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Chapter 5
Administrative Law
INTRODUCTION
Previous chapters were concerned primarily with constraints on business arising from court decisions and state
statutes. This unit deals primarily with constraints arising from federal statutes and administrative regulations.
Most administrative agencies are part of the executive branch and are subject to the authority of the president;
some exist as independent regulatory agencies, and their officials cannot be removed without cause. Most agencies
have a broad range of authority that seems legislative, judicial, and executive in nature and that engenders much
controversy. These topics are discussed in this chapter.
ADDITIONAL RESOURCES—
 VIDEO SUPPLEMENTS 

The following video supplements relate to topics discussed in this chapter—
Business Law Digital Video Library
95
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
96 UNIT TWO: THE PUBLIC ENVIRONMENT
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group
or individual review. Clips on topics covered in this chapter include the following.
• Real World Legal
Pharzime Corporation, Scene 1—A marketing vice president at a pharmaceutical company tries to gain the
support of a vice president of regulatory affairs for his marketing strategy for a new drug use. The scene
considers the pressure of patent expiration, the regulatory approval process, and legal and ethical strategies
for new drug use.
Pharzime Corporation, Scene 2—A new pharmaceutical sales rep confides his anxiety about an aggressive
marketing strategy for off-label uses of an FDA-approved drug. A veteran sales rep assures him that the strategy
is appropriate. The scene addresses corporate culture, whistleblowing, and the legality and ethics of marketing
drugs for off-label use.
• LawFlix
Cinderella Man—Regulatory agencies; ethics (Scene in which Russell Crowe tries to repay the welfare
money he has received after he is back on his feet financially).
CHAPTER OUTLINE
I. The Practical Significance of Administrative Law
Congress delegates some authority to make and implement laws, particularly in highly technical areas, to
administrative agencies.
A. ADMINISTRATIVE AGENCIES EXIST AT ALL LEVELS OF GOVERNMENT

There are federal, state, and local administrative agencies, and they affect all aspects of business—capital
structure and financing, employer-employee relations, production and marketing, and more.
• Executive agencies within the cabinet departments of the executive branch are subject to the power of
the president to appoint and remove their officers. The officers of independent agencies serve fixed
terms and cannot be removed without just cause.
• These agencies often parallel federal agencies in areas of expertise and subjects of regulation. Federal
rules that conflict with state rules take precedence.
B. AGENCIES PROVIDE A COMPREHENSIVE REGULATORY SCHEME

Agencies at different levels of government may cooperate to create and enforce their regulations. These
regulations can have benefits but also entail costs for businesses. Businesses—and others—thus have a
strong incentive to influence administrative agencies’ decisions.
ADDITIONAL BACKGROUND—
A History of American Administrative Law
CHAPTER 5: ADMINISTRATIVE LAW 97
American administrative law is a youthful creature. The modern era of administrative law began only about
120 years ago. Administrative agencies, historically, have been created in response to a sudden crisis or
serious social problem. Politics have been a major factor: the government has often met a public demand that
“something be done” by creating a new agency or by expanding the powers of an existing one.
During its early years, the United States was a predominantly rural society with a relatively simple,
nonindustrial economy. As the economy developed and society became more complex, demands for regulation
arose. Near the turn of the nineteenth century, concern over perceived abuses of powerful corporations and
anticompetitive monopolies gave rise to such agencies as the Interstate Commerce Commission (ICC). The
ICC was the first governmental organization created in the United States that could accurately be characterized
as a regulatory agency. Created in 1887 to regulate the railroad industry, its initial task focused principally on
setting prices and deciding disputes between competing companies.
A proliferation of regulatory agencies arose during the Great Depression of the 1930s. Most of these
agencies were part of the New Deal legislation that was aimed at stabilizing the economy and reigning in what
were perceived to be excesses of an unregulated market system. For example, in 1934 the Securities and
Exchange Commission was created to administer laws and regulations that govern transactions involving
capital assets (stocks and bonds). Also created in 1934 was the National Labor Relations Board. Initially, its
task was to safeguard unions and their members from employer abuses in the processes of organizing and
collective bargaining, but this task was later amended to include the job of protecting employers and union
members from unscrupulous union behavior whenever it occurred. (These amendments came in the form of
the Taft-Hartley Act of 1947 and the Landrum-Griffin Act of 1959.)
Agencies were created or expanded during World War II to mobilize manpower and production, and to
administer price controls and rationing.
Another impetus to the development of administrative law has been technology. As the technical advances
of this century have brought new services and products to consumers, so too new problems have arisen. As
in the past, the government’s response has been to create new agencies. Radio and television broadcasting
and nuclear power are but a few of the new technologies supervised and sometimes promoted by government
agencies.
The 1960s and 1970s saw a subtle shift in the focus of regulation. Earlier regulation was primarily
concerned with economic matters—making the free market work with less uncertainty or at least lessening
some of the discomfort that results when markets work in a dynamic and impersonal way. New regulation
sought to deal with what are principally social issues: health, the environment, poverty, and discrimination. The
same period also witnessed the most rapid rate of growth in regulation. More than a third of all current regulatory
agencies were created between 1970 and 1979, including the Environmental Protection Agency in 1970, the
Occupational Safety and Health Administration in 1970, and the Consumer Product Safety Commission in 1972.
During the later part of the 1970s, negative feelings about government generally, and the apparent
capriciousness of regulation particularly, created a backlash against bureaucracy. This was especially true with
regard to economic regulation, which seemed to create unreasonable burdens and inordinate costs of
compliance for firms. Most adversely affected seemed to be firms facing increasing competition in the
international arena and small businesses. Because the political climate has always had such a powerful impact
on the formulation of regulatory policy, it is not surprising that this attitude invoked an era of deregulation during
the 1980s. Although the undoing of some regulatory schemes did occur, a tremendous amount of regulation
persists. Some deregulation efforts have been overturned by courts. Because of the precariousness of its fit
within the American tripartite scheme of government, administrative regulation has always been politically
controversial. Accordingly, administrative law has always been a particularly controversial area of law. The
controversy is likely to continue for a long time to come.
II. Agency Creation and Powers

Enabling legislation specifies the name, purposes, functions, and powers of an agency (state or federal).
A. ENABLING LEGISLATION—AN EXAMPLE

The Federal Trade Commission (FTC) Act created the Federal Trade Commission to—
* Create rules and regulations to carry out the FTC Act.

* Conduct investigations of business practices.
* Obtain reports from interstate corporations concerning their business practices.
* Investigate possible violations of federal antitrust statutes.
* Publish the findings of its investigations
* Recommend new legislation
* Hold trial-like hearings to resolve certain kinds of trade disputes that involve FTC regulations or
federal antitrust laws
ANSWER TO LEARNING OBJECTIVE/FOR REVIEW QUESTION NO. 1

How are federal agencies created? Congress creates federal administrative agencies by delegating some
of its authority to make and implement laws. To create an administrative agency, Congress passes enabling
legislation, which specifies the name, purposes, functions, and powers of the agency being created.
B. AGENCY POWERS AND THE CONSTITUTION

Article I of the U.S. Constitution is generally held to authorize delegating such powers to administrative
agencies. Section 1 grants all legislative powers to Congress and requires Congress to oversee the imple-
mentation of all laws. Section 8 gives Congress the power to make all laws necessary for executing its
specified powers. Under the delegation doctrine, Congress has the power to establish agencies that can
create legislative rules to implement those laws and interpretive rules to declare policy.
ADDITIONAL BACKGROUND—
The Delegation Doctrine

The courts have seriously considered the extent to which Congress can delegate its powers to third parties
only in this century. In 1904, the United States Supreme Court first declared that the test of whether a delegation
is proper is if Congress establishes ascertainable “standards” that outline the limits of the agency’s discretion.
Supreme Court decisions in the 1920s held that Congress could delegate only gap-filling powers to
administrative agencies. In other words, Congress would pass a law expressed in general terms, and the
agency would fill in the “gaps” by creating regulations to implement the law. This approach was prompted by
the perception that Congress’s ability to oversee directly the implementation of particular laws is limited and
that specialized agencies are better able to regulate areas involving technical questions. The Court extended
great deference to such delegations by Congress.
This attitude changed with the 1929 stock market crash and the onset of the Great Depression. The rapid
disintegration of the national economy caused the unemployment rate to rise to 25 percent, and bank failures,
bankruptcies, and foreclosures became commonplace. Public pressure for government action resulted in the
creation of a number of programs designed to jump-start the economy and reverse its deflationary spiral.
Foremost among efforts to pump up prices and wages was the National Industrial Recovery Act (NIRA), which
gave the president unprecedented powers to manage the economy through the formulation of “fair-competition”
codes. These codes would be drawn up by trade or industrial groups and become law on the approval of the
president so long as they did not result in the creation of unlawful monopoly power.
A trade group in the poultry industry proposed a “poultry code,” and President Roosevelt approved it. Aaron
and Alex Schechter were wholesale kosher poultry dealers in Brooklyn, New York. They refused to comply
with the code and consequently were charged with violating it. At their trial in federal district court, they argued,
among other things, that the code system of the NIRA violated the Constitution by providing for the delegation
of legislative power by Congress. The court held that the NIRA was not an unconstitutional delegation of power,
reasoning that Congress was simply exercising its traditional authority to establish a general standard and to
delegate authority to enforce it. The Schechters were convicted on eighteen counts; they appealed. a The
appellate court sustained the convictions on all counts but one. Both parties appealed to the Supreme Court.
In Schechter Poultry Corp. v. United States, 295 U.S. 495, 55 S.Ct. 837, 79 L.Ed. 1570 (1935), the Supreme
Court held that the NIRA’s delegation of legislative power was unconstitutional and that thus the Schechters
were not be liable for violations of the poultry code. The Court characterized the NIRA as “a sweeping
delegation of legislative power,” in which trade associations “may roam at will, and the President may approve
or disapprove their proposals as he may see fit.” The Court explained that the statute did not prescribe
standards for any trade or industry, “to be applied to particular states of fact determined by appropriate
administrative procedure,” but only authorized the making of codes to prescribe them, and did not provide
adequate standards for the making of the codes.
Many legal scholars have viewed Schechter and associated cases of that era as exceptions to the general
tendency of the courts to rubber-stamp delegations of power by Congress. In a series of cases that appeared
in the 1950s, the courts altered their approach to avoid the delegation issue altogether. By the 1970s, the
approach had shifted to ensure the accountability of regulatory agencies to Congress. Using this approach,
the courts considered such things as the nature and scope of the original grant of power by Congress and the
existence of any applicable restrictions on the exercise of that power by the agency. Regardless of the
approach, however, the courts have not invalidated any delegations of powers by Congress to administrative
agencies since the 1930s.
a. Among the counts on which the Schechters were originally convicted was a charge that they sold diseased chickens. It was their
conviction on this charge that gave this case its popular name, the “Sick Chicken Case.”
1. Executive Controls
The executive branch exercises control over agencies through the president’s powers to appoint federal
officers and through the president’s power to veto enabling legislation or congressional attempts to
modify an existing agency’s authority.
2. Legislative Controls
Congress exercises authority over agency power through enabling legislation and subsequent leg-
islation. Congress can restrict or expand agency power substantively, limit or increase it through
funding, or set time limits. Congress can investigate an agency. Individual legislators may affect
agency policy through attempts to help their constituents deal with agencies. The Administrative
Procedure Act (APA) of 1946 and other laws also act as a check on agency power.
3. Judicial Controls
The APA provides for judicial review of most agency decisions. According to the exhaustion doctrine,
a party must have used all potential administrative remedies before filing a suit.
a. The Administrative Procedure Act

The Administrative Procedure Act (APA) of 1946 imposes procedural requirements that all federal
agencies must follow.
b. The Arbitrary and Capricious Test
The APA provides that courts should set aside agency decisions that are “arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with the law.” This occurs when an agency—
• Fails to provide a rational explanation for a decision.

• Changes prior policy without an explanation.
• Considers legally inappropriate factors.
• Fails to consider a relevant factor.
• Renders a decision plainly contrary to the evidence.
CASE SYNOPSIS—
Case 5.1: Federal Communications Commission

v. Fox Television Stations, Inc.
The Federal Communications Commission (FCC) polices “indecent” speech—“language that describes, in
terms patently offensive as measured by contemporary community standards for the broadcast medium, sexual
or excretory activities and organs.” The FCC had long ignored “fleeting expletives.” During a broadcast of the
Golden Globe Awards, Bono commented “this is really, really, fucking brilliant.” On a complaint about the
broadcast, the FCC held that any use of “the F-Word” inherently has sexual connotation and falls within the
scope of the indecency definition. During broadcasts of other awards shows, similar expletives were used, and
the FCC ruled similarly. Fox Television Stations, Inc., filed for review. The U.S. Court of Appeals for the Second
Circuit vacated the FCC’s order against the broadcasters, and remanded the case. The FCC appealed.
The United States Supreme Court reversed and remanded. “A court is not to substitute its judgment for that
of the agency” and should “uphold a decision of less than ideal clarity if the agency's path may reasonably be
discerned.” An agency must show good reasons for a new policy. “But it need not demonstrate to a court's
satisfaction that the reasons for the new policy are better than the reasons for the old one; it suffices that the
new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it
to be better.” Here, it was “reasonable to determine that it made no sense to distinguish between literal and
nonliteral uses of offensive words” when “a safe harbor for single words would likely lead to more widespread
use of the offensive language.”
..................................................................................................................................................
Notes and Questions
In its reasoning, the U.S. Court of Appeals for the Second Circuit cited uses by “the top leaders of our
government . . . of these expletives in a manner that no reasonable person would believe referenced sexual
or excretory organs or activities.” What were these uses? The court cited President Bush's remark to British
Prime Minister Tony Blair that the United Nations needed to “get Syria to get Hezbollah to stop doing this shit”
and Vice President Cheney's widely-reported “Fuck yourself” comment to Senator Patrick Leahy.
Should an administrative agency be locked into its first interpretation of a statute? Why or why not? No. A
settled, or consistent, course of conduct indicates an agency's judgment that, in following that course, it is
carrying out the policies in its enabling statute. An agency is not locked into its first interpretation of a statute,
however. It can change course, adopting a new, even entirely inconsistent position. On the challenge to such
a change in this case, the lower courts asked for a reasoned analysis to justify it. Why? Because an agency's
failure to reconcile conflicting precedents may be held to fall short of the requirement of reasoned decision-
making, and the agency’s change in course might then be ruled arbitrary and capricious.
Did the lower appellate court reject the agency’s reasons for its actions because the court disagreed with
those reasons? No. The court explained that it rejected the agency’s reasons for its change of course because
those reasons had no support in the record. The agency “has failed to set forth the required reasoned
explanation because its proffered rationale remains unsupported by any record evidence.” The court also noted
that the agency’s “rationale is disconnected from the actual policy implemented.”
Today, children are likely to be exposed to indecent language in various media far more often than they
were in the 1970s, when the FCC first began to sanction indecent speech. How should this affect the
government’s regulation of broadcasts? The answers to this question given by the Second Circuit Court of
Appeals and the United States Supreme Court, respectively, are illustrative. The Court of Appeals argued that
the greater likelihood that today’s children would hear indecent speech from other media sources supported
less (not more) stringent regulation of broadcast programs. According to the Court of Appeals, the
Commission’s decision was “devoid of any evidence that suggests a fleeting expletive is harmful,” and the
Commission certainly did not establish “that this harm is serious enough to warrant government regulation.”
The Supreme Court, however, reached just the opposite conclusion. According to the Supreme Court, “the
Commission could reasonably conclude that the pervasiveness of foul language, and the coarsening of public
entertainment in other media, such as cable,” justified a more stringent regulation of broadcast programs—so
as “to give conscientious parents a relatively safe haven for their children.”
ANSWER TO “THE TECHNOLOGICAL DIMENSION” IN CASE 5.1

Technological advances have made it easier for broadcasters to “bleep out” offending words in the
programs that they air. Does this development support a more or less stringent enforcement policy by the
FCC? Explain. The fact that it is now easier for broadcasters to bleep out offending words was one of the
reasons given by the Federal Communications Commission for expanding the scope of the Commission’s
enforcement activity. Because of this technology, broadcasters can air an otherwise desirable program without
worrying about violating the Commission’s ban on indecent speech—simply by bleeping out the objectionable
words. Thus, in the Commission’s view, the technological advances support a more stringent enforcement
policy. It is hard to imagine that the greater ease with which indecent speech can be removed from a broadcast
could support a less stringent enforcement policy. Indeed, neither the Second Circuit Court of Appeals nor the
Supreme Court disagreed with this element in the Commission’s reasoning.”
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases involving the courts considered the application of the arbitrary and capricious standard to
agency actions include the following.
• Modesto Irrigation District v. Gutierrez, __ F.3d __, 2010 WL 3274499 (9th Cir. 2010) (National Marine
Fisheries Service (NMFS) sufficiently recognized and explained its decision to depart from its past practice of
applying its own policy and to instead apply a policy developed by NMFS with the Fish and Wildlife Service in
determining whether to list populations of West Coast steelhead as a threatened species).
• Air Transport Association of America, Inc. v. National Mediation Board, __ F.Supp.2d __, 2010 WL
25272685 (D.D.C. 2010) (a new rule issued by the National Mediation Board, providing that, in representation
disputes, a majority of the valid ballots that are actually cast would determine the craft or class representative,
without requiring that a majority of the craft or class participate in the election, was not arbitrary and capricious).
• Handley v. Chapman, 587 F.3d 273 (5th Cir. 2009) (Federal Bureau of Prisons (BOP) complied with the
Administrative Procedure Act when it reclassified felon-in-possession convictions to be categorically ineligible
for early-release incentives—the BOP's actions constituted a policy change, the BOP had the statutory
authority, there was an obvious public safety rationale for the change, the agency's path could be readily
discerned from its prior rules, program statements, and consistent litigation position, and, by changing course,
the BOP sought to apply its regulation with uniformity).
• Water Quality Insurance Syndicate v. United States, 632 F.Supp.2d 108 (D.Mass. 2009) (For wholesalers
that sold electricity in regions where they had market power but electricity was ultimately used in regions where
they did not have market power, Federal Energy Regulatory Commission (FERC) sufficiently explained policy
change applying point-of-sale test to ensure that wholesalers sold electricity at cost-based rates).

(Note that your students can find the answers to the even-numbered For Review questions
in Appendix E at the end of the text.
We repeat these answers here as a convenience to you.)
How do the three branches of government limit the power of administrative agencies? The judicial branch
of the government exercises control over agency powers through the courts’ review of agency actions. The
executive branch exercises control over agencies both through the president’s powers to appoint federal officers
and through the president’s veto powers. The legislative branch has the power to create and fund agencies,
and the authority to investigate the implementation of the laws and the agencies that it has created. Individual
legislators may also affect agency policy through their “casework” activities. Congress has the power to “freeze”
the enforcement of most federal regulations before the regulations take effect. Other legislative checks on
agency actions include the Administrative Procedure Act, the Freedom of Information Act, and other laws.
III. The Administrative Process

Administrative agencies exercise powers that are normally divided among the three branches of government
(rulemaking, rule enforcement, and adjudication).

What are the three basic functions of most administrative agencies? The three functions that comprise the
functions of most agencies are rulemaking (making rules), enforcement (including investigating possible
violations and enforcing the rules), and adjudication (including administrative action against rule violators).
A. RULEMAKING
In enabling legislation, Congress confers an agency’s power to make rules.
1. Notice of the Proposed Rulemaking

A agency publishes a notice of proposed rulemaking proceedings in the Federal Register, stating where
and when proceedings will be held, the agency’s authority for making the rule, and the terms or subject
matter.
2. Comment Period
Interested parties can express their views on a proposed rule in writing or, if a hearing is held, orally.
The agency must respond to any significant comments that bear directly on the proposed rule by either
modifying its final rule or explaining why it did not change it.
3. The Final Rule

The final rule is published in the Federal Register and later compiled in the Code of Federal Regulations
(CFR). Final rules (“legislative rules”) have binding legal effect unless the courts later overturn them.

(Note that your students can find the answers to the even-numbered For Review questions
in Appendix E at the end of the text.
We repeat these answers here as a convenience to you.)
What sequence of events must normally occur before an agency rule becomes law? The most common
rulemaking procedure, called notice-and-comment rulemaking, involves three basic steps: public notice of the
proposed rulemaking, a period for public comment (including the agency’s response to significant comments),
and issuance of the final rule.
B. INVESTIGATION
During the rulemaking process, an investigation obtains information about a certain individual, firm, or
industry to avoid issuing a rule that is arbitrary and capricious and instead is based on a consideration of
relevant factors. After final rules are issued, agencies conduct investigations to monitor compliance.
1. Inspections and Tests

An on-site inspection may be the only way to obtain evidence to prove a regulatory violation.
Sometimes, an inspection or test is used in place of a formal hearing to correct or prevent an
undesirable condition. If a firm or individual refuses to cooperate with a request for an inspection or for
information, an agency may use a subpoena or a search warrant.
2. Subpoenas
There are two basic types of subpoenas: the subpoena ad testificandum (an ordinary subpoena,
compelling a witness to appear at a hearing) and the subpoena duces tecum (compelling an individual
or organization to hand over books, papers, records, or documents). Agency demands are limited by—
• The purpose of an investigation (an improper purpose is harassment).
• The relevancy of the information being sought.
• The specificity of the demand for testimony or documents.
• The burden of the demand on the party from whom the information is sought.
ENHANCING YOUR LECTURE—
 WHAT TO DO WHEN OSHA

INSPECTS YOUR COMPANY 
The Occupational Safety and Health Act of 1970a requires employers to furnish a workplace free of hazards
likely to cause death or serious injury and to comply with safety and health regulations that the Occupational
Safety and Health Administration (OSHA) issues. There are literally hundreds of OSHA standards covering all
aspects of the workplace: ladders, stairs, exits, noise, safety devices, and so on.
To determine whether an employer is complying with the standards, an OSHA inspector can enter a
workplace at any reasonable time. The employer may refuse to permit the inspector to enter, but a refusal only
postpones the inevitable—the inspector can obtain a search warrant and return.
When an OSHA inspector arrives, he or she must show official credentials, including identification with a
serial number and his or her photograph. Normally, an inspector will explain the purpose of a visit and give the
employer a copy of any employee complaints.
KEEP YOUR RECORDS AND W ORKPLACE IN ORDER

What the inspector looks at, where in the workplace he or she goes, and how long he or she is there is up
to the inspector. Typically, an inspector reviews an employer’s records of deaths, injuries, and illnesses—
records that the employer is required to keep. An inspector may tour the workplace, checking the display of
OSHA posters and other materials and looking for compliance with other regulations.
SELECT A COMPANY REPRESENTATIVE

An employer can choose anyone—typically a manager or supervisor—to accompany an OSHA inspector
during an inspection. A representative of the employees can also accompany the inspector. The inspector
may talk with employees about working conditions, but work disruptions must be minimal. Also, trade secrets
and business conditions are confidential under both state and federal law. Any such information that an
inspector discovers cannot be disclosed outside OSHA and the workplace.
KNOW THE PROCEDURE FOR VIOLATIONS

If an inspector finds a violation, he or she may informally discuss it with the employer or issue a formal
citation. Even a violation that can be corrected immediately may be the basis for a citation and a penalty. A
citation—which may be issued any time within ninety days of an inspection—normally includes an allegation of
a violation, a proposed penalty, and a deadline for correcting the violation.
A citation must be posted in the area of the violation for at least three days. Violations must be corrected,
and OSHA must be notified of the corrections. If an employer decides to fight a citation, a penalty, or a
correction deadline, he or she has fifteen business days after receipt of the citation to advise OSHA. An appeal
may be made to the Occupational Safety and Health Review Commission (OSHRC).
The OSHRC may grant the employer a temporary variance for up to a year (which may be renewed twice)
or a permanent variance. The employer must show that it cannot make a correction because of a lack of
personnel, materials, equipment, or a need to alter facilities. The employer must also show that what it is doing
is safe and healthful.
CHECKLIST FR OSHA INSPECTIONS

1. Insist on proper identification, which should include a serial number and a photograph of the OSHA
inspector. If a person who claims to be an OSHA inspector attempts to collect a penalty or sell a product, he
or she is NOT an official OSHA inspector.
2. Designate a company manager or supervisor to accompany the OSHA inspector.
3. If a citation is issued, post it, but if a correction is not possible, or if the condition is already safe and healthful,
seek a variance from compliance.
a. 29 U.S.C. Sections 651–678.
3. Search Warrants
• In most instances, a physical search for evidence must be conducted under the authority of a
search warrant.
• Warrants are not required to conduct searches in highly regulated industries. Sometimes, a statute
permits warrantless searches of certain types of hazardous operations, such as mines. A
warrantless inspection in an emergency is normally considered reasonable.

How do administrative agencies enforce their rules? Agencies enforce their rules by investigating the
entities that they regulate to monitor compliance with the agency’s rules. The agency uses a variety of
investigative tools, including subpoenas and search warrants.
C. ADJUDICATION
Most administrative actions are resolved through negotiated settlements at their initial stages, without
formal adjudication.
1. Negotiated Settlements
A settlement is an appealing option to firms for two reasons (regulated industries often do not want to
appear to the agency to be uncooperative, and litigation can be very expensive) and to agencies for
one reason (agencies thereby conserve their own resources).
2. Formal Complaints
A complaint is a public document, and a press release may accompany it. If the party against whom
the complaint is made and the agency cannot agree on a settlement, the case goes before an
administrative law judge (ALJ).
3. The Role of the Administrative Law Judge

• An ALJ presides over a trial-like hearing, with the power to administer oaths, take testimony, rule
on questions of evidence, and make determinations of fact.
• An ALJ must be unbiased. The APA requires that the ALJ be separate from the agency’s
investigative and prosecutorial staff; prohibits private communications with any party to an agency
proceeding; and protects the ALJ from arbitrary agency disciplinary actions.
4. Hearing Procedures
Hearing procedures vary from agency to agency. Disputes are often resolved through informal
proceedings. A formal hearing resembles a trial in many respects: The parties can use extensive
discovery; during the hearing, the parties may give testimony, present other evidence, and cross-
examine adverse witnesses. Much more information, including hearsay, can be introduced as evidence
during an administrative hearing, however.
5. Agency Orders
Either party may appeal the ALJ’s decision to the board or commission that governs the agency. If the
party against whom the complaint was filed is dissatisfied with the commission’s decision, it may appeal
the decision to a federal court of appeals. If no party appeals (or if review is denied), the ALJ’s decision
is the final order.

What are the three basic functions of most administrative agencies? The three functions that comprise the
functions of most agencies are rulemaking (making rules), enforcement (including investigating possible
violations and enforcing the rules), and adjudication (including administrative action against rule violators).
IV. Judicial Deference to Agency Decisions

Courts generally defer to an agency’s factual judgment on a subject within the area of its expertise and its
interpretation of its legal authority.
A. THE HOLDING OF THE CHEVRON CASE

When reviewing an agency’s interpretation of law, a court should ask (1) whether the enabling statute
directly addresses the issue and if not (2) whether the agency’s interpretation is reasonable.
B. W HEN COURTS W ILL GIVE CHEVRON DEFERENCE TO AGENCY INTERPRETATION

The extent of this deference has been much debated. If an agency’s decision has resulted from formal
rulemaking, it is more likely to be subject to deference.
CASE SYNOPSIS—
Case 5.2: Mayo Foundation for Medical Education and Research v.

United States
The Federal Insurance Contributions Act (FICA) requires employees and employers to pay Social Security
taxes on all wages. FICA excludes from its definition of employment any service for a school “performed by a
student who is enrolled and regularly attending classes.” The U.S. Treasury Department issued a rule providing
in effect that an employee who works forty or more hours per week is not a student. Mayo Foundation for
Medical Education and Research offers educational residency programs to doctors who seek instruction in a
chosen specialty. In addition to the instruction, the doctors spend fifty to eighty hours a week caring for patients.
Mayo filed a suit in a federal district court, asserting that the Treasury Department’s rule was not valid. The
court agreed, but the U.S. Court of Appeals for the Eighth Circuit reversed. Mayo appealed.
The United States Supreme Court affirmed. FICA does not define student nor does it state whether a
medical resident qualifies as a student. Congress gave the Treasury Department the authority to make rules
with respect to the enforcement of the Internal Revenue Code. The full-time employee rule was issued after
notice-and-comment procedures, on a reasonable determination that imposing Social Security taxes on
residents would further the purpose of the statute. The doctors were “the kind of workers that Congress intended
to both contribute to and benefit from the Social Security system.”
..................................................................................................................................................
Notes and Questions
Should the courts defer entirely to the decisions of administrative agencies on all matters within the
agencies’ purview? Why or why not? No. To always and entirely defer to administrative agencies would be to
accede too much power to the agencies. The judicial branch can review the laws that Congress enacts and the
orders that the executive branch issues, and those bodies can exercise control in various ways over the rulings
and the personnel of the courts. Under our governmental system of checks and balances, it is only reasonable
that the decisions of agencies should likewise be subject to some review.
Many students have to work full time to pay for their education. Is it fair to require them to pay FICA taxes
when they would not have to do so if they worked only thirty hours per week? Explain. It might seem somewhat
unfair to make students who work forty hours a week pay into FICA, while those who work less time are not
required to pay FICA taxes. Nevertheless, there are many benefits to working full time (it may qualify employees
for health insurance, sick days, and family leave, for instance). In addition, as the Court pointed out, “regulation,
like legislation, often requires drawing lines.” The Court reasoned that “focusing on the hours an individual
works and the hours [she or] he spends in studies is a perfectly sensible way of accomplishing that goal.” In the
Court’s view, it is clearly fair to distinguish between full-time workers who study and students who work less
than forty hours per week. Furthermore, the Court noted that exemptions to taxation should be construed
narrowly, so that most workers will contribute to and benefit from the Social Security system.
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION” IN CASE 5.2

Would the United States Supreme Court have deferred to the Treasury Department’s full-time employee
regulation even if it had disagreed with the rule? Why or why not? The United States Supreme Court found that
the Treasury Department’s regulation qualified for Chevron deference because the FICA statute did not define
student and was ambiguous as to whether medical residents are students. It would not have mattered if the
Court had disagreed with the department’s full-time employee rule, it would still have had to enforce it as long
as it was not “arbitrary or capricious in substance, or manifestly contrary to the statute.” Courts are not supposed
to substitute their reasoning for that of an agency having authority to regulate a specific area. It is possible that
if the highest court in the United States had strongly disagreed with the rule, the justices might have found some
way to conclude that it was arbitrary and capricious or inconsistent with the FICA statute. That was clearly not
the case here, though, as the justices approved of the Treasury Department’s reasoning and regulation.
Another random document with
no related content on Scribd:
Bendix paced back and forth, perspiration shining wetly on his face in
the light from the overhead bulb. "It's not fair," he said huskily. "It's not
a true election. It doesn't represent anything." He looked at
Kimmensen desperately. "It's not fair, Joe!"
Kimmensen sighed. "All right, Jem. I assume you brought the
necessary equipment—the screwdriver, the insulation, and so forth?"
After another half hour, Bendix looked across the room at

Kimmensen. The removed panel lay on the floor at his feet, its screws
rocking back and forth inside its curvature. "Joe, it's still not enough."
Kimmensen nodded, listening to the totals on the receiver.
"How many are you switching now?" he asked.
"One out of every three Messerschmidt votes is registering for me."
"Make it one out of two," Kimmensen said harshly.
They barely caught up with Messerschmidt's total. It was a close

election. Closer than any Kimmensen had ever been in before.
Bendix replaced the panel. They put out the room light and climbed
back up to the ground level offices, bringing the chairs with them.
"Well, Joe, it's done." Bendix whispered though there was no one
listening.
"Yes, it is."
"A thing like this creeps over you," Jem said in a wondering voice.
"You begin by telling yourself you're only rectifying a mistake people
would never make if they had time to think. You set a figure—one out
of five. One person out of five, you say to yourself, would switch his
own vote, given the chance. Then you wonder if it might not be one
out of four—and then three.... Joe, I swear when I first suggested we
go down there tonight, I hadn't a thought of doing—what we did. Even
when I put the insulation and wire in my pocket, I never thought I'd—"
"Didn't you?" Kimmensen said. He felt disinterested. They'd had to do
it, and they'd done it. Now the thing was to forget about it. "Good
night, Bendix."
He left him and walked slowly through the corridors left over from
another time. He went down the front steps and out into the plaza.
He found Messerschmidt waiting for him. He was standing in the
shadow of the plane's cabin, and the plaza lights barely showed his
face. Kimmensen stopped still.
Messerschmidt's features were a pale ghost of himself in the
darkness. "Didn't you think I'd make spot-checks?" he asked with pity
in his voice. "I had people voting at timed intervals, with witnesses,
while I checked the running total."
"I don't know what you're talking about."
Messerschmidt nodded slowly. "Mr. Kimmensen, if I'd thought for a
minute you'd do something like that, I'd have had some of my men in
that building with you." His hands moved in the only unsure gesture
Kimmensen had ever seen him make. "I had a good idea of how the
vote would go. When it started right, and suddenly began petering
out, I had to start checking. Mr. Kimmensen, did you really think you
could get away with it?"
"Get away with what? Are you going to claim fraud—repudiate the
election? Is that it?"
"Wait—wait, now—Mr. Kimmensen, didn't you rig the vote?"
"Are you insane?"
Messerschmidt's voice changed. "I'm sorry, Mr. Kimmensen. Once
more, I have to apologize. I ought to have known better. Bendix must
have done it by himself. I should have known—"
"No. No," Kimmensen sighed, "forget it, Messerschmidt. We did it
together."
Messerschmidt waited a long moment. "I see." His voice was dead.
"Well. You asked me if I was going to repudiate the election."
"Are you?"
"I don't know, yet. I'll have to think. I'll have to do something, won't I?"
Kimmensen nodded in the darkness. "Somehow, you've won and I've
lost." Suddenly, it was all welling up inside him. "Somehow, you've
arranged to win no matter what decent men do!"
"All right, Mr. Kimmensen. Have it your way."
"Whatever you plan to do now, I'll be home. If you should need me for
a firing squad or some similar purpose."
Messerschmidt made an annoyed sound. "Mr. Kimmensen, you're
notorious for your dramatics, but I think that's going too far." He
walked away into the darkness.
Kimmensen climbed into his plane, sick at the night that covered him,
and furious at Messerschmidt's ruthlessly sharp mind.
There was no one at home. He walked methodically through the

house, doggedly opening Susanne's empty closets. Then he sat
down in the living room with the lights off, staring out into the starlit,
moonless night. He nodded sharply to himself.
"Of course," he said in the dark. "She'd be one of his timed voters."
Then he sat for a long time, eyes straight ahead and focussed on
nothing, every fold of his clothing rigidly in place, as though he were
his own statue.
CHAPTER VII
Until, hours later, orange flowers burst in the valley below. He came
erect, not understanding them for a moment, and then he ran out to
the patio, leaning over the parapet. On the faint wind, he heard the
distant sound of earth and houses bursting into vapor. In the valleys,
fire swirled in flashes through the dark, and against the glare of
burning trees he saw bobbing silhouettes of planes. Men were far too
small to be seen at this distance, but as firing stabbed down from the
planes other weapons answered from the ground.
Suddenly, he heard the flogging of a plane in the air directly
overhead. He jumped back, reaching for his weapon, before he
recognized Jem Bendix's sportster. It careened down to his landing
stage, landing with a violent jar, and Bendix thrust his head out of the
cabin. "Joe!"
"What's happening?"
"Messerschmidt—he's taking over, in spite of the election! I was
home when I saw it start up. He and his followers're cutting down
everybody who won't stand for it. Come on!"
"What are you going to do?"
Bendix's face was red with rage. "I'm going to go down there and kill
him! I should have done it long ago. Are you coming with me?"
Why not? Kimmensen grimaced. Why wait to die here?
He clambered into the plane and buckled his seat belt. Bendix flung
them up into the air. His hands on the wheel were white and shaking
as he pointed the plane along the mountain slope and sent them
screaming downward. "They're concentrated around the office
building, from the looks of it," he shouted over the whine of air. "I
should have known he'd do this! Well, I'm League President, by God,
and I'm going to settle for him right now!"
If you don't kill us first, Kimmensen thought, trying to check over his
weapon. Bendix was bent over the wheel, crouched forward as
though he wanted to crash directly into the plaza where Kimmensen
could see running men.
They pulled out of the dive almost too late. The plane smashed down
through the undergrowth behind the office building. Bendix flung his
door open and jumped out while the plane rocked violently.
Kimmensen climbed out more carefully. Even here, in the building's
shadow, the fires around the plaza were bright enough to let him see.
He pushed through the tangled shrubbery, hearing Bendix breaking
forward ahead of him. Bendix cleared the corner of the building. "I
see him, Joe!"
Kimmensen turned the corner, holding his weapon ready.
He could see Messerschmidt standing in a knot of men behind the
wreckage of a crashed plane. They were looking toward the opposite
slope, where gouts of fire were winking up and down the
mountainside. Kimmensen could faintly hear a snatch of what
Messerschmidt was shouting: "Damn it, Toni, we'll pull back when I—"
but he lost the rest. Then he saw Bendix lurch out of the bushes ten
feet behind them.
"You! Messerschmidt! Turn around!"
Messerschmidt whirled away from the rest of the men, instinctively,
like a great cat, before he saw who it was. Then he lowered the
weapon in his hand, his mouth jerking in disgust. "Oh—it's you. Put
that thing down, or point it somewhere else. Maybe you can do some
good around here."
"Never mind that! I've had enough of you."
Messerschmidt moved toward him in quick strides. "Listen, I haven't
got time to play games." He cuffed the weapon out of Bendix's hand,
rammed him back with an impatient push against his chest, and
turned back to his men. "Hey, Toni, can you tell if those
Northwesters're moving down here yet?"
Kimmensen's cheeks sucked in. He stepped out into the plaza,
noticing Bendix out of the corners of his eyes, standing frozen where
Messerschmidt had pushed him.
Kimmensen came up to Messerschmidt and the man turned again.

His eyes widened. "Well, Mr. Kimmensen?"
"What's going on?"
Messerschmidt grunted. He pointed up the mountain. "There they
are. I suppose they knew they had to move fast once I repudiated the
election. They began airdropping men about a half hour ago. They're
thick as flies up there, and they'll be coming down here as soon as
they're through mopping up. That ought to be in a few minutes."
"Northwesters."
"That's right, Mr. Kimmensen.
"Well."
Messerschmidt smiled thinly. "I suppose you've guessed Susie's at
my house?"
"Will she be all right?"
Messerschmidt nodded. "It's fortified. That's our next holding point
when we fall back from here." His face was grave.
"Isn't there any chance of stopping them?"
Messerschmidt shook his head. "None. They're military specialists,
Mr. Kimmensen. We don't have any trained men."
"I see."
Messerschmidt looked at him without any perceptible triumph in his
eyes. "It seems, Mr. Kimmensen, that they have men like us in the
Northwest, too. Unfortunately, theirs seem to have moved faster."
"What're you going to do?"
Messerschmidt looked up the mountain and shrugged. "Nothing. We
got some of them in the air, but the rest are down. We may have
weapons as good as theirs, but they know how to use them in units.
It's quite simple. We'll try to hold and kill as many as we can when
they come at us. We'll keep retreating and holding as long as we can,
and when we reach the sea, if we get that far, we'll drown."
Kimmensen frowned. "Their men are concentrated on that
mountain?"
"Yes."
"And you're just going to stand still and let the League be wiped out?"
"Just what, Mr. Kimmensen, would you like me to do?"
Messerschmidt looked at him in fury. "I don't have time to train an
army of our own. They've got us cold."
"Messerschmidt, I see eight men here with weapons."
"As far as anything we can accomplish goes, we might as well use
them to toast sandwiches."
"We can scour that mountainside. Down to bare rock."
Messerschmidt blanched. "You're joking."
"I am not!"
"There are people of ours up there."
"There are people of ours all through this area. When the
Northwesters are finished up there, they'll fan out and burn them all
down, a little bit at a time."
Messerschmidt looked at Kimmensen incredulously. "I can't do it.
There's a chance some of our people up there'll be able to slip out."
"By that time, the Northwesters'll be down here and dispersed."
Messerschmidt started to answer, and stopped.
"Messerschmidt, if you're going to do anything, you'd best do it
immediately."
Messerschmidt was shaking his head. "I can't do it. It's murder."
"Something much more important than human life is being murdered
on that mountain at this moment."
"All right, Kimmensen," Messerschmidt exploded, "if you're so hot for
it, you give the order! There're something like a hundred League
families up there. Half of them're still alive, I'd say. If the election's
void, you're still president. You take the responsibility, if you can."
"I can."
"Just like that."
"Messerschmidt, the defense of freedom is instantaneous and
automatic."
"All right, Mr. Kimmensen," Messerschmidt sighed. He turned to his
men. "You heard him. It's his order. Aim at the mountain." He bared
his teeth in a distorted laugh. "In freedom's name—fire!"
Kimmensen watched it happen. He kept his face motionless, and he

thought that, in a way, it was just as well he hadn't long to live.
But it was done, and, in a way, his old dream was still alive. In a way,
Messerschmidt's hands were tied now, for in the end the Freemen
defeated the trained armies and no one could forget the lesson in this
generation.
He looked down at the ground. And in a way, Messerschmidt had
won, because Kimmensen was dying and Messerschmidt had years.
That seemed to be the way of it. And Messerschmidt would someday
die, and other revolutions would come, as surely as the Earth turned
on its axis and drifted around the sun. But no Messerschmidt—and
no Kimmensen—ever quite shook free of the past, and no revolution
could help but borrow from the one before.
Well, Bausch, Kimmensen thought to himself as the face of the
mountain slowly cooled and lost color, I wonder what we'll have to say
to each other?
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SOLUTION MANUAL FOR CENGAGE ADVANTAGE

BOOKS ESSENTIALS OF THE LEGAL ENVIRONMENT

 VIDEO SUPPLEMENTS 

Business Law Digital Video Library

A. ADMINISTRATIVE AGENCIES EXIST AT ALL LEVELS OF GOVERNMENT

B. AGENCIES PROVIDE A COMPREHENSIVE REGULATORY SCHEME

A History of American Administrative Law

II. Agency Creation and Powers

A. ENABLING LEGISLATION—AN EXAMPLE

* Create rules and regulations to carry out the FTC Act.

ANSWER TO LEARNING OBJECTIVE/FOR REVIEW QUESTION NO. 1

B. AGENCY POWERS AND THE CONSTITUTION

The Delegation Doctrine

a. The Administrative Procedure Act

• Fails to provide a rational explanation for a decision.

Case 5.1: Federal Communications Commission

Notes and Questions

ANSWER TO “THE TECHNOLOGICAL DIMENSION” IN CASE 5.1

ADDITIONAL CASES ADDRESSING THIS ISSUE —

ANSWER TO LEARNING OBJECTIVE/FOR REVIEW QUESTION NO. 2

III. The Administrative Process

ANSWER TO LEARNING OBJECTIVE/FOR REVIEW QUESTION NO. 3

1. Notice of the Proposed Rulemaking

3. The Final Rule

ANSWER TO LEARNING OBJECTIVE/FOR REVIEW QUESTION NO. 4

1. Inspections and Tests

ENHANCING YOUR LECTURE—

 WHAT TO DO WHEN OSHA

KEEP YOUR RECORDS AND W ORKPLACE IN ORDER

SELECT A COMPANY REPRESENTATIVE

KNOW THE PROCEDURE FOR VIOLATIONS

CHECKLIST FR OSHA INSPECTIONS

a. 29 U.S.C. Sections 651–678.

ANSWER TO LEARNING OBJECTIVE/FOR REVIEW QUESTION NO. 5

3. The Role of the Administrative Law Judge

ANSWER TO LEARNING OBJECTIVE/FOR REVIEW QUESTION NO. 3

IV. Judicial Deference to Agency Decisions

A. THE HOLDING OF THE CHEVRON CASE

B. W HEN COURTS W ILL GIVE CHEVRON DEFERENCE TO AGENCY INTERPRETATION

Case 5.2: Mayo Foundation for Medical Education and Research v.

Notes and Questions

ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION” IN CASE 5.2

After another half hour, Bendix looked across the room at

They barely caught up with Messerschmidt's total. It was a close

There was no one at home. He walked methodically through the

Kimmensen came up to Messerschmidt and the man turned again.

Kimmensen watched it happen. He kept his face motionless, and he

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