Sarbanes- oxley
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455
Part
>> The Regulatory Landscape for Business
Part Four of this text focuses on some of
the most important questions being discussed
today. Is there a limit to the federal
government’s power to regulate our lives? Are
there any areas of regulation over which state
and local governments have the right to control
to the exclusion of the federal government? To
what degree are persons and business organizations
free from governmental regulation?
The economic troubles that began in August
2008 continue to have substantial implications
for individuals and business. These recent events
involve a number of developments in the area
of government regulations of business activities.
The next five chapters describe and discuss some
of the most critical elements of this regulatory
environment.
Chapter 15 is a new chapter in this edition.
In this chapter, you will learn about the many
interpretations of the Commerce Clause in the
United States Constitution. Historically, decisions
involving this Clause have played a major part in
defining how business works in the United States.
Its relevance is no less important during this current
period as the Commerce Clause is the focus
of the court challenges to the Affordable Care
Act. This clause has a rich history of empowering
the federal government’s authority and restricting
state and local governments’ authority to regulate
business. Although the Commerce Clause
defines our regulatory environment, understanding
the role of administrative agencies in carrying
out the governments’ actions is critical. Chapter 15
also presents information about the workings of
these regulatory organizations.
Chapter 16 illustrates why the Sherman Act
and other antitrust laws remain important in
the early years of the 21st Century. The regulation
of business activities to ensure a competitive
environment is now over 100 years old—the
Sherman Antitrust Act became law in 1890—yet
it continues to be of critical significance. From
the market dominance of Microsoft to Apple to
Google, the regulatory environment attempts to
find the right balance of restrictive and free market
principles to ensure workable competition in
international marketplaces.
We know the regulation of the securities
industry began as an attempt to help the United
States emerge from the Great Depression in the
1930s. One of the commonplace responses to
economic troubles caused by business excesses
has been further regulation of financial institutions
and securities firms and exchanges. The
accounting scandals involving Enron, WorldCom,
and many other major companies produced the
Congressional response called Sarbanes-Oxley.
The more recent economic crises resulted in the
Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010. Chapter 17 provides
details on the history that lead to securities regulations
and financial reforms.
Another critically important area of regulations
concerns how individuals are protected
FOUR
456
from various business activities that might produce
harm. Chapter 18 examines various consumer
laws and some of the financial protections
of those laws. Consumer law protects people
only in buying goods and services for personal
and household use. If antitrust law regulates by
establishing legal boundaries that protect businesses
and their resources from economically
harmful competition from other businesses,
consumer law regulates by establishing legal
requirements that protect consumers and their
resources from harmful trade practices. Chapter 18
focuses on the Federal Trade Commission’s consumer
protection authority, various laws protecting
consumers in the extension of credit,
limitations on debt collection, and the financial
discharge of consumers in bankruptcy.
Finally, in this part of the text, we look at the
laws designed to protect our physical environment.
Chapter 19 examines the efforts of federal,
state, and local governments to enact laws limiting
pollution of air, water, and land. This chapter also
provides examples of environmental laws that
protect human health, endangered species, and
other aspects of the environment. At this moment
in time, some argue that our environmental laws
have been so successful in creating a cleaner environment
that there is little to gain from increased
regulation. Others argue that businesspeople will
sacrifice the environment’s well being for all in
return for increased profits for a few. Chapter 19
provides information so you can make your own
judgment as to how businesspeople should act to
ensure a safe future. •
Learning Objectives:
In this chapter, you will learn:
15-1. To analyze the power of the federal government to regulate businesses.
15-2. To understand and evaluate the sources of state and local governments’
regulatory powers and the limitations placed on these powers.
15-3. To apply the essential reasons for and requirements of administrative
agencies.
15-4. To evaluate the role of courts in reviewing the actions of administrative
agencies.
15-5. To create your own judgment about the regulatory processes.
The Commerce Clause
and the Regulatory
Process 15
459
From a historical perspective, there are
many eras during which significant laws
were passed. However, three periods
stand out as involving major expansion of government
regulation of business activities. First,
during the New Deal of the 1930s and 1940s,
we saw the creation of securities regulations,
social security, minimum wages, and several labor
laws. During the period of the Great Society in
the 1960s and 1970s, the Civil Rights Act, Medicare,
other employment laws, and environmental
regulations were enacted. Since the turn to the
twenty-first century, a third period of expansion
has included the Sarbanes-Oxley Act, economic
recovery legislation, health care, and financial
reforms.
460 PART 4 The Regulatory Landscape for Business
While it is beyond the scope of this text to explain whether a 30-year pattern
exists and whether one of these eras is more significant than the others, it is
clear we need to address several questions related to government regulation
of business.
How do governments get the power to regulate business activities? Given
such power, how is regulation actually accomplished? What limitations are
there to the governments’ power to regulation?
This chapter attempts to answer these questions. In doing so, you should
gain a historical perspective of the constitutional provision referred to as the
Commerce Clause. First, this history shows the importance of creating one
nation as a means of facilitating business activity. Second, it demonstrates the
growth of the federal government’s powers over an extended period. Third,
this clause restricts the regulatory powers of state and local governments.
Finally, in this early twenty-first century, we will see how courts are struggling
with what limitations should be placed on the federal government’s power to
regulate business.
After reviewing the Commerce Clause, this chapter focuses on how regulation
is conducted. In the second part of the chapter, you will be introduced
to the regulatory process through administrative agencies at the federal, state,
and local levels. In addition to learning about the reasons for and functions
of agencies, the role of the courts in reviewing and enforcing administrative
rules and regulations are examined.
>> Federal Government’s Authority to Regulate
Business—The Commerce Clause
The Commerce Clause can be found in Article 1, Section 8, of the United
States Constitution. This clause declares “The Congress shall have Power . . .
to regulate Commerce with foreign Nations, and among the several States,
and with the Indian Tribes.” The Commerce Clause gives rise to the federal
government’s power to regulate business activity.
This simple-sounding clause requires analysis in the following four areas:
• Regulation of foreign commerce
• Regulation of interstate commerce
• Impact on interstate commerce
• Possible limitations on federal regulatory authority
The next four sections focus on these areas and the impact on businesses and
businesspeople.
1. REGULATION OF FOREIGN COMMERCE
The first part of the commerce clause grants the federal government power to
regulate foreign commerce. The power to regulate foreign commerce is vested
exclusively in the federal government, and it extends to all aspects of foreign
trade. In other words, the power to regulate foreign commerce is total. The
federal government can prohibit foreign commerce entirely. In recent years, for
LO 15-1
CHAPTER 15 The Commerce Clause and the Regulatory Process 461
example, the federal government has imposed trade embargoes on countries such
as Iran, North Korea, and Libya. It can also allow commerce with restrictions.
That the federal power to regulate foreign commerce is exclusive means
state and local governments may not regulate such commerce. State and local
governments sometimes attempt directly or indirectly to regulate imports or
exports to some degree. Such attempts generally are unconstitutional. However,
a state may regulate activities that relate to foreign commerce if such activities
are conducted entirely within the state’s boundaries. For example, the U.S.
Supreme Court has upheld a state tax on the leases of cargo containers used in
international trade. This decision was based on the tax being fairly apportioned
to the use of the cargo containers within the state. Hence, the Court concluded
that the state tax did not violate the foreign commerce clause. 1
2. REGULATION OF INTERSTATE COMMERCE
Among the most significant early decisions by the United States Supreme
Court was one involving the meaning of “Commerce among the several
States.” As a result of Robert Fulton achieving success with the steam engine,
he and Robert Livingston, his father-in-law, were granted by the New York
legislature the exclusive right to operate steamboats in New York waters. This
monopoly right was operated by Aaron Ogden.
Several potential competitors to this monopoly operated steam-powered
ferries that transported people from the New Jersey shores to the harbors in
New York. Among the more aggressive competitors was Thomas Gibbons,
who hired Cornelius Vanderbilt to run steamboats between New Jersey and
New York. Mr. Ogden filed a lawsuit against Mr. Gibbons alleging the latter
was violating the legal monopoly granted by the State of New York. This lawsuit
eventually ended up before the relatively new United States Supreme Court.
In 1824, Chief Justice John Marshall announced what has been called
one of the Court’s landmark decisions when he concluded that the Commerce
Clause prohibits one state from interfering with commerce that crosses state
lines. In short, the case of Gibbons v. Ogden 2 stands for the proposition that
states cannot impede interstate commerce.
3. IMPACT ON INTERSTATE COMMERCE
It has been clear since the early 1800s that Congress has the power to regulate
commerce that passes across state lines. Less clear has been the federal government’s
power to regulate business activities that are not engaged in interstate
commerce. While there was little litigation during the rest of the nineteenth
century on this issue, the first half of the twentieth century created a clearer
picture. In a series of judicial decisions, the power of the federal government
expanded through interpretation to include not only persons engaged in interstate
commerce but also activities affecting interstate commerce.
The power of Congress over commerce is very broad; it extends to all
commerce, be it great or small. Labeling an activity a “local” or “intrastate”
Do appreciate the
significant grant of
power given to the
federal government
through the
commerce clause.
1Itel Containers In’t Corp. v. Huddleston, 113 S. Ct. 1095 (1993).
2 22 U.S. 1 (1824) .
462 PART 4 The Regulatory Landscape for Business
activity does not prevent Congress from regulating it under the commerce
clause. The power of Congress to regulate commerce “among the several
states” extends to those intrastate activities that affect interstate commerce
as to make regulation of them appropriate. Regulation is appropriate if it
aids interstate commerce. Even activity that is purely intrastate in character
may be regulated by Congress, when the activity, combined with like conduct
by others similarly situated, substantially affects commerce among states. As
a result of various Supreme Court decisions, it is hard to imagine a factual
situation involving business transactions that the federal government cannot
regulate.
4. LIMITATION ON FEDERAL AUTHORITY
The scope of the federal government’s power to regulate commerce has
become so broad that the focus, in the early twenty-first century, turns to
whether there is any limitation on this authority. This topic requires examination
from two perspectives. First, does the Commerce Clause contain any
unstated restriction on the federal government? Second, are there areas of
regulation of commerce that require the federal government to defer to the
states or local governments? This latter question is addressed in section 5.
Sidebar 15.1 addresses the former question.
A very interesting question concerning the scope and
limit of federal authority under the Commerce Clause
comes from the Affordable Care Act of 2010. One
provision of this complex law requires that everyone
have health insurance coverage beginning in 2014.
While many aspects of this law are controversial, this
mandate of insurance has been the focus of multiple
challenges. By 2011, several district judges had
issued ruling on the constitutionality of the federal
government mandating the purchase of health insurance.
Three judges found this requirement supported
by the Commerce Clause. These conclusions accept
the traditional view that Congress has broad authority
when interstate commerce might be impacted.
These judges agree that medical treatment of uninsured
persons impacts commerce.
Meanwhile judges in Virginia and Florida ruled
the requirement was unconstitutional since the federal
government was requiring individuals to engage
in commerce through the purchase of health insurance.
These two judges view this mandate as a step
beyond regulating commerce; they have found that
the Commerce Clause does not empower the federal
government to mandate purchases.
There is a lot of speculation of how, and even
whether, the Supreme Court will handle this issue.
So far, the Court has refused to combine these cases
and resolve the matter without these cases going
to the court of appeals first. These cases are being
reviewed by various circuit court of appeals. Thus, the
Supreme Court will not decide this issue until 2012
or 2013. Even then, predictions vary regarding how
the Supreme Court will rule. Since the mandate does
not become applicable until 2014, some believe the
Court will defer judgment until that year.
This particular example of requiring the purchase
of health insurance may or may not help set
the perimeter of federal power to regulate commerce.
However, given the lengthy history of Commerce
Clause litigation and the current mood to find
the limits of the federal government’s authority, this
topic likely will remain of interest.
>> sidebar 15.1
Constitutionality of Health Insurance Mandate?
CHAPTER 15 The Commerce Clause and the Regulatory Process 463
>> State and Local Governments’ Authority
to Regulate Business—Police Powers
Whereas the authority of the federal government to regulate business activity
comes from the express language of the commerce clause, state and local government
authority arises from a concept known as police powers. These powers
can be summarized as requiring state legislation and regulation to protect the
public’s health, safety, morals, and general welfare. These words, particularly the
last phrase, give state government expansive power to regulate business activities.
5. LIMITATION OF POLICE POWERS
The police powers are not limitless. For example, state regulations must not
be arbitrary, capricious, or unreasonable. Furthermore, the state regulation
must not violate the commerce clause. These limitations imposed by the U.S.
Constitution are referred to as the dormant commerce clause concept.
Three distinct subject areas of government regulation of commerce
emerge from Supreme Court decisions. Some areas are exclusively federal,
some are said to be exclusively state, and still others are such that regulation
of them may be dual.
Exclusively Federal The subject area that is exclusively federal
concerns those internal matters where uniformity on a nationwide basis is
essential. Any state regulation of such subjects is void whether Congress has
expressly regulated the area or not.
A classic example of a regulatory area that needs to be limited to the
federal government is the opening and closing of airports. Because airlines
need access to airports consistent with their routes, havoc could ensue if local
authorities were allowed to set the hours that their airports operate. The regulation
of the operating hours of airports is best left to the Federal Aviation
Administration so that a coordinated effort is present.
Exclusively State In theory, those matters that are exclusively within
the states’ power are intrastate activities that do not have a substantial effect
on interstate commerce. This topic of what is solely within the domain of
the states’ regulatory authority creates both interesting history and currentday
controversy. Prior to 1937, Supreme Court opinions frequently upheld
the authority of states to regulate business activities. Court decisions declaring
federal legislation to be unconstitutional as interfering with state regulation
caused Franklin Roosevelt to propose increasing the number of Supreme
Court justices. Although his efforts to “pack the Court” failed, Roosevelt may
have convinced the sitting justices and subsequent ones that society was looking
to the federal government to get the economy growing to overcome the
negative impact of the Great Depression.
Beginning in 1937, the one consistent outcome of Supreme Court cases
considering the commerce clause has been that the federal authority is unlimited
and there is nothing reserved exclusively for the states. Throughout the
past several years, the justices seem to signal that the federal authority under
the commerce clause must have limitations. Sidebar 15.2 summarizes an
important case along this line of analysis.
LO 15-2
To avoid needless
repetition, the phrase
state government
is used to refer to
both state and local
governments.
Don’t rely on one
historical perspective
to predict the outcome
of future cases.
464 PART 4 The Regulatory Landscape for Business
The state of Oregon, in 1994, legalized doctorassisted
suicide when voters approved a ballot issue
enacting the Oregon Death with Dignity Act (ODWDA).
This act allows an Oregon resident to request a prescription
under the ODWDA to hasten death. The law
specifies the following requirements:
• The resident’s attending physician must determine
this patient has an incurable and irreversible
disease that will cause death within six months.
• The physician must decide the patient’s request
is voluntary.
• The physician must determine the patient is
informed.
• The physician must refer the patient to
counseling.
• A second physician must examine the patient,
the medical records, and confirm the attending
physician’s decision.
• Any prescription that a physician provides must
be administered by the patient and not by the
physician.
In 2001, U.S. Attorney General John Ashcroft
interpreted the federal Controlled Substances Act
(CSA) as prohibiting any physician the legal right
to prescribe controlled substances for the purpose
of assisting suicide. Under this interpretation, the
attorney general concludes that it is not a legitimate
medical practice to assist any patient with hastening
death. In essence, this interpretation subjected any
Oregon physician complying with ODWDA to punishment
for violating the federal CSA.
The U.S. Supreme Court, in a 6–3 opinion, finds
Congress, through the CSA, did not grant the attorney
general authority to interpret this federal law in
a way to override a state’s standards of acceptable
medical practice. The Court rejects the attorney general’s
decision to criminalize doctor-assisted suicide.
In doing so, the Court states “the CSA’s prescription
requirement does not authorize the Attorney General
to ban dispensing controlled substances for assisted
suicide in the face of a state medical regime permitting
such conduct.”
Source: Gonzales v. Oregon, 126 S. Ct. 904 (2006).
>> sidebar 15.2
Federalism and State Rights under the Commerce Clause
Commentators on the Gonzales decision speculate that it is a signal that
the Supreme Court will not approve every federal action as being justified by
the commerce clause. Other cases, including ones involving drug- and gunfree
school zones and violence against women, have resulted in the Court
limiting federal regulation in favor of state legislation. However, Gonzales v.
Oregon is closer to a decision directly impacting businesses and professionals.
This case may be a trendsetter. What is even more interesting about this
particular case is its illustration of the complexities of labeling justices philosophically.
The three dissenters (Roberts, Scalia and Thomas) traditionally
advocate states’ rights over federal regulation. In this case they seem to value
preservations of life over state rights.
Dual Regulation Between the two extremes, joint regulation is permissible.
This area can be divided into the following three subparts:
• Federal preemption.
• Federal regulation but no preemption.
• No federal regulation.
Federal Preemption The first subpart concerns those subjects over which
the federal government has preempted the field. By express language or by
comprehensive regulation, Congress has shown that it intends to exercise
exclusive control over the subject matter. When a federal statute preempts a
Do look back
at Chapter 3 for
discussion of judicial
philosophies.
CHAPTER 15 The Commerce Clause and the Regulatory Process 465
particular area of regulation, any state or local law pertaining to the same subject
matter is unconstitutional under the commerce clause and the supremacy
clause, and the state regulation is void. The net effect of a law that preempts
an area of regulation is to make that subject matter of the law exclusively
federal. In essence, the commerce clause combines with the supremacy clause
to prohibit any state regulation.
No Preemption The second subpart includes situations in which the federal
regulation of a subject matter is not comprehensive enough to preempt the
field. Here state regulation is permitted. However, when state law is inconsistent
or conflicts irreconcilably with the federal statute, it is unconstitutional
and void. Irreconcilable conflicts exist when it is not possible for a business
to comply with both statutes. If compliance with both is not possible, the
state law must fall under the supremacy clause and the commerce clause. If
compliance with both is reasonably possible, dual compliance is required.
This usually has the effect of forcing business to meet the requirements of
the law with the greatest burden. For example, if the state minimum wage
is $8.00 per hour and the federal is $7.75, employers would be required to
pay $8.00 since the conflict can be reconciled. Case 15.1 involves the Court’s
review of these principles as they relate to an Arizona law.
case 15.1 >>
CHAMBER OF COMMERCE OF THE UNITED STATES
OF AMERICA v. WHITING
131 S. Ct. 1968 (2011)
This case addresses the issue of whether an Arizona
law that imposes on employers the requirement of hiring
only persons who are legally in the United States
contradicts federal enacted policy that employers must
not hire unauthorized aliens. The context of this case
begins with the Immigration and Nationality Act
(INA) passed by Congress in 1952. The INA established
a comprehensive federal regulation of immigration
and naturalization; however, the INA did not
address employment of either legal or illegal aliens. In
1976, the Supreme Court ruled that states could provide
restrictions on the employment of illegal aliens.
The Court held the states’ police powers to do so were
not preempted by the INA.
In the mid-1980s, Congress enacted the Immigration
Reform and Control Act (IRCA) making it unlawful
to recruit or employ an alien when the recruiter
or employer knew the alien was not authorized to be
in the United States. To avoid liability under IRCA,
an employer must complete the Department of
Homeland Security’s Form I-9, attesting to a review
of the employee’s passport, resident alien card, alien
registration card, or other documents approved by the
United States Attorney General.
The IRCA limits the ability of States to restrict
employment of unauthorized workers. The IRCA
expressly preempts “any State or local law imposing
civil or criminal sanctions (other than through licensing
and similar laws) upon those who employ, or
recruit or refer for a fee for employment, unauthorized
aliens.” This preemption provision changes the
Supreme Court’s prior view of the broad scope of
states’ police powers. States now cannot impose civil
or criminal penalties related to the hiring of unauthorized
aliens.
In 1996, Congress established the E-Verify
internet-based system to assist employers in reviewing
aliens’ documentation to work. When an
employer submits a request to the E-Verify system,
the employer receives either a confirmation or tentative
nonconfirmation of the employee’s authorization
to work. If the nonconfirmation is not successfully
challenged by the employee, the employment must be
terminated.
466
The State of Arizona adopted The Legal Arizona
Workers Act of 2007 allowing its courts to suspend or
revoke any licenses necessary to do business in Arizona
if an employer knowingly or intentionally employs an
unauthorized alien. This law requires the use of the federal
government’s E-Verify system. The law provides
“proof of verifying the employment authorization of an
employee through the e-verify program creates a rebuttable
presumption that an employer did not knowingly
employ an unauthorized alien.”
The United States Chamber of Commerce along
with businesses and civil rights organizations filed a
lawsuit arguing that Arizona’s law was preempted
by the federal IRCA. The District Judge upheld the
Arizona law finding that it fit within the “other than
through licensing and similar laws” exception to
the preemption provision. The 9 th Circuit Court of
Appeals agreed that the Arizona law comes within the
saving clause of the IRCA. The Supreme Court granted
certiorari to review the Arizona law.
ROBERTS, CJ.: . . . The Chamber of Commerce
argues that Arizona’s law is expressly preempted by
IRCA’s text and impliedly preempted because it conflicts
with federal law. . . .
When a federal law contains an express preemption
clause, we focus on the plain wording of the
clause, which necessarily contains the best evidence of
Congress’ preemptive intent.
IRCA expressly preempts States from imposing
“civil or criminal sanctions” on those who employ
unauthorized aliens, “other than through licensing
and similar laws.” The Arizona law, on its face,
purports to impose sanctions through licensing
laws. The state law authorizes state courts to suspend
or revoke an employer’s business licenses if
that employer knowingly or intentionally employs
an unauthorized alien. The Arizona law defines
“license” as “any agency permit, certificate, approval,
registration, charter or similar form of authorization
that is required by law and that is issued by
any agency for the purposes of operating a business
in” the State. That definition largely parrots the
definition of “license” that Congress codified in the
Administrative Procedure Act. . . .
A license is a right or permission granted in
accordance with law . . . to engage in some business
or occupation, to do some act, or to engage in
some transaction which but for such license would be
unlawful. Articles of incorporation and certificates of
partnership allow the formation of legal entities and
permit them as such to engage in business and transactions
which but for such authorization would be
unlawful. Moreover, even if a law regulating articles
of incorporation, partnership certificates, and the like
is not itself a licensing law, it is at the very least similar
to a licensing law, and therefore comfortably within
the savings clause.
IRCA expressly preempts some state powers dealing
with the employment of unauthorized aliens and
it expressly preserves others. We hold that Arizona’s
licensing law falls well within the confines of the
authority Congress chose to leave to the States and
therefore is not expressly preempted.
As an alternative to its express preemption argument,
the Chamber contends that Arizona’s law is
impliedly preempted because it conflicts with federal
law. At its broadest level, the Chamber’s argument
is that Congress intended the federal system to be
exclusive, and that any state system therefore necessarily
conflicts with federal law. But Arizona’s procedures
simply implement the sanctions that Congress
expressly allowed Arizona to pursue through licensing
laws. Given that Congress specifically preserved such
authority for the States, it stands to reason that Congress
did not intend to prevent the States from using
appropriate tools to exercise that authority.
And here Arizona went the extra mile in ensuring
that its law closely tracks IRCA’s provisions in all
material respects. The Arizona law begins by adopting
the federal definition of who qualifies as an unauthorized
alien.
Not only that, the Arizona law expressly provides
that state investigators must verify the work
authorization of an allegedly unauthorized alien
with the Federal Government, and shall not attempt
to independently make a final determination on
whether an alien is authorized to work in the United
States. What is more, a state court shall consider only
the federal government’s determination when deciding
whether an employee is an unauthorized alien.
As a result, there can by definition be no conflict
between state and federal law as to worker authorization,
either at the investigatory or adjudicatory
stage. . . .
From this basic starting point, the Arizona law
continues to trace the federal law. Both the state and
federal law prohibit “knowingly” employing an unauthorized
alien. But the state law does not stop there
in guarding against any conflict with the federal law.
The Arizona law provides that “knowingly employ
an unauthorized alien means the actions described in
8 United States Code s 1324a,” and that the “term
shall be interpreted consistently with 8 United States
Code s 1324a and any applicable federal rules and
regulations.”
[continued]
467
[continued]
The Arizona law provides employers with the
same affirmative defense for good-faith compliance
with the I-9 process as does the federal law. And both
the federal and Arizona law accord employers a rebuttable
presumption of compliance with the law when
they use E-Verify to validate a finding of employment
eligibility. . . .
As with any piece of legislation, Congress did
indeed seek to strike a balance among a variety of
interests when it enacted IRCA. Part of that balance,
however, involved allocating authority between the
Federal Government and the States. The principle that
Congress adopted in doing so was not that the Federal
Government can impose large sanctions, and the
States only small ones. IRCA instead preserved state
authority over a particular category of sanctions-those
imposed through licensing and similar laws.
Of course Arizona hopes that its law will result
in more effective enforcement of the prohibition on
employing unauthorized aliens. But in preserving to
the States the authority to impose sanctions through
licensing laws, Congress did not intend to preserve
only those state laws that would have no effect. The
balancing process that culminated in IRCA resulted in
a ban on hiring unauthorized aliens, and the state law
here simply seeks to enforce that ban. . . .
The Chamber also argues that Arizona’s requirement
that employers use the federal E-Verify system
to determine whether an employee is authorized
to work is impliedly preempted. In the Chamber’s
view, “Congress wanted to develop a reliable and
non-burdensome system of work-authorization verification”
that could serve as an alternative to the
I-9 procedures, and the “mandatory use of E-Verify
impedes that purpose.” . . .
Arizona’s use of E-Verify does not conflict with
the federal scheme. The Arizona law requires that
“every employer, after hiring an employee, shall verify
the employment eligibility of the employee” through
E-Verify. That requirement is entirely consistent with
the federal law. And the consequences of not using
E-Verify under the Arizona law are the same as the
consequences of not using the system under federal
law. In both instances, the only result is that the
employer forfeits the otherwise available rebuttable
presumption that it complied with the law.
Congress’s objective in authorizing the development
of E-Verify was to ensure reliability in employment
authorization verification, combat counterfeiting
of identity documents, and protect employee privacy.
Arizona’s requirement that employers operating within
its borders use E-Verify in no way obstructs achieving
those aims.
In fact, the Federal Government has consistently
expanded and encouraged the use of E-Verify. When
E-Verify was created in 1996, it was meant to last just
four years and it was made available in only six States.
Congress since has acted to extend the E-Verify program’s
existence on four separate occasions, the most recent of
which ensures the program’s vitality through 2012. And
in 2003 Congress directed the Secretary of Homeland
Security to make E-Verify available in all 50 States. The
Department of Homeland Security has even used “billboard
and radio advertisements . . . to encourage greater
participation” in the E-Verify program.
The Chamber contends that “if the 49 other States
followed Arizona’s lead, the state-mandated drain on
federal resources would overwhelm the federal system
and render it completely ineffective, thereby defeating
Congress’s primary objective in establishing E-Verify.”
Whatever the legal significance of that argument, the
United States does not agree with the factual premise.
According to the Department of Homeland Security,
“the E-Verify system can accommodate the increased
use that the Arizona statute and existing similar laws
would create.” And the United States notes that “[t]he
government continues to encourage more employers
to participate” in E-Verify.
The Chamber has reservations about E-Verify’s
reliability, but again the United States disagrees. The
Federal Government reports that “E-Verify’s successful
track record . . . is borne out by findings documenting
the system’s accuracy and participants’ satisfaction.”
Indeed, according to the Government, the program is
“the best means available to determine the employment
eligibility of new hires.”
IRCA expressly reserves to the States the authority
to impose sanctions on employers hiring unauthorized
workers, through licensing and similar laws. In exercising
that authority, Arizona has taken the route least likely
to cause tension with federal law. It uses the Federal
Government’s own definition of “unauthorized alien,” it
relies solely on the Federal Government’s own determination
of who is an unauthorized alien, and it requires
Arizona employers to use the Federal Government’s own
system for checking employee status. If even this gives
rise to impermissible conflicts with federal law, then there
really is no way for the State to implement licensing sanctions,
contrary to the express terms of the savings clause.
Because Arizona’s unauthorized alien employment
law fits within the confines of IRCA’s savings clause
and does not conflict with federal immigration law,
the judgment of the United States Court of Appeals for
the Ninth Circuit is
Affirmed.
468
>> CASE QUESTIONS
1. What action does the federal Immigration Reform and Control Act attempt to preempt
by state and local governments? What does the federal law allow state and
local laws to do?
2. What does the Supreme Court conclude regarding the nature of Arizona’s law and
how does this conclusion impact the express preemption argument by the Chamber
of Commerce?
3. How does the Court rule on the Chamber’s claim that the Arizona law conflicts
with the IRCA?
4. How does the Court address the Chamber’s argument that Arizona improperly
makes the use of E-Verify mandatory thereby burdening the federal government’s
system?
[continued]
The commerce clause also invalidates state laws imposing an undue burden
on interstate commerce. The commerce clause does not prohibit the imposing
of burdens on interstate commerce—only the imposition of undue burdens. The
states have the authority under the police power to regulate matters of legitimate
local concern, even though interstate commerce may be affected. Furthermore,
as Sidebar 15.3 illustrates, states can regulate intrastate commerce.
Under the Michigan Motor Carrier Act, any motor carrier
operating vehicles in intrastate commerce within
Michigan must pay an annual fee of $100 for each
vehicle that undertakes point-to-point hauls within
the state. The U.S. Supreme Court concludes that
this fee is applicable only to carriers doing business
locally and is not applicable to carriers engaged only
in interstate commerce. The fee taxes only purely
local activity; it does not tax a truck carrying goods
through Michigan; nor does it tax activities spanning
multiple states. The Court finds the Michigan fee
does not burden or discriminate against interstate
commerce. Thus, there is no violation of the commerce
clause.
Source: American Trucking Associations, Inc. v. Michigan Public Service
Commission, 125 S. Ct. 2419 (2005).
>> sidebar 15.3
$100 Fee: Regulating Interstate Commerce
State statutes fall into two categories: those that burden interstate commerce
only incidentally and those that affirmatively discriminate against such
transactions. For cases in the first category, courts weigh the burdens against
the benefits and find undue burdens only if they clearly exceed the local benefits.
Cases in the second category are subject to more demanding scrutiny.
If a state law either in substance or in practical effect discriminates against
interstate commerce, the state must prove not only that the law has a legitimate
purpose but also that the purpose cannot be achieved by nondiscriminatory
means. If a state law is pure economic protectionism, the courts apply a
virtual per se or automatic rule of invalidity.
CHAPTER 15 The Commerce Clause and the Regulatory Process 469
No Federal Regulation The third area of possible joint regulation exists
where there is no federal law at all. When there is no federal regulation of a
subject, state regulation of interstate commerce is permissible, providing, of
course, that it does not impose an undue burden on interstate commerce and
does not discriminate against interstate commerce in favor of local business.
The commerce clause also has been construed as prohibiting discrimination
against interstate commerce in favor of intrastate commerce. State and local governments
frequently attempt by legislation to aid local business in its competition
with interstate business. The commerce clause requires that all regulations be the
same for local businesses as for businesses engaged in interstate commerce. A
state may not place itself in a position of economic isolation from other states.
Case 15.2 illustrates the interpretation of the commerce clause as it impacts the
discriminatory nature of state regulations.
Key analysis of state
regulation relates to
the undue burden
on or discrimination
against interstate
commerce activities.
case 15.2 >>
GRANHOLM v. HEALD
125 S. Ct. 1885 (2005)
This case involves challenges against laws in Michigan
and New York restricting out-of-state wineries from
selling wine to in-state consumers. Michigan’s law
permits in-state wineries to sell and ship directly to
Michigan consumers. However, out-of-state wineries
must utilize a three-tier system of distribution. These
wineries must distribute their wines through Michigan
wholesalers who sell to retailers who sell to Michigan
consumers.
The New York law is similar with one exception.
A winery’s product may be sold directly to New York
consumers if the wine is made from grapes at least
75 percent of which are grown in New York. This
percentage requirement applies to both in-state and
out-of-state wineries. Furthermore, to sell directly to
consumers, the out-of-state winery must have a branch
factory, office, or storeroom in New York.
In the Michigan case, residents of that state and
a California winery filed suit contending that the
Michigan law discriminates against interstate commerce
in violation of the commerce clause. The district
judge upheld the Michigan law, but the Sixth Circuit
Court of Appeals reversed, holding the Michigan law
is unconstitutional.
In the New York case, similar arguments were
made by New York residents who filed suit. That district
judge found in favor of the plaintiffs; however, the
Second Circuit Court of Appeals reversed, finding the
New York law to be constitutional.
KENNEDY, J.: . . . We consolidated these cases and
granted certiorari on the following question: “Does a
State’s regulatory scheme that permits in-state wineries
directly to ship alcohol to consumers but restricts the
ability of out-of-state wineries to do so violate the dormant
Commerce Clause in light of §2 of the Twentyfirst
Amendment?”
For ease of exposition, we refer to the respondents
from the Michigan challenge and the petitioners in the
New York challenge collectively as the wineries. We
refer to their opposing parties—Michigan, New York,
and the wholesalers and retailers—simply as the States.
Time and again this Court has held that, in all
but the narrowest circumstances, state laws violate the
Commerce Clause if they mandate differential treatment
of in-state and out-of-state economic interests that
benefits the former and burdens the latter. This rule is
essential to the foundations of the Union. The mere fact
of nonresidence should not foreclose a producer in one
State from access to markets in other States. States may
not enact laws that burden out-of-state producers or
shippers simply to give a competitive advantage to instate
businesses. This mandate reflects a central concern
of the Framers that was an immediate reason for calling
the Constitutional Convention: the conviction that in
order to succeed, the new Union would have to avoid
the tendencies toward economic balkanization that had
plagued relations among the Colonies and later among
the States under the Articles of Confederation.
470
Laws of the type at issue in the instant cases contradict
these principles. They deprive citizens of their
right to have access to the markets of other States on
equal terms. The perceived necessity for reciprocal sale
privileges risks generating the trade rivalries and animosities,
the alliances and exclusivity, that the Constitution
and, in particular, the Commerce Clause were
designed to avoid. . . .
The discriminatory character of the Michigan system
is obvious. Michigan allows in-state wineries to
ship directly to consumers, subject only to a licensing
requirement. Out-of-state wineries, whether licensed
or not, face a complete ban on direct shipment. The
differential treatment requires all out-of-state wine,
but not all in-state wine, to pass through an in-state
wholesaler and retailer before reaching consumers.
These two extra layers of overhead increase the cost
of out-of-state wines to Michigan consumers. The cost
differential, and in some cases the inability to secure
a wholesaler for small shipments, can effectively bar
small wineries from the Michigan market.
The New York regulatory scheme differs from
Michigan’s in that it does not ban direct shipments
altogether. Out-of-state wineries are instead required to
establish a distribution operation in New York in order
to gain the privilege of direct shipment. This, though, is
just an indirect way of subjecting out-of-state wineries,
but not local ones, to the three-tier system. . . .
The New York scheme grants in-state wineries
access to the State’s consumers on preferential terms.
The suggestion of a limited exception for direct shipment
from out-of-state wineries does nothing to eliminate the
discriminatory nature of New York’s regulations. In-state
producers, with the applicable licenses, can ship directly
to consumers from their wineries. Out-of-state wineries
must open a branch office and warehouse in New York,
additional steps that drive up the cost of their wine. For
most wineries, the expense of establishing a bricks-andmortar
distribution operation in one State, let alone all
fifty, is prohibitive. It comes as no surprise that not a single
out-of-state winery has availed itself of New York’s
direct-shipping privilege. We have viewed with particular
suspicion state statutes requiring business operations
to be performed in the home State that could more
efficiently be performed elsewhere. New York’s in-state
presence requirement runs contrary to our admonition
that States cannot require an out-of-state firm to become
a resident in order to compete on equal terms. . . .
We have no difficulty concluding that New York,
like Michigan, discriminates against interstate commerce
through its direct-shipping laws.
State laws that discriminate against interstate
commerce face a virtually per se rule of invalidity.
The Michigan and New York laws by their own terms
violate this proscription. The two States, however, contend
their statutes are saved by §2 of the Twenty-first
Amendment, which provides:
The transportation or importation into any State,
Territory, or possession of the United States for
delivery or use therein of intoxicating liquors, in
violation of the laws thereof, is hereby prohibited.
The States’ position is inconsistent with our precedents
and with the Twenty-first Amendment’s history.
Section 2 does not allow States to regulate the direct
shipment of wine on terms that discriminate in favor
of in-state producers. . . .
The aim of the Twenty-first Amendment was to
allow States to maintain an effective and uniform
system for controlling liquor by regulating its transportation,
importation, and use. The Amendment did
not give States the authority to pass nonuniform laws
in order to discriminate against out-of-state goods, a
privilege they had not enjoyed at any earlier time. . . .
The modern §2 cases fall into three categories.
First, the Court has held that state laws that
violate other provisions of the Constitution are not
saved by the Twenty-first Amendment. The Court has
applied this rule in the context of the First Amendment,
the Establishment Clause, the Equal Protection
Clause, the Due Process Clause, and the Import-
Export Clause.
Second, the Court has held that §2 does not abrogate
Congress’ Commerce Clause powers with regard
to liquor. The argument that the Twenty-first Amendment
has somehow operated to repeal the Commerce
Clause for alcoholic beverages has been rejected. . . .
Finally, and most relevant to the issue at hand, the
Court has held that state regulation of alcohol is limited
by the nondiscrimination principle of the Commerce
Clause. When a state statute directly regulates
or discriminates against interstate commerce, or when
its effect is to favor in-state economic interests over
out-of-state interests, we have generally struck down
the statute without further inquiry. . . .
Our determination that the Michigan and New
York direct-shipment laws are not authorized by the
Twenty-first Amendment does not end the inquiry.
We still must consider whether either State regime
advances a legitimate local purpose that cannot be
adequately served by reasonable nondiscriminatory
alternatives. The States offer two primary justifications
for restricting direct shipments from out-of-state wineries:
keeping alcohol out of the hands of minors and
facilitating tax collection. We consider each in turn.
The States . . . claim that allowing direct shipment
from out-of-state wineries undermines their ability to
police underage drinking. Minors, the States argue,
have easy access to credit cards and the Internet and
[continued]
471
[continued]
are likely to take advantage of direct wine shipments
as a means of obtaining alcohol illegally.
The States provide little evidence that the purchase
of wine over the Internet by minors is a problem.
Indeed, there is some evidence to the contrary.
A recent study by the staff of the FTC found that the
26 States currently allowing direct shipments report no
problems with minors’ increased access to wine. This
is not surprising for several reasons. First, minors are
less likely to consume wine, as opposed to beer, wine
coolers, and hard liquor. Second, minors who decide to
disobey the law have more direct means of doing so.
Third, direct shipping is an imperfect avenue of obtaining
alcohol for minors who, in the words of the past
president of the National Conference of State Liquor
Administrators, “want instant gratification.” Without
concrete evidence that direct shipping of wine is likely
to increase alcohol consumption by minors, we are
left with the States’ unsupported assertions. Under our
precedents, which require the clearest showing to justify
discriminatory state regulation, this is not enough.
Even were we to credit the States’ largely unsupported
claim that direct shipping of wine increases
the risk of underage drinking, this would not justify
regulations limiting only out-of-state direct shipments.
As the wineries point out, minors are just as likely to
order wine from in-state producers as from out-of-state
ones. Michigan, for example, already allows its licensed
retailers (over 7,000 of them) to deliver alcohol directly
to consumers. Michigan counters that it has greater
regulatory control over in-state producers than over
out-of-state wineries. This does not justify Michigan’s
discriminatory ban on direct shipping. Out-of-state wineries
face the loss of state and federal licenses if they fail
to comply with state law. This provides strong incentives
not to sell alcohol to minors. In addition, the States
can take less restrictive steps to minimize the risk that
minors will order wine by mail. For example, the Model
Direct Shipping Bill developed by the National Conference
of State Legislatures requires an adult signature on
delivery and a label so instructing on each package.
The States’ tax-collection justification is also insufficient.
Increased direct shipping, whether originating
in state or out of state, brings with it the potential for
tax evasion. With regard to Michigan, however, the
tax-collection argument is a diversion. That is because
Michigan, unlike many other States, does not rely on
wholesalers to collect taxes on wines imported from
out of state. Instead, Michigan collects taxes directly
from out-of-state wineries on all wine shipped to instate
wholesalers. If licensing and self-reporting provide
adequate safeguards for wine distributed through
the three-tier system, there is no reason to believe they
will not suffice for direct shipments.
New York and its supporting parties also advance
a tax-collection justification for the State’s directshipment
laws. While their concerns are not wholly
illusory, their regulatory objectives can be achieved
without discriminating against interstate commerce. In
particular, New York could protect itself against lost
tax revenue by requiring a permit as a condition of
direct shipping. This is the approach taken by New
York for in-state wineries. The State offers no reason
to believe the system would prove ineffective for outof-
state wineries. Licensees could be required to submit
regular sales reports and to remit taxes. Indeed,
various States use this approach for taxing direct interstate
wine shipments and report no problems with tax
collection. . . . The States have not shown that tax evasion
from out-of-state wineries poses such a unique
threat that it justifies their discriminatory regimes.
Michigan and New York offer a handful of other
rationales, such as facilitating orderly market conditions,
protecting public health and safety, and ensuring
regulatory accountability. These objectives can also
be achieved through the alternative of an evenhanded
licensing requirement. Finally, it should be noted that
improvements in technology have eased the burden of
monitoring out-of-state wineries. Background checks
can be done electronically. Financial records and sales
data can be mailed, faxed, or submitted via e-mail.
In summary, the States provide little concrete evidence
for the sweeping assertion that they cannot police
direct shipments by out-of-state wineries. Our Commerce
Clause cases demand more than mere speculation
to support discrimination against out-of-state goods. . . .
The Court has upheld state regulations that discriminate
against interstate commerce only after finding, based on
concrete record evidence, that a State’s nondiscriminatory
alternatives will prove unworkable. Michigan and
New York have not satisfied this exacting standard.
States have broad power to regulate liquor under
§2 of the Twenty-first Amendment. This power, however,
does not allow States to ban, or severely limit, the
direct shipment of out-of-state wine while simultaneously
authorizing direct shipment by in-state producers.
If a State chooses to allow direct shipment of wine,
it must do so on evenhanded terms. Without demonstrating
the need for discrimination, New York and
Michigan have enacted regulations that disadvantage
out-of-state wine producers. Under our Commerce
Clause jurisprudence, these regulations cannot stand.
We affirm the judgment of the Court of Appeals for
the Sixth Circuit; and we reverse the judgment of the
Court of Appeals for the Second Circuit and remand the
case for further proceedings consistent with our opinion.
It is so ordered.
472
>> CASE QUESTIONS
1. What is the procedural background of the courts’ holdings in these Michigan and
New York cases?
2. Why does the Supreme Court conclude the states’ laws are discriminatory against
out-of-state wineries?
3. What is the Court’s conclusion regarding the states’ authority to regulate alcohol
sales under Section 2 of the Twenty-first Amendment to the U.S. Constitution?
4. Why does the Court reject Michigan’s and New York’s arguments that the discriminatory
laws are justified?
[continued]
3United Haulers Association, Inc. v. Oneida-Herkimer Solid Waste Management Authority, 127 S.Ct.
1786 (2007).
4 Department of Revenue of Kentucky v. Davis, 128 S. Ct. 1801 (2008).
The Supreme Court’s recent decisions clarify that this ban on discrimination
under the commerce clause does not apply to functions traditionally conducted
by the government for the public’s benefit within a specific state. A New
York law that favored government-sponsored trash disposal over private companies
in New York and other states does not violate the commerce clause’s
prohibition of discrimination. 3 Likewise, Kentucky has a law that exempts
taxes on interest paid on Kentucky-issued bonds while not exempting taxes on
the interest paid on bonds issued by other states. The Supreme Court ruled this
state-sponsored activity is not subject to analysis under the commerce clause. 4
>> EXCLUSIVELY FEDERAL SUBJECTS
• Any state regulatory law is unconstitutional
under the supremacy and commerce clauses.
>> EXCLUSIVELY LOCAL SUBJECTS
• The impact on state and local government of
laws based on the commerce clause is very limited;
very few subjects are exclusively local.
>> POSSIBLE DUAL REGULATION SUBJECTS
• Federal law preempts the field. The subject matter
is considered exclusively federal.
• Federal law does not preempt the field. A state
law is unconstitutional if it:
1. Is in irreconcilable conflict with federal law.
2. Constitutes an undue burden on interstate
commerce.
3. Discriminates against interstate commerce in
favor of intrastate commerce.
• No federal law. A state law is unconstitutional if it:
1. Constitutes an undue burden on interstate
commerce.
2. Discriminates against interstate commerce in
favor of intrastate commerce.
concept >> summary
Possible Subjects for Government Regulation
CHAPTER 15 The Commerce Clause and the Regulatory Process 473
6. LIMITATION ON STATE TAXATION
Taxation is a primary form of regulation. Therefore, taxes imposed by state
and local governments are subject to the limitations imposed by the commerce
clause. The commerce clause limits property taxes, income taxes, and sales or
use taxes levied by state and local governments on interstate commerce. Since
taxation distributes the cost of government among those who receive its benefits,
interstate commerce is not exempt from state and local taxes. The purpose
of the commerce clause is to ensure that a taxpayer engaged in interstate
commerce pays only its fair share of state taxes.
To prevent multiple taxation of the same property or income of interstate
businesses, taxes are apportioned. Apportionment formulas allocate the tax
burden of an interstate business among the states entitled to tax it. The commerce
clause requires states to use reasonable formulas when more than one
state is taxing the same thing.
To justify the tax, there must be sufficient contact, connection, tie, or
link between the business and the taxing state. There must be sufficient local
activities to justify the tax in a constitutional sense. This connection is called
the nexus. A business operating in a state directly benefits from its police
and fire protection, the use of its roads, and the like. Indirectly, it will be able
to recruit employees more easily if they have easy access to good schools,
parks, and civic centers. If the state gives anything for which it can reasonably
expect payment, then the tax has a sufficient nexus. In cases involving
property taxes, the term taxable situs is used in place of nexus, but each is
concerned with the adequacy of local activities to support the tax.
>> Regulatory Process—Administrative
Agencies
We have seen that authority of the federal, state, and local governments to
regulate our professional and personal lives is founded in the constitutional
principles of the commerce clause and police powers. Typically, the actual
regulatory activity is performed by administrative agencies. The term administrative
agencies describes the boards, bureaus, commissions, and organizations
that make up the governmental bureaucracy. Sidebar 15.4 lists several
federal agencies and briefly describes their functions.
These agencies have either one or both types of regulatory authority. The
first type is called quasi-legislative in that an agency can issue rules (regulations)
that have the impact of laws. The second type is quasi-judicial in that
agencies can make decisions like a court.
The direct day-to-day legal impact on business of the rules and regulations
adopted and enforced by these agencies is probably greater than the
impact of the courts or other branches of government. Administrative agencies
create and enforce the majority of all laws constituting the legal environment
of business. The administrative process at either the state or federal level
regulates almost every business activity.
Although we focus on federal agencies in this chapter, keep in mind that
state and local governments also have many agencies. For example, state
workers’ compensation boards hear cases involving industrial accidents and
Apportionment
and nexus are
fundamental to
determining the
validity of any state
tax on businesses
engaged in interstate
commerce.
Professional
ballplayers may be
taxed by the state of
the home team on
the portion of their
salaries earned in
each game.
LO 15-3
The regulatory process
involves agencies at all
levels of government.
474 PART 4 The Regulatory Landscape for Business
injuries to employees, and most local governments have zoning boards that
make recommendations that impact business activities. State governments
usually license and regulate intrastate transportation, and state boards usually
set rates for local utilities supplying gas and electricity.
>> NAME >> FUNCTIONS
Consumer Product Safety Commission (CPSC) Protects the public against unreasonable risks of
injury associated with consumer products.
Environmental Protection Agency (EPA) Administers all laws relating to the environment,
including laws on water pollution, air pollution, solid
wastes, pesticides, toxic substances, etc.
Federal Aviation Administration (FAA)
(part of the Department of Transportation)
Regulates civil aviation to provide safe and efficient
use of airspace.
Federal Communications Commission (FCC) Regulates interstate and foreign communications by
means of radio, television, wire, cable, and satellite.
Federal Energy Regulatory Commission (FERC) Promotes dependable, affordable energy through
sustained competitive markets.
Federal Reserve Board (FRB) Regulates the availability and cost of money and
credit; the nation’s central bank.
Federal Trade Commission (FTC) Protects the public from anticompetitive behavior
and unfair and deceptive business practices.
Food and Drug Administration (FDA) Administers laws to prohibit distribution of
adulterated, misbranded, or unsafe food and drugs.
Equal Employment Opportunity Commission (EEOC) Seeks to prevent discrimination in employment
based on race, color, religion, sex, or national origin
and other unlawful employment practices.
National Labor Relations Board (NLRB) Conducts union certification elections and holds
hearings on unfair labor practice complaints.
Occupational Safety and Health Administration
(OSHA)
Ensures all workers a safe and healthy work
environment.
Securities and Exchange Commission (SEC) Enforces the federal securities laws that regulate sale
of securities to the investing public.
>> sidebar 15.4
Major Federal Agencies
In the rest of this chapter, you will study the following:
• The reasons our governments have come to rely on administrative agencies
• The basic functions of administrative agencies
• The organization and workings of these agencies
• The limits of courts’ review of agencies’ actions
7. REASONS FOR AGENCIES
There are many reasons why administrative agencies are necessary. Almost
every governmental agency exists because of a recognized problem in society
and the expectation that the agency may be able to help solve the problem.
CHAPTER 15 The Commerce Clause and the Regulatory Process 475
This section contains a discussion of the reasons why agencies are the essential
part of the regulatory process.
Providing Specificity Legislative branches often cannot legislate in
sufficient detail to cover all aspects of many problems. Congress cannot possibly
legislate in minute detail, and, as a consequence, it uses more and more
general language in stating its regulatory aims and purposes. For example,
Congress cannot enact a securities law that covers every possible issue that
might arise. Therefore, it delegates to the Securities and Exchange Commission
the power to make rules and regulations to fill in the gaps and create the
necessary details to make securities laws workable. In many areas an agency
develops detailed rules and regulations to carry out a legislative policy.
Also courts cannot handle all disputes and controversies that may arise.
For example, each year tens of thousands of industrial accidents cause injury
or death to workers. If each of these industrial accidents results in traditional
litigation, the courts simply will not have the time or the personnel to handle
the multitude of cases. Therefore, workers’ compensation boards decide such
claims. Likewise, most cases involving alleged discrimination in employment
are turned over to agencies for investigation and resolution.
Providing Expertise A reason many agencies are created is to refer a
problem or area to experts for solution and management. The Federal Reserve
Board (FRB), the Nuclear Regulatory Commission (NRC), and the Food and
Drug Administration (FDA) are examples of agencies with expertise beyond
that of Congress or the executive branch. The development of sound policies
and proper decisions in many areas requires expertise, and thus we tend to
resort to administrative agencies for this expertise. Similarly, administrative
agencies often provide needed continuity and consistency in the formulation,
application, and enforcement of rules and regulations governing business.
Providing Protection Many governmental agencies exist to protect
the public, especially from the business community. Business often fails to regulate
itself, and the lack of self-regulation is contrary to the public interest. For
example, the failure of business to voluntarily refrain from polluting many
streams and rivers as well as the air led to the creation of the Environmental
Protection Agency (EPA). The sale of worthless securities to the investing public
was a major reason for the creation of the Securities and Exchange Commission
(SEC). The manufacture and sale of dangerous products led to the
creation of the Consumer Product Safety Commission (CPSC). Americans tend
to turn to a governmental agency for assistance whenever a business or business
practice may injure significant numbers of the general public. A prevailing
attitude exists that the government’s duty is to protect the public from harm.
Providing Regulation Agencies often replace competition with regulation.
When a firm is given monopoly power, it loses its freedom of contract,
and a governmental body is given the power to determine the provisions of its
contracts. For example, electric utility companies are usually given a monopoly
in the geographic area which they serve. A state agency such as a public
service commission then has the power to set the rate structure for the utility.
Similar agencies regulate transportation and banking because of the difference
in bargaining power between the business and the public. Regulation is
often a substitute for competition.
Administrative
agencies are needed
to provide specificity,
expertise, protection,
regulation, and
services.
The Internal Revenue
Service (IRS)
implements federal
tax policy.
Zoning and Planning
Boards are local
agencies that provide
specificity, expertise,
and protection.
476 PART 4 The Regulatory Landscape for Business
Providing Services Many agencies arise simply out of necessity. If we
are to have a mail service, a post office is necessary. Welfare programs require
government personnel to administer them. Social Security programs necessitate
that there be a federal agency to determine eligibility and pay benefits.
The mere existence of most government programs automatically creates a
new agency or expands the functions of an existing one.
Having read the various reasons for the creation and operation of administrative
agencies, the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 provides many examples of how Congress relies on
regulatory bodies to fulfill legislative mandates. An overview of financial
reform is provided at the end of Chapter 17. In that material, nine new agencies
are listed. A significant question that will be answered only with time is
how well these new agencies will perform.
8. FUNCTIONS OF AGENCIES
Administrative agencies tend to possess functions of the other three branches
of government, including:
• Rule making
• Adjudicating
• Advising
• Investigating
These functions do not concern all administrative agencies to the same
degree. Some agencies are primarily adjudicating bodies, such as industrial
commissions that rule on workers’ compensation claims. Others are primarily
supervisory, such as the SEC, which oversees the issue and sale of investment
securities. To be sure, most agencies perform all these functions to some
degree in carrying out their responsibilities. Figure 15.1 illustrates how these
functions have been delegated to these agencies.
“Big lobbying fights
remain in the future,
when regulators begin
the nitty-gritty task
of turning complex,
sometimes vague laws
into real-world rules
for these businesses
to follow.”
Edward Wyatt
and David M.
Herszenshorn ,
“In Deal, New Authority
Over Wall Street,”
The New York Times,
June 25, 2010.
Figure 15.1
The powers of
administrative
agencies
Power to
create rules
& regulations
Power to
investigate, prosecute,
advise, supervise
Power to
decide
controversies
Legislative Executive Judicial
Administrative
Agencies
CHAPTER 15 The Commerce Clause and the Regulatory Process 477
Rule Making Agencies exercise their quasi-legislative power by issuing
rules and regulations that have the force and effect of law. Because of the
vast volume of rules and regulations, many business organizations struggle
to know all the legal requirements. By allowing time periods for public comments
on proposed regulations, interested parties have an opportunity to be
heard on the desirability and legality of the proposals.
Rules and regulations may apply to a business practice irrespective of the
industry involved, or they may apply only to an industry. For example, Occupational
Safety and Health Administrative (OSHA) rules may cover anyone’s
workplace, or a rule may be drafted so that its coverage is limited to an industry
such as drug manufacturing.
Guidelines are also issued by agencies to supplement rules. Guidelines are
administrative interpretations of the statutes that an agency is responsible for
enforcing. Often, guidelines help businesses determine whether certain practices
may or may not be viewed as legal. While guidelines can be helpful in
understanding an agency’s policy, these guidelines do not have the same force
of law as rules and regulations do.
Adjudicating The quasi-judicial function involves both fact-finding and
applying law to the facts. If violations of the law are found, sanctions, such
as a fine or other penalty, may be imposed. In addition, an agency may order
that a violator stop (cease) the objectionable activity and refrain (desist) from
any further similar violations. This type of agency action is called a cease
and desist order. Violations of a cease and desist order are punishable by
fines, which can be as much as $10,000 per day.
Many cases before agencies are settled by agreement before a final decision,
just as most lawsuits are settled. Such a settlement results in the issuance
of a consent order, which requires that the organization or individual
accused admit to the jurisdiction of the agency and waive all rights to seek a
judicial review. There is no admission that the business has been guilty of a
violation of the law, but there is an agreement not to engage in the business
activities that were the subject of the complaint. A consent order saves considerable
expense and has the same legal force and effect as a final cease and
desist order issued after a full hearing.
Advising The advisory function of an administrative agency may be
accomplished by making reports to the president or to Congress. For example,
an agency may propose new legislation to Congress, or it may inform the
attorney general of the need for judicial action due to violations of the law.
Agencies also report information to the general public that should be known
in the public interest, and they publish advisory opinions. For example, a
commission may give advice as to whether a firm’s proposed course of action
might violate any of the laws that commission administers. Advisory opinions
are not as binding as formal rulings, but they do give a business an indication
of the view an agency would take if the practice in question were challenged
formally. The advisory opinion is a unique device generally not available in
the judicial system, as courts deal only with actual cases and controversies.
Investigating One of the major functions of all agencies is to investigate
activities and practices that may be illegal. Because of this investigative power,
agencies can gather and compile information concerning the organization
The Federal Trade
Commission and the
Justice Department
have guidelines to
help determine which
mergers are legal and
which ones are likely
to be challenged as
illegal.
Consent orders are
settlement agreements
in which a business
or individual agrees
to comply with all
administrative rules.
478 PART 4 The Regulatory Landscape for Business
and business practices of any corporation or industry engaged in commerce
to determine whether there has been a violation of any law. In exercising their
investigative functions, agencies may use the subpoena power and require
reports, examine witnesses under oath, and examine and copy documents, or
they may obtain information from other governmental offices. This power of
investigation complements the exercise of the agency’s other powers, especially
the power to adjudicate.
As discussed in Chapter 13, it is a crime to make any false or fraudulent
statement in any matter within the jurisdiction of a federal agency. A person
may be guilty of a violation without proof that he or she had knowledge that
the matter was within the jurisdiction of a federal agency. As a result, information
furnished to an agency must be truthful.
9. ORGANIZATION OF AGENCIES
Administrative agencies, boards, or commissions usually consist of five to
seven members, one of whom is appointed as chair. Laws creating the regulatory
body usually specify that no more than a simple majority of the members
(three of the five or four of the seven) may belong to the same political party.
Appointments at the federal level require Senate confirmation, and appointees
are not permitted to engage in any other business or employment during
their terms. They may be removed from office by the president only for inefficiency,
neglect of duty, or malfeasance in office.
The following case highlights the constitutional requirements related to
the appointment of administrative officials.
“The Commodity
Futures Trading
Commission (CFTC)
opened a record 419
investigations over the
last year, into things
as diverse as smalltime
Ponzi schemes
and claims of market
manipulation.”
Julie Creswell and
Graham Bowley ,
“Once on Sleepy
Beat, Regulator is
Suddenly Busy,”
The New York Times,
November 4, 2010.
case 15.3 >>
FREE ENTERPRISE FUND v. PUBLIC COMPANY
ACCOUNTING OVERSIGHT BOARD
130 S. Ct. 3138 (2010)
As a part of the Sarbanes-Oxley Act, Congress created
the Public Company Accounting Oversight Board
(PCAOB or Board). This Board consists of five members
who are appointed by the Securities and Exchange
Commissioners. Board members serve 5-year, staggered
terms and are not considered Government officers
or employers. This allows the recruitment from
the private sector since the Board members’ salaries
are not subject to governmental limitations. These
members can be removed by the SEC Commissioners
only “for good cause” if the Board member:
“(A) has willfully violated any provision of the
Act, the rules of the Board, or the securities laws; (B)
has willfully abused the authority of that member; or
(C) without reasonable justification or excuse, has failed
to enforce compliance with any such provision or rule,
or any professional standard by any registered public
accounting firm or any associated person thereof.”
This arrangement concerning the appointment and
potential removal of Board members makes the PCAOB
a Government-created, Government-appointed entity
with expansive powers to govern an entire industry
(public accounting firms). It further makes the Board
members insulated from the direct supervision of the
SEC Commissioners.
Following the Board’s release of a negative report
about Beckstead and Watts, LLP, a public accounting
firm, this lawsuit was filed by that firm and The
Free Enterprise Fund challenging the constitutionality
of the Sarbanes-Oxley Act at least as far as the
479
[continued]
creation and operation of the PCAOB. The basis of
this challenge is the Board members are not subject to
the appointed powers of the President of the United
States. The United States Government joined the suit
to defend the Sarbanes-Oxley Act and the PCAOB.
The District Judge granted summary judgment in
favor of the United States, and the D.C. Circuit Court
of Appeals affirmed. Certiorari was granted to review
the constitutional issue.
ROBERTS, C.J.: . . . We hold that the dual for-cause
limitations on the removal of Board members contravene
the Constitution’s separation of powers.
The Constitution provides that “[t]he executive
Power shall be vested in a President of the United
States of America.” Art. II, §1, cl. 1. As Madison stated
on the floor of the First Congress, “if any power
whatsoever is in its nature Executive, it is the power
of appointing, overseeing, and controlling those who
execute the laws.”
The removal of executive officers was discussed
extensively in Congress when the first executive
departments were created. The view that “prevailed, as
most consonant to the text of the Constitution” and
“to the requisite responsibility and harmony in the
Executive Department,” was that the executive power
included a power to oversee executive officers through
removal; because that traditional executive power
was not “expressly taken away, it remained with the
President.” . . .
The landmark case of Myers v. United States
reaffirmed the principle that Article II confers on the
President “the general administrative control of those
executing the laws.” It is his responsibility to take care
that the laws be faithfully executed. The buck stops
with the President, in Harry Truman’s famous phrase.
As we explained in Myers, the President therefore
must have some “power of removing those for whom
he cannot continue to be responsible.”
Nearly a decade later in Humphrey’s Executor,
this Court held that Myers did not prevent Congress
from conferring good-cause tenure on the principal
officers of certain independent agencies. That case
concerned the members of the Federal Trade Commission,
who held 7-year terms and could not be removed
by the President except for “inefficiency, neglect of
duty, or malfeasance in office.” The Court distinguished
Myers on the ground that Myers concerned
“an officer [who] 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.” By
contrast, the Court characterized the FTC as “quasilegislative
and quasi-judicial” rather than “purely
executive,” and held that Congress could require it “to
act . . . independently of executive control.” Because
“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
Court held that Congress had power to “fix the period
during which [the Commissioners] shall continue in
office, and to forbid their removal except for cause in
the meantime.”
Humphrey’s Executor did not address the
removal of inferior officers, whose appointment Congress
may vest in heads of departments. If Congress
does so, it is ordinarily the department head, rather
than the President, who enjoys the power of removal.
This Court has upheld for-cause limitations on that
power as well. . . .
We have previously upheld limited restrictions
on the President’s removal power. In those cases,
however, only one level of protected tenure separated
the President from an officer exercising executive
power. It was the President—or a subordinate he
could remove at will—who decided whether the officer’s
conduct merited removal under the good-cause
standard. The Act before us does something quite
different. It not only protects Board members from
removal except for good cause, but withdraws from
the President any decision on whether that good cause
exists. That decision is vested instead in other tenured
officers—the Commissioners—none of whom is subject
to the President’s direct control. The result is a
Board that is not accountable to the President, and a
President who is not responsible for the Board. The
added layer of tenure protection makes a difference.
Without a layer of insulation between the Commission
and the Board, the Commission could remove a
Board member at any time, and therefore would be
fully responsible for what the Board does. The President
could then hold the Commission to account for
its supervision of the Board, to the same extent that
he may hold the Commission to account for everything
else it does. A second level of tenure protection
changes the nature of the President’s review. Now the
Commission cannot remove a Board member at will.
The President therefore cannot hold the Commission
fully accountable for the Board’s conduct, to the same
extent that he may hold the Commission accountable
for everything else that it does. The Commissioners are
not responsible for the Board’s actions. They are only
responsible for their own determination of whether the
Act’s rigorous good-cause standard is met. And even if
the President disagrees with their determination, he is
powerless to intervene—unless that determination is
so unreasonable as to constitute inefficiency, neglect of
duty, or malfeasance in office.
480
This novel structure does not merely add to the
Board’s independence, but transforms it. Neither the
President, nor anyone directly responsible to him, nor
even an officer whose conduct he may review only for
good cause, has full control over the Board. The President
is stripped of the power our precedents have preserved,
and his ability to execute the laws—by holding
his subordinates accountable for their conduct—is
impaired.
That arrangement is contrary to Article II’s vesting
of the executive power in the President. Without the
ability to oversee the Board, or to attribute the Board’s
failings to those whom he can oversee, the President
is no longer the judge of the Board’s conduct. He is
not the one who decides whether Board members are
abusing their offices or neglecting their duties. He can
neither ensure that the laws are faithfully executed,
nor be held responsible for a Board member’s breach
of faith. This violates the basic principle that the President
cannot delegate ultimate responsibility or the
active obligation to supervise that goes with it, because
Article II makes a single President responsible for the
actions of the Executive Branch.
Indeed, if allowed to stand, this dispersion of
responsibility could be multiplied. If Congress can shelter
the bureaucracy behind two layers of good-cause
tenure, why not a third? At oral argument, the Government
was unwilling to concede that even five layers
between the President and the Board would be too
many. The officers of such an agency—safely encased
within a Matryoshka doll of tenure protections—
would be immune from Presidential oversight, even as
they exercised power in the people’s name.
Perhaps an individual President might find advantages
in tying his own hands. But the separation of
powers does not depend on the views of individual
Presidents, nor on whether the encroached-upon
branch approves the encroachment. The President can
always choose to restrain himself in his dealings with
subordinates. He cannot, however, choose to bind his
successors by diminishing their powers, nor can he
escape responsibility for his choices by pretending that
they are not his own.
The diffusion of power carries with it a diffusion
of accountability. The people do not vote for the
Officers of the United States. They instead look to the
President to guide the assistants or deputies . . . subject
to his superintendence. Without a clear and effective
chain of command, the public cannot determine on
whom the blame or the punishment of a pernicious
measure, or series of pernicious measures ought really
to fall. That is why the Framers sought to ensure that
those who are employed in the execution of the law
will be in their proper situation, and the chain of
dependence be preserved; the lowest officers, the middle
grade, and the highest, will depend, as they ought,
on the President, and the President on the community.
By granting the Board executive power without the
Executive’s oversight, this Act subverts the President’s
ability to ensure that the laws are faithfully executed—
as well as the public’s ability to pass judgment on his
efforts. The Act’s restrictions are incompatible with the
Constitution’s separation of powers. . . .
This case presents an even more serious threat to
executive control than an “ordinary” dual for-cause
standard. Congress enacted an unusually high standard
that must be met before Board members may be
removed. A Board member cannot be removed except
for willful violations of the Act, Board rules, or the
securities laws; willful abuse of authority; or unreasonable
failure to enforce compliance—as determined
in a formal Commission order, rendered on the record
and after notice and an opportunity for a hearing.
The Act does not even give the Commission power to
fire Board members for violations of other laws that
do not relate to the Act, the securities laws, or the
Board’s authority. The President might have less than
full confidence in, say, a Board member who cheats on
his taxes; but that discovery is not listed among the
grounds for removal. . . .
The rigorous standard that must be met before a
Board member may be removed was drawn from statutes
concerning private organizations like the New
York Stock Exchange. While we need not decide the
question here, a removal standard appropriate for
limiting Government control over private bodies may
be inappropriate for officers wielding the executive
power of the United States. . . .
Petitioners’ complaint argued that the Board’s
“freedom from Presidential oversight and control”
rendered it “and all power and authority exercised by
it” in violation of Constitution. We reject such a broad
holding. Instead, we agree with the Government that
the unconstitutional tenure provisions are severable
from the remainder of the statute.
Generally speaking, when confronting a constitutional
flaw in a statute, we try to limit the solution to the
problem, severing any problematic portions while leaving
the remainder intact. . . . Concluding that the removal
restrictions are invalid leaves the Board removable by the
Commission at will, and leaves the President separated
from Board members by only a single level of good-cause
tenure. The Commission is then fully responsible for the
Board’s actions, which are no less subject than the Commission’s
own functions to Presidential oversight.
The Sarbanes-Oxley Act remains fully operative
as a law with these tenure restrictions excised.
We therefore must sustain its remaining provisions
[continued]
481
[continued]
“[u]nless it is evident that the Legislature would not
have enacted those provisions . . . independently of that
which is [invalid].” Though this inquiry can sometimes
be elusive, the answer here seems clear: The remaining
provisions are not incapable of functioning independently,
and nothing in the statute’s text or historical
context makes it evident that Congress, faced with the
limitations imposed by the Constitution, would have
preferred no Board at all to a Board whose members are
removable at will.
It is true that the language providing for goodcause
removal is only one of a number of statutory provisions
that, working together, produce a constitutional
violation. In theory, perhaps, the Court might bluepencil
a sufficient number of the Board’s responsibilities
so that its members would no longer be “Officers
of the United States.” Or we could restrict the Board’s
enforcement powers, so that it would be a purely recommendatory
panel. Or the Board members could in
future be made removable by the President, for good
cause or at will. But such editorial freedom—far more
extensive than our holding today—belongs to the Legislature,
not the Judiciary. Congress of course remains
free to pursue any of these options going forward. . . .
It is so ordered.
>> CASE QUESTIONS
1. What was Congress’s purpose in creating the Public Company Accounting Oversight
Board?
2. As stated in the Sarbanes-Oxley Act, what are the restrictions on removing the
Board members?
3. What conclusion does the Supreme Court reach concerning the constitutionality of
the PCOAB members’ powers?
4. How does this decision impact the validity of the Board and other provisions of
the Sarbanes-Oxley Act?
Regulatory agencies require staffs to carry out their duties. While each
agency has its own distinctive organizational structure to meet its responsibilities,
most agencies have persons performing certain functions common to all
agencies. Because agencies have quasi-legislative and quasi-judicial functions as
well as the usual executive ones, the organizational chart of an agency usually
embraces the full range of governmental duties. Figure 15.2 shows an organizational
chart outlining the general functions and duties of administrative agencies.
In General The chairperson is designated as such at the time of nomination
by the president and is the presiding officer at agency meetings. The
chairperson usually belongs to the same political party as the president and,
while an equal in voting, is somewhat more important than the other agency
members because of visibility and the power to appoint staff. For example,
the chairman of the Federal Reserve Board is often in the news, while the
other board members are relatively unknown.
The secretary is responsible for the minutes of agency meetings and is
legal custodian of its records. The secretary usually signs orders and official
correspondence and is responsible for publication of all actions in the Federal
Register. The secretary also coordinates the activities of the agency with others
involved in the regulatory process.
The office of general counsel is so important in many agencies that the
appointment usually requires Senate approval. The general counsel is the
482 PART 4 The Regulatory Landscape for Business
chief law officer and legal adviser. He or she represents the agency in court
and often makes the decision to file suit or pursue other remedies. The general
counsel has significant impact on policy and is often as powerful as a commissioner
or board member.
Advisory councils are persons not employed by the agency but interested
in its mission. Persons serving on councils are usually selected because of their
expertise. For example, the Consumer Product Safety Commission has an
advisory council on poison prevention packaging and another on flammable
fabrics. These councils provide for interaction between regulators and those
being regulated.
The executive director for administration is the chief operating official of
an agency and supervises usual administrative functions such as accounting,
budgeting, and personnel. Research and planning are usually also supervised
by the executive director. Since agencies spend a great deal of time lobbying
with Congress, most of them have a legislative liaison, reporting to the executive
director for administration.
The duties and suborganization of the director of operations vary greatly
from agency to agency. These operating bureaus are assigned specific areas of
activity. For example, at the EPA, one group will be concerned with clean air
and another with water problems.
All the staff of an
administrative agency
are employees
of the appointed
commissioners or
board members.
Figure 15.2
Organizational chart
of typical agency,
board, or commission
Northeast
General
Counsel
Director of
Operations
Bureaus
Investigations
Advisory Opinions
Litigation
Executive
Director for
Administration
Accounting
Budgeting
Congressional Liaison
EEO
Personnel
Planning
Public Information
Research
Administrative
Law Judges
Southeast
Regional Offices
Northwest
Secretary
Members (5—7)
Chairperson
Advisory
Councils
Midwest
Rocky
Mountain Southwest
CHAPTER 15 The Commerce Clause and the Regulatory Process 483
Regional offices investigate alleged violations of the law. In addition, they
usually have an educational function. Many regional offices have their own
administrative law judges and special legal counsel.
Quasi-Judicial Staff Administrative law judges perform the adjudicative
fact-finding functions. Like other types of judges, administrative law
judges are protected from liability for damages based on their decisions. This
protection is called immunity. Because these administrative law judges must
exercise independent judgment on the evidence presented, they must be free
from pressures possibly asserted by the parties.
These administrative law judges hear cases of alleged law violations and
apply the law to the facts. The members of the agency board or commission
hear only appeals from the decisions of the administrative law judges.
The judges are organizationally separate from the rest of the agency so that
the quasi-judicial function will be performed impartially. Administrative law
judges use prior decisions or precedent. In addition, they must follow the procedural
rules of the agency as well as its policy directives.
Historically, administrative law judges and all other personnel involved
in a quasi-judicial hearing have been employees of the administrative agency
bringing the complaint. Despite their best efforts to serve as neutral adjudicators,
administrative law judges have been accused of being biased in favor of
their employer (the agency). To reduce the likelihood of this accusation, several
states have created an Office of Administrative Hearings. Such an office
provides impartial administrative law judges for hearings involving all agencies
in the state government. The movement toward this type of office is likely
to continue due to the importance of citizens believing that they are treated
fairly by governmental agencies.
Sidebar 15.5 presents an overview of the procedures typically followed in
quasi-judicial matters.
Since even the
administrative law
judges work for the
appointed agency
leaders who hear
appeals of the
decision made, there
is a clear appearance
of bias that must be
overcome to maintain
the confidence of the
parties regulated.
Quasi-judicial proceedings usually begin with a complaint
filed by the agency. The complaint is often
the result of an investigation of information received
from a consumer or other person affected by business
conduct that may be illegal. The complaint
contains allegations of fact concerning the alleged
illegal conduct. The business or individual accused
of some illegality is called the respondent. After the
formal complaint is served, the respondent files an
answer to the charges and allegations. The case is
then assigned to an administrative law judge. At the
hearing, counsels for the agency and the respondent
produce evidence to prove or disprove the
allegations of fact in the complaint and answer. The
judge rules on the admissibility of evidence, rules
on motions made by counsel, and renders an initial
decision that includes a statement of findings
and conclusions, along with reasons for them, as
to all material issues of fact and law. The ruling
also includes an order the judge deems appropriate
in view of the evidence in the record. This order
becomes final if not challenged within 30 days after
it is filed. On the appeal, the agency, board, or commission
reviews the record of the initial decision and
has all the powers it could have exercised if it had
rendered that decision itself.
>> sidebar 15.5
Procedures Followed in Quasi-Judicial Proceedings
484 PART 4 The Regulatory Landscape for Business
10. INFLUENCING AGENCY DECISIONS
As discussed in Section 8, agencies adopt rules and regulations. Due process
of law requires that before a rule or regulation may be adopted by an agency,
interested parties must be given notice of the proposed rules and an opportunity
to express their views on them. Agencies give public notice of proposed
rules and hold public hearings on them.
At public hearings, interested parties are allowed to present evidence in
support of, or in opposition to, a proposed rule or regulation. As a result,
the best means of influencing a quasi-legislative decision of an administrative
agency is to participate in the adoption process.
Agencies are not politically responsible, in the sense that they are elected
by the people. However, it is clear that they react, sometimes dramatically, to
the force of public opinion. For example, the Securities and Exchange Commission
(SEC) consistently garners media attention as it strives to investigate,
adopt rules, and assess fines covering corporate scandals.
Citizens writing letters to agencies to obtain action or a change in policy
may be effective. These are probably even more effective if directed to a member
of Congress, who in turn asks the agency for an official response or explanation.
At various times, an agency may find itself bombarded with official
congressional inquiries into its activities. Investigations may result in either
budget cutbacks or increases. Just the threat of such a proceeding is often sufficient
to cause a review of administrative policy.
Furthermore, each branch of government has some control over the
administrative process. The executive branch normally appoints the top officials
of an agency with the advice and consent of the legislative branch. In
addition, the executive branch makes budget recommendations to the legislature
and has veto power over its statutes. The legislature can review and
control administrative activity by abolishing the agency, enacting specific
legislation contrary to rules adopted by the agency, more explicitly defining
limitations on the agency’s activities, providing additional procedural requirements
for the agency’s adjudications, or limiting appropriations of funds to
the agency.
>> Judicial Review of Agency Decisions
What alternatives are available to a person, business, or industry unhappy
with either rules and regulations that have been adopted or with the quasijudicial
decisions? What are the powers of courts in reviewing decisions of
administrative agencies? What chance does a party upset with an agency’s
decision have in obtaining a reversal of the decision? How much deference
is given to an agency’s decisions? Answers to these questions must be clearly
understood to appreciate the role of administrative agencies in our system.
The following section discusses a requirement that must be satisfied by
the parties challenging an agency’s rule-making or adjudicating function.
Then, in Sections 12 through 14, you will see that the issues before a court
reviewing an agency’s decision vary depending on whether a quasi-legislative
or quasi-judicial decision is being reviewed.
The Food and Drug
Administration (FDA)
was a strong advocate
for regulating tobacco.
More recently, the FDA
has been criticized
for granting licenses
for products like Vioxx
without completing
sufficient testing.
Checks and balances
are supposed to
keep agencies from
becoming too political.
LO 15-4
CHAPTER 15 The Commerce Clause and the Regulatory Process 485
11. STANDING TO SUE
Any party seeking the judicial review of any administrative agency’s decision
must be able to prove standing to sue. To establish standing, the challenging
party must address two issues.
Reviewability First, is the action or decision of the agency subject to
judicial review? Not all administrative decisions are reviewable. The Federal
Administrative Procedure Act provides for judicial review except where
“(1) statutes preclude judicial review or (2) agency action is committed to agency
discretion by law.” Few statutes actually preclude judicial review, and preclusion
of judicial review by inference is rare. It is most likely to occur when an
agency decides not to undertake action to enforce a statute. For example, prison
inmates asked the Food and Drug Administration (FDA) to ban the use of lethal
injections to carry out the death penalty. It refused to do so. The Supreme Court
held that this decision of the FDA was not subject to judicial review.
Aggrieved Party Second, is the plaintiff “an aggrieved party”? Generally
the plaintiff must have been harmed by an administrative action or decision
to have standing. This aspect of standing was discussed in Chapter 4 . It
is clear that persons who may suffer economic loss due to an agency’s action
have standing to sue. Recent decisions have expanded the group of persons
with standing to sue to include those who have noneconomic interests, such
as First Amendment rights.
Sidebar 15.6 summarizes the U.S. Supreme Court’s explanation of why
broad meaning should be given to the concept of standing to sue.
The Administrative Procedures Act states:
A person suffering legal wrong because of agency action,
or adversely affected or aggrieved by agency action within
the meaning of a relevant statute, is entitled to judicial
review thereof.
Through United States Supreme Court cases, we
know that a plaintiff must show a claim within the
“zone of interest” protected by the statute under
consideration. The plaintiff does not need to prove
that the legislative body envisioned protecting this
particular plaintiff.
An example of this broad nature of standing to sue
is found in the decision of the Supreme Court allowing
banks to challenge whether credit unions must limit
membership to persons who have a common bond,
such as employment with the same company.
Source: National Credit Union Administration v. First National Bank &
Trust Co., 118 S. Ct. 927 (1998).
>> sidebar 15.6
Standing to Sue or Who May Challenge an Administrative Policy
12. REVIEW OF RULE MAKING
The rule-making function in the administrative process is essentially legislative
in character. Legislatures usually create administrative agencies or quasilegislative
power to the agency. An administrative agency must propose rules
486 PART 4 The Regulatory Landscape for Business
and regulations within the confines of its grant of power from the legislature,
or a court will find the proposal void.
However, once courts decide that an act of the legislature is constitutional or
a rule of an agency is authorized, the courts will not inquire into its wisdom or
effectiveness. An unwise or ineffectual law may be corrected by political action
at the polls; an unwise rule or regulation adopted by an agency may be corrected
by the legislature that gave the agency power to make the rule in the first place.
There are two basic issues in litigation challenging the validity of a rule
made by an administrative agency. First, is the delegation valid? Second, has
the agency exceeded its authority?
Is Delegation Valid? Delegation of quasi-legislative authority to
administrative agencies is subject to two constitutional limitations:
• It must be definite.
• It must be limited.
First, delegation of authority must be definite or it will violate due process.
Definiteness means that the delegation must be set forth with sufficient clarity
so that all concerned, and especially reviewing courts, will be able to determine
the extent of the agency’s authority. Broad language has been held sufficiently
definite to meet this test. For example, the term unfair methods of competition
is sufficiently definite to meet the requirements of due process and validate the
delegation of this authority to the Federal Trade Commission (FTC).
Second, the delegation of authority to an agency from the legislative or
executive branch must have limitations. This delegation of authority must
provide that the agency’s power to act is limited to areas that are certain,
even if these areas are not specifically defined. For example, the FTC regulates
unfair methods of competition in or affecting commerce. Regulations or
enforcement activities by the FTC that focus solely on intrastate business are
void as being beyond the “limited” authority delegated to that agency. Also,
procedural safeguards must exist to control arbitrary administrative action
and any administrative abuse of discretionary power.
Just as broad language has been approved as being sufficiently definite
for a delegation to be valid under the due process clause since the 1930s,
broad standards meet the limited-power test. Today, it is generally agreed that
delegations of authority to make rules may involve very broad language. For
example, the delegation of authority to make such rules as the “public interest,
convenience and necessity may require” is a valid standard.
The general language used in delegating quasi-legislative authority usually
involves grants of substantial discretion to an agency. It must be kept
in mind that this delegation of discretion is to the agency and not to the
judiciary. Therefore, courts cannot interfere with the discretion given to the
agency and cannot substitute their judgment for that of the agency. In essence,
there is a policy of deference by the judges to the decision of the administrators.
This practice of deference further emphasizes why a businessperson’s
influence on the rule-making process is greater in the administrative process
than through appellate procedures (see Section 10, above).
Sidebar 15.7 illustrates the Supreme Court’s use of this philosophy of
deference. It demonstrates the expansive discretion given to administrative
agencies and how courts are not to substitute their judgment for that of the
administrative process.
Do remember to ask
two critical questions:
Is the delegation valid?
Has authority been
exceeded?
State and local
agencies may regulate
areas of business that
are not subject to
federal regulation.
CHAPTER 15 The Commerce Clause and the Regulatory Process 487
The Federal Communications Commission (FCC) is
charged with regulatory broadcasters. One of the
controversial areas of FCC regulation concerns the
censorship of indecent language in broadcasts. In a
series of actions since 2003, the FCC has narrowed
the permissible use of certain words. Even a one-time
use of a word that inherently has a sexual connotation
or a word that refers to excrement can be considered
vulgar and censored as indecent.
Broadcasters challenged the FCC’s penalty
for broadcasting these words during the presentation
portion of an awards show. The Second Circuit
reversed the FCC finding the agency had not adequately
reasoned its conclusion. While the Second
Circuit did not reach a final conclusion on the constitutional
protection of the one-time use of certain
words, it did question the FCC’s conclusion.
The Supreme Court reversed the Second Circuit
and reinstates the FCC’s ruling and penalty. The
Court relies on the long-held principle that judges
should defer to the administrator’s ruling unless the
court finds the administrator’s action was arbitrary
or capricious. The Court concludes that the Second
Circuit failed to apply this standard. Furthermore, the
Court did not find the FCC acted in an improper manner,
even though the FCC’s ruling was controversial.
Source: Federal Communications Commission v. Fox Television Stations,
Inc., 129 S. Ct. 1800 (2009).
>> sidebar 15.7
Standard of Review of Agency Actions
Authority Exceeded? Although it is highly unlikely that a court
would hold a delegation invalid because of indefiniteness or lack of standards,
from time to time courts do find that agencies exceed their authority.
Courts will hold that an agency exceeds its authority if an analysis of legislative
intent confirms the view that the agency has gone beyond that intent,
however noble its purpose may be.
Case 15.4 presents a case that impacts all of us. Regardless of your personal
views on smoking, the Supreme Court’s analysis of the agency’s authority
to regulate cigarettes is quite interesting. Notice how the Court struggles
with the dilemma present in this case and how the rules of administrative
law assist in reaching a decision.
case 15.4 >>
FOOD AND DRUG ADMINISTRATION v. BROWN &
WILLIAMSON TOBACCO CORPORATION
120 S. Ct. 1291 (2000)
O’CONNOR, J.: This case involves one of the most
troubling public health problems facing our Nation
today: the thousands of premature deaths that occur
each year because of tobacco use. In 1996, the Food
and Drug Administration (FDA), after having expressly
disavowed any such authority since its inception,
asserted jurisdiction to regulate tobacco products. The
FDA concluded that nicotine is a “drug” within the
meaning of the Food, Drug, and Cosmetic Act (FDCA
or Act), and that cigarettes and smokeless tobacco
are “combination products” that deliver nicotine to
the body. Pursuant to this authority, it promulgated
regulations intended to reduce tobacco consumption
among children and adolescents. The agency believed
that, because most tobacco consumers begin their use
before reaching the age of 18, curbing tobacco use by
488
minors could substantially reduce the prevalence of
addiction in future generations and thus the incidence
of tobacco-related death and disease.
Regardless of how serious the problem an administrative
agency seeks to address, however, it may not
exercise its authority in a manner that is inconsistent
with the administrative structure that Congress enacted
into law. And although agencies are generally entitled
to deference in the interpretation of statutes that they
administer, a reviewing court, as well as the agency,
must give effect to the unambiguously expressed intent
of Congress. In this case, we believe that Congress has
clearly precluded the FDA from asserting jurisdiction
to regulate tobacco products. Such authority is inconsistent
with the intent that Congress has expressed
in the FDCA’s overall regulatory scheme and in the
tobacco specific legislation that it has enacted subsequent
to the FDCA. In light of this clear intent, the
FDA’s assertion of jurisdiction is impermissible.
The FDCA grants the FDA . . . the authority to
regulate, among other items, “drugs” and “devices.” The
Act defines “drug” to include “articles (other than food)
intended to affect the structure or any function of the
body.” It defines “device,” in part, as “an instrument,
apparatus, implement, machine, contrivance, . . . or other
similar or related article, including any component, part,
or accessory, which is . . . intended to affect the structure
or any function of the body.” The Act also grants the
FDA the authority to regulate so-called “combination
products,” which “constitute a combination of a drug,
device, or biologic product.” The FDA has construed this
provision as giving it the discretion to regulate combination
products as drugs, as devices, or as both.
On August 11, 1995, the FDA published a proposed
rule concerning the sale of cigarettes and smokeless
tobacco to children and adolescents. The rule,
which included several restrictions on the sale, distribution,
and advertisement of tobacco products, was
designed to reduce the availability and attractiveness
of tobacco products to young people. A public comment
period followed, during which the FDA received
over 700,000 submissions, more than “at any other
time in its history on any other subject.”
On August 28, 1996, the FDA issued a final rule entitled
“Regulations Restricting the Sale and Distribution of
Cigarettes and Smokeless Tobacco to Protect Children
and Adolescents.” The FDA determined that nicotine is
a “drug” and that cigarettes and smokeless tobacco are
“drug delivery devices,” and therefore it had jurisdiction
under the FDCA to regulate tobacco products. . . .
Based on these findings, the FDA promulgated
regulations concerning tobacco products’ promotion,
labeling, and accessibility to children and adolescents.
The access regulations prohibit the sale of cigarettes or
smokeless tobacco to persons younger than 18; require
retailers to verify through photo identification the age
of all purchasers younger than 27; prohibit the sale of
cigarettes in quantities smaller than 20; prohibit the
distribution of free samples; and prohibit sales through
self-service displays and vending machines except in
adult-only locations. The promotion regulations require
that any print advertising appear in a black-and-white,
text-only format unless the publication in which it
appears is read almost exclusively by adults; prohibit
outdoor advertising within 1,000 feet of any public
playground or school; prohibit the distribution of any
promotional items, such as T-shirts or hats, bearing the
manufacturer’s brand name; and prohibit a manufacturer
from sponsoring any athletic, musical, artistic, or
other social or cultural event using its brand name. . . .
Respondents, a group of tobacco manufacturers,
retailers, and advertisers, filed suit . . . challenging the
regulations. They moved for summary judgment on the
grounds that the FDA lacked jurisdiction to regulate
tobacco products as customarily marketed, the regulations
exceeded the FDA’s authority, and the advertising
restrictions violated the First Amendment. The court
held that the FDCA authorizes the FDA to regulate
tobacco products as customarily marketed and that
the FDA’s access and labeling regulations are permissible,
but it also found that the agency’s advertising and
promotion restrictions exceed its authority. . . .
The Court of Appeals for the Fourth Circuit
reversed, holding that Congress has not granted the
FDA jurisdiction to regulate tobacco products. . . .
We granted the Government’s petition for certiorari
to determine whether the FDA has authority under
the FDCA to regulate tobacco products. . . .
A threshold issue is the appropriate framework for
analyzing the FDA’s assertion of authority to regulate
tobacco products. Because this case involves an administrative
agency’s construction of a statute that it administers,
our analysis is governed by Chevron U.S.A. Inc.
v. Natural Resources Defense Council, Inc., 104 S. Ct.
2778 (1984). Under Chevron, a reviewing court must
first ask “whether Congress has directly spoken to the
precise question at issue.” If Congress has done so,
the inquiry is at an end; the court “must give effect
to the unambiguously expressed intent of Congress.”
But if Congress has not specifically addressed the
question, a reviewing court must respect the agency’s
construction of the statute so long as it is permissible.
Such deference is justified because 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, and because of the
agency’s greater familiarity with the ever-changing facts
and circumstances surrounding the subjects regulated.
[continued]
489
[continued]
In determining whether Congress has specifically
addressed the question at issue, a reviewing court
should not confine itself to examining a particular
statutory provision in isolation. The meaning—or
ambiguity—of certain words or phrases may only
become evident when placed in context. . . .
Viewing the FDCA as a whole, it is evident that
one of the Act’s core objectives is to ensure that any
product regulated by the FDA is “safe” and “effective”
for its intended use. This essential purpose pervades
the FDCA. . . .
In its rulemaking proceeding, the FDA quite
exhaustively documented that “tobacco products are
unsafe,” “dangerous,” and “cause great pain and suffering
from illness.” It found that the consumption
of tobacco products “presents extraordinary health
risks,” and that “tobacco use is the single leading cause
of preventable death in the United States.” It stated
that “more than 400,000 people die each year from
tobacco-related illnesses, such as cancer, respiratory
illnesses, and heart disease, often suffering long and
painful deaths,” and that “tobacco alone kills more
people each year in the United States than acquired
immunodeficiency syndrome (AIDS), car accidents,
alcohol, homicides, illegal drugs, suicides, and fires,
combined.” Indeed, the FDA characterized smoking as
“a pediatric disease,” because “one out of every three
young people who become regular smokers . . . will die
prematurely as a result.”
These findings logically imply that, if tobacco products
were “devices” under the FDCA, the FDA would be
required to remove them from the market. . . .
Congress, however, has foreclosed the removal
of tobacco products from the market. A provision of
the United States Code currently in force states that
“the marketing of tobacco constitutes one of the
greatest basic industries of the United States with
ramifying activities which directly affect interstate and
foreign commerce at every point, and stable conditions
therein are necessary to the general welfare:” 7 U.S.C.
§1311(a). More importantly, Congress has directly
addressed the problem of tobacco and health through
legislation on six occasions since 1965. . . . Congress
stopped well short of ordering a ban. Instead, it has
generally regulated the labeling and advertisement of
tobacco products, expressly providing that it is the
policy of Congress that “commerce and the national
economy may be . . . protected to the maximum
extent consistent with” consumers “being adequately
informed about any adverse health effects.” 15 U.S.C.
§1331. Congress’ decisions to regulate labeling and
advertising and to adopt the express policy of protecting
“commerce and the national economy . . . to
the maximum extent” reveal its intent that tobacco
products remain on the market. Indeed the collective
premise of these statutes is that cigarettes and smokeless
tobacco will continue to be sold in the United
States. A ban of tobacco products by the FDA would
therefore plainly contradict congressional policy. . . .
[O]ur inquiry into whether Congress has directly
spoken to the precise question at issue is shaped, at
least in some measure, by the nature of the question
presented. Deference under Chevron to an agency’s
construction of a statute that it administers is premised
on the theory that a statute’s ambiguity constitutes an
implicit delegation from Congress to the agency to fill
in the statutory gaps. In extraordinary cases, however,
there may be reason to hesitate before concluding that
Congress has intended such an implicit delegation.
This is hardly an ordinary case. Contrary to its
representations to Congress since 1914, the FDA
has now asserted jurisdiction to regulate an industry
constituting a significant portion of the American
economy. In fact, the FDA contends that, were it to
determine that tobacco products provide no “reasonable
assurance of safety,” it would have the authority
to ban cigarettes and smokeless tobacco entirely.
Owing to its unique place in American history and
society, tobacco has its own unique political history.
Congress, for better or for worse, has created a distinct
regulatory scheme for tobacco products, squarely
rejected proposals to give the FDA jurisdiction over
tobacco, and repeatedly acted to preclude any agency
from exercising significant policymaking authority
in the area. Given this history and the breadth of the
authority that the FDA has asserted, we are obliged to
defer not to the agency’s expansive construction of the
statute, but to Congress’ consistent judgment to deny
the FDA this power. . . .
By no means do we question the seriousness of
the problem that the FDA has sought to address. The
agency has amply demonstrated that tobacco use, particularly
among children and adolescents, poses perhaps
the single most significant threat to public health
in the United States. Nonetheless, no matter how
important, conspicuous, and controversial the issue,
and regardless of how likely the public is to hold the
Executive Branch politically accountable, an administrative
agency’s power to regulate in the public interest
must always be grounded in a valid grant of authority
from Congress. . . . Reading the FDCA as a whole,
as well as in conjunction with Congress’ subsequent
tobacco-specific legislation, it is plain that Congress
has not given the FDA the authority that it seeks to
exercise here. For these reasons, the judgment of the
Court of Appeals for the Fourth Circuit is
Affirmed.
490
>> CASE QUESTIONS
1. What regulations adopted by the Food and Drug Administration are challenged in
this case?
2. Describe the dilemma that the Court discusses regarding its role of determining
an agency’s authority and deferring to the finding of that agency.
3. What does the Court conclude in this case? Why?
4. If regulation of tobacco is to occur, what has to happen first?
[continued]
In 2009, Congress passed and President Obama signed the Family Smoking
Prevention and Tobacco Control Act. This legislation increased the FDA’s
authority beyond that discussed in the preceding case. However, the FDA still
cannot totally ban nicotine.
13. REVIEW OF ADJUDICATIONS:
PROCEDURAL ASPECTS
Judicial review of agencies’ adjudications by its very nature is quite limited.
Legislatures have delegated authority to agencies because of their expertise
and knowledge, and courts usually exercise restraint and resolve doubtful
issues in favor of an agency. For example, courts reviewing administrative
interpretations of law do not always decide questions of law for themselves.
It is not unusual for a court to accept an administrative interpretation of law
as final if it is warranted in the record and has a rational basis in law. Administrative
agencies are frequently called upon to interpret the statute governing
an agency, and an agency’s construction is persuasive to courts.
Administrative agencies develop their own rules of procedure unless mandated
otherwise by an act of the legislature. These procedures are far less
formal than judicial procedures, because one of the functions of the administrative
process is to decide issues expeditiously. To proceed expeditiously usually
means, for example, that administrative agencies are not restricted by the
strict rules of evidence used by courts. Such agencies cannot ignore all rules,
but they can use some leeway. They cannot, for example, refuse to permit
any cross-examination or unduly limit it. Because an agency “is frequently
the accuser, the prosecutor, the judge and the jury,” it must remain alert to
observe accepted standards of fairness. Reviewing courts are, therefore, alert
to ensure that the true substance of a fair hearing is not denied to a party to
an administrative hearing.
The principle that federal administrative agencies should be free to fashion
their own rules of procedure and pursue methods of inquiry permitting
them to discharge their duties grows out of the view that administrative agencies
and administrators will be familiar with the industries they regulate.
Thus, they will be in a better position than courts or legislative bodies to
design procedural rules adapted to the peculiarities of the industry and the
tasks of the agency involved.
CHAPTER 15 The Commerce Clause and the Regulatory Process 491
In reviewing the procedures of administrative agencies, courts lack the
authority to substitute their judgment or their own procedures for those of
the agency. Judicial responsibility is limited to ensuring consistency with statutes
and compliance with the demands of the Constitution for a fair hearing.
The latter responsibility arises from the due process clause. Due process
usually requires a hearing by an agency, but on occasion sanctions may be
imposed prior to the hearing.
Two doctrines guide courts in the judicial review of agency adjudications:
• Exhaustion of remedies
• Primary jurisdiction
Exhaustion of Remedies The doctrine of exhaustion of remedies
is a court-created rule that limits when courts can review administrative
decisions. Courts refuse to review administrative actions until a complaining
party has exhausted all of the administrative remedies and procedures
available to him or her for redress. Judicial review is available only for final
actions by an agency. Preliminary orders such as a decision to file a complaint
are not reviewable. Otherwise, the administrative system would be denied
important opportunities to make a factual record, to exercise its discretion,
or to apply its expertise in its decision making. Also, exhaustion allows an
agency to discover and correct its own errors, and thus it helps to dispense
with any reason for judicial review. Exhaustion clearly should be required
in those cases involving an area of the agency’s expertise or specialization;
it should require no unusual expense. It should also be required when the
administrative remedy is just as likely as the judicial one to provide appropriate
relief. The doctrine of exhaustion of remedies avoids the premature interruption
of the administrative process.
This doctrine is not an absolute principle. Courts do allow parties to
litigate prior to exhausting administrative remedies. Sidebar 15.8 provides
explanation for exceptions to this administrative requirement.
Don’t ignore what
may appear to be a
biased administrative
hearing. Relying on
courts to reverse the
agency’s decision is a
bad plan.
Your school likely
has an administrative
process for handling
students’ grade
appeals. You
must follow this
administrative
procedure.
When there is nothing to be gained from the exhaustion
of administrative remedies and when the harm
from the continued existence of the administrative
ruling is great, the courts have not been reluctant
to discard this doctrine. This is especially true when
very fundamental constitutional guarantees such as
freedom of speech or press are involved or when the
administrative remedy is likely to be inadequate.
Also, probably no court would insist upon exhaustion
when the agency is clearly acting beyond its jurisdiction
(because its action is not authorized by statute
or the statute authorizing it is unconstitutional) or
where it would result in irreparable injury (such as
great expense) to the petitioner. Finally, an exception
to the doctrine is fraud. If an agency is acting fraudulently,
immediate access to the court is appropriate.
>> sidebar 15.8
Exceptions to Requirement of Exhaustion
492 PART 4 The Regulatory Landscape for Business
Primary Jurisdiction A doctrine similar to exhaustion of remedies
is known as primary jurisdiction. Exhaustion applies when a claim must go
in the first instance to an administrative agency alone. Primary jurisdiction
applies when a claim is originally filed in the courts. It comes into play whenever
enforcement of the claim requires the resolution of issues that, under
a regulatory scheme, have been placed within the special competence of an
administrative body. In such a case, the judicial process is suspended pending
referral of such issues to the administrative body for its views. Primary jurisdiction
ensures uniformity and consistency in dealing with matters entrusted
to an administrative body. The doctrine is invoked when referral to the agency
is preferable because of its specialized knowledge or expertise in dealing with
the matter in controversy. Statutes such as those guaranteeing equal employment
opportunity that create a private remedy for dollar damages sometimes
require the parties to resort to an administrative agency as a condition precedent
to filing suit. Some of these are federal statutes that require referral to
state agencies. In these cases, referral must occur, but the right to sue is not
limited by the results of the administrative decision.
14. REVIEW OF FACTUAL DETERMINATIONS
When it reviews the findings of fact made by an administrative body, a court
presumes them to be correct. A court of review examines the evidence by
analyzing the record of the agency’s proceedings. It upholds the agency’s findings
and conclusions on questions of fact if they are supported by substantial
evidence in the record. In other words, the record must contain material evidence
from which a reasonable person might reach the same conclusion as
did the agency. If substantial evidence in support of the decision is present, the
court will not disturb the agency’s findings, even though the court itself might
have reached a different conclusion on the basis of other conflicting evidence
also in the record. For example, the determination of credibility of the witnesses
who testify in quasi-judicial proceedings is for the agency to determine
and not the courts.
Courts do not (1) reweigh the evidence, (2) make independent determinations
of fact, or (3) substitute their view of the evidence for that of the agency.
However, courts do determine if there is substantial evidence to support the
action taken. But in their examination of the evidence, all that is required is
evidence sufficient to convince a reasonable mind to a fair degree of certainty.
Thus, substantial evidence is that which a reasonable mind might accept as
adequate to support the conclusion.
For the courts to exercise their function of limited review, an agency must
provide a record that sets forth the reasons and basis for its decision. If this
record shows that the agency did not examine all relevant data and that it
ignored issues before it, a court may set aside the agency’s decision because
such a decision is arbitrary and capricious. Agencies cannot assume their
decisions. They must be based on evidence, and the record must support the
decision.
After reading this section and the preceding ones, do you understand
why it is important for businesses to take seriously the procedures within the
administrative agency?
A judge hearing a
case involving a
dispute over licensing
requirements for
a nuclear power
plant likely would
refer this case to the
Nuclear Regulatory
Commission (NRC).
CHAPTER 15 The Commerce Clause and the Regulatory Process 493
>> Criticism of Administrative Agencies
Administrative agencies and the regulatory process face many problems
and much criticism. Sidebar 15.9 summarizes issues relating to the people
involved, to the process followed, and to the substantive outcomes of agencies’
rule-making and adjudicating authority.
At the heart of many of these problems and criticisms is the cost associated
with the regulatory process.
15. THE COSTS TO BUSINESS
Regulation is a form of taxation. It directly increases the cost of government.
But these direct costs of regulation are only a small fraction of the indirect
costs. Regulation significantly adds to the cost of doing business, and these
costs are passed on to the tax-paying, consuming public. The consumer, for
whose protection many regulations are adopted, pays both the direct cost of
regulation (in taxes) and the indirect cost (when purchasing products and
services).
The existence of a governmental agency usually forces a business subject
to the agency’s jurisdiction to create a similar bureaucracy within its own
organization to deal with the agency. For example, the existence of EEOC has
caused most large corporations to designate affirmative action officers. These
employees assist their companies in complying with the laws, rules, and regulations
enforced by EEOC. Whenever a bureaucracy exists, firms dealing with
it must have internal groups with responsibilities that are the mirror image of
the agency.
LO 15-5
1. Regardless of whether a party is challenging an
agency’s rule making or adjudication, that party
must have standing to sue.
2. To establish standing to sue, the challenger must
show the reviewing court that the agency’s decision
is subject to review and that the challenger
is personally affected by the agency’s decision.
3. When the decision challenged involves the
agency’s rule-making function, the court must
determine if the agency’s authority was validly
delegated.
4. If the delegation of authority is definite and
limited, the court will decide if the agency has
exceeded its authority. If the answer is no, the
agency’s rule will be upheld.
5. When the decision challenged involves the
agency’s adjudicatory function, the law requires
the challenger to exhaust the available administrative
remedies and the court to determine
whether an agency should have primary
jurisdiction.
6. The factual findings of an agency are presumed
to be correct.
7. Courts are not permitted to substitute their personal
views for the agency’s findings and conclusions
if a reasonable person could reach the
same result as the agency.
8. An agency’s expertise is entitled to great deference
and will not be reversed unless it is clearly
erroneous.
concept >> summary
Judicial Review of Agency Decisions
494 PART 4 The Regulatory Landscape for Business
>> RELATING TO PERSONNEL
1. Government has difficulty in hiring and retaining
the best-qualified people. Salaries are often not
competitive, and advancement is often slower
than in the private sector. Also, some people are
overqualified for their positions.
2. The reward system usually does not make a significant
distinction between excellent, mediocre,
and poor performances. There are few incentives
to improve productivity and job performance.
3. It is very difficult, if not impossible, to discharge
unsatisfactory employees. Transfers of employees
are easier to accomplish than discharges.
4. The Peter Principle, which holds that people are
promoted to their level of incompetence, is obviously
present in many administrative agencies.
5. Personnel in many top positions are selected for
political reasons. They often lack the necessary
expertise to run an effective organization.
>> RELATING TO PROCEDURES
1. Delay in the decision-making process is quite
common. There often is no reason to expedite
decisions, and a huge backlog of cases is common
in agencies such as EEOC.
2. The administrative process is overwhelmed with
paperwork and with meetings.
3. Rules and regulations are often written in complex
legal language—“legalese”—which laypeople
cannot understand.
4. There is often a lack of enforcement procedures to
follow up on actions taken to ensure compliance.
5. The administrative process can be dictatorial;
there may be too much discretionary power,
often unstructured and unchecked, placed in
many bureaucratic hands. Formal as well as
informal administrative action can amount to an
abuse of power.
>> RELATING TO SUBSTANCE
1. There are so many agencies making rules and
regulations directed at the business community
that the rules and regulations often overlap and
are in conflict.
2. Some agencies are accused of “sweetheart regulations,”
or favoring the industry or industries
they regulate over the public interest. This may
arise as a result of the “revolving door” relationship.
Regulators are often persons who had former
high executive positions in the industries
they regulate. The reverse is also true: people in
high-paying jobs in certain industries often were
regulators of those very industries.
3. Many actions for illegal conduct end only with
consent orders. A business accused of a violation
agrees not to violate the law in the future without
admitting any past violation. Such actions have
little deterrent effect on others, and little or no
punishment is imposed for illegal conduct.
4. The volume of rules adopted by agencies is
beyond the ability of the business community to
keep up with and comply with.
5. Enforcement of some laws varies over time.
>> sidebar 15.9
Criticisms of Administrative Process
Other costs the public must absorb result from agency regulations that
inhibit competition and innovation. Regulation may protect existing companies
by creating a barrier to entry into a market. Regulation tends to protect
“cozy competition” to the extent that, quite often, the parties that object the
most to deregulation are the businesses being regulated.
Perhaps the most disturbing additional cost to the business community
is the cost of paperwork. The burden of the paperwork involved in filing
applications, returns, reports, and forms is overwhelming and a major cost of
doing business.
Attempts to comply
with administrative
agencies can cause
businesses to become
more and more
bureaucratic.
CHAPTER 15 The Commerce Clause and the Regulatory Process 495
Federal administrative agencies are required to work with the Small Business
Administration’s Office of Advocacy as it attempts to lessen the burdens
of regulation on small businesses. These requirements are spelled out in the
Regulatory Flexibility Act and the Small Business Regulatory Enforcement
Fairness Act.
16. THE COSTS TO SOCIETY
Historically, there was little or no cost-benefit analysis when new rules and
regulations were proposed. Government has tended only to assess the benefits
accruing from a cleaner environment, safer products, healthier working conditions,
and so on, in deciding to embark upon vast new regulatory programs.
The primary focus of policymaking by way of such social regulation has not
been on balancing the costs of the programs with their potential benefits. The
public, and especially consumers, has frequently been forced to pay for many
things it did not want or need in the sense that the cost far exceeded the benefits.
At first glance, the application of cost-benefit analysis to the administrative
process would seem to make sense. However, on closer examination, it
is obvious that in many cases it is not possible to weigh the costs against the
benefits of regulation.
How do you apply cost-benefit analysis to a rule dealing with human life?
How much dollar benefit is to be assigned to a life in measuring it against the
cost? Assume that a Department of Transportation rule requiring front- and
side-impact air bags in all new automobiles sold adds a cost of $800 to each
car. Assume also that it saves 50,000 lives per year. Is the cost worth the benefit?
Your answer may depend on whether you are one of the 50,000. Cost-benefit
analysis becomes ethically awkward when there is an attempt to place a dollar
value on things not usually bought and sold, such as life, health, or mobility.
A greater cost to each of us occurs when the regulatory process causes
inefficiencies. The regulatory process can be so cumbersome that even the
administrative agency involved becomes less effective. However, you must
ask—what should you do to stay current and in compliance? As much as you
may want to say, “Let’s not worry about all the details,” it is essential that
your company know the rules and guidelines of relevant agencies. As this
chapter describes, it is much easier to influence an agency’s action than it is to
convince a court you have been wronged by such action.
At the federal level, all agencies are required to publish guidelines and
rules in their proposed and final versions. The place for such publications is
the Federal Register, which appears daily. Reading the Federal Register is more
than a full-time job. The volume of pages printed is beyond what anyone can
manage day-after-day. Although it may take a staff, actions by federal administrative
agencies can be followed. Unfortunately the same cannot be said for
each state and all local administrative proposals and decisions. There simply
is nothing like a state or local version of the Federal Register. To keep track of
regulations of all levels requires personnel beyond that which businesses can
afford. Reliance on local attorneys or trade organizations becomes an incomplete
means of staying current. The cost of “keeping up” is balanced against
the cost of being out of compliance. As with the issue of how to enhance
efficiency in the regulatory process, there is no easy answer to staying fully
informed of administrative actions at all governmental levels.
Small businesses
can be forced out
of business by the
regulatory process.
“The total number
of Federal Register
pages per decade
has increased from
170,325 in the 1960s,
to 450,821 in the
1970s, to 529,233 in
the 1980s, to 622,368
in the 1990s, to
713,920 in the 2000s
(based on a four-year
average).”
—“Reviving Regulatory
Reform: Options
for the President and
Congress” by Marlo
Lewis , Jr.
496 PART 4 The Regulatory Landscape for Business
17. CONCLUSION
Perhaps from the time the U.S. Constitution was debated and adopted, people
have complained “There is too much government.” This feeling probably
exists today anytime a governmental action interferes with a property interest
we have.
How did we get to this situation? you might ask. The answer is rather
complicated and subject to some controversy. What is clear is all levels of governments
are larger and more complex in this first decade of the twenty-first
century than even 25 years ago. Indeed, each generation of Americans has
seen an increase in the government’s influence.
Sidebar 15.10 presents a historical overview of the growth of the regulatory
process and some corresponding administrative agencies.
The topics presented in Sidebar 15.10 are not exhaustive of important
administrative agencies. In fact, a complete list of agencies would take up too
much space. One federal government website lists 136 federal agencies. And
there are countless state and local administrative agencies.
“Most regulations
reviled by some are
cherished by others,
meaning that any
effort to reduce regulation
is a political process,
not a question of
housekeeping.”
Binyamin Appelbaum
and Edward Wyatt ,
“Obama May Find
Useless Regulations
Are Scarcer Than
Thought,”
The New York Times,
January 21, 2011.
As the 1800s ended and the 1900s began, a major
concern of the federal government was the concentration
of economic power into the hands of America’s
wealthiest. This concern led to the creation of
antitrust laws. Although it was not the first federal
administrative agency, the Federal Trade Commission
(FTC), created in 1914 to prevent unfair methods
of competition, started the growth of administrative
agencies in the twentieth century. ( Note: This topic is
the subject matter of Chapter 16.)
The financial crash of the country’s capital markets
and the ensuing depression caused Congress
to pass several laws attempting to restore economic
order. Among some of the most important laws were
the securities acts. These laws, passed in the 1930s,
and subsequent laws intended to address the business
scandals of the 1980s, 1990s, and early twenty-first
century, make up the subject matter of Chapter 17.
This chapter emphasizes the role of the Securities
and Exchange Commission (SEC).
Throughout the first half of the twentieth century,
Congress attempted to balance the bargaining
power of business management and organized labor.
These various laws and others impacting the employment
relationship are the topics of Chapter 22. A key
administrative agency studied in that chapter is the
National Labor Relations Board (NLRB).
The second half of the twentieth century saw a
focus on discriminatory practices and their negative
impact on society and business. At the heart of regulating
and preventing discrimination is the Equal Employment
Opportunity Commission (EEOC). This agency
and the related laws are described in Chapter 20.
Also, in the latter portion of the last century we
saw a growing concern for protecting the environment.
In the 1970s, Congress passed clean air and clean
water legislation. To ensure businesses and individuals
remain aware of their environmental impact, Congress
created the Environmental Protection Agency
(EPA). Chapter 19 discusses this area of the law.
>> sidebar 15.10
Trends in Regulations: Growth of Government in the Twentieth Century
Some additional data provides further insight as to the growth of government.
In colonial times, more than 90 percent of the people were engaged in
some agricultural activity. The westward expansion continued this trend. In
1840, four out of every five adults were self-employed. Ask yourself: How
Do review the
agencies found at
www.whitehouse.
gov/government/
independent-agencies.
html.
CHAPTER 15 The Commerce Clause and the Regulatory Process 497
much government protection/influence/interference did this society need?
Today, over 90 percent of adults are employees. This shift in our economy has
resulted in a larger role for government regulation.
>> Key Terms
Administrative agency 473
Administrative law 487
Administrative law judges 483
Apportionment 473
Cease and desist order 477
Commerce clause 460
Consent order 477
Dormant commerce clause
concept 463
Exhaustion of remedies 491
General counsel 481
Immunity 483
Irreconcilable conflicts 465
Nexus 473
Police powers 463
Primary jurisdiction 492
Prohibiting discrimination 469
Quasi-judicial 473
Quasi-legislative 473
Undue burden 468
>> Review Questions and Problems
Federal Government’s Authority to Regulate Business—The Commerce Clause
1. Regulation of Foreign Commerce
Why is it important that regulation of international business transactions is reserved exclusively
to the federal government?
2. Regulation of Interstate Commerce
What standard initially was used by the Supreme Court in interpreting the phrase “commerce
among the several states”?
3. Impact on Interstate Commerce
What is the legal analysis used by the courts to grant the federal government almost limitless
authority to regulate business activity?
4. Limitation of Federal Authority
Why is it necessary to find the limits of the federal government’s authority to regulate commerce?
State and Local Governments’ Authority to Regulate Business—Police Powers
5. Limitation of Police Powers
(a) Describe the five factual situations wherein the Commerce Clause might be used to restrict a
state or local governmental action. What analysis is used in each situation?
(b) A Maine statute imposed a tax on trucks. The tax required owners and operators of foreignbased
(out-of-state) trucks using Maine highways to purchase either an annual highway use permit
or a one-trip permit. Trucks based in-state were exempt. An out-of-state trucker challenged
the constitutionality of the statute. Is this Maine statute constitutional? Why or why not?
6. Limitation on State Taxation
(a) Define the terms apportionment and nexus.
(b) How are these concepts applied to restrict state government taxation of businesses engaged
in interstate commerce?
Regulatory Process—Administrative Agencies
7. Reasons for Agencies
This chapter discusses five reasons for having administrative agencies. Give an example for each
reason.
498
8. Functions of Agencies
Describe the four possible functions of an administrative agency.
9. Organization of Agencies
(a) Why is the position of general counsel of an administrative agency so important?
(b) What is the purpose of the administrative law judges within administrative agencies?
10. Influencing Agency Decisions
Suppose that a company is interested in a newly proposed regulation on clean air by the Environmental
Protection Agency. What should this company do to provide its input on this EPA
regulation?
Judicial Review of Agency Decisions
11. Standing to Sue
What are the two issues that must be considered by courts to determine whether a person has
standing to challenge an agency’s decision?
12. Review of Rule Making
(a) Again there are two issues that must be addressed by courts when they review the rulemaking
(quasi-legislative) functions of agencies. What are these two issues? Explain each.
(b) A national bank sought permission from the comptroller of the currency to sell annuities.
This permission was granted as “incidental to the business of banking.” The Variable Annuity
Life Insurance Company filed suit claiming the comptroller should not have granted this
permission. What standard of review of this administrative decision should courts apply?
13. Review of Adjudications: Procedural Aspects
Plaintiffs purchased state lottery tickets and were winners along with 76 others. The state had
advertised that $1,750,000 would be the prize, but it distributed only $744,471. Plaintiff sued
the lottery director, alleging fraud in the conduct of the lottery. The state lottery law provides
for administrative hearings upon complaints charging violations of the lottery law or of regulations
thereunder. It also allows any party adversely affected by a final order of the administrative
agency to seek judicial review. Must the plaintiffs exhaust their administrative remedies?
Why or why not?
14. Review of Factual Determinations
What standard of review do courts use to decide whether to uphold the factual determinations
made by an administrative agency?
Criticism of Administrative Agencies
15. The Costs to Business
Describe four types of costs that businesses must absorb due to the regulatory process.
16. The Costs to Society
Why has there been so little use of cost-benefit analysis when judging the merits of an agency’s
proposals and actions?
17. Conclusion
Why has the complaint against excessive government been consistent throughout the years?
499
1. In both your personal and professional lives, you realize how much government
at the federal, state, and local levels influences what you can and cannot do. For
example, since your business employs more than 15 people, there are numerous
federal statutes dictating the physical condition of the workplace, the amount you
must pay your employees, the taxes you owe, and the paperwork you must file with
regulatory agencies. At the state level, you know you have to obtain certain licenses
to conduct business or to engage in recreational activities, such as fishing. And your
local government regulates how you can use the land you own.
In light of this multitude of regulatory activity, you ask yourself the following questions:
By what authority do governmental entities impose various regulations?
Is there any limit to the extent such regulations impact our lives?
How can an individual or a business organization challenge the application of
regulatory authorities?
2. Suppose it has been two years since your graduation. During the time you have
worked for a large energy company. In your work, you have been exposed to the
numerous ways your employer is investing in energy. These sources include oil,
coal, natural gas, solar, wind, nuclear, and electrical plants.
Just last month, you were told you were being transferred to the CEO’s office.
Your first assignment is to work with the general counsel’s staff to determine how
your company is regulated and how all divisions are complying with the various,
relevant laws and regulations. As you ponder this assignment, you ask yourself the
following questions:
Is this company regulated only by the federal government, or are state and
local regulations relevant?
How does the company and its divisions keep track of laws and regulations?
If an administrative agency begins an investigation of your company, should
your company cooperate with or fight the agency’s action?
3. You are chief executive officer of a toy manufacturing firm. Your firm has
been inspected by officials at OSHA, the federal Occupational Safety and Health
Administration, for alleged violations of workplace safety regulations. The evidence
presented to the agency was confusing and conflicting. You feel strongly that the
company should not be penalized. Nevertheless your firm has been ordered to pay
a substantial fine, and an administrative law judge ordered you to make some very
expensive modifications in its manufacturing processes.
Should you continue to seek review of your case before the agency’s officials?
Should you appeal by filing a lawsuit to reverse the agency’s decision?
If you are successful in court, under what circumstances can you recover your
attorney’s fees?
4. As a manager employed by Want-It-Now Rapid Delivery Service, you are
responsible for pricing the services involving same-day deliveries. Among your
primary concerns is the competitive aspects of your business. You have proposed
contractual language that states “any package picked up after 10:00 a.m. will be
considered as if it is picked up the next business day. Any package delivered before
10:00 p.m. on the day of pick up will be considered to have arrived on that business
day. Under the language, a package received at 11:00 a.m. on Tuesday and delivered
by 10:00 p.m. on Wednesday is considered, by you, to involve a “same-day delivery.”
The impact of this language is that a business day lasts for as long as 36 hours;
thereby giving a customer the wrong impression of the phrase “same-day delivery.”
business >> discussion
500
The Federal Trade Commission (FTC), under its authority to protect the public
from unfair or deceptive trade practices, has contacted your company asking questions
about the plain meaning of “same-day delivery.” In anticipation of a face-toface
meeting with an FTC investigator, you strive to answer these questions.
To what degree does the FTC have authority to question your business practices?
Are your clearly stated contractual provisions unfair or deceptive?
Should you cooperate with this investigator or seek a court order enjoining this
investigation?
How do you challenge the FTC’s action if a formal complaint is filed against
your company?
continued
