SPEAKERS CONTENTS INSERTS Tables
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REGULATORY FAIR WARNING ACT OF 1998 AND THE TAXPAYERS DEFENSE ACT
COMMERCIAL AND ADMINISTRATIVE LAW
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
H.R. 4049 and H.R. 4096
JULY 23, 1998
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Printed for the use of the Committee on the Judiciary
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Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
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JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
THOMAS E. MOONEY, SR., Chief of Staff-General Counsel
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
Subcommittee on Commercial and Administrative Law
Page 4 PREV PAGE TOP OF DOCGEORGE W. GEKAS, Pennsylvania, Chairman
LAMAR SMITH, Texas
BOB INGLIS, South Carolina
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
LINDSEY O. GRAHAM, South Carolina
JERROLD NADLER, New York
SHEILA JACKSON LEE, Texas
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
RAYMOND V. SMIETANKA, Chief Counsel
SUSAN JENSEN-CONKLIN, Counsel
JAMES W. HARPER, Counsel
C O N T E N T S
July 23, 1998
Gekas, Hon. George W., a Representative in Congress from the State of Pennsylvania, and chairman, Subcommittee on Commercial and Administrative Law
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McLean, Christopher A., Deputy Administrator, Rural Utilities Service, U.S. Department of Agriculture
Niskanen, William A., Chairman, The CATO Institute
Onek, Joseph N., Esq., Principal Deputy Associate Attorney General, Department of Justice
Schatz, Thomas A., President, Citizens Against Government Waste
Schaum, James H., President and CEO, Allen Memorial Hospital, Oberlin, OH
Troy, Daniel E., Esq., Associate Scholar, American Enterprise Institute
Vladeck, David C., Esq., Director, Public Citizen Litigation Group
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Gekas, George W., a Representative in Congress from the State of Pennsylvania: Prepared Statement
McLean, Christopher A., Deputy Administrator, Rural Utilities Service, U.S. Department of Agriculture: Prepared Statement
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Niskanen, William A., Chairman, The CATO Institute: Prepared Statement
Onek, Joseph N., Esq., Principal Deputy Associate Attorney General, Department of Justice: Prepared Statement
Schatz, Thomas A., President, Citizens Against Government Waste: Prepared Statement
Schaum, James H., President and CEO, Allen Memorial Hospital, Oberlin, OH: Prepared Statement
Troy, Daniel E., Esq., Associate Scholar, American Enterprise Institute: Prepared Statement
Vladeck, David C., Esq., Director, Public Citizen Litigation Group: Prepared Statement
Material submitted for the record
REGULATORY FAIR WARNING ACT OF 1998, AND THE TAXPAYERS DEFENSE ACT
THURSDAY, JULY 23, 1998
Page 7 PREV PAGE TOP OF DOCHouse of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
The subcommittee met, pursuant to notice, at 10 a.m., in Room 2141, Rayburn House Office Building, Hon. George W. Gekas [chairman of the subcommittee] presiding.
Present: Representatives George W. Gekas, Ed Bryant, Bob Inglis, Steve Chabot, Jerrald Nadler, Sheila Jackson Lee, and William D. Delahunt.
Staff present: Raymond V. Smietanka, Subcommittee Chief Counsel, James W. Harper, Subcommittee Counsel; Audray Clement, Subcommittee Staff Assistant, and David Lachman, Minority Professional Staff Member.
OPENING STATEMENT OF CHAIRMAN GEKAS
Mr. GEKAS [presiding]. The hour of 10 o'clock having arrived, this hearing before the Commercial Administrative Law Subcommittee of the Judiciary shall come to order.
We will recess pending the arrival of the second member so that we may be able to constitute the rules majority for conducting such a hearing. In this way I have comported to my custom of starting every meeting on time but now we still have to wait. We will recess.
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Mr. GEKAS. The time of the recess has expired. We note the attendance and presence of the gentleman from New York, Mr. Nadler, the ranking minority member. A quorum for such a hearing having been constituted, we shall proceed.
In May of this year we had a hearing on attendant regulatory matters in which certain horror story anecdotes were related to this committee about the undue process that victimized ordinary citizens. One of them had to do with hospital or HCFA billings or HCFA review of certain billings rendered by a physician in which both he and his wife were implicated and they had to go through a series of haunting incidents with HCFA and other regulators, and two others that brought to our attention the continuing need for regulatory reform. During that process I remember that the gentleman from New York, Mr. Nadler, was upset initially by the fact that these individuals were complaining when he felt that perhaps there was merit in the agency actions that were being taken.
But as the hearing wore on, to the credit of the gentleman from New YorkI wanted you to hear this, I'm giving you credithe perceived that what we were after was whether the agencies were properly notifying or properly processing or properly giving balance to their actions against these groups of individual citizens. And he, the gentleman from New York, agreed that a review of such matters is probably an acceptable way for this committee to proceed.
At that time I also stated that perhaps this would be a good time to begin reviewing an action that had taken place in the previous Congress in which the Fair Warning Act was passed by the House and passed by the Senate in different versions but never the twain, met for final resolutions. The Fair Warning Syndrome that we encompassed in that Congress is now the basis forand I say ''basis for'' because we changed it a little bit and perhaps the aspect of it is a little bit differentthe subject of this hearing.
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We all recognize the value of the agencies who make sure that regulations protect our food, our shelter, our doing business, all the questions in society that arise from a free market. The agencies form a bastion of defense for the unscrupulous and for those who inadvertently or through negligence can hurt the public in general. So we recognize the good work that agencies do. We simply feel that there ought to be more applicability to a warning so that the disaffected member, one who is unduly punished, unduly scathed by an agency action, would have had an opportunity to respond and to cure if necessary, to provide a remedy, et cetera, et cetera.
At this time I will reserve the balance of my time for opening statement and yield to the gentleman from New York, after which I will complete my opening statement.
Mr. NADLER. Thank you, Mr. Chairman. Today we begin yet another hearing on the regulatory process and on legislation which purports to assert Congressional control over agency administration of taxes and fees, and on another bill which purports to protect the due process rights of regulated individuals and entities. I want to say at the outset that I agree with the lofty goals of both these bills. Certainly, the goals of the Regulatory Fair Warning Act, to provide all citizens with clear and effective notice of the rules and of how they may comply with the law is important, and I think we all support that goal.
We will hear from a representative of one hospital who will discuss the manner in which the False Claims Act was enforced in a series of cases, which, to put it mildly, caught the attention of members on both sides of the aisle.
I would defer on this to our colleague, the gentleman from Massachusetts, Mr. Delahunt, who has taken a real leadership role in working to resolve this matter. As a former prosecutor, he certainly understands prosecutorial discretion and has no patience for law-breakers. I'm encouraged by the steps which have been taken to resolve this particular matter though it bears further scrutiny, and I look forward to the testimony of the witnesses.
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Due process is an important, if sometimes lonely, cause. Regulated corporations, even those like Georgia-Pacific which have committed serious violations of our anti-pollution laws, on whose behalf the original version of this legislation which introduced, at least according to The New York Times and The Atlanta Journal Constitution, are still entitled to due process. But so are death-row inmates who are unable to afford the effective assistance of counsel at trial. So are middle-class families facing bankruptcy who cannot afford a $40 million lobbying campaign to tilt the bankruptcy code in their favor; and also refugees who in persecution who arrive at our border seeking a safe haven, as did so many of our families once upon a time.
I hope that in the future the majority, if it is still the majority, having developed an interest in due process and getting it, will start fighting for the due process rights of corporate polluters, will join those of us in the minority who believe that due process should also be available to the poor, the middle-class, and those who do not have packs. The question is not whether due process and fair warning is a good idea; we all agree it is a fundamental right. The question is how this legislation would operate in practice and whether it would strike the appropriate balance between due process and effective enforcement of the laws. The Taxpayers Defense Act, unfortunately, appears to extend the Iran/Contra doctrine of plausible deniability to legislative activity.
Congress passes a law. To cite a random example, the Telecommunications Act, which requires agencies to assess certain fees to ensure the provision of certain services, and then Congress denounces the agency for following its own legislative mandate. Now we have the power to do more. We have the power under the Congressional Review Act to overrule agencies on an expedited basis, except, of course, the Telecommunications Act which we exempted for some reason. The Congressional Review Act is part of the Contract with America so maybe a member of the majority can explain that exemption to me. But for Congress to change a policy like universal service, which may have become unpopular with a powerful industry, requires us to actually vote to eliminate programs which have provided phone service to rural communitiesnot a big deal in Brooklyn and Manhattan where my constituents live, but a big deal in States like Tennessee, South Carolina, Texas, Ohio, and even Pennsylvania.
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How much better to hold another hearing and denounce an agency for doing what we told it to do than to actually repeal the universal service mandate. We are shocked, truly shocked, to find programs we set up actually being administered. In the case of the Taxpayers Defense Act, I have an awful feeling of deja vu all over again. We debated a similar bill earlier in this Congress introduced by the gentleman from Arizona, Mr. Hayworth, which would have applied the procedures to every agency rule. That one was so preposterous it was not even included in the markup with the other bill considered in the same hearing. Well, here we go again.
Thank you, Mr. Chairman.
Mr. GEKAS. We thank the gentleman.
Reclaiming the time allotted to the Chair by the Chair for the opening statement, we will continue. Intriguing that we're going to be perhaps debating the Iran/Contra affair all over again, and the same kind of attacks that some of the minority have been casting on the majority about how we are insensitive to the poor, neither of which has anything to with what we are attempting to do here today. I'd like to make that clear. Iran/Contra has nothing to do with, nor does fair warning have anything to do with, Iran/Contra. That's a simplistic and unassailable piece of logic that I have just addressed.
The gentleman from New York fails to note in his assessment of the second part of our venture this morning, about the universal service that the complaints have come to Members of Congress not from utilities that seem to be the whipping boy of the gentleman from New York or from the large corporations to which he refers, but rather from citizens who have wondered from whence comes this additional long-distance surcharge that is now appearing on their books. It is their complaint that we take to heart and look into this situation of whether or not this is a tax, which we believe it is, a tax which was imposed by a series of events triggered by an agency rather than by the Congress which has had exclusive jurisdiction over whether or not to impose such a tax. That's the key issue, not Iran/Contra, but whether or not the Congress should have the ultimate last word in whether or not a tax should be imposed.
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I believe that the gentleman from Massachusetts, Mr. Delahunt and I and others, I thinkis it Mr. McCollum also who is involved in that with the hospital services, et cetera? And we are working on that, but in the meantime, we ought to know firsthand how the agencies can model the process. We know they protect our food chain and that's good, but we also know that they overreach many times and that's what we're trying to address in these hearings. These are benign, well-purposed hearings.
I promise that I will seek a separate investigation of Iran/Contra and what the agencies may have to do with whether or not that was pursued properly. But in the meantime, we're looking at whether or not the Congress should have the last word in imposing taxes and whether or not the Congress should prepare the agencies in a proper way for issuing fair warning when they reinterpret their regulations, never inform the affected parties, and then impose sanctions and penalties and take other actions without the knowledge of, and without a fair warning to the affected parties.
With that, I yield back the balance of my time. Does the gentleman from Massachusetts wish recognition? If so, I yield to the gentleman.
[The prepared statement of the Hon. George W. Gekas follows:]
PREPARED STATEMENT OF GEORGE W. GEKAS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA
Today, we examine two bills that illustrate the importance of the administrative process to the lives of Americans.
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Guided by our administrative laws, Federal agencies do a great deal of good for the American people. On rare occasions, however, bureaucrats and regulatory enforcers become excessively zealous in pursuit of their goals.
They may conduct enforcement actions that cross the boundaries from fairness into unfairness. They may adopt policies that technically serve the statutory goals of their agency, yet disregard the will of Congress and the needs of the American people.
Alas, it is these latter instances of overreaching that Americans remember. Agency overreaching breaks down trust between the people and their government, tarnishes the good work that the majority of regulation is intended to serve, and creates a lasting impression that the government is working on Americans, rather than for them.
Let me talk about two kinds of overreaching, and the bills intended to reduce them, which we consider today.
The Supreme Court's generous Chevron doctrine allows agencies to adopt any plausible interpretation of the statutes they enforce. Likewise, the Seminole Rock case allows agencies to interpret their own rules. Agencies can change their interpretations of the law and their own rules without notice to the regulated public.
It should come as no surprise that, on many occasions, Americans have been stung by regulations that are illogical, incomprehensible, or disturbingly innovative. Our hearing on May 7 illustrated such cases.
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The Regulatory Fair Warning Act would not curtail any of these agency freedoms. It would simply protect the American people from getting burned when an agency uses these freedoms to treat them unfairly.
There is a simple checklist that the Regulatory Fair Warning Act sends us through, which illustrates how it requires simple fairness:
First, is the regulation published in the Federal Register or Code of Federal Regulations, or is it something the regulated party knew or should have known?
Second, did the regulation give fair warning of what is prohibited or required?
And, third, was the regulated party given accurate official information about what the regulation prohibits or requires?
If agencies are doing their jobputting out clear regulations and working with the public to see them implementedthe answer to these questions will always be ''yes.'' If agencies are not doing their jobs, the bill protects Americans from being punished for that.
The Regulatory Fair Warning Act is a modest, but important, protection against overreaching by regulatory enforcers.
The Taxpayer's Defense Act, on the other hand, protects against agencies 'overreaching' right into the American peoples' wallets. Regrettably, this kind of overreaching seems to be favored by the Administration.
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In rare circumstances so far, Congress has given agenciessometimes unintentionallythe power to tax. Using methods as varied as their regulatory goals, Federal agencies fund their own budgets or fund pet projects through hidden taxes on the American people.
I have a few examples and, luckily, I know of only a few:
In September 1995, the National Science Foundation authorized the collection of a secret 30% tax on registration of domain names for the Internet. This tax money was to be used for the Administration's ''Next Generation Internet'' fund, and as much as $55 million dollars was collected before a Federal judge put a stop to it.
The Omnibus Budget Reconciliation Act of 1990 required the Nuclear Regulatory Commission to recover 100% of its budget authority from fees. This means that nuclear utilities pay for applications, licenses, inspections, and renewals ANDunlike any other utilities - they pay for all other benefits that the Commission provides to the public. The latter payments are taxes, which artificially raise the cost of nuclear-generated electricity to consumers in Pennsylvania and around the country. The NRC has refrained from submitting legislation to do away with this $350+ million dollar secret tax because such a bill would be inconsistent with the Administration's taxing and spending plans.
Then, there is the FCC's Universal Service Taxa well-known tax on every long-distance phone caller in the country. This multi-billion dollar tax, whose chief proponent is Vice President Gore, takes the provisions of the Telecom Act of 1996 and stretches them beyond the breaking point. So far, the FCC has spent more than $18 million in taxpayer dollars on illegal corporations that pay glamorous $200,000 salaries, while not a single penny has gone to benefit the American public.
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Finally, the Administration's proposed electricity restructuring legislation contains provisions for an invisible $3 billion dollar tax on electricity generation. The ''Comprehensive Electricity Competition Act'' would give the Secretary of the Federal Energy Regulatory Commission the power to tax electricity. This tax would raise the cost of electricity to the American people, while hiding from them the real cost of government.
I think these secret and invisible taxes should not exist.
The Taxpayer's Defense Act does one simple thing. It prevents any agency rule that amounts to a tax from taking effect until Congress has approved it.
The cry of ''no taxation without representation'' has gone up in the land before, and today we are hearing it again. Congress must not allow a Federal agency comprised of unelected bureaucrats to determine the amount of taxes hardworking Americans must pay. While preserving needed flexibility, the Taxpayer's Defense Act will allow Congress alone to determine the purposes to which precious tax dollars will be put.
I will be interested in the testimony we hear on both of these bills, and I thank everyone in attendance here today for their interest and participation.
Mr. DELAHUNT. Thank you, Mr. Chairman. I look forward to hearing the witnesses and maybe I'll surprise the chairman by saying that I would indicate that in terms of how do wewhat's described as the Regulatory Fair Warning Act, I always wonder where we get these titles. Do you dream them up, Mr. Chairman, or is there somebody out there that just
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Mr. GEKAS. If the gentleman would yield, I've been known to dream them up.
Mr. DELAHUNT. Okay. Well, this sounds good, ''The Regulatory Fair Warning Act.'' Again, I haven't had a chance to review the specific provisions, but I want to be forthcoming and say that I am concerned about the role of agencies. I think, obviously, the exercise of the oversight responsibility, the various committees, is a role that has to be respected by the various Chairs and exercised, but there have been a variety of anecdotes that had been presented to this particular committee in terms of what I would suggest is over-reaching, lack of discretion, poor exercise in judgment, and I look forward to this particular testimony and working with the chairman to see if we could work on a bill that would evolve into a consensus.
And having said that, I will yield back.
Mr. GEKAS. I thank the gentleman, and the Chair does recall that at the last hearing the gentleman from Massachusetts joined in our small chorus of coming to the conclusion that we ought to look at some of these overreaching situations and see if we can work together. I then stated that now we should be reviving the Regulatory Fair Warning Act which can serve as the basis for that joint consultation to which we look forward.
Let's begin the hearing. We call to the witness stand the Department of Justice representative, Mr. Onek, Joseph Onek, who in December 1997 joined the Department of Justice to serve as the Principal Deputy Associate Attorney General. Prior to joining the Department, he was a partner in the Washington, D.C. law firm of Crowell and Moring. Mr. Onek is a graduate of Harvard College and Yale Law School. He clerked for Justice William J. Brennan and has served on the staff of the Senate Judiciary and the Labor and Human Resources Committees.
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We welcome you and you may proceed with your statement. We stated at the outset that your written statement will become a part of the record we ask you to attempt to restrict your testimony to 5 minutes after which you will be cross-examined or gently examined depending on what you say, by the members. Thank you. You may proceed.
STATEMENT OF JOSEPH N. ONEK, ESQ., PRINCIPAL DEPUTY ASSOCIATE ATTORNEY GENERAL, DEPARTMENT OF JUSTICE
Mr. ONEK. Thank you, Mr. Chairman and members of the subcommittee. My name is Joseph Onek and I am the Principal Deputy Associate Attorney General at the Department of Justice. I am pleased to provide the Department's view on H.R. 4049, the Regulatory Fair Warning Act of 1998.
The Department of Justice and this administration firmly believe in providing the regulated community with fair notice and reasonable and accessible compliance assistance. While we support the goal of H.R. 4049, we do not think that the proposed legislation would appropriately accomplish those goals.
Let me turn first to the issue of reliance on official representation. H.R. 4049 seeks to bar any retrospective sanctions for violations of law if the defendant reasonably relied on misleading official representations about what a rule prohibits or requires. The bill nowhere defines the term ''official representations,'' nor does it make any distinction between representations by Federal or State officials or high officials or low officials. It is, therefore, unclear if the provision includes written statements by those officials, oral statements, or even totally informal remarks by an agency employee or by a State official with no delegated Federal regulatory authority.
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H.R. 4049 may, thus, open the door to arguments that Government employees who fail to specify violations in an inspection report may have implicitly acquiesced in those violations. The bill may arguably stop the United States, even when a State official's representations are directly contrary to the relevant statute and regulations. Moreover, the bill does not even require, at a minimum, that the person make a full and truthful representation to the authorized official.
The insertion of the term ''reasonable reliance'' does not allay our concerns. It, too, is undefined and will only invite endless litigation. H.R. 4049, because of this provision, may diminish national uniformity and the maintenance of minimal Federal standards by enabling State employees, and maybe even low-level State employees, to grant waivers or immunity from Federal rules, even if another State's citizens are harmed. The bill could result in lower standards and diminished deterrence in the enforcement of rules designed to protect the public because incorrect statements by State officials may have stopped the Federal Government from imposing the Federal standards. It could lead to unfair advantages to a company which somehow or another has a special relationship with a State official, high or low.
And the bill may discourage agencies from giving informal advice to help companies comply with the law because the agencies will be afraid that the defendant will then always cry or the regulated parties will always cry estoppel. And I note that Mr. Troy, who is testifying after me today, makes this very same point, that H.R. 4049 would discourage such communications by agencies.
We also have concerns about the definition of fair warning which the bill takes from part of a single sentence in the General Electric case. We think this provision is unwise because it would result in one inflexible standard applied to all cases without taking into account the particular facts at hand. It also fails in fact to incorporate all the elements of fair notice that were laid out in the General Electric case, including a requirement that a regulated party conduct a reasonable inquiry of relevant, regulatory standards. In addition, the General Electric case involved only civil penalties. I think that this is a key point. H.R. 4049 applies to a much broader range of agency sanctions, including injunctive prospective relief.
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Now it may be one thing to say to an agency that it cannot impose civil penalties on a drug manufacturer who has violated a possibly unclear regulation. It is another thing to say to that agency that it cannot prohibit the drug manufacturer from distributing an unsafe product. And more generally, I believe that a problem with this bill is that it applies to all sanctions, not simply retrospective penalties, but future looking action such as license approvals and injunctions.
Finally, I think the bill will invite unnecessary litigation concerning whether agency actions or statements are or are not rules and on the meaning of such undefined terms as ''official representations,'' ''retrospective sanction,'' ''reasonably rely,'' ''reasonable person,'' and ''ascertainable certainty.'' This litigation will not benefit either the regulated community or the administrative process.
As you noted, Mr. Chairman, I have submitted a fuller statement for the record and I am now available to answer your questions. Thank you.
[The prepared statement of Mr. Onek follows]:
PREPARED STATEMENT OF JOSEPH N. ONEK, ESQ., PRINCIPAL DEPUTY ASSOCIATE ATTORNEY GENERAL, DEPARTMENT OF JUSTICE
Mr. Chairman and members of the Subcommittee, my name is Joseph N. Onek, and I am the Principal Deputy Associate Attorney General of the Department of Justice. The Office of the Associate Attorney General oversees the Department's civil justice functions, including supervising the work of the Civil, Civil Rights, Antitrust, Tax, and Environment and Natural Resources Divisions. I am pleased to provide the Department's views today on H.R. 4049, the ''Regulatory Fair Warning Act of 1998.'' The Department testified previously concerning H.R. 3307, the predecessor to this bill offered in the second session of the 104th Congress. We appreciate the opportunity to provide once again the Department's views.
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The Department of Justice and this Administration firmly believe in providing the regulated community with fair notice and reasonable and accessible compliance assistance. The Justice Department, our client agencies, and the courts already take into account such factors as fair notice, sufficient clarity of regulations to warn a party of what is expected of it, and requirements of due process in assessing appropriate penalties. We also consider carefully those and other factors in determining whether it is appropriate to initiate a case. In addition, as I will describe below, the Administration and the Department have made numerous efforts to reach out to businesses and individuals to provide compliance assistance.
We appreciate, Mr. Chairman, that you have made changes to the bill intended to address some of the concerns we raised earlier regarding H.R. 3307. But while we continue to support the bill's goals, we do not think that this proposed legislation would accomplish those goals or the purposes set out in the bill. We would welcome the opportunity to work with you to achieve our common goals in a common sense, effective manner.
I. Unintended Consequences of H.R. 4049Undermining Agency Rules, the Backbone of Congressional Regulatory Enactments
H.R. 4049 seeks to ensure due process for persons that are potentially subject to civil or criminal sanctions. At the outset, we note that the bill may contain a drafting ambiguity that could allow defense counsel to argue, and courts to find, that the bill prohibits agencies or courts from imposing any sanctions (including prospective relief) for violations of agency rules if they find that any of the following is true: (a) the rule was not printed in the Code of Federal Regulations; (b) the rule was not printed in the Federal Register; (c) the rule was not known to the person; (d) the rule was not knowable to a person who has engaged in a reasonable, good faith investigation of the rules applicable to the conduct that allegedly violated the rule; (e) the rule failed to give the person fair warning of the conduct that the rule prohibits or requires; or (f) with respect only to a retrospective sanction, the person reasonably relied on misleading official representations about what the rule prohibits or requires.
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We do not believe that the drafters of this bill intended this result. A literal reading of the bill as drafted would arguably prohibit an agency or court from imposing a sanction unless all of the first four requirements were met (in new Sections 558(d)(1)(A) and 1660(a)). That would mean, for example, that an agency could not impose a sanction unless a rule was published in both the Code of Federal Regulations and the Federal Register. That cannot be what the drafters intended. Our analysis below assumes that this particular ambiguity can be clarified and that the bill would permit an agency or court to impose sanctions where any one of the four listed factors is present.
In many modern regulatory statutes, Congress legislates by conferring rulemaking authority upon agencies created to carry out a wide range of objectives. Among other things, agency rules
Protect our nation's food supply.
Protect our nation's drinking water.
Ensure drug safety, consumer product safety, and transportation safety.
Help local communities, and police and fire departments plan for emergency chemical releases and spills.
Ensure compliance with immigration laws.
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Protect civil rights, including the rights of citizens with disabilities.
Prevent illegal diversion of controlled substances and other related criminal activity.
Prevent fraud against the taxpayer.
Agency rules, regulations, and enforcement programs form the backbone of those congressional enactments and protect our families, communities, businesses, and fair competition in the marketplace. It is important to keep this framework in mind to understand the serious adverse consequences that may result if this bill is enacted. H.R. 4049 would impede law enforcement efforts and ultimately be detrimental to public health, safety, welfare, and the environment. Among other things, the bill could
Provide new defenses to criminals who violate the law.
Provide incentives for bad actors to remain ignorant of regulatory requirements.
Chill agency communications with regulated entities for fear that unanticipated waiver or immunity may result from statements that are misunderstood by the person.
Undermine national uniformity in the application of Federal law.
Place those who comply with the law at an unfair competitive disadvantage in the marketplace.
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Neither the Congress, the public, nor law-abiding companies would desire or support these results. Yet these are likely on-the-ground outcomes if H.R. 4049 becomes law.
I. Analysis of H.R. 4049The Bill will Impede Law Enforcement and Appropriate Administrative and Judicial Remedies.
A. Reliance on ''official representations''
New sections 588(d)(1)(B)(ii) and 1660(a)(2)(b) seek to bar any ''retrospective sanctions'' for violations of law if the defendant reasonably relied on misleading ''official representations'' about what a rule prohibits or requires. The bill does not define ''official representations,'' nor does it make any distinction between representations by Federal or state officials. It is therefore unclear if this includes written statements, oral statements, or even informal remarks by any agency employee or misleading statements by a state official with no delegated Federal regulatory authority.
This provision is unnecessary, inconsistent with Supreme Court case law, and would do little more than encourage litigation. It is well established that ''equitable estoppel will not lie against the United States as it lies against private litigants.'' Office of Personnel Management v. Richmond, 496 U.S. 414, 420 (1990). In fact, the Supreme Court has ''reversed every finding of equitable estoppel that [it] has reviewed,'' id. at 422, including ''unauthorized representations by agents of the government'' and ''mistaken representations of an agent unless it were clear that the representations were within the scope of the agent's authority.'' Id. at 420.
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H.R. 4049 could change equitable estoppel law by expanding the set of officials from those with real authority to interpret the law to all or any person making ''official representations,'' a broad, undefined term. Even if the term were restricted to employees with enforcement or implementation authority, the persons covered may be more numerous than the those with authority to interpret the law. And ''[a]llowing state representations to estop the Government . . . would provide states with a mechanism for going below the Federal floor of regulation.'' Marine Shale Processors, Inc. v. United States, 81 F.3d 1329, 1349 (5th Cir. 1996). For that reason, appellate courts have refused to estop the government in these cases. See e.g., id.
H.R. 4049 may open the door to arguments that, even when acting in good faith, government employees who fail to observe, note, or specify violations in an inspection report or during a visit to the entity may have implicitly acquiesced in those violations. The bill arguably may estop the United States even when a state's representations are contrary to the relevant statute and regulations. Moreover, the bill does not even require at a minimum that the person make a full, accurate, and truthful representation to the authorized official. Insertion of the term ''reasonable reliance'' does not allay our concerns. It is undefined, ambiguous, and will only invite further litigation. If H.R. 4049 is enacted, the United States arguably would be estopped in many situations from enforcing the laws necessary to protect public health, safety, and welfare. The adverse consequences to law enforcement and the public would be serious and detrimental. H.R. 4049 may
Diminish national uniformity and the maintenance of minimum federal standards.
Page 26 PREV PAGE TOP OF DOC Upset our partnership with states in the administration and enforcement of Federal programs, if state employees could grant companies waivers or immunity from Federal ruleseven if another state's citizens are harmed.
Result in lower standards and diminished deterrence in the enforcement of rules designed to protect the public (e.g., incorrect statements by the state may estop the Federal Government from imposing the Federal standard).
Foster inequities and unfair competition among companies, because one unauthorized Federal or state employee may give an unfair advantage to one company over its competitors who are complying with the law.
Invite abuse, including collusion between the violator and government employees, who may even lack any regulatory authority or authority to interpret the law.
Discourage agencies from giving informal advice designed to help companies comply with the law (e.g., placed in a defensive posture to prevent mistakes or abuse, agencies may limit persons who provide compliance assistance; caution employees who provide assistance; paper the record''to prevent an estoppel defense; and add disclaimers/qualifications to adviceconsuming valuable company and agency time and resources).
Invite costly and unnecessary litigation about whether the government can be estopped, including estoppel through mistake, silence or inadvertence to detail (e.g., defendants may argue that the government is estopped because an inspection report failed to note evidence of a violation).
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H.R. 4049 would thus lead to lower standards for the protection of public health, safety, and the environment.
B. Broad definition of ''Sanctions''
Because the APA defines the term ''sanction'' to include not just civil or criminal monetary penalties and imprisonment, but also prospective injunctive relief, compensation, restitution, and withholding relief, as well as administrative or court orders relating to compliance, or license or permit requirements, revocations, and suspensions, see 5 U.S.C. 551(10), H.R. 4049's new bar on ''sanctions'' (in new 5 U.S.C. 558(d)(1) and new 28 U.S.C. 1660(a)) would have profound effects. It may prevent the government from obtaining appropriate relief for serious problems. The government could become powerless to punish criminals or address major threats to public health, safety, and welfare. The Department is particularly concerned that the proposed restrictions on sanctions arguably would prevent the government from taking prospective action or ordering corrective action to protect the health and safety of the American public, as well as the public fisc (e.g., requiring inspection, maintenance, or grounding of unsafe aircraft; requiring companies to take corrective action or recall dangerous drugs or products; or refusing to renew a license for a nuclear power plant until correction of safety concerns). The bill could also restrain the government in law enforcement efforts to protect the public from dangerous criminals and allow criminal conduct to go unpunished. Although the bill would be improved if its application were limited to civil and criminal penalties, such an amendment would not solve all our concerns. Government cannot be everywhere to obtain injunctions to achieve compliance.
Page 28 PREV PAGE TOP OF DOCC. The Bill Would Change the Law with respect to Notice and Fair Warning.
New sections 558(d)(1)(A)(C) and 1660(a)(1)(3) seek to bar any sanction (civil, criminal, or court imposed) in the absence of ''fair warning'' to the defendant. We embrace the principle that penalties are inappropriate where an agency has not provided fair notice of the conduct that a rule prohibits or requires. Indeed, courts recognize this principle. See e.g., General Electric Co. v. EPA, 53 F.3d 1324, 132829 (D.C. Cir. 1995). But it is important that the courts retain the power to address fair notice concerns through a case-by-case examination of the facts. The relevant inquiry is what process is due under the facts of a particular case.
It appears that Sections 558(d)(2) and 1660(b) attempt to codify the law on fair warning by relying on a single sentence in the General Electric case. We think this would be unwise because it would result in one inflexible standard applied to all cases without taking into account the varied and particular facts at hand. It also fails to incorporate all the elements of fair notice as articulated by the General Electric court, including the requirement that a regulated party conduct a reasonable inquiry of relevant regulatory standards. In addition, the General Electric case involved only civil penalties, while H.R. 4049 applies to a much broader range of agency actions, such as prospective relief.
It is especially troubling that H.R. 4049 applies an inflexible new standard of notice to all rules and any sanction. The APA definition of ''rule'' is expansive and includes not just rulemakings and policies but also other agency actions, see 5 U.S.C.§551(4). As noted, H.R. 4049 arguably would also apply to any sanction, even a non-penal sanction to protect public health, safety, or welfare (e.g., requiring emergency breathing equipment in work areas where employees might be trapped by gas and smoke, or requiring inspections of airplanes to ensure their mechanical integrity).
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Due process is guaranteed by the Constitution and provided by law in the administrative process. Congress can, of course, expand upon what is required for fair notice by statute, but it should have good reasons for doing so and fully comprehend the impacts on other substantive law. Because this bill would prevent the government from enforcing the law and depart from current understandings of fair warning that have been established by years of constitutional and administrative case and statutory law, as well as numerous regulatory enactments, we do not think it would be wise for Congress to enact H.R. 4049. It is not necessary nor feasible to delineate the full contours of fair warning in a way that would govern all future questions in this area.
D. The Bill Would Encourage Unnecessary Litigation
This bill would not only go beyond the appropriate requirements for fair notice and warning, but would also invite unnecessary litigation. The potential breadth of some terms and additional undefined terms will create enormous incentives for defendants who break the law to litigatefor example, whether certain agency actions or statements are ''rules;'' the meaning of undefined words and terms, such as ''sanction,'' ''official representations,'' ''retrospective sanction,'' ''reasonable person,'' and ''ascertainable certainty;'' and who bears the burden of production or burden of proof. For example, it is unclear if the ''reasonable person'' would mean a person with knowledge of a particular industry or field, or an average lay person. While we cannot predict how courts will interpret those terms and provisions of the bill, we can reasonably expect extensive litigation with inconsistent outcomes. Rather than promoting fairness, justice, and an understanding by the regulated public of what the law provides for, the bill would have the opposite effect.
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III. Better Ways to Achieve the Goals of H.R. 4049
There is common ground between the Administration and the proponents in H.R. 4049 in the shared goals that regulations should be clear and companies endeavoring to comply with the law, especially small businesses, deserve reasonable compliance assistance. However, there are better ways to achieve our shared goals. In fact, Federal statutes and Administration policies already provide for and encourage agencies to furnish compliance assistance and to consider good faith efforts to comply with the law in deciding whether penalties are appropriate.
Congress, for example, has taken steps to address concerns about fairness in regulatory enforcement, including the following:
The Small Business Regulatory Enforcement Fairness Act of 1996 (''SBREFA''). SBREFA encourages compliance assistance and cooperation between agencies and regulated entities. Among other things, it requires agencies to prepare plain language compliance guides and provide informal guidance to small entities regarding regulations. Under SBREFA, evidence of reliance on informal agency advice is a factor considered in determining the reasonableness and appropriateness of proposed fines, penalties, or damages.
Other Statutes. Congress has expressly provided by statute that good faith compliance efforts should be considered, along with other factors such as the harm caused and the economic benefit of noncompliance, by courts and agencies in determining the assessment of any civil penalty. See e.g., 42 U.S.C.§1319 and 7413.
Page 31 PREV PAGE TOP OF DOC The Administration has made a number of efforts to simplify and reduce the burden of regulations and to provide relief from penalties when appropriate. These are just a few examples:
National Performance Review. Under the National Performance Review, Federal agencies have eliminated 16,000 pages of unnecessary regulations, reduced paperwork, provided new flexibility to businesses in meeting statutory goals, increased public input into the regulatory processes, and taken steps to focus regulatory resources on the most serious health, safety, and environmental risks.
Memorandum on Regulatory Reform: Waiver of Penalties and Reduction of Reports. The President issued a memorandum directing agencies to reduce small business reporting requirements and to develop policies to modify or waive penalties for small businesses when a violation is corrected within a time period appropriate to the violation in question.
Federal agencies continue to improve the clarity of regulations, to provide compliance assistance to regulated communities, and to implement policies mitigating penalties in appropriate cases. For example:
The National Oceanic and Atmospheric Administration has developed a civil penalty waiver/reduction program called the ''Fix-It Notice.'' Under this program, dozens of minor, first-time violations that are technical in nature and that do not have a direct natural resource impact receive a Fix-It Notice that allows the violation to be corrected in lieu of a penalty. Hundreds of these notices have been issued instead of penalties.
Page 32 PREV PAGE TOP OF DOC The Environmental Protection Agency has established ''compliance assistance centers'' on the Internet for nine industry sectors, including printing, metal finishing, automotive services and repair, printed wiring boards, small chemical manufacturers, agriculture, and industry sectors concentrated with small businesses. The centers provide comprehensive, plain English compliance information. EPA also provides hotlines and clearinghouses for information, plain language guides, and user-friendly electronic resources. EPA has committed to make all policy and guidance documents available to the public on the Internet by fiscal year 2000.
Department of Labor/OSHA. OSHA's Homesafe booklet helps small business homebuilders better comply with regulations affecting their industry, by illustrating and simplifying thousands of regulations. OSHA also provides substantial compliance information designed to assist small businesses on the Internet, on CD-Rom, through publications (including a quarterly magazine, posters, audiovisual products, and pamphlets), and through consultation programs in all fifty states.
The Department of Transportation has made its entire rulemaking docket available on the Internet, and some of the Department's agencies have web pages that include interpretations of rules hyperlinked to the rules themselves. DOT provides all types of compliance assistance, training, and guidance, including nation-wide seminars on new rules.
The Consumer Product Safety Commission has set up a small business ombudsman program to put small businesses in touch with agency safety experts with just one call to a toll-free number.
The Federal Trade Commission has done substantial outreach and compliance assistance. To enable companies to know what is required for proposed merger transactions, FTC provides formal and informal interpretations of its regulations, allows companies to inquire about their specific circumstances and transactions, and provides advice on whether and how to file. During the last 9 months of 1997, the FTC responded to 16,000 requests for compliance (and other) assistance from small businesses, and mailed 260,000 copies of compliance materials to businesses. Also, the FTC has continued to revise its regulations, repealing nearly 50% of its trade regulation rules and about 40% of its industry guides in recent years, and streamlining and simplifying other rules, including textile labeling rules.
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Department of Justice. Under various penalty policies and statutes, DOJ considers factors as justice may require, which may include good faith compliance efforts and reliance on misleading statements of authorized officials, in deciding whether a penalty is appropriate. We rely on those and other factors in deciding whether to initiate a case. Our components with regulatory functions also consider mitigating factors (e.g., the Immigration and Naturalization Service (INS) considers good faith of the employer, as one of several factors in deciding to impose penalties for Form I-9 violations (employment eligibility verification)). DOJ regulatory components also engage in compliance assistance (e.g., the DEA sponsors working committee meetings to educate regulated businesses and associations about new regulations and distributes compliance guides with easy-to-understand advice designed to assist registrants, including physicians, pharmacists, and chemical handlers, in understanding and meeting the requirements of the law and regulations).
Though these are just a few examples of the Administration's ongoing efforts to help individuals and companies understand and comply with the law, they reflect commitment to fairness and due process.
The Department of Justice opposes H.R. 4049 because it would have serious, unintended consequences. Even if drafting ambiguities are corrected, the bill will undermine important regulations designed to protect public health, safety, and welfare, the environment, the public fisc, civil rights, and commerce. It will promote unnecessary litigation. It will reduce regulatory flexibility and encourage ever more detailed mandates. And it could provide criminals with new ways to avoid punishment.
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Though well intended, H.R. 4049 provides many opportunities for abuse. A better approach is to support Administration and agency efforts to simplify and clarify regulations, to improve coordination with state regulators, and to expand and facilitate agency efforts to inform the regulated community about what the law requires. Mr. Chairman, the Department would welcome the opportunity to work with you, the Subcommittee, and any other interested Members, to find productive ways to achieve these goals.
Mr. GEKAS. Yes, we thank you. I might say parenthetically that one of the suggestions in your written statement about the way we've ad seriatim placed the four conditions, may allow people to reach the conclusion that all four conjunctively have to be met. That is not the intention. The Legislative Counsel assures us that our version is permissible but we're going to do something for you, we're going to try to change that to make you feel that it's more acceptable and perhaps gain the approval of the Department of Justice in the final version of the bill.
Mr. ONEK. I appreciate
Mr. GEKAS. To ensure that there's no difficulty we will change it pursuant to your written statement's suggestion on that point.
Mr. ONEK. [continuing]. Thank you.
Mr. GEKAS. I yield to the gentleman from New York for 5 minutes.
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Mr. NADLER. Thank you, Mr. Onek. In the next panel we will hear from a witness from the American Hospital Associationor one of the next panelsa witness from the American Hospital Association, about the application of the False Claims Act in a series of cases.
Could you provide the committee with the Department's view of these cases, of their status, and what you think we can learn from that might be relevant to the issues raised by this legislation please?
Mr. ONEK. Yes, thank you. Obviously, there have been concerns raised about the application of the False Claims Act in various health-related and hospital-related matters, and I believe that the Department of Justice and also other departments as well, as I'll indicate, have responded to that concern. Deputy Attorney General Eric Holder recently sent a guidance to all U.S. attorneys throughout the United States in which he advised them that, in reviewing cases involving False Claims Act and health care providers, they should take great care to make sure that the regulation or rule or policy of HCFA that is at issue is clear and that the providers had the appropriate knowledge of that regulation. And I believe that U.S. attorneys are and will be following this guidance by Mr. Holder.
In addition, it's my understanding that in one celebrated matter the General Counsel of HHS wrote a letter in which she stated that the Department of HHS would not pursue a particular issue with hospitals, the so-called PATH Regs, because she and the Department had determined that the guidance that had been provided to hospitals by carriers was inadequate or was confusing.
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So I think that the Department of Justice and the Department of HHS have responded. It is my understanding that the HHS Inspector General, in addition to this letter, is looking more generally at the same sort of issue and is trying to make sure that the guidances that are provided to hospitals are clearer than they may well be today.
So there is a legitimate concern. I think the administration has responded to it.
Mr. NADLER. Thank you. Let me ask you this: The legislation before us supplies the criminal as well as civil actions. How do you think it would affect the ability of the Department of Justice to pursue the war on drugs and to pursue organized crime and white-collar crime?
Mr. ONEK. Well, obviously, we would be concerned by anything in this legislation that would be construed as changing any of the knowledge requirements currently in the statutes, but we do not read it that way.
Mr. NADLER. You do not read that that way at this point?
Mr. ONEK. No.
Mr. NADLER. Okay. And would efforts by the Department of Justice to prosecute large-scale distributors of so-called designer drugs be in any way affected by this bill?
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Mr. ONEK. Well, again, one of the problems with this bill is that it applies not just to criminal penalties and civil penalties, but to injunctive action and to license approvals. So this bill could impact on the ability for example, of the FDA to bar a drug manufacturer from approving an unsafe drug and it might have an impact on the kind of situation that you've described. One of the things that I pointed out is that there is a distinction betweenin the GE case, for examplesaying that we're not going to impose a civil penalty on someone because the reg may have been unclear. It's another thing to say that, because the regs may have been unclear, the agency is barred from taking prospective action such as, for example, preventing the distribution of drugs, unsafe drugs or unsafe products in the marketplace. And this bill does not distinguish between those types of sanctions. It appears to cover all sanctions.
Mr. NADLER. Well, let me ask you the following: Thank you. Let me ask you the following: The bill in section 1660 reads as follows, at the bottom of page 4, ''No civil or criminal sanction may be imposed by a court for violation of a rule if the court finds the rule was not (a) printed in the Code of Federal Regulations; (b) printed in The Federal Register,'' et cetera.
In light of that sentence, how would that provision apply to the question I just asked about designer drugs, about the FDA?
And let me ask you now, Mr. Chairman, may I have an additional 2 minutes on this? Thank you.
Page 38 PREV PAGE TOP OF DOC Mr. ONEK. Well, with the chairman's clarification as to the meaning of these four items, and let's just take the first four, we think that, in the case you posit, criminal penalties would be able to be imposed because the rules involved for the manufacture of designer drugs would either be printed in the Code of Federal Regulations or printed in The Federal Register, or would be known to the person, or deemed knowable to a person who is engaged in a reasonable good faith, and
Mr. NADLER. Okay, and my last question, sir, is, in light of the chairman's clarification which perhaps we can put it in an amendment here to say that this is ''and,'' not ''or,'' but assuming that, which of your objections to the bill still remain?
Mr. ONEK. The two that remain are official representation, the ability of perhaps low-level State officials to immunize a company from environmental or other kinds of violations. That remains.
And the other objection is in the definition of fair warning, a definition that purports to be taken from the General Electric case, but doesn't include all the elements of the General Electric case. To read just from below where you were just reading on page 5 of the bill, ''A court shall find that a rule gives fair warning of the conduct, that the rule prohibits or requires that if a reasonable person acting in good faith,'' et cetera, et cetera.
This is missing two things: First of all, in the General Electric case the Court spoke of a regulated party rather than a reasonable person, and that might be important because a regulated party, GE or
Page 39 PREV PAGE TOP OF DOC Mr. NADLER. Has specialized knowledge.
Mr. ONEK. Right, and is expected to have somebody dealing with these matters who knows something.
Secondly, the GE case, and I'll quote from this, the GE case says, ''if by reviewing the regulations and other public statements issued by the agency, a regulated party acting in good faith. . . .'' So the case, but not the proposed statute, requires that the regulated person have reviewed not just the rule, which is all this bill talks about, but other public statements issued by the agency, and that's very, very important because we acknowledge that in some areas, environmental and others, the actual regulation can be very, very complex.
But what agencies often do in that situation is that they provide all sorts of other guidances. They provide all sorts of statements which explain how they interpret the rule, and this bill doesn't appear to cover that.
Mr. NADLER. Thank you, sir.
Mr. GEKAS. The Chair now acknowledges the attendance of the gentleman from Ohio, Mr. Chabot, and we will yield to the gentleman from Massachusetts 5 minutes. We also acknowledge the presence of the gentlelady from Texas, Ms. Jackson Lee. I defer to the gentleman from Massachusetts because he was here at the
Mr. DELAHUNT. Yes, thank you, Mr. Chairman.
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You know, I think part of the problem in the real world is that agencies issue thousands, if not tens of thousands, of rules and regulation. And just to pick up on your last statement about the language out of the GE case, which I haven't read, what's your definition of public statements? What kind of a burden would that impose upon the regulated party?
Mr. ONEK. Well, I think that the proposed legislation on this point I think lays it out in a way that is acceptable. It says ''knowable to a person who is engaged in a reasonable''
Mr. DELAHUNT. Can you tell me where you're reading from, Mr. Onek?
Mr. ONEK. I'm sorry, I'm reading from the bill, this case on page 5, and it's subsection (d) on page 5.
Mr. DELAHUNT. What line is that?
Mr. ONEK. It's line 5.
Mr. DELAHUNT. Thank you.
Mr. ONEK. And it says, ''Knowable to a person who is engaged in a reasonable, good-faith investigation of the rules applicable to the conduct that allegedly violated the rule.'' Now, agencies sendfirst of all, in some cases agencies communicate directly with individuals.
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Mr. DELAHUNT. Right.
Mr. ONEK. That is, the FAA often communicates directly with the airline and says, we think you need to do this to comply with this regulation; you need to have this new inspection of this problem which is in compliance with regulatory
Mr. DELAHUNT. Assisted compliance, if you will.
Mr. ONEK. Okay. So that's the case where obviously you'd expectthat's a public statement. But agencies issue all sorts of manuals. For example, in the
Mr. DELAHUNT. But, you know, that's my point. I think that what we're hearing here in terms of the problems that the public has at large, particularly if you're a small business person, to wade through the maze of rules and regulations for, let's say, a start-up biotech company in the Commonwealth of Massachusetts is an incredible burden. I mean that's the reality that we're dealing with. We're talking about people who, you know, who are acting in good faithnot necessarily the legal definition and all the prerequisites thereto, but that's what we're trying to deal with. We're trying to resolve the problem.
As I listen to your testimony about this particular proposaland, again, I can't say that I've reviewed it with any degree of scrutiny, but it doesn't sound like we're that far off.
Page 42 PREV PAGE TOP OF DOC Mr. ONEK. With respect to the first four, with respect to the first four requirements, if the changes were made that the chairman said, I don't think we are far off with respect to those. Again, knowable to a person who is engaged in a reasonable, good-faith investigation. If, in order to find this agency interpretation you have to fly to Washington, D.C.
Mr. DELAHUNT. Right.
Mr. ONEK [continuing]. And go through the docket, we might all agree that that is not a reasonable
Mr. DELAHUNT. What we're saying is, let's get reasonable.
Mr. ONEK. Right.
Mr. DELAHUNT. That's really what we're saying.
Mr. ONEK. Yes, but I do think that particularly in this administration and particularly in light of the Congressional enactment of SBRFA, that agencies are attempting to make clear to all people, and particularly to small business, what their rules are and are attempting to provide guidance to businesses with respect to those rules that are more complex. So I do believe that Congress has already addressed this situation, and I do believe that most, if not all, Government agencies are responding to SBRFA and are attempting to assist more businesses in understanding the rules.
Page 43 PREV PAGE TOP OF DOC Mr. DELAHUNT. Oh, that very well might be the case and that's welcome news to all of us. Some of us here, obviously, have a different perspective on occasion.
You know, in terms of official representation, I mean, I don't seeand again let me preface this comment by stating that I haven't really examined in any detail the language of the proposal, but to ascribe some sort of exemption because of a representation by a State official doesn't seem to me to be a reasonable interpretation of this particular language. I don't know if the chairman reads it as that, but I'd have great difficulty to see any administrative law judge give any credence to a Federal piece of legislation in which a State official made a representation in terms of prohibitingI yield to the Chair.
Mr. GEKAS. We just didn't dream that up when we prepared our text for the bill, but rather relied on the history of anecdotes and
Mr. DELAHUNT. I don't see anygo ahead.
Mr. GEKAS. The one main case that we can cite to you is on official representations where the Army Corps of Engineers said something upon which the regulatee relied, and then
Mr. DELAHUNT. The Army Corps of Engineers is a Federal agency.
Mr. GEKAS. Correct, but it's not the agency. No, no, it is an agency but it's subsumed in another agency.
Page 44 PREV PAGE TOP OF DOC Mr. DELAHUNT. Okay, but my understanding is
Mr. GEKAS. I'm trying to tell you the basis for which we planned this provision.
Mr. DELAHUNT. But it wasn't the intention of the Chair and the co-sponsors of the bill to confer upon any State official, as opposed to any Federal official, any authority to make a representation that would have any validity in terms of anything involved in the Federal Government.
Mr. ONEK. If I could, because this may help
Mr. GEKAS. Yes.
Mr. ONEK. There are Federal programs which are administered by State officials.
Mr. GEKAS. Yes, okay.
Mr. ONEK. So that, clearly, I believe the Chair and the committee did intend that official representations could in some circumstances be State officials. The problem here is, which State official? A high-level, low-level, a clerk? Is it a written response to a lengthy question, you know, laying out, ''Can I do this?'', and then there is a long, intelligent response saying, yes, you can; no, you can't. Or is it an off-hand remark by somebody who says yes.
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Mr. GEKAS. What the gentleman is saying, it's a question of fact as to the reasonability deducing that the representation made by this representative was something on which you can rely. It's a question of fact and we understand that.
Mr. ONEK. Right, and I think
Mr. GEKAS. I yield to the gentleman an additional 2 minutes so that he can yield.
Mr. DELAHUNT. Thank you and I'll yield. I think what we're talking about here, though, clearly, is an area where you express a concern, and I can understand that concern where reasonable people can sit down and develop language to address your concerns, and I think that that doesn't present an insurmountable obstacle in terms of the premise of the legislation.
Mr. GEKAS. If the gentleman would yield for 1 minutethe gentleman should know that we passed similar legislation, the last term. So all these objections were met and considered and overcome by the final vote, both in the Senate and in the House on this, on this question. So I want you to know that it's not just brought back out of the atmosphere, but rather on the basis of previous action.
Mr. ONEK. I believe that the previous legislation was substantially different. I believe that it included a requirement of a written statement by the official which would be better, and I think it also had a requirement that the official had to have acted on some reliable information. See, one of the problems you could have is somebody could come to an official and say, I'm dumping one ounce of something and is that okay, and the guy says yes, but in fact he's really dumping 20 pounds.
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Againand I think Mr. Vladeck, in his testimony is going to point to thisCongress has established in particular cases all sorts of systems where businesses can get advice. You can go to the Antitrust Division of the Justice Department, for example, and get an advice letter, and people, for example, in the health care field do it all the time. You say, ''I'm going to do this. Is that okay? And there are many, many other similar circumstances. There are also informal circumstances where presumably you can go to the head of an agency and get advice, but this bill doesn't tell you whether you can talk to a clerk, whether you can rely on some oral advice, and as I said in my testimony, there's not even a requirement
Mr. DELAHUNT. But my point, if I havecould I have an additional 2 minutes, Mr. Chairman?
Mr. GEKAS. Without objection.
Mr. NADLER. Can you yield to me for 1 second?
Mr. DELAHUNT. I will yield very briefly.
Mr. NADLER. Very briefly, I simply want to observe that the problem here that the chairman spoke of a moment ago is not a question of fact; it's a question of lack of specificity in the bill.
Mr. DELAHUNT. Reclaiming my time, I think that in terms of revisiting the language in the bill, that many of the concerns that you have voiced here can be addressed. And also at the same time I think that the chairman, when he refers to the standard of reasonableness, I mean that standard is interwoven through all of our jurisprudence. I mean, at some point in time, when we legislate, it's just so much specificity that we can incorporate into legislative language. But I don't think, again, I don't see it as a problem that's insurmountable.
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And again going back to your statement about, you know, there are programs that, particularly in the course of the past four to 6 years, which have encouraged agencies to assist and be helpful in terms of compliance, that very well might be the case, but my experience is that Congress has not appropriately and fully funded agencies to meet their mandates and we've got a real problem.
I think I've said enough, Mr. Chairman, and I'll yield back.
Mr. GEKAS. The gentlelady from Texas is recognized for 5 minutes.
Ms. JACKSON LEE. I thank the chairman very much, and I thank you very much for your testimony. I'd like to, Mr. Chairman, ask unanimous consent to have my statement submitted into the record.
Mr. GEKAS. Without objection.
Ms. JACKSON LEE. Thank you very much.
All of us have had our share of experiences with administrative law. Our first experience probably was trying to stay awake in that course in law school. But realizing the value of agency work, and I respect it very much, I think it is our task to ensure that it is a well-oiled machine. I think that when you begin to hinder that machine, you have difficulties on the consumer and the provider of the service. We all raise a great deal of concerns about small businesses, and I hope you take our concerns seriously and I believe you have. So that whenever we can find an opportunity to try to disentangle, if you will, the Government made for our small businesses known as the backbone of our infrastructure, our economic infrastructure, we try to do that.
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But I think you made a very good point. I'm not sure if you were citing the Congressional Review Act of the past Congress, when we began to start looking at reducing paperwork and a variety of other things. These two pieces of legislation, though, having some point in direction, leave me a little bit cold and uncomfortable.
I'd like you, if you would, to take me through the first H.R. 4, I think it's 049, tell me how that would work, in your mind, in terms of the functioning Government.
And then if you would, I'm a little confused about the Taxpayers Defense Act. I enthusiastically did support the IRS reform because I want to make the IRS more friendly toward the consumer. I am not sure where the Taxpayers Defense Act makes anything friendly to the consumer. If we are citing the Telecommunications Act, that to me is an obstructionist position because we reviewed the Telecommunications Act, the user fees, and other aspects of it, and so I'm very unclear as to why we would have a Taxpayers Defense Act and utilize in that manner.
If you would, I'd greatly appreciate it, and what I'm concerned about is the functioning of Government and where these would placewhat they would place on Government functions.
Mr. ONEK. Thank you. I should say that I am only testifying on 4049 and not on the Taxpayers Defense Act.
Ms. JACKSON LEE. All right, and if you would answer in that respect? Thank you.
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Mr. ONEK. Well, basically, this act sets six requirements and those are contained on, let's see, page 3 and 4, beginning at line of 14. The first four requirements, essentially ''Notice of the Rule'' requirements, I don't think would create a change, again, assuming they're interpreted the way the chairman has said they would be interpreted. I think that's a reasonable codification of law.
It's the next two requirements, (B) and (C), that you can see on page 4, at line 3 and at line 6, that pose the problem. With respect to (C), that's the official representations issue that I've been discussing with Mr. Meehan and with others. And our concern there is that would have a very balefuloops, I'm sorry, Mr. Delahunt, I apologizethat would have a baleful effect.
Ms. JACKSON LEE. Why don't youon that point, let's give us some sort of graphic examples, if you can try to do that for me, please?
Mr. ONEK. Well, the most graphic example would be this: There's a program, and somebody asks for very informal advice from a low-level State official; they don't even necessarily give that State official all the information about what they're doing, what they're planning to do. It's very informal. They may forget one or two crucial parts.
Ms. JACKSON LEE. Are they on the telephone or
Mr. ONEK. Yes, they could be on the telephone.
Page 50 PREV PAGE TOP OF DOC Ms. JACKSON LEE. So they might not even give their name. I'm calling; I'm a small business; I'm someone else.
Mr. ONEK. It's possible. Absolutely.
Ms. JACKSON LEE. Can they identify them?
Mr. ONEK. They don't give all the facts, and then the guy says, the man or woman on the line says, ''Oh, that sounds fine to me.'' They then go ahead. What they do in fact is a violation of the law. The Government or agency tries to sanction them in some way and they say they can reasonably rely on the advice. And we have this endless litigation because of a lack of specificity.
Another dangerand this is a danger, by the way, which Mr. Troy, who's testifying later and I think is generally testifying in favor of this bill, also points outis that, if this bill is passed, I think agencies are going to tell their people, don't give any advice. That's one of the good things that we're trying to do for small businesses, trying to help them. I think that's going to be deterred because an agency's going to be very nervous that if they give advice, they're going to be barred from taking action, issuing penalties, because people will always come in and say, ''I got this advice.'' So I think that's a danger.
The other thing is possible favoritism. Your company, you're competing against six other companies. You happen to have somebody in the State agency who's friendly with you. You call him or her up. He or she gives you favorable rulings and then you can do things that nobody else can do because, if you called up somebody else at that State agency, they wouldn't give you that wrong advice.
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So these are just some of the dangers that we see.
Ms. JACKSON LEE. Mr. Chairman, would you be kind enough to give me an additional 2 minutes? My good friend wants me to yield some time and I have one other question for the gentleman. Thank you, Mr. Chairman, because we're trying to work through this.
Let me give you an example: an aspect of the Small Business Administration that I have supported extensively called The U.S. General Store. Those are satellite offices throughout the country where small businesses walk in and there are a myriad of people sitting there and they ask questions, start-up questions or various other questions. I'm not sure if those satellitesI'm sure they're an arm of this administration, they're an arm of the Government, in giving sort of general information. Would there be a long reach to something like that, where someone is obviously acting in an agency relationship; they are part of the Small Business Administration?
Mr. ONEK. Well, what I am concerned about, and I think Mr. Troy was as well, that this would discourage those general stores from existing because every agency would say, don't give anything but the most bland advice, or don't tell anybody anything other than, ''read the regs,'' because somehow that might be used against us in a case.
Ms. JACKSON LEE. I thank you and I'd be happy to yield to my colleague.
Mr. DELAHUNT. Yes, I thank the gentlelady for yielding.
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You know, when you talked or when you described the scenario whereby someone calls and gets an unknown bureaucrat on the other end and information is gettingagain, let's put this in real-life context, Mr. Onek. I don't think anybody could describe that as reasonable reliance. I mean that's not reasonable reliance. I mean that just simply, I would respectfully suggest to you, is not a valid argument. And when you begin to say that, gee, this is going to deter Government agencies from giving advice, then, you know, that requires different leadership at the head of that particular agency. These agencies are here to serve the public, to assist the public. It's not, you know, ''CYA.''
I yield back.
Ms. JACKSON LEE. I thank you. Just reclaiming my time, on one point I can see my colleague and I agree on many things but disagree. I think that any creative lawyer might be able to stretch that and so I raise that concern. Thank you.
Mr. ONEK. Well, that's our concern. That's why, for example, we gave as a hypothetical the situation where an inspector comes into some area and there are 10 violations, and some of them may be in very plain view, and he or she writes up only three of them. You know, I do think that a clever lawyer will later come in and say, well, wait a minute, you were in my shop; you saw this other thing; you didn't write it up; you know, you misled me into thinking that was okay. I mean we don't know how this bill is going to be interpreted by courts all over the country, and we don't think that something as important as this, the enforcement of important environmental and drug safety laws, should be left to such unspecific language as in this bill. No requirement of written documentation, no requirement, again, that in asking for the advice the person has to give a full and truthful and accurate description of the situation at hand. It's just too vague.
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Mr. GEKAS. The time of the lady has expired. Now, now we'll yield to the Chair 5 minutes.
I have to agree with the gentleman from Massachusetts that any administrative law judge worth his salt or hers is going to be able to sift out what actions or words there could be on which reliance could be placed by a disaffected small business man or homeowner. And so the lack of specificity I dismiss out of hand because we're talking about the age-old process of fact-finding and drawing conclusions of law, that process which rests in the hands of the administrative law judge and which he uses to come to conclusions in a particular matter.
So when someone says he relies on a telephone call, the administrative law judge is going to determine whether or not that was reasonable reliance. We cannot, and the gentleman from the Justice Department knows, put in specificity, say, when a telephone call comes there has to be words reduced to writing and logged in a book, and so forth, that's expected of administrative procedures. Specificity of that telephone call is too much to ask. But I'd like to go back to something.
I wish I could get the Department just to agree to something. If you could agree with me that if we take simply the General Electric case and draw this bill down to meet just its admonitions, with just civil penalties, with just the language of the General Electric case and make that the Fair Warning Act of 1998, would the Justice Department come along and join hands with me in presenting this to the world? I doubt it.
Page 54 PREV PAGE TOP OF DOC Mr. ONEK. But we accept the General Electric case, so that if the General Electric full standard is invoked and applied only to the General Electric situation, i.e., civil penalties, I think we'd find it hard to object. I don't know what the need for such legislation would be because the General Electric case is the law
Mr. GEKAS. I knew you would say that.
Mr. ONEK. I think it's followed in this circuit and throughout the country.
Mr. GEKAS. I knew you would say that and we've met this in a judicial committee thousands of times, that it's unnecessary because we're already doing it. Well, if you're already doing it, then there's no reason to object to it by codifying it, no reason at all to object to it, codifying what you say you are doing because subsequent administrations, subsequent agencies, subsequent bureaucrats, may not be as well-versed in the findings of the General Electric case as you or the current Department of Justice; therefore, the law in codifying it would be of service to the public.
Mr. NADLER. Would the gentleman yield for a second?
Mr. GEKAS. Yes, I'll yield.
Mr. NADLER. Well, I think the real question isI would ask the Assistant Attorney Generalis not whether the Department is already following this practice, but whether in fact if the Department were for some reason not to, is there already an existing remedy at law for an aggrieved party?
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Mr. ONEK. Well, of course, in the General Electric case itself, the aggrieved party, General Electric won.
Mr. NADLER. So that's the law?
Mr. ONEK. That is the law.
Mr. NADLER. So why do you, do we? I made the point. I yield back.
Mr. GEKAS. We don't want people to have to go through filing in a case in which the final decision is going to rest in the Supreme Court. We want the law to give fair warning itself.
Mr. ONEK. Well, the General Electric case gives fair warning. Under our system of law, cases give warning just as statutes do.
Mr. GEKAS. But the bureaucrats quite often, the agency regulators, follow their own course, non-acquiescewe have cases of that hundreds of timesthey non-acquiesce in the stated law and wander off on their own without the benefit of a law that can be applied consistently.
Mr. NADLER. Would the gentleman yield?
Page 56 PREV PAGE TOP OF DOC Mr. GEKAS. Yes.
Mr. NADLER. I'm sorry, I have to make twoor a question or perhaps a comment, I'm not sure which. One, I totally agree with the chairman on the nonacquiescence question and we have a separate bill on that, as you know, of which you may not agree, but I agree. But, second of all, if right now you have a remedy at law, the chairman says, of course, you don't want people to have to go to court to vindicate their rights. But even if we passed the law codifying that, if the Department didn't do it, they'd still have to go to court to vindicate their rights. So I don't see the difference.
Mr. GEKAS. They would try to point out the difference.
Mr. ONEK. I agree with that. Let me say that I don't want to get into the nonacquiescence issue, but the Department does acquiesce in the General Electric decision.
Mr. DELAHUNT. Mr. Chairman, I just have 30 seconds.
Mr. GEKAS. Yes.
Mr. DELAHUNT. I think that, you know, we're losing context here. You know the requirements, or rather the ability of General Electric to do what is required by an agency, that corporations have the resources available to do it. I think what the intent and the premise of the Fair Warning Act is to deal with the thousands and tens of thousands of small business, you know, sole proprietorships, that don't have that ability. That's really what we're trying to address.
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I don't think anybody on this panel, particularly on this side, is going to stand up and defend multi-national corporations that obviously have the resources available to them to do the kind of due diligence to make the efforts to examine public statements. But somebody who is a small business with eight or nine employees, that's a whole different story.
Mr. ONEK. Well, let me just comment on that. We certainly agree that small businesses need special help in complying with the law and that sometimes accommodations may need to be made. But, a small businessyou mentioned biotech and I've represented biotech companies and drug companiesa small drug company has to make sure that its products are safe in the same way that a big one does. When we take the pill, we don't know where the pill comes fromso we have to
Mr. DELAHUNT. I understand your concern about prospective injunctive relief, but I really believe that there are areas here that reasonable people can sit down and develop a consensus.
Mr. GEKAS. The time of the Chair has expired. We thank the gentleman for his testimony, and we'll proceed with the second panel.
I want to ask the members to please restrain themselves after the questioning begins in the second panel to the 5 minutes. We have a time problem, and therefore, I ask the same restraint that the Chair itself will attempt to demonstrate.
The second panel will be comprised of Mr. Dan Troy, whom we invite to the table, an associate scholar of legal studies at the American Enterprise Institute and a partner at the Washington, D.C. Law Firm of Wiley, Rein and Fielding, where he concentrates on constitutional and appellate litigation. He is a graduate of Cornell University and Columbia Law School. He clerked for Judge Borke on the U.S. Court of Appeals for the D.C. Circuit.
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Joining him at the table will be James Schaum, the President and CEO of Allen Memorial Hospital in Oberlin, Ohio. He is a member of the Oberlin Civil Service Commission and is the current presidentse services of the Oberlin School Board. Mr. Schaum is a graduate of West Virginia University and holds a master of science in hospital and health service administration from Ohio State University.
And Mr. David Vladeck is the director of the Public Citizen Litigation Group. He has been with Public Citizen for the past 20 years and he has argued a number of cases before the Supreme Court and Federal Court of Appeals. He is a graduate of Columbia University School of Law and received a masters of Law from the Georgetown University Law Center.
And joining them is Mary Grealy, the American Hospital Association Representative. Is that right? All right, good.
I will begin with the precept that your written statements will be accepted for the record automatically and we ask you to restrict your testimony to about 5 minutes. Mr. Troy will begin.
STATEMENT OF DANIEL E. TROY, ESQ., ASSOCIATE SCHOLAR, AMERICAN ENTERPRISE INSTITUTE
Mr. TROY. Thank you, Mr. Chairman, members of the subcommittee. I should note I have also recently authored a book for the American Enterprise Institute entitled, ''Retroactive Legislation,'' that addresses the importance of notice to the rule of law. I also want to say that the views I'm presenting here are my own, not those of AEI, of my firm, or any of my clients. I'm not being compensated for my testimony.
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I'd like to make three points in support of this important legislation. First, I believe this legislation rests on a very firm, moral basis, and that is that man is a rational actor, imbued by God with free will. Second, this bill is needed, if for no other reason than, under current law, agencies have a powerful incentive to deliberately write ambiguous regulations. That reason is this: agencies get deference in the interpretation of their own ambiguous regulations. And I conclude with an already-much-ballyhooed suggested change to the bill that would avoid chilling informal communication and guidance from regulators that both serves the interests of American business and promotes compliance.
To begin, Romans 4:15 teaches, ''where no law is, there is no transgression.'' In my own tradition, the Talmud limits the applicability of the death penalty only to individuals who've been given actual notice that the transgression that they were about to commit would subject them to the ultimate penalty. The requirement that people be given notice of the legal consequences of their behavior assumes that God has created us in his image, as moral actors, possessing of free will. And under this traditional religious view of humanity, people are entitled to know what the law is, so that they can modify their behavior accordingly or knowingly bear the consequences.
Perhaps ironically echoing the New Testament, Justice Benjamin Cardozo said in ''The Path of The Law,'' ''Law as a guide to conduct is reduced to the level of near futility if it is unknown and unknowable.'' To avoid being merely futile, this requirement of fair notice is embedded in our fundamental law in the due process clause and elsewhere, as has been mentioned.
Page 60 PREV PAGE TOP OF DOC But, unfortunately, Mr. Chairman, we moderns have in some ways moved away from this traditional understanding of man. Instead, some seem to assume that people, especially those in business, are inherently evil. Paradoxically, many who are not willing to put their faith in people put their faith in Government instead. So we hear that the Government must be trusted only to go after bad actors and that such actors shouldn't be armed with any defenses that might help them evade punishment.
These arguments rest on two assumptions that are hostile to our religious and secular traditions: First, that people, particularly American businesses, are sufficiently venal that they should essentially be presumed guilty until proven otherwise; and, second, that politicians and bureaucrats can be trusted not to abuse their power. Well, both of these views are wrong. Like businessmen, bureaucrats and politicians are human beings capable of acting with evil motives as well as with good ones. And, in fact, public choice theory teaches us that the Government is uniquely susceptible to capture by powerful, but narrow, interests who seek to advance their own interest at the expense of the public interest.
Adequate public notice of the law, which is what this bill seeks, allows courts and society to judge the actions of governmental officials and to stay their hand when they act unjustly. Indeed, the very nature of the rule of law is to substitute rules announced in advance for the judgment of men.
On to my second point. Sir William Blackstone said that, if promulgators of law do not notify the public of these enactments, ''in the most public and perspicacious manner, we are no better than 'Caligula,' who wrote his laws in a small character and hung them above high pillars to more effectually ensnare the people.'' Unfortunately, today, some output of some regulatory agencies is the modern equivalent of laws written in small characters upon high pillars. And, Mr. Chairman, this legislation will increase the size of the characters at the same time that it reduces the size of the pillars.
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More important, this bill is needed to counteract the principle that agencies are entitled to deference in the interpretation of their own regulations. This principle, which I suggest warrants reexamination, creates a very powerful incentive for agencies to deliberately write ambiguous regulations if the ambiguity enables them to preserve their own flexibility and power in unanticipated future situations. After all, only prophets can foretell the future, not bureaucrats. So if they write ambiguous rules, they can avoid making the hard choices at the time of the rulemaking, reducing their political and monetary costs; they can wait until they find an actor that they deem sufficiently bad to warrant action, apply the ambiguous regulation to that actor, and claim deference to their own interpretation. The risk of ambiguity is borne by those regulated and not at all by the agency. Anecdotes that I won't repeatwhich have been adduced at the last hearingtell us that this concern is not just theoretical.
Well, courts have in fact begun to limit the power of administrative agencies to enforce regulations that don't give fair warning. But I think this rule should be embodied in our fundamental law, so that it can be applied in all cases. Such a rule would increase the uniformity of judicial decisionmaking and increase the incentives for agencies to promulgate clear rules.
Finally, in closing, I have one small, but I think an important, change to suggest in the current legislation. I am concerned that, as the bill is currently drafted, it could potentially chill the important informal communications between regulators and regulatees that do serve the interest of American business and promote compliance. I think the bill should leave room for these kinds of interactions by limiting the representations that would bind an agency to those that are secured in writing. I think the twin requirements of ''in writing'' and ''reasonable reliance'' would address many of the concerns that have been adduced earlier by the Department of Justice, and it will be addressed by Mr.Vladeck.
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I am grateful to the committee for the opportunity to present these views and I'm happy to answer any questions.
[The prepared statement of Mr. Troy follows:]
PREPARED STATEMENT OF DANIEL E. TROY, ESQ., ASSOCIATE SCHOLAR, AMERICAN ENTERPRISE INSTITUTE
This legislation rests on a firm moral basisnamely, that man is a rational actor, imbued by G-d with free will. The requirement that people be given notice of the legal consequences of their behavior assumes that G-d has created us in His image, as moral actors, possessing free will. Under this traditional, religious view of humanity, people are entitled to notice of what the law is, so that they may modify their behavior accordingly, or knowingly bear the consequences. This requirement of fair notice is embedded in our fundamental law, in the due process clause and elsewhere.
Government cannot be trusted only to go after bad actors. Government is uniquely susceptible to ''capture'' by powerful but narrow interest groups, who seek their own interests at the cost of that of the public. Adequate public notice of the law enables courts and society to judge the actions of governmental officials and to stay their hand when they act unjustly.
Second, this bill is needed to counteract the principle that agencies are entitled deference in the interpretation of their own regulations. Ambiguity enables them to preserve their own flexibility (and power) to address unanticipated future situations. Today, the risk of ambiguity is borne entirely by those regulated, and not at all by the agency.
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Unfortunately, the concerns this bill would address are not just theoretical. Too often, agencies have imposed liabilities on individuals without adequate notice. The Regulatory Fair Warning Act would prevent that. It would also increase the uniformity of judicial decision-making, and dramatically increase the incentives of agencies to promulgate clear rules.
Finally, the bill should leave room for informal communications between regulators and regulatees that serve the interests of American business. Representations that would bind an agency should be limited to those that are secured in writing.
My name is Daniel Troy. I am an associate scholar of legal studies at the American Enterprise Institute and a partner at Wiley, Rein & Fielding, where I practice constitutional and appellate litigation. I have argued many cases to courts of appeals challenging the actions of Federal agencies on a variety of administrative law grounds. Recently, I authored a book for AEI entitled ''Retroactive Legislation'' that addresses the importance of notice to the rule of law. I am also a member of the Council of the American Bar Association's Section of Administrative Law and Regulatory Practice, and I have published articles on a variety of legal subjects, including administrative law. A copy of my curriculum vitae is attached. The views I present here are my own, and not those of AEI, Wiley, Rein & Fielding, or any of its clients. I am not being compensated for this testimony, and I have not personally received any Federal Government grants.
Page 64 PREV PAGE TOP OF DOC Mr. Chairman, I am honored to be asked to testify in support of this law. I have read some of the prior testimony that has been offered on this subject. I was particularly impressed by the statement of Roger Marzulla, former Assistant Attorney General of the Lands Division of the United States Department of Justice. I will not repeat the arguments he made. Instead, I would like to focus particularly on the moral basis for this legislation, which is embedded in the view of man as a rational actor, imbued by G-d with free will. I next explain why this bill would promote economic efficiency and why those who believe that adequate notice is not vital to the rule of law are in error. I then cover the need for this legislation. I conclude with a suggested change to the bill that would avoid chilling informal communication and guidance from regulators that serves the interests of American businesses.
Notice Is Required Because Man is a Moral Actor, Imbued with Free Will
The New Testament teaches that ''Where no law is, there is no transgression.''(see footnote 1) In my own tradition, the Talmud limits the application of the death penalty to individuals who have been given actual notice that the transgression they were about to commit would subject them to the ultimate penalty. The rabbis argue about how precise that notice needs to be: whether it is enough to tell the person that what they are about to do is wrong, or whether the warning must include notice of the particular penalty for that specific transgression. (Incidentally, a key purpose of this stringent notice requirement was to ameliorate what many perceived as a too-draconian code of behavior.)
This requirement that people be given notice of the legal consequences of their behavior assumes that humans are moral actors, possessing free will. The traditional Jewish view is that G-d has endowed man with equal capacities for good or evil. To oversimplify, many Christians view man as fallen, a sinner, but capable of salvation one way or another. Under either view, people are entitled to notice of what the law is, so that they may modify their behavior accordingly, or knowingly bear the consequences. Supreme Court Justice Thurgood Marshall, a liberal icon but not conventionally thought of as a religious man, recognized the importance of notice when he wrote: ''because we assume that man is freed to steer between lawful and unlawful conduct, we insist that laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited so that he may act accordingly. . . .''(see footnote 2)
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In our everyday experience, we treat one another as moral actors, and we believe notice to be endemic to fundamental fairness. For example, from early on, we protest if our parents punish us without warning. Books on child training, on how to improve marriages, on effective management, all emphasize the importance of establishing a rule, sticking with it, and providing notice before changing it. A passage in H. Clay Trumbull's 1890 Hints on Child Training exemplifies this sentiment. He writes that ''as a rule, a child ought not to be punished except for an offense that, at the time of its committal, was known to the child to be an offense deserving of punishment.''(see footnote 3)
This idea of providing fair notice is embedded in our fundamental law. As Oliver Wendell Holmes put it in his classic ''The Common Law:''
But while the law is thus continually adding to its specific rules, it does not adopt the coarse and impolitic principle that a man always acts at his peril. On the contrary, its concrete rules, as well as the general questions addressed to the jury, show that the defendant must have had at least a fair chance of avoiding the infliction of harm before he becomes answerable for such a consequence of his conduct.(see footnote 4)
Echoing the New Testament, Benjamin Cardozo said, ''[l]aw as a guide to conduct is reduced to the level of mere futility if it is unknown and unknowable.''(see footnote 5) Thus, when John Locke spoke of law in a civil society, he referred to ''settled standing laws.''(see footnote 6) Or, as Dean Ronald Cass put it, ''[a] critical aspect of the commitment to a rule of law . . . is the premise that the government's force will be brought to bear on individualsespecially in criminal proceedings where that force is at its most fearsomeonly after fair warning.''(see footnote 7)
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Notice is therefore fundamental to the rule of law, and not just for the reason that people are entitled to fair notice before the state subjects them to its power. Social order requires reliance.(see footnote 8) Even a slave must be able to rely on a correlation between his own good behavior and his master's response. Without this correlation, there is no incentive to obey the master's commands. If the subjects of a state were to believe that the laws will be applied to them in a wholly arbitrary fashion, their incentive to comply with the law would evaporate. Thus, avoiding the imposition of liability without notice increases individuals' incentives to conform their behavior to the law.
Unfortunately, we moderns have moved away from this traditional, religious understanding of man. We frequently hear assertions that the government knows best and should be trusted; that no one really knows the law anyway; and that legal changes made with or without notice can upset expectations equally, so the case for requiring notice rests on a fiction. We also hear that the government must be trusted only to go after bad actors and that bad actors should not be armed with any defenses they can use to evade punishment.
These arguments, which I will deal with at greater length later, rest on two assumptions that are hostile to our religious and secular traditions. The first is that peopleparticularly American businessesare sufficiently venal that they should essentially be presumed to be guilty unless proven otherwise. The second is that politicians and bureaucrats can be trusted not to abuse their power. Both of these views are wrong.
We know that, as Professor Lund has noted, ''the authority to impose liability for completed conduct is a dangerous tool in the hands of politically responsive institutions.''(see footnote 9) Bureaucrats and politicians are human beings. As such, they are capable of acting with evil motives as well as good ones. In fact, public choice theory teaches us that government is uniquely susceptible to ''capture'' by powerful but narrow interest groups, who seek their own interests at the cost of that of the public. Adequate public notice of the law enables courts and society to judge the actions of governmental officials and to stay the government's hand when it acts unjustly. Indeed, the very nature of the rule of law is to substitute rules announced in advance for the judgment of men.
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Adequate Notice Promotes Economic Efficiency
The imposition of liability without adequate notice is also economically inefficient. Even a law that may be inefficient as a matter of social welfare may be ''efficient'' if it is well-specified and known in advance. At the very least, such a law permits the parties to arrange their affairs accordingly, thus maximizing social welfare within the constraints of the law (i.e., they can minimize the law's costs).
By contrast, punishing individuals without notice imposes economic costs on society by undermining predictability, or the ability to rely on expectations. As Greg Sidak and Daniel Spulber note, ''[e]xpectations determine decisions and actions in a market economy.''(see footnote 10) If expectations are ignored, predictability is gone. Yet, as Dean Ron Cass points out, predictability ''allows adjustments of individual behavior that increase societal well-being; increased predictability lowers costs associated with a decision.''(see footnote 11) Imposing liability without adequate notice thus leads to erroneous and therefore inefficient value assessments.(see footnote 12)
Predictability is essential to continuing investments in productive enterprises, as well as the availability of insurance. Decisions whether to invest or provide insurance rely on the probabilities of a loss and the potential range of such loss. Imposing liability without adequate notice undercuts this vital predictability, expanding the range of possible outcomes, thus harming society by suppressing investment.
Page 68 PREV PAGE TOP OF DOC Stated another way, imposition of liability without notice is, almost by definition, a contingency for which it is very difficult, if not impossible, for a firm to plan. Such liability almost defines opportunistic behavior by the government. Fear of post-investment opportunism by the government may well deter parties from relying on the government's promises as much as they should for the sake of efficiency. That fear would be heightened with respect to investments in assets that are most valuable in one specific setting or relationship.(see footnote 13)
To illustrate, a firm might invest less than would be optimal in a particular plant, if it fears that the government will revoke the plant's license to operate, or impose impediments to the distribution of product from that plant. Fearful of being held up by the government, a firm will, ex ante, invest less than it optimally should. Alternatively, rational economic actors will demand higher returns on their necessarily riskier investments. Thus, the individual actors may not be harmed by such government action, having factored that risk into their investment. But society would still be harmed, because the net amount of investment in such a society would be less than that which is optimally efficient.
Uncertainty as to operative rules discourages capital investment, which can only be amortized over time. To give an extreme example, few companies are willing to invest in a country where their permission to operate may be revoked at any time, and their property nationalized. Countries in which such governmental decisions have occurred have experienced a net decline in foreign investment.(see footnote 14)
Pablo Spiller, who has extensively documented this phenomenon in developing countries, makes clear that ''if the country's safeguarding institutions (e.g., stable politics, independent judiciary, high growth rate, tradition of independent and professional regulatory agencies) are not sufficient to reduce the risk of administrative expropriation, then private investments in sectors with large economies of scale and sunk investments producing mostly for the local market will not be forthcoming.''(see footnote 15) The easiest way for the government to expropriate a firms' sunk investments is via new legal requirements imposed without adequate warning. Thus, requiring adequate warning is apt to increase, or at least create the conditions for increased, investment.
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The Arguments In Favor of Applying Liability Without Adequate Notice Must be Rejected
Some scholars believe that imposing liability without notice is justified because all legal change upsets expectations and because legal change is so important. Their arguments can be summarized as follows:
Circularity. The argument against imposing liability without notice, these scholars maintain, is circular. If everyone understood at the outset that their expectations could be upset, these critics contend, then there would be no settled expectations, and therefore nothing would be wrong with liability imposed without adequate notice, because people would expect as much.(see footnote 16)
Similarity. All laws can upset expectations, whether they are imposed with or without adequate notice.(see footnote 17) Any differences in impact between nominally prospective and retrospective laws are differences in degree and not in kind, some argue.(see footnote 18)
No economic difference. Liability imposed without notici.e., retroactivelydoes not necessarily cost more than prospective laws. As Professor Jill Fisch points out in the Harvard Law Review, ''a rule that retroactively imposes a million dollars in liability for past pollution activities has the same wealth effect as the nominally prospective adoption of stricter emissions controls that reduce the value of the manufacturer's factory by a million dollars.''(see footnote 19)
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More efficient lawmaking. Efficient lawmakingthat is, lawmaking that maximizes the net benefits of legal changefavors the imposition of liability without notice. As Professor Fisch says, this notion is ''based on the utilitarian conception of a net gain in social welfare without regard for distributional issues.''(see footnote 20) The lack of regard for distributional issues means that, although there is a net social gain, there are also identifiable winners and losers when a law is applied retroactivelyi.e., without adequate warning.(see footnote 21)
The distinction is based on a fiction. It is a fiction that people ''know the law.'' Most laws are applied without actual notice.
Although many of these arguments have force, ultimately they must be rejected. Taking these objections in order, the circularity argument presumes that there are no preexisting property rights and other reliance intereststhat is, that they are the creation of the government. To state the extreme vision of this argument, no one will expect to hold property if they are told that all property is subject to confiscation at any time. Such an argument is of dubious constitutional validity. The Constitution both presumes and protects private property rights. It is beyond the power of government to define out of existence all expectation interests.
Second, although it is true that the differences between liability imposed with and without adequate notice can be a question of degree, the legal system can and often does address such differences. To quote Lon Fuller, ''as with other desiderata that make up the internal morality of the law, difficulties and nuances should not blind us to the fact that, while perfection is an elusive goal, it is not hard to recognize blatant indecencies.''(see footnote 22) The presence of close questions cannot shut down the enterprise.
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In addition, the imposition of liability without warning is more unusual, thereby coming as a greater surprise.(see footnote 23) Also, even if a change of a law with adequate notice can disrupt settled expectations, such laws generally offer a way out before imposing new liability. As Dean Ron Cass has pointed out, ''the distinction between retrospective and prospective decisions is important precisely because the effects of one are less binding. A penalty of any given magnitude is more threateningin terms of its capacity to interfere with personal autonomy, disrupt existing plans, undermine settled expectations, and impose greater disutility on those whose plans and property are changedwhen it is less easily evaded.''(see footnote 24)
To address the third argument, although the direct economic costs of liability imposed with and without adequate notice may be the same, liability imposed without adequate notice create greater transition costs. A society in which laws are routinely applied or frequently changed without notice will experience less investment than is economically efficient.
Notice also has an important psychological component. Even if it is all the same to an economist, every child knows the difference between having a toy taken away, and not being given an additional toy.(see footnote 25) Even if the child got the toy unfairly, the child has emotions invested in the toy, and that investment should be protected. At a minimum, the child deserves fair notice before being told that he or she will have to share the toy. Only if the child were given the toy illegallye.g., if his parent had stolen itshould the child's feelings be subordinated to the social need to uphold the rule of law. Failing to take these psychological effects into account can imperil the legitimacy of the legal regime.
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Fourth, the argument that imposing liability without adequate notice is more efficient assumes that legal change is positive and evolutionary. Public choice theory teaches us that legal change is often harmful, however. It is also precisely the efficiency of imposing liability without adequate public notice that allows an agency to target winners and losers.
Fifth, although it is certainly true that no one can know all of the law, people are aware of their legal obligations as a general matter. Drivers may not know every provision of the traffic code, but they know enough to understand in most circumstances what is right and wrong. In fact, there is no choice but to indulge this fiction, both for the application of the criminal law, and to avoid accepting a principle that would allow all laws to be changed arbitrarily. And where individuals have a particular interest in a manner, they are more likely to know the law.
Most fundamentally, those who defend the imposition of liability without adequate notice need to articulate forceful reasons why the need for legal change is so important that it should override the fairness concerns created by such action. Those defending untrammeled change must explain why such extreme (and compensated) change is a positive good.
The Need for the Legislation
Sir William Blackstone said, ''a bare resolution confined in the breast of the legislator, without manifesting itself by some external sign, can never be properly a law. It is requisite that this resolution be notified to the people who are to obey it.''(see footnote 26) If ''promulgators'' of laws do not notify that the public of laws ''in the most public and perspicacious manner'' we are no better than ''Caligula, who (according to Dio Cassius) wrote his laws in a very small character, and hung them above high pillars the more effectually to ensnare the people.''(see footnote 27)
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Some output of some regulatory agencies is the modern equivalent of laws written in ''small characters . . . hung above high pillars. This Committee has already heard about the more than 65,000 pages of rules and interpretive statements that fill the Federal Register each year. Frequently, different agencies issue inconsistent or overlapping regulations.
More important, and often overlooked, is the principle that agencies are given deference in the interpretation of their own regulations. This principle was set forth in Bowles v. Seminole Rock & Sand Co.(see footnote 28) In that case, the Supreme Court held that ''the ultimate criterion'' for judicial construction of an ambiguous regulation ''is the administrative interpretation, which becomes of controlling weight unless it is plainly erroneous or inconsistent with the regulation.''(see footnote 29) Under this rule, a reviewing court must accept ''a plausible construction of the . . . regulation.''(see footnote 30) In fact, this principle applies even if the agency's interpretation is not ''the best or most natural one by grammatical or other standards.''(see footnote 31)
Seminole Rock creates a powerful incentive for agencies to deliberately write ambiguous regulations. As Columbia Professor John Manning has pointed out:
If an agency's rules mean whatever its says they mean (unless that reading is plainly erroneous), the agency effectively has the power of self-interpretation. This authority permits an agency to supply the meaning of regulatory gaps or ambiguities of its own making and relieves the agency of the cost of the imprecision that it has produced. This state of affairs makes it much less likely that an agency will give clear notice of its policies either to those who participated in the rulemaking process prescribed by the Administrative Procedures Act (APA) or to the regulated public.(see footnote 32)
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This is an important and overlooked point that bears reiteration. If agencies get deference in the interpretation of their own ambiguous regulations, creating such ambiguity enables them to preserve their own flexibility (and power) to address unanticipated future situations. After all, only prophets, and not bureaucrats, can foretell the future. Writing ambiguous rules enables them to avoid making hard choices at the time of the rulemaking. Ambiguity reduces their political and monetary costs. Instead, regulators can wait until they find an actor that they deem sufficiently ''bad'' to warrant action, apply the ambiguous regulation to that actor, and claim deference to their own interpretation. The risk of ambiguity is borne entirely by those regulated, and not at all by the agency. As Professor Manning put it, ''under Seminole Rock, an agency can safely select words having 'so little color of their own that they can be made to take almost any hue.' ''(see footnote 33)
This concern is not just theoretical. Too often, agencies have imposed liabilities on individuals without adequate notice, and the courts have not always intervened. Others have recounted their stories: I will add another. In United States v. Rollins,(see footnote 34) an Idaho farmer applied a mixture of registered pesticides to approximately fifty acres of seed alfalfa growing on his farm. Shortly thereafter, a flock of geese set down on the field, ate the alfalfa, and died from ingestion of the pesticides. A United States Magistrate found the farmer guilty of violating the Migratory Bird Treaty Act even though the farmer had applied the chemicals ''in the recommended quantities [and] at the appropriate time,'' and had ''no effective way to keep [the geese] out'' of his fields.(see footnote 35) Moreover, the Magistrate issued a conviction despite the fact that the pesticides in question had been utilized ''by the farming community . . . for a number of years without major incident.''(see footnote 36) Thus, the Idaho farmer was found to be an ''environmental criminal,'' though he had demonstrated no intent to break any law, nor did he seek to increase his profit margin by cutting corners.(see footnote 37)
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Unfortunately, such examples can be multiplied many times over:
The EEOC sued Federal Express under the Americans with Disabilities Act for only employing drivers with sight in both eyes. In forbidding drivers with sight in only one eye from driving delivery trucks and other big rigs, Federal Express was applying the same standard used by the U.S. Department of Transportation. According to the EEOC, however, Federal Express's policy discriminates unlawfully.(see footnote 38)
Judy Hooper, owner of a small ''mom-and-pop'' bakery in Evanston, Illinois, had over $13,000 in fines imposed against her by OSHA for offenses such as her: (1) failure to have a written ''Material Safety Data Sheet'' for ''hazardous'' chemicals, even though the only chemicals used at her bakery were household bleach and pink dishwashing liquid; (2) failure to have a written emergency plan for its one-floor store, which has clearly marked exits and is inspected twice a year by the local fire department; and (3) failure to have a running accident log posted on the shop's wall, despite the fact that Mrs. Hooper's company has never experienced an accident requiring a workmen's compensation claim.(see footnote 39)
Arlene Kaplan, who owns a company that provides skilled nurses for patients needing home health care, hires nurses as independent contractors to accommodate the job's unpredictable hours and to provide flexible work schedules for its nurses. Using an arcane 20-point litmus test, IRS officials have determined that these nurses are legally not independent contractors, but rather employees. Consequently, Ms. Kaplan was charged over $250,000 in back taxes and fines for misrepresenting her workers to the IRS. This penalty was imposed even though, according to one certified public accountant, the 20-point litmus test employed by the IRS is so vague and subjective that ''even tax law practitioners cannot determine who is an employee and who is an independent contractor.(see footnote 40)
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The Response of the Courts
It is true that some courts have insisted that statutes be sufficiently clear to give those affected by the rule adequate notice of the legislature's intention. This void-for vagueness doctrine recognizes that, where the legislature has not adequately specified the scope of its prohibition, it is unjust to punish an individual for violating such a prohibition. Vague laws, as the Supreme Court said in 1925, ''leave[ ]open . . . the widest conceivable inquiry, the scope of which no one can foresee and the result of which no one can foreshadow or adequately guard against.''(see footnote 41)
Courts have primarily applied this doctrine, however, in the criminal context, or in the service of express constitutional protections most notably, the First Amendment. In fact, it appears only to have been applied in one civil case, during the height of the Lochner era. In A.B. Small Co. v. American Sugar Refining Co.,(see footnote 42) the Court invalidated a statute that limited a seller to no more than a ''reasonable profit.'' The Court said that ''the exaction of obedience to the rule or standard . . . was so vague and indefinite as really to be no rule or standard at all . . .''(see footnote 43) This standard is not often met. Thus, the void-for-vagueness doctrine cannot be viewed as a major impediment to the imposition of civil liability without notice.
More recently, though, courts have begun to limit the power of administrative agencies to enforce regulations that fail ''to give fair warning of the conduct [they] prohibit[ ] or require[ ].''(see footnote 44) Agencies have occasionally been denied the power to assess liability without adequate notice even as the interpretation of the statute giving rise to that liability has been upheld as a ''reasonable interpretation'' within the agency's discretion. This is an important and promising line of cases that deserves to be embodied in our fundamental administrative law.
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Rollins Environmental Services v. U.S. E.P.A.(see footnote 45) exemplifies this line of cases. That case involved an EPA regulation requiring any container holding PCBs, a toxic contaminant, ''be decontaminated by flushing the internal surfaces of the container three times with a solvent containing less than 50 ppm PCB. . . . The solvent may be used for decontamination until it contains 50 ppm PCB. The solvent shall then be disposed of as a PCB . . .'' (see footnote 46) After each rinse, Rollins analyzed the solvent to ensure that the PCB concentration was below 50 ppm PCB. The company then incinerated the solvent in a manner that did not comply with EPA's regulations under the Toxic Substance Control Act (''TSCA'') but which did comply with the Resource Conservation and Recovery Act (''RCRA''). As the court said, ''Rollins followed this course because it believed, in light of the italicized portion [above], that only solvents having a PCB concentration of 50 ppm or more had to be disposed of as PCBs.''(see footnote 47)
Six years later, the EPA charged Rollins with violating TSCA, contending that ''a particular PCB concentration cannot be avoided as a dilution.''(see footnote 48) The Administrative Law Judge recognized that Rollins had reasonably interpreted the word ''then'' as referring to the point at which the solvent reaches a concentration of 50 or more ppm PCB and, consequently, as not requiring the disposal of the solvent as a PCB if it never reached that threshold. EPA, by contrast, read ''then'' to refer to the time when the rinsing is over and the solvent is no longer being reused. The court charitably described this interpretation as ''rather more strained,'' and as one that ''would not exactly leap out at even the most astute reader.''(see footnote 49)
Page 78 PREV PAGE TOP OF DOC The court nonetheless believed that it was obligated to sustain EPA's reading under the extremely deferential standards accorded an agency's interpretation of its own regulation. But the court rejected the agency's finding that Rollins should be subjected to a $25,000 penalty, and reinstated an earlier ALJ's determination that the appropriate penalty should be zero, because Rollins' ''reading of the Regulations had a definite plausibility'' and because ''Rollins had proceeded with care, by burning the rinse in an incinerator approved under RCRA.''(see footnote 50) Specifically, the court said:
When the agency itself is uncertain of the meaning of its regulation, when agency personnel give conflicting advice to private parties about how to interpret it, and when the agency's chief legal officer finds the regulatory language equally supportive of one of two possible constructions, it is impossible to find the regulation ''clear.'' Ambiguity may be in the eyes of the beholder. But here EPA's imprecision, not Rollins' lack of acuity, led the company astray. No reasonable reader of this provision could have known that EPA's current construction is what the agency must have had in mind.(see footnote 51)
Concurring and dissenting in part, Judge Edwards would not even have upheld the finding of liability (he agreed that the penalty should be reduced to zero). The majority had found that Rollins' failure to cite the due process clause meant that it had not preserved the argument that the regulation was unfairly applied to it. Edwards noted that ''[t]he whole point of petitioner's argument in this case had been that a party cannot be found to have violated a regulatory provision absent 'fair warning' that the allegedly violative conduct was prohibited.''(see footnote 52) Whether this is a constitutional issuea question Edwards thought the court did not need to reach ''[i]t is a simple principle of administrative law that, in adopting administrative regulation, an agency 'has the responsibility to state with ascertainable certainty what is meant by the standards promulgated.' ''(see footnote 53)
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Four years later, in a similar case, the D.C. Circuit unanimously vacated a finding of liability and set aside a fine on the grounds that the regulations did not provide the affected party with fair warning of the agency's interpretation.(see footnote 54) Relying in part on Rollins, Judge Tatel referred to a long line of cases holding that ''when the sanctions are drastic . . . elementary fairness compels clarity in the statements and regulations setting forth the actions to which the agency expects the public to comply.''(see footnote 55)
Thus, courts are apparently increasingly willing to insist that agencies provide fair notice in the application of statutes or regulations to affected individuals. This is a positive development, but the Regulatory Fair Warning Act would ensure that this principle is applied in all cases. It would avoid requiring courts to decide whether this is a constitutional issue and, if so, whether the application of a particular regulation is so arbitrary as to rise to the level of a due process violation. The Regulatory Fair Warning Act would also increase uniformity of judicial decision-making, and dramatically increase the incentives of agencies to promulgate clear rules.
Caveat and Suggestion
I have one small but important change to suggest in the current legislation. I am concerned that, as the bill is currently drafted, it would chill informal communications between regulators and regulatees. It is often important for affected businesses to be able to have informal communications with agency officials about the legality of a particular action. In fact, much of what many Washington lawyers do is check things out with various regulators. Often, a regulatorsay an individual in the Mass Media Bureau of the Federal Communications Commissiondoes not have legal authority to speak for the full Commission. Nonetheless, such an individual may have a powerful influence on the outcomehe or she may, as a practical matter, be the person to decide the matter. Such an individual can also predict how the responsible regulators will react to a particular interpretation. But these individuals will not communicate with those they regulate if those communications can later be used as the basis for an estoppel claim against the government.
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My concern is not just that this provision would make it harder for Washington lawyers to make a living. It is that regulated businesses need and want the flexibility to talk with bureaucrats. The bill should leave room for these kinds of interactions by limiting the representations that would bind an agency to those that are secured in writing.
I am grateful for the opportunity to present these views to the Committee, and I am happy to answer any questions. I ask that my statement be made a part of the record.
Mr. GEKAS. We thank the gentleman, and we turn to Mr. Schaum for 5 minutes.
STATEMENT OF JAMES H. SCHAUM, PRESIDENT AND CEO, ALLEN MEMORIAL HOSPITAL, OBERLIN, OH
Mr. SCHAUM. Thank you, Mr. Chairman, members of the committee. I am Jim Schaum, President and CEO of Allen Memorial Hospital in Oberlin, Ohio. I am here on behalf of the American Hospital Association, which represents nearly 5,000 hospitals, health systems, networks, and other providers of care.
Hospitals and health systems deal every day with the lives and health of people. As a result, we are among the most regulated fields in America. Our Medicare billings alone are subject to nearly 1,800 pages of law, nearly 1,300 pages of regulations interpreting the law, and more than 14,000 pages of manual instructions interpreting the regulations.
Page 81 PREV PAGE TOP OF DOC Today I would like to focus on one example of the need to establish due process, fair hearing, and common sense in the enforcement of these laws, rules, and regulations, the Government's misuse of the False Claims Act in Medicare billing investigations. Specifically, I would like to talk about my hospital's experience with ''Operation Bad Bundle.''
On May 30, 1996, my hospital received a letter from the Department of Justice stating that we were being investigated. We had billed Medicare individually for outpatient blood chemistry tests that the DOJ alleges should have been grouped together, or bundled, for a lower payment rate. The DOJ conducted an investigation under the False Claims Act, which provides triple damages plus fines up to $10,000 for each alleged mis-billing. The Department of Justice gave us less than 10 days to decide to conduct an audit and settle with the Justice Department for twice the alleged overcharges or fight the DOJ in court. We hired an independent firm to audit our lab charges over the previous 6 years at a cost of $19,000. It was determined that, during these 6 years, the Government overpaid the hospital by $25,000. Each overpayment was for an average of $1.85.
We were given two choices: Repay the $25,000 plus an additional $25,000 in penalties, or go to court and prove that these billing errors were not fraudulent and repay only the $25,000 plus interest. The risk was that if we lost in court, we would have to repay three times the $25,000, plus up to $10,000 per claim for each of those $1.85 mistakes. That is a total of $135 million, nearly 10 times the annual budget of our hospital. We also risked exclusion from the Medicare and Medicaid programs, a fiscal death penalty for any hospital. Consequently, we paid the fine.
Because the Government never revealed a legal basis for its claim that tests must be bundled, the AHA commissioned a study to look into the allegations. The results say a lot about how difficult it is to discern what's wrong or right under the Government's rules and regulations.
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The report chronicles, from 1984 to 1998, ambiguous and conflicting pronouncements on bundling from the agencies involved with Medicare reimbursement. But the report is most striking for what it did not find. It did not find any statutory provisions or duly-promulgated regulations that place the burden on hospitals to bundle their claims. Clearly, hospitals received neither adequate notice nor guidance from the Government.
Hospitals convinced their Members of Congress that this was unfair. The result: The Health Care Claims Guidance Act, which has more than 200 co-sponsors, and I would also like to thank Mr. Delahunt for his leadership. It would require evidence of intentional wrongdoing before using the False Claims Act to threaten hospitals with prosecution.
In response to this congressional support, the Department of Justice and Health and Human Services Inspector General recently issued guidelines for the use of the False Claims Act.
We welcome the guidelines. They can be effective if strictly enforced, and we thank the members of this committee who were instrumental in convincing DOJ that enforcement guidelines were needed.
Hospitals must make a good-faith effort to accurately follow rules and regulations, and many have voluntarily implemented formal compliance plans, at a considerable cost.
Experiences like mine reveal the need for Federal rules and regulations to be issued in a timely manner, and to be understood by those they regulate as well as by those who enforce them. Legislation like Mr. Gekas' Regulatory Fair Warning Act can go a long way toward making this happen. At the same time, the Health Care Financing Administration must clarify its rules, and improve the system by which the concerns about Medicare billing are communicated to the hospital field. HCFA should establish an ''early warning system'' that notifies hospitals directly about potential billing problems.
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In addition, we have urged HCFA to work with us to establish a ''best practices'' process. Under this process we would identify vague laws, regulations, and instructions; work with our members to produce what we believe should be the industry standard; and submit that recommendation to HCFA for review. This is the type of public/private partnership that can make the system work better for everyone. We are waiting for HCFA's response to our proposal.
In conclusion, Mr. Chairman, we are well aware that the size and complexity of Medicare and Medicaid regulations is a challenge to HCFA. We support DOJ's efforts to rid the health care system of fraud, but HCFA and the Department of Justice must also make the regulatory system work better, not just for hospitals and health systems, but also for the patients and communities we serve.
[The prepared statement of Mr. Schaum follows:]
PREPARED STATEMENT OF JAMES H. SCHAUM, PRESIDENT AND CEO, ALLEN MEMORIAL HOSPITAL, OBERLIN, OH
Mr. Chairman, I am James H. Schaum, president and CEO of Allen Memorial Hospital in Oberlin, Ohio. I am here today on behalf of the American Hospital Association (AHA), which represents 5,000 hospitals, health systems, networks, and other providers of care. We appreciate this opportunity to present our views on the Regulatory Fair Warning Act of 1998, and on due process, fair warning, and common sense in the enforcement of Federal rules and regulations.
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Because hospitals and health systems deal every day with the lives and health of people, we are among the most regulated fields in America. Our Medicare billings alone are subject to nearly 1,800 pages of law, nearly 1,300 pages of regulations interpreting the law, and more than 14,000 pages of manual instructions interpreting the regulations.
At the same time, hospitals, health systems and other care providers must comply with instructions from 43 different Medicare Part A fiscal intermediaries, and 28 Medicare Part B fiscal intermediariesprivate insurance companies that contract with the Health Care Financing Administration (HCFA), which oversees Medicare, to process Medicare claims.
This does not include the laws, regulations and instructions we are subject to from Medicaid, the Occupational Safety and Health Administration, the Environmental Protection Agency, the Centers for Disease Control, the Internal Revenue Service, and other regulatory agencies.
Today, however, I would like to focus on what we believe is a perfect example of the need for due process, fair warning and common sense in the enforcement of these laws, rules and regulations: the government's use of the False Claims Act in Medicare billing investigations. More specifically, I would like to talk about what has become known as ''Operation Bad Bundle.''
''Operation Bad Bundle'' is an investigation by the U.S. Department of Justice (DOJ) into whether hospitals billed Medicare individually for outpatient blood chemistry tests that DOJ alleges should have been grouped together at a lower payment rate. DOJ has conducted the investigation under the False Claims Act, which provides for triple damages plus fines of anywhere from $5,000 to $10,000 for each alleged misbilling. This means, for example, that a single misbilling of a single $8 lab test could result in a hospital paying $10,024 in penalties.
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HCFA has had a history of conflicting instructions to hospitals on this issue. During the same period, they have told hospitals to both bundlegroup several tests for a single paymentand unbundle these lab tests before submitting them for paymenteven after many years of Congress telling the agency to issue clear regulations. And the fiscal intermediariesHCFA's contractorshave provided conflicting instructions as well. Yet, hospitals that followed the instructions provided by agents of the government are being prosecuted by DOJ under the False Claims Act.
Our contention is that DOJ's investigation is being used to prosecute Medicare billing errors instead of real fraud.
On May 30, 1996, my hospital received a letter from DOJ's Office of the Attorney General stating that they were conducting an investigation into Medicare and Medicaid claims submitted by our facility for outpatient services. DOJ had identified certain claims that may have been unbundled. Treating us as guilty until proven innocent, we were given less than 10 days to decide whether to conduct an expensive audit and immediately settle with DOJ for $50,000twice the amount of alleged overchargesor face charges of fraud and abuse in court. We hired an independent firm to audit our lab charges over the previous 6 years. The audit cost us $19,000. It was determined that, during that 6 years, Medicare and Medicaid had overpaid our hospital by $25,000. This overpayment consisted of 13,496 bills, which means that, on average, each overpayment was for $1.85.
The audit also found cases of underbilling, where our hospital was entitled to higher reimbursement from the government than it received. However, under Medicare and Medicaid guidelines, the hospital can only recover underbillings going back 1 year, while the government recovered overpayments going back 6 years.
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We were given two choices: repay the $25,000 overpayment, plus an additional $25,000 in penalties, and establish a corporate compliance program at a cost of $100,000 plus annual maintenance costs of $50,000. Or, go to court to prove that these billing errors were not fraudulent, and repay only the $25,000 plus interest. The risk, of course, was that, if we lost in court, we would have had to repay three times the $25,000$75,000plus up to $10,000 per claim for each of those $1.85 mistakes. That would be a total of $135 millionnearly 10 times our annual budget. We also risked exclusion from the Medicare and Medicaid programsa fiscal death penalty for any hospital. The prudent thing to do was to pay the $50,000 fine, and we did. But we were not happy about it.
There are many other examples of this kind of treatment. Because many of its members, like myself, were being punished for doing what we thought we were supposed to be doingand because the government had never revealed a legal basis for its claims that tests must be bundledthe AHA commissioned a study by the law firm of Jones, Day, Reavis & Pogue that looked into whether there was a legal basis for DOJ's investigations into bundling. The results say a lot about how difficult it is to discern what's wrong or right under the government's rules and regulations.
The Jones Day report chronicles, from 1984 to 1998, numerous ambiguous and sometimes conflicting pronouncements on bundling from the various agencies involved in Medicare reimbursement. But the report is perhaps most striking for what it did not find: any statutory provisions or duly promulgated regulations that place the burden on hospitals to bundle their claims. Instead, the report shows that, until recently, HCFA guidelines concerning outpatient laboratory tests were payment guidelines for fiscal intermediaries, not billing guidelines for hospitals.
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The report also reveals the following:
Medicare claims are not invoices. The report examines how Medicare reimburses hospitals for outpatient laboratory tests. It is crucial to recognize that claims submitted by hospitals are not tantamount to invoices that are paid in the amount submitted. Rather, Congress requires the Secretary of HHS, through fiscal intermediaries, to determine the payment amount based on a number of different factors and comparisons. Accordingly, fiscal intermediaries and carriers are to make payment determinations on the basis set forth in the Medicare statute, regardless of the billing or coding practice of the provider.
The OIG confirms that there is no obligation for hospitals to bundle tests. In its 1995, 1996 and 1997-98 editions of its guidelines (known as the Red Book), the OIG confirmed that hospitals were under no legal obligation to bundle. Rather, the OIG criticizes the fiscal intermediaries for failing to bundle blood chemistry tests that were submitted individually by hospitals.
HCFA confirms that there is no obligation for hospitals to bundle tests. In its Intermediary Manual, HCFA instructed fiscal intermediaries to bundle blood chemistry tests submitted individually by hospitals. HCFA also instructed the intermediaries to use computers to detect unbundled lab claims and bundle them together for payment. These manuals do not instruct intermediaries to deny payment for unbundled tests or to investigate providers for fraud. On the contrary, they instruct intermediaries to perform the bundling themselves if doing so would lead to the lowest appropriate reimbursement.
Page 88 PREV PAGE TOP OF DOC Numerous fiscal intermediaries confirm that there is no legal obligation to bundle tests. Fiscal intermediaries throughout the country advised hospitals that if they did not bundle blood chemistry tests, then the fiscal intermediaries would do it for them.
Manual provisions are not binding regulations. Intermediary and hospital manual instructions cannot serve as the basis for imposing substantive obligations on hospitals, nor subject them to liability beyond recoupment of overpayments. These manuals were not promulgated pursuant to the Administrative Procedures Act and cannot legally serve as the basis for imposing substantive affirmative legal obligations upon hospitals. Thus, the mere violation of a manual provision does not constitute a violation of the False Claims Act.
Neither the OIG nor DOJ can point to any legal authority requiring bundling of laboratory test claims that has been violated by AHA member hospitals.
In a related DOJ investigation, the department alleges that hospitals are submitting improper bills for outpatient services that should be included in their inpatient payment. This is called the DRG (diagnostic-related group) ''three-day window'' investigation. In 1990, Congress determined that outpatient services provided to a patient within 72 hours of admission to the hospital should be billed as part of the inpatient payment, and not billed separately. However, between 1991 and 1994, no regulations were issued on the change. Interim regulations were issued in 1994. Final regulations were not issued until last Januaryfour years later.
Still, DOJ sent letters to hospitalslike the letter they sent to my hospitalclaiming that they have violated the 3-day window rule, and giving them 2 weeks to respond to the charges or face prosecution.
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Hospitals and health systems across the nation made the case to their senators and representatives that this treatment was unfair, and the result was the Health Care Claims Guidance Act (H.R. 3523/S. 2007). This legislation, which attracted a total of more than 200 cosponsors in the House, would, among other things, require that DOJ and HCFA have evidence of intentional wrongdoing before using the False Claims Act to threaten hospitals with prosecution for Medicare billing errors. In response to this groundswell of congressional support for the legislation, DOJ and HHS OIG recently issued guidelines for the government's use of the False Claims Act. The guidelines, very basically, recognize that there be some proof of wrongdoing by hospitals before prosecution is threatened. We welcome the guidelines, and we believe that they can be effective if strictly enforced. We also would like to thank the members of this committee who were instrumental in convincing DOJ that enforcement guidelines were necessary and appropriate in this area.
However, the point we are making today is that there is clearly a need for Federal rules and regulations to be issued in a timely manner, to be made available, and to be understood not just by those who are regulated by them, but by those who enforce them as well. Legislation like Mr. Gekas' Regulatory Fair Warning Act can go a long way toward making this happen, and can result in a restoration of trust in our government's regulatory system.
The legislation would require that an agency give the regulated community adequate notice of its interpretation of an ambiguous rule. Agencies and courts would be barred from imposing penalties based on rules or policies that are not clearly known to the regulated community. They would be subsequently encouraged to make known what is required or prohibited by their rules.
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Specifically, the act would prohibit a civil or criminal sanction from being imposed by an agency or court if a rule or regulation is not available to the public or known to the regulated community; if the rule or regulation does not give fair warning about what is prohibited or required, or officials have been misleading about what a regulation prohibits or requires.
It is critical that hospitals and health systems be provided with fair warning of what the law and regulations require of them. It is just as critical that hospitals and health systems that rely on these regulations, or on instructions from the agencies that enforce them, not be punished for doing so.
The AHA has met with HHS Secretary Shalala and HHS Inspector General June Gibbs Brown to discuss the government's handling of anti-fraud activities. We have worked with them on a model compliance program to help hospitals better adhere to Medicare billing regulations. However, for hospitals to implement effective compliance plans, HCFA must clarify program rules so they can be better understood and followed
We also want the Federal Government to ensure that fiscal intermediaries are issuing instructions to hospitals that comply with the intent of HCFA and the HHS Office of the Inspector General. Contradictory instructions often emerge from fiscal intermediaries as a result of confusing regulations.
The AHA supports improving the system through which HHS' concerns about Medicare billing are communicated to the hospital field by:
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disseminating information to the field about billing practices that HHS is concerned about; and
establishing an ''early warning system'' for notifying hospitals directly and promptly about potential billing problems, rather than having them rely on fiscal intermediaries for information.
In addition, we have urged HCFA to work with the industry to establish a ''best practices'' process whereby we can identify vague laws, regulations, instructions, etc.; work with our members to produce what we believe should be the industry standard; and submit that recommendation to the agency for review within a date certain. This is the type of public/private partnership that can make the system work better for all partners. We are awaiting HCFA's response to our proposal.
In conclusion, Mr. Chairman, let me just say that the AHA is ready and willing to continue our work with HCFA on improving the way rules and regulations are promulgated. We are well aware that the size and complexity of Medicare and Medicaid regulations is a challenge to HCFA. We are proud of our working relationship with the agency, and we pledge to do all we can to help HCFA make the regulatory system work better not just for hospitals and health systems, but also for the patients and communities we serve.
Mr. GEKAS. Before we introduce the next witness, we want to acknowledge the presence of the gentleman from Tennessee, Mr. Bryant, a member of the subcommittee.
Page 92 PREV PAGE TOP OF DOC We turn to Mr. Vladeck.
STATEMENT OF DAVID C. VLADECK, ESQ., DIRECTOR, PUBLIC CITIZEN LITIGATION GROUP
Mr. VLADECK. Thank you, Mr. Chairman, members of the subcommittee. I appreciate being invited to testify before you this morning.
With all due respect to the co-sponsors of H.R. 4049, Public Citizen opposes this bill because we do not believe it will make the regulatory process work better for the American people. And although I submitted a lengthy statement, I'd like to focus on three issues this morning.
The first is that, by creating new defenses to regulatory action, this bill will engender enormous amounts of litigation, litigation that will sap the resources of our administrative agencies. What this bill does is shift the inquiry at enforcement proceeding away from the simple question of whether the rule was violated, to questions that are highly subjective, involving the state of the mind of individuals or entities accused of misconduct, their good faith, or the reasonableness of their reliance on oral or written agency pronouncements. To put it bluntly, H.R. 4049 invites law-breakers to evade responsibility for their misdeeds by pointing fingers at agency officials or reading ambiguities into agency policy statements.
The second point is that we disagree with the policy decision embodied in this statute to add two new defenses to allow people who are accused of violating agency rules to escape accountability. The first goes to whether the rule fails to give the person fair warning of the conduct that the rule prohibits or requires. The vice in this provision is the word ''conduct.'' If you look at agency rules, very rarely do they specify conduct that is forbidden or required. Typically, agency statements set out performance standards, OSHA-like standards. For example, an employee may not subject a worker to exposure to more than ''X'' amount of a toxic substance.
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Or they're written in very general terms. Take the Food and Drug Administration's good manufacturing practices rule. It simply says that people who deal directly with food ''shall use hygienic practices.'' They do not prescribe conduct, and what I am very concerned about is the way this provision is written, it would give a defense if the rule does not detail the conduct that is either forbidden or required. And to make that question the centerpiece of an agency enforcement proceeding is going to sap very, very scarce agency resources.
The third point I want to make this morning has I think been largely made by Joe Onek, who expressed concern about the new defense based on claims ''that official representations to the person about what the rule prohibits or requires were misleading and were reasonably relied upon the person.'' There are two problems with that approach. The first is it reverses two centuries of clear precedent in our courts. The rule has always been that estoppel does not lie against the Government and this provision stands that principle on its head.
The second problem is it creates an enforcement nightmare for the agency. Mr. Delahunt asked for examples. Take the typical OSHA inspection. An OSHA inspector goes through a plant and finds three or four things, maybe egregious violations, cites them, but doesn't cite something else. The plant blows up the next day and inspectors come and find that there was a defect that wasn't obvious in the inspection.
You're going to have litigation that is going to be endless over whether something the OSHA inspectors said or did gave rise to the expectation on the part of the employer that the plant was in compliance with agency rules. And the reason why the courts have historically rejected the argument that estoppel lies against the Government is precisely to avoid these kinds of swearing contests, these kinds of fights about who said what.
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Mr. Gekas pointed outand I agree with himthat most ALJs will be skeptical when a respondent in an enforcement proceeding comes in and says, well, I called the agency and they said it was okay. That was his point, as I understood it. The problem with that is you have to try that issue. You have to try that issue time and time again, which will cost agencies extremely valuable time and will work tremendous delays in the regulatory process.
Let me add one last pointI realize my time has expired. But I do believe there's a critical drafting error in the statute that I would urge you to take a look at, and that is the use of the word ''sanction.'' Sanction certainly would apply to a cease and desist order. Suppose the FDA goes and inspects a plant and finds an unsanitary conditions and seeks an emergency injunction to seize the products or to make sure they're not shipped out. This bill would apply in that instance, and would give the producer of those foods the opportunity to defend on the grounds that the agency's rules weren't clear enough or that there was something said by an official that made the producer believe that he or she was in compliance with Federal law. That is a serious problem.
Whatever you may think about the wisdom of applying this to civil penalties, please do not apply it to prospective injunctive relief. Thank you.
[The prepared statement of Mr. Vladeck follows:]
PREPARED STATEMENT OF DAVID C. VLADECK, ESQ., DIRECTOR, PUBLIC CITIZEN LITIGATION GROUP
Mr. Chairman and members of the Committee, thank you for the opportunity to testify before you this morning on H.R. 4049, the Regulatory Fair Warning Act of 1998.
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I am the Director of Public Citizen Litigation Group, the legal arm of Public Citizen, a nationwide advocacy organization of over 120,000 members. For more than twenty-five years, Public Citizen Litigation Group has represented consumer groups, labor unions, and public health organizations in standard-setting proceedings and in enforcement litigation involving OSHA, EPA, FDA, USDA, NHTSA, and other health and safety agencies.(see footnote 56)
Public Citizen's extensive, first-hand experience with the regulatory process gives us substantial insight into the way our system now operates. It also allows us to comprehend the changes that would be brought about by H.R. 4049, not just in terms of the procedural rules that govern agency enforcement proceedings, but in basic health, safety, environmental, and civil rights protections guaranteed by substantive statutes that, in our view, would be jeopardized by the implementation of H.R. 4049.
With all due respect to the co-sponsors of H.R. 4049, Public Citizen opposes this bill because it provides nothing to make the regulatory process work better for the American people. To the contrary, we oppose giving law-breakersand make no mistake, it is law-breakers who are the only beneficiaries of H.R. 4049additional defenses and incentives to remain ignorant of their legal obligations. And we believe that H.R. 4049 would add considerably to agency enforcement burdens, because it would shift the inquiry at enforcement proceedings away from the allegedly unlawful conduct, which generally is susceptible to proof by objectively verifiable facts, to highly subjective defenses involving the state of mind of individuals or entities accused of misconduct, their ''good faith,'' or the reasonableness of their reliance on oral or written agency pronouncements. Put bluntly, H.R. 4049 invites law-breakers to evade responsibility for their misdeeds by pointing fingers at agency officials or reading ambiguities into agency policy statements.(see footnote 57)
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We do not disagree with the sentiment underlying H.R. 4049namely, that justice must be meted out fairly. But the Fifth Amendment to our Constitution already guarantees those accused of wrongdoing of due process. And existing law already forbids the imposition of punishment where the government fails to give adequate notice that conduct is proscribed. But H.R. 4049 goes well beyond existing law to place new burdens on agencies and to give lawbreakers new defenses, all at the public's expense. Accordingly, we urge this Committee not to act favorably on H.R. 4049.
EXISTING LAW ALREADY PROTECTS THE PUBLIC FROM SANCTIONS BASED ON ''SECRET LAW''
The first problem we have with H.R. 4049 is that it appears to be based on a misapprehension of existing law. Reading H.R. 4049, one would conclude that current law permits individuals and corporations to be sanctioned for violations of law in cases where the agency has failed to clearly and publicly articulate the governing substantive legal standards or has affirmatively misled the accused as to the appropriate standards of conduct. Neither proposition is true.
The Administrative Procedure Act has long provided that agencies must publish in the Federal Register all ''substantive rules of general applicability.'' 5 U.S.C. 552(a)(1)(D). Failure to publish renders a final rule unenforceable against any person not having actual and timely notice of its terms. Id. 552(a)(1). The Supreme Court has long emphasized that it will not condone the government's use of unpublished regulations or ''secret law'' to affect adversely the substantive rights of individuals. Morton v. Ruiz, 415 U.S. 199 (1974). In explaining the policy underlying section 552(a)(1), the Court in Morton emphasized that ''[t]he [APA] was adopted to provide, inter alia, that administrative policies affecting individual rights and obligations be promulgated pursuant to certain stated procedures so as to avoid the inherently arbitrary nature of unpublished ad hoc determinations.'' Id. at 232. And the lower courts have consistently invalidated agency actions because of the agency's failure strictly to observe the APA's publication requirements.(see footnote 58)
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Nor have the courts condoned efforts by an agency to impose sanctions against individuals or corporations where the agency's own conduct has created ambiguities about regulatory requirements. Perhaps the clearest illustration of this point is NI Industries, Inc. v. United States, 841 F.2d 1104 (Fed. Cir. 1988), which was a government contracts case. The case arose when NI Industries appealed a finding of the Armed Services Board of Contract Appeals that denied NI a share of the savings realized when NI submitted an engineering change, accepted by the Army, for the manufacture of steel projectiles produced by NI and other contractors. Unbeknownst to NI, another contractor working on the same type of projectile proposed the same engineering change, and the dispute centered on which contractor should receive a share of the savings realized because of the change. Under the appendix to an unpublished set of operating procedures, the first contractor to formally submit engineering changes is entitled to share in the savings, and, based on the unpublished rules, the Board of Contract Appeals ruled against NI because its competitor had formally filed its submission first.
The Court of Appeals reversed. It concluded that if the rules ''had been either published or [made] provisions of NI's contract, [that] might have been sufficient to bar NI's claim to a portion of the savings from its suggested change.'' 841 F.2d at 1107. However, ''these rules,'' the court declared, ''are tainted by the glaring deficiency that they were unpublished.'' Id. The court went on to describe NI's plight in some detail. It noted that:
NI found itself facing the denial [of the benefits] because of precisely the scenario which the APA was designed to avoid. NI had no actual knowledge that this . . . policy existed . . . . It had no constructive notice of the policy (as it would have had if the regulation had been published in the Federal Register). NI had no reason even to suspect that such policy might exist because [it] had not been distributed to the procurement divisions [NI was dealing with] . . . So the very people with whom NI was negotiating its contract were not even aware of the policy's existence.
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Id. at 1107-08.
We do not cite NI Industries because it is an extraordinary case. It is not. To the contrary, we cite NI Industries because it is ordinary in every respect, and because it shows that the courts already take care to ensure that the government does not rely upon and enforce legal requirements that are out of reach for the regulated community. Thus, the first and most glaring problem with H.R. 4049 is that the problem it purports to addressunfairness due to the application of ''secret'' lawis already addressed by existing law.
THE EXPANSION OF DEFENSES FOR LAWBREAKERS UNDER H.R. 4049 IS UNWISE
Because existing law already meets the stated goal of H.R. 4049ensuring that agencies adequately inform individuals of their obligations and responsibilities before any sanction can be imposed (see H.R. 4049, section 2)it is essential to focus on precisely what new legal rights H.R. 4049 would confer on law-breakers. The answer, unfortunately, is many.
The operative provisions of H.R. 4049 are section 3, which would add a new subsection to the APA, and section 4, which would amend Title 28 of the U.S. Code, which deals with the Judiciary and Judicial Proceedings, to impose what H.R. 4049 calls a ''Ban on Imposition of Sanctions . . . in Certain Circumstances.'' In virtually identical terms, sections 3 and 4 create defenses to agency enforcement efforts that would permit those who have engaged in misconduct to escape liability.(see footnote 59) The first set of ''circumstances'' are those that, for the most part, replicate existing law by focusing on whether the rule itself was available for public review. They forbid the imposition of sanctions where the substantive rule to be applied was not published in the Code of Federal Regulations, printed in the Federal Register, or known to the person.
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H.R. 4049 then parts company with existing law by creating two new, sweeping defenses. The first goes to whether ''the rule failed to give the person fair warning of the conduct that the rule prohibits or requires.'' This focuses on the specificity of the rule, rather than whether the rule is accessible to regulated entities. The problem with this provision is that rules often set forth prohibitions or requirements in fairly general terms to maximize the flexibility that a regulated entity has for compliance (such as the good manufacturing practice (''G.M.P.'') regulations issued by the Food and Drug Administration), or in terms of performance (such as OSHA or EPA standards setting limits on toxic emissions). Very few regulations actually prohibit or require ''conduct.''(see footnote 60) Take FDA's G.M.P. regulations. These regulations are intended to ensure that foods, drugs, medical devices, and cosmetics are made in a sanitary, wholesome way. They are not prescriptive, and do not prohibit or require specific ''conduct.'' Rather, they set very general standards (e.g., persons working directly with food ''shall conform to hygienic practices '') and leave it to the regulated entity to decide on the methods of compliance. See, e.g., 21 C.F.R. Part 110 (establishing G.M.P.'s for manufacturing and packaging human food). Yet under H.R. 4049, a medical device manufacturer charged with failing to adequately sterilize a work-site could raise as a defense to a sanction the argument that the FDA's rules do not prohibit or require specific conduct, and that defense would end up the focal point of either an agency hearing or a court case.(see footnote 61) That result makes little sense, but it is the inevitable by-product of H.R. 4049.
Even more problematic is the final defense H.R. 4049 addsone based on claims that ''official representations to the person about what the rule prohibits or requires were misleading and were reasonably relied upon by the person.''(see footnote 62) Not only would this provision reverse precedent dating back into the early Nineteenth Century holding that ''estoppel'' does not run against the government, but it would create an enforcement nightmare that would ensure that agency enforcement proceedings would often degenerate into swearing contests. A party charged with violating anti-pollution rules issued by the EPA, worker protection standards imposed by OSHA, or food safety requirements established by the FDA can almost always assert that it relied on statements from government inspectors or investigators that it was in compliance with agency regulatory standards.
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One can easily imagine the dynamic at an agency or court proceeding in which this defense is raised (and since the defense would be so easy to assert, it is likely to become the first (not last) refuge of scoundrels). On the one hand, the accused party would claim that it reasonably relied on oral representations by an agency ''official'' (which, unfortunately is nowhere defined in H.R. 4049 or elsewhere, and could arguably mean any government employee, including a GS7 clerk) that the party's conduct did not run afoul of the agency's rules. On the other hand, agency officials would deny ever making such representations, claiming that the defense is simply an invention of the accused party. Instead of worrying about whether a violation of law occurred and protecting the public from further wrongdoing, the trier of fact would become enmeshed in weighing the credibility of witnesses and resolving the battle of ''who said what to whom.'' For what reason?
In enforcement litigation today, under existing law, the central focus is on the conduct of the party accused of breaking the lawdid the accused party in fact violate EPA's rules forbidding the dumping of toxic substances into a stream? Did a food manufacturer sell products contaminated with rodent droppings? Did a machine shop operator direct an employee to operate a drill press that did not have the appropriate guard rail? H.R. 4049 allows the law-breaker to put the agency on trial. The core questions will shift to the clarity of the agency's rules and the truthfulness of the agency's employees. That, in our view, is a dramatic step backward that can only thwart the effective enforcement of our nation's health, safety, environmental, and civil rights laws.
Congress and the courts have historically recognized the futility of unraveling such a Gordian knot and have rejected defenses based on alleged ''misinformation'' provided by government agents. Indeed, at least since 1813, the law has clearly held the government is not bound by the erroneous representations of government employees. See Lee v. Munroe & Thornton, 7 Cranch 366 (1813); The Floyd Acceptances, 7 Wall. 666 (1869); Utah Power & Light Co. v. United States, 1243 U.S. 389 (1917).(see footnote 63) Rather than turn this established legal doctrine on its head, in many other contexts in which Congress has been concerned at the possibility of significant detrimental reliance on the erroneous advice of government agents, it has provided narrow but effective legislative relief. See, e.g.., Federal Election Campaign Act of 1971, 2 U.S.C. 437F, 438(e); Federal Trade Commission Act, 15 U.S.C. 57b-4; Securities Act of 1933, 15 U.S.C. 77s(a); Truth in Lending Act, 15 U.S.C. 1640(f); Portal-to-Portal Act of 1947, 29 U.S.C. 259; Employment Retirement Income Security Act of 1974, 29 U.S.C. 1028. These examples only underscore the obvious pointnamely, that regulated entities in need of clear and binding guidance from agencies about their responsibilities and obligations have no shortage of avenues open to them right now to secure the agencies' views. H.R. 4049 is not needed for a regulated entity seeking clarification about its obligations under the law; rather, it gives an out for those who choose not to ask.
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Public Citizen sees no reason to give businesses that violate Federal regulatory requirements by polluting our air and water, exposing workers to toxic substances or harmful physical agents, or subjecting the American people to adulterated medicines and food products new defenses to shield them from being held accountable for their misdeeds. Too many Americans have fallen victim to regulatory violations in the past for Congress to try to further insulate wrongdoers from punishment. We urge that H.R. 4049 be rejected.
As a final note, although we would prefer to see H.R. 4049 interred once and for all, we note that there is a least one extremely serious drafting problem with H.R. 4049 that cries out for clarification or modificationthe pervasive use of the undefined word ''sanction.'' At a minimum, the word must be defined to ensure that it is not construed as covering injunctive or other declaratory orders that do no more than compel immediate compliance with the law. This change is essential. Suppose OSHA inspected a work-site and found safety violations that posed an imminent danger to workers; or suppose the FDA inspected a food manufacturing facility and determined that, because it fell far short of the FDA's rules regarding sanitation, food products might become contaminated with E. Coli. In these circumstances, the agencies would take swift action to ensure that the violations were corrected immediatelybefore workers and the public were placed in further jeopardy. We assume that the drafters of H.R. 4049 would want our health and safety agencies to respond without delay when faced with a serious public health threat. But as H.R. 4049 is currently drafted, an agency administrative law judge, or a Federal district court judge, could easily conclude that such an injunctive order was a ''sanction,'' and bar enforcement based on the new defenses set forth in H.R. 4049. Thus, we urge that the current drafting of the bill be modified to make it crystal clear that ''sanction'' does not include any form of declaratory or injunctive relief.
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Thank you for inviting me to appear before you today. I would be happy to answer any questions.
Mr. GEKAS. We thank the gentleman. Just a matter of quick inquiry, Mr. Vladeck: When we used the word ''sanctions,'' we were trying to follow the Administrative Procedure Act verbiage on sanctions and the definitions to apply to this bill, which, after all, is an amendment to that bill. So we want you to know that, and if you have any suggestions as to how to change the Administrative Procedures Act so we can make this conform to it, we'd be glad to hear it.
We start with the gentleman from New York, Mr. Nadler.
Mr. NADLER. Thank you.
First, Mr. Vladeck, having heard the horror story by Mr. Schaum of the experience of his hospitaland it is a legitimate horror story with an unreasonable Federal bureaucracyand given your, I think, quite valid criticisms of this legislation, can you think of ways that we could write legislation to prevent this kind of problem without getting into the problems that this bill does?
Mr. VLADECK. Well, one thing that I propose in my testimony is that Congress has regularly written statutes that require agencies to respond quickly and authoritatively to questions from the regulated industry. If you'll note on, I believe it's on page 9 of my testimonythere are just a few statutes that I compiled to illustrate the point, and I recognize the dilemmas that this gentleman faced. If there was some way to get a binding, authoritative interpretation from the agency about what ''bundling'' meant and how those practices had to be followed, that would go a long way toward eliminating this kind of problem, and what I would urge Congress to do is to think about more measured responses to legitimate problems like this.
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I would also say that legislating on the basis of this kind of anecdote, in my view, is wrong and it suggests to meand I know Chairman Gekas fought shoulder-to-shoulder with me on thisis that the Administrative Conference of the United States ought to be reconstituted and charged with the responsibility of looking at these problems and coming up with suggestions for Congress. This is a perfect issue
Mr. NADLER. But you don't think that this bill can be cleaned up to eliminate the problems you see with it and to deal with the problem that
Mr. VLADECK. Well, the way I would fix this bill is by eliminating (b) and (c), which I would imagine would be unacceptable to the sponsors. We don't disagree with (a), which basically codifies what I believe is existing law and duplicates other provisions of the Administrative Procedure Act, I don't see that that is objectionable. It's the Fair Warning Provision and the oral and written representation provision that I find fault with on page 4, for example, lines 3 through 15.
Mr. NADLER. So I suspect your answer's a qualified negative then? Let me ask someone else theMr. Troy, and withoutby the way, I was intrigued by your reference to the Talmudic rule of the warning that you have to give someone in advance. If you do this act, be aware that that penalty will apply. You were also aware that the Talmud refers to any supreme court that orders more than one penalty in 70 years as a murderous court precisely because of that rule?
Mr. TROY. Yes. But that was actuallywith respect, Mr. Nadlernotice was meant to ameliorate. This is one of the rules that was meant to ameliorate what is viewed as a too onerous legal system.
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Mr. NADLER. That's right.
Mr. TROY. Right, but that's the point. Actual notice can help to ameliorate
Mr. NADLER. Of course, okay. In any event, let me ask you the following question: This bill would apply to any rule which is a defined term under the Administrative Procedure Act. To fairly broad-term it, it includes many agency actions that don't appear in The Federal Register. For example, Federal Aviation Administration's air-worthiness notification. To what extent would an FAA fax to an airline saying, ''Don't fly this model aircraft until you've checked the following rivets lest the wings fall off,'' do you render that unenforceable by this bill as written?
Mr. TROY. I don't think it would be rendered unenforceable.
Mr. NADLER. Because?
Mr. TROY. Because I think that that would be certainly fair warning. I think that that would put people on reasonable notice. I think that it would be something that would then be known to the regulated individual that that's something that the agency's instructed them not to do.
Mr. NADLER. And assuming that the change that we talked about earlier is made in the bill? That is, that these are all in the alternative not
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Mr. TROY. Yes, yes.
Mr. NADLER. So you would think that that's a necessary change?
Mr. TROY. Yes.
Mr. NADLER. Okay, and
Mr. TROY. I think it's a helpful change.
Mr. NADLER. Could you tell meI think this will be the last questionI'll ask an additional one or 2 minutes
Mr. GEKAS. Without objection.
Mr. NADLER [continuing]. Thank youin a legal sense, what the following phrase means exactly: ''Knowable to a person who has engaged in a reasonable good faith investigation of the rules applicable to the conduct that allegedly violated the rule,'' means?
Mr. TROY. I think it's fairly clear as to what it means. I'm not saying that there wouldn't be any litigation to clarify it, but basically it's saying, as was pointed out before, the notion of reasonableness is rife throughout our jurisprudence, to a certain extent, as has been noted,
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And those who are arguingyou simply can't have it both waysyou can't argue, well, this still is unnecessary because we already protect people who engage in these kinds of reasonable searches and then say, oh, but it's so incoherent as to renderas to be, you know, relevant.
I think the reason why the General Electric case and this standard needs to be embodied in law is, first, administrative agencies should have to do more than not violate due process. They should have to provide people with clear, adequate warnings.
Second, General Electric is not necessarily a line of cases that is on the tip of everybody's tongue. It is relatively new and developing line of authority, and I think it deserves to be embodied under fundamental administrative law.
And the third thing is I think we need to change the incentives. The incentives now are for agencies to write ambiguous regulations. GE is there and they're still writing ambiguous regulations. So we need to change their incentives. This bill can help to do that.
Mr. GEKAS. We thank the gentleman. In answer to the question that the gentleman has posed about the language, that's drawn directly from General Electric. So Mr. Troy is correct on that.
The gentleman from Massachusetts is recognized for 5 minutes.
Page 107 PREV PAGE TOP OF DOC Mr. DELAHUNT. You know, what I'm hearing, the missing pieceI mean, Mr. Vladeck, you referred to this bill would generate additional litigation. I really have to take issue. I think that what the bill may do is diminish some litigation, and I think in terms of the part of the answer to what we have heardand let me again take issue with you about the anecdote that's related by Mr. Schaum; that clearly was not a isolated anecdote. I can assure you of that. I mean this happened throughout the health care industry, not only to hospitals, but to other segments of the health care industry.
But many of themI would add that I think that thatthe issues impacting the health care industry have been resolved. I know that the ranking member and the Chair of the Subcommittee on Immigration and Claims will continue to monitor the appropriate implementation of the guidelines issued by DOJ. So I'm optimistic and hopeful that that issue has been resolved. But it does demonstrate that this is not anecdotal.
But I think also that we, as not just members of the committee but as Members of Congress, also have to recognize that if we're going to impose additional burdens on agenciesand this is an additional burdenthat we have to secure the funding so that these agencies can meet their mandates. And I would suggest to the Chair, you know, that this is part of the equation; we continue throughout Government to impose additional requirements on agencies to implement policies enacted by Congress and signed off by the administration. And if we don't have the resources, then we've got a real problem.
Mr. VLADECK. You may be right, Mr. Delahunt, that in the long run a bill like this may somehow reduce litigation by forcing agencies to be highly prescriptive in their regulations, because that is the only way a bill like this could have that impact. But that, too, would have a tremendous cost and it runs counter to the direction that Congress is pushing the agencies in. And so what you're doing is you're putting agencies in a vice, that they cannot possibly meet both mandates that Congress has given them.
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Mr. DELAHUNT. Well, you know, I don't know if I necessarily disagree with what you're saying, but I do know this: For example, the reference made by Mr. Schaum to the regulation, and we've got to regulate health care, obviously it's a priority. But it is so overwhelming and so massive at this point in time, it's clear to me that HCFA clearly is issuing rules and regulations that, if not in direct conflict or in partial conflict with each other, are so vague and nebulous that we have an entire industry operating in a limbo. And that's a serious problem.
Your initial statement or one of your comments to the Chair regarding, you know, it's time to go back and maybe take a look at this and try to make some sort of sense out if it, you know, I can't encourage the Chair and other interested stakeholders more in the sense that I really believe this is the time to do it. We're never goingwe're really burdening, you know, not just the hospital, but all health care providers, and that's just the beginning. We can go all across every regulated industry and segment of our society.
Mr. VLADECK. Well, maybe we all should support a bill to revitalize the Administrative Conference. This is exactly the kind of issue that the non-partisan Administrative Conference addressed for 26 years and I know Mr. Gekas fought hard to salvage it.
Mr. DELAHUNT. Well, I would support any effort that the chairman or others may involve in, but I'll tell you now, we cannot allow the continuing uncertainty, the continuing uncertainty that exists in terms of those that are regulated without insisting on more clarity, more fairness, and some discretion. You know this idea and concept of reasonableness that I articulated and Mr. Troy, that's what it's about. And I hear the Deputy Attorney General talking about, well, it's going to deter agencies from even offering assistance. We've created boxes for ourselves here. We're not operating in the real world and we've got to operate, I would suggest, on the premise that most people act bona fide.
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Mr. GEKAS. The time of the gentleman has expired. The Chair wanted to indulge in a couple of questions that it wanted to pose, but now we are faced with the emergency emanating from the floor where we must retire for the purpose of casting several votes. Is that correct? Three votes. We reluctantly dismiss this panel as aforesaid and with gratitude. We will take all of their statements into consideration as we further develop the process of this litigation.
We ask the next panel to indulge itself in a cup of coffee and peanut butter crackers until 12:30, and we will reconvene at 12:30 for the purpose of the final panel. We apologize, but it was unavoidable.
The hour of 12:30 having arrived, the committee will come to order, and out of necessity, will have to recess, but before we recess I'm going to invite the members of the panel to take their places and introduce them, and we'll wait until another member appears before the actual testimony is recorded.
William Niskanen has been the chairman of the CATO Institute since stepping down as Acting Chairman of President Reagan's Council of Economic Advisors in 1985. Mr. Niskanen has written and lectured in a wide range of issues, including budget policy, defense, education, Government organization, health care, international trade, productivity, regulation and taxes. Among his several books is one entitled, ''Bureaucracy in Representative Government.'' He is a graduate of Harvard College and he has an MA and Ph.D. in economics from the University of Chicago.
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Thomas Schatz is president of Citizens Against Government Waste and the counsel for Citizens Against Government Waste. Prior to joining Citizens Against Government Waste in 1986, he was Legislative Director to our former colleague, Hamilton Fish. Mr. Schatz holds a law degree from George Washington University and he graduated from the State University of New York with an honors degree in political science.
And Christopher McLean is Deputy Administrator of the Rural Utility Service in the Department of Agriculture. He was Legislative Assistant and Legal Counsel to Senator Exxon until the Senator's retirement. There he helped to write the universal services provisions of the Telecommunications Act. He may be the culprit in this whole scenario.
We will engage in the chairman reciting form ''Othello'' until another member appears because we cannot proceed under the rules without two members being present. So we'll start with:
''Though that her gests were my dear heart strings, I'd whistle her down the wind to prey at Fortune.'' That's the extent of what I remember. We will recess until the other members appear.
Mr. GEKAS. Mr. Bryant promised that he'd be here, fulfilled his pledge to the chairman, thereby allowing him an extra doughnut tomorrow morning as we prepare for the next day. The gentleman from Tennessee is present, Mr. Bryant.
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We'll begin with the testimony of Mr. Niskanen.
STATEMENT OF WILLIAM A. NISKANEN, CHAIRMAN, THE CATO INSTITUTE
Mr. NISKANEN. Mr. Chairman, I'm pleased to testify before the subcommittee. May I make four simple points: One, Congress should not insist on approving all fees for goods and services supplied by the Federal Government. Two, section 815 of this act, the brief substantive section, does not distinguish between a tax and a fee or define the difference between a tax and a fee. Third, you cannot count on our outstanding law to make a sufficient distinction between a tax and a fee. And fourth, I suggest that section 815 should be amended to add one sentence defining a fee and exempting fees from coverage of this act.
Let me briefly give you the reason for these four points. First, in a big and complex Government, and since life is too short, Congress will necessarily delegate a lot of minor decisions; it will necessarily delegate, in many cases, to your own staff or to members of the Executive or regulatory commissions, and it's very important to articulate the principles to distinguish the authority that may be delegated or may not be delegated. In this case I think the proper principle is the distinction between a tax and a fee.
My second point is self-evident. Section 815 is very brief, refers only to taxes, does not define the difference between a tax and a fee.
On my third point: the outstanding court rulings on this matter are quite diverse. In a recent decision by the Supreme Court in March 1998, the court ruled that a tiny one-eighth of 1 percent ad valorem charge on shipments through American ports was a violation of the export clause of the Constitution, because the charge was not a fair approximation of the services, facilities, or benefits furnished to exports. So in the case of this particular charge, which Congress itself called a tax, a harbor maintenance tax, the fact that this tax was tiny did not exempt it from the export clause of the Constitution. The Court ruled in a unanimous decision, written by Justice Ginsburg, that since this tiny charge was not a fair approximation of the services provided to exporters, it was therefore a tax and not a fee and, as such, was a violation of the export clause of the Constitution.
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On a wide range of other charges, however, that do not involve the export clause of the Constitution, the court has upheld a variety of ad valorem and flat charges as being not in violation of the Constitution. The problem is that the Court has ruled in very narrow cases where it involves the export clause and a very narrow distinction between taxes and fees, but on basically any other case that does not involve the export clause the Court has upheld a variety of ad valorem and flat fees or flat charges as not being unconstitutional.
Now that presents a different problem, the problem of undue delegation, and the Court has not been very careful about that matter since the Schecter decision of 1935.
So you can't count on outstanding law making a sufficient distinction between a tax and a fee, and in that case you risk being enormously overloaded in being expected to approve all the fees for its parks and for charges by the Government Printing Office, and whatever, unless you quite clearly exempt fees from the coverage of this act and define what constitutes a fee.
And my fourth point, I respectfully suggest that the following sentence be added to section 815, ''The provisions of this act do not apply to charges that are closely related to the costs of goods and services supplied to the payer.''
And with that, I will entertain your questions.
The prepared statement of Mr. Niskanen follows:
Page 113 PREV PAGE TOP OF DOCPREPARED STATEMENT OF WILLIAM A. NISKANEN, CHAIRMAN, THE CATO INSTITUTE
Mr. Chairman and members of the subcommittee: My thanks for this opportunity to testify in support of the Taxpayer's Defense Act introduced by Mr. Gekas and others. This act would reassert the sole authority of the House to initiate tax legislation and the sole authority of Congress to approve tax legislationan authority that has been eroded by the increasing delegation of taxing and rule-making authority to the executive branch and regulatory commissions.
My testimony will address only the substantive section 815 of this act and the larger implications raised by this act. I will not address the procedural sections of this act that, I understand, are essentially identical to the Line Item Veto Act.
The primary problem of section 815 is the risk that it would be overreaching. Congress should not insist that it approve every fee for a Federal good or service. But section 815 does not define the difference between a tax and a fee. And the Supreme Court has upheld a number of flat and ad valorem charges as valid user fees, except in those narrow cases that involves the constitutional prohibition of taxes on exports. Over time, the effectiveness of the broader Congressional Review Act will depend importantly on articulating a principle by which some authority may not be delegated and other types of authority may be delegatedin this case, the difference between a tax and a fee.
Fortunately, a recent Supreme Court decision provides some useful guidance on this issue. In the decision on United States v. United States Shoe Corporation (31 March 1998), the Court ruled that a small harbor maintenance tax, ''which is imposed on an ad valorem basis, is not a fair approximation of services, facilities, or benefits furnished to the exporters, and therefore does not qualify as a permissible user fee.'' In other words, a tax is a payment that is not closely related to the cost of goods and services supplied to the payer. A tax on exports is an unconstitutional violation of the export clause. And a tax levied by an executive agency or regulatory commission on any other activity should be regarded as a violation of Congress' sole authority to approve a tax. Again, Congress should not insist that it approve every fee. For this reason, I respectfully suggest that some language be added to section 815, such as ''The provisions of this act do not apply to charges that are closely related to the cost of goods and services supplied to the payer.''
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The larger issue raised by this bill, of course, is the more general problem of the delegation of rule making to executive agencies and regulatory commissions. As a rule, this problem is due more to casual legislative language than to an abuse of rule-making authority by the agencies. Several examples illustrate this point:
The Clean Water Act authorizes a wetlands preservation program but provides no guidance about the scope or instruments of this authority.
The Americans with Disabilities Act leaves the executive branch almost complete discretion to make the critical definitions of disability, reasonable accommodation, and undue hardships.
The Telecommunications Act of 1996 authorizes the FCC to require that suppliers of interstate telecommunications services ''contribute, on an equitable and nondiscriminatory basis, . . . to preserve and advance universal service.''
In these three cases, and many others, Congress has delegated the critical rule-making and taxing authority to the executive, often with effects that are most undesirable.
Only Congress can resolve this problem. The recent decision by the Supreme Court in the Line Item Veto Case suggests that the Court may check some future examples of undue delegation, but the scope of delegation is now much too broad for the Court to be an effective monitor. For a substantial amount of delegation is inherent in big governmentfrom Congress to committees, from committees to the congressional staff, from Congress to the executive branch and regulatory commissions. Over time, both Congress and the Court should sort out what powers may not be delegated. And Congress must bear the responsibility of defining intelligible standards for the substantial amount of rule making that will necessarily continue to be delegated.
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The Taxpayer Defense Act is a good place to start but is only the first step toward reasserting the authority of Congress.
Mr. GEKAS. You said, ''closely related to,'' in your
Mr. NISKANEN. Closely related to the costs of goods and services supplied to the payer. In that, the Gore tax, which apparently provoked your legitimate concern, has nothing to do with the cost of goods and services supplied to the particular people who pay the tax, to the supplier of interstate telecommunications services and their customers. Congress bears the primary responsibility for that because the language of the Telecommunications Act talks about contributionswhat a lovely termtalks about contributions on a fair and equitable basis to pay for universal service. Now that raises the question of whether those contributions are a legitimate delegation of authority to set a fee or an illegitimate delegation of authority to tax. And at least according to the language of the Supreme Court in this recent decision, since the charge is not related to the services provided to the payer, it is a tax and not a fee, and as a tax, it would be a violation of the non-delegation doctrine.
Mr. GEKAS. We thank the gentleman and we turn to Mr. Schatz.
STATEMENT OF THOMAS A. SCHATZ, PRESIDENT, CITIZENS AGAINST GOVERNMENT WASTE
Mr. SCHATZ. Thank you very much, Mr. Chairman. I appreciate the opportunity to speak here today, and I agree with much of what Mr. Niskanen has said about the question of what we're trying to get at here.
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Clearly, the Universal Service Tax has raised a great deal of rancor among the American people, who may have been paying it without knowledge for many years, but have now discovered that we're doing something that may sound useful. But if one examines exactly what the Congress and the FCC are trying to do, you find that it was a very untargetted effort and a very extensive effort to do something that could be handled in a much more equitable manner. In many senses, it was the fault of Congress in the first place for not being very specific and not targeting this program. I found it interesting that, after the complaints about the scope of the fee, the FCC turned around and said, okay, we are going to find a way to target this to where it's needed, and now we're going to do what it was intended to do in the first place, which raises a question of what they were trying to do without the complaints that have come from the public, and there has been a great deal of that throughout the country.
There already is, for example, a Federal excise tax of 3 percent that originally was intended to fund the Spanish-American War 100 years ago. We find ourselves with a lot of these taxes that simply go on and on without any congressional oversight, without examining whether they are being used for their intended purposes.
The Universal Tax is a tax on top of the excise tax; people already pay extensive property taxes to finance their schools. Many of the schools that have been described as needy byfor example, the National School Boards Association release on the tablemake the point that Newark and Patterson, New Jersey require this money to wire their schools. I think they probably have a lot more problems than just worrying about whether wiring their schools is something that they need to do.
Page 117 PREV PAGE TOP OF DOC For example, kids are going to school without books; the schools need repairs. Just here in the District of Columbia we saw problems with simply opening the buildings on time because the roofs needed repairing, and people are sitting there worrying about whether or not we're spending, we're going to spend billions of dollars to wire these schools to the Internet. The Internet is a luxury; it's not a necessity, and it's a little bit outside the scope of whether your bill is appropriate or not.
But I think it does point to how agencies, when they are given some freedom by Congress, tend to overstep what they are supposed to do. They are not accountable to taxpayers; Members of Congress are. And while we may disagree with what Members do, at least they are subject to being voted in or out every 2 years; in the case of the Senate every 6 years. They have a better idea of how to set policy and they in many ways need to be more careful about setting policy.
The Line-Action Veto Act is a good example. In essence, Congress was throwing up their hands and saying, we can't be responsible enough not to put pork-barrel spending into these bills so, therefore, we will pass some of this burden onto the President. We agreed with that. The Supreme Court said that that was an unconstitutional delegation of power. That clearly applies in a situation of delegating to the FCC the same kind of power and authority to do something that Congress should have done in the first place.
Alexander Hamilton made the point in Federalist number 36: ''There is no part of the administration of government that requires extensive information and a thorough knowledge of the principles of political economy so much as the business of taxation. The man who understands these principles best will be least likely to resort to oppressive expedients, or to sacrifice any particular class of citizens to the procurement of revenue. It might be demonstrated that the most productive system of finance will always be the least burdensome. There can be no doubt that in order to be a judicious exercise of the power of taxation, it is necessary that the person in whose hands it should be acquainted with the general genius, habits, and modes of thinking of the people at large and with the resources of the country.''
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This is why Congress got the exclusive constitutional power to levy taxes and why Members, as representatives of the people and elected officials, are in the best position to speak to the needs and desires of all Americans. And clearly, people believe that we should have the ability of everyone to have access to telephones, but when we are supplying, for example, the town of Bretton Woods, New Hampshire, which is one of the wealthier areas of that region of the countrythere were 491 lines; they get $18,000 a year, which is $37 per line for a year. The Universal Service fee also goes out to big ranches out in Montana, many of which are now owned by movie stars and other wealthy people, Ted Turner being one of them that has a ranch where the subsidy is extensive. He could buy a phone company; he doesn't need a subsidy.
So I think there are questions of not only about how the Universal Service Tax was increased by the FCC, but questions about the tax itself and how it's being distributed or enforced at this time.
Thank you, Mr. Chairman, my time has expired and I appreciate the opportunity.
The prepared statement of Mr. Schatz follows:
PREPARED STATEMENT OF THOMAS A. SCHATZ, PRESIDENT, CITIZENS AGAINST GOVERNMENT WASTE
Mr. Chairman, members of the subcommittee, thank you for the opportunity to testify today. My name is Thomas A. Schatz. I am president of Citizens Against Government Waste, a 600,000 member nonprofit organization dedicated to eliminating waste, fraud and abuse in government. Citizens Against Government Waste has not received at any time any Federal grant and we do not wish to receive any in the future.
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Citizens Against Government Waste (CAGW) believes the Taxpayer's Defense Act addresses a matter of the utmost urgencypreventing unelected bureaucrats from imposing taxes on the American people.
Article 1, Section 8 of the Constitution clearly states: ''The Congress shall have power to lay and collect taxes, duties, imposts and excises.''
With this concise sentence, the founding document of our government clearly states that Congress alone has the power to tax.
The interests of the taxpayer have always been of paramount concern in this country. The American Revolution was fought in part to ensure our right to be free from burdensome and unfair taxation. The events leading up to that war and the Declaration of Independence generated the seminal phrase ''No Taxation Without Representation''a statement as valid today as it was more than two centuries ago.
There is no governmental action that has as profound an impact on the common person as taxes. Today, the tax burden on our economy is the highest in peacetime history. The average American family pays more in taxes than on food, clothing and shelter combined. With taxes robbing us of so much of our annual income, Americans cannot help but be concerned about why they are being taxed and by whom. Involved in this concern is the desire to ensure that the taxes that are imposed are fair, equitable and just. Taxes that are imposed by governmental agencies without the authority of Congress do not meet these criteria. Without congressional approval of a taxing policy, there is little oversight on agencies imposing unauthorized taxes, which leaves the door wide open for abuses of power.
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In the words of Alexander Hamilton in the Federalist Papers #36:
There is no part of the administration of government that requires extensive information and a thorough knowledge of the principles of political economy so much as the business of taxation. The man who understands those principles best will be least likely to resort to oppressive expedients, or to sacrifice any particular class of citizens to the procurement of revenue. It might be demonstrated that the most productive system of finance will always be the least burdensome. There can be no doubt that in order to be a judicious exercise of the power of taxation, it is necessary that the person in whose hands it is should be acquainted with the general genius, habits, and modes of thinking of the people at large and with the resources of the country.
It is for precisely the reasons stated by Alexander Hamilton that Congress was granted the exclusive Constitutional power to levy taxes. As representatives of the citizens of the United States, Members of Congress are in the best position to speak to the needs and desires of all Americans. As popularly elected officials, Members of Congress must have some concern for how their policies affect their constituents. Knowing that they are up for re-election every 2 years, they are less likely to abuse their powers for fear of being turned out of office. Also, Members of Congress feel some affinity toward and a sense of accountability to their constituents.
It is this lack of implicit accountability to the American people that makes giving taxation power to non-elected officials such a dangerous prospect, to say nothing of its dubious constitutionality. While an elected official must worry about being re-elected, a non-elected official doesn't have those concerns. As long as that person achieves the desired goals of his or her organization, job security is assured. These are the policy reasons for preventing bureaucrats from taxing citizens. The constitutional authorities are even more compelling.
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Two recent cases have made it clear that under Article 1, Section 1 of the Constitution, lawmaking functions cannot be delegated. The Supreme Court, in 1996, declared in Loving v. U.S., that ''the lawmaking function belongs to Congress . . . and cannot be conveyed to another branch or entity.'' The Court also found the line-item veto to be an unconstitutional transfer of lawmaking authority to the president, and overturned the law. The line-item veto permitted the president to cut spending and eliminate taxes after bills were passed by Congress, and while one may argue with the decision, it is consistent with the Loving case and consistent with the provisions of the Taxpayer's Defense Act.
The problem being addressed by your legislation, Mr. Chairman, is one of Congresses' own making. The line-item veto legislation, while well intentioned, was essentially an admission that Congress could not control its own spending habits, and therefore needed help from the president. While that law was in effect, the result, while disappointing in its meager exercise by President Clinton, was in fact to reduce wasteful spending.
A more recent example of passing its duties to the executive branch is the Universal Service Tax. On May 27 of this year, the Federal Communications Commission voted to increase this tax by about $1 billion. In addition, the FCC adopted a rule that would bar telephone companies from separately itemizing this tax in order to hide its actions from the taxpayers. This is deception and subterfuge at its worst. This entire catastrophe could have been avoided if Congress had simply passed a bill that excluded the FCC from the line of decision making, and had designated the agency as the administrator of a constitutional user fee or tax to increase the number of schools with Internet access, instead of giving the FCC the ability to create the tax.
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In addition to imposing a massive tax, the FCC created two nonprofit entities that the General Accounting Office has found to be unconstitutional and at risk for waste, fraud and abuse. The Taxpayer's Defense Act would restore constitutional balance and authority by requiring congressional approval for any rule that establishes or raises a tax before said rule could take effect. This would prevent agencies from directly establishing or raising taxes, while providing them with an avenue to advance proposals to Congress.
What makes this bill so important is that the American people are already suffering from the imposition of the FCC's Universal Service Tax. Universal servicethe idea that everyone should have access to affordable telecommunications servicesis certainly a noble and beneficial idea. The problem arises from the effect of the 1996 Telecommunications Act on the idea of universal service.
This act allowed the FCC to extend universal service funds to provide ''discount telecommunications services'' to schools, libraries, and rural health facilities. This sounded reasonable, but its effect is pernicious. The Act gave the FCC the power to decide the level of ''contributions''taxesthat telecommunications companies would have to pay to support universal service. The FCC determines how much can be collected in taxes to subsidize a variety of ''universal service'' spending programs. It charges long-distance providers, who pass on the costs to consumers in the form of higher telephone bills.
The Universal Service Tax is problematic and harmful in many respects: The Universal Service Tax is in addition to the Federal excise tax on telecommunications service. Not only is it an unauthorized tax, but it is double taxation on consumers for use of a vital service. The universal service system is extremely inefficient. According to Jerry Hausman of the American Enterprise Institute, every dollar raised through the Universal Service Tax winds up draining an additional $1.05 to $1.25 from the economy.
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In a letter written to Senator Ted Stevens (R-Alaska), the General Accounting Office stated that the FCC ''exceeded its authority when it directed the National Exchange Carriers Association, Inc. (NECA) to create the Schools and Libraries Corporation and the Rural Health Care Corporation. The Government Corporate Control Act specifies that 'an agency may establish or acquire a corporation to act as an agency only by or under a law of the United States specifically authorizing the action.'' Not only has the FCC decided it has the power to levy taxes, it has decided it can authorize the creation of agencies. The FCC is slowly expropriating increasing amounts of power that belong exclusively to Congress.
The tax is a hidden tax. Only cellular and business customers will get full disclosure of this tax. The American people are being assessed a tax that was not approved by Congress as it should have been, and are not being told about this tax. That is deception at its worst. Outlays for the Universal Service Fund will rise from $1 billion in fiscal 1997 to more than $13 billion in 2003. In other words, in just five short years every household in America will be squeezed for an additional $120 annually.
There are two approaches currently under consideration by the House that would correct this usurpation of congressional authority. Rep. Billy Tauzin (R-La.) has introduced the Schools and Libraries Internet Access Act to phase out the Universal Service Tax, along with the telephone excise tax. The E-Rate Termination Act, introduced by Rep. Tom Tancredo (R-Colo.) would repeal the Universal Service Tax outright. It should be clear that by allowing agencies to impose taxes without gaining congressional approval, Americans have become vulnerable to abuses such as those resulting from the Universal Service Tax. By requiring congressional approval for all Federal taxes, the Taxpayer's Defense Act ensures that Congress will retain its Constitutional powers as intended by this nation's Founding Fathers.
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According to the Federalist Papers #10, ''the apportionment of taxes . . . is an act which seems to require the most exact impartiality.'' Congress, although far from perfect, is considerably more impartial than a self-interested Federal agency. As popularly elected officials who must be accountable to their constituents, members consider many viewpoints when making policy decisions, making them more likely to advocate policies that the American people will view as beneficial, necessary and just. The government requires taxes to carry out its everyday operations and fulfill the obligations placed upon it. Both the need for some taxes and the desire among the populace to have their tax burden decreased are considered and weighed by Congress when deciding whether or not to impose a tax.
There is no chance of ever receiving that courtesy from government agencies, which are looking out for their own interests. The FCC is concerned with advancing the declared and undeclared goals of that agency. In order to achieve these goals, any and all methods that are potentially legal will be used. The FCC has proven this by twisting the provisions of the 1996 Telecommunications Act to gain the power to impose taxes. The legality of their actions is in question, but as yet has not been rejected.
Another area ripe for hidden taxes is the Internet. It has attracted another bureaucratic predator that would like to muscle in and get a piece of the action. In 1998, the Department of Commerce established the Internet Cooperation for Assigned Numbers and Names, or ''ICANN.'' The stated objective of this new organization was to facilitate the transition of the domain name system to the private sector from U.S. government oversight. Through ''consensus-based'' decision-making, ICANN was supposed to establish standards by which the Internet would operate. An interim Board of Directors was supposed to establish ICANN as an open membership organization. The members would then elect the actual board and all the decisions made would involve those effected.
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Unfortunately, ICANN took a detour somewhere on the road to cyberspace. ICANN has no members and the unelected ''interim'' board proposed a $1 tax on every registrant for a domain name in order to fund its $5.9 million operating budget. This decision was shielded from public view because its meetings were held in secret.
In addition to the tax, a letter to ICANN from the Department of Commerce underscores the importance of this hearing and your legislation, Mr. Chairman. The letter outlined several reforms that should be instituted by ICANN. Among these suggestions was the elimination of their $1 tax. However, their reason for suggesting this wasn't because it was unconstitutional or done without Congressional mandate, it was because ''it is controversial.'' Commerce explained that while the ''user fee may be determined to be an appropriate method'' to fund ICANN, the ''permanent financing method should not be adopted until after the nine elected members are added to the ICANN Board.''
Fortunately, ICANN has withdrawn its proposed tax as a result of public and congressional concern. But it seems that Department of Commerce wasn't as much concerned with the legality of the tax as it was worried about a public relations problem.
Your bill, Mr. Chairman, would restore the control of all taxes where everyone agrees it should bein Congress. The Taxpayer's Defense Act provides a method of checking the power of governmental agencies. In order for an agency to establish or raise taxes, it must submit a proposal to Congress and gain Congressional approval. This will require the agency to justify the imposition of a new tax or an increase in an existing tax. If it cannot be justified, it will not be enacted. This will prevent unnecessary and detrimental taxes from being imposed by agencies.
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Our government operates on a system of checks and balances to prevent tyranny. The power to tax is the power to destroy or improve our lives. In order to retain control of this awesome responsibility, it is imperative that Congress remain the only branch of the Federal Government with the power to levy taxes.
Mr. Chairman, the Taxpayer's Defense Act protects the interests of taxpayers. It promotes accountability on the part of political leaders and Federal agencies, reduces hidden taxes, and ends taxation without representation.
Mr. GEKAS. We thank the gentleman.
We turn to our final witness, Mr. McLean.
STATEMENT OF CHRISTOPHER A. MCLEAN, DEPUTY ADMINISTRATOR, RURAL UTILITIES SERVICE, U.S. DEPARTMENT OF AGRICULTURE
Mr. MCLEAN. Thank you, Mr. Chairman, and thanks for the invitation to comment on H.R. 4096 which provides that ''a rule that establishes or increases a tax however denominated shall not take effect before the date of the enactment of [an 'approval bill'.]''
While this legislation does not contain a definition of what constitutes a tax, the floor statement accompanying the bill's introduction highlights the FCC's universal service rules. Respectfully, it is the administration's view that this bill would not and should not apply to Universal Service. Simply put, universal service support is not a tax.
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The ideals of universal service have been the centerpiece of Federal communications policy since the passage of the Communications Act of 1934. Sixty years later, Congress and the President made universal service the central focus of the Telecommunications Act of 1996.
Universal Service is the way that all Americans, rural and urban, share the benefits and the costs of the ubiquitous nationwide global telecommunications network. The 1996 act also includes a p provision known as the E-Rate. In passing the E-Rate, the Congress assured that in a competitive environment, schools, libraries and rural health care facilities will have affordable rates. Without the E-rate, the price of admission to the information age would be prohibitive for many Americans; a $2,000 computer and $20 to $40 a month charge for Internet service. With the E-rate, the exciting world of the Internet and the information age will be available at your local school and library.
Congressional and administration scrutiny of the E-rate has been helpful. Before a dime has been spent on E-Rate discounts; meaningful, significant and dramatic actions have been taken to ensure that the program is prudent, efficient, and affordable. The administration of the E-rate, rural health care, and rural high cost support programs have been consolidated into one or will be consolidated into one efficient entity; the salaries of employees of that entity have been capped; the FCC froze the cost of the program to current levels; support for internal connections will be limited and targeted to the poorest schools; and protections have been and will be implemented to ensure that every E-rate dollar of discount only goes to qualified services and access.
Page 128 PREV PAGE TOP OF DOC The FCC has responded to the concerns raised by this committee with bold action. Now is the time to move forward, so that the clear promise of the Telecommunications Act of 1996 can be kept.
I suspect that the new interest in the arcane FCC universal service rules is due to the fact that some long distance companies have changed the way they bill their customers. That is not a tax. That is the free market. and while there has been a great deal of talk about lines on company bills, the only line that counts is the bottom line, and the bottom line is that sine the passage of the Telecommunications Act, phone bills have come down. Long distance rates are now lower than ever.
One thing, however, does remain to be done. That is to establish a policy of truth in billing. The Senate has passed legislation to protect consumers from unfair practices and require carriers to clearly disclose their monthly, usage and percentage charges, so that consumers can have a simple and accurate way to compare rate plans.
What makes the U.S. telephone network so valuable, so competitive, and so useful is that it is a network which reaches almost everywhere in the nation. The telephone in Washington, D.C. would lose its value if it could not reach Big Springs, Nebraska, St. Stephen, South Carolina, or Mt. Wilson, Pennsylvania. Universal Service is a very American ideal. It's about one nation, indivisible.
Without Universal Service support, telephone rates in rural America will skyrocket; and without discounts for schools, libraries and rural health care, America risks being divided into a nation of information haves and have-nots.
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Mr. Chairman, a great deal is at stake. At the Rural Utility Service we embrace the changing competitive environment in telecommunications, while challenging, it concentrates our attention on our core mission of assuring that citizens who live in the 75 percent of America that is rural are part of this one Nation.
Thank you, Mr. Chairman.
[The prepared statement of Mr. McLean follows:]
PREPARED STATEMENT OF CHRISTOPHER A. MCLEAN, DEPUTY ADMINISTRATOR, RURAL UTILITIES SERVICE, U.S. DEPARTMENT OF AGRICULTURE
Mr. Chairman, and members of the subcommittee, thank you for your invitation to comment on H.R. 4096. My name is Christopher McLean, and I am the Deputy Administrator of the Rural Utilities Service.
H.R. 4096 provides that ''a rule that establishes or increases a tax, however denominated, shall not take effect before the date of the enactment of [an ''approval bill''] and is not subject to review under [the Congressional Review Act]. This section does not apply to a rule promulgated under the Internal Revenue Code of 1986.'' The remainder of the legislation requires agencies to submit pertinent rules to the Congress and establishes procedures for the expedited consideration of approval bills.
The legislation, itself, does not contain a definition of what constitutes a tax for purposes of this legislation. However, the Floor statement accompanying the introduction of the bill highlights the FCC's universal service program as the catalyst for this legislation, as well as the prime example of the type of provision at which the legislation is aimed. Nevertheless, as I will discuss in a moment, it is the Administration's view that this bill would not apply to universal service.
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In addition, because the bill does not define tax, it remains very unclear what types of programs or provisions the legislation would cover. Depending on what definition is contemplated, the bill could apply to nearly everythingor nothing.
If defined broadly, this legislation could be applied to nearly every fee, charge, tariff, toll, or fine administered by the Federal Government. Broadly defined, this bill could therefore burden the Congress with micro-managing hundreds of very routine charges. If ''tax'' is defined narrowly, the bill could be construed to apply to nothing, since rules implementing the Internal Revenue Code are explicitly excluded.
But however defined, this bill should not apply to universal service. Let me explain why.
The Rural Utilities Service is a rural development agency of the Department of Agriculture. We have been dedicated to the mission of universal telephone service for nearly fifty years through targeted lending, technical support, and policy guidance. As the only Federal agency specifically dedicated to the mission of helping rural citizens gain access to safe, reliable and affordable telecommunications, power and water infrastructure, the RUS has been very active in the deliberations on the full and fair implementation of the universal service provisions of the Telecommunications Act of 1996.
While the universal service provisions of the '96 Act are a fundamental part of the law, the ideals of universal service have been the centerpiece of Federal communications policy for decades.
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The Communications Act of 1934 has as its purpose ''to make available to all the people of the United States . . . a rapid, efficient, nation-wide and worldwide. . . communication service . . . with adequate facilities at reasonable charges. . . .''
Sixty years later, the Congress and the President sought to secure the promise of the 1934 Act by making universal service the central focus of the Telecommunications Act of 1996. The '96 Act made clear the basic principles of universal service. Those principles are:
Quality service at ''just, reasonable and affordable rates;
Comparable rates and services between rural and urban areas;
Access to advanced services in all regions of the nation;
An evolving level of service;
Equitable and nondiscriminatory contributions to the preservation and advancement of universal service;
Specific, predictable and sufficient levels of support;
Access to advanced services for schools, libraries and health care providers.
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Universal service is not a tax. It is the way that all Americans share the benefits and burdens of a ubiquitousnationwideglobal telecommunications network.
For more than sixty years, the ability of regulators to group consumers and services into exclusive service areas and grant telecommunications carriers the right to provide monopoly service was an important and significant means of providing and assuring universal service. It meant that easy to serve, profitable customers could be combined with hard to serve customers and services could be packaged to create a sustainable market for phone service.
Even in this highly regulated environment, some phone companies were unwilling to serve some areas of the country. In 1949, the Congress expanded the Rural Electrification Act to assist in the provision of telephone service in rural areas. With the help of the Rural Electrification Administration (the predecessor to the RUS), this system brought affordable service to nearly 95% of all Americans. In opening all markets to competition, the '96 Act pre-empted state authority to grant companies exclusive service rights. The trade-off for opening markets was to bolster and reform the system of universal service to assure that in a new competitive market all Americans would continue to receive service at just, reasonable, and affordable rates and to assure that all Americans had access to the information superhighway by expanding the definition of universal service to include affordable service to schools, libraries and rural health care providers. To facilitate universal service in a competitive environment, the law also required that obligations to support universal service be shared among all telecommunications carriers and on a competitively neutral basis.
Page 133 PREV PAGE TOP OF DOC The '96 Act also includes for a provision known as the E-Rate. It promises to revolutionize American education, improve health care and to ensure that universal service is indeed universal. At the time the provision was being considered, many schools had some of the lowest levels of service provided at the highest business rates. The nation was also entering the age of the Internet. In passing the E-Rate, Congress assured that in a competitive environment, schools, libraries and rural health care facilities will have affordable rates. Just as schools and libraries would not allow the cost of books to deter an earlier American quest for knowledge, schools and libraries were key to making the benefits of the information age available to all Americans.
Without the E-rate, the price of admission to the information age would be a $2000 computer, and a twenty to forty dollar a month charge for Internet service. For many Americans, that price of admission is prohibitive. With the E-rate, the exciting world of the Internet will be available at your local school and library. That is why the E-rate is a natural and necessary extension of the decades old commitment to universal service.
It is easy to get excited about the possibilities of the E-rate. At the RUS, we have had a glimpse of the future. For several years we have had a Distance Learning and Telemedicine (DLT) program focused on loans and grants to purchase and deploy telecommunications hardware to meet educational and health needs in rural communities. Where we have been able to use our limited funds, it has changed lives, spurred development and enhanced infrastructure in rural areas.
The DLT program provides real life examples of the value of telemedicine and educational uses of telecommunications for technologies. Thanks to DLT, a family in North Dakota is able to take their son to a community clinic and have a doctor two and a half hours away examine the boy's recovery from ear surgery though a scope hooked up to an ISDN line and, a senior citizen double amputee can continue to have his health monitored via telecommunications network rather than being moved far away from friends and family to a nursing home. In education, six school districts in rural Pennsylvania using RUS funds developed a two-way interactive television network allowing the six districts to connect with two colleges and the State Museum of Pennsylvania. School credit courses are shared, teacher training is enhanced and tax dollars are saved.
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The RUS DLT program gives us a glimpse of what will be possible once E-RATE discounts are fully available. At RUS we are excited about the availability of discounts. They will leverage our infrastructure investment in a tremendous way.
Congressional scrutiny of the E-rate has largely been helpful. Before a dime has been spent on E-Rate discounts, meaningful, significant and dramatic actions have been taken to ensure that the program is prudent, efficient and affordable. The administration of the E-rate, rural health care and the rural high cost support universal service programs will be consolidated into one entity, salaries have been capped, the FCC has frozen the cost of the program to current levels, support for internal connections will be limited and targeted to the poorest schools and protections have been and will be implemented to ensure that every E-rate dollar of discount only goes to qualified services and access.
The FCC has responded to the concerns raised in this Committee with bold action. Now is the time to move forward so that the clear promise of the Telecommunications Act of 1996 can be kept.
I suspect that new interest in the arcane FCC action on universal service support is due to the fact that some long distance companies have changed the way they bill their customers. That is not a tax. That is the free market. And while there has been a great deal of talk about lines on company bills, the only line that counts is the bottom line. And the bottom line is that since the passage of the telecommunications act, phone bills have come down. Long distance rates are now lower than ever.
A smart shopper can find some extraordinary long distance savings and in communities where local competition has taken hold, savings on local bills as well. There is also vigorous competition in the business sector.
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One thing does remain to be done and that is to establish a policy of truth in billing. The Senate passed legislation to protect consumers from the unfair practices known as ''slamming and spamming'' and required telecommunications carriers to simply disclose the monthly, usage and percentage charges to their customers and on their bills so that consumers can have a simple and accurate way to compare rate plan to rate plan.
Universal service is about sharing the basic costs of a national telecommunications network. It is about the value of a national network. Congress instructed the FCC to make schools, libraries and rural health care providers a part of that national network. That is why universal service is not a tax. The Telecommunications Act clearly requires that those costs be shared among all telecommunications carriers on an equitable and competitively neutral basis.
Universal service does not only benefit the small towns and rural areas of America. It benefits all America. Telephone service in rural America enhances telephone service in urban America.
What makes the U.S. telephone network so valuable, so competitive and so useful is that it is a network which reaches almost anywhere in the nation. A telephone in New York City, Chicago or Los Angeles would lose its value if it could not reach Big Springs, Nebraska, St. Stephen, South Carolina or Mt. Wilson, Pa. It is in the interest of every citizen that every other citizen is connected to the network.
For the majority of Americans, competition will be the best means of providing universal service. Competition is a means, and not an end. The principle of competition complements but does not substitute for the principle of universal service.
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Without universal service support, telephone rates in the seventy-five percent of America that is rural will go through the roof and without discounts for schools, libraries and rural health care, America risks being divided into a nation of information haves and have nots.
In 1994, OPASCO, the Organization for the Preservation of Small Telephone Companies did an excellent study of what would happen to rural phone rates if all universal service support mechanisms were eliminated. Rural phone rates in New Mexico would increase more than $115 per month; in my home state of Nebraska more than $48 a month, in Pennsylvania $32 per month, and in Missouri, $35 per month. The weakening or elimination of universal service support would drive people off of the network.
At RUS, we embrace the changing competitive environment in telecommunications. That new environment, while challenging, concentrates our attention on our core mission of assuring that the citizens who live in the seventy 5 percent of America that is rural, are part of this one nation.
Thank you, Mr. Chairman and members of the subcommittee.
Mr. GEKAS. I thank the gentleman. You, of course, say that the new line on the telephone bills is not a tax.
Mr. MCLEAN. Yes, sir.
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Mr. GEKAS. And Mr. Schatz and Mr. Niskanen say it is. Is that correct?
Dr. Niskanen, on the question of receipt of commensurate services as being a defining line on the question of whether or not it's a tax, does Mr. McLean have a point that the universality of service for a national purpose constitutes enough of a commensuration for that charge?
Mr. NISKANEN. May I suggest that the question that is relevant here is not the value or the appropriateness of universal service, but how it is to be financed. And the Congress could have, and presumably should have, appropriated money to provide universal service that would then be borne by the general taxpayer, rather than those people who happen to use the connecting services that are subject to this so-called contribution.
Now, I don't think that it pays in this forum to discuss whether universal service is a good idea or a bad idea. I think the decision on whether universal service is a good idea would be much better if it were an explicit line item in the budget, subject to appropriation and periodic review, then if it is hidden in some kind of a tax that has nothing to do with the services provided to those people who pay the tax. And so the issue before this committee and on this bill is the question of the appropriateness of this charge as being the way to finance universal service and not the question of whether universal service is a good idea or not.
Mr. GEKAS. Dr. Niskanen, you must know by now that I agree with your position because we initiated this legislation that goes to the very heart of what we're discussing. How do we answer the critics who say, in 1934, universal service was entered into the societal scene; how do we now, as Members of Congress, all of a sudden differentiate when we are applied with an extension of that universal service?
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Mr. NISKANEN. Universal service in the past has been financed by a combination of means including substantial appropriations, and the issue here is whether it's appropriate to have the substantial cross-subsidy between one class of users and another class of users, and that has been the case in the past as well. That doesn't make it correct.
Mr. GEKAS. You care to comment on that, Mr. Schatz?
Mr. SCHATZ. I think the whole question is useful and I think your bill makes an excellent point, which is there are a lot of actions that are taken by agencies that happen without people knowing about them, and that in many senses is the kind of simplest explanation to the public about why this is necessary. This became a big issue because people did start noticing. In fact, I think on cellular bills and business bills there is a line and on residential phones there was not going to be a line for this. So, therefore, it became something that people were aware of for the first time. If they had been aware 50 years ago or 60 years ago, maybe they would have been asking a lot more questions at that point.
So the fact that it's been around for a long time doesn't necessarily mean that it's continually the right thing to do. And not to disparage the work of the rural utility service, but if you take a lot of agencies and a lot of names of organizations, whether it's Rural Electrification that sudden becomes Rural Utilities or the Market Access Program that becomes the Market Promotion Program, Federal agencies find a way to continue doing they're doing, and without strict oversight and without the kind of review that's required by the Taxpayer Defense Act, you will continue to find these fees and other activities going on without Congress being involved and without Congress taking the time to examine what's happening.
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So whether it's a sunset law or it's a pre-examination of fees or taxes that this bill anticipates, that kind of oversight is very useful in making sure taxpayers are well protected.
Mr. GEKAS. Mr. McLean, is the FCC on the verge of a further expansion of the expansion or a second set of rules or regulations with regard to universal service that we're talking about?
Mr. MCLEAN. The FCC has been, since the passage of the Telecommunications Act, engaged in a very long series of rulemaking to try to do exactly what Congress told them to do. And it's a pretty remarkable thing that Congress instructed the Commission to do. It basically said, here's a plate of scrambled eggs which is telephone service in America, and we want you, the FCC, to unscramble that egg, to figure out what's the yolkthat's the profit in phone service; what's the white and that's the cost of phone service. And then what's that thin shell that protects the whole thing that holds it all together called universal service?
And the Congress said, universal service, instead of being allocated in a historical way that had some haphazard results and had some results that discourage competition, Congress said to the Commission, figure out what universal service costs are and share them on a competitively neutral and equitable basis. Now the Commission is going through a very, very lengthy process to do that. It's a very difficult thing to do, but it is a means that will facilitate competition in telecommunications, and it is by introducing competition that will discipline the cost of universal service support.
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Section 253 of the Telecom Act opened market to competition; section 254 of the Telecom Act created universal service or expressed universal service principles and instructed the Commission to implement a competitively neutral universal service system. And that's the handshake of the Telecommunications Act. We knew when we were working on the Telecom Act that by deregulating the market, opening the market to competition, benefits would flow to urban areas. But it could come at the expense of rural areas and that's the bargain. That was the agreement in the Telecom Act, that we would assure that all competitors bear the cost of universal service on a fair and equitable basis, and that rural citizens would be able to have rates and services that are comparable to their friends in urban America.
And the reason is that to have a phone system, to have competitors, to have anything to compete for, we must have a national phone network. The thing that gives your telephone value is the fact that you can call any place in the world, any place in America. Without that, rates go up. If I might, Mr. Chairman, if I could provide for the record a study that OPASTCO did in 1994
Mr. GEKAS. Without objection, it will be submitted, but what you're giving, sir, is a dissertation on the value of universal service, which no one is prepared to argue is not valuable. The question is, and the reason I asked you about the pending rules and regulations and implementations contemplated by the FCC is this: Let's assume that we can do nothing about what has already transpired, and that our bill is prospective in its nature. Do you see anything wrong with our applying this legislation, if by a miracle it would be passed by August 1st and signed into law, on applying any future actions of the FCC which would result in additional charges on the telephone bills of the American people, but would you object to its being applied as only requiring the Congress to finally approve it?
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Mr. MCLEAN. What the FCC is doing is not taxing or not administering taxes.
Mr. GEKAS. That's argumentative. Assuming that there will be an additional charge like the one that you're defending. You're defending the charges not being a tax, is that correct?
Mr. MCLEAN. What the Commission is doing is not taxing; it's allocating costs among
Mr. GEKAS. All right, and I'm saying to you, if the Congress should believe in its heart that this is a tax and that it should be subject to any future allocation that you talk about. If in the minds of the Congress, notwithstanding your contrary opinion, it is a tax, then it should be reviewed by the Congress or approved before it goes into final action. Do you agree with or do you approve of that?
Mr. MCLEAN. Well, Congress made a very conscious decision in the Congressional Review Act to not include FCC rulemaking into that review.
Mr. GEKAS. And now it may be changing its mind and I'm saying to you, in fact, my bill contemplates a change of mind in that and says that, on a future thinking, if the FCC should embark upon expansion of this expansion, should the Congress have the right to approve it?
Page 142 PREV PAGE TOP OF DOC Mr. MCLEAN. Well, Congress has always had the right to take action and to change with any subsequent piece of legislation.
Mr. GEKAS. Well, then I think that's a lefthanded endorsement of our bill. [Laughter.]
The gentleman from Massachusetts is recognized for 5 minutes.
By the way, the statements that have been prepared by the witnesses will be made a part of the record as well as that additional document to which Mr. McLean referred, and so we will also ask unanimous consent, if the gentlemen at the table will agree, for the members to submit written questions to the witnesses for further elucidation.
Mr. GEKAS. The gentleman from Massachusetts is recognized.
Mr. DELAHUNT. Thank you, Mr. Chairman; I'll be brief. It's late in the day and, to be candid, my comprehension of the issue is limited. The learning curve is not a straight perpendicular, but it's limited.
Let me just ask a question that maybe is very naive. There's no mandate on a communications industry that they pass on a specific charge?
Mr. MCLEAN. Absolutely. In fact, that's what's so important about our suggestion of a policy of truth in billing. If consumers could have clear understanding of what they're purchasing, 10 cents a minute, $1.07 a month and frequent flyer miles, and they could take that and compare it from plan to plan, consumers will find very quickly that with a little smart shopping, they can make some tremendous savings. There has been $3 billion of costs erased from long-distance companies who pay those costs to local companies. That's what financed the expansion of universal service. That's more than enough to fully cover, and then some, any additional costs of the E-rate as the Commission has implemented it now and as the E-rate was recommended at full funding.
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So there are plenty of opportunities to save money. In fact, the smart shopper can find a carrier that doesn't charge any line items on the bill. And that's the marketplace at work. And a truth in billing I think would help the marketplace
Mr. DELAHUNT. Because the market balanceI mean, if you're a communication corporation, I mean, your responsibility is very simple. It's to the stockholders, to the investors, to the equity ownership, and to whomever possesses the debt. But we have a different responsibility as crafters of public policy, and obviously, there can be a lot of different perspectives as to what's the best policy. But I don't assume that there is much disagreement that the best social policy is to provide these opportunities, particularly in today's economy with its focus on information and technology, to every child possible in the United States, particularly in the rural areas.
I mean, you know, I come from an urban area, but as I travel through New England, and particularly in the more rural sections, there's a tremendous amount of poverty.
Mr. GEKAS. Would the gentleman yield?
Mr. DELAHUNT. I'll yield. Sure.
Mr. GEKAS. We have tried to delineate the fact that the merits or demerits of universal service are not the subject of this hearingnot that we can't talk about it because we arebut that even if we approve 100 percent of the necessity and the policy requirements of universal service, should we not as a Congress act to fund it the way we feel we ought to fund it and vote on it, rather than to use this subterranean methodology of subsidy and cross-subsidy and taxation without representation? That's the key.
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Mr. DELAHUNT. Well, again, if I can just have a couple of minutes, Mr. Chairman?
Mr. GEKAS. Yes, sure.
Mr. DELAHUNT. You know, I just want to see that that particular public policy is implemented, and as I indicated, I happen to be a freshman. I know that might be difficult as you look at me to think of me as a freshman, given my white hair and aging face, but this is the truth, so I don't have any particular history. But as long as the policy is funded, I mean we can do it through the income tax; we can, you know, increase corporate taxes. I mean, there is a variety of means, but it seems to me that the policy that Congress enactedwas in 1996?
Mr. MCLEAN. Yes, sir.
Mr. DELAHUNT [continuing]. You know, provides a source of funding that seems to be working. I mean, did you want to issue a comment?
Mr. MCLEAN. We have a telephone system that works and we had one that worked prior to the 1996 act. For rural citizens, the regulated environment was working pretty darn well. We were getting affordable phone service. Now opening markets to competition exposed rural citizens to risk. And again, that gets back to that bargain.
Part of what the Telecom Act, and if the Commission is successful in completing that part of the Telecom Act, is to move away from a subterranean labyrinth of inequitable support systems for universal service, to one where the costs are clearly allocated and fairly shared among all telecommunications carriers, so that all can compete without having to risk the burden of having to serve hard to serve customers alone. By having this fair sharing of universal service costs, that facilitates a competitive marketplace. It was always an impediment to opening markets to competition because your incumbent phone company would say, well, wait a minute, I can't have competition because if you take away my best customers, I'm going to be stuck. I'm providing universal service so you have to protect my market. You have to give me an insulated market place so I can continue to provide universal service.
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And the Telecom Act said, you know what, we're not going to protect your marketplace, but everybody is going to share the cost of universal service, and that facilitates competition, and that's what the Telecom Act is all about. And competition will drive down prices; competition will also drive down the price for support. And the remarkable thing in the Telecom Act, not only can you compete for customers, you can have multiple carriers competing for the support, so that they can drive the costs of universal service down. And it's starting to take hold; there are places where it is working. And so I urge the committee
Mr. DELAHUNT. Give me a couple of examples. Give me one example.
Mr. MCLEAN. My home town, Omaha, Nebraska.
Mr. DELAHUNT. Where?
Mr. MCLEAN. Omaha, Nebraska. U.S. West, Cox Cable are competing head-to-head on cable service and Cox Cable just recently introduced head-to-head competition on telephones. One of the things that made that possible is the Telecom Act. Section 253 struck down State barriers to competition. What's happened? In cable service, U.S. West is pricing below Cox; Cox is pricing below the FCC benchmark.
In telephone service, Cox announced pricing below U.S. West. That has spurred vigorous competition. Omaha has been torn apart with cable being laid everywhere. So we're getting infrastructure investment.
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So we're seeing the system work. We're seeing small companies get together and say, we want to be competitors in U.S. West territory, or big telephone companies, I should be careful not to mention individual phone companies but in big telephone company territory.
Mr. DELAHUNT. There's nobody here, Mr. McLean. You don't have to worry about.
Mr. MCLEAN. But the point is that the act is starting to work and the E-rate is going to provide tremendous benefits. We have a little program at the Rural Utilities Service called the Distance Learning Tele-Medicine Program, and it has given us a glimpse into the future and it is just so exciting about what will happen when telecommunications technology can come into education and to health care. You know, and so let's not get too impatient, and perhapswhile I'm not in a position of being able to endorse any legislation one way or the othermaybe the chairman would like to look at whether the Commission takes action that hurts universal support that will raise rates on rural consumers in a way that the Telecom Act did not anticipate. And Congressman, you may want to look at that.
Mr. GEKAS. The time of the gentleman has expired. One thing that worries me, Mr. McLean, what is your definition of a tax, or your Department's definition of a tax?
Mr. MCLEAN. Well, I have to be careful of my authority as a employee
Page 147 PREV PAGE TOP OF DOC Mr. GEKAS. Undoubtedly.
Mr. MCLEAN [continuing]. Of the United States Department of Agriculture, defining what a tax is.
Mr. GEKAS. Well, you're disputing our position that it constitutes a tax, are you not?
Mr. MCLEAN. As an individual with some degree of expertise on telecommunications policy and universal service, I am maintaining that what the Federal Communications Commission is doing is allocating cost, shared and common costs between carriers. That's an appropriate thing for an independent regulatory agency to do. So if the Transportation Board, for example, says to Amtrak, you operate over Conrail's lines; or you operate over Union Pacific's lines; and Congress said you shall pay incremental costs; here are what those costs are. That's not a tax; that's allocating costs between competitors.
Mr. GEKAS. What is a tax? What is your definition of a tax, if you want to venture to tell us?
Mr. MCLEAN. I will not venture to tell you that because
Mr. GEKAS. Well, I would formally request, if you please, to give us a differentiation between what is normally considered to be a tax and what the universal service allocation of costs, to which you refer, constitutes.
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Mr. MCLEAN. Yes, sir. Yes, sir.
Mr. GEKAS. And Dr. Niskanen, you heard the testimony of Mr. McLean who was raving about Omaha, Nebraska's tremendously successful competition on cable industry, cable television, and I'm wondering what that has to do with whether or not this is a tax.
Mr. NISKANEN. Mr. Chairman, Mr. McLean has made an articulate case for competition in telecommunication services and for universal service. I think that is wholly irrelevant to the issue before this committee.
The issue before the committee is whether a regulatory agency should have the authority to charge people in a way that has nothing to do with the services provided to that payer without the approval of Congress. And that's what is at stake before this committee and on this bill, and it has much more general implications than what was in the Telecommunications Act. It bears on the general authority of the House of Representatives to initiate all tax legislation and of Congress to have to approve all tax legislation. At the same time I recognize that Congress will necessarily and appropriately delegate to the agencies the setting of most fees, that there is a conceptual case for the distinction between a tax and a fee, and in this particular case, the March decision by the Supreme Court, they used that distinction intelligently and carefully and in a particular case actually ruled out what Congress had even called a tax, as saying that it was an inappropriate charge because it had no relationship to the services provided to the payer.
Mr. GEKAS. The Chair will yield to the gentleman from Massachusetts.
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Mr. DELAHUNT. I just wanted to ask a questionand again, I'm acknowledging my ignorance in this matter, but is it your position that in the Telecommunications Act of 1996 Congress did not delegate to the pertinent regulatory agency the authority to levy or to allocate costs?
Mr. NISKANEN. Congress, I think all too often was rather casual in writing the language, and the language that bears on this particular issue is that it authorized the FCC to require that suppliers of interstate telecommunication services ''contribute on an equitable and non-discriminatory basis to preserve and advance universal service.'' That's the language there.
Mr. DELAHUNT. You took issue, Doctor, you took issue with the interpretation by the regulatory agencies?
Mr. NISKANEN. I think that the regulatory agency has not abused the authority that Congress gave them. What I'm saying is that Congress gave them authority it should not have delegated.
Mr. DELAHUNT. Do you say that on a constitutional basis Congress wasthere's an impediment to delegating this authority? Are you saying just as a matter of policy, Congress ought not to have?
Mr. NISKANEN. I'm saying that Congress cannot delegate the setting of a tax to a regulatory agency or to an Executive agency.
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Mr. DELAHUNT. So it does come down to the definition of tax?
Mr. NISKANEN. Of a tax versus a fee.
Mr. DELAHUNT. Which is, I presume, in the eye of the beholder.
Mr. NISKANEN. No, I think there's an appropriate distinction in this case. You were not here during my original testimony, but the appropriate distinction is that a fee is a charge that is based on the costs of services provided a particular payer.
Mr. DELAHUNT. Okay. Well, I'll make a point of examining your testimony. Let me ask you another question. What would you recommendwhat avenue would you recommend that Congress pursues to ensure the implementation of the public policy, which obviously is rather clear? Do you have any specific recommendation?
Mr. NISKANEN. Congress has endorsed the provision of universal service. The appropriate response to that is for Congress to appropriate money to the FCC or to the Executive branch to provide universal service.
Mr. DELAHUNT. How would you fund it, though, Doctor?
Mr. NISKANEN. Out of general revenues. It should not be charged to other users of telecommunication services in a way that is independent of the cost of providing the universal service. And if Congress appropriated the money to provide universal service, two things would happen: It would have all of the favorable competitive effects, even more competitive effects than what Mr. McLean recommended because the total cost to the providers of interstate telecommunication services would be lower, it wouldn't have to pay the tax.
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And second, I think Congress itself will make a better decision if the costs of universal service shows up as a line-item on the budget and Congress has to regularly appropriate money to provide for that, Congress will make a better decision in that case than if the cost that is hidden, buried in the charges to the users
Mr. DELAHUNT. What about Mr. McLean's suggestion, though, in terms of being specific, you know, breaking out, if you will, the billing to reflect the specific services that are being provided? I mean, in other words I think part of the problemI think I recognize that it's minorbut I think part of it is transparency, if you will, or consumer understanding of what a corporation or an individual is actually paying for in terms of services.
Mr. MCLEAN. And there wouldn't be telecommunications service or competition without universal service.
Mr. GEKAS. The time of the entire hearing has expired. We are also called to the floor for a vote. We wish to thank the panel for its expert testimony, and I mean that, and you may be subject to further written questions by members of the committee.
Thank you very much for your contributionnot a taxcontribution.
[Whereupon, at 1:18 p.m., the subcommittee adjourned subject to the call of the Chair.]
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Material Submitted for the Hearing Record
QUESTION FOR CHRISTOPHER A. MCLEAN
Please describe what differentiates the universal service 'allocation of costs' from what is normally considered to be a tax. Please include in your answer a specific, universal definition of the term ''tax.''
ANSWER TO WRITTEN QUESTION BY CHAIRMAN HENRY HYDE
BY CHRISTOPHER A. MCLEAN
DEPUTY ADMINISTRATOR, THE RURAL UTILITIES SERVICE
UNITED STATES DEPARTMENT OF AGRICULTURE
One of the oldest principles of U.S. telecommunications law and policy has been the principle of universal service. That principle is contained in the first sentence of the Communications Act of 1934. It describes the purpose of the Act and its amendments ''to make available, so far as possible, to all the people of the United States, without discrimination . . . a rapid, efficient, Nationwide, and world-wide wire and radio communication service with adequate facilities at reasonable charges. . . .
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That principle had primarily been advanced through a system of Federal and state regulation and monopoly service. The ability to combine customers into exclusive service areas was a significant means of assuring that telephone service remained affordable. In this way, costs were shared among large numbers of customers and services.
As competition was introduced into telecommunications markets, new means of sharing those costs were developed. Access charges, the allocation of costs to the interstate jurisdiction, price regulation and other support mechanisms were developed to share costs and ensure that basic phone service remained affordable.
Universal service support is neither a tax nor fee. The cost of universal service support is essentially the cost of maintaining a ubiquitous national and international communications network that is accessible and affordable to all Americans. The network itself, is the essential element of the telecommunications market.
In passing the Telecommunications Act of 1996, the Congress instructed the FCC to ensure that the costs of universal service be shared by all telecommunications carriers on a competitively neutral basis. Most of these costs are already part of the telecommunications system but they are buried in the tangled web of regulation, pricing, and intra-company transfers which has developed over sixty years of Federal and state telecommunications policy.
In 1996, the Congress also instructed the FCC to expand the reach of that national network to include schools libraries and rural health care providers. This expansion of the scope of universal service is a natural and necessary evolution of the universal service principle. Without the e-rate fall participation in the information era would have a price of admission. Citizens would have to buy a $2000 computer and a $20$40 a month Internet service contract to participate in the digital revolution. With the e-rate, the benefits of the digital age will be available to all Americans through their schools, libraries and rural health care facilities. It is important to remember that the universal service provisions of the Telecommunications Act were accompanied provisions to open telecommunications markets to competition. The new regulatory frame work based on competitive markets and the strong commitment to universal service form the fundamental bargain of the law. Open markets are facilitating the dramatic growth in demand, profits and offerings of telecommunications services.
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What the FCC is doing in its universal service proceedings is seeking to find a fair way to allocate the costs of a national telecommunications network among all the competitors who profit from that network. That network is private and the intra-company transfers which pay for that network are largely facilitated by a private entities acting under FCC rules. (NECA & USAC).
In short, universal service costs are an essential cost of doing business, just as salaries, equipment and marketing. As for the line items on some long distance bills, the FCC rules on universal service do not require any company to charge customers for universal service costs. Companies offer a dizzying array of rate plans. Some include no line items. The line items are simply a marketing decision in a free market. Customers should consider all rate elements and shop around for the best plan to meet their needs.
That is why the Administration's advocacy for ''truth in billing'' is so important. Customers should have an easy to understand format to compare rates to find the best rate available for their particular calling needs. The bottom line is what is on the bottom line of your phone bill. Long distance rates have come down since the passage of the Telecommunications Act of 1996.
The FCC has reduced long distance costs by $3 billion, more than enough to cover the cost of any Congressionally mandated expansion of universal service. The market has also grown dramatically. Profits have also grown for major telecommunications firms.
While I am not authorized to speak on behalf of the U.S. Department Treasury beyond the scope of my testimony delivered on July 23rd, on the definition on taxes, I am pleased to offer my personal observations based on my nine and one half years working on Budget Committee issues for former Senator Jim Exon. A Tax is a government assessment on the public for the purposes of funding general government operations. Examples of taxes include income taxes, excise taxes, property taxes. A fee is a charge for a particular government service or activity assessed against the beneficiaries of that service at a rate related to the cost of providing that service or activity. Examples of fees are admission fees at national parks or tolls on a highway. As discussed above, Universal Service support payments are the means competitors share the cost of maintaining a ubiquitous telecommunications network.
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Hon. GEORGE W. GEKAS, Chairman,
|George Mason University,|
|School of Law,|
|Arlington, VA, July 30, 1998.|
Subcommittee on Commercial and
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR MR. CHAIRMAN: As a scholar in the field of administrative law and former Chairman of the Administrative Conference of the United States, I have been following with interest your Subcommittee's draft bill on Regulatory Fair Warning (H.R. 4049). I believe it is an excellent bill, and if enacted would truly advance fairness in regulatory enforcement.
I have written several articles that may bear upon your consideration of this bill. I enclose the most recent, ''The Supreme Court and the APA: Sometimes They Just Don't Get It,'' 10 Admin. L.J. of Am. U. 1 (1996), and respectfully ask that it be considered and placed in the record. You might find particularly relevant the subsections entitled ''The Agency as Judge in Its Own Interpretive Cause'' (pages 911) and ''Opportunistic Interpretation of Vague Regulations'' (pages 1112). Other potentially relevant articles are cited in this one.
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|Robert A. Anthony,|
|GMU Foundation Professor of Law|
Page 157 PREV PAGE TOP OF DOC59933k.eps
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(Footnote 1 return)
(Footnote 2 return)
Grayned v. City of Rockford, 408 U.S. 104, 108 (1972).
(Footnote 3 return)
H. Clay Trumbull, Hints on Child Training 126 (1890).
(Footnote 4 return)
Oliver Wendell Holmes, The Common Law 163 (43rd printing 1949).
(Footnote 5 return)
Benjamin N. Cardozo, The Growth Of The Law 3 (1924).
(Footnote 6 return)
John Locke, Second Treatise On Civil Government §137 at 72 (Laslett ed. 1980).
(Footnote 7 return)
Ronald A. Cass, Judging: Norms and Incentives of Retrospective Decision-making, 75 B.U. L. Rev. 941, 954 (1995).
(Footnote 8 return)
W. David Slawson, Constitutional and Legislative Considerations in Retroactive Lawmaking, 48 Calif. L. Rev. 216, 226 (discussing Lon A. Fuller, Problems Of Jurisprudence 70103 (temp ed. 1949)).
(Footnote 9 return)
Nelson Lund, Retroactivity, Institutional Incentives, and the Politics of Civil Rights, 1995 Public Interest L. Rev. 87, 91 (1995).
(Footnote 10 return)
J. Gregory Sidak & Daniel F. Spulber, Deregulatory Takings and Breach of the Regulatory Contract, 71 N.Y.U. L. Rev. 851, 865 (1996).
(Footnote 11 return)
Cass, 75 B.U.L. Rev. at 960.
(Footnote 12 return)
Id. at 961 (''When decision-makers based their determinations on inaccurate value assessments, parties who cannot easily contract to reverse or modify such decisions are left with a result that is less valuable than an alternative outcome.'').
(Footnote 13 return)
J. Gregory Sidak & Daniel F. Spulber, Deregulatory Takings and the Regulatory Contract: The Competitive Transformation Network Industries in the United States 10408 (1997).
(Footnote 14 return)
See, e.g., ASEAN Officials to Draw up Framework for Regional Investment Area, Deutsche Presse-Agentur, July 5, 1996 (describing investment area plan as protecting foreign assets from nationalization, to attract more foreign investment); New Government in Bangladesh: Restoring Confidence, EIU Business South Asia, July 1, 1996 (noting that 1971 government ''was responsible for ruining the new-born country's economy through nationalization of all industries. . . .''); Clyde Mitchell, The Current Landscape in Egypt, N.Y.L.J., March 20, 1996, at 3 (''Foreign investors responded [to strict regulation of ownership in 1958] by pulling out of Egypt . . . foreign investment participation in the economy drastically declined.'')
(Footnote 15 return)
Pablo T. Spiller, Institutions and Regulatory Commitment in Utilities' Privatization, 2 Indus. Corp. Change 387, 393 (1997).
(Footnote 16 return)
See, e.g., Michael J. Graetz, Legal Transitions: The Case for Retroactivity in Income Tax Revision, 126 U. Pa. L. Rev. 47, 4963 (1977).
(Footnote 17 return)
See, e.g., id.
(Footnote 18 return)
Louis Kaplow, An Economic Analysis of Legal Transitions, 99 Harv. L. Rev.511, 51519.
(Footnote 19 return)
Jill E. Fisch, Retroactivity and Legal Change, 110 Harv. L. Rev. 1055, 1069 (1997).
(Footnote 20 return)
Fisch, 110 Harv. L. Rev. at 1088.
(Footnote 21 return)
(Footnote 22 return)
Lon L. Fuller, The Morality of Law 62 (1964).
(Footnote 23 return)
Julian N. Eule, Temporal Limits on the Legislative Mandate: Entrenchment and Retroactivity, 1987 Am. B. Found. Res. J. 379, 43940.
(Footnote 24 return)
Cass, 75 B.U.L. Rev. at 950.
(Footnote 25 return)
Daniel E. Troy, Toy Story, The New Republic, June 12, 1996 (letter to the editor).
(Footnote 26 return)
1 W. Blackstone, Commentaries on the Laws of England *46.
(Footnote 27 return)
(Footnote 28 return)
325 U.S. 410 (1945).
(Footnote 29 return)
Id. at 414.
(Footnote 30 return)
Ehlert v. United States, 402 U.S. 99 (1971).
(Footnote 31 return)
Pauley v. Bethenergy Mines, Inc., 501 U.S. 680 (1991).
(Footnote 32 return)
John F. Manning, Constitutional Structure and Judicial Deference to Agency Interpretations of Agency Rules, 96 Colum. L. Rev. 612, 617 (1996). Indeed, Professor Manning makes a compelling argument that current law should be changed and that agencies should not be accorded deference in the interpretation of their own regulations.
(Footnote 33 return)
Id. at 660 (quoting Max Radin, Statutory Interpretation, 43 Harv. L. Rev. 863, 884 (1930).
(Footnote 34 return)
706 F.Supp. 742 (D. Idaho 1989).
(Footnote 35 return)
Id. at 743.
(Footnote 36 return)
Id. (quoting the Magistrate's Memorandum Decision at 14).
(Footnote 37 return)
See Timothy Lynch, Polluting Our Principles: Environmental Prosecutions and the Bill of Rights, 15 Temp. Envtl. L. & Tech. J. 161 (1996).
(Footnote 38 return)
Walter Olson, Disabling America, National Review, May 5, 1997, at 40.
(Footnote 39 return)
Sheila A. Moloney, The Lady in Red Tape, Policy Review, Sept.-Oct. 1996.
(Footnote 40 return)
(Footnote 41 return)
267 U.S. 233, 239 (1925) (quoting United States v. Cohen Grocery Co., 255 U.S. 81, 89 (1921)).
(Footnote 42 return)
Id. at 239.
(Footnote 43 return)
(Footnote 44 return)
Gates & Fox Co. v. OSHRC, 790 F.2d 154, 156 (D.C. Cir. 1986).
(Footnote 45 return)
937 F.2d 649 (D.C. Cir. 1991).
(Footnote 46 return)
Id. at 651, quoting 40 C.F.R. § 761.79(a) (emphasis added by the court).
(Footnote 47 return)
(Footnote 48 return)
Id. (quotation marks omitted).
(Footnote 49 return)
Id. at 652.
(Footnote 50 return)
Id. at 65152 (quotation marks omitted).
(Footnote 51 return)
Id. at 653.
(Footnote 52 return)
Id. at 655 (Edwards, J., concurring in part and dissenting in part).
(Footnote 53 return)
Id. at 655.
(Footnote 54 return)
General Electric v. U.S. E.P.A., 53 F.3d 1324 (D.C. Cir. 1995).
(Footnote 55 return)
Id. at 1329 (quotations omitted and citing, inter alia, Radio Athens Inc. v. FCC, 401 F.2d 398 (D.C. Cir. 1968), where the court set aside the dismissal of a petitioner's application for a radio license).
(Footnote 56 return)
To give the Committee some understanding of our work in the regulatory area, we have acted as lead or co-counsel in each of the following cases brought to compel the Department of Labor to promulgate regulations to protect worker health. See, e.g., Ethylene Oxide: Public Citizen Health Research Group v. Auchter, 702 F.2d 1150 (D.C. Cir. 1983); Public Citizen Health Research Group v. Tyson, 796 F.2d 1479 (D.C. Cir. 1986); Public Citizen Health Research Group v. Brock, 823 F.2d 626 (D.C. Cir. 1987); Hazard Communication: United Steelworkers of America v. Auchter, 763 F.2d 728 (3d Cir. 1985); 819 F.2d 1263 (3d Cir. 1987); 855 F.2d 130 and 862 F.2d 63 (3d Cir. 1988); Radon Daughters: OCAW v. Zeeger, 768 F.2d 1480 (D.C. Cir. 1985); Formaldehyde: International Union, UAW v. Pendergrass, 878 F.2d 389 (D.C. Cir. 1989); Benzene: United Steelworkers v. Rubber Manufacturers Ass'n, 783 F.2d 1117 (D.C. Cir. 1986); Cadmium: International Chemical Workers Union v. Pendergrass, 830 F.2d 369 (D.C. Cir. 1987); Order in No. 89-1357 (D.C. Cir., Feb. 12, 1990); Grain Dust: National Grain and Feed Ass'n v. OSHA, 866 F.2d 717 (5th Cir. 1988); and Lockout/Tagout: International Union, UAW v. OSHA, 938 F.2d 1310 (D.C. Cir. 1991). We have been equally active in other areas, including food safety, nuclear power, and automobile safety.
(Footnote 57 return)
The problems with H.R. 4049 are brought into sharp focus by asking whether Congress ought to amend the criminal law to provide for defenses of the sort that are embodied in H.R. 4049. Should criminals escape punishment simply because at some point they might have been misinformed by a government official, or because they claim ignorance of the law? This concern is not an idle one because there is a considerable overlap between administrative and criminal law, and thus the defenses in H.R. 4049 might impede criminal as well as civil enforcement of the law.
(Footnote 58 return)
Representative cases include Smith v. NTSB, 981 F.2d 1326 (D.C. Cir. 1993); NI Industries v. United States, 841 F.2d 1104 (Fed. Cir. 1988); D&W Food Center v. Block, 786 F.2d 751 (6th Cir. 1986); Alaniz v. OPM, 728 F.2d 1460 (Fed. Cir. 1984); Vigil v. Andrus, 667 F.2d 931 (10th Cir. 1982); Anderson v. Butz, 550 F.2d 459 (9th Cir. 1977).
(Footnote 59 return)
H.R. 4049 benefits only law-breakers because it becomes relevant only when the party accused of law-breaking has no defense on the merits, and is looking for other defenses to avoid liability.
(Footnote 60 return)
Imagine the disruption and lawlessness that would take place if this standard were applied to congressional enactments. For instance, section 5 of the Federal Trade Act gives the FTC jurisdiction over ''unfair and deceptive'' trade practices, and the FTC has some regulations implementing that grant of power. Under the standard articulated in H.R. 4049, every FTC case would dissolve into an argument over whether the accused party had been given adequate notice that the particular act or omission at issue was deceptive or fraudulent. That problem is no less true with respect to agency regulations that mirror general statutory commands, like those in the Food, Drug and Cosmetic Act prohibiting the sale of ''misbranded'' and ''adulterated'' products.
(Footnote 61 return)
Any suggestion that this concern is fanciful is belied by the substantial volume of litigation that already occurs by individuals and businesses claiming that they did not receive adequate notice of agency rules. These challenges range from the run of mill tax evaders/protesters, see, e.g., United States v. Bowers, 920 F.2d 220, 222 (4th Cir. 1990); Hudson v. United States, 766 F.2d 1288 (9th Cir. 1985); Kahn v. United States, 753 F.2d 1208 (3d Cir. 1985); to challenges by sophisticated business entities, see, e.g., Giles Lowery Stockyards, Inc. v. Department of Agriculture, 565 F.2d 321 (5th Cir. 1977), cert. denied, 436 U.S. 957 (1978); cf. Kennecott Utah Copper Corp. v. Department of the Interior, 88 F.3d 1191 (D.C. Cir. 1996).
(Footnote 62 return)
The phrase ''official representations'' appears to be intended to apply to oral as well as written statements, since dictionaries define ''representation'' to mean a ''statement made orally or in writing.''
(Footnote 63 return)
The Court has, however, reserved the question whether intentional, affirmative misconduct by a government official may give rise to estoppel. See, e.g., Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 60 (1984).