Federal agency guidance — though essential and ubiquitous — has long been a matter of controversy. It must be nonbinding as a matter of law, and yet one often hears complaints that it is binding as a matter of practice. This tension is the subject of the present symposium, in which I’m delighted to participate alongside so many scholars who’ve made important contributions to the debate.
Because the focal point for the symposium is my JREG article “Federal Agency Guidance and the Power to Bind,” I’ll devote this opening post to a summary of that piece. The piece draws from a study I conducted for the Administrative Conference of the United States, for which I interviewed 135 individuals, ranging from current and former agency officials to industry attorneys and executives to NGO representatives, across eight different regulatory areas. The study served as the basis for the Administrative Conference’s new best practices on how agencies should use nonbinding statements of policy.
From the interviews, I find that the complaints of practical binding impact often have a genuine factual basis, but also that the discourse about that impact — in the courts, the Justice Department, and the political arena — too often has a tone of accusation directed against the agencies that is largely unwarranted and unproductive. We hear repeatedly that agency officials “intend” for guidance to be binding — in other words, that agencies “intend” to circumvent the strictures that administrative law imposes on the making of legitimately binding regulations. But the practical coerciveness of guidance, where it exists, can be mostly explained by structural and organizational factors that have little to do with officials’ intent. Overall, the problem with guidance is real, but it is largely an institutional problem that calls for an institutional-reform response, not a problem of bureaucratic bad faith that calls for an indictment.
To explain these findings, it helps to break the subject into two parts. First, we need to consider what pressure a regulated party feels to follow guidance when the guidance is operative, that is, when the agency has not granted a party’s individual request for a dispensation from the guidance. Second, we need to consider agencies’ willingness or unwillingness to grant such dispensations — in other words, the agency flexibility that is supposed to be the distinguishing feature of guidance, as distinct from a full-blown regulation.
Starting with the pressure regulated parties feel when guidance is operative: The origins of this pressure are usually not in some plot hatched by the agency but in a series of structural features of modern regulation and of the legislation that establishes it, nearly all of which are beyond the control of the agency officials who issue or use a guidance document. First, legislation may require regulated parties to obtain pre-approval — that is, the agency’s affirmative assent — in order to get some legal advantage, like a permit or monetary benefit. If the advantage sought is important to the party, and if the agency’s decision is uncertain and subject to delay, the incentive to follow whatever the agency’s wishes appear to be (including guidance) can be overwhelming. Second, the legislative scheme may subject the regulated party to continuous monitoring and frequent evaluations by the agency. If the law is complex, the regulated party will inevitably end up failing to comply with at least a few prohibitions or approval requirements. To insure against this contingency, the party will invest in its relationship to the agency, that is, seek to build up the agency’s trust and confidence in its good faith and cooperativeness, including by following guidance. Third, the regulated firm is a “they,” not an “it,” and the last generation has seen rapid growth in new cohorts of corporate personnel — most prominently “compliance officers” — whose backgrounds, socialization, and career incentives arguably give them an especially strong incentive to maintain good relations with the agency and therefore to follow guidance. Fourth, a regulated party subject to ex post enforcement will have an incentive to follow guidance that increases with the probability of detection of noncompliant behavior, the cost of an enforcement proceeding irrespective of outcome, the probability of an unfavorable outcome, and the cost of a sanction in that event. This fourth factor is probably the most obvious, but its incentive power cannot be simply assumed, for it varies greatly depending on the structure of the statute and the agency. In some select contexts, dynamics arise similar to those in coercive plea-bargaining, meaning the regulated party cannot expect, without prohibitive risk, to get the accusation meaningfully examined and adjudicated by an official distinct from the enforcement personnel. This situation creates a strong incentive to avoid being accused in the first place. That means following guidance.
If an agency official works within a statutory and regulatory structure where most or all of these four factors are robust, then whatever that official issues in the form of guidance will quite likely be followed by regulated parties. But that is not because of any “intent” on the part of the official to bind anyone. The structural incentives to follow the guidance will operate on regulated parties regardless of the official’s subjective state of mind. Of course it’s possible that an official may consciously recognize these structural incentives and anticipate that they will operate in a way that shifts regulated parties’ behavior toward what the guidance says. But if such knowledge disqualifies those officials from issuing guidance, on the ground that this entails an impermissible intent to bind, then all agencies operating in areas where most or all of the four factors listed above are robust would be largely disqualified from ever issuing guidance. That is, many and perhaps most agencies would be disqualified from ever issuing guidance. That cannot be right.
If we really want to protect regulated parties from feeling pressured to follow guidance when operative, we’d need to reform quite substantially the structural features of the administrative state that create strong incentives to discern and follow an agency’s wishes. There are arguments for reforming those structural features — for rolling back pre-approval requirements, for preventing the formation of thick relationships between agencies and regulated firms, for reversing the buildup of corporate America’s “compliance infrastructure,” and for reducing the leverage of agency enforcers — but these would have major consequences and implicate a host of issues ranging well beyond the controversy over guidance.
Let’s now shift to the second part of the problem, agency flexibility. Even if regulated parties have strong structural incentives to follow guidance when it’s operative, there is still an escape hatch: the agency itself can stop the guidance from being operative for any regulated party that asks. If the agency is flexible — if it has an open mind toward regulated parties’ arguments for departures from guidance — then the guidance isn’t coercive. Yet, in the view of many critics, the agency’s mind is frequently closed, and intentionally so.
The critics are right that agencies are sometimes inflexible in their use of guidance and that such inflexibility can leave those parties with no practical choice but to follow guidance. But again, couching these problems in terms of the officials’ “intent” obscures more than it illuminates. One might assume that flexibility is the path of least of resistance for an organization, such that any inflexibility must reflect some conscious and nefarious plan. But that is wrong. Federal agencies face a host of external pressures and internal dynamics that can make them naturally inflexible.
To focus on the most prominent factor: Agencies are quite often under active stakeholder pressure to be inflexible (a.k.a., to be consistent), and these stakeholder pressures spring from legitimate rule-of-law concerns that agencies would be remiss to simply ignore. Most prominently, any regulated firm that receives a favorable departure from guidance will put its competitors at a disadvantage, and those competitors will protest. Further, they may come to lose faith in the predictability of the agency and in the idea that the agency provides them a level playing field — a shift that may cause them to withdraw from cooperation with the agency, thereby diminishing compliance and making the whole regulatory program less effective. Meanwhile, individualized flexibility on guidance, if it favors a particular regulated party, smacks of favoritism and thereby attracts the negative scrutiny of the media, NGOs, and members of Congress. On top of all this, some competitors of the firm that received the favorable departure from guidance will understandably ask, “why can’t I get this exception, too?” One departure thus invites other requests for departure, and these requests eat up the agency’s resources and pose the danger that any coherent policy will unravel. To prevent all this from happening, the agency may simply deny departure requests to avoid opening the floodgates to begin with.
There’s a way for an agency to maintain flexibility while addressing these legitimate pressures for consistency: it can take an approach I call “principled flexibility.” That is, for each departure from guidance the agency makes, it gives a written explanation that is accessible to other agency officials and to the public, with the understanding that the exception then becomes generally applicable to like cases prospectively. The departure explanations accumulate to form a body of evolving precedent. Principled flexibility helps refute accusations of favoritism, cabins the rationale for each departure so as to avoid opening the floodgates to more requests, promotes fairness among competitors by ensuring that all exceptions become generally available on a prospective basis, and aids predictability because the obligation to provide a reason for each departure will tamp down the number of departures and make it easier to anticipate when departures may happen.
Yet, unfortunately, principled flexibility is not easy to implement (though many agencies try). The reason-giving mandate means that every request for departure requires time and money to evaluate. Further, the need for a higher-level official to sign off on each departure — which many agencies require and many commentators and institutional pronouncements endorse — forces departures through a bottleneck of political appointees and senior civil servants who have especially limited time and lack fine-grained information about the matters they are reviewing. This renders departures yet harder to grant.
Thus, being flexible in a good way requires resources and active managerial initiative, both of which may in short supply. Agencies cannot, as a practical matter, be responsibly flexible on everything all the time. Priorities must be set. In deciding which guidance documents warrant the most active exertions in favor of flexibility, we should generally assign a higher priority to a document the more it is likely to alter regulated-party behavior when operative, given the incentives discussed earlier. Also, we should assign a higher priority to a document the less it is subject to the legitimate stakeholder pressures for consistency discussed a moment ago. The flexibility that partly defines “guidance” is a good that must inevitably be traded off against the expenditure of scarce resources and harm to competing rule-of-law values.
Nicholas R. Parrillo is a Professor of Law at Yale and a public member of the Administrative Conference of the United States.
This post is part of a symposium on federal agency guidance. The rest of the posts in this symposium can be viewed here.