it acted within the scope of its jurisdiction as outlined by the enabling statute, and (3) it followed proper statutory procedures and did not act in an arbitrary or capricious manner. 4  The following case considers the application of the arbitrary and capricious standard.

4  Administrative Procedure Act of 1946 (APA), 5 U.S.C. §§ 551–706; 5 U.S.C. § 706(2)(A).

 Case 18-2 Fox Television Stations, Inc. v. Federal Communications Commission

United States Court of Appeals 489 F.3d 444 (2d Cir. 2007)

The Federal Communications Commission’s (FCC’s) policing of “indecent” speech stems from 18 U.S.C. Section 1464, which provides that “[w]hoever utters any obscene, indecent, or profane language by means of radio communication shall be fined or imprisoned not more than two years, or both.” The FCC first exercised its statutory authority to sanction indecent (but nonobscene) speech in 1975, when it found Pacifica Foundation’s radio broadcast of comedian George Carlin’s “Filthy Words” monologue indecent.

Under the FCC’s definition, indecent speech is language that describes, in terms patently offensive as measured by contemporary community standards for the broadcast medium, sexual or excretory activities and organs.

During [a] January 19, 2003, live broadcast of the Golden Globe Awards, musician Bono stated in his acceptance speech: “[T]his is really, really, brilliant. Really, really, great ****” (expletive included in the original broadcast).

On a complaint about the broadcast by individuals associated with the Parents Television Council, the FCC held that any use of any variant of “the F-Word” inherently has sexual connotation and therefore falls within the scope of the indecency definition. The Commission found that use of the word was fleeting and isolated irrelevant, and it overruled all prior decisions in which fleeting use of an expletive was held not indecent.

On February 21, 2006, the Commission found Fox Television Stations, Inc.’s broadcast of the 2002 Billboard Music Awards and Fox’s broadcast of the 2003 Billboard Music Awards indecent and profane. During the 2002 broadcast, Cher stated: “People have been telling me I’m on the way out every year, right? So f*** ‘em.”

Fox filed a petition for review of the FCC’s order in the U.S. Court of Appeals for the Second Circuit.

Justice Pooler

Agencies are of course free to revise their rules and policies. Such a change, however, must provide a reasoned analysis for departing from prior precedent. When an agency reverses its course, a court must satisfy itself that the agency knows it is changing course, has given sound reasons for the change, and has shown that the rule is consistent with the law that gives the agency its authority to act. In addition, the agency must consider reasonably obvious alternatives and, if it rejects those alternatives, it must give reasons for the rejection. The agency must explain why the original reasons for adopting the rule or policy are no longer dispositive [a deciding factor].

The primary reason for the crackdown on fleeting expletives advanced by the FCC is the so-called “first blow” theory. Indecent material on the airwaves enters into the privacy of the home uninvited and without warning. To say that one may avoid further offense by turning off the [television or] radio when he hears indecent language is like saying that the remedy for an assault is to run away after the first blow.

We cannot accept this argument as a reasoned basis justifying the Commission’s new rule. First, the Commission provides no reasonable explanation for why it has changed its perception that a fleeting expletive was not a harmful “first blow” for the nearly thirty years between [the decisions in Pacifica’s case] and Golden Globes. More problematic, however, is that the “first blow” theory bears no rational connection to the Commission’s actual policy regarding fleeting expletives.

A re-broadcast of precisely the same offending clips from the two Billboard Music Award programs for the purpose of providing background information on this case would not result in any action by the FCC.

The Order makes passing reference to other reasons that purportedly support its change in policy, none of which we find sufficient. For instance, the Commission states that even non-literal uses of expletives fall within its indecency definition because it is “difficult (if not impossible) to distinguish whether a word is being used as an expletive or as a literal description of sexual or excretory functions.” This defies any commonsense understanding of these words, which, as the general public well knows are often used in everyday conversation without any “sexual or excretory” meaning. Even the top leaders of our government have used variants of these expletives in a manner that no reasonable person would believe referenced “sexual or excretory organs or activities.” [The court proceeded to recount examples of when President Bush and Vice President Cheney used the questionable words in public.]

Accordingly, we find that the FCC’s new policy regarding “fleeting expletives” fails to provide a reasoned analysis justifying its departure from the agency’s established practice. For this reason, Fox’s petition for review is granted.*

Affirmed for Fox Television.

Administrative Activities

In addition to rulemaking and adjudication, executive and independent agencies perform a variety of tasks that are less well known but equally important to the average individual or business. The most significant of these are the following:

1. Advising businesses and individuals concerning what an agency considers legal and not legal. The antitrust merger guidelines we discuss in  Chapter 24  are an example of an attempt by the Justice Department and the FTC to advise all interested parties about what conduct will be considered violations of Section 7 of the Clayton Act. More generally, lawyers representing interested parties meet daily with agency officials to receive informal comments or advice.

2. Conducting studies of industry and markets. Agencies such as the FTC, OSHA, and the FDA carry out studies to determine the level of economic concentration in an industry, dangerous products in the workplace, and the harmful effects of legal drugs.

3. Providing information to the general public on myriad matters by answering telephone calls, distributing pamphlets, and holding seminars.

4. Licensing of businesses in certain areas, such as radio and television stations (FCC).

5. Managing property. The General Services Administration (GSA) is the largest landlord in the country. It buys, sells, and leases all property used by the U.S. government.

6. Limitations on Administrative Agencies’ Powers

7. Statutory Limitations

8. Certain federal statutes, summarized in  Table 18-2 , limit the power of administrative agencies and their officials. We have already discussed the APA. You should carefully review the brief descriptions of the other statutes listed in the table. It is important that you know, both as a future business manager and as an individual citizen, their major provisions. For instance, under the Federal Register Act of 1933, the Federal Privacy Act of 1974, and the Freedom of Information Act of 1966 as amended in 1974 and 1976, the decision-making processes of administrative agencies are open to the public. This legislation prevents secret, arbitrary, or capricious activity by the “fourth branch of government.” Also, as you have seen, judicial review of administrative agencies’ rulemaking and adjudication functions serves a similar purpose. Note also that private citizens have a means of relief against improper acts by employees of federal administrative agencies through the Federal Tort Claims Act of 1946, which forces agencies to waive sovereign immunity for their tortious actions and those of their employees. Tortious actions under this act include assault, battery, abuse of prosecution, false arrest, and trespass. For example, if an inspector from the EPA illegally enters a business property after being told to leave, the inspector, as well as the agency, may be held liable.

9. We said earlier that agencies were exempted from holding open hearings in certain circumstances, chiefly when proceedings concern military matters or foreign affairs. Some agencies have tried to stretch the exemption to cover proceedings in other “sensitive” matters.

10. Institutional Limitations

11. Executive Branch

12.  

13. The power of administrative agencies is limited by the executive branch through (1) the power of the president to appoint the heads

14. Table 18-2 Federal Statutes Limiting Administrative Agencies’ Authority

Statute	Summary of Provisions
Federal Register of Act of 1993	Created the Federal Register system, which mandates the publication of all notices of federal agency meetings, proposed regulations, and final regulations in the Federal Register. The Federal Register system includes the Government Manual, which lists information, updated yearly, about each administrative agency, and the Code of Federal Regulations (CFR), which codifies regulations promulgated by agencies of the federal government.
Freedom of Information Act of 1966 (FOIA)	Requires each agency to publish in the Federal Register places where the public can get information from the agency, procedural and substantive rules and regulations, and policy statements. Also, the FOIA requires each agency to make available for copying on request such items as staff manuals, staff instruction orders, and adjudicated opinions, as well as interpretations of policy statements. Nine exceptions enable an agency to deny an FOIA request by the public, a business, or other groups.
Government in Sunshine Act of 1976 (Sunshine Act)	Requires each agency headed by a collegiate body to hold every portion of a business meeting open to public attendance. A collegiate body exists if the agency is headed by two or more individuals, the majority of whom are appointed by the president and confirmed by the Senate.
Federal Privacy Act of 1974 (FPA)	Prevents an agency from disclosing any record in a system of records, by any means of communication, to any person or agency without the written authority of the individual. Eleven exceptions to the statute allow information to be released by the agency without the consent of individuals. Some exceptions are (1) to meet an FOIA request, (2) for use by the Selective Service System, (3) for use by another federal agency in civil or criminal law enforcement, (4) for use by a committee of the Congress, or (5) to meet a court order. Also, under the FPA, an individual may obtain information and correct errors in his or her record.
Administrative Procedure Act (APA)	The APA requires that all federal administrative agencies follow certain uniform procedures when performing their rulemaking and adjudicative functions.
Federal Tort Claims Act of 1946 (FTCA)	Requires the federal government to waive sovereign immunity and to assume liability for the tortious acts of its employees if nondiscretionary functions are being carried out by the employee.
Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA)	Requires analysis that measures the cost that a proposed rule would impose on a business (particularly a small business). Congress may review a proposed regulation for 60 days. The SBREFA helps enforce the Regulatory Flexibility Act to make sure federal agencies seek to reduce the impact of new regulations on small businesses.
Congressional Review Act of 1996	This law, in effect, gives Congress a “veto power” over every single regulation that agencies pass. Under this statute, a regulation cannot take effect until at least 60 working days have passed since the regulation was promulgated. If, during the 60-day period, a majority of the members of Congress pass a resolution of disapproval of the rule and either the president signs it or Congress overrules his veto of it, the regulation is nullified.

15. of the agencies, (2) the power of the OMB to recommend a fiscal-year budget for each agency, and (3) presidential executive orders.

16. The president not only appoints the head of each administrative agency but also designates some lower-level heads of departments and divisions that do not come under the federal civil service system. Naturally, presidential appointees tend to have the same philosophical bent as the chief executive and are often of the same party. In this way, the president gains some influence over both independent and executive agencies.

17. Presidents exercise even greater influence over executive agencies through the budget process and executive orders. In 1981, for instance, President Reagan signed Executive Order 12291, which requires executive agencies to perform a cost-benefit analysis before promulgating a major federal regulation. A major federal regulation is a regulation that will cost businesses $100 million or more to comply with. Another example, this one concerning the budget process, Executive Order 12498, signed in 1985 (also by President Reagan), extended the OMB’s powers so that it now has authority over “pre-rulemaking action” by executive agencies. This executive order requires civilian government agencies to submit a Draft Regulatory Program listing all pre-rulemaking and other significant actions they intend to take in a fiscal year. These Draft Regulatory Programs become part of the administration’s Regulatory Program. Once that program is published by the OMB, no agency may deviate from the plan without approval from the OMB unless forced to do so by the courts.

18. Note that these executive orders affect executive administrative agencies. However, independent administrative agencies have been requested to comply voluntarily with these orders, and some have done so. A bill passed by the House of Representatives and the Senate in 1995, and discussed in this chapter under “Creation of Administrative Agencies,” applies to both executive and independent administrative agencies.

19. Legislative Branch

20. Congress limits the authority of administrative agencies through its (1) oversight power, (2) investigative power, (3) power to terminate an agency, and (4) power to advise on and consent to presidential nominations for heads of administrative agencies.

21. When Congress creates an agency, it delegates to that agency its own legislative power over a narrow area of commerce (e.g., human rights). Each year, through one of its oversight committees, it determines whether the agency has been carrying out its mandated function. Suppose, for example, that the House Energy and Commerce Committee’s Subcommittee on Consumer Finance and Telecommunications finds that the SEC is not enforcing laws against insider trading and fraud. The full committee will investigate and, if it finds dereliction, will order the SEC to enforce the laws as it is charged to do.

22. The greatest legislative limitation on agency power, however, lies in Congress’s right to approve or disapprove an agency budget submitted by the executive branch (the OMB). If Congress disagrees with the agency’s actions, it can slash the budget or refuse to budget the agency at all. The latter action, of course, will shut down the agency. In contrast, if Congress believes that the executive branch is shortchanging an agency for some reason, it can raise that agency’s budget above the amount proposed by the OMB.

23. Judicial Branch

24. The courts can curb administrative agencies’ rulemaking and adjudicative excesses by reversing or modifying such actions, as explained earlier in this chapter. You might want to go back to that portion of the chapter at this point and reread the standards used by the courts in reviewing these agency functions.

State and Local Administrative Agencies

Each of the 50 states, the District of Columbia, and territories such as Puerto Rico and Guam have created state and local administrative agencies to carry out tasks assigned to them by their legislative bodies. Most have utilities commissions (or the equivalent) that regulate local and in-state telephone rates and are similar to the Federal Communications Commission, which regulates telephone rates for calls between states (interstate calls). Agencies that regulate state-chartered banks, workers’ compensation, state universities, and state taxes are common at the state level and are assigned duties by the state legislature. At the city and county level, real estate planning boards, zoning commissions, and supervisory boards are just a few of the administrative agencies that have a profound effect on the life of all citizens; future business leaders should not overlook these when determining where their companies will be located.

When federal and state agency laws conflict, the Supremacy Clause of Article VI of the U.S. Constitution plays a significant role, as shown in the following case.

 Case 18-3 Vonage Holdings Corp. v. Minnesota Public Utilities Commission

U.S. District Court of Minnesota 290 F. Supp. 2d 993 (2003); aff’d 394 F.3d 568 (2004)

Vonage Holdings Corporation markets and sells Vonage DigitalVoice, a service that permits voice communication via a high-speed (broadband) Internet connection. Vonage’s service uses a technology called Voice over Internet Protocol (VoIP), which allows customers to place and receive voice transmissions routed over the Internet.

Traditional telephone companies use circuit-switched technology. Voice communication using the Internet has been called Internet protocol (IP) telephony, and rather than using circuit switching, it utilizes “packet switching,” a process of breaking down data into packets of digital bits and transmitting them over the Internet.

Vonage has approximately 500 customers with billing addresses in Minnesota. The Minnesota Department of Commerce (MDOC) investigated Vonage’s services and on July 15, 2003, filed a complaint with the Minnesota Public Utilities Commission (MPUC). The complaint alleged that Vonage failed to obtain a proper certificate of authority required to provide telephone service in Minnesota.

Vonage then moved to dismiss the MDOC complaint. The MPUC concluded that Vonage was required to comply with Minnesota statutes and rules regarding the offering of telephone service. Vonage then filed a complaint seeking an injunction.

Justice Davis

The issue before the Court is whether Vonage may be regulated under [a] Minnesota law that requires telephone companies to obtain certification authorizing them to provide telephone service. Vonage asserts that the Communications Act of 1934, as amended by the Communications Act of 1996, preempts the state authority upon which the MPUC’s order relies. Vonage asserts that its services are “information services,” which are not subject to regulation, rather than “telecommunications services,” which may be regulated.

The Supremacy Clause of Article VI of the Constitution empowers Congress to preempt state law. Preemption occurs when (1) Congress enacts a federal statute that expresses its clear intent to preempt state law; (2) there is a conflict between federal and state law; (3) compliance with both federal and state law is in effect physically impossible; (4) federal law contains an implicit barrier to state regulation; (5) comprehensive congressional legislation occupies the entire field of regulation; or (6) state law is an obstacle to the accomplishment and execution of the full objectives of Congress. Moreover, a federal agency acting within the scope of its congressionally delegated authority may preempt state regulation.

Examining the statutory language of the Communications Act, the Court concludes that the VoIP service provided by Vonage constitutes an information service because it offers the “capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications.” Vonage’s services are closely tied to the provision of telecommunications services as defined by Congress, the courts, and the [Federal Communications Commission (FCC)], but this Court finds that Vonage uses telecommunications services, rather than provides them.

The Court acknowledges the attractiveness of the MPUC’s simplistic “quacks like a duck” argument, essentially holding that because Vonage’s customers make phone calls, Vonage’s services must be telecommunications services. However, this simplifies the issue to the detriment of an accurate understanding of this complex question. The Court must follow the statutory intent expressed by Congress, and interpreted by the FCC. Short of explicit statutory language, the Court can find no stronger guidance for determining that Vonage’s service is an information service.

Where federal policy is to encourage certain conduct, state law discouraging that conduct must be preempted.*

For the Plaintiff, injunction granted.

Global Dimensions of Administrative Agencies

In the United Kingdom, the Financial Services Authority (FSA) regulates the banking, securities, commodities futures, and insurance industries. The FSA is an independent, nongovernmental body whose board of directors is nominally appointed by the Crown. In contrast, in the United States, banks are regulated by the Federal Reserve Board, the Comptroller of the Currency, and state bank regulators; securities firms are regulated by the SEC, state securities commissions, and the National Association of Securities Dealers; commodities futures are regulated by the Commodities Futures Trading Commission; and insurance is regulated by state insurance commissions.

The FSA’s self-avowed goals are to (1) maintain confidence in the British financial system, (2) promote public understanding of that system, (3) secure the right degree of protection for customers, and (4) help reduce financial crime. Like its American counterparts, the FSA oversees transactions, demands ethical and legal conduct from firms, and sets standards. Unlike the American system, which utilizes government funding, the FSA charges all firms it regulates annual licensing fees and thus is privately funded. This idea is to allow the FSA to act independently by removing all subjectivity, such as governmental wishes. The concentration of power in the FSA theoretically allows it to better regulate the country’s banking and trading exchanges because it does not have to coordinate with other bodies that may have diverging goals and interests.

Summary

Administrative law is defined broadly as any rule (statute or regulation) that directly or indirectly affects an administrative agency. The APA provides procedural guidelines for federal agencies; these guidelines are often copied, in whole or in part, by state and local administrative agencies.

The major functions of administrative agencies are rulemaking, adjudication, and the carrying out of numerous administrative activities. The executive, judicial, and legislative branches of government limit the power of federal agencies in numerous ways. In addition, several federal statutes limit the authority of administrative agencies.

Federal administrative agencies meet with their counterparts in other nations and enter into international agreements that aid the enforcement powers of U.S. agencies.

Assignment On The Internet

This chapter introduced administrative law and several administrative agencies. There are, however, many agencies not discussed that play a significant role in creating regulations. Use the Internet to discover three federal administrative agencies not discussed in this chapter. Explain the purpose of each agency and state at least two recent rules or regulations it has issued. The websites listed in the following section may be of use in locating the many federal administrative agencies.