Since 2010, I have been posting on the development of a new course I
have been developing for our first year law school students, "Elements
of Law." The course originally had a quite modest objective--to
introduce law students to legal research and reasoning through case law,
statutory interpretation, and legal history, processes, and
institutions. I chose to broaden its objectives within these specific
parameters and development a framing and concepts course that would
provide a deep foundation to law students on the legal system they were
undertaking to study.
This post produces some of the materials I will be presenting to the
class. I offer these materials in hopes that they may prove of use and
that you might share comments, perspectives and suggestions as I develop
those materials on this site. Thanks.
This post includes a draft of Chapter 6 (Law Articulated by Regulatory Agencies: The Administrative Function).
Chapter 6
Law Articulated by Regulatory Agencies ― The Administrative
Function
I. Introduction.
In
the preceding chapters students have been introduced to three of the major
forms of law that make up the legal system of the United States. The first was judicially
administered law—corresponding roughly to what remains of the common law and
equity. The second was the law articulated
by the legislature, statutes. This is what
many non-lawyers commonly understand as “law”.
Together, these constituted the sum of the law-making authority of the
early Republic. But changes, significant
ones for law, came as a consequence of industrialization in the 19th
century. Those changes challenged the
traditional bases of law to continue to order society in a way responsive to
the needs of the new institutions, cultures and activities of the emerging
national economic market and to hold together the fabric of a state
increasingly transformed by waves of immigration. Moreover, the need for
socialization attendant on immigration and the requirements for social
adjustments made necessary by the end of slavery from the mid 19th
century, fueled a taste for the sort of social legislation that might have been
novel in earlier periods.
Social
regulation, and the regulation of market activities required a distinct type of
government culture—one that need to play not merely the role of legislator, executive
and judge, but also the increasingly important role of manager. Managerialism was new to government in the 19th
century. It has become the central
element of how government functions int eh 21st century. Managerialism requires constant supervision
and rules that treat with great specificity highly technical areas of behavior
or conduct. Everything from safety
standards to the standardization of products called for new forms of
government. That new form of government
was created through the establishment and enlargement of the functions of
administrative agencies. These
governmental offices were established to fill out and enforce on an ongoing
basis legislation that increasingly merely set goals, targets or objectives and
delegated the details to organizations charged with their realization.
This
chapter, then, considers the law produced by these administrative or regulatory
agencies. These constitute an increasingly
important set of “rules” promulgated by agencies on the basis of power
delegated to them by the legislature through statutory “law.” They are not a substitute for law but a means
for filling in gaps of law that is no longer able to specify with any degree of
detail the rules necessary to meet the sometimes needs of regulation in highly
technical fields. We will consider how this form of law making differs from
statutes and the law of private disputes administered through courts.
II. Chapter Readings
· Edward
L. Glaeser and Andrei Schleifer, The Rise of the Regulatory State Journal
of Economic Literature XLI:401-425 (2003). READ ALL BUT SECTION 3
· United States
Securities and Exchange Commission, The Investor's Advocate: How the SEC
Protects Investors, Maintains Market Integrity, and Facilitates Capital
Formation (undated).
__________
The Investor's Advocate: How the SEC Protects
Investors, Maintains Market Integrity, and Facilitates Capital Formation,
Securities and Exchange Commission
Undated
(some footnotes added
and links omitted)
The mission of the U.S. Securities and Exchange
Commission is to protect investors, maintain fair, orderly, and efficient
markets, and facilitate capital formation.
As more and more first-time investors turn to
the markets to help secure their futures, pay for homes, and send children to
college, our investor protection mission is more compelling than ever.
As our nation's securities exchanges mature into
global for-profit competitors, there is even greater need for sound market
regulation.
And the common interest of all Americans in a
growing economy that produces jobs, improves our standard of living, and
protects the value of our savings means that all of the SEC's actions must be
taken with an eye toward promoting the capital formation that is necessary to
sustain economic growth.
The world of investing is fascinating and
complex, and it can be very fruitful. But unlike the banking world, where
deposits are guaranteed by the federal government, stocks, bonds and other
securities can lose value. There are no guarantees. That's why investing is not
a spectator sport. By far the best way for investors to protect the money they
put into the securities markets is to do research and ask questions.
The laws and rules that govern the securities
industry in the United States derive from a simple and straightforward concept:
all investors, whether large institutions or private individuals, should have
access to certain basic facts about an investment prior to buying it, and so
long as they hold it. To achieve this, the SEC requires public companies to
disclose meaningful financial and other information to the public. This
provides a common pool of knowledge for all investors to use to judge for
themselves whether to buy, sell, or hold a particular security. Only through
the steady flow of timely, comprehensive, and accurate information can people
make sound investment decisions.
The result of this information flow is a far
more active, efficient, and transparent capital market that facilitates the
capital formation so important to our nation's economy. To insure that this
objective is always being met, the SEC continually works with all major market
participants, including especially the investors in our securities markets, to
listen to their concerns and to learn from their experience.
The SEC oversees the key participants in the
securities world, including securities exchanges, securities brokers and
dealers, investment advisors, and mutual funds. Here the SEC is concerned
primarily with promoting the disclosure of important market-related
information, maintaining fair dealing, and protecting against fraud.
Crucial to the SEC's effectiveness in each of
these areas is its enforcement authority. Each year the SEC brings hundreds of
civil enforcement actions against individuals and companies for violation of
the securities laws. Typical infractions include insider trading, accounting
fraud, and providing false or misleading information about securities and the
companies that issue them.
One of the major sources of information on which
the SEC relies to bring enforcement action is investors themselves — another
reason that educated and careful investors are so critical to the functioning
of efficient markets. To help support investor education, the SEC offers the
public a wealth of educational information on this
Internet website,[] which also includes the EDGAR
database [] of disclosure documents
that public companies are required to file with the Commission.
Though it is the primary overseer and regulator
of the U.S. securities markets, the SEC works closely with many other
institutions, including Congress, other federal departments and agencies, the
self-regulatory organizations (e.g. the stock exchanges), state securities
regulators, and various private sector organizations. In particular, the
Chairman of the SEC, together with the Chairman of the Federal Reserve, the
Secretary of the Treasury, and the Chairman of the Commodity Futures Trading
Commission, serves as a member of the President's Working Group on Financial
Markets.
This article is an overview of the SEC's
history, responsibilities, activities, organization, and operation. More
detailed information about many of these topics is available throughout this
website.
The SEC's foundation was laid in an era that was
ripe for reform. Before the Great Crash of 1929, there was little support for
federal regulation of the securities markets. This was particularly true during
the post-World War I surge of securities activity. Proposals that the federal
government require financial disclosure and prevent the fraudulent sale of
stock were never seriously pursued.
Tempted by promises of "rags to
riches" transformations and easy credit, most investors gave little
thought to the systemic risk that arose from widespread abuse of margin
financing and unreliable information about the securities in which they were
investing. During the 1920s, approximately 20 million large and small
shareholders took advantage of post-war prosperity and set out to make their
fortunes in the stock market. It is estimated that of the $50 billion in new
securities offered during this period, half became worthless.
When the stock market crashed in October 1929,
public confidence in the markets plummeted. Investors large and small, as well
as the banks who had loaned to them, lost great sums of money in the ensuing
Great Depression. There was a consensus that for the economy to recover, the
public's faith in the capital markets needed to be restored. Congress held
hearings to identify the problems and search for solutions.
Based on the findings in these hearings,
Congress — during the peak year of the Depression — passed the Securities Act
of 1933. This law, together with the Securities Exchange Act of 1934, which
created the SEC, was designed to restore investor confidence in our capital
markets by providing investors and the markets with more reliable information
and clear rules of honest dealing. The main purposes of these laws can be
reduced to two common-sense notions:
- Companies
publicly offering securities for investment dollars must tell the public
the truth about their businesses, the securities they are selling, and the
risks involved in investing.
- People
who sell and trade securities – brokers, dealers, and exchanges – must
treat investors fairly and honestly, putting investors' interests first.
Monitoring the securities industry requires a
highly coordinated effort. Congress established the Securities and Exchange
Commission in 1934 to enforce the newly-passed securities laws, to promote
stability in the markets and, most importantly, to protect investors. President
Franklin Delano Roosevelt appointed Joseph P. Kennedy, President John F.
Kennedy's father, to serve as the first Chairman of the SEC.
The SEC consists of five
presidentially-appointed Commissioners, with staggered five-year terms (see SEC
Organization Chart;[] text
version [] also available). One of
them is designated by the President as Chairman of the Commission — the
agency's chief executive. By law, no more than three of the Commissioners may
belong to the same political party, ensuring non-partisanship. The agency's
functional responsibilities are organized into five Divisions and 23 Offices,
each of which is headquartered in Washington, DC. The Commission's
approximately 3,500 staff are located in Washington and in 11
Regional Offices [] throughout the country.
It is the responsibility of the Commission to:
- interpret
and enforce federal securities laws;
- issue
new rules and amend existing rules;
- oversee
the inspection of securities firms, brokers, investment advisers, and
ratings agencies;
- oversee
private regulatory organizations in the securities, accounting, and
auditing fields; and
- coordinate
U.S. securities regulation with federal, state, and foreign authorities.
The Commission convenes regularly at meetings
that are open to the public and the news media unless the discussion pertains
to confidential subjects, such as whether to begin an enforcement
investigation.
Divisions
Division of Corporation Finance
The Division
of Corporation Finance []
assists the Commission in executing its responsibility to oversee corporate
disclosure of important information to the investing public. Corporations are
required to comply with regulations pertaining to disclosure that must be made
when stock is initially sold and then on a continuing and periodic basis. The
Division's staff routinely reviews the disclosure documents filed by companies.
The staff also provides companies with assistance interpreting the Commission's
rules and recommends to the Commission new rules for adoption.
The Division of Corporation Finance reviews
documents that publicly-held companies are required to file with the Commission.
The documents include:
- registration
statements for newly-offered securities;
- annual
and quarterly filings (Forms 10-K and 10-Q);
- proxy
materials sent to shareholders before an annual meeting;
- annual
reports to shareholders;
- documents
concerning tender offers (a tender offer is an offer to buy a large number
of shares of a corporation, usually at a premium above the current market
price); and
- filings
related to mergers and acquisitions.
These documents disclose information about the
companies' financial condition and business practices to help investors make
informed investment decisions. Through the Division's review process, the staff
checks to see if publicly-held companies are meeting their disclosure
requirements and seeks to improve the quality of the disclosure. To meet the
SEC's requirements for disclosure, a company issuing securities or whose
securities are publicly traded must make available all information, whether it
is positive or negative, that might be relevant to an investor's decision to
buy, sell, or hold the security.
Corporation Finance provides administrative
interpretations of the Securities Act of 1933, the Securities Exchange Act of
1934, and the Trust Indenture Act of 1939, and recommends regulations to
implement these statutes. Working closely with the Office of the Chief
Accountant, the Division monitors the activities of the accounting profession,
particularly the Financial Accounting Standards Board (FASB), that result in
the formulation of generally accepted accounting principles (GAAP).
Increasingly, the Division also monitors the use by U.S. registrants of
International Financial Reporting Standards (IFRS), promulgated by the
International Accounting Standards Board.
The Division's staff provides guidance and
counseling to registrants, prospective registrants, and the public to help them
comply with the law. For example, a company might ask whether the offering of a
particular security requires registration with the SEC. Corporation Finance
would share its interpretation of the relevant securities regulations with the
company and give it advice on compliance with the appropriate disclosure
requirement.
The Division uses no-action letters to issue
guidance in a more formal manner. A company seeks a no-action letter from the
staff of the SEC when it plans to enter uncharted legal territory in the
securities industry. For example, if a company wants to try a new marketing or
financial technique, it can ask the staff to write a letter indicating whether
it would or would not recommend that the Commission take action against the
company for engaging in its new practice.
|
How the SEC Rulemaking Process Works
Rulemaking is the process by which federal
agencies implement legislation passed by Congress and signed into law by the
President. Major pieces of legislation, such as the Securities Act of 1933,
the Securities Exchange Act of 1934, the Investment Company Act of 1940, and
the Sarbanes-Oxley Act, provide the framework for the SEC's oversight of the
securities markets. These statutes are broadly drafted, establishing basic
principles and objectives. To ensure that the intent of Congress is carried
out in specific circumstances — and as the securities markets evolve technologically,
expand in size, and offer new products and services — the SEC engages in
rulemaking.
Rulemaking can involve several steps: concept
release, rule proposal, and rule adoption.
Concept Release: The rulemaking process usually begins with a
rule proposal, but sometimes an issue is so unique and/or complicated that
the Commission seeks out public input on which, if any, regulatory approach
is appropriate. A concept release is issued describing the area of interest and the Commission's
concerns and usually identifying different approaches to addressing the
problem, followed by a series of questions that seek the views of the public
on the issue. The public's feedback is taken into consideration as the
Commission decides which approach, if any, is appropriate.
Rule Proposal: The Commission publishes a detailed formal rule
proposal for public comment.
Unlike a concept release, a rule proposal advances specific objectives and
methods for achieving them. Typically the Commission provides between 30 and
60 days for review and comment. Just as with a concept release, the public
comment is considered vital to the formulation of a final rule.
Rule Adoption: Finally, the Commissioners consider what they
have learned from the public exposure of the proposed rule, and seek to agree
on the specifics of a final rule. If a final measure is then adopted by the Commission, it
becomes part of the official rules that govern the securities industry.
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Division of Trading and Markets
The Division
of Trading and Markets []
assists the Commission in executing its responsibility for maintaining fair,
orderly, and efficient markets. The staff of the Division provide day-to-day
oversight of the major securities market participants: the securities
exchanges; securities firms; self-regulatory organizations (SROs) including the
Financial Industry Regulatory Authority (FInRA), the Municipal Securities
Rulemaking Board (MSRB), clearing agencies that help facilitate trade
settlement; transfer agents (parties that maintain records of securities
owners); securities information processors; and credit rating agencies.
The Division also oversees the Securities
Investor Protection Corporation (SIPC), which is a private, non-profit
corporation that insures the securities and cash in the customer accounts of
member brokerage firms against the failure of those firms. It is important to
remember that SIPC insurance does not cover investor losses arising from market
declines or fraud.
The Division's additional responsibilities
include:
- carrying
out the Commission's financial integrity program for broker-dealers;
- reviewing
(and in some cases approving, under authority delegated from the
Commission) proposed new rules and proposed changes to existing rules
filed by the SROs;
- assisting
the Commission in establishing rules and issuing interpretations on
matters affecting the operation of the securities markets; and
- surveilling
the markets.
Division of Investment Management
The Division
of Investment Management []
assists the Commission in executing its responsibility for investor protection
and for promoting capital formation through oversight and regulation of
America's $26 trillion investment management industry. This important part of
the U.S. capital markets includes mutual funds and the professional fund
managers who advise them; analysts who research individual assets and asset
classes; and investment advisers to individual customers. Because of the high
concentration of individual investors in the mutual funds, exchange-traded
funds, and other investments that fall within the Division's purview, the
Division of Investment Management is focused on ensuring that disclosures about
these investments are useful to retail customers, and that the regulatory costs
which consumers must bear are not excessive.
The Division's additional responsibilities
include:
- assisting
the Commission in interpreting laws and regulations for the public and SEC
inspection and enforcement staff;
- responding
to no-action requests and requests for exemptive relief;
- reviewing
investment company and investment adviser filings;
- assisting
the Commission in enforcement matters involving investment companies and
advisers; and
- advising
the Commission on adapting SEC rules to new circumstances.
-
Division of Enforcement
First and foremost, the SEC is a law enforcement
agency. The Division of Enforcement []
assists the Commission in executing its law enforcement function by recommending
the commencement of investigations of securities law violations, by
recommending that the Commission bring civil actions in federal court or as
administrative proceedings before an administrative law judge, and by
prosecuting these cases on behalf of the Commission. As an adjunct to the SEC's
civil enforcement authority, the Division works closely with law enforcement
agencies in the U.S. and around the world to bring criminal cases when
appropriate.
The Division obtains evidence of possible violations
of the securities laws from many sources, including market surveillance
activities, investor tips and complaints, other Divisions and Offices of the
SEC, the self-regulatory organizations and other securities industry sources,
and media reports.
All SEC investigations are conducted privately.
Facts are developed to the fullest extent possible through informal inquiry,
interviewing witnesses, examining brokerage records, reviewing trading data,
and other methods. With a formal order of investigation, the Division's staff
may compel witnesses by subpoena to testify and produce books, records, and
other relevant documents. Following an investigation, SEC staff present their
findings to the Commission for its review. The Commission can authorize the staff
to file a case in federal court or bring an administrative action. In many
cases, the Commission and the party charged decide to settle a matter without
trial.
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Common conduct that may lead to SEC
investigations include:
- misrepresentation
or omission of important information about securities;
- manipulating
the market prices of securities;
- stealing
customers' funds or securities;
- violating
broker-dealers' responsibility to treat customers fairly;
- insider
trading (violating a trust relationship by trading while in possession
of material, non-public information about a security); and
- selling
unregistered securities.
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Whether the Commission decides to bring a case
in federal court or within the SEC before an administrative law judge may
depend upon the type of sanction or relief that is being sought. For example,
the Commission may bar someone from the brokerage industry in an administrative
proceeding,[] but an order barring
someone from acting as a corporate officer or director must be obtained in
federal court. Often, when the misconduct warrants it, the Commission will
bring both proceedings.
- Civil
action: The Commission files a
complaint with a U.S. District Court and asks the court for a sanction or
remedy. Often the Commission asks for a court order, called an injunction,
that prohibits any further acts or practices that violate the law or
Commission rules. An injunction can also require audits, accounting for
frauds, or special supervisory arrangements. In addition, the SEC can seek
civil monetary penalties, or the return of illegal profits (called disgorgement).
The court may also bar or suspend an individual from serving as a
corporate officer or director. A person who violates the court's order may
be found in contempt and be subject to additional fines or imprisonment.
- Administrative
action: The Commission can seek a
variety of sanctions through the administrative proceeding process.
Administrative proceedings differ from civil court actions in that they
are heard by an administrative law judge (ALJ), who is independent of the
Commission. The administrative law judge presides over a hearing and
considers the evidence presented by the Division staff, as well as any
evidence submitted by the subject of the proceeding. Following the hearing
the ALJ issues an initial
decision [] that includes
findings of fact and legal conclusions. The initial decision also contains
a recommended sanction. Both the Division staff and the defendant may
appeal all or any portion of the initial decision to the Commission. The
Commission may affirm the decision of the ALJ, reverse the decision, or
remand it for additional hearings. Administrative sanctions include cease
and desist orders, suspension or revocation of broker-dealer and
investment advisor registrations, censures, bars from association with the
securities industry, civil monetary penalties, and disgorgement.
-
Division of Economic and Risk Analysis
The Division of Economic and Risk Analysis
assists the Commission in executing its mission to protect investors, maintain
fair, orderly, and efficient markets, and facilitate capital formation by
integrating robust economic analysis and rigorous data analytics into the work
of the SEC. The Division has a broad role in Commission activities, interacting
with nearly every Division and Office, providing sophisticated and data-driven
economic and risk analyses to help inform the agency's policymaking,
rulemaking, enforcement, and examinations.
There are two main functions for the Division.
First, DERA staff provide vital support in the form of economic analyses in
support of Commission rulemaking and policy development. Second, the Division
also provides economic analysis and research, risk assessment, and data
analytics to critically support the agency's resources on matters presenting
the greatest perceived risks in litigation, examinations, and registrant
reviews, as well as providing economic support for enforcement matters.
Among the functions performed by the Division
are:
- Analyzing
the potential economic effects of Commission rulemakings or other
Commission actions. In this role, offices within DERA works closely with
the other Divisions and Offices to help examine the need for regulatory
action, analyze the potential economic effects of rules and other
Commission actions, develop data-driven analyses of market activity, and
assist in evaluating public comments and studies.
- Providing
quantitative and qualitative research and support related to risk
assessment. DERA staff help the Commission to anticipate, identify, and
manage risks, focusing on early identification of potential fraud and
illegal or questionable activities. Staff collects, analyzes, and
disseminates information to the Commission and its Staff about regulated
entities and market activity.
- Assisting
the Division of Enforcement by, for example, providing economic and
quantitative analysis and support in enforcement proceedings and
settlement negotiations.
-
Offices
Office of the General Counsel
The General
Counsel [] is appointed by the
Chairman as the chief legal officer of the Commission, with overall
responsibility for the establishment of agency policy on legal matters. The
General Counsel serves as the chief legal advisor to the Chairman regarding all
legal matters and services performed within, or involving, the agency, and
provides legal advice to the Commissioners, the Divisions, the Offices, and
other SEC components as appropriate.
The General Counsel represents the SEC in civil,
private, or appellate proceedings as appropriate, including appeals from the
decisions of the federal district courts or the Commission in enforcement
matters, and appeals from the denial of requests under the Freedom of
Information Act. Through its amicus curiae program, the General Counsel often
intervenes in private appellate litigation involving novel or important
interpretations of the securities laws, and the Office is responsible for
coordinating with the Department of Justice in the preparation of briefs on
behalf of the United States involving matters in which the SEC has an interest.
The General Counsel is also responsible for
determining the adherence by attorneys in the SEC to appropriate professional
standards, as well as for providing advice on standards of conduct to
Commissioners and staff, as appropriate. It is responsible for the final
drafting of all proposed legislation that the Chairman or the Commission choose
to submit for consideration to the Congress or the states, and for coordinating
the SEC staff positions on such legislation.
Office of the Chief Accountant
The Chief Accountant is appointed by the
Chairman to be the principal adviser to the Commission on accounting and
auditing matters. The Office of the Chief Accountant [] assists the Commission
in executing its responsibility under the securities laws to establish
accounting principles, and for overseeing the private sector standards-setting
process. The Office works closely with the Financial Accounting Standards
Board, whose accounting standards the Commission has recognized as generally
accepted for purposes of the federal securities laws, as well as the
International Accounting Standards Board and the American Institute of
Certified Public Accountants.
In addition to its responsibility for accounting
standards, the Commission is responsible for the approval or disapproval of
auditing rules put forward by the Public Company Accounting Oversight Board, a
private-sector regulator established by the Sarbanes-Oxley Act to oversee the
auditing profession. The Commission also has thorough-going oversight
responsibility for all of the activities of the PCAOB, including approval of
its annual budget. To assist the Commission in the execution of these
responsibilities, the Office of the Chief Accountant is the principal liaison
with the PCAOB. The Office also consults with registrants and auditors on a
regular basis regarding the application of accounting and auditing standards
and financial disclosure requirements.
Because of its expertise and ongoing involvement
with questions concerning the financial books and records of public companies
registered with the SEC, the Office of the Chief Accountant is often called
upon to assist in addressing issues that arise in the context of Commission
enforcement actions.
Office of Compliance Inspections and
Examinations
The Office
of Compliance Inspections and Examinations []
administers the SEC's nationwide examination and inspection program for
registered self-regulatory organizations, broker-dealers, transfer agents,
clearing agencies, investment companies, and investment advisers. The Office
conducts inspections to foster compliance with the securities laws, to detect
violations of the law, and to keep the Commission informed of developments in
the regulated community. Among the more important goals of the examination
program is the quick and informal correction of compliance problems. When the
Office finds deficiencies, it issues a "deficiency letter"
identifying the problems that need to be rectified and monitor the situation
until compliance is achieved. Violations that appear too serious for informal
correction are referred to the Division of Enforcement.
Office of Credit Ratings
The Office
of Credit Ratings
("OCR" or the "Office") [] assists the Commission
in executing its responsibility for protecting investors, promoting capital
formation, and maintaining fair, orderly, and efficient markets through the
oversight of credit rating agencies registered with the Commission as
nationally recognized statistical rating organizations or "NRSROs."
The staff of OCR monitors the activities and
conducts examinations of NRSROs to assess and promote compliance with statutory
and Commission requirements. The monitoring activities are geared towards
informing Commission policy and rulemaking and include identifying and
analyzing risks, monitoring industry trends, and administering and monitoring
the NRSRO registration process as well as the periodic updates by existing
registrant of their Forms NRSRO. The examination activities of the Office are
focused on conducting legislatively mandated annual, risk-based examinations of
all registered NRSROs to assess compliance with federal securities laws and
Commission rules. The Office also conducts special risk-targeted examinations
based on credit market issues and concerns and to follow up on tips,
complaints, and NRSRO self-reported incidents. The Office collaborates and
coordinates with other Commission Offices and Divisions as warranted to enhance
the Office's ability to serve the public interest and protect users of credit
ratings.
OCR is responsible for drafting annual public
reports to Congress addressing adopted and proposed rules, the status of
registrants and applicants, and the state of competition, transparency, and
issues related to the management of conflicts of interest. The Office also
drafts an annual public report summarizing the examinations of all NRSROs. The
Office may be called upon to leverage its expertise to conduct ad-hoc research
as warranted by industry or credit market conditions and draft statutorily
mandated studies.
Office of International Affairs
The SEC works extensively in the international
arena to promote cooperation among national securities regulatory agencies, and
to encourage the maintenance of high regulatory standards worldwide. The Office
of International Affairs []
assists the Chairman and the Commission in the development and implementation
of the SEC's international regulatory and enforcement initiatives. The Office
negotiates bilateral and multilateral agreements for Commission approval on
such subjects as regulatory cooperation and enforcement assistance, and
oversees the implementation of such arrangements. It is also responsible for
advancing the Commission's agenda in international meetings and organizations.
The Office also conducts a technical assistance program for countries with
emerging securities markets, which includes training both in the United States
and in the requesting country. Over 100 countries currently participate in this
program.
Office of Investor Education and Advocacy
The Office of Investor Assistance
responds to questions, complaints, and suggestions from the members of the
public. Tens of thousands of investors contact the SEC each year using the
agency's online forms [] or our . . . hotline . .
. to ask questions on a wide range of securities-related topics, to complain
about problems with their investments or their financial professionals, or to
suggest improvements to the agency's regulations and procedures.
The Office of Investor Education carries
out the SEC's investor education program, which includes producing and
distributing educational materials,[]
participating in educational seminars and investor-oriented events, and
partnering with federal agencies, state regulators, and others on investor
literacy initiatives.
The Office of Policy has responsibility
for reviewing agency action from the perspective of the individual investor,
including conducting investor surveys and focus groups. It also plays a role in
the Commission's efforts to help ensure that investor disclosures are written
in plain English.
Office of the Chief Operating Officer
The Office
of the Chief Operating Officer []
assists the Chairman in developing and executing the management policies of the
SEC. The Office formulates budget and authorization strategies, supervises the allocation
and use of SEC resources, promotes management controls and financial integrity,
manages the administrative support offices, and oversees the development and
implementation of the SEC's automated information systems. The Office has five
main functional areas:
The Office
of Financial Management []
administers the financial management and budget functions of the SEC. The
Office assists the Chairman and the Executive Director in formulating budget
and authorization requests, monitors the utilization of agency resources, and
develops, oversees, and maintains SEC financial systems. These activities
include cash management, accounting, fee collections, travel policy
development, and oversight and budget justification and execution.
The Office
of Support Operations []
assists the Chairman and the Executive Director in managing the agency's
facilities and assets, and provides a wide range of support services to the SEC
staff. The Office serves the Headquarters Office and all Regional Office
locations on matters including property management, office lease acquisition
and administration, space renovation, supplies and office equipment management,
transportation, mail distribution, publications, printing, and desktop
publishing. Also, OSO is responsible for the processing of requests under the
Freedom of Information and Privacy Acts, the management of all agency records
in accordance with the Federal Records Act, and maintaining the security and
safety of all SEC facilities.
The Office
of Human Resources [] assists the Chairman in
recruiting and retaining the best and the brightest professional staff in the
federal workforce, and in ensuring that the SEC remains the employer of choice
within the federal government. The Office has overall responsibility for the
strategic management of the SEC's human capital. In addition, it is responsible
for ensuring compliance with all federal regulations for the following areas:
recruitment, staffing, retention, and separation; position management and
classification; compensation and benefits counseling and processing; leadership
and employee development; performance management and awards; employee
relations; labor relations; the SEC's disability, work/life, and telework
programs; employee records processing and maintenance; and employee financial
disclosure. The Office also represents the Commission as the liaison to the
U.S. Office of Personnel Management and other Federal Government agencies,
various public and private-sector professional human resources organizations,
and educational institutions in matters relating to human capital management.
The Office
of Information Technology []
supports the Commission and staff of the SEC in all aspects of information
technology. The Office has overall management responsibility for the
Commission's IT program including application development, infrastructure
operations and engineering, user support, IT program management, capital
planning, security, and enterprise architecture. The Office operates the Electronic
Data Gathering Analysis and Retrieval (EDGAR) system,[] which electronically
receives, processes, and disseminates more than 500,000 financial statements
every year. The Office also maintains a very active website that contains a
wealth of information about the Commission and the securities industry, and
also hosts the EDGAR database for free public access.
Office of Legislative Affairs and
Intergovernmental Relations
The Office
of Legislative Affairs and Intergovernmental Relations [] serves as the agency's formal
liaison with the Congress, other Executive Branch agencies, and state and local
governments. The staff carefully monitor ongoing legislative activities and
initiatives on Capitol Hill that affect the Commission and its mission. Through
regular communication and consultation with House and Senate members and staff,
the Office communicates legislators' goals to the agency, and communicates the
agency's own regulatory and management initiatives to the Congress.
The Office is responsible for responding to
congressional requests for testimony of SEC officials, as well as requests for
documents, technical assistance, and other information. In addition, the Office
monitors legislative and oversight hearings that pertain to the securities
markets and the protection of investors, even when an SEC witness is not
present.
Office of Public Affairs
The Office
of Public Affairs [] assists the Commission
in making the work of the SEC open to the public, understandable to investors,
and accountable to taxpayers. It helps every other SEC Division and Office
accomplish the agency's overall mission — to protect investors, maintain fair,
orderly, and efficient markets, and facilitate capital formation. The Office
coordinates the agency's relations with the media and the general public, in
this country and around the world.
In addition to publicizing the work of the
Commission and its staff, the Office assists in the enforcement of the
Commission's policy concerning the confidentiality of law enforcement and
investigative information, which is designed to protect the privacy rights of
American citizens. The Office reviews and distributes within the agency press
coverage of the SEC and of Commission-related issues, including the securities
industry and the financial markets. It also provides limited research where
policy and public affairs goals overlap.
Office of the Secretary
The Secretary of the Commission is appointed by
the Chairman, and is responsible for the procedural administration of
Commission meetings, rulemaking, practice, and procedure. Among the
responsibilities of the Office []
are the scheduling and recording of public and non-public meetings of the
Commission; the administration of the process by which the Commission takes
action without a meeting (called the seriatim process); the administration of
the duty-officer process (by which a single Commissioner is designated to
authorize emergency action); the maintenance of records of Commission actions;
and the maintenance of records of financial judgments in enforcement
proceedings. The Office also provides advice to the Commission and the staff on
questions of practice and procedure.
The Office reviews all SEC documents submitted
by the staff to the Commission. These include rulemaking
releases,[] SEC
enforcement orders [] and litigation
releases,[] SRO
rulemaking notices and orders,[]
and actions taken by SEC staff pursuant to delegated authority. In addition, it
receives and tracks documents filed in administrative proceedings, requests for
confidential treatment, and comment letters on rule proposals. The Office is
responsible for publishing official documents and releases of Commission
actions in the Federal Register and the SEC Docket, and it posts
them on the SEC Internet website, www.sec.gov. The Office also monitors
compliance with the Government in the Sunshine Act.
Office of Equal Employment Opportunity
Because the SEC's employees are its most
important resource, the Office of Equal Employment Opportunity [] works to ensure that the
agency's professional staff come from diverse backgrounds that reflect the
diversity of the investing public. Equal employment opportunity at the SEC is a
continuing commitment. To maintain neutrality in resolving disputes, the EEO
Office is independent of any other SEC office. The EEO Director reports to the
Chairman. The primary mission of the EEO Office is to prevent employment
discrimination, including discriminatory harassment, so that all SEC employees
have the working environment to support them in their efforts to protect investors,
maintain healthy markets, and promote capital formation.
Office of the Inspector General
The Office of the Inspector General [] conducts internal audits
and investigations of SEC programs and operations. Through these audits and
investigations, the Inspector General seeks to identify and mitigate
operational risks, enhance government integrity, and improve the efficiency and
effectiveness of SEC programs.
Office of Administrative Law Judges
The Commission's Office
of Administrative Law Judges []
consists of independent judicial officers who conduct hearings and rule on
allegations of securities law violations in cases initiated by the Commission. When
the Commission initiates a public administrative proceeding, it refers the
cases to the Office, where it is assigned to an individual Administrative Law
Judge (ALJ). The ALJ then conducts a public hearing that is similar to a
non-jury trial in the federal courts. Just as a federal judge can do, an ALJ
issues subpoenas, rules on motions, and rules on the admissibility of evidence.
At the conclusion of the hearing, the parties submit proposed findings of fact
and conclusions of law. The ALJ prepares an initial
decision [] that includes factual
findings and legal conclusions that are matters of public record. Parties may
appeal an initial decision to the Commission, which can affirm, reverse, modify,
set aside or remand for further proceedings. Appeals from Commission action are
to a United States Court of Appeals.
The Laws That Govern the Securities Industry
Securities Act of 1933
Often referred to as the "truth in
securities" law, the Securities Act of 1933 has two basic objectives:
- require
that investors receive financial and other significant information
concerning securities being offered for public sale; and
- prohibit
deceit, misrepresentations, and other fraud in the sale of securities.
-
Purpose of Registration
A primary means of accomplishing these goals is
the disclosure of important financial information through the registration of
securities. This information enables investors, not the government, to make
informed judgments about whether to purchase a company's securities. While the
SEC requires that the information provided be accurate, it does not guarantee
it. Investors who purchase securities and suffer losses have important recovery
rights if they can prove that there was incomplete or inaccurate disclosure of
important information.
The Registration Process
In general, securities sold in the U.S. must be
registered. The registration forms companies file provide essential facts while
minimizing the burden and expense of complying with the law. In general,
registration forms call for:
- a
description of the company's properties and business;
- a
description of the security to be offered for sale;
- information
about the management of the company; and
- financial
statements certified by independent accountants.
-
All companies, both domestic and foreign, must
file their registration statements electronically. These statements and the
accompanying prospectuses become public shortly after filing, and investors can
access
them using EDGAR.[] Registration statements
are subject to examination for compliance with disclosure requirements.
Not all offerings of securities must be
registered with the Commission. Some exemptions from the registration
requirement include:
- private
offerings to a limited number of persons or institutions;
- offerings
of limited size;
- intrastate
offerings; and
- securities
of municipal, state, and federal governments.
-
By exempting many small offerings from the
registration process, the SEC seeks to foster capital formation by lowering the
cost of offering these types of securities to the public.
Securities Exchange Act of 1934
With this Act, Congress created the Securities
and Exchange Commission. The Act empowers the SEC with broad authority over all
aspects of the securities industry. This includes the power to register,
regulate, and oversee brokerage firms, transfer agents, and clearing agencies
as well as the nation's securities self regulatory organizations (SROs). The
various stock exchanges, such as the New York Stock Exchange, and American
Stock Exchange are SROs. The Financial Industry Regulatory Authority, which
operates the NASDAQ system, is also an SRO.
The Act also identifies and prohibits certain
types of conduct in the markets and provides the Commission with disciplinary
powers over regulated entities and persons associated with them.
The Act also empowers the SEC to require
periodic reporting of information by companies with publicly traded securities.
Corporate Reporting
Companies with more than $10 million in assets
whose equity securities are held by more than a specified number of holders
must file annual and other periodic reports. These reports are available to the
public through the SEC's EDGAR database.
Proxy Solicitations
The Securities Exchange Act also governs the
disclosure in materials used to solicit shareholders' votes in annual or
special meetings held for the election of directors and the approval of other
corporate action. This information, contained in proxy materials, must be filed
with the Commission in advance of any solicitation to ensure compliance with
the disclosure rules. Solicitations, whether by management or shareholder
groups, must disclose all important facts concerning the issues on which
holders are asked to vote.
Tender Offers
The Securities Exchange Act requires disclosure
of important information by anyone seeking to acquire more than 5 percent of a
company's securities by direct purchase or tender offer. Such an offer often is
extended in an effort to gain control of the company. As with the proxy rules,
this allows shareholders to make informed decisions on these critical corporate
events.
Insider Trading
The securities laws broadly prohibit fraudulent
activities of any kind in connection with the offer, purchase, or sale of
securities. These provisions are the basis for many types of disciplinary
actions, including actions against fraudulent insider trading. Insider trading
is illegal when a person trades a security while in possession of material
nonpublic information in violation of a duty to withhold the information or
refrain from trading.
Registration of Exchanges, Associations, and
Others
The Act requires a variety of market
participants to register with the Commission, including exchanges, brokers and
dealers, transfer agents, and clearing agencies. Registration for these
organizations involves filing disclosure documents that are updated on a
regular basis.
The exchanges and the Financial Industry
Regulatory Authority (FINRA) are identified as self-regulatory organizations
(SRO). SROs must create rules that allow for disciplining members for improper
conduct and for establishing measures to ensure market integrity and investor
protection. SRO proposed rules are published for comment before final SEC
review and approval.
Trust Indenture Act of 1939
This Act applies to debt securities such as
bonds, debentures, and notes that are offered for public sale. Even though such
securities may be registered under the Securities Act, they may not be offered
for sale to the public unless a formal agreement between the issuer of bonds
and the bondholder, known as the trust indenture, conforms to the standards of
this Act. The full text of this Act can be read at: http://www.sec.gov/about/laws/tia39.pdf.
Investment Company Act of 1940
This Act regulates the organization of
companies, including mutual funds, that engage primarily in investing,
reinvesting, and trading in securities, and whose own securities are offered to
the investing public. The regulation is designed to minimize conflicts of
interest that arise in these complex operations. The Act requires these
companies to disclose their financial condition and investment policies to
investors when stock is initially sold and, subsequently, on a regular basis.
The focus of this Act is on disclosure to the investing public of information
about the fund and its investment objectives, as well as on investment company
structure and operations. It is important to remember that the Act does not
permit the SEC to directly supervise the investment decisions or activities of
these companies or judge the merits of their investments. The full text of this
Act is available at: http://www.sec.gov/about/laws/ica40.pdf.
Investment Advisers Act of 1940
This law regulates investment advisers. With
certain exceptions, this Act requires that firms or sole practitioners
compensated for advising others about securities investments must register with
the SEC and conform to regulations designed to protect investors. Since the Act
was amended in 1996, generally only advisers who have at least $25 million of
assets under management or advise a registered investment company must register
with the Commission. The full text of this Act is available at: http://www.sec.gov/about/laws/iaa40.pdf.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law
the Sarbanes-Oxley Act of 2002, which he characterized as "the most far
reaching reforms of American business practices since the time of Franklin
Delano Roosevelt." The Act mandated a number of reforms to enhance
corporate responsibility, enhance financial disclosures and combat corporate
and accounting fraud, and created the "Public Company Accounting Oversight
Board," also known as the PCAOB, to oversee the activities of the auditing
profession. The full text of the Act is available at: http://uscode.house.gov/download/pls/15C98.txt. (Please check the Classification Tables [] maintained by the US
House of Representatives Office of the Law Revision Counsel for updates to any of the laws.) You can
find links to all Commission rulemaking and reports issued under the
Sarbanes-Oxley Act at: http://www.sec.gov/spotlight/sarbanes-oxley.htm.
Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010
Jumpstart Our Business Startups (JOBS) Act
On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act [] was signed into law by
President Barack Obama. The JOBS Act requires the SEC to write rules and issue
studies on capital formation, disclosure, and registration requirements.
Cost-effective access to capital for companies of all sizes plays a critical
role in our national economy, and companies seeking access to capital should
not be hindered by unnecessary or overly burdensome regulations. For more
information on the JOBS Act, see our Jumpstart
Our Business Startups (JOBS) Act Spotlight page.[]
__________
III. Law Articulated by Regulatory Agencies ― The Administrative
Function
We
have been unpacking what might at first appear to be a rather straightforward
inquiry: “what is law?” The least interesting (though necessary) purpose was to
lay a foundation for much of what is to follow. The more interesting was to
begin to suggest that the answer has at least to distinct aspects: one goes to
function and the other goes to form. Though tightly intertwined in everyday
operation, it is useful to disentangle them to understand each strand better.
To that end I stated with the same reading that Western students might have
encountered on their first day in law school near the end of the foundational
period of the development of Western legal culture, the Institutes written during the reign of the
Eastern Roman Emperor Justinian.
First,
the Institutes introduced the student to the core question of the function
of law in its broadest sense. It drew the connection between law and
justice, suggesting the idea, now central to conventional Western legal theory,
that law is the manifestation of justice. It then suggested a division within
justice that is also well known to Western legal theory: that the manifestation
of justice in law requires attention both to process and substantive norms. The
Institutes offer two general process principles, accessibility and
predictability. These now serve as the fountainhead of much of what passes for
Western principles of process expressed in the constitutional law of states.
The Institutes offer a more ambiguous approach to the connection between
justice and its substantive aspects. It suggests, at its general level that
justice (and law as the manifestation of justice) is welfare maximizing (“give
man his due”). But it offers no specifics other than to suggest that the answer
is contextual. More concretely, the Institutes frame the issue of the
substantive function of justice by reference to its manifestation in the
sources. The sources of law, then, are also the sources of its substance.
With the quest for the sources
of law, and the derivation from its appropriate application to the residents of
a particular state, the Institutes introduce the student to the forms of law
in its broadest sense. The Institutes draw the connection between the substance
of justice (and its manifestation in law) and the form in which law takes,
identifying three distinct sources of law―natural law, the law of nations and “local”
law. These sources provide the matrix within which the substance of law is
composed. This is so because, for the Institutes, sources of law describe the
formal as well as the normative structures of law: that is, a source of law includes
its form, the institutions or persons who may create it, its relative authority
in relation to other forms, and the basis for discovering its substance.
Natural law is immutable. It is based either on scientific or divine “truth” of
the kind that is incapable of refutation, except on its own terms (by other
divine or scientific truths). It is common to all people (especially where a
social system is grounded in a universalizing religion). The law of nations is
based on the customs and traditions observed by people of all states. It is not
international law in the modern sense of agreements among states in their
legislative or regulatory capacities, but rather it includes those governance
systems now more commonly understood as transnational private law. The best
example of thislaw of nations was the old law merchant and in its modern form
the emerging systems of private governance of supply chain relationships. The
third source of law, the local law of a state, is also based on custom and
tradition but more importantly is manifested by the actions of institutional
actors who have been empowered to act on behalf of the people. But it also
embraces the customary law of the people of a certain place. Both the law of
states and local law are grounded in consent and focused on the traditions and
customs of the subject populations. Yet they can also be expressed by the
authority of individuals and institutions―the government of a state―which has
been vested with the authority to act in the name of the people. And thus law,
government, justice, process, science, religion, custom, process and consent
are all bound up together and manifested in law through the forms which have
emerged through custom. At bottom, and beyond the complexity of its form and
manifestations, law may be understood to be those rules that a community
consents to be bound by, even when individuals within that community do not.
With that foundation we began
to consider in more detail those forms of law (and their form and sources) that
serve as the framework of the U.S. domestic legal order. We began with an
examination of the premises and legal culture of the common law. The
fundamental insight centered on the relationship between the form of
common law and its function and substance. These together define
a means of declaring law that remains influential in the United States. Common
law in its essence referenced a system in which the Crown (now the government)
offered to mediate disputes among private parties. The dispute had to of a kind
recognized as within the universe of judicially resolvable disputes, codified
by reference to the writs available from the clerks of the Crown Chancery and
accepted as within the jurisdiction of the court from which the plaintiff
sought relief. The writ itself included a promise, also enforceable by the
courts, of a minimum standard of process rights (notice and an opportunity to
be heard before judgment was rendered). The court would base its resolution of
the dispute through a process of deductive reasoning grounded in the essence of
rights at issue, derived from the statements of other courts considering
disputes grounded in the same writ, and reasoned by analogy to the resolution
of similar claims previously rendered by that court or by other courts
considering the same claim. The court did not make law; it applied the law
within the tightly constraining matrix of prior cases. The tie to custom and
customary expectation was reinforced by the role of a jury to which was
assigned the task of finding “facts” on which the court could apply the
reasoning of other courts and thus, the“ law.”
The
remedy available was usually reduced to money damages to make the victim whole.
To this equity added a number of additional private (and some public) claims
that could be asserted by individuals and a number of additional remedies
(injunction, constructive trust, specific performance, etc.). Most importantly,
it inserted notions of fairness in judging claims (dirty hands, laches, and the
like). Thus the form of common law and equity (application to a court
vested with jurisdiction over a matter of private dispute between parties
grounded through the filing of a claim based on an appropriately stated claim
for relief) also served to define its function (dispute resolution among
private litigants driven by the litigants themselves) and substance (the
development of rights to relief based on the aggregated resolution of similar
disputes that reflected the expectations of the community as refined and
applied by the courts). In this way common law was flexible in the sense that
it changed as community expectations and needs changed; it was autonomous of
the state in the sense that legislation was unnecessary to the development of
these rules and the courts served to drive the development of these rules
applied in a consistent way through the mediation of a class of lawyers well
versed in the (to them at least) accessible body of decisions. Common law was
driven by litigants with claims; and in this sense it was conservative,
resisting an instrumental use of law. It was conservative and presented a
moving target, the current version of the “law” to be applied necessarily had
to include past and current judicial applications of the standard in the cases.
To know the law required very sophisticated knowledge of the cases. When one
thinks about what it means to “think like a lawyer” in the U.S. system, it
tends to reference this closed, self-referencing and litigant driven system of
deducing law from the aggregate of its prior applications.
We
then examined the culture and structure of statutory law. A century ago, a
consideration of statutory law would have been a short appendix to the
consideration of common law in the United States. But the situation has been
reversed here and it is now of central importance for U.S. law students to
consider statutes as an integral part of their education. That consideration
must be grounded both on the peculiarities of the “culture” of statutory law in
the United States and the way in which statutory law co-exists with and draws
on common law in ways incomprehensible to civil law. Statutes are as old as
common law.
The Institutes remind us that
from earliest times in the West the power to use law instrumentally, that is to
have a government in place with the authority to issue commands with the
purpose of managing or changing behavior among a subject population. These
commands we have come to understand as statutory law when issued by an
institution of government which exercises its power in a manner specified in
the rules for the organization of states and the exercise of power delegated to
it from the people. At the time of the Institutes and in contemporary common
law origin states, customary law and statutes co-existed within the same regulatory
space. But this changed in most countries in Europe and Latin America (at least
as a formal matter) with the triumph of the French Revolution (and especially
its approach to the relationship between law and the state). We noted two
principal moving causes. The first was the philosophy of the Enlightenment
which embraced the idea that science and good management principles could be
used to make society and the individuals within them better and more productive
(perhaps even happier). The second was the increasing failures of then-current
systems to meet the regulatory needs of societies confronting the rapid and
socially destabilizing forces of industrialization. Customary law, grounded in
a premise of stability, was inadequate to the task of maintaining order at a
time of rapid social, technological, political and economic changes. Statutes
offered a more efficient alternative to regulation in terms of social
transformation. Statutes did not have to wait for litigants; it was more
responsive to popular demand for solutions to general problems, it could be
applied directly throughout a jurisdiction, it could be used instrumentally and
it was generally accessible in the form of written commands.
In the wake of the French
Revolution many states sought to apply “scientific” principles to the
construction of “modern” states by jettisoning the complex of ancient customs,
rights, royal and aristocratic prerogatives and obligations in favor of a
tightly integrated system of rules with the objectives of bettering individuals
and the society to which they belonged. To that end that apparatus of the
state, its government, was assigned the sole right to develop and implement law
through either administrative regulations (discussed in our next class) or
legislation. In many European states, by the beginning of the 20th century, the
philosophy of law posited (though the situation on the ground was of course
less clear) that only the state could make law and then only through the
appropriate bodies following the appropriate rules for making law. Courts
applied this law but had no authority to make or declare it (of course this was
also easier to maintain in theory than in fact).
In the U.K. the U.S. and other
states based on English common law a different approach was taken. Rather than
abandon common law, states supplemented common law with a statutory overlay.
Where regulation was required to meet problems not addressed by common law or
equity, statutes could fill the void directly; otherwise they sought to steer,
change, or supplement common law in a number of respects that reflected
conscious judgment about the way law should develop. But statutes required a
different approach to application than common law. Courts did not have to
aggregate cases to derive the rule and the factual constraints within which it
must be applied. The statute spoke for itself. Reference had to be made to the
words of the statute and perhaps to the intention of its drafters. That intent
might be found in intrinsic sources―the provision itself, in the section
in which it could be found, or in the entire statutory provision itself. That
intention was immutable (unlike the standards of common law). In a number of
jurisdictions that intent might also be derived from extrinsic sources―legislative
debates, reports and other evidence of motive or objective.
This grafting process also
produced a very different judicial culture in relation to application of
statutes in disputed between litigants. Courts tended to apply the philosophy
of common law judging to statutory enactments. Statutes in derogation of the
common law might be construed narrowly, or they could be construed broadly but
applied only within the narrow context of the issue they addressed, or they
could be integrated into common law systems and treated as part of common law,
from which legal principles could be derived and applied deductively to solve
problems generally. Courts were also confronted with the problem of statutory
ambiguity, either because statutes were poorly drafted (the product of
political compromise and interpretation avoidance), or failed to include
sufficient detail, or were unclear about the mechanics of its implementation.
To this problem, common law courts either engaged in statutory construction that
corrected errors, developed and engaged in elaborate standards for gap-filling
open textured statutes and developed substantial common law under-structures
that elaborated statutes their reach, application and construction. This served
to import some of the values of common law cultures to increasingly elaborate
statutory systems. In any case, in Anglo-American legal cultures statutes and
common law found ways to be drawn together, existing both side by side and as
part of integrated regulatory schemes.
But
even statutes ultimately failed to live up to their promise―and that failure
was in evidence almost from the time U.S. governments sought to divert the
thrust of law making from courts based common law to legislatively driven
statutory law. Like common law, statutory law increasingly was understood as an
inefficient means of managing behavior. Statutes were useful for commanding
specific behavior (in the criminal law for example) and announcing objectives
(clean air and protection of children from defective products, for example),
but they proved unable to actually set out with precision those rules necessary
to manage these policy objectives and more importantly statutes proved too
inflexible to be modified as conditions changed. These problems were structural―legislatures
were hardly capable of acquiring the expertise necessary to adequately develop
comprehensive rules for managing the increasingly complex behaviors they were
called upon to control. More importantly, legislatures are political bodies and
the process of passing legislation is closely constrained by the needs of
assuring democratic accountability. As a consequence legislation is often
difficult to enact and quick responses to changing conditions practically
impossible to expect form a legislature. Yet the appetite for managing activity―from
transportation, economic markets, product standards, trade, commodities,
environmental consequences of activity, education, and the like―required resort
to a form of law making that could avoid the passivity of common law and the
structural rigidity of legislation. The current consensus is that
administrative regulations, rules enacted by non-elected officials under
authority of a delegation of legislative power from democratically elected
institutions―serve that purpose.
So
today we consider what might be the most significant form of formal regulation,
one that impact of our lives in the most immediate and minute ways―administrative
regulations.The first of our readings, Edward L. Glaeser and Andrei Shleifer, The Rise of the Regulatory StateJournal of Economic Literature XLI:401-425 (2003), provides
a historical and conceptual basis for the rise of the modern administrative
state. The second reading, Backer, Larry Catá, Global Panopticism:
States, Corporations and the Governance Effects of Monitoring Regimes,
Indiana Journal of Global Legal Studies, Vol. 15,
2008, provides a glimpse of the culture of administrative regulation.
Glaeser and Shleifer start by
reminding readers of the status quo before 1900, one in which litigation was
viewed as the preferred default method for resolving commercial disputes. This
situation changed radically between 1887 (with the passage of the Interstate
Commerce Act) and 1917 (and the effective end of the progressive movement in
the U.S.). This period marked not merely a move toward statute as a preferred
means of managing behavior, but also set the foundation for the elaboration of
increasingly complex and intrusive administrative regulatory systems through
which government could more effectively engage in the social control of a wide
range of economic activity. Glaeser and Shleifer develop a theory of law
enforcement. They develop a theory based on a premise of the necessity of
instrumental efficiency of statutes to guide their analysis. “In our theory,
whatever law enforcement strategy the society chooses, private individuals will
seek to subvert its workings to benefit themselves. The efficiency of
alternative institutional arrangements depends in part on their vulnerability
to such subversion.”
First they consider standard
public interest theory, which is premised on the idea that regulation deals
with market failures and externalities but which may not explain why neither
tort nor contract law could successfully address these problems as effectively. They note that by the
beginning of the 20th century, it became more efficient for American society to
rely on regulation than on either statutes or litigation as a means of creating
regulatory structures. Commercialization and industrialization created large
companies that could more easily afford to influence justice, prevail in
litigation as experienced repeat players, purchase legal talent and experts and
avoid paying judgments. Smaller companies and individuals found their interests
better protected through statute and administrative regulation. From the
authors’ perspective, “the regulation of markets was a response to the
dissatisfaction with litigation as a mechanism of social control of business.” Recalling our discussion
of the connection between law and justice, the authors note that writers of the
1930s “saw regulation as a political response to the failure of private
litigation to keep up with the community ideas of justice.” More importantly,
perhaps, it was an approach that suggested obtaining policy objectives at lower
transaction costs to society. That is, administrative regulation might increase
the transaction costs of rich and powerful actors of subverting the system to
their own benefit. The central question for
administrative regulation, then, if regulatory efficiency (and social welfare
maximization) are fundamental goals for using law instrumentally to create
rules that “give every man his due” then the issue of litigation versus administrative
regulation becomes an empirical one with results dependent on the character of
each society: the unreliability of courts versus corruption of regulating
agencies. (Ibid., 404). The issue for each society, then, the authors argue, is
not whether administrative regulation is necessary, but what mix of
administrative regulation, statutes and cases will produce the maximum benefit
at the least social cost. (Ibid.).
The authors then describe the
movement from common law to administrative regulation in the United States
(Ibid., 404-408). Their thesis is that the road to administrative regulation in
the United States was paved by money and power and the efforts to reduce their
ability to subvert (and therefore preserve the legitimacy) of the state. They
describe the way that powerful business interests used that power to maintain
the dominance of common law, and through common law to minimize their exposure
to liability. This was accomplished through interventions in ideological
warfare (regulations as un-American and a threat to common law), and a range of
subversion tactics: strategic selection of judges that would advance an
appropriate ideological agenda, strategic use of trial tactics and the
investment of substantial sums in delaying tactic litigation, bribery
(witnesses, judges and legislators), and structural political corruption (city “machines“ and the like). In the 19th century, it
seems, the well-heeled always fared better in part because they had more
resources to effectively use the legal system against less well-resourced
opponents. But the move toward principles of mass democracy, and the increasing
availability of voting power eventually tilted the contests between these
groups from courts to legislatures and administrative agencies (Ibid., 407,
418) so that by the 1930s the administrative state had replaced the judiciary
as the principal source of social control of business. (Ibid). Thus regulation as
a means of lawmaking has a substantially important political objective―to shift
power from powerful actors to mass actors by moving the locus of regulation
from a judiciary viewed as corrupt to a legislature that is viewed as more
accountable to mass pressure through elections. (Ibid., 415).
Yet, like judges and
legislators, administrative regulators can also be corrupted. Within the
administrative state corruption follows two distinct paths―the first is old
fashioned bribery and subversion, the second and most successful is an informal
“capture” of regulatory agencies through sustained practices of interventions
and the management of information used to build administrative regulations.
(Ibid., 417). From this historical accounting the authors proposes set of
implications about the role of administrative regulation in modern states.
First, in states where corruption is likely and governmental institutions weak,
it might be best to avoid any sort of regulatory intervention. They make a case
for private or transnational governance alternatives to law, a subject we will
consider in our next class (Ibid., 420). Regulation is desirable where the
state has developed substantial governance capacity within a rule of law
framework and especially to correct business activity with high likelihood of
social damage. (Ibid., 421). Ironically, litigation as a regulatory strategy
works best only in the most advanced states, states with a high degree of
structural impediments to individual subversion of the system. (Ibid). In
essence, the highest degree of state intervention in and management of private
activity is possible only in those states that have themselves developed a
governmental apparatus the institutions with the technical expertise and the
culture of ethics strong enough to do their jobs and resist corruption.
In the United States, the
current framework of administrative regulations is fairly straightforward.
Regulations are rules with the effect of law, which are enacted by and
administered under an agency of the state which has been created by statutes
which (1) establish the structures and authority of regulatory agencies, (2)
define the scope of their authority to enact regulation, and (3) delegate
specific regulatory authority. These may be specified in one or several
statutes and the legislature may amend or revoke regulatory power as the
legislature likes. All regulation is treated as a delegation of legislative
authority―agencies are exercising legislative authority but only to the extent
the legislature has permitted such exercise. All such regulations may be
amended or voided neither by subsequent legislation nor by action of the
regulatory agency. Unlike statutes, which are the product of political
negotiation and must be enacted in accordance with the procedures for
legislation specified in state or federal constitutions, regulations are easier
to enact, modify or repeal. But regulation is still subject to a set of procedural constraints. Federal agencies are subject, for
example, to the constraints of the Administrative Procedure Act,
which specifies the manner in which regulations may
be enacted. The object of these is to ensure, to some extent, that regulatory activity
is open to some measure of public scrutiny and accountability. In the United
States, the federal government makes federal regulations accessible through
publication in the Federal Register, which serves as the daily journal of the United States
government. The regulations are also codified within a Code of Federal Regulations, which includes the general and permanent rules published
in the Federal Register by the departments and agencies of the Federal
Government. It is divided into 50 titles that represent broad areas subject to
Federal regulation.
Where regulations are issues,
statutes tend to be quite general, specifying the objectives of the statute and
assigning responsibility for drafting and implementing rules to operationalize
the statutory goals to administrative agencies. These rules are far more
specific and reflect an expertise that that may be beyond that of the
legislature. Yet administrative regulations may also suffer from the same
deficiencies as statutes: they may be badly drafted, they may leave
ambiguities, and they may not be flexible enough to deal with rapidly changing
regulatory environments. It is thus not uncommon for courts to treat
regulations, when asked to apply them, in a way that is similar to judicial
approaches to statutes. Because of the level of detail and the presumption of
expertise, courts have tended to defer to agency factual findings. Courts also
will look to both the statute and sometimes extrinsic sources within the agency
to resolve ambiguities. Some regulations have also spawned a substantial common
law style jurisprudence. A great example of the later is SEC Rule 10b-5,
codified at 17 C.F.R.240.10b-5. The judicial glosses on the
regulation, prohibiting fraud in connection with transactions in securities has
been substantial and represents something like a common law of securities
fraud. Likewise, the Federal Rules of Civil Procedure, enacted under authority
of the Rules Enabling Act, 28 U.S.C. § 2072 has also produced an enormous
jurisprudence, the study of which makes up the bulk of a first year law course
in procedure. These rules are efficient precisely because agencies with
expertise over the subject matter of the rule making delegation can be more
flexible in rule making. Yet in substantial respect, regulations bear much of
the same character of statutes, whose form and “culture” they mimic.
Having
set the context for regulation, it is important for the student of the U.S.
legal system to begin to understand the system in situ and to get a glimpse of
the context in which regulation arises.
It suggests, that like the institution of common law, regulation can
only be understood in the U.S. legal system in terms of its relationship with
the administrative agency within which it is created, administered and within
which applied to resolve disputes. Just as common law cannot be understood
without a knowledge of the courts within which it was developed and applied, so
regulations cannot be understood outside of the context of administrative
agencies. Though each agency conforms to the same set of general principles for
their operation, something we will consider in more detail in later
chapters, the character and extent of
regulation in a particular agency is substantially determined by its specific
character, objectives, and jurisdiction.
To
that end, the second reading provides, as an introductory example, a
description of the integration of institutional frameworks, and the regulation
that is produced thereby. The example,
is deliberately presented as a self description, in this case of one of the
more important agencies producing regulation in the United States, the
Securities and Exchange Commission. As
one reads through this self description, one notes the importance of the nature
of the relationships between agency structure, the limits and nature of
jurisdictional competence created through statute, the forms of regulation, and
the institutions established both to create it , enforce it, and interpret
it. The significant consequences of
combining quasi-executive, quasi-legislative, and quasi-judicial powers in one
agency, within the structures of a national government built on principles of
the separation of those powers as a fundamental tenet of its organization, will
be explored in later chapters. For now
the student can consider the way in which both organizational structures and
the character and scope of regulation are affected by the power of a single
unit of government to exercise legislative, executive and judicial power,
grounded on the regulations it itself develops.
The
self-description of the regulatory process is especially useful. Notice the way in which the process of
regulation is quite consciously instrumental—the approach is almost the mirror
reverse of that at the heart of common law and equity practice. Here the SEC is constantly on the look out
for issues requiring management and control.
That executive function is then translated into action through its
legislative function—the process of establishing regulation to meet or solve
issues or manage behaviors thought to impact on the mandate of the agency and
that might touch on its goals and objectives.
These regulations then serve as the basis for the assertion of executive
authority against those who fail to comply, and those issues of non-compliance
may be heard first, and resolved within the administrative hearings process
built into the authority of the agency itself.
Notice
as well that the regulatory authority of the agency is also deeply embedded in
international regulatory currents. This
represents an interesting extension of administrative authority beyond the
territorial boundaries of the state, a topic we will consider in later
chapters. It does suggest that the
instrumentalism inherent in statutes, combined with the managerialism at the
core of regulatory systems, tend to be well suited for the management of
activities, especially economic activities, that cross borders.
The
issue of agency power, and its alignment with the powers of the elected
branches has always been troublesome.
Consider an important early case in that connection:
________
HUMPHREY'S EXECUTOR
v.
U.S.
295 U.S. 602 (1935)
Decided May 27, 1935
Opinion
Mr. Justice SUTHERLAND delivered the opinion of
the Court.
Plaintiff brought suit in the Court of Claims
against the United States to recover a sum of money alleged to be due the
deceased for salary as a Federal Trade Commissioner from October 8, 1933, when
the President undertook to remove him from office, to the time of his death on
February 14, 1934. The court below has certified to this court two questions
(Act of February 13, 1925, s 3(a), c. 229, 43 Stat. 936, 939, 28 U.S.C. s 288 (28
USCA s 288)), in respect of the power of the President to make the removal. The
material facts which give rise to the questions are as follows:
William E. Humphrey, the decedent, on December
10, 1931, was nominated by President Hoover to succeed himself as a member of
the Federal Trade Commission, and was confirmed by the United States Senate. He
was duly commissioned for a term of seven years, expiring September 25, 1938;
and, after taking the required oath of office, entered upon his duties. On July
25, 1933, President Roosevelt addressed a letter to the commissioner asking for
his resignation, on the ground ‘that the aims and purposes of the
Administration with respect to the work of the Commission can be carried out
most effectively with personnel of my own selection,’ but disclaiming any
reflection upon the commissioner personally or upon his services. The
commissioner replied, asking time to consult his friends. After some further
correspondence upon the subject, the President on August 31, 1933, wrote the
commissioner expressing the hope that the resignation would be forthcoming, and
saying: ‘You will, I know, realize that I do not feel that your mind and my
mind go along together on either the policies or the administering of the
Federal Trade Commission, and, frankly, I think it is best for the people of
this country that I should have a full confidence.’
The commissioner declined to resign; and on
October 7, 1933, the President wrote him: ‘Effecti ve as of this date you are
hereby removed from the office of Commissioner of the Federal Trade
Commission.’
Humphrey never acquiesced in this action, but
continued thereafter to insist that he was still a member of the commission,
entitled to perform its duties and receive the compensation provided by law at
the rate of $10,000 per annum. Upon these and other facts set forth in the
certificate, which we deem it unnecessary to recite, the following questions
are certified:
‘1. Do the provisions of section 1 of the
Federal Trade Commission Act, stating that ‘any commissioner may be removed by
the President for inefficiency, neglect of duty, or malfeasance in office’,
restrict or limit the power of the President to remove a commissioner except
upon one or more of the causes named?
‘If the foregoing question is answered in the
affirmative, then—
‘2. If the power of the President to remove a
commissioner is restricted or limited as shown by the foregoing interrogatory
and the answer made thereto, is such a restriction or limitation valid under
the Constitution of the United States?’
The Federal Trade Commission Act, c. 311, 38
Stat. 717, 718, ss 1, 2, 15 U.S.C. ss 41, 42 (15 USCA ss 41, 42), creates a
commission of five members to be appointed by the President by and with the
advice and consent of the Senate, and section 1 provides: ‘Not more than three
of the commissioners shall be members of the same political party. The first commissioners
appointed shall continue in office for terms of three, four, five, six, and
seven years, respectively, from the date of the taking effect of this Act
(September 26, 1914), the term of each to be designated by the President, but
their successors shall be appointed for terms of seven years, except that any
person chosen to fill a vacancy shall be appointed only for the unexpired term
of the commissioner whom he shall succeed. The commission shall choose a
chairman from its own membership. No commissioner shall engage in any other
business, vocation, or employment. Any commissioner may be removed by the
President for inefficiency. neglect of duty, or malfeasance in office. * * *’
Section 5 of the act (15 USCA s 45) in part
provides that:
‘Unfair methods of competition in commerce are
declared unlawful.
‘The commission is empowered and directed to
prevent persons, partnerships, or corporations, except banks, and common
carriers subject to the Acts to regulate commerce, from using unfair methods of
competition in commerce.’
In exercising this power, the commission must
issue a complaint stating its charges and giving notice of hearing upon a day
to be fixed. A person, partnership, or corporation proceeded against is given
the right to appear at the time and place fixed and show cause why an order to
cease and desist should not be issued. There is provision for intervention by
others interested. If the commission finds the method of competition is one
prohibited by the act, it is directed to make a report in writing stating its
findings as to the facts, and to issue and cause to be served a cease and
desist order. If the order is disobeyed, the commission may apply to the
appropriate Circuit Court of Appeals for its enforcement. The party subject to
the order may seek and obtain a review in the Circuit Court of Appeals in a
manner provided by the act.
Section 6 (15 USCA s 46), among other things,
gives the commission wide powers of investigation in respect of certain
corporations subject to the act, and in respect of other matters, upon which it
must report to Congress with recommendations. Many such investigations have
been made, and some have served as the basis of congressional legislation.
Section 7 (15 USCA s 47), provides that: ‘In any
suit in equity brought by or under the direction of the Attorney General as
provided in the antitrust Acts, the court may, upon the conclusion of the
testimony therein, if it shall be then of opinion that the complainant is
entitled to relief, refer said suit to the commission, as a master in chancery,
to ascertain and report an appropriate form of decree therein. The commission
shall proceed upon such notice to the parties and under such rules of procedure
as the court may prescribe, and upon the coming in of such report such
exceptions may be filed and such proceedings had in relation thereto as upon
the report of a master in other equity causes, but the court may adopt or
reject such report, in whole or in part, and enter such decree as the nature of
the case may in its judgment require.’
First. The question first to be considered is
whether, by the provisions of section 1 of the Federal Trade Commission Act
already quoted, the President’s power is limited to removal for the specific
causes enumerated therein. The negative contention of the government is based
principally upon the decision of this court in Shurtleff v. United States, 189
U.S. 311, 23 S.Ct. 535, 537, 47 L.Ed. 828. That case involved the power of the
President to remove a general appraiser of merchandise appointed under the Act
of June 10, 1890, 26 Stat. 131. Section 12 of the act provided for the
appointment by the President, by and with the advice and consent of the Senate,
of nine general appraisers of merchandise, who ‘may be removed from office at any
time by the President for inefficiency, neglect of duty, or malfeasance in
office.’ The President removed Shurtleff without assigning any cause therefor.
The Court of Claims dismissed plaintiff’s petition to recover salary, upholding
the President’s power to remove for causes other than those stated. In this
court Shurtleff relied upon the maxim expressio unius est exclusio alterius;
but this court held that, while the rule expressed in the maxim was a very
proper one and founded upon justifiable reasoning in many instances, it ‘should
not be accorded controlling weight when to do so would involve the alteration
of the universal practice of the government for over a century, and the
consequent curtailment of the powers of the Executive in such an unusual manner.’
What the court meant by this expression appears from a reading of the opinion.
That opinion, after saying that no term of office was fixed by the act and
that, with the exception of judicial officers provided for by the Constitution,
no civil officer had ever held office by life tenure since the foundation of
the government, points out that to construe the statute as contended for by
Shurtleff would give the appraiser the right to hold office during his life or
until found guilty of some act specified in the statute, the result of which
would be a complete revolution in respect of the general tenure of office,
effected by implication with regard to that particular office only.
‘We think it quite inadmissible,’ the court said
(189 U.S. 311, at pages 316, 318, 23 S.Ct. 535, 537, 47 L.Ed. 828), ‘to
attribute an intention on the part of Congress to make such an extraordinary
change in the usual rule governing the tenure of office, and one which is to be
applied to this particular office only, without stating such intention in plain
and explicit language, instead of leaving it to be implied from doubtful
inferences. * * * We cannot bring ourselves to the belief that Congress ever
intended this result while omitting to use language which would put that intention
beyond doubt.’
These circumstances, which led the court to
reject the maxim as inapplicable, are exceptional. In the face of the unbroken
precedent against life tenure, except in the case of the judiciary, the
conclusion that Congress intended that, from among all other civil officers,
appraisers alone should be selected to hold office for life was so extreme as
to forbid, in the opinion of the court, any ruling which would produce that
result if it reasonably could be avoided. The situation here presented is
plainly and wholly different. The statute fixes a term of office, in accordance
with many precedents. The first commissioners appointed are to continue in
office for terms of three, four, five, six, and seven years, respectively; and
their successors are to be appointed for terms of seven years—any commissioner
being subject to removal by the President for inefficiency, neglect of duty, or
malfeasance in office. The words of the act are definite and unambiguous.
The government says the phrase ‘continue in
office’ is of no legal significance and, moreover, applies only to the first
Commissioners. We think it has significance. It may be that, literally, its
application is restricted as suggested; but it, nevertheless, lends support to
a view contrary to that of the government as to the meaning of the entire
requirement in respect of tenure; for it is not easy to suppose that Congress
intended to secure the first commissioners against removal except for the
causes specified and deny like security to their successors. Putting this
phrase aside, however, the fixing of a definite term subject to removal for
cause, unless there be some countervailing provision or circumstance indicating
the contrary, which here we are unable to find, is enough to establish the
legislative intent that the term is not to be curtailed in the absence of such
cause. But if the intention of Congress that no removal should be made during
the specified term except for one or more of the enumerated causes were not
clear upon the face of the statute, as we think it is, it would be made clear
by a consideration of the character of the commission and the legislative
history which accompanied and preceded the passage of the act.
The commission is to be nonpartisan; and it
must, from the very nature of its duties, act with entire impartiality. It is
charged with the enforcement of no policy except the policy of the law. Its
duties are neither political nor executive, but predominantly quasi judicial
and quasi legislative. Like the Interstate Commerce Commission, its members are
called upon to exercise the trained judgment of a body of experts ‘appointed by
law and informed by experience.’ Illinois Cent. &c. R.R. v. Inter. Com.
Comm., 206 U.S. 441, 454, 27 S.Ct. 700, 704, 51 L.Ed. 1128; Standard Oil Co. v.
United States, 283 U.S. 235, 238, 239, 51 S.Ct. 429, 75 L.Ed. 999.
The legislative reports in both houses of
Congress clearly reflect the view that a fixed term was necessary to the
effective and fair administration of the law. In the report to the Senate (No.
597, 63d Cong., 2d Sess., pp. 10, 11) the Senate Committee on Interstate
Commerce, in support of the bill which afterwards became the act in question,
after referring to the provision fixing the term of office at seven years, so
arranged that the membership would not be subject to complete change at any one
time, said: ‘The work of this commission will be of a most exacting and
difficult character, demanding persons who have experience in the problems to
be met—that is, a proper knowledge of both the public requirements and the
practical affairs of industry. It is manifestly desirable that the terms of the
commissioners shall be long enough to give them an opportunity to acquire the
expertness in dealing with these special questions concerning industry that
comes from experience.’
The report declares that one advantage which the
commission possessed over the Bureau of Corporations (an executive subdivision
in the Department of Commerce which was abolished by the act) lay in the fact
of its independence, and that it was essential that the commission should not
be open to the suspicion of partisan direction. The report quotes (p. 22) a
statement to the committee by Senator Newlands, who reported the bill, that the
tribunal should be of high character and ‘independent of any department of the
government. * * * a board or commission of dignity, permanence, and ability,
independent of executive authority, except in its selection, and independent in
character.’
The debates in both houses demonstrate that the
prevailing view was that the Commission was not to be ‘subject to anybody in
the government but * * * only to the people of the United States’; free from
‘political domination or control’ or the ‘probability or possibility of such a
thing’; to be ‘separate and apart from any existing department of the
government—not subject to the orders of the President.’
More to the same effect appears in the debates,
which were long and thorough and contain nothing to the contrary. While the
general rule precludes the use of these debates to explain the meaning of the
words of the statute, they may be considered as reflecting light upon its
general purposes and the evils which it sought to remedy. Federal Trade
Commission v. Raladam Co., 283 U.S. 643, 650, 51 S.Ct. 587, 75 L.Ed. 1324, 79
A.L.R. 1191.
Thus, the language of the act, the legislative
reports, and the general purposes of the legislation as reflected by the
debates, all combine to demonstrate the congressional intent to create a body
of experts who shall gain experience by length of service; a body which shall
be independent of executive authority, except in its selection, and free to
exercise its judgment without the leave or hindrance of any other official or
any department of the government. To the accomplishment of these purposes, it
is clear that Congress was of opinion that length and certainty of tenure would
vitally contribute. And to hold that, nevertheless, the members of the
commission continue in office at the mere will of the President, might be to
thwart, in large measure, the very ends which Congress sought to realize by
definitely fixing the term of office.
We conclude that the intent of the act is to
limit the executive power of removal to the causes enumerated, the existence of
none of which is claimed here; and we pass to the second question.
Second. To support its contention that the
removal provision of section 1, as we have just construed it, is an
unconstitutional interference with the executive power of the President, the
government’s chief reliance is Myers v. United States, 272 U.S. 52, 47 S.Ct.
21, 71 L.Ed. 160. That case has been so recently decided, and the prevailing
and dissenting opinions so fully review the general subject of the power of
executive removal, that further discussion would add little of value to the
wealth of material there collected. These opinions examine at length the
historical, legislative, and judicial data bearing upon the question, beginning
with what is called ‘the decision of 1789’ in the first Congress and coming
down almost to the day when the opinions were delivered. They occupy 243 pages
of the volume in which they are printed. Nevertheless, the narrow point
actually decided was only that the President had power to remove a postmaster
of the first class, without the advice and consent of the Senate as required by
act of Congress. In the course of the opinion of the court, expressions occur
which tend to sustain the government’s contention, but these are beyond the
point involved and, therefore, do not come within the rule of stare decisis. In
so far as they are out of harmony with the views here set forth, these
expressions are disapproved. A like situation was presented in the case of
Cohens v. Virginia, 6 Wheat, 264, 399, 5 L.Ed. 257, in respect of certain
general expressions in the opinion in Marbury v. Madison, 1 Cranch, 137, 2
L.Ed. 60. Chief Justice Marshall, who delivered the opinion in the Marbury
Case, speaking again for the court in the Cohens Case, said: ‘It is a maxim, not
to be disregarded, that general expressions, in every opinion, are to be taken
in connection with the case in which those expressions are used. If they go
beyond the case, they may be respected, but ought not to control the judgment
in a subsequent suit, when the very point is presented for decision. The reason
of this maxim is obvious. The question actually before the court is
investigated with care, and considered in its full extent. Other principles
which may serve to illustrate it, are considered in their relation to the case
decided, but their possible bearing on all other cases is seldom completely
investigated.’
And he added that these general expressions in
the case of Marbury v. Madison were to be understood with the limitations put
upon them by the opinion in the Cohens Case. See, also, Carroll v. Lessee of
Carroll et al., 16 How. 275, 286—287, 14 L.Ed. 936; O’Donoghue v. United
States, 289 U.S. 516, 550, 53 S.Ct. 740, 77 L.Ed. 1356.
The office of a postmaster is so essentially
unlike the office now involved that the decision in the Myers Case cannot be
accepted as controlling our decision here. A postmaster is an executive officer
restricted to the performance of executive functions. He is charged with no
duty at all related to either the legislative or judicial power. The actual
decision in the Myers Case finds support in the theory that such an officer is
merely one of the units in the executive department and, hence, inherently
subject to the exclusive and illimitable power of removal by the Chief
Executive, whose subordinate and aid he is. Putting aside dicta, which may be
followed if sufficiently persuasive but which are not controlling, the
necessary reach of the decision goes far enough to include all purely executive
officers. It goes no farther; much less does it include an officer who occupies
no place in the executive department and who exercises no part of the executive
power vested by the Constitution in the President.
The Federal Trade Commission is an
administrative body created by Congress to carry into effect legislative
policies embodied in the statute in accordance with the legislative standard
therein prescribed, and to perform other specified duties as a legislative or
as a judicial aid. Such a body cannot in any proper sense be characterized as
an arm or an eye of the executive. Its duties are performed without executive
leave and, in the contemplation of the statute, must be free from executive
control. In administering the provisions of the statute in respect of ‘unfair
methods of competition,’ that is to say, in filling in and administering the
details embodied by that general standard, the commission acts in part quasi
legislatively and in part quasi judicially. In making investigations and
reports thereon for the information of Congress under section 6, in aid of the
legislative power, it acts as a legislative agency. Under section 7, which
authorizes the commission to act as a master in chancery under rules prescribed
by the court, it acts as an agency of the judiciary. To the extent that it
exercises any executive function, as distinguished from executive power in the
constitutional sense, it does so in the discharge and effectuation of its quasi
legislative or quasi judicial powers, or as an agency of the legislative or judicial
departments of the government.1
If Congress is without authority to prescribe
causes for removal of members of the trade commission and limit executive power
of removal accordingly, that power at once becomes practically all-inclusive in
respect of civil officers with the exception of the judiciary provided for by
the Constitution. The Solicitor General, at the bar, apparently recognizing
this to be true, with commendable candor, agreed that his view in respect of
the removability of members of the Federal Trade Commission necessitated a like
view in respect of the Interstate Commerce Commission and the Court of Claims.
We are thus confronted with the serious question whether not only the members
of these quasi legislative and quasi judicial bodies, but the judges of the
legislative Court of Claims, exercising judicial power (Williams v. United
States, 289 U.S. 553, 565—567, 53 S.Ct. 751, 77 L.Ed. 1372), continue in office
only at the pleasure of the President.
[5] We think it plain under the Constitution
that illimitable power of removal is not possessed by the President in respect
of officers of the character of those just named. The authority of Congress, in
creating quasi legislative or quasi judicial agencies, to require them to act
in discharge of their duties independently of executive control cannot well be
doubted; and that authority includes, as an appropriate incident, power to fix
the period during which they shall continue, and to forbid their removal except
for cause in the meantime. For it is quite evident that one who holds his
office only during the pleasure of another cannot be depended upon to maintain
an attitude of independence against the latter’s will.
The fundamental necessity of maintaining each of
the three general departments of government entirely free from the control or
coercive influence, direct or indirect, of either of the others, has often been
stressed and is hardly open to serious question. So much is implied in *630 the
very fact of the separation of the powers of these departments by the
Constitution; and in the rule which recognizes their essential coequality. The
sound application of a principle that makes one master in his own house
precludes him from imposing his control in the house of another who is master there.
James Wilson, one of the framers of the Constitution and a former justice of
this court, said that the independence of each department required that its
proceedings ‘should be free from the remotest influence, direct or indirect, of
either of the other two powers.’ Andrews, The Works of James Wilson (1896),
vol. 1, p. 367. And Mr. Justice Story in the first volume of his work on the
Constitution (4th Ed.) s 530, citing No. 48 of the Federalist, said that
neither of the departments in reference to each other ‘ought to possess,
directly or indirectly, an overruling influence in the administration of their
respective powers.’ And see O’Donoghue v. United States, supra, 289 U.S. 516,
at pages 530-531, 53 S.Ct. 740, 77 L.Ed. 1356.
The power of removal here claimed for the
President falls within this principle, since its coercive influence threatens
the independence of a commission, which is not only wholly disconnected from
the executive department, but which, as already fully appears, was created by
Congress as a means of carrying into operation legislative and judicial powers,
and as an agency of the legislative and judicial departments.
In the light of the question now under
consideration, we have re-examined the precedents referred to in the Myers
Case, and find nothing in them to justify a conclusion contrary to that which
we have reached. The so-called ‘decision of 1789’ had relation to a bill
proposed by Mr. Madison to establish an executive Department of Foreign
Affairs. The bill provided that the principal officer was ‘to be removable from
office by the President of the United States.’ This clause was changed to read
‘whenever the principal officer shall be removed from office by the President
of the United States,’ certain things should follow, thereby, in connection
with the debates, recognizing and confirming, as the court thought in the Myers
Case, the sole power of the President in the matter. We shall not discuss the
subject further, since it is so fully covered by the opinions in the Myers Case,
except to say that the office under consideration by Congress was not only
purely executive, but the officer one who was responsible to the President, and
to him alone, in a very definite sense. A reading of the debates shows that the
President’s illimitable power of removal was not considered in respect of other
than executive officers. And it is pertinent to observe that when, at a later
time, the tenure of office for the Comptroller of the Treasury was under
consideration, Mr. Madison quite evidently thought that, since the duties of
that office were not purely of an executive nature but partook of the judiciary
quality as well, a different rule in respect of executive removal might well
apply. 1 Annals of Congress, cols. 611-612.
In Marbury v. Madison, supra, 1 Cranch, 137, at
pages 162, 165-166, 2 L.Ed. 60, it is made clear that Chief Justice Marshall
was of opinion that a justice of the peace for the District of Columbia was not
removable at the will of the President; and that there was a distinction
between such an officer and officers appointed to aid the President in the
performance of his constitutional duties. In the latter case, the distinction
he saw was that ‘their acts are his acts’ and his will, therefore, controls;
and, by way of illustration, he adverted to the act establishing the Department
of Foreign Affairs, which was the subject of the ‘decision of 1789.’
The result of what we now have said is this:
Whether the power of the President to remove an officer shall prevail over the authority
of Congress to condition the power by fixing a definite term and precluding a
removal except for cause will depend upon the character of the office; the
Myers decision, affirming the power of the President alone to make the removal,
is confined to purely executive officers; and as to officers of the kind here
under consideration, we hold that no removal can be made during the prescribed
term for which the officer is appointed, except for one or more of the causes
named in the applicable statute.
To the extent that, between the decision in the
Myers Case, which sustains the unrestrictable power of the President to remove
purely executive officers, and our present decision that such power does not
extend to an office such as that here involved, there shall remain a field of
doubt, we leave such cases as may fall within it for future consideration and
determination as they may arise.
In accordance with the foregoing, the questions
submitted are answered:
Question No. 1, Yes.
Question No. 2, Yes.
Mr. Justice McREYNOLDS agrees that both
questions should be answered in the affirmative. A separate opinion in Myers v.
United States, 272 U.S. 52, at page 178, 47 S.Ct. 21, at page 46, 71 L.Ed. 160,
states his views concerning the power of the President to remove appointees.
_________
Notes and Questions.
1. How
does the issue in the case touch on the regulatory power of the agency? Why might there be a concern about regulation
and control of the members of the agency?
3. How
does the court resolve the issue of the amalgamation of the entirety of
governmental power, separated among the three branches of government but
recombined within an agency?
3. How
does the court understand the role and place of the agency within our
government? How does the court
understand their legislative function?
4. The
extent of regulatory authority, like those of statutes are constrained by the
jurisdictional limits of agency power.
Unlike states or the federal government, those jurisdictional limits
include those discernable from the statutes which established the agency and
conferred quasi legislative (regulatory) power on it. The following case suggests the way the issue
of authority has come to dominate litigation over regulatory power.
_________
AMERICAN LIBRARY ASSOCIATION,
v.
FEDERAL COMMUNICATIONS COMMISSION et al.
406 F.3d 689
United States Court of Appeals,
District of Columbia Circuit.
No. 04–1037. | Argued Feb. 22, 2005. Decided May
6, 2005.
Opinion
HARRY T. EDWARDS, Circuit Judge.
It is axiomatic that administrative agencies may
issue regulations only pursuant to authority delegated to them by Congress. The
principal question presented by this case is whether Congress delegated
authority to the Federal Communications Commission (“Commission” or “FCC”) in
the Communications Act of 1934, 47 U.S.C. § 151 et seq. (2000) (
“Communications Act” or “Act”), to regulate apparatus that can receive
television broadcasts when those apparatus are not engaged in the process of
receiving a broadcast transmission. In the seven decades of its existence, the
FCC has never before asserted such sweeping authority. Indeed, in the past, the
FCC has informed Congress that it lacked any such authority. In our view,
nothing has changed to give the FCC the authority that it now claims.
This case arises out of events related to the
nation’s transition from analog to digital television service (“DTV”). Since
the 1940s, broadcast television stations have transmitted their programs over
the air using an analog standard. DTV is a technological breakthrough that
permits broadcasters to transmit more information over a channel of
electromagnetic spectrum than is possible through analog broadcasting. Consumer
Elecs. Ass’n v. FCC, 347 F.3d 291, 293 (D.C.Cir.2003). Congress has set
December 31, 2006, as the target date for the replacement of analog television
service with DTV. See 47 U.S.C. § 309(j)(14).
In August 2002, in conjunction with its
consideration of the technological challenges related to the transition from
analog service to DTV, the Commission issued a notice of proposed rulemaking to
inquire, inter alia, whether rules were needed to prevent the unauthorized
copying and redistribution of digital television programming. See Digital
Broadcast Copy Protection, 17 F.C.C.R. 16,027, 16,028 (2002) (“NPRM”).
Thousands of comments were filed in response to the agency’s NPRM. Owners of
digital content and television broadcasters urged the Commission to require DTV
reception equipment to be manufactured with the capability to prevent
unauthorized redistributions of digital content. Numerous other commenters
voiced strong objections to any such regulations, contending that the FCC had
no authority to control how broadcast content is used after it has been
received. In November 2003, the Commission adopted “broadcast flag”
regulations, requiring that digital television receivers and other devices
capable of receiving digital television broadcast signals, manufactured on or
after July 1, 2005, include technology allowing them to recognize the broadcast
flag. See Digital Broadcast Content Protection, 18 F.C.C.R. 23,550 (2003)
(codified at 47 C.F.R. pts. 73, 76). The broadcast flag is a digital code
embedded in a DTV broadcasting stream, which prevents digital television reception
equipment from redistributing broadcast content. The broadcast flag affects
receiver devices only after a broadcast transmission is complete. The American
Library Association, et al. (“American Library” or “petitioners”), nine
organizations representing a large number of libraries and consumers, filed the
present petition for review challenging these rules.
In adopting the broadcast flag rules, the FCC
cited no specific statutory provision giving the agency authority to regulate
consumers’ use of television receiver apparatus after the completion of a
broadcast transmission. Rather, the Commission relied exclusively on its
ancillary jurisdiction under Title I of the Communications Act of 1934.
The Commission recognized that it may exercise
ancillary jurisdiction only when two conditions are satisfied: (1) the
Commission’s general jurisdictional grant under Title I covers the regulated
subject and (2) the regulations are reasonably ancillary to the Commission’s
effective performance of its statutorily mandated responsibilities. See 18
F.C.C.R. at 23,563. The Commission’s general jurisdictional grant under Title I
plainly encompasses the regulation of apparatus that can receive television
broadcast content, but only while those apparatus are engaged in the process of
receiving a television broadcast. Title I does not authorize the Commission to
regulate receiver apparatus after a transmission is complete. As a result, the
FCC’s purported exercise of ancillary authority founders on the first
condition. There is no statutory foundation for the broadcast flag rules, and
consequently the rules are ancillary to nothing. Therefore, we hold that the
Commission acted outside the scope of its delegated authority when it adopted
the disputed broadcast flag regulations.
The result that we reach in this case finds
support in the All Channel Receiver Act of 1962 and the Communications
Amendments Act of 1982. These two statutory enactments confirm that Congress
never conferred authority on the FCC to regulate consumers’ use of television
receiver apparatus after the completion of broadcast transmissions.
As petitioners point out, “the Broadcast Flag
rules do not regulate interstate ‘radio communications’ as defined by Title I,
because the Flag is not needed to make a DTV transmission, does not change
whether DTV signals can be received, and has no effect until after the DTV
transmission is complete.” Petitioners’ Br. at 23. We agree. Because the
Commission overstepped the limits of its delegated authority, we grant the
petition for review.
I. BACKGROUND
The Communications Act of 1934 was “implemented
for the purpose of consolidating federal authority over communications in a
single agency to assure ‘an adequate communication system for this country.’ ”
Motion Picture Ass’n of Am., Inc. v. FCC, 309 F.3d 796, 804 (D.C.Cir.2002)
(quoting S. REP. No. 73–781, at 3 (1934)). Title I of the Act creates the
Commission “[f]or the purpose of regulating interstate and foreign commerce in
communication by wire and radio so as to make available, so far as possible, to
all the people of the United States ... a rapid, efficient, Nation-wide, and
world-wide wire and radio communication service with adequate facilities at
reasonable charges.” 47 U.S.C. § 151. Title I further provides that the
Commission “shall execute and enforce the provisions” of the Act, id., and
states that the Act’s provisions “shall apply to all interstate and foreign
communication by wire or radio,” id. § 152(a).
The FCC may act either pursuant to express statutory
authority to promulgate regulations addressing a variety of designated issues
involving communications, see, e.g., 47 U.S.C. § 303(f) (granting the
Commission authority to prevent interference among radio and television
broadcast stations), or pursuant to ancillary jurisdiction, see, e.g., 47
U.S.C. § 154(i) (“[t]he Commission may perform any and all acts, make such
rules and regulations, and issue such orders, not inconsistent with this
chapter, as may be necessary in the execution of its functions”).
Although somewhat amorphous, ancillary
jurisdiction is nonetheless constrained. In order for the Commission to
regulate under its ancillary jurisdiction, two conditions must be met. First,
the subject of the regulation must be covered by the Commission’s general grant
of jurisdiction under Title I of the Communications Act, which, as noted above,
encompasses “ ‘all interstate and foreign communication by wire or radio.’ ”
United States v. Southwestern Cable Co., 392 U.S. 157, 167, 88 S.Ct. 1994, 20 L.Ed.2d
1001 (1968) (quoting 47 U.S.C. § 152(a)). Second, the subject of the regulation
must be “reasonably ancillary to the effective performance of the Commission’s
various responsibilities.” Id. at 178, 88 S.Ct. 1994. Digital television is a
technological breakthrough that allows broadcasters to transmit either an
extremely high quality video programming signal (known as high definition
television) or multiple streams of video, voice, and data simultaneously within
the same frequency band traditionally used for a single analog television
broadcast. See Advanced Television Systems and Their Impact Upon the Existing
Television Broadcast Service, 11 F.C.C.R. 17,771, 17,774 (1996). In 1997, the
FCC set a target of 2006 for the cessation of analog service. See Advanced
Television Systems and Their Impact Upon the Existing Television Broadcast
Service, 12 F.C.C.R. 12,809, 12,850 (1997). Congress subsequently provided that
television broadcast licenses authorizing analog service should not be renewed
to authorize such service beyond December 31, 2006. See 47 U.S.C. § 309(j)(14).
In August 2002, the FCC issued a notice of
proposed rulemaking regarding digital broadcast copy protection. See Digital
Broadcast Copy Protection, 17 F.C.C.R. 16,027 (2002) (“NPRM”). The Commission
sought comments on, among other things, whether to adopt broadcast flag
technology to prevent the unauthorized copying and redistribution of digital
media. See id. at 16,028–29. The broadcast flag, or Redistribution Control
Descriptor, is a digital code embedded in a digital broadcasting stream, which
prevents digital television reception equipment from redistributing digital
broadcast content. See id. at 16,027. The effectiveness of the broadcast flag
regime is dependent on programming being flagged and on devices capable of
receiving broadcast DTV signals (collectively “demodulator products”) being
able to recognize and give effect to the flag. Under the rule, new demodulator
products (e.g., televisions, computers, etc.) must include flag-recognition
technology. This technology, in combination with broadcasters’ use of the flag,
would prevent redistribution of broadcast programming. The broadcast flag does
not have any impact on a DTV broadcast transmission. The flag’s only effect is
to limit the capacity of receiver apparatus to redistribute broadcast content
after a broadcast transmission is complete.
The NPRM also sought comments on whether the
Commission had the authority to mandate recognition of the broadcast flag in
consumer electronics devices. Id. at 16,029–30. The Commission requested
commenters to address whether “this [is] an area in which the Commission could
exercise its ancillary jurisdiction under Title I of the Act.” Id. The FCC also
asked “commenters to identify any statutory provisions that might provide the
Commission with more explicit authority to adopt digital broadcast copy
protection rules,” such as 47 U.S.C. § 336(b)(4) and (b)(5), id., which
authorize the Commission to regulate the issuance of licenses for digital television
services, see 47 U.S.C. § 336(a)-(b).
Unsurprisingly, there was an enormous response
to the NPRM. . . . Opponents of
regulation argued that the threat from content redistribution was overstated in
light of technological limitations to widespread Internet retransmission. See
id. at 23,553. In addition, critics of the proposed rules expressed concerns
about implementation costs and suggested that the broadcast flag both was an
inadequate tool to protect content and would stifle innovation. Id. at 23,557.
On the question of the Commission’s authority to
promulgate broadcast flag regulations, proponents pointed to 47 U.S.C. § 336.
See Flag Order, 18 F.C.C.R. at 23,562. Enacted as part of the
Telecommunications Act of 1996, Pub.L. No. 104–104, § 201, 110 Stat. 56, 107,
47 U.S.C. § 336 sets forth certain criteria pursuant to which the Commission
may issue new licenses for advanced television services. Proponents also argued
that, even if the Commission lacked express statutory authority under § 336, the
FCC was authorized to adopt broadcast flag rules pursuant to its ancillary
jurisdiction. See Joint Comments of the Motion Picture Association of America,
Inc., et al., 12/6/02, J.A. 760, 798–807.
Opponents contended that the Commission lacked
jurisdiction to implement broadcast flag rules. They pointed out that the plain
text of § 336 authorized the FCC to regulate only DTV broadcast licensees and
the quality of the signal transmitted by such licensees. . . .
In November 2003, the FCC adopted regulations
requiring demodulator products manufactured on or after July 1, 2005 to
recognize and give effect to the broadcast flag. See Flag Order, 18 F.C.C.R. at
23,570, 23,576, 23,590–91. . . . .
In explaining the source of its authority to
promulgate the broadcast flag rules, the Commission did not invoke 47 U.S.C. §
336. Rather, the Commission purported to rely solely on its ancillary
jurisdiction under Title I of the Communications Act of 1934. See id. at
23,563. . . .
The instant petition for review, filed by nine
organizations representing numerous libraries and consumers, challenges the
FCC’s Flag Order on three grounds: (1) the Commission lacks statutory authority
to mandate that demodulator products recognize and give effect to the broadcast
flag; (2) the broadcast flag regime impermissibly conflicts with copyright law;
and (3) the Commission’s decision is arbitrary and capricious for want of
reasoned decisionmaking. The Motion Picture Association of America (“MPAA”)
intervened in support of the Commission. In its brief to the court, MPAA also
contested petitioners’ Article III standing. After hearing oral argument, the
court requested additional submissions from the parties on the question of
standing. See Am. Library Ass’n v. FCC, 401 F.3d 489 (D.C.Cir.2005) ( “Am.
Library I ”).
As explained below, we are now satisfied that at
least one member of one of the petitioner groups has standing to pursue this
challenge to the FCC’s broadcast flag rules. The court therefore has
jurisdiction to consider the petition for review. On the merits, we hold that
the FCC lacked statutory authority to impose the broadcast flag regime.
Therefore, we grant the petition for review without reaching petitioners’ other
challenges to the Flag Order.
II. ANALYSIS
A. Standing
[Omitted]
B. The Limits of the FCC’s Delegated Authority
Under the Communications Act
* * * * * *
As noted above, the principal issue in this case
is whether the Commission acted outside the scope of its delegated authority
when it adopted the disputed broadcast flag regulations. The FCC, like other
federal agencies, “literally has no power to act ... unless and until Congress
confers power upon it.” La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 374, 106
S.Ct. 1890, 90 L.Ed.2d 369 (1986). The Commission “has no constitutional or
common law existence or authority, but only those authorities conferred upon it
by Congress.” Michigan v. EPA, 268 F.3d 1075, 1081 (D.C.Cir.2001). Hence, the
FCC’s power to promulgate legislative regulations is limited to the scope of
the authority Congress has delegated to it. Id. (citing Bowen v. Georgetown
Univ. Hosp., 488 U.S. 204, 208, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988)).
1. The Applicable Standard of Review
In assessing whether the Commission’s Flag Order
exceeds the agency’s delegated authority, we apply the familiar standards of
review enunciated by the Supreme Court in Chevron U.S.A. Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694
(1984), and United States v. Mead Corp., 533 U.S. 218, 226–27, 121 S.Ct. 2164,
150 L.Ed.2d 292 (2001). In reviewing agency action under Chevron, “if the
intent of Congress is clear,” the court “must give effect to [that]
unambiguously expressed intent.” Chevron, 467 U.S. at 842–43, 104 S.Ct. 2778
(“Chevron Step One”). If “Congress has not directly addressed the precise
question at issue,” and the agency has acted pursuant to an express or implied
delegation of authority, the agency’s statutory interpretation is entitled to
deference, as long as it is reasonable. Id. at 843–44, 104 S.Ct. 2778 (“Chevron
Step Two”). The FCC argues here that the court should defer to the agency’s
interpretation of its ancillary jurisdiction under Chevron, because, in its
view, the regulations promulgated in the Flag Order reflect a reasonable
application of the agency’s ancillary authority under the Communications Act.
The agency’s self-serving invocation of Chevron leaves out a crucial threshold
consideration, i.e., whether the agency acted pursuant to delegated authority.
As the court explained in Motion Picture Ass’n
of America, Inc. v. FCC, 309 F.3d 796, 801 (D.C.Cir.2002) (“MPAA ”), an
“agency’s interpretation of [a] statute is not entitled to deference absent a
delegation of authority from Congress to regulate in the areas at issue.” The
court observed that the Supreme Court’s decision in Mead “reinforces” the
command in Chevron that “deference to an agency’s interpretation of a statute
is due only when the agency acts pursuant to ‘delegated authority.’ ” Id.
(quoting Mead, 533 U.S. at 226, 121 S.Ct. 2164). See also Cal. Indep. Sys.
Operator Corp. v. FERC, 372 F.3d 395, 399 (D.C.Cir.2004); Bluewater Network v.
EPA, 370 F.3d 1, 11 (D.C.Cir.2004); AT&T Corp. v. FCC, 323 F.3d 1081, 1086
(D.C.Cir.2003); Ry. Labor Executives’ Ass’n v. Nat’l Mediation Bd., 29 F.3d
655, 670–71 (D.C.Cir.1994) (en banc).
* * * **
Petitioners’ principal claim here is that the
challenged broadcast flag regulations emanated from an ultra vires action by
the FCC. We agree. This being the case, the regulations cannot survive judicial
review under Chevron/Mead. Our judgment is the same whether we analyze the
FCC’s action under the first or second step of Chevron. “In either situation,
the agency’s interpretation of the statute is not entitled to deference absent
a delegation of authority from Congress to regulate in the areas at issue.”
MPAA, 309 F.3d at 801 (citing Ry. Labor Executives, 29 F.3d at 671). In this
case, as explained below, the FCC’s interpretation of its ancillary jurisdiction
reaches well beyond the agency’s delegated authority under the Communications
Act. We therefore hold that the broadcast flag regulations exceed the agency’s
delegated authority under the statute.
2. Ancillary Jurisdiction Under the Communications
Act of 1934
As explained above, the only basis advanced by
the Commission as a source for its authority to adopt the broadcast flag regime
was its ancillary jurisdiction under Title I of the Communications Act of 1934.
See Flag Order, 18 F.C.C.R. at 23,563–64. As the Commission recognized, its
ancillary jurisdiction is limited to circumstances where: (1) the Commission’s
general jurisdictional grant under Title I covers the subject of the
regulations and (2) the regulations are reasonably ancillary to the
Commission’s effective performance of its statutorily mandated
responsibilities. See id. at 23,563 (citing Southwestern Cable, 392 U.S. at
177–78, 88 S.Ct. 1994).
The insurmountable hurdle facing the FCC in this
case is that the agency’s general jurisdictional grant does not encompass the
regulation of consumer electronics products that can be used for receipt of
wire or radio communication when those devices are not engaged in the process
of radio or wire transmission. Because the Flag Order does not require
demodulator products to give effect to the broadcast flag until after the DTV
broadcast has been completed, the regulations adopted in the Flag Order do not
fall within the scope of the Commission’s general jurisdictional grant.
Therefore, the Commission cannot satisfy the first precondition to its
assertion of ancillary jurisdiction.
The Supreme Court has delineated the parameters
of the Commission’s ancillary jurisdiction in three cases: United States v.
Southwestern Cable Co., 392 U.S. 157, 88 S.Ct. 1994, 20 L.Ed.2d 1001 (1968),
United States v. Midwest Video Corp., 406 U.S. 649, 92 S.Ct. 1860, 32 L.Ed.2d
390 (1972) (“Midwest Video I ”), and FCC v. Midwest Video Corp., 440 U.S. 689,
99 S.Ct. 1435, 59 L.Ed.2d 692 (1979) (“Midwest Video II ”). In Southwestern
Cable and Midwest Video I, the Court upheld the Commission’s regulation of
cable television systems as a valid exercise of its ancillary jurisdiction, but
also made clear that the Commission’s ancillary authority has limits. In
Midwest Video II, the Court found that the Commission had overstepped those
limits. Because Southwestern Cable, Midwest Video I, and Midwest Video II are
central to our analysis of whether the Commission lawfully exercised its
ancillary jurisdiction in this case, we discuss these cases in some detail.
In Southwestern Cable, the Supreme Court
recognized that the Communications Act confers a sphere of ancillary
jurisdiction on the FCC. See 392 U.S. at 177–78, 88 S.Ct. 1994. The principal
question presented was whether the FCC had the authority to regulate cable
television systems (“CATV”), absent any express congressional grant of
authority to the FCC to regulate in this area. See id. at 164–67, 88 S.Ct.
1994. The Court’s conclusion that the FCC did have such authority rested on two
factors. First, it was beyond doubt that CATV systems involved interstate “
‘communication by wire or radio,’ ” id. at 168, 88 S.Ct. 1994 (quoting 47
U.S.C. § 152(a)), and, thus, were covered by Title I’s general jurisdictional
grant. Second, the Court concluded that at least some level of CATV regulation
was “reasonably ancillary to the effective performance of the Commission’s
various responsibilities [delegated to it by Congress] for the regulation of
television broadcasting.” Id. at 178, 88 S.Ct. 1994. Because these two
conditions were satisfied, the Court held that, to the degree it was in fact
reasonably ancillary to the Commission’s responsibilities over broadcast, the
FCC had the power to regulate cable television as “ ‘public convenience,
interest or necessity requires,’ ” so long as the regulations were “ ‘not
inconsistent with law.’ ” Id. (quoting 47 U.S.C. § 303(r)).
Four years later, the Court applied the two-part
test enunciated in Southwestern Cable to review a rule adopted by the FCC
providing that no CATV system with 3,500 or more subscribers could carry the
signal of any television broadcast station unless the system distributed
programming that had originated from a source other than the broadcast signals
and the system had facilities for local program production. See Midwest Video
I, 406 U.S. at 653–54 & n. 6, 92 S.Ct. 1860. The regulation was designed to
increase the number of outlets for community self-expression and the
programming choices available to the public. See id. at 654, 92 S.Ct. 1860.
A closely divided Court held that the
Commission’s rule was a valid exercise of its ancillary jurisdiction. In an
opinion by Justice Brennan, a plurality of the Court began its analysis by
recognizing the two requirements for the Commission’s exercise of ancillary
jurisdiction: (1) that the regulation must cover interstate or foreign
communication by wire or radio and (2) that the regulation must be reasonably
ancillary to the Commission’s effective performance of its statutorily mandated
responsibilities. See id. at 662–63, 92 S.Ct. 1860. The parties before the
Court in Midwest Video I did not dispute that the first precondition was met.
See id. at 662, 92 S.Ct. 1860. Furthermore, the plurality concluded that the
regulation was reasonably ancillary to the Commission’s responsibilities for
the regulation of broadcast television, because the Commission reasonably
concluded that the rule would “ ‘further the achievement of long-established
regulatory goals in the field of television broadcasting by increasing the
number of outlets for community self-expression and augmenting the public’s
choice of programs and types of services.’ ” Id. at 667–68, 92 S.Ct. 1860
(quoting Commission report accompanying the disputed regulation).
Chief Justice Burger provided the fifth vote to
sustain the regulation at issue in Midwest Video I, but he concurred only in
the judgment. Chief Justice Burger agreed that, in light of the “pervasive
powers” conferred upon the Commission and its “generations of experience,” the
Court should sustain the Commission’s authority to impose the regulation at
issue. Id. at 676, 92 S.Ct. 1860 (Burger, C.J., concurring in the result).
Nonetheless, he noted: “Candor requires acknowledgment, for me at least, that
the Commission’s position strains the outer limits of even the open-ended and
pervasive jurisdiction that has evolved by decisions of the Commission and the
courts.” Id.
Seven years later, in Midwest Video II, the
Court considered whether another FCC effort to regulate cable television was a
permissible exercise of the Commission’s ancillary jurisdiction. This time the
Court decided that the Commission had gone too far. The rules at issue required
that cable television systems carrying broadcast signals and having at least
3,500 subscribers develop at least a 20–channel capacity, make certain channels
available for third-party access, and furnish equipment for access purposes.
440 U.S. at 691, 99 S.Ct. 1435. The Court held that the rules exceeded the
Commission’s authority. Id. at 708–09, 99 S.Ct. 1435. Specifically, because the
Communications Act explicitly directed the Commission not to treat broadcasters
as common carriers, the Court concluded that it was not reasonably ancillary to
the Commission’s effective performance of its responsibilities relating to
broadcast television for the Commission to impose common-carrier obligations on
cable television systems. See id. at 702–05, 708–09, 99 S.Ct. 1435. While the
Court recognized that the statutory bar on treating broadcasters as common
carriers did not apply explicitly to cable systems, the Court explained that,
“without reference to the provisions of the Act directly governing
broadcasting, the Commission’s jurisdiction under [Title I] would be
unbounded.” Id. at 706, 99 S.Ct. 1435. The Court refused to countenance such a
boundless view of the Commission’s jurisdiction, noting that, “[t]hough
afforded wide latitude in its supervision over communication by wire, the
Commission was not delegated unrestrained authority.” Id. As the Commission
correctly explained in the Flag Order, Midwest Video II stands for the
proposition that “if the basis for jurisdiction over cable is that the
authority is ancillary to the regulation of broadcasting, the cable regulation
cannot be antithetical to a basic regulatory parameter established for
broadcast.” Flag Order, 18 F.C.C.R. at 23,563 n. 70.
The Court’s decisions in Southwestern Cable,
Midwest Video I, and Midwest Video II were principally focused on the second
prong of the ancillary jurisdiction test. This is unsurprising, because the
subject matter of the regulations at issue in those cases—cable
television—constituted interstate communication by wire or radio, and thus fell
within the scope of the Commission’s general jurisdictional grant under Title I
of the Communications Act. However, these cases leave no doubt that the
Commission may not invoke its ancillary jurisdiction under Title I to regulate
matters outside of the compass of communication by wire or radio. As we have
explained:
While the Supreme Court has described the
jurisdictional powers of the FCC as ... expansive, there are limits to those
powers. No case has ever permitted, and the Commission has never, to our
knowledge, asserted jurisdiction over an entity not engaged in “communication
by wire or radio.”
Accuracy in Media, Inc. v. FCC, 521 F.2d 288,
293 (D.C.Cir.1975) (additional internal quotation marks omitted) (citing Nat’l
Broad. Co. v. United States, 319 U.S. 190, 219, 63 S.Ct. 997, 87 L.Ed. 1344
(1943)); see also id. at 294 (“Jurisdiction over CATV [in Southwestern Cable ]
was expressly predicated upon a finding that the transmission of video and
aural signals via the cable was ‘interstate ... communication by wire or
radio.’ ” (quoting Southwestern Cable, 392 U.S. at 168, 88 S.Ct. 1994));
Midwest Video I, 406 U.S. at 662, 92 S.Ct. 1860 (making clear that the
Commission’s jurisdiction is limited to activities involving communication by
wire or radio). This principle is crucial, because the issue here is precisely
whether the Flag Order asserts jurisdiction over matters that are beyond the
compass of wire or radio communication.
Southwestern Cable, Midwest Video I, and Midwest
Video II are also relevant to the present controversy for a second reason. In
each of these decisions, the Court followed a very cautious approach in
deciding whether the Commission had validly invoked its ancillary jurisdiction,
even when the regulations under review clearly addressed “communication by wire
or radio.” As the Seventh Circuit has noted: “The Court [in Southwestern Cable
] appeared to be treading lightly even where the activity at issue” involved
cable television, which “easily falls within” Title I’s general jurisdictional
grant. Ill. Citizens Comm. for Broad. v. FCC, 467 F.2d 1397, 1400 (7th
Cir.1972). The Seventh Circuit’s characterization is equally apt with respect
to the Court’s opinions in Midwest Video I and Midwest Video II.
We think that the Supreme Court’s cautionary
approach in applying the second prong of the ancillary jurisdiction test
suggests that we should be at least as cautious in this case. Great caution is
warranted here, because the disputed broadcast flag regulations rest on no
apparent statutory foundation and, thus, appear to be ancillary to nothing. Just
as the Supreme Court refused to countenance an interpretation of the second
prong of the ancillary jurisdiction test that would confer “unbounded
jurisdiction on the Commission, Midwest Video II, 440 U.S. at 706, 99 S.Ct.
1435, we will not construe the first prong in a manner that imposes no
meaningful limits on the scope of the FCC’s general jurisdictional grant.
In light of the parameters of the Commission’s
ancillary jurisdiction established by Southwestern Cable, Midwest Video I, and
Midwest Video II, this case turns on one simple fact: the Flag Order does not
require demodulator products to give effect to the broadcast flag until after
the DTV broadcast is complete. The Flag Order does not regulate the actual
transmission of the DTV broadcast. In other words, the Flag Order imposes
regulations on devices that receive communications after those communications
have occurred; it does not regulate the communications themselves. Because the
demodulator products are not engaged in “communication by wire or radio” when
they are subject to regulation under the Flag Order, the Commission plainly
exceeded the scope of its general jurisdictional grant under Title I in this
case.
In seeking to justify its assertion of
jurisdiction in the Flag Order, the Commission relies on the fact that the
Communications Act defines “radio communication” and “wire communication” to
include not only the “transmission of ... writing, signs, signals, pictures,
and sounds” by aid of wire or radio, but also “all instrumentalities,
facilities, apparatus, and services (among other things, the receipt,
forwarding, and delivery of communications) incidental to such transmission.”
47 U.S.C. § 153(33) (defining “radio communication”); id. § 153(52) (defining
“wire communication”). The Flag Order asserts: “Based on this language, [the
Commission finds] that television receivers are covered by the statutory
definitions and therefore come within the scope of the Commission’s general
authority outlined in [Title I] of the Communications Act.” 18 F.C.C.R. at
23,563–64. The Commission thus apparently believed that, given the definitions
of “wire communication” and “radio communication” in Title I, it could assert jurisdiction
over television receivers even when those receivers were not engaged in
broadcast transmission simply because they are apparatus used for the receipt
of communications. See also FCC Br. at 26. We reject this position, for it
rests on a completely implausible construction of the Communications Act.
The statute does not give the FCC authority to
regulate any “apparatus” that is associated with television broadcasts. Rather,
the statutory language cited by the FCC refers only to “apparatus” that are
“incidental to ... transmission.” In other words, the language of § 153(33) and
(52) plainly does not indicate that Congress intended for the Commission to
have general jurisdiction over devices that can be used for receipt of wire or
radio communication when those devices are not engaged in the process of radio
or wire transmission.
The language relied upon by the Commission in
the statutory definitions of “wire communication” and “radio communication” was
part of the original Communications Act of 1934. See Pub.L. No. 73–416, §
3(a)-(b), 48 Stat. 1064, 1065; see also Southwestern Cable, 392 U.S. at 168, 88
S.Ct. 1994 (quoting this language). The Commission acknowledges that, in the
more than 70 years that the Act has been in existence, it has never previously
sought to exercise ancillary jurisdiction over reception equipment after the
transmission of communication is complete. See Recording of Oral Argument at
34:45–35:23. This is not surprising, since the Commission’s current
interpretation of the statute’s definitional language would render step one of
the Supreme Court’s two-part **368 *704 test for determining whether a subject
is within the Commission’s ancillary jurisdiction essentially meaningless.
[10] We can find nothing in the statute, its legislative
history, the applicable case law, or agency practice indicating that Congress
meant to provide the sweeping authority the FCC now claims over receiver
apparatus. And the agency’s strained and implausible interpretations of the
definitional provisions of the Communications Act of 1934 do not lend credence
to its position. As the Supreme Court has reminded us, Congress “does not ...
hide elephants in mouseholes.” Whitman v. Am. Trucking Ass’n, 531 U.S. 457,
468, 121 S.Ct. 903, 149 L.Ed.2d 1 (2001). In sum, we hold that, at most, the
Commission only has general authority under Title I to regulate apparatus used
for the receipt of radio or wire communication while those apparatus are
engaged in communication.
Our holding is consistent with the Seventh
Circuit’s well-reasoned decision in Illinois Citizens, which concluded that the
FCC may not lawfully exercise jurisdiction over activities that do not
constitute communication by wire or radio. See 467 F.2d at 1399–1400. In that
case, the Illinois Citizens Committee for Broadcasting filed a complaint with
the FCC, alleging that the proposed construction of the Sears Tower in Chicago
“would throw ‘multiple ghost images’ on television receivers in many areas of
the Greater Chicago Metropolitan Area.” Id. at 1398. The petitioners called
upon the FCC to take steps to prevent this interference, including, if
necessary, ordering Sears, Roebuck & Co. to cease construction of the tower
until the company had taken measures to ensure that television viewers would continue
to receive an adequate signal. The Commission denied the requested relief on
the ground that it lacked jurisdiction over the construction of the Sears
Tower, and the Illinois Citizens Committee sought review by the Seventh
Circuit. See id. at 1398–99.
The Illinois Citizens Committee argued that, in
light of Southwestern Cable, the FCC had the power to regulate “all activities
which ‘substantially affect communications.’ ” Id. at 1399. The Seventh Circuit
flatly rejected this argument as unsupported by the Communications Act or
judicial decisions interpreting the Act.
* * * * * :
In Motion Picture Ass’n, this court concluded
that the Commission lacked authority under Title I of the Communications Act to
promulgate regulations that significantly implicated program content. Focusing
specifically on 47 U.S.C. § 151, which is part of Title I and which the FCC
conceded was the only possible source of authority that could justify its
adoption of the video description rules at issue in the case, we explained:
Under [§ 151], Congress delegated authority to
the FCC to expand radio and wire transmissions, so that they would be available
to all U.S. citizens. Section [151] does not address the content of the
programs with respect to which accessibility is to be ensured. In other words,
the FCC’s authority under [§ 151] is broad, but not without limits.
309 F.3d at 804 (full citations omitted) (citing
Midwest Video I, 406 U.S. at 667–68, 92 S.Ct. 1860, and Southwestern Cable, 392
U.S. at 172, 88 S.Ct. 1994). Just as no provision in Title I addresses program
content, no provision in Title I addresses requirements for demodulator
products not engaged in communication by wire or radio.
In sum, because the rules promulgated by the
Flag Order regulate demodulator products after the transmission of a DTV
broadcast is complete, these regulations exceed the scope of authority Congress
delegated to the FCC. And because the Commission can only issue regulations on
subjects over which it has been delegated authority by Congress, the rules
adopted by the Flag Order are invalid at the threshold jurisdictional inquiry.
As was true in Aid Ass’n for Lutherans, “our judgment in this case is the same
whether we analyze the agency’s statutory interpretation under Chevron Step One
or Step Two. ‘In either situation, the agency’s interpretation of the statute
is not entitled to deference absent a delegation of authority from Congress to
regulate in the areas at issue.’ ” 321 F.3d at 1175 (quoting MPAA, 309 F.3d at
801). “An agency construction of a statute cannot survive judicial review if a
contested regulation reflects an action that exceeds the agency’s authority.”
Id. at 1174. It does not matter whether the unlawful action arises because the
regulations at issue are “contrary to clear congressional intent” as
ascertained through use of the “traditional tools of statutory construction,”
Chevron, 467 U.S. at 843 n. 9, 104 S.Ct. 2778, or “utterly unreasonable and
thus impermissible.” Aid Ass’n for Lutherans, 321 F.3d at 1174. The FCC has no
congressionally delegated authority to regulate receiver apparatus after a
transmission is complete. We therefore hold that the broadcast flag regulations
exceed the agency’s delegated authority under the statute.
3. Subsequent Congressional Legislation
We think that, for the reasons discussed above,
the FCC never has possessed ancillary jurisdiction under the Communications Act
of 1934 to regulate consumer electronic devices that can be used for receipt of
wire or radio communication when those devices are not engaged in the process
of radio or wire transmission. Indeed, in the more than 70 years of the Act’s
existence, the Commission has neither claimed such authority nor purported to
exercise its ancillary jurisdiction in such a far-reaching way. See Flag Order,
18 F.C.C.R. at 23,566 (“We recognize that the Commission’s assertion of
jurisdiction over manufacturers of equipment in the past has typically been
tied to specific statutory provisions and that this is the first time the
Commission has exercised ancillary jurisdiction over consumer equipment
manufacturers in this manner.”).
* * * * *
It is enough here for us to find that the
Communications Act of 1934 does not indicate a legislative intent to delegate
authority to the Commission to regulate consumer electronic devices that can be
used for receipt of wire or radio communication when those devices are not
engaged in the process of radio or wire transmission. That is the end of the
matter. It turns out, however, that subsequent legislation enacted by Congress
confirms the limited scope of the agency’s ancillary jurisdiction and makes it
clear that the broadcast flag regulations exceed the agency’s delegated
authority under the statute.
The first such congressional enactment of note
is the All Channel Receiver Act (“ACRA”), Pub.L. No. 87–529, 76 Stat. 150
(codified at 47 U.S.C. §§ 303(s), 330(a)). Enacted in 1962, the ACRA granted
the Commission authority to require that televisions sold in interstate
commerce are “capable of adequately receiving all frequencies allocated by the
Commission to television broadcasting.” 47 U.S.C. § 303(s). . . . .
It is clear, however, that, in enacting the
ACRA, Congress did not “give the Commission unbridled authority” to regulate
receiving apparatus. EIA, 636 F.2d at 696. This was confirmed when the
Commission attempted to set a standard requiring television manufacturers to
take steps to improve the quality of UHF reception beyond what could be
attained with then-existing technology. On review, this court ruled that the
Commission overstepped its delegated authority and vacated the Commission’s
action. See id. at 698. The court held that, while the ACRA granted the
Commission “limited ... authority to ensur[e] that all sets ‘be capable of
adequately receiving’ all television frequencies,” Congress had intentionally
restricted this jurisdictional grant to preclude wide-ranging FCC “receiver
design regulation.” Id. at 695, 696.
* * * * *
A second congressional enactment that confirms
the limited scope of the agency’s ancillary jurisdiction is the Communications
Amendments Act of 1982, Pub.L. No. 97–259, § 108, 96 Stat. 1087, 1091–92. As
part of the Communications Amendments Act of 1982, Congress authorized the
Commission to impose performance standards on household consumer electronics to
ensure that they can withstand radio interference. See 47 U.S.C. § 302a(a). The
legislative history of 47 U.S.C. § 302a demonstrates that this enactment was
intended by Congress to give the Commission authority it did not previously
possess over receiver equipment. . . . . Congress’s principal purpose in enacting 47
U.S.C. § 302a was clearly to expand the Commission’s authority beyond the scope
of its then-existing jurisdiction, which is inconsistent with the FCC’s current
view that it always has had sweeping jurisdiction over receiver apparatus under
Title I of the Communications Act.
III. CONCLUSION
The FCC argues that the Commission has
“discretion” to exercise “broad authority” over equipment used in connection with
radio and wire transmissions, “when the need arises, even if it has not
previously regulated in a particular area.” FCC Br. at 17. This is an
extraordinary proposition. “The [Commission’s] position in this case amounts to
the bare suggestion that it possesses plenary authority to act within a given
area simply because Congress has endowed it with some authority to act in that
area. We categorically reject that suggestion. Agencies owe their capacity to
act to the delegation of authority” from Congress. See Ry. Labor Executives’
Ass’n, 29 F.3d at 670. The FCC, like other federal agencies, “literally has no
power to act ... unless and until Congress confers power upon it.” La. Pub.
Serv. Comm’n v. FCC, 476 U.S. 355, 374, 106 S.Ct. 1890, 90 L.Ed.2d 369 (1986).
In this case, all relevant materials concerning the FCC’s
jurisdiction—including the words of the Communications Act of 1934, its
legislative history, subsequent legislation, relevant case law, and Commission
practice—confirm that the FCC has no authority to regulate consumer electronic
devices that can be used for receipt of wire or radio communication when those
devices are not engaged in the process of radio or wire transmission.
Because the Commission exceeded the scope of its
delegated authority, we grant the petition for review, and reverse and vacate
the Flag Order insofar as it requires demodulator products manufactured on or
after July 1, 2005 to recognize and give effect to the broadcast flag.
So ordered.
__________
Notes and Questions.
1. Can
you describe the jurisdictional issue in the case?
2.
Consider the way in which the court went about determining the
constraints on agency power to regulate.
Was this based strictly on statute, or did the court apply a judicially
elaborated “law” of agency jurisdiction?
Consider in that light the way that common law reasoning—the cultural
decision parameters of common law is overlaid on issues of statutory
construction and regulatory interpretation.
__________
If
the first reading helped the student understand the context in which social
tastes for administrative regulations arose, and if the second reading provided
a glimpse of the institutional context in which administrative regulation is
embedded, then the last of readings, Larry Catá Backer, Global Panopticism: States, Corporations and the Governance
Effects of Monitoring Regimes. Indiana Journal of Global Legal Studies, is meant to
suggest how administrative regulation can be naturalized within a social,
economic and political system so that it does not exist outside of the
activities it regulates but deeply within as part of those activities
themselves. More importantly, it suggests that the character of administrative
regulation is not always the same as statutes. That is, administrative regulations
have been developing a set of methodologies substantially broader than those of
statutes. While statutes still command action and set standards of behavior,
administrative regulations do not merely manage behavior within markets but
also set up systems of surveillance and assessment through which regulatory
goals can be internalized by the objects of regulations. This has one most
significant consequence―the costs of enforcement, that is the transaction costs
of implementing regulations decrease as the objects of regulation become their
own monitors.
Increasingly, public bodies
are requiring, or permitting, private entities to monitor and report on the
conduct and activities of a host of actors. It increasingly serves public
bodies as a substitute for lawmaking. Surveillance is a flexible engine. It can
be used to decide what sorts of facts constitute information, to determine what
sorts of information ought to be privileged and which do not matter, to gather
that information, to empower people or entities to gather information, and to
act on the information gathered. In its domestic form it can be used to assign
authority over certain types of information to private enterprises and then
hold those enterprises to account on the basis of the information gathered. In
its transnational form it can be used to construct a set of privileged
information that can be gathered and distributed voluntarily by private
entities on the basis of systems created and maintained by international public
or private organizations as an alternative to formal regulation and to provide
a means of harmonizing behavior without law. Surveillance in its various forms
provides a unifying technique with which governance can be effectuated across
the boundaries of power fractures without challenging formal regulatory power
or its limits. It avoids the barrier between the public and private spheres; it
substantially increases the regulatory palette of states without the
complications of the usual limitations of public formal lawmaking—especially
those of accountability and transparency.
The consequences of
surveillance, particularly those consequences on the shape of governance, are
to a great extent a function of the character of the surveillance power
elaborated. The principal effects will tend to promote a further convergence of
public and private regulatory power. This convergence arises from a fracturing
of traditional divisions of power. A sovereign is said to lose its character as
such when it “acts, not as regulator of a market, but in the manner of a
private player within it.” The reciprocal principle has not been accepted de
jure; a private actor is not said to lose its character as a private actor when
it acts in the manner of a sovereign. Still, private players now are required
to play the role of regulator and have sought that role for themselves de
facto. And, increasingly, public bodies are requiring, or permitting, private
entities to monitor and report on the conduct and activities of a host of
actors.
Surveillance, then, functions
as more than a descriptor of methodology. Surveillance is a new form of
lawmaking through which the old boundaries between the public and private,
national and transnational, are made irrelevant. The construction of complex
systems of conscious and permanent visibility, as both normative systems and
bundles of specific techniques, affects the power relationships among states,
economic entities, and individuals. It represents modalities of fractures and
complications in assertions of regulatory power, replicating its forms and
effects throughout society. Its privatization tends to complicate the
distinction between private and public institutions and between assertions of
private (market or personal welfare maximizing) and public (regulatory or stakeholder
welfare maximization). Surveillance cuts across borders—it embodies the
techniques and sensibilities of an essentially transnational response to
problems of governance.
To
understand the complexities and vectors of surveillance is to grasp the shape
of converging public/private governance in this century. To that end, the
article suggests an approach to the unbundling of the normative and
methodological assumptions of surveillance usefully divided into four aspects:
(1) normative, (2) informatics, (3) control, and (4) governance. The reading,
then, seeks to introduce the student to the transformation of surveillance from
a technique of governance (how regulations are effectuated) to a
regulation itself (the functional role of technique becomes the substance of
the measure without an intervening regulatory creation and adoption process)
(reading 1-12).
The
reading starts with a discussion of the normative role of surveillance, that
is, how it is that a technique of implementation can substitute for the form of
regulation, focusing on its sources and forms. Consider, for example “race.” A
regulation may require the monitoring a race in connection with some activity
(to further the objective of reducing the effects of racism in society). Race
can be viewed as “data” something that can be collected. But to get to the
point where “race” can be reduced to raw data that can be harvested and then
used in the enforcement of regulatory schemes, something “regulatory” happens
first―the collecting body has to determine the meaning of race. That
determination, of course, affects not merely the mechanics of collection but
has significant ramification for the targeted populations identified or missed
in decisions about what constitutes “race” and what does not. Where funds are
distributed by reference to race indicators, for example, inclusion or
exclusion can have significant effects on the way in which regulatory systems
operate and on the functional application of “law.” And the choices may
implicate substantially important social issues―how does one measure “whiteness”?
how does one determine hispanicity―race, ethnicity, markers? and so on. Beyond
issues of data identification, the process of data collection (who collects the
data and how it is collected) , and the process of evaluating the data (what is
important, how is it organized and to what purpose is that data managed to
conclusion) all affect the character of governmental responses and management
of those areas for which it has data gathering authority. Lastly the uses of
evaluation may have significant consequences for further regulation, judicial
construction of other regulations, statutes and common law and for managing
societal understanding of “facts” with political consequences.
The focus on surveillance adds
a layer of complexity to the idea of law. Until now, we have been thinking
about law in its traditional forms. That is law is understood as either a set
of consequences for taking an action (common law) or as commands designed to
manage activity (statute and regulation). Each provides a clear expression that
identifies conduct and declares the consequences of acting or failing to act in
the identified way. But with the advent of the regulatory state this form of
lawmaking also fails to appropriately respond to the needs for which regulation
arose. Where the object of regulation is the constant monitoring and management
of activity, a set of commands may not be sufficient to respond to threats to
the activity that is the subject of regulation. Regulations that are meant to
protect quality control, the integrity of markets, the discharges of
pollutants, or the market behaviors of individuals or entities may not be
adequately responsive is structured as a set of commands subject to enforcement
for violation.
Continuous
monitoring and correction may be what is required. But law is quite ineffective
as a tool for continuous monitoring and intervention, Either the law must
create structures through which the subject population monitors and corrects
itself or it must adapt its techniques to suit the objectives of constancy in
managing and controlling particular regulatory spaces (like markets). To that
end, the techniques of assessment and of monitoring appear to better serve the
regulating entity. But to invoke these forms of control is to move, and perhaps
move decisively, away from the carefully constructed and contained space within
which law acquires its character and legitimacy. Taken together, the
possibilities offered by the techniques of monitoring and assessment to
substitute for the traditional forms of command based regulation suggest that,
just as there is a continuum from statute to regulation, so a similar continuum
might exist between regulation and behavior controlling techniques that, though
not in the form of law, function like it. This movement may be
necessary both because of the nature of the object of regulation, and because
regulation may sometimes extend beyond the state.. More importantly, it provides an avenue for the
privatization of the regulatory function by shifting its enforcement to private
bodies, for example corporate boards of directors, accountants and lawyers
(corporate gatekeepers) who then are tasked with the gap filling and
ambiguity resolution functions traditionally exercised by courts.
But with the techniques of surveillance and
monitoring, the function of control may well overwhelm the form, of law. It is
to those issues that we turn to next.
IV. Problem
Regulations provide an important site for the
interaction of several law systems in the United States. It requires a sensitivity to the
methodologies of common law judicial approaches to interpretation, an reference
to statutes as the source of and the defining elements of constraints on
regulatory power, and the regulations themselves for the management of the
conduct described therein. The following problem is meant to suggest both the
complexities and intermeshing necessary in the approach to the interpretation
and application of regulations within the legal systems of the United States.
One
of the most difficult problems facing courts and individuals within the
administrative state is the extent to which administrative regulations have the
authority of law. While formally
approved regulations that conform to explicit statutory authority are easy to
accept as law, there are a number of instances in which administrative agencies
issue many distinct forms of decisions and rulings, whose legal status are more
in doubt. The issue is important because
the determination of the authority of these administrative decisions or rulings
may affect the rights of both administrative agencies and individuals seeking
to conform their behavior to law.
Problem. The Securities and
Exchange Commission issues “No Action Letters.” According to the SEC:
An individual or entity who is not certain
whether a particular product, service, or action would constitute a violation
of the federal securities law may request a "no-action" letter from
the SEC staff. Most no-action letters describe the request, analyze the
particular facts and circumstances involved, discuss applicable laws and rules,
and, if the staff grants the request for no action, concludes that the SEC
staff would not recommend that the Commission take enforcement action against
the requester based on the facts and representations described in the
individual's or entity's request. The SEC staff sometimes responds in the form
of an interpretive letter to requests for clarifications of certain rules and
regulations.
The no-action relief is limited to the requester
and the specific facts and circumstances set forth in the request. In addition,
the SEC staff reserves the right to change the positions reflected in prior
no-action letters.
Your client wants to know the legal effect of no
action letters. Do the following cases
help provide an answer?
__________
Chevron U.S.A.
V.
Natural Resources Defense Council. Inc.
Supreme Court of the United States
467 U.S. 837 (1984)
(footnotes omitted and renumbered)
JUSTICE STEVENS delivered the opinion of the
Court.
In the Clean Air Act Amendments of 1977, Pub.L.
95-95, 91 Stat. 685, Congress enacted certain requirements applicable [p840] to
States that had not achieved the national air quality standards established by
the Environmental Protection Agency (EPA) pursuant to earlier legislation. The
amended Clean Air Act required these "nonattainment" States to
establish a permit program regulating "new or modified major stationary
sources" of air pollution. Generally, a permit may not be issued for a new
or modified major stationary source unless several stringent conditions are
met. The EPA regulation
promulgated to implement this permit requirement allows a State to adopt a
plant-wide definition of the term "stationary source." Under this definition, an
existing plant that contains several pollution-emitting devices may install or
modify one piece of equipment without meeting the permit conditions if the
alteration will not increase the total emissions from the plant. The question
presented by these cases is whether EPA's decision to allow States to treat all
of the pollution-emitting devices within the same industrial grouping as though
they were encased within a single "bubble" is based on a reasonable
construction of the statutory term "stationary source."
I
The EPA regulations containing the plantwide
definition of the term stationary source were promulgated on October [p841] 14,
1981. 46 Fed.Reg. 50766. Respondents filed a timely petition
for review in the United States Court of Appeals for the District of Columbia
Circuit pursuant to 42 U.S.C. § 7607(b)(1). The Court of Appeals set aside the
regulations. Natural Resources Defense Council, Inc. v. Gorsuch, 222
U.S.App.D.C. 268, 685 F.2d 718 (1982).
The court observed that the relevant part of the
amended Clean Air Act "does not explicitly define what Congress envisioned
as a ‘stationary source, to which the permit program . . . should apply,"
and further stated that the precise issue was not "squarely addressed in
the legislative history." Id. at 273, 685 F.2d at 723. In light of its
conclusion that the legislative history bearing on the question was "at
best contradictory," it reasoned that "the purposes of the
nonattainment program should guide our decision here." Id. at 276, n. 39,
685 F.2d at 726, n. 39. Based on two of its precedents concerning the applicability
of the bubble concept to certain Clean Air Act programs, the court stated that
the bubble concept was "mandatory" in programs designed merely to
maintain existing air quality, but held that it was "inappropriate"
in programs enacted to improve air quality. Id. at 276, 685 F.2d at 726. Since
the purpose of the permit [p842] program its "raison d'etre," in the
court's view -- was to improve air quality, the court held that the bubble
concept was inapplicable in these cases under its prior precedents. Ibid. It
therefore set aside the regulations embodying the bubble concept as contrary to
law. We granted certiorari to review that judgment, 461 U.S. 956 (1983), and we
now reverse.
The basic legal error of the Court of Appeals
was to adopt a static judicial definition of the term "stationary
source" when it had decided that Congress itself had not commanded that
definition. Respondents do not defend the legal reasoning of the Court of
Appeals. Nevertheless, since this Court reviews judgments, not opinions, we
must determine whether the Court of Appeals' legal error resulted in an
erroneous judgment on the validity of the regulations.
II
When a court reviews an agency's construction of
the statute which it administers, it is confronted with two questions. First,
always, is the question whether Congress has directly spoken to the precise
question at issue. If the intent of Congress is clear, that is the end of the
matter; for the court, [p843] as well as the agency, must give effect to the
unambiguously expressed intent of Congress. If, however, the court
determines Congress has not directly addressed the precise question at issue,
the court does not simply impose its own construction on the statute, as would
be necessary in the absence of an administrative interpretation. Rather, if the
statute is silent or ambiguous with respect to the specific issue, the question
for the court is whether the agency's answer is based on a permissible
construction of the statute.
The power of an administrative agency to
administer a congressionally created . . . program necessarily requires the
formulation of policy and the making of rules to fill any gap left, implicitly
or explicitly, by Congress.
Morton v. Ruiz, 415 U.S. 199, 231 (1974). If
Congress has explicitly left a gap for the agency to fill, there is an express
delegation [p844] of authority to the agency to elucidate a specific provision
of the statute by regulation. Such legislative regulations are given
controlling weight unless they are arbitrary, capricious, or manifestly
contrary to the statute. Sometimes the legislative delegation to an agency on a
particular question is implicit, rather than explicit. In such a case, a court
may not substitute its own construction of a statutory provision for a
reasonable interpretation made by the administrator of an agency.
We have long recognized that considerable weight
should be accorded to an executive department's construction of a statutory
scheme it is entrusted to administer, and the principle of deference to
administrative interpretations
has been consistently followed by this Court
whenever decision as to the meaning or reach of a statute has involved
reconciling conflicting policies, and a full understanding of the force of the
statutory policy in the given situation has depended upon more than ordinary
knowledge respecting the matters subjected to agency regulations. See, e.g.,
National Broadcasting Co. v. United States, 319 U.S. 190; Labor Board v. Hearst
Publications, Inc., 322 U.S. 111; Republic Aviation Corp. v. [ 467 U.S. 845] Labor
Board, 324 U.S. 793; Securities & Exchange Comm'n v. Chenery Corp., 332
U.S. 194; Labor Board v. Seven-Up Bottling Co., 344 U.S. 344.
. . . If this choice represents a reasonable
accommodation of conflicting policies that were committed to the agency's care
by the statute, we should not disturb it unless it appears from the statute or
its legislative history that the accommodation is not one that Congress would
have sanctioned.
United States v. Shimer, 367 U.S. 374, 382, 383
(1961). Accord, Capital Cities Cable, Inc. v. Crisp, ante at 699-700.
In light of these well-settled principles, it is
clear that the Court of Appeals misconceived the nature of its role in
reviewing the regulations at issue. Once it determined, after its own examination
of the legislation, that Congress did not actually have an intent regarding the
applicability of the bubble concept to the permit program, the question before
it was not whether, in its view, the concept is "inappropriate" in
the general context of a program designed to improve air quality, but whether
the Administrator's view that it is appropriate in the context of this
particular program is a reasonable one. Based on the examination of the
legislation and its history which follows, we agree with the Court of Appeals
that Congress did not have a specific intention on the applicability of the
bubble concept in these cases, and conclude that the EPA's use of that concept
here is a reasonable policy choice for the agency to make.
III
In the 1950's and the 1960's, Congress enacted a
series of statutes designed to encourage and to assist the States in curtailing
air pollution. See generally Train v. Natural Resources Defense Council, Inc.,
421 U.S. 60, 63-64 (1975). The Clean Air Amendments of 1970, Pub.L. 91-604, 84
Stat. 1676, "sharply increased federal authority and responsibility [p846]
in the continuing effort to combat air pollution," 421 U.S. at 64, but
continued to assign "primary responsibility for assuring air quality"
to the several States, 84 Stat. 1678. Section 109 of the 1970 Amendments
directed the EPA to promulgate National Ambient Air Quality Standards (NAAQS's) and § 110 directed the
States to develop plans (SIP's) to implement the standards within specified
deadlines. In addition, § 111 provided that major new sources of pollution
would be required to conform to technology-based performance standards; the EPA
was directed to publish a list of categories of sources of pollution and to
establish new source performance standards (NSPS) for each. Section 111(e)
prohibited the operation of any new source in violation of a performance
standard.
Section 111(a) defined the terms that are to be
used in setting and enforcing standards of performance for new stationary
sources. It provided:
For purposes of this section:
* * * *
(3) The term "stationary source" means
any building, structure, facility, or installation which emits or may emit any
air pollutant.
84 Stat. 1683. In the 1970 Amendments, that
definition was not only applicable to the NSPS program required by § 111, but
also was made applicable to a requirement of § 110 that each state
implementation plan contain a procedure for reviewing the location of any
proposed new source and preventing its construction if it would preclude the attainment
or maintenance of national air quality standards.
In due course, the EPA promulgated NAAQS's,
approved SIP's, and adopted detailed regulations governing NSPS's [p847] for
various categories of equipment. In one of its programs, the EPA used a plantwide
definition of the term "stationary source." In 1974, it issued NSPS's
for the nonferrous smelting industry that provided that the standards would not
apply to the modification of major smelting units if their increased emissions
were offset by reductions in other portions of the same plant.
Nonattainment
The 1970 legislation provided for the attainment
of primary NAAQS's by 1975. In many areas of the country, particularly the most
industrialized States, the statutory goals were not attained. In 1976, the 94th
Congress was confronted with this fundamental problem, as well as many others
respecting pollution control. As always in this area, the legislative struggle
was basically between interests seeking strict schemes to reduce pollution
rapidly to eliminate its social costs and interests advancing the economic
concern that strict schemes would retard industrial development with attendant
social costs. The 94th Congress, confronting these competing interests, was
unable to agree on what response was in the public interest: legislative
proposals to deal with nonattainment failed to command the necessary consensus.
In light of this situation, the EPA published an
Emissions Offset Interpretative Ruling in December, 1976, see 41 Fed.Reg.
55524, to "fill the gap," as respondents put it, until Congress
acted. The Ruling stated that it was intended to [p848] address
the issue of whether and to what extent national
air quality standards established under the Clean Air Act may restrict or
prohibit growth of major new or expanded stationary air pollution sources.
Id. at 55524-55525. In general, the Ruling
provided that
a major new source may locate in an area with
air quality worse than a national standard only if stringent conditions can be
met.
Id. at 55525. The Ruling gave primary emphasis
to the rapid attainment of the statute's environmental goals. [n20] Consistent
with that emphasis, the construction of every new source in nonattainment areas
had to meet the "lowest achievable emission rate" under the current
state of the art for that type of facility. See Ibid. The 1976 Ruling did not,
however, explicitly adopt or reject the "bubble concept."
IV
The Clean Air Act Amendments of 1977 are a
lengthy, detailed, technical, complex, and comprehensive response to a major
social issue. A small portion of the statute -- 91 Stat. 745-751 (Part D of
Title I of the amended Act, 42 U.S.C. §§ 7501-7508) -- expressly deals with
nonattainment areas. The focal point of this controversy is one phrase in that
portion of the Amendments.
Basically, the statute required each State in a
nonattainment area to prepare and obtain approval of a new SIP by July 1, 1979.
In the interim, those States were required to comply with the EPA's
interpretative Ruling of December 21, 1976. 91 Stat. 745. The deadline for
attainment of the primary NAAQS's was extended until December 31, 1982, and in
some cases until December 31, 1987, but the SIP's were required to contain a
number of provisions designed to achieve the goals as expeditiously as
possible.
Most significantly for our purposes, the statute
provided that each plan shall
(6) require permits for the construction and
operation of new or modified major stationary sources in accordance with
section 173. . . .
Id. at 747. Before issuing a permit, § 173
requires (1) the state agency to determine that there will be sufficient
emissions reductions in the region to offset the emissions from the new source
and also to allow for reasonable further progress toward attainment, or that the
increased emissions will not exceed an allowance for growth established
pursuant to § 172(b)(5); (2) the applicant to certify that his other sources in
the State are in compliance with the SIP, (3) the agency to determine that the
applicable SIP is otherwise being implemented, and (4) the proposed source to
comply with the lowest achievable emission rate (LAER).
The 1977 Amendments contain no specific
reference to the "bubble concept." Nor do they contain a specific
definition of the term "stationary source," though they did not
disturb the definition of "stationary source" contained in §
111(a)(3), applicable by the terms of the Act to the NSPS program. Section
302(j), however, defines the term "major stationary source" as follows:
(j) Except as otherwise expressly provided, the
terms "major stationary source" and "major emitting
facility" mean any stationary facility or source of air pollutants which
directly emits, or has the potential to emit, one hundred tons per year or more
of any air pollutant (including any major emitting facility or source of
fugitive emissions of any such pollutant, as determined by rule by the
Administrator).
91 Stat. 770.
V
The legislative history of the portion of the
1977 Amendments dealing with nonattainment areas does not contain any specific
comment on the "bubble concept" or the question whether a plantwide
definition of a stationary source is permissible under the permit program. It
does, however, plainly disclose that in the permit program Congress sought to
accommodate the conflict between the economic interest in permitting capital
improvements to continue and the environmental interest in improving air
quality.
* * * * * *
VI
As previously noted, prior to the 1977
Amendments, the EPA had adhered to a plantwide definition of the term
"source" under a NSPS program. After adoption of the 1977 Amendments,
proposals for a plantwide definition were considered in at least three formal
proceedings.
In January, 1979, the EPA considered the
question whether the same restriction on new construction in nonattainment
areas that had been included in its December, 1976, Ruling [p854] should be
required in the revised SIP's that were scheduled to go into effect in July,
1979. After noting that the 1976 Ruling was ambiguous on the question
"whether a plant with a number of different processes and emission points
would be considered a single source," 44 Fed.Reg. 3276 (1979), the EPA, in
effect, provided a bifurcated answer to that question. In those areas that did
not have a revised SIP in effect by July, 1979, the EPA rejected the plantwide
definition; on the other hand, it expressly concluded that the plantwide
approach would be permissible in certain circumstances if authorized by an
approved SIP. It stated:
Where a state implementation plan is revised and
implemented to satisfy the requirements of Part D, including the reasonable
further progress requirement, the plan requirements for major modifications may
exempt modifications of existing facilities that are accompanied by intrasource
offsets, so that there is no net increase in emissions. The agency endorses
such exemptions, which would provide greater flexibility to sources to
effectively manage their air emissions at least cost.
Ibid.
In April, and again in September, 1979, the EPA
published additional comments in which it indicated that revised SIP's could
adopt the plantwide definition of source in nonattainment areas in certain
circumstances. See id. at 20372, 20379, 51924, 51951, 51958. On the latter
occasion, the EPA made a formal rulemaking proposal that would have permitted
the use of the "bubble concept" for new installations within a plant
as well as for modifications of existing units.
* * * * *
The EPA's summary of its proposed Ruling
discloses a flexible, rather than rigid, definition of the term
"source" to implement various policies and programs:
In summary, EPA is proposing two different ways
to define source for different kinds of NSR programs. . . .
* * * * * *
In August, 1980, however, the EPA adopted a
regulation that, in essence, applied the basic reasoning of the Court of
Appeals in these cases. The EPA took particular note of the two then-recent
Court of Appeals decisions, which had created the bright-line rule that the
"bubble concept" should be employed in a program designed to maintain
air quality, but not in one designed to enhance air quality. Relying heavily on
those cases, [n29] EPA adopted a dual definition of "source" for
nonattainment areas that required a permit whenever a change in either the
entire plant, or one of its components, would result in a significant increase
in emissions even if the increase was completely offset by reductions elsewhere
in the plant. The EPA expressed the opinion that this interpretation was
"more consistent with congressional intent" than the plantwide
definition because it "would bring in more sources or modifications for
review," 45 Fed.Reg. 52697 (1980), but its primary legal analysis was
predicated on the two Court of Appeals decisions.
In 1981, a new administration took office and
initiated a "Government-wide reexamination of regulatory burdens and
complexities." 46 Fed.Reg. 16281. In the context of that [p858] review,
the EPA reevaluated the various arguments that had been advanced in connection
with the proper definition of the term "source" and concluded that
the term should be given the same definition in both nonattainment areas and
PSD areas.
In explaining its conclusion, the EPA first
noted that the definitional issue was not squarely addressed in either the
statute or its legislative history, and therefore that the issue involved an
agency "judgment as how to best carry out the Act." Ibid. It then set
forth several reasons for concluding that the plantwide definition was more
appropriate. It pointed out that the dual definition "can act as a
disincentive to new investment and modernization by discouraging modifications
to existing facilities" and
can actually retard progress in air pollution
control by discouraging replacement of older, dirtier processes or pieces of
equipment with new, cleaner ones.
Ibid. Moreover, the new definition
would simplify EPA's rules by using the same
definition of "source" for PSD, nonattainment new source review, and
the construction moratorium. This reduces confusion and inconsistency.
Ibid. Finally, the agency explained that
additional requirements that remained in place would accomplish the fundamental
purposes of achieving attainment with NAAQS's as expeditiously as possible.
[n30] These conclusions were expressed [p859] in a proposed rulemaking in
August, 1981, that was formally promulgated in October. See id. at 50766.
VII
In this Court, respondents expressly reject the
basic rationale of the Court of Appeals' decision. That court viewed the
statutory definition of the term "source" as sufficiently flexible to
cover either a plantwide definition, a narrower definition covering each unit
within a plant, or a dual definition that could apply to both the entire
"bubble" and its components. It interpreted the policies of the
statute, however, to mandate the plantwide definition in programs designed to
maintain clean air and to forbid it in programs designed to improve air
quality. Respondents place a fundamentally different construction on the
statute. They contend that the text of the Act requires the EPA to use a dual
definition -- if either a component of a plant, or the plant as a whole, emits
over 100 tons of pollutant, it is a major stationary source. They thus contend
that the EPA rules adopted in 1980, insofar as they apply to the maintenance of
the quality of clean air, as well as the 1981 rules which apply to
nonattainment areas, violate the statute. [n31]
Statutory Language
The definition of the term "stationary
source" in § 111(a)(3) refers to "any building, structure, facility,
or installation" which emits air pollution. See supra at 846. This definition
is applicable only to the NSPS program by the express terms of the statute; the
text of the statute does not make this definition [p860] applicable to the
permit program. Petitioners therefore maintain that there is no statutory
language even relevant to ascertaining the meaning of stationary source in the
permit program aside from § 302(j), which defines the term "major
stationary source." See supra at 851. We disagree with petitioners on this
point.
The definition in § 302(j) tells us what the
word "major" means -- a source must emit at least 100 tons of
pollution to qualify -- but it sheds virtually no light on the meaning of the
term "stationary source." It does equate a source with a facility --
a "major emitting facility" and a "major stationary source"
are synonymous under § 302(j). The ordinary meaning of the term
"facility" is some collection of integrated elements which has been
designed and constructed to achieve some purpose. Moreover, it is certainly no
affront to common English usage to take a reference to a major facility or a
major source to connote an entire plant, as opposed to its constituent parts.
Basically, however, the language of § 302(j) simply does not compel any given
interpretation of the term "source."
Respondents recognize that, and hence point to §
111(a)(3). Although the definition in that section is not literally applicable
to the permit program, it sheds as much light on the meaning of the word
"source" as anything in the statute. [n32] As respondents point out,
use of the words "building, structure, facility, or installation," as
the definition of source, could be read to impose the permit conditions on an
individual building that is a part of a plant. [n33] A "word may have a
character of its own not to be submerged by its association." Russell
Motor Car Co. v. United States, 261 U.S. 514, 519 [p861] (1923). On the other
hand, the meaning of a word must be ascertained in the context of achieving
particular objectives, and the words associated with it may indicate that the
true meaning of the series is to convey a common idea. The language may
reasonably be interpreted to impose the requirement on any discrete, but
integrated, operation which pollutes. This gives meaning to all of the terms --
a single building, not part of a larger operation, would be covered if it emits
more than 100 tons of pollution, as would any facility, structure, or
installation. Indeed, the language itself implies a "bubble concept"
of sorts: each enumerated item would seem to be treated as if it were encased
in a bubble. While respondents insist that each of these terms must be given a
discrete meaning, they also argue that § 111(a)(3) defines "source"
as that term is used in § 302(j). The latter section, however, equates a source
with a facility, whereas the former defines "source" as a facility,
among other items.
We are not persuaded that parsing of general
terms in the text of the statute will reveal an actual intent of Congress.
[n34] [p862] We know full well that this language is not dispositive; the terms
are overlapping, and the language is not precisely directed to the question of
the applicability of a given term in the context of a larger operation. To the
extent any congressional "intent" can be discerned from this language,
it would appear that the listing of overlapping, illustrative terms was
intended to enlarge, rather than to confine, the scope of the agency's power to
regulate particular sources in order to effectuate the policies of the Act.
Legislative History
In addition, respondents argue that the
legislative history and policies of the Act foreclose the plantwide definition,
and that the EPA's interpretation is not entitled to deference, because it
represents a sharp break with prior interpretations of the Act.
Based on our examination of the legislative
history, we agree with the Court of Appeals that it is unilluminating. The
general remarks pointed to by respondents "were obviously not made with
this narrow issue in mind, and they cannot be said to demonstrate a Congressional
desire. . . ." Jewell Ridge Coal Corp. v. Mine Workers, 325 U.S. 161,
168-169 (1945). Respondents' argument based on the legislative history relies
heavily on Senator Muskie's observation that a new source is subject to the
LAER requirement. [n35] But the full statement is ambiguous, and, like the text
of § 173 itself, this comment does not tell us what a new source is, much less
that it is to have an inflexible definition. We find that the legislative
history as a whole is silent on the precise issue before us. It is, however,
consistent with the view that the EPA should have broad discretion in
implementing the policies of the 1977 Amendments. [p863]
More importantly, that history plainly
identifies the policy concerns that motivated the enactment; the plantwide
definition is fully consistent with one of those concerns -- the allowance of
reasonable economic growth -- and, whether or not we believe it most
effectively implements the other, we must recognize that the EPA has advanced a
reasonable explanation for its conclusion that the regulations serve the
environmental objectives as well. See supra at 857-859, and n. 29; see also
supra at 855, n. 27. Indeed, its reasoning is supported by the public record
developed in the rulemaking process, [n36] as well as by certain private
studies. [n37]
Our review of the EPA's varying interpretations
of the word "source" -- both before and after the 1977 Amendments --
convinces us that the agency primarily responsible for administering this
important legislation has consistently interpreted it flexibly -- not in a
sterile textual vacuum, but in the context of implementing policy decisions in
a technical and complex arena. The fact that the agency has from time to time
changed its interpretation of the term "source" does not, as
respondents argue, lead us to conclude that no deference should be accorded the
agency's interpretation of the statute. An initial agency interpretation is not
instantly carved in stone. On the contrary, the agency, to engage in informed
rulemaking, must consider varying interpretations [p864] and the wisdom of its
policy on a continuing basis. Moreover, the fact that the agency has adopted
different definitions in different contexts adds force to the argument that the
definition itself is flexible, particularly since Congress has never indicated
any disapproval of a flexible reading of the statute.
Significantly, it was not the agency in 1980,
but rather the Court of Appeals that read the statute inflexibly to command a
plantwide definition for programs designed to maintain clean air and to forbid
such a definition for programs designed to improve air quality. The distinction
the court drew may well be a sensible one, but our labored review of the
problem has surely disclosed that it is not a distinction that Congress ever
articulated itself, or one that the EPA found in the statute before the courts
began to review the legislative work product. We conclude that it was the Court
of Appeals, rather than Congress or any of the decisionmakers who are
authorized by Congress to administer this legislation, that was primarily
responsible for the 1980 position taken by the agency.
Policy
The arguments over policy that are advanced in
the parties' briefs create the impression that respondents are now waging in a
judicial forum a specific policy battle which they ultimately lost in the
agency and in the 32 jurisdictions opting for the "bubble concept,"
but one which was never waged in the Congress. Such policy arguments are more
properly addressed to legislators or administrators, not to judges. [n38]
[p865]
In these cases, the Administrator's
interpretation represents a reasonable accommodation of manifestly competing
interests, and is entitled to deference: the regulatory scheme is technical and
complex, [n39] the agency considered the matter in a detailed and reasoned
fashion, [n40] and the decision involves reconciling conflicting policies.
[n41] Congress intended to accommodate both interests, but did not do so itself
on the level of specificity presented by these cases. Perhaps that body
consciously desired the Administrator to strike the balance at this level,
thinking that those with great expertise and charged with responsibility for
administering the provision would be in a better position to do so; perhaps it
simply did not consider the question at this level; and perhaps Congress was
unable to forge a coalition on either side of the question, and those on each
side decided to take their chances with the scheme devised by the agency. For judicial
purposes, it matters not which of these things occurred.
Judges are not experts in the field, and are not
part of either political branch of the Government. Courts must, in some cases,
reconcile competing political interests, but not on the basis of the judges'
personal policy preferences. In contrast, an agency to which Congress has
delegated policymaking responsibilities may, within the limits of that
delegation, properly rely upon the incumbent administration's views of wise
policy to inform its judgments. While agencies are not directly accountable to
the people, the Chief Executive is, and it is entirely appropriate for this
political branch of the Government to make such policy choices -- resolving the
competing interests which Congress itself either inadvertently did not resolve,
or intentionally left to be resolved by the [p866] agency charged with the
administration of the statute in light of everyday realities.
When a challenge to an agency construction of a
statutory provision, fairly conceptualized, really centers on the wisdom of the
agency's policy, rather than whether it is a reasonable choice within a gap
left open by Congress, the challenge must fail. In such a case, federal judges
-- who have no constituency -- have a duty to respect legitimate policy choices
made by those who do. The responsibilities for assessing the wisdom of such
policy choices and resolving the struggle between competing views of the public
interest are not judicial ones: "Our Constitution vests such
responsibilities in the political branches." TVA v. Hill, 437 U.S. 153,
195 (1978).
We hold that the EPA's definition of the term
"source" is a permissible construction of the statute which seeks to
accommodate progress in reducing air pollution with economic growth.
The Regulations which the Administrator has
adopted provide what the agency could allowably view as . . . [an] effective
reconciliation of these twofold ends. . . .
United States v. Shimer, 367 U.S. at 383.
The judgment of the Court of Appeals is
reversed.
It is so ordered.
JUSTICE MARSHALL and JUSTICE REHNQUIST took no
part in the consideration or decision of these cases.
JUSTICE O'CONNOR took no part in the decision of
these cases.
__________
UNITED STATES
v.
MEAD CORP.
Supreme Court of the United States
533 U.S. 218 (2001)
on writ of certiorari to the united states court
of appeals for the federal circuit
(footnotes omitted and renumbered)
Justice Souter delivered the opinion of the
Court.
The question is whether a tariff classification
ruling by the United States Customs Service deserves judicial deference. The
Federal Circuit rejected Customs’s invocation of Chevron U. S. A. Inc. v.
Natural Resources Defense Council, Inc., 467 U. S. 837 (1984) , in support of
such a ruling, to which it gave no deference. We agree that a tariff
classification has no claim to judicial deference under Chevron, there being no
indication that Congress intended such a ruling to carry the force of law, but
we hold that under Skidmore v. Swift & Co., 323 U. S. 134 (1944), the
ruling is eligible to claim respect according to its persuasiveness.
I
A
Imports are taxed under the Harmonized Tariff
Schedule of the United States (HTSUS), 19 U. S. C. §1202. Title 19 U. S. C.
§1500(b) provides that Customs “shall, under rules and regulations prescribed
by the Secretary [of the Treasury] … fix the final classification and rate of
duty applicable to … merchandise” under the HTSUS. Section 1502(a) provides
that
“[t]he Secretary of the Treasury shall establish
and promulgate such rules and regulations not inconsistent with the law
(including regulations establishing procedures for the issuance of binding
rulings prior to the entry of the merchandise concerned), and may disseminate
such information as may be necessary to secure a just, impartial, and uniform
appraisement of imported merchandise and the classification and assessment of
duties thereon at the various ports of entry.”
See also §1624 (general delegation to Secretary
to issue rules and regulations for the admission of goods).
The Secretary provides for tariff rulings before
the entry of goods by regulations authorizing “ruling letters” setting tariff
classifications for particular imports. 19 CFR §177.8 (2000). A ruling letter
“represents the official position of the Customs
Service with respect to the particular transaction or issue described therein
and is binding on all Customs Service personnel in accordance with the provisions
of this section until modified or revoked. In the absence of a change of
practice or other modification or revocation which affects the principle of the
ruling set forth in the ruling letter, that principle may be cited as authority
in the disposition of transactions involving the same circumstances.”
§177.9(a).
After the transaction that gives it birth, a
ruling letter is to “be applied only with respect to transactions involving
articles identical to the sample submitted with the ruling request or to
articles whose description is identical to the description set forth in the
ruling letter.” §177.9(b)(2). As a general matter, such a letter is “subject to
modification or revocation without notice to any person, except the person to
whom the letter was addressed,” §177.9(c), and the regulations consequently
provide that “no other person should rely on the ruling letter or assume that
the principles of that ruling will be applied in connection with any
transaction other than the one described in the letter,” ibid . Since ruling
letters respond to transactions of the moment, they are not subject to notice
and comment before being issued, may be published but need only be made
“available for public inspection,” 19 U. S. C. §1625(a), and, at the time this
action arose, could be modified without notice and comment under most
circumstances, 19 CFR §177.10(c) (2000).
A broader notice-and-comment requirement for modification of prior
rulings was added by statute in 1993, Pub. L. 103–182 §623, 107Stat. 2186,
codified at 19 U. S. C. §1625(c), and took effect after this case arose.
Any of the 46 4 port-of-entry 5 Customs offices
may issue ruling letters, and so may the Customs Headquarters Office, in
providing “[a]dvice or guidance as to the interpretation or proper application
of the Customs and related laws with respect to a specific Customs transaction
[which] may be requested by Customs Service field offices … at any time,
whether the transaction is prospective, current, or completed,” 19 CFR
§177.11(a) (2000). Most ruling letters contain little or no reasoning, but
simply describe goods and state the appropriate category and tariff. A few
letters, like the Headquarters ruling at issue here, set out a rationale in
some detail.
B
Respondent, the Mead Corporation, imports “day
planners,” three-ring binders with pages having room for notes of daily
schedules and phone numbers and addresses, together with a calendar and
suchlike. The tariff schedule on point falls under the HTSUS heading for
“[r]egisters, account books, notebooks, order books, receipt books, letter
pads, memorandum pads, diaries and similar articles,” HTSUS subheading 4820.10,
which comprises two subcategories. Items in the first, “[d]iaries, notebooks
and address books, bound; memorandum pads, letter pads and similar articles,”
were subject to a tariff of 4.0% at the time in controversy. 185 F. 3d 1304,
1305 (CA Fed. 1999) (citing subheading 4820.10.20); see also App. to Pet. for
Cert. 46a. Objects in the second, covering “[o]ther” items, were free of duty.
HTSUS subheading 4820.10.40; see also App. to Pet. for Cert. 46a.
Between 1989 and 1993, Customs repeatedly
treated day planners under the “other” HTSUS subheading. In January 1993,
however, Customs changed its position, and issued a Headquarters ruling letter
classifying Mead’s day planners as “Diaries …, bound” subject to tariff under
subheading 4820.10.20. That letter was short on explanation, App. to Brief in
Opposition 4a–6a, but after Mead’s protest, Customs Headquarters issued a new
letter, carefully reasoned but never published, reaching the same conclusion,
App. to Pet. for Cert. 28a–47a. This letter considered two definitions of
“diary” from the Oxford English Dictionary, the first covering a daily journal
of the past day’s events, the second a book including “ ‘printed dates for
daily memoranda and jottings; also … calendars … .’ ” Id., at 33a–34a (quoting
Oxford English Dictionary 321 (Compact ed. 1982)). Customs concluded that
“diary” was not confined to the first, in part because the broader definition
reflects commercial usage and hence the “commercial identity of these items in
the marketplace.” App. to Pet. for Cert. 34a. As for the definition of “bound,”
Customs concluded that HTSUS was not referring to “bookbinding,” but to a less
exact sort of fastening described in the Harmonized Commodity Description and
Coding System Explanatory Notes to Heading 4820, which spoke of binding by “
‘reinforcements or fittings of metal, plastics, etc.’ ” Id., at 45a.
Customs rejected Mead’s further protest of the
second Headquarters ruling letter, and Mead filed suit in the Court of
International Trade (CIT). The CIT granted the Government’s motion for summary
judgment, adopting Customs’s reasoning without saying anything about deference.
17 F. Supp. 2d 1004 (1998).
Mead then went to the United States Court of
Appeals for the Federal Circuit. While the case was pending there this Court
decided United States v. Haggar Apparel Co., 526 U. S. 380 (1999) , holding
that Customs regulations receive the deference described in Chevron U. S. A.
Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984) . The
appeals court requested briefing on the impact of Haggar , and the Government
argued that classification rulings, like Customs regulations, deserve Chevron
deference.
The Federal Circuit, however, reversed the CIT
and held that Customs classification rulings should not get Chevron deference,
owing to differences from the regulations at issue in Haggar . Rulings are not
preceded by notice and comment as under the Administrative Procedure Act (APA),
5 U. S. C. §553, they “do not carry the force of law and are not, like
regulations, intended to clarify the rights and obligations of importers beyond
the specific case under review.” 185 F. 3d, at 1307. The appeals court thought
classification rulings had a weaker Chevron claim even than Internal Revenue
Service interpretive rulings, to which that court gives no deference; unlike
rulings by the IRS, Customs rulings issue from many locations and need not be
published. 185 F. 3d, at 1307–1308.
The Court of Appeals accordingly gave no
deference at all to the ruling classifying the Mead day planners and rejected
the agency’s reasoning as to both “diary” and “bound.” It thought that planners
were not diaries because they had no space for “relatively extensive notations
about events, observations, feelings, or thoughts” in the past. Id., at 1310.
And it concluded that diaries “bound” in subheading 4810.10.20 presupposed
“unbound” diaries, such that treating ring-fastened diaries as “bound” would
leave the “unbound diary” an empty category. Id., at 1311.
We granted certiorari, 530 U. S. 1202 (2000) ,
in order to consider the limits of Chevron deference owed to administrative
practice in applying a statute. We hold that administrative implementation of a
particular statutory provision qualifies for Chevron deference when it appears
that Congress delegated authority to the agency generally to make rules
carrying the force of law, and that the agency interpretation claiming
deference was promulgated in the exercise of that authority. Delegation of such
authority may be shown in a variety of ways, as by an agency’s power to engage
in adjudication or notice-and-comment rulemaking, or by some other indication
of a comparable congressional intent. The Customs ruling at issue here fails to
qualify, although the possibility that it deserves some deference under
Skidmore leads us to vacate and remand.
II
A
When Congress has “explicitly left a gap for an
agency to fill, there is an express delegation of authority to the agency to
elucidate a specific provision of the statute by regulation,” Chevron , 467 U.
S., at 843–844, and any ensuing regulation is binding in the courts unless
procedurally defective, arbitrary or capricious in substance, or manifestly
contrary to the statute. 6 See id ., at 844; United States v. Morton, 467 U. S.
822, 834 (1984) ; APA, 5 U. S. C. §§706(2)(A), (D). But whether or not they
enjoy any express delegation of authority on a particular question, agencies
charged with applying a statute necessarily make all sorts of interpretive
choices, and while not all of those choices bind judges to follow them, they
certainly may influence courts facing questions the agencies have already
answered. “[T]he well-reasoned views of the agencies implementing a statute
‘constitute a body of experience and informed judgment to which courts and
litigants may properly resort for guidance,’ ” Bragdon v. Abbott, 524 U. S.
624, 642 (1998) (quoting Skidmore, 323 U. S., at 139–140), and “[w]e have long
recognized that considerable weight should be accorded to an executive
department’s construction of a statutory scheme it is entrusted to administer …
.” Chevron, supra, at 844 (footnote omitted); see also Ford Motor Credit Co. v.
Milhollin, 444 U. S. 555, 565 (1980) ; Zenith Radio Corp. v. United States, 437
U. S. 443, 450 (1978) . The fair measure of deference to an agency
administering its own statute has been understood to vary with circumstances,
and courts have looked to the degree of the agency’s care, its consistency, formality, and relative expertness, and to the persuasiveness
of the agency’s position, see Skidmore, supra , at 139–140. The approach has
produced a spectrum of judicial responses, from great respect at one end, see,
e.g., Aluminum Co. of America v. Central Lincoln Peoples’ Util. Dist., 467 U.
S. 380, 389–390 (1984) (“ ‘substantial deference’ ” to administrative
construction), to near indifference at the other, see, e.g., Bowen v.
Georgetown Univ. Hospital, 488 U. S. 204, 212–213 (1988) (interpretation
advanced for the first time in a litigation brief). Justice Jackson summed
things up in Skidmore v. Swift & Co.:
“The weight [accorded to an administrative]
judgment in a particular case will depend upon the thoroughness evident in its
consideration, the validity of its reasoning, its consistency with earlier and
later pronouncements, and all those factors which give it power to persuade, if
lacking power to control.” 323 U. S., at 140.
Since 1984, we have identified a category of
interpretive choices distinguished by an additional reason for judicial
deference. This Court in Chevron recognized that Congress not only engages in
express delegation of specific interpretive authority, but that “[s]ometimes
the legislative delegation to an agency on a particular question is implicit.”
467 U. S., at 844. Congress, that is, may not have expressly delegated
authority or responsibility to implement a particular provision or fill a
particular gap. Yet it can still be apparent from the agency’s generally
conferred authority and other statutory circumstances that Congress would
expect the agency to be able to speak with the force of law when it addresses
ambiguity in the statute or fills a space in the enacted law, even one about
which “Congress did not actually have an intent” as to a particular result.
Id., at 845. When circumstances implying such an expectation exist, a reviewing
court has no business rejecting an agency’s exercise of its generally conferred
authority to resolve a particular statutory ambiguity simply because the
agency’s chosen resolution seems unwise, see id., at 845–846, but is obliged to
accept the agency’s position if Congress has not previously spoken to the point
at issue and the agency’s interpretation is reasonable, see id., at 842–845;
cf. 5 U. S. C. §706(2) (a reviewing court shall set aside agency action,
findings, and conclusions found to be “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law”).
We have recognized a very good indicator of
delegation meriting Chevron treatment in express congressional authorizations
to engage in the process of rulemaking or adjudication that produces
regulations or rulings for which deference is claimed. See, e.g., EEOC v.
Arabian American Oil Co., 499 U. S. 244, 257 (1991) (no Chevron deference to
agency guideline where congressional delegation did not include the power to “
‘promulgate rules or regulations’ ” (quoting General Elec. Co. v. Gilbert, 429
U. S. 125) (1976)); see also Christensen v. Harris County, 529 U. S. 576,
596–597 (2000) (Breyer , J., dissenting) (where it is in doubt that Congress
actually intended to delegate particular interpretive authority to an agency,
Chevron is “inapplicable”). It is fair to assume generally that Congress
contemplates administrative action with the effect of law when it provides for
a relatively formal administrative procedure tending to foster the fairness and
deliberation that should underlie a pronouncement of such force. 11 Cf. Smiley
v. Citibank (South Dakota), N. A., 517 U. S. 735, 741 (1996) (APA notice and
comment “designed to assure due deliberation”). Thus, the overwhelming number
of our cases applying Chevron deference have reviewed the fruits of
notice-and-comment rulemaking or formal adjudication. That said, and as
significant as notice-and-comment is in pointing to Chevron authority, the want
of that procedure here does not decide the case, for we have sometimes found
reasons for Chevron deference even when no such administrative formality was
required and none was afforded, see, e.g., NationsBank of N. C., N. A. v.
Variable Annuity Life Ins. Co., 513 U. S. 251, 256–257, 263 (1995) . 13 The
fact that the tariff classification here was not a product of such formal
process does not alone, therefore, bar the application of Chevron.
There are, nonetheless, ample reasons to deny
Chevron deference here. The authorization for classification rulings, and
Customs’s practice in making them, present a case far removed not only from
notice-and-comment process, but from any other circumstances reasonably
suggesting that Congress ever thought of classification rulings as deserving
the deference claimed for them here.
B
No matter which angle we choose for viewing the
Customs ruling letter in this case, it fails to qualify under Chevron . 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. We are not, of course, here
making any global statement about Customs’s authority, for it is true that the
general rulemaking power conferred on Customs, see 19 U. S. C. §1624,
authorizes some regulation with the force of law, or “legal norms,” as we put
it in Haggar, 526 U. S., at 391. It is true as well that
Congress had classification rulings in mind when it explicitly authorized, in a
parenthetical, the issuance of “regulations establishing procedures for the
issuance of binding rulings prior to the entry of the merchandise concerned,”
19 U. S. C. §1502(a). 15 The reference to
binding classifications does not, however, bespeak the legislative type of
activity that would naturally bind more than the parties to the ruling, once
the goods classified are admitted into this country. And though the statute’s
direction to disseminate “information” necessary to “secure” uniformity, 19 U.
S. C. §1502(a), seems to assume that a ruling may be precedent in later
transactions, precedential value alone does not add up to Chevron entitlement;
interpretive rules may sometimes function as precedents, see Strauss, The
Rulemaking Continuum, 41 Duke L. J. 1463, 1472–1473 (1992), and they enjoy no
Chevron status as a class. In any event, any precedential claim of a
classification ruling is counterbalanced by the provision for independent
review of Customs classifications by the CIT, see 28 U. S. C. §§2638–2640; the
scheme for CIT review includes a provision that treats classification rulings
on par with the Secretary’s rulings on “valuation, rate of duty, marking,
restricted merchandise, entry requirements, drawbacks, vessel repairs, or
similar matters,” §1581(h); see §2639(b). It is hard to imagine a congressional
understanding more at odds with the Chevron regime.
It is difficult, in fact, to see in the agency
practice itself any indication that Customs ever set out with a lawmaking
pretense in mind when it undertook to make classifications like these. Customs
does not generally engage in notice-and-comment practice when issuing them, and
their treatment by the agency makes it clear that a letter’s binding character
as a ruling stops short of third parties; Customs has regarded a classification
as conclusive only as between itself and the importer to whom it was issued, 19
CFR §177.9(c) (2000), and even then only until Customs has given advance notice
of intended change, §§177.9(a), (c). Other importers are in fact warned against
assuming any right of detrimental reliance. §177.9(c).
Indeed, to claim that classifications have legal
force is to ignore the reality that 46 different Customs offices issue 10,000
to 15,000 of them each year, see Brief for Respondent 5; CITBA Brief 6 (citing
Treasury Advisory Committee on the Commercial Operations of the United States
Customs Service, Report of the COAC Subcommittee on OR&R, Exhibits 1, 3
(Jan. 26, 2000) (reprinted in App. to CITBA Brief 20a–21a)). Any suggestion
that rulings intended to have the force of law are being churned out at a rate
of 10,000 a year at an agency’s 46 scattered offices is simply self-refuting.
Although the circumstances are less startling here, with a Headquarters letter
in issue, none of the relevant statutes recognizes this category of rulings as
separate or different from others; there is thus no indication that a more
potent delegation might have been understood as going to Headquarters even when
Headquarters provides developed reasoning, as it did in this instance.
Nor do the amendments to the statute made
effective after this case arose disturb our conclusion. The new law requires
Customs to provide notice-and-comment procedures only when modifying or
revoking a prior classification ruling or modifying the treatment accorded to
substantially identical transactions, 19 U. S. C. §1625(c); and under its
regulations, Customs sees itself obliged to provide notice-and-comment
procedures only when “changing a practice” so as to produce a tariff increase,
or in the imposition of a restriction or prohibition, or when Customs
Headquarters determines that “the matter is of sufficient importance to involve
the interests of domestic industry,” 19 CFR §§177.10(c)(1)(2) (2000). The
statutory changes reveal no new congressional objective of treating
classification decisions generally as rulemaking with force of law, nor do they
suggest any intent to create a Chevron patchwork of classification rulings,
some with force of law, some without.
In sum, classification rulings are best treated
like “interpretations contained in policy statements, agency manuals, and
enforcement guidelines.” Christensen, 529 U. S., at 587. They are beyond the
Chevron pale.
C
To agree with the Court of Appeals that Customs
ruling letters do not fall within Chevron is not, however, to place them
outside the pale of any deference whatever. Chevron did nothing to eliminate
Skidmore ’s holding that an agency’s interpretation may merit some deference
whatever its form, given the “specialized experience and broader investigations
and information” available to the agency, 323 U. S., at 139, and given the
value of uniformity in its administrative and judicial understandings of what a
national law requires, id., at 140. See generally Metropolitan Stevedore Co. v.
Rambo, 521 U. S., 121, 136 (1997) (reasonable agency interpretations carry “at
least some added persuasive force” where Chevron is inapplicable); Reno v.
Koray, 515 U. S. 50, 61 (1995) (according “some deference” to an interpretive
rule that “do[es] not require notice and comment”); Martin v. Occupational
Safety and Health Review Comm’n, 499 U. S. 144, 157 (1991) (“some weight” is
due to informal interpretations though not “the same deference as norms that
derive from the exercise of … delegated lawmaking powers”).
There is room at least to raise a Skidmore claim
here, where the regulatory scheme is highly detailed, and Customs can bring the
benefit of specialized experience to bear on the subtle questions in this case:
whether the daily planner with room for brief daily entries falls under
“diaries,” when diaries are grouped with “notebooks and address books, bound;
memorandum pads, letter pads and similar articles,” HTSUS subheading
4820.10.20; and whether a planner with a ring binding should qualify as
“bound,” when a binding may be typified by a book, but also may have
“reinforcements or fittings of metal, plastics, etc.,” Harmonized Commodity Description
and Coding System Explanatory Notes to Heading 4820, p. 687 (cited in Customs
Headquarters letter, App. to Pet. for Cert. 45a. A classification ruling in
this situation may therefore at least seek a respect proportional to its “power
to persuade,” Skidmore, supra, at 140; see also Christensen, 529 U. S., at 587;
id., at 595 ( Stevens, J., dissenting); id., at 596–597 ( Breyer, J.,
dissenting). Such a ruling may surely claim the merit of its writer’s
thoroughness, logic and expertness, its fit with prior interpretations, and any
other sources of weight.
D
Underlying the position we take here, like the
position expressed by Justice Scalia in dissent, is a choice about the best way
to deal with an inescapable feature of the body of congressional legislation
authorizing administrative action. That feature is the great variety of ways in
which the laws invest the Government’s administrative arms with discretion, and
with procedures for exercising it, in giving meaning to Acts of Congress.
Implementation of a statute may occur in formal adjudication or the choice to
defend against judicial challenge; it may occur in a central board or office or
in dozens of enforcement agencies dotted across the country; its institutional
lawmaking may be confined to the resolution of minute detail or extend to
legislative rulemaking on matters intentionally left by Congress to be worked
out at the agency level.
Although we all accept the position that the
Judiciary should defer to at least some of this multifarious administrative
action, we have to decide how to take account of the great range of its
variety. If the primary objective is to simplify the judicial process of giving
or withholding deference, then the diversity of statutes authorizing
discretionary administrative action must be declared irrelevant or minimized.
If, on the other hand, it is simply implausible that Congress intended such a
broad range of statutory authority to produce only two varieties of
administrative action, demanding either Chevron deference or none at all, then
the breadth of the spectrum of possible agency action must be taken into
account. Justice Scalia ’s first priority over the years has been to limit and
simplify. The Court’s choice has been to tailor deference to variety. This acceptance
of the range of statutory variation has led the Court to recognize more than
one variety of judicial deference, just as the Court has recognized a variety
of indicators that Congress would expect Chevron deference.
Our respective choices are repeated today.
Justice Scalia would pose the question of deference as an either-or choice. On
his view that Chevron rendered Skidmore anachronistic, when courts owe any
deference it is Chevron deference that they owe, post, at 9–10. Whether courts
do owe deference in a given case turns, for him, on whether the agency action
(if reasonable) is “authoritative,” post, at 17. The character of the
authoritative derives, in turn, not from breadth of delegation or the agency’s
procedure in implementing it, but is defined as the “official” position of an
agency, ibid., and may ultimately be a function of administrative persistence
alone, ibid .
The Court, on the other hand, said nothing in
Chevron to eliminate Skidmore’ s recognition of various justifications for
deference depending on statutory circumstances and agency action; Chevron was
simply a case recognizing that even without express authority to fill a
specific statutory gap, circumstances pointing to implicit congressional
delegation present a particularly insistent call for deference. Indeed, in
holding here that Chevron left Skidmore intact and applicable where statutory
circumstances indicate no intent to delegate general authority to make rules
with force of law, or where such authority was not invoked, we hold nothing
more than we said last Term in response to the particular statutory
circumstances in Christensen , to which Justice Scalia then took exception, see
529 U. S., at 589, just as he does again today.
We think, in sum, that Justice Scalia ’s efforts
to simplify ultimately run afoul of Congress’s indications that different
statutes present different reasons for considering respect for the exercise of
administrative authority or deference to it. Without being at odds with
congressional intent much of the time, we believe that judicial responses to
administrative action must continue to differentiate between Chevron and
Skidmore, and that continued recognition of Skidmore is necessary for just the
reasons Justice Jackson gave when that case was decided.
* * *
Since the Skidmore assessment called for here
ought to be made in the first instance by the Court of Appeals for the Federal
Circuit or the Court of International Trade, we go no further than to vacate
the judgment and remand the case for further proceedings consistent with this
opinion.
It is so ordered.
__________
Notes and Questions.
1. At the heart of these cases lies the core
issue of the nature and character of regulatory systems tied to the
establishment of organizations for the management of those systems: to what extent are these established regulatory
organizations autonomous of the legislatures that established them and the
executive who often oversee them. One
possibility is that regulatory agencies have no autonomy, they are merely
charged with the ministerial role of adding regulatory supplements to
legislative commands exercised through statutes. At the other end, one can view regulatory
organizations as autonomous of the legislatures that established them and the
executive that has some oversight power.
With respect to regulation that has important consequences. An autonomous regulatory agency is free to
reference itself and its constitution (the statutes creating the agency and its
charge) to the ends of creating regulation that furthers the statutory
objectives within the jurisdictional limits of the agency. The agency is free to gap fill and to add
regulation that responds to changing circumstances without the need to seek
permission. Agencies that are understood
as ministerial would have little room to legislate beyond what is specified in
the constituting statute. And it would
be for Congress to fill in gaps etc. Which model did the court embrace in the
cases you have read? Why?
2. Can you explain the differences in result I
Chevron and Mead? Was the difference
based on the form of regulation or on something else. How do you determine what the rule of
deference is after Mead?
3. How does the Chevron Court explain the
democratic deficit at the heart of the administrative state—the problem that
administrative agencies make law but are not directly accountable to the
people? Are you satisfied with the
Court’s rationale? How was that
rationale applied in Mead?
4. If agencies are autonomous law makers within
the constraints of their constituting documents, to what extent are there
checks and balances built into their process of enacting regulation? One check
in the United States is illustrated by the Administrative Procedure Act. 5 U.S.
Code §§ 511-599. “The Administrative
Procedure Act (APA) is the law under which some 55 U.S. government federal
regulatory agencies like the FDA and EPA create the rules and regulations
necessary to implement and enforce major legislative acts such as the Food Drug
and Cosmetic Act, Clean Air Act or Occupational Health and Safety Act.”
__________
Attorney General’s Manual on the Administrative Procedure Act
Prepared
by the United States Department of Justice Tom
C. Clark,
Attorney General, 1947.
(pages 9-10; 12-16;
26-35)
I
FUNDAMENTAL CONCEPTS
a. Basic Purposes of
the Administrative Procedure Act
The Administrative
Procedure Act may be said to have four basic purposes:
1. To require agencies
to keep the public currently informed of their organization, procedures and
rules (sec. 3).
2. To provide for public
participation in the rule making process (sec. 4).
3. To prescribe uniform
standards for the conduct of formal rule making (sec. 4 (b)) and adjudicatory
proceedings (sec. 5), i.e., proceedings which are required by statute to be
made on the record after opportunity for an agency hearing (secs. 7 and 8).
4. To restate the law of
judicial review (sec. 10).
b. Coverage of the
Administrative Procedure Act
The Administrative
Procedure Act applies, with certain exceptions to be discussed, to every agency
and authority of the Government. Section 2 (a) of the Act reads, in part, as
follows:
"Agency" means
each authority (whether or not within or subject to review by another agency)
of the Government of the United States other than Congress, the courts, or the
governments of the possessions, Territories, or the District of Columbia.
Nothing in this Act shall be construed to repeal delegations of authority as provided
by law.
It will be seen from the
above that agency is defined as each authority of the Government of the United
States, whether or not within or subject to review by another agency. This
definition was adopted in recognition of the fact that the Government is
divided not only into departments, commissions, and offices, but that these
agencies, in turn, are further subdivided into constituent units which may have
all the attributes of an agency insofar as rule making and adjudication are
concerned."(1)
For example, the Federal
Security Agency is composed of many authorities which, while subject to the
overall supervision of that agency, are generally independent in the exercise
of their functions. Thus, the Social Security Administration within the Federal
Security Agency is in complete charge of the Unemployment Compensation
provisions of the Social Security Act. By virtue of the definition contained in
section 2 (a) of the Administrative Procedure Act, the Social Security
Administration is an agency, as is its parent organization, the Federal
Security Agency.
The Administrative
Procedure Act applies to every authority of the Government of the United States
other than Congress, the courts, the governments of the possessions,
Territories, and the District of Columbia (see. 2 (a)). The term
"courts" is not limited to constitutional courts, but includes the
Tax Court, the Court of Customs and Patent Appeals, the Court of Claims, and
similar courts. Sen. Rep. p. 38 (Sen. Doc. p. 408).
While the Administrative
Procedure Act covers generally all agencies of the United States, certain
agencies and certain functions are specifically exempted from all the
requirements of the Act with the exception of the public information
requirements of section 3.
* * * * * *
c. --Distinction
Between Rule Making and Adjudication
The Administrative
Procedure Act prescribes radically different procedures for rule making and
adjudication. Accordingly, the proper classification of agency proceedings as
rule making or adjudication is of fundamental importance.
"Rule" and
"rule making", and "order" and "adjudication" are
defined in section 2 as follows:
(c) Rule and rule
making. "Rule" means the whole or any part of any agency
statement of general
or particular
applicability and future effect designed to implement, interpret, or prescribe
law or policy or to describe the organization, procedure, or practice
requirements of any agency and includes the approval or prescription for the
future of rates, wages, corporate or financial structures or reorganizations
thereof, prices, facilities, appliances, services or allowances therefor or of
valuations, cost, or accounting, or practices bearing upon any of the
foregoing. "Rule making" means agency process for the formulation,
amendment, or repeal of a rule.
(d) Order and
adjudication. "Order" means the whole or any part of the final
disposition (whether affirmative, negative, injunctive, or declaratory in form)
of any agency in any matter other than rule making but including licensing.
"Adjudication" means agency process for the formulation of an order.
(e) License and
licensing. "License" includes the whole or part of any agency
permit, certificate, approval, registration, charter, membership, statutory
exemption or other form of permission. "Licensing" includes agency
process respecting the grant, renewal, denial, revocation, suspension,
annulment, withdrawal, limitation, amendment, modification, or conditioning of
a license.
Since the definition of
adjudication is largely a residual one, i.e., "other than rule making but
including licensing", it is logical to determine first the scope of rule
making. The definition of rule is not limited to substantive rules, but
embraces interpretative, organizational and procedural rules as well.(5)
Of particular importance
is the fact that "rule" includes agency statements not only of
general applicability but also those of particular applicability applying
either to a class or to a single person. In either case, they must be of future
effect, implementing or prescribing future law. Accordingly, the approval
of a corporate reorganization by the Securities and Exchange Commission, the
prescription of future rates for a single named utility by the Federal Power
Commission, and similar agency actions, although applicable only to named
persons, constitute rule making. H.R. Rep. p. 49, fn. 1 (Sen. Doc. p. 283).
As applied to the
various proceedings of Federal agencies, the definitions of "rule"
and "rule making", and "order" and "adjudication"
leave many questions as to whether particular proceedings are rule making or adjudication.
For example, the question arises whether agency action on certain types of
applications is to be deemed rule making or licensing (adjudication), in view
of the fact that there is apparent overlapping between the defini-[14]tion of
"rule" in section 2 (c) and of "license" in section 2 (e).
Thus, "rule" includes the "approval * * * for the future * *
*", and "license" is defined to include "any agency permit,
certificate, approval * * * or other form of permission."
An obvious principle of
construction is that agency proceedings which fall within one of the specific
categories of section 2 (c), e.g., determining rates for the future, must be
regarded as rule making, rather than as coming under the general and residual
definition of adjudication. Furthermore, the listing of specific subjects in
section 2 (c) as rule making is not intended to be exclusive. It is
illustrative only. H.R. Rep. 20 (Sen. Doc. p. 254). Thus, in determining
whether agency action on a particular type of application is "rule
making", the purposes of the statute involved and the considerations which
the agency is required to weigh in granting or withholding its approval will be
relevant; if the factors governing such approval are the same, for example, as
the agency would be required to apply in approving a recapitalization or
reorganization (clearly rule making), this circumstance would tend to support
the conclusion that agency action on such an application is rule making.
More broadly, the entire
Act is based upon a dichotomy between rule making and adjudication. Examination
of the legislative history of the definitions and of the differences in the
required procedures for rule making and for adjudication discloses highly
practical concepts of rule making and adjudication. Rule making is agency
action which regulates the future conduct of either groups of persons or a
single person; it is essentially legislative in nature, not only because it
operates in the future but also because it is primarily concerned with policy
considerations. The object of the rule making proceeding is the implementation
or prescription of law or policy for the future, rather than the evaluation of
a respondent's past conduct. Typically, the issues relate not to the
evidentiary facts, as to which the veracity and demeanor of witnesses would often
be important, but rather to the policy-making conclusions to be drawn from the
facts. Senate Hearings (1941) pp. 657, 1298, 1451. Conversely, adjudication is
concerned with the determination of past and present rights and liabilities.
Normally, there is involved a decision as to whether past conduct was unlawful,
so that the proceeding is characterized by an accusatory flavor and may result
in disciplinary action. Or, it may involve the determination of a person's
right to benefits under existing law so that the issues relate to whether he is
within the established category of persons entitled to such benefits. In such
proceedings, the issues of fact are often sharply controverted. Sen. Rep. p. 39
(Sen. Doc. p. 225); 92 Cong. Rec. 5648 (Sen. Doc. p. 353).
Not only were the
draftsmen and proponents of the bill aware of this realistic distinction
between rule making and adjudication, but they shaped the entire Act around it.
Even in formal rule making proceedings subject to sections 7 and 8, the Act leaves
the hearing officer entirely free to consult with any other member of the
agency's staff. In fact, the intermediate decision may be made by the agency
itself or by a responsible officer other than the hearing officer. This
reflects the fact that the purpose of the rule making proceeding is to
determine policy. Policy is not made in Federal agencies by individual hearing
examiners; rather it is formulated by the agency heads relying heavily upon the
expert staffs which have been hired for that purpose. And so the Act recognizes
that in rule making the intermediate decisions will be more useful to the
parties in advising them of the real issues in the case if such decisions
reflect the views of the agency heads or of their responsible officers who
assist them in determining policy. In sharp contrast is the procedure required
in cases of adjudication subject to section 5 (c). There the hearing officer
who presides at the hearing and observes the witnesses must personally prepare
the initial or recommended decision required by section 8. Also, in such
adjudicatory cases, the agency officers who performed investigative or
prosecuting functions in that or a factually related case may not participate
in the making of decisions. These requirements reflect the characteristics of
adjudication discussed above.
The foregoing discussion
indicates that the residual definition of "adjudication" in section 2
(d) was intended to include such proceedings as the following:
1. Proceedings
instituted by the Federal Trade Commission and the National Labor Relations
Board leading to the issuance of orders to cease and desist from unfair methods
of competition or unfair labor practices, respectively.
2. The determination of
claims for money, such as compensation claims under the Longshoremen's and
Harbor Workers' Compensation Act, and claims under Title II (Old Age and
Survivors' Insurance) of the Social Security Act.
3. Reparation
proceedings in which the agency determines whether a ship per or other consumer
is entitled to damages arising out of the alleged past unreasonableness of
rates.
4. The determination of
individual claims for benefits, such as grants-in-aid and subsidies.
5. Licensing
proceedings, including the grant, denial, renewal, revocation, suspension, etc.
of, for example, radio broadcasting licenses, certificates of public
convenience and necessity, airman certificates, and the like.
1. The legislative history
of section 2 (a) illustrates clearly the broad Scope of the term
"agency." In the Senate Comparative Print of June 1945, the term
agency was explained as follows (p. 2): "It is necessary to define agency
as "authority" rather than by name or form, because of the present
system of including one agency within another or of authorizing internal boards
or "divisions" to have final authority. 'Authority' means any officer
or board, whether within another agency or not, which by law has authority to
take final and binding action with or without appeal to some superior
administrative authority. Thus, 'divisions' of the Interstate Commerce
Commission and the judicial officers of the Department of Agriculture would be
'agencies' within this definition." (Sen. Doc. p. 13). And in the Senate
Report the following appears at page 10: "The word 'authority' is advisedly
used as meaning whatever persons are vested with powers to act (rather than the
mere form of agency organization such as department commission, board, or
bureau) because the real authorities may be some subordinate or semidependent
person or persons within such form of organization." (Sen. Doc. p. 196).
* * * * *
III SECTION 4--RULE MAKING
In
general, the purpose of section 4 is to guarantee to the public an opportunity
to participate in the rule making process. With stated exceptions, each agency
will be required under this section to give public notice of substantive rules
which it proposes to adopt, and to grant interested persons an opportunity to
present their views to it. Where rules are required by statute to be made on
the record after opportunity for an agency hearing, the provisions of sections
7 and 8 as to hearing and decision will apply in place of the less formal
procedures contemplated by section 4 (b). With certain exceptions, no
substantive rule may be made effective until at least thirty days after its
publication in the Federal Register. Section 4 also grants to interested
persons the right to petition an agency for the issuance, amendment or repeal
of a rule.
EXCEPTIONS
In
addition to the agencies and functions exempted by section 2 (a), section 4
itself contains two broad exceptions to its requirements.
"
(1) any military, naval, or foreign affairs function of the United
States". The exemption for military and naval functions is not limited to
activities of the War and Navy Departments but covers all military and naval
functions exercised by any agency. Thus, the exemption applies to the defense
functions of the Coast Guard and to the function of the Federal Power Commission
under section 202 (c) of the Federal Power Act (16 U.S.C. 824a (c)). Sen. Rep.
p. 39 (Sen. Doc. p. 225); Senate Hearings (1941) p. 502.
As
to the meaning of "foreign affairs function", both the Senate and
House reports state: "The phrase 'foreign affairs functions,' used here
and in some other provisions of the bill, is not to be loosely interpreted to
mean any function extending beyond the borders of the United States but only
those 'affairs' which so affect relations with other governments that, for example,
public rule making provisions would clearly provoke definitely undesirable
international consequences." Sen. Rep. p. 13; H.R. Rep. p. 23 (Sen. Doc.
pp. 199, 257). See also Representative Walter's statement to the House, 92
Cong. Rec. 5650 (Sen. [27] Doc. p. 358). It is equally clear that the exemption
is not limited to strictly diplomatic functions, because the phrase
"diplomatic function" was employed in the January 6, 1945 draft of S.
7 (Senate Comparative Print of June 1945, p. 6; Sen. Doc. p.157) and was
discarded in favor of the broader and more generic phrase "foreign affairs
function". In the light of this legislative history, it would seem clear
that the exception must be construed as applicable to most functions of the
State Department and to the foreign affairs functions of any other agency.
"(2)
any matter relating to agency management or personnel or to public property,
loans, grants, benefits, or contracts". The exemption for matters relating
to "agency management or personnel" is self-explanatory and has been
considered in the discussion of "internal management" under section
3. The exemption of "any matter relating * * * to public property, loans,
grants, benefits, or contracts" is intended generally to cover the "proprietary"
functions of the Federal Government. 92 Cong. Rec. 5650 (Sen. Doc. p. 358). It
will be helpful to consider the implication of each of these phrases
separately.
Public
Property. This embraces rules issued by any agency with respect to real or
personal property owned by the United States or by any agency of the United
States. Thus, the making of rules relating to the public domain, i.e., the sale
or lease of public lands or of mineral, timber or grazing rights in such lands,
is exempt from the requirements of section 4. The exemption extends, for
example, to rules issued by the Tennessee Valley Authority in relation to the
management of its properties, and by the Maritime Commission with respect to
ships owned by the United States. The term "public property" includes
property held by the United States in trust or as guardian; e.g., Indian
property. H.R. Rep. p. 23 (Sen. Doc. p. 257).
Loans.
This exempts rules issued with respect to loans by such agencies as the
Reconstruction Finance Corporation, the Commodity Credit Corporation, and the
Farm Credit Administration. It also exempts rules relating to guarantees of
loans, such as are made by the Federal Housing Authority and the Veterans
Administration, since they are matters relating to public loans.
Grants.
Rule making with respect to subsidy programs is exempted from section 4.
"Grants" also include grant-in-aid programs under which the Federal
Government makes payments to state and local governments with respect to
highways, airports, [28] unemployment compensation, etc.
Benefits.
This refers to such programs as veterans' pensions and old-age insurance
payments.
Contracts.
All rules relating to public contracts are exempt from section 4. The exemption
extends to wage determinations made by the Labor Department under the Davis
Bacon Act (40 U.S.C. 276a et seq.) and the Walsh Healey Act (41 U.S.C. 35-45),
as conditions to construction and procurement contracts entered into by the
Federal Government. See Perkins v. Lukens Steel Co., 310 U. S. 113 (1940).
SECTION
4 (a)--NOTICE
Subsections
(a) and (b) of section 4 must be read together because the procedural
requirements of subsection (b) apply only where notice is required by
subsection (a). It is clear that the requirements of "general notice of
proposed rule making" apply only to rule making proposed or initiated by
an agency; the filing of a petition under section 4 (d) does not require an
agency to undertake rule making proceedings in accordance with subsections (a)
and (b). H.R. Rep. p. 26 (Sen. Doc. p. 260).
An
agency contemplating the issuance of a rule subject to section 4 (a) must
publish in the Federal Register a notice of the proposed rule making,
"unless all persons subject thereto are named and either personally served
or otherwise have actual notice thereof in accordance with law". The
reason for the quoted exception is to avoid burdening the Federal Register with
notices addressed to particular parties who have been personally served or
otherwise have notice. H.R. Rep. p. 51, fn. 8 (Sen. Doc. p. 285). For example,
where a proceeding is commenced to establish rates for named carriers or
utilities, if a notice complying with section 4 (a) is personally served upon
such persons, publication in the Federal Register is not required by the
subsection.
Contents
of notice. In both formal(1) and informal rule making, the required notice,
whether published in the Federal Register or personally served, must include
the following information:
1.
"A statement of the time, place, and nature of public rule making
proceedings". While section 4 (a) does not specify how much notice must be
given by an agency before it may conduct public rule making proceedings, it is
presumed that each agency [29] will give reasonable notice.(2)
In
this connection, each agency should take into account the fact that section 4
(c) provides that thirty days must ordinarily elapse prior to a rule becoming
effective. Accordingly, each agency should schedule its rule making in such
fashion that there will be sufficient time for affording interested persons an opportunity
to participate in the rule making as well as for insuring final publication of
the rule at least thirty days prior to the desired effective date.
The
nature of public rule making may vary considerably from case to case. Under
section 4 (b) each agency, as this memorandum will indicate infra, may conduct
its rule making by affording interested persons opportunity to submit written
data only, or by receiving a combination of written and oral evidence, or by
adopting any other method it finds most appropriate for public participation in
the rule making process. However, where an agency is required by statute to
conduct a hearing and to reach a decision upon the basis of the record made at
such hearing, the formal procedures prescribed by sections 7 and 8 must be
pursued. Therefore, the notice, required by section 4 (a) should specify the
procedure to be employed, that is, formal or informal hearings, submission of
written statements with or without opportunity for oral argument, etc.
2.
"Reference to the authority under which the rule is proposed". The
reference must be sufficiently precise to apprise interested persons of the
agency's legal authority to issue the proposed rule.
3.
"Either the terms or substance of the proposed rule or a description of
the subjects and issues involved". Where able to do so, an agency may
state the proposed rule itself or the substance of the rule in the notice
required by section 4 (a). On the other hand, the agency, if it desires, may
issue a more general "description of the subjects and issues
involved". It is suggested that each agency consider the desirability of
using the latter method if publication of a proposed rule in full would unduly
burden the Federal Register or would in fact be less informative to the public.
In such a case, the agency may inform interested persons that copies of the
proposed rule may be obtained from the agency upon request--this, of course, in
addition to the "description of the subjects and issues involved" in
the Federal Register. Where there is a "description of the subjects and
issues [30] involved", the notice should be sufficiently informative to
assure interested persons an opportunity to participate intelligently in the
rule making process. Final Report, p. 108.
Section
4 (a) and (b) applicable only to substantive rules. The last sentence of
section 4 (a) exempts from the requirements of section 4 (a) and (b), unless
otherwise required by statute, "interpretative rules, general statements
of policy, rules of agency organization, procedure, or practice". Thus,
the rules of organization and procedure which an agency must publish pursuant,
to section 3 (a) (1) and (2) are not ordinarily subject to the requirements of
section 4 (a) and (b). The further exemption of "interpretative
rules" and "general statements of policy" restricts the
application of section 4 (a) and (b) to substantive rules issued pursuant to
statutory authority.(3)
*
* * * *
Omission
of notice and public procedure for good cause. The last sentence of section 4
(a) authorizes any agency to omit the notice required by that subsection (and
the procedure specified by section 4 (b)) "in any situation in which the
agency for good cause finds ... that notice and public procedure thereon are
impracticable, unnecessary, or contrary to the public interest". It should
be noted that the reasons for which an agency may dispense with notice under
section 4 (a) are written in the alternative so that if it is
"impracticable" or "unnecessary" or "contrary to the
public interest" the agency may dispense with notice. Should this be done,
the agency must incorporate in the rule issued its finding of "good
cause" and "a brief statement of the reasons therefor". In
general, it may be said that a situation is "impracticable" when an
agency finds that due and timely execution of its functions would be impeded by
the notice otherwise required in section 4 (a). For example, the Civil
Aeronautics Board may learn, from an accident investigation, that certain rules
as to air safety should be issued or amended without delay; with the safety of
the traveling public at stake, the Board could find that notice [31] and public
rule making procedures would be "impracticable", and issue its rules
immediately. "Unnecessary" refers to the issuance of a minor rule or
amendment in which the public is not particularly interested. Senate Hearings
(1941) p. 828. "Public interest" connotes a situation in which the
interest of the public would be defeated by any requirement of advance notice.
For example, an agency may contemplate the issuance of financial controls under
such circumstances that advance notice of such rules would tend to defeat their
purpose; in such circumstances, the "public interest" might well
justify the omission of notice and public rule making proceedings. Senate
Hearings (1941) p. 812.
SECTION
4 (b)--PROCEDURES
Informal
rule making. In every case of proposed informal rule making subject to the
notice requirements of section 4 (a), section 4 (b) provides that "the
agency shall afford interested persons an opportunity to participate in the
rule making through submission of written data, views, or arguments with or
without opportunity to present the same orally in any manner." The quoted
language confers discretion upon the agency, except where statutes require
"formal" rule making subject to sections 7 and 8, to designate in
each case the procedure for public participation in rule making. Such informal
rule making procedure may take a variety of forms: informal hearings (with or
without a stenographic transcript), conferences, consultation with industry
committees, submission of written views, or any combination of these. These
informal procedures have already been extensively employed by Federal agencies.
Final Report, pp. 103-105. In each case, the selection of the procedure to be
followed will depend largely upon the nature of the rules involved. The
objective should be to assure informed administrative action and adequate
protection to private interests.
Each
agency is affirmatively required to consider "all relevant matter
presented" in the proceeding; it is recommended that all rules issued
after such informal proceedings be accompanied by an express recital that such
material has been considered. It is entirely clear, however, that section 4 (b)
does not require the formulation of rules upon the exclusive basis of any
"record" made in informal rule making proceedings. Senate Hearings
(1941) p. 444. Accordingly, except in formal rule making governed by sections 7
and 8, an agency is free to formulate rules upon the basis of [32] materials in
its files and the knowledge and experience of the agency, in addition to the
materials adduced in public rule making proceedings.
Section
4 (b) provides that upon the completion of public rule making proceedings "after
consideration of all relevant matter presented, the agency shall incorporate in
any rules adopted a concise general statement of their basis and purpose".
The required statement will be important in that the courts and the public may
be expected to use such statements in the interpretation of the agency's rules.
The statement is to be "concise" and "general". Except as
required by statutes providing for "formal" rule making procedure,
findings of fact and conclusions of law are not necessary. Nor is there
required an elaborate analysis of the rules or of the considerations upon which
the rules were issued. Rather, the statement is intended to advise the public
of the general basis and purpose of the rules.
Formal
rule making. Section 4 (b) provides that "Where rules are required by
statute to be made on the record after opportunity [33] for an agency hearing,
the requirements of sections 7 and 8 shall apply in place of the provisions of
this subsection." Thus, where a rule is required by some other statute to
be issued on the basis of a record after opportunity for an agency hearing, the
public rule making proceedings must consist of hearing and decision in
accordance with sections 7 and 8. The provisions of section 5 are in no way
applicable to rule making. It should be noted that sections 7 and 8 did not
become effective until December 11, 1946, and, pursuant to section 12, do not
apply to any public rule making proceedings initiated prior to that date.
Statutes
rarely require hearings prior to the issuance of rules of general
applicability. Such requirements, where they exist, appear in radically
different contexts. The Federal Food, Drug and Cosmetic Act (21 U.S.C. 301) is
almost unique in that it specifically provides that agency action issuing,
amending or repealing specified classes of substantive rules may be taken only
after notice and hearing, and that "The Administrator shall base his order
only on substantial evidence of record at the hearing and shall set forth as
part of the order detailed findings of fact on which the order is based."
Upon review in a circuit court of appeals, a transcript of the record is filed,
and "the findings of the Administrator as to the facts, if supported by
substantial evidence, shall be conclusive" (21 U.S.C. 371). It is clear
that such rules are "required by statute to be made on the record after
opportunity for an agency hearing". Accordingly, the rule making hearings
required by the Federal Food, Drug and Cosmetic Act, initiated on and after
December 11, 1946, must be conducted in accordance with sections 7 and 8 of the
Administrative Procedure Act.
Statutes
authorizing agencies to prescribe future rates (i.e., rules of either general
or particular applicability) for public utilities and common carriers typically
require that such rates be established only after all opportunity for a hearing
before the agency. Such statutes rarely specify in terms that the agency action
musts be taken on the basis of the "record" developed in the hearing.
However, where rates or prices are established by an agency after a hearing
required by statute, the agencies themselves and the courts have long assumed
that the agency's action must be based upon the evidence adduced at the hearing.
Sometimes the requirement of decision on the record is readily inferred from
other statutory provisions defining judicial review. For example, rate orders
issued by the Federal Power Commission pursuant to the Natural Gas Act (15
U.S.C. 717) may be made only after hearing; upon review in a circuit court of
appeals or the Court of Appeals for the District of Columbia, the Commission
certifies and files with the court "a transcript of the record upon which
the order complained of was entered", and the Commission's findings of
fact "if supported by substantial evidence, shall be conclusive". It
seems clear that these provisions of the Natural Gas Act must be construed as
requiring the Commission to determine rates "on the record after opportunity
for an agency hearing". See H.R. Rep. p. 51, fn. 9 (Sen. Doc. p. 285). The
same conclusion would be reached with respect to the determination of minimum
wages under the Fair Labor Standards Act (29 U.S.C. 201), which contains
substantially the same provisions for hearing and judicial review.
The
Interstate Commerce Commission and the Secretary of Agriculture may, after
hearing, prescribe rates for carriers and stockyard agencies, respectively.
Both types of rate orders are reviewable under the Urgent Deficiencies Act of
1913 (28 U.S.C. 47). Nothing in the Interstate Commerce Act, the Packers and
Stockyards Act, or the Urgent Deficiencies Act requires in terms [34] that such
rate orders be "made on the record", or provides for the filing of a
transcript of the administrative record with the reviewing court, or defines
the scope of judicial review. However, both of these agencies and the courts
have long assumed that such rate orders must be based upon the record made in
the hearing; furthermore, it has long been the practice under the Urgent
Deficiencies Act to review such orders on the basis of the administrative
record which is submitted to the reviewing court. United States v. Abilene
& Southern Ry. Co., 265 U.S. 274 (1924); Mississippi Valley Barge Line Co.
v. United States, 292 U.S. 282 (1934); Acker v. United States, 298 U.S. 426
(1936). It appears, therefore, that rules (as defined in section 2 (c)) which
are issued after a hearing required by statute, and which are reviewable under
the Urgent Deficiencies Act on the basis of the evidence adduced at the agency
hearing, must be regarded as "required by statute to be made on the record
after opportunity for an agency hearing".
With
respect to the types of rule making discussed above, the statutes not only
specifically require the agencies to hold hearings but also, specifically, or
by clear implication, or by established administrative and judicial
construction, require such rules to be formulated upon the basis of the
evidentiary record made in the hearing. In these situations, the public rule
making procedures required by section 4 (b) will consist of a hearing conducted
in accordance with sections 7 and 8.
There
are other statutes which require agencies to hold hearings before issuing
rules, but contain no language from which the further requirement of decision
"on the record" can be inferred, nor any provision for judicial
review on the record (as does the Natural Gas Act, supra). For example, the
Federal Seed Act (7 U.S.C. 1561) simply provides that "prior to the promulgation
of any rule or regulation under this chapter, due notice shall be given by
publication in the Federal Register of intention to promulgate and the time and
place of a public hearing to be held with reference thereto, and no rule or
regulation may be promulgated until after such hearing". See also the
so-called Dangerous Cargoes Act (46 U.S.C. 170(9)) and the Tanker Act (46
U.S.C. 391a (3)) discussed in Senate Hearings (1941) p. 589. In this type of
statute, there is no requirement, express or implied, that rules be formulated
"on the record".
There
is persuasive legislative history to the effect that the Congress did not
intend sections 7 and 8 to apply to rule making where the substantive statute
merely required a hearing. In 1941, a subcommittee of the Senate Committee on
the Judiciary held hearings on S. 674 (77th Cong., 1st sess.) and other
administrative procedure bills. Section 209 (d) of S. 674 provided with [35]
respect to rule making that "where legislation specifically requires the
holding of hearings prior to the making of rules, formal rule making hearings
shall be held". Mr. Ashley Sellers, testifying on behalf of the Department
of Agriculture, called the subcommittee's attention to the fact that in various
statutes, such as the Federal Seed Act, in which the Congress had required
hearings to be held prior to the issuance of rules, the obvious purpose
"was simply to require that the persons interested in the proposed rule
should be permitted to express their views". Mr. Sellers drew a sharp
distinction between such hearing requirements and the formal rule making
requirements of the Federal Food, Drug and Cosmetic Act. Senate Hearings (1941)
pp. 78-81, 1515, 1520.(4) Since this situation was thus specifically called to
the subcommittee's attention, it is a legitimate inference that with respect to
rule making the present dual requirement, i.e., "after opportunity for an
agency hearing" and "on the record", was intended to avoid the
application of formal procedural requirements in cases where the Congress
intended only to provide an opportunity for the expression of views. See Mr.
Carl McFarland's statement in Senate Hearings (1941) pp. 1343, 1386. See also
Pacific States Box & Basket Co. v. White, 296 U.S. 176, 186 (1935).
Publication
of procedures. Each agency which will be affected by section 4 should publish
under section 3 (a) (2) the procedures, formal and informal, pursuant to which
the public may participate in the formulation of its rules. The statement of
informal rule making procedures may be couched in either specific or general
terms, depending on whether the agency has adopted a fixed procedure for all
its rule making or varies it according to the type of rule to be promulgated.
In the latter instance, it would be sufficient to state that proposed
substantive rules will be adopted after allowing the public to participate in
the rule making process either through submission of written data, oral
testimony, etc., the method of participation in each case to be specified in
the published notice in the Federal Register. H.R. Rep. p. 25 (Sen. Doc. p.
259).
*
* * * *
SECTION
4 (d)--PETITIONS
Section
4 (d) provides that "Every agency shall accord any interested person the
right to petition for the issuance, amendment, or repeal of a rule." Section
4 (d) applies not only to substantive rules but also to interpretations and
statements of general policy, and to organizational and procedural rules. It is
applicable both to existing rules and to proposed or tentative rules.
The
right to petition under section 4 (d) must be accorded to any "interested
person". It will be proper for an agency to limit this right to persons
whose interests are or will be affected by the issuance, amendment or repeal of
a rule.
Every
agency with rule making powers subject to section 4 should establish, and
publish under section 3 (a) (2), procedural rules governing the receipt,
consideration and disposition of petitions filed pursuant to section 4 (d).
These procedural rules may call, for example, for a statement of the rule
making action which the petitioner seeks, together with any data available in
support of his petition, a declaration of the petitioner's interest in the
proposed action, and compliance with reasonable formal requirements.
If
the agency is inclined to grant the petition, the nature of the proposed rule
would determine whether public rule making proceedings under section 4 (a) and
(b) are required. However, the mere filing of a petition does not require the
agency to grant it or to hold a hearing or to engage in any other public rule
making proceedings. For example, under section 701(e) of the [39] Federal Food,
Drug and Cosmetic Act (21 U.S.C. 371 (e)), the Federal Security Administrator
must provide a hearing on a proposed rule only where an application, stating
reasonable grounds, is made by an interested industry or a substantial portion
of the industry. Section 4 (d) was not intended to modify that statute so as to
require the Federal Security Administrator to hold a hearing on the petition of
a single individual.
The
agency need act on the petition only in accordance with its procedures as
published in compliance with section 3 (a) (2). The denial of a petition is
governed by section 6 (d). Sen. Rep. p. 15; H.R. Rep. p. 26 (Sen. Doc. pp. 201,
260). Accordingly, prompt notice of such denial should be given to the
petitioner, together with a simple statement of the procedural or other grounds
therefor.
Neither
the denial of a petition under section 4 (d), nor an agency's refusal to hold
public rule making proceedings thereon, is subject to judicial review. Sen.
Rep. p. 44 (Sen. Doc. p. 230).
This
subsection (as in the case of the preceding portions of section 4) does not
apply to rules relating to the functions and matters enumerated in the first
sentence of section 4. The reports of the Senate and House Committees on the
Judiciary state that "The introductory clause exempts from all of the
requirements of section 4 any rule making so far as there are involved (1)
military, naval, or foreign affairs functions or (2) matters relating to agency
management or personnel or to public property, loans, grants, benefits, or
contracts." (Underscoring supplied). Sen. Rep. p. 13; H.R. Rep. p. 23
(Sen. Doc. pp. 199, 257). The petition procedure of section 4 (d) is not
applicable, for example, to the rules which an agency has issued or is
empowered to issue with respect to loans or pensions.
1. As used here, "formal" rule
making means those public rule making proceedings which must be conducted in
accordance with sections 7 and 8.
2. See section 8 of the Federal Register Act
(44 U.S.C. 308) for a general statutory standard of reasonable notice.
3. In this connection, the following working
definitions are offered: Substantive rules--rules, other than organizational or
procedural under section 3 (a) (1) and (2), issued by an agency pursuant to
statutory authority and which implement the statute, as, for example, the proxy
rules issued by the Securities and Exchange Commission pursuant to section 14
of the Securities Exchange Act of 1934 (15 U.S.C. 78 n). Such rules have the
force and effect of law.
Interpretative
rule--rules or statements issued by an agency to advise the public of the
agency's construction of the statutes and rules which it administers. See Final
Report. p. 27; Senate Comparative Print of June 1945, p. 6 (Sen. Doc. p. 18);
Senate Hearings (1941) p. 330.
General
statements of policy--statements issued by an agency to advise the public
prospectively of the manner in which the agency proposes to exercise a
discretionary power.
4. See, also, the statement of Acting Attorney
General Biddle citing examples of "statutes which require hearings as a
part of the rule making procedure without imposing a requirement of formal
adversary judicial methods". Senate Hearings (1941) p. 1468.
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